Good day, everyone. Thank you for participating in today's conference call to discuss BBSI's financial results for the second quarter ended June 30, 2020. Joining us today are BBSI's President and CEO, Mr. Gary Kramer; and the company's CFO, Mr. Anthony Harris. Following their remarks, we'll open the call for your questions..

Before we go further, please take note of the company's safe harbor statement within the meaning of the Private Securities Litigation Reform Act of 1995. The statement provides important cautions regarding forward-looking statements. The company's remarks during today's conference call will include forward-looking statements.

These statements, along with other information presented that does not reflect historical 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 5, 2020, 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.mybbsi.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, David. Good morning, everyone, and thank you for joining the call. I hope that everyone has stayed safe and healthy during these times. The second quarter proved to be a complex environment as a result of COVID-19 and the subsequent economic downturn.

Our business teams around the country executed flawlessly in working remotely while supporting our clients in these trying times..

I want to again thank everyone in the BBSI family, many of whom are listening to this call, for their exceptional response to this crisis. We continue to provide outstanding and uninterrupted service to our clients and distribution partners..

I'm very proud of the work and support that we delivered to our clients as we assisted in the challenging situations of layoffs and furloughs while deciphering all of the various legislations from essential versus nonessential to FFCRA to the CARES Act.

We developed reports or made introductions to assist the clients with applying for these various grants, loans and subsidies. And then we assisted on work-from-home programs and then fortunately, return-to-work programs..

Simply put, our product has never been more relevant. Unfortunate situations like COVID are why BBSI is here and why we exist to advocate for the success of the business owner..

I'm going to divide my remaining remarks into 3 sections. In the first section, I will discuss the company's financial strength. Then the section's section will be commentary on the second quarter operations, and in the third, I will provide an update on our strategy for growth.

Then Anthony Harris will deliver his prepared remarks regarding the second quarter as well as financial and capital review for the remainder of the year. Finally, we will open the line for questions..

Regarding the company's financial strength, our balance sheet is in an excellent position. We previously discussed building a financial moat around the company, and I am pleased to say that the moat is deeper this quarter as a result of closing a loss portfolio transfer.

This is another step in the direction of derisking our workers' compensation structure. The transaction generated a onetime increase in unrestricted cash of $48 million with additional cash flow benefits to be realized later in the year..

At quarter end, our true available cash and securities on hand increased $36 million from Q1 to $130 million, and we continue to have an additional $50 million credit facility behind us. Anthony will discuss our liquidity in more detail during his prepared remarks.

But I will say that we have made significant strides to bolster our already strong balance sheet despite market uncertainties created around the world from COVID-19. This is a very telling statement about the intrinsic value of our company..

Regarding the second quarter operations, our gross billings decreased 6% over the prior year. We provided interim financials last quarter and stated that April's gross billings felt like the bottom, and we are very pleased to say that it was.

Our breakdown for gross billings by month over the prior year was a decrease of 14% in April, and May and June averaged a decrease of 2.6%..

Overall, we are extremely pleased with the resiliency of our customer base, and gross billings exceeded our internal forecast for the quarter. We believe that Q2 will be the low watermark for the year..

Last quarter, we provided additional information regarding BBSI's client base, and we thought the pandemic would affect them and their industries. As you know, our client portfolio is skewed heavily to the blue and gray collar industries.

We do not have clients in the most distressed industries such as airlines and cruises and have a very low concentration in other industries such as retail, restaurants, gyms and salons..

Overall, we are extremely fortunate that our market approach of working with all clients rather than focusing on industry verticals has helped us avoid concentration risks that are affected by COVID. Of our client base in the quarter, 44% of our clients as a percentage of gross billings grew 1% on average.

This would include construction, contractors, warehousing and storage. 17% of our clients as a percentage of gross billings were minimally affected and decreased 3%. This would include waste management, landscaping and maintenance. 33% of our clients as a percentage of gross billings were moderately affected and decreased 12%.

This would include transportation and logistics, manufacturing, professional services, wholesale and retail sales. 6% of our clients as a percentage of gross billings were severely affected and decreased 34%. This would include restaurants and hospitality, real estate, rental and leasing services..

Regarding our client count, we added 227 new PEO clients. We mentioned last quarter that we saw referral partners and business owners go into their bunker in reaction to COVID. Our additions in the quarter are obviously less than our plan and less than prior year but are in line with where we think it should be in a COVID environment..

In April, we experienced the steepest decrease in prospect meetings. May was not much better, but we started to see more business flow in June. July is shaping up to be better than June but is still about 20% below prior year. Client acquisition in a COVID world is our #1 priority as an organization, and I will speak about this more shortly..

We experienced attrition of 142 clients, which was better than planned and better than prior. This was the inverse of our client acquisitions. As folks went into the bunker, our product was needed more than ever.

Regarding client attrition, we lost 4 due to accounts receivable, 5 for lack of peer progression, 7 due to risk profile, 14 businesses sold, 7 businesses closed, 22 businesses closed due to COVID, 83 left due to pricing competition or companies that moved away from the outsource model. This represents a build in the quarter of 85 net new clients..

Our staffing business slowed the quickest and the deepest and was down 26% in the quarter. When businesses need to make cuts, one of the first places they go to is the temporary workforce, and we experienced swift deceleration in staffing revenue as a result. We are not seeing the staffing business rebound as quickly as the economy.

We have the orders but not the supply, as the majority of the individuals can earn more money on unemployment stimulus versus working wages..

18 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. 20 emerging branches running between $30 million and $100 million, 19 branches we consider developing with run rates up to $30 million. Our business unit teams totaled $114 million.

All in, this resulted in gross billings being down by 6%. All things considered, we are pleased and optimistic regarding our gross billing stability. When projecting for the full year and taking all of these factors into consideration, we forecast that our gross billings will decrease by 3%..

Next, I'm going to provide an update on actions we have taken to manage through COVID-19 in the quarter. Our SG&A was down significantly in the quarter compared to prior year. We took swift and decisive action at the end of Q1 to reduce any discretionary spending.

We consolidated branches and also created satellite branches, which removed management layers. This resulted in rounds of layoffs and furloughs. All of these actions were done with the intent to reduce expense while not sacrificing revenue or quality of product.

As of today, we are pleased to have returned to more than half of our employees that were furloughed..

Next, I'm going to discuss the various initiatives and strategies we've embarked on as we operate in a COVID-19 world. We continue to be focused on sales and organic growth. In Q3, we will open a new branch in Albuquerque and a second branch in Phoenix.

Our products will be the same, but how we approach the market will be slightly different in a COVID environment. The new area managers have been hired and trained and will approach their market focused on sales and pipeline development. We will not commit to commercial real estate but will utilize alternative lease options to keep costs down.

The support of these branches will be hubbed by adjacent markets or at corporate until they reach a critical mass, and then we will invest in local teams to support the business..

We've also been exploring acquisitions of smaller PEOs that are located in geographies that we are not. The ideal target would be a PEO that culturally aligns with our value proposition, has less than 10,000 work site employees and utilizes a similar distribution strategy.

We believe that our balanced approach of reinvesting organically in new branches and in additional business units, coupled with tuck-in acquisitions and geographies that we aren't currently located, is the proper strategy to become a truly national and geographically diversified PEO with powerful gross billings growth over a normal economic cycle..

In June, we announced the successful launch of My BBSI for all clients -- all new clients. Client feedback thus far has been overwhelmingly positive and they appreciate the ease, simplicity and individualization of the system.

We are extremely excited about bringing this technology to market and have been executing our marketing and sales campaigns, including informing our referral partners about our new technology. We will be converting our existing client bases in waves throughout the remainder of the year and anticipate being fully transitioned by the end of the year..

We've also applied for our PEO license in every state and expect to be fully licensed in the next 2 months. We added 16 states since our last call and are now currently licensed in 35 states. As previously mentioned, not having an all state license can sometimes prohibit us from doing business with clients.

We have made the system changes, which will allow for the servicing of the business and we have also expanded our insurance offering to support the business. This change will be an important catalyst to growth as we will be able to go wherever our clients go. And we will be able to land new clients that may have been historically too large for us..

When we go to market, we are offering the best of BBSI. We have various products and assets consisting of strategic consulting, human resources, information technology, insurance, risk management, retirement services, staffing and recruiting.

When we meet with a potential client, they may join BBSI because they have a certain pain point today, but they will stay because we deliver our whole suite of products flawlessly..

People have been and continue to be our product, which has never been more relevant to the business owner than it is today, packaging their knowledge and expertise with our new technology platform and the ability to transact nationally, strategically positions us to go after larger, more tech-savvy clients and increases our total available market.

To say that we are poised for incredible future growth and are eager to accelerate our sales effort post in COVID-19 is an understatement..

Now I'm going to turn the call over to Anthony for his prepared remarks. .

Thanks, Gary. Similar to last quarter, I will begin with an overview of our quarter results and current capital position and I will conclude with more commentary on how COVID-19 is currently impacting our business and our outlook for the year..

Net income for the quarter was $11.5 million compared to $13.9 million in Q2 '19. The gross billings declined 6% to $1.37 billion. PEO gross billings declined 6% to $1.35 billion, while staffing revenues declined 26% to $20.5 million. Net revenues of $201 million were down 13% from Q2 '19.

Remember that our GAAP revenue presentation differs from PEO and staffing services, so a change in mix will impact our net revenue trend..

Mountain states grew 11% over the prior year quarter, East Coast grew by 4%, northwest billings declined by 7% and California billings declined by 10%..

Customer growth trends also came in line with our expectations relative to the current environment. As Gary noted, new customer adds slowed in the quarter, which was partially offset by slower client runoff. There remains a headwind to net customer adds in this environment..

Workers' compensation expense as a percent of gross billings was 3.8% this quarter, which is below our expected range of 4.2% to 4.4%. This decline is partly attributable to actuarially determined reductions of prior year estimated liabilities of $1.4 million in the second quarter and additional reductions due to cost-saving measures..

Our workers' compensation claims frequency also continues to trend favorably. In the quarter, we saw trailing 12-month relative frequency of claims as a percentage of payroll decrease 18% compared to the second quarter of '19. SG&A in the quarter was $33.3 million compared to $39 million in the prior year quarter, representing a decline of 15%..

As we described in our first quarter call, the BBSI management team was quick to plan for and respond to declining business volumes due to COVID-19. We executed on those plans, which included meaningful expense reduction and cash flow management in the second quarter..

In addition, a key part of our employee compensation comprises profit share and other incentive-based payments, and our accrued expenses for these programs has decreased based off our reduced profitability in the COVID-19 slowdown.

As business volumes have recovered, SG&A levels will continue to increase as we bring employees back from furlough and incur other employee compensation costs..

Our investment portfolios earned $1.8 million in the second quarter compared to $3.3 million in the prior year. The decrease in investment income is directly attributable to the decline in interest rates in the period and is consistent with our expectations communicated in the prior quarter..

Turning to the balance sheet. We are very pleased to report the progress we have made in our workers' compensation program structure. Part of our long-term goal is continuing to derisk our business model.

We entered into a loss portfolio transfer agreement in Q2 to transfer $116 million of workers' compensation claims liabilities off of our balance sheet. This transfer of claims for accident years 2014 through 2017 represented approximately 27% of our outstanding claims liabilities.

As a result of this transfer, BBSI has no exposure for any potential adverse development on those claims. However, the terms of the transaction do allow us to continue to participate in favorable development in future years based off certain predefined benchmarks..

In summary, there's only upside for the company. By transferring these claims, we were also able to unlock excess collateral that was tied to those claims, which resulted in the immediate transfer of $48 million of restricted cash investments moving back to the company's unrestricted accounts at June 30.

In addition, the company's renewal of its fronted program with Chubb as of July 1 also included several positive achievements. We were able to renew at favorable rates with considerably lower collateral funding requirements than prior years.

The result is expected collateral savings over the next 12 months of approximately $30 million compared to what we would have funded under the previous terms. This will be reflected as an increase in our unrestricted cash and investments over the coming year..

In addition, we lowered the company's loss retention from $5 million per occurrence to $3 million. And lastly, we also agreed to a multiyear term with Chubb for the first time with coverage secured through June 2022.

Not only do these arrangements derisk our model, they speak again to the success we have had in managing our workers' compensation program and the consistency of the company's results in this area..

After the loss portfolio transfer and collateral returns I just discussed, our ending unrestricted cash and investments balance at June 30 was $130 million compared to $94 million at March 31 and $101 million at the prior June 30.

Also remember that we typically build cash in the third and fourth quarters due primarily to the timing of payroll tax payments that occur earlier in the year. Because of these transfers, our restricted cash and investments at June 30 declined to $322 million from $467 million at March 31.

These restricted balances will now grow at a slower pace due to our more favorable collateral terms..

Our investments continue to be managed conservatively. As market yields have dropped, our unrealized gains on our investments increased significantly to $9.6 million. Our average duration remains conservative at 1.6 years and the average quality of investments remains at AA.

As expected, our interest income is down due to a combination of our variable rate investments, comprising approximately 26% of the total portfolio and lower interest rates on all new fixed rate investments acquired since March. Our average book yield has decreased to 1.8% from 2.3% at year-end..

We continue to be debt-free at quarter end except for our $4 million mortgage on our corporate headquarters. We discussed in our first quarter call that we had agreed with Wells Fargo to increase our line of credit in the second quarter from $33 million to $50 million, and that agreement was subsequently executed as planned.

This has built a vote of confidence from Wells Fargo and a source of additional financial flexibility given the economic uncertainty. Our agreement with Wells Fargo provides management the option to revert to the lower credit line if we wish..

I will now move to our discussion of how COVID-19 has continued to impact our business. The effects of the pandemic on our operations are now reflected in a full quarter of results, and they are more favorable than expected.

Client payrolls and therefore, gross billings, recovered at an encouraging pace in May, and we have still not seen a meaningful increase in customer defaults or bad debts. Because billings have recovered from their low, we have brought back many of our employees from furlough.

We also continue to believe our workers' compensation program is well insulated from the effects of COVID-19..

As noted last quarter, less than 2% of our work site employees were in the health care sector or were considered first responders as generally defined. Through underwriting actions, we have now reduced our exposure to these categories to less than 1% of our work site employees.

As of July 31, we had 16 reported claims for cases of COVID-19 with only 2 being accepted. Both claims are for immaterial dollar amounts and both individuals have returned to work..

Our claims frequency has also trended favorably. This is consistent with our expectation that the economic downturn related to COVID-19 would not necessarily translate to a significant increase in claims frequency.

That is in part due to the nature of this economic contraction as well as the significant amount of financial stimulus that has been made available to individuals through a variety of programs..

We continue to monitor legislative and executive actions that could impact our workers' compensation exposure, and there have been some positive developments there recently.

A California executive order related to workers' compensation coverage expired on July 5 and related pending legislation in that state is more restrictive in scope than the original order.

Even with these positive trends and although the amounts today are much smaller than they were a quarter ago, we have continued to approach our workers' compensation accruals conservatively..

Moving to our outlook for the remainder of the year. While there continues to be real uncertainty in the market created by the pandemic, we are reinstating our full year outlook based on the information that we have today. Our forecast does not contemplate the return to shelter-in-place orders like we saw in April..

We expect our gross billings for the year to decline by 3% compared to the full year of 2019. Within this figure, we expect staffing revenues to decline by 19% for the year. We expect gross workers' compensation expense as a percent of gross billings to range between 3.8% and 4%. This range includes our favorable experience recorded year-to-date.

We expect our full year diluted earnings per share to be $3.70, which assumes an effective tax rate of 21%..

In closing, we are pleased with the results of the quarter and the pace of the recovery so far. While there remains continued macroeconomic uncertainty, we have been able to derisk our business model, strengthen our balance sheet and streamline our operations in the second quarter, and we are well positioned for the future.

I will now turn the call back to Gary for closing remarks. .

Thanks, Anthony. In conclusion, our product, fundamentals and financials are solid, and I am confident that we will weather this pandemic and emerge stronger. Our client base is situated in industries that are not heavily affected by COVID, and I am optimistic that we can return to growth as normalcy resumes.

We continue to always think of the client first and to advocate for the success of the business owner. Now I'll turn the call over to the operator.

David?.

[Operator Instructions] Our first question is from Chris Moore with CJS Securities. .

Impressive quarter. Can you maybe start just with workers' comp? Obviously, workers' comp as a percentage of gross billings has come down meaningfully. It was closer to 5% a few years back. 2 questions on the 3.8% to 4% range. One is that range is just for fiscal '20, correct? It includes $2.2 million of favorable adjustments in the first half.

So that's just applies for '20?.

Yes, that's correct. So we don't include actuarial adjustments in our forecast. But for this year, for the full year guide, we were already accounting for the first half of the year, the $2 million that we recorded. That's correct. .

Got it.

And what -- I mean, what's kind of the theoretical limit here on the workers' comp as a percentage? I mean, could it be meaningfully below 4% or is that kind of a fair place to be?.

So we are seeing a long-term trend in reductions of workers' compensation costs that I think we've approached that trend cautiously in terms of our reserving. I think you've seen that come through our favorable actuarial adjustments, right? So the manifestation of that is the prior accident year contacts that we've been taking each quarter..

So there was reforms, especially in California several years ago that have favorably impacted the cost structure. There's still some unknowns with how COVID will play out, but I'll say in this last quarter, the data on that has been very favorable as well. So even though we continue to be cautious, the trends are very favorable on cost reductions. .

Yes, Chris. And if you just look at the quarter for us, the claims reported in Q2 compared to prior year was down 20%, which is a good sign, right? We -- I'll say we're fortunate that we're not in health care, which is where the COVID claims really are, on the workers' comp side. So we dodged that bullet. We haven't seen COVID claims.

We don't think COVID claims are going to be an issue for us..

So we were conservative going through our first half of the year accrual just because there's unknown out there. But if things continue to trend the way they are and we're getting some tightness on the legislative slide, I could see our accrual rate coming down just because of the experiences in there. .

Got it. That's helpful. And maybe just switch gears. In terms of, you're kind of looking at post COVID revenue growth. You had mentioned during a recent conference a big picture goal of 15% revenue growth kind of split between same-store, new clients and M&A. Can you -- I think the M&A was roughly 5%.

Can you just break down the same-store versus new clients? Would that be roughly equivalent as well or kind of just how you're looking at, this stage?.

Yes. We haven't given any guidance yet for '21. And honestly, the reason we can't do that is because it's even hard to give revenue guidance for Q3 or Q4 with the unknowable factors that are happening in the economy right now.

But when we think of the business over a long-term cycle, organically, between our investing in business units, investing in additional branches with the capacity we have at the company, there's really no reason that we shouldn't be organically 10-plus percent of a gross billings grower.

And then if we were to layer a M&A on top of that, it would just be accretive, which would get you up in that mid-teens plus range. .

Got it. That's helpful. And I give that qualifier post COVID, obviously. .

Our next question is from Josh Vogel with Sidoti. .

A couple of questions about the outlook for the balance of the year. And you talked about payroll trends had improved significantly in May and June versus April. I think you said down 2.6% on average.

And I'm curious how much of that do you think was just some pent-up and maybe not sustainable? And then to build off that, understanding that net client builds are expected to be slower than you've achieved historically, I'm just curious, what are the assumptions behind the implied 4% to 5% annual gross revenue declines that you built into your second half guidance?.

Sure. Yes. So first of all, on the revenue kind of shape of the recovery, we definitely saw what I would call a mini V-shaped recovery. So it was a deep cut in April as everybody went to shelter-in-place and companies immediately furloughed and laid off employees, and that bounced back rapidly in May..

And that payroll, we saw that level off pretty quickly. So June payroll sequentially were up over May but not much. And July payroll sequentially are trending fairly flat as well. So it definitely was a V-shaped recovery. And so we're seeing that as a fairly stable base at this point..

In terms of the future growth and our expectations for customer adds, our Q1 customer adds were in line with our plan. Q2 adds were obviously well off of plan, as Gary noted.

What's interesting about that is our sales conversion rate, when we were able to meet with a prospect, was actually steady with prior quarters, and that's generally held steady for us as a company..

So we were able to convince potential clients of our value proposition when we're able to get those meetings, but our prospect meetings were down 40% in the quarter over a year ago quarter.

So the question is, can we continue to get those meetings? And we've seen that trend up, as Gary noted, as we've all adapted to a virtual world and learned how to sell over -- through a webcam, that is improving. But the reality is there's still headwinds there..

And so we do see an upward trend. So it's not going to be down 40% like it was in Q2. But could it be down 20%? Yes. So we're factoring that into our model. .

Yes. I would say, when we -- when we're forecasting Q3 and Q4, we're making it based upon the assumption that is going to look and behave like June and July, right? And that's how we're saying that the economy is going to behave and how we're looking at the remainder of the year. The one thing that's unknowable is the effect of the PPP.

So we've kind of made some assumptions based upon PPP. But if you take that and then say, "Okay, well, how is our adds and our retention going to be for Q3, Q4?" Our adds are going to be less than what we planned. And we've made assumptions and changes in our models to say we're not going to add as many clients in Q3. It will pick up more in Q4.

But the inverse is our retention is going to be better as well..

So when we're thinking about Q3 specifically, we're saying, "All right, it's going to behave similar to Q2," and we selected our assumptions based upon that for adds and retention. .

That's helpful. And just thinking about the comment on the sales conversion rate, you had 227 new client adds.

How many prospect meetings did you have?.

We run at about a 34% closing ratio. So our closing ratio was consistent. We just didn't get as many pitches. So we had a good batting average. We just didn't get as many pitches. So if you do the math... .

Really all the same there. .

So Anthony, you said the SG&A spend over the balance of the year, it will increase as the year progresses. But I wanted to focus on that incremental. I think it was $5.6 million you mentioned at the -- coming out of 2019 for the new portal rollout.

And how much of that should we see hitting up in Qs 3 and 4, respectively?.

Yes. And that's, I think, what also makes the SG&A decline extra impressive, right, is the 15% decline, that's year-over-year. But of course, you correctly note that at year-end, we had guided for an SG&A increase this year. Right? So our decrease from plan really demonstrates kind of the effort that was put into that..

The $5.6 million, I mean, I think at this point, that's kind of baked in. That's obviously baked into our model. That does ramp up a little bit in Q3 and Q4. There's not much there in terms of incremental second half shape versus the first half. But what I will say is the big trend difference is going to be our employee costs.

Right? It's for the 2 things I mentioned. Not only are we going to bring more employees back and therefore have headcount adds in the second half of the year as our business volumes stabilize and increase.

We're also going to have an increase in our profit share and incentive compensation accruals, which, if you followed us, don't know that's an important part of our compensation strategy for our teams.

And so as our branch profitability improves, as our company profitability improves from what we saw in the first half of the year, we're going to see those accruals increase as well. .

Okay. And a quick question on the workers' comp benefit in the quarter.

Was that from this 2014 to 2017 time period?.

No.

So the 2 -- no, so the $1.4 million actuarial adjustment, is that what you're referring to?.

Yes. .

No. So that would be for the claims that are remaining with us at June 30. .

And that would be that would be for the '19 and prior, but '19 is still a little -- '19 is still too green to take action on. So if you think about the adjustments, it would be for '18 and prior. .

Okay. And just lastly, the comments around inorganic growth.

Can you just talk about the pipeline? Is this something you're looking to be active on in the second half of the year? Or you just want the dust to completely settle with COVID?.

So I don't want you to leave here thinking that we've got an itchy trigger finger, and we got to go spend money, right? We're good stewards of the capital, right? We will always look to invest in the business in IT, we will look to invest in business units, we'll look to invest in branches.

We will continue to support the dividend, which we announced in our press release. And then after we get through those, it's going to be -- where are you going to get a better return on capital for investors? Are you going to get it through M&A or you're going to get it through buybacks and we run through that decision-making process..

But when you think of -- after going through that, we -- when you think of the PEO business in the industry, it's a fragmented industry now. There's 900-ish -- it's like 920 PEOs now in the United States. If you look at -- of these businesses, how many of them are large or small, the overwhelming majority are small or smaller.

So if you just kind of say there's 900 PEOs, only 30 of them have work site employees over 20,000..

So when you get down into the stratification, there's a fair amount of smaller and a fair amount of regional players. And that's where we would look.

We would look at a regional player, say, in Texas that has 4 to 5 branches that when we -- we're not looking to buy a book roll, we're looking to buy a company that has people in those geographies and product in those geographies.

And then we could take that product at those people and make the best of BBSI available to their clients as well, right?.

So -- and then we would have our, call it, our anchor points in there and then we can continue to grow organically in those states after we get there. So when we're thinking about it, it's -- we're out there, we're talking, we're active, but we don't feel like we need to be aggressive or rush considering where the economy is right now. .

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

Kramer and Anthony, hope you're doing well. Yes, I wanted to -- I didn't hear you mention a same-store sales number for the quarter. If you have that number handy and kind of how that breaks down, it would be helpful. .

Yes. So same-customer sales for the quarter was down 4.5%. And so as expected, clients reduced headcount, it's kind of a weird quarter for same customer sales. And in that sense, obviously, it's highly impacted by COVID, but that reduction was split pretty evenly between headcount, of course, hours reductions..

We have seen wage inflation over the year. We have been mentioning that, and there's some wage inflation that continued to come through there just because that's a year-over-year number. So there's some inflation baked into that as well. .

Okay.

And then what I have -- Anthony, what was the unencumbered cash number at the end of the quarter?.

$130 million. .

Okay. And then, Kramer, you mentioned expanded service offerings for insurance.

Curious what specifically that entails? And then secondly, could you touch on your longer-term strategy in terms of derisking workers' compensation from the model?.

Sure. For the -- think of it this way, of us being a PEO in these other states now, we had to make some system changes so that we can handle the payroll, the processing, the billing, right? And that's done, check the box.

And then the other piece is with our partnership with our front end carrier, we can now offer our workers' comp insurance product in those states. So check the box, that's done..

So as far as being ready, we are now ready to do the business in, I forget the number, 36 states, and we're going to -- we're working on the other ones. It's a little slower than we had hoped.

Just as I imagined, COVID affects the state government as well, and that's causing a little bit of a drag for us, but we are -- we've got a plan to get -- to round out the additional 14 states in the next 2 to 3 months..

That was the first question.

What was the second question?.

Derisking the workers' comp, longer-term strategy?.

Okay. Yes. So we -- when we think about our insurance product, right, we've come leaps and bounds from where we were as far as how do we bring on risk, how do we price for risk. If we have a claim, how do we handle a claim, good process procedures controls around the whole process of insurance. And that's showing with the predictability in our losses.

That's showing with the predictability, I'll say, or the redundancies that are coming through for the prior accident year..

So being able to do a loss portfolio transfer and being able to sell it at what we had it carried at is a very good sign for investors and for the market because an independent third party was willing to take what we had at the price we had it carried at. And we all know that those companies are in the business to make money, not to lose money.

So they felt comfortable that with that price, they would make money on the trade..

So with that, it kind of steps into the next evolution of -- all right, when we renewed our program, we moved our retention down from $5 million to $3 million.

And then we were able to get our funding and things in line with what we view the losses as, which is another good sign of the carriers coming in at what we think our view of -- we all have the same view of the world.

But we would look to -- if these make sense in the future, we would look to pick off years in the future, right? And we would look to enter into some sort of relationships that potentially derisk the company on a prospective basis where we don't take 100% of the risk, maybe we take a portion of the risk..

But we're able to do this because of how well we do what we do, right? Doing what we do well, being conservative, this affords us the opportunities to explore financial structures like this that honestly were not available to us 4 years ago. .

Okay. That's very helpful.

Could you elaborate a bit more on the geographic growth and contraction differences between, say, Mountain states and California? Are there specific things going on that are either BBSI specific or state specific that are causing that separation in terms of how those different areas are performing?.

Sure. It's a good question. It's twofold, Jeff. It's -- the Mountain states had a very strong close to 2019 as far as their client adds and client retention, growing very well in the Mountain states.

So if you think of -- in the quarter 2, they added business at the end of the year, which gives them, call it, revenue in Q2 that wasn't there in the prior. So they had a strong client stack.

And then when you look at the Mountain states, they weren't hit -- their economies just were not hit as hard as, say, COVID for shelter-in-place as we were in California. California was down 10%..

Ironically, Northern Cal was down 10%. Southern Cal was down 10%. When we look at California in total, it was down 10%. But the Mountain states, I'll say, their economy has been a little more resilient as far as having the incidents for COVID and the restrictions for the shelter-in-place. .

Got it. Makes sense. Okay. Is there anything specific you would attribute the higher client retention in the quarter, I would imagine, I mean, you've already said that you expect that to kind of remain at a better level than it's been historically.

But just curious, is it the value of the assistance you're providing? Is it companies focusing on getting through this and not making any changes right now? Curious to know what your perspective is on that?.

Yes. The product we've been delivering has been phenomenal. Our HR folks in the field have just been rock stars with supporting our clients. And this was a tough time to be a business owner.

And I could not imagine doing it without BBSI or somebody like BBSI, to have the weight of the world in your shoulders and not have somebody like us that can help support you in that time..

So I think the value is there more now than ever. But we -- I can't -- we can't take full credit for that, right? There's a couple other things of -- if you're a business owner and you've got all this risk at your doorstep, right, which is the COVID world, are you going to take additional risk and try to leave BBSI? The answer there is no.

So we're seeing -- that cuts both ways, right? So that's why part of the reason we're not seeing clients go-to-market or come join BBSI is because the risk -- they have so much risk right now, why introduce a new variable, why try to change your payroll provider, why try to multi with your PPP, forgiveness reports and things of that nature.

So there are some influences that are helping us and hurting us the same way. .

Right, right. Okay.

And then final question is, would there be any shift in strategy if this slowdown were to extend well into the middle of next year? And if so, what might those change in the strategy be?.

Yes. I mean, we talked about -- we're learning some lessons in COVID, right? And that's that we can do our job remotely. We can do our job, arguably, just as efficient, if not more efficient. So that's part of the reason when we're talking about opening our branch in Albuquerque and the second branch in Phoenix.

When we open that branch, we're not going to put any support staff in those branches. That support staff will be held at other branches or up in corporate until they get enough critical mass that we'll then start to staff at those branches..

So we're looking at things like that, and we're looking at, call it, structuring our branches in the field of how do they -- how can they, in a virtual world, be more efficient and effective and arguably service more clients in this market.

So we're looking at both, but I'll say the first thing we're doing, which we'll open one of the branches this month and the second branch in September, is that true model of supporting the business elsewhere until they get critical mass. .

Our next question is from Vincent Colicchio with Barrington Research. .

Well, most of mine have been answered already. Just 1 or 2.

Just curious, how did pricing change in the quarter? And what is your outlook for the second half?.

Pricing. The fee we charge our clients is -- our admin is relatively consistent. It's hard to try to push rate in a time when business owners are worried about their own operations. So now is not the time to try to be aggressive and push rate even though we think that the value of our service is not going to be contested. I think we're worth it..

The one thing we continue to see is more pricing pressure in California workers' comp. We continue -- or I continue to try to call the bottom, and I get it wrong every quarter.

I -- my expectation was with all the uncertainty with COVID, with the capital things that were happening as far as lower investment income and things of that nature that we would have seen rates start to rise in California, but we haven't seen that yet.

So there's definitely still -- there's still some competition, and there's some competition that is not being good stewards of their capital right now, I'll say, and it makes it a little more challenging for us in the marketplace. But our teams are pros, and they know how to sell the value of BBSI and not just sell workers' comp. .

Okay.

And then does your forecast for the balance of the year assume California improves from the current level of economic activity?.

If California operates how it did in June and July for us. .

Okay.

So you're not assuming any improvement there per se?.

We're not. Yes, I mean it's both ways, right? We're not saying it's going to get better, and we're not saying that there's going to be a second shelter-in-place order. .

Our next question is from Bill Dezellem with Tieton Capital Management. .

I have a group of questions.

First of all, the reference you made earlier in response to someone else's question that you would hope to be able to grow the business 10% organically, the gross billings, that is -- what would that equate to? Assuming no acquisitions, you were just growing 10% organically, what do you want that to translate into for net income growth?.

Net income growth, if we -- our target is 15%. That included some investment income.

Investment income, we've got a, I'll say, a headwind there now, right? I don't know if you realize, but in our earnings guide, we moved our investment income number down by $4 million and that's just because of the Fed moving the rates 100 bps, right? So when we were talking about our 15%, that was with rates being where they were after taking the haircut on the rates.

I think we should be at a multiple of revenue growth, but it won't be at 15%, and with rates where they are, I think it will be somewhere around 13%. .

That's helpful. And actually, I do want to follow-up, take that one step further. If rates stay flat, does that 13% still hold? And I'm sorry, I'm not able to think about this quickly enough.

Or after you've annualized the lower rates, then would you be able to move up to that 15% income growth, assuming a 10% billings growth?.

Yes. I mean it's -- when rates move, if you look at our balance sheet, our OCI, we moved $9 million in the quarter, right? As rates went down, our investments went up. So we had $9 million of unrealized gains in the quarter. That's not even a P&L impact. That's a balance sheet impact..

So for the P&L impact, where we saw the rates move was on our cash that we were getting a good deal on, that's no longer a good deal. Because rates are so low, we were getting the 3 month plus 25 bps. And the 3 month was flat and 0 to negative. So in the quarter, you're seeing our investment income be down because of that variable part..

So when we think about how that's going to trend over the future, we're still going to be -- our investment income will be less than it was last year. But as we continue to grow and continue to add more assets, that investment income, even at rates this low, will grow in '20 over '19..

So when you think about how that's going to give you your return on capital or call it, your net income growth, when we think about that 13% number, that 13% number has that baked in there regarding the investments at such a low level here, right? It's unfortunately, if you're a saver, you're getting punished at these levels. .

Right. Okay. I'll shift, if I could, to the inorganic side.

The increased credit line, given that you have lots of cash, should we interpret that to mean that you are thinking about acquisitions from the borrowing perspective and you're really preparing the banking facility for acquisitions? Or is it truly tied to the -- solely the uncertainty of whatever COVID may bring?.

Yes. They -- those are completely separate and apart. When we increased the credit line, it was just in the abundance of caution in a COVID world.

When we think of acquisition, when we talk about our financial note, we have capital above our financial note, and that capital above the financial note would be what we would look, first and foremost, to fund any kind of acquisition. .

We're not looking at -- I don't want to scare anybody and think we're looking at doing debt offerings or looking at doing a stock offering and then diluting our shares. That's not -- we've done a lot of hard work to build capital, and it's just how do we put that capital to use. .

That's helpful. And speaking of that capital, your restricted cash and investments took a big drop in the Q2 versus the Q1. And of course, that moved to not restricted. But I was a bit surprised to see that given that the $116 million transfer of liabilities didn't happen until July 1.

So what was it that led to Q2 improvement in -- improvement being a decline in restricted cash?.

So the loss portfolio transfer actually was in June, Bill. So the $116 million transferred out in June, the $48 million release of excess collateral happened in June. So you really have both of those reducing restricted cash in the quarter. That would be offset, of course, by continued regular funding into the trusts for ongoing business operations. .

All right. I'll need to read that press release more carefully again.

And then lastly, did the -- all of the new clients that you did bring on in Q2, did they all go on to the new mybbsi platform?.

Yes. We have about 500 clients now on our new platform. So far, the field is excited. Our clients are excited. The feedback we've received has all been positive. And then in -- we're going to be rolling in anywhere from our conversion side, anywhere from depending upon the week, over the next, call it, until the end of November.

We'll transfer or transition about 400 clients a week onto the old -- transfer them from the old system to the new system..

And we're not concerned about the IT side of that or the conversion side. Really, it's education to the client and to be able to handle and service questions, which is why we don't go with the big bang. So we've got the system off. The system is running really well. June, our new business is on there. We're out there selling it in the market.

And now we're starting to do our conversions for our clients from the old systems to the new system. .

And you'd mentioned that your win rate with prospects basically held steady.

Would you expect your win rate to increase with time here now that you are selling on a more robust platform?.

That is the goal, right? The goal is to get better at what you do and you get more at what you do, right? So you get more in the pipe and you get better at what comes in the pipe, and that's what we work on, and we've got teams that are focused on that as far as sales and marketing initiatives..

Too early to say, Bill. I don't want to -- I can tell you what we aspire to be, but I can't tell you it's in the numbers yet. .

Understood. And congratulations on a solid quarter in a crazy environment. .

Ladies and gentlemen, we have reached the end of the question-and-answer session and are out of time for today's call. I'll now turn the call back to Gary Kramer for closing remarks. .

Thank you. Thank you, everybody, for taking the time to be on the call. Thank you for all the BBSI employees for all the hard work they did in the quarter. This was a challenging quarter for the business owner and a challenging quarter for all of our employees that were helping service our clients. So for them, I thank them from the bottom of my heart.

With no BBSI employees, there is no BBSI. And I just want to thank everybody for all their hard work. .

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