NSP
#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 2017 financial results.
<UNK> will then recap the 2017 year and discuss the major initiatives of our 2018 plan.
I will return to provide our financial guidance for the first quarter and full year 2018.
We will then end the call with a question-and-answer session where <UNK>, <UNK> and I will be available.
Now, before we begin, I would like to remind you that Mr.
<UNK>, Mr.
<UNK> or myself 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 more detailed discussions 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 me begin today's call by discussing our record-setting fourth quarter bottom line results as we executed our plan for continued double-digit worksite employee growth, pricing strength and direct cost management.
Adjusted EBITDA increased 67% over Q4 of 2016 to $38.5 million.
Adjusted EPS totaled $0.55 after taking into account the recent two-for-one stock split.
This is an increase of 90% over the fourth quarter of 2016 and above the high end of our guidance of $0.46 to $0.48 per share.
As to the details, average paid worksite employees increased by 10% over Q4 of 2016.
Client retention remains strong, again averaging over 99% for the quarter.
And as <UNK> will discuss in detail in a few minutes, we experienced a successful fall sales and retention campaign.
These results will be reflected in our first quarter 2018 guidance as worksite employees sold in Q4 are typically enrolled and paid in January of the following year.
Net hiring by the client base was once again minimal as the net loss during the first month of the quarter was followed by slight gains in each of the following 2 months.
Gross profit increased by 29% over Q4 of 2016 on the 10% worksite employee growth, continued pricing strength and favorable outcomes in our payroll tax, benefit and workers' compensation programs.
Our fourth quarter adjusted operating expenses increased 23% to $118 million and included a 16% increase in the total number of Business Performance Advisors over Q4 of 2016 and additional sales commissions associated with higher Q4 sales volume.
Q4 operating expenses also included an additional accrual for our cash and stock incentive compensation plans tied to our outperformance.
Lastly, we incurred additional stock-based compensation related to the acceleration of the vesting of restricted shares from Q1 2018 into Q4 2017 in order to maximize our tax deductions.
Our Q4 effective tax rate of 35% was impacted by a write-down of deferred tax assets to a new corporate tax rate of 21%, largely offset by a tax benefit associated with the acceleration of the vesting of the restricted shares from Q1 of '18 to Q4 of 2017.
Now before I turn the call over to <UNK>, let me summarize our record high full year 2017 operating results.
Adjusted EPS on a post stock split basis increased 37% to $2.45 and adjusted EBITDA increased 26% over 2016 to $178 million, both significantly above our 2017 budget.
Gross profit increased 17% on 10% worksite employee growth as we effectively managed changes in client mix, pricing and direct cost trends.
In the payroll tax area, we benefited from the recently passed Small Business Efficiency Act.
Effective management of our health plan resulted in an increase in benefit costs per covered employee of only 1.2% over 2016 net of planned migration.
Workers' compensation cost as a percentage of non-bonus payroll declined slightly from 2016 due to continued discipline around our client selections and safety and claims management.
Adjusted operating expenses increased 14.5% over 2016.
When excluding additional costs related to our incentive compensation plan for our outperformance, adjusted operating expenses increased by 11%, which was in line with our budget at the outset of the year.
Putting all the pieces together, our key profitability metric, adjusted EBITDA per worksite employee per month, increased 14% from $71 in 2016 to a record high of $81 in 2017.
Now with our strong balance sheet and cash flow, we are in a position to return $105 million to shareholders during the year in the form of dividends and share repurchases.
We paid a $1 special dividend in December of 2017, increased our regular quarterly dividend by 20% in May and repurchased 900,000 shares over the course of the year.
We also completed a two-for-one stock split, which is a reflection of increasing shareholder value and serves to enhance liquidity of our shares and build an attractive share price.
Our balance sheet remained strong as we ended the year with $61 million of adjusted cash and $245 million available under our recently expanded credit facility.
This level of liquidity and credit availability, combined with the continued forecast for strong cash flow, should allow us to continue to provide excellent returns to our shareholders in 2018.
Now, at this time, I'd like to turn the call over to <UNK>.
Thank you, Doug.
Good morning, everybody.
My comments today will cover 3 areas, including highlights that drove our outstanding results for the third year in a row in 2017, our successful fall selling and retention campaign just completed and our game plan for another record-setting year in 2018.
Our excellent results in 2017 demonstrated the strength of our business model as we executed our plan for double-digit unit growth, optimized pricing, management of direct cost and risk and continued operating leverage.
This recipe for success was repeated over the last 3 years in a row resulting in year-over-year growth in adjusted EBITDA of 31%, 28% and 26%, while more than doubling over this period from $84 million to $178 million.
There are 6 major highlights worth noting from 2017 that demonstrate this strong execution of our plan across the company.
First, we validated our sales system for consistent predictable growth by successfully increasing the average number of trained Business Performance Advisors by 13% while maintaining nearly the same level of sales efficiency as the prior year.
This resulted in total new sales for the full year at 99% of our aggressive budget.
The key sales funnel metrics proved our competence in training BPAs to reach targeted levels of sales efficiency.
Discovery calls increased 12% and business profiles increased 11% and our closing rate of sales to business profiles was constant at 23% in both of the last 2 years.
Our marketing results were also a key highlight validating our capability to provide a sufficient number of qualified leads to support this BPA growth rate.
Total corporate leads increased 58% and resulted in 56% of the worksite employees sold in 2017, up from 45% in 2016.
Another major achievement in 2017 was our 85% client retention rate, which was our second best year ever in this key metric.
This follows 86% in 2016 and 84% in 2015, validating a systemic change from historical annual retention rates of approximately 80%.
This trend is key to continuing both growth and profitability going forward.
Another highlight last year was the major move forward for Insperity deploying leading technology in both traditional and co-employment offerings.
Insperity Premier has been a tremendous success as the only true HCM system designed for the co-employment relationship and service model.
All clients have been moved to the upgraded platform on schedule, along with over 300,000 user accounts.
2017 was also critical in laying the groundwork for expansion into the traditional employment solutions space through our new Workforce Administration bundle.
During the year, we upgraded technology, formed a new division and redesigned the offering and price point to meet our objectives.
I\
Thanks, <UNK>.
Now, let me provide our 2018 guidance, beginning with the full year.
As <UNK> just mentioned, we are forecasting an 11.5% to 13.5% increase in average paid worksite employees over 2017, resulting in a range of 203,700 to 207,400 for 2018.
Our forecast is based upon a January starting point of paid worksite employees, followed by accelerated growth over the remainder of the year in line with the increasing number of trained Business Performance Advisors.
For the full year 2018, we are forecasting client retention and net hiring in our client base consistent with 2017.
As for our gross profit area, we have gone through our usual budget process of analyzing client mix, pricing and direct costs, including health care and workers' compensation claim trends.
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 costs over the course of the year.
Our operating plan includes further investment in our growth, including the hiring of Business Performance Advisors, opening of 5 new sales offices and additional channel and marketing programs.
Also, as we execute our long-term growth plan, we will continue to invest in our high-touch, high-tech service model with personnel and technology infrastructure, security and development.
Our operating plan also includes investment in the new Workforce Administration bundle, our traditional employment offering.
The combination of improved worksite employee growth, stable gross profit and continued investment in operating leverage leads to our forecast of an 11% to 15% increase in adjusted EBITDA from $178 million in 2017 to a range of $197 million to $204 million for 2018.
We are forecasting a 21% to 26% increase in adjusted EPS from $2.45 in 2017 to a range of $2.96 to $3.08.
This forecast assumes 42 million average outstanding shares and a full year effective tax rate of 27% after considering the impact of tax reform.
Both our full year 2018 and first quarter guidance for adjusted EPS and adjusted EBITDA excludes the recently announced onetime tax reform bonuses to be paid to our nonmanagement personnel.
Now, as to the first quarter, we are forecasting an 11% to 12% increase in average paid worksite employees over Q1 of 2017, resulting in a range of 193,500 to 195,300.
We are forecasting Q1 adjusted EBITDA in the range of $69 million to $71 million, an increase of 10% to 13% over Q1 of 2017, and forecasting Q1 adjusted EPS from $1.12 to $1.16, an increase of 22% to 26%.
Our Q1 adjusted EPS guidance includes an effective tax rate of 25%, which is lower than our forecasted full year tax rate due to the tax benefit associated with divesting our performance-based shares, which occur during the first quarter of each year.
As for our quarterly earnings pattern, keep in mind that our Q1 earnings results are typically higher than subsequent quarters.
And in particular, we are on a higher level of payroll tax surplus prior to worksite employees reaching their taxable wage limits and benefit costs are lower in Q1 and step up over the remainder of the year as deductibles are met.
In conclusion, we are pleased with our strong top line and bottom line growth in 2017 and are expecting another great year in 2018.
Now, at this time, I'd like to open up the call for questions.
Sure.
We ended the year right at our number ---+ close to our number of 500 that we kind of accelerated the plan in the last half of the year.
We ended the year at 16% increase over the year prior.
We're looking at over the course of the year, since we're kind of ahead, we don't really feel we have to add that many new.
Training will continue on and we're kind of looking at about a 14% average trained number year-over-year over the course of the year.
So that's the game plan.
Sure.
Yes, Jim.
We ---+ obviously, our fourth quarter's results were the best quarter of the year in terms of the trend.
It was down to about 0.5% in Q4.
And for the full year, it was ---+ it ended up on the total benefits, which includes just all the medical, dental, vision, disability, all that other stuff was about 1.2% for the year.
And what we're seeing this year is we're seeing a really good trend on the medical side, but the pharmacy trend is actually going to be up.
And so when we put all that together, along with the ---+ there's some more ACA taxes that are going to ---+ that went away in '17 that are coming back in '18.
So when we put it all together, we're looking in that kind of a low 3% range for 2018.
Yes, sure.
We ---+ I've mentioned just a minute ago that we had excellent trend for the year 2017.
It was well below 2%.
And what we're seeing is a little bit of a step up, including planned migration and mix of business for 2018, but we're seeing something in the 3% to ---+ 3% to 3.5% kind of worst-case scenario right now.
We think that there's enough going on in the marketplace that ---+ with the ACA taxes, one of the big factors that are driving some of that this year.
So we still think a 3% trend would be great in the marketplace, but we'll just have to see how it works out as we go through the year.
It's definitely up from what we budgeted for 2017.
Yes, absolutely.
Yes.
Yes, absolutely.
We spent the whole year last year testing a variety of elements that are important to a rollout strategy.
And the last one that we tested, in the fall, we created a new, what we call discovery call brochure that kind of revised some of the top track and some of the dialogue and then, literally on a fold out page, puts Workforce Optimization and Workforce Administration side-by-side and right upfront.
I'm meaning side-by-side, so you can compare the 2 and right upfront in the sales process on the discovery call.
And what we have found there is just really exciting because of how it puts our BPA in such a consultative role to describe the differences.
Of course, most prospects we're calling on are already in traditional employment and our Workforce Administration is a great step-up in having a comprehensive, cohesive solution to upgrade a traditional employment solution, but we're able to discuss traditional employment right next to co-employment and really hone in and describe the advantages, the group buying advantage of being in co-employment, the lowering of the risk of being an employer that comes along with it.
So many advantages of co-employment, we're able to really identify side-by-side and have contrast.
Of course, in selling it's always true you're better off if you're offering a prospect options.
And we have found that when you have the 2 options there, you're able to discuss both of them more fully without trying to force somebody into one solution.
And we just think that's going to be awesome in 2 ways.
We think we'll get every Workforce Optimization customer that we've ever gotten plus some that, for now, we're able to have a more full discussion about it without kind of the fear of co-employment and some of the myths that go along with that.
And then, we're also going to, we believe, be able to bring customers into our family, if you will, in Workforce Administration if they opt to ---+ for an upgrade in their traditional employment world as opposed to co-employment.
We're so confident about that, we've actually built that into budgets and for our Business Performance Advisors and their management to shoot for, for this year, more of a balanced scorecard among all of our business performance solutions.
And that kind of ties in with this whole concept of moving forward as one Insperity.
So the other thing we did is we did a lot of work with the marketplace and customer base to determine what is the best comprehensive traditional employment services bundle that meets the need of the target market and also can be priced at a price point that puts us in a really strong competitive position to bracket our competition between our co-employment solutions offering, which is the premium service in the marketplace, and then our traditional employment services offering that comes in typically just underneath competitive co-employment offerings.
And many of those, we would actually think are more traditional employment solutions because of how limited [their] co-employment structure is.
So we think we've also created a nice competitive advantage out in the marketplace and we're excited about getting out there and executing this plan.
Yes.
It's a good question.
We obviously are watching that closely and some of the changes from a regulatory standpoint have kind of opened up some opportunities there.
Kind of the way we look at that is we're the ---+ we're a 30-year-old proven solution in our structure and the way we manage benefits.
And even though I think it does open up some opportunities for associations across state lines, et cetera, and there are successful association plans state by state, it's quite a trick to manage a national benefit program.
And these association plans are still going to have the common issue that these type of multiemployer plans have always had.
When people come to you for one reason, health insurance, you naturally have potential for adverse selection.
And those plans can get very unwieldy.
Now, when ---+ one of the advantages we have is that the health plan benefit is definitely a very desirable aspect of what we do, but it's only one component.
[If] people come to us for the comprehensive solution and how it affects their business, so they're not just coming with that one reason to be in or out.
That way, when people ---+ prices change, et cetera, if they're in for the one reason, price goes up, they're out of here.
They can get a lower price elsewhere.
That doesn't happen for us in our play and that's why we're able to have, over many, many years, these small increases compared to the marketplace at large.
And I just don't see anybody being able to compete with that for a long time.
You're welcome.
It's been fun.
Yes.
It's a good question, Greg.
What's happening out there, you're right.
There's some loosening of regulations at the federal level and that's kind of started a cascading out to the states for states trying to adjust.
Of course, we've always had this whole multistate regulatory environment to contend with, but our team of government affairs folks are ---+ have a full plate because we're always monitoring what's going on state by state and have to stay on top of any regulatory changes that are going on out there.
So we do see that as a risk going forward, kind of states ramping up while the federal regulation is kind of being reduced, if you will, or at least not growing as fast.
And we just ---+ we're ready for that.
We're kind of in place to go fight fires where fires come up in different jurisdictions.
Yes.
It's always a double-edged sword for us.
More regulation is more burden for employers.
They start looking for a solution.
So we do use that to grow the business.
At the same time, we have to comply and we have to deal with the changes and so that adds a little bit of cost, but it's what we do.
It's what we know how to do.
We are good at it and it's a part of what we're delivering to our client.
Yes.
Well, I mentioned that our marketing efforts produced 56% of our paid worksite employees this year.
It was 58% increase over last year.
And that's been driven by 3 primary programs: The loyalty program, which you know are leads that come from current customers or worksite employees of customers or even close advisers to our customers.
Those are kind of our best leads and they close at the highest rate.
We continue to have a corporate-sponsored methodology of localized meetings where we provide a benefit to the customers, but we're also very focused on [leaning] opportunities out of those meetings and that's gone very well.
The second component is a channel program.
We have some excellent channels, different types of channel ---+ the relationships that we've developed, some with the insurance community, some with the banking community, other types of relationships.
And we constantly have programs of channel managers that are responsible for delivering up a certain number of qualified prospects for our BPA channel.
And then, we also have a ---+ so you've got the channel programs, you've got the ---+ so what's the third one.
Well, the digital program.
Our digital effort is just going fantastic.
I mean, we have made a significant investment there and we have excellent people across our company that have blogs that they write on various subjects and we have quite a following out there.
And our digital activities generated a good number of opportunities as well.
Why don't you hit the tax rate first.
Yes.
Regarding the tax rate, so the 21% bridging up to the 27% level, the big piece there is the state and income taxes.
We've also got the ---+ they are no longer allowing a qualified transportation deduction.
Some of that we're still trying to get clarification on, but that's one aspect of it that may lead you to believe it's a little bit higher than probably what you expected, sort of in the ---+ if that does stick, it's probably an additional 2% or so, 1%, 2% on our effective tax rate.
What we've done, we're not anticipating any great change.
However, we've ---+ we essentially now have set up in our sales and marketing team kind of 3 campaigns: So there's spring, summer and fall.
Obviously, fall was up.
It will continue to be our most dramatic and biggest investment campaign, but we are moving toward a kind of a more evened out approach because we think there's really not any limiting factor about wait until the end of the year or wait until the end of the quarter or whatever.
So we're going to work that this year and see if that produces a change.
Well, once again, thank you, everybody, for joining us today.
An excellent year, off to a great start this year and we look forward to seeing you out on the road over the course of the spring.
Thanks for joining us.
