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, 2023. Joining us today are BBSI's President and CEO, Mr. Gary Kramer, and the company's CFO, Mr. Anthony Harris. Following their remarks, we will 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 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 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 March 28, 2024, starting at 8:00 p.m. Eastern Time 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. Kramer. Sir, please go ahead.

Thank you, and good afternoon, everyone, and thank you for joining the call. We had another strong quarter, capping off an equally strong year, and I am pleased with our results. Before I speak about our financial performance, I would like to recap some of the key operational and strategic accomplishments for the year. We are successfully selling and servicing BBSI benefits in every one of our markets. Our existing clients are buying and so are new clients. On the new clients, we are seeing success in white collar verticals that we previously had a difficult time penetrating. Our strategic sales initiatives have been operationalized and are resulting in consistent and predictable acquisition of new clients and new referral partners. We continue to invest in our asset-light model and have successfully expanded into new geographies and are gaining momentum. We continue to invest and perfect our other new products with BBSI U and BBSI recruiting. We continue to invest and bolster our tech stack with enhancements to myBBSI. And we also made further advancements on our Employer of Choice Initiative and earned the Great Place of Work designation for the third year in a row. Our client retention continues to trend better than the pre-pandemic error. Every year, we conduct the survey of our clients to evaluate customer satisfaction and needs. This year, we modified our survey sum so that we could calculate a Net Promoter Score, which is an evaluation of how many of our clients would be willing to recommend and refer BBSI. I am pleased to say that we scored a 64. To put this in perspective, a Net Promoter Score above zero is considered good, and anything above 50 is exceptional. This gives us great confidence in the value our clients place on the services and…

Thanks, Gary. Hello, everyone. I'm pleased to report we finished the year with strong results and strong momentum in our sales pipeline. Gross billings increased 4% to $7.7 billion in 2023 versus $7.4 million in the prior year, while diluted earnings per share increased 13% to $7.39, compared to $6.54 in the prior year. Looking at Q4, our gross billings increased 5% and to $2.05 billion versus $1.95 billion in Q4 of 2022. Our diluted earnings per share increased 32% to $2.16, compared to $1.64 in the prior year quarter. PEO gross billings increased 6% in the quarter to $2 billion, while staffing revenues were $22 million in the quarter, representing a modest increase on a sequential basis but a decline year-over-year of 22%. Our PEO worksite employees grew by 2% in the quarter, which was the result of strong controllable growth from net new PEO clients, offset in part by slower hiring within our existing customer base. Looking at trends and client hiring more closely, we continue to see hiring stabilize in the quarter with most of the year-over-year WSE reductions occurring early in 2023. The pace of hiring remains broadly slower than historical trends. But we continue to see the largest impact concentrated in the construction sector and in our Northern California region. Average hours worked and overtime hours per employee have also remained stable in the quarter. And for the first time in over a year, total overtime hours worked were higher than the prior year quarter. Average billing per WSE increased 3% in the quarter, driven by higher average client wage rates, which remain resilient and which will continue to be a source of billings growth going forward. Looking at PEO gross billings growth by region versus the prior year fourth quarter, the East Coast grew…

[Operator Instructions] Our first question is from the line of Chris Moore with CJS Securities. Please go ahead.

Hey, it's actually Lee Jagoda for Chris this evening. Good afternoon.

Hi, Lee.

So, Gary, I guess just starting with health care first. Some of your healthcare competitors obviously take underwriting risk on the healthcare, but you don't. Can you talk a little bit about the puts and takes? And clearly, there's less risk for you all, but what are you giving up as a result?

Yeah. Good question. I mean we've -- over the years, we've evolved our model on the workers' comp side so that we no longer take the workers' comp risk, we lay it all, primarily all of it off to the insurance and reinsurance market. So when we brought on the healthcare, we didn't want to have the perceived underwriting risk on the healthcare side. So we make sure that when we partnered with our partners that were going to be long-term strategic plays. We think of it as we get a seller's fee and arguably we're able to charge more for our product. So that's really to give it as a fixed fee type business that we're getting. The economics that we give up is the risk first reward as far as the underwriting on the health side that our competitors do, right? Some years, they're making money, some years, they're losing money. We just want to have a consistent cash flow and earnings pattern.

And then in terms of the geographic bias, once this is fully rolled out, how should we think about geographies in the sense that like, obviously, most of your workers' comp today is in California. Is it going to be a smaller geographic split? Or is there any other moving parts there?

We have workers comp in every state, not just California. I would say it's pretty well distributed based upon the way the payroll operations are. California is our largest market. We've got 20 branches there. It's -- I'd rather be big in California than big in Rhode Island, right? So -- but when we look at the map, we're able to sell this product everywhere, and we're able to bring on white collar business. I think it was about 25% of the new business we brought on for the healthcare was in the white-collar space, which is fun and exciting for us, right? That was an industry that was a little more challenging for us to penetrate because of being heavy blue gray with the workers' comp. But we're filling in the map with our market development managers. But as we grow outside of California, we grow in California. So our plan is to ultimately be a national player and be big everywhere.

And then one more for me, and I'll hop back in queue. So gross billings this year around 4%, and you're guiding to 6% to 8% in 2024. Is there a scenario or what would it take to sort of approach double-digit gross billings at some point? Or have you just gotten too large and it's the law of large numbers preventing that?

No. So, right, we grew in '23 when our clients were reducing their workforce, right? So as we think of '24, we think our clients are modestly going to hire. And we have that model that it's going to be more in the back half of the year, starting in Q2. But realistically, if our clients hire, we could easily get into the double-digit range.

Great. Thanks very much. I’ll hop back in queue.

Thank you. Our next question is from Jeff Martin with ROTH Capital Partners. Please go ahead.

Thanks, good afternoon. So, Kramer, I wanted to get into the renewal season, a lot of the portfolio of clients renew in the first two months of the year, even some in December, I would assume. November, December, I would assume. Just curious how that renewal period has gone and how the pricing environment is within new and existing clients?

Yeah. So this -- good question. So there was a couple first for us, right? So the first was that this was our first 1-1 selling season in California. And I can say I'm pleased with what we did in California. The other first was -- this was our first renewal. So clients that we brought on outside of California for 1/1/23, this was our first renewal. I can tell you that our carriers are happy -- our carriers are honestly ecstatic, and this is why we're able to bring on more carriers this year. They're ecstatic about how well we've done. They're ecstatic about our loss ratio and how good our underwriting is. But this was our first renewal season, and we renewed -- I want to say it was 94% of the benefits. So we only really had a couple that fell out and they fell out for either an under -- primarily, there were for underwriting reasons that they fell out. But pleased with the operations for what we got done for both new and renewal.

And in terms of the pricing environment on new and renewals?

Inflation is everywhere, right? So you're seeing on the benefit side, the medical cost trend and some of the other drugs that are coming out and driving up the Rx prices. So there was some markets that were up 20%. But us being a new entrant into the game, we didn't have to try to push those 20% rate increases to our clients. What we're able to do is be an alternative for them. And we saw because of the, I'll say, we're still new at this, right? We've -- we don't have a lot of years of experience to talk about it. But I can tell you that we had more submissions and more transactions coming through because the market was charging a higher rate and folks were shopping around.

Makes sense. Sounds like you're looking to continue to kind of bolster up the technology platform for clients. Just curious if there are specific things that you can enlighten us with in terms of strategically what you're doing there? And is this client driven? What is the underlying driver behind further enhancement?

Yeah. I would say it's predominantly client-driven as we think of our enhancements to myBBSI, it's really think of that client first and think about the employee life cycle that they have with their employees. And then how do we feel that employee life cycle data, number one? And then number two, how do we push and pull data via APIs and things like that with other sources. So that's kind of the focus of, think of the client first as far as specifics. I don't want to give specifics until we actually launch products, and we're going to have products that we're launching later in the year.

Okay. And then last one for me, if I could. On the adjustments to prior year workers' compensation liability and premiums, $13 million last year, roughly $15 million this year. I assume that's going to tail off at some point. How should we think about that for maybe 2024 and 2025 in terms of a potential range? I know it's hard for you to predict. But just in terms of how to think -- how people should think about it from a modeling standpoint?

We're conservative by nature when we set our current year loss rates. And then -- sorry, this is -- I'm going to give you a Kramer answer. I'm going to wander on this one, Jeff. So we have what I call best-in-class structural partners. We've got best-in-class risk managers, underwritings, claims folks, operation, actuarial. We are a very mature organization. We have tech, we have AI that we adopt to help us with all of this. And then we have about 200 folks either directly or indirectly that work on workers' comp at our organization. We structured these new programs so that the interest is aligned with the market. If things are favorable, the market makes money and then we, as BBSI and as shareholders get money back. We did that because we thought this would be more attractive to investors because it's a derisked model. And we thought that we would get multiple expansion with them. Our conservatism in our results, you have to fact check me on this, but I think we've had 20-plus quarters, Anthony? 20. 20 quarters of favorable changes in estimate for prior year liabilities and for premium adjustments. 2024 was our largest in our history. So if you just look at the trend, the trend for that aspect is our friend, right? So we feel like we've set ourselves up that this trend is going to continue. And if you look at '23. That was the largest number we've had in our history.

Helpful. Thank you.

[Operator Instructions] Our next question is from the line of Vincent Colicchio with Barrington Research. Please go ahead.

Good afternoon, Gary. Curious how your view of the economy has changed since last quarter? I assume it's a bit better, if I heard correctly, you're assuming that existing clients will hire, people will expand their roles in '24.

Yeah. If you just think about, call it, our last 18 months of experience, right, from just the payroll exposure, we started to see our clients pull back at Q4 of '22, and they pulled back in Q1 of '23, pulled back some in Q2. The nice thing was in Q3 of '23 was when we started to see it stabilize, slight hiring. In '24, for Q4 of '23, we saw slight hiring as well, right? So we're seeing stability in Q3. We see stability in Q4. And then the numbers that we're seeing so far through January and February is more stability. So we -- when we look at the business that reduced their workforce, that was primarily in the construction and trades. And if you look at the construction trades, you just look at the housing starts, things are coming back now, and that's what gives us kind of more optimism for our workforce that our clients are going to resume hiring into '24.

And if you double your healthcare clients by next year, the amount of income that comes in from that, is that what you would have -- let me ask -- what I'm trying to say is, will that be a meaningful amount of income to the company if you hit that goal?

We're not going to guide to just the product line, but we're not doing this for pennies. We're doing it for dollars.

Okay. And then you said you have 15 asset-light programs in place currently. Curious if some of those have already converted to physical locations and how do you feel about opening additional physical locations this year?

Yeah. We are in a couple of the markets we're actively searching for real estate, and we are also recruiting to have local support. So in a couple of the markets, we're looking at local HR because we're doing pretty well in those spots. We anticipate that we'll probably have 3 markets that go brick-and-mortar in '24 and then more of that to follow in '25.

Thanks, Gary. I’ll go back in the queue. Nice quarter.

Thank you.

Thank you. Our next question is from the line of Marc Riddick with Sidoti & Company. Please go ahead.

Good evening everybody. So I was wondering if -- with this being the first selling season for first key selling season for BBSI, if you could talk a little bit about the benefits, I'm sorry, for the -- were there any particular learnings or things that have taken place as you've gone through this process thus far that have been slight positive surprise, slight negative? Anything as part of that process that was outside of expectations?

I'd say I'm glad I lost my hair prior to this rollout. It was not a straight line. It was -- we learned a lot of things along the way. Part of what we're doing right now is while it's still fresh, we are having a whole continuous improvement team to go through and understand what do we need to do better on the sales service underwriting for new and renewal. We -- I could say I'm proud of the team, I'm proud of the company, I'm proud of the organization for getting it done. We learned a lot of lessons, but probably good lessons that we can build upon.

Okay. Excellent. Then the other thing was shifting gears a little bit. I was -- sorry, go back to your commentary around the NPS exercise that you did. I thought it was kind of interesting. One, maybe -- you could maybe talk a little bit about what led you to do that? And two, was there any sort of differentiation of certain industry or client verticals that may be scored higher than others? Or was there any -- was that generally across the board with those scores? Thanks.

Good question. I mean part of this was every year we do a survey, and we get -- surprisingly, we get a lot of folks that utilize it. We get a good sample, right? And we use that to understand what are we doing well, what do we need to do better, what our clients are asking for. And that's how we shape some of the directions that we go with our IT products. It's really we're listening to the clients and they're telling us that. The Net Promoter Score was a good thought from some of our Board. They said if you're doing this, why don't you do the Net Promoter Score. So I honestly didn't know what it was. I had to read it up, but I'm pretty pleased with the results of the survey. I mean it's pretty remarkable to have a score that high. I'm really proud of the work we're doing.

I'm glad you actually called that out that was pretty interesting to hear, so I really appreciate that. Thank you.

Thank you. Ladies and gentlemen, 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.

Yeah. I just want to thank all of our BBSI employees for a great year, and I want to thank all of our clients for partnering with BBSI. I appreciate your time. Thank you.

Thank you. The conference of BBSI has now concluded. Thank you for your participation. You may now disconnect your lines.