Good morning. My name is Kyle, and I will be your conference operator for today. I would like to welcome everyone to the Insperity Fourth Quarter 2018 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; 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 of our fourth quarter and full year 2018 financial results. Paul will then recap the 2018 year and discuss the major initiatives of our 2019 plan. I will return to provide our financial guidance for the first quarter and full year 2019. 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 statement, 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, once again, achieved record high operating results, reporting a 25% increase in adjusted EPS over Q4 2017 to $0.69 and a 24% increase in adjusted EBITDA to $47.6 million. These results were driven by continued acceleration of worksite employee growth and effective management of pricing, direct cost programs and operating costs. As for the fourth quarter details, average paid worksite employees increased by 17% over Q4 of 2017 at the high end of our forecasted range. Client retention remained strong, again averaging over 99% for the quarter. As for our sales efforts, worksite employees paid from new sales increased by 36% on a 13% increase in the average number of trained Business Performance Advisors on continued sales momentum in both our core and…

Thank you, Doug. And thank you for being with us today. We're very pleased with the impressive results we are reporting today demonstrating the strength of our business model and excellent execution of our strategic plan across Insperity. These results represent four years in a row, increasing adjusted EBITDA by more than 25% from $84 million to $240 million including 35% growth in this key metric in 2018. Today I'd like to cover our successful fall campaign and year-end transition which capped-off our best year ever and set us up for continuing outstanding performance in 2019. I also want to discuss our priorities for this year which are intended to continue our strong momentum in growth and profitability. I'll finish my comments with some color on how we view our vast market opportunity and how we are extending our competitive advantage in the marketplace. Our fall selling and retention campaign was very successful in four key areas including; core and mid-market sales, client retention and pricing on both new and renewing accounts. We achieved a 103% of our sales forecast for Q4 and a 107% for the full year 2018. This represents a 21% increase in worksite employees sold as we successfully grew that trained Business Performance Advisors or BPA count by 16%, while improving sales efficiency 5%. This is quite an amazing accomplishment, clearly demonstrating the effectiveness of our sales, training and management. Our mid-market sales results played a key role in 2018 as collaboration with our BPA channel provided a strong pipeline of qualified prospects in this segment. These efforts produced a 24% increase in proposals and a 77% increase in sold accounts and an increase of more than 100% in worksite employees sold in this segment. Our three-pronged marketing approach including; digital, loyalty programs and channel programs…

Thanks, Paul. Now, let me provide our 2019 guidance beginning with the full year. Paul just mentioned we are forecasting a 14% to 16% increase in average paid worksite employees over 2018 to a range of 238,400 to 242,600. Our forecast is based upon our successful year-end transition of new and renewing accounts, 15% growth in the average number of trained Business Performance Advisors, while maintaining recent sales efficiency levels, and continued success in our mid-market client segment. For the full year of 2019, we are budgeting client retention consistent with 2018 and slightly less net hiring in our client base as we intend to take a more conservative approach to this metric at the outset of the year. As for our gross profit area, we have gone through our usual budget process of analyzing client mix, pricing, and direct cost, including healthcare and workers' compensation claim trends. Similar to prior years, our budget process is intended to begin the year with a conservative forecast for direct cost trends and leave the upside to favorable developments as we manage pricing and direct cost over the course of the year. Our operating plan includes further investment in our growth including the hiring of Business Performance Advisors, opening of nine new sales offices, and incremental marketing programs. Also as we execute our long-term growth plan, we will continue to invest in our software-with-a-service model with personnel and technology infrastructure, security, and development. The combination of improved worksite employee growth, stable gross profit, and continued investment in operating leverage leads to our forecast of 12% to 19% increase in adjusted EBITDA from $240 million in 2018 to a range of $268 million to $285 million for 2019. We are forecasting a 17% to 25% increase in adjusted EPS from $3.75 in 2018 to…

[Operator Instructions] Your first question comes from the line of Tobey Sommer from SunTrust. Your line is now open.

Hey. This is Joseph on the line for Tobey this morning. My first question is about the growth you guys experienced in the mid-market this last quarter. What is driving this growth? Is it mainly related to the ramping of Workforce Acceleration? Or are you seeing more middle market clients that are interested in Workforce Optimization? Thank you.

Sure. Our effectiveness and the ramp up in the volume of sales in mid-market is really driven by two things. First of all, the collaboration with our core sales team is the group that serves up the prospects and they did a great job last year of providing a higher volume of qualified prospects for us to follow up on. Then you combine that with the improved closing rates coming from our mid-market sales team and that just produced a lot better results. But as always, all of that’s based on the reality that we have really refined our offering to the mid-market customer in the co-employment space both Workforce Optimization and Workforce Synchronization and we're having tremendous service results and a lot of really happy customers who have really solved for the complexity of the mid-market customer and we're seeing those results and expect that to continue.

Thank you. And then one more from me. Which of your service bundles are growing the fastest? And which one of them are growing the slowest? And then, how did the mark-up or I guess service fee on stand-alone services grow versus last year? Thank you.

Sure. We have a – of the primary bundles that we have, our flagship Workforce Optimization continues to grow the fastest and we would expect that. And then, one that is, it's growing fast, but on a small base. So I still consider it kind of behind the curve yet is our Workforce Acceleration. Now we expect to see excellent growth in that offering this year, based on the training results we just completed at our sales convention. So we're really excited on all fronts that we got a great target market for each of our offerings and expect that growth across the board.

Thanks. I will jump back in the queue.

Your next question comes from the line of Jim MacDonald from First Analysis. Your line is now open.

Yeah. Great quarter, guys. Could you give us any more details on the net gains in your client account in 2018? And then more specifically what you're expecting in 2019? How much of deceleration? Are you seeing any signs of deceleration yet?

Yeah. It's really interesting. We obviously watched that real closely. And we have over our year-end transitioned last couple of years that's not unusual for us to have a slight decrease in the net gain from customers from December to January. And we saw that again this year, a slight decrease. The only driver of – that would – we would consider have been a negative, would have been the sentiment issues – business sentiment kind of over the December and January period, pretty much around the market volatility and some other things that were going on. But if you look at the underlying metrics, as I mentioned in my script, if you look at average pay for example, was up over 5% on hourly employees, up over 3% for all employees. If you look at commissions that we pay to the clients – to the sales staff of our client companies that was at a number double, what we consider to be strong. So it was over 12%. Overtime as a percentage of base pay, we consider if it's over 10% that new hiring it is in the forefront and that was over 12%. So, all the underlying metrics that drive, the hiring are still positive. However, we think it's appropriate to be conservative. And so we basically took down our expectation for net gain from the client base by about 10% to maybe 12% compared to last year. So maybe 1% total on the base and we think that's appropriate to do, because, it's the one thing we don't control, so might as well built in a little conservatism on that expectation.

Yeah, Jim the other factor we're seeing in that particular component of our growth is M&A activity. And so as we're having more success particularly in the mid-market segment is where we’re experiencing more M&A activity from those clients. And so we saw that through 2018 I think looking at that with our existing client base and what their plans are for 2019, it could also be a contributor to that growth in the existing base.

Great. Just one quick follow-up. You got 2% growth in health benefits trend last year, what are you of -- where you're really thinking this year?

I think, we're kind of looking at -- again being conservative at the beginning of the year around 3%. So look at a range around 2.5% to 3.5% and start working on it from there, and do we can to like we did last year make that number try to come out of that low end of the range.

Great. Thanks.

Your last question comes from the line of Mark Marcon from Baird. Please go ahead.

Good morning, and let me add my congratulations. So wondering with regards to the increased sales efficiency that you're seeing, can you differentiate a little bit in terms of regions of the country Paul, just in terms of where you're seeing the greatest uplift? Is it in the more mature markets where PEO has been established for a while? Or are you seeing a change in behavior in terms of some of the less matured states? And how did your new sales offices do over this last year?

Yeah. I think, I'll tell you if you want just really peel it back to what's the driver of our sales efficiency and effectiveness of efficiency gain, I really would have to go all the way to the training of our district managers because we really not seen a geographic difference. What we've seen is that between the District Manager's training, so their ability to keep all the different sales team at whatever tier of production they are, keep them moving and progressing. You combine that with the sales training in our new BPAs because obviously we're having a lot of BPAs. But within the core BPA team, we've been able to grow at mid-double digits and keep that efficiency the same and then when you weigh in mid-market success that's driving a higher total sales efficiency. So those are things driving that and it's a lot of blocking and tackling it down at the very training level BPA-by-BPA level. The other thing I would say is that our marketing success in terms of serving up qualified leads, a 40% increase last year. That means you're going to have our sales team is saying more time in front of qualified prospects instead of trying to find those qualified prospects. So a lot of those things together to be able to accomplish that really is amazing when you think about growing a sales team that fast and having the sales efficiency increase.

Yeah. It really is. And I was wondering if there is -- if you're seeing any change in terms of just the general acceptance of the PEO concept particularly with some of the legislative changes that have occurred nationally?

Yes. I absolutely do. I really think we really have moved up that adoption curve in the marketplace, just the energy behind it. And I think it goes - certainly, the PEO acceptance has improved, but also I think behind that is just the recognition of HR is a driver to business success. And that's why we're really capitalizing on that theme, trying to cast a much wider net, really going after the thought leadership in the space. I can remember a time when we didn't really want to say HR, because it's kind of a Debbie downer moment to talk about that. But its front and center now because people realize, if you give the people strategy right, it makes a huge difference.

Well, you've certainly shown that and congratulations on your book, by the way.

Thank you.

I was wondering, can you talk a little bit about as it relates to the first quarter and the full year guidance. What are you expecting particularly for the first quarter in terms of gross profit for worksite employee? You've got a really tough comp there?

Yes. I think, generally speaking, I think, as you know, Mark, first quarter would always have most of our dollars generated during that quarter, because of how the payroll taxes and the medical trends work. We have deductibles, still being met the employees during that Q1. So I don't have the specific numbers in front of me, but you would expect somewhat of a similar step down from Q1 to Q2 because of those drivers.

I am just wondering how you were thinking about the Q1 number in terms of that's embedded in your guidance?

Yes. I think if you just look at the EBITDA expectation and you look at the employee growth and I think we've -- if you look at our expected growth on the operating expense side, you kind of back into that. But it will be strong, because the first quarter in terms of seasonality, we always have those two components that make the first quarter strong at the gross profit line.

Yes. I recognize that. I was just thinking about last year the severity and incidents on the healthcare side were really favorable. So I was just wondering, for assuming that the healthcare cost on a per employee basis are probably going to be a little bit -- maybe a little bit higher than they were last year?

Yes. We look at the trend on that with the underlying claims in there and kind of build it on a year-over-year basis. So we would expect that be down a little bit, because it was so exaggerated last year.

Yeah. Okay.

That make sense?

It does. I just want to make sure that, that was in fact the case. And then, with regards to what you said about the growth geographically. So you're seeing as faster level of growth out of Texas as you are out of some of the newer markets?

Yes. Actually, when you just evaluate the growth rate, I'd say, we're probably running little fast in the Northeast than we are in some areas. But it's really wherever we kind of grow the BPAs is where you're going to grow the business. So we do try to even that out as to where -- as we look at the regions and where we're opening offices and where we're growing the BPA base.

And then with the expanded client solution side, as well as the enhanced training, are you actually seeing an increase in BPA retention rates?

Yes. We are seeing what I would call them kind of a step up improvement in retaining our BPAs for a long time first 30 years in business or 28 may be years in business. We were north of 30% around the 30% to 35% mid -- sometimes even as high as that. And we're more in the 26%, 27% retention and I think we have room for improvement there. Success breeds success people are doing well and you're able to retain BPAs more effectively.

Then that 26% to 27% is the turn over rate and retention is running 63 to...

Sorry about that. Yes, I am thinking in turnover, right rather than retention, but yes.

Great. Terrific, congratulations.

Thank you.

[Operator Instructions] A follow-up question comes from the line of Tobey Sommer from SunTrust. Your line is now open. Q –Unidentified Analyst: Hey just one quick question about capital allocation. So you repurchased a lot of stock in 4Q, how does – how do repurchases rank as far as your plans for capital allocation going into 2019 with the stock price being significantly higher than the implied purchase price for the fourth quarter? Thank you.

Sure. Obviously we weigh in on a variety of factors at each Board meeting every quarter and get outside input from advisors etcetera. But in the fourth quarter last year it was obvious to us that there was a -- we think a reduction stock price didn't really relate to anything based on reality happening the business. So we increased our allocation of our capital toward buying back shares. And you will see us from time-to-time emphasize different uses of our capital. So we wouldn’t have bought back a lot of shares, but we still have plenty on our authorization. We're generating a lot of cash and so we’ll weigh that accordingly each quarter. Q – Unidentified Analyst: Thank you.

There are no further questions at this time. I will now hand the call back to Mr. Paul Sarvadi.

Once again, we really appreciate your interest in Insperity and we will be out on the road some this quarter and next. So we look forward to seeing you and talking to you some more about our game plan for 2019. So thank you again for participating. We'll see you out there.

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