Insperity, Inc.

Good evening. My name is Catherine and I will be your conference operator today. I would like to welcome everyone to the Inspirity third quarter 2021 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'd like to ask a question during this time, please press star and then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. At this time, I'd like to introduce today's speakers. Joining us are Paul Cervati, Chairman of the Board and Chief Executive Officer, and Douglas Sharpe, 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. Let me begin by outlining our plan for this evening's call. First, I'm going to discuss the details behind our third quarter 2021 financial results. Paul will then comment on the key drivers behind our Q3 results and our plan over the remainder of the year, our return to provide our financial guidance for the fourth quarter, and some high-level thoughts on 2022. 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 filed today, which are available on our website. Now let's discuss our third quarter results. We achieved 89 cents in adjusted earnings per share and $60 million of adjusted EBITDA above the midpoint of our forecasted ranges and driven by the quick rebound to double-digit worksite employee growth from the pandemic lows experienced in the prior year. As for our growth metric, the average number of paid worksite employees increased by 11% over Q3 of 2020, above the high end of our forecasted range of 9.5% to 10.5%. This was a sequential increase of 6% over Q2 of 2021. The accelerated worksite employee growth was driven by net gains from hiring in our client base exceeding our targets, worksite employees paid from new sales and third-quarter client retention of 99%. In a few minutes, Paul will provide an update on our recent sales activity, including some early insight into our fall campaign sales efforts. Now, along with worksite employee growth, our revenue per worksite employee, which reflected a 4% increase in pricing and a non-recurrence of the 2020 FICA deferral, also exceeded our expectations. In addition to the strong pricing, our workers' compensation program and payroll tax areas produce favorable Q3 results. Our benefits program continues to reflect the dynamics associated with the pandemic. This includes the increase in healthcare utilization over the course of this year, including elective care that was previously deferred, COVID-19-related vaccination, testing, and treatment costs, and slower claims payment processing by our carrier associated with these claims. These factors have obviously impacted the gross profit and earnings comparisons when compared to the third quarter of 2020. Q3 cash operating expenses increased 9% over the prior year, slightly below forecasted levels. We continue to invest in our growth plans, including an increase in marketing spend in Q3 as we headed into our fall selling season, and incremental costs related to our Salesforce implementation. 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. Our financial position and liquidity remain solid as we continued investment in our growth while providing strong return to our shareholders. During the quarter, we repurchased 106,000 shares of stock at a cost of $11 million, bringing our year-to-date repurchases up to 544,000 shares at a cost of $50 million. Additionally, over the course of the first three quarters of this year, we have paid out $50 million in cash dividends and invested $24 million in capital expenditures. We ended Q3 with $228 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. I plan to cover three topics to provide insight to investors into the tremendous opportunity ahead for Insperity. First, I'll highlight the drivers of our recent results, which point to strong demand for our services and excellent execution of our strategy. Second, I'll explain how the recent trends and our expectations for Q4 set up potential for growth acceleration in a strong 2022. And last, I'll emphasize the macro picture I believe may drive high levels of adoption of our services for the longer term. Our recent growth acceleration to 11% in paid worksite employees over last year, was caused by our three primary drivers hitting on all cylinders, namely new client sales, client retention, and net gain in employment within our client base. Our clients continue to add worksite employees in this quarter at a strong pace despite the tight labor market. One of the many advantages of being an Insperity client is gaining a competitive advantage in hiring new employees. Insperity provides a combination of big company benefits, and HR support with compensation analysis and the recruiting effort critical in a competitive labor market. Our services appear to be helping our clients attract and retain employees, which adds value to our client companies and contributes to our growth. In addition to the strong net gain in employment in the client base, we saw an 18% improvement in paid worksite employees from sales of new accounts and a 16% improvement in fewer employees lost from client attrition over the same period last year. Now, in our business model, two of the most important metrics driving our growth potential are sales efficiency and client retention. Booked sales of new accounts in the third quarter was excellent, with approximately the same number of business performance advisors as last year, selling 20% more clients and 34% more worksite employees than in the same period in 2020. This level of sales by the same number of BPAs demonstrates a significant increase in sales efficiency over last year. Several factors are contributing to an increase in sales efficiency, including remote selling and technology improvements, more marketing leads, and some success with our fast track program focused on early sales wins for new BPAs. However, the most significant factor in increasing sales efficiency is the maturing of our sales force. This was a significant factor in our decision at the start of the year to hold total BPA count steady for at least the first half of the year. A simple way to understand the impact of the maturity of the BPA team is to look at the number and percentage of trained BPAs with less than 18-month experience, 18 to 36 months experience, and those with greater than 36 months experience. Generally, the group in the middle with 18 to 36 months experience has approximately the average sales efficiency. The mature group, significantly higher than that number, and the new BPAs are significantly lower than the average. Now, we've been growing the number of trained BPAs at an average rate of approximately 13% per year from 2016 through 2020, resulting in an increase in the total trained BPAs by 80%. Over much of that period, the number of BPAs with over three years' experience increased slowly, but the number of new BPAs increased at a rate that kept the average sales efficiency relatively constant, other than the pandemic effect. The growth in the number of BPAs with greater than three years experience has increased dramatically now that we are over five years from the beginning of the ramp up. This significant increase in the number of BPAs with greater than 36 months experience and the corresponding increase in overall sales efficiency creates a new opportunity for us. In the past, we focused on growing at higher rates by continuing to grow the BPA team over 10% each year. However, the increased tenure of our BPAs gives us the opportunity to pursue our targeted double-digit growth in worksite employees without increasing the total number of BPAs at double-digit levels. This is a perfect time for this opportunity when the labor market is tight, and we want to continue to be selective in adding new BPAs to the team. Based upon our recent success in the tight labor market, we're reassessing the ramp-up timing and for total BPA growth for the balance of this year and 2022. Another highlight from the recent quarter was continuing to increase workforce acceleration sales. Year-to-date sales of this offering have more than doubled compared to the same period in 2020. Mid-market sales are also an important part of our story. We started this year refilling the pipeline after a successful Q4 sales period last year, So sales were lower during the first half, but the pipeline's back in line, and we believe momentum is in the right direction for a strong finish this year. Our client retention has been continuing at historically high levels in Q3 and throughout the year, with the only exception being the loss of our largest client ever back in January. The departure of that 6,800 employee client in January is somewhat masking the excellent client retention for this year. Since we have no clients that even have that size, we have no similar event on the horizon. So continuing these underlying improved client retention rates strongly supports our growth expectations. On the service side of the business, we're continuing to see deeper levels of service interaction with clients since the pandemic started. There's a heightened need for HR support on issues from return to work, vaccination policies and practices, diversity and inclusion, the tight labor market, and maintaining and developing the desired corporate culture. The expertise of our highly qualified and dedicated staff is a great competitive advantage that our clients are experiencing. We believe the number of quality, impactful interactions has been a driver of improved client retention. As we look ahead to the fourth quarter and year-end transition, we're in a solid position As a reminder, we have our strongest selling period every year in the fourth quarter due to prospects wanting to make a change at year end. Since the number of new accounts is the highest every year at this time, we have the highest number of client renewals every December through February. So every year we have a fall selling and retention campaign from September through December. This year we're off to a great start, including a kickoff in September, bringing the company together in a unique way. We held local meetings across the country at Topgolf and connected virtually to deliver the message of our plan for this year. Activity in both sales and the renewal side of the campaign are on track. However, the ultimate success is only determined when we see the full results of the campaign after year end. Now, we're in a unique position this year for our starting point in paid worksite employees and the likelihood of significant double-digit growth to start 2022. Our strong selling and retention momentum, combined with year-over-year comparison in January to last year's large client loss, means the growth rate could be exceptional. The early picture for 2022 includes this strong possibility of double-digit growth combined with the expectation of some normalization of pandemic-driven costs, including benefits, unemployment taxes, and some operating expenses. Our business model and normal years of double-digit worksite employee growth include some leverage at the gross profit and operating expense lines, driving adjusted EBITDA up substantially. We would expect this to occur in 2022 as well, however, may be masked somewhat by the pandemic and other one-time gross profit contributions when comparing to the prior couple years. The strength of the underlying growth plan combined with the strong demand for our services provides a clear and compelling macro picture. We believe we're in the early stages of a rapid growth period for our services, driven by a potentially higher adoption rate for PEO services. Several factors, including post-COVID validation of the need for a sophisticated HR function, changes in workplace and employee expectations, and the difficulty these factors have on small and medium-sized businesses are driving prospects our way. We also believe we're well positioned to capitalize on this opportunity with the most comprehensive service in the marketplace, a proven business model, and a highly dedicated team of focused professionals. At this point, I'd like to pass the call back to Doug.