Q2 2023 Insperity Inc Earnings Call
Good morning, My name is Jenny and I will be your conference operator today.
Would like to welcome everyone to the inspires T second quarter 2023 earnings conference call.
Currently all participants are in a listen only mode and a question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your phone keypad. Please.
Please note this conference is being recorded.
At this time I would like to introduce today's speakers joining us are Paul Salvati, Chairman of the board and Chief Executive Officer, and Douglas Sharp Executive 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 second quarter 2023 financial results.
Paul will then comment on the quarter and our plan over the remainder of the year I'll return to provide our financial guidance for the third quarter and an update to the full year guidance and then we will end the call with a question and answer session.
Now before I begin I would like to remind you that Mr. <unk> body or I may make forward looking statements during todays 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 second quarter 2000, <unk> financial results in which we effectively executed on our plan and sales service pricing in other areas of the business. However experienced a shortfall from our forecasted earnings due to substantially higher health care costs.
We reported adjusted EPS of 64 cents and adjusted EBIT EBITDA of $51 million for the quarter.
As for our growth metric the average number of paid Worksite employees increased by seven 2% over Q2 of 2022, which.
Which was just below the midpoint of our guidance is net hiring by our clients came in slightly lower than expected.
Worksite employees paid from a combination of sales and client retention came in on target.
Moving to gross profit, we continue to achieve pricing above targeted levels and when combined with our workers' compensation program payroll tax area and traditional employment offering we experienced a favorable outcome.
However, due to health care costs came in approximately $42 million higher than expected.
This was primarily due to both the number and severity of large claims up to our $1 million per person insurance claim limit.
Large claim activity accounted for approximately 75% of the higher costs.
With claims over 750000 being the primary driver of this increase.
The remaining 25% related to higher than expected pharmacy costs.
And as for the higher pharmacy costs, we experienced an increase in utilization of the specialty drugs.
And a significant step up in the use of diabetes and weight loss drugs and behavioral health drugs.
Now well my large claim activity persisting over more than one consecutive quarter has been greater over the course of our history.
Our updated range of earnings guidance incorporates a continued high level of large claim activity over the remainder of the year on the low earning side.
And a return to more normal normal activity on the high earning side.
In both cases, we anticipate that pharmacy costs will remain elevated.
When considering these factors along with our results over the first half of the year. We are now forecasting a benefit cost trend of <unk>.
7% to eight 5% for 2023.
Up from our prior estimate in a range around 5%.
On top of the pricing improvements that we have achieved we intend to further adjust our pricing to mitigate the impact of this potential increase cost trend.
And Paul will provide additional comments on our better benefit pricing and cost trends in a few minutes.
Now moving to operating expenses cost increased 9% over Q2 of 2022 and included continued investments in our sales service and technology and the impact of the inflationary environment on our calls.
Our growth investment included a 15% increase in the number of hired business performance advisors.
Putting us in a good position as we approach our fall selling season.
Net interest income increased by $3 million over Q2 of 2022 on higher interest rates and invested balances.
Second quarter's effective tax rate was 25%, which we are also now forecasting our full year rate.
Our financial position and liquidity remained strong and we continue investment in our growth, while providing returns to our shareholders.
During the quarter, we repurchased 98000 shares of stock at a cost of $11 million.
It paid out $22 million in cash dividends.
We ended Q2 with $219 million of adjusted cash and $370 million of debt.
And as announced this morning, we have increased our share repurchase authorization by 2 million shares.
And then tend to be more aggressive than our typical repurchase activity depending on market conditions.
Now at this time I'd like to turn the call over to Paul.
Yeah.
Thank you Doug and thank you all for joining our call today I'd like to provide comments on the following three topics.
First I'll comment on the second quarter excellent execution and the results across key long term performance drivers in our business second I'll discuss how it's Baird is positioned to capitalize on our vast market opportunity with a focus on the future of the workplace and the corresponding changes needs.
Changing needs of our target market.
I'll finish with comments on the outlook for the company into next year and beyond despite the unexpected large health care claims in the recent quarter.
Our most important key drivers for long term success and growth and profitability more within our control are new sales pricing client service and retention.
All of these areas were strong in Q2 and contribute toward a positive outlook for the future.
Our workforce optimization book sales were solid driven by the outstanding effort in our mid market business performance consultant team.
This team experienced one of their strongest quarters in history and booked sales in both deal count and Worksite employees sold.
In addition to substantial book sales excellent progress was made by our V. P. As driving sales activity, which was a priority coming into the quarter or 15% higher number of B P. As increase discovery calls nearly 30% over Q2 of last year, making our perspective.
<unk> pipeline is significantly stronger as we go into the second half of the year.
What are the other highlights of the quarter was workforce acceleration or ws continuing to gain traction across the sales organization and coming in well above budget and booked sales.
One of the reasons. This is exciting is the opportunity to test one of our assumptions regarding W X.
At this level of Ws adoption and incentives and a large number of new ppas over the last 12 months, we could begin to assess the potential for W apps to lower BPA turnover.
Historically, the 18 months ramp up period for training BPH and workforce optimization sales.
It resulted in a level of frustration from the complexity of the sale and relatively few closes over the learning period.
This caused higher turnover rates and less tenured tier one and tier two V. P. A's.
WNS is less and less complex sale and provides opportunity for earlier success as the ultimate W. O sales training has accomplished the.
The early read for this first half of the year appears to be validating as the WNS sales adoption has considerably lowered turnover in both tiers.
Sales efficiency is down somewhat year to date, which is to be expected with the high number of new ppas in the mix and a different economic climate in the first half of the year, our refined sales compensation incentive programs are encouraging exactly the behavior, we want to drive efficiency going forward.
Not only does strong WEX sales by tier one and tier two bpa's create a quiet base to upgrade to W. O overtime, but they also provide an opportunity for sales efficiency to improve sooner. If this lower BPA turnover continues.
Now our strong pricing allocations were also a highlight this quarter.
This is particularly critical considering the higher than expected claim cost in Q2 in a few minutes I'll address how this pricing trend our plans going forward will contribute to offset cost trends.
Q2 was also another strong quarter and execution reflected in our client service and retention results retention was 99% each month of the quarter at historically high levels. Our success in our recruiting and training efforts and corporate staff over the last few quarters has resulted in appropriate quiet service ratios.
To support our changing client needs.
So through the first half of the year, we've experienced solid execution of our plans across the company and we believe the business is on sound footing for growth going forward.
As we look ahead, we are seeing fundamental changes to the future of the workplace and therefore, the needs for small and medium size businesses to compete as an employer of choice. This was clear to us more than a year ago, and we established a new division in the company and are rolling out a new role on our executive leadership team.
Our strategic planning and development organization led by Executive Vice President Kathy Johnson is focused on strategic corporate and organizational development to continue our industry leadership position in the breadth and depth of services provided and the level of care for our clients.
This team is focused on purposeful transformation to the changing HR environment, including everything from data analytics and artificial intelligence to employee generational psychological demands for flexibility and resources to support personal wellness and development.
Examples of these critical drivers to employee engagement include adjustments to work mode and locations changes to payroll and access to wages and inclusion of mental physical and financial wellness offerings. We are planning upgrades to many of these areas over the last half of the year to support our clients change.
Needs.
I believe with our focus and innovation in these areas, we are well positioned to meet small and medium sized employer needs to remain competitive in the tight labor market and succeed in the marketplace.
These demands required cultural changes and companies to attract and retain the best people our history of working with clients on these issues combined with our efforts to provide the appropriate benefits and dynamic employee experience platform for these businesses positions disparity as the provider of choice into the future.
So we believe that our long term outlook remains very strong driven by effective ongoing execution and enhanced strategic planning and development our level of confidence is not impeded at all by the recent large claims and the effect on the quarter or the projected year.
The best place to start to put this claim quarter.
In proper perspective.
Is to look at our five year compounded annual growth rates in both pricing and cost of our benefits plan with this years estimate included.
Our estimated benefits cost compound annual growth rate is four 2% to four 6%.
Including the wide range of potential claims we've estimated for the full year.
Our compound annual growth rate for benefits allocations over the same period is four 1% now these rates demonstrate effective healthcare cost management compared to the marketplace.
Achieving our goal of aligning our pricing with cost increases over time.
Our long term historical cost trends are solid and our pricing strategy has performed well now.
Now this year, we're running ahead of target allocation increases and we've already initiated a plan to add a moderate incremental amount of pricing for 2024 of approximately one to one 5%, which we believe is in line with marketplace trends and should put us in a solid position to lie in our pricing.
Cost going forward.
When we look ahead to next year and beyond we believe we will be able to continue to appropriately align our pricing strategy to our cost trends over time like we have in the past.
We are in year two of our current five year plan in this quarter's results did not change our strategy to achieve our goals.
Our history from time to time, we've had quarters in which we experienced unexpected large claims and each such instance, we've successfully manage through the situation and continued our long term growth and profitability.
For the company to stay on plan. The most important focus is on our growth drivers over the balance of the year.
Our focus includes continuing to investment in V P, a hiring and training and additional marketing to drive sales over the balance of the year.
We also have the organization ready willing and able to continue solid execution on our pricing and client service and retention strategies.
We remain confident in our ability to achieve these goals, which we believe will drive future performance and position us well to continue our history of superior returns to shareholders. At this point I'd like to pass the call back to Doug to provide our specific guidance.
Thanks, Paul now.
Now, let me provide our guidance for Q3 and an update for the full year 2023.
Our updated earnings guidance includes assumptions around a possible range of outcomes in our benefit costs over the remainder of the year.
Outside of this area, we continue to expect favorable trends in our pricing and other areas of gross profit and.
And our forecasting slightly lower paid worksite employees and operating expenses.
As for the details we are now forecasting six 5% to 7% Worksite employee growth for the full year 2023 slides.
Slightly lower than our previous guidance and a tighter range. Since we are now more than halfway through the year.
The lower growth outlook is primarily a result of Q2's average paid worksite employees coming in a little light due to lower hiring in our client base.
And then the assumption that the slower hiring continues over the remainder of the year.
As for Q3, we are forecasting year over year, Worksite employee growth of 4% to 4.5%.
Now this is lower than our full year growth forecast due to our assumption of significantly less hiring in Q3 of 2023 compared to Q3 of 2022.
However, this guidance reflects continuing sequential worksite employee growth over the remaining two quarters of 2020, 'twenty, three and improving year over year growth in Q4.
We have a.
Buys our earnings guidance based upon our results through the first half 'twenty 23, and our updated outlook for Worksite employee growth in the range of expectations around our benefit cost as previously discussed.
So after putting together the pieces. We are now forecasting full year 2023, adjusted EBITDA in a range of $300 million to $350 million and adjusted EPS in a range of $4 35 to $5.32.
As for Q3 earnings we are forecasting adjusted EBITDA in a range of 57 million to $81 million.
Adjusted EPS from 69 cents to $1 14.
Now at this time I'd like to open up the call for questions.
Thank you at this time, we are opening the floor for questions. If you would like to ask a question. Please press star one on your phone keypad, a confirmation tone will indicate your line is in the question. Keith You May Press star two if you'd like to remove your question from Nicky.
Anyone using speaker equipment, it may be necessary to pick up your handset before you pass to peace teas pulls amendment lusby poll for questions.
Thank you. Your first question is coming from Andrew Nicholas of William Blair, Andrew Your line is live.
Thank you and good morning, I wanted to ask on the benefits cost side first I was hoping you could provide a little bit more color on the benefit cost trend, particularly on the $750000 plus side is there anything to.
Pinpoint in terms of the underwriting approach or the risk management approach that would help to explain that or is it just some some noise and then I guess, maybe the bigger picture question as you know two quarters like this.
Change your appetite for risk on the health care side or any kind of long term ramifications too to this kind of quarter. Thank you.
Yeah, I think when you look at a little bit more of the detail behind the cost obviously, we investigate them.
Investigated that some of the detailed claims data that was provided from our health care carrier.
You know very diligently I think one thing that came out of that was that there was not a higher concentration of large claims from new clients, which would indicate that through our fall selling season and our year end renewal. There is this is not a situation where there has been adverse clients.
Selection, that's obviously one of the.
The first thing is that you want to rule out a.
When you look at the types of of claims.
Really across the board as far as the 750000 and above you have got.
Some cancer, you've got some heart attacks you've got some accidents.
And so it was really.
You know buried and diversified over as far as the nature of the type of of claims.
And so.
So yeah I think it was from what we can see thus far yeah. We did have a claim a period of large claim activity.
It has happened in our history, but I think we still feel that particularly when you look at Paul's comments with respect to over the long term in the five year compounded rates that are we're still managing.
The health care cost trends, even with the forecasted higher costs over the remainder of the year.
Within a range that is tolerable tolerable range and really within a range, where our pricing with being above target recently, and maybe some adjustments and some adjustment to that.
We feel like the matching of pricing cost is still in play.
So let me address the second half of that question about the kind of appetite for risk cars.
Because I think there's two different ways. We you have to look at it first of all you know we are comfortable with.
The way, we have structured our program to align price and cost over the long term.
And we know that it provides advantaged to grow the business.
A more profitable long term structure.
But at the same time you know.
Sure don't like when we have a large claim quarter like this and as you know when we did this in 2019, we did purchase.
Our coverage limit on the individuals at the million dollar level.
We also will continue to look and evaluate that as this year goes by.
We've quoted lower limits before sure we'll take a look at that.
Like we do every year and I would just say also that we on an ongoing basis look at other possibilities to take out some of the volatility.
That relates to this type of quarter and how that affects us in the public markets. So.
We continue to pursue those things so.
So I would say our appetite.
We still want to run the business this way, but certainly as we can find other ways to.
Reduce the volatility that's caused by these occasions, we will continue to pursue that.
That's helpful.
Thanks to you both I guess for my follow up question I wanted to ask on capital allocation and maybe the capacity you have for repurchases in 2023.
Actually in light of the increased authorization and I think Doug your comments on on your intention to be a bit more aggressive there can you just flush out the type of capacity you have this year or two to put back into buying buying the stock. Thank you.
Well I think you can see from the increased authorization of 2 million shares that we can give you some indication as to where the board is currently.
You know feeling with respect to.
Our repurchase authorization, which would indicate.
Higher level than what we have done typically in but even if you look at it over the course of our.
History, you know, we've always been a big partners of shares I think if you go back to the 2019 events, where we had some quarters of high elevated large claim activity, we were quite aggressive because we.
We felt bad you know over the long term business model remains very much intact.
We obviously feel very confident in that today, so with the increased authorization. It does allow us to be more aggressive.
Should opportunities present themselves you know coming off of this quarter's activity again.
Strong confidence that our long term plans are still in place and still.
So reasonable targets for us.
Thank you.
Thank you very much. Your next question is coming from Tobey Summer from Truest Tobey Your line is life.
Thanks, I was wondering if you could share with us your expectations and what you're hearing from your.
Our health care provider.
About whether the higher health care expense level, you know may continue into 2024, I think it's been a theme in concern that.
Those people have sort of in the post pandemic era.
Yeah, I think we do continue these conversations on an ongoing basis and Tobey as you as you heard from our discussion here.
We did go ahead and build in just a higher pharmacy trend because there's things in there that same theyre likely more likely to continue then to.
And then b.
The short term bubble. So we do continue to monitor those things I think that's different from this.
The large claim component.
However.
Since we had a difficult.
A long difficult period in 2019 that covered multiple quarters, we've just used.
No a wider range of the expectation for this year.
But in the conversation.
With our advisors.
And outside the company.
You know, we think we're properly managing and aligning our cost and price with the underlying trends.
Thanks, Paul and for my follow up.
Make it two pronged if I could so.
Hum.
The midyear price like you talked about one 5% is that applicable to all clients or is that sort of a new and renewing client only and then maybe you could talk about in a dig into your experience with BPA retention and maybe talk about something a little more exciting than on the sales front away from the benefits. Thanks.
Sure. So you know we when we look at you remember were where you are.
We are looking at pricing everyday in our operation based on the trends that are that we're seeing and where pricing new and renewing business every day.
And so when we talk about raising debt.
Adding another 1% to 1.5% that began it immediately when we decided that and.
That adds to the typical trend increases we've been.
Building into clients, you know clients typically get an increase from us.
Varies based on.
Their experience with us, but generally speaking.
Customers will get an increase in the high single digits.
Some will get double digits, but most of the time, it's on average I would say in the high single digits and then they will make.
Make their own decisions on how to lower that cost by plan selection or how they might share costs with employees or other issues that they'll look at.
So what we're saying now is we will continue to drive that higher than the average it's been but it appears to us to be very much in line with what is going on in the marketplace at large.
So we're not in a position where we've got it raised price considerably.
In response to what we see going on we think we're comfortable with where we are and what we're able to pass on it as you can see we've just come off of a year and a half of really strong pricing success.
With our client base. So we're very comfortable with that going forward. So now onto the exciting part on the growth side, yes, Im very excited about.
Really everything we're doing.
And in our organization around.
The core business.
And the incentives that we change too.
Direct behavior at the appropriate things at the appropriate time also dws element.
We also extended in such a way that we're seeing are the.
The lower turnover year to date.
And that has a dramatic potential effect and then of course, the other factor that I always want to focus on is how successful we were in mid market and we are building that team.
And building that pipeline for more consistent and predictable growth on the mid market front. So all three of those pieces together really point to a positive growth outlook for the company, even though we've been in a period of time when.
Growth in the in the business is below the double digit number we're still have had the highest growth rate in the industry.
But I think as these things really take effect.
This long term potential for improved sales efficiency.
Less turnover and in addition to that and so.
Also lower cost dramatically low across when you have lower turnover, so that kind of has a double dip positive effect and.
We're excited about where we are on that front still a lot of work to do but we're really poised for an excellent second half.
Thank you very much. Your next question is coming from Mark Mark on a bad Mark Your line is live.
Thank you.
Got a couple of questions.
The first one.
Basically relates again to a little bit more detail with regards to the.
The higher healthcare claims.
What I'm wondering specifically is can you talk a little bit more about what's going on on the pharmaceutical side.
Which seems like it will be an ongoing trend.
And and.
And then on the on the larger claims.
Could you find that it's that it's just that you had more severe incidents or is there also some inflation for.
Some higher.
You know higher incidents in other words is.
He was treating the same type of cancer significantly more expensive today than it used to be or our heart attacks more expensive than they used to be obviously labor costs are going up within a hospital system. So I'm wondering if that's part of what we're seeing.
Well I think on that front you know that's a good point and we do monitor exactly that and that's generally more in the typical year to year trend numbers and.
We work of course with our outside advisers and of course with our carriers.
To monitor those things, but what we're really talking about this quarter.
I don't think that factor.
As an underlying factor all the time is not that different this quarter.
But on the pharmacy side, you know I think most people have heard and as you see in the marketplace a lot of discussion about.
Various drugs that are being used.
Especially more recently on the weight loss front some of the diabetes drugs. The drugs that may be weren't originally designed for that but are being used that way more of a fad type thing and I think that's you know that may weigh in also because there are some long term effects that are not positive for people but.
It takes time for that to run through.
And so.
There's also I think an increase in behavioral.
Behavioral health.
<unk> needs and.
That is also a factor that if you think about being two years into.
A period of high inflation in and kind of the squeeze of the wallet for a lot of people that has it.
It'll nervous effect it has it.
Behavioral health.
Cost effect and so those are things with Turner saw underlying here and he said look that.
Now that is most of the most important to build in.
As we see it so we've done that.
And.
Like I said, we've done stuff on the pricing side to make sure that's all aligned.
Going forward.
Great and then.
With regards to.
Implementing a modest price increase.
Which can be mitigated to a certain of subjects by the behaviors of our clients what sort of impact would that have on sales and then some.
And then offsetting that you know to what extent Paul can you accelerate WSI to an even greater effect.
And you know and take out some of the other health care risk.
From the initial placement discussion.
Yeah. That's good you know we definitely on the WEX front one of the advantages of course of growing that business is its not there. There is no medical risk in that business. So we do see that as a nice enhancement.
And we are intending to drive that considerably as time goes forward it makes sense to do that and.
We are what's happening right now is the sales team is really getting on board.
Incentive there.
There are effort too.
Close to <unk> business.
And that has such so many strong effects there, adding a client base of their own that can upgrade to W. O as time goes on and they are feeling more successful early in their tenure.
That's what's lowering the turnover.
So.
We just see a lot of advantages for WEX, we are definitely moving that ball forward and expect that it can be much much larger there's other things that we're doing there.
That deal with some of these change in the.
The workplace issues that I was discussing.
For example.
Access to wages and things of that nature.
The other tools that can be provided to employees for wellness, we're doing that both in <unk> and W. O on the financial wellness and.
Other types of.
Of services that employees are are demanding more and more.
Kind of post Covid.
So we are moving ahead, there and I think I'm looking forward to some dramatic success in WNS.
Tobey I think your other question was with respect to that.
The pricing adjustments that were going to be making on the health care side.
We mentioned earlier you know the good news is we've been above our targets on the medical pricing allocations you know over the course of this year and when we look at.
Our forecast and assuming.
A wide range and that some of this large claim activity continues.
We're looking at making making incremental pricing changes in the range of one to one 5%.
And looking out there in the marketplace. It is very much in line with the marketplace trends. So we don't think at all.
Our pricing is it going to be outside of the marketplace.
Marketplace trends and will be very consistent and shouldnt put at a disadvantage.
Thank you very much. Your next question is coming from Jeff Martin of Roth Capital Partners, Jeff Your line is live.
Thank you and good morning.
Doug I wanted to get a sense when you think the you know.
Central price increases for the benefit of cost allocation, maybe fully implemented is that are you know early next year or is that going to be sooner than that.
Yeah, a significant chunk of it happens through the year end transition.
And then that will continue on.
Through the first quarter or so of the year.
But you know that's that's just that that one that's the increase component.
With that have been strong.
Pricing increases that are flowing in every month.
Yeah.
Got it Okay, and then on the new initiative in terms of helping small businesses positioned for the current.
Environment, and attracting and retaining employees.
Is that an added component in terms of an additional service charge, whereas that lumped in with the workforce optimization product.
I'm, sorry can you repeat that for me.
Just curious if that's if that new service offering for small businesses, where you heard Kathy Johnson.
Elevated her to lead that.
Is that going to be an offering that you specifically charged for as part of workforce optimization or is that built into the product itself.
That's good that you bring that up because what this strategic planning and development group is all about.
He is carefully.
Evaluating any new things that are offered to determine the appropriate.
The appropriate.
Structure for that addition, and so there will be things that will be charged for because there outside of.
No for US, we don't want to just keep adding to the bundle so to speak.
And there's certain services or products that people want.
To AUM to have outside of that bundle. So we'll be looking at a variety of things on every every product service every improvement that we're going to make sense of that group will.
We will be looking at those as a financial.
Investments and looking for the return on those investments.
Thank you.
Thank you very much we have reached the end of our question answer session I will now turn the call over to Mr. Sovaldi for any closing remarks.
Once again, we do want to thank everyone for participating today, and we look forward to.
Strong second half continue to focus on our growth.
Into the future and continuing our.
Our strong second year in our five year plan. So thank you once again for being a part of this today and we look forward to talking to you next quarter. Thank you.
Thank you everybody. This does conclude today's conference call. You may disconnect. Your lines at this time and have a wonderful day. Thank you for your participation.
Goodbye.