Barrett Business Services Inc (BBSI) 2008 Q4 法說會逐字稿

Good afternoon. My name is Barrett and I will be your conference operator today. At this time, I would like to welcome everyone to the Barrett Business Services fourth quarter conference call. (Operator Instructions).

Mr. Bill Sherertz, you may begin your conference.

This is Jim Miller with Bill Sherertz, Mike Elich and Greg Vaughn. Today we will provide you with our comments regarding the company's operating results for the fourth quarter ended December 31, and our outlook for the first quarter 2009. 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 reports 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 yesterday's earnings release, reflecting our operating results summarizes the company's revenues and cost 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 gross revenues because management believes such information is, one, more informative as to the level of our business activity, two, more useful in managing and analyzing our operations, and, three, adds more transparency to the trends within our business. Comments related to gross revenues is compared to a net revenue basis of reporting have no effect on gross margin dollars, SG&A expenses or net income.

Turning now to the fourth quarter results, as reported, the company earned $0.21 per diluted share in the fourth quarter, as compared to $0.34 for the fourth quarter of 2007. The decline in earnings on a quarter over quarter basis, was primarily due to a 10.4% decline in gross revenues, and a $3.4 million decline in gross margin dollars. Total revenues for the fourth quarter of $263.1 million decreased $30.7 million from the 2007 fourth quarter. Excluding the benefit from the company's two acquisitions made since December of 2007, the internal growth rate for the company on a quart-over-quarter basis represented a decline of 10.9%, which continues to reflect the difficult economic conditions in our markets. California, which comprised approximately 77% of our overall fourth quarter gross revenues declined 10%, owing to declines in both staffing and PEO revenues.

Staffing revenues for the fourth quarter of 2008 decreased 26.1% from the fourth quarter of 2007, primarily due to a significant decline in demand for our staffing services from existing customers in the majority of our markets. We experienced a significant decline in the last several weeks in December as customers cut back hours around the holidays or in some cases even shut down for a week or two. PEO gross revenues declined 7.6% on a quarter-over-quarter basis. Our new PEO business over the quarter continued to nearly cover our loss PEO business from the fourth quarter of 2007. The decline was primarily due to a decrease in hours worked at existing customer work sites. Gross margin percent on a gross revenue basis for the 2008 fourth quarter declined from 5.3% to 4.6 from the prior year.

Direct payroll costs increased 56 basis points over the 2007 fourth quarter primarily due to a decrease in billing markup largely related to lower's worker's comp rate component of the overall markup on payroll. Payroll taxes and benefits for the 2008 fourth quarter as a percentage of gross revenues remained nearly constant at 7.3% compared to the 2007 fourth quarter, due to similar effective payroll tax rates in the fourth quarter both years. Workers compensation expense for the fourth quarter of 2008 is a percentage of gross revenues increased slightly from 3.5% to 3.6%. Workers compensation expense in terms of total dollars decreased from the same 2007 quarter from $10.3 million to $9.6 million. The 2007 fourth quarter included an additional $2.2 million charge for increases in estimates for existing in states where the company is self-insured. The 2008 fourth quarter SG&A expenses of $8.8 million declined $1.2 million or 12.2% from the fourth quarter.

The decrease was primarily due to lower branch profit sharing partially offset by expenses in a noncomparable branch offices from two acquisitions completed since December of 2007. The income tax rate for the 2008 fourth quarter was approximately 30.2%, representing a decline from recent quarters as a result of additional federal employment tax credits earned by the company. Looking now at the balance sheet at December 31st, cash and current marketable securities totalled $60.2 million compared to $60.1 million at December 31, 2007. The slight increase was primarily due to cash provided by operations offset in part by $8.5 million used to repurchase 714,000 shares of the company's common stock. $3.8 million used for the First Employment Services acquisition and $3.5 million used to pay quarterly cash dividends.

Trade accounts receivable at December 31st of $34.4 million decreased $2.3 million from December 31, 2007, primarily due to a decline in revenue during the fourth quarter of 2008 as the day's sales outstanding in accounts receivable or DSO remain nearly unchanged at approximately 12 days. We continue to closely monitor our customer credit terms and collections in light of the continued difficult economic environment. The decrease in stock holder's equity at December 31, 2008, compared to December 31, 2007, is primarily due to the company's share repurchases and cash dividends partially offset by net income for the year.

Turning now to our outlook for the 2009 first quarter. As reported yesterday, we are expecting gross revenues to range from $240 million to $245 million for the first quarter of 2009. This projection represents a likely midpoint decline of 6.6% from $259.6 million in the first quarter of 2008. The projected decline of 2009 first quarter gross revenue is based upon a recent revenue trend and largely reflects the continued challenging economic climate. Based upon the foregoing estimates for gross revenues, we anticipate a diluted loss per share for the 2009 first quarter to range from $0.19 to $0.22 as compared to earnings per share of $0.01 for the 2008 first quarter. This decline is due in part to projected higher payroll costs resulting from a change in mix towards PEO services from staffing services as well as a significant increase to many of our state unemployment tax rates. The rate of payroll taxes is front loaded as these taxes decline over the course of the year as employees reach their statutory wage rate ceilings. We currently expect to return a profitability during the second quarter and remain profitable for the remainder of 2009.

At this time, Bill Sherertz and Mike Elich will comment further on the recently completed fourth quarter and our outlook for the first quarter of 2009. We will then open the call up for questions. Bill?

Thanks, Jim. Well, I had to go back and read some of Buffet's stuff about what makes a good company, and it's reassuring to me as a CEO to know we are on the right path. We have good people. We have a solid business form form. We continue to sign new customers. We are riding some very tough economic conditions as I'm sure all of you know. Our unemployment rate on the west coast on average is 9.13%. In a lot of our markets we are faced with 10 to 12% unemployment. If you would have told me that we would be down less than 5%, less than 10%, and the unemployment rate was 9.3% in the states we are in, I would have thought you were on drugs, because I have never experienced such a small downturn in what we are doing. So you're not going to hear a lot of woe is me out of me today. In fact, I have probably never been more positive with the people and the operations side of the business than our execution.

What we need to really rock and roll is going to be a slackening in the decline more than anything else. We are not even hoping for an upturn, all we are hoping for now is that we stop going down. This has been going on for a couple of years. And certainly you all are as much aware of it as I am. It is almost depressing when you watch CNBC and listen to the bull stuff that goes on with Congress in their meager attempts to try and fix things. My opinion all they have to do is get rid of the mark-to-market and we would go a long way to solving a lot of these issues.

However, back to the company. During the quarter we signed 86 new PEO customers, which I think is very good for a fourth quarter. During that quarter we lost 57. The breakdown of ten of them were canceled. Seven for AR issues and 3 for non-AR. 26 of the 57 closed or were sold. 45.6% of the businesses. 21, excuse me, decided to leave on their own. Six due to price. Eight took payroll in house. Three went to another PEO for additional services, and typically additional services mean they are willing to carry the credit, and fourth one to another PEO to cut costs. That one I don't quite understand.

On a quarter over quarter revenue analysis, the new PEO business continues to just about cover the lost PEO business. One is up 15%, the other is down 15%. Mike and Greg just finished with review of the branches and I went through some of the slides and a lot of their present customers are down year over year 40 to 60%. What we are really facing is not necessarily a lack of -- certainly not a lack of customers, but they have cut their hours rather significantly on the hours worked by employees. That's what I see. Really knocked out the overtime. Revenue for PEO customers that were with us in fourth quarter 2007 and fourth quarter 2008 was down about 9%. New staffing business brought in about $1 million more than the 2007 revenues lost from the revenue from staffing customers that were down in the fourth quarter of 2007 and '08 which was down 17%.

Further analysis suggests that our PEO customers are cutting hours more than cutting people. Average nonovertime hours per employee were consistent between fourth quarter '07 and fourth quarter '08. However, overtime hours, as I said, were down 19% in 2008. We had another great signing period in the first quarter. I think we signed 66 new customers for the month of January, which was rather good. My hope is that, again, without any kind of flattening of the economy, I think the number of loss customers will start to decrease rather dramatically which will really step up us in terms of our head count of customers which is the way we certainly look at the world, and the leverage we have on profitability is going to be very substantial. We have no plans to do any cuts in the company. We are well staffed. We have a lot of talented people. If we don't get any better in revenue than we are right now, we will be profitable looks like in March and for the rest of the year. So while it's not back to the $1.41 we made a couple years ago, certainly given the economic conditions out there to be profitable for the year, I'm going to rack up as being a big win.

And so I'm relatively optimistic. The only thing that people ask me what keeps you up at night? It used to be anything above 7.5% unemployment would certainly make me twinge. However, we can put that one to bed because it's already happened. Now I guess the next step is that we are trying to avoid a depression and I'm hopeful that we can do that. I think the underlying business climate is there. We need a loosening of credit. We certainly see that with our customers. And it wouldn't hurt to get some optimism. I see an awful lot of pessimism being spread over the news wires every day, and I can't believe that that helps.

So. With that, you can throw the barbs and the tomatoes and the questions at us from here.

(Operator Instructions). Your first question comes from Josh Vogel.

How are you feeling these days, Bill?

I'm doing good. Gained a little weight and I'm getting feisty.

Good. All right. My first question is really about the guidance and you guys mentioned that with the shifting mix to more PEO to staffing but I'm just trying to get a handle on it here. Because if I look at the mix in the first quarter of '07, let's say, the PEO work was about 86% of gross revenue versus 14% for staffing and if the mix is just 100 basis points more towards PEO it just seems like kind of a drastically low guidance. I was wondering if maybe there was something outside of just the payroll costs and the mix shift there and the revenues, was there a worker's comp claim that hit up in January or anything of that sort?

No, comp remains very benign. Remember, we've got almost a 1% increase in unemployment. And that all piles into the first quarter. So -- and it's not -- in this climate it would not be smart to try to pass on cost increases to your customers. So some of that we will have to eat until times get better. Over time we will make that back. But I would say it is a two fold deal. Staffing carries a much higher margin. Staffing as you know, if you look at the competitors, it is just getting killed out there. And the unemployment costs. You put those two together, it makes a pretty big swing in a hurry in terms of making money. We did an analysis. If our unemployment costs were the same as last year, even on the down revenues, we would break even in the first quarter as we did last year.

Okay. Got you. So obviously the pricing environment is not in your favor right now but at what point in the cycle do you think you could start going back and gaining some leverage there?

Again, I think it is just keep the economy from going down. I mean, I would say the first up tick we get or down tick in unemployment, where 7.6 now, the next number is probably 8 something. And I think we could live with 7.6 if it would stay there. I'm surprised -- I will be real frank with you -- I'm quite surprised we are doing as well as we are at 7.6.

Okay.

But just to have it stop from going down. I think we are going to gain the upper hand.

Right. Okay. Now, seeing a lot of companies in this type of environment, given where certain stock levels are at and the assets on the books, they are taking a closer look at the balance sheet and goodwill balances and some are taking impairment charges. I was wondering if you were working through that with your auditors right now and if a goodwill impairment charge was likely.

Go ahead, Jim.

Yeah, we have just gone through that with our auditors and at least through 12/31 we were certainly did not have any kind of issue with any kind of goodwill impairment in our analysis, and we don't anticipate having any issues at least currently going forward.

We would have to turn negative for the whole year and then the goodwill impairment would be that a certain -- one of those acquisitions that we made would have to be significantly negative.

Right. Do you know off hand what part of the goodwill is attributable to the strategic acquisition?

Probably about close to $14 million.

Okay, great. Just lastly, Jim, do you happen to have the cash flow from operation numbers in CapEx for the full year?

For the full year, cash flow from operations was approximately $14 million and CapEx was approximately $830,000.

Okay. Great. Thank you very much, guys.

Thank you.

Your next question comes from the line of Tobey Sommer.

Hi, this is Frank in for Tobey. How are you?

Good, Frank.

Couple quick questions. Could we get the cash flow and CapEx for the quarter as well as kind of your thoughts going into '09?

Yeah, cash flow for the quarter was approximately $2.6 million. And CapEx for the quarter was just a couple hundred thousand.

What were we buying? Stock in.

Yeah.

We are not spending a lot of money.

Okay. And do you expect those levels, the year levels to be fairly stable going into 2009? Any color you could provide there would be helpful.

In terms of CapEx or just general?

Yeah, mainly CapEx.

We don't have any pressing needs unless we were to make an acquisition and to be real frank about acquisitions at this point, until I see some stabilization in the economy, I'd be hard pressed unless it was a give away deal to make an acquisition.

Okay. That was a nice trend into my next question. As far as looking out there are you seeing valuations come down in terms of multiples and what are you looking for in terms of stock repurchases and shoring up that balance sheet going into 2009.

I think the balance sheet is pretty solid and we dearly love to buy our stock. We don't really have any need to raise capital for any reasons that I foresee at least at the moment. And the valuations of the companies out there, they never really change. It's always been a four, six times EBITDA and really good companies won't come off that number and really bad companies, you don't want to buy anyway because it is just too much work. We have got a lot of stuff we can do internally to augment our growth. So that's what we are focused on at the moment.

Okay. Great. Last question, little bit about the captive business. Could you talk about the trends there and what you see going into the first quarter.

Really, we have not had any kind of catastrophic claims that would tap into the captive since we formed it so it's been a nice adjunct and saved us some pretty good tax dollars. It is doing what it is supposed to do and now we have the new insurance company in Arizona. And we picked up another state on self-insurance, so the captive, I want it to remain as a non-issue. It doesn't do anything. That's the good news.

Okay. Great. Thank you so much.

Thank you.

Your next question comes from Ruthanne Roussel.

Bill, I'm glad to hear you sounding so well.

I'm better.

Good. Good to hear it. I wanted to ask a few questions about the stock buy back in the quarter. If you spent just a couple hundred thousand dollars on it I'm going to assume you didn't buy back a whole lot of stock but could you give us numbers for it?

The couple of hundred thousand that we were talking about, that was purely CapEx, and that was related more to a software upgrade that we are currently in the midst of here. As far as the buy back activity for the fourth quarter, first of all, for the year, it was about $8.5 million spent for the entire year and for the quarter, we came in at at about $1.5 million.

I'm sorry, is that dollars or shares?

Dollars.

I would love to get 1.5 million shares.

I also was thinking, at the time of the strategic acquisition, there was some talk about possibly leveraging those offices so that they would eventually begin to offer PEO services as well. I just thought I would ask if there had been any progress on that or evolution of that?

Yes, we have started down that road and we have had some limited success, although given the economic climate they are fighting to hang on to their staffing business. But we are down that road. Colorado is starting to do better with the PEO world. And we've got one person here from corporate dedicated almost full time to teaching and help develop and train our people over in the mountain states for PEO.

Okay. Thank you. No further questions.

Thank you.

Your next question comes from the line of Tim Brown.

Good morning, guys.

Is the weather better down there than up here?

It is actually starting to get sunny again. It was pretty cold for a while. Bill, good to hear you. The one thing that stuck out was the signings in January. 66. And I'm just curious, what's driving the new signings in particular in this environment?

I think we are good at what we do. I know that's kind of a cliche but it's been so many quarters we have been doing it, I don't think it is external influences, I think we get out in the market, we see people. It is a value proposition. You've got to remember that we are pretty strict on the credit side of the world and on the safety side.

So I think to get to 66, we probably could have signed 156. That would be my guess that we see a lot more than we signed. And it's a well received product out there. I mean, it's service. Word of mouth is still extremely strong. All we need is a little help out of the economy to really kind of rock and roll.

And in terms of the number of clients that you lost so far in the year, is that still trending where it was in the fourth quarter or is that lightening up at all?

Well, we haven't seen it in the first -- same kind of numbers in the first four weeks of January. But until I see a couple quarters of that slackening, I'm not going to make any predictions about it because, you know, if the economy continues to decline, then you're probably going to see some continuation of that kind of decline in our customer list. They are like the cat hanging on. You know, they are hanging on by the claws. And anything that they can do to try and survive.

It's tough to predict.

Well, I'm sure you see it down around there. Just read the newspapers. What is your unemployment? Got to be at the 9.5 range?

I think it is getting there. You just wonder when it is going to stop.

Yeah. You and me both. I mean, I've been through four or five of these recessions and in the past, all it took was the lowering of the interest rates. Well you've got interest rates at zero. So we can throw that one out. So I'm in unchartered waters here about the macro-economics of what's going to drag us out of this.

And, Jim. Actually have a question for Jim. I don't know if you did this analysis but historically Q1 has always been the lowest EPS quarter and because of the unemployment taxes. You expect a $0.27 to $0.28 jump from Q1 to Q2 or would that be more given the higher unemployment costs this quarter, this year?

It won't be all of it, Jim. But there will be a big chunk that goes to profitability in the second quarter. Unless our revenues decline significantly.

Certainly that's the biggest piece of turning from a loss back into being profitable.

Right. I'm just wondering in 2007, in Q1 to Q2 you were up $0.27. '08 you were up $0.28. So all things being equal on the revenue side should we expect that $0.27 to $0.28 from Q1 to Q2.

Tim, you've got a couple of things going on. Our seasonal business, which is staffing and higher margin picks up in that quarter. The unemployment drops off. So given all things equal, I would anticipate that we certainly would do that.

We should see a similar trend.

I don't see anything standing in the way of -- if the staffing picks up and we know that the unemployment will drop off then there would be no reason why it wouldn't do the similar things we have done in the past.

Okay. And then just on that staffing, Bill. Historically I saw your staffing business is a little bit more immune than Kelly-type services but what's the status of that in this environment?

Well, I mean our customers have just simply cut back. They just are not using. We haven't lost a lot of customers but a lot of the big stuff that we do, excluding the cannery business, the cannery business and the wine packaging and those things that we do should remain relatively similar, so I do not see staffing going to zero. But I'm not so sure about some of my competitors. I hope to own a couple of my competitors in terms of their stock and I'm not positive they couldn't go to zero. It's pretty rough out there.

Okay.

So we have done some of the right things. We are a little bit insulated from -- I would hate to be in the high tech staffing arena right now. That's a very difficult proposition.

Yeah. Okay. Those were all my questions. Thanks.

Thank you.

(Operator Instructions). We do have another question from Shawn Willard.

Good morning.

First question is?

First question is from me. One thing you and I sort of talked about once before and it is somewhat more timely given that they are passing or trying to pass the stimulus mess. What would happen or your opinion -- you said lowering interest rates to zero. You can't do anything more there. One of the things that's been bandied about is actually putting in a reduction of the payroll taxes so it goes directly through to the employees. One, do you think that would be beneficial and maybe be something that could kick start things. And two, from an accounting perspective how would that impact you? And you and I did start a conversation on this long ago but we never finished it.

If it is passed through to the employee it would have no effect on us whatsoever. And if it was a company like the $3000 tax credit they once proposed.

Right.

We wouldn't pay any taxes for a couple of years probably. I personally don't think that it is meaningful to put the money in the hands of employees at such a low level. 3, 500, $600. I think that helps Wal-Mart and McDonald's but I don't think it is going to help the overall economy. Loosening bank credit is going to be -- and you and I have talked about this whole mark-to-market stuff. Really, we see a lot of our customers are suffering as a result of of the inability to get loans to continue to operate their businesses.

And so as you go down the scale of credit worthiness whereas somebody may have been a 70 percenter could get money before, they're out, and if your business is not liquid enough that you've got enough net assets to do to carry it yourself, what are you going to do? You're screwed. You're out of business.

Particularly with them calling credit lines lately has been the big thing that has hurt businesses.

What's going to help us, Shawn, we have already heard about it. Is our competitors, a lot of them will go out of business. It's just the way, I have a theory that in general recessions are a result of too many of everything. Too much competition, too many cars, too many houses. Too many whatever you want to name.

And what recessions do, it eliminates a lot of the too manies, and so when these too manies build up, the margins decrease. The pie stays the same. Everybody gets a smaller piece. When recessions hit a lot of competitors go away. We had somebody just today wanted to know if we would PEO their temporary service and the answer was no. So I think over this next year, assuming a non-rapid recovery, that we are going to get some benefits just of people going out of business. A lot of competitors. Particularly locals. And maybe some nationals.

Okay. Then the second question. I know that you obviously have most of your business on the West Coast but you do have the Maryland operations and a few other specialty areas. The past couple of recessions have tended to start in California and end first in California. Do you think that might be the case this go around as well or just no visibility at all, what might bring it around at this time?

I thought back in November that we may have leveled it out some. And I think the country did. But the last two weeks of December were like somebody threw water on a fire and it just went out. Most of the miss in the quarter came in the last two weeks in December. That's how bad it was.

It's kind of like I went shopping for Christmas and you could have shot a gun -- a bullet through a store and never hit anybody. And I think there are a lot of companies that simply shut down. And significantly cut back because there just wasn't any reason for them to stay open. I'll let Mike speak to it. Mike and Greg just finished with the round robins down in Southern California and Northern. Did you do Northern yet?

Yeah.

Maybe they can speak a little more because those are the people right at ground level. Mike?

Yeah, I think that -- again, we kind of thought things were firming up even at October and November and felt that overall that we were holding our own pretty well and then after Thanksgiving it was -- everybody just slowed everything down and then as you got closer to Christmas and New Year's, basically companies shut down. They basically said if you want -- we will pay you half wages and take two weeks off. And then as we came into January it was a slow go. In fact, the first couple of weeks in January looked a little bit like the last couple of weeks in December. And then as we continued now into February things are firming up. As far as California leading the charge, California still seems to have, and it is still suffering with some of the highest unemployment in the country. So again, I think where you could before in our business look out a month or two months and have some visibility, today it is week-to-week. In our markets what we continue to do is our management strength continues to mature and strengthen. Our process which we acquire new business is maturing quite well, and we're building with, but anyone we are talking to are a half to a third as big as they were two years ago.

Thank you.

There are no further questions at this time.

Well, we thank you for your interest and for those who are continuing to own the stock, rest assured that we are running a well run company here where there is no -- there is no slack. We are running tight, we have got a great business model. And we hope that over the next several months, we will see this economic malaise back off and I think you will see some really good numbers come out of us. I can see where the leverage is, and I'm not just blowing smoke about it, I'm really proud of the company and I think that our opportunities, assuming we do not enter a depression are going to be great. So we will talk to you all next quarter. Thank you very much.

This does conclude today's conference call. You may now disconnect.