Gary Kramer; President, Chief Executive Officer, Director; Barrett Business Services Inc
Anthony Harris; Chief Financial Officer, Executive Vice President, Principal Accounting Officer; Barrett Business Services Inc
Jeff Martin; Co - Director of Research And Senior Research Analyst; Roth Capital Partners LLC
Vincent Colicchio; Managing Director, Senior Equity Analyst; Barrington Research Associates, Inc.
Good afternoon, everyone. And thank you for participating in today's conference call to discuss BBSI financial results for the third quarter ended September 30th 2024.
Joining us today are BBSI's President and CEO Mr. Gary Kramer and the company's CFO Mr. Anthony Harris.
Following their remarks. We will open the call for your questions before we go further. Please take note of the company's Safe Harbor statement within the meaning of the private Securities Litigation Reform Act of 1995.
The statement provides important cautions regarding forward-looking statements.
The company's remarks during today's conference call will include forward-looking statements. These statements along with other information presented that does not reflect historical fact are subject to a number of risks and uncertainties.
Actual results may differ materially from those implied by these forward-looking statements.
Please refer to the company's recent earnings release and to the company's quarterly and annual reports filed with the Securities and Exchange Commission. For more information about the risk 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 December 6th, 2024 starting at 8p.m. Eastern Time tonight.
A webcast replay will also be available via the link provided in today's press release as well as available on the company's website at www.BBSI.com .
Now, I would like to turn the call over to the President and Chief Executive Officer of BBSI, Mr. Gary Kramer. Sir. Please go ahead.
Thank you.
Good afternoon everyone and thank you for joining the call. I am pleased to report that we had a strong third quarter. Our financial results exceeded our expectations and we have greater optimism in our full year results. We continued to execute our short and long term objectives and we added a record number of worksite employees from our controllable growth. Moving to our financial results and work site employees. During the quarter, our gross billings increased 9% over the prior year quarter which is greater than expected. We continued to execute our various strategies to increase the top of the sales funnel and we achieved a record number of work site employees from new client ad during a third quarter.
Our client retention continues to trend well and it's in line with our expectations. 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 is our controllable growth is that we added approximately 4,600 work site employees year over year from net new clients.
The economy in the third quarter remained relatively consistent with the first half of the year. Our client's workforce continued to modestly grow in the third quarter and into October to summarize for the quarter. We grew our work site employees by 5% as we sold and retained more business and benefited from our clients net hiring. Moving to our staffing operations, our staffing business declined by 2% over the prior year quarter.
We previously mentioned that in 2022 we repriced the portfolio and jettisoned clients where we were not achieving an adequate return. We also shifted our strategy to recruit for our PEO clients which generated equal margin to our traditional staffing model but resulted in less top line revenue.
This quarter is the first clean quarter over quarter comparison and we are seeing our staffing business stabilize.
We continued to execute our strategy to recruit for our PEO clients and place 105 applicants in the quarter.
Moving to the field operational updates.
We're very pleased with our entrance in the new markets with our asset light model. We have 21 total new market development managers in various stages of their development.
They are doing well and largely achieving their goals of adding and servicing new clients and new referral partners in three of the markets. We have hired additional local talent to support our clients and we are in the process of moving into traditional brick and mortar BBSI branches.
We continue to see positive results from our investments in new markets and are actively recruiting additional new market development managers.
Regarding product updates, we continue to execute on the sale and service of BBSI benefits, our new health insurance offering. We previously mentioned that we entered into a strategic multiyear partnership with Kaiser Permanente and are now successfully selling their HMO side by side with our national PPO and just like our workers' compensation and existing health insurance offering, we take no underwriting risk.
Our new business resulted in more new subscribers in October and November than over the same prior year period.
I am pleased to report that today. We have approximately 480 clients on our various medical plans servicing more than 11,000 total participants.
We are in the thick of the 1/1 selling season and our business teams are offering BBSI benefits to our existing clients as well as potential new clients. It is still too early to provide any definitive guidance for 2025. We are pleased that our current pipeline for 12/1 and 1/1 opportunities are about 35% greater compared to this time a year ago.
As we look forward to 2025 we are confident that this product will be accretive to earnings. We have the people, the product, the technology and the experience to be confident in our various offerings.
We are bullish on this product and we begin to reap the benefit of leverage through scale.
Next, I'd like to shift our view of the remainder of the year in the 2025. We have a solid track record of selling and servicing through uncertain economic times and our blue gray clients are proving to be resilient.
We are consistently growing our WSE stack and we ended Q3 with a record number of work site employees.
We have consistently achieved strong controllable growth by focusing on the needs of our clients and by adding new clients, we have more product to sell, more folks selling it and more referral partners recommending BBSI. It is important to note that there is one less business day in 2025. If there's no dislocation in the economy and we close out the year in the manner that I believe we will and we expect gross billings growth in 2025 to be similar to 2024.
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 Q3 with strong results and continued momentum in our sales initiatives.
Gross buildings increased 9% to 2.14 billion in Q3 '24 versus 1.96 billion in the prior year quarter.
PEO gross billings increased 9% in the quarter to 2.12 billion while staffing revenues declined 2% to USD21 million in the quarter.
Our PEO work site employees grew by 5% versus the year ago quarter, which as Gary noted was driven by a record number of WSE's added from new clients both on a gross basis and net of client runoff.
The continued strong trend of controllable growth of recent quarters was once again combined with positive client hiring in the quarter, The pace of client hiring remains below our historical averages. But we continue to see consistency in client hiring rates across most regions and industries.
Looking at wage rates and hours worked total hours continue to remain stable in the quarter. While overtime hours increased modestly year over year wage rates continue to increase as well.
An average billing per WFE increased 3% in the quarter.
Looking at year over year PEO gross buildings growth by region East Coast grew by 18%.
Mountain in southern California. Each grew by 10%.
Northern California grew by 6% and the Pacific Northwest declined by 1%.
Southern California represents our largest region and has improved a double digit growth through a combination of consistent client ads and stable customer hiring.
The strong East Coast performance represents the 14th consecutive quarter of double digit growth in that region and is also driven by a combination of strong controllable growth and above average client hiring.
The Pacific Northwest region is successfully adding clients but continues to be most impacted by slower client growth including being the only region with net negative client hiring in the quarter, 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 claims.
In Q3 '24 we recognized favorable prior year liability and premium adjustments of USD4.3 million.
As a reminder, our client workers' compensation exposure is now primarily covered by our fully insured program with no retained claims risk by BBSI. Our overall profitability continues to benefit from operating leverage.
This quarter saw an increase in SG&A expense on a year over year basis, that was expected and was driven primarily by increases in variable employee compensation and incentive pay related to stronger financial results compared to the third quarter of 2023.
Year-to-date, our SG&A growth remains in line with expectations and our full year profit goals.
Moving to investment income, our investment portfolios earned 2.2 million in the third quarter. In line with the prior year.
Our investment portfolio continues to be managed conservatively with an average quality of investment at AA an average book yield of 2.9%.
The combined results of these activities with net income per diluted share of USD0.74 compared to USD0.67 per diluted share in the year ago quarter.
Our balance sheet remains strong with USD94 million of unrestricted cash investments at September 30th and no debt.
We stayed consistent in our approach to capital allocation making investments back into the company through product enhancement and geographic expansion and distributing excess capital to our shareholders through our dividend and stock buyback plan.
Continuing under our USD75 million July 2023 repurchase program.
BB SI repurchased USD8 million of shares in the third quarter at an average price of USD35.09 per share with USD37 million. Now remaining available under the program at quarter end. We also paid out USD2.1 million of dividends in the quarter at our increased dividend rate of USD0.08 per share. This brings our return of capital to shareholders to 10.1 million in the quarter and over USD28 million a year-to-date.
Moving to our outlook for the full year. We had strong results in the quarter and we are reflecting that in our updated outlook, we now expect gross billings to increase between 7 and 8% for the year versus 6 to 8% prior.
We continue to expect WSEs to increase between four and 5% for the year.
We now expect gross margin as a percent of gross billings to be between 3.03% and 3.07% versus 3% to 3.1% prior.
And we continue to expect our effective annual tax rate to remain between 26% and 27%.
I will now turn the call back to the operator for questions.
Operator
Thank you.
Ladies and gentlemen, we will now be conducting a question and answer session.
(Operator instructions)
Ladies and gentlemen, we will wait for a moment while we poll for questions.
The first question comes from the line of Jeff Martin from Roth Capital Partners. Please go ahead.
Jeff Martin
Hey, good afternoon, Cameron Anthony. How are you?
Gary Kramer
Good, Jeff.
Jeff Martin
Wanted to, to touch on the competitive environment. A lot of, you know, public peers are, are really struggling for growth in this environment and, and competition seems to be fairly cut throat. Just curious what you're seeing out there. And given this is, this is, you know, your first real full year of, of BBSI benefits. Do you think that's helping you outpace growth relative to peers?
Gary Kramer
Yeah. Good question. A couple of things, right? One is you know, our our clients are, are in a sweet spot, I would say for the macro economy, our blue gray clients are, are modestly hiring. Now, Anthony said it's, it's at a pace less than the historical, but it's, it's growth, right. And we'll take growth because last year, we didn't have growth in that space. So our clients are growing number one, our clients are healthy. We're retaining our clients. That's, that's key in this business is to retain your business. And we've got a very high retention rate from the products and services that we provide.
And then on the, on the sales side, you know, we've been saying for years that workers' comp has been competitive, you know, that hasn't changed. And then as far as competition in the marketplace, you know, we've had a lot of focus and attention on our sales pipeline, our sales efficiency, our sales process, we get, you know, we, we're getting more, you know, more referral partners recommending business to BBSI, we're getting more prospects, we're getting more closes with those closes, we get more work site employees. So, you know, just in general, we're, we're selling and servicing more. And we're doing that in, in a market that in my mind, I don't think it's any more competitive. It's just always been competitive. But we, we've got a good focus and attention on it and then on the health side, it is it, it is another arrow in our quiver. It's something that, you know, we're now getting referral partners in the benefit space. We're getting clients that we wouldn't have typically seen before that are looking for a package product. So we've got new products that are attracting new referral partners and new products that are attracting clients. So I think we we've been working on the right things and we're putting together some executive quarters of positive results.
Jeff Martin
Excellent and on the on the benefit side, will you be, do you foresee providing additional details about the offering, you know, from a metric standpoint, from a contribution standpoint in 2025 relative to what you're currently disclosing? And could you also touch on to what degree that could be a creative? Maybe not just next year but just, you know, broadly speaking in the in the mid to longer term?
Anthony Harris
Sure, Jeff. Yeah, this is Anthony. Yeah, we continue to watch the disclosure side of it. Obviously, it's been fairly material this 1st year, but as it grows, we'll continue to enhance disclosures. You know, there's some commentary about it in our MD&A and obviously Kramer does give statistics of the script, but we'll continue to incorporate those more formally going forward.
In terms of the profit potential, you know, we've said there's really only upside for us on the benefits product. So we're already, you know, covering the cost of the program, it's profitable.
A little better than break even. So we really haven't seen earnings leverage from that. And that's really what we're expecting to start seeing in 2025 that Kramer mentioned.
And that will just grow with scale. So we have our kind of foundation built but from the it side and the operations side.
So as we continue to sell more of that benefits product, the gross margin rate on that will be on average a little higher than our, than our typical gross margin rate today at around 3%.
So as we continue to add those dollars and won't have to add very many incremental SG&A dollars, we should start to see some strong operating leverage that could be, you know, meaningful to the bottom line as that scales up.
Jeff Martin
Great. And then last question for me is on the pipeline side, you've done a lot over the last say 3 to 5 years to add additional sources of, of leads. Just curious if you could give us an update, if there are any in particular that are currently contributing to a greater degree than, than some of the others.
Gary Kramer
It's broad based. I mean, we, you know, we, we are a referral partner friendly PEO. We treat our referral partners like clients as well. We've got a lot of respect for them and ultimately want to help them grow their book and their profitability. So, you know, we, our profile is really the P&C brokers, the employee benefits brokers, CPAs things of that nature, trusted advisor, small business and that, that profile has not changed. We're just getting better at bringing on more referral partners. So it's really the the velocity of referral partners that we're bringing on that's making a difference. And then the other, you know, leg of the stool is, you know, we've also started our direct efforts, right? So our, our SEO,SEM lead gen technologies that we're using to bring in direct efforts and we're seeing positive results there. So it's a, you know, it's a multi channel approach that we're that we're using to make sure that we got a, you know, a fair amount of business that comes into the top of the sales funnel.
Jeff Martin
Great. Thanks for taking my questions.
Operator
Thank you.
The next question comes from the line of Chris Moore from CJS Securities. Please go ahead.
Hey, good afternoon guys, a nice quarter. You may maybe we'll start with just gross billings growth. The guide is 7 to 8%. You did 9% Q3 historically, you know, you've had more than a few double digit gross billing years.
You know, what kind of environment would you need to consistently grow? Double digits again?
Gary Kramer
Yeah, the you know, we, we talk about our controllable growth, right? So that's the clients we have in the WSEs they have and the clients routine in WSEs. Our, our controllable growth is the best, it's ever been, right? So that's going to be a huge, huge piece of our growth this year is going to be on our controllable side. Then you're going to get a little wage inflation which is going to help you grow as well and then you're going to get your clients that are hiring, which is going to help you grow as well. Now the client hiring Anthony mentioned it's still below historical levels. We grow quicker when our clients hire, not, not by our clients giving raises. So the more the more the employees they hire, the quicker we grow and that has been the slowest, the slowest piece in this economy last year, it was negative this year. It's positive. But it's still a fraction of what it was on our historical level. So it's running like 25 30% of what it was historically. So realistically, if that number, as far as our client hiring were to increase, that would easily put us back into the double digit sweet spot.
Perfect. Thank you.
May maybe just, you know, kind of on the competitive environment we're talking about. So TriNet and insperity, perhaps your two closest comps. You know, I'm going to ignore evaluations today before they went crazy. TriNet was down, I think more than 20% since this time last year and insperity down 40% you guys up 35 to 40%. Certainly that well, time split help but models are, are different. They take more risk, but you're really subject to many of the same macro challenges. You know, I wonder if maybe you could just kind of compare and contrast your model versus theirs.
Gary Kramer
We respect our peers and we play in a massive space that really is under penetrated.
So when we go to market now, we're not taking business from competitors from other PEOs, it's typically, and still converting clients to the outsource model for the first time, right? Our, our model is I'll, I'll just speak to the strength of our model, right? So number one, people are our product.
We've got all of the tools of PEO industry, the 401k, the payroll, the, all the different tools, the technology, but the differentiator for us has been and always will be our local service teams, right? If I have the option of, if it's a bake off and it's the same price and I can have a local service team plus a first, a call center. I would go with the local service team every day and our clients really gravitate to that. So that local service team is our differentiator. And that's one of the reasons why we have such high client retention, which helps us on the forward growth, right? So, and that's, that's really the big thing. We, we grew up as a you know, we, we skew to the blue gray because of our workers' comp offering. And our comfortability and expertise in workers' comp And we feel like that is a, you know, what I'll say is an under penetrated PEO market and we're very comfortable in that group in that blue gray collar space. That's our sweet spot. We know it, we know our swim lane, we stay in it.
And then the other thing is, you know, you mentioned, but you know, we, we've been on a journey over the last four years to de risk the organization. We don't take risk on workers' comp we don't take risk on health insurance. You know, we did this for a reason. We think it gives us predictability and profitability, predictability and cash flow. Which ultimately if we put up good consistent growth that has good consistent earnings and cash flow, we think will demand a, you know, a superior market multiple. So that's, that's been our strategy. We know what we're good at and we're executing to that.
Appreciate that. Last one for me is just, I think you referenced it. But you've talked about SG&A growth being half of revenue growth. That that's still the the target.
Anthony Harris
Yeah, I mean, I'd say our target really is earnings leverage, which is accomplished by, you know, growing SG&A slower than we're growing. The top line. That ratio can change a little bit from year to year depending on that top line growth over the cycle. But the goal is to grow if we grow 10% on the top line to grow 15% on the bottom line. So about a 1.5 X leverage.
Got it. I'll leave it there. Thanks guys.
Gary Kramer
And Chris to clarify. Anthony said in his prepared remarks. So Q3 was a profitable quarter and a lot of our compensation is profit related. So the more profit we have, the more profit share we have to pay out. And that's where you're seeing a little bit of a K, a little bit of a tip in the quarter. But on the year, we're, we're about where we want to be.
Sounds good. Thank you guys.
Operator
Thank you.
The next question comes from the line of Vincent Colicchio from Barrington Research. Please go ahead.
Vincent Colicchio
Yes, Gary. You've been at your, your PEO staffing business if I remember correctly for about a year or so. It's, it's good to hear the progress there. Do you think you're in a, in a place where you can consistently grow that going forward?
Gary Kramer
Yeah, we've, we've been doing the recruiting for our PEO clients now. It's really a product that if you think of it, they, they've never used recruiters before. A lot of it is, you know, in the small blue collar space, they've been doing it on their own or friends of friends or friends of employees and they've never adopted a recruiting model. So when they're typically joining us, they're doing recruiting for the first time. And we're getting good penetration into our installed base and then we use it as a sales tactic when we're bringing on new business. So it's been working, working well for both. And then every branch has goals. Every branch is talking to their clients about it. Every branch gets compensated on how many, you know, how many places we're putting in. So we've got alignment through the organization in order to make sure this is successful because we think it's a really good tool for our clients.
Vincent Colicchio
And then our health care brokers becoming more productive as a source of referrals.
Gary Kramer
Yes, we, you know, I don't want to, I don't want to overplay this. It's still a small fraction of our referral partners, but it's growing. And we've had more success, interesting, their, their busiest time of year right now and we're getting more business from them right now because they've come to understand that if they place the business with BBSI, we handle all of the administration enrollment and it frees up their time to sell more business. So we're having better penetration this quarter in that distribution channel than we have in the prior quarters ever.
Vincent Colicchio
Okay.
Thanks for answering my question. Nice quarter.
Operator
Thank you. The next question comes from the line of Mark Reddick from Sidoti & Company. Please go ahead.
Mark Reddick
Hello, good evening. So I was wondering if we could talk a little bit about, in, in your, either in your prepared remarks or the press release, besides talking about the value added and, and sort of where we are with the BBSI side benefits. I was wondering if you could talk a little bit about some of the, potential, new product offerings, new service offerings, things of that nature that, that we might, you know, that, that you might be looking at or if there's any sort of adjacencies that have sort of opened up as a as an opportunity to, to layer on with, with with benefits.
Gary Kramer
Yeah. Hey, hey, Mark, we, we have a pretty well baked product road map and I don't want to spill the popcorn or get ahead of ourselves, but we have a pretty, pretty baked product road map. And when we get to next quarter, we're going to be talking about some new products that we're launching in 25. I don't want to spill the popcorn now, but we will be launching additional new products that are bolting into our tech platform, that are better, you know, that will be used to by our clients to better service their business. And we're excited about these these products that are going to go out next year, but we're going to wait a quarter until we, so I, I can say it with confidence that it works because right now it's, it's in beta with some of our clients but until we get through beta and launch it, I don't want to, I don't want to over promise.
Mark Reddick
Okay, that's something to, something to look forward to that. That's, that's great. And then I just wanted to talk a bit about the, client trends that, that were, I, I think referred to and, and in prepared remarks, maybe what you're seeing as far as, any, any potential. Has there been any, has it seems as though things have been pretty strong? But maybe you could talk a little bit about what those terms would look like and maybe if, if you've had the opportunity to sort of, you know, you see other platforms or verticals come aboard a little more aggressively than others.
Gary Kramer
Yeah, our, our, our retention continues to be, you know, above a 90% which is, you know, it's really our, our, our bogey, that's our target, for the 10% of the clients that run off, the lion's share of them is because they go out of business or M&A, that's over half of clients that leave us are, are in that, that bucket. And that's really, you know, call it a success factor if they sell or if they retire or something like that. I mean, it's, that's just kind of the nature of the business. It's, it's, we can say that we've seen that increase some as time got a little harder as you think of. If you think of just the economy, right, the stimulus money has run out and the businesses have to stand on their own and some of the money has been propping it up and we're seeing, we're seeing a higher closure or sale right now. It's nothing that's give us any pause or concern. It's just our retention is, is really strong in spite of that, right. So we're really, we feel really good about our retention on that metric. And then, you know, the other pieces are, you know, we're not perfect. Sometimes we we lose business, we don't want to lose, or the clients have to go somewhere else because of, you know, certain requirements, but just in general, you know, our, our teams in the field really get intertwined with the operations of our clients to the point of we are an extension of their business and as an extension of their business, they tend to stick around with us longer because of that.
Mark Reddick
Great. Thank you. Very, very encouraging quarter. Thank you, Jim.
Operator
Thank you, ladies and gentlemen. This concludes our question and answer session.
I would now like to turn the call back over to Mr. Kramer for his closing remarks.
Gary Kramer
I just want to thank all the BBSI professionals for a great quarter. Thank everybody for the support. I appreciate it.
Operator
Thank you, ladies and gentlemen, this concludes our call. Thank you for your participation. You may now disconnect your lines.
