Insperity, Inc.

Good afternoon. My name is Lori and I will be your conference operator today. I would like to welcome everyone to the Insperity first quarter 2020 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, Please press star then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. At this time, I would like to introduce today's speakers. Joining us are Paul Sarvadi, Chairman of the Board and Chief Executive Officer, and Douglas Sharp, Senior Vice President of Finance, Chief Financial Officer and Treasurer. At this time, I'd like to turn the call over to Douglas Sharpe. Mr. Sharpe, please go ahead.

Thank you. We appreciate you joining us this evening. Let me begin by outlining our plan for this evening's call. First, Paul will provide an update on our business and operations, including how the extraordinary efforts of our corporate employees and our business model has benefited our clients and our worksite employees and their families. during the COVID-19 pandemic. He will also discuss the impact of both COVID-19 restrictions and the resulting stimulus packages on our business today and the potential impact going forward. This discussion will include the range of possible outcomes on the key metrics and drivers of our business. I will then briefly discuss our first quarter financial results, provide an update on our balance sheet and liquidity, and provide our guidance for Q2 and our updated guidance for the full year 2020. We will then end the call with a question and answer session. Now, before we begin, I would like to remind you that Mr. Sarvadi or I may make forward-looking statements during today's call which are subject to risks, uncertainties and assumptions. In addition, some of our discussion may include non-GAAP financial measures. For more detailed discussion of the risks and uncertainties that could cause actual results to differ materially from any forward-looking statements and reconciliation of non-GAAP financial measures, please see the company's public filings, including the Form 8K filed today, which are available on our website. Now, at this time, I'd like to turn the call over to Paul.

Thank you, Doug, and thank you all for joining us. Before I discuss our results and outlook for Insperity, I'd like to say our hearts go out to all those who have lost loved ones and are suffering the most from this sudden and unexpected health crisis. Our thoughts and prayers are also with those feeling the severe economic effects that have ensued as this crisis continues to run its course. Insperity is able to see firsthand the impact of this health and economic calamity on the small and medium-sized businesses we serve. Our mission to help them succeed so communities prosper has never been more critical to these clients, their employees, and families. I'm extremely proud and thankful to all employees of Insperity for the way they have risen to the challenge by providing exemplary care and support during this time. I'll begin today's call with some brief comments about our solid first quarter results, highlighting two important outcomes which preceded the COVID-19 outbreak. I'll follow with a discussion of our quick and effective response to the health and economic crisis since mid-March, including detailed metrics reflecting the effects on our client base. I'll finish my comments today describing the economic climate and considerations that over the balance of the year that form the basis for our updated guidance we are providing today. Our first quarter results represent a significant rebound from the fourth quarter including strong sales and a welcome improvement in our benefit plan driven by improved pricing allocations and lower than budgeted costs. First quarter sales were 122% of budget representing a 25% increase over the same period last year. These results were driven by a 13% increase in trained business performance advisors and a 10% improvement in sales efficiency. Both core and mid-market sales were substantially over budget. Mid-market sales were particularly impressive throughout the period. Core sales exceeded forecast for the full quarter despite a fall-off in March to 83% of budget as the pandemic escalated. As a reminder, worksite employees sold generally become paid worksite employees and flow into revenues over the following few months. The other important development evident in the first quarter results is the improvement in our benefit plan as the elevated number of large claims we experienced last year continue to decline toward historical levels, and our benefits allocations continue to outpace our expectations. This combination means we came out of Q1 with our health plan in good shape, as Doug will describe further in a few minutes. I'd like to provide some detail regarding our initial response in March as the COVID-19 health crisis emerged and quickly became an economic calamity. Our decisive response proved to be critically important for our clients, their employees, and families. We believe our rapid and pivotal reaction to the pandemic, combined with the quality of our client base, has caused Insperity to experience a relatively less severe impact in layoffs and ultimately in paid worksite employees than would have otherwise occurred. The best empirical evidence is our paid worksite employee decline in April, which was only 3.3% lower than March. Allow me to provide some context for this with a bit of a chronology. In mid-March, as cancellation of public events were announced, it became evident that this COVID-19 pandemic was escalating and morphing into a significant economic disruption. We promptly transitioned to a work-from-home environment in order to protect our own employees and their families. Our experience over the years with hurricanes and other disasters proved beneficial as we were totally prepared to work remotely on a broad basis with 93% of our employees working at home and only 7% of employees with the need to be at the workplace to accomplish their responsibilities. Our workload with clients was increasing dramatically at this point. The initial efforts revolved around policy changes helping clients transition to working from home, employee communication, and regulatory changes. The response to this health and economic emergency required prompt, thoughtful, and well-executed HR solutions, which is right up our alley. As the gravity of this situation set in, it became apparent our small and mid-sized business clients would be facing a firestorm and would need immediately help evaluating alternatives to make operational changes. These options including reducing or furloughing staff, lowering pay rates, and adjusting benefit plans, to name a few. We immediately began tracking these operational changes daily through new reporting, which has been invaluable in providing a clear picture of how clients reacted to this crisis. This reporting has also been vital to inform our forecasting of future scenarios. Our daily reporting from March 9th forward provides real-time information on how our clients have responded to the pandemic in adjusting staffing levels. Since that time, we have been watching daily changes in layoffs, temporary layoffs or furloughs, and rehires directly associated with the economic disruption. We've also observed trends in more routine voluntary and involuntary employee terminations and hiring within the client base. On Monday, March 16th, we decided to form the Insperity Business Continuity Support Team to address escalated complex client requests. Within days, this team, comprised of professionals from human resources, finance, regulatory, and other disciplines, was fully functional, helping clients quickly and effectively make operational changes and obtain critical resources to navigate through the current health and economic crisis. Due to our ongoing government affairs efforts, Insperity was on the ground involved in Washington as the Senate and the administration were addressing the needs of small businesses, devising and drafting the CARES Act. Our government affairs team was closely monitoring the CARES Act and provided valuable, real-time feedback to us as the Paycheck Protection Program was developed. Our involvement at this level allowed us to be ahead of the curve, which enabled us to meet our goal of helping our clients be in a position to apply for paycheck protection loans when the program was launched on April the 3rd. One key element in this effort was providing the reports required with the loan application to substantiate and validate the eligible loan amount. The CARES Act was signed into law by the President on Friday, March 27th. and on Sunday the 29th, I was reviewing the first version of these complicated reports. Two days later, these reports became available on Insperity Premier and by Friday, the first day the banks began accepting applications, over 67% of Insperity clients had run the necessary reports to submit their applications. Last week, we conducted a client survey to obtain important feedback on business owner sentiment, and on their outlook for the near term and the balance of the year. In this survey, also released today, we also included questions regarding applications and funding of these loans because of the direct effect on temporary layoffs and expected rehires. According to our survey, approximately 80% of our clients apply for a loan under the Paycheck Protection Program. We are very pleased for our clients when survey results indicated 59% of these applicants received their PPP funding in the first round before funds ran out on April 16th. This compares very favorably against the National Federation of Independent Business survey, which reported 20% of respondents had received their funding. It appears our goal to help our clients obtain these funds to sustain their employees and businesses was very successful. Our daily tracking data also aligns with our survey results. Since March 9th through the end of April, 25% of our clients have reported layoffs totaling approximately 22,000 employees, or about 9% of the total worksite employee base. 35% of these layoffs were processed as permanent layoffs, and 65% as furloughs or temporary layoffs expecting to be rehired in the coming months. Approximately 15,000 of these layoffs were reported before the end of March, with the remaining 7,000 in April as layoffs moderated. Over the same period, we've already seen approximately 2,200 employees, or 10% of the total, rehired. which we believe is somewhat due to our early success with clients in the Paycheck Protection Program. Keep in mind these terminated employees typically get a final paycheck after the reported layoff and rehires get paid on the next pay date so there's a lag in the paid worksite employee impact for both types of these reported changes. You also have to factor in paid worksite employees pluses and minuses from terminating clients, new clients, voluntary and involuntary terminations, and regular hiring in the base. With all these factors in and finalized at the end of April, the result was the 3.3% reduction in paid worksite employees that I mentioned earlier. We expect a similar reduction in May based upon a comparable analysis as the balance of layoffs and furloughs from April come out of the paid worksite employee count. During this period, we also converted our entire sales team of business performance advisors to sell from home. It's been amazing to watch this valiant effort to keep sales moving through virtual discovery and closing calls. While sales activity has decreased significantly, Those that are going through the process seem to be more qualified and appear to have a greater sense of urgency. Another aspect of our business that we watched very closely was clients' terminations and bad debts from financial defaults. We're very pleased to say at this time we've not seen a material increase in these key metrics, although it stands to reason that these issues could increase if the recovery is weak or delayed. Now, at this point, I'd like to address the economic climate and considerations we've worked through driving the range of our expectations implied within the guidance we're providing today. The impact of this ongoing pandemic on Insperity will be driven largely by the staffing levels maintained by our small business client base since we earn our fees on a per worksite employee per month basis. Over the balance of the year, we expect staffing levels in our client base to be primarily driven in the near term by the effectiveness of the Paycheck Protection Program combined with how successful and widespread the restart of the economy turns out to be. The second significant effect we expect will come from a change in the pattern of our direct cost due to health care and to a lesser extent workers' compensation trends. We expect an unusual pattern within our direct cost which we believe will begin with lower costs near term while many employees are working from home, deferring elective procedures, and using telemedicine. We then expect potentially higher than normal costs once employees are back at work, catch up on elective procedures, and have possible worse and chronic conditions from a period of lack of care or treatment. Our outlook determining the range of our guidance is based upon Thank you very much. We also assume the Paycheck Protection Program has a positive effect on rehiring of furloughed employees, however, at a level reflecting the uncertainty our clients are facing. In this case, we assume about 65% of the furloughed employees would be rehired over the next couple of months in time for clients to include them in their calculation for loan forgiveness of their PPP loan. Even though this is the high case, We are assuming 35% of furloughed employees do not return within that period as business leaders stretch out their funds, allowing time for the economic activity to increase. New client sales, considered within the high end of our guidance, assumes sales at 80% of our original budget over the balance of the year. This includes lower sales in Q2 and Q3 and improving to more normalized levels in the fourth quarter. Client terminations are assumed to be slightly elevated over the balance of this year, even in this high-case scenario. We have included an approximately 15% increase in worksite employee attrition from client terminations over our original budget. Now, in our low-case scenario, we're assuming an economic environment where government-mandated shutdowns continue longer, reopening proves more difficult, and it takes longer for demand to resume. In this environment, we assume layoffs persist through the second quarter and are only marginally offset by rehires related to the Paycheck Protection Program. This case assumes clients most affected by the pandemic stretch out their PPP funds and don't rehire most of the furloughed staff and eventually convert a high number of these employees into permanent layoffs. At the low end of our range, we also assume this slower recovery leads to delayed decisions on new sales and efficiency is lower throughout the balance of the year. In this case, sales results are assumed to be approximately 60% of our original budget over the last three quarters of the year. The low end of our range also anticipates a 20% higher level of worksite employee attrition due to client terminations above our original budget. Full-year retention is expected to be 80% in this scenario. Both scenarios include a higher gross profit per worksite employee than our original budget due to the outperformance in the first quarter combined with the pattern of direct cost we expect due to COVID-19. We expect direct cost could be materially lower in the short term but it is unclear how these costs will rebound or what unexpected costs may arise thereafter. Therefore, these scenarios represent more of a shift of cost from the second into the third and fourth quarters and only a relatively small reduction in total costs over the balance of the year. Our operating plan for the balance of the year anticipates a continued elevated level of services needed by our clients Managing through a safe return to work plan or responding to whatever this situation deals up next. At this point, our plan is to maintain our current corporate staff level to handle the increased workload. We also intend to continue to add to our business performance advisor team over the balance of the year, however, allowing the growth rate to moderate to high single digits. So, we believe we've weathered this unprecedented storm well. primarily due to our quality client base made up of the best small to medium sized businesses in America and an amazing team of employees at Insperity. Now before I pass the call on to Doug, I'd like to tell a quick story that explains why I'm so passionate about small business owners and the role they play in a recovery like the one we need right now. All four of my grandparents immigrated to the United States during the early 1900s from Romania. Their families pooled their funds together to send each of them to the land of opportunity, which was not uncommon at that time. They arrived with little or no money, spoke very little English, but had the dream for a better life and the work ethic to go with it. One of my grandfathers was only 16 years old when he arrived in 1909. He was very entrepreneurial and told me about many businesses he started from a Grocery store with a hair salon up above to a great farm in Pennsylvania. But my favorite story about him I only learned at his funeral when an elderly woman I did not know grabbed my arm to tell me about my grandfather's heroism during the Depression. It appears my grandfather played a major role in his community, keeping people alive with his grocery store, extending credit to hungry families, and working with his suppliers to stretch every dollar. She said mine was one of those families. When I watch our clients today, I'm reminded that the entrepreneurial spirit is alive and well. Our client survey routinely asks our clients major concerns. It was no surprise to see the top concern in this survey was sustaining their business through this economic slowdown. The right behind that was employee well-being. Next was returning to work safely, followed by employee engagement, sustaining relationships and culture. Strikingly, quite a bit further down the list was meeting terms for loan forgiveness. We are here at Inspirity to support these incredible people that play such an important role in our communities and our nation as a whole. If our recovery from this pandemic and its after effects is dependent on these small and medium-sized business owners, and it is. My money's on them, and we will be here helping every step of the way. At this time, I'd like to pass the call on to Doug.