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Insperity Inc (NYSE:NSP)
Q1 2020 Earnings Call
May 4, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon. My name is Laurie, and I will be your conference operator today. I would like to welcome everyone to the Insperity First Quarter 2020 Earnings Conference Call. [Operator Instructions]

At this time, I would like to introduce today's speakers. Joining us are Paul Sarvadi, Chairman of the Board and Chief Executive Officer; and Douglas Sharp, Senior Vice President of Finance, Chief Financial Officer and Treasurer.

At this time, I'd like to turn the call over to Douglas Sharp. Mr. Sharp, please go ahead.

Douglas S. Sharp -- Senior Vice President Finance, Chief Financial Officer, Treasurer

Thank you. We appreciate you joining us this evening. Let me begin by outlining our plan for this evening's call. First, Paul will provide an update on our business and operations including how the extraordinary efforts of our corporate employees in our business model has benefited our clients and our worksite employees and their families during the COVID-19 pandemic. He will also discuss the impact of both COVID-19 restrictions and the resulting stimulus packages on our business to date and 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, provide 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 a question-and-answer session.

Now, before we begin, I would like to remind you that Mr. Sarvadi 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.

Now at this time, I'd like to turn the call over to Paul.

Paul J. Sarvadi -- Management Director Chairman, Chief Executive Officer

Thank you, Doug, and 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 who have lost loved ones and are suffering the most from this sudden and unexpected health crisis. Our thoughts and prayers are also with those feeling the severe economic effects that have ensued as this crisis continues to run its course. Insperity is able to see firsthand 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 COVID-19 outbreak. I'll 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 costs. First quarter sales were 122% of budget, representing a 25% increase over the same period last year. These results were driven by a 13% increase in trained Business Performance Advisors and a 10% improvement in sales efficiency. Both core and mid-market sales were substantially over budget. Mid-market sales were particularly impressive throughout the period, core sales exceeded forecast for the full quarter despite a fall-off in March to 83% of budget as the pandemic escalated. As a reminder worksite employees 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 continue 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 COVID-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 and 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 in paid worksite employees than 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 COVID-19 pandemic wsa escalating and morphing into a significant economic disruption. We probably transitioned to work from home environment in order to protect our own employees and their families. Our experience over the years with hurricanes and other disasters proved beneficial as we were totally prepared to work remotely on a broad basis with 93% of our employees working at home and only 7% of employees with the need to be at the workplace to accomplish their responsibilities.

Our workload 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 set and it became apparent our small- and mid-sized 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, lowering pay rates and 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 is also been vital to inform our forecasting of 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 have been watching daily changes in layoffs -- temporary layoffs or furloughs and rehires directly associated with the economic disruption. We've also observed trends and more routine voluntary and involuntary employee terminations and hiring within the client base.

On Monday, March 16, we decided to form the Insperity business continuity support team to address escalated complex client request. 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 involved in 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 3. 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 29th, 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 to 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 their outlook for the near-term and the balance of the year. 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 rate hires. According to our survey, approximately 80% of our clients applied for a loan under the Paycheck Protection Program. We are very pleased for our clients when survey results indicated 59% of these applicants receive 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 and businesses was very successful.

Our daily tracking data also aligns with our survey results. Since March 9, through the end of April, 25% of our clients have reported layoffs totaling approximately 22,000 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 15,000 of these layoffs were reported before the end of March with the remaining 7,000 in April as layoffs moderated. Over the same period, we've already seen approximately 2,200 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 layoff and rehires get paid on the next pay date. So there is 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 termitating 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 in paid worksite employees for the one -- that I mentioned earlier.

We expect similar -- a similar reduction in May based upon a comparable analysis as the balance of layoffs and 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 the sell from home. It's been amazing to watch this valiant effort to keep sales moving through virtual discovery and closing costs. While sales activity has 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 defaults. 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 and 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 in 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 restart of 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 healthcare 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 deferring elective procedures and using telemedicine. When they -- we then expect potentially higher than normal cost once employees are back at work catch up on elective procedures and have possible worsen 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 COVID-19 causing a second shut down in the low case. So the high end of our range is appropriately conservative, assuming a slow but steady improvement in the economy as States reopen and activity resumes over several months. We also assume the Paycheck Protection Program has a positive effect on rehiring our 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 rehired 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 did not return within that period as Business Leader 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 Q3, 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 are 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 persist through the second quarter and are only marginally offset by rehires related to the Paycheck Protection Program. This case assumes clients most affected by the pandemic, stretch out their PPP funds and don't rehire 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 our original budget over the last three quarters in 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 employees in our original budget due to the outperformance in the first quarter, combined with the pattern of direct cost we expect due to COVID-19. We expect direct cost could be materially lower in the short term, but it is unclear how these costs will rebound or what unexpected cost may arise thereafter. Therefore, these scenarios represent more of a shift of cost from the second into the thid and four quarters, and only a relatively small reduction in total cost over the balance of the year.

Our operating plan for the balance of the year, anticipate a continued elevated level of services needed by our clients, managing through a safe return 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've whether this unprecedented storm well, primarily due to our quality client base, made up of the best small- to medium-size businesses in America and an amazing team of employees at Insperity.

Now before I pass the call on to Doug, I would 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 emigrated to the United States during the early 1900s 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 arrived with little or no money, spoke very little English, but had the dream 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 1909. He was very entrepreneurial, and told me about many business he started from a grocery store with the hair salon up above to a great farm in Pennsylvania. But my favorite story about him, I only learned at is funeral. When an elderly woman, I did not know grab 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 grocery store, extending credit to 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 ask our clients major concerns. It was no surprise to see the top concern in this survey were sustaining their business through this economic slowdown, but right behind that was employee well-being, 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 here at Insperity to support these incredible people that play 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-sized business owners and it is my money's on them and we will be here helping every step of the way.

At this time, I'd like to pass the call on to Doug.

Douglas S. Sharp -- Senior Vice President Finance, Chief Financial Officer, Treasurer

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 238,000. This quarters growth reflected a higher-than-expected level of 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 of 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 results from both our benefits and workers compensation programs were favorable.

As for large healthcare claim activity, we continue to see a decline in the number of claims over $100,000 since the initial spike in the second quarter of 2019, although it's 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 of pharmacy costs into the quarter. As you may be aware, as a result of the COVID-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 of the -- the impact of insurance companies relaxing their normal requirements around this area, ultimately impacting the cost of all planed sponsors. iI the health plan like ours, this essentially accelerated what would have been Q2 and Q3 pharmacy costs into Q1. Other than this factor, we do not believe our Q1 benefit costs were impacted by COVID-19 due to its occurrence late in the quarter. So all things combine 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 of pharmacy costs. Now on the pricing side, our benefit allocations were also favorable. So in conclusion, we exited the quarter ahead of plan in our benefits area.

Our first quarter adjusted operating expenses increased 5.3% over Q1 of 2019 below budgeted levels. It's important to note that we continue to invest in our growth as we increased our trained BPA count by 13% over Q1 of 2019. And in 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 at expected 27%, which was significantly higher than the 12% rate in Q1 of 2019 due to a lower tax benefit associated with the vesting of long-term incentive stock awards in Q1 of this year.

Now let's discuss our cash flow and liquidity. During the quarter, we repurchased a total of 878,000 shares at a cost of $61 million. These repurchases included those shares bought in the open market and under our corporate 10b5-1 plan in mid-February and early March and shares repurchased in connection with tax withholdings upon the vesting of employee restricted shares. We also paid $16 million in cash dividends under our regular dividend program and invested $16 million in capital expenditures. While we continue to have a strong balance sheet and liquidity position in the latter part of the quarter, we drew down $100 million from our credit facility to provide further flexibility in this uncertain business environment. So we ended the quarter with $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 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 the 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 the net provided in the past. And based on the details that Paul just shared on our expected worksite employee levels, we are now forecasting a 1% to 5% decrease in the average number of paid worksite employees for the Q2 stand-alone quarter and a 1% to 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 $3.19 to $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 the factors surrounding the COVID-19 pandemic. The 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 or cancellation of elective procedures and a lower level of office and emergency room visits. However, over the latter half of 2020, as stay-at-home orders are relaxed, costs may be elevated to include the restoration of some of the deferred elective care, costs associated with participants with chronic conditions that miss treatments, COVID-related testing and treatment costs and a potential increase in COBRA participation.

As for our workers' compensation area, we also expect to see a similar quarterly pattern, although, at a much smaller level that will develop over a longer period of time. As for our operating costs, our guidance reflects the following actions based upon our current expectations of the impact of COVID-19 pandemic and related economic recovery. We intend to continue to grow the number of Business Performance Advisors as we position ourselves to both muscle 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. And at this point with the exception of Business Performance Advisors, 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% to 39% increase over Q2 of 2019 and adjusted EPS in a range of $1 to $1.29, an increase of 23% to 55%.

Now at this time, I'd like to open up the call for questions.

Questions and Answers:

Operator

[Operator Instructions] We have a question from Mark Marcon from Baird. Your line is now open.

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

Good afternoon. Hope all -- everybody that you know personally is well and safe. I'm just wondering if you could talk a little bit more about some of the sensitivities around the guidance. And specifically, if you could talk a little bit about what the -- like what happens to your SG&A in terms of sales commissions and how that flexes with sales performance? And how we should think about that just in terms of those levels of sensitivity? And then the second part of my question has to do with what sort of regional differences are you currently seeing? Obviously, the virus has hit in a different manner across the country. So wondering if you can just tell us what you're seeing from a regional perspective? And how you expect some of the areas that haven't been hit yet but are expected to be hit? How that would end up flowing through or how are you thinking about that?

Paul J. Sarvadi -- Management Director Chairman, Chief Executive Officer

Thank you, Mark. Hope you and yours are doing well also. So, yes, certainly, I'm 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. 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 come from those locations compared to how they -- the percentage of our total base that's in those locations. Just as an example, 21% of the West accounts for 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 why you saw the most -- and I think that fits and it makes sense.

Douglas S. Sharp -- Senior Vice President Finance, Chief Financial Officer, Treasurer

Yes, Mark. As far as your question on the sales commissions, you're probably referring to the first quarter in your initial thoughts there is up about 22% over the prior year, well the reason for that was this successful extension of our fall sales campaign into the first quarter. So you've got some year-over-year comparisons related to that particular metric. But obviously, going with the course of the year based upon some of the discussion that 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, particularly in the second and third quarters then picking up in the fourth quarter as we are expecting somewhat of a rebound in the fourth quarter in our mid-case.

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

Great. And then you've been through a number of cycles. I mean the client retention, how would you expect that to kind of flow through? I mean, this hit so fast that probably companies are hanging on, but if this lasts for a while how would you expect that to impact?

Paul J. Sarvadi -- Management Director Chairman, Chief Executive Officer

Yes, we had a lot of discussion about that Mark, because we have not seen an elevation in our client terminations at all through this. And in fact, it's so interesting to me how this type of both health issue and economic issue really require so much HR thoughtfulness and execution that the way we've been able to help clients and the way they've expressed their appreciation really has demonstrated what the value what Insperity does for businesses and how it really helps them succeed in good and bad times. And I really think, we will see increased demand for the services long haul. We have great opportunity to tell a really powerful story about how this has 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 scenario. So we actually put 15% even in the high case to where are -- 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% in the high case and 80% in the low case, which for the last -- balance of the year, it's the low time of year in terminations anyway. So that's a lot more terminations added in. We haven't seen it yet, but you are correct to assume that if the recovery is slow, delayed, we expect you to see some and that's why we built that in.

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

Right. Can you just talk about like any request for client pricing concessions, are you seeing that? How are you handling it?

Paul J. Sarvadi -- Management Director Chairman, Chief Executive Officer

Yes, we have, we have certainly seen some of that come through, which is normal in a time like this part of our effort with our business continuity support team was to 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. I would, we are always stand ready to help customers. But we've also were able to help them make adjustments within what we're doing for them that would help lower cost, all the way through that for us, and them. And I think, those who are 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 some there may be some short-term benefit, but it's unclear how much of that really will end up going back out in other types of cost in the not too distant future.

Operator

And your next question is from Jeff Martin from Roth Capital Partners. Your line is now open.

Jeff Martin -- Roth Capital Partners, LLC -- Analyst

Thank you. Good evening, guys. And I want to commend you and your team for all you've done for this client base. Those are pretty impressive numbers coming out of the survey. I wanted to tell you -- get a sense, do you have a feel for what percentage of your client base is considered an essential service versus non-essential?

Paul J. Sarvadi -- Management Director Chairman, Chief Executive Officer

It's interesting because 88% of our customers said they had been, affected 36% said they were severely affected or considerably, I forget what the word was significantly affected. I think it was the right word. But as far as essential it was hard to tell. My best guess is around 40%.

Jeff Martin -- Roth Capital Partners, LLC -- Analyst

Okay. And then with respect to your fall sales campaign. I would imagine there's still quite a bit of uncertainty that would allow you to kind of shape what changes might come, but can you give us kind of a first glance at what things you might be doing differently with the fall sales campaign this year?

Paul J. Sarvadi -- Management Director Chairman, Chief Executive Officer

Well, we have learned a lot during this period and we're sales is particularly difficult because it's so normal to to go out and build a trust relationship with the customer and that takes face to face interaction. and, but in spite of that, we have really seen our sales team adapt and do way better than I thought. And based on how we've sold in the past, but what I like about what I'm seeing now is even though we are seeing a significant reduction in the amount of sales activity, the ones that are going through the process, have a much higher there seem to be much more engaged, and I think our closing rates are going to be high be higher, that's good for the short term, but the other thing that's been interesting is how our sales team are setting things up with our prospect base for as soon as you can get out income 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 is 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 there is any direct implication with respect to your plant costs or you're your benefits cost going forward. Yeah, the kind of changes we're talking about. There were two somewhere at renewal. Some were not at renewal but customers wanting to shift to a lower cost plan and that's shows up in our business model, in 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 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, Sso we saw some of that where it was appropriate. I don't consider that to be much of a factor, it was more isolated.

Jeff Martin -- Roth Capital Partners, LLC -- Analyst

Got it. Thank you. Well-wishes to all of you and your families.Thank you. Appreciate that.

Operator

[Operator Instructions]Your next question is from Tobey Sommer. Your line is now open.

Tobey Sommer -- SunTrust Robinson Humphrey -- Analyst

Thank you. Can you give us a glimpse as to how the the arc of the benefits cost centers has kind of played out in the year following a big economic events to prior recession, just so we start to formulate a cadence and expectation for the trajectories next year?

Paul J. Sarvadi -- Management Director Chairman, Chief Executive Officer

Yes, it's a little early for us to be. I mean we've thought about that, but we really haven't put a lot of thoughts to paper. 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 do have some longer term things like payroll -- on the payroll tax side, you have unemployment claims, and that is a pretty slow and retrospective process that will flow through the whole system. So you'll have some increasing rates there. On the benefit side, I think there'll be this short-term interruption that we'll be able to look back and see pretty clearly. But I don't expect really any long-term change that would come out of this out of this situation, isn't any reason to believe there'll be some long-term change to our overall picture as we go forward.

Tobey Sommer -- SunTrust Robinson Humphrey -- Analyst

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?

Paul J. Sarvadi -- Management Director Chairman, Chief Executive Officer

Yes, that's a really good question, Tobey. When we ran 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 been an immediate 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 if the next one look like this, we probably would have -- we are -- we have planned to and we are going to keep adding Business Performance Advisors because I think we've proven out that that helps us muscle through the downtime and brings us out much faster as things get better.

And we also have talked about in the past about reacting earlier on managing operating expenses differently. Now this time we have seen a lot of operating expenses that are coming out, just because you can't travel some of our events are canceled and all that kind of stuff. But the need for our services is so great that we are 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 looks as the months roll on here. And hopefully, we'll be forecasting good response here and growing out of that and then continuing to grow our staff accordingly beyond that point.

Tobey Sommer -- SunTrust Robinson Humphrey -- Analyst

Thanks. Just two little things, one, do you have a BPA growth figure that you're targeting for the end of the year, apologize if you mentioned it and then are there any legislative changes either at the state level of federal level that you're looking at as a possible curve ball with respect to employer obligations and benefits, like in the last downturn?

Paul J. Sarvadi -- Management Director Chairman, Chief Executive Officer

So the first question is the where we were at 13% growth in BPAs 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, have that number be high single digits by the time we get to end of the year, maybe 8% or 9% or maybe even 10%, but some around 9%. We think that puts us in a really strong position going into next year. On your other question. While this whole dilemma this whole calamity has been full of regulatory changes that have been coming in fast and furious. And we have been responding 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, there is still a lot on the table in Washington DC. We're keeping our eye on things like the COBRA possibility. And we have seen a dialog about that and there have been some sometimes recently when a localized disaster, for example, in Puerto Rico, they put in a rule relating to extending COBRA that was different than what happened years ago and I think we wouldn't be surprised if that but we're something like, it came down the pike, but there's 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 laundry list of potential. things but as best we can, I think we're ready for what may come out of left field.

Operator

Your next question is from Mark Marcon from Baird. Your line is now open.

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

Thanks for taking my follow-up questions. Doug, I think you mentioned it but I didn't quite capture it all. The benefits cost -- what were the health benefits cost up during this quarter?

Douglas S. Sharp -- Senior Vice President Finance, Chief Financial Officer, Treasurer

In the first quarter?

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

Yes.

Douglas S. Sharp -- Senior Vice President Finance, Chief Financial Officer, Treasurer

Yes. Well, we mentioned the fact that benefit costs came in lower than our budget coming in. And I talked about the different components of that. Large claim activity continuing to decline was one piece of that the second piece is just your overall your smaller underlying claims continue to come in near our targeted levels. I think one thing that I pointed out thing was in total, our benefit cost came in lower in spite of the fact that we had this acceleration in the pharmacy cost into the Q1 from the Q2 probably normally be Q2, Q3. To the extent of about 4 million bucks. So all those things combined. We came in b-etter than-expected. And obviously, the other big piece of it is the pricing side of it. Yes and so having pricing come in a little bit above target on the pricing allocations. Puts us in a -- put us in a good position to exit the quarter ahead of our plan, in that particular area.

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

We're the benefits costs themselves up in that 2.5% to 3.5% range, or where did they follow within that?

Douglas S. Sharp -- Senior Vice President Finance, Chief Financial Officer, Treasurer

Yes, I don't have that specific number, Mark. But the trend was favorable relative to what we expected going into the quarter.

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

Okay. Aand then three other short questions. One is just given your exposure to Texas. What are you seeing this in terms of the impact of energy prices, that's one question. Second question is, capital allocation. How should we think about it going forward. And then the last thing that we get a lot of questions on is just the difference in terms of the COBRA impact this recession relative to the last one. I think that you've got some provisions that enables you to to change your COBRA exposure, if we end up having some change in legislation, but just wanted to hear that.

Paul J. Sarvadi -- Management Director Chairman, Chief Executive Officer

Sure, happy to do that. First of all on the Texas, we are about 90% or just under 20% I guess, of our total business is Texas-based and all in Texas. It was less than 15% of the layoffs, even though the 20% percent 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 situations., we were only about 3%. So, 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 of situations. So on the question on COBRA., we expect there will be more COBRAs anytime we have more layoffs workovers, but since a lot of the layoffs are still on coverage right now because they 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 haven't seen any sign of that yet, but in that scenario, we handle the problem was that a lot of people come on COBRA then it got extended again extended and we were unable to pass the cost on to clients. Because it's cost was in determinable and nobody knew with that cost was going to be. So, we know have a methodology that came out what we learned then. And we have to right in our contract to pass those costs on to clients, if they would have been subject to those without us. So we have a -- we're comfortable with that that plan in place if we needed to come about. Hopefully that won't, but it's totally different situation today than what we were in back down. Another thing different Mark is that under ACA you've got another alternative for state exchanges today, that you didn't have back then as another alternative for healthcare. So that's another factor.

Operator

Your next question is from Tobey Sommer from SunTrust. Please ask your question.

Tobey Sommer -- SunTrust Robinson Humphrey -- Analyst

Thanks. Just a your survey past your efforts in helping your customers in a very favorable fashion, have you learned anything from in terms of competitive intelligence that would suggest your company's performance is out just in some competitors and this may give you an edge looking at in the future?

Paul J. Sarvadi -- Management Director Chairman, Chief Executive Officer

We believe so. It's a little hard to pin down, but -- and the stories we have and what we're going to be able to do to really show what happened. I think it's going to be strong for us, our marketing teams all excited because they're collecting all that stuff and almost put one of our client letters into my script, because it was -- you would have thought I wrote it but it was -- this is really been a time to shine for our corporate employees have done such an amazing job in the need was so great. In a normal time, the better we do for our clients, the less they notice it, because our stuff has done behind the scenes and they give to keep going runing their businesses and don't have to pay attention to the stuff, in this case, the stuff we do was front and center right in front of our client owners. And the way we did it, the timeliness of it, the care and concern our people showed while we were doing it, it was really -- it really powerful. And I believe it's -- I've always said our 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.

Tobey Sommer -- SunTrust Robinson Humphrey -- Analyst

Thank you.

Operator

And there are no further questions at this time, I'd like to turn the call over to Mr. Sarvadi for closing remarks.

Paul J. Sarvadi -- Management Director Chairman, Chief Executive Officer

Once again, we want to thank everybody for participating today and we look forward to updating you after another quarter. Thank you very much.

Operator

[Operating Closing Remarks]

Duration: 58 minutes

Call participants:

Douglas S. Sharp -- Senior Vice President Finance, Chief Financial Officer, Treasurer

Paul J. Sarvadi -- Management Director Chairman, Chief Executive Officer

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

Jeff Martin -- Roth Capital Partners, LLC -- Analyst

Tobey Sommer -- SunTrust Robinson Humphrey -- Analyst

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