Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Douglas S. Sharp - Chief Financial Officer

Richard G. Rawson - President, Director

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

Analysts

Michael Baker - Raymond James & Associates

Tobey Sommer - SunTrust Robinson Humphrey

Mark Marcon - Robert W. Baird & Co., Inc.

Cynthia Houlton - RBC Capital Markets Corporation

Administaff, Inc. (ASF) Q1 2008 Earnings Call May 1, 2008 10:00 AM ET

Operator

Welcome to the first quarter 2008 earnings conference call with Richard Rawson, President; Paul Sarvadi, Chairman of the Board and Chief Executive Officer; and Douglas Sharp, Chief Financial Officer. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call Douglas Sharp.

Douglas Sharp

Before we begin, I would like to remind you that any statements made by Mr. Sarvadi, Mr. Rawson, or myself, that are not historical facts are considered to be forward-looking statements within the meaning of the Federal Securities laws.

Words such as expects, intends, believes, likely, probably, goal, objective, outlook, guidance, appears, target, and similar expressions are used to identify such forward-looking statements and involve a number of risks and uncertainties that have been described in detail in the company’s filings with the SEC. These risks and uncertainties may cause actual results to differ materially from those stated in such forward-looking statements.

Now let me take a minute to outline our plan for this morning’s call: First I’m going to discuss our first quarter financial results; Richard will discuss trends in our direct cost, 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, our outlook for the remainder of the year and how we expect to be positioned going into 2009; I will return to provide financial guidance for the second quarter in the remainder of 2008; we will then end the call with a question-and-answer session.

Now let me begin by summarizing the financial highlights from the first quarter beginning with a significant year-over-year increase to the bottom line.

We reported a 70% increase in first quarter earnings per share to $0.51, our highest ever quarterly earnings. These results, which were also above our expectations, were driven by positive outcomes in each of our key metrics. The average number of worksite employees pay increased just over 8% for the quarter.

Gross profit for worksite employee per month averaged $254 for the quarter, up from $216 reported in Q1 2007 and at the high end of our expected range. In addition operating expenses came in at the low end of our expectations. As for our share repurchase activity, we repurchased 584,000 shares during the first quarter, and currently have approximately 1.6 million shares remaining for repurchase under our authorization.

Now let’s review the details for our first quarter results. As I just mentioned, the average number of paid worksite employees increased just over 8% compared to the first quarter of 2007 from 104,881 to 113,541, just below the low end of our expectations.

In a few minutes, Paul will provide the details behind our first quarter unit growth, including sales, client retention and net change within the existing client base, and comment on our outlook for the remainder of 2008.

First quarter revenues increased 12% over 2007 to $456 million as a result of the 8% increase in the average paid worksite employees, and a 3% increase in revenue per worksite employee per month.

Looking at first quarter revenue contribution and growth by region: The southeast region, which represents 10% of total revenue, grew by 14%; the northeast region, which represents 21% of total revenue, grew by 19%; the central region, which represents 15% of total revenue, grew by 14%; the west region, which represents 20% of total revenue, grew by 5%; and the southwest region, which represents 33% of total revenue, grew by 11%.

Moving to gross profit, gross profit per worksite employee per month for the quarter was $254, up significantly from the $216 reported in Q1 of 2007.

You may recall that last years first quarter was negatively impacted by higher than expected health care costs. This year was quite the opposite, as we experienced positive developments in our benefits area.

We entered Q1 of 2008 forecasting an increase in the gross profit per worksite employee per month to this range of $250 to $254. When factoring in the expected positive impact of lower heath care administrative costs and plan design changes, higher payroll tax surpluses and continuing favorable trends in our Workers Compensation program. We then successfully managed both our pricing allocations and direct costs to come in at the high end of the forecasted range.

As for the specifics, benefit costs per covered employee per month declined on a year-over-year basis by about 1% and on a sequential basis from Q4 of 2007 by approximately 3.4% to an average of $681 for the quarter.

Richard will discuss the details in a few minutes, but suffice it to say that we are very pleased with the impact of our recent efforts on both this quarter’s costs and forecasted costs for the remainder of the year.

Workers Compensation costs were 0.66% of non-bonus payroll for the quarter, slightly above our forecast of 0.60%. This overage was not due to claim costs, which continue to trend favorably, but rather to the lowering of the discount rate that we use to calculate the present value of expected future claim payments.

The recent significant decline in the interest rates resulted in a greater than expected impact to this quarters costs. As for this quarter’s reserve adjustment, updated actuarial loss estimates resulted in a $2.6 million reduction in previously reported loss estimates. Richard will provide more detail on our continuing favorable claim results in a few minutes.

We generated a higher than expected surplus in the payroll tax area in Q1 as higher payroll averages and bonuses of worksite employees were applied to the spread between our pricing allocation and payroll tax costs.

Payroll taxes as a percentage of total payroll costs declined from 8.93% in Q1 of 2007 to 8.68% in Q of this year, as a result of lower state unemployment tax rate, and the higher payroll averages and bonuses of worksite employees.

Now let’s move on to operating expenses, as you may recall from our previous conference call, we forecasted an increase in operating expenses to approximately $69 million for Q1. When considering, among other things, the recent sales office expansion at mid market in HR tools initiatives, operating expenses actually came in slightly below our expectations at $68.6 million.

As for the details, salaries and ranges increased by 15% due primarily to the addition of sales and service personnel, including those associated with our mid market initiatives. This is reflective of our decision to continue to execute our long-term growth plan.

Sales and service head count is up 10% to 11% over the first quarter 2007.We increased the total number of sales reps to 320 by the end of the quarter, and averaged 277 trained reps, a 10.4% increase over the first quarter of 2007.

Stock-based compensation increased by about a $1 million due to the full effect of the three year vesting of annual restricted share grants and a lower turn over rate of key personnel than previously estimated.

Sales commission increased by 6%, slightly below our worksite employee growth. Advertising increased by $1.7 million, due to both an acceleration of marketing initiatives into Q1 of this year as compared to 2007 and an increase in the level of such expenditures. This is consistent with our plan to increase sales lead activity to offset slightly lower closing rate in a weaker economy. We are still forecasting a full year increase in advertising costs for approximately 19%.

Depreciation and amortization remain flat, which is consistent with the relatively flat level of capital expenditures over the past few years. G&A costs increased by 18% and included costs associated with our sales office expansion and consulting costs related to our HR tools initiative.

Now let’s review several key balance sheet and cash flow items. We generated $24 million of EBITDA during Q1. Cash outlays during the quarter included share repurchases of $15.1 million, cash dividends of $2.9 million and capital expenditures of $4.8 million.

Working capital, which is also a good measure of our liquidity, declined from $97 million at December 31, 2007 to $83 million at March 31, 2008. The reclassification of certain marketable securities from short-term to long-term assets accounted for approximately $8 million of this decline; so let me take a minute to explain.

Our portfolio of marketable securities totaled approximately $88 million at March 31. It included $54 million in tax-exempt money market funds, $30 million of tax-exempt municipal auction rate securities and $4 million of municipal bonds.

Our investments are all high credit quality and unrelated to subprime mortgages or home equity loans, nor do they include any collateralized debt obligations. As for our auction rate securities, approximately $8 million of these securities are preferred shares of a closed end bond fund that is considered temporarily liquid and therefore has been reclassified to a long-term asset.

The take away here is that our liquidity has not been significantly impacted by the recent issues in the credit markets, and is more than enough to execute our plans.

Now I’d like to briefly comment on the acquisition we announced earlier today. We recently acquired USDatalink an employment screening services company. We are excited about the acquisition on several fronts, including the opportunity to acquire a quality service offering, lower our costs to serve our PEO clients and generate revenue growth outside of the PEO relationship.

In summary, we are very pleased with our first quarter activity and results. We continue to execute our long-term growth strategy, while providing significant shareholder return through share repurchases and cash dividends.

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

Richard Rawson

This morning I’m going to discuss the details of our excellent first quarter gross profit results, and then I will update you on the pricing and direct cost trends that we are seeing and how they will affect gross profit per worksite employee per month for the balance of 2008.

Our gross profit comes from the markup that we earn on our HR services combined with the surplus that is generated when our direct cost pricing allocations exceed the corresponding direct cost.

Doug just reported that our gross profit per worksite employee per month was $254, which was at the top end of our forecasted range of $250 to $254. These results came from achieving $198 per worksite employee per month of markup, and generating a surplus of $56 per worksite employee per month or 4.2% of our total markup.

We had a decline in the average markup per worksite employee per months in Q1 primarily driven by slight reductions in pricing for renewing business. On the brighter side, our new business sold increased almost $5 per worksite employee per month over the first quarter of last year. Now this quarter’s better than expected surplus came primarily from the payroll tax cost center.

Last fall we knew what most of the state unemployment tax rates would be for 2008 and we adjusted our pricing accordingly to maintain our targeted spread for this year. The first quarter spread is typically the largest of the four quarters, and when there are more payroll dollars subject to payroll taxes than forecasted, you automatically get more surplus dollars. This is exactly what we experienced this quarter.

From the benefits cost center, we had benefits cost of $681 per covered employee per month, which is slightly less than our expectations and was directly related to the planned design changes that we implemented in January.

On the pricing side, we have continued to see migration of employees out of the United Health Care Choice Plus 250 Plan, which reduces our allocation, but it also reduces our ultimate cost.

Last but not least, is the contribution from our Workers Compensation cost center. The number of claims reported this policy period to date is exactly the same number as last year’s comparable period. This continues to be impressive when you consider that we’ve had an 8% growth in the number of paid worksite employees that incur those claims. These positive results are directly related to the great job our safety professionals in the field continue to do.

The severity rate of those claims that were filed through the end of the first quarter is down 22% over the same period as last year, continuing to demonstrate the effectiveness of our claims management personnel.

We had a nice surplus from our Workers Compensation program as expected. These excellent metrics were off set by the $1 million of higher costs related to the discount rate calculation that Doug referred to a few minutes ago.

In summation, we’re very pleased with our first quarter results.

Now let me share with you what we see for the second quarter and beyond, beginning with pricing: We believe that renewals for the second quarter will be easier than last quarter; therefore we expect the markup component of our service fee to increase slightly each quarter for the balance of the year. This would result in an average markup of $200 per worksite employee per month for the full year.

In addition, we anticipate an increase in the surplus component of gross profit to increase from our initial range of $33 to $38 per worksite employee per month for the full year, to a new range of $39 to $43 per worksite employee per month.

Here’s how, the surplus generated from the payroll tax cost center typically declines each quarter through out the year. The better than expected results in Q1 should carry forward through out 2008 and add an additional dollar per worksite employee per month to the surplus.

Now let’s discuss the Workers Compensation cost center. We also expect to see a nice contribution to the surplus component of our gross profit from this cost center for the balance of the year, but it will be dampened if interest rates stay at their current levels; so, for now we’re going to estimate our costs to be about 0.65% of non-bonus payroll for the remainder of the year.

As for pricing, we’re maintaining the same levels as last quarter. The benefits cost center is where we expect to see further contribution to gross profit for 2008.

Last quarter I mentioned that we had three factors that should positively affect the benefits cost center for 2008. As part of our historical strategy for managing this cost center, we made a couple of plan design changes that took effect January 1. Our second factor is continued migration of covered worksite employees moving from the United Health Care Choice Plus 250 Plan to lower cost, higher deductible plans. The third factor that reduces costs is the reduction in the administrative fees, which we had previously negotiated with United Health Care beginning in 2008.

Well, as you can see from our first quarter results, our plans are developing very nicely; therefore we now believe that our total benefits cost per covered employee should only increase about 2.5% over 2007.

We have continued to increase our allocations on the pricing side to match normalized trend increases and reduce the deficit in this cost center. This combination of allocation increases and reduced costs should add an additional $4 to $% per worksite employee per month to our surplus for 2008.

Additionally, we just renegotiated our employment practices liability insurance policy for a direct cost savings of about $600,000 or 10% over last years policy costs. This is significant to us when you consider that we have grown the base of employees covered by this policy by more than 8%. Premiums for this type of policy increase as the exposures increase.

These great results come from the success that we have in managing employment practices liability claims and reducing liabilities for our clients.

In summation, we should see our gross profit for worksite employee per month increase to a new range of $239 to $243 per worksite employee per month for the full year of 2008.

At this point, I’d like to turn the call over to Paul.

Paul Sarvadi

Today my goal is to provide some insight into the resiliency of our business model and our opportunity for growth and profitability through out a weak economic cycle. I will discuss the transition we experienced in the first quarter, and the acceleration in sales that we are driving as the platform for future growth. I’ll conclude my remarks with a discussion of what we expect as an economic rebound emerges later this year or into 2009.

Our first quarter results clearly demonstrate the value of our recurring revenue stream business model. As I mentioned on our last call in February, we had just seen the effects of the economic slow down reach our client base in the form of lower commission indicating lower sales for our clients, products, and services. We saw hiring and lay offs become dead even and we had an increase in client attrition at year-end to 9.6% in January.

Now this did not sound like the backdrop that would produce the first quarter results you’ve seen today. In fact, this quarter was our all time record for earnings per share at $0.51. We also had 12% year-over-year revenue growth and 8% unit growth. We continue to invest in growing the sales and service staff, developing new products and the purchase of a new division to offset costs and add a revenue stream.

These results are in sharp contrast to many other companies in the business services sector, and validate that Administaff has a much lower economic sensitivity. Our first quarter growth was driven by the combination of solid client retention numbers for February and March, continued enrollment of accounts sold in our fall campaign and no loss or gain from the net effect of layoffs and new hires in the client base.

During the quarter we initiated a company wide focus on client retention as part of our annual incentive plan for 2008. This initiative includes the formation of teams to tackle specific areas targeted for improvement, including segmentation, pricing strategy, cost value communication, customer touch program and the renewal process. We also have enlisted the entire staff to innovate through our reward program, established for client retention improvement ideas.

Early returns are good with both February and March attrition below historical levels at 2.1% and 1.3% respectively. The outlook for the second quarter also looks positive for continuing this improvement.

During the first quarter we had a 9% increase in paid worksite employees from the sale of new accounts: this is consistent with the 10% increase in the number of trained sales personnel. The most significant highlight from the sale operation since the first of the year is the dramatic move in the total number of sales personnel. This time last year we had 290 total reps with just over 250 trained, today we have 336 sales people, which is an increase of more than 15%. As these new sales staff roll into the trained sales person count, we expect to see substantial sales growth.

Last quarter I mentioned our efforts to upgrade staff for our clients and fill our own open positions, taking advantage of layoffs at large firms. Our success in hiring new reps this quarter is directly related to this strategy.

The first quarter was also a transition period for the sale organization. In recognition of the change in the economic climate, special training was conducted at the annual sales convention in February. This proved to be very timely as sales in January were off substantially and contributed to coming in just shy of expectations for our first quarter unit growth. The sales message was adjusted and activity levels were increased and sale followed. Each month sales levels have increased since January up to budgeted numbers, most recently in April.

We’re also seeing nice early results from our mid market improvement efforts. Client feedback from our new service model has improved dramatically and three new sales are scheduled for enrollment in the second quarter. From our perspective we’ve absorbed the year-end client attrition related the weakened economy and now have absorbed the ¼ transition in sales that also occurs with an economic slow down.

The last element to consider is layoffs and new hires in the client base. Last quarter we provided specific year-over-year unit growth guidance for 2008 of 8% to 9% assuming no gains or loss from the net effect of new hires or layoffs.

In the Q&A session last quarter, I provided a range of 5% to 6% unit growth if layoffs began to exceed new hires. So let’s revisit and update this 5% to 9% unit growth range, looking at current economic indicators we follow in our client base.

During the quarter we got exactly what we expected from the employment picture, as the net effect from this unit growth driver was flat, no loss and no gain from hiring in the client base. In addition, we have seen some rebound in commissions paid to the sales staff of our client, which indicates their pipeline for new business has improved in the first quarter from the fourth quarter of 2007.

As I mentioned last quarter, year-over-year increases in commission paid had dropped from an 8% to 12% range in previous quarters to less than 4% in Q4. This number has improved to approximately 7% by the end of Q1. Over time as a percentage of base pay has fallen slightly, but remains strong at nearly 10%; this indicates capacity is still stretched and hiring in our client base could resume if sales continue to improve.

Average pay increases for the same employees year-over-year is up a modest 4% or so, which includes the full effect of pay increases and promotions.

When you weigh in these factors, we don’t se an immediate threat of layoffs exceeding new hires for an extended period. However month-to-month there is some risk. So, where does that leave our unit growth range of 5% to 9%? Well at this stage, we believe we can narrow the range for the rest of 2008 to 6% to 8% factoring the current starting point for worksite employees and a net gain of 700 to 1400 employees from month-to-month beginning in May.

If layoffs exceed new hires and we have modest sales growth, we would be closer to 6% for the full year. If we have continued solid sales and no loss or gain from the employment picture, we’ll be closer to the 8% number. When you add the 6% to 8% unit growth to the solid gross profit outlook Richard mentioned, you can clearly see the strength of our business model in spite of a weak economy.

We will continue to invest in growing the sales and service staff, developing our HR tools product set, and remain opportunistic for strategic acquisition. When you add in the operating expense picture we continue to expect profitability and earnings in the range we originally forecasted for the full year.

Now, I believe it’s worthwhile to look beyond the immediate term and consider our positioning for 2009. We are poised for growth acceleration driven by several factors. First and foremost is the acceleration of trained sales staff. Historically double-digit growth in trained reps produces double-digit growth in paid worksite employees within 12 months.

Secondly, a systemic improvement in client retention has an immediate positive impact on growth and profitability. I believe our focused effort in this regard will pay substantial dividends in years to come, based upon the ideas we’ve generated, and the changes we are implementing.

Thirdly, our technology improvement scheduled for delivery to our clients in early 2009, represents a significant increase in functionality and features which we have historically been able to translate into stronger pricing and growth.

Finally, our efforts are directed toward accelerating growth prior to an economic rebound, which leaves the benefit of a better labor market as icing on the cake.

At this time, I’d like to pass the call back to Doug to provide our specific guidance for the second quarter and the balance of the year.

Douglas Sharp

At this time I’d like to provide financial guidance for the second quarter and an update to our full year forecast. Before we get into the details, I’d like to point out that we are essentially reiterating our guidance for the full year.

Based upon the factors discussed by Paul a few moments ago, and in particular taking into account the expected range of possibilities from a slowing economy on our sales and hiring within our client base, as he mentioned, we are revising our forecasted unit growth to a range of 6% to 8% for the full year.

This revised forecast assumed average paid worksite employees in a range of $115,500 to $116,000 for the second quarter and net additions of $700 to $1400 each month for the later half of the year. This results in a forecasted range of $117,000 to $119,000 average paid worksite employees for the full year.

As Richard mentioned, we now expect full year guidance for gross profit per worksite employee per month to be in a range of $239 to $243. This is an increase from our initial range of $235 to $240 based upon our improved outlook and our direct cost program, in spite of the higher Workers Compensation cost resulting from the decline in interest rates. As for the second quarter, we expect gross profit per worksite employee per month to be between $235 and $238, also slightly higher than initially expected.

As for operating expenses, we now expect to be in a range of $274 million to $277 million for the full year, with the high end of the range, including additional incentive compensation tied to achieving higher unit growth in gross profit goals. The increase from our previous guidance of approximately $1.2 million is directly related to operating costs associated with our recently announced acquisition of USDatalink.

While we are hopeful that we can transition the PEO background check activities from our current vendors before the end of the year, we have conservatively not included these savings in our 2008 forecast; however, we have included revenues from services currently being performed by USDatalink to their existing client base and we expect the operations to be slightly accretive to our 2008 earnings.

As for the second quarter, operating expenses are expected to be in a range of $67.25 million to $67.75 million. This is below Q1 operating expenses due primarily to an anticipated sequential decline in cash compensation and G&A costs.

As a reminder, first quarter operating expenses included higher corporate payroll taxes and expenses associated with our annual sales conference employee incentive trip.

We continue to forecast net interest income in a range of $9.5 million to $10.5 million for the full year, as expected in cash balances should offset the recent decline in interest rates. We are forecasting a range of $2.3 million to $2.5 million for the second quarter.

As for average outstanding shares, we are now forecasting $25.7 million for Q2 and for the full year, and we are estimating and annual effective income tax rate of 35.7%.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Michael Baker - Raymond James.

Michael Baker - Raymond James & Associates

United Health continues to face some service issues, and I’m wondering if that had any impact on retention.

Paul Sarvadi

No, Michael. We have just continued to have great service experience. We are such a large customer for United Health Care, and most of their service issues were out in the, right on the California market that dealt with the conversion from them going from the Pacific Air platform to the United platform.

I would say that, from all of the qualitative feedback that we’ve had, it’s just been very nominal. So, we may have lost a few because of that, but we just didn’t see that much taking place.

Michael Baker - Raymond James & Associates

Doug in terms of the sequential downtick in D&A it looked a little bit more pronounced than what we’ve seen in the past. If you could just provide some sense of maybe what drove that and just give us a sense of how that might trend for the year?

Douglas Sharp

I think for the full year it’s fairly consistent with 2008, our estimate for the full year with the previous years. We did have some assets become fully amortized, going from the fourth of last year to the first of this year. We do have some capital expenditures coming online still. I think the bottom line is, to the full year we expect to be relatively consistent.

Operator

Your next question comes from Tobey Sommer - SunTrust Robinson.

Tobey Sommer - SunTrust Robinson Humphrey

I had a question about your sales force growth, which seems to be pretty impressive in terms of the higher figure at 15%; what is the distribution of them? Is your new sales office initiative absorbing the bulk of that increase, or are you also fleshing out some of your recent office openings over the last couple years?

Paul Sarvadi

We’re pretty aggressive in our office openings over the course of last year and we still have four new office openings this year, but it’s a mix between adding to those new offices and then selling out our other current offices and making sure we’re fully staffed to take advantage of this climate in terms of having really better candidates available for us.

We’ve had a great run in hiring and also in training. This first quarter’s been very exciting. Our office has been full of new sales staff and the quality level looks fantastic; so we’re very excited about that going forward.

Tobey Sommer - SunTrust Robinson Humphrey

In terms of the sales, distribution geographically speaking, I was wondering if you could comment specifically on what the California market is like. It seems to be one that has been impacted relatively significantly from a real estate decline perspective.

Paul Sarvadi

We do look at the geographic climate in terms of the economy and certainly the southwest is stronger that the rest, largely driven by the energy sector.

In terms of our sales effort, I think our business model, which focuses on aggregating the best small businesses from within our targeted industry categories, is one that continues to provide advantages even in a tougher market place, because in any market, especially California, such a large market, there are always strong small businesses that are doing well, or that are trying to really improve during a tough economic time and those are perfect candidates for our service.

We’ve had a good sales effort going on across all the markets, in spite of the weak economy.

Tobey Sommer - SunTrust Robinson Humphrey

Based on the new guidance for gross profit towards that employee per month, how much of that is related, how much of the surplus, this year that’s embedded in the guidance is related to all of the positive impacts that come from the health care plan redesign with United?

Paul Sarvadi

It’s hard to break those three out exactly, but I’ll tell you that like the first quarter is largely driven by the payroll tax component, which we anticipated and mentioned over the last year continually; but I think it’s also important to point out that the Workman’s Compensation components affected this year by the lower interest rate, so the other two areas are not only performing well, but even offset a little bit of a declining contribution from the Workers Comp area.

Richard Rawson

When you look specifically at the medical side, when we set the plan design changes in place last year we anticipated that the value from the calculations we looked at, we anticipated that the value proposition would reduce the trend by about 5%, so that’s what we’re seeing. At the end of last year when we looked at our pricing increases, we were expecting normalized trends in the 8% to 9% and if you back off of 5% of that for just strictly plan design changes, that takes you down to about a 4% year-over-year trend.

Then utilization comes into play and all that, so that’s why we’re seeing lower utilization in the plan and that’s why our trended increases looks like it’s going to be lower than what we originally expected in the 2.5% range for the year.

So, on the pricing side you’re trying to make sure that you don’t get too far out of wack there, because it takes a long time, if you let that spread get too far away, it takes a long time for it to turn itself around and we’re just not going to allow that to happen.

Douglas Sharp

The last component of the reduction in benefit costs versus the prior year is, we’re in a new three year contract with United and we need negotiated lower administrative costs over the next three years, so that began in January of this year. So that factor should be ongoing over the next three years.

Operator

Your next question comes from Mark Marcon - Robert W. Baird.

Mark Marcon - Robert W. Baird & Co., Inc.

With regards to Workers Comp, can you tell us the Workers Comp accrual reversal for this quarter?

Richard Rawson

$2.3 million for the quarter.

Mark Marcon - Robert W. Baird & Co., Inc.

Can you talk a little bit about the improvements in terms of the mid market? It sounds like you’re seeing better retention there. What specifically, you’ve talked in the past about some of the plans that you had for improving the service level. Can you talk a little bit more about what’s actually been implemented and the feedback you’re getting?

Douglas Sharp

We’re very excited about the changes we implemented. Of course last year we did a deep dive to really dig in and understand this target and try to make our service a more hand-in-glove fit for this target customer base.

We have implemented some very interesting things. First and foremost on the services side was establishing high level single point of contact, a new role called an account executive that literally just manages the implementation of the service plan with the client. We’ve gotten great results out of that in terms of the dialogue we’ve had with clients as we have moved our current clients over to this new model and we’re not near fully transitioned yet in that respect.

Also, all the new accounts that have come on, it has really added a level of touch with these clients that are being well received. We also are doing much more to make sure we’re connected properly with our mid market client and the multiple contacts that have a view of what it means to have a good service relationship with Administaff; so we’re doing a better job of managing the multiple relationships and making sure we’re meeting the expectations of the larger number of decision makers at these size clients.

I think there have been a lot of other improvements across the company to support our mid market customer differently in terms of escalation on issues and responsiveness, and these things are really starting to pay some dividends.

Mark Marcon - Robert W. Baird & Co., Inc.

What percentage of your revenue is now being derived from these mid market accounts?

Richard Rawson

It’s in the 11.5% or so, which is, I really expect to see over the next 12 months or so that we’ll start to see some recognizable improvements in terms of market share coming out of mid market, if these trends continue.

Mark Marcon - Robert W. Baird & Co., Inc.

It sounds like in the last couple of months, the stick rates been really good.

Richard Rawson

Yes, we’ve had really a nice couple months in client retention. The year-end retention number or attrition number was high and that was still reflecting things that were going on.

I mentioned that we’ve started to have these stewardship meetings with these customers and go through the details of where the money goes and what the costs are to do what we do and how much we make and that’s all good information for them. We were only able to implement that with about 11 or so customers during that year-end renewal cycle, but since then we are continuing to do those on a regular basis.

We’ve also uncovered other needs they had in terms of being able to reconcile invoices and things of that nature, and so we’ve got some plans coming up soon that we’ll address a little bit at our investors day, Analysts Day coming up on May 8. But, we’re not near finished on what we’re implementing to make this a great fit for our mid market customers.

Mark Marcon - Robert W. Baird & Co., Inc.

On the benefits side, what percentages of the participants are actually participating in the plan?

Richard Rawson

A little under 74% in the first quarter.

Mark Marcon - Robert W. Baird & Co., Inc.

So it actually increased?

Richard Rawson

Yes, it increased from the Q4 of last year a little bit.

Mark Marcon - Robert W. Baird & Co., Inc.

Did you see any impact at all from this flu season in terms of the benefits costs?

Richard Rawson

No, we looked at the utilization and from what we could tell we didn’t see anything that was specific to that.

Paul Sarvadi

And, all the health carriers, that was an issue, but that affects generally an older population and didn’t really affect us very much.

Mark Marcon - Robert W. Baird & Co., Inc.

With regards to your sales force, what retention levels are you seeing now?

Richard Rawson

Our turn over rates are continuing to run in the low 30’s range and I think one important factor though is, it’s normally up when you go from the fourth quarter to the first quarter.

Our trained rep count normally goes down in the first quarter and actually we held even from the fourth to the first quarter and that’s a very positive sign, both on the retention and for going forward. I think that’s been improved by a little bit of a tweak that we made in the compensation side that we mentioned a couple quarters ago and also we’ve got a lot of enthusiasm around our sales staff right now; our sales convention was fantastic; we’ve got some good momentum there.

It didn’t reflect that much in the first quarter actual sales, because we were transitioning the message. You slow down the activity for a short time while you convert the message over and then ramp back up. Now that that transitions over, we’re ready to rock and roll.

Mark Marcon - Robert W. Baird & Co., Inc

Do you think that means that for next year, maybe the economy is still weak, but on the flip side you’re going to have more trained sales people, they’re all going to be on message, and you’ll have probably some better retention. So therefore maybe the growth in units ends up going back towards more traditional levels?

Paul Sarvadi

Yes, that’s certainly our goal. We have seen historically, we’ve been at this for 22 years now and when we grow sales staff double digits within 12 months, you grow the units in double-digits, our target for this year is to get up into that 14%, 15% range and increase in trained sales reps: you can’t get there on the trained rep count until you get there on the total rep count. Now that we’re there on the total rep count, we’re pretty excited about it.

Operator

Your next question comes from Cynthia Houlton - RBC Capital Markets.

Cynthia Houlton - RBC Capital Markets Corporation

From your comments during the call, you mentioned that renewals, there was some pricing pressure with renewals in the March quarter, but that you felt that that would reach a reverse trend going forward. Could you just talk a little bit more about that in terms of why you think renewals on the pricing side will improve as you go out into the next quarter?

Douglas Sharp

Most of the renewal pressure that we had was the result of some mid market customers that we had still been dealing with in terms of the old contracts where there’s some single-year pricing. The larger customers want a discount when it comes time for renewal’ so the effect of this going from an average of $200 to $198 on the renewing business or for the full book this quarter, was really the year end clients that we did renew.

Now that we’re into the first quarter, we’re seeing each month that the customers that are renewing are actually renewing at really substantial amounts, which in terms of dollars per employee per month, we’re looking at the $7 to $8 range, even as recent as April. That gives us a lot of confidence that the worst is behind us now, and so we’re not concerned about pricing pressure going forward.

Cynthia Houlton - RBC Capital Markets Corporation

Is there industry alignment and/or geographic concerns in terms of where you’re seeing greater layoffs or where you saw some spike in layoffs, just any more detail on that?

Paul Sarvadi

I think it’s consistent with what you see in the broader market. With the southwest, like I said, was a little stronger because of the energy sector. We have seen a little bit more in the northeast than the west and in the southeast in terms of layoffs exceeding new hires.

In terms of industry categories, we still see actually on the technology side better than I think expected on growth there; so health care is still growing, even though I know health care companies are running into some struggles, but that’s pretty much the picture. Obviously the financial side and we saw previously on the mortgage and that type of business being worse.

Operator

That concludes the Q&A for today’s conference call.

Paul Sarvadi

Well thank you all once again for being with us today, we appreciate it. We look forward to anyone who would like to come to our analyst day presentation, which is on May 8, here in Houston, Texas. We’d love to have any of you come, if you can be here in person, but we’ll also be webcasting that presentation; we invite you to participate in that way as well.

Thank you once again.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Administaff, Inc. Q1 2008 Earnings Call Transcript
This Transcript
All Transcripts