Insperity, Inc.

Good afternoon. My name is Matthew, and I'll be your conference operator today. I would like to welcome everyone to the Insperity Second Quarter 2022 Earnings Conference Call. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation. 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 Sharp, 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 second quarter 2022 financial results. Paul will then comment on the key drivers behind our Q2 results and our outlook over the remainder of the year. I will return to provide our financial guidance for the third quarter and an update to the full year guidance. We will then end the call with a question and answer session. Now, before we begin, I would like to remind you that Mr. Sarvati 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 more detailed discussion of the risks and uncertainties that could cause actual results to differ materially from any forward-looking statements and reconciliations of non-GAAP financial measures, please see the company's public filings, including the Form 8K filed today, which are available on our website. Now let's discuss our strong second quarter results in which we achieved a 25% increase in adjusted EBITDA, and a 27% increase in adjusted EPS on 19% growth in the average number of paid worksite employees. Q2 paid worksite employee growth of 19.4% was above the high end of our forecasted range. It was a 4.3% sequential increase over Q1 of this year. Our growth momentum was driven by high client retention, averaging 99% for the quarter, continued strong hiring by our clients despite the tight labor market, and worksite employees paid from new client sales above our Q2 forecast. Second quarter gross profit significantly exceeded our forecast on the outperformance in worksite employee growth, and favorable contributions from each of our direct cost areas. As for our benefits area, you may recall that we intended to take a conservative approach in budgeting our 2022 healthcare cost trend as we entered the year with an uncertain environment surrounding the pandemic. First quarter's cost trend came in near budgeted levels. As for Q2, a combination of both lower-than-expected COVID-related costs and healthcare utilization held costs below forecasted levels. And when combined with the execution of our pricing strategy, the contribution to gross profit was above our expectations. Our workers' compensation program also continued to perform well as a result of our ongoing management of safety practices and claims and a slightly higher discount rate on longer-term reserves given the rising interest rate environment. We also experienced a favorable contribution from our payroll tax area compared to our expectations. Estate unemployment tax rates remain below anticipated levels. Now as for our operating expenses, our second quarter spend reflects planned investments in our growth, including national market initiatives, our service capacity relative to our high worksite employee growth, and technology, including the ongoing implementation of Salesforce. During the quarter, 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 lastly, we experienced an increase in travel costs associated with client and prospect meetings, corporate events and training compared to the low expenditures during the pandemic-related slowdown in the prior year. While making these investments, the overall leverage in our cost structure resulted in a $5 decline in operating expense per worksite employee per month from Q2 of 2021. Our financial position and liquidity remain strong as we continue to invest in our growth while providing returns to our shareholders. During the quarter, we repurchased 308,000 shares of stock at a cost of $29 million and increased the regular dividend rate by 16%, paying out $20 million in cash dividends. We ended Q2 with $167 million of adjusted cash and $369 million of debt under our recently amended credit facility. During the quarter, our credit facility was renewed for five years and borrowing capacity increased from $500 million to $650 million. 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'll comment on three topics of interest for Insperity stakeholders. First, I'll address our continuing impressive growth performance and other highlights of our strong second quarter results. Next, I'll discuss key initiatives over the back half of this year driving our raised guidance and setting up 2023. I'll finish by providing some color around our recently launched five-year plan and our outlook, considering some economic uncertainty in the air. Our second quarter results included continuing momentum in all three of our growth drivers, including new account sales, client retention, and hiring within the client base. Excellent effort from our sales and service teams and continued client hiring success in the tight labor market resulted in nearly 20% growth in paid worksite employees for the second quarter in a row. New booked workforce optimization sales continued strong momentum in the second quarter with a 19% increase over the same period last year. Sales efficiency increased 23% as these sales results were achieved by 3% fewer trained BPAs. Both core and mid-market teams exceeded our internal book sales budget in the second quarter. Mid-market is beginning to achieve greater consistency, and their relationships with core sales for lead development also created a strong pipeline going into the second half of the year. This significant level of sales effectiveness is also carrying over into our newer workforce acceleration business, which has tremendous potential as somewhat of a silver bullet over the next several years. 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. And most importantly, this business adds to gross profit without any benefits-related risk we take in the co-employment workforce optimization model. We are beginning to achieve considerable traction in our workforce acceleration business, with an increase of 41% using this traditional employment solution over the same period one year ago. Booked workforce acceleration sales were also strong this quarter, up over 23% from the same period last year. So the sales efficiency gain we have seen applies to both co-employment and traditional employment services. For the second quarter, closing rates for both workforce optimization and workforce acceleration of business profiles or opportunities to bid improved by over 20% and 30% respectively over the same period last year. Another highlight of the quarter was continuing client retention levels above 99%. The client service teams and others across the company that support those teams have done an excellent job handling this high growth period. These teams also support our client hiring efforts, which were also quite impressive during the second quarter. As we entered Q2, we forecasted conservatively on this growth driver due to the tight labor market and the beginning of some business owner concern over interest rate increases. However, the client base continued hiring throughout the second quarter at rates consistent with the first quarter. Now, we also monitor other metrics as the HR department for small and mid-sized company client base we have, including pay increases, overtime, and commissions. Base compensation is up approximately 6% over the same period a year ago on the same employees. Overtime is up 10% of regular pay, and commissions paid to the sales staff of our clients are up 16% over last year, validating solid sales at client companies. The commission's metric gives us some insight into the pipeline of new business within the client base. We're seeing a strong commission increase even considering inflation, which is a contributing factor. So at this point, we've not identified anything in our client metrics pointing to an imminent slowdown. Another significant contributor to a very strong quarter was our pricing and direct cost results exceeding our gross profit per worksite employee forecast. This is good news against the backdrop of uncertainty and variables related to the pandemic that impact some of these factors. We also managed operating expenses well during the quarter, despite a significant increase in travel and event expenses as business activity in these areas have increased from pandemic lows. We continue to make strategic investments in technology, marketing, and compensation to support the strong growth we've experienced and the opportunities we see straight ahead. Another highlight of the quarter was achieving a higher level of success in internal hiring to grow our service teams and begin ramping up our BPA staff. We completed a realignment of our recruiting organization and increased resources focused on achieving our internal staffing objectives and already have had some early success. So after a strong second quarter, we entered the second half of the year with strong momentum, achieving significant milestones in July of 300,000 worksite employees and an additional 50,000 client employees served on our workforce acceleration platform. Now, as we look ahead to the balance of the year, the first key initiative is continuing the hiring and training of internal staff to match our recent growth and capitalize on our opportunity going forward. Ramping up to 700 BPAs by year end is also a critical element of the plan. We're on track to reach a 6% to 7% increase in total hired BPAs over the balance of the year. The next most significant factor for the second half of this year is to continue to drive enough sales activity to ensure we hit sales numbers and achieve a strong starting point for 2023. Based upon the successful marketing efforts earlier this year, we intend to invest several million additional dollars in advertising and business promotion to drive targeted activity levels. We're also in the middle of a very important infrastructure improvement with our Salesforce implementation. The sales and marketing organization moved on to Salesforce in Q2, and it's ramping up utilization at an appropriate pace. We're also working throughout the balance of the year and early into next year to convert the service organization and the rest of the company onto Salesforce. This will be a critical element to continue to improve both sales and service efficiency and effectiveness. Our updated guidance released today reflects a very strong outlook For year one of our recently adopted five-year plan in both growth and profitability, the midpoint of our ranges implies worksite employee growth at 18% and adjusted EBITDA growth of approximately 25%. This includes some conservatism due to the current economic uncertainty. Last quarter, I discussed the potential for our new five-year plan to exceed the last five-year run that occurred from 2014 to 2019. Our compound annual growth rate in paid worksite employees over that period was 12.5%, and 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. Of course, a five-year compound annual growth rate will always have higher and lower rates for individual years. This year's guidance implies an annual worksite employee growth rate and adjusted EBITDA rate above our last five-year run in the current year of our new plan, and that's a good start. We believe the new plan implemented at the beginning of this year has the potential to achieve compound annual growth rate of 13% to 16% growth in worksite employees versus 12% in the last run, especially with such a strong start to the first year. We also see the possibility of achieving this with BPA growth at only 8% to 10%, which introduces operating leverage on the sales side of the business in this plan. We believe this added operating leverage combined with the potential contribution gross profit from workforce acceleration increases our potential for compound annual growth rate on adjusted EBITDA to exceed our last run. Of course, there are a number of factors, particularly the macroeconomic environment, that may put pressure on the ultimate success of the plan. Recently, the National Federation of Independent Businesses reported a drop in business owner confidence to the lowest level in almost 10 years. However, despite concerns of inflation and interest rates, 50% of companies surveyed reported job openings they could not fill. This interesting dynamic of higher interest rates, inflation, an economic slowdown, and lower business owner confidence in combination with a tight labor market is certainly unusual, if not unprecedented. In this environment, we're inclined to be cautious and build a lower level of client hiring over the balance of the year than we expect experience in the first half. Interestingly, if you look at our earnings presentation released today, you can see a chart of our forecasted five-year ending 2022 in paid worksite employee and adjusted EBITDA compound annual growth rates. These metrics are 10% and 12% respectively, despite the pandemic in the middle of this period. Now, these results over the last five years demonstrate considerable versatility and resilience in our business model, to deal with uncertain and changing times. So we remain confident in our people and our corporate culture as the critical drivers of our success and our ability to respond to challenges and come out on top. At this point, I'd like to pass the call back to Doug.