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Paychex, Inc. (NASDAQ:PAYX)

October 11, 2011 10:00 am ET

Executives

Todd Card -

Unknown Speaker -

Efrain Rivera - Chief Financial Officer, Senior Vice President and Treasurer

B. Thomas Golisano - Chairman and Member of Executive Committee

Martin Mucci - Chief Executive Officer, President, Director and Chairman of Executive Committee

B. Thomas Golisano

Good morning, ladies and gentlemen. I'm Tom Golisano, Chairman of the Board of Paychex, and it's my pleasure to welcome you all here this morning. It's 10:00. In accordance with the Notice of Annual Meeting, I call the order of the 2011 Annual Meeting of Stockholders. I should mention that our Annual Meeting is being broadcast over the Internet and can be accessed on our website at www.paychex.com on the Investor Relations homepage. The broadcast will be archived and available for replay until one month from today.

At this time, I would like to introduce our Board of Directors. If you gentlemen and ladies would stand up as I call your name. Present with us today are Joseph Doody; David Flaschen; Phillip Horsley, a name you may remember, because Phillip served on the Board of Directors for some-25 years and sort of announced his retirement, but after a year or two, we convinced him to come back and he's here today. We're glad to have him back. He must have missed us or something.

Grant Inman; Pamela Joseph; Martin Mucci; Joseph Tucci; and Joseph Velli. I would also like to introduce Don Murray, who is here today representing Ernst & Young, the company's independent accountants.

I'd like to take a moment to mention something about our dividend. Those of you who don't know it. The Board of Directors increased the dividend by 1 share, so it is now $0.32 a share beginning with the next quarterly payout.

During fiscal 2011, we paid out nearly $450 million in dividends. We returned 80% -- 87% of our net income for fiscal 2011 to our shareholders.

Now moving on to the more formal part of the meeting. I am Chairman of the Board; Martin Mucci is President and CEO; and Stephanie Schaeffer is Secretary. The meeting is held pursuant to the printed Notice of Annual Meeting mailed on August 31, 2011, to stockholders of record on August 12, 2011, who are eligible to vote. A list of those stockholders entitled to vote in this meeting and an affidavit attesting to the mailing of the Notice of Annual Meeting to stockholders are available at the inspector's table for any stockholder who wishes to examine them.

Todd Card has been appointed to act as Inspector of Election at this meeting. Mr. Card has reported that approximately 90% of the outstanding common stock is present in person or by proxy. I hereby declare a quorum is present at the meeting. On behalf of the Board of Directors of the company, I would like to thank all stockholders who return their proxies.

First matter to come before this meeting is the election of 9 Directors, each of whom will hold office for a term of one year. The following persons have been nominated: B. Thomas Golisano, Joseph Doody, David Flaschen, Phil Horsley, Grant Inman, Pamela Joseph, Martin Mucci, Joe Tucci and Joseph Velli. Is there any discussion on these nominations? Yes, sir? Do we have a microphone? It's on its way.

Unknown Speaker

Yes. I want my fellow stockholders to listen very carefully. I'm not reading from any kind of teleprompter on the left side or the right side, as the 44th President of the United States does. My name, for the record, once again, is Harvey Koerber [ph]. I reside in Yonkers, New York, the fourth largest city in the State of New York. This is my seventh out of the last 9 annual meetings of this here great company, which I'm attending and praising this morning. And number two, this is my 1,057th annual meeting I have attended since Tuesday noon, April 19, 1955. So was 56 years ago this past Tuesday, April 19, 2011.

Now, Mr. Chairman, some comments on the Board of Directors. The 43-page proxy statement dated August 31, 2011, on Page 17, it states, "Fiscal 2011 4 director meetings held, plus 2 conference calls, for a total of 6 as compared to 4 for 2010." Where were these 6 meetings held in 2011?

B. Thomas Golisano

Two of the meetings are held here in Rochester, and this afternoon will be one of those meetings. Another meeting is held in Boston, Massachusetts, and a fourth meeting has been held in Las Vegas, Nevada. The reason coast-to-coast is we have board members that live in California, and we have board members -- plural -- that live in Boston. So to make it easier for them, because they're kind enough to travel here twice a year, we go out to those locations. The other 2 meetings my guess is that they were telephonic.

Unknown Speaker

Right.

B. Thomas Golisano

And the reason we have telephonic board meetings, I think, in this particular case this year is the fact we have 2 relatively small acquisitions that we wanted to make. And the process is for the CEO to hold an executive committee meeting telephonically because they're under a certain dollar amount...

Unknown Speaker

Right.

So we do that over the telephone and saves all the travel.

Unknown Speaker

And my next 2 comments relate to a great American on this here board by the name of B. Thomas Golisano, 69 years of age.

B. Thomas Golisano

Do you have to keep repeating that every year, Harvey?

Unknown Speaker

And I'm going to make 2 comments, which are favorable in reference to my friend. I looked through the Forbes Magazine of October 10, 2011, on Page 88, and it said, "Mr. Golisano's assets were $1.4 billion." $1.4 billion. And the next comment is a very serious comment in reference to you. On the back cover of the 2011 annual report is a colored picture of officers observing the 40th anniversary of Paychex on March 3, 2011, and I noticed that you in no kind of way was at this here great historic event which you founded in 1971. Would you explain the reason why you was not present?

B. Thomas Golisano

I think I was living in my residence down in Florida. It probably wasn't convenient for me to come up for it. Plus, was I invited?

Unknown Speaker

And my final comment is a reference to the common stock. As one of the 15,343 stockholders as of June 20, 2011, I want to make a comment to my fellow stockholders about Paychex. Last year, the annual meeting was held on Wednesday morning, October 13, 2011, and the common stock closed at $27.28. It closed yesterday on the Global NASDAQ Select Market at $27.77. So since the last annual meeting, the common stock has risen $0.47. $0.47. Thank you.

B. Thomas Golisano

Thanks, Harv. Any other discussion on the board nominations? We will proceed to voting after presentation of the remaining items of business.

The second proposal in 2011 proxy statement asks stockholders to provide advisory approval of our executive compensation as discussed in their proxy statement. Please note that this vote is advisory and is, therefore, not binding on the company, the Governance and Compensation Committee or on our board. However, if there is a significant vote against our executive compensation, we will take into consideration stockholder concerns and the Governance and Compensation Committee will evaluate whether actions are necessary to address those concerns.

The board is recommending a vote for this proposal. Briefly, it is our belief that the policies, procedures and amounts of compensation, as described in the proxy statement, are effective in achieving the desired goals of aligning our executive compensation structure with the interest of our shareholders. Is there any discussion on this particular matter?

I will now move on to the third matter presented. The third proposal in 2011 proxy statement is an advisory vote on the frequency in which to hold future say-on-pay votes. We are asking stockholders to indicate how often they would prefer a say-on-pay advisory vote to occur, every 1, 2 or 3 years. Whichever frequency receives the most votes cast will be the frequency selected by the shareholders. In other words, the shareholders are making this determination. The board is recommending a frequency of every year for holding an advisory vote. We believe this is the most appropriate for the company at this time as decisions on executive compensation are made annually. An annual vote will allow us to obtain frequent and timely input from our shareholders regarding our executive compensation program. Anybody who would like to comment on this proposal?

The fourth matter to come before this meeting is the ratification of selection of the independent registered public accounting firm. The audit committee has appointed Ernst & Young, LLP as the company's independent accountants for the year ending May 31, 2012. The board believes that it's appropriated to seek shareholder ratification of this appointment and to seriously consider shareholder opinion on this issue. The stockholders do not ratify the appointment, the audit committee will review shareholder concerns and its future selection of the independent accountants. The polls are now open for voting. If you wish to vote in person at this meeting, please proceed to the inspector's table to complete your vote.

While this is being done, I will now turn the meeting over to Marty Mucci, our President and Chief Executive Officer, to provide an overview of what is happening in the Paychex and to answer your questions. Please welcome Marty.

Martin Mucci

Yes, sir?

Unknown Speaker

Yes. I want to add some comments on Ernst & Young on Page 15 of the 43-page proxy statement. As one of the 15,344 stockholders in this here company, I want to compliment the management for doing this. You paid this here firm for the 2011 $744,000, which was up from $737,000, an increase of only $7,000. I want to compliment you, Mr. Chairman, and your board, for doing a good job. And my last comment is this. You told me last year full-time lawyers on the payroll was 5, the same as in 2009. What's the exact figure for 2011?

Martin Mucci

We now have 6 attorneys on the payroll at Paychex. We've gone from 5 to 6.

Unknown Speaker

Okay. Thanks.

B. Thomas Golisano

Okay. We're asking for the $7,000 rebate from Ernst & Young too.

Martin Mucci

Thank you, Tom. Thank you for joining us here this morning for our annual meeting of Paychex shareholders. We are pleased to be here at The Strong Museum, a wonderful community institution in Rochester, which is, of course, founded -- our company headquarters are founded here 40 years ago. If you'd like to tour the museum, by the way, after this meeting, please just go to the admissions desk. You can get a wristband and feel free to tour the museum, which has expanded quite a bit in the last few years.

Paychex has been on quite a journey the past year. My first full year as CEO of this great company. During our journey, our focus has been on growth, making sure that all the elements are in place to position us for that growth, the right people, products, marketing, all needed to support our identity as the payroll and HR expert our clients need. My job is to build on the success of this business by expanding, reinvigorating growth and delivering results.

In fiscal 2011, I'm proud to say that Paychex produced $2.1 billion in revenue and net income of $515 million. As Tom said, with 87% of our net income returning shareholders as dividends nearly $450 million. Our mission as a company remains constant, continuing to be the leading provider of payroll, human resource and benefit outsourcing for America's businesses, businesses throughout the nation.

We saw signs of economic improvement in our client base last year, and those signs continued into the fiscal 2012. In our first quarter results released just 2 weeks ago, and Efrain will talk a little bit more about those in a few minutes, we announced continued improvement in key metrics.

Checks per client up 6 straight quarters. Client retention improved 7 consecutive quarters, and client satisfaction results continue to be at the highest levels in the company's history. I'm proud of the results of our 12,000 employees and the management team that they delivered in fiscal 2011.

There have been a number of changes during the past year on the leadership team. I've been building an executive team through a combination of internal promotions and hiring of external talent in a number of areas. The team has one goal: to be the very best in this industry in the eyes of clients, employees and our shareholders.

I would like to introduce that team to you now. First, Mark Bottini -- if they'd please stand and remain standing -- Mark Bottini, our new Senior Vice President of Sales, who will officially begin next Monday, October 17; Mike Gioja, Senior Vice President, Information Technology, Product Management and Development; Efrain Rivera, our new Senior VP and Chief Financial Officer and Treasurer of the company. Efrain joined us at the start of this fiscal year in June, succeeding our long-time Senior VP and CFO, John Morphy.

I'd ask now John now to stand. John is serving as Vice President of Finance, as he has graciously agreed to stay through the end of the year through a transition period with Efrain. Dan Canzano, VP of Information Technology. Dan has announced his retirement after 22 years with the company. Andy Childs, our new Vice President of Marketing. Kevin Hill, Vice President of Insurance and Human Resource Solutions Services. Bryan Hodge, VP of Eastern Operations. Will Kuchta, VP of Government Affairs. Will earlier this year announced his retirement as VP of HR and Organizational Development. Laurie Maffett, VP Centralized Product Operations and Support. Lonny Ostrander, VP, Human Resource Services Sales. Neil Rohrer, VP of Payroll Services Sales East. Stephanie Schaeffer, up in front, our VP and Chief Legal Officer and Secretary. Tom Szwak -- can't see her, but she's behind all the tall guys there. There we go. Thank you -- Tom Szwak, our VP of Western Operations. Chris Timol, our VP of Major Market Sales. Suzanne Vickery, VP, Payroll Services Sales West. Jenny Vossler, our VP and Controller; and Laurie Zaucha, our VP of Human Resources and Organizational Development. Laurie has succeeded Will Kuchta as he retires.

I would like to ask Dan, John and Will to remain standing while the others sit. And I would ask you to join me in special recognition to our retiring executives and thanks for their important contributions to our company over the years. Thank you very much. Please feel confident as I do that we have an exceptional team as we move forward, and I feel very fortunate to work with all of them. They joined at the helm of a company that demonstrates each day why it's an industry leader. Paychex is a valuable and essential partner with our clients, the nation's small- and medium-sized businesses. We provide 564,000 clients with payroll, HR and benefit services that they need so that they can focus on what they do best: their business. We give them the freedom to succeed.

We currently serve over 9 million client employees with our payroll services. We have moved to our core advanced payroll application about 2 years ago and have continued to invest in our applications with Paychex next generation. In 2010, we added W-2s online and pay stubs. And through the new application development, you will see us continue to expand and enhance our products, including new client interfaces on tablets, iPads and mobile devices and more fully integrated solutions and reporting for both small business and major market services.

To broaden our payroll portfolio and take advantage of an increasing number of small businesses who do their payroll manually today, we expect they will move to an Internet-based application we acquired SurePayroll in February. SurePayroll added over 30,000 payroll clients and gives us an entry into a new segment of online payroll. SurePayroll Software-as-a-Service model gives clients looking for a self-service payroll another alternative, while clients looking for a high level of personal interaction still come to Paychex and the service we're known for.

We also acquired a company called ePlan Services, which gives us an opportunity to greater penetrate the 401(k) market. It's targeted at financial advisors. This acquisition also helps us further connect with the financial advisor community, a growing part of the 401(k) marketplace. Nationwide, we are the #1 provider of new 401(k) plans for the eighth year. And for the first time ever, we have the largest number of 401(k) record-keeping plans in the country, more than any other provider. The 57,000 plans we service in all 50 states account for 10% of all 401(k)s in the U.S.

And Paychex continues to be at the forefront of providing HR outsourcing for small- and medium-sized businesses. We now serve 567,000 client employees with our HR outsourcing. In 2011, we expanded our product offerings in this segment by introducing Paychex HR Essentials, basically, offering HR support over the phone and online.

And our Paychex Insurance Agency passed the 100,000 client milestone this year, providing businesses with coverage ranging from health and dental insurance, to worker's comp and property and casualty. In total, our agency placed nearly $1 billion in premiums for a full array of insurance on behalf of our clients.

And the Paychex Insurance Agency is now ranked among the 30 largest in the country. We have a whole suite of products and a clear roadmap for our future, the tools our sales team needs to help drive new client growth.

And to support their efforts, we are increasing our focus on marketing. I promised you a year ago you would see increased marketing presence for Paychex, and it's happening and it's making a difference. We are gaining more sales leads and referrals from CPAs, our bank partners and the web. In fact, we have increased our sales from search engine marketing, where clients go on the web searching for the name Paychex 50% in the first fiscal year, and Internet search now accounts for 10% of our core sales. And in the strong statement about the strength of our relationship with the accounting community, the AICPA last year extended our agreement to be the preferred provider of payroll and retirement services through the year 2016.

We have a product set in place and a plan for the future that will put us on track to achieve growth. We clearly set the course during the past year, a year when Paychex marked the 40th anniversary. In honor of that occasion, I was pleased to join about 50 Paychex employees -- Tom couldn't make it, as you've heard. And the great -- he was invited. For some reason, he decided to stay in Southern Florida instead of go to New York City in early March. I don't know why that was, but -- and to ring the opening bell at NASDAQ this year for the Stock Market on March 3. Also, with the event, we had 2 gentlemen from a Paychex client that was in New York who had been with us for over 30 years as a client. They were with us when our only product was payroll, and they have been with us through all the growth that Paychex has seen. While we are a leader now in payroll and HR outsourcing and insurance, they have stuck with us. And we're going to keep right and growing, delivering the industry-leading products our clients need, providing the best service to businesses and continuing our tradition of offering outstanding shareholder value.

Our plans for future are ambitious and achievable. Together with all Paychex employees, we are committed and focused on one goal, and that is to grow this business. We appreciate your investment in Paychex, and thank you for your support and confidence as shareholders, and I certainly appreciate you being here today to show us your support.

I would now like to turn over the podium to our new Chief Financial Officer, Mr. Efrain Rivera. Thank you. Efrain?

Efrain Rivera

Thank you, Marty. It's a real pleasure to be here with you today, and it's my pleasure to welcome our shareholders also to the meeting. I'd like to take this opportunity to talk about financial results for fiscal 2011 and to share our expectations for fiscal 2012.

Before I begin, you should be aware that certain forward-looking statements that may be made today by management -- this is the legal disclaimer -- need to be evaluated in light of certain risk factors. These factors, which are disclosed in our earnings press releases and periodic filings with the SEC, may cause our actual results to differ from our anticipated results. So now that the disclaimer is over, let's go to the financial results highlights.

Highlights for 2011 include the following. In fiscal 2011, we returned year -- to year-over-year growth. Total service revenue increased 5%, and both net income and diluted earnings per share increased 8% compared to fiscal 2010.

One of our most important key indicators is checks per client. For fiscal 2011 checks per client increased 2.1%, which was a significant contributor to our growth in service revenue. This compares to declines in checks per client of 2.6% and 2.9% for fiscal 2010 and fiscal 2009, respectively. Checks per client first began to show a positive trend in the fourth quarter of fiscal 2010 with a 1.1% increase, and then continued to improve with increases for each of the respective quarters of fiscal 2011.

Our client base increased 5% to approximately 564,000 clients as of May 31, 2011. Excluding the impact of our SurePayroll acquisition, we would have experienced a decline of approximately 1%. But this was an improvement from the 3% decline in both fiscal 2010 and 2009. The reduction for fiscal 2011 reflects the impact of weak new business formation. During fiscal 2011, we also initiated a number of changes to increase sales productivity.

Another positive development in 2011 was improvement in client retention of approximately 2 percentage points. This improvement was driven by fewer clients going out of business or having no employees. We also lost fewer clients to local and regional customers in fiscal 2011 compared to fiscal 2010. In 2011, we made 2 strategic acquisitions of Software-as-a-Service companies in order to expand our service offerings. We acquired SurePayroll in February of 2011.

SurePayroll was a provider of payroll processing for small businesses with an easy-to-use online payroll product and mobile application. ePlan services, acquired in May 2011, is a record keeper and administrative solutions provider for the defined contribution marketplace. It allows us to expand our channels to financial advisors.

We were pleased with our results for fiscal 2011. We experienced continued improvement in several of our key business indicators, which led to positive financial results. Payroll service revenue increased 2%, largely the result of the increase per checks -- in checks per client previously mentioned. We also experienced higher revenue per check as a result of lower discounting and price increases.

Our 8 [ph] human resources services revenue increased 10% as a result of improvements in economic conditions, client growth and favorable pricing. Paychex HR Essentials, a new HR outsourcing offering, contributed to the growth.

Our health and benefits revenue continued to advance, increasing 29% for fiscal 2011. Interest rates on high-quality investments have remained low. The fed funds rate has been unchanged at 0 to 25 basis points since December of 2008. Our combined investment portfolios, interest on funds held for clients and corporate events investments earned an average rate of return of 1.3% for fiscal 2011 compared with 1.5% for fiscal 2010 and 2.1% for fiscal 2009.

We continue to follow an investment strategy focused on optimizing liquidity, while protecting principal, ensuring that we meet all of our client obligations each and every day. Our employees rose to the challenge becoming more productive while maintaining excellent levels of customer service. Our operating income, net of certain items, increased 7% as we leveraged our resources to deliver strong operating margins at 36.3%, an improvement of almost a full percentage point over fiscal 2010.

Now let's turn to financial results on Slide 6. Corporate cash and investments grew from $657 million to $671 million. This increase occurred while paying out almost $450 million in dividends to stockholders. As Tom mentioned previously, we paid out 87% of our net income in dividends to shareholders in fiscal 2011.

Stockholders equity was $1.5 billion as of May 31, 2011. Return on equity of 35% for fiscal 2011 compared to return on equity of 34% for the previous year.

Let's look at total revenue. It's increased -- it increased 4% for fiscal 2011 following a decrease of 4% for fiscal 2010. Our 5-year cumulative annual growth rate for total revenues is 4%.

Let's look at operating income excluding interest on funds held for clients and certain items. This is the best way to evaluate year-over-year growth. It measures -- it excludes interest on funds held for clients and the expense charge to increase our litigation reserve. $19 million was recognized in fiscal 2010 related to the Rapid Payroll litigation. Interest on funds held for clients can vary greatly between years as a result of fluctuations in interest rates that are not under our control. The expense charge to increase the litigation reserve is unusual and infrequent in nature and outside of the normal course of our operations.

Operating income, net of certain items, increased 7% to $738 million for fiscal 2011 following a decrease of 6% for fiscal 2010. As a percent of service revenues, operating income was 36.3% compared to 35.4% in fiscal 2010. This significant achievement was made possible by the efforts of our 12,000 employees. Our 5-year cumulative annual growth rate for operating income net of certain items is 6%. Now these were good results, but I will say that our Chairman always demands more, so our job is to continue to improve on that.

Now I'd like to take you through our expectations for fiscal 2012 and the results for the first quarter. We were encouraged by financial results for the first quarter of this year. Our first -- these results were aided by the addition of SurePayroll and ePlan which were acquired in the second half of fiscal 2011.

Here's some of the highlights of the quarter. Service revenue increased 9%, driven by growth in both payroll and HRS revenue. Payroll service revenue increased 6%, influenced mainly by increased checks per client, as I mentioned previously, and higher revenue per check. The increase would have been 4% if we exclude the SurePayroll acquisition. Checks per client increased 2% for the first quarter compared to the same quarter last year, and this is consistent with the growth seen for the fourth quarter of fiscal 2010.

HRS revenues grew 17%. Excluding the ePlan acquisition, growth would have been 14%, reflecting client [ph] growth and pricing. Interest on funds held for clients declined 9%. As discussed previously, rates of return on high-quality securities remained low in this environment. Operating income net of certain items increased 16% to $219 million. We continue to manage our personnel costs and expenses tightly, while still investing in the business. Finally, net income increased 13% to $149 million, and EPS increased 14% to $0.41 per share.

In summary, the first quarter was a good quarter. While the economy remains challenging, we believe that steps put in place last year to improve sales productivity will benefit us as the year progresses.

Now let's look forward beyond the first quarter. We document our short-term expectations through guidance we provide and disclosure to stockholders and to Wall Street. This guidance is provided in our press releases and our SEC filings that can be found on our website under Investor Relations.

First quarter was encouraging, but we remain cautiously optimistic in the current environment. We did not increase our guidance from that provided in June. We expect checks per client to moderate in -- as fiscal 2012 continues, which will impact our quarterly comparisons as we go forward. We expect to continue with planned investments in our technology platform, and we expect the economic and interest rate environments, which are challenging, will remain at about the same level. Our guidance is summarized as follows: Payroll service revenue will increase in the range of 5% to 7%. HRS revenue will grow between 12% and 15%. Interest on funds held for clients is expected to be down 12% to 14% for fiscal 2012 due to lower interest rates. Our corporate investment income will be flat or increase slightly. And overall, we expect an improvement of 5% to 7% in our net income for 2012.

I'd like to conclude with a moment of appreciation. As Marty mentioned, John Morphy is retiring after 15 years with Paychex, and he's always been a key contributor to the business. He set a high bar with strong leadership and a high standards of ethics. He's truly built a solid reputation for Paychex in the investment community. And as we have done this transition, I have had a chance to visit with investors, you see that respect that the investment community has for John.

I'd like to personally thank John for his assistance in my transition as CFO of the company and for introducing me to those analysts, with whom he built a tremendous relationship over the years. I want to wish him the best of luck in the future. Enjoy your retirement, John.

At this time, I'd like to turn the meeting back to our President and CEO, Marty Mucci.

Martin Mucci

Thank you, Efrain. We now like to open it up to questions. Any questions you have, there are microphones here. If you could just raise your hand, we'll bring a mic to you. I just ask you to state your name and whether you're a shareholder or not would be appreciated. Any questions? Yes, we have one right over here. Mic's coming down to you.

Question-and-Answer Session

Unknown Speaker

Yes, Mark Noblet [ph]. I'm a shareholder. First of all, what percent of the market does Paychex have for payroll services?

Martin Mucci

What percent of the market? The market, if you look at it, there's about 7 million small businesses in the nation. If you look at then who outsource and those who outsource and who don't, so they do it themselves, with do-it-yourself, we probably have about 15% of the market. ADP about another 15 and then there's others there.

Unknown Speaker

So is ADP is the primary...

Martin Mucci

Is the primary national competitor, correct.

Unknown Speaker

Right. What's being done to get market share as far ADP is concerned to differentiate your product from, say ADP?

Martin Mucci

Sure. Number one, our service. We have a very different service model from ADP. ADP started a few years before us. They were always in the high end of the market, from a business standpoint. They have come down into our market over the years. We've always provided a dedicated payroll person to our businesses who really own that service model, and ADP still has as an 800 service. And then certainly our products, always trying to bundle and add our products. We, I think, are much more successful in 401(k) business example and so forth.

Unknown Speaker

Good question -- good answer. Do you have any, like, expectations about what additional market share you'll be able to get in Europe in the short-term horizon?

Martin Mucci

Well, we look at it more from a growth standpoint. We're trying to grow our revenues in upper single digits. You saw the first quarter, and so we're trying to grow the upper single digits in revenue and then operating income at 1% or 2% additional leverage margin from that. So we're trying to grow that business and we go after ADP. But we also -- 50% of our sales come from brand-new businesses. So it's important to us that sell to new businesses, about 1/3 come from CPAs, 1/3 referrals, 1/3 from current clients and 1/3 from everywhere else.

Unknown Speaker

All right. Great. Look, I just got a couple comments from people who have used Paychex services.

Martin Mucci

Sure.

Unknown Speaker

One is a dentist that I have in Annapolis, Maryland. I came in from Maryland for the meeting.

Martin Mucci

Great.

Unknown Speaker

And he's having -- he's pulling his hair out, to put it bluntly. He can't get cash transferred to the checking account. And for all I know, difficulties dealing with the home office, wherever his point of contact is. Actually, he was really frustrated last time I was in his office, and probably have left the company right now. Another guy right here in Rochester on your 401(k) services, Resource Financials is the name of the company, right out here. He's having a fit essentially with the 401(k) services. They got turn-over apparently. There's no back-office support. It's a real poor reflection on the company in general, so somebody is not watching what is going on here. I don't know about accountability or whether you're monitoring what 401(k) providers are actually pulling in terms of it. So it's not -- he's not a happy camper.

Martin Mucci

What I'd like to do is I'd get all the names from you, and we'll get to these clients and make sure that we're satisfying them.

Unknown Speaker

Great. Those are a couple of the feedback comments that I have gotten. And one thing I would like say about Mr. Golisano. Golisano, is that right?

Martin Mucci

Right.

Unknown Speaker

I don't know if it's a company function or whether it's a personal function, but he does support Christian Heritage Services, which I have a personal family connection with some of the founders. There's 3 founders, and that's a great cause. So I got to just give them a little bit of a thank you there for I think supporting a great cause. And just looking the list over here, I think I've covered the extent of my input to the meeting, and I'll get you back this information on the...

Martin Mucci

Please. We'll get someone to you and get the names so that we can get in touch with those clients. Thank you for coming. Appreciate it. Other questions? Comments? Okay. Yes, sir? We have one down here. The phone's over here.

Unknown Speaker

My name is Jim Hoekayling [ph], and I've just got -- I've got one comment and another question.

Martin Mucci

Sure.

Unknown Speaker

Since retiring from Kodak, I've made a study of the company. I just called to review, and one of them is Wegmans and the other is Tops. And there's a reason why Tops is so -- why Wegmans is so successful. It depends on the leadership. In the front row here have got an awesome responsibility in these times. And I urge you, you probably don't realize, but maybe you do, the importance of being out and about and recognizing people is so important. And Danny Wegman has got it all together. I hate to use his name.

Martin Mucci

Sure.

Unknown Speaker

He has got it all together. There are people in the Wegmans store that would die for him. And that's what's made that company so great; it's the people. And that's what will make Paychex great; is the people. Now my question is: As I review companies, there's more and more companies that are going away from benefits. Kodak is one of them, I'll tell you that. Is this going to have an effect as more companies go away from providing benefits, and they say to an employee, "You get your own benefits. Don't come to us." What effect might that have on Paychex?

Martin Mucci

Well, from -- I think from a client standpoint -- sir, let me address the first thing, if you don't mind your comment. I absolutely agree with you that people are making the difference. I feel that one of the reasons I came to Paychex 10 years ago was because of the culture that was at Paychex. I had been 21 years at another company that had a great culture, very focused on the employees. Our front-line service providers, I'm thrilled that we have the highest client satisfaction in our clients. We certainly always can do better, as you've heard, but we're very happy that we dedicate our employees to our clients. And we are very careful about who we hire and then how we support and recognize them. We do a lot of recognition and whether it's right in our branches in over 100 locations or here in Rochester. And we try to take a lot of time on that. We've been -- gotten awards for best places to work. Our IT organization for 7 years in a row has been one of the best places to work in IT, and we're -- those things make us very proud of, not only the people, but the leadership. From a change in benefits, I think from an employee standpoint, certainly, let me address it first from Paychex as an employer. It's very important to us to provide very competitive benefits. We are able to just actually roll out our health insurance increases for this year, and they were the lowest we've had in probably 5 years, the lowest increase. And we try to keep very competitive from that standpoint, because you want to encourage employees to come and build their careers at your company, so you have always got a competitive offering of both salary and benefits. From a client standpoint, certainly, that would be challenging as benefits cut back, it would be more difficult for us to sell things like health insurance and so forth. However, what we're seeing is anything is the opposite, while they're cutting back maybe on some benefits, they're also looking for more help in changes in regulations. As you see, healthcare reform is very confusing. You see payroll tax changes, very confusing now under the administration. And so we're actually getting more opportunity as a company to be able to go out to our small businesses and say, "Let me take that burden from you and let me help you organize and provide your benefits." If anything, I think Paychex provides a support to employers, to be able to continue to give benefits because we take the burden of how to do it, how to report it and how to organize it for their employees off their back. So okay? Thank you for the question. Any other questions, comments? Yes, sir?

Unknown Speaker

My name is John Langdon [ph]. I'm a shareholder. First of all, I want to thank Mr. Golisano, Paychex staff, it's a company that all New York can be very proud of. And there's -- my question is in the -- for sure, you show a $1.42 in latest earnings. Next year, it's forecasted to variance be $1.51, and the year after, $1.63. In this economic environment, do you feel these are realistic numbers?

Martin Mucci

Yes, I think our guidance is, as Efrain just pointed out, we work very hard to hit those numbers in this economy. You have to try twice as hard, but we feel very confident in the employee team and in the products that we have and the investments that we're making. At this point, we feel very good about hitting those numbers, and we continue that guidance. Even though we had a very stronger first quarter than we expected, we came back and said, "Look, we're not going to improve our guidance, not raise that $1.51. We think we can hit that $1.51." And certainly, the whole management team that's here is working hard to do just that. Thank you. Any questions or comments? Yes, sir? Mr. Koerber? [ph] I'd be disappointed if I didn't get one.

Unknown Speaker

Yes, I want to ask you one serious question, and it's in regard to the 2011 very fine annual report. First of all, what was the price per copy for this here very fine annual report?

B. Thomas Golisano

I don't have that number right in front of me, to be honest with you. I'll have to get back to you. I know that our team does a lot of that work internally. We don't send a lot of it out all the design work, and everything was done internal and we keep it at a very economic basis. But I can give you the final number, I just don't know it off the top of my head.

Unknown Speaker

And my final comment is a very serious comment as one of the 15,344 stockholders of record. I looked at the very fine annual report and I came to the meeting this morning. And I want to meet and see a young, attractive individual on this here annual report. And I found out that this here young lady is a fashion model, is not involved with Paychex. I think it would be appropriate of yous people who have 15,344 stockholders put down in small print a young lady is a fashion designer. She does not work for Paychex.

Martin Mucci

Okay. Thank you. I'll take that under advisement. Thank you. We have plenty of employees that look very nice though, but we just happen to choose a model. So okay. Thank you. Any other questions or comments? Yes, sir. We have one right here. Mic coming down.

Unknown Speaker

Marty, my name is Bob Anonsi [ph]. Could you give me a summary of how Paychex is doing business in Germany?

Martin Mucci

Sure. The question was how we're doing business in Germany. We started the German operation probably about 7 to 8 years ago. As many of you know, we opened a small office there. It has now grown to about 2,000 clients. It's grown actually very quickly. We're in 3 cities, one for operations in Hamburg and the other 2 in Berlin and Munich for sales. It is turning -- hopefully turning profitable this year. It's taken a while in the payroll business to turn a profit for that operation. We're very pleased with how they've been doing. We're continuing to look to see whether expansion makes sense or not. We're not sure because it does take a long time to invest there. So as we have dollars to invest, we look at is it better to put money in U.S. operations or in Europe. Right now, Europe is probably as dicey as it's ever been. But we feel good about that branch and the sales efforts, but it takes a while to grow it. So we continue to watch it. We're pleased with it. We just don't know about further expansion at this time. Okay. Thank you for the question. Any other questions? Great. I'd like to turn the podium back over to our Chairman, Tom Golisano, and thank you very much for being here today.

B. Thomas Golisano

Before we get into the final portion of the process procedure, I'd like to make a couple comments. We're all shareholders and owners of this company. And in the United States of America today, there has been a lot of negative conversation about corporate citizenship. And corporations have been accused across-the-board of number one, not being ethical organizations; number two, not paying their fair share of taxes and so forth. To me, it's a real shame because maybe there are some small number of companies that aren't being good corporate citizens, but I thought I'd give you a little bit of information about your corporation and its corporate citizenship.

First of all, last year, we paid $256 million in corporate income tax. I'd say we were paying our share. It also doesn't include the over $50 million we paid in payroll taxes on behalf of our employees since they can receive their benefits and our 13,000 employees also paid income taxes. So as far as corporate citizenship is concerned, when you folks walk down the street and somebody attacks you or asks you about this issue, you can all stand very proud and your head up high as being an owner of Paychex because we think we really do a great job of being a corporate citizen in this country. We certainly pay our fair share. I wish it was less, but we pay our fair share. Who ever can define fair? Okay. Enough editorializing and my -- okay. The results of the balloting. Has everybody had an opportunity to vote? I now declare the polls closed. The inspector of elections will proceed to tabulate the votes and provide his report. Todd?

Todd Card

Mr. Chairman, in connection with the proposal to elect 9 directors, I wish to report that a majority of the votes cast were voted for the election of each of the 9 nominees.

In connection with the proposal for an advisory vote on executive compensation, I wish to report that a majority of the votes cast were voted for the proposal.

In connection with the proposal for an advisory vote on the frequency of future votes on executive compensation, I wish to report that the majority of the votes cast were voted for a frequency of every year.

In connection with the proposal to ratify the selection of the company's independent registered public accounting firm, I wish to report the majority of the votes cast were voted for the proposal.

B. Thomas Golisano

Okay. You've heard the results. I hereby declare that the nominees for directors have been duly elected. The executive compensation has been disclosed in the 2011 proxy statement has been approved on an advisory basis. A frequency of every year for future advisory votes on executive compensation has been selected on an advisory basis, and that the selection of our independent accountants Ernst & Young have been approved. That's the official part of the meeting.

Thank you, all, for coming. A few of us will be here, if you'd like to grab us and ask us a personal question or a different question. So thanks again for coming. Thank you.

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Source: Paychex Inc. - Shareholder/Analyst Call
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