CBIZ Inc (CBZ) 2004 Q3 法說會逐字稿

Good morning ladies and gentlemen and welcome to the CBIZ Third Quarter earnings results conference call. (OPERATOR INSTRUCTIONS).

Please note that this conference is being recorded.

I would now like to turn the call over to Mr. Steven Gerard, Chief Executive Officer and Chairman.

Mr. Gerard you may begin.

Thank you.

Good morning everyone and thank you for calling in to CBIZ's third quarter conference call.

Before I begin my comments, I would like to remind you of a few things.

As with all 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 that if you have questions, you hold them till after the call, and we will be happy to discuss your questions 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 we issued this morning.

If you did not, you can access it on our Website or you can call our corporate office.

Finally, please remember that during the course of this 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 forward-looking statements.

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

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

This morning before the opening, we released our third quarter earnings.

Due to the seasonality of our business, as most of you know, our third quarter is almost difficult, and we were happy to announce this morning that for the first time in recent memory we actually posted a profit in the quarter.

Our 18 cents year-to-date compared to 15 cents continuing operations year-to-date, for last year represents the 20 percent increase that is consistent with the performance we have shown in the first and second quarter.

I have a number of comments that I would like to make following the detailed review of the financials concerning the state of our industry and some other initiatives within CBIZ.

I will hold back until after Ware gives you the details of the report.

Thanks Steve and good morning everyone.

I want to take a few minutes to highlight some items in connection with the third quarter and year-to-date numbers for 2004 that we've released earlier today.

For the third quarter, our total revenue was $121.6 million, an increase of 3.5 percent or $4.2 million over the third quarter last year.

Our same unit revenue grew by 2.3 percent in the quarter led by continued growth in our medical management practice business.

Compared with the year ago, divestitures have resulted in a revenue decline of $860,000 and newly acquired operations contributed $2.3 million to our revenue growth in the third quarter.

Within the Insurance Group, you should be aware that our core group health business continues to grow.

And as was mentioned in the earnings release, we have continued to experience operating difficulties with one of our business units that is included in the Benefits and Insurance Group.

This business unit has grown very rapidly over the past 2 years, and we are finding it difficult to sustain this growth and serve our larger client base at the same time.

During the third quarter, this unit's pretax contribution results were $1.5 million lower than in the third quarter a year ago.

Also during the third quarter, our legal expenses have continued to run higher than a year ago, primarily in connection with several long-standing litigation issues that've required a higher level of activity and that is responsible for the majority of the increase we reported in our general and administrative expenses.

In addition, we have incurred higher expenses for auditor and other outside professionals in connection with our review of internal control, which is mandated by the Sarbanes-Oxley Act of Section 404, which most public companies are dealing with this year.

The combination of these 2 items has increased general and administrative expense by approximately $1.4 million in the third quarter, which is the majority of the increase in this area.

Including all these items, through the third quarter, we reported net income from continued operations of $490,000, which is $0.01 per diluted share.

Through the first 9 months of 2004, our total revenue was $394.5 million, an increase of $10.6 million or 2.8 percent over the first 9 months of 2003.

Newly acquired operations contributed $7.5 million to revenue and divestitures resulted in a revenue decline of $9.7 million.

Our same unit revenue has grown by 3.4 percent for the first 9 months or by $12.9 million, again faced by continued growth in our Medical Management practice business.

For the 9 months we have experienced same unit revenue growth in all of our business groups.

When you look at the benefits in the Insurance Group revenue for the 9 months, the divestiture of the health Administration services business unit, which occurred in the second quarter of last year has caused a decline in the total revenues reported for this group.

Also, within the benefits in Insurance Group, however, as I mentioned earlier we have one unit that is performing well below our expectations.

For the 9 months ended September 30, the pretax contribution from this unit has declined by $4 million compared with the first 9 months a year earlier, which is the equivalent of about 3 cents per diluted share.

As I mentioned previously, general administrative expenses had been impacted by the additional legal expenses we have incurred in connection with several longstanding litigation issues and by expenses associated with our Sarbanes-Oxley 404 compliance efforts.

For the 9 months ended September 30, these items have increased our general administrative expenses by about $2.0 million compared with the year ago.

Including these items, for the 9 months ended September 30, we reported net income from continued operations of $14.7 million, which is 18 cents per share, compared with the 15 cents per share reported for the first 9 months a year earlier.

As you look at the balance sheet, you will note that our debt level has increased to $52.5 million as of September 30, 2004.

The increase in our debt level is largely driven by our share repurchase activity.

In addition to the 7.5 million shares purchased in our tender offer during the second quarter for a cost of $37.5 million, we have been conducting open market purchases since that time.

Through September 30, we have purchased an additional 1.8 million shares for an additional cost $7.8 million.

The total cost of share repurchase activity through September 30 is approximately $45.3 million.

During the third quarter, we established a new $100 million credit facility, which lowers our volume cost and gives us greater flexibility to grow our business, make acquisitions, and conduct share repurchases.

Our debt to equity ratio at the end of the third quarter was 21.1 percent, and our day sales outstanding in our receivables was at 78 days.

As we go into the fourth quarter, we think our full-year earnings per share will increase in a range of 20 to 25 percent over the 17 cents per share we reported for the full year 2003.

I want to conclude by saying that despite the several challenges which I described, our earnings per share stands at 18 cents per share through September 30, which is an increase of 20 percent over a year earlier.

We are pleased with the continued momentum of our same unit revenue increase, which is at 3.4 percent through the first 9 months.

Each of our business groups has increased same unit revenue.

We have also made four acquisitions in 2004, and the acquisitions we have made in the past year are all performing well.

Our balance sheet continues to be very sound, and we are utilizing our cash flow to conduct share repurchases and to make acquisitions, both of which are accretive to shareholders.

So, with these comments, let me conclude, and I'll turn it back over to Steve.

Thank you.

Let me comment on a few other items.

As all of you know, cross-serving is a significant part of our business strategy, and one of the three legs of our revenue -- one of the three drivers of our revenue and we had set for 2004 a first year goal of $9 million of incremental revenue, up from $7.7 million last year.

I am pleased to report that CBIZ exceeded that goal last week, and we are now above the $9 million number, and I would expect that number would grow for the full year.

That is a very significant event, because it means we are providing more solutions to our clients, more revenue to our Company, and in many ways it is validating the business model that we are pursuing.

Second, let me repeat what Ware said, that the same business unit revenue growth is broad based, each of our three major groups saw increases in their same business unit revenue.

Let me also comment a little bit on the current activity in the insurance industry.

As all of you listening now, we are a major insurance broker in this country, the bulk of our business is on the health and retirement side, our property and causality business is quite small.

The fact of the matter is that the total revenue received from any type of supplemental insurance commission arrangement on property cum causality is less than one-half of 1 percent of all of CBIZ's revenue.

It is not material to us.

Our total revenue from all commission -- supplemental commission sources including the health and retirement businesses is less than 2 percent of our revenue.

We see no significant impact as a result of what's going with the Attorney General in New York and perhaps other states.

We see no significant impact to our financials this year, and quite frankly, do not see any significant negative impact to our financials next year.

We believe what may happen in this regard is if in the event there is a change in the commission schedules that some of the supplemental commission arrangements may go away and that's certainly possible and they'll probably be made up by just a realignment of the existing commission schedule.

We think that our position in our communities as a strong local broker, we think that the quality of our employees and the standards under which they conduct themselves, and certainly the result of our own internal review indicate that none of the items, which have been so prominently displayed in the newspaper have seem to -- have occurred within CBIZ, I would say that we have a very good code of conduct here, and we are not concerned.

I would also tell our investors that we have received no enquiry from any government official concerning anything to do with our insurance businesses.

While we look at this and we are going to stay on top of the market and we'll probably follow whatever industry changes may be made, if not likely to have any impact on our financials in 2004 and 2005.

I'd also like to reiterate that while we had some unexpected challenges, which we have announced to you in the second quarter, and now again in the third quarter, we are very much on track and expect to post at least 20 to 25 percent increase in our earnings per share for the full year.

With that, I would like to stop.

I'd be happy to take questions from our shareholders and analysts.

(OPERATOR INSTRUCTIONS) Robert Kirkpatrick, Cardinal Capital.

First of all, could you give us what's the same-store revenue numbers where so to speak for each of the 3 major divisions, you sighted that they were all positive?

Yes.

Rob, we don't specifically disclose that.

I'll just say for the first 9 months, clearly, you can see the Medical Management Practice group, which is a stand-alone segment and that's a same unit equivalent.

We got positive movements that will be modest in the Benefits and Insurance group.

The core group health business is healthy but those numbers as a group have been impacted pretty significantly by the one group where we talked about the challenges we're trying to manage through.

We saw a very strong third quarter on behalf of our Accounting group, and year to date they are up but I'd say less than the kind of 3 to 5 percent that we would hope for, but they are positive.

And the last group, our National Practices group other than the medical management practice business is also of the similar amount.

Okay.

And secondly, do you have available what the bad debt number was for the quarter that you took as compared to the bad debt number in the year-ago period?

I don't Rob.

Of the top of my head, I would tell you that there was nothing significant that occurred in the third quarter.

It would have been a similar amount perhaps slightly lower as we've improved our management receivables than it was a year ago.

Okay.

And finally, could you discuss what is going on that is causing the rise in the funds held for clients and the client fund obligations and those both went down substantially in the June quarter relative to the March quarter and then have now come back up?

Yes.

The client fund obligations is where we account for all the cash that we manage in connection with our payroll clients.

So that truly is held in CBIZ's account but is held on behalf of our clients.

And that's strictly a function of the seasonality and the timing of our client payrolls.

So, you'll see that trend upward as that business grows and from time to time depending on the month end cut-off, it may spike or not.

So, it's strictly a timing issue.

And it has no working capital impact on you, is that correct?

No, it does not because the funds you will note are offset on the liability side by an amount due to clients, I mean it can be a like amount.

And then finally maybe one for Steve since he's probably feeling a little ignored.

Could you talk a little bit about the two acquisitions that you have just announced and how they fit strategically into your plan for the future for CBIZ?

Sure, I'll be happy to.

We announced in the quarter two acquisitions; the first was HTR, a benefits group in Maryland and the second was Gallery Asset Management, a wealth management group in Cleveland, both of them fit squarely in the previously announced acquisition strategy.

You may recall we said our strategy was going to be to acquire businesses in the businesses we're already in, in locations we already have the beachhead to build out our product array.

The HTR acquisition is a great small business that falls right into our Maryland market and covers basically the Baltimore

and Gallery Asset Management is going to be a cornerstone of our growing wealth management business that we rolled out internally about two weeks ago and we will really start to hit the ground running in the beginning of the year.

Could you spend one more time Steve talking about that and why was Gallery so attractive as a cornerstone and what are you going to really try to be focused on for rolling that business out in 2005?

Gallery, which was the company we've worked with for a number of years, co-provides advice to parties, network, individuals as well as corporations on their pension plans and does analytics with respect to the performance of various funds.

So, they really have two different businesses.

The CBIZ wealth management business is going to be focused on offering a wide array of investment and insurance and tax related products to high network individuals, many of whom are already our clients in one fashion or another.

If you look at the spectrum or the product array that you need in this business which is highly complex insurance product, well-trained professionals on the asset management side and strong tax advice.

CBIZ already has the component buried somewhere.

Now, we're just pulling it all together into a national business headed by someone who is building a staff to build a network business.

Gallery advises companies with an excess of a billion dollars in asset.

CBIZ today already before Gallery advised companies with at least that much, so we've got a good platform to build a wealth management business for the future.

Jim Macdonald, First Analysis.

Could we come back on the accounting side, that was up 10 percent year-over-year, so a very strong performance.

Can you --talking about the accounting business, up 10 percent year-over-year, it looks like some may be due to acquisitions but what else can you attribute the strength to?

Yes, clearly some of that was due to acquisitions, about half the growth was acquisition, about half the growth in the third quarter was same unit revenue growth in the third quarter.

And over the past year, we've invested in a different kind of person who has a slightly larger client base and we've seen the nice impact of that growth, the acquisition we made a year ago, the focus is our services and the internal audit and stocks consulting area has grown nicely, and that would help the acquisition growth and the accounting growth.

So, how about the benefit side?

I was surprised that revenue was down, as much as it was but I thought the problem unit was growing rapidly, did that change in the third quarter 100

?

So, on a year-to-year basis, Jim, the revenue for that problem unit is down.

It had grown in '03 and '02 and in '04 we are having some severe challenges sustaining that growth because this business by and large is not recurring.

So to the extent that we had successful 2002 and 2003, we are having a hard time matching those numbers.

So that definitely has an impact on those revenue numbers.

The other thing I want to point out again is the Health Administration Service Group, which was divested mid-year last year, that's roughly -- that was roughly a $12 million revenue unit.

So the absence of that in '04 does impact the total group revenues.

When did the revenues start trailing off for the problem Benefits group, was it there this year just now?

We saw a drop off significant -- a significant drop off in the second quarter and it continued in the third quarter.

What's the kind of prospects on turning that around or what kind of timeframe can we talk about?

I think, we are going to struggle with this for the rest of the year.

There are 2 things that happened, while we are fixing the operating problems, we are losing some business and quite frankly and not taking some other business that we don't think we can handle until we know we can do it right.

So I'm expecting that it'll take the balance of this year to really finish getting our hands around to stop the negative trend.

Let me ask a couple of technical questions, share repurchase was a -- a large number of that done at the kind of end of the quarter?

We are pretty active, Jim, throughout the entire quarter.

We bought in round terms 1.8 million shares in the open market.

Hadn't you done about $0.5 million of those in the second quarter already?

We had under a half million dollars in the second quarter.

So we've done, I'll say again in round terms, roughly a million and a half in the third quarter.

And that was spaced through out the quarter?

Yes, it was.

We would have been blacked out through late July and then our window would have reopened in late July, early August and we've been fairly active.

But, Jim, you realize that we are limited by volume and other constraints as to how much we can buy and when we can buy.

So, while we've been active, meaning we are buying everyday, we are not necessarily buying a lot of shares everyday and if you follow the volume of late, the volume has really have been quite low.

I guess, one of the reason I was asking is that the share count didn't go down as much as I had expected, considering the amount you purchased and I'm just guessing. may be that is due to partial quarter share count?

Jim, that 's a good observation.

When you look at the third quarter count on a standalone basis it starts to reflect, more fully reflect the reduction.

But on a year-to-date basis, we are weighting both the first, second and third quarters together.

Couple of other things.

Can you talk at all about the revenue dollars from the new acquisitions and the amount you paid for them?

Sure, the revenue impact from the acquisitions will be minor for 2004, the Gallery transaction, which we announced, actually doesn't close officially until January 1.

So, there will be no revenue.

The HDR will have some small revenue impact, but it won't be material.

In total, these 2 acquisitions we paid in a range of 5 to 7 times EBITDA as a multiple and we stretched that out over a 2- to 3-year period of time.

Yes, the reason, we are hesitating is that we really haven't -- the doubt, what we really paid so far, and what we like to do all transactions is the first down payment.

This gets paid out over 2 or 3 years based on performance.

So, it wasn't a particularly significant or eye-catching amount, compared to CBIZ's total revenue.

Although I'm sure of the significance to the people whose firms we purchased.

Any amount like a couple of million revenue each or --?

Absolutely.

The aggregate revenue that we expect from both of them is in the first year at least $4 million and an incremental revenue next year --

And then, one more on that.

SG&A obviously, you talked about what happened in the quarter.

What's the prospects for Q4 and kind of when can we expect that to get back in line?

I think that the impact of the litigation expense that were highlighted in both the second and third quarter we'll update in the fourth quarter.

It will be higher than we've thought it was going to be running but not as high as in the second and third quarter.

And the Sarbanes, is that continuing?

That's continuing and that will probably increase a bit.

That has a much smaller impact quite frankly than the legal expenses which we've highlighted, but it is a factor and we mentioned it.

Arthur Winston, Pilot Advisors

Good morning everybody Steve, I was curious if you put any informal or formal parameters about how much money CBIZ should borrow as attractive acquisition opportunities come to your pipeline?

All right.

We have no hard and fast rule.

I think both Ware and I in our conversations with you and with other investors over the last 2 years have indicated that as a service Company that generates a rather consistent cash flow in the $45 to $50 million range.

We're generally not going to be comfortable with debt more than 150 percent of our cash flow.

So, if you wanted an informal cut off, it would be at that level.

And is the pipeline for potential acquisitions bigger than usual or just the same opportunistic happens-to-impact situation?

No, I think the pipeline for acquisitions is bigger than usual.

We hired effective July 1, a full time M&A internal resource, who is doing an excellent job in helping us both source and do the due diligence on new transactions, and we have indicated that we need to step up this activity a little bit, and I think you'll see it certainly in the fourth quarter or probably a higher level of acquisition activity than we've had in the first 3 quarters.

Rob Kirkpatrick, Cardinal Capital.

Steve, staying with the M&A scene, would you expect to have larger acquisitions in the pipeline or would they tend to remain about the same size as what you've made in the year-to-date size, in this $2 million businesses on annual run rate basis?

What is interesting is the answer is yes.

We're going to see some number of the smaller acquisition which is the $2 to $5 million revenue transactions because in some of our businesses that's what fits in nicely in our regions, and I think there is a very good chance that we will see some larger transactions as well.

We have the capacity and we have the management team at the operating level in place to absorb larger transactions.

We're actively looking for them and that as you know being a professional in this business they never call

but we're certainly looking at more transactions than we're looking at larger transactions.

And then, could you also talk a little bit more about why you think the cross-serving goal has been exceeded here with several months to go in the year and are there any kind of lessons we can draw from that, and then secondly have you given any thought to what the cross-serving goal should be in 2005?

I think cross serving is gaining traction for a number of reasons.

First of all, we are very much, we're pretty much completed with our core location effort and core location goes a long way to getting people used to each other and working with each other and building a trust as I've said before cross-serving or cross-selling is a function of trust, it's not a function of product delivery.

So, I think the more we do it, the more comfortable everyone gets that their partners are as good as they are in their individual respective areas.

I think we put a lot of time and effort into managing cross serving.

All the senior officers talk about it wherever they go.

We track every transaction, we acknowledge every transaction.

There are economic and centers built in at the business unit level for businesses to focus on cross serving.

So, what we're seeing in part is the beginning of a significant cultural change where people are realizing yes, it works, yes, it helps to acquire yes, they are not putting themselves for their relationships at risk and the company is benefiting it.

I'm pleased that it's at $9 million, but $9 million is less than 2 percent of our total revenue and we're shooting for a much bigger number than that.

I have no view at this point as what the number is going to be next year.

We're in the middle of our budget process with all of our business units, the goals for cross serving like many of our other goals get rolled up and then some executive adjustment is typically made.

So, at this point, I think it's too premature to talk about.

Next year, I just think what's important is we've gone from $6.50 million the first year incremental revenue 2 years ago to 7.7 last year to over 9 this year and it's heading in the right direction.

Well, congratulations on that.

(OPERATOR INSTRUCTIONS) Mr. Gerard at this time I'm sorry, we have no further questions.

Well, thank you Sandra and thank you to all of you who have called in.

We appreciate your continued support.

We'll keep you advised of all significant transactions and we look forward to speaking to you about the full-year results when they come out next February.

Thank you and good bye.

Ladies and gentlemen, this concludes today's conference.

Thank you for participating.

You may now disconnect.