Barrett Business Services Inc (BBSI) 2021 Q4 法說會逐字稿

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, 2021. Joining us today are BBSI's President and CEO, Mr. Gary Kramer; and the Company's CFO, Mr. Anthony Harris. Following their remarks, we'll 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 facts, are subject to a number of risks and uncertainties. Actual results may differ materially from those implied by these forward-looking statements.

Please refer to the Company's recent earnings release and 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 April 2, 2022, starting at 8:00 p.m. Eastern 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 President and Chief Executive Officer of BBSI, Mr. Gary Kramer. Sir, Please go ahead.

Thank you, Paul. Good afternoon, everyone, and thank you for joining the call. Our operational and financial results were exceptional in the fourth quarter and capped off a great year. We consistently exceeded our internal estimates for client retention, net client adds, and worksite employee growth, all of which resulted in better-than-expected financial results.

Before I speak to the financial results, I would like to recap some of the key operational and strategic accomplishments for the year. We successfully completed the conversion of our existing clients over to our new my BBSI platform. We are pleased with the platform, but more importantly, our clients are appreciative of the investment and the feedback continues to be positive.

We are not done with our investment and have an IT road map of enhancements, new features as well as new products. We packaged our new technology with our nationwide offering and brought on larger clients on average this year than we have in previous years.

We built out a corporate sales department and increased 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 executed on our employer of choice initiative and invested in our employees with robust enhancements and compensation, benefits, vacation, training, and volunteerism. People are our product, and we attract, train, and ultimately retain the best employees that any PEO has to offer.

In November, we were pleased to announce that we were certified as a great place to work for the first time. We successfully rolled out our asset-light markets, which encapsulates everything I just mentioned: 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 will service the clients out of an adjacent branch or at corporate and invest behind them in infrastructure as they build up their client base.

We entered into workers' compensation insurance transactions, which derisk our business model and results in better financial predictability. These transactions are structured in a manner that greatly limit any potential downside of our insurance program, but we can still share in the upside of our disciplined underwriting.

I want to again thank everyone in the BBSI family for their exceptional efforts. Plainly stated, I am proud that we foster a culture that embraces innovation and execution.

Moving to our financial results. During the quarter, our gross billings increased 13% over the prior year's quarter and exceeded our expectations. Our average worksite employees were up 7% over the prior year quarter. We have exceeded our pre-pandemic levels and 2021 finished the year with the highest year-end worksite employees in BBSI's history. This is due to our client hiring as well as net new business, and we continue to be the head of our internal forecast for our worksite employee stack.

Our staffing business increased 14% over the prior year quarter. We could have grown more, but continue to have challenges filling orders with the tightness of the labor market. We are seeing more applicants, placing more applicants and companies are increasing wages to attract employees. We are still unable to fill all of our orders, but our fill ratio is improving.

To summarize our financial performance for the year, our gross billings increased by 11%, and our earnings per share grew by 14%, which is in line with our long-term growth plans. We returned $9 million in dividends and bought back shares totaling $70 million, which reduced our shares outstanding by 3.2%. These are fabulous results and a great return for shareholders.

Moving to the branch operational updates. Our branch footprint decreased by 3 to 50 total branches. We continue to be mindful of operating efficiencies and consolidated Glendale into Phoenix, Eugene into Willamette Valley and Valencia into Pasadena. These decisions were made with the intention of continuing to grow revenue while servicing our clients, but doing so in a more cost-efficient manner.

Our branch stratification is as follows: 23 mature branches with run rates in excess of $100 million, 17 emerging branches running between $30 million and $100 million, 10 branches we consider developing with run rates up to $30 million. Our business units totaled 98 and incorporates the consolidations previously mentioned. We also continued our migration into a revised structure of our 16-member business unit, which allows us to service more clients with less management employees and increases our return on management payroll.

To summarize our branch footprint over the past 2 years, at the end of 2019, we had 64 branches. Over the past 2 years, we consolidated 19 branches within existing markets and expanded 5 branches into new markets, finishing 2021 with 50 branches. By the end of 2022, we forecast that our gross billings will be up by approximately 20% over 2019, but our SG&A field payroll will only be up by 6%, and that includes investing in 14 asset-light markets.

Speaking to the asset-light model, our first class has graduated and is currently selling in 4 new markets. We are still in the early innings, but through February, we have 8 new clients added or in contracting. We are seeing positive trends in this model and intend to invest in approximately 10 new markets in 2022 and are actively recruiting in markets we're not in now.

Moving to our client and WSE stack. Our client 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 bring in this ever-changing and complex economic environment.

Regarding our distribution channels, business is almost back to normal. Our leads and prospects in the quarter were greater than the previous quarter and our best quarter post-pandemic. We had a strong fourth quarter and our year-end WSE stack was the highest in our history. More importantly, we capitalized on the 1/1 selling season, and this January was our best January for net new business in the past 5 years, better than pre-pandemic.

We continue to invest and refine our longer-term initiatives of increasing the top of the funnel by focusing on lead generation via an omnichannel digital campaign where we target both clients and new referral partners in different markets. Results thus far are positive.

We are signing up new referral partners and new clients that would not have come to us via our traditional channels. We will continue this initiative and make further investments in 2022. These positive trends resulted in the company adding over 1,300 net new worksite employees in the quarter, which was ahead of our forecast and further supports our optimistic outlook for 2022.

As I think to the future, I have never been more optimistic about BBSI's trajectory. We had great momentum in 2021, and it is carrying into 2022. Our client retention is the best it's ever been, and we're seeing and closing on more prospects. Our prospects continue to be larger because of our technology stack, coupled with our nationwide offering. We will continue to invest in technology, and we will continue to invest in growth initiatives.

We have minimized the insurance risk to the company and the only thing that can hinder our progress now is execution risk. And honestly, our fabulous results speak for themselves. Now I'm going to turn the call over to Anthony for his prepared remarks.

Thanks, Gary, and hello, everyone. I am pleased to report we finished 2021 with strong results and, as Gary noted, strong momentum. Both the quarter and the year exceeded our expectations. Starting with the full year first.

Our gross billings increased 11% to $6.6 billion and diluted EPS increased 14% to $5 per share compared to $4.39 in the prior year. The increase in earnings leverage was achieved even with the return to more sustainable SG&A levels in 2021 from the uniquely low level seen in 2020. Focusing on our Q4 numbers, net income for the quarter was $10.6 million compared to $7.2 million in Q4 '20.

Q4 PEO gross billings increased 13% over the prior year quarter to $1.8 billion. Staffing revenues increased 14% to $33 million. Our increase in PEO gross billings was driven by stronger-than-expected growth from net new clients in the quarter, continued strong hiring within our customer base and higher average billing per WSE. Our Q4 average WSEs increased 7% year-over-year, while our average billing per WSE increased 5%, driven primarily by higher wages.

PEO gross billings growth by region versus the prior year fourth quarter were as follows: Mountain states grew 38%, East Coast grew 19%, the Pacific Northwest grew 15%, Northern California grew 13%, and Southern California grew 6%.

As discussed in prior quarters, the primary driver of the slower growth in Southern California is lower same-customer sales growth as our clients are adding fewer new employees than in other regions. However, we continue to see positive trends in the region, including faster sequential growth in Q4 than in Q3, and we expect this momentum to continue into 2022.

Workers' compensation expense continued to trend favorably in the quarter and included an actuarially determined reduction of prior year estimated liabilities of $1.7 million in the quarter. Our claims performance also remains favorable, and our relative frequency rate once again trended down in the quarter and remains well below historical rates.

As a reminder, we entered into a new fully insured workers' compensation program effective July 1 for the majority of our clients. We now describe our workers' compensation coverage for clients as being under either this insured program or our self-insured programs. Approximately 82% of our worker's compensation exposure, including all California clients, are covered by our insured program.

All claims incurred in these states after July 1 are now covered 100% by the insurance market with 0 claims cost retained by BBSI. The strategy of derisking our operations through this insured program is operating as planned with favorable results, and we expect these favorable results to continue into 2022. Because of the move to our fully insured program, our workers' compensation liabilities decreased by approximately $18 million in the fourth quarter as remaining historical claims continue to be paid.

Looking at margin and pricing, we are seeing billing rates for new at levels consistent with the prior year. Looking at the market more broadly, market pricing for workers' compensation coverage has now largely flattened after decreasing for several years. Rates remain at low levels relative to historical rates, but these lower rates have been offset by lower workers' compensation expense in the year, and our margin rates have remained stable.

We continue to see strong client retention in the fourth quarter and beyond, which demonstrates the value we're creating for our clients and supports our ability to maintain margins even in competitive pricing environments.

Moving to operating expenses. SG&A for the quarter came in line with expectations at approximately the same levels as Q4 2020. As discussed in prior quarters, much of 2021 saw faster year-over-year growth in SG&A due to the abnormal compare in Q2 and Q3 of 2020. As we look ahead to 2022, we expect to return to more normalized SG&A growth rates, in line with our target of approximately half of our top line billings growth.

Our largest increase in SG&A will come from employee-related expenses in 2022, including higher average wages and increased headcount primarily to support growth initiatives. We continue to closely manage our operating expenses and our management employee headcount in 2021 still ended below that of 2019.

Our investment portfolios earned $1.7 million in the fourth quarter compared to $1.6 million in the prior year quarter. Our investments continue to be managed conservatively, have an average duration of 4.1 years, average quality of investment at AA, and average book yield of 1.8%.

Turning to the balance sheet and our capital plan. We had $166 million of unrestricted cash investments at December 31 compared to $116 million at September 30. As we continue to evaluate our most efficient capital arrangements, we renegotiated our credit agreement with Wells Fargo to increase our line of credit to $50 million from $33 million previously and extend the maturity of the agreement to June of 2024.

With favorable fee changes, the increased capacity will come with little incremental cost. We also restructured our covenants to provide more flexibility, including in share repurchases.

To further optimize our capital commitments, we have purchased certain assets that were formerly leased. This will show as an increase in Q1 CapEx that will result in lower overall operating expense for the company going forward. And subsequent to year-end, we paid off the remaining balance on our corporate headquarters mortgage. And as a result, we can now say that we are completely debt-free.

We continually assess the level of capital needed to maintain effective business operations with appropriate risk mitigation. This minimum level of required capital has decreased as we have derisked our model and now retain less workers' compensation claims exposure. We are committed to deploying our excess available cash investments in ways that benefit the long-term health of the company and our shareholders.

I will recap our general philosophy on capital allocation. Our first priority is to invest in the business. Our best path to continued earnings growth is operating leverage through scale, and we continue to seek out new opportunities to invest in order to scale consistently and effectively. This investment typically comes in the form of strategic hiring and focused growth initiatives, and it will also continue to include investment in IT software and infrastructure in the year as we focus on enhancing our product and our client experience.

Second, we have said that we are open to investing in inorganic growth through acquisition, and this remains true. But we are also committed to ensuring that any potential acquisition is right for our company and our shareholders for the long term.

Third, as BBSI continues to steadily generate positive free cash flow, we remain committed to returning capital to shareholders. In 2021, we returned $26 million to shareholders through a combination of dividends and stock repurchases. This equates to an income payout ratio for the year of approximately 70%.

To solidify our commitment to drive shareholder value, our Board of Directors has approved a new $75 million 2-year stock repurchase program, which will replace the $50 million 3-year repurchase program that was previously in effect. In addition, BBSI remains committed to its dividend and the Board also reconfirmed our quarterly dividend of $0.30 per share to be paid April 1.

Turning now to the outlook for 2022. We expect gross billings to increase between 7% and 9% for the year. We expect average WSEs to increase between 3% and 4%. We expect gross margin as a percentage of gross billings to be between 3.0% and 3.1%, and we expect our effective annual tax rate to be between 24% and 25%. I will now turn the call back to Gary for closing remarks.

Thanks, Anthony. 2021 was a great year, and we think 2022 is going to be even better. We continue to always think of the client first and to advocate for the success of the business owner. We've been working on the right things, and I think we're in a great position for future growth. Now I'd like to turn the call over to the operator for questions.

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

A couple of questions. Given the changes with the Chubb Trust and rising rates, when you look at investment income for '22, how does that compare with '21?

Yes, it's a great question, Chris. We've said previously with our fully insured model, as we have capital requirements going down, we expect our restricted investments to go down rates in the year. So those are effectively offsetting in our forecast for 2022 in terms of investment income.

Maybe can you talk a little bit about the shape of your earnings quarter-to-quarter in fiscal '22 versus '21?

Yes, absolutely. So if you look at our income, it is always seasonal, and that's driven by the timing of when payroll taxes are occurred. And those are front-loaded primarily into Q1, so Q1 will always be our lowest profit quarter. Correspondingly, Q3 is typically our highest profit quarter, then Q2 and Q4 are usually similar but lower profit. And that will be true again this year.

One thing is if you look at our top line growth in the year, we're expecting sequential growth in each quarter. But when you look at the compare from 2021, there will be some variance in the quarters. So Q1 will be our strongest top line growth quarter if you look at the year-over-year compares.

And Q4 actually will be lower in part because 2022 does have 1 less business day. So that -- that equates to about 0.5 percentage point of billings growth that we'll lose in 2022 because of that one less business day, and that occurs in Q4. So on a year-over-year basis, Q1 will be strongest, Q4 will be weakest, Q2 and Q3 will be more consistent on the top line.

Our next question comes from Jeff Martin with ROTH Capital Partners.

I was just curious if you could dive into the worksite employee growth a little more during the quarter, primary drivers, net hiring versus wages, how those 2 break out? And if there are any other factors?

Yes. I'll start it off, and then Anthony can clean it up. I would say the one I'm the most proud of in the quarter is clients we added and the worksite employees they had minus clients that ran off in the worksite employees they had resulted in us having 1,300 more worksite employees that we added in the quarter, right?

And that is our -- what we call here is that's our controllable organic growth, right, which we're very pleased with. And we've had strong track records of that over the last couple of quarters and a very strong track record of that going into January as well that I mentioned in my script. So if you take our controllable organic and then you add the same customer sales, what's the same customer sales, Anthony?

8%.

8%?

6.4% average billing per WSE increase for the year. Is this where you want me to jump in?

Yes, yes. Clean it up.

So for the figures, we give quarterly figures and annual figures, Jeff. But for the annual figures, for average WSE growth, it was 4.3%. And within that number, that will include WSEs from client hiring but also net new client adds. And as Gary said, the portion of net new client adds is the highest it's been in years on that. So that's fantastic news.

On the average billing per WSE, that's 6.4% for the year, and we saw that right off the bat. Early in the year, we were seeing high year-over-year billings growth per WSE. And partly, that was attributable to employee mix shift towards higher wages, but especially later in the year, that was driven genuinely by wage inflation. So we are seeing true wage inflation come through, particularly in Q4. And that's part of the momentum we talked about going into 2022.

And then the prospects for average size of new clients is interesting. You would think that would become fairly -- so just curious if you could give us some relative perspective on the size of new clients you're bringing on now versus maybe in 2018 or 2019?

Yes. If you go back to what I meant -- if I go back to what I mentioned earlier about the clients we're adding as far as -- clients we're adding with the WSEs they had minus clients that are running off with the WSEs they had, that got us to the positive 1,300.

And I want to say that our unit counts -- to put it in perspective, our unit counts are more, I'll say, consistent now. In the past, we were adding smaller clients and running off larger clients. And you had to add 2 or 3 to make up for the one you lost. Where we're getting at now is we're adding clients that are larger than what we're running off.

So our -- if you say our average worksite employee per client is about 26. We're adding north of 26 WSEs on average now. We have some still smaller than that, but the majority seem to be larger than that.

And one of the things we've done, too, is we have been -- we love small clients that become big clients, and we love small clients that we can make adequate margin on. But if we're not making the adequate margin on the smaller clients or they don't have plans to grow, then we try to make the business decision to focus on the larger business now.

And you've been in the CEO role for almost 2 years now or maybe it's been 2 years. I was just curious from your perspective how you see a typical market cycle affecting the business? And what are some of the things you do strategically and/or operationally as part of the different phases of the cycle?

Good question. It has been a long 2 years, and it's hard to visualize what normal is with no pandemic or hyperinflation or conflict over in Europe. But just in general, the way that we think of the business is -- and I'll talk approximate, right, because I'll do round numbers and try to keep it simple.

Kind of last year results is what we think we're capable to put up annually, right, where we can grow the top line 10%, grow the SG&A in a normal market at about half of what our top line is, and then what that equates to the bottom line is about a 15% increase in net income. And we feel like we've got the machine in place to consistently over a cycle get 10% on the top and 15% on the bottom.

Yes, that's nice. (inaudible) it should be great to see that happen. I know a lot of us have been rooting for the SG&A leverage over the years, and it sounds like you're at that point now. You did make a comment that in the normal environment, do you expect that you'll be able to experience that leverage this year? Or does wage inflation and employee retention become a factor where that may not be the case just yet this year or parts of this year?

We've modeled in that, and we've also modeled in investments in the company, investments in adding new headcount, investments -- and I mentioned adding the 10 new markets. And even layering all of that in, we feel pretty confident that we'll be able to do it.

I mean if you -- just to keep it simple, if you put up 10% growth at a 3% margin, that's about $20 million of gross margin dollars. And then we're mindful of how we invest in the SG&A so that we show leverage down at the bottom for the net income growth.

(Operator Instructions) Our next question comes from Vincent Colicchio with Barrington Research.

Yes, Gary, a nice quarter. I think I heard you say that you're investing in 10 new markets in '22. That sounds pretty aggressive versus the past. Can you maybe take us through your thinking on that? Is it just more optimism -- any thoughts would be helpful.

Yes. So this kind of ties into my prepared remarks where I talked about our asset-light model, right? So we're able to attract good talent. We've invested in training good talent. We have immersion training with them as well. We get them up to speed where they can go sell in their market. When they sell in their market, we assist them with our digital campaigns. And really, that's one salesperson in one market.

And then what we do is support that business either out of corporate or an adjacent market. So we call that the asset light because what we're really doing is hiring 10 folks and putting them in 10 markets. And what we're seeing so far after experimenting with this in 2021 is saying, "all right, we feel comfortable with what -- the results we got and where we are for 2021, we're going to double down in 2022 on this program."

And the idea is once they are successful and they begin to get critical mass, then we will invest in infrastructure behind them in that market as far as people to help service the business locally.

And can you talk a little bit about acquisitions? Has your focus changed at all? Are you still looking at the same markets? And how does pricing look?

Not much of an update there. We look at everything that comes across, we're active, but we are thoughtful, right? We are thoughtful of shareholder equity, and we need to make sure that we put on the right acquisition, not just any acquisition. And that just comes down to how we look at our capital and the risk that we have to take with capital. So we are active. We will continue to be active, but we will be mindful, I said in prior quarters that you got to kiss a lot of frogs and we're still kissing frogs.

And what did the mix look like in the quarter in terms of WSE additions from referrals and your new model?

So the direct versus the referral channels, we're a heavy -- we will -- we are a heavy referral channel business, and that's where the majority of our business comes from and will continue to come from, and we love our referral channels. I mean part of our digital campaigns is to try to attract new referral partners.

And if I look at Q4 for referral partners that brought us leads or prospects for Q4 '21 versus Q4 '20 -- now these are new referral partners, new to BBSI. We had 3x the velocity of new referral partners that were feeding us business in '21 versus '20. Part of that is a function of '20 was still coming out of pandemic, number one. But number 2 is we have the discipline to seek out referral partners and we're using technology to assist us with that.

And how does the pipeline of leads and prospects look now versus last quarter?

Compared to last quarter, it was -- if I just look at our prospects that we had going into Q4, we were about 50% higher than we were -- than the prior year, which results in -- it's kind of math, if you keep your close ratio the same.

We had more closes in Q4, which added to our strong WSE growth in Q4, but that momentum carried into January. And January was our strongest January as far as net client adds over the past 5 years. So positive things, Q3 into Q4 that continued into Q1, which gives us -- those clients we had in Q4 and early January give us a real good tailwind for revenue growth for '22.

Our next question comes from Kevin Mackey, independent analyst.

Yes. So I believe it was last conference call that you mentioned your new technology (technical difficulty).

Our next question comes from Matt Dhane with Tieton Capital Management.

I wanted to delve a little bit more into your initiatives to attract larger clients. What additional color can you share around that? What specifically are you doing to help drive those larger clients and attract them to (inaudible) BBSI?

It's the technology that we have is able to bring on larger clients now. The clients appreciate our technology much more than what we had in the past. That's first and foremost. The second is larger clients have exposure in various states and before we weren't able to do -- we weren't licensed in every state as a PEO. So now we have the technology, and we can go anywhere they go as far as on the state mix.

And we mentioned that we are investing in technology, and we'll continue to invest in technology. And part of these investments we'll be making in '22 is to better support larger clients. Because larger clients have a -- I'll say, a different need or sophistication than a smaller client, and we're going to utilize and invest in technology to make that business I'll say, easier to flow data with with our larger clients.

And then on the actual sales and marketing side. I understand that the technology really facilitates it today compared to the past. But in regards to targeting them specifically, is it more just interactions with your referral sources and asking them -- telling them, "Hey, these are the ideal type of clients." And -- or is there other sales and marketing approaches that really allow you to target those -- the size of clients that you'd like better?

There's twofold here, right? One is we're using technology on the sales and marketing side. And I don't want to get into too much of the plumbing because we have about 500 competitors that listen to this call.

So we utilize technology to get the clients that we -- that wouldn't have typically come to us before, especially in new markets where we're building out. And we've learned a lot in '21. We have been refining as we go, and we think we have a better mousetrap for '22 than we did for '21. Is it perfect? No. Is it better than it was? Yes, will we continue to evolve it? Absolutely.

And then on the referral partner side, it's really being comfortable with your expertise and knowing who you are, right? We can go in with a referral partner and understand what their specialty is, right? So if their specialty is transportation, it's like, great. We have a huge portfolio of transportation.

Let me help you do some co-branding and co-marketing on the transportation. Is it -- pick an industry, right? And we can work with them that way because it depends on how the distribution channel comes to you and what their specialty is and that's how we try to align with them.

There are no further questions at this time. I would like to turn the floor back over to Gary Kramer for any closing comments.

I just want to wrap up and thank everybody at BBSI for their hard work. And I just want to say that 2021 was a great year, and we feel good momentum and good trajectory and are optimistic about where 2022 is going to go. So thank you, everybody.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.