Barrett Business Services, Inc.

12 branches we consider developing with run rates up to $30 million. Our business units totaled 100 and incorporates the new opening and consolidations previously mentioned. We also continued our migration into a 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. Moving to our client and worksite employee stack, our client retention continues to be stronger than pre-pandemic levels. I like to attribute that to the work we do with our clients and the value our teams bring in this ever-changing and complex economic environment. Regarding our referral channel distribution, leads and prospects in the quarter were greater than the previous quarter and exceeded our internal Q3 forecast. We are still behind pre-pandemic levels but we are optimistic as we continue to see a gradual recovery as economies open. Our closing ratio continues to be in line with historical levels. Last quarter, we discussed our longer-term initiatives where we intend to increase the top of the funnel by focusing on lead generation via an omnichannel digital campaign where we target both client and new referral partners in different markets. We are only four to five months into the various trials, but I am excited about what we are seeing, and I'd like to provide some statistics since the last earnings call. We've signed up 82 new referral partners, and we set up 74 new meetings with interested potential clients. We are testing and refining our various sales initiatives by market, measuring the return on investment, and will transport the most successful method to our other markets. We continue to package our new technology with our nationwide offering, and we continue to see larger opportunities. So to summarize all these efforts, our client retention is better than historical. We are seeing more opportunities than we forecasted. We continue to see larger opportunities, and we are closing at the same levels as historical. These positive trends resulted in the company adding 3,200 new worksite employees from net new customer ads over the past 12 months. To put a finer point on this accomplishment, this is the most net new worksite employees from net new customer additions we had added over the past four years. This is just a fabulous result and a testament of our value proposition, as well as the focus of the organization. Next, I'm going to provide some updates on other initiatives. We discussed last quarter a new strategy that we are coining as asset light markets. We have taken lessons learned in a COVID environment for how to operate remotely, coupled with our digital initiatives, and we will hire and train a professional in a new market and have them sell into that market. We will serve as this client out of an adjacent branch or at corporate and invest behind them in infrastructure as they build up their client base. It is still early, but we hired four new folks in the quarter that are currently going through our training and immersion program. Shifting to IT, our internally built client portal, MyBVSI, continues to perform well and is being received favorably by our clients. We are committed to quarterly enhancements that will add new features or improve existing functionality. Our vision is to bring on additional products and services and deliver these through the portal and we have a dedicated team working on this. So in summary, we are in the people business, and people have never been more relevant to the business owner than they are today. 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 Q3 performance continued to build on the momentum we reported last quarter, with results that were once again stronger than expected. PEO growth billings increased 12% over the prior year quarter and 5% sequentially from Q2 to $1.66 billion. Staffing revenues increased 2% over the prior year to $29 million. As Gary noted, Our increase in PEO growth billings was driven by stronger than expected growth from net new clients in the quarter, as well as stronger than expected hiring within our customer base. Our average WSEs increased 8% year over year, which is 1% higher than our expectations. We also continue to see higher average billing per WSE, which is up 3% in Q3 over prior year, and continues to trend ahead of expectations. PEO growth buildings growth by region versus the prior year third quarter were as follows. Mountain states grew 35%, East Coast grew 16%, the Pacific Northwest grew 14%, Northern California grew 13%, and Southern California grew 6%. While Southern California continues to grow steadily, our customers in the region are expanding more slowly than in other regions. and the effect is generally consistent across industries. For example, our construction industry clients in Northern California have grown 10% on average year to date compared to only 3% for those clients in Southern California. Workers' compensation expense continues to trend favorably in the quarter and included an actuarially determined reduction of prior year estimated liability of $800,000 in the third quarter. Our claims performance is also remaining favorable, with relative claim frequency 6% lower than the third quarter of 2019. We announced last quarter our new insurance program that became effective July 1st. This new program greatly reduces the workers' compensation risk that BBSI now retains. As a reminder, we will now describe our workers' compensation coverage for clients as being under either our insured program or our self-insured programs. Approximately 82% of our workers' compensation exposure, including all California clients, are covered by our insured program. All claims incurred in these states after July 1 are now covered 100% by the insurance market with zero claim costs retained by BBSI. This is a significant change from our previous structure, which included $3 million of retention per occurrence. Because of this move to our fully insured program, our workers' compensation liabilities no longer increased in the quarter, but instead decreased by nearly $19 million as remaining historical claims were paid. Looking at our margin and pricing, we continue to hold our billing rates effectively flat on renewal when compared to the prior year. The workers' compensation market is firming, but it's still competitive in certain geographies and industries for new business. However, our strong client retention is an indication of the value we are creating for our clients, even in this competitive market. Looking at operating expenses, SG&A continues to trend in line with expectations. Although employee expenses are up relative to the prior year, the variance reflects prior year reductions implemented during the COVID-19 pandemic that have since been reversed, increased employee travel and marketing costs, and higher profit share and incentive pay in the current year due to stronger than expected results. Through Q3, management headcount levels and non-IT operating costs both remain below 2019 levels. Our investment portfolios earned 1.8 million in the third quarter compared to 1.6 million in the prior year. Our investments continue to be managed conservatively and have an average duration of 4.1 years average quality of investment at AA, and average book yield of 1.8%. Going forward, 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 $116 million of unrestricted cash investments at September 30th compared to $110 million at June 30th. 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 return capital to shareholders in the quarter through $2.3 million in dividends and $4.2 million of stock repurchases at an average price of $75.54. At quarter end, there's approximately $31 million remaining on the Board's approved $50 million share repurchase program. Turning to the outlook for the year, given the stronger than expected results in the quarter, We now expect gross billings to increase between 9% and 10%, up from 6% to 8% previously, and we expect average WSEs to increase between 3% and 5%, up from 2% to 4% previously. We continue to expect gross margin as a percent of gross billings to be between 3.0% and 3.1%, and we expect our effective annual tax rate to be between 22% and 24%. I will now turn the call back to Gary for closing remarks.

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

Thank you. Ladies and gentlemen, at this time, we'll be conducting a question and answer session. If you'd like to ask a question, you may press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would 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 key. Our first question comes from the line of Chris Moore with CJS Securities. Please proceed with your question.

Hey, good afternoon, guys. Thanks for taking a couple questions. Maybe I would just start on the kind of – the mechanics and the impact of the Chubb agreement. So, you know, my understanding is that, so you had the two LPTs that, you know, basically took care of between 2014 and 2018. The current agreement with Chubb is, you know, starts as of July 1st, 2021. So 2019, 20, and half of 21 are the years where you still, you know, theoretically would have, you know, unfavorable workers' comp claims, you know, could be an issue. Am I looking at that correctly?

Yes, that is correct. So those two and a half years are the only claims we have remaining on the balance sheet. We do have some self-insured claims. That's outside of our fully insured program, right? That's the 18%. It's not part of the fully insured. But under the fully insured program, those are the only remaining claims.

Got it. And will there likely be... Go ahead.

I know that's a little confused. I'll just say it's a lot. I don't want to say it's confusing. It's a lot. And there's a good disclosure in the queue that has... call it the liabilities by year for what we're at risk on.

Got it. All right, that's helpful. Will there likely be additional LPTs? Is there kind of a normal period of aging? Like, for example, mid-next year, is it likely to be something that's focused on 2019?

Yeah, I mean, we have it in our plan to look at the next year. but it comes down to price to risk and if it makes economic sense for both sides of the transaction. So we both intend to look at it next year, and if we can get to an agreeable price, then we'll get a deal. If not, then we'll keep it. We're comfortable keeping it if we have to.

Got it. And maybe just one more for me. On the investment income, so it sounds like the investable base is going to, you know, continue to decline? I'm just, how rapidly should we expect that to happen?

It'll be gradual as we pay claims. Our rule of thumb is that we pay about 25% of our remaining claims in a year, and that will trail that rate of decline in terms of the investments. You know, we are seeing rates tick up slightly from their lows, so I'm also optimistic that we'll get some offset there as our investment yield goes up.

Got it. I'll jump back in line. I appreciate it, guys. Thanks, Chris.

Our next question comes from the line of Josh Vogel with Sedoti. Please proceed with your question.

Thanks. Good afternoon, guys. Gary, you talked about initiatives to expand the business, whether opening new branches or the asset-light markets, the trials there, investments in tech enablement and MyBVSI. I'm curious if Q3's SG&A run rate is a new normal base for us to think about going forward.

No. So Q3 is higher because if you think this is the quarter where we're increasing our guide and there's some variable compensation to the branches as far as profit share if they hit revenue targets and they're not only hitting them, they're exceeding them. So there's going to be a variable profit share that realizes in Q3. So that'll be our highest SG&A rate for the year. It'll slow down into Q4.

All right, great. Thank you. You know, obviously an impressive build in worksite employees. The Just anything that can be read into the average number being higher than the ending count, was that just because there's some seasonal stuff that hit up over the summer months?

Yeah, in terms of the pattern of our work-set employee count, it always peaks in the middle of summer, and that's driven from two large industries, the agricultural industry and construction, just have more bodies working in the summer.

Right, okay. I was looking at the safety incentive costs, and it was down a lot, even from the prior two quarters in which you revised that element of the business. Is this a move to do away with that altogether? How should we think about that as part of workers' comp going forward?

Good question, Josh. If you go back to this quarter last year, we talked about how we refined our pricing in the market. what we really did was the workers' comp market, specifically in California, was competitive. And what we did was lowered our pay-in rates to our clients. And ultimately what we did was move that safety incentive up front and netted it out of what we would charge to clients. And it made sense because of the competition of the market, number one. And then number two, it helps them out in cash flow when we did that during COVID. So what you see now is we've, you know, renewed almost all of our accounts without a safety incentive, which, you know, some accounts still may have it, but I'll say the overwhelming majority will not have it. And what you're left with is a liability that's going to, you know, slowly run off or has been running off.

All right, great. And just last one from me right now. You know, thinking about the vaccine mandates, I know your average client has around 30 or less employees today, but you are moving upstream. You're going after and landing larger national accounts. You know, I guess I know we know it's so early here, but, you know, what dialogue are you having with clients today? And you can make the argument that your relationship and value prop comes into play when thinking about holding their hand through a process like this, similar to what you did in the early days of the pandemic with small business loans. Just curious your thoughts around the mandates, the ongoing dialogue you're having with clients today and whether we can discern if this is going to be a potential positive and tailwind for you.

This is a tricky one because it's still not into effect. What we're coaching our clients on and that's how we're handling our business now because this will affect our management employees. It's Get your plan ready so that if it does go into effect, you know how to operate to it. So, you know, we have our own plan internally and then we're working with our clients so, you know, if they are affected that they can develop their plan. But, you know, anytime, nobody wants to get into business because they want to be the vaccine czar, right? And this is an example of you open in a business and now you're an employer and you have more challenges and this pulls you away from what you get in the business for, which is your product or your service. And we're there to help the clients get through this because we see this and can take it to all of our clients rather than one person trying to figure this out on their own. So it really does help the business owner to be with a PEO in times like this.

Great. Well, thanks for taking my questions.

Our next question comes from the line of Jeff Martin with Roth Capital Partners. Please proceed with your question.

Thank you. Hi, Gary and Anthony. Hope you're doing well. Gary, I wanted to dive into the referral partner network. You mentioned that leads are still below pre-pandemic levels. Just Curious if you give us some relative perspective if they're three-quarters back, if they're almost all the way back, and how would you describe the quality of those leads relative to perhaps pre-pandemic levels?

So I gave a stat in my prepared remark, which was, you know, organically over the last 12 months, you know, for business we added versus business we lost. we added 3,200 WSEs. So over the last 12 months, our organic growth is 3,200, which I think going through a pandemic is a phenomenal number. And then you take that number and you add in the same customer sales, which gets us up to our total increase. What we're seeing in the pipeline is good quality leads. We're seeing larger leads. which we are being able to convert to clients. And that's really what we're seeing as far as how we're able to build those 3,200 over the last 12 months. We're keeping the business, and the business that we're adding is larger than it's been historically. So even going through here with less submissions, we're adding more WSEs, which is why we changed our metric to get to a WSE as opposed to a client count. so that there's no head fakes here on the business. Because the reality is we're growing the business organically through a pandemic.

Yep, great. And then with respect to your omnichannel initiative, could you give us some perspective? You added 82 new referral partners. I take it that's off of a relatively small pilot test, not 82 out of a nationwide number. broad effort, some perspective there would be helpful.

Yeah, we're doing that in about 20 markets now. And, you know, these 82, these are folks that signed up that want to be partners. It doesn't mean we've done a deal with them, but it means that, you know, they understand our value prop. They want to learn more about BBSI and they want to sell that value prop in the market or to their clients. So We look at them as a future pipeline that the teams out in the field are working with them to cultivate those relationships to hopefully bring on clients in the future.

Okay. And then you also made a comment with respect to adding additional products and services on the technology platform. I was curious if you could maybe give us a sneak peek at what some of those are and how much earlier you anticipate those being to growth acceleration over time.

Yeah, good question. You know, we built our portal out with the idea that we own our technology destiny. So we have the ability to plug in more products and services, whether we make enhancements or increase productivity in there, or we white-label things and plug it in. There is, I'll say, a limitless potential for products and services that we can bring in. And we've got folks working on executing to that product roadmap so that we can ultimately have more things that we can sell to make us either more attractive or the business stickier. But we're not gonna spill the popcorn until we do the launch on those.

Okay, great. And then just one housekeeping item if I could. What was the same store growth number in the quarter?

So Gary said we added 3,200 work-set employees from net new customers. The year-over-year same customer work-set employee growth was 5,500. Okay, that's it for me.

Thanks, guys.

As a reminder, there's one more question.

Yeah, Jeff, just one clarification on that one. That's just WSE growth. That doesn't count wage inflation or anything like that. That's just pure WSE growth. All right.

Our next question comes from the line of Vincent Colicchio with Barrington Research. Please proceed with your question.

Hi, Gary and Anthony. I hope you're doing well also. So curious about, are you seeing any pushback from any clients on pricing, given the wage pressures out there in the market?

I would say no more than normal. You know, it's, it is, it has been a competitive market and it's been competitive because of workers' comp. And, you know, Anthony mentioned in his prepared remarks that we've, we've been able to hold our renewals, you know, relatively flat. So our markup's relatively flat for, you know, 21 versus 20. So, you know, we like to think that the product that we bring to market is worth the price that the clients are paying because we're able to hold the pricing pretty consistent. And then our runoff is the best we've seen. I would say all signs pointed in the right direction.

And what portion of your teams have transitioned thus far to the new model with more HR professionals?

That model is when you're going to get into the larger branches. It's going to be those mature branches that have that model or are close to that model. The total mature branches is going to be 22. 22 would have, I'll say, adopted some form of that new model.

The efficiencies you should start seeing from that are fully in place, is that what you're saying?

Well, if you think of the efficiency, so, you know, our management payroll is down still compared to 2019. So we have more clients, we have more WSEs, and our management payroll is still less. And the reason we're able to do that is because of the efficiencies we get on the technology with MyBBSI. And because of going into this six person team as opposed to a four.

And last one for me, how are some of your newer locations performing?

It's still early days. So we opened Pittsburgh and Nashville. And they're about three months into being new branches and opening. It takes a little time to try to do a judge on those. We have good professionals in those branches. One of them was from another BBSI branch. The other was a new hire who's been trained and operating in the new model. We're confident they will do well, but we've got to give them a little time.

Okay. Thanks for answering my questions.

There are no further questions in the queue. I'd like to hand the call back over to Mr. Kramer for closing remarks.

Sure. Thank you, everybody, for taking your time to be on the call. Thank you, everybody at BBSI, for the hard work and a great quarter. I appreciate everybody dialing in, and we'll talk to you again next quarter. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.