Barrett Business Services Inc (BBSI) 2014 Q1 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 first quarter ended March 31, 2014. 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 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 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 to May 30, 2014, starting at 3 p.m. Eastern this afternoon. A 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, Luke, and depending upon where you are 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 first quarter ended March 31, 2014. The 23% increase in gross revenue during the first quarter reflects our continued focus on delivering a management platform that is both predictable and adaptable in how it supports well-run clients over the long term.

Vital to this long-term model is a client vetting process, which has driven our 90-plus retention rate. During the past several months, however, the size of clients that we ultimately determined were not a fit for our platform has been larger than in the past. This recent trend does not impact our long-term view about our untapped market opportunity that helps our client base and the strength of our referral network.

Given this view, we remain well-positioned to continue gaining market share and deliver another record year for our shareholders.

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 first quarter results, total gross revenues increased 23% to $727.4 million over the first quarter of 2013. California, which comprised approximately 88% of our overall first quarter gross revenues, increased 23% due to the continued net build in the Company's co-employed client count and same-store sales growth.

Overall PEO gross revenues increased 24% to $693.9 million over the first quarter of last year, primarily due to the build of our co-employed client base and same-store sales growth, partially offset by the vetting and cancellation of specific clients who no longer met certain performance criteria.

Our PEO revenues from existing customers increased approximately 9% year over year due to increases in both headcount and hours worked. This compares to a 10% increase experienced during the fourth quarter of 2013, and an 8% increase in the first quarter of 2013.

Staffing revenues for the first quarter of 2014 increased 13% to $33.5 million, primarily due to an increase in new business partially offset by lost business from former customers.

On a percentage basis, gross margin in the first quarter was 1.3%, as compared to 1.4% for the first quarter of 2013. The key components of this quarter's gross margin are as follows -- direct payroll cost as a percentage of gross revenues in the first quarter increased slightly to 84.3%, compared to 84.4% in the same quarter last year, due to a small increase in the overall average customer markup percentages on a year-over-year basis.

Workers' compensation expense as a percentage of gross revenues was 4.4%, which represents a 15 basis point increase over the same quarter a year ago, primarily due to small increases in the provision for estimated workers' comp claim costs, adding safety incentives, and, to a lesser extent, the initial cost of the new ACE program.

Looking ahead to the second quarter of 2014, we anticipate the level of gross revenues for workers' comp expense to be in the 4.4% to 4.5% range.

For the first quarter, payroll taxes and benefits as a percentage of gross revenues remained flat at 10% compared to the year-ago quarter, as payroll tax rates for 2014 remained comparable to 2013.

SG&A expenses increased 22% to $14.4 million, compared to $11.8 million in the first quarter of 2013, primarily due to the higher management payroll and other variable expense components within SG&A to support continued business growth.

The benefit for income taxes in the first quarter was $2 million, which represented a tax rate of approximately 35.5%. We expect this similar rate to continue for the balance of 2014.

The income tax rate is increased as compared to 2013 as we anticipate generating a lesser amount of employment tax credits during 2014 resulting from uncertainties surrounding the renewal of the federal employment tax credit program.

For the first quarter of 2014, we recorded a net loss of $3.6 million compared to a net loss of $2.5 million in the same period last year. The diluted loss per share in the first quarter of 2014 was $0.50 compared to $0.36 per diluted share in the year-ago quarter. Consistent with our historical experience, the net loss for the first quarter is due primarily to the seasonally higher burden of employment taxes during the first several months of our year.

Now turning to the balance sheet at March 31, our cash, cash equivalents, marketable securities, and restricted maturities totaled $147.9 million, up from $143.2 million at December 31, 2013.

At March 31, 2014, approximately $15 million of our cash is unencumbered or, said another way, not part of our captive insurance subsidiary or our new ACE program. We also have no outstanding borrowings on our revolving credit facility.

During the first quarter, we funded $20 million of cash into the new ACE trust account as an initial deposit for our new workers' comp insurance [fronted] arrangement with ACE. These funds are included as a component of a restricted marketable securities and workers' compensation deposit within long-term assets on our balance sheet.

The balance in the ACE trust account will continue to build as we transition customers into the ACE program throughout the remainder of 2014.

We generated approximately $7.7 million in operating cash flow during the first quarter of 2014, in large part due to the accrual of first quarter payroll taxes, which are paid out in the month following the end of the quarter.

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 is primarily generated from workers' compensation expense we recognize but do not immediately pay out to third parties.

As we discussed on our last call, during the first quarter of 2014 we began our new workers' compensation fronted arrangement with ACE that provides coverage to BBSI employees in California. The arrangement, typically known as a fronted program, will provide BBSI with the use of a licensed admitted 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. This arrangement addresses the requirements of California Senate Bill 863, which prohibits BBSI from continuing its self-insurance program in California beyond January 1 of 2015.

Now turning to our outlook for the second quarter of 2014, we are expecting gross revenues to increase at least 15% to a range between $780 million and $800 million, compared to $675 million in the second quarter of 2013.

The projected increase of 2014 second quarter gross revenues is based upon our recent revenue trends. We expect diluted income per common share to increase at least 16% to a range between $0.93 and $0.98, compared to $0.80 in the second quarter of 2013.

I look forward to addressing you again on our second quarter earnings call. Now I would like to turn the call over to the President and CEO of BBSI, Michael Elich, who will comment further on the recently completed first quarter and our outlook for the second quarter of 2014. Mike?

Good morning, and thank you for being on the call. In the first quarter of 2014, we recognized more clearly that we have been experiencing growing pains within operations resulting from growth fatigue related to doubling the Company over the past two years; maturing of the organizational foundation through a build in senior management as well as retooling of branch operations to accommodate business units and how we focus on client development in teams; and the implementation and adoption of HRP, our payroll and data platform, along with the implementation and transition of our insurance model as a result to SB 863.

It is easy to see in hindsight. Looking forward, we believe we have turned the corner in the most recent quarter, adapting to effects resulting from third and fourth quarter of 2013. With experience brings new perspective as to how we should look at the organization on a go-forward basis.

In the quarter, we added 202 new clients. We lost 53 clients. Six clients left due to AR reasons; 20 clients lost due to non-AR reasons -- risk and lack of tier movement. 12 client businesses sold, seven left on their own due to pricing or went to a competitor; three took payroll in house; and five for other reasons.

This represents a new build in the quarter of 149 new clients added. Related to canceled clients, we did see an impact created by canceling of larger-than-normal clients in the fourth quarter of 2013 and January of 2014. As a result, we saw a loss of revenue as impacting our revenue base through this vetting process that, once replaced, will return us to our more recent trend.

By identifying and canceling clients who were utilizing a disproportionate level of BBSI resources, we expect to recognize a long-term increase to efficiencies and quality of operation which will benefit remaining and future clients.

Also in the quarter, we saw an 8% build in same-store sales. Looking at the current quarter compared to fourth quarter 2013, we saw 38% of clients add new headcount, 35% of our clients reduce headcount, 27% of our clients remained unchanged. We saw 42% of our clients increase hours worked while 57% of our clients reduced hours worked. 43% of our clients increased hours worked while 53% reduced hours worked.

Excuse me -- I'll back up a second. We saw 42% of customers increase payroll while 57% reduced payroll. We saw 43% of our clients increase hours worked while 53% of our clients reduced hours worked.

In comparison to fourth quarter, we saw 43% of clients increase hours worked versus 57% of clients in the fourth quarter. In a sense, we're seeing -- we saw a little bit of a flip from what we'd seen historically from -- not so much headcount add, but we saw a disproportionate change in hours worked, which is ultimately affecting payroll, we believe.

Related to our regional pipeline growth, we continue to see strong momentum across all regions. In surveying the operation as to forward-looking pipeline strength, the general market outlook, we are not seeing change in momentum and things seem to be continuing on track related to new client adds.

Related to structure and organizational build, we continue to expand and build business units to support our operational integrity, matching resources to support client demand. One reason we vet clients and cancel when necessary is to optimize how we are allocating time to ensure we are not disproportionately supporting clients we are not making progress with within the model.

Currently, we have 32 business units supporting 52 branches. We currently have one business unit being built and are forecasted for an additional three business units to be built in the first half of 2014. We look to capacity utilization to determine our rate of infrastructure build to support our net new client adds and will adapt as we see capacity strained by rates that we are building clients.

To the look at quality and underwriting risk, in the quarter we finalized the funded range amount which will satisfy our workers' compensation insurance requirements in California related to our current self-insured program that goes away January 1, 2015, as a result of SB 863.

Today, we have transitioned 215 new and existing clients into systems with very little disruption. The first indication is that this new arrangement is being very well received and should work to complement our overall effort offering in the future.

Related to workers' compensation, in the quarter we continued to make progress on our reserve strengthening process in which we estimate to be completed in the next 60 days. This has been a process focused on taking dollars that have been accrued in IBNR into incurred on individual claims, which is intended to get us closer to an ultimate expected level on all claims.

Following completion of this process, it is our plan to employ an outside resource to evaluate a sample of claims to ensure we are not missing anything in the process.

In the quarter, we continued to see positive trends related to claim frequency reduction relative to payroll growth, total claim count build being neutral to even, and settlements of more complex claims increasing.

Moving forward and looking to lessons learned in the past several months, I can see today that we have in the past, and can no longer run, the Company in the rear-view mirror. In the quarter, we have started to review methods we have historically used to review and predict operational outcome and stress assumptions against larger numbers to build more robust operating matrices.

During a time of significant change over the past few years, we have grown to appreciate the impact of change management methods. We continue to refine methods to adapt how we must communicate internally as well with clients to ensure change does not create disruption internally or externally in the future.

We cannot say at this point there is much we could or would have done differently in the past couple of years, but as an organization we will use what has been experience to build a stronger organization for tomorrow.

Over all, I'm very pleased with the progress we continue to make while continuing to retool systems and infrastructure to meet the demand of our product offering. We realize we're not perfect, and have experienced recent growing pains but realize today that there is no straight line to where we are trying to get to.

It seems we have turned a corner but may take a couple of quarters to get things firmly back on track. As a result, this process will make us stronger as a Company long term.

Lastly, I want to mention the additional release posted this morning announcing the promotion of Gerald Blotz to Vice President and Chief Operating Officer for Field Operations and Greg Vaughn as Vice President and Chief Operating Officer for Corporate Operations. These moves complete the organizational transition we have been working through the past three years.

Both Gerald and Greg have been, and will, serve as crucial pillars in supporting the overall growth and ongoing evolution of the Company for the long term. That means Greg has to stick around a lot longer than he planned on.

This move also rounds out my ability to support and guide a much larger organization with better visibility to details within the operation, providing the means for BBSI to remain nimble and relevant in the marketplace long term.

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

(Operator Instructions) Jeff Martin, Roth Capital Partners.

Hi, Mike and Jim.

Morning, Jeff.

Good morning.

Mike, can you go into a little more detail on the client vetting process? What all is behind it? Is it just larger clients? Is it clients in general that are taking a disproportionate amount of resources? Do you expect margin gains to result from this, and how long do you think the transition will take?

We continue to look at our base of clients on an ongoing basis to understand and figure out where we're at with them. Are we making progress with them? Are we stalled in the process? Are they communicating with us? Are we able, longer term, to have an impact on them?

So as we look at branches and/or business units and we reach a point where we look to, one, some of the analytics that come back and tell us that we're not making the progress with a certain client, we look to that client to figure out, okay, is it short term, long term? Does it make sense to continue to invest there?

The one piece that usually stresses that is as we grow and add business, we have two choices. We can add additional resources via build more business units and add capacity to the overall branch. But the first thing we typically do is we'll look back to the client base and kind of identify an 80/20 rule to understand which 20% or 10% of clients within that business unit or branch might be taking up 80% of the capacity within that branch.

So the first step is that we'll look at, one, quality of risk. Are we seeing things that we shouldn't see? It just so happens, as we keep combing through the branch and we keep combing through, I think it served us probably good last year that we had some larger clients that were causing us a little more problem than we may have understood earlier and it just made sense to move them out.

We still do business with a number of large clients and we do a great job with them. It's just that with some larger clients, you feel the pain a little bit more from operations -- what it takes, how many visits you have to have. Do you have access to the owner? That's -- a lot of times in bigger organizations, you don't have access to the owner and within their own organization, you have an infrastructure that is supporting a little bit of the status quo, and it makes it difficult for us to help support change within that organization.

So we look at it, we look at it from risk -- it might come from client frequency. We'll look at it from tier movement -- are we stuck in tier movement where we're in Tier 1 and we've become a tactical subordinate in the relationship with the client, or are we truly a partner and given another six months, we'll be able to see where we're moving forward, we're having an impact at the supervisor level? Management's listening to us and ultimately both we and the client are becoming more efficient in how, one, the relationship works; and two, how both operations are able to run.

And then, three, we still have a -- if you look back at the last two quarters, roughly 100 clients that we pushed out off a base that's close to 3,000 clients, the disproportionate piece is when you go in and start looking at vetting out a block that is bigger than it had been in the past. And a lot of times you'll see that at the end of the year, and especially after you've done a long run, where you just say, no, I'm going to take the hit today and we'll backfill tomorrow. That was a little bit of what went on.

Okay. And is this a process that's toward the end of its cycle or -- it's somewhat of an ongoing process, but the big egg, so to speak, has worked its way through the snake?

No, we've done a lot of time in the field over the last couple of months trying to understand that ourselves. All indications are that it was kind of a spike and that we're on the back end of it. I mean, we'll continue to have ongoing vetting, as we always should. But there was definitely a spike in that activity that, now that it's cleared out, we'll see it reach a more normalized level and ultimately help us return to a base of supporting a stronger product.

The other thing, too, I would add is that with that, we begin to get more efficiency out of business units so we don't have to add as much to infrastructure. And once you clear that out a little bit, it allows us to focus on remaining clients and add new and better clients.

Because we get better at underwriting over time and I think that this -- this is a pent-up build that you've got to get out of the way sometimes to be able to move to the next level, and that's kind of where we ended up.

Okay. And then, sounds like you've transitioned over 200 customers to ACE. Wondering if you could give any detail how that's gone and how the pricing talks have gone (inaudible) to what you're selling.

On the front end of it -- we didn't ultimately get the arrangement finalized till closer to March 1. We started bringing clients into the process in March but we didn't really have that many. In April, actually, has been accelerating -- with no effect. I mean, we're having good conversations. It seems to be pretty much a neutral change for our clients where we're pricing our product with new business coming in.

We're not -- it's like anything, your prices is always going to be a product of how good are you. But we're not seeing competitive pressures there that are keeping us from getting business, at least on the front end.

I think the arrangement, over all, will be additive to the quality of the product that we're bringing, in that our clients are getting a certificate of insurance now rather than a certificate of self-insurance or a letter of self-insurance. It allows them to go to their clients and have a more valid rate of paper behind them. It's just going to be cleaner and we're already seeing results of that.

Okay. You previously talked about a 25 to 30 basis point uptick in workers' compensation as a percentage of gross payroll once this is fully transitioned. Are you seeing your ability to recoup a good percentage of that? I mean, it's early, but just curious if you're feeling that this is still likely to be an earnings-neutral transition.

I think throughout this first year, throughout 2014, we'll be ramping into it and we'll be capturing additional margin where it makes sense. And then over time, we'll normalize to where we need to get to, which will be a process in 2015 more so. But for the most part, we should be somewhat neutral even though the expense will increase.

We're not seeing where we believe that it'll be -- it shouldn't slow our growth curve to be able to capture that additional margin on a go-forward basis to make sure that we're remaining neutral to maybe somewhat accretive to the new program.

Okay. And then one more, Mike, if I could. You've talked about a couple more quarters to kind of get through these growing pains. What sort of things should investors look for in terms of ways to gauge your progress towards getting back to where you feel you're back on track?

Well, you come out of first quarter and you go through and you're looking at, what was the real effect of the business that left versus what you're backfilling with? So if you look at the quarter, we added 149 net new clients to the process. How big they are, how much the new business coming in contributes to the existing month, the existing quarter.

When we look to first to second quarter, we're seeing pretty strong pipelines. We've already had what looks to be a pretty strong April. May looks pretty strong, and then getting into July -- I think it's a little cloudier as you get out there.

But what you're really doing is you're kind of backfilling. You might be at a neutral basis. If we were to add back in what came out, we're still on trends that we have been on previously. The challenges with it is that as you're coming through and backfilling the vetting, you're still going up against higher and higher costs based on a 35% to 37% growth rate last year. And that's probably working against you more than what's really going on in the operation.

So if you were to normalize or add back in, say, close to $200 million onto the base and then look at how we are building on top of it, it might give you more of a normalized idea of what our growth rate would be based on trends over the last couple of years.

Okay. And then, just to clarify that -- the clients that were vetted, that's included in the subtractions number for the quarter?

Yes. But the problem with it is, when you let a client go, you let 100% of those dollars that are contributing in that -- in a month or in a quarter ago -- where when you're building throughout the quarter, and let's say you added 200 clients, you're getting maybe a 60% to 70% credit in that quarter for what's coming in.

So you've got your lines -- you've got a growth curve that's going up, you've got a vetting curve that's maybe going up. But as that vetting curve tips over, you now will cross lines and you'll start to find another build coming on after that.

Okay. Thanks, Mike; appreciate it.

You bet.

(Operator Instructions) Josh Vogel, Sidoti and Company.

Thank you. Good morning, Mike and Jim.

Good morning.

Good morning.

I just want to focus a little bit more on this vetting. You did $2.8 billion in revenue last year. Can you kind of quantify how much of this revenue you're going to be culling out?

That's just a little bit of a moving target, but I would say that if you took out about $200 million, which represents around $50 million a quarter, and then you kind of start off a new base of say $2.6 billion and then you were to grow similar to what you've seen in the past, it would get you back to where we should be. And that's a little bit how we're looking at it internally.

It's a little more complex when you look at timing throughout a quarter of how business might leave versus how it's coming in. We're looking to this coming quarter and we don't see -- I mean, it's gotten back to much more of a normal process. So it's not spiking anymore.

So if you looked at that against additional clients that are coming in, that's being offset. I mean, if you look at maybe some strength returning to same-store sales, which you saw -- on a year-over-year basis, we typically see third and fourth quarter start to support or strengthen same-store sales. I mean, if we were looking at 30% on the $2.8 billion growth line taking us to almost a $3.6 billion level, at $2.6 billion you're probably going to be somewhere between $3.3 billion and $3.4 billion in the year.

Okay. You had some commentary about a decline in hours worked. When we're looking at your guidance for Q2, you're taking into account vetted clients, but are you also baking in the decline in hours worked? Are you taking conservative assumptions there?

I think we're probably taking pretty conservative assumptions right now. We're kind of working through this process. We missed two quarters, one by $700,000 at the bottom end and the other one $8 million, which is literally a matter of hours within our guide. We're trying to get to a point where we can look deeper into what's going on in that fungible pot and understand where it really should be landing with a better predictability rather than using the old methods that we've had that don't seem to be robust enough to kind of get us to a real level.

So we're looking at -- when we're diving back into it, we're looking at the effect of new clients added. We're looking at the effect of same-store sales. And then we're looking at the effect of the vetting process, all built on a base of what your run was in the previous quarter.

And so as you do that, you've got new clients coming in. So it's a product of how big they are, how much they're going to contribute in the quarter, and then at what rate they're coming in.

Then you look at same-store sales and you look at three factors that are going to affect same-store sales -- it's going to be new hires coming on. It's going to be hours worked, the number of hours worked, which was going backwards last quarter. And then you look at wage inflation. So headcount, hours worked, wage inflation -- that's what's going to affect same-store sales.

And really, those are out of our control. But historically we've seen where those trends are but we're continuing to see similarities to previous quarters so we're not seeing really where that changes.

And then, the last one is ultimately is how many clients are you moving out relative to what you're bringing in, which either gives you a build or a net build in your client as it adds to your daily run rate.

Okay. Now, the clients that you targeted to vet out -- are these more recent clients that you signed in the last two years or are these more of your clients that you've had dating back to pre-recession?

I would say probably more recent because we continue to go through a pretty strong vetting process. I would say that they're probably a product of some of the more rapid growth that we've seen over the last couple of years.

And it's not even that -- we went through post-recession and 2009, 2010, 2011, and we've kind of looked at the smaller clients that were causing us issues, because it's how much you're making versus what are you putting back into them. And then you kind of go through that process and that starts to get pretty clean.

And then all of a sudden, you start seeing these bigger clients that offer more margin dollars and more cost dollars short term. But when you start to look back on it after the fact, you start seeing, well, what is the real net effect of them? Again, I want to say that 80% of those larger clients are rock solid and they're great. We do a lot of good business with them.

But then there are others where we probably came into the relationship wrong. When we look at how we come into the relationship, how we sell the product today through the business unit process, and even in the last year to year and a half, compared to where we were three years ago, it's not even the same. It's so much more strong.

So I would say it's not clients that came on six months ago and it's not clients that probably -- we give clients a fair shot at -- we give everybody. I mean, we want to make everything work, but you've got to be a realist sometimes and say, you've got to trim your portfolio and make sure that you're not keeping stuff that you shouldn't keep.

It's probably a blend but I would say it's probably clients that have been on two to three years.

Okay. Now, I just want to get a sense of how revenue growth should trend throughout the balance of the year. You talked about a spike in activity over the near term with regard to the vetting. So is it safe to say that in terms of the revenue deceleration that we've seen over the last several quarters, will Q2 basically mark a trough there before we expect to see revenue growth re-accelerate in the back half of the year?

That's our belief, yes. In all the modeling we're doing, and we're looking at this pretty conservative and -- I mean, you know us. We're an operations-based company. So we're all over this, trying to understand -- it really comes down to what's going out. And then the effect of what's going out versus what's coming in.

If you were to not be up against a growth rate of 38%, 37%, I think, in second and third quarter last year, the decline would be a lot more muted. We're still adding quite a bit of business, if you look at a year-over-year basis from almost $200 million.

So yes, I would estimate that it is somewhat of a trough. It's hard, still, to understand what sort of impact it'll have in third quarter, as you just kind of are running up against higher costs. But then, by the time you get in and through fourth quarter, first quarter --

The problem is, a little bit next year you're going to see it go the other direction again. Because you're going to be up against lower costs. So we get excited about that, but I'd rather run it at a basis where you have the predictable growth rate that's reasonable -- the mid-20s to high 20s is probably a good number that we can peg to and run long term at once we get through this little maturing process that we're going through.

Okay, that's helpful. And just switching gears, we've seen a lot of investment by peers into their tech infrastructure and platforms. I know you've rolled out a new payroll and data platform. But it seems like there's a big push into cloud-based products and I was wondering, what kind of exposure you have there or any planned investments in the future on that front?

We basically have a cloud system. I mean, we have an infrastructure and platform that's supported through our branches. We're going through Phase 2 of HRP implementation today that's giving our clients an access point to that information which will bring a cleaner interface for us and bring us somewhat into the 21st century from where we had been previously.

A lot of the investment that we're making is all about bringing more crisp analytics back to, one, the operating units that we have; and then two, creating the bridge between our partners and who we are in the room. So realistically, we have an invested base into the same system.

It's a combination of cloud and on-site. HRP is on site at our individual branch units. The major platform cloud is going to be through our CRM process and system foundation, which is sales force. And all of our electronic docs that we have that our clients need to access will be cloud.

So without dressing it up into the latest and greatest, we're doing what the industry is doing and I'd like to say with our operations-based platform, ground up, supported with our technology and our innovation around technology, especially what we'll see going into 2015 and the next couple of years is truly going to give us a leg up in the process of supporting our clients and competing in the market.

Okay. And just one last one, if I may, maybe more for Jim. For the benefit of the investment community, can you maybe quantify for us what the incremental or frictional costs that went toward ACE were in Q1, and what's built into your modeling for Q2? Just so we get a better idea of how this is really a net neutral event for you.

Yes, during the first quarter there was probably -- only maybe 2 to 3 basis points of frictional costs related to the ACE program. And looking at 2Q, it's going to increase to probably 10 to -- depending on how customers transition -- maybe as high as 15 basis points. But I would say probably closer to 10 basis points for 2Q. And then obviously, it will ramp more in third and fourth quarter.

And again, going back to what we had talked about here last quarter, that once fully loaded, the incremental frictional costs are probably going to be 25 to 30 basis points. But again, we won't see that fully loaded cost until 1Q of 2015.

Okay, great. That's all I had. Thanks a lot, guys.

Thank you.

And at this time, this does conclude our question-and-answer session. I would now turn the conference over to Mr. Elich for closing remarks. Please go ahead.

It's one of those things -- as you grow and you have success it's hard to see, sometimes, what's not working. And like anything, unfortunately you have to have, sometimes, the mirror put in front of you or something goes sideways for you to be able to look at things differently than you've always looked at.

Although it's painful -- I wouldn't want to ever say I had to do this many more times; but at the same time, I said I'll do it as many times as it needs to be done to make sure that we'll become a better company over all.

I think this process has done a couple of things. When I look at -- you build an organization, the organization doesn't necessarily grow up until you have to figure out why you have to come together to get things done. And one of the things that this transition, or this period of time, has done is it's made us spread ownership through the organization as to what has to get done.

Before, I always felt like I had to find the next answer. I feel like today, I have an organization that's backing that up. We're pretty rock solid and we're only going to get better.

I think related to your data points, it's always easy to look at them and keep trusting them and believe them when they're working. When they quit working on you is when you look deeper and go, okay, this is broken. And I think from that, we've figured out probably three or four more new ways, better ways, to look at the business in the last month or two that will help us have better predictability.

By the time we get to 2015, we should be able to lock it down and have a pretty good idea of where we'll be, even as far out as a couple of years.

And then the last thing is, growing up in the business and moving from the role of COO into CEO, it's a tougher transition than I would have ever expected because you're still so much part of the operation, you're trying to get the answer you want to get to. And with bringing Gerald and bringing Greg to a new level and watching the whole organization grow up a little bit more, it allows me to be able to step back and be a little bit more impartial to where I want us to be and more critical and ask better questions that will help us get better, and maybe see the next blind spot that might be coming at us.

I don't want to discount for a minute how powerful and important this process has really been for us, and/or how serious we're taking it. And the fact that it already has impacted the quality of the organization and who we're becoming.

So with that, I'll leave you to more important things and talk to you next quarter. Thank you.

And thank you, Mr. Elich. Ladies and gentlemen, that will conclude the conference call for today. Again, we thank you for your participation and you may now disconnect your line.