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Barrett Business Services, Inc. (NASDAQ:BBSI)

Q1 2010 Earnings Call Transcript

April 28, 2010 12:00 pm ET

Executives

Jim Miller – VP-Finance, Treasurer and Secretary

Bill Sherertz – President and CEO

Analysts

Josh Vogel – Sidoti & Company

Alex Smith – Bellone & Associates Limited

Jeff Martin – Roth Capital

John Willer [ph] – ORCA Investment [ph]

Operator

Good afternoon, my name is Tasha, and I will be your conference operator today. At this time, I would like to welcome everyone to the earnings release conference call.

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 would now like to turn the call over to Mr Miller. Please go ahead, sir.

Jim 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 first quarter ended March 31 and our outlook for the second 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 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, 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 first quarter results, as reported, the company experienced $0.16 loss per diluted share in the 2010 first quarter as compared to a $0.30 loss per share for the first quarter of 2009. Total gross revenues for the 2010 first quarter of $262.6 million increased $34.7 million or 15.2% over the 2009 first quarter.

California, which comprised approximately 81% of our overall first quarter gross revenues, increased 19.4%, owing to modest growth in PEO revenues, partially offset by a small decline in staffing revenues. Staffing revenues for the first quarter of 2010 increased $3 million or 12.6% over the first quarter of 2009, primarily due to an increase in demand for our staffing services from existing customers in both our Northwest and Intermountain markets, as our new staffing business during the quarter nearly equalled the loss of business from former customers. The increase in staffing revenues from existing customers reverses a trend of declines over the past five quarters.

PEO gross revenues increased $31.7 million or 15.5% on a quarter-over-quarter basis due to the addition of new customers. Our new PEO business during the quarter from customers added since April 1 of 2009 exceeded the sum of lost PEO business from the first quarter of 2009 from former customers, and a decline in hours worked at existing customer work sites. Bill will comment further on the growth of new PEO customers in a few minutes.

Gross margin dollars for the 2010 first quarter increased approximately $1.7 million over the 2009 first quarter primarily due to the 15.2% increase in revenues, and to a lower payroll taxes and benefit cost component as a percentage of revenues. Gross margin percent on a gross revenue basis was 2.1% compared to 1.6% from the prior year, again primarily due to the decline in the payroll taxes and benefits expense percentage.

Direct payroll cost increased 20 basis points over the 2009 first quarter, primarily attributable to an increase in the mix of PEO services, which typically have a much higher payroll cost component than staffing services. Payroll taxes and benefits for the 2009 first quarter as a percentage of gross revenues decreased from 9.9% to 9.4% primarily resulting from the company changing to client specific state unemployment wage reporting in California for all our PEO clients.

The change resulted in a decline in the company’s overall average effective California state unemployment rate. These wages were previously all reported under BBSI’s account, which generally has a higher unemployment tax rate due to the impact of our staffing employee population. Workers' compensation expense for the first quarter of 2010 as a percentage of gross revenues decreased slightly from 3.5% to 3.4%, as the company experienced similar loss levels for 2010 compared to 2009 in relationship to the increased business volume.

Selling, general and administrative or SG&A expenses of $8.2 million increased $184,000 or 2.3% over the 2009 first quarter. This small increase was primarily due to the increased level of business activity. The benefit from income taxes for the first quarter of 2010 included an additional benefit of $248,000 or approximately $0.02 per share, primarily from a reduction to a deferred tax asset allowance as sales of certain closed-in bond funds during the first quarter of 2010 allowed the company to carry back these tax losses against unused 2009 taxable capital gains. We expect our overall tax rate for the remainder of 2010 to be in the low 30% range.

Looking at the balance sheet at March 31, cash and marketable securities totaled $43.3 million at March 31 compared to $50.4 million at December 31, 2009. The decrease was primarily due to

$6.1 million used to capitalize our new wholly owned, fully licensed insurance company in Arizona, and a quarterly cash dividends of $837,000.

The insurance company provides workers’ compensation coverage to our employees working in Arizona. The $6.1 million capitalization is included on our consolidated balance sheet as a component of restricted marketable securities and workers’ compensation deposit.

Trade accounts receivable at March 31, 2010 of $44.5 million, increased $11.4 million over December 31, 2009, primarily due to the increase of accrued revenue at March 31. The days sales outstanding and accounts receivable or DSO of 14 days is up from December 2009 of approximately 11 days, primarily due to seasonality, and is more consistent with the DSO of 14 days at March 31, 2009.

The decrease in stockholder's equity of $2.5 million at March 31, 2010 is primarily due to the net loss of $1.7 million and cash dividends paid of $837,000. Cash flow from operations for the 2010 first quarter totaled approximately $800,000, which was primarily comprised of the seasonal increase in accrued payroll and payroll taxes exceeding the combined seasonal increase in accounts receivable and the net loss for the first quarter.

Turning now to our outlook for the 2010 second quarter, as reported yesterday, we are expecting gross revenues to range from $278 million to $282 million for the second quarter of 2010. This projection represents a likely mid-point increase of 12.8% over the $248.2 million in second quarter 2009 gross revenues. The projected increase of 2010 second quarter gross revenue is based upon our recent revenue trends, and is consistent with historical trends of second quarters typically experiencing an increase over first quarter revenue, due in part to seasonality.

Based upon the foregoing estimates for gross revenues, we anticipate diluted earnings per share for the 2010 second quarter to range from $0.18 to $0.20 per share as compared to a diluted loss per share of $0.65 for the 2009 second quarter, which included a $11.8 million charge to increase our workers’ compensation reserves.

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

Bill Sherertz

Thanks Jim. We had another really good quarter and signing new customers. The total was 161 new PEO customers in which 55 were clerical and 106 were related to an incentive program that we have having to do with risk.

During the quarter, we had 70 cancellations, which is a little higher than we have had in the past that is made up of 28 due to accounts receivable issues or risk, 25 were due to people who sold closed where they had no more employees, six decided to leave concerning pricing, seven decided to leave where they took the payroll in house, four went to another service. So in general, I was pleased with the number of cancellations. There is not a lot we could do about particularly the AR issues or the business sold. Overall, we are seeing customers not increasing much. Our growth is coming because we are adding a lot of new customers. Our product and services appear to be in demand and that trend continues into this quarter with another strong start of the second quarter a new customer business.

So, that side of the business looks very positive. Our customers overall do not appear to be losing much ground. Some of them are getting larger and taking more market share is what I see with our customer base. There is not an overall uplifting in terms of hiring at a customer base but more the customers – those who are doing well tend to be taking more market share. I am pleased with the staffing business being up 13% that is very nice particularly in Utah, and those will spell some very nice things for us in the upcoming quarter.

We continue to work on our new markets and that is our focus and will be probably for the rest of the year in Denver and the Phoenix market those I think provide an opportunity for us to really do quite well. The rest of our markets are doing fairly well. Some of the smaller markets we are addressing those issues, as you know, unemployment rates in California are still well above 12%. Most places where we operate, we are operating in double-digit unemployment.

So, I am relatively pleased that we came out of ’09, the worst recession arguably, since the depression with our cash intact and it looks like we are going to have a very nice year in generating cash as well as continuing to build the business.

So, pretty positive outlook from me and I will be happy to take your questions.

Question-and-Answer Session

Operator

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

Josh Vogel – Sidoti & Company

Hi, good morning, thanks for taking my questions.

Bill Sherertz

Good morning Josh.

Josh Vogel – Sidoti & Company

With regard to your gross revenue guidance, it came in a little above what I was looking for and I assume that most of that is driven by strength in the PEO business, but I was just curious are you seeing – could you just talk a little bit more about what you are seeing on the staffing front?

Bill Sherertz

I did not mean to do that, I think staffing is just generally what you are seeing on a national level. The business activity has picked up some, and it is not like we have added a whole bunch of new customers. You mean, you are always in the staffing business adding new customers, and customers’ usage just going down. So it is a pretty good size churn but overall it just reflects an increase in business activity, particularly in the Salt Lake market for us.

Josh Vogel – Sidoti & Company

Okay and can you remind me what the margin profile of staffing is versus PEO?

Bill Sherertz

Staffing runs about 13% and PEO runs around 2.5% to 3%, maybe 4% depending on the comp levels and incentives.

Josh Vogel – Sidoti & Company

Okay great.

Bill Sherertz

It is about a four to one ratio.

Josh Vogel – Sidoti & Company

Okay and the G&A cost last quarter came in a little lower than what I was looking for and I was just curious what actions if any were taken in recent quarters to lower G&A, and if there is any more leverage we could see on that front?

Bill Sherertz

The leverage comes from the upside, in other words, the SG&A will remain relatively constant other than profit sharing and the margin dollars would start to increase fairly substantially, and that is what the real leverage is. As far as the decrease goes, we run a kind of a tight ship, we did not do anything dramatic here to do that, and we have not been laying off people per se. I mean, we are always looking to add and replace and trim where necessary, but in general, I am pretty happy with the level of the company.

Josh Vogel – Sidoti & Company

Okay and I probably ask you every quarter, but you obviously maintain a very sound financial footing, you are generating a lot of cash and I was wondering if you were looking to expand and if you would do that possibly through acquisition, and if you are looking to expand out East?

Bill Sherertz

Yes, a couple of areas we would certainly take advantage of. We made a small acquisition in December in Utah and that has worked out extremely well for us. Our preferred payroll is really gaining some traction. I would not be opposed if we found the right little payroll company to buy one of those and expand our footprint, as well as internal growth where we can push our preferred payroll to some regions, I am getting more and more comfortable with our model and the pricing and the profitability of preferred payroll is doing very well for us, and we think we can take that to others.

So, the acquisitions if they come along are great, but I do not think, quite frankly, I do not think we need them to grow the company. I think we have got other opportunities sitting right here in front of us.

Josh Vogel – Sidoti & Company

Okay great, I may have missed it Bill, but your customers’ payrolls, are they stable or are they growing?

Bill Sherertz

On a general basis, they are stagnant, but some customers are taking market share. So some of our customers are – just as I reported, we had about 28 of them or so, I guess close to 30 or so either went out of business or had AR issues that business somewhere else to somebody. And we are seeing that it goes to some of our customers is what happens. So when one guy in a certain line of area of business goes out of business, not all the time but certainly some of the time, our customers pick up that line of business. So they increase but as an overall economic, I have not seen it in terms of just an overall increase in employment.

Josh Vogel – Sidoti & Company

Okay, and I am sorry if I could squeeze one more in there and then I will jump in the queue, you added a lot of new PEO customers last quarter, and I was just curious which markets or sectors you are seeing these new clients being added or is it broad-based?

Bill Sherertz

Pretty broad-based. Again, our revenues are 81% in California. So you would expect a majority of those to be California, but when I look at just kind of a (inaudible) to the new business report, I am seeing a lot of different names.

Josh Vogel – Sidoti & Company

Okay, thank you very much.

Bill Sherertz

Eastern United States as well as in Utah, it is just pretty broad-based.

Josh Vogel – Sidoti & Company

Okay, great, thanks Bill.

Bill Sherertz

Thank you.

Operator

Your next question comes from the line of Alex Smith with Bellone [ph] & Associates Limited.

Alex Smith – Bellone & Associates Limited

Hello?

Bill Sherertz

Yes.

Alex Smith – Bellone & Associates Limited

(inaudible).

Operator

(Operator instructions) Your next question comes from Jeff Martin with Roth Capital.

Jeff Martin – Roth Capital

Thanks Bill. I will not repeat what that guy did.

Bill Sherertz

I did not understand him, my hearing is going I think.

Jeff Martin – Roth Capital

Getting back to business here, your 161 clients that you signed in the quarter, how many of those are purely PEO, how many are staffing, and how many are something else like preferred payroll?

Bill Sherertz

Those are all PEO.

Jeff Martin – Roth Capital

They are all PEO.

Bill Sherertz

161.

Jeff Martin – Roth Capital

Okay and then with the higher client attrition, I guess, if you collectively call it is obviously dragging on earnings because you have got payroll costs associated with the ramping up a large number of new clients every quarter –

Bill Sherertz

Yes.

Jeff Martin – Roth Capital

Any idea what quantitatively that is on an annualized basis in terms of draw [ph] in earnings?

Bill Sherertz

A pretty good question, you know in the first quarter it is not as bad as you think because there is very little margin having to do with customers in the first quarter, it is in the second-half of the year. So, what you would not want to see, or I particularly would not want to see that kind of customer count in the third and fourth quarter. It basically in the first quarter is kind of a breakeven quarter on PEO customers that is why we reported loss in the first quarter.

But you are right, if we decide to quit adding customers, I suppose it would – somewhere up that would be $0.04 or $0.05 up. This is just a guess Jeff.

Jeff Martin – Roth Capital

Okay, it helps, it gives an idea, and then signing 65 clerical customers in the quarter, I have always thought of Barrett as more of a blue-colored focus PEO, is that a pretty significant shift to clerical or are we just not really talking much about how many are clerical in the past?

Bill Sherertz

It is a higher percentage than I have seen and I think it will take a couple of quarters to see if that is a trend or that is just kind of an anomaly for the first quarter.

Jeff Martin – Roth Capital

Okay. Is profitability any different with clerical versus blue collar?

Bill Sherertz

Potentially it is less but it is safer. So it is kind of one of those you are trading off a little bit of longevity and sure profitability for more risk and sometimes more profitability but also more risk.

Jeff Martin – Roth Capital

Okay and then in the last earnings call you said that you thought you would be about breakeven in the first half on an EPS basis, and earned somewhere in the vicinity where consensus was for the back half, are you still feeling the same way?

Bill Sherertz

Yes, I think – if you went back and looked and said well, when was the last time that we lost $0.16 in the first quarter, make $0.20 in the second than what we do in the rest of the year. I think all things being equal, assuming a (inaudible) does not take us into some other kind of major downturn then I think that momentum carries forward and then the numbers just kind of come out to what they are. So we have continued to add customers and I think we are a little better than what we forecast in terms of revenue. So, it all looks pretty positive.

Jeff Martin – Roth Capital

Okay and then I noticed from Jim’s comments that you spent $6 million roughly to capitalize insurance in Arizona that means your license is up and running.

Bill Sherertz

We are (inaudible) is the name of the company and we do have clients already and we will see where that goes but it should really accent what we want to do down there in terms of the PEO world.

Jeff Martin – Roth Capital

Is that a material driver in the back half, do you think?

Bill Sherertz

I think that possibility is there Jeff, our focus right here is on Colorado and Arizona. We think those can be major contributors to what we are doing and the leverage is, if you look at those branches now, they are not contributing anything, and so our hope is and the way we are focused on how we run our business is that there will be major contributors as we go forward. They are big cities.

Jeff Martin – Roth Capital

Yes, great. Thanks Bill.

Bill Sherertz

Yes, thank you.

Operator

(Operator instructions) Your next question comes from the line of John Willer [ph] with ORCA Investment [ph].

Bill Sherertz

ORCA.

John Willer – ORCA Investment

ORCA, good morning. Just two follow-up questions I guess. One, when you reported your fourth quarter, you were talking about some of the rate changes in California and now that we are three to four months into that, I was just kind of curious how that has played out versus your expectations or if that is potentially more growth in the back half of this year as people start to shop for rates and try to get out of the pool.

And then the second one is on the insurance line now that that is fully up and running and funded, the natural progression is you use it on your safer positions, make sure you have got all the (inaudible) and you run it through everything and then possibly start to offer it as standalone service. Where are you in that timeline of events?

Bill Sherertz

On the first part, having rising rates certainly helps us. I mean, it is not a headwind, it is not a major contributing tailwind, but it is certainly very positive (inaudible). Some REITs in certain industries went up a lot, some did not go up very much and it depends on where you want to focus your business, and I would say overall we are taking less risk than we have ever taken or more stringent on the kind of people we do business with.

As far as the insurance company goes, we are going to use that primarily in the PEO world where we know how to take risk and risk managers where we control the payroll so we know as opposed to doing much of a standalone. I am not very comfortable with that, do not want to particularly be a standalone insurance company just as a broker type thing. So, that will be primarily to help us – we have already helped our staffing business and should definitely open some doors on the PEO world.

John Willer – ORCA Investment

Okay, great, thank you.

Operator

(Operator instructions) There are no questions at this time.

Bill Sherertz

We appreciate your interest and we look forward to a good year from BBSI, and we will talk to you next quarter. Thank you very much.

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