Good afternoon, everyone, and thank you for participating in today's conference call to discuss BBSI's Financial Results for the Third Quarter Ended September 30th, 2021. 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 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 facts, 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 with the Securities and Exchange Commission for more information about the risks and uncertainties that could cause actual results to differ from those expressed or implied by the forward-looking statements.

I would like to remind everyone that this call will be available for replay through December 3rd, 2021 starting at 8:00 PM tonight. A webcast replay will also be available via the link provided in today's press release, as well as available on the Company's Web site at www.bbsi.com.

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

Thank you, Doug. Good afternoon, everyone, and thank you for joining the call. We had an excellent quarter, both financially and operationally. Our positive momentum we experienced in the first and second quarters continued in the third quarter as the economy continued to recover.

Our overall performance exceeded our forecast, leading us once again to raise our full-year outlook. During the quarter our gross billings increased 12% over the prior year's quarter and exceeded our expectations. Our average worksite employees were up 8% over the prior year quarter and up 3.5% sequentially from Q2.

Please note that we are almost back to pre-pandemic levels and expect to reach an all-time high at the end of next quarter. Our growth in worksite employees is a combination of our clients hiring or rehiring, as well as net new business and we are ahead of our forecast for worksite employee stack.

Our staffing business increased 2% over the prior year quarter. It could have grown more, but continued to have challenges filling orders with the tightness of the labor market.

We discussed last quarter that the government stimulus was set to expire in early September, and it did and that we expected to see an uptick in applicants and placements about three to four weeks after the stimulus expired and we did.

As I look at our results in October, we are seeing more applicants, placing more applicants, and companies are increasing wages to attract employees. We are still unable to fill our orders, but our ratio is improving. Next I would like to provide an update on the de-risking of the company.

We discussed last quarter that we entered into a workers' compensation insurance transactions which de-risks our business model and results in better financial predictability. This was our first quarter in the newly insured structure and we are very pleased that the program is operating as intended.

These transactions are structured in a manner that greatly limits any potential downside of our insurance program, but we can still share the upside of our disciplined underwriting. In essence, we are passing off the risk to the traditional insurance market, but we can share in the reward as we execute with the precision we are accustomed to.

Moving to our branch operational updates. Our branch footprint decreased by one to 53 total branches. We continued to expand on the East Coast and open new branches in Nashville and Pittsburgh. The East Coast is doing well and clients and referral partners are pulling us in the new geographies.

We continue to be mindful of operating efficiencies and consolidated Orem into Sandy, Utah and are now referring to this market as Utah County; and Bend into Medford, and are now referring to this market as Southern Oregon, as well as Monterrey into San Jose, California.

These decisions were made with the intention of continuing to grow revenue, while servicing our clients, but doing so in a more cost-efficient manner. Our branch stratification is as follows.

22 mature branches with run rates in excess of $100 million, 19 emerging branches running between $30 million and $100 million, 12 branches we consider developing with run rates up to $30 million. Our business units totaled 100 and incorporates the new opening and consolidations previously mentioned.

We also continued our migration into revised structure of the 16 member business units, which allows us to service more clients with less management employees and increases our return on management payroll. Moving to our client and worksite employees stack, our client retention continues to be stronger than pre-pandemic levels.

I like to attribute that to the work we do with our clients and the value our teams bring in this ever-changing and complex economic environment. Regarding our referral channel distribution, leads and prospects in the quarter were greater than the previous quarter and exceeded our internal Q3 forecast.

We are still behind pre-pandemic levels, but we are optimistic as we continue to see a gradual recovery as economies open. Our closing ratio continues to be in line with historical levels.

Last quarter we discussed our longer-term initiatives where we intend to increase the top of the funnel by focusing on lead generation via an omni-channel digital campaign where we target both clients and new referral partners in different markets.

We are only four to five months into the various trials, but I am excited about what we are seeing and I'd like to provide some statistics since the last earnings call. We've signed up 82 new referral partners and we set up 40 or 74 new meetings with interested potential clients.

We are testing and refining our various sales initiatives by market, measuring the return on investment and will transport the most successful method to our other markets. We continue to package our new technology with our nationwide offering and we continue to see larger opportunities.

So, to summarize all these efforts, our client retention is better than historical. We are seeing more opportunities than we forecasted. We continue to see larger opportunities and we are closing at the same levels as historical.

These positive trends resulted in the company adding 3,200 new worksite employees from net new customer adds over the past 12 months. To put a finer point on this accomplishment, this is the most net new worksite employees from net new customer additions we had added over the past four years.

This is just a fabulous result and a testament of our value proposition, as well as the focus of the organization. Next, I'm going to provide some updates on other initiatives. We discussed last quarter a new strategy that we are pluming as asset-light markets.

We have taken lessons learned in a COVID environment for how to operate remotely, coupled with our digital initiatives and we will hire and train a professional in a new market and have them sell into that market.

We will service this client out of an adjacent branch or at corporate and invest behind them in infrastructure as they build up their client base. It is still early, but we hired four new folks in the quarter that are currently going through our training and emerging program.

Shifting to IT, our internally built client portal, myBBSI, continues to perform well and is being received favorably by our clients. We are committed to quarterly enhancements that will add new features or improve existing functionality.

Our vision is to bring on additional products and services and deliver these through the portal and we have a dedicated team working on this. So, in summary, we are in the people business and people have never been more relevant to the business owner than they are today.

We are executing to our strategic initiatives and we are realizing positive results and seeing future positive trends which result in our increased outlook for the remainder of the year. Now I'm going to turn the call over to Anthony for his prepared remarks..

Thanks, Gary, and hello everyone. I am pleased to report that our Q3 performance continued to build on the momentum we reported last quarter, with results that were once again stronger than expected. PEO gross billings increased 12% over the prior year quarter and 5% sequentially from Q2 to $1.66 billion.

Staffing revenues increased 2% over the prior year to $29 million. As Gary noted, our increase in PEO gross billings was driven by stronger than expected growth from net new clients in the quarter, as well as stronger than expected hiring within our customer base. Our average WSEs increased 8% year-over-year, which is 1% higher than our expectations.

We also continue to see higher average billing per WSE which is up 3% in Q3 over prior year and continues to trend ahead of expectations. PEO gross billings growth by region versus the prior year third quarter were as follows.

Mountain States grew 35%, East Coast grew 16%, the Pacific Northwest grew 14%, Northern California grew 13%, and Southern California grew 6%. While Southern California continues to grow steadily, our customers in the region are expanding more slowly than in other regions, and the effect is generally consistent across industries.

For example, our construction industry clients in Northern California have grown 10% on average year-to-date compared to only 3% for those clients in Southern California.

Workers' compensation expense continues to trend favorably in the quarter and included an actuarially determined reduction of prior year estimated liability of $800,000 in the third quarter. Our claims performance is also remaining favorable with a relative claim frequency 6% lower than the third quarter of 2019.

We announced last quarter our new insurance program that became effective July 1st. This new program greatly reduces the workers' compensation risk that BBSI now retains. As a reminder, we will now describe our workers' compensation coverage for clients as being under either our insured program or our self-insured programs.

Approximately 82% of our worker's compensation exposure, including all California clients are covered by our insured program. All claims incurred in these states after July 1 are now covered 100% by the insurance market with zero claim cost retained by BBSI.

This is a significant change from our previous structure, which included $3 million of retention per occurrence. Because of this move to our fully insured program, our workers' compensation liabilities no longer increased in the quarter, but instead decreased by nearly $19 million as remaining historical claims were paid.

Looking at our margin and pricing, we continue to hold our billing rates effectively flat on renewal when compared to the prior year. The workers' compensation market is firming, but it's still competitive in certain geographies and industries for new business.

However, our strong client retention is an indication of the value we are creating for our clients even in this competitive market. Looking at operating expenses, SG&A continues to trend in line with expectations.

Although employee expenses are up relative to the prior year, the variance reflects prior year reductions implemented during the COVID-19 pandemic that have since been reversed, increased employee travel and marketing costs and higher profit share incentive pay in the current year due to stronger than expected results.

Through Q3 management headcount levels and non-IT operating costs, both remained below 2019 levels. Our investment portfolios earned $1.8 million in the third quarter compared to $1.6 million in the prior year.

Our investments continue to be managed conservatively and have an average duration of 4.1 years, average quality of investment at AA, and average book yield of 1.8%. Going forward, investment balances will begin to decline as our collateral funding requirements diminish under our new fully insured workers' comp program.

Turning to the balance sheet, we had $116 million of unrestricted cash and investments at September 30th compared to $110 million at June 30th. We continue to be debt free except for our $4 million mortgage on our corporate headquarters.

We remain committed to our capital allocation strategy and return capital to shareholders in the quarter through $2.3 million in dividends and $4.2 million of stock repurchases at an average price of $75.54. At quarter end, there is approximately $31 million remaining on the Board's approved $50 million share repurchase program.

Turning to the outlook for the year, given the stronger than expected results in the quarter, we now expect gross billings to increase between 9% and 10%, up from 6% to 8% previously, and we expect average WSEs to increase between 3% to 5%, up from 2% to 4% previously.

We continue to expect gross margin as a percent of gross billings to be between 3% and 3.1% and we expect our effective annual tax rate to be between 22% and 24%. I will now turn the call back to Gary for closing remarks..

Thanks, Anthony. In conclusion, we had a great quarter as we executed our short and long-term strategies. We continue to always think of the client first and to advocate for the success of the business owners. We've been working on the right things and I think we're in a great position for future growth.

Now, I'd like to turn the call over to the operator for questions..

Thank you. Ladies and gentlemen, at this time, we'll be conducting a question-and-answer session. Our first question comes from the line of Chris Moore with CJS Securities. Please proceed with your question..

Hey, good afternoon guys. Thanks for taking a couple of questions. Maybe I would just start on the kind of the mechanics and the impact of the Chubb agreement. So, my understanding is that, so you had the two LPTs that basically took care between 2014 and 2018.

The current agreement with Chubb is -- starts as of July 1st, 2021, so 2019-2020 and half of 2021 are the years where you still theoretically would have unfavorable workers' comp claims could be an issue.

Am I looking at that correctly?.

Yes, that is correct. So, it was 2.5 years, the only claims we have remaining on the balance sheet. We do have some self-insured claims that's outside of our fully insured program, right, that's the 18%, it's not part of the fully insured. But under the fully insured program, those were the only remaining claims..

Got it. And will there likely be -- go ahead..

I know that's a little confused. I'll just say it for lot. I don't want to say it's confusing, it's a lot and there is a good disclosure in the Q that has, call it, the liabilities by year for what we're at risk on..

Got it. Alright, that's helpful. Will there likely be additional LPTs, is there kind of a normal period of aging, like for example, mid next year was likely to be something that's focused on 2019..

Yes, I mean we have it in our plan to look at the next year, but it comes down to price to risk, and if it makes economic sense for both sides of the transaction. So, we both intend to look at it next year and if we can get to an agreeable price, then we'll get a deal, if not then we'll keep it, we're comfortable keeping it if we have to..

Got it. And maybe just one more from me, on the investment income, so it sounds like the investable base is going to continue to decline.

I'm just -- how rapidly should we expect that to happen?.

It will be gradual as we pay claims. Our rule of thumb is that we pay about 25% of our remaining claims in the year and that will trail that rate of decline in terms of the investments. We are seeing rates tick up slightly from their lows. So, I'm also optimistic that we'll get some offset there as our investment yield goes up..

Got it. I'll jump back in line. I appreciate it guys..

Thanks, Chris..

Our next question comes from the line of Josh Vogel with Sidoti. Please proceed with your question..

Thanks, good afternoon guys. Gary, you talked about initiatives to expand the business, whether opening new branches or the asset-light markets.

The trials there, your investments in tech enablement and myBBSI, I'm curious if Q3's SG&A run rate is the new normal -- a new normal base for us to think about going forward?.

So, Q3 is higher, because if you think this is the quarter where we're increasing our guide and there is some variable compensation to the branches as far as profit share, if they hit revenue targets and they're not only hitting them, they are exceeding them. So, there is going to be a variable profit share that realizes in Q3.

So, that will be our highest SG&A rate for the -- for the year, it will slow down in Q4..

All right, great. Thank you.

Obviously an impressive build in worksite employees, the -- just anything that can be read into the average number being higher than the ending count, was that just because there's some seasonal stuff that hit up over the summer months?.

Yes, in terms of the pattern of our worksite employee count, it always peaks in the middle of summer and that's driven from two large industries, the agricultural industry and construction, just to have more bodies working in the summer..

Right, okay.

I was looking at the safety incentive costs and it was down a lot, even from the prior two quarters in which you revised that element of the business, is this a move to do away with that altogether, and how should we think about that as part of workers' comp going forward?.

Yes, good question, Josh. If you go back to this quarter last year, we talked about how we refined our pricing in the market and what we really did was the -- the workers' comp market and specifically in California was competitive.

And what we did was lowered our pay-in rates to our clients and ultimately what we did was move that safety incentive upfront and netted it out of what we would charge to clients and it made sense because of the competition of the market, number one. And then number two, it helps them out in cash flow and we did that during COVID.

So, what you'll -- what you see now is we've renewed almost all of our accounts without a safety incentive which -- some accounts still may have it, but I'll say the overwhelming majority will not have it. And what you're left with is a liability that's going to slowly run off or has been running off..

All right, great. And just last one from me right now. Thinking about the vaccine mandates, I know your average client has around 30 or less employees today. But you are moving upstream, you're going after and landing larger national accounts.

I guess, I know -- we know it's still early here, but what dialog are you having with clients today and you can make the argument that your relationship and value prop comes into play when thinking about holding their hand through a process like this. Similar to what you did in the early days of the pandemic with small business loans.

Just curious, your thoughts around the mandates, the ongoing dialog you're having with clients today and whether we can discern if this is going to be a potential positive or a tailwind for you?.

This is a tricky one, right, because it's still not into effect. So, what we're coaching our clients on and that's how we're handling our business now, right, because this will affect our management employees. It's get your plan ready so that if it does go into effect, you know how to operate to it.

So, we have our own plan internally and then we're working with our clients. So, if they are affected that they can develop their plan, but anytime nobody wants to get into business, because they want to be the vaccines are, right.

And this is an example of you open in a business and now you're an employer and you have more challenges and this pulls you away from what you get in the business for which is your product or your service.

And we're there to help the clients get through this, because we see this and can take it to all of our clients rather than one person trying to figure this out on their own. So, it really, it really does help the business owner to be with a PEO in times like this..

Great, well thanks for taking my questions..

Our next question comes from the line of Jeff Martin with ROTH Capital Partners. Please proceed with your question..

Thank you. Hi Gary and Anthony, hope you're doing well. Gary, I wanted to dive into the referral partner network. You mentioned that the leads are still below pre-pandemic levels.

Just curious if you give us some relative perspective if they're three quarters back, if they are almost all the way back? And how would you describe the quality of those leads relative to perhaps pre-pandemic levels?.

So, I gave a stat in my prepared remark, which was over the last -- organically, over the last 12 months, for business we added versus business we lost. We added 3,200 WSEs.

So, over the last 12 months, our organic growth is 3,200, which I think going through a pandemic is a phenomenal number, and then you take that number and you add in the same customer sales, which gets us up to our total increase.

What we're seeing in the pipeline is, good quality leads, we're seeing larger leads, which we are being able to convert to clients. And that's really what we're seeing as far as how we're able to build those 3,200 over the last 12 months, it's, we're keeping the business and the business that we're adding is larger than it's been historically.

So, even going through here with less submissions, we're adding more WSEs which is why we changed our metric to get to WSE as opposed to the client count so that there is no head fix here on the business. Because the reality is, we're growing the business organically through the pandemic..

Yes. Great. And then with respect to your omni-channel initiative, could you give us some perspective, we added 82 new referral partners, I take it that's off of a relatively small pilot test, not 82 out of a nationwide broad effort, some perspective there would be helpful..

Yes, we're doing that in about 20 markets now and these 82, these are folks that signed up that want to be partners. It doesn't mean, we've done a deal with them, but it means that they understand our value prop. They want to learn more about BBSI and they want to sell that value prop in the market or to their clients.

So, we look at them is future pipeline that the teams out in the field are working with them to cultivate those relationships to hopefully bring on clients in the future..

Okay. And then you also made a comment, with respect to adding additional products and services on the technology platform.

I was curious if you could maybe give us a sneak peek at that, what some of those are and if you -- how mature you anticipate those being to growth acceleration over time?.

Yes, good question. We built our portal out with the idea that we own our technology destiny. So, we have the ability to plug in more products and services. Whether we make enhancements or increase productivity in there or we white label things and plug it in. There is a, I'll say, a limitless potential for products and services that we can bring in.

And we've got folks working on executing to that product road map so that we can ultimately have more things that we can sell to make us either more attractive or the business stickier. But we are not going to spill the popcorn until we do the launch on those..

Okay, great. And then just one housekeeping item if I could.

What was the same-store gross number in the quarter?.

So, Gary said we added 3,200 worksite employees from net new customers, the year-over-year same customer worksite employee growth was 5,500..

Okay. That's it from me, thanks guys..

As a reminder….

And that's just -- Jeff, just one clarification on that one. That's just WSE growth, that doesn't count wage inflation or anything like that, but just pure WSE growth..

Our next question comes from the line of Vincent Colicchio with Barrington Research. Please proceed with your question..

Hi, Gary and Anthony, I hope you're doing well also.

So, curious about, are you seeing any push back from any clients on pricing, giving the wage pressures out there in the market?.

I would say no more than normal. It has been a competitive market and it's been competitive because of workers' comp. And Anthony mentioned in his prepared remarks that we've been able to hold our renewals relatively flat. So, our markup is relatively flat for 2021 versus 2020.

So, we like to think that the product that we bring to market is worth the price that the clients are paying and because we're able to hold the pricing pretty consistent, and then our run-off is the best we've seen. So, it's, I would say, all signs pointed in the right direction..

And what portion of your teams have transitioned thus far to the new model with more HR professionals?.

That model is when you're going to get into the larger branches. So, it's going to be those mature branches that have that model or are close to that model. So, the total mature branches is going to be 22. So, 22 would have, I'll say, adopted some form of that new model..

So, the efficiencies you should start seeing from that are fully in place.

Is that what you're saying?.

Well, if you think of efficiency, so our management payroll is down still compared to 2019. So, we have more clients, we have more WSEs and our management payroll is still less. And the reason we're able to do that is because of the efficiencies we get on the technology with myBBSI, and because of going into this six person team as opposed to a four..

And last one from me, how are some of your newer locations performing?.

It's still early days. So, we opened Pittsburgh and Nashville and they are a month -- they are about a three months into being new branches and opening. It takes a little time to try to do a judge on this. So, we have good professionals in those branches. One of them is -- was from another BBSI branch.

The other was a new hire who has been trained and operating in the new model. So, it will be a -- we're confident they will do well, but we got to give them a little time..

Okay. Thanks for answering my questions..

There are no further questions in the queue. I'd like to hand the call back over to Mr. Kramer for closing remarks..

Sure. Thank you everybody for taking your time to be on the call. Thank you everybody at BBSI for the hard work and a great quarter. I appreciate everybody dialing in and we'll talk to you again next quarter. Thank you..

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day..