Barrett Business Services Inc (BBSI) 2009 Q4 法說會逐字稿

Good afternoon. My name is Vanessa, I'll be your conference operator today. At this time I would like to welcome everyone to the earnings release call for Barrett Business Services. (Operator Instructions) Thank you. I would now like to turn the call over to Mr. James Miller. Please go ahead, sir.

Thank you. Good morning This is Jim Miller with Bill Sherertz Today we will provide you with our comments regarding the Company's operating results for the fourth quarter ending December 31st and our outlook for the first quarter of 2010. At the conclusion of our comments we will respond to your questions. 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 for the fourth quarter summarizes the Company's revenues, 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 one -- more informative 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 fourth quarter results, as reported, the Company earned $0.21 per diluted share in the 2009 first quarter as compared to similar earnings per share of $0.21 for the fourth quarter of 2008. Total gross revenues for the fourth quarter of $270.8 million increased $7.7 million or 2.9% over the 2008 fourth quarter. California, which comprises approximately 79% of our overall fourth quarter gross revenues increased 5.7%, owing to an increase in PEO revenues partially offset by a small decline in staffing revenues. Staffing revenues for the fourth quarter of 2009 decreased $2.7 million or 8.1% from the fourth quarter of 2008 primarily due to a decline in demand from our existing staffing services from existing customers in the majority of our markets as our new staffing business added during the quarter nearly offset the loss of business from former customers.

PEO gross revenues increased $10.4 million or 4.5% on a quarter over quarter basis primarily from the addition of the PEO business. Our new PEO business during the quarter from customers added since January 1 of 2009 exceeded the sum of our lost PEO business since the fourth quarter of 2008 from former customers, and the decline in hours of work at existing customer work sites. Gross margin dollars for the 2009 fourth quarter declined approximately $97,000 from the 2008 fourth quarter primarily due to an increase in direct payroll cost associated with the growth in PEO business. These cost increases were partially offset by the growth in revenues and a decrease in workers' compensation expense. Gross margin percent on a gross revenue basis was 4.4% compared to 4.6% from the prior year primarily due to an increase in the direct payroll cost percentage.

Direct payroll cost increased 59 basis points over the 2008 fourth quarter primarily attributable to the increase or mix of PEO services, which typically have a much higher payroll cost component than staffing services. Payroll taxes and benefits for the 2009 fourth quarter as a percentage of gross revenues decreased slightly from 7.3 to 7.2%. Typically during the fourth quarter, the statutory taxable wage ceilings have been reached for many of our employees, therefore reducing our overall effective payroll tax rates.

Workers' compensation expense for the fourth quarter of 2009 as a percentage of gross revenues decrease from 3.6% to 3.3% due primarily to a decline in the overall estimated cost of injury claims during the quarter compared to the 2008 fourth quarter. 2009 fourth quarter selling, general and administrative or SG&A expenses of $8.7 million decreased $124,000 or 1.4% from the 2008 fourth quarter. The decrease principally due to lower branch management payroll. Looking at the balance sheet of December 31st, cash and marketable securities totaled $50.4 million at December 31st, 2009, compared to $60.1 million at December 31st, 2008.

The decrease was primarily due to $3.4 million used to pay quarterly cash dividends $3.1 million used in net purchases of long-term corporate bonds and an attempt to improve the Company's investment yield and $3.0 million in cash used to repurchase 313,000 shares of the Company's common stock. Trade accounts receivable at December 31st, were $33.1 million decline, $1.3 million from December 31st, 2008, primarily due to a decrease of accrued revenue at December 31st, 2009. The day sales outstanding and accounts receivable or DSO of 11 days, is down from December 2008 of approximately 12 days due in part to a shift in PEO mix, which has shorter payment terms. We continue to monitor our customer credit terms and closely track collections in light of the continued challenging economic environment.

The increase in current long-term portions of workers' compensation claim liabilities as of December 31st, 2009 compared to a year earlier primarily represent the impact of an $11.8 million workers' compensation adjustment taken during the second quarter of 2009. The decrease in stockholders equity of $10.5 million at December 31st, 2009, is primarily due to the net loss of $4.8 million for the entire 2009 year. Cash dividends paid of $3.4 million and the Company share repurchases of $3 million. Cash flow from operations for the 2009 fourth quarter, total approximately $4.7 million, which was primarily comprised of net income of $2.2 million for the quarter, plus the seasonal declining accounts receivable exceeding the seasonal decline in accrued payroll and payroll taxes.

Turning now to our outlook for the 2010 first quarter. As reported yesterday, we were expecting gross revenues to range from 258 to $262 million for the first quarter of 2010. This projection represents a likely mid-point increase of 14.1% over the $227.9 million in first quarter 2009 gross revenues. The projected increase of 2010 first quarter gross revenue is based upon our recent revenue trends, and is consistent with historical trends of first quarters typically experiencing a decline from fourth quarter revenue due to seasonality.

While we are projecting a sizable growth and gross revenues for the 2010 first quarter, the majority of this growth is projected to be in PEO business, which early on in the year tends to provide very low gross margin dollars until statutorily taxable wage ceilings are reached, which usually is late into the first quarter or into the second quarter.

Based upon the foregoing estimates for gross revenues we anticipate a loss per share from the 2010 first quarter to range from $019 to $0.22 per share as compared to a diluted loss per share of $0.30 for the first quarter of the 2009 first quarter. At this time Bill Sherertz will comment on the recently completed fourth quarter and our outlook for the first quarter of 2010. We will then open the call up for questions. Bill?

Thanks, Jim. Actually, I considered the fourth quarter to be a good quarter, particularly given the challenge of the economic environment. During that quarter, we signed a total of 113 new customers on the PEO side. Of those 28 were considered white collar. During the quarter, we canceled or had 50 customers leave us. Of that 50, 15 were for AR issues, which is our choice. An additional 15 were non-AR issues or risk issues that we did not care to take any longer. Four businesses sold. The number of businesses left on their own. Three, pricing, was four customers. Two payroll in house was three. So three customers decided to leave using another service. So very positive. We still face a lot of economic head winds in terms of particularly credit probably being the number-one issue that we see.

Starting the year, I'm pleased with what I see, a lot of new customers coming on. The overall trend is up 10% for the first four weeks of January. Preferred payroll is growing. We have nice deals with the PEO and staffing is up. And that's given some headwinds that we have snow in the east as some of you I'm sure are familiar with. A lot of our branches on the East Coast were kind of small or shut down. And then heavy rains in Southern California which is affecting us as well. Being up 10% given those two factors, I think, portrays some very good stuff in the future for us. That's about all I know right at the moment.

I'm pleased with the Company, even though it's going to be a loss in the first quarter. That's mostly due to pseudo rates. The more new customers you bring on, which was another really good quarter for bringing on new customers. Actually all of those customers in the first quarter we probably have very small margins to negative margins. And, unless staffing were to pick up significantly first quarter is going to remain to be negative most years to come as well. And, with those comments, I'll open it up to questions.

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

Hey, good morning. Thanks for taking my questions. Actually, your last comments lead into my first question about the payroll taxes and whatnot. But I was curious mainly, what your outlook is for the staffing business is right now; and as we look out to future years, is PEO going to continue to grow faster than staffing, or do you see, staffing maybe a little bit of a coming back, and then thereby easing the -- easing the losses we typically see in Q1 in future years?

The staffing business is a very competitive world out there, and it's much easier for us to grow on the PEO side, which is not to say that we're eliminating the staffing; but it's been pretty difficult '09 for staffing. I mean, that's kind of one of the first things that's cut. But as you've seen from Kelly and some of the others, staffing in general has picked up, and we're seeing it as well.

But it's not a main emphasis that we're particularly pushing at this point, because it's a difficult business to really kind of push in the economic environment we're in. I think what you see from others is just organic internal growth of the size of their customers, and it is with us. While we're always signing new customers and older customers are using less just because that's the nature of the business, we see the PEO business certainly as a longer term revenue, and that's the attractiveness of PEO business as well as preferred payroll. Those tend to be very long term and the staffing tends to be a lot shorer term. Still a very nice addition to margin's profitability. But very subject to economic conditions.

Okay. And I understand the tax component that hits up early in the year especially when you're bringing on a new PEO business; but what about if we're looking at quarters two through four? When you're adding those PEO clients what's the margins right there if you're adding the -- I actually missed the number of client additions you had, was it 113?

Yes, 113.

When you're bringing on a hundred new clients a quarter how long does it take until you turn a profit on them?

Approximately three months; and it depends on the level of pay. We're tending to sign higher pay clients, which will put us out of the caps earlier, but that's always going on. That the subject that hits in the first quarter is every customer we have, not only new ones, but every customer gets back in that business. So it's zero margin to sometimes negative margins. Then second quarter we pick up the margins. We picked up all those margins in our profit as well. We make our money in the last six months.

So there will be a return to profitability in Q2 similar to what we had seen last year and prior years?

I think it will more than last year. Just based on my own internal models, we should make up what we lose in the first quarter in the second if economic conditions remain as they are.

Right. Okay. Just shifting gears a little bit, I just wanted to get a feel of your clients payrolls. Are they adding, or at least holding firm?

Holding firm. We just ran an average hours worked, and average number of employees, and we're -- you know, we're pretty heavily California. It's remained stagnant the last six months. I guess that's good news. It's the old deal that every time when I hit my finger with a hammer it hurts. Well, quit using a hammer to hit your finger. So when it stops going down it feels better. That's what we've seen over the last six months.

Over the average worked the last few months, are those metrics that you'll disclose.

I don't know. The only -- yes, we could. Greg runs those. Yes, we could do that.

Okay.

I don't know how inaccurate they are. But it's the same inaccuracies,all the time, so it's a comparative level that we look at, not necessarily how accurate they are in terms of actual dollars and numbers.

I got it. But I guess you could give those to me off line. With regards to temp hiring, obviously we see the temp hiring pick up based on the monthly BLS reports here. I was wondering, what percent of your clients use recruiters for the temp hiring versus do that internally?

What percent of our clients are temporary? You mean on the PEO front, or just general?

Mostly on the PEO front. Totally on the PEO front I'm just curious if the bulk of your clients actually do the temp hiring internally versus using the recruiters, because you benefit when it's done internally.

Our customers are mostly small businesses, and there is crossover between PEO and staffing. I would say we probably hit 90 plus percent of any staffing that they do use. Although, they're not very big users, to be frank about it, of temporary help.

Okay. I'll jump back into queue. Thanks a lot, Bill.

Thanks, Josh.

Your next question comes from the line of Jeff Martin from Barrett Business Services.

Maybe Roth.

Good morning, guys. This is [Amit Azicari] I'm calling in for Jeff.

Yes

Just curious to see what your clients are telling you in terms of business conditions. I mean, would you guys say the environment is showing signs of improvement.

We kind of polled managers and talked to them, I think what we're hearing is they're hopeful. It would be nice to see Washington make decisions or shut up for awhile, and I think people would make more definitive decisions. Credit is still the number-one issue of small business, the able to get loans with bank financing has loosened some, but it is still a critical issue for them.

Okay. And can you talk about the recent trends for the fee part of the business, versus the direct costs components like taxes and workers comp insurance.

Well unemployment tax universally across the nation has gone up. That certainly contributes to a higher first quarter loss than may be normal. We were able to recoup some of that from our customers, not all, but other than that relatively it's kind of a pass-through cost that really has not much effect on us. Our margins per employee, if you will, our PEO customers remain fairly consistent.

How many shares were bought back during the quarter.

Jim?

I have that number here. During the fourth quarter of '09, we bought back just a little over 60,000 shares.

Okay. And how much is authorized left in the buy-back?

Yes, current remaining authorizations, a little over 1.8 million.

1.8 million. And have you guys thought about boosting that?

I don't think we need to boost it? We're having a hard time getting shares when we're in there trying to buy it any way. As soon as we get close to 1.8 million we'll let you know about the boost.

Sounds good. Thanks, guys.

(Operator Instructions) At this time there are no further questions.

That's great. Well, thanks for your interest, and we actually look forward to a very good 2010. We've got a lot of momentum, a lot of things going on. I anticipate, given that we don't have some kind of W that we're going to have a good year. Thank you, an we'll talk to you next quarter.

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