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Barrett Business Services, Inc. (NASDAQ:BBSI)

Q1 2011 Earnings Call

April 27, 2011 12:00 pm ET

Executives

Mike Elich - Interim President, CEO and COO

James Miller - CFO, VP of Finance, Treasurer, PAC and Secretary

Analysts

Josh Vogel - Sidoti

Jeff Martin - Roth Capital Partners

Michael Prouting - 10K Capital

Kimberly Sherertz - Estate of William Sherertz

Ken Thomas - Progressive Investment

Operator

Good afternoon. My name is Parnell and I will be your conference operator today. At this time, I would like to welcome everyone to the Barrett Business Services Investor 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 Mr. Miller. You may begin your conference.

Jim Miller

Thank you. Good morning, this is Jim Miller, with Mike Elich. Today we'll provide you with our comments regarding the company's operating results for the recently completed first quarter, ended March 31st and our outlook for the second quarter of 2011.

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 & 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, as management believes such information is more informative as to the level of our business activity, two more useful in managing and analyzing our operations and three, add more transparency to the trends within our business.

Cost 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. Looking out at the first quarter results, as reported the company earned $0.54 per diluted share in the 2011 first quarter as compared to a diluted loss per share of $0.16 for the 2010 first quarter.

Income for the 2011 first quarter included the $10 million of proceeds in the Key Man Life Insurance policy, a Company maintained on Bill Sherertz, the Company’s President and CEO, who passed away in January of this year. But after that sort of the life insurance proceeds and certain incremental SG&A expense associated with the leadership transition, the company experienced a net loss of approximately $0.19 per share of the 2011 first quarter.

Total gross revenues for the 2011 first quarter of $331.1 million increased $68.5 million or 26.1% over the 2010 first quarter. California which comprised approximately 83% of our overall first quarter gross revenues increased 29.6% owning to continued growth and new PEO business.

Staffing revenues for the first quarter of 2011 increased $1.3 million or 4.7% over the first quarter of 2010, primarily due to an increase in demand for our staffing services from existing customers. New staffing business during the first quarter approximately offset the loss of business from former staffing customers.

PEO gross revenues increased $67.2 million or 28.6% on a quarter-over-quarter basis primarily due to the addition of new customers. Our new PEO business during the quarter from customer's added since April 1, 2010 totaled $73.7 million, which tripled the amount of last PEO business from the first quarter of 2010 from former customers. Our PEO revenues from existing customers also experienced an increase of $13.5 million or 6.4% on a quarter over quarter basis. Increase in PEO revenues from existing customers represents the fourth consecutive quarter of existing customer growth.

Gross margin dollars for the 2011 first quarter of $5.6 million increased approximately $233,000 over the 2010 first quarter, primarily due to the increase in revenues. Gross margin percent on a gross revenue basis was 1.7% for the 2011 first quarter as compared to 2.1% for the 2010 first quarter, primarily attributable to higher direct payroll cost and higher payroll taxes and benefits.

Direct payroll cost increased 23 basis points over the 2010 first quarter, due to an 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 2011 first quarter as a percentage of gross revenues increased from approximately 9.4% to 9.6% due to a higher state unemployment tax rates in various states the company operates in. To mitigate the impact of the increased unemployment tax expense from our PEO customers, we analyzed PEO customer unemployment experience and negotiate higher mark-up rates when warranted upon the customer's annual contract renewal.

Worker's compensation expense for the 2011 first quarter increased 2.1 million over the 2010 quarter. Worker compensation expense for the first quarter as a percentage of gross revenues decreased slightly from 3.4% to 3.3% primarily due to the relative stability of the fixed cost component of our self-insured program.

The company experienced similar loss levels for the 2011 first quarter in relationship to business volume as compared to the 2010 first quarter. Selling, general and administrative or SG&A expenses of $8.8 million increases approximately $600,000 or 7.3% of the 2010 first quarter. This increase was primarily due to increases in branch management payroll, travel and cost associated with the leadership transition.

Other income net for the 2011 first quarter totaled $454,000 primarily attributable to investment income earned on the company’s cash and marketable securities as well as gains recognized on the sale of certain marketable securities.

Income tax rate for the first quarter of 2011 was 19.5%, which included a favorable benefit from the effect of the $10 million life insurance proceeds on the annual effective tax rate for the company. We expect a effective tax rate of approximately 19% to 20% to continue for the second through fourth quarters of 2011 and we expect our overall tax rate to return to a more normalized rate in the low to mid 30 percentage for the first quarter of 2012.

Looking at the balance sheet at March 31st, cash and marketable securities totaled $62.4 million compared to $55.4 million at December 31st 2010. This is increase primarily due to receipt of the life insurance proceeds, partially offset from by the loss from operations and payment of the quarterly cash dividend during the first quarter.

Trade accounts receivable at March 31st, $54.8 million, increased approximately $17.2 million over December 31st, primarily due to an increase in the accrued revenue at the end of March.

Days sales outstanding and accounts receivable or DSO of 14 days is up over December 2010, similar count of 10 days and that’s primarily due to seasonality and is fairly consistent with the DSO of 14 days at March 31, 2010.

Accrued payroll, payroll taxes and related benefits increased $23.6 million over December 31st, due to increases in accrued payroll and first quarter payroll taxes which are much higher during the first quarter of the year as taxable unemployment wage ceilings are reset each January 1st.

Stockholders equity increased approximately $4.7 million over December 31, 2010, primarily due to the net income of $5.5 million, offset by cash dividends paid of approximately $900,000.

Looking out our outlook for the 2011 second quarter, as reported yesterday, we are expecting gross revenues to range from $347 million to $352 million for the second quarter of 2011. This projection represents a likely midpoint increase of 17.6%, over the $297.1 million in second quarter 2010 gross revenues.

The projected increase of 2011 second quarter gross revenue is based upon our recent revenue trends and doesn’t factor in too much of a seasonality given the current economic conditions which appeared as to be somewhat neutral.

Based upon the foregoing estimates for gross revenues we anticipate diluted earnings per share for the 2011 second quarter to range from $0.31 to $0.34 per share as compared to diluted earnings per share of $0.22 for the 2010 second quarter.

The $0.31 to $0.34 range includes the favorable benefit from the effect of the lower tax rate on an annual basis of approximately 20% using a more normalized rate for income tax we would anticipate diluted earnings per share for the second quarter of 2011 to range from approximately $0.25 to $0.28.

At this time, Mike Elich will comment further on the recently completed first quarter and our outlook for the second quarter of 2011. Mike?

Mike Elich

Good morning. I guess overall we consider that it was a very good quarter. In the quarter, we saw that we added 136 new clients, we lost 32. Of the 32 that we did lose two of them were due to AR issues, six were due to non-AR issues, six businesses sold, 11 left due to price, seven to payroll in-house and three went to a competitor which left a net gain clients at 104.

The company overall sees stability in its existing client base and we continue to retain our best clients. Our pipelines overall are very strong, as evidenced at the beginning of April, we also continue to see strong growth in new PEO client adds.

Overall, our clients see stability in their employment base and continue to hire, but the hiring is not as much widespread, we see it more in smaller pockets which lends us to believe to that, as we continue to add to our base of clients, we will eventually see that uptick and leverage through those existing clients as they had employees, but have not realized that yet.

By region, for Southern California, we continue to see a firm footing and growth. Northern California continues to be our strongest growth region. Northwest continues to be relatively flat although in the last month, we are starting to see signs of an uptick in both growth of employees and growth of new clients.

Mountain states, we continue to see strength in both Utah, Colorado, and Arizona. Idaho continues to lag somewhat in recovery. On the east coast we see it been relatively flat. We believe that the weather in the first quarter affected the add of new business and also our employee headcount in that region.

Related to our overall transition over the last 90 days, it's really been a test for our organization. I would give us extremely high marks in how we have been able to execute, we have seen and I guess my observation has been from an organization, we see continued great, strong continuity within the organization between the board and management.

Organizationally, we are very focused and very committed to division that we are working towards. We have seen no customer concerns and I have been fortunate to be out and visit with a majority of shareholders and see significant confidence in where we are intending to take the company. Tail winds that we are recognizing is that the recovery remains on track even though in the first quarter, we saw unrest in Egypt and Libya and the earthquake in Japan and even a $100 plus oil, employers continue to be forward-looking and making decisions.

Our referral networks continue to mature and grow and our pipelines remain very strong because of that. Headwinds that we see or the credit for new clients coming in continues to be a challenge and worker’s comp as the recession has lasted longer than ever expected continues to offer an ongoing management, not concern as much as, it is something we are watching very closely.

Moving forward, we continue to mature the organization with the transition that we’ve been through, we are now we looking at different things that were assumed many years ago that we are looking at and trying to understand why we do certain things we do. Most of them are very justified, but some of them we found that we can do and maybe improve on. We are also looking at how we can use and evaluate our data more effectively to make business decisions from and how looking more importantly, how we continue to stand in front of our growth curve and build for our future.

With that I’ll turn it over for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And we do have a question from Josh Vogel from Sidoti.

Josh Vogel - Sidoti

Thank you. Good morning, Mike and Jim. I guess, my first question, Jim, you commented about increased revenue with existing clients being the fourth consecutive quarter. I was curious, is this a more function of these customers using more of your services or is it more a function of them hiring?

Jim Miller

Well, I think, it is probably more of a function of increase in hours as I think, most of our customers were at less then capacity a year ago and so I think, it's really more of an increase in hours rather than necessarily much in the way of hiring.

Josh Vogel - Sidoti

Okay. And in terms of, I think, you said it was $13.5 million increase. Was this – can you maybe parse it out a little bit geographically, you were saying mostly from like Northern California?

Jim Miller

Yeah. That would be mostly Northern and certainly Southern California as well.

Josh Vogel - Sidoti

Okay. And you mentioned -- you were trying to mitigate increases in the state unemployment taxes and you are negotiating higher markup rates. Are you getting any push back from your clients?

Jim Miller

I would say, we are not seeing a pushback. And in fact, we worked with our clients throughout the recession to support their business model and we are bringing our own justification of values that we bring and also the cost that we're seeing is increased. It's being --it's not having any adverse effect on our business.

Josh Vogel - Sidoti

Okay, great. And just two more quick ones and I will hop back in the queue. Can you just talk about the average size of your new PEO clients, in terms of total employees versus maybe what you've seen in prior quarters?

Jim Miller

I would probably say, we go through patches where we’ll see the dynamic shift but I would say that we’ve probably seen the average size increase sales a bit.

Josh Vogel - Sidoti

Okay. And then on the last conference call, you guys were talking about exploring two possible opportunities on the acquisition front. I was just wondering if you had any comments on that?

Jim Miller

Right now, on an on-going basis I continue to engage with both brokers and also interest parties. I think I have three on my desk right that we continue to visit with. It’s maturing a relationship, trying to understand how it would make sense. So at some point down the road, we would if it make sense pursue those opportunities.

Josh Vogel - Sidoti

Okay. Thanks, Mike and Jim, I’ll jump back in the queue.

Jim Miller

Thank you.

Operator

Your next question comes from the line of Jeff Martin with Roth Capital Partners.

Jeff Martin - Roth Capital Partners

Thanks, hi Mike and Jim.

Jim Miller

Hi Jeff.

Jeff Martin - Roth Capital Partners

Could you go into a little bit of more detail on the PEO taxes, I know that’s been a drag on gross profit for a little while now and that improves at the renewal period. Could you give us a sense of when the bulk of customers are new and when the PEO taxes will return to – or what contribute to margin improvement and secondly, is it possible to quantify the dollar amount that we expect to recoup?

Jim Miller

Well, first of all, each customer is on their contract year, so we have renewals each month and I don’t know that we have necessarily any date that is really more dominant than the other although may be January 1st might have more renewals than other months. So it is really an ongoing renewal process.

Mike Elich

I would probably add to Jeff, is we are working and interfacing with our clients. We’re -- it's a process that start, the increased process and transitioning some of those cost out to our clients through our mark-up is really a total evaluation of the client. And we’re having them from inception to where they are at today. And we are really working through each client in 2011 to assess where we are from a profitability with the client. If they are in line and things are looking good, there is not reason to change. If because of the increase in SUTA and/or may be changes in even worker's comp have crept into our overall margin spread that's why we’re sitting down with the client and evaluating where an increase is necessary.

The one thing that we do see and we did recognize this quarter as much as any of -- over the last few years as we have noticed increases in overall state increases to SUTA, if you compare this year over last year and the way those dollars have been diluted back into the quarter, it seems to have normalized itself. The rate even though they are increasing in some areas, continued to increase in some areas. We may have seen the top.

Jeff Martin - Roth Capital Partners

Okay. And then you also talked about areas to improve from this management transition, you kind of looking and investigating, could you go into more detail of what some of those are and do those have the direct financial impact and what's the timing?

Mike Elich

I think the more, the financial impact will be found in it as we look at the operation and we look at how we are operating at the size we are today and as we continue to grow. We are looking for areas that we can leverage our operation more effectively.

As we look at the data we’re finding that we can make better decisions about one we let clients; go how we keep them; where our price points need to be. We are already pretty tight, but we just see some areas for improvement.

The other area that I see that we can start to mature our overall operating platform is that we have certain predictability with our client as we work with them and we’re working on models right now that allow us to take our clients down a more direct path and are able to manage and measure how they are doing as we work with them over the years.

Jeff Martin - Roth Capital Partners

Okay. And then you also mentioned economic conditions appear neutral. What are the factors that you are taking into account there and what is you crystal ball say?

Mike Elich

I think the neutral factor is when we look hours worked on a week-to-week basis and not total hours of work but by individual and we see that even though headcount has not in robust our increasing robustly, that the disability within hours worked per employee has been very stable for probably the last six months.

Given that you’ll eventually see companies reach a point of capacity and have to either increase hours which isn’t as easy to do much and stuck into overtime issues or an increased headcount. So we’re not seeing the choppiness that we saw a couple of years ago or even a year ago and we’re seeing that base being fairly firm where the clients that we have are maintaining the headcount numbers and the hours worked that they have.

Jeff Martin - Roth Capital Partners

Okay. That’s helpful. And then this is more of a question for Jim. You mentioned that the increase in SG&A was largely due to management transition, is that largely complete and should we expect to see SG&A tick down in Q2?

Jim Miller

Well, I think the transitional costs were maybe only a quarter of the overall increase in SG&A costs and we had a little bit of an increase the SG&A just to service the increase in the business volume. And I think Mike can probably talk more about future transition costs.

Mike Elich

One of the things that has happened is if you go back and say that we are in a recession from ’07 and or ’08 through 2010 you’re somewhat managing the organization sideways and even as you start to see recovery we were not in 2010 very aggressive at reinvesting back in infrastructure.

Now as we consider and see that the organization is pretty stable and that the trends economically are going to continue, we are looking at the investments we need to make as we see our – the organization growing over the next couple of years and we need to be ahead of the curve on that.

So the SG&A expense should be inline with the business growth, but I see it being the structural moves that once the investments are made we should see tremendous leverage out of them.

Jeff Martin - Roth Capital Partners

Okay, great. Thanks, good luck guys.

Jim Miller

Thank you.

Operator

Thank you. Our next question is from the line of [Mitch Almi] with [McAdams Rate and Ranking]

Unidentified Analyst

Good morning, gentlemen.

Jim Miller

Good morning.

Mike Elich

Good morning.

Unidentified Analyst

Just wanted kind of take your brain a little, we’ve had the confluence of, I guess Bill Sherertz’s passing; the receipt of the Keyman Insurance and the filing on April 11th of some employment contracts. And in light of the call today, where the Board – or you say that there is continuing working between the Board and management, you are committed to the vision of the company.

I am just kind of – I have got two basic questions. The first one is, what are you telling to shareholders by adoption of the employment contracts? And second, within those contracts, there seems to be some eventualities that might come out that could, you know, truly benefit management without benefiting shareholders at the same time.

I think they are a bit loose, you know, I think there could possibly be changes in the Board and changes in management that leave the company essentially as it is, yet trigger some of the payouts. Could you please just address those questions?

Mike Elich

Yeah, no, pleased to. First of all, the employment agreement and/or change of control agreement that were filed was really a transition from existing agreements that were already in place. I already had an agreement in place. It would've expired April 20th, and this was merely a replacement to that.

One of the things within a transition as we've gone through is management needs stability to know that we can continue on to do what we need to do and as well as in the best interests of the shareholders to have those agreements in place to make sure that we know that we can continue to do our jobs as they were intended and not have to always be wondering what could happen tomorrow.

So that was the first intent and as well previous executives to the organization had had similar agreements and with those agreements in place, it felt that was, the Board felt that was a prudent idea to put those in place as well for the balance of the officers be it Greg and Jim.

As far as representing or I guess we are focused every day when we come to work as to run the company in the best interest of all shareholders and if the agreement would protect all shareholders from those who might otherwise want to hurt the company, then they protect all shareholders.

Unidentified Analyst

Okay, I was just looking. I don’t know and I’m not an expert in this, but if Bill, the state owns 24% of the company and the best thing for the estate is without making any judgment on management’s capability or your vision or anything like that, if the best thing for his estate is to sell the shares and they get sold to somebody who owns 5.5% of the company you can keep doing exactly what you’re doing. Yet it’s going to trigger every single event in there. That’s all why I’m asking because it looks like that might happen, could happen.

Michael Elich

Well, first of all, in the agreement there is a double trigger and so the double trigger, if it was a singer trigger, I can see that, but as it is a double trigger, still nothing changes unless there is adverse change to the overall management structure.

Operator

Our next question is from the line of Michael Prouting from 10K Capital.

Michael Prouting - 10K Capital

I had a few questions. Firstly I was wondering, following those passing, I am just wondering if you could give us a sense of morale at the company, both in terms of the sales force and I guess sort of throughout the company as well?

Michael Elich

Bill was a great friend to all of us and through the transition, it was extremely challenging. But one of the things that we did and I think that we have done well is we have made continued effort to communicate with each individual within the company following the transitional moves in late January and early February.

I was on the road and met with every, 98%, all but about four managers in our company face to face. And those that I did not meet with face to face, met with on the phone and spoke with on the phone. We spent time in those meetings, initially intended to last about two hours. They went about four and five hours.

We were able to really talk about the company, what Bill had brought us and offered us. And were allowed the opportunity to really grow up in a sense to take that vision and take everything to the next level for him. So the overall tone is extremely good.

We had an all call after our last conference call for the company and I sent an e-mail out to every person in the company, not every manager, but every person in the company to get onto the call and have a chance to ask any questions you want to ask. And that was extremely well received and because it was so received, we are doing it again today at 2 o’ clock.

I believe in the opportunity for every person to be able to communicate with management and help us all understand what we can be doing better, where we might be off track and determine where we can contribute to make the company stronger tomorrow, but the overall tone within the company is very, very positive.

Michael Prouting - 10K Capital

Okay, thanks. And secondly as far as your guidance for topline for the second quarter at least in terms of the mid point and that guidance, that seems to imply some considerable slowing in top line growth when looked at on a year-over-year basis versus the last several quarters. And I am wondering does that reflect something you are seeing in the business environment, is that conservatism, just how we should understand that?

Michael Elich

This is a little bit a challenging quarter, coming out of first quarter is always challenging, going into second quarter because in the first quarter, you see kind of the recovery of the holidays, January is always slow and as we go through March and then roll into April we see trends moving in a certain direction and so we guide off those trends.

The bigger challenge is that we can never really recognize what the seasonality of the business is going to be and so if anything, we tend to be a little more conservative in our revenue guidance in those areas just because we don’t have a solid trend built for the year yet.

Michael Prouting - 10K Capital

Okay. As far as seasonality goes, is there any reason why the second quarter of this year wouldn’t be any different from any second quarter, comparing it to the second quarter of last year or other second quarters. I just want to understand if there is anything you are seeing that’s different?

Michael Elich

Now, we don’t. You know the challenges that you find is when you have, what went on in Libya, what went on in Cairo, what went on in Japan, which you never know is how much and just with some of the inflation pressures you don't know how business owners are going to respond to hiring and if they don't hire a bunch of new people for the seasonality of the business and it remains relatively neutral we will probably guide to where we are at.

And from a year-over-year comparison we are going to be bumping up against higher comparables and that will slow our rate of growth even though incrementally we are still adding a tremendous amount of business.

Michael Prouting - 10K Capital

All right thanks for parsing that. Looking at the balance sheet obviously you've got a fair bit of cash on the balance sheet at this point. It sounds like you are still evaluating some acquisition opportunities. Can you give us some kind of, I guess, sort of breadbox size of the acquisition opportunities you are looking at and how much cash you feel you need to attain in order to pursue those kinds of acquisition opportunities.

Mike Elich

We have a certain threshold because we do work in so many states that from an insurance standpoint like to see cash on our balance sheet, as well as our customers like to see cash on our balance sheet and their customers so we see a [floor] on our cash or an area of comfort in that $35 million to $40 million. Cash over and above that area would be utilized for opportunities and whatever might come along, that could be accretive.

Michael Prouting - 10K Capital

Okay. And then I missed something at the beginning of the call. So I am not sure if you've already addressed this but have any decisions been made as far as Bill and the family stock is concerned?

Mike Elich

We have worked with and been very closely working with couple of different firms to explore all of our options. The Board has been very actively working to understand what it is that they have at their disposal as well as what represents the best interest to all shareholders and there has been a dialogue and their face with the shareholders, with the estate to try to understand how we can facilitate whatever they might need to accomplish.

Michael Prouting - 10K Capital

Do you know when we might get some clarity on that because I get the sense that there's some degree of choice say uncertainty or anxiety among the shareholder base relating to what might transpire there so can you give us some kind of time frame?

Mike Elich

The dialogue is ongoing and as we know more we will let you know.

Michael Prouting - 10K Capital

Okay.

Mike Elich

Its somewhat out of our control to the extent that the estate and the heirs of the family need to have their opportunity to understand what they want to do and when they can narrow their options as well. We are hoping that dialogue will include us and then we will work towards try and do, facilitate whatever is necessary.

Michael Prouting - 10K Capital

Okay, I know there's a lot of sort of conditional events here but once we get some clarity on that and I guess these new term acquisition opportunities, do you think there might be a possibility to address perhaps stock buyback or something here. I mean just given the amount of cash that you have, given the amount of cash that you are generating, given the valuation of the company, may just seemed to me notwithstanding the change in control provisions it doesn't really seem to be in anyone’s interest, either current stockholders or management that the stock should continue to trade up the [Wall Street’s] is currently turning at and it seems like that does create the kind of risks that a prior questioner alluded to.

Jim Miller

Well I think first of all we do have a stock buyback plan in place and I think we still have about $1.4 million or so shares available for that but as well in last since -- we lost the founder that had been in place for -- the founder of the company had been CEO for roughly 40 years and since his passing we've been able to transition the company and our stock is up roughly 10% since that day. I would probably say for the first 90 days we've accomplished a lot. I will say that we will continue to work on areas of the company that will bring value to our shareholders and continue to support the success of the company.

Michael Prouting - 10K Capital

Okay. Great. And best of luck and thanks for taking my question.

Mike Elich

Thank you.

Operator

Thank you. Our next question is from the line of Kimberly Sherertz with the Estate of William Sherertz.

Kimberly Sherertz - Estate of William Sherertz

Good morning. I have no questions at this time. Thanks.

Mike Elich

Thank you Kim

Operator

Thank you. Our next question is from the line of Ken Thomas from Progressive Investment.

Ken Thomas - Progressive Investment

I wanted to follow-up on Mitch’s question regarding the 8-K and the change of directors or principal officers, kind of your change of control provision there. Was there an event or a series of events that led the company to feel that the timing was now or necessary to do this today and could you also clarify may be a little bit on that double trigger that you were talking about with Mitch.

Mike Elich

Well the double trigger is, is that the only way that the change and control provision within the agreement would come into play would be if there was a significant change in the overall landscape of the company.

Ken Thomas - Progressive Investment

Okay that's first trigger right.

Mike Elich

Well, no, that would be the second trigger related to the first trigger would be change in control. The second trigger would be significant change in control in the overall landscape for the management of the company and how we’re expected to manage the business.

Ken Thomas - Progressive Investment

Okay. It’s actually the first part; was there a single event or series of wins made this necessary?

Mike Elich

No. As I stated, I had an employment agreement in place that was to expire April 20th, based on the event, because there was a 90-day window following the change in control of Bill Sherertz where I had the option of exercising my option and moving on. And I didn’t. I chose to stick around and for personal reasons I felt – thought that it was important to get either a complimentary agreement or a replacement agreement in place.

Ken Thomas - Progressive Investment

Okay, thanks. I have a follow-up question regarding the kind of the management meetings and turnover, since Bill’s death have you seen any turnover at the branch level of management or hire? And how many of the branches currently are missing permanent managers?

Mike Elich

I have one manager that has left for personal reasons. He wanted to move back to Southern California because he had a son that had a prolonged illness and the environment and because family was there. It was a direction he wanted to move. We've been talking to it for roughly a year. And besides of that, we have – including that, I have three branches right now that are without managers that we are actively searching for replacements. And probably for other three, we’re 90% along with two of them.

Ken Thomas - Progressive Investment

Okay. But that was going on before Bill’s death, correct? So that’s not a significant change.

Mike Elich

It's somewhat an ongoing process. We find that there is roughly a 10% to 12% change out of management and branch management on an annualized basis. So it’s very normalized to the on-goings of the business.

Ken Thomas - Progressive Investment

Very well, thank you very much.

Mike Elich

Thank you.

Operator

Thank you. (Operator Instructions). And I am showing no further questions at this time.

Mike Elich

With that, thank you very much. We’ll see you at the end of the second quarter. Thank you.

Operator

Thank you for your participation in today’s investor conference call. You may now disconnect.

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