Good afternoon, everyone, and thank you for participating in today's conference call to discuss BBSI's financial results for the second quarter ended June 30, 2025. 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 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 September 6, starting at 8:00 p.m. Eastern 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. We continue to build on our momentum in the second quarter, delivering results that exceeded our plan. Strong revenue growth was fueled by new client sales, expanded adoption of new products and excellent client retention. Notably, our success in adding new clients led to a record number of worksite employees. Moving to our financial results and worksite employees. During the quarter, our gross billings increased 10.1% over the prior year quarter, exceeding our expectations. We continue to execute various strategies to increase the top of the sales funnel, and we achieved a record number of WSEs from new client adds. Our client retention continues to trend well and has performed better than 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 controllable growth is that we added a record 10,100 worksite employees year-over-year from net new clients. We mentioned during our last call that we began to see our clients resume hiring but below historical levels, and this continued in Q2. The quarter included a significant amount of macroeconomic uncertainty, which we believe caused our clients to pause hiring. While our clients' workforce modestly grew in Q2, it was at a slower pace than we planned. The net result of record WSE adds and modest customer hiring was that we grew worksite employees by 8%. Moving to our Staffing operations. Our Staffing business declined by 11.5% over the prior year quarter and was below our expectations. January and February were in line with our expectations, but we experienced a slowdown in March, and that trend continued into Q2. With the macroeconomic uncertainty, our clients…

Thanks, Gary, and hello, everyone. I'm pleased to report that we finished the quarter with strong results and exceeded our plan. Gross billings increased 10.1% to $2.23 billion in Q2 '25 versus $2.03 billion in Q2 '24. PEO gross billings increased 10.3% in the quarter to $2.22 billion, while Staffing revenues declined 12% to $17 million in the quarter. Our PEO worksite employees, or WSEs, grew by 8% in the quarter, which, as Gary noted, was driven by a record number of WSEs added from new clients. This was coupled with ongoing strong client retention, which continued a strong trend of controllable growth. Client hiring was positive but modest in the quarter and remained well below historical levels. Average billing per WSE increased 1.7% in the quarter, which was driven by continued increasing wages, slightly offset by lower average hours worked per WSE in the quarter. Looking at year-over-year PEO billings growth by region for Q2, Southern California grew by 12%, Northern California grew by 6%, Mountain grew by 12%, East Coast grew by 13%, the Pacific Northwest declined by 4% and our asset-light markets grew by 100%. Southern California represents our largest region and has maintained double-digit growth driven primarily by consistent client adds and better-than-expected client retention. The strong Mountain and East Coast results also continue to be driven by strong controllable growth performance. And our Pacific Northwest was the region most impacted by client hiring trends 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 Q2, we recognized favorable prior year liability and premium adjustments of $8.8 million compared to favorable adjustments of $8.9…

[Operator Instructions] Your first question comes from the line of Chris Moore from CJS Securities.

Terrific quarter. Maybe we can start with workers' comp. You have talked in the past about raising workers' comp rates, something like 11% at the end of calendar '25. I'm just trying to understand, is that a done deal? Or is that a recommendation? Where does that stand?

Chris, it's Kramer. That's specific to California and California has a regulatory board called the WCIRB. They recommended a rate increase of over 11%. Then it goes to the commissioner and then the commissioner approves a rate. The rate the commissioner approved was like 9%. So that will be reflected in -- ultimately, carriers will update their filed rates, carriers will get their filed rates approved. And ultimately, we think that this is going to start to push the workers' comp pricing up in California specifically.

Got you. And that timing is more -- it's a bigger impact in '27 than '26? Or just trying to understand the timing there?

It will be -- think of it as when all of these insurance policies come up for renewal, which is going to be kind of rolling depending upon their effective date. It will take 1 year to get through the rate increases, but it's honestly just a good sign that the market is moving that way. And we think it's a good thing for 2 reasons, right? Number one is rate is a good thing, rate is your friend. And then secondarily, when folks are being charged more, they tend to shop more. So we think there'll be more people shopping in the marketplace.

Got it. Very helpful. And maybe just as a follow-up. Workers' comp adjustment unusually big, $8.8 million, can you just talk to that a little bit more?

It was within $100,000 of the same quarter last year. So Q2 of '24 was, give or take, the same amount. So it's kind of the normal.

Your next question comes from the line of Jeff Martin from ROTH Capital Partners.

Kramer, I wanted to dive in on the renewal on the workers' comp agreement. It sounds like you probably have some improved profit potential from that renewal. Maybe you could comment to that. And then specifically, I wanted to circle back around on the last question with regard to what higher rate means for the business? I would assume that means you can go after a broader pool of clients potentially because you can underwrite risk a little more safely and then you have clients shopping. So I think this seems like potential for a nice improvement in profitability as a result of this rate increase. Would you say that's fair?

Yes, do you want to take it?

Yes, I can chime in, Jeff, on the impact of the insurance renewal. So yes, the rates have come down. The way we've structured this program now since we've had this fully insured program going back to 2021 is that if the claims perform better than expected, we get return premium back from the carriers. And in every year, we've had claims perform better than kind of what was originally underwritten. So we've continued to see those benefits and those do come back to us. And that's part of what we're seeing in these actuarial adjustments that we talk about each quarter now. And so with that trend, we do expect those rates to come down in the following renewal, right, to reflect that improvement, and we have seen that. So that's great news. And you're not wrong, that's lower cost to us. If those claims continue to perform even better, which has been the trend, we'll continue to accrue those benefits as return premium and that's exactly right. And the real benefit here would be if we continue to see those lower costs paired with stable or upward trending market pricing. Typically, what we've been seeing is our costs have been coming down, but market pricing has been coming down and essentially offset those savings. And so that's really where the profit expansion opportunity comes in if we do start to see that market shift, which we believe is happening.

Great. And then I wanted to dive in on the technology enhancements that you're planning coming up here. I would imagine that over the past couple of years, that significantly helped your market positioning. It sounds like you're now able to and will with the rollout of additional technology offerings to be able to go after the white-collar market and maybe even the middle market in a more aggressive fashion?

Yes. Specifically, to the white collar, right, we've grown up as a blue-collar business because of our workers' comp offering. But now that we have the health insurance product, it opens up a lot of TAM for us, right? It opens up white-collar business. It opens up employee benefits brokers. It really makes our total addressable market be squared, if you think of it that way. So the health insurance offering for the white-collar business, after payroll is their most expensive spend. So with this health insurance offering, we're able to go and offer to white-collar businesses, right? So we're bringing on things we haven't done before, like doctors and dentists and lawyer and law firms, like business we haven't been in before and it's creating good opportunities for us. But those clients expect a little more on the IT side. And what we're trying to do is by the end of the year, have an IT product that we can really go toe for toe with anybody out there on the HRIS, HCM platform side.

Okay. And then could you speak to the performance of the policies you've underwritten on the health care side? I know you don't take on the risk, but I think it's worth asking the question. And in terms of pharmacy costs and large claim incident rates, are you seeing the performance of those plans on expectation? Or are you seeing similar trends that the broader industry is seeing?

Trend is real in health. This year, it's going to be a higher renewal rate for the whole world, right? If you look at the big insurance companies, if you look at the other PEOs, it's been tough sledding this last 12 to 24 months. We underwrite our business. We underwrite it conservatively. We want to make sure that when we bring a client on, we're going to be able to offer them good terms and conditions for the subsequent year. We're viewing this honestly, like we're good stewards of capital. We're prudent underwriters. But we're viewing this as an opportunity as well. Like Anthony mentioned that in his prepared remarks that you've seen the insurance market on the health side, you've seen the articles in the Wall Street Journal, you've seen what's happening in the ACA market, you know that rates are going to be more than they were. This is going to be a double-digit probably rate increase market. And we view that as a benefit because we have a small book of health, but we have big capabilities to do more, and there's going to be more people shopping because of the rate increases that we're projecting in 2026.

Great. And then last one from me. Could you talk about some of the considerations that went into deciding to raise guidance for the balance of the year?

Yes. I think it's largely driven by strong year-to-date performance. We really have seen a consistent trend in controllable growth specifically, not just in adding new clients but also retaining clients, both ahead of our expectations internally. Really partnering that with hitting our margin and operating cost targets that were in line with expectations internally translates to consistent growth.

I would say, as we think about growth now, just to growth through the midpoint, it's been 80% from new business. We're not getting much tailwind from our clients' hiring. It's a little bit of an unknown right now for what's going to happen on the back half of the year for the economy, but what we can control, we're doing a really good job at adding new business and keeping business. And then if clients hiring increases, that's just going to be a tailwind for us.

Your next question comes from the line of Vincent Colicchio from Barrington Research.

Yes. Gary, nice quarter. Very strong net new client additions. Are you tweaking anything? Is there anything you could share with us in terms of what strategies are working best? Anything of that nature?

No, I'm not going to give the secret sauce, but right, if you think of all the things we've done, we've got great people, we've got more product on the health side, we've got more product on the IT side, we've got a bigger total addressable market by being able to bring on larger clients, by being able to bring on white-collar business, and then we've got a lot of process around our sales and sales cycle and a lot of focus and emphasis on it. So it's a lot of things, but it's really everybody knowing which way the organization is going and working together to get there.

Has the competitive backdrop changed at all? I know in the past, you've talked about a large number of the clients you add are new to the PEO market. Is that still the case?

That's still the case for us. I mean, we're having more PEO takeaway than we ever had, but the majority of our business that we're bringing on is business that's new to a PEO for the first time.

Okay. And any color on what's going on in the Pacific Northwest? Is there particular verticals that are struggling? Any color would be helpful.

It's our smallest region, and we have 4 branches in Oregon and 1 branch in Washington. And Portland is the largest and Portland has seen the most pullback. It's a -- I would say, the economy in general is -- there's more people leaving Portland than entering Portland and you're seeing a slowdown in construction, you're seeing a slowdown in a lot of the industries and the trades.

Okay. And Anthony, I missed what you said in terms of the wage inflation was a bit better. Did I get that right? And also, I missed what you said in overtime hours.

Yes. Wage inflation has been very consistent as usual, right? The offset -- that was offset by a decrease in average hours worked in the quarter, which is consistent with some of the macroeconomic uncertainty that we saw on the client hiring side, right, where that really slowed down. So the net average billing per WSE was 1.7% increase, which was the net of those 2 factors.

Your next question comes from the line of Marc Riddick from Sidoti.

I wanted to touch a little bit on the openings in Chicago and Dallas. I know obviously, it just happened, but maybe you could share some of your thoughts on the -- some initial thoughts and sort of the preparation going into that and sort of how that plays into your expectations? And I think in your prepared remarks, you're looking at another branch or 2 before the end of the year and then how that plays into your thoughts potential for '26?

Yes. It was -- we had all of our market development managers in about 6 weeks ago, and we had -- we do a meeting with them like every 9 months. And it's kind of interesting and kind of cool to be honest with you, because it's 21 folks all going -- all trying to conquer the world, build their market. And in the beginning, we had a thesis, and it's kind of nice now because the thesis has been proven, right? Hire somebody, hire good people, train them, get out of their way so they can sell and support them. And then when they do well, start to hire locally. And then after they hire locally, they can build out their true BBSI branch. And we've proven that in multiple markets now. So it's more than a dream. It's a reality, which is fun when you see that on the faces of everybody that they can own their geography; the harder they work, the more they get paid; the harder they work, the more they grow, the better the results. So it's -- Dallas and Chicago were our first ones. We'll have 1 to maybe 2 more coming on this year. But the nice thing as we look out and ladder this, we can see that this is going to be successful and that it's going to continue to roll and it's going to continue to generate growth and profitability for the organization.

Okay. Great. And then a lot of my questions were already answered, but I was sort of curious as to maybe how you view the client activity and pacings through the quarter and into 3Q, particularly maybe if there was any tie-in or read through vis-a-vis headlines, whether it's big beautiful bill or maybe what client impacts have been to sort of the big picture stuff and sort of a real-time environment?

Yes. We went through -- our client hiring was lower than we expected. I mean, our clients grew, but at a much lower rate than historical and lower than we forecasted. And if you're a business owner, it was a tough time to make an investment, right? You had 10 different things coming at you from tariffs to [indiscernible] to you name it, right? It was a tough quarter. And I feel like we have better stability now. When you have the stability, you can do more long-range planning. And the clients that we talk to are now making that shift to more of a long-term planning as opposed to a hole and weight approach.

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.

I just want to thank everybody on BBSI for all their hard work and dedication and great results, and thank you to all of our shareholders for being on board with us. Thank you, everybody.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.