CBIZ Inc (CBZ) 2004 Q2 法說會逐字稿

Welcome to the CBIZ second-quarter earnings results conference call.

At this time 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 would now like to turn the call over to Mr. Steven Gerard.

Thank you and good morning, everyone, and thank you for calling in to CBIZ's second-quarter conference call.

Before I begin with my comments I would 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're welcome to listen in; however, I ask that if you do have questions you hold them until after the call and we will be happy to address them at that time.

As noted before, this call is being webcast.

You can access the call over our website, www.CBIZ.com.

You should all have received a copy of the release which was issued this morning.

If you did not, you can access it on our website or you can call our corporate office for 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 the actual results to differ materially from those in the forward-looking statements is contained in our SEC filings, our Form 10-K and our press release.

Joining me this morning here in New York is Ware Grove, our CFO, and in Cleveland, Jerry Grisko, our President and Chief Operating Officer.

This morning before the opening we released our second-quarter earnings, and basically the second quarter showed an increase in revenue, more importantly an increase in same-store revenue.

And while our earnings per share remained flat compared to last year, I ask that each of you pay attention to the presentation this morning because as you will recall, last year's second quarter contained some extraordinary items.

And as we will discuss, this year's second quarter contains some extraordinary items which we do not believe are reoccurring.

Before I go any further, I would like to turn it over to Ware Grove, who will give you the details, and then I will come back to wrap up.

Thanks, Steve.

Good morning, everyone.

I want to take a few minutes to highlight the results we announced earlier this morning for the second quarter and for the year-to-date.

We are pleased to report that same-unit revenue increased by 3.2 percent, or by $3.9 million for the quarter, and same-unit revenue has increased by 3.8 percent, or by 9.9 million for the year-to-date.

Same-unit revenue has increased in five of the last six quarters.

Revenue growth in our medical management practice business continues to be strong and same-unit revenue for the benefits and insurance group continues to grow.

In addition, same-unit revenue in our national practices group -- which includes our IT consulting, payroll, mergers and acquisition valuation, and several other businesses -- has increased both for the quarter and for the first half.

Same-unit revenue for our accounting tax advisor group declined slightly in the second quarter, and has essentially been flat for the first half of the year.

Let me outline several factors that should be noted when you review the second quarter and year-to-date results in comparison to a year ago.

As Steve mentioned, or will talk about momentarily, we have one business unit within our benefits and insurance group that has negatively impacted our results.

Rapid growth within that unit over the past two years has presented significant challenges.

As a result, the pre-tax direct contribution from that unit this year has negatively impacted our margins for the second quarter and for the first half.

The pre-tax impact in the second quarter was approximately $900,000 and the impact here year-to-date is approximately $2.5 million of pre-tax income, or the equivalent of approximately 2 cents per share when you compare first half results this year with last year.

We are addressing these issues, and despite this challenge we remain confident that we will achieve our full year target of increasing our earnings per share by 25 to 30 percent over the earnings per share of 17 cents which we reported for 2003.

In addition, within general and administrative expenses, we have incurred approximately $1.3 million in higher legal expense in the first half of 2004 compared with last year, as we have needed to address several long-standing litigation issues.

In addition, our spending to support our wealth management initiative has increased as has our spending to support and invest in the growth of several benefits and insurance operations.

Also, when you compare results from the second quarter a year ago, I want to remind you that a gain on sale of approximately $1.8 million was recognized a year ago in connection with the sale of our health administration services business unit which was part of our benefits and insurance group.

We announced two additional acquisitions in the second quarter.

While these recent acquisitions had very little impact to revenue comparisons as of June 30, the total impact from all acquisitions made within the past 12 months is a revenue increase of $2.6 million for the second quarter and a revenue increase of $5.1 million for the first six months.

The impact to revenue from operations had it been divested or closed within the past 12 months accounts for a decline of $3.7 million for the second quarter and a decline of $8.9 million for the first half.

And as I mentioned previously, the divestiture of health administration services is the primary driver of those numbers.

I also want to remind you that during the second quarter, CBIZ repurchased an additional 7.5 million shares for a total cost of $37.5 million under our tender offer.

In addition, we were active in open market purchases and bought an additional 464,000 shares for an additional cost of approximately $2 million after the initial tender was completed.

Combined with the shares repurchased in 2003, CBIZ has repurchased approximately 18 million shares for a total cost of about $73 million within the past 12 months.

Our operations continue to generate positive cash flow, and while are focused on increasing revenue growth through internal organic and cross-serving efforts, as well as through targeted acquisitions, our strong balance sheet and continued strong cash flow has enabled us to conduct this share repurchase activity in addition to these other initiatives.

As of June 30, our outstanding bank debt was approximately $47 million, or about equal to our trailing 12-month cash flow as measured by EBITDA.

I want to remind you that as we repurchase shares, the shares repurchased are accounted for as treasury stock, and therefore, these repurchases effectively reduce our reported shareholder equity.

Considering all of this, our debt-to-equity ratio as of June 30 was 18.5 percent; so our balance sheet continues to reflect very strong ratios.

Our days sales outstanding -- a measure of how quickly we are able to convert our revenue to cash -- was 79 days as of June 30, 2004.

We continue to strive toward our target of 75 days outstanding, which we think is an attainable goal for a professional services business like CBIZ.

So let me conclude by saying that while we are addressing a significant operating challenge in one of our benefits operating units, and this has impacted our operating margins for the first half of 2004, we are pleased to report our first-half earnings per share were 17 cents for 2004 compared with 14 cents per share for the first half of 2003.

Our balance sheet continues to be strong and we want to reiterate our expectations of achieving a 25 percent to 30 percent increase in earnings per share for the full year 2004.

So with those comments, let me conclude and I will turn it back to Steve.

Thank you, Ware.

Let me just add a few more of my own comments.

Our cross-serving, which is a key element of our revenue growth, is on or ahead of plan as we sit here in July.

As we sit here in July, as Ware has said, we are still confident of hitting our earnings per share growth number.

We have a targeted revenue growth number for the year of between 4 and 6 percent, not counting acquisitions.

We are on target to hit that.

And we're on target to hit our EBITDA plan of $50 million for 2004.

So having said all of that, when you take into consideration the extraordinary gains in the second quarter of last year, some of the extraordinary expenses we have incurred in the second quarter of this year, our quarter-to-quarter comparison is, in my opinion, satisfactory and keeps us exactly on plan for where we said we would be for the full year.

With that, I would like to stop.

And I'd be pleased to take questions from any of our shareholders or analysts.

(OPERATOR INSTRUCTIONS).

Jim Macdonald, First Analysis.

Could you give any more details on this benefits business that's having the issues, and kind of what area its in?

Sure.

Our benefits business is really divided into two pieces.

We have our national retail business, which quite frankly is operating just fine.

Their returns are good.

Their growth is fine.

They're on track.

And then there is a half a dozen what we call national businesses under the benefits and insurance group, and one of them has had just explosive growth in the last year, which has caused some systems issues and some client service issues, and what I would just basically describe as general control issues when something grows very, very quickly.

And we've had to commit significant resources to make sure that as that growth continues -- and we think it will -- we're in a better position for it.

So we have had additional expenses on the operating side and we've had some revenue in the first quarter that needed to be reversed because our bookkeeping wasn't as crisp as it should have been.

Having said all of that, it is a strong business for us; it is a business we do expect to grow the rest of the year, and we expect to get them back on track sort of by the end of the year.

I will remind all our investors and our shareholders that a year ago we had indicated that we had a significant problem in a different unit.

We spent a lot of money last year fixing that, and that unit turned around and is very, very profitable this year.

So in a portfolio of 60 companies, while it is not acceptable that we have these kinds of problems, from time to time you are going to have them when a business grows as rapidly as that business grew.

Can you give us some idea of how fast it is growing, kind of the amount of revenue reversed, and when you expect to have it back in control?

We think we are in control now.

We're changing systems.

We're changing client service interface.

We're putting significant management resources against it.

So from a control standpoint, I think we are in pretty good control and we're getting there every day as we speak.

The revenue of that business unit is between 12 and $15 million, and that is up significantly from the year before.

And -- I'm sorry, go ahead.

Jim, that unit over the last three years has probably increased its top-line by three to four times, perhaps slightly more than four times.

So it's been a very good success story.

Along with that rapid growth, however, has come some growing pains.

And with respect to Steve's comment on the revenue, we have brought on a slightly different kind of an account, and we have determined that the stickiness of the accounts is not what it had been in the past.

So we have made some adjustments to revenue as we have gone through and evaluated each quarter.

So that's what we have done.

What was the magnitude of the impact in the second quarter?

In the second quarter when you compare it to a year ago, the comparison is about $900,000 unfavorable.

(indiscernible) the reversal versus (technical difficulty)

And that's a combination, Jim, of lower revenue and higher expenses to support the growth.

Going over to the ATA business -- any issues there?

I know it seemed to be slowing after (inaudible) to turn up, and is it going to start turning up here in --?

Let me give you my best take on the ATA business, which as I've said before is a slow growth business.

What is important to think about when you look at ATA is you really have to look at the first six months versus six months.

It's very hard to look at quarter-to-quarter, especially given the importance of the first quarter.

And the reason I say that is that last year for example, our first quarter wasn't as robust but we made up some of it in the second quarter.

We have also -- I think it's important to note that in the past year we have downsized that business by over 100 people.

There is an expense of that in terms of severance and some dislocation.

We think we're more profit properly sized for the business that we have, and we expect the accounting and tax and advisory business to make its plan this year, and that plan is growth over last year.

So we're probably a little bit more balanced, but we still carry -- we carried over the last quarter or two some expenses that we hope won't continue.

But again, it is a good business for us; it's a core business for us.

We are picking up significant Sarbanes work within that business.

But the rest of the tax and accounting business is a relatively slow growth business.

You're not seeing any positives from the economy?

We're seeing a little bit in some of the areas.

I want to just ask two technical questions and then I'll let some else ask.

Tax rate seemed, if I did my calculations right, to be low this quarter.

Could you talk about that?

And also, share count seemed lower than I expected, and maybe you can give us some thoughts on where we're going to settle out in Q3?

I'm not sure.

In Q3 we should settle out close to the June 30th number, maybe slightly lower, Jim.

Because remember that the share count came down early in the second quarter as we completed the tender, and then we did another $464,000 throughout the quarter as we were allowed -- 464,000 shares throughout the quarter.

The tax rate has come down as we have -- we've more aggressively managed our tax structure at CBIZ.

You may recall that we were carrying a load of nondeductible goodwill, and as gains and losses go through we still carry some of that stuff.

But as we have cleaned up some of the formative-year tax positions we have been able to adjust the tax rate down.

What is the guidance going forward on tax rates?

I think for the full year it will probably come in at around 41 to 42 percent, Jim.

I think it is important to comment here, Jim, and to everyone else, that we have as a goal in this company to significantly reduce the tax rate from the rates we had been running at.

So we are hopeful that with the kind of planning we are doing and some organizational restructuring that we are working on, that both the -- that the tax rate will come down a little bit by the end of this year, and quite frankly by a little bit more next year.

41 to 42 isn't -- it wouldn't really be down, I mean -- so --

I think we have been slightly north of 42.5 in prior years.

So it is coming down maybe a point, half-a-point to a point this year -- perhaps more.

But I think for full-year expectations, something in the range of 41 to 42 percent at this point would be reasonable.

Tom Cullman (ph), Pensico (ph).

This is actually Josh Rosen (ph) calling from Pensico.

A few quick questions.

The first is, if you can give some guidance on the dollar amount for run rate interest expense going forward.

The second part is some guidance on CapEx for the full year.

And the third is not the effective tax rate, but cash taxes -- a little bit of guidance on that.

We had 46, $47 million outstanding on our bank debt as of June 30, and seasonally in the second half of the year we generate cash.

So we would expect to reduce that; in fact, today we're sitting on $42 million.

So we have already reduced that $5 million from June 30.

I would expect the run rate to reflect about a 3.5 percent interest cost on an average balance of roughly $40 million for the balance of the year.

Josh, let me interject -- that's a steady-state forecast, that should CBIZ make any significant acquisitions or should CBIZ make any significant amount of share repurchases, obviously, that number might go up.

In terms of capital spending, we typically spend approximately $10 million a year.

The first half was slightly higher than that, but I would expect that to be $2.5 million, plus or minus some small factor, each quarter.

And cash taxes?

Cash taxes, I think, will come in probably at 8 to $10 million for the year.

Bob Bennett (ph), (indiscernible) Management.

My question, guys, was on your concept of cross-servicing customers -- in my mind, sort of cross-selling.

And I just wanted to get a little bit more color in terms of how you guys manage that process and what systems you have in place to do that, and what is your sort of hit rate and how you're working to improve that?

Sure, Bob.

First of all, we publish our target every year.

Last year we did $7.5 million of incremental first-year revenue from our cross-serving.

This year our target is $9 million of incremental revenue.

We're already at 5.2 as we speak going towards our target.

We have an internally developed system whereby every cross referral is entered, it's tracked, it's monitored.

And when it closes, we are able to record expected revenue.

We have tied some of everyone's compensation to their cross-serving effort.

We have reinforced it with our marketing and all of our branding efforts.

So we have a very, very aggressive program to try and generate a larger and larger share of our clients (indiscernible) in our various services across all of CBIZ.

And as I mentioned in my comment before, we continue to be on track.

Long-term, our goal is to get cross-serving to be 3 to 5 percent or 3 to 6 percent of our total revenue.

And each year in the last four years we have increased the dollar amount that we have been able to cross-serve.

And we're going to continue to push it.

Can you just give me a general ballpark of how much someone's compensation could potentially come from sort of cross-serving?

That depends on what business that they're in.

Ad what we do is we tie the cross -- there are two answers to that.

Certain groups have individual incentive plans where some of their incremental revenue each -- incremental earnings, that you're tied to a cross-serving goal.

But in general what we do is we give the business unit that the person is in a credit of 20 percent of that first-year revenue, and that money becomes a bonus pool to be divided up among a number of people in the Company -- in that business unit -- I'm sorry.

So it's very hard to go down to the person and say you've got 25 percent or 30 percent of your revenue at risk.

But I would say that the cross-serving revenue that generates bonus money can influence people, certainly up to 10 percent or more of their total comp.

I guess the follow-on question would be a sort of total cost of ownership, i.e. marketing dollars to generate a new customer, versus marketing dollars to generate a cross-serving customer.

Have you ever done analysis in terms of what the difference is there?

No.

Because our cross-serving is such an integral part of our total marketing plan that the umbrella covers both.

Don't forget, cross-serving requires education; in many cases it requires co-location.

It requires a lot of pieces which are also part of our normal business.

So I don't think we've ever broken down where I could say the cost of acquisition of a cross-serve is versus a branded new client that we got from the outside.

One last question.

I know that you guys have some offices where you're really trying to consolidate all the business units in one space to see sort of some synergies, and I just wanted to see if you have seen a difference in the productivity in terms of cross-selling in those sort of consolidated offices?

78 percent of our cross-serving revenue last year came from those offices that were co-located.

(OPERATOR INSTRUCTIONS).

Jim Macdonald, First Analysis.

Just a couple of more topics.

On the recent acquisitions, could you talk a little bit about how those are going and your thought process in making those acquisitions, and whether we have more acquisitions expected here?

The two new acquisitions were made within the last 30 days.

They are doing great for 30 days.

They're on track, as are the ones that we did last year.

For the most part all the acquisitions we have made are pretty close or ahead of plan.

The two that we made -- one in Cleveland, Ohio -- adds to our technical information technology business, and the other is a wonderful acquisition in Denver that folds in under our accounting group.

Our strategy for acquisitions has not changed, which is, we're going to acquire companies that are in businesses we are already in, and in those cities that we have established presences before we go outside of our own backyard.

Both of those fit that strategy.

We are actively looking at any point in time at at least a half-a-dozen or more additional acquisitions.

None of them are close enough to make an announcement on, but I am highly confident that between now and the end of the year we will complete a number of other acquisitions.

Do you expect the rate to increase compared to past history?

I would certainly hope so.

We have recently hired a full-time internal resource to head up our M&A activity, and I am hopeful that we will continue to find the right strategic -- enough of the right strategic acquisitions so that the pace will increase.

It is our intention to try and increase the pace.

On the legal costs, you mentioned how much the legal costs were for the six months.

Could you give the legal costs for the quarter related to these issues, and kind of remind us which are the major legal issues that are outstanding?

The legal costs bump in the second quarter was about half of the $1.3 million I mentioned for the year to date.

We've got two or three things that are long-standing issues.

One of them relates to the heritage case in California, which I think we made an announcement on in the second quarter.

And as you may know from that announcement, we needed to change counsel, and that took a lot of time and attention and some extra expense.

And then there were a couple of other cases that were long-standing that we basically needed to address and clean up.

Let me add, Jim, that I think it's important to underscore that the three cases that ate up most of the money in the second quarter are either cases that came from activities before the entities were owned by CBIZ or go back to the '98, '99, 2000 period.

None of the money that's been spent in the quarter had anything to do -- none of the large dollars had anything to do with any recent activity.

These are unfortunately the expense of dealing with legacy issues.

And I would also point out that in a number of the cases which actually went to trial -- and that's where there's a lot of expense -- we have won every case.

It's just unfortunately we have to pay for it.

Where are we, in terms of those expenses starting to go away?

I think that, obviously, the two cases where we went to trial, those are over subject to appeal, which we don't expect.

The heritage case which sort of came out of the blue and required a lot, as Ware said, a lot of resources and a lot of money, is -- I think that the initial expense will now taper down to the normal maintenance expense.

We still remain very confident in that case.

It still is not likely to have any material effect on our financial condition, and I would expect that these things would start to trend down a little bit.

We thought that -- we thought they were trending down last year quite frankly, and we just got a blip in primarily the second quarter.

One more topic.

Where do you stand in terms of your authorized share repurchases?

Give us some thoughts on activity in the markets.

We have at least authorization from the Board for at least 2 million more shares.

It may be slightly more than that.

I think it's closer to 2.5 million shares.

The Company, as I'm sure you know, is precluded from buying during the period 15 days before the end of the quarter, through the release of its earnings.

So for the past 45 or 55 days we have not even been in the market, because we're not allowed to.

We have the authorization, we have the cash.

It is certainly possible that when the window opens up, which will be towards the end of this week, that we would be back in the market.

(OPERATOR INSTRUCTIONS).

Tom Cullman from Pensico with a follow-up.

This is Josh Rosen again; sorry.

Is there any update on reverse stock split?

There is neither an update nor had there been a prior discussion or announcement of it.

We will continue to address our capitalization issue.

We have lots of options, but at this point there is no plan to do anything along those lines.

Gentleman, at this time there are no additional questions.

Okay.

I would like to thank our investors and the analysts who are following us.

We remain confident of our performance for the rest of the year, and I look forward to speaking to each of you with the third quarter report if not before.

Thank you.

Thank you for participating in the CBIZ second-quarter earnings results conference call.

This concludes today's teleconference.

You may disconnect at this time.