CBIZ Inc (CBZ) 2005 Q2 法說會逐字稿

Good morning ladies and gentlemen and welcome to the CBIZ Second Quarter 2005 Results Conference Call. [OPERATOR INSTRUCTIONS] I would like to turn the call over to Mr. Steven Gerard. Mr. Gerard, you may begin.

Thank you Rose, and good morning everyone. And thank you for calling in to our second quarter 2005 conference call. 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're welcome to listen in; however, I ask that if you have questions, you hold them for after the call, and we'll be happy to address them 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 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 forward-looking statements. Additional information concerning the factors that could cause additional results to differ materially from those in forward-looking statements is contained in our SEC filings, our Form 10-K, and our press releases.

Joining me on the call this morning is Ware Grove, our Chief Financial Officer. This morning, before the open, we announced our second quarter results. We reported earnings per share of $0.06 versus $0.04 same quarter last year, on revenue of almost $140 million, which was up some 13% from last year's second quarter. Same-business unit revenue was up nearly 8% for the quarter. We are encouraged by these operating results particularly because all four of our operating groups were ahead of where they were last year.

Before I continue with my comments, I would like to turn it over to Ware to give you some insight into the numbers we released this morning.

Thanks Steve. I want to take a few minutes to talk about the highlights of the numbers we released this morning for the second quarter and six-month results for the period ended June 30, 2005. We're very pleased to report that total revenue in the second quarter was $139.6 million, an increase of $15.7 million, or 12.7% over the second quarter of a year ago. Acquisitions we have made in the past 12 months contributed $6.1 million to this revenue growth, and divestures caused a decline of $181,000 in revenue. We are pleased to report that same-unit revenue grew by $9.8 million for the second quarter, which is a growth rate of 7.9% compared with the second quarter a year ago.

Each of our business segments recorded growth and revenue for the quarter and for the six months. On a same-unit basis, the medical management practice business continued its record growth in the second quarter. In our Accounting, Tax & Advisory as well as our National Practice group of businesses, both achieved nice same-unit growth in the second quarter.

We were able to leverage the revenue growth in the second quarter into a 47.1% growth in operating income. Earnings per share from continuing operations for the second quarter increased to $0.06 per share from $0.04 per share reported a year ago. For the second quarter, all operating segments reported an increase in earnings contribution compared with second quarter a year ago.

For the six months ended June 30, 2005, total revenue from continuing operations increased by $26.3 million or 9.8% over the first six months a year ago. Newly acquired operations contributed $13.6 million to revenue growth and divestitures reduced revenue by $632,000. Same-unit revenue grew by 5.0% or by $13.6 million for the first six months.

Included in the first half numbers are the consolidation and moving expenses we incurred in the first quarter as a result of our continuing co-location of operations. Compared with the first six months of a year ago, this expense increased by $1.8 million primarily in connection with activities in the Chicago and Denver markets. This expense is included in operating expenses for the first six months. Also, let me remind you that in the first quarter, we settled a litigation matter and recorded a $1.1 million expense, which was reflected in our general and administrative expenses for the first six months.

You will also note that interest expense has increased by $957,000, almost a $1 million, for the first six months this year. This is the result of carrying higher debt levels this year compared with the prior year. The higher debt levels result from our share repurchase activities, which have continued through the first half of 2005, as well as our acquisition activities. We continue to utilize the positive cash flow generated from our operations by making acquisitions and conducting share repurchases. We announced two acquisitions in the first quarter of this year and over the past 12 months, we've made 6 acquisitions.

As I mentioned earlier, these new operations contributed $13.6 million of revenue growth, to the first half results this year, and all are performing well. In the second quarter, CBIZ has been actively repurchasing shares in the open market. And through June 30, 2005, we purchased a total of 1,876,000 shares at a cost of approximately $7.6 million. Since June 30, we have continued to repurchase shares under an approved 10B-51 plan and, we have now repurchased a total of 2.4 million shares at a total cost of approximately $9.9 million in 2005. You may recall that during 2004, CBIZ repurchased 10.4 million shares including 7.5 million shares, which we repurchased in connection with the tender offer we concluded in the first half of last year.

Our bank debt, which has been utilized to finance share repurchases and acquisitions, stands at $50.3 million at June 30, 2005, which was 19.9% of equity compared with a balance of $53.9 million or 21.9% of equity at the beginning of the year. As you look at cash flow for the first six months, please bear in mind that spending for acquisitions and for share repurchases has totaled $16 million for the first half of this year. Capital spending for the first six months has been $3.8 million. So, with these comments, let me conclude and I will turn it back over to Steve.

Thank you, Ware. Just some additional information, we continue to be encouraged by our strong cash flow as Ware just described to you. Some recent announcements that we have made, this is the fourth year in a row that we've been named by Business and Insurance Magazine as the number one Benefit Specialist in the United States.

We've recently announced an affiliation with Kreston International, which is an international organization of affiliated accounting firms, which now gives us an opportunity to provide accounting services in over 70 countries, in over 400 offices around the world, which will enable us to provide more services for our existing client base. Our cross serving is on plan or ahead of plan compared to where we were last year.

And I want everyone to remember that effective August 1, we are officially changing our name from Century Business Services Inc., to CBIZ Inc., and you will find it listed slightly different in your newspapers. With that, I'd be happy to open up the call for questions from our shareholders and analysts.

[OPERATOR INSTRUCTIONS]. Robert Kirkpatrick, Cardinal Capital.

Good morning. Steve, could you talk a little bit about the SG&A line, that was almost $7.5 million in the quarter and were there any kind of more one-time items in there and why is -- are we not seeing much of a drop-off in that line relative to the ending of some of these legal issues that we've been dealing with?

Yes, this is Ware. Let me address that. There is primarily an increase in the G&A line in the second quarter due to our earnings incentive plan. It's an incentive comp plan, which we accrue throughout the year, based on the business unit performance against their planned expectations. We had a very good second quarter and this year we are proportionately a little further ahead of plan than we were this time last year. So, we needed to accrue more expense, and that reflects primarily in the G&A line for the second quarter.

That may smooth out over time but understand that as businesses over perform a piece of that over performance gets accrued as an incentive plan. So, the shareholders still get the vast majority of the overage. We just accrue a piece of it for the incentive plan.

We also changed a little bit the timing of the accrual, last year it was basically spaced out over four quarters, and this year we more properly aligned it in the first couple of quarters given that's where our revenue comes in.

And again that is for the unit heads, that's for the executives?

It goes through the whole organization. It’s through the senior officers, the business unit Presidents, down through the individual incentive programs at each business unit.

But all the cost is carried in the SG&A line and none of it is up in your cost of sales line?

No, there is a piece Rob, that is up in the operating expense line, but the majority of the expense is reflected in the G&A expense line.

Okay. And the total shift in the first half of this versus the first half of last year due both to the shifting in your timing, and due to being further ahead of your base plan.

It was $1 million.

That's great. Okay and secondly, I was wondering if you could talk maybe a little bit more about what specifically the same store growth rates were at some of the business units, and what is driving them in particular?

Well, we have had a good demand for accounting services. It's been a fairly strong environment for our related audit services, as we picked up additional engagements. We have seen good growth of which we share a piece of that through our administrative service agreements. We have seen good growth in -- and we have been able to pass through some pricing increases in the first half, with our accounting group. So for the six months, that same-unit revenue is up, slightly more than 7%, for the accounting group. The MMP group, which is a little easier to look at, because it's very comparable year-to-year consistently, has improved revenue 12, 13, 14%, and this first half is no exception, they are coming in between 12 and 13%.

The second quarter for the other National Practices Group, let me remind you that our merger and acquisition business unit, where we are engaged to conduct merger and acquisition activities, is a little bit choppy. We did close two engagements in the second quarter, so we saw a nice lift in the second quarter, also let me remind you that we've worked real hard in a couple of different business units including our payroll unit or Valuation Group within the National Practice Group that are also showing extremely nice performance on year-over-year basis within the National Practice Group. The Benefits and Insurance group is -- their improvement is not so great, so they are flat to slightly down on a year-to-year basis, and first of all the environment is not so favorable, we've seen some softness in pricing primarily in the property and casualty business line, which is a small piece of our business.

But we've also in the first half of this year terminated a relationship with a fairly significant client and reached a mutual decision with ourselves and the client to terminate that relationship, and that has an impact on our revenue growth for the first half plus the environment for carrier bonuses is changed this year. And we are not seeing quite the same level of bonuses, that's a small piece of the total picture but that kind of completes the picture for you on Benefits and Insurance.

But one of the encouraging things Rob that we are seeing is that as opposed to prior conference calls, we are really seeing improved performance pretty much across the board in almost all of our business units.

Great. And then, there was $1 million in other income that you booked during the quarter. I was wondering if you could shed a little more light on that please.

Most of that relates to our interest income that we get from our client funds and restricted funds that we are able to invest in short-term instruments, so as interest rates are up compared to a year ago, we are enjoying more income on that. It's still not a high rate, I think it's less than 3% income interest rate on those funds, but that's a big piece of it. Other items that come through and from time to time when we sell business units, we retain an ability to get royalties and earn outs based on performance post sale and we are able to book that as income in the other income line as well. So that's another piece of it.

And then finally, you also list on your balance sheet about $10 million in what is, you label as restricted cash. That is different I believe from the funds that you hold for clients. Help me understand the differences between the two of those and what that restricted cash is set aside for?

Client funds are essentially, what I'll call pass-through funds that we hold for the benefit of payroll clients and flex benefit plan clients where the funding comes in and we hold it pending the pay out of the funds over a short period of time. Restricted funds would be those funds that we hold in trust related to property and casualty premiums and any SD (ph) regulated activities, where those funds just fall into a different category.

And do you earn interest income on those as well?

Yes, we do.

But they are not your funds?

That's correct.

Thank you so much. I will get back in line.

Jim Macdonald, First Analysis.

Good quarter guys. Could you talk a little bit about -- whether we can expect this same-store sales growth to continue or was it a bit of anomaly in the quarter?

When we originally forecast in the beginning of the year, we thought same-store revenue would be up 5 to 8% for the year. We've seen nothing today to change those forecasts. So the outlook on same store looks pretty good to us.

Is there any reason that it might be softer in the third and fourth quarter as benefits become a bigger percentage of the mix?

Third quarter is always our softest quarter. It's possible that you could see a little bit of softening in it, but on the other hand, our other businesses which did very well in the second quarter are expected to continue to do pretty well.

Just a technical question, talk about interest income from the client funds, I think ADP counts that as revenues. Any thoughts about moving that up into revenues?

We're looking at it but probably not for the balance of this year, we wouldn't reclass it. If we do a reclass we might look at it in 2006.

And your margins were very strong in the quarter, anything stand out there besides maybe the M&A transaction?

No, I think the margin improvement came -- it was pretty much across the board. I think we've signaled in the last conference call that we saw a pricing improvement, particularly in the accounting group, and there is nothing particular -- there is no particular one-time items that would have caused the margin to go up.

On the Kreston deal, it allows you to sell (technical difficulty) for in the US. Is there any kind of ability for them to give you business or you to give them, I guess, you will give them business internationally. But anything -- (technical difficulty) do you expect this to impact in terms of quantitative measures on your revenue?

The Kreston transaction is a two-way transaction. We now have the ability to support our clients, basically everywhere in the world, as they grow and as their needs change, we now also become a source for international firms to refer their clients when they have a US related tax or accounting problem or issue or opportunity. At this point, we have not quantified it, we knew that we've known for sometime now that this was a need in the marketplace, especially, as we look at getting larger and larger clients. So, we basically satisfied a corporate need on behalf of our clients but we haven't really quantified how much it will provide us in additional revenue. That really needs to be determined over time.

Now there are other Kreston companies in the US, correct? So if international companies bring business to the US, it may or may not come to CBIZ?

That's correct. There are some other Kreston units in the United States. We will be by far the overwhelming largest one here, and where they have units, for the most part they do not overlap with our existing business units, they only overlap in a few cities. So, we expect over time, we will get some revenue opportunity coming our way as well.

Would that be a source of possible acquisitions, some of these other Kreston units?

Well, we are actively looking at accounting units across the country, if we have relationships with some it could be a source. Right now, it isn't anymore of a targeted source than all of the other accounting units that we are looking at.

Steve Balog, Cedar Creek Management

Thanks, the payroll business, there is a whole bunch of questions on that, how large is that on an annualized basis now? Is that profitable, I know you made a big investment in the software and the systems there, is cross-serving, is that a business that cross-serving helps a whole lot, and how is this business positioned and competes relative to the ADPs and Paychex? What do you -- what's kind of the pitch or prospect?

Let me see if I can answer them in order, we don't typically give out specific revenue sizes of our businesses, I think we have signaled that it is in the $6 to $10 million range, it is a very important part of our overall employee management strategy, because it links to our Flex and our COBRA and our other insurance products.

The -- in terms of size it is dwarfed clearly by the big three, which is ADP, and Paychex and Ceridian. It is however growing, it is very profitable, and it is a real success story in terms of turning the business around and generating substantial profits for us, relative to their size. And it is an important component of cross serving, I would say that a significant number of their new accounts come from the cross-serving efforts within the CBIZ family.

Okay, and the funds held for clients is that -- can we look at that as kind of a leading or at least coincident indicator of how that business is performing, or is that is still -- when it jumped a lot if that's going up a lot, it means Payroll is working or is that lost with the benefits business?

Yes, there is a -- it may be a slight indicator of size, but there are two things you need to keep in mind, first there is funds in there, funds held in trust for clients, but also there are timing issues which is at a point in time we may have a lot of clients funds that aren't necessarily -- to be remitted to the taxing authority for example for another 15 to 30 days. So any arbitrary cut off isn't necessarily going to give you a good indication.

Okay, co-location program status, what's next, and how many more cities do we have to go?

We are going to continue our co-location, because that's -- I think we have identified that as a key part of our strategy, the ones for the rest this year and going into next year we have Atlanta, San Diego and then there is -- there probably will be a couple more in each of the successive years.

Okay, and lastly, kind of sitting back here now, you made a huge effort in turning things around divesting, the divestitures are now almost nil, how do you feel, Steve about management, organizational development, the team you have around you and built up?

I'm very comfortable with the team we've built up, and with the organization that we have built and we are building. The team is strong, it's focused, everybody knows what they have to do. This is a point in our evolution where we are firing on most cylinders, so I feel very good about the team that's in place, and I feel very good about the business unit's activities, and I feel particularly good about the strategy we have and the direction we are going in.

Okay thanks, you have turned the thing into a growth stock, at least the growth has been (ph), we haven't seen the stock (ph) yet, but the businesses is, I'm shocked, it’s wonderful.

Thank you Steve.

Thank you.

Robert Kirkpatrick, Cardinal Capital

Thanks, first of all I want to as a shareholder say thank you for instituting the 10B5 plan, I think that's a good way for you to take advantage of times that you are normally out of the market to be able to buy in (ph) shares. Secondly, is -- are there any plans for a kind of an investor relations push going forward here?

Yes, we typically, reactivate the investor relations outreach program in the August, September, October time frame. You know, you appreciate the first quarter is difficult for us given the volume that comes in and given wrapping up the year-end numbers, there was a very short window between first and second quarter. We continue to actively talk to our investors, and we are always responsive to calls coming in, but as far as our normal outreach program, I think you will see that in September and October, before we get locked out again.

Great and I understood that there was a fairly significant IT upgrade that was going on in the medical practice management group and that that would be impacting margins, but yet you have managed to come through with very healthy margins this quarter. Could you provide us an update on the IT effort there and maybe what contributed somewhat to the good margins?

Yes, I would be happy to. That's a good question. We signaled early on that we were making a significant investment in upgrading the IT for the medical practice business. That implementation quite frankly has been slower than we originally planned and therefore we have not had as much expensed this year as we originally thought. That's the primary contributor to the fact as to why the margins didn't decrease.

The margin strength continues to be because we have good pricing in that business and we run it well, but what we signaled early on as a possible outcome of our investment, we are taking our time, we are going to do it right, we are in beta testing now in a number of smaller locations, but that now looks like the -- if there is going to be any margin impact, it's probably going to be more likely next year.

And the reason that this upgrade is going slower than planned, can you shed a little more light on that as well?

We are trying to do two things at once, we are growing the business and we are trying to upgrade the systems. The way we do things here, we are not going to rush into it until we know we have it right, and the business is complicated, which is taking us a little longer to make sure we have it right, and I would say we are probably three to six months behind where we thought we would be in the development side.

And then were there any co-location costs in the second quarter and how much of them do you expect in the second half of the year?

There were very minor co-location costs in the second quarter. We co-located in Columbia, Maryland to a building we actually were already in. So, really the numbers weren't very big and for the second half of the year, I don't see very much that hasn't been booked.

We had roughly $870,000 in the second quarter, that's roughly what it was for the same quarter a year ago. So, no big change on a year-to-year basis to talk about.

And then finally, if somebody could comment upon what your free cash flow implication is in terms of how many millions of dollars do you expect for 2005 given your kind of 20 to 25% increase in earnings per share?

Well, I will just do some quick math with you on the phone. When you look at the year-to-date cash flow, if we started the year at $54 million with bank debt. We have spent roughly $16 million with respect to acquisitions and share repurchases net of any divestiture proceeds. So, in ending the quarter at $50 million that shows that we have generated roughly $22 million year-to-date for the first half.

Now remember second and third quarter are typically the cash flow positive quarters for us, and then it evens out in the fourth quarter, and then in the first quarter typically we started to use a little cash as we build up receivables before the cash comes in the second and third quarters. But we would continue to guide you into roughly a $25 to $30 million annualized free cash flow number.

Finally the discontinued operations, if you could give us an update on those and where they stand in terms of either being fixed and/or divested or closed?

With respect to the units that are in the discontinued operations, we have a plan for each of them, and I think the best thing I can say is we are exactly on plan as we sit here today. So, they'd probably resolve themselves over the next six months.

So that we would expect them to be around with us for the balance of the year. But perhaps not into '06.

Well and perhaps not for the balance of the year; we will have to see.

Great, thank you so much and congratulations for the fine quarter.

Jim McDonald, First Analysis

On acquisitions, are you still -- would you still characterize yourself as active or interested?

We are clearly interested and we are very active. I would say that the pipeline of potential acquisitions today are as big as it's ever been. However, I caution you that there is nothing today that's announcable and there is nothing today that I wouldn't even suggest to you is on the horizon at this point. That would be overly material, but we are in active discussions with quite a number of companies in almost all areas of our business.

And tax rate was a little bit lower this quarter. Can you give us some thoughts about the quarter and going forward?

I think after the first quarter call, we estimated that the annualized tax rate would be roughly 41% this year because last year, we took some fairly significant credits and had an extraordinarily low tax rate, which we cannot and will not replicate this year. So I think, when you look at the first six months, the effective tax rate is a tad bit higher than 40%, and we would expect it to be ranging between 40 and 41% for the year.

I think it's also important to say that a year ago or more than a year ago, we actively undertook a project to do what we could to lower the tax rate including some business reorganizations in terms of location and number of other things at the state level. So, the fact that it's down from prior years was planned and managed.

And could you give us -- and I also congratulate on your 10B-51 plan, any comments on how that will operate?

Well, the 10B-51 plan Jim is just for everyone's benefit, it's a plan when you go into what's called the blackout period, it allows you to continue to repurchase shares so as long as you give predetermined guidance as to pricing and volume still subject to the share repurchase limitations out there in open market repurchases. Now that we have released earnings, the window is now open for us again, so it's not necessary to conduct a 10B-51 plan at this time, and I will just remind you that at the beginning of this year our Board authorized us to repurchase up to 5 million shares this year.

[OPERATOR INSTRUCTIONS]. We have no further questions at this time.

I would like to take this opportunity to thank our shareholders and our analysts for their continued support. To the extent we have CBIZ associates listening in, and I like to again thank you for your hard work in the second quarter, and I would like to reiterate the forecast that we made in the beginning of the year, which is a 20 to 25% EPS growth for the year and our EBITDA coming in between 50 and 55 million, and as we sit here today, we are very comfortable with those projections. With that I'd like to thank you all and look forward to talking to you after the release of the third quarter numbers.

Thank you ladies and gentlemen, this concludes today's conference. Thank you for participating, you may all disconnect.