Question-and-Answer Session
Operator
(Operator Instructions) The first question comes from the line of Josh Vogel – Sidoti & Co.
Josh Vogel – Sidoti & Co.
Bill, glad to hear you are back full time.
Bill Sherertz
Somebody called me an asshole the other day so I guess I’m much better.
Josh Vogel – Sidoti & Co.
Building off what you just said about you may make adjustments depending on how the economy tracks, if things stay status quo with today those branches that are unprofitable do you think you would lean towards closing them down over the next quarter or two?
Bill Sherertz
They are small. They are not our big branches. We are in small markets. Actually the expense is not very great. That would be a tough decision but if we really thought we were headed towards 20% unemployment then yes we would pull the trigger on that.
Josh Vogel – Sidoti & Co.
Shifting gears, the staffing business I know it is generally weaker quarter-over-quarter into Q1 but I was wondering if there was anything else unusual in the quarter outside of the general recessionary pressures? Maybe were any significant clients lost or did they go out of business?
Bill Sherertz
No, it is just down. By nature what it is, people are using less and trying to make do with what they have?
Josh Vogel – Sidoti & Co.
Can you maybe give us some comments on the pricing environment and if you are losing any significant leverage with any of your clients? Also, I know the gross margin came in at 4.6% last year. I was wondering if you could give us any sort of idea of what you think the margin could be in 2009.
Bill Sherertz
I will let Jim address that second part. The first part, and I left this out, we should see some margin expansion going through particularly the second half of the year. California has decided to raise Worker’s Comp rates by 24% and that is effective July 1. It looks like that is going to go through. That is really kind of a big help to us in terms of our pricing pressure with our PEO customers.
We have been lowering our customers’ mark up for the last three years and you see that and if you were to go back and look at our margins three years ago versus today it is lower as well as our losses are lower. But, we see the pressure was coming from the Worker’s Comp side of the world. Our Comp expense is up a little bit and certainly in the state of California Comp expenses on a state basis has gone up and so the expense has gone up far more than the revenue from an insurance point of view. That could be a big help to us particularly in expanding margins with existing customers as well as the new customers. It will take any pressure we have had over the last 2-3 years in terms of having to lower mark up which effectively lowers our margin.
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