Barrett Business Services Inc (BBSI) 2012 Q4 法說會逐字稿

Good morning, everyone, and thank you for participating in today's conference call to discuss BBSI's financial results for the fourth quarter and full year ended December 31, 2012. Joining us today are BBSI's President and CEO, Mr. Michael Elich and the Company's CFO, Mr. Jim Miller. Following their remarks, we'll open the call up for your questions.

Before we go further, I would like to take a moment to read the Company's Safe Harbor statement within the meaning of the Private Securities Litigation Reform Act of 1995 that provides important cautions regarding forward-looking statements. The Company 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 the Company's recent Earnings Release and to the Company's 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.

I would like to remind everyone that this call will be available for replay through March 13, 2013 starting at 3.00 PM Eastern this afternoon. Webcast replay will also be available via the link provided in today's press release as well as available on the Company's website at www.barrettbusiness.com. Now I would like to turn the call over to the Chief Financial Officer of BBSI, Mr. Jim Miller. Sir, please go ahead.

Thank you, Camille, and depending upon where you are dialing in from, good morning or afternoon, everyone. As you saw through the close of the market yesterday, we issued a press release announcing our financial results for the fourth quarter and full year ended December 31, 2012. Overall we are very pleased with the quarterly and annual results. The fourth quarter was a continuation of the positive trends we experienced in the first three quarters of 2012. These include our strong referral channels driving new business, solid organic growth from continuing customers, and the overall maturation of our brand.

We also continued investing in our operational infrastructure and professional talent which has played an integral role in supporting our growth and maintaining our greater than 90% client retention rate. We expect these growth drivers to continue as we move through 2013 and we remain committed to investing in the business to ultimately support a much larger and more mature Company.

Before taking you through our financial results, I would like to mention that yesterday's Earnings Release summarizes our revenues and cost of revenues on a net revenue basis as required by Generally Accepted Accounting Principles or GAAP. Most of our comments today, however, will be based upon gross revenues and various relationships to gross revenues because we believe such information is, one, more informative as to the level of our overall 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.

Now, turning to the fourth quarter results. Total gross revenues increased 41% to $597 million, compared to the fourth quarter of 2011. California, which comprised approximately 87% of our overall fourth quarter gross revenues, increased 44% due to continued growth in our PEO business. Overall PEO gross revenues increased 43% to $563 million, compared to the fourth quarter of 2011, primarily due to a similar trend we've experienced throughout 2012 where the addition of new PEO clients for the 2012 fourth quarter more than tripled our lost PEO business from former customers as compared to the 2011 fourth quarter.

Additionally, our PEO revenues from existing customers experienced approximately an 8% increase year-over-year primarily due to increases in headcount. Staffing revenues for the fourth quarter of 2012 increased 8% to $34 million, primarily due to an increase in revenues from existing customers, as the addition of new business was pretty much offset by lost business from former customers during the quarter.

On a percentage basis, gross margin in the fourth quarter was 3.7%, as compared to 2% for the fourth quarter of 2011. The key components of this quarter's gross margin are as follows. Direct payroll cost as a percentage of gross revenues in the fourth quarter decreased to 84.7%, compared to 85.2% in the same quarter of 2011, due to increases in the overall customer markup percentage as a result of price increases experienced during the first half of 2012.

Workers' compensation expense as a percentage of gross revenues was 4.1%, which is down 120 basis points from the same quarter a year ago, primarily due to the $8.5 million charge taken in the fourth quarter of 2011 as a result of prior year adverse loss development. This was partially offset in the 2012 fourth quarter by higher safety incidents and a higher broker commission. Looking ahead to the first quarter of 2013, anticipate the current percentage level of gross revenues for workers' comp expense of approximately 4.1% to continue.

Payroll taxes and benefits for the fourth quarter decreased from approximately 7.6% of gross revenues to 7.5% primarily due to the effect of slightly higher excess taxable wage benefits from new clients whereby BBSI is able to apply clients' year-to-date taxable wagers credit coming on board against the annual statutory payroll tax peelings.

SG&A expenses increased 26% to $13.4 million versus Q4 of 2011, primarily due to higher branch and corporate profit sharing based upon increased performance and to increases in management payroll as part of our investments in infrastructure, as well as in variable expense components within SG&A to support the growth in business. Our income tax rate for the fourth quarter was 32.4%. We expect this tax rate to likely increase by a full percent during 2013 as a result of anticipated higher taxable income for the full year.

Now, turning to the balance sheet at December 31. Cash, cash equivalents, and marketable securities totaled $72.4 million compared to $81.8 million at December 31, 2011. This decrease is primarily due to the repurchase of approximately 3 million shares of our common stock associated with the estate of William Sherertz and Nancy Sherertz for total consideration of approximately $59.7 million or $20 per share. As part of the financing of this repurchase, we issued and redeemed within six months all outstanding shares of the Series A non-convertible, non-voting redeemable preferred stock for $34.8 million in September 2012. We funded the redemption using a combination of cash and availability under a new revolving credit facility provided by our principal bank.

This five year credit agreement is a revolving reducing secured loan initially for a maximum amount of $24 million. Advances under the revolving reducing loan bear interest, at our discretion, at either fixed rate for a term from time to time or a fluctuating rate. In each case the rate is calculated based on LIBOR plus 1.75%. During the 2012 fourth quarter, we entered into a five year term loan for approximately $5.5 million with our principal bank secured by our corporate office building here in Vancouver, Washington, which increased the total credit facility to approximately $29.5 million.

Total debt outstanding at December 31, 2012 was $10 million, which included $4.5 million outstanding on our revolving credit line. Now, touching on our full year results. Net revenues for 2012 increased 28% to $403 million, compared to $315 million in 2011. Total non-GAAP gross revenues in 2012 increased 36% to $2.1 billion compared to $1.5 billion in 2011, with the increase primarily attributable to the previously discussed increase in net PEO clients and same-store sales growth. Net income in 2012 was $13.1 million, or $1.67 per diluted common share, compared to net income of $14.3 million, or $1.41 per diluted common share, in 2011. Excluding several nonrecurring items in both the 2012 and 2011 years, which were disclosed in more detail in yesterday's press release, non-GAAP net income in 2012 was $13.4 million, or $1.71 per share -- per diluted common share, which compares to non-GAAP net income in 2011 of $9 million, or $0.89 per diluted share.

We generated approximately $46.9 million in operating cash flow in 2012. Free cash flow in 2012 was approximately $22.7 million. Much of our cash generated from operations is in the form of free cash flow except for the build in the workers' compensation and safety incentive liabilities, as cash used to fund our insurance subsidiaries, primarily generated from workers' compensation expense, we recognized but did not immediately pay out to third parties. During a period of growth, our free cash flow will tend to be in line or exceed our net income on an annual basis.

Now, turning to our outlook for the first quarter of 2013. We are expecting gross revenues to range between $585 million and $590 million. This projection represents a likely midpoint increase of 36%, or the $432 million in gross revenues for the first quarter of 2012. The projected increase of 2013's first-quarter gross revenues is based upon recent revenue trends. We expect net loss per common share to range between $0.36 and $0.40 which includes the effect of the decrease in the outstanding shares as a result of our 3 million share repurchase, compared to a net loss per common share of $0.22 in the year-ago quarter.

Net loss per common share in the first quarter of 2012 included $460,000 of incremental legal and professional fees associated with the response to request for a special stockholders meeting. Without the effect of these items, net loss for the first quarter of 2012 was $1.9 million, or $0.19 per common share. Please keep in mind the Company historically loses money in the first quarter due to higher effective payroll taxes at the start of a new year. A significant portion of these payroll tax ceilings are typically met towards the end of the first quarter, which significantly reduces the payroll tax burden for the remainder of the calendar year. We continue to be very enthusiastic about the momentum in our financial results over the past year.

I look forward to addressing you again on our first-quarter earnings call in late April. Now, I would like to turn the call over to the President and CEO of BBSI, Mike Elich, who will comment further on the recently completed fourth quarter and our outlook for the first quarter of 2013. Mike?

Good morning. Overall, I'm very, very pleased with a very strong quarter and, as well, a very strong 2012. On many levels, we have made significant progress to plan in the year and 2012 truly represents a turning point in the maturing process, both organizationally and for our product offering. In the quarter, we added 171 new PEO clients. We lost 28. Within that, two were left due to AR issues, 10 were cancelled for non-AR issues, typically at risk and/or non-tier development of the client base. Seven businesses sold. Two left on their own due to price. Five took payroll in-house and two left to work with a competitor. The net gain of 143 new clients in the quarter represents a 74% year-over-year growth in client build.

We saw some strength in client hiring but, for the most part, flat. 35% of clients added new headcount. 36% reduced headcount. 29% were unchanged. 53% of clients increased hours while 42% reduced hours worked. In comparison, in 3Q, we saw 55% of clients increasing hours. Now, you need to be careful with fourth-quarter data, just because given the three holidays that we have it can get a little bit skewed. But, primarily, that's because in Thanksgiving you have off weeks, Christmas you have off weeks, around New Year's you have off weeks so it changes the behavior patterns of individual clients and how they employ and hire and lay people off.

In the pipeline, we continue to see growth coming from the a broad base of branch operations and industry sectors. We still have no client that is more than 1% of our total client base. We feel that the continued strength, strong momentum in our pipeline growth is attributed to our continued maturing of our brand and organizational culture supporting existing clients.

Growth is also supported by a 95% retention rate of our existing clients which, without a slippage, it makes it easier for us to build on the existing base that we have. Regionally, we still continue to see California continuing to grow double digits across the board. Northwest and Mountain states continue to see positive momentum, and on the East Coast we saw strong growth in the quarter and in the year, despite an effect of Hurricane Sandy back in November.

In the year of 2012, we saw -- well, we saw 36% growth. We also saw significant maturing in the organization structure while maintaining alignment with the culture of the organization. We opened two new branches that are doing very well. We introduced the branch-within-branch method to our infrastructure. We made significant progress in refining how we look at workers' compensation. We completed the final conversion steps to a point of implementing our HRP platform, which is our new payroll platform, and we maintained focus on our organizational alignment and development.

Within 2013, our focus leans towards continued -- our efforts to continue mature management systems and recognized outliers in client data supporting the development of predictive analytics. By doing this, we can recognize quicker what clients we should be doing, where we need attention and where we shouldn't be working with a client. We'll continue to mature the branch-within-branch structure and business unit teams as they support clients, allowing for increased branch capacity and the quality of client support. And we will continue to roll out our -- the roll-out of HRP to be completed in 2013, which will offer additional scalability of operation systems, more client flexibility, a more robust platform of data structure, and an expanded infrastructure -- interface capable of supporting client data access over time. We'll also continue to work on areas that mature the alignment of our brand with branch operations which support continued maturity in our referral networks and we'll continue to focus on continued internal organizational developments.

Overall, we continue to maintain a strong pipeline for new businesses-- for new business, while retaining a healthy client base. We remain ahead of plan in aligning the organization to support our growth curve and we'll continue to make necessary investments into infrastructure to stay ahead of the growth curve. And we will continue to work internally to infrastructure to support growth while gaining efficiencies and branch operations within corporate support functions. All efforts are geared towards strengthening and maturing the organizational product offering. With that, I'll open it up to questions.

Thank you, sir. Ladies and gentlemen, we'll now begin the question-and-answer session.

(Operator Instructions)

Our first question is from the line of Josh Vogel with Sidoti & Company.

Thank you. Good morning, Mike and Jim.

Good morning, Josh.

I was curious, what percent of your clients have over 50 employees? And I was -- I'm basically trying to get at -- are you on the hook to provide healthcare insurance? And, if so, can you pass all that along to the client?

As it relates to health insurance, we have never adjoined ourselves in any way related to health insurance, so for our clients, what we've always done is operated on a pass-through basis. So, any work that we do related to health benefits for clients that already provide health insurance is purely administrative, and it becomes a direct cost to the client while we support the process of remitting premiums back to carriers. With the now-imminent implementation of Obamacare, we'll continue to maintain that role of being the facilitator and/or TPA, as it would be, for remitting information and/or costs back to our client, but we take no risk in that area.

Related to our number of clients over 50, I really don't have a clean stat on that. I'll get that to you. But for the most part, our average base of client is right around 30 employees. We do have many, though -- it could be as many as 30% have over 50 employees.

But in the case where there will be impacted by Obamacare, many of them already provide benefits. The real question will be how many of them will opt out of the existing benefits that they're paying for, to opt for a program that may be less expensive compared to what they're already spending. For those clients that are not providing benefits, we are having conversations with different companies to help them understand or help them build a plan for how they will implement the requirement starting in '14.

Okay. That's helpful. Thank you.

Switching gears a little bit. How many branches did you end the year with?

We have 50.

50. Okay. And you said you opened 2 during the year?

Correct. Yes, Monterey and in Valencia, California.

And I understand you're going to try to leverage those branches even more so with the branch-within-a-branch? Do you think, one, you could sustain 30%-plus PEO growth for the entire year without a significant investment in additional buildouts?

You know, if the rate of growth slides a little bit, it won't have anything to do with our footprint. So, I think the branch-within-branch model is probably going to support continued growth of good client. I think that one of the things that we're always cautious about is who are we working with that we shouldn't be working with, and we want the latitude to be able to push out businesses that we shouldn't be working with.

And so, pegging to a percent growth based on infrastructure build is hard for us to get to. What I would say is that, in the year, we added 14 business units, so that's 14 branch-within-branches set up in some of our bigger branches, and that is working very well, and it has increased our capacity. And we have a model built now where we can scale that pretty well. So, frankly, when you look at, say, the Inland Empire of California, we have the ability now to scale that market, but we're going to do it smartly.

I think the biggest thing that will support our continued growth, though, is that we're seeing all branches contributing now. If you went back a couple years ago, we would see 90% -- 80% of business coming from 20% of business, the old 80/20 rule. Where, when we looked at this at the end of third quarter, we saw that out of the 50 branches we had, that 40 of them had -- were over 20% growth. And that's what's really going to make the biggest difference on a go-forward basis. And we have many emerging branches and markets that haven't reached or even come close to reaching maturity.

Okay. Great. Can we get an update on the workers' comp reform, and just your ongoing dialogue with clients, and if you have any idea if that will potentially impact SG&A costs this year?

You know, as an SG&A factor, we are putting extra resources into the, I guess, the realignment or working on the solution for -- towards SBA[63]. SBA63 says that effective 1/1/2015, we will lose our license to be self-insured. With that, we're working pretty close with a couple lobbying firms to try to understand where we may be able to gain exception, if possible.

The one thing that happened in the overall processes is that the legislation was not geared towards us. We were really pulled into it by adverse selection. But one of the things it has done is that it allows us to step back and look at more options for ourselves. So, we're pursuing roughly four different options overall for resolving the legislative area that could impact us. But cost-wise, we may spend in the year maybe another $0.5 million, but it won't probably have much of a material effect on earnings.

Okay. And just housekeeping one, then I'll jump back in the queue. What was the total cash available to shareholders at the end of the year?

Cash -- so, Josh, are you talking about free cash? Are you talking about total cash?

Well, if you back out, let's say, workers' comp claims or just cash earmarked towards that, what cash would be available for potential buybacks or acquisitions?

Yes, so essentially free cash.

Yes.

You know, we probably only had several million, and that was probably due to float, and that's why you see us into our credit line to the tune of about $4.5 million.

Okay. Do you have any -- what's your plans for paying down the debt balance?

So, as we look into 2013, probably the peak draw on the line will occur toward the end of April. That's when the first-quarter payroll taxes that we are accruing during the quarter will be due. From that point forward, we will continue to pay down the line, and we believe that the last half of the year, we will remain out of the line the majority of the time.

Okay.

So, we're projecting to build cash sufficient to keep us out of the line for probably the majority of the year, following that April 30 peak.

Okay. That's great. Thanks a lot, guys.

Thank you.

(Operator Instructions)

Our next question is from the line of Jeff Martin with ROTH Capital Partners.

Thanks. Hi, Mike. Hi, Jim.

Good morning, Jeff.

Mike, I was curious if you could characterize how you think the economy is trending as a whole? Barrett's typically had, over the history of its last couple cycles, has a pretty good view in terms of leading indicator. Wondering if you're seeing any noticeable changes out there? The internal metrics at your client base don't say there's a whole lot going on, but just seeing if you're noticing anything out there?

It's interesting. In December, you could really see, as we were approaching fiscal cliff, where customers were positioning. I was actually surprised that more customers -- we only had seven sell. I thought that we would see more, and we didn't.

As far as hiring goes, I've been actually out in the field a little bit visiting with clients here in the last few weeks, and one of the things that I'm hearing is that if they can find good people, they'll add -- they'll increase. So that, if you look at hours worked, it remains stable. We did see that.

I call it the January hangover because you go through the holidays and everybody just kind of gets off balance between -- are we hiring? Are we firing? Are we laying people off? How soon do we have to bring people back to support maybe a softer economy in January? It's very much a seasonal move. It kind of looked soft, and then in the last two weeks it's kind of come around.

But what we're hearing from -- what I was hearing and what we're hearing on the street is that, for the most part, companies are solid and they're making money. We're not seeing any effect within AR. That's typically an area where we'll see a little bit of softness if companies are having trouble getting paid, we'll start to get pinged here and there. And that remains very solid for us.

Overall, again, I don't see characteristics of a double-dip recession of any sort. I do think that there is pressure and confusion in the market relative to how companies are going to deal with Obamacare. Last night, they announced that they're going to increase minimum wage. Really won't have an effect on us, but it will bring the overall bar up for, somewhat, more of the unemployable. So, if your average wage rate today is $12 an hour, it's going to squeeze that a little bit. So, over time, market competition will drive up the overall base of what you have to pay people to get the right talent that you're looking for.

But overall, I think that the economy seems to be pretty strong. It will be interesting to get another four weeks behind us as we really get into '13 and people can know what's going to happen and maybe get through even the end of March where we still have a little bit of fiscal issues. Because many of our customers work to support contracts that are governmental. But for the most part, the word on the street is -- if I could find good people, I could add and build my business.

That's great insight, Mike. In terms of the election impact, if you had to take a stance whether the uncertainty around the election helped or hurt you in terms of client additions or client retention, how would you argue that?

You know, I've never seen a stronger December. Typically, if you look at -- I think our net build in 2011 was 81 clients in the fourth quarter. Typically, companies don't make forward-looking decisions in December, and then in January we see a strong build. And so, we saw a very strong build in the fourth quarter, be it 171 clients, net 143. That's a huge jump for us.

So, when I saw that, I was a little concerned -- okay, did more business get pushed back in December versus what we would typically see in January? But then when we looked at January numbers, it was in line and up from previous years as well. So, no, we're not seeing -- we're still seeing companies making forward-looking decisions.

Okay. And then, how would you characterize the pricing environment relative to the competition, particularly in California today, and are you competitively priced? Are you under-priced relative to competition? Do you think you're premium priced?

I think our premium's in line. I think that in the last year we went through and really looked at where we needed to increase. We looked at where we could increase. And then we were very careful, too, to not push ourselves into adverse selection where clients were leaving us because it just didn't make sense anymore. But we're not seeing competitive pricing from competition but -- and I only say that because I don't really know who would compete on a one-to-one basis with us, even from a product offering, when you look at what we bring.

But for the most part, we have not seen -- we've not pushed out customers through that price increase. They don't like it. They're not happy with it. But for the most part, they recognize that we have to make money, too. And if we can move forward from this point and create some stability in their cost structure, I think we're going to be fine.

Okay. Great. And then, do you worry about your larger clients having an issue with Obamacare to the point where they just look to cut costs? Because that happened with one of your competitors, they lost over 3,000 client employees in their mid-market? Just curious if you have concerns about your larger clients?

I think because we're feet on the ground with them, we're working with our clients, and we're trying to find solutions for them. In many cases, our customer -- think about on a PEO basis, our average wage rate is $21 an hour. So, at $21 an hour, a lot of times, those employees are garnering -- are receiving some kind of benefit already.

But there is a stress put on those companies over 50 to try to figure out what it's going to mean to them, first. And then, two, how they will adapt, and for their benefit, they're going to -- whether they do business with us or not, they're going to still be in that same boat. But I think what we're doing is trying to help them see how to maybe more effectively leverage their workforce, to make that investment that they have to make in health benefits become accretive in a way that they can gain efficiencies by having the right workforce on board.

And I think it's going to -- probably long term, it's going to make companies look harder at who they're hiring, and the liability and associated cost of being an employer, and they're going to be more particular about who they're hiring.

Right, right. And then, final question I have is surrounding the self-insured insurance law that's going into effect. Do you have any visibility in terms of timing for resolution for Barrett? And, if so, when do you think that is?

You know, we're working on it, and we've made a lot of progress in the last four months. I would say it's just a continued work in process. I wouldn't probably suspect that we're going to have any kind of answer before the end of third quarter. But I know that we're working down a path, and it's kind of like being in a boxing match. Sometimes you're on the ropes. Sometimes you're punching back a little bit. And I think at this point we're kind of going back and forth with it.

So, it's a 50/50 deal. But right now, we have many options and so we're pursuing, like I said, four paths, three of them are very strong, and we'll have a solution. It's just a matter of what form it will take, and then how we'll have to adapt to it.

Great, thanks for the insight, Mike.

Thank you.

At this time, this concludes our question-and-answer session. I would now like to turn the call back over to Mr. Elich for closing remarks.

You know, 2012 was a very interesting year for us. We grew up a lot. We've matured. We've been through a lot. I appreciate everybody out there that has continued to support us, and trust that we know what we're doing. We will make mistakes in time, and we will stumble here and there, but for the most part I think that with the internal work we're doing and what we're building as an organization, it's setting us up for a long run. And I probably wouldn't bet against us, because I think that we've shown that we can survive in adversity.

So, I appreciate everybody being on the call. I appreciate taking time to understand our story, and I look forward to seeing you next quarter.

Ladies and gentlemen, this concludes BBSI's fourth quarter of 2012 earnings conference call. Thank you for your participation. You may now disconnect.