Insperity Inc (NSP) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen, and thank you for your patience. Welcome to the Administaff's Second Quarter 2006 Earnings Conference Call. [OPERATOR INSTRUCTIONS] I would now like to turn the call over to Mr. Douglas Sharp, Chief Financial Officer.

Thank you. We appreciate you joining us this morning.

Before we begin I would like to remind you that any statements made by Mr. Sarvadi, Mr. Rawson, or myself that are not historical facts are considered to be forward-looking statements within the meaning Federal Securities Laws. Words such as expects, intends, projects, believes, likely, probably, goals, objectives, outlook, guidance, appears, target, 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 the company's filing with the SEC. These risks and uncertainties may cause actual results to differ materially from those statements in such forward-looking statements.

Now let me take a minute to outline our plan for this morning's call. First I'll discuss our second quarter financial results. Richard will then discuss recent trends in our direct costs, including benefits, worker's compensation, payroll taxes, and how these trends impact pricing and gross profit. Then Paul will add his comments about the first half of the year and our plans for future growth and new product offerings. I will return to provide financial guidance for the third quarter and the remainder of 2006. We will then end the call with a question and answer session.

Let me begin by summarizing the financial lights from the quarter. We reported a 32% increase in second quarter earnings per share to $0.37 on a 15% increase in average-paid work site employees and a 21% increase in revenues.

As for a brief recap of our key metrics, paid work site employees averaged 99,839 for the quarter, above the high end of our forecasted range of 99,000. Secondly, gross profit per work site employee per month averaged $228 up from $216 reported in the second quarter of 2005 and above our forecasted range. For the second consecutive quarter, we generated $21 million of EBITDA. Working capital has increased by 14 million since December 31, 2005; to a balance of 107 million in spite of the payoff of our $32 million mortgage on our corporate headquarters and share repurchase costs totaling 14 million.

Now let's review the details of our second quarter results. The average number of paid work site employees per month increased 15% compared to the second quarter of 2005 from 86,868 to 99,839 as we surpassed 100,000 paid work site employees during the quarter. Paul will provide further details on the drivers of our unit growth, including sales, client retention, and net growth within the existing client base in a few minutes.

Second quarter revenues increased approximately 21% over Q2 of 2005 to approximately $340 million on the 15% increase in the average paid work site employees and a 5% increase in revenue per work site employee per month. Double digit revenue growth continued throughout all regions of the country and produced the following results. The southeast region which represents 9% of total revenue grew by 30%. The northeast region which represents 17% of total revenue grew by 38%. The central region which represents 14% of total revenue grew by 30%. The west region which represents 23% of total revenue grew by 17%. And the southwest region, which represents 36% of total revenue, grew by 11%. The growth rate in the southwest region continues to reflect the termination of two mid-market accounts in January that were sold prior to our mid-market initiative at below-standard pricing.

As for gross profit, let me begin by reminding you of the quarterly trend in this metric, as there may have been some confusion following the first quarter conference call. Our business model will typically produce a decline in gross profit for work site employee per month from Q1 to Q2 of each year. This relates to how we invoice new business that is brought on after January 31st, of year.

The payroll tax allocation in our fee for this new business is billed ratably over the remainder of the year while the payroll tax cost is generally front-end loaded. With this in mind, our Q2 guidance provided for a sequential decline of $12 to $15 in gross profit per employee per month from the $236 reported in the first quarter. However, we reported only a decline of $8 and therefore gross profit was $228 for the quarter. These better than expected results were due to both a slight increase in the total service fee, and a higher surplus generated from the pricing and management of our direct cost programs.

As for our direct costs, payroll taxes as a percentage of total payroll costs declined from 7.56% in Q2 of 2005, to 7.4% inQ2 of this year, as more work site employees reached their taxable wage limits earlier in the 2006 period due to increased payroll averages and bonus levels.

Worker's compensation costs were .95% of non-bonus payroll for the quarter, slightly below our Q1 cost of .99%. Updated actuarial loss estimates reflect the continued favorable claims trends and resulted in a reduction in previously reported loss estimates. This is similar to what we have experienced in each quarter over the past two years. This quarter's $2.3 million reduction is relatively consistent with amounts recognized in the last two quarters.

Total benefit costs per coveted employee per month was $616 for the quarter which compared to $578 in the 2005 period. Benefit costs for the 2005 period included a $2.6 million administrative fee credit, while this quarter's costs included a $1.9 million reduction in estimated medical claims reserves. This reduction in reserves was the result of actual claim runoff from the 2005 plan year coming in lower than our initial estimates. In a few minutes Richard will provide further details on both the recent and projected trends in our direct costs and the impact on our pricing strategy.

Now let's move on to operating expenses. As you will recall, our Q2 guidance indicated an expected increase in operating expenses of 17 to 18% over Q2 of 2005, associated with the planned addition of sales and service personnel and a shift in the timing and level of advertising costs. We reported a slightly higher increase of 19% to 54.2 million. This was approximately $500,000 above the high end of our expected range, which reflects the amount of additional accrual for incentive compensation tied to our improved operating results.

As for interest income in the second quarter of 2006 we reported a net interest income of approximately 2.6 million compared to 760,000 in Q2 of 2005, due to higher invested balances and rising interest rates.

Now let's review several key balance sheet and cash flow items. Working capital has increased by approximately $14 million since December 31, 2005 to 107 million, in spite of the following year to date cash outlays: the pay off of the mortgage on our corporate headquarters, totaling 32 million, repurchase of 325,000 shares at a cost of 14 million, cash dividends totaling 5 million, and capital expenditures of 8.4 million. These outlay were more than offset by working capital generated from our operations as well as $14 million in proceeds received from the exercise of stock options during the first half of this year, and $26 million of excess funding reimbursed from our worker's compensation's program.

Before providing our updated financial guidance, I would like to turn the call over to Richard for his comments.

Thank you, Doug. Today I'm going to report on the details of our second quarter pricing and second cost results and update you on how we see these trends affecting our gross profit per work site employees per month for the remainder of 2006.

As you know our pricing model is built by using individual allocations designed to match each of the direct costs plus a separate allocation for our HR services, we call that the mark-up, that is designed to generate most of our gross profit per work site employee per month. Since all of our direct costs are not known in advance, we built in targeted allocations to cover those particular costs. Our pricing strategy is to have these allocations match or exceed the direct cost and produce a net 2 to 3% surplus that, when added to our mark-up, produces the desired gross profit per work site employee per month.

At the end of the first quarter we said that our forecasted mark-up for 2006 would increase from an average of $195 per worksite employee per month to an average of $198 per worksite employee per month for the year and our surplus would add an another $22 to $26 per worksite employee per month. So let me update everyone on the progress during the second quarter.

So far this year our average markup on renewing business has increased over $6 per work site employee per month over last year, and the mark-up on our new business sold has increased $5 per work site employee per month over last year. So we're well on our way to achieving our full year target of $198 for the mark-up component of our gross profit.

As Doug just reported, the net surplus component of our gross profit was above the top end of our forecasted range for each of the last two quarters. Let me explain what happened in the second quarter for each of the direct cost centers beginning with benefits. For this quarter our benefit costs, that includes health care prescriptions, dental, vision and life and accident insurance and disability coverage, came in slightly above our expected range, similar to the first quarter.

At the beginning of 2006, I had mentioned that we had a number of changes that would affect our total cost of benefits for 2006. These included plan design changes, participant migration from a PPO product to the United Health Care Choice Plus products and demographic shifts resulting from our normal end of the year new sales and client terminations.

Now with two quarters of enrollment data, we have seen that more people selected the lower deductible type plans than we had originally thought. This migration partially has offset the expected plan design cost savings that we had factored into our 2006 health care strategy. Also during the second quarter we experienced an unusually large shop loss claim that contributed to our higher cost for this period.

Outside of these two factors that indicate higher costs, our detailed analysis of the plan shows that we have normal hospital utilization and only slight shifts in the average family size in the age gender mix of our work site employees. So when we weigh in all of the factors we continue to expect health care cost increases to trend up about 5 to 6% for the full year. However, we expect that the last half of this year the trend will be closer to the higher end of the range. As for pricing, we have increased our benefits allocation on both new and renewing business in each of the last two quarters.

So, benefit costs are rising slightly faster than we expected and accordingly we will be raising allocations. Therefore, this cost center is likely to contribute less to gross profit for the balance of the year, than we had previously expected.

The better than expected second quarter surplus was produced in the other two areas of our direct costs, those being the employer payroll taxes and worker's compensation. Let's begin with employer related payroll taxes.

Again, this quarter's spread between our allocation and this cost was slightly higher than we had originally forecasted. The surplus is still the primary result of unemployment rates from various states coming in lower than previously estimated. The allocations that were set last fall are still sufficient for us to continue to expect a surplus in this area for the balance of the year.

The second contributor to our surplus came from lower than expected costs in our worker's compensation program, a theme that has become a part of our success as a result of our worker's compensation captive structure that we implemented in September of 2003. When a new policy year begins the insurance company and our independent actuary make a conservative estimate as to the total costs of claims to be incurred for that policy period.

These costs are primarily driven by the number of reported injuries, i.e.: the incidence rate, and the ultimate cost of those injuries including both medical and lost time, i.e.: the severity rate. So to manage the cost, our safety professionals work to reduce the incidence rate and our claims management personnel work to reduce the severity rate.

In each accounting period, our independent actuary updates the original loss reserve estimates using recent incidents and severity information on all of the open claims. Our expense each quarter includes the actuary's revised estimates for the current policy year, plus a separate reserve estimate for each prior policy year. When the continuing efforts of our people to manage and settle these claims at lower than expected reserve amounts are successful, our actuary continues to reduce the reserve amounts needed to settle the remaining open claims.

Over time as the claims associated with the older policies get closed out, the change in the reserve estimates for the remaining claims in that policy year typically become smaller. Therefore, when you stack multiple policies together you have new policies with conservative estimates based upon limited information, and you have older policies with refined estimates based upon greater information.

This quarter the actuary reduced the reserve amounts both the prior policy years as well as the current policy year. This adjustment was about 2.1% of the total estimated costs for all three policies or 2.3 million, and as Doug said, it's consistent with the prior two quarters reductions. Looking at the early indicators related to the current policy here, we see that our work-site employees have grown 15% and our incident rate has only grown 5.82%, with only three months left on the policy. In addition, the severity of these new claims has actually declined 1.2% from last year. These factors indicate lower cost in the future for worker's compensation.

Additionally the worker's compensation laws in California have been changed such that there are now caps placed on the number of certain types of treatments that an employee can receive. The law also requires injured workers to go to prescribed medical provider networks. Lastly, the new law allows the carrier to submit questionable treatments to a utilization review board. All of these law changes should help reduce the cost of worker's compensation in California as well.

Another factor that we are seeing is the proposed administrative cost reductions that we would be getting for our new policy that would begin October 1st of this year. The current quotes from carriers all look very favorable. So when we factor in all of this information for worker's compensation, we expect to see this cost as a percent of non-bonus payroll drop from a previous forecast of approximately 1.05 to a range of .95 to 1.0 for the balance of this year, more in line with our year to date experience.

In summary, as we look at the last half of 2006, we should achieve the $198 per worksite employee per month targeted mark-up. As for the surplus, for the full year, we continue to expect a solid $28 to $30 per work site employee per month range or about 3% of total direct allocations. Year to date we know our pricing and direct cost management has produced a surplus of $35 per work site employee per month. This includes approximately $7 per worksite employee per month related to payroll tax allocations that are front end loaded each year and do not reoccur in the last half of the year.

So for the balance of this year we expect benefit costs to be at the high end of our range, which we expect to be partially offset by lower worker's compensation costs. So for the balance of the year, we're forecasting a 21 to $25 per worksite employee per month surplus. When you put it all together, we now expect a 2% increase in the mark-up and an 11% increase in the surplus on a per worksite employee per month basis, over 2005, which would be another great year.

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

Thank you, Richard. Today I will comment on three topics. First I'll provide some color on our excellent first half results, including some details around growth in the second quarter. Then I'll discuss some decisions we have made to put us ahead of the game for next year that have been made possible by exceeding our expectations in the first two quarters of this year. And finally, I'll describe our strategy for additional products and services, including our launch of the new HRtools.com website announced yesterday.

A couple of quarters ago, I laid out our plan for 2006, including growth and profitability target and critical development plans for the year. The growth plan included mid-teens unit growth coming from improved sales and retention levels experienced last year and ramping up our trained salesperson count to ensure future growth. Our guidance per gross profit per employee and operating expenses implied an earnings per share increase of 25% to 35% over last year. And our development plans included a new benefits administration system and integrating our acquisition of HR tools.

In short we exceeded growth, profitability and development targets for the first half of this year. As a result, we have increased our earnings per share targets to 34% to 41% over last year, while also accelerating our investment in growth in new products.

Our growth for the second quarter exceeded our expectations due to continued solid sales in client retention results, combined with a seasonal increase in employment within our client base. This year, new hires exceeded layoffs in two of the three months in the quarter. However, clients hired approximately 1,000 part-time or temporary employees for the summer that we expect will depart over August and September.

Sales were on budget for the quarter and we were successful in increasing the size of the trained sales staff from 224, trained reps in Q1 to 238 in Q2. We also may be beginning to see the payoff from our sales training improvement as sales efficiency improved beyond historical levels and even better than last year, in spite of the 6% increase in trained reps and a lower than expected contribution from our mid-market initiatives.

Although we closed fewer mid-market accounts in Q2 than we hoped, we were successful in filling the pipeline with qualified prospects with as a result of targeted marketing initiative. Last year approximately 80% of closed mid-market accounts claim in the last half of the year. Our efforts so far this year position the company well for the back half of the year for mid-market clients rolling in as paid work site employees in January of 2007.

We also had a very good quarter in client retention. The monthly client attrition averaged 1.5% of the base for the second quarter coming back into line with historical norms after April started out above our expectations at 1.8%.

Our outlook for growth in the last half continues to assume a 1200 to 1400 net gain in paid work site employees as growing sales results may be offset in the near term by the termination of seasonal staff and mid-market client contracts are expected to be effective in January. We are also continuing our policy of assume no net gain or loss in paid work site employees from the net gain or loss from new hires and layoffs in the client base. Our early indicators for the employment outlook in our client base are continuing at strong levels that signal no change in the economic climate. Compensation increases in commissions are running around 6% ahead of last year, indicating business is solid and overtime is nearly 10% of regular pay, demonstrating the need to add personnel.

Now I'd like to shift gears and discuss some opportunities we're taking advantage of over the last half of this year that have been made possible by exceeding expectations in the first half. Our first priority when we get ahead of the plan in any year is to get ahead of the growth requirements for next year. We plan to continue the sales -- the growth of sales and service staff and we're on track for our target of 250 trained sales personnel for our fall campaign beginning in September. We have also increased our spending by investing in additional middle market sales implementation support.

The second priority for investment once we could see we were running ahead of our plan was to accelerate our efforts to add new revenue streams to create a third driver to our gross profit per worksite employee per month. Our strategy is to add to our income sources by leveraging our brand and expertise to create revenues beyond your core PEO service fee.

We plan to sell new products to perspective PEO clients to extend our reach as the HR solution for small business. We plan to leverage alliance partner relationships to sell other goods and services small businesses need to current PEO clients to help their small businesses succeed. And we plan to treat former clients and work site employees as a target market to retain components of our service or products with an ongoing income stream and to increase the likelihood of the client returning to the full PEO service.

Now our primary focus in investment for 2006 in this area of new product sales -- is in new product sales to perspective clients. For this reason we have purchased certain assets from Recruit Max at the end of 2005, including the HRtools.com website as our engine for the sale of new products and services to prospects.

Over the first six months of this year we obtained and transferred the asset and planned the introduction of the redesigned HRtools site that we launched yesterday. The new website integrates content from Administaff's HR Power House website into the redesigned HRtools.com website, providing a single dynamic resource for HR news, tools, information, and products for small and medium-sized businesses.

The new website will begin by serving the consolidated 345,000 registered users from both previous websites then begin to drive target through placing the site within alliance partner locations and improved websearch capability. We have already replaced HR Power House with HRtools at 16 alliance partners small business websites including IBM, Office Depot, and Pitney Bowes. Receptivity to the new site has been tremendous, and we're planning to embed the site into many more partner sites over the third quarter.

This new site will be strategic to Administaff in three important ways. First, the site will demonstrate our human resource expertise and extend our brand as HR departments for the best small businesses in America. Secondly, the site will offer products and services to small businesses, creating a new revenue stream for Administaff from our target client base. And third, it will provide opportunities for perspective PEO clients to experience a point solution to a specific problem as a taste of what Administaff can do in our full service solution.

The HRtools acquisition included online human resource solutions sold on a per use or subscription basis to create job descriptions, employment policies, and performance reviews. The purchase also included a broader and deeper desk top solution for each of these needs called Descriptions Now, Policies Now and Performance Now. Our investment in this strategy was accelerated during the second quarter to move the launch date to August 1st to meet the demand from alliance partners for the new site. We have also added a technology development team to accelerate updates to the online and desk top products, which we expect will increase revenue through this new channel.

For the last half of this year our objectives in this area will be to drive traffic to the new site and monitor conversion rates into sales. This should provide the information we need toward our goal to add to our gross profit per employee per month from this revenue source in 2007.

All in all, I'm very pleased with the progress we have made year to date across the Company in the execution of our game plan. The first half of this year has been exceptional and our business model is performing so well, we're able to absorb an increase in medical costs, accelerate investments in future growth and new product opportunities, pay out appropriate levels of incentive compensation and increase EPS growth forecasts to 34% to 41% range over last year.

At this point I'll pass the call back over to Doug.

Thanks, Paul. Let me begin by providing an updated forecast for our full year key metrics.

As for worksite employees, we have maintained our range of 101,000 to 101,500 average paid work site employees per month. As Paul mentioned a few moments ago, while our sales and retention metrics have exceeded our goals during the first half of the year, a portion of second quarter's growth was due to net new hire in our client base, some of which was seasonal help. Our forecast for the remainder of the year assumes that our clients will reduce their workforce by this seasonal help. Also, we have not assumed any growth from new hires within the existing client base for the latter half of the year. This is consistent with how we have historically forecasted this component of our unit growth.

As for gross profit, last quarter we set a range of $225 to $227 per worksite employee per month, which assumed approximately $198 of mark-up on our HR services and $27 to $29 of surplus from our direct cost programs. We are on track to reach our targeted markup on our HR services and now expect a slightly higher contribution to gross profit from our pricing and direct cost management. Therefore, we have increased our guidance of gross profit per work site employee per month is $226 to $228.

As for operating expenses, we now expect to be in the range of $218 to $219 million for the full year, as our better than expected fist half results have given us the opportunity to make further investments in our growth and new product offerings. The increase over our prior guidance primarily relates to our success in accelerating the hiring of sales and service personnel, costs associated with accelerating our development and marketing of new product offering, HRtools, and additional accruals for incentive compensation due to our improved operating results.

As a result of increased cash balances, we now expect net interest income be in the range of $11 million to $12 million for the full year. We are forecasting 28.3 million average diluted outstanding shares. And we continue to estimate a 36.7% income tax rate for the year and forecast annual capital expenditures of approximately $13 million.

Now for third quarter's guidance, based upon my earlier comments, we expect average paid work site employees per month to be in the range of 102,500 to 103,000 for the quarter. As for gross profit, based upon Richard's earlier discussion, we expect to be in a range of $219 to $223 per work site employee per month for Q3. Third quarter operating expenses are expected to be in a range of $53.7 million to $54.2 million, and relatively consistent with second quarter operating expenses. We expect net interest income to be between $2.75 million and $3.25 million, and are forecasting 28.3 million average diluted outstanding shares for the quarter. At this time I'd like to open up the call for questions.

[OPERATOR INSTRUCTIONS] Your first question will come from the line of Tobey Summer of SunTrust Robinson Humphrey.

Thank you, congratulations on a good quarter. Wanted to see if you-- we would step back for a minute and, Paul, you know, how should we think about these new revenue and profit opportunities and if you were to, you know, fast forward a few years, how might they be contributing to-- to the business.

Well, Tobey as you know, you know our gross profit per work site employee today has two contributors. The mark-up from HR services and surplus from manage our pricing and costs of our direct cost. And the goal here in this new strategy to add his new products and services to three identified target markets and hopefully add a third contributor to gross profit. Today there is a small contribution from activities we tested out in this area, but our goal, obviously now is to begin to grow that, and you know, as I look at gross profit out into the future, we're comfortable with the mark-up component growing like it has been, you know, on a 2 to 3% range. We believe that the surplus component, a healthy 2 to 3% of the total allocations for direct cost is a comfortable range for us and makes sense to reward our Company for the work we do to keep costs down for our client, and then this third new area we're talking about is an opportunity for us to kind of add a premium by adding these new services.

Now the magnitude of it is really too early to tell. You know, we've been real clear that the investment made last year on HRtools was expected to not be material in this year. We still expect that to be though case as we've invested a little more because the strategy has proven to be successful, but obviously revenues don't ramp-up as fast, or-- or perfectly in line with the investment. So we still don't expect any material contribution this year.

Next year hopefully we'll be talking about for the first time, identifying a dollar amount and I would expect that to be, you know, nominal in magnitude, but very important as we have established a third contributor. So it's really hard to tell how much it will grow, but you know, we're optimistic that it's a solid strategy for our future.

Thanks, two other questions and I'll get back in the queue. One, I was wondering if you could update us on your office opening strategy in terms of the execution there and the numbers to be looking for, and maybe update us as to other opportunities, perhaps the acquisition market for you to expand, I guess, inside the PEO or perhaps more likely outside the PEO space. Thank you.

Okay. Well to the office openings first, as I mentioned, you know, we're on track for the number of trained sales reps we-- we want in order for this fall campaign to be successful, and lay a foundation for next year, we expect to be at that 250 number, and we have some room within our current offices to continue to add sales staff at an appropriate rate so we decided not to open another office this year. We completed all four of the office openings we were intending to open earlier in the year.

Next year you could look at that same rate or maybe a little faster than that, maybe four to six, we really haven't pinned that down. We'll be going through our budget process for next year over the third quarter. So we'll be pinning that down, but that would be a normal range for that.

Relative to acquisitions, as you know, to acquire another PEO doesn't really work well for us since we have a very specific client profile that we target. And most other PEOs only have about a 30% or so concentration of accounts that fit our client profile and for our service they are underpriced and really bought a different service, so it's not likely we will acquire in that realm. We will continue to look at acquisition opportunities or point solutions that might fit within our strategy that would also maybe even lower some of our costs for some of the services that we currently provide the customers in the HR arena.

We also may consider investments that leverage the expertise we have on the wealth management or retirement services area that we started a couple of years ago, that we really have developed a quality organization and expertise level there that we think can be leveraged in the future to at least continue to serve clients that happen to terminate the relationship, or employees that leave us, whether they are terminated at a client location or go away as a result of a customer leaving. So we think there's some great opportunities there, and you know, we'll continue to monitor those opportunities as they come about.

Thank you very much.

And your next question will come from the line of Jim McDonald of First Analysis, please proceed.

Hi, guys I'd like to dig into the health care a little bit, if we could. Could you talk about the size of the shock loss and a little bit about the expense reduction in the quarter?

Yes. Jim, you know, typically when we look at shop loss claims we're looking at claims that average over-- or that are in the $100,000 range, and we have a number of those every quarter. It's been fairly consistent. This particular one was actually almost $1 million. So you know, that's obviously going to have an effect on your cost. And I'm sorry what was your second question.

And just any more color on the release you talked about earlier.

We're six months down the road now, looking at the 2005 plan year, so we're in a position to take a look at the reserves that we had set up as of 12-31-2005 and the runoff subsequent to that. So we initially made an estimate and subsequent to that we have seen favorable runoff versus that reserve to the tune of the $1.9 million reserve adjustment that we made in the second quarter of this year.

And just then a big picture thing, looking forward to 2007, any thoughts on-- on where you are going and-- and how your experience now will make you want to change things for next year?

You are talking about in terms of pricing for health care?

Pricing, plan design, things like that.

Yes. We're actually, you know, we're seeing the trended increase in-- for us, in the 5 to 6% range. You know, I think companies are talking about it in the 8 to 9% or 8 to 10% range. The insurance companies, and of course historically, our experience has been better than the insurance companies, just because of the natural churn that goes on in our business from one year to the next.

So you know, on the pricing side, we're-- we're comfortable with the increases that we have put in place, because they have actually been quite a bit more targeted in specific markets, where they needed to be increased. And that's the beauty of what our system that we have now, the benefits administration system that we are putting in place within the next couple of months is going to add to the capability for us to really target increases and also monitor at an even more granular level than we have now about the kinds of cost that we need to make plan designed changes for the coming years. I don't see a lot for 2007 in the plan design change at this point, because we're pretty comfortable where we are.

So just to finish off, you believe basically you're in balance with where you are at health care right now?

Yes.

Okay. Thanks very much.

And your next question will come from the line of Mark Marcon from Robert W. Baird, please proceed.

Good morning, and congratulations on the quarter.

Thank you.

I was wondering with regards to the health care coverage what percentage of the employees were covered--

It was about 72--

A little over 72%, Mark.

Great. In terms of the-- in terms of the trained sales force, what are you seeing in terms of productivity trends in terms of deals closed per month and how do you expect that trend to over the balance of this year and going into next year?

Yeah, thank you for the question. We-- as I mentioned in my script we were successful in both increasing the number of trained reps by about 6%. And of course when you increase trained reps count you immediately look over at sales efficiency because you expect some downward pull on that number.

Sure.

In this particular, we actually not only continued to run better than historical levels, which we've been running now for a couple of years, but we were actually even better for the quarter and for the first half of this year than we were-- than we were last year. Slightly, but still better, so that was to me, you know, that's kind of your home run in sales management.

So-- so was it around 1.2 or 1.3?

Remember, the first half of the year, we average -- for example, last year we were at 1.24 for the full year.

Uh-huh.

Remember that averages in our fall campaign where the numbers generally run, well, actually, I think it ran over 1.7. So the first half of the year is usually lower than that.

Uh-huh.

.8, .9, 1.0 we're a little over that number year to date on budget and growing the sales staff, so for the last half of the year we expect to be well above that number, and then-- but of course those sales in that last half tend to flow in as your starting point for '07.

Okay. So-- so you're-- for the first half you are basically running at 1.0.

A little more than that.

Little more. And then for the back half you would expect it to pick back up into that 1.7 range.

I don't know if it will that be at that range, that's usually only for the fourth quarter, to be that high. We expect to have, you know, pretty normal fall campaign for us, which is to be significantly greater than that and I think we were budgeting for the year to be somewhere around the 1.2 number for the year, you know, I don't have any reason to believe we're going to be too much different than that, but you know, it is that careful combination of growing the staff, and keeping that efficiency number moving in the right direction.

Okay. Great. And then the growth, obviously, in the northeast, southeast, most of the geographies was terrific. Any-- any special color that you can give us there.

No, I just think keep in mind that we generally grow effectively in any district where we have an effective managers. As they select the sales staff, help them get up to speed, manage activity and attitude, and that's what makes it work. The marketplace for our service, there are, you know, 600,000 perfect fit customers and when we look market by market, it's -- our target customer loves this service and they are out there and available, it just takes good execution to get it done. So where we put the sales people is where we see the growth, and we try to balance that to get a good balance of growth across the regions to limit our geographic risk, and we have done a fair job of that to this point and intend to continue that.

Great. Thank you.

And our last question will come from the line of Jim Wilson of JMP Securities. Please proceed.

Thanks, good morning, guys. A couple of questions. First, I don't know if I missed -- I got on a few minutes late but, client retention rates and then sales force turn over to do you have those two numbers?

Client retention for the quarter I mentioned was 1.5% on average per month. That's our targeted historical metric even though it was 1.8 in April. Month to month, it can be a little choppy but it did average out 1.5 attrition, the attrition rate was 1.5% for the quarter. Sales turnover, not much change over the quarter. You know, we are looking at some things to hopefully improve that going forward, but we're still in that, you know, mid-30s type range.

Okay. And then I know you talked about the-- the widespread success geographically and the sales force additions. Is it pretty evenly spread where you're adding -- you're building the sales team, or is there any further or specified geographic push you are making in any given market?

No, nothing that would move the meter. You know, we-- we just look at that on a-- you know, region by region basis, and you know, look at it more in terms of, you know, where we have the staff and capability to, you know, either add individual salespeople, or like we did earlier this year open up new offices, so nothing significant.

Okay. All right. Very good. Thanks.

And ladies and gentlemen, that concludes our question and answer session, so I will now turn the call back to Mr. Sharp for any closing remarks.

Thank you. I don't believe we have any prepared closing remarks but thanks for attending the call. If you have any other questions feel free to give me a call.

Thank you all very much.

Thank you for participation in today's conference. This does conclude the presentation. And you may now disconnect your lines. Have a wonderful day.