Barrett Business Services Inc (BBSI) 2009 Q1 法說會逐字稿

Good afternoon. My name is Tasha and I will be your conference operator today. At this time, I would like to welcome everyone to the Barrett Business Services first quarter conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. (Operator Instructions). Thank you. Mr. Miller, you may begin your conference.

Thank you. Good morning, this is Jim Miller with Bill Sherertz and Michael Elich, and today we will provide you with our comments regarding the company's operating results for the first quarter ended March 31 and outlook for second 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 these 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 on gross revenues and various relationships to gross revenues, because management believes such information is more informative as to the level of our business activity, more useful in managing and analyzing our operations, and adds more transparency to the trends within our business. Comments related to gross revenues as compared to a net revenue basis of reporting have no effect on gross margin dollars, SG&A expenses, or net income.

Turning now to our first quarter results, as reported, the company experienced a $0.30 loss per diluted share in the first quarter as compared to earnings per share of $0.01 for the first quarter of 2008. The decline in earnings on a quarter over quarter basis was primarily due to, one, a 12.2% decline in gross revenues and, two, a $4.9 million decline in gross margin dollars. The $0.30 loss per share was larger than the previous guidance range of a loss per share of $0.19 to $0.22, primarily due to the shortfall in total revenues compared to our previous first quarter revenue guidance of $240 million to $245 million, and slightly higher direct payroll cost as a percentage of gross revenues.

Total gross revenues for the first quarter of $227.9 million decreased $31.7 million or 12.2% from the 2008 first quarter, which continues to reflect the challenging economic conditions in our markets, particularly in California and Oregon, which have two of the highest unemployment rates in the nation. California, which comprised approximately 78% of our overall first quarter gross revenues, declined 10.8% due to declines in both staffing and PEO revenues. Staffing revenues for the first quarter of 2009 decreased $11.8 million or 32.9% from the first quarter of 2008, primarily due to a significant decline in demand for our staffing services from existing customers in the majority of our markets.

PEO gross revenues declined $19.9 million or 8.9% on a quarter over quarter basis. Our new PEO business during the quarter from customers added since April 1 of 2008 exceeded our lost PEO business from the first quarter of 2008. However, the decline in overall PEO revenues is primarily due to a decrease in hours worked at existing customer work sites. Gross margin percent on a gross revenue basis for the 2009 first quarter declined from 3.3% to 1.6% from the prior year, primarily due to an increase in direct payroll costs and higher employer payroll taxes.

Direct payroll costs increased 101 basis points over the 2008 first quarter, primarily due to a decline in the mix of staffing services, which typically have a much lower payroll cost component than PEO services and also due to a decrease in the billing markup largely related to lower workers comp rate component of the overall markup on payroll. Payroll taxes and benefits for the first quarter of 2009 as a percentage of gross revenues increased from 9.4% to 9.9% due to increased state unemployment tax rates in 2009 in the majority of the states we do business in as compared to 2008. Workers compensation expense for the first quarter as a percentage of gross revenues increased from 3.4% to 3.5%. However, workers compensation expense in terms of total dollars decreased from $8.7 million to $8 million.

2009 first quarter SG&A expenses of $8 million decreased $629,000 or 7.3% from the 2008 first quarter. The decrease was primarily due to lower branch management payroll, lower profit sharing, and to an overall reduction in variable operating expenses due to the decline in business activity.

Looking now at the balance sheet at March 31, cash and current marketable securities totaled $57 million at March 31 compared to $60.1 million at December 31, 2008. The decrease was primarily due to $2.2 million in cash used to repurchase 234,000 shares of the company's common stock and $844,000 used to pay the quarterly cash dividend. Trade accounts receivable at March 31 of $36.4 million increased $2 million over December 31, 2008, primarily due to an increase in accrued revenue at March 31. The days sales outstanding and accounts receivable or DSO of 14 days is up from December 2008 of approximately 12 days, but unchanged on a seasonal basis from March 31, 2008. We continue to closely monitor our customer credit terms and collections in light of the continued challenging economic environment. The decrease in stockholders equity of $6.1 million at March 31 from December 31, 2008, is primarily due to the first quarter net loss of $3.2 million and the company's share repurchases of $2.2 million the quarterly cash dividend of $844,000.

Turning now to our outlook for the 2009 second quarter, as reported yesterday, we are expecting gross revenues to range from $235 million to $240 million for the second quarter of 2009. This projection represents a likely midpoint decline of 11.9% from the $269.5 million in second quarter 2008 gross revenues. The projected decline of 2009 second quarter gross revenue is based upon our recent revenue trends and largely reflects the continued challenging economic climate in our markets. Based upon the foregoing estimates for gross revenues, we anticipate diluted earnings per share for the 2009 second quarter to range from a loss of $0.03 per share to earnings per share of $0.03 as compared to diluted earnings per share of $0.29 for the 2008 second quarter. This projected decline from the prior year is due to, one, lower projected revenues; two, a higher projected payroll costs, primarily resulting from a change in mix towards PEO services, front staffing services, and to a significant increase in many of our state unemployment rates for 2009 compared to 2008. As we mentioned last quarter, the rate of the payroll taxes is frontloaded and will generally decline over the course of the year as employees reach their statutory wage rate ceilings.

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

Thanks, Jim. Well, I don't think we are rearranging the chairs on the Titanic, but it wasn't a particularly great quarter. The positive thing was we signed 122 new customers. That's one of our better quarters in history, and we only lost 43 PEO customers during the quarter. Of those, 11 were cancelled for either risk issues or AR, one left for other, one left due to pricing, 11 left and took their payroll inhouse which is certainly understandable, and two actually went to another service.

So while we continue to maintain our base above 90% retention ratio and we continue to add -- and that is we are broadening the base but as Jim mentioned on the call earlier, the hours worked continue to decline at our customer base. At some point, we think that that will stop, and we have not seen that yet. Our revenues have remained relatively flat and anecdotally we hear things are better. I have not seen it in the numbers. And in general, though, I'm really pleased with the level of management we have in the company and we are really kind of poised to do exceptionally well, but we are going to need a little help from the economy. I think if we get no help from the economy, in a flat economy, we will probably do pretty good. If the economy continues on down towards 15% and 20% unemployment, we are going to remain in a very difficult period as long as that continues. If we get an uptick, I think we will do really well.

So your guess is as good as mine. People asked me what would happen with 8% or 9% unemployment nationally. Well, here we are, and actually I'm very pleased that we are only running down 10% to 12%. Right at the moment we are down about 10% on a weekly basis. Staffing, as you well know, really takes the brunt of recessions and will be the first to come out. So some of the indicators about whether the economy is really turning or not will come not only from us but Kelly and Manpower and others who have a broader scope across the United States in terms of the number of employees. We will probably see it in the hours worked of our employee base first, and when we do, it will be rather dramatic in what it has an effect on us.

But we still have not seen any of that take place. We continue to add customers. We have no plans to close branches. Some of the branches obviously are losing money even without the caps. Our big branches are doing very well and I would expect that we will make money this year. And it really depends on just how the economy goes for the rest of the year. Like I said, we can take a flat economy and I think we will do really well. An up economy, we'll do great. And if it continues on down then, we will make the necessary adjustments as we go.

I don't have a lot more to say. Why don't we open this up for questions? Mike is here if you want to talk to him. Mike Elich is our COO and he's the road warrior. He's out at the branches on a weekly basis and has his ear to the ground. And for those of you who know or don't know, I'm pretty much back full time and keeping my finger on the pulse of what's going on out there in the business world. We've not -- we've looked at some acquisitions, but until we get some better visibility, buying an acquisition may be just stepping in front of a firing line. Unless it were really fantastic, we have really no desire to make an acquisition at this point. So with that we'll take your questions.

(Operator Instructions). Your first question comes from the line of Josh Vogel with Sidoti & Company.

Good morning, thank you. Bill, glad to hear you're back full time.

Somebody called me an (expletive deleted) the other day, so I guess I'm much better.

Building off of what you just said about you may make adjustments depending on how the economy tracks -- if things stay status quo with today, those branches that are unprofitable, would you, do you think you would lean towards closing them down over the next quarter or two?

And they are small, Josh. They are not our big branches. We are in small markets. Actually the expense is not very great, so that will be a tough decision. But if we really thought that we were headed towards 20% unemployment then, yes, we would pull the trigger on that.

Okay. Shifting gears, the staffing business, I know it's generally weaker quarter over quarter into Q1. But I was wondering if there was anything else unusual in the quarter outside of the general recessionary pressures, maybe were any significant clients lost, did they go out of business?

No, no, just down. I mean it's just, by nature what it is is people are using less, trying to make do with what they have.

Right. Okay. Can you maybe give us some comments on the pricing environment and if you are losing significant leverage with any of your clients? And also I know the gross margin came in at 4.6% last year. I was wondering if you could give us any idea of what you think the margin could be in 2009?

I will let Jim address that second part. The first part -- and I left this out -- we should see some margin expansion going through the particularly the second half of the year. California has decided to raise workman's comp rates by 24%. And that's effective July 1, and it looks like that's going to go through. That is really a big help to us in terms of our pricing pressure with our PEO customers. We've been lowering our customers' markup for the last three years, and you see that, and if you were to go back and look at our margins three years ago versus today, it's lower as well as our losses are lower. But we see the pressure was coming from the workmans comp side of the world. Our comp expense is up a little bit, and certainly in the state of California comp expenses on a [safe] basis has gone up. And so the expenses has gone up far more than the revenue from insurance point of view. and that could be a big help to us particularly in expanding margins with existing customers as well as the new customers. And we'll take any pressure we've had over the last two or three years in terms of having to lower markup, which effectively lowers our margin.

Okay. That's helpful. Thank you.

Jim?

And as far as the margin percentage going forward throughout the rest of 2009 -- will likely continue to lag 2008, again primarily due to the change in the mix towards PEO services, which will then result in a higher direct payroll cost component. We've spoken about the payroll taxes. As we get further out into the year, those will continue to decline but just with the overall base rates being higher in 2009, that will keep that cost component on a year over year basis higher.

As we add new customers we have to start over with the employees. So there's always a component of actually losing money every time you sign a new customer for a period of two to three months.

Right. Okay. So as payroll costs go down throughout the year we should expect to see a sequential improvement just off of the levels we've seen in prior years?

Yes, and that's what you see from first quarter to second quarter -- if everything being equal we lost the same amount of money in the second quarter as we did the first. But obviously you see that rather dramatic improvement, and most of it has to do with the [SUTA caps coming off, because the revenues are relatively the same.

Two more quick ones. Jim, do you have the cash flow from operations and CapEx? I just want to get a sense of the free cash flow in the quarter?

CapEx was a little under $400,000, and that was primarily due to our software upgrade that we recently completed internally. So no big CapEx projects going on. And cash flow from operations was just shy of about $700,000 for the quarter. Now obviously because of the loss, we have a lot of payroll taxes that are paid on a quarterly basis that will be coming out here this week.

Okay. And just lastly with your guidance here, the midpoint of the gross revenue range down 12% -- I was wondering if through the first three weeks or so of April, is gross revenue down 12% or maybe are you building in a little bit of a cushion here?

I don't want to use the word cushion. The first couple weeks, we are down about 10% or 12%.

Great. Thank you very much.

The next question comes from the line of Bill [DeGuire], a private investor.

Good morning and welcome back, Bill. It's good news.

Thank you.

And my question is two-fold. The first part is where do we stand on the number of authorized shares to be purchased and how many have we repurchased? And the second part is I understand the Board of Directors authorizing a specific number of shares to be repurchased. But after that authorization, who specifically decides how many within that containment are going to be purchased and at what price and when? Thank you very much.

As far as the number of shares that have been repurchased during the first quarter of 2009, there were about 234,000 shares that were repurchased, and the remaining authorized number of shares to be repurchased is about 1.9 million shares.

And as far as who decides the price, I suppose I do. In fact, I know I do. And I saw too many other companies, (inaudible) is one of them that decide to pin the stock price at too high a price and had no ability to defend the company at a lower price. However, at this point in time, our cash is greater than the total value of our stock. So we are in the market and we are subject to what we can and can't do, and I would suspect if we were to -- which I dearly would love to do would be to use up the allocation, that the board would be more than happy to reup that allocation of our authorization to buy more shares.

Thank you for that. I missed one data and that is how many shares remain to be purchased.

Approximately 1.9 million shares.

Thank you very, very much. And I conclude my comments, nice job, gentlemen.

Thank you.

(Operator Instructions). Your next question comes from the line of Jeff Martin with Roth Capital Partners.

Thanks. Good morning, welcome back, Bill.

Thanks, Jeff.

Should we look at -- when you talk about the hours being down really impacting the results, should you look at the decline additions and attrition? That suggests that the underlying business is doing extremely well and that you get a rebound in hours and you are going to see some pretty dramatic leverage in the model. Does the decline in hours pretty much track in lock step with the decline in revenue?

Yes, I think there's some leverage there. So the hours go down, but the revenue goes down greater.

Okay.

You don't have any -- a couple of things that happen. You don't have as many year end bonuses, you don't have as much overtime. It could be a dramatic number, when they start having people work 20 hours instead of 40 or 60.

Right. And in terms of California, since it is such a large percentage of the business, could you give a little more detail on maybe some specific geographies within the state, and then also by industry segment?

There is no real -- we tend to be more blue collar, gray collar than white collar. But there's really no industry concentration anymore of any size, probably nothing greater than 2% of any one particular industry. In terms of geographic locations it's -- I think Southern California will do better than northern California, but it's nothing that you are going to write home about. They both got whacked pretty good.

Is it safe to say that you need more of a recovery in the construction side of the economy for California to come back in a big way? What would it take for the hours to tick up based on specific parts of the economy?

That would help. Housing prices quit going down, get off the foreclosure and short sale stuff. That would definitely help. Because there's so much of a ripple effect going through to Home Depot and people who sell patio furniture and people who make bricks and people who drive trucks and all kinds of stuff. So while construction per se would help us because we do some of that, I think the ripple effect of having construction at least stabilize would have a much greater effect on us than construction itself.

Okay. And then can you take a shot at what the earnings potential is for the second half of the year if things stay stable?

I think if the unemployment rate quits going down, and so far in this quarter we continue to sign new customers at a similar place to first quarter, looks very good, that we'll be towards the upper end of our targets on the range. And then third quarter we should jump up into the $0.20 to $0.30. It's hard to tell -- depends on how good it gets. My goal would be to make money this year. I would like to see us make money this year. So we are going to be working on the expense side and hopefully the growth side and to make that happen.

Okay. And then on the staffing side of the business, are you going to see, do you still have the fairly large seasonal customers? Will we see an uptick in Q3 and Q4 like we have seen historically? Q3, I guess?

We haven't seen that uptick yet, but there's no indication it's gone away. So our revenue forecasts don't even include that. Every week I get the numbers. I'm waiting for some good numbers to come through here. That should be happening here very quickly.

Okay. And then I would take it any new branches would be on hold for an extended period of time at this point?

Only if we were walking in with a big customer would be the only way I would be tempted to open a new branch at this point. I need visibility, and right at this moment, I think like the rest of the world. Visibility is poor to say the least. I don't know whether stimulus is going to work or not work. I have no clue. I can only judge by what's given to me on a daily basis and a weekly basis and try and respond to it. Right now, I would remain relatively cautious. It's the same thing I said about acquisitions. I just don't know.

Okay. Thanks very much, Bill.

Thank you.

(Operator Instructions). There are no audio questions at this time.

Well, you guys are letting us off easy. I remain relatively optimistic. I think there are signs that maybe the economy is bottoming, and as I said earlier, really all we need is for the economy to stop going down. Every week that you see a new unemployment number go higher, it's got an effect on us, and when we see things flatten out, we are going to do really well and I am very pleased with the company. There's no restructuring needed here. We are certainly working hard on the cost containment side of the world, and keeping our expenses as low as possible without actually hurting ourselves. So hopefully by this time next quarter, we'll have much brighter news and I know your all businesses aren't perfect either. You guys have a tough deal out there as well, and I feel for you. So we will talk to you, and hopefully we will talk to all of you next quarter. Thank you very much.

This concludes today's conference. You may now disconnect your line.