Good afternoon. My name is Erica and I will be your conference operator today. I would like to welcome everyone to the Insperity Fourth Quarter 2021 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. [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. Let me begin by outlining our plan for this evening's call. First, I'm going to discuss the details of our fourth quarter and full year 2021 financial results. Paul will then recap the year and discuss the major initiatives of our new five-year plan. I will return to provide our financial guidance for 2022 and how it fits into the context of our long-term view. 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 begin by discussing our fourth quarter results beginning with our solid growth. We ended the year on a strong note with a 12.4% increase in the fourth quarter average number of paid worksite employees. The continued acceleration of our unit growth above the high end of our forecast was driven by strong net hiring in our client base, improved sales efficiency of our business performance advisors and high client retention ending 2021 above our growth expectations combined with a new sales book during our fall sales campaign above budgeted levels and continued high client retention levels positions us for further growth acceleration in paid worksite employees into Q1 of 2022. And Paul and I will comment further on our 2022 growth expectations later in the call. Now in addition…

Thank you, Doug and thank you all for joining our call. Today I plan to provide comments on three topics. First I'll offer my perspective on our fourth quarter performance which includes an unusual combination of strong momentum toward long term growth and pandemic related short term noise. Second I'll provide some context for these results with a discussion of our new five year plan we recently launched to capitalize on the tremendous opportunity we see ahead. I'll finish by providing a view into the dramatic growth acceleration we have going into 2022 and our key initiatives for the New Year. This fourth quarter included exceptional execution in everything we control across the company finishing off a strong year in the midst of the continuing pandemic. Earlier in the year we were hopeful the pandemic and the uncertainty it brought were waning and a new normal would soon set in. Instead new variants emerged and federal and state government reactions in the form of policies and guidance led to more complexity confusion and compliance challenges for clients and worksite employees. Clients responded with a deeper engagement level with us and request for more help with more issues. Service personnel across our organization did an outstanding job supporting clients and worksite employees through these challenges as service interactions continued at nearly three times pre-COVID levels. One of the significant drivers of confusion and complexity was the federal and state vaccination regulations and mandate requirements to gather information from all employees and monitor vaccination testing and masking created an immediate client need for remote technology solution and for support creating and implementing new policies. These conservative interactions were at the top of our client organizations with business owners and C-suite level individuals on many sophisticated HR issues including employee wellbeing, culture, talent…

Thanks, Paul. Now, I'll provide the details behind our 2022 guidance. Then, I'll put this year's outlook in context with our performance over the past few years given the noise created by the pandemic and how we are positioned for strong growth and profitability in the next five years. Our worksite employee growth with successful year-end transition coming off our strong selling and renewal season has positioned us for further acceleration of unit growth in Q1 and into the mid-teens for the full year. We are forecasting an 18% to 19% increase in the average number of paid worksite employees in Q1 over the prior year. Remember this comparison is impacted by the loss of a large enterprise crime in the prior year's first quarter, which reflected 3% of paid worksite employees. Subsequent to Q1, our growth is expected to be driven by the ongoing improvement in the tenure and production of our business performance advisors during a period of strong demand for our services. Continuing solid client retention and net hiring in our client base, although at a slower pace than last year, assuming our clients are impacted by the tight labor market. We are forecasting 14.5% to 16.5% growth for the full year when considering these factors, along with a strong starting point to the year. As for our gross profit area, our outlook remains intact from the high level thoughts provided in our previous earnings call with the exception of incorporating the recent developments related to the pandemic and its impact on our benefits area. Similar to the prior year, due to the continued level of uncertainty associated with the pandemic, we will adopt a wider-than-typical range of expected outcomes in this area in 2022. As for some specifics in the gross profit area, the historically low…

[Operator Instructions] Your first question comes from the line of Andrew Nicholas with William Blair.

Hi good afternoon. Thanks for taking my questions. To start just on the COVID costs. Could you help us understand what about fourth quarter was different from the last several quarters? Is it just a lag effect from higher costs in previous quarters that's all flooding through in the fourth quarter? And then I guess you know I heard all your commentary around the elevated cost but I'm trying to better understand what impact this headwind could have on 2022 specifically. Is there carryover? How much of that is priced in looking forward I know it's a multipart question. I might have a few follow ups but maybe we start there.

I think that's a good big picture type of question. And the bottom line answer is that you know the fourth quarter of healthcare claims especially the COVID related costs were significantly higher than expected. As you look back on it in hindsight it's driven by the new variants mostly delta driven treatment costs and then of course booster and ongoing vaccination costs and then also as the omnicron began a significant amount of testing costs. So all three of those areas were significant. And you know what we have done to look at that for going forward is like I mentioned in my script even though it looks more like a spike in the fourth quarter. But you know we just really can't look at that that way as we look at budgeting for this year. So as Doug said we're not considering it as a bubble in our budgeting process. If it comes out that way, it just turns into upside for us. But we have actually gone ahead and budgeted acclaimed trend on top of that higher than expected costs we had in the fourth quarter.

So just to make sure I understand, I guess, you know, why wouldn't it be a bubble? I guess I'm wondering, you know, what about third and fourth quarter of this year would have been different than previous waves? Is it that the outside of COVID specific costs utilization was much lower to offset it or what was different this quarter versus as, you know, throughout 2020 or...

Yeah, that's a good question. I mean, if you look at the big picture, early in the pandemic, there was a lot of deferred care and costs, and that's why we had, you know, actually the only time in our history actually had the costs go down on the benefit program. But then as we looked at last year, at the beginning of the year, we budgeted for double trend, you know, 6% to 7% that would be driven by COVID costs, would also be driven by deferred care coming back in and you know, the potential even for acuity from the deferral of care, etcetera. And yes, that did come in through that first half of the year. But what nobody knew at the beginning of last year was two new variants were going to happen, and it was not possible for us to be able to predict those, even in the late third quarter or so, because it was not possible to tell how the delta cost were going to run out. So, that's just, you know, pandemic-related. We did have some utilization in that fourth quarter as well. We could see utilization of you know up from the year prior in the quarter prior. But you know this is pandemic related. Like I say said in my script is the noise of it and we've decided that for this year's budget we should trend off of that number. And it does turn out to be a bubble because the COVID costs will go down you know I think that's probably going to happen. But I also realized you could have other deferred care costs other acuity related costs. So we're just going to be conservative to this year. And what's more important is to look at the big picture of the five year plan we have ahead because when you start this year off with the type of growth that we have 18% to 19% unit growth for the quarter mid-teens growth for the year and the type of momentum we have in this effort this drag you have in the gross profit for the 2022 year is really just masking this tremendous growth in units and profitability that we'll see in the years ahead.

I think the other piece is on the pricing side of that as we mentioned in some previous earnings call at the outset of the pandemic going into 2020 when you had all this abatement of care we ended up with a slight negative cost trend year over year which has never happened to us before. We were still pricing in over the long term at a more of a normal type trend factor. And obviously you had some doubling up of that in 2021. But as I mentioned in my script you know you had a little slight negative in 2020, 9.8% some double up of the trend in 2021 which you would expect with the deferred care and ongoing COVID costs. But you know the average was 4.5% and our pricing has risen at a similar rate. So the real objective for us is matching pricing costs were taken conservative approach we believe by looking at the 2022 forecast on top of the 2021's elevated costs and continuing a price for the long term and you know we think that's an appropriate plan.

Your next question comes from the line of Josh Vogel with Sidoti.

Thank you. Good afternoon guys. You know just thinking about you know workplace safety on site testing or vaccinations. Is there an opportunity there for you to provide these services and ancillary offering and you know adding a markup to your pricing?

Well some of these you know when I look at that compared to other things we can do, I don't see that as a tremendous opportunity. I mean the opportunity we have ahead of us simply by growing the business at significant ways you know is really the best driver along with our traditional employment services which is you know expected to add to gross profit significantly over this next five years. So we've got a good plan for adding those revenue sources in things that are more directly related to what we're doing. And you know we're hoping to see that a waning of vaccination and testing cost you know the cost but the actual vaccination and testing which seems to be reducing or the emphasis is starting to slide on that anyway.

Now I understood and hopefully that that is how it plays out. So it's nice to see the extent with the United Health and you know you mentioned administrative cost savings, understanding your guidance, you're giving a wider than usual range but is there any way to quantify under the extension you know what you know you expect you know annual administrative cost savings to be starting this year?

So it actually the way it works is that we actually have targeted growth levels that we hit and it causes administrative cost reductions. So some of it depends on the timing of hitting those numbers and we've got it set up you know for the long term and can literally you know deeply cut those costs over that period. But the timing of how much happens when it's a little harder to predict. And so you know we won't be given a direct number on that but it is part of the fact that you know this year it is one of the components where even though we're trending the claim cost at a higher rate. We have offsets to that that have kind of kept our overall benefit cost going up in a range that's easy for us to match the price and cost of the total benefit. So that is one of the factors that is an offset.

Your next question comes from the line of Jeff Martin with ROTH Capital Partners.

Thanks for the detail on the call. Yeah. Hi. Paul could you give us a sense -- are you going to share the details of your five year plan you know from a financial metric standpoint with the street at any point? And if so, you know what are kind of out year objectives in terms of, you know revenue EBITDA EPS if you could share?

Yeah you know we've kind of throughout our history we have not provided our aspirational objectives for long term you know formally to this trade. And I think that's the better way because you know obviously that's a long term look. But I think what we like to describe to our investors for them to be aware of is that you know our long term plan always involves shooting for double digit unit growth and then some slight improvement in gross profitability on a per unit basis and then leverage at the operating side of the business. And that produces you know significant adjusted EBITDA growth you know 20% to 30% a year type ranges when we're growing double digit unit growth a little bit better gross profit and some operating leverage. What's really exciting about this next five years is that we have a whole another source of operating leverage and growth support in improving sales efficiency. We've spent 35 years using pretty much the same sales efficiency numbers because of you know the dynamics and what we see today is with the demand that we're seeing in the marketplace and how we've been able to mature our sales team how we're able to drive leads to them through our marketing effort. We see the opportunity now to even go beyond that in this next five year plan. So instead of 10% to 12% unit maybe it's more than that. Of course this coming year we've given specific guidance in the mid-teens. Can we do that for the longer term? So we'll be working at around here but you know, no, we're not ready to say this is our five year plan for that level of growth, but that's kind of how our focus is inside now when you…

Understandable. Okay. I have one more question, it’s a two part question. The first part of it is you had a 9.8% benefit cost trend in 2021. You said you're basically assuming it's not a bubble. Does that mean you're pricing in a 9.8% or thereabouts cost trend this year if not maybe you could correct me on that and then secondly you referred to workforce acceleration serving as a de-risking factor from the benefits side of the model, how much of an impact and how quickly does that de-risk it over the next couple of years in review?

Sure. So let's talk about the claims side first and keep in mind that I think in Doug's script, there was a list of different things that have actually offset the claim trend, so that the total benefit cost is a lower amount of an increase over the prior year. So even though the benefit cost increase is under 5% , I think the 4.5% range, the actual claim component was significantly higher than that and is trending off of the claim cost that added to the 9.8% trend for last year. But other things that have happened like the mix of business changes come in demographic changes in our organization and lower cobra cost also, certain customers that left. So there's a lot of components that have offset those costs, including like we were talking about previously, the new agreement with the UnitedHealthcare. So when it's all in, we are building in those continuing claim costs that may or may not occur, but it was offset by some of these other cost reductions that we've earned in other ways. Then, on the workforce acceleration front, it's a little early to actually give you some view into that, but what's really exciting is, you know like you've heard in my script, we had over 100%. It was 111% increase in workforce acceleration sales this year and you know it's so exciting because the sales organization really caught the picture this year and I can see them really continuing to improve in this year. And as the years progress part of our five year plan is to have a full companywide commitment to that WX strategy. And you know that we believe will be a nice contributor. And the good news of course is we don't take any health related risk on that traditional employment business. So if the way to look at it is you know if you've got a gross profit per employee number which we've had in the 260 to 270 range that kind of area you know you'll have a bigger part of it as it goes up in the future, bigger part of that will not be benefits related. So will not be the surplus on those direct cost which is one of the three components to that gross profit number. So we're excited about that. And you know it does have the potential to reduce the risk. It's a little hard to give you the numbers today on how and when that happens.

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

Good afternoon Paul and Doug. I don't want to dig too much into the healthcare area because you've answered a number of questions but I do have just a couple of clarifying questions just to make sure I fully appreciate what you're saying. So the first part is basically of the $27 million that you cited in the press release. How much of that was, unusual COVID related costs versus, you know some of the elective deferred you know procedures finally coming back and then what are you building in specifically for healthcare cost for 2022? What's the level of visibility that you have there and how is the pricing changing for your clients for the clients that are basically signing up outside of the typical cycle?

Yes. So first of all you know it's hard to -- we can tell you that the biggest driver the primary driver to that cost that was put into the press release was certainly the COVID related cost. It's a little bit hard to pin down because you know the reporting on these types of claims are still you know they have issues with how they're processed and what big you know there's every period. There are claims that if they're listed as COVID they have to go through another process to determine how much of that claim is COVID related. It's really a complicated process. So that's part of what's made the unpredictability not having enough information after the third quarter on those specifics and more what I call pended claims yet to be processed. So it's been harder to estimate what that incurred but not reported number is. And in the fourth quarter you know a lot of that information did come back in. I think we've got a deeper and I think a better understanding of it and we were able to factor that into the going forward. And one the second part of your question about the pricing with customers this is you know again the very good long term view that we've had about this. We have continued to move pricing up at a more normalized rate in spite of the variability going on in the pandemic related issues. And so even for this year we're talking about an extra 1% or 2% on the pricing of the business. And of course we're in an environment where you have wage inflation going up and when wage inflation goes up since our phase many times are represented as a percent of payroll it's even easier for us to pass on any increases. And in this case this is not any different than what we've been doing the last couple of years and doing it very consistently. And you know you can see how our retention rates have been highest in our history. And so we don't have any issue with continuing that same pricing strategy.

Your next question comes from the line of Tobey Sommer with Truist.

Thank you. Could you give me a sense if you could for what the exits coming out of here means for your pricing trajectory over the next couple of years because we've had now you know three years of varying health care benefit performance where you clearly you can demonstrate to your customer that you're you know providing value there. What is that? How does that inform what you think about your pricing over the next two or three years?

Yeah so you know the issue of how we price just on the allocations for the direct costs we cover those are – we kind of look at each of those as buckets, workers compensation, payroll taxes, benefit costs and all of that pricing we continue to move based on that whole concept of matching or aligning price and cost. And we feel very comfortable, even with this crazy volatility of the pandemic in the last year or two that we've kept things on the right track for the long-haul. Now, we're also looking, though, at increasing pricing of – on our service fees, and that's just simply in line with the inflation picture that we have in the marketplace at large and so we'll continue to move pricing up. We've got some of that budgeted into this year. Keep in mind we knew customers every month, so those increases in price roll in over a period of time but we feel like we're in great shape. The value received from our clients through this period is extremely high and so we're comfortable that being able to appropriately add pricing to deal with inflation is also necessary and very doable. Like I said a few minutes ago, just keep in mind that there's even a little bit of help in passing on price increases because the dollars that we put in are percent of payroll. So it's an overhead item, a burden item, if you will. And as wage inflation has gone up, it actually makes those dollars a lower percentage. So, we're in great shape on the pricing front.

Thank you. There are no further questions at this time. I'll turn the call back over to Mr. Sarvadi for closing remarks.

Well, once again, we'd just like to thank everyone for being on the call today and look forward to further dialogue and discussion and excited about the growth momentum we have in the company and especially the five-year plan ahead of us. Thank you once again for participating today.

This concludes today's conference call. Thank you for participating. You may now disconnect. Goodbye.