Barrett Business Services, Inc.

Good day, everyone, and thank you for participating in today's conference call to discuss BDSI's financial results for the third quarter ended September 30, 2020. Joining us are BDSI's President and CEO, Mr. Gary Kramer, and the company's 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's safe harbor statement within the meaning of the Private Securities Litigation Reform Act of 1995. The statement provides important cautions regarding forward-looking statements. The company's remarks during 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. Action results may differ materially from those implied by these forward-looking statements. Please refer to the company's recent earnings release and to the company's quarterly and annual reports. File with the Securities and Exchange Commission for more information about the risks and uncertainties that could cause action results to differ. I would like to remind everyone that this call will be available for replay through December 4, 2020, starting at 3 p.m. Eastern Time this afternoon. 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.mybbfi.com. Now, I would like to turn the call over to the President and Chief Executive Officer of BBFI, Mr. Gary Kramer. Sir, please go ahead.

are performing around the country with our clients as we traverse this rapidly changing economic landscape together. Bringing the best of BVSI to market is a difference maker to our clients, and we are experiencing better client retention, lower than expected client failure rate, and better than expected revenue. I want to again thank everyone in the BVSI family, many of whom are listening to this call for their exceptional response to the crisis. I would also like to thank all of our clients for entrusting DBSI. Your entrepreneurial spirit is adaptable, resilient, and refreshing. Regarding the company's financial strength, our balance sheet is in an excellent position as our unrestricted cash investments grew 8% versus Q2 of 20. Anthony will go into more detail regarding our capital and use of capital in his prepared remarks, but I would like to state that we are operating from a position of financial strength. Thank you. Thank you. Thank you. We navigated a challenging second quarter where our revenue were down 14% in April and then down 3% in May and June. We forecasted that Q3 would behave similar to May and June, and we are pleased that we finished slightly better than forecast. As previously discussed, we do not have clients in the most distressed industries such as airlines and cruises, and we have low concentration in other industries such as retail, restaurants, gyms, and salons. Our forecasting by industry was relatively in line with our actual results for the quarter. Overall, we are extremely fortunate that our market approach of working with all clients, rather than focusing on industry verticals, has helped us avoid concentration risk. Regarding our client count, we added 253 new PEO clients. We have previously mentioned that we saw referral partners and business owners go into their bunkers in reaction to COVID. Each month, we are seeing more and more leads, and the market is adapting to operating in a COVID world. Our sales conversion ratio continues to be consistent with pre-COVID metrics, but simply put, there is just not as much business transacting. Our Q3 leads were sequentially 30% better than Q2, but still behind Q3 of 2019. Client acquisition in a COVID world is our number one priority. We are not sitting idly by and waiting for the business to come to us. We have various initiatives that I will speak to shortly about going and getting to business. We experienced attrition of 139 clients, which was a better retention ratio than Q2 of 20 and of Q3 of 19. This shows that during a crisis like COVID, our product was needed more than ever. Regarding client attrition, we lost three due to accounts receivable, 8 due to risk profile, 5 businesses sold, 14 businesses closed, 36 businesses closed due to COVID, and 73 left due to pricing, competition, or companies that moved away from the outsource model. This represents a build in the quarter of 114 net new clients. Our staffing business rebounded slightly and was down 16% in the quarter compared to being down 26% in Q2. Results vary by geography, but in the aggregate for the quarter, we had the orders but not the supply as the majority of individuals could earn more money on unemployment stimulus versus working wages. We are seeing this business pick up some in October as the stimulus has expired. Regarding our branch footprint, at the end of September, we had 59 total branches. We continue to be mindful of operating efficiencies and consolidated the Dalles, Oregon branch into the Portland, Oregon branch. This decision was made with the intention of continuing to grow revenue while servicing our clients, but doing so in a more cost-efficient manner. Our mountain regions have been exceeding our expectations, and we made additional investments opening two new branches, Albuquerque, New Mexico, and Glendale, Arizona. as discussed last quarter, the quality of our products will be the same, but how we approach these markets will vary slightly. The new area managers will approach their market focused on sales and pipeline development. We will not commit to commercial real estate, but will utilize alternative lease options to keep costs down. Support of these branches will be helped by adjacent markets or a corporate until they reach a critical mass, and then we will invest in local teams to support the business. Our branch stratification of the 59 total branches is as follows. 19 mature branches with run rates in excess of 100 million. 20 emerging branches running between 30 and 100 million. 20 branches we considered developing with run rates up to 30 million. Our business unit teams totaled 114. Regarding other operational updates, our SG&A was down significantly in the quarter compared to prior year. This is the result of the cost-cutting, cost deferrals, and restructuring that took place throughout the year. I am pleased to say that we no longer have any employees on furlough. As our revenue increased, our folks returned to grow and support our business. Next, I'm going to provide an update on our other initiatives and strategies. In June, we announced the successful launch of MyDVSI for all new clients. Client feedback thus far has been overwhelmingly positive as they appreciate the ease, simplicity, and individualization of the system. All new clients since June are on the new system, and as of last weekend, we have converted 82% of our existing clients. We are on pace to be fully transitioned before the end of the year. We are also pleased to announce that we are now able to offer our PEO services nationwide. We have the systems, licenses, and operations in place and are starting to sell this value. We were able to expand relationships with 15 existing clients and successfully brought on 11 new clients that utilized this offering. It is still early days. We are optimistic that we will see more and larger opportunities as a result of this offering. Regarding larger opportunities, we can package our new technology with the nationwide offerings. and we are asking for larger clients. In the quarter, our percentage of larger leads were up 14% over Q3 of 19. We know that we need to be adaptable and are not sitting back and waiting for the business to come to us. We have been actively pulling our client referral lever and almost 10% of our ads in the quarter were from client referrals. In addition, we mentioned previously that we formed a dedicated sales and marketing team. The team has been working on various strategies and initiatives and I am pleased to announce that we will have a new company website that will launch later this month that will better reflect the best of BVSI value proposition. It is being designed with the intent to better tell our story but more importantly to attract additional business. We have a long-term marketing and sales plan that hinges on our website refresh and we will have more to discuss in the upcoming quarters. When we go to market, we are offering the best of BBSI. We have various products and services consisting of strategic consulting, human resources, information technology, insurance, risk management, retirement services, staffing and recruiting. When we meet with a potential client, they may join BBSI because they have a certain pain point today, but they will stay because we deliver our whole suite of products flawlessly. People have been and continue to be our product, which has never been more relevant to the business owner than it is today. Packaging their knowledge and expertise with our new technology platform and the ability to transact nationally strategically positions us to go after larger, more tech-savvy clients and increases our total available market. Now I'm going to turn the call over to Anthony for his prepared remarks.

Thanks, Gary. Hello, everyone. Our quarterly results were strong despite the continued economic impact of the COVID-19 pandemic. Net income for the quarter was $18.5 million compared to $25 million in Q3-19, with a reduction due to lower billing volume, lower favorable development on claims incurred in prior years, and a decrease in investment income, partially offset by reductions in operating expenses in the period. Gross billings declined 3% to $1.5 billion. PEO gross billings declined 2% to $1.48 billion, and staffing revenues declined 16% to $28.5 million. Net revenues of $227.5 million were down 8% from Q3 2019. As Gary mentioned, these results were better than management's expectations for the quarter. PEO gross billings growth by region versus the prior year quarter were as follows. Mountain states grew 17%. East Coast grew 6%. Northern California and the Pacific Northwest were both flat and Southern California declined by 8%. Same customer sales for the period were down 1.3% from Q3 2019 due to the ongoing economic downturn. This decrease was in line with expectations and was attributable to a decrease in headcount partially offset by an increase in average payroll rates over Q3 2019. Average hours worked in the period were generally consistent with the prior year. Workers' compensation expense as a percent of gross billings was 3.4% this quarter, which is below our expected range of 3.8% to 4.0%. This decline is primarily attributable to actuarially determined reductions of prior year estimated liabilities of $3 million in the third quarter. Our overall workers' compensation claims frequency continues to trend favorably. and the quarter we saw trailing 12 months relative frequency of claims as a percentage of payroll decreased 15% compared to the third quarter of 19. We continue to monitor the impact that the COVID-19 pandemic may have on our workers' compensation program. This includes monitoring updates to state regulations in response to COVID-19 and changes to the presumption of coverage. The only significant update to report this quarter is the passage of legislation in California in September that codified COVID-19 coverage in a way that is generally more restrictive and therefore more favorable than the governor's executive order that was issued in May and has since expired. The new legislation will apply to most employers in the state that have a COVID-19 outbreak. An outbreak is defined as having positive COVID-19 tests from either four employees or 4% of the workforce, whichever is greater, and the cases must occur within a 14-day window. We recorded previously that we've had minimal COVID-19 claims exposure and minimal claims reported through Q2, and with the more favorable terms of the new California legislation, we continue to believe that COVID-19 claims will not materially increase our overall workers' compensation costs. However, we continue to monitor the situation carefully, and we have contemplated COVID-19 uncertainty when selecting our accrual rates for our workers' compensation reserves. We have discussed previously that the broader market for workers' compensation insurance has become increasingly competitive, particularly in California, where most carriers have instituted price decreases over the last two years. While we do not compete primarily on price and our offering is more comprehensive than traditional insurance, We continue to adjust our pricing and marketing strategies to remain competitive and attract new types of customers. One of the adjustments we made was to scale back our safety incentive program in exchange for lower service fees. This change is particularly attractive in the current environment as it allows customers to pay less money up front and allows DBSI to better position our pricing relative to competitors. This change is expected to be margin neutral but you will see our safety incentive costs and liabilities decrease with a corresponding reduction in gross billing rates. S&A in the quarter was 35.6 million compared to 41.4 million in the prior year quarter, representing a decline of 14%. As we described in our previous earnings calls, cost savings measures were implemented in response to COVID-19, and while we continue to be cautious in our spending, SG&A levels will continue to increase modestly as business volume grows. We also incur a larger share of our variable employee compensation, including profit share and other incentive payments, in quarters three and four. Our investment portfolios earned $1.7 million in the third quarter, compared to $3 million in the prior year. The decrease in investment income is directly attributable to the lower interest rate environment compared to the prior year, and is consistent with our expectations for the period. Our investments continue to be managed conservatively with an average duration of 1.6 and average quality of investment at AA. Due primarily to our variable rate holdings, our average book yield has decreased to 1.5% from 2.3% at year end. Turning to the balance sheet, we had $148 million of unrestricted cash investments at September 30th compared to $130 million at June 30th. We continue to be debt-free at quarter end with the exception of our $4 million mortgage on our corporate headquarters. We announced in Q1 that we increased our line of credit with Wells Fargo as a source of additional financial flexibility given the current economic uncertainty. Our agreement with Wells Fargo provided the option to revert to a lower credit line amount if we wished, and due to the available unrestricted cash investments on hand and the general resilience of our operations, We have elected to lower our credit line back to $33 million at September 30th, which also included corresponding fee reductions. As our cash and investment balances increase, management and the Board of Directors have remained diligent in our approach to capital allocation. We have discussed previously the importance of establishing a working capital reserve sufficient to weather unforeseen circumstances, and the COVID-19 pandemic was a validation of that strategy. We believe we now have unrestricted cash and investment balances above the levels necessary for these reserves, and we will continue to execute on our capital allocation philosophy. This philosophy has four priorities. First, our investments in our company to take advantage of the significant market opportunities available to us. The PEO industry is widely underpenetrated, and BBSI is well positioned to serve the addressable markets. We're excited about continuing our journey of growth, in part by enhancing our products and evolving our strategies. The launch and continued enhancement of the MyBBSI portal is an important example of that type of investment. Second, Gary has previously mentioned that we are now pursuing strategic inorganic growth opportunities, where we believe we can launch into new geographies more effectively through M&A than we can through greenfield branch openings. We continue to actively evaluate potential targets but are maintaining high standards as we consider who we might bring into the BBSI family. It is important that our people, product, and vision are all aligned before we would move forward. Third, the Board reinstated our stock buyback program and we repurchased approximately 57,000 shares at an average price of $53.61 per share during the trading window. We will continue to be an opportunistic buyer of our stock as a preferred method of returning capital to shareholders. Fourth, we remain committed to our quarterly dividend, which the Board just reaffirmed at 30 cents per share. We will continue to evaluate and update our capital plans regularly to ensure that we are responsive to our environment and new opportunities as they arrive. Turning to outlook for the year, with the favorable results of Q3, We now expect full-year diluted earnings per share to be $4.10, up from $3.70 in our prior outlook. We now expect gross workers' compensation expense as a percentage of gross billing to range between 3.7% and 3.9% versus 3.8% and 4% previously. And we continue to expect an effective tax rate of approximately 21%. As with our past forecast, these estimates do not include significant economic deterioration for widespread shelter-in-place orders in the remainder of the year. I will now turn the call back to Gary for closing remarks.