Good day, everyone, and welcome to today's Paychex Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, you will have an opportunity to ask questions during the question-and-answer session. [Operator Instructions] Please note, this call is being recorded, and that I will be standing by should you need any assistance. It is now my pleasure to turn today's program over to John Gibson.

Thanks, Chelsea. Thank you, everyone, for joining us for our discussion of the Paychex second quarter fiscal 2024 earnings release. Joining me today is Bob Schrader, our Chief Financial Officer. This morning, before the market opened, we released our financial results for the second quarter. You can access our earnings release on our Investor Relations website, and our Form 10-Q will be filed with the SEC within the next day. This teleconference is being broadcast over the Internet and will be archived and available on our website for approximately 90 days. I'm going to start today with a brief update on the business highlights for the second quarter, and then I'll turn it over to Bob for a financial update, and then, of course, we'll take your questions. We had solid results in the second quarter and for the first half of the fiscal year with particularly strong performance in the PEO, mid-market HCM, and retirement. Revenue for the first half was up 6% year-over-year and our adjusted diluted earnings per share was up 10%, double digits. The demand for our HR technology and advisory solutions remained strong as business leaders continue to face a very challenging small and mid-sized business environment. The tight labor market and rising healthcare and benefits costs are forcing many to rethink their HR and benefit strategies, and they can turn to Paychex as a trusted business partner in these times. As we sit here today, the selling season for our mid-market HCM and our PEO teams are in their final phases, and our insurance open enrollment is underway. All are going well and in-line with our expectations. Our pipelines for these solutions are strong and up from this time last year. In the small business market, selling season is just ramping up. We still have a critical third quarter to go both in terms of selling and delivering for our clients during year-end, but we are fully staffed and well positioned at this critical time of year. Our revenue retention remains above pre-pandemic levels as we continue to focus our resources on acquiring and retaining high value clients. Client retention has improved over last year and retention in our HR outsourcing solutions remains at record levels. I'd like to highlight the success specifically in our PEO business, which we've talked about on prior calls. It has continued to gain momentum with strong results during the first half of the fiscal year. We have seen a back -- a shift back towards the PEO offering, both outside and inside our client base. This shift in mix has a long-term positive impact on customer lifetime value in our business model, particularly as clients attach insurance benefits. We previously discussed actions we took to help the PEO recover after last year's challenges including: one, redesigning our health offerings; second, leveraging AI to revamp our sales and marketing models and to identify and attract high-value prospects; three, putting more focus on upgrading existing HCM and ASO clients to the PEO model; and finally, improved sales execution. As mentioned earlier, our insurance enrollment is underway and the tax rates are up after a challenging year last year. I want to specifically thank and congratulate our PEO team for all the hard work and success the past year so far. The macro environment and labor environment continue to be challenging for small and mid-sized businesses. Our Small Business Employment Watch continues to show moderation in both job growth and wage inflation, which is indicative of a stable macro environment and that the actions taken by the Fed are having their desired impact. While we haven't seen any normal signs of a recession in our data, we started to see some softening in seasonal hiring in the quarter, particularly in our large client segments, including our HR outsourcing businesses, many of which typically add seasonal employees at this time of the year. SMBs are still challenged with access to capital, the high cost of capital, inflation and macro uncertainty. While we certainly don't see any signs of economic downturn, we are ready to take the required actions if such trends emerge. As one of the best operators in the business, we have demonstrated that we are able to respond and successfully navigate changes in the -- any economic environment. I know that AI and related technology advancements remain a hot topic in our industry. As I've noted in past calls, AI at Paychex is nothing new. We have over hundreds of and growing models -- AI models that are actively working in our business today, designed to provide valuable insights fueled by our vast data assets. The exciting transformation that is now occurring around generative AI opens up the opportunity for us to bring AI solutions to our employees, so they can be more effective and efficient and to our clients. We are actively investing in GenAI in exploring how it can be used to improve efficiency and the customer experience and provide actual insights to us and our clients to help them succeed. Currently, recently we partnered with Visier, a global leader in people analytics and workforce solutions, to offer new benchmarking reports in AI-powered HR analytics solutions to our customers. This enhances our current reporting and analytics available in Paychex Flex and will perfectly complement our industry-leading HR advisory services. The partnership provides core HR and compensation analytics and compensation in salary benchmarking, an AI-driven model with benchmarks against 750 million market data points. This offering, in addition to our AI-driven Retention Insights Solution that we launched over a year ago, is just the beginning of how we will leverage AI to help businesses succeed. Partnerships with Visier, like our recruiting and onboarding partnership with Indeed, is another example of how Paychex is bringing together the power of partnerships, our large data assets and integration to improve the customer experience and deliver real value and business outcomes for our clients. We are also pleased that for the seventh consecutive year, we have been positioned in the Leader quadrant as part of the NelsonHall's 2023 Vendor Evaluation report for payroll service providers. This provides further evidence of our leadership position based upon our robust technology and customer support. We're also very proud to be recognized in the Sapient Insights Group Voice of the Customer Top Five Vendor Survey for 2023 and 2024, receiving top five ratings in six categories spanning payroll, HR, time and attendance, learning and performance. And really what I'm most proud of is that the Sapient report is actually based on actual voices of our customers and customers from across the competitors, which demonstrates our leadership position across the industry. As we head into selling season in calendar year-end, I'm confident in our global Paychex team and that they will constantly deliver and consistently deliver for our clients. We remain driven to be the trusted partner for small and mid-sized businesses that deliver industry leading HCM technology and advisory solutions that help our clients succeed. I'll now turn it over to Bob to give you a brief update on our financial results in the quarter. Bob?

Thanks, John, and good morning, everyone. I'd like to remind everyone that today's commentary will contain forward-looking statements that refer to future events and involve some level of risks. I'll refer you to our customary disclosures in our press release as well as our Investor Relations presentation that should be on our website. I will start by providing a summary of our second quarter financial results. Total revenue for the quarter increased 6% to $1.3 billion. Management Solutions revenue increased 4% to $931 million that was primarily driven by growth in a number of our clients served across our suite of HCM solutions, price realization, an increased product penetration and growth in ancillary services. PEO and Insurance Solutions revenue increased 8% to $296 million that was driven primarily by higher revenue per client, including higher insurance revenues and average worksite employees. As John mentioned, our PEO saw continued momentum in sales activity and medical plan purchase volumes during the second quarter. Interest on funds held for clients increased 44% to $31 million that was primarily due to higher average interest rates. Total expenses increased 5% to $752 million. Expense growth was largely attributable to higher compensation costs, PEO direct insurance costs and continued investments in sales, marketing and technology. Operating income increased 7% to $506 million for the quarter, with an operating margin of 40.2%, that's a 50 basis point expansion over the prior-year period. And both diluted earnings per share and adjusted diluted earnings per share increased 9% to $1.08 per share. I will now quickly touch on the results for the first six months of the year. Total revenue grew 6% to $2.5 billion. Management Solutions revenue in the first half of the year increased 5% to $1.9 billion. PEO and Insurance Solutions was up 7% to $593 million. And interest on funds held for clients increased 62% to $64 million. Our total expenses for the first half of the year were up 5% to $1.5 billion. And our operating margins for this first six months were 41%, and that was a 60 basis point improvement over the prior year. Diluted earnings per share and adjusted diluted earnings per share both increased 10% to $2.24 and $2.23, respectively. I'll take you through a quick overview of the company's financial position. As you all know, we maintain a strong financial position with high quality cash flows and earnings. Our balance for cash, restricted cash and total corporate investments was more than $1.4 billion and our total borrowings were approximately $812 million as of the end of November. Cash flow for operations for the six -- first six months of the year were $1 billion, and that's up 40% compared to the same period last year. This was primarily driven by higher net income and fluctuations in working capital. Do want to call out, similar to last quarter, there were some timing differences there based on where the quarter ended, ended on a collection day, that's having higher operating cash flows, that's why you see the 40% level. That will moderate as we move through the year. We returned a total of $811 million to shareholders during the first six months that includes $642 million of dividends and $169 million of share repurchases. And our 12-month rolling return on equity remains strong at 47%. I'll now turn to our guidance for the fiscal year ended May 31, 2024. We've raised guidance on certain measures based on performance this past quarter. For other measures, I will also provide some color on where we now expect to be within the ranges and certainly we can provide some more detail when we get into the Q&A. The outlook assumes the current macro and competitive environment, which had some uncertainty, particularly as it relates to future interest rate changes in the economy. So, our current outlook is as follows: Management Solutions is unchanged with growth in the range of 5% to 6%, although we do anticipate it will now be at the low end of the range. PEO and Insurance Solutions is now expected to grow in the range of 7% to 9%, that's up from our previous guidance, which was 6% to 9% expectation. Interest on funds held for clients is not changed. We still expect that to be in the range of $140 million to $150 million. Total revenue is expected to grow in the range of 6% to 7%, but we now expect it to be more in the middle of the range. I know last quarter, we thought that might be a bit stronger. We now expect the total revenue guidance to be more aligned with our original guidance of 6% to 7%. Operating income margin is expected to be in the range of 41% to 42%. Although we now anticipate that will probably be toward the upper end of that range. Other income net is expected to be income in the range of $35 million to $40 million, and that's raised from our previous guidance of $30 million to $35 million. No change to the effective income tax rate. We still expect that to be between 24% and 25%. And then, adjusted diluted earnings per share is now expected to grow in the range of 10% to 11%. So, we raised that last quarter to 9% to 11% just based on what we're seeing. We expect that to be a bit stronger and we're raising that guidance to 10% to 11%. Now, I'm going to turn to the third quarter to give you a little color on the third quarter. We are currently anticipating total revenue growth for the third quarter to be in the range of 5% to 6%, and operating margins to be in the range of 44% to 45%. As it stands right now, we would expect to pretty much be in the middle of those two ranges. And I'd like to remind everyone that we've talked about this in the past that ERTC becomes a headwind in the back half of the year. If I go back and look over the last two-and-a-half years that we've been selling ERTC, Q3 of last year was the largest quarter that we had with ERTC. And so that's a bit more of a headwind in Q3 than Q4, but will be a headwind in the back half of the year. Of course, all of this is based on our current assumptions, which are subject to change. We'll come back and update you again on the third quarter call. As I mentioned, our investor slides are posted on the website, so I'll refer you there for additional information. And with that, I will turn it back over to John.

Okay. Thank you, Bob. We will now open it up -- the call for questions. Chelsea?

[Operator Instructions] And our first question will come from Kevin McVeigh with UBS.

Thanks you so much, and congratulations as you close out the year, John, Bob, and I want to thank Efrain, because I think this is the last quarter Efrain will be on the call too. So, John or Bob, I think you talked about revenue retention at record levels and client retention improving. Can you maybe dimensionalize that a little bit? And -- because it feels like that's getting a little bit better, but the revenue maybe more the middle of the range. So, what's driving the improvement, and then, kind of maybe just the tweak on the revenue expectations overall?

Yeah. Kevin, I'll start off on retention and we can talk a little bit about the revenue expectations. Bob will add some color on that, then I'll jump in. Look, we continue to be very pleased with where we are on revenue retention. I think as we continually talked about, we've really been highly focused on having an impact in those critical areas where it counts and that's our high-value segments and that's what we've seen. Our HR outsourcing business, both ASO and PEO, record levels of retention. And we're very pleased with that. Client retention across the business was actually better in the first half of this fiscal year than it was last fiscal year. And that's really attributable to the team's great job of really managing the controllables. We're continuing to see on the lower end of the market, bankruptcies out of businesses and non-controllable losses being higher year-over-year. That's not surprising to me when you see the level of business starts that we've seen during the COVID period really at elevated levels. And we just know, out of those small companies that started out two years ago, most of those have trouble financially. And so, overall revenue retention continues to be at pre-pandemic levels, which I would remind you was at near historic highs for the company.

Yeah, Kevin, I'll just add on the guide. As you guys remember, at the end of Q1, I think where we ended the quarter, we had said we expected to be towards the high end of the range. I think there were a couple of reasons at that time why we felt confident in saying that. I would say, one, the positive trends that we were seeing in the PEO business. I think we wanted to wait another quarter before we raised the PEO guidance. But we definitely saw some positive trends really going back to the end of last year. That continued into Q1. I'd say that gave us a little bit of confidence. And as you guys know, we did do a small acquisition at the end of Q1, not a big contributor to growth. But I think those two things combined really gave us a bit of confidence that we thought we might be towards the upper end of the range, I'd say, as we got through Q2. The one thing that I'll highlight, I think John made reference to it, although we didn't have big growth assumptions in the plan related to employment growth, particularly in our larger employee sizes across both Management Solutions and the PEO. We typically get some seasonal hiring. We expected to see some growth there that didn't materialize to the level that we expected and certainly what we've seen in the past. And so that's given us a little bit of pause. And as I mentioned, that was across both categories, Management Solutions and PEO and Insurance. The PEO and Insurance, for the most part, they've been able to outrun that I would say, just given the strength of the business. John talked about the strong demand there. And some of the action plans that we've taken have really paid off there. But on the Management Solutions side, it's been a little bit of a headwind. And that is kind of what you see in the quarter as well as kind of the fine-tuning of the guidance ranges that I just provided.

Very helpful. Thank you so much.

Thank you. Our next question will come from Andrew Nicholas with William Blair.

Hi, good morning, thanks for taking my question. Really strong quarter on the PEO front. I wanted to ask about pricing dynamics there. And in health insurance, more specifically, we've heard from some competitors within the space that there are certain players that are being more aggressive on the health side during this year's renewal cycle. I'm just kind of wondering if you've seen that. How Paychex is navigating that environment stacking up in terms of rate increases relative to those peers and maybe just how you're faring broadly on the pricing side?

Yeah. So, thanks for the question, Andrew. I'll say this, the PEO, you can tell by the growth numbers, continued to improve as the year has gone on. And I would tell you that our pipeline is very strong in comparison to last year. So, whatever the competitors are doing, our value proposition is resonating. I can assure you that we're not using cheap health as that part of the value proposition. So, we go at it more as a comprehensive HR outsourcing value proposition. And if clients are looking for cheap health, they're probably -- we're probably not engaging in that conversation very long. We have the capability, as you know, to also leverage our insurance agency within our PEO as well. But very pleased with where we are on -- with the PEO right now, very strong performance. The pipeline is solid. We are in the final stages. As you can imagine. That in the mid-market, as you know, typically the selling season is much earlier, it's pretty much in the final innings. And both pipelines, I would say, for the PEO are very, very strong, both in terms of insurance attachment and in terms of sales.

Great. And if you don't mind, just a follow-up on ERTC. It sounds like that's trending towards your expectation that the comp in the fiscal third quarter is a bit tougher. I just wanted to confirm that. And then also, it looks like the IRS has taken a stance with respect to ERTC and potentially making PEOs liable for that. Just wondering if that presents any risk or how you are kind of thinking about that dynamic in that part of the business. Thank you.

I'll start on just kind of the financials. I'd say for the most part, ERTC, we finally got it right from a forecasting standpoint after three years. It's bit been a little challenging to forecast that. But for the most part, it has lined up with our expectations. Most of that was assumed to be in the front half of the year. That's behind us. There still is a little bit in the back half of the year. But for the most part, it has lined up. I've gotten this question a lot. I promise to provide an update on ERTC. So, I'm going to stick to my word, which was essentially we had said prior that we expected it to be a slight tailwind in the front half of the year. That's where the front half landed, it was a slight tailwind. We expected it to be a headwind in the back half of the year. It will be a headwind in the back half of the year. But I wanted to provide a little bit more color and you guys can kind of do the math and back into it. But on a full-year basis, with the tailwind in the front half and the headwind in the back half, we would expect it to be about a 1% headwind on a full-year basis to growth. And then, I don't know if, John, you want to address the PEO?

Yeah. I think relative to your question on the PEO and ERTC and the IRS stance on it, I would say, the IRS has been trying to look for bad actors in both parts of that equation and tighten rules. As you can imagine, we've been very diligent with our compliance teams in setting up our process. In fact, we were a little slower going out on ERTC products in the PEO because we wanted to work through all of those compliances and the way we approach the contracting with our clients for those services. So, I would tell you, Andrew, we feel very good about our position of where we are in terms of managing that risk.

Perfect. Thanks so much.

Thank you. Our next question will come from Ramsey El-Assal with Barclays. Ramsey El-Assal: Hi, thanks so much for taking my question. I had a follow-up on ERTC. It strikes me that there is a kind of a backlog building, right, as they've paused processing. So, is this the type of thing that we should think about, yes, it's a headwind in the back half of the year, but eventually as the IRS begins processing again that revenue might start to flow again in the future? Is it sort of more of a shift of revenue into the future? And I know it's complicated and they're rolling in some deadlines in '24 -- calendar '24. So, I'm just curious how we should -- how you're thinking about that ERTC revenue, not just for the following quarters, but maybe a little bit beyond that.

Yeah, not really, Ramsey, because what we're basically doing is we're amending the returns and filing the submissions for our clients which the IRS continues to accept. And so, we're recognizing the revenue as we do that and they're still accepting submission. So, there's really not a timing shift there. The change at the IRS made at the end of Q1 really hasn't impacted our ability to continue to go into our base and sell it, really hasn't impacted our forecast from a revenue standpoint. The big difference is that you have the deadline, you are approaching a deadline here at the end of this fiscal year. And we're three years into it and we've been through our base and really have identified all the clients that qualify for the opportunity. We've talked to them. And if we haven't talked to them, you can turn on the radio, everyone else has talked to them. So it just, hey, we're through eight years into it. I think most small businesses that were qualified for this benefit have taken advantage of the opportunity. And there may be some a little bit flows into next year, but nothing of significance. I'm hoping at some point in time, I can stop talking about ERTC, but there's really no timing shift there related to what the IRS did. Ramsey El-Assal: Great. That's very helpful. And a quick follow-up. SECURE Act 2.0, is that in any of your conversations in the selling season? Give us kind of your latest view about how that opportunity is framing up for Paychex?

Yeah. I think we highlighted and mentioned, in first half, 401(k), a very solid continued performance. So, we're very pleased with that offering. I think as you know, we probably go out to the market with the most comprehensive retirement offerings for small businesses, anywhere from simple IRAs to our SEP plan that we are one of the largest providers, if not the largest provider of PEP plans. So, very pleased with that. It is part of our selling season campaigns. I think as I said, one of the things we've learned a lot about the retirement business from some of the state mandates, I continue to try to pound this in is this is one of the things you still have a lot of education to do for the small business owner. Even though there are a lot of benefits to it, there are costs involved, there's compliance issues. So, this is not something that people just sign up for. So, there's a lot of education and pre-marketing that has to be done, but we're certainly leveraging the SECURE Act as a means to entice clients into a conversation, and are finding it successful once we do in getting them to understand the benefits of our offerings. Ramsey El-Assal: Got it. All right, thank you so much. Happy holidays, by the way.

Happy Holidays.

Same to you.

Thank you. Our next question will come from Bryan Bergin with TD Cowen.

Hi, guys. Good morning. Thank you. So, I wanted to start on Management Solutions. The late seasonal hiring that you've called out here that drives the weaker view, can you just dig in more on that client profile? And is this more so a pullback in demand for employees or issues in hiring? So, I'm curious what you might be seeing as it relates to clients' talent acquisition funnels, job openings, background checks, things like that.

Yeah, Bryan, it's a good -- that's a very good question, very insightful question, because we're trying to get under that as well. Here's what I will tell you. It is a very challenging environment for small and mid-sized businesses. I think they are still challenged and we're seeing it in our HR advising, they're still challenged with a very challenging labor market in terms of finding qualified workers, I'll always leave it at that. So, I think that's certainly part of the issue. I think there -- certainly with the high cost to capital, also with lower access to capital, I think they're being very cautious about investing for growth. So, they're trying to figure out how do I do more for less. So, there may be a little bit of a hesitancy. At the time -- at the same time, what we hear are people want to hire qualified people. And I think they had some experience with that. There was a small group that I was talking to where what they found was they were paying higher rates for less qualified people. And then, our HR matters that we were dealing with disciplinary issues, no shows, all of these types of issues, I think a lot of business owners are saying, "If I can't hire a qualified person, I may be better off to try to figure out how I can use to people I have to get there." So, I just -- I read that as the macro environment, because we're not seeing anything in our data that would say mass downsizings or reductions. That's not what we're seeing. I think in the higher-end enterprise side, you are seeing rightsizing going on in the business. When you get into the mid-market, really what we're seeing is a little more choppiness in hiring across various industries, and particularly it's mostly up-market and what I would say what we've typically seen seasonal hiring, that's where we did not see that at the rates that we historically have seen. Now what's interesting about that I'll point out is when you see -- when I see the impressive results of our PEO team, remember a lot of PEO clients are in Florida, which, as you can imagine, is a pretty seasonal state this time of year. So, the growth numbers you're seeing there were with a headwind of not having as much seasonal hiring. We saw a similar thing in our ASO business, which is in Managed Solutions, and to a lesser extent in our HCM mid-market business. So, I would say more choppiness there. In the small market, it's more of the same moderation that you see in our index, really not what I'd say downsizing or clients taking actions from an employment perspective. But more of either they can't find people to fill the spots they want or they are being hesitant on adding additional headcount at this time. So, I don't know if that gives you some additional color.

Hey, Bryan. I just want to add a little bit. You didn't specifically ask this, but just as your comment as it relates to the weaker Management Solutions. The other part of that -- beyond the softer hiring versus what we expected, the other part of part of that has to do with the strong performance in PEO as well. We talked to you guys about the PEO business. We've had a lot of questions on that and our ability to kind of reaccelerate growth there. And one of the strategies there was that we knew the ASO was really strong last year. We had put a plan together to really go back inside of the base, leverage our data, leverage our AI models, really look at the clients that we thought would be good PEO fits, and we've been executing on that plan over the last six months and that has actually been a little bit better than what we anticipated. So, now the pendulum has swung back a little bit the other way. We probably should just put these two businesses together in one category. It would make mine and John's job much easier. But we've had a lot of success with PEO. I think that's why you see the raise there. And that is impacting to some extent, to use your word, the little bit weaker performance in Management Solutions.

Okay. That's all helpful color. And I fully understand the ASO versus kind of PEO shift there. And maybe just a follow-up here on the PEO, can you just dig in a bit more around the expectations of at-risk health insurance attachment participation rates as you go towards the 1/1 go-live period? And specifically, did PEO bookings accelerate in the quarter relative to last quarter?

Well, let me take the last one first. Yes, I would tell you that we talked about the PEO in the fourth quarter of the last fiscal year. We told you about many of the changes we were making across that business. We began to see acceleration there. It accelerated further in the first quarter, and it continued in the second quarter. And it continued both outside the base as well as inside the base. So, as Bob pointed out, this ASO to PEO conversion. So, we've seen a very healthy pipeline. And I would say not only in the PEO, also in our mid-market. So, when you look at the two businesses, that are -- in summary, if you -- if we're sitting here today in the selling season in our mid-market HCM and PEO, they're well underway. They're really in the final stages. Our pipeline was very strong. And then, the enrollment of the insurance, it was very strong as well. I would tell you that we're getting back in line to where we've been historically. If you remember, we had a little degradation. And actually, what we saw inside the existing customer base was an increase, I would say, maybe single-digit increase in penetration. If you remember, last year, we had some employees in it sign up for plans. We did some things on changing our plan lineup. We did some things in the way we're doing education and open enrollment there. And the team has done a great job of improving our attach rate within the existing client base as well during this enrollment.

All right, thank you. Happy holidays.

Happy holidays.

Same to you.

Thank you. Our next question comes from Jason Kupferberg with Bank of America.

Good morning, guys. I wanted to ask a follow-up just on Management Solutions. I mean, I know we're talking about the lower end of the 5% to 6% for the year. So, you basically need to maintain the 5% growth rate that you saw in the first half, in the second half, despite the fact you're lapping ERTC, and it sounds like maybe the tone on overall health of SMBs is down-ticking a little bit. So, just wanted to get your perspective on the visibility of Paychex's ability to maintain that 5% growth in the second half given some of those moving parts out there? Thank you.

Yeah. I mean, I can start and then John can add on. I mean, obviously, there is the headwind there with ERTC, but there's other areas of the business. And although ASO, we had some of the hiring challenges that John referenced as well as better PEO performance, ASO still continues to be a strong contributor to growth, and we expect that to continue to be the case in the back half of the year. We talked about retirement. That has been a really strong driver of growth for us and just really increased product penetration. We expect that to continue into the back half of the year, Jason. That will offset, to some extent, some of the ERTC headwind. And again, we did do a small acquisition. It's not a huge contributor to growth on a full-year basis. But again, that will help mitigate some of that headwind as we move into the back half of the year. And when we kind of put all those things together, we would expect Management Solutions to be in a similar growth rate in the back half of the year than the first half -- or same as the first half.

Yeah. Jason, I just think the other thing I would add on commentary, relative to the SMB market, we're not even in really the key selling season. So, we're just in the selling season. That's just beginning to kick off, and we have a lot of execution during January, as you know, to go out in the marketplace. So that's just starting. So, the areas where we are nearly complete with the selling season, the mid-market, the PEO, the high end of ASO, those pipelines are full, much better than last year. And really in that small market, we're just beginning to enter the selling season with a lot of execution to go in the next 60 days.

Okay. That's good color. I know you talked about how you're thinking about overall revenue growth for Q3 versus Q4, but can you just parse out maybe your segment level growth expectations for Q3 versus Q4, just so we get our models tuned properly? Thank you, guys. Have a great holiday.

Thanks, Jason. Happy holidays.

Yeah, I'm just -- I'm taking a look at that, Jason. Obviously, the Management Solutions will probably be a bit lower in Q3 than Q4 because of the headwinds that we talked about being greater with ERTC in Q3. And then, the PEO and Insurance, those growth rates are going to be similar to where they were in Q2. And hopefully, when you look at the full-year guidance, the guide that I gave you on Q3, you can kind of do the math and should get you close.

Yeah. The other thing, Jason, I just think, again, on color of this -- Bob said that this geography shifting that we have going over last year counter rotated the ASO from the PEO offering when we're offering both, there's more movement that way. So, we're talking geography. Now, we're talking the geography move from Management Solutions to PEO and Insurance, because it's tilted kind of the other way. The other thing that I would remind everybody, which is a little different on the ASO to PEO conversions, there's not a selling season for that. We do those migrations all year long. And so, we continue to see good traction there, and we don't intend to slow that down. There's no reason to. It's higher revenue, it's a higher lifetime value in our overall model. So again, just relative to forecasting between the two areas as well doing -- Bob's got a model, he'll go through it with you. But the caveat I always have that I'll say that geography thing is if we can continue to move more of our clients from HCM and ASO to PEO in the back half of the year, we'll do that.

Okay. Thanks again.

Thank you. Our next question will come from Peter Christiansen with Citi.

Good morning. Thanks for the question. Nice execution here. John, Bob, I was just hoping if you could talk a little bit about balance of trade. Any trends that you're noticing, particularly in the Management Solutions area? And then -- and John, you also mentioned AI playing a part in the sales role. Just wondering if you could dig a little bit into that and give us a sense of where you're making headway on that front? Appreciate the commentary. Happy holidays.

Yeah, thank you very much. No, look, I think relative to across the platforms in the mid-market, very pleased with the growth we have there. We've talked about the PEO already, very happy with where we are there. As I look across the small business, it's a competitive market. I wouldn't say there's any major changes. And I would say I've talked about on the last call, our balance of trade metrics continue to look solid. I always say we're entering the selling season, and the next 60 days is about -- is all about that, and it's a competitive market. So we'll see. But as we sit here today, the known knowns, very happy with our progress, upmarket in the mid-market HCM, very pleased with where we are on PEO, upper end of the ASO market. And then, as I said, as we sit here today, I'm pleased with our balance of trade in the other areas. There was another question I missed something...

On the AI front, I think you mentioned it...

Yeah, thanks. I can't believe I passed up an opportunity to talk about AI. Look, AI is -- I will tell you, we've been doing a lot around this for decades. And now it's kind of out there in the public domain, but it's really quite amazing. So, let's talk about on the sales side, we talk about on the PEO side. We're using it in our underwriting. We're using it in our targeting, and we're using it in the mining of our base. The productivity lift that we get in terms of being able to understand where we can add value, you're almost getting to the point where you almost like have a pre-proposal because you almost know the client is going to be -- is going to like what they see. So, we're doing a lot of things there using AI models and our data models there. Doing a lot of this -- we talked a bit about pricing. And one of the things we now have is we have all of our major sales teams on one common platform in terms of proposal, proposal management and pricing management. And we're actually building AI models, started to use that in the mid-market that actually then gives our sales reps in real time based upon numerous factors, what price and what level of discounting we would allow for a particular client based upon the value of the client, based on the competitive set, et cetera. And that's actually allowing us to maximize both volume and rate. And we're going to continue to refine those models and expand those across the teams. But what we're getting from a sales productivity perspective, what we're getting in terms of a marketing targeting perspective, what we're getting in terms of the ability to set the right price and rate to get the biggest competitive advantage, all of those things are pretty impressive. Then on top of that, we're actually using it for analytics. We're actually taking and using voice analytics on the conversations we're having with prospects, and in real time, able to give coaching to our sales teams relative to what phrases are working, what messages are working, and we can dynamically change those things on the fly with our marketing message and sales scripts accordingly. So, just a ton of very interesting things that we're doing. It was interesting as a lot of these changes to our go-to-market, we actually started piloting in the PEO back in the second half of the last quarter when we were having some challenges. We thought that was the best place to start and to see if we could get some lift. And some of what we've seen in the PEO, I think is a direct result of some of these tactics.

Thank you.

Thank you. Our next question will come from Kartik Mehta with Northcoast Research.

Hey, good morning, John and Bob.

Kartik, good morning.

Thanks. John, you talked about -- a little bit about the key selling season, obviously, in the SMB. And I'm wondering if you've seen any kind of change in price competition or if you're seeing anything that is a little different this time than last year?

Kartik, look, I don't -- look, it's a competitive market, and it has been as long as I've been in the industry, 27 years. So look, I think there's all kinds of tricks. There's all kinds of marketing [indiscernible] using them. The fact of the matter is I think there's a lot of offers out there when you get under the details of how long you have to be there, what are the strings attached. Really what it is, it's basic. It's the same kind of environment in terms of discounting. It is very aggressive. But I would say this. I mean, look, we continue to see that we have price value and pricing pressure -- pricing power, both within our base and in the market. And that was very high in the last two years. I think we have been very able with the PPP and the ERTC to be able to really command very strong pricing power. That being said, we've done it for decades. I mean, we're not the lowest cost provider out there, and haven't been for decades. And I think what you see is when you look at our retention levels with our existing clients at record highs, I think that says something about the value proposition. At the end of the day, I think small, medium-sized business owners buy on value, not necessarily on price. So, we're going to be competitive. We're going to meet people where they are head to head, but we're not going to be stupid. And you can see that we're being competitive, we're winning where we've been in combat in the market. We've got a good pipeline and a good track record of success. And as you can tell from our margins, we're not giving away the store.

And then, Bob, just on the Management Solutions and you're talking about the seasonal employees, is that just -- if we kind of consolidate all that, is it just a matter of your pays per control expectations were X, but they came in a little bit less because of what you're seeing?

Yeah. I'd say it's more than that, Kartik, because as we've talked about, on a full-year basis, we had some moderate expectations for clients adding employees. It wasn't a big driver of growth overall, as I mentioned, across both Management Solutions and PEO, that was a little bit softer. But what we're really seeing is not on the low end of the market. It's with our larger size clients, particularly in those ASO and PEO models. They're bigger client sizes, and we typically get some seasonal hiring. We get it every year. We had some assumptions around what that would look like in Q2, and that hasn't materialized to the level of our assumption or what we've seen in prior years. So, it's really -- it is across the board. It's a little bit softer than what we anticipated. But to John's point earlier, it's not that small businesses are getting rid of employees, they're just not adding to the level that we assumed in the plan.

Thank you both. Appreciate it.

You're welcome.

Thank you. Our next question comes from Samad Samana with Jefferies.

Hey, good morning. Thanks for taking my questions. Maybe just stepping back, since the last time you guys reported, the company put out midterm financial goals. And I was wondering if maybe you could just provide us some context on the assumptions in that upper single-digit growth target for revenue, just especially as we think about employment maybe peaking and rates doing what they are. Just what was in that assumption, especially given that it was put out there between the last time you guys reported and now? Just maybe help us understand what the building blocks are?

Yeah -- oh, you want me to take it?

No, go ahead. Go ahead.

Yeah. Samad, I've gotten this question a lot. I think if you look back at -- and we've talked about this area. I've talked about it with many of you on this question specifically. But if you look at what we've done from a revenue growth, whether it's over the last five years or 10 years, it's well within the range of that midterm guidance that we gave. I would also say the guidance that we're providing this year, at least the way I think about it, is well within that range as well. And as you know better than anyone, we have a way we go about delivering that growth. It's a mix of client-based growth, and then, I would say that we would assume that to be similar with past performance. One thing that we're really good at is getting a larger share of wallet out of our client base, particularly with our higher value solutions, ASO, PEO, retirement. We still think there's a lot of opportunity inside the base. When you look at a lot of those key solutions, the penetration rates are fairly low. And so, we believe we have a lot of opportunity to continue to drive growth there. As John mentioned, we have pricing power, right? We deliver a strong value proposition and our expectation is that, hey, we might not be capturing price to the level that we did over the last couple of years where inflation was, but we believe we have a strong value proposition that is going to enable us to continue to capture price in the future. And I think when you put all that together -- I'd say the other component of it, when you look back historically, is we have used M&A as a way to drive growth in the business, and that has been part of our growth formula. It's part of what we've delivered over the last five and 10 years, and we expect that we'll continue to look for opportunities, and that will be part of our growth in the future. So, when you kind of put that all together, that gives us confidence that we can continue to deliver in that upper single digit level. It's not going to be -- it'll vary year by year, but for the most part, we expect it to be in that range.

Understood. Thanks for that. And then maybe just a follow-up. Based on the trends that you guys have called out so far or what you observed in this most recent quarter, how should we think that may be your own near-term hiring plans for quota-carrying sales reps or just in your own sales organization, any change to that plan based on what you just observed in the prior quarter?

No. We're fully staffed, and our intent is to continue to grow sales. Look, the business starts are up. We feel like the opportunity in the marketplace is strong. Now, I will tell you, the thing we are trying to balance is the productivity gains that we can get out of some of the go-to-market strategies. As I said, we did some testing learns in the PEO that showed some really good lift. And so, quite frankly, I think we're going to apply those in the mid-market and upper end of the SMB market. And I think those could also be a lift as well, but we have no plans of pulling back on investing in growth.

Great. Thank you. Enjoy the holiday season.

Thank you.

Thank you. Our next question will come from Bryan Keane with Deutsche Bank.

Hi, guys. Good morning. Just a couple of clarifications from me. When you talked about SMBs investing for growth, hesitation -- some hesitation there. Does that impact their willingness to buy ancillary services and maybe has impacted the management services growth as well?

We've really not seen that, Bryan. I think what we see is, it's probably in the case of -- I'll just use an example, let's use an example. You may have a very good business owner has opened a couple of franchises, doing very, very well financially, and probably could justify adding another franchise store somewhere. But the cost of capital, access to capital is constrained, and they're holding back on doing that because the hurdle rate just can't be met. So that's more what I see than people pulling back and saying that I don't need that. Again, most of the time when you look at our products and services that we're offering, they're either driving efficiency or they're helping them retain and attract quality employees, either by enhancing their benefits or by having an HCM solution. So, I kind of view that most of our clients that are looking at our services understand the value of the products and services, and believe that they're actually going to help their business be more successful. And so, I don't think they always view it as an expense line item, if you know what I mean.

Got it. And then, the other clarification I had is, the shift to ASO the PEO, did that surprise you guys or was that all part of the plan and pretty typical?

No, I mean, it's something we've always historically done. What I would say is that it turned out better than we expected. Now, let's keep in mind, last year when we're out in the market with the PEO and ASO offering, we saw a tilt towards -- we had great HR outsourcing sales last year, we have great HR outsourcing sales this year. They're just in different locations on the reporting structure. And so, last year, we knew we had a lot of clients that we would have typically seen be great candidates for PEO and they, for whatever reason, went to the ASO offering. And we said in the calls, we felt like that would be a good opportunity to go back to them once they've experienced our human capital management system, the benefits of our HR advisory solutions and our HRGs to go back and kind of reintroduce them to the comprehensive outsourcing of the PEO model. That's exactly what we did. And so, we had a bigger group of clients inside the base because of the success of ASO last year to go in mind. And then, the other point that I said, what we're doing in terms of analytics to be able to identify clients that we have a high degree of certainty that they're going to benefit from the co-employment relationship that a PEO provides, and that's enabling us to what I would say a little bit better cherry-pick inside our vast customer base, who we should go after.

Got it. That's helpful. And then, just a quick one for Bob. Just to quantify the small acquisition, does that add about 1 point to 2 points of revenue for third quarter or how do we think about that?

No, it's small. I don't have the exact number, Bryan, On a full year basis, we said it's not a material contributor to revenue growth at all. I mean, way less than 1%. I don't have the split in front of me by quarter.

Yeah, I was just thinking maybe it could offset some of the ETRC...

Yeah, I mean, it certainly is, and that's assumed in the guide, and it certainly is offsetting it, but ERTC was so large in the back half of last year, particularly in Q3, and unfortunately, it comes nowhere near close enough to offset the full thing, but it does minimize it a little bit, the headwind.

Great. Happy holidays.

Yeah, same to you.

Happy holidays.

Thank you. Our next question will come from James Faucette with Morgan Stanley.

Great. Good morning, guys. Just a couple of quick follow-up questions. In terms of back to this point on seasonal hiring, maybe being a little bit weaker, I'm just wondering from your perspective if there's been any impact or truth even before now to this narrative that we've heard a lot around labor hoarding and that smaller businesses in particular were keeping people on payroll or employed that they maybe otherwise wouldn't have just because they were concerned about shortages. And just wondering if you'd seen any evidence of that actually in your customers and if that could be impacting the seasonal hiring at all.

Well, James. I actually would say in the small business, it's not been hoarding at all. It's been a deficit. Now, to be fair, in our index, which we follow very closely, and I've reported a lot on this, small businesses probably nine months ago kind of got back to a level playing field. I think where you saw hoarding was more in the upper end and enterprise side of the space. I think you saw that. Now -- so that's where I think you saw hoarding and hiring of people maybe they didn't even need. And these stats where you've seen in some of these bigger downsizing. I think to the point you may be making is I do think that small and mid-sized business owners were reluctant to change employees out because they were trying a lot of focus on retention. That's why we relaunched the Retention Insights AI offering over a year ago because small business owners want to keep their good employees. I do think now that small business owners are trying to make sure that they have high quality workforces. And that's what we see them talking to our HR generalists about is really more about how do I lead and feed my employee base? I maybe don't have the employee base that I wanted because I was kind of forced to hire some people two years ago when it was hard to find people. Now there's more opportunity to upskill my workforce. That's kind of what we're seeing in the slow and I wouldn't say any hoarding.

Okay, got it. I just wanted to make sure that I was interpreting that correctly. Thank you. And then, you mentioned that we still are in a period of strong business starts. What about on the other end? I think there had been this view over -- in the economy generally that we weren't seeing failure rates or out of business rates get back to pre-pandemic levels yet. But can you just give us an update on what kind of out of business levels we're seeing? And how much -- and particularly in the context of continued strong business stores, I'm just wondering on that component of the customer set.

Yeah, I would tell you that bankruptcies are up, and have been on the rise probably over the last year. You're still seeing births outpacing deaths. Now, deaths typically report a little lag. I would just tell you in our data that bankruptcies continue to accelerate this year over last year in terms of out of business reasons. Again, what I always want to warn people here because I think people read into that data, other concerns on a macro basis, I don't view it that way. The fact of the matter is we had such high levels of new business burst two years ago during the pandemic that if you just do the math of survivability rates of those businesses that most of them are gone after five years and 50% of them are gone in the first two years. So, what you're seeing is that shedding of that big bulk that started two years ago, the first group of those are going out of business. So, I think it's not a sign that there's an abnormal level of bankruptcies given the level of business starts that we had over the last three years, if that makes sense. Did I say that properly?

It does. Yeah, I just -- on that point, so clearly bankruptcies have been rising, but have they -- in your customer sets, have they surpassed pre-COVID levels or not yet? Or -- and it sounds like, given that large number of bursts, we probably should expect them to surpass pre-COVID levels at some point if they haven't, right?

Yeah, I would -- let me get right here, because -- what I would tell you is bankruptcies are definitely up and have surpassed the fiscal year '20 levels, which is just...

Got it.

...[first year] (ph) of the pandemic. And just passed that mark in the second quarter.

Okay. Fantastic. Thank you so much for that.

Yeah.

Thank you. Our next question will come from Mark Marcon with Baird.

Hey, good morning, and thanks for taking my questions. So, on Management Solutions, John and Bob, you started off by talking about the upper -- the mid and upper end being a little bit stronger and seeing good performance there. I'm wondering to what extent is that being driven by some of the new tools that you've recently introduced? In other words -- and what are you seeing just in terms of the strength dissecting between new logos versus further upsells into the existing client base?

Yeah, I mean, as John mentioned, I think we've seen a lot of strength in the mid-market. And from a sales performance standpoint, our unit performance that we had in Q2, I think you mentioned in the prepared remarks, John, was above where we were at this time last year. We continue to see strong penetration within the existing client base, upsells into the base, whether that's ASO, PEO, retirement, but I would say, Mark, there's strength across the board, both from a new logo standpoint, particularly in the mid-market as well as upsells into the base.

Great. And then, despite that strong growth, we're basically assuming a slightly slower pace with -- so it basically would be the [SBS] (ph) side, and you've mentioned an increase in terms of bankruptcies. In terms of the selling season, are there any things that you're seeing in terms of differences between Paychex versus SurePayroll? Any sort of differences? And I know it's still early in the selling season, but any color that you would provide above and beyond what you've already said?

Yeah, Mark, I would say what we're seeing is what we've typically seen, again, SurePayroll more in the micro set. So, if I look at the micro set, continuing to see similar type of -- there's a lot of new business starts. So, there's a lot of opportunity there for growth. And then, in the small business, we're just so early in the key selling season. Really as you know, the next 60 days are really going to tell us how that's going to shake out. Back to I think what your original question was as well on Management Solutions is, remember, you have the geography issue occurring at the same time. So, while we're selling a lot more inside our human capital management base and into our ASO base, some of what we're upselling is PEO. And so, they're moving over to the other geography on the P&L, which is a good thing from a long-term perspective. And then, as we said, this issue relative to the seasonal hiring, which happened in the upper end of the market, that impacted both the PEO on the PEO and Insurance side and the ASO market on the Management Solution side.

That's a great point. And then, on the PEO side, just one question with regards to the insurance costs. On an apples-for-apples basis, what sort of price increase are you seeing for similar plans relative to what was offered last year through your various health insurance partners for this coming enrollment season?

Yeah, look, you're pointing to an item which I think is a tailwind that I think will continue to evolve, and that is healthcare inflation. And really, I think you'll see that evolve in the future post-pandemic. Pushing costs through the health system is a slow process. It starts with more expenses at the hospital. They have to negotiate with carriers. They have contracts that takes years to do. In our local community, there's unionization and strikes going on at the local hospital for more pay. Then that has to get approved by state legislature. So, the cost increase that we saw inflationary in healthcare last two years is going to start making its way to health plan costs in the future. We're certainly aware of that, and we're doing things to prepare for that. And when we talked about that last year, we did a lot of changes in our healthcare lineups to give more choices to people, making sure that we have the right plans. And I would say that our apples-to-apples was actually highly competitive to what the general inflation was, and we're keeping our MLRs in-line to where they've historically been at the same time. And so, through some plan designs and some other ways in which our teams have been creative in coming up with some creative health solutions, I think we've got a good portfolio of products and services that our clients are finding very competitive to alternatives that they have. I don't know if that helps.

It does. But would you say, John, that you would be looking at increases for this year in terms of -- would they be higher than last year? And then, what sort of impact does that have? Does it make your PEO offering more or less attractive relative to everything else that's out there as a small business owner that's trying to manage through that situation?

Well, I would say given the results and the pipeline that I see, that's made us more successful. That's the results I look at. We're not in a -- we're in a very competitive environment. So, most of the deals that we're involved in, someone else is involved in. And I think our lineup is very comparable. I think what you would -- what I would say is that we manage our plans in such a way that we tend to beat the standard health inflation and we've broadened our portfolio of offerings such that I think there is something for every client. They can find something that they want in our plans. And I think that breadth of services and breadth of options is one of the things that differentiates us from others.

Great. Thank you, and happy holidays.

Happy holidays.

Thank you. Our next question will come from Scott Wurtzel with Wolfe Research.

Hey, good morning, guys. Just one from me quickly. Can you remind us of what your top end market exposures are by vertical, maybe in the PEO segment? We have heard from one of your peers who is seeing some challenges sort of on the pays per control worksite employee side in PEO mostly due to some certain end market exposures. So, it would be very helpful if you guys can just remind us of where you guys have some of your larger exposures in the PEO. Thanks.

Scott, we do not have any high concentrations in our PEO. It's the general market. Remember, historically, our PEO was really an upsell within our client base, our payroll client base. Our payroll client base is diverse as the country's small business market. We didn't originate in a vertical strategy as a business from PEO perspective, so we never got highly concentrated in any particular area. We maybe had some geographic concentration before the acquisition of the Oasis, but the Oasis acquisition really made us a broad national player. And so, there's no one industry concentration that really drives that business.

Great. That's super helpful. Thanks, guys.

Thanks.

Thank you. Our next question will come from Ashish Sabadra with RBC Capital Markets.

Hi, good morning. This is David on -- David Paige on for Ashish. I just had a quick one regarding the organic growth in Management Solutions in the quarter. It looks like you grew revenue by 4%, but maybe you could just -- if you could remind us what the organic growth is? It looks like you had a small $200 million acquisition. So that would be helpful.

Yeah, I mean, that was a very small contributor, David, to growth in the quarter. And the other thing you need to keep in mind, we kind of gave you color on ERTC being a slight tailwind in the first half. It was actually a headwind in Q2, so most of that came in Q1. So, you kind of -- you have the headwind of ERTC. You have a slight tailwind from the acquisition. But the organic growth rate is not going to be too far different from what you see as reported.

Okay, great. Thank you. Happy holiday.

Yeah, same to you.

Thank you. Our last question will come from Tien-Tsin Huang with JPMorgan. Tien-Tsin Huang: Hey, thanks. Yeah, just to close out the call, John, you mentioned the LTV for the PEO business being attractive. I don't think I've heard that from Paychex all these years. So, can you elaborate on that relative to the ASO or HRO or even if you can't size it, just the ratio there? Just love to learn more on that.

Yeah, I mean we've talked about it in the past that certainly when we look across all the different solutions that we offer, the PEO is certainly the highest lifetime value. And as you can imagine, when you start getting all of the -- you get into that PEO model and they have -- the client has their health insurance and their workers' comp insurance and their SUI with us and all the different offerings, that's really our full solution that we offer. You're getting more hooks into them, and particularly when they have their health insurance with us. If they have their health insurance with us, if they were to leave the PEO, that would be very disruptive for their employees. They may have to get new insurance cards. They may have to -- they might be in a different network, might have to change doctors. So, it's very disruptive. And so, you get a lot of hooks into them in that model. And as you know, retention is a big driver of lifetime value. So, although, when we're selling clients, we want to put them in the right model that meets their needs. Ultimately, and that was, as we've talked about, one of our strategies this year is to really to go back into that base, get them over into that PEO model, because the economics in that model over the long term are very favorable. And so that's part of our strategy. Tien-Tsin Huang: Got it. Yeah. I know the notionals are high, but in my mind, the payroll [indiscernible] payroll business, the retention, [indiscernible] margins are so high, I figured that was also tough competition...

Yeah, it's really the retention that drives it. Tien-Tsin Huang: Thank you for that.

Yeah. Tien-Tsin, I think it's a very easy thing. You think about the way we approach it, you got our HCM platform, and you know that on a standalone basis, is a good business to be in. We then add our, what you'd say is ASO, so you add HR professional. Now you got someone advising your business, there's more value there. We know our retentive natures of that is high. Now you get into adding the insurance. And as Bob said, because we've done such a strong job of managing that over the long term, that there's a predictable health inflation metric, that becomes very attractive in terms of certainty for the clients there. And then you mentioned SUI, you mentioned everything else. So, you've got a profitable business on top of a sticky product and so you just keep it there. And I think the evidence is, both in terms of you look at the national studies, et cetera, is the survivability. Now it, to be fair, tends to be more attractive to larger clients, 20 plus if you will, so they naturally have a higher survivability rate, but the simple fact is what we see is there's a higher business survivability rate in those that are going with the PEO solution and then they're staying with us longer and we're getting all of the flow through and benefit of the HCM and the HR outsourcing margins. Tien-Tsin Huang: And the CAC is also low because a good chunk of it is still selling into exist. I know you said it's coming [indiscernible]...

Good point.

Good point. Tien-Tsin Huang: Okay. Very good. Thanks for the education and have a safe end of the year.

Thank you. You too. Okay, I think that was it. At this point, we'll close the call. If you're interested in a replay of the Webex of this conference call, it will be archived approximately 90 days on our website. We would certainly want to wish all of you and your families a very safe and happy holiday season. I want to continue to thank you for your interest in Paychex and hope everyone has a great day. Take care.

Thank you. Ladies and gentlemen, this concludes today's program, and we appreciate your participation. You may disconnect at any time.