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.

Thanks, Paul. Now I'll provide the details behind our 2022 guidance. Then I'll put this year's outlook in context with our performance over the past few years, given the noise created by the pandemic and how we are positioned for strong growth and profitability in the next five years. As for worksite employee growth, the successful year-end transition coming off our strong selling and renewal season has positioned us for further acceleration of unit growth in Q1 and into the mid-teens for the full year. We are forecasting an 18% to 19% increase in the average number of paid worksite employees in Q1 over the prior year. Remember this comparison is impacted by the loss of a large enterprise client in the prior year's first quarter, which reflected 3% of paid worksite employees. Subsequent to Q1, our growth is expected to be driven by the ongoing improvement in the tenure and production of our business performance advisors during a period of strong demand for our services, continued solid client retention, and net hiring in our client base, although at a slower pace than last year, assuming our clients are impacted by the tight labor market. We are forecasting 14.5% to 16.5% growth for the full year when considering these factors, along with a strong starting point to the year. As for our gross profit area, our outlook remains intact from the high-level thoughts provided in our previous earnings call, with the exception of incorporating the recent developments related to the pandemic and its impact on our benefits area. Similar to the prior year, due to the continued level of uncertainty associated with the pandemic, we will adopt a wider than typical range of expected outcomes in this area in 2022. As for some specifics in the gross profit area, the historically low cost trend in our workers' compensation plan over the past few years is expected to continue into this year, particularly with the recent decrease in the frequency of claims associated with the remote work status of many of our worksite employees. Similar to prior years, we intend to budget conservatively and effectively manage safety and claims during upside in this area over the course of the year. As for the payroll tax area, we expect a contribution to gross profit in 2022 similar to that experienced in the latter half of 2021. Non-recurring items in the prior year, including payroll tax refunds and incremental pseudo surplus prior to mid-year pricing adjustments is expected to result in a $10 per worksite employee per month decline in this area in 2022. As for our benefits area, since there is still a considerable amount of uncertainty around benefit utilization and the level of COVID testing, vaccination, and treatment costs, our approach to budgeting 2022 benefit costs was to apply an overall trend factor on top of 2021's elevated costs. In other words, our budget assumes that 2021 did not include a bubble in costs, but will continue to trend forward this year, either in ongoing COVID costs, increased utilization, or acuity from previously deferred care. We'll leave it to upside if, in hindsight, 2021 turned out to be a bubble. Also, there are several areas of recent improvement in our benefit plan, which we believe should work in our favor over time. First, the demographics of our worksite employees, which include age, gender, number of dependents, and geography have improved with our year-end client mix change. Second, the number of COBRA participants, which generally cost us twice as much as a normal participant, has declined to a historical low level. And third, under our recently renewed contract with UnitedHealthcare, the administrative cost of this plan is expected to decline with our projected growth. We will target benefit pricing allocations slightly above our expected cost trend, and we are also increasing our HR service fees, particularly when considering the expected impact of inflation on our operating costs. And finally, as Paul mentioned, the strong momentum behind our recent sales of our traditional employment offering workforce acceleration is expected to add incremental gross profit. Now, as far as our operating costs, we are focused on the initiatives in our five-year plan, including continued growth in our sales force and service capacity, investment in marketing initiatives, and a step up in investment in our technology. With our expectation of mid-teens works on employee growth, we are expecting overall improved leverage in our operating costs, inclusive of these investments. As for some specific areas of spend, our budgeted corporate personnel costs include a 9% increase in the average number of business performance advisors, along with a 9.5% increase in service personnel. Along with the budget increase in BPAs, we will be implementing a new incentive program for both BPAs and sales management to continue to drive sales efficiency in line with the targets in our five-year plan. Our sales efforts will also be supported by additional marketing investments to extend our brand and drive a higher level of lead flow. We have also evaluated the compensation levels of our corporate staff given the recent labor market dynamics as we target our recruiting and retention goals. And other areas of spend include a step up in internal technology development resources, the continued investment related to our ongoing implementation of Salesforce and data analytics. Now, while there have been recent discussions regarding rising interest rates given the current inflationary environment, we have conservatively budgeted for only a 25 basis point increase. It's very important to note that a rising rate environment is expected to be favorable to our earnings, given our low level of debt and the interest income we earn on our cash and investments, including the funds in our workers' compensation program. On a related note, our workers' compensation costs are generally lower when discounting long-term reserves using higher interest rates. So in conclusion, with the expected acceleration of worksite employee growth into the mid-teens and our outlook for gross profit and operating costs, we are forecasting 2022 adjusted EBITDA in a range of $251 million to $311 million, ranging from relatively flat to a 22% increase over 2021. We are forecasting full-year adjusted EPS in a range of $3.74 to $4.86. Now, taking a longer-term view, over the period from 2017 through our 2022 forecast, we are looking at a five-year compounded annual worksite employee growth rate of 10%. The efforts to achieve this double-digit growth rate through this period include holding worksite employees flat during the 2020 year, which was heavily impacted by the pandemic, recovering to 7% growth in 2021 as economic conditions improved, followed by a strong year-end transition of sales and client renewals, enabling us to project a return to mid-teen growth in 2022. The pandemic's effect on our direct cost programs also impacted our earnings over this period. However, when considering both the impact on healthcare utilization and a significant level of incremental COVID costs, our compounded annual growth rate and benefit costs per covered employee from 2017 through our 2022 forecast is just 3.8%. When combined with our pricing strategy over this period, we believe the current status of our health plan and our long-term strategy of matching price and cost remains intact. And also keep in mind that the other areas of gross profit, including our payroll tax and workers' compensation areas, remain strong through this period, and we have effectively managed our operating costs. Today we posted a presentation to our investor website, which includes a view of our worksite employee in earnings growth over a five-year period, ending with 2022's forecast. This chart demonstrates that despite having a dampening effect from the pandemic over the past five years, our worksite employee growth has recovered and accelerated, and our earnings have remained strong. As the pandemic subsides, we expect our gross profit results to normalize, positioning us to achieve impressive earnings growth targets in our five-year plan. Now, at this time, I'd like to open up the call for questions.

As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key.

Please stand by while we compile the Q&A roster. Your first question comes from the line of Andrew Nicholas with William Blair.

Hi, good afternoon. Thanks for taking my questions. To start just on the COVID costs, could you help us understand what about fourth quarter was different from the last several quarters? Is it just a lag effect from higher costs in previous quarters that's all flooding through in the fourth quarter? I guess, you know, I heard all your commentary around the elevated cost, but I'm trying to better understand what impact this headwind could have on 22 specifically. Is there carryover? How much of that is priced in looking forward? I know that's a multi-part question. I might have a few follow-ups, but maybe we start there.

I think that's a... A good big picture type of question. And the bottom line answer is that, you know, the fourth quarter healthcare claims, especially the COVID-related costs, were significantly higher than expected. As you look back on it, in hindsight, it's driven by the new variants, mostly Delta-driven, you know, treatment costs. And then, of course, booster and ongoing vaccination costs. And then also as the Omicron began a significant amount of testing costs. So all three of those areas were significant. And what we have done to look at that for going forward, like I mentioned my script, even though it looks more like a spike in the fourth quarter, but we just really can't look at that that way as we look at budgeting for this year. So as Doug said, We're not considering it as a bubble in our budgeting process. If it comes out that way, it just turns into upside for us. But we have actually gone ahead and budgeted a claim trend on top of that higher than expected costs we had in the fourth quarter.

So just to make sure I understand, I guess, you know, why wouldn't it be a bubble? I guess I'm wondering, you know, what about... third and fourth quarter of this year would have been different than previous waves? Is it that the outside of COVID specific costs utilization was much lower to offset it? Or what was different this quarter versus throughout 2020?

That's a good question. I mean, if you look at the big picture early in the pandemic, there was a lot of deferred care and cost, and that's why we had, you know, actually the only time in our history actually had the cost go down on the benefit program. But then as we looked at last year at the beginning of the year, we budgeted for a double trend, you know, 6% to 7%. that would be driven by COVID costs, would also be driven by deferred care coming back in and, you know, the potential even for acuity from the deferral of care, et cetera. And, you know, yes, that did come in, you know, through that first half of the year. But what nobody knew at the beginning of last year was two new variants were going to happen And it was not possible for us to be able to predict those even in the, you know, late third quarter or so because it was not possible to tell how the Delta costs were going to run out. So, you know, that's just, you know, pandemic related. You did have some utilization in that fourth quarter as well. You know, we could see utilization of, you know, up from the year prior in the quarter prior. But, you know, this is pandemic related. Like I said in my script, it's the noise of it. And we've decided that for this year's budget, we should trend off of that number. And, you know, if it does turn out to be a bubble because the COVID costs will go down, you know, I think that's probably going to happen. But I also realize you could have other deferred care costs, other acuity related costs. So we're just gonna be conservative to this year. And what's more important is to look at the big picture of the five-year plan we have ahead. Because when you start this year off with the type of growth that we have, 18 to 19% unit growth for the quarter, mid-teens growth for the year, and the type of momentum we have in this effort, this drag you have in the gross profit for the 2022 year, is really just masking this tremendous growth in units and profitability that we'll see in the years ahead.

I think the other piece is on the pricing side of that. As we mentioned in some previous earnings call, at the outset of the pandemic going into 2020, when you had all this abatement of care and we ended up with a slight negative cost trend year over year, which has never happened to us before, we were still pricing in over the long term. you know, at a more of a normal type trend factor. And obviously, you had some doubling up of that in 2021. But as I mentioned in my script, you know, you had a little slight negative in 2020, 9.8%, some double up of the trend in 2021, which you would expect with the deferred care and ongoing COVID costs. But the average was 4.5% and our pricing has risen at a similar rate. So the real objective for us is matching price and cost. We're taking a conservative approach, we believe, by looking at the 2022 forecast on top of the 2021's elevated costs and continuing to price for the long term.

And we think that's an appropriate plan.

Your next question comes from the line of Josh Vogel with Sidoti.

Thank you. Good afternoon, guys. Just thinking about workplace safety, on-site testing, or vaccinations, is there an opportunity there for you to provide these services as an ancillary offering and adding a markup to your pricing?

Well, some of these, you know, when I look at that compared to other things we can do, I don't see that as a tremendous opportunity. I mean, the opportunity that we have ahead of us simply by growing the business at significant rates, you know, is really the best driver, along with our traditional employment services, which is, you know, expected to add to gross profit significantly over this next five years. So we've got a good plan for, you know, adding those revenue sources in things that are more directly related to what we're doing. And, you know, we're hoping to see a waning of vaccination and testing costs, you know, not the cost, but the actual vaccination and testing, which seems to be reducing or the emphasis is starting to slide on that anyway.

No, understood. And hopefully that is how it plays out. So it was nice to see the extension with UnitedHealth. And, you know, you mentioned administrative cost savings, understanding your guidance, you're giving a wider than usual range. But is there any way to quantify under the extension, you know, what, you know, you expect, you know, annual administrative cost savings to be starting this year?

So it actually, the way it works is that we actually have targeted growth levels that we hit and it causes administrative cost reductions. So some of it depends on the timing of hitting those numbers and we've got it set up, you know, for the long term. and can literally deeply cut those costs over that period. But the timing of how much happens when is a little harder to predict. And so we won't be given a direct number on that. But it is part of the fact that this year, it is one of the components where even though we're trending the claim cost at a higher rate, we have offsets to that that have kind of kept our overall benefit costs going up in a range that's easy for us to match the price and cost of the total benefit. So that is one of the factors that is an offset.

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

Thanks. Good evening, Doug and Paul. Hope you're doing well. Thanks for the detail on the call. Yeah, hi. Paul, could you give us a sense, are you going to share the details of your five-year plan from a financial metrics standpoint with the street at any point? And if so, what are kind of the out-year objectives in terms of revenue, EPS, if you could share?

Yeah, no, we've kind of, throughout our history, we have not provided our aspirational objectives for long-term formally to the street. And I think that's the better way because obviously that's a long-term look, but I think what we like to describe to our investors for them to be aware of is that our long-term plan always involves shooting for double-digit unit growth, and then some slight improvement in gross profitability on a per unit basis, and then leverage at the operating side of the business. And that produces... significant adjusted EBITDA growth, 20% to 30% a year type ranges when we're growing double-digit unit growth, a little bit better gross profit, and some operating leverage. What's really exciting about this next five years is that we have a whole other source of operating leverage and growth support in improving sales efficiency. We've spent 35 years using pretty much the same sales efficiency numbers because of the dynamics. And what we see today is with the demand that we're seeing in the marketplace, and how we've been able to mature our sales team, how we're able to drive leads to them through our marketing effort, we see the opportunity now to even go beyond that in this next five-year plan. So instead of 10% to 12% unit, maybe it's more than that. Of course, this coming year, we've given specific guidance in the mid-teens. You know, can we do that for the longer term? That's what we'll be working at around here. But, you know, no, we're not ready to say this is our five-year plan for that level of growth. But that's kind of how our focus is inside. Now, when you grow at faster rates, and if you're able to add the gross profit to workforce acceleration, especially since that's a big part of the plan, you know, that means that you're growing gross profit at a significant rate above your unit growth rate. And then if you've got operating leverage from both the historical service side of the business and now in the sales side as well, you're talking about incredible growth. growth rates and adjusted EBITDA and really, really substantial returns to our shareholders. So we're super excited about that. You know, we just had our annual convention in Houston with over 1,000 people. We broadcasted it out to our entire workforce across the country, all 3,600 employees. And we have our people totally aligned and in tune with the key success factors to drive this level of success over this five-year plan. So we're really, I guess you can tell, we are really fired up about it. And, you know, it's unfortunate that you have this one short-term issue that kind of cropped up in the fourth quarter that takes the light off of that. But, you know, so it causes some dampening effect in this first year, this five-year plan. But boy, we're dead on for an incredible run.

Understandable. Okay, I have one more question. It's a two-part question. The first part of it is you had a 9.8% benefit cost trend in 2021. You said you're You're basically assuming it's not a bubble. Does that mean you're pricing in a 9.8% or thereabouts cost trend this year? If not, maybe you could correct me on that. And then secondly, you referred to workforce acceleration serving as a de-risking factor from the benefits side of the model. How much of an impact and how quickly does that de-risk it over the next couple of years in your view?

Sure, so let's talk about the claim side first. And keep in mind that, I think in Doug's script, there was a list of different things that have actually offset the claim trend so that the total benefit cost is a lower amount of an increase over the prior year. So even though the benefit cost increase is under 5%, I think in the 4.5% range, the actual claim component was significantly higher than that and is trending off of the claim cost that added to the 9.8% trend for last year. But other things that have happened, like the mix of business changes come in, demographic changes in our organization, and lower COBRA costs, also certain customers that left. So there's a lot of components that have offset those costs, including, like we were talking about previously, the new agreement with UnitedHealthcare. So when it's all in, we are building in those continuing claim costs that may or may not occur, but it was offset by some of these other cost reductions that we've earned in other ways. Then on the workforce acceleration front, It's a little early to actually give you some view into that, but what's really exciting is, like you heard in my script, we had over 100%, I think it was 111% increase in workforce acceleration sales this year. And it's so exciting because the sales organization really caught the picture this year and And I can see them really continuing to improve in this year and as the years progress. Part of our five-year plan is to have a full company-wide commitment to that WX strategy. And that, we believe, will be a nice contributor. And the good news, of course, is we don't take any health-related risk on that traditional employment business. So the way to look at it is, you know, if you've got a gross profit per employee number, you know, which we've had in the 260 to 270 range, that kind of area, you know, you'll have a bigger part of it as it goes up in the future. A bigger part of that will not be benefits related. So it will not be the surplus on those direct costs, which is one of the three components to that gross profit number. So we're excited about that, and it does have the potential to reduce the risk.

It's a little hard to give you the numbers today on how and when that happens.

Our next question comes from the line of Mark Marcon with Baird.

Good afternoon, Paul and Doug. I don't want to dig too much into the healthcare area because you've answered a number of questions, but I do have just a couple of clarifying questions just to make sure I fully appreciate what you're saying. So the first part is basically of the 27 million that you cited in the press release, how much of that was, you know, unusual COVID related costs versus, you know, some of the elective deferred, you know, procedures, you know, finally coming back and then what are you building in specifically for healthcare costs for, for 2022? What's the level of visibility that you have there and how is the pricing, you know, changing for, for your clients, for the clients that are basically signing up, you know, outside of the typical cycle?

Yeah. So first of all, You know, it's hard to, we can tell you that the biggest driver, the primary driver to that cost that was put into the press release was certainly the COVID-related cost. It's a little bit hard to pin down because, you know, the reporting on these types of claims are still, you know, they have issues with how they're processed and what, you know, there's a Every period, there are claims that if they're listed as COVID, they have to go through another process to determine how much of that claim is COVID related. It's really a complicated process. So that's part of what's made the unpredictability, not having enough information after the third quarter on those specifics and more what I call pended claims yet to be processed. So it's been harder to estimate what that incurred but not reported number is. And in the fourth quarter, you know, a lot of that information did come back in. I think we've got a deeper and I think a better understanding of it, and we were able to factor that into the going forward. And on the second part of your question about the pricing with customers, this is, you know, again, the very good – long-term view that we've had about this we have continued to move pricing up at a more normalized rate in spite of the variability going on in the in the pandemic related issues and so even for this year we're talking about you know an extra one or two percent on the pricing of the business and And of course, we're in an environment where you have wage inflation going up. And when wage inflation goes up, since our fees many times are represented as a percent of payroll, it's even easier for us to pass on any increases. And in this case, this is not any different than what we've been doing the last couple of years and doing it very consistently. And, you know, you can see how our retention rates have been highest in our history. And so we don't have any issue with continuing that same pricing strategy.

And your next question comes from the line of Toby Summer with Truist.

Thank you.

Can you give me a sense, if you could, for what the exit coming out of here means for your pricing trajectory over the next couple years? Because we've had now three years of varying healthcare benefit performance where clearly you can demonstrate to your customer that you're providing value there. What does that How does that inform what you think about your pricing over the next two, three years?

Yeah, so, you know, the issue of how we price just on the allocations for the direct costs we cover, you know, those are – We kind of look at each of those as buckets, workers' compensation, payroll taxes, benefit costs, and all of that pricing, we continue to move based on that whole concept of matching or aligning price and cost. And we feel very comfortable, even with this crazy volatility of the pandemic the last year or two, that we've kept things on the right track for the long haul. Now, we're also looking, though, at increasing pricing on our service fees, and that's just simply in line with the inflation picture that we have in the marketplace at large. And so we'll continue to move pricing up. We've got some of that budgeted into this year. Keep in mind, you know, we renew customers every month, so those increases in price roll in over a period of time. But no, we feel like we're in great shape. The value received from our clients through this period is extremely high. And so we're comfortable that Being able to appropriately add pricing to deal with inflation is also necessary and very doable. Like I said a few minutes ago, just keep in mind that there's even a little bit of help in passing on price increases because the dollars that we put in are a percent of payroll, so it's an overhead item, a burden item, if you will. And as wage inflation has gone up, you know, it actually makes those dollars a, you know, a lower percentage. So, you know, we're in great shape on the pricing front.

Thank you.

There are no further questions at this time. I'll turn the call back over to Mr. Servati for closing remarks.

All right, well, once again, we'd just like to thank everyone for being on the call today and look forward to further dialogue and discussion and excited about the growth momentum we have in the company and especially the five-year plan ahead of us. Thank you once again for participating today.

This concludes today's conference call. Thank you for participating. You may now disconnect.

Goodbye.