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Barrett Business Services, Inc. (BBSI)

Q4 2009 Earnings Call Transcript

February 10, 2010 12:00 pm ET

Executives

James Miller – VP-Finance, Treasurer and Secretary

Bill Sherertz – Chairman, President and CEO

Analysts

Josh Vogel – Sidoti & Company

Ameda Zakari [ph] – Roth Capital

Operator

Good afternoon. My name is Vanessa and I will be your conference operator today. At this time, I would like to welcome everyone to the earnings release call for Barrett Business Services. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. (Operator Instructions) Thank you. I will now like to turn the call over to Mr. James Miller. Please go ahead, sir.

James Miller

Thank you. Good morning. This is Jim Miller with Bill Sherertz. Today, we will provide you with our comments regarding the company's operating results for the fourth quarter ended December 31 and our outlook for the first quarter of 2010. At the conclusion of our comments, we will respond to your questions.

Our remarks during today 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 the 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 for the fourth quarter 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, 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.

Turning, now to the fourth quarter results. As reported, the company earned $0.21 per diluted share in the 2009 fourth quarter as compared to similar earnings per share of $0.21 for the fourth quarter of 2008. Total gross revenues for the fourth quarter of $270.8 million increased $7.7 million or 2.9% over the 2008 fourth quarter.

California was comprised approximately 79% of our overall fourth quarter gross revenues, increased 5.7%, owing to an increase in PEO revenues, partially offset by small decline in staffing revenues. Staffing revenues for the fourth quarter of 2009 decreased $2.7 million or 8.1% from the fourth quarter of 2008, primarily due to a decline in demand from our existing staffing services from existing customers in the majority of our markets as our new staffing business added during the quarter nearly offset the loss of business from former customers.

PEO gross revenues increased $10.4 million or 4.5% on a quarter-over-quarter basis primarily from the addition of a new PEO business. Our new PEO business during the quarter from customers added since January 1 of 2009 exceeded the sum of our lost PEO business since the fourth quarter of 2008 from former customers and the decline in hours of work at existing customer work sites.

Gross margin dollars for the 2009 fourth quarter declined approximately $97,000 from the 2008 fourth quarter primarily due to an increase in direct payroll cost associated with the growth in PEO business. These cost increases were partially offset by the growth in revenues and the decrease in worker’s compensation expense.

Gross margin percent on a gross revenue basis was 4.4% compared to 4.6% from a prior year primarily due to the increase in a direct payroll cost percentage. Direct payroll cost increased 59 basis points over the 2008 fourth quarter, primarily attributable to the increase in our mix of PEO services which typically have a much higher payroll cost component than staffing services.

Payroll taxes and benefits for the 2009 fourth quarter as a percentage of gross revenues decreased slightly from 7.3% to 7.2%. Typically, during the fourth quarter, the statutory taxable wage ceilings have been reached for many of our employees, therefore reducing our overall effective payroll tax rates. Workers' Compensation expense for the fourth quarter of 2009 as a percentage of gross revenues decreased from 3.6% to 3.3%, due primarily to a decline in the overall estimated cost of injury claims during the quarter, compared to the 2008 fourth quarter.

2009 fourth quarter selling, general and administrative or SG&A expenses of $8.7 million decreased, 124,000 or 1.4% from the 2008 fourth quarter. The decrease was principally due to lower branch management payroll.

Looking at the balance sheet of December 31, cash and marketable securities totaled $50.4 million at December 31, 2009, compared to $60.1 million at December 31, 2008. The decrease was primarily due to $3.4 million used to pay quarterly cash dividend, $3.1 million used in net purchases of long-term corporate bonds and an attempt to improve the company's investment yields and $3.0 million in cash use to repurchase 313,000 shares of the company common stock. Trade accounts receivable at December 31 of $33.1 million, decline $1.3 million from December 31, 2008, primarily due to a decrease of accrued revenue at December 31, 2009.

The days sales outstanding and accounts receivable or DSO of 11 days, is down from December 2008 of approximately 12 days due to in part to a shift in PEO mix, which has shorter payment terms.

We continue to monitor our customer credit terms and closely track collections in light of the continued challenging economic environment. The increase in the current long-term portion of workers' compensation claims liabilities as of December 31 2009, compared to a year earlier primarily represents the impact of $11.8 million workers' compensation adjustment taken during the second quarter of 2009.

The decrease in stockholder's equity of $10.5 million at December 31, 2009 is primarily due to the net loss of $4.8 million for the entire 2009 year. Cash dividends paid of $3.4 million and the company's share repurchases of $3 million.

Cash flow from operations for the 2009 fourth quarter, total approximately $4.7 million, which was primarily comprised of net income of $2.2 million for the quarter, plus the seasonal declining accounts receivable exceeding the seasonal decline in accrued payroll and payroll taxes.

Turning now to our outlook for the 2010 first quarter. As reported yesterday, we were expecting gross revenues to range from 258 to $262 million for the first quarter of 2010. This projection represents a likely mid-point increase of 14.1% over the $227.9 million in first quarter 2009 gross revenues.

The projected increase of 2010 first quarter gross revenue is based upon our recent revenue trends and is consistent with historical trends of first quarters typically experiencing a decline from fourth quarter revenue due to seasonality.

While we are projecting a sizable growth and gross revenues for the 2010 first quarter, the majority of this growth is projected to be in PEO business, which early on in the year tends to provide very low gross margin dollars until statutorily taxable wage ceilings are reached, which usually is late into the first quarter or into the second quarter.

Based upon the foregoing estimates for gross revenues we anticipate a loss per share from the 2010 first quarter to range from $019 to $0.22 per share as compared to a diluted loss per share of $0.30 for the first quarter of the 2009 first quarter.

At this time Bill Sherertz will comment on the recently completed fourth quarter and our outlook for the first quarter of 2010. We will then open the call up for questions. Bill?

Bill Sherertz

Thanks, Jim. Actually, I considered the fourth quarter to be a good quarter, particularly given the challenge economic environment. During that quarter, we signed a total of 113 new customers on the PEO side. Of those 28 were considered white collar.

During the quarter, we canceled or had 50 customers leave us. Of that 50, 15 were for AR issues, which is our choice. An additional 15 were non-AR issues or risk issues that we did not care to take any longer. Four businesses sold. The number of businesses left on their own. Three, pricing, was four customers. Two payroll in house was three. So three customers decided to leave using another service. So very positive. We still face a lot of economic headwinds in terms of particularly credit probably being the number-one issue that we see.

Starting the year, I'm pleased with what I see, a lot of new customers coming on. The overall trend is up 10% for the first four weeks of January. Preferred payroll is growing. We have nice deals with the PEO and staffing is up. And that's given some headwinds that we have snow in the east as some of you, I'm sure are familiar with. A lot of our branches on the East Coast were kind of small or shut down and then heavy rains in Southern California, which is affecting us as well. So being up 10% given those two factors, I think portrays some very good stuff in the future for us. So that's about all I know right at the moment. I'm pleased with the company, even though it's going to be a loss in the first quarter.

That's mostly due to pseudo rates. The more new customers you bring on, which was another really good quarter for bringing on new customers. Actually, all of those customers in the first quarter we probably have very small margins to negative margins. And unless staffing were to pick up significantly first quarter is going to remain to be negative most years to come as well. And with those comments, I'll open it up to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Josh Vogel from Sidoti & Company.

Josh Vogel – Sidoti & Company

Hey, good morning. Thanks for taking my questions.

Bill Sherertz

Yeah.

Josh Vogel – Sidoti & Company

Actually, your last comments lead into my first question about the payroll taxes and what not. But I was curious maybe, what your outlook is for the staffing business is right now and as we look out to future years, is PEO going to continue to grow faster than staffing or do you see, staffing maybe a little bit of a coming back and then thereby easing the -- easing the losses we typically see in Q1 in going future years?

Bill Sherertz

Josh, the staffing business is a very competitive world out there and it's much easier for us to grow on the PEO side, which is not to say that we're eliminating the staffing, but it's been pretty difficult '09 for staffing. I mean that's kind of one of the first things that's cut. But as you've seen from Kelly and some of the others staffing in general has picked up and we're seeing it as well. But it's not a main emphasis that we're particularly pushing at this point, because it's a difficult business to really kind of push in the economic environment we're in.

I think what you see from others is just organic internal growth of the size of their customers and it is with us. While, we're always signing new customers and older customers are using less just because that's the nature of the business. We see the PEO business certainly as a longer term revenue and that's the attractiveness of PEO business as well as preferred payroll. Those tend to be very long-term and the staffing tends to be a lot shorter term, still a very nice addition to margins profitability. But very subject to economic conditions.

Josh Vogel – Sidoti & Company

Okay. And I understand the tax component that hits up early in the year especially when you're bringing on a new PEO business. But what about if we're looking at quarters two through four? When you're adding those PEO clients what's the margins right there if you're adding the similar, I actually missed the number of net -- of client additions you had, was it 113?

Bill Sherertz

Yes. 113.

Josh Vogel – Sidoti & Company

Okay. So when you're bringing on a hundred new clients a quarter, when the -- how long does it take until you turn a profit on them?

Bill Sherertz

Approximately three months and it depends on the level of pay. We're tending to sign higher pay clients, which will put us out of the caps earlier, but that's always going on. That the subject that hits in the first quarter is every customer's that we have, not only new ones but every customer gets back in that level. So effectively all of our PEO business in the first quarter, its zero margin to sometimes negative margins. And then second quarter we start to pick up the margins. And then obviously, third and fourth quarter we picked up all those margins in our profit as well. So effectively, you could look at the PEO businesses as we make our money in the last six months.

Josh Vogel – Sidoti & Company

Okay. But if everything stays status quo, you -- obviously you are going return to profitability in Q2 similar to what we saw last year and prior years?

Bill Sherertz

I think it will be greater than last year. The economic conditions just based on my own internal models, we should make up what we lose in the first quarter and second quarter if economic conditions remain as they are.

Josh Vogel – Sidoti & Company

Right. Okay. Just shifting gears a little bit, I just wanted to get a feel of your client's payrolls. Are they adding or at least holding firm?

Bill Sherertz

Holding firm. We just ran an average hours worked and average number of employees and we're pretty heavily California. It's remained stagnant the last six months. I guess that's good news. It's the old deal that every time when I hit my finger with a hammer it hurts. Well. Quit using a hammer to hit your finger. So when it stops going down, it feels better. That's what we've seen over the last six months.

Josh Vogel - Sidoti and Company

Over the average worked the last few months, are those metrics that you'll disclose.

Bill Sherertz

I don't know. The only – yeah, we could. Greg runs those. And yeah we could do that.

Josh Vogel - Sidoti and Company

Okay.

Bill Sherertz

I don't know how inaccurate they are. But it's the same inaccuracies, all the time, so it's a comparative level that we look at not necessarily how accurate they are in terms of actual dollars and numbers.

Josh Vogel - Sidoti and Company

I got it. But I guess you could give those to me off line. With regards to temp hiring, obviously we see the temp hiring pick up based on the monthly BLS reports here. I was wondering, what percent of your clients use recruiters for the temp hiring versus do that internally?

Bill Sherertz

What percent of our clients are temporary? You mean on the PEO front or just general?

Josh Vogel - Sidoti and Company

Mostly on the PEO front. I mean, totally on the PEO front I'm just curious if the bulk of your clients actually do the temp hiring internally versus using the recruiters, because you benefit when it's done internally.

Bill Sherertz

Our customers are mostly small businesses and there is crossover between PEO and staffing. I would say we probably hit 90 plus percent of any staffing that they do use. Although, they're not very big users to be frank about it of temporary help.

Josh Vogel - Sidoti and Company

Right. Okay. I'll jump back into queue. Thanks a lot, Bill.

Bill Sherertz

Thanks, Josh.

Operator

Your next question comes from the line of Jeff Martin from Barrett Business Services.

Bill Sherertz

May be Roth.

Ameda Zakari – Roth Capital

Hey, Good morning, guys. This is Ameda Zakari [ph]. I'm calling in for Jeff.

Bill Sherertz

Yes

Ameda Zakari – Roth Capital

Just curious to see what your clients are telling you in terms of business conditions. I mean, would you guys say the environment is showing signs of improvement.

Bill Sherertz

We kind of polled managers and talked to them, I think what we're hearing is they're hopeful. It would be nice to see Washington make decisions or shut up for awhile and I think people would make more definitive decisions. Credit is still the number-one issue of small business, the able to get loans with bank financing has loosened some but it is still a critical issue for them.

Ameda Zakari – Roth Capital

Okay. And can you talk about the recent trends for the fee part of the business versus the direct costs components like taxes and workers comp insurance.

Bill Sherertz

Well. Unemployment tax universally across the nation has gone up. That certainly contributes to a higher first quarter loss than may be normal. We were able to recoup some of that from our customers, not all but other than that relatively it's kind of a pass-through cost that really has not much effect on us. Our margins per employee, if you will our PEO customers remain fairly consistent.

Ameda Zakari – Roth Capital

Okay. And then how many shares were bought back during the quarter?

Bill Sherertz

Jim?

Jim Miller

I have that number here. During the fourth quarter of '09, we bought back just a little over 60,000 shares.

Ameda Zakari – Roth Capital

Okay. And how much is authorized left in the buy-back?

Jim Miller

Yes. Current remaining authorizations, a little over 1.8 million.

Ameda Zakari – Roth Capital

1.8 million. OKAY. And have you guys thought about boosting that?

Bill Sherertz

I don't think we need to boost it? We're having a hard time getting shares when we're in there trying to buy it any way. As soon as we get close to 1.8 million we'll let you know about the boost.

Ameda Zakari – Roth Capital

Okay. Sounds good. Thanks, guys.

Bill Sherertz

All right.

Operator

(Operator Instructions) At this time there are no further questions.

Bill Sherertz

That's great. Well. Thanks for your interest and we actually look forward to a very good 2010. We've got a lot of momentum, a lot of things going on. I anticipate, given that we don't have some kind of W that we're going to have a good year. Thank you and we'll talk to you next quarter.

Operator

This does conclude today's conference call. You may now disconnect.

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Source: Barrett Business Services, Inc. Q4 2009 Earnings Call Transcript
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