Q3 2020 Earnings Call

Ladies and gentlemen, this is the operator today's conference is scheduled to begin momentarily.

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Ladies and gentlemen, this is the operator today's conference is scheduled to begin momentarily until that time Airlines will again be placed one musical.

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Good morning, My name is Lisa and I will be your conference operator today.

At this time I would like to welcome everyone to the Paychex third quarter earnings Conference call.

All lines have been placed on mute to prevent any background noise.

After the speaker's remarks, there will be a question and answer session.

I would like to ask a question. During this time simply press Star then to number one on your telephone keypad.

She was like withdraw your question press the pound King.

I would now like to turn the call over to Mr., Martin will see President and Chief Executive Officer. Please go ahead Sir.

Thank you. Thank you for joining us for a discussion of the Paychex third quarter fiscal 2020 earnings release, joining me today, it's up in Revere or Chief Financial Officer. This morning before the market open to be released our financial results for the third quarter ended February 29, 2020, you can access earnings release Center Investor Relations Web page.

Our form 10-Q will be filed with the FCC within the next few days and this teleconference is being broadcast over the internet and will be archived in available on our website for approximately one month I will start todays call with an overview of how we are responding to cope with 19, and then review business highlights for the third quarter enterprise.

Our third quarter financial results and discuss our guidance for fiscal 2020, including our current thinking and the potential impacts of covert 19 on our business and then we'll open it up for your questions.

First and foremost I want to address the evolving situation. We're currently facing with cope with 19 are number one priority is the safety and well being of our employees in serving our clients and their employees. Our business continuity plan was implemented in our teams are working around the clock to ensure that we take the necessary steps to ensure employee safe.

Well continuing to support our clients through this unprecedented time.

Really odd we instituted travel restrictions and began to reduce the number of employees working in our offices.

This time all employees unless designated as critical on site a person that's less than 5% are now working from home enters service metrics and quite response time has been excellent in fact, our average answer performance yesterday, what seven seconds extremely proud of this team in the work they've done in a very fast period of time I mean.

Credibly proud of all the whole leadership team and employees have responded to this situation because of their hard work and efforts we've been able to complete all of these transitions without any service disruptions. We continue to help our clients navigate the significant amount of information in changing regulations from state and federal governments, including the families first Galena virus response.

At our compliance team also remains in contact with the federal state and local government authorities on a real time basis to ensure we are aware of in offering support and ideas on any new regulations or support initiatives related to cope with 19 that could impact our clients. So far we've seen minimal changes in our key metrics.

However, with the expanding shutdowns of businesses throughout the nation. We do expect that this will be particularly challenging time for small and midsize businesses. This will have impact on our recent results in an effort will provide some color when he discusses our current outlook.

The federal government has taken a number of steps to stabilize these issues in its considering more relief actions as we speak a I'm sure you're all aware of the at least handshake agreement last night and we're working through those detailed changes as we see how the vote and the president true approval goes up probably today small businesses in particular are in need of aid.

To be able to stay in business and pay their employees, the speed and which relief actions are put in place will impact the severity of the economic impacts resulting from this virus.

We can we were part of a small group that sent a letter to Congress supporting that small business loan program to help businesses continue to pay their employees. It offered our assistance as they payroll processor to do that in the most effective in timely way.

We continue to monitor leading indicators to gauge the changes in the small business environment.

We believe we're well prepared to navigate our way through these uncertain times the significant investments we've made in our technology and in particular are mobile App <unk> and our expanded product and features in our service model options allow us to support our clients in any environment.

As you are well aware, we maintained a strong balance sheet and cash position, we will continue to focus on our business objectives and invest in our people and our clients. This is a rapidly evolving situation, but we will keep you informed on the expected impacts is events continue to unfold.

Now I will update you on our business and financial results for the third quarter, which reflect good progress on our key initiatives total revenue growth was 7% for the quarter management solutions revenue grew 6% and Pete you own insurance solutions revenues grew 10%.

Through the third quarter, we have continued to see strong execution in operations with record high net promoter scores and client retention. In addition, we've had strong results in our virtual sales divisions digital marketing efforts and midmarket sales through the selling season.

As we've discussed on previous calls this fiscal year, we had a slower start than anticipated on the integration of waste as.

We believe we've addressed these issues in sales we are now fully staffed and have a new leadership team in place for service staffing levels are stabilized in the focus can no continues to be on servicing our clients with less need to work on integration of the clients into the platform.

The business is strong fundamentals that will drive growth over the long term and we remain very positive about the continued strong demand for HR in insurance support and PEO services, particularly in this difficult environment.

As the largest for one k. record keeper in the U.S. Paychex was prepared to respond to the secure act, which was enacted in December 2019. This legislation provides incentives for employers to offer retirement savings plans and provisions to improve savings for millions of Americans with our strong expertise in retirement plans and our award winning retired.

And services part participant portal, we are well positioned to assist small and midsize businesses and their employees as they navigate this new legislation and planned for retirement.

We launched fan demand in December which improves the employee experience by offering them flexible access the wages are they have already earned before payday, helping them manage their personal cash flow. This is a valuable tool for employers to help attract and retain talent other companies in the industry Upper similar services on a smaller scale, but our solution as you know.

Need in that it provides our clients with flexible payment options, including direct deposit Paycard did you in digital payment into Amazon or pay Pal accounts. We also believe that pay on demand will see increased usage in this current environment with employers needing a more flexible workforce that will need much more flexible pay options and probably more.

Immediate pay.

We were excited the launch the first of our wearable apps as well, which we demonstrated in October it HR Tech Paychex time for the Apple Watch was launched in January for Flex customers. This allows clients employees, a the flexibility and convenience of punching in and out on the or Apple Watch. We also launched Paychex Flex helps centre, which provide.

Dozens of training resources, and how tutorials for assistance using flex technology from within the application itself.

Home Center allows customers to access help materials that are relevant and easy to consume via their individual preferred learning method, whether that is video to tour real step by step instructions or chat.

The latest product releases included significant enhancements to existing features which continue to add value by making things simple for our clients and allowing users flexibility in choice. These enhancements include electronic signature capabilities in our document management tool improved visibility into labor cost and employee data would lie reports and.

Additional integrations with some of the top HR finance time, and attendance and benefit solutions in our paychex in a integrations solution, while the while flex Paychex Flex does provide full suite of HR solutions. The open platform allows customers the flexibility they may need to integrate with other tools if they so choose where if they already have.

Of them and don't want to switch out of them.

Products like learning management services with online training electronic signature capabilities of document management will support the needs of clients. In this time of remote workforce is a real time payments offering was introduced will be introduced in April. We believe we're one of the first to offer this capability to customers and this will allow employers the pay employees back.

Mr., which can help attract talent can also help quickly resolved any issues with payroll.

Our technology roadmap continues to focus on the area of emerging technologies, such as Wearables real time payments product integration options data analytics and AI all of which will play an important role in helping clients in this current environment.

We are proud that paychexs commitment to technology innovation has been recognized by industry experts are flexes, our paychex flex assistant was selected as the Stevie Award winner for best use of technology and customer service Flex assistant answers over 250 questions covering the breadth and depth of the paychex payroll and HR Sweet would differentiate.

It's our technologies that had seamlessly connects to a lives specialist in real time, if the user wants more assistance in the entire bought transaction is visible to that specialists. So no repetition.

As needed both paychecks and Surepayroll also received Stevie awards for our excellent customer service.

As a critical business partner for many of our clients, we pride ourselves on doing business with integrity is ingrained in our corporate corporate culture and very evident in the last few weeks as we quickly implemented our business continuity plan for clients and employees I'm extremely proud that paychex is once again been recognized by Ethisphere as one of the too.

That was in 20 2020 world's most ethical companies. The 12 time, we've received this recognition and in summary, as we navigate these unprecedented times, we continue to support our clients our employees our communities and our shareholders. We have invested heavily in making our technology solutions in service flexible and mobile.

And we are more prepared than ever to handle this current environment I would like to thank all righty sales service compliance marketing and HR teams, who have worked diligently to ensure regular communication to our employees and our clients and that all employees have the equipment they need to work remotely and stay connected with each other and our.

Clients.

Also thank you to our employees, we have maintained diligence and flexibility during these transitions in the way. We all work I will now turn the call over that from Rivera to review our financial results for the third quarter Efron.

Thanks, Marty good morning, I'd like to remind everyone that todays conference call will contain forward looking statements that refer to future events such involve risks. Please refer to the customary disclosures in our earnings release and additional periodically refer to non-GAAP measures such as EBITDA adjusted net income adjusted diluted earnings per share.

Jim referred to the press released before I start.

I hope that as we speak you all or.

Safe in good health.

It's the most important thing.

At times like this.

If you have loved ones who are affected.

By the virus and it impacts.

Please accept our thoughts and prayers for you.

And for your family.

Being sumant at this time.

Is the most important thing we can do so now let's talk finance.

Let's start by providing some of the key highlights for the quarter and then follow up with some greater deal will detail in certain areas a wrap with review fiscal 2020 outlook.

And some high little commentary on fiscal 2021, just some high level commentary on fiscal 2021 stay tuned.

Based on preliminary looks into next fiscal year total revenue as you saw it grew 7% for the third quarter 1.1 billion voices contributed about 1% to this growth expenses increased 5% to the third quarter to 673 million.

Increases in compensation costs, some PEO direct insurance costs contributed than total expense group growth, partially driven by the acquisition of Oasis.

Op income increased 10% of 470 million up margin was 41.1% third quarter compared to 40.1% for the third quarter fiscal year 90.

EBITDA increased 8% at 520 million EBITDA margin was 45.6 compared to 45% for the same period last year.

Very strong results.

Other expense net for the quarter of 6 million includes interest expense related to long term borrowings.

Our effective income tax was 23.6% <unk> third quarter compared to 23.7% same period last year net income and adjusted net income for the third quarter, both increased 9% to 355 and 381 million respectively.

Diluted earnings per share an adjusted earnings per share each increased 9% to 98%.

98 cents, sorry for sure and 97 cents per share respectively received approximately one cents a benefit from stock based comp payments during the third quarter, which is included for gap.

Excluded in our adjusted Deluded, yes.

Let me provide some additional color in selected areas service revenue.

Increased 7% for the third quarter to 1.1 billion within service revenue management solutions revenue increased 6% to 850 million.

And insurance solutions increased 10% 72 million. So you saw through third quarter.

Continued strong performance on management solutions.

This was primarily driven by increases in our client base across many of our services along with growth in revenue per client revenue per client improved as a result higher price realization increased.

Penetrance aboard suite of solutions, particularly retirement services time and attendance nature outsourcing.

You know in insurance solutions revenue grew 10% was driven by growth in clients across or PEO businesses insurance solutions revenue benefited from increased the number of health and benefit applicants.

Partially offset as we've been saying all your by the impact of softness in workers' compensation premium.

Interest on funds held for clients decreased 7% for the third quarter, primarily as a result of lower interest rates earned partially offset by higher average interest.

Vessel balances I should say unrealized gains funds held for clients.

Average investment balances were impacted by wage inflation and increases within our client base offset by changes in client base mix and timing of collections remittances. These results.

These leagues do not include the impact to March rig cuts by the Federal reserve.

Turning to our investment portfolio, we continue to invest in high quality credit Securities long term portfolios have an average yield of 2.1% and average duration of 3.1 years combined portfolios have earned an average rate of return of 1.8% for the third quarter down.

2% last year.

Now year to date.

Total revenue increased 12% to 3.1 billion.

Service revenue increased 12%.

With management solutions, reflecting growth of 6% 2.3 billion and PEO and insurance.

Solutions, reflecting growth of 36% to 763 million.

Well wishes contributed approximately 28% growth interest on funds held for clients grew 6% 62 million operating income increased 10% to 1.2 billion net income in diluted earnings per share each increased 9% to 877 million in 2.2 thousand 40.

Three cents per share respectively.

Adjusted net income in adjusted diluted earnings per share both increased 8% to 863 million in $2.

Cents per share.

Respectively.

Let me talk about our financial position, which I think is really really important and the time like this.

It remains obviously very very strong with cash restricted cash and total corporate investments of $930 million as of February 29, 20 Twond.

Funds held for clients as of February 29, 2020 was 4.4 billion compared to 3.8 billion as of May 31 funds held for clients. As you know very widely in a day to day basis in averaged 4.5 billion for the third quarter.

Total available for sale in the investments, including corporate investments and funds held for climbs reflected net and unrealized gains of 84 million as of February 29, 2020, compared with 20 million as May 31, 2019, and as interest rates oscillate that number changes very very significantly.

Total stockholders' equity was 2.8 billion as of February 2029, reflecting 667 million in dividends paid and $172 million of shares repurchased during the first nine months or return on equity in the past 12 month.

Very robust 42% cash flows from operations were 1.1 billion for the first nine months and increased 3% over the same period last year. The increase was driven by higher net income offset by timing fluctuations in working capital.

Let me just summarize financial our financial position, because it's very as I said important.

We are very solid.

With our cash position is strong.

We have $900 million in cash we have an undrawn revolver, we have the highest cash generation of our peer group.

We had the highest dividend and we have confidence that we will weather the storm.

We're both our clients our employees in our shareholders.

Now I turn to guidance for the current fiscal year ended May 31 2020.

First I want to provide context as you another new events unfolding daily and we're constantly incorporating this information.

Our guidance reflects view some of our assumptions as of today based on the information that we have regarding petition potential effects on the business.

This guidance also reflects the impact of 150 basis points of interest rate cuts that have occurred in March.

Our guidance for the full year fiscal 2020 as you saw in the press release now is that we anticipate management solutions to grow approximately 4% P.O. now about 24% for the full year interest on funds up for clients as anticipated now to decline in the range of 2% to 3% and total revenue is now anticipated.

So in the range of 8% to 9%.

Op income as a percentage total revenue is anticipated to be approximately 36% EBITDA margin for the full year 2020 is expected to be approximately 41. Other expense net is expected to be in the range of 22 to 24 million and the effective income tax rate is expected to be in the range of 23.5 24.

Net income diluted earnings per share growth are now anticipated to increase approximately seven an adjusted net income and adjusted diluted earnings per share are expected to grow approximately 6%.

For the fourth quarter as you can do it when you plug in your models you can see that the guidance implies we're anticipating that total revenue will decrease modestly and operating margins will be approximately 32%.

We monitor a variety of leaving internal business indicators to drive this estimate let me just provide.

Some bought on that and then I'm going to talk about next year. So.

We look at leading indicators and is I'm sitting here about 42 page.

Document from our data.

Analytics group that tells me a lot of stuff about what's going on in the business not not everything can forecast all of the future, but we see what's happening in real time.

We we through the middle of March were not seeing significant impacts Marty mentioned earlier that we were monitoring key metrics didn't really see significant drops and then towards the last the second half of March we started to see the impacts on the business roll through.

We've incorporated as much of that into the guidance in fourth quarter.

As we can we think we have a reasonably good handle on on what's going on.

But you also temper that with experience a both what happened in.

911.

Because that was in the Dodge and shocked that was more short lived and then you also balance that against the O. eight or nine recession. So all of those.

All of those ideas, our or are part of the information were triangulating to get not only to fourth quarter, but to the the year that.

The next year, which I'll talk about it in the second it is for many view as you know it says, though we are on the L.A. expressway on our way through the beaches and you know there is the traffic is flowing smoothly, but you know theres a stop ahead. What you don't know is those of us been caught.

There.

Whether it's a two hour stop at three hours stop or something longer and so we know it stop is coming we expect that impacts will be felt in April in may for the remainder of this year, we've estimated them.

As best we can but circumstances can change, especially as more states decide to go on on a full lockdown so with that that.

Analogy and with the the caveats that I, just so I'm about to mention let me talk about next year.

We typically give at least a preview of where we expect next year to be.

And we won't bail out and say, it's too early to say anything we know some things and we'll give will tell you what we know.

We will give guidance on in fiscal 2020 during our fiscal 2020 in the fourth quarter call in June So our intent is to provide you with guidance.

It's more complete that.

But let me tell you about our thought process based on everything that we're monitoring and again, we're early on in the process and subject to change by the way shout out to Accenture. They went first they said what they could and obviously circumstances as changed I'm certain that went on.

Theres report later circumstances will have changed there will be in position to better information, but this is what we have at this point, we'll share with you.

So based on the leading indicators that we and then based on a modeling on the debt the impacts of the business in other business contractions on a very preliminary base start thought processes that total revenues going to be flattish to down low single digits for fish.

School 2021.

This scenario remember includes the impact to the most recent cuts to interest rates and so that will impact total revenue growth.

Next year, we're anticipating at this point that that impact will be somewhere in the range of about $20 million off of where we and this year that part we have some some understanding up but obviously if the fed to decides to go negative will have its conversation to that about that looking very.

The preliminarily, we would anticipate that operating margins will be somewhere in the range of about 35%.

We would obviously management business to that our tax rate before discrete items will remain consistent with fiscal year 20, I just can't emphasize enough that this is preliminary subject to change.

At this point the scenario that we see unfolding is significant impact in Q1.

Followed by some some improvement in Q2.

Moderate improvement through Q3, and then more of a recovery in Q4 that is consistent with the shocked that we saw.

When we went through 911.

We continue to update our information.

Every day literally.

And I wanted to give you at least at least a an understanding of how our thought process is going at this point so with that.

I will turn it back to Marty one thing I would say is we want we.

Get a lot of questions at the end why don't you guys.

Stop taking questions certain point, we will not do that will answer every single question you've got the only the only issue I would ask is that you keep them brief and focused if someone asked the question before unless you need clarification on it. Please please don't repeat the question. So everyone can have a chance to talk before.

Our our voices give out so with that I'll turn it back to Martin.

Great. Thank you Lisa if you could now open the call to questions.

At this time I would like to remind everyone. If you would like to ask a question. Please press star and the number one on your telephone keypad, we'll pause for just a moment took on topic una roster.

Your first question comes from the line of Ramsey El Assal with Barclays.

Sure and after taking a stab at guidance and it's really difficult environment I appreciate that.

I Wonder if you could go into little bit more detail in terms of the expense leverage in the different levers you have in your business just sort of manage to two that protect the bottom line and adverse scenario is what do you. What do you have that you can kind of titles the habit grants to take kind of get ready to get you.

Yeah. So you know like most service business is 65% of your costs or or or people costs and 35% or variable.

We we obviously will go right after as much variable cost as we can and then and then we'll look at where there are other opportunities I think that's a that's the order in which we'll do it yeah I think with the.

Changes when you look back to the financial crisis of eight nine we were very quick.

To react there and yet keep.

Full employment of the people that we had given some of the turnover that we havent. So forth I think we have a pretty flexible ability.

It too.

To keep a focus on the margins as we always have as Efrain said you know, we've always led by far the industry and margins and and we certainly keep a close eye on that.

Okay.

And then my second one is on the PEO and insurance segment in the quarter can can you pushed out what growth would have been there without the deal waste this stub.

And then just more broadly in the insurance part of your business can you talk about sort of.

Risk management strategies in the context, the environment, we're in and I'll hop back in the queue after that.

Okay. So so I'm going to ask you to repeat the second question to clarify what what you're asking but but because I think.

The way you asked it I can answer it in a variety of different ways, but but if you look at Apio and insurance I'm sorry, the PEO business, we would have grown about five mid single digits I'd say in the PEO business in the third in the third quarter.

The second question I didn't get.

I didn't understand.

It was just basically in terms of the insurance part of the business, maybe I'll rephrase. The question and just trying to ask it has.

How do you how do you see that business sort of have you seen preliminary signs of that business, if any type of deterioration in terms and.

Leading indicators and how do you go about managing risk in that side of the business throughout threw out a downturn, maybe I'll leave that you'd answered as you as you would.

Yeah, Yeah, let me, let me just explain why I'm I'm, causing so PEO and insurance I've mentioned this to to to many of you.

Is is both the brokered insurance business, which is roughly call it.

18% to 20% of revenues in that category and the PEO business. So that cause is sometimes confusion when people look at and on the brokered business. We bear no risk. So so the short answer to your question, which I don't think is what you're asking is that it really doesn't have much of an impact the softness in the insurance I keep calling out as really the softness in the way.

Workers comp insurance portion of of the brokered business not not in the PEO I think what you're asking is.

If if I understand the question is how we're we monitoring the at risk portion of the insurance in the PEO I think that that's the issue.

During the show that's incorrect yeah. Okay. So the short answer to that is that it's predominantly in the state of Florida. That's a one so number two.

We we look at.

Medical loss ratios and they had been running very favorable.

And the third.

Which requires a much.

More understanding of the way, we we operate the PEO, we don't anticipate that we will make insurance make a profit on the insurance portion of the at risk.

Typically health insurance.

What that means is that we are very cautious and very conservative in the amount of reserves that we provide.

So the short answer to your question is that Weve stress tested that population, which again is primarily in the state of Florida within by the way just if you want to know the average age of that population of Worksite employees is about 38.

What would happen if the medical loss ratio increased by 10%, which would be significant.

We are we are still in good shape from a reserve standpoint. So the short answer is we're constantly monitoring our medical loss ratios in that population we are.

We just reserves as we think appropriate based on the experience, we're having and at this stage we feel we're in pretty good shape. If you are relying.

On that portion of the of your portfolio to generate profits you put yourself in a more complicated situation because.

Your reserves may or may be lower than you need at this point in time. So that's my explanation I think the only thing I'd add to that is it the and then any initial.

View on the PEO side is actually very active on the HR and insurance side, So and we've done it I think a very good job.

On the diligence the underwriting and that's going to certainly continue and so we havent seen any uptick in claims and Efron said, how well we manage that and are very tight on that to begin with but we've actually seen a you know a lot of interest on the HR side, obviously with the complexity of the regulations that are coming out both the PEO and asked so.

So part of our business our HR outsourcing, we're the only one was 600 plus eight or specialist around the country that are handling these clients and in it is the interest is grown very quickly. So the initial pieces, there's going to be a lot a need for the HR support not only at the beginning of this in case.

I have to shut down temporarily et cetera, but how do I handle the support payments, how do I handle small business loans, hattaway, where do I do with payroll tax efficient all those things.

That's tremendously helpful. Thanks, so much.

Okay.

Your next question comes from the line of Kevin Mcveigh with Credit Suisse.

Great. Thank you so much and thanks for taking Shannon 2021, obviously in a fluid environment. He.

In front of Marty.

Couple of thoughts on kind of semantics, how because obviously feels like just the shocking is much more Brazil is there any way to think about as somebody gets furloughed versus laid off how that impacts kind of the business model.

That was my first one and then just.

Yes, what type of kinda.

Placement rate Cheely Selman in that 2021 is if there's any thoughts around that.

Yeah, Let me start on the first one I think it is really important right now.

We were able with our new flex technology.

We're able to actually survey clients, who are in our app.

And we've had a tremendous response just in the last four days asking them, what's the impact of them and we're seeing that the vast majority of UBS small businesses and mid sized businesses is the fact that.

Hey, Bob, but 50 over 50% of had minimal impact at this point and then another 40%.

Have basically furloughed. So our are hoping our word tracks from our payroll specialists on the service side. Our salespeople are hey, if you can stay in business.

In key and keep somehow either for lower or you know keep paying your employees. If you can.

Theres going to be support certainly looks like there is going to be help coming whether it'd be the small business loan project. That's why we pushed.

Also to offer our assistance, we have all that information we know the direct deposit accounts in the bank. We could quickly continue to help our clients pay their employees six weeks eight weeks whatever the government wants to do.

And then just take that money from a government loan fund versus the client and I think thats the quickest way to keep these businesses in business. So it is really important and I'm seeing right now at least leading indicator is that small businesses are trying to hold it together maybe layout for furlough a few people.

But maintain their business model, so that to kind of depending on how long. This is going to go and if it doesn't go too long they'll be able to bounce back remember just two weeks ago, we had full employment and it was the biggest challenge for small businesses was finding people to fulfill the demand I don't think that the demand in many places will.

Actually change and I think it'll bounce I I think it'll bounce back fairly quickly people are going to want to get out they're going to want to get back to restaurants, and new services may do it a little bit differently and how they.

Staying close the people, but I think they still want to get out a new services and so these small businesses are trying to hold onto their employees and that's going to make a big difference in how many clients are lost and how many checks were cutting.

Hey, the second to the second question Kevin.

Okay.

So let me just say broadly.

Many of our clients or if you look at our on the payroll side Im sorry management solution side and you ask yourself.

When you look at our revenue how much of it is based on a people model what percentage of revenue is versus subscription.

In our case and there is certain as a general rule of thumb is about a third as people and and and two thirds of subscription.

We assume that in the next several months the or the the drop in pays per control will will become will be severe will be pretty significant I should say I don't know severe.

I know you're asking the question that everyone is theres unemployment, let me go to 20% to 25%.

I don't I don't have a good crystal ball was no one else does but but I can tell you that.

The way we model that.

We we see some significant contraction coming in the upcoming months, we'll see how long. It was we've done the modeling and think we've got at least a reasonable handle on it so.

So I would say significant over the next several months.

Great. Thanks again bye.

Okay.

Your next question comes from the line of Bryan Keane with Deutsche Bank.

Hi, guys just wanted to ask about a bridge, maybe going from the six or so percent organic growth level that we're at today down to the.

Slightly negative growth in the fourth quarter and then for next year, just thinking about what's in those assumptions, including bankruptcies and other things that drives it to those levels.

Yeah, our assumption is that there will be client losses in the base will that there will be that will be lowered pays per control and we've modeled it based upon on.

The prior.

In prior recessions and then we got to figure out how my bad La Z analogies, just simply to figure out what's the duration of the of the traffic jam until that that.

That that resolves then then the questions what's sharp rebound.

How sharp rebound is and we think it ends up coming back towards the end of the year.

There is I can't Brian I can't give you a bridge that said that 6% this 3% that because frankly the modeling is early on that all I can say that we've looked at the client base stressed it assumed certain.

Certain impact, particularly in force for a for some of our payroll client base.

Compared that against what we saw in previous recessions and come up with our best estimate, but we do but we do anticipate that Theyre, obviously is going to be an impact.

To the client base and there's going to be an impact on pays per control and I would just caveat it with one thing, which Marty said earlier.

To the extent that the downturn is severe but.

More a short duration than our assumption start to change and to the extent that that the downturn is both severe short term and the government stimulus, which they're working through now helps to keep some of those businesses in place. It also helps our projections don't.

But any way yet of being able to figure all of that out we'll see in the upcoming days.

What it looks like that could have a nice I emphasize could have some impact, but it's too early to itself and then of course efron already mentioned the interest rate changes is in that as well that's a known yes, that's more of a note.

Yeah, I was going asset as my follow up is how did you account for the stimulus.

We're doing a lot for smbs to trying to prompt them up and keeping the lives. So is that is that model then as well or do you just modeling as if there would be no stimulus.

I think it was pretty high level, you know Brian I, we modeled some I think we were trying to be a little more conservative on who would go out of business and on the checks because of that but it was pretty it's pretty high level and you Didnt know where the stimulus is going to be and how long it's going to take I think the thing that selwyn.

Important that we try to get across I think the government's taken some great steps very quickly.

This one you know could go faster if you if you do use someone like the payroll processors I think could be very quick or if you have to go through a loan program. It could take we sold those weeks are very important to the how this happens.

I think to keep people employed in being paid and businesses in session. So I'm very hopeful that they will do something faster.

And.

Because of the way they've done it already and that that keeps these businesses running.

Okay. Thanks to the common stay healthy.

Okay. Thank you too.

Your next question comes on line of David to do with Evercore.

Hi.

Thank you appreciate the preliminary 2021 outlook.

Could you did mention for US your revenue exposure to some of the most affected industries like restaurants, just broadly foodservice. So we can.

Thanks through 2021 in in terms of the framework that you gave.

Yeah, let me start to than ever in conjunction with I think.

Definitely I'd say restaurants in general and those groups are probably around five.

Five or 6% of our base and so it's not as big as some might expect so I think thats going to be helpful. And those are the industries that youre seeing obviously, the most impact in someplace like New York State and other states that shutdown the restaurants.

Completely it also depends as separate has set a couple of times, how long does that happened as we try to start the open those back up in a few weeks with even the partial in over the 50% role or something else. How do you know how long do you keep them in business, but I think it's around that number roughly on a client base, yes, you know David so.

Theres been a fair amount of of talk about.

How how does this endogenous shock is affecting industries marty's right that the or if you look at a essentially hospitality foodservices, that's about 6% of our client base. So obviously that's impacted pretty significantly both.

Both in the on the payroll side and on the PEO side, but at 6%. If you look at everything else for example, oil and gas is 1%.

And everything else is distributed in a in a.

Distribution that looks pretty similar to what.

Broader economy. It looks like so we don't have significant exposures to one industry or the other on on our payroll client base. Yeah. One of the real positive as Aaron mentioned about our model in our financial strength is we don't have any direct and a large percentage in one industry.

The sic code or region, and so that up that allows us a lot more diversity across the base that the type of businesses and so forth.

Understood just a quick final question you noted that the business really started to experience impacts in the second half of.

This month versus the first Jeff can you can you share your what you saw in the second half in terms of quantifying the impact on K P eyes.

Yes. So so what we saw was you know we we so I was looking at we were looking at.

People running payroll.

And we weren't seeing any impacts and it looked like clients.

To us were either staying at current with their current crossing routine or in some cases, they were accelerating the processing because they were in the process of either downsizing or or in some cases closing.

But that didn't give us enough data. So we went back into the.

The other data that we had on time and attendance systems.

Well, we triangulate time and attendance systems, we triangulated.

Marketing leads sales activity and we saw.

Significant drops starting.

As the rollout of state closures or state Lockdowns accelerated so that's where we saw the impact now.

The good thing about that is that that we can see with the impact is and we can see the change and the demand environment.

The question is how quickly would come up out of that obviously, New York is not going to come out of that quickly question is what other what happens with with other states that have gone into that into that place yeah. The interesting one of the interesting things as well we've seen lead to drop drop off on the front end, but there, but then there's been other.

Pieces that have picked up so they're definitely down, but they're not they're not like shutdown a they're down.

Double digits, but not as much as you might have even thought so people still looking for and maybe because of this looking for payroll support HR support insurance.

Those kind of thing so.

There are also finding that frankly this is the time that they better go with it outsourcer and and that they would want to go with somebody who's National and has the support and service teams that we have that are the segregated across the entire country and that can provide great answer performance and support.

Even with 15000 people working from home. So I think there's some benefits to the strength of of who we are in our experience level at this point in time.

Thanks, so much stay healthy.

Thank you too.

Our next question comes from the line of Stephen was with Morgan Stanley.

Good morning, Thanks for taking my question I. Appreciate you trying to provide as much guide you can hear.

Just maybe following up on some of that conversation you just mentioned about the down double digits on the lead but things aren't completely frozen as we think about the developing competitive environment. As you go through the trough and come out of this how are you guys thinking about positioning that obviously you made a lot investments on the alessi side to get that fully staffed up from the sale side, but when we think about things like.

Mike Waiving fees right now to offset pressure in the clients may be receiving more you know the fact that you may have some pricing competition from the very crowded market. How are you thinking about that over the next 12 months.

Yes, I think it's a lot more about our you position to help the clients through this difficult time, that's what they're looking for some clients are going to be looking for taking you do something to help me in the short term on price, but you know our prices frankly, as a cost to a small business or mid size business is not that big comps.

There to the other things that they're concerned about what we are finding is our strength in telesales. For example is making a big difference. So you know we've been selling telephonically for some time generating leads that are then picked up in handle telephonically with the conversation the demo and the sale all being done over.

The phone and even to some degree when you look at your payroll on line all by the client and self service mode. We've read trained and added training to the field sales force on handling those calls remotely. So you know being able to talk to clients that don't want to meet in person, but to do that over the phone to be able to demo the product.

And in cell and complete the sale and of course with some of the features that we have with document management and we've had for some time everything can be done electronically electronic signatures moving the documents back and forth and of course electronically onboarding someone to start them up frankly as matter of a few hours. So I think what we're focused.

Going on as Alright, all of our marketing and so forth is how we can help you through this here's the service model. We can give you here is the product and feature set that can help you. When you think of our strong our mobile App is we're seeing increases in mobile app utilization because now clients are many clients employees our remote.

And they are able to use the mobile app. The investments that we've made are really paying off from that standpoint of mobile App learning management on site. They can give training through their employees on line.

Of course direct deposit pay end demand can help them, but they are only part time or they're in short shifts and they need cash. So we're positioning this is more the value that we're providing and then if there's something that comes up specifically.

We'll talk to the client, but it's not been as much about price as it back as it is hey are you. The full service provider that can help me through this period of time versus someone else that I have that's not as experienced and that is strong financially.

Got it and that's helpful. And then just maybe a quick turn a two parter. After you mentioned that 42 page report yet on the sort of running through how to think about this.

If we go back to the prior downturn and leave retention rates drop towards the mid to high Seventys. How are we thinking about that relative to two them great financial crisis and also on someone had asked previously that the exposure to industries and how you're thinking about at present prior downturns, but honestly cross section it and say you know a restaurant in the terms.

And base and Thats more than just being exposed to oil and gas how are you thinking about this.

Yeah. So so good question, Steve and then and I would say, we'll go into more detail analysis of that type as we're going through the the.

Through the plan process. We are we're right in the middle of it right now so we'll we'll do more work in that way and by the way. The analysis, we have looks at exactly those kinds of things.

But coming back to your question.

When we when we in previous downturns and now I'm going to go back to all eight or nine we started from a a retention place that was.

Lower than than or yeah. It was lower than where it is now if we would have continued on the same track we were on through the third quarter. We would have had record retention I mean, we were we were aiming towards a really really significantly.

A significant improvement in retention through the third quarter.

And if you would have said to me when I started nine years ago that we would hit that number I would have been surprised because we were we were typically in the high seventys. So we start from a good place. So that's the first part.

But you have to stress it based on based on the change that you saw in in different environments and we've taken our best estimate what what what that will be so so that's that's where we're at right now looking at it.

Versus the modeling of or or actual experience of previous recessions I think we've got a good handle on on dimensioning. The range and then we can overlay what'll happen by by industry, but to Marty's point I think Thursday, there would say there is an assumption that were very exposed.

Two restaurants, we certainly have a certain amount of those in the in the base, but but it's not.

It's not all of the clients that that we serviced by a long shot and I would say that that that that's.

For payroll, it's a little bit different for Pete.

And Steve I guess I'd, just say, it's it is sold determined on whatever instead about that the length of how long. This goes and then is the stimulus package you know going to help them through the first couple of months and then does it go another two months three months or so forth.

You know the with the financial crisis. It went longer certainly I think seven quarters, or so you know and and so if there is something that can hold that mine and they can still get business, even if its takeout and they can furlough a few people, but get support on their payroll I could make a huge difference. So we've done some enough.

Total modeling, but we really need to see kind of how the next couple of weeks even play out.

Got it thanks and stay healthy.

Thank you.

Your next question comes from the line of Kartik Mehta with Northcoast research.

Yeah front end Marty Yaron. Thanks.

Thanks for at least trying to put together I'm going to fly 21 guidance and I'm wondering if you could just give some the assumptions you're making on pays per control or retention. Some of the metrics that usually talk about it to get an idea of what the backdrop is for your EPS at slide 21 guidance.

Yeah.

Kartik I can't I can't get too specific about that at this point, but I would say that.

Generally I'll give you kind of a framework.

That.

We're modeling drops in pay pays per control consistent with.

Some of the effects that we saw in the previous two contraction. So we're using that as a guide.

For what at least the next three four or so month.

Look like and and as I said, I think we're going to have severe impacts.

Absent whatever the the buffer that the stimulus stimulus provides.

Through the certainly through the summer into the early fall.

So that's one and then in terms of in terms of clients, we've used that that data as a reference 0.4.

For how we're we're trying to think about or create a framework for for next year.

I think many of you have that data understand what I'm referring to.

When I say that so we've incorporated that and obviously.

Need to have a framework as we go into next year. So that's I would say that general level. That's that's what we're using.

And then.

At the beginning in Marty talked about the balance sheet I think you know the one to benefit you have is you have an X on balance sheet and I'm wondering your thoughts on share repurchase would you do you feel comfortable enough that you would want to go back when it's appropriate in the market to buy back shares or are you at this point so want to Wade.

And see how things progress for the next couple of quarters before you would want to go into marketing buyback shares.

Yes, kartik, so so one of the things that.

That's challenging in an environment like this is.

In the in the absence of any other concerns you would think that.

Now it's time to start getting very constructive on share repurchase because we obviously think that that.

The business will bounce back and we're we're highly confident that that's going to occur.

So that's that's the one side of the thought process and I would say by the way. This this fall so my foot the thought some expressing also apply to the portfolio.

You have to and I've been through this before.

Where we had and then Dodge into shock in my in my prior life.

You have to worry about.

Making sure that Theres, absolutely no questions about your liquidity and I mean, absolutely we people depend on on.

The dividends in this company, we protect that.

And don't want anyone to think that that there is an issue there and so shorter term until you have a very clear perspective on where you are you protect liquidity in the short term you ensure that capital markets are functioning the way they should.

And then you make decision. So so there are there are those considerations that we play through and I would say right now.

Now we we are ensuring that there are no issues on that up there would be given our cash flow generation, but it also kartik extends to things like.

Extending the duration of the portfolio in order to get more yield right now we're not assuming that we're going to do that because at this stage of the equation.

We put a premium on on liquidity not that we have any any issues with that I. Just would were just reiterate we have undrawn revolver, we have almost 1 billion dollars' worth of cash and.

So there is no issues, there, but you've got a balance while over those pieces.

In terms of before you start thinking about getting constructive on share repurchase there may be a time, we'll talk with Ford at the appropriate time and and have that conversation probably is not now.

And then just one last question Marty Marty we looked at the previous recession was zero. When we came out of it did you see more small businesses wanting to go with an outsource provider either because of what happened or they're looking to save money. So in another words as we come out of this could you see.

Maybe an acceleration in sales because you have businesses that are not using outsource services wanting to use the service.

Oh I don't think we saw you know I don't remember seeing that much of it kartik at that point, but theres a couple of things that are very different in this shocked that I think can help one is the the.

Government stimulus packages and the regulation changes are very complex and in I think more businesses will say, if I'm going to take advantage of that I'm I'm going to start my business or reignite my business and take advantage of some of the things that are out there.

I cannot follow that I need outside support and so I think that's going to help more businesses say, if I haven't outsourced before or five outsource to a small provider that can't provide that kind of guidance like weekend, Hey, I'm going to go with I'm going to go with somebody second.

It is so different from a technology perspective as everyone knows you know back then it was not all of the more the mobile apps imagine where we were 10 years ago. There was no mobile apps really there was no remote working very little remote working.

All of the things that businesses now and by the way their employees are getting used to and those that you might employee or retain are getting used to what can you do with a mobile app can you provide you know on on a online training can you provide pay end demand can you provide.

You are four on K balances and loans on line can you do all these things online connect with your employees, it's such a different environment and I think this is going to change the workforce permanently to say Wow I've seen these things that I can do remotely and through self service I want part of that I don't want to necessarily do old school.

You know somebody writing a check or any me a check even I think all of these things are going to get people used to a whole new world, which are going to drive more people to the technology investments that we've made so I think there's two very positive impacts here as we come out of this that could say.

More new business startups and existing businesses that reignite are going to be looking for someone.

Like us.

Thanks, Marty I really appreciate it. Thank you both of you. Thanks, Sir your foreign currency take care.

Your next question comes from the line Bryan Bergin with Cowen.

Hi, guys. Thanks for the only guy plus here and that front I appreciate the law analogy. Thank you for the on.

I wanted to ask.

All of you have to remember when I was wrong, but.

At least tried I, let me but should.

Hey, guys.

Wanted to ask just from a business mix standpoint can you just give us some color on where you're expecting the most in the lease pressure as we think about PEO and management solutions and then the various offerings within management solutions that are most and lease insulated here.

Yes. So one thing I think we should mentioned I think it's been.

It's part of the part of the.

I guess, the backdrop and just take off from what Marty said build on what he said, we're very different business. So we were no way too or nine.

At the end of this year about half of our revenue were less than half our revenue will be payroll.

If you split our business.

About 80% of our client base is under 20.

But that they are our revenue split pretty evenly below $20 above 2050, 50. So that's a very different animal then than we were in the o. eight or nine.

Timeframe and while we do apply that that that book process to how we're looking at the future.

There are some there are some differences I think we could see we could very well see to marty's point increased demand for anything HR services related and by the way if I slice now the Rubik's cube, you can place or excuse, but if you if I slice.

Our revenue.

About 50% is of our revenue is derived from HR related product. So you could very well see an increase in demand to marty's point given the complexity of what Congress is about to unleash and let me tell you something email slight every single might hear about what's in the bill without.

What the implications are there's lots of good things.

In that bill for four businesses, but it requires interpretation. So I would say from an HR standpoint, you could see increased demand, which Marty has been talking about and then on where we see more stress is on the smaller businesses, who if they don't get a lifeline over the next six to eight.

Weeks.

Our going to be severely impacted and stress. So so I would say in broad strokes, a higher demand for HR and related services that could include PEO by the way.

Because weve include that in and more more impact on smaller clients simply because of the depth and the severity of this correction.

Okay, and then just payroll tax holiday implications forgotten question. So curious here how should we think about the impact from potential payroll tax holiday that might be in this final.

Stimulus Bill.

Yeah, I don't I don't think.

So if it from a standpoint of interest on client funds that we withdraw and then pay those.

Pretty small of course, we won't earn much on it anyway, because there is no interest. So I don't I don't think it'll be a very big impact at all yes. So I thought you were talking about what the business impact, whether we think that alone would.

Right.

Some significant improvement I think youre going to have to go deeper than that to really make an impact for most clients, but marty's right. If it if thats a question related to interest on funds held for clients I think the feds kind of helped us there.

We are backend that way, so it's not going to impact.

Very much.

Okay. Thanks, guys.

Okay.

Your next question comes from the line of Andrew Nicolas with William Blair.

Hi, good morning.

Just wanted to talk a little bit about kind of the administrative.

Challenge is tied to the affecting fiscal stimulus and just curious given how close you are too to that market.

Thoughts might have on the most effective way for the federal government to handle handle that initiative what would.

Seemingly be a very difficult task given just sheer number of small businesses in the U.S. and obviously, it's important facet handled so I'm just interested in your thoughts on the challenging set of affecting that change.

Yeah, I think if you if you look back at like 2008, nine and of course, not even close to the amount of stimulus, but that is being done now you know things took I think the average time it took to get a check or money to small businesses was like 50 days, we went back and looked at it.

So it was roughly a couple of months that needs to be so much faster now because of the in particular the shutdowns that have occurred in many states of small businesses they need to pay the rent they need to pay.

Employer employees to keep them with them.

Which because you're going to come back I think to a pretty good employment two weeks ago. I said, it's amazing their biggest issue was how do I find employees to fill my jobs and now I want to keep them. So I think speed is such an essence and of such an essence and I and I do think that we could payroll processors could be such as.

Help because we could immediately continue to pay that payroll that we paid last week or the week before and then just look for those funds from.

Government program the SBA whoever I mean, however, they do it is is fine with me as long as they give that backstop and it does look like they're going to do that to give that payroll, but if it's a long SP a loan process that takes paperwork that you know et cetera et cetera, that's not going to help as many many you've seen have already laid off.

Employees across.

The country, whether they'd be hotels or or whatever.

And I think they got to move really quick administratively one of the great things with our size and our experience is that we have over 200 complain specialist our compliance people have been on the phone with the federal government Congress. The treasury. The IRS you know the SB eight you name it and are working with them not only to answer there quite.

Tons about what could be done.

But also trying to help say this could be the fastest way to do something.

And so forth and so we're very supportive of the work that the government is doing and we're very much in touch with them and we think we could turn it around pretty quickly.

We have a lot of resources 1500 people at ITC, and we've been talking daily and they understand that depending on what comes out we're going to everything gets turned to that our first thing is to comply with these regulations and be sure our employees at our clients and their employees are taking care of.

Great. Thank you asked encouraging.

And then and then as my follow up obviously Theres a lot of moving pieces right now, but I just wanted to get your sense for the impact social distant thing and working from home.

May have on your Salesforce his ability to sell new business, particularly within PEO, where.

We have enough white space that that may be a material slowdown in and new business starts is less than that headwind I'm. Just curious if if you'd expect sales cycle lengthened to slow considerably I'm, just kind of kind of lets face to face interaction almost equal.

Yeah, it's kind of a mixed.

Mixed situation, while we said leads were down a little bit there's still pretty strong lead flow coming in for payroll and HR and a in because we've had so many years of virtual selling we have a lot of experience in selling which I mentioned earlier, we have now taken that training that have been used for virtual sales, which by the way it.

Virtual sales is lower cost in pretty productive from a web lead perspective, and so we're now training the field sales force Hey, Here's here's a way if you have to do it remotely and someone doesn't want to meet here's how we demo the product. We can use the same tools for the field sales force, where they would have demoed something in person here's how you.

Can do some things online and here and the good news is everything can be done electronically. So you don't have to be in front of a client to have them sign something necessarily a lot of the document management can all be done electronically and that kind of a docusign kind of features and then all of that sent to remote Onboarding specialist who can set up the CLO.

Okay, and you know in a very short period of time. So it certainly is going to hit it has some impact in clients not wanting to focus on it right now or meet in person, but I do think that we have a vast amount of experience in a very effective virtual sales team that that will continue to grow frankly, and the field sales force is fine.

The ways to get in touch with their clients get in front of their clients through email through chat through calls and and they're very receptive to that and appreciative that we're here, it's amazing that many clients or prospects think that because your home, they're not going to be able to reach issue that is not the case at all we've never lost any contact with.

Anybody and as I said.

Alright team has done a tremendous job and moving 15000 people remote and then being able to handle it.

Great. Thanks, a lot for taking the question Andrew they help.

Thank you too.

Your next question comes from the line of Jeff Silber with BMO capital markets.

Thanks, so much in an effort to really appreciated your remarks at the beginning, especially the segue from being him into talking about finance.

Yeah.

Yeah.

Okay.

Yeah I think at just one quick question you talked about how I guess your business or your customer facing businesses in different now I'm just wondering internally we compare your business.

To the prior shocks or in the prior recession is there anything different is that more of a variable cost structure than you had before any color would be great.

Yes.

I'll, let Marty talked about about what substantively is different in terms of of how we operate but.

I think look if you're going to service business I said, 65% of people in 30 Bucks on variable, which Cnf comparison at 65 exempt people in 35% other not all of that variable I would say that that.

We've moved the cost structure.

In such a way that more of that cost structure supports the other parts of the business I would say that that structure you guys, who are you sure you guys, but you who who were analyzing it knows if that's the way most of the the split of cost that most businesses have it's distributed deferred.

And so the implication of that is that.

We don't have as many cost tied up in one part of the business that that we had.

During the last downturn, we've got a little bit more diversification.

Across the cost base.

So that we support more business that is not purely payroll nothing wrong with supporting payroll, but as I said before.

Most of our business now as HR related so, but yes, I think just from an internal flexibility at we're on a unified what we call unified communication system that we've installed over the last number of years and so we can easily move calls all across the country, even to which we have never tested before.

Having all of these people work from home, it's incredible technology difference than it was in the last shack and you have a lot of flexibility to have teams in different areas and moved teams around and so forth. So there's a there's a lot of flexibility here is to how you control costs. How you look at the the your employee base.

And and give them support tools and we've always been good obviously controlling our cost and and I think having a great focus on margin and we'll continue to do that theres, probably as much or more flexibility now than there ever was.

Okay. That's helpful. Thanks, so much.

Okay, all right so.

Our next question comes from the line of Tomorrow, some minor with Jefferies.

Hi, Good morning, Thanks for I think you're taking all of our questions really appreciate at its running kind of while F or maybe just one.

Just one quick question for you on <unk> I know you guys mentioned a couple of different anecdotal comments about what you see what you've seen in maybe the second half of March, but if I could maybe triangulate little more precisely I knew booked business. What are you seeing happened in terms of new bookings over the last couple of.

Weeks, and then what's new bookings type of assumptions are you making for for fiscal 21. Thanks again for taking my questions and hopefully everybody's families are safe and healthy.

Yeah, Hey, somebody so we wouldn't give you that we wouldn't give.

Precise inform bookings.

And then we wouldn't typically give precise bookings.

What we anticipate but I think we all know that that given lead flow bookings are down and given what we expect in the remainder of the quarter. They we also expect them to be down.

We expect to be in Oh fall off a cliff absolutely not for many of the reason that Marty said, if if the stimulus.

Gives the Joel it may actually.

May actually be helpful. There are things in that in that package that may cause the business that are there to book other services, even if they're not booking base payroll, but but.

It's a challenging environment for sure.

Maybe if I could ask this one from a competitive standpoint, it sounds like price was able to stick.

During that that's three Q I'm curious if you've seen a change in competitive behavior I'd their pricing more aggressively to capture as much business is possible before the gears start to slow down or maybe just how are your competitors are reacting at from a pricing perspective and the current environment.

Yes, not seeing.

Theres Theres some three months you're in their first three months for of this service for that service, but not seeing a too much too aggressive yet does it get more aggressive up it may on the other hand, I think when you look at it again as I mentioned earlier I think businesses are worried about a lot more than when.

You think about our average business that that might pay a couple of thousand dollars or a year $2400 a year 25 hours a year, they're looking for.

Yes, the whether they save 200 Bucks or 500 Bucks is not that critical to him right now its hey can you give me the service and and can you give me the service that I need the service excuse me and the products that I need to survive in this environment. So I'm I'm sure, we'll see a little bit more discounting here in there, but frankly, it's a little bit missed.

Hi, good in the fact of what clients are looking for in my opinion, Yeah Tomorrow morning.

Uh huh.

Easy to overlook it.

But when you have response time measured in seconds I'd I'd ask you to ask all of our competitors. What their response Tomorrow May May service may not seem like it's all that important and other environment I can tell you based on the interactions. We're having we could post all of the comments that we've gotten from clients about how response we've been on.

Website, it's kind of become very very critical when things that we're very proud of Marty said. It earlier is that that we moved everyone to work from home and our service times have been tremendous and our response times to clients have been tremendous and they are asking a lot of questions and if the if you can.

I can get to them and you can't service from.

They're probably going to have some second thoughts about where they continue.

Continue with you.

Great. Thanks, again for taking my questions feel.

Okay. Thank you too.

Your next question comes from the line of Peter Christianson with Citi.

Good morning, gentlemen, thanks for the update and certainly for your plane poignant sediments earlier.

Good news I think we're hearing that.

In the bail out so far that the stimulus is providing 10 million.

Up to 10 million for individual businesses.

Provided no lay off so perhaps there's some upside.

To the outlook here, so fingers crossed.

Yes, I appreciate your.

Appreciate your thoughts that the doubles will be the doubled in the details but.

Let's just hoping.

We can go back to that really.

Two.

Very quickly and and can you quantify your exposure between.

Hourly workers versus salaried workers.

Perhaps what you have seen earlier and then has a follow up.

Looking back to the last downturn looks like the dividend rate was was held steady for quite a bit.

At risk of pulling up the carton sort of a horse here.

How should we think about that.

We expect to see something similar at least over the near term. Thank you.

Yeah, Peter I don't have much for you on on on hourly versus a versus salary I'd have to.

Get that breakdown.

And in a figure that out so.

In.

Don't have a precise answer on that with respect to the dividend you know look our earnings amply supports the dividend we have whether we should increase it.

We will depend in part on the discussion that we have with the board and where we are when we present the plan, we try to peg it around 80% or so obviously in some situations that might be a little bit higher.

So we'll have to go through that that conversation with the board in terms of what.

What level they want to set it up.

Thank you gentlemen, best of luck can be well.

Okay. Thank you too.

Your next question comes from the lineup Lisa Ellis with a Moffett medicine.

Hi, good morning. Thanks.

Hi, I'm sure question couple of questions on workers compensation actually I know, we are I guess, presumably going from an abrupt period, where workers comp claims and premiums was very low to probably be endorsement that can you just remind us I know the premium going up we'll actually be it.

Well when PR insurance business.

In general how how does how does that kind of dramatic shift impact.

Yeah, what it wouldn't be a tailwind to the to the insurance business. It would also have a modest impact.

On our PEO business from a revenue standpoint so.

Both of those would would would be positives on the other half where we are where we have some at risk exposure and in on the workers comp side in in.

In the PEO.

We'd have to monitor that so so I think it's a balance more to the positive side of the ledger.

And then you've you've just got a man's reserves appropriately.

Yes, and then on that point does but the follow up because I know we've got more questions about can you just remind us.

Looking at more in the K it looks like your reserve level, one workers comp, it's something like 170 million. So in total across like short term and long term yep Yep.

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How is that.

We answered again.

That's like how much axle risk exposure do you do you really haven't thought the way to think about it it's kind of that number or how does that mark.

I'd have to look back at I think we say in the K. What we have in terms of exposure I think it's around a million on one I want to say per case a million dollar workers comp case is a very very unusual case my my experience, it's cap there, but beyond that by the way.

That's only part of the equation, what you have to look at it the development of claims, which we look at on a quarterly based managed to reserves.

They are needed. So we're we're we're our typical typical workers comp adjustments are.

Our our modest and generally generally we end up.

In a in a positive reserve situation. So so we should should be able to manage.

Well.

There will be no change in terms of the way we manage we don't anticipate a significant impact at this point.

Got it okay. Okay, and then just a quick follow up what on the attrition I think you've said in the past that about 9.7, your attrition each year or come from.

This is going out of business just didn't like normal period is that about the right number then can you just dimensions.

Worse.

Oh diner.

After 911.

Yeah. So so what you're doing is picking about half of the the 18% that we would average I think it's close it's somewhere between a 9%.

And we'll we'll see a spike I can't I cant quality, yet Lisa but.

If we go back back to Oh, eight or nine.

Hi, spiked up to about.

23, 24%, but are faced with about 2021 most of that three to four was coming from out of business, Yes, sorry, Marty no I'd say exactly whatever inside it wouldn't its most of that came from out of business and but please remember that one went longer. So this one's just kind of hard to measure because we think we're going to have you know.

Depending on the stimulus that could hold the front here for a couple of months if it really could help them quickly and and then how long does it go before they open back up or give up and go out of business.

It's always going to be very interesting <unk>. It doesn't feel like it's going to be as bad as 089, because that went on for seven quarters in businesses couldn't survive.

These hopefully they can furlough they could come back I don't I really it obviously hard to predict a few weeks into this but I don't think it's going to be we wouldn't expect it would be that bad it might be more it's got to be more of a shock in the first probably maybe first quarter of next year, but then bounced back pretty quickly we would think at this point.

Terrific. Thank you thanks Nicholas Okay. Thanks.

Next question comes from the line of Marc Mcconnell with parent.

Hi, Marty and Efrain. Thanks for squeezing me and best wishes to you and your family.

Yes.

With regards to.

No the stimulus what what elements that youve heard discussed around the stimulus are you most excited about it could potentially have a positive impact.

Well definitely the small loan program. The small business loan program. You know anything that is I've mentioned that would keep paying employees of small businesses and keep them in place is really important.

Depending on how long this goes a bit shorter than you know if it's shorter rather than longer that could make a big differences the whether a business goes out of business or not and they keep their employees employed I think also you know the unemployment benefits is the is the also another way that up small business might say, hey, I'm going to further.

Oh, you I might pay you theres theres been different rules discussed about paying half and there is certain rules that are out there about sharing a job where you could.

You could further you could pay someone you could keep two people instead of laying off to get to people that have laying off one in keeping one you could have them jobs share and then make it up with unemployment.

That could have some impact depending on what are they how they handle those regulations I think anything around supporting small business and employees with their wages.

Is the most important to me hey, the direct checks can't hurt but.

No I'm not sure what that's going to do as much as from a business standpoint, as keeping businesses going that's kind of how I think of it anyway at this stage based on what we've seen.

What's your level of confidence if that's what those elements that you cited are going to go through based on all the interactions that you've had.

I'm pretty strong pretty strong I think there has been very little disagreement on the small business loan program. There has been we still don't know how they're going to it procedurally enacted that is important but that's not clear yet, but I do think based on all the discussion they're going to try to do it is quickly is Pos.

But with as little Red tape as possible.

And that will be very important, but but feel pretty good that those things are going to get an act that they haven't been argued much at all it's been more the large business.

Stimulus, giving money to the airlines et cetera that seems to have the bigger arguments what sort of a marketing program could you put in place in order to take advantage of that because.

Obviously your capabilities to deal with something like that would be far greater than any independent companies.

Yes, a very much of already position the marketing to to even over we could go about how we can help you and we've had webinars that have been kind of blowing the doors off.

From the number of people and CB eight the join those webinars because they want to know about it. So I think we're well positioned from a marketing and training perspective for our clients and prospects to take advantage of those.

If I could shift gears just for the follow up component.

Can you just talk about the the percentage of business that you have in New York in California in the states that have gone through the shutdowns and what you ended up seeing in those states you know during the last.

Ace.

Yes, it's a you know if there is a <unk>. There's a number of business is not all of them are the small businesses.

But I think you know I do think its a.

Might be up around the 40 or well northern California alone I don't have that data for all of this states that are shut down which includes New Jersey, Illinois, and California, New York of course, we kind of follow that population, so it's probably around 50% or so.

That are in those but again, they're not all small businesses that are necessarily impacted.

By the shutdowns and partial shutdown that you're seeing.

Okay, and what were you seeing and in the states that are shut down in terms of like.

This does the very recent trends.

Very early but mostly we're seeing more.

More of the I'd say, you know I'm I'm furloughing.

I'm staying open a I'm doing like restaurant, that's up again restaurants, being five or 6%, but that's where you're seeing the most impact are saying, hey, I'm going to try to furlough people I'm going to try to keep my employees, maybe only keep you know three of them out of six or and added 20, but I'm staying open so far and again our.

Most people in flex in in that survey that I mentioned earlier that we've gotten a huge response on that and it's still been 50% are minimal impact at this point in another 40% are saying I've done some layoffs or furloughs, but I'm continuing to run that's all been very good news, what we don't have a great handle on yet.

As any losses, because you're going to see those more more probably next week or end of this week, if they're completely going out of business, but more the feeling is im going to try to hang out here see with the stimulus is try to furlough my employees why keep them and continue to do what I can with minimal with minimal staff.

Great and then one last one.

Well you will come.

But what you are.

Mark you're breaking up there could you try that again about this the portfolio.

Composition with regards to the float balance would enjoy seeing there.

The.

You mean, you mean securities in the oil industry, Mark curator and the willingness to treat your your muni portfolio yeah.

The solid.

We haven't had any issues having had seen any any impairments of any securities. You know obviously, we we we invest in very.

Highly liquid.

And I'd say security. So we had a few in the in the oil industry, but but but we haven't had any impairments, but very small part of it.

Great. Thank you.

Okay. Thanks, Mark stay safe you too.

Your next question comes from the line of Tensing, Hong with JP Morgan.

Hi, Thanks, Thanks, so much for the hard work here just on the margins just wanted to clarify it looks like you're guiding to I think 35 versus the 36 this year.

Yep is that just a function of the decremental margin of.

Sorry, I forgot yeah, Hey engine.

So so.

Yes, just want to say preliminarily, we see it around 35, yeah, what's happening to engine is right now my assumption is the portfolios down around 20 million or maybe a bit higher that portfolio drops straight to the bottom line with with without a lot.

Expense offsets, what we assume that we're going to take actions to obviously offset expenses and other areas, but it's hard to its hard hard in the short term at this point office six weeks a day to say here's how we go after after replacing some of that margin I would say were pretty good.

If you remember all eight or nine.

We took a tremendous hit on the on the drop in the portfolio nowhere near as severe here and found a way over time to make it up but yes. That's that's a one component of what what creates the drop in margin.

Okay that makes sense, so you're being conservative here, if things get a little bit was there's room to do more but you just see calling it as you see it and then you can move on got it and then just really quickly and a lot of people ask good questions on the outsourcing what happens on the recovery how about on P.E., Oh, I'm curious if we could see a ship there if people want to manage their.

Medical side, a little bit better, but outside I guess.

Risk that you are carriers my prices in anticipation of higher costs, but also in that my price out others I'm.

Trying to better understand how you think about PEO here given that Youve put some more capital into that business in the last three years yeah.

Engine I'm asked a great question. So so here's here's how at least some preliminary thinking on that.

If you have a lot of costs rippling through your health care plans you may not feel them at first but eventually are going to feel them and then or your clients are going to be impacted to what extent or another.

As true through the course of this year and as we have manage the integration of voice is what we've seen theres a tremendous opportunity to to operate a P.O.S. So hybrid model, where where you have and they have so with with the provision of benefits from from our insured.

I'd say agency and in some ways and sometimes it's better for you to go through our insurance agency on the PEO instead of being on some sort of PEO Master plan. So I think you're going to have to figure out some be flexible an agile in terms of what you provide on the benefit side and what solutions you provide.

Either.

A one off through insurance agency, a master plan or from some other other arrangements. So I think what we've seen is that a ASO and PEO kind of converging and in some cases full peos the better modeled for some clients in some cases pesos the better model for for other clients. So.

You could see shifts between those categories, depending on what happens in in each of those markets as we go through the year. Yeah. I think that's exactly right. The Ginny you brought up there or anything we don't know what's going to happen to insurance rate. The depends on how many claims are filed and whether you have a lot of claims there's a lot of costs that are going to be covered you know like the 10.

Thing and so forth. So it's kind of early to tell but it will be that balance, but as efrain said I think than that can shift toward asshole model, but I think the PEO model will still be pretty strong I think this is bringing awareness of insurance plans and employees. There was going to be you know this fight for employees again a in.

Finding them for your businesses and I think insurance, you know could be an even stronger.

Selling point now as an employer who's trying to hire people. So that may bring even more club to the PEO, it's going to be going to be an interesting balance as we come out of this we're well positioned obviously with both and so in PEO to do that.

Yes, you got on both Yeah I Trust you got to be right on that thank you all for the candor, it's very comforting. Thanks. Thank you. Thank you.

Your next question comes from the line of Jason Kupferberg with Bank of America.

Hey, guys I'm glad you're a healthy I was just curious.

Revenue sensitivity to changes in certain key metrics like ATP you talked in the past, though 1% change in client retention has about six times the revenue impact as a 1% change in bookings just as an example, I mean should we assume kind of similar types of relationship.

Told for paychex or any specifics you you'd feel comfortable sharing just so we can think about the way forward.

Yeah, Hey, I would to say broadly you know a drop of a change in our loss rate of about 1%.

Yields about $25 million of of impact 25, well.

2.5, I'm, sorry 2.5 million.

Techs are pays per control or really the most important so it sounds like it sounds like there they're somewhat similar to what we are so but we'll see as we work through through our plan.

Okay, and then I just wanted to go back a friend to me.

Answer to earlier question. It sounded like you guys very soon or assuming a similar amount to deteriorate expert client, adding client retention as as you saw the past couple of recession.

Is the reason you're not assuming anything deeper than that just because of the change in mix since those last recession like like the HR and the CEO Max or are there other Catherine.

Yes, Jason that that's the that's the impact I mentioned earlier.

Oh, just providing some color.

If you look at our our business, 50% of our revenues are with clients that are better 20, and under 50% our clients 20 in over that's a different mix than we had during the last recession of course, there scenarios where.

Where it could get a lot worse than that depending on on.

And how long the the downturn less but at this point, that's our best guess on modeling, yes, again on the timing and.

And obviously not knowing that timing, but you could have this you know larger drop in checks it it in the first half of the year fiscal year, and then come back and that's kind of how we're thinking that over that period of time I think over the fiscal year, it right balance out, but past recessions and Ben so it might be a little stronger in the early part but I.

I think if the bounced back everybody has a different view, but if it's you know a bounce back in the second half it could be a pretty strong bounce back and checks.

Right right, so maybe a deeper trough, but I hear you are saying and then just last one real quick.

Our relaxing or refundings certain fees to help customers stay afloat or defer price increases or anything along those lines.

Well, we're you know we're looking at it again, we havent had that much of a push from that's what they're concerned about and we want to we're focusing really on what they need at this point to survive in and get through all of the stimulus packages and that in this downturn and so forth in the shutdown.

So is that hasn't been that critical from a client perspective, you know obviously, we're looking at the price increase and you know I think it's going to be prudent to to push that out a little bit and we'll continue to watch that as we go month to month.

Okay. Thanks again, okay.

Bridges.

Your final question comes on line of David Grossman with Stifel.

Great. Thank you.

I know, it's pretty late here just one really quick question just certainly very good David.

Yes.

[laughter], that's one way to look at it I guess that.

Just quickly on your commentary about your your mix and PE pm versus subscription I think he's had one third ppm and two thirds subscription you just help us understand how you how do you get at that.

How to get how you get it that.

Yeah, how you get those percentages like because it seems like a large percentage or mix is really driven by the number of employees. So.

Just.

Wanted to better understand that right. Yeah, I think I think it has to do with the composition of our client base David So.

ER and and when you are smaller you tend to have more on the subscription side of the of the equation. For example, we don't separately disclosed shapiro, but surepayroll purely subscription. So so ppm has no no impact on it and then.

It's an estimate on on other clients how much of what they're they're getting is based on a on a ppm revenue.

And that's what it ends up being when your smaller your proportion tends to be more subscription larger tends to be more on the ppm side.

So what what just as an example of what are the services, you're including in that subscription bucket.

I, just primarily it's primarily payroll.

So, but that's a big chunk of the management solutions revenue.

Got it.

Alright Thats it for me Thanks again.

Okay all right. Thank you.

At this point.

Alright. Thank you at this point, we will close the call.

We do wish the best.

To all of your yourselves and your families and a good health all of you. Thank you for participating in this call. It will be archived for approximately 30 days and again, we appreciate your participation and interest in paychecks and stay safe everyone. Thank you.

This concludes today's conference you may now disconnect.

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