CBIZ Inc (CBZ) 2002 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the CBIZ First Quarter Results Conference Meeting. At this time, all participants are in a "listen only" mode. Later we will conduct a question and answer session. I would now like to turn the call over to Mr. Steven Gerard. Mr. Gerard, you may begin.

Thank you, and good morning, everyone. Thank you for calling in to CBIZ's first quarter conference call. Before I begin with my comments, I'd like to remind you of a few things. As with all of our conference calls, this call is intended to answer the questions of our shareholders and analysts. If there are media representatives on the call, you are welcome to listen in. However, I ask that if you have questions, you hold them for us after the call. We'll be happy to address them at that time.

This call is also being webcast, and you can access the call over our website, www.CBIZ.com. You should have all received a copy of the press release, which we issued this morning. If you did not, please call our corporate office at 216-447-9000, and we'll be happy to send you a copy.

Finally, please remember that during the course of this call, we may be making forward-looking statements. These statements represent management's intentions, hopes, beliefs, expectations, and predictions of the future. Actual results can, and sometimes will, materially differ from those projected in the forward-looking statements.

Additional information concerning the factors that could cause actual results to differ materially from those in the forward-looking statements are contained in our SEC filings, Form 10K and press releases. Joining me on the call this morning is Jerry Grisko, our President and COO, and Ware Grove, our CFO. This morning, we released the first quarter results, with revenue of approximately $144 million, as compared to $162 million for the prior quarter. As Ware will explain in a moment, the $162 million contained the -- our discontinued operations.

Generally, we're satisfied with the results of the first quarter, although they are somewhat below where we expected them to be. We continue to see a softening in the economy, which is affecting our business solutions group, and I think we're doing a reasonably good job holding our revenue in face of the economic conditions.

I'd like at this time to turn the call over to Ware, who'll give you more detail on our first quarter results.

Thanks, Steve, and good morning, everyone. I want to take a few minutes to run through the highlights of the numbers we released this morning. I'll actually address the revenue numbers, the impact of divestitures over the past year, related expenses, earnings, cash flow, and the continuing improvements to our balance sheet. Total revenue for the first quarter was 144.2 million, which was 17.9 million below a year ago. Several factors are important to know when looking at first quarter revenue. In keeping with our efforts to rationalize our business, improve the focus on core operations, we have divested or closed 22 operations during the past year. The impact of these divestitures for the first quarter was a reduction in revenue of $13.3 million. Same-unit revenue declined by 4.6 million, or 3.2 percent. The decline in same- unit revenue was primarily attributable to our business solutions group, where 4 operating units declined by an aggregate of $3.9 million compared to a year ago. The business solutions group has been generally impacted by weak economic conditions, which have impacted general consulting revenue, and other transaction-related revenue during the first quarter.

Also, I should mention the impact of a recent IRS ruling that discontinued the requirement to file the annual report Form 5500 for cafeteria-style benefit plans. We do a significant amount of work for clients, and in the first quarter, the impact of this IRS announcement reduced our revenue by approximately $1 million. We are evaluating the various engagements that are impacted by this change, and we're taking actions to mitigate any further impact for the balance of the year by either re-pricing services for other work performed, or by reducing staff and related costs as necessary.

During the first quarter, our capital markets group, which primarily advises on sell-side transactions, continued to be impacted by weak market conditions. Revenue in that group was down $1.1 million, compared to the first quarter a year ago. This group currently has a number of transactions in their pipeline, and has letters of intent to close transactions in the second quarter. So that as these transactions close, we expect this group to be on plan, or possibly above plan, by the end of the second quarter.

In looking at expenses in the first quarter, a significant item was 2.1 million of consolidation and integration charges. A majority, or $1.8 million, relates to our decision to move forward to consolidate our operations in Kansas City next year. As a result of committing to a new lease in the first quarter, we recognized anticipated expenses associated with lease costs, once the move and the consolidation occurs. Another item you will note is the reduction and depreciation in amortization expense. In keeping with the new accounting rules under FAS-142, we are no longer required to amortize goodwill expense associated with prior acquisitions. As a result, goodwill amortization expense was reduced by 5.5 million for the first quarter, compared to a year ago.

We are currently evaluating the impact of the new goodwill impairment rules required by FAS-142. As of March 31st, 2002, goodwill on our balance sheet was $245.3 million. By June 30th, we expect to complete our evaluation, applying the new criteria under FAS-142, but at this time we have not yet determined if any impairment charge will be required. Looking further at expenses, I want to point out that the interest expense for the first quarter was $818,000 compared to $2.5 million a year ago. Amounts outstanding on our bank line of credit were reduced to $50 million at the end of the quarter, compared to $100 million at the end of the first quarter a year ago. Cash flow continued to be positive during the first quarter, as we reduced our debt to $50 million, from 55 million at the end of the year. We expect further positive cash flow during the second quarter and for the balance of the year.

During the quarter we recognized a $1.1 million gain, primarily related to the sale of a small unit within our business solutions group. Also, during the quarter we made a decision to close down another operation, and we have accounted for the first quarter results and the anticipated loss as a discontinued operation. So when you look at net income from continuing operations of 9.9 million, this compares to net income of 9.4 million a year ago. Considering the change in accounting for goodwill amortization, which was effective January 1st, 2002, the net income for the first quarter of 2001, adjusted to eliminate goodwill amortization, would have been $14.6 million. Further, considering the impact of the divested operations that contributed to net income a year ago, comparable net income would have been approximately 12.1 million for the first quarter a year ago. As I mentioned earlier in my comments, cash flow for the first quarter continued to be positive, and we expect positive cash flow for the second quarter, and further improvements to our balance sheet throughout the year. At the end of the quarter, shareholder equity was $380 million, and the debt-to-equity ratio was 13 percent at the end of the quarter, compared to 26 percent for the first quarter a year ago.

So with those comments, I will conclude, and I'll turn it back to Steve.

Thank you, Ware. Let me add some additional highlights. First, I think it should be noted that our benefit and insurance group and our national practice group, both came in on plan for the first quarter. So we are encouraged by the results of those two significant groups.

In addition, you will recall that over the past year, we had identified that we had last year been -- had problems with 6 or 7 major business units that attributed to some of the losses we had last year, and I'm happy to report that most of those units are showing dramatic improvement as well. I'd like to highlight the fact that our cash flow continues to be positive and strong; that our debt's now to $50 million; and that the business activity, as we see them going forward, continues to give us the expectation that will be on our original plan. I'd also like to announce that as a result of the reduction in revenue for the first quarter, we have made a significant reduction in our expenses for the rest of the year. The business solutions group will be reducing their headcount by over 5 percent, and the combined expense reduction for CBIZ of all the actions that have been taken in the last few weeks. As a result of carrying through the first quarter, perhaps more resources than we needed will be an annualized expense reduction in excess of $8 million. So as we've seen the revenue come down somewhat, we've reacted by reducing our expense base. As a result of those actions that management has taken, we are today reaffirming our 2002 outlook. We expect our earnings per share still to be in the 22 to 25 cent range, and we expect our EBITDA to be in the 55 to $60 million range. So while the economy continues to become somewhat soft for our business solutions group, we have a number of plans in place, both on the expense reduction side and the marketing side, to bring that group back to it's original plan. And we are encouraged by the fact that our other 2 major groups are also on their plan.

With that, I'd like to stop and take questions from our shareholders.

Thank you. CALL INSTRUCTIONS). And our first question comes from Stan Saxon [phonetic] from First Analyst Corporation.

I have a question related to the $1.14 million, the gain on the sale of operations. And I understand that that has to do with a certain roll with 1.44, whereby it's sale of 1 unit, rather than the whole business line. I guess what confuses me is that I would imagine that, because this occurred during this quarter, then that wouldn't be subject to that rule, in terms it would then be put below the line. Could you clarify that?

Yeah. Let me clarify. A new accounting rule, FAS-144 will allow you to take those types of transactions beginning January 1, 2002 as discontinued operations. However, we made the decision to close down and sell that operation prior to the end of the year. However, we were not able to recognize the gain at that point in time, until the transaction closed. So under the new rules, if you have a prospective transaction, and you're far enough along in value in that transaction, you are required to book a potential loss early, but defer the potential gain until the actual transaction close. Under the new rules, you can account for those under the discontinued operations section. That's why it's purely a transitional issue, as the new rules took effect January 1st, 2002.

Our next question comes from Jim McDonald from First Analyst Corporation.

The -- on a big-picture basis, were benefits and national practices, did they have positive internal growth? And can you talk about the levels of positive internal growth for those 2 units?

The -- certainly the benefits and insurance group had positive internal growth. The national practices were pretty much flat, but ahead of their own plan.

And can you go through the impact of divestitures for the second quarter and the whole year, so what -- on a same-store sales basis; what the comparable numbers you're up against are? And then, kind of where -- when you think you'll be back to positive internal growth this year, if at all, given the environment?

We do not have, as we sit here today, any divestitures that should affect us in any significant way in the second quarter, or in the rest of the year. That's not to say they won't come along, but right now, we're not close enough on any of them to comment on it. I'm expecting we're going to see internal growth on the benefit insurance side this year, and I'm expecting that we will see internal growth on the national practices this year. So I expect both of those to be positive. The economic slow down, or the impact of the current economy that's affecting the business solutions group, may continue for some time, and we may not see internal growth from that group the rest of the year.

I guess just to clarify, I was also asking the impact in the second quarter of past divestitures?

Yeah, Jim, I'll just give you a general question. For the full year last year, the revenues related to divested businesses were approximately $30 million, 13 of which was in the first quarter. And I don't have the split for second, third, and fourth quarter at this time.

And in terms of kind of your -- some of the troubled units where you may have lost people or had trouble, when are we going to kind of anniversary the worst of those problems? Have we just anniversaried those?

Well, I think we're going to see some continued softness in some of those units. Don't forget, we're going to reduce the headcount in the business solutions group by over 120 people. There's going to be some severance payment, and there's going to be a little bit of drag as those expenses come through. That's number one. What we're trying to do is, right-size each organization opposite the revenue, the base that have today, and that we expect them to continue to have. So I can't tell you that it's all behind us. My guess is that we'll probably have an unfavorable comparison, certainly through this second quarter. And we should come out of it into the third quarter, assuming the business doesn't get any softer. And we do not think at this point that it will. Then we should have most of that behind us.

But I thought it was -- I think it's important that we keep in mind that this is a portfolio of some 70 different businesses, and at any point in time, some are going to be better and some are going to be worse. And last year, the ones we really focused our attention on, the 6 or 8 firms that were really giving us a problem last year, for the most part, they've all turned around. The 4 business units and the business solutions group that missed their plan by the aggregate of almost $4 million that Ware mentioned before, were not ones that particularly had given us a problem a year ago; or at least 3 of the 4 were not.

So, what we're seeing -- some of this is regional. Some of it relates to the fact that we have lost some senior people. So I think there are -- unfortunately, there are a variety of reasons in each case. It's not consistent reasons, although I do think that we should have most of this behind us by midyear.

And could you talk about the big picture out there, and whether you're gaining any business with all the turmoil in the accounting industry? And any other comments on where you see the -- any new regulations going, and whether they'll impact you?

The turmoil in the accounting industry so far has not represented, as best we can figure out, a problem for us. It's represented a series of opportunities. We continue to talk to various Andersen groups for possible inclusion in CBIZ, but we're not close enough with any of them for us to have anything to announce. And we may not, at the end of the day, pick up any business directly from them. But we do expect that there'll be a fallout as a result of the breakup of Andersen, and we think that the remaining 4 firms will be re-examining their client base, and we think there's an opportunity. We know there'll be an opportunity there to pick up additional business. The 141, 142 work has contributed at least a million and a half to our revenue so far, and we expect that will continue. So we see the current, quote "turmoil" in the accounting industry as representing opportunities for us. There is nothing on the horizon, either federally or state, that has come up that would any way negatively impact us.

Jim, as you know, we do not do in CBIZ the attest work. So we really have the separation between the test and consulting that probably will be the ultimate model.

And then just one other quick question. I'll let someone else ask. What were your receivables at the end of the quarter?

Jim, I've got about $132 million net. And let me share with you that the DSOs continue to show the same kinds of improvements on a year-to-year basis, as we reflected at the end of the year. That's about a 14-day improvement compared to a year ago.

Our next question comes from Arthur Winston from Private Advisors.

I was curious that if your assumptions on EBITDA hold up, and you weren't to make any acquisitions, or do anything extra, how much more debt you might be able to pay off by the end of the year?

The debt's at $50 million. If we do no acquisitions, at the end of the year the debt should at least be half of that.

25 million?

Yeah. That's if we do no acquisitioning, but you should understand that our primary objective this year is to be building our revenue base. And we are actively looking today at probably a dozen different type of acquisitions across the company, none of which are ready to close, but some of which are far enough along that we're encouraged that they may close. So we'll use some of our cash for acquisitions.

Is it premature to comment how your efforts to cross-sell are going, or should we wait another 6 months to ask you about that?

I think what's -- I think the cross-selling is improving. We are on plan to double the cross-serving revenue that we did last year. The model cities program that we put in place in 4 of our major cities seems to be beginning to bear fruit. The new track system, which we put in place to keep track of all of the cross-selling initiatives, is being very well received and widely utilized. So we're encouraged at this point that we will continue to see a significant growth in our cross- selling efforts.

Our next question is from Bon Hedu [phonetic], private investor.

Two-part question. I was wondering in the foreseeable future if there will be any charges related to the goodwill of past acquisitions? And part of the second question was possibly already answered in the previous gentleman's report.

The goodwill charges, we've not yet determined if any charges are required under the new rules under the FAS-142. If we were far enough along in our evaluation, we would have recognized any impairment charges as of March 31st. So until we get far enough along, I really can't comment that there will be any charges or not. We just haven't determined at this point in time.

We are, however, required to make that determination by our June 30th quarter.

Our next question is from Grant Jackson from First Analyst Corporation.

Just if you could give a little more detail on what reasons you're giving for seeing some stability in the business solutions group? You had mentioned last year that the problem units last year have shown improvement, and then you had several this time that have become problem units. Do you feel that those are all instances where you've been able to identify what the problem is, and you do not see that being an issue going forward? Or is it more that you have 70 different units out there, and it's tough to maintain each one of them at their current pace going forward? In other words, should we look for more stability, or do you see there being some problems continuing in the future with maybe some that you haven't identified yet?

Well, I'm hopeful that we're going to see more stability. We're putting the practices in place that are necessary to monitor the businesses, and to maintain the stability. I think -- you should keep in mind that most of the business -- many of the business units that we had problems with last year, were not in the business solutions group. There were major businesses in both benefit and insurance, and in national practices. And those are the ones that we're seeing significant improvement in.

The business solutions problem really comes from two pieces. One is, we intentionally carried through our busy season more resources that we ultimately needed, in anticipation of higher revenue. And we wanted to be sure, in terms of being able to provide the best client service, that we had the right resources. When the revenue didn't come, the reaction to that was to reduce the headcount and other expenses, so that the business units are more likely to be back on their plan.

The other problem comes from the fact that much -- that at least 30 percent of our business solutions work is consulting work, financial consulting work, and that business has just been soft. It was soft in the fourth quarter of last year as well. So we have a combination of a general softness in the economy. The combination of -- added to the fact that we carried too many resources through the busy season, and in some of the business units, we have lost some of the -- some principals in those firms who historically had generated revenue. In one of the firms, we actually -- which is the Cleveland-based firm, which we're still having a problem with, which as I think you know, we lost a substantial part of the office last March.

So each business unit has a slightly different reason. In one case it's regional; in one case it's the loss of principal; in one case it's a consolidation of a number of business units into one major practice, which we have every expectation will turn itself around, and be back on its plan by the end of the year. So the reasons are slightly different, but they primarily are driven by the fact that the revenue is just lower than we expected.

CALL INSTRUCTIONS). We do have a follow-up question from Jim McDonald from First Analyst Corporation.

So based on what you just said, the -- we should anniversary some of the problems at SMR in Cleveland, just second quarter, right?

Yes.

And in terms of principal turnover, can you give us a percentage, or an indication of whether that's going down?

All right. I indicated this earlier. We've lost virtually no principals in the last quarter, and actually, we didn't really lose too many in the fourth quarter either. The people that have left us were prior in the year.

But it's been stable recently.

Absolutely stable recently. The only people that have really left us as principals on the business solutions side were folks that left at our request.

And just could you give just a little more clarification on the acquisitions you're looking at? What areas in general are you looking to expand, or what's your philosophy on acquisitions?

I'll be happy to explain that, but I also caution the listeners that we have no acquisitions that are ready to close. And no one should factor into our projections anything to do with the acquisitions at this time. Our primary interest in acquisitions are on the benefit and insurance side, in the property and casualty, and in the benefits businesses, as well as on the payroll business. So that's the primary corporate thrust.

We have, as all financial and accounting firms in the country, we have seen opportunities that have come as a result of what's happened with Andersen. And while they weren't necessarily on the scope, we're now looking at smaller Andersen practices in both the accounting, tax, and valuation businesses. But the primary thrust for this year will be in the benefit-insurance sector, and in the payroll sector.

CALL INSTRUCTIONS). There are no further questions at this time.

Well, I thank all of you for calling in for the CBIZ business units that are on the call. I thank you for the hard work in the first quarter. For our shareholders, I appreciate your support.

We have our annual meeting coming up in a few weeks, and I urge as many of who can get to Cleveland to come to join us at our annual meeting. And I look forward to speaking to you all when we announce our second quarter results. Thank you, and goodbye.