Insperity, Inc.

Good afternoon, everyone. My name is Erica, and I will be your conference operator for today. I would like to welcome everyone to the Insperity Second Quarter 2021 Earnings Conference Call. At this time, all participants' lines are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press Par 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would like to introduce today's speakers. Joining us are Paul Sarvati, Chairman of the Board and Chief Executive Officer, and Douglas Sharpe, Senior Vice President of Finance, Chief Financial Officer and Treasurer. I'd like to turn the call over to Douglas Sharpe. Mr. Sharpe, please go ahead.

Thank you. We appreciate you joining us. Let me begin by outlining our plan for this evening's call. First, I'm going to discuss the details behind our second quarter 2021 financial results. Paul will then comment on the key drivers behind our Q2 results and our plan over the remainder of the year. I will return to provide our financial guidance for the third quarter and an update to the full year guidance. We will then end the call with a question and answer session. Now, before we begin, I would like to remind you that Mr. Servati 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 a more detailed discussion of the risks and uncertainties that could cause actual results that differ materially from any forward-looking statements, and reconciliations of non-GAAP financial measures, please see the company's public filings, including the Form 8-K file today, which are available on our website. Now let's discuss our second quarter results. We achieved $0.91 in adjusted earnings per share and $60 million of adjusted EBITDA, with our growth rebounding ahead of plan from the pandemic close a year ago. As for our growth metric, the average number of paid Worksite employees increased by 7% over Q2 of 2020, above the high end of our forecasted range of 5% to 6%. And this was a sequential increase of 4.3% over Q1 of 2021. Both Worksite employees paid from new client sales and net gains from hiring in our client base exceeded our targets. And second quarter client retention came in at our historical high level of 99%. Now, along with worksite employee growth, our revenue per worksite employee, which included a 6% increase in pricing, and the non-recurrence of the 2020 FICA deferral and customer service fee credits exceeded our expectations. Our workers' compensation program also continues to produce favorable results. In spite of these three factors, we experienced a decline in gross profit of 9% from Q2 of 2020 related to the dynamics associated with the pandemic. First, during Q2 of 2020, with the onset of the pandemic, we experienced unusually low utilization in our health plan and therefore lower benefit costs. Over the first half of this year, We have seen an increase in healthcare utilization, including elective care that was previously deferred, and COVID-19 related vaccination, testing, and treatment costs, along with changes in claim payment patterns by our carriers associated with these claims. A second area of gross profit unemployment taxes has been favorable relative to our expectations coming into 2021. We prudently budgeted for an increase in state unemployment tax rates coming off of the high 2020 unemployment levels. Ultimately, many states elected not to raise their rates at anticipated levels, including Texas, whose rate we received during Q2. Also, we experienced a change in client mix that had a favorable impact on our SUTA costs. So the gross profit contribution from our payroll tax area has exceeded our budget through the first half of 2021. Moving forward into the second half of this year, we have appropriately lowered our pricing to allow our clients and prospects to benefit from our lower SUTA costs while still targeting our initial budgeted spread between price and cost. We will closely monitor SUTA rates as we enter 2022 to determine the need for any further pricing adjustments. Now, another positive outcome in the payroll tax area during Q2 was the receipt of $11 million of federal payroll tax refunds related to prior years. As for our Q2 operating expenses, we continue to balance managing costs relative to the ongoing pandemic while also investing in our current and long-term growth plans. We have increased our marketing spend related to lead generation activity and have incurred costs related to our Salesforce implementation. Other corporate employee headcount has remained relatively flat in the first half of 2021. We have reinstituted travel for certain employees and events. However, these costs, along with other G&A costs, continue to be managed at historically low levels as the economy and our growth recovers from the pandemic. Our financial position and liquidity remains strong as we continue investment in our growth and provide returns to our shareholders. During the quarter, we repurchased 98,000 shares of stock at a cost of $9 million, raised our dividend rate by 12.5%, paying out $17 million in cash dividends, and invested $9 million in capital expenditures. We ended Q2 with $213 million of adjusted cash and $370 million of debt. Now, at this time, I'd like to turn the call over to Paul.

Thank you, Doug, and thank you all for joining our call today. Let me begin by providing some color around our strong second quarter and first half results and the solid execution driving our growth acceleration. I'll follow these comments with the discussion of priorities for the balance of this year, and I'll finish with some thoughts about the exciting market opportunity we see ahead for Insperity, the PEO industry, and the overall HR services sector. We've had an excellent first half of 2021 in the face of considerable uncertainty from the ongoing effects of the pandemic. Our priority as we entered this year was to accelerate our growth momentum and return to double-digit growth in paid worksite employees as soon as possible while managing through the uncertainty. As the year began, we were optimistic we would achieve this growth rate by year end or early 2022, despite the loss of our largest client, which represented just under 3% of our worksite employee base. Our confidence was based upon our solid sales momentum, underlying client retention improvement, and steady hiring in the client base. Our guidance provided today indicates we now expect to return to double-digit unit growth in the third quarter, well ahead of schedule, building off our strong recent trends in all three of our growth drivers. Outperformance in paid worksite employees from previous booked sales, combined with stronger than expected hiring within the client base, and historically high client retention to produce a rapid acceleration in our unit growth. In fact, paid worksite employees were up 9% in four months by the end of June over our low point of the year in February. New sales in the second quarter met our targets with book sales for new clients and worksite employees up 39% and 30% respectively over last year. This positions us well to fuel third quarter growth since book sales from a given quarter typically become paid worksite employees in the following quarter. Another highlight from our sales organization this quarter was book sales for our traditional employment solution, workforce acceleration, which achieved 94% of forecasts. We are beginning to see decent traction with this offering, with gross profit contribution in Q2 from this offering increasing significantly over the same period last year. Although the numbers are still small relative to other contributors to gross profit, we believe this trend bodes well for the future since the potential for this offering is substantial. Our client retention in the second quarter continued at historically high levels as our client service interactions have continued at rates dramatically above pre-pandemic levels. We would have expected the level of service interactions to recede to historically normal levels by now, but it appears more of our client base has discovered the depth of our service team's expertise and the capability of a sophisticated HR function to help their businesses succeed. The most significant driver to our rapid growth acceleration in the first half of the year was growth in our client base above our expectations. We budgeted this metric at the low end of our historical range for this year, and it appears we are more likely to end up near the high end, even with some potential cooling off in hiring over the balance of the year. We expect continued hiring within the client base over the back half of the year, but the labor market is showing some stress level around availability of candidates that could dampen the rate. The competition for qualified candidates is quite pronounced, leading to wage inflation, signing bonuses, and an increased employee turnover to pursue better opportunities. We saw some of these effects in our own data this year with average wages and bonuses up 7% and 44% respectively. The tightening labor market is also the result of a significant increase in retirements and career decisions reflecting personal reprioritization coming out of the pandemic. This dynamic represents a considerable opportunity for Insperity since one of the major advantages of our workforce optimization offering is the immediate capability to compete for employees against much larger firms. Once again, a sophisticated HR function is needed to respond to address these marketplace changes to gain a competitive advantage. The second quarter and first half of this year also reflected the expected volatility in two of our direct cost areas most affected by the pandemic, specifically unemployment taxes and health care costs. There are simply many moving parts in these two areas that will take some time to settle out as the pandemic wanes. So we will continue to set wider ranges than normal for our expectations in these areas. So we have delivered solid profitability year to date, and we have a good plan for the balance of the year. To continue to set the stage for long-term growth and profitability, our plan includes strategic investments in sales and service capacity. We expect to begin ramping up the number of business performance advisors at a rate of approximately 10 per month and go into 2022 at around 700 BPAs across the country. We are reinstituting our fall campaign kickoff in early September with simultaneous events held across the country and linked together remotely. We also have budgeted an increase of several million dollars in radio and digital marketing spend, extending campaigns that have been successful, generating qualified leads. We are also continuing our investment to implement Salesforce and are on schedule for our target rollout to the sales organization next spring. And most importantly, we intend to invest to add service team capacity for the growth we are experiencing and expect to continue in the months ahead. We believe a successful fall selling and retention campaign will build upon our recent success and increase the likelihood of double digit growth into 2022. Insperity has a tremendous market opportunity in the years ahead. Demand and recognition of the value of our services has never been higher. The PEO industry has reached a stage of more rapid adoption, and the total addressable market is large. My optimism for the long-term future is rooted in a different dynamic than I've seen in the 35 years building our company and industry. At the core of this optimism is the recognition of the importance of the HR function and the need for consultative HR support to achieve business objectives. I have mentioned throughout the pandemic the increase in the number and average length of time of interactions with our client owners and C-level management. Another element and maybe the most significant change to note is the topics being discussed at this level, including corporate culture, diversity and inclusion, employee communication and emotional support, and talent acquisition and retention. It is apparent that developing and implementing an ongoing people strategy is front and center in the minds of business owners and the C-suite. This reality highlights the value of the PEO option for small and mid-sized firms in general, and even more so, the distinct competitive advantage of Insperity's premium service offering. So we believe it's time to pour gas on the fire and prepare for the growth potential in the years ahead. We are in a great position to ride the wave of the recognized value of a sophisticated HR function on top of a second wave of the growing awareness of the PEO solution on top of a third wave of the value Insperity can deliver with our superior service model. We intend to continue to capitalize on this expanding market opportunity by investing in innovative ways designed to drive awareness and adoption of Insperity's best-of-class offerings. We believe this will allow us to continue to deliver on our mission of helping businesses succeed so communities prosper and provide exceptional returns to our shareholders. At this point, I'd like to pass the call back to Doug.