Insperity Inc (NSP) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Administaff second quarter 2009 earnings conference call. My name is Tuanda and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session toward the end of this conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

Joining us today are Mr. Paul Sarvadi, Chairman of the Board and Chief Executive Officer, Mr. Richard Rawson, President and Mr Douglas Sharp, Chief Financial Officer. I would now like to turn the presentation over to Mr. Douglas Sharp, Chief Financial Officer. You may proceed, sir.

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, 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 mornings call. First, I am going to discuss the details of our second quarter 2009 financial results. Richard will discuss expected trends in our direct costs, including benefits, workers' compensation and parole taxes and impacts of such trends on our pricing. Paul will add his comments about the quarter, outlook for the remainder of 2009 and the expected impact of an economic recovery on the business model. I will provide financial guidance for the third quarter and then update to our full year 2009 guidance. We will then end the call with a question-and-answer session.

Now, let me begin today's call by discussing our second quarter results. Today, we reported second quarter earnings per share of $0.22, which was at the low end of the EPS range implied in our key metrics guidance. As for our key metrics, the number of paid worksite employees averaged just above 108,500, which was at the midpoint of our forecasted range. Gross profit per worksite employee per month averaged $221 for the quarter, below our expected range. The impact of lower gross profit results was partially offset by effective operating expense management, which produced $1.4 million of savings from the midpoint of our Q2 forecast. Our cash flow remains strong and our balance sheet continues to reflect significant liquidity and no debt. EBITDA plus stock-based compensation totaled $16 million in Q2. Working capital increased by $21 million during the quarter to a balance of $126 million at June 30th.

Now, let's review details of our second quarter results. Second quarter revenues declined by 4% from 2008 to $404 million as a result of a 7% decrease in average paid worksite employees, partially offset by a 3% increase in revenue per worksite employee per month. Looking at second quarter revenue contribution and year-over-year change by region, the southeast region, which represents 11% of total revenue increased by 1%. The northeast region, which represents 22% of total revenue also increased by 1%. The central region, which represents 15% of total revenue increased by 2%. The west region, which represents 20% of total revenue declined by 5%. And the southwest region, which represents 32% of total revenue declined by 10%.

Declines in the west and the southwest regions were a result of a disproportionate number of large clients that turned for financial reasons in Q1 of this year. Moving to gross profit, as you may recall from last quarters conference call, we were expecting gross profit per worksite employee per month to be in a range of $227 to $231 for Q2. Sequentially down from Q1, which is our normal gross profit pattern. We were also forecasting a decline from the $241 achieved in Q2 of 2008, a quarter in which we received a $1.5 million state unemployment tax refund and also experienced unusually low workers' compensation costs.

Now, gross profit per worksite employee per month for Q2 2009 actually came in at $221. The $6 short fall from the low end of our forecast was due primarily to higher benefit costs, which averaged $733 per covered employee per month or a 5.8% increase over Q2 2008. Richard will discuss the details in a few minutes, but generally speaking, the percentage of worksite employees on our health plan has remained relatively flat over the past several quarters at 74 to 75%. However, we have experienced an increase in the number of Cobra participants as a result of the, and a new federal Cobra legislation. This has resulted in an increase in benefit expense as the claim costs of a typical Cobra approximate participant is typically double that of the regular participant costs. As for our other two direct costs, workers' compensation costs were 0.68% of nonbonus payroll for Q2 of 2009, slightly below our forecasted level of 0.72%. However, above the 0.57% of nonbonus payroll experienced in Q2 of 2008. Actually loss estimates resulted in a $1.6 million reduction in previously reported loss estimates. As for our third component of direct costs, payroll taxes as a percentage of total payroll costs totaled 7.11% for the quarter. This was a slight increase from 7.09% in Q2 of 2008, which included the $1.5 million tax credit previously mentioned.

Now, let's move on to operating expenses which totaled $63.4 million for the quarter, a 7.5% decline from Q2 of 2008. These results reflect the execution of our 2009 operating plan, which targeted various areas for cost reduction in response to the impact of weak economic conditions on our unit growth outlook. As for some of the details, salaries and wages declined by 5% from Q2 of 2008, in accordance with our 2009 operating plan we continue to experience cost savings through the reduction of corporate head count, a 50% reduction in the Company's 401 K match and the deferral of merit increases of our corporate employees. Additionally, incentive compensation expense has declined from Q2 of 2008. General and administrative costs declined by 16% compared to Q2 of 2008. Costs were reduced in various areas, particularly those that are variable with worksite employee and corporate head count levels. Additionally, while we increased our bad debt budget in the face of the economic downturn, we have effectively managed this expense at a lower level. Sales commission costs has declined by 12% from Q2 2008 consistent with the decline in paid worksite employees, and lower sales production.

Advertising costs declined by 17% as we have been able to take advantage of lower advertising rates. Additionally, we have eliminated the least producted business promotion efforts. Depreciation and amortization increased by 12%, due primarily to capital expenditures made throughout the prior year. We have scaled back capital expenditures in 2009, spending just $4.4 million year-to-date. This compares to $7.8 million of CapEx in the first half of 2008. Interest income decreased by approximately $1.5 million from Q2 of 2008, and slightly more than expected due to declining interest rates.

Our effective tax rate was 39.9% for the quarter, slightly above our forecast, however, significantly higher than last year's rate. The increase from the Q2 2009 tax rate or 37% 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 $16 million for the second quarter. Cash outlays during Q2, included repurchases of approximately 19,000 shares, at a total cost of $500,000. Cash dividends of $3.3 million and capital expenditures of $1.9 million. Positive cash flow from our operations combined with the receipt of a scheduled $14 million reimbursement from our workers' compensation program resulted in a $21 million increase in working capital in Q2, to $126 million at quarter end. At this time, I would like to turn the call over to Richard.

Thank you, Doug. This morning I am going to update you on the details of our second quarter gross profit results. 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 per worksite employee per month through the balance of 2009.

Now, as you know, our gross profit comes from the service fee component of our mark up combined with the surplus that is generated when the direct cost pricing allocation component of our mark up exceeds the corresponding direct costs. Doug just reported that our gross profit per worksite employee per month was $221 this quarter, which was $8 below the midpoint of our expected range. These results came from achieving $195 per worksite employee per month of service fees, and generating a surplus of $26 per worksite employee per month or 2.49% of our total direct costs allocations. The pricing of our service fee for new accounts sold this quarter in creased $3 per worksite employee per month compared to is second quarter of last year. And the pricing on our renewed business increased $2 per worksite employee per month for the quarter. However, the service fee on our entire book of business is down $2 per worksite employee per month from our last quarters forecast. This is because we made some pricing concessions for some of our existing clients to help support them during this unbelievable economic downturn. Overall, we are very pleased with our relative strength in this difficult economy.

Now, let's review the details surrounding the remaining $6 short fall in our gross profit. The bottom line is that we had an $8 per worksite employee per month larger than expected deficit in the benefits cost center offset by approximately $2 of additional surplus in the workers' compensation cost center. On the benefits side, the cost per covered worksite employee was $733 or 5.77% higher in Q2 of 2008. The significant increase in Cobra participation was the culprit and drove up our health care costs. Let me explain the details. During our last quarterly call, I shared with you the uncertainty we had regarding the potential impact on employers health care costs of the newly passed federal legislation called the ARRA, American Recovery and Reinvestment Act of 2009. Under this new law, employers are required to offer health care benefits under Cobra to any involuntarily terminated worksite employee retro actively to September of 2008. Those employees as well as currently terminated employees have an opportunity to purchase health insurance for 35% of the costs, while the taxpayer subsidizes the remaining 65% as part of the stimulus package. A lay offs in our client base at the end of last year, and in the first quarter of this year were higher than normal and many of them have not been re-employed elsewhere. As a result, many of these individuals have taken advantage of this Cobra stimulus package. In Q3 of last year, we were averaging 2800 Cobra participants per month that were enrolled in our plan . This quarter, the average participants per month has increased to 4100.

Now, the problem is that the claim costs of a typical Cobra participant is usually double that of a regular participants costs. In fact, we saw an increase in our health care claims during this quarter that came directly from the Cobra participants, and accounted for the $8 per worksite employee per month additional costs. Now our only positive contributor to gross profit this quarter came from the expense side of our workers' compensation cost center. We had very good experience during this quarter in that the incidence rate, which is total number of claims reported for the policy year-to-date is now almost 15.5% lower than this time last year. The severity rate, which is the average cost of these claims is 12% lower than the policy period -- prior policy period to date. These results produced workers' compensation of 0.68% of nonbonus payroll or $2 per worksite employee per month below our average forecast. In summary, had it not been for the spike in health claims coming from increased Cobra participation, and the Government Stimulus Plan, we would have been very pleased with this quarters results.

Now, let me update everyone on what our gross profit trends look like for the balance of 2009, beginning with the benefits. The increase in Cobra participants is expected to continue until either the stimulus plan terminates or these employees are hired elsewhere. Therefore, we will continue to forecast our future costs off of this second quarters expense. We expect the impact on Q3 and Q4 to reflect a 7 to 7.5% year-over-year increase in benefit costs for covered worksite employee. This would translate to an annual benefits cost increase of 6 to 6.5% over 2008, which is up from our previous forecast of 5 to 6%.

Unfortunately, the federal law only allows the employer to charge individual Cobra participant 2% more than an active employees previous years health care costs plus trend. Since the cost of the average Cobra participant is twice that of a regular participant that mismatch has to be paid for by someone, that someone is either the employer or the plan participants. In most cases, the costs are socialized and paid for my all plan participants and higher future rates. In our case, we will be absorbing this additional cost for about two quarters while we pas along these costs in the form of price allocation increases. We have added 1% to our regularly scheduled price increases to all new business quoted after August the 1st, and on all current customers at renewal. We will also benefit from the regularly scheduled Cobra premium increase for all Cobra participants beginning January 1st of next year.

So, the income statement effect for the balance of this year is that we expect to experience a short term squeeze at the gross profit line of about $2 million each quarter. By the time we get to Q1 of next year, our price increases should offset the entire quarterly short fall. I think it is important to note that our ability to quickly identify a potential gross margin squeeze and react quickly to fix it is a real strength of this Company. I remember in times past when we did not have the information systems or the staff to quickly determine a mismatch between price and costs. So, while we are not happy with this situation at the moment, we know it will be corrected soon.

Now, as for the other components of gross profit, the picture is a little brighter. The service fee component of our gross profit should increase about $1 per worksite employee per month over the next two quarters, as we continue to moderately increase our pricing. In the payroll tax cost center, our surplus should decline in the third quarter, from this quarter as employees reach their wage limits and then increase in the fourth quarter as year end accruals always add some extra surplus. As for the workers comp cost center, our allocations have been declining slightly over the past three quarters. We had previously been told that the workers' compensation insurance companies were planning increases but they have not materialized. So until they do we will not increase our allocations.

On the cost side, workers' compensation, we will still conservatively forecast a 0.69 to 070% of nonbonus payroll for the balance of the year. If our incidents rates continue to stay at the current levels due to safety programs and our claims personnel settle claims at lower, then our quarterly expense would be lower than this forecast. In summary, when we factor in all that I have mentioned, our gross profit per worksite employee per month should be in the range of $228 to $231 for the full year. At this point, I would like to turn the call over to

Thank you, Richard. My comments today will cover four important topics for investors and other stake holders in Administaff. First, I will comment on recent sales and retention trends and how that translate into unit growth expectations for the second half of 2009. Second, I will discuss the business decision making mind set reflected in our most recent data and survey information from the small business community, including what this information indicates regarding the timing of an economic recovery. Third, I will describe our plans for the balance of the year to position Administaff to benefit substantially as an economic recovery emerges. And I will end my comments with a description of the factors that are inherent in our business model and have a multiplying effect on profitability as the economy starts to grow.

In the second quarter, we were able to achieve our unit growth expectations, as the degree to which lay offs exceeded new hires eased and new sales were able to offset client attrition. The second quarter results reflected a continuing economic head wind and persistent labor market weakness. However, layoffs in the client base diminished during the quarter, which is a good sign. Even though hiring in the small business community also declined, there was enough activity to nearly offset the lay offs for the last few months. A leveling off between lay offs and new hires at a low rate for each component indicates no recovery yet but this stall in the labor market is part of the bottoming process necessary before a turn around can take place. It is certainly a good sign that net lay offs and new hires were nearly a wash. If this head wind on this growth driver remains calm that will be a positive for Administaff.

For second quarter, client retention rates were very good, considering the typical increase in clients leaving for financial are reasons, which naturally occurs in a down economic cycle. We retained 98.4% of worksite employees on average each month of the quarter. This 1.6% monthly attrition is only slightly higher than the historical average of 1.5%. Sales for the second quarter started out fairly strong in April but quickly retreated in May and June. This is where the economic climate and business owner mind set is creating the biggest head wind for growth. For quarter, we were at 75% of internal forecasted sales, selling just over 8,000 worksite employees. Sales in any given quarter generally become paid worksite employees in the subsequent quarter. Since the pipeline for paid worksite employees from Q2 sales is not as strong as previously expected, our outlook for unit growth for the balance of the year is lower. We are now expecting the average number of paid worksite employees for the third quarter to be between 107,500 and 108,500 employees.

The second issue I want to discuss is the valuable information our client base is providing through our quarterly survey responses and the compensation and employment data that comes directly out of our system. This information may be useful in handicapping the timing of an economic recovery and determining when business decision makers may begin the to invest in the future again. As lay offs and new hires have stabilized, so have some of the compensation indicators we watch closely. Commission paid to the sales staff of our client small businesses down 8%, 3% and 9% respectively in Q3 and Q4 of 2008, and Q1 of 2009. Q2, however, was flat with the prior year indicating some pick up in sales. The previous commissions declines imply declining sales of goods and services sold by our clients, which led to the pull back in spending compensation and staffing levels.

In the survey on this subject, 41% of our clients expect an increase in sales over the last half of this year, while 35% expect sales to remain constant, and only 15% expect a decline. Survey respond indicated levels would remain flat with 60% expecting no change, 23% expecting to add employees, and 16% expecting to reduce staff. One other very important factor in an economic turn around is the expectation of the timing of a recovery from business decision makers. In the recent survey, 14% expect the recovery to begin before the end of the year , while 58% expect the recovery in 2010 and 14% expect the recession to last until 2011. The survey also reflects business owners have some long term concerns that may have played a part in the recent to invest or make significant buying decisions. While 83% agree, the biggest concern for 2009 is the economy, beyond 2009, three other issues rated as greater concerns. 77% rated their concern level at elevated or very concerned about potential tax increases. 70% had the same ratings for their concern about government expansion and the effect on business, and 69% also sited the federal deficit causing the same high level of concern in 2010 and beyond.

These macro factors introducing a substantial level of uncertainty and concern have made business decision makers ultraconservative in their spending, and buying decisions in the first half of the year. However, that I shall outlook for recovery next year and an improving sales pipeline may be the first indicators they're ready to make 2010 different from 2009. Historically, when business owners get in the the mind set to make next year better, receptivity to our services and fall selling campaign is at its higher. Small business owners have reacted predictably in this downturn. They cut expenses where ever they can. But the winds of change are in the air again. They know you can spend your way to failure in a recession but you can't save your way to success in a recovery. I believe they will react predictably to the signs of recovery and begin to make buying decisions and improve chances for success in 2010.

In any event, our financial performance so far this year and our outlook for the balance of the year directly reflect the extreme pressure the recession has had on the small business community. Fortunately, our services have proven highly valuable for existing clients throughout this period. Our client retention and pricing have shown considerable strength and our corporate staff has done an outstanding job controlling operating expenses. Even so, our business model has taken the dramatic onslaught of the persistent recession and we have continued to generate profits and increase working capital to $126 million. This now becomes a war chest to take advantage of strategic acquisitions, develop new products and services, or finance whatever initiatives accelerate our long-term strategy. Over the last half of 2009, we expect to continue important development initiatives to position Administaff to regain growth momentum and improve profitability. We will focus on sales and retention over the last half of the year, in both our core and MidMarket segments. Our MidMarket service organization has continued to transition tenured clients on to our new MidMarket service platform which has prove ton be a better service model. We are hopeful these efforts will lead to better client retention at year end, which could be highly beneficial for 2010 growth expectations.

We have continued to refine our MidMarket sales process and we expect to increase Administaff executive involvement throughout the balance of the year to help close accounts. In our core business, we will conduct our annual fall selling campaign, with a focus on improving closing rates and converting the significant backlog of prospects that we have seen throughout the year that were interested in our service but could not pull the trigger until they felt better about the economy. On the product development front, we are completing development of our online benefits enrollment and expect to roll out this service to client this is fall. This state of the art application automates the decision support for employees selecting benefit options and enrolling in Administaff programs. The client and employee service experience will be greatly improved and Administaff and our clients will benefit from the administrative efficiency, especially in the year end open enrollment. We are continuing to implement our strategy to take internal competency and create service offerings on a stand alone basis, outside the PEO relationship. These services currently include retirement services, recruiting service, background screening, an HR session for MidMarket clients, and the HR tool suite of software offerings that we offer.

We are making solid progress rewriting HR tools products into an integrated software of service offering for introduction early next year. This application will include tools to develop job descriptions and manage the performance review process and provide a repository for employee data with a robust reporting capabilities. We expect to add other services which leverage the investment we have made to provide our full service PEO offering. We intend to formalize the process for introducing these solutions beginning in MidMarket and eventually capitalizing on a relationship developed with the nine out of ten prospects we see in the core business that do not become PEO clients. We are also continuing to target potential acquisitions that add to our service offering or replace a vendor relationship. We expect any of these transactions will involve companies making a profit and be accretive to earnings.

All of these strategies are focused on regaining revenue and unit growth momentum and improving profitability as an economic recovery issues. These will be in addition to the following factors inherent in our business model that he will have a multiplying effect as the economy starts to grow. In a recovery, we see improvement in every stage of the sales process from first calls to opportunities to bid and of course, closing rates. As we move from the low levels we have seen this year to more normalized leads, sales literally double from curb levels. Although, we have done an admiral job in client retention and pricing throughout this recession, both of these accelerate growth and profitability dramatically with slight improvements as a recovery takes place. We also expect to see gross profit expansion ultimately as an economic upturn takes hold. The pricing changes Richard discussed will have offset higher costs from Cobra participation and as the plan grows again, the percentage on Cobra will recede.

Our workers compensation has performed beautifully throughout the downturn but remember the surplus has been reduced substantially by interest rates and the effect on discounting reserves. This reverses and becomes a contributor to gross profit expansion as rafts increase. We have also managed operating expenses well throughout the downturn but we have not used a crash-and-burn philosophy, which will then require substantial increases to handle growth. We believe we have made prudent choices in controlling costs and improving efficiencies that is will provide operating leverage as a rebound occurs.

Finally, there has been a substantial effect on earnings as we have mentioned in previous calls from the financial market turmoil and the effect on interest and tax rates. Our expectations for the balance of the year include interest income of 200 to $400,000 per quarter on $240 million invested and a tax rate of 40%. It may be a while before interest rates rise but when they do Administaff will benefit substantially.

So in summary, while the effect of the recession on the small business community has impacted our results, we have been able to remain profitable and help our clients weather the storm. Our financial condition has allowed strategic investments and we are well positioned for growth and profitability as a recovery emerges. Our clients and target prospects appear to be ready for a recovery in 2010 and we are ready to help them make that happen. At this point, I would like to pas the call to Doug to provide specific guidance for the balance of the

Thanks, Paul. Now, before we open the call for questions, I would like to comment on our financial guidance for the third quarter and the remainder of 2009. In general, we are lowering our unit growth and gross profit forecast for the remainder of the year due to the continued weakness in the economy and labor markets. Macro economic factors continue to weigh on the unit growth through sluggish sales and net lay offs in the client base. Additionally, the high level of lay offs over the past three quarters combined with subsidies provided by the recent government stimulus has resulted in an increase in Cobra participants and higher benefit costs.

Similar to the first half of the year, the impact of lower worksite employees and gross profit for worksite employee on the bottom line is expected to be partially offset by continued operating expense control. As for our key metrics guidance, based upon Paul's earlier comments, we are now expecting average paid worksite employees to remain relatively flat over the remainder of the year. Specifically, we are forecasting a range of 107,500 to 108,500 for the third quarter. For the full year, we are now forecasting average paid worksite employees in a range of 108,750 to 109,250. As Richard mentioned, we now expect gross profit per worksite employee per month to be in a range of $228 to $231 for the full year 2009. As for third quarter, we expect gross profit per worksite employee to be in the range of $218 to $222 relatively flat from Q2 of this year. As for operating expense, we have lowered the full year forecast to $261.5 million to $262.5 million based upon successful cost reduction efforts to date and on going cost control efforts. The midpoint of this range is a 6% decline from 2008 operating expenses.

As in prior years, the high end of our full year operating expense guidance is tied to additional incentive compensation to be accrued upon achieving higher unit growth results and operating expense reductions. For the third quarter, operating expenses are expected to be in a range of 62.25 million to $62.75 million, which is slightly down from Q2. We have subsequently forecasting a step up in Q4 due to business promotion activity surrounding our annual fall sales campaign.

Now, 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 to a revised range of $1.3 million to $1.7 million. We are forecasting Q3 net interest income between $200,000 and $400,000. And we are now forecasting an effective income tax rate of 40%. As for average outstanding shares, we are forecasting 25 million for Q3 and the full year. At this time, I would like to open up the call for questions.

(Operator Instructions). Your fist question comes from the line of Michael Baker with Raymond James. Please proceed.

First question is for Richard. As you look out with respect to your health care, health benefit cost expectations have you factored in or thought about the potential for a more severe flu season this year?

Actually, no we have not. I know that there's -- has been this issue of the swine flu, but we have not baked in any more expense for that and in my prepared remarks, I talked about an increase of 2 million over what we are currently experienced in Q2. That number may in fact take care of some of that but it is too hard for us to isolate that as a particular item.

Okay. And then I didn't watch where you -- catch where you expect the percentage of Cobra continuance or participants to reach by the end of year?

Yes. We have forecasted, and even into July, we have seen a step up in the number of participants on Cobra. We think that's going to be flattening out now because we have kind of got the big on slot of all the ones that go back to September of last year that enrolled . So we are kind of thinking that we are going to be, you know, probably in the 4600 to 5,000 range on average for the balance of the

And then I just had a question of for Paul. I was wondering if you can give us your initial thoughts for health reform. Maybe addressing from the perspective of the two extremes on the one hand, the public plan option and on the other, you know, the co-ops or potential for co-ops.

Sure. You might expect we have a significant group of internal staff and also outside consultants working with us on on going basis to stay on top of what's going on there, what the impact might be on our clients and Administaff. So far, nothing on the table eliminates optional plan, eliminates you know what our customers to participate in plan health attract and retain employees. But, all of the proposals include more complex rules and requirements on employers. So, as typical for us, we, there's kind of a, you know, two edged sword to it.

The additional difficulty gives people reason to consider using our services and kind of opens up for us to help employers figure out, you know, whether the tax, whether they need to pay the tax or provide the coverage or get the coverage from. Those kind of things are things that is we and do well. As that need increases, there should be an increase in need for our service. At the same time as an employer, we have to comply with everything that comes down the pipes. So some times it adds some expense or complexity for us. We don't see anything out there that's at this point a serious threat.

Thanks a lot.

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

Good morning.

Hi, Jim.

It sounds like you're sort of getting more optimistic, you know you talk about a number of things you would do as the economy improves. Are you starting to do those things or are you still tightening, tightening the ship down at this point?

Well, on the operating side of our model, we have been able to really do a nice job controlling expenses but we haven't had to cut into anything that would keep us from being able to do what is necessary to be, you know, right all over it as things move the right way.

So we feel real good about that. So I would say no. We are not battening down the hatches but we are getting more and more creating about how to help our customers and especially our -- we have done well on helping our clients but on prospects see what to they need to do to be on the front end of the recovery. That's kind of where we are focusing our dialogue and communications. We are expecting to roll that out soon and I believe that's going to dove tale nicely with where our prospects are thinking and that's where my optimism comes from.

Can you tell me what your current sales force level is?

Yes. We are at about the same level we were, about 320 trained reps. So we are we have a good solid crew there with a lot of experience. We are at the high end of our historical range on tenured sales staff. They have been beat up pretty good in this market. But we are about to do our fall campaign increase and I think some of the data and information coming from our clients and prospects as we tailor our message to match where they're thinking, I think that is going to help reinvigorate the sales staff as we go into the fall. Then, you know, we are going to see some recovery there on sales rates that automatically happen toward a new year and our fall selling season is always better. So you will see a nice rebound in the attitudes as well as they start to have some success.

Just one more for now. You talked about helping your clients out during this period, and lowering their rates. How do you see that playing out and is that temporary or how do you recover those lower rates?

I think there's two things that are important that we will be communicating to our customers. Actually, really three. What things we were able to do so help customers in this downturn has been amazing. You will even hear some advertising coming out to help to higher those here in the fall. But we also have where appropriate made some concessions to help clients get through this difficult time and I know that has been very much appreciated.

The third thing, we will start to emphasize is how we stood kind of in the gap between the small business community we serve and some of these other macro things that is generally jerk small businesses around and frankly, this Cobra participation issue is one of them. So, you know, we are, the reason we charge how, the way we do for these direct cost items and build in a coemployment charge is so that we can absorb some of these spikes when they happen on behalf of our client.

So we will be identifying those three things and communicating that to clients and prospects and I believe that's going be a very much appreciated. You know, as far as our price increases going forward I think Richard and his team have done an excellent job on the direct costs and were able. We do have to pass on increases but I think they going to compare favorably to the marketplace and as you heard in his script, I will tell you our pricing on new and renewing business both went up a little bit although,.not much but up, instead of down in this marketplace. That's a fantastic work by our sales team, our renewal staff and you know I think that also demonstrates how effective our service has been.

Okay. Thanks.

Your next question comes from the line of Tobey Sommer with Suntrust Robinson Humphrey. Please proceed.

Good morning. This is Frank in for Tobey.

Hello, Frank.

Wanted to ask about repurchases during the quarter and our outlook going forward in terms of the use of cash for repurchases.

Yes. We have, we have been pretty quite on the repurchases thus far this year, and it goes back to building up the working capital position, as Paul mentioned. Once the economic recovery takes hold we will be in a strong position to make investments and invest in products and services to allow for that, that further growth. I think moving forward in the latter half of the year, I think our working capital position is strong such that we will be able to take advantage of some share repurchases going forward. Can't give you the details tore level of that but I think we will be active.

Okay. And as far as CapEx going into the back half.

Our budget for the full year was around $10 million. We are a little shy of $5 million in the year. I expect us to still invest in CapEx over the remainder of the year. Probably a little short of the budget but close to $10 million.

Okay. And you commented a little bit on the health care reform, and nothing that you have seen so far has been a huge impact. What would you worry about or what are things you watch for that would impact the Company going forward.

I think it would be soft. A dramatic move to the to the fully single payer socialized system where employers don't play a roll, where employers are not allowed to provide coverage. That would be a problem. But even in places where that exists, where employers don't provide the basic coverage there are supplemental plans provided and that's how employers are able to put plans in place and attract employees. Remember the issues in business for benefits is attracting and retaining key people. So no matter what they do, they're going to find ways to attract and retain. That's what we are there to help them do.

One last one last quarter we talked about reduced hours. Are you seeing any trends in terms of the hours worked or has that affected you in anyway.

There has been like I mentioned in the script kind of a flattening of the other compensation. Bonuses were down, but that seems to be kind of bottoming and a lot of signs in there where that kind of businesses that made the adjustments are going to make, and now they're kind of waiting to pounce, once they really feel better about what's coming.

All right. Great. Thank you very much.

Your next question comes from the line of Jeff Martin with Roth Capital Partners. Please proceed.

Thanks. Good morning, guys.

Morning.

Paul, can you help give us some perspective to previous recessions, where are we today? I know, the '02, '04 time frame it was really second quarter of '05 before you saw significant results come through your P&L. Where do you think we are today with the current downturn.

That's a good question. Remember the economy effects us in a variety of different ways, and if you remember back in the previous recession there was a prolonged labor market weakness.

Remember the jobless recovery. We are I think in a similar situation here that it is going to take some substantial economic growth before hiring if necessary. For example, over time as a percentage of base pay is down to like in the 7% range. A normal rate would be ten or so. Which means companies can grow and add quite a bit of business. Increase hours worked and utilize over time before they have to hire anybody. In that respect, I see it somewhat similar. But the other areas that were affected that are important have to do with that business owner mind set and how much uncertainty there is and when are they really ready to get on with it and the effect that has on the sales cycle. We are really at the end of that. I believe that as we go into this fall, we are going to see business spending start to increase again, and there was a huge pull back if Q1.

Q2 was better but still, you know, for bigger decisions, they were really on hold. But as we go into this fall, that's the stage where we are. The mind set gets better. We start business decisions being made. We start to see sales going up, and that effects our business model dramatically and as long as lay offs aren't exceeding new hires, then we have room to grow. There's so many other factors that I described that are positive in our business model. We obviously feel fairly upbeat about 2010 because there's a lot of to recover. It is almost like this pull back is going further and further. A lot of tension, and it is certainly affected us but when this thing lets go, it will be pretty exciting.

This may be a question more for Richard but one I wanted too clarify. The recapture of the $8 of benefit on the health care side over the benefit cost you expect that to be recouped by January 1 or --

Yes.

Some time next year.

Yes. By the beginning of next year because of the increases that we put into effect already, plus the fact that on January 1st, which is the, you know you only get to do this once a year, and that is you get to reset the Cobra costs of the participation costs. So with the increase we've had this year obviously our average cost is going to be going up, you know, 7%, 8%, 9%. I don't know what the number is, and so we will be immediately on January 1st, we will get to add that increase amount to what we are already collecting for Cobra participants.

So the combination of the increase in our pricing allocations, plus the increase that we are going to be able to charge Cobra participants beginning in January. We have, you know, we have calculated it out, spent some time really returning through the numbers, and our expectation is we will be caught up. And squeeze will be over.

Okay. So we have really a bottoming in Q3 and then an up the uptick.

That's correct, yes. That's exactly correct.

And it is my understanding you really look to grow that prose profit each year, where do you think you can get to and over what time frame?

Well, we have talked about because of the addition of other, some other services, that we actually have currently that will continue to increase. We feel like that the gross profit will go up 2% to 3% a year, just as a normal inflationary increase and then, if we have success on the other products and services like that Paul touched on in his script, they could become material to us and we are looking forward to the day that we can report on those and letting you know they are material.

Great. One housekeeping item, what was the reduction of previous loss estimates for workers comp in the quarter.

$1.6 million.

Okay. Thanks so much.

Your next question cops from the line of Mark Marcon with Robert W Baird and Company. Please proceed.

Morning everybody.

Morning, Mark.

Hi.

I was wondering if you could talk a little. You mentioned you were helping some clients out in terms of reducing service fee. Can you talk about how that dynamic occurs?

Yes. What happens is you've got customers at that have already gone through the renewal process, and they actually were depending on when they hit a difficult spot. We have had a group of them called over the last few months, and say we want to stay with you guy, with love the service, we are in a squeeze. Is there anything you can do to help us out. And so we will sit and kind of re-review that account and see where they are currently in terms of all of our allocations against our costs and look at how we are servicing them et cetera, and when it makes sense. We have actually, we have done some changes to the pricing for the remainder of this contract period. And so we feel like that that is the -- , that you know a few dollars here and there is a lot better than trying to find a replacement for whole account. So we have been strategic and systemic about how we have done it. I think it has worked out

It has opened up some good discussions with clients with what they can do to control their costs related to employment. It opens up a conversation for us to have a good discussion about their compensation levels, their pay raises. And over time, their allocation for contributions for benefits. There are a lot of tweaks that companies do, which plan they're on is a very significant one. So we can talk about reducing price, we are talking about looking at the whole picture, and helping them manage their -- the cost of being an employer more effectively.

So remember one of the strategies we supported at the beginning of year one of our nine HR strategies during the down time had to do with managing operating expense and talking to vendors and seeing how to optimize the relationship and their customers did that with us as well, and we were able to accommodate them. There were a lot we were not able to accommodate. But because of the particulars related to their account. But every account, we made a significant effort to do what we could do and help them figure out what they can do. I think it was appreciated.

Great. Thank you. And then back on the call.

Your next question is a follow up from the line of Jim Macdonald with First Analysis. Please proceed.

I noticed that I guess I am hearing that obviously pay increases are or even pay decreases are common now, pay increases are less common. How does that effect you and your ability to get the core -- your core fee.

Fortunately, years ago with after the last down turn we build our system to where our charge is on a dollar per person basis and does not move with the average pay change at a client location. So there's no direct impact related to the compensation.

There is generally speaking, it is easier to get increases when the total cost base is going up relative to payroll, and our total fee is ultimately viewed as a percentage of payroll as well as the total dollars. So there's some benefit to it when there's more wage inflation. But I haven't seen that as a major factor this time.

Okay. You talked a little bit about how you have been able to neutralize the bad debt and taking bad debt. Can you expands on what you were saying.

Relative to the budget we had set up at the beginning of the year, you know we had increased the budget and the economy that we are working in, and we have been able to manage our credit exposure and our bad debt below that budget. So far this year, we have seen obviously some financial difficulties with our clients. We have seen some bankruptcies. However, you know I would say so far, not to the level we expected.

Okay. Thanks very much.

At this time, we have no further questions. I would now like to turn the call over to Mr Paul Sarvadi for closing remarks.

We just want to say once again thank you for joining us and being on the call and we look forward to some improvement in the economic outlook and in our results as we go forward. Thank you for being with us.

Thank you for joining today's conference. That concludes the presentation. You may now disconnect. And have a wonderful day.