Gary Kramer – Chief Financial Officer Michael Elich – President and Chief Executive Officer.

Chris Moore – CJS Securities Jeff Martin – Roth Capital Partners Bill Dezellem – Tieton Capital Management. Patrick O’Keefe – Cloverdale Capital.

Good day, everyone, and thank you for participating in today’s conference call to discuss BBSI’s financial results for the second quarter ended June 30, 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 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 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 September 8, 2018, starting at 3:00 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 available on the company’s website at www.barrettbusiness.com.

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

Thank you, Carolyn. Depending upon where you’re dialing in from, good morning or good afternoon, everyone. The operations of the company continued to be strong in the second quarter. Net revenue of $232 million increased 3% compared to Q2 of 2017. Gross billings of $1.4 billion grew 6% over the same period.

Diluted income per share was $1.46 compared to $1.47 in Q2 2017. In the quarter, PEO gross billings increased 7% to $1.3 billion compared to the second quarter last year. And same customer sales growth were 5.7% compared to 7.6% in Q2 of 2017.

We continued to increase our client base with a record gross addition of 380 clients or 254 net of runoff in the quarter. As we mentioned on prior calls, we are seeing pricing pressures, specifically regarding workers' compensation insurance in California, which has slowed our growth in California.

Our strong growth outside of California continues to better balance our portfolio and further validates portability of our business model. We also continue to see the average size of our new clients decrease. Staffing revenue in the second quarter decreased 9% to $34 million.

This decrease was slightly higher than our expectations and is a direct result of the continued tight labor market. Each quarter, we have 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 orders without compromising our hiring standards. As such, we anticipate that staffing will continue to be a slight headwind to near-term revenue growth. Gross margin was $48.5 million or 3.5% of gross billings compared to $44.2 million or 3.4% in the prior year quarter.

The fee we charge our clients remained constant. However, payroll as a percentage of gross billings is increasing as other components of gross margin decrease. This is related to an increase in PEO business mix and continued expansion outside of California where many states have lower payroll tax and workers' compensation ratios.

Given the pass-through nature of our pricing, this shift in the composition of our cost of revenue does not affect our branch profit. Workers' compensation expense as a percentage of gross billings was 4.8% this quarter, which is below our expected range of 4.9% to 5.1%.

The quarterly independent actuarial valuation resulted in no change in the prior year estimated liability.

Having the expense coming below the range is a direct result of our strict focus and attention on managing and mitigating claims, reducing cost associated with running the program and was also assisted by the small shift in our business from California into states that have a lower workers' compensation loss cost.

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 remained flat compared to the second quarter of 2017 and decreased 9% compared to the second 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. Additionally, we went our long-term objective of reducing cost in our workers' compensation program.

And then after June that we restructured our arrangement with Chubb, which will reduce frictional cost even further. The new structure require that we provide additional collateral in advancing the program inception of 7/1/2018. And we provided surety bonds and an unsecured letter credit from our primary bank.

The net savings from this restructure will be minimally accretive to earnings in 2018 with the greater effect in 2019, as the savings for policies with an effective date after 7/1/2018 ramp in and are realized.

Our ability to achieve this advancement is due to the fact that the strength of our balance sheet continues to grow, our workers' compensation expense is consistent with better predictability and because of our relationships with Chubb and Wells Fargo.

All in, we are very pleased with the way our workers' compensation portfolio is performing and are optimistic that we have built a model that will return positive results for shareholders in coming years. SG&A in the second quarter was $35.6 million or 2.6% of gross billings compared to $28.1 million or 2.2% in the prior year quarter.

SG&A outpaced revenue growth in the quarter and is attributable to our continued investment in future growth, plus an increase of expenses associated with security law issues.

We announced yesterday that we have reached an agreement in principle with the SEC Division of Enforcement staff for a full resolution of the investigation that results in a civil penalty in the amount of $1.5 million to be paid in the third quarter of 2018, pending final regulatory approval.

$500,000 was expensed in the second quarter and an accrual for the full amount has been recorded as of June 30, 2018, and is classified within other accrued liabilities on the consolidated balance sheet. We are pleased to have resolved this matter and can now turn the corner as we have executed our remediation plan.

The provision for income taxes in the second quarter was $2.5 million. We continue to expect a full year effective tax rate of approximately 20%, resulting from a passage of the Tax Cut and Jobs Act. Our credit line with Wells Fargo was successfully renewed at $28 million.

We had no borrowings under the credit line as of 6/30/2018, and we continue to be debt-free, except for the $4.3 million mortgage on our corporate headquarters in Vancouver, Washington. Unrestricted cash in the second quarter decreased to $33.8 million from $59.8 million at December 31, 2017.

This decrease is primarily related to payroll tax payments that are made in the first half of the year. As part of our funded 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 on the Chubb trust was $408 million at 6/30/18 and $381 million at 12/31/17. The trust is fully invested with a fixed income, asset liability-matching strategy, targeting a duration of 3.5 years. At June 30, the book yield was 229 basis points with a duration of 3.16 years.

The trust has already executed guidelines with restrictions on asset class and asset diversification. This is a high-quality and highly liquid portfolio. At 6/30/18, the average quality of the portfolio was AA, and no investment was greater than 4% of the portfolio. In the quarter, we earned $2.2 million of investment income from the trust.

In summary, we had various achievements and added a record number of clients in the quarter. Our revenue growth decelerated in California where we had been experiencing pricing pressure on workers' compensation as we continue to hold pricing firm in the quarter.

We continued to have net client growth in California, but continue to see the average size of our new clients decrease. We continue to combat this headwind with strong growth outside of California, which is better balancing the portfolio and further validating the portability of our model.

Our pipeline remains strong, and our distribution channel continues to widen. Regarding our outlook, for the full year 2018, we are adjusting the forecasted diluted earnings per share down by $0.14 from $2.45 to $2.31 to reflect the pending SEC settlement. The forecast continues to assume an effective tax rate of approximately 20%.

We also now expect gross billings for the next trailing 12-month period to increase approximately 10% and 8% for the calendar year 2018. Now I’d like to turn the call over to the President and CEO of BBSI, Mike Elich, who will comment further on the recently completed second 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. As Gary mentioned, while our growth has slowed, the fundamentals of the business remained strong. And we are seeing continued support of our value proposition in the market.

Beyond the work our teams are doing every day in the field with our clients, we continue to spend time with referral partners, broadening and strengthening our referral channel as well as spending time with business owners working to understand what they may be seeing in their marketplace.

Both disciplines provide a means to understanding how we may evolve our offering over time to address challenges business owners face. In the quarter, we had solid results. We added 2 – 380 new PEO clients.

We experienced attrition of 126 clients, five due to accounts receivable, five – or eight for a lack of tier progression, six due to risk profile, 11 businesses sold, 18 businesses closed, 78 left due to pricing competition or moved away from the outsourcing model. This represents an approximate build in the quarter of 254 net new clients.

Outside of California, we continue to experience growth in excess of 20%. That said, we are seeing headwinds to grow in two areas. Softness in California, primarily in Southern California, as well as the average client size we are adding to – adding is smaller than our historical average in many markets.

Also in the quarter, we took time to pull 385 of our existing clients to better understand what they may be seeing. In general, they are cautiously optimistic. We are also hearing that, while there is opportunity for expansion, the shortage of skilled labor is the number one limitation to small business growth.

There is uncertainty related to trade tariffs in some markets. Some are seeing inflation in raw material cost. And the emergence of an underground economy is creating pricing and competitive pressure in some sectors.

These economic and regulatory concerns result in the business owners' hesitation to take financial risk and why we believe same-customer sales is softer than historically. Related to pipeline, we achieved a record number of client adds in the quarter, and we believe this is the result of our referral partners understanding and recommending BBSI.

We continue to 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. Today, we are seeing development of new referral channels in all markets, which support strong pipeline growth as evidenced by continued new client adds.

Related to organizational structure, we continue to build the field organizational changes for future growth, scale into new markets and invest and support our product offering. In the quarter, we opened branches in Las Vegas and Pasadena. With the addition of these branches, we now have 105 business teams across 60 branch locations.

Related to branch stratification, we 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 running between $30 million and $100 million. We regularly reinvest back into these teams to support capacity as they grow.

Finally, we have 26 branches we consider developing with run rates of up to $30 million. 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, we are tracking to add 13 new business teams and four physical locations in 2018.

At the end of 2018, we anticipate having more than 117 business teams housed in 62 physical locations. Although we are experiencing headwinds to branch growth in some markets, we see this as temporary to the long-term strategy, and we will continue to invest in the infrastructure as appropriate.

Looking forward, the fundamentals of the business are strong. While we were experiencing headwinds in the short term, we remained focused on bringing predictability and value to the business over the long haul.

My confidence in our ability to execute comes from strength of our organization’s leadership, maturity of teams and the structure that allows us to stay nimble. We know the value we bring to small business. As we build communities and markets, we see strength in our brand and a sustainable relevance over time. With that, I’ll open up for questions..

Thank you [Operator Instructions] And we’ll go first to Chris Moore with CJS Securities..

Hi guys, thanks for taking my questions. Yes. Maybe I just – could start with the kind of the workers' comp environment in California. Obviously, you guys have been working in California a long time, have been through kind of workers' comp pricing cycles there.

Can you kind of talk a little bit further about what gives you the confidence that you’re kind of approaching, I think, you talked about in the past, maybe the seventh inning of this cycle and why you think it will normalize down the line?.

Yes. Chris, it’s Kramer. What we talked about the last quarter has continued into this quarter as far as the industry and how competitive it is for insurance companies moving in. Yes, loss costs are trending better than inflation trends, which means insurance companies are coming in and pricing the business lower.

We look at this and say, "We’re in this for the long haul. We never want to be the most expensive. We never want to be the cheapest. We want to be long-term partners with our clients." And when we look at this, we say, "We could have hit the easy button.

And the easy button would have been the lower prices, right?" But the way we’re looking at this now is to say, "The business we’re bringing on is sustainable, it’s profitable and it’s good business." And then when we think about pricing in the future, we’re going to have to evaluate that. We’re in a position that we can evaluate that.

We have good loss experience, good control over the losses, understand loss rating. And when we think about all of the savings that we’re getting out of the program and the structure, specifically for the change in the Chubb structure, this puts us in a position that if we wanted to lower rates in the future, we could.

But as of the quarter end 2018, we held prices firm..

Yes. Chris, and I’d add to that, too. As we look through cycles and watch a lot of volatility in California, workers' comp market over many years now, and we’ve been writing insurance there for 23 years, we see new balance sheet coming to the market and they’re there for a little bit. They leave, they come back, they leave.

And we’re just not going to succumb to that. One of the things that I would say, over time, in our model is one of the value sides to our model is not really as much about workers' comp, but it’s bringing stability to small business and their ability to have predictability in what rates they’re going to get over time.

Now in any cycle of economy, not everybody is going to buy into the idea that if they can save $50,000 today that – to their benefit tomorrow when all of a sudden now that rate might move the other direction or they were sold on a bait and switch idea.

But this was where I kind of look at our discipline over a lot of years now holding true to what we believe our – is the best, is a good matchup for our clients.

Now e we’re not going to be – we’re still working with our clients and not putting them in a spot where we’ve got a little bit of room we can work with them, but we’re not throwing the baby out of the bath water. And even in the quarter, we’re seeing sequential growth of around almost 9%. We’re adding clients without workers' comp attached.

And so a lot of clients are sticking around for our value proposition without workers' comp attached. We’re bringing business on in all markets without workers' comp attached, and that’s the benefit.

But from where it lands today, companies that might be focused a little bit more in that direction or having a cost structure in that direction are going to feel a little bit more and may not see the longer-term ramifications of jumping just for price..

Got it. That’s very helpful. When you’re saying with the kind of gross revenue growth, when you look at the change in guidance from 14% to 10%, last quarter, I got the feel that, really, most of that was the workers' comp environment in California.

And today, you kind of talked about other things in terms of smaller clients, uncertainty in tariffs, et cetera.

On a relative basis, is most of the change from 14% to 10% still on the workers' comp? Or is that kind of more evenly split between that and some of the other things that are going on?.

I would say, from my view, it’s more evenly split in three areas, actually – well, two areas I guess. If you look at the same store number, it’s moving around a lot. And that’s what makes it hard to predict a good guide because you’ve got one quarter, it’s 7%. Next quarter, it’s at 5%. And in most cases, you just don’t see that much movement in markets.

And when things are going in one direction, it’s easy to say, it’s 7% or it’s 8% or it’s 9% or – but when you got a market that’s kind of jumping around a little bit on you, that one makes it a little bit harder to predict. And that’s, I think, it came in, like, 5.4% this quarter and that’s – it’s – that was one factor.

The second fact – and that’s probably due to the economic indicators that I had talked about.

The second one is that as you look at a branch that might be building even a year ago and they’re stacking in, and they’re stacking in at a good rate for their bill, but then they lose one client that might be three times what the average is or they’re – and they’re bringing in business that might be a little bit smaller, they’ve got a little bit of a hole to fill.

And as your backbone – you’re actually backboning it with price, a stronger base of business, because now you’ve got more clients that are spreading my risk.

But that’s kind of – that is related primarily to the workers' comp side and one why a bigger client might believe that it’s more price sensitive and why you might be backfilling with clients that might be a little smaller because those clients aren’t as price-sensitive or they see the value in a different – through different lens.

So that – so when I break it back – when I break it in half, I kind of look at – it’s not really even a 50-50 deal in any given quarter. It might be – and it kind of moves around. And we expect that we’ll start seeing as we make a turn on our run stability related to the smalls that are coming on. We feel like we’ve got a good handle on our runoff.

We don’t have a problem there. And then with same store, as you work through a couple of cycles, hopefully, we’ll have a little bit of stability there. We’re not hearing recession in the market. We’re not hearing science that tell us that something is eroding. But we are just seeing where business owners aren’t taking risk.

And so there’s not a real propensity to say I want to grow my business on an accelerated basis..

Yes. Chris, it’s Kramer. So when we – this quarter – just to frame it out, this quarter was our toughest compare to last year. Same-customer sales in Q2 2017 was the largest for the year. So this quarter, we knew going into the year that this was going to be our toughest comp.

And then when we look out for the remainder of the year to say that we’re going to get 8% for a year-to-date growth on gross billings, we look at it and feel pretty confident in that number. And just to bring you aware is in the fourth quarter, we have an extra business day, as well, which gives us a little bit of a tailwind.

And then when we think about the business going forward for the rolling 12, we factor in same-customer sales, which is going to be at this slightly lower than historical. But we feel like, come January, when we’re making the turn, we’re going to be making the turn on smaller comps, right? So the – we’re going against later comps.

So we feel like that tailwind we’re going to get in Q1 is going to carry through the rest of 2019..

Got it. That’s helpful. Maybe just one more. On the Chubb side, maybe just – you’re going to start – you have to start paying at, what, 2.5% on the – on that unused portion. Then you’re going to start to – excuse me, and then you’re going to start to fund on an annual basis.

Is that right, like, $16 million or something like that? Can you just walk through the mechanics. I just kind of want to understand – make sure I understand that.

And also from a kind of savings standpoint, where will we be looking at the workers' comp as a percentage of gross revenue? Could it be going down a little bit further from the 4.9% to 5.1% range?.

Yes. So the – so we restructured the program, and this is for all policies that were effective 7/1/2018 and greater. So kind of what happens is policies that were incepted prior to that, they need to run off. And then policies from 7/1/2018 need to ramp in.

So you have old policies running off at a greater expense and then new policies coming on at a less expense. So what will happen here is our – it will be minimally accretive to 2018, but will get much more accretion in 2019. And we haven’t given a net number on that yet.

When we get closer out to the full year guide for 2019, we’ll quantify that better for you. But what will happen is our workers' compensation expense will trend down. So workers' comp as a percentage of gross billings will go down. Our interest expense will go up. That’s for the, call it, the facing fee on the letter of credit.

So the comp goes down, interest goes up. The net of the two is accretive to earnings and good for shareholders. And then what we’ll do is think of that letter of credit as a four-year term loan or a bridge loan. We’ll start to fund that letter of credit every year up to a minimum of $60 million. And after four years, that letter of credit will go away.

And what will happen is that interest expense goes away with that letter of credit..

Got it very helpful. I’ll jump back in line thanks guys..

Thank you..

And our next question will come from Jeff Martin with Roth Capital Partners..

Yes, good morning Mike and Kramer.

How are you?.

Yes, good morning, Jeff..

Just want to get a better sense of the client additions and subtractions in the quarter. Sounds like you’re somewhat of a victim of losing larger clients.

Is that a spaced conclusion to draw here?.

I wouldn’t say that there was actually large clients that our averages – the average adds are smaller than – our average came down relative to our adds.

And so you might look and say if the average client historically was $1 million, we got a block of clients, but it’s not a large pool relative to the whole that might trend north $2 million, $3 million, $4 million.

It wasn’t those guys that left as much, as you just see headwinds to when your average client at yesterday’s average at $1 million is being replaced by the new average that might be closer to $750,000 or $600,000. And so when you get that headwind over time, you really got to add 1.5 – call it, 1.5 clients to replace the one that leaves us.

So it’s – there are cases where you – we saw where we lost some bigs at the beginning of the year, so we’ve been backfilling that hole. And then – and as in every quarter, we’ll lose some, but it’s more a matter of a shift in the almost average trend as in any bank. .

Yes, I would say that the clients we’ve added this year are, on average, about, I’d say, 15% to 20% smaller than the clients we added in the prior year. So it’s not a runoff issue. It’s really just the clients that we’re adding are smaller, and it takes more clients to fill the bucket..

And that would be probably on an individual branch basis. And then when you look at it on an aggregated basis, you got adds coming from markets that tend to give you smaller clients compared to other markets, too. So that’s shifting the average as well..

Yes. I was just going to say, so for the growth we had in the quarter, about 2/3 of that growth was outside of California.

And then what you see outside of California is typically smaller businesses and smaller billings because they don’t have – in general, outside of California, you don’t have the higher workers' comp, the higher payroll taxes, it’s – the cost of business in California is greater than outside of California..

Okay. And then with respect to your guidance coming down by $0.14, that’s all due to the SEC settlement.

Off of a lower growth assumption, where are you making up the difference there to – on a net basis coming out basically at the same pro forma level?.

Yes. So when we guided for the year, we only guided for, call it, legal cost for the SEC. We did not guide – or we did not factor it into our guide any penalty or fine. So when we reduced our estimates, it’s really just reducing it for that known, the 1.5 – yes, $1.25 million that we realized in the year for the SEC.

And then when we look at keeping guide where it is, we feel pretty good that we have the tools to get to that number. We gave a guide at the beginning of the year that we felt was attainable, right? So we knew going into the year that, that revenue was going to be a headwind based upon the trends.

We felt like we could still make our revenue number, but we were conservative on the earnings number. So we had, call it, a buffer in the earnings. And then we fund things as far as our workers' comp restructure with Chubb and a couple other things that we’re going to be able to make up some things on the back end of the year..

Okay. And then could you help us understand, once you’re fully loaded on this new workers' comp structure, what kind of impact that has maybe going out two years in terms of the comp expense as a percentage of gross billings..

Yes. If this – once we get – it’s difficult because when you think of how it’s – we got to ramp down this year and then ramp up, so you really don’t get a full savings until the third quarter of 2019.

So come third quarter of 2019, fourth quarter is where we get – we’ll have a true clean numbers and it’s going to be a little bit of a bridge until we get there. But we’ll – yes, we haven’t given that number yet, and we’ll give that number when we get out into the 2019 guide..

Okay thanks guys..

Thanks..

[Operator Instructions] And next, we’ll go to Bill Dezellem with Tieton Capital Management..

I just want to make sure that we are clear what you’re saying relative to the SEC settlement. Is the $500,000 that you expensed this quarter, that was legal fees? And the $1.5 million of penalty assessed by the SEC, that will be realized in the third quarter.

Is that correct?.

No. The full $1.5 million is carried as a liability. So we’ve expensed that $1.5 million. We had some expense go up in the second quarter as we are negotiating through the settlement. But when we got to the end of the second quarter, that $1.5 million has been expensed in the P&L for – we are carrying that liability as of the second quarter.

So there will not be any more P&L effect from the SEC. It will just be – we got a liability, and we’re going to pay that in the third quarter..

Understood. And then you just made a comment to the prior questioner that you have some things that will make up that $0.14 in the back half of the year.

Would you please detail those things?.

The one easy – easy one to talk about is Chubb, right, with the Chubb restructure. So that’s going to be minimally accretive. So we’re going to get a pickup in Chubb for the year. And then we’re constantly looking at ways to make the business more efficient and more effective in the way to run our model more lean and clean.

So we are doing a lot of things. It will be a lot of little things. It won’t be anything that is, call it, a monumental one..

Thank you.

And then relative to your increasing rate of growth in the next 12 months versus the first half of 2018, would you please go back over kind of the drivers that you see that are going to make that happen?.

So we – when we’re looking at going out for the year, right, so the rolling 12, when you get into the fourth quarter, there’s an extra business day. So there’s a little bit of a tailwind there, which, call it, an extra $25 million of revenue.

And then once we get into – this trend that we had, had of our customer adds coming in at 25% or 15% to 20% less than their historical size, that’s a trend that started in the third quarter of 2017 – or third quarter of 2016 – or 2017, I’m sorry, third quarter 2017.

So what happens is you’re going to be going on seeing – you’re going to be going on comps quarter-over-quarter of a similar base. So what that gets is an easier comp as far as going against the prior quarter, if that makes sense..

Yes. And Bill, I would say, too, where we see our, call it, our weakest market has been Southern California probably for the last year.

We’ve seen some levers there where with what we’re adding and what we’ve – with even the new branch structures that we’ve added into those markets that, that’s going to basically low level a little of some the headwinds that we’ve seen against some of our bigger branches relative to the – adding smalls because when you get into those branches, they’re going to grow off a base of zero or very little.

And we’ve got – in just Southern California alone, we’ll have three new branches that will be – that we’re feeding, that we’re working off of this year. And so there’s some things that are going on right now that seem more like crosswinds than headwind – as a headwind.

And we feel pretty comfortable that we can reverse that trend, and that’s the work that has to get done. Now it will take the next couple of quarters for us to really get that moving.

And that’s where – you look at third quarter and fourth quarter, that’s where the disparity between what we see in – for the balance of the year versus what we see on a 12-month guide..

That’s helpful.

And then if we layer those comments on top of the fact that you have seen this hesitation by your customers to truly expand and, yet, we are nearly a decade into the economy directionally going up, is this a sort of environment where we could see same-store sales somewhat just take a jump up at some point and almost very difficult to determine why that would happen other than just, finally, a higher level of confidence by the business owners?.

I think that there’s two potential headwinds, and I’ll revert back even to California a little bit. Even though we had a tax break for – at the federal level, there are a lot of deductions that are taken away from higher income earners in California.

And I think people are still trying to digest a little bit of what that really means for them on a personal level relative to taking risks. I think that some of the tariff – if you look at the West Coast in California, in general, and, specifically, Southern California, you’ve got – it’s an import state.

It’s – they’re importing raw materials to build on. And one of the things that we’re seeing right now is inflation relative to steel and wood. Wood has an impact to construction. Steel has impact to construction.

And then you look at – but I think it seems normalized a little bit, and there’s just – there’s enough noise out there that if I were an owner of the business that was either, call it, construction or whether it was just to grow my own business and put risk back into it, I’d probably be just being cautious about it.

And I think that some of these things can kind of normalize or get some real meat behind them and people understand where they’re really at. Yes, it could go the other direction pretty fast.

Now the other flip side of it is, okay, what next? And that’s why even in our modeling and where we’re looking at, we’ll take a more of a conservative approach as to how we view same store. And so it was – if it’s moving 2% or 3% a quarter, which is almost unprecedented, when will that stabilize? I don’t know.

But I think, as we look at where we’re going, I – where we combat that is just keep building with. That’s – if we were able to going to build a recessionary environment, we’ve got the discipline we build with. As we look at infrastructure, we’ll allocate infrastructure dollars to where we have the highest leverage and the highest probably for success.

And so – and we’re not in that – well, we’re a little bit in that mode now.

It’s just we’ll just continue to build with when you got – when you can’t control what the market is going to give you, you just – you build the discipline of making sure that you’re in front of the market and building with on – building what on you got, and that’s kind of how we’re approaching it..

That’s quite helpful. And if you’ll allow, one more question, please. That Mike, in your comments, you made reference to something about an underground economy.

Would you circle back to that and explain kind of what it is you’re seeing there?.

So one of the things that you see in late stages of economy, and this is where – so if you take the more mature business that is saying, "I’m not going to take – I don’t need to chase a business." What you find is there’s opportunity left for the guy that owns the pickup truck or buys a van and becomes a heating and air company overnight or wants to go out and just make it on his own.

And typically, the big guys and they’re going, I’m going to likely go ahead and do that. And I don’t need a big guy. I needed somebody that’s been around a while. I’m just going to let you go and do that. And they’re not going to compete with you.

But at the same time, they’re going to create disruption in certain markets and create competition to the extent that the more mature business is going to say, "I want to step away from that." And I consider us doing business with a more mature, more sophisticated business versus the guy that probably doesn’t have his own license, doesn’t have all the insurances and everything, but they can go to market because there’s just no supply.

There’s no supply to satisfy all the demand. I mean, I don’t know if anybody who’s out there that’s just trying to get a landscaper to come out to their house in the recent year, at least on the West Coast, and you just – you’re on waitlist. You can’t get it done.

So the guy that used to work for that landscape company sees this and they go like – go on my own and start doing it and I don’t have to – I’ll probably not going to be as tied down as everybody, so my cost structure is going to be a lot different. And that becomes a little bit of what we see in late-stage economies.

We saw in 2006, 2007, and it’s just what happens..

Thank you for that, additional explanation. And thank you both for the time..

And we’ll go next to Patrick O’Keefe with Cloverdale Capital..

So kind of – I think I heard on the call that outside of California, you guys are still growing in excess of 20%. That sounded like an acceleration.

Can you just talk about that in more detail?.

It’s – so outside of California, we’ve grown at 20%. When we look at the total growth that we had in the quarter, about 2/3 of that growth was outside of California. So we’re growing outside of California. It’s adding more contribution to the company. In total, California is being, I’ll say, slowly diluted, but it will be a slow dilution..

And Patrick, I would say that we’re seeing – it’s like – it’s – what you see is even there, a little bit of volatility in that one quarter. You’ve got the East Coast is moving pretty good. The Mountain States is kind of more in line with where they’ve been historically. And then maybe even Northwest is kind of seeing a headwind.

And the next quarter, the Northwest is jumping. And the Mountain States are jumping. And then East Coast might be seeing a headwind. So outside of California, yes, we are seeing acceleration there in both adds. Same store is stronger outside of California. So those are markets that we’re continuing to invest in and they’re – and they’re doing great.

And I think in the quarter, the Mountain States was our strongest grower of – by region, and we’re seeing a lot of traction in, call it, out of Utah, Idaho and Arizona.

And it’s – we attribute it to the strength of our teams and the maturity of the infrastructure that we’re building there, probably, more than a macro effect that we also know that those are states that are very business friendly and they tend to see a stronger growth overall than most markets. .

Okay, thank you guys, very helpful..

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

Just want to say thank you for being on the call. Thank you for continuing to support our interests, and looking forward to catching up in early November as we bring results of the third quarter. Thank you..

And that concludes today’s conference call. Thank you, everyone, for your participation. You may now disconnect..