Good afternoon. My name is Erica, and I'll be your conference operator today. I would like to welcome everyone to the Insperity Fourth Quarter 2019 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [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'd like to turn the call over to Douglas Sharp. Mr. Sharp, please go ahead.

Thank you. We appreciate you joining us this evening. Let me begin by outlining our plans for this evening's call. First, I'm going to discuss the details of our fourth quarter and full year 2019 financial results. Paul will then recap the 2019 year and discuss the major initiatives of our 2020 plan. I will return to provide our financial guidance for the first quarter and full year 2020. We'll 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 the details behind our fourth quarter results. We reported Q4 adjusted EBITDA of $41 million and adjusted EPS of $0.57, slightly above the midpoint of our forecasted range. Average paid worksite employees increased by 10% over Q4 of 2018. Gross profit increased slightly as higher benefit costs were partially offset by improved pricing. As you may recall, our Q4 forecast included higher benefit costs for the possibility of continued elevated large claim activity coming off of Q2 and Q3's activity. During Q4, the number of large claims continue to decline from the high point in Q2. However, remained elevated when compared to the periods prior to Q2 of 2019. And we once again performed an in-depth analysis of the large claim activity. Similar to Q3, a detailed review of the Q4 claims…

Thank you, Doug, and thank you all for joining us today. Considering the unusual and unexpected challenges we faced over the last half of 2019, I would like to provide some depth and color around exactly what took place and how we have responded decisively with the plan to regain our growth and profitability momentum over the course of 2020. I'll also highlight the important progress we made on three strategic initiatives that we expect will contribute substantially to a quick rebound and to the success of our long-term plan. These initiatives included an emphasis on pricing our flagship Workforce Optimization solution, gaining traction in our Workforce Acceleration traditional employment offering and the development of a data science and data analytics strategy for Insperity. First, let me drill down on obstacles we faced in the fourth quarter in client retention, benefit plan dynamics and new client sales. This will provide some clarity around the year end transition and the starting point for January that set the stage for our 2020 operating plan. As we entered the fourth quarter, we believe we were well-positioned for an effective fall campaign with a strong pipeline for new sales and we were confident the strong client retention we have experienced over the last several years would continue. The last five years we demonstrated a significant improvement reducing January client attrition from over 9% of the prior December paid worksite employees to 7.8% in 2015 and less than 6% from 2016 through 2019. This improvement resulted in a step-up in full year client retention from approximately 80% before these improvements to around 85% the last several years. This January worksite employees lost from client attrition came in at 7.3%, 180 basis points above January 2019 which was 5.5%. This was a primary driver to the…

Thanks Paul. Now, let me provide our 2020 guidance beginning with the full year. As Paul just mentioned, we are forecasting 6% to 8% growth in the average number of paid worksite employees for the full year 2020. Our growth plan includes an 11% increase in the average number of trained Business Performance Advisers, full year client retention of 83% and a similar level of net gains in our client base as 2019. As for our gross profit area, we have gone through our usual budget of -- process of analyzing client mix, pricing and direct costs, including recent health care and workers' compensation claim trends. As for the total benefit costs including health, dental, life, disability and other benefits, we are forecasting an overall cost trend of 2.5% to 3.5% over 2019. The three components driving this overall increase for 2020 include the underlying health care claim trend, large claim costs and other benefit costs and administrative fees that have a relatively flat cost trend. Now, within the health plan with our national carrier, our forecast assumes a trend of 3.5% to 4.5% for the underlying claim cost when considering planned migration to lower cost options and other demographic factors. As for our forecast for large claim activity, while it is possible that the frequency of these claims revert back to levels prior to Q2 of 2019, we have taken a more conservative approach in our 2020 forecast. Even though we have seen a slight decline in the number of quarterly large claims since the peak in Q2 of 2019, the upper end of our benefit cost range assumes an increase in the number of large claimants in line with our projected worksite employee growth. The lower end of our forecasted benefit costs assumes the number of large claimants…

[Operator Instructions] Our first question comes from the line of Jim MacDonald from First Analysis. Your line is open.

Hey, good morning, guys or good afternoon, I guess. Can you talk about the larger client losses we haven't seen those in a while. Are there any notable like large 1,000-person -- 1,000 company losses anything like that?

Well, yes, as I mentioned the difference in what we would have expected was in our larger emerging growth and mid-market customers. And really, the only surprising thing was that the -- at that the M&A activity that we saw you do lose some for that that's kind of part of helping our customers succeed and having them accomplish what they set out to do. But it was interesting that M&A activity seem to move deeper into the client base than previous years. We didn't have our largest customer leave or anything like that, but we did have higher frequency of those large customers leave from that M&A activity. The balance of it was -- that was about half of the difference than -- above what we would have expected another 40% or 42% were for cost type considerations.

Okay. And so you probably given the benefits trend have been raising prices more than you did last year. Do you think that impacted your our year end performance?

When we really get into the details of what happened kind of case by case. There's just -- and we do a really deep investigation of a variety of I don't know 20-some reason codes of what customers tell us. It wasn't really an overriding theme, there were a lot of different things, benefits cost in the marketplace were lower. There are just a lot of different detail items that might be an issue. But it didn't just jump out at us that we drove cost and cause this much attrition. Obviously, driving costs were doing -- driving price wouldn't do anything with M&A activity. And on those other ones, the fact that the ones that went away were -- are price-sensitive customers already they were lower price compared to the cost. So across the board, if you look at our core market, we actually improved retention last year. So I don't think our pricing policy was the root cause.

Okay. And just on the benefits, I mean three quarters in a row seem, I mean, you keep suggesting that there's no trends and things. But I mean it just seems like that's never -- I mean two quarters in row hasn't happened before. So, it just seems like three quarters is sort of -- there's got to be something going on there?

Yes. It's really, what we said last quarter of course was that -- well, let me back up step in our history, we've had spikes. And then the very next quarter kind of fell back in line or at least fell back enough in line that it didn't jump out. But, what we've seen now is the spike and then a slow painful decline or slower decline that we just have to bake in there now for going forward. But in our dialogue with United, it's -- we're reverting back toward the norm it's just taken a while.

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

Thanks. Good afternoon, guys.

Yes, Jeff.

I was wondering if you could help us think -- how to think about the growth acceleration throughout the year. Your WSE growth guidance is 5.5% to 6.5% for Q1. How much will that accelerate to by Q4 do you think?

Well, our target at this point of course is to get back to double-digit growth in January next year. So, you're going to ramp up. You got the 6% to 8% range that we've provided. You obviously need to be at the high-end of that range as you get towards the back half of the year. Keep in mind, once you get toward that part of the year, you'll be focused on really selling the fall campaign to get the starting point up for January. And a lot of those customers won't roll until then. But you should be looking at that range and be at the threshold of heading toward 10% or above for next year.

And within your guidance for that, how much contribution from the middle market do you factor in?

It would be more in line with what we had last year as opposed to the year before when mid-market really outperformed. We sold the same number of accounts in mid-market last year as we did the year before, but the average size was smaller. We didn't have a super jumbo in there. So, we've incorporated something more in line with what we had last year.

Great. Okay. And then, could you give us some contrast between the large benefit claims in Q2 relative to Q4, how much has that come down? And what kind of comfort level do you have that it could find some stability here. In the next quarter or two and then maybe improve from there?

Well, like we said, it didn't snap back in line with the pre-Q2 levels, but it's come down in frequency, those two quarters in a row. And we felt like though it was important for us for budgeting purposes to not assume that was just going to keep happening with no basis for it. So instead, we've assumed kind of in our worst-case that the number of these claims goes up with our unit growth. And so, Doug, in the best case the scenario that you said was --

Yes. The large claim is pretty consistent with the elevated amount that we experienced in 2019. So, that's sort of at the low end. So, obviously we don't have in there, the number going back and reverting back to pre-Q2 2019 levels in our forecast.

Yes. We really don't have it trending lower, much less falling off. I mean if it did either those things, we -- you'll see some outperformance on that front. But just not appropriate at this point to build any of that in.

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

Good afternoon. The benefits cost for the fourth quarter, how much higher were they this fourth quarter relative to a year ago?

Well, I think, if you remember and as I mentioned in my script, in our fourth quarter forecast. We considered even though the data was pointing to no systemic issues relative to the large claim activity. In our forecast, put in a similar level for the possibility of it continuing on from Q3 probably -- fairly at the level we experienced in Q3. At the end of the day, the Q4 large claim activity came in just very slightly ahead of that forecast that we incorporated into the Q4 numbers. Yes, the frequency came down some, but the total cost it didn't move very much.

So, it was around 6.5% up year-over-year?

Yes, I don't have the percentage Mark in front of me I'm sorry.

Total trend was just over four in for the year.

Okay. And in terms of the number of claims that you're seeing at the $50,000 and above in the $250,000 and above, can you give us any sense for that? And I meant -- clearly sounds from all of our prior conversations like, there's unusual random elements in terms of what you've seen. But there are obviously industry sources that would point to higher healthcare costs for higher level claims. And so, I'm wondering, what's the possibility that the higher cost claims actually increase next year relative to this year in terms of the $50,000 to $250,000 range?

I think, that's a good question, Mark. I think, what we have to rely on for that is the comparisons we have in our ongoing dialogue with our outside benefit consultant, our team internally and United and it's clear from their -- discussions with them that, if you go back we went from 2018 kind of being under the average of these types of claims to being over that average. And now we are coming down back towards that average. So, is it possible, it could be? Nobody thinks there would be another step-up increase on top of this huge step-up we had this year, a compounding type thing. That's why even the percentage increase in claims of 3.5% to 4.5% trend that we're applying is on top of this large trend from last year in total claims. The team I think is confident. We've got a good handle on that and are being conservative as we look forward.

Your next question comes from the line of Tobey Sommer from SunTrust. Your line is open.

Thanks. With respect to worksite employee growth, what's the numeric impact of the January catch up on your annual WSE guidance?

Let's see. So, that's kind of hot off the presses but we -- the catch-up from the sales effort, of course, it will roll in over the next 90 days, but it was several thousand employees.

Right. So is that a percentage point on the annual number? And what does that equate to?

Yes I think that's part of what we factored in to roll into going up from six to the seven on average for the year and gives you the range of 6% to 8% even though we're starting around that 6% number.

Okay. And then in terms of managing the growth and trying to reaccelerate it, you talked about BPAs up 11% is kind of a goal. Why not try to jack that up to the mid-teens or pull a couple of office openings out of the 2021 plan and put them into '20 to give you kind of more cushion and more firepower?

Yes that's a good question. What we find ourselves as you remember, we had a 14% increase in trained BPAs in the fourth quarter. And we feel like, we can have a decent efficiency increase, as they mature, through this year. And can let it slowly come down some to that 11% number. And that will have a favorable boost to growth. We feel good about that. If you added a lot more BPAs on top of the growth, we expect for this year, you have all the added cost upfront. And we felt like, balancing everything this was the appropriate plan.

We have another question from Jim MacDonald from First Analysis. Your line is open.

Yes. I just one, sometimes in the fourth quarter, you get people on their high deductible plans, kind of using a -- I don't think you mentioned, whether that was an issue in the fourth quarter. And I just wanted to check on that.

Yes. I think that's always a part of your fourth quarter. You expect people to have reached their -- even the people on high deductible plan many times have reached their limits. But I think that's factored into our normal seasonality. And I wouldn't call it out as an unusual occurrence for this recent fourth quarter.

Okay. I just wanted to check on that. Thanks.

Thank you.

We have a follow-up question from Mark Marcon from Baird. Your line is open.

On the mid-market client losses, to what extent did they -- the ones that weren't acquired, when they left for cost pressures? Did they go to other PEOs? Or what did they end up doing?

Yes. That's a good question. In the analysis when we looked at the whole book of business, the same percentage of customers ended up, at competitors as we had last year. In fact, I think, one year it was 40% -- 41% the previous year and 40% this year. Of course, it's 40% of a higher number. So, yes, some more went to competitors. But you still had about a 60-40, between kind of taking things back in-house, compared to going to another PEO.

And from a pricing perspective Paul, what was the -- like how much higher were the prices relative to what it would have cost, where they would have said we'll stay? Or how do we think about that? And then…

Yes. Those are the battles and the trenches that you go through to -- and you kind of have to try to figure that out. We'll reassess all that. It was hand-to-hand combat through the fall, on a case-by-case basis. And we do make pricing concessions to keep customers like everybody does. What about things, we highlighted is maybe we can have some process improvement to see those customers earlier, start them out at a little bit lower price, so that maybe we don't get into that. That intensive debate or have our process work better. So that we're quicker to react so it doesn't take as long to get to an ultimate price and bring in competition or whatever else -- what other options they're considering. So those are things that we're looking at that you do in a, debrief and we've got the teams look at that. We'll be tuning all that up. And I'll probably report about some of the improvements we make in mid-market as the year progresses.

We have a last follow-up question from Tobey Sommer from SunTrust. Your line is open.

Thanks. If you could refresh me on what your assumed contribution is to WSE growth from net hiring in the customer base. And how that figure compares to the higher levels you've seen in recent years?

Yes. So, I mentioned that it was fairly consistent with 2019. And that's a percentage we generally look at that in our assumptions, as a percentage of the base at the end of the prior year. So as a percentage of the December numbers, in the two years, it's very consistent. And so in spite of the fact that we had a tight labor market in the 2019 period, we're unsure obviously what that factors -- kind of how that's going to play in 2020 but we assumed a similar low level. Because historically 2019 was a lower level of contribution in that particular area that we've received in, prior years particularly when they kind of have been strong like it has been.

Right, so what was that number Doug, in 2019?

We didn't really provide that number. We're just trying to give you the feel for it. Generally speaking, it was of course lower than we expected and lower than the prior year due to the difficulty in finding people to fill the jobs. And so we've continued that same consideration into 2020.

We no longer have any questions, on queue. I would like to turn the call over back to Mr. Sarvadi. Please go ahead, sir.

Well, once again we thank you all for participating on the call today. And we look forward to seeing you out at conferences or when we get out on the road. And we look forward to talking to you again, next quarter. Thank you very much.

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