Q3 2022 Barrett Business Services Inc Earnings Call
Good afternoon, everyone and thank you for participating in today's conference call to discuss B B S financial results for the third quarter ended September 30th 2022.
Joining us today are Bbsi's, president and CEO , Mr Gatti grammar and the company's CFO , Mr. Anthony Harris.
Following their remarks, we will open the call for questions.
Before we go further please take note of the company's Safe Harbor statement within the meaning of the private Securities Litigation Reform Act of 1995.
The statement provides important cautious.
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 facts.
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, and the company's 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 December .
Second 2022, starting at eight P. M E T Tonight.
Oh webcast replay will also be available via the link provided in todays press release as well has available on the company's website at www Dot B B S I dot com.
Now I would like to turn the call over to the President and Chief Executive Officer of B B S Hi, Mr. Gatti Campbell.
So please go ahead.
Thank you Ryan.
Good afternoon, everyone and thank you for joining the call we had an excellent third quarter, both financially and operationally our performance and momentum continued across all facets of the business and resulted in us once again, raising our full year outlook we.
We are executing on our objectives and our strategies are delivering superior results our growth in worksite employees resulted in better than expected financial results.
Regarding our client in WMC stack, we continue to execute on various strategies to increase the top of the sales funnel and I am pleased to say that we once again exceeded our expectations in Q3.
This is the result of our three pronged strategy.
Mature and deepen relationships with our existing referral partners to utilize technology and digital campaigns to target and nurture new referral partners and to utilize technology and digital campaigns to target potential clients directly.
I'd like to put a finer point on our new referral partner initiative.
Through the third quarter of 2022, we have strategically.
About 6000, new potential referral partners and we have forged new partnerships with about 18% of them.
This is a long term strategy trust is earned slowly over time as these new referral partners see BBSI and our product in action, we believe they will become more comfortable recommending BBSI to their clients.
On a year to date basis, we added 41, new accounts from these efforts up from 15 last quarter and expect this to continue to accelerate into the future. We will continue this strategy in 2023, along with targeting new referral partners that specialize in the benefit space.
The next trend that we previously discussed is that we've been able to sell and support larger clients with our upgraded technology stack and national PEO licenses. This continues to progress favorably and the average size of the clients that we are 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.
I like to attribute that to the work, we do with our clients and the value our teams provide.
The results of all these efforts or what I referred to was our controllable growth is that we added approximately 4300 worksite employees year over year from net new clients.
We bill as a percentage of payroll and we grow as our clients grow by adding worksite employees with wage inflation and as hours worked increases our client base is resilient and we exceeded our internal forecast for worksite employee growth in the quarter.
Our average Worksite employees were up 8% over the prior year quarter, which is the culmination of controllable growth as well as our clients hiring we exceeded our internal forecast for our Worksite employee stack.
Moving to our staffing operations, our staffing business increased 1% over the prior year quarter and was less than we anticipated there's still strong demand for labor and we're receiving more orders, we're placing more applicants and companies are increasing wages to attract employees. It is still a thin recur.
Routing market and we are unable to fill all orders and.
And he will give some regional color for what we're seeing in the markets.
I mentioned previously that we made investments in our recruiting operations and we are seeing positive results. One of our objectives was to provide recruiting services for our PEO clients.
This is a valuable service to our PEO clients and a tight labor market, which also rewards BBSI when we place a candidate we receive a recruiting fee.
And as the candidate joins the client's payroll, we realized PEO revenue.
We have built out recruiting hubs in every region that support our branch network on a year to date basis. We have placed 287 candidates with 147, PEO clients and generated $1 $7 million in recruiting fees. We expect this to increase as we introduce to more.
Yes.
Moving to the field operational updates.
We're very pleased with our progress of entering new markets with our asset light model. Our first class of four is doing well and we added 25, new accounts with about 250 Worksite employees.
In 2022, we started small with our first class as we were learning and refining the various aspects of our new market development program. We are at a point now that we are confident that we can scale. This program and have hired and our training. The next class of 11 folks. This class is primarily located in the central States plus a few.
East Coast markets and will begin selling in Q1 of next year.
At the end of Q3, we operated in 13 States and 68 markets, which is consistent with the prior year quarter and does not include our asset light markets. Some markets will be more profitable than others due to their maturity, but with our evolution every market is expected to be profitable.
Regarding product updates.
We successfully launched our new health benefits offering in the quarter and began selling for the 123 enrollment season.
As a refresher we entered into a strategic multi year partnership with one of the world's leading health insurance companies. This is a fully insured program, where we take no underwriting risk we have been derisking the workers compensation program over the past couple of years and it was a key objective of ours not to take underwriting risk we have.
Invested in I T to allow this offering to be delivered seamlessly through our my BBSI portal and clients will find value from the ease of administration billing and compliance.
BBSI clients will now have access to discounted products and plan designs that are not currently available to them in the traditional small group market, we will be offering health insurance, plus ancillary benefits, including but not limited to dental vision life disability and critical illness.
In the quarter, we rolled this out to a limited number of existing clients in select markets for the 123 enrollment season.
Our intent is to perfect our craft and then shift our focus to California and to new prospects.
This will not move the needle for revenue or profit in 2023, as we targeted a very small cohort of clients, but we anticipate this will provide material contribution as we look to the future of BBSI.
We view this as an opportunity to diversify our client profile, while expanding our total addressable market.
We have the people products operations and technology in place and are executing to our sales plan I am pleased with where we are with this new offering and have our sell through thus far.
In addition to our benefits offering we've also been investing in electronic training and development you've heard me say over the past two years that we've invested in technology that was designed to train and develop our new market development managers. We are taking this technology and are now making it available to our clients through my BBSI.
We are excited to be launching BBSI U in the fourth quarter. This is a learning management portal that our clients can purchase and contains various catalogs, consisting of HR and compliance risk and safety leadership and professional skills.
This does not replace our experts in the field, but will be a valuable tool that complements our offering.
Next I'd like to shift and speak about the macro economy.
The growth in Worksite employees for our installed base during the third quarter was strong and our October numbers were equally strong wage inflation is still prevalent but at a slower growth rate in 2021.
As the payroll and HR companies for over 8000 clients over various states and industries. There is nothing in our data that would reflect a slowdown in the economy at this time.
However, we would be remiss, if we didn't Mcdonald's that times are growing more challenging for business owners, given tight labor markets record inflation supply chain challenges in a rising interest rate environment.
We know that labor is in high demand that the unemployment rate is still at all time lows that the labor force participation is lower than pre pandemic levels that job openings rose last month that immigration is low.
These are all unusual facts that do not fit any previous historical inflationary recession scenario.
Also lay offs should be delayed due to business owners recent memories of how challenging it was to attract new employees post pandemic.
Sorry, your quarter to $1.9 billion, while staffing revenues increased 1% over prior year to $29 million.
As Gary noted or increase in PEO gross billings was driven by stronger than expected growth from net new clients in the quarter continued stronger than expected hiring within our client base and higher average billing per work site employee.
Overall works that employees increased 8.2% over Q3 21, an average billing for WC increased for 2% of the.
The increase in average billing for WC was driven primarily by rising wages in our existing employee base.
Set partially I continued hiring of more lower wage roles.
To the prior year.
T O gross billings growth by region versus the prior year third quarter were as follows.
Mountain States grew 21% East coast grew 20%.
Southern California grew 14%, Northern California group by 10% in the Pacific Northwest grew 7%.
Tapping revenues increased 1% over prior year, which is a slower growth rate than we have seen recently.
We monitor our staffing revenues closely for broader trends, but the slowing growth. This quarter was primarily driven by client and region specific circumstances.
And the northwest we have agricultural clients were work has shifted from Q3 Q4 in response to a late harvest season.
And in the mountain States, we experienced a slowdown in certain light manufacturing clients due to supply chain challenges.
Both of these examples are transitory.
The one market, where we have seen demand contraction as in northern California, where we support more technology clients. However.
However, we are not seeing broader negative trends.
We continue to see stability in our workers compensation market and our overall pricing has remained consistent and in line with our plan.
Gross margin rate continues to trend ahead of prior year through Q3 with cost savings in payroll taxes and more significantly from lower workers compensation expense in the current year.
Our workers compensation program continues to perform well with favorable claims frequency Trent trends and favorable development on historical claims reserves.
Quarter included an actuarially determined reduction of prior year estimated liabilities of $1.4 million compared to zero point $8 million a year ago quarter.
As a reminder, we renewed our fully insured workers compensation program effective July one of this year.
Prior year program has performed favorably and a renewed program includes several enhancements, including even more cost certainty.
For the 12 months policy effective July one 2022 if.
If claims developed favorably in future periods.
I received the benefit of those lower claims costs to return premium from carriers.
If claims develop unfavorably there is no additional premium that can be owed that is BBSI continues to participate in all of the upside of favorable workers compensation questions, but has no exposure to downside risk.
Turning to operating expenses SG&A in the quarter is on plan.
Our new health benefits program is launched successfully on schedule and with costs in line with our forecasts.
Our top line growth and profitability are ahead of expectations and we accordingly have increased employee compensation expense for profit sharing and incentives.
Those increases have been offset by other savings and a quarter.
As a reminder, we expect our earnings growth rate of approximately 1.5 times, our top light growth rate.
Even with the incremental expense in preparation for health benefits offering we continue to expect earnings leverage to be ahead of target for the year.
Moving to our invested assets are investment portfolios or in $1.6 million in the third quarter compared to $1.8 million in the prior year with.
With the rapid increase in interest rates are fixed income portfolio remain in an unrealized loss position.
However, we intend to hold those securities in our portfolio continues to be managed conservatively with an average duration of four years average quality of investment double a an average book yield of 2.1%.
Looking at the balance sheet, we had $132 million of unrestricted cash investments that September 30, compared to $111 million at June 30.
The increase is primarily due to the results of operations and the timing of payroll tax payments.
As a reminder, BBSI is now completely debt free.
We continue to see intrinsic value in our share price relative to our profitability and growth potential and we've continued to repurchase shares under the boards $75 million share repurchase program and.
In the third quarter, BBSI repurchased 130000 shares an average price of $81.74 per share year.
Year to date, we have now purchase more than 7% of the company shares outstanding and still have $36 million remaining on the program.
The company also paid $2.1 million in dividends in the quarter and reaffirmed its dividend for the following quarter.
We have paid $6 $6 million in dividends year to date.
Given the strong results for the quarter and positive trends, we are increasing our full year outlook.
We now expect gross billings for the year to increase between 12, and 13% up from 11% to 13% previously.
We expect average wsu's to increase 8% to 9%.
Up from 7% to 8% previously.
And we expect gross margin as a percent of gross billing to be between 3.1 and 3.2%.
From three point O, 5% to 3.15% previously.
And we expect our effective annual tax rate to be between 26% to 28% <unk>.
Consistent with our previous guidance.
We finished this year and look ahead to the next we believe BBSI is poised for continued growth even in an uncertain economic environment.
We will continue to invest in growth and products, including our new health benefit offering in new market expansion.
And even with those investments will continue to benefit from leverage our operating model.
In short we are optimistic about the future and are looking forward to the year ahead.
Now I will turn the call back to the operator to open the line for questions.
Thank you.
Ladies and gentlemen at this time, we will be contacting a question and answer session.
If you would like to ask a question. Please press star one on the telephone keypad.
Confirmation tone will indicate your line isn't a question Q U.
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Four participant using speak of equipment it may be necessary to pick up your handset before pressing the stocky.
Ladies and gentlemen, we will wait for a moment, while I pull for questions.
Our first question comes from the line of Chris more from C. G. S Securities. Please go ahead.
Hey, good afternoon, guys congrats on another.
Quarter, you mean, we just start.
On the property casually market side, so hurricane Ian had a significant impact on the property and casualty market generate large losses.
Is that causing more tightening of riskin and re tolerance by carriers.
Hey, Chris Good question, it's still early a lot of that.
A lot of that catastrophe was fell off sees about 60% of that losses with Lloyds out of London.
So 40 40 per cent on the U S market, which is where you would have.
Call commonality with the workers comp lines of business still early days.
We're seeing.
We're seeing the rates kind of trade in a flat band of the.
Plus to minus two we haven't seen any broad stroking rate increases yet from everybody.
We've.
We've continued to see the workers comp market get more rational.
And we expect we expect that it will stay in that.
Flat to up range for now, we're just not seeing or not seeing the the deep discounts anymore like we used to see a year or two ago, it's more more trading and where the rate should be.
Got it very helpful [noise].
And maybe maybe just a staffing I mean over the.
I don't know how many quarters you know you can.
Talking about staffing shortages that obviously continued into Q3.
After Q to Ya.
Kind of had this.
Thesis out there so we're talking about <unk>.
Hiring skilled workers was it a matter of businesses not being able to find enough skilled labor or they can't afford. These workers just maybe any any follow up thoughts you had on that from from Q3.
Yeah. So we we measure our orders right, which is really people that want us to hire right. So we measure our borders.
Our our orders are are not down so we're not seeing the orders go down which the question is is that the Canary in the coal mine and we're not seeing companies are still asking us to go higher for them on the staffing side. It you know we've had a couple of seasonality things that Anthony mentioned as far as in the northwest and in Mountain States.
But companies are asking us to hire that hasn't slowed down really these are our fill ratios are dripping down again, just because of the availability of the workforce, So where we were able to fill less orders on a ratio basis. In Q3, then we were in queue too it's still a tight labor market out there.
Sure.
Got it it may be just the last one for me M&A My sense is that M&A could happen at some point, but this is not really an area you're spending a lot of energy on currently is that is that a fair statement.
We.
We look at anything that comes across our desk, we go out and talk to folks as well on the offensive side.
We are active in the market, but ultimately we're gonna do what we think is the best for the company for the long term.
And we.
We've we've shifted right. We honestly, we're trying to find a company that had benefits we couldn't sign a company that had benefits that we wanted to buy and then we started our own benefits Department right.
And then we're not gonna sit idly by and wait for an acquisition, that's why we're going with our asset light.
Model to enter new markets. So we're excited that we have 11 11, new BBSI folks that are in the training program that are going to be selling and new markets.
Come come Q1, so that's that's how we're going to fill out the map is with the asset light model. So.
If we can find somebody inorganically that fits we will do that if not we will we will grow it on our own.
Oh that sounds great I will leave it there I really appreciate it.
Okay.
Thank you.
Our next question comes from the line of Jeff Martin from Roth Capital Partners. Please go ahead.
Thanks, Good afternoon, Okay. When I was hoping you could give us a sense of what the initial client reaction has been to the new benefit benefits offering and now.
What kind of uptake rate are you seeing or is it too early to really tell that.
Good good question, it's I'll say that the clients have been asking for this and Anthony and I were playing back and forth about whether we put a quote in our in our earnings script, because we had a couple of nice clothes, but we ultimately left them out where they were very complimentary of.
Of a BBSI doing this and then be of the product that they have.
We we only did this in select markets and we only did it to current customers that have benefits right. So we didn't try to go real wide with this to start. So we went with a very select group I can say that were positive.
We're optimistic on the sell through that we've seen we don't have good numbers, yet we actually just started to push the enrollment outs. This week. So we don't know how many participants.
Participants are gonna enroll we don't know of the total census, what it's gonna look like.
But so far I think it's been a good launch for us a good learning exercise, we learn some some valuable things along the way so that when we when we try to take this thing to scale next year and offer in California, and then offered to new clients. We're gonna have a much better conversion rate because we have one.
Some things this year.
And then you know tied to that what what are you seeing in terms of attractiveness to referral partners that specifically traffic within within the health care market.
That's that's gonna be a focus and attention for us next year right because.
90% of our business comes from referrals partners and all of that 90% a large portion is P&C carrots P&C brokers, we don't have a lot of life and health referral partners now because we don't sell a life and health product right. So we look at this and say we have a mapping of our referral partners that do both sides of the house.
As far as the life and health and the P&C and we're working with them and then we're gonna have a strategy similar to what we did this year as far as you know I I called making new friends going out and and advertising and attracting new referral partners specifically in the benefits base in explaining the BBSI product I mean, we're.
Where are the broker friendly PEO, we make sure that if they put the business with us.
They're compensated in a similar way as if they put it with the standard market. So really if they put it with us their life becomes easier because we've got better.
Retention.
And our platform makes their life easier there was less administration for the broker when they put it with US. So we think we have a lot of good selling points. When we when we go to the market to try to bring all new referral partners.
Okay, Great and then I was curious on the on the placements initiative you know kind of first time, if you've talked about this has this been something you've been doing all year and it's just kind of starting to to reach you know a material part of the business that you're starting to talk about it and how.
You know how much of a focus this this going forward.
We internally, we've we've promoted somebody to run our staffing vertical and this was one of the objectives was the bring recruiting to our PEO clients. So.
We started in southern Cal.
With our recruiting branches with a recruiting branch to be a hub for southern Cal. Good results there took into northern Cal and then we took it to Portland, and we took it to the mountain States and now we have a recruiting hub on the east coast as well it supports all of our PEO clients. So.
We tried it it worked and then we took it to all the other markets and it's working and all the other markets and now we're at a point of where we say we can do this nationally and and it's it's a good value add right we.
We do recruiting for our PEO clients when we do the recruiting we get paid a fee and then they go on PEO payroll and we make PEO revenue. So it's it's a win win.
Yeah that sounds sounds very interesting and then last question in terms of.
Know your workers compensation outlook, you know as a.
Percentage of of gross billings next year, you're thinking it will have the opportunity to come down from the you know three to 3.1 range. This year.
Does it have room for the room next year to decline.
Yeah. Thanks, Jeff.
The answer is we always think we can continue to improve and we will so at this point.
We see positive trends as I noted in my remarks.
Nothing worrisome coming through Q3 Q for.
That right there were paying now in the fully insured program will continue obviously in the first half of next year.
And then we would reset that next July one but.
Seem to monitor that and frankly are optimistic so far in these first two years virtually ensured program that we're more on the return premium side of that equation right and we'll get money back. So it's still early to tell but the trends are positive.
And then the last one for me.
In the absence of you know a significant fall off in the economy.
Well, what do you think that the opportunity to start to grow worksite employees, a double digit rate is and and over what time frame.
Yeah that's.
We're trying to stay away from twenty-three we feel.
We said it my my remarks, and Anthony said in his that even even if this is a weird a recessionary environment right because of how tight the labor market as we.
We feel even if there is a pullback we can put up growth next year, we feel like.
We can put up respectable growth I don't want to really give a range because we're going to wait until we get through Q4, but we feel like we've got the controllable piece going right. The sales machine and the retention machine are going in a positive direction, we've said that quarter over quarter. This quarter, we did.
Over 4000, more wsu's right, which is good controllable growth and then we think we can we can grow on that and then really the question becomes of what is our one of our clients going to grow like in this environment, but we feel comfortable that.
All scenarios point to good growth for us and twenty-three.
Great. Thanks for taking my questions.
Okay.
Thank you.
Ladies and gentlemen, if you wish to ask a question. Please press start one.
Okay.
Our next question comes from the line of Vincent.
C O from Barrington Research. Please go ahead.
Yes, <unk> nice quarter <unk>.
Came on the call a bit late so sorry. If this was already said I'm curious how the P. O sales pipeline changed sequentially and how your traditional sales agent is working relative to your digital campaign.
Yeah, I mean, we think of eases.
Really we've got call at three channels that we that we monitor.
Our direct channel or referral partner channel and.
And our client referrals right our client referrals are a big piece of of our of our prospecting.
All all three year up until the right. That's the trend we continue to see we've got more leads to come in every quarter over quarter and then it's the scrubbing those leads to get them through the prospecting in the discovery.
The only thing I would just say is.
Our our clients now on average are larger than the clients. We've had historically, so we're adding larger clients and the clients that run off are a little on the smaller side. So we're being able to attract bigger business and retain all of our larger clients, which is a good positive trend, which is a tailwind that's helping support.
Our our earnings and WSB growth.
And on the staffing side, you've got some transitory issues you had mentioned well those sort of burn off next quarter Q4, and so what we see a nice sequential improvement.
Yeah, I think for the northwest specifically, we will see that pick up because of the late harvest the supply chain ones, but there was a there was a couple on sites, we have or we do light manufacturing.
In light assembly, they're the ones that may persist a little bit depending upon the supply chain challenges I I do think the recruiting that we did in northern Cal is going to continue to slow down specific to the tech sector.
T as probably the one the one industry that's under pressure right now.
And the sales and training capability.
You're you're adding to your service.
Was it a sort of a minimal investment and that is it sort of lets see how this goes in and maybe we'll invest more heavily in this overtime Where's your thinking there.
Yeah, It's a small investment for the company and really we made this investment when we develop the product to train our internal employees. So we built it to train our internal employees to kind of shorten the learning curve.
And it's worked well for us. So now we've kind of made some modifications and spun it up so that we can sell to our clients and put some different content in there for them to review.
This is not going to be a needle mover as far as revenue earnings. This is something that the clients had been asking for and ultimately we think it will help with retention. So we're we're gonna charge for will cover our costs make a little spread but ultimately it's a it's a tool that we think will help retain our clients.
Okay.
And then as you said before clients were asking for health care with sure you're fixing now and also booking Ah bookkeeping service is that the sort of the bookkeeping side sort of a back burner.
Or is this something you would consider doing in the next year or so.
We we have a parking lot of full of products that we would look to add Ah bookkeeping is one of them, but we have many of them as we think of our product roadmap, we're not going to really.
We're not going to advertise our playbook to the competitors right now.
[laughter] alright, Gary a nice job.
Thanks.
Thank you.
Ladies and gentlemen at this time. This concludes our question and answer session.
I would now like to turn the call back over to Mr. Crammer for closing remarks.
Sure. Thank you I think I'd like to just think the whole BBSI team for work entire tirelessly to help our clients thrive.
It's been a very good quarter of a very good year for BBSI and we're proud of where we are and we're really proud of wherever goin', so with that I will call. It quits and thank you everybody.
I can't.
Confidence of business Services, Inc. Has now conclude thank you for your participation you may now disconnect your lines.
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