CBIZ Inc (CBZ) 2003 Q3 法說會逐字稿

Good morning, ladies and gentlemen, welcome to the third quarter earnings report conference call. At this time all participants are in a listen-only-mode. Later, we will conduct a question and answer session. Please note this conference is being recorded.

I would like to turn the call over to Mr. Steven Gerard. Mr. Gerard, please go ahead, sir.

Thank you and good morning everyone. Thank you for calling into our third quarter earnings report.

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 if you do have questions, you hold them until after the call and we'll be happy to address them at this time.

This call is being Web cast. You can access the call over our Web site at www.cbiz.com. You should have all received a copy of our press release, which we issued this morning. If you did not, please call our corporate office at 216-447-9000 and we would be pleased to send you a copy.

Finally, please remember that during the course of the call, we may make forward-looking statements. These statements represent management's intentions, hopes, beliefs, expectations and predictions of the future. Actual results can sometimes differ materially from those projected in the forward-looking statements. Additional information concerning factors that would cause actual results to differ materially from those in the forward-looking statements are contained in our SEC filings, a Form 10K in our press release.

Joining me this morning on the call are Ware Grove, our CFO and Jerry Grisko, our president and COO. This morning we are pleased to announce our third quarter operating results and for the first time in the last three or four years, Cbiz was able to report a profit in our third quarter which is many of you know is historically our weakest quarter.

The result of our third quarter operations resulted in a year-to-date earnings per share of 15 cents and we are well on our way to making our plans for the year. With that introduction, I'd like to turn it over to Ware to give you the details of the third quarter and nine months.

Thanks Steve and good morning everyone. I'd like to take several minutes to highlight our accomplishments and some of the numbers that we released earlier this morning. During the third quarter, we successfully concluded our Dutch auction tender offer with resulted in a purchase of approximately $10 billion shares at $3.30 cents per share.

In addition, we followed with open market purchases of $104,000 shares. We also announced the acquisition of two businesses. Harbor View partners which will enhance our focus on Sarbanes-Oxley and internal audit services for public companies and we announced the acquisition of benefits firm in Salt Lake City which will help us to develop our benefits offerings not only in Salt Lake but in the Denver market as well.

For the third quarter, Cbiz reported total revenue of $119.5 billion, an increase of 3.6% or $4.2 million over the third quarter, a year ago. The same unit revenue increased by 4.1% or $4.6 million, compared with third quarter, a year ago. Divestitures announced since a year ago have resulted in a revenue decline of $3.5 million, with acquisitions contributing an additional $3.1 million of revenue in the third quarter.

The acquisitions we have made since a year ago are all performing in line with our expectations, are serving to strengthen our markets in the D.C. area, Florida, Salt Lake and Denver and in the southern California market.

CBIZ income from continuing operations before tax for the third quarter has increased to $1.2 million, compared with a loss of $4.6 million for the third quarter a year ago. You will note that net income and the resulting earnings per share we reported for the third quarter were impacted by our higher effective tax rate in the quarter.

A number of factors impact our tax rate, but in connection with investment write-downs we recognized earlier, some of these charges are not yet deductible for tax purposes, and we have recorded a higher tax expense as a result. The third quarter tax expense serves to adjust the full year rate to 44.5%, which reflects the expected full year rate for 2003.

With the higher tax expense, net income after tax for continued operations was $205,000, which is, calculated a break-even per diluted share compared with a loss of 4 cents per diluted (inaudible) for the third quarter a year ago.

Now, for the nine months, CBIZ revenue was $390.1 million, an increase of $9.6 million for the nine months, a year ago. The same year revenue for the nine months has increased by 2.1% or by $7.6 million. Acquisitions have increased revenue by $7.5 million, and divestitures have resulted in a decline in revenue of $5.5 million through September. I want to remind you that the nine months results include several items we announced in previous quarters.

In the second quarter, we completed a sale of health administration services, and we recognized a gain of $1.8 million.

In the first and second quarters we also announced note receivable (inaudible) charges, which totaled $2.0 million and we also, announced approximately $700,000, of severance related expense in the first quarter.

Including these items, CBIZ reported income from continuing operations before tax of $24.9 million, and an increase over the $16.5 million reported for the nine months a year ago. Net income after tax was $13.8 million for the first nine months, or $15 cents per diluted share compared to $7.9 million or 8 cents per diluted share, a year ago.

As Steve mentioned, I want to draw your attention to the fact that despite the third quarter earning per share, which calculated a break-even per share, the (inaudible) month number through September of this year has increased to 15 cents per share from 14 cents per share, which we reported at the end of June.

Now, as I mentioned earlier, in the third quarter, CBIZ concluded the Dutch action tender offer. In this transaction, we paid for approximately $10 million share, at a price of $3.30 cents per share for a total expenditure of approximately $33 million.

With this expenditure during the quarter, it is important to know that CBIZ carried $23 million of debt at the end of the quarter, so cash flow continued to be positive during the third quarter. We expect positive cash flow will continue through the fourth quarter and this will result in a further reduction in our debt level by the end of the year.

Performance of our receivables continues to improve, and we calculate day sales outstanding at 81 days, compared with 82 days, which we reported at the end of September a year ago.

So, to sum up, we are very pleased with our results in our performance through September, is in line with our expectations. The Dutch auction share repurchase we concluded will be accretive and we have already made quick progress in reducing the debt associated with that transaction.

We have continued our steady program of making selective acquisitions to strengthen our service offerings in existing CBIZ markets. Each acquisition is performed in line with our expectations. We are seeing a continuing improvement in our cross-serving efforts and we are very pleased to be able to report at 4.1% increase in the same unit revenues in the third quarter.

With those comments, let me conclude and I'll turn it back over to Steve.

Thank you, Ware. I'd just like to sum up by saying that in the beginning of the year, we indicated that we expected our earnings per share for the full year to be between $16 cents and 18 cents. We expected our EBITDA to be in the range of $45 million to $50 million.

We are pleased to report that we believe we will at least make those targets for the full year as we sit here today. We are very comfortable with the acquisitions we have made. They're athleting in very nicely with our businesses. And they're performing as well if not better than expected. Our cash flow remains strong, our balance sheet remains strong and gives us the flexibility we need to continue our various corporate initiatives.

So, on balance, as we look at the third quarter and the nine months results, we are comfortable we are on the plan that we set out for the year. With that, I'd like to open it up to questions of our shareholders and analysts.

Thank you. We will now begin the question and answer session. If you have a question, you will need to press star, 1 on your touch-tone phone. You will hear an acknowledgment . Thank you. If your question has been answered and you wish to be removed from the queue, please press the "#" sign. Your questions will be queued in the order they are received. If you are using a speakerphone, please pick up the handset before pressing the numbers. Once again, if there are any questions, please press star, 1 on your touch-tone phone.

The first question is from Arthur Winston (ph) from Pilot Advisors.

Thanks for the great quarter. Could you just expand on what you said, because you went fast on the 4.1% same-store-sales, what was that exactly and what did you meet.

Let's say a same unit revenue growth of those operations and business units that were in place a year ago, compared to the year earlier. So the growth on the same unit basis is 4.1% for the third quarter compared to the same units and the revenue in the third quarter a year ago.

Could you break it down by business -- was more than 4 and which was less?

Generally speaking, our benefits insurance was stronger. And our medical management practice was stronger, the accounting group was weaker and some of the other national practices, which include I.T. consulting and M&A were weaker than the 4.1%.

Was accounting a plus or minus?

Essentially, a break-even.

OK.

And which, in our view is not bad performance in light of the economic environment.

And I - had a comment which doesn't need answering, but the company bought back a lot of stock, which was terrific, some of the shareholders like me would hope that you would find a way to increase the amount of shares that are owned by the managers, so that they would be, you know, have the same mentality and experience as the shareholders. So, that would be something to think about going forward.

Thank you Arthur.

Thank you.

The next question is from Jim Macdonald from First Analysis. Please go ahead, sir.

Good quarter, guys.

Thanks, Jim. How are you?

Great. Could you go on a little more on the outlook for the different segments? I still ask again if you could give the segment information on this call, it would be very, very helpful.

We're aware of that request, Jim, and I think we're going to be in a position starting with the next conference call and all others after that to issue in the press release and cover in the conference call the segment breakout.

OK.

So, we will -- we know that's important to you and the other analysts and shareholders. We'll try to do that for you.

Is the benefits area still expected to continue to be strong with kind of a rising insurance prices which seem to be actually ameliorating and on the accounting side, some of your big four of they're competitors are showing some very impressive growth rates. Are you seeing any changes in kind of the relative outlook of those sectors?

Let me see if I can break it down for you. It's also important to note that on the contribution basis, the national practice is including the -- medical practices, the entire group actually posted on a pretax contribution basis better results quarter over quarter last year.

Basically we look at, we expect our benefits and insurance businesses to remain strong in the fourth quarter, you're right that the pricing has come back a little bit and most of the large retail -- most of the large brokerage firms are reporting somewhat slower growth.

We do expect strong fourth quarter in our benefits and insurance. We expect probably flat up on the accounting and we expect our medical business to continue to be strong in the fourth quarter and we're still working with the rest of the national practice.

OK. Could you just talk a little bit about the recent win on the MMT business, how significant that was, and when that will kick in?

Yes. In the overall scheme of things, it's important for its position in the market, it's important locally, total revenue --total revenue is important to us but it isn't earth shattering. I mean it isn't going to move the meter great deal. It's just another example of a strong business getting stronger by expanding into market, and to picking up very credible players in that market. We typically don't release the revenue par transaction on the medical practices.

Could you give as you little background for the fourth quarter, what the acquisition and divestiture as actual is or the net effect would be in the fourth quarter?

I think it's going to be about the same as it was for the third quarter, and that is I'll tell you, roughly speaking, the acquisitions and the divestitures will effectively cancel each other out. And the reason for that is the health administration services business, which we sold in the second quarter had a full impact in revenue in the third quarter, and that was, remember, that's about a $12 million a year business. It was very marginally profitable, but the revenue was about $3 million per quarter. And the collective sum total of the acquisitions would be about that $3 to $4 million a quarter.

OK. And I'll just ask a couple of quick questions and come back in the line. You talk about free cash flow the receivables balance, cash, payables and your CAPEX during the quarter.

Well, we started the quarter at a surplus at $2.6 million, and remember, we were completely out of debt on June 6, and we wound up June 30 at $2.6 million. And we spent $33 million for the transaction, so that netted a surplus gives us about $30 million of debt that we would have incurred dead and net, and we wound up the quarter at 23. So, that's roughly a $7 million cash flow, which effectively came from various sources throughout the quarter.

Please quickly go through the receivable cash, payables and CAPEX?

I don't have all of those numbers here today, Jim. The receivables are in line with where we need to be at 81 days. We're marginally improving, but the rate of improvement is slowing, as we get closer to our 75-day target. So, we're -- we are getting some slight marginal benefit cash flow-wise from the continued improvement in receivables, but it's not the major source of cash.

OK. I'll get back in queue.

OK.

The next question is from Robert Kirkpatrick from Cardinal Capital. Please go ahead.

Good morning. Could you talk a little bit more about the acquisitions you made, what total cost of them, together was and exactly how the harbor view acquisition will play into your plans going forward?

We typically do not release for each acquisition, the purchase price that we paid. You can appreciate we're in the market looking for transactions all the time. And that's not in our best interests to put that number out.

So, in theory, the aggregate purchase price, I don't think, we ever released that. I think we have said is we have a very focused acquisition policy, which says we're only going to acquire companies in the businesses that we're in, and in locations that we already have the beachhead.

We typically pay five to six times EBITDA, adjusted EBITDA and we pay it out over three years or generally over three years based on retainage of revenue. That is the model that we use. Harbor View is a company that we had an economic interest in, that was started three or four years ago to provide internal audit and then now with Sarbanes work and we converted our economic interest into the full ownership of the company, and we expect it to strategically fit with the business going forward because we had -- Harbor View had basically been generating opportunities and in some part utilizing our resources to use them.

Thank you. When do you expect the 10Q to be available with all of the numbers?

No later than I think the 14th of November, perhaps several days earlier than that. That's our target.

OK. Thank you so much.

OK.

The next question is from Alan Weir from Pat Reifen Capital (ph). Please state your question.

Could you describe your cross-serving efforts. Have you made any modifications to that lately, and in the past you have given us growth rates for what you expected that to contribute. Can you tell us what you think it's going to look like going forward?

Sure. Last -- in the year 2001, we believe we cross-served about $4.5 million of 12-month revenue. In the year 2002, we know that we cross-served $9.6 million of our first year revenue, but you may remember that in that $9.6 million was $13 million fee that we received from an M&A transaction. I tend to take that out of our analysis, because regrettably, we cannot do $3 million M&A deals every year. So, we went from 4.5 to 6.5 last year. This year our target is $7.8 million. We will meet or exceed that target this year. So, we are growing, and we're somewhere we are below 2% of our total revenue coming from cross serving. We have a target to get to long-term of getting that number up to 3%, and we're on track to do that, although it's going to take a little while to get there.

You need to appreciate that the -- while we do some very large cross-serving and very fine consulting work, a great number of these transactions are relatively small individual dollar amounts for many of our products and services. So, it takes quite a few of them to run up $1 million. But I expect we will hit or exceed the $7.5 million this year.

Great. Thank you very much.

Once again, if there are any questions, please press star, 1 on your touch-tone phone. Jim Macdonald from First Analysis is back online with a question. Please go ahead.

Any current thoughts on use of cash. Is it acquisitions, number one, and one, other repurchases and just general thoughts at this point?

Sure. We have been pretty consistent about this. The number one use of our cash in addition to whatever limited infrastructure improvements we need to make, are for acquisitions to build out the model. We have -- we have the resources to continue to do that.

We have also indicated that as opportunities present themselves we will continue to look at the number of share we have outstanding, at 86 million shares. I have said a number of places publicly, we still think that's too many shares. At some point, we may have our use of cash. But at the present time, the cash is being made available for any acquisitions that we want to make.

OK. Just a couple other follow-ups. What was the interest rate in the quarter? And give us guidance on share count in the fourth quarter.

Sure. Jim, the interest rate in the third quarter, I think, effectively was about 3.6%, and that was a couple of hundred basis points lower than it would have been a year ago.

And of course, we had an average debt level quiet a bit lower than we had a year ago, third quarter to third quarter. In terms of the share count, effectively for the fourth quarter, which will blend in an average for the full year, you should see a similar share count to what you are seeing in the third quarter.

Thanks. The impact offsets the fact that you didn't do the repurchase at the very, very beginning of the quarter.

I'm sorry. I -- that -- I didn't understand the question.

I mean, the higher share price has got more options in the money?

Yes. On a weighted equivalent basis, the options do count as the share price goes up. There are more options on an equivalent basis as it calculated.

That's offset by the repurchases that weren't done exactly at the beginning of the quarter?

Yes. OK.

Thanks very much.

Thank you, Jim.

The next question is from Arthur Winston from Pilot Advisers. Please state your question.

As the economy strengthens and traditional accounting practices grow, which may be different than yours, do you think that on a same store basis, our accounting businesses will grow, or do you think they'll sort of just stay constant going forward?

We're working very, very hard notwithstanding the economy to get the accounting businesses to grow. We have found that there's a very, very high correlation between general economic activity and accounting. This is not just for us. It's across the board. People need to be very careful when they look at the big four, because those numbers include all of the acquisitions that they made and the breakup of Andersen, so there's a lot of moving parts in those numbers.

We would expect if the economy grows and as that growth trickles down to the small and middle markets, we would expect our accounting businesses to grow on the same store basis. About 65% of our accounting revenue comes from what we have more traditional products and services, and about 30 to 35% comes from special projects that relate to expansion, acquisitions turnover the businesses, sort of the consulting side of it. That's the side quiet frankly we have seen swallow up in the last couple of years.

So, assuming the economy grows, we are expecting, and working towards seeing a growth in the accounting group.

Thank you.

Our next question is a follow-up question from Robert Kirkpatrick from Cardinal Capital. Please state your question.

Two questions. One, Steve, do you feel this late in the calendar year as though you have any insights into what 2004 will bring, and then secondly, could you also comment upon the acquisition environment? Are you seeing more businesses, are you seeing more businesses in any particular sectors? Sellers' expectations on prices are more reasonable, less reasonable?

OK. We are in the midst of actually -- in the midst of our budget process for 2004, and we have 60 business units not counting the corporate units to aggregate and we probably will not have a good handle on our actual budget until early December, which is what our timetable is. I am expecting to see bottom line growth and top line growth for next year. It's just going to be a question of how much and where is it going to come from.

With respect to the acquisition environment, this is still a --this is still a relatively tough market, certainly on the benefits and insurance side, given the historical last two years strength in pricing. Most business owners on that end of our industry segment still have very very high expectations for what they want and in many cases higher than we are prepared to pay.

On the accounting side, there are quite frankly very few that fit the quality and the standards and the locations that we are interested in. In those, I would say that the market is probably unchanged in the last two years. We have looked at a number of other businesses that would face -- that would interface well with our technology area.

And I would say that -- I would say there that the sellers are more or less realistic in today's market as to what technology companies are were. The real difficult area is what I said before, which is the insurance arena, given that is somewhat of a cyclical business and they have benefited in the last two years from straight --the hardening of the prices.

OK. And then as your -- let's assume that you're going to be able to grow the accounting business, and how you are able to achieve higher margins in that segment of the business? In other words, how does that business scale given that it's such a people intensive type of business?

There are a number of --there are a number of things that do you, through technology. You help them -- you help our accounting groups become more efficient through co-location. You maximize the infrastructure. You minimize the infrastructure costs. We are moving aggressively towards compensation programs that put more at risk within the business units. This is not just on our accounting group. This is in other groups as well.

So, the individual performance has a number of very measurable items in them, and there are economic consequences as well as benefits for that. So, there are quite a number of things that we can do. We have publicly said -- by public, I mean with respect to our various investor groups and presentations that we have given that the accounting group had a contribution margin of about 11% last year, and we have a long term as defined as two to three year goal of getting that to 15%. That is their goal. That is achievable, the management team that directly manages the accounting group is working very hard to get there as well as all of our accounting groups themselves.

So, we think we have some significant margin improvement, notwithstanding any top line growth in all three our business segments, and in particular, in our accounting group.

And just so I'm clear, the contribution margin that you refer to is your EBITDA calculation or your operating income after depreciation and amortization.

Yes. It's operating income, and there's some small -- apples, to apples, there's some small amount of depreciation in those numbers. We measure the businesses a little bit differently than we report them, but the bottom line is not particularly which line it is that is -- it is there is some amount, $200 to $300 metimore (ph) basis points improvement opportunity in each of our business segments over time, and I am -- I have the degree of confidence that as the year 2003 ends, we will see a margin improvement in the accounting group notwithstanding the environment that we have lived in.

OK. Then how are the co-location efforts going?

Co-location efforts are going very, very well. We have the largest co-location close or happen this Summer in Kansas city where we have a - real Marche building with 350 to 400 people in it and they come together very very well as has Los Angeles, as has Philadelphia as has most, almost all the cities that we are doing that in. We have two or three scheduled for next year as well.

Great. Thanks so much.

Thank you.

If there are no additional questions, please press star, 1 on your touch-tone phone. At this time, I'm showing that we have no further questions.

Well, I thank you all for calling in. I thank you for your continued support. We are comfortable with where we are, with respect to making our exceeding our plans. We are actively working on next year, and we quite frankly look very forward to bringing you the full year results in January, when we have -- when we have wrapped up the year. Thank you all. I look forward to speaking to you then.

Thank you, ladies and gentlemen. That does conclude today's teleconference. Thank you for participating. You may now disconnect.