Gary Kramer - CFO Michael Elich - CEO.

Bill Dezellem - Tieton Capital.

Good day everyone and thank you for participating in today's conference call to discuss BBSI's Financial Results for the Second Quarter Ended June 30, 2017. 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 for your questions.

Before we go further, please take a 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 September 09, 2017, starting at 3 P.M. Eastern 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 Chief Financial Officer of BBSI, Mr. Gary Kramer. Sir, you may begin..

Thank you, Ashley. Depending upon where you are dialing in from good morning or afternoon everyone. The operations of the company were strong in the second quarter. Net revenue of $225.6 million increased 11% from Q2 '16. Gross revenue of $1.3 billion grew 14% over the same period. Diluted income per share was $1.47 compared to $1.16 in Q2 '16.

In the quarter, PEO gross revenue increased 14% to $1.26 billion compared to the second quarter last year. Contributing to this growth was a record addition of 350 gross PEO clients. This further validates our value proposition as we are seeing an increasing and consistent client add throughout the year.

Same customer sales accounted for 7.6% of total PEO revenue growth. Same customer sales rebounded in the quarter from the lows of the prior two quarters but is still below historical averages [in less than a model] [ph].

As mentioned over the last two quarters, the labor market has tightened the levels where our employers cannot easily hire to fulfill their needs. Staffing revenue in the second quarter increased 1% to 37.9 million and is in line with our strategy given the current market environment.

Workers compensation expense as a percentage of gross revenues increased due to an unfavorable change in the estimate of prior year’s liability of 2.4 million. Claim development on prior years was slightly higher than expected and resulted in a slightly higher selection by our outside independent actuary.

Although we are required to have an expert independent actuarial valuation performed annually, we have chosen to have one completed quarterly and we book to that result. This process provides greater overall confidence in the adequacy of our reserves but it may also lead to more volatility by quarter.

In the second quarter, the resulting workers compensation expense as a percentage of gross revenue was 5.17% which is slightly higher than our forecasted range of 4.9% to 5.1%. Our workers compensation claims frequency continues to improve as we experience the decline in the relative frequency of claims reported.

Our total workers claim at Q2 ’17 was 8% from open claims at Q2 ’16 than gross revenue grew 14% for the same period. In the quarter, we saw trailing 12 months relative frequency of claims as a percentage of payroll decrease 9% compared to the second quarter of 2016 and decrease 18% compared to the second quarter of 2015.

Claims severity continues to trend in line with management’s expectation. This is a continued result of the way our branch has managed to decline the retentions and the controls and processes that we have in place to manage and mitigate risk.

We continue to pay heightened attention to the structure of our insurance program and our insurance operation and are making investments that we believe will be accretive in future periods. Gross margin was negatively affected by the unfavorable change in estimate of prior year’s workers compensation liability.

Gross margin was 44.2 million or 19.6% of total net revenue compared to 42.3 million or 20.8% in the prior year quarter. The fee we charge our clients remain constant, our value proposition continues to migrate to a consultant model and we are seeing a shift in the portfolio to smaller clients. This is by design and our strategy is threefold.

First, we seek to work with as many good clients as possible regardless of size. Second, larger clients tend to be more susceptible to competition and pricing pressure. Third, our consulting model is more attractive to smaller companies as they typically do not have an internal infrastructure and identify well with the BBSI value proposition.

SG&A in the second quarter was 28.1 million or 2.2% of gross revenue compared to $28.5 million or 2.5% in the prior year quarter. The decrease in SG&A is attributable to lower non-recurring expenses of 300K in Q2 ’17 compared to 2.6 million in Q2’16.

We continue to make investments to support growth in the field and we have built out our corporate groups to scale with our growth and have added a deeper bench in accounting, internal audit, IT as well as with external partners. The provision for income taxes in the second quarter was 5.4 million with an expected annual tax rate of 32.9%.

We had no borrowings under our line of credit with Wells Fargo as of 6/30/17. We continue to be debt free except for the $4.5 million mortgage on our corporate headquarters in Vancouver, Washington. $4.3 million of this mortgage is classified as long-term liability as it is due in Q3 of 2022.

At June 30, 2017 we had cash, cash equivalents, investments and restricted securities totaling $366.7 million compared to $358.3 million at December 31, 2016. The unrestricted cash position in the second quarter decreased to 17.9 million from 18.4 million in the prior quarter.

The decrease is primarily related to payroll tax payments that are made in the second quarter for first quarter activity. As part of our funded workers compensation insurance program with Chubb, we established and funded a trust account called the Chubb Trust.

On the balance sheet, the Chubb Trust is included in restricted cash and investment, the balance in the Chubb Trust was 327.9 million at June 30, 2017 and 277.1 million at December 31, 2016. As mentioned last quarter we negotiated program changes and are now investing the assets in the Chubb Trust in a conservative fixed income portfolio.

We continue to invest the Chubb Trust over the second quarter and about 96% of this balance was invested at 6/30/17. The portfolio is invested in an asset liability matching strategy targeting a duration of 3.5 years. At July 31st, the book yield was 203 basis points with a duration of 3.41 years.

The Trust has eligible security guidelines with restrictions on asset class and asset diversification. This is a high quality and highly liquid portfolio. At 6/30/17, the average quality of the portfolio was AA and no investment was greater than 4% of the portfolio.

The Trust will continue to grow as BBSI grows and will result in a greater return on the assets with low risk to the company. Any return from these investments will show up in the investment income line on our income statement.

We will release our 10-Q later today and I would like to provide an update on the progress we are making with our remediation plan. We looked at the controlled efficiency related to workers’ compensation this quarter as we have demonstrated efficient consecutive quarters of the controls working effectively.

This leaves one remaining deficiency regarding IT controls, I am very pleased with the progress we have made thus far and I am confident that we have a plan in place to be completely remediated by the end of the year. In summary, our pipeline remains strong and we continue to build our base of net new clients.

Our referral relationships are deep and our distribution channel is the widest it has ever been. With a continued blank [ph] slowdown in same customer sales, we expect gross revenue for the next rolling 12 months period to increase approximately 15%.

For the full year 2017 we now expect diluted earnings per share to be approximately $3.10 up 22% compared to $2.55 per diluted share in 2016.

This continues to assume approximately $0.13 per diluted share in estimated cost associated with accounting and securities law issues, as well as the return to an effective tax rate of approximately 32.9% compared to 26.5% in 2016.

However, this number also now includes the adverse development on workers’ compensation that was realized in Q1 and Q2 as well as the investment income offset we expect to receive from the revamp Chubb trust investment strategy. Final point on our outlook assumes gross revenues grow 14% for the 2017 calendar year.

Now I’d like to turn the call over to the President and CEO of BBSI, Mike Elich who will comment further on the recently completed second 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. As Gary mentioned despite slight headwinds we had a good quarter. The foundation of the business remains strong as we continue to invest in future growth. The organization has well aligned our pipelines are consistent and we’re seeing our value proposition mature in all markets.

Looking at the quarter, we added 350 new PEO client which is a record. We experienced attrition of 81 clients four, due to accounts receivable; five for lack of tier progression, eight were cancelled due to risk profile, 24 businesses sold or closed and 40 left due to pricing, competition or companies that have moved away from the outsourced model.

This represents an approximate build in the quarter of 269 net new clients. Same customer sales of 7.6% was an improvement over the last quarter but continues to be lower than our historical average. Our strategy as always been to add width to our client base.

We recognize that while we cannot control the size of our client companies, we can control how many clients we work with. This is demonstrated by consistent ads on the quarter and ongoing retention north of 90%.

Related to pipeline, we continue to evolve our ability to scale from a model based on individual market contribution to a systemic approach for developing referral channels. As a result, today we see developments in new referral channels in all markets which supports strong pipeline growth.

In the first half of 2017, we saw contribution to pipeline from a significantly larger base of referral partners. Because of this, we are seeing consistent contribution to new business from all markets.

Our ability to expand pipeline and consistently add to our client base is in all market gives me confidence in the ability to move in to new markets and support growth against the law of large numbers.

Related to organizational structure, we have operationalized our approach to developing leadership and have roughly 18 months of runway with our existing bench. We continue to build the field organization to support future growth, scale into new markets and invest in support of our product offering.

Currently we have 97 business teams housed in 57 physical locations. By the end of 2017, we anticipate having more than 100 business teams housed in 60 physical locations. Related to branch stratification, we now have 17 mature branches with run rate in excess of 100 million. This is a measure we use to indicate a branch stability to increase leverage.

We have 13 emerging branches that are running between 30 and 100 million in gross revenue. We regularly reinvest back into these teams to support capacity as they grow.

Finally, we have 27 branches we consider developing with run rates of up to 30 million in gross revenue and these branches we invest to support consistency of pipeline while maintaining integrity of products as they scale.

Looking forward, in recent months I’ve had the opportunity to spend time in the field meeting with business owners from our client companies and our referral partners. As the organization continues to mature, these sessions have become a meaningful way for me to stay engaged with business owners and evolve my thinking around what’s possible.

These sessions have also helped me renew -- my renewed vision, visibility to ongoing maturation of our team, the value our teams bring to business owners every day, affordability of our product and the ability to scale our offering.

Combined with our consistent growth, these factors give me confidence in our ongoing relevance of the model, future opportunities and growth of our brand. With that, I will turn it over to questions..

Thanks. I would like to talk about the Chubb Trust investments. You mentioned that at the end of the quarter 96% was invested.

How much was invested on average for the quarter and really what I am trying to understand is when we look at the third quarter what’s the incremental dollars that will be invested for the Q3 in comparison to Q2?.

Hey Bill, it’s Gary Kramer. If you take the 203-basis point and apply that to the balance, that’s a good number for the go forward since we are close invest it at the end of the quarter.

It’s not as easy to invest all that capital at once, it’s not like going to the grocery store and buying milk and eggs, it takes a little bit of time to get it deployed. So really by the end of the quarter it’s when we were fully invested. So, if you take that 203 basis points and roll that forward, that’s good for your model.

And then with the growth of the Trust, it's going grow somewhere in the 25 a quarter range, 25 million a quarter is what we see the incremental growth of the value of the Trust being..

Thank you. And then let me circle back to the second quarter.

How much was invested on average in the second quarter because to your point this wasn’t something that you are able to do immediately at the beginning of the quarter?.

I don’t have it by month. I mean we were really targeting to have it completely invested by the end of the quarter and we hit that goal. But it was not an equal amount by quarter so really if you just think it for the end of the month and use your 203 basis points to model forward that’s a good number..

And then I would like to circle back Mike to the question or the topic of referral development.

We can talk in more detail about that and how you came to the point of building that referral pipeline and what you see or believe the implications could be over the next one to three years please?.

Well one of the things that we started to recognize all the way, as much as is year and a half ago, two years ago was that as we were going to market on an individual basis that we were creating a little bit of a cross current for ourselves in overall markets then as we were trying to mature into new branches, new locations, that cross current actually was creating headwinds and there was never an intent to do that and so one of the things that we discovered also is we were able to bring our referral channels and principals to those groups to bring us new business and give them a clear view as to who we are and what we’re about and I would like to say that when an owner of one of our referral channels sits down with us, we’re trying to -- we help them to see their business through -- our business through their own eyes as they run their business.

And as we do that, the visibility of the consulting and the facilitating model that we bring to our client makes a lot more sense and continues the migration of our value proposition. So, if we started that a year and a half two years ago, we began to really test it probably a year ago even though we were kind of dabbling with it year and a half ago.

In the last six months, we’re still in a lot of R&D, we’re still having a lot of meetings that we’re testing differently as we go about as that we go about is that we’ve probably run through about 150 groups or principles of individual.

So, as you think of the one to many approach, I’ve got one principle of referral channels, they might have influence over maybe as few as five but maybe as many as 200 just different producers that are in the market talking about us. And so, we look at the last year and half we’ve probably run 150 of those principles through this process.

Where after they see what we’re about and they see it from the inside looking out, looks very different than them and then they become much stronger advocates to our value proposition.

As we continue to look at a build on the large numbers, we can anticipate out three or four, five years in recognizing how big our pipelines have to be, how many referral channels that we need to be able to receive business from and then what it will take to sustain our overall staff rate to support our growth rate.

The other part two that really helps and we’ve seen this on the east coast in particular is that when we’ve pulled a group of our referral channels in -- we’re still exploring it, but I believe it will help us to accelerate how we’re able to break into new markets and expand in new regions that are a little more Greenfield for us. .

And then this process is somewhat new and from a formal perspective I know you’ve worked with referrals sources in the past, but now as you’re formalizing it, not now, and I realize it is counter to how your press release is with [ph] but this potentially accelerates your rate of growth over a longer time period?.

I think the first real goal is to create sustainability in the consistency of our ability to add new clients. When you’re -- for supporting 5,000 clients today and we have our build of 350 to be able to support a growth rate out three or four, five years from now when we’re supporting north of 10,000 clients.

You have to be adding more to support the growth rate of the large numbers. So, your pipeline obviously are going to have to be wider.

But I think what we’re really going to see more importantly is when a consistency of pipeline is coming through which we are already recognizing to that there is a level of integrity in that pipeline that allows us to achieve a higher yield if we choose.

But more importantly when it comes to just underwriting and the selection of our clients we will be able to be more particular as we allocate our capacity of our organization back to supporting those clients. .

[Operator Instructions]. And as there are no further questions, I would like to turn the conference back over Michael Elich for any additional or closing remarks..

Thank you for joining us for the call. We look forward to speaking with you as the year progresses and moving into ‘18. I really do feel very good about where we are at as a company. This week in particular we have a group of new hires that have been on board more than 90 days but less than six months and are building in.

I am very excited about the talent that we are hiring today. I am excited about the quality of companies that are coming on board. I am excited about the conversations that we are having with clients which is leading to a very strong retention level.

And we have discipline of running the company for the future we are going to continue to maintain an integrity about how we are bringing clients on and how we are supporting them and how we are continuing to mature that value proposition. So, thank you and stay tuned. Look forward to speaking with you in late October, early November. Thank you..

And that concludes today's presentation. We thank you all for your participation and you may now disconnect..