Good day, everyone, and thank you for participating in today's conference call to discuss BBSI's financial results for the third quarter ended September 30, 2019. 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 up for 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 company 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 matter (sic) [ number ] of risks and uncertainties. Actual results may differ materially from those implied by those 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 results -- excuse me, that could cause actual results to differ. .

I'd like to remind everyone that this call will be available for replay through December 6, 2019, starting at 3 p.m. Eastern Time this afternoon. A webcast replay will also be available via the link provided in today's press release as well as available on the company's website at www.mybbsi.com. .

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

Thank you, Michelle. Depending upon where you're dialing in from, good morning or good afternoon, everyone. We had a very strong quarter that resulted in record earnings. Diluted income per share for the quarter increased 30% to $3.24 compared to $2.50 in Q3 of '18. Gross billings of $1.55 billion grew 7% over the same period.

PEO gross billings increased 8% to $1.52 billion compared to the third quarter last year. The third quarter of 2019 had 1 more work day when compared to the third quarter of 2018. when adjusting for the 1-day difference, our gross billings increased approximately 6% over the prior year period.

Gross billings grew by 5% in California versus 15% in all other combined geographies. Same customer sales were 5.7% compared to 4.7% in Q3 of '18. However, adjusting for the 1-day difference, same customer sales would have been approximately 4.3%, which was lower than Q3 of '18 and lower than our internal plan..

We continue to increase our client base with a gross addition of 386 clients or 217 net of runoff in the quarter. The 386 gross additions are a record number in any third quarter in our history. .

Net revenue of $248 million reflects a slight increase compared to $247.3 million in Q3 of '18 and reflected weaker staffing revenue, which decreased 17% to $33.8 million compared to Q3 of '18.

The decrease in staffing revenue is a direct result of the continued tight labor market, and we anticipate that staffing will remain a slight headwind to near-term revenue growth. .

Gross profit outpaced gross billings growth and increased 19% to $70.8 million compared to $59.7 million at Q3 of '18. Gross payroll taxes and benefits as a percentage of payroll was 6.8% in Q3 of '19 versus 6.9% in Q3 of '18. .

Workers' compensation expense as a percentage of gross billings was 3.6% this quarter, which is below our expected range of 4.4% to 4.6%. This compares to 4.5% of gross billings in the third quarter of 2018. .

The third quarter is when we reset our triangles and bring in another year of experience. The independent actuarial evaluation resulted in a reduction of prior year estimated liability of $5.6 million.

Also, as previously discussed, we restructured our arrangement with Chubb to reduce frictional costs, and this is the first pure quarter where all policies are effective on the more efficient structure..

Our workers' compensation claims frequency continues to trend favorably. In the quarter, we saw trailing 12-month relative frequency of claims as a percentage of payroll decrease 12.9% compared to the third quarter of 2018. All in, we are very pleased with the way our workers' compensation portfolio is performing.

We have taken many steps and actions which are yielding positive results. We are conservative and deliberate. And this strict focus and attention has resulted in a redundancy in the portfolio 7 quarters in a row and why our expense continues to come in lower than our range. .

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. .

SG&A in the third quarter was $41.4 million, which is 13% higher than the prior year quarter. This increase includes a timing portion for the extra business day, plus a slight increase in profit sharing. We continue to be mindful and diligent about balancing spend against growth while investing in the business for the future.

For the full year of 2019, our SG&A is expected to be on plan..

The provision for income taxes in the third quarter was $6 million. As mentioned last quarter, we increased our annual effective tax rate estimate from 18% to 22%..

Moving to the balance sheet. We mentioned last quarter that we successfully renewed our 7/1/19 insurance program with Chubb. This was a significant renewal because we have moved closer together with our collective view of the actuarial loss rates.

This was a tipping point for the balance sheet and results in accelerated growth of our unrestricted cash balance and our free cash flow..

Accordingly, our unrestricted cash and investments were $137 million at 9/30/19, which is $36 million greater than 6/30/19 and $100 million greater than 12/31/18. The restricted cash and investments, which are primarily comprised of the Chubb trust, was $420 million at 9/30/19.

The $557 million combined unrestricted and restricted cash and investments will continue to be invested in a manner consistent with our previous disclosures. We continue to stay conservatively invested in shorter-duration securities in the near term due to a flattening yield curve.

At 9/30/19, we had $173 million in cash that returned an annual crediting rate of 220 basis points..

At September 30, the book yield for the invested portfolios was 238 basis points with a duration of 1.71 years. At 9/30/19, the average quality of the invested portfolios was AA, and no investment was greater than 4% of the portfolio. In the quarter, we earned $3.7 million of investment income. .

On the liability side of the balance sheet, we have no material updates. We had no borrowing under our credit line as of 9/30/19, and we continue to be debt-free, except for the $4 million mortgage on our corporate headquarters in Vancouver, Washington. .

Turning to capital allocation. We have built a financial note around the company, and we will continue to be diligent and mindful regarding balancing investment in the company while returning capital to shareholders.

We have an authorized stock repurchase plan, which is another tool to drive shareholder value, but we did not buy back any stock in the quarter. We increased the dividend last quarter by 20% and have returned $6 million to shareholders so far this year..

In summary, for the quarter, our branches are continuing to meet or exceed expectations regarding the controllables for gross and net client adds. We continue to experience margin expansion through product relevance while reducing costs in our model.

Our gross billings continue to increase even with the softness of the uncontrollable same customer sales. We continue to invest in the business and future growth while being mindful of expenses and looking for savings and efficiencies in everything we do. Our pipeline remains strong, and we continue to build our base of net new clients.

Our referral relationships and distribution channels continued to widen. Our balance sheet has made a turn, and we have built a financial note to support the company. But more importantly, our core earnings are strong and predictable. .

Regarding our outlook for the remainder of the year. We continue to expect gross billings growth for the next rolling 12-month period to be approximately 8%. This contemplates continuing deceleration in staffing revenue and same customer sales growth for PEO to be similar to what we have experienced thus far in 2019.

For the full year 2019, we are raising our estimate for diluted earnings per share by $0.65 to approximately $6.05. This increase reflects our core operating results performing as planned, plus our workers' compensation portfolio performing better than expected, which is partially offset by an increase in our effective tax rate to 22% from 18%.

For the fourth quarter of 2019, we expect the range for workers' compensation expense as a percentage of gross billings to be 4.3% to 4.5%. This range can also be applied as an approximation when looking forward to 2020. .

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 third quarter as well as our operational outlook for 2019.

Mike?.

Hello, and thank you for taking time to be on the call. As we do each year, we spent much of September in the field, reviewing progress of 2019 and looking forward to 2020. From my view of the business, the organization looks strong, and we continue to execute to our plan in support of our fundamentals. .

Additionally, in September, we introduced a new website and a new URL, mybbsi.com. This is the first step moving forward that will make us -- excuse me, this is the first move and several we will make in coming -- in the coming months to more accurately represent our value proposition to the market.

Also, we continue to spend time in the field with referral partners and business owners, working to understand what they may be seeing in the market. These efforts and our visibility to the business continue to support confidence in our value proposition we -- as we look at the market..

Looking forward in the quarter, we added 386 new PEO clients. We experienced attrition of 169 clients, 15 due to accounts receivable, 13 for lack of tier progression, 3 due to risk profile, 20 businesses sold, 45 businesses closed and 73 left due to pricing competition and companies that have moved away from the outsourced model.

This represents an approximate build in the quarter of 217 net new clients. .

Also in the quarter, we took time to poll 10% of our existing clients to better understand what they may be seeing. In speaking with these clients, a majority are profitable and continue to see relevance in their offering.

Despite runway and opportunity, lack of skilled labor continues to be the limitation to growth, and there continues to be some uncertainty related to a variety of macro issues.

In general, the business owners we spoke to expressed optimism but are not able to find the talent they need to grow, which is why we believe we are seeing softness in same customer sales..

Related to pipeline, we continued to see strong client adds in the quarter, and we believe this is a result of our referral partners understanding and recommending BBSI. We continued 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 supports strong pipelines growth as evidenced by continued new client adds. .

Related to organizational structure. We continue to build the field organization to support future growth, scale into new markets and invest and support of our product offering. In the quarter, we added 1 business team, bringing us to 114 business teams across 63 branch locations. We continue to build organizational structure at all levels.

To that end, in October, we announced the addition of Diane Dewbrey to our Board of Directors, bringing our total count to 8 members..

Related to branch stratification, we have 18 mature branches with run rates in excess of $100 million. This is a measure we use to indicate branch's ability to increase leverage. We have 20 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 25 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.

As we add infrastructure to support capacity, as dictated by our pipelines, we pay particular attention to our ability to add business teams in support of our growth. .

Looking forward, the fundamentals of the business are strong. We remain focused on bringing predictability and value to the business over the long run. Feedback I've received from our clients and referral partners supports relevance of our product as we look at the next 5 years.

Having spent a great deal of time in the field this year, my confidence in our ability to execute comes from the strength of our teams and the structure that allows us to stay nimble. We continue to invest in infrastructure that supports both product evolution and our ability to scale into new markets with predictable outcomes.

Today, we have a foundation that is strong. We know where we need to focus our energy, and we are executing to our plan. .

With that, I'll turn it over for questions. .

[Operator Instructions] Our first question comes from the line of Chris Moore with CJS Securities. .

Maybe just focus a little bit on growth, specifically outside California, kind of the impact that, that has, kind of near and midterm. Just start with maybe on the referral channels. So the referral channels that you have in California are well established.

Can you talk a little bit about kind of how they look outside of California?.

Chris, it's Kramer. So that's a good question. And what we've really focused on is consistency in our product and consistency in how we deliver the product and how we go to market. So if you think about how we try to forge these relationships on a national basis, we've got a strategy for how we work with our referral partners in every state.

So if you're a referral partner in Utah, you get treated to the same sort of service and platform as California. So it's going to vary by market. Some of our markets that are more mature, like in the Mountain states versus, say, our East Coast branches that are opening up, that are going to take a little time to get those channels developed.

But the basic idea is if you go in any BBSI storefront, it looks the same no matter what state you're in, and that referral partner gets treated with the same respect and service everywhere. .

Yes, Chris, and I'd add to that. One of the things that I saw probably in the reviews that we did in the third quarter, just being out in the field was, one, our bench of leadership in all markets is very consistent, and you really don't see very much a difference between, call it, California and the Mountain states to the East Coast.

The other thing I would say is that as we may have had -- if we grew up on the West Coast and California with more of an insurance offering in the past, as we've evolved that brand and have shifted it, that's taken more effort. And we've had to reeducate and retool a lot of our referral partners in California.

As we look at other states, where we probably came at a lot of our growth through a different value proposition, we're seeing an adoption of our current value proposition in those markets and probably an acceleration through our existing pipelines in those markets where we actually see a higher effective yield coming out of the referral channels that we get in markets outside of California.

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That's interesting. From a kind of customer or client size, it's -- the clients are smaller that you're -- on average, that you're signing up outside of California. You had kind of historically talked about a 5-year time frame for a successful branch to reach that $100 million level.

Does the -- kind of starting on the smaller side, does that impact much that potential progression that you see?.

Yes. There's a little bit more of a headwind. And what you -- there's 2 sides to the smaller customers. The smaller customer is a lot of times when you see a new branch coming online. There is maybe a tendency to be more comfortable adding a smaller company.

And as you get more traction, you'll see that average client, employee size increase in all markets. So that's kind of a standard.

But then you have to take into consideration that if you look at companies in Southern California versus companies in Utah or Boise, Idaho, there tends to be -- just by nature of population size and market demographics, they just tend to be smaller. So it will take a little bit longer for us to get there.

But one of the things I would say, too, is, today, in our overall model, we get there faster today because I think we're more efficient in how we're adding and building pipeline and how we're adding business than we maybe have been if you went back 10 years ago. .

Our next question comes from the line of Jeff Martin with Roth Capital Partners. .

Was wondering if you could comment on the implied Q4 guide relative to your updated guidance of $6.05 for the year would imply down year-over-year. I know there are some things going on with payroll taxes, but I think it'd be helpful to kind of get some insight from you in an open format here on that. .

Yes. So if you think back for Q4 of '18, we have, call it, 2 nonrecurring. So we had a change in estimate for workers' comp, which was like $2.3 million. So when we're giving any forecast for the forward-look, we don't forecast for any change in estimates. So that's one of the puts.

And then the other one was in Q4 of '18, we were estimating that we were going to have a payroll tax that was going to be due that ended up not being due. So we took down on that accrual in Q4 of '18. So you've got, call it, 2 credits from '18 that don't repeat in '19.

So if you normalize for those, we still are getting to earnings growth for Q4 of '19. .

Okay. And then I was wondering if you could give us an update on the progress of some of the new branches and new business units that have opened up this year. .

So as we've added new branches and new markets, we're finding that there's 2 style of branches. Let's say that if we add a branch in a market adjacency, we'll call that a tuck-in.

Typically, those branches are started with talent that's already been working in a branch, be it a current business partner that maybe moves to a new branch and opens that, for example.

With that, you're taking experience and tenure, and you're combining that with a book of business that gets started that might be peeled off from local branches that makes more sense for those customers to be in the new branches.

When that happens, that branch, one, gets off the ground faster because of the talent but also the momentum that's already there with the existing client. And typically, there's already a -- somewhat of a pull where you've got existing referral channels already built around that market.

So in those branches, we'll find that they move pretty fast through that $20 million to $30 million to $50 million. They all have to go through a retool and a rebuild right around $60 million, and we tend to get there more proactively today than we ever used to.

But when I look at new branches that have ramped in the last couple of years, they're all doing very well. We don't have any branches that are suspect or needing to be retooled at this point relative to anything that's new.

When we look at markets that we enter as a greenfield, we tend to take a little bit more time on the front end by having either that new manager or whoever's going to be running it sit in the wings for up to 6 months and really learn the business before they go out and enter those markets.

What's helping us a lot also is that our referral channels are broader. And once we go into a greenfield market, we find that we're able to create pipeline a lot quicker. So the pace of a greenfield might be a little bit slower than the tuck-in, but we're also seeing where those branches are ramping faster than historically. .

And I would -- just to throw some numbers on it, when we set out our plan for -- beginning of the year, we had, call it, 4 to 5 new branches. So far this year, we've opened 3 branches, 2 in California, 1 in Colorado. And we're in the process of signing the lease to open a location for another one in the Allentown area.

So we're, call it, hitting our number for the branches. And then when we think about business units, business units were a little behind for our plan for where we thought we'd be. I think for the year, we're going to be slightly below it, and that's really just a function of timing more than anything else, more than change of strategy.

It's just the timing of when you have to find the people, get them in and get them operationalized. .

Yes. we're looking at where we optimize efficiency of capacity utilization against where we need to be to make sure we don't stall pipeline or anything. And our cap u has come up. If it was running closer to 58%, 59%, call it, at the beginning of the year, today, we're closer to about 64%.

But we feel like we still have good runway to build capacity as necessary to business units. But we're kind of seeing where we are gaining more efficiencies through our teams, and we're getting more done as well. So... .

Okay.

And then with the additional build on the balance sheet in terms of unrestricted cash, how are you looking at investments for growth versus share repurchases at this point?.

Yes. I mean, first and foremost, when we think about having excess capital, right, the first thing we're going to do is we're going to invest in our businesses and invest in our branches and our business units.

Then we're going to look and we're going to invest in things that make the company -- either revenue synergies, expense synergies, i.e., IT, information technology. And then we're not a very acquisitive company. When you think of our value props, people are a product and why buy it when you can grow it.

So then we get down to the next tranche, which is raising the dividend, which we've done, and then stock purchase -- stock repurchase, which the Board authorized last quarter for $50 million over 3 years. That's a tool that we will utilize if we see any kind of dislocation in the market to be a backstop for when we think the stock is undervalued.

And we can just say that we don't have any trigger finger, and when we're going to be smart and methodical with how we spend our shareholders' dollars. .

Yes. I would say, too, and to complement that, Jeff, that when we look at investments that we've made, typically when we add a branch, it's not capitalized, so it just comes up through our own earnings stream, and it becomes a headwind to earnings.

So one of the areas that we have been putting a lot of energy back into is just bringing a new look and maturity level to our overall IT platform. And as we get into 2020 and beyond, we'll be rolling that.

But we have probably a broader strategy today than we've had in the past relative to how we're building technology and where we're going with that as a complement to our existing infrastructure and model. So... .

Right, right. Okay. Last question. So many peers have had issues with underwriting health care insurance. Just want to clarify that you have no exposure to underwriting health care and some of the similar issues that others were having. .

Yes. So we do not offer health care to our clients. As you're seeing with some of our peers, that's a -- can be a difficult risk to underwrite, and we don't really feel the need for it in our value prop.

When we think about the risk we do take, call that workers' comp, for that risk, we have a very methodical process for how we bring clients on, for how we work with the client to align better, for how we can work with them to mitigate risks, and we feel like we can make that a better underwriting decision as opposed to the health care side, which is more of a challenging risk that it's more difficult to mitigate.

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Yes. I would also say that, Jeff, as we've grown and matured our model over time that the health care side is, although an opportunity, I think it always has been a little bit of conflict with what we're really trying to get down with our business owners.

And we're running our high-touch model, I would rather be non-captive to help benefits and have professionals that can come in and really support our clients for where they're living, rather than have one-stop-fits-all.

And as we have stayed outside of that and stayed risk-neutral on the health care level, we still have mechanisms where we can help our clients find the best resources. But we do that as a service rather than taking underwriting risk. .

Our next question comes from the line of Josh Vogel with Sidoti & Company. .

Mike, you usually give some commentary around the average pay and overtime trends across your client base. Just wondering if you can share that with us. .

So in the quarter, I'll probably defer to the absolutes with Kramer. One of the things that we have seen probably as it relates to growth in same customer sales is still probably coming from wage inflation. And -- but I'll let Kramer talk to more of the details of that. .

Josh, it's more of the same trends that we talked about last quarter. So when I give you numbers here, I'm going to adjust it for the 1 extra day. So we're still seeing of our 4.3% in same customer sales, the lion's share of that is wage inflation, which is going to be in the mid- to high 2s.

And then after wage inflation, you get a little bit of a bump up in head count adds. And then you get -- after that, you get a little bit of a bump up in hours worked.

So when we're looking at how this -- how our same customer sales is performing, it's probably going to be in this -- over this next cycle, I'll say, next 18 months, it's going to primarily come from the wage inflation. I don't -- with unemployment at a sub-3.5%, I just don't see how we're going to get the uptick in WSEs. .

Yes. And I would say, Josh, in meeting and spending time with our clients, they're -- a lot of them just are in a good spot. They're doing well. They're profitable. They're making money.

And what we did notice probably over the last couple of quarters is that wage or hours worked, it's somewhat normalized, where, to me, that's where business owners aren't finding that they have to stress their organization to capture market opportunity but more have modulated themselves to make sure that their capacity is aligned with the opportunity and not to push -- to have a lot of overtime and in doing so, I think, are running more profitable businesses.

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The one flip, and this is maybe off this market a little bit that we noticed in a conversation that we were having a couple of weeks with a group of owners, is that you're seeing a little bit of a transition where you have an old guard and a young guard.

The older guard is the group that has owned the businesses for a long time, lived through '08,'0 9, '10. And as they look at their business, they can think about growth. They can think about where they're going, but they're not going to break it to take unnecessary risks.

The interesting part is the young guard is coming in, where you've got maybe a mid-30s group that seems to almost be a split now in the room, where they are actually buying companies. They're doing acquisitions. They're more aggressive, and they're building for their future. And so there's a little bit of a shift going on there.

It's more anecdotal at this point, but I think that there's a little bit of that going on as well. .

That's helpful. And I don't want to get too into the weeds here, but you did mention that 45 businesses closed in your attrition number for PEO clients. And I was just curious, is that mostly being seen in California or elsewhere? And then I can't find it in my notes, but I'm just -- it just seems a little high.

I was wondering how that status trended this year.

And how often do you evaluate your client base? And given how immersed you are in their business as a partner, do you typically see the writing on the wall before they do?.

So we've got very good visibility as we work with that client. The idea of closing versus selling is probably a -- closing could mean that they changed an FEIN number and moved to a different ownership structure. And we probably wouldn't be able to see or dissect that as much as we recognize that the business was there, and then it wasn't there. .

The businesses that sold, we recognize that they moved -- they've shifted ownership structure there. And typically, we might capture that same business on the other side. But the trend has upticked in the last couple of quarters between businesses sold and businesses closed.

The one thing I'd kind of look at that a little bit, too, though, is that on a relative basis, if you said I have 65 clients in the quarter that either closed or sold, it's less than 1% of our total base of business. So as our overall base grows, those numbers may get skewed a little bit when you look at them just on a -- from a real standpoint. .

Yes. And I would say, Josh, we pay attention to companies that have the potential to go dark from a credit perspective. And we've got to push $6 billion through the pipe. And if you look at our allowance and our expense for companies that go dark, it's not even a rounding issue because we got pretty tight on how we do that side of it.

So we're usually ahead of it than behind it if they are going dark. .

Great. And just around that website you rolled out.

Just curious how that's being received across the client base? And can you discuss some of the other efforts that are planned for rollout and if this involves any notable investment or outlays on your end?.

So I'm reluctant to call it anything related to a rebrand. And it -- when you start to show up different in the market, that's how it can be perceived.

What I would say is that, as we discussed it internally, we started to really rebuild and restructure and realign who we are from the inside out before we ever decided we could look different on -- from the outside looking in.

And so when we poll the organization as a whole and we asked them when do they really think that we started to rebrand, retool ourselves, people will point back to 2011, 2012.

We finally have reached a place where all the pieces that we've been pulling together for the last many, many years have reached a place where we can actually tell a different story. And that story has been well received.

I think that if you go out to the new website, it's under mybbsi.com, you'll see maybe a story that represents a lot of what we've been talking about the last couple of years, but it aligns us with what we really believe we're bringing to market.

And as business owners and different people see it, they -- the one comment that I've had back for me is that it finally talks about what we really do, and that's where -- we're excited about that. .

As we look forward, I think that as we look at what's possible from here, we've got a very strong core business.

I think we've got good core discipline around how we interface with our clients through our blueprinting, through how we basically manage and manage the full client life cycle through our framework process that we have, and then ultimately, how we tie that out with the talent that we have in front of clients every day and then how we support that with technology.

So those are all things that we'll continue to enhance. As it relates to different places that you might see us show up, it will be -- you might find us in different venues, showing up in different ways. But I think the real emphasis towards where the direction we're going is when you think about mybbsi versus BBSI, it implies community.

And when we look at business owners that we pull together, we're building communities both locally and super regionally around an idea that they don't have to be alone and that they actually have a place to go and a partner that they can be there with to help them increase their own probability for success. So that's the direction we're going with.

And -- but through these communities that we're building -- and we've been working on this for about 3 years now. When we bring a group of business owners in and we start to get them to talk to each other, it's game changing. And as we get better in the field working with our clients, it's actually accelerating.

So I'm excited about all those things, and we'll keep you posted as there's more to look at. .

[Operator Instructions] Our next question comes from the line of Bill Dezellem with Tieton Capital Management. .

I have a group of questions, and I'd like to start just picking up on where you left off. Early in the opening remarks, you said that mybbsi was just the first of many steps that you will be making to highlight your value proposition.

Would you please kind of open the shades on the window and give us a look into what you're going to be doing from this point forward to highlight that value proposition?.

Well, I'm going to make it -- I'm going to them blinds. And as we kind of turn the little thing and the blinds open a little bit, we'll let a little bit of sunlight in. I'll give you that much.

How about that?.

That's fair. .

As we look at -- again, if there is a theme about what we've been building over many years, it's been about creating a client interface where our clients see us as a true partner. And through the interface that we have with them over a long period of time, they see us as their true advocates. .

As we look also to our referral channels and we educate and help them understand the value they can bring to their clients by introducing us into the DNA of their client base, that begins to support it.

So if you look at the theme around mybbsi being a community, there are a lot of things we can do there related to our access point, where we can bring them in and give them exclusive access to the collective of business owners that we work with.

So I think that when we look at technology aligned with that, that becomes one way that we are broadening that network and access to information that's proprietary to us.

When I look at just where we start to show up outside of the -- of what we do already, we do a lot of our, I'll call it, referral channel developing through a networking strategy and through a channel strategy. And we bill it through an event strategy.

And as we have events where we bring a lot of our referral partners in to really understand and have an experience with BBSI, as well as our channel partners that we work with that support us, as well as we bring customers in, that becomes a little bit of an incubator to learn a little bit more.

We have today 3 LPGA events that we use, where we'll bring and do create environments that literally is -- there's barrier to entry. They can't get into those. But over periods of times, we've brought groups through, and we've built very, very firm relationships over time. .

With that, we've looked at the idea of front-running new markets that we might be getting to and creating a way -- efficient way and cost-effective way to being able to start building visibility in the market to a broader footprint over time.

And using the LPGA a little bit, but we've actually -- this last year, we're on 3 -- or 2 new golf bags that are on tour year-round out on the LPGA. What we recognize there is 77% of those individuals that participate in a pro-am and participate as business owners in pro-ams are CEOs or business owners.

So we're tapping a market that allows us to, one, create an experience. We're also getting our brand out in front of us without being -- going TV and media-wise.

But we're creating environments to build relationships with our referral channels, and then ultimately, two, begin to expand and create avenues where the brand of BBSI and mybbsi are being visual -- are being seen by those people that might be our audience, either today or in the future, and creating more of a curiosity approach. .

And you had also mentioned that your referral relationships were widening.

Would you talk about that and really what you mean when you state that?.

When I look at somebody that is a -- potentially a person that's aligned and a trusted adviser to a business owner, when we first meet them, we would probably tier them as a Tier 1 referral partner, and that individual probably can kind of get who we are. They see us.

It's maybe an opportunity for them to create business for themselves, but it tends to be a little more transactional.

So as we recognize the work we have to do through education and through helping them see maybe the opportunity through a different lens, we spend a lot of time working with that -- those individuals, both in local markets, in micro regions throughout our network of branches.

And then on a more global basis, as we get to a point where we're doing business and they're starting to get to understand our value proposition, we'll bring them into environments to help them see the product through the eyes of their own business, if that makes sense.

So if you think of somebody that might own an accounting firm or a law firm or an insurance agency, they're running a business. And rather than help them see the product as it may be explained, we'll bring them into a similar environment that we bring our business owners into.

And when we do that, they actually start to see the product from the inside out and start to really understand the nature of what we're trying to do. From there, we double back, and we'll tend to work with their internal organization to help mature and help them understand it.

That might lead us to a tier -- a Level 2 or Tier 2 referral partner that, at that time, now all of a sudden, becomes one of those areas where we've got to still handle them a little bit, but they're catching on, and they're getting there.

If we can now evolve that relationship from Tier 2 to Tier 3, you get the Tier 3 referral partner that probably understands and can articulate our value proposition as well as we can. Now they're really doing work for us in the market. .

That's helpful. And so presumably then, you are seeing an increasing number of the partners you would consider Tier 3, and hence, the widening of the relationships. .

Yes. And so one of the areas -- one of the ways we look at that is through yield.

And as we look at opportunities that we have presented to us versus the number of conversions or the yield on the original opportunities, that's a little bit of where we then start to stratify, where is that business coming from, from who and then what's our effective yield with different audiences.

The one thing that we have also seen in this last quarter and probably a couple of quarters is a significant uptick in referrals from existing clients. .

Mike, I think you mentioned in your opening remarks or somewhere in this call that the California yield was less than -- referral channel yield was less than outside of California. So congratulations on having more referrals from existing customers.

So what can or needs to be done to improve that referral channel yield in California?.

And I would probably -- what I meant was the way the channel works is if you look at first meeting, the second meeting, the third meeting or the fourth meeting, there's -- the falloff happens differently.

When we finally get to the ultimate yield of the ultimate -- of the first pipeline that we see to the end, it's pretty much in line with what we see in California as well, and it's pretty consistent across all states, but how it happens is different. So I -- thank you for bringing that up, so I can clarify that. .

The other part, though, that I would say is that as we have seen the uptick of even client referral, it's the more we execute and the more clarity we bring to the market as to what we really do. It's more of a time-based maturing process that it's allowing us to get more from the opportunities that we have. .

Yes. And I would just put some numbers around that. Our efficiency ratios, right, for how we acquire clients is pretty consistent, whether it's California or all other geographies. We are growing quicker outside of California, but California is still adding more clients than outside of California.

And it's just -- when we get to California, it continues to grow, and it's like diluting the ocean because we've got such a big footprint in California. .

And then I do want to talk about claims frequency, and then I'll be done here. You said claims frequency dropped to roughly 13%.

What was behind that success?.

I wish we could pinpoint to the one thing and do it over repetitively. But when you're doing these things, it's a lot of little things. So we've got about 30 different strategies and those 30 different strategies are yielding the favorable results that we're seeing, so it's not one thing we can pinpoint to. It's a lot of little things.

But we feel very comfortable with where we are for the year for workers' comp, for claims coming in, for the value of the claims. We feel very comfortable about what we're seeing on the prior years, and you can see those results and the consistent redundancies that we have in the prior year loss pick.

So the only thing I can say is we have a disciplined strategy, and we are conservative, and we are executing to that strategy. And then you start to see the conservatism unwind over time. .

Yes. I would add that it's more of a systemic approach to all the things that we do from -- when we bring a new client onboard to actually the level of retention that we have with the overall base. And that the longer we do business with a client, the more apt they are to be better-run companies.

And I think that's probably where we see one area that makes a big difference.

So were you serious when you said 30 different things to improve the claims frequency?.

We have many tools in the box. .

So is this just one of those examples where the business is being run much better from an operational perspective than it was several years ago and as part of this consistency that you referenced in the opening remarks is part of what is going to lead to that consistency going forward. .

I would say this that BBSI is better, and I would say that the value that we're bringing to our clients is better. So when you take the 2, it becomes a multiplicative effect. .

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

Again, thank you for continuing on this journey with us. It's been very rewarding to see all the work that we've been putting into the organization over many years starting to pay some dividends and look forward to catching up with you, both in the field and on the next call. Thank you. Bye..