Insperity, Inc.

Good morning, my name is Jay and I'll be your conference operator today. I would like to welcome everyone to Inspirity's first quarter 2022 earnings conference call. At this time, 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. At this time, I would like to turn the call over to Douglas Sharpe, Mr. Sharp, please go ahead.

Thank you. We appreciate you joining us. Let me begin by outlining our plan for this morning's call. First, I'm going to discuss the details behind our first quarter 2022 financial results. Paul will then comment on the key drivers behind our Q1 results and our plan over the remainder of the year. Our return to provide our financial guidance for the second 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 filed today, which are available on our website. Now let's discuss our strong first quarter results in which we exceeded both our worksite employee growth and earnings expectations. We achieved adjusted EBITDA of $119 million, a 14% increase over Q1 of 2021, and adjusted earnings per share of $1.99. These results reflect growth in the average number of paid worksite employees above the high end of our forecasted range, pricing above targeted levels, effective management of our direct cost programs, and operating leverage. As for our growth metric, the average number of paid worksite employees increased by 19.5% over Q1 of 2021. As most of you are aware, the year-end transition from 2021 to 2022 in which we enroll new clients from our fall sales campaign and renew approximately 45% of our existing clients was important to our 2022 starting point and therefore our full-year growth expectations. We are pleased to report a very strong year-end transition as demonstrated by a 3.6% sequential increase and the average number of paid worksite employees from Q4 of last year to Q1 of this year. As for the drivers of this growth, worksite employees paid from new client sales increased 37% over the first quarter of 2021. First quarter client attrition was near our historical low, totaling only 8.5%, and an improvement over Q1 of 2021's attrition of 12%. and our clients continue to experience robust hiring in spite of the current tight labor market. First quarter gross profit was managed above forecast on the outperformance in the worksite employee growth, pricing above targeted levels, and a favorable contribution from our direct cost areas. As for our payroll tax area, while unemployment levels have fluctuated over the course of the pandemic, Our state unemployment tax rates have remained below anticipated levels, resulting in a favorable contribution to gross profit. Our workers' compensation program continues to perform well as a result of our ongoing management of safety practices and claims. Workers' compensation costs also include the favorable impact from the reduction in the number of claims due to the work-from-home status of many of our clients' employees. Q1 benefit costs came in at expected levels, while benefit pricing allocations exceeded our targets. We continue to take what we believe is a conservative approach in estimating our benefit cost trend at budgeted levels for the full year in what appears to be an improving, although still uncertain, environment. Now, as for the gross profit comparison to Q1 of 2021, in which we achieved 14% growth, keep in mind that this is affected by the additional payroll tax surplus in the first quarter of 2021, including the receipt of prior period payroll tax refunds and the quarterly fluctuations in healthcare costs related to the pandemic last year. Now as for our operating expenses, our Q1 spend reflects the initiatives in our five-year plan discussed in our previous earnings call. This spend includes investments in our service capacity relative to our worksite employee growth, national marketing initiatives, and technology, including the ongoing implementation of Salesforce. We implemented a new quarterly incentive program for our BPAs during the quarter, to drive further improvements in sales efficiency. We also made targeted adjustments to the compensation levels of our corporate staff, given the current labor market dynamics and our ongoing management of recruiting and retention goals. And while making these investments, the overall leverage in our cost structure resulted in a 7% decline in operating expense per worksite employee from Q1 of 2021. Now 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 308,000 shares of stock at a cost of $27 million and paid out $17 million in cash dividends. We ended Q1 with $153 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. My comments today will address three key areas for Insperity stakeholders. First, I'll provide specifics regarding the momentum drivers behind our strong Q1 results. Second, I'll comment on how this momentum and our key initiatives provide confidence in raising our guidance for the balance of 2022. And I'll finish by providing some color around the extraordinary shareholder return opportunity of our recently launched five-year plan. Our strong Q1 performance was the result of continuing momentum in all our growth drivers, namely new client sales, retention, and client hiring. Our dramatic 37% increase in worksite employees paid from our successful conversion of booked sales from our fall campaign into new clients and near historical high retention from our successful campaign combined with continued strong hiring in our client base to drive nearly 20% unit growth. New book sales in the first quarter continued this strong momentum with both core and mid-market sales coming in over 120% of sales budget. Booked sales came in 28% higher than the comparable period last year, with 3% fewer business performance advisors, demonstrating significant increase in sales efficiency over 30%. In the first quarter, BPA's tier levels were determined based upon final 2021 sales levels. Sales management was successful last year in increasing the number of BPAs at Tier 3 or above by 18%. This movement in our most experienced and productive BPAs was a significant contributor to the sales efficiency gain. This strong sales momentum also flowed over into book sales of our traditional employment solution workforce acceleration, coming in at 126% of sales budget and 140% increase over the comparable period last year. The traction we've gained in this initiative is evident, increasing the revenues on this service 39% over the same period one year ago. Several key initiatives are behind these strong sales results, including recent marketing success, capitalizing on increased demand in the marketplace for our sophisticated HR solutions. Booked worksite employees sold for marketing programs were up 29% over Q1 of 2021. Inbound leads converted into book sales increased 34%, and worksite employees' books from these inbound leads more than doubled. Sales efficiency for marketing-assisted deals booked in the quarter increased 36%, contributing to the overall sales efficiency improvement. Another key driver of these impressive sales results is the recent implementation of a new quarterly bonus component of BPA compensation. BPAs now have quarterly targets based upon their respective tier levels and earn a bonus for achieving and exceeding these targets. This first quarter showed immediate signs of validation of this approach in generating excitement, extra effort, and strong results. Another highlight of the quarter was the excellent client satisfaction and retention from the fall campaign that continued throughout the quarter. Our service team and all those that support them across the country have done an outstanding job serving clients and meeting their needs in the face of this considerable growth. Client net hiring was also impressive in Q1 despite the tight labor market. Our clients are continuing to do well in the battle to recruit and retain employees with the support of our services. Demand for employees continues to be high driving wage increases within our client base over 7% and overtime was above 11% of base pay. Commissions and bonuses paid to employees at client locations also provide some insight to the sales success in the small to medium-sized business community and efforts to compensate to retain staff. Both measures were significantly higher in the first quarter than we have seen historically. At the same time, business owner confidence has been weakening somewhat with inflation concerns moving to the top of the owner significant issues list in the recent NFIB survey. At this point, the real-time metrics we have as the HR department for over 11,000 businesses across the country do not reflect a slowdown in hiring. So for now, it appears to be more of a general concern small business owners have about the future. Another welcome highlight from this quarter was the contribution from gross profit drivers, including slightly higher surpluses than forecasted due to effective management of price allocations and cost. The noise we've experienced in the healthcare plan during the pandemic appears to have waned somewhat, and we believe our conservatism in pricing allocations and cost estimation is appropriate. As Doug mentioned, we also saw significant operating leverage in the quarter, which is also an important factor in our business model. So all in, the first quarter was an excellent start to 2022. Now, as we look ahead to the balance of the year, our confidence in raising guidance is due to our expectation of many of these recent positive trends to continue. We expect our growth to be fueled by our higher starting point in paid worksite employees, BPA performance at their current tiers, and continued strong retention. We're cautious about client hiring continuing at recent levels due to the tightness of the labor market and business owner concern about inflation and economy. We still expect some client hiring, but we believe it's prudent to build in a lower rate going forward. Our confidence in our race profitability expectations is based upon the combination of this higher growth and our gross profit contribution and operating leverage trends. This profitability is consistent with how our model has performed in historical periods of high worksite employee growth. We also have key initiatives that support these expectations, including a clear focus on sales efficiency, effective pricing, and growing our service organization. This quarter, we're implementing some new incentives to our sales management compensation, which we believe will continue the sales efficiency improvements and new business pricing priorities. In addition, the marketing and business development team applied the learnings from the successful fall marketing campaign in 10 markets to enrich the spring program further, expanding into all Insperity markets. We recently launched a fully integrated marketing program in all 41 markets in an effort to continue this momentum. We are also going live this quarter on our Salesforce implementation across our growth organization, which we believe will improve our efficiency going forward. We expect to implement the implementation across the rest of the company early next year. Another important initiative we have over the balance of this year is an aggressive corporate recruiting plan to add both service and sales staff. We've also felt the effects of the tight labor market and have made enhancements that we believe will allow us to achieve staffing targets to support our growth and client retention priorities. So it's apparent we're off to an excellent start for our first quarter of our five-year plan and our guidance implies a strong first year in 2022. Also, our key initiatives are laying the groundwork to capitalize on the growth and profitability outlook we see ahead. This new five-year plan has extraordinary potential beyond what we have seen in previous successful five-year runs. For example, from 2014 to 2019, Our compound annual growth rate in paid worksite employees was over 12%, and in adjusted EBITDA was over 24%. Our total return to shareholders was even more remarkable at 434% over that period. Quarterly dividends increased an average of 27% each year, and the share price increased more than five-fold. This was not surprising over that period because our business model is designed to produce double-digit unit growth slightly higher gross profit growth and some operating leverage, producing adjusted EBITDA growth north of 20%. Historically, this double-digit growth has been fueled by increasing the number of BPAs at a double-digit pace. For example, in the period I just described, the compound annual growth rate for BPA growth was 12%. The five-year plan we just launched has three significant distinctions that I believe can drive adjusted EBITDA growth rates even higher. The first distinction is the marketplace demand I've described over the last several quarters. The impact of the pandemic and all the after effects drove home the importance and the direct connection between a sophisticated HR function and business survival and success. We have seen this reaction in our clients, prospects, and those who invest in small to medium-sized businesses. This increase in demand and receptivity is the initial reason we thoroughly developed and implemented this plan. I believe it is a significant industry-specific wave we can capitalize on over the next five years. The other two distinct differences are within our business model. First, the traction we have with our traditional employment solution, workforce acceleration, has the potential to add to gross profit in a way we have not seen before. Small increases in gross profit per worksite employee in our model drive significant increases in adjusted EBITDA. This source of gross profit also is not healthcare cost-dependent, and if it were to grow significantly, could help to mitigate our overall volatility. Workforce acceleration has the potential to improve our sales efficiency, lower BPA turnover, and enhance our customer-for-life strategy for long-term client retention. The second distinctive difference in our business model for this five-year plan is the sales efficiency gain we have begun to see and will strive to further improve. This creates the potential for us to grow faster with a BPA growth rate below the unit growth rate, which would add operating leverage we have not seen before. So I see the potential, if we are successful on this five-year plan, to grow faster, add to gross profit per worksite employee, and have more operating leverage than our last run. This could mean significantly higher adjusted EBITDA growth, which we believe could create extraordinary returns to shareholders. Insperity is laser-focused across the company on the 10 critical success factors expected to drive home the goals of this new five-year plan. We are off to a great start and hopeful for a bright future for all Insperity stakeholders. At this point, I'd like to pass the call back to Doug.