Barrett Business Services Inc (BBSI) 2010 Q3 法說會逐字稿

Good afternoon. My name is Cassandra and I will be your conference operator today. At this time, I would like to welcome everyone to the third quarter earnings 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. And now I would like to turn the call over to Jim Miller. You may begin.

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 recently completed third quarter ended September 30th and our outlook for the fourth quarter of 2010. At the conclusion of our comments, we will open the call up for 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 analyzing and managing our operations and three, adds more transparency to the trends within our business. Comments related to gross revenues is 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 $0.36 per diluted share in the 2010 third quarter as compared to $0.28 per share for the third quarter of 2009. Total gross revenues for the 2010 third quarter of $332.9 million increased $59.8 million or 21.9% over the 2009 third quarter. The $332.9 million represents a new quarterly high for gross revenues. California, which comprised approximately 81% of our overall third quarter gross revenues, increased 27.7% owing to continued growth in PEO revenues. Staffing revenues for the third quarter of 2010 increased $774,000 or 2.3% over the third quarter of 2009, primarily due to a small increase in demand for our staffing services from existing customers and to a small net new staffing business added during the quarter.

PEO gross revenues increased $59.1 million or 24.6% on a quarter-over-quarter basis, primarily due to the addition of new customers. Our new PEO business during the quarter from customers added since October 1st of 2009 more than doubled the amount of lost PEO business from the third quarter of 2009 from former customers. Our PEO revenues from existing customers experienced a small increase on a quarter-over-quarter basis. The increase in PEO revenues from existing customers represents the second consecutive quarter of existing customer growth. Bill will comment further on the growth from new PEO customers in a few minutes.

Gross margin dollars for the 2010 third quarter of $14.1 million increased approximately $1.9 million over the 2009 third quarter, primarily due to the 21.9% increase in revenues. Gross margin percent on a gross revenue basis was 4.2% for the 2010 third quarter, as compared to 4.4% for the 2009 third quarter, primarily due to higher direct payroll costs. Direct payroll cost increased 34 basis points over the 2009 third quarter, primarily attributable to an increase in the mix of PEO services which typically have a much higher direct payroll cost component than staffing services.

Payroll taxes and benefits for the 2010 third quarter as a percentage of gross revenues decreased from 7.5% to 7.4%, primarily resulting from the Company changing to client specific state unemployment wage reporting in California for all our PEO clients effective January 1, 2010. The change resulted in a decline in the Company's overall average effective California state unemployment rate. This decrease was partially offset by higher state unemployment rates in various other states the Company does business in. Workers' compensation expense for the third quarter of 2010 as a percentage of gross revenues was 3.3%, or the same rate as for the 2009 third quarter. The Company experienced similar loss levels for the 2010 third quarter in relationship to business volume as compared to the 2009 third quarter.

Selling, general and administrative or SG&A expenses of $9.2 million increased $740,000 or 8.8% over the 2009 third quarter. This increase was primarily due to increased profit sharing and related taxes resulting from increased branch profitability. Other income net for the 2010 third quarter totaled $588,000, primarily due to investment income earned on the Company's cash and marketable securities and to the sale of certain closed end bond funds. The income tax expense rate for the third quarter of 2010 was 28.4%, which included, one, a favorable benefit from additional prior year employment tax credits, and two, a reduction to a deferred tax asset allowance as sales of certain closed end bond funds during the quarter generated previously unanticipated gains. We expect our overall tax rate for the fourth quarter of 2010 to be in the low 30% range.

Turning now the balance sheet at September 30th, cash and marketable securities totaled $42.5 million at September 30, 2010, compared to $50.4 million at December 31, 2009. The decrease was primarily due to $6.1 million used to capitalize our new wholly owned fully licensed insurance Company in Arizona, $3.4 million in share repurchases of the Company's common stock, and payment of quarterly cash dividends of $2.5 million. Trade accounts receivable at September 30, 2010 of $56.5 million increased $23.4 million over December 31, 2009, primarily due to an increase in business as well as seasonality as reflected in increased accrued revenue at September 30, 2010.

The days sales outstanding and accounts receivable or DSO of 15 days is up from December 2009 of approximately 11 days, due again primarily to seasonality and is more consistent with the DSO of 15 days at September 30, 2009. The decrease in stockholders equity of $1.6 million at September 30, 2010 from December 31, 2009 is primarily due to the Company's repurchase of approximately 267,000 shares of its common stock for $3.4 million, and to cash dividends paid of $2.5 million, partially offset by net income of $4.3 million for the first nine months of 2010. Cash flow from operations for the first nine months of 2010 totaled approximately $5.5 million, which was primarily comprised of net income plus the seasonal increase in accrued payroll and payroll taxes less the seasonal increase in accounts receivable.

Looking now at our outlook for the 2010 fourth quarter, as reported yesterday we are expecting gross revenues to range from $321 million to $326 million for the fourth quarter of 2010. This projection represents likely midpoint increase of 19.5% over the $273.1 million in fourth quarter 2009 gross revenues. This projected increase of 2010 fourth quarter gross revenue is based upon a recent revenue trends and it's consistent with historical trends of fourth quarters typically experiencing a small decline from third quarter revenue due to seasonality. Based upon the foregoing estimates for gross revenues, we anticipate diluted earnings per share for the 2010 fourth quarter to range from $0.28 to $0.32 per share, as compared to earnings per share of $0.21 for the 2009 fourth quarter.

At this time, Bill Sherertz will comment further on the recently completed third quarter and our outlook for the fourth quarter of 2010. We will then open the call up for questions. Bill?

Thanks, Jim. During the quarter, we added 104 new PEO customers and we lost 40. Of those 40, 19 of them we cancelled, 16 were sold and five decided to leave on their own. Only one went to another service out of all of our customers. We've seen some good progress, particularly in the Phoenix market. And we've made some changes in the other markets that have been struggling, namely one was Denver, and though that's starting to look more positive for us and gaining some momentum.

I don't have much else to say, other than I'm very pleased with the growth. We've seen actually the growth accelerate in the first couple weeks of October. New customers has been very strong. Even though 104 was one of the lower quarters we've had, we seemed to hit some kind of a lull in August and -- but since then, the new customers have picked back up again in terms of new signings. All in all, we're doing very well and I'm very pleased with the Company. So with that, questions?

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

Hey, good morning. Thank you, guys, for taking my call. It's encouraging to see the acceleration in PEO growth and I think you talked about business from new customers more than doubling business that was lost. I was just curious, of your existing PEO client base, not necessarily new PEO clients brought on-board in the past year, are you seeing their payrolls starting to grow or is that more -- or the growth in those accounts is more a function of increased hours worked or something else?

Jim mentioned on the call this was the second quarter in a row in which we've seen actual hours and days worked go up at our PEO same store sales, if you will.

Got you. Sorry. I must have missed that comment. Okay. Great. And on a different note, I read something recently that workers' comp claims are down significantly but it's really been a function of fewer people in the labor pool. But I was wondering if you were seeing similar claims rates or trends?

I don't know where you read that but that's bull.

[ LAUGHTER ]

We see rates going much higher. In fact, we've raised our rates. So, no, I don't know about claims being down, maybe because there's less people in the workforce but the claims are definitely more expensive and I think if you look, most insurance companies are running negative.

Right. Okay. So do you think that your workers' comp expense is going to start trending higher as we get later this year and through 2011?

I do. And we've allowed for that in raising our premium side of the business, yes.

Okay. And I know last year you increased the workers' comp claim reserve. Do you still think that the accrual is ample?

I think for where we are. We do the quarterly actuarial study. I think where we are is fine. It will just be on an ongoing basis of staying even with the actuaries.

Okay, great. Just lastly, of the cash and marketable securities on the books at the end of the quarter, is this all cash that is fully available to you today or is any of t it restricted?

No, that would be what is fully available today.

Okay. So that has nothing to do with the claims of the workers' comp claims accruals or anything, that money is already put aside?

The liability's on the books and of course that money will be used to pay out workers' comp claims as it always has been over time.

Okay.

But it's not specifically earmarked for that purpose.

Josh, I was asked that question in a conference and they said well, you only have enough cash to cover your comp claims and I didn't -- I wasn't quick enough to respond that, we've got a lot of money in receivables that doesn't have anything against it either. So actually the truth is, we do have a lot of cash available to us.

Okay. That's helpful. Thank you very much.

Your next question comes from the line of Jeff Martin.

Thanks. Good morning, Bill and Jim.

Good morning.

Good morning.

Bill, could you give us an update on staffing? I would have thought you would have a little stronger seasonal quarter in staffing this quarter.

We haven't seen it. It's up 2%, I guess, and the PEO is kind of crowding the staffing. Although certainly we would change our margins if we were to increase the staffing side. But a little bit dependent, Jeff, on particular customers that we go after and we have. So -- and I don't know how much we're focused on it, to be real frank about it.

Okay. Because you were running -- for a while there you were running kind of low teens year-over-year growth first and second quarter, anyway.

Well, I think it's reflective of just the overall general economic conditions.

Okay. Fair enough. And then in terms of SG&A this quarter, was there any bonus accrual in that? SG&A was a bit higher than our model had. Just curious if there was anything behind that $700,000 increase that should be considered either bonus related or more one-time in nature.

It was -- that was all bonus related and as you may recall, our branch offices are rewarded based on their specific individual performance and throughout the year as you go further into the year and branches reach certain levels of profitability, their bonus rate increases and so we're starting to see that in the third quarter and that was really the primary increase in the overall SG&A structure.

Once a branch manager hits $1 million in profitability, they earn 10% of the pretax profits. So that would typically happen in third or fourth quarter, the bigger branches.

Okay. And then Bill, could you comment on upcoming election in California and what could go well for you, what could present a challenge for you as a result of that?

Well, we would certainly like to see California be solvent again. That would be nice. I don't see that it can get a lot worse, I suppose, unless the state just declares bankruptcy. It's pretty much a mess and somebody's got to come in and clean it up. The courts are overrun. They can't get anything done to be real frank about it, particularly in the comp area. Comp carriers are losing money down there. So my guess is they've either got to raise premiums dramatically or they've got to pass significant reform and I don't think that's going to happen until after the election, no matter who gets elected. Unless the state of California just wants to run all the employers off. The good news I guess is that everybody seems to be focused on small business, if you listen to all the economists and everybody that that's the job creators and they're doing everything at least that they think they know how to beef up small business and have them be more successful, hire people, which of course plays right into our hands.

Right, right. Along those lines, are you getting any sense if hiring is on the horizon from your small business customers?

I've said this a number of times, Jeff. This election is a big time deal. I think if Congress gets wrestled away from the Democrats than we're going to see a fairly significant uptick. If it stays in their hands and we go socialist, then I don't know. I don't know where it goes from there.

Okay. All right. Well, that's really all I had. Appreciate your time.

Yes, thank you.

Your next question comes from the line of Jacques Soenens.

Hi, Bill. Can you hear me?

Yes, yes, yes.

Great. I want to drill a little bit more into your same store sales on the PEO side. If my notes are correct last quarter you advanced 3% and that was the first time that was a positive number and this quarter again you posted a positive number. I'm getting a sense that it was -- was it better than 3% this quarter?

Jim will answer that question for you.

Yes, it stayed about at that 3% level.

Okay. That's pretty good. In your guidance that you're -- for Q4, what kind of same store sales are you looking for?

I think very similar. Revenues have actually kind of increased the first two weeks of October but I don't know that we want to build that into our model yet.

Okay.

But we -- I think we would anticipate that it would be up in that 3% range and it's still our ability to add new customers that's really fueling the growth.

So just diving into it a little bit more, going back to last quarter it was 3% and I think on a PEO gross basis you grew on a year-over-year basis by 20% and in this quarter you grew nearly 25% on a gross PEO basis. So it does seem like your same store sales for Q3 were actually better than last but you're saying it was about the same? I'm just looking for a little clarity on that.

Same store sales were about the same but the adding of new customers is what's fueling the 25% or 20%.

Oh, I see. Okay. Good. Hopefully it seems like the trend is in the right direction on the same store sales which is encouraging. That's all for my questions. Thanks a lot.

No, we've got a little wind at our back. That's what it feels like.

Great. Keep up the good work.

Thank you.

(Operator Instructions). Your next question comes from the line of Gerry Heffernan.

Good morning, everybody. Thanks for having the call. Can you hear me?

Yes.

Okay. Okay. Actually, if I could just follow up on what the last questioner was asking there. Bill, I know parts of your business clients are agricultural related or should I say more seasonally related. Anything about the seasons going on out there that would have -- because of when product was brought in might have happened earlier this year to support the current quarter's numbers and, therefore, you get a lag in the next quarter?

There's always -- it's hard to pick out, but there's always some weather related issue, whether it's drought or too much rain or too cold or whatever and that has an effect on it. But nothing out of the ordinary as to what we would experience almost any year, unless it's truly dramatic. Our view on the staffing will be to win more customers more so than same store sales, although should the economy pick up, our staffing will pick up too.

Right, right. Though I'm sure that many on the call are thinking boy same store sales pick up, that's an internal growth engine that will have an amazing amount of leverage to it.

The margin is like four times PEO.

Right.

Yes, I know, that has a dramatic effect.

Okay. Hey, Bill, in your comments you mentioned seeing some good progress in different regions, particularly Phoenix.

Yes.

I was wondering if you could comment on that. But then you also said no, in some areas they've been struggling. You're seeing progress in getting things back online, particularly Denver. Could you, a, give us a little talk about what's going on in Phoenix, an area that most still consider pretty much down in the dumps and then what are your three most struggling areas and what's going on to pick them up?

Phoenix has definitely picked up speed and started signing new customers and looks like they're getting a team in place and so we're pretty encouraged with that. The struggling side, Denver, we let the manager go and in fact Mike Elich is sort of overseeing that until we find the right person and they've made a little progress there, but nothing that's going to affect the Company one way or the other. Long-term it may, but not very short-term. We made a change in Tucson and that's a branch that struggled, not doing very well. The rest of the Company, we can talk -- most of the issues come from very small branches and we address those as we go forward. But they're the kind of branches that really don't have much impact on the Company, unless they're all in concert, going in the same direction.

Okay. For Tucson you said to have made a change there. Are you speaking the manager of that area?

Yes.

Okay. And so you have -- that position's been filled?

No. Pete, who works for here at corporate, he's running the Tucson branch.

He's running the Denver branch also; right?

No Mike Elich is running it. They haven't assigned me a branch yet.

They're looking for branches ready for you.

I think so, yes.

Okay. And what about August? You commented that things kind of took a -- was everyone just too, I don't know, preoccupied talking about Greece which we don't talk about anymore in August or did people just finally come back in September and say okay, you know what, we're not falling off the face of the earth, let's get back to work?

I guess that's what it is. We hit those lulls every once in a while and then we hit really hot streaks. We noticed August was one of our lower signing months and then it picked right back up in September. I don't know what that means, whether everybody took vacation in August, nobody did anything. It's hard to put your finger on it.

Maybe it's another sign that we're changing to a European type society. I'm sorry, I was leading the witness there. Thank you very much for your time.

Appreciate it. Thank you. Only have to work four days a week, right?

There are no further questions.

Go ahead.

There are no further questions at this time.

Thank you for your participation and we certainly are upbeat here and we think the trends are going to continue in our favor and we're always going to have some issues that we're working on. That's just the nature of the beast. But in general, we feel pretty good about what we're doing. So we will talk to you all on the next call. Thank you.

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