BARRETT BUSINESS SERVICES INC Q4 FY2024 earnings call

• Key operational accomplishments include successful sale and service of BBSI Benefits in all markets, entering a strategic multiyear partnership, success in penetrating white collar verticals, operationalizing strategic sales initiatives, having more referral partners, expanding into new geographies with asset-light model, investing in myBBSI and tech stack with product releases, making advancements on Employer Choice initiative, earning Great Place to Work designation for fourth year, and Net Promoter Score increasing 5 points to 69.
• Financial highlights: Strong fourth quarter and full-year results, gross billings growth, worksite employees growth, staffing decline slowing, workers' compensation program performing well with favorable adjustments, SG&A expense trends, and investment income details.

For the PEO segment, gross billings increased 10% over the prior year quarter and 8% for the full year. Worksite employees grew by 5.2% in the fourth quarter, with a record number of new client adds, and client retention set a record. The staffing business declined by 9% in the prior year quarter and 7% for the year, but the rate of decline has slowed, and it's forecasted to modestly grow in 2025. The PEO segment's gross billings by region in Q4 2024: East Coast grew by 21%, Southern California by 11%, Mountain by 10%, Northern California by 5%, and Pacific Northwest declined by 4%.

• 2025 gross billings expected to increase between 7% and 9%, and average WSEs to increase between 4% and 6%.
• Gross margin expected to remain generally consistent with 2024, ranging between 2.85% and 3.10%.
• Client payroll tax rates increased in 2025, similar to 2024, impacting earnings shape with some lag. Workers' compensation pricing expected to be soft, offset by cost savings. Effective annual tax rate expected to be between 26% and 27%.

• Workers' compensation pricing remains soft, continuing to move overall rates lower.
• Client payroll tax rate increases may have a lag impacting the shape of earnings.
• Pacific Northwest region, being the smallest region with about 5% of gross billings, had the weakest client hiring, though trends have started to stabilize.

Q: Hey, good evening guys. Thanks for taking a couple of questions and congrats on another good year and on the NPS score. Maybe we'll talk about obviously higher wages in a vacuum positive for you guys. What are you hearing from clients in terms of being able to continue to grow in the current environment? It sounds like hiring is picking up a little bit, but just any further thoughts there?

A: Yes. Thanks, Chris. This is Anthony. We're really seeing stability and recovery in those metrics. So, first of all, you mentioned wage inflation. We've continued to see consistent wage inflation every year and that's a baseline driver of growth for us and we're seeing that rate remain stable. We continue to see on a year-over-year and sequential basis wage inflation remain consistent. In terms of hiring, we've seen that trend improve during the year. And notably in Q3 and Q4, we also saw overtime hours improve in the year, also indicating kind of increased activity in our clients. So, as I mentioned in my remarks in our outlook, we're cautiously optimistic. We're expecting only modest improvement for the purposes of our outlook, but we see the trends that are favorable.

Q: Got it. I appreciate that. Average WSE growth is targeting around 5% this year. Just wondering the majority of those are come from new clients, correct?

A: Yes, that's going to be the lion's share of our growth is going to come from our controllable growth, which is the clients we add and the WSEs they have and the clients we retain.

Q: Got it. And maybe one more on the healthcare side. Can you just maybe talk a little bit about the mechanics of how you get paid on healthcare, like reseller fees versus admin fee expansion and where that looks to go over time in terms of that split?

A: Yes. It's something we've talked about and we want to make sure we're disclosing the right metrics for understanding the business. One of the nuances of disclosing a revenue number for benefits is just from the question you asked is really our kind of income generated from that program is twofold, right? It's kind of the reseller fees, but it really is packaged together with our overall admin fee that represents the value that we're providing to our clients, right? And a big part of that now is health benefits. So, kind of that -- as we think about the profitability of that program, the income is more than just the reseller fee, it's also that admin fee expansion. So, we're being thoughtful about how we present that and disclose that, but absolutely we'll continue to expand those disclosures.

Q: Thanks. Hi Kramer, hi Anthony, how are you doing?

A: Good.

Q: So, Kramer, I wanted to drill down on the tech investments. It sounds like this is in part, I mean, I'm sure this is part of a roadmap that had been planned for quite a while, but just curious if you've enhanced your technology initiatives or your technology product initiatives as a result of starting to attract non-traditional clients in the white collar space and larger clients?

A: Yes. So, when you're running a company, the biggest decisions you have to make is strategy and allocating capital. And if you think of how we've shifted over the years, right, we've repositioned the product to sell health insurance to have a learning management system for all these different things. And those all have an IT component to them, right? So, we have been really investing and bolstering up our IT tech stack for the last three years to support the business. And that was really designed for the products that we were trying to launch. Now, we're really thinking of using software as a -- I don't want to say Software-as-a-Service, but using software to help support our business and to help support the business. The first one we've launched is the applicant tracking, right? And it's pretty cool because if you're a client and you hire a lot, and it could be anything from a franchise to you name it, right? It doesn't need to be just like an office worker. It could be anything in that space and has a lot of volume in the hiring. But the basic idea is you can come into our system. We have a bunch of job descriptions that are curated. You can take the job descriptions. You can then modify it to better fit your company. You can post it. It posts out the different job boards. People go in and apply. When they apply, they come into our system. When they come into our system, depending upon how the client has it set up, they can ask them questions, do screening, do the interviews in there, push out emails and calendars and all those things. Okay. Now, we want to hire the person, hire the person, boom, we push out the I-9s, the background checks, the different forms through our system, okay. Now, they passed all that, boom, we want to hire them and then they go right into payroll, into our payroll platform and into our timekeeping systems if they buy our timekeeping systems. So, that's the front end and that's what we talk about on the employee life cycle, right? So, it's how do you attract clients, how do you bring them in, how do you hire them. That's the first step I would say that we're building out in 2025 and we launched it this week and we're going to start selling it in March. But the idea is that's the front end and then throughout the year, we're going to have additional products that come out that support that employee -- that client employee life cycle. So, you'll see more of this coming out in the back half of the year. We've got a roadmap that's going to be a couple of years until we get to what I would call best-in-class.

Q: And on the payroll tax side, I think you were I think rates were due for a catch up. Did the rate come in, in line with your expectations? Did it surprise you to the extent that it cost you a little bit of margin relative to your initial budget for the year? And is there an ability to recapture some of that if that's the case with pricing?

A: Yes, Jeff. This is Anthony. You're correct that rates were due for a catch up to some extent, right? They have been coming down for multiple years in a row. Last year, they went up. This year, they went up as well, but I would say very much in line with expectations. We saw that trend coming. We see the unemployment activity and that was in line with our expectations. That said, every client in our client reporting states like California has their own rate, and so we need to wait till those rates come in to effectively reprice most of them. So we have processes to do that. But as I mentioned, there is some lag in that. At the end of the day, that will be captured, but there may be some change in the shape of our earnings, a little bit more of a loss in Q1. We saw that trend last year as well. But overall, especially over a rolling 12 months, we are not expecting margin degradation.

Q: Hey, good evening.

A: Hey Marc. Hello.

Q: I wanted to follow-up on your comment on the strong finish to the year and strong beginning to the year. I was wondering if you could talk a little bit about maybe if you're seeing any particular client industry verticals that are kind of leading the way that you touched a little bit on construction, but are there any sort of call outs that you're seeing that might be leading away in that activity?

A: Marc, I would say it's not so much related to any one geography or any one industry. I would say broad based, the company just did well in Q4 and the company did well in January. The one call out I did give in my script was our asset-light, our Market Development Managers. They added over 500 WSEs in January, which is a really good accomplishment for them. We're starting to see consistency out of that group and I'm looking forward to watching that grow.

Q: Great. And then I was wondering if you could maybe sort of discuss with benefits. The -- I know it's sort of early into a new year or what have you, but maybe can you sort of talk about where you are currently from a competitive positioning standpoint, maybe some of the call outs that give you confidence in the strength of the ads that you've seen to-date, which -- and I appreciate the detail and update on that data, but maybe some of the things that you think sort of are helping you sort of stand out in that area, particularly with the pickup on the white collar side that you alluded to earlier in your prepared remarks?

A: Yes, if you just kind of take a step back and look at our value prop, right? We're going to we've got more products now with Benefits and with other things in IT. We're going to have more IT products coming out. But they will never replace our core product, which is our people, right? So, people are our product. They will always be our product. That's our differentiator in the local market. So, if I can have a local team that is second to none and then I've got all of these additional products and if those products are even if say we're equal to the different marketplace, if you can be equal to the marketplace plus have that killer team there, it's going to be hard to beat us, right? If the price is the same and you get our teams, it's going to be hard to not go BBSI. And that's why we're seeing the uptick in sales.

Q: Hey, good evening.

A: Hey Marc. Hello.

Q: I wanted to follow-up on your comment on the strong finish to the year and strong beginning to the year. I was wondering if you could talk a little bit about maybe if you're seeing any particular client industry verticals that are kind of leading the way that you touched a little bit on construction, but are there any sort of call outs that you're seeing that might be leading away in that activity?

A: Marc, I would say it's not so much related to any one geography or any one industry. I would say broad based, the company just did well in Q4 and the company did well in January. The one call out I did give in my script was our asset-light, our Market Development Managers. They added over 500 WSEs in January, which is a really good accomplishment for them. We're starting to see consistency out of that group and I'm looking forward to watching that grow.

Q: Great. And then I was wondering if you could maybe sort of discuss with benefits. The -- I know it's sort of early into a new year or what have you, but maybe can you sort of talk about where you are currently from a competitive positioning standpoint, maybe some of the call outs that give you confidence in the strength of the ads that you've seen to-date, which -- and I appreciate the detail and update on that data, but maybe some of the things that you think sort of are helping you sort of stand out in that area, particularly with the pickup on the white collar side that you alluded to earlier in your prepared remarks?

A: Yes, if you just kind of take a step back and look at our value prop, right? We're going to we've got more products now with Benefits and with other things in IT. We're going to have more IT products coming out. But they will never replace our core product, which is our people, right? So, people are our product. They will always be our product. That's our differentiator in the local market. So, if I can have a local team that is second to none and then I've got all of these additional products and if those products are even if say we're equal to the different marketplace, if you can be equal to the marketplace plus have that killer team there, it's going to be hard to beat us, right? If the price is the same and you get our teams, it's going to be hard to not go BBSI. And that's why we're seeing the uptick in sales.