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Executives

Michael Lavington - Chairman of the Board, CEO

Jim Hardee - SVP Chief Sales and Marketing Officer

Garry Welsh - SVP, CFO

Patrick Lee - Director of Investor and Media Relations

Analysts

David Cohen - JP Morgan Investments

Matthew Milask - Raymond James

Jim McDonald - First Analysis Corporation

Tim Brown - Rock Capital

Gevity HR, Inc. (GVHR) Q3 2008 Earnings Release November 5, 2008 10:00 AM ET

Operator

Good day, everyone and welcome to the Gevity third quarter earnings conference call. Conducting today’s call will be Mr. Michael Lavington, Jim Hardee, and Garry Welsh. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer period. As a reminder ladies and gentlemen, this conference is being recorded today, November 5, 2008.

I would now like to turn the call over to Mr. Patrick Lee, director of investor and media relations. Mr. Lee you may begin your conference.

Patrick Lee

Thank you. Good morning, ladies and gentlemen, and thank you for joining us today. Before we review our third quarter 2008 results, I would like to tell you that this call will contain forward-looking statements within the meaning of the Federal Securities Laws. These forward-looking statements are based on our current expectations and beliefs concerning future developments, and their potential effects. Forward-looking statements involve a number of known and unknown risks and uncertainties that may cause actual results to be materially different from those expressed or implied by the forward-looking statements. We encourage all of you to review our filings with the Securities and Exchange Commission. These filings contain more information regarding forward-looking statements and risk factors that could cause materially different results from those expressed or implied in any forward-looking statements.

Once again, we are pleased that you have joined us. For your convenience, all press releases and the latest statistical data are available on our website at www.gevity.com. Also if you would like to be included on our distribution list, simply submit a request online at our Investor Relations homepage.

It is now my pleasure to introduce Gevity’s Chairman and CEO, Mike Lavington.

Michael Lavington

Thank you, Patrick, and good morning to everyone on the call. Quarter three results present a mixed picture. On the positive side, sales production showed continued improvement, despite the tough economic climate. The employee sales result was 24% better than quarter three last year and 29% higher than Q2 this year. Our production improvement was the result of an 11% increase in new clients, coupled with the progress we have made in converting larger prospects. Jim Hardee will speak more about this momentarily. Florida business was overall satisfactory, and the new medical plans have helped to re-establish our business outside of Florida.

The sales prospects for Quarter Four look encouraging. Although we cannot assure the prospects will convert into clients, there are a number of large client deals in the pipeline. Our attrition numbers were a disappointment, but the majority was the result of the present economic conditions, which include client bankruptcies, business closings, and other financial related terminations. These terminations will more than double the rate we have been running through Q2.

We also terminated approximately 100 clients at our own option during the quarter. The majority of which were accounts receivable concerns. We are also experiencing a reduction in the average size of our existing clients due to client staff downsizing. Unfortunately, the effects of the economy impacting the small business community have more than offset our own sales production progress during the quarter. Although attrition was higher than anticipated, our client satisfaction metrics continued to improve. This is reflected in another favorable trend in the number of client requested terminations other than for financial reasons, which has now improved for three consecutive quarters. We believe the reduction in client requested terminations is evidence of the progress we have made in enhancing the attractiveness of our health insurance offerings, introducing self-service improvements to our IT platform and the investment in training in our clients’ service center.

Greater levels of client satisfaction and a lower number of client requested terminations have been achieved in spite of the certain level of uncertainty in the marketplace created by our publicly disclosed ongoing strategic discussions. Gevity colleagues’ continued focus and motivation in difficult circumstances has been laudable.

We have made great strides during the quarter with our longstanding workers’ compensation partner AIG Commercial Insurance. As previously announced, we received in the quarter a cash return of $33.1 million from AIG, which represented excess workers’ compensation collateral. This cash infusion compares favorably to our prior estimate of $17.3 million.

An agreement was also reached with AIG to waive approximately $14 million in workers’ compensations collateral payments during quarter four. The return of capital reflects our favorable claims cost trends, which are a direct result of our effective underwriting practices and cost management controls. We are also actively engaged in discussions with AIG Commercial Insurance to accelerate the return of an additional amount of excess collateral in early 2009. We will provide an update on this initiative, should it materialize.

With regards to our overhead costs, we have taken a number of actions to improve the cost shape of the business. Action has been taken at both head office and regional operations. Our contacts were beginning to experience the cost benefits of consolidation of certain field offices, while clearly not experiencing an adverse effect on sales and service levels. We expect to take further cost saving initiatives in Q4, in readiness for the start of the 2009 financial year. I would now like to hand it over to Jim Hardee, chief sales and marketing officer.

Jim Hardee

Thank you Michael and good morning everyone. I will provide a brief sales update, regarding our third quarter production, attrition, BDM productivity, and lead indicators across the regions. Earlier this year, we said that in order to create a framework for growth we needed to focus on several things. First thing was we needed to make investments in training for our BDMs or sales managers, and client support teams to increase their effectiveness. Second, we said we need to simplify the sales support process, improve deal management, and increase customer face time.

Third, we needed to leverage the almost 50 years of BDM sales management experience to improve our execution nationally, by assuring best practices and product knowledge across our teams. I am very pleased to report that as a result of these and other actions, our Gevity sales services teams delivered an increase of 24% client employee sales growth, and a 17% increase in new clients in the third quarter of 2008, compared to the same period a year ago. Our new improved health plans and the positive traction we are seeing in the regions outside of Florida has helped to accelerate our sales growth for the quarter.

Our Florida region has delivered employee growth quarter-to-quarter of approximately 5%, in a very highly competitive environment. The sales teams produced 5,389 client employees versus a little over 4,200 client employees for the same period in 2007. Our productivity per BDM increased 25% to roughly 15 employees per month in the third quarter compared to 12 worksite employees in the month in 2Q. The largest percentage of the business closed within the quarter came from our professional services segment at 41%, and hospitality segment at 16%. Our top producing regions were the central region, with a growth rate of 103%, the northeast with 156% growth, and the southeast with a 12% growth, and South Florida just below 10% over 2Q of 2008.

Our pipeline remains as strong as any other period over the last two years. And I am pleased with the level of activity in setting appointments and completing proposals. This is an indication that our investment in training and single focus on delivering our PEO message and solution is working. The economic issues we face are manageable but challenging.

We have redoubled our efforts to simplify our sales approach, to improve our client retention by delivering more competitive benefit rates. We have improved and focused on leadership and service training for all client facing teams. And we have enjoyed the most successful annual benefits enrollment to date. For example, we have seen about 37% fewer client employees terminate during this period, due to reasons attributed to healthcare benefit issues, compared to the third quarter of 2007. We are very encouraged by the positive response from our clients’ to date. Key movements during the quarter, we have seen a reduction of 6,395 worksite employees within the quarter, compared to 6,520 in 2Q. This does not include a change of existing in the third quarter estimate of just a little over 2,400 worksite employees, which was primarily been driven by lower seasonal employment demand and reduced staffing levels.

A reduction of 699 parts of the 700 worksite employees was driven by the proactive termination of loss making clients compared to 360 in 2Q. We are also very pleased by improvement in service levels, which has had a positive impact on retention. We ended the quarter with 122 BDMs and continue to aggressively hire talents from within the PEO industry. We have redoubled our efforts on sales coaching and leadership development by providing industry leading training and education. For example, we recently completed a General Manager Leadership training class for all sales managers, which focused on developing specific individualized skills improvement plans for every BDM. This will have a positive impact on improving our consistency and the quality of how we coach and develop our people. The objective is to increase our team’s success rate in this highly competitive market. In summary, I am very pleased with the improvements our sales and services teams have made regarding our sales growth and client support during a very tough economic period. We expect that our continued focus on helping our clients lower their employee related cost will have a positive impact on our pipeline growth and business closed throughout the year.

Now, over to Garry.

Garry Welsh

Thank you, Jim. Good morning, everybody. My comment this morning regarding our third quarter financial results will principally make comparisons to the previous quarter’s results. We believe that such comparisons provide a better insight into the sequential progress of our business. For year-over-year comparisons, please refer to the financial statements presented within today’s earnings release. Now for the headlines; for the third quarter of 2008, we reported a net loss from continuing operations of $1.8 million or $0.07 per share as compared to net income from continuing operations of $2 million or $0.08 per diluted share for the second quarter of 2008.

Third quarter 2008 results included pre-tax cost alignment charges totaling $1.3 million or $0.03 per share, related to the consolidation of certain branch offices and the reduction of staffing levels. This compared to a similar charge of $1.8 million or $0.05 per diluted share in the second quarter of 2008. Revenues for the third quarter of 2008 totaled $125.1 million, as compared to, $128.7 million in the second quarter of 2008. This modest decline of 2.8% was primarily due to the increased level of economic related and seasonal client employee attrition during the third quarter. This resulted in a lower number of average paid client employees in the third quarter of 2008. The number of paid client employees is the principal driver of our revenues.

For the third quarter of 2008, the average number of paid client employees was 95,717, as compared to 98,331 in the second quarter of 2008, a sequential decline of 2.7%. Professional service fees totaled $27.9 million in the third quarter of 2008, as compared to $28.8 million in the second quarter of 2008. This decrease was primarily attributable due to the sequential reduction in the number of average paid employees. Professional service fees per paid client employee of 1,166 for the 2008 third quarter were comparable to the previous quarters 1,172 per paid client employee.

Fluctuations in our PSF rates reflect the evolving mix of clients, and their tailored service offerings, as well as the varied competitive conditions through out all of our regional markets. Turning to workers’ compensation, our workers’ compensation program continues to be a valuable service to our clients, and a profitable contributor to our operating results. On balance, the key metrics of our program continue to demonstrate favorable trends in terms of claim takes and claim frequency per $100 of payroll. These trends reflect well on our client underwriting standards, and risk management practices. As a result, our gross profit percent realized from the current year’s program in the third quarter of 2008 was up approximately 40 basis points over the second quarter of 2008.

Turning now to the numbers, in terms of gross profit dollars, the current policy year’s workers’ compensation program contributed approximately $3.7 million for the 2008 third quarter, identical to the second quarter of 2008. On a year-to-date basis, our total estimated claim costs are approximately 10% below the same nine month period a year ago. In connection with our prior policy years, the current actuarial assessments continue to confirm an improving trend with respect to ultimate claims loss projections, thereby resulting in a reduction in the amount of workers’ compensation expense recognized in the quarter associated with prior years’ claims.

With respect to these prior year programs, the reduction of the actuarial assessments enabled us to reduce cost estimates during the third quarter by $3.3 million, which compares to $7.3 million in the second quarter of 2008. If the current actuarial alignment for ultimate loss trends continues, we expect to recognize further favorable adjustments to prior year cost estimates in future periods. As Mike has already stated, we collected $33.1 million in excess workers’ comp collateral during the quarter. Additionally, AIG Commercial Insurance have agreed to waive our fourth quarter 2008 loss collateral fund payments totaling approximately $14 million, in view of our overall collateralization level compared to future estimated claim costs. These events strengthen our balance sheet and reflect favorably on our client underwriting standards, risk management practice, and the claims cost trends.

I would like to add that the management team at AIG Commercial Insurance has conducted themselves as true business partners, reflective of our longstanding relationship, despite the recent challenges faced by their parent company.

Moreover, in concert with our renewal discussions with AIG for 2009, we are in advance stages of discussions to obtain a further material release of excess collateral early next year. We expect to provide an update in the future, when these discussions conclude.

Healthcare, our third quarter results reflect the benefit of actions taken in the first and second quarters of 2008, to strengthen the competitiveness of our health insurance offerings. Our renegotiated rates for new and existing clients generated improved sales production and client retention. We enjoyed a 400 basis point increase in the participation rate in our medical plans, by eligible employees during our most recent benefit renewal period, which coincides with our third quarter. Moreover, 37% fewer client employees terminated during this period, due to reasons ascribed to healthcare benefit issues, as compared to the third quarter of 2007.

For the third quarter of 2008, our health plans contributed a modest surplus to gross profit, which improved slightly over the second quarter of 2008. The modest improvement was due to a smaller number of claims paid in the 2008 third quarter, primarily related to the managed attrition initiated earlier in the year.

The small surplus from our health plan offerings is intended to partially fund our overall costs of administering the numerous plans that we offer throughout our markets. SUTA, as you maybe aware, the burden of SUTA expense typically declined over the course of the calendar year, as client employee wage limits were met. For the third quarter of 2008, SUTA resulted in a negative contribution to gross profit of $0.5 million, as compared to a negative contribution of $1.4 million for the second quarter of 2008. As we previously reported, the second quarter of 2008 included a $1.1 million accrual in connection with our proposed settlement with the State of California, related to the states reassessment of unemployment taxes. Today, we are still awaiting comment from the state regarding our settlement proposal.

Gross profit, in summary, we reported $34.3 million in gross profit for the 2008 third quarter, as compared to $37.9 million for the second quarter of 2008. Gross profit as a percentage of revenues totaled 27.4%, a sequential decline of approximately 200 basis points from the second quarter 2008, due principally to a decrease in the amount of prior year workers’ compensation cost declines, offset in part by the California SUTA accrual in the second quarter.

Operating expenses, operating expenses for the third quarter of 2008 totaled $34.8 million, as compared to $35 million in the second quarter of 2008. As previously mentioned, operating expenses for the 2008 third quarter included pre-tax cost alignment charges of 1.3 million related to the consolidation of certain branch offices and the reduction of staffing levels. This compared to a similar pre-tax charge of $1.8 million recognized in the second quarter of 2008.

In addition, the third quarter 2008 operating expenses included $900,000 in bad debt expense, which was an $800,000 increase over the second quarter of 2008. This increase was attributable to two clients. This should point out that, within the press release today, there was a typographical error on this particular item and to be clear the bad debts as at the second quarter 2008 were actually $100,000 and not $10,000 for the press release, but we’ve corrected that. The increase as I said was attributable to two clients, while the current economic climate had increased the potential for credit issues, we have strengthened our credit and collection disciplines to identify and minimize potential accounts receivables risks. As we look to the future, the management team is currently analyzing a material and strategic reshaping of our overhead cost structure, so we will be better positioned to operate profitably in the future.

Interest and other expense; net interest expense was sequentially flat at $700,000 during the third quarter of 2008. We expect a lower utilization of our credit facility in the fourth quarter of 2008 due in part to the waiver of workers’ compensation collateral payments by AIG Commercial Insurance.

As a result, we expect interest expense to be slightly lower. Tax, as you may know, effective tax rates become materially disproportionate to pre-tax income or loss when such amounts are very low. As such, our effective income tax rate for the nine months ended 30th September was 114%, which compared to 8% through the first six months of 2008.

The material swing in our effective tax rate reflects the technical accounting reassessment of the inter-period allocation and recognition of certain tax credits, coupled with the recognition of a discrete adjustment related to 2004. We expect the effective income tax rate for the full year to be significantly lower than the rate for the nine months ended September 30th. Discontinued operations, as we previously announced, the Company exited its non-core employee business earlier this year, which gives rise to reporting discontinued operations. For the third quarter of 2008, we reported a net loss of $200,000 from the run-off of the discontinued operations, as compared to a net loss from discontinued operations of $1.8 million in the second quarter of 2008.

Turning quickly to the balance sheet, as of September 30, 2008, unrestricted cash increased to $12.5 million compared to $10 million at the end of the fourth quarter of 2007. The modest decline in accounts receivable from a $130.2 million on December 31, 2007, to $124.9 million at September 30, 2008, primarily reflects a lower level of paid employees during September, as compared to December.

The short-term workers’ compensation receivable was $24 million at the end of the third quarter of 2008. This does not reflect the discussions, I mentioned earlier with AIG Commercial Insurance to further accelerate excess workers’ compensation collateral in the first quarter of 2009. Our long-term workers’ compensation receivable at the end of September 2008 was $96.9 million. The balance on our revolving credit facility decreased from $63 million at the end of the second quarter to $32.5 million at the end of the third quarter of 2008. The decrease reflects a pay down arising from the receipt of the $33.1 million of excess workers’ comp collateral received during the quarter from AIG.

At the end of the quarter, we had approximately $33.9 million of availability under our credit facility. In summary, we ended the quarter with $115.2 million in shareholders’ equity, $12.5 million of unrestricted cash, $120.9 million of workers’ compensation receivable, $33.9 million of additional availability under our revolving credit facility, and our working capital position improved by over $30 million since the year-end.

At this time, I will hand you back to Mike Lavington for closing comments.

Michael Lavington

Thanks, Garry. In conclusion, I am pleased that sales are now tracking in the right direction, and the sales productivity is also improving. The impact of the economy on clients’ attrition is obviously a concern, but we believe that it is manageable. We are cautiously optimistic that Gevity will end the year on a positive note, and thereby, position the business for a strong start in 2009.

I would like to invite questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from David Cohen of JP Morgan. Please go ahead with your question.

David Cohen – JP Morgan Investments

With the competitive landscapes looking like in the current economic environment and what specific drivers are you hearing from the prospects that are putting Gevity on their shortlist?

Jim Hardee

Okay, thank you David. This is Jim. What we are seeing from the competitive stand-point is that clients are continuing to focus on three things. One, cost savings and the value they receive from their supplier. Two, they are looking for companies whereby they can outsource activities that they do particularly on administrative level that are non-strategic. And three, they are looking for, particularly in our industry, they are looking for places where they can get solutions that will help them consolidate their HR support across multiple branches and locations.

David Cohen – JP Morgan Investments

Okay, that is great. And, I think there is a comment on that. The economic environment is challenging but manageable. What gives you guys the confidence that you can manage through, again with what is going on with the economy and if it potentially gets worse?

Jim Hardee

That is a good question. The thing that allows us to, I think, the one important criterion in my mind that will help us manage that is around a couple of things. One is simplifying our execution priorities so that you do not make things overly complex and complicated. You do that by taking noise off the line and help your team focus on those essential activities around customer face time and in engaging with prospects in the market. Number two, you improve, obviously, the skills and their ability in the market. And three, you continue to work to make the solution that you bring in to market competitive particularly in the area of reducing the cost of the company’s employees and that is what we focus on.

David Cohen – JP Morgan Investments

Okay then. Last question, Garry have you tried to stress test the financial model for assumptions around deterioration in the economy and how aggressively, if you have done it, how aggressively have you stress tested it and how did the model held up?

Garry Welsh

As part of our 2009 planning process, which we are not intending to share today, but we have produced a number of models, but one of which we stripped. We do evaluate, what you just said, we stress tested on a number of assumptions. We looked at the economic impact on pricing and the economic impact on the client terminations. So that is what we have done. We have done that and we are working through that. I think, just to add, as we look at the different scenarios that potentially worked through, we will not share those now, and we were resolved to do what we have said in earlier on in these quarters. We are taking a hard look at our own expense line to ensure that we are aligned that in a way, that it gets the business profitable on a go forward basis. But we have done that stress tests and it is part of our process.

David Cohen – JP Morgan Investments

Can you just, a qualitative follow up? Qualitatively if we see an employment level then –we get discretion on it, if we see employment levels go 9% and 10%. What sort of impacts that we look to see in terms of the financial statement?

Garry Welsh

We are now in the position to share that at the moment, David. We are still working through these different scenarios.

David Cohen – JP Morgan Investments

Okay thank you very much.

Operator

Thank you and our next question comes from Matthew Milask of Raymond James Please go on with the question.

Matthew Milask - Raymond James

For Michael , now I just wanted to get a sense for any prospects in the current clients’ voicing some concerns over the AIG in theworkers’ comp side Thank you.

Michael Lavington

Initially when the news hit, there were some concerns as you can imagine. Many clients were concerned particularly with the developments in the financial markets, but much of that we had lots of conversations with them- much of that was around…, just trying to really understand which group, which division within AIG that this was impacting. So we spent a lot of time with our clients assuring them we had number of conversations with AIG directly to our clients to talk to them about it. Garry spent a lot of time on the topic.

Garry would you like to offer some more insights?

Garry Welsh

Yes Mike, thank you for the question. I understand the question, we worked at AIG. We worked very proactively a few weeks back to make sure that we understood as best we could the challenge AIG was facing but also the impact at our own business. AIG helped us with a whole host of it. We just want to get some confidence in that space, but also to give us some question-and -answer and some input that we can actually share with our field within a very specific debrief with the field on AIG and while we felt confident leaving forward with AIG with the renewal and put some perspective around the current challenges in terms of handling it in the company level rather than the insurance company level. We got some pretty comprehensive question-and -answer type material from those guys from AIG and we shared them with the field and we talked with the major clients. I have not seen a trend of a client being very concerned about this and nothing has been affecting us now.

Matthew Milask - Raymond James

Fair enough so the current client does not seem like new sales side, any sort of headwinds there?

Garry Welsh

Technically not too much were right to that issue and one of their comments that I have would make about in relation to the economy and made the job. Let me tell you what we are starting to see, we are starting to see clients today that are a lot more receptive to sitting down and talk to us about the merits of the PEO and after this model that we have ever seen. What do I mean about that? I mean that you look at the market opportunity; this economy actually is creating, based on the pressure of cost savings in managing a more effective business. Another reason to sit and listen so the turmoil, the challenges in the economy, actually the disruption, if you will, that each of these things is having in the economy is creating opportunities for us to talk to people in times when they might not have considered PEO and the solutions.

Matthew Milask - Raymond James

Great! Thank you very much.

Operator

Thank you and our next question comes from Jim McDonald from First Analysis. Please go ahead

Jim McDonald – First Analysis Corporation

Yes, good morning guys! In terms of number of worksite employees, it sounds like you are optimistic you can grow in Q4, is that true? And also, do you expect to be able to grow into the first of the year with the end of the year kind of on and off?

Jim Hardee

Jim this is Jim, I am optimistic if I look at the headlines going forward. I am optimistic on a couple of things. I am optimistic if you look at the leading indicators which drive our business which is really built off throughout our activities, people that will sit and have conversations with us about the business and then the proposals that we generate. Exiting September is an example into the quarter, I am seeing a 40% improvement in the number of appointments we were able to get and a 31% improvement in the number of proposals that we are delivering to our clients. So as I think about how that leads us into the fourth quarter and beyond, I am actually encouraged by that progress.

Jim McDonald – First Analysis Corporation

And you think that can overcome the economy we have seen in October and the situation wherein there has got to be more attrition than what you would have expected.

Garry Welsh

This is Garry if I could just chip in from an attrition perspective, there is an element that we feel we can not control which is clearly some of the financial related to economic things. Where we get some comfort based on where we are today is firstly the ABE Pricelist, the Annual Benefits Enrolment Pricelist we are ahead of where we were at this point last year in terms of the number of clients that we enrolled. So we have invested a lot of time in healthcare and trying to get those right, we have just gone through the annual process of the statistics , if I may, are more positive. With that said, Q4 is typically a period of higher attrition we think hopefully the health clients will help to a large extent. We are also doing some work on some of our technology in terms of kinds of service which we think will also reinforce our commitment to get service at a very high level and build on the good performance we had recently in those space.

Jim McDonald – First Analysis Corporation

Quick one on the help plan, you have said that the participation rate was up. What is the current participation rate?

Garry Welsh

It is 78.3%

Jim McDonald – First Analysis Corporation

Seventy-eight percent?

Garry Welsh – SVP, CFO

Yes of illegible employees.

Jim McDonald – First Analyst

What does that equate to in terms of total employees?

Garry Welsh

In terms of total it is just under 38%. It went up from 74.3% to 78.3%. Totally it went up 36.6% to 37.9%. Actually, that is compared with Q2, if you compare it with the same period last year on the medical participation we have grown up from 76.3% to 78.3% and if you look at the total of the total employee base we have gone up from 33% to 37.9%.

Jim McDonald – First Analysis Corporation

That is very good. Could you comment on the changes with the workers comp reductions for next year and how is that going to impact you, the manual premium proposed reductions?

Garry Welsh

We are working through that. We expect our clients to benefit from those reductions. What we are working through is the consequences in terms of the net impacts, so to speak, on our revenues and costs. There are number of things that go into the mix. Firstly, obviously the clients’ benefit from the reduction where we are still working through the renewal process with AIG for the year 2009 worker’s comp program. Within there, there will be some changes to some of the costs numbers, that is not settled yet but we are working through that and we expect the clients to benefit and we expect to be able to do something to mitigate some of that through the discussions on the renewal.

Jim McDonald – First Analysis Corporation

So, in addition to kind of collateral return that you were talking about, hopefully reduced administrative fees?

Garry Welsh

Well that is what we are working through with them at the moment and yes we have had, through the annual renewal process, we have had a good dialogue with AIG and the appropriateness of the level of charge given the mix and the size of the business. We have not settled on the number yet, we are still working with AIG on that but we are looking at the administration fees, the clients’ managing cost, etc. That is part of the overall renewal, for it is a sub-set of the overall renewal.

Jim McDonald – First Analysis Corporation

And just more quick one. In terms of bank covenants, where do you stand and how do you look going forward here?

Garry Welsh

We have complied with our bank covenants and based on our results on Q4, we do not see an issue there as of today. As we said earlier we have got a lot of work to pay down or we have worked with AIG just to make sure that we are not excessively over collateralized that has been acknowledged and has been reflected in some material refunds, the waiver in Q4, and the prospect of a further return in early Q1 that helps pay down the credit line but as you move forward the available balances is linked to profitability as well. So we complied with our bank covenants and we see no respites on the plan that we have today and we will monitor as we go forward. Actually I think that the work that we have done in cash has been a major positive for us.

Jim McDonald – First Analysis Corporation

Yes that has been good. Thanks you very much.

Operator

Thank you and our next question comes from Tim Brown of Roth Capital, please go ahead.

Tim Brown - Roth Capital Partners, LLC

Hi! Good morning guys. I think most of my questions have been answered but maybe just a few follow on questions. First, you said that 2,400 was a number employees laid off at your clients this quarter, you think that will accelerate in Q4 and what have you seen in October?

Garry Welsh

Yes that was the number, most of that driven Tim really is seasonal. Two things really got seasonal in terms of the point of demand. We have a number of clients that are seasonal actually in the summer. So one it is the change in those summer workforce are really often lower overall demand. It is difficult to forecast that number going into the quarter largely because of the wild card of the economy, but it tends to ride really as a direct relationship to the economy but there are many things that I see there which is driving that number excessively but then again, the economy is the wild card that we almost have there.

Tim Brown - Roth Capital Partners, LLC

Yes that is the reason I asked it is because I have heard so much about and accelerated phase of layoff and really just in the last month or two and then just to make sure if you are seeing that at all. Secondly, the AIG you were talking about getting a return in Q1. Would that be on par with what you received in Q3, just in terms of magnitude?

Garry Welsh

We are not going to comment on the magnitude yet because we are still in the process of finalizing that. But we are expecting it to be significant and just by the way of context, we are looking at the overall level of collateralization we talked to AIG about the fact that we felt that given claims performance, given the maturity of the scheme, given the amount of money that we have with AIG, that we would be significantly over collateralized. There has been some acknowledgement from the past and we are working through the last part of that. What I can say is that we are focused predominantly on the years 2000 and 2002 which are extremely mature years. You can see data in our 10Q 10K, it shows the number of client claims is minimal. Our actuarial assessments are pretty conservative and we have got some excessive, some significant amounts of collateral right there and with AIG support we are working through a renegotiation of that to achieve a return on Q1.

So we can not comment on the amount at the moment but hopefully you understand that as soon as we can, we will likely issue the release on the other item. We feel that it is worthy of sharing with you, with the market, we will be deciding once we get this in the right place.

Tim Brown - Roth Capital Partners, LLC

Okay and just on your cost structure, I think previously you talked about again in the cost structure the operating expenses down to the specific levels. Where is that now? What is your thought process?

Garry Welsh

What we are working at, is about the line, I didn’t understand I am afraid, so I think your question was about the cost structure and where is it now or where our thoughts are in terms of how we are taking the cost structure forward?

Tim Brown - Roth Capital Partners, LLC

Yes, I mean like it sounds that you wanted to take it down further, on a normalized basis then maybe you can give us where it is now?

Garry Welsh

We are running at, I think it is 27 network; operating expense is turning in the 30, 33, and 34 to 35 million range. You can see from our numbers that we made a pretax loss for the period and we are taking a very hard look on the costs to get us back to the point where we can do the things that we need to do to take the business forward for us at the same time make sure that we get back to reporting profits as soon as we can. So we are working through that Tim, we will give a much fuller update when we have completed the ongoing plan. We are doing it as part of the 2009 planning process.

Tim Brown - Roth Capital Partners, LLC

Okay.

Jim Hardee

We are trying to see where we can reasonably get to. We got some internal thoughts on that but we are still developing this, I think that we just need a little bit more time there.

Tim Brown - Roth Capital Partners, LLC

Okay, fair enough. Thank you.

Operator

Thank you and our last question comes from Jim McDonald of First Analysis, please go ahead with your question.

Jim McDonald – First Analysis Corporation

Just a couple of quick follow-ups, so maybe could you talk about the costs savings that we have resulted from your $1.3 million expenses in the quarter?

Garry Welsh

That was a little bit of branch consolidation and some staff reductions.

Jim McDonald – First Analysis Corporation

Is it saving extra mile per quarter from that or…?

Garry Welsh

Yes I have not got the annualized figure with me actually, that would probably be a useful figure to have. We need to look at that, practically we benefit from that. That would be annualized benefit for the staff reductions and from the branch consolidations.

Jim McDonald – First Analysis Corporation

Right, that worked through.

Garry Welsh

When I try to take it to another level in terms on the way we looking at costs for 2009 in terms of the overall shape of revenue versus costs versus profit. So that is what we are trying to look at.

Jim McDonald – First Analysis Corporation

Just two more quick one, so the number of offices you have now after the consolidation?

Jim Hardee

We have about 30 but I think we were 32 at the end of the quarter.

Jim McDonald – First Analysis Corporation

Okay and in terms of modeling workers comp releases going forward similar to what we saw this quarter or any big changes we can talk about?

Jim Hardee

Just a few comments on that, the number in Q3 was less than Q2 but we have applied exactly the same methodology, the utilization of the external data with the same approach. In terms of the underlying trends for Q3 and then obviously forward on the second, we saw no change for the estimates for the years 2002 to 2003, big changed but external actually. We saw a reduction in estimates for the odd years but the bulk of those reductions came really into the following years 2006 and 2007.

As we move forward, as we stand today the kind of trends remain positive I think again in statistics and the update I gave. So we would expect to see further prior year loss adjustments as these years’ trends continue. Further shape and size space, it is difficult to predict until we get the next set of actuarial data, we use that external data for very deliberate reasons to ensure that we are both conservative and independent and objective in terms of the way we accept those cost. So I am looking at it from the point of view of, I think we are getting a lot of things right here in terms of the way we are at the business, the way we are managing the business and it is flowing through that the numbers it is difficult to shape and size the exact number for prior year loss pick-ups for next year for example. But as we go to our 2009 planning process, just to give you some insight, we adopt the reasonably conservative staffs not because we take the numbers beyond the next set of falls, but because it forces our thinking on the overall profitability of the rest of the business. So that is the way we look at it and I do not have to address it Jimmy but just going to clarify one point I made earlier but is there anything else from that Jim?

Jim McDonald – First Analysis Corporation

No that is helpful, thank you.

Jim Hardee

Just to follow up Jim, when you asked about the costs. The numbers you have included and depreciation, and amortization are annualized G&A in the range of $117 million at the moment and that is the number that we are looking to drag down. So apologies for bundling in the G&A number there.

Jim McDonald – First Analysis Corporation

Thank you.

Operator

And at this time, sir, we have no further questions.

Garry Welsh

Well thank you very much everybody and if you have any more questions we will provide you our number at the end of today’s conference call. Thank you very much for your participation.

Operator

This concludes today’s Gevity Third Quarter Earnings Conference Call. You may now disconnect.

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Source: Gevity HR, Inc. Q3 2008 Earnings Call Transcript
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