Barrett Business Services, Inc. (NASDAQ:BBSI) Q4 2022 Earnings Call Transcript
Barrett Business Services, Inc. (NASDAQ:BBSI) Q4 2022 Earnings Call Transcript March 1, 2023
Operator: 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, 2022. 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 results, 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 April 1, 2023, starting at 8:00 p.m. ET 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. Good afternoon, everyone, and thank you for joining the call. We had a successful quarter, both financially and operationally, which capped off a record year. We consistently exceeded our internal estimates for client retention, net client adds and work-side employee growth, all of which led to better-than-expected financial results. Before I speak to the financial performance, I would like to recap some of the key operational and strategic accomplishments for the year. We continue to build out our corporate sales effort and increase the top of the funnel by focusing on lead generation via an omnichannel digital campaign, which brought on new clients and new referral partners. We continue to invest in new geographies, and we are now operational in 14 asset-light markets.
We have refined our expansion model where we attract and hire great people, train them well, apply the lessons we learned in a COVID environment for how to operate remotely and package with our digital initiatives to help grow their market penetration. We launched 3 new products. The first is BBSI Benefits. We now offer health insurance plus ancillary benefits. This is a fully insured program where we take no underwriting risk. This offering is made available and delivered seamlessly through our MyBBSI portal. The second is BBSI You, a learning management portal that our clients can purchase, which contains various catalogs consisting of HR and compliance, risk and safety, leadership and professional skills. This offering is also delivered through our MyBBSI portal.
The third is BBSI recruiting. We've built out recruiting hubs in every region that support our branch network and now provide recruiting services for our PEO clients. We also successfully renewed our workers' compensation facility and received better pricing and better terms and now have no downside and only share in the upside of our disciplined underwriting operations. And we also made further advancements on our Employer of Choice Initiative and earned The Great Place to Work designation for the second year in a row. All of these efforts strategically put us in position for promising top line and bottom line growth in 2023 and beyond. Moving to our financial results. During the quarter, our gross billings increased 8% over the prior year quarter.
To note, this quarter had one less business day than the prior year quarter. Regarding our client and WSE stack, 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 Q4. The 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 continues to be 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 controllable growth is that we added approximately 4,100 worksite employees year-over-year from net new clients. Our client hiring was softer than we forecasted in the quarter, and the net result was a 6% increase in our average worksite employees over the prior year quarter. In 2022, we averaged the most worksite employees in BBSI's history. Our growth in worksite employees is a combination of our controllable growth plus our clients' hiring. Moving to our staffing operations. Our staffing business declined by 13% over the prior year quarter and was lower than anticipated. This decrease is a combination of many factors, including, but not limited to, demand, supply, weather, and it varies by geography.
Anthony will give some regional color for what we're seeing in our markets. I mentioned previously that we made investments in our recruiting operations, and we are seeing positive results with BBSI recruiting where we provide recruiting services for our PEO clients. When we place a candidate, we receive a recruiting fee, and then as the candidate joins the client's payroll, we realized PEO revenue. On a year-to-date basis, we've placed 375 candidates with 189 PEO clients and generated over $3 million of recruiting fees. We expect this to increase as we introduce this product to more clients. Moving to the field operational updates. We are very pleased with the progress of entering new markets with our asset-light model. Our market development managers are doing well and achieving their goals of adding and servicing new clients and new referral partners.
Our first 3 classes have all graduated and are attacking their 14 new markets. Our results thus far are better than we expected and are exceeding our internal return hurdle rate, and we anticipate opening additional new markets in 2023. Regarding our product update, we successfully executed on the sales and service of BBSI Benefits, our new health insurance offering. As a refresher, we rolled this out 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 add new prospects. This will not move the needle for revenue or profit in 2023 as we targeted a very small cohort of clients, but we anticipate that this will provide material contribution as we look to the future of BBSI.
I am pleased to say that we had a very successful soft launch in these markets. Our sales, underwriting, operations and IT all worked in unison as intended. We have successfully sold our medical and ancillary products to approximately 70 clients and have about 1,200 members on our various plans. More importantly, we have gained the confidence through our repetitions and are now bringing this product into all markets for existing clients as well as new prospects. BBSI Benefits is now open for business in every market. In addition to our benefits offering, we also launched BBSI You late in the fourth quarter. This is a learning management portal that our clients can purchase and contains various training catalogs. This does not replace our experts in the field, but will be a valuable tool that complements our offering.
Photo by Glenn Carstens-Peters on Unsplash
It is still early days as this just launched, but we've added over a dozen clients already. We view this as an additional product that will help us retain and add new business. To emphasize this point, last month, we had an existing client in the Northwest who began to shop us as they were looking for a learning tool and quickly stayed with BBSI and purchased 87 licenses. Next, I'd like to shift and speak to the 2023 plan. We know that we have consecutive quarters of great momentum. We know that our client retention is strong and that our sales efforts are resulting in more business opportunities. We know that our prospects continue to be larger. We know that we have products to offer. We know that we have been executing to our product road map while achieving our controllable growth goals.
I have never been more optimistic about what we can control. However, times are growing more challenging for business owners, given tight labor market, record inflation, expiring government subsidies, supply chain challenges and a rising interest rate environment. Due to these conditions, we believe that our client hiring will slow in 2023 and have reflected accordingly in our gross billings outlook. This is an unknown, and we may be wrong, but we always are on the side of caution when we set our targets. Based upon our optimism of things we can control, slightly offset with slower economic conditions, we are confident that we can continue to grow our business and our profitability at our long-term targets. Now I'm going to turn the call over to Anthony for his prepared remarks.
Anthony Harris: Thanks, Gary, and hello, everyone. I am pleased to report that we finished the year with strong results as gross billings increased 13% in 2022 to $7.4 billion versus $6.6 billion in 2021. This strong growth is from a combination of better-than-expected growth from net new clients as well as stronger-than-expected hiring and wage increases within our existing customer base. In addition, we achieved strong earnings leverage for the year with diluted earnings per share increasing 31% to $6.54 compared to $5 in the prior year. . Looking more closely at our Q4 results, net income was $11.5 million compared to $10.6 million in Q4 '21. Our Q4 PEO gross billings increased 8% over the prior year quarter to $1.9 billion, while staffing revenues decreased 13% over the prior year to $29 million.
As Gary noted, our increase in PEO gross billings in Q4 was once again driven by stronger-than-expected growth from net new clients in the quarter as well as higher average billings per WSE. Our average billing per WSE increased 3.3% in the quarter, driven primarily by rising wages in our existing employee base. Our client wages have been resilient, and will continue to drive billing growth going into 2023. We mentioned last quarter that we continue to watch for slower growth from client hiring in our PEO client base, and we have seen the pace of hiring slow in Q4 relative to prior quarters. Clients associated with residential construction and manufacturing have been most affected, driven primarily by economic conditions. However, adverse weather across the West Coast in December and continuing into 2023 also served as a headwind to our construction accounts.
Other sectors like hospitality, logistics and services have not seen a slowdown in hiring in Q4. Looking at PEO gross billings growth by region versus the prior year fourth quarter, the East Coast grew 15%, Southern California grew 13%, Mountain States grew 13%. Northern California grew by 1% and the Pacific Northwest was flat. The weather impacts, I mentioned earlier, were most significant in Northern California and Pacific Northwest regions. The net result of higher starting wages, but slower client hiring is that we continue to expect growth from existing customers in 2023, but at a slower rate than we saw in 2022. As a reminder, we are not anticipating significant incremental revenue from our health benefits offering until after the January 1, 2024 enrollment season.
Looking more closely at the decline in staffing revenues. We noted in the previous quarter that the drivers of our slowing revenue vary by region, and that has continued to be the case through year-end. Our primary challenge in the Mountain states continues to be the availability of labor to fill client orders, as unemployment rates remain at all-time lows. And then in the Pacific Northwest, our staffing billings are more weighted toward agricultural services and weather and core harvests have resulted in lower billings. Our California regions are more weighted toward light industrial staffing services, and we have seen decreases in demand there due to softening economic conditions. As Gary noted, we're in the process of leveraging our staffing infrastructure to roll out expanded recruiting and talent acquisition services for our PEO clients.
We have seen positive early results in this space. And as these services grow, we'll begin to generate higher average margin rates in staffing as we earn placement fees. Overall, our expectation is that staffing revenues will decline in 2023 due to these ongoing challenges in the labor market and economy. Moving to our overall gross margin results. Our gross margin rate is again trending ahead of prior year through Q4 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 fourth quarter included a favorable actuarially determined reduction of prior year estimated liabilities of $600,000.
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 any favorable development on claim costs in future periods. With regards to pricing, we continue to see stability in the workers' compensation market. And while the market remains competitive, any pricing adjustments we are making are in line with cost savings. For 2023, we expect this trend to continue. Any pricing adjustments would be well matched to ongoing cost savings, resulting in overall gross margin rates in line with 2022. Turning to operating expenses. SG&A for the quarter was in line with our plan and included increases associated with the launch of our health benefits offering, as well as higher commissions and employee profit sharing as a result of achieving strong results.
Looking ahead to 2023, we are anticipating slower SG&A growth than in 2022. 2023 will include additional investments in our benefits offering of approximately $1.5 million as we increase capacity for our nationwide rollout. But even with these investments, we still expect favorable earnings leverage in 2023, in line with our long-term targets. Moving to our invested assets. Our investment portfolios earned $1.6 million in the fourth quarter, unchanged from the prior year. As we noted in prior quarters, with the rapid increase in interest rates in the year, our fixed income portfolios are in an unrealized loss position. However, we intend to hold these securities our portfolio continued to be managed conservatively with an average duration of 3.8 years, average quality of investment at AA, an average book yield of 2.3%.
Turning to the balance sheet, we had $160 million of unrestricted cash and investments at December 31 compared to $132 million at September 30. The increase is primarily due to cash generated through operations and the timing of payroll tax payments. As a reminder, BBSI is completely debt free, and we do not incur increased expenses associated with higher interest rates. As we look at our accomplishments in 2022, we generated strong profitable growth with gross billings increasing 13% and earnings per share increasing 31%, well ahead of target. We expanded our growth potential with the successful launch of our new health benefits offering and other products and accelerated geographic expansion to our asset-light model, and we returned significant capital to shareholders through our dividend and stock buyback.
Continuing under the Board's $75 million share repurchase program, in the fourth quarter, BBSI repurchased 92,000 shares at an average price of $87.92. In 2022, we have now repurchased nearly 8% of the company's shares outstanding through total purchases in the year of more than $47 million. The company also paid $2 million in dividends in the quarter and reaffirmed its dividend for the following quarter. We have now paid $8.5 million in dividends year-to-date, bringing total capital return to shareholders in the year to $56 million. Turning to our outlook for 2023. We expect gross billings to increase between 5% and 8%. We expect average worksite employees to increase between 2% and 4%. We expect gross margin as a percent 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.
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