Barrett Business Services Inc (BBSI) 2008 Q2 法說會逐字稿

My name is Sherry and I am your conference operator today. At this time I would like to welcome everyone to the Q2 2008 Barrett Business Services earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there'll be a Q&A session. (OPERATOR INSTRUCTIONS)

Thank you, I would now like to turn the call over to Mr. James Miller. You may begin your conference.

Good morning. This is Jim Miller with Bill Sherertz and Mike Elich. Today we will provide our comments regarding the company's operating results for the second quarter ending June 30th and our outlook for the third quarter of 2008. At the conclusion of our comments, we will respond to your questions.

Our remarks during today's conference call may include forward-looking statements. These statements, along with other information presented that are not historical facts are subject to a number of risks and uncertainties. Actual results may differ materially from those implied by the forward-looking statements. Please refer to our recent earnings release and to our quarterly and annual report filed with the Securities and Exchange Commission for more information about the risks and uncertainties that could cause actual results to differ.

Page one of our operating results summarizes the company's revenues and costs of revenues on a net revenue basis as required by Generally Accepted Accounting Principles. Most of our comments today, however, will be based upon gross revenues and various relationships to those revenues because management believes this information is one, more informative at the level of our business activities; two, more useful in managing and analyzing our operations; and three, add more transparency to the trends within our business. Comments related to growth revenue as compared to a net revenue basis of reporting have no effect on gross margin dollars, SG&A expenses, or net income.

For the second quarter results, as reported, the company earned $0.29 per diluted share in the second quarter as opposed to $0.42 for the second quarter of 2007. The decline in earnings on a quarter over quarter basis was primarily due to three factors. One, gross revenues remained nearly flat with a slight increase of 0.7% or about $1.8 million. Two, a 38 basis points decline in our gross margin percent, which I will review in just a minute, and higher branch level SG&A expenses due to the company's three acquisitions that we have made since July 2007. Excluding the benefit from the company's three acquisitions made since July '07, the internal growth for the company on a quarter over quarter basis represented a decline of 4%, which continues to reflect the overall economic conditions in our market. California, which comprised approximately 75% of our overall second quarter gross revenues, declined 3.4%, owing to small declines in both staffing and PEO revenues.

Staffing revenues for the second quarter of 2008 increased 36.5% over the second quarter of 2007 primarily due to the three acquisitions. On an internal growth or comparative branch office basis, staffing revenues declined about 5.4%. PEO gross revenues declined 3.8% on a quarter over quarter basis. The three acquisitions that we made were pretty much exclusively staffing for those acquisitions and did not affect PEO rates of change. Gross margin percent -- on a gross revenue basis, the 2008 second quarter declined 38 basis points from the prior-year, and detailed in that, direct payroll costs decreased 8 basis points primarily due to increased staffing business which tends to have a higher markup percentage and therefore a lower payroll percentage of revenues. Payroll taxes and benefits for the 2008 second quarter as a percentage of gross revenues remained nearly flat with only 2 basis points increase. One of the things we saw during the first quarter of 2008 were about $600,000 incremental taxes related to the increased California SUTA rate. As we rolled into 2008 second quarter, most of those wage dealings were met, and we did not experience much of a bump at all in the payroll taxes of 2008 second quarter versus 2007 second quarter.

Workers' compensation expense increased over the 2007 second quarter in terms of actual dollars and as a percentage of gross revenues from about 2.8% to 3.3%. This increase was primarily attributable to higher estimates for claim costs where the company is self insured. 2008 second quarter G&A expenses of $9.2 million increased $1.4 million or 18.26% over the 2007 second quarter. The increase was entirely due to the incremental growth brought on by the three non comparable branch offices from the three acquisitions in July of last year. On a comparable office basis, SG&A expenses for the 2008 second quarter had a slight decline of about 1% compared to 2007.

Turning to the balance sheet on June 30th, during the second quarter of 2008, management re-evaluated the classification of its cash and investments professionally managed by Wells Capital management. These funds were previously included entirely as a component of the company's cash and cash equivalent. Management determined a large portion of the portfolio is more appropriately classified as marketable securities, resident cash, and cash equivalents. These investments are highly liquid and are subject to little market volatility given their relatively short term maturities. However, these investments do not meet the rather strict definition of cash and cash equivalents and prescribed by Generally Accepted Accounting Principles. As a result, the company has reclassified the amounts of the portfolio representing investments at December 31, 2007, cash and cash equivalents to marketable securities to conform to the June 30th 2008 presentation.

Cash in current marketable securities totaled $46.7 million at June 30th compared to $60.1 million on December 31st, 2007. The decrease was primarily due to $4.4 million used to repurchase the company's common stocks. $3.8 million used for the first employment [sure of] these acquisitions, and $1.8 million used to pay quarterly cash dividends. Trade accounts receivable at June 30th of $45.3 million, were up about $8.6 million over the December-year end, due in part to an increase in days sales outstanding from about 12 days to 15 days, and also due to increase in the amount accrued at June 30th quarter end compared to December 2007. We continue to monitor collections and creditors very closely in light of the challenging economic environment. The decrease in stockholders' equity of about $2.3 million was primarily due to the $4.4 million of company stock repurchases, which equated to 336,000 shares during that six month period.

Turning to our outlook for the 2008 third quarter. As we reported yesterday, we are expecting gross revenues to range from $277 million to $282 million for the third quarter. This projection represents a modest midpoint sequential increase of 3.7% over the 2008 second quarter, with a likely midpoint decline of about 5.8% from the $298.6 million in the third quarter of 2007 gross revenues. The projected decline of third quarter gross revenues was largely due to a tougher year over year comparison, as the strategic staffing revenues will now be reflected in both the third quarter of 2008 and 2007, as this acquisition was effective July 2007. Based on the foregoing estimates for revenues, we anticipate diluted EPS for the 2008 third quarter to range from $0.34 to $0.36 as compared to $0.54 per share in the 2007 third quarter. At this time, Bill Sherertz and Mike Elich will comment further on the recently completed second quarter and the outlook for the third quarter. We will then open the call for questions.

Thanks. As some of you may know or may not know, two weeks ago I had major surgery on my spleen. They removed it. I have been out of the office for a couple weeks. I am recovering well, and should be back in the seat probably by another month or so. Whenever that is worth, I feel very comfortable with Mike and Jim and Greg at the controls and as far as I can tell, we haven't missed a beat. During the quarter we signed 103 new customers -- which I am not sure, I'd have to go back and look, but that is pretty close to a record. We lost 61 customers. Of the 61, 10 we canceled for AR issues, 10 we canceled for comp issues, and 27 businesses closed, no more employees. We had 16 leave on their own. All in all, not bad. It is reflective of the times, that AR becomes a daily fight. During the quarter, we booked a little more for reserves for bad debt to reflect that probably we are going to have issues as we go forward and I don't want to get blindsided by those kinds of issues. We took a conservative approach towards the quarter.

Beyond that, I don't know much else. Things are bumping along, the economy is not that much better, it is not that bad. We continue to sign a lot of new customers, which is very good. Perchance, should the economy stabilize, it will do exceptionally well, I believe. As far as the company and its position that we are in, it is probably in as good condition as I have seen it in terms of our staff and managers and the people that we have working for the company. We're very strong. Now, it is a matter of taking care of business and making up for the macros. Mike, do you have anything to add?

I'll just reiterate that our focus continues to be growing with and our client base and offsetting the general decline of the number of employees that our clients employ on a weekly basis and continue to ensure their organization is strong, and we are in a position to take on a trend that will increase as the market sures itself up and companies start to have employees.

With that, we will open it up to questions.

(OPERATOR INSTRUCTIONS) We will pause for a moment to compile the Q&A roster. Your first question comes from Tobey Sommer.

Thanks. Let me ask you a question, what are you seeing in terms of wage rates, whether it is on the staffing side or among your PEO customers, whether the rate of growth is staying comparable to how it has been or you're seeing changes in the rate of growth?

That is a fair question for Mike. He is close to the street.

We are not really seeing a change in the wage rate in particular other than with the layoffs we have seen and an increase in overall unemployment. In our summer staffing business, we are seeing a desire from some clients to drive down wage costs. But with some of the inflationary pressures that we are dealing with, that is not easily done -- not as easily done as it is hoped for.

Thank you. I was wondering if you could comment on internal retention of your own employees, what the hiring and headcount outlook may be for the next couple quarters. You think you are adding bodies or staying the same?

In general we are staying about the same. At the manager level we don't anticipate any turnover. We are short one manager in one branch. Obviously we can be very picky. In terms of below manager level, there is always a little bit of churn, but not very much. It has been very benign. People are not leaving.

Thank you. Could you comment on what the trends have been like within California? And also if you have the figure in front of you, what the percentage of revenue is from California, and maybe Oregon?

The revenue -- PEO is about 85% of California, of the company total, and staffing is about 23% of the company total in California.

Could you comment on what the market is like? The new sales we are getting? Are they outside California or is it relatively evenly proportional among California and ex California?

It is pretty much across the board. Our salespeople are producing the managers. California's just a bigger place. You've got more offices, you have more people working there, but we're tight on that. There are very few places that aren't putting on new customers.

Do you think you are seeing some stability in the market? Or is it still becoming increasingly tough?

I don't think we could have turned this quarter or given you the estimates if we didn't see stability in the market. If you were to say you have to stake your life on those estimates for next quarter, I would probably back away and say I don't know that much for sure, because things happen out there when you're dealing with recession. But in general we are not seeing any cliff deals. I haven't seen any branches run off cliffs. I haven't seen any segment of our business disappear overnight. That makes me relatively comfortable that we that we are holding our own, if you will. With the addition of new customers, we're doing okay.

Could you give us an update on how is the Captive doing? What your expectations are? I know you have to see what the back half of the year brings, but year to date, how are things progressing?

Really good news. The captive is not doing anything.

That is good news.

That is what it was built to do, not do anything.

Congratulations on that. Two other questions and I will get back in the queue. One, how have the seasonal elements of your staffing business performed so far this summer and what expectations may you have as we work our way into the next couple months from a seasonal perspective?

Mike is close to that.

The outlook is seasonalitywise we will see incrementally the similar ramps that we do on an ongoing basis year to year, but one thing that we are seeing little bit in Central Valley and Washington is where the cherry harvests was cut in half due to frost, we are offsetting that with additional business that we are doing with the bumper crop of potatoes. It should ramp as normally scheduled.

We are already in the middle of most of that.

Lastly, in terms of acquisitions, you have executed a few in the last year or so and obviously still have a pot of cash sitting on the sidelines. The two questions are are you happy with the acquisitions that you executed in the last year, and knowing what you know about the labor markets, would you have done them in retrospect, and secondly, looking forward, do you see ongoing opportunities presenting themselves to you?

I couldn't be happier with the acquisitions. They went very smoothly. They felt like they were a fabulous acquisition. Denver and Phoenix both have fulfilled their promises, and we will have to replace [Sheila] out of Phoenix come one-year anniversary, but beyond that I am very happy with them. As far as what is new on its streak, I am starting to see -- There must be some trend, and I would like to go back and figure out exactly what it is, but all of a sudden I am getting a lot of IT acquisitions of which I have zero interest. It seems like whenever those IT guys come along, there's something going on out there. Lately it has been more than just a few. It has been a lot.

Okay. Thank you very much for the perspective.

Next question comes from Josh Vogel.

Good morning, thank you. Could you follow up on those comments you just made about the IT acquisition opportunities? When guys start popping up, what is that saying to you?

There was a lot of it right around Y2K, if you remember. I don't know what it says to me. Whether there is some kind of downturn coming with IT that they see or it is a coincidence, I can't put my finger on what it is. I just know that all of a sudden, we are getting a lot of acquisition candidates in that arena which I have no interest in.

Thank you. Playing off of your guidance which is stronger than what I was looking for, can you discuss with us the trends you saw so far through July in the PEO and and staffing businesses?

Yes. It's just taking July and running forward.

Can you maybe just give a little more insight into how much the PEO business is up or down year over year or sequentially versus the first three weeks of last quarter and year ago?

I didn't look at it that way, Josh, but I would assume the staffing business is going to be up a little more than PEO business because this is when our major staffing stuff comes on. So the pop you see in the third quarter is going to be a lot more staffing than PEO, even though we signed a lot of PEO customers.

Okay. Now just some maintenance questions. Do you have the cash flow from operations and CapEx for the quarter and the half?

Jim, do you have the CapEx?

The CapEx was fairly minimal. I don't have an exact number. It was maybe a couple million.

What is our big CapEx?

We had some IT going on with the upgrade of --

Austin?

Yes. But it is pretty minimal.

What was the other question?

Cash flow from operations, operating cash flow?

How about if we get back to you on that?

No problem. Lastly, how much left do you have to go on the current buyback authorization?

300,000 something, I think.

We have about 327,000 shares still to go. And we have bought back year to date through today of about 513,000 shares.

Okay. Great, thank you very much.

Your next question comes from Tim Brown.

Morning. Just had another question on this past quarter. The revenue and EPS both came in above the top end of your expectations. What really surprised you in Q2 that you didn't see three months ago in terms of the strength of the business?

I think revenue held up better than we thought, and our margins were a little better. There were no tricks in this quarter. In fact, we were pretty conservative with it.

Okay. Was it staffing or PEO?

Staffing stayed very strong. The PEO is one of those deals that didn't decline as much as we thought. We signed 103 new customers. Between losing 61 and having the present customer base get smaller, the net on all of that is going to be negative. It is a longer-term deal. Longer term, that will come back to us in spades.

Last quarter, I think you mentioned staffing in California in particular had really fallen off a cliff. Has that stabilized at this point?

What fell off a cliff?

Last quarter there was a comment that staffing, just in the state of California, really pulled back.

We haven't had any of that. It has been pretty consistent. I don't recall making that statement.

Q1 or Q2 -- maybe I'm mistaken. Looking at your PEO customers, can you give us what you see out there in terms of the trends in hiring and also in terms of the trends in credit, is credit indeed getting worse or is it still stabilizing?

That is a tough question on getting worse or still stabilizing. It's something that we have our fullbore attention every week on that and will remain so until we really see that it's sort of a nonissue. Not that it is never a nonissue, but I have a report on my desk every Monday morning. So does Mike Elich and all of us, to keep track of who didn't make their payroll. We are very fast to act. We have to be. Is it getting worse? How many people do you blow through before you say it is one of those diminishing returns? You blow through enough people and pretty soon you say it is not as bad because you have already called out all the people who couldn't pay you. It is more along those lines than it is getting better or worse. I think it is a tough environment.

Okay. The net higher, the current clients, is that declining still?

Yes. I think Greg told me the number was somewhere in the 5% or 6% range that our customers year over year are down. If you took the same customers and ran them up against themselves.

That is a big number. On your worker's compensation experience in the quarter, can give us a little more color there?

It was very good. We were conservative, and took some money to IBNR there, but we haven't seen any trends that would alarm us. It was one of those deals you want to pay attention in a down economy because the comp may be the only last place of refuge for some people. We haven't seen anything at this point that would raise our antennae, so to speak.

Okay. That is all my questions. Thanks.

Next question comes from Ruthanne Roussel.

Good morning. It's Ruthanne Roussel speaking. A couple things. We had the -- at the time of the Salt Lake acquisition I remember there was mention of an undisclosed amount that would be paid as a milestone payment if the acquisition met its target. Now that it sounds as though the acquisition has indeed met its internal targets, should we be looking in their third quarter at some sort of visible bump on the balance sheet to reflect this milestone payment?

Yes.

I mean not the balance. The income statement. Can you give us a way to think about the possible size of such a bump?

We have gone through some preliminary calculations and we need to run those by the strategic staffing folks in the next several weeks and conclude on that. Initially it looks like it will be a couple million dollars that will be added into the goodwill on the balance sheet. There will not be any P&L impact.

Thank you. Also, I was hoping you might speak a little bit more to the workers' comp market in California. There were several mentions in the news about how some insurers, including Berkshire Hathaway and AIG, are exiting the workers' comp market in California. At the time, there was some thought that this might present further opportunity for BBSI. Can you speak to that further? Has that developed that at all?

I have not heard that AIG was leaving, but I know Redwood did and there were a couple other PEOs that pulled out of the market. And all those things help us, yes.

You haven't seen other big insurers stepping in to take over the mantle, as it were?

No. I think the trend will be to leave California, not to come into it.

Okay. Another thing I was hoping we could get more coloring on that you spoke to a little bit, would be the food processing, the seasonal food processing market. How has that been holding up? It had some real challenges with various weather related conditions.

I would say it is the same as last year. When the cherry crop goes down, apple crop goes up. It is about the same.

Okay. Thank you, most of my other questions have been answered. I will get back in the queue.

Thank you.

Next question comes from Gary [Hepburn].

Good morning. Bill, thank you for being on the call. I hope you're feeling alright and recovery is quick.

Getting better.

That's good. That is very good to hear. The most recent questioner asked you about workers comp. There are some news items of companies leaving and you made the statement that -- and that's better for us. Just for my benefit and perhaps some others on the call, can you just review again why a reduction in capital being supplied by the insurance companies and workers comp being reduced is good for you?

They just throw customers on the market, and when they do that we become an alternative. It makes the pie bigger for us, particularly when it is a PEO customer. For companies like Redwood, which was the [buffet] company, they canceled all their contracts as of August 1st. Those people are all looking for workmen's comp coverage. A lot of times, we are able to provide an alternative to traditional coverage through our program, our safety program and safety incentives. The same way that it interacted with us back in 2001 and 2002, in which there were no comp carriers literally in the state of California, we were just inundated with business, because they didn't have anyplace else to go. There was a little bit of that. I am not saying it is at that level again. Any time you pull people out, those people have got to make a change. They've got to go somewhere.

That is great. Staying with the workers' comp, you made the comment -- or it was made in the comments at the beginning of the call that workers comp expense is up in -- versus Q2 '07 in dollars and percentage revenues due to higher estimates of claims costs. Can you discuss that trend a little bit? Certainly California has some negative spots in history, when those numbers have gotten really out of control. Are we heading towards something like that? Would effect does a poor economy do on this?

I don't think it is headed toward out of control, but it is certainly not heading down anymore. The plaintiff attorneys are chipping away at the costs and the legal rules under which we have to operate. I think it is always better to be more conservative than it is to be not so conservative when it comes to comp. Since we had the opportunity to do it, we did it. There is no particular number I am standing on here. What I have got in my pocket says God, we had better be doing something. It is one of those things where we had an opportunity and we took it.

Okay. Years of being in it, getting a sense of where the market is going and try to be ahead of it?

Yes.

Okay. A previous questioner asked you about the actual results as opposed to where your collective heads are at regarding the state of the business last quarter. It certainly seems, if I may throw in here, that you are not as negative about the direction of where things are going. You're not ready to throw a party and say things are over but perhaps not as dark.

You look at the glass and you can always see it two ways. I am very pleased with the overall performance of the people in the company. That is probably what you are hearing. I am not particularly pleased that unemployment is California is 7.5%, and we have lawmakers that are playing around with each other and building a bridges to nowhere. Those things certainly don't bide very well for what is -- for business point of view. But certainly from a company point of view and execution point of view on [towel] level, I don't think we have ever been any stronger. Maybe that is what makes me see the glass half full.

To a certain extent just the ability -- you underestimated how good your people were to handle this difficult situation.

Until you get there you don't really know.

That is true.

You can talk about how strong you are. Recession, there is no practice field for recession.

Right. If you can lay out some of the things that are happening better than you had hoped for in your business, I am looking at the number of 103 new customers signed and I believe you said that is a quarterly record. Is it the 103 new customers or is it only canceling 61? Other things you can point to?

Out of the 61, there is a couple things out of our control. The AR issues are out of our control, the ones that go out of business -- that's out of our control to some extent. When you boil it down, you say you added 103, you really only lost 16 as a result of them wanting to do their own thing, that is a pretty good stat. That's a real good stat. I recognize still the tenant went with AR, and the tenant went with non-AR, which is typically workman's comp. But I think that is the normal level. I wouldn't expect much different. Things change, people cut corners, that kind of stuff.

You wouldn't expect much different in a normal economic area or you wouldn't expect much different in a poor economic scenario?

I would not -- In a normal market I would not expect much different except that our AR issues would be down rather substantially, which isn't huge. You wouldn't see as many businesses sold and closed, which was 25. Of the 61, you have 35 of them that don't have any money. Most likely, the ones that closed didn't have any money either.

Right, right. Last thing, I believe an answer was given along those lines, but I missed it. If you look at your customers on a year over year basis or a same-store basis, where do you see employment count at your customers, at your PEO customers, the ones that have been with you for a year on a comparative basis?

Down about 5% to 6%.

Very good. Thank you very much. Best wishes to your health recuperation.

Thank you.

Next question is from Kevane Wong.

A few things. You obviously gave some color on California, what is happening there -- forgive me if this has been covered, but Pacific Northwest -- can you address that a little bit? The last quarter, one of your competitors was talking about that beginning to weaken. How was the Pacific Northwest as far as employment et cetera in the last quarter and what you seeing going into July?

Are you talking about us specifically or the market?

You guys specifically. What are you seeing? I am assuming the market is having more issues. I am curious how that is affecting you.

When you look at the Northwest, we were up 2.5%. Portland itself was down 11%. Those are kind of individualized, but nonetheless, but not much more -- that is about what I would expect.

Okay. The thing where it's getting worse, it is just dropping down and that is where it is and that is where it stayed at these levels going into the third quarter so far?

So far, that is what we see. There isn't a cliff out here that we are running over.

When I was looking at the numbers, looks like the way I am backing up pricing that things have actually, for staffing and PEO, looks like the market is very stable, 2Q versus 1Q. I am curious, are you seeing pressures on pricing on either of those businesses, or or things actually holding up well? I am not sure if it's a matter of people want lower pricing and you are saying no or if you are not seeing pricing pressure? What is happening on pricing there?

We have not seen -- Price is always an issue but we have not seen people turning the screw down to the last notch. I don't know that we would participate if they did. It has been a mantra of we will pay for good people because pricing is only relative to what people put out. Whether you're paying somebody $10 an hour or $12, will incrementally be whether they produce $1 or more on the output, whether you'd be satisfied with that. We have not seen a lot of pricing pressure.

Excellent. Shifting over to California, last couple quarters there had been more scrutiny in California on PEOs due to a particular bad player. I am curious what is happening on that front. Has that sort of mellowed out? What is happening as far as PEO scrutiny in California?

You might be talking about the contractor's work.

The guy who is related to an Indian reservation as I recall?

That has been going on forever. They are after those guys. They've been after those guys for as long as I can remember -- the whole Indian reservation PEO deal. Unfortunately every once in a while, we get dragged into it because we are PEO. They had a chance to put them out of business and they didn't do it. They keep doing what they keep doing. I don't know what else to say.

Has the risk of making a broader legislation order to control them mellowed?

I haven't seen anything. They took on the Contractors' Board, and the Contractors' Board handed them their heads. That is the last I heard about what's going on down there.

That is it for now. Best wishes to your health.

Thank you, good to talk to you.

Next question comes from Tobey Sommer.

My question has been answered, thank you.

At this time there are no further questions.

Thank you very much. I made it through the entire call. That is a good sign. We will see you in the third quarter and hopefully the results in the third quarter will be better than we expect. We need a little help from the economy, I think. But we may not. The good news is we may not need that much help from the economy. In any case, we will see you all next quarter. Thank you.

Ladies and gentlemen, thank you for joining today's earnings release conference call. Thank you for your participation. You may now disconnect.