Barrett Business Services Inc (BBSI) 2010 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 earnings release conference call. (Operator Instructions). Thank you.

I would now like to turn the call over to Mr. 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 first quarter ended March 31st and our outlook for the second quarter of 2010. 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 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 first quarter results, as reported the Company experienced a $0.16 loss per diluted share in the 2010 first quarter as compared to a $0.30 per share for the first quarter of 2009. Total gross revenues for the 2010 first quarter of 262.6 million increased 34.7 million or 15.2% over the 2009 first quarter. California, which comprised approximately 81% of our overall first quarter gross revenues, increased 19.4%, owing the modest growth in PEO revenues, partially offset by a small decline in staffing revenues.

Staffing revenues for the first quarter of 2010 increased 3 million or 12.6% over the first quarter of 2009, primarily due to an increase in demand for our staffing services from existing customers in both our Northwest and intermountain markets, as our new staffing business during the quarter nearly equaled the loss of business from former customers. The increase in staffing revenue from existing customers reverses a trend of declines over the past five quarters. PEO gross revenues increased 31.7 million or 15.5% on a quarter over quarter basis due to the addition of new customers. Our new PEO business during the quarter from customers added since April 1st of 2009 exceeded the sum of lost PEO business from the first quarter of 2009 from former customers and the decline in hours worked at existing customer worksites. Bill will comment further on the growth from new PEO customers in a few minutes. Gross margin dollars for the 2010 first quarter increased approximately 1.7 million over the 2009 first quarter, primarily due to the 15.2% increase in revenues and to a lower payroll taxes and benefit cost component as a percentage of revenues.

Gross margin percent on a gross revenue basis was 2.1% compared to 1.6% from the prior year; again, primarily due to the decline in the payroll taxes and benefits expense percentage. Direct payroll cost increased 20 basis points over the 2009 first quarter, primarily attributable to an increase in the mix of PEO services, which typically have a much higher payroll cost component than staffing services. Payroll taxes and benefits for the 2009 first quarter as a percentage of gross revenues decreased from 9.9% to 9.4%, primarily resulting from the Company changing to client-specific state unemployment wage reporting in California for all our PEO clients. The change resulted in a decline in the Company's overall average effective California state unemployment rate. These wages were previously all reported under the BBSI account which generally has a higher unemployment tax rate due to the impact of our staffing employee population. Workers' Compensation expense for the first quarter of 2010 as a percentage of gross revenues decreased slightly from 3.5% to 3.4%, as the Company experienced similar loss levels for 2010 compared to 2009 in relationship to the increased business volume.

Selling, general and administrative, or SG&A, expenses of 8.2 million increased 184,000 or 2.3% over the 2009 first quarter. This small increase was primarily due to the increased level of business activity. The benefit from income taxes for the first quarter of 2010 included an additional benefit of 248,000 or approximately $0.02 per share, primarily from a reduction to a deferred tax asset allowance as sales of certain closed-in bond funds during the first quarter of 2010 allowed the Company to carry back these tax losses against unused 2009 taxable capital gains. We expect our overall tax rate for the remainder of 2010 to be in the low 30s percent range. Looking now at the balance sheet at March 31st, cash and marketable securities totaled 43.3 million at March 31st compared to 50.4 million at December 31st, 2009. The decrease was primarily due to 6.1 million used to capitalize our new wholly-owned, fully-licensed insurance company in Arizona, and to make quarterly cash dividends of 837,000. The insurance company provides Workers' Compensation coverage to our employees working in Arizona.

The 6.1 million capitalization is included on our consolidated balance sheet as a component of restricted marketable securities and Workers' Compensation deposits. Trade accounts receivable at March 31st, 2010 of 44.5 million increased 11.4 million over December 31, 2009, primarily due to an increase in accrued revenue at March 31st. The days sales out standing and accounts receivable, or DSO, of 14 days is up from December 2009 of approximately 11 days, primarily due to seasonality, and is more consistent with the DSO of 14 days at March 31st, 2009. The decrease in stockholder's equity of 2.5 million at March 31, 2010, is primarily due to the net loss of 1.7 million and cash dividends paid of 837,000. Cash flow from operations for the 2010 first quarter totaled approximately 800,000, which was primarily comprised of the seasonal increase in accrued payroll and payroll taxes exceeding the combined seasonal increase in accounts receivable and the net loss for the first quarter.

Turning now to our outlook for the 2010 second quarter, as reported yesterday, we are expecting gross revenues to range from 278 to 282 million for the second quarter of 2010. This projection represents a likely midpoint increase of 12.8% over the 248.2 million in second quarter 2009 gross revenues. The projected increase of 2010 second quarter gross revenue is based upon our recent revenue trends and is consistent with historical trends of second quarters typically experiencing an increase over first quarter revenue due in part to seasonality. Based upon the foregoing estimates for gross revenues, we anticipate diluted earnings per share for the 2010 second quarter to range from $0.18 to $0.20 per share as compared to a diluted loss per share of $0.65 for the 2009 second quarter, which included an 11.8 million charge to increase our Workers' Compensation reserves. At this time, Bill Sherertz will comment further on the recently completed first quarter and our outlook for the second quarter of 2010. We'll then open the call up for your questions. Bill?

Thanks, Jim. We had another really good quarter in signing new customers. The total was 161 new PEO customers, in which 55 were clerical and 106 were related to an incentive program that we have having to do with risk. During the quarter, we had 70 cancellations, which is a little higher than we've had in the past. That's made up of -- 28 were due to accounts receivable issues or risk, 25 were due to people sold, closed or they had no more employees. Six decided to leave concerning pricing. Seven decided to leave where they took the payroll in-house. Two went to another service, and two -- actually there was four that went to another service.

So in general, I was pleased with the number of cancellations. There is not a lot we can do about particularly the AAR issues or the business sold. Overall, we're seeing customers not increasing much. Our growth is coming because we're adding a lot of new customers. Our product and services appear to be in demand, and that trend continues into this quarter with another strong start of the second quarter and new customer business, so that side of the business looks very positive. Our customers overall don't appear to be losing much ground. Some of them are getting larger and taking more market share, is what I see with our customer base. There is not an overall uplifting in terms of hiring in our customer base, but more that customers -- those who are doing well -- tend to be taking more market share.

I am pleased with the staffing business being up 13%. That's very nice, particularly in Utah, and those will spell some very nice things for us in the upcoming quarter. We continue to work on our new markets and that's our focus, and will be probably for the rest of the year in Denver and the Phoenix market. Those, I think, provide an opportunity for us to really do quite well. The rest of our markets are doing fairly well. Some of the smaller markets, we're addressing those issues. As you know, unemployment rates in California are still well above 12%. Most places where we operate, we're operating in double-digit unemployment.

And so I am relatively pleased that we came out of '09, the worst recession arguably since the Depression, with our cash intact, and looks like we're going to have a very nice year in generating cash as well as continue to build the business. So pretty positive outlook for me, and I will be happy to take your questions.

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

Hey, good morning. Thanks for taking my questions.

Good morning, Josh.

With regard to your gross revenue guidance, it came in a little above what I was looking for, and I assume that most of that is driven by the strength in the PEO business. But I was just curious, are you seeing -- can you just talk a little bit more about what you're seeing on the staffing front?

I didn't mean to do that. Well, I think staffing is just generally what you're seeing on a national level that business activity has picked up some, and it is not like we've added a whole bunch of new customers. You're always in the staffing business adding new customers and customers usage is going down, so it is a pretty good sized churn. But overall it just reflects an increase in business activity, particularly in the Salt Lake market for us.

Okay. And can you remind me what the margin profile of staffing is versus PEO?

Staffing runs about 13%, and PEO runs around 2.5 to 3, maybe 4 depending on the comp levels and the incentives.

Okay. Great.

It is about 4 to 1 ratio.

Okay. The G&A costs last quarter came in a little lower than what I was looking for, and I was just curious what actions if any were taken in recent quarters to lower G&A and if there is any more leverage we could see on that front?

I probably -- the leverage comes from the upside. In other words, the SG&A will remain relatively constant other than profit sharing, and the margin dollars will start to increase fairly substantially, and that's what the real leverage is. As far as decrease goes, I guess we run kind of tight ship. We didn't do anything dramatic here to do that, so -- and we haven't been laying off people per se. I mean, we're always looking to add and replace and trim where necessary, but in general, I'm pretty happy with the levels of the Company.

Okay. And I probably asked you this every quarter, but you obviously maintain a very sound financial footing. You're generating a lot of cash, and I was wondering if you were looking to expand, and if you would do that possibly through acquisition, and if you were looking to maybe expand out East?

Our preferred payroll -- a couple areas that we certainly would take advantage of. We made a small acquisition in December in Utah, and that's worked out extremely well for us. Our Preferred Payroll is really gaining some traction. I would not be opposed if we found the right little payroll company to buy one of those and expand our footprint, as well as internal growth where we can push our Preferred Payroll to some regions. I am getting more and more comfortable with our model, and the pricing and the profitability of Preferred Payroll is doing very well for us, and we think we can take that to others. So the acquisitions if they come along are great, but I don't think -- quite frankly, I don't think we need them to grow the Company. I think we have got other opportunities sitting right here in front of us.

Okay. Great. And just lastly, I may have missed it, Bill, but your customers' payrolls, are they stable or are they growing?

On a general basis, they're stagnant. But some customers are taking market share, so some of our customers are -- just as I reported that we had about 28 of them or so, or I guess closer to 30 some, that either went out of business or AR issues. That business goes somewhere else to somebody, and we're seeing that it goes to some of our customers is what happened, so when one guy in a certain line of area of business goes out of business -- not all the time but certainly some of the time, our customers pick up that line of business, so they increase. But as an overall economic, I have not seen it in terms of just an overall increase in employment.

Okay. And I am sorry, just if I could squeeze one more in and I will jump in the queue. You added a lot of PEO customers last quarter, and I was just curious which markets or sectors you're seeing these new clients being added, or is it broad based?

Pretty broad based. Again, our revenues are 81% in California, so you would expect a majority of those to be California, but when I look at just kind of the list of new business report, I am seeing a lot of different names.

Okay. Thank you very much.

Eastern United States, as well as in Utah, and it is just pretty broad based.

Okay, great. Thanks, Bill.

Thank you.

Your next question comes from the line of (Inaudible) with (Inaudible) and Associates, Limited.

Hello?

Yes?

Yes, how big is (inaudible)?

Pardon?

How big is (inaudible)?

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

Thanks, Bill. I won't repeat what that guy just said.

I didn't understand him. My hearing is going, I think.

Well, getting back to business here, your 161 clients that you signed in the quarter, how many of those are purely PEO and how many are staffing and how many are something else like Preferred Payroll?

Those were all PEO.

They're all PEO, okay.

161.

Okay. And then with the higher client attrition, I guess if you collectively call it, is obviously dragging on earnings because you've got payroll costs associated with ramping up a large number of new clients every quarter?

Yes.

Any idea what quantitatively that is on annualized basis in terms of draw on earnings?

That's a good question. In the first quarter, it is not as bad as you think because there is very little margin having to do with customers in the first quarter. It is in the second half of the year. So what you would not want to see, or I particularly wouldn't want to see, is that kind of customer count in third and fourth quarter. Basically in the first quarter it's kind of a break even quarter on PEO customers. That's why we have a reported loss in the first quarter. So -- but you're right, if we decided to quit adding customers, I suppose it would -- somewhere out there would be $0.04 or $0.05. It is just a guess, Jeff.

That helps. That helps give an idea. And then signing 55 clerical customers in the quarter, I have always thought of Barrett as more of a blue collar focused PEO. Is that a pretty significant shift to clerical, or have you just not really talked much about how many are clerical in the past?

No. It is a higher percentage than I have seen, and I think take a couple of quarters to see if that's a trend or that's just kind of an anomaly for first quarter.

Okay. Is profitability any different with clerical versus blue collar?

Potentially it is less. But it is safer, so it is kind of one of those you're trading off a little bit of longevity and sure profitability for more risk, and sometimes more profitability but also more risk.

Okay. And then last earnings call, you said that you thought you would be about break even in the first half on APS basis and earn somewhere in the vicinity of where consensus was for the back half. Are you still feeling the same way?

Yes. I think if you went back and looked and said, well, when was the last time that we lost $0.16 in a first first quarter, made $0.20 in the second and what did we do the rest of the year? I think all things being equal, assuming Obama care doesn't take us into some other kind of major downturn, I think that momentum carries forward, and then the numbers just kind of come out to what they are. So we continue to add customers, and we're a little better than -- I think we're a little better than what we forecasted in terms of revenue, so all looks pretty positive.

Okay. And then I noticed from Jim's comments that you spent 6 million roughly to capitalize insurance in Arizona. That means your licensed and up and running?

We are. ECOL is the name of the company, and we do have clients already and we'll see where that goes, but it should really accent what we want to do down there in terms of the PEO world.

Okay. Is that a material driver in the back half, do you think?

I think that possibility exists, Jeff. I mean, I think that's -- our focus right here is on Colorado and Arizona. We think those can be major contributors to what we're doing, and the leverage is -- if you looked at those branches now, they're not contributing anything, and so our hope is, and the way we're focused on how we run our business, is they will be major contributors as we go forward. They're big cities.

Okay. Great. Thanks, Bill.

Yes. Thank you.

Your next question comes from the line of Emily Grayson with Grayson Capital. (Operator Instructions). Your next question is from the line of John Willard with ORCA Investments.

ORCA.

ORCA. Good morning.

Good morning.

Just two follow-up questions, I guess. One, when you reported your fourth quarter, you were talking about some of the rate changes in California, and now that we're three to four months into that, I was just kind of curious how that is played out versus your expectations or if that's potentially more growth in the back half of this year as people start to shop for rates and try to get out of the pool? And then the second one is on the insurance line, now that that's fully up and running and funded, the natural progression is you use it on your safer positions, make sure you have all the kinds out and you run it through everything and then possibly start to offer it as a stand alone service. Where are you in that timeline of events?

Well, on the first part having rising rates certainly helps us. I mean, it is not a headwind. It is not a major contributing tailwind, but it is certainly very positive from what we see. Some rates in certain industries went up a lot. Some didn't go up very much. And it depends on where you want to focus your business, and I would say overall we're taking less risk than we have ever taken. We're more stringent on the kind of people that we do business with. As far as the insurance company goes, I am not -- we're going to use that primarily in the PEO world where we know how to take risks and risk managers where we control the payroll so we know as opposed to much of a stand alone. I am not very comfortable with that, don't want to -- particularly want to be a stand alone insurance company just as a broker type thing. So that will be primarily to help our -- already helps our staffing business, and definitely opens doors on the PEO world.

Okay, great. Thank you.

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

We appreciate your interest, and we look forward to a good year from BBSI, and we'll talk to you next quarter. Thank you very much.

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