Q1 2024 Barrett Business Services Inc Earnings Call

Presentation

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 31st, 2024. Joining us today are BBSI's President and CEO, Mr. Gary Kramer, and the company's CFO, Mr. Anthony Harris. Following the remarks, we will open the call for 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. This statement provides important questions regarding further 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 facts, 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 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 everybody that this call will be available for replay through June first, 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 w. w. w. dot DBSI. dot com. Now I would like to turn the call over to the President and Chief Executive Officer of BBSI, Mr. Gary Kramer.
Please go ahead, sir.
Thank you, and good afternoon, everyone, and thank you for joining the call.

I am pleased to report that we had a strong start of the year and our financial results are in line with our full year projections. We continued to execute our short and long-term objectives, and we added a record amount of worksite employees for our first quarter.
Moving to our financial results and worksite employee status during the quarter, our gross billings increased 7% over the prior year quarter and was in line with our expectations. We continue to execute on our various strategies to increase the top of the sales funnel, and we are seeing positive results. We added 11% more WSEs from new client adds than the prior year quarter. Our client retention continues to trend better 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 controllable growth is that we added approximately 3,100 worksite employees year over year from net new clients. We mentioned previously that we began to see our clients' workforce stabilize in Q3 and Q4. We are pleased to report that our clients began to hire modestly in the first quarter as we were forecasting.
To summarize for the quarter, we grew our worksite employees by 3.1% as we sold and retain more business and experienced the benefit from our clients' moderate net hiring.
Moving our staffing operations, our staffing business declined by 12% over the prior year quarter and was within our expected range. We continue to execute on our strategy to recruit for our PEL. clients and placed 79 applicants in the quarter. We are also experiencing macroeconomic factors, including supply and demand imbalances, which vary by geography. As we look to the remainder of the year, we will be going against softer comparables starting in Q2, and we are forecasting our staffing business to stabilize, meaning for the field operational updates, we are very pleased with our entrance into new markets with our asset-light model. We have 15 total new market development managers in various stages of their development. They are doing well and largely achieving their goals of adding servicing new clients and new referral partners into the markets. We have hired additional folks to support our clients and are in the process of moving into a traditional brick-and-mortar BDSI branch. We continue to see positive results from our investments in new markets and are actively recruiting additional new market development managers.
Regarding our product updates, we continue to execute on the sale and service of BBSI benefits.
Our new health insurance offering.
We had a successful year-end selling season, and I am pleased to report that through March, we have approximately 280 clients on our various plans with more than 7,000 total participants, we continue to invest and evolve our business product offering. Earlier in the month, we announced that we entered into a strategic multiyear partnership with Kaiser Permanente for programs effective seven one 24 and greater Kaiser is renowned for its excellence in healthcare services and offers one of the most complete and competitive HMO products in the marketplace. This offering falls into our workers' comp and health insurance framework where we take no underwriting risk. The addition of Kaiser will further round out our product offering from blue and gray collar clients. We'll be offering a national PPO side-by-side with the Kaiser HMO, and we are receiving positive feedback from our clients and referral partners. We believe that this is going to give us a lift for seven one, but more importantly, being an accelerant to growth as we look out to 2025 and beyond. We are pleased with the results of BDSI benefits and that 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.
Next, I would like to shift to our view of the remainder of the year. We have consecutive quarters of great momentum. We met our worksite employee expectations. 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 product to sell more folks selling it and more referral partners recommending BBSI overall, our view of the economy and materials dislocation in the economy.
It's growth in 20.
Yes, your phone is cutting out on us.

Thank you, Gary. Can you hear me now?
Yes.
Okay.
Can tell continue.
Yes, go ahead.

Okay.

Thank you. Learned the transition and the content flow resettled intermission.
Thank you, and hello, everyone. I'm pleased to report. We finished Q1 with strong results consistent with our plan and with continued positive momentum in our sales pipeline. Gross billings increased 7% to 1.9 billion in Q1 24 versus $1.8 billion in the prior year quarter. Peo gross billings increased 7% in the quarter to $1.89 billion, while staffing revenues declined 12% to 20 million in the quarter.
Our PE. and worksite employees grew by 3.1% versus the year ago quarter, which is the result of strong controllable growth from net new PEO clients as well as modest hiring within our existing customer base.
Looking at trends in client hiring more closely, we saw moderate positive hiring in every region, except for the Northwest region, Northwest continues to be most impacted by declines in the construction sector. While all other regions are now seeing modest increases in construction hiring on a year-over-year basis. The pace of hiring remains broadly slower than historical trends across all regions, but it is in line with our expectations.
Looking at hours worked overtime, hours per employee have remained stable and for the second quarter in a row, total overtime hours worked were higher than the prior year quarter. Wage rates continue to increase and average billings per WSE increased 3.5% in the quarter.
Looking at PEO gross billings growth by region versus the prior year first quarter, East Coast grew by 17%. Mountain States and Southern California both grew by 7%. Northern California grew by 4% and the Pacific Northwest declined by 6%.
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 Q1 24, we recognized favorable prior year liability and premium adjustments of $3 million compared to favorable adjustments of $1.1 million in the first quarter of 23. As a reminder, our client Workers' Compensation exposure that primarily covered by our fully insured program with no retained liability by BBSI. Payroll taxes are typically highest in Q1 as wage caps reset and this year has seen a modestly higher effective client unemployment tax rate than recent years. These higher rates are reflected in our billing rates over the course of the year and our gross margin rate remains in line with expectations, both for the quarter in the year, our overall profitability has continued to benefit from operating cost management. For Q1, SG&A expense increased by approximately 3% growing slower than our billings growth rate and providing ongoing operating leverage.
Moving to investment income. Our investment portfolios earned $3.2 million in the first quarter, up 0.9 million from the prior year.
Our investments continue to be managed conservatively with average quality of double-A, an average book yield of 2.9%.
Net loss for the first quarter was 0.1 million, or $0.02 per diluted share compared to net income of 0.8 million or $0.12 per diluted share in the year ago quarter the decrease is primarily attributable to an increase in payroll taxes, partially offset by decreased workers' compensation expense and the increase in investment income.
Our balance sheet remains strong with 124 million of unrestricted cash and investments at March 31st and no debt. We continue our approach to capital allocation, making investments back into the Company through product enhancements and geographic expansion and distributing excess capital to our shareholders through our dividend and stock buyback plan.
Continuing under the Board's July 2023 repurchase program, EDCI repurchased 7 million of shares in the first quarter at an average price of $120 per share with $52 million remaining available under the program at quarter-end. The Company also paid $2 million in dividends in the quarter and reaffirmed its dividend for the following quarter. The Board also announced their intent to execute a four for one stock split pending approval by shareholders of a related increase in the number of authorized shares. Executing the stock split is intended to increase our float, benefiting liquidity and trading efficiency for our shareholders and speaks to our optimism about the long-term value of our company and our trajectory. The effective date of the split is expected to be in June, pending the results of the shareholder vote.
Looking to our outlook for the full year. Our results for Q1 are in line with our plan and our expectations for 2024 remain consistent with our prior outlook and we continue to expect gross billings to increase to 6.8% for the year. We expect average WSEs to increase to 45%. We expect gross margin as a percent of gross billings to be between 2.95% and 3.15%. And we expect our effective annual tax rate to between 26% and 27%.
I will now turn the call back to the operator per question.

Question and Answer Session

Operator

Thank you.
If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue, you may press star two. If you would like to remove your question from the queue and For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Our first question is from Jeff Martin with Roth Capital Partners.
Please proceed.

First, good afternoon, guys, how are you adjusted for Tom?

I guess let's let's dive in by starting with the gross billings growth is obviously, guidance is reiterated with 4% to 5% WSE growth that implies pretty low wage inflation and pretty modest net hiring. I would assume. I'm just curious if you could elaborate on that.
Sorry.
Yes.
I think you're correct that the we went into this expecting really flat period last year with a net negative client hiring this year, we're expecting modest growth.

We've seen that modest growth.
We message that to the extent that there is upside in economic activity and particularly in the construction sector, that would be a benefit to Argo.
And Scott?
Yes, I would say the lion's share of our revenue growth is going to come from our controllable growth this year, right? So we've got a good track record over the last couple of years of adding and retaining business. And that's really going to carry us forward in 24. And then if if the economy picks up and our client start to hire again, and that's just a tailwind, that's not really baked into our outlook, our forecast.

And then if I recall correctly, at the end of Q4, we had 275 clients on the health care plan. We just ended a renewal period pay for one one new. Now we're at two eighty's or something I'm missing here. I would think you'd see a pretty and a significant step up from Q4 to Q1 in terms of clients on the healthcare plan.
So when I yes, good question. When I when I gave those stats last earnings call, I gave them as of end of January. So I was trying to show the investment community how successful we were for the one one. So really all you all are taking credit for now and this roll forward as February and March, which I think is like a small amount of clients because they're not real big health care models.

Got it.
Okay.

And then in terms of the July first kickoff with Kaiser. Just curious what kind of initial expectations we should.

Yes, I don't want to tell you what I expect as I expect, too much. So I won't.
I'll separate this from Tom Seddon.
Ones are launch for the program.
We started to market and sell it in April.
It's still early, right?
So where we're four weeks into the selling season for seven one. We've quoted 60 plus some deals so far and we've got more in the in the Q to quote, we've got about 10 that we've closed so far for seven one. But I would say that this is specifically in the geographies we're in right cause. If you look at California and you look at Oregon, there are two pretty heavy Kaiser states on in an interesting part about Kaiser is I feel like folks are born Intuit and raised the newest knowing they become adults. They want to have it as well because it's what they know and what they trust. They really bought a really built a good brand and we're just pleased that we can we can put the BBSI. brand next to the Kaiser brand plus with a national partner for the CPO., we think it really rounds out the offering in those states and yes, everyone is settled was our second biggest season. But really this is, I'll say, learning the craft and the dance with Kaiser so that when we get to the one one for 25, we can be successful. We've set ourselves up for a good one to 25.
Great.

And then just one more, if I could, and then I'll circle back around. But in terms of the Kaiser offering, is it my understanding correctly, it's HMO only in curious if it doesn't include DTOY. and then we had we were very competitive PPO. on our national partner.
So really when we when we put the product offering out there, they can buy the clients at the opportunity to buy the PPL. on our national or if they would like the HMO or Kaiser Kaiser predominantly sells in this small business spaces, the lion's share is predominantly the HMO.

Thank you.
Our next question is from Chris Moore with CJS Securities.

Operator

Please proceed.

Hey, good evening, guys. Thanks for taking a couple of questions.
You may.
Maybe I'll just start with the or the benefits where Jeff left off, I just want to make sure that I understand that the enrollment process, so it's July first with Kaiser, there will be ongoing enrollment during 24, but but there is a bias towards starting on January first. Just trying to understand how that works.
Yes, the lion's share for health insurance salons share three times already, but the lion's share of our health insurance is effective one one. And part of the reason for that is in Palm. It ties into the HSA accounts where you don't have HSA it's less beholden to a one one effective date of One One One One is the biggest effective day seven one is the second largest effective date. And then it kind of it's kind of a smattering from there by month. I mean, we add we add clients every month, but a large portion of them will be settled one & one one Got it.
Maybe we can talk a little bit more about the the asset-light model itself. It sounds like within 15 there potentially two kind of traditional BBSI branches that are beginning to form. Is that right? And roughly where is that geo geographically?
Yes.

So we had a we have first, we've got a good client base there and where we're covering the cost of the program.
So we make additional investments in the first investment we make is typically it's been so far we hire HR professional locally. And then we also then build out a true branch of BBSI brick and mortar as we call it. So intuitive markets, we've hired additional folks locally to support our clients, and we're in the process now our tenant improvements are moving into Dallas and Chicago.
Got you.

Very helpful.

And maybe just the last one for me. Can you maybe talk about the Kate, this is earnings Q2 and Q4 as you know, I think in the past, it's often been Q2 and Q4 kind of in that same range in Q three a little bit higher. Is that the way we should be looking at it now? Is there anything kind of DIFFERENT at this stage?
Yes, similar pattern, our operations are peak seasonally in Q three, and that's when we see our highest profits. Usually Q2, Q4 would be similar, little weighting more towards the back half of the year decisions that are trending. But yes, that's right. QQ. one, we always have very low margins because the payroll taxes, as I mentioned.
Got it right. I will leave it there. I appreciate it, guys.
Our next question is from Vincent Colicchio with Barrington Research.

Operator

Please proceed.

Yes, Gary, I'll let you finish your comment. You were cut off on All I heard was the economy. I suppose you were going to discuss your thoughts on the economy versus last quarter.
I guess I am my Forrest Gump moment there, but the I guess the way we're the way we're looking at the economy, there was no material change in Q1 versus Q4. And we were looking ahead, we're saying if the economy trades the way it behaves the way it is now, we still anticipate greater growth, billings growth in 2014 than in 23. Com, which is obviously reflected in our HIGHER guide for 24 than what we realized for 23.
And then a follow up on the asset-light model. Some of the remaining programs that are not moving to an office on, if I heard you right, two are moving to an office, right? Do you expect any of them to also move to that next stage this year.
I mean, ultimately, we expect all of them to graduate to a BBSI. branch. It's just a question of when that has to do with what their what their profitability and sell-through rate is.
I have to get back to I'll speak to that next quarter. Maybe I'll lay out a better projection for how we think come the end of 24 and 25 is going to go for fiscal Gresham.
And I think you said last quarter you would add three more asset-light MARKETS, is that accurate?
It's some it's an evolving number because we hire two and one doesn't make it type of thing. So really it's it's a of a fluid number where we hire everybody.

We know we have a good compensation package. We train folks.
We we give them immersion training. We go into the market and help them and ultimately, we are trying to make sure that they're successful, but it's a tough job and there's some that are successful. We had a few that haven't been on, but when they're not we backfill and start again. So it's sometimes it's three steps forward.

One step back as a last question, as you roll out this healthcare product, are you getting better at adding large clients. What does that progression look like?
Our economics, if you don't mind, ask me that next quarter, when I actually had this, when we have seven one under our belt right now right now, I'm still I'm still looking ahead and we'll most of the folks still make their buying decision for seven one until May or middle of May. So we have a lot of a lot of folks that we've presented to that. We think we have a chance to win, but ultimately they haven't given us the order yet when we get to next quarter, we'll have a a true tally of what our second one results were.
Okay, thank you.
As a reminder to star one on your telephone keypad. If you would like to ask a question.
Our next question is a follow-up from Jeff Martin with ROTH Capital Markets.

Operator

Please proceed.

You wanted to ask about payroll taxes. You know, state unemployment rates had remained low for a nationally sizable period of time and appears as states are catching up to that.
Now I'm looking at gross margin down about 25 basis points year over year, you did comment that it was in line with your internal budget expectations, but just curious, it was strong pricing that you've you're experiencing and this would imply that you get more of a trampoline effect in the later part of the year when you hit the caps. Just just curious comment on.

Yes, you're spot on there.
So higher payroll tax really across every region for us that are our clients. Just the trend you had said that was and we see payroll tax rate coming down, the strong economy, the last couple of years that even after COVID, a lot of states put policies in place to really update all of the effects of the COVID layoffs, right? But now with the return, we are seeing higher rates.
We do bake that into our pricing because you noted that will flow through over the course of the year.
So we'll be somewhat of a tripling effect, as you noted, a little lower margin than usual this quarter, and that will rebound over the next three quarters.

Thanks for clarifying.
At this time concludes our question and answer session. I would now like to turn the call back over to Mr. Kramer for closing remarks.

Well, thank you, everybody, for dialing in. I would like to thank all of the BBSI professionals for their hard work.
And you had a great quarter and a great start of the year and just thank you, everybody.
Thank you. This will conclude today's conference you may disconnect your lines at this time, and thank you for your participation.