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Executives

Douglas S. Sharp - Chief Financial Officer, Vice President - Finance, Treasurer

Paul J. Sarvadi - Chairman of the Board, Chief Executive Officer

Richard G. Rawson - President, Director

Analysts

Tobey Sommer - SunTrust Robinson Humphrey

James Macdonald - First Analysis

Michael Baker - Raymond James

Mark Marcon - Robert W. Baird

Administaff, Inc. (ASF) Q3 2008 Earnings Call November 3, 2008 10:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Administaff third quarter 2008 earnings conference call. (Operator Instructions) Speaking on today’s call we have Paul Sarvadi, Chairman and Chief Executive Officer; Richard Rawson, President; and Douglas Sharp, Chief Financial Officer. I would now like to turn the presentation over to your host for today’s call, Mr. Doug Sharp. Please proceed.

Douglas S. Sharp

Thank you. We appreciate you joining us this morning. Before we begin, I would like to remind you that any statements made by Mr. Sarvadi, Mr. Rawson, or myself that are not historical facts are considered to be forward-looking statements within the meaning of the Federal Securities Laws. Words such as expects, intends, projects, believes, likely, probably, goal, objective, outlook, guidance, appears, target, and similar expressions are used to identify such forward-looking statements and involve a number of risks and uncertainties that have been described in detail in the company’s filings with the SEC. These risks and uncertainties may cause actual results to differ materially from those stated in such forward-looking statements.

Now, let me take a minute to outline our plan for this morning’s call. First, I’m going to discuss the details of our third quarter financial results. Richard will discuss trends in our direct costs, including benefits, workers’ compensation, and payroll taxes, and the impact of such trends on our pricing. Then Paul will add his comments about the quarter and our outlook for the remainder of the year. I will return to provide financial guidance for the fourth quarter of 2008. We will then end the call with a question-and-answer session.

Now, let me begin today’s call by summarizing the financial highlights from the third quarter. As most of you are aware, we reported preliminary third quarter results on October 17th to provide early commentary on our solid results in current market conditions. Additionally, early reporting allowed us to resume our share repurchase activity at attractive price levels. Today we reported third quarter earnings per share of $0.46, the same as that reported in our preliminary release.

As for the year over year comparison, Q3 EPS of $0.46 increased from $0.45 in the 2007 period. However, bear in mind that lower interest rates negatively impacted investment income, discounting of workers’ compensation reserves and our effective income tax rate by $0.05 per share in the 2008 period when compared to Q3 of 2007.

Our quarterly results were driven by the following key metrics. The average number of paid worksite employees increased just over 6% for the quarter to 119,389, just below our expected range.

Gross profit per worksite employee per month averaged $239 for the quarter, above our forecasted range and more than offsetting the shortfall in paid worksite employees.

Operating expenses were at the high end of our forecast range and interest income fell below our expected range, primarily due to a higher concentration of lower-yielding, more conservative investments in response to market conditions.

We have generated year-to-date EBITDA plus stock-based compensation of $76 million, and ended the quarter with $109 million of working capital.

Now let’s review the details of our third quarter results. As I just mentioned, the average number of paid worksite employees per month increased just over 6% compared to the third quarter of 2007, from 112,496 to 119,389. In a few minutes, Paul will provide the details behind our third quarter unit growth, including sales, client retention and net change within the existing client base, and also comment on our outlook for the remainder of 2008.

Third quarter revenues increased 10% over 2007 to $422 million as a result of the 6% increase in the average paid worksite employees and a 4% increase in revenue per worksite employee per month.

Looking at third quarter revenue contribution and growth by region: the Southeast region, which represents 11% of total revenue, grew by 10%; the Northeast region, which represents 21% of total revenue, grew by 16%; the Central region, which represents 14% of total revenue, grew by 13%; the West region, which represents 20% of total revenue, grew by 10%; and the Southwest region, which represents 33% of total revenue, grew by 5%.

Moving to gross profit, gross profit per worksite employee per month for the quarter was $239, significantly above the $222 reported in the 2007 period. These results were also above the high end of our forecasted range of $233 to $235, with the upside primarily due to lower benefit costs.

As for the specifics, benefit costs per covered employee per month averaged $693 for the quarter. This was sequentially flat from the second quarter and a year-over-year increase of only 1.5%. Richard will discuss the details in a few minutes, including how these results and forecasted trends provide a pricing advantage beneficial in the current market conditions.

Workers’ compensation costs were 0.63% of non-bonus payroll for the quarter. This was just under our forecast of 0.65%, as we continue to successfully manage both the frequency and the severity of claims. Actuarial loss estimates continue to reflect these favorable claims trends and resulted in a $2.8 million reduction in previously reported loss estimates.

Payroll taxes as a percentage of total payroll cost declined from 6.55% in Q3 of 2007 to 6.44% in Q3 of this year as a result of lower state unemployment tax rates and the higher payroll averages and bonuses of worksite employees.

Now let’s move on to operating expenses, which increased 15.8% over Q3 of 2007, just above expected levels. You may recall that an expected 15% increase included investments in our sales expansion, new products and services, such as HR Tools and our mid-market initiative, and the integration of the recently acquired employment screening company.

As for the details, the majority of the operating expense increase was reflected in our salaries and wages, as we continued to successfully grow our sales force. Trained sales reps averaged 307 for the quarter, an increase of 16% over Q3 of 2007. Sales commission costs increased just over 3%. General and administrative costs, which included rent associated with our sales office expansion and development costs related to our HR Tools initiative, increased by approximately 7%. Advertising and depreciation costs remained relatively flat.

Interest income declined by approximately $1.2 million from Q3 of 2007 and came in about $300,000 less than our forecast. As you may recall, at the outset of Q3, the majority of our investments were held in a tax-exempt money market fund. Due to some uncertainty surrounding the liquidity of these funds, we liquidated a large portion of these securities during the quarter and reinvested the monies in lower-yielding government backed funds. We will continue to adjust our investment strategy to the changing market dynamics, with principal preservation a priority.

Now let’s review several key balance sheet and cash flow items. EBITDA plus stock-based compensation totaled $23 million for the third quarter and $76 million year-to-date. Additionally, we were reimbursed approximately $20 million in excess workers’ compensation claim funds during the quarter.

As of today, we have returned $44 million to shareholders through dividends and share repurchases. As for our YTD share repurchase activity, we have now repurchased 1.5 million shares and currently have 614,000 shares remaining for repurchase under our authorization.

So in summary, we are very pleased with our third quarter activity and results, particularly in light of current market conditions.

At this time, I’d like to turn the call over to Richard.

Richard G. Rawson 

Thank you, Doug. This morning, I am going to share the details of our strong third quarter gross profit results. Then I will update you on the pricing and direct cost trends we are seeing and how they will affect gross profit per worksite employee for the fourth quarter and into 2009.

Our gross profit comes from the mark-up that we earn on our HR services combined with the surplus that is generated when our direct cost pricing allocations exceed the corresponding direct costs. Doug just reported that our gross profit per work site employee per month was $239 which is above the top end of our forecasted range.

These results came from achieving $197 per worksite employee per month of service fees and generating a surplus of $42 per work site employee per month or 4.3% of our total direct cost allocations.

The pricing on our service fee for new business increased $11 per worksite employee per month over the third quarter of last year, while renewal pricing increased $5. These facts continue to support the value proposition that we bring to prospects and current clients.

This quarter’s better-than-expected surplus of $5 per worksite employee per month came primarily from better than expected results from our payroll tax and benefits direct cost centers. Additionally, our workers’ compensation cost center surplus contributed slightly to the better than expected results.

Let’s begin with payroll taxes. Our better-than-expected surplus in this cost center came as a result of having a spread between our allocation and the actual payroll tax expense applied to a larger amount of taxable payroll than what we had forecasted. This spread is consistent with what we saw in the second quarter’s positive results and continued to contribute almost $2.00 of additional surplus to the gross profit per worksite employee per month for this quarter.

The other primary contributor to the better-than-expected surplus came from our benefits cost center which added $3 of additional surplus to the gross profit per employee per month. As Doug mentioned a few minutes ago our benefits cost per covered employee per month was $693, which was below our estimate of $696.

On the pricing side of this cost center, we achieved our allocation targets; therefore, the additional $3 surplus was the result of better-than-expected costs.

The plan design changes that we made at the beginning of 2008, coupled with the migration of participants to lower cost plans, have caused our trend in healthcare costs to increase only 2% this year over last. This is part of the value proposition that the Administaff PEO model brings to small business. The remainder of this quarter’s additional surplus came from our workers’ compensation program, which continues to produce great results.

The total number of claims reported for the policy year which ended on September 30, 2008, is the same as the 2007 policy year. This incidence rate is very meaningful when you consider that we have had over a 6% growth in the number of worksite employees that incur those claims.

The average cost of these claims is 13% higher than last year’s average claim cost. Considering marketplace medical cost trends of about 10% and wage inflation of about 3% this increase is in line with what we would have expected. These results continue to showcase the great job our safety and claims management professionals do.

In summation, we had another very solid quarter of performance at the gross profit line.

Now let me share with you what we expect gross profit per worksite employee per month to be for the fourth quarter, beginning with pricing. We believe that renewals for the balance of the year will continue to add mark-up dollars to our service fee and we would expect to see an increase in our mark-up on new business sold similar to what we saw this quarter. Therefore, our average mark-up per worksite employee per month for Q4 should be about $198, which would continue to be impressive in the current economic environment.

In addition, we anticipate the surplus component of gross profit to be in the range of $48 to $51 per worksite employee per month for the fourth quarter, which is up a few dollars from our previous forecasts. Let me explain how we get there.

The surplus generated from the payroll tax cost center typically declines each quarter throughout the year. However, when we have slower growth later in the year, our costs are lower and the result is more surplus. Therefore we should add an additional $1 to $2 per worksite employee per month to the surplus in the fourth quarter.

Now let’s discuss the workers’ compensation cost center. We renewed our workers’ compensation policy with ACE Insurance Company beginning on October 1, 2008 and secured a nominal decrease in the administrative fees for this policy year. The claim costs have increased slightly for the reasons that I mentioned a few minutes ago. In addition, the discount factor applied to workers’ compensation reserves continued to decline slightly. Therefore, we now estimate the workers’ compensation costs to increase about one basis point from last quarters estimate to 0.66% of non-bonus payroll for Q4.

When combined with our pricing allocations, we are expecting a surplus similar to the third quarter.

Now the remaining upside to our surplus in Q4 should come from the benefits cost center. We are continuing to increase our allocations on the pricing side to match normalized trend increases and further reduce the deficit in this cost center.

On the cost side, we still see the same 3 factors positively affecting the benefits cost center in Q4. The first factor was the plan design changes that took effect in January of 2008. The second factor was migration of covered worksite employees moving from the UnitedHealthcare ChoicePlus250 Plan to lower cost, higher deductible plans. And the third factor that would reduce our cost was the reduction in administrative fees from UnitedHealthcare that also took effect in January of this year.

All three factors are still contributing to the lower cost of benefits compared to last year. So for the 4th quarter, we believe that the total benefits costs per covered employee should only increase about 3% over Q4 of 2007. This combination of allocation increases and reduced costs should add an additional $4 to $6 per worksite employee per month to our surplus for the fourth quarter.

In summation, we should see gross profit per worksite employee per month increase to a new range of $246 to $249 for the fourth quarter and punctuate another very successful year.

While it is still early to forecast specific line items for 2009, I would like to share with you a few details that we already know about for next year. First of all, we are planning to have a very nominal price increase in the service fee component of our total mark-up for new and renewing customers in 2009.

Second, even though unemployment claims have been increasing, there is a lag of more than a year on the effect of unemployment tax rates. Our client contracts allow for an immediate price increase when a statutory rate change occurs. Therefore, the surplus that we have earned throughout 2008 should continue into 2009.

Third, we will not be implementing any plan design changes for our health plans for 2009. However, we will be getting a reduction in our administrative fees from UnitedHealthcare. Therefore we are forecasting only a 6% to 9% increase in benefits costs for next year and we are continuing to increase our allocations for new and renewing business to match these increases.

And last, our workers’ compensation cost center should continue to produce positive surpluses next year even if our cost trends upward. If interest rates go back up at any time in 2009, the discount factor that we apply to our workers’ compensation reserves will cause us to recoup some of the $2.1 million additional expense that we had to take in 2008. But we are not going to count on that until it happens.

So in summary, we feel good about our capability to effectively manage price and cost at the gross profit line for 2009. At this point, I would like to turn the call over to Paul.

Paul J. Sarvadi

Thank you, Richard. Today I will provide information on our growth drivers and key initiatives in the third quarter. I will also discuss our fall selling campaign and the important year-end transition which becomes the foundation for our 2009 plan. I will wrap up my comments with some detail regarding our target market client base and our expectations as our clients react to the current economic climate.

Our unit growth in the third quarter was driven by strong client retention and sales continuing at the same pace of the first half of the year. This growth was offset by some layoffs experienced in the client base toward the end of the third quarter.

Our average client worksite employee retention percentage for the quarter was excellent at 98.6%. The average number of employees lost per month due to client attrition in the third quarter was 1.4% of the worksite employee base. This is considerably better than the same period last year at 1.7% and lower than the historical average for this period of 1.5%.

As I mentioned earlier in the year, we have a company-wide initiative surrounding improvement in client retention throughout 2008 and into 2009. This includes established retention improvement targets as part of the annual incentive compensation plan for all employees in the company.

Since the initiative began in February of this year, we have experienced a 21% improvement in client retention over the same period last year. Of course the highest concentration of renewing accounts and year end terminations are still ahead of us but if we can extend these results through the next few months, this will contribute substantially to the starting point for paid worksite employees in 2009.

The sales effort throughout 2008 has reflected lower closing rates indicative of uncertainty and a sluggish economy. Sales for the third quarter and year to date on our core business has been approximately 75% of our internal targets. These levels were produced by census to first call rates in line with previous periods just under 50%, combined with closing rates of approximately 16%, down from 20%.

Year to date sales per salesperson per month was 0.70 which is off 25% from historical levels for the first three quarters of the year. Our highest efficiency occurs each year in the fourth quarter in connection with our fall selling campaign. Our range in sales efficiency for this period has been from approximately 1.2 in economic climates similar to today, to 1.7 sales per salesperson per month in a more robust economy.

In anticipation of a difficult sales environment, our plan for this year included a targeted increase in the number of trained sales staff of 15%. As Doug mentioned earlier, we have exceeded this target with an increase in trained sales staff of 16%. This will be very beneficial as we muscle our way through the current economic environment.

Our pricing on new business has remained solid throughout the year and through the third quarter, so as we enter the fall campaign, the impact of the economy on sales has been on the volume sold rather than pricing and margins.

Our annual fall selling campaign had an interesting start this year to say the least. Each year we bring the entire sales staff to the corporate office for a kick-off meeting to introduce our marketing initiatives and goals for the campaign. This year, we had an unexpected visit from Hurricane Ike over the weekend prior to the scheduled kick-off, which of course was then cancelled.

In addition over the same weekend, the economic turbulence became very apparent with the demise of Lehman Brothers, the first bail out of AIG, and the combination of Merrill Lynch into Bank America.

Due to the hurricane, we implemented our disaster recovery plan and operated on back-up power and essential staff in our corporate office in Houston and moved other staff and operations to our Dallas and other regional facilities. I am very pleased to report we continued to meet client and worksite employee needs throughout the storm and the extended power outage and disruption Ike caused.

However, these conditions did provide a rough start for the fall campaign lead production. The first two weeks of the campaign in September reflected the uncertainty in the marketplace and the disruption from the hurricane, which affected our outbound call center operations in Houston. Fortunately, our sales team made adjustments on the spot and when the kick-off was cancelled, sales teams held their own prospecting competition and replaced the lead production deficiency with their own cold calling.

To replace the fall campaign kick-off, our senior sales leadership began a nationwide tour to have regional meetings that included each sales office throughout the country. Our marketing plans were initiated and lead production and first call appointments have improved since the rocky start.

In addition to our successful radio and TV ads featuring Arnold Palmer, this year marketing efforts included direct mail and a “We want you back program” directed toward 2100 targeted former clients.

At this point in the fall campaign, activity and attitudes are where they need to be. What remains to be seen are the closing rates and the reaction of our target client base to the current economic climate.

Our target client base is unique in the marketplace. We serve companies that fit our characterization as the best small to medium size businesses in America. These companies are set apart by both qualitative and quantitative distinctions.

They have been screened through a selection process at Administaff to qualify them from both a demographic and a psychographic assessment to fit our client profile. Our clients have typically been in business more than 7 years before joining Administaff and have a level of profitability that is reflected in pay rates and benefits provided to employees. They care about their people and connect to the role their people play in reaching their company goals.

Most importantly, these businesses have a definitive getting better agenda that is in the form of a written business plan. These client owners are focused on improving, growing, and developing their businesses and taking advantage of opportunities.

They have taken risk before, learned from their failures, and have an intuition about opportunities. Their own experience is a success story of persistence in the face of significant challenges and defying the odds. They have a level of success and a base of experience that makes them uniquely qualified to be opportunistic in the exact conditions we find the marketplace today.

Their level of profitability and agility make them exceptional in responding to changes in the marketplace. There is a distinction between our 10% of the best small businesses in America and the other two other segments, large corporations, and the other 90% of the small business community.

Large corporations respond to major marketplace shifts by lowering revenue estimates and quickly cutting costs by trimming the fat, matching staffing and spending levels to the new revenue targets. The lay-off announcements we have heard over the last several months is the typical corporate response.

For most small businesses outside our target base, their financial limitations and dependency on key customers or vendors make them vulnerable to market shifts. Their reaction is also abrupt and similar to large corporations in cutting costs; however with no fat to cut and no reserves to call on, many of these small businesses fail.

Now our target client base is the only segment of the business community in a position to remain opportunistic and find ways to benefit from difficult economic conditions. Although they do cut back and lay off personnel as required as conditions change, their reaction is typically more measured and less severe than large corporations or typical small businesses. The reason for this is their pipeline for new business is usually more substantial than other small businesses and their staffing levels are usually less bloated than large corporations.

Our experience of our client base reaction to the economic turbulence is layoffs start later than large corporations and weaker small companies. This also occurs after a more prolonged period of sluggish sales. Additionally, our target clients can take advantage of their stronger financial condition to be acquisitive or add new lines of business, or new markets as others fail. This means they are also more likely to see things get better sooner once the economy stabilizes.

Layoffs in the marketplace at large have been increasing throughout the year. We did not see layoffs increase in our client base until September. Although some of this was summer help going away and some was related to Hurricane Ike, there may be some affect from the economy reaching our base at this time. This fact is supported by the compensation data that we track from month to month.

Average compensation increases, bonus compensation, overtime pay, and commissions are all down from the second quarter. The most important number is the commissions paid to worksite employees, which reflects the pipeline for new business for our clients. Commission levels in the third quarter were down 8.3% from the same period last year and down 6.5% from the second quarter.

Still in this environment, our client base is optimistic and opportunistic about 2009. The business confidence survey we released today shows clients are not changing their goals but rather their plans on how to achieve them.

Seventy-five percent of respondents to the survey expect to grow as fast or faster in 2009 versus 2008. Nearly the same percentage expects staffing levels to remain the same or increase next year as well. This is not because they are failing to see the turbulent economy but rather because they respond differently to such challenges.

Eighty-one percent of those surveyed rated the economy as their biggest concern yet 61% expect their capital spending to increase or remain the same next year. This reflects attitudes and intentions to gain a competitive advantage while large corporations and less healthy small businesses shrink, fail, or just stand still.

With the current economic conditions, we have an interesting range of possibilities as we enter our year end sales and renewal cycle. Retention has been strong. Sales have been an uphill battle but with our increase in the number of sales staff and the fall campaign in high gear, we have reason to be optimistic. On the other hand, our target prospects and current client base are reacting to the economic weakness, yet remain optimistic.

As we roll these factors into our starting point for paid worksite employees, we see a wider range than normal for this time of year. We see no advantage to providing specific guidance for next year at a time when the range is this wide and when the actual starting point will be known in a short period. It will have to suffice for today to say we have scenarios for next years’ unit growth that bracket this years’ unit growth rate.

We can see a dower scenario with unemployment rates at 8% to 10% that could slow our unit growth rate by several percentage points from this year. We can also see a scenario where the size of our sales staff, our retention improvements, and our client base resiliency could result in growth acceleration into next year.

We do expect to grow through this period unlike the 2002 and 2003 period which included the jobless recovery following 9/11 and the burst of the technology bubble. In that period, we had our own corporate crisis including a margin squeeze and a 15-month repricing effort on the healthcare component on our entire client base. We had to redirect the sales team to renewing accounts and new sales suffered. Even with all of that difficulty, we declined by only 4% year over year in that period.

We are in a very different situation today. Even though the economy may be the same or even worse, we are poised to continue to demonstrate growth and profitability. The size of our sales staff today, the resiliency of our business model, our financial strength, and our unique client base position Administaff to grow and remain opportunistic in the face of a recession.

At this point, I will pass the call on to Doug to provide specific guidance for Q4 and his thoughts about 2009 profitability.

Douglas S. Sharp

Thanks, Paul. We are essentially reiterating our full year and Q4 implied earnings per share ranges, with some adjustments among the key metrics. As for the details of our fourth quarter guidance: we expect average paid worksite employees per month to be in a range of 120,500 to 121,000. As a reminder, clients sold during the fourth quarter of any year, and in particular during our fall sales campaign, are typically converted to paid worksite employees during the first quarter of the following year.

As for gross profit per worksite employee per month, we expect to be in a range of $246 to $249 for Q4. An expected sequential increase in this metric over Q3 is associated primarily with the benefits area. Benefit plan design changes have positively impacted costs, while we have passed through appropriate price increases over the course of this year.

Fourth quarter operating expenses are expected to be in a range of $74 million to $74.5 million. This is sequentially up from the third quarter operating expenses by approximately $5.3 million, and includes approximately $3.3 million of additional advertising costs focused around our fall sales campaign, $1 million in higher G&A costs primarily associated with fall sales campaign travel and HR Tools development, and $700,000 in compensation expense, primarily associated with additional sales personnel.

We expect Q4 net interest income to be between $1.4 million and $1.6 million and are forecasting an effective income tax rate of 36.2%.

We are also forecasting 25 million average diluted outstanding shares for the fourth quarter and 25.6 million shares for the full year 2008.

In summary, we believe our business model has performed exceptionally well in the face of a weakening economy. In fact, if not for an $0.18 per share negative impact of lower interest rates on our investment income, discounting of workers’ compensation reserves and effective income tax rate, the expected full year 2008 implied earnings per share would be at the high end of the range we set at the beginning of the year.

Now, before we open up the call for questions, I’d like to briefly comment on 2009. We are currently working on next year’s operating plan and financial budget. As you are probably aware, our unit growth is impacted by the number and efficiency of our sales reps; client retention, which can be impacted by financial defaults; and hiring or layoffs within our client base. Our gross profit per worksite employee is impacted by our pricing and direct costs management.

We have maintained some flexibility in our 2009 operating plan to incorporate a range of outcomes in each of these factors. These areas of flexibility include, among other things: staffing levels of our sales and service personnel; the number of sales office openings; advertising and business promotions spending; and G&A spending. We will finalize our plan and budget based upon the results of our 2008 fall sales campaign and our year-end client renewal period, also incorporating the expected impact of the economic climate.

In summary, we expect to budget for earnings growth under either an improving or relatively flat unit growth scenario.

Detailed 2009 guidance will be provided during next quarter’s conference call to be held in early February.

At this time, I would like to open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Tobey Sommer of SunTrust Robinson Humphrey. Please proceed.

Tobey Sommer - SunTrust Robinson Humphrey

Thank you. A lot of good detail on your prepared remarks. I am interested in asking you a question about the commissions that you are seeing in the customer base. They did come under a little bit of pressure in the quarter. I was wondering if you saw a noticeable trend within the quarter, whether that decline that you quoted was kind of more material in September when the overall economy seemed to grind to a halt with the credit crisis.

Paul J. Sarvadi

Yes, it was. It did deteriorate throughout the quarter and ended up in the 8.3% range for the quarter.

Tobey Sommer - SunTrust Robinson Humphrey

Paul, from your perspective when you look at things historically, you mentioned that being perhaps one of the better indicators that you can look at for your customers’ kind of health, or at least near-term. How does that rate of decline compare to what you have seen in previous slow-downs?

Paul J. Sarvadi

You know, it’s unfortunate we don’t have as good data back historically. You know, our information is so much better today that we are able to see things in a very granular level. Unfortunately, we really don’t have a good comparative back during that period. But I would also like to just say that that is one factor -- to me it’s a big one -- that affects the mindset of the business decision maker. But it is one data point that we use against several others and fortunately most recently, we had our annual large hospitality event where we are able to really sit face-to-face with many of our clients and get a direct feel for their attitudes and their actual actions that they are taking, their plans. And we found our client-base’s attitude to be inspiring in terms of how they were upbeat and opportunistic, even though they were recognizing some real economic turbulence.

Tobey Sommer - SunTrust Robinson Humphrey

Thanks. One last housekeeping question and I’ll get back in the queue -- the press release says you repurchased 1.5 million shares I think year-to-date, if I’m correct, and your guidance implies I think continued share repurchase. How much will you have repurchased if you get to a 25 million outstanding share count by the end of the year?

Paul J. Sarvadi

The 25 million just assumes what we have repurchased to date, so it doesn’t assume any further repurchases.

Tobey Sommer - SunTrust Robinson Humphrey

Okay. Thank you very much. I’ll get back in the queue.

Operator

(Operator Instructions) Your next question comes from the line of James Macdonald of First Analysis. Please proceed.

James Macdonald - First Analysis

You talked about some flexibility going forward on expenses. Have you taken any actions currently given the situation?

Paul J. Sarvadi

Well, Jim, no, we have not, simply -- well first of all, we have clearly developed a range of possibilities but it’s not time to pull the trigger on anything until we see how things go. You know, we are right in the middle of the point of where things could -- we could actually end up with accelerating unit growth in the next year or we could see growth that’s a little slower than this year, so we are in that point where we are going to see what happens and then -- but we’ve got a variety of plans in place, ready to take action if necessary.

James Macdonald - First Analysis

Okay, and could you talk -- so you’ve seen something in October so far. Obviously October has been a pretty different kind of a month. What can you tell us about October lay-offs and what you are seeing currently?

Paul J. Sarvadi

Well, consistent with what I’ve been saying about our client base and the distinction from the rest of the marketplace, we did not see lay-offs continuing dramatically into October. And obviously we are still evaluating that because the month just ended and we are digging down in the weed and peeling the onion back a little bit but it’s a little bit in conflict with the commission level being off that much. So that’s why we say we want to be cautious but we are also optimistic.

James Macdonald - First Analysis

And just one more -- in the last couple of weeks, there have been some dislocations in a lot of the interest rate type of things. Did you do anything to take advantage of that or do you stay totally kind of safe in treasuries?

Paul J. Sarvadi

We had a little bit of a mix but I would say for the most part, we are staying safe in treasury up to this point. But it’s something that we will revisit going forward.

James Macdonald - First Analysis

You didn’t look at some of the high-yielding munis during that period?

Paul J. Sarvadi

We still have some of our investments in the tax exempt money market funds but the majority are in the government-backed funds.

James Macdonald - First Analysis

Okay. Thanks very much.

Operator

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

Michael Baker - Raymond James

Thanks. I was wondering if you could give us a little bit of color on what you are seeing in the mid-market versus the core PEO business.

Paul J. Sarvadi

Sure. We continue to make good progress in the mid-markets. Our focus this year has been converting more and more clients to the mid-market service model and at the end of the quarter, we had 60 clients in that model. We’re having great results there with service satisfaction and also with our stewardship meetings, where we are going in and laying out the detail of the economics of the relationship. That’s all going well.

As we move into this fourth quarter, we still have a good percentage, like we do even on our core business, of customers that are in the renewal process. I think we have much better visibility there than we have had in previous periods. And then also -- so that’s on the renewal side. On the sales side, we have a pipeline that has ramped up throughout the third quarter and we have some good opportunities there for new business. But in the current economic climate, those types of decisions are pretty significant for these companies, so it’s kind of hard to tell. You know, it’s part of this equation that we have of a wide range of possibilities here for year-end.

Michael Baker - Raymond James

Okay, and then I had a question for Richard -- any early read on uptake of the health benefit as you get towards the renewal process?

Richard G. Rawson 

Are you talking about trends for next year?

Michael Baker - Raymond James

Well, I’m talking about actual signing up for the benefit in light of all the other constraints that a consumer might feel at this point.

Richard G. Rawson 

Oh, okay. Yeah, no -- you know, I mean, we are obviously starting the renewal process and the ones that we’ve renewed so far, you know, some customers will increase the deductibles and go to a higher deductible plan within our current range of opportunities. But over the last two quarters, we have seen kind of the migration flatten out in terms of the richer plans and so you know, we are expecting to see just kind of a steady as you go from 2009. I would expect to see some people migrate into the higher deductible plans just from a cost side but we don’t see any crisis going on there and certainly we are starting -- January we’ll start the second year of a three-year contract with UnitedHealthcare and as I mentioned in my remarks, we will be getting an additional reduction in the administrative fee component of the cost for 2009 over 2008.

So we have already gotten the renewals for the non-UnitedHealthcare plans. We’ve already baked those into kind of our early forecasts for 2009 in our pricing. All of those increases seem to be pretty nominal, so I think we are set to go.

Michael Baker - Raymond James

And then just one final question on the health benefit -- in terms of the high deductible option, are you seeing any difference in seasonal utilization? In other words, utilization kind of being more back-ended in the year, once they hit the deductible?

Richard G. Rawson 

No, you know what? I mean, our -- with the 2% year over year trend increase, we have seen utilization at kind of a normal rate, what we would have expected. We haven’t seen any huge step-up in the utilization and so -- I mean, we’re forecasting about a 3% year-over-year cost to contemplate a little bit of that in the fourth quarter. But we haven’t seen a huge step up, no.

Michael Baker - Raymond James

That’s helpful. Thank you.

Operator

Your next question or comment comes from the line of Mark Marcon of Robert W. Baird.

Mark Marcon - Robert W. Baird

Good morning. Can you mention the specific impact of the UnitedHealthcare reduction in terms of the administrative cost?

Richard G. Rawson 

Yeah, each -- you know, we renewed that contract in 2007 and it began January of ’08, then ’09, and then through 2010. And as part of that agreement, we got a reduction in the administrative fee component of that contract each year and it declined from -- or it’s gone down and will go down in ’09 from ’08 and it will go down a little bit further in 2010 from ’09.

Mark Marcon - Robert W. Baird

Right, and I was -- what I was wondering was if you could remind us what that actual reduction is in ’09 relative to ’08?

Richard G. Rawson 

Well, I would submit to you that I am not allowed to do that, but thanks for asking.

Douglas S. Sharp

It’s all factored into the total benefit increases.

Richard G. Rawson 

Right, yeah.

Mark Marcon - Robert W. Baird

Okay. I mean, when we go back and re-look at that 8K, I mean, you did talk about what the total benefits would be. Can you -- is there a much bigger benefit in ’09 relative to ’08 than --

Richard G. Rawson 

Well, I think if you go back to the press release that when we released this in ’07, we talked about the benefit over three years being $17 million plus, so there will be some benefit and we have factored that into our pricing for ’09.

Mark Marcon - Robert W. Baird

Okay, and what percentage, Richard, of the client employees ended up using the benefits?

Richard G. Rawson 

It’s right at when you -- well, it’s actually all -- it’s over 90% of the eligible but in terms of just the raw math, it’s about 73% of the total covered employees on a plan at any given time.

Mark Marcon - Robert W. Baird

Got it. And the -- in terms of looking towards next year when we think about the sales efficiency ratio, you mentioned earlier that the 1.2 to 1.7 as kind of being the range. I’m assuming that was for the fourth quarter, right?

Douglas S. Sharp

Right, that was for the fall campaign sales periods in the past.

Mark Marcon - Robert W. Baird

Okay, and what would you anticipate on a full-year basis, given the macro environment? Or how should we think about that as being a range for a full year?

Douglas S. Sharp

I think if you look at years that were more difficult, we ended up in the 0.90 to 0.93, 4, somewhere in there. And in the best years we’ve had, you’re in the 1.2 to 1.25 range.

Mark Marcon - Robert W. Baird

Okay, great. And then what are you seeing actually in terms of like bankruptcies or things of that nature? It doesn’t sound like you have seen much changes yet.

Douglas S. Sharp

Up through this point, we haven’t seen a lot of that yet, Mark, as far as the financial defaults related to a bankruptcy.

Mark Marcon - Robert W. Baird

Have you heard anything from any of your clients just in terms of having a tougher time accessing capital or anything of that nature?

Douglas S. Sharp

I wouldn’t say to a large extent. There’s been a few cases but not to a large extent up through this point.

Paul J. Sarvadi

You know, I think that actually, Mark, another distinction in our target base, they are more profitable and they actually are less debt capacity related in terms of their operating plan, so we haven’t heard any outcry about oh my gosh, you know, the credit markets seized up and you know, we can’t operate.

Mark Marcon - Robert W. Baird

Great, and then in the west you ended up having an acceleration with regard to your growth rate. Can you talk a little bit about what you are seeing there? Is it just that you are going up against easy comps or have things actually improved?

Paul J. Sarvadi

I’m sorry, what was the first part of that question?

Mark Marcon - Robert W. Baird

Just in the west, your revenue growth.

Paul J. Sarvadi

Oh, in the west, I’m sorry. You know, no, nothing dramatic there. This always goes back to more of where we put the sales staff, where you grow, where you add markets and all that kind of thing. That’s usually what dictates more one area of working better than another, other than at times we’ll have a particular market or a particular sales office with a manager changeover, something like that, but we haven’t seen anything on a regional basis that gives us any pause or that would direct any particular attention to.

Mark Marcon - Robert W. Baird

Okay, great. I’ll jump back in the queue.

Operator

And due to time constraints, this concludes the Q&A session. I will now turn it back to Paul Sarvadi for closing remarks.

Paul J. Sarvadi

Okay, well, we just want to thank everyone for your interest and participation and we look forward to a strong year-end performance and once we go through that, we’ll provide information about our plans for 2009. Thank you very much.

Operator

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

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