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 30, 2024. 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 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 06, 2024, starting at 8:00 P.M. ET 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 website at www.bbsi.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. Good afternoon, everyone, and thank you for joining the call. I am pleased to report that we had a strong third quarter. Our financial results exceeded our expectations, and we have greater optimism in our full year results. We continue to execute our short- and long-term objectives and we added a record number of worksite employees from our controllable growth. Moving to our financial results and worksite employees. During the quarter, our gross billings increased 9% over the prior year quarter, which is greater than expected. We continued to execute our various strategies to increase the top of the sales funnel and we achieved a record number of worksite employees from new client adds during the third quarter. Our client retention continues to trend well and is in line with our expectations. I'd like to attribute that to the work we do with our clients and the value our teams provide. The result of all these efforts, or what I refer to as our controllable growth, is that we added approximately 4,600 worksite employees year-over-year from net new clients. The economy in the third quarter remained relatively consistent with the first half of the year. Our clients' workforce continued to modestly grow in the third quarter and into October. To summarize, for the quarter, we grew our worksite employees by 5% as we sold and retained more business and benefited from our clients' net hiring. Moving to our staffing operations, our staffing business declined by 2% over the prior year quarter. We previously mentioned that in 2022, we repriced the portfolio and jettisoned clients where we were not achieving an adequate return. We also shifted our strategy to recruit for our PEO clients, which generated equal margin to our traditional staffing model, but resulted in less top line revenue. This quarter is the first clean quarter-over-quarter comparison and we are seeing our staffing business stabilize. We continue to execute our strategy to recruit for our PEO clients and placed 105 applicants in the quarter. Moving to the field operational updates, we're very pleased with our entrance into new markets with our asset-light model. We have 21 total new market development managers in various stages of their development. They are doing well and largely achieving their goals of adding and servicing new clients and new referral partners. In three of the markets, we have hired additional local talent to support our clients and we are in the process of moving into traditional brick-and-mortar BBSI branches. We continue to see positive results from our investments in new markets and are actively recruiting additional new market development managers. Regarding product updates, we continued to execute on the sale and service of BBSI benefits, our new health insurance offering. We previously mentioned that we entered into a strategic multi-year partnership with Kaiser Permanente and are now successfully selling their HMO side by side with our national PPO. And just like our workers' compensation and existing health insurance offering, we take no underwriting risk. Our new business resulted in more new subscribers in October and November than over the same prior year period. I am pleased to report that today we have approximately 480 clients on our various medical plans servicing more than 11,000 total participants. We are in the thick of the 1/1 selling season and our business teams are offering BBSI benefits to our existing clients as well as potential new clients. It is still too early to provide any definitive guidance for 2025, but we are pleased that our current pipeline for 12/1 and 1/1 opportunities is about 35% greater compared to this time a year ago. As we look forward to 2025, we are confident that this product will be accretive to earnings. We have the people, the product, the technology, and the experience to be confident in our various offerings. We are bullish on this product and will begin to reap the benefit of leverage through scale. Next, I'd like to shift to our view of the remainder of the year and to 2025. We have a solid track record of selling and servicing through uncertain economic times and our blue/gray clients are proving to be resilient. We are consistently growing our WSE stack and we ended Q3 with a record number of worksite employees. We have consistently achieved strong controllable growth by focusing on the needs of our clients and by adding new clients. We have more product to sell, more folks selling it, and more referral partners recommending BBSI. It is important to note that there is one less business day in 2025. If there is no dislocation in the economy and we close out the year in the manner that I believe we will, then we expect gross billings growth in 2025 to be similar to 2024.

Thanks Gary and hello everyone. I'm pleased to report we finished Q3 with strong results and continued momentum in our sales initiatives. Gross billings increased 9% to $2.140 billion in Q3 2024 versus $1.960 billion in the prior year quarter. PEO gross billings increased 9% in the quarter to $2.120 billion while staffing revenues declined 2% to $21 million in the quarter. Our PEO worksite employees grew by 5% versus the year ago quarter, which as Gary noted was driven by a record number of WSEs added from new clients, both on a gross basis and net of client runoff. The continued strong trend of controllable growth of recent quarters was once again combined with positive client hiring in the quarter. The pace of client hiring remains below our historical averages, but we continue to see consistency in client hiring rates across most regions and industries. Looking at wage rates and hours worked, total hours continued to remain stable in the quarter, while overtime hours increased modestly year-over-year. Wage rates continued to increase as well and average billing per WSE increased 3% in the quarter. Looking at year-over-year PEO gross billings growth by region, the East Coast grew by 18%, Mountain and Southern California each grew by 10%, Northern California grew by 6%, and the Pacific Northwest declined by 1%. Southern California represents our largest region and has improved to double-digit growth through a combination of consistent client adds and stable customer hiring. The strong East Coast performance represents the 14th consecutive quarter of double-digit growth in that region and is also driven by a combination of strong controllable growth and above-average client hiring. The Pacific Northwest region is successfully adding clients but continues to be most impacted by slower client growth, including being the only region with net negative client hiring in the quarter. Turning to margin and profitability. Our workers' compensation program continues to perform well and benefit from favorable claim frequency trends and favorable claim development. This strong performance has once again resulted in favorable adjustments for prior year claims. In Q3 2024, we recognized favorable prior year liability and premium adjustments of $4.3 million. As a reminder, our client workers' compensation exposure is now primarily covered by our fully insured program with no retained claims risk by BBSI. Our overall profitability continues to benefit from operating leverage. This quarter saw an increase in SG&A expense on a year-over-year basis that was expected and was driven primarily by increases in variable employee compensation and incentive pay related to stronger financial results compared to the third quarter of 2023. Year-to-date, our SG&A growth remains in line with expectations and our full-year profit goals. Moving to investment income, our investment portfolios earned $2.2 million in the third quarter, in line with the prior year. Our investment portfolio continues to be managed conservatively with an average quality of investment at AA and average book yield of 2.9%. The combined result of these activities was net income per diluted share of $0.74 compared to $0.67 per diluted share in the year-ago quarter. Our balance sheet remains strong with $94 million of unrestricted cash investments at September 30 and no debt. We stayed consistent in our approach to capital allocation, making investments back into the company through product enhancement and geographic expansion and distributing excess capital to our shareholders through our dividend and stock buyback plan. Continuing under our $75 million July 2023 repurchase program, BBSI repurchased $8 million of shares in the third quarter at an average price of $35.09 per share, with $37 million now remaining available under the program at quarter end. We also paid out $2.1 million of dividends in the quarter at our increased dividend rate of $0.08 per share. This brings our return of capital to shareholders to $10.1 million in the quarter and over $28 million year-to-date. Moving to our outlook for the full year. We had strong results in the quarter and we are reflecting that in our updated outlook. We now expect gross billings to increase between 7% and 8% for the year versus 6% to 8% prior. We continue to expect WSEs to increase between 4% and 5% for the year. We now expect gross margin as a percent of gross billings to be between 3.03% and 3.07% versus 3% to 3.1% prior and we continue to expect our effective annual tax rate to remain between 26% and 27%.

Thank you. The first question comes from Jeff Martin from Roth Capital Partners. Please proceed.

Thanks. Good afternoon. Gary and Anthony, how are you?

Good. Hi, Jeff.

Wanted to touch on the competitive environment. A lot of your public peers are really struggling for growth in this environment and competition seems to be fairly cutthroat. Just curious what you're seeing out there and given this is your first real full year of BBSI benefit, do you think that's helping you outpace growth relative to peers?

Yes. Good question. A couple of things, right? One is our clients are in a sweet spot I would say for the macro economy. Our blue/gray clients are modestly hiring now. Anthony said it's at a pace less than the historical, but it's growth, right? And we'll take growth because last year we didn't have growth in that space. So our clients are growing number one. Our clients are healthy. We're retaining our clients. That's key in this business is to retain your business and we've got a very high retention rate from the products and services that we provide. And then on the sales side, we've been saying for years that workers' comp has been competitive. That hasn't changed. And then as far as competition in the marketplace, we've had a lot of focus and attention on our sales pipeline, our sales efficiency, our sales process. We are getting more referral partners recommending business to BBSI. We're getting more prospects. We're getting more closes. With those closes we get more worksite employees. So just in general we're selling and servicing more and we're doing that in a market that in my mind I don't think is any more competitive. It's just always been competitive. But we've got a good focus and attention on it. And then on the health side, it is another arrow in our quiver. It's something that we're now getting referral partners in the benefits space. We're getting clients that we wouldn't have typically seen before that are looking for a package product. So we've got new products that are attracting new referral partners and new products that are attracting clients. So I think we've been working on the right things and we're putting together some successive quarters of positive results.

Excellent. On the benefit side, will you be do you foresee providing additional details about the offering from a metric standpoint, from a contribution standpoint in 2025 relative to what you're currently disclosing? And could you also touch on to what degree that could be accretive, maybe not just next year, but just broadly speaking in the mid to longer term?

Sure, Jeff. Yeah, this is Anthony. Yeah, we continue to watch the disclosure side of it. Obviously, it's been fairly material this first year, but as it grows, we'll continue to enhance disclosures. There's some commentary about it in our MD&A, and obviously, Kramer does give statistics of the script, but we'll continue to incorporate those more formally going forward. In terms of the profit potential, we've said there's really only upside for us on the benefits product. So we're already covering the costs of the program. It's profitable, a little better than breakeven, so we really haven't seen earnings leverage from that. And that's really what we're expecting to start seeing in 2025 that Kramer mentioned. And that will just grow with scale. So, we have our kind of foundation built, both from the IT side and the operations side. So, as we continue to sell more of that benefits product, the gross margin rate on that will be, on average, a little higher than our typical gross margin rate today of around 3%. So, as we continue to add those dollars and won't have to add very many incremental SG&A dollars. We should start to see some strong operating leverage that could be meaningful to the bottom line as that scales up.

Great. And then last question for me is on the pipeline side. You've done a lot over the last three to five years to add additional sources of leads. Just curious if you could give us an update if there are any in particular that are currently contributing to a greater degree than some of the others?

It's broad-based. I mean, we are a referral partner friendly PEO. We treat our referral partners like clients as well. We've got a lot of respect for them and ultimately want to help them grow their book and their profitability. So, our profile is really P&C brokers, the employee benefits brokers, CPAs, things of that nature, trusted advisors, small business and that profile has not changed. We're just getting better at bringing on more referral partners. So it's really the velocity of referral partners that we're bringing on that's making a difference and then the other leg of the stool is we've also started our direct efforts, right? So our SEO, SEM, lead generation technologies that we're using to bring in direct efforts and we're seeing positive results there. So it's a multi-channel approach that we're using to make sure that we got a fair amount of business that comes into the top of the sales funnel.

Great. Thanks for taking my questions.

Thank you. The next question comes from the line of Chris Moore from CJS Securities. Please go ahead.

Hey, good afternoon, guys. Nice quarter. Maybe we'll start with just gross billings growth. The guide is 7% to 8%. You did 9% Q3. Historically, you've had more than a few double-digit gross billing years. What kind of environment would you need to consistently grow double digits again?

Yes. We talk about our controllable growth, right? So that's the clients we add and the WSEs they have and the clients we retain in WSEs. Our controllable growth is the best it's ever been, right? So that's going to be a huge piece of our growth this year is going to be on our controllable side. Then you're going to get a little wage inflation which is going to help you grow as well, and then you're going to get your clients that are hiring which is going to help you grow as well. Now the client hiring, Anthony mentioned, it's still below historical levels. We grow quicker when our clients hire, not by our clients giving raises. So the more the employees they hire, the quicker we grow. And that has been the slowest piece in this economy. Last year it was negative. This year it's positive, but it's still a fraction of what it was on our historical level. So it's running like 25%, 30% of what it was historically. So realistically, if that number as far as our client hiring were to increase, that would easily put us back into the double-digit sweet spot.

Perfect. Thank you. Maybe just kind of on that competitive environment we're talking about. So TriNet and Insperity, perhaps your two closest comps. I'm going to ignore valuations today before they went crazy. TriNet was down, I think, more than 20% since this time last year and Insperity down 40%. You guys are up 35% to 40%. Certainly, that well-timed split helped. But models are different. They take more risk. But you're really subject to many of the same macro challenges. I wonder if maybe you could just kind of compare and contrast your model versus theirs.

We have a great deal of respect for our competitors and we operate in a vast, under-served market. Currently, our strategy is not to take clients away from other PEOs, but rather to onboard clients who are new to outsourcing. Our approach centers around our strengths, primarily our people. We provide all the essential tools of the PEO industry, such as 401(k) plans and payroll services, along with advanced technology. However, our key differentiator is our local service teams. If faced with a choice between a local service team and a call center at the same cost, I would consistently choose the local team, and our clients feel the same way. This local service model is why we maintain such high client retention, which contributes to our future growth. We tend to focus on the blue and gray collar sectors due to our expertise in workers' compensation, an area we believe is still under-penetrated by PEOs. We are comfortable operating in this space and understand it well. Additionally, over the past four years, we have made strides to reduce risk within our organization. We do not assume risk in workers' compensation or health insurance, which we believe enhances our predictability and profitability, along with cash flow. This consistent growth and earning along with cash flow should ideally lead to a higher market multiple for us. We know our strengths and are focused on executing within that framework.

Appreciate that. Last one for me is just I think you referenced it, but you've talked about SG&A growth being half of revenue growth. That's still the target?

Yes. I mean, I'd say our target really is earnings leverage, which is accomplished by growing SG&A slower than we're growing the top line. That ratio can change a little bit from year to year depending on that top line growth over at the cycle. But the goal is to grow 10% on the top line to grow 15% on the bottom line, so about a 1.5x leverage.

Got it. I'll leave it there. Thanks, guys.

Yes. Chris, to clarify, Anthony said in his prepared remarks, so Q3 was a profitable quarter and a lot of our compensation is profit-related. So the more profit we have, the more profit share we have to pay out. And that's where you're seeing a little bit of a tip in the quarter, but on the year we're about where we want to be.

Sounds good. Thank you, guys.

The next question comes from the line of Vincent Colicchio from Barrington Research. Please go ahead.

Yes, Gary. You've been at your PEO staffing business, if I remember correctly, for about a year or so. It's good to hear the progress there. Do you think you're in a place where you can consistently grow that going forward?

Yes. We've been doing the recruiting for our PEO clients now. It's really a product that if you think of it, they've never used recruiters before. A lot of it is in the small blue-collar space. They've been doing it on their own or friends of friends or friends of employees and they've never adopted a recruiting model. So when they're typically joining us, they're doing recruiting for the first time and we're getting good penetration into our installed base and then we use it as a sales tactic when we're bringing on new business. So it's been working well for both. And then every branch has goals, every branch is talking to the clients about it, every branch gets compensated on how many places we're putting in. So we've got alignment through the organization in order to make sure this is successful. We think it's a really good tool for our clients.

And then are healthcare brokers becoming more productive as a source of referrals?

Yes. I don't want to overplay this. It's still a small fraction of our referral partners, but it's growing. And we've had more success. Interestingly, their busiest time of year is right now and we're getting more business from them right now because they've come to understand that if they place the business with BBSI, we handle all of the administration enrollment and if we sell more business, we can offer more products. So we're having better penetration this quarter in that distribution channel than we have in the prior quarters ever.

Okay. Thanks for answering my questions. Nice quarter.

Thank you. The next question comes from the line of Marc Riddick from Sidoti & Company. Please go ahead.

Hey, good evening. So I was wondering if we could talk a little bit about in your either in your prepared remarks or the press release, besides talking about the value added and where we are with the BBSI benefit, I was wondering if you could talk a little bit about some of the potential new product offerings, new service offerings, things of that nature that you might be looking at or if there is any sort of adjacencies that have sort of opened up as an opportunity to layer on with benefits?

Yes. We have a well-defined product roadmap, and while I don't want to get ahead of ourselves, we will be discussing new products set to launch in 2025 next quarter. I'm excited about these new offerings that will integrate into our tech platform to help our clients serve their businesses better. However, since these products are currently in beta with some of our clients, I want to wait until we've completed the beta phase and can confirm their effectiveness before making any promises.

That’s something to look forward to, and that’s great. I was wondering if you could discuss the client retention trends mentioned in the prepared remarks. It seems that things have been pretty strong, but could you elaborate on what those trends have looked like? Additionally, have you noticed any other platforms or sectors becoming more aggressive in their approach?

Our retention remains above 90%, which is our goal. Of the 10% of clients that leave, most do so because they go out of business or due to mergers and acquisitions. More than half of those who leave fit this category, and we consider it a success if they sell or retire. This is just the nature of the industry. We've noticed a slight increase in this trend over time, and it's become a bit more challenging given the current economic conditions. With the end of stimulus funds, businesses need to be self-sustaining, which has led to more closures or sales recently. However, this does not raise any major concerns for us, as our retention remains strong despite these factors. While we do occasionally lose clients for reasons beyond our control, in general, our teams work closely with our clients' operations, becoming an integral part of their business. This connection tends to encourage clients to stay with us longer.

Great. Thank you. Very encouraging quarter. Thank you, gents.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I would now like to turn the call back over to Mr. Kramer for his closing remarks.

I just want to thank all the BBSI professionals for a great quarter. Thank you everybody for their support. Appreciate it.

Ladies and gentlemen, this concludes our call. Thank you for your participation.