Insperity Inc (NSP) 2003 Q1 法說會逐字稿

Ladies and gentlemen, welcome to Administaff's first quarter 2003 year-end earnings call. My name is George and I will be your coordinator. At that time all lines are in a listen-only mode with question-and-answer session to follow. Should you require operator assistance during the call, key star zero on your touch-tone phone and will be happy to help you.

The speakers for today are Paul Sarvadi, President and Chief Executive Officer and Richard Rawson, Executive Vice President and Chief Financial Officer.

Any statements made by Mr. Sarvadi or Mr. Rawson that are not historical facts are considered to be forward-looking statements within the meaning of the federal securities law. Words such expects intends, plans, believes, estimates, likely goal, assume, and similar expressions are used to identify such forward-looking statements involving certain risks and uncertainties.

Forward-looking statements involve a number of risks and certainties that have been described in detail in Administaff's filings with the S.E.C. These risks and uncertainties may cause actual results to differ materially from those stated in such forward-looking statements. Beginning with its filings of its 2002 form 10 K Adminstaff changed the presentation of revenues from the gross method to an approach that presents its revenues net of work site employee payroll costs.

Certain key metrics as referred to later in this call have been changed to be consistent with the company's net presentation.

Now I would like to turn the call over to Mr. Richard Rawson, Executive Vice President of Administration and Chief Financial Officer. Please go ahead, sir.

Thank you. We appreciate all of you joining us today. To begin I would like to outline our plan for this morning's call.

First I am going to discuss the first quarter results and then Paul will come in and add his comments about the quarter and provide details about our game plan for the second quarter and the balance of the year.

Then I will come back and provide some financial guidance fort second quarter in the financial statements for the year and then we will come back for a question-and-answer session.

Let me begin by summarizing some of the most significant financial highlights from the quarter. I would remind you that these results exclude the operations of financial management services, which is currently held for sale and is being reported as a discontinued operation.

Our revenue per work site employee were month was $984 for the quarter, an increase of 10.7%, or $95 over Q1 of 2002. $82 of this increase is pure pricing that rolled in from new and renewing clients over this last year. Only $13 of the increase is due to the accelerated payroll tax allocation in the comprehensive service fee for those clients that were invoiced on the new billing system beginning January 1 of this year.

We experienced a 14% increase in gross profit per work site employee per month over last year to $157which was at the top end of our expected range. Operating expenses for the quarter increased 6.1% to $42.6 million which was below the low end of our expected range.

We reported a first quarter loss from continuing operations per share of.15-cents compared to the .19-cents loss in the first quarter of 2002, a 21% improvement.

Now let me explain the details. The average number of work site employees paid in the first quarter of this year increased by 4% over the first quarter of last year, below the low end of our expected range which was 5.5 to a 6%increase and declined sequentially from $79,560 work site employees paid in Q4 of 2002 to 76,425 paid in the first quarter of this year.

Now, will Paul be discussing the details of this decline in a few minutes.

Moving on to revenues, our revenues for the first quarter grew by 15% over last year to $226 million. Look at our revenue growth by region, the Northeast region which represents13% of total revenue grew by 33%. The Southeast region, which represents 11 percent of total revenue grew by 12%. The Central region, which represents 15% of total revenue grew by 14%. The West region, which represents 20% of our total revenue, grew by 23%, and the Southwest region which represents 41% of our total revenue, grew by 9%.

We ended the quarter with an average of 231 trained sales reps.

Moving to gross profit, as I mentioned a few moments ago, our gross profit per work site employee grew from -- to$157 this quarter. Primarily as a result of a$95 increase in the revenue per work site employ agree offset bay $76 increase in the direct costs per work site employee per month.

As for the components of direct cost, our payroll taxes which include FICA, federal unemployment tax and state unemployment taxes, as a percent of total payroll was 8.9% in the first quarter of 2003 compared to the 8.46 percent in the first quarter of 2002. Or $11 of this $76 increase that I referred to a moment ago.

Benefits cost per covered employee, which is currently 72%of our total work site employee base was $533 for the quarter, an increase of 19% over the first quarter of last year, or $53 of that $76 increase. Our claims experience resulted in a surplus on our health care -- on our health plan of approximately $3.8 million for the quarter.

Now, from the inception of this plan through march 31 of 2003,that accumulated surplus is approximately $1.5 million. Workers' Compensation costs were 1.36% of total payroll for the quarter compared to 1.02% in the first quarter of last year, $13 of that $76 increase. In the past, we have reported Workers' Compensation costs as a percent of fee payroll which excluded bonus payrolls.

To simplify reporting we will report workers' compensation cost as a percent of total payroll going forward. The increase this period is -- was primarily due to two things. Number one, a reported dividend of 1.5 million in the first quarter of last year as compared to no dividend recorded in the first quarter of this year, and, number two some state surcharges of approximately $1 million that were assessed by various states to our carrier on policies dating back to 1999 and passed through to us in the final recollection of -- reconciliation of our returned premium of approximately $9 million that we got at the end of the first quarter.

These surcharges were underestimated by our former carrier, which was Reliance, and not corrected by our current carrier, Kemper, until this final reconciliation.

Now let's talk about operating expenses. This quarter, our operating expenses from continuing operations on a per work site employee base increased from$182 in the first quarter of last year to $186 -- 186 in Q 16 this year.

This increase of operating expenses included the following items:

Number one, compensation costs increased by $5 per work site employee per month last year due to an accrual related to our 2003 incentive compensation plan in contrast to last year when no incentive compensation was paid. This compensation is payable only on the achievement of certain annual goals.

Now as for corporate head count, it remained flat from the fourth quarter of 2002.

The second item of operating expenses is advertising costs which increased $2 per work site employee were month and commission costs declined by$1 per work site employee were month.

Third item of operating expenses is depreciation and amortization costs increase which $1 per work site employee were month.

Last item is administrative costs which increased by $3 pr work site employee per month due to a decline of telecommunications costs under our new vendor contracts that was partially offset by an increase in legal costs related to our lawsuit with Aetna, our former health insurance carrier.

While we continue to believe our fiduciary liability insurance policy allows for the reimbursement of a significant portion of these legal fees, we have taken an appropriate conservative position to expense off costs associated with this litigation.

For this quarter, these expenses totaled approximately $960,000, which was inline with our previous guidance. As for other income in the first quarter of2003, we incurred a net interest expense of approximately253,000 due to the mortgage on our headquarters. This compares to a net income of 735,000 in the first quarter of 2002. Now I would like to make some comments on our balance sheet and our cash position and cash flow.

Total assets are $301 million including current assets of$184 million. We ended the quarter with approximately$74 million in cash, cash equivalents and marketable securities and 33.7 million of working capital.

Of the$9 million decline in working capital since December of 2002 is primarily related to the use of $8.2 million per stock repurchases that we outlined in our press release. Prepaid expenses and our current assets totaled$18.7 million and included the following items. $7 million in prepaid insurance, which includes $6 million related to our current workers' compensation insurance policy.

A $2.7 million notary receivable related to the amount previously for a service center which is converted to be converted to cash this quarter, the second quarter of 2003. And finally an estimated refund of overpaid 2002 unemployment computation taxes from the state of Texas which remains about $2 million.

The state of Texas has not finished transferring -- and therefore has not issued our final 2002 or 2003 unemployment tax rate.

We are now pleased with the recent progress and are hopeful for the final resolution this quarter. Deposits were 26.4 million consistent primarily with the $25 million security deposit with our national health care provider and capital expenditures for the quarter including software development costs totaled $1.4 million.

Now at this points I would like to turn the call over to Paul.

Thank you, Richard. Today my comments will cover three topics.

Firstly comment on our first quarter results.

Next I will provide some detail on the plan we're working to regain our growth moan men item over the balance of the year.

Finally I had comment on how we're positioned in the marketplace and the opportunity ahead for Administaff.

The first quarter was a real mixed bag for us this year. On one hand I was very pleased with our progress in several key areas including the recovery of our gross profit margin, the effectiveness of our new pricing and billing system and the tune up of our sales and marketing division.

On the other hand, I was certainly disappointed with the unit growth metrics as we felt the fully effect of an uncertain economic and employment environment and the anticipated impact of our pricing priority. Let me address the disappointing aspects first.

The economic stagnation in Q1 prior to the war in Iraq affected all three drivers of our unit growth, sales of new clients, retention of current clients, and layoffs exceeding new hires within our client base. Sales of new clients were less than 75% of our target as decision makers were very reluctant to make an investment in the face of the uncertainty of an impending war.

This attitude flowed into hiring decisions as layoffs exceeded new hires within the client base in all three months of the quarter and accounted for nearly 40% of the work site employee decline in the quarter.

Our client retention numbers were in the range we expected for the quarter. However as I mentioned on the last conference call these numbers were running below normal levels and would not return to historical levels until later in the year as pricing increases moderate.

The net effect of these three factors was a decline over the quarter from 77,900 employees paid in January to 75,330 however we could see - exceeded layoffs for the month of April. For the first time since October of last year, but it's far too early to tell.

Now, on the positive side, the first quarter showed a strong rebound of the company from a year ago. The results demonstrated the effectiveness of our game plan over the last three-quarters to restore our gross profit per employee. The fully effect of our price increases that rolled in over the last year and the benefit plan design changes that went into effect on January 1 produced the desired results in reaching the high end of our expected range for this key metric.

Our new pricing and billing system has been well received and is working as designed. The new system provides valuable information to clients and prevents any shrinkage from quoted pricing even with payroll selection and benefit changes. This eliminates the possibility of the revenue shortfall we saw last year and locks in the profitability per employee per day. Over the quarter we increased the number of paid work site employees on the system from 20% to over 30%.

We are on track to convert all clients over the balance of the year and go into 2004 with all clients on the new system.

I am very encouraged by the improved visibility and the simplification in forecasting I expect once this conversion is completed. I was also pleased with the work in the quarter to tune up our sales and marketing effort. This leads me to the second part of my discussion today which is the effort under way to regain our growth momentum.

The first step in regaining our growth momentum is increase sales and sales efficiency to the levels we have reached historically. Over the six years wins since we went back from 1997 to 2002 we sold 92% of our budgeted work site employee goal over 37,000 work site employees.

However in the five years prior to 2002 we were at 98 percent. In 2002 in the face of high price increases, many distractions and a weak economy we only sold 77% of our targets.

So our sales management spent the first quarter tuning the engine and Craig efforts to increase future sales. This tune up included testing of new messages and developing a new radio direct mail, email and print advertising campaign that is being launched this quarter. The new campaign is called "uh-ho" and increases the -- in the value of avoiding the many problems that can arise from mishandling employees issues.

We have expanded our rates to prospects by buying syndicated national radio for just slightly higher more costs than the cost of the local radio buys in the 21 markets we currently have at sales locations.

We expect this campaign, heard on business talk radio on programs such as Lou Dobes (ph), Rush Limbaugh (ph), Shawn Oz Goods (ph) and Sean Hannity (ph) to increase productivity as well.

We also updated and added in supporting collateral pieces including client case studies and a new executive summary sales proposal customizable for each sales prospects needs. We have ramped up our lead generation efforts with our HR Powerhouse web site and our call center activity. We now have over 27,000 registered users on H.R. Powerhouse through our own web site and small business sites at IBM, Pitney Bowes and American Express.

A new co-branded version of HR Powerhouse has been launched on Monday of this week on the splash page on bizjournals.com, the web site for the business network in 40 markets across the country. This site currently receives 4.5 million (inaudible) per month and has a base of 1.2 million registered users who opted into receiving a weekly information mail update. This is particularly exciting in that early analysis shows a significant higher average size account on leads that come in from the HR Powerhouse channel.

We have also initiated a national major account strategy for prospects utilities of 250 to 2500 employees in a mature market strategy in Houston to test new ideas to test new ideas to leverage our size and equity in a mature market.

We held our annual sales convention earlier this month which included training for district manager and sales staff on selling against competition and leveraging the new pricing and billing system.

We also introduced our new pricing policy which broadens our price competitiveness to more prospects through the use of age, gender and industry factors. I expect these efforts to lead to increased sales activity in the second quarter in lead generation, first calls or appointments with first prospects and new bids to potential clients which will turn into new sales in Q3 and beyond.

The second factor that must improve in order to regain our growth momentum is our client retention. Our recent increase in attrition rates has been directly related to the price increases over the last year. This quarter the rate increases we are quoting for third quarter renewals are much more in line with historical levels prior to our step up and benefits cost. I believe we will see retention improve in the third and fourth quarter as a result.

As sales and retention numbers improve I believe our growth momentum will be re-established. If the economy improves on top of that, we will certainly benefit however we're certainly not building that into our sales at this juncture.

Finally I would like to comment on our position in the market place and our opportunity for the future. I believe we have a unique quality product offering that is a perfect fit for our target client. I have yet to see any competitive product or service meet it need of our target client.

During our difficult period last year we lost a discernible number of accounts to competition for the first time. We are already seeing some of these clients returning and have greatly improved our ability to sell against other offerings.

Our target client base is hundreds of thousands of businesses in the United States. Our strategy is to aggregate the best businesses in the country and on to our powerful H.R. platform. We are prepared to capitalize on this opportunity over the next five years like never before.

We have the product and service mod told meet our unique client needs in the sales and target marking engines to locate and sell our target client. We have the infrastructure to support dig growth without new investment and a business model that has recovered from a series of significant challenges and has emerged stronger than ever. We are certainly not out of the woods yet. And we have our work cut out for us in regaining our unit growth momentum.

However this is what we know best and have demonstrated over our history. In the meantime, our revenue growth will continue to be driven more by our pricing initiatives than our (inaudible) growth like we saw in the first quarter.

At this point I would like to turn the call back over to Richard to provide some guidance fort second quarter in the - for the second quarter in the balance of the year.

Thank you, Paul. Now let's talk about guidance for the second quarter first and the remainder of the year. As a reminder in this guidance we will be excluding the results of financial management services as this division is currently for sale and being reported as a discontinued operation in 2003.

Now for the reasons Paul has just mentioned, we will be forecasting, the average work site employees to be paid per month for Q2 to remain flat from the 75,330 work site employees that we paid in march of this year. Then we begin forecasting a net increase of about 500 work site employees per month for Q3 and then increasing back up to a thousand employees per month for October and November.

Now, we typically do noted a many work site employees in December so we're not counting any there.

So our revenue growth as Paul said a few minutes ago, for the balance of 2003, will be driven more by pricing than by unit growth. We expect that the average pay per work site employee per month to remain relatively flat compared to the second quarter of last year at approximately 3,950 and for the remainder of 2003.

In our guidance last quarter, we talked about sequential increases in gross profit per work site employee were month being -- being a 25% increase in Q2 over Q1, a 10%increase in Q3 over Q2 and a 5% increase in Q4 over Q3.

Now, considering the pricing -- pricing strength and the improvement in our out look for benefit costs, we now expect gross profit per work site employee per month for the second quarter to be in the range of 200 to 20 a 5 per work site employee per month or an increase of 27 to 31%over Q1 of this year. Now this range includes the expectation of a 4 to 4.5% sequential increase in benefit costs per covered work site employees from the $533 cost we experienced in 20001.

These favorable trends translate into increases of 13% from Q2 to Q3 and 1% from Q3 to Q4. We expect operating expenses to be in a range of 43 to$44 million for the second quarter, which is slightly higher than the first quarter results as expenses associated with our annual sales conference and incentive trip offset by the expected decline of corporate payroll taxes from our first quarter to second quarter and the lower budgeting advertising costs in the second quarter.

We are continuing to conservatively budget legal costs associated with the Aetna lawsuit to be about a million dollars for this quarter like last quarter. Net interest expense should be in the range of 250 to $300,000 for the second quarter and our effective tax rate should be about39.5%.At this point I would like to open up the call for questions.

Thank you, sir. Ladies and gentlemen, this is your question-and-answer session. If have you a question or a comment, please key star one on your touch tone phone. If your question has been answered or you wish to withdraw your question, please star 2.Questions will be taken in the order they're received.

Please hold for your first question.

Your first question is from Joshua Rosen of CSFB.

This is Josh at First Boston. To turn to the sales activity and going back to the last quarter, I remember the trained sales reps, I believe, was a higher number than you gave this quarter. What sort of attrition have you seen there? Has that been voluntary? And what other plans are there as you try to ramp that activity back up for the remainder of this year?

Thanks, Josh, for joining us and your question. If you look back over the history when you look at the fall campaign, there's a shakeout on some of the sales staff. If you're not able to be effective during that campaign, then we generally do some house cleaning at that time. That happened this year, although the good news is, even though the total number of trained rep count went down, the total number of reps with over 18 months experience did not.

So, you know, we feel like the sales engine is even a little more efficient now than it was then, or what I anticipate coming out of that period. We will start to ramp that number back up. We are holding training meetings and so forth and, you know, have a new crop coming in. And that will happen over the balance of the year.

Joshua Rosen And then also along those lines, as you evaluate your strategy there, any thoughts as it relate totes incentive compensation structure or any changes along those lines in.

Well, you know, when we do a tune up like I talked about, we turn over every rock to see what needs change or stay the same. We didn't make any change in the incentive structure but we made a significant change in the monitoring and consultative role that our managers play and the frequency of which information flows throughout the organization on activities. So our focus for this quarter is all around activity. And we felt like the compensation area was fine. So we didn't make any move there.

Okay. And then last -- just quickly, any updates from a timing standpoint as related to Aetna, things we lookout for?

The only -- obviously there's -- we can't talk about the Aetna lawsuit other than to say that the -- that the docket that was scheduled for mid April, the judge has actually removed that docket call. Because there is quite a bit of activity going on and felt like we needed a little bit more time to do the work -- the pre-trial work. So we don't have a new docket date set yet. So it's kind of often ended.

Okay, thanks, guys.

Next question is from Thomas Geovine (ph) from Geovine Capital Group (ph). Please go ahead.

I just want to go back and clarify something. Am I right where you said the gross profit per work site employee per month, about $13 of that was associated with the new pricing? Was that correct?

Well, it was associated with the billing, not price -

I'm sorry, the new billing system.

Yes.

So then would it be fair to say that your - that the -- I guess the $19 increase, if we backed out the $13 bucks, that you actually are showing on increase over, like, a year, for example, like 2001, when your cost structure was more in line?

It's actually correct. It's still -- I believe it's about $5 of gross profit per work site employee per month over that time frame. You bet.

So you have had some analysts suggest that the profitability was being (inaudible) by the fact that your moving the timing deferential, you have clarified that illustrates the fact that the pricing is not being (inaudible) by that.

That is exactly the purpose that I stuffed that into the highlights for the quarter

Sure, I wanted to be sure everyone understood that. The next question, although you brought back shares from America's petrol (ph) is great and (inaudible) in the open market, can we expect on your next quarterly conference call, given the fact your timing mismatch is much less though going into the second quarter, could we see significant improvement on the share re-purchases I guess for -- speaking for myself, and I'm still -- I think buying back another million or 2 million shares in the open market, which, given your cash situation, I think, would go a long way in terms of, you know, kind of instilling confidence? Do you think we will see some more improvement in that that second quart?

Under the current authorization that's still remaining, we have about $650 thousand shares remaining under the current authorization. And because of where we are and our financial position is extremely strong right now at these levels, yes, you would see us back in the market.

Great. Let me just say this. One more question and I will yield the floor. Earlier on in the year, you guided to $20 of operating profit were employee per month, are you still confirming that guidance?

Yes, as a matter of fact we are, based on what we have laid out this morning.

Excellent. Good job, guys.

Thank you

Thank you.

Next question is from Randall Mehl of Robert W. Baird and Company.

Good morning Paul and Richard. Good job in outsourcing the Safe Harbor reading this morning. I thought you were going to kill the poor lady. Could you please explain the state surcharges again? And also, is there a chance of recurrence or additional charges going forward there?

Yeah, Randy, that was kind of -- that was certainly something that came out of the blue for us. Right at the end of the quarter when we were, you know, getting ready to receive our $9 million refund back from Kemper. And as we -- we are in the process of reviewing those - that amount that was withheld.

We are -- we have reviewed the insurance contracts and, you know, there's obviously somewhat of a complication or confusion between when one carrier buys out another carrier's policy during the policy period, and so we don't -- we're not for sure as we sit here today, whether or not that that expense is actually ours to pay. But we went ahead and took the conservative route and expensed it during the quarter. We know that there is a period under an existing policy that you can have a premium surcharge after the policy period is over.

But this went back to a policy that was a 1999,2000, 2000 and 2001, and 2001 to 2002. So it was quite a bit of a surprise to us. So now at least we know that the policy -- the premium surcharges through the policy that expired in September 30, 2002, according to Kemper, were paid up now.

So I don't know -- you know, I can't say that there would never be anymore but this is certainly an area that when you had carriers that are -- that are taking out other carriers in the middle of a policy, it's something else that we could learn that happened that we don't have any control over.

Okay, and you had a significant surplus on the healthcare side in the quarter. If I recall, you had a deficit last quarter. Why the big variation from quarter to quarter? It seems like, you know, you're making obviously an estimate at the beginning of the quarter, but I'm just trying to understand why the volatility in that?

Well, I would say that, yes, I wouldn't -- I'm not arguing that that $3.8 million surplus and 2.5 million deficit is not a big number but I would like to give you the context of that to the plan which is 80 some odd million dollars. You're never going to hit the number right on. If you're within, you know, a couple of percentage points, you're -- it's doing extremely well.

I think the other item is that in the first quarter, you're always going to have a possibility of a surplus because the funding rate that we had to measure that surplus against was set two quarters ago. So when we talk about at plus or deficit, remember, it's in the funding rate that our expense is being compared against that was set, you know, six months ago.

Okay.

So I think kind of good news about this is that, you know, since the inception of this plan at the beginning of 2002, after 18 months, that there's only about a million and a half dollars swing is pretty solid stuff.

One other comment own that, of the rates Richard was talking about were set prior to the plan design changes, so I think there's a uniqueness to this quarter in that level of fluctuation.

Okay. And just one last question, and this is for clarification for me. You had given a few numbers for changes in -- per work site employee per month, direct costs, and I was wondering if I could get the absolute number for the quarter for payroll tax other and workers' comp?.

Let's see. Would you -- would you ask that question one more time?

Sure. What was the payroll tax other cost per work site employee per month in the quarter and what was the workers' comp per work site employee per month.

Okay, wait a minute.

Why don't we let them get that while we go on.

We will add those up for you and come back and answer that question.

Okay. You gave us a change and an attribution to a change in the overall expense but it seems like there's a discrepancy in terms of (inaudible) numbers so I wanted to make sure I knew what those were.

Thank you very much. I appreciate that.

Sure.

Next question is from Adam Waldo of Lehman brothers

Good morning. I noticed in your annual report and 10K the increased emphasis on the new retirement services initiative. A couple of questions arise from that. One is, to what extent would you specialize your sales force going forward around retirement services relative to the core PEO (ph) offering given that retirements services seem s it will be sold on bundled and unbundled basis; and secondly, could we infer from the unbundled efforts in retirement services that you may be considering broader offerings of services unbundled administrative services in nature?

Sure, let me take run at that one, Adam. First the retirement services offering that we're rolling out now to current clients is really a very exciting effort for us here. And what I expect to happen first, the first step -- it's kind of any phases. The first is compliance with the IRS new procedure that came out last year, which requires us to go out to all of the current customers and change their plan to comply with the structure that we agreed with the I.R.S. That's the first step.

And that won't be happening in this process. Now, statement in the first phase is completely rebuilding what the retirement service offering is to our current clients, to our prospects, so that means educating the sales force. At our sales convention a couple of weeks ago was the first time we showed the sales staff what we will now be offering in terms of flexibility, design, customization for our customer, in this area of retirement services.

So the most immediate effect is the fact that prospects and current customers now have much better flexibility and it literally turns this aspect of our service from a positive -- to a positive from somewhat of a negative. Previous to this we had the 401K offering which is a one size fits most with very much limitation and a lot of customers did not even qualify to be in the plan because of the way the I.R.S. rules worked, so all of sudden you turn something that was a positive but was a negative and turn it into a positive (inaudible). I think it has dramatic effect on selling new PEO business

Further down the road, we have, I believe, a retirement services business that starts to be built by customers who maybe leave the PEO relationship but there's no reason to leave the record-keeping relationship, so that will start. And then at that point we will also look at the approach and test the approach of whether a lead in retirement services leads to PEO services or not. So some of that remains to be seen but we're certainly excited ability the prospects and are working diligently to bring that about.

So, Paul, at this point, it would be -- and correct me if I'm wrong -- fair to say we shouldn't infer this as part of a broader initiative to offer unbundled (inaudible) administrative services offering as compared to PEO but rather an initiative focused on the retirement services area as an expansion of a PEO offering, also potentially a single unbundled service?

Yes. That's the way to look at it for the next year, year and a half.

Switching gears if we move over to the workers' comp claim side, Richard, can you give us an update in terms of where things stood at the first quarter at the end of April from the claims exposure from the Reliance national bankruptcy?

Yes, I can, Adam. Obviously in our 10K, we announced that actually going back to several queues that there was that possibility.

And all can I -- there's really nothing to update at this point. There's still dialogues going on but nothing can I can update anybody at this appointment.

So Richard the maximum remaining aggregate financial risk is still eight million dollar range more or less?

Yeah, somewhere in that vicinity

And your net cash position at the end of April, roughly after you paid the key tax payments in April?

I haven't given that out.

And finally switching back to the sales force, Paul, could you give us a sense for sort of your ratio of new censuses to first calls during the key sales season this year versus prior years and how is that trending in the February, March, April period as compared with historic enormous?

Sure. Those numbers were down in the tailend of the year last year. And in the first quarter of this year. You know, we really did see what I was mentioning in my script about the indecisiveness of key decision makers in companies, and, you know, the ratios were down. The activity was down and the ratios were down. But I have to tell you, as I sit here today I am more encouraged than I have been in 18 months just in terms of, you know, how we have got things teed up, you know. We did a lot of evaluation and what was causing those issues in that fall season and even through the first quarter. And I believe we have addressed them very directly, have the sales staff energized and reinvigorated. You know, there were a lot of distractions during that period. You know, a lot of, you know, just truly wearing them out over that period. But everybody is reinvigorated, focused.

We're doing the right things that lead to the kind of sales results that we're used to around here so I'm encouraged about the back half of this year.

Not to put too fine a point on it, Paul, but can you give us some degree of quantification of the variance of, say, the last four or five months with historic norms and the rate of improvement you might have seen, if any material improvement here in the March, April time frame.

No we didn't see any in the March, April timeframe, of course we had the whole group out for a whole week here training and getting them re-energized and refocused, but, like I said, we were -- if you look at the whole your last year, our results were about 77% of target. The first quarter was in that same range in terms of sales. But a lot of the reasons behind that, I believe, are already behind us. So the first thing we will see, and that's what we're focused on for this quarter, we're focused on the activity numbers.

And these ratios of first calls and censuses and so forth and I think we will -- you know, I feel good about that for the quarter, the activity levels. And that will flow into sales in the back half.

Okay, ladies and gentlemen, with respect we can ask you that you please limit yourself to one question. Due to the amount of questions that we have in queue.

Next question is from Mark Allen with SunTrust Robinson Humphrey. Please go ahead, sir.

Hey, let me just ask a question relative to, you know, obviously you had to get a price increase to recover the health care insurance costs. So can you kind of ball park for us, what was the average price increase a customer was looking at, as you went through this round of renewals and how did that compare historically with price increases and then also comments about client retention. I think you had said that was sort of as you expected but I think it's down below historical. So where was it and where is that relative to historical.

Sure, these two are directly related as I mentioned earlier. If you look at the last 15 months or so and when you looked at price increases that clients were looking at to do renewals, you see a bell curve. Maybe not a perfect bell, might have been hired early and it's now tailing off. But in the fall of last year, it would have been the peak, you would see customers getting 70% increases in some cases, significant decreases -- increases on the health care component within the pricing. So it was truly an uphill battle and a serious distraction, our sales staff spent a lot of times on renewals to get things done.

To quantify it, you know, we talked about our client attrition, instead of being in the 6% range like it was historically or even the 6.9%prses was the worst we ever had until this year and for the fall campaign season is up to 7.8%. We're still seeing -- in the first quarter, those increases, instead of being in the 70 percent range were more like in the 50, 40 to 50% range. The ones we're quoting now, you know, are back into the 20, 30% range or so, on average, and the ones we're quoting now that will be signed and renewed in the third quarter.

So the ones that we quoted in the first quarter are being renewed now so it's still running a little higher than I want it to be. But I can see already looking down the pipe here that retention and price pressure there is coming back to normal.

The other thing I think on the pricing is that, you know, we were ahead of the market so to speak in getting to these levels of health care pricing. And, you know, that's one time when you really would rather not be in the head of the market but that's where we were. But as I look and measure what is happening with other offerings in the marketplace and other channels for businesses to get benefits, we are definitely coming back in line in that measure as well, and I believe that affects both sales and renewals.

Next question is from James Janesky with Janney Montgomery Scott. Please go ahead, sir.

Richard and Paul, good morning.

Jim.

Can you go over -- again, I think I kind of missed what you said you expect for headcount, in average headcount work site employee in the second quarter?

Yeah, second quarter, we think it's going to be flat from where we were at the March where we -- march we paid $75,330 and we think that will be about the level we're at for the second quarter

Okay, and with that in mind, I know that the --certainly the geo political events have at least primarily come to an end, but with respect to the -- with respect to hiring, it still is pretty weak. So as you enter into the second quarter and then the up tick that you expect in the third quarter and fourth quarter, can you just give me --I want to keep -- get in line with your reasoning as to what is going to drive that and initially why the decline might not be as large as it was this quarter?

Well, as we look at the pipeline for, you know, what new business is coming on, what's going away, you know, we're comfortable that we're going bottom out here about this number. So it's pretty fair visibility on that for this quarter. You know, I guess the one thing that could turn it the other way, if there's another big drop, you know, of layoffs, like we say, it's a grab bag and not one that we can really predict, but like I mentioned in my remarks, we see little up tick there for the first time since October. We're not counting on that and not counting on it being a big negative.)) Does the pricing coming down affect your thinking at all?)) Absolutely. This is not a cliff. Like I say it's a bell curve gradually coming down so. We feel like our price decreases -- not decreases but lower levels of increase helped retention, helped new business, you know, so we feel comfortable that being flat for the quarter is about what it's looking like.

Okay, great, thank you.

Next question comes interest from Tyle Divatos (ph) of C.L. King. Please go ahead.

Hi. When you started instituting the new pricing, the hope was that eventually it would smooth out some of the seasonal patterns in the quarterly earnings progressions. So there is a chance down the road that loss would be eliminated in the first quarter?

Oh, absolutely. Beginning in January of 2004. Because all of the customers will be on the new building system and that new billing system accounts for -- in our allocation, it accounts for the higher cost of payroll taxes earlier in the year. TY,

We can see that already and I'm looking at the 20% of our customers who were on that new system for the quarter. The system worked beautifully in basically locking in our anticipated mark upper employee. That's why I mentioned, this whole model simplifies dramatically next year, because we will have our entire base on the new system for January. Then any new business sold, you know, the only business that has any what I call prorating of tax component would be a new account coming on February, march, April, or throughout the year. That -- that is it. So, you know, you have 80 something percent of your base that you've got locked in on predictability.

Okay, one very quick one if I can. The operating profit per employee you projected at 2030, back a quarter or two ago and based on today's guidance it looks like this year you're aiming for the middle of that.

You know, we're -- what we have said most recently is 20 plus is the target, and that's what we've got everybody focused on here. And, you know, when the business is being driven more by pricing than unit growth, I think you always want to be conservative about that. And so, you know, we're not jumping off a cliff. But we feel great about how solid the -- how much the solid rebound in the team metrics of the business in terms of from a gross profit standpoint.

Sounds good. Thanks an awful lot.

Thank you.

Next question comes from Tony Tristani (ph) of Halpern Capital (ph). Go ahead, sir.

Couple of questions. For Paul, can you talk about competitively, you know, why you're confidence, you know, the drop in work site employees was due to decision makers not coming through -- coming through with decisions, et cetera, and why it's not just some rumblings of competitors saying, you know, pricing is high and they're lower priced and, you know, maybe they're gaining business -- can you talk about on the competitive situation where you're confident that you still have the -- you know, it's not competitive, why you're losing work someplace?

You bet. That's an porch question. Thanks for bringing that up. In our analysis going back for the fourth quarter and the third quarter obviously we look at any direct competition accounts, whether we won or lost, what was the reasoning, and what has come out of that is very clear for us in that the client that fits our target, someone who, you know, is really trying to move their business forward, understands the role people play in the business, you know, sent some real upside from putting high performance human practices into business, we're not losing any of those customers. They are pumped about what we do for them. And we're winning those.

If somebody is more cost conscious, which a lot of folks are today, those -- if somebody is just looking for better benefits or lower costs or some kind of cost-saving motive, we don't do as well there but that's nothing knew. That's where we have always been.

Now, what is interesting to me is that the only competitor that we lost a discernible number of accounts to, and I'm not talking about one here or there, but, you know, that we lost a few accounts where I could sit there today and say, boy, there are some accounts we shouldn't have lost, that was ADP or Total Source.

And we already had some of those accounts. I wouldn't expect any of those accounts back for a year and we already have some of those accounts coming back. It really validated me -- and this is what we have told the customer and now we have documented it in case studies of specific customers, it really documents that there's nobody delivering on the promise like Administaff delivers on the promise. So we still feel very strongly about, you know, how effective we are against competition.

And, of course, we learned a lot. We learned a lot over the last six months, how we trained the sales staff, put new information and tools into their hands and I believe we're going to do very well in that respect.

Next question is from James McDonald of First Analysis. Please go ahead, sir.

I will try to sneak in two questions. First give us more on the large account strategy that you mentioned, Paul, and also an update on your workers' comp thoughts with Kemper going away?

Let me handle the one on the large accounts. We have form formalized that effort in the sales negotiation, a major account team that has been put together. We kind of tested things out last year and now have added to that team, and we have organized it within the sales operation where, you know, anywhere across the country where a salesperson has a client in that target range of 250 employees up, there's team people who have both the sales and service group that worked that account specifically in tandem with the local sales professional.

And I expect that to be very docile. We also -- very beneficial. Also those kinds of accounts tend to actively involve senior staff here at the company, up to and including myself. So we're really energized about it. We know that our technology platform is a great thing for those accounts. We have had some great successes in serving larger accounts. We have grown that segment of our business some over the last year and a half or so and we're just now to get ready start rolling it out across the country.

With respect to your second question, Jim, a couple of things that I can report. Kemper, who you know has been our carrier fort last two years, will not be renewing any business in the large market workers' comp arena going forward. So we will be having a new carrier come October 1, 2003.

The good news is that we have several of carriers that are very interested in our business. And we're having a lot of positive -- our team is having a lot of positive dialogue with those. We're looking at all of the alternatives that are available to us. Though the workers' compensation field is different today post September 11 than it was a couple of years ago when we instituted these policies. So there may be differences in the program that we have.

We don't know that for sure. But we are looking at all of the options and I can certainly comment own the fact that we will have a good program come October 1 of 2003.

Next question is from Christopher Gutek of Morgan Stanley. Please go ahead, Sir.

I notice you guys didn't include in the press release the payroll cost for work site employee or markup for work site employees. (inaudible) policy but to the extent those metrics help us understand the drivers behind your gross profit, Richard, do you have those handy?

Yeah, I sure do and Chris this is exactly right. Because we can't report those anymore because we -- you know, we don't have payroll. Anyway, let me just give you all the numbers and I - I had prepared them based on Randy's remark. Let me just give you the raw numbers and you can, you know, use them there to convert them to a work site employees.

Our payroll taxes and other costs for the quarter was $88.6 million. Our benefits costs were $87.8 million. And our Workers' Compensation costs were 13.1 million and that should tie to your direct costs for the quarter.

Next question compress David Farina of William Blair & Company. Please go ahead, sir.

Can you just tell us, Paul or Richard, what kind of pricing increases you have for the new workers' comp plan? Is it factored all right into the guidance or is that something that you need to see?

We have enough in addition, David, to be able to fairly accurately build them price increases for that. While we don't have final numbers, if you're looking at our model in the big picture, our last year in 2002, our Workers' Compensation cost on a pro work site employees base was about 49, $50. So, you know, if we had a 20% increase in Workers' Compensation cost that would translate to about 10,000 per month. Adding $10 of allocation on a $980 markup is going to be probably no, ma'am that for anybody to be concerned about. So we're already building it in, to answer your question.

Gentlemen, no further questions at this time. You may proceed.

Right. Well, again we thank everyone for your time and interest in our company and our call today. And I believe that ends the call.

Ladies and gentlemen, that concludes your Administaff conference call. Thank you for your participation. You may disconnect now.