Barrett Business Services, Inc.

Good afternoon, everyone, and thank you for participating in today's conference call to discuss BBSI financial results for the third quarter ended September 30th, 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 will 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 caution 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 released 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 December 6, 2024, 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. 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 third quarter. Our financial results exceeded our expectations, and we have greater optimism in our full-year results. We continued to execute our short and long-term objectives, and we added a record number of worksite employees from our controllable growth. Moving to our financial results and worksite employees, During the quarter, our gross billings increased 9% over the prior year quarter, which is greater than expected. We continued to execute our various strategies to increase the top of the sales funnel, and we achieved a record number of worksite employees from new client ads during a third 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 our controllable growth, is that we added approximately 4,600 worksite employees year over year from net new clients. The economy in the third quarter remained relatively consistent with the first half of the year. Our clients' workforce continued to modestly grow in the third quarter and into October. To summarize, for the quarter we grew our worksite employees by 5%, as we sold and retained more business and benefited from our clients' net hiring. Moving to our staffing operations, our staffing business declined by 2% over the prior year quarter. We previously mentioned that in 2022, we repriced the portfolio and jettisoned clients where we were not achieving an adequate return. We also shifted our strategy to recruit for our PEO clients, which generated equal margin to our traditional staffing models. but resulted in less top line revenue. This quarter is the first clean quarter over quarter comparison and we are seeing our staffing business stabilize. We continue to execute our strategy to recruit for our PEO clients and placed 105 applicants in the quarter. Moving to the field operational updates. We're very pleased with our entrance in the new markets with our asset light model. We have 21 total new market development managers in various stages of their development. They are doing well and largely achieving their goals of adding and servicing new clients and new referral partners. In three 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 sale and service of BBSI benefits, our new health insurance offering. We previously mentioned that we entered into a strategic multi-year partnership with Kaiser Permanente and are now successfully selling their HMO side-by-side with our national PPO. And just like our workers' compensation and existing health insurance offering, we take no underwriting risks. Our new business resulted in more new subscribers in October and November than over the same prior year period. I am pleased to report that today we have approximately 480 clients on our various medical plans servicing more than 11,000 total participants. We are in the thick of the 1-1 selling season and our business teams are offering BVSI benefits to our existing clients as well as potential new clients. It is still too early to provide any definitive guidance for 2025, but we are pleased that our current pipeline for 12-1 and 1-1 opportunities are about 35% greater compared to this time a year ago. As we look forward to 2025, we are confident that this product will be accretive to earnings. We have the people, the product, the technology, and the experience to be confident in our various offerings. We are bullish on this product and will begin to reap the benefit of leverage through scale. Next, I'd like to shift to our view of the remainder of the year and the 2025. We have a solid track record of selling and servicing through uncertain economic times, and our blue-gray clients are proving to be resilient. We are consistently growing our WSE stack, and we ended Q3 with a record number of worksite employees. We have consistently achieved strong, controllable growth by focusing on the needs of our clients and by adding new clients. We have more product to sell, more folks selling it, and more referral partners recommending BVSI. It is important to note that there is one less business day in 2025. If there is no dislocation in the economy and we close out the year in the manner that I believe we will, then we expect gross billings growth in 2025 to be similar to 2024. 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 Q3 with strong results and continued momentum in our sales initiatives. Gross billings increased 9% to $2.14 billion in Q3 24 versus $1.96 billion in the prior year quarter. PEO gross billings increased 9% in the quarter to $2.12 billion while staffing revenues declined 2% to $21 million in the quarter. Our PEO worksite employees grew by 5% versus the year-ago quarter, which, as Gary noted, was driven by a record number of WSCs added from new clients, both on a gross basis and net of client runoff. The continued strong trend of controllable growth over recent quarters was once again combined with positive client hiring in the quarter. The pace of client hiring remains below our historical averages, but we continue to see consistency in client hiring rates across most regions and industries. Looking at wage rates and hours worked, total hours continued to remain stable in the quarter, while overtime hours increased modestly year over year. Wage rates continued to increase as well. and average billing per WSE increased 3% in the quarter. Looking at year-over-year PEO gross buildings growth by region, the East Coast grew by 18%, Mountain and Southern California each grew by 10%, Northern California grew by 6%, and the Pacific Northwest declined by 1%. Southern California represents our largest region and has improved to double-digit growth through a combination of consistent client ads and stable customer hiring. The strong East Coast performance represents the 14th consecutive quarter of double-digit growth in that region and is also driven by a combination of strong, controllable growth and above-average client hiring. The Pacific Northwest region is successfully adding clients but continues to be most impacted by slower client growth, including being the only region with net negative client hiring in the quarter. 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 Q3-24, we recognized favorable prior year liability and premium adjustments of $4.3 million. As a reminder, our client workers' compensation exposure is now primarily covered by our fully insured program with no retained claims risk by BBSI. Our overall profitability continues to benefit from operating leverage. This quarter saw an increase in SG&A expense on a year-over-year basis that was expected and was driven primarily by increases in variable employee compensation and incentive pay related to stronger financial results compared to the third quarter of 2023. Year to date, our SG&A growth remains in line with expectations and our full-year profit goals. Moving to investment income, our investment portfolios earned $2.2 million in the third quarter in line with the prior year. Our investment portfolio continues to be managed conservatively with an average quality of investment at AA and average book yield of 2.9%. The combined results of these activities with net income per diluted share of 74 cents compared to 67 cents per diluted share in the year-ago quarter. Our balance sheet remains strong with $94 million of unrestricted cash investments at September 30th and no debt. We stayed consistent in 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 $8 million of shares in the third quarter at an average price of $35.09 per share, with $37 million now remaining available under the program at quarter end. We also paid out $2.1 million of dividends in the quarter at our increased dividend rate of $0.08 per share. This brings our return of capital to shareholders to $10.1 million in the quarter and over $28 million year to date. Moving to our outlook for the full year, we have strong results in the quarter and we are reflecting that in our updated outlook. We now expect gross billings to increase between 7% and 8% for the year versus 6% to 8% prior. We continue to expect WSEs to increase between 4% and 5% for the year. We now expect gross margin as a percent of gross billing to be between 3.03% and 3.07% versus 3% to 3.1% prior. And we continue to expect our effective annual tax rate to remain between 26% and 27%. I will now turn the call back to the operator for questions.