Insperity Inc
NYSE:NSP

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Insperity Inc
NYSE:NSP
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Price: 75.66 USD -0.59% Market Closed
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Earnings Call Transcript

Earnings Call Transcript
2018-Q2

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Operator

Good morning. My name is Lei, and I will be your conference operator today. I would like to welcome everyone to the Insperity’s Second Quarter 2018 Conference Call. [Operator Instructions].

At this time, 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.

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

D
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 behind our second quarter 2018 financial results.

Paul will then comment on the key drivers behind our Q2 results and our plans for the remainder of the year. I will return to provide our financial guidance for the third quarter and an update to the full year 2018 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 myself may make forward-looking statements during today's call, which are subject to risks, uncertainties and assumptions. In addition, some of our discussion may include non-GAAP financial measures.

For 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 8K filed today, which are available on our website.

Now, let's discuss the details behind our strong second quarter results, we once again achieved record high operating results reporting $0.68 in adjusted EPS, a 66% increase over Q2 over 2017, and adjusted EBITDA of $46.6 million, an increase of 40%. These results were driven by continued double-digit worksite employee growth and effective management of gross profit in operating costs.

As for some of the details average paid worksite employees increased 13% over Q2 of 2017 to 203,950 above the high-end of our forecasted range and accelerating off a Q1’s growth of 12%. This quarter’s growth was driven by continued strong sales, a high-level of client retention and improvement in net hiring by our clients.

As for our sales efforts, we have been successful in exceeding our goal in the hiring of Business Performance Advisors to drive growth in our core client segment and the experienced increased sales activity in our mid-market segment.

Client retention during the quarter totaled over 99%, consistent with Q2 of 2017 and we are on track to hit the recent historical highs of 85% to 86% for the full year 2018.

Gross profit increased 18% over Q2 of 2017 and was driven by the 13% worksite employee growth, improved pricing and effective management of our direct cost areas. This is reflected in an increase in gross profit for worksite employee per month from $241 in Q2 of 2017 to $253 in Q2 of this year.

Q2 adjusted operating expenses increased 12% over Q2 of 2017 declining on a per worksite employee per month basis from $199 in the prior year to $198 in Q2 of 2018. This is reflective of planned investments in our growth including the hiring of business performance advisors and service personnel and in technology development while we leverage other areas of the business.

Our effective tax rate in Q2 came in at our forecasted rate of 28% and we continue to expect a full year rate of 26%. Now these Q2 results coming off of the strong start to the year has resulted in significant bottom line growth through the first half of the year. This is demonstrated by a 57% increase in adjusted EPS to $2.09 and a 36% increase in adjusted EBITDA to $130 million.

Additionally, adjusted EBITDA per worksite employee per month, our measure of unit profitability increased 21% from $90 in the 2017 period to $109 in the 2018 period. As for our balance sheet and cash flow we ended the quarter with $110 million of adjusted cash and have $245 million available under our line-of-credit.

For the first half of the year, we have repurchased 212,000 shares of stock at a cost of $16 million and paid $17 million in cash dividends. Now, at this time I'd like to turn the call over to Paul.

P
Paul Sarvadi

Thank you, Doug. Today, I will discuss three topics of importance to investors as we continue to produce exceptional financial results from our unique business model. First, I’ll cover highlights from Q2 driving our growth acceleration and earnings outperformance.

Second, I'll provide some insight into our successful execution of our mid-market sales and service strategy, which provides an opportunity to further optimize our business model. And third, I'll describe several initiatives for the balance of 2018 designed to fuel continued strong performance in 2019.

All three of our unit growth drivers including sales, retention and hiring in our client base contributed to our growth acceleration in Q2. Recent sales results have been very impressive in both our core and mid-market businesses. In the second quarter, a 15% increase in trained Business Performance Advisors produced a 23% increase in total clients sold and a 36% increase in total worksite employee sold over Q2 of 2017.

This is our second quarter in a row coming in at 118% of our sales budget. The first quarter outperformance, was driven primarily by core sales and the second quarter by our mid-market team including the sale of our largest client in our history with approximately 29,000 employees.

Over the past year, we have ramped up year-over-year growth rate in the number of trained Business Performance Advisors from approximately 13% to 15%. Sales efficiency has actually improved 12% during this ramp-up period driven by a 4% gain in our core BPA team and the effect of our recent mid-market success.

Increasing sales efficiency, while growing the sales team at this rate is quite a credit to our sales leadership training and the entire sales organization. Our successful marketing programs continued to support these strong sales results. In Q2, unique visitors to our insperity.com site were up 21%. Social media, followers up 32% and leads provided to our business performance advisors were up 42% over the same period last year.

Now in addition to this tremendous success in our co-employment business, our Business Performance Advisor channel made great strides validating our new traditional employment bundle, which we recently rebranded Workforce Acceleration. This quarter sales of this new comprehensive service offering increased 38% at a price point 61% higher than the previous Workforce Administration version.

Our client retention was also highlighted in Q2 continuing at historical highs with attrition averaging only 0.63% per month. These results demonstrate the value our service team is delivering through the breadth, depth and level of care that differentiates Insperity in the marketplace.

We also saw strong evidence of increased economic activity driving substantial momentum in the labor market. In the recent quarter, all three of our key compensation indicators were very strong. Average compensation for employees in our client base paid in Q2 over the same period one year ago was up 4.4%.

Overtime pay as a percentage of regular pay exceeded 12% and commissions paid to the worksite employees of our clients increased 14% over this same period last year. These numbers indicate strong sales and a strong demand for employees in the small-to-medium sized business marketplace.

The demand for employees is strong but the supply is limited, so competition among employers is substantial. In a market dynamic like this, we have historically experienced strong demand for our services since our infrastructure for benefits and HR support provides a competitive advantage in attracting and keeping employees.

So, with all three drivers of our growth contributing, our unit growth was above the high-end of our range for Q2. The pipeline from both our core and mid-market sales is very strong and we are poised for significant unit growth acceleration to a range of 14.5% to 15.5% over the balance of the year.

In addition to the positive volume variance this quarter, our earnings outperformance was driven by higher gross profit and lower operating expenses have been budgeted. We continue to see benefit at the gross profit line from effective pricing and management of direct costs. Our Safety Services Group has had a particularly strong year so far helping to drive lower relative frequency and severity of claims in our workers’ compensation program.

We also continue to see effective operating expense management coming in under our budget, in spite of significant investments we are making in growing the BPAs, adding service personnel and extending our technology leadership.

The second topic, I want to discuss today is our mid-market strategy, selling and serving clients with 150 employees up to several thousand employees. This segment is very important because success with these clients doubles our adjustable market and adds a premium to our growth rate.

For many years, we had a success penalty as we help small clients grow into this segment. However, many ultimately terminated the relationship with Insperity taking HR back in-house. This was a drag on our growth rate, and we needed more BPAs to sell a larger number of small accounts to replace that. Over the last five years, we’ve developed a highly customized mid-market sales and service model to turn this segment into a profitable drive to our growth. The objective was to improve the service model to drive retention and develop a capability to attract and sell these larger accounts.

Both of these mid-market objectives have been accomplished as we have achieved a comparable retention rate to our core business and developed a sales methodology to sell these accounts. The next step is to consistently maintain a strong pipeline and improve closing rate to achieve consistent predictable growth in this segment.

The reason this next step is so important is the potential to improve sales efficiency and lower cost of client acquisition in our business model. Historically, our unit growth rate and paid worksite employees follows the growth rate in the number of Business Performance Advisors within about 12 to 18 months.

If we continue our progress in mid-market, it would be possible to achieve a higher unit growth rate without growing the number of Business Performance Advisors as fast. We're seeing just a glimpse of that possibility with our recent mid-market success which has allowed us to reach the 15% unit growth rate within just a few months of reaching that rate in the number of Business Performance Advisors. Ideally a growth rate in Business Performance Advisors in a range of say 13% to 15% would drive a growth rate in paid worksite employees of maybe 15% to 17%, with larger account sales providing the 2% premium to our growth rate.

The potential for faster growth at lower cost is a worthy pursuit and we are pleased with our progress in this area. The addition of our largest account recently is also a milestone that bodes well for the future. Our Software-as-a-Service platform combined with our unique ability to customize our service relationship with these larger accounts provides a significant competitive advantage for Insperity in this segment.

These large accounts come with a complexity that requires significant collaboration and coordination across our entire organization in order to sell and roll and serve a client this size. Our team did an outstanding job and demonstrated an important capability, we can leverage into a substantial future growth opportunity.

We are using the momentum from this effort to establish an enterprise service model within our mid-market organization. This team will serve our largest accounts with over 1,000 employees and continued to develop this service model to capitalize on this market opportunity.

The last topic for today is to provide some color on initiatives we have in place for the balance of the year to set up a strong 2019. Our goal is to continue double-digit growth and profitability extending the impressive run we've had over the last several years. We intend to continue to invest in the growth of our sales organization. We expect to add BPAs over the balance of the year to position us to achieve our targeted 13% to 15% growth rate in this metric for next year.

We also expect to invest in mid-market service personnel due to the recent results we've had and our confidence level in the future growth of this segment. Another aspect of our plan for the balance of the year is to encourage our BPA channel to incorporate two additional priorities during the fall campaign in addition to the expectation of achieving our sales target. First, we intend to incentivize BPAs to increase the volume of Workforce Acceleration sales.

Workforce Acceleration, our comprehensive traditional employment solution is now fully ready for rollout. In the second quarter, we completed an agreement with Mylo, a division of Lockton Companies to provide the brokered benefits and business insurance for this offering. Through Lockton, we are bringing a high level of expertise and quality insurance solutions generally unavailable to this target customer base.

This is consistent with our goal to provide the leading traditional employment HR bundled solution in the marketplace. The second new priority for the balance of the year is an added emphasis on pricing. Our success in the management of our benefits programs has created the opportunity with no substantive plan design changes for 2019.

This factor in combination with our ongoing releases of exciting technology enhancements opens the door for pricing strength in new and renewing accounts. So in summary, we are really hitting on all cylinders and our business model is performing very well. We are in a great position for growth acceleration over the balance of the year and we have the right initiatives in place to continue double-digit growth into 2019.

Our guidance implies 2018 will be our fourth year in a row with adjusted EBITDA increases over 25%. Our adjusted EBITDA has more than doubled over that period and our adjusted EPS has more than tripled. Our efforts to improve our dynamic and unique business model to create more ways to achieve growth and profitability target has proven to be quite successful.

At this time, I'd like to pass the call back to Doug.

D
Douglas Sharp

Thanks Paul. Now before we open up the call for questions, I'd like to provide our financial guidance for the third quarter in an update to our full year 2018 forecast, which includes top and bottom line growth significantly above our initial budget. As Paul just mentioned, we have raised our forecast of full year growth of average paid worksite employees to a range of 13.5% to 14.5%.

This is up from our initial guidance of 11.5% to 13.5%, due to the strong growth during the first half of 2018 in our continuing sales momentum. We are forecasting Q3 worksite employee growth to accelerate to a range of 14.5% to 15.5% based on a number in sales efficiency of our trained Business Performance Advisors and continued success in our mid-market area.

We are increasing our earnings guidance based upon the outperformance through the first half of 2018 and in an improvement in our outlook for the remainder of the year driven by the higher worksite employee growth rate. Our guidance also considers incremental costs associated with our BPA growth over the remainder of 2018. As we position ourselves for continued double-digit worksite employee growth in 2019.

Forecasted operating costs also include the additional mid-market service personnel tied to recent growth in this area of our business and higher sales commissions on more paid worksite employees. As for the timing, these incremental investments are expected to have more of an impact on the fourth quarter than Q3. Also with respect to the implied to Q4 2018 earnings guidance, keep in mind that our gross profit per worksite employee typically declines from Q3 to Q4 as healthcare deductibles are met our plan participants.

And the forecasted Q4 year-over-year earnings growth is impacted by the comparison to the 2017 period, in which we experienced favorable healthcare and workers' compensation claims. So we're now forecasting full year 2018 adjusted EBITDA in a range of $225 million to $229 million, an increase of 27% to 29% over 2017 and up approximately $27 million over our budget.

As for Q3 we are forecasting adjusted EBITDA of $53 million to $56 million, an increase of 23% to 30% over Q3 of 2017. We are now forecasting full year 2018 adjusted EPS of $3.49 to $3.53, a 42% to 44% increase over 2017. Q3 adjusted EPS is projected in a range of $0.80 to $0.84, an increase of 40% to 47% over Q3 of the prior year. In conclusion, we are encouraged by the strong top and bottom line growth trends in our business and our position for continued growth as we plan for 2019.

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

Operator

[Operator Instructions] Our first question comes from the line of Jim Macdonald, First Analysis. Your line is open. Please ask your question. Jim Macdonald, First Analysis. Your line is open. Please ask your question.

J
Jim Macdonald
First Analysis

Can you hear me?

P
Paul Sarvadi

Yes, we can.

D
Douglas Sharp

Now we can.

J
Jim Macdonald
First Analysis

Okay, okay. I don’t know what that was but sorry about that.

P
Paul Sarvadi

No problem.

J
Jim Macdonald
First Analysis

So your growth acceleration in the third quarter is somewhat unusual. I had a number of questions I’d like to try to get to that number. So maybe you could tell us when the new mid-market client is going to come on board, a little more on hiring at existing accounts, any additional summer hiring you're expecting this year, things like that?

D
Douglas Sharp

The summer hiring part kind of already come into the numbers and of course, you have a lot of the seasonality those go away in the late August, September time period. But the growth acceleration over the last half of the year is driven by the outperformance in the sales side both on in our core business and in the mid-market side. The large customers already enrolled and paid in the month of July so that's already in. But beyond that when you have your total sales number 36% ahead of a year ago. Your pipeline is going to be full and those numbers are going to roll into paid worksite employee numbers over that next quarter or so. The pipeline for both core and mid-market also looks very strong. So we're in a position to keep that momentum moving.

P
Paul Sarvadi

I think, Jim, the other factor is as you know, with the passage of SBEA, no longer having to restart payroll taxes that helps out, give us a little bit of a boost and be able to sell throughout the year.

J
Jim Macdonald
First Analysis

Can you give us any sort of metrics is the seasonal hiring and/or hiring in existing accounts, thousands of employees or anything like that?

P
Paul Sarvadi

The hiring within the existing was slightly above our expectation we kind of budgeted in some. But what we're seeing out there is the demand is high but it's pretty hard to fill the positions. So the amount of net gain from within the client base, I think is not exactly lining up with what the other metrics would tell us. In other words, if they could find people faster, they'd be adding them faster.

But even in our recruiting operation, we see the difficulty of finding and attracting and keeping the best employees. So that competitive environment, we believe is really a good thing for us. But one way that it does affect us is that customers have trouble adding employees as fast as they would like to.

J
Jim Macdonald
First Analysis

And just one more on the – interested in your new enterprise services operation for a very large customers, could you tell us a little more about that we'd be doing stuff on-site, taking over HR responsibilities or anything like that?

P
Paul Sarvadi

Yes, in that enterprise model, there's a lot of complexity to those clients. And we have to have an incredible amount of agility and flexibility to design them a service program that fits that specific client. And certainly that can include a lot of customized reporting or a lot of kind of collaborative effort to serve up both what we normally serve up to our co-employee – worksite employees but also incorporating things that they want to serve up to that those employees as well. So it could in fact involve employees on-site, generally speaking were involved at a very high level, sitting at the table with the leadership of that organization and just helping to make sure that they have the most effective people strategy in place is possible.

J
Jim Macdonald
First Analysis

Great. Thanks.

Operator

Thank you. Our next question comes from the line of Mark Marcon from Baird. Your line is open.

M
Mark Marcon
Baird

Thanks for taking my question. Congratulations on the strong quarter. I was wondering if you could talk a little bit more about any sort of regional disparities that you might be seeing and how you would comment in terms of acceptance of the PEO concept outside of the traditionally strong states.

P
Paul Sarvadi

Yes, we’ve – right now, Mark, I would just have to tell you that we are really seeing the results across the board. I don't see a weak spot in terms of any region of the country or any particular driver. So we're just – I think we’ve got a lot of really strong execution out there in the demand. I do believe that the PEO service in general, once that law was passed a couple years ago now that it's in place. I think the advisor community can now look and see it's in the code. So you don't run into that kind of problem or question.

So there's a lot more certainty around this alternative as a way to effectively run your organization, I think we're also saying, a lot more of – not just the advisor community but even the investor community like private equity or venture capital firms, seeing this approach as a way to make companies more successful and lower the risk, that's obviously very important to investors in small and mid-sized companies. And so if you want to say acceptance overall, yes, I think definitely we're at a different stage and we've been at before.

M
Mark Marcon
Baird

Great. How would you characterize the penetration in some of the more merging states like – if you were looking at a map of the country, I mean obviously, Florida and Texas are more mature. How would you lay out for somebody is thinking about it long-term, how things are stack up from a penetration perspective?

P
Paul Sarvadi

Yes. It amazes me after all these years that the business is so open in Greenfield, as it is today. We are expanding now rapidly, we’ll probably open another 10 or 12 offices. You just saw a couple recently but another 10 or 12 over the next year, each of the next couple years. There's still plenty of places to go, plenty of room for us to have additional offices within even with our strongest markets. And it's just a number of small and mid-sized companies is huge. And now that we have our mid-market aspect working as well, also really does double the addressable market for worksite employees.

M
Mark Marcon
Baird

Can you talk a little bit more about that with regards to like the largest client that you've ever signed, were they a competitive win that was already using a PEO or were they brand new to service?

P
Paul Sarvadi

This is an interesting one because many years ago when they started, I guess – it just early in their growth, they were a client of ours, many, many years ago. And they grow and they did move to other services also most recently did come from another PEO. But they very clearly saw that our capability was completely different in terms of being a platform for their acquisition strategy and that's a pretty interesting factor. And I think that it does put us in a position to kind of be a platform for growing companies that already even a pretty good size.

M
Mark Marcon
Baird

That's great. And just the margin profile on the mix and larger sized clients, how does that compared to the small company?

P
Paul Sarvadi

Yes, its interesting, obviously these larger companies we've talked about before that the gross profit is lower on those companies. But the operating income can be similar to the rest of the business because you've spreading that across such a large group of people. So we'll obviously be monitoring that, you do have kind of a mix issue at the gross profit line. And you've got to be monitoring and managing how those operating cost work with these size accounts. But for now we feel good about that and as you can see our adjusted EBITDA per worksite employee continues to strengthen to some numbers that are really impressive, unprecedented in our industry. And we think we have room to keep that running.

M
Mark Marcon
Baird

Congrats. I’ll jump back in the queue.

Operator

Thank you. Our next question comes from the line of Michael Baker from Raymond James. Your line is open. Please ask your question.

M
Michael Baker
Raymond James

Yes, first question Paul is, it sounds like you’ve done a lot based on past learnings in this mid-market segment to bring them, all these clients on more efficiently and effectively. Can you give us a sense of the one you just brought on how long it took and how long it was relative and you used to speak about upfront cost et cetera. Can you at least give us some sense around that how maybe that's improved as well?

P
Paul Sarvadi

Sure. The length of time it takes for these accounts can be a really long time. And in fact sometimes you'll make a run at them a couple years in a row before you're able to make that progress. But this particular one I think is pivotal kind of opens the dam force, it did take two years to bring this one on. But the pipeline we have now for these accounts is so much bigger than I've ever seen it. And our process is so much more refined, the way we help the customer evaluate the investment and the return on the investment, they'll make to go this route.

The way we integrate the service personnel and the team to plan the transition with the prospect, it's such a smooth process, it's such a highly professional process. The way we bring customers and to experience our people and I’ll tell you another thing that's really having a dramatic effect is the technology demonstration aspect in the process, it's really keeps the process moving. We're winning with our technology. Insperity Premier is really exciting in terms of how a company this size can really take a big step forward.

There are technologies unique because it also supports the collaborative relationship that we have with the customer. So they can kind of see how they can, how we work together and can be – a lot of these companies they're spread out all over the country. So having their HR function remote from their corporate office is not a big deal, because there are people all over the place. And, in fact our people are out there, we have offices all over. So, even if there's an onsite need our people can go out and deal with that.

So, there are a lot of aspects around what we're doing in this space that really put us out front but I would say the most significant thing is our ability to customize and create this service model that fits this customer need.

M
Michael Baker
Raymond James

And, then you indicated that with your mid-market initiative that you'll have a better possibility of retaining the previous, what we call core PEO. Do you have to convert them to a different system? And what are some of the changes, in other words traditionally what would happen is, somebody would believe that they can kind of do health care on their own, and so that would roll off. Are there other services that used to roll off and those still remain like is this new larger customer a – like a traditional PEO customer, or are they no longer doing – are they not doing healthcare with you.

And obviously they're looking towards a different suite of services that you're offering.

P
Paul Sarvadi

Yeah, we will have a mix of that. Some larger customers may want some more flexibility on what benefit they – plan they provide. I bet we can do that within the PEO model but we also have our Workforce Acceleration model, which is the traditional employment solution. And we are having some pick-up on that. On customers that do decide to leave lots – lot of those are moving right into our Workforce Acceleration solutions, which is which is a nice alternative for us to have.

But I do say that the room for our PEO service model, our co-employment model in the mid-market is really substantial. And we do have the flexibility on your question about platforms, you really don't have to change platforms. Insperity Premier is available for both our traditional mid-market and this enterprise group. But we will kind of organize differently in how we serve the client and how we designed the service model for that customer.

So there's, it's more on the people side that there would be a difference than it would be on the systems side if you will.

M
Michael Baker
Raymond James

And then just one last question, you gave us a heads-up and thanks for that in terms of how you'd be able to sell through the year in terms of the change around payroll tax et cetera. As you look forward, obviously historically your dependency has been on the fall selling season, have you learned enough yet to give us a better sense for how we should think about unit growth on a quarterly basis as we look to the future.

P
Paul Sarvadi

It's a little early for that but I will say that what we have done is developed basically three selling campaigns, the spring, summer, fall. And, so we're kind of pretty much always have a campaign running and a lot of that is because we should be as dependent on the year-end. Now we always will be on new and renewing accounts to some degree because we have so many accounts that do renew around that year-end. So, it will be a while before that really evens out kind of entirely.

But, as I look forward to this particular fall season, I mean you look back now we've had several years in a row where our transition to the year-end is really strong. One of the things, I mentioned in my prepared remarks is that our management of our benefit programs have been, has been very effective managing the price and cost. And, we actually don't see the need this year to do any plan design changes, any substantive changes. And that always bodes well for our renewal season. I mean, it's just flat easier, when we don't have to explain changes and go through how pricing would have to be justified around those changes.

So it just makes for a simpler renewal season. So, I would think we're really in a good position as we go into the last half of this year, and both on the sales and retention side.

M
Michael Baker
Raymond James

Thanks for the update.

Operator

Thank you. And your next question comes from the line of Jeff Martin from Roth Capital Partners. Your line is open.

J
Jeff Martin
Roth Capital Partners

Thanks, good morning guys.

P
Paul Sarvadi

Hi, Jeff good morning.

J
Jeff Martin
Roth Capital Partners

You may have stated this already but I didn't catch it. What’s the timing on the role in of this new large mid-market client. Is it already in the numbers, is it ramping up over the course of this quarter. Sorry, if I missed that.

P
Paul Sarvadi

No, no problem that customer did enroll and has already in the numbers at the start of this second quarter. Oh, sorry third quarter, excuse me.

J
Jeff Martin
Roth Capital Partners

Great, and then on the direct cost side specifically benefits, when you say there will be no plan design changes rolling into 2019, does that mean pricing is basically flattish or is that kind of in-line with your 4% increase year-over-year that you've seen in the last several years.

P
Paul Sarvadi

We’ll continue to move pricing up in-line with the trend that we're seeing in the plan. But what we're really seeing is, the trend is modest enough that there's no reason to try to go offset some of that trend increase by changing the plan design by increasing deductibles or co-insurance or making some other pharmacy related change or whatever. Those are some of the tools, you use to manage cost over time.

And we're just in a position that for this year we're comfortable, we don't need to use that tool this year. And we can manage the price in cost by simply passing through trend increase.

J
Jeff Martin
Roth Capital Partners

Okay, and then do you have any indication what. In a broader market place that looks like whether you see the underlying insurance providers having the plan design changes in 2019.

P
Paul Sarvadi

Well in the marketplace at large we generally are hearing from our carriers and so forth that typically 6% to 8% type trend. In our particular world, we've provided benefit trend going forward within our numbers. I think we looked at maybe 2.5% to 3.5% for this year and halfway through the year, we had a really good first quarter on that number. Not so good a second but on average still better than we were thinking.

So, we're looking probably more closer to the 2.5 for the balance of the year and that kind of puts us in a position to just manage the pricing side. And not have to look at those plan design changes.

P
Paul Sarvadi

Okay, and then could you give a little more detail around the unbundling of the service to the core market that was a very recent initiative, but any kind of early stage impact there what kind of the uptake rate is on that.

P
Paul Sarvadi

Are we talking about the Workforce Acceleration, the traditional employment model?

J
Jeff Martin
Roth Capital Partners

No, we are talking about the unbundling version. If that is one and the same, then yeah.

P
Paul Sarvadi

Yeah, the initiative that we've had most recently is to – we pretty much replicate our bundled solution in the co-employment side of the business with the traditional employment solution. And that, that's what we now call Workforce Acceleration. And, I mentioned in my remarks that we had about 38% increase in sales in that, in that new offering at a 61% higher price point. And, so that – that's good progress towards where we're going to end-up.

And this fall now that we have our brokered benefit solutions in place to handle volume, we're really going to push the pedal down in the fall here with our BPA channel and see how many Workforce Acceleration customers we can bring in alongside, our really strong growth in our historical Workforce Optimization solution.

J
Jeff Martin
Roth Capital Partners

Great, very helpful thanks for taking my question guys.

P
Paul Sarvadi

You bet.

Operator

Thank you. [Operator Instructions] We have a follow-up question from Mark Marcon, Baird. Your line is open.

M
Mark Marcon
Baird

Hi, I was just wondering, if we can dig in terms of the gross profit per worksite employee. It sounds like some of the safety programs are providing a benefit. I was wondering if you could give a little more color in terms of where workers' comp came in from the quarter.

P
Paul Sarvadi

Yeah, I think, just in a general sense, when you kind of set the program for the year remember our workers Comp year starts from October 1, through September 30. And so we're pretty far into that policy period now, and some years you have better years than others in terms of frequency and severity of claims. And our safety services team has been really effective out there. And we've seen some good numbers in this year's policy period. So, our historical way that we manage that is when we start the year.

We obviously budget for workers' comp cost to be at an expected claim level and if they come in lower, we wait till that emerges throughout the year before you see that role in and out. And we've, had so we have come in lower than our original target on that and we expect that to continue some through the balance of the year.

M
Mark Marcon
Baird

Okay, and can we think of that as a percentage of direct pay. It sounds like that’s coming in nicely and should continue through – those trends should continue into the coming years. Is that fair assessment.

P
Paul Sarvadi

I think so. Keep in mind our old customer base is more white collar than blue.

M
Mark Marcon
Baird

Oh, sure.

P
Paul Sarvadi

Ours is a pretty low percent of payroll anyway, below 1%. And then but you have a fluctuation in there. If we target say 0.7% come in at 0.6% those are big dollars. And that's kind of what our objective is. We manage it as a cost center and we're out there trying to manage both the safety side and the actual claim payment side and to make that number come out lower than that original budget.

M
Mark Marcon
Baird

Great, and then on the health plan side what was the growth in terms of the health expenses.

D
Douglas Sharp

Yeah, we are expected to trend over the course of the year. I think we started the year with about a 2.5% to 3.5% expectation and looks like, we're going to come in more closer to 2.5%.

M
Mark Marcon
Baird

And then there should be some positive implications from a retention perspective in terms of no plan design changes. Isn’t that correct.

P
Paul Sarvadi

Absolutely, I mean that does put us in a position to continue that really strong client retention that we've had through the year-end over the last few years.

M
Mark Marcon
Baird

Terrific. Congrats.

P
Paul Sarvadi

Thank you

Operator

That will be our last question. I will now turn the call over to Mr. Sarvadi for the closing remarks.

P
Paul Sarvadi

Once again we appreciate everyone participating in our call today. And we look forward to continue to delivering these types of strong results. And hopefully we'll see you out on the road. Thank you again, see you next quarter.

Operator

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