Insperity Inc (NSP) 2022 Q2 法說會逐字稿

Good afternoon. My name is Matthew, and I will be your conference operator today. I would like to welcome everyone to the Insperity Second Quarter 2022 Earnings Conference Call. (Operator Instructions)

At this time, I'd like to introduce today's speakers. Joining us are Paul Sarvadi, 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 Sharp. Mr. Sharp, 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. I'll 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. Sarvadi 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 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 8-K 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 and 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 health care cost trend as we entered the year with an uncertain environment surrounding the pandemic.

First quarter cost trend came in near budgeted levels. As for Q2, a combination of both lower-than-expected COVID-related costs and health care 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 as state 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 marketing 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.

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 remains 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 5 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 3 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 5-year plan and our outlook considering some economic uncertainty in the air.

Our second quarter results included continuing momentum in all 3 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. Book to 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 in 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 1 year ago.

Book to 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 continue 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 midsized company client base we have, including pay increases, over time 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 commissions 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 impacts 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.

The other 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 milestone 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 higher 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 is 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 1 of our recently adopted 5-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.

Now last quarter, I discussed the potential for our new 5-year plan to exceed the last 5-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 fivefold.

Of course, a 5-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 5-year run up in our first -- 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 to gross profit from Workforce Acceleration, increases our potential for compounded 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 company 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 the 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 that we expect to experience in the first half.

Interestingly, if you look at our earnings presentation released today, you can see a chart of our forecasted 5-year ending 2022 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 5 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.

Thanks, Paul. Now let me update our guidance in which we are once again raising our 2022 growth and earnings expectations based upon our outperformance in the first half of the year and an improvement in our growth and profitability outlook over the remainder of the year.

We are now forecasting 17.5% to 18.5% worksite employee growth for the full year, an improvement over our prior guidance of 15.5% to 17.5%. We expect the increase over our prior forecast is based upon a higher starting point going into the second half of the year, continuing sales momentum and maintaining client retention at our recent levels.

As for the noncontrollable component of our growth, which is the net gain in our client base, we intend to continue to be cautionary given the tight labor market and the uncertainty surrounding the possible economic slowdown. When considering these factors, our full year guidance assumes 17% to 18% paid worksite employee growth for Q3 and a slightly lower implied Q4 growth due to the comparison to the 2021 period when we're experiencing very strong hiring in the base as the labor market recovered from the pandemic. As for Q4, also keep in mind that worksite employees sold in the fourth quarter are typically enrolled and paid in Q1 of the following year.

As for our earnings guidance, we now expect 2022 gross profit to be higher than our prior forecast based upon the outperformance of the first half of the year and the recent positive trends in our growth, pricing and direct costs. We continue to be mindful of the ongoing uncertainty associated with the pandemic and its impact on our health care costs. Although the country continues to experience new variants, so far, the severity has been lower than previous variants such as the Delta variant, which negatively impacted our second half of 2021 costs, particularly in Q4 of last year.

We are also monitoring utilization within our health care plan, including care, which might have been deferred during earlier periods. But thus far, we have not seen patterns indicating higher acuity levels related to any deferred care. We are also mindful of the possible inflationary impact of provider costs on our health plan, and we'll closely monitor this as we price our new and renewing business.

As for our workers' compensation program, we expect further upside given the ongoing management of claim costs, the remote working environment, lower administrative costs expected on our Q4 policy renewal and, to a lesser extent, the impact of higher interest rates on our reserves.

As for our operating costs with the outperformance in worksite employee growth, we plan to invest in further growth of our core personnel, particularly in the service area. We have devoted considerable effort in hiring and retaining our personnel in this tight labor market and made significant progress in Q2 towards achieving our goals.

Consistent with the first half of the year, we have also forecasted additional travel costs due to the improvement in the pandemic conditions and the recent increase in pricing of airfare and lodging. Finally, we continue to invest in marketing activities given the high demand for our services and in our technology.

I'd like to make a few comments on the expected impact of the current inflationary environment and rising interest rates on our business model. On an increase in rates results in higher interest expense on our debt, this is expected to be outweighed by the higher interest income on our overnight investments and monies held on deposit in our workers' compensation program.

In our forecast of health care costs, we have considered the impact of inflation on provider costs. Additionally, we expect that our workers' compensation costs will be favorably impacted by discounting long-term reserves at slightly higher interest rates.

Lastly, we expect inflation to impact our operating costs, particularly pay inflation associated with our corporate employee compensation, which comprises about 60% of our total operating expenses. Therefore, we intend to consider this factor in pricing of new and renewing business.

So when taking into account our improved outlook for worksite employee growth and the other factors just mentioned, we have raised and narrowed our range of 2022 adjusted EBITDA from a previous guidance of $285 million to $327 million to our updated guidance of $305 million to $335 million. As for full year 2022 adjusted EPS, we are now forecasting a range of $4.68 to $5.25, up from our previous range of $4.31 to $5.09. Now for Q3, we are forecasting adjusted EBITDA in a range of $59 million to $71 million and adjusted EPS from $0.83 to $1.06.

Now at this time, I'd like to open up the call for questions.

(Operator Instructions) Your first question is coming from Andrew Nicholas from William Blair.

I wanted to start by asking a little bit more on the health care book this quarter. It sounds like costs came in favorably relative to your expectations. Just curious, did you make any changes with respect to your guidance in terms of those same expectations for the third and fourth quarter? Or would you characterize what's embedded in guidance for the second half as being as conservative as previously?

Yes, I would say we've seen some improvement, obviously, through the second quarter. I wouldn't say we materially changed our approach to the second half of the year as it relates to some caution with respect to the ongoing variants. But with current less severity of the variants, less hospitalizations, what we're not seeing as far as deferred care and acuity levels, I would say we made some slight improvement relative to the forecast over the last half of the year, but nothing material though at this point.

I would just add that with just 1 quarter having some improvement, that's no time to be -- drastically be changing anything.

Makes sense. Agree there. And then for my follow-up, I just wanted to ask a bigger picture question about kind of risks around the recession. I think you mentioned several times in your prepared remarks that you haven't seen much of the slowdown, commission activity pay increases over time, all trending positively. But how do you think about the industry and Insperity's resilience to potential economic slowdowns broadly? Do you feel like the industry can navigate a more challenging economic environment? If there's any way to kind of quantify what that could mean for the various pieces of your business in that environment, that certainly would be helpful.

Thanks for the question. This is kind of what I was trying to kind of frame in some of my prepared remarks, but we've gone through a lot of different times. And of course, the difficult period of the pandemic is an example, and we've really demonstrated the resiliency and the versatility and ability to respond. So we're very well prepared for whatever comes our way.

But I think for what we're seeing right now, it's important to note that we aren't seeing anything within the metrics in our client base that would indicate that something is changing dramatically right now in the behavior of our clients from an HR perspective. So hiring is continuing, but we thought it's prudent to budget a lower level because of the change in sentiment and the amount of dialogue that's going on about the potential for change.

So we're not seeing anything in the metrics, but we felt like with the sentiment change, we have to at least be prudent and conservative. And so we don't expect the same level of client hiring over the balance of the year that we had in the first half of the year.

But as we look in the bigger picture and say is there a recession coming or did the 2 quarters -- is that a recession or will there continue to be a slowdown of economic activity, the biggest effect on us is the state of the labor market and how that normally changes in a recession. In other words, layoffs occurring across the board. And of course, at this stage, we don't see that happening.

And even in the sentiment change among business owners, the further information indicated that businesses were reporting still having difficulty filling openings that they still have. So we're just not at that stage, but we are able to change our dialogue with clients. And you use an HR department heavily in a growth phase and when things are going the opposite direction. So you just use different services in the HR department. And we're ready to serve our clients no matter what comes forward.

Your next question is coming from Tobey Sommer from Truist Securities.

With respect to the Salesforce and managing those productivity measures that have been improving pretty dramatically, what are you learning from that? And do you have a sense that you're seeing a sort of threshold that you wouldn't expect further improvements? Or maybe if you could contextualize the improvement that you've experienced and maybe where it could go, that would be helpful.

Thank you, Tobey. No, I would say that we've made some really great strides in gaining some sales efficiency. And like I've said before, some are bigger picture in the market, demand for the services, people being willing to meet by Zoom call as opposed to face-to-face. And so the number of contacts that can be made to increase and so forth.

But we've also seen some significant improvements that are coming from how we're going about things and how we're trying to have early success with newer BPAs and then aligning everything in terms of compensation, some bonuses that we've built in, other things that I think we're still in the early phase of seeing the full effect of some of these changes we've made.

So I've said I believe we're off to a good start. We are benefiting from the large things in the marketplace that have happened, but we're also really seeing some benefits coming out of -- some improvement coming out of the changes we've made, but I still think there's room for more.

And I'd like to follow up on that. You gave us some good context about the economic sensitivity and the puts and takes. I would just ask a more pointed question, just say if we had the economic contours of 2020 repeats, and hopefully not be pandemic-driven but the economic contours, do you think the business would perform better or worse than that?

I would -- I think even if we enter into a more difficult economic period, I do think that there are a lot of things that are helping us be more effective than we were and more efficient. So I would expect us to perform better than we did through previous down period.

Your next question is coming from Jeff Martin from ROTH Capital.

Wanted to dive into the benefits cost side a little bit more. How much of the shift that you're seeing or the improvement that you're seeing is less COVID-related expense versus lower utilization?

Well, most of it pretty much relates to the COVID side. And I think on the utilization side, we're trying to track whether there's any utilization increases coming that were from deferred care or acuity. But what we're seeing at this point is just more of an ease across the board in both the COVID cost and in utilization. And so also, I think we're rightfully being conservative about that. We're conservative in the last quarter and conservative going into this next quarter. But hopefully, we see this continue the direction we're seeing.

Okay. Great. And then I was just curious if you could give us a little bit of context around some of the early results of your increased investment on recruiting efforts, particularly on the BPA and service side. And then could you also touch on BPA retention trends? .

Yes, that's good. We really had a great quarter and we reorganized our recruiting organization for -- internally and added some resources. And we saw some nice, early success from that, that by the end of the quarter and even into this month, we're really feeling strong about bringing on the high-quality people that we need, the right number of them on the surf side because we've had such high growth. You've got to have the service capacity. We expect to continue to grow at high rates. So we want to make sure that we're bringing on the right level of support and feel real strong that we've got the machine working to feel good about that going forward.

And then also we've had -- over the quarter, from the beginning of the quarter to the end, we had a nice ramp-up in total higher BPAs. Even though the average for the quarter in trained BPAs was down 3%, we're actually up significantly a number of BPAs -- total higher BPAs at the end of the quarter. So I feel very comfortable that hitting our target over the balance of the year is clearly in view. And working toward this long-term view of an 8% to 10% increase in rate of BPA growth driving a higher worksite employee growth, we're really in good shape for that element of the plan.

Your next question, Mark Marcon from Baird.

This is Andre Childress on for Mark Marcon. So my first question is, has there been really any change with the competitive dynamics over the past few quarters, whether that be a source of wins? Is any of that changing with the Workforce Acceleration product? And then could you touch on kind of what you think the largest drivers are for driving the higher and the better improved closing rate?

Yes. I think the closing rate improvements are coming from very specific elements of what we're doing in training and management, and we are seeing that the customer base and the marketplace being able to get back in front of people face-to-face also helps with the closing aspect. So there's very specific things that we're seeing improving that in the marketplace. And I still think there's room for us to improve there, but it's nice to see that move in the right direction.

And has there been any change kind of in the competitive dynamics in the industry or the source of wins? And if you could touch on there?

Yes, I apologize, I forgot that first part of your question. But on the competitive landscape, I got to tell you, there's always been competition out there that's out there now. I think all of the whole industry, I think, is moving forward nicely. So it validates the higher level of demand that we've talked about in the marketplace. We think we're really seeing that, and that trend is what we're trying to capitalize over this 5-year run. But we really don't feel like there's any issues that have changed or that we're contending with on the competitive front. We see our best-of-class products and services and higher level of premium service model being appropriate for a very specific target in the marketplace. And when we're in front of those target clients, that fit is obvious and we're the right solution.

So we do still end up in the seeing prospects and competing with others. But if they're looking just to save a few bucks on insurance or just get some basic services, a lot of times, they'll choose somebody else. If they're really trying to move their company to the next level and really want to take care of their people, that's what our company is about. We help small businesses take care of their people and get the full benefit of doing that well because that's what really helps those businesses grow.

Great. It sounds like the value proposition of the premium service is really resonating. Just one more quick follow-up. It sounds like the marketing initiatives are really being very successful with the higher spend in the back half of the year. Can you discuss some of the efforts that you guys are doing, what you're seeing and where you're kind of ramping up the spend on that front?

Yes, absolutely. Last year, we tested some very localized marketing efforts where we designed every marketing plan for each market specifically to see what we thought would be optimal in that market. And then this spring, we did that across all 41 markets, I believe it was, and saw some nice success there. So we're basically taking what we've proven to be effective, and it just makes perfect sense to ensure that we have the level of sales activity we want to make sure we have a great balance of the year.

Great. Congratulations.

Thank you. That concludes our Q&A session. I will now hand the conference back to Paul Sarvadi for closing remarks. Please go ahead.

Well, once again, we just want to thank all of you for being on the call today, and we expect to continue to have some effective results over the last half of the year and look forward to seeing you somewhere out in the marketplace over the quarter. Thank you very much.