Insperity, Inc. (NSP) Q1 2012 Earnings Report, Transcript and Summary

Good morning. My name is Georgina, and I will be your conference operator today. I would like to welcome everyone to the Insperity First Quarter 2012 Earnings Conference Call. [Operator Instructions] At this time, I would like to introduce today's speakers. Joining us are Paul Sarvadi, Chairman of the Board and Chief Executive Officer; Richard Rawson, President; and Douglas Sharp, Senior Vice President of Finance, Chief Financial Officer and Treasurer. At this time, I'd like to turn the call over to Douglas Sharp. Mr. Sharp, please go ahead.

Thank you. We appreciate you joining us this morning. Before we begin, I would like to remind you that any statements made by Mr. Sarvadi, Mr. Rawson or myself that are not historical facts, are considered to be forward-looking statements within the meaning of the federal securities laws. Words such as expects, intends, projects, believes, likely, probably, goal, objective, outlook, guidance, appears, target and similar expressions are used to identify such forward-looking statements and involve a number of risks and uncertainties that have been described in detail in the company's filings with the SEC. These risks and uncertainties may cause the actual results to differ materially from those stated in such forward-looking statements. Now let me take a minute to outline our plan for this morning's call. First, I'm going to discuss the details of our first quarter 2012 financial results. Richard will discuss trends in our direct costs, including benefits, workers' compensation, and payroll taxes; and the impact of such trends on our pricing. Paul will then add his comments about the quarter and the progress we are making, implementing our long-term growth strategy. I will return to provide our financial guidance for the second quarter and an update to our full year 2012 guidance. We will then end the call with a question-and-answer session. Now let me take -- let me begin today's call by discussing our first quarter results. Today, we reported first quarter earnings of $0.54 per share, which was at the high-end of our forecasted range and our highest quarterly EPS ever reported. Earnings increased 64% over the $0.33 per share recorded in Q1 of 2011. As for our key metrics, paid worksite employees averaged 121,938 for the quarter, an increase of 8.5% over Q1 of 2011, and in the middle of our forecasted range. Gross profit per worksite employee per month averaged $282. This was above our Q1 forecasted range of $277 to $280 and above the $270 recorded in Q1 of 2011. Operating expenses totaled $80 million, in line with our budget, and a 5.4% increase over 2011. We generated $30 million of EBITDA plus stock-based compensation, and ended the quarter with $136 million of working capital and no debt. Now let's review the details of our first quarter results. Revenues increased 11% over Q1 of 2011 to $595 million, primarily as a result of the 8.5% increase in average paid worksite employees. As for the drivers to our worksite employee growth, client retention averaged 96.7%, which is relatively consistent with a high level achieved in Q1 of 2011. Also, net hiring in our client base offset a slight shortfall in worksite employee's pay from new sales. As you probably are aware, our key pricing metric is gross profit per worksite employee per month, and our Q1 results exceeded our expectations. The average gross profit per worksite employee per month of $282 was $3 above the midpoint of our forecasted range, and a record high for our first quarter. Richard will provide the details behind our favored results in a few minutes. So I'll just provide some brief comments on our direct cost. Benefit cost per covered employee increased by just 3.6% over Q1 2011 to $832. Approximately 73% of worksite employees were covered under our health plans during the quarter. Workers' compensation costs totaled 0.56% of non-bonus payroll, below our forecast of Q1 cost of 0.62% and included a $3.5 million reduction in previously reported loss reserves. Payroll taxes as a percentage of total payroll remained relatively flat to 9.6%. As an increase in SUTA rates was offset by higher worksite employee payroll and bonuses. Now let's move on to Q1 operating expenses, which were in line with our budget of $80 million and increased 5.4% over Q1 2011. This year-over-year comparison includes the impact of rebranding costs incurred in Q1 of 2011. This was reflected in the decrease in advertising cost and G&A cost being relatively flat over the 2 periods. An increase in salaries and wages made up most of the operating expense increase over the 2 periods and was primarily related to headcount associated with our Adjacent Businesses. Net interest and other income for the quarter totaled $288,000, within our expected range, and our effective income tax rate declined from 43% in Q1 2011, to the expected 41% rate in Q1 of 2012. As for our cash flow, EBITDA plus stock-based compensation increased from $21 million in Q1 2011 to $30 million in Q1 of this year. Cash outlays included cash dividends of $3.9 million, repurchases of just under 106,000 shares at a cost of $3.3 million, and capital expenditures of $3.4 million. At this time, I'd like to turn the call over to Richard.

Thank you, Doug. This morning, I will first update you on the details of our record-setting first quarter gross profit results, and then I will focus most of my time on our gross profit outlook for the balance of 2012 and specifically, Q2. As Doug just reported, our first quarter gross profit per worksite employee per month was $282, which was above the top end of our range and $3 above the midpoint of our range. Gross profit was made up of $190 of average markup, $82 of surplus and $10 from the Adjacent Businesses. Now let me give you the details of each component. The $190 average markup was $1 per worksite employee per month, lower than our forecast. The $82 surplus was $5 per worksite employee per month above our forecast, and the Adjacent Business contribution was $1 per worksite employee per month below our forecast. Now the dollar per worksite employee per month decline in our markup was driven primarily by a faster growth than our MidMarket segment compared to the growth of our core business. Looking at the details of the $5 per worksite employee per month better-than-expected surplus, we find that most of that surplus came from the workers' compensation cost center, while the payroll tax cost center and the benefits cost center were right on target. So let's discuss the workers' compensation cost center surplus results. Our incidence rate for the quarter increased 4.5 per 6 [ph] over Q1 of 2011, which is well below the growth in the number of worksite employees that produced those claims. The severity rate per average claim is down 14.6% on the same period last year. These results, coupled with the success of our claims professionals settling previously filed claims, for amounts less than our outside actuaries original estimates continue to produce the better-than-expected surpluses. In summary, our effective pricing and direct cost management strategies that our people work on each day produced record-setting first quarter results. These results give us a solid foundation to forecast the balance of 2012. So let's begin that discussion starting with our markup. During the first quarter, we increased our average markup: $2 per worksite employee per month on customers that renewed. Additionally, the new business sold in Q1 was $3 per worksite employee per month, higher than the new business sold in Q1 of 2011, which I would characterize as not great, but certainly not bad in this economy. Therefore, we expect price increases over the balance of the year to offset the mix change that we experienced in Q1. Now let's look at the surplus component of gross profit for the balance of the year, beginning with the payroll tax cost center. You may recall that our payroll tax cost center surplus declines each quarter throughout the year, as employees reach their specific wage limits. Typically, the second quarter surplus drops considerably from Q1, so don't be surprised when it happens again this quarter. For the full year, this cost center surplus should be slightly better than our original forecast. Moving to the workers' compensation cost center, here's what we see. On the pricing side of the workers' compensation cost center, our pricing allocations for new and renewing business have remained consistent. Our claims experience has been good, so the only reason to raise our allocations would be to keep pace with inflation. We have heard from Worker's Compensation insurance carriers that they are in "a transition market" and that we should expect to see carriers increase their prices as the year goes by. Therefore, as we see these changes, we will increase our allocations accordingly, but we are not changing our forecasts at this time. From the cost side of the workers' compensation cost center, we have experienced positive results so far this policy year, as I mentioned a few minutes ago. Therefore, we are comfortable lowering our expected expense range a couple of basis points to 0.58% to 0.60% of non-bonus payroll for the balance of the year. Combining this cost assumption with our current allocation assumptions, we should see a slightly higher surplus for the balance of 2012 over our previous forecast. Now switching to the benefits cost center, let me tell you how we see our deficit changing beginning with the pricing allocations. We have continued to see a significant increase in the number of employees covered by one of our health plans, moving to our $1,500 or $3,000 high deductible health plan. This means that the pricing allocations we received from this group of covered employees will be lower than their previous allocations when they were in the richer plans. However, since UnitedHealthcare has recently announced an increase to their contracted rates with many of their network doctors and hospitals, we will be increasing our allocations on both new and renewing business to offset this increase to our costs. Since our health care cost trends continue to be substantially lower than the small business marketplace per comparable plans, we expect our pricing allocations will compare favorably throughout the year to our clients and prospects. On the cost side of the benefits cost center, when we consider continued migration into the lower cost plans, plan design changes in January of 2012, participant deductibles being satisfied beginning in Q2 and the trend, we would expect to see total benefits cost per covered worksite employee to increase about 4% in Q2 from Q1, and about 4% to 5% for the full year over 2011. When you combine the pricing allocation increases in the cost estimates for benefits, we expect the deficit in this cost center for the full year to be in line with our prior forecast. Then, when you combine all of the forecasted direct surpluses -- or excuse me, direct cost surpluses, and the benefits cost center's deficit, we should generate a net surplus of $32 to $34 per worksite employee per month in Q2, and $47 to $51 per worksite per employee per month for the full year. Then our last contributor to gross profit which is our Adjacent Business Services, should continue to add about $11 to $12 per worksite employee per month to gross profit for the balance of 2012. In summation, when you combine the service fee, the surplus and the adjacent business contribution, we should see our gross profit per worksite employee per month end up in a range of $250 to $254 for 2012, which is slightly better than our original forecast. Now before I turn the call over to Paul, I would like to update everyone about a future positive impact to gross profit that we have not factored into any of our forecasts. As you may recall from last quarter's conference call, we experienced a $2.5 million reduction in the payroll tax cost related to a Pennsylvania tax matter. This amount represented the reversal of an accrual for taxes, which we believe were no longer owed to the state, and as confirmed by the state Supreme Court in February of this year. In addition to this accrual, we had previously paid approximately $2.9 million to the state, on the same tax matter. We have now filed a refund claim for this amount and are currently working with the state to receive reimbursement of these funds. We have not considered this in our forecast, as the timing and ultimate amount is uncertain. However upon receipt of any funds from Pennsylvania, we would experience a further reduction on our payroll tax cost during that quarter thus increasing our surplus and our gross profit per worksite employee per month. Hopefully, we will get the funds this year. At this point, I'd like to turn the call over to Paul.

Thank you, Richard. Today, I'll briefly comment on our record-setting financial results in the first quarter and some key highlights. I'll spend most of my time this morning discussing the tremendous progress we're making, implementing our long-term strategy for growth acceleration beginning in 2013. The balance of my remarks will address our take on the economy and labor market from our small to mid-sized business client base and our outlook for the balance of the year. We had an excellent first quarter this year, setting a record in EPS against the backdrop of a weakening labor market. Our rate results in sales and marketing and client services were particularly impressive, since we are in the midst of implementing significant changes in our business model. Sales results in our flagship Workforce Optimization business were on budget for the quarter, achieving a 17% increase over Q1 of 2011. This was accomplished by 9% fewer trained Business Performance Advisors compared to last year, and represents a 30% improvement in sales efficiency in our key sales, per salesperson per month metric. In the number of leads, First Call census per rep in average-sized account, were all up over last year. We believe these results are the first hard metrics confirming the success of our rebranding initiative last year and validating the survey results I reported on last quarter. Leads were up 7% over last year and first call's up 6%. Our marketing and advertising continues to support our new brand and it appears the Insperity brand is gaining some real momentum in the marketplace. Our client satisfaction retention results continued near historic highs, at a level of 96.7% for the full quarter, compared to 96.8% in Q1 2011. These levels continue to confirm the value of our Workforce Optimization solution and the excellent service delivery from our client services organization. It's certainly rewarding to see solid execution in this environment, but it's even more exciting when one understands the revolutionary new growth engine as being established at the very same time. Two years ago, we began to implement a vision to make a bold transformation of our business model in order to grow our business faster. As we approached our 25th anniversary and evaluated our remarkable history, we concluded we had but one frustration: we had not helped enough businesses succeed through our game-changing Workforce Optimization service. We demonstrated a highly successful business model that has produced consistent, predictable growth over 26 years, through a variety of economic cycles. It would've been far easier to stay the course and enjoy the level of success achieved and to take on a major change. However, our desire to grow our business faster and help more companies succeed, combined with the struggles of our national economy and the small business community, led us to a new strategy for long-term growth acceleration. Due to the complex nature and the breadth of the changes required to implement this new strategy, and the desire to maintain historical growth rates during the transition, we phased in the changes over a period of years. We identified 6 phases we would have to take the company through, to lay a foundation for a faster, consistent, predictable growth. The first 4 phases put in place the building blocks and including -- included the following: Phase 1, strategy, development, communication; Phase 2, Adjacent Business Development; Phase 3, new brand implementation; and Phase 4, Bundle Plus selling. We are currently in Phase 5, which is Proficiency and Refinement. So I will focus in on the critical activities that are going on today. The goal in this phase is first to make any refinements in the 4 building blocks that are evident. I'm pleased to report that we have validated each element of the strategy and we are more confident than ever with the potential for growth as we first become proficient, and then efficient in executing this new plan. Our current focus on Proficiency and Refinement involves confirming new processes are in place and working, the new habits are being learned across the organization. Most critical areas revolve around our Business Performance Advisors and their new role, providing multi-product recommendation -- recommendations as an integral part of the sales process on each call. This is critical to converting our organization from our historical focus on one offering, Workforce Optimization, into a cross-selling machine. The adjacent business offerings we have added have specific elements which complement our service or offset costs related to our Workforce Optimization offering. We expect, offering this array of service options will lead to more Workforce Optimization sales coming in from the same activity, as well as more sales of our new Adjacent Business offering. The ramp up of our inside Sales Support Organization and the ability to take in a large volume of lead activity and conduct online demos is also a key refinement. The ability to demonstrate our solutions as part of the sales and trust-building process has been proven effective but will have to grow to handle the expected volume. Another area of substantial effort going on in this phase is in our sales performance improvement group. Bundle Plus sales training and Business Performance Advisor certification are in full swing, and will continue through the rest of the year. The support system for Business Performance Advisers, the Inside Sales, and Adjacent Business Sales personnel to gain proficiency are being developed and honed in real time. Training and automation for managers, to coach and facilitate Bundle Plus selling success, are also critical. The Refinement phase also includes important activity in our Adjacent Business Development organization. In current Adjacent Business units, we are working diligently on execution skills. These teams are refining sales and operating plans, and learning to accurately forecast and achieve results. We are also preparing to launch strategically selected new Adjacent Businesses this fall, that complete an array of services to facilitate the sales efficiency we are aiming to achieve. We also have new products in development for many of our adjacent business units that are expected to drive future growth. In the marketing area, we're very pleased to see the refinement, surrounding our new Insperity brand can be characterized as tweaking messaging and leveraging validated strength. Advertising, collateral materials, websites, videos and other marketing materials are working well, and Version 2 of each of these will be even better. In this phase, we are literally turning on the new growth engine and running it but ever so carefully to ensure it gets broken in properly and fine-tuned. We are getting close to the final Phase 6, which is Efficiency and Growth Acceleration, which will occur this fall when we attempt to rev the engine for the first time. If we are successful as we expect, this new growth strategy will take hold in 2013 and drive significantly higher growth for Insperity. We believe this deliberate approach will provide a framework for consistent, predictable, faster growth in the years ahead. In the meantime, we are dealing with the realities of the economic climate and an on-again, off-again labor market. The indicators we monitor in our client base continue to be mixed and in our view decrease the likelihood of any substantial hiring in the near term. Over time, as a percentage of base pay is down to 8.5%, the commissions paid to the sales staff of our clients are flat, on a year-over-year basis. This data, coupled with a cautious outlook from business owners and decision makers, make the odds favor a labor market with a low level of activity in both layoffs and new hires. Our survey clearly shows the optimism and desire to grow that is inherent in a small-business community, but there's also some demonstrable concern over fuel prices, the coming election, the impending tax increases, and the effect these issues have on the economy. The good news is 75% of clients surveyed said their businesses were performing either on, or ahead of plan for this year, to-date. Most expect to maintain current pay and staffing levels, but 38% say they expect to hire more employees this year, while only 6% expect layoffs. Their optimism is also reflected in their expectations per sales improvement, with 56% expecting an increase in sales over the balance of the year. However, when asked about their expectations for an economic rebound, the highest percentage are unsure when it might happen, at 40% against 25%, that believe our recovery is happening now. In our experience, there have been times when the data and the sentiment, don't line up and more often than not, the data wins out in the end. So our best analysis of this information gives rise to some level of caution surrounding hiring for the near term. Generally, our outlook for the balance of the year per earnings per share is in the same ballpark as we started the year with. However, we now expect slightly lower worksite employee growth offset by a slight increase in gross profit per worksite employee. Also as we've done in the past, we'll make some minor operating adjustments to lower expenses to match the growth rate. We originally budgeted the year with a slight tailwind from net employment growth in the client base, and we feel it's prudent to take this out, based on what we're seeing in the labor market. This reduces our expectations per unit growth, slightly from a monthly increase of 1,300 to 1,500 worksite employees, down to 1,200 to 1,400 worksite employees per month. From where we are today, this net gain each month produces 8% to 9% unit growth from 2012 over last year. All in all, we're off to an excellent start and on track for a great year in 2012. We're excited with the progress we're making as we near completion of our business transformation, and the prospects for growth acceleration as we look ahead to 2013. At this time I'll call -- I'll pass the call back to Doug for final comments on our guidance.

Thanks, Paul. Now before we open up the call for questions, I'd like to provide our financial guidance for the second quarter and an update to our full year 2012 forecast. In general, we continue to expect our full-year financial results to be within the range of our initial guidance. We've made slight adjustments to our operating plan for the latter half of 2012 to accommodate for the lack of improvement in the labor market and overall weak economy. Additionally, with the benefit of the actual first quarter results, we are able to refine the seasonal pattern in gross profit over the balance of the year. This resulted in some tweaking of gross profit between the quarters. So as for our key metrics guidance, based upon Paul's earlier comments, we are forecasting average paid worksite employees in the range of 124,250 to 124,750 for Q2, and has update our full year guidance to a range of 126,500 to 127,000, or an 8% to 9% increase over 2011, slightly lower than our initial forecast. As Richard mentioned, we expect gross profit per worksite employee per month to be in the range of $250 to $254 for the full year of 2012, which is slightly higher than our initial guidance. As for the second quarter, we expect gross profit per worksite employee per month to be in the range of $234 to $236. We expect to step down from first quarter results reflects the seasonality associated with payroll taxes, 2012 benefit plan design changes, and the increased participation in higher deductible plans. We now expect a sequential increase of $3 per worksite employee per month from Q2 to Q3, and an increase of $15 from Q3 to Q4. As for operating expenses, we are now budgeting in the range of $311 million to $313 million for the full year, which is down by approximately $2 million from our initial budget and reflects the slight changes in our operating plan to coincide with lower worksite employee forecast. The second quarter, operating expenses are expected to be in the range of $78.75 million to $79.75 million, which is consistent with our initial budget. As a reminder, our sponsored Champions Tour golf event will occur in Q2 of this year. Historically, this event was held during the fourth quarter of each year. So taking this and some other timing changes into account, operating expenses are expected to decline by approximately $2.5 million from Q2 to Q3, and decline approximately $1 million from Q3 to Q4. As for interest income, we continue to forecast $1 million to $1.5 million for the full year, and $200,000 to $300,000 for the second quarter. We are estimating an effective income tax rate of 41% and 26 million average outstanding shares. In summary, our key metrics guidance implies a range of 2012 full year earnings per share of $1.58 to $1.72, or a 36% to 48% increase over 2011, similar to the EPS range implied by our initial guidance. At this time, I'd like to open up the call for questions.

[Operator Instructions] Our first question will come from the line of Tobey Sommer with SunTrust.

Given the context in your prepared remarks and the cautious data you're getting out of your customer base as it regards to the economy, what are the internal improvements and as you optimize this, the new business model and the approach with the sales force, how are you going about trying to tweak your sales volume growth higher? Is it akin to the historical method of kind of increasing the sales force itself or are there other levers you're trying to pull?

No, we're really focused on the improving sales efficiency and as we've forecasted for the year, we felt like it would be going up naturally based on the branding and some of the things we were doing. But the new habits and new First Call training and -- we're basically retraining the entire group of Business Performance Advisors to a new approach and those elements of the sales process from the prospecting to the first call, to what we call a validation step in the sales process to closing all those elements you have to go through training, developing new habits, et cetera, and we're migrating through that very well. We're validating that new habits are being learned and put it into practice and it's really exciting to see that. Even with all that level of change going on, we're continuing to see some improvement over last year. But there's a delay though between, when you get all those elements in place before you start to really see that efficiency ramp up on an individual level and then of course, across the whole company. And that's what we're expecting to see in the last phase, which is our Efficiency and Growth Acceleration phase, which is what our fall campaign will be about this year. And we hope that will lead to a nice step up at yearend in a whole different level of growth going forward.

Paul, can I ask you a question about the Adjacent Businesses? Where are you seeing the best traction and conversely, maybe where are you -- where are you a little bit more challenged? And then do you have an outlook to continue to add to those externally through M&A or more internal development?

Thank you for that question. We are -- we certainly within the -- in terms of which ABUs are kind of doing better than others, where we've got a lot of great things happening in each one of them. They are -- separate businesses have to be worked their own issues within each one. But the commonality in terms of strategy is getting to this point where on every First Call that our Business Performance Advisors are on, that they're making a multi-product recommendation at the end, that could involve whatever set of services meets that particular clients' immediate need. And so we're seeing that begin to happen now, and it's really exciting when each of our Sales Business Performance Advisors, come out of a call and they're recommending -- as an example, they may recommend say, Time & Attendance and Expense Management because that -- those are cost-containment or cost reduction solutions and that cost savings there would help make the Workforce Optimization solution more viable for that client. So they might recommend a 3 product solution. And then once they make that recommendation, new steps in the sales process where demos are done on the Time & Attendance and Expense Management solutions. So by the time they come back in with the Workforce Optimization proposal, you have a proposal for a combined solution that puts together the total picture of the cost savings from the up the -- of ABU recommendations against the investment made on Workforce Optimizations. So there's some new skills around that, that are putting -- being put to work and we're seeing that really come together. But like any new habit, you have to do it and then do it enough to gain proficiency, then it becomes second nature and you become more efficient in it. So we're getting traction on each of the ABUs to some degree. The ones that are moving on, the best I think, would be the more -- on the cost saving side to use in the -- that's why I used the example I just used. So Time & Attendance, Expense Management. But people are starting to understand very well how, for example the 401(k) plan as a Bundled Plus solution is such a tremendous value-add for the client owner, that it builds momentum and trust in terms of going through the demo of our new Retirement Services Center, which is part of the Employee Service Center and seeing something tangible. This whole idea of demoing the Employee Service Center, and demoing the Retirement Services Center. Those kind of things make Workforce Optimization more tangible and when you offer that combination with a variety of services, together with Workforce Optimization, we just expect that that's going to achieve higher sales efficiency on our core service, plus additional sales for each of those Adjacent Businesses.

Your next question will come from the line of Jim Macdonald with First Analysis.

I think I might've missed it, but could you tell me the number of trained salesman you have now and kind of what your expectation is for that to change throughout the year?

Yes, it's in about 260, 261, something like that and we're -- we are going to make sure it stays at that level. It might ramp it up a hair, but not much. We're -- again this is a Proficiency stage. We want to make sure people are doing what they're supposed to be doing, picking up the new habits. We're gaining some natural efficiency year-over-year, because even though we're 9% down a number of Business Performance Advisors from a year ago, but we're up a little, from -- you say from the fourth quarter, so it will probably stay in about that same range, and continue the efficiency gain that we have. But as things are moving in the right direction, all their training is validated. We'll get back to really growing that number in the not-too-distant future.

So you don't see any issues expanding that? Or any high turnover in the sales force?

No, I sure don't, in fact we're -- I think we're doing well, right there, right now and people are really engaged and learning. And I think we have our arms around that, making sure that in the recruiting process, we have the right type of person. We've got that profile really identified well. And -- well, this is an exciting career. I think our recruiting -- even the new branding around in what we do and how we do it, and how this role has changed, is an exciting opportunity for people who really love to help businesses succeed and so we're finding, we're attracting and bringing out a real high-quality individual. And I really think we're in a better position than ever on growing the sales force, once we're ready to do so.

Okay and on the ABUs, just another quick question. So it sounds like their growth there is really a 2013 maybe type of story. But are -- and it also sounds like you're still investing pretty heavily in them. Is -- can you talk about how much extra earnings drag you have this year versus, say, last year, for the ABUs?

Yes, I think we talked about that in our last call, and I think the real important thing to remember is that the investment made there is also an investment in growing the Workforce Optimization business faster. The whole idea of having these ABUs available, these other offerings, is to increase sales efficiency on Workforce Optimization. We felt like it was important to show both of those, but one's an investment in growth and the other -- we were, I think -- Doug probably has the exact numbers, but we were about $0.15-or-something-like-that last year in terms of an investment ABUs. And we said it would be $0.17 to $0.20 or something like that, for this year. It's going to go up for this year as you observed. But we're expecting that, the payoff for that ultimately will turn it -- as those will turn profitable, so we will recover that in the future. But more importantly, that becomes faster worksite employee growth than Workforce Optimization on a going forward -- systemically, on a going forward basis and that's what we're really after by that investment.

Your next question will come from the line of Jeff Martin with Roth Capital Partners.

Just curious on the workers' comp side, if you could elaborate a bit on your comment that it's a transition market and that prices may be going up by other carriers and how that would impact the business? I think you also said that it wasn't factored into your forecast right now. Could you maybe take a stab at quantifying what the impact could be if that does happen?

Oh yes. The transition market that I described was talked about quite a bit, at the RIM's conference, a couple of weeks ago, that's the Risk Insurance Managers Society annual convention. And all of the P&C carriers are there, Property and Casualty; and Workers' Comp carriers, and so in the meetings that we were in, they talked -- they all talked about the fact that they've had basically an 8-year period of where they really haven't made any money and now they're going to have to make profits on their underwriting because they can't make money on the interest rate. So what's happening is they're all planning increases and throughout 2012. They're not calling it a hard insurance market. They're saying it's a transition market. So that means that prices will start to increase. Well, what happens in our -- with us, is that as we see that in -- when we're getting proposals or to quote for prospects, we're seeing what their rates are going to be, and as they increase, then we'll increase ours and our allocations, which means that kind of the spread between our allocations and our costs, certainly won't get any worse and possibly, they'll even get better. So we may end up in a situation, by this time next year, with even higher surpluses than that we have right now in that particular cost center.

Okay. That's helpful. And then on the -- on Phase 6 of the plan, could you quantify what growth rate you -- you're targeting? I mean in -- back when things were in the 2004, 2007 timeframe, you were growing at 13%, 14% on a worksite employee basis. I mean, are you targeting growth above that? And some insight into your expectation assuming the economy improves modestly from here.

Yes, sure. We kind of laid out a range of expectations at our Investor Meeting last year when we first laid out the long-term strategy. And we really love the way this business works at a mid-teen growth rate. I mean, it just really jams and you can efficiently add new business and serve people well, keep the retention rates high it -- you talked about optimizing profitability. If you get into that, 13% to 17% range is just the beautiful growth rate to grow at. It can grow a little faster on units, up to about 20% and more challenging, and a little more waste probably in there in terms of the chance or the odds of attrition rates affecting you in some of those kind of things. But that's kind of the range we want and expect to be in, as we get better at what we're doing in this new strategy.

Okay. Great and then, final question. What are your -- what's the CapEx budget for this year? And do you see it accelerating next year?

We're still in the, I'd say $15 million to $20 million range on that CapEx budgets. That's similar to the guidance that we set forth during our last quarterly conference call. And I think it's a little early to talk about 2013 there. But that's been our historical run rate on our typical CapEx expenditures.

Your next question will come from the line of Michael Baker with Raymond James.

I just wanted to get a sense of when we might get some clarity on, about potential additional investments for the Adjacent Business units, and whether or not that would come before kind of the fall sales campaign in light of your objective there? Or is it just a function of finding the right mix at the right price so to speak, and so it could slip beyond that?

Well, what we've been able to do is target some specific adjacent business offerings that we feel like will -- are particularly well-suited to advance Workforce Optimization sales. Some of them are in the finance -- in financial product area. We've got a couple of other things that are -- that also tried to find a good starting point with the customer if they're not ready for Workforce Optimization. And in both of these areas, we have been able to find a way to launch those without an acquisition or major type of investment. So most of the investment you're already seeing in this step up been in the little bit of the cost associated with those solutions. So we are out there looking at other things in the marketplace that we could buy. There are opportunities available, some of them even in -- if there was something that would boost the current ABU dramatically, we would do that, if we found something. But we're not in a position right now where there's anything on the horizon that's major that we will be doing. So it's kind of exciting. We're able to add these without making some huge off-line investment and then having to integrate some type of acquisition.

That's helpful. I was wondering if you could also provide your thoughts on possible outcomes as it relates to the Supreme Court, mainly from what you would anticipate to be an impact to the business.

Well, it's still a real grab-bag out there in terms of what the ultimate implementation is of health care reform. There's still a wide range of outcomes and we see a tremendous amount of opportunity if we still go down this track. However, it's really complex. It creates a lot of complex options for business owners to try to figure out and for us that's an opportunity, because we're here to be able to help businesses optimize their performance and that's a big component. We're able to do that. But on the flip side, there is so much in this health reform that drives up cost without any real cost containment measures. And I mean, it's -- to me, looking at the details it's like whoever thought this was flat in the growth rate of cost. I just don't know how, when you just keep adding benefits, for people adding -- people on the benefits. You're taxing people to pay for the benefits for other people and just -- it's just -- it's really a complicated, complex and disjointed. It's so big. It's so unwieldy and hard to get arms around it and there's so many unintended circumstances that it's just cumbersome. But, so then you go to the prospect of it being uprooted. The Supreme Court, they come in and they decide it's unconstitutional and in its entirety has to be revoked the -- or is declared unconstitutional. Then the question is how much of what's already started, still goes on or what gets pulled back? How does that work? Obviously, we're happy if we get to keep doing things that everyone -- like we're doing right now, we like that work. But there's some other things in between and we've got a whole group of people in our shop and in Richard's group that are spending a lot of time at a deep level of detail on the possible scenario. So that's the other side of it. It's just kind of a pain to be having to deal with it all the time. There've been daily proclamations coming out of bureaucrats, about what you have to or don't have to do and -- you have things like, for example, I think you're hearing it from the insurers right now, that they're costs have gone up. It's really, due to the plan design change that happened over year ago, and that had to do January 2011.

Yes, January 2011 when they sit at -- they took away the total copayments and removed copayments from preventative care at the physicians' practices. And so, we think that there is going to be some effect on everybody on health plans, because of that over the next year or so.

But it was kind of a delayed effect because it took time for the physicians to realize, there's a no co-pay option for things that are coded as preventive. So you have the hold game that goes on between how things are coded and -- so those are their -- like the devil in the details all over this. And so we'll just have to see how it works out. But I think we're ready in either event. We're all over it.

We've try to keep it simple for everybody.

Your last question will come from the line of Mark Marcon with R.W. Baird.

I got a series of questions. I'm just wondering, first of all, with regards to the projections for this year, what's the implied sales efficiency?

It's still in the range of what we talked about. We talked about moving up, from I think the 0.75% or so, and we were last year to about 0.85% to 0.9%.

0.85% to 0.9%?

Right.

And then, how would you think that, that's going to trend over the -- during the last quarter and going into the first quarter of next year?

Well, as you know, sales from the fall campaign impact your worksite employee growth in the spring, right?

Sure.

So what I'm hoping is that the sales efficiency doesn't trend. I'm hoping it steps up. That's what this is all about. Now reality is, maybe it steps up in 20% of the sales staff, and then steps up at another 20% in the next quarter, another 20% in the next quarter. So it looks more like to ramp-up in the total. But what we're working every day to do around here, is the -- for this fall to have a step up in sales efficiency beyond what you normally have in a fall campaign. That's going to mean, that over this proficiency phase that we're in, people are going to learn well how to set appointments with the whole new brand and new language, et cetera, which they're doing. But we're going to see that really step up in the fall and turn into a step up in the number of appointments set. It has to start at the front end of the sales process. Step up the number of appointments. Step up in censuses that are -- that come out of First Call opportunities because of the Bundle Plus approach in the multi-product recommendation. Then a step up in the Validation step in how many prospects move into that closing phase, and then a step up with closing rates. Now all those have their own issues that we are developing the training and helping and learning. So it's -- there is a learning process going on here. But I'm hopeful that we'll see a step up, as early as the fall campaign that will make a big difference going into next year.

Great. Along those lines, is there any plans for tweaking the messaging from the national campaign?

Actually, boy the -- our messaging currently is -- was just so right on the money in terms of what the survey results came out. And that -- and now we're starting to see -- this is only our third round of advertising now. Since the brand change, you had the spring last year after the March kickoff. You had the fall campaign and now hereafter the convention started kind of mid-March or so, started the advertising and promotion again. And we're seeing results in terms of an increase in the number of leads that are coming in, and First Calls coming out of those leads. So a lot of good signs there. And I think we're heading the right direction. So there's no reason to really do some major changing on messaging, and that's why we do have some tweaking here or there, going on in some revision, but not a lot.

How about on the media budget?

Well, we've been able to do what we intended to do, which was try to get our advertising -- kind of back up to pre-recession levels. But I'm really happy we didn't have to -- the actual bubble of investment in advertising related to the rebranding, we got behind this last year and we're not having to goose it more because it's so new. It's -- that means the advertising was catchy enough. The image was enough to get people's attention. We have a lot of people who have said well we -- Insperity, who are the -- it seems like they've been around a long time, well that's just perfect. That means, it's like a new name that they feel like it's been here a long time. So that's really -- kind of a -- it sounds like a contradiction, but it's -- we really have knocked it out of park in that regard. It's gaining a lot of steam.

Great. And how are you thinking about new offices? Any thoughts there?

Yes. I think this year, we want to keep that number of Business Performance Advisors about in the same range. We want to start moving up a little bit as we see that all of our trainings really worked in place. If we can ramp it up a little bit, we will, depending on -- kind of managing the operating side of business. But it -- as we -- once we validate the sub-level of efficiency gain, then we're going to start growing this sales force again. We have room. I think we can root and run up to about 320 probably with that -- any new offices. Don't hold me to that exact number I didn't calculate that one in a while, but it's about, 300, 320 for sure. And then we can -- at that point, we'd start opening a new offices and we're anxious to that. I'd like this -- I'd like to be opening in a couple -- latter half of next year or something, if everything goes well.

Great. So the 260 that you'll have during the fall selling campaign, how will that compare to the -- to what you had during the last fall selling campaign?

It should be about the same.

Roughly about the same?

Yes, roughly about the same number.

But more experience?

No, no. Well, let's see, in the fall campaign last year, we had, let's see, trained reps. Actually it'll be just a little higher, and we were probably about in the 250 range. 250, to 252, or something like that.

Okay. So this time it'll be a slightly higher number and also more experienced, both from knowing the new concept, knowing the ABUs, and this time in a -- time within the organization, correct?

Absolutely.

So we should see a sales efficiency increase, if everything else remains equal. But you're just a little bit more cautious with regards to some of the survey results that you're getting, is that...

Well, yes, I think, we just felt like we needed to take out any help from net hiring within the client base. It doesn't seem like that's something we should count on. If it happens, well, it's upside. Fine. But with an election looming; no tax -- trying to figure out what the tax code is going to be next year; fuel prices up; economic growth weakening; labor numbers decrease each month through the first quarter, this is not time to be counting on net hiring in the base. So we thought we'd leave that as upside.

Okay. And did you give the regional breakdown that you took out?

No, we didn't do that. That's something we've been doing over the years, primarily as we gone through the national expansion plan and have gotten out of a higher concentration in the Southwest. And typically, the growth, as you've seen has been, where we put the sales reps and we think -- that the growth has been nice up in the Northeast and coming out in the West, but we're growing in each of the different regions. But that's something we didn't give this time. We're focusing more on the core business and then Paul talking also a little bit about the ABU strategy.

Okay. Did the Southwest grow though?

Yes. And there'll be something in the Q. We'll continue to do that revenue contribution, growth by region in the Q.

Okay. Great, and then the -- what's the ABU take-up rate on Time & Attendance and Expense Management?

Well, I don't know exactly how you would describe a take-up rate, but...

Yes.

Like of the new sales or -- you did mention that however you track it, just in terms of what percentage of the new sales that you're getting are also taking the Time & Attendance ABU.

It's a little early to go see. I hope to do that and fairly soon. But we're not -- what we're focused on is making sure with that -- Business Performance Advisors know when to recommend which solution. How that fits with the game plan that, that particular client, and what they're focused on, what their needs are. And then, we don't -- we're not training our folks to go in there and just show everybody everything and let them pick. We're trying to advise them based on our experience as to what combination of services will help their business improve, either run better, grow faster or make more money as soon as possible. We're looking for quick hits, substantive changes that can make a difference that the company can feel, early on. So it's -- but, hopefully over time, we'll have some better numbers for you on that.

Okay. And then lastly, any commentary with regards to competitive activity? How are you seeing the competition at this point? How are they behaving? Are they having any impact?

Well, not really. We've been working so hard in what we're doing to be a category of one, different, unique and so meaningful to the client that none of that matters. So we haven't seen a lot of changes there. I mean, pretty much the same thing. There's a lot of what I'd call price competitors type thing, but -- more and more, this strategy is also about competitive advantage and it's about distinguishing yourselves -- ourselves, in such a way that nobody else can do what we do. And we're on the good track for that.

There are no further questions at this time. I would now turn the conference back over to Mr. Sarvadi for any closing remarks.

All right. Well, thank you all very much for participating today and we look forward to continuing this solid execution going forward. Thank you.

Ladies and gentlemen, this does conclude today's conference call. Thank you all for joining and you may now disconnect.