Barrett Business Services, Inc.

Good afternoon, everyone, and thank you for participating in today's conference call to discuss BBSI's financial results for the fourth quarter and full year ended December 31st, 2020. Joining us today are BBSI's president and CEO, Mr. Gary Kramer, and the company's CFO, Mr. Anthony Harris. Following their remarks, we'll 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. Actual 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 Follow the Securities and Exchange Commission for more information about the risks and uncertainties that could cause actual results to differ. I would like to remind everyone that this call will be available for replay through April 3rd, 2021, starting at 8 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.bbsi.com. Now I'd like to turn the call over to 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. 2020 proved to be a challenging year for the world and the economy. I am extremely proud of the work that our business teams performed throughout the year. We quickly embraced working remotely, and our operations did not miss a beat as we assisted our clients with the rapidly changing economic and and Regulatory Landscape. Our client retention rate was the best we've experienced in years, and our client failure rate was better than expected. I like to attribute that to the work we do with our clients. This ultimately led to our gross revenue and profit being better than we forecasted. We also executed on various long-term strategic initiatives, including securing a nationwide PEO license, standing up MyDDSI, our state-of-the-art technology portal, and DeRisking the company with an alternative insurance structure. I want to again thank everyone in the BBSI family for their exceptional efforts. Plainly stated, I am proud of the actions everyone at BBSI contributed and of our financial results. Before I step into the fourth quarter operations and the outlook for 2021, I'd like to take some time to discuss metrics that the executive team utilizes to measure and manage the operations. First, We grow by adding additional clients, maintaining good client retention, and by our clients themselves growing. Our clients grow by adding more employees, which we refer to as worksite employees, by their employees working more hours, and with wage inflation. Worksite employees is a key driver of our clients' businesses and are the closest metric that correlates with gross billings. Going forward, we will be reporting on and providing guidance for worksite employees and average worksite employee growth. We will no longer be providing information regarding client counts, as this may not truly reflect gross billings. The purest example of why this is important is to take a retrospective look at 2020. We started the year with 7,200 clients and 115,000 worksite employees. We finished the year with an additional 398 net new clients, but our worksite employees decreased to 109,000 or 5% as a result of the pandemic. The decrease in worksite employees for the year translates better to our gross billings decrease of 1%. Regarding the fourth quarter operations, we exceeded our expectations in virtually every financial metric in the quarter. Our gross billings increased 0.6% over the prior year quarter and benefited from greater than expected bonus payments and from strong revenue per worksite employee. Our worksite employees grew an average of 1.8% during the quarter sequentially. Regarding our new business pipeline, we added 271 new PEO clients. We have previously mentioned that we saw referral partners and business owners go into their bunker in reaction to COVID. Each month we were seeing more and more leads, and October was our busiest month since March. However, we saw our leads retrace in November and December as the shelter-in-place orders resumed in California. Our sales conversion ratio continues to be consistent with pre-COVID metrics, but simply put, there's just not as much business transacting. Our staffing businesses rebounded slightly and grew sequentially over Q3. Results vary by geography, but in the aggregate we are seeing our staffing business pick up and are forecasting growth in staffing in 2021. Regarding other operational updates, we have been previously communicating the softness in the workers' compensation market and that we took various steps and actions to navigate the cycle. We enacted cost reduction measures, portfolio management, reduced the safety incentive, and initiated profitability management. Regarding profitability management, our branches and underwriting teams thoroughly triaged the book and we priced out 124 clients in the quarter because the price to risk was not adequate or the price was not commensurate to the work effort to support the worksite employees. Regarding client attrition, we lost three doodle accounts receivable, 14 businesses sold, 41 businesses closed, including 22 due to COVID, 99 left due to pricing competition or companies that moved away from the outsource model, and 124 for profitability management. To summarize our build for the quarter, we added 271 clients, initiated intentional runoff of 127, and unintentional runoff of 154, for a net reduction of 10 clients. However, our average worksite employee stack grew 1.8% sequentially, and we finished the quarter with a stronger WSE stack than what we started with. Regarding our branch footprint, at year end, we had 56 total branches. We continue to be mindful of operating efficiencies and consolidated Moses Lake into Yakima, Washington, the DALs into Portland, Oregon, and Albany into Salem, Oregon. The decision was made with the intention of continuing to grow revenue while servicing our clients, but doing so in a more cost-effective manner. Our branch stratification of the 56 total branches is as follows. Twenty mature branches with run rates in excess of $100 million. Twenty emerging branches running between $30 and $100 million. 16 branches we consider developing with run rates of up to $30 million. Our business unit teams totaled 110. Next, I'm going to provide an update on other initiatives and strategies. In February, we released the third major milestone for MyBBSI. This release completed the build of our portal and included upgraded electronic onboarding, improved reporting, as well as other enhancements. Our big build is now complete. I am proud of our product, and I am proud of our team that brought it to market. We will continue to invest in enhancements in MyBBSI, but at a slower pace than in 2020. Regarding our nationwide offering, in the quarter we expanded relationships with 37 existing clients and successfully brought on nine new clients that utilized this offering. When we package our new technology with our nationwide offering, We are able to pursue larger opportunities. Regarding larger clients, we added 25% more clients in the quarter with a payroll greater than $1 million versus Q3. In 2020, we tested out a new business team structure with an eye to continue to provide the best of BVSI with a more targeted and cost-effective manner. Historically, our business teams have been structured in a team of four. which includes a business partner, a human resource manager, a risk and safety consultant, and a payroll analyst. We were able to modify our business teams to a six-member team consisting of a business partner, three human resource managers, a risk and safety consultant, and a payroll analyst. This model allows us to service more clients with less management employees and increases our return on management payroll from 5X up to 8X when at capacity. We are applying working remote practices plus efficiencies that we gained with MyBBSI and we will grow into the new model through 2021. 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 BVSI because they have a certain pain point today, but they will stay because we deliver our whole suite of products flawlessly. Now I'm going to turn the call over to Anthony for his prepared remarks.

Thanks, Gary. Hello, everyone. I am pleased to report that our Q4 results and our full year 2020 results were both stronger than expected despite the continued economic impacts of the COVID-19 pandemic. Looking at the full year first, Our gross billings declined only 1% for the year to $5.9 billion, while diluted EPS was $4.39. The COVID-19 pandemic presented significant uncertainty and operational disruption throughout most of the year, but we were consistently impressed by the resilience of our small business customers and proud of the impact our teams had in working with them. Looking at our Q4 numbers, net income for the quarter was $7.2 million, compared to $11.7 million in Q4-19, with the reduction due primarily to lower favorable development on claims incurred in prior years and a decrease in investment income. PEO growth billings increased 1% over prior year quarter to $1.57 billion. The increase in PEO growth billings was primarily attributable to higher average payroll per WSE, including higher than expected client bonuses at year end. Staffing revenues declined 13% over the prior year to $28.9 million, but did experience modest sequential growth from Q3. PEO growth buildings growth by region versus the prior year fourth quarter were as follows. Mountain States grew 23%. East Coast grew 5%. Northern California grew 4%. Pacific Northwest grew 2%. and Southern California declined by 5%. For the year, all regions experienced positive growth with the exception of Southern California, where market and economic conditions affected customers to a greater extent than in other regions. Same customer sales for the period were up 1.4% from Q4 2019 due primarily to the increase in bonuses paid. Workers' compensation expense as a percent of gross billings was 3.7% in the fourth quarter, which is at the low end of our expected range of 3.7% to 3.9%. The continued decline is primarily attributable to actuarially determined reductions of prior year estimated liabilities of $1.2 million in the fourth quarter. Our overall workers' compensation claims frequency continues to trend favorably. In the quarter, we saw trailing 12-month relative frequency of claims as a percentage of payroll decrease 11% compared to the fourth quarter of 2019. We reported previously we've had minimal COVID-19 claims exposure and minimal claims reported, and we continue to believe that COVID-19 claims will not materially increase our overall workers' compensation costs. However, we continue to monitor the situation, including the broader economic conditions and potential effects on our workers' compensation program. We've discussed for several quarters now that our pricing has faced increased pressure from a competitive workers' compensation market, particularly in California. These cyclical market forces have continued to put pressure on the rates that we are able to charge our clients, and we've responded by implementing several of the strategies that Gary mentioned earlier, including cost reductions and portfolio and profitability management initiatives. We believe that workers' compensation pricing is at or near its low point, and that overall, rates should now trend flat or increase in 2021. Looking at operating expenses, SG&A in the quarter was effectively flat from the prior year at $41 million. Cost savings in the quarter, including from structural efficiencies implemented in response to COVID-19, offset planned cost increases associated with the maintenance of the MyBEFI portal. For the year, SG&A costs were down $12 million over prior year and were approximately $22 million lower than our original plan for 2020. As we implemented several cost savings and efficiency strategies, including changes to our business team model, we finished the year with management employee headcount approximately 10% lower than at the beginning of the year. While maintaining our focus on efficiency, our operating expenses will increase in 2021, to impart to a full year of operation and amortization of the MyBDSI portal versus only a half year in 2020, and continued investment in our operations and growth strategies, including planned new branch openings. Overall, 2021 SG&A costs are still expected to remain slightly below 2019 levels and well below the trend from our pre-COVID plan and cost structure. Our investment portfolios earned $1.6 million in the fourth quarter compared to $3.2 million in the prior year. The decrease in investment income is directly attributable to the low 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 1.4 and average quality of investment at AA. Due primarily to our variable rate holdings, our average book yield has decreased to 1.3% from 2.3% at December 2019. Turning to the balance sheet, we had $170 million of unrestricted cash investments at December 31st compared to $148 million at September 30th. We continue to be debt-free at quarter end except for our $4 million mortgage on our corporate headquarters. We are proud of our results for the year. We faced significant uncertainty and planned for a wide variety of scenarios, which resulted in some tough decisions. But we always remained focused on our customers and delivering value, and we continued to improve our operations and execute on our strategy as we invested in new sales and marketing initiatives, continued enhancements to our MyBDSI portal, and opened new branches. We also returned capital to shareholders in the form of $9 million in dividends and $8 million of repurchased stock in the year.