Insperity Inc (NSP) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2009 Administaff earnings conference call. At this time, all participants are in a listen-only mode. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. Joining us on today's call is Mr. Paul Sarvadi, Chairman of the Board and Chief Executive Officer. Mr. Richard Rawson is President.

I would now like to turn the presentation over to Mr. Doug Sharp, Chief Financial Officer. Please proceed.

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 of the Federal Securities laws. Words such as expects, intends, projects, believes, likely, probably, goal, objective, 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 filings with the SEC. These risks and uncertainties may cause actual results to differ materially from those stated in such forward-looking statements.

Now, let me take a minute to outline our plan for this morning's call. First, I am going to discuss the details of our first quarter 2009 financial results. Richard will discuss expected trends in our direct costs including benefits, worker's compensation, and payroll taxes, and the impact of such trends on our pricing. Paul will then add his comments about the quarter and our outlook for the remainder of the year. I will provide our financial guidance for the second quarter and an update to our full year guidance. We will then end the call with a question and answer session.

Let me begin today's call by discussing our first quarter results. Today we reported first quarter earnings per share of $0.33. These results were above our expectations as the unit shortfall caused by the continued deterioration in the economy and labor market was more than offset by a higher gross profit and lower operating expense levels. As for our key metrics, the average number of paid worksite employees declined by 1.6% for the quarter to 111,742, which was below our expectation due to a significant level of net layoffs in our client base. Additionally, while client attrition improved compared to the 2008 period, paid worksite employees from our 2008 year end sales effort were not enough to offset the attrition. Gross profit per worksite employee per month averaged $249 for the quarter, at the high-end of our forecasted range as pricing continued to hold steady and the surplus from our direct costs was managed to better than expected levels. Effective operating expense control produced $2.2 million in savings from our first quarter budget. Interest income came in as forecasted, declining by about $1.9 million from Q1 of 2008. In spite of the very difficult economic environment, our cash flow remained strong through the quarter and our balance sheet continues to reflect significant liquidity and no debt. EBITDA plus stock based compensation totaled $20.5 million in Q1, and we ended the quarter with $105 million of working capital.

Now let's review further details of our first quarter results. First quarter revenues increased by 1.3% over 2008 to $462 million as a result of a 2.9% increase in revenue per worksite employee per month, more than offsetting the 1.6% decline in average paid worksite employees. Looking at first quarter revenue contribution and growth by region, the Southeast region, which represents 11% of total revenue, grew by 5%. The Northeast region, which represents 22% of total revenue, grew by 6%. The Central region, which represents 15% of total revenue, grew by 5%. The West region, which represents 20% of total revenue, declined by 3%. And the Southwest region, which represents 32% of total revenue, declined by 2%. Declines in both the West and Southwest regions were a result of a disproportionate number of large clients that termed for financial reasons.

Moving to gross profit, gross profit per worksite employee per month for the quarter was $249, at the high end of our forecasted range of $245 to $249. As for our direct costs, benefits costs per covered employee per month increased only 4.9% over Q1 of 2008 to an average of $714. Approximately 75% of worksite employees were covered by one of our healthcare plans during the quarter.

We continue to experience favorable cost trends in our workers' compensation program. Workers' compensation costs were 0.67% of non-bonus payroll for Q1 of 2009, below our forecasted level of 0.75% and relatively flat compared to Q1 of 2008. Actuarial loss estimates resulted in a $2.5 million reduction in previously reported loss estimates. As for our third component of direct costs, payroll taxes as a percentage of total payroll costs was 8.69% and were relatively flat with Q1 of 2008 as the impact of higher unemployment tax rates were offset by higher payroll averages of our worksite employees.

Now let's move onto operating expenses, which totaled $70.7 million for the quarter, an increase of only 3% over Q1 of 2008 and $2.2 million below the midpoint of our forecasted range. As you may recall from last quarter's conference call, our 2009 operating plan targeted various areas for cost reduction in response to the impact of weak economic conditions on our unit growth outlook. The rapid implementation of this plan combined with a strong companywide focus resulted in expense reduction in excess of these targeted levels.

As for some of the details, salaries and wages increased by 4.5% over Q1 of 2008, reflecting both the management of headcount and pay to budgeted levels. This increase is inclusive of a 19% increase in trained sales reps, which averaged 330 for the quarter. On a sequential basis, the number of trained sales reps declined by about 20 during the quarter. Our salesforce is typically evaluated each year coming off of our fall sales season, and this reduction was at an expected level. Non-sales headcount was reduced by about 30 employees to budgeted levels through no new hiring and only limited and targeted replacement of termed employees. Also in accordance with our 2009 operating budget, salaries and wages were reduced through a deferral of merit increases of our corporate employees and a 50% reduction in the company's 401(k) match.

General and administrative costs were managed significantly lower than the budget and declined by 5% compared to Q1 of 2008. Costs were reduced in various areas including travel, training, consulting, postage, and other administrative costs. Depreciation and amortization increased by 15%, due primarily to capital expenditures made throughout the prior year. We have scaled back capital expenditures in 2009, spending just $2.5 million during the first quarter. This compares to $4.7 million of CapEx in Q1 of 2008. As expected, interest income declined by approximately $1.9 million from Q1 of 2008 due to declining interest rates and a higher concentration of invested funds and lower yielding taxable government backed funds.

Our effective tax rate was 39.4% for the quarter, slightly above our forecast -- however, significantly higher than last year's rate. The increase from the Q1 2008 tax rate of 35.7% was due primarily to lower tax exempt interest income and the effect of higher state tax rates.

As for our balance sheet and cash flow, EBITDA plus stock-based compensation totaled $20.5 million for the first quarter. Cash outlays included repurchases of approximately 68,000 shares at a total cost of $1.5 million, cash dividends of $3.3 million, and capital expenditures of the $2.5 million. Working capital increased by $6.5 million since December 31, 2008 to $105 million. At this time, I would like to turn the call over to Richard.

Thank you, Doug. This morning, I am going to update on you the details of our first quarter gross profit results and then I will comment on the pricing and direct cost trends that we are seeing going forward and how we believe they will affect gross profit for worksite employees per month for the balance of 2009. Our gross profit comes from the markup that we earn on our HR services combined with the surplus that is generated when our direct cost pricing allocations exceed the corresponding direct costs.

Doug just reported our gross profit per worksite employee per month was $249 for this quarter and was at the top end of our forecasted range. These results came from achieving $196 per worksite employee per month of service fees and generating a surplus of $53 per worksite employee per month or 4.5% of our total direct cost allocations. The pricing on our service fee for new accounts sold was flat compared to the first quarter of 2008. Our pricing on renewal business declined $1 per worksite employee per month for the quarter. This decline was driven by January renewals only, as renewal pricing for both February and March increased a couple of dollars per worksite employee per month. These results are very good considering the economic environment that we are in today.

Now let's review the details of the $53 per worksite employee per month surplus portion of our gross profit, beginning with the payroll tax cost center. We had $2 per worksite employee per month of additional surplus above our expectation this quarter in the payroll tax cost center. This occurred because we did not add as many new worksite employees as previously forecasted and therefore did not have the associated higher payroll tax expense.

Next I would like to discuss how our benefits cost center affected our results this quarter. Our benefits cost per covered employee came in at $714 or $4 higher per covered employee, which was above the midpoint, but within our expected range. While we continue to see further migration of worksite employees moving from the higher deductible lower cost plans, we have not seen the subsequent decline in the claims quite yet. On the pricing side, our allocations exceeded our forecast by $1 per covered worksite employee. Therefore, the net effect to the gross profit per worksite employee surplus was $3 lower than our previous forecast. Our most positive contributor to the surplus in gross profit this quarter came from the expense side of our worker's compensation cost center. The total number of claims reported for this policy year-to-date is 13% lower than the same period last year. The average cost of these claims is 19% higher than the prior policy period to date and is driven primarily by one large claim that was filed in the fourth quarter of 2008. These results produced workers' compensation costs of 0.67% of non-bonus payroll or $7 per worksite employee per month below our original forecast. Even though we began to slightly reduce our allocations on the pricing side last fall, we still generated a $4 per worksite employee per month surplus in this cost center. In summation, a $6 per worksite employee per month additional surplus from the payroll tax and workers' compensation cost centers offset a $3 per worksite employee per month higher deficit in the benefits cost center and put us at the top end of our forecasted range for gross profit surplus.

Now let me update everyone on what our gross profit trends look like for the balance of 2009, beginning with the markup component of our service fee. As I mentioned a few minutes ago, our new business pricing is the same as it was this time last year, and considering that the economic environment that we are still in, we will assume new business pricing for the remainder of 2009 will remain flat with 2008. We will continue a very nominal increase for renewing customers this year as we help them work through this difficult economic environment. Therefore, we will assume that our average markup per worksite employee per month should increase about $1 each quarter for the balance of the year.

The assumptions for the surplus component of gross profit for the balance of 2009 have not changed much from last quarter. In the payroll tax cost center, our surplus declined throughout the year as employees reached their wage limits. However, it does not decline as much when we're not growing as fast. Therefore, our surplus increase should increase slightly each quarter compared to 2008 except for this coming quarter. In the second quarter of 2008, we received $1.5 million state unemployment tax credit from the state of Texas. There will not be a credit coming this year. Therefore, our payroll tax expense in Q2 will be higher than last year and will result in a lower contribution to the surplus for this quarter only.

Now let's discuss the workers' compensation cost center. If our incident rates continue to stay at the current levels due to effective safety programs, and our claims personnel settle claims faster and at lower than forecasted reserves, then our quarterly expense would be lower than originally forecasted. We're halfway through this policy year, and our results so far have been better than expected, which should reduce our ultimate cost for this policy year. Our allocations in this cost center have been declining slightly, but increases by the workers' compensation carriers are now expected, which will allow us to begin increasing our allocations accordingly.

Now, our last cost center to discuss is the benefits cost center. As I mentioned last quarter, we did not make any plan design changes for 2009, but United Healthcare did file for an amendment to their master policy in Texas, which included modifications to a few of their covered charges. These changes should help reduce our costs for 2009. Also, last quarter I mentioned that we had previously negotiated a slight reduction to our administrative fees beginning in January of 2009.

Another factor that should help us have lower cost increases for the balance of 2009 comes from the continued migration of covered worksite employees moving from the higher cost, lower deductible plans to the lower cost, higher deductible plans. However, the new federal legislation that deals with COBRA extensions for previously terminated employees could have an adverse effect on our current cost trends. Under this new law, we are required to offer benefits under COBRA to any involuntarily terminated worksite employee retroactive to September of 2008. These employees have an opportunity to purchase health insurance coverage for 35% of the cost while the taxpayer subsidizes the remaining 65% as part of the stimulus package. The problem is that claim costs of a typical COBRA participant is usually double the regular participant cost. At this point, we don't know how many former worksite employees will take advantage of this program or if the claims costs associated with these employees will exceed the allocations that are collected. Under our contract, we are allowed to pass along costs associated with statutory law changes to our clients, because they would have to pay them with or without us. At this time, we don't know what these costs will be, if any. So for now, we do not anticipate any detrimental impact to our cost structure. Therefore, we're going to maintain our previous trend assumptions of a 5% to 6% increase over 2008.

From a pricing perspective in the benefits cost center we have been continuing to increase our allocations for new and renewing business to match the trend that we are forecasting. However, we are still seeing the total allocations increase at a slower rate due to the effect of the employees' migration into the lower cost plans. For now we will not change our forecast from last quarter and assume no additional contribution to gross profit from the benefits cost center.

In summary, when we look at our complete gross profit picture for the balance of 2009, we now see an increase in our gross profit per worksite employee per month for the full year to a range of $235 to $239. At this point, I would like to turn the call over to Paul.

Thank you, Richard. My comments today will cover three primary topics. I will begin with the discussion of the economic climate and the continuing weakness we have seen in the labor market, specifically within the small business client base we serve. Next, I will comment on our strategies we've implemented to battle through the downturn, remain substantially profitable, and help our clients rebound. I will finish my remarks with our outlook for re-establishing positive unit growth and the strong position we are in to benefit greatly as the economy stabilizes and ultimately recovers.

The first quarter results reflected a continuing economic headwind and deepening labor market weakness. Layoffs in the client base exceeded new hires by approximately 2,800 employees in Q1, similar to what we experienced in November and December last year. For the first quarter, client retention rates have actually improved slightly compared to last year, with the total of 95.8% of worksite employees retained this year compared to 95.6% in Q1 of 2008. However, since our last conference call, worksite employees lost from client attrition has continued to exceed the new employees paid from previous periods' sales of new clients. This year, sales from the fall selling campaign were impacted at year end due to the uncertainty regarding the economy. This resulted in 2,200 fewer work site employees paid in Q1 2009 from new accounts sold in the Q4 fall campaign than in the same period 2008. In addition, the new accounts that did come on did not add employees in subsequent months in the typical way we see in the first quarter new accounts. The combination of net layoffs in the client base and a net worksite employee decline from sales and retention of accounts resulted in a loss of 6,900 employees from our December paid worksite employee count of 116,900 to our March count of 110,000.

In order to complete the picture, it is a benefit to also look at some data hot off the press. Our small business survey released today reflects an uncharacteristically conservative outlook across the country and across industry categories among small business owners. Although 57% of these companies are on or ahead of their 2009 plan, only 23% expect the economy to turn around in the second half of the year. 60% of those surveys expect to turn around in 2010 or later, and 17% declined to predict when a recovery might begin. Compensation data from the recent quarter corroborates the sentiment reflected in the survey. Both the number of employees receiving bonuses and the average bonus was down over the same period last year, commissions and overtime were both down as a percentage of regular pay from last year, and the average commission paid to the sales staff of our clients declined almost 9%, reflecting slumping sales in the small business community.

Although the economic picture has been bleak, we've developed and implemented strategies to continue our profitability and regain our growth momentum as soon as possible. We are seeing the early signs that these strategies are achieving the desired result. We aligned both sales and service personnel around a national campaign to help clients beat the odds in 2009 by implementing nine specific HR strategies. These ideas became the basis for opening doors with prospective clients and demonstrating active support of current clients bringing added value to the table. These nine strategies include for example -- focusing on profit generating activities, reducing operating expenses, taking advantage of market opportunities, and upgrading your workforce. We've supported our client needs with a wide variety of services including organization redesign and realignment, compensation and benefits consulting, workforce reduction, and liability management services. The result has been effective client retention and a greater realization of the value of our services in a difficult economy.

These strategies also rallied our sales team and reignited our sales engine. Although the paid worksite employees from previous period sales were disappointing in Q1, new sales which will produce future paid worksite employees have been improving. New sales have increased each month since January and both March and April were in excess of 3,000 employees sold. Sales activity including First Call appointments and acquiring a census, which indicates an interest from the prospect and provides an opportunity to bid our services, also increased substantially over the last two months. At this level of sales activity, paid worksite employees from sales will soon exceed employees lost from client termination and the current level of layoffs. As this occurs, we anticipate stabilization in the total paid worksite employee count. We now expect to bottom out at an average of 108,000 to 109,000 in Q2 and begin to grow again in Q3.

We also made significant strides in our midmarket segment during the quarter. We created an opportunity for C-level interaction with 26 of our largest clients, which deepened and solidified our client relationships. We reinvigorated our midmarket sales effort by focusing on establishing a relationship with larger accounts by selling our HR assessment as a first step to the full service PEO relationship. These HR consulting projects provide an assessment of HR practices and identify needs and upside potential for strategic alignment of the client organization. The results are used to develop a people strategy for the client, which becomes the PEO service plan for implementation by Administaff. Two of the HR assessments were sold in Q1 and a solid pipeline for future opportunities has been established.

Our strategies to continue our profitability through this cycle have also been affected. In addition to the new revenue stream created by the HR assessment, we were also successful in selling a $750,000 standalone recruiting contract to utilize valuable recruiting resources, even as demand from these services has been dampened by the economy. The most successful aspect of profitability focus has been our companywide stewardship initiative to lower operating expenses as part of our conservative operating plan for 2009. Our corporate staff has responded very quickly and effectively to changing priorities and the results speak for themselves. We've managed staffing levels, allowing attrition to reduce the size of both sales and service operations. We're entering Q2 with 315 trained sales personnel, with 47% tenured reps with more than 18 months experience. Our strategy to establish companywide and divisional cost reduction targets as part of our annual incentive plan has aligned the organization and driven home the need for prudent cost controls.

As I back away and look at the overall picture, I certainly have some disappointment in the depth and breadth of the toll the economic climate has had on our client base and subsequently on Administaff. I have only high praise, however, for the way our company has responded to the challenge. Our focus on rolling up our sleeves to help our clients has reinforced our value proposition and our competitive position. We are in an excellent position to emerge from this downturn stronger than ever. We have learned that our business model has even more flexibility and resiliency than we thought. In just six months the economic storm reduced the size of the company by 10% in worksite employees, yet we were able to react and manage to maintain a substantial level of profitability. Our strong balance sheet with no debt and over $100 million in working capital allows us to take advantage as acquisitions or investment opportunities emerge from this downcycle. Our ongoing profitability has allowed us to continue development in technology and service enhancements to extend our industry leadership position, and our professional and dedicated corporate staff has proven once again if you have the right people, you can be successful even in the face of major challenges.

Now I would like to pass the call back to Doug to provide specific guidance for Q2 and the balance of the year.

Thanks, Paul. Before we open up the call for questions, I would like to comment on our financial guidance for the second quarter and remainder of 2009. In general, we are lowering our unit growth forecast primarily as a result of the weak labor market and the associated layoffs in our client base. Similar to the first quarter, the impact of lower worksite employees on the bottom line is expected to be partially offset by effective direct cost management and operating expense control. As for our key metrics guidance, based upon Paul's earlier comments, we are now expecting average paid worksite employees in a range of 108,000 to 109,000 for the second quarter. Thereafter we're forecasting sequential increases of about 1% for the third and the fourth quarters. So for the full year we're now forecasting average paid worksite employees in the range of 109,500 to 111,000.

As Richard mentioned, we now expect gross profit per worksite employee per month to be in a range of $235 to $239 for the full year 2009. This is an increase from our initial range of $232 to $236 based upon better results in the first quarter and similar trends for the balance of the year. As for the second quarter, we expect gross profit per worksite employee per month to be in a range of $227 to $231. This is down sequentially from the first quarter, when we typically generate a higher payroll tax surplus on worksite employees who have yet to reach their taxable wage limits.

As for operating expenses, we're forecasting the reduction of approximately $10 million from our initial 2009 budget based upon successful cost reduction efforts to date and ongoing cost control measures. Our revised range for the full year is $263.5 million to $265.5 million. The midpoint of this range is a 5.2% decline from 2008 operating expenses. As I mentioned during last quarter's conference call, a component of our 2009 incentive compensation plan will be tied to achieving a predetermined level of operating expense reductions with further reward to our corporate employees for any incremental reductions. So as in prior years, the high-end of our full year operating expense guidance is tied to additional incentive compensation which will only be accrued upon achieving higher unit growth and gross profit results and these operating expense reductions. Now for the second quarter, operating expenses are expected to be in a range of $64.5 million to $65 million.

For interest income and our effective income tax rate, as a result of the continued decline in interest rates, we have lowered our 2009 forecast of net interest income by approximately $600,000 to a revised range of $1.8 million to $2.2 million. We are forecasting Q2 net interest income between $400,000 and $600,000. We are forecasting a slight increase in our effective income tax rate from 39% to 39.4%. As for average outstanding shares, we're now forecasting 25 million for Q2 and for the full year.

In summary, although we have been affected by the economic climate, we continue to manage our business for solid profitability, and we are well positioned for future growth as economic conditions improve. At this time, I'd like to open up the call for questions.

(Operator Instructions). Our first question is from the line of Tobey Sommer with SunTrust. Please proceed.

Thank you. You gave an awful lot of useful information on the call, so maybe I wanted to ask you strategically -- on the expense side how are you thinking about managing the salesforce growth this year? Is that an area you're going to try to preserve your investment? And then in terms of the sales going forward, how do you think about the mix between your investment on the salesforce itself and then on the marketing side? Thanks.

Thank you for the question, Tobey. We are now planning to maintain a level of around this 315 trained reps as we go through the balance of the year for the purpose you outlined -- to maintain that investment. And we believe we're at that period now where we're starting to really see this turn on the sales side with some real momentum starting to build again. So now would be the time to shut off the return on the investment we made. Also, we have been able on the marketing side to manage the expenses, but still get more for our money. Advertising costs have come down even on the business promotion side. Other areas within our marketing budget, we're just really all over it -- but trying to get the most value for the dollar, and those efforts have paid off this year. So that's the game plan for this year, and want to keep moving the ball forward from the sales and marketing perspective.

Thanks. Just to backtrack on some numbers, if you maintain sequentially that 315-ish number in trained salespeople, that will mean the rate of year-over-year decline moderates somewhat as we work our way through the year, is that right?

That's correct. If you'll remember we ramped up over the course of last year to around -- I think it was around 340 or so in terms of the trained rep count, so we have trimmed that back some. As Doug mentioned in his script, that's pretty much a normal seasonal deal that we do through the fall campaign. When you get to the end and before a sales convention, sometimes there is some trimming back done and that again happened this year.

One last question, and I will get back in the queue. You described improving sales trends, particularly really good new sales in March and April. Could you describe the attrition in April of clients relative to the first quarter? Did you see a similar kind of moderation in client terminations? Thanks.

On the client termination side, we still have some of that information coming in for last month. But generally speaking, in the core business we're doing great on that front. The layoffs, we saw just a little lighter than the average in the first quarter, but not enough to even call it a sign that things might be getting better. We really haven't seen that yet on the layoffs, so we just want to be conservative about that. And that's the part that's hardest for us to predict is what the layoffs will be. You also have in the second quarter -- typically you have summer help add on in the second quarter, but with the economic climate we just don't see or don't want to assume that there will be any substantial summer help increase. There might be some, but it is again hard to predict in this environment. So we have done our best to balance all three of those on the unit growth side.

Thank you very much, Paul.

Your next question is from the line of Michael Baker with Raymond James. Please proceed.

Thanks. Richard, I was wondering if you can give us a sense of whether or not you're going to be able to get an indication of the type of claim coming in on the health benefit? In other words, are you going to be able to tell if it is a COBRA claim and begin to develop some assumptions around that? And given that the notifications have recently been sent out, is there any indication of a pickup in claims activity at this point?

Yes, Michael, we will be able to look at the total percentage of COBRA claims compared to -- in the current period compared to where they're going to be say by the end of the second quarter and then subsequently. So we can look at the percent of COBRA claims in the aggregate compared to the total claims that we have, and we monitor that even today. So if there is going to be a step up, we will see it in the next quarter. We'll see it by the end of the second quarter and on into the third quarter. And then if that in fact happens, then we'll have to obviously adjust our forecast on the cost side and increase that -- as well as the fact of the matter is that COBRA is a socialized cost, and it gets spread over the whole base. So we would have to start to increase our allocations even more to cover that cost. So it is a long way to say, yes, we'll know.

Then I just had a question -- if you could provide thoughts on health reform and whether there would be any potential or anticipation in terms of having to adjust the business model? I understand it is early, but just to want get your thoughts on things you're watching for in the debate?

We're looking at -- obviously we're monitoring -- we have a whole government affairs department within the company that is monitoring not just at the federal level but at the state level in all the states on all the issues of healthcare and workers' comp and unemployment on a daily basis. So we're monitoring everything that's going on up there, and so far I would say that we haven't seen anything that would cause us to start wringing our hands yet. We know that if there is -- historically if there comes this dialog again about a national healthcare, and it looks anything like the one in Canada, we'll be fine because it will drive more people to want to have private coverage. So I would say at this point we're fine. We're not concerned about it, but we're just monitoring it very closely and trying to make sure if anything does come into -- in potential legislation that we're there to respond accordingly.

Thanks for your thoughts.

Your next question is from the line of Jim Macdonald from First Analysis. Please proceed.

Good morning, guys.

Good morning, Jim.

Could you comment on specifically on new sales versus plan in the first quarter versus your typical budget?

I sure can. In the first couple of months, we always have a low budget because you just exhausted the fall campaign effort and then you bring sales staff out of the market for a couple of weeks. We have a sales convention early in February and then the sales reward trip following that. So there is some reason that we budget a little low, and we were around those numbers, but it is such a low budget, didn't mean very much. In March and April, as that budget then moves up, that was the challenge to see if we could get around those levels, and we were able to, which was really a result of a lot of hard work. In this market, getting into doors has been harder. That's why this new dialog about the new strategies has been helpful. We're getting to know faster, if people aren't willing to consider anything, they're saying no -- but it means you just need to create more opportunities. So it has been a lot of hard work and some real good thinking by our people in the sales team to get things moving the way they need to be.

I think specifically, we're probably slightly below our budget in March and then right around the budget or slightly over it in the most recent months, so we're feeling good about that. Obviously that's what will cause our growth. What will cause us to bottom out and then start to increase again is having this level of sales continue in successive months so that the paid from sales is more than the sum of client terms and net layoffs.

And on that last point, your survey said that a lot of people are reducing hours. So could you comment on your attrition -- how many are really people lost versus reduced hours, which would show up as lower average employees?

Well, in our model we've actually seen a little bit of an uptick in what I would call hours worked or we would call it days hired. And what happens in this marketplace, you actually have absenteeism go down. You have other factors that offset a planned reduction in hours. So in the overall, we actually have seen a little bit higher percent of days worked is the way we'd look at it.

So there is no chance that there will be a bounceback -- I guess that would help, just help you if there was a bounceback in hours worked?

For us, the help would be to where layoffs and new hires balance out to where it is not a headwind. So it is not so much the hours work that affect us, it is more the actual number of heads because most of our model works off that number of paid worksite employees versus the hours worked.

Okay. Thanks very much.

Your next question is from the line of Mark Marcon with R. W. Baird. Please proceed.

Good morning. Wondering if you could talk a little about the competitive environment? What are you seeing from your competitors? There were some noteworthy competitors that were targeting some of your clients, and it sounded like you'd put in place some initiatives to counter that. I was wondering if you could talk a little bit about how that's going?

I think on the competitive front, I think the best single word I could use to describe what we're seeing out there would be desperation. We're seeing the only way that those with a similar product or service or apparently similar product or service is to compete on price. So we're seeing a lot of price related -- again, I would say desperation is the best word. We have seen some pricing that doesn't even make any sense in the marketplace, and that's pretty normal in a down economic cycle. So it is not something we're not -- weren't expecting. I think what also is amazing, and it was mentioned in Richard's script, if you look at our pricing on new sales, we've been able to maintain it at the same level of last year, which I think is astonishing. On renewals has been positive. We've actually had a little bit of a -- we're intentionally keeping our pricing down on renewals, because we're really trying to help our customers get through this cycle. So I think the biggest impact I have seen on the competitive front I would say is in pricing, not so much -- and we're probably seeing more competition in deals also. But I think we have fared very well against this type of price slashing tactics.

Are you seeing the more aggressive pricing from everybody or just a few select competitors? Is it nationals or regionals or how would you characterize that?

That's a good question. I really haven't broken it down that much to answer that specifically, but just the feedback we've gotten from the sales staff has been the price competition has been more severe. So I didn't hear them distinguish it between the majors and locals. So my assumption would be that it is probably pretty much across the board, but I will check into that.

Great. Can you talk a little bit about the client retention efforts, particularly with regards to the midmarket clients and what you ended up seeing as the calendar year terminated and we went into this new calendar year?

We really -- it was really a much, much better experience than we've had over the last couple of years. We did have a straggler or two where the economic environment was just too much for them to bear, had financial difficulty. I mentioned last quarter we had a customer in the banking business that was taken over by FDIC, so we had a large customer there that went away. We've got one that has departed out here just recently. So we've had a couple, but not near what we have had in the past. We have been able to -- like I said in the first quarter, we actually had total retention slightly better than last year. I think that's amazing in this environment. We're pretty pleased about that, and as I look forward into the pipeline, for mid-market terms, we feel very good about it. We know a lot more. Like I mentioned in my remarks, we orchestrated some C-level interactions to where at the C-level in our company have met with CEOs and CFOs of many of our clients during the first quarter just to deepen those relationships, understand better how we can help them, and also just be more informed about where these customers stand and what's going on in their businesses and how we can help them. So we feel very good about that pipeline.

Great. Can you talk a little bit about the assumptions you're making with regards to client retention on a go-forward basis? And then the productivity of the trained reps in terms of what you're expecting there and how many [sales] would they close per month?

We're looking at -- we've left client attrition I think slightly above our historical levels consistent with what we've experienced in recent periods, and we've kept sales efficiency lower than we have had in the past -- around 0.75 or so, about where we were last year, 0.75 sales per salesperson per month. And we're allowing that to tick up a little bit I think as the year progresses, maybe to 0.85 or so, but as you know if you have been familiar with our sales operation for long time, a typical environment is more like 1.0 or even better than that in the fall campaign. So I think we're being pretty conservative in that regard, but I think that's appropriate because to do those numbers would be good.

The client attrition is running at -- for the full year you would expect it to be around?

I would say probably in the -- I would have to look and do some calculating here, but we typically end up 79% to 80%, and you're looking below that, probably 77% to 78% or something in that range.

Given the environment and all the stresses that are there.

Right.

Great. Thank you very much.

Next question is from the line of Jeff Martin with Roth Capital Partners. Please proceed.

Thanks. Good morning, guys.

Good morning.

What kind of factors do you look for to say we've reached a turning point in the business? You're calling for modest increases in the worksite employee base in Q3 and Q4. What underlying macroeconomic factors are you assuming in that scenario?

We're looking at having layoffs continue to exceed new hires at a significant level throughout this quarter and even throughout the summer and into the fall. We don't have a model here today that shows that turning around. It eventually will. But when I look at the compensation data, the sales commissions we pay to employees -- to sales staff of the client and you see that commission down 9% over a year ago, that means their new business pipeline is -- is not that good. And also when I saw the overtime pay at 7% or so of regular pay, that means they have room to work -- increase hours and work overtime. You could support a significant increase in business without hiring any new employees. So you have got to factor that in. It is going to be a while before the labor market really turns around substantially, and that's what we've got built into our numbers.

Okay. Great. And, Richard, could you go over the 2009 assumption on the workers' comp side?

Yes. We had started the year -- actually our policy -- let's go back. We talk about our cost in terms of the policy year. Our policy year -- this last one started October 1st of 2008, and will run obviously through September 30th. What we talked about at the beginning of the policy year was kind of a 0.72% to 0.74% of non-bonus payroll as being our costs for the year. And then as we got into the fall of last year, we actually had to do a little bit of reduction in our pricing allocations because the market was real soft, et cetera.

So we assumed a nice contribution of surplus for the year of 2009, but the first quarter's results or the fourth quarter of 2008, which was the first quarter of the policy year, we had an increase in claims, we had a large claim that took place that drove up our expected claims cost. And so this quarter, first quarter of 2009, the incident rate of our claims had declined quite a bit, and it is mitigating the cost of -- when we look at total claims for the six months now, our trended cost increases is only up I think I said 19%. So we are seeing the likelihood of a lower cost structure for 2009, and more contribution to the surplus, which is driving a little bit of that increase for this second quarter and the balance of the year.

It is all about managing the incident rate and then the subsequent severity rate on claims when they're filed, and this is a year that we would expect the incident rate to decline. We went back and asked our claims adjudication company last fall -- what does workers' compensation claim incident rates look like in a down economy? They went back about 40 or 50 years, and said that the incidents rate of claims during a down economy literally falls out of bed because people don't want to miss work. And so as a result of that, we think 2009 could be a better year for us than what we're forecasting, but we like to let it evolve as opposed to baking in some big surplus contribution.

Okay. And then lastly on the COBRA extension potential issue, what kind of scenario could play out here? Could you have a hit to Q2 costs, carry into Q3, and then you -- what do you do, you recover that from clients? Will you recover all of it? How could that scenario play out?

Obviously the first thing that you would see is significant costs -- well, first of all we're going to see as people sign up for the COBRA who previously weren't on COBRA, we're going to see our revenue allocations for that. They're going to jump up automatically. Subsequently later on what you would see is if they had claims, then you would see the costs come in later, and then you would see us go back and try to -- and rebuild customers and clients for that difference. So there is a three-phrased approach in there that could be very short lived. It could take a couple of quarters. It could take the balance of this year. Which way it is going to come out, it is impossible for us to know. I would tell you that when you think about at our gut level, we would expect the logic of people that are on COBRA that were already on COBRA before this law came into being which took place in February -- if they were already on COBRA and there was a reason they were on COBRA, it is because of the likelihood they're going to be sicker and have more claims. So this could be an interim passthrough of time where people are saying I want to enroll in this new benefit, even though they were already on our existing COBRA because it is going to cost them less. So the net effect to us could in fact be zero.

Okay. Great. Thanks, Richard.

At this time there are no other questions in the queue. I would now like to turn the call over to Mr. Paul Sarvadi for closing remarks.

Once again, we would like to thank everybody for participating in the call and for following the company, and we're looking forward to moving things forward and seeing a turnaround out there. Thank you again for participating, and we'll see you next quarter.

Ladies and gentlemen, thank you all for your participation in today's conference call. This concludes the presentation. You may now disconnect and have a great day.