Q2 2023 Barrett Business Services Inc Earnings Call
Yeah.
Good afternoon, everyone and thank you for participating in today's conscious cool to discuss P. B S. I a natural results for the second quarter ended June Tichy 2023.
Joining us today on P B S.
And she Mr Carey payment and the company season, Mr. Anthony heavy.
Following the remarks will open to cool so you're a Christian.
Before we go for that you've taken that does a company safe all the statement within the meaning of the private security situation Reform Act of 1995.
The statement provides important questions regarding forward looking statement.
The company's remarks during today's conference call will include forward looking statement. These statements along with other information presented that does not reflect historical fact subject to a number of risks and uncertainties.
Actual results may differ materially from those employed by these forward looking statements.
Refer to the company's recent earnings release until the company's culture.
[noise] annually report filed with the Securities and Exchange Commission for more information about the risks and uncertainties.
Actual results to differ.
Sometimes it's based or implied by the forward looking statements.
I would like to remind everyone that this call will be available for replay through September 220, 23, starting at a T N E T Tonight.
Oh it costs replay will also be available via the link provided in today's press release, that's when it is available on the company's website at Www Dot <unk> Dot com.
No I would like to turn the call over to the President and Chief Executive Officer of C. B S. I.
Gary claim minutes, Sir Please go ahead.
Thank you and good afternoon, everyone and thank you for joining the call. We had a strong second quarter and I am pleased with our results. We continue to execute on our short term and long term objectives, and we exceeded all of our internal controllable key performance indicators.
Regarding our client and Wsu's that are controllable growth exceeded our expectations in the quarter as we continue to execute on our various strategies to increase the top of the sales bottle and I am pleased to say that we once again exceeded our expectations and new clients and in new Worksite employees.
As discussed previously we had been able to sell and support larger clients with our upgraded technology staff in Nashville, PEO licenses. This continues to progress favorably and the average size of the clients and we are adding are larger than the average size of the clients that are running off.
Regarding client run off our retention in the corner was better than the prior year quarter and continues to remain stronger than pre pandemic levels.
I'd like to attribute that to the work, we do with our clients and the value our teams provide.
The result of all these efforts or what I refer to is controllable growth.
Is that we added approximately 3700 worksite employees, you're over a year from that new clients. However.
However, our clients hiring was lower than we forecasted in particular.
Curious the slowdown in April and May.
More than California, and in the northwest with our clients, who work in or around new residential construction.
These clients reduce their website employees reduce overtime and reduced hours worked we had positive quite hirings and our other geographies, which was more than offset by the weakness in northern California in the northwest and our net client of hiring was negative in the quarter.
To summarize we grew our website employees by 2%, which was on plan for the quarter as we sold and retain more business and this was partially offset by weakness in northern California in northwest operations.
Moving to our staffing operation are staffing business declined by 32% over the prior year quarter and was lower than we anticipated. We mentioned previously that we re price the portfolio and jettison clients, who were not achieving an adequate return. We also shifted our strategy to recruit for PEO clients.
And placed 121 Africans in the quarter, which generated equal margin to staffing, but resulted in less top line revenue.
We also experienced macroeconomic factors, including but not limited to supply or demand, which varies by geography.
Overall business owner sentiment was cautious in the second quarter and while we are seeing July requisitions increase sequentially. It is below prior year.
Moving through the field operational updates.
We are very pleased with our entrance into new markets with our asset lay model of market development managers are doing well and largely achieving their goal of adding and servicing new clients and new referral partners.
First three classes of all graduated and were selling in their respective markets in the second quarter.
Our fourth class has been through training and is selling in their markets. In Q3 are results. Thus far are better than we expected and are exceeding our internal return hurdle rate.
Regarding product updates, we continue to execute on the sale of service a BBSI benefits are new health insurance offerings.
As a refresher we rolled out our benefits offering in California in the second quarter and are now selling and servicing BBSI benefits and every market where we operate.
I am pleased to report that we more than doubled our plan participation in the quarter and now have over 135 clients on our various plans with more than 3000 total participants.
Our value proposition is resonating well and we have success with small and large clients and white and blue collar industries in every state, we operate and with a diverse distribution channel.
We have learned some lessons and have made some modifications to our technology into our operations along the way.
The company is now shifting.
To the one 120 for selling season, and we have gained confidence in our craft and as a product and teams in place to be successful.
Next I'd like to shift to argue for the remainder of the year.
We have consecutive quarters of great momentum are controllable growth exceeded our expectations and Q2 and this trend continued into July we are selling and servicing BDSI benefits in all markets now and we continue to be optimistic regarding the road ahead.
We have derisked the business and have a track record of achieving strong controllable growth.
Evidence and the strength of our operations results and predictability in cash flows as such I am pleased to announce that our board is authorized a new $75 million stock repurchase program.
Now I'm going to turn the call over to Anthony for his prepared remarks.
Thanks, Gary Hello, everyone I'm pleased to report Refinished Youtube with strong results and strong controllable growth.
As we continue to exceed our expectations for work set employees added and a quarter from new clients.
Our overall gross billings increased 5% in Q2 $23 billion to $1.9 billion versus 1.8 billion in Q2 22.
We achieved diluted earnings per share of $2.47 compared to $2.48 and a proud of your order.
PEO gross billings increased 5.1 per cent over the prior year quarter at 1.9 billion of staffing revenues decreased 32 per cent over the prior year to $20 million.
Works at employees grew by two per cent and a quarter, which is the result of adding more works unemployed and expected from that new PEO clients offset in part by reduction hiring within our existing customer base.
Average billing per wsh increased three per cent and a quarter.
As expected client wage rates have remained resilient and increased in the quarter, which will continue to be a source of buildings growth going forward.
Average hours worked per employee remain lower than prior ear, but we have seen continued improvement in average hours worked and overtime hours since Q1.
Within the quarter, there was positive sequential improvement with each month, showing improved hiring and more hours worked than the previous month.
Looking at PEO gross billings growth in total by region versus the prior year second quarter East.
East Coast grew 12% southern.
Southern California grew 9%.
Mountain States grew 5% that.
As Gary discussed staffing revenues are down driven by strategic shifts in our model of focus on profitable clients and the current economic environment.
The reduced staffing volume has been accompanied by lower costs to support the model <unk>.
And but positive trends in orders, we expect a year over year decline in staffing to improve in the remainder of the year.
Our workers compensation program continues to perform well benefit from favourable claim frequency, France and favorable claimed development.
The strong performance has once again resulted in favorable actuarial adjustments a prior claim liability.
As a reminder, our current client workers compensation exposure is now primarily covered are fully insured program with no retained liability I BBSI.
As we have Derisked, our workers compensation program in recent years, we have entered into several fully insured policies and agreements that for provide for potential returned premium to BBSI if claim spelled favourably overtime.
As we begin to recognize benefits from these returned premiums we will know update how we refer to the effect of workers compensation adjustments at.
Prior year liability and premium adjustments.
Q2 twenty-three we.
We recognized favorable prior year liability and premium adjustments of $6.3 million.
This compares to favorable Pryor liability and premium adjustments of $8.5 million in the second quarter of 2022.
We renewed our fully insured workers compensation policies effective July 120 23.
The program continues to perform well and we once again renewed with favorable terms, including cost savings a multiyear commitment.
No downside risk to BBSI for future adverse claim development.
And it continued ability for BBSI to participate in any favorable claim development via returned premium.
In addition, we revised our payment terms for the program to enable us to hold funds longer which will result in increased investment income in 2023 and 2024.
Our gross margin rate was better than expected in the quarter due to the cost savings from lower workers compensation expense and our increased focus on pricing discipline.
We are tightening our outlook for our gross margin rate for the year to better reflect a favorable results are the first six months as well as anticipated trends in Q3 Q for.
Turning to operating expenses SG&A for the year continues in line with our plan, which is to grow slower than prior ear and slower than our billings growth rate.
As a reminder, SG&A includes increases associated with the launch of BBSI benefits, which have been largely offset a savings driven by cost management efforts.
Moving to our investment income or investment portfolios earned $2.1 million in the second quarter of 500000 from the prior year.
<unk> is 2.3% up from 1.8% in the prior year quarter.
A portfolio continues to be managed conservatively with an average duration of 3.9 years, an average quality of investment double a.
Turning to the balance sheet, we had 133 million of unrestricted cash investment that June 30, compared to 160 million at December 31.
The decrease is primarily due to the timing of quarterly payroll tax payments and stock repurchases.
As a reminder, BBSI is completely debt free and we do not incur any increased expense associate with higher interest rates.
Continuing under the boards share repurchase program in the second quarter BDSI repurchase $10 million of shares an average price of $82.23 per share. The company also paid $2 million in dividends in the corner and reaffirmed its dividend for the following order.
Since the launch of the repurchase program in February of 2022, the company is now repurchased over $65 million of stock.
Representing approximately 11% of shares outstanding at an average price of $79.70 per share.
Management and the board continue to be highly optimistic about the longterm value of our business and the growth potential ahead of us.
The fact that value is made even more compelling by the enhancements we've made over the past several years, which have been reflected in stronger controllable growth from client adds <unk>.
Positive earnings leverage.
Reduced risk and strong performance from our workers compensation program.
And product expansion that increases our addressable market.
With this perspective and with the success of February 2022 repurchase program.
The board has approved a new $75 million to your stock repurchase program effective July 31.
The new program replaces the previous program and represents capacity to acquire approximately 12% of the outstanding shares of the company at the current share price.
The renewed program, while management to continue to show our commitment to being thoughtful stewards of capital and generating longterm value for shareholders.
Turning to our outlook for the year, we now expect gross billings to increase between four and 6% a slight decrease from the 5% to 8% a prior outlook to account for the slower client hiring an hour's work, we have observed in our existing customer base.
We can continue to expect average wsb's to increase between two and 4% for the year.
Given the lower workers compensation expense and our increased focus on pricing discipline. We now expect gross margin as a percentage of gross billings to be between 3.1 and 3.15 per cent.
And we continue to expect our effective annual tax rate to remain between 27 and 28%.
I will now turn the call back to the operator for questions.
Thank you Sir.
We will now be conducting a Christian and <unk>.
If you would like to ask a question. Please <unk> than one on your telephone keypad.
A confirmation 10 will indicate your line you said the question Keith.
Yeah. My first start and then too if you would like to remove the question from the kids.
Who participants you speak eight equipment it might be necessary to pick up your handset before pushing this tall Keith.
One moment, please while we pose the question.
Does this question is from <unk>.
C. J eight please go ahead.
Hey, good afternoon, guys. Thanks for taking a couple of questions.
Yeah, you know what I've got for my own edification anyway, I thought it might be helpful. Could you compare and contrast, the challenges that you're you're facing now versus.
The beating of the pandemic.
Oh quite different but I wanted to maybe you know have you go a little bit deeper there and make sure that I understand them.
Hey, Chris I.
You know I I would say.
You know we are a much better company now than we were pre pandemic.
Yeah, we we talk about our controllable, which is you know clients we add in the Wsu's they have an <unk>.
Clients, we ultimately the runoff that W. A C.
And are are controllable is the best it's ever been right. So so plain and simple the things that we can do things that we can control and the things that we can handle are are far superior than they were pre pandemic I.
I think through June as far as clients. We added an wsu's. They have we're up like 35 per cent compared through six months of last year like that's how much better we are year after year after year. So.
For us we feel very good and very confident in our our day to day go to market operations.
But the the one place where we are and it's not it's not in every geography.
Primarily.
For the construction vertical in northern Cal and in the northwest we are <unk>.
Ah slowed us and our clients are existing client slowness in.
In hiring.
Many of them are sharing a little bit of workforce that has to deal with residential construction. So if you just think of it as well.
We're gonna keep selling through whatever whatever we do we're gonna keep sell them through it. That's the one thing we can control is what we sell it won't be service and then ultimately you know our clients are are gonna turn and start to grow again, we just don't know when that's gonna be.
Got it it's helpful.
Maybe just shift gears too.
Health care side of it.
When when we have the visibility as to whether or not.
You could you know health care could could generate meaningful or having a meaningful impact on 24 resolved is that is that unrealistic is that is that possible is it really more of it 25.
Time frame when when you'll start to get meaningful revenue there.
So we you know in our numbers now we we reflect some of the health care were selling were reflecting 100 per cent of the expense the service of the business in the technology to service the business. So.
We've always said that too.
2023 is going to be expense before revenue of the revenue is really going to generate in 24.
And you know I would say that.
We've modified our operations, we modified our I T. Some.
We've learned some lessons were comfortable with our craft and.
And really right now is when we're getting ready to go and embark on the one 120 for selling season that usually kicks off.
You know mid mid.
Mid to end of August and September .
So you know you typically it will make the sale some time in Q3 and then in Q4 is when you start to do here.
Enrollment in your Onboarding for the one one.
So I say that because when we get to Q3 with sharp Q3 earnings as in November we will have an idea for how well or sell through is gonna be 424 and for what our participation that'd be for 24, So we'll be able to foreshadow and in our queue three earnings what we think the effects that.
B for the 24 calendar here.
Got it it's helpful. So.
I will leave it there <unk> I appreciate it.
Here, but yeah, I, just wanted to dive into a little bit more.
The reference in technology, and the operational Jasmine furniture, making wondering what specifically what is that.
Typically ranted related to the Jan 120th 471 that you just referenced.
Yeah. Good good questions you have a I'll say, where we're comfortable with our client facing I T and we're not gonna have a lot of changes there really the changes we're making our you know kind of lessons learned for how we how we handle sales efficiency in sales process alright. So.
The technology investments that we're making now is to make our folks in the field much more efficient so that they can spend more time selling as opposed to you know handling some some high burden leverage activities.
Okay, Great and then uhm on the worker's comp renewal.
Graham review all your <unk>.
Mentioned.
The opportunity to haul cash longer and generate some additional.
<unk> what other benefits.
D C.
Coming through from that renewal, if any and then how should we think about the workers compensation expense ratio for the balance of this year.
20 per month.
Yeah, Thanks check yet the ratios the performance of the portfolio has continued to be strong and and frankly very consistent and we're proud of that for.
For the renewal I really reflected the cost savings so we renewed at lower right now.
Now even at that rate, we will continue to get premium back if those claims continue to develop favorably over time.
The key one of the key changes was that.
Changing the payment terms, so that we can hold the premium from our clients for longer before we re-met that onto the carriers.
And we think that change alone should add about $1 million of investment income to the current year in closer to 3 million next year. So that's a big change for us and the economics of that tunnel.
Overall, though the the terms the program could t-stop right very <unk> very favorably or bleached for finding that at this point.
Okay, Great and then one more if I could.
That's.
The health care offering referred last one or two.
July 1st selling season being second largest of the year do you have any comments around how things performed in July there I know it sounds very currently but anything at Mcdonald's.
Yeah, I mean, if you in my prepared remarks, we said we more than.
Double the participants on the plan and the quarter right. So if you just think of how how.
How well we did for seven one we did you know.
Equally if not better than what we did for all one one selling season. So we're we're.
We're pleased with that result, it really what that if you think of it that was.
Yeah, I'm looking at it.
You sat here real quick.
You know for California.
And a quarter it was about.
Less than 30 deals that we sold for seven one and that was really the first quarter that they started to sell benefits.
So we look at that and say, okay, well <unk>.
We got the reps, we know what we're dealing we're comfortable with how to do it we gotta make some modifications. So that we can do with a little bit better, but really we have the confidence that we can go out now you know sell this business for the one one selling season, which was which was part of the plan right. The plan was to do the reps get ready so that we can capitalize for one one.
Okay, one more of a tribe and in terms of.
<unk> are you, saying that more for new clients.
Clients and have a new clients are you, saying that in one of the white collar area.
I'm Gonna call me thanks.
Thanks.
Yeah. The the sell through right now is about to our existing clients. It's been about 70 per cent of the clients. We brought all for benefits have been to existing clients.
So then if you look at the other <unk>.
Call. It 30 per cent were having.
Good success and the central part of the state with our new market development managers.
And that's a mix of I would say there it's predominantly white collar verse blue collar.
But it's really you know if you look at it across the board, where we're doing well with existing clients with new clients White and Blue collar and then we're starting to get more referral partners that want to do business with BBSI because we have this offering.
Alright, Thank you bye.
Mmm.
Ladies and gentlemen are reminded if you would like to ask a question you are welcome to <unk> <unk>.
The next question is from <unk> <unk> <unk> <unk>.
Yeah, Gary I'm I'm curious how was wage inflation tramping at your client base versus your private expectation.
Yeah, then I'll take that one we're continuing to see very resilient wages. So I mentioned last quarter at.
That our client wages are up between five and 6%, which is consistent with or a little above the national average and we're still seeing that even sequentially wages are up again, so the resiliency of those wages is in line with expectations and as I said that'll continue to be a source of buildings growth and.
In the future.
Okay, and then how 'bout pricing a new one renewing clients is that in alignment with plan.
Yeah. So we've had a lot of initiatives internally, if I mentioned focus on pricing discipline, especially on that PEO product and we are continuing to meet or exceed those expectations, which we're seeing in our margin results.
I would say part of you know if you look at our our Guy our <unk>, we we brought up our gross margin target and part of the reason we brought up our gross margin was.
It was because of our ability to charge more for our product though.
And maybe it's early to assess this but I know you know your.
Energized from for lack of a better word about the idea of all the health care brokers you could bring in the full for referrals are you seeing them become a source of referrals or is it too early to gauge that.
[noise] okay.
Good question, we are excited about it we we love to partner with folks that understand our valued probyn feel comfortable recommending us we are getting better.
At talking to health brokers part of that is you know we had to learn our craft and our trade and we're getting more comfortable in our own skin now and we're gaining a comfort and we're able to go talk to them regarding this product offering.
It's still early days I can't say that we see anything that's gonna.
Until the pendulum, yet, but it's something that we have focus and attention and discipline on and to make sure that we're still could you give it to just double the potential of federal part of the size of the company or making sure. We're trying to knock on all those doors.
And then one last one for me any help you can give them in terms of the cave ins to revenue and earnings and and then back to quarters.
So we're seeing consistent friends on that controllable growth sort protesting that to be pretty consistent in Q3, and Q4, obviously client hiring has been slower. So we are in fact, you're not into our forecast are typical pattern of Q3 being our most profitable quarter should should continue though.
Okay.
Thanks, guys.
At this time this completes a question and answer session I would not like to turn the call back over to Mr. Crime up for pledging remarks, please can I hit.
Sure. Thank you I just wanted to thank all the BBSI professionals for all the hard work they do in support and our clients and thank you everybody for for dialing in in this concludes our call. Thank you.
Gentlemen that complete today's conference. Thank you for joining US you may now disconnect your lines.
[music].