Barrett Business Services, Inc.
Q2 2008 Earnings Call Transcript

Published: 30 Jul 2008

[Operator:]

Welcome to the earnings release conference call. (Operator Instructions) I would now like to turn the call over to James Miller.

[James D. Miller:]

This is Jim Miller with Bill Sherertz and Mike Elich. Today we will provide you with our comments regarding the company’s operating results for the second quarter ended June 30 and our outlook for the third quarter of 2008. At the conclusion of our comments we will respond to your questions. A remark 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 the forward-looking statements. Please refer to our recent earnings release and to our quarterly and annual report 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 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 relationship to gross revenues because management believes this information is

[William W. Sherertz:]

As some of you may know or may not know, two weeks ago I had major surgery on my spleen; they removed it so I have been out of the office for a couple weeks. I’m recovering well and should be back in the seat probably by another month or so, though just for whatever that’s worth. I feel very comfortable with Mike and Jim and Greg at the controls and as far as I can tell we haven’t missed a beat. During the quarter we signed 103 new customers which I’m not sure, I have to go back and look, but that’s pretty close to a record. We lost 61 customers; of the 61, 10 we cancelled for A/R issues, 10 we cancelled for comp issues, and 27 were businesses closed or no more employees and we had 16 leave on their own. So all in all not bad, but it’s reflective of the time that A/R becomes a daily fight and during the quarter we booked a little more for reserves of bad debts to reflect that probably we’re going to have issues as we go forward and I don’t want to really get blindsided by those kinds of issues. We took a pretty conservative approach towards the quarter. Beyond that, I don’t know much else. Things are bumping along; the economy’s not that much better, it’s not that bad. We continue to still sign a lot of new customers which is very good and portends that should be stabilized and we’ll exceptionally well, I believe. As far as the company and its position that we’re in, it’s probably in as good a condition as I’ve seen it in terms of our staff and managers and people that we have working for the company. We’re very very very strong so it’s just now it’s a matter of taking care of business and making up for the macros. Mike, you’ve got anything you want to add?

[Michael L. Elich:]

I just reiterate that our focus continues to be growing width in our client base and offsetting the general decline of the number of employees that our clients do employ on a weekly basis and continuing to ensure that our organization is strong and we’re in position to take on a trend that will increase as the market sured itself up and companies start to have employees.

[William W. Sherertz:]

So with that we’ll open it up to questions.

[Operator:]

(Operator Instructions) Your first question comes from Tobey Sommer.

[Tobey Sommer:]

I wanted to ask you a question

[William W. Sherertz:]

Oh that’s probably a better question, Tobey, for Mike Elich. He’s real close to the street.

[Michael L. Elich:]

I would say that we’re not really seeing a change in the wage rate in particular other than with the layoffs that we’ve seen and in increase in overall unemployment. In our summer staffing business we’re seeing a desire from some of our clients to drive down wage costs but with inflationary pressures that we’re dealing with that’s not as easily done as it is hoped for.

[Tobey Sommer:]

Wondering if you can comment on internal retention of your own employees and what the hiring and head count outlook may be for the next couple quarters, whether you think you’re adding bodies or just staying the same.

[William W. Sherertz:]

In general I’d say we’re staying about the same. At the manager level we don’t anticipate any turnover. We’re short one manager at one branch and obviously we can be very picky. In terms of below manager level there’s always a little bit of turn but not very much. It’s been very benign; people are not leaving.

[Tobey Sommer:]

Could you comment on what the trends have been like within California and also maybe if you have the figure in front of you, what the percentage of revenue is from California and maybe Oregon?

[James D. Miller:]

Yes, the PEO revenue is about 85% of California, of the company total and staffing is about 23% of the company total in California.

[Tobey Sommer:]

And could you comment on what the market is like, whether the new sales you’re getting, are they outside of California or is it relatively evenly proportional among California and ex-California?

[William W. Sherertz:]

I would say, Tobey, it’s pretty much across the board. Our sales people are producing and managers. California’s just a bigger place. You’ve got more offices, you’ve got more people working there, but we’re pretty tight on that. There’s no place or there are very few places that aren’t putting on new customers.

[Analyst 1:]

Do you think you’re seeing some stability in the market there or is it still becoming increasingly tough?

[William W. Sherertz:]

I don’t think we could have turned this quarter or given you the estimates if we didn’t see stability in the market. If you were to say, “You’ve got to stake your life on those estimates for next quarter,” I’d probably back away and say, “You know, I don’t know that much for sure because things happen out there when you’re dealing with recessions.” But in general we don’t see any clip deals, I haven’t seen any branches run off cliffs, I haven’t seen any segment of our business just disappear overnight, so that makes me relatively comfortable that we’re holding our own if you will and with the addition of new customers, we’re doing okay.

[Analyst 1:]

Could you give us an update on how the captive is doing and what your expectations are? I know you’ve got to wait and see what the back half of the year brings, but year-to-date kind of how are things progressing?

[William W. Sherertz:]

The really good news is the captive’s not doing anything. That’s what it was built to do; don’t do anything.

[Analyst 1:]

Two other questions and then I’ll get back in the queue. One, how have the seasonal elements of your staffing business performed so far this summer and what expectations may you have as we work our way in the next couple of months from a seasonal perspective?

[William W. Sherertz:]

Mike’s really close to that.

[Michael L. Elich:]

The outlook is that seasonality wise we will see incrementally the similar ramps that we do on an ongoing basis year-to-year. The one thing that we are seeing a little bit in the Central Valley and Washington is where the cherry harvest was cut in half due to frost, we are offsetting that with additional business that we’re doing with the bumper crop in potatoes. So it should ramp as normally scheduled.

[William W. Sherertz:]

In fact, we’re already in the middle of most of that.

[Analyst 1:]

Lastly, in terms of acquisitions you’ve executed a few in the last year or so and obviously still have a pot of cash sitting on the sidelines. The two questions are

[William W. Sherertz:]

I couldn’t be any happier with the acquisitions. They went very smoothly. The Salt Lake is just a fabulous acquisition. Denver and Phoenix both fulfilled their promises and we’ll have to replace [Sheila] who’s out of Phoenix come our year anniversary, but beyond that I’m very happy with them. As far as what’s new on the street, I’m starting to see, this must be some trend and I’d like to go back and figure out exactly what it is but all of a sudden I’m getting a lot of IT acquisitions of which I have zero interest. But it seems like whenever those IT guys come along there’s something going on out there and lately it’s been more than just a few; it’s been a lot.

[Operator:]

Our next question comes from Josh Vogel - Sidoti & Company.

[Josh Vogel:]

Bill, could you just follow up on those comments you just made about the IT acquisition opportunities? Basically when guys start popping up, what is that saying to you?

[William W. Sherertz:]

Well, there was a lot of it right around Y2K if you’ll remember. I don’t know what it says to me, whether there’s some kind of downturn coming with IT that they see or it’s a coincidence. I can’t put my finger on what it is; I just know that all of a sudden we’re getting a lot of acquisition sanity in that arena, which again I have no interest in.

[Josh Vogel:]

Now playing off your guidance which is stronger than what I was looking for, can you just discuss with us the trends you saw so far through July in the PEO and staffing businesses?

[William W. Sherertz:]

Let’s just take July and run it forward.

[Josh Vogel:]

Can you just give a little bit more insight into how much the PEO business is up or down year-over-year or sequentially versus the first three weeks of last quarter and the year ago?

[William W. Sherertz:]

I didn’t look at it that way Josh but I would assume that the staffing business is going to be up a little more than the PEO business because this is when all of our major staffing stuff comes on. So the pop you see in the third quarter’s going to be a lot more staffing than PEO even though we signed a lot of PEO customers.

[Josh Vogel:]

And now just some maintenance questions here. Do you have the cash flow from operations and cap ex for the quarter and the half?

[William W. Sherertz:]

Jim, do you have the cap ex?

[James D. Miller:]

The cap ex was fairly minimal. I don’t have an exact number in front of me but it was maybe a couple million.

[William W. Sherertz:]

What’s our big cap ex expense?

[James D. Miller:]

Well we’ve got some IT going on with the upgrade of -

[William W. Sherertz:]

[Dopson]?

[James D. Miller:]

Yes. But it’s pretty minimal.

[William W. Sherertz:]

And what was the other question Josh?

[Josh Vogel:]

Cash flow from operations? Operating cash flow?

[William W. Sherertz:]

How about if we get back to you with that?

[Josh Vogel:]

Okay, no problem. And just lastly, how much left do you have to go on the current buy-back authorization?

[William W. Sherertz:]

3 something I think.

[James D. Miller:]

Yes, we’ve got about 327,000 shares still to go and we’ve bought back year-to-date through today about 513,000 shares.

[Operator:]

Our next question comes from Timothy Brown - Roth Capital Partners LLC.

[Timothy Brown:]

I just had another question on this past quarter, the revenues and EPS both came in above the top end of your expectations. What really surprised you in Q2 that you didn’t see three months ago in terms of the strength of the business?

[William W. Sherertz:]

Well I think revenues held up a little better than we thought and our margins were a little better. There were no tricks in this quarter. In fact we were pretty conservative with it.

[Timothy Brown:]

I mean, was it staffing or PEO or I guess those?

[William W. Sherertz:]

Well staffing has been very strong and PEO it’s one of those deals now that it didn’t decline as much as we thought. We signed 103 new customers and between losing 61 and having the present customer base get smaller, the net on all of that’s going to be negative. But it’s a longer term deal so that’ll come back to us in spades.

[Timothy Brown:]

Last quarter I think you mentioned that staffing in California in particular had really fallen off a cliff. Has that stabilized at this point?

[William W. Sherertz:]

We haven’t had any of that really. It’s been pretty consistent. We would know. I don’t recall making that statement.

[Timothy Brown:]

Through Q1 and Q2. Okay, maybe I’m mistaken. Bill, just looking at your PEO customers, can you just give us what you see out there in terms of the trends in hiring? And then also in terms of the trends in credit and is credit indeed getting worse or is it still stabilizing?

[William W. Sherertz:]

Boy I don’t know. That’s a tough question on getting worse or still stabilizing. I mean it’s something that we’ve got our full-blown attention on every week and will remain so until we really see that’s sort of a non-issue, not that it’s never a non-issue but it’s got, I have a report on my desk every Monday morning and so does Mike Elich and all of us keep track of who didn’t make their payroll. And we’re very fast to act. We have to be. So it is getting worse? How many people do you blow through before you say it? It’s kind of one of those diminishing returns. If you blow through enough people, and pretty soon you say “Well it’s not as bad” because you’ve already culled out all the people that couldn’t pay you. I think it’s more along those lines than it is that it’s getting better or worse. I think it’s a tough environment.

[Timothy Brown:]

And the net hires that, current clients, is that declining still?

[William W. Sherertz:]

Yes. I think Greg told me the number was somewhere in the 5% or 6% range that our customers year-over-year are down if you just took the same customers and ran them up against themselves.

[Timothy Brown:]

On your workers’ compensation experience in the quarter, can you just give us a little more color there?

[William W. Sherertz:]

It was very good. We were conservative and took some money to IBNR there, but we haven’t seen any trends that would alarm us. I mean it’s one of those deals that you want to pay attention in a down economy because the comp may be the only last place of refuge for some people. But we haven’t seen anything at this point that would kind of raise our antenna up so to speak.

[Operator:]

Our next question comes from Ruthanne Roussel - The Robins Group.

[Ruthanne Roussel:]

At the time of the Salt Lake acquisition I remember that there was mention of an undisclosed amount that would be paid as a milestone payment if the acquisition met its targets. So now that it sounds as though the acquisition has indeed met its internal targets, should we be looking in the third quarter at some sort of visible bump on the balance sheet to reflect this milestone payment? I mean the income statement.

[William W. Sherertz:]

Yes.

[Ruthanne Roussel:]

Can you give us any way to think about the possible size of such a bump?

[James D. Miller:]

We’ve gone through some preliminary calculations and will need to obviously run those by the strategic staffing folks here in the next several weeks and conclude on that, but initially it looks like it’ll be a couple million bucks probably that will be added into the goodwill on the balance sheet. There will not be any P&L impact.

[Ruthanne Roussel:]

Also I was hoping that you might be able to speak a little bit more to the workers’ comp market in California. There were several mentions in the news about how some insurers including Berkshire Hathaway and AIG are exiting the workers’ comp market in California and at the time there was some thought that this might present further opportunity for BBSI. Could you speak to that further? Has that developed at all?

[William W. Sherertz:]

I hadn’t heard that AIG was leaving but I know Redwood did and there were a couple other PEOs that pulled out of the market, and all those things help us, yes.

[Ruthanne Roussel:]

You haven’t seen other big insurers sort of stepping in to take over the mantle as it were?

[William W. Sherertz:]

No. I think the trend will be to leave California, not to come into it.

[Ruthanne Roussel:]

Another thing that I was hoping we could get a little more coloring on, you spoke to this a little bit, would be the seasonal food processing market. How has that been holding up? It’s had some real challenges I know with the various weather-related conditions.

[William W. Sherertz:]

I’d say it’s about the same as last year. One cherry crop goes down and apple crop goes up, so it’s about the same.

[Operator:]

Our next question comes from [Gary Heppernan].

[[Gary Heppernan]:]

The most recent question asked you was about workers’ comp. There are some news items of companies leaving and you made the statement that and that’s better for us. Just for my benefit and perhaps some others on the call, could you just review again why a reduction in capital being supplied by the insurance companies and workers’ comp being reduced is good for you?

[William W. Sherertz:]

Well they did throw customers on the market and when they do that we become an alternative. It just makes the pie bigger for us particularly when it’s a PEO customer. But for companies like Redwood which was the buffet company, they cancelled all their contracts as of August 1 so those people are all out looking for workers’ comp coverage and a lot of times we’re able to provide an alternative to traditional coverage through our safety program and safety incentives. So the same way that it interacted with us back in 2001 and 2002 in which there were no comp carriers literally in the State of California, we were just inundated with business because they didn’t have any place else to go. So there’s a little bit of that. I’m not saying that it’s at that level again but any time you pull people out, those people have got to make a change. They’ve got to go somewhere.

[[Gary Heppernan]:]

Staying with the workers’ comp, you made the comment that or the comment was made in the beginning of the call that the workers’ comp expense is up versus Q207 in dollars and percentage revenues due to higher estimates of claims costs. Can you just discuss that trend a little bit? Certainly California has some negative spots in history when those numbers have gotten really out of control. Are we heading towards something like that and what does effect does a poor economy do on this?

[William W. Sherertz:]

I don’t see that it’s headed toward out of control but it’s certainly not headed down any more - rates. The plaintiff attorneys are chipping away at the costs and the legal rules under which we have to operate. I just think that it’s always just better to be a little more conservative than it is to be not so conservative when it comes to comp. And since we had the opportunity to do it, we did it. There’s no particular number that I’m standing on here or I’ve got in my pocket that says, “God, we better be doing something.” It’s just one of those things where we had an opportunity and we took it.

[[Gary Heppernan]:]

I guess just years of being in it, getting a sense for where the market’s going, and trying to be ahead of it?

[William W. Sherertz:]

Yes.

[[Gary Heppernan]:]

A previous questioner had asked you about the actual results as opposed to where your collective heads are at regarding the state of the business last quarter. It certainly seems if I may throw in here that you are not as negative about the direction of where things are going. You’re not ready to throw a party and say “Things are over” but perhaps just not as dark.

[William W. Sherertz:]

You look at the glass and you can always see it two ways. I’m very pleased with the overall performance of the people in the company. I think that’s probably what you’re hearing. I’m not particularly pleased that unemployment in California is 7.5% and we’ve got lawmakers that are playing around with each other and building bridges to nowhere, those things certainly don’t bide very well for business point of view. But certainly from a company point of view and execution point of view and talent level, I don’t think we’ve been any stronger. I think maybe that’s what makes me see the glass half full.

[[Gary Heppernan]:]

So to a certain extent you underestimated just how good your people were to handle this difficult situation?

[William W. Sherertz:]

Well until you get there you don’t ever really know. I mean you can talk about how strong you are but there’s no practice field for recessions.

[[Gary Heppernan]:]

If you can lay out some of the things that are happening better than you had hoped for in your business? I mean I’m looking at the number of 103 new customers signed and I believe you said that’s a quarterly record. Is the 103 new customers or is it only cancelling 61 or other things you could point to?

[William W. Sherertz:]

Out of the 61 there are a couple things out of our control. The AR issues are out of our control, the ones that go out of business, that’s out of our control to some extent, so when you kind of boil it down and you say “Bill, you added 103 and you really only lost 16 as a result of them wanting to just do their own thing, that’s a pretty good stat. That’s a real good stat.” Now I recognize that there’s still the 10 that went with AR and the 10 that went with non-AR which is typically worker’s comp, but I think that’s a normal level. I wouldn’t expect much different. Things change out there; people cut corners; that kind of stuff.

[[Gary Heppernan]:]

You wouldn’t expect much different in a normal economic scenario or you wouldn’t expect much different in a poor economic scenario?

[William W. Sherertz:]

In a normal market I would not expect much different except that our AR issues would be down rather substantially, which isn’t huge and you wouldn’t see as many businesses sold and closed which was 25. So out of the 61 you had 35 of them that don’t have any money. Most likely the ones that closed didn’t have any money either.

[[Gary Heppernan]:]

I believe an answer was given along these lines but I missed it. If you look at your customers on a year-over-year basis or a same-store basis, where do you see employment count at your customers or your PEO customers, the ones that have been with you for a year, on a comparative basis?

[William W. Sherertz:]

They’re down about 5% to 6%.

[Operator:]

Our next question comes from Kvane A. Wong - JMP Securities.

[Kvane A. Wong:]

I’d like you to give some color on California and what’s happening there. Forgive me if this has already been covered but the Pacific Northwest, can you address that a little bit? Last quarter one of your competitors was talking about that beginning to weaken then. How has the Pacific Northwest been as far as employment, etc. in this last quarter and what are you sort of seeing going here into July?

[William W. Sherertz:]

Are you talking about us specifically or are you talking about the market?

[Kvane A. Wong:]

About you guys specifically, what are you sort of seeing? I’m assuming the market’s having more issues. I’m sort of curious how that’s affected you.

[William W. Sherertz:]

When you look at the Northwest, we were up 2.5%. Portland itself was down 11%. So those are kind of individualized but nonetheless, that’s about what I would expect.

[Kvane A. Wong:]

Is it a thing where it’s getting worse or it’s just sort of dropped down and that’s where it is and it sort of stayed around these levels going into the third quarter so far?

[William W. Sherertz:]

So far that’s what we see, yes. There isn’t a cliff out here that we’ve run over.

[Kvane A. Wong:]

When I was looking at the numbers, it looks like the way I’m sort of backing out pricing, things have actually both for the staffing and the PEO business, it looks like the market there is fairly stable 2Q versus 1Q. I’m sort of curious as far as, are you seeing sort of pressures on pricing on the either of those businesses or are things actually sort of holding up well? I’m not sure if it’s a matter of people want lower prices and you’re just saying no or you’re just not seeing pricing pressure? I’m curious about what’s happening on pricing there?

[William W. Sherertz:]

Really we have not seen it. Price is always an issue but we haven’t seen people turning the screw down to the last notch and I don’t know that we’d participate if they did. So it’s been a mantra of “We’ll pay for good people” because pricing is only relative to what people put out. And so whether you’re paying somebody $10 an hour or $12 will incrementally be whether they produce a dollar or more on the output whether you’d be satisfied with that. But no we have not seen a lot of pricing pressure.

[Kvane A. Wong:]

Shifting over to California, of the last couple of quarters there has been some more scrutiny in California on PEOs due to a particular bad player. I was sort of curious what’s sort of happening on that front? Has that sort of mellowed out or what’s happening as far as PEO scrutiny in California?

[William W. Sherertz:]

You might be talking about the Contractors Board?

[Kvane A. Wong:]

The guy that’s related to an Indian Reservation as I recall.

[William W. Sherertz:]

Oh, that’s been going on forever. They’re after those guys. I mean they’ve been after those guys for as long as I can remember, the whole Indian Reservation PEO deal. And unfortunately, every once in a while we get drug into it just because we’re a PEO. They had a chance to put them out of business and they didn’t do it, so they keep doing what they keep doing. I don’t know what else to say Kvane.

[Kvane A. Wong:]

Has the risk of them making a broader sort of legislation in order to try to control them sort of mellowed?

[William W. Sherertz:]

Yes. I haven’t seen anything. They took on the Contractors Board and the Contractors Board handed them their heads. But that’s the last I heard about what’s going on down there.

[Operator:]

Our next question comes from Tobey Sommer - SunTrust Robinson Humphrey.

[Tobey Sommer:]

My question’s been answered. Thank you.

[Operator:]

At this time there are no further questions.

[William W. Sherertz:]

Thank you very much. I made it through the entire call. That’s a good sign. And we’ll see you in third quarter and hopefully the results in third quarter will be better than we expect. We need a little help from the economy I think and we may not. The good news is we may not need that much help from the economy. In any case, we’ll see you all next quarter. Thank you.