Good morning. My name is Lei, and I will be your conference operator today. I would like to welcome everyone to the Insperity’s Second Quarter 2018 Conference Call. [Operator Instructions]. At this time, I would 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 would like to turn the call over to Douglas Sharp. Mr. Sharp, please go ahead.

Thank you. We appreciate you joining us this morning. Let me begin by outlining our plan for this morning's call. First, I'm going to discuss the details behind our second quarter 2018 financial results. Paul will then comment on the key drivers behind our Q2 results and our plans for the remainder of the year. I will return to provide our financial guidance for the third quarter and an update to the full year 2018 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 myself 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 8K filed today, which are available on our website. Now, let's discuss the details behind our strong second quarter results, we once again achieved record high operating results reporting $0.68 in adjusted EPS, a 66% increase over Q2 over 2017, and adjusted EBITDA of $46.6 million, an increase of 40%. These results were driven by continued double-digit worksite employee growth and effective management of gross profit in operating costs. As for some of the details average paid worksite employees increased 13% over Q2 of 2017 to 203,950 above the high-end of our forecasted range and accelerating off a Q1’s growth of 12%. This quarter’s growth was driven by continued strong sales, a high-level of client retention and improvement in net hiring by our clients. As for our sales efforts, we have been successful in exceeding our…

Thank you, Doug. Today, I will discuss three topics of importance to investors as we continue to produce exceptional financial results from our unique business model. First, I’ll cover highlights from Q2 driving our growth acceleration and earnings outperformance. Second, I'll provide some insight into our successful execution of our mid-market sales and service strategy, which provides an opportunity to further optimize our business model. And third, I'll describe several initiatives for the balance of 2018 designed to fuel continued strong performance in 2019. All three of our unit growth drivers including sales, retention and hiring in our client base contributed to our growth acceleration in Q2. Recent sales results have been very impressive in both our core and mid-market businesses. In the second quarter, a 15% increase in trained Business Performance Advisors produced a 23% increase in total clients sold and a 36% increase in total worksite employee sold over Q2 of 2017. This is our second quarter in a row coming in at 118% of our sales budget. The first quarter outperformance, was driven primarily by core sales and the second quarter by our mid-market team including the sale of our largest client in our history with approximately 29,000 employees. Over the past year, we have ramped up year-over-year growth rate in the number of trained Business Performance Advisors from approximately 13% to 15%. Sales efficiency has actually improved 12% during this ramp-up period driven by a 4% gain in our core BPA team and the effect of our recent mid-market success. Increasing sales efficiency, while growing the sales team at this rate is quite a credit to our sales leadership training and the entire sales organization. Our successful marketing programs continued to support these strong sales results. In Q2, unique visitors to our insperity.com site were up…

Thanks Paul. Now before we open up the call for questions, I'd like to provide our financial guidance for the third quarter in an update to our full year 2018 forecast, which includes top and bottom line growth significantly above our initial budget. As Paul just mentioned, we have raised our forecast of full year growth of average paid worksite employees to a range of 13.5% to 14.5%. This is up from our initial guidance of 11.5% to 13.5%, due to the strong growth during the first half of 2018 in our continuing sales momentum. We are forecasting Q3 worksite employee growth to accelerate to a range of 14.5% to 15.5% based on a number in sales efficiency of our trained Business Performance Advisors and continued success in our mid-market area. We are increasing our earnings guidance based upon the outperformance through the first half of 2018 and in an improvement in our outlook for the remainder of the year driven by the higher worksite employee growth rate. Our guidance also considers incremental costs associated with our BPA growth over the remainder of 2018. As we position ourselves for continued double-digit worksite employee growth in 2019. Forecasted operating costs also include the additional mid-market service personnel tied to recent growth in this area of our business and higher sales commissions on more paid worksite employees. As for the timing, these incremental investments are expected to have more of an impact on the fourth quarter than Q3. Also with respect to the implied to Q4 2018 earnings guidance, keep in mind that our gross profit per worksite employee typically declines from Q3 to Q4 as healthcare deductibles are met our plan participants. And the forecasted Q4 year-over-year earnings growth is impacted by the comparison to the 2017 period, in which we experienced favorable healthcare and workers' compensation claims. So we're now forecasting full year 2018 adjusted EBITDA in a range of $225 million to $229 million, an increase of 27% to 29% over 2017 and up approximately $27 million over our budget. As for Q3 we are forecasting adjusted EBITDA of $53 million to $56 million, an increase of 23% to 30% over Q3 of 2017. We are now forecasting full year 2018 adjusted EPS of $3.49 to $3.53, a 42% to 44% increase over 2017. Q3 adjusted EPS is projected in a range of $0.80 to $0.84, an increase of 40% to 47% over Q3 of the prior year. In conclusion, we are encouraged by the strong top and bottom line growth trends in our business and our position for continued growth as we plan for 2019. Now at this time, I’d like to open up the call for questions.

[Operator Instructions] Our first question comes from the line of Jim Macdonald, First Analysis. Your line is open. Please ask your question. Jim Macdonald, First Analysis. Your line is open. Please ask your question.

Can you hear me?

Yes, we can.

Now we can.

Okay, okay. I don’t know what that was but sorry about that.

No problem.

So your growth acceleration in the third quarter is somewhat unusual. I had a number of questions I’d like to try to get to that number. So maybe you could tell us when the new mid-market client is going to come on board, a little more on hiring at existing accounts, any additional summer hiring you're expecting this year, things like that?

The summer hiring part kind of already come into the numbers and of course, you have a lot of the seasonality those go away in the late August, September time period. But the growth acceleration over the last half of the year is driven by the outperformance in the sales side both on in our core business and in the mid-market side. The large customers already enrolled and paid in the month of July so that's already in. But beyond that when you have your total sales number 36% ahead of a year ago. Your pipeline is going to be full and those numbers are going to roll into paid worksite employee numbers over that next quarter or so. The pipeline for both core and mid-market also looks very strong. So we're in a position to keep that momentum moving.

I think, Jim, the other factor is as you know, with the passage of SBEA, no longer having to restart payroll taxes that helps out, give us a little bit of a boost and be able to sell throughout the year.

Can you give us any sort of metrics is the seasonal hiring and/or hiring in existing accounts, thousands of employees or anything like that?

The hiring within the existing was slightly above our expectation we kind of budgeted in some. But what we're seeing out there is the demand is high but it's pretty hard to fill the positions. So the amount of net gain from within the client base, I think is not exactly lining up with what the other metrics would tell us. In other words, if they could find people faster, they'd be adding them faster. But even in our recruiting operation, we see the difficulty of finding and attracting and keeping the best employees. So that competitive environment, we believe is really a good thing for us. But one way that it does affect us is that customers have trouble adding employees as fast as they would like to.

And just one more on the – interested in your new enterprise services operation for a very large customers, could you tell us a little more about that we'd be doing stuff on-site, taking over HR responsibilities or anything like that?

Yes, in that enterprise model, there's a lot of complexity to those clients. And we have to have an incredible amount of agility and flexibility to design them a service program that fits that specific client. And certainly that can include a lot of customized reporting or a lot of kind of collaborative effort to serve up both what we normally serve up to our co-employee – worksite employees but also incorporating things that they want to serve up to that those employees as well. So it could in fact involve employees on-site, generally speaking were involved at a very high level, sitting at the table with the leadership of that organization and just helping to make sure that they have the most effective people strategy in place is possible.

Great. Thanks.

Thank you. Our next question comes from the line of Mark Marcon from Baird. Your line is open.

Thanks for taking my question. Congratulations on the strong quarter. I was wondering if you could talk a little bit more about any sort of regional disparities that you might be seeing and how you would comment in terms of acceptance of the PEO concept outside of the traditionally strong states.

Yes, we’ve – right now, Mark, I would just have to tell you that we are really seeing the results across the board. I don't see a weak spot in terms of any region of the country or any particular driver. So we're just – I think we’ve got a lot of really strong execution out there in the demand. I do believe that the PEO service in general, once that law was passed a couple years ago now that it's in place. I think the advisor community can now look and see it's in the code. So you don't run into that kind of problem or question. So there's a lot more certainty around this alternative as a way to effectively run your organization, I think we're also saying, a lot more of – not just the advisor community but even the investor community like private equity or venture capital firms, seeing this approach as a way to make companies more successful and lower the risk, that's obviously very important to investors in small and mid-sized companies. And so if you want to say acceptance overall, yes, I think definitely we're at a different stage and we've been at before.

Great. How would you characterize the penetration in some of the more merging states like – if you were looking at a map of the country, I mean obviously, Florida and Texas are more mature. How would you lay out for somebody is thinking about it long-term, how things are stack up from a penetration perspective?

Yes. It amazes me after all these years that the business is so open in Greenfield, as it is today. We are expanding now rapidly, we’ll probably open another 10 or 12 offices. You just saw a couple recently but another 10 or 12 over the next year, each of the next couple years. There's still plenty of places to go, plenty of room for us to have additional offices within even with our strongest markets. And it's just a number of small and mid-sized companies is huge. And now that we have our mid-market aspect working as well, also really does double the addressable market for worksite employees.

Can you talk a little bit more about that with regards to like the largest client that you've ever signed, were they a competitive win that was already using a PEO or were they brand new to service?

This is an interesting one because many years ago when they started, I guess – it just early in their growth, they were a client of ours, many, many years ago. And they grow and they did move to other services also most recently did come from another PEO. But they very clearly saw that our capability was completely different in terms of being a platform for their acquisition strategy and that's a pretty interesting factor. And I think that it does put us in a position to kind of be a platform for growing companies that already even a pretty good size.

That's great. And just the margin profile on the mix and larger sized clients, how does that compared to the small company?

Yes, its interesting, obviously these larger companies we've talked about before that the gross profit is lower on those companies. But the operating income can be similar to the rest of the business because you've spreading that across such a large group of people. So we'll obviously be monitoring that, you do have kind of a mix issue at the gross profit line. And you've got to be monitoring and managing how those operating cost work with these size accounts. But for now we feel good about that and as you can see our adjusted EBITDA per worksite employee continues to strengthen to some numbers that are really impressive, unprecedented in our industry. And we think we have room to keep that running.

Congrats. I’ll jump back in the queue.

Thank you. Our next question comes from the line of Michael Baker from Raymond James. Your line is open. Please ask your question.

Yes, first question Paul is, it sounds like you’ve done a lot based on past learnings in this mid-market segment to bring them, all these clients on more efficiently and effectively. Can you give us a sense of the one you just brought on how long it took and how long it was relative and you used to speak about upfront cost et cetera. Can you at least give us some sense around that how maybe that's improved as well?

Sure. The length of time it takes for these accounts can be a really long time. And in fact sometimes you'll make a run at them a couple years in a row before you're able to make that progress. But this particular one I think is pivotal kind of opens the dam force, it did take two years to bring this one on. But the pipeline we have now for these accounts is so much bigger than I've ever seen it. And our process is so much more refined, the way we help the customer evaluate the investment and the return on the investment, they'll make to go this route. The way we integrate the service personnel and the team to plan the transition with the prospect, it's such a smooth process, it's such a highly professional process. The way we bring customers and to experience our people and I’ll tell you another thing that's really having a dramatic effect is the technology demonstration aspect in the process, it's really keeps the process moving. We're winning with our technology. Insperity Premier is really exciting in terms of how a company this size can really take a big step forward. There are technologies unique because it also supports the collaborative relationship that we have with the customer. So they can kind of see how they can, how we work together and can be – a lot of these companies they're spread out all over the country. So having their HR function remote from their corporate office is not a big deal, because there are people all over the place. And, in fact our people are out there, we have offices all over. So, even if there's an onsite need our people can go out and deal with that. So, there are a lot of aspects around what we're doing in this space that really put us out front but I would say the most significant thing is our ability to customize and create this service model that fits this customer need.

And, then you indicated that with your mid-market initiative that you'll have a better possibility of retaining the previous, what we call core PEO. Do you have to convert them to a different system? And what are some of the changes, in other words traditionally what would happen is, somebody would believe that they can kind of do health care on their own, and so that would roll off. Are there other services that used to roll off and those still remain like is this new larger customer a – like a traditional PEO customer, or are they no longer doing – are they not doing healthcare with you. And obviously they're looking towards a different suite of services that you're offering.

Yeah, we will have a mix of that. Some larger customers may want some more flexibility on what benefit they – plan they provide. I bet we can do that within the PEO model but we also have our Workforce Acceleration model, which is the traditional employment solution. And we are having some pick-up on that. On customers that do decide to leave lots – lot of those are moving right into our Workforce Acceleration solutions, which is which is a nice alternative for us to have. But I do say that the room for our PEO service model, our co-employment model in the mid-market is really substantial. And we do have the flexibility on your question about platforms, you really don't have to change platforms. Insperity Premier is available for both our traditional mid-market and this enterprise group. But we will kind of organize differently in how we serve the client and how we designed the service model for that customer. So there's, it's more on the people side that there would be a difference than it would be on the systems side if you will.

And then just one last question, you gave us a heads-up and thanks for that in terms of how you'd be able to sell through the year in terms of the change around payroll tax et cetera. As you look forward, obviously historically your dependency has been on the fall selling season, have you learned enough yet to give us a better sense for how we should think about unit growth on a quarterly basis as we look to the future.

It's a little early for that but I will say that what we have done is developed basically three selling campaigns, the spring, summer, fall. And, so we're kind of pretty much always have a campaign running and a lot of that is because we should be as dependent on the year-end. Now we always will be on new and renewing accounts to some degree because we have so many accounts that do renew around that year-end. So, it will be a while before that really evens out kind of entirely. But, as I look forward to this particular fall season, I mean you look back now we've had several years in a row where our transition to the year-end is really strong. One of the things, I mentioned in my prepared remarks is that our management of our benefit programs have been, has been very effective managing the price and cost. And, we actually don't see the need this year to do any plan design changes, any substantive changes. And that always bodes well for our renewal season. I mean, it's just flat easier, when we don't have to explain changes and go through how pricing would have to be justified around those changes. So it just makes for a simpler renewal season. So, I would think we're really in a good position as we go into the last half of this year, and both on the sales and retention side.

Thanks for the update.

Thank you. And your next question comes from the line of Jeff Martin from Roth Capital Partners. Your line is open.

Thanks, good morning guys.

Hi, Jeff good morning.

You may have stated this already but I didn't catch it. What’s the timing on the role in of this new large mid-market client. Is it already in the numbers, is it ramping up over the course of this quarter. Sorry, if I missed that.

No, no problem that customer did enroll and has already in the numbers at the start of this second quarter. Oh, sorry third quarter, excuse me.

Great, and then on the direct cost side specifically benefits, when you say there will be no plan design changes rolling into 2019, does that mean pricing is basically flattish or is that kind of in-line with your 4% increase year-over-year that you've seen in the last several years.

We’ll continue to move pricing up in-line with the trend that we're seeing in the plan. But what we're really seeing is, the trend is modest enough that there's no reason to try to go offset some of that trend increase by changing the plan design by increasing deductibles or co-insurance or making some other pharmacy related change or whatever. Those are some of the tools, you use to manage cost over time. And we're just in a position that for this year we're comfortable, we don't need to use that tool this year. And we can manage the price in cost by simply passing through trend increase.

Okay, and then do you have any indication what. In a broader market place that looks like whether you see the underlying insurance providers having the plan design changes in 2019.

Well in the marketplace at large we generally are hearing from our carriers and so forth that typically 6% to 8% type trend. In our particular world, we've provided benefit trend going forward within our numbers. I think we looked at maybe 2.5% to 3.5% for this year and halfway through the year, we had a really good first quarter on that number. Not so good a second but on average still better than we were thinking. So, we're looking probably more closer to the 2.5 for the balance of the year and that kind of puts us in a position to just manage the pricing side. And not have to look at those plan design changes.

Okay, and then could you give a little more detail around the unbundling of the service to the core market that was a very recent initiative, but any kind of early stage impact there what kind of the uptake rate is on that.

Are we talking about the Workforce Acceleration, the traditional employment model?

No, we are talking about the unbundling version. If that is one and the same, then yeah.

Yeah, the initiative that we've had most recently is to – we pretty much replicate our bundled solution in the co-employment side of the business with the traditional employment solution. And that, that's what we now call Workforce Acceleration. And, I mentioned in my remarks that we had about 38% increase in sales in that, in that new offering at a 61% higher price point. And, so that – that's good progress towards where we're going to end-up. And this fall now that we have our brokered benefit solutions in place to handle volume, we're really going to push the pedal down in the fall here with our BPA channel and see how many Workforce Acceleration customers we can bring in alongside, our really strong growth in our historical Workforce Optimization solution.

Great, very helpful thanks for taking my question guys.

You bet.

Thank you. [Operator Instructions] We have a follow-up question from Mark Marcon, Baird. Your line is open.

Hi, I was just wondering, if we can dig in terms of the gross profit per worksite employee. It sounds like some of the safety programs are providing a benefit. I was wondering if you could give a little more color in terms of where workers' comp came in from the quarter.

Yeah, I think, just in a general sense, when you kind of set the program for the year remember our workers Comp year starts from October 1, through September 30. And so we're pretty far into that policy period now, and some years you have better years than others in terms of frequency and severity of claims. And our safety services team has been really effective out there. And we've seen some good numbers in this year's policy period. So, our historical way that we manage that is when we start the year. We obviously budget for workers' comp cost to be at an expected claim level and if they come in lower, we wait till that emerges throughout the year before you see that role in and out. And we've, had so we have come in lower than our original target on that and we expect that to continue some through the balance of the year.

Okay, and can we think of that as a percentage of direct pay. It sounds like that’s coming in nicely and should continue through – those trends should continue into the coming years. Is that fair assessment.

I think so. Keep in mind our old customer base is more white collar than blue.

Oh, sure.

Ours is a pretty low percent of payroll anyway, below 1%. And then but you have a fluctuation in there. If we target say 0.7% come in at 0.6% those are big dollars. And that's kind of what our objective is. We manage it as a cost center and we're out there trying to manage both the safety side and the actual claim payment side and to make that number come out lower than that original budget.

Great, and then on the health plan side what was the growth in terms of the health expenses.

Yeah, we are expected to trend over the course of the year. I think we started the year with about a 2.5% to 3.5% expectation and looks like, we're going to come in more closer to 2.5%.

And then there should be some positive implications from a retention perspective in terms of no plan design changes. Isn’t that correct.

Absolutely, I mean that does put us in a position to continue that really strong client retention that we've had through the year-end over the last few years.

Terrific. Congrats.

Thank you

That will be our last question. I will now turn the call over to Mr. Sarvadi for the closing remarks.

Once again we appreciate everyone participating in our call today. And we look forward to continue to delivering these types of strong results. And hopefully we'll see you out on the road. Thank you again, see you next quarter.

This concludes today's conference call. You may now disconnect.