Q4 2023 Barrett Business Services Inc Earnings Call
Participants
Gary Kramer; President and CEO; Barret Business Services, Inc.
Anthony Harris; CFO; Barret Business Services, Inc.
Chris Moore; Analyst; CJS Securities
Jeff Martin; Analyst; ROTH Capital Partners
Vincent Colicchio; Analyst; Barrington Research
Marc Riddick; Analyst; Sidoti & Company
Presentation
Operator
Good afternoon. Everyone, and thank you for participating in today's conference call to discuss BBSI. financial results for the fourth quarter and full year ended December 31st, 2023 Joining us today are BBSI's President and CEO. Mr. Gary Kramer has 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 statement provides important cautions regarding forward-looking statements in 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 subject to a number of risks and uncertainties. Actual results may differ materially from those implied by the forward-looking statements. Please refer to the Company's recent earnings release and 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 March 28th, 2024, starting at 8 P.M. Eastern time today. Our 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.bsi.com. Now I would like to turn the call over to the President and Chief Executive Officer of BBSI, Mr. 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, capping off an equally strong year, and I am pleased with our results. Before I speak about our financial performance. I would like to recap some of the key operational and strategic accomplishments for the year. We are successfully selling and servicing BBSI benefits in every one of our markets, our existing clients are buying. And so our new clients on the new clients.
We are seeing success in white-collar verticals that we previously had a difficult time penetrating. Our strategic sales initiatives have been operationalized and are resulting in consistent and predictable acquisition of new clients and new referral partners. We continue to invest in our asset-light model and has successfully expanded into new geographies and are gaining momentum. We continue to invest and Perfect. Our other new products with BDSRU. and BBSI recruiting.
We continue to invest and bolster our tech stack with enhancements to mighty VSI and we also made further advancements on our employer of choice initiative and earned the Great Place to Work designation for the 3rd year in a row. Our client retention continues to trend better than the pre-pandemic era. Every year. We conduct a survey of our clients to evaluate customer satisfaction and needs. This year, we modified our survey some so that we could calculate a net promoter score, which is an evaluation of how many of our clients would be willing to recommend and refer BBSI.
I am pleased to say that we scored 64 to put this in perspective and net promoter score above zero is considered good and anything above 50 is exceptional. This gives us great confidence in the value our clients place on the services and solutions we provide our clients love what we do and they are ready and willing to spread the word about BBSI 2023 was a great year for BDSI, and I am proud of what our team accomplished from moving to our financial results for the quarter, we surpassed our gross billings estimate for the quarter by continuing to execute on our various strategies to increase the top of the sales funnel. In 2023, we added 6% more WSEs from new client adds versus the prior year. I am pleased to say that we once again exceeded our controllable growth expectations in the quarter for net new clients.
We finished the year with more WSEs than we forecasted, which sets us up well for the start of 2024. 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 our client runoff, our retention in the quarter 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 38 hundred worksite employees year over year from net new clients.
To summarize for the year, we grew our worksite employees by 2.2% year over year. We sold and retain more business, which was partially offset by reductions in WSEs at our existing clients. We started to see client workforces stabilize in Q2 three, and that trend continued in Q4. Moving to our staffing operations, our staffing business declined by 22% over the prior year quarter and was in line with our forecast. We mentioned previously that we repriced the portfolio and jettison 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. We are also experiencing macroeconomic factors, including supply and demand imbalances, which varies by geography. We expect our staffing revenue to stabilize in 2024.
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. Some of these will graduate to a traditional BBSI. branch in 2024 as we are actively searching for real estate and recruiting locally to support the business, our next classes in training, and we'll begin selling in their markets in March. We anticipate that we will have three classes this year, depending upon the talent in the marketplace.
Regarding our product updates, we continued to execute on the sales 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 January, we have approximately 275 clients on our various plans with more than 6,800 total participants. Our value proposition resonates 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 pleased with these results and this product will be accretive to earnings in 2024. We are in a great position and will now reap the benefit of leverage through scale for BBSI benefits.
We have operational plans in 2024 to enhance our tech, refine our processes and add additional carriers to our offering. We think the additional carriers will be attractive and compelling in certain markets and may further accelerate our growth. We are estimating that we will double our participation by January of 2025 Next, I'd like to shift to my view of 2024. We have consistently achieved strong controllable growth by focusing on the needs of our clients and by adding new clients these actions more than outweighed our clients' workforce reduction in 2023, we have more product to sell more folks selling in and more referral partners recommending BBSI.
We will have additional health insurers to offer. And we'll have additional client focus advancements in IT that are going to make our value proposition more compelling. If there is no dislocation in the economy we expect to see greater gross billings growth in 2024 than in 2023. 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 the year with strong results and strong momentum in our sales pipeline. Gross billings increased 4% to $7.7 billion in 2023 versus $7.4 billion in the prior year, while diluted earnings per share increased 13% to $7.39 compared to $6.54 in the prior year. Looking at Q4, our gross billings increased 5% to $2.05 billion versus $1.95 billion in Q4 of 2022, while diluted earnings per share increased 32% to $2.16 compared to $1.64 in the prior year quarter. Peo gross billings increased 6% in the quarter to $2 billion, while staffing revenues were $22 million in the quarter, representing a modest increase on a sequential basis, but a decline year-over-year of 22%. Our PEO worksite employees grew by 2% in the quarter, which was the result of strong controllable growth from net new PEO clients, offset in part by slower hiring within our existing customer base.
Looking at trends in client hiring more closely, we continue to see hiring stabilize in the quarter with most of the year-over-year WSE reductions occurring early in 2023. The pace of hiring remains broadly slower than historical trends, but we continue to see the largest impacts concentrated in the construction sector and in our Northern California region, average hours worked and overtime hours per employee have also remained stable in the quarter and for the first time in over a year, total overtime hours worked were higher than the prior year quarter. Average billing per WSE increased 3% 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 PEO gross billings growth by region versus the prior year fourth quarter, the East Coast grew 16%. Mountain States grew 10% Southern California grew 6%. The Pacific Northwest grew by 3%. In Northern California, it was flat. 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 Q4 2023 three, we recognized favorable prior year liability and premium adjustments of $5.4 million compared to favorable adjustments of $600,000 in the fourth 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 EBSI. 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. Our overall profitability has continued to benefit from operating cost management for both Q4 and the full year 2023, SG&A expense increased by approximately 3%. As a result, SG&A for the year grew slower than our billings growth rate, and we expect this trend to continue in 2024, providing ongoing operating leverage.
Moving to investment income. Our investment portfolios earned $1.7 million in the fourth quarter, and our investment portfolio continues to be managed conservatively with an average duration of 3.1 years, average quality of investment at double-A, an average book yield of 2.8%. Our balance sheet remains strong with $152 million of unrestricted cash and investments at December 31st and no debt. Our philosophy for capital allocation remains unchanged. We continue to prioritize our investments back into the company on strategic value add initiatives over the last several years.
These initiatives been expanding our IT capabilities with the launch and continued enhancement of MIBBSI., the launch of new products, including our health benefits offering, our plant learning management system and improved system integrations among others and geographic expansion, which has been accelerated by our asset-light approach in new markets. We expect our level of investment in these areas to remain similar going forward as we continue to expand and enhance our products and expand our reach beyond these investments.
Our next priority is to distribute capital to our shareholders. Continuing under the Board's July 2023 repurchase program announced last year, BDSI repurchased $5 million of shares in the fourth quarter at an average price of $111 per share, with $59 million remaining available under the program at year end. In total in 2023, we repurchased over 5% of the company's shares outstanding to purchases of more than $34 million. We also paid over $8 million in dividends for the year, bringing total capital returned to shareholders in 2023 to $42 million. Looking ahead to 2024, we expect to continue to generate excess available cash and to continue these capital allocation strategy.
Now turning to our outlook for 2024. We expect gross billings and average WSEs to strengthen from 2023 with 2024 gross billings expected to increase between 6% and 8% and average WSEs to increase between 4% and 5% as a baseline, we expect client wage inflation to continue at a similar to 2023 or 2024. We now also expect a return to positive net client hiring While 2023 had net negative client hiring. Most of the reductions occurred early in the year with trends improving as the year progressed while only modestly factored into our outlook. We are also starting to see signs of residential construction spending improving benefiting our construction sector clients, which were a primary driver of declines in 2023.
Beyond our client hiring, we are optimistic about the momentum we see in our sales pipeline. And 2023 is shown that even in the year with negative client hiring, we were able to grow our Total WSE stack by adding new customers more consistently. This improvement in our ability to sell in service through economic fluctuations will bring even more stability to our long-term growth. For 2024, we expect gross margin as a percent of gross billings to be between 2.95% and 3.15% in line with our 2023 rates, with pricing adjustments being matched to ongoing cost savings Finally, 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.
Question and Answer Session
Operator
(Operator Instructions) Chris Moore, CJS Securities.
Chris Moore
It's actually Lee Jagoda for Chris this evening. Good afternoon. And so Gary, I guess just starting with Healthcare First, then some of your healthcare competitors obviously take underwriting risk on the health care, but you don't can you talk a little bit about the puts and takes and clearly there's less risk for you all, but what are you giving up as a result?
Gary Kramer
Yes. Good question. I mean, we've over the years, we've evolved our model on the workers' comp side so that we no longer take the Workers' Comp risk. We lay it all primarily all of it off to the insurance and reinsurance market. So when we brought on the healthcare, we didn't want to have the perceived underwriting risk on the health care side. So we made sure that when we partnered with our partners that were going to be long term strategic plays, we think of it as we get a seller fee and arguably, we're able to charge more for our products. And so that's really to give it as a fixed fee type business that we're getting the economics that we give up as the risks first reward as far as the underwriting on the health side that our competitors do read some some years, they're making money. Some years, they're losing money. We just want to have a consistent cash flow and earnings pattern.
Chris Moore
And then in terms of the geographic bias, once this is fully rolled out how should we think about geographies in the sense that like obviously most of your working Workers' Comp today is in California? Is it is it going to be a similar geographic split or is there any other moving parts?
Gary Kramer
We have workers' comp in every state from not just California. I would say it's it's pretty pretty well distributed based upon the way the payroll operations are California is our largest market. We've got 20 branches there. It's I'd rather be big in California than big in Rhode Island, right? So but when we look at when we look at the map and we're able to sell this product everywhere and we're able to bring on white collar business, I think it was about 25% of the new business we brought on for the healthcare was it was in the white collar space, which which is fun and exciting for us, right?
That was a that was an industry that was a little more challenging for us to penetrate because of being heavy blue gray with the workers' comp.But we're filling in the map with our market development managers on.
Chris Moore
But as we grow outside of California, we grow in California. So and our plan is to ultimately be a national player and be big everywhere. And then one more for me and I'll hop back in queue. So gross billings this year around 4%, and you're guiding to 6% to 8% in 2024. Is there a scenario or what would it take to to sort of approach double digit gross billings, but at some point or have you just gotten too large and it's the law of large numbers preventing?
Gary Kramer
No. So right, we grew in 23 when our clients were reducing their workforce, right? So as we think of 24, um, we think our clients are modestly go into higher. And we have that model that it's going to be more in the back half of the year starting in Q2. But realistically, if our clients higher, we could we could easily get into the double digit range.
Chris Moore
Great. Thanks very much. I'll hop back in queue.
Operator
Jeff Martin, ROTH Capital Partners.
Jeff Martin
Thanks. Good afternoon. And so Kramer one, as we get into the renewal season, a lot of a lot of the portfolio of clients renew in and first two months of the year, even some in December, I would assume November, December. I would assume just curious how that renewal period has gone and how the pricing environment is within new new and existing clients?
Gary Kramer
Yes. So this good question. So there was a couple of first for us, right? So the first was this was our first one one selling season in California and I can say I'm pleased with what we did in California. The other first was this was our first renewal. So clients that we brought on outside of California for one one 23. This was our first renewal.
And I can tell you that our carriers are happy or are carriers are obviously ecstatic, and that's why we're able to bring on more carriers this year, they're ecstatic about how well we've done. They're ecstatic about our loss ratio and how good our underwriting is. But this was our first renewal season and we renewed I want to say it was 94% of the benefits. So we only had a really had a couple that fell out and they fell out for either and under and primarily they were for underwriting reasons that we that they sell out, but pleased that pleased with the operations for what we have done for both new and renewal and in terms of the pricing environment on new and renewal on it, inflation's everywhere, right?
So you're seeing on the on the benefits side and the medical cost trend and some of the other drugs that are coming out and dry and driving up the Rx prices. So we there was some there were some markets that were up 20%, but us being new meal being a new entrant into the gain. We didn't have to tried to push those 20% rate increases to our clients. What we're able to do is be an alternative for them. And we saw because of the I'll say we're still new at this, right?
We are we don't have a lot of years of experience to talk about it, but I can tell you that we had more submissions and more transactions coming through because the market was charging a higher rate and folks were shopping around.
Jeff Martin
Yes. And it sounds like you're looking to continue to kind of bolster up the technology platform for clients. Just curious if there are specific things that you can do enlighten us with in terms of strategically what you're doing there? And is this client driven? What is the underlying driver behind further?
Gary Kramer
Yes, I would say it's predominantly client driven in some ways we think of our enhancements to my DVSI., it's really think of think of that client first and think about the employee life cycle that they have with their employees. And then how do we how do we fill that employee life cycle better, number one? And then number two, how do we push and pull data via APIs and things like that with other sources so that's that's kind of the focus of think of the client.
First, as far as specifics, I don't want to I don't want to give specifics until we actually launch products and we're going to have products that we're launching later in the year.
Jeff Martin
And then last one for me, if I could, on adjustments prior year workers' compensation liability and premiums and 30 million last year, roughly 15 million this year. I assume that's going to tail off at some point. How should we think about that for maybe 2024 and 2025 in terms of a potential range. I know it's hard for you to predict, but just in terms of how to think how people should think about it from a model.
Gary Kramer
We're conservative by nature when we set our current year loss rates and in a size is I am going to give you a Cramer answer when I wonder on this one just so weak. We have what I call best in class structural partners. We've got best in class risk managers, underwritings claims, folks, operation actuarial. We are very mature organization. We have tech. We have a guy that we adopt to help us with all of this. And then we have about 200 folks either directly or indirectly that work on workers' comp IT organization.
We structured these new programs so that the interest is aligned with the market. If things are favorable, the market makes money. And then we as BDSI and its shareholders get money back. And we did that because we thought this would be more attractive to investors because it's a de-risked model and we thought that we would get multiple expansion with them, our conservatism and our results.
You have to fact, check me on this, but I think we've had 20 plus quarters ANTHONY 2020 quarters of favorable favorable changes as an estimate for prior liabilities and for premium adjustments, 2024 was our largest in our history. So if you just look at the trend, the trend for that aspect is our friend, right? So we we feel like we've set ourselves up that this trend is going to continue. And if you look at 23, that was the largest number we've had in our history.
Jeff Martin
Yes. Thank you.
Operator
(Operator Instructions) Vincent Colicchio, Barrington Research.
Vincent Colicchio
Yes, good afternoon. Gary, I'm curious how your view of the economy has changed since last quarter. I assume it's a bit better on if I heard it correctly, you're assuming that existing clients, so we'll hire a meal, people will expand their roles in 24.
Gary Kramer
Yes. If you just think about call it our less 18 months of experience, right from just the payroll exposure. We started to see our clients pull back in Q4 of 22, and they pulled back in Q1 of 23 pulled back some in Q2. The nice thing was in Q three of 23 was when we started to see it stabilize a slight hiring in 24 for Q4 of 23, we saw slight hiring as well, right? So we're seeing stability in Q three. We see to build stability in Q4. And then the numbers that we're seeing so far through January and February is more stability.
So yes, we when we look at the business that reduced our workforce, that was primarily in the construction and trades and if you look at the construction trades, if you just look at the housing starts, things are coming back now and that's what gives us kind of more optimism for our workforce that our clients are going to resume hiring into 24.
Vincent Colicchio
And if you double your health care clients by, you know, next year, the amount of income that comes in from that is that we know what you would have expected. I mean, I guess what I'm trying to say is will that be a meaningful amount of income to the Company? If you hit that goal?
Gary Kramer
E, we're not going to guide to just the product line from, but we're not we're not doing this for pennies. We're doing it for dollars. And then them.
Vincent Colicchio
You said you have 15 asset-light. A program is in place currently. I'm curious if some of those have already converted to physical locations and how do you feel about opening additional physical locations this year?
Gary Kramer
Yes, we are in a couple of the markets. We're actively searching for real estate, and we are also recruiting to have local support. So a couple of the markets. We're looking at a local HR because we're doing pretty well in those spots. Some we anticipate that we'll probably have three markets that Peco brick and mortar in 24 and then Florida that the following 25.
Vincent Colicchio
Thanks, Gary. I'll go back in the queue and nice quarter. Thank you.
Operator
Marc Riddick, Sidoti & Co.
Marc Riddick
Well, good evening, everybody. So I was wondering if I was wondering if with this being the first selling season for the first sort of key selling season for BBSI. If you could talk a little bit about the benefits I'm sorry for the were there any particular learnings or things that have taken place that you've gone through this process thus far that have been a slight positive surprise, slight negatives, anything and as part of that process that it was outside of expectations, I'd say I'm glad I lost my hair prior to this rollout.
Gary Kramer
It was not a straight line. It was a it was We learned a lot of things along the way. Some part of what we're doing right now is while it's still fresh, we're having a whole continuous improvement team to go through and understand what do we need to do better on the sales service underwriting for new and renewal. We are I could say I'm proud of the team. I'm proud of the company. I'm proud of the organization for get that done and we learned a lot of lessons from, but probably good lessons that we can build upon.
Marc Riddick
Okay, excellent. Then the other thing was shifting gears a little bit. I was sorry, to go back to your commentary around the NPS exercise that you did. I thought it was kind of messaging one. Maybe you could maybe talk a little bit about what led you to and to do that and to was there any sort of differentiation of certain industry or client verticals that maybe scored higher than others? Or was there any was that generally across the board with those scores?
Gary Kramer
That's a good question. I mean, part of this was every year we do a survey and we did surprisingly well, we get a lot of folks that utilize it and we get a good sample, right? And we use that to understand. Now what are we doing? Well, what do we need to do better? What are clients asking for.
Marc Riddick
And that's that's how we shape some of the directions that we go with our IT products. It's really we're listening to clients, and they're telling us that the Net Promoter Score was a was a good thought from some of our Board. They said if you're doing this, why don't you do the Net Promoter Score? So I honestly didn't know what it was. I had to read it up, but I'm pretty pleased with with the results of the survey.
Gary Kramer
I mean it's Sam. It's pretty remarkable to have a score that high. I'm really proud of the work we're doing and I'm glad you actually called it out. So it's pretty pretty interesting here. So I really appreciate it. Thank you.
Operator
Thank you. Ladies and gentlemen, at this time, this concludes our question and answer session. I would now like to turn the call back over to Mr. Kramer for closing remarks.
Gary Kramer
Yes, I just want to thank all of our BBSI employees for a great year, and I want to thank all of our clients for partnering with BDSI. Appreciate your time. Thank you.
Operator
Thank you. The conference of BBSI. has now concluded. Thank you for your participation. You may now disconnect.
