Earnings Call Transcript - TNET Q1 2021

Operator, Operator

Good afternoon, and welcome to the TriNet First Quarter 2021 Earnings Call. All participants will be in listen-only mode. Operator instructions were provided regarding how to ask questions. After today’s presentation, there will be an opportunity to ask questions. Operator instructions were provided regarding how to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Alex Bauer, Investor Relations. Please go ahead.

Alex Bauer, Investor Relations

Thank you, operator. Good afternoon, everyone, and welcome to TriNet’s 2021 first quarter conference call. Joining me today are Burton M. Goldfield, our President and Chief Executive Officer, and Kelly Tuminelli, our Chief Financial Officer. Our prepared remarks were prerecorded. Burton will begin with an overview of our first quarter operating performance. Kelly will then review our financial results. We’ll then open up the call for the Q&A session. Before we begin, please note that today’s discussion will include our 2021 second quarter and full-year guidance, and other statements that are not historical in nature or that depend upon or refer to future events or conditions, such as our expectations, estimates, predictions, strategies, beliefs, or other statements that might be considered forward-looking. These forward-looking statements are based on management’s current expectations and assumptions and are inherently subject to risks, uncertainties and changes in circumstances that are difficult to predict and that may cause actual results to differ materially from statements being made today or in the future. Except as may be required by law, we do not undertake to update any of these statements in light of new information, future events or otherwise. We encourage you to review our most recent public filings with the SEC, including our 10-K and 10-Q filings for a more detailed discussion of the risks, uncertainties and changes in circumstances that may affect our future results or the market price of our stock. In addition, our discussion today will include non-GAAP financial measures, including our forward-looking guidance for net insurance margin, adjusted EBITDA margin and adjusted net income per diluted share. For a reconciliation of our non-GAAP financial measures to our GAAP financial results, please see our earnings release, our 10-Q filing or our 10-K filing for our first quarter of 2021 and full year of 2020 reconciliation, respectively, both of which are available on our website or through the SEC website. Reconciliation of our non-GAAP forward-looking guidance to the most directly comparable GAAP measures is also available on our website. With that, I will turn the call over to Burton for his opening remarks. Burton?

Burton M. Goldfield, President and CEO

Thank you, Alex. The first quarter of 2021 saw a continuation of many of the positive trends that TriNet experienced throughout 2020. Our strong customer base showed resilience as well as significant growth in the first quarter of 2021. I am proud of the TriNet team and their ability to help our customers navigate the current economic climate. We continue to put our customers at the center of everything we do and in the first quarter, we were again rewarded with strong operating and financial performance. During the first quarter, we grew GAAP total revenues 1% year-over-year to approximately $1.1 billion. I am especially pleased with this revenue growth as the year-over-year comparison was positive against the pre-pandemic quarter in 2020. Furthermore, this revenue growth was supported by our installed base of customers who have committed to TriNet at high retention rates and grew with us during the first quarter. Extrapolating our Q1 trend and the continued reopening of the U.S. economy, I would expect continued outsize hiring in our installed base throughout 2021. GAAP earnings per share grew 15% year-over-year to $1.51 per share. Our revenue growth coupled with reduced healthcare costs and expense management drove our first quarter GAAP EPS growth. Finally, we finished the first quarter with approximately 326,000 WSCs, down 3% year-over-year and down 2% sequentially versus the fourth quarter of 2020. These year-over-year and sequential metrics reflect lower churn than what we've seen in a typical January, but also lower contribution from new sales when compared to our pre-pandemic experience. We are increasingly optimistic as we look out on the balance of 2021. The lower churn or higher retention rate we saw in January was in part driven by our 2020 recovery credit program. In fact, we lost less than 1% of the customers who participated in the 2020 recovery credit program. Furthermore, the strength and resilience of our customer base was key to our first quarter volume and business performance. Our customer base hired the most new employees during a first quarter in our 30-plus year company history. Putting together the higher retention with the strong customer hiring, three of our core verticals — technology, financial services, and life sciences — significantly outperformed our other verticals. This outperformance even includes absorbing an incremental percentage point of uncontrollable attrition from mergers and acquisitions in our technology vertical. This increased M&A activity in technology reflects a vibrant industry already on the rebound. Turning to new sales during the quarter, we closed some of the sales gap from our pre-pandemic sales performance, but still have an opportunity for improvement. As inferred from our forward-looking guidance found in our earnings release, we expect new sales momentum to build during the year. As we look forward to the second quarter and the balance of 2021, we are encouraged by how the economic reopening and recovery has positively impacted TriNet. Although we do not guide to WSC count, I am confident in the growth of WSCs during the second quarter. We look forward to updating you as the year progresses. For nearly a decade, we have targeted our sales and service efforts on our core verticals including technology, financial services, professional services, life sciences, non-profit and Main Street. In doing so, we have built a group of dynamic customers who represent the innovative spirit of America's small and medium-sized businesses. We remain confident in the effectiveness of our vertical strategy. The true value of this customer base revealed itself during the pandemic. While we work tirelessly in service of our customers, our customers responded by continuing their relationship with TriNet while managing through the economic shock. Beginning in June of 2020, as the pandemic-related lockdowns started to ease, our installed base began to hire workers, a trend that has continued unabated since that date. As noted, the first quarter of 2021 saw TriNet’s customers hire the most new employees in any first quarter in TriNet’s history. The value proposition remains particularly strong. Prior to the pandemic, our customers experienced fierce competition for talent. TriNet provides them with an advantage through our differentiated service and benefits offering. As the economy improves throughout 2021 and business reopenings accelerate across America, we expect our installed base to leverage our solution while continuing to hire and compete for scarce talent. In the first quarter the technology vertical was the hiring growth leader. We also experienced strong hiring from the financial services and life sciences verticals. The economic reopening and recovery has highlighted that TriNet is much more than a vendor to our customers. An example of this relationship is the creation of our 2020 recovery credit program. This recovery credit program is our effort to share with our customers the excess cost savings we generated from underutilized health services, primarily in April of 2020. Through the first quarter of 2021, we have accrued a total of $140 million for the 2020 recovery credit program. Beginning in the fourth quarter of 2020, we have been busy returning these funds to our customers. In fact, in the first quarter, we returned $27 million to our customer base. As a result of the 2020 recovery credit program, well over 50% of our installed base who have renewed with TriNet are now signed to annual contracts. This has the impact of stabilizing our installed base, increasing our predictability and improving the renewal dialogue with our customers. During the first quarter, we again saw significantly lower health costs. As a result of this performance, we once again put all of our stakeholders first and established a new 2021 credit program. For this program, we accrued an incremental $25 million. The 2021 credit program is structured differently from our recovery credit program. It is our expectation that health costs will rebound over the course of 2021, which has already been captured in our forecast. As such, the amount of the 2021 credit program available to our customers will be contingent upon the full-year performance of our health costs. Kelly will provide more details later. Ultimately, we believe the primary long-term outcome for the 2021 credit program and the 2020 recovery credit program will be measured by greater customer satisfaction and retention. Finally, as the economic reopening and recovery take hold, we expect new sales to continue to improve throughout 2021. As we previously noted when the pandemic began and the lockdowns proliferated beginning in March of 2020, our new business growth dropped significantly from our pre-pandemic levels. Our prospects became far more concerned with the front of their business versus the back office of the business, or the survivability of their business rather than their HR services. In response, we had to change our approach to new sales, as well as the count for social distancing, which became the norm. As we reflect on our first quarter 2021 new sales performance, we finally saw the gap with our pre-pandemic performance begin to shrink. We continue to add customers in our core verticals as we highlighted how being with TriNet is so much more than a vendor relationship. And as we look forward to the rest of 2021, we expect to build new sales growth through the balance of the year as business activity re-accelerates. In summary, I am pleased with our financial performance. Our vertical strategy has once again become validated through the durability of the customer base and our customers' continued record hiring and growth in the first quarter. Our 2020 recovery credit program achieved an acceptance rate of well over 50% across the fourth quarter of 2020 and first quarter of 2021, contributing to retention and resulting in a more predictable customer base. New sales are recovering, but we still have opportunities for improvement. Consistent with guidance outlined in our earnings release, we expect sales to improve throughout the year. Ultimately, TriNet has demonstrated its commitment to our customers throughout the pandemic and beyond, and we believe we can leverage that commitment to drive growth in the future. I will now turn the call over to Kelly for a review of our financial performance. Kelly?

Kelly Tuminelli, Chief Financial Officer

Thank you, Burton. I'll review our first quarter financial results before discussing second quarter and full year 2021 guidance. With respect to our first quarter financial performance, I am very pleased with our results. We again benefited from our recent trends: strong performance from our installed base coupled with reduced health costs. During the first quarter GAAP total revenues increased 1% year-over-year, and professional service revenues were down 2% year-over-year, reflecting the 3% lower ending WSCs. GAAP total revenues came in slightly below our guidance as we accrued $37 million in the first quarter: $12 million for the existing recovery credit program started in 2020 and an additional $25 million for our new 2021 credit program. Combined, these items reduced GAAP revenue by 3%. The 2021 credit accrual differs from our 2020 recovery credit program. First, this contra-revenue accrual is allocated against insurance revenue only. Second, disbursement of this accrual is contingent upon the full-year performance of our health costs. It is our expectation that health costs will rebound in the second half. If costs do rebound greater than what we're currently anticipating, the accrual will be reduced proportionally in line with the excess costs up to $25 million. If costs do not increase greater than what we're forecasting, these funds will be made available to a portion of our customers. In the quarter average WSCs declined 4% to 321,000 compared to a pre-pandemic first quarter in 2020. As Burton discussed, we once again benefited from our customer selection as our installed base continued to hire. We did see some volume headwind of nearly 1% as our technology vertical experienced higher-than-normal M&A activity. Finally, we believe we have fortified our installed base for 2021 through our 2020 recovery credit program. Net service revenue in the quarter increased 9% year-over-year, largely driven by the outperformance of our net insurance margin. For the first quarter, we delivered a net insurance margin of just over 17% versus our first quarter guided range of 12.5% to 14.5%. Net insurance margin outperformed in the quarter as we benefited from larger positive claims development as our fourth quarter reserves were paid during the first quarter. Given the higher paid claims activity in December, we had assumed higher levels of incurred but unpaid health costs. In fact, COVID-19 testing and vaccination costs were slightly higher than our forecast. However, once again, these higher-than-forecast COVID-19 related costs were more than offset by reduced overall health services utilization, as we saw the paid claims activity in January and February play out. This underutilization enabled us to set aside $25 million for our 2021 credit program. In the first quarter, we delivered an adjusted EBITDA margin of 53%, five points above the top end of our guidance. We spent approximately $60 million to repurchase approximately 744,000 shares of stock in the first quarter. In addition, we reshaped our debt structure during the quarter, issuing longer-dated debt at a favorable 3.5% interest rate. Our first quarter effective tax rate was 25%. In the quarter, the rate was lower due to the timing differences from the tax treatment of employee equity compensation. GAAP net income per share increased 15% to $1.51 compared to $1.31 per share in the same quarter last year, exceeding the top end of our guidance range by $0.17. Adjusted net income per share increased 18% to $1.66 compared to $1.41 per share in the same quarter last year, which exceeded the top end of guidance by $0.27. Overall, we view the first quarter as a really good start to 2021 as our core performance funded both the customer credit and allowed us the ability to lock in longer duration debt. Turning to our 2021 second quarter and full year outlook, I will provide both GAAP and non-GAAP guidance. Please recall that the initial accrual in the second quarter of last year for our 2020 recovery credit program represented approximately 6% of GAAP total revenues and professional service revenues for the period. For the second quarter of 2021, we expect GAAP revenue growth of 12% to 14% year-over-year, and professional service revenue growth to be in the range of 10% to 14% year-over-year. Please note that in the second quarter, we expect to accrue just $5 million for our 2020 recovery credit program. The second quarter will be the final quarter where we accrue any meaningful amount for the 2020 recovery credit program. As such, the total amount accrued for this program and made available to customers will be $145 million. Regarding net insurance margin, we are forecasting a second quarter margin of approximately 10% to 11%. In the quarter, we expect COVID-related costs to continue, primarily comprised of testing and vaccine administration as well as the normalization of healthcare utilization. Additionally, please recall that our adjusted EBITDA margin and earnings per share in the second quarter of 2020 benefited significantly from the reduced health costs, as health behaviors changed in response to COVID-19 protocols last year. We do not anticipate that recurring. We are forecasting our second quarter 2021 adjusted EBITDA margin to be in the range of 35% to 39%. We expect second quarter GAAP earnings per share to be in the range of $0.59 to $0.74 per share, or down versus last year due to last year’s significant underutilization of health costs. Finally, we expect second quarter adjusted earnings per share to be in the range of $0.70 to $0.86 per share. Turning to our full year guidance, given our very strong first quarter performance, we are making a few changes. As I discussed earlier, we do expect health costs to rebound in the second half of 2021. In light of that, we believe our full year guidance is partly de-risked by the fact that our 2021 credit program will be adjusted downward by up to $25 million should we experience additional health costs above our current expectations. Furthermore, the strong hiring and retention of our core verticals has improved our outlook and we've pulled up the bottom end of our guidance range. We are now forecasting our year-over-year GAAP revenue growth to be 9% to 11%, lifting the bottom end of our range by one percentage point. Our professional service revenue forecast is now 8% to 10% year-over-year growth, an increase of two percentage points. The increase in our professional service revenue growth forecast is a result of strong hiring growth, retention in our core verticals and resilient pricing. We expect our 2021 net insurance margin to remain in the range of 10% to 11%, and we will closely watch developments in trends given our expected increase in utilization of health services in the second half of the year. Our full year 2021 adjusted EBITDA margin is now expected to be in the range of 38% to 40%, up one point on the bottom end of the range. We now expect GAAP EPS to be in the range of $2.86 to $3.31, an increase of $0.07 on the low end of the range, while the high end of the range remains unchanged. This reflects our strong core performance, which is funding the 2021 credit program, as well as covering the increased costs associated with our recently completed debt offering. Adjusted net income per share is now expected to be in the range of $3.42 to $3.90, or down 23% to down 12% year-over-year. The new adjusted net income per share guidance reflects a $0.07 increase to the bottom end of the guidance range. With that, I will return the call to Burton for his closing remarks. Burton?

Burton M. Goldfield, President and CEO

Thank you, Kelly. In summary, our long-term commitment to our vertical strategy resulted in a vibrant and resilient installed base of customers. Our customers hired new employees at record rates, and we continued our strong financial performance. We once again leveraged our unique business model and financial performance to offer another credit program for the benefit of all our stakeholders. As the vaccination process takes hold and the economy continues to reopen, we will continue executing our vertical strategy and build momentum in our business. We are well positioned to return to volume growth in 2021. Operator.

Operator, Operator

Operator instructions were provided regarding how to ask questions. Our first question today comes from Tien-Tsin Huang with JP Morgan.

Tien-Tsin Huang, Analyst

Thank you, thanks so much for your remarks. Maybe I'll start with Burton. Good afternoon. Burton, I’ll ask you about new sales. I'm curious if your target for new sales for the calendar year has changed versus 90 days ago. I know your prior outlook assumed some different ranges or outcomes around new sales, but as the rhythm of sales evolves, has that changed at all, or is insurance still the hold-up for some of these changes?

Burton M. Goldfield, President and CEO

So I think about it every day, Tien-Tsin. We started to close that gap from the pre-pandemic quarter, which was very encouraging. As far as I can tell, I can't tell you exactly when we return to normal, which includes selling in front of our prospects. I'm very happy with the rollout of the vaccines, and I like the way the model is showing results during the pandemic, as reflected by not only closing the gap but retention rates, et cetera. You know me: I'm pretty impatient. I'm glad that the gap is shrinking, but I want to be selling more to those right customers and the right verticals at the right price. So I'm cautiously optimistic and I'm highly focused in this area.

Tien-Tsin Huang, Analyst

Yes, we'll keep tracking it. Maybe I'll ask a quick follow-up on the net insurance margin outlook here. Q1, as you said, was way better than expected and the full year is unchanged. The recovery and this new credit makes a lot of sense. I'm curious about the line of sight on healthcare utilization for the rest of the year. Has that thinking changed at all? I know you have some cushion with the credit, but I'm asking about visibility on the utilization side. Thank you.

Kelly Tuminelli, Chief Financial Officer

Good to hear from you, Tien-Tsin. As I'm thinking about utilization and what we saw in the month of March, we did see things like normal doctor visits come back. We did see lower utilization in terms of flu and respiratory issues, probably due to social distancing. But we also saw higher utilization, as I mentioned in my prepared remarks, of both testing and vaccines. We're cautious as we're looking forward because we're not sure how big that bounce-back will be. We think our guidance really reflects that level of caution, and it's just prudent this early in the year.

Tien-Tsin Huang, Analyst

Okay, thank you, Kelly. Thank you, Burton.

Burton M. Goldfield, President and CEO

Thank you.

Operator, Operator

Operator instructions were provided. Our next question comes from Kevin McVeigh with Credit Suisse.

Kevin McVeigh, Analyst

Great, thank you so much, and congratulations on the results.

Burton M. Goldfield, President and CEO

Thank you, Kevin.

Kevin McVeigh, Analyst

You're very welcome, Burton. It's well done. As you're thinking about the retention of folks that are leveraging the credits versus those who are not, how should we think about the brackets of overall retention, and what are the experiences for folks that have taken the credit versus those that haven't?

Kelly Tuminelli, Chief Financial Officer

Kevin, I'll take that. For customers that participated, as Burton mentioned in his prepared remarks, over 50% of our renewal base participated fully in our recovery credit program and less than 1% of those participants churned. So we have had a noticeable difference in attrition between those that fully participated in the recovery credit and those that didn't.

Kevin McVeigh, Analyst

It did, thank you. I apologize, I missed that earlier. And then, Kelly, as you think about the margins at the lower end, is 10% the floor in terms of the progression of the quarters? Would you need to see the full year play out before you'd revisit those accruals? In other words, can we think of 10% as the floor unless you see full-year developments that cause you to change the accruals?

Kelly Tuminelli, Chief Financial Officer

I think we're going to be prudent and watch the year as it develops. I appreciate the question, but we did set 10% as the low end of our guidance, for sure.

Kevin McVeigh, Analyst

Super, thank you so much.

Burton M. Goldfield, President and CEO

Thank you, Kevin.

Operator, Operator

Operator instructions were provided. Our next question comes from Andrew Nicholas with William Blair.

Andrew Nicholas, Analyst

Hi, good afternoon. I understand the current environment is a bit unprecedented from a health care utilization perspective, but I'm wondering, given you've now instituted the second credit program, when do you expect it to become a more permanent aspect of your pricing strategy going forward? If you could walk us through the thought process for why that would or would not make sense in 2022 and beyond, that would be really helpful. Certainly it seems like the program in its 2021 form will help limit some of the variability you experienced on the insurance margin side, which I would imagine would be a positive development for the company going forward. Any thoughts there would be great.

Burton M. Goldfield, President and CEO

Great question. The transparency and value creation for our customers is a critical aspect of our model, which is pretty unique in our industry. You mentioned a couple of key points like lack of volatility, etc. The bottom line is our first program, the recovery credit program, demonstrated to our customers the depth of our partnership and the foundation for the long-term relationship, and it was expressed as a clear benefit. As Kelly told you, over 50% of our WSCs are employed by customers who have committed to annual contracts with the program, and of those customers less than 1% churned. So it worked out and exceeded my expectations. Looking forward, this was a way for TriNet stakeholders to benefit from the recovery credit program, and I am going to continue to look for innovative ways that we can differentiate ourselves by partnering with customers.

Andrew Nicholas, Analyst

Makes sense. Thank you. And then for my follow-up, changing gears a little bit, I was hoping you could help us get a better sense for how you're thinking about the impact of the past year on the workers' comp book. How much of what I would assume was much lighter claims activity in 2020 has already been accrued for? If not, when would you expect that to flow through in the form of prior period adjustments? Thank you.

Kelly Tuminelli, Chief Financial Officer

I appreciate the question. We did see favorable performance in workers' comp in 2020. As we're looking forward, I think we priced our workers' comp appropriately given the environment and our expectations for loss, and we will continue to watch the trends and see how it comes out. I think you've noticed though some portion of periphery development coming through a little bit smaller this quarter than we've seen in past years.

Burton M. Goldfield, President and CEO

Thank you.

Operator, Operator

Operator instructions were provided. Our next question will come from Sam England with Berenberg.

Sam England, Analyst

Thanks for taking the questions. First, I was wondering as we come out of the pandemic how you think remote working trends might impact both TriNet and the PEO industry in general. Has that been something that's driven some of the new inquiries that you're seeing?

Burton M. Goldfield, President and CEO

Great question. I believe we're emerging from the COVID pandemic in a solid position and that our customers will continue to hire additional employees to support their business and growth plans. Many of those employees will be remote, and there's tremendous complexity, particularly if you cross state lines, as it relates to hiring and retaining those employees. That complexity is suited particularly well for our business model because we can make sure that they're paid correctly, taxes are paid correctly, and they have great benefits in all 50 states. So I believe that the combination of the model itself as well as our long-term commitment to this vertical strategy and the hiring that's occurring bodes well for the future.

Sam England, Analyst

Great, thanks. And then a follow-up: how are you thinking about the M&A environment in 2021 and longer term? Has the pandemic impacted people's willingness to sell businesses? Some thoughts around that would be great.

Kelly Tuminelli, Chief Financial Officer

One thing I noted on the M&A front is that it is still a robust environment. Burton in his prepared remarks talked about the M&A in the tech sector, and that it had about a 1% impact on our WSC count due to the robust M&A market. How we're thinking about M&A specifically hasn't really changed. In terms of capital prioritization, first we're going to look at organic growth. Second, we will look at M&A, but it has to fit our strategy and the type of business or geography where we want to be. And then lastly, we will participate in share repurchase opportunistically and at least to cover dilution.

Burton M. Goldfield, President and CEO

Thank you.

Operator, Operator

Operator instructions were provided. Our next question comes from David Grossman with Stifel.

David Grossman, Analyst

Thank you, good afternoon. Hey, Burton. I was hoping you could shed a little more light on the WSC dynamic. Kelly, you mentioned a point impact from M&A, but if I look sequentially it looks like WSCs were still down sequentially after normalizing for that. Can you help us understand where we are in this dynamic of puts and takes in that WSC base? With the recovering economic situation and strong retention, why are WSC counts still down? Is it really the new sales dynamic in calendar 2020 that gated the WSC counts into the beginning of the year? I'm trying to understand if it's mostly a timing/new sales issue versus other dynamics.

Kelly Tuminelli, Chief Financial Officer

Let me take that and then I'll pass it to Burton. If we look at it sequentially, usually January is when a lot of people change PEOs. They may change because they want to keep their WSCs tied to one W-2 for the year. We do see the most churn in January. After that we have seen growth. As I'm thinking about our sectors, we saw hiring in tech, financial services and life sciences very strong. So even though there was a lot of M&A activity, we still saw very strong net hiring and hopefully as more people get fully vaccinated and things open up even more, we'll see other sectors follow on. Actually in the first quarter, for every single vertical except non-profit, we saw positive hiring. Burton, do you want to add anything?

Burton M. Goldfield, President and CEO

David, I would point you to Main Street, which has not recovered yet. When I pointed to professional services revenue being up, I was pleased with the revenue generated when taking out the net insurance margin. For me, it was a strong quarter, and I believe Main Street will recover over time as well. The hiring in the other verticals was strong. Ultimately, I am very comfortable with where we ended Q1 as a great quarter to start from for the rest of the year.

Kelly Tuminelli, Chief Financial Officer

One other thing to add is that if you look at our guidance, we did raise our professional service revenue guidance by about two percentage points. Our guidance really includes our view of WSCs into the future and our perspectives on hiring, sales and attrition, and I think it bodes well that we were able to raise that guidance.

David Grossman, Analyst

So just rolling that together, is it really the new sales dynamic in 2020 that gated WSC growth in Q1? Retention and hiring were strong, except maybe Main Street, so shouldn't we expect growth for the balance of the year if those trends hold?

Kelly Tuminelli, Chief Financial Officer

Typically we see WSCs dip in January and then new sales in later quarters help close the gap, and that was the case this quarter. We were actually a little better from an ending WSC perspective relative to our initial guidance, and our guidance incorporates our expectations for sales and hiring through the year.

David Grossman, Analyst

Got it. Then on the recovery credit, is this effectively setting up a buffer for some of the volatility you typically see on insurance margin while also enhancing retention? Historically, would you say normalized net insurance margin would be, say, 11% to 13%? How should we think about the more normalized level including the credit, coming and going year to year?

Kelly Tuminelli, Chief Financial Officer

Our guidance for 2021 is 10% to 11% combined net insurance margin. We don't attempt to make money on health insurance overall, but we do price it to be able to cover our costs and our balance sheet risk. So 10% to 11% is appropriate for 2021. We'll continue to watch trends as we move forward, but I won't provide further long-term outlook on that at this point.

David Grossman, Analyst

Got it. Last, a quick modeling question: did you say 3.5% interest on the new debt, and can you summarize what the interest expense impact will be for the year?

Kelly Tuminelli, Chief Financial Officer

Yes, it was a 3.5% coupon on $500 million of debt that was refinanced. In terms of guidance, we built in roughly $0.11 of incremental impact associated with interest expense by extending that debt, so it will affect EPS by about $0.11 versus our prior guidance.

David Grossman, Analyst

Got it, that's $0.11 year-over-year. Okay, great, thanks very much.

Burton M. Goldfield, President and CEO

Thanks, David.

Operator, Operator

This concludes our question and answer session as well as today's conference call. Thank you for attending today's presentation. You may now disconnect.