Barrett Business Services Inc (BBSI) 2013 Q4 法說會逐字稿

Good day, everyone, and thank you for participating in today's conference to discuss BBSI's financial results for the forth quarter and full year ended December 31, 2013. 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 for your questions.

Before we go any 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's remarks today's conference 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 this call will be available for replay through March 5, 2014, starting at 3 PM Eastern Time this afternoon. A webcast replay will also be available via the link provided in today's press release, as well as available on the companies website at www.Barrettbusiness.com. Now I'd like to turn the call over to the Chief Financial Officer of BBSI, Mr. Jim Miller. Sir, please go ahead.

Thank you, Luke, and depending upon where you're dialing in from, good morning or afternoon, everyone. As you saw at 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, 2013.

In 2013, our referral channels and organic growth from existing clients fueled a record year of revenue and earnings. We also ended the year as a much stronger organization from the standpoint of human capital and branch development. BBSI remains well positioned for continued growth in 2014 and beyond, and we remain committed to investing in our organization to ultimately support a much larger and mature organization.

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 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 31% to $779.3 million over the fourth quarter of 2012. California, which comprised approximately 88% of our overall fourth-quarter gross revenues, increased 32% due to continued build in our co-employed client count and same-store sales growth.

Overall PEO gross revenues increased 32% to $742.2 million over the fourth quarter of last year, primarily due to the addition of new clients as PEO business from new customers nearly tripled our lost PEO business from former customers as compared to the fourth quarter of 2012, which follows a similar trend we've experienced over the past eight quarters.

Additionally, during the fourth quarter we experienced double- digit growth in PEO revenues in all of our geographic regions. Our PEO revenues from existing customers increased approximately 10% year-over-year, due to increases in both headcount and hours worked. This compares to a 13% increase experienced during the third quarter of 2013, and an 8% increase in the fourth quarter of 2012.

Staffing revenues for the fourth quarter of 2013 increased 10% to $37.1 million, primarily due to an increase in new business as staffing business from existing customers was nearly flat on a year-over-year basis.

On a percentage basis, gross margin in the fourth quarter was 3.1%, as compared to 3.7% for the fourth quarter of 2012. 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 25 basis points to 84.5%, compared to 84.7% in the same quarter last year, due to increases in the overall client markup percentages as a result of price increases.

Workers' compensation expense as a percentage of gross revenues was 4.9%, which represents an 83 basis point increase over the same quarter a year ago, primarily due to an additional increase in the provision for estimated workers' comp claim costs of $5.1 million. Looking ahead to the first quarter of 2014, we anticipate the level of gross revenues for workers' comp expense to be in the 4.3% range.

Payroll taxes and benefits as a percentage of gross revenues for the fourth quarter were 7.5% of gross revenues, which remain at a similar rate compared to the year-ago quarter as the effective payroll tax rates were nearly the same level for the fourth quarter of 2013.

SG&A expenses increased 27% to $16.9 million, compared to $13.4 million in the fourth quarter of 2012, primarily due to higher branch incentive pay, increases in management payroll and other variable expense components within SG&A to support our continued business growth.

The provision for income taxes in the fourth quarter was $1.4 million, which represented a tax rate of approximately 20.3%. The tax rate for the fourth quarter was more favorable in comparison to the first three quarters of 2013, primarily due to the effect of lower annual pretax income that originally projected as a result of the additional $5.1 million in workers' comp expense recognized in the quarter. We expect our tax rate to be back into the mid-30%s for 2014.

In the fourth quarter of 2013, we recorded an additional increase to our self-insured workers' comp reserve of $5.1 million, or $3.1 million after-tax, equating to $0.42 per diluted share. The increase represents approximately 5% of our total workers' comp reserves and is a result of increased estimated reserves for prior-year injury claims, primarily in the state of California. Taking into account the effect of this expense, net income in the fourth quarter of 2013 was $5.6 million, compared to net income of $5.8 million in the same period last year.

Diluted earnings per share in the fourth quarter of 2013 was $0.74 compared to $0.80 in the year-ago quarter. Excluding the effect of the additional increase in the workers' compensation reserve, net income increased 50% to $8.7 million, and diluted earnings per share increased 45% to $1.16 in the forth quarter of 2013.

Now turning to our full-year 2013 results, total gross revenues increased 35% to $2.8 billion, compared to $2.1 billion in 2012, with the increase primarily attributable to the previously discussed increase in net PEO clients and same-store sales growth. Net income in 2013 increased 36% to $17.9 million, compared to $13.1 million in 2012. Diluted earnings per share increased 45% to $2.42, compared to $1.67 per diluted common share in 2012.

Now turning to the balance sheet at December 31, as you may recall, during the second quarter of 2013, we posted $63.9 million in restricted certificates of deposit to collateralize a letter of credit, issued to satisfy an increased surety requirement for our self-insured workers' compensation program in the state of California. During the fourth quarter of 2013, we replaced the $63.9 million letter of credit with surety bonds, which reduced the amount of the restricted certificates of deposit required as collateral to $12.8 million.

As a result, of December 31, 2013 our cash, cash equivalents, marketable securities, restricted certificates of deposit and restricted marketable securities totaled $143.2 million compared to $82.1 million at December 31, 2012. At December 31, 2013, approximately $16 million is unencumbered or, said another way, not part of our captive insurance subsidiary. At December 31, 2013, we had no outstanding borrowings on our revolving credit facility.

We generated approximately $70.1 million in operating cash flow during 2013. Much of our cash generated from operations is in the form of free cash flow except for the build and workers' compensation and safety and incentive liabilities, as cash used to fund our insurance subsidiaries is primarily generated from the workers' compensation expense we recognize but do not immediately pay out to third parties. During a period growth our free cash flow will tend to be in line or exceed our net income on an annual basis.

As we disclosed in a press release on January 21, we are working through the final details of our new workers' compensation insurance fronted arrangement to provide coverage to BBSI employees in California beginning in the first quarter of 2014. The arrangement, typically known as a fronted program, will provide BBSI with the use of a license-admitted insurance carrier in California to issue policies on behalf of BBSI without the intention of transferring any of the workers' compensation risk for the first $5 million per claim.

The risk of loss up to the first $5 million per claim will be retained by BBSI, quite similar to our current self-insurance program in California. The arrangement addresses the requirements of California Senate Bill 863, which prohibits BBSI from continuing its self-insurance program in California beyond January 1, 2015.

We will transition existing California clients each month upon their annual contract renewal date, as well as add new California clients throughout 2014, so that by the end of 2014, all California employees will be covered by the fronted program. Once all employees are transitioned, we expect the full incremental, or frictional, costs of the program to be approximately 25 to 30 basis points above the recent workers' compensation rate of approximately 4.3% of gross revenues.

During the transition in 2014, the frictional costs will be ramping towards that full 25 to 30 basis point level, with a small effect in 1Q, and then growing in the remaining quarters as more clients are transitioned. But we won't see the full effect until the first quarter of 2015, which will represent the first full quarter of all employees being covered under the new program.

Now turning to our outlook for the first quarter of 2014, we are expecting gross revenues to grow at least 24% to a range between $735 million and $755 million, compared to $591.2 million in the first quarter of 2013. The projected increase of 2014 first-quarter gross revenues is based upon a recent revenue trend. We expect the diluted loss per common share to range between $0.45 and $0.50, compared to a loss of $0.36 per share in the first quarter of 2013.

Please keep in mind that the Company historically loses money in the first quarter, due to the higher effective payroll taxes at the start of a new calendar year. A significant portion of these payroll tax ceilings are typically met toward the end of the first quarter, which then significantly reduces the payroll tax burden for the remainder of the calendar year.

We continue to be pleased with the momentum in our financial results during 2013, and I look forward to addressing you again on our first-quarter earnings call. Now I'd like to turn the call over to the President and CEO of BBSI, Michael Elich, who will comment further on the recently completed fourth quarter and our outlook for the first quarter of 2014. Mike?

Good morning, and thank you for being on the call. 2013 was a great year for BBSI in many ways, for the growth the Company has experienced to how we have matured as an organization internally and in the marketplace. We continue to look at how we continue to mature or improve our visibility and predictability of outcomes as we continue to see a long runway of growth both top-line and bottom-line into the future years coming.

In the quarter, we added 156 new clients. We lost 36 clients, 3 due to AR reasons, 9 were cancelled for AR -- or non-AR reasons, risk and lack of tier movement, 7 businesses sold, 11 left on their own due to pricing, 4 took payroll in-house and 2 left to work with a competitor. This represents a net build in the quarter of 120 new clients worked with.

As Jim mentioned already, we saw a 10% build in same-store sales in the quarter. We continue to see strength within our existing client base, and in the quarter we saw 33% of our clients added headcount, where 39% of our clients reduced headcount. This is in line with what we saw year-over-year -- little bit heavier, but we were, I think, down 36% of our client -- percent of our clients reduced headcount a year ago in December.

28% of our clients in the quarter were unchanged, 59% of our clients increased payroll, down from 60% last quarter, roughly flat. We saw 51% of our clients increase hours worked, while 45% of our clients reduced hours worked. In comparison to third quarter, we saw 51% of our clients increase hours worked, versus 50% in the third quarter, somewhat flat again. We did notice some softness in late October and early November, most likely as a hold-over from the government shutdown.

Also, we saw a lighter-than-expected work week during Christmas, due to companies' choice to work, given during the holidays, the holiday was in the middle of the week. When you look at a year-over-year basis, it's difficult to project how companies will respond to the holiday, given that if the holidays on a Monday or a Tuesday, they will take the first part of the week off and you'll work the second part of the week versus if the holiday was at the end of the week, you'll see a different effect.

When the holidays right in the middle of the week, you have kind of a 50/50 split of whether or not companies will take more of the week off or take less of the week off. What we saw in our data is that they tended to take more time off during that week, and be off more days, which is a little bit of the softness in our guide.

Related to pipelines and regional growth, we continue to see strong momentum across all regions. In the quarter, all regions saw growth rates anywhere from 14.5% in the Northwest to 41.6% in the Mid-Atlantic states. We did see Southern California up 32.3% and Northern California up 30%. I

n surveying the organization as to pipeline strength and general market outlook, we are not seeing any change in momentum and things seem to be continuing on track, other than some holiday chop, and a little bit of what we've seen in January as we've come out of the holiday -- what I consider the holiday hangover where companies lay off people and you see a little bit of disruption in payrolls in December, which usually folds over into January. But for the most part, overall, we are positioning and continue to run the Company to achieve the mid-20%, mid- to high-20% top-line growth on a go-forward basis.

Related to structural and organizational build, we continue to expand and build business units to support our operational integrity. Currently we have 32 business units supported by 50 branches, so in a sense, if you look at operating profit centers that gives us 82 profit centers.

We currently have three business units being built out and are forecast for an additional eight business units to be built within the first half of 2014. We look to capacity utilization to determine our rate of infrastructure build to support our net new client adds. When we look at what we should be getting from operations from a capacity standpoint, what we'll do is look at the percentage of capacity we have within the organization and then, based on pipeline, as we burn that capacity, as we're adding new clients in, we make decisions about adding capacity for the future.

In 2014, we plan to open two new branches in markets, one in San Luis Obispo. That's a little bit of a build-off business that we already have in that market, that will complement our Central Coast area, and then also a new branch in Reno, Nevada, which is a complement of business that we already see there and market opportunities that we tend to expand on.

We will continue to look to new growth markets, but our primary focus will continue to be on penetrating existing markets we are presently in, while maturing the model to insure productive product quality and efficiency of operations into 2014. It makes no sense for us to get out in front of ourselves too much. We've made a lot of progress in the last couple years, but we continue to see areas where we can improve in existing markets and still see a very low penetration rate relative to what our potential is in existing markets.

As we look at quarterly and -- quality and underwriting risk, in the past several weeks we have been working to finalize the fronted arrangement, which will satisfy our workers' compensation and insurance requirements in California, replacing our current self insurance program that goes away January 1, 2015 as a result of SB863. We'll begin the transition, as Jim has already mentioned, in the next several weeks, ramping basically into March. The plan is, is to transition existing clients upon renewal date into the program and ultimately have all the transition completed by 2014.

We see this as a great step for the organization in that moving from the self-insurance program, which is really helped us grow up to a point where we're at, into a fronted arrangement which has some element sophistication that will support a long term stability of the organization, that's truly beneficial to the organization. We will have a transitional process that we go through, but we feel like we're well out in front of the process to insure that we facilitate a smooth transition.

Related the charge in the quarter, in reviewing the why behind our taking a charge in the quarter, there are a couple contributing factors. During the past couple years, we have been taking steps to evolve our process by which we reserve for liabilities related to workers' comp. When I say that, I'm really speaking more to how we put dollars up against claims, more so than how we accrue for the claims.

I just want to kind of clarify and walk through an example. I know this seems like Voodoo science on our end, but just maybe to give you an example,

When we look at the 20 years of experience that we have in taking risk with our clients in the area of workers' comp, we have, over time, created a great deal of history that tells us roughly where we should be. So if you look at 20 years of history, and look at the fact that we have throughout our entire history, closed 92% of all claims that we've ever opened, and today have roughly 8% of that total book still open, we have a basis to identify what it is that we should be accruing to accrue for the total liability, while at the same time, when we hang up against our existing claims, and we do stress those claims to what we consider the ultimate expected, we're not seeing a deviation between the two.

So given that as the baseline of history, our first step is, is that we go and look at a percentage of payroll or percentage of revenue, however you want to look at it, and we accrue at a rate into a bucket that ultimately should be adequate to cover 100% of the liability over time for the current year. As we do that, we look at the dollars as they're coming in, and I just want to use an example, so I'm going to call the bucket that we accrue in is to our IDNR bucket.

And I don't want to get into the technical term of what IDNR, is because it can be defined by a lot of different people a lot of different ways, but as we put dollars into that bucket, that is for the contingency of recognized liability down road. So in the year we will go on a week-to-week basis, we accrue dollars into that bucket and ultimately we know that, from history that at some point we're going to have say a broken arm. When we have a broken arm by one of our workforce employees, those dollars, that claim is now recognized as a liability by the Company.

When that happens, what we do is, we move dollars from this accrued bucket over into what is called an incurred number, which is put upon that claim to recognize, or estimate, for the liability of the broken arm. What happens over time, then, is the person goes, gets the arm set, gets the cast on, gets the cast off, moves on, maybe goes through some physical therapy, maybe sues you, whatever it is, but at the end of the day, those liabilities are recognized through paying the dollars out of what has been incurred on the claim, out in checks back to providers that took care of the person.

What happens is, is let's just say that that claim in our history was a $10,000 claim. In the past, what we would do is we would put up on the first day or early in the claim maybe $2,500 on that claim. As the person and the claim matured, we would put dollars up again, and maybe again and again. And what our history said is that we would turn four times before we recognize the $10,000 for the total liability, as it was paid out, the claim was paid and the person was permanent stationary and went back to work.

The challenge is, is that when you start to change your reserving practices to get more dollars up on the claim earlier, say we put $5,000 now onto the claim earlier, the total liability doesn't change from $10,000, but now we're half way there earlier. The actuaries have very little way of recognizing where we're at. So what they do is they look at the four times turn on the initial dollars that you put up in your history, and they say because you're putting dollars up faster, now the liability went from $10,000 to $20,000. That's where we struggle in making the transition.

Ultimately, the best part about making a transition, though, is that if we have half the dollars incurred on the claim from the IDNR bucket faster, it creates better predictability as we go forward, and knowing we have dollars up on the claims and that ultimately we have properly reserved for the total liability associated with the claim, and then we have that also within our accrual rate from ongoing operations.

Again, I'm not trying to confuse this. We can ask questions if we need clarity, but I think it's important that we walk through this process and we all become better educated and understanding what goes on in that process.

On a moving-forward basis, we are ultimately working to align more effectively with better predictability and how we recognize our liability for claims. Given that we have been doing this for 20 years, we have a lot of history to know where we need to be and have matured our processes significantly over the past 24 months at estimating where we need to be. We'll continue to work on alignment with our actuaries as they review trends on quarterly and at the end of the year to insure that we have better predictability overall within our operations.

In 2013, we contributed many of the changes made to the organization during -- we completed a lot of the changes made to the organization over the last three years. We completed a transition to our payroll and data platform which will allow for significant improvement in how we use technology to improve efficiencies and the quality of our offering in the coming years. And we have seen a significant move in how we align as an organization, supporting consistency within our product offering from branch to branch in accordance and adaptability of the model.

We've made great progress in maturing operational matrix and statistics to -- in the year, allowing for better visibility in the coming years and greater predictability of internal operations and for our clients. In 2014 we'll continue to mature how we build infrastructure through hiring and developing talent internally, by focusing on how we mature systems to support efficiency and teams and integrity of our offering.

We'll continue to focus on how we mature, the way we look at risks and outliers within our product offering. We'll continue to mature referral partner networks and predictability of pipeline and client build.

Overall, I'm very pleased with the progress we have made in the past two years, and we -- as we have doubled the size of the Company while retooling systems and infrastructure to meet the demands of our product offering. We recognize that we're not perfect, and have experienced recent growing pains, but realize that today that there is no straight line to where we are working to get to and we have great outlook towards the future. We're going to continue to mature as we grow into the coming years, and have our eyes set on becoming a much larger, well-run Company with an offering that is adaptability and relevance long term.

With that, I'll open it up for questions.

Thank you. Ladies and gentlemen, we will now conduct a question-and-answer session.

(Operator Instructions)

Your first question today will come from the line of Jeff Martin of Roth Capital Partners. Please go ahead.

Thanks. Good morning, Mike. Good morning, Jim.

Good morning, Jeff.

Mike, could you go into the guidance? I know we've talked about this on the call on the past, but I think it's useful for people to understand how you derive your guidance. And if -- I think my recollection is, you take the last couple weeks of the quarter and basically flat line that in terms of your forward guidance. Have you done that in the case of first-quarter guidance?

Yes, so here is what we do. We look at our run rate, and then we translate that back to a daily run rate. And so if we look at what we do in the week, we divide that by five and we get a daily run rate and then we extrapolate that forward over, say, a 21 or 22 day month, and then ultimately over -- like in this quarter, a 64 week -- or day run for the quarter.

The problem that we have in January is that as you come out of December, you have so much chop it's hard to use any days in December as a guide to really what's going on in January. So when you come into January, you take a baseline in January in the first week and the second week, and it kind of gives you a degree of your trend, of which you now go back and you determine your daily run rate. The problem with this quarter was, was that when we came out of December into January, normally you have a pattern where you go a high week, a low week, a high week, a low week, and then every now and then it will shift and you'll have a high week, a low week, a high week, or you'll have a low week, a high week, and a low week, so you have patterns that fall out.

In the beginning of the quarter, we saw, actually, where we came out into the quarter with a high week, and then we saw two low weeks. And without having a real good idea of what the next week -- we estimate that it's a high week, but without having an idea where that is, it kind of makes it difficult to say, all right, this is the trend that we're on, complicated also by December being a bad month to get any kind of trend on.

So when we looked at the quarter as a whole, we've got three weeks of data to extrapolate on, and within those three weeks, we've had a little bit of chop. So I would say that ultimately we've tried to lean on the side of being conservative, in that those three weeks aren't necessarily making a trend. And that was one of the reasons why we did so much research back into the organization to say, okay, anecdotally, are we seeing trends change, are we seeing softness in the market, are we seeing additional or new competitive pressures? And we're not. So our hope and our process is that we'll just work through this in the next few weeks and get back on track. But if nothing else, it keeps our eye on the ball and it makes us make sure that we're focusing on the right thing long term.

Okay, that's very helpful. And then on the client signings, how did renewals go in January? In January and July, my understanding, are the two big renewal months of the year, with some renewals every month of the year, but those are the two big ones. If you could give us some idea how the January renewal went?

You know, we see a spike in January but it's equivalent to the same type of a spike that we might see in April 1, October 1 and July 1, and over the years its normalized itself quite a bit because we've found efficiencies to operations and being able to bring clients in on an consistent basis. To date, we have not seen any issue with renewals in January and we seem to be rolling through fine, and even going in looking at February we're not seeing chop or headwinds related to it that I'm aware of.

Okay. And then in terms of your transition over to ACE, my understanding is you plan on adjusting pricing accordingly. Could you comment on that and give your level of conviction and successfully passing along any drag on profitability that would otherwise happen if you didn't adjust pricing?

Yes, if you look at a baseline, today we accrue -- and I say accrual because there's some expenses that are going into the IDNR bucket relative to the accrual for future liabilities and then there's other expenses like risk management, PPA fees and a litany of other things that are hard expenses. But when we look at the total cost of workers' comp in our program, it's running around 4.25%. If you look at the added frictional costs, we estimate -- and this is probably a ballpark high number -- but it's anywhere from 25 to 30 basis points over and above the 4.25%.

So if you looked at the fully loaded 2015, our cost structure would increase roughly 5% to 4.5% to 4.55%, given all of our estimates. And that's always as a percentage of payroll, so it's normalized to match what it is you're getting from the market. Then our plan is, is that we go through a renewal, we're going to look at, first of all, new clients coming in will be definitely priced at the stepped-up basis in the model, and then we'll look at where we may be out of whack or if we need to capture more dollars from existing clients, but our primary objective there is not to create adverse selection in the process and probably normalize that increase to expense where we may split the difference over time.

Okay. And then, what happens with the safety incentive program? In the past, clients have been able to earn back part of their workers' comp premium. Does that stay in place or does that change?

Everything is staying in place. In fact, one-to-one, the client itself, the relationship with the client should not change, and ultimately, they're receiving from -- they're going from a letter of self-insurance as their proof of insurance to paper that has a rating behind it, so it does add integrity to the overall product as well.

Okay, great. Thanks, Mike. Thanks, Jim.

Thank you.

(Operator Instructions)

Your next question will come from the line of Josh Vogel of Sidoti & Company. Please go ahead.

Thank you. Good morning Mike and Jim.

Good morning, Josh.

I just want to make sure I understand this completely, and I think there's just a little confusion out there between the arrangement you have with ACE and the workers' comp reserve adjustment. Those are mutually exclusive events. You didn't have to increase the reserve to satisfy any requirements with ACE?

Correct.

Okay. Because I just think there was a little bit of confusion out there. Now building off one of the earlier questions with regards to pricing, Jim mentioned some frictional costs and you said that you may have to split these costs going forward, but have you been having any dialogue with your clients ahead of this ACE arrangement? One of the reasons I ask is because I've noticed that throughout the year, Q1 through Q4, you were seeing -- I think we went from 1 to 3 clients to 7 to 11 clients leave because of pricing, and I was just curious if -- what was driving that.

Yes. No, I don't think that -- I mean you look at 11 clients, or 1 or 3 or 7, I think that if you're going to -- typically if you're going to leave it might be your end-of-year, related to pricing and we will always see a spike there and we'll also see a spike in companies that sell typically either around a July 1 or a January 1. So those are the two areas that you'll see more of.

One of the things that we did in bringing in our payroll system is that where there was maybe a little bit of float it got tighter in the last year, and I think the companies that were a little tighter in cash flow may have also made decisions where maybe we didn't match up well to them. But we have not seen -- I mean you literally look at even 39 clients leaving over what our total base is, even if it was 100 clients it wouldn't be a significant percent relative to what we're bringing in on a yearly basis. And the one thing I never want to do is get to a point where we're so worried about a client leaving that we're going to compromise the integrity of our overall product, and we'll continue to look at that as far as culling our base.

And that's also a component of capacity utilization. One of the things we look at when we look at building a business unit is saying okay, do we have an 80/20 rule or a 90/10 rule where we've got 10% of our clients that are taking up 90% of our capacity. And when we look at our operating matrix, I'd rather weed out the 10% that are either -- that we are not making any money on, or that they are not efficient clients for it, or we just are not a good match for it. But our first goal is to make sure that we're doing our part on that end.

I guess the long and short of it is, is that as we've gone through the last year and you grow at plus 30% for eight quarters in a row and you literally double the size of already a pretty large Company, you've got to go through a little bit of a vetting process from time to time, and that's where I would attribute it a little bit to the growing pains we've experienced as we're trying to grow into our new shoes as we're running at a very much higher basis.

Okay, that makes sense. Thank you. Now, prior to the arrangement with ACE, when you were going out trying to win new business were you getting any pushback from potential clients because they were concerned about the upcoming Senate Bill?

Yes, we have really good relationships with our clients and that's one of the real keys to our product offering and our niche. I would say that there's probably been a little bit more of a cross current from those maybe trying to sell against us, and we have seen more noise than normal around just competitors that are coming into the market trying to say we're going to go out of business and we aren't going to be around, or just a litany of other things that go on in an competitive landscape, and that's probably what we've seen more than anything.

But our clients, for the most part, are -- we have great tenure with our clients, we have great product offering and today, looking at our product offering, it's not just about insurance. It's about a lot more of what we really do for our clients.

Insurance is an add-on. It's a complement to what we do relative to the economics of the model. And ultimately, the real focus of our business is to advocate for the business owners success and bring tools that allow for their efficiencies and their predictability within their own business model, and that's what our driver is in our model.

Okay. Is there still a chance that you explore other options with regard to the Senate Bill, considering the ACE arrangement only runs through early 2015? I know you could renew annually, but I was just curious if other options were still on the table.

Oh, one of the things I said -- the strength of our organization is that we're very adaptive and we've been around this a long time. I mean, I've almost been in this business close to 20 years myself. I've made more mistakes than I've ever gotten anything right, so with that comes a lot of experience.

When I look around at my team, I don't even want to try to count how many hours in the seat we have. We're going to be very adaptive. We're going to be very opportunistic to do what's in the best interest of the Company and best interest of our customer on a go-forward basis, and we're never done looking for ways to improve or reduce to take risk out of the model.

Okay, thanks for taking my questions. I'll jump back in the queue.

Thank you.

Ladies and gentlemen, at this time, this concludes our question-and-answer session. I would now like to turn the call back over to Mr. Elich. Please go ahead.

Again, I really appreciate everybody continuing to follow us, to stay on the call. And what I really do encourage you to do is, if you have questions please ask. We've always made ourselves very open to questions, very available, and again, we're learning as we go through and we operate at higher levels.

We feel like we know probably 95% of what we need to know, but there's still that 5% that will always be out there as we mature as an organization. I know for sure that our best days are still ahead because we haven't even begun to recognize a lot of the work that we've been getting done the last couple years, so --look forward to seeing you in the street, thank you.

Thank you. Ladies and gentlemen, again, we thank you for your participation and you may now disconnect your line.