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Barrett Business Services, Inc. (NASDAQ:BBSI)

Barrett Business Services at the Noble 8th Annual Equity Conference Call

January 17, 2012, 03:30 pm ET

Executives

Michael Elich - President and CEO

Analysts

Michael Elich

Good afternoon. I appreciate your hanging with me through this afternoon. I am glad I am not the only one here. So that's a good sign. I will try to keep it light and have a little bit of fun with it. But I wanted to introduce you first of all to BBSI. I am not sure how much everybody knows about the company but it’s been around for many years over the last 10 years. We’ve reformatted it a little bit of who we are in that timeframe. We’ve have grown, find ourselves in a position today, where a year ago our founder passed away and I was the operating COO for the company. I stepped in to the role and over the last 12 months we’ve had very successful transition and continue to move things forward. I will leave you to read our disclaimer. I am sure most of you have done that already.

Just looking at some operating statistics for our company as you just see, over the last 12 months we’ve had quite an appreciation in our stock value, still holds pretty strong balance sheet with earnings being up, cash begin up, revenue growth as well. So who are we? I like to look at us as a little bit of a hybrid. If you were to take the best of what to staffing industry, the payroll industry and the PEO industry has offered and combine that into a company that utilizes the resources of those companies, we take those resources apply them to our clients to help build the management platform that helps them in those operations. And those business owners leverage their internal resources more effectively to grow their companies.

We focus our attention towards the HR side in the human capital management side of our clients and over the last few years see ourselves with a client base in excess of 2000 different companies with a 90% plus retention rate, which is historical. If you think of a business owner, a business owner starts lot of times in their garage. They build a product; they have a product that works. They step out and sell the product; they find themselves reaching their own capacity level, so they add an employee and another employee, another employee.

They get to about 10 employees and now they have hired all other friends and so now they have to hire people they don’t know. They hire 11, 12, 13, 14, 15 person on day-to-day basis. They can go around the room and they can touch and they can help to control the success of organization by impacting each person’s outcome by direct interface. Some of them find themselves with 16, 17, 20-25 employees and all of a sudden the dynamic changes. And we will like to think that a business owner can manage the business tactically up to about 15-20 employees. But beyond that standpoint, they now have to start hiring layers of management back into their organization and the organization shifts from being able to run tactically to having a more dynamic complexion about it.

What we do is, we come in and help the business owner get their arms around all the pieces, help them to frame a management platform or a method for interfacing with that organization on a regular basis and help them to ultimately leverage the internal human capital that they had invested already.

The industry as a whole is pretty-vast. If you check just the HR industry, HR outsourcing look to be 162 billion by 2015 and then the consulting industry related to all facets of consulting is around 366 billion.

What I consider important here is, we lot of times are, even though we have been around the long term, today in any one of our given markets at max we would have may be a 5% concentration and we tend to be one of a larger players in the markets that we serve.

So why do companies outsource? I already explained a few things. The traditional first impression for people is that they’re going to save money, to control risk, to reduce just complexities.

As I see it, if a business owner has the ability to refine their focus and put their attention, where they have the most leverage in their time, they have a higher probability to be unsuccessful. And that’s where we get in and work as a management team with our clients, on a localized basis to help them get out of their own way.

Our model is we develop and as we continue to work with our clients, it starts with the business development cycle. And a business development foundation, we get our clients from one of three areas. From direct sales, we still pick up 10% of our business through direct sales. Referral networks that could be anything from brokers to financial planners to accountant CPAs. Those resources and partners out there that we work with, that have a trusted advisor relationship with the business owner and on a growing basis.

We see more and more business coming from customer referrals and we see a multiplier effect in that and that if we continue to take care of business, we find that our customers are referring to us to more customers and that carries on and as our base gets larger, there is a multiplier effect that we’re seeing.

And so as our model matures, what we find is our clients come in to, think of that business owner again. They have 20 employees. They come and work with us. It’s not necessarily a sales cycle that gets in there but it’s more of an alignment cycle of what it is they are doing today against what it is they need to be doing or they should be doing from a best practices standpoint.

We start at the stage one tier one relationship with our client that is designed to create a cultural alignment between who they are and who we are and how their employees, how their supervisors manage? How they do different things from simply as how do they get payroll done? How do they get the data in on time? How do they, when they hire a person, how does that information get to us? How do they know that they are doing that they need to do legally from a safety stand point? What are their basic safety premises to how they ensure that the work force is operating the way it should?

In tier one, what we are really doing is interfacing tactically with the client to build out and build a frame work to allow them as an organization to operate as many larger companies that have learned the lessons along the way do. Within three to six months that client is either moving up to a tier two relationship where that interfaces becomes more dynamic or they are moving out. We figured out may be they wanted the best pick for us and within that client, we can’t do much with them or their utilization capacity for them doesn’t makes sense.

So at the dynamic stage we have an interface with our client where we are now working with supervisors, managements and management owners, to teach them and help them understand how we do what we do and how to use the platform that we have built and then as time goes on, year or two years, we find ourselves in a more of a business focus relationship with our client where we’re stepping back with them and saying, where is your business going, defining from that where their business is going and then helping them to achieve through an organizational setting of how to keep up and how to move forward with that.

Some key niches for us, we have a bottom-up philosophy where we tend to always work around at 10% role where we generally will push out 10% of our clients that aren’t doing as well as they can. There’s two things; freeze up capacity for us and it also helps us to managing control and mitigate risk. We also do that from an employment standpoint.

Overtime, what we found is that we’ve developed a very strong team of entrepreneurial driven managers that interface with customers and local markets on a day-to-day basis to build the framework of our overall product into local markets. We tend to stay within 50 miles of anyone of our clients and just because we have a very much of a high-touch model compared to much of our industry that will interface with the market and then push everybody to a web portal. We find that with the profile of our client they do need the hands-on attention and so from a risk management standpoint, payroll standpoint, an HR standpoint and just a business professional standpoint, we’ll interface with them on a local basis.

If you really want to frame what our product looks like in a nutshell, this is probably the best place. If you take the consulting worlds, the consulting world goes out, they interface with a company, they tear down a lot of the factors of what’s working, what’s not and they deliver to the owner, a white paper of some sort. The issue there is that more small businesses be it 20 to 40 employees don’t know what to do with the white paper and the companies mentioned here generally don’t interface with those individual companies.

If you take the staffing, the PEO, the payroll industry they have great tools. You know we do a lot of things. Our model combines the best of both; and I think the sweet-spot becomes, how we interface with our client allows them to become better, because we’re combining the best ideas that might come from the consulting side of the world with the mechanics and the tools and on the outsourcing, HR outsourcing world and when we combined them, we actually create value to our clients by improving their top-line as well as helping them become more profitable as they grow.

A landscape of our western third of the United States; we do not hit Nevada, probably maybe we do but, that looks we have grown over the years to have a pretty strong footprint in the western third of the United States. We do have a presence on the East Coast, Maryland, Delaware and North Carolina. Those states represent our East Coast presence. You’ll see a lot of concentration in California; one of the questions that always comes back to me is, are you concerned about concentration in California and you know that just seems like a why. The reality of it is we have probably less than 1% but I’ll be safe and say less than 2% of market share in California; you know it is a dynamic place to work, but once you’ve figured it out, it offers greater opportunity as well.

If you want to look at thus slide, I’ll go back to 2007; in 2007, we were working with roughly 1,100 clients. We had just had a run up from 2001 to 2007. In 2002, we did a $175 million; 2006 we crusted the billion mark. In 2007, we saw signs of the recession in January, February of ’07. We did $1.1 billion with 1,100 clients and roughly 40,000 employees on our payroll. We saw the recession coming; knew we couldn’t control, how many employees an employer would have on their payroll, how many hours they would work or the pay rates of those individual companies to those employees.

But what we could control was, how many individual clients we would work with. From 2007 to 2008 into 2009, we vetted out probably a third of the base that we had in 2007. So we have to draw down probably 300 to 400 clients out of that 2007 base. But because of the discipline of building with, we continued to outpace that and over the last five years, we’ve taken our client base from 1,100 clients upwards to and in this quarter it’s somewhere closer to about 2,000 different clients.

I am just measuring the PEO client base on this side, the reason I don’t measure the staffing base is because if an employee has one hour work or there is a one employee at a client, that would skew things a lot. There is probably another couple of thousand staffing clients, but this is just PEO clients under contract.

Today we have, you can see where the run has taken us and interesting enough our headcount today is roughly 40,000 employees, the same as it was back in 2007. So if you take the logic of it, if employers just are hiring a little bit based on the base that we have built for the last five years, if everybody added two employees, we have about a 10% uptick in our overall base of employees.

So revenue, earnings, history, guidance, kind of gives you a feel for who we’ve been; same thing on revenue, on a quarter-over-quarter basis we’ve seen consistent growth over the last three years on a quarter-to-quarter basis. Don’t really see that trend changing. I know earlier this year, it was kind of, I wasn’t really, didn’t know if we would see some softness later in the year; we did not. We continue to see strength in our overall growth in top-line revenue.

If you look at the breakdown, roughly 68% of our gross margin comes from PEO, 31% comes from staffing and then there is preferred payroll. Preferred payroll is a product that we’ve built roughly four years ago that competes directly with the ADPs, paychecks of the world; it’s more of a filler for us. We do still find that there is a lot of companies that, I guess it gives us more flexibility if nothing else.

Earnings per share, we guided for $0.37 to $0.41 in the quarter. Cash, we continue to generate a lot of cash. Balance sheet; as of October, we have about $77 million in cash, no debt as said.

You know, our growth drivers, as our clients add headcount, we will see tremendous leverage in our operating infrastructure. We see a lot of leverage in our referral network side. I heard a comment in a meeting that we had about a week ago with a risk manager and he was talking about how we had one client come on in Southern California back about four years ago, five years ago. And just because the client relationship of that one person they kind of traced it all back, we’ve added 40 new clients just from that one client. The more we can leverage that, the better we’ll be and I think it will also help us to leverage into new markets and expand.

We will penetrate new geographies; a lot of times people ask are we doing acquisitions; we have a history of doing acquisitions. By the way, the growth from 2002 to current of roughly from 175 to where we’re at 99% or about 98% of that was organic; we only had about 100 million of that came from or 90%, 100% of about 100 million came from acquisitions the rest was organic. We will continue to presume acquisitions of growing to new markets want to make sense; but right now we’ve got quite a bit going on in our existing markets.

Takeaways; we have unique offering. There is nobody that we really compete with head-to-head in our markets. We have a very scalable model where we’re actually opening two branches right now, just in California as fillers to fill in the few markets that we have and with the plan of expanding beyond that doesn’t make sense.

We have a high retention level; lot of stickiness in our client base especially in the PEO side. Of the 10% that we do lose, we’ll probably push out roughly 80% of that as a means to keeping our block clean and freeing up capacity for clients that might fit a better profile than the ones we might be working with. And we have a solid financial growth plan – cash flow platforms as well. Questions?

Question-and-Answer Session

Unidentified Analyst

(Question Inaudible)

Michael Elich

We have right now things like 200 to 220, so we've incubated it in Vancouver; but we also are having or seeing where our individual branches as they run into payroll opportunity or a client that maybe doesn't fit our risk profile is falling back into that product. We are in the process today of rolling and rolling our platform that we use for preferred payroll out into our overall, as our overall platform for the whole company. So that tool in itself will give us some mechanism eventually to do that; but regardless we don’t want to dilute our PEO product and just be in the business of selling payroll. We’ve already found it; well, our competitors tell us that doesn't work so.

Other questions? Thank you.

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