Q3 2023 Barrett Business Services Inc Earnings Call
Good afternoon, everyone and thank you for participating in today's conference call to discuss B B S is financial results for the third quarter ended September 30th 2023.
Joining us today or B B S is president and C E O Mr. Gary Kramer and the company CFO, Mr. Anthony Harris.
Following their remarks, we will open the call for your questions.
Before we go further please take note of the company is safe Harbor statement was hitting the meaning of the private Securities Litigation Reform Act of 1995.
[noise] statement provides important cautions regarding forward looking statements.
The company's remarks during today's conference call. We'll include forward looking statements.
These statements along with other information presented that does not reflect historical fact are subject to a number of risks and uncertainties.
Actual results may differ materially from those employed by these forward looking statements.
Please refer to the company's recent earnings release and did 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 1st 2023.
Starting at eight P M Eastern Tonight.
A webcast replay will also be available via the link provided in today's press release as well as available on the company's website at Www B B S. I E Dot com.
Now I'd like to turn the call over to the President and Chief Executive Officer of B B S. I Mister Gary Kramer, Sir Please go ahead.
Thank you and good afternoon, everyone and thank you for joining the call. We had another strong quarter and I am pleased with our results. We continued to execute on our short term and long term objectives, and we surpassed all of our internal controllable key performance indicators.
Regarding our client and Wsb's stack are controllable growth exceeded our expectations and a quarter as we continued to execute on our various strategies to increase the top of the sales funnel 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 have been able to sell and support larger clients with our upgraded technology stack Nash.
National P E L licenses, along with BBSI benefits. This continues to progress favorably and the average size of the clients that we are at it are larger than the average size of the clients that are running off.
Regarding client run all our retention in the quarter was better than <unk> 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 as our controllable growth.
Is that we added approximately 4300 worksite employees year over year from net new clients.
This was partially offset by slower client hiring in the quarter, our clients increase their workforce sequentially over the second quarter, but by less than we were forecasting.
Anthony will provide more color for the portfolio by geography in industry.
To summarize we grew our worksite employees by 1%, which was slightly lower than forecast for the quarter as we sold and received more business, but this was partially offset by slower than anticipated client hiring.
Moving to our staffing operations.
Our staffing business declined by 25% over the prior year quarter and was slightly better than we anticipated.
We mentioned previously that we re price the portfolio and jettison clients, where we were not achieving inadequate return. We also shifted our strategy to recruit for our P E O clients and.
<unk> 83 applicants in the quarter, which generated equal Marge into our traditional staffing model, but resulted in less top line revenue.
We also experienced microeconomic factors, including.
Supply and demand imbalances, which vary by geography.
Moving to the field operational update.
We are very pleased with our entrance into new markets with our asset light model. We have 14 total new market development managers that are in various stages of their development.
They are doing well and largely achieving their goals of adding and servicing new clients and new referral partners and have a robust pipeline.
Our results thus far are better than we expected and are exceeding our internal return hurdle rate and we are actively recruiting for the next class.
Regarding our product updates.
We continue to execute on the sales and service of 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 BDSI benefits in every market, where we operate.
I am pleased to report it through October we have 160 clients on our various plans with more than 3500 total participants are.
Value proposition is resonating well and we are having success with small and large clients and white and blue collar industries. In every state we operate in with a diverse distribution channel.
We are in the thick of the one one selling season and our business tunes are offering BBSI benefits to our existing clients as well as potential new clients.
It is still too early to provide any definitive guidance, but we are pleased with our current pipeline if.
If we close the current opportunities that are in our pipeline at our historical benefits closing right.
And we are confident that this product will be accretive to earnings in 2024.
Next I'd like to shift to our view of the remainder of the year end of 2024.
Our various sales strategies continued to increase the top of the sale salt are controllable growth exceeded our expectations every quarter this year and that trend continued into October.
Are qualified prospects at the end of the quarter, where approximately 75% greater than the prior year quarter.
If we close this business near our historical closed right plus closed on our benefits opportunities and we're setting ourselves up for a strong start to 2024.
If there's no dislocation in the economy and.
And we close out the year in the matter I. Just described the we expect to see improved gross billings growth in 2024 over 2023.
Now I'm going to turn the call over to Anthony for his prepared remarks.
Thanks, Gary Hello, everyone.
I'm pleased to report they finished Q3 with strong results as we continue to exceed our expectations for profitability and work set employees added and a quarter from that new clients.
Our overall gross billings increased three per cent in Q3 $23 billion to $1.96 billion versus 1.91 billion in Q3 22.
Chief diluted earnings per share of $2.68 compared to $2.45 in the prior year quarter.
PEO gross billings increased 3.3% over the prior year quarter to 1.94 billion, while staffing revenues decreased 25 per cent over the prior year to 22 nine.
Our work side employees grew by 1.1% in the quarter, which was the result of adding more W. A C. S unexpected for met new PEO clients.
Offset in part by slower hiring within our existing customer base.
Looking at hiring more closely we have seen overall hiring training stabilizing the quarter and increased modestly on a sequential basis.
But the pace of hiring remained slower than historical trends and slower than expected.
We continue to see this slowness primarily in the construction sector and most concentrated in our northern California region.
Average hours worked in overtime hours per employee have continued to stabilize and a quarter as well.
Average building for a W. A C increased 3.5 per cent and a quarter driven by higher average client wage rates, which remain resilient and which will continue to be a source of billings growth going forward.
Looking at overall PEO gross billings growth by region versus the prior year third quarter East Coast grew 12% Mountain States grew 8%.
Southern California grew 5%.
The Pacific Northwest decreased by three per cent in northern California decreased by three per cent.
As Gary discussed staffing revenues are down year over year, driven by strategic shifts in our model and the current economic environment.
That said, our staffing revenues increased sequentially and we expect this stability to continue through here at.
Our workers compensation program continues to perform well and benefit from favourable claim frequency trends and favorable claimed development.
The strong performance is once again resulted in favorable adjustments for prior to your clients.
In Q3, twenty-three, we recognized favorable prior year liability and premium adjustments up $2.2 million.
This compares to favorable prior year liability of premium adjustment of $1.4 million in the third quarter of 2022.
As a reminder, our client workers compensation exposure is now primarily cover are fully insured program with no retain liability by BBSI.
Our gross margin rate improved in the quarter due to the cost savings from lower workers compensation expense and our ongoing focus on pricing discipline.
In addition, our profitability continues to benefit from cost management efforts.
Have largely offset the impact of our ongoing investments and the launch of BBSI benefits.
And are expanding team of market development managers.
As a result, SG&A for the year continues to grow slower than prior ear and slower than our billings growth rates.
Moving to investment income or investment portfolios or $2.3 million in the third quarter up $700000 from the prior year.
Do do higher yields and more favorable cash flow timing associated with our current fully insured program.
Our investment portfolio continues to be managed conservatively with an average duration of 3.5 years, an average quality of investment at double a.
Our balance sheet remains strong with $129 million of unrestricted cash investments that September 30, and.
And no debt.
Continuing under the boards July 2000, twenty-three repurchase program announced last quarter B.
BBSI repurchased $11 million of shares in the third quarter to $64 million remaining available under the program.
The company also paid $2 million in dividends in the corner and reaffirmed its dividend for the following quarter.
Turning to our outlook for the year, we're updating our outlook to reflect our year to date results.
And we now expect gross billings to increase between four and 5% a slight decrease from the 4% to 6% in our prior outlook and.
And we expect average wmc's to increase between two and 3% for the year, a slight decrease from the 2% to 4% in our <unk>.
We continue to expect gross margin as a percentage of gross billing to be between 3.1, and 3.15% and we continue to expect our effective annual tax rate to remain between 27 per cent and 28%.
I will now turn the call back to the operator for questions.
Thank you.
Ladies and gentlemen at this time it will be conducting a question and answer session.
If you'd like to ask a question you May press star one on your telephone keypad a confirmation tunnel indicate your line is just a question Q U.
You May press start to if you would like to remove your question from the queue.
Four participants using speaker equipment, it may be necessary to pick up your handset before pressing starkey.
Our first question comes from the line of Jeff Martin with Roth Capital Partners. Please proceed with your question.
Thanks, Good afternoon, going Anthony hope you're doing well.
Wanted to dive into a little bit more on on the you know sales funnel you know what are some of the things you're doing differently. This year versus yours past, maybe that's a leading needs to hit your internal controllable.
Targets.
Yeah, Hey, Jeff I would say that we had.
Laser focus on the top of the final we've tried and refined over the past couple of years to make sure that we're getting as many looks as we had.
You know targeting clients directly targeting referral partners targeting benefits brokers. So it's really not just one easy button, it's a lot of <unk>.
Different strategies that we have been executing on over the past I'll say two plus years and then we're really just seeing good results for that now.
With I I said in my prepared remarks that are our prospects right. So these are these are qualified prospects that we're in the process with Whereabout 75 per cent higher at the end of September than we were against September of 22. So we've got that many more possible potential clients that can join.
In the queue for the Q1, so we're just.
We've we've got a lot of energy go in there and hopefully we're going to see the reward of it going into Q for an acute <unk>.
Right and then remind us on the BBSI benefits side, what what's the investment this year next year that you've got essentially cover to become.
Earnings accretive there and then second part to that question is can you give us an update on some of the new referral partners that you've brought on board you know some specifically for the beside benefits would be helpful. Thanks.
Sure. This is Anthony H I'll take the investment question and then Gary can speak to the referral partners, but.
We send about $3 million, a total expense investment top right. This program so.
That's that's essentially the run rate rat right. Now obviously is it scales over time that could change a little bit but that's.
That's where we're at.
And then on the referral partner side, we I have this bad I just don't have it with me for how many new referral partners. We brought it in the quarter, but we have a constant discipline to to attract new referral partners, we've got a <unk>.
An army of folks in the field that that's what they that's what they do on a day to day basis, and they're doing it very well as far as making we call it making new friends, but work.
Part of that strategy you as we talk about our total addressable market as we're now able to go to.
Employee benefits brokers, where.
Before we could they could refer to us, but we didn't really have a product that they that they could sell into their clients because it wasn't didn't have the health insurance, but now that we have the health insurance, we're able to.
Tap into almost twice as many employee brokerages out there.
Right and then last one for me.
In terms of gross drivers for next year, obviously, a rebound in hiring from clients. It would be a big one but you know is.
Potential for workers compensation rates in California in particular is that how you doing that as a potential gross driver next year.
We were.
We're not seeing any you know like I said in the prior calls that we're seeing.
We're seeing some carriers be less aggressive than they were they're still competition in the marketplace, but they're less aggressive than they were.
We are not seeing anything that is driving accounts to market as far as rate increases on the worker's comp side, we're seeing some of that on the health insurance side.
<unk> clients go to market because you know some markets, they're getting 20 plus per cent rate increases other medical so that's driving some accounts to market, but all the workers comp.
It's still trade and and you know plus or minus two per cent plus or minus 5%. It's not really a pain point, that's driving business to market, yet or not forecasting that.
Great. Thanks for taking the time.
Our next question comes from the line of Chris Moore with C. J S. Securities. Please proceed with your question.
Hey, good afternoon, guys. Thanks for technical questions, maybe just a quick follow the the 3 million incremental expense on health care.
Some of that isn't twenty-three and some in 24 or where where does that get placed.
No annual expenses in 2023, and we ramped a little bit, but we were fully mostly fully staffed for the year at the approximate run rate for 24 as well.
Unknown Attendee: Good afternoon, everyone, and thank you for participating in today's conference call to discuss BBSI's Financial Results for the third quarter and its September 30th, 2023.
Got it.
And maybe just one more on on the health care side. So.
Do you expect you know the ultimate penetration here to match the penetration of existing business. Chino. For example, 75 per cent of the health care to be in California easier drive your biases or some other bias you know by type of employment, just trying to kind of get your thoughts there.
Unknown Attendee: Joining us today are BBSI's President and CEO, Mr. Gary Kramer, and the company CFO, Mr. Anthony Harris. Following their remarks, we will open the call for your questions.
Unknown Attendee: 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 caution regarding forward-looking statements. The company's remarks during today's conference call will include forward-looking statements. These statements, along with other information presented that does not reflect historical fact, are subject to a number of risks and uncertainties. Actual results may differ materially from those implied by these forward-looking statements.
You know as as we you are mastering our crafts for benefits, we've had better success <unk>.
Selling it into our installed base.
So you know I think we said 160 clients that are that are enrolled through October of those hundred and 60.
20% of those are new business. So that's new to BBSI, we wouldn't have brought those clients on so called that 30, we would not have brought those clients on if we didn't add benefits. So that's that's allowing us to pick up additional business that'd be witness received.
But as we're learning a craft, it's it's it's a little bit easier to sell it to your friends right and our clients. They know as well they know the product we deliver they trust us it's a little bit of an easier sell to sell it into your installed based on the cell to a new but what we want to get too in the future is Ah.
Unknown Attendee: Please refer to the company's recent earnings release, and to the company's quarterly and annual reports, filed with the securities and exchange commission for more information about the risks and uncertainties that could close actual results to differ from those expressed or implied by the forward-looking statements.
After we sell through the art installed base continue to sell into to new clients, but you can kind of see how this how.
Unknown Attendee: I would like to remind everyone that this call will be available for replay through December 1, 2023, starting at 8pm Eastern tonight. A webcast replay will also be available via the link provided in today's press release, as well as available on the company's website at www.bbsi.com.
How this will.
This will ramp over time right, we doubled doubled the bulk of seven one will probably double or to get a one one as far as our portfolio clients that by the benefits and then we'll see where it goes from there.
Got it helpful and just you know kind of big picture, just trying to get a sense as to how much visibility you have and physical twenty-four as of November 1st you do you know much today that you didn't know three to four months ago. Just you know trying to get a better sense of staff have you seen early early 20th.
Gary Kramer: 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. Thank you. Good afternoon, everyone, and thank you for joining the call. We had another strong quarter, and I am pleased with our results. We continued to execute on our short-term and long-term objectives, and we surpassed all of our internal controllable key performance indicators. Regarding our client and WFC stack, our controllable growth exceeded our expectations in the quarter as we continued to execute on our various strategies to increase the top of the sales funnel.
Sure.
Gary Kramer: And I am pleased to say that we once again exceeded our expectations in new clients and in new worksfight employees. As discussed previously, we have been able to sell and support larger clients with our upgraded technology stack. National PEO licenses along with BBSi benefits. 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 better running off. Regarding client runoff, our retention in the quarter was better than the prior year quarter, and continues to remain stronger than pre-pandemic levels.
Yeah, we.
Yeah, we feel you're looking at our pipeline that we have we got to <unk> you to think of it we got a pipeline of benefits opportunities and we feel good with that one if we close at at our starve with out it was closing right.
That we're gonna have a accretive ear for benefits and 24. So it's gonna be you know, we're gonna make more than the 3 million. We're gonna spend right. We're not gonna give a number until we get into 24, but we're gonna make more than the 3 million. We're gonna spend on it and then if you look at the pipeline for our traditional non benefits prospects, that's the largest pipeline we've ever.
Had an S. At the end of the Q3 so.
If we do what we do and we're good at doing that right over the last two years, we've we've really been executing on our controllable write up of adding clients and adding wsu's.
If we keep doing what we're dealing with the pipeline we have we feel very optimistic about 24. So.
If you say alright, we've got all these good things going on the controllable side and then even if you know say.
Gary Kramer: I 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 referred to as our controllable growth is that we added approximately 4,300 work site employees year over year from net new clients. This was partially offset by slower client hiring in the quarter. Our clients increased their work force sequentially over the second quarter, but by less than we were forecast, will provide more color for the portfolio by geography and industry.
You know our client hiring is flat, it's gonna be easy.
Easy for us to have a better gross billings year in 2000 for over 23.
Got it that's helpful I will leave it there thanks guys.
Our next question comes from the line of Vincent Colicchio with Barrington Research. Please proceed with your question.
Yeah Gary.
Side of construction is a weak sector, if I remember correctly, that's been a week with some time I'm curious are you seeing that deteriorate.
Gary Kramer: To summarize, we grew our work state employees by 1% which was slightly lower than four cats for the quarter as we sold and retained more business but this was partially offset by slower than anticipated client hiring. Moving to our staffing operations, our staffing business declined by 25% over the prior year quarter and was slightly better than we anticipated. We mentioned previously that we reprised the portfolio and jettisoned clients where we were not achieving inadequate return.
No <unk> I mean, we're actually solid come back some in Q3, so sequentially, our our clients hired in Q3 over Q2.
No.
It was a slight positive it wasn't a big positive, but it was still positive and I'll take a positive or negative anytime, but if you think of when we started to see the slowdown in our in our clients. It was November December of 22, and then we saw it come back into Q1 of 23 222.
Gary Kramer: We also shift in our strategy to recruit for our PEO clients and place 83 applicants in the quarter which generated equal margin to our traditional staffing model but resulted in less pop line revenue. We also experienced micro-actinomic factors including supply and demand imbalances which vary by geography. Moving to the field operational updates, we are very pleased with our entrance into new markets with our asset light model. We have 14 total new market development managers that are in very stages of their development.
Three three and we've seen it slowly come back Neil reverse out in Q3 so.
It's still early but you know, we're we're thinking especially in the Bay area, where we're seeing it come back we're hoping that that trend has reversed.
And what one clarification did you say the profits gained from staff and clients within P O offset losses from clients that you shed and the staffing line.
So.
Gary Kramer: They are doing well and largely achieving their goals of adding and servicing new clients and new referral partners and have a robust pipeline. Our results thus far are better than we expected and are exceeding our internal return hurdle rate and we are actively recruiting for the next class. Regarding our product updates, we continue to execute on the sales and service of BBSI benefits, our new health insurance offering. As a refresher, we rolled out our benefits offering in California in the second quarter and are now selling and servicing BBSI benefits in every market where we operate.
This is a challenging willing to try to explain we.
We do yeah rooting for our call, we do recruiting for our clients now and when we when we.
When we broke the recruiting for you say, it's $10000 right, we'd be higher or we recruit for our clients and they hire somebody when we get paid 10000 dollar recruiting today.
So that's that recruiting for a profit for us the sale. We recognize all that is 10000 the property we recognize keep it simple as 10000.
Now where that's different is if that was you.
Traditional staffing business and say that person was making $75000 in wages.
We would book the wages plus taxes, plus other things into the revenue lines, so that revenue would've been.
Gary Kramer: I am pleased to report that through October, we have 160 clients on our various plans with more than 3500 total participants. Our value proposition is resonating well and we are having success with small and large clients in white and efficient channel. We are in the thick of the one-one selling season and our business teams are offering BBSI benefits to our existing clients as well as potential new clients. It is still too early to provide any definitive guidance but we are pleased with our current pipeline. If we close the current opportunities that are in our pipeline at our historical benefits closing rate, then we are confident that this product will be accretive to earnings in 2024.
Call it $100000.
But we would have made our $10000 in profit so it's it's.
It's a little bit of a shift in the accounting for recruiting for staffing and all we're trying to say is we're making adequate margins on staffing. We're just not realizing rigging is adequate profit on staffing or just not realizing as much revenue as we used to know where we are realizing the cost of it.
Okay, and then you mentioned staffing I believe you mentioned should grow sequentially, what's driving that is.
In particular.
Yeah, we had sequential growth in this quarter and we're projecting modest sequential growth next quarter again, we're talking small paws positives here not large percentage.
Gary Kramer: Next, I would like to shift to our view of the remainder of the year and the 2024. Our various sales strategies continue to increase the top of the sales funnel. Our controllable growth exceeded our expectations every quarter this year and that trend continued into October. Our qualified prospects at the end of the quarter were approximately 75% greater than the prior year quarter. If we close this business near our historical closed rate, plus close on our benefits opportunities, and we are setting ourselves up for a strong start to 2024. If there's no dislocation in the economy and we close out the year in the manner I just described, the way you expect to see improved gross buildings growth in 2024, over 2023.
Clinical increases.
But they keep taking away the large declines really we think are behind us. So that for example that 25% decrease in revenue now.
It's really representing just at year over year compare where if you look at the trend right now it's it's flat the positive.
So.
We're really holding that were seemed as Gary said the activity and staffing that we're excited about it is not necessarily needing to larges a large increases in revenue.
But it's still showing up at some revenue and certainly margin.
As you go after bigger clients and in the competitive.
I think the competition is a little different are you seeing competitive pressures increase in the current environment.
Nah no more than.
Anthony Harris: Now I'm going to turn the call over to Anthony for his prepared remarks. Thanks, Gary, and hello everyone. I'm pleased to reportly finish Q3 with strong results as we continue to exceed our expectations for profitability and work set employees added in the quarter from net new clients. Our overall gross buildings increased 3% in Q323 to 1.96 billion versus 1.91 billion in Q322. We're going to achieve diluted earnings per share of $2.68 compared to $2.45 in the prior year quarter.
No more than normal I mean, there's there's competition everywhere, but.
You know it.
With our product at our people in the field. It's really are differentiator right. We can talk about all these different tools that we have as far as workers comp or health insurance and yada Yada yada, but.
The people in the field doing the work you know being there with the business owner that is the core product and and that's what that's what we're able to sell in the market. That's what keeps the business on the books. That's the one that that the clients truly find the value as a note for that business unit.
Okay.
Anthony Harris: PEO gross buildings increased 3.3% over the prior year quarter to 1.94 billion while staffing revenues decreased 25% over the prior year to 22 million. Our work set employees grew by 1.1% in the quarter, which was the result of adding more WSCs than expected from net new PEO clients. Offset in part by slower hiring within our existing customer base. Looking at client hiring more closely, we have seen overall hiring trends stabilized in the quarter and increased modestly on a sequential basis.
Thanks care.
Our next question comes from the line of Margaret What's at Odeon Company. Please proceed with your question.
Hi, Good evening, everyone I wanted to just touch a little bit on the the follow up on the construction commentary and if I want it I I just want to sort of go back because if I remember correctly from a timing perspective birth last year. There was there were there were impact some beyond the controller.
Both of you will if I remember correctly you you had weather impacts are thinking and if I remember correctly, both of <unk>, the fourth quarter and into the first quarter.
Anthony Harris: But the pace of hiring remains slower than historical trends and slower than expected. We continue to see this slowness primarily in the construction sector and most concentrated in our Northern California region. Average hours worked and over time hours per employee have continued to stabilize in the quarter as well. Average building per WSC increased 3.5% in the quarter divided by higher average client wage rates, which remain resilient and which will continue to be a source of buildings growth going forward.
I was wondering you talk a little bit about the timing of maybe what you saw it then and how old that my sort of play out if I don't know if he's in comparison, that's a fair way to put it but I was wanting to talk a little bit about maybe what you saw there and.
How we might see a flow through this turmoil.
Yeah. We you know we saw our clients start to shrink Q for and it accelerated into Q1 that happened at the same time of your head interest rates coming up really how you had a shift in the macro economy and then we also had a terrible weather in.
Anthony Harris: Looking at overall PEO gross buildings growth by region versus the prior year third quarter, east coast through 12% mountain states grew 8%. Southern California grew 5% that the Pacific Northwest decreased by 3%. And Northern California decreased by 3%. As Gary discussed, staffing revenues are down year over year driven by strategic shifts in our model. And the current economic environment. That's said, our staffing revenues increased sequentially and we expect this stability to continue through year end.
Anya, specifically northern Cal as well so you had a crowdsource of all of this happened at the same time it left us in that position of you know we think it's a piece of of of you know, it's a little bit of each it was hard to discern from where we were sitting what was gonna happen. We thought it was gonna come back and Q2 23.
But ultimately didn't come back.
But our confidence now as you know in those clients that reduce staff that we just reference we solve them hire more folks in Q3, and we saw sequentially our clients grow in Q3, so that's what gives us the optimism.
Anthony Harris: Our workers compensation program continues to perform well and benefit from favorable claims frequency trends and favorable claim development. This strong performance has once again resulted in favorable adjustments for prior year twice. Thank you 323 we recognize favorable prior year liability and premium adjustments of 2.2 million dollars. This compares to favorable prior year liability and premium adjustments of 1.4 million in the third quarter of 2022. As a reminder, our client workers compensation exposure is now primarily covered by our fully insured program with no retain liability by BVSI.
They did for three quarters and then they pulled back and you know started to add people back into Q3 this year.
Okay actually yeah, that's that's where I was going with that and then I was so what is your is this too.
Different track, but there was a little similarity there I was looking to bring us up to speed on maybe what you're seeing with the banking and finance customers. I mean, we sort of anniversary those challenges that again or outside of the controllables. What maybe you can sort of bring us up to speed, maybe on what you're seeing there.
Yeah, I mean, we really work that affected by the banking crisis, a year ago. You know, we don't have a lot of direct clients in that space. Obviously all of our clients use banking services. So we were watching very closely to see if there are any impacts.
Anthony Harris: Our gross margin rate improved in the quarter due to the cost savings from lower workers compensation expense and our ongoing focus on pricing. In addition, our profitability continues to benefit from cost management efforts that largely offset the impact of our ongoing investments in the launch of BDSI benefits and our expanding team of market development managers. As a result, SGNA for the year continues to grow slower than prior year and slower than our buildings growth rate.
Clients <unk>.
It wasn't.
A prevailing pinpoint.
Beyond a few anecdotal stories.
Stories separately.
Hopefully they recovered very quickly from that I mean for our clients and the blue and gray color space.
The biggest pet.
Headwind has been <unk>.
Construction and really driven by the cyclical nature of that with interest rates.
Okay, Great and then the last one for me I was I was wondering if it could circle back to benefits for a moment are there any particular ah client verticals or any particular customer groups that are who who have responded more positively than others or are there any differentiation.
Anthony Harris: Moving to investment income, our investment portfolios earned 2.3 million in the third quarter, up $700,000 from the prior year, due to higher yields and more favorable cash flow timing associated with our current fully-insured program. Our investment portfolio continues to be managed conservatively with an average duration of 3.5 years, and average quality of investment at AA. Our balance sheet remains strong, with $129 million of unrestricted cash investments at September 30, and no debt.
That you're seeing as to you know as to <unk> to those who are who are are are being part of that that AD. And then also makes you talk a little bit about the the sales cycle and maybe how that's played out compared to what your expectations work. Thank you.
Anthony Harris: Continuing under the board's July 2023 repurchase program, announced last quarter, BBSI repurchased $11 million of shares in the third quarter, the $64 million remaining available under the program. The company also paid $2 million in dividends in the quarter, and reaffirmed its dividend for the following quarter.
Sure so.
He just think of of who were selling to where we're primarily trying to sell into our installed base.
So yeah, that's really no new vertical for us, but we're having a good success selling it into our installed base and and really in every every state right. There's not a state that were not that we're not able to sell into so we feel comfortable that we have the product that works in every state and that our clients are eager and willing to pay for so we still <unk>.
Anthony Harris: Turning to our outlook for the year, we're updating our outlook to reflect our year-to-date results, and we now expect growth buildings to increase between 4 and 5 percent, a flight decrease from the 4 to 6 percent in our prior outlook. And we expect average WSEs to increase between 2 and 3 percent for the year, a flight decrease from the 2 to 4 percent in our prior outlook. We continue to expect growth margin as a percentage of growth buildings to be between 3.1 and 3.15 percent, and we continue to expect our effective annual tax rate to remain between 27 percent and 28 percent.
There the one thing I would just say that we're seeing success on us and our new markets right. So our market development managers about.
80 per cent of the business, they're bringing on for new business, they're selling benefits as well.
So we feel pretty optimistic that in these greenfields. They have you know many different products to sell and they tried to figure out what's the best way to craft their market and they're doing a great job cracking their market I'm proud of all of them.
Unknown Attendee: I will now turn the call back to the operator for questions. Thank you.
So so just in general and those new markets. Yeah. We we are seeing more white collar and blue collar, just because of their comfort and maybe the purpose of the folks that they now because we are typically higher and so does that come.
Unknown Attendee: Ladies and gentlemen, at this time we will be conducting a question and answer session. If you'd like to ask a question, you may press star 1 on your telephone keypad. The confirmation tunnel indicate your line is in the question queue. You may press star 2 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 star key.
From in and around the <unk>.
This little saucer from our industry or adjacent industry. So feel good with with the growth there and then as the sales cycle right. This is we we know that this is not a quick sales cycle right. It's it's typically does it take you.
Jeffrey Martin: Our first question comes from the line of Jeff Martin with Roth Capital Partners. Please proceed with your question. Thanks.
Three months to four months right from the from the time you sell it for the time you you do the underwriting and you sell too and you have to get the employees through the enrollment process. It just takes a little a little more lead time to get to make sure it's done properly and make sure it's done accurately but.
Gary Kramer: Good afternoon, Gary. And Anthony, hope you're doing well. I wanted to dive into a little bit more on the sales funnel. What are some of the things you're doing differently this year versus years past, maybe that's leading you to hit your internal controllable targets? Yeah. Hey, Jeff. I would say that we've had laser focus on the top of the funnel. We've tried and refined over the past couple years to make sure that we're getting as many looks as we can. You know, targeting clients directly, targeting referral partners, targeting benefits brokers. So it's really not just one easy button. It's a lot of... Thanks for taking my time.
We wish we could give you a better number right now, but we're right in the middle of the sick for the for the one one C. As in most of the folks are gonna make their decisions and most of the clients are gonna make their buying decisions in mid November mid and November with the idea of start your <unk> around Thanksgiving or the first week of December so that you have everything.
Wrapped up by mid December, but until we get through those enrollments, we're not gonna have a real good definitive estimate on what we think ourselves through laws for so the one one season.
Okay. That's very helpful. Thank you very much.
There are no further questions that make you I'd like to hand in a call back to management for closing remarks.
Thank you just again I want to thank all the BBSI professionals for for another great quarter on controllable gross everybody's doing a great job and we appreciate everything you do for the organization. Thank you everybody.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation.
[noise] may disconnect your lines at this time and have a wonderful day.
Christopher Moore: Our next question comes on the line of Chris Moore with CJ S. Securities. Please proceed with your question. Hey, guys. Thanks for taking a couple of questions. Maybe just a quick follow. The three million incremental expense on healthcare. Some of that is in 23 and some in 24, or where is that get placed? Yeah, annual expense is in 2023, and we ramp a little bit that we're fully, mostly fully staff for the year stuff that the approximate run rate for 24 as well.
Gary Kramer: Got it. And maybe just one more on the healthcare side. So, do you expect, you know, the ultimate penetration here to match the penetration of existing business? So, you know, for example, 75% of healthcare to be in college one year, is there a degree of bias? Is there some other bias, you know, by type of employment? Just trying to kind of get your thoughts there. You know, as we are mastering our craft for benefits, we've had better success selling it into our installed base.
Gary Kramer: So, you know, I think we said 160 clients that have been rolled through October of those 160. You know, 20% of those are new business. So, that's new to be VSI. We wouldn't have brought those clients on. So, call that 30. We would not have brought those clients on if we didn't have benefits. So, that's allowing us to pick up additional business that we wouldn't have received. But as we're learning our craft, it's a little bit easier to sell it to your friends, right in our clients.
Gary Kramer: They know us well. They know the products we deliver, they trust us. It's a little bit of an easier sell to sell it into your install base, then to sell it to a new. But what we want to get to in the future is, you know, after we fell through the our install base, you know, continue to sell into new clients. But you can kind of see how this, how this will, you know, this won't ramp over time, right? We doubled the book on 71. We'll probably double it again on one one as far as our portfolio clients that buy the benefits and then we'll see where it goes from there.
Gary Kramer: Got it helpful. And just, you know, kind of big picture. It's trying to get a sense as to how much visibility you have in fiscal 24 as of, you know, to remember first. You know, much today that you didn't know three to four months ago, just, you know, trying to get a better sense as to how you're seeing early early 24. Yeah, we, you know, we feel, you look at our pipeline that we have, we got two pipelines do you think of it, we got a pipeline of benefits opportunities.
Gary Kramer: And we feel good with that one, if we close that at our historical benefit closing rate. That we're going to have a, a creative year for benefits in 24. So it's going to be, you know, we're going to make more than the three million we're going to spend, right? We were not going to give a number until we get into 24, but we're going to make more than the three million we're going to spend on it.
Gary Kramer: And then if you look at the pipeline for our traditional non-benefits prospects, that's the largest pipeline we've ever had at the end of a Q3. So, you know, if we do what we do, and we're going to do in that right over the last two years, we've really been executing on our controllable right of adding clients and adding WSCs. If we keep doing what we're doing with the pipeline we have, we feel very optimistic about 24. So, If you say, all right, we've got all these good things going on the controllable side.
Unknown Attendee: And then even if, you know, say, you know, our client hiring is flat, it's going to be easy for us to have a better gross Billings year in 24 over 23. Please proceed with your question.
Gary Kramer: Yeah, Gary, I get sighted construction as a weak sector. If I remember correctly, that's been weak for some time. I'm curious, are you seeing that deteriorate? No, we're actually, I mean, we're actually saw it come back some in Q3. So sequentially our clients hired in Q3 over Q2. Now, you know, it was a slight positive. It wasn't a big positive, but it was still positive. And I don't think a positive over negative any time.
Gary Kramer: But if you think of when we started to see the slowdown in our clients, it was November, December of 22. And then we saw it come back into Q1 of 23, Q2 of 23. And we've seen it slowly come back, you know, reversed out in Q3. You know, it's still early, but you know, we're thinking especially in the Bay Area where we're seeing it come back. We're hoping that that trend is reversed.
Gary Kramer: And one clarification. Did you say the profits gained from staffing clients within PEO offset losses from clients that you shed in the staffing line? So, this is a challenge you wanted to try to explain. We do recruiting for our clients now. And when we, when we book the recruiting phase, it's $10,000, right? We hire, we recruit for our clients and they hire somebody and we get paid a $10,000 recruiting fee. So, that's that recruiting for his profit for us.
Gary Kramer: The sale we recognize on that is $10,000, the profit we recognize keep it simple with $10,000. Now, where that's different is if that was, you know, traditional staffing business and say that person was making $75,000 in wages, we would book the wages plus taxes plus other things into the revenue lines. So, that revenue would have been, you know, call it $100,000, but we would have made our $10,000 in profits. So, it's, it's a little bit of a shift in the accounting for recruiting for staffing.
Gary Kramer: And all we're trying to say is we're making adequate margins on staffing. We're just not realizing, we're making it adequate profit on staffing or just not realizing as much revenue as we used to, nor are we realizing the cost of it. Okay. And then you mentioned staffing. I believe you mentioned should grow sequentially. What's driving that is in particular? Yeah. We had sequential growth in this quarter and we're projecting modest sequential growth next quarter.
Gary Kramer: Again, we're talking small positives here, not large percentage sequential increases. But the key takeaway is the large decline. Really, we think are behind us. And so the, for example, the 25% decrease in revenue now is really representing just that year-over-year compare where if you look at the trim line now, it's flat and positive. So we're really holding that. We've seen, as Gary said, the activity and staffing that we're excited about is not necessarily too large increases in revenue, but it's still showing up as some revenue and certainly margin.
Gary Kramer: As you go after bigger clients and the competitive, I think the competition is a little different. Are you seeing competitive pressures increase in the current environment? No more than normal. There's competition everywhere, but with our product and our people in the field, it's really our differentiator. We can talk about all these different tools that we have, as far as workers' comp or health insurance and yada yada yada, but the people in the field, doing the work, being there with the business owner, that is the core product and that's what we're able to sell in the market. That's what keeps the business on the books. That's the one that the clients truly find the value is in this unit. Okay.
Unknown Attendee: Thanks, Gary.
Marc Riddick: Our next question comes in line of Mark Riddick with Cedodian Company. Please proceed with your question. Thank you.
Gary Kramer: Good evening, everyone. I wanted to just touch a little bit on the follow-up on the construction commentary. I just wanted to go back because if I were a member correct, I'm a timing perspective versus last year, there were impacts beyond the controllables, if you will. If I'm a member correct, you had weather impacts, I think, if I'm a member correct, both at the fourth quarter and into the first quarter. I was wondering if you talk a little bit about the timing of maybe what you saw then and how that might sort of play out if I don't know if easing comparison is a fair way to put it, but I was wondering if we talk a little bit about maybe what you saw there and how we might see it flow through this time of the month.
Gary Kramer: Yeah, we saw our clients start to shrink Q4 and it accelerated into Q1. It happened at the same time of your head interest rates going up really high. You had a shift in the macro economy, and then we also had a parable weather in California, specifically northern Cal as well. So you had a crowd of points of all of these things happening at the same time. It left us in that position of, you know, we think it's a piece of, you know, it's a little bit of each.
Gary Kramer: It was hard to discern from where we were sitting, what was going to happen. We thought it was going to come back in Q2 of 23, but ultimately it didn't come back. But our confidence now is, you know, in those clients that reduce staff that we just referenced, we saw them hire more folks in Q3 and we saw sequentially our clients growing Q3. So that's what gives us the optimism of, you know, they did for three quarters and then they pulled back and you started to add people back in the Q3 this year.
Gary Kramer: Okay, actually, yeah, that's, that's where I was going with that. And then I was sort of curious as to on a different track, but there's a little similarity there. So we can bring us up to speed on maybe what you're seeing with the banking and finance customers. I mean, as we sort of anniversary those challenges that again or outside the controllables, what maybe you can sort of bring us up to speed.
Gary Kramer: Maybe on what you're seeing there. Yeah, I mean, we really worked that effected by the banking crisis a year ago. You know, we don't have a lot of direct clients in that space. Obviously, all of our clients used banking services. So, we were watching very closely to see if there were any impacts of our clients. The biggest headwind has been, you know, construction and really driven by the cyclical nature of that with interest rates. Okay, great.
Gary Kramer: And the last one for me, I was one of the good circle back to benefits from them. Are there any particular client verticals or any particular customer groups that are who have responded more positively than others? Or are there any differentiation that you're seeing as to, you know, as to those who are being part of that ad.
Gary Kramer: And then also maybe you talk a little bit about the sales cycle and maybe how that's played out compared to what your expectations were. Thank you. Sure. So, you know, if you just think of who we're selling to, we're primarily trying to sell into our installed base. So, you know, that's really no new vertical for us, but we're having good success selling it into our installed base. And really in every state, right, there's not a state that we're not that we're not able to sell into.
Gary Kramer: So, we feel comfortable that we have the product that works in every state and that our clients are, you know, eager and willing to pay for. So, we feel good there. But one thing I would just say that we're seeing success on is in our new markets. Right? So, our market development managers about 80% of the business they're bringing on for new business, they're selling benefits as well. So, we feel pretty optimistic that in these green fields, they have, you know, many different products to sell and they try to figure out what's the best way to crack their market.
Gary Kramer: And they're doing a great job cracking their market. I'm proud of all of them. So, just in general, you know, in those new markets, you know, we are seeing more white collar than blue collar. Just because of their comfort and maybe their works and the folks that they know because we're typically hiring folks that come, you know, from and around the business, I'll say from our industry or adjacent industry. So, feel good with the growth there.
Unknown Attendee: And then it's the sales cycle, right? This is, we know that this is not a quick sales cycle, right? It's typically going to take you, you know, three months to four months, right? From the time you sell it, you know, from the time you do the underwriting and you sell to, then you have to get the employees through the enrollment process. It just takes a little, a little more lead time to get to make sure it's done properly, make sure it's not accurately.
Unknown Attendee: But, you know, like we wish we could give you a better number right now, but we're right in the middle of the thick for the for the one one season. Most of the folks are going to make their decisions. Most of the clients are going to make their buying decisions in mid November, mid and November with the idea of start your enrollments around Thanksgiving or the first week of December. So, again, if everything wrapped up by mid-December, but until we get through those enrollments, we're not going to have a real good definitive estimate on what we think our sell through was for the one one season. There's very helpful. Thank you very much. There are no further questions in the queue.
Gary Kramer: I'd like to hand the call back to management for closing remarks. Thank you. Just again, I want to thank all the BBSI professionals for another great quarter on controllable growth. Everybody's doing a great job and we appreciate everything you do for the organization. Thank you, everybody.
Unknown Attendee: Ladies and gentlemen, this goes to today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.