Q3 2021 Barrett Business Services Inc Earnings Call
Good afternoon, everyone and thank you for participating in today's conference call to discuss Bbsi's financial results for the third quarter ended September 32021.
Joining us today are Bbsi's, president and CEO, Mr. Gary Kramer and the company's CFO, Mr. Anthony Harris.
Following their remarks, we'll open the call for 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 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 actual results may differ materially from those implied by these forward looking statements.
Please refer to the company's recent earnings release and to the Companys quarterly and annual reports.
With the Securities and Exchange Commission.
For more information about the risks and uncertainties that could cause actual results to differ from those expressed or implied by the forward looking statements.
I would like to remind everyone that this call will be available for replay through December three 2021, starting at eight PM Tonight.
A webcast replay will also be available via the link provided in today's press release as well as available on the Companys website at Www Dot BBSI Dot com.
Now I'd like to turn the call over to the President and Chief Executive Officer of BBSI, Mr. Gary Kramer, Sir. Please go ahead.
Yeah.
Thank you Doug good afternoon, everyone and thank you for joining the call we had an excellent quarter, both financially and operationally.
Our positive momentum we experienced in the first and second quarters, continuing third quarter as the economy continues to recover.
Our overall performance exceeded our forecast leading us once again to raise our full year outlook.
During the quarter, our gross billings increased 12% over the prior year's quarter and exceeded our expectations are.
Our average Worksite employees were up 8% over the prior year quarter and up three 5% sequentially from Q2.
Note that we are almost back to pre pandemic levels and expect to reach an all time high at the end of next quarter.
Our growth in Worksite employees is a combination of our clients hiring or re hiring as well as net new business and we are ahead of our forecast for Worksite employee stack.
Our staffing business increased 2% over the prior year quarter.
You could have grown more continue to have challenges filling orders with the tightness of the labor market.
We discussed last quarter that the government stimulus was set to expire in early September and it did and that we expected to see an uptick in applicants and placements about three to four weeks after the stimulus expired and we did.
As I look at our results in October we are seeing more applicants, placing more applicants and companies are increasingly ages to attract employees.
We are still unable to fill our orders, but our fill ratio is improving.
Next I'd like to provide an update on the derisking of the company.
We discussed last quarter that we entered into a workers' compensation insurance transactions, which de risks our business model and results in better financial predictability. This.
This was our first quarter and the newly insured structure and we are very pleased that the program is operating as intended these transactions are structured in a manner that greatly limit any potential downside of our assurance program, but we can still share the upside of our disciplined underwriting in essence, we are passing off the risks to the traditional <unk>.
Lawrence market, but we can share in the reward as we execute with precision we are accustomed to.
Moving to our branch operational updates.
Our branch footprint decreased by one to 53 total branches, we continue to expand on the east coast and opened new branches in Nashville in Pittsburgh, The East Coast is doing well and clients and referral partners are pulling us into new geographies.
We continue to be mindful of operating efficiencies and consolidated orem into Sandy, Utah and are now referring to this market as Utah County, and then in the Medford and are now referring to this market as southern Oregon, as well as Monterey into San Jose, California.
These decisions were made with the intention of continuing to grow revenue, while servicing our clients, but doing so in a more cost efficient manner.
Our branch stratification is as follows.
22 mature branches with run rates in excess of $100 million 19 emerging branches running between $30 $100 million.
12 branches, we consider developing with run rates up to $30 million.
Our business units totaled a 100 and incorporates the new opening and consolidations previously mentioned.
We also continued our migration into a revised structure of the 16 member business unit, which allows us to service more clients with less management employees and increases our return on management payroll.
Moving to our client and Worksite employee stack.
Our client retention continues to be stronger than pre pandemic levels I'd like to attribute that to the work, we do with our clients and the value our teams bring in this ever changing and complex economic environment rigs.
Regarding our referral channel distribution leads and prospects in the quarter were greater than the previous quarter and exceeded our internal Q3 forecast we are still behind pre pandemic levels, but we are optimistic as we continue to see a gradual recovery as economies open.
Our closing ratio continues to be in line with historical levels.
Last quarter, we discussed our longer term initiatives, where we intend to increase the top of the funnel by focusing on lead generation via an Omnichannel digital campaign, where we target both client and new referral partners in different markets.
We're only four to five months into the various trials, but I am excited about what we're seeing and I would like to provide some statistics since the last earnings call.
<unk> signed up 82, new referral partners, and we set up 40% or 74, new meetings with interested potential clients.
We are testing and refining our various sales initiatives by market measuring the return on investment and will transport. The most successful method to our other markets.
We continue to package, our new technology with our nationwide offering and we continue to see larger opportunities.
So to summarize all of these efforts our client retention is better than historical we are seeing more opportunities than we forecasted we continue to see larger opportunities and we are closing at the same levels as historical.
These positive trends resulted in the company, adding 3200, new Worksite employees from net new customer adds over the past 12 months.
A final point on this accomplishment. This is the most net new worksite employees from net new customer additions, we had added over the past four years.
This is just a fabulous result, and a testament of our value proposition as well as the focus of the organization.
Next I'm going to provide some updates on other initiatives.
We discussed last quarter, our new strategy that we are cleaning as asset light markets.
We have taken lessons learned in a COVID-19 environment for how to operate remotely.
Bold with our digital initiatives, and we will hire and train a professional and a new market and have them sell into that market.
We will serve as this client out of an adjacent branch, where at corporate and invest behind them and in infrastructure as they build up their client base.
It's still early but we hired four new folks in the quarter that are currently going through our training and immersion program.
Shifting to.
Our internally built client portal my BBSI continues to perform well and is being received favorably by our clients.
We are committed to quarterly enhancements that will add new features or improve existing functionality.
Our vision is to bring on additional products and services and deliver these through the portal and we have a dedicated team working on this.
So in summary.
We are in the people business and people have never been more relevant to the business owner than they are today.
We are executing to our strategic initiatives and we are realizing positive results and seeing future positive trends, which result in our increased outlook for the remainder of the year now.
Now I'm going to turn the call over to Anthony for his prepared remarks.
Thanks, Gary and Hello, everyone.
I am pleased to report that our Q3 performance continued to build on the momentum we reported last quarter with results that were once again stronger than expected.
PEO gross billings increased 12% over the prior year quarter, and 5% sequentially from Q2 to $1 66 billion.
Staffing revenues increased 2% over the prior year to $29 million.
As Gary noted our increase in PEO gross billings was driven by stronger than expected growth from net new clients in the quarter as well as stronger than expected hiring within our customer base.
Our average <unk> increased 8% year over year, which is 1% higher than our expectations.
We also continue to see higher average billing per WMC, which is up 3% in Q3 over prior year and continues to trend ahead of expectations.
PEO gross billings growth by region versus the prior year third quarter were as follows.
Alton States grew 35%.
East Coast grew 16% the.
The Pacific Northwest grew 14%.
Northern California grew 13% and southern California grew 6%.
While southern California continues to grow steadily our customers in the region are expanding more slowly than in other regions and the effect is generally consistent across industry.
For example, our construction industry clients in northern California have grown 10% on average year to date.
Hard to only 3% for those clients in southern California.
Workers' compensation expense continues to trend favorably in the quarter and.
<unk> included an actuarially determined reduction of prior year estimated liability of $800000 in the third quarter.
Our claims performance is also remaining favorable with relative claim frequency, 6% lower than the third quarter of 2019.
We announced last quarter, our new insurance program that became effective July one.
This new program greatly reduces the workers' compensation risk that BBSI now retains.
As a reminder, we will now describe our workers' compensation coverage for clients as being under either our insured program or our self insurance programs.
Approximately 82% of our workers' compensation exposure.
<unk>, all California clients are covered by our insured program.
All claims incurred in these states after July one.
Now covered 100% by the insurance market with zero claim costs retained by BBSI.
This is a significant change from our previous structure, which included $3 million of retention per occurrence.
Because of this move to a fully insured program our workers compensation liabilities no longer increased in the quarter, but instead decreased by nearly $19 million has remaining historical claims were paid.
Looking at our margin and pricing, we continue to hold our building rates effectively flat on renewal when compared to the prior year.
The workers compensation market is firming, but it's still competitive in certain geographies and industries for new business.
However, our strong client retention is an indication of the value we are creating for our clients even in this competitive market.
Looking at operating expenses SG&A continues to trend in line with expectations.
Although employee expenses are up relative to the prior year. The variance reflects prior year reductions implemented during the COVID-19 pandemic that have since been reversed.
Increased employee travel and marketing costs and.
And higher profit share and incentive pay in the current year due to stronger than expected results.
Through Q3 management head count levels, and non operating cost both remain below 2019 levels.
Our investment portfolios earned $1 8 million in the third quarter compared to $1 6 million in the prior year. Our investments continue to be managed conservatively and have an average duration of four one years average quality of investment in <unk>, an average book yield of one 8%.
Going forward investment balances will begin to decline as our collateral funding requirements diminish under our new fully insured workers' comp program.
Turning to the balance sheet, we had $116 million of unrestricted cash investments at September 30, compared to $110 million at June 30.
We continue to be debt free except for our $4 million mortgage on our corporate headquarters.
We remain committed to our capital allocation strategy and return capital to shareholders in the quarter through $2 3 million in dividends and $4 2 million of stock repurchases at an average price of $75 54.
At quarter end, there was approximately $31 million remaining on the board has approved a $50 million share repurchase program.
Turning to the outlook for the year, given the stronger than expected results in the quarter. We now expect gross billings to increase between 9% and 10% up from 6% to 8% previously and.
And we expect average WSI fees to increase between three 5% up from 2% to 4% previously.
We continue to expect gross margin as a percent of gross billings to be between $3 <unk> and three 1%.
And we expect our effective annual tax rate to be between 22% and 24%.
I will now turn the call back to Gary for closing remarks.
Thanks, Anthony in conclusion, we had a great quarter as we executed our short and long term strategies. We continue to always think of the client first and 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 for future growth now.
Now I'd like to turn the call over to the operator for questions.
Thank you ladies and gentlemen at this time, we'll be conducting a question and answer session.
If you'd like to ask a question you May press star one on your telephone keypad.
Confirmation tone will indicate your line is in the question queue you May press <unk>.
<unk>, if you would like to remove your question from the Q4 participants using speaker equipment. It may be necessary to pick up your handset before pressing the snarky.
Our first question comes from the line of Chris Moore with CJS Securities. Please proceed with your question.
Hey, good afternoon, guys. Thanks for taking a couple of questions.
Yes, maybe ill just start on the <unk>.
It's kind of the mechanics, and the impact of the of the Chubb agreement. So.
My understanding is that.
So you had the two LP Ts that.
Basically took care of between 2014 and 2018.
The current.
With Chubb is starts as of July one 2021 so.
2000, 1920 and half of 'twenty, one are the years, where you still.
Theoretically would have.
Unfavorable workers' comp claims.
It could be an issue am I looking at that correctly.
Yes that is correct. So there is two and a half years. The only claims we have remaining.
On the balance sheet, we do have some self insured claims that's outside of our fully insured program right. That's the 18% right that part of the fully insured.
But under the fully insured program those are the only remaining claims.
Got it and will there.
Go ahead, I know that I know thats, a little confused I will just say, it's a lot I don't want say, it's confusing it's a lot and there's a good disclosure in the Q that has that has.
Call it the liabilities by year for what we're at risk on.
Got it alright, that's helpful.
But would there likely be additional LPT is there kind of a normal period of aging like for example.
Mid next year is it likely to be something that's focused on 2019.
Yes, I mean, we have it in our plan to look at to look at the next year.
But it comes down to price to risk and if it is it makes economic sense for both sides of the.
The transaction. So we both intend to look at it next year and if we can get to an agreeable price that we'll get a deal if not then we'll keep it we're comfortable keeping it if we have to.
Got it and maybe just one more from me on the investment income so it sounds like.
The.
Investable base is going to.
Continue to decline I'm, just how rapidly should we expect that to happen.
It'll be gradual as we pay claims our rule of thumb that we pay about 25% of our remaining claims and a year and that will trail that rates of decline in terms of the investments.
We are seeing rates tick up slightly from their lows. So I'm also optimistic that we'll get some offset there as are our investment yield goes up.
Got it.
Jump back in line I appreciate it guys.
Thanks, Chris.
Our next question comes from the line of Josh Vogel with Sidoti. Please proceed with your question.
Thanks, Good afternoon guys.
Gary you talked about initiatives to expand the business.
Whether opening new branches or the.
Asset light markets. The trials there are investments in tech enablement and might be BSI.
I'm curious if Q3's SG&A run rate is a new normal.
A new normal base for us to think about going forward.
No. So Q3 is higher.
Because if you think this is the quarter where were increasing.
Our guide.
And there is some variable compensation to the branches as far as profit share if they hit revenue targets and theyre, not only hitting them they're exceeding them.
So there's going to be a variable profit share that realizes in Q3.
So that'll be our highest SG&A rate for the for the year it will slow down into Q4.
Alright, great. Thank you.
Yeah.
Obviously, an impressive build in worksite employees.
Just anything that can be read into the average number being higher than the ending count was that just because there is some seasonal stuff that hit up over the summer months.
Yes in terms of the pattern of our Worksite employee count always peaks in the middle of summer and Thats driven from two large industries the agricultural industry and construction just have more bodies working in the summer.
Alright, okay.
I was looking at the safety incentive costs and it was down a lot even from the prior two quarters and what your revised.
That element of the business is this a move to do away with that altogether, how should we think about that as part of <unk>.
Workers comp going forward.
Yes. Good question, Josh If you go back to this quarter last year, we talked about how we refined our pricing in the market.
What we really did was the workers comp market and specifically in California was was competitive and what we did was lowered our pay in rates.
To our clients and ultimately what we did was move that safety incentive upfront and netted it out of what.
What we were charged to clients and it made sense because of the competition in the market number one and then number two it helps them out in cash flow when we did that during COVID-19.
So what you'll what you see now as we've.
Renewed on most all of our accounts.
Without a safety incentive which some accounts still may have at the I'll say the overwhelming majority will not have it and what you are left with is a liability that is going to slowly run off or has been running off.
Alright, great and just last one for me right now.
Thinking about the vaccine mandates I know your average client has around <unk>.
30, or less employees today, but you are moving upstream youre going after and landing larger national accounts I guess I know we know it's still early here, but what dialogue are you having with clients today.
And you can make the argument that your relationship with value pop comes into play when thinking about holding their hand through a process like this similar to what you did in the early days of the pandemic with small business loans, just curious your thoughts around the mandates the ongoing dialogue youre, having with clients today.
Whether we can discern if this is going to be a potential positive or tailwind for you.
Yes.
This is a tricky one right because.
It's still not into effect, so what we're coaching our clients on and that's how we're handling our business now right because this will affect our management employees.
It is.
Get your plan ready so that if it does go into effect you know how to operate to it. So we have our own plan internally and then we're working with our clients. So if they are affected that they can develop their plan but.
Anytime.
No nobody wants to get into the business because they want to be the vaccines are right and this is an example of you open in our business and now you're an employer and you have more challenges in this pulls you away from what you get in the business for which is your product to your service.
And we're there to help the clients get through this because we see this and can take it to all of our clients rather than one person trying to figure this out on their own so it really.
It really does help.
The business owner to be with the PEO in times like this.
Sure.
Great well, thanks for taking my questions.
Our next question comes from the line of Jeff Martin with Roth Capital Partners. Please proceed with your question.
Thank you Hi, Gary and Anthony Hope you're doing well.
Gary I wanted to dive into the referral partner network you mentioned that volumes are still below pre pandemic levels. Just curious if you could give us some relative perspective, if there three quarters back if they're almost all the way back in and how would you how would you describe the quality of those leads relative to perhaps.
Pre pandemic levels.
So I gave a stat in my prepared remark, which was over the last organically over the last 12 months.
For business, we added versus business. We lost we added 3200 ws fees. So over the last 12 months our organic growth.
<unk> 3200, which I think goes through a pandemic is a phenomenal number.
And then you take that number and you add in the same customer sales, which gets us up to our total increase.
What we're seeing in the pipeline is.
Good quality leads.
We're seeing the larger leads which we are being able to convert to clients.
And that's that's really.
What we're seeing as far as how we are able to build those 3200 over the last 12 months. It's we're keeping the business and the business that we're adding is larger than it's been historically so.
Even go through here with with less submissions were adding more WCS, which is why we changed our metric to get to <unk> as opposed to a client count.
So that Theres no head fakes here on the business because the reality is we're growing the business organically.
Through a pandemic.
Yeah, Great and then with respect to your Omnichannel initiative could you give us some perspective, we added 82, new referral partners.
I take it that's off of a relatively small pilot test not yeah.
82 out of a nationwide broad effort.
<unk> there would be helpful.
Yes, we're doing that in about 20 markets now.
And these 82 these are folks that signed up that want to be partners. It doesn't mean, we've done a deal with them, but it means that they understand our value prop they want to learn more about BBSI and they want to sell that value prop in the market or to their clients. So we look at them as.
Future pipeline that the teams out in the field are working with them to cultivate those relationships to hopefully bring on clients in the future.
Okay. And then you also made a comment with respect to adding additional products and services on the technology platform was curious if you could maybe give us a sneak peek at what some of those are and how mature you anticipate those being to growth.
Growth acceleration over time.
Yes, good question.
We built our portal out with the idea that we own our technology destiny.
So we have the ability to plug in more products and services, whether we whether we make enhancements or.
The increase productivity in there or are we white label things and plug it in.
There is a I'll say, a limitless potential for products and services that we can bring in.
And we've got folks working on.
Executing to that product road map, so that we can ultimately have.
More things that that we can sell to make us either more attractive or the business stickier.
But we are we're not going to spill the popcorn until we do the launch on those.
Okay, Great and then just one housekeeping item.
What was the same store.
Gross number in the quarter.
So.
Gary said, we added 3200 worksite employees from net new customers to year over year same customer Worksite employee growth was 5500.
Okay helpful. Thanks, guys.
As a reminder, and thats good.
Good question.
Yes, Jeff just one clarification on that one that's just WMC growth that doesn't count wage inflation or anything like that that's just pure WSI growth alright.
Our next.
Comes from the line of Vincent Colicchio.
Colicchio with Barrington Research. Please proceed with your question.
Hi, Gary Nancy I hope you're doing well also.
So curious about.
What are you seeing any pushback from any clients on pricing given.
Wage pressures out there in the market.
Yeah.
I would say no more than normal.
<unk>.
It is it has been a competitive market and it's been competitive because of workers' comp and Anthony mentioned in his prepared remarks that we've been able to hold our renewals relatively flat so our markups relatively flat for 'twenty one versus 'twenty.
So we like to think that the product that we blurring to market.
It is worth the price that the clients are paying because we're able to hold the pricing pretty consistent.
And then our run off is the best we've seen so.
I would say.
All signs pointed in the right direction.
And.
What portion of your teams have transitioned thus far.
To.
The new model with more HR professionals.
So that model is when youre going to get into the larger branches.
So it's going to be those mature branches that have that have that model or are close to that model. So.
And the total mature branches is going to be 'twenty to 'twenty two.
I'll say adopted some form of that new model.
So the efficiencies you are.
Seeing from that.
We are fully in place is that what you're saying.
Well, if you think of the efficiency so are our management payroll.
As is down still compared to 2019.
So we have more clients, we have more WCS and our management payroll is still less.
And the reason, we're able to do that is because of the efficiencies we get on the technology with my BBSI.
And because of.
Going into this six person team as opposed to a four.
And last one for me.
As some of your newer locations performing.
It's still early days.
So we opened Pittsburgh in Nashville.
And.
There are months, where there are about three months into being new branches and opening.
It takes it takes a little time to try to do a judge on this so.
We have good professionals in those branches one of them is.
Was from another BBSI branch.
The other was.
A new hire who has been trained and operating in the new model. So.
B.
But were confident they will do well, but we got to give them a little time.
Okay. Thanks for answering my questions.
There are no further questions in the queue I'd like to hand, the call back over to Mr. Kramer for closing remarks.
Yes.
Sure. Thank you everybody for taking your time to be on the call. Thank you everybody of BBSI for the hard work and a great quarter I appreciate everybody dialing in and we'll talk to you again next quarter. Thank you.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.