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 30, 2023. 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 to the company's quarterly and annually 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 September 2, 2023 starting at 8 p.m. ET 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. Sir, please go ahead.

Thank you, and good afternoon, everyone, and thank you for joining the call. We had a strong second quarter, and I am pleased with our results. We continue to execute on our short-term and long-term objectives, and we exceeded all of our internal controllable key performance indicators. Regarding our client and WSE stack, our controllable growth exceeded our expectations in the quarter as we continue 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 new clients and in new worksite employees. As discussed previously, We have 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'd like to attribute that to the work we do with our clients and the value our teams provide. The result of all these efforts, or what I refer to as controllable growth, is that we added approximately 3,700 worksite employees year over year from net new clients. However, our clients' hiring was lower than we forecasted. In particular, we experienced a slowdown in April and May in Northern California and in the Northwest with our clients who work in or around new residential construction. These clients reduced their worksite employees, reduced overtime, and reduced hours worked. We had positive client hirings in our other geographies, which was more than offset by the weakness in Northern California and the Northwest, and our net client hiring was negative in the quarter. To summarize, we grew our worksite employees by 2%, which was on plan for the quarter, as we sold and retained more business, and this was partially offset by weakness in Northern California and Northwest operations. Moving to our staffing operations, our staffing business declined by 32% over the prior year quarter and was lower than we anticipated. We mentioned previously that we repriced the portfolio and jettisoned clients who were not achieving an adequate return. We also shifted our strategy to recruit for PEO clients and placed 121 applicants in the quarter. which generated equal margin to staffing but resulted in less top-line revenue. We also experienced macroeconomic factors, including but not limited to, supply or demand, which varies by geography. Overall, business owner sentiment was cautious in the second quarter, and while we are seeing July requisitions increase sequentially, it is below prior year. Moving to the field operational updates, We are very pleased with our entrance into new markets with our asset light model. Our market development managers are doing well and largely achieving their goal of adding and servicing new clients and new referral partners. Our first three classes have all graduated and we're selling in their respective markets in the second quarter. Our fourth class has been through training and is selling in their markets in Q3. Our results thus far are better than we expected and are exceeding our internal return hurdle rate. Regarding product updates, we continue to execute on the sale and service of BBSI benefits, our new health insurance offering. As a refresher, we rolled out our benefits offering in California in the second quarter and are now selling and servicing BBSI benefits in every market where we operate. I am pleased to report that we more than doubled our plan participation in the quarter and now have over 135 clients on our various plans with more than 3,000 total participants. Our value proposition is resonating well and we have success with small and large clients in white and blue collar industries in every state we operate and with a diverse distribution channel. We have learned some lessons and have made some modifications to our technology and to our operations along the way. The company is now shifting to the 1-1-24 selling season, and we have gained confidence in our craft and have the product and teams in place to be successful. Next, I'd like to shift to our view for the remainder of the year. We have consecutive quarters of great momentum. Our controllable growth exceeded our expectations in Q2, and this trend continued into July. We are selling and servicing BVSI benefits in all markets now, and we continue to be optimistic regarding the road ahead. We have de-risked the business and have a track record of achieving strong, controllable growth. The confidence in the strength of our operations results in predictability in cash flows. As such, I am pleased to announce that our board has authorized a new $75 million stock repurchase program. 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 Q2 with strong results and strong, controllable growth. as we continue to exceed our expectations for worksite employees added in the quarter from new clients. Our overall gross billings increased 5% in Q2 23 to 1.9 billion versus 1.8 billion in Q2 22. We achieved diluted earnings per share of $2.47 compared to $2.48 in the prior year quarter. PEO gross billings increased 5.1% over the prior year quarter to 1.9 billion, while staffing revenues decreased 32% over the prior year to 20 million. Our worksite employees grew by 2% in the quarter, which is the result of adding more worksite employees than expected from that new PEO client, offset in part by a reduction in hiring within our existing customer base. Average billing per WSE increased 3% in the quarter. As expected, client wage rates have remained resilient and increased in the quarter, which will continue to be a source of billings growth going forward. Average hours worked per employee remain lower than prior year, but we have seen continued improvement in average hours worked and overtime hours since Q1. Within the quarter, there was positive sequential improvements, with each month showing improved hiring and more hours worked than the previous month. Looking at PEO gross billings growth in total by region versus the prior year second quarter, East Coast grew 12%, Southern California grew 9%, Mountain states grew 5%, the Pacific Northwest decreased by 1%, and Northern California decreased by 2%. As Gary discussed, staffing revenues are down, driven by strategic shifts in our model, a focus on profitable clients, and the current economic environment. The reduced staffing volume has been accompanied by lower costs to support the model. And with positive trends and orders, we expect the year-over-year decline in staffing to improve in the remainder of the year. Our workers' compensation program continues to perform well and benefit from favorable claim frequency trends and favorable claim development. This strong performance has once again resulted in favorable actuarial adjustments of prior claim liabilities. As a reminder, our current client workers' compensation exposure is now primarily covered by our fully insured program with no retained liability by BBSI. As we have de-risked our workers' compensation program in recent years, we have entered into several fully insured policies and agreements that provide for potential returned premium to BBSI if claims develop favorably over time. As we begin to recognize benefits from these return premiums, we will now update how we refer to the effect of workers' compensation adjustments as prior year liability and premium adjustments. In Q2 23, we recognized favorable prior year liability and premium adjustments of $6.3 million. This compares to favorable prior year liability and premium adjustments of $8.5 million in the second quarter of 2022. We renewed our fully insured workers' compensation policies effective July 1, 2023. The program continues to perform well, and we once again renewed with favorable terms, including cost savings, a multi-year commitment, no downside risk to BBSI for future adverse claim development, and the continued ability for BBSI to participate in any favorable claim development via return premium. In addition, we revised our payment terms for the program to enable us to hold funds longer which will result in increased investment income in 2023 and 2024. Our gross margin rate was better than expected in the quarter due to the cost savings from lower workers' compensation expense and our increased focus on pricing discipline. We are tightening our outlook for our gross margin rate for the year to better reflect the favorable results through the first six months, as well as anticipated trends in Q3 and Q4. Turning to operating expenses, SG&A for the year continues in line with our plan, which is to grow slower than prior year and slower than our billings growth rate. As a reminder, SG&A includes increases associated with the launch of DBSI benefits, which have been largely offset by savings driven by cost management efforts. Moving to our investment income, our investment portfolios earned $2.1 million in the second quarter, up $500,000 from the prior year. Our book yield is 2.3% up from 1.8% in the prior year quarter. Our portfolio continues to be managed conservatively with an average duration of 3.9 years and average quality of investment AA. Turning to the balance sheet, we had $133 million of unrestricted cash investments at June 30 compared to $160 million at December 31. The decrease is primarily due to the timing of quarterly payroll tax payments and stock repurchases. 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 share repurchase program, in the second quarter, BBSI repurchased $10 million of shares at an average price of $82.23 per share. The company also paid $2 million of dividends in the quarter and reaffirmed its dividend for the following quarter. Since the launch of the repurchase program in February 2022, the company has now repurchased over $65 million of stock, representing approximately 11% of shares outstanding at an average price of $79.70 per share. Management and the board continue to be highly optimistic about the long-term value of our business and the growth potential ahead of us. That value is made even more compelling by the enhancements we've made over the past several years, which have been reflected in stronger controllable growth from client ads, positive earnings leverage, reduced risk and strong performance from our workers' compensation program, and product expansion that increases our addressable market. With this perspective and with the success of the February 2022 repurchase program, the Board has approved a new $75 million two-year stock repurchase program effective July 31. The new program replaces the previous program and represents capacity to acquire approximately 12 percent of the outstanding shares of the company at the current share price. The renewed program will allow management to continue to show our commitment to being thoughtful stewards of capital and generating long-term value for shareholders. Turning to our outlook for the year, we now expect gross billings to increase between 4 and 6 percent, a slight decrease from the 5 to 8 percent in our prior outlook, to account for the slower client hiring and hours worked we have observed in our existing customer base. We continue to expect average WSEs to increase between 2 and 4 percent for the year. And given the lower workers' compensation expense and our increased focus on pricing discipline, we now expect gross margin as a percentage of gross billings to be between 3.1 and 3.15 percent. and we continue to expect our effective annual tax rate to remain between 27 and 28%. I will now turn the call back to the operator for questions.