Gary Kramer - CFO Michael Elich - CEO.

Chris Moore - CJS Securities Jeff Martin - ROTH Capital Partners 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 Third Quarter Ended September 30, 2017. Joining us today are BBSI's President and CEO, Mr. Michael Elich; and the Company's CFO, Mr. Gary Kramer. Following their remarks, we'll open 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 December 8, 2017, starting at 3 P.M. Eastern Standard 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, Shannon. Depending upon where you are dialing in from good morning or good afternoon everyone. The operations of the company continue to be strong which resulted in record earnings this quarter. Diluted income per share was a record $1.96 compared to $1.38 in Q3 2016. Net revenue was $240.1 million increased 7% compared to Q3 2016.

Gross revenue of $1.4 billion grew 11% over the same period. Our third quarter 2017 had one less workday when compared to the third quarter of 2016. When adjusting for a one day different, our gross revenue increased by 13% over the prior year period.

In the quarter, PEO gross revenue increased 12% for 1.33 billion compared to the third quarter last year and same customer sales grew by 5.9%. However, adjusting for the one day difference and customer sales growth which was in 8.4% and was in line with our expectation.

We continue to consistently increase our client base with a gross addition of 281 clients or 169 meadow runoff in the quarter. Staffing revenue in the third quarter decreased 11% to $42.7 million. This decrease was greater than we expected and has a direct result in a continued tight labor market.

Each quarter we discussed that this trend is making it difficult for our clients to hire and we are experiencing this affect in our staffing business. We have the demand and orders from our client for it is challenging to fulfill all orders without compromising our hiring standard.

At such, we're expecting that staffing will now be a straight headwind to near-term revenue growth. Workers compensation expense as a percentage of gross revenue decreased to 4.9% this quarter which is at the low end of our expected range of 4.9% to 5.1%.

Claim development on prior years was slightly better than expected and the selection by our outside independent actuary resulted in a $300,000 favorable change in estimate. As previously discussed, we have chosen to have a quarterly independent actuarial evaluation which provides greater overall confidence and the adequacy of our reserves.

The costs associated with administering insurance program were also lower in the quarter and this was a continued result of our efforts to pay heightened attention to the structure of our insurance program and our insurance operations.

Our workers compensation claim frequency continue to improve as we experience a decline in the relative frequency as claims reported. Our total working claims at Q3 '17 grew 3% from open claims at 3Q '16, while gross revenue grew 11% for the same period.

In the quarter we saw trailing 12 month relative frequency of claims as a percentage of payroll decreased 1% compared to the third quarter of 2016 and decreased 16% compared to the third quarter of 2015. Our strategy to reduce frequency was initiated in 2014 and has been successful over the last three years.

Gross margin was $54.9 million or 4% of total gross revenue compared to $49.6 million or 4% in the prior year quarter. The fee we charge our clients remain constant and the gross margin is in line with our expectations. SG&A in the third quarter was $33.9 million or 2.5% of gross revenue compared to $30.4 million or 2.5% in the prior year quarter.

We had made investments to support growth in the field and we have build out our corporate groups to scale with our growth. We've added a deeper bench in accounting, internal audit and IT, as well as with external partners.

In the future we expect to see this increase spend gradually decline as we gain can leverage from our build in this field and in our corporate operation. Nonrecurring expenses associated with accounting and securities law issues in the quarter were $200,000 compared to nonrecurring expenses of $1.7 million in the prior year quarter.

The provision for income taxes in the third quarter was $6.7 million with an expected annual tax rate of 32.9%. We had no borrowings under our line of credit with Wells Fargo as of 09/30/17. We continue to be debt-free except for the $4.4 million mortgage on our corporate headquarters in Vancouver, Washington.

$4.2 million of this mortgage is classified as long-term liability as it is due in Q3 of 2022. At September 30, 2017 we had cash, cash equivalent investments and restricted securities totaling $409.5 million compared to $358.3 million at December 31, 2016.

The unrestricted cash position in the third quarter increased to $35.6 million from $17.9 million in the second quarter. The third and fourth quarters are typically our most profitable quarters and where we experienced a build in unrestricted cash.

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 $358.4 million at September 30, 2017 and $277.1 million at December 31, 2016.

The Trust is now fully invested with the fixed income, asset liability matching strategy, targeting the duration of three and half years. At September 30, the book yield was 210 basis points with the duration of 3.4 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 9/30/17 the average quality of the portfolio was AA and no investment was greater than 4% of the portfolio. In the quarter we earned 1.5 million of investment income from the Trust.

The Trust will continue to grow as EDCI grows and we believe will result in a greater return on the asset with low risk to the company. We will release our 10-Q later today and I would like to provide an update on the progress we're making with our remediation plan. We have one remaining deficiency regarding IT controls.

I continue to be pleased with the progress we have made thus far and I’m confident that we have a plan in place to be completely remediated by the end of the year. In summary, we had record earnings in the quarter and we grew unrestricted cash while returning to $0.25 a share to shareholders via the quarterly dividend.

Our pipeline remains strong and we continue to build our base of net new client. Our referral relationships are deep and our distribution channel continues to widen. Now moving to our outlook, for the full-year 2017 we are reconfirming our expectation of diluted earnings per share to be approximately $3.10.

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.

With a slight head wind in staffing and the continuation of the tightening labor market, we expect growth in gross revenue over the next rolling 12-month period to be approximately 14% down from our prior estimate of 15%.

During this quarter, we will be finalizing our plan for 2018 and will provide full year 2018 guidance in our fourth-quarter earnings release.

Now I’d like to turn the call over to the President and CEO of BBSI, Michael Elich who will comment further on the recently completed third quarter, as well as our operational outlook for the remaining of the year.

Mike?.

Hello and thank you for taking time to be on the call. Before I move on to a discussion about the quarter, I’d to like to highlight a few areas of note. As I do every year at the end of third quarter, I recently spend time in the field getting perspective on the business, guiding the organization, and looking towards 2018.

From this experience I’m seeing continued maturation of talent in our team, alignment around our vision and consistency in our approach regardless of geography. In addition to meeting with our teams, I've also had opportunities to meet with a number of clients and referral partners in recent months.

As a result I’m getting consistent feedback from our clients and partners as to the value our teams are delivering. Additionally my experience in the field gives me confident in the organization and our ability to bring value for our business owners we should translate into long-term relevant and future shareholder value.

Looking at the quarter we saw solid results and the fundamental of the business remains strong.

We added 281 new PEO client we experienced attrition of 112 clients two, due to accounts receivable, eight for lack of tier progression, four were cancelled due to risk profile nine businesses sold, 24 businesses closed and 65 left to price competition or companies that have moved away from the outsourced model.

This represents an approximate build in our quarter of 169 net new clients which is in line with expectation. We start same customer sale of 5.9% as Gary mentioned this was affected by having one less work day in the quarter then we had seen in third quarter of 2016.

Related to pipeline we continue to evolve our ability to scale from model base on individual market contribution to a systemic approach for developing referral channels. As result today we're seeing development in new referral channels in all markets which supports strong pipeline growth.

Year-to-date we have seen contribution to pipeline from a significantly larger base of referral partners because of this we are seeing consistent contribution to new business from all market.

Our ability to extend pipeline and consistently add to our client base in all market gives me confidence in our ability to move into new market and support growth into 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 field organization to support future growth, scale into markets and invest into support of our product offering. Currently, we have 99 business teams supporting typically out of 57 locations. At the end of 2017, we anticipate having more than 102 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 identify branches with the ability to increase leverage. We have 14 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 26 branches we consider developing with run rate of up to 30 million in gross revenue in these branches we invest to support consistently of pipeline while maintaining integrity of product as they scale.

Looking forward, as I mentioned this time of the year force me the opportunity to spend time in the field meeting with our team as well as business owners from our client companies and are referral partners. This combined exposure to client and our team gives me visibility into what we are accomplishing.

Our team continues to mature and they’re focus on the right thing. Our leadership bench continues to expand our value proposition has meaningful to business owners and the model is portable and scalable. These factors support ongoing relevance of the offering which allows for expansion of brand in markets while leveraging our existing infrastructure.

All of which gives me renewed confidence that our continued focus for result and our goal which is to increase shareholder value. With that, I'll open it up for question..

[Operator Instructions] We first go to Chris Moore with CJS Securities..

Maybe just start with the 14% ruling guidance on non-GAAP gross revenue.

Can you at least provide maybe a rough breakdown between how you see that picking up between same-store growth and branchless client expansion?.

In the third quarter we did see the headwind to our staffing business and that was a function of - there's demand out there but we are having a difficult time with our hiring standards to find available employees to fill those spot.

And we expect that we’re going to have a similar headwind for staffing in the fourth quarter and to continue on into 2018 as well but based upon that we would say we’re going to have a headwind to staffing, we’re going to continue to build out the branches and we’re going to continue to add branches which Mike talked about we’re going to add aiming for three in the fourth quarter and when we take same-store sales which we think is going to be comparable to historical averages, those three get us to the 14% revenue growth over the next rolling 12..

The 169 net new clients can you kind of break that down roughly geographically or most of them or nearly all of them California.

Are you seeing much strength in new markets like Baltimore?.

Yes, on a percentage of just base of growth and mostly in consistency across pretty much all markets right now.

We’re seeing consistency in growth in - from the East Coast to Mount states has been strong even in Northwest if anything California is probably more in particular Southern California has been maybe a little bit a headwind to growth but on has.

The one thing about the third quarter it’s a little bit tricky - and I've watched this for years it seems as though the better the economy is doing the more time people take off during the winter or during the summer months and that includes probably late July, August and then early September.

And I used to think that it was just that we would lose our focus but we’re really kind of understanding more about it is that in the third quarter it is difficult sometimes to get to settle down the business owner, your referral channels, keep them focused and get them to make decision.

So we typically always see the most volatility in the third quarter simply because you got about six to eight week period in there where there's just a little bit of lack of focus. And then the model is always that you watch or the recovery as you come through September and in October and as you round up towards the end of the year..

Maybe just switch to worker's comp for a second, obviously the 4.9% looked great number for the quarter. My understanding is roughly 80% of your clients use worker's comp to you.

So a few questions here, as you expand into new markets any reason to think that percentage will change California is very litigious market is that percentage likely to kind of stay reasonably smooth as you move out into new markets?.

The comp is one of the products that we offer and we don't see that changing as we expand in geographies. The glory of the model that we have now with the Chubb program is that pretty much any market we go in where comp is available we have that ability. So if not where we try to lead with, but it’s the product that we offer..

And leading to that from a client standpoint do you think that the percentage of clients today versus a couple years ago do they view worker's comp any different I mean say three years ago was worker's comp a must have for higher percent of your clients than it is today?.

Yes absolutely. I think one of the steps that I trust in the organization on a - at least an annual basis and probably even more frequently than that would be as if we did not have comp in our offering how much business would we lose.

If I asked that question back in 2012/2013 it would've been by north of 90% today when I ask that same question its quite closer to a third and the idea is as we are continuing to mature our teams and mature our infrastructure that we get that number below 10%..

Next question comes from Jeff Martin with ROTH Capital Partners..

Mike I was curious if you could expand on your comments regarding some of the new channels that or new client additions that you’re seeing out there and it’s that by referral partners you recently connected with them.

Was curious if you could give some details surrounding what you're thinking today and how that compares with a year or two ago?.

So one of the things that we've always done is we get our pipeline of new business through referral channels probably 90% to 95% of our business comes from some sort of referral whether it’s a partner that is a trusted advisor to small business owner that we might pay to bring those opportunities, whether it’s a new work from your insurance broker to your financial planner to your account and to your attorney that's always been the basis to how we grown up.

We actually are getting an increasing number of referrals from existing clients as well.

So but when we look at the - I call the professional referral source that we use one of the things that we discovered a couple years ago was that we were creating a one-to-one relationship where if the branch was working with the referral channel that relationship was somewhat finite to those two individuals working on individual market.

What we realized it was the typically that individual that was referring us business had a much broader footprint and could impact a larger geography for us.

So a couple of years ago probably it was August of 15, we started to back up a little bit and looked at kind of the lot large numbers and wondered if we could - if we did shift that a little bit would we end up having a problem with the consistency of our pipeline and where we optimize in the relationships we had.

So we started at the time bringing in our referral channels to really educate them more about who we are and what we’re about and with the intent with creating alignment between our value proposition as it is today versus what it might have been in the past.

As we've done that now we have a full algorithm that brings this scheduled to next year bring through close to 300 individual referral partner or referral channels that we have with the intent of getting to know them better help them to see our business through the eyes of how they’re running their own business.

And as we’re doing that we’re seeing a lot of leverage and a lot of reaffirmation of one the value proposition and then the client, then the individual referral partners two are taken a harder look at their business how they're running their business and how they can use us to scale and filled out and leverage their business.

The other thing we’re doing to this and we’re getting a lot of traction here we've always been and have grown-up as somewhat isolated by region or even by branch and by taking a more global perspective we’re finding that where we have now interface with larger players that could - can refer us business that we’re now looking across large regions or even a superregional be at East Coast or the Western 30 United States.

So we’re starting to create pipeline that are much larger and we’re having that one too many relationships where when we have that relationship with that one referral partner they can find more business to us because the one individual might have contact that might be 101 multiplier within their own organization..

Well then shall we dive in the same-store sales growth a little bit more, as pricing is relatively stable what is the bigger drivers of the 6% to 8% intra sales growth rate?.

So I’ll let Gary talk about the numbers what I’ll say as we look back it’s hard to look over in the mix, but when we look back over where we were a year ago compared to what we've been pushing up against in the last 12 months.

But prior to the election we saw where business owners we’re not hiring people but they were as easily and we priced all headwind to labor ad spend what we saw was they were making it up through increased hours work. So when we go back and look at chart we can see that our average hours worked were somewhere between 40 and 41 hours a year ago.

And I believe it was more of a the idea of the risk associated with maybe election results leading in and so why would I build infrastructure if I didn't know where I was going to end up. It was after the election that we saw hours drop almost by – they dropped from say a 40, 41 hours down to like 38.

So that was the first impact to when we saw same-store sales soften. The other thing that we did see was that wages had not really moved yet which would be a counterbalance to a tight labor market. And in the last year what we've done as we have notice and that wage inflation has gone up probably about $1 an hour.

So we were running about $24.5 to $25 an hour six months to a year ago we’re pushing now $25.50 maybe even $26 an hour. So you’re seeing some wage inflation and what we’re starting to see is with few hours work we’re starting to see a rebound where you do have built in headcount but it's slower.

So if kind of working off averages that we used in the past and you know a robust economy where you've got easy to find people you got stability in hours works you got stability and wage pace.

We were pushing 9%, 10% 11%, 12% of orders sometimes in same-store sales growth today when we ratchet it back we’re kind of looking at more of a band of 6% to 8% in that world just because right now there's not a it’s difficult the visibility of what the first and second quarter of next year will be from a same-store growth is probably the cloudy one.

And so we’re kind of left to offset that with how we’re building and stacking into our pipe..

When we look at call it the next rolling 12 in the fourth quarter we’re going against a softer comp and then in the first quarter we’re going against the softer comp as well. And then that's really where in the fourth quarter of 2016 is where we saw the same customers drop to lows and then it continued into the first quarter.

So when we look at rolling 12 going forward we say well historically we feel pretty comfortable at the 6 to 8 range. And then if we take that and put it over softer comp we feel pretty good about the rolling 14% revenue growth..

And then any expected changes that are material and the payroll taxes or other areas of taxes that may move the needle on margins next year California budget goes into place here shortly and as things progress there?.

Yes I obviously we watched the pseudo half and we haven't seen the halves are not rising or staying with wage inflation so that actually a benefit to us and the industry and for what we’ve seen so far we don't see anything drastic regarding if the rates or the limits are going to go up going into 2018.

So from payroll tax I think it’s going to be pretty consistent with what we have for 2017..

And then last question for Mike is how is the competitive dynamic change in your larger markets over the past year?.

When I look at our pure PEO market we still don't see a clear direct competitors so when we show up as we do as we built to we’re not seeing we’re losing business to that what we have seen is in the comp market the worker’s comp portion of that business over the last few years there has been a lot of pricing pressure there and there has been a lot of softness in the world of worker's comp.

We have not given into that and we won't and so we probably run after a little bit against that in last probably a year or so. One thing we've also been able to do is test our brand against that, so - and we’re not seeing where we’re having an adverse development in that area.

When I look at even businesses that would leave for pricing or competitive reasons that number still is less than 2% of the overall runoff in our overall book based on larger numbers.

So we feel pretty good about that I don't know that I want to – and think I won’t ever get to zero because if that was the case then probably wouldn’t be charging enough or where we could..

[Operator Instructions] We next move to Bill Dezellem with Tieton Capital..

And relative to the commentary about the price and hours work.

If you said if I missed what your existing client employment rate of growth or change has been would you either share that or circle back to what as you already said it?.

Could you quantify that question a little more is that regarding we’re selling fully growth?.

Existing client employment growth for change?.

That was calculated in our same customer sales number so the same customer sales is kind of three factors that they add more employees.

Are they paying a higher rate or the employees working more hours and that all gets wrapped into the numbers we gave for the quarter which on the calendar it was 54 or 59 but if you look at it within extra day it’s about 84% growth over prior quarter..

Yes we'll get low cloudy Bill on that one is that you still have wage inflation contributing to that some degree of that number. And then you have hours works it’s been pretty stable. So probably looking at the majority of that add or may be even price 70%, 80% of that has been from clients stack.

The challenge there is a little bit is that only includes clients that have been with us more than a year you're using period over period comp so it doesn't count the clients that have come on in the recent year. But it's probably - if we’re seeing 8% same-store growth it’s probably close to 5% that’s a little bit of slag..

Right so 3%?.

3% would be inflation..

And since hours worked are roughly flat and that puts remainder for the employment?.

Yes, that kind of added back into it..

And then a couple of numbers questions that I apologize for not understanding this more clearly but the direct payroll costs were down on an absolute basis to 32 million versus 37 million last year on revenue growth.

I don’t understand that would you help clarify how that happened?.

The payroll is really on the gross - are you looking at the gross or the net Bill..

I’m looking at - would be the net on the full income statement that you published I believe it's the last - it is the last, last night when you published in the press release?.

Yes this is why we look at our book on a gross basis because when you’re looking it on a net basis staffing distorts the net it’s a small piece of the book as far as our portfolio but it’s actually a larger piece of the net. So that’s why we look and we measure our book on a gross basis.

So when you look at staffing going down by 10% that's where it distorting you on a net basis. But if you look at the payroll at gross revenue on a gross basis it's in line with where we think it should be..

I would still be confused because the gross revenue did go up and it's the direct payroll costs went down.

What is it that I am missing there?.

That's the staffing and I can walk you through it offline but - with staffing going down on a net basis that has a direct effect to the payroll. Because on a net basis the payroll costs for our PEO clients don't go through payroll right so that's why we have it on a gross basis so that they go into payroll and they go into gross revenue..

And worker's comp also declined as a percent of your PEO revenues versus the Q2 and versus the Q3 and here I am looking on a net basis so maybe this is a net gross phenomenon but would you describe or help me understand the ins and outs of how that happened?.

The worker’s comp was a - I’ll say a laser focused effort to try to minimize the cost.

We had a small favorable development that came out of the study which was 300,000 but really what we do is we continually look at our workers comp and try to figure out better ways to which to manage the cost, to manage the expenses and manage the structure that goes with it.

So what we’re really starting to see is I’ll say a concerted effort to try to get that comp expense down to the lower end part of the range..

So if I may infer something you didn't actually say but maybe you were implying does that - you had a real like you said laser focus on this and as a result you were successful this quarter. You wouldn’t want us to incorporate that too far into our forward thinking.

However, if you are able to continue to be successful you may be directionally moving that worker's comp down as a percentage of the PEO revenue?.

Yes we have the intent and the focus to try to drive that cost down just like we do with everything in our business. The idea there is to try to bring as much value to shareholders as possible and if we can control expenses or structures and costs we’re going look at every opportunity to do that..

Yes Bill I would also add is that we’re building up a program with Chubb over the last several years, we were kind of establishing a new normal we’ll call it and now we’re getting to the point where and especially with Gary's expertise, we’re just finding areas where we can bring efficiencies back to the program..

At this time this concludes our question-and-answer session. I'd now like to turn the call back over to Mr. Elich for closing remarks..

Thank you for joining us for the call. Again very pleased with the quarter, pleased with what we're getting done. Looking forward to joining you all on the call again in February as we announce the close of the year and the close of the fourth quarter. Thank you..

Thank you. Ladies and gentlemen that does conclude today's conference. We thank you for your participation. And you may now disconnect..