Barrett Business Services Inc (BBSI) 2015 Q3 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 third quarter ended September 30, 2015.

Joining us today is BBSI's President and CEO, Mr. Michael Elich, and the Company's CFO, Mr. Jim Miller. Following their remarks, we will 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 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 November 28, 2015, starting at 3 p.m. 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 Company's 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, Audra, 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 third quarter ended September 30, 2015. The Company delivered strong results in Q3, with sales up 17% and passing the $1 billion quarterly revenue threshold for the first time in our history.

These results were driven by the addition of 150 new client companies and strong same-store sales growth of 10.6%. This was tempered by a slight year-over-year decline in our staffing business, due to some seasonal and episodic fluctuations that can be experienced from time to time in the staffing industry. We will expand upon this later in our prepared remarks.

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 operation; and three, adds more transparency that 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 third-quarter results, total gross revenues increased 17% to $1.1 billion over the third quarter of 2014, primarily due to the continued build in our (technical difficulty) employee client count and same-store sales growth, partially offset by a 4% decline in staffing revenue. Overall, PEO gross revenues increased 19% over the third quarter of last year to $1 billion, due primarily to the continued build in our client count and same-store sales.

Our PEO revenues from existing customers increased approximately 10.6% year over year, due to increases in both headcount and hours worked. This compares to a 9.2% increase last quarter and an 8.3% increase in the third quarter of 2014.

Staffing revenues for the third quarter of 2015 were approximately $46.6 million, representing a 4% decline from the 2014 third quarter. This decline was due primarily to the impact of the drought in California and the Northwest on our seasonal agricultural business, which is particularly active in these regions during the third quarter due to the cherry, apple, and wine producers we support.

Additionally, we are seeing a tightening labor market and a shortage of qualified employees in some markets. We have chosen not to pursue staffing in instances where we are unable to place skilled talent or where wages are being depressed, as we believe pursuing lower-margin opportunities is not in the best interest of the Company.

On a percentage basis, gross margin in the third quarter was 4.2%, compared to 4.1% last year, which sets aside the additional workers' comp charge taken during the 2014 third quarter. The key components of this quarter's gross margin are as follows. Direct payroll cost as a percentage of gross revenues declined 17 basis points from the third quarter of 2014 to 83.9%, which reflects an increasing overall average customer markup percentage on a year-over-year basis. We evaluate pricing on an as-needed basis to account for operational demand and market trends and we have thus far been able to offset various incremental costs to maintain a similar gross margin percentage.

For the third quarter, payroll taxes and benefits as a percentage of gross revenues declined 20 basis points to 7%. The lower effective payroll tax rate for the 2015 third quarter resulted from a decline in overall state unemployment tax rates where BBSI does business for 2015 as compared to 2014.

Workers' compensation expense as a percentage of gross revenues was 4.9% and represents an increase from 4.6% in the third quarter of 2014 on a normalized basis. As expected and consistent with the first six months of 2015, the year-over-year percentage increase is due to an increase in loss accrual rate, incremental expense associated with the ACE program, and the collateral cost related to satisfying the security requirement for the runoff of the California self-insurance program.

As you may recall, the 2014 third quarter included an $80 million incremental charge to the Company's workers' comp reserves, which put our actual workers' comp expense for the third quarter of 2014 at 13.5%. Looking at the fourth quarter of 2015, we anticipate the level of workers' comp expense to range between 4.9% and 5% of gross revenues.

During the third quarter, we closed an additional 75 claims from years 2012 and prior, resulting in approximately $1 million of credit. This follows the progress we reported for each of the past three quarters and also supports the results we expected of the claims strengthening process initiated in late 2013.

To date, this brings the closure of 725 claims or approximately 56% of the total strength in claims from 2012 and prior, yielding $8.8 million in total credit. Specifically, we are seeing a continued trend of claims from the years 2012 and prior closing for less than the amount put up on these specific claims. The significance of the 2012 and older claims is that they are now well seasoned and, having been fully strengthened, provide us with a solid basis for analyzing the development of claim years 2013 through 2015. The number of total open claims from 2012 and prior is now less than 800.

SG&A expenses increased 20% to $25.4 million, compared to $21.2 million in the third quarter of 2014. This increase is due primarily to incentive bonus paid in the field as more branches reach profit-sharing threshold. It also represents continued investment in the infrastructure to support future business growth. While it is important that we prudently invest to stay in front of expansion, on a fiscal-year basis we continue to target the rate of SG&A to grow in line or less than our gross revenue growth.

Income from operations for the third quarter of 2015 was $17.8 million and represents the levers we would expect in our bottom line once we repay our outstanding debt.

The provision for income taxes in the third quarter was $5.9 million, which represented a tax rate of approximately 33.8%. The lower rate was primarily due to higher-than-anticipated employment tax credits taken on our 2014 federal tax return, which we filed in the 2015 third quarter. We expect the tax rate for the balance of 2015 to be in the upper 30%s.

Net income for the third quarter of 2015 was $11.6 million, resulting in diluted income per share of $1.57.

Now turning to the balance sheet, our cash, cash equivalent, marketable securities, as well as restricted securities, totaled $273.9 million at September 30, 2015, compared to $239.1 million at December 31, 2014. At September 30, 2015, we had no borrowings on our $14 million revolving line of credit.

During the third quarter, we funded approximately $33.8 million of cash into the ACE trust account to supplement the $59.4 million funded in the first six months of 2015 and $50.1 million funded at December 31, 2014. These funds are included as a component of restricted marketable securities and workers' compensation deposits in long-term assets. A portion of these funds represents an estimate of injury claims to be paid out in the next 12 months and are included in current assets on our balance sheet.

The balance in the ACE trust account is expected to build for the foreseeable future as growth into the program continues. However, we project that most of the fundings for the remainder of 2015 will come from the expense we accrue in the workers' compensation line item.

In long-term assets, we show $88.3 million of restricted certificates of deposit. This represents cash secured letters of credit to satisfy collateral requirements associated with runoff of our expired self-insurance workers' compensation program in California. During the 2015 third quarter, the state of California reduced our security requirement, which resulted in approximately $26 million of previously short-term restricted certificates of deposit being moved into cash at September 30, 2015.

Going forward, we anticipate semiannual decreases to the security requirement as the outstanding California self-insured liability these deposits secure will continue to be in a runoff mode.

Additionally, during July we received approximately $8.2 million of our expected $10 million federal and state income tax refund resulting from the [tearback] of the 2014 tax loss to prior year's taxable income. We anticipate receiving the remaining income tax refunds during the fourth quarter of this year.

While our current ratio does not appear strong, it is important to note that cash generated from the operations of the business is sufficient to fund the daily needs of the Company. Additionally, we expect to fund the $15 million installment of bank debt due December 31, 2015, primarily from cash flow generated from operations throughout the fourth quarter of 2015.

We generated approximately $51.3 million in operating cash flow during the first nine months of 2015, as compared to $33.5 million in the same period last year. Much of our cash generated from operations is typically in the form of free cash flow, except for the build in our workers' compensation liabilities, as cash used to fund the ACE trust is primarily generated from the related workers' compensation expense. At September 30, 2015, approximately $5 million of our cash is true free cash.

During the first nine months of 2015, we made payments totaling $10 million on our term loan with Wells Fargo, representing the scheduled debt repayments.

Now I would like to provide an update on the SEC investigation and the shareholder lawsuits that we have previously disclosed. Regarding the SEC investigation, we have fully cooperated and provided the SEC with documents it has requested. While there has been no timetable communicated for resolution, we strongly believe that our financial statements and accounting practices are and have been in full compliance with US GAAP.

The shareholder lawsuits include a consolidated class action filed in federal court in Tacoma, Washington, and a shareholder derivative lawsuit filed in Maryland state court, based on largely the same allegations as those in the class action. All of the directors and three executive officers are named as individual defendants in the derivative lawsuit.

We believe the claims in both lawsuits are without merit. The lawyers we have engaged to defend us are well versed in this type of litigation and they have filed motions against the complaints that are typical at this stage of the proceeding. They have instructed us not to comment further while these matters are pending.

As we introduced last year in order to provide our investors with a more appropriate forward-looking view of our business, we have initiated a rolling 12-month outlook for gross revenues, which we plan to update on a quarterly basis. As such, we continue to expect gross revenues for the next 12-month period to increase approximately 18%. Included in this expectation is a high single-digit contribution from same-store sales growth, as well as growth from new business, consistent with current trends.

In addition to quarterly updates to our gross revenue expectation, we expect to make comments about our net income expectation at the end of each fiscal year.

I look forward to addressing you again on our fourth-quarter earnings call. 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 2015 third quarter, as well as our outlook for the remainder of 2015. Mike?

Good morning and thank you for taking time to be on the call.

Very pleased with the results of the quarter. For the first time, we crossed the $1 billion in revenue mark in a single quarter. I only mention this as we consider this a significant milestone representing the contribution of many people over many years.

In the quarter, we continued to see progress through the maturation of our brand, as measured by the consistency of growth we experienced across all markets. We continued the process of maturing our organizational structure as the process -- and the process by which we attract, develop, and retain people. Based on our rate of new client adds and organizational bench, we still believe we have at least 18 months' runway in our organizational structure today.

We also continue to mature systems and internal matrices designed to support predictability in the model, while bringing increased efficiencies to operations.

In looking at the quarter, we added 210 new PEO clients. We lost 56, due to accounts receivable or collections issues. Nine were canceled for non-AR issues and lack of tier progression. 15 businesses sold or closed and 20 left due to pricing competition or have moved away from an outsourcing model by taking payroll in house. This represents an approximate net build in the quarter of 160 new PEO clients.

PEO same-store sales increased 10.6%. This specifically measures hiring increase of hours worked and wage inflation. Measured sequentially, second-quarter 2015 versus third-quarter 2015, 44% of our clients added headcount, 29% of our clients reduced headcount, and 27% of our clients remained unchanged.

As mentioned in Jim's overview, we did see softness in the staffing business during the quarter. We see two drivers in the softness. First, leading into September, we experienced delay in seasonal employee ramps brought on by extreme droughts in California and in the Northwest, primarily in the Northwest. It was more eastern Washington or eastern Oregon.

We were -- these are markets that we provide seasonal labor to support the agricultural industry. We expect the impact of the drought to normalize as we move into the fourth quarter, where we historically see increased activity related to our nonagricultural sectors.

Second, we are starting to see a shortage in qualified labor in several markets. As Jim mentioned, we will continue to be selective in our hiring practices. We will continue to maintain our standard as we see shifts in labor markets.

I will note that we have not seen the drought or the labor shortage impact our PEO business. Unlike our staffing business, it is not nearly as prone to such seasonal or episodic fluctuations.

Related to pipeline and regional growth, we continue to see maturation and maturity in our brand, as evidenced by ongoing interest in our offering. We did see softness in select markets in late August and September, related to our rate of closures of new PEO opportunities. August is typically a softer month, with activity picking up into September. Now that we are nearly through October, we believe the softness was more of a delay in contract closures as October has started off strong and reverting to our most recent historical trends, while pipelines continue to be strong.

Our general market outlook remains strong with consistency building -- with consistent build across all regions. We continue to see increased momentum coming from the East Coast, Northwest, and mountain states as these regions mature.

Related to structure and organizational build, we continue to build and expand business units to support current and future organizational needs and to meet market demand. Currently, we have 39 business units supporting 54 branches. We have six business units being built and have forecasted an additional four business units to be built by the end of first-quarter 2016, for an approximate 49 total business units. In the next few months, we expect to add business units to existing markets in Modesto, Fresno, Bakersfield, Napa, Portland, and Valencia.

We are in the process of opening two new branches, one in Alexandria, Virginia, and an additional market in southern California by the end of first-quarter 2016. We anticipate additional markets on the East Coast in 2016. We continue to see positive momentum within new markets opened in recent quarters as well.

Related to systems, we continue to focus on the integration and adoption of systems developed over the past 18 months. The adoption of several different systems is allowing for gains and efficiencies in operational delivery, as well as enhancing our visibility and predictability, which is key to -- as we reach new levels of scale.

Related to workers' comp and the underwriting of risk, in the quarter we saw related relative frequency of claims as a percentage of payroll decreased by 3.1% compared to the third quarter of 2014 and a decrease of 2.3% compared to the third quarter of 2013. Also in the quarter, we continued to see positive claim closures, as evidenced by the continued increase in the percentage of claims closed over the past three claim years.

We have also continued to see decreases in severity, as evidenced by improved trends in ultimate severity for claims years 2013, 2014, and 2015. Moving forward, we continue to monitor trends to maintain a proactive position related to workers' compensation. We expect this to result in a greater predictability within the model.

Looking forward, during the quarter we completed our annual all meetings and branch reviews. These sessions provide an opportunity for management to spend a full day with every employee in the Company and to bring alignment to the organization as we look ahead. One observation made was how much we have evolved as a Company over the past 12 months, while supporting double-digit growth.

I continue to be pleased with the strength and the maturity I see in the organization and we continue to focus on elevating talent and developing bench strength. I'm also confident with the progress I see in our approach to the market, the strength of our pipeline, and the value we deliver to our clients. We also continue to see progress in the adoption of systems and processes that all will allow us to strengthen engagements with our clients and improve efficiencies over time.

As our teams mature and share best practices across markets, we continue to see more consistency in our brand and greater contribution for the entire -- from the entire organization. With that, I'll open it up to questions.

(Operator Instructions). Jeff Martin, ROTH Capital Partners.

Thanks. Good morning, Mike and Jim. Mike, could you touch on the California market with respect to the current employment model, if there's any particular trends you are seeing, either from an economic standpoint, small business standpoint, or the insurance environment?

I will start with the insurance environment. We are not really seeing movement there. We maybe are seeing a little more competition as it relates to some of our competitors, be it -- TriNet has been more aggressive over the last probably six months. ADP even is minimal, but more aggressive.

But as it relates to comparables, true comparables, we are not seeing where competition is that much of a headwind, but maybe more of a market disruption. Also related to workers' comp insurance, we are not seeing big swings in rates. I think that that part of that has stabilized, to a large degree.

Related to just overall trends, one of the things that I've watched over the last, call it, seven years since 2008 is everybody has been trying to get back on their feet and it seemed like this year, the economy is doing well. You see kind of a step up in just overall hiring as a whole, but this summer seemed to be more of a -- I don't know if people just took more vacations or whatever, but it just seemed to be maybe a little bit of a market stall, more so seen in California than in other markets.

I think that the Dow dropping 1,000 points in August probably doesn't help, either, when you look at business owners making decisions to structurally shift their business to go with us.

So that's more anecdotal noise related to what we are maybe seeing in the market. We are not seeing really a huge shift, but I think overall our average branch in California was growing somewhere between 15% and 21%, and as we have a lot of bigger branches in that market, it kind of also -- you are running up against some large numbers, so it's kind of hard to blame that on an economy more than anything else.

Okay. And then, in terms of the net client builds in the quarter, is there anything specific to your strategy that has changed or might be -- I know you did some vetting of non-tier progressing clients dating back probably over a year now. Was there anything internally that you did that might have affected that or is it just purely kind of a market lull?

No, I call it a market lull. In fact, I'd say that from a consistency of operations, we've been pretty -- very consistent.

You might be able to isolate a branch or two that maybe is going through its own inflection point, which is a stall against the growth that they've been experienced until they retool a little bit, but there's nothing systemic related to that. I think our value proposition is accelerating.

One of the things that we've been doing over the last probably year is reeducating the market on who we are and what we're really about and ensuring that we are driving our value the right way coming in, which is actually supporting the adoption of who we are more effectively, and so that's why you are not seeing that vetting process that we had to go through before or we are not having to cancel as many clients as we have had in the past.

One of the things that we see that's been an opportunity for us, so it's been a little bit of a rightsizing of how -- of a sector of our pipeline is where a lot of PEOs have come in the market offering a healthcare option, we have now found new pipeline sources with healthcare brokers because we don't offer a healthcare option are actually prone to bring business to us to be able to compete in that market. But that's true. You are going through an educational process as you are bringing online those resources, so your yield and closures from those pipelines isn't going to be as high at first until they mature how they interface with us.

Okay. And then, any developments of note with your partner, ACE?

It's going well. We're scheduled to have our annual review with them and it's going well.

We've got a good partnership with them. We spend time with them probably three or four times a year just to make sure that we're staying calibrated and we have to make sure that we still have that open dialogue if there are issues. But as far as we know, the relationship is very strong.

Great. Thanks for your time, Mike.

Matt Blazei, Lake Street Capital Management.

Hi, guys. On the workers' comp side, where are you in terms of the pre-2012 closures? You said you were at 650 last quarter.

Yes, so we've now closed 725, so that's about 75 in the quarter.

All right. So you are getting closer to the 60% to 70%?

Yes, I think we've actually closed about 56% of those reserve-strengthened claims.

Got it.

So continue to see positive movement there.

And were those closed at a credit as well?

Yes. So those 75 closed at credit of about $1 million.

Okay. Thank you.

Brian Hollenden, Sidoti.

Hi, guys. Thanks for taking my call. How much new client capacity do the existing branches have?

You know, when we look at our pipeline, which is -- our pipelines are very strong right now. We would look at cap utilization of flow being that probably -- it's different in every market, but as a whole, we would say that we are still only running probably close to about 50% capacity as a Company. Better said that we would probably say that we have 18 months of runway in front of us. Even though we are continuing to build, if we shut off our build today for new capacity, we would have probably about 18 months before we would start to enter a stress point.

Okay. And can you talk a little bit more about your plans for new unit growth in the East Coast?

So the way we grow new units or go to new markets is that we pivot around already successful markets. So what we've found is our first non-California $100 million branch showed up in Baltimore, Maryland. It took us many years to build that.

What's happening now is you reach these levels of operation. You start getting pulled to alternative markets, and so we've been getting pulled more south towards the DC region and that's what leads toward peeling off a block of those clients that we're supporting from Baltimore and now establishing a new hub in Alexandria.

So we've hired our new manager there. That person is working actually out of the Baltimore office until they get up to speed, and then ultimately that person will go down and seed and start and support that branch.

Where we opened a new branch in Charlotte this last year, we didn't have that critical mass. It was more of a greenfield startup. And so, it's been a little bit slower in the build process, but we do have the right person in place and we're seeing momentum at least pipeline wise and we'll see more closures coming.

As I continue to look at just the East Coast in general, we'll continue to do those stairsteps around our successful branches, as well as capitalize on markets that make sense to start up greenfield.

Thanks. And if I can just ask one last question, can you just talk a little bit about your debt repayment timetable?

Sure. So, again, we've -- out of the original $40 million loan, we've paid off $10 million to date. We have a $15 million payment due at the end of December of this year, and then there are three payments of $5 million each scheduled for next June 30, September 30, and then the final $5 million due December 31, 2016.

All right. Thank you very much.

(Operator Instructions). Bill Dezellem, Tieton Capital Management.

Thank you. First of all, would you please repeat the PEO same-customer change?

Yes. So same-store sales growth on the PEO business was 10.6%.

And because that has been growing each and every quarter this year, that leads to the question of why and -- maybe I'll just leave it at that. Why is that happening?

If you compare -- a better way to compare it is not so much sequentially, but just on a year-over-year basis, because there is a seasonal effect in our PEO base as well where you have a little bit more hiring in the third quarter, compared to first quarter and second quarter. So if you were to go back and look at subsequent quarters and do that in comparison, you would probably see that little uptick in third quarter, traditionally.

Okay. To make sure I'm clear, wasn't the first quarter in the eights, the second quarter in the nines, and then here in the third quarter in the 10s in terms of percentage increase versus the prior year? So it really is taking into account the seasonality?

Yes, yes. I think what we're seeing is that in our markets, our customers are continuing to do well and it's really the overall economy effect on our customers' business.

Okay. Congratulations on seeing that acceleration.

And then, two additional questions. Number one, do you see any regulatory proposals or any other phenomenon in that area that is worth watching closely? And then, secondarily, you've been talking about the pre-2012 claims now for a period of time. Is there a point here where you shift to the pre-2013 claims because then 2013 and prior will be more mature?

Yes. So 2013, at the end of this year, will now fall into that 2012 and prior group.

So what you look for is a 36-month window from the beginning of -- so 2013, at the end of this year, 2015, you will have 36 months in 2013, so now it will fall into the prior year's block, and so 2013 will become part of the 2012 and prior block by next quarter. So that's the first -- that answers the first question.

And then, the second question, we're not seeing -- it goes in fits and starts as far as regulatory stresses. One of the things that I would say that has been probably the bigger one in this last year and even right now is going on is the ACA, Affordable Care Act, and now the onset of reporting for ACA because there's a whole new set of rules that every company has to comply with in ensuring that they meet certain deadlines to report a lot of employee data back, and that's been a stressful point related to employment and small employers.

As far as the industry goes, it comes and goes. One day you hear that there's going to be some kind of regulatory driver that could change what PEO business looks like, and then it fades off and you don't hear much about it for a while. But I anticipate that that will be something at some point down the road that we'll have to look at.

One of the things that we've tried to do is build our model and we are getting very close to this to reach a point where we are independent of regulatory threats, I guess it would be, as it relates to the PEO industry. So we can become actually non-coemployed and run our exact model that we run. And that's probably work that we -- that's work that we are getting done now and it will be work that will round out in 2016 to offset that risk.

That's very helpful. And circling back to the healthcare reporting requirements, that actually works to your advantage because it does create more complication stress on the customer base and prospective customer base.

It does. Just even for us, it's one of those things that -- we are getting it done, but it's pretty convoluted right now, and I think it will be interesting to see as it goes through one cycle what it looks like next year because I don't think that everybody really has a good grasp on the rules or mechanically how to get it done.

We're in good shape. We've made a lot of progress there. We are getting it done, but it takes a number of parties to get it done. It takes the business owner, it takes the healthcare broker, it takes somebody to do administratively what needs to get done, and so that's the trickiest part of it. So we're serving one of those elements, but we also have to work with the other elements as well.

But you are right. It creates stress and it makes being an employer that much more difficult year over year.

Thank you both.

Matt Schwarz, Maze Investments.

Obviously, you have branches at different stages of growth and revenue levels, but can you talk a little bit about how the incremental margins change at your branches as they ramp to higher revenue levels?

So if you look at a maturing branch, think of a branch as -- in three stages. You've got a developing branch, which is a startup to just getting the momentum going where you are just trying to get to a breakeven.

You've got an emerging branch, where now all of a sudden you have margin coming through up against operational overhead and it starts to reach operational efficiencies, but as it reaches operational efficiencies, you are actually adding infrastructure so -- to scale, so you kind of have this stall a little bit until the branch really reaches more of a true maybe developed level. So in the emerging stage, consider that a branch that's maybe somewhere between $30 million and maybe $70 million to $80 million in revenue.

That branch itself as it grows will kind of have to reinvest. So you'll see their flow-through of margin maybe being closer to 50%, and as they are investing, it might actually grow to -- go to 40% and then they can get it to 60%, but it tends to fluctuate a little bit.

One of the things that we see is that when we get a large branch get $70 million, $80 million, $100 million -- $100 million is a good crossover point -- we don't see that fluctuation as much because there's enough dollars in margin coming through in volume, and even the maturity of the teams are to a level where now all of a sudden we see an increase in flow-through that can be closer to 60% to 70% flow-through.

The interesting thing part of where we are at today in our developmental cycle as a Company is if we were to go back five years ago, it took us 40 years to get to our first six $100 million branches. Today, we'll finish this year with around 13 $100 million branches, which means that if you take 13 up against 54, we are getting closer and closer to maybe that 50% critical mass of branches that are starting to lever.

We today also feel like we have another probably six to seven branches prone in position to reach those same levels. As you look at stages and branches, that's how incrementally you see more margin flowing through, and that's where you see leverage start at the branch level and ultimately start showing up at the Company level.

That's great. So it sounds like it sets up quite well to hopefully generate some leverage next year as more branches cross over that $100 million level. Is that a fair way to think about it?

Yes, that is, and one of the things that I would say is it took -- as we keep learning a lot along the way, we took what we had known -- what we had learned in the last probably three or four years and we had started a branch in southern California, and that branch is already in the short period of time doing -- reaching those levels of leverage, and we'll see that branch get there probably inside of maybe four years, five years where it's starting to flow through, where the other branches that have come before them, it took 20. So we are becoming more efficient in how we get more branches to that level as well.

Okay, great. All right. Thank you very much.

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.

Again, thank you for being on the call. I'm looking forward to rounding out 2015 and looking forward to 2016. We feel like things are going in the right direction, we're working on the right stuff, and the future looks good. Thank you.

And that does conclude today's conference. Again, thank you for your participation.