Good morning. My name is Lera [ph], and I'll be your conference operator today. I would like to welcome everyone to the Insperity Third Quarter 2020 Earnings Conference Call. At this time, all participants’ lines are in a listen-only mode. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. 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. Let me begin by outlining our plan for this morning's call. First, I'm going to discuss the details behind our third quarter 2020 financial results. Paul will then comment on the key drivers behind our Q3 results, our outlook for the remainder of 2020 and some general comments on 2021. I will return to provide our financial guidance for the fourth quarter and an update to the full year 2020 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 I are make -- 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 our third quarter results in which we achieved $0.91 in adjusted earnings per share, a 21% increase over Q3 of 2019; and adjusted EBITDA of $58 million, a 13% increase. These results reflect outperformance in worksite employee growth and pricing relative to our expectations in this uncertain and challenging business environment and upside in our direct cost programs brought about by the dynamics of the pandemic and the structure and ongoing management of these programs. As for our growth metric, the average number of paid worksite employees in Q3 of 2020 increased by 1.7% sequentially over the Q2 period to 231,750, which was above the high-end of our expected range. Now you may recall that employee layoffs in our…

Thank you, Doug and thank you all for joining us. Today, I'll provide comments on three topics, starting with some thoughts on our significant outperformance in the recent quarter. I will then discuss how the primary drivers to our business model reacted to the pandemic resulting in the opportunity implied by the guidance we are providing today to attain double-digit growth in adjusted EBITDA this year. I'll finish with some comments on our view of these factors going forward, which will ultimately drive our outlook for 2021. We are certainly pleased with our execution in the third quarter, which resulted in a variety of factors contributing to better than expected results. The resiliency of our client base supported by our dedicated service providers, combined with solid sales and retention to drive a nice rebound and sequential growth in our key metric paid worksite employees. Net gain in worksite employees from within our client base exceeded our expectation as client hiring of furloughed and new employees occurred sooner and at a faster pace. As Doug mentioned, the client retention continued at historical levels of 99%, despite the economic pressure on small businesses in the current environment. In addition, our booked sales since the pandemic have been approximately 70% of our pre-pandemic sales budget, which we believe is solid performance in a virtual selling environment. In the third quarter paid worksite employees from previously booked sales was 92% compared to the same period last year, demonstrating continued demand for our services and strong execution in enrolling new clients. Another highlight of the quarter was our strong pricing of both new and renewing accounts in service fees and allocations for direct costs, including our benefit programs. The matching of price and direct costs is critical to our model and exceeding our targets and…

Thanks, Paul. Now, let me provide our guidance for the fourth quarter and an update for the full year 2020. As you're aware, there continues to be uncertainty as to the duration and the conditions of the pandemic and the trajectory of the economy, the current political environment and the timing and details of any further government stimulus as this uncertainty. We have taken this into account when providing our financial guidance over the remainder of 2020, and we will be considering these factors in our budgeting process for the upcoming year. We typically do not provide formal guidance for the upcoming year at this time. And therefore, we'll consider any further developments in these areas and the outcome of our year-end selling and renewal season when providing 2021 guidance in our next earnings call. Now based upon the details that Paul just shared, we continue to expect sequential worksite employee growth over the remainder of 2020. For the fourth quarter, we are forecasting average paid worksite employees in a range of 236,500 to 238,500, a sequential increase of 2% to 3% over Q3 of 2020. This equates to an expected decrease in average paid worksite employees of only 1% for the full year 2020 in the face of significant challenges that the small business community caused by the pandemic and its impact on the economy. With an improved outlook for Q4 worksite employee growth, our current pricing strength and a range around expectations in our direct cost programs, particularly our benefits program, we're now forecasting Q4 adjusted EBITDA of $21 million to $30 million, and adjusted EPS of $0.20 to $0.38. When combined with our Q3 outperformance, we are raising our full year 2020 earnings guidance and now forecasting adjusted EBITDA of $271 million to $281 million, an increase of 8% to 12% when compared to 2019. As for full year, 2020 adjusted EPS, we are now forecasting a range of $4.35 to $4.53, up from our previous guidance of $3.67 to $4.04. Now at this time, I'd like to open up the call for questions.

Thank you, sir. [Operator Instructions] Presenters, your first question will come from the line of Josh Vogel from Sidoti & Company. Your line is now live. Go ahead, please.

Thank you. Good morning guys. Thanks for taking my questions.

Good morning.

Good morning.

Paul, just a question around some of your comments. Obviously, you're seeing a lot of effectiveness in selling in a virtual environment. As we move forward, though, you want to reintegrate face-to-face meetings and that could lead to efficiency gains. But I am just curious if there's an opportunity here for you to potentially pared-down the real estate footprint longer term, given the success in selling virtually.

That's something we'll certainly consider for the long run and as we evaluate how work actually changes and what needs come out of that. But remember, we have both our sales and service teams distributed throughout the country to be close to our customer base. But as again, we will have to evaluate how those needs may change into the future.

Okay. Great. And your comments around having limited exposure to the hardest hit sectors, so just curious, if we dissect your client base, what percent is within like entertainment, hospitality, restaurants, and travel?

It's really, really nominal. I mean, less than 2%. We generally stay away from types of industries that have high turnover rates as -- which is a significant employer risk. And a lot of times, restaurants and other types of companies that have been hardest hit, just aren't in our target customer base. And so, we actually just benefited from that, because that was part of our model before all this came about.

Okay. Great. And then, obviously, pretty successful in pricing. I was just curious if you can get a little bit more detail around -- what was behind that 4.4% year-over-year improvement? And did you lose any clients over pricing?

No. We always lose some clients over what I'd call value that -- how customers may look at what they're paying and what they're getting and their own analysis of that. That's kind of -- we -- out of the turnover we have in clients every year. It's typically about 3% of the total that have a cost value related type of decision. But no. We didn't see any change in that this year, even though we were driving pricing that 4.4% is -- the full comprehensive service fee which includes other changes like our markup for the services we're providing, plus the pricing for our -- to the allocations for our direct costs like benefits, workers' compensation and even payroll taxes, et cetera. So, our strategy coming into the year was to drive our pricing higher to match cost and actually to build in the cost that we had seen from higher, large claim activity last year. We have done that. That's built in now. And we feel like we're very good shape. We have -- we realize that there's a lower trend right now coming in the benefit plan from the effects of the pandemic, but we expect that over time to be more in line over the longer period with a normal trend. And so, we've been pricing to make sure we have accounted for that as things normalized.

Thank you, sir. Your next question will come from the line of Tobey Sommer from Truist Securities. Your line is now live. Go ahead, please.

Thank you. Paul, I was wondering if you could comment on your thought process and sort of level of optimism about the company's ability to return to double-digit worksite employee growth, and perhaps you could compare that to how you felt three or six months ago now that you have some experience operating independently [ph].

Thank you, Tobey. Yes. We -- that double-digit unit growth is kind of in our blood. It's what we live for. And the market opportunity is so great. The demand for our services is awesome. There's really no reason we shouldn't be able to get to that. And the way our model works is if you grow the BPAs at the right rate at double-digit growth, then you have the sales efficiency at the right rate and you keep your retention properly then ultimately you have, over a 12 to 18-month period, you have double-digit unit growth. That's affected somewhat by inputs plus or minus from mid-market performance, which is a little choppier. But at this point, that's kind of how we're planning. We're planning for how soon can we get back to double-digit unit growth some time next year and how soon can we do it? Of course, the focus right now is, have an effective fall sales campaign in both selling and retention to optimize the starting point for the year. It looks like we end this year around where we started. So, the pandemic reduced worksite employee 6%. We've come back almost all the way by the end of the year. We think we're about even. So, if we can start the year at that point, it's almost like a mulligan, like a do-over and we should be able to ramp up as we hit the second and certainly the third quarter ramped back up to double-digit growth. Now that's all pending some of these other considerations. If there are shutdowns that are pretty severe, then you're going to have that will delay when you can get back to that growth. But I think we're in a good point of being able to balance the inputs. We've learned pretty fast. We're going to really dig in on that learning over the next quarter and put these things into our budget and into -- more into operation, kind of taking best practices from across the company and making sure those are in full effect as the new year begins and we're -- we believe that will have us on track to get back to how we like to do things around here in terms of growing worksite employees double-digit.

Thank you. If I could ask a numbers question of Doug, and then I get back in the queue. If I look at net effect of kind of COVID-related benefit costs and other things that have been altered, how much of a benefit might 2020 reap, not so much, maybe relative to some historic norm or 2019? Just so we can use that for our own inputs, as we think about how to model next year ahead of your guidance.

Yeah. It's a little bit of a different -- difficult answer, because there's a lot of puts and takes in the benefits area within the COVID arena and even outside of it. What we've seen is, as I mentioned in my prepared remarks is that the second quarter where you had quite a bit of the deferral of the elective procedures develop out favorably relative to our initial estimates of that quarter, obviously a high degree of uncertainty and it was prudent to do so. The third quarter is going back towards more normalization. If you remember, we said, okay, the deferred elective procedures, we expect those to come back in the second half of the year. We saw a little bit of that in the third quarter. But we don't -- not to the degree that we expected. Now what were incorporated into fourth quarter guidance is continued returned to that normalization, and on top of that some increased COVID treatment and testing costs into the fourth quarter. So I think we've been appropriately conservative in the fourth quarter guidance relative to that. But you've got some puts and takes there. You've also -- you've got the mild flu season that we're hearing from the CDC as a result of the precautions people are taking. And so, that goes into it too. And then you've got the potential growth in COVID costs with the unemployment all -- with the layoffs that have occurred throughout the year. So, I'm not giving you a number, because it's -- there's just so much uncertainty related to all of those pieces. I would say, going into the year, we were probably expecting a year-over-year benefit cost trend in the 3% to 4% range or so. With the year-to-date results that we've achieved and with the fourth quarter guidance, our forecast, which I just discussed with you, it probably at the end of the day, if all that proves true for 2020 would be flattish to 1% or so.

Thank you. That’s helpful.

Thank you, sir. [Operator Instructions] Presenters, your next question will come from the line of Jeff Martin from Roth Capital Partners. Your line is now live. Go ahead, please.

Thank you. Good morning, Paul and Doug. I hope you well. Could you touch on the sales effectiveness throughout the quarter? How did that trend? I know that 70% was, I think, towards the midpoint of your expectation that you outlined in April or May, if I recall. And then secondly, in terms of your BPA growth plans, I know you had talked about 10% this year and getting back to 15%, but how should we think about BPA growth next year?

Yeah. That's good. Thank you, Jeff. So, in terms of sales and how our budget works, keep in mind that as the -- our budget gets bigger every month as the year progresses, following the historical pattern of how our sales work. So, we had a good increase during the quarter. We were in that 70% range, which is we believe is good performance in this environment. And it's -- but it is a bigger number than the second quarter because budgets go up as the year progresses. So, we also were able to maintain that 10% increase and BPA growth. And just preliminarily as we're looking into next year, we're going to dig down on the budget and come to a final conclusion on this, but our intuition is we really don't. We could probably have a pause in growing the BPA team for at least six months or so and allow some efficiency gain that will come out naturally to continue to drive that double-digit growth. So, we're looking at those options for next year, but we're in such a strong position now, it really gives us some nice options. So, we'll kind of see how things are playing. If we have -- if we're going into the year and there's such strong upside from other sources, we might continue the growth in BPAs to stay ahead. But like I say we have a lot of options about going into the year. It's one of the levers we'll be able to decide what to do with to optimize our performance next year.

Okay. And then, could you give us an update on the large claim activity with the benefits cost side? I know that had been gradually trending in the right direction. Are we back to kind of levels prior to second quarter of 2019?

No. We haven't gone back. If you'll remember it, as we came into the year, we said we had three quarters in a row where the claims were elevated. So, we were baking that into pricing. We've done that. But it's gotten a little bit harder to tell because of the COVID crisis. Because now you've got a large claims that relate to COVID that didn't have anything to do with kind of a normal large claim. So, it's just gotten a little muddy there. But I -- we aren't planning for it if it goes back that's upside. Okay? It's kind of stayed not as elevated as it was in that second quarter when it originally spiked, but it's gotten a little harder to tell. And as far as we're concerned now we're better off baking that in which we have, and we've addressed that in pricing habit matched and we're good to go going forward.

Okay. Great. And then, one last question, if I could. How should we think about the healthcare benefits cost next year, relating to vaccine treatments?

Well, there's a lot that remains to be seen about how that cost is covered. And there's a battle that will be weighed so for that, because what you have is you have. Our -- the government has prepaid for vaccine development and a certain volume of those. And so, what happens going forward, we don't know. And we're anticipating that some costs could come into our plan. I think that's just the prudent thing to consider how much costs, we really have no idea. And like you say, it's one of those unanswerable questions at this point.

Sure. Well, that helps anyway. Thanks for taking the questions.

You bet.

Thank you. [Operator Instructions] Your next question will come from the line of Mark Marcon from Baird. Your line is now live. Go ahead, please.

Good morning, Paul and Doug.

Good morning, Mark.

Nice quarter. Can you talk a little bit about the mix of synchronization versus optimization? Like which one is selling the most, and what are you seeing in terms of small business versus your larger clients?

Sure. In the mid-market segment, we still have some that move from workforce optimization to workforce synchronization. But it's been a pretty modest rate. And when we -- remember mid-market is -- the inputs to that are we sell mid-market customers into that space, but we also promote customers into that space as they grow. And most of those customers grow in there on workforce optimization. And so, there is some migration, which is great. It means we have another option we're able to accommodate how companies do growing and developing. But I would say we still sell more workforce optimization than we do even synchronization in mid-market. So, strategy is working well on that front.

Great. And what about the workforce administration? How's that selling help? What sort of progress we see here?

Yeah. We've continued to sell. And our -- we've made good strides on people learning. However, I would say that this year with everything else we've had to focus on, it has taken more of a backseat. And so, we're not where we'd like to be against our budget. We're close to 50% on that rather than the 70% on the WO budget. But not discouraged by that at all. It literally is just a matter of how much can you do it once in the middle of a crisis. And we'll get -- we'll get back on that in a more intense fashion as soon as the circumstances allow it.

Right. And then just staying on sales for a sec. If we take a look at the performance of the BPAs, to what extent was it -- was there a discernible difference in terms of regions? Particularly in terms of the core market, just wondering, was there more uptake in the established PEO markets versus nascent ones? How would you describe that?

Well, I would say that it was probably a little bit more directly related to where you had lockdowns that maybe were more severe, a little harder to get meetings and get proposals, et cetera. But it's pretty much evened out to a degree. Even the Northeast we've had a good strong third quarter, not so much on the West Coast. So it does bounce around. It just depends. But we have -- I would just say in a general sense, we noticed with things were opening up. It was easier. So, there is a connection there. But I would also say that we sold deals in every market, in every situation, every circumstance. And I'm really proud of the sales team all across the board for the way they've taken on the challenge and have performed.

Right. And then, with regards to like this fall selling season you've got your new marketing program going into effect. And then I'm wondering how you're -- which is going to elaborate on all the benefits that you've provided to your clients. Wondering how are you thinking about pricing the healthcare, because you're going to have to give quotes, how do you -- how are you going to think about that, given the uncertainties with regards to next year in terms of like what happens with large claims, the vaccines, the favorable lack of deferred procedures this year, how do you factor that in or?

Yeah. That's a good question, Mark. And the -- our view of that is the only way you can do this properly is to really play the long game on benefit trends and the things that drive those trends and try to do your best to evaluate any short-term interruptions to the trend, either on the favorable or unfavorable sides. So, part of our goal with our clients is to give a much more stable environment to them than they would otherwise have outside of our relationship. So, sometimes we actually take a hit on behalf of the clients. You might've noticed that in 2019. And then sometimes it works to our benefit like it has so far this year in 2020. But we have continued to keep our eye on the long-term trend in benefits. And there's a difference in what affects the long-term versus what happens in the short-term. So, we do a lot of work in triangulate on that with our carriers and our outside consultant and our really stellar internal team that keep track of all that. And we make sure that we're matching price to the long-term trend. The other thing I think we've done more recently that people just need to be reminded of is that we did purchase coverage for the largest claims, claims over $1 million. And you do have in the marketplace today things that where claims -- certain things that drive some of those really large claims, and it turns out -- we didn't realize it, but COVID is one of those things that can drive some of those large claims or when there's co-morbidities, et cetera. So, that's also part of the plan, a part of how you kind of manage the long-term trend.

Thank you, sir. You have a follow-up question coming from the line of Tobey Sommer from Truist Securities. Your line is now live. Go ahead, please.

Thank you. Could you contextualize the 4.4% pricing in the quarter relative to sort of historical trends what you've seen, because it seems like a pretty good number to me? Thanks.

Yeah. It's -- I mean, it is a good number, but it's -- I would say it's modestly over kind of what we normally do. A normal year, you're going to have some price increases on benefits more around 2.5% to 3% when it's all-in after -- your benefit increase may be higher than that, but people will actually buy down their plan to buy -- changing benefit, benefits elections or choosing a lower cost plan. So, this is an all-in number. That's taken a lot of factors, but I think you'd see that typically more in a 3% to 3.5% and it's 4.5%. So that shows that we did some catch-up to make sure that if large claims continued at the pace we saw last year that we would be covered in the normal trend and we are.

Thank you very much.

Thank you. [Operator Instructions] Your next question -- I'm sorry -- your follow-up -- a follow-up question coming from the line of Mark Marcon from Baird. Your line is now live. Go ahead, please.

Just a quick question with regards to stock comp, can you talk a little bit more about the change that happened this quarter? And how we should think about it on a go-forward basis?

Yeah. I think, as I mentioned, the two factors that drove the increase this past quarter was one the outperformance, both on the worksite employee side and on the earning side, because our stock-based comp plans are based upon performance and particularly those two metrics recently. And then the comparison to last year's quarter, third quarter. And if you remembered last year's fourth quarter, we still had some elevated large claim activity, and our stock-based comp was quite low relative to that and how it impacted the earnings number. And again, with the stock-based comp tied to that, the accrual last year was pretty low. So, just generally speaking, I would expect a -- the fourth quarter, if we continue to perform the way we're performing this year, things go as expected with our guidance. Another probably healthy increase in the stock-based comp relative to the fourth quarter of last year.

Thank you, sir. And there are no further questions at this time. I would like to turn the call over back to Mr. Sarvadi for closing remarks.

Well, once again, we'd like to thank everybody for joining us today. And we look forward to putting the finishing touches on this year and putting our outlook for 2021 together and informing you about our expectations next quarter. So, wish everybody a great holiday season and hope to see out on the road. Thank you.

Thank you so much, presenters. And again, thank you everyone for participating. This concludes today's conference. You may not disconnect. Stay safe and have a lovely day.