Good afternoon, everyone, and thank you for participating in today's conference call to discuss BBSI's financial results for the first quarter ending March 31, 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 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 facts, are subject to a number of risks and uncertainties. Actual results may differ materially from those implied by these forward-looking statements.

Thank you, Hilary. Good afternoon, everyone, and thank you for joining the call. We had a really good start to the year, with our results exceeding most of our internal and external metrics. We saw a continuation of the positive trends that we experienced in the back half of the fourth quarter extend into 2021, and we expect these trends to further accelerate as we emerge from a COVID economy. During the quarter, our gross billings increased 2% over the prior year's quarter, and exceeded our expectations. It is important to note that this quarter had one less business day and we are comparing against a prior year quarter which experienced far less pandemic-related disruptions. Our average worksite employees were down by 6% over the prior year quarter, and down 3% sequentially from Q4. We historically have a sequential decrease in Q1 from Q4, as some of our industries support the holiday season and the volumes don't repeat into the new year. For example, Q1 of 2020 was down 3% and Q1 of 2019 was down 2% sequentially. We are on plan for our worksite employee staff and net new client counts. Regarding the client counts, we saw continued softness of new client ads, which was offset by higher client retention. In previous earnings calls we stated that our referral partners and business owners went into their bunkers at the onset of the pandemic. We continue to see a gradual recovery, and in the first quarter we experienced our best quarter for client ads since the pandemic started, with gross ads of 293 and net ads of 146. Our sales conversion levels continue to be consistent with pre-COVID metrics. We are seeing more deal flow and more successes, but we are still not at the pre-pandemic levels. We are optimistic regarding the remainder of the year. Our deal flow in April was better than any month since the pandemic occurred, and we are seeing more enthusiasm in the market as economies reopen. Our gross margin as a percentage of gross billings exceeded the prior year quarter and benefited from continued favorable development on workers' compensation as well as affirmation of workers' compensation pricing.

Thanks, Gary, and hello, everyone. I am pleased to report that our Q1 results were stronger than expected, and showed positive year-over-year billings growth. PEO gross billings increased 2% over the prior year quarter to $1.47 billion. Staffing revenues declined 3% over the prior year to $24.6 million. PEO gross billings growth by region versus the prior year first quarter were as follows: Mountain states grew 26%, Northern California grew 7%, Pacific Northwest grew 5%, East Coast grew 4%, and Southern California declined by 5%. As noted in previous quarters, Southern California continues to be the region most impacted by COVID-19-related declines in our clients' business volumes. The overall increase in PEO gross billings for the Company was attributable to higher average billings per WSE. The average number of WSEs in the quarter decreased 6% year over year, which was in line with our forecast given the comparable quarter last year was not materially impacted by the COVID-19 pandemic. Workers' compensation expense continues to trend favorably and included an actuarially determined reduction of prior year estimated liabilities of $1.2 million in the first quarter. Our overall workers' compensation claims performance remains favorable and frequency continues to improve. In the quarter, we saw trailing 12-month relative frequency of claims as a percentage of payroll decrease 3% compared to the first quarter of 2020 and decrease 20% compared to the first quarter of 2019. Consistent with 2020, we continue to expect that COVID-19 claims will not materially increase our overall workers' compensation expense. We have discussed for several quarters that our pricing has faced increasing pressure from a competitive workers' compensation market, particularly in California. These cyclical market forces have continued to put pressure on the rates that we're able to charge our clients, but we've also communicated that we believe the workers' compensation pricing is at or near a low point. And we continue to expect that overall rates should continue to trend flat or increase in 2021. We are monitoring rates closely on renewal, and for April 2021 renewals, rates are generally either up or flat over the prior year.

Thanks, Anthony. In conclusion, we had a really good start to the year 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 owner. We've been working on the right things, and I think we're in a great position to capitalize on a reopening economy. Now I'd like to turn the call over to the operator for questions. Thank you.

And our first question is from Chris Moore of CJS Securities.

Historically, BBSI's been able to recover from economic downturns with exceptional growth. This obviously has not been a typical economic downturn. But maybe you could just talk about the puts and takes that would get you to double-digit gross revenue growth in fiscal '22 and kind of how workers' comp rates fit into that whole mix.

So that was a lot of questions, Chris. I'm going to take a stab at these, and of course correct me if I don't get them all. Regarding how we are going to come out of the recovery, this is a unique one because we were very fortunate that our clients weren't affected as much as the general economy. So if you look at say the Great Recession and where our reds went in the Great Recession, we actually held up better in this pandemic than we have historically. So we didn't pull back as much, which means we're not going to shoot up as much as we look at '21. But when we look at '21, we had real positive trends in Q1. We're seeing more deal flow in Q2, which gives us a good degree of confidence to move our guide from the 2-5, the original was 2-5, up to 5-7. And we're still not getting overly aggressive with the guidance and we feel we're being conservative on that guidance as well. So as we look at how the economy's going to come out of this, there's still some question marks as far as when states are going to fully reopen and what that's going to look like. But we feel like for the visibility we have now, raising guidance for the future ahead looks pretty strong for us.

Got it. That's helpful. And from a workers' comp standpoint, obviously you guys talked about still a challenging environment. If I look at that, obviously it impacts margins, but it also impacts how aggressively people have to do business. Is that a fair way to look at it?

We've been talking for multiple quarters now that the market is firming and we're seeing some positive trends in the market now, as far as when we look at our renewal book and looking at how we're holding rate, so we're getting to the position of where the market's firming, where we're getting to flat to positive rate, as far as when we have our clients renew. So we feel like we have potentially turned the corner and we could have a little bit of a tailwind behind us when it comes to rate increases in the market.

Got it. Last one from me, it's been a couple of quarters, at least since you've been de-emphasizing those safety incentives and just wondering kind of how that's impacting your perceived competitiveness when bidding.

When we moved off of the model of our safety incentives back in 2020, the idea there was we were reducing the pay-in to our clients. So we were reducing the rates so they were getting a discount on the front end, which we think during a time of a pandemic was a better sell in that environment, right? So less cash up front means better for the client. Some clients like it; they are the few minority, the majority of the clients like the lower pay-in as we go, so we haven't had a lot of pushback or anything there. We think it's actually to the benefit of the client to be on that new structure.

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

Congratulations on the large client win. The $35 million payroll client, I was curious if you could give us a little background on how that came to fruition as well as how many worksite employees does that encompass and what does the pipeline look like for the larger clients in general?

Yes, just for the pipeline for larger clients in general, we're seeing more in the pipe now than we've seen over the past two years. We're able to support the larger clients with our payroll system, we're able to support the larger clients with multi-state operations and our national footprint. The word's out, we're having good success, we've converted a lot of clients to the multi-state so with success comes more success and we're seeing more leads come in on the larger clients. For that client in specific, it was a client out of California, it's about 700 to 750 worksite employees that started payroll runs in the first quarter. And we feel real good about that client and servicing that client and being able to handle the larger clients in that space.

Great. And then with the increased guidance, I'm certain that it's not going to be a linear growth path from here. You've got some quarters that are easier comparisons to others. I was hoping if you could kind of frame how we should think about gross billings growth as we proceed through second, third and fourth quarter.

Yes. Spot on Jeff. So our sequential growth will be more linear, but year-over-year growth Q2 is by far going to be the easiest compare, right? Last April we saw significant declines. So we are expecting our year-over-year growth percentage in Q2 to be about double that of our year-over-year growth percentage in Q3. And then from there would taper off slightly more, but really that big jump is going to be from Q2 to Q3.

Okay. And then how should we think about the direct sales model? Is it still too early to say what the impact of that could be? Do you have any idea of what kind of contribution growth it could be for this year and maybe next year?

I wish we had more to say — we'll have more next quarter after we get a full quarter under our belt. When we put together the plan and the strategy for this year, what we did was we booked — we built in the expense for that, but we didn't — we weren't optimistic or we weren't aggressive on loading in the revenue side. So if the revenue side comes in, it'll just be, call it gravy for us. We're optimistic. We've partnered with good companies, we've partnered with good agencies, we've got good technology, we've built good content, we're going to be pulling the trigger here to let it out, and we've got the teams in place and ready to handle when they come back to us. We're ready to execute on it and by next quarter, we'll be able to give, I'll say, more definitive answers to how it's progressing.

Yes. Okay. Certainly sounds like you've got the growth engine ready to go here. Last question is on M&A, I know you're out looking, any update there?

Same as last quarter, right? We are good stewards of the shareholders' capital. We worked hard to make the money and we're going to be wise with how we spend it. And we're still kissing a lot of frogs and taking our time. We don't have an itchy trigger finger here. We're going to make sure it's the right fit with the right company, with the right people that will get us some geography that we're not in.

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

I'll actually start by following on with that last question. Is it your sense that today the more fruitful strategy will be simply bringing teams on rather than buying entire businesses and as you are out, I guess, using your phrase, kissing frogs, that ultimately you're building a pipeline of opportunity for when there's retirements that take place or other transitions that lead to an opportunity for acquisition, or are you thinking about it somewhat different than that?

Yes, I'll say our growth plan hasn't changed. We are going to grow organically in our businesses. That's our expansion of our business units and growing our branches in the markets we're in, and then we're going to extend in the markets and grow organically where we're not in. And then the third lever is we'll look at building out a pipeline for M&A transactions where they make sense. But as we think of it first and foremost, we are an organic growth company and that's the way that we think.

That's a nice segue to my next question, Gary, which you referenced in the press release and in your remarks here today, that the overall performance is ahead of your plan? Why is that? What's leading to that success?

Q1 was going to be our hardest compare for the year. So we internally thought we were going to be down as far as gross billings, and we've exceeded that by being up by 2%. So when we look at the client base, our WSE stack is on plan. Our client stack is on plan. Our revenue per WSE is up slightly. We're getting some tailwind from same-customer WSE. So we're on plan and our clients are doing better than we expected as well. So when we look forward, we're saying, all right, well, the machine's rolling here, and we've got good momentum and we don't think the momentum is going to slow. We think the momentum is only going to accelerate when the economy opens up more.

And on that note, two things: number one, hearing your customers, in California specifically, talking about plans to bring on additional people once they go to the full reopening, which I think I have heard the governor they're talking about, is it June? I believe, so next month. And secondarily, can you talk more about Southern California and how COVID is fitting into it being the only region that's down?

So Southern Cal, if we take the quarter and parse it by month, Southern Cal, our clients were negative in January, negative in February, and then in March we saw our clients start to grow again. And then that's the positive trend for us. And then we're looking at things in April — our April month isn't closed yet. We're still open for our accounting. But when we look into April, April's trending positive as well. So we feel like, just looking at payrolls and clients in Southern Cal, that it's made the turn from negative to positive as of March of 2021.

Congratulations. And then what about just bigger picture with California and your clients there relative to the governor's conversation about full reopening? Do you feel like that will lead to a somewhat immediate step up in employees or WSEs? Or is it more nuanced than that?

We're looking at the crystal ball here. Logically, we would think that if there was an area that could snap back, it would be Southern Cal for us because that was pulled back the hardest. But until we see it in numbers or until we see it in payroll cycles, it's more of a hypothesis than an actuality.

Our next question is from Vincent Colicchio of Barrington Research.

Yes, Gary, I apologize if you'd already commented on this, I came to the call late. I'm curious if your traditional sales model, your referral model, contributed in a positive manner in the quarter or not.

Yes, absolutely. We saw more deal flow in the first quarter than out of any quarter since the pandemic. And we had more leads, more prospects, more clients added in Q1 over any quarter since the pandemic started. So seeing positive trends there, even more positive trends into April, but we're still not at pre-pandemic numbers yet as far as deal flow in the economy.

And what portion of your teams have transitioned to that model with the three HR professionals?

Good question. That's a hard one for us to answer because really that model only applies to our larger branches that have more than one business unit per se. So that's not going to be the model for every branch. If you think of our developing branches and emerging, they don't have the size and scale to get into that model yet. So for what we see now it's about 12 business teams that are operating in that new model, and so far so good with the efficiencies that we've been able to pick up working remotely and with our new payroll system.

And can you update us on what expansion territory you plan to do this year?

So far I would say that we have committed to Nashville and we have committed to Pittsburgh. And then, we're always looking for good talent. So we let talent drive where that branch would be after that.

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.

Thank you everybody for taking the time to be on the call. We are super optimistic about the business and about the economy reopening, and we think that we're in a great spot to capitalize on it. So we'll talk to you again in a quarter and we'll be safe until then. Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.