Michael Elich - CEO Gary Kramer - CFO

Jeff Martin - ROTH Capital Partners

Thank you, Vicki. Depending upon where you dialing in from good morning and afternoon everyone.

The operations in the company were strong in the first quarter and we believe our results represent a solid foundation on which to build. Net revenue $210 million increased 10% from Q4 '16.

Gross revenue of $1.2 billion grew 13% over the same period. Diluted loss per share was $1.55 compared to $1.11 in Q1 '16 and Q1 '17 results included nonrecurring expenses of $400,000 or $0.03 per share for outside investigation and legal proceedings.

Please recall that we historically incur a loss in the first quarter due to higher effective payroll taxes at the beginning of each year. Also in the quarter, PEO gross revenue increased 13% to $1.2 billion compared to the first quarter last year.

Contributing to this growth were 225 net new PEO client additions and growth in same customer sales comprised 3.7% of total PEO revenue growth. As mentioned last quarter we encounter some less than predictable event that resulted in the slow down and same customer sales in the fourth quarter of 2016, and as anticipated extended into the first quarter of 2017.

The real weather in many of our markets had a direct effect on hours worked in certain industries, also the labor market is tightened to levels where our employers cannot easily hire to fulfill their need. So a combination of the decrease in days worked and a slowdown in hiring resulted in the lower same customer sales growth.

Staffing revenue in the first quarter increased 4.1% to $37.8 million. We have experienced three quarter of consecutive year-over-year growth and anticipate sequential growth for the foreseeable future.

Our strategy to pursue only those client relationships that align with our core value is bearing fruit. Workers' Compensation expense as a percentage of gross revenue declined to 5.17% compared to 5.23% in the year ago quarter.

This decline was due to minor shift in paid allocation plus consecutive period of favorable reduction in claim frequency, which is being factored into the current year expense. This is partially offset by an increase due to unfavorable change in the estimate of prior-year liability of 2.9 million.

We are required to have an expect independent actuarial evaluation annually, however we have one completed quarterly and we booked at that result [ph]. This process provides greater overall confidence of 10 results in variability by quarter.

This quarter's change in estimate is primarily related to the adverse claim development on a certain number of claims that had changes of facts. This is not a reserve strengthening, but rather increases on a certain number of claims that resulted in the small change in estimate of the core reliability.

To give you better prospective, our worker's compensation liability for yearend 2016 was 313 million and a 2.9 million change is less than 1% variation. Our workers' compensation claim frequencies continue to improve as we experience a decline in the relative frequency of claims reported.

Our total open claims at Q1'17 grew 8% from open claims of Q1'16, while gross revenue grew 13% for the same period. In the quarter, we saw trailing 12-month relative frequency of claims as a percentage of payroll decrease 13% compared to the first quarter of 2016 and decrease 19% compared to the fourth quarter of 2015.

Claim severity continues to trend in line with expectation although we experienced a change in facts on a certain number of claims that resulted in an increase on prior year estimates, all-in, the workers' compensation programming is performing as expected. This is a continued result of the way our branches manage their client retention and the controls and processes that we have in place to manage and mitigate risk.

Gross margin was negatively affected by the unfavorable change in estimate of prior year workers compensation liabilities and was 10.5 million or 5% of total net revenues compared to 10.4 million or 5.4% in the prior year quarter. The fee we charge our clients has remained constant.

We continue to see direct table cost comprise a large share of gross cost of revenue. This is because we're experiencing improvement in payroll tax, as wage tax continues to lag with wage inflation, coupled with current year improvement in workers compensation as we continue to expand outside of California.

Given the pass-through nature of our pricing, the shift in the composition of our cost of revenue does not have effect on profit. SG&A in the first quarter was $26.6 million or 2.2% of gross revenues compared to $21.9 million or 2.1% in the prior-year quarter.

The increase of the percentage of revenue was primarily due to $2.2 million investment in management payroll and related expenses in order to support our growth. We also experienced an increase in 1.4 million in audit fees related to a change in auditor for the yearend 2016 audit.

The benefit from income taxes in the first quarter was 5.8 million, the annual tax rate increase was primarily due to higher forecasted pretax income which dilutes the effect of state and federal tax credit. We have no borrowings under our line of credit with Wells Fargo as of March 31, 2017.

We continue to be [indiscernible] expect for the 4.6 million mortgage on our corporate Headquarter in Vancouver Washington. This mortgage is now classified as current liability as it Q1, '18.

At March 31, 2017 we had cash, cash equivalent, investments and restricted [ph] securities totaling $343.4 million compared to $358.3 million at December 31, 2016. The unrestricted cash position in the first quarter decrease by 32.2 million to 18.4 million, this decrease is primarily related to 2016 annual payroll tax filing due in the first quarter of 2017.

As part of our funded workers compensation and insurance program with Chubb, we established and funded a trust account for the Chubb Trust. On the balance sheet, Chubb Trust is included in restricted cash and investment, the balance in the Chubb Trust was 299.6 million at Q1'17 and 277.1 million at Q4'16.

The March 31, Chubb Trust balance does not reflect an additional 11.3 million that was in transit and payed to Chubb on March 24, but was not deposited into the trust account until April 5. On the balance sheet, this intrinsic amount is included in other assets.

We constantly look for efficiencies in our operation and in how we structure our finance and insurance. The Chubb Trust has historically been invested in the money market investment which earned a low yield.

The Chubb program has matured which provides greater flexibility on program structure. We negotiated program changes and we’ll now be investing the assets in the Chubb Trust into a conservative fix income portfolio.

A portion of the trust was invested in the late March and will continue to be deployed until completely invested. This change will result in a greater return on the asset with low risk to the company.

In summary, our pipeline remains strong and we continue to build our base of net new client, while we saw the continued and expected slowdown in same customer sales, we anticipate the continued growth in the economy will translate to sustained health of our client. We believe that economic growth coupled with our ongoing effort 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 the more appropriate overlooking view of our business, we initiated a rolling 12 month outlook for gross revenue which we will update on a quarterly basis. We expect gross revenue for the next trailing 12 months period to increased approximately 16%.

For the full year 2017, we continue to confirm diluted earnings per share expectation of approximately $3.65, this includes non-recurring 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’d like to turn over to the President and CEO of BBSI, Mike Elich who will comment further on the recently completed first quarter as well as our operational outlook for the remainder of the year.

Mike?

Hello. And thank you for being on the call.

As Gary mentioned, despite headwinds we had a good start to 2017. As I look at the business, we've build a strong foundation and the fundamentals of the model are sound, the organization is well aligned, our pipelines are consistent and we’re seeing our value proposition mature in all markets.

Looking at the quarter, we added 334 new PEO clients, we experienced attrition in the 109 clients, 10 were due to account receivable, four were due to lack of tier progression, 12 were accountable due to risk profile, 25 sold or were closed and 58 left due to pricing to competition or companies that left to move away from the outsourced model. This represents an approximate net build in the quarter of 225 net new clients.

Looking forward our focus remains and drive to support scale in the model while bringing consistency and ongoing relevant to our offering. Related to the pipeline, we continue to evolve our ability to scale from a model base on individual market contribution to a systemic approach for developing channel and pipeline.

As a result we're seeing development of new referral channels in all markets, which support strong pipeline growth. This approach also supports consistency of message and product, which allows us to move more easily into new market and support growth against the large number.

We continue to see a consistent in contribution of a new business from all markets, most notably from developing emerging market that has historically under performed. Related to organizational structure, we've operationalized our approach to developing leadership and have roughly 18 months of run way with our existing bench.

We continue to build the field organization to support future growth, scale into new markets and investment support of our product offering. Currently we have 95 business teams housed in 57 physical locations.

By the end of 2017, we expect to have 101 business teams housed in 62 physical locations. If you look at the stratification of our branches across the organization, we now have 17 mature branches in excess of 100 million in gross revenue.

This is a measure we use to indicate a branch's ability to increase leverage. We have 13 emerging branches that are running between 30 million and 100 million in gross revenue.

We regularly reinvest back into these teams to support capacity in as they grow. Finally, we have 27 branches we consider development which run rate of up to 30 million in gross revenue and these branches we invest in infrastructure which supports consistency of pipeline while maintaining integrality of product as they scale.

Related to systems as a field driven organization which focus on building systems to bring visibility and predictability to our team, which allows for greater efficiency, these teams also support consistency which allows us to scale our product with integrity across all markets. As an example, in the quarter we launched a new platform in support of staffing and recruiting, which will allow us to more effectively meet the need of our clients in the tight labor market.

This allows us to sunset a legacy staffing payroll system. Looking forward in recent months I have had the opportunity to spend time in the field, gaining perspective on the maturity of our leadership, the quality of our teams and the consistency of product.

This is seen by the impact we're having on our client companies. Through massive [ph] design to maintain a nimble entrepreneurial culture the organization has align and I believe we have operationalized a variety of methods to stretch our internal teams.

We continue to see our value proposition mature today our product has runway and substantial relevant to the small business owner in all market that we serve. With that I'll turn it over to questions.

Nice job of going through in detail with your prepared remarks, I appreciate that. Mike, could you talk about the client attrition in the quarter.

If I recall correctly a year ago or going back overtime, the rate of client attrition first quarter is it a bit lower than it was this quarter. Can you compare and contrast perhaps the business today versus the last couple of years in terms of the first quarter net app.

Is there anything -- do you see the difference today versus the last couple of years?

One thing Jeff it happened in this quarter and it kind of was a transition between fourth quarter and this quarter is that we have typically measured whether the client was [indiscernible] when a client was added, against when we did payroll for that client. In the last two quarters we’ve actually move that and actually throughout last year we moved it to a measure where we don’t count that client is being active until -- we count that client being an active once we have a contract with them.

So, when we have a client, that had a contract, it normally would have come into January, if probably was counted back in December. So that would be on the ad front.

The other thing that we’ve done historically we’ve move from a model where we typically would count customer numbers, because you can get duplications of -- a customer can have multiple numbers. Today, we’ve matured a process where we're accounting FBIN which is the federal and employee tax number, which is a cleaner number as to who’s -- how many clients we have.

And that both -- those were actually better measures that have given more consistency through how we measure things throughout the organization. Relative to the attrition rate, we’ve seen a little more competition and we're just not going to change business for price.

But on a relative basis to our size, the shift over the last couple of years is in line with our growth. We still are seeing a retention level of north of 90%, probably even closer to about 92%.

So, that part, that’s fast and then the other thing on our ad, you're just going to -- you're going to go up to period where well if we haven't paid shift, we probably would have had a softer fourth quarter, but we would have been strong in the third quarter. So, there is roughly a balancing out of making 50 clients that are added quarter-to-quarter if you look at it.

And we did see some headwinds probably just call it, look on the hind sight, maybe a little bit of distraction in third quarter and fourth quarter which gauzed up our pipelines a little bit. And we’re back to -- we’re back and we’re focus well now and I think we're -- I'm not too concern that we won’t make that up in the year.

Okay. And with labor being so tight among you client base.

How does this -- new platform help the clients to meet their need for additional labor?

One of the things that we’re working on and this is still on build stage. But we have all the staff and resources already in place to support our staffing business.

We’re working more and more with our clients from a recruiting base. One of the things that we have; we’re supporting a 100,000 people on a week-to-week basis.

And our employees on week-to-week basis we do see that as that labor pool moved that we've that we'll have the ability to capture that labor course and we’re more effectively deploy that in local markets to support a hiring model for our PEO clients.

Okay. And then could you characterize the current pricing environment.

because you did renew a lot of business in the first couple of months of the year, may be how that pricing environment was during that [avenue] process?

Its always competitive, if you're getting as much as you can. But we haven’t seen where -- even though we would say that we ran off 53 client's due to competition, it spend higher, but I wouldn’t say that were running into -- we're not losing deals on new ads to that and where we're really -- I don’t think we're losing that much--we’re not losing business that really would choose to keep relative to price on our customer retention.

The thing we have is that we renew as we moved and evolved our model even to be less workers comp dependent. We 're adding business very consistently even week to week now.

So we don’t really have a spike in renewal as some of our competitors do.

Thank you Tylorson [ph] Capital and I have a group of questions. First of all, would you quantify how much weather impacted the quarter in terms of same location revenue and EPS wise?

So I will start and Gary can follow up. It's hard to quantify in dollars by location, but we saw the greatest impact in the North West and then Northern California, but also in Southern California.

So if you look at historically, what we would expect same store sales to be closer to 7% to 8% in the quarter coming in right about 4%, you're looking at the base of probably close to 50 million that was not same because of weakness in same store sale. Gary?

Bill, let's say it’s a good question we get to answer that but it’s hard one for us to try to quantify. Because we can tell you kind by geography or by regions where we're seeing the softness and the hours worked.

But to actually pinpoint specific industries or specific locations within this geography it is difficult because we have a large, a large client base of 5,000 clients and really it comes, they are feeding us their payroll and what we can tell from the payroll they feed us is that the hour's worked are down or that there employee base is not growing as much as it historically have.

That’s helpful I appreciate both those comments. And recognizing what you have just said, this next question may be even more difficult or less relevant, but what are you seeing in qualitative terms, in terms of weight growth, headcounts changes from your customers and hours worked, excluding the weather impact.

So I'm just trying to just get a feeling of general trends that you're seeing on a more normalized non-weather and important stuff basis.

So it kind of gets back to that same piece, what we're seeing in an hour's work on a aggregated basis, it's hard to separate the two, the evidence we have, the companies are having some difficultly hiring is more of a survey based, where you companies just to say I would probably grow my business by 20%, but I can't find the labor to scale. One of the things that we have seen relative to delay, probably more related to the probably more related to the weather effect, if we were running close to a 39 hour a week per FTE and historically during this period we were probably about to about closer to about 36 hours in the quarter, so that’s we have hours that were hit.

Wage inflation, as we look back over the last couple of years has crept, if we went back even three years or so we were probably, three or four years ago, we were at roughly $22, $23 an hour base, today we’re close to $25. Typically, when you're moving into a market where you have call zero employment if you really look seriously and say how much of your labor force below 4% is employable, you're going to have to see a little bit inflation to break that log count and we haven't seen that yet, not at least in the most recent quarters.

Okay. And is that something that given what you've seeing in past cycles that you would anticipate would happen that ultimately someone's going to break price and start to push wages up a bit?

I think if you're going to have on an economy it's going to be continue to expand, businesses are going to find out opportunity where it is and you're either going to find it through -- you're going to first find it and if they've got more business than they can handle, you're going to see pricing inflation in the overall economy first and then it will follow because there is opportunity at a new price point, so they can pass on the cost of that additional labor. So, there is -- the pieces have to work together a little bit and there is a more of a cycle.

I do sense and we’ve had a lot of conversations with owners and principle in our book over the last three or four months and there is a lot of optimism and willing us to grow. I still feel that there is a little bit of a risk off scenario, where the business owner may have gotten back to where they were even to a level where they were in 2007, 2008.

They’re feeling good, they're making money and there is been lots of work met to take the risk to really grow in. That’s probably the bigger headwind right now is why grow, if I can’t find good people, I don’t want to grow.

And that’s only encouraged them not to get out over their tips of they can't find good people as they can find good people. And then with those two factors, that will be what will break that log down and get things moving.

Okay. Thank you.

And I do have one additional question, I'm going to have to apologize in advance for my ignorance. The 2.9 million adverse claim change that you had referenced.

Does that impact the P&L or does that pour through the balance sheet? What piece of accounting if you would please?

Yeah, Bill. So that is -- so every quarter we do an outside actuarial evaluation where we look at the historical claims and the historical loss experience.

And then we also look at the more greener years in the current trends which we have used for our, called it our loss ratio, our loss expectation for the current year. In that scenario, for the 2.9 million what we had was a handful of claims that has a change in fact.

So the claims are constantly being worked by the claim adjustor and when you have claims you can have a claim in a change in fact and the fact could be the way the medical evaluation came in or somebody else needs a supplemental surgery or things of that nature that won’t original in there. So what had happened once we had a handful of claims that has changes of fact, when they had a change in facts, we had increased the reserve on those claims.

And what happens there as those claims being going to be actuarial evolution. And then based upon that actuarial we moved the estimated liability for the year 2016 and prior by 2.9 million and that change of 2.9 million is that’s an expanse to the P&L and then a liability that goes up on the balance sheet, but the importance there is that's a change that does not affect revenues, that’s just a P&L within offset for the liability, where it doesn’t have a revenue offset.

So to make sure that I'm clear, if I've done the tax effecting correctly, you had a $0.27 may be it is impacted that flow through the P&L that do not have these change in facts, that you would not have had and as a results you would have reported a loss of closer to a $28 and then the $55.

Your logic sound, I don’t have the tax effective numbers in front me, but your logic is sound.

Again, I would like to thank you for being on the call. We feel that 2017 is off to a good start, got a little bit of make to do in the year, but we're confidence that our teams are all growing in the same direction and feel very good about where the company is today.

Looking forward to catching up with you in a couple of months. Thank you.