Good afternoon. My name is Matthew and I will be your conference operator today. I would like to welcome everyone to the Insperity Second Quarter 2022 Earnings Conference Call. [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. Let me begin by outlining our plan for this evening's call. First, I'm going to discuss the details behind our second quarter 2022 financial results. I will then comment on the key drivers behind our Q2 results and our outlook over the remainder of the year. I will return to provide our financial guidance for the third quarter and an update to the full-year 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 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 years. 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 file today, which are available on our website. Now, let's discuss our strong second quarter results, in which we achieved a 25% increase in adjusted EBITDA and a 27% increase in adjusted EPS on 19% growth in the average number of paid worksite employees. Q2 paid worksite employee growth of 19.4% was above the high end of our forecasted range with a 4.3% sequential increase over Q1 of this year. Our growth momentum was driven by high client retention, averaging 99% for the quarter, continued strong hiring by our clients despite the tight labor market and worksite employees paid from new client sales above our Q2 forecast. Second quarter gross profit significantly exceeded our forecast on the outperformance in worksite employee growth and favorable contributions from each of our direct cost areas. As for our…

Thank you, Doug, and thank you all for joining our call. Today, I'll comment on three topics of interest for Insperity's stakeholders. First, I'll address our continuing impressive growth performance and other highlights of our strong second quarter results. Next, I'll discuss key initiatives over the back half of this year driving our raised guidance and setting up 2023. I'll finish by providing some color around our recently launched five-year plan and our outlook considering some economic uncertainty in the air. Our second quarter results included continuing momentum in all three of our growth drivers, including new account sales, client retention and hiring within the client base. Excellent effort from our sales and service teams and continued to client hiring success in the tight labor market resulted in nearly 20% growth in paid worksite employees for the second quarter in a row. New book workforce optimization sales continued strong momentum in the second quarter with a 19% increase over the same period last year. Sales efficiency increased 23% as these sales results were achieved by 3% fewer train BPAs. Both core and mid-market teams exceeded our internal book sales budget in the second quarter. Mid-market is beginning to achieve greater consistency and their relationships with core sales for lead development also created a strong pipeline going into the second half of the year. This significant level of sales effectiveness is also carrying over into our newer workforce acceleration business, which has tremendous potential as somewhat of a silver bullet over the next several years. Workforce acceleration has the potential to improve our sales efficiency, lower BPA turnover and enhance our customer for life strategy for long-term client retention. And most importantly, this business adds to gross profit without any benefits-related risk we take in the co-employment workforce optimization model. We…

Thanks, Paul. Now let me update our guidance, which we are once again raising our 2022 growth and earnings expectations based upon our outperformance in the first half of the year and an improvement in our growth and profitability outlook over the remainder of the year. We are now forecasting 17.5% to 18.5% worksite employee growth for the full year and improvement over our prior guidance of 15.5% to 17.5%. We expect increase over our prior forecast is based upon a higher starting point going into the second half of the year continuing sales momentum and maintaining client retention at our recent levels. As for the non-control will component of our growth, which is a net gain in our client base, we intend to continue to be cautionary given the tight labor market and the uncertainty surrounding of a economic slowdown. When considering these factors, our full year guidance assumes 17% to 18% paid worksite employee growth for Q3 and slightly lower implied Q4 growth due to the comparison to the 2021 periods, when we are experiencing very strong hiring in the base as a labor market recovered from the pandemic. As for Q4, also keep in mind networks our employees sold in the fourth quarter are typically enrolled in paid in Q1 of the following year. As for our earnings guidance, we now expect 2022 gross profit to be higher than our prior forecast based on the outperformance of the first half of the year and in the recent positive trends in our growth, pricing and direct costs. We continue to be mindful of the ongoing uncertainty associated with the pandemic and its impact on our health care costs. As the country continues to experience new variance, so far, the severity has been lower than previous variance such as…

[Operator Instructions] Your first question is coming from Andrew Nicholas from William Blair. Your line is live.

Hi, good afternoon. Thanks for taking my questions. I wanted to start by asking a little bit more on healthcare book this quarter. It sounds like cost came in favorably relative to your expectations. Just curious, did you make any changes with respect to your guidance in terms of those same expectations for the third and fourth quarter or would you characterize what's embedded in guidance for the second half as being as conservative as previously?

Yes, I would say, we've seen some improvement obviously through the second quarter. I wouldn't say we materially changed our approach to the second half of the year as it relates to some caution with expert - with respect to the ongoing variance. But with current less severity of the variance, less hospitalizations, we're not seen as far as deferred care and acuity levels, I would say we made some slight improvement relative to the forecast of the last half of the year, but nothing material at this point.

Yes, I would just add that with just one quarter having some improvement, that's no time to be drastically changing anything.

Makes sense, agree there. And then for my follow-up. I just wanted to ask a bigger picture question about kind of risks around the recession. I think you mentioned several times in your prepared remarks that you haven't seen much of a slowdown Commission activity pay increases over time. All trending positively, but how do you think about the industry and Insperity resilience to potential economic slowdowns broadly, do you feel like the industry can navigate a more challenging economic environment, if there's any way to kind of quantify us what that could mean for the various pieces of your business in that environment that certainly be helpful. Thank you.

Thanks for the question. This kind of what I was trying to kind of frame in some of my prepared remarks, but we've gone through a lot of different times in the course difficult period of the pandemic is an example and we've really demonstrated the resiliency and the versatility and ability to respond. So we're very well prepared for whatever comes our way. But I think for what we're seeing right now, it's important to note that we aren't seeing anything within the metrics in our client base that would indicate that something is changing dramatically right now in the behavior of our clients from an HR perspective. So hiring is continuing, but we thought it's prudent to budget a lower level, because of the change in sentiment and the amount of dialog that's going on about the potential for change. So we're not seeing anything in the metrics, but we felt like with the sentiment change, we have to at least be prudent and conservative and so we don't expect the same level of client hiring over the balance of the year that we had in the first half of the year. But as we look in the bigger picture and say, you know, is there a recession coming or the two quarters? Is that a recession or will there continue to be a slowdown of economic activity? You know, the biggest effect on us is the state of the labor market and how that normally changes in a recession, in other words, layoffs occurring across the board. And of course, at this stage, we don't see that happening. And even in the sentiment change among business owners, the further information indicated that business we're reporting still having difficulty filling openings that they still have. So we're just not at that stage, but we are able to change our dialog with clients and you use in HR department heavily in a growth phase and when things are going to opposite direction. So you just use different services in HR department and we're ready to serve our clients no matter what comes forward.

Thank you. Your next question is coming from Tobey Sommer from Truist Securities. Your line is live.

Thank you. With respect to the sales force and managing those that those productivity measures that have been improving pretty dramatically. What are you learning from that? And do you have a sense that you're hearing a sort of threshold that you wouldn't expect further improvements or maybe if you could contextualize the improvement that you've experienced and maybe where it could go, that will be helpful.

Thank you, Tobey. No, I would say that we've made some really great strides in gaining some sales efficiency. And like I've said before, some are bigger picture in the market demand for the services, people being willing to meet by Zoom call as opposed to face to face and so the number of contacts that can be made increase in cell phone. But we've also seen some significant improvements that are coming from. How we're going about things and how we're trying to have early success with newer BPAs and then aligning everything in terms of compensation, some bonuses that we've built in. Other things that I think we're still in the early phase of seeing the full effect of some of these changes we've made. So I've said I believe we're off to a good start we are benefiting from them large things in the marketplace that have happened, but we're also really seeing some benefits coming out of some improvement coming out of the changes we've made, but I still think there's room for more.

And I would like to follow up on that. You gave us some good context about the economic sensitivity in the puts and takes. If I was asking more pointed question just say if we had the economic time tours of 2020 repeat and hopefully not be pandemic-driven, but the economic counters. Do you think the business would perform better or worse than that?

Well, I would, I think is even if we enter into a more difficult economic period, I do think that there are a lot of things that are helping us be more effective than we were and more efficient. So I would expect us to perform better than we did two previous down period.

Thank you. Your next question is coming from Jeff Martin from ROTH Capital. Your line is live.

Thanks. Hi, Paul. And Doug, hope you doing well. I wanted to dive into the benefit cost side a little bit more. How much of the shift that you're seeing or the improvement that you're seeing is less COVID-related expense versus lower utilization?

Most of it pretty much relates to the COVID side. And I think on the utilization side, we're trying to track whether there is any utilization increases coming that were from deferred care or acuity. but what we're seeing at this point is just more of an ease across the board in both the COVID cost and the utilization. and so we're also, I think we're rightfully being conservative about that. We're conservative in the last quarter and conserve but going into this next quarter, but hopefully, we see this continue the direction we're seeing.

Okay, great. And then I was just curious if you could give us a little bit of context around some of the early results of your, your increased investment on recruiting efforts, particularly on the BPA and service side. And then could you also touch on BPA retention trends.

Yes that's good. We really had a great quarter again. We reorganized our recruiting organization for internally and added some resources and we saw some nice early success from that so that I, the end of the quarter and even into this month we're really feeling strong about bringing on high quality people that we need the right number of them on the service side because we've had such high growth, you've got to have the service capacity. We expect to continue to grow at high rates. So we want to make sure that we're bringing on the right level of support and feel real strong that we've got the machine working to feel good about that going forward. And then also we've had over the quarter from the beginning of the quarter to the end, we had nice ramp up in total higher BPAs even though the average for the quarter and train BPAs was down 3% were actually up significantly, a number of BPAs total higher BPAs at the end of the quarter. So I feel very comfortable that hitting our target over the balance of the year is in, clearly in view and working toward this long-term view of an 8% to 10% increase in or rate of BPA growth driving a higher worksite employee growth, we're really in good shape for that element of the plan

Thank you. Your next question Marcon from Baird. Your line is live.

Hi, this is Andre Childress on for Marcon. Thank you for taking our questions. So my first question is, has there been really any change with the competitive dynamics over the past few quarters, whether that be a source of wins, is any of that changing with workforce acceleration product. And then could you touch on kind of what you think the largest drivers are for driving the higher and better improved closing rate?

Yes, I think the closing rate improvements are coming from very specific elements of what we're doing in training and management and we are seeing that customer base in the marketplace being able to get back in front of people face to face also helps with the closing aspect. So there's very specific things that we're seeing improving that in the marketplace and I still think there's room for-- us to improve there, but it's nice to see that move in the right direction.

And has there been any change kind of in the competitive dynamics in the industry or the source of wins and if you could touch on there.

Yes. I apologize forgot that first part of your question, but on the competitive landscape, I got to tell you there's always been competition out there, it's out there now. I think all of the whole industry, I think is moving forward nicely. So the invalidates the higher level of demand that we've talked about in the marketplace, we think we're really seeing that and that trend is what we're trying to capitalize over this five-year run. But we really don't feel like there is any issues that have changed, or that we're contending with on the competitive front, we see our best of class products and services and higher level of premium service model being appropriate for a very specific target in the marketplace. And when we're in front of those target clients that fit is obvious and we're the right solution. So, we do still end up in the, seeing prospects and competing with others but if they're looking just to save a few bucks and on insurance or just to get some basic services a lot of times they'll to somebody else. If they're really trying to move the company to the next level and really want to take care of their people. That's what our company is about, we help small business is take care of their people and get the full benefit of doing that well because that's what really helps those businesses grow.

Great. Sounds like the value proposition of the premium service is really resonating. Just one more quick follow up. It sounds like the marketing initiatives are really being very successful with the higher spend in the back half of the year. Can you discuss some of the efforts that you guys are doing, what you're seeing and where you're kind of ramping up the spend on that front.

Yes, absolutely. Last year we tested some very localized marketing efforts where we designed every marketing plan for each market, specifically to see what we thought would be optimal in that market. And then this spring. We did that across all 41 markets, I believe it was and you saw some nice success there. So we're basically taken what we've proven to be effective. And it just makes perfect sense to ensure that we have the level of sales activity. You want to make sure we have a great balance of the year.

Thank you. That concludes our Q&A session. I will now hand the conference back to Paul Sarvadi for closing remarks. Please go ahead.

Well, once again, we just want to thank all of you for being on the call today and we expect to continue to have some effective results over the last half of the year and look forward to seeing you somewhere out in the marketplace over the quarter. Thank you very much.