Barrett Business Services Inc (BBSI) 2009 Q3 法說會逐字稿

Good afternoon. I will be your conference operator today. At this time, I would like to welcome everyone to the Barrett Business Services earning release. (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 third quarter ended September 30th, and our outlook for the fourth quarter of 2009. At the conclusion of our comments we will respond to your questions. Our remarks during today 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 upon gross revenues and 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 third quarter results. As reported, the Company earned $0.28 per diluted share in the 2009 third quarter, as compared to earnings per share of $0.06 for the third quarter of 2008. Included in the 2009 third quarter earnings was a pretax gain of $572,000, or approximately $0.04 per share from the sale of certain corporate bonds. The increase in earnings on a quarter-over-quarter basis was primarily due to, one, the 2008 third quarter mark-to-market impairment charge of approximately $3.5 million taken on the Company's investment in foreclosed and bond funds. And two, the 2009 third quarter experienced a $1.6 million decrease in selling, general and administrative expenses from 2008. These comparative benefits were partially offset by a 5.3% decline in gross revenues, and a $2.8 million decline in gross margin dollars from 2008.

Total gross revenues for the third quarter of $273.1 million, decreased $15.3 million or 5.3% from the 2008 third quarter. California, which comprised approximately 77% of our overall third quarter gross revenues declined 2.9%, owing to a decrease in staffing revenues and a small decline in PEO revenues. Staffing revenues for the third quarter of 2009 decreased $11.3 million, or 25.3% from the third 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 $4.1 million, or 1.7% on a quarter-over-quarter basis. We have continued to see a positive trend of the decline narrowing in year-over-year PEO revenues as we go further into 2009, primarily due to the addition of new business.

Our new PEO business during the quarter from customers added since October 1st of 2008, nearly equaled the sum of our lost PEO business in the third quarter of 2008 from former customers, and the decline in hours worked at existing customer work sites. Gross margin dollars for the 2009 third quarter declined $2.8 million, primarily due to the 5.3% decline in revenues, and a decrease in our gross margin percentage. Gross margin percent on a gross revenue basis was 4.5%, compared to 5.2% for the 2008 third quarter, primarily due to an increase in direct payroll cost. Direct payroll cost increased 74 basis points over the 2008 third 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 third quarter as a percentage of gross revenues increased from 7.4% to 7.5%, due to increased state unemployment tax rates in a majority of the states we do business in as compared to 2008. The rate of increase for the 2009 third quarter compared to the prior year has declined compared to the first two quarters of 2009, as statutory taxable wage ceilings have been reached for many employees, therefore reducing the overall effective payroll tax rates. Workers' Compensation expense for the third quarter of 2009 as a percentage of gross revenues decreased from 3.4% to 3.3%, due primarily to a decline in the number of injury claims reported during the quarter, compared to the 2008 third quarter. 2009 third quarter selling, general and administrative or SG&A expenses of $8.4 million decreased $1.6 million or 15.9% from the 2008 third quarter. The decrease was primarily due to lower profit sharing and commissions due to the decline in business activity and profitability, and also to lower branch management payroll.

Other income net for the 2009 third quarter totaled $965,000 or an increase of $500,000 over the 2008 third quarter, primarily due to the sale of certain corporate bonds. Cash and marketable securities totaled $47.4 million at September 30, 2009, compared to $60.1 million at December 31, 2008. The decrease was primarily due to $3.1 million used in net purchases of long-term corporate bonds, in an attempt to improve the Company's investment yield, $2.5 million used to pay quarterly cash dividends, and $2.4 million in cash used to repurchase 252,000 shares of the Company's common stock. Trade accounts receivable at September 30th of $46.2 million, increased $11.8 million over December 31, 2008, primarily due to an increase in accrued revenue at September 30, 2009.

The days sales outstanding and accounts receivable or DSO of 15 days is up from December 2008 of approximately 12 days, similar to the 15 days outstanding on a seasonal basis, compared to September 30th of 2008. We continue to monitor our customer credit terms, and closely track collections in light of the challenging economic environment. The increase in the current long-term portion of Workers' Compensation claims liabilities compared to December of 2008, primarily represent the impact of the $11.8 million Workers' Compensation adjustment taken during the second quarter of 2009. The decrease in stockholders' equity of $11.3 million at September 30, 2009 compared to December 31, 2008 is primarily due to the net loss of $7 million for the first nine months of 2009, cash dividends paid of $2.5 million, and the Company's share repurchases of $2.4 million.

Turning now to our outlook for the 2009 fourth quarter. As reported yesterday, we are expecting gross revenues to range from $265 million to $270 million for the fourth quarter of 2009. This projection represents a likely midpoint increase of 1.7% over the $263.1 million in fourth quarter 2008 gross revenues. The projected increase of 2009 fourth quarter gross revenue is based upon a recent revenue trend, and is consistent with historical trends of fourth quarters typically experiencing a mild decline from third quarter revenue due to seasonality. Based upon the foregoing estimates for gross revenues, we anticipate diluted earnings per share for the 2009 fourth quarter to range from $0.19 to $0.22 per share, as compared to diluted earnings per share of $0.21 for the 2008 fourth quarter. At this time, Bill Sherertz and Mike Elich will comment further on the recently completed third quarter, and the outlook for the fourth quarter of 2009. We will then open the call up for questions. Bill?

Thanks, Jim. During the quarter, we signed 101 new PEO customers, and we lost 44. Of the 44 that left, 12 we asked to leave on AR ,which is the single -- probably the single most thorny issue we have with customers is their ability to pay. Eight left for non-AR, and those typically would be safety-related issues. 11 businesses were sold, closed or no more employees. Four customers decided to leave for reasons unknown. Five customers decided to leave due to pricing. One customer decided to take payroll in house. Three customers decided to leave, use another service. Overall, the ratio between signing new customers and those who leave for various reasons remains extremely positive.

Revenues from PEO's in the quarter, same-store sales would have been down 15%. We lost about $34 million from PEO's who are no longer here. We picked up $60 million from new PEO's. This spread continues to trend in our favor. We used to break even each quarter, last quarter was $17 million gain. Overall staffing is down about $11 million or 25%. Same-store sales staffing down about 22% or $7 million. We picked up about $7 million in new staffing business, but lost about 11.8 from third quarter staffing customers who didn't use us in 2009.

All in all, I'm very pleased with what the Company has done in a very difficult situation, particularly having to do with credit and high unemployment. Just in the last few weeks, our revenues have turned positive year-over-year. And we think we have a lot of momentum in the Company, and we certainly have a lot of capacity. So if the economy will simply stay where it's at, or it'sgets a little better, we should do really well. If we enter a double dip recession, I don't quite know what to make of that. We will survive, and at some point the bet is, that things will get better. Mike, you got anything to add?

Well, I think overall we continue to see that our operations are -- continue to gain strength, both in maturing and internally. We've done a lot of right sizing within branches to match them to the business. As well as build capacity internally to ensure that we're handling the new business that we have coming on. And overall, we're seeing a trend towards optimism in the market where businesses are starting to make forward-looking decisions, and ultimately making decisions to come on-board. So we're seeing an uptick in our pipeline.

With that, we'll take your questions.

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

Hey, good morning and thanks for taking my questions. I guess my first question is more from a macro standpoint. I was wondering if you were seeing with your client base, are they starting to add employees to their payrolls?

Josh, no. The first step you're going to see is the average workweek was 33 hours now. And the first step is not going to be to add employees, it's going to work those people longer hours. Then they get into overtime, they start working them in overtime, and then they'll add. So it's actually a three-step process. What we're seeing right now is a fairly consistent workweek, and which would imply, the good news is, that it's not getting worse. But we don't see any strong uptick at this point either.

Okay. And as the workweek increases, I guess I just want to have a better idea of the leverage here that you have with each client. Are you going to be more profitable with an increasing workweek or with them having more employees on the payroll?

Both. Both affect us. Our margins are determined by wages. So the more wages a Company pays, the more gross margin we get. So we have it both ways.

Okay. Good. Now, shifting to the staffing business, I know the year-over-year comps are tough, but we have seen some nice sequential improvement two quarters in a row here. Can you remind us, what are the seasonal factors in this business?

Well, we do an awful lot of canning, which is a spring, summer, fall business where we're running canneries. We do some of the wine business down in Napa, where we're stocking the shelves and packaging and helping out with the stores and those kinds of things. Those are seasonal. And then beyond that, a big part of our staffing is out of Utah. And so goes Utah, so goes our staffing. And they do a lot of manufacturing, packaging, those kinds of things, particularly the vitamins and others. So -- but typically staffing will fall off in December and January and February.

Okay. What about the margin profile in that business? I know there's a lower payroll component. I know you're consolidating gross margins, are at about 4.5%. I was just curious what the staffing gross margins are.

I haven't look at them in a while, but they're usually in the 13%, 14%.

Okay. Just two more quick ones. Obviously, you guys are sitting on a nice amount of cash and I was curious if you wanted to maintain that position for the time being? Or would you maybe explore some acquisitions? What are your near term priorities for that cash?

Right now, we're working on a couple acquisitions. They're relatively small, but strategically, they could work in our favor. As far as much larger ones go, I don't know that I'd have the appetite to do that, not knowing what's coming at us. I would rather see the economy really stabilize and the government get off this spending binge it's on, and that's kind of before I kind of make the decision to peel out $10 million or $20 million.

Right.

I kind of like having it in the bank. It makes me feel good.

Of course. These niche acquisitions, were these mostly PEO?

Both PEO, yes. We're getting sometimes one or two a day. Looks like people don't want to be in this starting next year, and some of them are pretty poor. It's the old Alaskan story, you know, the odds are good and the goods are odd. So we look at them and if they fit strategically, then we'll pursue it. And the ones that are severely overpriced, and there are some, that are located in the middle of no place, then we just kind of move on. We've got a lot of internal stuff that we're working on. Our preferred payroll is starting to do well. It's the fastest growing part of our Company. And we really want to -- we just hired a new salesperson in Denver, and we want to see that market pick up, and Phoenix. So we've got plenty to do here.

Okay. Great. Lastly, just do you have the cash flow from operations number for the quarter?

Yes. And I'm speaking more on a GAAP cash flow basis, and that was essentially approximately about $3 million for the quarter.

Okay. Thank you very much for taking my questions.

Thanks, Josh.

Your next question comes from the line of Jeff Martin with Roth Capital.

Thanks, good morning, guys.

Hi, Jeff.

Bill, could you give us some update on workers' comp in California, and if it continues to be a big driver for new client signings, and what to expect in the future?

It's still a little bit up in the air down there. There's a big paint fight going on in Sacramento. But it looks like they're going to raise comp rates 22% or 23% first of the year. If they do that it will be a huge influx of business for us, yes.

And when will that be determined? What kind of things can we follow to stay up on that?

Well, there's a WCIB bulletin, executive bulletin that comes out weekly. That would be probably the best, unless you have a contact somewhere at the halls down there. But it still has to get past the director. I think that's where it's hung up. It's a political fight at the moment.

Okay. And are you seeing any change in the competition from private insurers in California?

Some of them left early. And I have not gotten any -- lately have not gotten any feedback of people going away. But if the rates go up because of the cost of claims go up, my guess is more will leave. They get frustrated with it.

Okay. So makes the PEO proposition that much more compelling?

I think so, yes. I think PEO proposition is becoming more compelling beyond workman's comp. In a severe downturn like this, where people have to focus on their core competencies, and they don't have the time to do the administrative work and still survive. So I think that message is getting pretty clear out there.

Okay. And then on to the client adds and subtractions, with 12 accounts terminated for AR reasons, was there a quantifiable bad debt associated with those 12 accounts, or is it really nonmaterial?

Well, we wrote off $200,000 in the quarter. We've been -- I don't know what is the number for the year we've written off so far?

Probably about 300.

About 300. We would like to think that we couldn't get stuck, but we do. The state holds us to the payroll. If the Company bounces a check off us, and that's typically we get either an NSF back on a wire or a check or a cashier's check that does never arrive. That's the kind of stuff that goes on. And we're seeing that continue into this quarter.

Okay.

We're getting a lot tougher, though. I mean, we're getting a lot faster. And part of that's a sales process up front, that if you don't pay us, you're gone.

Right. Right. And then on the acquisition front, are you looking at PEO's that are kind of in lock step with what you've done historically? Or are these possibly white collar oriented PEO's. The question is it white-collar or blue-collar oriented.

More towards the white collar, Jeff.

I'm sorry. What did you say? Blue collar?

No. White.

White collar, okay. Are you then seeing a mix in the type of new clients that you are adding, basically by industry category.

It's all over the board. Cranes -- I'll just read to you a few. Electric Company, crane service, firearms and ammunition, dental studio, community services, insurance company, a kitchen, somebody's kitchen. So that's the kind of stuff. There's nothing -- there's a few smaller construction companies in here, but very few.

Okay. And then to I think Jim's comment about turning to positive year-over-year growth, in the past few weeks, does that mean you're seeing an acceleration of the business recently? Or are you just eclipsed some lower numbers?

When we look at week over week, we're maintaining that level and a little bit up. But you're right, we're coming up against -- fourth quarter last year was the start of a pretty big downturn. So we're going to look good, just because we're up against -- not very good numbers, but week over week we're also heading higher.

Okay. And then give us -- final question on a more macro level. Give us a sense of how quickly the business turns in front of a labor market recovery?Or in lock step with or trailing a labor market recovery and what specific metric? Is it unemployment? Is it payroll? What kind of things do you lead, lag or run coincident with?

Well, as I said earlier, the first thing that will turn up will be the hours worked by employees. And then you'll start to see more overtime, and then eventually companies start to hire. So those are the three steps in the process. And when you're looking at those components, what you don't want to see is the average workweek going down on a macro level. So going from 33 to 29 would not be a good sign. We're seeing it very stable at this point.

Okay. Great. Nice job, guys.

Thank you.

Your next question comes from the line of Frank Madglen with The Robins Group.

Good morning, Bill.

Good morning.

That was a pleasant surprise for the quarter and just a couple follow-ons. The preferred payroll, the preference payroll, how well is that going? And do you ever see that becoming a separate line item?

I suppose if it got big enough. It's all margin, so, yes, it could be. It could at some point. Right now we're focused on the brand here in Vancouver and Portland, and that's a pretty big market for us here.

Where are you booking it now?

Right here in --

Revenue line-wise.

It's going into the PEO service revenues.

Okay. It's in the PEO. And that's got to be substantially -- can you give us some guidance as to what the margin you expect on that kind of business?

What are we doing Greg right now? Do you know? Bi-weekly? It's about 15, 18,000 or something.

Six or seven a week.

And that's pretty small. 13, 14,000 every two weeks, six, seven a week.

Okay. And then the percentage on that, the gross margin percentage?

It's 100%.

Okay. That's all -- all right.

There's no cost or revenues to arrive at a margin. The only thing that's in it would be management payroll.

Okay. And then coming into the fourth quarter, a little help if we could, on the tax rate. Does that stabilize or what should we expect there?

Talking about the corporate income tax rate?

Yes.

That should be -- should remain in the low 30s, anywhere from 31% to 32%, 33%. It was higher during the second quarter because of the Workers' Compensation charge.

And was it a little bit lower, did you -- on the bonds, did you get long-term gain on that?

Yes. Part of the reason for selling the bonds and taking that gain was for tax benefits. We have a 2005 loss carry-forward of about $250,000 that is due to expire in 2010. So this gain will help us be able to utilize that loss carry-forward.

All right. And then what should we expect for next year, tax rate?

Again, I would say in the low 30s, around -- I would say in a range, 31% to 33%.

Okay. Then one other question for the fourth quarter, should we expect any type of bonuses in that SG&A number? Should that trend up a little bit?

No.

No, it's not going to be that good, huh?

Well, it could trend up a little bit. I wouldn't think significantly.

Bonuses for who? Management?

Yes.

We don't have any reversals coming or anything like that?

No.

No.

All right. Well, thank you very much.

Thank you.

(Operator Instructions). You have a follow-up question from Mr. Jeff Martin.

Thanks. Bill, I wanted to ask you a little bit about the first quarter. Because I'm thinking back three, four years ago when we had a couple consecutive quarters of guidance being below consensus, and just to kind of set an expectation for first quarter, when we're three months out from now. Based on the current level of business, do you think you'd be somewhere near breakeven for the first quarter, assuming economy stays kind of stable from where it is today?

Well, that would be -- what would need to really happen in the first quarter would be staffing business pick up, because the PEO business related to state unemployment runs mostly negative in that first quarter. So I would anticipate a small loss in the first quarter.

Okay. Great. That's all I had. Thanks.

All right.

(Operator Instructions). You have a question from Shawn Willard with Cygnus Capital.

Good morning. Just two quick questions for you. One, you mentioned that the workweek, you're averaging about 33 hours now. What was the low point, ballpark? And what would be normal before you would start the second leg up of people hiring? I'm assuming they don't get to 50 hours or anything like that. And then secondly, I realize they're not in your market, but any thoughts on Adecco buying MPS and the valuations?

I think the workweeks, when you get down at the very low unemployment levels, you're going to be seeing average work weeks in the high 30s. And you're going to be seeing a lot of overtime. So and I don't know, Shawn, worst case, that was what I was looking at. I think I was looking at First Interstate at eight and Baird, at 10 and every other stock in the world that looked like it was going to zero, but I would think the low point would probably be in the 20s somewhere. So it's probably bounced a little bit. But it's nothing substantial. I think it's more stabilized at this point now than anything else. It's just kind of stabilized where people are not letting people go. They're not working them more hours. They're not working them more overtime, or overtime, other than selective cases.

But the good news is that it's no longer going down. For almost 12 months we saw the average workweek go down. And companies laying off. And as we said earlier in ours, that our customer base in and of itself was down 15% in terms of the number of people they employed. The valuation on MPS, I guess I don't know enough about MPS to make that call. I mean, it certainly looked like a rich offer. And Adecco, they bought a lot of companies over the years. They don't seem to have much of a culture there, but I guess more power to them.

Just the first large acquisition in the space that there's been for a while, so I was just curious.

Well, there's some others out there, Comforce and Spherion that are fairly cheap and have a lot of locations. I have chosen not to run small branches. And so somebody has an infrastructure to run small branches, those would be a couple targets that somebody could look at, I would think.

Okay. Great. Thank you. Nice quarter, by the way.

Thank you.

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

Well, thank you for joining us. And we anticipate if the economy holds that we're going to do very well for as far as I can see, I like the momentum we have behind us. We're beefing up the sales side a little bit. We think it's a great opportune time to establish a bigger market share than we already have. And we hope that that will prove out in the quarters ahead. So we'll see you all at the end of the fourth quarter. Thank you very much.

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