Q1 2020 Earnings Call
Ladies and gentlemen, today's conference is scheduled to begin momentarily until that time Airlines will again be placed Oh no. Thank you.
Ladies and gentlemen, todays conference is scheduled to begin momentarily until that time. Your line. So we're looking to be placed on hold thank you.
[music].
Good afternoon, My name is Laurie and I will be a conference operator today.
I would like to welcome everyone to the Insperity first quarter 2020 earnings conference call.
Thanks, I've been placed on mute to prevent any background noise.
After the speaker's remarks, there will be a question answer session.
If you would like to ask a question. During this time needs Press Star then but number one on your telephone keypad. If he would like to withdraw your question press the pound key.
At this time I would like to introduce today's speakers.
Joining us on hold for body chairmen of the board and Chief Executive Officer.
And Tom Musharraf, Senior Vice President Finance, Chief Financial Officer, and Treasurer at this time I'd like to turn the call over to talk with a sharp Mr. Shore. Please go ahead.
Thank you. We appreciate you joining us this evening.
We began by outlining our plan for this evenings call.
First Paul will provide an update on our business in operations.
Moving how the extraordinary efforts of our corporate employees and our business model that's benefited our clients in our worksite employees and their families. During the cobot 19 pandemic.
He will also discuss the impact of both cobot 19 restrictions and the resulting stimulus packages on our business today.
The potential impact going forward.
This discussion will include the range of possible outcomes on the key metrics and drivers of our business.
I will then briefly discuss our first quarter financial results provided an update on our balance sheet and liquidity.
And provide our guidance for Q2 in our updated guidance for the full year 2020.
We will then end the call with the question and answer session.
Now before we begin I would like to remind you that Mr shore body or I may make forward looking statements during today's call, which are subject to risks uncertainties and assumptions.
In addition, some of our discussion may include non-GAAP financial measures.
For more detailed discussion of the risks and uncertainties that could cause actual results to differ materially from any forward looking statements.
And reconciliation of non-GAAP financial measures. Please see the company's public filings, including the form 8-K filed today, which are available on our website.
No at this time I'd like to turn the call over to park.
Thank you Doug Thank you all for joining us.
Before I discuss our results and outlook for Insperity.
I'd like to say our Hearts go out to all those have lost loved ones.
And our suffering the most from this sudden an unexpected health crisis.
Our thoughts and prayers are also with those feelings the severe economic effects.
They haven't suit as this crisis continues to run its course.
[noise] Insperity is able to see first hand, the impact of this health and economic calamity on the small and medium sized businesses we serve.
Our mission to help them succeed so communities Prosper has never been more critical to these clients their employees and families.
I'm extremely proud and thankful to all employees of Insperity for the way they have risen to the challenge by providing exemplary care and support during this time.
So I'll begin today's call with some brief comments about our solid first quarter results highlighting two important outcomes, which preceded the cobot 19 outbreak.
Follow with a discussion of our quick and effective response to the health and economic crisis since mid March including detailed metrics, reflecting the effects on our client base.
I'll finish my comments today, describing the economic climate and considerations over the balance of the year that form the basis for our updated guidance we are providing today.
Our first quarter results represent a significant rebound from the fourth quarter, including strong sales and a welcome improvement in our benefit plan driven by improved pricing allocations and lower than budgeted cost.
First quarter sales were 122% of budget, representing a 25% increase over the same period last year. These results were driven by 13% increase in trained business performance advisors.
And a 10% improvement in sales efficiency.
Both core and Midmarket sales were substantially over budget Midmarket sales were particularly impressive throughout the period core sales exceeded forecast for the full quarter. Despite a fall off in March 283% of budget is the pandemic escalated.
As a reminder, worksite employee sold generally become paid worksite employees and flow into revenues.
Over the following few months.
The other important development evident in the first quarter results is the improvement in our benefit plan as the elevated number of large claims we experienced last year continue to decline toward historical levels and our benefits allocations continued to outpace our expectations.
This combination means we came out of Q1 with our health plan in good shape as Doug will describe further in a few minutes.
I'd like to provide some detail regarding our initial response in March as the Cobot 19 health crisis emerged and quickly became an economic calamity.
Our decisive response proved to be critically important for our clients their employees and families.
We believe our rapid in pivotal reaction to the pandemic combined with the quality of our client base has caused insperity to experience a relatively less severe impact in layoffs and ultimately and paid Worksite employees, then would have otherwise occurred.
The best empirical evidence is our paid Worksite employee decline in April which was only 3.3% lower than March.
Allow me to provide some context for this with a bit of a chronology.
In mid March as cancellation of public events were announced it became evident that this cobot 19 pandemic was asking escalating and morphing into a significant economic disruption.
We probably transition to a work from home environment in order to protect our own employees and their families.
Our experience over the years with Hurricanes. Another disasters proved beneficial as we were totally prepared to work remotely on a broad basis with 93% up our employees working at home and only 7% of employees with the need to be at the workplace to accomplish their responsibilities.
Our work load with clients was increasing dramatically at this point the initial efforts revolved around policy changes, helping clients transition to working from home employee communication and regulatory changes. The response to this health and economic emergency required prompt thoughtful and well executed.
HR solutions, which is right up our alley.
As the gravity of this situation sit in it became apparent are small and midsize business clients would be facing a firestorm and would need immediately help evaluating alternatives to make operational changes.
These options, including reducing or Furloughing staff lowing pay rates in adjusting benefit plans to name a few.
We immediately began tracking these operational changes daily through new reporting, which has been invaluable and providing a clear picture of how clients reacted to this crisis.
This reporting has also been vital to inform our forecasting a future scenarios.
Our daily reporting for March 9th forward provides real time information on how our clients have responded to the pandemic in adjusting staffing levels.
Since that time, we've been watching daily changes in layoffs temporary layoffs or furloughs and rehires directly associated with the economic disruption.
We've also observe trends in more routine voluntary and involuntary employee terminations and hiring within the client base.
On Monday March 16th we decided to form the Insperity business continuity support team.
To address escalated complex client requests within days. This team comprised of professionals from human resources finance regulatory and other disciplines was fully functional helping clients quickly and effectively make operational changes and obtain critical resources to navigate through.
The current health and economic crisis.
Due to our ongoing government affairs efforts Insperity was on the ground involved in Washington, as the Senate and the administration were addressing the needs of small businesses devising and drafting the cares Act.
Our government affairs team was closely monitoring the cares act and provided valuable real time feedback to us as the Paycheck protection program was developed.
Our involvement at this level allowed us to be ahead of the curve, which enabled us to meet our goal of helping our clients be in a position to apply for paycheck protection loans. When the program was launched on April the third.
One key element in this effort was providing the reports required with the loan application to substantiate and validate the eligible loan amount.
The cares act was signed into law by the President on Friday March 27, and on Sunday. The 29 I was reviewing the first version of these complicated reports two days later. These reports became available on Insperity Premier and by Friday, The first day, the banks began accepting applications.
Over 67% of Insperity clients had run the necessary reports to submit their applications.
Last week, we conducted a client survey to obtain important feedback on business owner sentiment.
And on the outlook for the near term and the balance of the here.
In this survey also released today.
We also included questions regarding applications and funding of these loans because of the direct effect on temporary layoffs and expected rehires.
According to our survey approximately 80% of our clients applied for alone under the Paycheck Protection program. We are very pleased.
For our clients when survey results indicated 59% of these applicant received their PPP funding in the first round before funds ran out on April 16.
This compares very favorably against the National Federation of independent business Survey, which reported 20% of respondents had received their funding. It appears our goal to help our clients obtain these funds to sustain their employees in businesses.
Was very successful.
Our daily tracking data also aligns with our survey results since March nine.
Through the end of April 25% of our clients have reported layoffs totaling approximately 22000 employees or about 9% of the total worksite employee base.
35% of these layoffs were processed as permanent layoffs.
In 65% as furloughs or temporary layoffs expecting to be rehired in the coming months.
Approximately 15000 of these layoffs were reported before the end of March with the remaining 7000 in April as lay offs moderated.
Over the same period, we've already seen approximately 2200 employees or 10% of the total rehired, which we believe is somewhat due to our early success with clients in the Paycheck protection program.
Keep in mind. These terminated employees typically get a final paycheck after the reported lay off.
And Rehires get paid on the next pay date, so there's a lag in the paid worksite employee impact from both types of these reported changes.
You also have to factor in paid Worksite employees, pluses and minuses from terminating clients, new clients voluntary and involuntary terminations and regular hiring in the base.
With all these factors in and finalized at the end of April. The result was the 3.3% reduction and paid Worksite employees for the one for other that I mentioned earlier.
We expect similar similar reduction in May based upon a comparable analysis as the balance of Les Austin Furloughs from April come out of the paid Worksite employee count.
During this period, we also converted our entire sales team of business performance advisors to sell from home. It's been amazing to watch this valiant effort to keep sales moving through virtual discovery in closing costs.
While sales activity has disk decreased significantly those that are going through the process seem to be more qualified and appear to have a greater sense of urgency.
Another aspect of our business that we watch very closely was client terminations in bad debts from financial default.
We're very pleased to say at this time, we've not seen a material increase in these key metrics. Although it stands to reason that these issues could increase if the recovery is weak or delayed.
Now at this point I'd like to address the economic climate in considerations, we've worked through driving the range of our expectations implied within the guidance, we're providing today.
The impact of this ongoing pandemic on Insperity will be driven largely by the staffing levels maintained by our small business client base since we earn our fees on a per worksite employee per month basis.
Over the balance of the year, we expect staffing levels and our client base to be primarily driven in the near term by the effectiveness of the paycheck protection program combined with how successful and widespread the restarted the economy turns out to be.
The second significant effect, we expect will come from a change in the pattern of our direct cost due to health care and to a lesser extent workers compensation trends.
We expect an unusual pattern within our direct cost, which we believe will begin with lower cost near term. While many employees are working from home differing elective procedures and using tele medicine.
With a win win we then expect potentially higher than normal cost once employs our back at work catch up on elective procedures and have possible worse in chronic conditions from a period of lack of care or treatment.
Our outlook determining the range of our guidance is based upon a range of economic conditions that does not include a V shaped recovery in our high case, nor does it include a second wave of cobot 19, causing a second shutdown in the low case.
So the high end of our rages appropriately conservative assuming a slow but steady improvement in the economy as states reopened in activity resumes over several months.
We also assumed the paycheck protection program has a positive effect on rehiring of furloughed employees. However, at a level, reflecting the uncertainty our clients are facing.
In this case, we assume about 65% of the furloughed employees would be we hired over the next couple of months in time for clients to include them in their calculation for loan forgiveness of their PPP loan.
Even though this is the high case, we are assuming 35% of furloughed employees do not return within that period as business leaders stretch out their funds, allowing time for the economic activity to increase.
New client sales considered within the high end of our guidance assumes sales at 80% of our original budget over the balance of the year.
This includes lower sales in Q2, and three and improving to more normalized levels in the fourth quarter.
Client terminations are assumed to be slightly elevated over the balance of this year. Even in this high case scenario. We have included an approximately 15% increase in worksite employee attrition from client terminations over our original budget.
Now in our low case scenario, we're assuming an economic environment, where government mandated shutdowns continue longer reopening proves more difficult and it takes longer for demand to resume.
In this environment, we assume layoffs persists through the second quarter in our only marginally offset by Rehires related to the Paycheck protection program.
This case assumes clients most affected by the pandemic stretch out there PPP funds and don't we hire most of the furloughed staff and eventually convert a high number of these employees into permanent layoffs.
At the low end of our range. We also assume this slower recovery leads to delayed decisions on new sales and efficiency is lower.
Throughout the balance of the year in this case.
Sales results are assumed to be approximately 60% of original budget over the last three quarters of the year.
The low end of our range also anticipates, a 20% higher level of Worksite employee attrition due to client terminations above our original budget.
Full year retention is expected to be 80% in this scenario.
Both scenarios include a higher gross profit per worksite employee than our original budget.
Due to the outperformance in the first quarter combined with a pattern of direct cost we expect due to covert 19.
We expect direct cost could be materially lower in the short term.
But is it on it is unclear how these costs will rebound or what unexpected costs may arise thereafter.
Therefore, these scenarios represent more based shift of cost.
The second into the third and fourth quarters, and only a relatively small reduction in total costs over the balance of the year.
Our operating plan for the balance of the year anticipates, a continued elevated level of service as needed by our clients managing through a safe returned to work plan or responding to whatever this situation deals up next.
At this point our plan is to maintain our current corporate staff level to handle the increased workload.
We also intend to continue to add to our business performance advisor team over the balance of the year, however, allowing the growth rate to moderate to high single digits.
So we believe we weathered this unprecedented storm well.
Primarily due to our quality client base made up of the best small to medium sized businesses in America, and an amazing team of employees at Insperity.
Now before I pass the call onto Doug I'd like to tell a quick story that explains why I'm. So passionate about small business owners and the role they play in a recovery like the one we need right now.
All four of my grandparents immigrated to the United States during the early 19 hundreds from Romania.
Their families pulled their funds together to send each of them to the land of opportunity, which was not uncommon at that time.
They arrive with little or no money spoke very little English.
But had the dream of for better life and the work ethic to go with it.
One of my grandfather's was only 16 years old when he arrived in 19 Onein.
He was very entrepreneurial and told me about many businesses started from a grocery store with a hair salon up above to a great farm in Pennsylvania.
But my favorite story about him I only learned that is funeral when an elderly woman I did not know Grad my arm to tell me about my grandfather's heroism during the depression.
It appears my grandfather played a major role in his community keeping people alive with his growth grocery store extending credit so hungry families and working with his suppliers to stretch every dollar.
She said mine was one of those families.
When I watch our clients today I'm reminded that the entrepreneurial spirit is alive and well our client survey routinely asked our clients major concerns. It was no surprise to see the top concern in this survey will sustain their business through this economic slowdown but.
Behind that was employee will be next was returning to work safely followed by employee engagement sustaining relationships and culture.
Strikingly quite a bit further down the list was meeting terms for loan forgiveness.
We are hearing insperity to support these incredible people that place such an important role in our communities and our nation as a whole if our recovery from this pandemic and its after effects is dependent on these small and medium size business owners and it is.
My money is on them and we will be here, helping every step of the way at this time I'd like to pass the call onto Doug.
Thanks, Paul now, let's discuss some of the details of our first quarter results.
We reported Q1 adjusted EPS of $1.70 at the high end of our forecasted range.
Adjusted EBITDA totaled $101 million for the quarter.
Average paid worksite employees increased by 5.5% over Q1 of 2019 to just over 238000.
This quarter's growth reflected a higher than expected level worksite employees paid from new sales.
Coming off of the successful extension of our fall sales campaign.
However, our Q1 growth was dampened by lower than expected net gains in our client base.
Gross profit increased by 3.2% over the first quarter 2019.
And as you may recall from our earlier discussions the year over year comparison was impacted by our favorable benefit cost trend in Q1 of the prior year.
However, we effectively managed overall gross profit for Q1 of this year above budgeted levels as a result from both our benefits and workers compensation programs were favorable.
As for large healthcare claim activity, we continue to see a decline in a number of claims over $100000.
The initial spike in the second quarter 2019.
Although still slightly elevated from a historical perspective.
Also our Q1 claim trend associated with normal smaller healthcare claims came in near targeted levels.
Now an outlier in Q1 was a shift in the timing of approximately $4 million, a pharmacy costs into the quarter.
As you may be aware as a result of the cobot 19 stay at home orders many benefit plan participants across the country accelerated their pharmacy refills with many extending the refill period from 30 to 90 days.
The impact.
The impact of insurance companies relaxing their normal requirements around this area ultimately impact in the cost of all plan sponsors.
In a health plan like ours. This essentially accelerated what would've been Q2 in Q3 pharmacy costs into Q1.
Other than this factor, we do not believe our Q1 benefit costs were impacted by cobot 19 due to its occurrence late in the quarter.
So all things combined the good news is that benefit costs for Q1 of 2020 came in favorable when compared to our budget in spite of the additional $4 million a pharmacy costs.
Now on the pricing side our benefit.
Allocations were also favorable.
So in conclusion, we exited the quarter ahead of plan and our benefits area.
Our first quarter adjusted operating expenses increased 5.3% over Q1 2019 below budget levels.
It's important to note that we continued to invest in our growth as we increased our trained BPA account by 13% over Q1 of 2019.
And then a few minutes I'll provide more detail behind our current thoughts on our operating plan in light of the current business environment.
Finally, our Q1 effective tax rate came in and expected 27%.
Which was significantly higher than a 12% rate in Q1 of 2019 due to a lower tax benefit.
Associated with divesting of long term incentive stock awards in Q1 of this year.
Now, let's discuss our cash flow and liquidity.
During the quarter repurchased a total of 878000 shares at a cost of $61 million.
These repurchases included those shares bought in the open market.
And under our corporate Tenbfive one plan in mid February in early March and shares repurchased in connection with tax withholdings upon divesting of employee restricted shares.
We also paid $60 million in cash dividends under our regular dividend program.
And invested $60 million and capital expenditures.
While we continued to have a strong balance sheet and liquidity position in the latter part of the quarter Redrew down $100 million from our credit facility to provide further flexibility in this uncertain business environment.
So we ended the quarter with a $167 million of adjusted cash.
And $130 million available under our $500 million credit facility.
Now as far as our guidance for the remainder of 2000 2020, let's begin by putting it into context.
As you know events continue to unfold almost daily there remains a high level of uncertainty on a short term and long term impact of the pandemic on the economy in the small business community.
As a result, this guidance will reflect a wider range of possibilities that provided in the past.
And based on the details that Paul just shared on our expected Worksite employee levels. We're now forecasting a 1% to 5% decrease in the average number of paid worksite employees for the Q2 Standalone quarter.
And a 1% the 6% decrease for the full year 2020, as compared to the 2019 periods.
For the full year 2020, we are forecasting adjusted EBITDA in a range of $215 million to $250 million, which is flat to down 14% from 2019.
As for adjusted EPS, we are forecasting a range of $3, a 19 cents, so $3.86 and this assumes an effective tax rate of 28% in 2020.
As compared to a rate of 20% in 2019.
Now the quarterly earnings pattern is expected to be different this year due to factors surrounding the cobot 19 pandemic.
Second quarter is expected to be positively impacted because we believe the stay at home order will result in lower healthcare utilization.
Including the delay our cancellation of elective procedures, and a lower level of office and emergency room visits.
However over the latter half of 2020, a stay at home orders are relax costs may be elevated to include the restoration of some of the deferred elective care.
Cost associated with participants with chronic conditions that miss treatments.
Covert related testing and treatment costs.
And the potential increase in Cobra participation.
As for our workers compensation area. We also expect to see a similar quarterly quarterly pattern, although at a much smaller level.
That will develop over longer period of time.
As for our operating cost our guidance reflects the following actions based upon our current expectations of the impact of the cobot 19 pandemic and related economic recovery.
We intend to continue to grow the number of business performance advisors as we position ourselves to both muscled through this challenging time and position ourselves for the long term.
We have currently decided to postpone the opening of two sales offices into 2021, which will now result in the opening of five sales offices in 2020.
Marketing costs have been reduced for the reduction and cancellation of promotional events, including the Insperity Invitational.
In addition to the cancellation of travel due to the stay at home orders, we have replaced a significant portion of our in person training with online meetings.
At this point with the exception of business performance in by advisers, we intend to hold our corporate headcount flat.
As increased service demands offset any reductions that would have been commensurate with the lower worksite employee level.
Now as for our Q2 earnings guidance, we are forecasting adjusted EBITDA range of 65 million to $79 million.
A 15%, 39% increase over Q2 of 2019.
And adjusted EPS in a range of one dollar two to $1.29 an increase of 23% to 55%.
Now at this time I'd like to open up the call for questions.
And ladies and gentlemen, Im sorry, my direct to ask a question you will need to press star one on your telephone to withdraw your question press the pound.
Again in August asking a question please press Star Wars.
We have a question from Mark Marcon from Baird Your line.
Good afternoon hopeful everybody that you know personally as well.
So.
Just wondering if you could talk a little bit more about some of the sensitivities around the guidance and specifically.
You could talk a little bit about.
What the like what's what happens to your SGN a in terms of sales commissions and how thats flexes with sales performance and how we should think about that just in terms of those levels of sensitivity on them.
Then the second part of my question has to do with what sort of regional differences are you currently seeing.
Obviously the viruses.
In a different manner across the country. So wondering if you can just.
I was what you're seeing from a regional perspective, and how you expect.
Some of the areas that haven't been yet.
To be how that would end up.
Yes.
Flowing through or how youre thinking about that.
Thank you Mark Hope you hope you and Eurs are doing well also.
So yes certainly.
Im going to kind of start with the last part of your question I'll, Let Doug go back to the first part of the question, but from a regional perspective, it's what you would expect.
We've seen a disproportionate effect.
In terms of how many of the layoffs.
In the northeast and the west.
Have.
Have have come from those locations compared to the how they.
The percentage of our total base thats in those locations.
As soon as as an example.
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21% of the West accounts were 21% of our Worksite employee base and had 28% of the impact on layoffs.
Similarly in the northeast about 26%.
Of the base.
There was actually about a 30% of the impact.
So that's that's where you saw the most and.
I think that fits and it makes sense.
Yes, Mark as far as your question on the sales commissions you probably.
Referring to the first quarter in your initial thoughts there you know is up about 22% over the prior year will the reason for that was this a successful extension of our fall sales campaign.
Into the first quarter, so you've got some year over year comparisons related to that particular.
Particularly metric, but obviously go over the course of the year based upon some of the discussion at Paul had relative to what we are forecasting on sales as a percentage of our initial budget you would expect it to be lower.
Year over year up, particularly the second and third quarters than picking up at picking up in the fourth quarter is we are expecting somewhat of a rebound in fourth quarter and our mid case.
Right and then you've been through a number of cycles I mean the.
The client retention, how would you expect that to kind of slow through I mean.
So fast that probably.
These are hanging on but.
If this last for a while how would you expect that.
Yes, we had a lot of discussion about that mark because we have not saying.
An elevation and our client terminations.
At all through this and in fact.
You know is so interesting to me how this type of.
Both health issue and economic issue.
Really require so much H R.
Thoughtfulness and execution.
Matt.
The the.
Way, we've been able to help clients and the the way they've expressed their appreciation.
It really has demonstrated the value what insperity does for businesses and how it really helps them succeed in good and bad times and I really think we'll see increased demand for the services long haul we have great opportunity to tell it really powerful story about how.
This is as happened but.
In our forecasting we just could not.
We just felt like we had to build in some level of elevation of client terminations into the going forward scenarios. So we actually put 15% EBIT in the high case.
To where our just for those of you have a reference to the full year.
Retention numbers.
Instead of 83% in our original budget.
We have now.
81 person in the high case and 80% in the low case.
Which which for the last ballast the year, it's the low time of year in terminations anyway. So thats a lot more terminations added and we haven't seen it yet but you are correct to assume that if if you know the recovery is slow delayed.
You know, we expect you'd see some and Thats why we built at in.
Right, but can you just talk about like.
Request for client pricing concessions are you seeing that how are you are you handling it.
Yeah, we have we have certainly seen some of that come through which is normal at a time like this.
Part of our effort with our business continuity support team was to.
No really dig in and understand what clients needs were so we've made some accommodation where we felt like it was important to do so.
You know.
We're always stand ready to help customers.
But we've also were able to help them make adjustments.
Within.
So what we're doing for them that would help lower cost all the way through.
That will for us ending.
And I think those those who have generally more significant to helping them deal with what they were trying to deal with right away.
On a going forward basis, we'll see how things play out but right now we're expecting.
You know some there may be some short term benefit.
But it's unclear how much of that Lilly.
We'll end up going back out in other types of cost.
Not too distant future.
And your next question is from Chats Mike.
Roth Capital Partners. Your line is now open.
Thank you good evening, guys and Jeff men view and you and your team for all you've done for for this client base.
Pretty impressive numbers coming out of the survey.
Good morning.
Get a sense do you ever feel for what percentage of your client base is considered essential service versus non essential.
You know, it's interesting because 88% of our customer said they had been affected 36% said they were severely affected or considerably I forget what the word was significantly affected I think was right word.
But as far as essential it was hard to tell.
My Best guess is around 40%.
Okay, and then with respect to your fall sales campaign I would imagine there's still quite a bit of uncertainty EBIT would allow you to kind of shape, what what changes might come but could you give us kind of a first glance at what what things you might be doing differently with.
While sales campaign this year.
Well, we have learned a lot during this period.
And where sales is particularly difficult because its.
So normal to go out and build a trusted relationship with the customer and that takes face to face interaction and but in spite of that we have really saying.
Our sales team adapt and do.
Way better than I thought [laughter].
Based on.
How we've sold in the past, but what I like about what I'm, saying now is even though.
While we are seeing at.
A significant reduction in the amount of sales activity.
The ones that are going through the process have a much higher.
[music].
You know there seem to be much more engaged and I. Thank our closing rates are going to the higher be higher that's good for the short term, but the other thing thats been interesting is how our sales team are setting things up with our prospect base for as soon as you can get out in come see these customers again.
So in some ways I feel like we're starting the fall campaign with this major prospecting effort among our.
Sales team to start driving that activity as we get through the summer and are able to come out of sale.
Okay and then my final question you alluded to.
Some of the clients shifting their healthcare plans or making adjustments to them. Just curious if you could go into any detail on that and if theres any.
Direct communication with respect to your your plan costs, where you're.
And benefits costs going from yet.
The kind of changes we're talking about there were to somewhere at renewal some are not at renewal, but customers wanting to shift to a lower cost plan and that's that's.
Shows up in our business model through migration.
Into lower cost programs are usually happens over a longer period. So if you had an increase in that we would see some lower cost show up eventually but the corresponding reality is a you see an immediate effect in the lower.
Allocations that are included with clients and that's what lowers their fee structure right off the bat so.
We saw some of that where it was appropriate.
I don't consider that to be much of a factor. It was it was more isolated.
Got it thank you well wishes to all of you and your families.
Thank you appreciate that.
Do you have further questions at this time.
Taiwan on your telephone keypad.
Your next question is from Tobey Sommer. Your line is now open.
Thank you.
Give us a glimpse as to how the the arc of the benefits call centers.
As a kind of played out in the year following a big economic events at Pryor recession, just so we start to formulate a cadence in us and expectation for the trajectory is next year.
Yeah, you know with a little early for us to be I mean, we've we've.
Thought about that but we really havent put a lot of thoughts to paper you know as I look at the longer term first of all nothing fundamentally has changed in our business and will be.
Cranking along as soon as things are back to normal out there. So I would expect us to see our growth.
Engine Reengage and in a significant way, but you did have some longer term things like.
It will pay on the payroll tax side, you have unemployment claims and that is a pretty slow and retrospectively process that will flow through the whole system. So you'll have some increasing rates there.
You know on the on the benefits side.
I think they'll be this short term interruption that we'll be able to look back and see pretty clearly.
But I don't expect will in a long term change.
That would come out of this.
So out of this situation isn't any reason to believe there be.
Some long term.
Change to our overall picture.
As we go forward.
How has the the playbook that you're executing now.
Deferred from maybe what you would have envisioned.
Non pandemic driven recession.
Six months or 18 months ago.
Yeah, that's a really good question Toby.
When we ran our our models for.
What we would do the next recession based on how the last one happened.
The last one.
The financial crisis, driven recession was a financial calamity followed by an extended period really.
15 months of layoffs exceeding new hires.
And.
Kind of a long and painful.
This one has.
Ben and immediate.
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Impact.
And really shutting things down dramatically and then hopefully we'll see how things look as things are going along but I think the difference would be.
We had anticipated next one looked like this we probably would have.
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We will all while we are.
We plan to and we are going to keep adding business performance advisors, because I think we've proven out that.
Helps us muscle through the downtime and break this out much faster as things get better and we also have talked about in the past about reacting earlier on.
On the managing operating expenses differently now this time, we have seen a lot of box operating expenses that are coming out just because you can't travel.
Some of our events have cancelled and all that kind of stuff, but the need for our services is so great.
That we're hanging tight on making sure we have.
The right service levels, we're going to meet our commitments to our customers and this is a time for us to shine and we're definitely going to shine throughout this period, we're going to be there for our client base.
So I think those two things kind of offset a bit and we'll see how that.
It looks as though as the months roll on here and hopefully we'll be forecasting a good response here and growing out of that and then.
Continuing to grow our staff accordingly beyond that point.
Thanks, just through little things one.
Do you have a BP a growth figure that you are targeting for the end of the year, Paul just be already mentioned.
And then.
Are there any legislative changes either at the state local and federal level that you're looking at as a possible curve ball with respect to employer obligations and benefits like in the last downturn.
Yes. So the first question is the.
You know, we're kind of we were at 13% growth in BP Ace for.
The first quarter, we don't need to be at that level to be in a strong position as we go through this and we're looking at having that number be high single digits by the time to get to enter the year, maybe eight or 9% or maybe even 10, but somewhere around 9%.
We think that puts us in a really strong position going into into next year on your other question well this whole.
Dilemma. This whole calamity has been full of regulatory changes that have been coming fast and furious.
And we have been responding in it in an incredible way to changes that have to happen in the system.
And all types of things as we look at where we are today.
Theres still a lot on the table in Washington DC.
We're keeping our eye on on things like the Cobra possibility and.
We have seen dialogue about that.
And.
There've been some some.
Sometimes recently, when and where that localized disaster for example in Puerto Rico, They put in a.
A rule relating to extending Cobra that was different than what happened years ago.
I think we wouldn't be surprised at that.
Or something like it came down the pike, but theres other kinds of things, but I think we've accounted for some of that in our whole going forward plan.
In both the staffing side to be able to deal with things and also.
Unexpected costs that could flow in.
I know, Doug kind of highlighted a laundry list of potential things, but.
As best we can I think we're ready for ROE for.
What may come I left field.
Your next question is from Mark Marcon from Baird. Your line is now open.
Thanks for taking my follow up questions.
Doug I think you mentioned, it but I didnt quite capture it all.
The benefits costs.
The health benefits costs up during this quarter.
In the first quarter.
Yep.
Well, we mentioned the fact that.
The benefit costs came in lower than than our budget coming in and I've talked about a different components of that and.
Large claim activity continuing decline.
But that's one piece of that.
The second piece is just your overall client you smaller underline claims continue to come in near our targeted levels I.
I think one thing that I pointed out was in total our benefit cost came in lower in spite of the fact that we had this acceleration in the pharmacy costs into the Q1 from the.
Q2 pro normally be Q2, Q3 to the extent of about 4 million Bucks. So.
All those things combined.
We came in better than expected and obviously the other big piece of it is the pricing side of it.
And so having pricing come in a little bit above target on the pricing allocations.
No puts us in a put us in a good position to exit the quarter head of our plan in that particular area.
What were the benefits costs themselves up in that two in the house to 3.5% range or where do they fall within that.
Yes, I don't have that specific number mark.
But.
Trend was favorable relative to what we expected going into the quarter.
Mhm three other short questions.
One is just.
Given your exposure to Texas, what are you seeing just in terms of the impact of energy prices. That's one question second question in capital allocation, how how should we think about it going forward.
And then the last thing we get a lot of questions on its just the difference in terms of the Cobra impact this recession relative to last one I think that you've got some provisions that enable you to to change.
Your Cobra exposure, if we end up having some change in legislation.
Just wanted to hear that.
Sure happy to do that first of all in the Texas. You know we are about 19% or just under 20, I guess of our total business is Texas based.
And.
All in Texas was less than 15% of the layoffs, even though the 20% of client base. So that shows you. Some strength here in this market part of the reason, we're not affected that much by the.
Oil price situation as we were only about 3% that right, Doug about 3% of our clients relate to that.
To the oil business and we really haven't seen much happen for that group most of those are like in consulting and other types.
Situations.
So on the question on Cobra, we expect there'll be more cobras anytime we have more layoffs you have more cobras, but since a lot of the layoffs are still on coverage right now because a temporary layoffs into that creates a whole different scenario.
And then as far as the last time, we went through.
That was a very different situation where.
Cobra was subsidized by the government, we havent seen any sign of that yet but.
In that scenario, we handle.
The problem was that we a lot of people come on Cobra then it got extended again extended.
And we were unable to pass the cost on the clients because it's a cost was indeterminable.
And nobody knew what thats cost was going to be.
So.
We now have a methodology that came a walk out of what we learned in and we have the right in our contract to pass those cost on to clients.
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If they were if they would have been subject to those.
Without us so we have a we're comfortable with that that plan in place if it if it needed to come about hopefully that will but it's totally different situation today than what we were back then.
Another thing different Mark is that Andre Spa.
Got another alternative for.
State exchanges today that you Didnt have back then as another alternative for health care. So.
That's another factor.
Your next question is from Tobey Sommer Suntrust.
Ask your question.
Thanks.
Your survey.
Past your efforts in helping your customers even in a very favorable fashion.
Have you learned anything from in terms of competitive intelligence that would suggest your company's performance is out distinct some competitors in this may give you an edge looking out in the future.
We believe so its a little hard to pin down.
But and the stories, we have in that what we're going to be able to do to to really dem show what happened I think is gonna be strong foreseen, our marketing teams all excited because they're collect and all that stuff.
Almost put one of our client letters into my script because it was.
He would have thought I wrote it.
But.
You know it was this has really been a time to shine for for our our corporate employees done such an amazing job in the need was so great.
Normal in a normal time.
The better we do for our clients to let's say notice. It has you know our stuff is done behind the scenes and they get to keep going run their businesses and don't have to pay attention. This stuff.
In this case stuff, we do was front and center right in front of our client owners and the way we did it timeliness of it the care and concern our people showed while we were doing it.
It was really it really powerful and.
You know I believe its I've always said are differentiating factors are the breadth of our services the depth of the service and the level of care and that was front and center throughout this to date and continuing everyday around here right now.
Thank you.
There are no further questions at this time I'd like to turn the call over to Mr. Sarvadi for closing remarks.
Once again, we want to thank everybody for participating today, and we look forward to updating you. It after another quarter. Thank you very much.
Ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.
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