Barrett Business Services, Inc. (NASDAQ:BBSI) Q1 2023 Earnings Call Transcript May 6, 2023

Operator: 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 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 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 June 3, 2023, starting at 8:00 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’d like to turn the call over to the President and Chief Executive Officer of BBSI, Mr. Gary Kramer.

Please go ahead, sir.

Gary Kramer: Thank you. Good morning 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 nonevent for BBSI. 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 Q1.

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’d 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 believed 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 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% 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 3 classes have all graduated and were selling in their respective 14 markets in the first quarter.

We have hired our next Class of 5 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 rate. 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 products sold successfully in every geography we operate in. I’d 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’ve 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.

Anthony Harris: 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 adds in the quarter than in the prior year quarter. Our overall gross billings increased 5% in Q1 2023 to $1.79 billion versus $1.71 billion in Q1 ’22. With continued positive earnings leverage, we achieved diluted earnings per share of $0.12 compared to $0.04 cents in the prior year quarter. Looking more closely at our Q1 results, PEO gross billings increased 5.3% over the prior 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 our existing customer base. Overall, WSE’s 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 2/3 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 billing 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 over time decreased 11%. As a result our total average billing for 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 onetime 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 sell 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. So the decline should be at a slower rate than the Q1 decrease. Moving to our gross margin results. Our gross margin 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 the favorable claim development in future periods. Turning to operating expenses. SG&A for the quarter is in line with our plan 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 earn $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 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 31, compared to $160 million at December 31. 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 gross billings to increase between 5% and 8%. We expect average WSE to increase between 2% and 4%. We expect gross margin at the percentage of gross billings to be between 3.0% and 3.15% and we expect our effective annual tax rate to remain between 27% and 28%. I will now turn the call back to the operator for questions.

Q&A Session

Operator: [Operator Instructions]. Our first question comes from Jeff Martin of ROTH MKM.

Operator: The next question is from Vincent Colicchio of Barrington Research.

Operator: The next question is from Chris Moore of CJ Securities.

Operator: The next question is from Jeff Martin of ROTH MKM.

Operator: The next question is from Bill Dezellem of Tieton Capital.

Operator: Thank you. Ladies and gentlemen, that concludes our conversation on this session. And I would now like to turn the call back over to Mr. Kramer for some closing remarks.

Gary Kramer: Sure. I feel like I used all my words on this one, but I just want to thank all the BBSI professionals for a great quarter, and thank you, everybody, for dialing in for your support, and that concludes our call.