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 31, 2023. Joining us today are BBSI's President and CEO, Mr. Gary Cramer, 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 report-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 will cause actual results to differ from those expressed or implied by the report-looking statements. I would like to remind everyone that this call will be available for replay through June 3rd, 2023, 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. Please go ahead, sir.

Thank you. Good morning everyone or good afternoon everyone and thank you for joining the call. We had a strong start to the year and I'm very pleased with our results. We were laser focused and successfully executed on our short term and long term objectives. Our financial results are in line with our full year projections and we produced record Q1 profitability. Moving to our financial results, during the quarter our gross billings increased 5% over the prior year quarter. I would like to state that we have no direct exposure to the troubled regional banks, and very few of our clients bank at these facilities. This was, in essence, a non-event for BBSI. Regarding our client and WSC stack, our controllable growth exceeded our expectations in the quarter as we continued to execute on our various strategies to increase the top of the sales funnel, and I am pleased to say that we once again exceeded our expectations in Q1. 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 are adding are larger than the average size of the clients that are running off. Regarding client runoff, our retention in the quarter was better than the prior year quarter and continues to remain stronger than pre-pandemic levels. I like to attribute that to the work we do with our clients and to the value that our teams provide. The results of all these efforts, or what I refer to as our controllable growth, is that we added approximately 3,000 worksite employees year over year from net new clients. Our same customer sales were softer than we forecasted and is a mix of a couple factors. I mentioned last quarter that California was receiving a colossal amount of weather, which we believe could impact our clients' operations. Our Northern California clients in the construction and landscaping industries were affected severely. In these industries, and specific to Northern California, our clients reduced their worksite employees, reduced overtime, and reduced hours worked. They were unable to work in these conditions and moderated their staff accordingly. We had positive same customer sales in every other geography, which more than offset the weakness in Northern California, and we finished the quarter at a net positive, but by less than we forecasted. To summarize, we grew our worksite employees by 3%, which was on plan for the quarter, as we sold and retained more business. This was partially offset by our clients growing slower than anticipated. Moving to our staffing operations, our staffing business declined 23 percent over the prior year quarter and was lower than we anticipated. This decrease is a combination of many factors, including but not limited to supply, demand, weather, and varies by geography. Anthony will give some regional color for what we're seeing in our markets. Moving to the field operational updates, we are very pleased with our progress of entering new markets with our asset light model. Our market development managers are doing well and largely achieving their goals of adding and servicing new clients and new referral partners. Our first three classes have all graduated and we're selling in their respective 14 markets in the first quarter. We have hired our next class of five and they start their training in Q2 with the plan to start selling in Q3. Our results thus far are better than we expected and are exceeding our internal return hurdle rates. Regarding our product update, we continue to execute on the sales and service of BBSI benefits, our new health insurance offering. As a refresher, we rolled out a soft launch to a limited number of existing clients in select markets for the 1-1-23 enrollment season. Our intent was to perfect our craft and then shift our focus to California and to new prospects. Our soft launch was successful, and in March, we started selling BBSI benefits in every market to new prospects as well as existing clients. Since our last earnings call, we have successfully sold medical and ancillary products to 31 additional clients of which 11 are based in California. This brings our year to date total to approximately 101 clients on our various plans. More importantly, we have proven that our product can be sold successfully in every geography we operate in. I would like to take a minute and discuss some successes of BBSI Benefits. We have been able to sell into our existing clients, which is a great thing. We have also been able to take this product to new distribution channels and to new client industries. Regarding new distribution channels, our BBSI Benefits products aligns well with benefits brokers. We onboarded 74 new benefit referral partners in the quarter. This is approximately 15% of the new referral partners that we added in the quarter, and we expect the velocity and quantity to increase throughout the year. Our distribution channel has been heavily skewed to property and casualty brokers because of our workers' compensation product, and this new product will allow for better balance and better diversification. Regarding our new client industries, We have had early successes in adding clients in the industries of consulting, healthcare, and financial services. These white collar industries were previously more challenging for us to penetrate with the lack of a benefits offering. The company is extremely excited to work with all of these new markets. Next, I'd like to shift to our view for the remainder of the year. We've had consecutive quarters of great momentum. Our controllable growth exceeded our expectations in Q1 and this trend continued into April. We are selling and servicing BBSI benefits in all markets now, and we continue to be optimistic regarding the road ahead. Now I'm going to turn the call over to Anthony for his prepared remarks.

Thanks, Gary, and hello, everyone. I'm pleased to report we finished Q1 with strong financial results, achieving our highest Q1 income as a PEO, and with strong controllable growth as we added more worksite employees from net client ads in the quarter in the prior year quarter. Our overall gross billings increased 5% in Q1 2023 to $1.79 billion versus $1.71 billion in Q1 2022. With continued positive earnings leverage, we achieved diluted earnings per share of 12 cents compared to 4 cents in the prior year quarter. Looking more closely at our Q1 results, PEO gross billings increased 5.3% over the prior year quarter to $1.8 billion, while staffing revenues decreased 23% over the prior year to $22 million. As Gary noted, our increase in PEO gross billings in Q1 once again included stronger than expected growth from net new clients in the quarter. This was partially offset by slower client hiring in our existing customer base. Overall, WSEs grew by 3% for the quarter, which was in line with our expectations. With respect to client hiring, the decline in Northern California accounted for approximately two-thirds of our total slowdown in hiring. We have seen hours worked increase in April since the poor weather subsided in California, but we continue to expect the pace of client hiring going forward to be slower than last year. Client wage rates have remained resilient and even increased in the quarter, which will continue to drive building growth for the remainder of 2023. However, as previously mentioned, our average billing per WSE was impacted by fewer hours worked and less overtime in the quarter. Average hours per WSE decreased 5% year-over-year, and overtime decreased 11%. As a result, our total average billing per WSE increased less than 1% for the quarter. Looking at PEO gross billings growth in total by region versus the prior year first quarter, East Coast grew 14%, Southern California grew 10%, Mountain States grew 8%, the Pacific Northwest increased by 1% when normalized for large one-time bonuses in the prior year, and Northern California declined by 2%. Looking more closely at the decline in staffing revenues, we anticipated that Q1 would be our toughest compare for staffing due to strong staffing demand in the prior year first quarter. Reviewing by region, our primary challenge in the Mountain States continues to be the availability of labor to fill client orders as unemployment rates remain low. In the Pacific Northwest, several larger customers have decreased orders and moved more of their labor in-house. Our California regions were impacted primarily by weather and decreases in demand due to softening economic conditions. We continue to roll out our PEO recruiting services, and in the quarter, we placed an additional 73 employees of PEO clients. Overall, we expect staffing revenues to continue to decline year over year due to the ongoing challenges in the economy, but the decline should be at a slower rate than the Q1 decrease. Moving to our gross margin results, our gross margin rate continues to trend favorably with continued cost savings from lower workers' compensation expense in the quarter, while our pricing has remained in line with plan. Workers' compensation expense continues to benefit from favorable claim frequency trends. And the first quarter included a favorable actuarially determined reduction of prior year estimated liabilities of $1.1 million. As a reminder, our workers' compensation exposure is now primarily covered by our fully insured program with no downside risk to BBSI for future adverse claim development. However, BBSI can still participate in any favorable claim development in future periods. Turning to operating expenses, SG&A for the quarter is in line with our plan and included increases associated with the launch of BBSI benefits, largely offset by savings driven by cost management efforts. The result is continued earnings leverage and higher earnings for Q1 than prior first quarters. Looking at the remainder of 2023, we continue to anticipate slower SG&A growth in 2022, and continue to expect favorable earnings leverage in line with our long-term targets. Moving to our invested assets, our investment portfolios earned $2.3 million in the first quarter, up $700,000 from the prior year. Our book yield is 2.3%, up from 1.8% in the prior year quarter. And our portfolio continues to be managed conservatively, with an average duration of 3.8 years and average quality of investment AA. Turning to the balance sheet, we had $133 million of unrestricted cash investments at March 31st compared to $160 million at December 31st. The decrease is primarily due to the timing of year-end employee profit-sharing and quarterly tax payments. As a reminder, BBSI is completely debt-free, and we do not incur any increased expense associated with higher interest rates. Continuing under the board's $75 million share repurchase program, in the first quarter, BBSI repurchased $8 million of shares at an average price of $88.67 per share. The company also paid $2.1 million in dividends in the quarter and reaffirmed its dividend for the following quarter. Turning to our outlook, our expectations for 2023 remain consistent with our prior outlook. We continue to expect growth billings to increase between 5% and 8%. We expect average WSEs to increase between 2 and 4 percent. We expect gross margin as a percentage of gross billings to be between 3.0 and 3.15 percent. And we expect our effective annual tax rate to remain between 27 and 28 percent. I will now turn the call back to the operator for questions.