Insperity Inc (NSP) 2005 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Administaff third quarter 2005 earnings conference call. My name is Cheryl, and I will be your coordinator for today. At this time all participants are in listen-only mode. We will be conducting a question-and-answer session towards the end of this conference. [OPERATOR INSTRUCTIONS]

I would like to remind you that any statements made by Mr. Sarvadi, Mr. Rawson, or Mr. Sharp that are not historical facts are considered to be forward-looking statements within the meaning of the federal securities laws. Words such as "expects," "intends," "plans," "projects," "believes," "estimates," "likely," "possibly," "probably," "goal," "objective," "assume," "outlook," "guidance," "predicts," "appears," "indicator," and similar expressions are used to identify such forward-looking statements and involve a number of risks and uncertainties that have been described in detail in Administaff's filings with the SEC. These risks and uncertainties may cause actual results to differ materially from those stated in such forward-looking statements.

I would now like to turn the presentation over to Mr. Doug Sharp, Chief Financial Officer for Administaff. Please, sir, go ahead.

Thank you, we appreciate you joining us today. Let me begin by outlining our plan for this morning's call. First I'll discuss our third quarter financial results, Paul will add his comments about the quarter on our outlook for the remainder of 2005, and some preliminary comments on 2006. Then Richard will discuss trends in our direct costs including benefits, worker's compensation, and payroll taxes and the impact of such trends on our pricing. I will return to provide our updated financial guidance for the fourth quarter and full-year 2005 and some preliminary guidance for 2006. Then we'll be available to answer any questions.

Let me begin by summarizing the financial highlights from the quarter. Year-over-year unit growth accelerated to 15% for the third quarter up from 12.5% in the previous quarter and above our expected range of 13% to 14%. Continued pricing strength combined with favorable trends and benefits in worker's compensation costs resulted in an increase in third quarter gross profit per worksite employee per month from $202 in 2004 to $214 this year.

Operating leverage was demonstrated by a decline in operating expense per worksite employee per month from $180 in the 2004 period to $175 in the 2005 period. We reported third quarter earnings of $7.2 million, or $0.26 per share, an 86% increase in earnings per share over the third quarter of 2004.

As for the balance sheet, we continue to generate significant working capital, ending the quarter with a balance of approximately $98 million, an increase of $50 million since the end of 2004.

Now let's review some of the details of our third quarter results. As I just mentioned, the average number of paid worksite employees per month increased 15% over the third quarter of 2004 to 90,493. This was above our expected range of 89,200 to 89,600, which assumed an average net monthly growth of 800 to 1,000 worksite employees. In a few minutes, Paul will provide details on the drivers of our unit growth acceleration including sales, client retention, and net growth within the existing client base.

Third quarter revenues increased approximately 21% over Q3 of 2004 to $285 million as a result of the 15% increase in the average paid worksite employees and a 5% increase in revenue per worksite employee per month for the quarter.

Looking at third quarter revenue contribution in growth by region, the Southeast region, which represents 9% of total revenue, grew by 15%; the Northeast region, which represents 15% of total revenue grew by 32%; the Central region, which represents 13% of total revenue grew by 15%; the West region, which represents 23% of total revenue grew by 19%; and the Southwest region, which represents 39% of total revenue grew by 22%.

As I mentioned a moment ago, gross profit per worksite employee per month for the quarter was $214, up from $202 in Q3 of 2004 and above our forecasted range of $207 to $211. These results were achieved through an increase in the markup related to our HR services and a higher surplus generated from effective pricing and management of our direct-cost program. This higher surplus continues to be driven primarily by favorable trends in both health care and worker's compensation claims combined with the lower administrative fees negotiated with our insurance carriers.

Worker's compensation costs totaled 1.06% of non-bonus payroll for the quarter, below our expected range of 1.20 to 1.25%, as we continue to benefit from our ongoing efforts in managing worker's compensation claims. Such efforts contributed to this quarter's $1.9 million reduction in previously reported loss estimates.

These lower worker's compensation costs were partially offset by higher-than-expected benefit costs resulting from a $1.1 million state medical premium tax assessed to our national health insurance carrier and passed on to us this quarter. This assessment resulted in total benefit costs per covered employee per month increasing 5.5% over the third quarter of 2004 to $602 above our expected cost increase of 3.5 to 4.5%. Health care claims trended as expected for the quarter. Approximately 72% of the worksite employee base was covered by our medical plans during the quarter, resulting in a cost of $433 on a per-worksite-employee per month basis.

Payroll taxes including FICA, FUTA, and state unemployment taxes as a percentage of total payroll costs was 6.87% compared to 6.88% in Q3 of 2004.

Now let's review operating expenses, which totaled $47.6 million for the quarter within our expected range. The expected increase of $5 million of the third quarter of 2004 consisted primarily of the following -- a $3.7 million increase in salaries and wages including a $2.1 million increase in incentive compensation tied to our improved operating results and a $1.4 million increase in advertising costs as we increased and also shifted certain marketing efforts associated with our fall sales campaign in Q3 of 2005 as opposed to Q4 of 2004.

On a per-worksite-employee-per-month basis, operating expenses declined from $180 in 2004 period to $175 in the 2005 period.

Our improved operating results are reflected in the 108% increase in third quarter operating income to $10.6 million, an increase on a per-worksite-employee-per-month basis from $22 in Q3 of 2004 to $39 in Q3 of this year.

For net interest income, we reported approximately $1,051,000 for the quarter in excess of our expected range of $800,000 to $900,000 due to higher invested balances and rising interest rates.

Now let's review several key balance sheet items. Working capital increased by approximately $50 million since December 31, 2004, to $98 million. Cash dividends, a total of $5.5 million in capital expenditures that totaled $6.9 million through the third quarter of 2005. Additionally, approximately 649,000 shares have been repurchased at a cost of $12.2 million and approximately $21.6 million in proceeds were received from the exercise of stock options thus far this year.

As for other balance sheet details, prepaid expenses and other current assets totaled $24 million including $10 million related to our primary health care plan, and $6 million related to our worker's compensation program.

Deposits and other assets of $51 million consisted primarily of $49 million related to our worker's compensation program, which includes $42 million set aside for expense future claims and $7 million in collateral.

Now, before providing our financial guidance, I'd like to turn the call over to Paul for his comments about the quarter, our outlook for the remainder of 2005, and some preliminary comments about 2006.

Thank you, Doug. Today my comments will cover three topics. First I will review the long-term business plan we're executing in order to provide a context for our third quarter results. Secondly, I'll discuss each of the specific drivers of the outstanding results we had in the third quarter and then, finally, I'll highlight the key success factors that will extend our momentum through the fourth quarter and into 2006.

So let's begin by looking at the big picture and understanding the potential of our business model. Our business model and plan includes three simple, however, critical targets. Our unit-growth goal, our gross profit per employee range and an operating leverage objective. After 19 years refining this model, we've implemented a plan for the optimal level of growth and profitability.

The plan for unit growth was to reestablish growth momentum by achieving double-digit growth by the end of 2004 and then ramping up steadily toward our target of 20% unit growth by early 2007. This would be accomplished by returning to historical levels of sales in client retention and then taking steps to improve on those rates and grow the sales staff.

Looking back, our year-over-year growth rate accelerated from a decline in the first quarter of 2004 to 3%, 6%, 9%, 11.9%, 12.5%, and now 14.8% over the subsequent six quarters. In a few moments, I'll provide the details behind the execution that has us on plan on ramping up the unit growth.

Our plan for gross profit per employee is to slightly increase our markup on our service fee from year-to-year and manage pricing cost for payroll taxes, worker's compensation, and benefit, to a surplus within a $10 to $30 range. Both of these objectives were accomplished in 2004 and are implied in the 2005 and 2006 guidance released today.

The third prong of the strategy is to grow operating expenses at a rate that's about half of the gross profit growth rate. This level of operating leverage is possible due to the previous investments we made in infrastructure and competencies across the company in a very capital-efficient business model.

Now, from my perspective, the third quarter results were a continuation of the excellent execution we've seen across the company against these goals I just outlined. All the key performance measures from sales, pricing, and direct-cost management to service, client retention, and operating expense control are on track to accomplish these long-term goals for unit growth, gross profit per employee, and operating expense control.

Our acceleration in unit growth during the quarter was the result of solid execution in client retention, some benefit from hiring in the client base, and outstanding performance in sales. Total sales increased 56% over the third quarter of last year driven by a 62% improvement in sales efficiency from a 3% lower number of sales personnel. Our key sales per salesperson per month metric soared to 1.26 for the quarter bringing our year-to-date number over our annual 1.0 target with the entire fall campaign period yet to come.

We are continuing to have success in the middle market but even without the middle market contribution, our sales efficiency was 1.13. This level of sales success is unprecedented for the third quarter, which historically has included a summer slowdown.

Our advertising and marketing efforts early in the year combined with our new training and activity standards are certainly achieving desired results.

The efficiency metric is driven by our census to First Call rate and our closing rate. During the third quarter our census rate improved from 43% to 50% and our closing rate increased from 16% to 20% over the same period a year ago.

Another exceptional result is the average markup on new sales, which increased $7, or 4%, over new sales from the same period a year ago. This increase in volume and price simultaneously drives home the demand and attractiveness of our product offering and the excellent execution by our sales team. The average number of trained sales staff increased slightly in the quarter to 223 from 215 in Q2, and we're continuing to grow the sales force toward a target of 230 as we move toward 2006.

Our client retention for the quarter was also on target, as the attrition rate averaged 1.5%. Satisfaction rates continue to improve, reaching 91% and 94% and 95% for each month of the quarter. Our service organization is continuing to do an outstanding job in delivering on our promise to help our client companies succeed.

We also had some benefit from new hires within the client base exceeding layoffs, which contributed to our unit growth rate exceeding our targeted range for the quarter. We have also seen no indication of an economic slowdown in the predicted data we monitor, including overtime pay, pay raises, commissions, bonuses, and hiring plans.

On the subject of our gross profit per employee results from our pricing and direct cost management, you'll hear details from Richard in a few minutes. I would simply add our strategies in this area are continuing to deepen our competitive advantage, benefiting our client and worksite employees and adding to our profitability. Our results in this area are also demonstrating the advantages for Administaff of our co-employment models.

As for the operating leverage strategy, we're beginning to see our operating expenses increase now that we've had several quarters of double-digit growth. However, it's readily apparent that the rate of growth in operating cost is lower than the unit and gross profit growth rate and our operating expense per employee is declining. So it's evident that we are working our plan to optimize growth and profitability.

Now I'd like to discuss the key success factors in the near term that are the foundation of our plan for 2006. The first two important factors are the number of paid worksite employees in the service fee dollar-per-employee markup on the client base in January. Now, due to the recurring revenue nature of our business, this starting point represents approximately 80% of our base gross profit budget for next year.

Our fourth quarter guidance implies adding a net gain of approximately 1,000 employees in October, 300 in November, and flat in December consistent with prior years as new enrollments from the fall campaign usually defer to a January 1 start. In order to arrive at our January starting point for worksite employees, we then add the results of our fall selling campaign and our year-end renewal results. Keep in mind, our client attrition in January is typically 6% to 7% of our client base due to the large number of accounts that renew at this time.

Our fall campaign typically adds another 7% to 9% to the base, so this represents a change in the client base of approximately 15% and a step-up in January of 1% to 3% of the total client base. It's readily apparent how critical a successful fall campaign is in both new sales and renewals to current client. This year we are off to a very good start and have some advantages over previous years. First, as we discussed last quarter, we increased our spending on advertising and promotion due to the success of our marketing earlier in the year. The additional 750,000 allowed us to extend the time period for our television advertising, and we also were able to add local radio to the mix.

This year's campaign is certainly our most comprehensive marketing effort in our history. In addition to television, radio, and direct mail featuring our national spokesperson, Arnold Palmer, we've updated our print collaterals and included webinars, Webex presentation capability, and our Web-based referral program.

The other significant announcement from last quarter that bodes well for the fall campaign was the plan to hold the line on health care allocation within our pricing to clients. We expect our pricing to be very competitive over this critical period for both new and renewing accounts.

Now, in addition to the number of worksite employees, the pricing of that 15% of new worksite employees added to the base will determine our starting point for our markup for worksite employees. This level of variability is the reason we're conservative in budgeting 2006 at this time and for our increased visibility on February 1st of each year.

Once we arrive at the starting point, we then have to factor in our net monthly unit growth range for next year. Based upon the current trends, we're comfortable estimating a range of 1,200 to 1,400 employees per month, which, on the low end, is at the level we've experienced over the last six months and, at the high end, represents a 13% increase over 2005 monthly unit growth targets.

Our plan for achieving this is to maintain recent sales and client retention levels, continue to develop our middle market initiatives, grow the sales staff at a modest rate, and restart our market expansion plans. In a few moments, you'll hear details regarding our outlook for gross profit including both the markup and the surplus component and for operating expenses for 2006. When you put the whole picture together, you'll arrive at a plan consistent with results for strong double-digit unit growth, effective pricing and direct-cost management, and operating leverage leading to substantial operating income growth. These metrics imply earnings-per-share growth in the 30% to 50% range for next year.

Now, the [unintelligible] to this plan are, first, poor execution of the fall campaign; number two, a reversal in the economy; number three, unexpected direct-cost increases; and/or number four, legislative or regulatory surprises.

Conversely, the upside to this plan would come from continued selling and retention success through the fall campaign; number two, continued growth in the labor market; and, number three, a larger surplus contribution to gross profit as we work to increase our service fee markup and manage the cost of claims in our direct cost area throughout the next year.

At this point, I'd like to turn the call over to Richard.

Thank you, Paul. Today I'm going to update you on the status of our direct cost trends and our pricing strategy and how they affect gross profit for the balance of 2005 and 2006. As Doug mentioned a few minutes ago, our benefits cost that include health care, prescriptions, dental, vision, life and accident insurance, and disability coverage came in at $602 per covered worksite employee per month. This amount included claims costs, which fell within our expected range and a $5-per-covered-employee state premium tax assessment.

A $1.1 million payment was a retroactive true-up for all the prior years that we have been with United Healthcare. Additionally, this payment included an estimate for the first six months of 2005, which was $285,000. Our current claims experience has been trending upward at about 6% year-over-year, which is significantly lower than the market at large. This better-than-average experience is due to the same three factors that we reported last quarter.

They are, number one, the migration of customers from higher co-pay, lower deductible plans to lower co-pay, higher deductible plans; number two, a geographic shift from higher-cost markets to lower-cost markets; and, number three, the conversion of United Healthcare PPO customers to their new Choice Plus network.

When we look at the total cost of our benefits, excluding the premium tax assessment, this increase was only 4.5%, reflecting the effect of lower administrative fees that we negotiated beginning last quarter.

Now, for the fourth quarter of 2005, we anticipate these same factors will help mitigate a typical 6% to 7% year-over-year trend in our health care costs down to an approximate 4.5% year-over-year increase.

Now let's talk about our benefits cost for 2006. Beginning in January of 2006, we will have some health care plan design changes that will go into effect. These changes include minor increases to co-pays for emergency room visits and prescription drugs. And, additionally, we made modest increases to the deductibles for several of the plans. We also completed the negotiation and renewals of all of our other fixed-rate benefit plans.

When we factor in the plan design changes in the previously announced administrative fee reductions, we would expect to see our total benefits cost per covered worksite employee to increase about 5% to 7% year-over-year. We expect this level of increase to compare very favorably with marketplace trends, which our advisors have indicated could trend up about 11% to 13% year-over-year.

Our current pricing allocations are matching our expected cost trends, therefore, we do not expect significant increases in our pricing, which is quite an advantage for our clients.

The next direct cost to discuss is employer-related payroll taxes. It is still too early for the state to send us our unemployment tax rates for 2006, so, once again, we have engaged PriceWaterhouseCoopers to assist us in developing a preliminary forecast of our rates for 2006. While this process is ongoing, the early read is that state unemployment tax rates should not be changing significantly since the labor market has improved over the last couple of years. We are comfortable with our current allocations and would expect to have little change in this allocation for 2006.

Now let me give you some details regarding our current worker's compensation program and the associated direct cost expectations for the new policy year beginning October 1, 2005, through September 30, 2006. Our cost is driven by the number of reported injuries, which is called the "incidence rate," and the ultimate cost of those injuries including both medical and lost time, i.e., the "severity rate." For the past six quarters we have continued to report lower trends in both the frequency and the severity of the claims. These results continue to come from the excellent work of our safety professionals and other staff who provide training, safety recommendations, and claims administration. For the current policy year that just ended, the incidence rate of reported worker's compensation claims is 1% lower than last year on a worksite employee basis. That is 12% higher than last year.

Additionally, the estimated cost of those claims is down 8.6% from last year. Our independent actuary uses this data to determine the basis for how much we should reserve each quarter to settle claims that are still open. Our estimate each quarter includes reserves for prior policy years plus another estimate for the current policy year. This quarter the actuary lowered the loss estimates for both the prior policy year and the current policy year resulting in our expense for the fourth consecutive quarter being lower than previously forecasted.

During this quarter, we also announced the renewal of our worker's compensation policy with AIG. The success of the last two years' programs resulted in AIG reducing the future funding amounts as well as a significant decrease in the administrative fees they charge to manage this program.

When we factor lower administrative fees coupled with lower incidence rates and lower severity rates from last year, we are again lowering our forecast for the future cost. We would expect our next four quarters of worker's compensation expense to be in a range of 1.1% to 1.15% of non-bonus payroll.

Now let's shift our discussion from direct cost trends to pricing trends for 2006. As you know, our pricing model is built using individual allocations designed to match each of the direct cost plus a separate allocation we call "markup" that is designed to generate our gross profit per-worksite-employee-per-month. Since all of the direct costs are not known in advance, we filled in targeted allocations to cover those particular costs. Most of the time, these targeted allocations exceed the direct cost, and we have a net surplus that, when added to our markup, produces the gross profit per-worksite-employee-per-month. At the outset of 2005, we planned to have the markup component of our service fee average $193 per-worksite-employee-per-month without including the effect of any price increases on new or renewing business throughout the year.

Additionally, we conservatively estimated adding a surplus of about $10 per-worksite-employee-per-month. As Paul mentioned a few minutes ago, our new business has come in at an average of $7 higher than the sales in the prior year. Our renewed business has increased at an average of approximately $5 per-worksite-employee-per-month over their previous contract period.

Additionally, the average service fee markup on terminating clients was $16 per-worksite-employee-per-month lower than the average renewed account. The combination of these factors has caused us to increase our estimate for the markup component of our service fee to $195 for 2005 and to an average of $198 per-worksite-employee-per-month for 2006. As I discussed earlier, we have experienced lower-than-expected direct costs, which also adds to the surplus.

This higher pricing and lower cost has caused our surplus to increase from our original estimate of $10 per-worksite-employee-per-month to $20 per-worksite-employee-per-month for the full year 2005. Therefore, we are raising our fourth quarter estimate of gross profit per-worksite-employee-per-month to be in a range of $217 to $221. Then for 2006, based on our current pricing and direct cost trends, we estimate we should average $198 per-worksite-employee-per-month in a service fee, and we should have an average surplus of $14 to $18 per-worksite-employee-per-month for a total gross profit per-worksite-employee-per-month estimate of $212 to $216.

Now I would like to turn the call back over to Doug.

Thanks, Richard. Now let's discuss our guidance for the fourth quarter. We expect average paid worksite employees per month to be in a range of 92,750 to 93,250, which assumes a 15% increase over the fourth quarter of 2004. As a reminder, clients [unintelligible] during the fourth quarter of any year are typically converted to paid worksite employees during the first quarter of the following year.

As for gross profits, we now expect to be in a range of $217 to $221 per-worksite-employee-per-month for the quarter, reflecting the continuation of increases in both the markup on our HR services and surpluses in our direct cost programs, as we had experienced throughout 2005.

Fourth quarter operating expenses are expected to be in a range of $50.5 million to $51 million. This is up from third quarter operating expenses of approximately $47.6 million due primarily to the following expected increases -- approximately $1.5 million in advertising costs related to our fall sales campaign and our PGA Champions Tour golf event; $600,000 in compensation expense primarily associated with additional sales reps and service personnel; $700,000 in general and administrative costs consisting of expenses associated with our year-end benefit mailout and increased travel associated with our fall promotional events; and $500,000 in depreciation expense related to some modification in our existing office space to accommodate future growth.

On a per-worksite-employee-per-month basis, this guidance assumes a Q4 2005 operating expense range of $181 to $183 compared to $190 reported in Q4 of the prior year.

As a result of the increase in invested balances and rising interest rates, we expect net interest income to be between $1.2 million and $1.4 million for the fourth quarter. We are forecasting 28 million average diluted outstanding shares for the quarter based upon our current share price.

Now let's review our updated full-year guidance beginning with worksite employees. Based on our better-than-expected results through the third quarter, combined with our new fourth quarter forecast, we have increased our range to 88,400 to 88,600 average paid worksite employees per month. This represents a 13.4% to 13.7% increase in unit growth over 2004, up from the 12.5% to 13% in our previous guidance.

As for gross profit, we are now forecasting gross profit per-worksite-employee-per-month to be in a range of $216 to $217 for the full year. This compares to $211 per-worksite-employee-per-month averaged in 2004.

We now expect operating expenses to be in a range of $190.7 million to $191.2 million for the full year, and on a per-worksite-employee-per-month basis expected to climb from $188 in 2004 to approximately $180 for 2005.

Net interest income is expected to be in a range of $3.5 million to $3.7 million for the full year, and we are forecasting $26.9 million average diluted outstanding shares based upon our current share price, and we estimate a 37.8% income tax rate for the year.

Now, before we open the call for questions, I'd like to provide some preliminary guidance for the full year 2006. We plan to update this guidance during next year's conference call based upon the results of both our 2005 fall sales campaign and our year-end client renewal period, which typically results in a 15% turnover in the worksite employee base.

So -- as for worksite employee growth based upon the early results of our 2005 fall sales campaign, our 2006 sales rep hiring plan and assuming our current sales efficiency and client retention levels, we are initially budgeting an increase in the average paid worksite employees between 15% to 17% over 2005.

As for gross profit based upon recent trends in both our pricing and direct costs, we are currently forecasting gross profit per-worksite-employee-per-month to be in a range of $212 to $216 for 2006. As you are aware, this metric includes both the markup on our HR services and any surplus achieved from effective pricing and management of our direct cost programs. We are initially forecasting an average markup of approximately $198 per-worksite-employee-per-month and a surplus on our direct cost programs in a range of $14 to $18.

This 2006 estimated surplus is largely based upon our initial outlook for health care and worker's compensation cost trends and a preliminary estimate of 2006 state unemployment tax rate. Similar to the prior years, we may subsequently adjust this estimated surplus contingent upon changes in our pricing, emerging health care and worker's compensation claims experience, and the receipt of 2006 state unemployment tax rates.

Our initial look at 2006 operating expenses indicates an expected range of $207 million to $211 million with the high end of this operating expense range including additional incentive compensation upon achieving our unit growth and gross profit goals. This expected range assumes increases over 2005 in the following areas -- corporate headcount primarily in the sales and service areas; stock-based compensation assuming a mid-year grant of restricted shares; commission expense consistent with the expected unit growth; and market cost to continue to drive improvement in our sales efficiency; general and administrative costs and depreciation are expected to remain relatively flat.

So although we expect an 8% to 10% in total operating expense, this would result in a decline on a per-worksite-employee-per-month basis from $180 expected in 2005 to $170 forecasted for 2006 as we continue to demonstrate our operating leverage.

As for net interest income based upon an initial forecast of invested balances, and assuming the current interest rate environment, we would expect a range of $6 million to $8 million.

At this time, I'd like to open up the call for some questions.

[OPERATOR INSTRUCTIONS] Toby Summer of SunTrust Robinson Humphrey.

Good morning. Congratulations on a good quarter. I had a question regarding -- you did give thorough explanation of guidance, but I'm afraid I might have missed a couple of numbers. Regarding the gross profit per employee per month, could you review again the components, markup versus your expectations, for surpluses?

Yes, it's Doug -- and I assume you're speaking of the 2006 guidance?

I am, thank you.

Once again, for the total range, we're giving the range of $212 to $216 for 2006. If you break it up into the two pieces, on the markup we are forecasting $195 per-worksite-employee-per-month averaging for 2005. We are forecasting that to go up to $198 for 2006. And then on the surplus, on our direct cost programs, we are initially forecasting a range of $14 to $18 per-worksite-employee-per-month for the 2006 period.

Okay, thank you. And then I was curious if you could, you know, given the trajectory of the business and the positive momentum that seems to both be in the market as well as internally in the company, I was wondering if you could update us regarding your plans for investment, perhaps any new services that you could layer on, or is it time to take expansion plans off the shelf and maybe open up a new branch or two?

Yes, Tobey, as I mentioned in my script, we are going to re-initiate our expansion plan early next year. We'll probably open four to six markets next year. We haven't locked it down exactly, so that will be re-initiated. We also are looking at and are open to any other ideas or investments that would accelerate our plan.

But, you know, we have our base business model working so well, we're just not in a hurry to do anything to disrupt the way this thing is genning [ph]. So we're on track, we're certainly looking at other possibilities that help to move our plan ahead, and we will start expanding.

Beyond the branch expansions that you may have embedded in your plan, does it include any additional investment in new services, or would that be incremental?

That would be incremental.

Okay, and then two questions, and I'll get back in the queue -- two more. Was there any impact on your customer base from the change -- recent change in the bankruptcy law? And then, two, how about relative to the hurricanes in the Gulf area -- anything you could see from that?

Sure, well, first of all, we really didn't see any significant change or impact from either on of those events. Our retention or attrition rate -- average monthly attrition rate was 1.5%, which was right on the budgeted number. So we really didn't see anything dramatic. Fortunately, for us, we were not heavy -- we don't have a lot of business in New Orleans and Louisiana coastal area, and then we were really fortunate that Hurricane Rita went to the east of us in terms of where it crossed the Gulf and crossed the coastline. And so we were, in large part, spared on that front as well.

I know that in past conference calls, you've said that you'd be hearing from customers that finding talented workers to grow had been kind of an obstacle, and I was just curious if the influx of people in the Houston area could provide some relief, because I think in the fed's beige book, it did cite that as some commentary when it came time to commenting on the employment situation in the Houston area.

Well, that is a possibility. In fact, we have been aggressive about finding and actually helping people to get back into the labor market. The folks that were displaced, a half a million people that were displaced on the coast, there were a lot of folks from all walks of life, you know, white collar as well as blue, and we did see in the Houston area all the office space just pretty much get leased up and a lot of businesses relocated. So I think it will help us both in new businesses that are available to sign on as new clients, and also, as you pointed out, it could be a benefit on the recruiting side.

But it continues to be difficult to hire new employees. We've seen the hiring plans of our client base are continuing to be very strong, and we're helping them fill those slots as quickly as possible.

Jim MacDonald of First Analysis.

Very good quarter, guys. Could you give us some thoughts on what your economic view is for your guidance? Just the background?

Yeah, I think, again, when we -- like this year, when we looked out into a new year, our approach to this is to go with what we know for sure or have a very high level of confidence in, which comes out of the much better data that we have now. That's why we can -- early on at this point, we can say we think we're going to average 198 in our markup for next year. That's a conservative number based on the current pricing trends we're seeing in our base, the snapshot of exactly how we're priced today and kind of rolling that forward a couple of months. We also start each year looking at a known surplus, and based on what our contractual arrangements are and what the pricing of our direct cost components are compared to the expected costs that we have.

So that gives us a solid foundation. When we look at the economic factors and how they will roll in, we also try to be equally conservative in that respect. Let me explain what I mean by that. The unit growth, for example, at 15% to 17% has a significant degree of conservatism in that, and I think appropriately so. It basically just says that instead of at the low end, it assumes the same level of net monthly gain in worksite employees of around 1,2000 employees per month. That's what we're doing right now without a lot of tailwind. We have a little bit of help from the base, but I wouldn't call it a smokin' labor market out there. I think we're seeing that hiring plans are strong, but it is hard to find people of adding up to some level of net gain, a little bit of wind at the back, so you can say that we're looking at the same level, going forward, into '06.

To hit the high end of that range, you've got to have a normal fall campaign of actually slightly what I would call a "modestly successful" campaign for a small step up into that 1% to 3% range on the unit number in January, and then growing at 1,400 per month, which assumes a 13% increase in the net monthly growth. Well, to do that we just need this steady ramp in number of trained reps that we have going, and the efficiency trends all kind of flow right into those numbers.

I really haven't factored in what we could see from the indicators we have from an economics perspective. I didn't mention this in the script, but compensation numbers, for example, pay raises are up almost 6% year-over-year. That's a very strong number. The average bonus is up 5%. The average commission rate, which is very much a forward look on the economic environment, how good our small businesses are doing -- that's up 7% over a year ago. Overtime, as a percent of regular pay, is 10% -- 10.1% of regular pay, which means we're right at capacity, and commissions are running over 6% of regular pay. So all those things would say the outlook is pretty strong. We are doing a survey of the base to see where they are from an emotional standpoint of what their outlook is, and when we factor that in, we'll have a better feel for that. But it's too early to be factoring those kinds of things into our game plan for next year.

Okay, let me just ask you two quick numbers things -- what's the health surplus now and can you give us the percentage of new hires in the quarter?

With respect to the -- I assume you're talking about the funding surplus on the United plan?

Yes.

It's about $20 million at the end of the third quarter -- the $11 million maintenance level in the short-term assets is about $9 million.

Just how much is that up quarter-over-quarter -- that's up about 9, right?

Consistent with the second quarter.

It was 20 then as well?

Yes.

And then new hires, do you have a percentage on that?

No, we normally don't give out a percentage on that number because you have a mix there between new hires in the base, the clients we had at the beginning of the quarter and new hires at new accounts that came in during the quarter. It's a little bit of a fuzzy number. We generally don't give that one out.

Jeremy Davis of Credit Suisse First Boston.

Hi, guys, it's Jeremy and Josh. Congrats on the quarter. I just wanted to jump on the back of Tobey's question from earlier specific to the surplus component of gross profit for '06. You've got it pulling back from 20 in '05 to modestly lower than that. Despite the fact that you got your incidence and severity metrics continuing to improve, does that reflect conservatism going out in the coming year or do you start to see -- are you anticipating a stabilization within some of those metrics, going forward?

Jeremy, this is Richard. No, we are conservative. We're always conservative when we forecast in the surpluses. We know that there is a portion of that $14 to $18 that is pretty hardwired, but you still have to realize that things can happen, and your estimates for health care claims, et cetera, can be different than what you forecasted them to be. So we have to be conservative, and obviously as we go throughout 2006, we're not going to be adjusting our pricing to match those declines in the existing areas, because health care costs are going up, as I said earlier, in a range of 11% to 13%. Of course, we've got plan design changes that are going to help mitigate that increase, but it's just not prudent to forecast any more of the surplus than that right now.

I think consistent with last year, I would just add on to that, we started out with a known surplus of around 10, and as we've said before, we allow the actuaries to do their work as the year progresses, and we try to work hard to close claims out earlier and for lower costs, and those are the things that lower as the year progresses. So our position is to start every year with what we feel strongly we can count on and then let the rest emerge and go to work to make it better than that.

Okay, bigger picture, though, do you still consider yourself to be in an improving cost environment, generally speaking, specifically in terms of worker's comp probably? Or do you think that things potentially may be leveling out a little bit?

No, I mean, as I mentioned in my script, our costs are going down. They've been going down for six-plus quarters, and we're continuing to see that decline. I think that when you look at the administrative fee reductions that we got from AIG going into this next year, it helps to continue to drive that cost down. So we're real pleased with where we're at in that program.

Okay, and then, just lastly, can you give us an update on your mid-market push that you've been going through? I think last quarter you said you were hiring six new salespeople, so just an update on their success, so far?

Sure, I can do that. In fact, it's definitely in my script. I'd like to expand about 10 minutes on that, but it's not appropriate to do so here. But I will say that, year-to-date, we're running about 36% ahead of last year in dead market sales, but really this is just beginning. You know, we did just add the sixth rep early in the quarter, and we initiated our very first serious marketing effort on that front. We had tremendous results in terms of building up a queue of potential clients that could come in over this fall campaign period. Obviously, we wouldn't built that kind of expectation into our campaign and into these kind of guidance numbers, but there could be some real upside in the mid-market. We're doing well there. We are going to make some improvements over the next year or so from a technology area that will give us more flexibility for those larger accounts, and we're very excited about that market.

Mark Marcon of R.W. Baird.

Good morning and let me add my congratulations. With regards to the growth by region, I was impressed by the growth that you've experienced in the Northeast. I'm wondering if you could -- what can you attribute that to and what's occurring over there that isn't happening in the central or Southeastern regions?

If you go back to the question and what it is always driven by is where and when we put the sales offices and the sales staff. And you have to then take into account how we're doing from a district manager perspective. Every time I see those kind of things and try to dig in and see if there was something happening in that region different from everywhere else, it always kind of boils back down to the execution of our business model, where we put the salespeople, how many mature salespeople there are in each market, and how the district managers and the regional managers are doing.

So we are pleased with what's going on up there, but I can't tell you that it's related to any regional-related market factor.

Okay, and you're not doing any special advertising push in any markets?

No, and we are doing that very much across the board, and we are getting a lot of lead production and very high-quality lead production from that effort, but it's across the board.

And then with regards to the salespeople, as you mentioned, they're extremely important. It looks like you're at 223 currently, and it sounds like you're heading towards 230 by the end of this year. Where would you expect to be at the end of next year?

I would expect to grow the sales staff around 20% in terms of trained sales reps in order to be at that 20%-plus unit growth in the following year. So that's kind of how you think about that venture.

So we'll have a 20% increase on the 230?

Yes, I would say probably 40 to 50 or so new trained reps over that period.

Okay, and in terms of mid-market, how would that trend?

Well, that is something you have to factor in because if we add a significant number of mid-market reps, and we're having the same kind of success we've had recently, you wouldn't have to add as many of the reps in the other two segments, our 20 to 150 group and even less than 20. So that is something you have to factor in. But we'll evaluate the middle market success with the six new reps we have after the fall campaign, and we'll see where we go from there.

Are they still three times as productive?

Well, that was the early estimate, and so far so good. I can't wait to see what happens in the fall campaign, myself.

Mr. Wilson?

Yes?

It's your turn in the queue, sir.

Oh, you didn't say anything.

Oh, I'm sorry.

Hello? I didn't hear my name, I apologize. I just had a couple of questions on the additions, in total, and if I'm doing my math right -- I try to do this every quarter, but were the total gross additions in the 7,600 neighborhood, if I'm doing this right, and attrition somewhere around 4,000. Is that kind of ballpark numbers?

That would be close.

To get to your 30 -- roughly, 3,600 net?

Right.

That's pretty close? Okay. Regionally, I was wondering, your pattern has been obviously good for some time in the Northeast and West and a little slower in your core Southwest markets, but this quarter the numbers had a pretty good balance and good growth rate out of the Southwest. I was wondering if you could -- the expected employment numbers are certainly improved over the course of '05. Is that a driving force behind it or are there other things going on in Texas or other parts of the Southwest that are [inaudible].

That's a good question and one of the things that we've done -- it's kind of an interesting project we've had going, focuses on our most mature market here in Houston, and we, about a year ago, kind of got the sales and service teams together and said, "What's our long-term plan for a mature market, folks? You've got to show me what we can do," and they got together and started working on what they call a "Grow Houston" initiative, and they've had some success there. So I think that's played in. Also, again, it goes back to where you put the salespeople and obviously we have a lot of mature salespeople in this part of the country and that plays a factor as well.

And then I just -- any meaningful differences in -- I'm assuming not surplus, but I guess in the fee pricing and across any of your regions if we get more in the Northeast and West -- maybe the sunbelt or is it pretty stable?

We really haven't drilled down to that level at this point in time. We plan on doing some more of that over the course of this period and see if that's factoring in, but pretty much across the board it's the same.

There's not any differences.

Due to time constraints, that will be our last question, and I turn the presentation over to our speakers. Any additional questions may be directed to Mr. Sharp's office, our chief financial officer.

Thank you very much and thank you all for participating today. We'll speak to you next time around.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.