Insperity, Inc.

Good afternoon. My name is Erica, and I will be your conference operator today. I would like to welcome everyone to the Insperity Fourth Quarter 2021 Earnings Conference Call. At this time, all participants 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 star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. At this time, I would 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 would 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 of our fourth quarter and full year 2021 financial results. Paul will then recap the year and discuss the major initiatives of our new five-year plan. I will return to provide our financial guidance for 2022 and how it fits into the context of our long-term view. We will then end the call with a question and answer session. Now, before we begin, I would like to remind you that Mr. Sorvati 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 begin by discussing our fourth quarter results, beginning with our solid growth. We ended the year on a strong note, with a 12.4% increase in the fourth quarter average number of paid works at employees. The continued acceleration of our unit growth above the high end of our forecast was driven by strong net hiring in our client base, improved sales efficiency of our business performance advisors, and high client retention. Ending 2020-21 above our growth expectations combined with a new sales book during our fall sales campaign above budgeted levels And continued high client retention levels positions us for further growth acceleration and paid worksite employees into Q1 of 2022. And Paul and I will comment further on our 2022 growth expectations later in the call. Now, in addition to the worksite employee growth, our pricing was up 5%, and gross profit contribution remained strong from our payroll tax and workers' compensation areas. Operating costs were also effectively managed near forecasted levels. Unfortunately, while we experienced favorable results in our growth and other areas of the business, our earnings for the quarter were negatively impacted by higher than expected healthcare claim costs. A significant step up in COVID treatment, vaccination, and testing costs associated with the Delta variant and the early stages of the Omicron variant drove an increase from 4% of total claims in each of the prior three quarters to 7% in Q4. The unprecedented and difficult environment associated with the pandemic over the last couple of years has an impact on both our costs and the predictability of our health plan given the variability in utilization and claim payment patterns. For the first time ever, we experienced a negative benefit cost trend in 2020, largely due to the abatement of care at the onset of the pandemic. We entered 2021 estimating a 6% to 7% cost trend, knowing that our costs would be impacted by an increase in utilization, including care deferred in the prior year, some acuity related to this deferred care, and ongoing COVID costs. When considering increased utilization along with the impact of higher COVID-related costs due to two new variants and booster vaccinations, we experienced a 2021 cost trend of 9.8%. Given the volatility over the two-year period, we remain focused on the long term. And when we look at our benefit costs over the two years, we have experienced an annual cost trend of just 4.5%, and our pricing has risen at a similar rate. Now, turning to operating expenses, we continue to manage costs in the current operating environment while also investing in our long-term growth plan. Before operating expenses, excluding stock-based compensation and depreciation and amortization, increased 8% on higher headcount and sales commission costs tied to our recent growth. We increased our marketing spend to take advantage of the improved market opportunity associated with our offering. We also incurred higher travel costs related to this additional face-to-face sales and service efforts when compared to Q4 of the prior year when activity was more restricted by the pandemic. So for the fourth quarter, we drove worksite employee growth above the high end of our forecast and effectively managed our payroll tax, workers' compensation programs, and operating costs. However, higher-than-expected health care costs resulted in earnings below forecast with adjusted EPS of 34 cents and adjusted EBITDA of $30 million. Now, in spite of the fourth quarter earnings shortfall, we reported full year 2021 adjusted EBITDA of $255 million and adjusted EPS of $3.95. The acceleration of paid worksite employee growth over the course of the year resulted in a 7% increase over 2020. Worksite employees paid from new sales increased by 9%, largely driven by the improved sales efficiency of our business performance advisors. Client retention remained high, averaging 82%, which includes the 3% impact of the loss of the large enterprise account at the beginning of the year. A third driver to our growth included robust hiring by our clients as they rebounded from the pandemic and were successful in attracting candidates in a tight labor market. As expected, gross profit per worksite employee per month, our key pricing and direct cost metric declined from 2020, primarily due to the unusually low healthcare utilization in that year. However, in 2021, this metric averaged $273, slightly exceeding our budget as favorable results in our pricing and payroll tax and workers' compensation areas, more than offset higher benefit costs. And operating expenses increased by just 6% on the 7% worksite employee growth. We continue to produce strong cash flow and ended the year with a solid balance sheet while investing in the business and providing strong return to our shareholders. We invested $33 billion in capital expenditures during the year and returned $214 million to shareholders through our dividend and share repurchase programs. We repurchased a total of 716,000 shares at a cost of $70 million. We also paid out $144 million in cash dividends, which included the 12.5% increase in our regular dividend rate in May of 2021 and a $2 per share special dividend in December. We ended the year with $163 million of adjusted cash and $130 million available under our $500 million credit facility. 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 provide comments on three topics. First, I'll offer my perspective on our fourth quarter performance, which includes an unusual combination of strong momentum toward long-term growth and pandemic-related short-term noise. Second, I'll provide some context for these results with the discussion of our new five-year plan we recently launched to capitalize on the tremendous opportunity we see ahead. I'll finish by providing a view into the dramatic growth acceleration we have going into 2022 and our key initiatives for the new year. This fourth quarter included exceptional execution in everything we control across the company, finishing off a strong year in the midst of the continuing pandemic. Earlier in the year, we were hopeful the pandemic and the uncertainty it brought were waning and a new normal would soon set in. Instead, new variants emerged and federal and state government reactions in the form of policies and guidance led to more complexity, confusion, and compliance challenges for clients and worksite employees. Clients responded with a deeper engagement level with us and request for more help with more issues. Service personnel across our organization did an outstanding job supporting clients and worksite employees through these challenges as service interactions continued at nearly three times pre-COVID levels. One of the significant drivers of confusion and complexity was the federal and state vaccination regulations and mandates. Requirements to gather information from all employees and monitor vaccination testing and masking created an immediate client need for remote technology solution and for support creating and implementing new policies. These conservative interactions were at the top of our client organizations with business owners and C-suite level individuals on many sophisticated HR issues, including employee well-being, culture, talent management, and diversity and inclusion. We also played a key role in supporting client efforts to retain staff and recruit new employees in a very tight labor market. This level of communication, interaction, and excellent service execution resulted in exceptional Q4 and year-end client retention. The bottom line is the importance of HR services in meeting business objectives was crystal clear and our employees delivered. Now, the one area of disappointment in the quarter was higher than expected healthcare utilization driven by the pandemic and the new variants effect on treatment, vaccination, and testing costs. As Doug mentioned, COVID-related costs was stable at 4% of total claims in the prior three quarters and spiked to 7% in Q4. Now, fortunately, our long-term view and emphasis on aligning price and cost has kept us moving healthcare allocations up throughout the past two years. We're also in a position for continuing our pricing policy going forward to keep pace with the latest trends. Whether the pandemic-driven cost trend continues or softens, we believe this still represents short-term noise at the gross profit level. Now, the need for sophisticated HR services that we saw in the client base was also evident in driving demand for Insperity services among prospective clients, adding fuel to our sales effort. This resulted in substantially exceeding our fall campaign sales objectives and achieving a historical record level of booked sales. New sales booked in this year's fall campaign were up 39% over last year's campaign in worksite employees sold. This was accomplished by approximately the same number of business performance advisors, reflecting the strong demand for our services and a dramatic improvement in sales efficiency. Now, as a reminder, the sales budget for booked sales is the internal metric we use to monitor and track performance of our sales organization. Booked sales refers to clients who signed an agreement with us, and sales booked in a given quarter generally become paid worksite employees in the next quarter as new clients and their worksite employees are enrolled, paid, and then at that time flow into revenues. Now, sales efficiency improvement during this period was driven by the combination of refinement of remote selling, movement of business performance advisors into higher performance tiers, and increased marketing investments. Our marketing and business development team executed very well in Q4, expanding our market penetration in all Insperity markets. As a result, Brooks sales in Q4 for market and leads were up 27% over last year and accounted for approximately one-third of the sales efficiency improvement. The other two-thirds of the Q4 improvement was the result of continuing maturation of our sales organization and their execution of remote selling. Two key sales metrics demonstrate this momentum. Proposal opportunities from discovery calls were up 17%, and the proposal closing rate was up 14%. Mid-market sales and service execution was also exceptional in Q4, as sales came in at 117% of budget and client retention was 99%. These results with our larger, more complex accounts were outstanding for both sales and services. Now, we also saw significant traction in sales of our traditional employment workforce acceleration offering. For the full year, workforce optimization and workforce acceleration book sales increased 24% and 111%, respectively, over 2020. We believe these results reflect significant sales momentum and important long-term sales efficiency potential for both our PEO and traditional employment business. Now, one other important highlight from Q4 was the renewal of our UnitedHealthcare Group policy through 2026. This renewal recognizes our significant growth opportunity and provides service-level improvements for our clients and worksite employees, combined with volume-driven administrative cost reductions. This renewal secures an important component of our service and creates the opportunity to control cost for clients and contribute to profitability for Insperity over the next five years. Now one other very important activity that occurred over the last half of last year was the completion and adoption of a new five-year plan for Insperity. Now we've adopted and worked toward five-year plans for most of the history of our company. Over the years, we have completed some five-year plans in as few as three years, and in contrast, had some plans interrupted by economic downturns. This was the case when the COVID pandemic struck and the previous plan was set aside. Now, our experience from the pandemic drove a sense of urgency to create a new five-year plan for two reasons. First is the dramatic validation of the value of a sophisticated HR function in driving the success of any company. And secondly, was the need to address the emotional fatigue from the pandemic, lift people's heads, and look to the future with optimism. Now, in the last couple calls, I've mentioned the possibility of higher adoption rates for our services coming out of the pandemic, and the recent results seem to affirm the significant opportunity ahead. We've completed a detailed five-year plan to capitalize on the potential higher adoption rates and make refinements to optimize our business model. We've identified the key success factors and communicated them throughout the organization at our recent convention in Houston, which was broadcasted across the country. The optimization of the business model in this five-year plan relates to the capability to grow the worksite employees at a faster rate than the growth of BPAs. Throughout our history, the growth rate of BPAs drove the growth rate of worksite employees. The opportunity to increase sales efficiency adds a new level of leverage to the business model. Another element of optimization of the business model is a company-wide focus on workforce acceleration. Several potential positive effects to our model, including converting more prospects to clients, contributing to gross profit, reducing BPA turnover, and reducing healthcare claim risk, make this initiative like a silver bullet if we are successful. So with record level of sales and retention in Q4, we are poised for impressive growth as we move into the first year of this five-year plan, 2022. Our Q1 guidance indicates an expected strong year-over-year growth rate of 18% to 19% in worksite employees and a full-year expectation of mid-teens. We have some conservatism built in through the quarters due to a possible lower net gain in hiring in our client base than last year due to the tight labor market and leaving some level of sales efficiency gain to the upside. We also have several key initiatives underway for 2022 that will continue to drive growth and profitability going forward. These initiatives are directed toward continuing to increase sales efficiency, deliver premium service levels, and develop highly competitive HR technology. In 2021, we completed a deep dive evaluating our sales compensation and reward programs for BPAs and sales management. We've modified these programs to reward consistent effort moving through performance tiers and the achievement of targeted levels of volume and pricing. Another important initiative in sales is capitalizing on the recent development of our personalized, self-paced BPA training program. The pandemic-driven remote work paradigm shift has resulted in tremendous opportunity to develop new PBAs faster and increase the likelihood of their success. Another key initiative we focused on is continuing to recruit, train, and retain professionals in our strong corporate culture to ensure the high level of service we've delivered throughout the pandemic continues. This is very important, especially with the tight labor market overall and specifically in the HR space. We also expect to go live with Salesforce and the growth organization in the first half of this year and continue to work toward a rollout across the rest of the organization in early 2023. This important initiative will position the company to capitalize on enhanced data analytics capabilities. We are also increasing our investment in technology development teams this year to continue to deliver platform and application enhancements and improve efficiency of our service delivery to our clients. So our plan for 2022 is an excellent start and the growth acceleration is evident. The recent pandemic related cost trend we have built into this year's plan has dampened EBITDA and EPS expectations somewhat but is effectively masking the dramatic earnings growth potential we see straight ahead. We believe we're in an excellent position to capitalize on our enhanced market opportunity, an amazing five-year run, and strong growth and profitability is possible. We're excited about helping many more small and medium-sized businesses succeed and the lift that will provide in the communities we serve. We're also very pleased with the tremendous value to shareholders we have the opportunity to create as we execute our five-year plan. At this point, I'd like to pass the call back to Doug.