Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Barrett Business Services, Inc. (NASDAQ:BBSI)

Q1 2009 Earnings Call

April 29, 2009 12:00 pm ET

Executives

James D. Miller – Chief Financial Officer, Vice President, Finance

William W. Sherertz – Chairman of the Board, President, Chief Executive Officer

Michael L. Elich – Chief Operating Officer, Vice President

Analysts

Josh Vogel – Sidoti & Co.

Bill [Deguire] – Private Investor

Jeff Martin – Roth Capital Partners

Operator

Welcome to the Barrett Business Services first quarter conference call. (Operator Instructions) Thank you, Mr. Miller you may begin your conference.

James Miller

Good morning. This is Jim Miller with Bill Sherertz and Mike Elich. Today we will provide you with our comments regarding the company’s operating results for the first quarter ended March 31 and our outlook for the second quarter of 2009. At the conclusion of our comments, we will respond to your questions.

Our remarks during today’s conference call may include forward-looking statements. These statements, along with other information presented that are not historical facts are subject to a number of risks and uncertainties. Actual results may differ materially from those implied by these forward-looking statements. Please refer to our recent earnings release and to our quarterly and annual reports filed with the Securities and Exchange Commission for more information about the risks and uncertainties that could cause actual results to differ.

Page one of yesterday’s earnings release reflecting our operating results summarizes the company’s revenues and cost of revenues on a net revenue basis as required by Generally Accepted Accounting Principles. Most of our comments today, however, will be based upon gross revenues and various relationships to gross revenues because management believes such information is more informative as to the level of our business activity, more useful in managing and analyzing our operations and adds more transparency to the trends within our business. Comments related to gross revenues as compared to a net revenue base of reporting have no effect on gross margin dollars, SG&A expenses or net income.

Turning now to our first quarter results, as reported the company experienced a $0.30 loss per diluted share in the first quarter as compared to earnings per share of $0.01 for the first quarter of 2008. The decline in earnings on a quarter-over-quarter basis was primarily due one, a 12.2% decline in gross revenues, two, a $4.9 million decline in gross margin dollars.

The $0.30 loss per share was larger than the previous guidance range of a loss per share of $0.19 to $0.22 primarily due to the shortfall in total revenues compared to our previous first quarter revenue guidance of $240-245 million and slightly higher direct payroll costs as a percentage of gross revenues.

Total gross revenues for the first quarter of $227.9 million increased $31.7 million or 12.2% from the 2008 first quarter which continues to reflect the challenging economic conditions in our markets particularly in California and Oregon which have two of the highest unemployment rates in the nation. California, which comprised approximately 78% of our overall first quarter gross revenues, declined 10.8% due to declines in both staffing and PEO revenues.

Staffing revenues for the first quarter of 2009 decreased $11.8 million or 32.9% from the first quarter of 2008 primarily due to a significant decline in demand for our staffing services from existing customers in a majority of our markets. PEO gross revenues declined $19.9 million or 8.9% on a quarter-over-quarter basis. Our new PEO business during the quarter from customers added since April 1, 2008 exceeded our lost PEO business from the first quarter of 2008. However, the decline in overall PEO revenues is primarily due to a decrease in hours worked at existing customer work sites.

Gross margin percent on a gross revenue basis for the 2009 first quarter declined from 3.3% to 1.6% from the prior year primarily due to an increase in direct payroll costs and higher employer payroll taxes. Direct payroll costs increased 101 basis points over the 2008 first quarter primarily due to a decline in mix of staffing services which typically have a much lower payroll cost component than PEO services and also due to a decrease in the billing mark up largely related to lower Workers Comp rate component of the overall mark up on payroll.

Payroll taxes and benefits for the first quarter of 2009 as a percentage of gross revenues increased from 9.4% to 9.9% due to increased state unemployment tax rates in 2009 in a majority of the states we do business in compared to 2008. Workers Compensation expense for the first quarter as a percentage of gross revenues increased from 3.4% to 3.5%. However, Workers Compensation expense in terms of total dollars decreased from $8.7 million to $8 million.

2009 first quarter SG&A expenses of $8 million decreased $629,000 or 7.3% from the 2008 first quarter. The decrease was primarily due to lower branch management payroll, lower profit sharing and to an overall reduction in variable operating expenses due to the decline in business activity.

Looking now at the balance sheet at March 31, cash and current marketable securities totaled $57 million at March 31 compared to $60.1 million at December 31, 2008. The decrease was primarily due to $2.2 million in cash used to repurchase 234,000 shares of the company’s common stock and $844,000 used to pay the quarterly cash dividend.

Trade accounts receivable at March 31 of $36.4 million increased $2 million over December 31, 2008 primarily due to an increase in accrued revenue at March 31. The day sales outstanding in accounts receivable or DSO of 14 days is up from December 2008 approximately 12 days but unchanged on a seasonal basis from March 31, 2008.

We continue to closely monitor our customer credit terms and collections in light of the continued challenging economic environment. The decrease in stockholders equity of $6.1 million at March 31 from December 31, 2008 is primarily due to the first quarter net loss of $3.2 million and the company’s share repurchases of $2.2 million and the quarterly cash dividend of $844,000.

Turning now to our outlook for the 2009 second quarter as reported yesterday we expect gross revenues to range from $235-240 million for the second quarter of 2009. This projection represents a likely mid point decline of 11.9% from the $269.5 million in second quarter 2008 gross revenues. The projected decline of 2009 second quarter gross revenue is based upon our recent revenue trends and largely reflects the continued challenging economic climate in our markets.

Based upon the foregoing estimates for gross revenues we anticipate diluted earnings per share for the 2009 second quarter to range from a loss of $0.03 per share to earnings per share of $0.03 as compared to diluted earnings per share of $0.29 for the 2008 second quarter. This projected decline from the prior year is due to one, lower projected revenue; two, higher projected payroll costs primarily resulting from a change in mix towards PEO services from staffing services and to a significant increase in many of our state unemployment rates for 2009 compared to 2008.

As we mentioned last quarter the rate of the payroll taxes is front-loaded and will generally decline during the course of the year as employees reach their statutory wage rate ceilings.

At this time, Bill Sherertz and Michael Elich will comment further on the recently completed first quarter and our outlook for the second quarter 2009. We will then open the call up for questions. Bill?

Bill Sherertz

I don’t think we are rearranging the chairs on the Titanic but it wasn’t a particularly great quarter. The positive thing was we signed 122 new customers. That is one of our better quarters in history. We only lost 43 PEO customers during the quarter. Of those, 11 were cancelled for either risk issues or AR. One left for other. One left due to pricing. 11 left and took their payroll in-house which is certainly understandable. Two actually went to another service.

While we continue to maintain our base above 90% retention ratio and we continue to add, that is we are broadening the base but as Jim mentioned in the call earlier the hours worked continue to decline at our customer base. At some point we think that will stop. We have not seen that yet. Our revenues have remained relatively flat. Anecdotally we hear things are better. I have not seen it in the numbers.

In general though I am really pleased with the level of management that we have in the company and we are really kind of poised to do exceptionally well but we are going to need a little help from the economy. I think if we get no help from the economy, in a flat economy we will probably do pretty good. If the economy continues on down towards 15-20% unemployment we are going to remain in a very difficult period as long as that continues. If we get an up tick I think we will do really well.

So your guess is as good as mine. People ask me what would happen with 8-9% unemployment nationally. Well here we are. Actually I am very pleased that we are only running down 10 to12%. Right at the moment we are down about 10% on a weekly basis. Staffing, as you know, really takes the brunt of recessions and we will be the first to come out. Some of the indicators about whether the economy is turning or not will come not only from us but Kelly and Manpower and others who have a broader scope across the United States in terms of the number of employees.

We will probably see it in the hours worked of our employee base first and when we do it will be rather dramatic in what it has an effect on us. We still have not seen any of that take place. We continue to add customers. We have no plans to close branches. Some of the branches obviously are losing money even without the caps. Our big branches are doing very well and I would expect we will make money this year and it will really depend on just how the economy goes for the rest of the year.

Like I said, we can take a flat economy and I think we will do really well. An up economy we will do great. If it continues on down we will make the necessary adjustments as we go. I don’t have a lot more to say. Why don’t we open it up for questions? Mike is here if you want to talk to him.

Michael Elich is our COO and he is kind of the road warrior and he is out there at the branches on a weekly basis and he has his ear to the ground. For those of you who know or do not know, I am pretty much back full time and keeping my finger on the pulse of what is going on out there in the business world. We have looked at some acquisitions but until we get some visibility buying an acquisition might be just stepping in front of a firing line. Unless it were really fantastic we have really no desire to make an acquisition at this point.

So with that, we’ll take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Josh Vogel – Sidoti & Co.

Josh Vogel – Sidoti & Co.

Bill, glad to hear you are back full time.

Bill Sherertz

Somebody called me an asshole the other day so I guess I’m much better.

Josh Vogel – Sidoti & Co.

Building off what you just said about you may make adjustments depending on how the economy tracks, if things stay status quo with today those branches that are unprofitable do you think you would lean towards closing them down over the next quarter or two?

Bill Sherertz

They are small. They are not our big branches. We are in small markets. Actually the expense is not very great. That would be a tough decision but if we really thought we were headed towards 20% unemployment then yes we would pull the trigger on that.

Josh Vogel – Sidoti & Co.

Shifting gears, the staffing business I know it is generally weaker quarter-over-quarter into Q1 but I was wondering if there was anything else unusual in the quarter outside of the general recessionary pressures? Maybe were any significant clients lost or did they go out of business?

Bill Sherertz

No, it is just down. By nature what it is, people are using less and trying to make do with what they have?

Josh Vogel – Sidoti & Co.

Can you maybe give us some comments on the pricing environment and if you are losing any significant leverage with any of your clients? Also, I know the gross margin came in at 4.6% last year. I was wondering if you could give us any sort of idea of what you think the margin could be in 2009.

Bill Sherertz

I will let Jim address that second part. The first part, and I left this out, we should see some margin expansion going through particularly the second half of the year. California has decided to raise Worker’s Comp rates by 24% and that is effective July 1. It looks like that is going to go through. That is really kind of a big help to us in terms of our pricing pressure with our PEO customers.

We have been lowering our customers’ mark up for the last three years and you see that and if you were to go back and look at our margins three years ago versus today it is lower as well as our losses are lower. But, we see the pressure was coming from the Worker’s Comp side of the world. Our Comp expense is up a little bit and certainly in the state of California Comp expenses on a state basis has gone up and so the expense has gone up far more than the revenue from an insurance point of view. That could be a big help to us particularly in expanding margins with existing customers as well as the new customers. It will take any pressure we have had over the last 2-3 years in terms of having to lower mark up which effectively lowers our margin.

James Miller

As far as the margin percentage going forward throughout the rest of 2009 we will likely continue to lag 2008. Again primarily due to the change in the mix towards PEO services which will then result in a higher direct payroll cost component. We have spoken about the payroll taxes. As we get further out in the year those will continue to decline but just with the overall base rates being higher in 2009 that will keep that cost component on a year-over-year basis higher.

Bill Sherertz

As we add new customers we have to start over with the employees. So there is always a component of actually losing money every time you sign a new customer for a period of two to three months.

Josh Vogel – Sidoti & Co.

So as payroll costs go down throughout the year we should expect to see a sequential improvement just off the levels we have seen in prior years?

Bill Sherertz

Yes and that is what you are seeing first quarter to second quarter. Everything being equal we lose the same amount of money in the second quarter as we did the first but obviously you see the rather dramatic improvement and most of that has to do with the [inaudible] caps coming off because the revenues are relatively the same.

Josh Vogel – Sidoti & Co.

Jim, do you have the cash flow from operations and CapEx? I just want to get a sense of free cash flow in the quarter.

James Miller

CapEx was a little under $400,000 and that was primarily due to our software upgrade we recently completed internally. So, no big CapEx projects going on. Cash flow from operations was just shy of $700,000 for the quarter. Obviously because of the loss we have a lot of payroll taxes that are paid on a quarterly basis that will be coming out here this week.

Josh Vogel – Sidoti & Co.

Lastly, with your guidance here at the mid point of the gross revenue range down 12% I was wondering if through the first three weeks or so of April is gross revenue down 12% or maybe are you building in a little bit of a cushion here?

Bill Sherertz

I don’t like to use the word cushion. For the first couple of weeks we are down about 10%.

Operator

The next question comes from Bill [Deguire] – Private Investor.

Bill [Deguire] – Private Investor

My question is twofold. The first part is, where do we stand on the number of authorized shares to be purchased? How many have we repurchased? The second part is I understand the Board of Directors authorizing a specific number of shares to be repurchased but after that authorization who specifically decides how many within that containment are going to be purchased and what price and when?

James Miller

As far as the number of shares that have been repurchased during the first quarter of 2009 there were about 234,000 shares we repurchased. The remaining authorized number of shares to be repurchased is about 1.9 million shares.

Bill Sherertz

As far as who decides to price, I suppose I do. In fact, I know I do. I saw too many other companies, [inaudible] is one of them that decided to defend the stock price at too high a price and had no ability to defend the company at a lower price. However, at this point in time our cash is greater than the total value of our stock so we are in the market and we are subject to what we can and can’t do and I would suspect, which I would dearly love to do, would be to use up the allocation that the Board would be more than happy to re-up that allocation of our authorization to buy more shares.

Bill [Deguire] – Private Investor

I missed one data that is how many shares are remaining to be repurchased?

James Miller

Approximately 1.9 million shares.

Operator

The next question comes from Jeff Martin – Roth Capital Partners.

Jeff Martin – Roth Capital Partners

Should we look at when you talk about the hours being down really impacting the results should we look at the decline additions and attrition, that suggests that the underlying business is doing extremely well and that you get a rebound and you are going to see some pretty dramatic leverage in the model. Do the client hours pretty much track in locked step with the decline in revenue?

Bill Sherertz

I think there is some leverage there. The hours go down but the revenue goes down greater. A couple of things could happen there. You don’t have as much in bonuses. You don’t have as much in overtime. It can be a really dramatic number when they start having people work 20 hours instead of 40 or 60.

Jeff Martin – Roth Capital Partners

In terms of California since it is such a large percentage of the business, could you give a little more detail on maybe some specific geographies within the state? Also by industry segment?

Bill Sherertz

There is no real…we tend to be more blue collar, grey collar than white collar. But there is really no industry concentration anymore of any size really greater than 2% of any one particular industry. In terms of geographic locations, I think Southern California will do better than Northern California but it is nothing that you want to write home about. They both got whacked pretty good.

Jeff Martin – Roth Capital Partners

Is it safe to say that you need more of a recovery on the construction side of the economy for California to come back in a big way? What would it take for the hours to pick up based on specific parts of the economy?

Bill Sherertz

That would help. Housing prices quit going down. Get off the foreclosure and short sale stuff. That would definitely help because there is so much of a ripple effect going through to Home Depot and people who sell patio furniture and people who make bricks and people who drive trucks and all kinds of stuff. While construction per se would help us because we do some of that, I think the ripple effect of having construction at least stabilize would have a much greater effect on us than construction itself.

Jeff Martin – Roth Capital Partners

Can you take a shot at what the earnings potential for the second half of the year if things stay stable?

Bill Sherertz

I think if the unemployment rate quits going down and so far in this quarter we continue to sign new customers at a similar place to the first quarter, which looked very good, we will be towards the upper end of our targets on the range. Then third quarter we should jump up into the $0.20 to $0.30. It is hard to tell. It depends on how good it gets. My goal would be to make money this year. I would like to see us make money this year. We are going to be working on the expense side and hopefully the growth side to make that happen.

Jeff Martin – Roth Capital Partners

On the staffing side of the business are you going to see and do you still have the fairly large seasonal customers? Will we still see an up tick in Q3 and Q4 like we have seen historically? At least Q3 I guess?

Bill Sherertz

We haven’t seen that up tick yet but there is no indication it has gone away. Our revenue forecasts don’t even include that. Every week I get the numbers and I’m waiting for some good numbers to come through here. That should be happening very quickly.

Jeff Martin – Roth Capital Partners

I would take it any new branches would be on hold for an extended period of time at this point?

Bill Sherertz

Only if we were walking in with a big customer would be the only way I would be tempted to open a new branch at this point. I need visibility and right at this moment I think like the rest of the world visibility is poor to say the least. I don’t know whether the stimulus is going to work or not work. I have no clue. I can only judge by what is given to me on a daily basis and a weekly basis and try to respond to it. Right now I would remain relatively cautious. It is the same thing I said about acquisitions. I just don’t know.

Operator

There are no further questions at this time.

Bill Sherertz

You guys are letting us off easy. I remain relatively optimistic. I think there are signs maybe the economy is bottoming. As I said earlier really all we need is for the economy to stop going down. Every week that you see a new unemployment number go higher it has an effect on us. When we see things flatten out we are going to do really well and I am very pleased with the company. There is no restructuring needed here. We are certainly working hard on the cost containment side of the world and keeping our expenses as low as possible without actually hurting ourselves. So hopefully by this time next quarter we will have much brighter news. I know your businesses aren’t all perfect either. You have a tough deal out there as well and I feel for you.

Hopefully we will talk to all of you next quarter. Thank you very much.

Operator

Ladies and gentlemen this does conclude today’s conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Barrett Business Services, Inc. Q1 2009 Earnings Call Transcript
This Transcript
All Transcripts