Good afternoon. My name is Lori, and I'll be your conference operator today. I would like to welcome everyone to the Insperity First Quarter 2020 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, Paul will provide an update on our business and operations including how the extraordinary effort of our corporate employees and our business model has benefited our clients and our work site employees and their families during the COVID-19 pandemic. He will also discuss the impact of both COVID-19 restrictions and the resulting stimulus packages on our business today and the potential impact going forward. This discussion will include the range of possible outcomes on the key metrics and drivers of our business. I will then briefly discuss our first quarter financial results provided an update on our balance sheet and liquidity and provide our guidance for Q2 and our updated guidance for the full year 2020. 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 more detailed discussion of the risks and uncertainties that could cause actual results to differ materially from any forward looking statements and reconciliation 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 at this time, I'd like to turn the call over to Paul.

Thank you, Doug, and thank you all for joining us. Before I discuss our results and outlook for Insperity, I'd like to say our hearts go out to all those who have lost loved ones and are suffering the most from this sudden unexpected health crisis. Our thoughts and prayers are also with those feelings the severe economic effects that have ensued as this crisis continues to run its course. Insperity is able to see firsthand the impact of this health and economic calamity on the small and medium sized businesses we serve. Our mission to help them succeed, so communities prosper has never been more critical to these clients, their employees and families. I'm extremely proud and thankful to all employees of Insperity for the way they have risen to the challenge by providing exemplary care and support during this time. So, I'll begin today's call with some brief comments about our solid first quarter results, highlighting two important outcomes, which proceeded the COVID-19 outbreak. I'll follow with a discussion of our quick and effective response to the health and economic crisis since mid-March including detailed metrics reflecting the effects on our client base. I'll finish my comments today describing the economic climate and considerations over the balance of the year that formed the basis for our updated guidance we are providing today. Our first quarter results represent a significant rebound from the fourth quarter, including strong sales and a welcome improvement in our benefit plan driven by improved pricing allocations and lower than budgeted costs. First quarter sales were 122% of budget representing a 25% increase over the same period last year. These results were driven by a 13% increase in trained business performance advisers and a 10% improvement in sales efficiency. Both core and midmarket sales were…

Thanks Paul. Now let's discuss some of the details of our first quarter results. We reported Q1 adjusted EPS of a $70 at the high end of our forecasted range. Adjusted EBITDA totaled a $101 million for the quarter. Average paid work site employees increased by 5.5% over Q1 of 2019 to just over 238,000. This quarter’s growth reflected a higher than expected level of work site employees paid from new sales coming off of the successful extension of our false sales campaign. However, our Q1 growth was damping by lower than expected net gains in our client base. Gross profit increased by 3.2% over the first quarter of 2019 and as you may recall from our earlier discussions, the year over year comparison was impacted by our favorable benefit cost trend in Q1 of the prior year. However, we effectively managed overall gross profit for Q1 of this year above budgeted levels. As a result from both our benefits and worker's compensation programs were favorable. As the large healthcare claim activity, we continue to see a decline in a number of claims over a $100,000 since the initial spike in the second quarter of 2019 although still slightly elevated from a historical perspective. Also, our Q1 claims trend associated with normal smaller healthcare claims came in near targeted levels. Now an outlier in Q1 was a shift in the timing of approximately $4 million of pharmacy costs into the quarter. As you may be aware, as a result of the COVID-19 stay at home orders, then you'd benefit plan participants across the country accelerated their pharmacy refills with many extending the refill period from 30 to 90 days. The impact of insurance companies relaxing their normal requirements around this area ultimately impacted the cost of all plan sponsors in…

[Operator Instructions] We have a question from Mark Marcon from Baird. Your line is now open.

Good afternoon, hope all, everybody that that you know personally is well and safe. Just wondering, if you could talk a little bit more about some of the sensitivities around the guidance and specifically, if you could talk a little bit about what happens to your SG&A in terms of sales commissions? And how that flexes with sales performance? And how we should think about that just in terms of those levels of sensitivity? And then second part of my question has to do with, what sort of regional differences are you currently seeing, obviously, the viruses fit in a different manner across the country? So wondering, if you can just tell us what you're seeing from a regional perspective and how you expect, some of the areas that haven't been hit yet, like are expected to be, how that would end up flowing through or how you're thinking about that?

Thank you, Mark. Hope you and yours are doing well also. So certainly, I'm going to kind of start with the last part of your question. I'll let Doug go back to the first part of the question. But if from a regional perspective, it's what you would expect, we've seen a disproportionate effect in terms of how many of the layoffs in the Northeast and the West have come from those locations compared to the percentage of our total base that's in those locations. You know, just as an example 21% of the West accounts for 21% of our work site employee base and had 28% of the impact on layoffs. Similarly in the Northeast, about 26% of the base there was actually about a 30% of the impact. So that's where you saw the most in, I think that fits in and makes sense.

And Mark as far as your question on the sales commissions, you're probably referring to the first quarter in your initial thoughts there, is up about 22% over the prior year. The reason for that was this successful extension of our fall sales campaign into the first quarter. So you've got some year over year comparisons related to that particular metric. But obviously, go over the course of the year based upon some of the discussion that Paul had relative to what we're forecasting on sales as a percentage of our initial budget, we would expect it to be lower year over year, particularly in the second and third quarters. Then taking out this picking up in the fourth quarter is we are expecting somewhat of a rebound in fourth quarter in our mid case.

Right. And then you've been through a number of cycles, I mean the client retention. How would you expect that to kind of flow through? I mean, this hits so fast that probably companies are hanging on, but if this lasts for awhile, how would you expect that to impact?

Yes, We had a lot of discussions about that, Mark, because we have not seen an elevation in our client terminations at all through this. And in fact, it's so interesting to me how this type of both health issue and economic issue really requires so much HR thoughtfulness and execution that, the way we've been able to help clients and the way they've expressed their appreciation really has demonstrated what the value of what Insperity does for businesses and how it really helps them succeed in good and bad times. And, I really think we'll see increased demand for the services long haul, we have great opportunity to tell a really powerful story about how this has happened. But, in our forecasting, we just could not -- we just felt like we had to build in some level of elevation of client terminations into the going forward scenario. So, we actually put 15% even in the high case to where our, just for those of you have a reference to the full year retention numbers. Instead of 83% in our original budget, we have now 81% in the high case and 80% of the low case, which for the last balance of the year, it's the low time of year in terminations anyway. So, that's a lot more terminations added in. We haven't seen it yet, but you are correct to assume that if the recovery is slow, delayed, we expect you'd see some and that's why we built that in.

Great. Can you just talk about like any requests from client pricing concessions? Are you seeing that? How are you handling it?

Yes, we have certainly seen some of that come through, which is normal in a time like this. Part of our effort with our business continuity support team was to really dig in and understand what clients' needs were. So, we've made some accommodation where we felt like it was important to do. So, we were always stand ready to help customers, but we've also were able to help them make adjustments within what we're doing for them that would help lower cost all the way through, that were for us and them. And I think those who are generally more significant to helping them deal with what they were trying to deal with right away. On a going forward basis, we'll see how things play out. But right now, we're expecting some, there may be some short-term benefit, but it's unclear how much of that really will end up going back out in other types of costs in the not too distant future.

And your next question is from Jeff Martin from Roth Capital Partners. Your line is now open.

Thank you. Good evening guys.

Hello, Jeff.

And congrats to you and your team for all you've done for this client base. Those are pretty impressive numbers coming out of the survey. Wanted to get a sense, do you have a feel for what percentage of your client base is considered essential service versus non-essential?

It's interesting because 88% of our customers said they had been affected, 36% said they were severely affected or considerably, I forget what the word was, significantly affected, I think was the right word. But as far as the central, it was hard to tell, my best guess is around 40%.

Okay. And then with respect to your fall sales campaign, I would imagine there's still quite a bit of uncertainty that would allow you to kind of shape what, what changes might come, but can you give us kind of a first glance at, what things you might be doing differently with the fall sales campaign this year?

Well, we have learned a lot during this period and where sales is particularly difficult because it's so normal to you to go out and build a trust relationship with a customer. And that takes face to face interaction. And but in spite of that, we have really seen our sales team adapt and do way better than I thought, based on how we've sold in the past. But what I like about what I'm saying now is even though we were seeing a significant reduction in their mouth of sales activity, the ones that are going through the process have a much higher, there seem to be much more engaged. And I think our closing rates are going to the higher, that's good for the short term. But the other thing that's been interesting is how our sales team are setting things up with our prospect base for as soon as you can get out and come see these customers again. So in some ways I feel like we're starting the fall campaign with this major prospecting effort among our sales team to start driving that activity as we get through the summer and are able to come out and see him.

Okay. And then my final question is you alluded to some of the clients shifting their healthcare plans or making adjustments to them. Just curious if you could go into any detail on that and if there's any direct implication with respect to your plan costs or your benefits costs going forward?

Yes, the kind of changes we're talking about. There were some were at renewal, some were not at renewal, but customers wanting to shift to a lower cost plan, and that's shows up in our business model through migration into lower cost programs that usually happens over a longer period. So if you had an increase in that, we would see some lower costs show up eventually. But the corresponding reality is that, you see an immediate effect in the lower allocation that are with clients and that's what lowers their fee structure right off the bat. So, we saw some of that, where it was appropriate. I don't consider that to be much of a factor. It was more isolated.

[Operator Instructions] Your next question is from Tobey Sommer. Your line is now open.

Can you give us a glimpse as to how the arc of the benefits cost centers has kind of played out in the year following the big economic events to prior recession? Just so would start to formulate a cadence and expectation for the trajectories next year?

Yes, it's a little early for us to be, I mean, we've thought about that, but we really haven't put a lot of thoughts to paper. As I look at the longer-term, first of all, nothing fundamentally has changed in our business and we'll be cranking along as soon as things are back to normal out there. So, I would expect us to see our growth engine re-engage in a significant way. But you do have some longer-term things like, on the payroll tax side, you have unemployment claims and that is a pretty slow and retrospective process that will flow through the whole system. So, you'll have some increasing rates there. On the benefits side, I think there will be this short-term interruption that we'll be able to look back and see pretty clearly, but I don't expect really any long-term change that would come out of this situation. There isn't any reason to believe there would be some long-term change to our overall picture as we go forward.

How the playbook that you're executing now differed from maybe what you would have envisioned in a non-pandemic driven recession 6 months or 18 months ago?

Yes, that's a really good question, Toby. When we ran our models for what we would do the next recession based on how the last one happened. The last one, the financial crisis driven recession was a financial calamity followed by an extended period really 15 months of layoffs exceeding new hires and kind of a long and painful. This one has been an immediate impact and really shutting things down dramatically. And then hopefully, we'll see how things look as things are going along. But I think the difference would be, we had anticipated the next one looked like this. We probably would have, we have planned to and we are going to keep adding business performance advisors because I think we've proven out that, that helps us muscle through the downtime and brings us out much faster as things get better. And we also have talked about in the past about reacting earlier on managing operating expenses differently. Now this time we have seen a lot of operating expenses that are coming out just because you can't travel some of our events are canceled and all that of stuff. But the need for our services is so great that, we're hanging tight on making sure we have the right service levels. We've got to meet our commitments to our customers and this is a time for us to shine and we're definitely going to shine throughout this period. We're going to be there for our client base. So, I think those two things kind of offset a bit and we'll see how that looks as the months go on here and hopefully we'll be forecasting a good a response here and growing out of that, and then continuing to grow our staff accordingly beyond that point.

Thank you. Just two little things. One, do you have a BPA gross figure that you're targeting for the end of the year? I apologize if you already mentioned it. And then, are there any legislative changes either at the state level or federal level that you're looking at as a possible curveball with respect to employer obligations and benefits like in the last down turn?

Yes, so the first question is the, we've kind of we were at 13% growth in BPA for the first quarter. We don't need to be at that level to be in a strong position as we go through this. And we're looking at having that number be high single digits by the time we get to the end of the year, maybe 8% or 9% or you know, maybe even 10, but somewhere around 9%. We think that puts us in a really strong position going into next year. On your other question, this whole dilemma or this whole calamity has been full of regulatory changes that have been coming fast and furious and we have been responding in an incredible way to changes that have to happen in the system and all types of things. You know, as we look at where we are today, there's still a lot on the table in Washington DC. We're keeping our eye on things like the COBRA possibility and we have seen a dialogue about that. And there've been sometimes recently when a localized disaster for example, in Puerto Rico, they put in a rule relating to extending COBRA that was different than what's happened years ago. And I think, we wouldn't be surprised if that or something like it came down the pipe, but there's other kind of things. But I think we've accounted for some of that in our whole goal and forward plan in both staffing side to be able to deal with things and also unexpected costs that could flow in. I know Doug kind of highlighted a laundry list of potential things, but as best we can, I think we're ready for what may come on left field.

Next question is from Mark Marcon from Baird. Your line is now open.

Thanks for taking my follow-up questions. Doug. I think you mentioned it, but I didn't quite capture it all, the benefits costs what were the health benefits costs up during this quarter?

In the first quarter?

Yes.

Well, we mentioned the fact that the benefit costs came in lower than our budget coming in, I've talked about the different components of that. And the large claim that given you continuing to decline, it was one piece of that. The second piece is just your overall claim. Your smaller underlying claims continue to come in near our targeted levels. I think one thing that I pointed out was in total our benefit calls came in lower in spite of the fact that we had this acceleration in the pharmacy costs into Q1 from the Q2, Q3 to the extent of about 4 million bucks. So, you know, all those things combined, we came in better than expected. And obviously, the other big piece of it is the pricing side of it. And so having pricing come in a little bit about target on the pricing allocations put us in a good position to exit the quarter ahead of our plan in that particular area.

Were the benefits costs themselves up in that 2.5% to 3.5% range or where did they fall within that?

Yes, I don't have that specific number Mark, but the trend was favorable relative to what we expected going into it

Okay. And then three other short questions, one is just given your exposure to Texas. What are you seeing just in terms of the impact of energy prices? That's one question. Second question is capital allocation. How should we think about it going forward? And then the last thing that we get a lot of questions on is just the difference in terms of the COBRA impact this recession relative to the last one? I think that you've got some provisions that enable you to change your COBRA exposure, if we end up having some change in legislation. I just wanted to hear that.

Sure, happy to do that. First of all on the Texas, we are about 19%, just under 20% I guess of our total business is Texas based and in Texas was less than 15% of the layoffs even though the 20% of client base. So that shows you some strength here in this market. Part of the reason we're not affected that much by the oil price situations, we are only about 3%, is that right Doug?

Yes.

About 3% of our clients relate to that, to the oil business, and we really haven't seen much happen for that group. Most of those are like in consulting and other types of situations. So, on the question on COBRA, we expect to be more COBRAs, anytime you have more layoffs you have more COBRAs. But since a lot of the layoffs are still on coverage right now cause they're temporary layoffs, that creates a whole different scenario. And then, as far as the last time we went through, that was a very different situation where COBRA was subsidized by the government. We haven't seen any sign of that yet. But in that scenario, we had, a problem was that we had a lot of people come on COBRA then it got extended again and extended and we were unable to pass the cost on the clients because its cost was indeterminable and nobody knew what that cost is going to be. So, we now have a methodology that came out of what we learned then, and we have the right in our contract to pass those costs on to clients, if they would have been subject to those without us. So we're comfortable with that, that's plan in place if it needed to come about. Hopefully that won't, but it's totally different situation today than what we were in back then.

Another thing different Mark, is that, under ACA, you've got another alternative for state exchanges today that you didn't have back then as another alternative for healthcare. So that's another factor.

Your next question is from Tobey Sommer from SunTrust. Please ask your question.

Thanks. Just, your survey past your efforts in helping your customers in a very favorable fashion, have you learned anything from, in terms of competitive intelligence that would suggest your company's performance without just from competitors, and this may give you an edge looking at in the future?

We believe so. It's a little hard to pin down, but, and the stories we have and what we're going to be able to do to really show what happened. I think is going to be strong for us. Our marketing team is all excited because they're collecting all that stuff. And, I almost put one of our client letters into my script because it was, you would've thought I wrote it, but this has really been a time to shine for our corporate employees done such an amazing job and the need was so great. In a normal time, the better we do for our clients for less say notice it. Because, our stuff is done behind the scenes and they get to keep going, running their businesses and don't have to pay attention to stuff. In this case, the stuff we do was front and center right in front of our client owners and the way we did it, the timeliness of it, the care and concern our people showed while we were doing it, it was really powerful. And I believe it's, I've always said our differentiating factors are the breadth of our services, the depth of the service and the level of care. And that was front and center throughout this to-date and continuing every day around here right now.

And there are no further questions at this time. I'd like to turn the call over to Mr. Sarvadi for closing remarks.

Once again, we want to thank everybody for participating today, and we look forward to updating you after another quarter. Thank you very much.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.