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, 2022. 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 meeting of the Private Securities Litigation Reform Act of 1995. The statement provides important cautions regarding forward-looking statements. The company's remarks during today's conference call will include forward-looking statements. These statements, along with other information presented that does not reflect historical fact, are subject to a number of risks and uncertainties. Actual results may differ materially from those implied by these forward-looking statements. Please refer to the company's recent earnings release and to the company's quarterly and annual reports 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 June 4, 2022, 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. Thank you, sir. Please go ahead.

Thank you, John. Good afternoon, everyone, and thank you for joining the call. Our positive momentum continued into 2022 as we had a fantastic start to the year. Our financial and operational results exceeded most of our internal and external metrics. We exceeded our internal estimates for client retention, net client ads, and worksite employee growth, all of which resulted in better than expected financial results. Regarding our client and WSC stack, over the past 18 months, we've been executing a strategy to increase the top of the sales funnel, and I am pleased to say that our sales leads exceeded our expectations in Q1. This is the result of our three-pronged strategy. First, to mature and deepen relationships with our existing referral partners. Second, to utilize technology and digital campaigns to target and nurture new referral partners. And third, to utilize technology and digital campaigns to target potential clients directly. Our leads, prospects, and client ads in the quarter were greater than the previous quarter and our best quarter post-pandemic. I mentioned during our last call that the 1-1 selling season was our best January for net new business in the past five years. The next trend that we previously discussed is that we've been able to sell and support larger clients with our upgraded technology stack and national PEO licenses. This continues to progress favorably, and the average size of the clients that we're adding are larger than the average size of the clients that are running off. Regarding client runoff, our retention continues to be stronger than pre-pandemic levels. I like to attribute that work to the work we're doing in the field to support our clients and the value our teams bring in this ever-changing and complex economic environment. The results of all these efforts, or what I refer to as our controllable growth, is that we added 3,500 worksite employees year over year from net new clients. This was ahead of our plan and our best quarter in over five years. We bill as a percentage of payroll, and we grow as our clients grow by adding worksite employees with wage inflation and as hours worked increases. Our client base is resilient and exceeded our internal forecast for worksite employee growth in the quarter. Regarding our financial results, during the quarter, our gross billings increased 16% over the prior year quarter and exceeded our expectations. For our PEO business, our average worksite employees were up 9% over the prior year quarter and is the culmination of the controllable growth as well as our clients hiring. We exceeded our internal forecast for our worksite employee stack. Our staffing business increased 18% over the prior year quarter and we continue to experience favorable year-over-year growth trends. We are seeing more applicants. We're placing more applicants, and companies are increasing wages to attract employees. It is still a thin recruiting market, and we are unable to fill all orders, but our fill ratio is improving. We could have grown more, but we continue to have challenges filling orders with the tightness of the labor market. We've made investments in staffing and recruiting, and we're seeing positive results in recruiting for our PEO clients. Moving to the field operational updates. Over the past two years, we've evolved our branch and business unit model as we adapted to COVID, but also to the shape of my vision as CEO. Regarding our business unit model, we are able to revise the structure and migrate into a six person team from a four person team, which allows us to service more clients with less management employees and increases our return on management payroll. Regarding our branch network, over the past two years we have consolidated branches with the intention of continuing to grow revenue while servicing our clients. Consolidations in these various branches allowed us to leverage mature teams and leadership to achieve better profitability. We never abandoned a market, but rather are servicing and selling into a market in a more cost efficient manner. We also evolved how we enter new markets with our asset light model. where we will hire and train a professional in a new market, assist them with our digital sales initiatives, and then have them sell into the market. We will service the clients out of corporate with a virtual business unit and invest behind them in infrastructure as they build up their client base. All of these strategic evolutions, it starts to complicate our historical reporting regarding quantity of branches and business unit stratification. As such, we are updating our reporting to better reflect how we think of the business. We structure our operations in the context of how many local markets we can sell into and service locally. At the end of Q1, we operated in 13 states and 68 markets, which is consistent with Q4 of 21. Some markets will be more profitable than others due to their maturity, but with our evolution, every market is expected to be profitable. Regarding macroeconomic updates, the growth in worksite employees for our installed base during the first quarter was strong, and our April numbers were equally strong. Payroll data is a lagging indicator by a couple of weeks due to timing of pay cycles, but we don't see any indication in our data that would give us pause or concern about the future. As the payroll in HR company for over 8,000 clients over various states and industries, there is nothing in the data that would reflect the slowdown at this time. However, we would be remiss if we didn't acknowledge that times are growing more challenging for business owners given tight labor markets, record inflation, supply chain challenges, and a rising interest rate environment. As we look ahead to the balance of the year, our confidence in raising guidance starts with our higher than expected Q2 starting point for our installed base of clients and WSE stack, plus optimism of our revamped and disciplined sales and service teams executing on controllable growth and a slower increase in client hiring toward the back end of the year. Anthony will provide more color to our full year outlook in his prepared remarks. As I think to the future, I've never been more optimistic about VBSI's trajectory. We have consecutive quarters of great momentum, and I don't see it slowing. Our client retention is the best it's ever been, and we are seeing and closing on more prospects. Our prospects continue to be larger because of our tech stack coupled with our nationwide offering, and we will continue to invest in technology and continue to invest in initiatives. Simply put, we are executing to our plan. Now I'm going to turn the call over to Anthony for his prepared remarks.

Thanks, Gary. Hello, everyone. I am pleased to report that we have strong results for the quarter in all areas of our operations. PEO gross billings increased 16% over the prior year quarter to $1.68 million, while staffing revenues increased 18% over the prior year to $28.9 million. As Gary noted, our increase in PEO growth billings was driven by stronger-than-expected growth from net new clients in the quarter, stronger-than-expected hiring within our client base, and higher average billings per WSE. Overall, WSEs increased 9% over Q1 2021, and average billing per WSE increased 6%, driven primarily by higher wages. PEO gross buildings growth by region versus the prior year first quarter were as follows. Mountain states grew 38%, East Coast grew 25%, the Pacific Northwest grew 19%, Southern California grew 13%, and Northern California grew by 11%. As expected, we are now seeing Southern California return to growth levels more consistent with other regions as clients there have expanded hiring and increased wages, and this trend has continued through April. In addition, every region is on or ahead of plan for controllable growth, that is, growth from clients added, less clients lost in the period. Our gross margin rate remains on target for the year and benefited in the quarter from favorable payroll tax rates which included a combination of favorable statutory rates and wage caps not increasing at the same pace as average wages. This benefit is primarily realized in Q1, as most employees reached their payroll tax wage caps in the first quarter. The workers' compensation market remains competitive, but we are seeing stabilization in pricing and competitor behavior. There have not been significant changes in market pricing in recent periods. Workers' compensation expense continues to trend positively with continued favorable claims frequency and favorable development on historical claims reserves. This quarter included an actuarily determined reduction of prior year estimated liabilities of $2.9 million compared to $1.2 million in the year-ago quarter. As a reminder, with our new fully insured workers' compensation model, the company has significantly de-risked its workers' compensation program for current year claims. Looking at operating expenses, SG&A in the quarter is on plan, and we continue to invest thoughtfully in the business while navigating market increases and employee-related expenses. We continue to expect earnings leverage to be on target for the year. Our investment portfolios earned $1.6 million in the first quarter, compared to $1.8 million in the prior year. With the increase in interest rates in the quarter, our fixed-income portfolios moved to an unrealized loss position. But we intend to hold these securities, and our portfolio continues to be managed conservatively, with an average duration of 4.1 years, average quality of investment at AA, and average book yield of 1.8%. The net of these overall strong results is that we generated positive net income in Q1 for the first time in over 10 years. As a reminder, BBSI typically shows a loss in Q1 due to the timing of when payroll taxes are incurred in the year. Turning to the balance sheet, we had $127 million of unrestricted cash investments at March 31st compared to $166 million at December 31st. The decrease from year end is primarily due to the timing of payroll tax payments. as well as stock repurchases and the paydown of our mortgage and certain leases in the quarter. As a reminder, BBSI is now debt-free. Looking holistically at the business, we remain committed to driving shareholder value through our strategies of generating consistent, profitable growth and earnings leverage, de-risking our workers' compensation program, investing in growth initiatives, including IT, sales strategies, and expanding into new markets, and returning capital to shareholders through our dividend and stock buyback. We announced last quarter that the Board approved a new $75 million stock repurchase plan, and we commenced acquiring shares under that plan in March. Through May 3rd, we have purchased 241,000 shares with an aggregate purchase price of $18 million, or an average of $74.80 per share. Of that, 115,000 shares were acquired in Q1. The company also paid $2.2 million in dividends in the quarter and reaffirmed its dividend for the following quarter. We are also on track for strong billings growth and earnings leverage in the year. And given the strong results for the quarter and more favorable expectations going forward, we are increasing our full-year outlook. We now expect growth billings for the year to increase between 10% and 12%, up from 7% to 9% previously. We expect average WSEs to increase between 4% and 6%, up from 3% to 4% previously. We expect gross margin as a percent of gross billings to remain between 3.0% and 3.1%. And we expect our effective annual tax rate to be between 25% and 27%, up from 24% to 25%. I will now turn the call back to Gary for closing remarks.