沛齊 (PAYX) 2018 Q3 法說會逐字稿

Welcome, and thank you for standing by.

(Operator Instructions) Today's call is being recorded.

If you have any objections, you may disconnect from the conference.

Now I'll turn the meeting over to your host, Mr. Martin Mucci, President and Chief Executive Officer.

You may now begin.

Thank you.

Thank you for joining us for a discussion of the Paychex Third Quarter Fiscal 2018 Earnings Release.

Joining me today is Efrain Rivera, our Chief Financial Officer.

This morning, before the market opened, we released our financial results for the third quarter ended February 28, 2018.

Our Form 10-Q will be filed with the SEC within the next few days, and you can access our earnings release and Form 10-Q on our Investor Relations web page.

This teleconference is being broadcast over the Internet and will be archived and available on our website for approximately 1 month.

On today's call, I will review business highlights for the third quarter, and Efrain will review our third quarter financial results and discuss our full year guidance.

Then we'll open it up to any questions.

We were pleased with our results for the third quarter as we continued to deliver solid performance across our major HCM product lines.

Our total revenue growth was 9%, aided by our acquisition of HROI.

This is the highest revenue growth in our past 6 fiscal quarters.

In addition to HROI, organic HR outsourcing services, retirement services and insurance services all performed very well in the quarter.

On March 1, 2018, we announced the acquisition of Lessor Group, a market-leading provider of payroll and HCM software solutions, headquartered in Denmark and serving clients in Northern Europe.

We believe the combination of Lessor's payroll and HCM software products, with our full-service business process outsourcing capabilities, will provide a complete technology-enabled services platform in the markets that they serve and will expand to.

The Lessor Group is a good strategic fit for the following reasons: First, the vast majority of its clients across 4 countries are in our target small business market.

Lessor has a solid and scalable proprietary intellectual property, with experienced technology development talent.

They have a seasoned management team.

They are profitable and reflect steady growth with the ability to fund further growth and development.

We can leverage Lessor to support our growth in Germany, where we've been for the past 10 years and provide an enhanced technology solution going forward there.

And this acquisition offers us the opportunity to expand our market penetration in countries Lessor serves as well as other European countries in the future.

We are pleased to welcome the employees of Lessor Group to the Paychex family.

And while our international operations are currently small in relation to the company as a whole, we are excited by the opportunities this acquisition provides us for further expansion and growth.

We have seen increased momentum in our sales execution as the year has progressed.

In third quarter, sales to new businesses were up approximately 7% compared to last year's third quarter.

During our third quarter selling season, in the small end of the market, less than 10 employees, our sales teams have done very well.

The mid-market, up 20 plus to 500 or so, has seen an increase in the competitive intensity.

However, our comprehensive HR outsourcing services, both PEO and ASO, which we consider part of the mid-market, performed well in both sales and client retention.

HROI, acquired in August, has been tracking ahead of our plan.

Overall, despite a slow start to the year, we have exited our selling season with momentum.

The labor market shows signs of tightening, as evidenced by our Paychex | IHS Markit Small Business Employment Watch.

The growth in jobs is stabilizing because of challenges in finding qualified employees, and we expect this will result in business owners making positive changes to wages and benefits as they compete for top talent.

We've seen a 12-month growth in hourly earnings of about 2.7%.

The combination of this level of wage growth and consistent small business job growth are indicators of a healthy small business sector.

We believe these promising indicators will continue to create opportunities for new sales in the small business market.

On December 21, 2017, the Tax Cuts and Jobs Act, or tax reform, was enacted and is the most comprehensive tax reform legislation in more than 2 decades.

Paychex, as a corporate taxpayer, is a significant beneficiary of tax reform.

Efrain will discuss the financial impacts in more detail.

However, I want to mention that as a result of this significant income tax reduction, we plan to utilize some of this opportunistic benefit to make various investments in our business.

These investments include accelerating certain technology projects for the continued evolution of our customer experience, increasing our spend in marketing demand generation, and sales and service strategy enhancements as well as investment in our employees.

These accelerated investments will help drive future returns for our shareholders.

As it pertains to our clients, we are already helping them navigate the new tax code.

Our systems were updated with the new tax rates within hours of their release, and we provide many resources to our clients from online educational content to our dedicated service center with experienced payroll specialists and on-site HR support.

We are committed to delivering best-in-class technology solutions for our clients and business partners.

And our HCM solutions have continued to gain acceptance, as shown by recent recognition we have received, and I'd like to mention a few of those.

We were recognized as a leader in the 2018 NelsonHall Evaluation and Assessment Tool, or NEAT, for payroll services for the second year in a row.

We receive this recognition for the overall depth of the payroll delivery capability and a robust user experience, which enabled -- which is enabled through our Paychex Flex cloud platform.

In addition to this overall distinction, we also are -- were placed in the Leader quadrant for technology and user experience, analytics and reporting, and our HR cloud integration.

We are proud that our Flex platform has once again been recognized as an innovative and powerful tool that enables our clients to gain productivity and focus on growing their businesses.

Business News Daily honored Paychex by saying that the Paychex PEO offering is the best in the industry for midsized businesses.

This was based on our unmatched breadth of services, along with choice, flexibility and scalability we offer clients in several areas.

The hands-on support we provide our clients through our experienced HR generalist is a differentiator for us in the market.

We are pleased that this media outlet recognized the culture of service that exist here at Paychex.

On March 1, we announced the second -- for the second consecutive year that the American Business Awards honored Paychex with a bronze medal for Customer Service Department of the Year as part of its Stevie Awards program.

The Stevie Awards are considered among the nation's top honors for sales and customer service.

This award reflects the dedication of our service givers and the responsiveness, reliability and knowledge that help us provide world-class service to our clients.

We also were honored to earn a silver Alexander Hamilton Award for Excellence in Operational Risk Management and Insurance.

We earned this recognition for our Authentication and Financial Crime Prevention initiative, which works to help protect our clients from fraud activities in the digital age.

We're also proud to be named to the 2018 World's Most Ethical Companies by Ethisphere Institute, our 10th consecutive year receiving this honor.

Integrity is one of our company's most important values, permeating our culture.

Receiving this honor underscores our commitment to leading with integrity and prioritizing ethical business practices.

Learning and development is a founding principle at Paychex, and our learning and development center has again been recognized by Training magazine as one of the top 125 training organizations for the 17th consecutive year.

And we jumped 6 spots this year to #14.

We're also pleased to be selected by the International Franchise Association, the world's oldest and largest organization representing franchising worldwide, as its preferred payroll solutions provider for its IFA membership.

IFA based its decision on metrics involving service model, client retention, pricing and franchise experience.

We continuously also look to enhance the value of our portfolio and products to our clients.

Recently, we announced that we will offer Netspend's Tip Network to help clients in the restaurant industry manage what is an administrative challenge unique to their industry.

In conjunction with paycard, Tip Network allows restaurants to tract employees' tips, calculate tip sharing and pooling amounts and distribute tips electronically at the end of a shift.

I'm very proud of what our 14,000 employees have accomplished with their hard work and effort every day for our clients.

I will now turn the call over to Efrain Rivera to review our financial results for the third quarter.

Efrain?

Thanks, Marty.

Good morning to all of you.

I'd like to remind everyone that today's conference call will contain certain forward-looking statements that refer to future events and, as such, involve risk.

Please refer to the customary disclosures.

In addition, I will sometimes refer to non-GAAP measures, such as adjusted operating income, adjusted net income and adjusted diluted earnings per share.

These measurements include certain discrete items and onetime charges.

Please refer to our press release and also refer to our investor slide presentation, which breaks it all out, for a discussion of these measures and a reconciliation for the third quarter and 9 months of fiscal 2018 to the related GAAP measures.

I'm going to cover a few things today.

In addition to talking about the third quarter, I'll give some discussion about the fourth quarter, full year and then a peek ahead into 2019.

So I'll highlight that as we go along.

Let me start by providing the key highlights for the quarter.

Total revenues, as you saw, grew 9% to $866 million.

Approximately 3% of the growth was attributable to HROI.

As Marty mentioned, they are performing ahead of where we expected at this stage.

Expenses increased 17% for the third quarter.

The growth rate was significantly impacted by a few items of note.

These include the following: the acquisition of HROI.

That contributed 5% to total expense growth for the third quarter.

Very importantly, a onetime charge that we recorded following the termination of certain licensing agreements that we had, this contributed approximately 7% to total expense growth.

Just please note that it's a onetime charge.

We decided it was the right time to exit those licensing agreements.

Our investment in employees by a onetime bonus to nonmanagement employees during the third quarter contributed approximately 2% to total expense growth for the quarter.

We didn't call that out as a onetime charge.

Technically, it is not.

But we increased spending.

Obviously, we wanted to allow employees to share in the benefit of the tax reform benefit.

So total expense growth was also driven by higher headcount in operations and sales as well as continued growth in our combined PEO business and investments in technology.

The effective tax rate was 11.7% for the third quarter compared to 34.2% for the years -- prior year's third quarter.

So let me explain that a bit.

The significant decline in the effective tax rate is due to tax reform.

I'm going to walk you through the details of that shortly.

Net income was up 29% to $260 million, and adjusted net income increased 14% to $228 million.

Diluted earnings per share increased 29%, again, for the third quarter, and adjusted diluted earnings per share, 15% to $0.63.

Let me provide some additional color in selected areas.

Payroll service revenue increased 2% for the third quarter to $455 million.

The growth was driven by an increase in revenue per check, which improved as a result of price increases net of discounts.

HRS grew 17% to $393 million for the third quarter.

It reflected strong growth in the client base across most major HCM services, as Marty mentioned, including comprehensive HR outsourcing services, retirement services, time and attendance and insurance services all performed well.

Within Paychex HR Services, we've continued to see strong demand, which, along with the acquisition of HROI, is reflected in strong growth in the number of client worksite employers served.

Our Paychex PEO, that doesn't include HROI, has shown a surge of more than 20% in worksite employees from this time last year.

Insurance services benefited from continued growth in the number of health and benefit applicants and higher average premiums within our workers' comp insurance offering.

Retirement services revenue benefited from an increase in asset fee revenue earned on the value of participant funds.

Interest on funds held for client grew 37% in the third quarter to $18 million, primarily as a result of higher average interest rates earned, a 1% increase in average investment balances and excellent portfolio management.

Now I'll provide some color on the impacts of tax reform on our third quarter.

The largest impact was a reduction in the corporate statutory rate, which took us from 35% down to 21%.

Paychex, as Marty mentioned, is a significant beneficiary of this change in the tax rate.

In addition to this overall change, we had several discrete items that reduced our effective tax rate to 11.7%.

The first one is that we recorded a catch-up in our effective tax rate for the first 6 months of the year during the third quarter.

This had a benefit of $36 million or an approximate 12% reduction in our effective tax rate.

The adjustment was necessary to conform our tax rate to the rate we expect will apply to our full year earnings.

It's done in the third quarter.

It got caught up.

We also had a onetime revaluation of our net deferred tax liabilities that was a benefit of $20 million to the quarter, reducing our effective tax rate by approximately 7%.

Since we were in a net liability position on our deferred tax, a reduction in the prospective tax rate yields a benefit, because it reduces the amount of taxes we would expect to pay in the future.

So we had 2 adjustments there: one, a catch-up; and one, the revaluation of deferred tax liabilities.

Again, it's all spelled out in the table.

Should be pretty clear.

As Marty previously mentioned, we intend to utilize some of this benefit, the tax reform benefit, to accelerate various investments in the business.

These investments are in the following areas: technology for evolution of the customer experience and continued digital transformation within that business; increasing spend in sales and marketing to drive revenue growth; investments to drive operational excellence and efficiency; and finally, investment in our employees, part of which occurred this quarter.

This accelerated investment will help drive future returns for shareholders.

Let's talk about investments and income.

Our goal in our portfolio is to protect principal and to optimize liquidity.

On the short-term side, primary short-term investment vehicles were bank demand deposit accounts and variable rate demand notes.

In our longer-term portfolio, we invest primarily in high-credit-quality municipal bonds, corporate bonds and U.S. government agency securities.

Our long-term portfolio has an average yield of 1.9% and currently has an average duration of 3.3 years.

Combined portfolios have earned an average rate of return of 1.6% for the third quarter, which is up from 1.2% last year.

We are realizing the benefit of a rising rate environment.

Average balances for interest on funds for clients were up approximately 1% for the third quarter, primarily driven by year-end bonus payments, wage inflation, partly offset by some client size mix.

Let's talk about year-to-date.

Just cover that briefly.

Total revenue, up 7%, of which about 2% was attributable to HROI.

Payroll revenue, up 1%; HRS revenue, up 13% over the 9 months of the prior year.

Operating income growth was 3%.

And adjusted operating income, which excludes the onetime charge following termination of certain licensing agreements, reflected growth of 7%.

Net income and diluted earnings per share grew 13% and 14%, respectively, on a GAAP basis to $705 million and $1.95 a share.

Adjusted net income and adjusted diluted EPS are 16% and 17%, respectively.

Let me focus on our financial position next.

It remains strong, with cash and total corporate investments of $827 million as of February 28, 2018.

Funds held for clients as of February 28 were $3.9 billion compared to $4.3 billion as of May 31, 2017.

Funds held for clients, as you know, vary widely on day-to-day basis and averaged $4.6 billion for the quarter.

Total available-for-sale investments, including corporate investments and funds held for clients, reflected net unrealized losses of $35 million as of February 28, 2018, compared with unrealized gains of $32 million as of May 2017.

Our longer-term portfolio has seen an increase in the unrealized losses due to recent increases in market rates of interest.

Total stockholders' equity was $2 billion as of February 26, 2018, reflecting $539 million in dividends paid and $94 million worth of shares repurchased during the first 9 months of fiscal 2018.

Our return on equity for the past 12 months was a superb 45%.

Our cash flows from operations were $989 million for the first 9 months, significant increase of 29% over the prior year period.

This change was primarily a result of higher net income and timing impacts within working capital, largely related to income taxes in our PEO payroll-related unbilled receivables for payrolls not yet processed as of the reporting date.

So now let's turn to guidance.

We're updating it, as you all saw.

Payroll revenue now anticipated to grow approximately 2%.

That includes a contribution from the acquisition of Lessor in the -- which we will see in the fourth quarter.

We haven't mentioned it because to this point in terms of the results because it really had no impact in Q3.

HRS revenue growth is expected to increase in the range of 13% to 14% for the full year, incorporating HROI.

Interest on funds held for clients is now expected to increase in the range of 20% to 25%.

That includes a very modest contribution from the Fed rate rise last week.

Total revenue is expected to grow approximately 7%.

Operating income margin is anticipated to be approximately 38%.

That's down from our initial guidance.

But the reason for that is that investment initiatives are now anticipated to impact margins for the full year by 150 to 175 basis points.

Our effective income tax rate is expected to be in the range of 28.5% to 29%.

Investment income net is anticipated to be approximately $8 million, slightly lower than prior guidance due to the use of funds for the Lessor acquisition.

Net income is expected to increase approximately 13%.

And adjusted net income, non-GAAP, is expected to increase approximately 15%.

Diluted earnings per share is anticipated to increase in the range of 13% to 14%.

And adjusted diluted earnings per share, non-GAAP, is expected to increase in the range of 15% to 16%.

Now a few things that we typically and customarily do not provide, but we need to because of the number of changes that are occurring in this quarter and then going forward.

Let me give you start -- or let me start by giving you some color on the fourth quarter.

Our current expectations for the fourth quarter are: first, payroll revenue growth of approximately 3%.

That includes a contribution from Lessor, which will be a little bit less than -- or around 1% of payroll revenue; HRS revenue growth in the range of 15% to 16%; total revenue growth of 8% to 9%; operating income margins of 35.5% to 36%; effective tax rate of 30% to 31%.

I should say that I'll talk about the contribution of Lessor for the full year, fiscal '19 when I get there.

As is our custom, we'll provide guidance on fiscal 2019 on our fourth quarter call.

Since we are currently in the midst of our annual operating plan process, but to give you some direction, based on the trends we're experienced, I'll provide the following comments: We anticipate that our payroll revenue growth for fiscal 2019 will be comparable to the rate we experienced in the fourth quarter, which as I just mentioned, is approximately 3%.

And that includes a contribution from Lessor.

And next year, we anticipate that the contribution from Lessor will be less than 1% of total revenue.

We also anticipate that HRS will grow approximately 10% to 11%.

This growth is comparable to the trend we experienced this quarter, excluding the incremental impact of HROI.

We have not made any assumptions at this stage on the impact of further Fed rate increases.

We expect they will come, but don't know when and what the timing will be.

So we'll update when we get to the fourth quarter.

With a full year of tax reform in fiscal 2019, we anticipate our effective income tax rate to be approximately 24% for fiscal 2019.

Since we are taking the opportunity to use some of the tax reform benefit to accelerate investments in the business, we anticipate that operating margins next year will be approximately 36%.

Finally, we anticipate that the acquisition of Lessor will be modestly dilutive by about $0.02 in fiscal 2019.

Let me just emphasize that these comments are preliminary.

I anticipate that some of you would ask this, and it's important to update so you know the trajectory we're on.

But they're subject to revision when we issue guidance during the fourth quarter.

They're based on the trends we're observing in the business and could change based on actual fourth quarter results.

I want to comment also that we're completing our analysis on the impacts of the new revenue recognition standard, and we'll update you in fourth quarter.

Please refer to our 10-Q for more information.

We'll update you on all of these issues when we discuss final guidance at the end of the fourth quarter.

And now with all of that, I'll turn it back over to Marty.

Thank you, Efrain.

Operator, we'll now open the call to questions.

(Operator Instructions) Our first question coming from the line of David Togut from Evercore.

You called out 7% growth in new bookings for the quarter.

So 2 questions: Number one, how does this compare versus your plan?

And then second, since you don't regularly give out this metric, does this mean you'll start to disclose this going forward?

Not necessarily, but I thought I was trying to give some sense of the sales momentum coming out of the quarter.

What the 7% was, was the sales -- the small business sales to new business -- to new businesses.

So we had a nice growth in the sales, payroll sales to new small businesses that were just starting up.

And I think that tells a couple of things: One, that the number of new businesses continue to start up.

And two, that we're getting a bigger share of those new business startups than we were last third quarter.

That was the difference.

So we're up 7% in sales to new businesses on the small end over third quarter of last year.

How does that compare versus your plan for the year?

Well, we don't talk about plan, our plan outside of the business, David.

But we were pleased with it.

It was definitely better than we had last year, and you could expect plan would have been very similar.

So it was a little stronger than we had anticipated from new business start-ups.

Understood.

And then you mentioned growth in revenue per check.

Could you put some numbers around that for the February quarter?

Yes.

We don't disclose necessarily the number that we are measuring that against, David.

But I think what we're saying is we're getting more price out of customers.

That's the point that we're making there.

Got it.

And quick final question, 20% client count growth at the PEO pre-acquisition.

Can you just maybe flesh that out a little bit?

Any specific reasons why the growth is that high.

Do you expect that to be sustainable?

Well, we're very pleased with the performance of both the sales team and for our PEO organic as well as HROI, but this was our organic PEO, and the retention team.

So we had a very good retention.

I think the way we've been pricing in the insurance changes, the benefit plans that we've been able to offer and the very effective way that we've serviced clients and sold to new clients.

I think there's a growing demand for, as we've talked about on other calls, the PEO service, particularly with all the changes in health care and tax reform and all of these things.

Clients, especially in that mid-market, are looking for more of a PEO than they ever have in the past.

So we picked up more clients, saved more clients and we've seen growth in the clients that we have in the worksite employees.

Our next question coming from the line of Jason Kupferberg from Bank of America Merrill Lynch.

So Efrain, just a question on the fiscal '18 core payroll.

I know you're obviously putting Lessor in there for Q4.

So I just want to make sure we understand apples-to-apples.

Because coming out of last quarter, I think we were talking about kind of the lower end of the 1% to 2% guidance range.

So organically, I guess, is that still where we are?

Or are you telling us that you feel a little bit better about where you'll fall in the 1% to 2% kind of organic, putting Lessor on the side?

Yes.

I guess, what I'm saying is I feel a little bit better today, and I'm in the mid part of that range.

Okay, perfect.

And so now the key selling season has obviously passed, so just a couple of months left in the fiscal year.

Any view you'd share in terms of where you see net client growth landing for the year on an organic basis?

And as part of that, just any general observations coming out of key selling season?

I mean, you talked about the new sales to newly formed businesses.

But any specific color on retention, for example, would be great.

Yeah, retention, Jason, we felt good about.

We're really near historic highs, and at least, we're heading that way.

We had a good -- very good year in from a service and retention perspective in how we handled clients and how we retained our clients, and even as we rolled off discounts and so forth.

They have discounts that roll off at times, and that went well.

I would say, on the sales side, I thought on the small end, we did well.

As we said, we've got a bigger share of new sales to new businesses than we had last year, up about 7%.

And in the mid-market, it's just very competitive.

So I think, however, when you look at it from the payroll side only, it's very competitive now on both price and quality.

On the PEO side, as you've seen, we've done very well.

So we're -- you're seeing a shift more to that complete HR outsourcing, and we're feeling good about that.

I would say overall, in the sales side, we feel like we have better momentum.

We kind of started the first year slow, the first of the year slow, the first half.

In the back half, we're coming out with better momentum on the sales side kind of across the board.

And that includes insurance, retirement.

Everything is stronger in the second half.

Most everything is stronger in the second half.

On net client, we only talk about it really after the year is over.

And so with all the things going on, I'd continue to wait until we get done with the year to talk about it.

Okay.

And just lastly, a clarification.

So the fiscal '19 guidance, the preliminary outlook there was super helpful.

You talked about approximately 36% operating margins inclusive of reinvestments.

Can you clarify how much reinvestment is baked into that 36%?

We'll talk about that in the fourth quarter, Jason.

Because then, I'm going to get into a reconciliation exercise, which I'm not ready to do yet, so we'll talk more.

But you can see that -- I'd say 2 things: One is that we indicated where we'd end the year, so you can see where we will be versus the run rate where we -- or the average for 2018.

And you can also get a sense, Jason, from where we were on our initial guidance, what kind of investments we're making.

So that's the general direction I'd give.

Our next question coming from the line of Jim Schneider from Goldman Sachs.

Just maybe to follow up on the prior question a little bit more.

Previously, last quarter, I think you talked about a bit of a negative mix shift in terms of client size to the smaller clients from the larger clients or the mid-market clients.

Is that still an effect heading into fiscal '19?

And if it is, I guess that kind of implies that your client count, at least among smaller clients, could be up nicely.

You're able to kind of hold the same pricing dynamics of 2% as you had.

So I just wanted to test if those are indeed correct assumptions.

I would say this, Jim, that we're seeing, compared to the quarter a year ago, we're seeing some of that pressure easing.

So we'll see as we -- the tricky part of calling the year in the third quarter is that there's still a fourth quarter to go, so we'll see where we end.

But we think some of those pressures are starting to ease somewhat.

Got it.

And then just to kind of -- maybe if you can clarify what you just said there a little bit.

I mean, does that imply that the pricing pressure you've called out in the mid-market is abating slightly?

Or is that more of a statement about the mid-market selling -- sorry, the down-market selling momentum?

No, it's really a comment about the mix shift we were experiencing a quarter ago -- or the same quarter a year ago.

We're not experiencing the same level of mix shift we were 1 year ago.

And so we would expect, as we go through the year, that to continue to normalize or to stabilize.

Understand.

And then just a follow-up for me, if I could.

With respect to the investment portfolio, I think you had called out last quarter that you may be considering some more wholesale changes, given the impact of tax reform and the various moving parts in terms of both the types of investments you're making as well as the duration.

Can you maybe just kind of comment on whether we can expect some of those more wholesale changes to kind of play out?

And if so, what you're contemplating?

Yes.

So as you know, and everyone who's followed us knows, we have tended to be pretty heavily weighted in municipal bonds.

With the advent of tax reform, corporates look like a potential opportunity.

And when we look at the after-tax returns on corporates, it looks like there may be some advantage at current rates to tilting a bit more towards corporates.

So we're evaluating that.

We're in the process of thinking about that, and you could see more corporate bonds in the portfolio.

I recognize it's very easy to say, well, on an after-tax basis, it really won't make that much of a difference.

It could have a modest after-tax impact.

So we're looking at all of that and trying to factor in what we think, by the time we get to June when we -- or fourth quarter when we issue the guidance, what we think the right mix for the portfolio is, based on our assumption of what the Fed's going to do in the -- over the next 9 to 12 months.

So that's where our thinking is right now.

Nothing's set in stone, that's why I didn't call out that specific item when I talked a bit about '19.

So that's where our thinking is currently.

Our next question coming from the line of Bryan Keane from Deutsche Bank.

Just want to ask about the operating margin.

The fiscal year '19, Efrain, I think you talked about 36%.

Just curious, is there any onetime investments in fiscal year '19 that won't continue going forward?

Just trying to get a sense of the real kind of continuous operating margin thereafter.

Yes.

I think what, Bryan -- we'll update when we're in fourth quarter.

But some of that spending, clearly, is temporary over a couple year period.

So starting -- we actually started -- we'll start some of it in '18, and that will extend into '19.

But then you'll start to see some of that spending come down as we exit '20.

So some of the spending occurs in '19.

Some of the spending, at this point, we're thinking extends into '20, and then we see some of this spending roll off.

So we'll come back to you at the end of -- when we issue guidance at the end of the year.

Okay.

Well, that's helpful.

On the effective tax rate, I know with tax reform, the corporate rate went down to 21%.

The fourth quarter effective tax rate is higher, much higher and at 30% to 31%.

Then for the full year '19, it doesn't quite get down to 21%.

It gets to 24%.

So just curious, some puts and takes on those tax rates.

Yes, 2 quick things: First thing is on '19 is, while the Fed rate is 21%, you got to bake in state taxes, which are -- for us, at least, between 3% and 4%.

That's why we don't get quite down to 21%.

So that's part.

And then with respect to 2018, you only have a partial-year effect of tax reform.

That's why don't quite get down to the run rate in fiscal year '19.

That's after you've kind of filtered out all of the onetimers that we've got in there -- the devalue -- the revaluation, not the devaluation, but revaluation of deferred taxes.

So when you kind of net it out in very, very broad terms, you're getting about 5 months of benefit in 2018.

In 2019, you get 12 months of benefit.

And remember always, it's not just 21%.

It's also state tax, and there's other puts and takes.

But that's basically what's going on.

Yes.

I thought the effective tax rate in the fourth quarter, though, was higher.

The effective tax rate in the fourth quarter is.

But the way taxes are booked is you're booking at the annual rate for taxes in the quarter, not the tax rate for that specific quarter.

So you -- when you do the catch up in Q3, you adjust to what you think the run rate will be, excluding the discrete items.

And then you carry through that same rate, based on whatever your estimate is for the full year into the fourth quarter.

So you're not doing a discrete tax rate for the fourth quarter.

That's why that rate is where it's at.

Got it.

Got it.

And then last one for me.

I know you said 7% up in new sales in the smaller market.

Is there a metric there for new sales growth rate in that mid-market, where there was a little bit more challenge in what that grew?

No.

We really don't break it out that much.

I guess I'd say, the point that I was making is -- on the mid-market side is, payroll alone and those bundles continue to be very competitive.

And it's just a more difficult -- it's about the same as it has been in a difficult competitive environment.

We feel better on the PEO side, which is in that mid-market, and selling the complete PEO suite of services, where that's continued to be very strong.

And again, on the small market, that's kind of a component of the small business sales.

So what we're saying is in new -- sales to new businesses is up 7% higher than it was last third quarter.

Our next question coming from the line of Kartik Mehta from Northcoast Research.

Marty, as you look at the payroll business and the payroll service revenue growth, do you think, in essence, it'll be a 1% to 2% grower over the next few years?

The reason I say that, we're in a very good economic environment.

Seems like you guys are executing well.

Or do you feel as though that business -- the core business can grow much better than that?

Well, I think certainly, we're looking for more than that.

I think it's been a couple of -- it's been a bit challenging on that low end from a -- sometimes, from a price perspective.

Although when we build the bundles in, we're getting more prices, Efrain mentioned earlier.

And then I think it's just -- I think -- we're hoping for a little bit stronger than that on what it's going to be in a go-forward basis, but that's kind of where we've been for the last 2 years.

But I do think it can be stronger than that.

We just got to get a little bit more effective, and I think some of the investments we're making on the marketing side, in particular, for demand generation.

The world has changed.

And while we've been making changes on lead generation to the small side, and we've made changes in the selling approach, where we've sold more of those very low end over the phone and through web leads, I think we're going to be more effective -- even more effective on that next year.

So I think it's got some upside to it.

I think we're continuing to evolve the way we get demand generation and as well as selling.

And then, Efrain, as you look at the interest on funds held for clients, do you think, based on wage growth and some of the other things that you've talked about, that we should start seeing growth in that -- in the float portfolio?

Yes, I haven't gone through the numbers, but we have 1% growth, Kartik, this quarter.

So I'd anticipate that we'll have at least modest growth in the portfolio next year in the absence of some change in the direction of the mix shift that we've seen over the last couple of years.

And then just one last question, Efrain.

Just a clarification, when you talked about 2019 EBIT margins of 36%, I'm assuming that excludes the float portfolio revenue and impact from that, correct?

Well, so, no.

I said operating margin.

I'll just be careful, it's operating margin.

So that would include income from the float.

But I didn't give you any guidance as to what that float will be because, at this point, I don't have a good feel for where the Fed rate rises are going to be.

So that wasn't provided in that discussion.

Our next question coming from the line of Gary Bisbee from RBC Capital Market.

So let me just clarify that last one.

So the 36% is your GAAP operating margin outlook, excluding any nonrecurring items that come up?

Yes, that's correct.

So that's down a couple hundred basis points...

Correct.

Year-over-year.

And I guess, it is -- part of that would be the acquisition because you said that would be dilutive.

Part of it, the investment, but you're not yet willing to talk about sort of an underlying trend before that, is that right?

That's correct.

It's the investments plus the impact of acquisitions.

That's correct, Gary.

Okay.

All right.

And so if I could just ask 2 bigger picture question, can you give us a quick update on how you're thinking about the international strategy?

We know you've been in Germany for a long time, but it's never really grown to the point of being material.

Now you're doing another acquisition that it sounds like brings some better technology.

Do you plan to really ramp investment at this at any point?

Should we think of it as a potential to become more material contributor to your overall growth in the next few years or what's the strategy?

Yes, the strategy is that I, think, while we've been in Germany, and it's been a service model, like more of a payroll specialist model type of thing, there hasn't been as much of a play on the technology side in Germany.

We've grown okay there, but it's not gotten, certainly as you mentioned, significant from the way the company has grown from $2 billion to over $3 billion in revenue.

It's not going to get that significant.

However, we've been looking -- we continue to look on the acquisition side for opportunities to grow in Europe.

We think there was an opportunity to have a good -- particularly a low-end product, that was payroll and HR, and that we think there was a nice opportunity there to grow because we didn't see as much competition on the low end, and that they were at a place where we could acquire something.

So we've had a couple of things we've looked at.

And then Lessor, we felt was very strong because it's already a platform in 4 different countries, including Germany.

And so that will give us a technology, a stronger kind of self-serve technology solution on the low end and the mid-market solution in Germany from a technology standpoint.

And they're already selling in Norway, Sweden and Denmark, and very strong, particularly in Denmark, and they have a platform that can grow into other Western European countries.

So will it get significant compared to $3.5 billion in revenue?

I'm not sure, but it continues to offer opportunities for growth, and profitable growth at that.

And Lessor, the other thing about Lessor was that they had a very strong development team and a very experienced leadership team.

So we felt that the leadership team and development team is there in place and ready to build out that platform to grow, not only in the existing 4 countries that they're in, but in many more in the future.

Is there an opportunity to drop some of the technology and development that you've done with the Flex offering into that market to accelerate what they're doing or improve their offering?

Well, I think, yes.

I mean, I think, certainly, the expertise will be shared between the IT teams.

They have a good IT leader there with a lot -- many years of experience and he'll work very closely with the IT leadership team here that's working on Flex, our mobility platform and all of our integration in the cloud for HR and payroll.

So we'll certainly -- they will -- Lessor will certainly benefit, I believe, from the IT team here.

But they've got a very strong development team themselves.

That was one of the things that really was attractive to us is it's not just a service model where everyone's calling in and the payroll specialist is doing everything, we have that in Germany.

This was adding a technology solution that has performed extremely well and is very much a leader in particularly in Denmark, and we think it can grow.

Great.

And then just the last one for me, given the competitive intensity and a lot of chatter, especially among investors around the competitive outlook with the software play, I wonder if you could just give us a high level update on SurePayroll and how that's gone since you've acquired it?

I know it was certainly growing robustly early on after you acquired it.

But is that a channel to upgrade people to the more full-service model?

Or is it an opportunity if people are agitating for a different offering from your core base, to push them into that product?

Or is it really being run separately right now and just another growth vehicle?

And any color on where that's at?

Yes.

The Sure has continued to perform very well from a growth's perspective, sales and retention.

It's very much more of a do-it-yourself technology play.

If anything, we see -- we've seen the opportunities there of upgrading.

If you're in Sure and you're continuing to grow and you want the full breadth of products and services, you tend to go to Paychex and the Flex platform, and we have a process in place that we've had for many years where they can refer clients up based on -- not only based on whether they see it as an individual or not, but the data analytics as well that will say these clients are ready to move and would be better placed on Flex, and we work clients through that.

But it's been a very good low-end entry model for clients who want to do it themselves, set themselves up.

And that's one of the reasons that we kind of kept that brand separate as part of Paychex, but it had that brand that competes very effectively, I think, with some of the low-end, lower-priced competitors who want a do-it-yourself product.

So they've continued to perform very well and certainly at or above our expectations.

And Gary, what I'd say too just to build on what Marty said, so Sure informs us of what that -- the part of the market that wants less expensive, do-it-yourself product is really looking for, but also Flex has significant self-service capabilities itself.

So what was your traditional full-service outsourcing in the past is much more hybrid right now.

And so if you want more feature functionality, you move to Flex.

If you want a more basic system, you can be very well served by SurePayroll.

And I think that what's happening in the market or what will continue to evolve in the market, and this goes everywhere from -- all the way from SurePayroll to Flex, and frankly, even to the PEO offering, is that people are self-selecting on the kind of service they want.

If they want very little, they go DIY SaaS.

If they want more, they go to Flex.

If they want compressive outsourcing, they'll go to the PEO.

And we see that continuing to evolve as we move into the future.

Next question coming from the line of David Grossman from Stifel Financial.

So -- I think this question has come up in different forms a couple of times on the call about just the dynamic with growth in the core payroll business.

But my recollection was that we had some mid-market retention issue in the prior year and perhaps some pricing kind of associated with that.

And that perhaps we're anniversary-ing those losses now, which is helping put some upward lift into the payroll growth rate going forward.

So I mean, first, am I getting that right?

Am I remembering this right?

And if so, how do we think about kind of what your expectations are for that kind of unit pricing dynamic going forward in core payroll?

Is 1% to 2% really at this stage of maturity where we should be thinking for the business?

Or should we be thinking differently now that you've got an opportunity to invest at a different rate?

So, David, great compound question there.

So let me parse it into 3 pieces.

So the first part of your question, yes, that's correct, we're anniversary-ing some of the effects that you did mention.

I'd say it's less about losses and more about what the mix of sales was less -- a year ago, less mid-market, more small market.

So I think we're anniversary-ing, starting to anniversary some of that.

And also, client retention plays into that picture.

That's Part A. Part B, the pricing dynamic.

So we've always said it's 1% to 3%.

You can continue to price at that level, especially if you deliver value for the products that you provide to clients.

If you provide excellent service, clients are very willing to give you -- consider those kinds of price increases.

I think what's changed is the going-in price when you sell now is more competitive, and that's a little bit more challenging.

But you still have an opportunity to price in the range that we've been saying you can.

And I didn't get the last part of the question.

Well, the last part of the question really was how to think about that pricing unit equation going forward and perhaps what's assumed in your preliminary fiscal '19 guide?

Because it sounds like last year -- or in the last 12 months at least, we got probably 0% to 1% unit growth and the balance of the growth came from pricing.

How should we think about unit growth going forward, since that clearly has been a challenge for the company.

And I was curious whether or not now that you've got the tax rate benefits to reinvest at a higher rate, should we be hopeful at least that we could get some acceleration in that unit growth?

I think that's a fair comment.

Some of those investments are going to be geared to precisely that, and I think you're right that that's where we're going to be putting some of our effort.

Yes, I think a couple of things.

One is that, David, I think that's very right.

As I mentioned earlier, and some of the investments are pushing more toward accelerated marketing and demand generation.

I think we were slower to this than we should have been as far as picking up more leads on the web and then being able to close them more effectively.

I think we've made some big changes this year into that.

It's starting to pay off, and we'll continue to accelerate that.

There's just a different -- a changing, I don't want to say it's drastic like it's everything, but there's a changing model here where, as you'd expect, more people are searching, researching and deciding online and then making the call very quickly.

So it's got to have this balance that we've been investing more in the virtual sales team.

You've got to have this balance of virtual sales, telephonic sales who handle those leads and close the sales and the field -- and focusing the field on the larger clients even than some of the ones that come in on leads.

Because on leads, they're ready to buy and do it over the phone or over a WebEx type of thing.

They just want to see it, research it and buy it.

So we're seeing that change.

And in the mid-market, we definitely did see better retention this year than we did last year on the mid-market sales and through the end of the year.

So that was a real positive for us.

And I think that's just more comprehensive product, better service and so forth.

Got it.

And I had just 2 quick follow-ups.

One was just on the WSE growth.

I just want to make sure that I heard that right, did you say 20% growth in WSEs on an organic basis or is that client growth?

That was WSE growth, not client.

So that's correct, that's what we had.

For the PEO, by the way, that's what we're talking about.

And that just seems like an extraordinarily high number to me based on historical -- I thought we were tracking kind of in the 10% to 12% range.

So am I remembering that right because that seems like a big number to me and if it is, what changed?

I think as usual, David, your memory is good, and you are getting it right.

It was 20%.

We had a really strong sales.

Strong sales and retention.

Yes, and retention.

And we had a good quarter.

Was that a competitive dynamic, was that a market dynamic -- I mean, that just seems like close to 2x your growth rate where it had been trending?

And just curious, is there some change in the business that would drive that kind of exceptional acceleration?

I'd say couple of things.

So the -- we have made a big investment in sales execution on the PEO side, and it's -- those things don't occur overnight, and we're getting benefit from that.

And I would say that's really kind of probably the #1 reason why we're seeing that kind of benefit.

I think also on the sales side, as Efrain mentioned, also retention.

As I said, we've been able to perform very well, and therefore, we been able to have very good plans, insurance plans and pricing on those plans.

And I think that we definitely saw a nice improvement in retention as well.

So on both sides of the organic PEO, this is without HROI, we performed very well and we've been very focused on it as well.

Yes, I just want to -- David, one other caveat to that is we're just talking about PEOs, not necessarily ASO.

At year-end, we update our entire worksite employee number, which includes our lower-end product, the ASO and the PEO.

We still have more clients on the ASO, more worksite employees on the ASO.

But we put a lot of focus on PEO because we think there's opportunity there and it's starting to pay benefits.

Right, but there was no increase in the risk profile of the business in terms of at risk on health insurance or anything like that?

Absolutely.

We -- there is no increase in profile and -- on the risk profile.

And of course, we monitor that very carefully.

Our next question coming from the line of James Berkley from Barclays.

Just 2 questions here real quick.

First, I noticed on Page 5 of the press release, you guys took out the $0.10 impact from the change in annual effective tax rate of $36 million there.

But it looks like year-to-date, it was not taken out, it was left alone.

So you got the $194 million versus like $184 million, if you just add up each quarter individually, is that fair?

And then does that imply about $0.60 for 4Q for the full year guidance?

How should we think about that?

I have -- I would have to look at that, Jim.

I don't think that -- I think it will -- it should be spelled out pretty clearly in our investor presentation.

Okay.

And then a quick follow up, just on the Lessor Group.

Just like commenting on some of the target markets you see beyond the ones that you're currently exposed to there in Europe and if you could give any detail around the margin or the growth rate of the company, that would be great too.

Jim, can you just say that one again, I just -- I couldn't catch that last part.

I think it was on the European -- on Lessor or...

Yes, so you're talking about some of the markets that they're currently in and the ability to kind of realize revenue synergies hopefully in Germany over time.

But what are some of the other markets that you think you could expand into beyond the ones that it's exposed to now?

Sure.

I think there's already some work being done on a product that would get into Spain or France and Poland.

So I think the other markets, something that we haven't been able to do because we didn't want to necessarily put the investment into the development of each platform.

We're kind of at a stage now and Lessor is at a stage that we found that has a solid platform and a way to update and build up those platforms for various countries at an effective way.

They are profitable and we believe that their whole service model, which is very much a do-it-yourself model, is going to be a good way to go in Europe right now, as we move forward.

There's a number of -- and in the -- with the success that they've seen in those 4 countries, we think that we can easily expand to others.

Our focus right now will be, hey, how do we drive penetration in those 4 countries.

But then after that, expand to others, probably more 18 to 24 months down the road.

Jim, one -- I think I understood your question, I apologize because I was not tracking.

So when you look at the table, the $0.10 really relates to Q3.

And it's the catch up that now gets Q3 to close to $0.30 when -- I'm sorry, 30%, when you make the adjustment in that quarter.

You're catching up those first 2 quarters, that's why Q3 is low and then you exit the year at around that rate.

There's puts and takes there, so.

If that's not clear, just give me a buzz back and we could talk about it further.

Our next question coming from the line of Jeff Silber from BMO.

It's Henry Chien calling for Jeff.

Just a high-level question.

I know you mentioned some of the metrics kind of highlighting the tightness of the labor market and wage inflation for earnings picking up.

I'm just curious, in light of that kind of environment with a tighter labor market, what's kind of changed for your sales or demand from your perspective?

Well, I think we're not having a strong recovery.

Recovery was very long and slow from additional jobs and new business startups.

New business startups have now kind of gotten back to where they were kind of prerecession, a long time ago now, and seemed to be holding.

And then in the jobs, the job growth is back to kind of a normalized component, at least in our review.

For -- this is clients under -- this is businesses under 50 employees is what we refocused that on.

We're back to kind of a normalized growth of businesses and employment growth back to kind of 2004, which was our base year.

And then the wages should pick up some.

So we've seen wage growth that held under 2% for pretty consistently until about a year ago.

Now it's starting to tick up.

We actually saw it very close to 3%, which was nice and strong and now it's kind of drifted back into that 2.7%, which is a little strange, but I think it's going to end up closer to that 3% because of the shortage of employees with specific skills and so forth.

Plus, you're also seeing at the very low end a lot of minimum wage increases are going into effect.

So when you put that in, depending on the time of the year, you're going to see something probably closer to 3%.

And in those kind of front-end jobs, you're going to do something stronger, even probably 4% to 5%.

And I think all of that kind of bodes well for Chex.

Also, what really bodes well is that with that job growth and wage growth, more and more businesses, small and midsize, are going to need products that are full payroll and HR outsourcing.

Got it.

Okay.

That's helpful.

And that kind of leads to my follow-up question.

For the investments that you're making, just curious what's sort of driving the decision to ramp up investments, and any color you can give on what these investments are?

Is it focused on sales and execution in light of the more positive environment or any kind of color you can give that would be great.

Yes.

I think you always want to spend more to accelerate growth, and so we wanted to take advantage of some of the tax reform benefit to do that.

So what we're finding is technology spend, so where we, particularly in the client interface, so from our mobility platforms and what we're building into our mobility platform that's been very popular with clients, the reporting platform, the analytics, all of the things that clients want, and the HR administration piece of it, there's always things that we want to do faster than we already have to be ahead of competition.

And we decided that given this benefit to us because we are a very profitable company, this is a good time to reinvest and accelerate a few of these projects that are on our road map.

And so you'll see enhancements to the client interface in both mobility and in the breadth of product as well and we're accelerating those.

If you look at marketing spend, the marketing spend will go up as well as the sales spend because we think with marketing -- new marketing generation tools and a bigger spend and a more focused spend, that we can get more leads into Paychex and that we'll be able to close more sales with the focus of those leads.

So we're putting more emphasis on our marketing leads, our marketing spend and demand generation as well as you'll see the sales team grow.

We're not kind of, right at this point, ready to say how much it will grow, but there will be a combination of growth between the virtual or telephonic sales teams and the field sales teams because we think the opportunity is there to sell more if we had more people out there, which is a good thing.

Our last question coming from the line of Mark Marcon from Baird.

I had a few questions, kind of clean-ups.

But on the investments and as they relate to the operating margin going to 36% for 2019, where would they fall in terms of between direct operating expenses versus SG&A?

How should we think about that, number one.

And number two, as it relates to that specific item, it sounds like some of that is going to continue through 2020.

But once we normalize, how should we think about the pattern of margin expansion and pace of margin expansion going forward once we get through that investment phase, that's number one.

Number two, and I'll be glad to repeat these.

Number two, on the PEO side, where you're getting the wins, are those primarily coming from clients that have existing PEO relationships or are you seeing a lot of white space out there where you're selling into clients that don't have a current PEO and how does that make you think about the PEO market?

And number three, you didn't buy back any stock this quarter, wondering is that because of Lessor?

How should we think about that?

Let me start with the PEO one, Efrain can jump in on the stock one and the others.

I think, one on the PEO, I think it's a combination, Mark.

I think, we certainly have been able to win over with our service and our plans and our pricing and sales execution, existing PEO clients in a number of markets.

So I think we've had very competitive offerings that have done well.

I also think we're selling PEO.

We're also where I've seen experience with selling PEO to some new clients that have not had PEO before.

And as I mentioned earlier, I think it's continuing to evolve, that more and more clients are looking for that HR support and the co- employment is getting more known not only because of us, but because of competitors out there as well, that that's becoming more known and more comfortable with clients who have not experienced that before because of tax reform, because of all the HR requirements, because of health care.

Things are changing, it's probably the most confusing -- one of the most confusing times we've ever had from what federal government is doing.

In the federal government, the state governments, I've mentioned before, regulations are going up, minimum wage changes, Family Leave Act changes.

There's never been a time, frankly, when there's been probably more confusion as to what I have to do, if I'm -- particularly if I'm a multistate business.

So I think PEO is both -- PEO for us has definitely been both those who already have it and those who don't have it, but are now finding it as a good alternative.

Marty, is it silly to think that -- I mean, take all your comments together, sounds like a pretty obvious opportunity now?

Definitely.

Definitely.

That's why, as Efrain mentioned, I think I've mentioned, we put more sales teams toward this.

This was behind acquisition of HROI.

We felt that was a very good PEO that was doing some things different than we were and they were very effective.

They were ahead of what we expected from them, so -- and it's early, just from last August.

So I think this is definitely an opportunity and you're seeing us put more investment in the PEO in it from a sales and execution standpoint and product standpoint.

The more you put in, the more encouraged you're getting?

Yes, I would definitely say that right now.

Mark, as to your question on the split between the investment, so let me just bracket them.

I can't give you a direct answer yet, I've got to wait until fourth quarter.

But in part is because there -- some of the categories may shift between our current...

Sure, and part of it is just an allocation that's objective.

Right.

But let me just sort of generally say that a reasonable way to think about it is that about 1/3 of the investments would be on the operating expense side and 2/3 would be on SG&A.

Just before I go further, let's just remember that in our business, IT is in G&A.

So that's why 2/3 is going into SG&A.

Marty mentioned sales and marketing demand-driven spending, that will be one focus, and then lots of IT projects that are -- that were on board and that we're accelerating forward to try to get in over the next couple of years or so or accelerate the opportunities we get from doing that.

So more to come in Q4, and we can talk about it then.

On the share buyback, we buy back for dilution.

If you look back at where we were in the quarter, we're not too far from where I expected to be.

We'll do more buying as we head into first quarter of next year.

Okay.

And just going back on the -- just the pace of margin expansion once we get past the early part of fiscal '20?

And...

Yes.

So I think when we get beyond that, I'll have to -- we'll reserve discussion on how quickly we can expand margins.

But it would certainly be our expectation getting through this period that we continue to expand margin, and part of the investment is intended to drive that as we come out of the period.

How quickly, we'll have to see how the projects go and how they pay off, but that's clearly in the forefront of our mind.

Yes, the idea of these investments and in taking some of the benefit from tax reform spend is to drive more -- better and stronger top line sustainable top line growth and that will start to bring the margin back as opposed to just trying to look at where we're cutting costs.

Where we've always been good at keeping costs out, we're pretty targeted as to where these investments are going to be, and hopefully, how long they're going to last, and then start to see margin improvement because of the growth in the top line back into the ranges that we have in the past.

Great.

And then just think about the balance sheet and the strength of it and the strength of the free cash flow and the sustainability of it.

You mentioned you might change a little bit what you're doing in terms of the investments on the float down.

How are you thinking about just the balance sheet in general, I mean, just given the recurring nature of the cash flows and the strength of the business, leverage levels, things of that nature?

Yes, Mark, what I'd say is, as we looked at tax reform, another bucket that we targeted was at the margin being able to do more M&A.

I think the fact that we did Lessor in Q3 is the first indicator of that.

We will be active in looking at opportunities, at this stage, none transformational, but we think we have obviously, a lot of ability to do the right kinds of M&A, and we think there is targets out there that are of interest to us.

At this time, there are no questions over the phone.

Speakers, you may proceed.

Thank you.

At this point, we'll close the call.

And If you're interested in replaying the webcast of this conference call, it'll be archived for about 30 days.

Thank you for taking the time to participate in our third quarter press release conference call and for your interest in Paychex.

Have a great day.

That concludes today's conference.

Thank you all for joining.

You may now disconnect.