Q1 2022 Barrett Business Services Inc Earnings Call
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 your questions before we go further please take note of the company's Safe Harbor statement within the meaning of the private Securities Litigation Reform Act of 1995.
The 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 information presented that does not reflect historical fact are subject to a matter 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 and to the Companys quarterly 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 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 June 4th 2022, starting at eight P. M Eastern time Tonight.
Cast 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 dotcom.
Now I would like to turn the call over to the President and Chief Executive Officer of BBSI, Mr. Gary Kramer. Thank you Sir Please go ahead.
Thank you John Good afternoon, everyone and thank you for joining the call. Our positive momentum continued into 2022 as we had a fantastic start to the year, our financial and operational results exceeded most of our internal and external metrics.
We exceeded our internal estimates for client retention net client adds and worksite employee growth all of which resulted in better than expected financial results.
Regarding our client in WSI stack over the past 18 months, we've been executing a strategy to increase the top of the sales funnel and I'm pleased to say that our sales leads exceeded our expectations in Q1.
This is the result of our three pronged strategy first to mature and deepen our relationships with our existing referral partners.
To utilize technology and digital campaigns to target and nurture new referral partners and.
And third to utilize technology and digital campaigns to target potential clients directly.
Our leads prospects and client wins in the quarter were greater than the previous quarter and our best quarter post pandemic.
I mentioned during our last call that the one one selling season was our January for net new business in the past five years.
The next trend than we previously discussed is that we've been able to sell and support larger clients.
Our upgraded technology stack and national PEO licenses.
This continues to progress favorably and the average size clients that were adding are larger than the average size of the clients that are running off.
Regarding client runoff, our retention continues to be stronger than pre pandemic levels.
Like to attribute that works to the work we're doing in the field to support our clients and the value of our teams to bring in this ever changing and complex economic environment.
The results of all these efforts or what I refer to as our controllable growth is that we added 3500 worksite employees year over year from net new clients.
This was ahead of our plan and our best quarter in over five years.
We bill as a percentage of payroll and we grow as our clients grow by adding worksite employees with wage inflation and is hours worked increases our client base is resilience and exceeded our internal forecast for worksite employee growth in the quarter.
Regarding our financial results during the quarter, our gross billings increased 16% over the prior year quarter and exceeded our expectations for our PEO business. Our average worksite employees were up 9% over the prior year quarter.
And is the culmination of the controllable growth as well as our clients hiring we exceeded our internal forecast for our Worksite employee stack.
Our staffing business increased 18% over the prior year quarter, and we continue to experience favorable year over year growth trends. We are seeing more applicants were placing more applicants and companies are increasing wages to attract employees.
It is silly soon recruiting market and we were unable to fill all orders butterfill ratio is improving we could have grown more but we continue to have challenges filling orders with the tightness of the labor market.
We've made investments in staffing and recruiting and we're seeing positive results in recruiting for our PEO clients.
Moving to the field operational updates over.
Over the past two years, we've evolved our branch and business unit model as we adapted to Covid, but also to the shape of my vision as CEO .
Regarding our business unit model, we are able to revise the structure and migrate into a six person team from a four person team, which allows us to service more clients with less management employees and increases our return on management payroll.
Regarding our branch network over the past two years, we've consolidated branches with the intention of continuing to grow revenue while servicing our clients.
Consolidations any various branches allowed us to leverage mature team and leadership to achieve better profitability.
We never abandon the market, but rather our servicing and selling into a market in a more cost efficient manner.
We also evolved how we enter new markets with our asset light model, where we will hire and train a professional and a new market and assist them with our digital sales initiatives and then have them sell into the market.
We will service the clients out of corporate with a virtual business unit and invest behind them in infrastructure as they build up their client base.
All of these strategic evolutions it starts to complicate our historical reporting regarding quantity of branches and business unit stratification.
As such we are updating our reporting to better reflect how we think of the business.
We structure our operations in the context of how many local markets, we can sell into and service locally.
At the end of Q1, we operated in 13 States and 68 markets, which is consistent with Q4 of 'twenty one.
Some markets will be more profitable than others due to their maturity, but with our evolution.
Every market is expected to be profitable.
Regarding macroeconomic updates.
The growth in Worksite employees for our installed base during the first quarter was strong and our April numbers were equally strong.
Payroll data is a lagging indicator by a couple of weeks due to timing of pay cycles, but we don't see any indication in our data that would give us pause or concern about the future.
As the payroll and HR company for over 8000 clients over various states and industries. There is nothing in the data that would reflect the slowdown at this time.
However, we would be remiss, if we didn't acknowledge that times are growing more challenging for business owners, given tight labor markets record inflation supply chain challenges in a rising interest rate environment.
As we look ahead to the balance of the year, our confidence in raising guidance starts with our higher than expected Q2, starting point for our installed base of clients and WSI stack.
Plus the optimism of our revamped and disciplined sales and service teams executing on controllable growth.
And a slower increase in client hiring towards the back end of the year.
Anthony will provide more color to our full year outlook in his prepared remarks.
As I think of the future I've never been more optimistic about BBSI trajectory, we had consecutive quarters of great momentum and I don't see it slowing or client retention is the best it's ever been and we are seeing in closing on more prospects or prospects continue to be larger because of our tech stack coupled with our niche.
[noise] wide offering and we will continue to invest in technology and continue to invest in initiatives.
Simply put we are executing to our plan.
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 we had strong results for the quarter in all areas of our operations.
Gross billings increased 16% over the prior year quarter to 168 million.
Staffing revenues increased 18% over the prior year to $29 million as.
As Gary noted our increase in PEO gross billings was driven by stronger than expected growth from net new clients in the quarter.
Stronger than expected hiring within our client base.
And higher average billings per WMC.
Overall, the fees increased 9% over Q1, 'twenty, one and average billing for WMC increased 6% driven primarily by higher wages.
PEO gross billings growth by region versus the prior year first quarter were as follows.
Mountain States grew 38% East coast grew 25%.
The Pacific Northwest grew 19%.
Southern California grew 13% and northern California grew by 11%.
As expected we are now seeing southern California, a return to growth levels more consistent with other regions as clients. There are expanded hiring and increased wages and this trend has continued through April .
In addition every region is on or ahead of plan controllable growth that is growth from clients added less clients lost in the period.
Our gross margin rate remains on target for the year and benefited in the quarter from favorable payroll tax rates, which included a combination of favorable statutory rates and wage caps not increasing at the same pace as average wages.
This benefit is primarily realized in Q1 as most employees reached their payroll tax bleach caps in the first quarter.
The workers compensation market remains competitive, but we are seeing stabilization in pricing and competitor behavior there.
They have not been significant changes in market pricing in recent periods.
Workers' compensation expense continues to trend positively.
With continued favorable claims frequency and favorable development on historical claims reserves.
This quarter included an actuarially determined reduction of prior year estimated liability of $2 $9 million compared to $1 2 million in the year ago quarter.
As a reminder, with our new fully insured workers' compensation model. The company has significantly derisked its workers' compensation program for current year claims.
Looking at operating expenses SG&A in the quarter and unplanned and we continue to invest thoughtfully in the business, while navigating market increases in employee related expenses.
We continue to expect earnings leverage to be on target for the year.
Our investment portfolios earned $1 $6 million in the first quarter compared to $1 8 million in the prior year.
With the increase in interest rates in the quarter, our fixed income portfolio has moved to an unrealized loss position.
But we intend to hold these securities in our portfolio continues to be managed conservatively with an average duration of four one years average quality of investment in double E and average book yield of one 8%.
The net of these overall strong result is that we generated positive net income in Q1 for the first time in over 10 years.
As a reminder, BBSI typically showed a loss in Q1 due to the timing of the payroll taxes are incurred in the year.
Turning to the balance sheet, we had $127 million of unrestricted cash and investments at March 31.
Compared to $166 million at December 31.
The decrease from year end is primarily due to the timing of payroll tax payments as well as stock repurchases and the pay down of our mortgage and certain leases in the quarter.
As a reminder, BBSI is now debt free.
Looking holistically at the business, we remain committed to driving shareholder value through our strategy of generating consistent profitable growth and earnings leverage.
Derisking, our workers' compensation program.
Investing in growth initiatives, including sales strategies and expanding into new markets.
And returning capital to shareholders through our dividend and stock buyback.
We announced last quarter, the board approved a new $75 million stock repurchase plan and we commenced acquiring shares under that plan in March.
Through May three we have purchased 241000 shares that aggregate purchase price of $18 million or an average of $74 87 per share.
Of that 115000 shares were acquired in Q1.
The company also paid $2 2 million in dividends in the quarter and reaffirmed its dividend or the following quarter.
We are also on track for strong billings growth and earnings leverage for the year.
Given the strong results for the quarter in more favorable expectations going forward, we are increasing our full year outlook.
We now expect gross billings for the year to increase between 10, and 12% up from 7% to 9% previously.
We expect average wsb's to increase between four and 6% up from 3% to 4% previously.
Gross margin as a percent of gross billings to remain between three point island three 1%.
And we expect our effective annual tax rate to be between 25, and 27% up from 24% to 25%.
I will now turn the call back to Gary for closing remarks.
Thanks, Anthony we continue to always think of the client first and to advocate for the success of the business owner I want to thank all of our professionals, who work tirelessly to help our clients thrive.
We've been working on the right things and I think we're in a great position.
Yeah.
Yeah.
Thank you Sir at this time, we'll be conducting a question and answer session.
I'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the queue. You May press star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing any star keys. One moment. Please when we poll for any questions.
Our first question comes from the line of Vincent <unk>.
Hockey O with Barrington Research. Please proceed with your question.
Yes, nice quarter gentlemen.
So if this one is for Gary or Anthony you talk about the distribution of revenue and earnings and are in the final three quarters of 'twenty two.
Yeah, I can speak to that.
So we're still expecting sequential growth.
Each quarter.
Terms of year over year growth, we noted that Q4.
The Q1 would be our largest expected year over year growth because of the softer compare last year. So we saw that obviously, we did even better than we expected.
16% billings growth.
Q2, and Q3, we think we'll be strong Q4 will also be strong, but we noted that there'll be one less business day in Q4 so.
With that there will be a.
A little bit lower percentage year over year.
I think this is Dave.
Profitability similar trend in the past Q3, typically are our highest Q2.
Boiler will be impacted a little bit.
Payroll taxes being back in the latter part of that quarter.
Yeah.
Okay, Thanks for that and.
Gary.
Given the the economic risks that are out there and you've got a very strong financial position will you be a bit.
More cautious in terms of.
Maybe on the acquisition side in.
Does pricing look.
<unk> improves at all in that side of things.
<unk>.
I would say pricing has improved for sellers not buyers still.
Yeah, just in general it is a competitive market out there on the acquisition space, we are still looking at acquisitions.
We are good stewards of capital, we will continue to be thoughtful.
We're not going to chase valuations or whatnot that chase.
Undesirable structures, but.
But we are active in looking in the market.
We just haven't found one that fits our profile yet.
And how are you.
Operating on the pricing side are you selectively increasing pricing.
Given Oh, I guess overall I'd like to know.
<unk> is trending and if there's any pushback from any clients, giving wage pressures.
Yes, there's a couple of things right. So as our clients grow we make we make better or when we make the same margin, but we make more margin dollars as our clients grow right. So just by our clients growing we make money on you know we make more margin dollars on WMC growth than wage inflation growth.
You know I'll I'll say pricing for workers comp Anthony mentioned it in his prepared remarks.
It is.
More rational now.
We do see some competition every once in a while where somebody is trying to buy an industry or buy a business.
But it is more rational and people are I'll say being more professionals with their pricing and the workers' comp market than we've seen.
Specifically, the WC IRB, which is the rating agency for California has gone through.
<unk> proposed rate increase for seven 4%.
Ultimately carriers are going to charge, what they think the risk is worth but just the idea that the state is now waking up to the realization that rates need to go up as a good sign.
So in general we tend to try to price and accounts to make sure that we're getting a return on management payroll dollars as well and I would say this that that hasnt changed.
And now Anthony what was the year over year same customer delight ws see growth in the quarter.
Yeah.
So we added is as Gary noted in his remarks about 3400, worksite employees from that new customers and about 6500.
Worksite employees from customer hiring year over year.
Okay. Thank you I'll go back in the queue.
Yeah.
And our next question comes from Chris Moore with CJS Securities. Please proceed.
Hey, good afternoon, guys two questions my phone kind of broke up Anthony when you were talking about the cadence of our profitability on a quarterly basis.
Yeah, no worries its a pretty typical cadence to our standard pattern, obviously Q1.
Uh huh.
Income is affected by payroll taxes, we had a great top line billings growth and partly because the compare last year was a little weaker the.
The rest of the year, we're expecting strong sequential growth as Gary said, we are well positioned for the year, but the fundamentals.
I didn't know again to remind you that Q4 has one less business day than last get work for the year over year that did a little bit.
Overall, though we're seeing strong momentum for the year.
Got it in terms of the.
Q1 profitability I mean, you you had a bigger than normal workers' compensation adjustment I think you would've had a loss of around 25 cents without that but.
Is this you know kind of timing of payroll taxes is this a new trend for you know say Q1 next year or is it likely where we're back to the normal you know loss in Q1 moving forward.
That's a great question Chris.
It's interesting with the pandemic, obviously, there was no significant unemployment claims for a period of time states have generally.
Held back pushing those costs down to business owners Radebe theyre not pushed those costs at all our they've entered into programs to phase in those increases over time so.
So we really have not seen increases and in fact have seen statutory rate decreases.
She would not typically expect.
And that the funding level of those unemployment trust accounts.
Little bit to be determined what happens next year and the year after.
But in theory.
Unemployment tax rates will need to go out to replenish those thus far.
Got it and in terms of of.
Investment income you know and in this rising.
Interest rate environment. It can you talk about that again it sounded like it was 1.6 million invested in income in Q1 versus 1.8 I'm just in terms of your your thoughts for for for the balance of the years is that 1.6 going up or E. There's also some unrealized and realized loss in there so.
Maybe I missed it.
Talk to that a little bit.
Yes, its generally fairly stable as the fixed income portfolio. So these are bonds that we intend to hold them. There are some variable rate holdings, so that will put.
Some of the upward pressure, which is fantastic that would be offset by our general guidance in the past that with our new fully assured program. Our collateral requirements will continue to come down. So some of our investment balances will come down overtime sure you've talked about how rate increases might have offset that I think that's more true now.
So overall I would expect fairly steady investment returns.
Got it.
I appreciate it I'll jump back in line thanks, guys.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
A confirmation tone will indicate that your line is in the queue.
And our next question comes from Jeff Martin with Roth Capital Partners. Please proceed.
Thanks, Good afternoon guys.
Wanted to dive into the asset light model, a little bit more in detail you mentioned eight clients, where either added or.
Contracted through February if he could give us an update there and maybe just talk qualitatively as well about our progress with the initial four.
Geographic locations such started last year.
Yeah, Hey, Jeff.
So for the four markets that we're in and using this asset light model I can say that we're very pleased.
With the outcome. So far we spent a lot of time on training. We spent a lot of time on development on immersion training on role playing and we think we have a good formula for folks to be successful quicker and we're seeing that success quicker I would say the markets are.
Performing.
At or better than what our expectations were so.
The servicing as well as handling and doing the servicing virtually.
Has has really gone over well to in those markets. So the.
The they're able to sell water able to service you know for the certain markets we're using our.
Our digital technologies to market.
Market to referral partners in the market to direct clients.
I would say that where we are.
Everything I mean all of them.
Kind of hit it with my closing right with every everything we're working on as is working and we're hitting our plan number of them are pretty pretty pleased with where we are for.
For that regard.
I don't think it's going reasonably well or reasonably ahead of expectation. That's great to hear you also mentioned the pipeline was 50% higher than Q4 and that they say I believe you mentioned that it continues to strengthen but I I don't know if you want to add any detail to that.
Yeah, I mean, where you're seeing the economy over the last back half of the year reopen.
And we saw good.
Good momentum into Q1, and Q1 was our.
One was our best selling season, and I'll say over five years and.
No.
We have a discipline now.
Uh huh.
How we handle our activities what we do in those activities.
The one the one focus we've had is as you know think of it as trying to make new friends were making our referral partners.
You know throughout this duration I can just tell you that the leads that came in this quarter.
120 of those leads were from new referral partners for new relationships that we fostered then and most of those relationships, we were able to get them into the BBSI ecosystem through our digital strategy. So.
We're seeing really good things and feel positive that.
These are now you know what.
When we broke them out and talk about them before it was because it was an initiative now it's kind of part of the DNA and operationalized and it's part of our foundation for how we do what we do.
Okay, Great and then I was just curious if you could comment on the dead Sea average WC growth guidance of 4% to 6% and put that in context to the last three quarters, where you've grown between eight and 9% year over year. Yeah is that just a degree of conservatism given some of the uncertainties there or.
Or are you expecting something to knock that growth rate down towards the back half of the year.
Yes, I think.
Maybe a little conservatism, but I think more broadly it is looking at the trend and the year over year compare.
The shape of that.
Well I think as we look at our forecast.
Including external forecast and other metrics that we use in our modeling.
Temper that growth in our model the latter part of the year.
We knew that we were going to have stronger growth equity on that metric.
The year.
Okay.
<unk> of those sectors.
Yeah, I would say, Jeff too as you.
We had strong growth in Ws season quarter, one right. So we think it is two things one is what do we control and that's clients, we adding clients we keep in our Ws CES.
And then the second is how our clients grow in and I can say that we beat on both metrics as far as our controllable WMC growth and then our clients hiring and.
If you look at unemployment and where things are you kind of feel like hiring has slowed down with with where the labor market is.
And we baked that into our assumptions.
Assumptions and plan for the year.
But Q1, our client hiring exceeded our expectations and then we're just kind of looking at the back half of the you're saying.
Ken.
Can we get that Ws see growth in our installed base in this tight labor market.
Yeah. Okay. That's helpful. Thanks, and congrats on a good start to the year.
Thanks, Jeff.
Okay.
And our next question is a follow up from Vincent Colicchio with Barrington Research. Please proceed with your question.
Yeah, Gary I'm curious.
If the economy slows a say in the second half yeah, I've got some macro headwinds out there obviously.
Is there more of a branch consolidation that you can do or and you know what other actions maybe a tick.
Aye.
You know.
The fed has 400 economists and it seems like we can't get a good prediction out of anybody right. So.
From where we're sitting now.
Our data is strong and I was trying to convey that in my prepared remarks, we don't see anything in our data that gives us any pause or concern for a slow down now, but we do realize that there's headwinds out there for you know for.
For the various things.
You know we just.
Does this feel different.
All right this feels more.
Right now you have record unemployment right Youre your unemployment rate is the lowest it's been in probably our lifetime.
And this doesn't feel like like a I'll say a historical recession I don't know if there's going to be a compare for this one what happens right.
Alright, if I look at the industries we're in.
We're not in industries that I that I see slowing down as far as construction transportation logistics.
Blue grades I don't see that slowing down.
This year.
At all.
And then as you look out into the following year you know.
Time will tell but I feel like for for worthy.
Economy is in the country isn't where BBSI is placed in that.
Diagram I feel.
Good for where we're at so.
We went through the whole world went through the shock of the pandemic and I you know I think we weathered through that pretty well as a company I mean through 'twenty, our revenue was flat in <unk>.
We still put up a $4 39 for EPS.
We were able to manage through it and I feel like the teams in the field.
The company in general our financial positions I feel like.
I feel like we can take whatever the whatever the world has to throw at us.
And one clarification did I did I hear that the pipeline was up 50% from Q4 is that the right number.
Okay.
Jeff mentioned that I think are need so it was a stat. He gave us a subset of the pipeline at our leads are up yes.
Yes, it was a stat for Q4, not Q1 I think.
Your leads were up 50% from Q4 Q1.
He was quoted I felt from Q1 or Q4, I don't have that I don't have that number in front of me Vince.
Thank you.
That's it for me thanks.
At this time. This concludes our question and answer session and I would now like to turn the call back over to Mr. Kramer for any closing remarks.
So thank you everybody for joining the call. Thank you to everybody at BBSI, who does what they do.
We had a really good quarter, we have a really good momentum churn in and where we're positive about the outlook of the company. So thank you everybody.
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