Barrett Business Services, Inc.
Q4 2012 Earnings Call Transcript

Published: 13 Feb 2013

[Operator:]

Good morning everyone and thank you for participating in today’s conference call to discuss BSSI’s Financial Results for the Fourth Quarter and Full Year Ended December 31, 2012. Joining us today are BSSI’s President and CEO, Mr. Michael Elich, and the company’s CFO, Mr. Jim Miller. Following their remarks, we will open the call up for your questions. Before we go further, I would like to take a moment to read the company’s Safe Harbor statement within the meaning of the Private Securities Litigation Reform Act of 1995 that provides important cautions regarding forward-looking statements. The company’s 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 the company’s recent earnings release and to the company’s 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. I would like to remind everyone that this call will be available for replay through March 13, 2013 starting at 3

[Mike Elich:]

Good morning. Overall, I’m very, very pleased with a very strong quarter and as well a very strong 2012. On many levels, we have made significant progress planned in the year and 2012 truly represents the turning point in the maturing process both organizationally and for our product offering. In the quarter, we added a 171 new PEO client; we lost 28. Within that two were left due to AR issues, 10 were cancelled for non-AR issues typically risk and/or non-tier development with the client base, 7 businesses sold, 2 left on their own due to price, 5 took payroll in-house and 2 left to work with the competitor. The net gain of a 143 new clients in the quarter represents a 74% year-over-year growth in client build. We saw some strength in client hiring, but for the most part plus 35% of clients added new headcount, 36% reduced headcount, 29% were unchanged, 53% of client increased hour while 42% reduced hours work. In comparison in 3Q, we saw a 55% of client increasing hours. Now, you need to be careful with the fourth quarter data just because given the three holidays that we have it can get a little bit skewed, but and then primarily that’s because of Thanksgiving, you have half weeks, Christmas you have half weeks, around New Year you have half weeks. So its changes the behavior patterns of the individual clients and how they employ and hire and lay people off. In the pipeline, we continue to see growth coming from a broad-based of branch operations and industry sectors. We still have no client that is more than 1% of our total client base. We feel that the continued strong momentum in our pipeline growth is attributed to our continued maturing of our brand and organizational culture reporting existing clients. Growth is also supported by a 95% retention rate of our existing clients, which if without a slippage, it makes easier for us to build on the existing base that we have. Regionally, we still continue to see California continuing to grow double-digit across the board, Northwest and Mountain States continue to see positive momentum, and on the East Coast, we saw strong growth in the quarter and in the year despite an effective Hurricane Sandy back in November. In the year 2012, while we saw a 36% growth, we also saw a significant maturing in the organizational structure, while maintaining alignment with the culture of the organization. We opened two new branches that are doing very well. We introduced the branch within branch method to our infrastructure. We made significant progress in refining how we looked at workers compensation. We completed the final conversion steps to a point of implementing our HRP platform, which is our new payroll platform and we maintained focus on our organizational alignment and development. Within 2013, our focus lean towards - our efforts to continue mature management systems and recognize outliers and client data, supporting the development of predictive analytics. By doing this we can recognize quicker what clients we should be doing, where we need attention and where we shouldn’t be working with the client. We will continue to mature the branch within branch structure and business unit team, as they support client allowing for increased branch capacity and the quality of client support. And we will continue to roll out our HRP to be completed in 2013, which will offer additional scalability of operation systems, more client flexibility, a more robust platform of data structure and expanded interface capable of supporting client data access over time. We can also continue to work on areas that mature the alignment of our brand with branch operations, which support continued maturity in our referral networks and we will continue to focus on continued internal organizational development. Overall, we continue to maintain a strong pipeline for our new business while retaining a healthy client base. We remain ahead of plan in aligning the organization to support our growth curve and we will continue to make necessary investments into infrastructure to stay ahead of the growth curve. And we will continue to work internally to support growth while gaining efficiencies in branch operations within corporate support function. Our efforts are geared towards strengthening and maturing the organizational product offering. With that I will open it up to questions.

[Operator:]

Thank you, sir. Ladies and gentlemen we will now begin the question-and-answer session. (Operator Instructions) Our first question is from the line of Josh Vogel with Sidoti & Company. Please go ahead.

[Josh Vogel:]

I was curious, what percent of your clients have over 50 employees? And I am basically trying to get at, are you on the hook to provide healthcare insurance and if so can you pass off that along to the client?

[Mike Elich:]

As it relates to health insurance, we have never adjoined ourselves in any way related through health insurance. So, for our clients what we have always done is operated on a pass through basis. So any work that we do related to health benefits for clients that already provide health insurance is purely administrative. And it becomes a direct cost to the client while we support the process of remitting premiums back to carriers, with the now eminent implementation of ObamaCare, we will continue to maintain that role of being the facilitator and/or TPAs that would be for remitting information and/or cost back to our client, but we take no risk in that area. Related to our number of clients over 50, I really don’t have a clean data on that, I will probably get back to you. But for the most part our average base of client is right around 30 employees. We do have many though -- it could be as many as 30% over 50 employees. But in the case where, they will be impacted by ObamaCare, many of them already provide benefit. The real question will be how many of them will opt out of the existing benefits that they are paying for to opt for a program that may be less expensive compared to what they are already spending. For those clients that are not providing benefits, we are having conversations with different companies to help them understand or help them build a plan for how they will implement the requirements starting in 2014.

[Josh Vogel:]

Okay, that’s helpful. Thank you. And switching gears a little bit, how many branches did you end the year with?

[Mike Elich:]

We have 50.

[Josh Vogel:]

50, okay. And you said you open two during the year?

[Mike Elich:]

Correct. Yeah, Monterey and in Valencia.

[Josh Vogel:]

Okay. And I understand you’re going to try to leverage those branches even more so with the branch within a branch but do you have, do you think when you could sustain 30 plus percent PEO growth for the entire year without a significant investment in additional build outs?

[Mike Elich:]

Yeah, if the rate of growth slides a little bit, it won’t have anything to do with our footprint. So, I think the branch within branch model is probably going to support continued growth of the client. I think that one of the things that we’re always cautious about is whoever we’re working with that we shouldn’t be working with. And we have the latitude to be able to push our businesses that we shouldn’t be working with. And so taking to a percent growth based on infrastructure build is hard for us to get to. What I would say is that in the year, we added 14 business unit, so that’s 14 branch within branches setup in some of our bigger branches and that is working very well and it has increased our capacity and we have a model built now where we can scale that pretty well. So I think when you look at say the Inland Empire, California, we have the ability now to scale that market but we’re going to do it smartly. But I think the biggest thing that will support our continued growth though is that we’re seeing all branches contributing now. If you went back couple of years ago, we would see 80% of business coming from 20% of business, the old 80/20 rule, where when we looked at just at the end of third quarter, we saw that out of the 50 branches we had that 40 of them had were over 20% growth, and that’s what’s really is going to make the biggest difference on a go forward basis. And we have many emerging branches and markets that haven’t reached or even come close to reaching maturity.

[Josh Vogel:]

Can we get an update on the workers comp reform and just your ongoing dialog with clients, and if you have any idea that will potentially impact the SG&A cost this year?

[Mike Elich:]

As an SG&A factor, we are putting extra resources into I guess the realignment or working on the solution for towards SB 863. SB 863 says that effective 1/1/2015, we will lose our license to be self-insured. With that we’re working pretty close with a couple lobbying firms to try to understand where we may be able to gain exception if possible. The one thing that happened in the overall process is that the legislation was not geared towards us; we were really pulled into it by adverse selection. But one of the things that it has done is it allows us to step back and look at more options for ourselves. So, we’re pursuing roughly four different options overall for resolving the resource that the legislative area that could impact us. But, cost wise, we may spend may or maybe another $0.5 million, but it won’t probably have much of a material effect on earnings.

[Josh Vogel:]

Okay. And just a housekeeping one and I’ll jump back in the queue. What was the total cash available to shareholders at the end of the year?

[Jim Miller:]

Cash available, so Josh, are you talking about free cash, are you talking about total cash?

[Josh Vogel:]

Well, if you back out let’s say workers’ comp claims or just cash you’re marked towards that what cash would be available for potential buy backs or acquisitions?

[Jim Miller:]

Yeah, it’s essentially free cash.

[Josh Vogel:]

Yeah.

[Jim Miller:]

We probably only had several millions and that was probably due to float, and that’s why you see us into our credit line to the tune of about $4.5 million.

[Josh Vogel:]

Okay. What’s your plan for paying down the debt balance?

[Jim Miller:]

So, as we look at into 2013 probably the peak draw on the line will occur towards the end of April. That’s when the first quarter payroll taxes that we are accruing during the quarter will be due. From that point forward, we will continue to pay down the line, and we believe that the last half of the year we will remain out of line the majority of the time.

[Josh Vogel:]

Okay. Got it.

[Jim Miller:]

We are projecting to build cash sufficient to keep us out of the line for probably the majority of the year following that April 30 peak.

[Operator:]

(Operator Instructions). Our next question is from the line of Jeff Martin with ROTH Capital Partners. Please go ahead.

[Jeff Martin:]

Mike, I was curious if you could characterize how you think the economy is trending as a whole Barrett’s typical had over the history of its last couple of (years). That was pretty good view in terms of leading indicator. Wondering if you’re seeing any noticeable changes out there, the internal metrics of your client base don’t say there is a whole lot going on, but just seeing if you’re noticing anything out there?

[Mike Elich:]

It’s interesting. In December, you could really see as we are approaching fiscal cliff where customers were positioning. I was actually surprised that more customers, we only had seven. I thought we would see more and we didn’t. As far as hiring goes, we were in -- I have been actually out of the field a little bit visiting with clients during the last few weeks. And one of the things that I’m hearing is that, if they could find people they will increase. So, that if you look at hours worked it remains stable. We did see that, I call it the January hangover because you go through the holidays and everybody just kind of gets off balance between are we hiring, are we firing, are we laying people off, often we have to bring people back where maybe a softer economy in January, it’s very much a seasonal move. It kind of looked soft and then in the last two weeks, it kind of come around. But what we are hearing from, what I was hearing, and what we were hearing on the Street is this, for the most part companies are solid and they are making money. We are not seeing any effect within AR that’s typically an area where we will see a little bit of softness as companies are having trouble getting paid, we will start to get panged here and there. And that remains very solid for us. Overall, again, I don’t see characteristics of a double dip procession of any sort. I do think that there is pressure and confusion in the market relative to how companies are going to deal with ObamaCare. Last night they announced that they are going to increase minimum wage, really won’t have an effect on us, but it will bring the overall bar up for somewhat the more of the unemployable. So if your average wage rate today is $12 an hour, it’s going to squeeze out a little bit, over time market competition will drive up the overall base of what you have to pay people to get the right talent that are you looking for. But overall, I think the economy seems to be pretty strong. It will be interesting to get another four weeks behind this as we really get into 2013 and people can know what’s going to happen and maybe get through even the end of March where we have just a little bit of fiscal issues, because many of our customers work to support contracts that are governmental. So for the most part, the word on the Street is, that if I could find good people, I could add and build my business.

[Jeff Martin:]

That’s great, Mike. In terms of the election impact, if you had to take stands with the uncertainty around the election helped or hurt you in terms of the client additions and client retention, how would you argue that?

[Mike Elich:]

I have never seen a stronger December, typically if you look at, I think our net build in 2011 was 81 clients in the fourth quarter. Typically companies don’t make forward-looking decisions in December and then in January we see a strong build and, so we saw very strong build in the fourth quarter be at 171 clients, net 143, that’s a huge jump for us. So when I saw that I was a little concerned okay did more business get pushed back in December versus what we would typically see in January, but then we look at January numbers it was in line and up from previous years as well. So, no, we are not seeing, we are still seeing companies making forward-looking decision.

[Jeff Martin:]

Okay. And then how would you characterize the pricing environment relative to the competition particularly in California today and are you comparatively priced or you’re under priced relative to competition or you think you are premium priced.

[Mike Elich:]

I think our premium is in line. I think that from last year, we went through and really looked at where we needed to increase. We looked at where we could increase. And then we were very careful to deny and push ourselves into adverse selection where clients were leaving us because it just didn’t make sense anymore. But, we are not seeing competitive pricing from competition. But and I always say that because I don’t really know who would compete on a one-to-one basis with us even from a product offering when you look at what we bring. But for the most part we have not seen - we have not pushed out customers buy through that price increase, they don’t like it, they are not happy with it. But for the most part they recognize is that we have to make money too and if we can move forward from this point and create some stability in their cost structure, I think we’re going to be fine.

[Jeff Martin:]

Okay, great. And then, do you worry about your larger clients having an issue with ObamaCare to the point where they just look to cut cost because that happened with one of your competitors, they lost over 3000 client employees in their mid-market just curious, if you have concerns about your larger clients?

[Mike Elich:]

I think because we are feet on the ground with some, we are working with our clients and we are trying to find solution for them, but in many cases our customer - think about on a PEO basis our average wage rate is $21 an hour, so $21 an hour a lot of times those employees are garnering or receiving some kind of benefit already. So but there is a stress put on those companies over 50 to try to figure out what it’s going to mean for them first. And then two, how they will adapt and for their benefit they are going to, whether they do business with us or not they are going to still be in that same boat. But, I think what we are doing is trying to help them see how maybe more effectively leverage their workforce to make that investments that they have to make in health benefit become accretive in a way that they can gain efficiencies by having the right workforce on board. I think it’s probably long-term it’s going to make companies look harder at who they are hiring and the liability and associated cost of being an employer and they are going to be more particular about who they are hiring.

[Jeff Martin:]

Right, thanks. And then final question I have is, surrounding the tough maturity insurance law that’s going into effect, do you have any visibility in terms of timing for resolution for Barrett and if so, when do you think that is?

[Mike Elich:]

We’re working on it and we’ve made a lot of progress in the last four months. I would say it’s just the continued work in process, I wouldn’t probably suspect that we’re going to have any kind of answer before the end of third quarter. But, I know that we’re working down a path and it’s kind of again boxing match sometimes you’re on rope, sometimes you’re punching back a little bit. And I think that at this point, we’re trying to go back and forth with it, so it’s a 50-50 deal. But, right now, we have many options, and so we’re pursuing like I said four pass, three of them are very strong and we’ll have a solution it’s just a matter of when it will peak and then how we’ll have to adapt to it.

[Jeff Martin:]

Okay, thanks great. Thanks for the insight, Mike.

[Mike Elich:]

Thank you. Operator

[Mike Elich:]

You know 2012 was a very interesting year for us. We grew up a lot, we’ve matured eventually. I appreciate everybody out there that continued to support us and trust that we know what we’re doing. We won’t make mistakes in time. And we will stumble here and there but for the most part I think, what’s the internal work we’re doing and what we’re building as an organization. It’s setting us up for a long run and I would bet against this because I think that we’re showing that we can survive an adversity. So I appreciate everybody being on the call. I appreciate taking time to understand our story and I look forward to seeing you next quarter.

[Operator:]

Ladies and gentlemen, this concludes BBSI’s fourth quarter 2012 earnings conference call. Thank you for your participation. You may now disconnect.