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 second quarter ended June 30th, 2021. Joining us today are BBSI's president and CEO, Mr. Gary Kramer, and the company's CFO, Mr. Anthony Harris. Following the 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 those forward-looking statements. Please refer to the company's recent earnings releases 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. I'd like to remind everyone that this call will be available for replay through September 4, 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, www.bbsi.com. Now I would like to turn the call over to President and Chief Executive Officer of BBSI, Mr. Gary Kramer. Sir, please go ahead.

Thank you, Kevin. Good afternoon, everyone, and thank you for joining the call. We had an exceptional second quarter, both financially and operationally. The positive momentum we experienced in the first quarter accelerated in the second quarter as the economy reopened. Our overall performance exceeded our plan, leading us again to raise our full-year outlook. During the quarter, our gross billings increased 17% over the prior year's quarter and exceeded our expectations. Our average worksite employees were up 10% over the prior year quarter and up 6% sequentially from Q1. Our growth in worksite employees is a combination of our clients' hiring as well as net new business, and we are on plan for our worksite employee stack. Our staffing business rebounded, increasing 20% over the prior year quarter. We could have grown more, but it is challenging to fill orders with a tight labor market. At the end of Q2, we had 1,300 open job recs nationally, with approximately 700 open in California. The tightness of the labor market is the number one complaint we hear from our PEO clients today. On the positive note, we have seen an uptick in applicants and placements about three to four weeks after the government stimulus is reduced or expired. Our gross margin as 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. Before moving to the operational updates, I'd like to spend some time on a strategic milestone for the organization. We announced on July 6th that we entered into two material workers' compensation insurance transactions, which de-risked our business model and result in better financial predictability. These transactions were a culmination of many years of hard work and were only possible due to our disciplined underwriting coupled with the quality of our insurance operations. Anthony will go into more detail in his prepared remarks regarding the terms and structures of the transactions, but I'd like to make a couple of points on their significance. These transactions are structured in a manner that greatly limit any potential downside of our insurance program, but we can still share in the upside of our disciplined underwriting. In essence, we are passing off the risk to the traditional insurance market, but we can share in the reward as we execute with the precision we are accustomed to. We believe our value will be maximized due to the perceived insurance risk under the old model and that these transactions materially reduce or eliminate that insurance risk. Moving to the branch operational updates and other initiatives, we continue to be mindful of operating efficiencies and consolidated Vacaville into Concord, California and Twin Falls into Idaho Falls. 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. The consolidation decreases our branch footprint from 56 to 54 total branches. And the stratification of our 54 branches as of Q2 is as follows. 21 mature branches with run rates in excess of 100 million, 21 emerging branches running between 100 and 30 million, 12 branches we consider developing with run rates up to 30 million, Our business units totaled 101 and decreased from the prior year 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. In addition, we continue pursuing our strategy of opening new branches, and we will open three new branches in Q3 of 21, Pittsburgh, Pennsylvania, Nashville, Tennessee, and Raleigh, North Carolina. Next, I'm going to provide some updates on operational initiatives. We successfully completed the conversion of our existing clients over to our new MyBVSI platform. I would like to thank our various IT teams and the folks in the field that supported the migration and the client education. I'm very pleased with the platform, but more importantly, our clients are appreciative of the investment and the feedback continues to be positive. We continue to package our new technology with our nationwide offering, and we continue to see larger opportunities. In the quarter, we onboarded three clients in excess of $15 million annual payroll with operations in multiple states. These clients joined us for our core offering, but without the technology investment we have made, it is unlikely that we would have onboarded them. Regarding our client count, In previous earnings calls, we stated that our referral partners and business owners went into the bunker during the pandemic, and this resulted in lower sales leads. We continue to see a gradual recovery and saw more opportunities in Q2 than in Q1, but we are still behind pre-pandemic levels. Our client retention continues to be stronger than pre-pandemic levels and is partially offsetting the slowness at the top of the sales funnel. we previously mentioned that we are not going to sit idly by and wait for business to come to us during the pandemic and we have been investing in sales and marketing initiatives accordingly in the second quarter we executed on the next step of the plan which is to increase the top of the funnel by focusing on lead generation via an omni-channel digital campaign where we target both clients and new referral partners in 10 different markets It is still early days as we are only one to two months into this initiative depending upon the market, but I am excited about what we are seeing and would like to provide some statistics. We had about 7,500 unique emails opened. We had over 3,000 views of our information and the prospects were spending more time viewing pages than anticipated. We set up 65 meetings with interested prospects. We onboarded three clients thus far. This is expected given the duration of our sales cycle, which is typically 45 days. We have signed up 50 new referral partners. We are testing and refining our various sales initiative by market, measuring the return on investment, and will transport the most successful method to other markets. 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 and with our referral channels. We have exceeded our plan for the first half of the year, and I am optimistic about the back half and beyond. We are executing to our strategic initiatives, and we are realizing positive results and seeing future positive trends, which result 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 Q2 results continue to build on the momentum we reported last quarter with results that were once again stronger than expected. PEO growth billings increased 17 percent over the prior year quarter and 9 percent sequentially from Q1 to $1.58 billion. Staffing revenues increased 20 percent over the prior year to $24.7 million. PEO gross buildings growth by region versus the prior year's second quarter were as follows. Mountain states grew 36%, Northern California grew 24%, the Pacific Northwest grew 20%, East Coast grew 17%, and Southern California grew 8%. We've discussed for several quarters that we're seeing differences in performance by region, and particularly in Southern California, where we've seen a significant lag in our customers expanding their workforce. For example, when comparing between Northern California and Southern California, there is a 6% difference in the growth rate of WSCs in the year from existing clients. And Southern California remains the only region with negative year-to-date WSC growth through Q2 when compared to the prior year. Our average client wage has historically been lower in Southern California than Northern California, and we expect that Southern California is being impacted more than other regions by the effects of stimulus and other government programs and restrictions in place. Looking at our overall increase in PO gross billings for the company, the prior year's second quarter was the period most impacted by COVID, and as a result, our year-over-year billings growth was driven largely by higher average WSEs paid versus 2020, with the average number of WSEs in the quarter increasing 10% year-over-year. This is in line with our expectations overall, despite Southern California growing slower than expected. We also continue to see higher average billing per WSE, which is up 6% in Q2 over the prior year and continues to trend ahead of our expectations for the year. Workers' compensation expense continues to trend favorably and included an actuarially determined reduction of prior year estimated liabilities of $5.5 million in the second quarter. Included in this adjustment was a gain of approximately $1 million from the lost portfolio transfer that was effective in Q2. Our overall workers' compensation claims performance remains favorable. In the quarter, we saw trailing 12-month relative frequency of claims as a percentage of payroll increase modestly compared to the second quarter of 20, but frequency remains 11% lower than the second quarter of 2019. Consistent with 2020, we continue to expect that COVID-19 claims will not materially increase our overall workers' compensation expense. We are very pleased to report on the significant strides we've made in Q2 in de-risking our business model related to our workers' compensation program. First, we entered into a loss portfolio transfer, or LPT, to transfer approximately $53 million of claims liabilities from our balance sheet at June 30th. These claims were primarily from the 2018 calendar year. As a reminder, with the LPT entered into in 2020 and the LPT entered into this year, we have now effectively removed claim exposure for most claims incurred prior to 2019. The workers' compensation liabilities on our balance sheet therefore relate primarily to 2019, 2020, and the first half of 2021. What is even more transformative is our new insurance program that became effective July 1st. This new program greatly reduces the risk that BBSI will retain on a prospective basis. For clarity, we will now describe our workers' compensation coverage for clients as being under either our insured program or our self-insured programs. Approximately 82 percent of our workers' compensation exposure, including all California clients, are covered under our insured program. All claims incurred in these states after July 1 are now covered 100 percent by the insurance market with zero claim costs retained by BBSI. This is a significant change from our structure prior to July 1, which included $3 million of retention per occurrence. Our ability to move to this fully insured model is a testament to the effectiveness and favorable performance of our overall workers' compensation program. There is no incremental expense in moving from our high retention model to the new fully insured model. The premium that we now pay for this coverage is equal to the actuarially determined accrual rate that we have been recording for our retained losses. Although workers' comp expense will not change, there will be some impacts to our balance we will now no longer accrue workers' compensation liabilities for insured clients after July 1. Because of this, our workers' compensation liabilities will no longer grow, but will instead begin to decrease over time as the remaining historical claims are paid. Although BBSI has no claim exposure after July 1 on insured clients, our insurance agreements provide for a premium adjustment in future periods, depending on the overall performance of our portfolio of clients. If claims develop more favorably than expected, the premium required will go down with potential refunds of up to $20 million for the 12-month policy year. If claims develop adversely, we may be charged additional premium, but this additional premium is capped at $7.5 million. This structure allows BBSI to benefit from favorable claims trends like we have been but also provides the company and our shareholders with the security of a cap on workers' compensation expense if claims develop negatively. Our self-insured programs remain unchanged, which include our self-insured workers' compensation coverage in Oregon, Maryland, and Colorado, and BBSI employees in Washington, and coverage through our wholly owned insurance company, Ecole, in Arizona and Utah. These states comprise approximately 18% of our workers' compensation exposure, and we have retention limits of $1 million to $3 million per occurrence, depending on the state. We believe the regulatory structure and risk profile of these states warrants the greater level of retained risk in these locations, and we are able to recognize cost efficiencies through self-insurance. However, we will continue to evaluate that optimal tradeoff of risk and economics as we move forward. Turning to the pricing of our services and the fees we are able to charge, We have discussed for several quarters the increased pricing pressure related from the current workers' compensation market, particularly in California. While the workers' comp market remains soft overall, we are seeing rates firming. We are monitoring our billing rates closely on renewal, and for Q2, our billed margin is on average either up or flat over the prior year as expected. Looking at operating expenses, SG&A continues to trend on plan. Headcount levels remain below 2019, while current year increases in SG&A have resulted from increased IT expense and increased selling activities and initiatives. Our investment portfolios earned $2 million in the second quarter compared to 1.9 in the prior year. Our investments continue to be managed conservatively and have an average duration of 4.3 years, average quality of investment at AA, an average book yield of 1.8%. Going forward, our investment balances will begin to decline as our collateral funding requirements diminish under our new fully insured workers' comp program. Turning to the balance sheet, we had $110 million of unrestricted cash investments at June 30th compared to $143 million at March 31st. The decrease in unrestricted cash is primarily due to the cyclical timing of payroll tax payments in April, as well as an agreement reached in the quarter to replace an existing letter of credit with other collateral, which resulted in the transfer of $25 million of unrestricted cash into restricted trust accounts. Separately, due to the timing of payments related to the lost portfolio transfer in the quarter, approximately $13 million was transferred from restricted trust accounts back into unrestricted cash in July after quarter end. We continue to be debt-free except for our $4 million mortgage on our corporate headquarters. We remain committed to our capital allocation strategy and returning capital to shareholders in the form – and in the quarter, we return capital to shareholders in the form of $2.3 million in dividends and $3 million of repurchased stock in the quarter. At quarter end, there's approximately $35 million remaining on the board's approved $50 million share repurchase plan. Turning to the outlook for the year, given the stronger than expected results in the quarter, we now expect gross billings to increase between 6% and 8%, up from 5% to 7% previously. We expect average WSEs to increase between 2% and 4%, unchanged from the prior quarter. We expect gross margin as a percent of gross billings to be between 3.0% and 3.1%, up from 2.9% to 3.1%. And we expect our effective annual tax rate to be between 22 and 24%, increasing from 21 to 23% due primarily to our higher income levels. I will now turn the call back to Gary for closing remarks.

Thanks, Anthony. In conclusion, we had a great first half of the year as we executed our short and long-term strategies. We continue to always think of the clients first and to advocate for the success of the business owner. We have been working on the right things And I think we are in a great position for future growth. Now I'd like to turn the call over to the operator for questions.

Thank you. And I'll be conducting a question and answer session. If you'd like to be placed into question Q, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question Q. You may press star 2 if you'd like to move your question from the Q. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star 1. One moment, please, while we poll for questions. Our first question today is coming from Chris Moore from CGS Securities. Your line is now live.

Hey, good afternoon, guys. Maybe we could just start on the new workers' comp structure. So the tradeoff, as I understand it, is significantly different a less risky business model, and a bit less investment income. Is that correct?

Yep, that is correct. There's no incremental expense to the coverage. So the economic tradeoff here is that we're no longer holding onto those funds prior to paying the claims. We're just paying those premiums as we go. So there will be an incremental decrease in our investment income gradually as those investment funds go down.

And the premium adjustments or penalties, is that something that occurs on a quarterly basis? Is that an annual adjustment? How does that work?

So they'll reassess the performance at set milestones at multiple points in the future, but the first milestone won't be for several years. So what we will do in the meantime is continue all of our same underwriting procedures, all of our same actuarial analysis of the book, and we will monitor how those claims are performing. And currently we record an accrual for our claims based on our best estimate of ultimate cost, and essentially we'll continue to do that. So if those develop adversely and our best estimate that we will owe additional premium for that, we would accrue that in the period.

Got it. And maybe could you just explain a little bit further why the 18% is still self-insured. You talked about it a little bit. Maybe just go a little bit deeper there.

Sure. Chris, it's Kramer. On the self-insured side, you have a model that has less frictional cost to it because you're self-insured. And the economics of trying to do an insured program there may not be beneficial to the company. So When we do this, we look for the best price to risk we can get. I mean, this is really, if I think of it, this was really a testament to many years of hard work to be able to get this done, right? I've been here five years, and I've watched the company transform and grow up on the workers' comp side. And for years, we've felt that we didn't get a market multiple worthy of where we should be. because of the perceived risk of insurance. But now from an investor perspective, that perceived risk should really go away. And we look at this as we can focus on the growth and the core of growing our margin business.

That makes sense. Just last one for me, Kramer, you had mentioned firming or workers' comp rates early in your prepared remarks. Any specifics around that?

When we look at our renewal book for the second quarter, we were slightly positive as far as rate increase. Slightly positive is in a much better place than we've been in the market over the last four years as far as rates coming down and rate on rate. So for us to have the underwriting discipline to manage the portfolio to a flat rate was a very good outcome and and a lot of hard work for the folks in the field. I'll leave it there. Thanks, guys.

Thank you. Next question is coming from Jeff Martin from Roth Capital Partners. Your line is now live.

Thanks. Good afternoon, Gary and Anthony. Hope you're doing well. Wanted to ask a question on the workers' comp de-risking. You basically have a three-to-one upside-to-downside ratio there. I'm curious, with respect to prior year adjustments, you had roughly $6.5 million last year, $13.5 million the year before that. Would a similar recognition of a return of the premium to you be similar, would it be dollar for dollar with what you've seen in past years, or is there a different formula that's tied to that?

Yeah, it's set up dollar for dollar. So we set those, as we negotiated this arrangement, we set those levels strategically, the idea being that with $20 million of potential upside, we could comfortably absorb the favorable trends that we've been seeing. So that would be right in line, and that would be a direct pass-through to us.

Yeah, Jeff, I would say our interests are aligned with the insurance market where we place this. If we make money, if we get money back, then the insurance market guarantees that they've made money. So our goal is to try to get every penny of that $20 million that we can.

Okay. And just to clarify, is that on a per-year basis or is that over a certain term?

Yeah, it's a 12-month policy period. So it'll be from July 1, 2021 to June 30, 2022. So all claims incurred in that 12 months.

Okay, great. And then was curious with respect to your guidance for worksite employee growth, 2% to 4%. It looks very overly conservative given if you take the Q2 average WSE base or even the period end, you're talking 4% to 5% if you don't grow from here. I was just curious your commentary around that because it seems to me like worksite employees – likely to grow between now and the end of the year?

So it's really, you know, we hope it is conservative, Jeff, but it's really coming down to what we're seeing in Southern California. Southern California is our largest region, and we just haven't seen the worksite employee recovery there. You know, those worksite employee levels are still below 2019. So we grew worksite employees pretty rapidly. quickly in the second half of last year, right from the low of Q2. So right now we're comparing year over year to Q2 last year, which was obviously the most depressed quarter. Q3 and Q4 last year grew at a faster rate. So the 2% to 4% is saying we're going to grow faster than last year's second half and assumes that Southern California continues to perform how it has. We do think there's upside, though, as the stimulus runs off Q3 And we're seeing more of these low-wage jobs come back into the California. So we agree with you that there's potential up there.

Yeah, just to put a finer point on that, we saw in, say, Utah, for example, when they terminated the stimulus, the flood of people that went to the market in about three to four weeks for jobs. What we're still seeing in California is the lower wage folks have not returned to the market. And we know that the stimulus ends on September 6th. So you figure, all right, well, September 6th, the stimulus ends. arguably come October, we've got more people in the job market. We haven't forecasted that into our model and into our assumptions because we just don't know. But we look at it and say, if California, Southern Cal has to get a tailwind, and when it does, it'll be Q4, and we just haven't put that into our numbers just because it's an unknown on the macro side. But I think we definitely have an upside there in Southern Cal.

Okay. And then I was curious if you could kind of help break down the segmentation of 17% gross billings growth in PEO. I think you said 6% of that was rate. How much of it came from hiring and wage inflation?

So 10% WSC growth year over year, 6% billing per WSC growth. And those numbers compound with each other to get to the 17%.

Got it. And what was your experience with net hiring within the client base in the quarter?

The WSC growth was primarily from growth in customer expansion, which was on plan for where we thought it would be because we were a little ahead outside of Southern California, obviously below in Southern California. Yeah. But again, I would reiterate the point here that Gary mentioned in his remarks, which is that the consistent feedback really across our branch network is that our PO clients want to hire even more than they have and cannot find the candidates. So that's a potential tailwind as well as we go forward from here and the labor market finds its new equilibrium.

Great. Thanks for taking my questions, and congrats on all the hard work on the workers' comp program. It's good to see it.

Thanks, Jeff. Thank you. Next question today is coming from Josh Vogel from the Sudodian Company. Your line is now live.

Thanks. Good afternoon, Gary and Anthony. You basically covered everything I had on workers' comp, so I'll shift gears a little bit. I was curious about your experience with Suda rates. And, you know, I know a competitor of yours that's been coming in lower than what they had forecasted in an effort to improve retention, but also prospecting. They're passing along pricing breaks. I was just curious, you know, your thoughts around that.

Yeah, so we haven't seen – so I would agree with the observation that you're referring to here, which is that in general states – have not increased suitor rates, and particularly in California. They have not increased suitor rates. Certain states have, but broadly speaking, we haven't. What we have seen more so for our performance is that there's a little bit of a shift in that suitor timing as the hiring ramped up as the economy opened later in Q1 or the beginning of Q2. We saw hitting those wage caps later, so some of that trickled into Q2 where it would have been Q1. That's one thing that as we look at potential tailwinds from accelerated hiring in Q3 and Q4, we could be incurring more taxable wages from a pseudo perspective, because usually it's only the first $6,000 to $10,000 that are taxed, depending on the state. We could be hitting more of those as hiring ramps up, but the pseudo rate increases, we're watching those very closely. We are anticipating more states to raise them next year, but so far this year we haven't seen... disconnect between the way we've priced that and the expense coming in.

Okay, great. Gary, you had some comments around the prospect funnel or bringing in larger clients. I think you said $15 million in annual payroll. So I'm just thinking with new clients, in general, what's the average size you're seeing from a WSE perspective? And then just talk a little bit more about the traction with those larger, more national or regional clients and, you know, outside of those three that you onboarded, you know, what the prospect funnel is looking like there.

Yeah. I mean, we love, we love all of our clients and all of our prospects. Um, but we have margin thresholds that we need to make sure that we hit. And, um, you know, so when we're bringing on clients now, we're still around the average we've been, um, You know, we're seeing some larger ones now. The three I mentioned, you know, it was, you know, the largest one in the quarter was about $26 million. And we brought that on out of one of our California branches. But, you know, we're getting those bigger looks that we didn't get, you know, call it two years ago when we didn't have the all-states footprint and we didn't have the technology. So... You know, the larger clients are coming in. Our referral partners know that we can do the larger business, that we can handle it, that the clients appreciate our IT. So that's no longer an obstacle that we have to try to sell against. So larger clients, if the referral partners are listening, we're open for business, and you can send them to us. And then if I think of the funnel, you know, California is a large portion of our portfolio, and California specifically is where we are are seeing the slowness, um, coming out of the pandemic. And that's, you know, primarily it was, uh, the most restrictive of all states and it hasn't opened up the way other states has. And, and we're still seeing that in our deal flow, the deal flow is getting better every month, getting better every quarter. Uh, but we're not, uh, we're not better than pre pandemic levels yet.

Understood. I appreciate that color. And just, um, one last one. I, I, uh, I know you probably won't really want to comment on it, but when we think about your guidance for this year and then rolling into next year and thinking about prior years, what your targets were, is that high single digit, 8% gross billings growth? Is that a good target to think about beyond this year?

In a normal market where there is no COVID, I would agree. But let us get through Q3 and understand where the economy is, and we can answer that with a little more confidence.

Very great. And I actually just, with that largest client you said you added in the California branch, 26 million, I was just curious how many WSEs was that?

That was a 700 WSC count.

All right, great.

Thank you, guys. 700 to 900 on that one. I got a couple of them mixed up in my head.

No worries. Well, thanks for taking my questions, and good luck the rest of the year.

Thanks. Thank you. Our next question is coming from Vincent Colicchio from Barrington Research. Your line is now live.

Yeah, Gary, good quarter. Will you be expanding the scope of the digital campaign in terms of target markets, or is it too early?

So right now we've got about three or four different strategies, and we're doing them in ten markets. And we're managing and measuring the results. And ultimately, whichever one or two is the most successful and has the best return on investment we will transport that to the other branches. So I call it test and refine. We're testing and refining now, running through it, and whichever one works the best, we're going to let it loose for the company.

On the staffing side, should we expect year-over-year growth to continue, or is that going to be affected by the hiring backdrop?

Yeah, I think we are excited about it continuing to grow, but that is entirely constrained at this point by our ability to find candidates. So as Gary mentioned in his notes, I mean, we have over 1,000 open positions that we're trying to recruit for. So we believe that those jobs and workers will come back, and we also are continuing to invest in the staffing business in terms of making our recruiting more efficient. So yes, we believe it will continue to grow.

Yeah, we think that Ultimately, when the stimulus subsides, we will get a tailwind for both PEO and staffing because we'll be able to hire on the staffing and our clients will be able to hire on the PEO.

Remind me of the timing of when the subsidy subsides.

If nothing changes, it would be September 6th. Okay.

And what portion of your teams have transitioned to the new model of six? Just trying to get a sense for how much more efficiencies we have ahead.

Sure. So that model is the most utilized in our mature branches. So, you know, as the branches grow and develop, you know, some branches only have two people in the branch as they're growing, right? It depends on where they are in their maturity. So you typically will see them in the mature branches or in the upper emerging branches as they cross over into the mature.

Okay. You had mentioned some consolidation in California. Is there more of that to come in the near term? What does that look like?

So when we're doing these consolidations, the idea is we're able to put more under one leadership team. And we're able to get efficiencies out of scale. And we will have two more that come online that actually came online in July. And Those will probably be the last two for the remainder of the year.

Okay. My other questions were asked. Thank you, Gary. Good quarter. Thank you.

Thank you. Next question today is coming from Bill DeZellum from Teton Capital Management. Your line is now live.

Thank you. Again, great quarter. I extend my congratulations along with others. Relative to your commentary about having consolidated additional branches this quarter, as you were walking through the breakdown of branches, those over 100 and those, what, 30 to 100, et cetera, over time, are you looking to consolidate any branch that you don't believe can achieve 100 million of revenues or and therefore you're really looking for all branches that you're going to keep in place to have that opportunity, or am I thinking about this a little too rigidly?

You know, it's a good question, and we don't think of it that way. I think of it as profitability and not dollar size. So if you think of Idaho Falls, You know, we were there via acquisition on the staffing side many years ago, and we're working to try to build a PEO market in a small town. And, you know, if you think of the area managers, they're the most expensive as far as payroll dollars in the branch. And really all we're doing is, you know, for that branch, having it report into another branch and eliminating that layer. So it's really a leader taking on more responsibilities with more upside with the idea of these are smaller markets that are a little more challenged to get to the tipping point of profitability.

Thank you. And then you'd mentioned that you have 1,300 staffing openings. How does that compare to normal?

I don't know what normal is anymore, but if I would say pre-pandemic, if you remember pre-pandemic, we were in a tight labor market as well. But the 1,300 is higher than where we were at pre-pandemic by probably 35% to 40%. All right.

That certainly gives scale. Thank you. And then lastly, what is leading to the increased revenues per WSE?

So that's, yeah, sorry, that's driven by higher average wages. And that's a combination of things. There's some genuine wage inflation from role to role, but more so it's just mixed. We're seeing the average wage of employees now is higher and the lower wage employees aren't there in the same numbers. So the average has moved up. And that's where, as we see that lower wage employee come back, we may see that average billing number normalize or go down, but that would be offset, obviously, by the increased wages of those employees adding. So it'll be an interesting trade-off to watch these next couple of quarters as those employees come back to the market.

And not to... dive too far into what seems to be a bit of a political issue, but you are seeing after the federal unemployment benefits are dropped in the various states, you said three to four weeks after, a significant enough increase in applications that you do believe that the extra unemployment benefits are having an impact?

Yeah. I mean, at We're not in every state, so I can tell you that the states that we're in, when we've watched the stimulus go up and down, there was a direct correlation to how many people were applying to jobs.

That's helpful. Thank you, and again, great quarter. Thanks, Bill.

Thank you. As a reminder, that's star one to be placed in the question queue. Our next question is coming from Rich Glass from Glass Capital. Your line is now live.

Hey, guys. Didn't think I was going to make it. Very nice quarter, though.

Can we loop back to that question on the digital campaign? You said you had four strategies and ten markets now, and maybe you don't want to do this for strategic reasons, but can you give us any insight as to what sort of variables or what the distinctions, differentiations are between those four programs? Yeah, Rich, that's a good question. We're working hard on the secret sauce, and we don't really want to send the recipe out. Okay, fair enough. Good enough answer. Let's switch back to the, you're opening three branches, and Nashville, Pittsburgh, and another place, Raleigh. maybe Pittsburgh is a good example. How should we think about Nashville is growing like a weed, but in a city like Pittsburgh, which is growing, but maybe a slower, more normal pace, how should we think about given the new size of teams and things like that? Are these branches a drag for a quarter, six months, the full year? Are they break even the full year? How should we think about if you're going to open up a new branch? And tied into that, is Given the new model, is the one branch for Pittsburgh likely your only branch for Pittsburgh, and when you plant your flag, it'll be in a whole other area? Yeah. So we will – if you think of our model now, right, so we've invested a ton in people, right? So we've really spent time with our package being an employer of choice, being able to attract and retain people, right? And we are more attractive in the market now than we ever were as far as our compensation of benefits. So we feel like we can go out and get better people that understand the culture and can sell BBSI. So that's the big one, number one. Number two, we've invested in organizational development. So for that, we've really tried to flatten the learning curve for how someone learns the business and can go out and efficiently and effectively sell the business. So if we said our learning curve was 18 months, we think we've flattened it now to about four months. So in four months, the individual in Pittsburgh, she will be able to go out and sell in her market. And when she goes out to sell in her market, she will work from home until she gets some client base. When she gets enough client base, she will go and get a shared office. After she gets a shared office and has more client base, then she'll go get a brick and mortar. And when she goes to her market, she will have the support of the sales and marketing team where we blitzkrieg the market for her ahead of her. And we're going to blitzkrieg referral partners and we're going to blitzkrieg potential clients. with the idea of hire good people, pay them well, train them, give them the tools, and have them go sell. And as they sell, we grow into the infrastructure. Okay. So with that description, they should ramp pretty quickly in terms of the financial impact on the P&L should be minimal to start and get to positive pretty quickly without putting a number on it. Yes. Yes. Yeah, that's the way we've designed this, that we can scale into a market cheaper with the way we're going to market now. Okay, so is it likely to be one office for greater Pittsburgh from here? Is that the way to think about it? I would think so, but I hope Pittsburgh gets so big in the next couple years that I have to have that conversation. Right. Well, that might be Nashville, I guess, but that's a different topic. So my last question here is on the buyback, does getting rid of the letter of credit with the swap you did, the asset exchange, does that free up the ability to do more on the buyback aside from trading volume and other restrictions like that?

Are you just referring to like a covenant restriction?

Yeah, didn't you guys have a limit on what you could do in a given year, given the letter of credit?

Yep, there's a covenant restriction, and we talked about that. That's still in place. So our credit agreement with our primary bank, Wells Fargo, does have a buyback restriction in there. That was separate from the letter of credit agreement that was canceled in the quarter.

Okay, why... Given a cash-rich balance sheet, isn't that something that might be worth revisiting with, say, a lender like Wells Fargo who has their own problems?

Be kind. Well, funny you should mention that. So we are in discussions to renew our letter of credit, and we are doing a covenant review with them as we speak behind the scenes. So we will continue to negotiate those issues. kind of in our best interest, but yeah, that's on our agenda.

Good, good. All right, great. Keep up the good work, guys.

Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to management for any further closing comments.

No, I just want to say thanks, everybody, for dialing in, and thank you for everybody at BBSI who helped generate a great quarter.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.