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, 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 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 would like to remind everyone that this call will be available for replay through April 2, 2022, 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 a as well as available on the company's website at 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, Paul. Good afternoon, everyone, and thank you for joining the call. Our operational and financial results were exceptional in the fourth quarter and capped off a great year. We consistently exceeded our internal estimates for client retention net client ads, and worksite employee growth, all of which resulted in better than expected financial results. Before I speak to the financial results, I would like to recap some of the key operational and strategic accomplishments for the year. We successfully completed the conversion of our existing clients over to our new MyBBSI platform. We are pleased with the platform, but more importantly, our clients are appreciative of the investment and the feedback continues to be positive. We are not done with our investment and have an IT roadmap of enhancements, new features, as well as new products. We packaged our new technology with our nationwide offering and brought on larger clients on average this year than we have in previous years. We built out a corporate sales department and increased the top of the funnel by focusing on lead generation via an omnichannel digital campaign, which brought on new clients and new referral partners. We executed on our employer of choice initiative and invested in our employees with robust enhancements in compensation, benefits, vacation, training, and volunteerism. People are our product, and we attract, train, and ultimately retain the best employees that any PEO has to offer. In November, we were pleased to announce that we were certified as a great place to work for the first time. We successfully rolled out our asset-light markets which encapsulates everything I just mentioned. Attract and hire great people. Train them well. Apply the lessons we learned in a COVID environment for how to operate remotely and package with our digital initiatives to help grow their market penetration. We will service the clients out of an adjacent branch or at corporate and invest behind them in infrastructure as they build up their client base. We entered into workers' compensation insurance transactions which de-risk our business model and results in better financial predictability. 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. I want to again thank everyone in the BBSI family for their exceptional efforts. Plainly stated, I am proud that we foster a culture that embraces innovation and execution. Moving to our financial results, During the quarter, our gross billings increased 13% over the prior year's quarter and exceeded our expectations. Our average worksite employees were up 7% over the prior year quarter. We have exceeded our pre-pandemic levels and 2021 finished the year with the highest year-end worksite employees in BBSI's history. This is due to our clients hiring as well as net new business, and we continue to be at the head of our internal forecast for our worksite employee stack. Our staffing business increased 14% over the prior year quarter. We could have grown more, but continue to have challenges filling orders with the tightness of the labor market. We are seeing more applicants, placing more applicants, and companies are increasing wages to attract employees. We are still unable to fill all of our orders, but our fill ratio is improving. To summarize our financial performance for the year, our gross billing has increased by 11%, and our earnings per share grew by 14%, which is in line with our long-term growth plans. We returned $9 million in dividends and bought back shares totaling $17 million, which reduced our shares outstanding by 3.2%. These are fabulous results and a great return for shareholders. Moving to the branch operational updates, our branch footprint decreased by three to 50 total branches. We continue to be mindful of operating efficiencies and consolidated Glendale into Phoenix, Eugene into Willamette Valley, and Valencia into Pasadena. These decisions were made with the intention of continuing to grow revenue while servicing our clients, but doing so in a more cost-efficient manner. Our branch stratification is as follows. 23 mature branches with run rates in excess of $100 million. 17 emerging branches running between $30 and $100 million. 10 branches we consider developing with run rates up to 30 million. Our business units totaled 98 and incorporates the consolidations previously mentioned. We also continued our migration into a revised structure of our 16-member business unit, which allows us to service more clients with less management employees and increases our return on management payroll. To summarize our branch footprint over the past two years, At the end of 2019, we had 64 branches. Over the past two years, we consolidated 19 branches within existing markets and expanded five branches into new markets, finishing 2021 with 50 branches. By the end of 2022, we forecast that our gross billings will be up by approximately 20% over 2019, but our SG&A field payroll will only be up by 6%. And that includes investing in 14 asset light markets. Speaking to the asset light model, our first class has graduated and is currently selling in four new markets. We are still in the early innings, but through February, we have eight new clients added or in contracting. We are seeing positive trends in this model and intend to invest in approximately 10 new markets in 2022 and are actively recruiting in markets we're not in now. Moving to our client and WSE stacks, 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 distribution channels, business is almost back to normal. Our leads and prospects in the quarter were greater than the previous quarter and our best quarter post-pandemic. We had a strong fourth quarter, and our year-end WSE stack was the highest in our history. More importantly, we capitalized on the 1-1 selling season, and this January was our best January for net new business in the past five years, better than pre-pandemic. We continue to invest and refine our longer-term initiatives of increasing the top of the funnel by focusing on lead generation via an omnichannel digital campaign, where we target both clients and new referral partners in different markets. Results thus far are positive. We are signing up new referral partners and new clients that would not have come to us via our traditional channels. We will continue this initiative and make further investments in 2022. These positive trends resulted in the company adding over 1,300 net new worksite employees in the quarter, which was ahead of our forecast, and further supports our optimistic outlook for 2022. As I think to the future, I have never been more optimistic about BVSI's trajectory. We had great momentum in 2021 and it is carrying into 2022. Our client retention is the best it's ever been and we're seeing and closing on more prospects. Our prospects continue to be larger because of our technology stack coupled with our nationwide offering. We will continue to invest in technology and we will continue to invest in growth initiatives. We have minimized the insurance risk to the company, and the only thing that can hinder our progress now is execution risk. And honestly, our fabulous results speak for themselves. Now I'm going to turn the call over to Anthony for his prepared remarks.

Thanks, Gary. Hello, everyone. I am pleased to report we finished 2021 with strong results and, as Gary noted, strong momentum. Both the quarter and the year exceeded our expectations. Starting with the full year first, our gross billings increased 11% to $6.6 billion and diluted EPS increased 14% to $5 per share compared to $4.39 in the prior year. The increase in earnings leverage was achieved even with the return to more sustainable SG&A levels in 2021 from the uniquely low level seen in 2020. Focusing on our Q4 numbers, net income for the quarter was $10.6 million compared to $7.2 million in Q4-20. Q4 PEO gross billings increased 13% over the prior year quarter to $1.8 billion. Staffing revenues increased 14% to $33 million. Our increase in PEO gross billings was driven by stronger-than-expected growth from net new clients in the quarter, continued strong hiring within our customer base, and higher average billing per WSE. Our Q4 average WSEs increased 7% year-over-year, while our average billing per WSE increased 5%, driven primarily by higher wages. PEO growth billings growth by region versus the prior year fourth quarter were as follows. Mountain states grew 38%, East Coast grew 19%, the Pacific Northwest grew 15%, Northern California grew 13%, and Southern California grew 6%. As discussed in prior quarters, the primary driver of the slower growth in Southern California is lower same-customer sales growth as our clients are adding fewer new employees than in other regions. However, we continue to see positive trends in the region, including faster sequential growth in Q4 than in Q3, and we expect this momentum to continue into 2022. Workers' compensation expense continued to trend favorably in the quarter and included an actuarially determined reduction of prior year estimated liabilities of $1.7 million in the quarter. Our claims performance also remains favorable, and our relative frequency rate once again trended down in the quarter and remains well below historical rates. As a reminder, we entered into a new fully insured workers' compensation program effective July 1 for the majority of our clients. We now describe our workers' compensation coverage for clients as being under either this insured program or our self-insured program. 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 claims cost retained by BBSI. The strategy of de-risking our operations through this insured program is operating as planned with favorable results, and we expect these favorable results to continue into 2022. Because of the move to our fully insured program, our workers' compensation liabilities decreased by approximately $18 million in the fourth quarter, as remaining historical claims continue to be paid. Looking at margin and pricing, we are seeing billing rates renew at levels consistent with the prior year. Looking at the market more broadly, market pricing for workers' compensation coverage has now largely flattened after decreasing for several years. Rates remain at low levels relative to historical rates, but these lower rates have been offset by lower workers' compensation expense in the year, and our margin rates have remained stable. We continue to see strong client retention in the fourth quarter and beyond. which demonstrates the value we're creating for our clients and supports our ability to maintain margins even in competitive pricing environments. Moving to operating expenses, SG&A for the quarter came in line with expectations at approximately the same level as Q4 2020. As discussed in prior quarters, much of 2021 saw faster year-over-year growth in SG&A due to the abnormal compare in Q2 and Q3 of 2020. As we look ahead to 2022, we expect to return to more normalized SG&A growth rates in line with our target of approximately half of our top line billings growth. Our largest increase in SG&A will come from employee related expenses in 2022, including higher average wages and increased headcount, primarily to support growth initiatives. We continue to closely manage our operating expenses and our management employee headcount in 2021 still ended below that of 2019. Our investment portfolios earned $1.7 million in the fourth quarter, compared to $1.6 million in the prior year quarter. 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%. Turning to the balance sheet and our capital plan. We had $166 million of unrestricted cash investments at December 31st, compared to $116 million at September 30th. As we continue to evaluate our most efficient capital arrangements, we renegotiated our credit agreement with Wells Fargo to increase our line of credit to $50 million from $33 million previously, and extend the maturity of the agreement to June of 2024. With favorable fee changes, the increased capacity will come with little incremental cost. We also restructured our covenants to provide more flexibility, including in share repurchases. To further optimize our capital commitments, we have purchased certain assets that were formerly leased. This will show as an increase in Q1 CapEx that will result in lower overall operating expense for the company going forward. And, subsequent to year end, we paid off the remaining balance on our corporate headquarters mortgage. And as a result, we can now say that we are completely debt-free. We continually assess the level of capital needed to maintain effective business operations with appropriate risk mitigation. This minimum level of required capital has decreased as we have de-risked our model and now retain less workers' compensation claims exposure. We are committed to deploying our excess available cash investments in ways that benefit the long-term health of the company and our shareholders. I will recap our general philosophy on capital allocation. Our first priority is to invest in the business. Our best path to continued earnings growth is operating leverage through scale, and we continue to seek out new opportunities to invest in order to scale consistently and effectively. This investment typically comes in the form of strategic hiring and focused growth initiatives And it will also continue to include investment in IT software and infrastructure in the year as we focus on enhancing our product and our client experience. Second, we have said that we are open to investing in inorganic growth through acquisition, and this remains true. But we are also committed to ensuring that any potential acquisition is right for our company and our shareholders for the long term. Third, as BPSI continues to steadily generate positive free cash flow, we remain committed to returning capital to shareholders. In 2021, we returned $26 million to shareholders through a combination of dividends and stock repurchases. This equates to an income payout ratio for the year of approximately 70%. To solidify our commitment to drive shareholder value, our board of directors has approved a new $75 million two-year stock repurchase program, which will replace the $50 million three-year repurchase program that was previously in effect. In addition, BBSI remains committed to its dividend, and the Board also reconfirmed our quarterly dividend of $0.30 per share to be paid April 1st. Turning now to the outlook for 2022, we expect gross billings to increase between 7% and 9% for the year. We expect average WSEs to increase between 3% and 4%. We expect gross margin as a percentage of gross billing to be between 3.0% and 3.1%. and we expect our effective annual tax rate to be between 24 and 25%. I will now turn the call back to Gary for closing remarks.