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 first quarter, ended March 31st, 2021. 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 quarter 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. I would like to remind everyone that this call will be available for replay through June 5th, 2021, starting at 8 p.m. Eastern time 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 would like to turn the call over to the President and Chief Executive Officer of BBSI, Mr. Gary Kramer. Sir, please go ahead.

Thank you, Hillary. Good afternoon, everyone, and thank you for joining the call. We had a really good start to the year with our results exceeding most of our internal and external metrics. We saw a continuation of the positive trends that we experienced in the back half of the fourth quarter extend into 2021, and we expect these trends to further accelerate as we emerge from a COVID economy. During the quarter, our gross billings increased 2% over the prior year's quarter and exceeded our expectations. It is important to note that this quarter had one less business day, and we are comparing against the prior year quarter, which experienced far less pandemic-related disruptions. Our average worksite employees were down by 6 percent over the prior year quarter and down 3 percent sequentially from Q4. We historically have a sequential decrease in Q1 from Q4, as some of our industries support the holiday season and the volumes don't repeat into the new year. For example, Q1 of 2020 was down 3%, and Q1 of 2019 was down 2% sequentially. We are on plan for our WorkSite employee stack and net new client counts. Regarding the client counts, we saw continued softness of new client ads, which was offset by higher client retention. In previous earnings calls, we stated that our referral partners and business owners went into their bunkers at the onset of the pandemic. We continue to see a gradual recovery, and in the first quarter, we experienced our best quarter for client ads since the pandemic started, with gross ads of 293 and net ads of 146. Our sales conversion levels continue to be consistent with pre-COVID metrics. We are seeing more deal flow and more successes, but we are still not at the pre-pandemic levels. We are optimistic regarding the remainder of the year. Our deal flow in April was better than any month since the pandemic occurred, and we are seeing more enthusiasm in the market as economies reopen. Our gross margin as a percentage of gross billings exceeded the prior year quarter and benefited from continued favorable development on workers' compensation as well as affirming of workers' compensation pricing. Our branch footprint remains unchanged with 56 total branches, and the stratification is as follows. Twenty mature branches with run rates in excess of $100 million. Twenty-one emerging branches running between $30 and $100 million. Fifteen branches we consider developing with run rates of up to $30 million. Our business units totaled 103 and decreased from the prior quarter as we migrate into our revised structure of the 16-member business unit, which allows us to service more clients with less management employees and increases our return on management payroll. Next, I'm going to provide some operational updates and updates on other initiatives. In the quarter, we demonstrated our value proposition by continuing to help small business owners navigate these challenging times. including by helping our clients process more than $30 million in employee retention credits. We continue to invest during the pandemic, and we are seeing the fruits of our labor. We released the third major milestone for MyBVSI in the quarter. This release completed the build of our portal and included upgraded electronic onboarding, improved reporting, as well as other enhancements. Our clients are appreciative of the investment, and the feedback is overwhelmingly positive thus far. We are packaging our new technology with our nationwide offering, and we continue to see larger opportunities. For example, in the quarter, we onboarded a client with a $35 million annual payroll with operations in multiple states. The client joined us for our core offerings with an emphasis on our expertise in payroll and human resources, but without the technology investments we have made, it is unlikely that we would have onboarded this client. In addition, we previously mentioned that we formed a dedicated sales and marketing team that developed a longer-term plan that leverages our refreshed company website that launched in Q4. The new marketing plan better reflects the best of BVSI value proposition and is designed with the intent to better tell our story, ultimately leading us to attract additional business. We are now embarking on the next step of the plan, which is to increase the top of the funnel by focusing on lead generation via an omnichannel digital campaign where we target both clients and new referral partners. This is launching in Q2, so it is early days, but we are optimistic that this will yield both short- and long-term results for the organization. In summary, I'm encouraged by our excellent client retention. We are in the people business, and people have never been more relevant to the business owner than they are today. Packaging our knowledge and expertise along with our new technology platform and the ability to transact nationally, strategically positions us better in the market with our referral partners. Our clients are more optimistic today than we have seen them since the pandemic began, and my optimism is elevated as well. As we look toward the remainder of the year, I am encouraged by the results we achieved in Q1 and the increase in activity that we were seeing early in Q2. We are executing to our strategic initiatives, and we are realizing positive results and seeing future positive trends, which resulted in our increased outlook for the remainder of the year. Now I'm going to turn the call over to Anthony for his prepared remarks.

Thanks, Gary, and hello, everyone. I am pleased to report that our Q1 results were stronger than expected and showed positive year-over-year billings growth. PPEO growth billings increased 2% over the prior year quarter to $1.47 billion. Staffing revenues declined 3% over the prior year to $24.6 million. PPEO growth billings growth by region versus the prior year first quarter were as follows. Mountain states grew 26%. Northern California grew 7%. Pacific Northwest grew 5%. East Coast grew 4%. and Southern California declined by 5%. As noted in previous quarters, Southern California continues to be the region most impacted by COVID-19-related declines in our clients' business volumes. The overall increase in PEO gross billings for the company was attributable to higher average billings per WSE. The average number of WSEs in the quarter decreased 6% year over year, which was in line with our forecast given the comparable quarter last year, was not materially impacted by the COVID-19 pandemic. Workers' compensation expense continues to trend favorably and included an actuarially determined reduction of prior year estimated liabilities of $1.2 million in the first quarter. Our overall workers' compensation claims performance remains favorable and frequency continues to improve. In the quarter, we saw trailing 12-month relative frequency of claims as a percentage of payroll decreased 3% compared to the first quarter of 2020 and decreased 20% compared to the first quarter of 2019. Consistent with 2020, we continue to expect that COVID-19 claims will not materially increase our overall workers' compensation expense. We have discussed for several quarters that our pricing has faced increasing pressure from a competitive workers' compensation market, particularly in California. These cyclical market forces have continued to put pressure on the rates that we're able to charge our clients, but we've also communicated that we believe the workers' compensation pricing is at or near a low point, and we continue to expect that overall rates should continue to trend flat or increase in 2021. We are monitoring rates closely on renewal, And for April 2021 renewals, rates are generally either up or flat over the prior year. Looking at operating expenses, SG&A in the quarter was $5 million higher than the prior year quarter, primarily due to one-time cost savings in the prior year, as well as planned increases in IT investments in the current year. Our investment portfolios earned $1.8 million in the first quarter, compared to $3 million in the prior year. We expect that Q1 will be the low point for investment income in the year as our investment balances continue to increase over time and as rates rise from their historical lows. Our investments continue to be managed conservatively and have an average duration of 3.5 years, average quality of investment at AA, and average book yield of 1.7%. Turning to the balance sheet, we had $143 million of unrestricted cash investments at March 31st, compared to $170 million at December 31st. The decrease was primarily due to the timing of payroll tax payments and year-end employee profit sharing. We continue to be debt-free at quarter-end, except for the $4 million mortgage on our corporate headquarters. As part of our ongoing effort to optimize investment income and interest expense, we reached an agreement in April with Chubb to replace the $63.7 million letter of credit with other collateral assets and cancel the letter of credit in its entirety. As part of this transaction, Wells Fargo released $38.7 million of collateral held in support of the letter of credit, and we transferred those funds along with an additional $25 million to the Chubb Trust accounts to satisfy the collateral obligations. These moves are expected to benefit investment income and provide interest expense savings going forward. We remain committed to our capital allocation strategy and return capital to shareholders in the form of $2.3 million in dividends and $3.4 million of repurchased stock in the quarter. At quarter end, there's approximately $39 million remaining on the board's approved $2 million share repurchase plan. Turning to the outlook for the year, given the stronger than expected results for the quarter and more favorable expectations going forward, we now expect growth billings, to increase between 5 and 7 percent, up from 2 to 5 percent previously, and we expect average WSEs to increase between 2 and 4 percent, up from 1 to 3 percent previously. We expect gross margin as a percentage of gross billings to remain between 2.9 percent and 3.1 percent, and we expect our effective annual tax rate to remain between 21 and 23 percent. I will now turn the call back to Gary for closing remarks.