Q3 2024 Barrett Business Services Inc Earnings Call
Unknown Attendee: Good afternoon everyone and thank you for participating in today's conference call to discuss BBSI financial results for the third quarter ended September 30th, 2024.
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 'twenty 'twenty full.
Unknown Attendee: Joining us today are BBSI's President and CEO, Mr. Gary Kramer, and the company's CFO, Mr. Anthony Harris.
Joining us today are Bbsi's, president and CEO, Mr. Gary Kramer.
The Companys CFO, Mr. Anthony Harris.
Unknown Attendee: Following their remarks, we will open the call for your questions.
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. This 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 facts, are subject to a number of risks and uncertainties. Actual results may differ materially from those implied by these forward-looking statements.
Before we go Fuddle. Please take note of the company's Safe Harbor statement within the meaning of the private Securities Litigation Reform Act of 90 95.
The statement provides important cautions 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. Please.
Unknown Attendee: Please refer to the company's recent earnings released 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 cause actual results to differ from those expressed or implied by the forward-looking statements.
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 cause actual results to differ from those expressed or implied by the forward looking statements.
Unknown Attendee: I would like to remind everyone that this call will be available for replay through December 6, 2024, starting at 8 p.m. Eastern Time tonight.
I would like to remind everyone that this call will be available for replay through December six 2020 full starting at eight P. M Eastern time Tonight.
Unknown Attendee: 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.
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 Dot B B S Dot com.
Unknown Attendee: Now I would like to turn the call over to the President and Chief Executive Officer of BBSI, Mr. Gary Kramer. Sir, please go ahead.
Speaker Change: Now I would like to turn the call over to the President and Chief Executive Officer of BBSI, Mr. Guy came up.
Speaker Change: So please go ahead.
Gary Kramer: Thank you. Good afternoon, everyone, and thank you for joining the call. I am pleased to report that we have a strong third... Our financial results exceeded our expectations. and we have greater optimism in our full year.
Speaker Change: Thank you.
Speaker Change: Good afternoon, everyone and thank you for joining the call.
Speaker Change: Pleased to report that we had a strong third quarter, our financial results exceeded our expectations and we have greater optimism and our full year results.
Gary Kramer: We continued to execute our short and long-term objectives, and we added a record number of worksite employees from our controls. Moving to our financial results and worksite employees. During the quarter, our gross billing increased 9% over the prior year quarter, which is greater than expected. We continued to execute our various strategies to increase the top of the sales funnel, and we achieved a record number of worksite employees from new client ads during a third quarter. Our client retention continues to trend well and is in line with our expectations. I'd like to attribute that to the work we do with our clients and the value our teams provide.
Speaker Change: We continued to execute our short and long term objectives, and we added a record number of Worksite employees from our controllable growth.
Speaker Change: Moving to our financial results in Worksite employees during.
Speaker Change: During the quarter, our gross billings increased 9% over the prior year quarter, which is greater than expected. We continue to execute our various strategies to increase the top of the sales funnel and we achieved a record number of Worksite employees from new client adds during the third quarter.
Speaker Change: Our client retention continues to trend well and is in line with our expectations I'd like to attribute that to the work, we do with our clients and the value our teams provide.
Gary Kramer: The result of all these efforts, or what I refer to as our controllable growth. is that we added approximately 4,600 worksite employees year-over-year from NetNew. The economy in the third quarter remained relatively consistent with the first half. Our client's workforce continued to modestly grow in the third quarter and into October.
Speaker Change: As a result of all these efforts are what I refer to as our controllable growth.
Speaker Change: Is that we added approximately 4600 worksite employees year over year from net new clients.
Speaker Change: The economy in the third quarter remained relatively consistent with the first half of the year.
Speaker Change: Our clients' workforce continue to modestly grow in the third quarter and into October.
Gary Kramer: To summarize, for the quarter we grew our worksite employees by 5%. sold and retained more business and benefited from our clients net hire.
Speaker Change: To summarize for the quarter, we grew our worksite employees by 5% as we sold and retain more business and benefited from our clients' net hiring.
Gary Kramer: Moving to our staffing operation. Our staffing business declined by 2% over the prior year. previously mentioned that in 2022, we repriced the portfolio and jettisoned clients where we were not achieving an adequate return. We also shifted our strategy to recruit for our PEO clients, which generated equal margin to our traditional staffing model, but resulted in less top-line revenue. This quarter is the first clean quarter-over-quarter comparison, and we are seeing our staffing business stabilize. We continue to execute our strategy to recruit for our PEO clients and place 105 applicants.
Speaker Change: Moving to our staffing operations.
Speaker Change: Our staffing business declined by 2% over the prior year quarter.
Speaker Change: We previously mentioned that in 2022, we repriced the portfolio and jettison clients. When we were not achieving an adequate return.
Speaker Change: We also shifted our strategy to recruit for our PEO clients, which generated equal margin to our traditional staffing model, but resulted in less top line revenue.
Speaker Change: This quarter is the first clean quarter over quarter comparison, and we are seeing our staffing business stabilize.
Speaker Change: We continued to execute our strategy to recruit for our PEO clients and placed 105 applicants in the quarter.
Gary Kramer: moving to the field operational. We're very pleased with our entrance in the new markets with our AssetLight model. We have 21 total new market development managers 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. In all three of the markets, we have hired additional local talent to support our clients. We are in the process of moving into traditional brick-and-mortar BBSI branding. We continue to see positive results from our investments in new markets and are actively recruiting additional new market developers.
Speaker Change: Moving to the field operational updates.
Speaker Change: We're very pleased with our entrance into new markets with our asset light model. We have 21 total new market development managers in various stages of their development.
Speaker Change: They are doing well and largely achieving their goals of adding in servicing new clients and new referral partners.
Speaker Change: And three of the markets, we have hired additional local talent to support our clients and we are in the process of moving into traditional brick and mortar BBSI branches.
Speaker Change: We continue to see positive results from our investments in new markets and are actively recruiting additional new market development managers.
Gary Kramer: regarding product updates. We continue to execute on the sale and service of BBSI Benefits, our new health insurance. We previously mentioned that we entered into a strategic multi-year partnership with Kaiser Permanente and are now successfully selling their HMO side-by-side with our national... And just like our workers' compensation, an existing health insurance offer. take no underwriting. Our new business resulted in more new subscribers in October and November than over the same prior year. I am pleased to report that today we have approximately 480 clients on our various medical plans servicing more than 11,000 total clients. We are in the thick of the 1-1 selling season and our business teams are offering BBSI benefits to our existing clients as well as potential new clients.
Speaker Change: Regarding product updates.
Speaker Change: We continued to execute on a sale and service of BBSI benefits, our new health insurance offering.
Speaker Change: We previously mentioned that we entered into a strategic multi year partnership with Kaiser Permanente and are now successfully selling their HMO side by side with our National P. P O.
Speaker Change: And just like our workers' compensation and existing health insurance offering.
Speaker Change: We take no underwriting risk.
Speaker Change: Our new business resulted in more new subscribers in October and November then over the same prior year period.
Speaker Change: I am pleased to report that today, we have approximately 480 clients on our various medical plan servicing more than 11000 in total participants.
Speaker Change: We're 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 for 2025.
Gary Kramer: It's still too early to provide any definitive guidance for 2025. We are pleased that our current pipeline for 12-1 and 1-1 opportunities are about 35% greater compared to this time of year. As we look forward to 2025, we are confident that this product will be a creative to earn. We have the people, the product, the technology, and the experience to be confident in our various... We are bullish on this product and will begin to reap the benefit of leverage through scale.
Speaker Change: But we are pleased that our current pipeline for 12, one and one loan opportunities.
Speaker Change: 35% greater compared to this time a year ago.
Speaker Change: As we look forward to 2025, we are confident that this product will be accretive to earnings we have the people the products the technology and the experience to be confident in our various offerings.
Speaker Change: We are bullish on this product and will begin to reap the benefit of leverage through scale.
Gary Kramer: Next, I'd like to shift to our view of the remainder of the year and the 2025. We have a solid track record of selling and servicing through uncertain economic times. and our blue-gray clients are proving... We are consistently growing our WSC stack, and we ended Q3 with a record number of work We have consistently achieved strong, controllable growth by focusing on the needs of our clients and by adding... We have more product to sell, more folks selling it, and more referral partners recommending BVS.
Speaker Change: Next I'd like to shift to our view of the remainder of the year and the 2025.
Speaker Change: We have a solid track record of selling and servicing through uncertain economic times and our blue Gray clients are proving to be resilient.
Speaker Change: We are consistently growing our WSI stack and we ended Q3 with a record number of Worksite employees.
Speaker Change: We have consistently achieved strong controllable growth.
Speaker Change: Focusing on the needs of our clients and by adding new clients, we have more product to sell more folks selling it and more referral partners recommending BBSI.
Gary Kramer: It is important to note that there is one less business day in 2025. If there is no dislocation in the economy, then we close out the year in the manner that I believe we will. and we expect gross billings growth in 2025.
Speaker Change: It is important to note that there was one less business day in 2025.
Speaker Change: If there is no dislocation in the economy, and we close out the year in the manner that I believe we will and we expect gross billings growth in 2025 to be similar to 2024.
Anthony Harris: Now I'm going to turn the call over to Anthony for his preparation. Thanks, Gary. And hello, everyone. I'm pleased to report we finished Q3 with strong results. Continued momentum in our sales initiative. Gross buildings increased 9% to $2.14 billion in Q3'24 versus $1.96 billion in the prior year quarter. CEO growth billings increased 9% in the quarter to $2.12 billion, while staffing revenues declined 2% to $21 million in the quarter. Our PEO worksite employees grew by 5% versus the year ago quarter, which as Gary noted, was driven by a record number of WSCs added from new clients, both on a gross basis and net of client run Continued strong trend of controllable growth of recent quarters.
Speaker Change: Now I'm going to turn the call over to Anthony for his prepared remarks.
Anthony Harris: Thanks, Gary and Hello, everyone I'm.
Anthony Harris: I am pleased to report that we finished Q3 with strong results and continued momentum in our sales initiatives.
Anthony Harris: Billings increased 9% to $2, one 4 billion in Q3 24 versus $1 96 billion in the prior year quarter.
Anthony Harris: PEO gross billings increased 9% in the quarter to $2, one 2 billion.
Anthony Harris: Staffing revenues declined 2% to $21 million in the quarter.
Speaker Change: Our PEO Worksite employees grew by 5% versus the year ago quarter, which as Gary noted was driven by a record number of Wsb's added from new clients, both on a gross basis and net of client runoff.
Anthony Harris: The continued strong trend of control the growth of our recent quarters was once again combined with positive client hiring in the quarter.
Anthony Harris: Once again, combined with positive client hiring. The pace of client hiring remains below our historical average. But we continue to see consistency in client hiring rates across most regions and Looking at wage rates and hours worked, total hours continued to remain stable in the quarter while overtime hours increased modestly year over year. wage rates continue to increase as well. average billing per WSE increased 3% in the Looking at year over year PEO gross buildings growth by region. The East Coast grew by 18%. Mountain and Southern California each grew by 10%. Northern California grew by 6% and the Pacific Northwest declined by 1%.
Anthony Harris: The pace of client hiring remains below our historical averages but.
Anthony Harris: But we continue to see consistency inquire client hiring rates across most regions and industries.
Anthony Harris: Looking at wage rates and hours worked total hours continue to remain stable in the quarter, while overtime hours increased modestly year over year.
Anthony Harris: Wage rates continue to increase as well.
Anthony Harris: And average billing per WSB increased 3% in the quarter.
Anthony Harris: Looking at year over year, PEO gross billings growth by region.
Anthony Harris: The East coast grew by 18%.
Anthony Harris: Mountain in southern California, each grew by 10%.
Anthony Harris: Northern California grew by 6% and the Pacific Northwest declined by 1%.
Anthony Harris: Southern California represents our largest region and has improved to double digit growth through a combination of consistent client ads. Unstable Customer Hiring. Strong East Coast performance represents the 14th consecutive quarter of double-digit growth in that region. is also driven by a combination of strong, controllable growth and above-average client hiring.
Anthony Harris: Southern California represents our largest region. It has improved to double digit growth through a combination of consistent client adds and stable customer hiring.
Anthony Harris: The strong east coast performance represents the 14th consecutive quarter of double digit growth in that region and it's also driven by a combination of strong controllable growth and above average client hiring.
Anthony Harris: The Pacific Northwest region is successfully adding clients, but continues to be most impacted by slower client growth, including being the only region with net negative client hiring in the quarter.
Anthony Harris: The Pacific Northwest region is successfully adding clients, but continues to be most impacted by slower client growth, including being the only region with net negative client hiring in the quarter.
Anthony Harris: Turning to margin and profitability, our workers' compensation program continues to perform well and benefit from favorable claim frequency trends and favorable claim development. Strong performance has once again resulted in favorable adjustments for prior year. In Q3'24, we recognized favorable prior year liability and premium adjustments of $4.3 million. As a reminder, our client workers' compensation exposure is now primarily covered by our fully insured program. No retained claims risk by BBSI. Our overall profitability continues to benefit from operating. This quarter saw an increase in SG&A expense on a year-over-year basis that was expected and was driven primarily by increases in variable employee compensation and incentive pay related to stronger financial results compared to the third quarter of 2023.
Anthony Harris: Turning to margin and profitability, our workers' compensation program continues to perform well and benefit from favorable claim frequency trends and favorable claims development.
Anthony Harris: This strong performance has once again resulted in favorable adjustments for prior year claims.
Anthony Harris: In Q3, 'twenty four we recognized favorable prior year liability and premium adjustments of $4 $3 million.
Anthony Harris: As a reminder, our client workers' compensation exposure is now primarily covered by our fully insured program.
Anthony Harris: With no retained claims risks by BBSI.
Anthony Harris: Our overall profitability continues to benefit from operating leverage.
Anthony Harris: This quarter saw an increase in SG&A expense on a year over year basis that was expected and was driven primarily by increases in variable employee compensation and incentive pay related to stronger financial results compared to the third quarter of 2023.
Anthony Harris: Year-to-date, our SG&A growth remains in line with expectations and our full-year profit Moving to investment income, our investment portfolios earned $2.2 million in the third quarter in line with the prior year. Our investment portfolio continues to be managed conservatively with an average quality of investment at AA and average book yield of 2.9%. Combined results of these activities was net income per diluted share of $0.74 compared to $0.67 per diluted share in the year-ago quarter. Our balance sheet remains strong with $94 million of unrestricted cash investments at September 30th and no debt. We stayed consistent in our approach to capital allocation, making investments back into the company through product enhancement and geographic expansion.
Anthony Harris: Year to date, our SG&A growth remains in line with expectations and our full year profit goals.
Anthony Harris: Moving to investment income our investment portfolios earned $2 2 million in the third quarter in line with the prior year.
Anthony Harris: Our investment portfolio continues to be managed conservatively with an average quality of investment in double E and average book yield of two 9%.
Anthony Harris: The combined result of these activities with net income per diluted share of <unk> 74.
Anthony Harris: Compared to 67 per diluted share in the year ago quarter.
Anthony Harris: Our balance sheet remained strong with $94 million of unrestricted cash and investments at September 30th and no debt.
Anthony Harris: We stayed consistent in our approach to capital allocation, making investments back into the company through product enhancement and geographic expansion and distributing excess capital to our shareholders through our dividend and stock buyback plan.
Anthony Harris: Distributing excess capital to our shareholders through our dividend and stock buyback plan. continuing under our $75 million July 2023 repurchase program. DBSI repurchased $8 million of shares in the third quarter, an average price of $35.09 per share. with $37 million now remaining available under the program. We also paid out $2.1 million of dividends in the quarter at our increased dividend rate of $0.08 per share. This brings our return of capital to shareholders to $10.1 million in the quarter. and over $28 million a year.
Anthony Harris: Continuing under our $75 million July 2023 repurchase program.
Anthony Harris: <unk> repurchased $8 million of shares in the third quarter and average price of $35.09 per share.
Anthony Harris: With $37 million now remaining available under the program at quarter end.
Anthony Harris: We also paid out $2 $1 million of dividends in the quarter at our increased dividend rate of <unk> per share. This brings our return of capital to shareholders to $10 1 million in the quarter.
Anthony Harris: And over $28 million year to date.
Anthony Harris: Moving to our outlook for the full year. We have strong results in the quarter, and we are reflecting that in our updated outlook. We now expect gross billings to increase between 7% and 8% for the year versus 6% to 8% prior. We continue to expect WSEs to increase between 4 and 5 percent for the year. We now expect gross margin as a percent of gross billing. versus 3% to 3.1% prior. And we continue to expect our effective annual tax rate to remain between 26% and 27%.
Anthony Harris: Moving to our outlook for the full year, we had strong results in the quarter and we're reflecting that in our updated outlook. We now expect gross billings to increase between 7% and 8% for the year versus 6% to 8% prior.
Anthony Harris: We continue to expect WSI <unk> to increase between four and 5% for the year.
Anthony Harris: We now expect gross margin as a percent of gross billings to be between three 3% and three 7%.
Anthony Harris: Versus 3% to three 1% prior.
Anthony Harris: And we continue to expect our effective annual tax rate to remain between 26% and 27%.
Unknown Attendee: I will now turn the call back to the operator for questions. Ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question, please press star and 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Ladies and gentlemen, we will wait for a moment while we poll for questions.
Anthony Harris: I will now turn the call back to the operator for questions.
Anthony Harris: Okay.
Speaker Change: Thank you.
Speaker Change: Ladies and gentlemen, even in I'll be conducting a question and answer session.
Speaker Change: If you would like to ask a question. Please press star and one on your telephone keypad a.
Speaker Change: A confirmation tone will indicate your line is in the question queue.
Anthony Harris: You May press star two if you'd like to remove your question from the queue.
Anthony Harris: All participants using speaker equipment, it may be necessary to pick up your handset before pressing the stock east.
Anthony Harris: Ladies and gentlemen, we will wait for a moment, while we poll for questions.
Jeff Martin: The first question comes from the line of Jeff Martin from Roth Capital Partners, please go ahead. Hey, good afternoon.
Speaker Change: The first question comes from the line of Jeff Martin from Roth Capital Partners. Please go ahead.
Jeff Martin: Hey, good afternoon Kamran Anthony how are you good Hey, Jeff.
Jeff Martin: Cameron, Anthony, how are you? Good.
Jeff Martin: Hey, Jeff.
Jeff Martin: Good.
Jeff Martin: I wanted to touch on the competitive environment. A lot of, you know, public peers are really struggling for growth in this environment and competition seems to be fairly cutthroat. Just curious what you're seeing out there.
Jeff Martin: Wanted to touch.
Jeff Martin: That's on the competitive environment a lot of public.
Anthony Harris: Public peers are really struggling for growth in this environment and competition seems to be fairly cut throat, just curious what youre seeing out there.
Jeff Martin: Given this is, this is, you know, your first real full year of BBSI benefits, do you think that's helping you outpace growth relative to peers?
Anthony Harris: Given this as this is your first real full year BBSI benefit do you think that's helping you outpace growth relative to peers.
Gary Kramer: Yeah. question couple things right one is are in a sweet spot, I would say, for the macro economy. Our blue-grey clients are modestly hiring. at a pace less than the historical. https://www.barrett.com So our clients are growing, number one. Our clients are healthy. We're retaining our clients. That's key. We've got a very high retention rate from the products and services that we provide. and that on the sales side.
Anthony Harris: Yeah.
Speaker Change: Good question couple of things right one is.
Anthony Harris: Our clients are in a sweet spot I would say for the macro economy, our blue great clients are modestly hiring now Anthony said, it's it's at a pace less than the historical but it's it's growth right and we'll take growth because last year, we didn't have growth in that space. So our clients are growing number one our clients are healthy we are retaining.
Anthony Harris: Our clients. That's that's key in this business is to retain your business and we've got a very high retention rates on the products and services that we provide.
Anthony Harris: And then on this on the sales side.
Gary Kramer: You know, we've been saying for years that workers' comp... Page PAGE of NUMPAGES http://officials.verbalink.com and then as far as competition in the market. We've had a lot of focus and attention on our sales pipeline, our sales efficiency, our sales process. We've had a lot of focus and attention on our sales pipeline, our sales efficiency, we're getting more. More referral partners recommend. We're getting more prospects, we're getting more closes, with those closes we get more worksites. So, you know, just in general, we're selling and servicing. and we're doing that in a market that, in my mind, I don't think it's any more competitive, it's just always been competitive.
Anthony Harris: We've been saying for years that workers comp as being competitive.
Anthony Harris: That hasnt changed.
Anthony Harris: And then as far as competition in the marketplace.
Anthony Harris: We've had a lot of focus and attention on our sales pipeline our sales efficiency our sales process.
Anthony Harris: We get.
Anthony Harris: We're getting more.
Anthony Harris: More referral partners recommending business to BDSI, and we're getting more prospects, we're getting more closes with those close as we get more worksite employees.
Anthony Harris: So.
Anthony Harris: Just in general, where we're selling and servicing more.
Anthony Harris: And we're doing that and in a market that in my mind I don't think it's any more competitive it's just always been competitive.
Anthony Harris: But we've got a good focus and attention on it.
Gary Kramer: got a good focus and attention.
Gary Kramer: And then on the health side, it is another arrow in our quiver. It's something that, you know, we're now getting referral partners in the benefit space. Clients that we wouldn't.
Anthony Harris: And then on the health side it is.
Anthony Harris: It is another arrow in our quiver as something that we're now getting referral partners in the benefits space we're getting.
Anthony Harris: Clients that we wouldn't have typically seen before that are looking for a packaged product.
Unknown Attendee: Unknown Attendee, Barrett Business Services Inc, Unknown Attendee, Barrett Business Services We've been working on the right things, and we're putting together.
Anthony Harris: So we've got new products that are attracting new referral partners and new products that are attracting new clients. So I think we we've been working on the right things and we're putting together some consecutive quarters of positive results.
Anthony Harris: Excellent.
Jeff Martin: Excellent. On the benefits side, will you be, do you foresee... providing additional details about the offering, you know, from a metric standpoint, from a contribution standpoint in 2025 relative to what you're currently disclosing.
Speaker Change: On the benefit side will you be do you foresee.
Anthony Harris: Providing additional details about the offering from a metric standpoint from a contribution standpoint.
Anthony Harris: In 2025 relative to what you're currently disclosing.
Jeff Martin: And could you also touch on to what degree that could be accretive? Maybe not just next year, but just, you know, broadly speaking in the mid to longer term.
Anthony Harris: And could you also touch on to what degree.
Anthony Harris: That could be accretive maybe not just next year, but just broadly speaking in the in the mid to longer term.
Anthony Harris: Sure, Jeff. Yeah, this is Anthony. Yeah, we continue to watch the disclosure side of it. Obviously, it's been fairly material this first year, but As it grows, we'll continue to enhance disclosures. You know, there's some commentary about it in our MD&A, and obviously, Kramer does. We'll continue to incorporate those more formally going forward. In terms of the profit potential, you know, we've said there's really only upside for us on the benefits product. So we're already, you know, covering the cost of the program, it's profitable. a little better than break even. So we really haven't seen earnings leverage from that.
Anthony Harris: Sure. Jeff. This is Anthony Yes, we continue to watch the disclosure side of it obviously its been fairly material.
Anthony Harris: This first year, but is.
Anthony Harris: As it grows we'll continue to enhance the disclosures there is some commentary about it in our MD&A and obviously Kramer does give statistics of the scrap that we'll continue to incorporate those more formally going forward.
Anthony Harris: In terms of the profit potential you know, we've said theres really only upside for us on the benefits products. So we're already covering the cost of the program is profitable.
Anthony Harris: Better than breakeven. So we really haven't seen earnings leverage from that and that's really what we're expecting to start seeing in 2025, the Kramer mentioned.
Anthony Harris: And that's really what we're expecting to start seeing in 2025 that Kramer And that will just grow with scale. So we have our kind of foundation built from the IT side and the operation side. So as we continue to sell more of that benefits product. The gross margin rate on that will be, on average, a little higher than our typical gross margin rate today of around 3%. So as we continue to add those dollars and won't have to add very many incremental SG&A dollars, we should start to see some strong operating leverage that could be meaningful to the bottom.
Anthony Harris: And that will just grow with scale. So we have our kind of foundation built though from the <unk> side and the operation side.
Anthony Harris: So as we continue to sell more of that benefits product.
Anthony Harris: The gross margin rate on that will be on average a little higher than our than our typical gross margin rate today of around 3%.
Anthony Harris: So as we continue to add those dollars then you won't have to add very minute incremental SG&A dollars. We should start to see some strong operating leverage that could be meaningful to the bottom line.
Anthony Harris: at that scale.
Anthony Harris: As that scales up.
Jeff Martin: Great.
Speaker Change: Great and then last question for me is on the pipeline side, you've done a lot over the last say three to five years to add it.
Jeff Martin: And then last question for me is on the pipeline side. You've done a lot over the last, say, three to five years to add additional sources of leads. I'm just curious if you could give us an update if there are any in particular that are currently contributing to a greater degree than some of the other. It's broad-based, I mean, you know. We are a referral partner friendly. We treat our referral partners like clients as well, we've got a lot of respect for that. ultimately want to help them grow their book and their product. So, you know...
Anthony Harris: Additional sources of leads.
Anthony Harris: Just curious if you could give us an update if any in particular.
Anthony Harris: Currently contributing to a greater degree than in some of the others.
Speaker Change: It's broad based I mean.
Anthony Harris: We are a referral partner friendly PEO.
Anthony Harris: We treat our referral partners like clients as well, we've got a lot of respect for them and.
Anthony Harris: Ultimately, we want to help them grow their book and their profitability.
Anthony Harris: So.
Anthony Harris: We.
Gary Kramer: Our profile is really Brokers, Employee Benefits Brokers, CPAs, things of that nature. trusted advisor, a small And that profile has not changed. We're just getting better at bringing on more referral partners. So it's really...
Speaker Change: Our profile is really the P&C brokers employee benefits brokers CPA as things of that nature trusted advisor a small business.
Anthony Harris: That that profile has not changed we're just getting better at bringing on more referral partners. So it's really the the.
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Anthony Harris: The velocity of referral partners that were bringing on is making a difference and then the other leg of the stool is we've also started our direct efforts right. So our SCO SCM.
Gary Kramer: And the other, you know, leg of the stool is, you know, we've also started our direct efforts, right? So, our SEO, SES. Leach and Technology. direct efforts, and we're seeing positive results there. It's a multi-channel approach that we're using to make sure that we got a top of the shelf.
Anthony Harris: Lead Gen technologies that we're using to bring indirect efforts and we're seeing positive results. There. So it's a.
Anthony Harris: It's a multichannel approach that we're that we're using to make sure that we got out.
Anthony Harris: A fair amount of business that comes into the top of the sales funnel.
Jeff Martin: Great.
Speaker Change: Great. Thanks for taking my questions.
Jeff Martin: Thanks for taking my question.
Unknown Attendee: Thank you.
Speaker Change: Thank you.
Christopher Moore: The next question comes from the line of Chris Moore from CJS Securities.
Speaker Change: The next question comes from the line of Chris Moore from CJS Securities. Please go ahead.
Christopher Moore: Please go ahead.
Christopher Moore: Hey, good afternoon, guys. Nice quarter. Maybe we'll start with just gross billing growth. The guide is 78%. You did 9% Q3. Historically, you know, you've had more than a few double digit gross billing years.
Chris Moore: Hey, good afternoon, guys, a nice quarter.
Chris Moore: Maybe we'll start with just gross billings close the guide is 7% to 8% you did 9% Q3, historically you've had more than a few double digit gross billing years.
Christopher Moore: You know, what kind of environment would you need to consistently grow double digits again? Yeah, the, you know, we talk about our controllable growth, right. So that's the clients we have in the WSCs they have in the clients routine and WSCs, our controllable growth is the best it's ever been, right. So that's going to be Page PAGE of NUMPAGES www.verbalink.com Page PAGE of NUMPAGES Now, the client hiring, Anthony mentioned, it's still below historical level. We grow quicker when our clients hire, not by our clients getting raises. So the more employees they hire, the quicker we grow.
Anthony Harris: You know what kind of environment would you need to consistently grow double digits again.
Anthony Harris: Yeah.
Anthony Harris: Yeah.
Anthony Harris: We talk about our controllable growth right. So that's the clients we added the WCS they have in the client's routine AWS sees our controllable growth is the best it's ever been right.
Anthony Harris: So that's going to be a huge huge piece of our growth. This year is going to be on our controllable side then.
Anthony Harris: And then youre going to get a little wage inflation, which is going to help you grow as well and then youre going to get your clients that are hiring which is going to help them grow as well.
Speaker Change: The client hiring Anthony mentioned, it's still below historical levels.
Speaker Change: We grow quicker when our clients hire not not by our clients, giving raises so the more and more of their employees. They hire the quicker we grow and that has been the slowest the slowest piece in this economy last year. It was negative this year is positive.
Gary Kramer: And that has been the slowest piece in this economy. Last year it was negative, this year it's positive. But it's still a fraction of what it was on our historical level. So it's running like 25, 30% of what it was historically. So realistically, if that number, as far as our client hiring, were to increase, that would easily put us back into the double-digit sweep.
Speaker Change: But it's still a fraction of what it was on our historical level. So it's running like 25% to 30% of what it was historically so realistically if that number as far as our client hiring were to increase.
Anthony Harris: That would easily put us back into the double digit sweet spot.
Christopher Moore: Perfect. Thank you.
Speaker Change: Perfect. Thank you.
Christopher Moore: Maybe just, you know, kind of on that competitive environment we're talking about. So Trinet and Insperity, perhaps your two closest comps.
Speaker Change: Maybe just kind of on the competitive environment, we're talking about so.
Anthony Harris: Trying it and in Sperry D. Perhaps your two closest comps.
Christopher Moore: You know, I'm going to ignore valuations today before they went crazy. Trinet was down, I think, more than 20 percent since this time last year. Insperity down 40 percent. You guys up 35 to 40 percent. Certainly that well-timed split helped, but models are different. They take more risk, but you're really subject to many of the same macro challenges.
Anthony Harris: You know I'm going to ignore valuations today before they went crazy trying that was down I think more than 20%. Since this time last year and it's barely down 40%.
Anthony Harris: Guys up 35% to 40% certainly that well time split help but.
Anthony Harris: Models are are different they take more risk, but you really subject to many of the same macro challenges.
Gary Kramer: You know, I wonder if maybe you could just kind of compare and contrast your model versus theirs. We respect our peers and we play in a massive space that really is underpenetrable.
Speaker Change: Wonder if maybe you could just.
Anthony Harris: Kind of compare and contrast, your motto versus theirs.
Anthony Harris:
Speaker Change: We respect our peers and we play in a massive space that really is underpenetrated.
Gary Kramer: So when we go to market now, we're not. business from competitors, from other PEOs, it's typically and still Converting Clients to the Outsource Model for the First Time Our model is... I'll just speak to the strengths of our model, right? So number one, people are our product. We've got all of the tools of the PEO industry, the 401Ks, the payrolls, all the different tools, the technology. We've got all of the tools of the PEO industry, the 401Ks, the payrolls, all the different But the differentiator for us has been, and always will be, our local. If I have the option of if it's a bake-off and it's the same price and I can have it.
Speaker Change: So when we go to market now, we're not taking business from competitors from other PEO is it's typically in still.
Speaker Change: Converting clients to the outsource model for the first time right.
Speaker Change: Our model is.
Speaker Change: I'll just speak to the strengths of our model right. So number one people are our product.
Speaker Change: We've got all of the tools of the PEO industry. The 401k payrolls are all the different tools the technology.
Speaker Change: But the differentiator for us has been and always will be our local service teams right. If I have the option of if its a bake off and it's the same price and I can have a local service team plus a mercy call Center I would go with the local service team every day and our clients really gravitate to that so that low.
Gary Kramer: local service team. versus a call center, I would go with the local service team every day and our clients really gravitate to that. that local service team is our differentiator. And that's one of the reasons why we have such high client retention.
Speaker Change: <unk> service team is our differentiator and that's one of the reasons why we have such high client retention, which helps us on the forward growth right. So yeah. That's.
Gary Kramer: Unknown Attendee, Barrett Business Services Inc, Unknown Attendee, Gary Kramer, Unknown What I'll say is an underpenetrated PEO market. were very comfortable in that group. Gary Kramer, James Potts, Unknown Attendee, Barrett Business Services Inc And then the other thing is, you know, you mentioned, but...
Speaker Change: That's really the big thing we grew up as a.
Anthony Harris: We skew to the blue Gray because of our workers' comp offering.
Anthony Harris: And our comparability and expertise in workers' comp.
Speaker Change: And we feel like that is a you know what.
Speaker Change: What I'll say is an underpenetrated PEO market and.
Speaker Change: And we're very comfortable in that Glu does that blue Gray collar space, that's our sweet spot we know what we know our swim lane, we stay in it.
Speaker Change: And then the other thing as you mentioned, but.
Gary Kramer: We've been on a journey over the last four years to de-risk the organization. We don't take risk on workers comp, we don't take risk on health insurance. did this for a reason. We think it gives. Unknown Attendee, Barrett Business Services Inc. Ultimately, if we put up growth that has earnings and cash flow. We think we'll demand a Transcription by CastingWords Transcription by CastingWords That's, that's been our strategy.
Speaker Change: We've been on a journey over the last four years to Derisk. The organization, we don't take risk on workers comp, we don't take risk on health insurance.
Speaker Change: We did this for a reason we think it gives us predictability and profitability predictability and cash flow, which.
Speaker Change: Which ultimately if we put up good consistent growth that has good consistent earnings and cash flow.
Speaker Change: Think will demand a.
Speaker Change: Our superior market multiple so that's that's been our strategy and we know what we're good at and we're executing to that.
Christopher Moore: We know what we're good at and we're Unknown Speaker I appreciate that. Last one for me is just, I think you referenced it, but you've talked about SG&A growth being half of revenue growth. That's still the target. Yeah, I mean, I'd say our target really is earnings leverage, which is accomplished by, you know, growing SG&A slower than we're growing the top line. That ratio can change a little bit from year to year depending on that top line growth or rat in the cycle.
Speaker Change: I appreciate that last one for me is just I think I think you referenced it but.
Speaker Change: You've talked about SG&A growth being half of revenue growth that that's still the target.
Speaker Change: Yeah, I mean, I'd say, our target really is earnings leverage which is accomplished by growing SG&A slower than we're growing the top line.
Speaker Change: That ratio can change a little bit from year to year, depending on that top line growth of around the cycle.
Gary Kramer: But the goal is to grow, grow 10% of the top line to grow 15% on the bottom line. So about a 1.5 x Anthony said in his prepared remarks, Q3 was a profitable quarter and a lot of our compensation is profit related. So the more profit we have, the more profit share we have to pay out. And that's where you're seeing a little bit of a tip in the quarter, but on the year, we're about where we need to be.
Speaker Change: But the goal is to grow grow 10% on the top line to grow 15% on the bottom line. So about a 1.5 X leverage.
Speaker Change: Got it I'll leave it there thanks, guys, Yeah, Chris to clarify Anthony said in his prepared remarks, so Q3 was a profitable quarter and a lot of our compensation is <unk>.
Speaker Change: Profit related so the more profit we have the more profit share we have to pay out.
Speaker Change: And Thats, where youre seeing a little bit of a kid with a little bit of a tip in the quarter, but on a year, where we're about where we want to be.
Christopher Moore: Sounds good. Thank you guys.
Speaker Change: It sounds good thank you guys.
Vincent Colicchio: Thank you. The next question comes from the line of Vincent Colicchio from Barrington Research.
Speaker Change: Thank you.
Speaker Change: The next question comes from the line of Vincent Colicchio from Barrington Research. Please go ahead.
Vincent Colicchio: Please go ahead. Yes, Gary, you've been at your your PEO staffing business, if I remember correctly, for about a year or so. It's good to hear the progress there. Do you think you're in a place where you can consistently grow that going forward? Yeah, we've been doing the recruiting for our PEO clients now. It's really a product that if you think of it, they've never used recruiters before. A lot of it is, you know, in the small blue collar space. doing it on their own or friends of friends or friends of employees and they've never adopted a recruiting model.
Vincent Colicchio: Yes, Gary.
Speaker Change: You've been at your your P O staffing business.
Speaker Change: If I remember correctly about a year or so it's good to hear the progress there do you think you're in a place.
Speaker Change: Where you can consistently grow that going forward.
Speaker Change: Yes.
Speaker Change: We've been doing the recruiting for our PEO clients now, it's really a product that if you think of it they they've never use recruiters before.
Speaker Change: A lot of it is the small blue collar space they've been.
Speaker Change: Doing it on their own or friends of friends or friends of employees and they've never adopted in recruiting model. So when they're typically joining us theyre doing recruiting for the first time.
Vincent Colicchio: When they're typically joining us, they're doing recruiting for the first time, and we're getting good penetration into our install base. Sales, Tactical, and we're bringing. So it's been working well for both. And then every branch has goals, every branch is talking to their clients about it, every branch gets compensated on how many, you know, how many... We've got alignment through the organization in order to... We think it's a really good tool for our clients.
Speaker Change: And we're getting good penetration into our install base and then we use it as a sales tax equal or bringing on new business. So it's been working working well for both.
Speaker Change: And then every branch has calls every branches talk with your clients about it every branch get compensated on how many.
Speaker Change: How many places we're putting in so we've got alignment through the organization in order to make sure. This is successful because we think it's a really good tool for our clients.
Vincent Colicchio: And then, are healthcare brokers becoming more productive as a source of referrals? Yes, we you know, I don't want to I don't want to overplay this, it's still a small fraction of our referral partners but it's growing and we've had more success. That's interesting, their busiest time of year is right now. and we're getting more business from them right now because they've come to understand that if they place... We handle all of the administration enrollment and it frees up their time to sell more business. So we're having better penetration this quarter in that.
Speaker Change: And then our health care brokers, becoming more productive as a source of referrals.
Speaker Change: Yes sweep.
Speaker Change: I don't want to.
Speaker Change: I don't want to overplay. This it's still a small fraction of our referral partners, but it's growing.
Speaker Change: And we've had more success, it's interesting their busiest time of year is right now.
Speaker Change: And we're getting more business from them right now because they've come to understand that if they place the business with BBSI.
Speaker Change: We handle all of the administration enrollment in a pretty soft third type of things.
Speaker Change: Sell more business so.
Speaker Change: We're having better penetration this quarter in that distribution channel that we have in the prior quarters ever.
Vincent Colicchio: Page PAGE of NUMPAGES www.verbalink.com Page PAGE of NUMPAGES Thanks for answering my questions. Thanks, Corder.
Speaker Change: Okay.
Speaker Change: So thanks for answering my questions and nice quarter.
Speaker Change: Thanks.
Unknown Attendee: Thank you.
Speaker Change: Thank you.
Marc Riddick: The next question comes from the line of Marc Riddick from Sidoti and Company.
Speaker Change: The next question comes from the line of Marc Riddick from Sidoti and company. Please go ahead.
Marc Riddick: Please go ahead. Hey, good evening.
Marc Riddick: Hey, good evening.
Marc Riddick: So, I was wondering if we could talk a little bit about, in your prepared remarks or the press release, besides talking about the value-added and sort of where we are with the BBS benefits, I was wondering if you could talk a little bit about some of the potential new product offerings, new service offerings, things of that nature that we might, that you might be looking at or if there's any sort of adjacencies that have sort of opened up as an opportunity to layer on with benefits. Yeah, hey, Marc, we, we have a pretty well baked product roadmap.
Marc Riddick: Hello, Good evening. So I was wondering if we could talk a little bit about it in your either in your prepared remarks or the press release, Besides talking about the value added and sort of where we are with Bbs side benefits I was wondering if you'd talk a little bit about.
Speaker Change: Some of the.
Speaker Change: Potential new.
Speaker Change: New product offerings and service offerings things of that nature that we might.
Speaker Change: That you might be looking at or if there was any sort of adjacencies that are sort of opened up as a as an opportunity to layer on with a with a with benefits.
Speaker Change: Yeah.
Speaker Change: Yeah, Hey, Mark.
Speaker Change: We have a pretty well baked product roadmap and I don't want to spill the popcorn or get ahead of ourselves, but we have a pretty pretty baked product roadmap and when.
Gary Kramer: And I don't want to spill the popcorn or get ahead of ourselves. But we have a pretty, pretty big product roadmap.
Gary Kramer: When we get to next quarter, we're going to be talking about some new products that we're launching in 2025. I don't want to spill the popcorn now, but we will be launching. Transcripts provided by Transcription Outsourcing, LLC. We're excited about these products that are going to go out next year, but we're going Until I can say it with confidence that it works, because right now it's in beta with some of our clients. But until we get through beta and launch it, I don't want to overpromise.
Speaker Change: When we get to next quarter, we're going to be talking about.
Speaker Change: Some new products that we're launching in 25, I don't want to build a popcorn now, but we will be launching additional new products that are bolting into our tech platform.
Speaker Change: That are better.
Speaker Change: It will be used to.
Speaker Change: By our clients to better service their business and we're excited about these.
Speaker Change: Products that are going to go out next year, but we're going to wait a quarter until we.
Speaker Change: Until I can say with confidence that it works because right now it's Ah.
Speaker Change: It's in beta with some of our clients, but until we get through beta and launch it I don't want to I don't want to over promise.
Marc Riddick: Okay, that's something to look forward to. That's great.
Speaker Change: Okay.
Speaker Change: It's something to look forward to it.
Gary Kramer: And then I was wondering if you could talk a bit about the client retention trends that were, I think, referred to in prepared remarks, maybe what you're seeing as far as any potential... It seems as though things have been pretty strong, but maybe you could talk a little bit about what those trends look like and maybe if you've had the opportunity to sort of, you know, see other platforms or verticals come aboard a little more aggressively than others. Yeah, our, our retention continues. above a 90%. It's really our bogey, that's our target. For the 10% of the clients that run off...
Speaker Change: And then I was wondering can talk a bit about the.
Speaker Change: Client retention trends that that where I think referred to in prepared remarks, maybe what you're seeing as far as.
Speaker Change: Any any potential.
Speaker Change: Has there been any as it seems as though things are pretty strong, but maybe you can talk a little bit about what those trends look like and maybe if you've had the opportunity to sort of.
Speaker Change: Yes, the other platforms verticals come aboard the little more aggressively than others.
Speaker Change: Yes.
Speaker Change: Yes.
Speaker Change: Our retention continues to be a.
Speaker Change:
Speaker Change: Above 90%, which is.
Speaker Change: Really our bogie that's our target.
Speaker Change: For the 10% of the clients that run off.
Gary Kramer: The lion's share of them.
Speaker Change: The lion's share of them.
Gary Kramer: https://www.barrett.com call it a success factor if they sell or if they retire or something like that. That's just kind of the nature of it. I would say that we've seen that increase some, as times got a little harder, as you think of just the economy, right? The stimulus money has run out. have to stand on their own. And some of the funding has been propping it up. We're seeing a higher closure or sale rate now. It's nothing that's given us any pause or concern, it's just our retention.
Speaker Change: Is because they go out of business or M&A.
Speaker Change: That's over half of clients that leave us are in that bucket.
Speaker Change: And that's really.
Speaker Change: Call. It a success factor if they sell or if they retire or something like that I mean, it's.
Speaker Change: That's just kind of the nature of the business.
Speaker Change: We can say that we've seen that increase some as time has gone a little harder as you think of.
Speaker Change: If you think of just the economy right. This stimulus money has run out of the businesses have to stand on their own and some of the right funding has been propping it up and we're seeing.
Speaker Change: We're seeing a higher closure or sale right now its nothing that gives us any cause of concern. Its just our retention is is really strong in spite of that right. So we're really we feel really good about our retention on that metric and then the other pieces are you know we're not perfect. Sometimes we lose business, we don't want to lose.
Gary Kramer: Marc Riddick. You know, the other pieces are, you know, we're not perfect. Sometimes we we lose business. We don't want to or the clients have to go somewhere else. just in general, you know, our... really. Intertwined with the operations of our clients to the point of we are an extension of their business.
Speaker Change: Or the clients have to go somewhere else because of.
Speaker Change: Certain requirements, but.
Speaker Change: Just in general.
Speaker Change: Our teams in the field.
Speaker Change: Really get into.
Speaker Change: Intertwined with the operations of our clients to the point of we are an extension of their business and as an extension of their business.
Unknown Attendee: Unknown Speaker . . stick around with us longer.
Speaker Change: They tend to stick around with us longer because of that.
Unknown Attendee: Great. Thank you. Very, very encouraging quarter.
Speaker Change: Great. Thank you very very encouraging quarter. Thank you Jim.
Unknown Attendee: Thank you, Jim.
Jim: Thank you.
Gary Kramer: Ladies and gentlemen, this concludes our question and answer session. I would now like to turn the call back over to Mr. Kramer for his closing remarks. just want to thank all the BVSI professionals for a great quarter. Thank everybody for the support. Appreciate it. Thank you.
Speaker Change: Ladies and gentlemen, this concludes our question and answer session.
Speaker Change: I would now like to turn the call back over to Mr. Kramer for his closing remarks.
Speaker Change: I just want to thank all the BBSI professionals for a great quarter. Thank you everybody for the support I appreciate it.
Speaker Change: Thank you ladies and gentlemen, this concludes our call. Thank you for your participation you may now disconnect your lines.
Unknown Attendee: Ladies and gentlemen, this concludes our call. Thank you for your participation. You may now disconnect your lines.
Speaker Change: Okay.
Speaker Change: Okay.
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Speaker Change: Yes.
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