Good afternoon, everyone. My name is Erica, and I will be your conference operator for today. I would like to welcome everyone to the Insperity Second Quarter 2021 Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. 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. 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 2021 financial results. Paul will then comment on the key drivers behind our Q2 results and our plan 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. 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 results. We achieved $0.91 in adjusted earnings per share and $60 million of adjusted EBITDA, with our growth rebounding ahead of plan from the pandemic lows a year ago. As for our growth metric, the average number of paid worksite employees increased by 7% over Q2 of 2020, above the high end of our forecasted range of 5% to 6%, and this was a sequential increase of 4.3% over Q1 of 2021. Both worksite employees paid from new client sales and net gains from hiring in our client base exceeded our targets. And second quarter client retention came in at our historical high level of 99%. Now, along with worksite employee growth, our revenue per worksite employee, which included a 6% increase in pricing and the non-recurrence of the 2020 FICA deferral and customer service fee credits, exceeded our expectations. Our workers' compensation program also continues to produce favorable results. In spite of these three factors, we experienced a decline in gross profit of 9% from Q2 of 2020 related to the dynamics associated with the pandemic. First, during Q2 of 2020, with the onset of the pandemic, we experienced unusually low utilization in our health plan and therefore, lower benefit costs. Over the first half of this year, we have seen an increase in health care utilization, including elective care that was previously deferred and COVID-19-related vaccination testing and treatment costs, along with changes in claim payment patterns by our carrier associated with these claims. A second area of gross profit, unemployment taxes, has been favorable relative to our expectations coming into 2021. We prudently budgeted for an increase in state unemployment tax rates coming off the high 2020 unemployment levels. Ultimately, many states elected not to raise their rates at anticipated levels, including Texas, whose rate we received during Q2. Also, we experienced a change in client mix that had a favorable impact on our SUTA costs. So the gross profit contribution from our payroll tax area has exceeded our budget through the first half of 2021. Moving forward into the second half of this year, we have appropriately lowered our pricing to allow our clients and prospects to benefit from our lower SUTA costs while still targeting our initial budgeted spread between price and cost. We will closely monitor SUTA rates as we enter 2022 to determine the need for any further pricing adjustments. Now another positive outcome in the payroll tax area during Q2 was a receipt of $11 million of federal payroll tax refunds related to prior years. As for our Q2 operating expenses, we continue to balance managing costs relative to the ongoing pandemic while also investing in our current and long-term growth plans. We have increased our marketing spend related to lead generation activity and have incurred costs related to our sales force implementation. Other corporate employee headcount has remained relatively flat in the first half of 2021. We have reinstituted travel for certain employees and events. However, these costs, along with other G&A costs, continue to be managed at historically low levels as the economy and our growth recovers from the pandemic. Our financial position and liquidity remains strong as we continue investment in our growth and provide returns to our shareholders. During the quarter, we repurchased 98,000 shares of stock at a cost of $9 million, raised our dividend rate by 12.5%, paying out $17 million in cash dividends and invested $9 million in capital expenditures. We ended Q2 with $213 million of adjusted cash and $370 million of debt. Now at this time, I'd like to turn the call over to Paul.

Thank you, Doug, and thank you all for joining our call today. Let me begin by providing some color around our strong second quarter and first half results and the solid execution driving our growth acceleration. I'll follow these comments with the discussion of priorities for the balance of this year. And I'll finish with some thoughts about the exciting market opportunity we see ahead for Insperity, the PEO industry, and the overall HR services sector. We've had an excellent first half of 2021 in the face of considerable uncertainty from the ongoing effects of the pandemic. Our priority as we entered this year was to accelerate our growth momentum and return to double-digit growth in paid worksite employees as soon as possible while managing through the uncertainty. As the year began, we were optimistic we would achieve this growth rate by year-end or early 2022 despite the loss of our largest client, which represented just under 3% of our worksite employee base. Our confidence was based upon our solid sales momentum, underlying client retention improvement, and steady hiring in the client base. Our guidance provided today indicates we now expect to return to double-digit unit growth in the third quarter, well ahead of schedule, building off our strong recent trends in all three of our growth drivers. Outperformance in paid worksite employees from previous booked sales, combined with stronger-than-expected hiring within the client base and historically high client retention, produced a rapid acceleration in our unit growth. In fact, paid worksite employees were up 9% in four months by the end of June over our low point of the year in February. New sales in the second quarter met our targets with booked sales for new clients and worksite employees up 39% and 30%, respectively, over last year. This positions us well to fuel third quarter growth since booked sales from a given quarter typically become paid worksite employees in the following quarter. Another highlight from our sales organization this quarter was booked sales for our traditional employment solution, Workforce Acceleration, which achieved 94% of forecast. We are beginning to see decent traction with this offering, with gross profit contribution in Q2 from this offering increasing significantly over the same period last year. Although the numbers are still small relative to other contributors to gross profit, we believe this trend bodes well for the future since the potential for this offering is substantial. Our client retention in the second quarter continued at historically high levels as our client service interactions have continued at rates dramatically above pre-pandemic levels. We would have expected the level of service interactions to recede to historically normal levels by now, but it appears more of our client base has discovered the depth of our service team's expertise and the capability of a sophisticated HR function to help their businesses succeed. The most significant driver to our rapid growth acceleration in the first half of the year was growth in our client base above our expectations. We budgeted this metric at the low end of our historical range for this year, and it appears we are more likely to end up near the high end, even with some potential cooling off in hiring over the balance of the year. We expect continued hiring within the client base over the back half of the year, but the labor market is showing some stress level around availability of candidates that could dampen the rate. The competition for qualified candidates is quite pronounced, leading to wage inflation, signing bonuses, and an increased employee turnover to pursue better opportunities. We saw some of these effects in our own data this year with average wages and bonuses up 7% and 44%, respectively. The tightening labor market is also the result of a significant increase in retirements and career decisions reflecting personal reprioritization coming out of the pandemic. This dynamic represents a considerable opportunity for Insperity since one of the major advantages of our Workforce Optimization offering is the immediate capability to compete for employees against much larger firms. Once again, a sophisticated HR function is needed to respond to address these marketplace changes to gain a competitive advantage. The second quarter and first half of this year also reflected the expected volatility in two of our direct cost areas most affected by the pandemic, specifically unemployment taxes and health care costs. There are simply many moving parts in these two areas that will take some time to settle out as the pandemic wanes. So we will continue to set wider ranges than normal for our expectations in these areas. So we have delivered solid profitability year-to-date and we have a good plan for the balance of the year. To continue to set the stage for long-term growth and profitability, our plan includes strategic investments in sales and service capacity. We expect to begin ramping up the number of business performance advisors at a rate of approximately 10 per month and go into 2022 at around 700 BPAs across the country. We are reinstituting our fall campaign kickoff in early September with simultaneous events held across the country and linked together remotely. We also have budgeted an increase of several million dollars in radio and digital marketing spend, extending campaigns that have been successful in generating qualified leads. We are also continuing our investment to implement sales force and are on schedule for our target rollout to the sales organization next spring. And most importantly, we intend to invest to add service team capacity for the growth we are experiencing and expect to continue in the months ahead. We believe a successful fall selling and retention campaign will build upon our recent success and increase the likelihood of double-digit growth into 2022. Insperity has a tremendous market opportunity in the years ahead. Demand and recognition of the value of our services has never been higher. The PEO industry has reached a stage of more rapid adoption and the total addressable market is large. My optimism for the long-term future is rooted in a different dynamic than I've seen in the 35 years building our company and industry. At the core of this optimism is the recognition of the importance of the HR function and the need for consultative HR support to achieve business objectives. I have mentioned throughout the pandemic the increase in the number and average length of time of interactions with our client owners and C-level management. Another element, and maybe the most significant change to note, is the topics being discussed at this level, including corporate culture, diversity and inclusion, employee communication and emotional support, along with talent acquisition and retention. It is apparent that developing and implementing an ongoing people strategy is front and center in the minds of business owners and the C-suite. This reality highlights the value of the PEO option for small and midsized firms in general, and even more so, the distinct competitive advantage of Insperity's premium service offering. So we believe it's time to pour gas on the fire and prepare for the growth potential in the years ahead. We are in a great position to ride the wave of the recognized value of a sophisticated HR function on top of a second wave of the growing awareness of the PEO solution, on top of a third wave of the value Insperity can deliver with our superior service model. We intend to continue to capitalize on this expanding market opportunity by investing in innovative ways designed to drive awareness and adoption of Insperity's best-in-class offerings. We believe this will allow us to continue to deliver on our mission of helping businesses succeed so communities prosper and provide exceptional returns to our shareholders. At this point, I'd like to pass the call back to Doug.

Thanks, Paul. Now let me provide our guidance for the third quarter and an update for the full year 2021. We're now forecasting 5.5% to 6.5% worksite employee growth for the full year, an improvement over our previous guidance of 4% to 6% growth. This increase is based upon our outperformance during the first half of the year, leading to a higher starting point going into Q3, continuing momentum in sales and client retention, and some continued hiring by our clients. We are forecasting Q3 paid worksite employee growth of 9.5% to 10.5% over Q3 of 2020. This is coming off the 7% year-over-year growth in the prior quarter. As we approach our annual fall sales campaign, we have taken a portion of the upside in earnings created during the first half of this year and invested it in initiatives designed to build upon our strong sales momentum. These initiatives include the continued hiring of business performance advisors, increased investment in advertising, and reinstituting our corporate sales and client retention fall campaign event. Also, as I mentioned a few minutes ago, as a result of the 2021 SUTA rates coming in lower than anticipated, we have taken the opportunity to pass savings to our renewing clients and prospects through lower SUTA pricing allocations over the latter half of 2021 to further support our sales and retention goals. Now there does seem to be continued uncertainty surrounding the pandemic and its impact on our direct cost programs, particularly in our benefits area where COVID-related costs, potential deferred care, higher acuity and the Delta variant are potential factors. Therefore, we continue to take the approach of adopting a wider-than-usual range around our earnings expectations. When considering this factor and the investment of a portion of the earnings upside for the first half of the year, we are now forecasting adjusted EBITDA in a range of $258 million to $288 million. This is up from our previous guidance of $250 million to $280 million. As for full year 2021 adjusted EPS, we are now forecasting a range of $4 to $4.59, up from our previous guidance of $3.83 to $4.40. As for Q3, we are forecasting adjusted EBITDA in a range of $52 million to $62 million and adjusted EPS from $0.74 to $0.93. Now at this time, I'd like to open up the call for questions.

Your first question comes from the line of Andrew Nicholas from William Blair.

My first one, and I apologize if I missed this in the prepared remarks, but I just was hoping you could provide an update on the mid-market. Specifically, any color on sales momentum there, commentary on the pipeline, conversion rates, etc.

Sure, no problem. I didn't really mention mid-market this quarter. They're, of course, embedded into the total sales growth numbers. And I mentioned last quarter that we had really wrung out the mid-market sales pipeline toward the end of the year, and it's built really strong over the course of this year. And we're looking forward to a good fall in mid-market but not much else to report on that front at this time.

Got it. And then in terms of the guidance, specifically around worksite employees, obviously, a pretty big increase there. Is there any way to kind of dimensionalize how much of that is a consequence of better hiring from the base versus new sales? Just trying to understand the change in and how much is a function of the stronger end market?

Yes. Well, certainly, I mentioned in the prepared remarks that we generally have a range that we use for net gain of hiring in the client base over the course of a full year. And we had budgeted in for this year to be at the low end of our range, which would be around or maybe less than 4%. And the high end of our range would be typically, over the course of the year, in the 6% to 7% range. So that gives you a little bit of color going from the low end to the high end over the course of our estimate for the full year. But as you look back over the first half, certainly, you had outperformance in sales, you had incredible retention at historically high levels, which formed the base for the net change from the clients to be an upside for you, which is exactly what happened. So very good for this part of the year. We haven't really budgeted in that for the balance of the year at these kinds of rates we've seen simply because we know the labor market's tightening up some. Be nice if that could continue like that, but that's not what we're building in our expectations.

Your next question comes from the line of Tobey Sommer from Truist Securities.

I was wondering if you could dig into the pricing. I think you said up 6% but then maybe some sort of reaction to the payroll situation being better in alleviating some of that to your customers. How should we think about pricing if we kind of net out those two pieces on a go-forward basis?

Yes. Thanks for the question, Tobey. So we are continuing to move price appropriately with underlying trends we're seeing in the marketplace. And so that what you've seen in the total revenue per employee increase going up does reflect strong pricing in what we're doing. And of course, we manage each of the allocations for each of the ultimate costs that come out. So relative to the unemployment tax, we had boosted rates early in the year, anticipating additional costs that would be passed on from the layoffs during the pandemic. A lot of that did not come through. And so we have opted to reduce the allocation rates for the balance of the year and then take another look as we get some insight into next year's potential cost. But this is the ongoing aspect of managing price and cost within each of the buckets that we manage that contribute to gross profit.

From a BPA perspective, where would 700 puts you year-over-year in terms of growth at the year-end? And then you talked about some incremental sort of investments and upside you're investing to help stimulate growth. Could you give us some color about what areas you're applying the increased investments?

Yes, absolutely. We've had a great first half with the maturing of our sales staff, allowing for us to hit our sales targets without a lot of growth in the net number of BPAs, which was the plan as the year began. As we ramp up the number of BPAs, the 700 number, which should put us around 5% ahead of the year prior, so we'll be continuing to benefit from some of the sales efficiency gain. But we're investing, over the last half of the year, additional marketing dollars in both digital and also radio advertising that's proven to be effective in helping us get in front of qualified leads. So that investment is a little bit of an insurance policy on hitting those sales targets over the balance of the year and continuing to build on the strong sales momentum we have in the company as we sit today. So it makes sense to both start going head back to increasing the number of BPAs. That's your investment really in 2023 growth because it takes 12 to 18 months to train BPAs. So we'll be ramping up over the back half of this year and in the first half of next year, moving that BPA count up to the right number. And in the meantime, we're investing more to help support the success that our current trained BPAs are having.

Your next question comes from the line of Joshua Vogel from Sidoti.

My first question, you've talked about increasing the client count. Last quarter, it was offset a little bit by a reduction in the average size of clients. So I was just curious, when we're looking at your wins and prospects pipeline today, what does the average client profile look like relative to the existing base?

Yes. So both the -- we saw, over the course of last year, about an 8% decline in the average coming out of COVID. And we've seen about half of that come back. And it's been interesting to watch how it's pretty consistent between the average size of the customer base and the prospect base. So I would say we're half to maybe 60% back on average size, both in the base, and it seems to be flowing through also in the prospect base. That means, to me, there's still some more to be gained there before we're back at that level. So there may be some more room there. But also, you often have to consider that businesses may have just kind of tightened their belt a little bit and found other efficiencies. So may not get back to that level. It would take new growth for new growth within their company to go beyond that.

Great, I appreciate those insights. And looking at how the state unemployment rates have come in below expectations you had at the beginning of the year, and now you're using these lower rates to pass along savings, to further support sales and retention. And this may be silly and I apologize, but if we see some lockdowns or extended stimulus efforts, can states change those tax rates on the fly, which could potentially squeeze you? Or can that only be done once a year at this point and any changes would be a 2022 event?

Yes. It would be highly unusual for there to be some kind of unemployment change midyear. It's not impossible, but I would -- that'd be highly unusual. And so this is really, at this point, more about just looking ahead to 2022, adjusting for what we prepared for that didn't occur this year. We've adjusted for that in pricing. And we'll have a look at pricing going into 2022 with more insight into what's happening on the cost side. And the good news about unemployment tax is when you change the rates in the system, both on the pricing and cost side, those changes flow right through. So it's much easier to match the pricing and cost in the unemployment tax area.

Your next question comes from the line of Jeffrey Martin from ROTH Capital Partners.

Wanted to get a sense on the revenue per worksite employee, up pretty significantly, both on -- well, year-over-year, $175 or so. Could you help us kind of parse out what the sources of that are? Is it Workforce Acceleration being -- contributing within the gross profit dollars but it's not in the worksite employee count versus wage inflation and higher commissions versus maybe some additional ancillary features like your Software-as-a-Service platforms offer?

Yes. So if you're looking at the year-over-year increase for Q2 in that revenue per employee number, well, first, in total revenues, I think it's about 19%. And then 7%, obviously, is the increase in worksite employee volumes, so you're left with a 12% number. And we talked about the fact that 6% of that 12% was an increase in pricing that we've been passing through, and the other 6% or so has to do with what was happening back in 2020 with the government stimulus and deferral of FICA payments. So you had a comparison issue, so you didn't have that money flowing through your revenue per employee last year, and that has since been lessened significantly. And then we gave customer service fee credits back in Q2 of last year. And so that's the other piece of that revenue per employee number.

Okay, great. And then could you also speak to your client retention efforts? Are there any unique things you're doing today that you maybe weren't doing 1.5 years, 2 years ago pre-pandemic?

Well, there are quite a few things down in more subtleties in the way that the processes that are going on there and the interactions with clients like I've mentioned. But as we look forward to this year in terms of the year-end transition, I'm really excited about it. I think we're in a good place right now in terms of how those processes have and continue to work. And this year, we don't have the kind of large or jumbo clients that could affect that type of retention or attrition like we had in the last couple of years-end. So it's early, but we feel good about the way retention is going to this point and optimistic about the balance of the year.

The next question that we have is from Mark Marcon from Baird.

Just wondering if you could talk a little bit about what you're seeing on a couple of gross cost elements. One, just the healthcare cost. How did that trend over the course of the quarter? I know there's a lag between when the costs are incurred and when you become fully aware of them. But what are you seeing just in terms of the sequential trends, and particularly as it relates to those elective procedures and how you're thinking about it as the year unfolds? That's one aspect of it. And then the second aspect of it is, can you talk a little bit about the service infrastructure and what you're seeing in terms of interactions and length of interactions and how we should think about the service group expanding.

Sure. If we want to talk about the benefit side first, this was -- it's really interesting to watch the dynamics of the pandemic as they play out because, as you know, there have been moving parts, a lot of moving parts and components that you have to really dig down on and monitor. And so you have some -- obviously, if you have a deferral of care, that lowers your cost. If you have -- early in the pandemic, we had pharmacy costs go up dramatically because they were allowing people to buy more for extended periods, then you have COVID actual claim costs start to come through and testing costs. And, of course, this year, you had the addition of vaccine costs. And then you have the potential for a deferral of care coming in or chronic care that was deferred. So we really dug in this quarter to look at the detail. And certainly, COVID costs were higher. If you remember, the peak of the COVID hospitalizations being early in the year and that plays out over -- as you mentioned, plays out over time, so certainly part of the first half story. We started to see some higher levels of things that relate to possible deferral of care like lab work and MRIs and things of that nature. But it's interesting because all of -- it's just little bits and pieces all over the map inside the benefit plan. So all in, a little higher than we would have expected or that we did expect but not outside of the range of our expectations. So for the full year, I think we've continued to be appropriately conservative, and that's why we continue to have a wider range around our earnings targets. So that's the benefit side. Now on the service side, it is definitely time to invest in service capacity based on the way service needs have continued at a high level, and our growth has accelerated faster than we originally budgeted. So it's important to make sure that we staff up effectively and make sure we maintain our unique service model with our clients, the unique level of care that we provide and the breadth, depth of services, depth of our services and the level of care is our distinguishing factor in the marketplace. And so that's definitely something that you've got to always manage when you make the investment to make sure that you're ready and maintain those service levels.

That's great. And then with regards to a couple of revenue factors, both in terms of what's occurred so far and then in addition to that going forward, can you talk a little bit about two dynamics? One, just the contribution and the expectations from Workforce Acceleration and the successes that you're seeing in Workforce Acceleration, particularly in certain regions where it might be working better and gaining a lot of traction. And then how should we factor in the lower tax rates with regards to pricing in the second half of stimulus efforts? Can states change of the year? In other words, when we can obviously see the worksite employee growth, but what sort of decline should we see from a pricing perspective in total relative to the first half as we model out the second half?

Yes. So on the unemployment tax, remember, most of your unemployment taxes are really incurred in the first quarter and second quarter. And it's -- even though we've adjusted the rates for the balance of the year, it will have a minimal effect on the actual collected allocations because a lot of people hit their limits for many of these taxes. But -- so it will also, though, lower the rates we'll be building in for next year, which will help us add new business. So that's -- we don't see that, that's going to have a dramatic effect on lowering our revenue for the balance of the year. Now the other part of your question is interesting because on the Workforce Administration, I felt like I needed to mention this quarter because what I'm really seeing is more of the Workforce Acceleration being an ingrained part of the sales process, and it's just more routinely becoming an option that is being presented and people are taking when they're not ready for the full Workforce Optimization step. That's what we were hoping for, and it's beginning to happen. It's happening at a more acceptable rate. I think we'll continue to get adoption across our BPA base. And on a year-over-year basis, when I look at the total gross profit contribution, even though it's a small number, it has such potential. I felt like I needed to mention it because it really increased a lot in 12 months, and it has the potential to do that for a long time. We continue to see the same trends of adoption in the base. So it is a bright spot for the future and allows us to continue to drive these key factors like gross profit per worksite employee. And in our business, adjusted EBITDA per worksite employee is really the primary key metric about what we're -- what the business is about because that worksite employees are unit revenue, unit expense and unit of risk, so it's really how much cash flow you make per unit of risk that you take. So anything that drives that equation, we think has tremendous potential for the future.

Thank you. The Q&A is now closed. I would like to turn the call over back to Mr. Sarvadi. Please go ahead, sir.

Well, once again, I'd like to thank everybody for joining the call today. We appreciate your interest in the company and look forward to any follow-up questions for Doug in the coming days. And we look forward to seeing you at some point this fall. Thank you again, and we'll see you next quarter.

This concludes today's conference call. Thank you all for joining and you may now disconnect.