CBIZ Inc (CBZ) 2005 Q1 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the CBIZ 1st quarter 2005 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 will now turn the call over to Mr. Steven Gerard, CEO and Chairman.

Mr. Gerard, you may begin.

Thank you Christine.

Good morning, everyone.

Thank you for calling in to CBIZ’s 1st quarter conference call.

Before I begin my comments, I’d 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’re welcome to listen in.

However, I ask that if you have questions, you hold them 'til after the call, and we’ll be happy to discuss your questions at that time.

This call is also being web cast.

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

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

If you did not, you can access it on our website or you can get a copy by calling our corporate office here in Cleveland.

Finally, 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 forward-looking statements.

Additional information concerning the factors that would cause additional results to differ materially from those in the forward-looking statements is contained in our SEC filings, our Forms 10K and our press releases.

Joining me on the call this morning are Jerry Driscoll, our President and COO, and Ware Grove, our CFO.

By now, I’m sure you are all aware we issued our 1st quarter results this morning.

We were happy to see our revenue at $155-plus million.

Up over the comparable period from last year.

As the press release indicates, our EPS is down, compared to last year.

Primarily as a result of some expected and some unexpected events of an unusual nature in the 1st quarter.

We’ll get into the details of that during this call.

I’d like to also remind you that last year in the 1st quarter, we had a significant increase as the result of an M&A transaction, which we were not able to replicate this quarter.

It is important to note -- and we will get into the details of this later, as I said -- that we continue our same-business unit revenue growth, and we have increased our same-business unit revenue for 7 consecutive quarters.

I will make comments on the individual businesses and the general business climate that we see in a little while.

But right now, I’d like to turn it over to Ware, to give you the details of the financials.

Thank you, Steve -- and good morning, everyone.

As I normally do, I want to take a few minutes to review some of the highlights of the 1st quarter numbers we released this morning.

We are pleased to report that total revenue for the 1st quarter was $155.4 million -- which was an increase of 7.3 percent, or $10.6 million over the $144.8 million reported for the 1st quarter of 2004.

Same-unit revenue growth increased by $3.6 million or 2.5 percent in the 1st quarter -- compared with the 1st quarter of a year ago.

Newly acquired operations contributed $7.4 million to revenue in the 1st quarter.

And divestitures resulted in a revenue decline of $451,000.

With respect to our accounting, tax and advisory business, we are seeing revenue growth driven by increased demand for new services.

And we are also achieving some level of pricing increases for these services, as well.

As we look at our benefits in the insurance business, the retail group health business is flat, compared to a year ago.

And we have experienced some decline in the 1st quarter results in several of our national insurance business units -- primarily due to the delayed timing of new-business development, which we think will correct itself through the balance of the year.

Our medical-practice management business continues to achieve a nice level of growth in both revenue and in the pre-tax income contribution.

When looking at the results of the national practice group of businesses, keep in mind that during the 1st quarter of 2004, as Steve commented on, CBIZ recognized $2.1 million of revenue and $1.6 million of pre-tax contribution from fees recognized in connection with a merger-and-acquisition transaction in which we are engaged as an advisor.

We expect to recognize revenue from these types of engagements during 2005.

However, we did not close a similar transaction in the 1st quarter of this year.

Therefore, the comparable results this year were absent this revenue and the related earnings contribution.

As we mentioned in our last conference call, the Company is continuing to co-locate and consolidate operations.

During the 1st quarter, we recognized $1.8 million of expense in connection with these activities in the Chicago and in the Denver markets.

Most of these items are reflected in our operating expenses, as you compare year-to-year gross margins.

Another item that affected the 1st quarter of 2005 was a $1.1 million expense in connection with the settlement of a litigation matter, which Steve will comment on in more detail, later.

We also incurred approximately $400,000 of expense in the 1st quarter relating to our SOX 404 compliance efforts.

These expenses are reflected in the corporate G&A expense for the 1st quarter, and account for the increase in expense compared with the year-ago.

You will also note that interest expense has increased this year to $781,000 in the 1st quarter -- compared with 240,000 in the 1st quarter of a year ago.

Bank debt at the end of the 1st quarter was $67.5 million -- compared with $23.4 million a year ago.

Because of the seasonal nature of our business, debt levels typically reach a peak around the end of the 1st quarter, and we expect the positive cash flow generated in the 2nd and 3rd quarters will enable a significant reduction in debt from this 1st quarter level.

Of course, we will continue to evaluate the deployment of our cash flow for potential acquisitions or for share repurchases.

Please keep in mind that over the past year, CBIZ purchased approximately 10.4 million shares of common stock, at a cost of $50 million.

Also during the past year, the Company has spent approximately $14 million on acquisitions.

The increased level of debt we are carrying as a result of these investments will result in a higher level of interest expense throughout 2005, compared with 2004.

I also want to remind you that earlier this year, the CBIZ board authorized the purchase of 5 million shares during 2005.

During the 1st quarter, we repurchased approximately 90,000 shares.

And as I mentioned, we will continue to evaluate additional repurchase activity as we go forward.

The acquisitions we have completed over the past year are performing well.

And the share repurchases we have completed are accretive to EPS.

So considering all of the items I outlined, the net earnings-after-tax for the 1st quarter were $10.1 million -- which was $0.13 per share, compared with $0.15 per share a year ago.

Now also, as Steve commented on, please note that results of a year ago have been restated to reflect the impact of several operations that are now recorded as discontinued operations.

With over 60 different business units within CBIZ, we are continually evaluating our operations, and their strategic fit within our business.

During the 1st quarter, we made a decision on 3 operations that resulted in our recording these units as discontinued operations.

These business units are non-[inaudible] to CBIZ.

In 2004, these units generated approximately $10 million of revenue, and they operated at a loss.

We are resolving these operating issues as we address our alternatives, at this point, as we have utilized our positive cash flow and our debt capacity over the past several years to finance significant share-repurchase activity, and to make a number of acquisitions.

At the end of the 1st quarter, our debt-to-equity stood at 26.5 percent compared to 21.9 percent a year ago.

The DSO on receivables stood at 87 days at the end of the 1st quarter of this year, compared with 89 days a year ago.

It is important to know that while the merger-and-acquisition related transaction income of a year ago and the restructuring costs we incurred this first quarter made the year-to-year comparison difficult, these items were anticipated as we looked at our operating plans and our financial goals for 2005.

As we outlined in our last conference call, we are looking to achieve an increase of 20-25 percent in our EPS in 2005 compared with the $0.21 we reported for 2004.

And our 1st quarter results continue to be inline with these expectations.

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

Thank you, Ware.

Let me elaborate a little further on some of the items that Ware talked about.

Let me first start with the litigation matter, which cost us $1.1 million in the quarter.

Let me explain it as follows.

This was an employment-related lawsuit that we were highly confident that we would be successful, for which we had little-or-no reserve, because of the analysis we did -- and our confidence in winning the case.

As sometimes happens in a jury trial, we lost.

We lost and had a settlement that cost us $1.1 million.

It came as a surprise to us.

It came as a surprise to our counsel.

But that’s what accounts for the unusual transaction in the 1st quarter, and it was not related to the items that we talked about last year.

With respect to the rest of our businesses, we are seeing a business climate that is generally flat, compared to prior-year.

Economic growth is basically flat, but the market opportunities still remain out there for us.

So as Ware has said before, we are at this point -- based on all the information we know today -- still looking to make the plan that we outlined, notwithstanding the unusual transactions of the 1st quarter.

I also want to comment on the discontinued operations, which I appreciate sometimes makes the comparisons a little difficult.

There were 3 units that have been included in that.

A small unit in the ATA group, a small unit in the national practice group, and a unit in the B&I group.

Each of those, as Ware indicated, combined represented a loss for us, last year.

We are in the process of implementing plans to correct all of that.

But the proper accounting was to call them, “discontinued operations,” which is what we’ve done.

With that, I’d like to stop and open it up for questions of our shareholders and analysts.

Thank you.

We will now begin the question-and-answer session.

If you have a question, please press *, then 1 on your touchtone phone.

If you wish to be removed from the queue, please press the # sign.

If you’re using a speakerphone, please pick up the handset before pressing the numbers.

Once again, if there are any questions, please press *, then 1 on your touchtone phone.

Jim McDonald, First Analysis.

To start with the big picture, on the accounting business, you’re getting price increases, now.

I presume there’s also kind of an accreting issue, because there’s a high demand for talent, out there.

Could you talk about kind of the net-net of those impacts?

Sure.

I think we have both commented on it.

We’re seeing revenue increases from new business and from pricing.

We’re seeing margin compression from the huge demand for accounting personnel across the country.

Then for the need in certain areas to be increasing compensation.

So we are seeing some pressure, there.

I think our expectation for the year, however, is that we’re expecting the revenue to be above prior-year.

And we’re expecting that by the end of the year, based on a number of things that we implemented last year, to actually see margin improvement, bottom line, year-over-year.

Yes.

I would agree.

I just want to remind you, when you think about the accounting environment out there, it’s a pretty nice demand for accounting services.

CBIZ does not operate directly auditing services.

We have some auditing businesses we have a relationship with.

But we don’t operate the auditing services directly.

The other thing that’s under great demand right now is the internal audit and SOX-consulting related services.

We do have a business unit that devotes its attention to those services.

The results and the growth of that business unit has been terrific.

But it continues to be a relatively small piece of our accounting group.

We are under great pressure to recruit people.

As is the case when this happens, the costs of compensation are going up.

Therefore, our ability to get a margin lift, as Steve commented on, will come later.

But it hasn’t come yet, in the 1st quarter.

Can you comment on turnover?

Is it getting to any problem levels?

No.

We’re experiencing very, very low turnover, actually in all of our businesses -- at both the managerial level and at below that level.

Turnover has not been an issue for us.

What’s really been an issue with us in the areas of high demand is the inability to find qualified people in local markets.

Let me ask one more question and I’ll let someone else ask, and I’ll come back.

On the medical business -- you didn’t mention that in your remarks.

It seemed to have a decent quarter.

Could you comment on that?

Yes.

We put it in the press release, Jim.

The medical practice business continues to be strong for us.

Revenue grew and contribution grew.

They’re doing just fine.

Arthur Winston, Pilot Advisors.

Arthur Winston: Could you be more specific as to what kinds of price increases and what kinds of utilization you’re getting in your accounting business?

I know how much the increases are that auditors gave to us.

But you don't do auditing.

I want to find out if, in effect, you can pass on as much price increase, and what you do as to what auditors might be able to do, right now.

I think the general answer is, we cannot pass on the kind of pricing increases most people are seeing on the audit side.

Our pricing increases are really probably 2-4 percent, in general.

It’s also a little bit difficult in the first quarter to factor all of that out, since that’s such a crunched quarter for us.

You cannot use as an indicator what you’ll see in terms of the final 4 -- the big 4 -- and their increases.

Nor can you factor in the kind of increases that most public companies are seeing in their Sarbanes bills, because that does not equate down to the middle market financial work and tax work that we do.

Are your managers incensed to, in effect, put through as much price increase as they can?

Or do you think maybe they hold back?

In other words, is there more opportunity than your guys are realizing?

We believe that every billing manager has incentives for increasing pricing.

Because every billing manager has economic incentives to improving the bottom line of their units.

It’s always in the small end of the market or really the middle market -- it’s always a difficult push regionally to get as much as you’re seeing, nationally.

But we’re reasonably confident that pricing is going up in every place that it can go up.

We analyze it at least quarterly.

I know when the accounting tax and advisory unit did their goals for this year, they factored that in, down to the manager level.

I think the process works.

I think that over time, there really are 2 question. “How much can you raise price?” And then, “How much of that pricing increase can really stick?” We’ll probably have a better handle on that by June.

You made the comment -- if I interpreted it right -- maybe I interpreted it wrong -- that you thought that your profit margin for the full year in accounting could be as good as last year, or better -- even though the 1st quarter, which is a key quarter, started out lower.

That’s right.

I think the comment I made is our expectation, based on what we know now, is that the margin -- the full-year margin for our accounting and tax unit will be higher than last year’s.

Arthur Winston: The reason you get to that conclusion is the price increases that are coming through as we speak?

A combination of price increases, a combination of new business that gets booked and worked after busy season.

There’s more and more of that coming in.

Just basically better utilization of our staff during the softer time.

Alan Weber, Robotti & Company.

Please go ahead.

A few questions.

One was, in the previous press release and conference call, you gave guidance for EBITDA.

Is that unchanged?

Because you talked about the EPS, but not EBITDA.

The guidance for EBITDA would not change, along with the guidance for EPS.

It continues as we outlined, earlier.

Then my next question was, when you talked about the stock repurchase, I guess I’m a little bit confused.

Why, given where the stock is now, are you not as aggressive?

Since it sounded like you paid on average, close to $5 a share?

Yes.

Alan, we’re basically blacked out, unless we set up some programs -- which we did not, in the 1st quarter.

We’re blacked out until after we release earnings.

So during the course of the 1st quarter, typically -- between the end of the year and the release of year-end earnings, and then the subsequent 1st quarter cycle of earnings release -- we can’t have a lot of activity.

Let me also, Alan, clarify or reiterate what Ware said, earlier.

We evaluate the use of our cash strategically.

And we’ve said all along that the best use of our cash was to continue to make acquisitions in our core businesses.

Secondarily would be the repurchase of shares.

We continue to believe that’s the right plan for the Company, and we will continue to assess both of those as we go forward.

Certainly, if we were a buyer of stock at $5, one can conclude that $3.50 is probably more attractive than $5.

But it really comes down to what our acquisition program looks like.

It comes down to how many share we think might be available in the market.

So there are a lot of factors, there.

But as Ware indicated in his opening statement, those 2 uses of cash will continue to be our primary focus.

Let me ask you a broader question.

When you look at the Company -- and I know you’ve had some discontinued operations and you’ve made acquisitions.

But I look at like from ’02 to ’04 -- the gross margin in ’03 was higher than ’02. ’04 was a little bit higher than ’02.

But then your corporate and G&A is way up, and it’s up again.

I understand there are legal issues.

I guess what I’m concerned of is that you make the acquisitions -- you’re buying at a reasonable price, but your corporate G&A goes higher.

So it’s kind of almost back to treading water.

A couple of things, Alan -- and I don’t have all those numbers.

I can’t speak.

But I’ll just give you a couple of general comments.

A couple of years ago, we determined that the Company was stable.

We were coming together.

It was time to establish branding and national marketing.

So we initiated that -- a national marketing campaign.

And we’ve incurred some expense relative to prior years in ’03, ’04 and ’05.

We also have a wealth-management initiative.

We are building an infrastructure which we think is a good investment in the future.

Some of those start-up costs were incurred in ’04, compared to ’03 and ’02.

So you see some increases, there.

The other thing -- the comment -- that I want to remind you of, and we commented on it pretty regularly through the second half of the year last year -- were the legal expenses we incurred in connection with the litigation that we needed to deal with in California on the valuation case that popped up in litigation.

It related to work that we did back in ’98 and ’99.

That was also a pretty big factor in the ’04 number.

In addition, I think if you factor out the unusual legal expense of this quarter and our Sarbanes expense both this year and last year, in fact our SG&A as a percent of revenue is flat-to-down.

So while we’re making investments in marketing -- making investments in wealth management -- making investments in technology -- all of which are designed to give us a stronger base for the future, we’re absorbing that as a percentage of revenue.

I was just looking at the absolute numbers.

So a good part of the legal expenses that we’re looking at was last year.

That all basically occurred in the 3rd and 4th quarter?

That’s correct.

So that’s the 2nd half of the year.

There should be a pretty significant improvement, there, on that corporate front.

That’s correct.

As a reminder, for any questions, please press *, then 1 on your touchtone phone.

There’s a follow-up question from Jim McDonald from First Analysis.

Please go ahead.

Just wanted to go through a couple of other things, and try to figure out what should really be considered one-time items in the quarter.

Litigation, I think, would be clear.

That’s about $0.01 a share.

I assume you’d agree with that it’s clearly a one-time item.

What about on the restructuring charges?

You kind of… How many of those related to kind of ongoing office restructurings like you’ve been doing for several years versus things related to some of the new acquisitions?

None of it relates to new acquisitions.

It all relates to consolidation of existing business units in cities that we’ve been in a long time.

It’s a one-time hit in the quarter.

It’s not likely to continue at all, this year -- based on what we know.

And there are not, as I can think of it… There may be a couple next year, but at this point, nothing of that magnitude.

Just let me comment.

We’re kind of finishing up the costs related to the Chicago consolidation.

We have a number of operations in the greater Chicago market.

In the Denver market, we acquired an accounting firm a little over a year ago.

At this stage, we’ve staged a consolidation of those operations, along with the existing operations, into a new location this first quarter.

We may incur some expenses as we go forward to finish up these existing programs across the country, as we stage these moves.

But by and large, we’re mostly done with that program.

The San Diego acquisition may trigger some moving and consolidation expenses as we go forward, but nothing major in 2005.

Were all these expenses actually incurred in the quarter?

Or is this a reserve?

Why did it all hit in the quarter?

Well, when we vacate a space and move, we try to orchestrate this in an intelligent manner.

But we need to recognize the non-cash expense at that point in time of the existing lease that we’re vacating.

In addition, there may be some out-of-pocket moving-related expenses.

Quite frankly, there may be some efficiencies and some severance-related expense that needs to be incurred, associated with these activities.

So it’s a combination of all of those things.

But by far the largest number is the lease write-off.

The remaining lease write-off of the space.

Moving on, you mentioned acquisitions.

They’d be the primary use of Jim cash flow.

How do things look on the acquisition front, at this point?

Well, I’d say our pipeline of potential acquisitions is pretty strong.

The market still is very, very tight compared to what we’re prepared to pay.

So I’m not at this point prepared.

We have nothing we’re at this point prepared to announce.

We do expect that we will make some more acquisitions this year in our core businesses.

We are seeing kind of press expectations go up, maybe because of the stronger accounting?

We’re seeing the accounting business actually not going up a great deal.

We’re seeing that pretty flat to last year.

We continue to see pressure in the property and casualty market and in the health benefits market for acquisitions, as well as some of our national practices.

Just a clarification on the repurchase amount.

I think you’re somewhat unusual.

That $5 million share authorization -- does that go away if you don’t use it by the end of the year?

I guess you could always have another one, but does that go away?

Technically, Jim, it does.

The authorization speaks for the calendar year.

But in practice, the board is actively engaged in the dialogue with us about the activities on repurchase.

But that particular authorization would go away and you’d have to get a new authorization?

Technically, that’s correct.

Eugene Fox, Cardinal Capital Management.

In terms of your guidance of 20-25 percent growth over the $0.21.

Are you using the $0.13 number in that calculation, as far as Q1 contributing to your annual guidance?

Yes, we are.

In terms of just thinking about an operating income year-over-year, is it fair to say you’d basically add back the $2.9 million to come up with a number of about $20.5 million for first quarter of ’05, and going back to last year?

Taking out the 16?

So in terms of year-over-year on a recurring basis, you see about $1 million of underlying improvement?

Is that fair?

Well, I mean we’ll leave that kind of analysis to you.

Certainly, the unusual events of the first quarter are not likely to recur.

And the M&A transaction occurred last year.

Hopefully, we can replicate that.

The hesitancy I have is that there is always a lot of moving parts in any of this.

Especially with the disc op.

But yes, one can certainly pro forma back the unusual events of last quarter and this quarter.

When you do that, if all you’re doing is looking at those items, it’s a quarter-over-quarter improvement.

Thinking about that, what do you view as your successes this quarter, and the issues that you have to deal with?

I’m not talking about the discontinued items.

I’m talking about sort of the ongoing core businesses.

I think the successes of the quarter -- certainly the accounting tax-and-advisory group is up nicely over last year.

So that’s a success.

And our medical practice group is up.

That’s clearly a success.

We have some work to do on the benefits and insurance side, as Ware indicated.

We believe a lot of that is timing-related.

But until it comes in, you worry abut it.

We also had some operating issues, with respect to some of our other business units that we’re constantly working on.

Let me repeat what Ware said.

We have almost 60 separate business units.

At any point in time, some of them need more special attention than other times.

There isn’t anything on the horizon today that rises to the level of such concern that we lose sleep on it.

On the other hand, until everybody reports every month, you never really know.

So we are working hard to resolve the issues that are in discontinued operations, because those units can go a number of different ways.

And we’re paying very close attention to the rest of our businesses.

The continued success of the Company is going to be driven by, “Can we sustain revenue growth as we have for 7 consecutive quarters?

Can we sustain the increase in cross-serving that we’ve had over the last couple of years?” and, “Can we control expenses, notwithstanding the fact that the business unit that accounts for 40 percent of our revenue is under some significant compensation expense pressure?”

Relative to the issues you had in employee benefits last year -- is that still a source of concern, or has that basically been taken care of?

I think we have -- with respect to the single unit that gave us the biggest trouble last year, I think we have a plan in place that we’re working very hard… That will resolve that issue.

We’re still, as Ware said in his opening -- have some issues with a couple of the other national benefits and insurance groups.

But I think they’ll work out okay.

George Jusak, a private investor.

On your reporting, in terms of the benefits and insurance services division -- you show a 2.8 percent gross margin growth.

But you also indicate that the work site marketing business has experienced significant growth.

What portion of that 2.8 gain was work site marketing versus group medical-practice management?

First of all, I’m not aware that we have ever identified work site as any business unit, in any conference call we’ve ever had.

So…

But on your annual report on Page 25.

I thought you were referring to this press release.

Give me the question again, then.

I don’t think I understood it.

You’re showing basically the change last year in growth in the business an insurance services was attributable to work site [inaudible] versus medical practice-management [isn’t up].

Can you tell me how one’s progressing versus the other, currently?

I believe that perhaps we have the statement a little bit backward.

There was no growth last year in work site.

The business unit that you’re referring to -- work site.

There was growth in our benefits group.

So if we have a technical question, maybe we can deal with it offline.

I’ll be happy to do that.

Are there any new initiatives in medical practice-management in the benefits and insurance division, toward initiating new programs, marketing initiatives or anything of that nature?

The group health business itself is looking at -- first -- a number of acquisitions.

Secondly, they’re constantly reading the market and coming up with new products.

They’re using our branding, and they’re using the cross-serving initiatives to get more clients.

In addition to which we have been spending significant money on something called CBIZ Solutions -- which is our automated processing for small businesses.

That’s coming along very well.

They’re looking at the whole question of, “How do you handle small clients versus large clients?” In terse of general new-business activity, I think it’s fair to say that there’s a great deal going on.

Jim McDonald, First Analysis.

I guess no call would be complete without some talk about cross-serving.

Could you kind of give us a flavor of that in the 1st quarter?

Cross-serving in the 1st quarter remains on track.

I think we announced before that last year’s $10.5-10.4 million, we were shooting.

And we’ve actually put this up on our website -- for over $11 million, this year.

At this point, we’re on track with that.

We’ve already got a couple million dollars booked.

Last year, you may recall there were a couple of elephant deals -- $500,000 or more -- that really moved those numbers.

They did not occur in the 1st quarter.

So on a comparative basis, we are where we thought we would be.

For any question, please press *, then 1 on your touchtone phone.

Mr. Gerard, at this time, there are no additional questions.

Well I thank you all for calling in, and I understand the 1st quarter might be a little difficult to appreciate -- given the unusual nature of some of the transactions.

We remain confident, based on what we know today, that we’ll hit the plan that we previously indicated.

I will remind you that we continue to grow the same unit revenue as I said before, on 7 consecutive quarters.

That’s obviously taking a great deal of our focus.

I look forward to reporting to you our continued improvement with our 2nd quarter results.

Thank you all very much.

This concludes the teleconference for today.

Thank you for participating.

You may all disconnect at this time.