Barrett Business Services, Inc. (NASDAQ:BBSI) Q3 2023 Earnings Call Transcript

Barrett Business Services, Inc. (NASDAQ:BBSI) Q3 2023 Earnings Call Transcript November 1, 2023

Barrett Business Services, Inc. beats earnings expectations. Reported EPS is $2.68, expectations were $2.4.

Operator: Good afternoon, everyone, and thank you for participating in today’s conference call to discuss BBSI’s Financial Results for the Third Quarter Ended September 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 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 December 1, 2023, starting at 8:00 p.m. Eastern 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.

Sir, please go ahead.

Gary Kramer: Thank you, and good afternoon, everyone, and thank you for joining the call. We had another strong quarter, and I am pleased with our results. We continue to execute on our short-term and long-term objectives and we surpassed 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 continued 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 national PEO licenses, along with BBSI Benefits.

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 our controllable growth, is that we added approximately 4,300 worksite employees year-over-year from net new clients. This was partially offset by slower client hiring in the quarter. Our clients increased their workforce sequentially over the second quarter, but by less than we were forecasting.

Anthony will provide more color for the portfolio by geography and industry. To summarize, we grew our worksite employees by 1%, which was slightly lower than forecast for the quarter as we sold and retained more business, but this was partially offset by slower-than-anticipated client hiring. Moving to our staffing operations. Our staffing business declined by 25% over the prior year quarter and was slightly better than we anticipated. We mentioned previously that 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 and placed 83 applicants in the quarter, which generated equal margin to our traditional staffing model, but resulted in less top line revenue.

We also experienced microeconomic factors, including supply and demand imbalances, which vary by geography. Moving to the field operational updates. We are very pleased with our entrance into new markets with our asset-light model. We have 14 total new market development managers that are 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 and have a robust pipeline. Our results thus far are better than we expected and are exceeding our internal return hurdle rate, and we are actively recruiting for the next class. Regarding our product updates, we continue to execute on the sales 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 through October, we have 160 clients on our various plans with more than 3,500 total participants. Our value proposition is resonating 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. We are in the thick of the 1/1 selling season, and our business teams are offering BBSI Benefits to our existing clients as well as potential new clients. It is still too early to provide any definitive guidance but we are pleased with our current pipeline.

If we close the current opportunities that are in our pipeline at our historical benefits closing rate, then we are confident that this product will be accretive to earnings in 2024. Next, I’d like to shift to our view of the remainder of the year and the 2024. Our various sales strategies continue to increase the top of the sales funnel, our controllable growth exceeded our expectations every quarter this year, and that trend continued into October. Our qualified prospects at the end of the quarter were approximately 75% greater than the prior year quarter. If we close this business near our historical close rate plus close on our benefits opportunities, and we are setting ourselves up for a strong start to 2024. If there’s no dislocation in the economy, and we close out the year in the manner I just described that we expect to see improved gross billings growth in 2024 over 2023.

Now, I’m going to turn the call over to Anthony for his prepared remarks.

Anthony Harris: Thanks, Gary. Hello, everyone. I’m pleased to report we finished Q3 with strong results as we continue to exceed our expectations for profitability and worksite employees added in the quarter for net new clients. Our overall gross billings increased 3% in Q3 ’23 to $1.96 billion versus $1.91 billion in ’22. We have achieved diluted earnings per share of $2.68 compared to $2.45 in the prior year quarter. PEO gross billings increased 3.3% over the prior year quarter to $1.94 billion, while staffing revenues decreased 25% over the prior year to $22 million. Our worksite employees grew by 1.1% in the quarter which was the result of adding more WSEs than expected from net new PEO clients, offset in part by slower hiring within our existing customer base.

Looking at client hiring more closely, we have seen overall hiring trends stabilized in the quarter and increased modestly on a sequential basis, but the pace of hiring remains slower than historical trends and slower than expected. We continue to see this slowness primarily in the construction sector and most concentrated in our Northern California region. Average hours worked and overtime hours per employee have continued to stabilize in the quarter as well. Average billing per WSE increased 3.5% in the quarter, driven by higher average client wage rates, which remain resilient and which will continue to be a source of billings growth going forward. Looking at overall PEO gross billings growth by region versus the prior year third quarter, East Coast grew 12%.

Mountain States grew 8%, Southern California grew 5%. The Pacific Northwest decreased by 3%, and Northern California decreased by 3%. As Gary discussed, staffing revenues are down year-over-year, driven by strategic shifts in our model and the current economic environment. That said, our staffing revenues increased sequentially and we expect this stability to continue through year-end. 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 ’23, we recognized favorable prior year liability and premium adjustments of $2.2 million. This compares to favorable prior year liability of premium adjustments of $1.4 million in the third quarter of 2022.

As a reminder, our client workers’ compensation exposure is now primarily covered by our fully insured program with no retained liability by BBSI. Our gross margin rate improved in the quarter due to the cost savings from lower workers’ compensation expense and our ongoing focus on pricing discipline. In addition, our profitability continues to benefit from cost management efforts that largely offset the impact of our ongoing investments in the launch of BBSI Benefits and our expanding team of market development managers. As a result, SG&A for the year continues to grow slower than prior year and slower than our billings growth rate. Moving to investment income. Our investment portfolios earned $2.3 million in the third quarter, up $700,000 from the prior year due to higher yields and more favorable cash flow timing associated with our current fully insured program.

Our investment portfolio continues to be managed conservatively with an average duration of 3.5 years and average quality of investment at AA. Our balance sheet remains strong with $129 million of unrestricted cash investments at September 30 and no debt. Continuing under the Board’s July 2023 repurchase program announced last quarter, BBSI repurchased $11 million of shares in the third quarter, to $64 million remaining available under the program. The Company also paid $2 million in dividends in the quarter and reaffirmed its dividend for the following quarter. Turning to our outlook for the year, we are updating our outlook to reflect our year-to-date results, and we now expect gross billings to increase between 4% and 5%, a slight decrease from the 4% to 6% in our prior outlook.

And we expect average WSE to increase between 2% and 3% for the year, a slight decrease from the 2% to 4% in our prior outlook. We continue to expect gross margin as a percentage of gross billings to be between 3.1% and 3.15% 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.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Jeff Martin with ROTH Capital Partners. Please proceed with your question.

Jeff Martin: Good afternoon, Gary and Anthony. Hope you are doing well. Wanted to dive into a little bit more on the sales funnel, what are some of the things you’re doing differently this year versus years past, maybe that’s leading you to hit your internal controllable targets?

Gary Kramer: Jeff, I would say that we’ve had laser focus on the top of the funnel. We’ve tried and refined over the past couple of years to make sure that we’re getting as many looks as we can, targeting clients directly, targeting referral partners, targeting benefits brokers. So it’s really not just one easy button. It’s a lot of different strategies that we have been executing on over the past, I’ll say, two-plus years. And then we’re really just seeing good results for that now. We’ve — I said in my prepared remarks that our prospects, right? So these are qualified prospects that we’re in the process with — we’re about 75% higher at the end of September than we were against September of ’22. So, we’ve got that many more possible potential clients that can join into Q4 into Q1. So we’re just — we’ve got a lot of energy going there, and hopefully, we’re going to see the reward of it going into Q4 and Q1.

Jeff Martin: And then remind us on the BBSI Benefits side, what’s the investment this year and next year that you’ve got to essentially cover to become earnings accretive there? And then second part to that question is, can you give us an update on some of the new referral partners that you’ve brought on board some specifically for BBSI Benefit, would be helpful.

Anthony Harris: Sure. This is Anthony. Jeff, I’ll take the investment question, and then Gary can speak to the referral partners. But we spent about $3 million of total expense investment to operate this program. So that’s essentially the run rate we’re at right now. Obviously, as it scales over time, that could change a little bit, but that’s where we’re at.

Gary Kramer: And then on the referral partner side, we — I have the stat, I just don’t have it with me for how many new referral partners we brought in, in the quarter, but we have a constant discipline to attract new referral partners. We’ve got a an army of folks in the field, that’s what they do on a day-to-day basis, and they’re doing it very well as far as making — we call it making new friends. But we’re — part of that strategy is as we talk about our total addressable market is, we’re now able to go to employee benefits brokers where — before they could refer to us, but we didn’t really have a product that they could sell into their clients because it wasn’t — didn’t have the health insurance. But now that we have the health insurance, we’re able to tap into almost twice as many employee brokerages out there.

Jeff Martin: And then last one for me. In terms of growth drivers for next year, obviously, a rebound in hiring from clients would be a big one. But is potential for workers’ compensation rates in California, in particular, is that — are you viewing that as a potential growth driver next year?

Gary Kramer: We’re not seeing any — I think I said in the prior calls that we’re seeing we’re seeing some carriers be less aggressive than they were. There’s still competition in the marketplace, but they’re less aggressive than they were. We are not seeing anything that is driving accounts to market as far as rate increases on the workers’ comp side. We’re seeing some of that on the health insurance side. We’re seeing clients go to market because in some markets, they’re getting 20-plus percent rate increases on their medicals. So that’s driving some accounts to market. But on the workers’ comp, it’s still trading in that plus or minus 2%, plus or minus 5%. It’s not really a pain point that’s driving business to market yet, and we’re not forecasting that.