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 fourth quarter and full year ended December 31, 2024. Joining us today are BBSI's President and CEO, Mr. Gary Kramer and the company 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 March 26th 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, and good afternoon everyone, and thank you for joining the call. I am pleased to report that we had a strong fourth quarter, capping off an equally strong year. Our financial results exceeded our expectations, and we are optimistic for the future. We continue to execute our short and long-term objectives, and we added a record number of work site employees from new clients. Before I speak about our financial performance, I would like to recap some of the key operational and strategic accomplishments for the year. We are successfully selling and servicing BDSI benefits in every one of our markets. We entered into an additional strategic multi-year partnership with a new carrier that set us up for a great 1-1-25 selling season. Of the new clients, we are seeing success in white collar verticals that we previously had a difficult time penetrating. Our strategic sales initiatives have been operationalized and are resulting in a greater velocity at the top of the sales funnel resulting in record WSE ads. We have more referral partners that understand and appreciate our value proposition and are referring more business to BBSI. We continue to invest in our asset light model and have successfully expanded into new geographies and continue to gain momentum. We continue to invest in MyBBSI and in our tech stack, which resulted in multiple product releases in 2024 and we are executing on exciting new product releases in 2025. We also made further advancements on our employer choice initiative and earned the Great Place to Work designation for a fourth year in a row. Every year we conduct a survey of our clients to evaluate customer needs and satisfaction, and I am pleased to report that our Net Promoter Score increased five points to 69. This gives us great confidence in the value our clients place on the service and solutions we provide. Our clients love what we do, and they are ready and willing to spread the word about BBSI. This is further illustrated in our record client retention rate for the year. 2024 was a great year with great results, and I am proud of what our teams accomplished. Moving to our financial results and website employees, During the quarter, our gross billings increased 10% over the prior year quarter, which is greater than we expected. We continued to execute various strategies to increase the top of the sales funnel, and we achieved a record number of worksite employees from new client ads during fourth quarter and for the full year. Our client retention set a record and exceeded our expectations in both the fourth quarter and the full year. 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 4,000 worksite employees year over year from net new clients. While our clients' growth remained below our historical averages, our clients' workforce continued to grow modestly in the fourth quarter and was up sequentially and year over year. We anticipate these hiring trends will continue in 2025. To summarize for the quarter, we grew our worksite employees by 5.2% as we sold and retained more business and benefited from our clients' net hiring. For the year, our gross billings grew 8%, driven by 4.2% growth in average WSEs. Moving to our staffing operations, our staffing business declined by 9% over the prior year quarter and 7% for the year. Please note the rate of decline in our staffing business has slowed significantly compared to the previous year, and we are forecasting our staffing business to modestly grow in 2025 as our higher value recruitment offering for our PEO clients commands a higher share of the business. In fact, we continue to execute our strategy to recruit for our PEO clients and placed 103 applicants in the quarter. Moving to the field operational updates, We are 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. These folks have been gaining traction and consistency. January was a big month. Our MDMs added over 500 new WSEs. In three of the markets, we hired additional local talent to support our clients. We anticipate having ribbon cutting ceremonies for the new brick and mortar branches by the end of second quarter. 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. To recap, we started off the year with 275 clients on our various plans with more than 6,800 total participants. Our plan was to double the book in 12 months, and I am pleased to say that we have exceeded our plan. At the end of January, we have approximately 575 clients on our various plans with more than 16,000 total participants. As a reminder, we partnered with Kaiser Permanente and added their best-in-class HMO product to our offering mid-year. we saw strong momentum in Q4 that carried into Q1 of this year due to the attractiveness of a national PPO side by side with Kaiser HMO in California. I'm very pleased with our teams, our progress, and our financial results. As we look forward to 2025, this product is now a profit center for us, and we reap the benefit of leverage through scale. Our value proposition resonates well, and we are having success with small and large clients, in white and blue-collar industries, in every state we operate, and with a diverse distribution channel. Next, I'd like to shift to our 2025 IT product objectives. I previously mentioned that we have been investing in our tech stack on the product side to service and support our clients better. Over the last couple of years, we've made additional investments in MyBBSI to support our BBSI benefits offering, learning management systems, and to integrate with additional third parties. As we evolve and look forward to 2025, we will be making additional investments to round out the employee lifecycle experience. We think of the employee lifecycle from a client perspective, from when an employee is hired to when the employee retires, and everywhere in between. We will be replacing or bolstering attributes of the lifecycle with additional product launches throughout the year. On Monday, we issued a press release for our first new product launch of the year, BDSI Applicant Tracking System. This cutting edge tool allows for our clients to create job postings from our centralized system, which integrates with various third party job boards. Clients can manage the interview process in our system, and then when employees are hired, they integrate seamlessly with our payroll and timekeeping systems. This will help our clients with organization and create multiple efficiencies. You may ask, why are we doing this now? Simply put, our clients are asking for it. With our benefits offering, we are seeing larger clients, and we are also seeing more white-collar businesses. This product will help support those clients, and it's designed for the employer who has multiple hires per month. This does not replace BBSI recruiting, which is our product that is utilized by our PEO clients for hard-to-place candidates or clients who don't have much velocity in hiring. We are excited about this launch and the future launches as we execute on our product roadmap in 2025. We are also making investments in systems and AI that will launch in 2025 to better support our employees and create efficiencies that Anthony will discuss in his prepared remarks. Next, I would like to shift to my view of 2025. We have consistently achieved strong controllable growth by focusing on the needs of our clients and by adding new clients. Furthermore, we have also seen improvements in client hiring in 2024, especially in Q4, and we expect these hiring trends to continue in 2025. We have been executing on the sale and service of BBSI benefits, and this has become one of our core competencies. We have IT product enhancements rolling out, more products to sell, more folks selling, and more referral partners recommending BBSI. we will execute on our additional IT initiatives that are going to increase our efficiencies and also increase our financial results. We have a culture of taking care of our clients and for executing to a plan, and I'm looking forward to 2025. 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 that we've finished the year with strong results and are off to a strong start in 2025. For the quarter, our gross billings increased 10% to 2.25 billion versus 2.05 billion in Q4 2023, while diluted earnings per share increased 17% to 63 cents compared to 54 cents in the prior year quarter. For the full year, gross billings increased 7.9% to 8.3 billion in 2024 versus 7.7 billion in the prior year, while diluted earnings per share increased 7% to $1.98 compared to $1.85 in the prior year. Looking at the quarterly results more closely, PEO growth billings increased 10% in the quarter, while staffing revenues declined 9% to $20 million. Our PEO worksite employees grew by 5.2% in the quarter, which, as Gary noted, was driven by a record number of WSCs added from new clients in a fourth quarter. This continued a strong trend of controllable growth during the year and was once again combined with positive and improved client hiring in Q4. The pace of client hiring exceeded our expectations in the quarter, but still remains below our long-term historical averages. We continue to see consistency in client hiring across most regions and across industries. Looking at wage rates and hours worked, total hours remained stable in the quarter, while overtime hours increased modestly year-over-year. Wage rates continued to increase, and average billing per WSE increased 3.3% in the quarter. Looking at year-over-year PEO gross buildings growth by region for Q4, East Coast grew by 21%, Southern California grew by 11%, Mountain grew by 10%, Northern California grew by 5%, and the Pacific Northwest declined by 4%. Southern California represents our largest region and has improved a double-digit growth through a combination of consistent client ads and stable customer hiring. The strong East Coast performance represents the 15th consecutive quarter of double-digit growth in that region, also driven by a combination of strong controllable growth and above average client hiring. The Pacific Northwest region is our smallest region, comprising about 5% of our gross billings, and continue to have the weakest client hiring. However, those trends have begun to stabilize, and the region had a successful year-end selling season. As such, we expect the Pacific Northwest region to return to growth in 2025. 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 Q4 2024, we recognized favorable prior year liability and premium adjustments of $2.4 million compared to favorable adjustments of $5.4 million in the fourth quarter of 2023. As a reminder, our client workers' compensation exposure is now primarily covered by our fully insured program with no retained claims risk by BBSI. As with past quarters, the cost savings we recognize in workers' compensation expense continue to offset pricing pressure in the workers' compensation insurance market, which continue to move overall rates lower. Moving to SG&A, fourth quarter SG&A expense increased 7% on a year-over-year basis, primarily due to increases in variable employee compensation and incentive pay related to stronger financial results compared to the fourth quarter of 2023. For the full year 2024, SG&A expense increased by approximately 6%. We continue to see efficiencies from our operating investments in 2024 and prior, including investments in technology and new product support. As such, we expect our SG&A growth rate to slow in 2025 compared to 2024. Moving to investment income, our investment portfolios earned $2.5 million in the fourth quarter, down approximately $300,000 from the prior year due to lower average interest rates. Our average investment balance is expected to remain stable in the year ahead, but average book yield will come down with short-term rates decreasing year over year, leading to lower investment income in 2025. As a reminder, our investment portfolio continues to be managed conservatively with an average quality of investment at AA. Our balance sheet remains strong with $122 million of unrestricted cash investments at December 31st and no debt. Our approach to capital allocation remains consistent, and that includes first making investments back into the company where we can. In 2024, these investments included several initiatives that Gary mentioned, including technology investments related to ongoing product development as we continue to invest in and expand our value proposition, and investments in our sales team, including our asset light expansion in 2024. In 2025, we expect to continue these investments and we'll launch additional systems and initiatives that will make our internal operations more efficient across our team, including leveraging modern systems, AI tools, and streamlined processes. We are also excited about the launch of additional sales technologies that should further improve our sales velocity, increase our operating efficiency, and help accelerate the success of our new sales team members. After investing in the company, we continue to generate excess cash flow, and we continue to distribute excess capital to our shareholders through our dividend and stock buyback plan. Under our $75 million July 2023 repurchase program, BBSI repurchased $7 million of shares in the fourth quarter at an average price of $43 per share, with $30 million remaining available under the program at quarter end. In total in 2024, we repurchased over 3% of the company's shares outstanding through purchases of more than $29 million. We also paid over $8 million in dividends for the year, bringing total capital return to shareholders in 2024 to $37 million. Looking ahead to 2025, we expect to continue to generate excess available cash and to continue these capital allocation strategies. Now turning to our outlook for 2025. We expect gross billings and average WSEs to strengthen from 2024. With 2025, gross billings expected to increase between 7% and 9%, and average WSEs to increase between 4% and 6%. As a reminder, 2025 includes one less business day, which equates to about a half percentage point lower billings growth. However, we expect that to be more than offset by continued growth in our net client ads, a trend that has continued throughout 2024, and from continued but modest improvements in client hiring. For 2025, we expect gross margin to remain generally consistent with 2024 and range between 2.85% and 3.10%. There are two variables that I would like to call out. First, client payroll tax rates have increased in 2025, similar to the increases we saw in 2024. These rates are being reflected in our pricing, but may have some lag impacting the shape of our earnings. Second, we expect continued softness in workers' compensation pricing, offset by savings in our workers' compensation costs. And finally, we expect our effective annual tax rate to be between 26 and 27%.