Q3 2019 Earnings Call

Ladies and gentlemen, thank you for standing by conference will begin momentarily once again, ladies and gentlemen, thank you for standing by our conference will begin momentarily.

Good day, everyone and thank you for participating in today's conference call to discuss BB Aside financial results for the third quarter ended September Thirtyth 2019.

Joining us today, our Bts, Vice President and CEO Mr., Michael you watch and the company CFO Mr., Gary Kramer following their remarks, well open the call for 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 company provides important questions regarding regarding forward looking statements.

The company's remarks during today's conference call will include forward looking statements. These statements along with other information presented that does not reflect historical fact, our subject matter of risks and uncertainties actual results may differ materially from those implied by these forward looking statements. Please refer to the company's Risa earnings release and to the company's quarterly and annual reports filed.

The Securities and Exchange Commission for more information about the risks and uncertainties that could cause results excuse me that could cause actual results to differ.

I'd like to remind everyone that this call will be available for replay through December 6th 2019, starting at three PM. Eastern time. This afternoon, a webcast replay will also be available.

Yeah. The link provided in today's press release as well as available on the company's website at www dot might be ESI dotcom.

Now I'd like to turn the call over to the Chief Financial Officer, BB ESI Mr., Gary Kramer, Sir. Please go ahead.

Thank you Michelle.

Depending upon where are your dialing in from good morning, or good afternoon, everyone.

We had a very strong quarter that resulted in record earnings diluted income per share for the quarter increased 30% to $3.24 compared to $2. A 50 cents in Q3 at 18.

Gross billings of 1.55 billion grew 7% over the same period.

P.O. gross billings increased 8% to 1.52 billion compared to the third quarter last year. The third quarter 2019 had one more work day when compared to the third quarter 2018.

When adjusting for the one day difference our gross billings increased approximately 6% over the prior year period.

Gross billings grew by 5% in California versus 15% in all other combined geographies same customer sales were 5.7 per cent compared to 4.7% in Q3 leaching.

However, adjusting for the one day difference same customer sales would've been approximately 4.3%, which was lower than Q3, the gene and lower than our internal plans.

We continue to increase our client base with the gross addition of 386 clients or 217 net of runoff in the quarter.

The 386 gross additions our record number in any third quarter in our history.

Net revenue of 248 million reflects a slight increase compared to 247 point Threemillion in Q3 in 18 and reflected weaker staffing revenue, which decreased 17% to 33.8 million compared to Q3 of 18.

The decrease in staffing revenue is a direct result of the continued tight labor market and we anticipate that staffing will remain a slight headwind to near term revenue growth.

Gross profit outpaced gross billings growth and increased 19% to 70.8 million compared to 59.7 million at Q3 at 18.

Gross payroll taxes and benefits as a percentage of payroll was 6.8 per se in Q3 of 19 were 6.9% in Q3 at 18.

[noise] workers' compensation expense as a percentage of gross billings was 3.6% this quarter, which is below our expected range of 4.4% to 4.6%. This compares to 4.5% of gross billings in the third quarter 2018.

The third quarter is one we reset our triangles and bring in another year of experience. The independent actuarial valuation resulted in a reduction of prior year estimated liability of $5.6 million.

Also as previously discussed we restructured our arrangement with Chubb to reduce frictional costs and this is the first pure quarter. We're all policies are effective on the more efficient structure.

Our workers compensation claims frequency continues to trend favorably in the quarter. We saw trailing 12 month relative frequency of claims as a percentage of payroll decreased 12.9% compared to the third quarter 2018.

All in we're very pleased with the way our workers compensation portfolio is performing.

We have taken many steps and actions, which are yielding positive results, we are conservative and deliberate and this strict focus and attention has resulted in a redundancy in the portfolio seven quarters in a row and why our expense continues to come in lower than our range.

[noise] payroll as a percentage of gross billings is increasing as other components of gross margin decrease this is related to an increase in PEO business mix and continued expansion outside of California, where many states have lower payroll tax and workers compensation ratios.

S DNA into third quarter was 41.4 million, which is 13% higher than the prior year quarter. This increase includes a timing portion for the extra business day, plus a slight increase in profit share.

We continue to be mindful and diligent about balancing spend against growth while investing in the business for the future.

For the full year 2019, our S gene a is expected to be on plan.

The provision for income taxes in the third quarter was $6 million as mentioned last quarter, we increased our annual effective tax rate estimate from 18% to 22%.

Moving to the balance sheet.

We mentioned last quarter that we successfully renewed our seven 119 insurance program with Chubb. This was a significant renewal because we have moved closer together with our collective view of the actuarial loss rates. This was a tipping point for the balance sheet and result in accelerated growth of our unrestricted cash balance and our.

Free cash flow.

Accordingly, our unrestricted cash and investments were $137 million at 939 team, which is $36 million greater than 630, 19, and $100 million greater than 12 30 118.

The restricted cash and investments, which are primarily comprised of the Chubb Trust was 420 million at 939 team.

The 557 million combined unrestricted and restricted cash and investments will continue to be invested in a manner consistent with our previous disclosures. We continue to stay conservatively invested in shorter duration securities in the near term Google flattening yield curve.

At 930, 19, we had 173 million in cash that returned an annual crediting rate of 220 basis points.

At September Thirtyth book yield for the invested portfolios was 238 basis points with the duration of 1.71 years at 939 chain. The average quality of the invested portfolios was double play and no investment was greater than 4% of the portfolio.

In the quarter, we earned $3.7 million of investment income.

On the liability side in the balance sheet, we have no material updates we had no borrowing under our credit line as of night 39 team and we continued to be debt free except for the 4 million dollar mortgage on our corporate headquarters in Vancouver, Washington.

Turning to capital allocation, we have built a financial moat around the company and we will continue to be diligent in mindful regarding balancing investment in the company, while returning capital to shareholders. We have an authorized stock repurchase plan, which is another tool to drive shareholder value, what we did not buyback any stock in the core.

Sure we increased the dividend last quarter by 20% and have returned $6 million to shareholder so far this year.

In summary for the quarter, our branches are continuing to meet or exceed expectations regarding the controller for gross and net client adds.

We continue to experience margin expansion through product relevance, while reducing costs in our model. Our gross billings continue to increase even with the softness of the old controllable same customer sales.

We continue to invest in the business and future growth be mindful of expenses and looking for savings and efficiencies in everything we do.

Our pipeline remains strong and we continue to build our base of net new clients.

Our referral relationships and distribution channels continue to widen.

Our balance sheet has made the turn and we've built the financial note to support the company.

But more importantly, our core earnings are strong and predictable.

Regarding our outlook for the remainder of the year.

We continue to expect gross billings growth for the next rolling 12 month period to be approximately 8%.

This contemplates continuing deceleration in staffing revenue in same customer sales growth for PEO to be similar to what we have experienced thus far in 2019.

For the full year 2019, we are raising our estimate for diluted earnings per share by 65 cents to approximately $6.05. This increase reflects our core operating results performing as planned.

Yes, our workers compensation portfolio performing better than expected, which is partially offset by an increase in our effective tax rate to 22% from 18%.

For the fourth quarter of 2019, we expect arrange for workers compensation expense as a percentage of gross billings to be 4.3% to 4.5%.

This range can also be applied as an approximation when looking forward to 2020.

Now I'd like to turn the call over to the President and CEO Bbs I, Mikey Litch, who will comment further on the recently completed third quarter as well as our operational outlook for 2019, Mike.

Hello, and thank you for taking time to be on the call as we do each year. We spent much of September in the field reviewing progress of 2019 and looking forward to 2020 from my view of the business. The organization looks strong and we continue to execute to our plan in support of our fundamentals.

Additionally in September we introduced a new website and a new U.R.L. My baby Aside dotcom. This is the first step moving.

Moving moving forward.

Well make that will make us well excuse me. This is the first move in several we will make and coming in the coming months to more accurately represent our value proposition to the market also we continue to spend time in the field with referral partners and business owners working to understand what they may be saying.

In the market these efforts and our visibility to the business continued to support confidence in our value proposition we.

As we look at the market.

Looking forward on the quarter, we added 360 386, new PEO clients, we experienced attrition of 169 clients 15 due to cost receivable 13 for lack of tier progression three due to risk profile 20 businesses sold 45 businesses close.

<unk> and 73 left due to pricing competition and companies that have moved away from the outsourced model. This represents an approximate build in the quarter of 217 net new clients.

Also on the quarter.

We took time to pull 10% of our existing clients to better understand what they may be seeing and speaking with these clients. A majority are profitable and continue to see relevance in their offering despite runway as to end opportunity lack of skilled labor continues to be the limitation to growth.

And there continues to be as some uncertainty related to a variety of macro issues in general the business owners, we spoke to expressed optimism, but are not able to find the talent they need to grow which is why we believe we're seeing softness in same customer sales.

Related to pipeline, we continue to see strong client adds in the quarter and we believe this is a result of our referral partners understanding and recommending Bbs side, we continue to evolve our ability to scale from a model based on individual market contributors to a systemic approach for developing referral channels on a national basis.

Today, we are seeing development of new referral channels, and all markets, which supports strong pipelines growth.

Evidenced by continued new client adds related to organizational structure, we continued to build the field organization to support future growth scale into new markets and invest in support of our product offering in the quarter. We added one business team, bringing us to 114 business teams 63 branch.

Locations.

We continue to build organizational structure at all levels to that end in October we announced the addition of Dan debris to our board of directors, bringing our total count to eight members.

Related to branch stratification.

We have 18 mature branches with one rate run rates in excess of 100 million. This is a measure we used to indicate branches ability to increase leverage we have 20 emerging branches running between 30 and 100 million we regularly reinvest back into these teams to support the path.

Subsidy as they grow finally, we have 25 branches, we consider developing with run rates of up to 30 million and these branches, we invest to support consistency of pipeline, while maintaining integrity of product as the scale.

As we add infrastructure to support capacity as dictated by our pipelines, we pay particular attention to our ability to add business teams and support of our growth.

Looking forward.

The fundamentals of the business are strong we remain focused on bringing predictability and value to the business over the long run.

Feedback I've received from our plans from referral partners supports relevance of our product as we look at the next five years, having spent a great deal of time in the field. This year my confidence in our ability to execute comes from the strength of our teams and the structure that allows us to stay nimble we continue to invest in infrastructure that's it.

Ports, both product evolution, and our ability to scale into new markets with predictable outcomes.

Today, we have a foundation that is strong we know where we need to focus our energy and we are executing to our plan.

With that I'll turn it over for questions.

Thank you Sir at this time will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question Q you May press star to if you'd like some of your question from the Q for participants using speaker equipment, maybe necessary to pick up your hands that before price.

Let's start keys.

At least we pull for your questions.

Our first question comes from the line of Chris Moore with CJS Securities. Please proceed with your question.

Hey, good morning, do you guys.

Yes, Hi, Chris Good morning, MAGE focus a little bit on growth.

Specifically, you know outside California kind of.

The impact that that has kinda near and midterm midterm.

Just start with maybe on the referral channels. So.

You referral channels that you have in California are well established can you talk a little bit about you know kind of how they look outside of California.

Hey, Chris its Kramer. So that's a good question and what we've really focused on is consistency in our product inconsistency in how we deliver the product and how we go to market. So if you think about how we try to forge these relationships on a national basis we.

Got a strategy for for how we how we work with our referral partners in every state. So if you're referral partner in Utah, you get treated to the same sort of service and platform and as a California. So you know it's going to vary by market some of our.

Markets that are more mature like in the mountain states versus.

Say, our east coast branches that are opening up.

That are going to take a little time to to get those channels developed but you know the basic idea is if you go in any Bbs ice storefront. It looks the same no matter what state you're in that referral partner gets treated with the same.

Respect and.

Service everywhere, Yeah, Chris night add to that one of the things that I saw probably in the reviews that we did.

In the third quarter, just being out in the field was.

One of our bench of leadership in all markets is very consistent and.

You really don't see a very much a difference between.

Call, It, California, and the mountain states to the East coast. The other thing I would say is that as we may have had.

If we grew up on the West coast in California, with more of an insurance offering in the past as we've we've evolve that brand and have shifted it.

Thats taken more effort and we've had two reeducate, an retool lot of our referral partners in California, as we look at other states, where we've we've probably came at a lot of our growth through a different value proposition, we're seeing an adoption of our current value proposition in those markets and probably enough.

Celleration.

Through our existing pipelines in those markets where.

Our where we actually see a higher effective yield coming out of the referral channel that we get in and markets outside of California.

It's interesting.

From a kind of customer or client size. It's it's.

The clients are smaller a that you're on average that you're.

You're signing up outside of California.

You had you know kind of historically talked about a five year timeframe for a successful branch to reach that hundred million dollar level.

Does the kind of starting on the on the smaller side does that impact much that that potential progression that you see.

Yeah, there's there's a little bit more of a headwind and what you. There's two sides to the smaller customer the smaller customer is a lot of times when you see a new branch coming online. There is maybe a tendency to be more comfortable adding the smaller company company and as you get more traction.

You'll see that average client.

Employee size increase.

And in all markets, so that kind of the standard, but then you have to take into consideration that if you look at companies in southern California versus companies in Utah, or Boise, Idaho, there tends to be just by nature of population size and and much.

Graphics, they just tend to be smaller so.

It will take a little bit longer for us to get there, but one of the things I would say two is today.

Our overall model, we get there faster today because.

I think one more efficient and how we're adding and building pipeline and how we're adding business than we maybe have been go. If you went back 10 years ago.

Got it that's helpful. I appreciate it I'll jump back in line. Thanks, guys.

Thank you. Our next question comes from the line of Jeff Martin with Roth Capital Partners. Please proceed with your question.

Thanks, Good morning, Michael Kramer, how are you.

Yes, yes.

I was wondering if you could comment on the implied.

Q4 guide relative to your updated guidance of $6.05 for the year.

Implied down year over year.

I know, there's some things going on with payroll taxes, but I think be helpful to kind of get some insight from you.

And then open format here on that.

Yes so.

If you if you think back for Q4 of 18.

We have.

Ill call. It two nonrecurring so we had a change in estimate for workers comp which was.

2.3 million so when were given any forecast for the forward look we don't we don't forecast for any change in estimates. So that's that's one of the puts and then the other one was in Q4.

18, we were estimating that we were going to have a payroll tax that was going to be do that ended up not being do so we took down that accrual in Q4 of 18, So you've got call. It two credits from 18 that don't repeat 19. So if you if you normalize for those we still are getting to earnings growth for.

For Q4 of 19.

Okay.

And then just wondering if you could give us an update on the progress some some of the new branches in new business units that have opened up this year.

So as we've added new branches in new markets, we're finding that.

Well, there's there's two style of branches will say that if we add a branch in a market adjacent see we'll call it a tuck in.

Typically those branches are started with.

Talent, that's already been working interbranch be it a current business partner that maybe moves to a.

Our new branch and opens that for example, with that your taken experience and tenure and you're combining that with a book of business that get started that might be peeled off from a local branches that that it makes more sense for those that for that for those customers to be in the new branches.

When that happens that branch one gets off the ground faster because of the talent, but also the momentum that's already there with the existing client and typically there's already a somewhat of a poll, where you've got a existing referral channels already built around that market. So in those branches will find that they.

They they move pretty fast through that 20 to 30 to 50 million.

They also they all have to go through a retool and a rebuild right around 60 million and we tend to get there more proactively today than we ever used to but when I look at new branches that have ramped in the last couple of years, they're all doing.

Very well, we don't have any branches that are that are suspect or needing to be retooled at this point relative to anything that's new.

When we look at markets that we enter as a.

Greenfield, we tend to take a little bit more time on the front end by having you that new manager or whoever is going to be running it sit in the wings for up to six months and really learned the business before they go out and enter those markets.

It is helping US a lot also is that our referral channels are our broader and once we go emit into a greenfield market, we find that we're able to.

Create pipeline a lot quicker so the the pace of a greenfield might be a little bit slower than than the tuck in but we're also seeing where are those branches are ramping faster than historically.

And I'll just throw some numbers on it when we.

When we set out our plan forbid the beginning of the year we had.

All of four to five new branches.

So far this year, we've all we've opened three branches to in California, one in Colorado.

And where we were in the process of signing the lease to open the location for another one in the Allentown area. So we're calling hitting our number for the branches and then when we think about the business units.

Business units were a little behind for our plan for where we thought we'd be I think for the year, we're going to be slightly below it and that's really just a function of.

You know.

Timing more than anything else more than change in strategy. It's just the timing on when you have to find the people get a man and get them operationalized, Yeah, we're looking at where we optimize efficiency of capacity utilization against.

Where we need to be to make sure we don't stall pipeline or anything in our our cap you has come up if it was running closer to 58, 59% call. It at the beginning of the year today, we're closer to about 64%, but we feel like we still have good runway to build capacity is necessary through business units.

But we're we're what kind of seeing where we or gaining more efficiencies through our teams and we're getting more done as well so.

Okay.

And then what the additional.

Build on the balance sheet in terms of under strict cash how are you looking at.

Investments for growth versus share repurchases at this point.

Yes, I mean first and foremost when we when we think about having excess capital right. The first thing we're going to do is we're going to invest in our businesses and invest in our branches on our business units.

Then we're going to look in we're going to invest in things that meet the company either revenue synergies or expense synergies I E T information technology and.

And then you know we're not we're not a very acquisitive company.

When you think of you think of our value prop people are our product and and why buy it when you grow it.

So then we get down to the next tranche, which is.

Raising the dividend, which we've done in stock purchase stock repurchase, which the board authorized last quarter for.

50 million over three years.

That's a tool that we will utilize if we see any kind of dislocation in the market to to be a backstop for when we think.

The stock is undervalued I can just say that we don't we don't have an itchy trigger finger and we're going to be smart methodical with how we.

Spend.

Our shareholders dollars, Yeah, I would say too and complement that Jeff that.

When we look at investments that we've made typically when we add a branch it's not capitalized. So just comes up through through our own learnings stream and it becomes the headwinds to earning earnings one of the areas that we have been putting a lot of energy back into is just.

Bringing a new work in maturity level to our overall IP platform and was we get into 2020.

And beyond we'll be rolling that but we have probably a broader strategy today than we've had in the past relative to how we are building technology, and and where were where we're going with that as a complement to our existing infrastructure and model.

Right right. Okay last question some of your peers have had issues with underwriting healthcare insurance.

Just wanted to clarify that you have no exposure to underwriting health care and some other similar issues that that others are having.

Yes, so we do not offer health care to our clients.

As you are seeing with some of our peers that's a.

Can be difficult risks to underwrite and we don't really feel the need for it in our value prop.

When we think about the risk we do take.

Call that workers comp and for that risk, we have a very methodical process for how we bring clients on for how we work with declines to align better for how we can work with them to mitigate risk and we feel like.

Surely we can make that a better underwriting decision as opposed to the healthcare side, which.

You know is more of a challenging risk that it's more difficult to mitigate.

I was also say that Jeff as we've grown in mature model over time that the healthcare side is although an opportunity I think it always has been a little bit of conflict with what we're really trying to get done with our business owners and we're running our high touch model.

I would rather be non captive too.

To help benefits and have professionals that can come in and really support our clients for where they're living rather than have won one stop fits all and and as we have stayed outside of that and and stayed risk risk neutral on on the health care level, we still have mechanisms where we can.

Help our clients find the best resources, but we do that as the service rather than taking underwriting risk.

Great. Thank you guys.

Thank you. My next question comes from the line of Josh Vogel with Sidoti and company. Please proceed with your question.

Thank you a high making Kramer.

Or John .

Mike usually give some commentary around the average pay in overtime trends across your client base was wondering if you could share that with us.

So in the quarter I'll, probably deferred to the absolute slipped Kramer one of the things that we have seen probably as it relates to growth in same customer sales are still probably coming from wage inflation and but oh, it cranford talk to us more of the detailed up.

Yeah, Hey, Josh it's more of the same trends that we talked about last quarter. So when I give you numbers here I'm going to.

Im going to adjusted for the one extra day [noise].

So we're still seeing of our 4.3% increase in same customer sales.

The lions share of that is wage inflation, which is going to be in the mid to high twos.

And then after wage inflation you get a.

A little bit of a bump up in headcount adds and then you get after that you get a little bit of a bump up in hours worked so when we're looking at how this how our same customer sales is performing well, it's probably going to be in this over this next cycle I'll say next 18 months, it's going to primarily come from the wages.

Relation idle with unemployment at a sub three five I just don't see how.

We're going to get the uptick in Wses.

Yeah, and I would say, Josh in meeting and spending time with our clients.

They are there a lot of interest during a good spot there they are doing well, they're profitable, they're making money and what we did notice probably over the last couple of quarters is that wage or hours worked at somewhat normalized where to me. That's we're business owners aren't finding that they have to stress their organization to cap.

Sure market opportunity, but more have.

Modulator themselves to make sure that their capacity is aligned with the opportunity and not to push the to have a lot of overtime and in doing so I think are running more profitable businesses.

The one the one flip and this is maybe off this mark a little bit that we noticed in a conversation that we were having a couple of weeks with a group of owners is that you're seeing a little bit of a transition where you have an old guard and a young guard. The older Guard is the group that has on the businesses for a long time lived through eight or 910.

And and as they look at their business. They can think about growth. They can think about where they're going but they're not going to break it to take unnecessary risks. The interesting part is the young artists coming in where you've got maybe a mid thirtys group that seems to almost be a split now in the room, where there are actually.

The buying companies they are doing acquisitions, there, they're more aggressive and there they are building for their future and so there's a little bit of a shift going on there. It's it's more anecdotal at this point, but I think that there's a little bit of that going on as well.

That's helpful. Thank you and I don't want to get to into the weeds here, but.

Did mentioned.

45 businesses closed.

In your attrition number for PEO clients and I'm just curious.

Mostly being seen in California, or elsewhere, and then I can't find in my notes.

Seems a little high I was wondering how that status trended this year and.

How often you evaluate your client base and given how immersed you are in their business as a partner do you typically see the writing on the wall before they do.

So we've got very good visibility as we work with that client the idea of closing versus selling is probably a a.

Closing could mean that they changed in FDIC and number and move to different ownership structure.

And we probably wouldn't be able to see or dissect that as much as we recognize that the business was there and then it wasn't there.

The businesses that sold we recognize that they they they move they shifted ownership structure, there and typically we might capture that same business on the other side, but the trend has upticked in the last couple of quarters between businesses sold and businesses closed. The one thing I'd kind of look at that a little bit too though is this.

On a relative basis, if you said I have 65 clients.

In the quarter that either closed or sold its it's it's less some 1% of our total base of business. So as our overall base grows those numbers may get skewed a little bit when you look at them just on a on from a real standpoint.

Yeah, and I wouldn't say Josh we.

We pay attention to you know companies that have the potential to go dark from a credit perspective.

And we've got.

Bush.

6 billion through the pipe in if you look at our allowance and our expense for companies that go dark it's it's not even a rounding issue because we got pretty pretty tight on how we do that side of it.

So we're usually we're usually ahead of them behind it if they are going dark.

Great. Thanks for the thoughts around that and just around the site.

Just curious how how thats being received across a client base and can you discuss some of the other efforts that are planned for rollout and if this involves any.

Notable.

Investment or at least on your end.

So I'm reluctant to call it anything related to a rebrand and that when you start to show up different in the market Thats, how it can be perceived what I would say is that as we discussed internally, we started to really rebuild and restructure and realign who we are.

Our from the inside out before we ever decided we could look different on from the outside looking in and so when we pull the organization as a whole and we asked them when do they when do they really thinks that we started to rebrand retool ourselves people will point back to 2011 2012, we finally have reached a place where.

There are.

All the pieces that we've been pulling together for the last many many years have have reached a place where we can actually tell a different story and that story is being well well received I think that if you go out to.

The new website, it's under my BB aside dot com.

We'll see maybe a story that represents a lot of what we've been talking about the last couple of years, but it it aligns us with what we really believe were brand to market and as business owners and different people see it. They they want to comment that I've had back for me is that it finally, it finally talks about what we really do and.

And that's where we're excited about that as we look forward I think that you know as we look at what's possible from here. We've got a very strong core business I think we've got good core discipline around how we interface with our clients through our blueprinting through how we basically manage and manage the full.

Our client lifecycle through our framework process that we have and then ultimately how we tie that out with the talent that we have in front of clients everyday and then how we support that with technology. So those are all things that will continue to enhance as it relates to different places that you might see a show up.

It will be you might find us and different venues.

Showing up in our and and different ways, but I think the real emphasis towards where the direction. We're going is when you think about my Bbs side versus Bbs side in place community and when we look at business owners that we pull together, we're building communities, both locally and Super regions.

Only around.

An idea that they don't have to be alone and that they actually have a place to go and on a partner that they can be there with to help them increase their own probability for success. So that's that's the direction, we're going with it and but through these communities that were building and we've been we've been working on this for about three years now when we bring a group of business owners in and we.

Start to get them to talk to each other it's game changing and as we get better in the field working with our clients. It's actually accelerating so I'm excited about all those things and we'll we'll we'll keep you posted as there's more to look at.

Sounds good thanks for taking my questions guys.

Thank you once again as a reminder, if you'd like to ask a question. Please press star one on your telephone keypad for participants do you think speaker equipment, maybe necessary to pick up your handset for pressing the star keys.

Our next question comes from the line of build that does Zelman would tie in capital management. Please proceed with your question.

Thank you I have a group of questions and I'd like to start picking up on a on where you left off.

Early in the opening remarks, you said that my Bbs I was just the first of many steps.

That she will be making to highlight your value proposition would you. Please.

Open the shades on the window and give us a.

Give us a look into what you're going to be doing from this point forward to highlight that value proposition.

Well im going to make it I'm going to make unblind and as we kind of turned the little thing in the blinders off a little bit lower little bit of sunlight and I'll give you that much about that that's.

You know as we look at again, if there is a theme about what we've been building over many years, it's been about creating a client interface, where our clients see us as a true partner and through the interface that we have with them over a long period of time, they see us as.

They are true advocates as we look also to our referral channels and we educate and help them understand the value they can bring to their clients by introducing us into the DNA of their client base.

That begins to support it. So if you look at the theme around my BB OSI being a a community there are a lot of things we can do there related to.

Our access point, where we can bring them in and give them exclusive access to the collective a business owners that we work with so I think that when we look at technology aligned with that that becomes one way that we are broadening that network and access to information that is proprietary to us.

When I look at just where we start to show up outside of of the of what we do already.

We do a lot of our our.

I'll call it a referral channel developing through a networking strategy and through a channel strategy and we build it through an event strategy and as we have events, where we bring a lot of our referral partners in to really understand and havent experience with BB OSI as well as our channel partners that we work.

With that support us as well as we bring customers in that becomes a little bit of an incubated or learn a little bit more.

We have today three LPG events that we use.

We're will bring and do do create environments that literally it's there's there's barrier to entry they can't get into those but over periods of times, we brought groups through and we've got very very firm relationships overtime.

With that we've we've looked at the idea of front running.

New markets that we might be get into and creating a way efficient way and cost effective way to being able to.

Start building a visit building visibility in the market to a broader footprint overtime and using the LPG a little bit but we've actually.

This last year we're on.

Three or two new.

Golf bags that are on tour year round out on the LPG a.

What we recognize there is 77% of those individuals that participate in a program and participate as business owners in programs are Ceos are built or business owners. So we're tapping a market that allows us to one create an experience. We're also getting our brand out in front of us.

Without being going TV and media wise, but we're creating environments to build relationships with our referral channels and then ultimately to begin to expand and and create avenues, where the brand of Bbs I and my Bbs side.

Our being visual are being.

Seen by.

Those people that might be our audience, either today or in the future and creating more of a curiosity approach.

Thank you and and you would also mentioned that your referral relationships were widening would you would you talk about that and and really what you mean.

You state that.

When I look at somebody that is a potentially a a person that is aligned in a trusted advisor to a business owner when we first meet them, we would probably tear them as a tier one referral partner in that that that individual probably can kind of get who we are they they.

I see us, it's maybe an opportunity for them to create an opt to create business for themselves.

But but it tends to be a little more transactional so as we recognize the work we have to do through education and through helping them see maybe the opportunity through a different lens. We spent a lot of time working with that those individuals both in local markets.

And Mike or regions throughout our network of branches and then on a on a more global basis as we get to a point, where we're doing business and they're starting to get to understand our value proposition will bring them into environments to help them see there see the product through the eyes of their own bill.

Business, if that makes sense. So if you think of somebody that might own a and accounting firm or a lot from or an insurance agency, they're running a business and rather than help them see the product is that might be explained will bring them into a similar environment that we bring our business owners into and when we do.

You that they actually start to see the product from the inside out and start to really understand the nature of what we're trying to do from there we double back and will tend to work with their internal organization to help mature and under and help them understand that that might lead us to a tier a level two or tier two referral partner that at that time now.

Well the sudden becomes one of those areas, where we've got a still handled a little bit, but they're catching on and they're getting there. If we can now evolve that relationship from tier two tier three you get the tier three referral partner that probably understands it can articulate our value proposition as well as we can now they are really doing work for us in the market.

That that that's helpful.

So presumably then you are seeing an increasing number of the partners you would consider tier three and hence the widening of the of the relationships.

Yeah. So one of the areas. The one of the ways. We look at that is through yield and as we look at opportunities that we we we have presented to us versus the number of conversions or the yield on on the original opportunities that's a little bit of where we then start to stratify Where's that business coming from from who and then what is.

Our effective yield and with different audiences. The one thing that we have also seen in this last quarter and probably a couple of quarters as a significant uptick in referrals from existing clients.

Mike I think you mentioned in your opening remarks or somewhere in this in this call that the California yield was less than referral channel yield was less than outside of California.

So congrats yet on having more more referrals from existing customers, but what can or needs to be done to improve improve that referral channel yields in California.

And I would probably what I meant was the way the way. The channel works is if you look at first Mena second means a third meeting a fourth meeting there's the fall off happens differently. When we finally get to the ultimate yield of the ultimate the first pipeline that we see to the end it's pretty much in line with what we see and.

In California, as well and it's pretty consistent across all states, but how it happens is different so I. Thank you for brand that up so I can.

Clarify that the other part, though that I would say is that.

As we have seen the uptick of of.

Even client referral, it's the more we execute and the more clarity we bring to the market as to what we really do.

It's more of a time based maturing process that it's allowing us to get more from the opportunities that we have.

Yes, I would just.

Put some numbers around that are our efficiency ratios right for how we had how we acquire clients is pretty consistent whether its california or all other geographies.

We are growing quicker outside of California.

But California is still adding more clients than outside of California, and it's just we get the California. It's it continues to grow and it's a little bit like diluting the ocean because we've got such a big footprint in California.

Thank you and then I do want to talk about claims frequency and then I'll then will be done here.

You said claims frequency dropped a roughly 13% of what was what was behind that that success.

You know I wish we could pinpoint to the one thing and do it over repetitive Lee but.

When you're doing these things it's a lot of a little things. So we've got about 30 different strategies in those 30 different strategies are yielding the favorable results that we're seeing so it's not it's not one thing we can pinpoint to its a lot of little things, but.

We feel very comfortable with where we are for the year for for workers comp for claims coming in for the value of the claims we feel very comfortable about.

What we're seeing on the prior years and you can see those results in the consistent redundancies that we have in the prior year loss picks so.

Although the I can say is we have a disciplined strategy and we are conservative and we are executing that strategy and then you.

You start to see the conservatism on wind overtime.

Yes, I would add that it's more of a systemic approach to all the things that we do from when we brand new client onboard to actually the level of retention that we have with the overall base and that the longer we do business with a client the more app. They are to be be better run companies and I think thats, probably where we see.

One area that that makes a big difference.

So where are you a serious when you said 30 different things to improve.

Claims frequency.

We.

We have many tools in the box.

So is this just one of those examples where that business is being run.

Much better from an operational perspective than it was several years ago and a as part of this consistency that you a that you referenced in the opening remarks as part of what is going to lead to a.

Lead to that consistency going forward.

I would say this that Bbs Psi is better.

And I would say that the value that we're bringing to our clients is better.

So when you take the two it becomes a.

Multiplicative effect.

Great. Thank you both for taking care of any questions.

Thank you.

Thank you at this time. This concludes our question and answer session I'd like to turn the call back over to Mr. for any closing remarks.

Again, thank you for continuing on this journey with US it's been very rewarding to see.

All the work that we've been putting into the organization over many years.

Starting to pay some dividends and.

Look forward to catching up with you both in the field and on the next call. Thank you bye.

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