Insperity's (NSP) CEO Paul Sarvadi on Q4 2015 Results - Earnings Call Transcript

| About: Insperity, Inc. (NSP)

Insperity, Inc. (NYSE:NSP)

Q4 2015 Earnings Conference Call

February 12, 2016 10:00 PM ET

Executives

Douglas Sharp – Senior Vice President-Finance, Chief Financial Officer and Treasurer

Paul Sarvadi – Chairman and Chief Executive Officer

Richard Rawson – President

Analysts

Jim Macdonald – First Analysis

Tobey Sommer – SunTrust

Mark Marcon – R W Baird

Jeff Martin – ROTH Capital Partners

Operator

Good morning. My name is Stephanie, and I will be your conference operator today. I would like to welcome everyone to the Insperity Fourth Quarter 2015 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions]

At this time, I’d like to introduce today’s speakers. Joining us are Paul Sarvadi, Chairman of the Board and Chief Executive Officer; Richard Rawson, President; and Douglas Sharp, Senior Vice President of Finance, Chief Financial Officer and Treasurer.

At this time, I’d like to turn the call over to Douglas Sharp. Mr. Sharp, please go ahead.

Douglas Sharp

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 2015 financial results. Paul will then recap the 2015 year and discuss the major initiatives of our 2016 plan. I will return to provide our financial guidance for the first quarter and full year 2016. We will then end the call with question-and-answer session, where Paul, Richard, and I will be available.

Now, before we begin, I would like to remind you that Mr. Sarvadi, Mr. Rawson or myself may make forward-looking statements during today’s call, which are subject to risks, uncertainties and assumptions. In addition, some of our discussions 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 me begin today’s call by discussing our fourth quarter results, which included continued double-digit worksite employee growth, and a successful year-end sales and renewal season to position us for a strong 2016. Average paid worksite employees increased 12% over Q4 of 2014, and we ended the quarter at our expected level, which was encouraging as we approach the important January starting point.

Client retention remains strong, again averaging over 99% for the quarter, and worksite employees paid from sales exceeded our forecasted levels. Overall, net hiring by the client base was slightly positive, but weakened during the quarter. Now over the quarter, we continued to effectively manage our direct cost programs such as the underlying trends in our unemployment tax area, workers compensation program, and benefit programs position us well for 2016.

However, we experienced unusually high large-claim medical costs during the quarter, including two claims totaling approximately $2.4 million. In total, large-claim cost came in approximately $5 million in excess of the average – of the previous three quarters and resulted in Q4 adjusted EBITDA coming in below expected levels. Unfortunately, large claim activity in the health plan of our size can negatively impact a standalone quarter.

However, when viewed on an annual basis, large-claim costs increased only 6% over 2014 on a 10% increase in medical participants. When combined with favorable underlying trends in the general utilization of our health plans, benefit costs per covered employee increased only 1.4% for the full year 2015 over 2014. Therefore, while the timing of the large-claims negatively impacted Q4, we experienced a very favorable healthcare trend over the full year, and expect our trend to compare favorably to the overall marketplace in 2016.

Now, moving on to our operating cost, we continue to focused on operating expense management and leveraging our cost structure in our current double-digit growth environment. This is clearly demonstrated by less than 1% increase in adjusted operating expenses over Q4 of 2014, and a 10% decline in adjusted operating expense per worksite employee per month from $213 in Q4 of 2014 to $191 in Q4 of this year.

Cost savings initiatives implemented throughout 2015 are reflected in various areas including corporate headcount, marketing costs, and G&A costs. It’s also important to note that these initiatives have been implemented while continuing to invest in areas important to achieving our growth objectives beyond 2015. So at the bottom-line, Q4 adjusted EBITDA came in at approximately $17 million, about $4 million below the low-end of our expected range, due primarily to the unusual large health claim activity during the quarter, partially offsets by operating expense savings.

Now, before I turn the call over to Paul, let me summarize our full-year 2015 operating results. Adjusted EPS increased 53%, and adjusted EBITDA increased 31% over 2014, well exceeding our expectations going into the year. Effective selling and client retention over the course of the year resulted in a 12% increase in average paid worksite employees. Worksite employees paid per new sales increased by approximately 30% over 2014, and retention improved from 80% in 2014 to 84% in 2015.

Gross profit increased 8% after considering changes in client mix, pricing, and direct cost trends, while adjusted operating expenses increased only 2% through the implementation of targeted cost savings initiatives. The outcome of cost savings initiatives and leverage in our business model is demonstrated by an 8% reduction in adjusted operating expense per employee per month from $225 in 2014 to $206 in 2015.

Now as for our balance sheet and cash flow, we were in a position to return over $88 million to shareholders in the form of dividends and share repurchases during the year. We increased our regular quarterly dividend by 16% to $0.22 per share per quarter in May of 2015, and repurchased 1.4 million shares throughout 2015 at a cost of $67 million.

Additionally, we launched the Dutch tender offer in December, which resulted in the repurchase of just over 3 million shares or 12% of our outstanding common stock at its conclusion in January of this year. The source of funds for this tender was a combination of $39 million from our available cash and borrowing $104 million under our $125 million line of credit.

Now at this time, I’d like to turn the call over to Paul.

Paul Sarvadi

Thank you, Doug. Today, I’d like to add some color for our investors on three important topics as we move into 2016. First, I’ll provide some details behind our successful fall selling and retention campaign and the record setting year-end transition we are experiencing. Second, I will comment on the full-year 2015 results including the major trends and capabilities that make Insperity such a great business model and investment for the future. And finally, I’ll comment on major initiatives and factors driving our guidance and value creation for 2016.

Last quarter, I’ve reported our sales and retention activity was on track for a successful year-end transition. We were able to convert these positive activity levels into actual sales and retention results, which has led to our best year-end transition in the last 10 years. The best measure of this success is the resulting step-up and paid worksite employees over this period, which positions Insperity for a very strong 2016.

We have some concentration in our client attrition at year-end from the number of client renewals that occur at that time of year. This causes us to experience our highest attrition rates in January and February each year. Our historical range for client attrition in January and February combined has been 10% to 12% and in the balance of the year monthly attrition has been at 1% or lower, for an annual retention rate of approximately 80%.

Now in recent years, our objective was to sell enough new accounts to offset terminating clients and remain even in worksite employees from Q4 of one year to Q1 of the next. Breaking even over the year-end transition sets us up for a double-digit growth rates for the upcoming year as sales each month, thereafter, exceed typical low-client attrition levels.

Now going from 2014 to 2015, we saw a dramatic improvement in client retention. These results were driven by offering a wide-range of business performance solutions, and new mid-market alternatives providing more flexibility and customization for our clients and of course the diligent efforts of our staff. This resulted in a 9.5% attrition rate for January and February 2015 period and the increase from 80% to 84% for client retention for the full year 2015, as Doug just reported.

Now this improved retention combined with effective fall selling campaign resulted in a slight step-up in average paid worksite employees from Q4 2014 to Q1 2015 and that’s what set us up for the 12% unit growth we just reported for the full year. Now, this performance set a very high bar for our retention efforts over this fall campaign period for the 2015 to 2016 transition and was a real test to determine whether last year’s retention level was truly the systemic improvement we have strived to achieve.

Our results, this year, were nothing short of remarkable and we are starting 2016 with a jump on client retention, which sets us up to at least match, but more likely exceed the 84% level achieved last year. The combination of strong sales and record retention levels we just experienced are expected to produce a step-up this quarter of more than 3,000 worksite employees from the average paid worksite employees in Q4.

In our recurring revenue business model, the starting point for paid worksite employees in January provides valuable visibility into growth and profitability in the year ahead. So, our forecast for 2016 from these recent sales and retention results have set the foundation for an expected acceleration in the growth rate to a range of 13% to 15% in 2016 in paid worksite employees.

Now our sales success throughout 2015 was also a highlight. We grew the number of business performance advisors 12% over 2014. Discovery calls, which are face-to-face meetings with qualified prospects, increased 15%. The number of business profiles or opportunities to bid went up 16%, and the number of new client sold increased 20%, but the most important metric for sales is the number of paid worksite employees, which increased an impressive 30% over 2014.

We grew the sales staff and improved sales efficiency and productivity at the same time, which frankly is the holy grail of sales management. The number of sales of our additional business performance solutions increased even more at an impressive rate of 43% as we have now ingrained cross-selling of additional business performance solutions into our BPA channel.

These products and services solutions help to sell our core workforce optimization offering. They also add customers to up-sell later when these products are purchased on a standalone basis, and of course they contribute substantially at the gross profit line. Our full-year 2015 results, demonstrate several important trends and capabilities that have established momentum, which we expect will continue to drive our business model going forward. This includes the strong demand for our full service model, our refined growth engine, our inherent operating leverage, and our effective management of risk.

First is demand for our comprehensive full service solution to HR needs. We continue to see through 2015, the value of our high touch services delivered in combination with our vision cloud technology platform. The value of these consultative professional services distinguishes Insperity in the marketplace and sets a high bar for competitive offers. Our cloud technology platform providing administrative and transactional HR services is delivering efficiency and compliance as expected.

However, there is a substantial and growing prospect base, who need and value the expertise and support of real people advising them on dealing with the complex people issues that occur everyday in small and mid-sized companies. The value of these high touch services to help clients achieve alignment in their organizations and speed of execution is unique to Insperity. Delivery of these services is complex and costly to develop.

We believe our business model delivering this unique level of care and expertise has created quite a moat around our company from a competitive standpoint. Another factor driving demand throughout 2015 was the continuing complexity and compliance requirements driving businesses to seek solutions. The ACA reporting requirements on a national level and continuing state and local regulations have many business owners and managers at wit’s end, stuck between the cost and burden of compliance and the risk and liability of noncompliance.

The validation of co-employment as a way to eliminate or reduce compliance risk and liability continues to gain traction in the marketplace and drive growth in our industry. Another dynamic we saw in 2015 that gives us confidence in the future was the validation of the Insperity selling system and potential productivity of our refined growth engine. This system is designed to produce consistent predictable sales results through a team of professional advisors, selling value-added services to the small and medium-sized business community.

We believe the strong sales results, I referred to earlier, are just the beginning of the synergies created by our wide array of business performance solutions that allow us to customize offerings and solve immediate issues for our clients and prospects. Another attractive element of our business model, evident in 2015, was the operating leverage at double-digit growth rate. Last year, our service organization improved our headcount efficiency ratio by 14%, and operating expenses per worksite employee continue to decline. As a result, our adjusted EBITDA margin as a percentage of gross profit improved by 430 basis points.

We are in an excellent position to continue this trend with approximately 50% fixed and 50% variable cost in our operating structure. This inherent leverage in the business model is expected to continue as we grow. The last capability, I’d like to highlight today, is our deep expertise managing the inherent risk in our business. Employment is a risky business and the matching of price and cost for the risk you take is a critical success factor.

Growing the number of worksite employee is important, but selecting the right type of clients and employees and managing the risk is even more important. Perhaps the most important metric for our business is the adjusted EBITDA per worksite employee per month, which measures the cash value received per unit of risk you take. This metric improved 17% from $54 in 2014 to $63 in 2015, demonstrating a superior return in our industry and sustainability of our exceptional business model into the future.

So with this foundation coming off of 2015, we’re looking forward to a record year in 2016. We are off to an excellent start and we have clear line of sights about the value creation we want to deliver to shareholders and the initiatives that will get us there. We’ve reorganized internal resources to align the company around these important initiatives and priorities.

These changes include creating our mid-market division and consolidating our strategic business unit products, services and technology development into our marketing and technology organizations. We have brought together all sales, service, implementation and development to serve the unique needs of our growing mid-market segment and we recently announced the promotion of Kathy Johnson to our management team to lead this division.

After several years of developing and incubating our strategic business units, it was time to integrate these products and services more deeply into the day-to-day activities across the company. Product development and management was consolidated into marketing and technology development into our technology group. This will allow for all marketing and technology development of all Insperity products and services to be analyzed, prioritized and implemented with a company-wide perspective.

We expect this will lead to more effective marketing, sales, and product development, while reducing overall cost. Another priority for 2016 will be to pour gas on the fire by increasing marketing effectiveness and lead generation to support our growing sales organization. We expect to make substantial progress toward this objective through channel and loyalty programs and an increase in digital marketing spend.

So in summary, 2015 was a record year for the company on many levels and established substantial momentum going into 2016. We believe our unique position in the marketplace and our dynamic recurring revenue business model will create significant value for shareholders in 2016 and for many years to come.

At this point, I’d like to turn the call back over to Doug.

Douglas Sharp

Thanks, Paul. Now, let me provide our 2016 guidance beginning with a full-year. Paul just mentioned, we are forecasting the 13% to 15% increase in average paid worksite employees over 2015, resulting in a range of 164,800 to 167,700 for 2016. Our forecast is based upon the January starting point coming off of the strong year-end sales and renewal period, annual retention consistent with that achieved in 2015 and a continued nominal level of net hiring in our client base.

When combined with our expected client mix, pricing, direct cost trends and operating expense leverage, we are forecasting a 22% to 28% increase in adjusted EBITDA from a $110 million in 2015 to a range of $134 million to $141 million. This forecast incorporates recent cost savings initiatives and ongoing investments in sales, service, and technology necessary to meet our long-term objectives.

We’re forecasting a 46% to 53% increase in adjusted EPS from $2.19 in 2015 to a range of $3.19 to $3.36. Our 2016 forecast of adjusted EPS assumes approximately 21.5 million average outstanding shares down from 25 million shares in 2015 as a result of shares repurchased throughout 2015 and the recent tender offer. We’re forecasting 2016 capital expenditures of approximately $39 million, which includes $21 million associated with the construction of a campus building to allow for consolidation of our off-site use and service center and recruiting an employment screening operations. This consolidation is expected to have a positive impact on adjusted EBITDA in 2017 and beyond.

Now for the first quarter, we are forecasting a 13% to 14% increase in average paid worksite employees over Q1 of 2015, resulting in a range of 155,900 to 157,300. We’re forecasting an increase of 35% to 42% in adjusted EBITDA over Q1 of 2015 to a range of $57 million to $60 million.

Q1 adjusted EPS is projected in a range of $1.44 to $1.52, an increase of 67% to 77% over the first quarter of 2015. Keep in mind, that our Q1 results are typically higher than subsequent quarters due to the seasonality in our gross profit. In particular, we are in a higher level of payroll tax surplus prior to worksite employees reaching their taxable wage limits. And with the continued migration of participants to more high-deductible health plans, benefit costs are lower in Q1 and step-up over the remainder of the year as deductibles are met.

In conclusion, we’re pleased with our 2015 results and a strong start to 2016. These results have positioned us for continued growth acceleration and operating leverage, and we look forward to update you on our progress throughout the year.

Now at this time, I’d like to open up the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Jim Macdonald with First Analysis. Your line is open.

Jim Macdonald

Good morning guys. Good fall selling season.

Paul Sarvadi

Thank you.

Douglas Sharp

Thanks.

Jim Macdonald

So, could you talk about the guidance a little more and what level of sales force you have built-in and what your thoughts are on the economy in general?

Paul Sarvadi

Sure, happy to do that. We have built into the model with such a great starting point and also since we ramped up sales staff substantially last year. We’re expecting trained sales BPAs, trained BPAs to be up about 13% or 14% this year over last year, although we expect total BPAs hired will go up closer to the 10% level. So we’re at that point where you’ve got the bunch in the hopper that are coming into the trained account. And so, as we go through this year, we’re in really good shape on having the right number of BPAs with the right efficiency level or tenure and what we call tiers, in terms of performance tiers, we feel strong about our growth.

We expect that group – in terms of looking at our growth model for this year, the way we’ve looked at it is because of the potential of the economic climate. We’ve kind of built a range for the balance of the year once you get through this year-end transition for the new growth to be in a range of what it was last year from March through the end of the year to an increase of added 300 or 400 employees per month based on the larger sales staff and their tenure.

So we’re comfortable with that range, but we’ve used the low-end to be the same as last year’s number and that’s simply because you just want to be cautious about the economic climate and the potential for weakness in the net gain and the customer base between new hires and layoffs although we also factored that number down in our in our model. So point is we’re just off to such a great start this year. We have been, I believe, recently conservative for the balance of the year. And I think our 13% to 15% unit growth number is a great place to start for the year.

Jim Macdonald

Great. Just a follow-up, could you remind us how many trained sales staff you have now or at the end of the year. And also maybe, how much impacted your health – your unique health plan have on your fall selling season success?

Paul Sarvadi

Well, I think, obviously our benefit program is always an important component of what we provide to customers, you know, say administrative relief, the better benefits, reduce liability and having a systematic way to improve productivity is why customers come to Insperity, but the benefit plan is always a part of that mix. And there is no question that we had a good – that was well received in this campaign. I mentioned in my prepared remarks that we had really a great year in terms of managing the risk that we take.

And Richard and his group, they have the benefit program going up at such a low trend rate balancing all the factors that go into that, definitely put us in a position to be very competitive and demonstrate what I think is a key value that we provide to customers, which is some cost stability in one of the most volatile cost areas for a small business to have to live with. So that’s always valuable. And we’ve been in a period of relative stability in that area for quite some time and it really is a value-add for our customer.

Jim Macdonald

And the trained sales level…

Paul Sarvadi

Yes, on the trained BPAs, that number is going up about 14%. We should be around the 350 level was – where we ended up in the year. And I think you look at average for last year was below that, but the numbers are built off around a 370 or so trained reps for the 2016 full-year. And we should end up with around 425 or 430 somewhere in that range at the end of the year in total reps.

Jim Macdonald

Great, thanks. I’ll circle back.

Paul Sarvadi

Thanks Jim.

Operator

Your next question comes from the line of Tobey Sommer with SunTrust. Your line is open.

Tobey Sommer

Thank you. What did you think the impact will be on growth from kind of the different treatment of taxes and that penalty box that made a challenge to sell in the interim months throughout a year previously?

Paul Sarvadi

I guess you’re referring to, Tobey, the Small Business Efficiency Act that was past year and a half of ago or a little over year ago. Yes and the impact of that is that they’re – when we bring new customers on through the year as soon as the act is implemented. We won’t have to have a double taxation. And we’re actually going to be able to pick the customer up with successor employer status for unemployment tax purposes, which will lower our price to the customer to transition to us.

So, there is no question in my mind that’s going to be favorable, but it has to be implemented first. The Internal Revenue Service was supposed to pass rules to certify PDOs to be able to take advantage of this new tax treatment. And they were supposed to pass those regulations in July of 2015; the latest from the Internal Revenue Service is that they do expect to meet the new self-imposed deadline of July 1 of this year.

And once that happens then we’ll be able to actually submit our information to be certified and then begin to operate under those new rules. So, we haven’t built any of that into our model for this year. If that happens fast enough that we can do it, we certainly that would leave that as upside, but when you’re waiting on the government to do something, I don’t think it’s wise that build it into your going forward plan until that.

Tobey Sommer

That makes sense. Thanks for the color. I’m curious, what has been your experience in Texas with the decline in the commodity price of oil in sort of the hometown status you have not just in the state, but in Houston I’m curious about how sales have gone what the volume of worksite employees looks like in job growth. Any color you can provide on that specifically would be helpful.

Paul Sarvadi

I’ll let Doug to give you specific numbers on that, but from a – just in terms of the backdrop if you will, you know, in Houston we say this is not our first rodeo. And of course we have gone through many cycles in the business community here around the oil prices and it does have a significant effect. As you know from our business model, we are not – we don’t do a lot of business with the oil industry in terms of the over the whole or exploration because the risk is too high.

So we don’t have a lot of dependency there, but there is a ripple effect that goes out from there. The oil business provides a lot of great paying jobs et cetera. And so, there is a ripple effect. And we still have quite a bit of business in Texas. So, we’ve kind of factored that in although because it’s such a small part of our total business, we don’t think it will have a dramatic effect. Doug, can you pass on some numbers in that regard?

Douglas Sharp

Yes, so, as far as in 2015, Houston worksite employees were about 12% of the total. And, obviously not all of Houston is energy, oil and gas related. When we look at oil and gas related and some even ancillary type services related to the oil and gas industry, it totals about 2% of our worksite employee, it’s about 3,500, okay. So it’s a smaller number. And I think we’ve seen over the past month or so, we’ve seen some clients take some initial steps. I wouldn’t say anything significant as respect to net layoffs in those particular clients basis. But again, I think that the takeaway is the oil and gas related. Worksite employees are only about 2% of the base.

Paul Sarvadi

And that’s been happening all – throughout last year too. Once you got to about March of last year, companies began some serious restructuring, so a lot of that’s already kind of been taking place.

Tobey Sommer

Thank you.

Operator

Your next question comes from the line of Mark Marcon with R W Baird. Your line is open.

Mark Marcon

Good morning and thanks for taking my questions and great to hear the starting base here. First question is to what extent do you think the ACA ended up helping the sales efforts in the fall selling season? And did you see anybody who maybe started a little bit earlier just in order to be offset up before the compliance requirements kicked in. We saw that with a few other companies and so I was wondering if you saw it.

Paul Sarvadi

We had our sales convention already this year. We actually moved it up and had it earlier in our cycle. So, in the third week of January, I guess, we had all of our sales staffs from all over the country in. And I was kind of when I was walking the halls and talking to folks, I was just trying to kind of get a feel for how much that would – that was a factor. And I would have to say, it wasn’t as much a factor as I thought it should have been. Certainly, the complexity and compliance around healthcare reform and other things is always a backdrop and the requirements for these customers with more than 50 employees was definitely on people’s minds, but I would have thought it would have been more. I know maybe Richard can comment a little bit on that as well.

Richard Rawson

Yes, I was going to say that the fact that we started early in building the infrastructure for the reporting that took place at the end of December of 2015 for the year that had to be reported out in 2016 in January. What we saw is the very first day that the IRS report was required to be put out. We put it out online because we’ve been building this infrastructure platform for our clients. And we had over 100 clients that morning come online and look at their data for the year. So our sales force is definitely using that information to communicate that. We have a superior platform for giving clients and the information that they need to do their own income tax return reporting.

Mark Marcon

Well, that’s great. And 1000 is out of…

Paul Sarvadi

For that group…

Richard Rawson

Well, it’s – yes, it was all for the large – the large employers in the group of 100 or more. And so, but a lot of them went online just to see the data even though they weren't required to report on it, but we had it available for all 6,000 plus clients.

Mark Marcon

Can you remind us what the average client size is and what percentage are over 50 full time employees?

Richard Rawson

I don’t have the percentage in front of me. Mark, but – yes, you can maybe give Doug a call, I think we’ll look that up for you. I just don’t remember off the top of my head.

Mark Marcon

And just to be clear that the clients that have less than 50 employees, they’re not required to comply or are they because of the co-employment?

Richard Rawson

That in 2016, they are.

Mark Marcon

Okay, so all of them well.

Richard Rawson

50 to – it was 100 for 2015 and it’s 50 to 100 for 2016.

Mark Marcon

Right, but that 50 to 100, I mean the clients that you have – that have less than 50 employees, just because of the nature of their co-employment they won’t be required to…

Richard Rawson

That’s correct. Right, that’s correct, yes.

Mark Marcon

Okay, terrific. And then can you give us some feel for with regards to the gross profit metrics that are built into the expectations for this coming year.

Richard Rawson

Sure.

Mark Marcon

How we should think about that both in terms of the fee, the surplus, and the SBUs?

Richard Rawson

Yes, let’s talk about – first of all, the service fee component. It’s going to be pretty close to flat from last year maybe down a $1 or so. And that’s because of the continued mix of customers that we have in – especially in the mid-market area that have gone from our – to our newly created workforce synchronization offering, which is obviously a lower priced offering.

When we look at our benefits cost, the trend across the board for 2016 over 2015 is going to be a whopping 2.5% and we are excited about that because the things that we’ve been doing for the last couple of years continue to support a very low trend along with the migration of prospects and customers migrating to the lower cost higher deductible plans throughout the year. And then our strategic business units operations, they’re going to be growing gross profit about 17 or so percent in 2016, but because we’re growing so much in the worksite employee base, it’s going to look like only about $1 per worksite employee per month, but it’s serious money at the gross profit line.

Mark Marcon

Yes, thanks.

Paul Sarvadi

The big picture there, Mark, is I think it was wise for us to kind of look at gross profit for worksite employee to be about in the same range as it was last year. And as we always do, we try to start out somewhat conservatively and let the results in the claim management and all the things that Richard’s group and our service team do to manage cost – claim cost safety all that kind of stuff. We kind of let that emerge as the year goes on. So that should give you the big picture on that.

Mark Marcon

So, the surplus would basically – the anticipated surplus would be around what range?

Paul Sarvadi

I would kind of stop going that deep into the weeds on that because it’s – as you know you have moving parts in there between the three direct cost items. But if you look at the total picture, we’ve kind of provided it all the way down in the EBITDA line where you can see we’re expecting 22% to 28% increase in adjusted EBITDA as our starting point for the year.

Mark Marcon

Terrific, thanks.

Operator

Your next question comes from the line of Jeff Martin with ROTH Capital Partners. Your line is open.

Jeff Martin

Thanks. Good morning guys.

Paul Sarvadi

Hi, Jeff.

Douglas Sharp

Good morning.

Jeff Martin

Could you speak to any shift in the competitive dynamic in which you’re operating?

Paul Sarvadi

I would say that most significant thing on that front from my view and talking with our sales team is what I mentioned in my prepared remarks about the value of the high touch services that we provide our customers. I mean, we are involved with our customers at a completely different level than others in our space. And that makes it a differentiated product. And I kind of described how that service dynamic, well it is hard to do it well and it’s costly. So you have to be able to charge more to do it.

And so you have to have a higher quality sales team that can sell value-added services. And you have to have service teams that have a high level of expertise because they’re talking straight to business owners about their real issues that are going on in their company. All that together is what I’ve always talked about as a premium service provider positioning Insperity really as a category of one out there in terms of what we’re really able to do to help small and mid-sized business to succeed.

And there really isn’t anyone else out there like that. And I think that what someone would have to do to try to challenge us in that space is enormous and I don’t even see anybody trying. So that would be how I would frame it. Now I’m really happy about the industry as a whole relative to the Small Business Efficiency Act that was passed a year and half ago. I said I thought that would really cause a momentum across the industry and I believe it has.

I think you’re seeing good growth and more customers and advisors to customers that are really open to co-employment as a way to solve their complexity and compliance and cost issues around being an employer. So, I do see some great macro trends that are good for us in our industry. What I really like about it is that in our target customer base, customers that would appreciate the value-add that we can deliver. People that really want to take their business to the next level that have a definitive – getting better agenda and understand the role that people play to get there. That group is growing and we are a hand in glove fit for them. So, I really see a lot of runway for the Company in front of us.

Jeff Martin

That’s very helpful. Doug, I have got a couple of questions for you, you have mentioned consolidation of the Houston service center with the construction of a new campus building. Is there any transition expense associated with that in 2016 and is that factored into your guidance?

Douglas Sharp

Yes, it is. And the transition expense is insignificant, I mean, they’re not far from here, just a matter of moving costs. And so, it is factored into the guidance, it’s not a significant cost.

Jeff Martin

And then you mentioned some benefit to 2017, could you ballpark quantify what that benefit might be?

Douglas Sharp

I don’t have the exact numbers in front of me. I think the point I want to make is that we are currently leasing the Houston service center and when you compare a lease rate, and the landlord, you know, his share of things versus constructing the building here on campus where you have those savings and also would be the campus land already being owned, we ran the numbers and it was clearly more beneficial from an EBITDA perspective and typically the way a shareholder will look at it in more advantageous to consolidate them here from money wise, economic wise.

But also in getting efficiencies by having personnel – service personnel here on campus and working together, and I think that’s a better move for the company. So we analyze that quite a bit and I think it will be beneficial to the EBITDA numbers. The construction is not expected to get complete until the first quarter 2017. And so, you will have some of this interim construction costs going into the capital numbers throughout 2016, but it doesn’t really get put in place until 2017.

Jeff Martin

Got it, okay. And then was there any reduction workers compensation expense from prior periods throughout the year?

Richard Rawson

No. As a matter of fact it was pretty flat this year. We had some going into the very beginning of 2015. We had some fairly large claims that, but our experience throughout the remainder of 2015 really graded an environment that was pretty smooth until.

Douglas Sharp

Yes, Jeff, I think we have historically talked about the reserve adjustments from prior periods as claims runoff and there’s only $1.3 million this year compared to about $3 million last year. So those numbers are much lower than they were earlier in the workers compensation program stuff quite a few years back.

Jeff Martin

Right, right, okay, great to see such a good outlook for 2016 and good luck guys.

Paul Sarvadi

Thank you, Jeff, I appreciate it.

Douglas Sharp

Thank you.

Operator

Your next question comes from the line of Jim Macdonald with First Analysis. Your line is open.

Jim Macdonald

Yes, I just have follow-ups here. On the ABUs, you said the growth was 17%, anymore color you can give on how there each one or how some of the better ones are doing?

Paul Sarvadi

Yes, we will continue to have a lot of growth in the time of the tenants business. We are doing well on our retirement services business. We actually have – you know believe it or not really a good growth in our improving business even though you would think against the economic backdrop that your recruiting division will be doing well, but we are. And we have this young, but growing payroll operation, payroll service that is starting to gain some steam. And we think that’s really good long-haul because obviously that’s kind of beginner outsourcer service, right. And so we think we can build a nice sized customer base that will be up sold over time, you know, similar to some other models that are out there in our business.

Jim Macdonald

Right. And then you said your average sized client seem to be up a little bit, so that must mean you had pretty good mid-market success over year-end?

Paul Sarvadi

We had a good year overall in mid-market. And as I mentioned in my remarks, we actually felt like we were far enough along in incubating that mid-market operation that we brought it altogether from under one – into one division. And we think our plan for that going forward to me is very exciting and we’re off to a good start for this year.

Jim Macdonald

And then just one for Doug, you have a new line item in our P&L, seems to be like an impairment line. Could you just talk about what that is and why you broke it out?

Douglas Sharp

Well, in 2015, I think, it was more associated with the corporate aircraft that we sold and then going through that process and caring value versus what we ultimately sold it at I think that was only instance in 2016…

Paul Sarvadi

I mean, 2015…

Douglas Sharp

I mean, 2015, I am sorry. And so, yes, that’s broken out on the income statement obviously. When we look at our adjusted EBITDA number, that impact the EBITDA numbers that we report versus our target.

Jim Macdonald

Okay, great. Thanks a lot.

Operator

And that’s all the time that we have for questions today. I turn the call back over to Mr. Sarvadi for closing remarks.

Paul Sarvadi

Okay, once again thank you all so much for participating our today’s call. We look forward to updating you as the year progresses. Thank you.

Operator

This concludes today’s conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

About this article:

Expand
Tagged: , Staffing & Outsourcing Services,
Error in this transcript? Let us know.
Contact us to add your company to our coverage or use transcripts in your business.
Learn more about Seeking Alpha transcripts here.