Mike Elich - President and CEO Gary Kramer - CFO.

Rich Murphy - Cross River Capital Management Matt Dhane - Tieton Capital Management Craig Pieringer - Wells Capital Management.

Good morning and afternoon everyone and thank you for participating in today's conference call to discuss BBSI's Financial Results for the Fourth Quarter and Full Year Ended December 31, 2016. Joining us today are BBSI's President and CEO, Mr. Michael Elich; and Company's CFO, Mr. Gary Kramer.

Following their remarks, we'll open up the call to your questions. Before we go further, please take note of the company's Safe Harbor statement within the meaning of the Private Securities Litigation Reform Act of 1995. The statement provides important cautions regarding forward-looking statements.

The company remarks during today's conference call will include forward-looking statements. These statements along with other information presented that does not reflect 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 April 08, 2017, starting at 3 P.M. Eastern Time this afternoon. A webcast replay will also be available via the link provided in today's press release, as well as available on the company's website at www.barrettbusiness.com.

Now, I would like to turn the call over to the Chief Financial Officer of BBSI, Mr. Gary Kramer. Please go ahead sir..

Thank you, Ebony. Good morning and afternoon everyone and thank you for joining our call. The operations of the company were strong in the fourth quarter and we believe our results represent a solid foundation on which to build. Net revenue $221.1 million increased 14% from Q4 '15. Gross revenue of $1.3 billion grew 15% over the same period.

Diluted earnings per share were $1.08 compared to $1.55 in Q4 '15 and Q4 '16 results included nonrecurring expenses of $0.16 per share for outside investigation and legal proceedings. The total cost of nonrecurring expenses for the year was $8.5 million or $0.69 per share versus the prior estimate of $8.2 million.

this $300,000 increase is related to the acceleration of legal expenses incurred. Net income in the fourth quarter of 2015 included a $0.32 per share diluted benefit for change in estimate of prior year's Workers Compensation liabilities. Also in the quarter, PEO gross revenue increased 15% to $1.2 billion compared to the fourth quarter last year.

Contributing to this growth were 185 net new PEO client additions and growth in same customer sales of 3.3%. The growth in same customer sales was met by some less than predictable and uncontrollable events in the quarter. First, we saw a net hiring slowdown in the fourth quarter due to what we believe was the uncertainty in the political environment.

Second, the labor market has tightened to levels where our employers cannot easily hire to fulfil their need. Finally, severe weather in many of our markets had a direct effect on hours worked in certain industries, with some clients losing 7 to 11 work days in the quarter.

The severe weather carried into the new year and will influence the full-year revenue guidance for 2017, which I will address shortly. Staffing revenue in the fourth quarter increased 11% to $44.9 million primarily due to an increase in new business.

As mentioned last quarter, we tampered growth in this business due to a continued labor shortage and chose not to pursue client relationships that do not align with our own values. We believe that this decision was sound and now believe that we will see sequential growth for the foreseeable future.

Gross margin in the fourth quarter was $43.3 million or 19.6% of total net revenues compared to $41.2 million or 21.2% in the prior-year quarter. Since we find compassion to gross revenue more useful in managing our operation, I'll break down the ratios accordingly.

Total gross margin in Q4 '16 was 345 basis points compared to 378 basis points in the prior-year quarter. Payroll as a percentage of gross revenue increased 21 basis points from the year ago quarter.

This is related to an increase in PEO business mix and we have and will continue to expand outside of California and this will have an accretive effect on payroll as a percentage of gross revenue.

Workers' Compensation expense as a percentage of gross revenue increased due to an unfavorable change in the estimate of prior-year liability of $1.3 million.

This was slightly offset by an improvement in payroll tax as a percentage of gross revenue, which was attributable to the accretion of the federal unemployment tax credit from prior wages and as payroll tax cash continue to lag with wage inflation.

Our Workers' Compensation claim frequencies continue to improve as we experience a decline in the relative frequency of claims reported. Our total open claims of 4Q'16 grew 11% from open claims of 4Q'15, while gross revenue grew 17% for the same period.

In the quarter, we saw trailing 12-month relative frequency of claims as a percentage of payroll decrease 14% compared to the fourth quarter of 2015 and a decrease of 17% compared to the fourth quarter of 2014. Claim severity continues to trend normally. All-in, the Workers' Compensation programming is performing as expected.

This is a continued result of the way our branch is managed their client retention and the controls and processes that we have in place to manage and mitigate risk. SG&A in the fourth quarter was $32.5 million or 2.6% of gross revenues compared to $26.3 million or 2.4% in the prior-year quarter.

The increase as a percentage of revenue was primarily due to nonrecurring expenses of $1.8 million related to accounting legal cost associated with outside investigation and legal proceedings related to security law issues.

The provision for income taxes in the fourth quarter was $1.8 million, which represented the annual tax rate of approximately 26.5% down from 27.5% in the prior-year. The rate of decrease was primarily due to more favorable allocation of state income and work opportunity credits as well as lower pretax income.

As announced during our last call, we fully paid off our note with Wells Fargo in the third quarter and we continue to be debt-free except for the mortgage on the corporate headquarters in Vancouver Washington. We have no borrowings under our line of credit with Wells Fargo as of 12/31/16.

In December, we increased the credit limit under the agreement by $11 million to $25 million and reduced the number of covenant. At December 31, we had cash, cash equivalent investments and restricted securities totaling $358.3 million compared to $305.3 million at December 31, 2015.

As I mentioned in the third quarter call, the Chubb program has matured and is stabilizing and the net funding level will decrease going forward. This will in turn increase our unrestricted cash position over time. The unrestricted cash position in the quarter increased by $24 million to $50.8 million at Q4 '16.

On December 20, Vincent Price was appointed to our Board of Directors effective January 1, 2017 and now subsequently appointed to be a member of the new Risk Committee. The Risk Committee's responsibility will include oversight of over Worker's Compensation insurance, all other insurance, investment and information technology.

This appointment and these actions are all part of our short and long term remediation plan and we are pleased with our progress thus far. In fact, we will be releasing our 10-K later today, which puts us ahead of the filing deadline. In the 10-K, please take notice that we remediated most of the previously identified control deficiencies.

A few other items to call to your attention. On February 09, we increased our dividend by 14% to $0.25 a share. This increase supports our belief in the longevity and sustainability of our organization's fundamentals. On February 23, a judge entered an order granting final approval regarding the shareholder class action.

We're pleased to say that this matter is now fully concluded. In summary, our pipeline remains strong and we continue to build our base of net new clients.

While our income in the fourth quarter was impacted by a slowdown in same customer sales, greater than expected nonrecurring expenses and an adverse change in estimate for prior year's Workers Compensation liability will anticipate that the continued growth in the economy, coupled with our ongoing efforts to deepen our referral relationship and the ability of our teams to remain focused on delivering value to our client will result in another strong year for the company.

As introduced in 2015, in order to provide our investors with a more appropriate forward-looking view of our business, we initiated a rolling 12-month outlook for gross revenues, which we will update on a quarterly basis. The severe weather that I spoke to earlier carried into 2011 and will have a slight impact on Q1 revenues.

Taking this into consideration, we expect gross revenues for the next rolling 12-month period to increase approximately 15%. For the full year 2017, we are introducing diluted earnings per share expectation of $3.65, a 43% increase compared to $2.55 in 2016.

This includes nonrecurring legal and accounting expenses of $1.6 million or $0.13 per diluted share, as well as the return to a more normalized effective tax rate of 33.5% compared to 26.5% in 2016.

Now I would like to turn the call over to the President and CEO of BBSI, Mike Elich, who will comment further on the recently completed fourth quarter as well as our operational outlook for the remainder of the year. Mike..

Hello and thank you for taking time to be on the call. Before I move into discussions about the quarter, I would like to comment on 2016.

2016 was a year met with challenges, but also a year in which we accomplished a great deal, including adding a new CFO, adding two new Board members and successfully navigating through turmoil, while continuing to grow gross revenues by 17%, adding 810 net new clients and maintaining better than 90% retention.

As we shift focus to 2017 and beyond, we continue to strengthen and mature our bench of leadership throughout the organization.

We also continue to expand our bench of referral channels by operationalizing methods to develop and strengthen our relationships and we continue to take broader approaches to how we evolve our effects on bringing value to small business.

Moving forward, in the quarter -- in the fourth quarter of 2016, we saw progress through growth and maturing of our brand in all markets. The strength of our organizational bench and culture of BBSI as evidenced by my experience with our teams in the field and consistency in tone and messaging across the organization and in all markets.

In the quarter, we added 311 new PEO clients. We experienced attrition of 126 clients, eight were due to accounts receivable issues, nine were due to lack of tier progression, 10 were canceled due to risk profile, 29 businesses sold or closed any 70 clients left to pricing, to competition or companies that have moved away from the outsourcing model.

This represents an approximate net build in our quarter of 185 new clients. Same customer sales increased 3.3% in the quarter as Gary mentioned.

We attribute the softness in this measure to be related to the election environment in October and early November, a tight labor market by which -- a tight labor market and severe weather in nearly every market -- every region we serve. We're seeing some spillover into the first quarter. We'll continue to monitor trends closely.

While same customer sales were softer than expected, we continue to experience strong future pipeline and client adds. Related to pipeline and regional growth, we continue to see consistent activity in pipeline and new client add as a result of focused efforts with our referral channel.

As we've focused attention on the drivers supporting growth and retention, we continue to see broader contributions to client growth from all regions as a result of these efforts. Also, we see more consistent growth across all markets and in developing branches.

We're paying close attention to smaller sized clients as less matured branches tend to maintain a smaller average client size. While we don't expect a shift in the aggregate client size, we'll monitor the growth of our new and developing branches closely.

Related to structure and organizational build, we continue to build business units as needed to support current and future organizational and market demand. Currently, we have 95 business teams in house and 57 physical branches. We currently have 54 business units with an additional 6 inbuild, which will bring us to a total of 60 by the end of 2017.

We now have 15 branches that are at or near $100 million in gross revenue, a measure we use to indicate a branch's ability to increase leverage and tipping point in our brand in these markets. We also expect to add five new branches in 2017 and with tuck ins in the Western part of the United States, while continuing to expand on the East Coast.

We continue to make progress related to systems -- sorry, related to systems, we continue to invest in systems that lead to the efficiencies or teams -- of our teams and integrity of our product. We also continue to make progress in systems that allow us to better -- have their better visibility and predictability in the business.

Related to Workers' Comp and the underwriting of risk, we continue to make progress in bringing predictability to Workers Compensation expense.

Through our approach to running the company and helping business owners to run better companies, we are seeing systemic improvement related to stronger cultural alignment in all disciplines during pipeline phase, which continues through the client relationship.

Emphasis on continuous improvement and on root cause analysis as we interface with our client and focus on frequency as a controllable factor in claims expense. Moving forward, we will continue to monitor trends, to maintain a proactive approach -- position related to Workers Compensation.

We expect this to continue to result in greater predictability within the model. Looking forward to 2017, having spent the past two months in the field, I am impressed with the continued growth of our leadership, the progress our teams are making and the new tech we are having on our client base.

The result -- the real proof of the organizational progress is feedback I've received from our clients and referrals partners in recent months as I've spent time in the field. It is a good representation of our current and future product relevance and stretch -- and strength and stretch to look at the next five years.

As I look at the organization today, I've looked forward with confidence that our efforts are beginning to have the intended effect. We have put resources into the organization.

We're building -- with the emphasis on bringing predictability to the model, we have operationalized our approach to developing our leadership bench and have roughly 18 months of runway. We have brought a consistent approach to channel development resulting in predictable pipelines and new client build.

We have focused on systemic reduction of risk in our client business resulting in continued decrease in relative frequency and an increase in predictability and we have defined a variety of methods to stretch our teams with the focus on continued product relevance.

As I reflect on my six years as CEO, I have shared with my teams after several years of reengineering every piece of the business, we're finally becoming the company I've always wanted to lead. This said, we have also learned that there is no there and that it is our collective job to ensure all future growth is built on a foundation of bedrock.

With that, I'll turn it over to questions..

Thank you. [Operator instructions] And we'll take our first question from Rich Murphy with Cross River. Please go ahead..

Yeah, how are you doing guys. I had a question on the guidance. Just going back to history, you did about, you did $3.48 in earnings in 2015. You did $3.61 and the question -- in the third quarter you said you took a $1.06 charge, is that -- have you retracted taking some back from that or are you talking about $0.69 now.

Where is the difference in that charge first of all before I go further?.

Hey Rich. It's Gary Kramer.

Can you ask that question again? I didn't follow it? So, $0.69 just for the full year?.

Yes, so in the quarter -- in the third quarter you said you had a staffing $0.06 charge, plus $0.30 for litigation for the year, that was your guidance.

So, what am I missing between the $1.06 and the number you just announced?.

So, the number we gave for the $8.6 million, that $6.9 million diluted per share and that does not include the shareholder settlement. That's for nonrecurring legal and accounting..

Okay. So, when I look at normalized earnings from the $2.55, do I add back a $1.06 or I just add back the $8.6 the number you have there..

The reason we didn't give the -- we didn't include the shareholder settlement in this quarter was because in the third quarter we also mentioned that we had a one-time federal unemployment tax refund and some of those two just about equal out.

So, then you're left with the nonrecurring legal and accounting, which is the $8.6 or the $0.69 per diluted share..

All right. Got it. Okay. So, then I add back the $0.59 to the $2.55 and that will get me to what's like a normalized run rate is..

Yes..

All right. So, the $3.23, $3.24 and then the $3.65 is really $3.78 if you add back the 13% that's in the guidance..

Yes. Exactly and then when you're going to do your role, one of the big factors is picking up 700 basis points in income taxes and that adds to about, that adds to about $0.39 drain on the 2017 outlook. So, the effective tax rate is going up to 33.5% which is a 700-basis point change and that cost about $0.40 per diluted share..

Okay.

And that effective tax rate is going up, is that kind of an estimate or is that you're pretty confident in?.

They're all in estimate, but that's the function of the increase in the effective tax rate is a function of as we earn more money, it dilutes the credit we get for the work opportunity tax credit..

Okay.

And so just to kind of spin this in different angles and the number of clients we've grown and you guys have done a great job of adding clients from 3,000 to 4,400 or neighborhood, how I think about marrying the additional clients or customers I should say into their earnings equation? Because that doesn’t seen over those three years, the earnings growth has kept up with the client additions.

Is there some type of leverage, like the SG&A leverage that should kick in at some point in this model and again it's been hard because there has been so many moving parts, but I trying to get my hands around what -- how to view this business model as we add clients?.

When we do our modeling, we do it at the book, we don't do it at the account and when we give the guidance for the 16%, that includes the 810 net new clients that we added in 2016. So, it includes that base plus our future ads, which gets us to that 16% revenue growth guidance..

I would say also, as it relates to the business, we've employed a lot of resources in addition to the nonrecurring stuff back into the business. Over the last couple years, I think that we've somewhat made a turn there.

I think that one indicator is the number of branches that we're getting to that 100 million mark, but interesting enough getting from above that 60 million to 100 million mark, you pour more SG&A into branches because we're now building business units.

But once you get your critical math of two to three business units built in a branch, you can probably get to 200 million in a branch without adding a lot of capacity. So, you're frontloading quite a bit. So even today as we watch SG&A grow both at corporate level and in the field level, it's really spearheaded at staying in front of growth.

And today I think we're somewhat frontloaded there, but one of the things I worry about is that we will have slippage there and lose runway, but as for the growth rate that we see today, we have probably 18 months to maybe even two years of runway in front of us, if we didn't do anything to develop.

But also, know it takes us probably a year to 18 months to build and mature teams but the critical math of the number of business unit teams that we have built now and even with mature branches versus [idling] branches is starting to outpace.

So even future build and future build of new branches will be less -- it will be less of a headwind to earnings as it relates to our SG&A in the coming two or three years..

Okay. Thank you..

Thanks Rich..

And we'll take our next question from Matt Dhane with Tieton Capital Management. Please go ahead..

Thank you. That's Tieton Capital Management. A couple of questions for you, the first one, I wanted to talk about the weather impacting Q1 versus Q4. Obviously, I would expect to probably have a pretty good sense of how that's going to play out in Q1 here.

Is it worse in the first quarter compared to the fourth quarter the weather impact that you've seen to date or how would you classify that?.

I would probably say that what we saw in December, the weather impact in December was more towards the trail end of September or December. When we look at California, we looked at the East Coast in particular in December, the East Coast was hit in December.

California was hit in December somewhat but the weather really got worse in December and January and even spilled into February.

The Northwest that really hadn’t been affected in the fourth quarter was probably more affected in January and into February there was quite a bit of snow and one thing that happened in the Northwest was when you get show, it shuts everything down.

So, if you're measuring same-store sales off the basis of hours worked, you just have fewer hours worked when the job sites are either shut down or just business shuts down for a period of time. So, we're seeing that have the impact for January and February and we're seeing some improvement. We still are looking at the labor shortage.

When we went out and did an actual survey of our clients and dug pretty deep on this, one of the things that they talk about was jobs being pushed off not necessarily cancelled, which is a positive. They're very optimistic, small business owners right now are very optimistic about, for the most part about where their business is and where it's going.

But the challenge that they're facing is there is labor shortage out there and the thing about where our book of business lands today, is that when we're paying people $10 an hour, those clients would add $10 an hour or $10 an hour person because there wasn't necessarily a challenge, there not a lot of risk there, but when you get your average wage rate to about $25 an hour now, there is more.

So, they're being more particular and do their hiring, which is creating a little bit of that labor shortage. So, you have a confluence of those two variables that are working into the first quarter, but the most noticeable one at this point would be the weather where you have 11 days worked in January.

I think there was seven days that were, there were seven out of 11 days that were just not there and that, if you look at that as a percentage of the whole month, it takes a pretty good swipe out of what would help you in the area of same-store sales..

Okay. Okay. The other thing I wanted to ask about is California I believe increased its wage, Washington State did as well.

Can you walk us through the impacts benefit from the middle wage increase that went into effect and I guess there a lot of the states that have laid out paths for additional minimum wage increases? How should we think about that and the impact on the business?.

Well I look at it two ways. One from our standpoint, our average employee on the PEO side is making $25 an hour. So, if you look at the effect of somebody, how much wage inflation will you use see for $25 now and above, that's the question that we don't necessarily now have an answer to.

Where you're paying below that minimum wage, it's going to bring that up to 15 over time, but what it's really going to do is it’s going to take the person that was making $15 an hour and you're going to see quite a bit of, I think you're going to see wage inflation of the $15 an hour person that goes to $20 an hour in that same equation.

For us as it relates to same-store sales, you're going to have wage inflation which will actually increase in the aggregate base. It's hard to measure how much that's going to be because you're stratifying your overall labor pool and going how much of it's going to be affected by it.

But I worry a little bit that the same increase might be offset by the lack of where companies just look and then say I am not going to hire anybody or my model will sustain the increase.

So, it should be up in that neutral but I worry more about the small business owners that we're supporting that will be faced with inflation and they're going to have to pass those cost on..

Great. Thanks Mike..

Sure..

[Operator instructions] And we'll take our next question from Craig Pieringer with Wells Capital Management. Please go ahead..

Good morning. You mentioned something about February 23 some final class action just missed, can you summarize for me the remaining legal overhang that you confront? At one point, there was an SEC investigation. Someone was on maternity leave. I am not even sure where that stands anymore.

Can you just summarize your current challenges legal wise?.

Yes, so what I referenced in my discussion was the shareholder settlement class action that has been settled and is fully concluded. What we still have out there is the SEC and DOJ investigations that are still pending. We're cooperating fully with those investigations and they're just going to take as long as they take..

So, the $0.13 that you speak about continuing into 2017, is that going to be done with or is that just an estimate and it could go higher and/or longer?.

That's an estimate for the legal that we -- the legal regarding those investigations and it's an estimate in that estimate it doesn’t include any settlement or anything like that. It's just the estimate for what the legal would be. There may not be a settlement. There may not be action. We still don't know yet..

So, there is still an overhang..

Yes, the only thing we know for certain is that we need to defend the company and that's the legal cost to defend the company..

Okay. And moving on, so there is no Wall Street coverage at present.

Are you doing anything on that front to bring some of the analysts back to BBSI?.

We've continued to maintain relationships with and communication with those that were covering us and the analysis do their job. It's their choice to come back, but we continue to entertain all calls that we have and look towards expanding coverage. We've had decent conversations in the last couple months that I think in our K filed is a good first.

Bringing on Gary Kramer, a lot of credit here, he and his team have done a lot of heavy lifting in the last six months and to switch auditors and go through everything that we've been through and to be able to get our K filed ahead of schedule and bring on that new auditor and be able to work through a process and I actually considered that a huge success and with that and its own that I think that that begins to clear some of the overhang that might be impacting where analysts might be.

But that's kind of for them to define more than us..

All right. And continuing on that track, the worst of the storm seems to be behind you and you eluded to that Mike in your comments about building a strong foundation in the company that you've always imagined you wanted to lead and maturity of the brand.

So now that some of this storm may be passed do you contemplate any new strategic direction may be new geographic expansion? You talk about the maturity of the brand. Over time that can be a national brand, I would surmise.

Can you talk about any plans along those lines?.

We've actually put a lot of energy in the last year in developing the East Coast.

We've opened two new branches just on the East Coast in the last six months and we're continuing to expand through tuck-in in the Western through the United States and from where I sit I'm feeling more optimistic and bullish about expanding footprint today that I have just in the past just simply because I do feel like we've gotten a lot of the -- I'll call it cleanup, but even reengineering to get to a good solid foothold and today we know that our model can transfer.

It can move to new markets. We've got front position, a pretty strong bench that's maturing in a way that give us that foundation to be able to build on.

I think even -- I don't want to speak for our [Joe] our COO who runs all operations in the field, but I know as he visits, his energies are less and less spent on what has to happen day-to-day and we're able to work on the business strategically now compared to where we've been over the last several years and even getting down to the mechanisms that we're in the process of maturing.

but we've built related to how we're maturing pipeline, how we're maturing and building our bench and our teams, our ability to be able to look at new markets and be able to piggyback our success that we've had in existing markets into new markets, those are all positives and the next three to five years I am pretty excited about the next three to five years..

Good. That's illuminating. Thank you so much..

Thank you..

And at this time, this concludes our question-and-answer session. I would now like to turn the call back over to Mr. Elich for closing remarks..

Again, thank you for continuing to join us and stay in the ring with us and I just want to throw a complement out to all my teams that have continued to stay in the ring and be there for what we've had to go through in 2016 and prior and I still believe that what we've had -- what we've been challenged with has made us stronger and better.

Even bringing new partners into the room, having even a rebuild of our accounting department, it's taken us to a whole new level and I am really proud of that and I am excited about our future. So, we'll see you in the field and looking forward to next quarter. Thank you..

Thank you, everybody..

Thank you for your participation. This concludes our call. You may now disconnect..