Good afternoon, everyone, and thank you for participating in today's Conference Call to discuss BBSI's Financial Results for the Fourth Quarter and Full Year Ended December 31, 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. This 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..

Thank you. Good afternoon, everyone, and thank you for joining the call. 2020 proved to be a challenging year for the world and the economy. I am extremely proud of the work that our business teams performed throughout the year.

We quickly embraced working remotely, and our operations did not miss a beat as we assisted our clients with the rapidly changing economic and regulatory landscape. Our client retention rate was the best we've experienced in years, and our client failure rate was better than expected. I'd like to attribute that to the work we do with our clients.

This ultimately led to our gross revenue and profit being better than we forecasted. We also executed on various long-term strategic initiatives, including securing a nationwide PEO license, standing up myBBSI, our state-of-the-art technology portal and derisking the company with an alternative insurance structure.

I want to again thank everyone in the BBSI family for their exceptional efforts. Plainly stated, I am proud of the actions everyone at BBSI contributed and of our financial results.

Before I step into the fourth quarter operations and the outlook for 2021, I'd like to take some time to discuss metrics that the executive team utilizes to measure and manage the operations. First, we grow by adding additional clients, maintaining good client retention and by our clients themselves growing.

Our clients grow by adding more employees, which we refer to as worksite employees, by their employees working more hours and with wage inflation. Worksite employees is a key driver of our clients' businesses and are the closest metric that correlates with gross billings.

Going forward, we will be reporting on and providing guidance for worksite employees and average worksite employee growth. We will no longer be providing information regarding client counts as this may not truly reflect gross billings. The purest example of why this is important is to take a retrospective look at 2020.

We started the year with 7,200 clients and 115,000 worksite employees. We finished the year with an additional 398 net new clients, but our worksite employees decreased to 109,000 or 5% as a result of the pandemic. The decrease in worksite employees for the year translates better to our gross billings decrease of 1%..

Thanks, Gary. Hello, everyone. I am pleased to report that our Q4 results and our full year 2020 results were both stronger than expected despite the continued economic impacts of the COVID-19 pandemic..

Thanks, Anthony. In conclusion, 2020 was a challenging year and the company managed to exceed expectations. Our product is strong and has never been more relevant to the business owner. We are working on the right things and I am extremely optimistic of the future.

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

And our first question comes from Chris Moore with CJS Securities..

Maybe we could start with the gross billings growth. Just the guidance is 2% to 5%.

Can you maybe talk a little bit about the puts and takes between the low and high end?.

Yes. Just -- hey, Chris, it's Kramer. Just in general, forecasting in this environment is a challenge, and we wanted to put something out there that we felt very comfortable with that we think is attainable. I'm not trying to say it's a layup but we think it's an attainable range.

If you think about the shape of the curve, Q1 is going to be our hardest compare. Q2 is going to be our biggest growth. Q3 will be lower than Q2, and then Q4 will be less than Q3. But we feel comfortable with those numbers out there that -- of the 2% to 5%.

And then just in general, if you try to think of the macro assumption trend, it's that the economy kind of behaves like it is right now. And then in the back half of the year, starting in, say, third quarter is where we anticipate that, that business flow was going to pick up for our business as far as more adds..

Got you. So just in terms of -- so SG&A is going to be a little bit below fiscal '19. I haven't had a chance to put this in.

So at the midpoint of gross billings growth at 3.5%, say, and gross margin at the 3% range, roughly, where does that get us EPS?.

We gave you all the numbers. You got to do the math..

Fair enough.

To make sure I understand that the WSE growth versus the gross billings, the delta is just the payroll growth at the WSEs?.

Yes, that's correct..

Okay.

Last one for me is just on the 6-team approach, can you just talk to that a little bit further? It's -- so there's 3 human resource people within each team?.

Yes. What we're able to do there is we picked up efficiencies with our new technology portal, which is a good thing that helps us on both the risk and the payroll. On the risk side, there are some things that we've learned from working remotely and how to do our jobs more efficiently.

And if we think about where -- one of the strong value props of BBSI is our HR and HR consulting.

So what we're able to do is kind of load that business unit up with more HR to support almost double the amount of clients to get us the return on management dollars, which is the way that we like to think about the business is it gets it from a 5x return on management dollars up to an 8x return.

So we are able to service more clients with the best of BBSI but with less management payroll..

And our next question is from Jeff Martin with ROTH Capital Partners..

Gary, I want to get your sense in terms of growth initiatives, not necessarily this year but over a 5-year period.

Are you kind of on hold with some of those or paring them back while we kind of trudge along and gradually recover here this year? And then also wanted to get a sense of your view on lead generation, if you see a shift over from the intermediate to longer term in terms of generating additional client referrals, given that's one of the primary inhibitors to growth currently.

And will you take a direct sales approach at some point to go after larger accounts?.

Yes, sorry. I think I -- you said I have 2 questions but there's like 12 in there, Jeff. So let me go with our growth plans, right? So we consolidated 3 branches in the quarter, and that's the same idea that we've done in previous quarters where we can service those branches and still grow that business.

Some of those branches are less than 40 minutes from the other adjacent branch, and we're able to service them under one management team and grow the business while being, I'll say, more cost conscious. But we are still investing. In Anthony's numbers that we have for the SG&A, that includes us adding additional branches.

So we'll add anywhere from 3 to 5 branches in '21. And when we open those branches, they're going to be similar to the model that we've adopted in 2020, which is it'll be a person that is selling in that market, and then we're servicing that business out of either an adjacent market or back at corporate.

And when that happens and they start to grow their book, then we'll start to hire locally to support the business. So we are continuing to invest in new branches, invest in new business units. So that hasn't changed at all. And then if I get to the lead gen, we have initiatives and we are working on things.

And we recognize that it's a little more challenging in COVID as far as business coming to us. We're not sitting back on our laurels and waiting for the business to come to us. We're going to go get it. And we've got plans and strategies for that, that we've baked into our operational plan for '21.

But that's something that I'm not ready to share until we know it's successful and we know that we're going to adopt it throughout the organization. But we are being mindful in working on that as well..

Okay. And then was curious if you have a sense of, relative to the first round of PPP loans, if you're seeing significant number of clients get a second round or if they're applying for a second round..

So similar to last time, it's difficult for us to get good data on that, right? It's mostly anecdotal. But the answer is, yes, our clients are participating in that and taking advantage of that as well as the other relief that was included, the expansion of the employee retention tax credits as well as the extension of the FCRA.

So those are all boon for small business, including our clients. And so we're grateful for those, and they are having an impact..

Okay. And then I know you gave guidance for gross profit as a percentage of gross billings.

But within that gross profit guidance, what kind of assumption is embedded in that for workers' compensation? Is that going to stay in the 3.7% to 3.9% range that you expected for the third quarter for next year? Or is there additional benefit forthcoming?.

So we introduced that workers' comp guide range at a time when our program was experiencing some uncertainty, we wanted to be able to give that transparency.

And as the program has become more predictable and a pretty steady trend of favorable results, really, the more important metric, we think, is the gross margin percent, which obviously is influenced by that workers' comp number. But we've seen the positive trends in workers' comp. We expect those to continue.

We're not giving a specific guide range for workers' comp this year. But there is no evidence that the positive trend line we've seen would change..

Okay. And then final question. Overall pricing on a blended basis across the book, what's your -- what was that experience in 2020? What's your expectation in 2021? Just directionally would be helpful..

Yes. We've been mentioning for a couple of years the softness in the workers' comp market, and we've done things accordingly to react and navigate through the softness in that cycle, right, as far as portfolio management, profitability management. In the second quarter, we talked about reducing the safety incentive.

So the basic idea is if we're -- we need that program to be as efficient as possible because we're not able to charge as much as we once were. But when we look at -- when I look at where 1/1 kind of landed for the cycle, it feels like we're close to the bottom. It feels like it's turning.

It feels like when we're looking at '21 that it's going to be flat to up as we get out into '21. I mean you can't have interest rates as low as they are and everything else going on and not be able to get rate on the workers' comp side.

So we feel -- we're not out there pushing it, but we see our competitors starting to charge more, and we're obviously going to jump on that bandwagon when the market turns..

And our next question is from Josh Vogel with Sidoti & Company..

You were talking about profitability management, and you had priced out 124 clients in the quarter.

Are you done with that? Or should we expect to see more of that at least in the early part of this year?.

We -- good question, Josh. That, in general, is addition through subtraction for how we think about it. We may shed some revenue dollars, but we make them up in profit. So when we think about that strategy, that was enacted back in -- this is soft market mentality for workers' comp, right? So that was enacted back in the second quarter of '20.

And it started with how our underwriters will work with our branches to try to scrub where we need to be with certain accounts and making price to risk moves. And we saw those happening throughout the year. We saw a little more in this quarter because of how the market cycle works for year-end for 12/31, 1/1 business.

So I would think in Q1, we're going to see a little more -- or I think in Q1, we'll still see some coming through, and then it'll subside after we get through Q2 and beyond. I mean it's part of our DNA that we always want to -- we like our clients and we want to make money, and we want them to make money.

So we -- it's part of our DNA to -- we're going to continue to do that. But I don't think you'll see a move as big as we had in Q4..

Great. I know the pandemic makes this next question a little bit murky, but it's been about 9 months since the rollout of the portal and the big build-out you said was completed in February.

But have you seen any quantifiable success here when we think about new business or opportunities in the pipeline that were driven to you because of the portal?.

Yes. Good question, Josh. That's why part of when we're talking about WSEs externally, that's how we're talking about the business internally, right? And even our sales team, our sales teams has metrics, and I'll say, their goals are based upon WSEs, not on client size. And what we're seeing now is larger opportunities.

So in Q3, we had more large opportunities come to us. In Q4, we closed more large opportunities. And that's why, in my remarks, I said we were up 25% in Q4 over Q3 for accounts that we landed over $1 million in payroll. And that has a strong correlation with us being able to provide the IT solutions that those larger clients look for..

I appreciate that. So your definition of a large client is north of $1 million in annual payroll.

So what percent of your client base exiting the year falls under that definition?.

I don't have that. But just in general, what -- when we looked at our profitability management, we looked at it 2 ways. We looked at it as what were we not making money on from an insurance perspective and then what were we not making money on from a margin to WSE perspective.

So a lot of what we saw in Q4 was we were raising pricing on smaller accounts, which are the more price sensitive. But if you look at the -- for the stat I gave for what we added versus what we lost, we still had our worksite employees grow in the quarter, and that's because of losing a fair amount of smalls..

All right. Great. And I got to ask, obviously, you've done a tremendous job building up a hoard of cash. You've been investing internally on the portal, business teams. You talked about potential acquisitions in underpenetrated markets where there's a good client and culture fit.

I'm just curious -- and yes, you've been buying back stock, you have a dividend in place.

But what's the plan for capital deployment this year? And what's a good base number, for happy amount of cash that you just want to have on the books ?.

Yes. So we've said that priority 1 is maintaining that financial moat, as Gary has called it, and we have not disclosed kind of what that safety net number is that we feel comfortable with. And frankly, it is somewhat relative. I mean there's some science to it and some art. And we have a number, but we haven't disclosed that.

But as we look at excess cash, we walked through our capital philosophy last quarter, and the first area we look to is investing in the business. And that could be through M&A, which is still on the table.

We're still exploring potential targets and opportunities there that are strategic, but it's also going to be through continued enhancements through IT. So we will -- we fully expect to continue to evolve and enhance our myBBSI portal and other system -- systems we're developing in the year and other initiatives.

So some of these sales and marketing initiatives that Gary said as well will take some money. Beyond that, we're obviously committed to buying back stock and the dividend. As we continue to see how the year progresses, we can update that, but currently, that's the plan we're sticking to in our philosophy..

Yes, Josh. And then on the acquisition side, we've been active in the market for the last couple of quarters, probably for the last 3 quarters. And my view on acquisitions is I'd rather not do an acquisition than do the wrong acquisition. So we will be meticulous and thoughtful about companies that we bring in under the BBSI umbrella.

We are looking, but I come from the school of you got to kiss a lot of frogs when you do acquisitions, and we're not going to rush into it..

That's certainly a good strategy. Just last one, when we think about the -- your PEO platform today and clearly, there's the digitization revolution going on, seeing it in large enterprise but trickling down to the SMB space.

And as everyone looks to continue to get on the cloud and further facilitate more of their back office and admin functions, how well is your PEO platform prepared to handle this and beyond the portal? And you alluded to it a little bit, Anthony.

But what are the rollouts or capabilities are you potentially looking to add to the platform? And would that be done all internally and organically?.

Yes. Good question, Josh.

We're not ready to -- we put ourselves in an excellent position now with building out myBBSI because we have the flexibility to plug in whatever widget we want to, whatever product we want to through our portal to make it available to our clients, right? Whether we get revenue, whether we get margin, whether we get stickiness of the business is the way that we think about it.

But we weren't in that -- we didn't have that opportunity until now. And now that we literally just stood up, did the last promote 1.5 weeks ago to get to where our, call it, the -- myBBSI is completed, the next stage is we're looking at, okay, what else can we roll in to add or enhance the offering.

We have things we're working on but nothing that we're ready to disclose yet..

And our next question is from Vincent Colicchio of Barrington Research..

Yes. Gary, just curious in the workers' comp market.

Is it simply pricing discipline that's brought to market to a better place? Or has there been any consolidation or any other industry changes?.

No, it's a function of workers' comp has been a profitable line. When there's profit, people flock to it. When they flock to it, prices go down. And we've seen year-over-year price decreases that we think are going to subside in '21..

Okay. You gave a good read on quarterly revenue outlook. I missed if you said it on Q1.

How does that look sequentially?.

Q1, we thought was going to be our toughest compare because we grew 6% in Q1 of '19 -- or Q1 of '20. So we thought that, that was going to be our toughest compare. And what we're seeing so far is we had a strong year-end as far as our WSE stack being up. We've had a strong selling season in the 1/1.

And Q1 will be our lowest growth quarter for the year, but we feel good that we have a good base -- or we call it our stack. We feel that we have a very good stack to grow from here to get the positive growth .pro.

Okay.

And curious, any feedback -- what are you hearing with the new portal in terms of how it compares to your more automated competitors?.

For us, it's light years from where we were. Before, we had a payroll engine. Now we have a platform. So it's a much more user-friendly adaptable system, and we're hearing a lot of great things from our clients because of it, the ease of use, the freedom, the flexibility to perform. So we're hearing great things from the clients.

And then we -- look, we do our bake-off, right? We know what our system has versus what every competitor's system has. And we know where we think we are when we look at our technology to the industries. And I would -- pound for pound, I'd put us up there with anybody in the industry on the technology side..

. And our next question is from Bill Dezellem with Tieton Capital Management..

A couple of questions. I'm not sure if you covered this, but I'm trying to back into what's happening with wages. So you had a 6% decline in employees.

With billings up 1%, does that imply that compensation on average was up 7%?.

Not the 7% but you're picking at the point, which is what we saw when our clients faced tough times was that they let go their low-wage employees, which was driving up our average wage per WSE..

Okay. That's very helpful. And it actually leads into the next question I was trying to think through. So employee count is down 6%.

How much of that is, to your point, cost savings where they were let go, again, to improve profitability versus COVID restrictions leading to them being furloughed or otherwise laid off? And I'm trying to really differentiate between those 2 buckets as cost savings measures versus COVID restrictions..

It's -- I'd be shooting from the hip if we gave you that. We don't -- when we receive payrolls, we run the payrolls. If people aren't on there, we don't. We can tell you that the COVID restrictions that we saw were the heaviest in Q2, and then it started to rebound. In Q3 and Q4, we got to normalcy. But we're very fortunate.

We've been saying it this whole time, right? We are not in the industries that are heavily affected. So we were very fortunate with our client base. Our clients are very resilient. Our product is very strong, and we're -- if you would have asked me in March if we would have been down 1% for the year, I would have taken the under on that 1.

So we're very pleased with where we ended up for the year..

Great.

And then finally, relative to Southern California, is there anything that you feel like you have in terms of levers that you can improve the revenue situation down there since it's the only region where you are seeing a decline?.

The decline in revenue in Southern Cal is mainly from our clients shrinking and from the effects of COVID in Southern Cal.

So we think that if -- depending upon how the economy comes back, we think that Southern Cal will get the biggest pop out of any other region, right? Our Mountain States held up pretty much resiliently through the whole thing, and they're not going to get the upward trend that, say, Southern Cal is going to get.

So we're looking at -- when the economy gets back to normalcy, we're going to have a nice tailwind for us in Southern Cal..

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

Once again, I just wanted to thank everybody, and I want to thank all the BBSI employees for all their hard work and challenging year, get through 2020. We are very optimistic about the future. We know that we're working on the right things. We know that we have the right product, and we know that our product has the relevance.

So we are excited about the future here. So with that, we're going to let it go, and thank you everybody for joining..