Barrett Business Services Inc (BBSI) 2009 Q2 法說會逐字稿

Good afternoon. My name is Angelea and I will be your conference operator today. At this time, I would like to welcome everyone to the earnings release 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 Mike Elich. Today we will provide you with our comments regarding the Company's operating results for the second quarter ended June 30 and our outlook for the third quarter of 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 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 the second quarter results, as reported, the Company experienced a $0.65 loss per diluted share in the second quarter as compared to earnings per share of $0.29 for the second quarter of 2008. Without the impact of the additional Workers' Compensation charge of $11.8 million, net income per diluted share for the 2009 second quarter would have been $0.07.

The decline in earnings on a quarter over quarter basis was primarily due to, one, the $11.8 million increase in the Workers' Compensation expense resulting from the Company's change in estimate of its Workers' Compensation reserves; secondly, a 7.9% decline in gross revenues; and thirdly, a $4.5 million decline in gross margin dollars. And this is without the additional charge to Workers' Compensation expense.

Total gross revenues for the second quarter of $248.2 million decreased $21.3 million or 7.9 % from the 2008 second quarter which continues to reflect the challenging economic conditions in our markets, particularly in California and Oregon, which continue to experience two of the highest unemployment rates in the nation.

California, which comprised approximately 78% of our overall second quarter gross revenues, declined 5.4%, owing to a decrease in staffing revenues, and a small decline in PEO revenues. Staffing revenues for the second quarter of 2009 decreased $12.6 million or 31% from the second quarter of 2008, primarily due to a decline in demand for our staffing services from existing customers in the majority of our markets.

PEO gross revenues declined $8.7 million or 3.8% on a quarter over quarter basis. Our new PEO business during the quarter from customers added since July 1 of 2008 exceeded our lost PEO business from the second quarter of 2008 from former customers. However, the decline in overall PEO revenues was primarily due to a decrease in hours worked at existing customer worksites.

Gross margin dollars for the 2009 second quarter declined $16.3 million, primarily again due to the additional Workers' Compensation charge of $11.8 million as well as to the decline in revenue. Gross margin percent on a gross revenue basis without the impact of the additional Workers' Compensation charge was 3.9% compared to 5.2% for the prior year, primarily due to an increase in direct payroll cost and slightly higher employer payroll taxes.

Direct payroll costs increased 110 basis points over the 2008 second quarter, primarily due to a decline in our mix of staffing services which typically have a much lower payroll cost component than PEO services. Payroll taxes and benefits for the 2009 second quarter as a percentage of gross revenues increased from 7.7% to 7.8% due to increased state unemployment tax rates in 2009 in a majority of the states we do business in, compared to 2008.

The rate of increase for the 2009 second quarter compared to the prior year has declined compared to the first quarter of 2009 as statutory taxable wage ceilings have been reached for many employees, therefore reducing the overall effective payroll tax rates.

During the second quarter of 2009, the Company engaged a new actuary to review its Workers' Compensation liabilities. Based upon discussions with the actuary and a thorough review of the Company's reserving process, management elected to increase its liabilities to equal the new actuarial estimate as of June 30, 2009.

While reporting reserves for self-insured losses involves a considerable amount of judgment, management believes that the use of a new actuary provides a preferable basis of estimating the ultimate cost of claims, both now and in the future.

Workers' Compensation expense for the second quarter of 2009 as a percentage of gross revenues increased from 3.3% to 8.2% due to the additional charge. Without the charge, Workers' Compensation expense would have been 3.4% of gross revenues.

The 2009 second quarter selling, general and administrative or SG&A expenses of $8.3 million decreased $829,000 or 9% from the [2000] second quarter. The decrease was primarily due to lower branch management payroll and lower profit sharing commissions due to a decline in business activity and profitability.

Looking now at the balance sheet at June 30, cash and current marketable securities totaled $40.3 million at June 30, 2009 compared to $60.1 million at December 31, 2008. The decrease was primarily due to $10.8 million used to purchase single issue corporate bonds in an attempt to improve the Company's investment yield, $2.2 million in cash used to purchase 236,000 shares of the Company's common stock, and $1.7 million used to pay quarterly cash dividends.

Trade accounts receivable at June 30 of $41.5 million increased $7.1 million over December 31, 2008, primarily due to an increase in accrued revenue at June 30 compared to December 2008. The days sales outstanding in accounts receivable or DSO of 14 days is up from the December 2008 amount of approximately 12 days, but down from 15 days on a seasonal basis from June 30 of 2008. We continue to monitor our customer credit terms and closely track collections in light of the continued difficult economic environment.

The increase in the current and long-term portion of the Workers' Compensation claims liabilities primarily represent the impact of the $11.8 million Workers' Compensation adjustment.

The decrease in stockholders' equity of $13.6 million at June 30, 2009 from December 31, 2008 is primarily due to a net loss of $9.9 million for the first six months of 2009, the Company's share repurchases of $2.2 million and cash dividends paid of $1.7 million.

Turning now to our outlook for the 2009 third quarter, as reported yesterday, we are expecting gross revenues to range from $258 million to $263 million for the third quarter of 2009. This projection represents a likely mid-point decline of 9.7% from the $288.4 million in the third quarter of 2008 gross revenues.

The projected decline of 2009 third 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 third quarter to range from $0.17 to $0.20 per share as compared to diluted earnings per share of $0.06 for the 2008 third quarter. As you may recall, the third quarter of 2008 included a $3.5 million mark-to-market impairment charge on the Company's investments in foreclosed and bond funds.

The 2009 third quarter projection compared to the 2008 third quarter represents, one, lower projected revenues; and two, higher projected payroll costs, primarily resulting from a change in mix towards PEO services from staffing services.

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

Thanks, Jim. All in all, it wasn't a bad quarter. We felt like --particularly we feel like right now that we're at the bottom of the trough. In fact, my overall feeling is that we've started to turn up a little bit. And in that process, we wanted to make sure that our balance sheet was very clean and that we don't have ongoing issues in front of us. And we hired the actuarial firm to come in and look at every year separately. And it was determined that the years '05 and '06 had been misjudged as to the level of expense that we were going to record.

I think that represents the same thing that insurance companies and others that are pulling out of California have experienced, that there was a change in overall plaintiff compensation and medical costs that sometimes doesn't show up for two or three years. And obviously, we experienced that and a number of others in California as well. And that's why your rates have gone up 15% and probably will continue to go higher in California.

The two biggest issues facing the Company are, obviously, the Workmen's Comp issue is always going to be an issue, and bad debts. And we continue to see it and I'll talk in a minute about how many customers that we've had to cancel as a result of nonpayment or the inability to pay. But in this environment, those are the two main issues that really are kind of out in front of us.

During the quarter, we signed 158 new customers on the PEO basis, which is an all-time record for us in terms of new customers. And the trend continues to be very solid in signing new customers. We're also seeing a trend in which the hours worked are not going down. And that's a very positive statement, because up until this for two years, we've seen the hours decline in our customers' work base.

During the quarter, we cancelled or had 46 customers leave us, which is a very good ratio. Nine of those were cancelled as a result of AR. Seven of them were cancelled as a result, most likely, of comp issues. Sixteen businesses were sold. We had approximately 14 others decided to leave for pricing reasons, took payroll in-house or just wanted another service, of which we only lost two customers to another service during the quarter.

At this point in time where we've done some cost cutting, I think we're going to be a lot more aggressive in terms of bringing people on and building out in front of a market. If you look at building a company, at least in my point of view, the last thing you want to do is be trying to build a company in a major downturn. But if you can (inaudible) something near the bottom or the upturn, and we did that very successfully over the years. And I think we're at that point now. It's much easier to gain market share and the quality of people available to bring in is really very substantially higher than if the economy were good or you wait too long to try and increase your overall business.

So I'm relatively positive on the outlook. I certainly don't like taking those kind of charges. However, it does clean our balance sheet up, and we think we have a better handle with the actuarial now on not getting blindsided. We have four or five ways that we measure this. But the possibility always exists that things change that we don't see. And because the Comp has a long tail, things like this could happen again. And I won't try to sweep that under the rug.

But I am very positive right now. We're starting to see a little pickup in business, as I said. New customer signing is very good. We're well staffed, our branches. The losses -- branches that are losing money are small branches. Our big branches are making money. And we could choose to close the small branches. But again, if we are at the bottom or we're starting to make a move up, that would be the last thing in the world you want to do. It took us a long time to establish beachfronts in a lot of these markets, and they're good markets. And we'll participate, I think, very strongly with an economic flattening of the economic cycle or an upturn. At this point, I'm going to take flat -- would be really positive.

And I think that's kind of where we're at. We'll see what happens over the winter months and the first part of next year. But from our point of view, how we're looking at the world, we think there's a substantial opportunity here for us to gain market share and to build the Company. And if we'll get a little help from the market, we should do really well.

And with that, we'll take your questions.

(Operator instructions.) Our first question is from the line of Josh Vogel from Sidoti & Company.

Thank you. Good morning, Bill.

Good morning, Josh.

I was wondering if there were any reforms or legislation floating around California that you think is either making you nervous or making you more positive on the prospects of the business.

Well, we're not taking IOUs. No, they're really -- business is business. And the more the government continues to jump on the backs of small business and require them, whether it's health insurance or others, it's going to benefit us. And I think we're seeing a direct benefit from that. There is no specific legislation going on that I know of that would have any major impact on us.

Okay. And on the last call you mentioned something about California raising the Workers' Comp rates on July 1, and that was going to be a big positive to you guys in the back half of the year. Is that still --?

Yes, it went up -- the State went up 15%. They backed it down from the 24%. And a lot of the insurers went up 5% to 10%. So all that kind of plays into our hands. As long as we pick carefully. I mean, that's the real key to it.

Right. And you also mentioned last quarter that you expect the gross margin to continue to improve throughout the year. Is that still your stance here in the back half?

Yes. Yes, we're making our -- one of the things that we're really trying to push is what we call preferred payroll. And that would be a direct competitor to Paychex and ADP. It's a part of the Company that's growing and we think has great potential and will help our margins.

Great. And looking at your guidance, the decline at the midpoint in the range in the gross revenue for Q3, it implies a rate of decline that's greater year over year than what we saw in Q2. I was wondering if there is some seasonal stuff going on here, or are you just being super conservative?

Well, now Josh, you know you've got to give the numbers as you see them. You can't be super conservative or liberal or anything else. You just do them as you see them. Let's just say that we've got a month behind us and that's -- those are good numbers.

Okay.

We're probably a little better than that.

Do you have any comments on the first couple of weeks of July, what you've seen there year over year, and maybe versus April?

Actually, July we hit a breakeven week so far. I mean, it's better, it's better.

Okay. That's all I have right now. Thank you very much.

Thank you.

Thank you. Our next question is from the line of Bill [Deguire], a private investor.

Good morning, Bill. And the fact that you're in the saddle with such a dire economic situation, I'm convinced you're going to live another 40 years or 50, and I'm glad to hear that.

My question, Bill, is how many shares are there left for repurchase?

This is Jim. There's approximately 1.9 million shares authorized to be repurchased.

All right. I'm uplifted with the call and that's all I have, and thank you all very much.

Thank you.

Thank you.

Our next question is from the line of Jeff Martin from Roth Capital.

Good morning, Bill.

Good morning, Jeff.

Could you give us -- you mentioned hours worked being down a couple of times on the call. How far off the top are we? In other words, how much could you grow organically just regaining those hours?

30%.

Okay.

That's a guess, Jeff, but that's probably about right.

Okay. And are you starting to see that tick up or --?

Yes, I think the process you're going to see, and we're going to see it, and we've already started to see a little of it, is the number of hours worked -- the unemployment rate will probably still go higher, but the average hours worked will go higher as well. So they'll start using up -- the process will be people work will more hours. Then they'll start working more overtime. And then they'll start hiring. So in the process, what you look for as the first signs are that the hours are not declining.

Okay. What's your best guess on how quickly you could get that 30% back?

It will happen very fast if the economy improves. I mean, we're still -- even though I'm pretty upbeat about the Company, we're still fighting issues of people can't pay us and businesses closing their doors. So it's all not a panacea out here yet. But we think that -- it certainly -- it feels like we've turned a corner on it and it doesn't feel like it's been in the past where it's just going to get worse from here.

And I think a lot will just depend -- you live in California. You know. You can look around. The new home sales were good. That's very positive. We're operating down in California where some of the places are 13% and 14% unemployment.

Right, right. And then could you put into perspective -- obviously you're signing a huge number of clients. Put that into perspective, are those all PEO? Are you doing -- you mention preferred payroll. Are you doing some things just to kind of get clients on board and then add other PEO services on top of that? I mean, are you -- is the 158 clients, half of them only payroll, or is it all PEO?

That was all PEO. That's a number that if you went back over that we report each quarter, that's just all PEO. And no, we are not cutting our prices to bring people on board. We're not trying to gain market share in that and start a price war. I have no desire to do that.

Okay, because by my count you're probably adding 7%, 8%, 9% a quarter on a gross basis and two-thirds of that on a net basis to your existing client base. I mean, that's pretty significant.

Well, look back at what we did in 2001 and 2002 and 2003. It feels very similar to that, in that we were adding a lot of customers and then the economy got hot and everybody started doing a lot of overtime and hiring people. And -- but boom, it went pretty fast.

Yes, definitely.

If I knew that exact date, we'd go into the market and we'd just buy every share we can and we'd run. But I don't know that exact date.

Okay. What other questions did I have? On the Workers' Comp side of things, I mean, we seem to be in pretty good shape now that the charge is behind us. And if you had to say what kind of timeframe this could ever happen again, I mean, are we free and clear for a few years now? Or how would you give perspective on that?

I think we have better information, Jeff. I mean, it's always been a struggle trying to get a good number on what these ultimate claims have been. Very comfortable with the new actuarial firm that we hired. They're the ones that also do the State of Oregon. I would think that we're good for at least five years. Now that's not -- that's barring that something dramatic doesn't change again. But we certainly don't see that. And we have four or five benchmarks that are --- that we're using now that would have been nice to have been using back in '05 and '06. Our numbers would have been different.

We didn't have any problems with '07, '08 and the first part of '09. We had them go through all years, every year since '01, and take a look at where we were. So it primarily was those two years that really kind of got us.

Got it. Okay. And then could you speak to the staffing business a little bit? A lot of your staffing peers are calling a bottom here. Is it time to go out and start looking at acquisition opportunities again?

No, I -- if it were exactly right, we certainly would do it. But I think hiring management talent in some of our bigger markets and sort of forcing the market is really going to play better into our hands and is a lot less expensive way to build. At this level going into the Denver market and the Phoenix market and adding a few hundred thousand dollars in management salary, I think it's going to really give us a great return as opposed to buying a company and the distraction with it. Again, unless it's just a perfect fit.

Okay, great. Thanks, Bill.

Our next question is from the line of Jim Bussone from North & Webster.

Hi, guys. This is actually Sam Kidston. But just a couple of questions and I apologize if -- I dropped off the call for a minute during the Q&A. So if you've already answered them, I apologize. But number one, could you give us a sense on 2005 and 2006? You said that you've gone to the actuarial number, but where in the actuarial range are you actually booking those reserves at this point?

I believe we're booking them right at the top end. And we didn't -- there isn't a low, high, and most likely. We took it right at the high end. I mean, if you're going to take the charge, don't screw with it. There's no point in it.

Actuarial issue or was it --?

Well, no, it's a real cost issue. We saw that in the first six months of the year, particularly in April and May, that claims in those years were starting to creep up, and that caused us some concerns. And we hired an actuarial firm to come in and start looking at the years to see where the problem was. And the problem was '05 and '06, primarily.

And that would have been coupled, also, with the State of California audit earlier in the year that started to give rise to us wanting to take a closer look at it.

And is the issue the number of claims, the length of the claims? Where are you guys really seeing the issue there?

It's the length and the cost of the claims. We have almost no claims that are unknown. It's an issue of a finger or an arm or an ankle that you think is going to settle for $10,000 and you find out it's not going to settle for $100,000.

And how many open claims do you have from those years at this point?

We still have anywhere from 50 to 100 claims open for those years. So they are ones of severity and they've had a long tail.

Right, and I guess just the big question is does this cause you to -- cause any change in your ideas of self-insuring?

Yes, the loss ratio is still very positive. It's just -- the only thing that makes us change is we want to be a lot more conservative with our comp numbers, that's all. It's just one of those things where you say, well, your comp can't possibly triple or double. Well, it can, truth is.

Right. Does it affect how you're going to buy reinsurance at all, or -- ?

No. Again, we're looking at an issue that's almost three years old now, three and four years old. So we made those changes in '07 and '08 in terms of our reinsurance. So it really -- we're talking about old issues here.

All right, thank you.

Thank you. Our next question comes from the line of Tim Kang from Olstein.

Hi, this is Tim Kang from Olstein. Maybe I'm just -- I just missed the point on this one. But why did you -- do you guys have a rotating actuarial engagement program or how does that work exactly when you look for a different actuary?

Well, we were getting numbers from the actuarial that were stupid and couldn't be used. They were of no value to us. So through some personal contacts, Rick Sherman's firm here in Oregon, we brought them in and had them take a look to see what they thought. And it was simply having another set of eyes on the numbers to come in and his analysis made a lot sense to us. And not only did it make sense, it allowed us to run the Company as well.

We were looking to get information not only on the past, but looking out in the future on a better way of estimating claim costs.

I see. And this is more, like you said, in the last three months or so, right?

Correct.

And that hasn't changed your view about this specific self-insurance business?

No, again, it's -- the loss ratios are relatively very low. But you just need -- we just need to be a lot more conservative with our numbers. And I think we have that ability with the new firm and how we're looking at it and percents of payroll and a lot of different ways to come up with numbers that should last over long periods of time.

And have you implemented any of those types of, maybe, a little bit more conservatism into your pricing model in terms of new business or anything like that?

Yes.

Do you anticipate any change there or no?

Well, now I know there's not that much change there. Again, it's -- if you go back and look at '05 and '06, we made $1-something. We shouldn't have made quite that much money if we'd have been using a different methodology. So the model is not broken.

And a lot of the pricing issue is more market driven.

Yes, you're going to see our margins probably over time increase with the Comp rates going up. Remember, comp rates in California have been going down for the last three years.

Right.. Okay, thanks, guys.

Thank you.

Our next question is from the line of Frank Magdlen from the Robins Group.

Good morning, Bill.

Good morning.

On the PEO that you're signing up, is there a significant difference in the size of the people, the companies, you're signing up now than you were two or three years ago?

Well, to make our numbers look good, we went out and got a whole bunch of one-person accounts. No, not really. We're not signing any really big ones, but they're nice-sized accounts, about average.

Which would be what now, in today's environment?

About 30.

Okay. No material change there and I think we've beaten up the Workmens' Comp well enough to know that we shouldn't expect any problems for the '07 and '08 estimates?

Well, if we do, shame on me. But we've looked at it with the best set of eyes we know how to look at it. And so that's all we can do.

And it's -- since you took the high end of the estimates, if you're lucky, you manage those right and we'll bring it back to earnings a little bit later on.

Boy, I've had people, including our accountants, talk about that. Comp being what it is, that's a tough deal to bring it back in.

Okay, thanks a lot.

Thank you. (Operator instructions). Our next question is from the line of Jeff Martin from Roth Capital.

Thanks, Bill. I wanted to just get a sense. Are we going to see Q4 seasonality like we normally do, or could Q4 be up over Q3, do you think?

Boy, if the economy turns, Jeff, that will be a real harbinger Q4 will go over Q3. But I would expect there would be some seasonality on a normal basis.

Okay. That's really all I had, thanks.

That's good, because I'm losing my voice.

There are no further questions at this time.

Well, thank you very much. And we'll join you next quarter and we look for better and brighter things ahead. Thank you very much.

This concludes today's conference call. You may now disconnect.