CBIZ Inc (CBZ) 2004 Q1 法說會逐字稿

Welcome to the CBIZ first quarter earnings results conference call. All participants are in a listen-only mode. Later we will conduct a question and answer session. Please note that this conference is being recorded.

I will now turn the call over to Mr. Steven Gerard, CEO and Chairman. Mr. Gerard, you may begin.

Thank you and good morning, everyone. Thank you for calling in. Before I begin 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, if you have questions I'd ask you to hold them until after the call. We'd be happy to address your questions at that time.

This call is also being web cast and you can access the call over our website, www.cbiz.com. You should have all received a copy of the release which was issued this morning. If you did not, please call our corporate office for a copy.

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 sometimes differ materially from those projected in forward-looking statements. Additional information concerning the factors that would cause the actual results to differ materially from those in forward-looking statements just contained in our SEC filings form 10-K and press releases.

Joining me on the call are Jerry Grisko, our President and Chief Operating Officer, and Ware Grove, our Chief Financial Officer.

As each of you probably know by now, before the opening we released our first quarter results. We are comfortable with those results and that they showed growth in revenue, growth in same unit revenue. Improved bottom line margin and earnings up for the quarter.

I will now ask Ware to go through and give us the details of the quarter results.

Thanks, Steve. Good morning, everyone.

I want to take several minutes to review some of the highlights of the first quarter numbers we released earlier this morning. Total revenue in the first quarter was $148 million, which was an increase of $3.2 million or 2.2% increase compared with total revenue for first quarter a year ago. During the first quarter same unit revenue increased by 4.2% which is an increase of $5.8 million, compared with same unit revenue in the first quarter a year ago.

In addition newly acquired businesses contributed $2.5 million to revenue growth. Divestures resulted in a decline in first quarter revenue of $5.1 million from a year ago. This includes $3.2 million reduction of revenue from the health administration services business which was included in our benefits and insurance segment and was divested in the second quarter a year ago. When you adjust for the impact of divestures, the growth and revenue from same unit growth combined with revenue from newly acquired businesses was $8.3 million for the quarter for about 5.8%.

Operating income from the first quarter was $19.3 million and 13.1% of revenue compared with a margin of 12.8% of revenue for first quarter a year ago.

Net income was $11.6 million in the first quarter this year, an increase of 14.3% compared with the first quarter a year ago. On a fully diluted basis, earnings per share from continuing operations was 13 cents per share this year compared with 10 cents per share for the first quarter a year ago. The fully diluted share count of 87.9 million shares for the first quarter this year fully reflects the stock repurchase completed last July when CBIZ repurchased approximately 10 million shares.

As you are probably aware, CBIZ recently completed another tender offer earlier this month with the purchase of an additional 7.5 million shares. This reduced share count will begin to be reflected when we report our second quarter results later in the year.

Bank debt at the end of the first quarter was $23.4 million. This compares with a balance of $17.0 million at the end of the first quarter a year ago. In looking at this balance you should consider the repurchase of shares completed last year at a total cost of approximately $33 million which was funded through borrowing on the credit facility. Net of this transaction, the cash flow used to pay down bank debt over the past 12 months has been approximately $27 million.

Our balance sheet continues to be very strong with debt to equity at the end of the first quarter of 8.1%.

As I mentioned previously, our recent tender offer, the $5 per share was completed in April. As with the transaction completed in 2003, this transaction was also funded through borrowings from the company's credit facility of approximately $37.5 million.

Current borrowings outstanding on the credit facility totalled $54 million and we expect to reduce this balance throughout 2004 as we continue to generate positive cash flow. It is important to note that we have funded this share repurchase transaction but we also continue have the capacity to support the growth of the business including growth through future acquisitions.

To sum up, we are pleased to be able to utilize our cash flow to conclude our second cash repurchase within the past 9 months. With the two transactions combined, we've been able to reduce our share count by approximately 17.5 million shares. This represents approximately 18% of our total shares outstanding. We believe these transactions will be accretive to shareholders.

On the revenue side, the acquisitions we have made in the past 15 months are performing in line with our expectations and we are continuing our efforts to identify additional acquisition opportunities during 2004. So these comments I will conclude and I'll turn it back over to Steve.

Thanks, Ware.

In summary in the first quarter we are comfortable with the strong performance of our accounting tax and advisory group, our national practices and MMP business and retail BNI business. We had challenge in some of the other BNI businesses we are working on, but in general, most of the business units within CBIZ performed well in the first quarter.

I'll remind each of you of the guidance we put out in the beginning of the year of our revenue growth for the year in the 4-6% range, and our EPS growth in the 25-30% range, and EBITDA of approximately $50 million, and as we sit here today we believe those goals are attainable for this year. With that I'd be happy to take any questions from any of our shareholders or analysts.

Thank you. We will begin the question and answer session. If you have a question press star 1 on the touchtone phone. If your question has been answered and you wish to be removed from the queue, please press the pound sign. Your questions will be queued in the order they are received. If using a speaker phone, pick up the handset before pressing the numbers. For any questions, press star 1 on the touch tone phone.

The first question comes from Jim McDonald from First Analysis.

Good morning. Good quarter, guys. Can we go through some of the business areas? A large M&A fee during the period? Is that true?

That's correct.

How much was that?

About $1 million swing from last year's first quarter to this year's first quarter with the one transaction.

$1 million positive?

1.5 million positive, yeah. Of the $2.8 million swing you see from the negative last year on the contribution line, about half of that came from an M&A transaction.

And any other big transactions on the horizon there?

There's always transactions in the hopper, as you can appreciate. They are always hard to forecast because the close rates are really quite small. There isn't anything at this point that I think we're comfortable disclosing.

On the benefits side, some of the weakness is due to divesture. You mentioned other weakness. Can you go into that further?

I think you should look at the benefit side in two pieces, one we sort of indicated in the third and fourth quarter last year. We thought that the growth rate in some of our insurance and benefit practice products might slow down a little bit as the industry slowed down. Still growing but not at the rate as before.

We have had some operational issues in a couple of our other nonretail businesses we are working on.

Give us a scale for what some of those are?

We typically don't identify issues we work on within specific business units. It's safe to say they are not material to the overall picture and things we are working on we think we'll have resolved in the next quarter or two.

And what's a reasonable growth rate in benefits going forward here? Back to mid-single digits?

Yeah, I would say the mid-single digits makes sense given the mix of business we have. Maybe slightly higher but not much higher.

On MMP, any strategic thoughts there continues to be doing well?

Continuing to go well and that's our strategy.

Okay. Let me ask you one more question and I'll let somebody else go and come back. Shares were down from the first quarter and I've been trying to figure out how a diluted share count how that could be, with your stock being net up since the fourth quarter.

Yeah. I don't know that I have a reconciliation from quarter to quarter. Some options have been exercised. Some options have forfeited so you've got fewer equivalent shares outstanding, I think is probably accounts for the difference.

I'll circle back.

Okay.

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

Good morning. Could you tell us a little bit more about the health administration services business that you sold. Was it profitable in the year ago period? How much did it contribute in the upcoming second quarter and was it profitable in the year ago upcoming second quarter and was it profitable in that period as well?

In the first quarter as I mentioned earlier the revenue was $3.2 million. In the upcoming second quarter until we lap this, we'll have a revenue decline in the $2.2 million range. We mentioned a year ago that this business was marginally profitable so it was less than a 10% margin. A year ago in 2003 we probably contributed $500,000-600,000 of pre-tax income from that operation. Perhaps slightly less.

I'm sorry, that was for the quarter or the whole period?

The whole year in 2003.

Okay.

And generally you can split it between the first and second quarter as I've just given you the splits on the quarter revenue.

Okay. And given that you had a very large nicely positive swing in your gross profit in the other national practice business, you talked about the large M&A fee, could you talk about what steps you've taken on the other side of the business which has resulted in so much of an improvement, number one, and number two, assuming no more large M&A fees, can we reasonably expect this business to remain profitable throughout 2004 or is there a seasonal factor involved here?

Well, I'll give you my factor and let Jerry answer as well. The answer is 9 of the 11 business units in the national practices are on or ahead of plan, all improved over last year. The operating margins they are showing now should be more or less we expect to continue. There are no large single transactions in any of those national practices that should influence the bulk of that business going forward. It's a result of a lot of hard work by the managers of those business units to turn them around.

I would agree. I would say the two things that we focused most on last year were leadership and business development. As you can appreciate, when you make those changes, you don't immediately see the impact. I think today we are seeing the impact of things last year we did last year and 18 months ago.

Okay. And switching to the medical practice management business. Do I understand, is there a seasonal aspect to that business so that it is lower in the first quarter than in the calendar fourth quarter?

No, no real seasonality in that business.

Okay. And I'll let other people ask and get back in line.

The next question comes from Terry O'Connor from Cedar Creek Management. Please go ahead.

It's actually Steve Baylog, Cedar Creek Management... Could you, reading the Annual Report we just got yesterday, speaking about the payroll business, wondering if you made an investment there and if that's going to be more of a focus, it says "and payroll remains one of our most frequently outsourced services" and in the key service area, excellent offerings, etc. What is your strategy there and where does that business stand in terms of size and profitability and enhancements to it that you've made or haven't made? What's your whole thinking there?

The answers we've disclosed on a number of these calls over the past year that payroll was then and continues to be a key product for us. We have made a significant investment in payroll over the last 18 months, improving the processing and getting better control of the business. We have it among our many corporate goals a significant expansion of that business this year. If you look at our cross-serving results for the first quarter, we successfully cross-served and closed more payroll transactions than at any other product. It continues to be a focus, a significant focus of the business. We disclosed sometime last year that the payroll business revenue was in the $5-10 million range and that's where it is today. Although it continues to grow from where it was a year ago. Payroll is profitable for us, which was not that case a year ago or two years ago and we will continue to dedicate the resources necessary to grow that business.

[inaudible] Thank you. And you give us a description of what the opportunities look like in the deal market and realism or lack of realism and sellers [inaudible] and how that's all coming together?

You mean in the M&A business, the M&A business is a good business for us. It's not a core business, it's an opportunistic business for us. We have very good internal resources that handle a small number of transactions.

Our view of the current M&A market isn't drastically different than from what you hear from other people, which is that it probably picked up from the doldrums of the prior two years. But on the small business side, it's not yet robust. It's going to continue to be a contributor although I'm not sure it'll be a substantial contributor.

The ability of CBIZ to close million dollar fee transactions, we don't really do a lot of that. We do smaller deals.

Sorry, I meant the deal market for you guys finding acquisition opportunities.

Oh, I'm sorry. We continue to aggressively look at acquisitions in all of our key areas. I don't think there's been a dramatic change in the expectations of the sellers over the last six months. Continues to be a tight market. We are encouraged by the transactions we're looking at.

We have a goal of generating at least 3% incremental revenue on our existing base from acquisitions and we have a shot of meeting or exceeding that goal. As the CBIZ story gets better known and as our products and services continue to improve, we are seeing more interest on behalf of sellers.

Thank you.

The next question is a follow-up from Jim McDonald. Please go ahead.

The accounting and tax business, after their big quarter, any other thoughts there and are you seeing any strength in the new [pract] areas like internal audit and other large company services?

We're seeing very strong growth in our Harborview business which is our internal audit and Sarbanes 404 work. That's a strong contributor so far and we expect it to be strong all year.

We are seeing a little bit of a light on the horizon with respect to the project business in the accounting world which we had not seen over the prior two years. The first quarter was good and the outlook for the year looks like it's a reasonable outlook this year.

Seeing a little bit more business and we've done a good job in matching our resource base against our business.

There have been significant changes in terms of business consolidations and staff reductions over the past 18 months which has gotten us down to the size that we're in now. Let me ask you questions you asked before about the share count. If you're asking about the shares outstanding, that's a combination of option exercises some amount of shares in acquisitions and no repurchases of the first quarter.

Why is the share count down then? Sequentially?

I'm sorry. You'll have to tell me which line you're looking at. For shares outstanding?

The fully diluted shares. As of December 31, that's the weighted average shares for the year. It doesn't fully reflect the share count post repurchase. It's about a 50% weighting as of December 31, 2003. We pick up the entire impact of that as of January so the number you see for March fully reflects last July's share count repurchase.

I was looking at the quarter only number, fourth quarter only number of 89.1.

Not sure how to answer that.

We'll get back to you.

Okay then a couple other little things. You mentioned cross serving. Can you talk about your results there?

I think we have indicated that our full year goal for 2004 is $9 million the first year revenue up from $7.5 million last year up from $6.5 million the prior year. We're tracking pretty well to that now. We've gotten $3.5 million done year to date of first year revenue. So expected first year revenue. So far we're on plan to make or exceed our corporate goal.

And then I think over to the expense side of things, I think you mentioned it looked like very good expense control is that the result of this restructure, or anything else you want to talk about there?

All of the business units and business leaders continue to focus on the expense line. We've got a very good budget process, a very good monthly review process of expenses. We monitor it from corporate. I think the process works pretty well.

Looks like basically a smaller expense rate than you've been in a while.

Nothing particular other than paying attention to detail.

DSOs were up a bit at the end of the quarter Any thoughts there?

No. The DSOs tend to climb the first quarter as I'm sure you can appreciate with the buildup on the business. I don't think of anything special there. Our full year goal to get the DSOs down. One we're in pretty good shape to make. Nothing specific there. A couple of anomalies we've been working on. Nothing that affects us long-term and nothing that's not correctable.

Thanks very much.

The next question is a follow-up from Robert Kirkpatrick. Please go ahead.

Could you talk a little bit about your cash flow and free cash flow you generated during the quarter? For some reason compared to past first quarters looks like it was a bit worse. I may be off on my estimates.

We actually, you're right, Rob. We used some cash as opposed to a source from cash. Typically in the first quarter, I described it as a cash flow neutral quarter. We have additional resources in the ATA group for tax season. We are generating lots of receivables that haven't yet converted to cash so it's a more neutral quarter.

Last year, I think, we got some tax refunds and things like that that would have helped the cash flow that didn't recur this year. Generally speaking we expect the first quarter to be relatively neutral. Maybe use a little bit of cash and then the cash flow from the receivables that are generated in that work turn into cash that's used to reduce the debt balance in the second and third quarters predominantly.

Great. So that we would expect X the share repurchase you paid for in the second quarter to see the debt come down from the peak level you mentioned earlier in the call.

That's right. And we've seen that from the March 31 level. We've seen that come off $5-6 million through today.

Okay. So the $54 million peaked at about nearly 60.

That's correct. Because we funded the tender offer the first week in April within days of March 31.

Okay. Great. Oh, and do you have an estimate as to what your bad debt that you took against sales in the quarter was?

There was nothing abnormal. I don't have that.

Probably in line with last year then. Exactly. Thank you so much and congratulations, guys.

Thanks.

For any questions press star 1 on the touch tone phone. Todd Van Fleet from First Analysis on line. Please go ahead.

Along the lines of the free cash flow, do you have a CapEx figure for the quarter?

We spent roughly $2 million in cash for the first quarter. And we would track to say $8-10 million for the year.

Great. Thanks.

Gentleman, at this time we have no additional questions. Any concluding comments?

Thank you. To answer the question asked before, the bad debt number is 1.4% so it's tracking to what we do historically. Actually slightly better.

Our summary of the quarter was it was a good operating quarter on our major businesses. We thank our employees for their continued hard work, thank our shareholders for their continued support.

We view the tender offer as a big success and we that we acquired the 7.5 million shares we were looking for. We look forward to reporting to you and hearing from each of you with our second quarter report. With that I thank you and goodbye.

This concludes today's teleconference. Thank you for participating. You may all disconnect at this time.