Q1 2021 Barrett Business Services Inc Earnings Call
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Good afternoon, everyone and thank you for participating in today's conference call to discuss Bbsi's financial results for the first quarter ended March 31, 2021, joining us today are bbsi's, President and CEO, Mr. Gary Kramer and the Companys CFO Mr. Anthony Harris.
Following their remarks, we will open the call for your questions before we go further please take note of the Companys Safe Harbor statement within the meaning of the private Securities Litigation Reform Act of 1095. The statement provides important cautions regarding forward looking statements. The company's remarks during todays conference call will include forward looking statements. These statements along with other <unk>.
Information presented that does not reflect historical fact 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 Companys recent earnings release and to the Companys quarter and annual reports filed with the Securities and Exchange Commission for more information about the risks and uncertainties that could cause actual results to differ.
I would like to remind everyone that this call will be available for replay through June of 2021, starting at eight P. M. Eastern time Tonight, a webcast replay will also be available via the link provided in today's press release as well as available on the company's website at Www Dot BBSI Dot com.
Now I would like to turn the call over to the President and Chief Executive Officer of BBSI, Mr. Gary Kramer, Sir. Please go ahead.
Thank you Hillary good afternoon, everyone and thank you for joining the call. We had a really good start for the year with our results exceeding most of our internal and external metrics.
We saw continuation of the positive trends that we experienced in the back half of the fourth quarter extend into 2021, and we expect these trends to further accelerate as we emerge from COVID-19 economy.
During the quarter, our gross billings increased 2% over the prior year's quarter and exceeded our expectations.
It is important to note that this quarter had one less business day, and we're comparing against the prior year quarter, which experienced far less pandemic related disruptions.
Our average Worksite employees were down by 6% over the prior year quarter and down 3% sequentially from Q4.
We historically have a sequential decrease in Q1 from Q4 as some of our industry support the holiday season, and the volumes don't repeat into the new year.
For example, Q1 of 2020 was down 3% Inc.
Q1 of 2019 was down 2% sequentially.
We are on plan for our Worksite employee staff.
And net new client accounts.
Regarding the client accounts, we saw continued softness of new client adds which was offset by higher client retention.
In previous earnings calls, we stated that our referral partners and business owners went into other bankers at the onset of the pandemic.
We continue to see a gradual recovery and in the first quarter, we experienced our best quarter for client add since the pandemic started with gross adds of 293 and net adds of 146.
Our sales conversion levels continue to be consistent with pre COVID-19 metrics.
We are seeing more deal flow and more successes, but we are still not at the pre pandemic levels.
We are optimistic regarding the remainder of the year our deal flow in April was better than any month since the pandemic occurred and what youre seeing more enthusiasm in the market as economies reopen.
Our gross margin as a percentage of gross billings exceeded the prior year quarter and benefited from continued favorable development on workers' compensation as well as the affirming of workers' compensation pricing.
Our branch footprint remains unchanged with 56 total branches.
And the stratification is as follows.
<unk> mature branches with run rates in excess of $100 million.
The 21 emerging branches running between 30% of $100 million.
<unk> 15 branches, we consider developing with run rates of up to $30 million of.
Our business units totaled 103 and decrease from the prior quarter as we migrate into our revised structure of the 16 member of business unit, which allows us to service more clients with less management employees and increases our return on management payroll.
The next I'm going to provide some operational updates and updates on other initiatives.
In the quarter, we demonstrated our value proposition by continuing to help small business owners navigate these challenging times, including by helping our clients process more than $30 million and employee retention credits.
We continue to invest during the pandemic and we are seeing the fruits of our labor. We released the third major milestone for my BBSI in the quarter. This release completed the build of our portal and included upgraded electronic Onboarding improved reporting as well as other enhancements of our clients are appreciative of the investment.
The feedback is overwhelmingly positive thus far.
We are packaging of our new technology with our nationwide offering and we continue to see larger opportunities.
For example in the quarter, we onboard of the client with a $35 million of annual payroll with operations in multiple states the.
Of the client joined us for our core offerings with an emphasis on our expertise in payroll and human resources, but without the technology investments. We have made it is unlikely that we would have onboard of this client.
In addition, we previously mentioned that we formed a dedicated sales and marketing team that developed the longer term plan that leverages, our refreshed company website that launched in Q4 of the.
The new marketing plan better reflects the best of BBSI value proposition and has been designed with the intent to better tell our story ultimately leading us to attract additional business.
We are now embarking on the next step of the plan, which is the increase the top of the funnel by focusing on lead generation via an omni channel digital campaign, where we target both clients and new referral partners.
This is launching in Q2. So it is early days, but we are optimistic that this will yield both short and long term results for the organization.
In summary, I am encouraged by our excellent client retention, we are in the people business and people have never been more relevant to the business owner than they are today packaging, our knowledge and expertise along with our new technology platform and the ability to transact nationally strategically positions us better in the market with our <unk>.
For our partners are.
Our clients are more optimistic today than we have seen them since the pandemic began.
And my optimism is elevated as well.
As we look toward the remainder of the year.
<unk> by the results we achieved in Q1 and the increase in activity that we were seeing early in Q2.
We are executing to our strategic initiatives and we are realizing positive results and seeing future positive trends, which resulted in our increased outlook for the remainder of the year day.
Now I'm going to turn the call over to Anthony for his prepared remarks.
Thanks, Gary Hello, everyone.
Im pleased to report that our Q1 results were stronger than expected and showed positive year over year billings growth.
PEO growth billings increased 2% over the prior year quarter to 147 billion staffing revenue declined 3% over the prior year to $24 6 million.
PEO gross billings growth by region versus the prior year first quarter were as follows.
Mountain States grew 26%.
And then California grew 7% Pacific Northwest grew 5% each.
East Coast grew 4% and southern California declined by 5%.
As noted in previous quarters, Southern California continues to be the region. Most impacted by COVID-19 related declines in our client's business volumes.
The overall increase in PEO gross billings for the company was attributable to higher average billings per WMC.
The average number of <unk> in the quarter decreased 6% year over year, which was in line with our forecast given the comparable quarter last year was not materially impacted by the COVID-19 pandemic.
Workers' compensation expense continues to trend favorably and included an actuarially determined reduction of prior year estimated liabilities of $1 2 million in the first quarter.
Our overall workers' compensation claims performance remains favorable and frequency continues to improve in the quarter. We saw trailing 12 month relative frequency of claims as a percentage of payroll decreased 3% compared to the first quarter of 2020 and decreased 20% compared to the first quarter of 2019.
Consistent with 2020, we continue to expect that COVID-19 claims while not materially increase our overall workers' compensation expense.
We have discussed for several quarters that our pricing has faced increasing pressure from a competitive workers' compensation market, particularly in California. The.
The cyclical market forces have continued to put pressure on the rates that we are able to charge our clients, but we have also communicated.
We believe the workers' compensation pricing is at or near a low point.
And we continue to expect that overall rates should continue to trend flat or increase in 2021.
We are monitoring rates closely on renewal and for April 2021 renewals rates are generally either up or flat over the prior year.
Looking at operating expenses SG&A in the quarter was $5 million higher than the prior year quarter, primarily due to one time cost savings in the prior year as well as planned increases in investments in the current year.
Our investment portfolios are the $1 8 million in the first quarter compared to $3 million in the prior year.
We expect the Q1 will be the low point for investment income in the year as our investment balances continued to increase over time and as rates rise from their historical lows.
Our investments continue to be managed conservatively and have an average duration of three five years average quality of the investment at <unk>, an average book yield of one 7%.
Turning to the balance sheet, we had $143 million of unrestricted cash and investments at March 31, compared to $170 million at December 31.
The decrease was primarily due to the timing of payroll tax payments and year end employee profit sharing.
We continue to be debt free at quarter end, except for the $4 million mortgage on our corporate headquarters.
As part of our ongoing effort to optimize investment income and interest expense. We reached an agreement in April with Chubb to replace the $63 $7 million letter of credit with other collateral assets and cancel the letter of credit in its entirety.
As part of this transaction Wells Fargo released $38 $7 million of collateral held in support of the letter of credit and we transferred those funds along with an additional $25 million.
To the Chubb trust accounts to satisfy the collateral obligations.
These moves are expected to benefit investment income and provide interest expense savings going forward.
We remain committed to our capital allocation strategy and return capital to shareholders in the form of $2 3 million in dividends and $3 4 million of repurchase stock in the quarter.
At quarter end, there was approximately $39 million remaining on the board approved.
Share repurchase plan.
Turning to the outlook for the year.
Given the stronger than expected results for the quarter and more favorable expectations going forward. We now expect growth billings to increase between 5% and 7% up from 2% to 5% previously.
And we expect average <unk> to increase between 2% and 4% up from 1% to 3% previously.
We expect gross margin as a percentage of gross billings to remain between two 9% and three 1% and we expect our effective annual tax rate to remain between 21 and 23%.
I will now turn the call back to Gary for closing remarks.
Thanks, Anthony in conclusion, we had a really good start for the year as we executed our short and long term strategies. We continue to always think of the client first and to advocate for the success of the business owner, we've been working on the right things and I think we're in a great position to capitalize on the reopening economy.
Now I would like to turn the call over to the operator for questions. Thank you.
Thank you Sir at this time, we will be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue for participants using speaker equipment and may be necessary to pick up your handset.
Before pressing the star Q1 on the please while the poll for questions.
And our first question is from Chris Moore of CJS Securities. Please state your question.
Hey, good afternoon. Thanks, Thanks for taking a few questions guys.
Hey, Chris.
Yeah. Thanks.
Historically.
<unk> been able to recover from economic downturn with exceptional growth.
This obviously has not been typical economic downturn.
Maybe you could just talk about the puts and takes that would get you the double digit gross revenue growth in fiscal 'twenty two and.
Kind of how the how how.
Workers' comp rates.
Fit into that whole mix.
So that was a lot of questions, Chris I'm going to take the I'm going to take a stab of these of course correct me if I don't get them all.
Alright.
Regarding how we are going to come out of the recovery. This is a unique one because we were very fortunate that our clients werent affected as much as the general economy.
So if you look at.
The say the great recession, and where our revenue went in the great recession, we actually held up better in this pandemic than we have historically, so we didn't pull back as the launch which means we're not going to shoot up as much.
As we look at 'twenty, one, but when we look at 'twenty, one we had real positive trends in Q1.
We're seeing more deal flow in Q2.
Which gives us a.
Good degree of confidence to move our guide from.
The two five the original was two five up to $5 seven.
And we're still not getting over our tips with the guide and we feel we feel we're being conservative on the on that guide as well. So as we look at how the economy is going to come out of this there's still some question marks as far as when states are going to fully reopen and what thats going to look like but we feel like for the visibility we have now.
Raising guide and the future ahead looks pretty strong for us.
Got it that's helpful and from from <unk>.
Workers comp standpoint, obviously, you guys talked about you don't still a challenging environment.
If I look at that obviously, it impacts margins, but it also.
Impacts kind of how aggressively you go after new business is that a fair way to look at it.
Yeah, we've been talking for.
Multiple quarters now that the market is firming.
And we're seeing some positive trends in the market now as far as when we look at our renewal book and looking at our hold rate. So we're getting to the position of.
Where the markets firming, where we're getting to flat to positive rate as far as when we when we have our clients renew.
So we feel like we have potentially turn the corner and we could have a little bit of a tailwind behind us when it comes to.
Rate increases in the market.
Got it and then last one from me just.
It's been a couple of quarters at least since you've been the deemphasizing that the safety incentives and just wondering kind of how that's impacting your perceived competitive when bidding.
So we moved off of the model of our safety incentives back in 2020.
The idea there was we were reducing the pay into our clients. So we are reducing the rates. So they were getting the discount on the front end, which.
Which we think during a time of the pandemic.
As a better sell in that environment right, so less cash upfront means better for the client.
So some clients like it.
They are the few minority of the majority of the clients like the lower paying as we go. So we haven't had a lot of we haven't had a lot of pushback or anything there and we think it's it's actually to the benefit of decline to be on that new structure.
Got it helpful I'll jump back in line thanks, guys.
Our next question is from Jeff Martin of Roth Capital Partners.
Please state your question.
Thanks, Hi, Kamran Anthony how are you doing.
Good day, Jeff.
Congratulations on the the large client win the 35 million payroll client I was curious if you could give us a little background.
How that came to fruition.
As well as how many worksite employees are or does that encompass and what does the pipeline look like for the larger clients in general.
Yes, just for the pipeline for larger clients in general we're seeing more in the pipe now that we've seen over the past two years.
We're able to support the larger clients with our payroll system, we're able to support the larger clients with multi state operations in our national footprint, So where the words out where we're having good success. We've converted a lot of clients to the multi state. So with success comes more success and we're seeing more leads come in on the on the <unk>.
On the larger clients.
For that client specific it was a client out of California.
It's about.
About 700 of 750 Worksite employees that started payroll runs in the first quarter.
And we feel feel real good about that client and servicing of that client and be able to handle the larger clients in that space.
Great and then with the increased guidance.
Certain that it's not going to be of linear growth paths from here you've got some quarters that are easier comparisons to other hoping if you could kind of frame, how we should think about gross billings growth as.
As we proceed through the second third and fourth quarter.
Yes spot on Jeff So.
Our sequential growth will be more linear but year over year growth Q2 is by far going to be the easiest compare right last April we saw a significant decline.
We are expecting our year over year growth percentage in Q2 to be about double that of our year over year growth percentage in Q3.
And then for.
From there would taper off slightly more but really that big jumps could be from Q2 to Q3.
Okay. Okay, and then how should we think about the direct sales model Thats still too early to say what the impact of that could be do you have any idea of what kind of contribution of growth there could be for this year and maybe next year.
Yes, I wish we had more to say, we'll have more next quarter. After we get a full quarter under our belt, but.
When we put together the plan and the strategy for this year, what we did was we both we.
The built into the expense for that but we didnt, we werent optimistic or we weren't aggressive on loading and the revenue side. So if the revenue side comes in and it will just be <unk>.
All of gravy for us.
We're optimistic we've partnered with good companies we've partnered with good lead Gen. As we've got good technology, we've built good content.
We're going to be pulling the trigger here to let it out.
We've got the teams in place and ready to handle when they come back to us so.
We're ready to execute on it and by next quarter, we'll be able to give.
Say more definitive answers to how its progressing.
Yes, Okay, certainly kind of look you've got the growth engine ready to go here last last question is on.
M&A I know youre out looking any update there.
Okay.
Same as last quarter right, we work for.
We're good stewards of the shareholders' capital and we worked hard to make the money and we're going to be wise with how we spend it and.
We're still kiss of a lot of frogs and taken our time, we don't know.
We don't we don't have the.
We don't have an itchy trigger fingers here, we're going to make sure. It's the right fit with the right company with the right people that will.
Get us some geography that we're not in.
Great good to talk to you guys. Thank you.
Thanks, Jeff.
Our next question is from Bill the xylem.
Eitan capital management. Please state your question.
I'll actually start by following on with that last question.
Is it your sense that today the.
The.
The more fruitful strategy will be to simply bringing teams on rather than buying an entire businesses and as you are.
<unk>.
I guess using your phrase kissing frogs that ultimately you are building a pipeline of opportunity for win.
There is retirement that take place for other other transitions that lead to an opportunity for acquisition or or are you thinking about it is somewhat different than that.
Yes.
I'll say our growth.
The plan Hasnt changed we are going to grow organically in our businesses.
That's our expansion of our business units and growing our our branches in the markets. We're in and then we're going to extend in the markets and grow organically that were not in.
And then the third lever is we'll look at high of one building out of pipeline for for M&A transactions, where they make sense, but as we think of first and foremost we are an organic growth company and that's the way that we think.
That's a nice segue to my next question, Gary which.
You referenced in the press release and in your remarks here today.
The overall performance is ahead of your plan.
Why is that what's the leading to that too.
To that success.
Q1 was the was going to be our hardest compare for the year. So we internally we thought we were going to be down as far as gross billings and we've exceeded that by being up by 2%. So.
When we look at when we look at the client base are our WSI stack is on plan. Our client stack is on plan, our WMC or raise per day USC is up slightly we're getting we're getting some tailwind from the same customer wsh. So.
We're on plan and our clients are doing better than we expected as well. So when we look forward, we're saying all right well the machines.
Machines roll in here and we've got good momentum and we'd all the zinc the momentum is going to slow I think the momentum is the only going to accelerate when the economy opens up more.
And on that note are you.
Are you.
Two things number one hearing.
Your customers in California, specifically talking about plans to bring on additional people once.
Two of the full reopening, which I think I have heard the governor of they're talking about is it.
June I believe for next month.
And secondarily can.
Can you talk more about southern California.
Uh huh.
How COVID-19 is fitting into that.
It being the only region Thats down.
So.
Southern Cal if we if we take the quarter and parse it by month.
Southern Cal our clients.
We're negative Inc. In.
In January negative in February and in March we saw our clients start to grow again.
And then that's the positive trend for US and then as we're looking at things in the April or April month isn't closed yet we're still open for our accounting, but when we look into the April april's trending positive as well. So we feel like just looking at payrolls and clients in southern Cal that it's made the turn.
From negative to positive as of March of 'twenty one.
Congratulations and then what about just bigger picture with California, and your clients there relative to the covenants conversation about for reopening.
Do you feel like that where we need to.
Somewhat immediate step up in employees.
Or <unk> or or is it more nuanced than that.
Hi.
Sure.
Looking at the Crystal ball here.
Logically, we would think that if there is an area of that could snap back it would be southern Cal for us because of that was pulled back the hardest.
But until we until we see it in numbers or until we see it in payroll cycles.
It's more of a hypothesis and in actuality.
Great.
Thank you again.
Great quarter.
Thanks.
As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue for participants using speaker equipment and made the necessary to pick up your handset before pressing the star keys.
One moment, please while we poll for additional questions.
Our next question is from Vincent Colicchio of Barrington Research. Please state your question.
Yes, Gary I apologize if you already commented on this I came in the core of late.
I'm curious if your traditional sales model of your referral model.
Attributed in the positive manner.
Or not.
Oh, yes, absolutely we saw we saw more deal flow in the first quarter.
And out of any quarter since the pandemic.
We had more and more leads more prospects more clients added in Q1 over any quarter since the pandemic started so seeing positive trends there even more positive trends in the April.
But we're still we're still not at pre pandemic numbers, yet as far as deal flow in the economy.
And what portion of your teams have transitioned to the the.
Let your plan to transition to the model with the three.
<unk> I think it's true to HR professionals.
Yes. Good good question that's the.
That's a hard one for us the answer because really those that model only applies to our larger branches that have more than one business unit per se.
So that's not going to be the model for every branch of if you think of our developing branches and emerging middle They don't have the size and scale to get into that model yet so for what we see now its about 12 business teams that are operating in that new model and so far so good with the efficiencies that we've been able to pick.
Up for.
Working remotely and with our new payroll system.
And can.
Can you update us on the expansion.
The expansion of territories you plan to.
Do this year.
So far I would say that we have committed to Nashville, and we have had committed to Pittsburgh.
And then we're always looking for good talent. So we let talent drive where that branch would be the after that.
Okay.
Nice quarter guys.
Thanks, Thank you.
At this time. This concludes our question and answer session I would now like to turn the call back over to Mr. Kramer for closing remarks.
Thank you everybody for taking the time to be on the call. We are super optimistic about the business and about the economy of reopening and we think that we're in a great spot the capitalize on it. So we'll talk to you again in the quarter. It would be safe until then thank you.
Okay.
Yes.
This concludes today's conference you may disconnect your lines at this time.
Thank you for your participation and have a great day.
Okay.