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 in the June 30, 2024. 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 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 August 31, 2024, starting at 8pm 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. Good afternoon, everyone, and thank you for joining the call. I am pleased to report that we had a strong second quarter and our financial results are in line with our full-year outlook. We continue to execute our short-term and long-term objectives and we added a record number of worksite employees for a second quarter. Moving to our financial results and worksite employees, during the quarter, our gross billings increased 6% over the prior year's quarter, which is in line with our expectation. We continue to execute on our various strategies to increase the top of the sales funnel, and we achieved a record number of WSEs from new client ads during a second quarter. Our client retention continues to trend well and is in line with our expectations. 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 2,500 worksite employees year over year from net new clients. We previously mentioned that we began to see our clients' workforce stabilize in Q4 and modestly grow in Q1. We are pleased to report that our clients' growth accelerated in Q2. In fact, they experienced the greatest net hiring in six quarters. To summarize, for the quarter we grew our worksite employees by 4% as we sold and retained more business and benefited from our clients' net hiring. Moving to our staffing operations, our staffing business declined by 3% over the prior year quarter and was within our expected range. We continue to execute our strategy to recruit for our PEO clients and place 91 applicants in the quarter. But we were impacted by macroeconomic headwinds, including supply and demand imbalances, which vary by geography. We have seen our staffing business stabilize, and although we are expecting modest declines year over year, we are forecasting our staffing business to grow sequentially in both Q3 and Q4. Moving to the field operational updates, We are very pleased with our entrance into new markets with our asset light model. We have 17 total new market development managers in various stages of their development. They are doing well in largely achieving their goals of adding and servicing new clients and new referral partners. In two of the markets, we have hired additional local talent to support our clients, and we are in the process of moving into traditional brick-and-mortar BVSI branches. We continue to see positive results from our investments in new markets, and are actively recruiting additional new market development managers. Regarding product updates, we continue to execute on the sales and service of BBSI benefits, our new health insurance offering. Last quarter we announced that we entered into a strategic multi-year partnership with Kaiser Permanente for programs effective 7-1-24 and onward. Kaiser is renowned for its excellence in healthcare services and offers one of the most complete and competitive HMO products in the marketplace. And just like our workers' compensation and existing health insurance offerings, we take no underwriting risk. We are now offering a national PPO side-by-side with the Kaiser HMO, and our results are positive thus far. In July and August, we sold Kaiser to 20 new clients with wins in Southern California, Northern California, and Oregon. Our new business resulted in more new subscribers in July and August than over the same prior year period. I am pleased to report that today we have approximately 380 clients on our various medical plans, servicing more than 8,500 total participants. We are pleased with the results of BBSI benefits, and this product will be accretive to earnings in 2024. We are bullish on this product and will now reap the benefit of leverage through scale. As we look forward to 2025, our focus is on the 1-1 selling season. We have the people, the product, the technology, and the experience to be confident in our various offerings. Next, I'd like to shift to our view of the remainder of the year. We've had consecutive quarters of great momentum. We are consistently growing our WSE stacks. We ended Q2 with a record number of WSCs, and we continue to be optimistic about the road ahead. We have consistently achieved strong, controllable growth by focusing on the needs of our clients and by adding new clients. We have more products to sell, more folks selling it, and more referral partners recommending BDSI. Now I'm going to turn the call over to Anthony for his prepared remarks.

Thanks, Gary. Hello, everyone. I'm pleased to report that we finished Q2 with strong results, consistent with our plan, and with continued positive momentum in our sales pipeline. Growth billings increased 6% to $2 billion in Q2 24 versus $1.9 billion in the prior year quarter. PEO growth billings increased 6% in the quarter to $2.01 billion, while staffing revenues declined 3% to $20 million in the quarter. Our PEO worksite employees grew by 4% versus the year-ago quarter, which was the result of strong, controllable growth from net new PEO clients, as well as hiring within our customer base. Looking at client hiring more closely, we continue to see improved hiring rates in Q2. We are now seeing positive hiring across almost all industries, including construction. The rate of client hiring remains lower than the long-term average, but the pace of hiring is improving and slightly exceeding our expectations. Looking at wage rates and hours worked, total hours and overtime hours have continued to remain stable, while wage rates continue to increase, and average billing per WSE increased 3% in a quarter. Looking at year-over-year PEO growth buildings growth by region, East Coast grew by 19%, Mountain States grew by 7%, Southern California grew by 6%, Northern California grew by 4%, and the Pacific Northwest declined by 3%. The Pacific Northwest region continues to be the most impacted by slower client growth, including being the only region with net negative client hiring and sustained lower average hours worked. The East Coast growth is driven by a combination of strong controllable growth and above average client hiring. Turning to margin and profitability, 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 adjustments for prior year claims. In Q2, we recognized favorable prior year liability and premium adjustments of $8.9 million. As a reminder, our client workers' compensation exposure is now primarily covered by our fully insured program with no retained liability by BBSI. We renewed our fully insured workers' compensation policies effective July 1, 2024. 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 any adverse claim development, and the continued ability for BBSI to participate in any favorable claim development be a return premium. Last year, we introduced more favorable payment terms for the premiums on the Fully Insured Program, and we were able to renew with similarly favorable terms that allow us to hold these premium dollars for longer. As a result of these terms, there's a balloon premium payment in June of each year, which we just paid in Q2 for the prior policy period, and which in turn reduced our restricted investment balance and a corresponding premium payable balance. These investment balances will continue to build again over the policy year until next June's payment, and investment income will continue to correlate with the investment balance. Payroll taxes remain higher than the prior year as we discussed last quarter. These higher rates are being contemplated in our pricing, which will contribute to higher gross margin rates in the latter half of the year. Overall, our gross margin rate remains in line with expectations. Our overall profitability has continued to benefit from operating cost management. For Q2, SG&A expense increased by approximately 4%, growing slower than our billings growth and providing ongoing operating leverage. Moving to investment income, our investment portfolios earned $3 million in the second quarter, up $0.9 million from the prior year. Our investment portfolio continues to be managed conservatively with an average quality of investment at AA. an average book yield of 2.9%. The combined results of these activities was net income per diluted share of 62 cents compared to 62 cents per diluted share in the year-ago quarter. Our balance sheet remains strong with $110 million of unrestricted cash investments at June 30th and no debt. We continue our approach to capital allocation, making investments back into the company through product enhancement and geographic expansion and distributing excess capital to our shareholders through our dividend and stock buyback plan. Continuing under our $75 million July 2023 repurchase program, BBSI repurchased $7 million of shares in the second quarter at an average price of $31.63 per share, with $45 million remaining available under the program at quarter end. As announced today, our Board of Directors also approved an increase in the quarterly dividend rate from a split adjusted 7.5 cents per share to 8 cents per share. This equates to a 7% increase in our dividend pay rate and reflects our ongoing optimism about our strong recurring cash flows and growth plans. Looking to our outlook for the full year, our results for Q2 are in line with our plan and our expectations for 2024 remain generally consistent with prior outlook. We continue to expect growth billings to increase between 6% and 8% for the year. We continue to expect And we're tightening our range of expected gross margin as a percent of gross billing to be between 3.0 and 3.1%. And we continue to expect our effective annual tax rate to remain between 26 and 27%.