Barrett Business Services Inc (BBSI) 2010 Q4 法說會逐字稿

Good afternoon, my name is Debbie, and I will your conference operator today. At this time, I would like to welcome everyone to the Barrett Business Services earnings release. 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. Jim Miller. Please go ahead.

Thank you. Good morning. This is Jim Miller. Joining me today on the call are Mike Elich and Tony Meeker. Today we will provide you with our comments regarding the Company's operating results for the recently completed fourth quarter ended December 31, and our outlook for the first quarter of 2011. At the conclusion of our comments, we'll open up the call up for 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 1 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, as management believes such information is more informative as to the level of our business activity, more useful in managing and analyzing our operations, and 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 $0.31 per diluted share in the 2010 fourth quarter as compared to $0.21 per diluted share for the fourth quarter of 2009. Total gross revenues for the 2010 fourth quarter of $344.2 million increased $73.4 million, or 27.1% over the 2009 fourth quarter. The $344.2 million represents a new quarterly high for gross revenues. California, which comprised approximately 82% of our overall fourth quarter gross revenues increased 31.2% owing to continue growth in PEO business. Staffing revenues for the fourth quarter of 2010 increased $1.8 million or 5.9% over the fourth quarter of 2009, primarily due to an increase in demand from our staffing services from existing customers as new staffing business during the quarter approximately offset the loss of business from former customers.

PEO gross revenues increased $71.6 million, or 29.9% 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 January 1 of 2010 more than double the amount of lost PEO business from the fourth quarter of 2009 from former customers. Our PEO revenues from existing customers also experienced a moderate increase on a quarter-over-quarter basis. The increase in PEO revenues from existing customers represents the third consecutive quarter of existing customer growth.

Gross margin dollars for the 2010 fourth quarter of $13.6 million increased approximately $1.6 million over the 2009 fourth quarter, primarily due to the increase in revenues. Gross margin percent on a gross revenue basis was 4% for the 2010 fourth quarter as compared to 4.4% for the 2009 fourth quarter, primarily due to higher direct payroll costs and higher workers' compensation costs as a percentage of revenues. Direct payroll costs increased 36 basis points over the 2009 fourth quarter, primarily due to an increase in our mix of PEO services, which typically have a higher payroll cost component than staffing services.

Payroll taxes and benefits for the 2010 fourth quarter as a percentage of gross revenues decreased slightly from approximately 7.3% to 7.2%, primarily as a result from the effect of the Company changing to client specific state unemployment wage reporting in California for all of our PEO clients, which was effective January 1 of 2010. Workers' compensation expense for the fourth quarter of 2010 as a percentage of gross revenues increased from 3.3% to 3.5%, primarily due to an increase in self-insured claim costs, particularly in California as a result of an increase in overall projected severity of the 2010 claims.

Selling, general and administrative, or SG&A expenses of $9.6 million increased $953,000, or 11% over the 2009 fourth quarter. This increase was primarily due to increased profit sharing and related taxes resulting from increased branch profitability. Other income net for the 2010 fourth quarter totaled $758,000, primarily due to gains recognized in the sale of certain corporate bonds, as well as investment income earned on the Company's cash and marketable securities. The income rate for the fourth quarter 2010 was 28.2%, which included a favorable benefit from the reduction to a deferred tax asset allowance as sales of certain corporate bonds during the quarter generated previously unanticipated gains.

Turning now to the balance sheet at December 31. Cash and marketable securities totaled $55.4 million compared to $50.4 million at December 31, 2009. The increase was primarily due to cash generated from operations of $7.4 million, an increase in payroll -elated accruals of $7.3 million. These were offset by $6.1 million used to capitalize our wholly-owned fully licensed insurance Company in Arizona in early 2010, as well as -- $3.4 million in share repurchases of the Company's common stock and payment of quarterly cash dividends totaling another $3.4 million in 2010. Trade accounts receivable at December 31, 2010 of $37.6 million increased about $4.5 million over the same 2009 period, primarily due to an increase in business.

The day sales outstanding in accounts receivable, or DSO of 10 days declined from December 2009 of approximately 11 days, due primarily to the weighted growth in PEO business which has much shorter payment terms as compared to staffing business. Stockholders' equity increased approximately $500,000 over December 31, 2009, primarily due to net income of $7.4 million during 2010, which was offset by the Company's repurchase of approximately 267,000 shares of its common stock and the cash dividends, which in total of the two were $6.8 million.

Looking at our outlook for the 2011 first quarter. As reported yesterday, we are expecting gross revenues to range from $320 million to $325 million for the first quarter of 2011. This projection represents a likely mid-point increase of 22.8% over the $262.6 million in first quarter 2010 gross revenues. The projected increase of 2011 first quarter gross revenues is based upon recent revenue trends. As we reported yesterday, the Company expects to receive proceeds of $10 million for its key man life insurance coverage the Company carried on Bill Sherertz, our President and CEO, who passed away on January 20. As a result of the life insurance proceeds, we anticipate diluted earnings per share for the 2011 first quarter to range from $0.50 to $0.54 per share as compared to a diluted loss per share of $0.16 for the 2010 first quarter. Without the positive effect of the life insurance proceeds, we estimate a diluted loss per share for the first quarter of 2011 to range from $0.19 to $0.22.

As we've mentioned in previous years, during a period of PEO growth, as we are currently experiencing, first quarter estimates tend to project larger losses due to low or negative customer margins resulting from the effect of high payroll taxes at the start of a new year. However, the PEO growth becomes additive for the remainder of the year once these payroll tax ceilings are reached, which usually begins towards the end of the first quarter, and into the beginning of the second quarter. I also want to point out that while we estimate there to be little if any income tax directly associated with the life insurance proceeds, the inclusion of the proceeds in pre-tax income provides a favorable impact to our estimated effective tax rate for 2011, which we currently estimate to be in a range of about 18% to 20%, as compared to a more normalized rate in the low 30% range. This effective tax rate of between 18% and 20% is expected to be used for each of the four quarters in 2011. At this time, Mike Elich will comment further on the recently completed fourth quarter and our outlook for the first quarter of 2011. Mike?

Good morning. I just wanted to start off by saying that I'm very proud and humbled by the way everyone in the Company has stepped up to support the transition since Bill Sherertz's passing on Monday -- Thursday, 20 of January. He left a great legacy, left us with the tools to carry the torch forward. He would basically say, to get over it, time to move forward. So we shall. In the quarter, we added 105 new clients. We lost 60, 2 for AR reasons. 19 were cancelled for to non-AR reasons, 21 sold, 5 left on their own due to pricing. 9 took payroll in-house, and 4 left to work with a competitor. 2011 is starting off to be a good year. Pipelines are full, and the tone in the field is more optimistic than I've seen in the last four years. Through the first 4 weeks of 2011, revenues were up by 23% year-over-year.

California continues to see strength, Southern California continues to have strong momentum. Northern California has emerged as the strongest growth region for 2010 and year-to-date 2011. The Northwest continues to recover from the recession, although slower than we are seeing in California. Mountain states were later to feel the pains of the recession, but are now beginning to see a recovery in sight. Most recently, we're beginning to see companies making decisions to move forward, while generally indicating we should see these markets strengthening in 2011. East Coast continues to add clients, but we have seen some headwinds in the last six weeks due to weather on the East Coast. 2010 was a good year that has left us with wind at our back for 2011.

The recession has offered us the opportunity to continue maturing our business infrastructure while making key investments in talent. I would give us high marks in our ability to retain top talent and strengthen our presence in all markets during the recession. With that said, we do continue to see headwinds in the coming quarters, due to the recession's effect on state unemployment tax rates and the lingering effect of the recession on workers' comp. The overall tone in the market is that business owners are starting to look forward, making forward-looking decisions with better optimism, which gives us greater hope and confidence that this will be a strong year. With that, I would like to offer Tony -- would you like to comment?

Sure. This is Tony Meeker. The Board of Directors is pleased with the way the transition has occurred over the last several weeks since Bill's passing. We're very pleased with this quarterly result. Clearly having increases, the last 3 quarters tells us that the model of our business is working well. We look forward to the next quarter, although there are some challenges as Mike has just outlined, but we feel very comfortable with the staff that we have, and with the direction of the Company, and the Board is planning to observe how things go over the next quarter. We're very excited about our opportunities as we see them. Mike, let's turn it to questions now.

Great.

Josh Vogel.

Thank you. I have a couple of questions here. I guess first I'll start with the PEO business. Obviously, it's growing very robustly right now, and, Jim, you talked about just some trends with your existing clients, and I was curious, the gains there, or the year-over-year growth, are they -- that they're added to payroll, is this more a function of increased hours worked and overtime, or more employees are adding to their payrolls?

I would say both. We have seen where hours worked has strengthened over the last year, and, also, wages have stabilized, but I think the greatest growth is coming, also, from adding new business -- clients. A year ago, clients that we were bringing on were much smaller. We are seeing today where the clients that we are bringing on are a little larger in size.

Okay. Is there any way to break down between the 30% year-over-year growth in PEO, how much came from existing and how much from new business?

Yes. Of the $71 million in PEO growth, about $10 million of that was from existing customer increases, and the rest was the net of new customers less business loss from previous customers.

Okay. And now we saw a couple of years ago the big surge in PEO, and it led to, I guess, an accrual, a worker's comp accrual that was a little too light, and given that this business is growing so robustly, do you feel you have adequate accruals set aside, for -- or earmarked for future potential claims?

Yes, I think we do. We work very closely with an independent actuarial firm who values our reserves, and updates their model each quarter, so we're working very closely with them, feeding them data, and keeping in contact with them, as far as trends that they're seeing in the numbers to make sure that we are -- continue to keep our reserves at an appropriate level. So we don't see anything out there that's looming, that will come back to bite us.

I would say also, Josh, to add, that we are looking in that model, we look a little bit more towards that payroll growth, and there is a component that adds to reserves for that reason.

Okay. Great. And, Mike, you just discussed some challenges regarding [SUDA] and workers' comp. comp, and wondering if you could give a little more detail there. And I don't know how much you want to comment about full year 2011, but maybe just what impact do you think that could have on full-year margins?

I think most of the challenge is probably already built in. One of the things that we continue to see is no matter what our history is related to, our state unemployment tax rate -- the states across the border incrementally increasing, we see some states that have doubled over the last two years their unemployment rate that has very little to do with history of the individual company. So that continues for a little bit of a headwind more so because of the unknown as well, that you don't know where states are going to end up being able to fund those deficits.

We continue, though, to pass that cost forward to our clients, although there is a timing lag associated with that, in that we assess each individual client as we do that, and it usually is addressed at the client's contract renewal time. Related to workers' comp, this recession went on a long time, and if you really consider the fact that we started to see the effects of the recession back as late as fall of '06 in Southern California, typically, if you had a short recession, people would go back to work. But because unemployment rates are staying high, employees are still finding a way to use worker's comp as an offset to not being employed.

Okay. That's helpful. Thank you. Just one more, and I'll jump back in the queue. As the PEO business continues to grow and you're adding new clients, are you seeing any shift in the seasonality of your business?

I would say if anything it's probably leveling a little bit. As we grow by region, as well, we're tapping into different industries which have a little less seasonality associated with it, plus we're diluting some of the seasonality that we might find in different markets such as the agriculture market in eastern Washington and eastern Oregon.

Okay. All right. I'll jump back in the queue. Thanks so much.

Your next question comes from the line of Jeff Martin.

Good morning, guys. This is actually Omid calling in for Jeff. Just a few questions here. First off, how does the sales environment look in terms of new client additions?

I think it -- I feel like as though it looks very strong. One of the things that we've run into in the last year was that there's, especially in our mountain state regions, where the recovery is a little bit slower, is that companies were not making decisions to move forward, where just in the last quarter, and more specifically in the visits that I've had with all managers in the last three weeks, there's a great deal of optimism looking forward that companies are starting to look at their business differently, and they're starting to make decisions moving forward. So our sales pipelines are very strong right now, and we see that we're in a great position to add new clients.

Okay. And has there been any change in lead sources for new clients?

I think that -- they're not necessarily a change, but definitely a maturing process. We use a number of different networks to bring leads to us, one of which is just referrals from our own client base. As that client base continues to grow, we have more tenure with those clients, they bring us more business.

Okay. And then I noticed that your workers' comp expense rose by $1 million sequentially. How should we read into this?

It's always a hard game, because you're trying to level somewhat choppiness of different quarters. We did see an uptick in fourth quarter. We're just -- I guess we're looking at it quarter to quarter, and we'll address it accordingly. Will it continue in that direction? It's -- I guess it really comes back more to some of the back years, as those start to fall off, and as we're cleaner on the front end, everything -- it will start to normalize itself. But we are also building in factors for the growth in revenue.

Right. Okay. And then could you also explain how payroll taxes are impacting the business, and what your expectations are for improvements in 2011?

Well, the payroll tax, as most of you probably already know if you followed us for very long, is built into our equation where we front-load or pay literally 90% of our payroll taxes in the first quarter. So the bigger we get, the bigger the whole bit gets, or the bigger the liability gets that's paid in the first quarter. Also, as we grow PEO, and it does outrun or outpace the staffing growth, we find that, that hole gets bigger as well. So as that's paid off, we really have [free] sales given the balance of the year, other than the clients that we have to now prepay as we bring on new business. But as we're getting bigger, the effect of new business that we're bringing on becomes muted somewhat.

Got it. Okay. And then last question on the stock buybacks. Did you guys buy any shares this quarter?

Yes, we brought so far just about 4,000 shares, so very little. And we currently have about -- a little over 1.5 million shares remaining on our buyback plan.

Okay. That's great. Thank you.

Your next question comes from the line of Jason Harris.

First of all, you guys -- the cash balance has built quite a bit, and I was wondering someone just asked about the buyback, what are the Board's thoughts on cash usage going forward? Would there be thoughts of increasing the dividend or stepping up the buyback, or did you feel more comfortable just keeping the cash on the balance sheet?

Well, I think given the events of the past few weeks, we're stepping back a little bit. We're looking internally as to where we might need to invest to strengthen our overall base for our future going forward. I think the -- we'll continue to look at acquisition opportunities. We were in the process of exploring two different opportunities prior to January 20, and that's not off the calendar. It's definitely in our sights and we'll continue to look for prudent opportunities to deploy our cash effectively.

And then just lastly, obviously, Bill owned a large stake in the Company. Is there any update on what would happen to his shares, or is his family planning on holding on to the Company?

The family is still sorting things out. If they were there in a position or had a desire to liquidate some shares, we're in a great cash position to support that, and -- but right now, I think it's too early to tell. I think that, as a whole, we're all working together and communicating, but we're -- they, as well as we are in a great position to not have to do anything.

Okay. Great. Thank you.

Your next question comes from the line of Bill Nasgovitz.

Yes. Sympathy, certainly, to Bill's family and all of you. He was a great guy. What are the tractions -- how much stock does current management own?

Jim?

What percent of the Company?

Current management, probably in total, I would say, probably about 1%.

1%? And Bill's ownership or his estates ownership is what percent?

About 25%.

25%. One of the things that attracted us to the Company, just wanted to state this, was his, well, strong insider ownership, certainly represented by Bill, so at least on behalf of our firm, we would love to see more insider ownership and not just through options, but direct purchases of shares would be awfully nice to see. Any comment on that?

Well, I would -- I speak for myself, although I don't own 25%, I do own 43,000 shares, and relative to my overall net worth, that's a pretty significant amount. So my interests are definitely in line with the Company's success. Okay. That's great to hear. Thank you.

At this time, there are no further questions.

This is Tony Meeker speaking. I would like to respond a little bit to the question asked about the arrangement with the estate, Bill's estate.The Board of directors is very cognizant of his stock ownership and the estate's ownership, and there are concerns going forward on the tax burden that might be faced by them, and I can tell you that the Board of Directors has an open line of conversation with Bill's family. We are quite obvious about the impact that a huge sale might make on the stock, but we believe we're in a very strong position to assist in any way that might develop out of that. The Board is keeping that line of communication open. We have the ability to add more to our stock buyback program anytime we feel like we need to, so we're very, very pleased about our position both in cash and ability to acquire stock.

All in all, I guess I would add that we're very excited about where we're at. Bill left us in a great place, and we're very fortunate to have a great Company to move forward, to expand new opportunities, and to look forward to where we're at, and where we're going. So, with that, we'll leave you to till next quarter, and look forward to seeing you on the Street. Thank you.

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