CBIZ Inc (CBZ) 2005 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the CBIZ Third 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 would now like to turn the call over to Mr. Steven Gerard, Chairman and Chief Executive Officer for CBIZ.

Mr. Gerard, you may begin.

Thank you and good morning everyone, and thank you for calling in for the CBIZ’s third 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 are welcome to listen in.

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

The call is also being webcast, and you can access the call over our website at [.cbiz.com].

You should have all received a copy of the press 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 this call we may make forward-looking statements.

These statements represent management’s intentions, hopes, beliefs, expectations, and predictions of the future.

Actual results sometimes can differ materially from those projected in forward-looking statements.

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

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

Before the opening this morning, we reported our third quarter results.

You will note that the third quarter was a continuation of the trend that we saw in the second quarter.

We were proud to report that our revenue was up, our margin was up, and our earnings from continuing operations were up, and we posted an earnings per share of $0.04 in the third quarter, which I believe is probably the best third quarter we’ve had in the past five or six years.

I would like to turn the call over to Ware now, who will walk you through the details.

Thanks, Steve, and good morning everyone.

I want to take a few minutes to review the highlights of the numbers we released this morning for the third quarter and year-to-date period ended September 30, 2005.

For the third quarter, total revenue was $135.3 million, which is a 12.8% increase over total revenue reported for the third quarter a year ago.

We are pleased that same-unit revenue grew by 8.7% in the third quarter, which was an increase of $10.4 million compared with the third quarter a year ago.

With this increase, CBIZ has achieved nine consecutive quarters of same-unit revenue growth, and the 8.7% growth achieved in the third quarter represents the highest rate of growth that we have achieved over that time.

In addition to same-unit revenue growth, revenue increased by $4.9 million in the third quarter as a result of four acquisitions we have made since the third quarter a year ago, and there was no impact from divestitures in the third quarter.

It is noteworthy that each of our four business segments has contributed to our revenue growth.

Our Medical Management Practice business continues to grow at approximately 13%, and our Accounting, Tax, Advisory business recorded total revenue growth in the third quarter of approximately 20% and for the year-to-date the Accounting, Tax, Advisory segment revenue has grown approximately 16% over a year ago.

As you review the third quarter results, you will see that the increase in revenue has resulted in a 77% increase in operating income from continuing operations in the third quarter compared with the third quarter a year ago.

Earnings per share from continuing operations were $0.04 per fully diluted share in the third quarter compared with our results of $0.02 per share for the third quarter a year ago.

As we have mentioned on previous calls, the 2004 results have been restated as required to reflect the impact of discontinued operations in 2005.

During the third quarter, we announced the sale of our Worksite Marketing Business unit.

Early in 2005, we made a decision to divest this business unit, and the financial results from this unit have been reflected in the discontinued operations each quarter throughout 2005.

We received some cash upon the sale of this unit in September, and the terms of the transaction call for potential additional payments based upon results over 6 and 12 months after the date of the sale.

Any further adjustments to the gain recognized on the sale of this business will be reflected in discontinued operations in future periods.

For the nine months ended September 30, 2005, total revenue increased by $41.6 million or 10.7% over the same period in 2004.

Newly acquired businesses have contributed $18.4 million to revenue growth, and divestitures have caused a decline in revenue of approximately $600,000 for the nine months.

Over the first nine months of 2005, same-unit revenue has now grown by $23.8 million or by 6.1%.

As you look at the year-to-date numbers, let me remind you that we have incurred $2.2 million of restructuring expense in connection with consolidation efforts in our Chicago and Colorado markets, and in the first quarter we settled a litigation matter at an expense of $1.1 million.

Our earnings per share from continuing operations was $0.23 per share for the nine months ended September 30th, compared with our restated results of $0.21 per share for the same period in 2004.

As was outlined in our earnings release, we have continued to repurchase shares.

During the third quarter, we purchased approximately 1.3 million shares, and through September 30th, we have repurchased a total of approximately 3.2 million shares at a cost of approximately $13.7 million.

Since September 30th, we have continued to repurchase shares under [our current D51] program, and we have repurchased an additional 623,000 shares under this program through today.

Our cash flow has continued to be strong during 2005.

Our bank debt outstanding was $43.8 million on September 30th, compared with $53.9 million at the beginning of 2005.

This represents a net reduction in debt of approximately $10 million through the first nine months.

It should be noted that we have used approximately $25 million of cash for investments in both share repurchases and acquisitions through the first nine months of 2005.

In addition, capital spending has been approximately $5.1 million for the first nine months this year.

At September 30th, debt was at 17.5% of equity, and you will note that day sales outstanding on our receivables was at 72 days as of September 30, 2005.

With these third quarter results, we are pleased to report another strong quarter of revenue growth and we are pleased that we are able to leverage this revenue growth into faster growth in net income and earnings per share from continuing operations.

Our cash flow continues to be very strong, and we continue to deploy our cash and our borrowing capacity to accomplish both strategic acquisitions and share repurchases that will add further value.

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

Thank you, Ware.

Let me comment on a number of other important items for the Company.

As many of you know, we issued a press release on Friday indicating that CBIZ Benefits and Insurance, our insurance brokerage subsidiary, had received a subpoena from the Attorney General of the State of New York requesting information on our compensation arrangement with our carriers.

We have for the past two years indicated to you in our Forms 10-K and 10-Q that we do from time to time receive inquiries from insurance regulators and others requesting information on our compensation arrangements with insurance carriers.

While most such requests had ever come from New York State, where, by the way, we do very little insurance business, we were not surprised that as one of the 20 largest insurance brokers in the United States that we would receive such a request for information as part of what we believe is the Attorney General’s ongoing inquiry into the industry.

When the issue of broker compensation practices first appeared in the insurance industry almost two years ago, we undertook a review of our business practices, our disclosure to our clients, and our relationships with our carriers.

As a result of that review, we did not incur-- uncover any evidence of procedures that appeared unlawful.

Moreover, we revised the form of our disclosure that we make on our website and to our clients in an effort to make sure that our broker compensation practices and procedures were even clearer.

I have mentioned before on these conference calls that if the insurance industry determines that volume-driven bonuses need to be changed, then it is our view, confirmed by our discussions with our major carriers, that the existing bonus and commission structures will probably change in methodology and form, but that the total compensation package to the insurance brokerage business would not materially change.

In 2005, we have not witnessed any significant reduction in the bonuses we expected to receive, and such bonuses amounted to approximately 1% of total CBIZ revenue.

CBIZ intends to cooperate fully with any and all such inquiries, and based on what we know today, we do not think these inquiries will have any material affect on our business.

As many of you know from what we post on our website, we had set as a goal for our cross-serving effort, which is the business we generate between our business units, at $11 million for 2005.

I am pleased to report that last week we passed that goal and we are well on our way to posting even larger cross-serving numbers.

What this means is more solutions to our clients and it means that the incremental revenue derived from the business model is [really] gaining traction.

As we roll into the fourth quarter of this year, let me reiterate what we put in the press release, which wherein we said what we announced in the beginning of the year, which was that we thought we could deliver this year at a minimum 20 to 25% growth in earnings per share, and as we look forward into next year, we believe that at a minimum that growth rate is sustainable.

With that, I would like to stop and I would be happy to take questions from our shareholders and analysts.

Okay.

Thank you.

We will now begin the question-and-answer session. [OPERATOR INSTRUCTIONS].

We have Robert Kirkpatrick from Cardinal Capital.

Please go ahead.

Thank you.

Good morning, guys.

Could you talk a little bit about what the driver has been in the acceleration that we’ve seen in the last six months in the kind of your same-store revenue growth so to speak?

A lot of it, we’ve been really happy with the growth in the Accounting, Tax, Advisory revenue this year, and we’ve seen-- as we’ve talked with you in the past, we’ve seen some lift from the clients’ migration from the Big 4, as we’re picking up some middle market clients on the audit side and that’s giving us some lift in revenue, as well as our SOX consulting and internal audit business.

And both of those businesses tend to keep us busier in the second half of the year.

In the first half of the year, our people are pretty fully deployed on the tax-related issues, and what we’ve needed is second half business, and that’s providing the growth in Accounting, Tax, Advisory.

So that has been the driver there.

And, Ware, does that continue into the fourth quarter?

I mean is it really just a second and third quarter business or is it really a kind of complete rest-of-year business?

Based on our review of all of our businesses, each of which [have] now posting improved same-business-unit revenue year over year, we think that this increase is in fact sustainable.

And how much of that growth is coming from your acquisition that you made I believe in San Diego within the last 12 months?

The same-business-unit revenue takes that out.

It does, but in terms of the total growth, maybe a third of it comes out of the acquired business and the balance would be same-unit revenue growth.

Okay.

And then, did you make payments for either acquisitions and/or how much cash did you receive during the quarter for the divestiture that you made?

Well, we didn’t spend any money on acquisitions in the quarter, and we received a $2 million payment as a first payment on the sale of the Worksite Marketing Business.

And with your strong third quarter results, are you, Ware, now more optimistic on the free cash flow generation for the Company this year than you were 90 days ago when I asked you that question?

Well, we’ve continued to say to everyone that we expect free cash flow to be in the $25 to $30 million range, and that’s where it is today.

It sits closer to the $30 million range than the $25.

Okay.

And then, Steve, any further update for us on the Medical Practice Management business in terms of strengthening the IT systems?

I know there have been some delays in that the last six months or so.

What are your plans for the next six months?

That program is being developed.

They’re in data testing as we speak.

We will roll it out slowly next year, business by business, and we will implement it over the next couple years, but it looks like it will be on track.

Okay.

So this isn’t going to be an accelerated timetable?

At this point, we’re not accelerating.

It’s very important that we do this right and we do it carefully.

If it takes us a little longer to transition it, that’s okay.

The systems we use today work.

As you can see from the results of that business unit, they’re doing very, very well.

So the new system will be handled carefully, but I don’t expect it to upset anything over the next year.

Okay.

And then, finally, and then before I get back in line, your non-allocated operating expenses that show up at the end of your press release, which were I think $5.1 million during the quarter, could you talk a little bit about why those are not coming down, especially given the fact that we’ve been winding down some of our litigation and some of our other areas of spending that had kept that number higher?

I’m not sure I understand the question.

The $5.1 million that I mentioned in my comments was our capital spending year-to-date.

No, where at the end of your press release, Footnote number 1, it says, “Includes operating expenses recorded by corporate and not directly allocated to the business units of five million (ph) 0 seventy-two for the three months ended September 2005.” That number, if I look back a couple of years ago, was running around $1 million a quarter, maybe $1.5 million or $2, and has now grown to $5 million, and I’m trying to understand what is behind that.

There was a period in 2004 when there were legal expenses and probably some SOX costs, but I would have thought that those would have diminished by now.

No, but we have-- we keep at corporate a large amount of the IT, of the HR, of legal, a lot of the infrastructure expenses that we use to run the Company.

Our philosophy is let the businesses manage the things that are more controllable by them, which is their revenue and their direct expense, and let’s keep away from having allocation fights and distribution fights over the legal department, the IT department, the HR department, and any other consolidation issues that we may decide to make as a corporation.

And any increase you see comes really from the investments we make in those areas.

Okay.

Great.

Thank you so much.

I’ll get back in line.

Now have Jim Macdonald from First Analysis.

Please go ahead.

Hi.

This question’s kind of a technical one related to your guidance.

If you look at your guidance, [do you] view the first quarter as a--?

Jim, we’re breaking up.

I’ll pick it up and see if you can hear.

That’s better.

Do you view your first quarter as a $0.13 quarter or a $0.14 quarter when you think about your guidance?

You mean next year?

Last year.

This year.

If I remember, and I don’t have the first quarter release, we reported $0.13 and we would just as you see the year-to-date number at $0.23, that’s what we would consider in the context of our guidance.

Okay.

And just one more guidance related question, since you’re doing I think at the high end of your range, how are you--?

Are you accruing any extra costs like bonuses that will result from doing kind of at the high end of your range?

If you take a look at the corporate number, I think you’ll see part of that increase is the bonuses that are part of the overall corporate incentive plan that goes quite deep into the organization which reflects the higher performance numbers.

Okay.

And that’s then accrued on a quarter-by-quarter basis?

That’s right.

That’s right.

On the share count, it looks like you’ve purchased [repo] a lot of shares.

It doesn’t look like we’ve had the same impact in the diluted share count.

Was that done at the end of the--?

Was it done at kind of the end of the quarter, is that why, or any other reasons?

Yeah, a lot of it was done at the end of the quarter, from late August through September, so that’s probably why you didn’t get the full effect as we [weight] those things in to the calculation.

Okay.

And I’ll just remind you that as we start 2006, we’ll start with the new basic count at that time, whatever it is at the end of ’05.

Okay.

And just another technicality on the tax rate, it seems to be bouncing around.

Is your guidance still kind of 40 to 41?

Yeah, that’s right.

We make an adjustment quarter to quarter as the effective annualized tax rate may change due to some factors.

And I think because the third quarter is fairly light with respect to our pretax income compared to the full year, any adjustments that we make in the third quarter are magnified a little bit.

Okay.

And just one more and I’ll get back in line.

It sounds like the Benefits business has turned positive, although it’s still pretty flattish.

Any prospects for that out into 2006?

The Benefits business reported an increase in revenue for the third quarter year-over-year, an increase in contribution year-over-year.

It’s making up a little bit of the ground.

We’ve got a little bit of weakness in some of our products.

We’ve got one of our National Benefits and Insurance groups that’s behind where they were last year, but I am viewing-- We haven’t done our budgets yet and our business plans for next year, but, quite frankly, I’m expecting all the reporting segments to show positive improvement next year.

Okay.

I’ll get back in line.

Thank you.

We have Steve Balog from Cedar Creek Management.

Please go ahead.

Thanks.

What does the acquisition environment look like, target look like?

I would think in the Accounting area people are feeling pretty good and looking for higher prices.

And I’m wondering if accounting, if ATA is on your want list, or are you okay there and, therefore, you don’t have to wade into maybe a richer environment?

Our acquisition pipeline is as full today with prospects as it has ever been.

The accounting industry certainly is doing very well and there are some expectations of slightly higher pricing, but not out of the range that we would necessarily go after.

You typically do not-- if you haven’t closed an acquisition in the Accounting group by now, you typically don’t do it between now and the end of the year because that industry gears up, for the most part, for tax season for the next year.

Across the board we’re seeing both our Benefits and Insurance and our National Practice companies is where we’re looking to expand.

We’re seeing-- we’re not seeing any increase in multiples.

We’re not seeing a dramatic decrease either.

So I would say that the market that we’re looking at is probably pretty stable with respect to multiples right now.

Great.

Thanks.

Robert Kirkpatrick is back on line from Cardinal Capital.

Please go ahead.

Steve, could you go into a little more detail as to why you expect all the reporting segments to show improvements next year?

Yeah, I think I can.

Without being flip about it, this is a management team that expects its business units to do better year over year.

We are pushing our Company into as much of a growth mode as we can given the businesses that we have.

We’ve also gotten rid of, closed, changed the management, or otherwise made changes in most of the business units that have given us problems before.

As we look at our business segments going forward next year, our Accounting and Tax and Advisory business, we expect that business to remain strong.

We think the industry-- the industry dynamics are going to keep it strong, both in terms of pricing and new clients.

We have made over the past 18 months significant investment in people in our Benefits and Insurance group.

It typically takes 18 months to 2 years for those new people to begin to generate significant revenue.

We expect that that-- we will expect that will come in.

We’ve got, as I mentioned before, at least one of our National business is somewhat behind last year, but I’m expecting that they will get back on track.

Within our National Practice group, our Medical Practice business, as you know, has been growing every single year, and I see nothing on the horizon that will slow that down.

And our other National practices are reasonably well positioned in their market.

I’m not going to say today that we’re going to be able to generate 25% revenue growth, but we’re not a Company that has ever forecasted that.

We’re a Company that has said consistently we believe we can grow the top line at 10%.

We believe we can grow the bottom line at 20 to 25%.

And, as I look out, I don’t see anything today that will get us off that track.

Now, let me also caution you.

We’re in the middle of our planning and our budgets and we do need to fine tune this, and, certainly, we will be affected if there are macroeconomic changes.

But as I look at the markets that we’re in and as I look at how we’re positioned in those markets, this is really starting to reap the fruits of all the seeds that were planted or, in some cases, buried over the last four or five years.

Well, it’s good to hear you so optimistic.

When you make acquisitions, who are the--?

What is the competitive alternative for those companies?

Where else are they turning to in cases where you are not successful?

Are they financial buyers, are they industry buyers?

Can you make any generalizations about those competitive alternatives for the acquired companies?

Sure.

In general, they’re industry buyers.

There are very few financial buyers in the areas that we are in.

You really have to look practice group by practice group.

In our Accounting and Tax and Advisory area, we tend to lose to large, regional accounting firms, and there are many large, regional, very well-run accounting firms.

In the Benefits and Insurance group, on the retail side, we tend to lose in the other aggregating brokers, and most of those are public and I think you follow those.

On our National Practice side, we tend, again, to-- to the extent we lose any, we tend to lose them to other people in the industry, be it payroll or technology or property tax.

So the decision tends to come-- do I want to sell and do I want to sell for growth, because if they want to sell as a bail out, as I mentioned before, we will not be the buyer.

So it really comes down to do I want to sell to further my growth or am I happy where I’m at.

I think we lose more because people decide they don’t want to sell at all than we lose to-- in a competitive bidding situation.

Okay.

Great.

Well, congratulations and keep up the good work everyone there.

Jim Macdonald is back on line from First Analysis.

Please go ahead.

Yeah, a couple of other little questions.

CapEx for the quarter, I think you gave it for the year.

Could you give it to us for the quarter?

Yeah, it’s approximately $500,000 for the quarter Jim.

Okay.

And receivables you’ve done, I mean, a remarkable job there.

Any prospects on that continuing or is that as good as it’s going to get or--?

We’re going to constantly work at it.

But, as you know because you’ve followed us so closely, and so well by the way, you know that we set the target at 75 on an annual basis.

We’re now below that.

So we’ll continue to put pressure on it, but it probably ends up more [like] in this range over a period of time.

Yeah, and just let me remind you, we’re a bit seasonal with respect to the way we book revenue and then the ensuing receivables.

We’ll tend to bill receivables through the first four or five months of the year and then collect the receivables through the balance of the year.

So the DSO’s will tend to climb in the first half and decline in the second half.

Okay.

Thanks for the nice comment, Steve, and since I’ve been covering for so long, I remember you saying I don’t know how long ago that when your Medical Practice business got over $100 million you might look at strategic alternatives, and I see it crossed $25 million this quarter, so I guess I have to ask what your thoughts are there.

Well, I don’t think I ever said that when it crossed $100 million we would look at strategic alternatives.

What I think I said, and I have said consistently, is it’s a good growth business for us that may not be core over the long run, but it was still too small to be on its own.

That is still my view of the business.

It is growing.

It is contributing.

It is very well run.

We have no plans today to do anything with it other than to continue to grow it.

I can’t give you a number at which point we might do something.

We’ll continue to watch it and we’ll continue to support the growth of investing in the Company.

It’s been a great business.

Thanks very much guys.

Steve Balog is back on line from Cedar Creek Management.

Please go ahead.

A question about cross-serving, cross-selling.

I remember a few years ago you had described the challenge of getting a professional service organization to cross-sell as kind of a Holy Grail and if you could attain that, that would be something really good because everybody from Prudential Insurance to American Express has tried and pretty much failed to get the organizations to cross-reference and cross-sell.

You’ve beaten the goal already now, the earlier part of the year than you have in the past I guess.

Have you--?

Has the Company attained some kind of cultural point or tipping point where they trust each other and this is happening?

Or-- I think it’s something that’s great you’ve hit the goal.

On the other hand, I look at the goal as $11 million.

Out of over $0.5 billion Company, it’s not that huge.

It’s a great goal and all, but I’m just trying to see have we gotten the Holy Grail or close to the Holy Grail or how do you see that?

That’s a good question.

The-- you’re right in your observation that at $11 million versus a Company that is well over $0.5 billion in revenue is still an insignificant amount of incremental revenue.

That’s my view of it, so we’re going to continue to work to get more.

I believe the answer is more and more of our people are getting more comfortable with each other and their ability to deliver quality products and services to our clients, but this is a very, very slow process.

It takes-- you must have co-location, you must have education, you must have the right economic incentives, and then people have to work together over a long period of time to when they get comfortable.

I think we’re gaining traction.

I think we’re making improvements and the bar will be raised every year, but I think it would be inappropriate to say that everybody is drinking from the same Kool-Aid at this point and they all get the message because, quite frankly, they don’t.

But if you reference the tipping point, if you remember the book, the tipping point comes as you incrementally add to whatever you’re doing, and I do think we’re getting there.

I think that in the cities where we’re co-located, where we have well-run businesses, we’re clearly seeing a change in attitude.

I also know that I have said on numerous occasions publicly that no one has ever successfully made cross-serving or cross-selling the top part of their business.

And we are looking, and we have said consistently for four years now, we are looking to get to a point where we’re generating 3 to 5% incremental revenue.

We’re actually at that level for those units that can cross-serve, but in total we’re not there yet, and our goal is to get ourselves up across the board to that 3 to 5%.

So look at this as a long-term process.

Look at the progress we’ve made now.

For four consecutive years the number has gone up, albeit a small number, but we’re getting closer.

A little more-- That’s great.

A little more clarification.

You’re getting a 3 to 5% growth out of the units that can cross-serve.

You mean the ones where you’re co-located and they have all the bag of tricks, all the services in one area?

That’s right.

We have a number of units that are geographically so far from any other units to support it that it makes it very difficult.

We have some businesses where by virtue of the business that we are in, it’s very hard to cross-serve.

We have some wholesale business and we have a number of businesses that just don’t lend themselves to it.

So when we look at the numbers, we don’t break it out publicly because we want to set that goal at a corporate goal.

But when we look at it internally, we’re actually getting pretty close to what we thought we could do in the areas we thought we could do it.

Okay.

Great.

Thanks.

[OPERATOR INSTRUCTIONS].

At this time, there are no questions.

Thank you.

I would like to thank our analysts and our shareholders for their continued support.

I know that on this call we have quite a number of CBIZ officers and employees that listen, and I’d really like to thank all of you.

We have posted revenue increases, earnings per share increases, margin increases, and strong cash flow.

The credit for that goes to our employees who work so hard to serve their clients, so I want to take this opportunity to thank all of them.

Also, caution them not to rest on their laurels because we still have a lot of work to do, and I look forward to everybody dialing into our year-end wrap up call in January.

Thank you and goodbye.

Thank you.

This does conclude today’s conference.

Thank you for participating.

You may now disconnect.