Barrett Business Services Inc (BBSI) 2018 Q1 法說會逐字稿

Good day, everyone, and thank you for participating in today's conference call to discuss BBSI's financial results for the first quarter ended March 31, 2018. Joining us today are BBSI's President and CEO, Mr. Michael Elich; and the company's CFO, Mr. Gary Kramer. Following their remarks, we'll open up 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. This 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 results and 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.

I would like to remind everyone that this call will be available for replay through May 2, 2018, starting at 3 p.m. Eastern time this afternoon. A webcast replay will also be available via the link provided in today's press release as well as being available on the company's website at www.barrettbusiness.com.

I would now like to turn the call over to the Chief Financial Officer of BBSI, Mr. Gary Kramer. Sir, please, go ahead.

Thank you, Evan. Depending upon where you're dialing in from, good morning or good afternoon, everyone. The operations of the company continue to be strong. Net revenue of $224 million increased 7% compared to Q1 '17. Gross billings of $1.3 billion grew 10% over the same period. Diluted loss per share was $1.25 compared to a loss of $1.55 in Q1 '17. Please recall that we historically incur a loss in the first quarter due to higher effective payroll taxes at the beginning of the year.

In the quarter, PEO gross billings increased 11% to $1.3 billion compared to the first quarter last year, and same-customer sales growth were 6.3% compared to 3.7% in Q1 of '17. We continue to increase our client base with a gross addition of 301 clients or 152 net of runoff in the quarter. As we mentioned on prior calls, we are seeing pricing pressures, specifically regarding California's workers' compensation insurance, but we continue to hold our pricing firm. This discipline resulted in losing some larger accounts this quarter as these accounts can be more susceptible to price competition, but we believe our value proposition is much more than workers' compensation, and we will not chase the market to the bottom.

Staffing revenues in the first quarter decreased 7% to $35 million. This decrease was in line with our expectations and is a direct result of the continued tight labor market. Each quarter, we've discussed that this trend is making it difficult for our employers to hire, and we are experiencing this effect in our staffing business. We have the demand and orders from our clients, but it is challenging to fulfill all orders without compromising our hiring standards. As such, we anticipate that staffing will continue to be a slight headwind to near-term revenue growth. We continue to expect staffing to be flat to slightly down for the year.

Workers' compensation expense as a percentage of gross billings was 4.9% this quarter, which is at the low end of our expected range of 4.9% to 5.1%. This includes a minor favorable change of $6,500 in prior year estimated liabilities. As a reminder, although we are required to have an expert independent actuarial evaluation performed annually, we have chosen to have one completed quarterly and we book to that result. This process provides greater overall confidence in the adequacy of our reserves.

Our workers' compensation claims frequency continues to trend in line with expectations. In the quarter, we saw trailing 12-month relative frequency of claims as a percentage of payroll increased 0.1% compared to the first quarter of 2017 and decreased 13% compared to the first quarter of 2016. Our strategy of reducing claims frequency was initiated in 2014 and has been successfully operationalized and now forms part of the DNA for how our branches manage their client onboarding and retention.

We have taken many actions over the past year to enhance controls and processes while improving program structure to manage and mitigate risk and costs more effectively. Over the last 3 quarters, our total open claims have decreased 2%, while gross billings have increased 12% over the same period. And we have experienced the cumulative minor favorable change of $111,000 in prior year's estimated liabilities. All in, we continue to apply laser focus to the workers' compensation program, and it is performing as expected with better predictability.

Gross margin was $16.3 million or 1.2% of total billings compared to $10.5 million or 0.9% in the prior year quarter.

SG&A in the first quarter was $29.4 million or 2.2% of gross billings compared to $26.6 million or 2.2% in the prior year quarter.

Nonrecurring legal expenses associated with accounting and securities law issues in the quarter were $200,000 compared to nonrecurring expenses of $400,000 in the prior year quarter.

The benefit from income taxes in the first quarter was $3.1 million. The first quarter effective tax rate is higher than our previous guide due to a onetime prior-period tax credit, which was renewed in the first quarter. We continue to expect the full year effective tax rate of approximately 20%, resulting from the passage of the Tax Cut and Jobs Act.

We increased our credit line with Wells Fargo from $25 million to $40 million during the quarter. As we continue to grow, we look for a partner and a credit line that will grow with us. And this increase positions us for the renewal of the credit line at 7/1/18. We had no borrowings under the credit line as of 3/31/18, and we continue to be debt free, except for the $4.3 million mortgage on our corporate headquarters in Vancouver, Washington. The unrestricted cash in the first quarter decreased to $24 million from $59.8 million at December 31, 2017. The decrease is primarily related to 2017 annual payroll tax filings due in the first quarter of 2018.

As part of our fronted workers' compensation insurance program with Chubb, we established and funded a trust account called the Chubb trust. On the balance sheet, the Chubb trust is included in restricted cash and investments. The balance in the Chubb trust was $399.7 million at 3/31/18 and $380.6 million at 12/31/17. The March 31 Chubb trust balance does not reflect an additional $12.1 million that was in transit and paid to Chubb in late March but was not deposited into the trust account until early April. On the balance sheet, this in-transit amount is included in other assets.

The trust is fully invested with a fixed income asset liability matching strategy targeting a duration of 3.5 years. At March 31, the book yield was 226 basis points with a duration of 3.46 years. The trust has eligible security guidelines with restrictions on asset class and asset diversification. This is a high-quality and highly liquid portfolio. At 3/31/18, the average quality of the portfolio was AA, and no investment was greater than 4% of the portfolio.

In the quarter, we earned $2 million of investment income from the trusts. Rising interest rates resulted in the portfolio yield increasing 14 bps, and this will continue to tick higher as new money continues to flow into the trusts. Bond prices move at the inverse of interest rates, and we have an increase in accumulated other comprehensive loss that we view as temporary as our investment practice will be to hold these bonds until maturity.

In summary, we continue to build out our base of net new clients, and our earnings for the quarter were strong as we gained leverage out of our model. While we experienced slightly lower revenue growth than prior quarters, it was driven by an active decision to not chase the workers' compensation market. And we are confident that this will be offset by our robust referral channels.

Regarding our outlook, we continue to expect gross billings for the next rolling 12-month period to be approximately 14%. For the full year 2018, we continue to confirm diluted earnings per share to be approximately $4.45. This assumes approximately $0.06 per diluted share and estimated legal costs associated with accounting and securities law issues as well as a lower effective tax rate of approximately 20%, resulting from the passage of the Tax Cuts and Jobs Acts. This also assumes that workers' compensation expense as a percentage of gross billings will be in the expected range of 4.9% to 5.1%.

Now I'd like to turn the call over to President and CEO of BBSI, Mike Elich, who will comment further on the recently completed first quarter as well as our operational outlook for the remainder of the year. Mike?

Hello, and thank you for taking time to be on the call. For my review of the business, we built a strong foundation, and the fundamentals of the business are sound. We continue to invest in infrastructure and talent that support our product evolution and our ability to scale into new markets with predicable outcomes. We have defined methods for bringing efficiencies to the delivery of our product. We have a clear focus of ongoing efforts to bring value to small business owners which supports our brand trajectory.

In the quarter, we saw solid results as we added 301 new PEO clients. We experienced attrition of 149 clients, 4 due to accounts receivable, 4 for lack of tier progression, 11 were canceled due to risk profile, 15 sold, 23 businesses closed and 92 left for pricing or competitive -- for competition or companies that have moved away from the outsource model. This represents an approximate build in the quarter of 152 net new clients.

We are seeing continued support for our value proposition as we add new clients. Although our gross billings are slightly off plan, our pipelines are strong, and we have confidence that we'll close the gap in the coming quarters. We are seeing a slight uptick in client attrition due to pricing and competition, but it continues to be in line with expectations. We are paying close attention to pricing and competitive pressures in the market, specifically as it relates to insurance in California. Given the work we have done in the past several years to differentiate our value proposition, we have held our own very well over the past 3 years as pricing related to workers' compensation in California has softened. We will continue to hold true to our pricing methods as we recognize that, historically, rates are cyclical. Outside of California, all other regions are experiencing growth rates in excess of 25% year-over-year.

Related to pipeline, we continue to hold -- evolve our ability to scale from a model based on individual market contributors to a systemic approach for developing referral channels on a national basis. As a result, today, we are seeing development of new referral channels in all markets which supports strong pipeline growth. We continue to bring brand awareness and consistency through ongoing educational efforts with our referral partners. Because of this, we are seeing consistent contribution to new business from all markets and from broader channels.

Related to organizational structure. We have operationalized our approach to developing leadership and have roughly 18 months of runway with our existing bench. We continue to build the field organization to support future growth, scale into new markets and invest in support of our product offering. In the quarter, we added a business team in Portland, Oregon. We currently have a total of 102 business teams housed in 58 physical locations.

Related to business branch stratification. We now have 17 mature branches with run rates in excess of $100 million. This is a measure we use to indicate a branch's ability to increase leverage. We have 17 emerging branches that are running between $30 million and $100 million in gross billing. We regularly reinvest back into these branches to support capacity as they grow.

Finally, we have 24 branches we consider developing with run rates of up to $30 million in gross billing. In these branches, we invest to support consistency of pipeline while maintaining integrity of product as they scale. In conjunction with our long-term growth strategy, our goal is to add 13 new business teams and 4 physical locations in 2018. At the end of 2018, we anticipate having more than 117 business teams housed in 62 physical locations. To that end, Las Vegas became operational in April, and we expect Pasadena, California, to open its doors in May. We also consolidated teams in Tillamook and Roseburg, Oregon, into existing physical locations. Moving forward, they will continue to reflect as business teams but no longer as branches.

Looking forward, as I spent time in the field, my confidence in our ability to execute comes from the strength of our organization's leadership. I am seeing clear methods for bringing consistency and predictability to the product and the business. As we envision the future, we are beginning to see the impact we could have on small businesses. We are creating communities within markets, resulting in a clear understanding of our brand and accelerating -- and acceleration in the belief of what is possible from the model.

With that, I'll open it up for questions.

(Operator Instructions) Our first question comes from Chris Moore from CJS Securities.

Maybe just start with the kind of the pricing pressures and the kind of the increased turnovers that you're seeing in clients. I guess the question is, is the profile or size of the companies that are leaving, is that much different than the companies that are coming in from a profitability standpoint? Or does it take a while for these new guys to -- are there extra costs associated with that to kind of match the clients that are leaving?

Chris, it's Kramer. Good question. The -- what we're seeing in California is not new. Since 2015, the California rating agency called the WCIRB has lowered rates by about 35%. And California, in general, is seeing favorable trends in workers' comp. So the California workers' comp bureau has enacted some laws over the past 5 years, and the reforms are actually working, which are trending to favorable development in California workers' comp. And as such, you're getting more people and lower prices coming into the market. So when we look at our book, we're seeing some insurance carriers and that type of market come in and start to decrease prices. So when they come in, they're not going to try to price smaller accounts. They're typically going to stay at the higher end of our book, and that's where we're really seeing the pricing pressures is the higher end of our book. So when we have some of those clients leave, the goal is we continue to backfill and bring in additional clients. And that's where we're at. We had a 301 gross adds in the quarter, 152 net of the runoff.

Yes. And I would also add, Chris, that one of the things when you look at our larger clients, we have -- by less than 2% of our clients are over $5 million in total revenue, so it's a small concentration. And the other part that we see is that even with that where we might see pricing pressure, in particular, we're finding where if a client can save $100,000 by going somewhere else to get workers' comp, we're saying, "Go do that and peel that off, the offering, and just stay with us for what we really do, which is help you run a better operation." And we're seeing a lot of traction there. On a year-over-year basis, we've actually seen about a 30% gain in the number of clients that are without workers' comp coming into our book. That would -- and maybe to answer your other question, too, when we look at working with clients that might be a little bit smaller, yes, you're -- we don't have to price to the economies of scale. So typically, they will be more profitable out of the gate. And as a collective portfolio, they're more profitable. So -- and we have more efficiency in working with them, so -- because of the way we do things. But as this kind of rolls through, it will normalize itself. And I think ultimately, too, as you would might look at, call it, a recessionary environment at some future date, your more at-risk clients in a recession are typically that larger client, where the smaller, more nimble client is one that probably will weather it more effectively and probably is paying a higher wage rate. So we don't see it as a problem. We see it more as a little bit of a sea change, and it's an opportunity for us to just continue to build with.

Got it. That's extremely helpful. In terms of the 14% guidance over the next 12 months kind of versus 14% guidance for fiscal year '18, obviously it only makes a difference if you are making kind of a big assumption difference for Q1 '18 versus Q1 '19 growth rates. Is there -- Q1 '18 was a little bit soft. Are you assuming much of a pickup in Q1 '19?

What I would say is that we probably -- we were seeing a little bit of softness pricing-wise, and we talked about it a little bit after the fourth quarter. And we feel like we're kind of making a turn on it, and our pipelines are very strong right now. And so one of the things that we're not doing is our yields have dropped a little bit off the pipeline, but we also recognize that there are some areas where we can improve on how we're going to market to ensure that we're capitalizing on the opportunities that are good opportunities. So we're not letting ourselves off the hook, and I think that just with our -- what we're seeing in the pipeline and what we're continuing to see us build, we just have to execute. And we figured that -- we feel that we'll close the gap. If you look at the gap between where we were anticipating being as our net builds and where we ended up being on our net builds in the first quarter, it was only about a 20% -- or excuse me, a 20 client spread. So we can -- we'll close that. Likewise, the biggest thing that will come into play that is always the unknown for us is the same-customer sales percent, which was a little lighter, too, in the quarter than we anticipated, and that can be quarter-to-quarter. It can move on you a little bit, and we're seeing strength in our client base. We're not seeing any kind of erosion there, so that gives us confidence that we'll kind of make the turn there. And then ultimately, we would see ourselves in a stronger position, first quarter of '19.

Our next question comes from Jeff Martin from Roth Capital Partners.

Gary, could you comment on the sustainability of the workers' comp at the lower end of your range, which is pretty much where it's been the last 3 quarters? So curious what your thought is there.

Yes. We have pretty much restructured our operations, how it comes to -- how a claim comes in, how it gets set up, who we work with on that aspect, how we work with them, the pricing with them. So we've really are -- I'll say we've had a focused effort on trying to take administrative costs out of the model, and that's something we're continuing to look at. It's something that we feel is a good return to shareholders to try to remove as much friction out of the model as we can, and we're going to continue to look at that. So when we're looking at -- when we look at comp for this quarter, you're going to have a little bit of ebb and flow as far as -- that's why we give the change of the 4.9% to the 5.1%. But looking at the model and what we've done, we think it's going to be more in the 4.9% to the 5%, but you can always have some up and down. So we feel that where we're at is sustainable for the future.

Okay. And then that kind of segues into the gross margin. It was up nicely year-over-year even when you back out the prior year's change in estimate for workers' comp for previous year claims. Curious if you think that you're on a trend where you could see your year-over-year improvement in the gross margin on a quarterly basis.

Yes. I mean, that's our goal, right. Our goal is to try to get as much leverage out of gross margin to try to get leverage out of the SG&A. Our branches take the margin seriously, and we handle the pricing that way. I mean, if you back out the change in prior, you get to like a 0.12 percentage increase over Q1 of '17, and we are proud of that. We feel good about that. This was a good quarter. This is a good earnings number for us, and it had a lot to do with all of the work that we're doing in the field and what we're doing in corporate. So we're proud of that, and we think it's going to be sustainable.

Yes. And Jeff, I would probably add, too. I feel as though we've made a little bit of a turn on all of the restructure, reinvestment and build that we've been doing actually over the last 6, 7 years. And it seems like we've tiered up and we're coming into our own a little bit, and we're really reaching a place where we can find leverage in the model. If you look at just the stratification piece we had, where you'd want to see the shift in stratification was a movement from our developing branches into emerging this last quarter. And that becomes an important point because those are usually -- the developing branches are the ones we might be feeding, where the emerging ones are now where we're still feeding, but they're holding their own pretty well. If you're watching over a longer period of time, we'll be -- the number of branches that we're moving into that $100-million-plus mark because that's where you really see a lot of leverage against SG&A within that infrastructure.

All right, all right. Okay. And then I was wondering if you could shed some perspective into the pipeline? It sounds like you're optimistic on it but curious to kind of know underneath the surface what gives you that level of confidence. Otherwise, I think we're sitting on a scenario where maybe you grow a little less than that 14%, but your margins are much, much better. So your earnings are going to grow a lot faster than that.

Yes. I'd say the work that we're doing to educate the market has us receiving a stronger pipeline. I'll -- so we've got a pretty good visibility in our pipelines through sales force. We build -- we can look out and go and almost week to week know what's going on yield-wise. You kind of have to almost look at it over a 3-month moving average. But if we were to look at pipeline today versus where it was probably in November -- October, November, December, it's much stronger than then. And usually, you're going to have a 3-month leg to result on that. So that's probably the first thing that we look at. The second part is really the yield off that pipeline. And as we were pushing up against some pricing pressure, you could see where your yield and markets were -- might have a few branches that are still really bring their confidence, their value versus other areas in the company where we're really bringing the true value proposition where we're outrunning that. And so that's another part that gives me confidence. The other thing that I would say is as we have looked at that build throughout time, it's going to kind of ebb and flow a little bit, and it's going to be somewhat cyclical. So you're going to have branches where maybe they've grown pretty fast and then they're going to peak out a little bit, and you got to reset them. And we may have seen that a little bit in some of our larger branches. So we're going through a process right now of resetting and just kind of pulling back some of our larger branches and looking at where they're at. And so there's a lot of good things going on that gives us confidence from what we're seeing in the pipeline that, one, we'll be able to increase our yield; two, that there should be consistency behind that pipeline. One more micro example would be we had a branch that historically has received about 30% -- about 20% -- 22%, 23% of their business through customer referrals. This quarter, it jumped to 30% -- almost 35%. And at the nth degree in our model, the more we can get from customer referrals, the better. And over time, that's what sustains growth against large numbers.

Okay. And then my last question is can you provide some perspective on various cycles in the California comp market over history and how long they've taken and where do you think we are using a baseball analogy in the cycle in California today?

Yes. It's a good question, and that's difficult to answer because it's a unique market now. If you just look at the insurance market in general, 2017 was the worst catastrophic loss in history. And really, insurance pricing is based upon capital and how much capital is in the market. So there's still a lot of capital in the market. The difficulty of where we are in the market is you have capital in the market, but you have still low interest rates. And the question really becomes with low interest rates, as they start to rise with -- offset by how are we going to have more favorable tax -- income tax from the Tax Cut and Jobs Act. It's really a unique time in the market when you listen and follow it, it's because of the low rates and because of the cats, you're seeing broad base higher rates going up, so companies are charging more in order to make up for that. But really, what we're seeing in California is the reform has been favorable, and it's showing in the losses. So California has been, for the last 2 years, under 100% combined ratio, which is the first time it's done that in over 10 years, so long answer to a difficult question. But typically, I'm going to say that we're getting down to the point of rates, I'd say, the seventh inning for when rates are going to have to start to push up.

(Operator Instructions) Our next question comes from Bill Dezellem from Tieton Capital Management.

Gary, I'd actually like to follow up on your last comment to begin with. So what do you see will happen then with your new customer win process and pricing if the workers' comp rates do start to rise or when they do start to rise in California?

Our theory is we don't want to be fee based. We don't want to be the most expensive. We just want to be consistent for our clients, right. So consistency is key. We look at these as long-term partnerships. The way we do our fixed pricing, the way that we do our long-term contracts, we think this is long-term partnerships. And we're going to -- we'll have to ebb and flow with the market. But ultimately, we're not going to vary that much. We're going to try to stay in our sweet spot, which is where we're at now.

Yes, Bill, and I would add to that. One of the things that I've watched over the many years that's always been a challenge in doing business in California is the predictability and consistency of your cost structure. So as we've built our model, it's really been about running a value-add risk mitigation, help you run a better business, while at the same time, bring in stability to your cost structure. So for the same reason that we don't follow prices down, we're not going to chase them up if it gets too crazy because we want our customers to be successful. Bill Sherertz taught me a long time ago that you can price your client to bankruptcy, and I never want to find ourselves being that where we're capitalizing so much on the opportunity on the upside that we're actually hurting our client at the same time. And I think that's where, long term, we build our brand, and we become that trusted partner in all markets, which ultimately will win in the end.

Does that also imply that your ability to win new business will become greater, or careful to say this, but easier because your pricing is -- would be then more competitive?

Good clients are always going to be a scarce commodity that we've got to make sure that we're hunting all the time for. So I would never say it's going to get easier, and we won't let it be easier. The difference will be is that we'll have in our pools where we put ourselves will remain in that spot. We're making the choice of who we do business with. It -- where it will probably make -- have an impact is that where you've got companies that really want to do well and run and have good cultures and hire good people, they'll win the battle because those are the ones that we'll work with. And then those that are just chasing price will probably not be of interest to us.

Understood. A couple more questions, please. First of all, relative to workers' comp since it was down at that 4.9%, is that a function of having better claims experience? Or is this really more a function of now that you are doing your quarterly reevaluation with the actuaries that you just simply have this pool better dialed in than you ever have before?

So the prior accident year or what I'll say the change in estimate for prior years was pretty much flat, right? It was $6,500 good guy, so what you're seeing in the operations for the quarter is a true reflection of the operations in the quarter. A large part of the workers' comp expense is our estimate, and I'll say that our estimate is pretty much fixed for the year. I mean, we look at it on a quarterly basis, but what we're going to estimate is our estimated loss ratio on this book. It's pretty much fixed for the year, but we'll obviously evaluate depending upon frequency, depending upon severity if we need to change that. And then in that comp expense, we also have a fair amount of other expenses regarding the administration. And the administration is where we have really tried to focus in on as well to try to remove as much friction out of the model as possible.

Yes. And I would add, too. As I -- when you kind of look at the number quarter-to-quarter and it really is a product of a longer-term trend, it's not really a quarter-to-quarter number. It's more probably a 3-year rolling of where you're landing, and I think that that's where we begin to see more stability in the model, too, as we look at the work we've gotten done over the last few years.

Yes. We've taken a lot of measures, and those measures are now giving us better predictability and consistency with how our workers' comp expense is running.

Great. And then relative to your referral channels, I think multiple times on this call, each of you have made reference to some strength, the robustness with the referral channels. Will you quantify or can you quantify in some way your success with the referral channels?

The one -- I guess the one -- and I'll let Kramer follow up for you with data point on this. But one of the things that we've seen out of the business that we're adding today, we're seeing that business come from a larger source of channel, where if we went back a year ago, we were receiving business from, call it, 500 individual -- like in a single quarter, maybe 500 individual resources or channel partners. Today, it might be closer to 700. So we're getting a wider base of referrals coming from a wider base of referral partners in a given period, which I see as strength. So we've got a lot of, I'll call it, raw material to work with. We just have to be better at being able to tap that DNA that we're building, and we go up. And even within that, there is -- I think there's an evolving understanding and belief in the overall offering of what we're doing that extends well beyond payroll, workers' comp, even just HR. It's more of our partners are really understanding the value we're really bringing to customers.

Yes, Bill. And we won't -- I don't think we'll get into a position where we'll give stats or things of that nature, but the practice that we have is go make more friends, right. And you have more friends and then you got a -- if you have those friends, you got to get deeper into their client base. So we try to build with, and then once we have a new friend, then we try to do more business with that friend. So there's a continual effort of keep trying to bring on more referral partners.

Great. And then lastly, I have historically thought about the first quarter as you grow, losing more money than the prior year, and that's considered a good thing because the business is larger. But given that you saw that reverse this quarter and you saw growth, it makes me wonder. Are you reaching some level of scale where, at some point, the first quarter may be actually breakeven? Or how should we be thinking about this longer term, not next year, but longer term?

Yes. We're seeing -- there's a couple of things that go into, call it, how we're getting to the first quarter. What we're seeing, especially on the payroll tax side, is states are not raising their limits. So you're having wage inflation, but the cap limits are staying the same. So we're hitting the caps quicker, which is when we -- that's why we have our loss in the first quarter. But what happens is we're hitting that quicker, which means we're getting more profitability or more margin that's coming in, in March. And that's going to continue throughout the year. So we -- it is part of our pricing. I would -- I have to model out, and -- we have modeled out. And I can tell you in our model, first quarter will be a loss for the foreseeable years.

Yes. I'd say there's probably a little -- more unknowns than that equation. But as Kramer mentioned it, as you see your average wage probably 6, 7 years ago move from, say, $20 an hour to closer to $25, $26 an hour, your average person is reaching your $8,000 cap for food and [suit] are quicker, and that's on a state-to-state basis. And so as that's happening, your tax -- you're moving through where that top tax obligation is quicker because of just your wage base. But it's -- I don't know that you'll ever see it get to 0, but I do think you could see it normalize to slightly improve year-over-year.

Yes.

And so if I'm interpreting your comments correctly for Q2 of this year and beyond, that does give some indication of the strength that we could be seeing in earnings the rest of this year then if I've heard those comments right.

Yes. We're comfortable with our $4.45 earnings guide. We think it's a fair, reasonable number that we have a high degree of confidence that we're going to achieve.

Our next question comes from Kevin Casey from Casey Capital.

Yes. A couple questions. One, I'm trying to understand if the price pressure is just on workers' comp. And then can you talk about the advantages, risk, margins of workers' comp customer versus the nonworkers' comp customer? Like how do you view this one better than the other? Are they the same?

I'll start off on -- as we look at the customer, we don't look at it -- we look at them the same because when we price, we look at -- we have -- we take payroll. We mark up for tax, then we mark up for a bucket that's allocated completely for workers' comp in our modeling based on the c code that they're doing the work under, and then we allocate x percent for our margin, which is tied back or pegged to that basis of about $1,000 a head per person. So when we look at a client without workers' comp, we just peel out the workers' comp portion and then we remain with our margins. So that customer now doesn't look any different from a margin standpoint, but one place you'll see is that, yes, we won't have the risk. We don't have the risk in -- with working with that individual customer. But one of the things you will see is because we might have carved out, call it, 5%, 6% of the workers' comp amount that you're going to build that plan less, and -- but you'll actually charge them the same amount for the margin that you would have otherwise.

Okay. And then have you gone back and looked back when you had some of these workers' comp hiccups? Was it larger customers? Was it smaller coverage? Or was it a broad mix?

It's a broad mix. I mean, when you get to be our size, it really becomes about the portfolio when you get to that level. And it's -- if we have a client that's unprofitable, then the branch is trying to work with that client to make them profitable. If we can't make them profitable, then we -- we'll move them out and not take the comp. But when you get to a portfolio of our size, it's really not an account or it's not a specific loss. It's just how is the portfolio and the trend going.

Yes. I'd only add to that, that sometimes when we see larger clients that they'll -- as they get -- let's say, they're getting to 200 going to 300 employees that typically you might have -- in that last 100 employees, you might have a lower wage base and more of a flexed workforce. And both, from a standpoint of a recession, that would be the workforce that would go the quickest because they're the easiest to let go and the easiest to bring back in. And then that group also tends to probably carry the bulk of more of the frequency and potential for risk as well. So it's not that big clients bring more risk. You're charging for that. But when we watch it through cycles, you have more stability in the smaller client versus the larger client.

I was actually asking because the bigger clients probably have more business chasing them, so you might have the same risk but lower margin.

Yes. I mean, there are -- especially in the -- if we're talking specifically to workers' comp. Larger accounts are going to draw more competition, right. And that's the business that we're not going to chase.

At this time, this concludes our question-and-answer session. I'd like to turn the call back to Mr. Elich for closing remarks.

Appreciate everybody joining us this morning. Again, feel really good about the quarter, feel good about where we're at. We're playing a long game and looking forward to staying in touch, so thank you. Speak to you in a few months.

Thank you for your participation. We look forward to talking to you again on our second quarter earnings call. Thank you.