Q2 2020 Barrett Business Services Inc Earnings Call
[music].
Good day, everyone. Thank you for participating in today's conference call to discuss PBS High financial results for the second quarter ended June Thirtyth 2012.
Joining us today, <unk>, President and CEO Mr., Gary Kramer, the company's CFO Mr. Anthony Harris.
Following their remarks, well open the call for your question before we go further please take note of the company's Safe Harbor statement within the meaning of the private Securities Litigation Reform Act 1995, It's David provides important cautions 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 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 to the company's quarterly or annual reports filed with Securities Exchange Commission for more information about the risks and uncertainties that could cause actual results to differ.
I'd like to remind everyone that this call will be available for replay through September 15020, starting at three PM Eastern time this afternoon.
Webcast replay will also be available via the link provided in todays press release as well as available in the company's website at Www Dot <unk> D. V. S. R. Taco now, we'd like to turn call over to the President and Chief Executive Officer, Bbs, Sorry, Mr., Gary Kramer, Sir Please go ahead.
Thank you David.
Good morning, everyone and thank you for joining the call I hope that every want to stay safe and healthy during these times.
Second quarter proved to be a complex environment as a result of cobot 19, and the subsequent economic downturn.
Our business teams around the country executed flawlessly and working remotely wall supporting our clients in these trying times.
Well again, thanks, everyone in the Bbs I family, many of whom are listening to this call for their exceptional response to this crisis, we continue to provide outstanding and uninterrupted service to our clients and distribution partners.
I'm very proud of the work in support that we delivered to our clients as we assisted in the challenging situations lay offs and furloughs wall deciphering all the various legislations from a central burst non essential to FFC all right to the carriers Act. We developed reports were made introductions to assist the clients.
With applying for these various grants loans and subsidies.
And then we assisted on work from home programs and then Unfortunately returned to work programs simply put our product has never been more relevant unfortunate situations like coded or why Bbs eyes here and why we exist.
The advocate for the success of the business owner.
I'm going to divide my remaining remarks industry sections in the first section I will discuss the Companys financial strength then the section section will be commentary on the second quarter operations and in the third I will provide an update on our strategy for growth then Anthony Harris will deliver his prepared remarks regarding the second quarter as well as financial in capital review.
For the remainder of the year.
Finally, we will open the line for questions [noise].
Regarding the Companys financial strength, our balance sheet is an excellent position. We previously discussed building a financial moat around the company and I'm pleased to say that the Modi deeper this quarter as result of closing a loss portfolio transfer.
This is another step in the direction of de risking our workers compensation structure.
The transaction generated a one time increase in unrestricted cash of $48 million with additional cash flow benefits to be realized leader in the year.
Quarter end, our true available cash and securities on hand increased 36 million from Q1 to $130 million and we continue to have an additional 50 million dollar credit facility behind us Anthony will discuss our liquidity in more detail during his prepared remarks, well I will say that.
We've made significant strides to bolster our already strong balance sheet. Despite market uncertainties created around the world from Cobiz 19.
This is a very telling statement about the intrinsic value of our company.
Regarding the second quarter operations, our gross billings decreased 6% over the prior year.
We provided inner financials last quarter in stated that April's gross billings felt like the bottle and we're very pleased to say that it was our breakdown for gross billings by month over the prior year was a decrease of 14% in April and May and June averaged a decrease of 2.6%.
Overall, we're extremely pleased with the route the resiliency of our customer base and gross billings exceeded our internal forecast for the quarter.
We believe that Q2 will be the low watermark for the year.
Last quarter, we provided additional information regarding DBS ice client base, and we thought the pandemic would affect them in their industries.
As you know our client portfolio skewed heavily to the blue in Gray collar industries, we do not have clients in the most distressed industry such as airlines in cruises and have a very low concentration in other industries, such as retail restaurants gyms and salons.
Overall, we are extremely fortunate that our market approach of working with all clients rather than focusing on industry verticals has helped us avoid concentration risks that are affected by coated.
Our client base in the quarter.
44% of our clients as a percentage of gross billings grew 1% on average. This would include construction contractors warehousing and storage.
17% of our clients as a percentage gross billings were minimally affected and decreased 3%.
This would include waste management landscaping and maintenance.
33% of our clients as a percentage of gross billings were moderately affected and decreased 12%. This would include transportation and logistics manufacturing professional services wholesale and retail sales.
6% of our clients as a percentage of gross billings were severely affected and decreased 34%. This would include restaurants and hospitality real estate rental in leasing services.
Regarding our client count.
We added 227, new PEO clients, we mentioned last quarter that we saw referral partners and business owners go into their bunker in reaction to cope it.
Our additions in the quarter are obviously less than our plan and less than prior year. What are in line with where we think it should be in it cobot environment.
In April we experienced the steepest decrease in prospect meetings may was not much better well, we started to see more business flow in June July shaping up to be better than June but is still about 20% below prior year.
Client acquisition in a coded world is our number one priority as an organization and I will speak about this more shortly.
We experienced attrition of 142 clients, which was better than planned and better than prior this was the inverse of our client acquisitions as folks went into the bunker our product was needed more than ever.
Regarding client attrition, we lost four due to accounts receivable five for lack of pure progression seven due to risk profile 14 business is sold seven business is closed 22 businesses closed due to coded.
83 left due to pricing competition or companies that moved away from the outsourced model.
This represents a build in the quarter of 85 net new clients.
Our staffing business slowed the quickest and the deepest and was down 26% in the quarter.
Businesses need to make us one of the first places. They go to is the temporary workforce and we experienced swift deceleration in staffing revenue as a result.
We're not seeing the staffing business rebound as quickly as the economy.
We have the orders, but not the supply as the majority of the individuals can earn more money on unemployment stimulus verse working wages.
At the end of June we had 57 branches and the stratification is as follows.
18 mature branches with run rate in excess of $100 million. This is a measure we used to indicate a branches ability to increase leverage 20 emerging branches running between 30, and 100 million 19 branches, we consider developing with run rates up to 30 million our business unit team totaled 114.
All in this resulted in gross billings being down by 6%.
When projecting for the full year and taking all these factors into consideration we forecast that our gross billings will decrease by 3%.
Next I'm going to provide an update on actions we've taken to manage through cobot 19 in the quarter.
Our SGN a was down significantly in the quarter compared to prior year.
We took swift and decisive action at the end of Q1 to reduce any discretionary spending.
We consolidated branches and also created satellite branches, which removed management layers. This resulted in rounds of lay offs and furloughs. All of these actions were done with the intent to reduce expense, while not sacrificing revenue or quality of product.
As of today, we're pleased to have returned more than half of our employees that were furloughed.
Next I'm going to discuss the various initiatives and strategies, we've embarked on as we operate in a co bid 19 world.
We continue to be spoke just on sales and organic growth.
In Q3, we will open a new branch in Albuquerque, and a second branch in Phoenix.
Our product will be the scene, but how we approach the market will be slightly different encoded environment.
The new area managers have been hired and trained and we'll approach their market focused on sales and pipeline development.
We will not commit to commercial real estate, but we'll utilize alternative lease options to keep costs down.
The supported these branches will be hub by adjacent markets or at corporate until they reach a critical mass and then we will invest in local teams to support the business.
We've also been exploring acquisitions of smaller peos that are located in geographies that we are not.
The ideal target would be a PEO that culturally aligns with our value proposition.
Has less than 10000, worksite employees and utilizes a similar distribution strategy.
We believe that our balanced approach of reinvesting organically in new churches and in additional business units, coupled with tuck in acquisitions and geographies that we are currently located is the proper strategy to become a truly national and geographically diversified PEO with powerful gross billings.
Growth over a normal economic cycle.
In June we announced the successful launch of my BB ESI for all clients.
All new clients client feedback thus far has been overwhelmingly positive and they appreciate the ease simplicity and individualization of the system.
We're extremely excited about bringing this technology to market and have been executing our marketing and sales campaigns, including informing our referral partners about our new technology.
We will be converting our existing client bases in waves throughout the remainder of the year and anticipate being fully transitioned by the end of the year.
We've also apply for our PEO license in every state and expect to be fully license in the next two months.
We added 16 states since our last call and are now currently licensed in 35 states.
As previously mentioned not having an all states license can sometimes prohibit us from doing business with clients. We've made the system changes, which will allow for the servicing of the business and we have also expanded our insurance offering to support the business.
This change will be an important catalyst to growth as we will be able to go wherever our clients go.
And we'll be able to land new clients that many had been historically too large for us.
When we go to market, we're offering the best of Bbs side, we have various products in assets consisting of strategic consulting human resources information technology insurance risk management retirement services staffing in recruiting.
When we meet with the potential client they may join BB aside because they have a certain pain point today, but they will stay because we deliver our whole suite of products flawlessly.
People have been and continue to be our product, which has never been more relevant to the business owner than it is today packaging their knowledge and expertise with our new technology platform and the ability to transact nationally strategically positions us to go after larger more tech savvy clients and increases our total.
Available market.
To say that we are poised for incredible future growth and are eager to accelerate our sales effort and post cobot 19 is an understatement.
Now I'm going to turn the call over to Anthony for his prepared remarks.
Thanks, Gary.
Similar to last quarter I will begin with an overview of our quarter results in current capital position and I will conclude with more commentary I have covert 19, it's currently impacting our business and our outlook for the year.
Net income for the quarter was 11.5 million compared to 13.9 million in Q2 19.
Gross billings declined 6% to 1.37 failure.
PEO gross billings declined 6% to 1.35 billion.
I'll staffing revenues declined 26% to 20.5 million.
Net revenues of 201 million were down 13% from Q2 19.
Remember that our GAAP revenue presentation differs for PEO and staffing services. So I change in mix will impact our net revenue trends.
As Gary noted April with the low point for our billings and the company 19 slowdown and we're pleased with the speed of the recovery of billings in May and June.
Gross billings by region varied in part due to the actions taken by various states in the different geography.
In the quarter gross billings by region were as follows.
Mountain States grew 11% over the prior year quarter.
East Coast grew by 4%.
Northwest Billings declined by 7% in California billings declined by 10%.
Customer growth trends also came in line with our expectations relative to the current environment as Gary noted new customer adds slowed in the quarter, which was partially offset by slower client run off.
There remains a headwind to that customer adds in this environment.
Workers' compensation expense as a percent of gross billings were 3.8% this quarter, which is below our expected range of 4.2 to 4.4 per se.
This decline is partly attributable to actuarially determined reduction to prior year estimated liabilities of 1.4 million in the second quarter and additional reductions due to cost saving measures.
Our workers compensation claims frequency also continues to trend favorably in the quarter. We saw a trailing 12 month relative frequency of claims as a percentage of payroll.
Decreased 18% compared to the second quarter of 19.
As gene a in the quarter was 33.3 million compared to 39 million in the prior year quarter, representing a decline of 15%.
As we described in our first quarter call. The Bbs I management team was quick to planned for and respond to declining business volumes due to co big 19.
We executed on those plans, which included meaningful expense reduction and cash flow management in the second quarter.
In addition, a key part of our employee compensation comprises profit share and other incentive based payments and our crude expenses for these programs has decreased based off our reduced profitability in the cobot 19th slowdown.
At business volumes have recovered SNA levels will continue to increase as we bring employees back from furlough and incur other employee compensation costs.
Our investment portfolios earned 1.8 million in the second quarter compared to 3.3 million in the prior year.
The decrease investment income is directly attributable to the decline in interest rates in that period, and it's consistent with our expectations communicated in the prior quarter.
Turning to the balance sheet, we're very pleased to report the progress we've made in our workers compensation program structure.
Part of our long term goal of continuing to de risk our business model, we entered into a loss portfolio transfer agreement in Q2 to transfer $116 million of workers compensation claims liabilities off of our balance sheet.
This transfer of claims for accident years 2014 through 2017 represented approximately 27% ever outstanding claims liabilities.
As a result of this transfer ESI has no exposure for any potential adverse development on those claims.
However, the terms of the transaction do allow us to continue to participate and favorable development in future years.
Certain predefine Predefine benchmarks.
In summary, Theres only upside for the company.
By transferring these claims we were also able to unlock excess collateral that was tied to those claims.
Which resulted in the immediate transfer of $48 million have restricted cash investments moving back to the Companys unrestricted accounts at June 30.
In addition, the company's renewal of its fronted program with Chubb as of July. One also included several positive achievements.
We were able to renew at favorable rates with considerably lower collateral funding requirements. The prior years. The result is expected collateral savings over the next 12 months of approximately $30 million compared to what we would have funded under the previous terms.
This will be reflected as an increase in our unrestricted cash investments over the coming here.
In addition.
We lowered the company's lost retention from $5 million per occurrence to 3 million.
And lastly, we also agreed to a multiyear term watch out for the first time with coverage secured through June 2022.
Not only did these arrangements de risk our model they speak again to the success, we've had in managing our workers compensation program and the consistency of the company's results in this area.
After the loss portfolio transfer and collateral returns I just discussed our ending unrestricted cash investment balance at June 30 was 130 million compared to 94 million at March 31, and 101 million at the prior June 30.
Also remember that we typically build cash in the third and fourth quarters due primarily to the timing of payroll tax payments that occur earlier in the year.
Because of these transfers are restricted cash and investments at June 30 declined to 322 million from 467 million at March 31.
These restricted balances from now grow at a slower pace due to our more favorable collateral terms.
Our investments continue to manage conservatively.
The market yields have dropped our unrealized gains on our investments increased significantly to $9.6 million.
Our average duration remains conservative at 1.6 years, and the average quality of investments remains a delay.
As expected our interest income is down due to a combination of our variable rate investments comprising approximately 26% the total portfolio.
And lower interest rates on all new fixed rate investments acquired since March.
Our average book yield has decreased to 1.8% from 2.3% erect.
Continued to be debt free at quarter end, except for our 4 million dollar mortgage on our corporate headquarters.
We discussed in our first quarter call that we had agreed with wells Fargo to increase our line of credit in the second quarter from 33 million to 50 million.
And that agreement was subsequently executed as planned.
It's both they vote of confidence from Wells Fargo, and the source of additional financial flexibility given the economic uncertainty.
Our agreement with Wells Fargo provides management the option to revert to the lower credit line, if we wish.
I will now move to our discussion of how Kovac 19 has continued to impact our business.
The effects of the pandemic on our operations are now reflected a full quarter of results and they're more favorable than expected.
Client payroll and therefore gross billings recovered to an encouraging pace in may and we have still not seen a meaningful increasing customer defaults or bad debts.
Hi, guys buildings have recovered from their low we have brought back many of our employees from furlough.
We also continue to believe our workers compensation program as well insulated from the effects of coping 19.
As noted last quarter, but the 2% about worksite employees for in the healthcare sector or were considered first responders is generally defined.
Through underwriting actions, we have now reduced our exposure to these categories to less than 1% of our worksite employees.
As of July 31st we had 16 reported claims for case of Cobot 19, with only two being accepted.
Both claims are for immaterial dollar amounts and both individuals have returned to work.
Our claims frequency has also trended favorably.
This is consistent with our expectation that the economic downturn related to cover the 19 would not necessarily translate the significant increase in claims frequency.
That is in part due to the nature of this economic contraction as well as a significant amount of financial stimulus that has been made available to individuals through a variety of programs.
We continue to monitor legislative and executive actions that could impact our workers compensation exposure and there have been some positive developments there recently.
The California executive order relating to workers compensation coverage expired on July 5th and related pending legislation in that state is more restrictive in scope than the original order.
Even with these positive trends and although the announced today are much smaller than they were a quarter ago. We've continued to approach our workers compensation accruals conservatively.
Moving to our outlook for the remainder of the year.
While there continues to be real uncertainty in the market created by the pandemic. We are reinstating our full year outlook based on the information that we have today.
Our forecast does not contemplate to return to shelter in place orders like we saw in April.
We expect our gross billings for the year to declined by 3% compared to the full year 2019.
Within this figure we expect staffing revenues to decline by 19% for the year.
We expect gross workers compensation expense as a percent of gross billings to range between 3.8 and 4%.
This range includes our favorable experience recorded year to date.
We expect our full year diluted earnings per share to be $3.70.
Since an effective tax rate of 21%.
In closing, we're pleased with the results of the quarter and the pace of the recovery. So far but that remains continued macroeconomic uncertainty we have been able to de risk our business model strengthen our balance sheet and streamline our operations in the second quarter, and we are well positioned for the future.
I will now turn the call back to Gary for closing remarks.
Thanks, Anthony in conclusion, our product fundamentals and financials are solid and I'm confident that we will whether this pandemic and emerge stronger.
Our client base is situated industries that are not heavily affected by coded and I'm optimistic that we can return to growth as normalcy resumes. We continue to always think of the client first and to advocate for the success of the business owner.
Now I'll turn the call over the operator David.
Thank you.
This time, we opened conducting a question and answer session.
He would like to ask a question. Please press star one under telephone keypad.
Confirmation tell will indicate your line is then the question Q.
If at any time, you wish to remove your question from the Q. Please press star too.
Participants using speaker equipment, he may be necessary to pick up your handset before pressing the star keys.
One moment all evolve for question.
Our first question is from Chris Moore with CJS Securities.
Hey, good morning, guys impressive quarter.
Thanks for taking a few questions.
Maybe start just with with workers comp obviously workers comp is.
Percentage of gross billings. This can come down meaningfully was closer to 5% a few years back that two questions on the on the 3.8% to 4% range one is.
That range is just for fiscal 2000, correct. Its and includes 2.2 million of a favorable adjustments in the first half. So that's just applies for for 20.
Yes, that's correct. So we don't include actuarial adjustments in our keep forecast, but for this year for the full year guide we were already accounting for the the first half of the year the $2 million that we've deliberately recorded that's correct.
Got it and what I mean, whats kind of the the theoretical limit here on the workers comp as a percentage.
Could it be meaningfully below 4% or is that kind of a fair place to be.
So we are seeing a long term trend and reductions of workers compensation costs that I think we've approached that trend cautiously in terms of our reserving and I think you've seen that come through.
Through our favorable actuarial adjustments writes the manifestation of that is that.
The prior accident year, good guys, we've been taking each quarter.
So theres was reforms, especially in California, several years ago that of.
Favorably impacted the cost structure, there's still some unknowns with how cold it will play out, but I'll say in this last quarter.
The data on that has been very favorable as well so even though we continue to be cautious the.
The trends are very favorable on cost reductions.
Yeah, Chris and if it if you just look at the quarter for us.
The claims reported in Q2 compared to prior year was down 20%.
Which is a good sign right.
We.
I'll say, we're fortunate that we were not in in health care, which is where the coded claims really are on the workers comp side. So we dodged a bullet.
We haven't seen cobot claims we don't think cobot claims are going to be an issue for us.
So we were conservative going through our first you know first half of the year accrual just because there is unknown out there.
But if.
No as things continue to trend the way they are and we're getting some tightness on the legislative slide.
I could see I can see our accrual rate coming down just because of the experience isn't there.
Got it that's helpful.
And maybe just switch gears in terms of you kind of looking at.
Post co bid.
No.
Revenue growth you had mentioned during a recent conference.
Picture goal of a 15% revenue growth.
Kind of split between you know same store, new clients and and M&A can you.
I think the M&A was it was roughly 5% can you just break down the same store versus new clients would that be roughly equivalent as well or kind of just how you're looking at this stage.
Yes, we.
We haven't given any any guidance yet for 21 and honestly. The reason we can't do that is because it's it's even hard to give revenue guidance for Q3 or Q4 with.
The the unknowable factors that are happening in the economy right now.
But when we think of the business over a long term cycle.
You know organically between our investing in business units investing in additional branches.
With the capacity we have at the company. There's there's really no reason that we shouldn't be.
Organically.
10, plus percent of a gross billings grower.
And then if we were in a layer a M&A on top of that it would just be accretive which would get you up in that that mid teens plus range.
Got it that's helpful and I did give that qualifier postcode, obviously I'll jump back in line. Thanks, guys.
Thanks, Chris.
Our next question from Josh Vogel with Sidoti.
Hey, good afternoon guys.
A couple of questions about the outlook for the balance of the year and you talked about payroll trends had improved.
Significantly in May and June versus April I think you sit down 2.6% on average and I'm curious how much of that you think was.
Just some pent up and maybe not sustainable and then and then to build off that understanding that net client builds are expected to be slower than you've achieved historically I'm, just curious where did the assumptions behind the implied 4% to 5% annual gross revenue declines that you built into your second half guidance.
Sure.
Yes, so first of all on the revenue.
It's kind of shape the recovery, we definitely saw what I would call action on many V shaped recovery. So it was a deep cut in April as everyone shelter in place and companies immediately furloughed and laid off employees that bounce back rapidly in may.
And that payroll, we saw that level off pretty quickly.
So June payrolls sequentially were up over may, but not much and July payroll sequentially, our training fairly flat as well so I.
Definitely was a V shaped recovery and so we're seeing that as as fairly stable base at this point.
Hi terms of the future.
Growth in our expectations for customer add our Q1 customer ads.
Were in line with our with our plan.
Q2 adds were obviously well off a plan as Gary noted what's interesting about that is our sales conversion rate when we're able to meet with the prospect was actually steady with prior quarters and that's generally held steady for us as a company. So we were able to convince potential clients of our value proposition, we were able to get those meetings.
But our prospect meetings were down 40% in the quarter over a year ago quarter.
The question is can we could continue to get those meetings and we've seen that trend up as Gary noted as we've all adapted to a virtual.
World and learned how to sell over through webcam.
That is improving but the reality is there still headwinds there and so we do see an upward trend thats not going to be down 40% like it wasn't Q2, but you know it could could it be down 20%, yes. So when we're factoring that into our model, yes, I would say when we when we're forecasting Q3 in Q.
Before.
We're making it based upon the assumption that is going to look in behave.
Like June and July.
Right and that's how we're saying that the economy is going to behave and how we're looking at the remainder of the year.
The one thing that's unknowable is the.
Effective the PPP.
So we've we've kind of made some assumptions based upon PPP.
But if you take that and then say, okay, well how is our ads in our retention going to be for Q3 Q4, our ads are going to be.
Less than what we planned and.
We've made assumptions and changes in our models to say, we're not going to add as many clients in Q3, it will pick up more in Q4, but the inverse is our retention is going to be better as well. So when were warmer thinking about Q3, specifically, we're saying all right, it's going to behave similar to Q2.
And we selected our assumptions based upon that for ads and retention.
That's helpful. Thanks, and just.
Thinking about the comment on the sales conversion rate you at 227, new client adds how many prospect meetings.
We run at about a 34% closing ratio. So our closing ratio was was consistent we just didn't get as many pitches. So we had a good batting average we just didn't get as many pitches.
So if you do the math Sam there.
[laughter].
So Anthony said, the ash DNA spend over the balance of the are you will increase as the year progression, but I want to focus on that incremental I think was 5.6 million you mentioned that the coming out of 2019 for the new portal rollout and how much of that should we see hitting up in Q3 and four respectively.
Yeah, and that's I think what also makes the SGN a decline extra impressive right as the 15% decline that's year over year, but of course, you correctly note that at year end, we had guided furnace Gionee increase this year Reits are decrease from plan.
Really demonstrates the effort that we that was put into that.
The the 5.6 I mean, I think at this point, yes, thats kind of baked in that's obviously baked into our model the that does ramp up a little bit in Q3 in Q4, there's not much there's not much there in terms of incremental second half shape versus the first half, but I will say is the big trend difference is going to be our employee costs.
Right. It's for the two things I mentioned not only are we going to bring more employees back enough rep headcount adds.
In the second half of the year as our business volume stabilize an increase.
We're also going to have an increase in our profit share and incentive compensation accruals, which if you followed us you'll know thats an important part of our compensation strategy for our teams and so as our branch profitability improves as our company profitability improves probably saw in the first half of the year, we're going to see those accruals increase as well.
Okay and a quick question on the workers comp benefit in the quarter.
With that from this 2014 at 2017 time period.
No so the two.
No. So the 1.4 million actuarial adjustments that you're referring to yes.
No so that would be for the claims that are remaining with us at June 30.
Okay and that would be that would be for the 19 in 19 in prior but.
19 is still a little 19 still to green to take action on so if you think about the adjustments it would be for 18 in prior.
Okay.
And just lastly.
The comments around.
Inorganic growth can you just talk about the pipeline.
Nothing you're looking to be active on in the second half of the year, you just or you just want to adults so completely settle with coated.
So I don't want you to to leave here thinking that we've got an itchy trigger finger and we Gotta go spend money right were good stewards of the capital right. We will always look to invest in the business and I see we will look to invest in business units will look to invest in branches. We will continue to support the dividend, which we now.
And our press release and then after we get through those it's going to be.
Where are you going to get a better return on capital for investors are going to get it through M&A are you getting a good to get it through buybacks and we run through that decision making process.
When you think of.
After going through that we when you think of the PEO business in the industry. It's it's a fragmented industry now there's.
900 ish, it's like 920, Peos now in the United States.
If you look at.
Of these businesses how many of them are large for small the overwhelming majority are small or smaller.
So if you just kind of say there is 900.
Peos.
Only 30 of them have worksite employees over 20000.
So when you get down into the stratification Theres a there was a.
Fair amount of smaller in a fair amount of regional players and Thats, where we would look.
We would look at a or regional player say in Texas that has.
Four to five branches that you know when we were not looking to buy a book role, we're looking to buy a company that has people.
In those geographies and product in those geographies and then we could take that product that those people and make the best of Bbs I available to their clients as well right. So and then we would have are called our anchor points in there and then we can can continue to grow organically in those states. After we get there so when we're thinking.
About it its.
Yeah, we're we're out there we're talking we're active.
But we don't we don't feel like we need to.
Be aggressive were rush, considering where are the economy is right now.
Great well, thanks for taking my questions.
Our next question is from Jeff Martin with Roth Capital Partners.
Thanks, Good morning, Kramer and Anthony what you're doing well.
Yeah, I want I didn't hear you mentioned that same store sales number for the quarter.
If you have that number handy and kind of how that breaks down would be helpful.
Yes, so same customer sales for the quarter was down 4.5%.
And so as expected clients reduced head count, it's kind of a weird quarter for same customer sales.
And in that sense, obviously, it's highly impacted psycho bid, but that reduction was split pretty evenly between head count of course hours reductions we have seen wage inflation.
Over the year, we had been mentioning that and there is there are some wage inflation that continue to come through there.
Just because that's a year over year number so theres, some inflation baked into that as well.
Okay, and then well have Anthony what was the unencumbered cash number at the end of quarter.
130 million.
Okay.
And then Kramer you mentioned expanded service offerings for for insurance curious, what what specifically that entails and then secondly could you touch on your.
Longer term strategy in terms of de risking workers compensation from the model.
Sure for the think of it this way of us being a PEO in these other states now.
We had to make some system changes so that we can handle the payroll the processing the billing right and that's done check the box and then the other pieces with our partnership with our front end carrier.
We can now offer our workers comp insurance product in those states. So check the box. That's done so you know as far as being ready, we're now ready to do the business and I forget the number 36 states and we're going to we're working on the other ones, it's a little slower than we had hoped.
Just as bad in coated effects.
The state governments as well and that's.
Causing a little bit of a drag for us, but we are we've got a plan to get.
To round out the additional 14 states in the next two two to three months.
That was the first question was the second question.
The de risking their workers comp longer term strategy.
So we when we think about.
Our insurance products right. We've we've we've come leaps and bounds from where we were as far as how do we bring on risk how do we price for risk. If we have a claim how do we handle a claim.
Good process procedures controls around the whole.
Process of insurance and.
That's showing with the predictability in our losses that showing with the predictability I'll say or the redundancies that are coming through for the prior accident year.
So being able to do a a loss portfolio transfer and being able to sell it at what we had a carried that is a very good sign for investors and for the market because and independent third party was willing to.
To take what we had at the price we had carried at.
And we all know that those companies are in the business to make money not to lose money. So they felt comfortable that would that price they would make money on the trade.
So with that it kind of steps into the you know the next evolution of all right. When we when we renewed our program we moved our retention down from 5 million to 3 million.
And then we were able to get our funding and things in line with with what we view the losses as which is another good sign the the carriers coming in at what we think our view of we all have the same view of the world.
But we would look to you know if these makes sense in the future we would look to to pick off years in the future right and we would look to to enter into some sort of relationships that potentially you know de risked the company on a prospective basis, where we don't take a 100% other risk maybe we take a portion a portion of the risk.
But we're able to do this because of.
How well we do what we do right doing what we do well being conservative this affords us the opportunities to explore financial structures like this that honestly, we're not available to us four years ago.
Okay, that's very helpful.
Could you elaborate a bit more on the geographic.
Growth in contraction defenses between say mountain States in California are there specific things going on that are either Bbs specific or state specific that are causing that separation in terms of how those different areas are performing.
Sure. It's good question, it's twofold, Jeff its.
The mountain States had a very strong close to 2019 as far as their their client adds and client retention.
Growing very well in the mountain states.
So if you think of in quarter two they added business at the end of the year, which gives them call. It revenue in Q2 that wasn't there in the prior so they had a strong client stack.
And then when you look at the mountain States they.
They weren't hit their economies, just we're not hit as hard as say co bid for shelter in place as we were in California.
California was down 10%.
Ironically is northern Cal is down 10% Southern Cal was down 10% when we look to California total it was down 10%, but.
We did mountain states I'll say their economy has been a little more resilient as far as.
Having the incidence for Cove, it and the restrictions for the shelter in place.
Got it makes sense okay.
Is there anything specific you would attribute the higher client retention in the quarter I would imagine I mean, you've already said that you expect that to kind of remain at a.
As a better level than it's been historically, but just curious is it the value.
The assistance you are providing is that.
Yeah, committing focusing on getting through this and not making any changes right now.
No what your perspective on that.
Yes.
The product we have been delivering has been phenomenal our HR folks in the field have just been rock stars with supporting our clients.
And this was a this was a tough time to be a business owner and I I could not imagine doing it.
Without Bbs API or somebody like DBS I.
To have the weight of the world shoulders, and not have somebody like us that can that can help support you in that time.
So I think the value is there more now than ever.
But we I can't we can't take full credit for that right. There's a couple other things of if you're a business owner and you've got all this risk at your doorstep.
Right, which is the covert world.
Are you going to take additional risk and try to leave Bbs high.
The answer there is no. So we're seeing a that cuts both ways right. So thats why part of the reason, we're not seeing clients go to market or come join VBS eyes because.
The the risk they have so much risk right now I introduce new variable why it why why try to change your payroll provider why tried a monkey with your PPP forgiveness reports and things of that nature. So there's there's some influences that are helping us in hurting us the same way.
Right.
Okay, and then final question as.
I would there be any shift in strategy this slowdown or to extend.
Well into the middle of next year, and if so what what might those change in strategy be.
Yes, I mean, we talked about we're learning some lessons encoded right and that's that we we can do our job remotely we can do our job arguably.
Just as efficient if not more efficient. So that's part of the reason when we're talking about opening or no a branch in Albuquerque in the second branch in Phoenix, When we open that branch, we're not going to put any support staff in those branches.
Support staff will be held did other branches were up in corporate.
Until until they get enough critical mass that will then start to to staff at those branches.
So we're looking at things like that and we're looking in.
Call it structure in our branches in the field of.
You know how do they see how can they in a virtual world be more efficient and effective.
And arguably service more clients.
In this market. So we're looking at both but I'll say the first thing were doing which.
We'll we'll open one of the branches. This month in the second branch in September is that true.
Model of supporting the business elsewhere until they get critical mass.
Great. Thanks for your time thanks.
Thank you.
Our next question.
Vincent Colicchio with Barrington research.
Yes, hi, guys well most of mine the when I answered already just one or two.
Just curious I did pricing change in the quarter and what does your outlook for the second half.
Pricing you know the fee we charge our clients is our admin is relatively consistent.
It's hard to try to push rate in a time when business owners are.
Worried about their own operation. So now it's not the time to try to be aggressive push rate, even though we think that.
You know the value of our service is.
It is not going to be can test that I think were worth it.
The one the one thing we continue to see is more pricing pressure in California workers comp.
We continue or I continue to try to call the bottom and.
I get it wrong every quarter.
I My expectation was with all the uncertainty with coated with the capital things that were happened as far as lower investment income and things of that nature that we would have seen.
Rates start to rise in California, but were haven't seen that yet so there's definitely still there's still some competition and there's some competition that is.
That is not being.
Good stewards of their capital right now I'll say and it makes it a little little more challenging for us in the marketplace, but our teams are pros and they know how to sell the value would be OSI not just sell workers comp.
Okay. Thanks, and then does your forecast for the balance of your Shim, California improves from the current level of economic activity.
It's it's California operates how it did in June and July for Us.
Okay.
So you're not assuming any improvement there for a per se.
We're not yeah, I mean, it's both ways right, we're not saying, it's going to get better and we're not saying that there's going to be a second shelter in place order.
Okay.
That's it for me thanks.
Thanks.
Our next question is from Bill Xylem with Tieton capital management.
Thank you I have a group of questions first of all the reference you made earlier in response to someone else's question that you would hope to be able to grow the business, 10% organically yet that gross billings that is what would that equate to assuming no acquisitions, you're just growing 10% organically what do you.
You.
Want that to translate into for a net income growth.
Net income growth if we.
Well our target is 15% that included.
Some investment income.
Investment income, we've got a I'll say a headwind there now right I don't know if you realize but in our earnings guide. We've we moved our investment income number down by $4 million and Thats, just because of the the fed move in the rates 100, Bips right. So when we're talking about our 15% that's that was with rates be.
Being where they were.
After taking them the hair cut on the rates I I think we should be.
At a multiple of.
Revenue growth, but it won't be a 15, it with rates, where they are I think it'll be somewhere around 13%.
That's helpful. Thank you.
And actually I do want to follow up tick pick that one step further if rates stay flat does that 13% still hold I'm, sorry, I'm not able to think about this quickly enough.
Or after you've annualize the the lower rates, then would you be able to move up.
15% income growth, assuming the 10% Uh huh.
Earnings growth.
Yes, I mean that some when rates move will give you look at our balance sheet. Our OCI, we moved $9 million in the quarter writers rates went down our investments went off so we had 9 million of unrealized gains in the quarter.
That's not a piano impact that's a balance sheet impact so for the PNM will impact where we saw the rates move was on our cash that we were getting a good deal on that's no longer a good deal.
Because rates are so low we were getting in the three month, plus 25 Bips and.
The three much is the three month was flat and zeroed in negative so in the quarter, you're seeing our investment income be down.
Because of that variable part so when we think about how that's going to trend over the future.
We're still going to be.
Our investment income will be less than it was last year.
But you know as we continue to grow and continue to add more assets that you know investment income even at rates. This low will grow in 20 over 19.
So when you think about how that's going to give you a return on capital your order or your call your net income growth.
When we think about net that 13% number that 13% number has that baked in there regarding the investment at.
Such a a low level here right. It's unfortunately, if you're a savory or get punished at these levels.
Right Okay.
I'll shift if I could to the.
Inorganic side.
The increase credit line given that you have lots of cash should we interpret that too.
I mean that youre thinking about acquisitions of from a from the borrowing perspective, and you're really preparing.
The banking facility for acquisitions or is it truly tied to the solely the uncertainty.
Of whatever coated neighboring.
Yes. They are those are completely separate and apart when we increase the credit line. It was just in the abundance of caution in a co bid world.
When we think of acquisition when we talk about our financial note, we have capital above our financial note and that capital above the financial note would be what we would look first and foremost to fund any kind of acquisition.
We're not looking at.
We're not looking I don't want to scare anybody and think we're looking at doing debt offerings are looking at doing.
Our stock offering and diluting our shares that's not we've we've done a lot of hard work to build capital when it's just how we put that capital to use.
Thank you that's that's helpful and speaking of that capital Youre.
Restricted cash and investments.
Took a big drop a in the Q2 versus the Q1 of course that moved to a two not restricted.
But I was a bit surprised to see that given that the 216 million transfer of liabilities didn't happen until July one what was it that led to the Q2 improvement in improvement being a decline in restricted cash.
So the loss portfolio transfer actually was in June Bill. So the 116 million transferred out in June the 48 million release of excess collateral happened in June.
So you really have both of those reducing restricted cash in the quarter that would be offset of course by continued regular funding into the trust.
Front for ongoing business operations.
All right I'll need to read that a press release more carefully again. Thank you and then lastly did the.
All of the new client a that you did bring on in Q2 did they all go onto the new a new might be B S. I platform.
Yes, we have.
About 500 clients now on our new platform.
So far.
The field is excited our clients are excited the feedback we receive is all been positive.
And then you know in.
We're going to be rolling in anywhere from our conversion side.
Anywhere from depending upon the week over the next fall until the end of November.
Will will transfer or transition about.
400 clients a week onto the old transfer them from the old system to the new system.
And we're not we're not concerned about the IP side of that are the conversion side.
Really its.
Education to the client in the be able to handle and service questions, which is why we don't go with the Big Bang.
So we've we've got the system off the systems running really well.
June our new businesses on there were out there selling in the market and now we're we're starting to do our conversions for our clients from the old system to the new system.
[noise] and you'd mentioned that sure youre.
Win rate with prospects basically held steady.
Would you expect your win rate increase.
With time here now that you are selling on a on a more robust platform.
That is the goal right. The goal is to get better what you do and to get more at what you do right. So you get more in the pipe and you get better well comes into play, but Thats, what we work on and we've got teams that better focused on that as far as.
You know sales and marketing initiatives.
[music].
Too early to say Bill I don't want to.
I can tell you what we aspire to be what I can tell you it's in the numbers yet.
Understood. Thank you for taking my questions and congratulations on a solid quarter on a crazy environment.
Thank you thanks Bill.
Ladies and gentlemen, we have reached the end of the question and answer session and there are enough time for today's call.
I'll now turn the call back to Gary Kramer for closing remarks.
Thank you thank everybody for taking the time to be on the call. Thank you for all the Bbs I employees for all the hard work they did in the quarter. This was a.
Challenging quarter for the business owner in a challenging quarter for all of our employees that were helping service our clients so for them I.
I thank them from the bottom my heart was with no with no BB OSI employees. There is no Bbs side and I just want to thank everybody for all their hard work.
This concludes today's conference.
Thank you for your participation you may disconnect your lines at this time.