Barrett Business Services, Inc. (NASDAQ:BBSI) Q1 2024 Earnings Call Transcript May 4, 2024
Barrett Business Services, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
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, 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 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 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 1, 2024, starting at 08:00 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 would 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, 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 a 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 retained more business and experienced a benefit from our clients’ moderate net hiring. Moving to 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 PEO 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. Moving to 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 and servicing new clients and new referral partners. In two of the markets, we have hired additional folks to support our clients and are in the process of moving into a traditional brick-and-mortar BBSI 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 multi-year partnership with Kaiser Permanente for programs effective 7/1/24 and greater. Kaiser is renowned for its excellence in health care 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 for blue and gray-collar clients. We will 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 post 7/1, but more importantly, be an accelerant to growth as we look out to 2025 and beyond. We are pleased with the results of BBSI Benefits and 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 products to sell, more folks selling it, and more referral partners recommending BBSI. Overall, our view of the economy has material [Technical Difficulty] dislocation in the economy. [Technical Difficulty]
Operator: Your phone is cutting out on us.
Anthony Harris: Thank you, Gary. Can you hear me now?
Operator: Yes.
Gary Kramer: Okay. Should I continue?
Operator: Yes, go ahead.
Anthony Harris: Okay. Thank you.
Gary Kramer: I was right at the transition.
Anthony Harris: I know. Maybe that’s a good time. Little 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 PEO 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.
The 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 continued to increase and average billing 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 in 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 is now 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 modestly higher effective client unemployment tax rates 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 and 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 AA and 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 investments at March 31 and no debt. We continued 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 the Board’s July 2023 repurchase program, BBSI 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 this stock split is intended to increase our flow, 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. We continue to expect gross billings to increase between 6% and 8% for the year. We expect average WSEs to increase between 4% and 5%.
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 be between 26% and 27%. I will now turn the call back to the operator for questions.
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