CBIZ Inc (CBZ) 2005 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the CBIZ 2005 fourth quarter and year-end results conference call.

[OPERATOR INSTRUCTIONS]

I'll now turn the call over to Mr. Steven Gerard.

Mr. Gerard, you may begin.

Thank you, and good morning, everyone.

Thank you for calling in to CBIZ's fourth quarter and year-end 2005 conference call.

Before I begin with 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 until after the call.

We'll be happy to address your questions at that time.

This call is also being webcast, and you can access the call over our website at 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 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, and sometimes do, 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, is contained in our SEC filings, our Form 10-K, and in our 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.

This morning, before the opening, we're very pleased to report very strong fourth quarter results and strong results for the full year.

We reported EPS of $0.28 a share.

We reported continued growth in our same-business unit revenue.

We reported strong cash flow, and we also announced the signing yesterday of a new unsecured bank facility for the Company.

Before I continue with my overview remarks, I'd like to turn it over to Ware who will walk you through the details of the press release that we issued this morning.

Thanks, Steve, and good morning, everyone.

As is our normal practice, I want to take a few minutes to run through the highlights of the financial results we released this morning for the fourth quarter and the full-year ended December 31, 2005.

Before we get started talking about the results for 2005, it is important to know that 2004 results have been re-stated to reflect the impact of our decisions to discontinue operations for certain units, including our Worksite Marketing unit, which was divested in September.

This re-statement impacts both revenues and earnings from continuing operations as now re-stated.

Therefore, the results from these discontinued operations have been excluded from the results reported from continuing operations, and they are classified under discontinued operations for the periods reported.

I also want to remind you that in the fourth quarter of 2004, we included a tax benefit related to a favorable determination on an IRS audit to CBIZ.

This had a favorable impact on EPS calculations in 2004, as the effective tax rate reported for the full year was 27.4%.

If a normalized 41% tax rate is applied to 2004 results, the impact to 2004, for this tax benefit, was $0.05 per share, and the comparable earnings from continuing operations would have been $0.21 for fully diluted share, using the normalized tax rate.

With these things in mind, then, let's look at the results for 2005.

Total revenue in the fourth quarter was $132.1 million, which was an increase of 10.2% for $12.2 million over revenue in the fourth quarter of 2004.

Same unit revenue grew by 5.8% in the fourth quarter, and the balance of the revenue growth was contributed by newly acquired businesses.

We experienced revenue growth in every business segment in the fourth quarter.

As you look at results in the fourth quarter, you will see a continuation of the improvement in our operating margins, which we also achieved in prior quarters earlier this year.

Looking at full-year results for 2005, we recorded revenue of $559.3 million, which was an increase of 10.8% over 2004.

Same-unit revenue increased by 6.2%, or by $31.3 million for the year, and newly acquired businesses contributed $23.7 million, or another 4.7%, to revenue growth in 2005.

There was a nominal $600,000 impact on revenue from divestitures for the full-year.

Pre-tax income from continuing operations for the full-year was $36.2 million, a 23% increase over $29.4 million, which was recorded for 2004.

This translates into earnings per fully diluted share of $0.28 from continuing operations for the year ended December 31, 2005.

As you look at the comparison with 2004, as I mentioned in my earlier comment, if you apply a normalized 41% effective tax rate to 2004, the $0.28 per share earned in 2005 from continuing operations is comparable to $0.21 per share in 2004.

Cash flow has continued to be very strong during 2005, as we generated approximately $40 million of cash flow that was used to make acquisitions, re-purchase shares, and reduce debt levels.

With the repurchase of 3.8 million shares during 2005, we invested approximately $16.7 million in share re-purchases.

We invested approximately $12.5 million in acquisition-related payments, and net of these items, we also reduced the level of bank debt by approximately $22 million during the year.

During 2005, capital spending was approximately $7.5 million.

Days sales outstanding on receivables declined to 67 days at December 31, 2005, compared with 73 days a year earlier.

The ratio of bank debt to equity on the balance sheet was 12.6% at December 31, 2005.

The CBIZ balance sheet remains very strong, and when combined with our continued strong cash flow, this gives us the flexibility to support our continued growth, continue to make targeted acquisitions, and continue to repurchase shares as conditions warrant.

I want to announce that yesterday, as Steve commented, CBIZ established a new $100 million unsecured credit facility, which is led by Banc of America as agent.

The new unsecured facility replaced an existing $100 million secured bank facility.

This new facility lowers the cost of borrowing and, within constraints on total debt levels, generally removes restrictions on share re-purchases and acquisitions.

Also, as we announced Friday of last week, our Board of Directors has authorized a purchase of an additional 5 million shares.

This authorization expires March 31, 2007.

As we have stated before, our continuing priority is to deploy our cash and borrowing capacity to make acquisitions that provide a strategic fit for us.

However, as conditions warrant, we will consider the re-purchase of additional shares.

In summary, we're very pleased with the performance of the business in 2005.

Achieving a same-unit revenue growth of 6.2% is a significant step for the business, and our cross-serving results, which Steve will talk about in a minute, have steadily improved since we began actively managing this activity three years ago.

As we consider the outlook for 2006, bear in mind that, as required by FAS 123R, CBIZ will begin to expense stock options in 2006.

This expense has been previously disclosed on a pro forma basis and footnotes to our financial statements, however, this change in accounting will create a direct compensation expense in 2006 that is expected to impact our reported EPS number by approximately $0.03 per share in 2006.

Nonetheless, our financial performance goals remain consistent with the long-term goals that we've described on previous occasions.

For 2006, we expect revenue growth within a range of 8% to 10%, which includes the impact of the two acquisitions, TriMed and Valley Global, that we announced earlier this year.

These acquisitions, which closed in January, are expected to increase revenue about $14 million, or by approximately 2.5%, in 2006.

We expect to achieve a 20% to 25% growth in EPS in 2006 when compared with the $0.28 EPS reported for 2005, and we expect EBITDA within a range of 60 to $62 million for 2006.

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

Thank you, Ware.

As we look at the 2005 numbers, we take particular pleasure and pride in the fact that every one of our business units reported revenue growth, every one of our significant business units improved their operations according to our long-term plan.

Our cross-serving for 2005 nearly reached $14 million in incremental first year revenue, up from 10.5 million in the prior year, and we continued to see margin improvement in our businesses.

Our acquisition pipeline continues to be strong, but I caution you that nothing counts until it closes, and we will, as Ware said, opportunistically, be looking at the use of our cash for buy-back over the next year.

With that, I'd like to stop and take any questions that we may have from our analysts and our shareholders.

[OPERATOR INSTRUCTIONS]

Our first question comes from Jim Macdonald from First Analysis.

Please state your question.

Good quarter, guys.

Thanks, Jim.

On your guidance -- I just want to make sure I understand -- so the 20% to 25% EPS growth is in addition to the $0.03 impact of the share re-purchase?

That's-- that's correct.

That's correct.

We plan to -- we're forecasting 20% to 25% EPS growth assuming the additional expense of the expensing of equity.

That's very -- I mean, is there any particular area that leading you to that confidence?

Yes.

There are a couple particular areas -- our accounting, our ATA business, continues to look to be -- looks to be strong in 2006, as it was in 2005; our B&I business, our benefits and insurance business, looks strong for next year; and our medical practice business looks strong next year.

So, basically, as we look across the spectrum of businesses, almost all are forecasted to improve their results for 2006.

Are there any cost savings areas that are kicking in, and, as part of that, I noticed the G&A was low this quarter, and I was wondering, is that going to recur, or is that an anomaly?

I think the G&A, when you compare it to fourth quarter a year ago, fourth quarter a year ago, we incurred a layer of expense related to SOX as it was the first year we were going through the SOX 404 compliance.

So, we had a layer of costs last year that we didn't have again this year,

But, generally speaking, Jim, we've talked a little bit about some of the operating leverage that we can derive as we continue to grow, so, you saw some improvement in margins across the board above and below the G&A line that I think will continue to some degree next year.

So, when you combine the growth we've experienced in the top line, with some, at least, moderate continued expansion of margins, that leads us to the guidance that we're giving you

For G&A, going forward, I mean, it had been run being about 6 million a quarter -- is that a realistic run-rate going into 2006, plus some cost of the options?

Yes, Jim.

That's probably not too far off in terms of what the expectations would be for 2006.

Then, I just wanted to ask one more question, and I'll let someone else ask for a while.

Could you give us details on the economic impact of your new bank line?

Will it involve -- what kind of interest rate and savings there?

Well, it -- the interest rate costs, obviously, have been trending up all year.

So, the costs that we look at for 2006 were a function of the average borrowings that we predict and the trend upwards of rates that we have experienced here, but long story short, we've improved the rate by 37.5 basis points.

So, we would expect to incur a level of interest, depending on acquisitions and share re-purchases, which are tougher to predict, about the same as what we incurred for 2005.

The significance to us, Jim, is we've got a lower borrowing cost.

We removed the baskets that dealt with acquisitions and with stock buy-back, and for the first time in the Company's history, we're unsecured, so which we think is an important statement, which shows the financial community's recognition of the -- of how far we've come and the strength of our balance sheet and our operating earnings.

Yes, that's impressive.

Thanks.

I'll let someone else ask.

Our next question from Robert Kirkpatrick from Cardinal Capital.

Please state your question.

Good morning.

Let me also add my congratulations as well.

Steve, could you talk a little bit about the TriMed acquisition, which I know you closed probably there just on the first of the year or so?

Sure, Rob.

TriMed is a medical billing company that is consistent with our MMP business in terms of its practice, namely the radiology and anesthesiology businesses.

It's located in Michigan.

It is a well-known entity in the marketplace.

It fills out geographic need we had; we were not very strong in the Ohio-Indiana-Michigan area.

The culture, being a quality firm that it is, the culture fit beautifully with our MMP business, and it's part of the expansion program that we have in place for MMP, which is, you know, is our fastest growing business segment within CBIZ.

Okay.

And the integration of that in the first six weeks of ownership seems to have gone reasonably well?

The integration has gone wonderfully well, both from a systems standpoint, more importantly, from a clients' standpoint.

We're very comfortable with the principles there who are running it, and we have a very good integration plan.

The fact that it closed in January, as you realize, it -- this was a transaction, which had been actively worked, including the integration plan, for 2.5 months before the closing.

So, we're comfortable today with how it's come together.

Have you disclosed the purchase price for that yet?

No, we typically don't do that.

Okay.

And then, now, with the gain on the disposal of discontinued operations, net of tax, that we recorded in Q4, do we still have discontinued operations going forward, or have we now -- for now -- we've got them all cleaned up, and we won't see that number going forward?

Well, let me answer it two ways -- we have other operations that are in discontinued operations that went in in '05, so you will see a [discont].. loss of some number in 2006, but you're also going to see a continued gain in 2006, from the Worksite business that we sold in September.

That was the major disc. op.. last year, and now, we're recording the benefits of that sale, which will go on through 2006.

So, there will be some netting on those two lines in 2006.

And can you explain to me, given that we've sold it, why we're continuing to see gains on the sale?

Well, what happens is that when you sell it, it has to be a disc op.., but the way it was sold, there was series of contingent revenue items based on the acquirer's handling of the book of business, and we're being driven by the accountants here, which says that when that revenue comes in, you must report it as a gain on sale of that already discontinued operation.

Okay.

And would you, therefore, expect the net cash of the two of those things to, therefore, be a positive?

I think we're probably going to be pretty close to even.

Okay.

Alright.

That's great.

And, then, I noticed that you bought-back substantially less stock in the fourth quarter than, perhaps, might have been the case given how much you had re-purchased by the time of your third quarter call.

Was there anything conscience in terms of a decision behind that, and if so, why?

Yes.

We acquired no shares in the fourth quarter--.

But let me -- we announced 3.8 million shares in October, which included 600,000 shares in the fourth quarter.

Right.

We bought no shares in the fourth quarter.

After that announcement, we bought no shares above $5 a share during that period of time, and that was a conscience decision, in part, looking at our cash and what we might need or might not need for pending acquisitions, and as you know, we also get blacked out toward the end of the year -- in the last half of December, anyway.

So, there were no purchases at that time.

The authorization that we had from our Board actually expired on December 31, and we did not go back to the Board until the Board meeting of last week, which is -- accounts for why we were not in the market in January.

I would expect we will now evaluate the market and the price and the accretion at various levels and make whatever determination we would normally make.

Great.

Okay.

I'll let somebody else ask some questions.

Thanks, guys.

Thanks, Rob.

Our next question comes from John Walthausen from Paradigm Capital Management.

Please ask your question.

Good morning.

Congratulations.

Thanks, John.

Excellent accounts receivable collections it looks like -- are those a sustainable level?

Well, we think so.

We've worked real hard on bringing the DSOs down over the last three or four years.

We have a series of best practices in place at the business operating units that are actively managed by all of us quite frankly, and collection on receivables receive as great deal of attention each month in our monthly management review of results.

So, we're hopeful of maintaining that DSO, yes.

Let me also clarify.

There were no one time collection items, there were no write-offs above the normal accrual to account for the reduction, so this is really the result of a lot of hard work by where -- the finance staff and more importantly, all of the people in the field.

How much further we can drive it down below 67 days, I think, is a question mark, but to Ware's comment, we should be able to, at least, maintain it in this range, and we will, of course, endeavor to lower it.

Let me also comment to that there is is seasonal ebb and flow to the receivables as we tend to book more receivables in the first half of the year related to the tax business in our accounting tax-advisory business, and those receivables, then, get reduced down in the second half of the year.

So, there is some seasonality to that number, and I would expect it would increase in the first half of 2006.

Yes, that's a good point to keep in mind.

Thanks.

I guess the other question was -- maybe you have covered this, I just missed it -- in your outlook on the 8- to 10% revenue growth, what does that imply for internal or same unit growth?

Well, if you look at the 8% to 10%, we commented that TriMed and Valley Global will contribute roughly 2.5%.

Okay.

Now, we have a pipeline of acquisitions, but it is difficult to predict.

So, we're not really assuming a great deal of growth for 2006 from acquisitions, in addition to those we've already closed.

Good.

Thank you very much.

Okay.

Our next question comes from Steve Balog from Cedar Creek Management .

Please state your question.

Good morning.

Could you talk about your track record on acquisitions for the last three years or so?

Just looking at them, if you can, how do you do that?

Do you do a look-back, and could you just talk about it and put them into three buckets -- what percentage, or how many are -- have come out better than you expected; as expected; or worse than expected?

Yes.

We're really pleased with the acquisitions.

We've made roughly a dozen acquisitions in the last three years, and as we may have commented -- I'll just take you back -- we had a fairly disciplined structure to the way we make acquisitions that require them to integrate with existing operations and co-locate fairly immediately.

So, the integration plan was fairly aggressive.

I think, in every single case, we are hitting the targets.

We typically structure the transactions so that there's an immediate payment, and then, subsequent payments at the end of first or second year, depending on the newly acquired business's performance.

The good news is they're hitting their targets, and they're making -- they're accretive to the results.

Thanks.

If you did -- can you translate EBITDA -- 60 to 62 million -- into -- for what that would look like on a free cash flow basis?

Is that possible?

We would -- I'll just tell you, generally speaking, last year, if you push a pencil, we had approximately $40 million of free cash flow, as I commented on, and some of that came from reductions in -- or cash flow from working capital, and we'll say the 67 days is a good target.

I'm not sure we're going to get big improvements from that.

So, generally, we've been telling people that roughly $30 million of free cash flow is what we would expect.

Okay.

Even with the--.

If not -- if not higher, as margins continue to expand.

Right.

With CapEx at $7 to $10 million a year, assuming we come in at the 60 million -- $60 to $62 million, then our free cash flow probably is up in the $40 million -- $38 to $40 million range.

Yes, between 30 and 40 -- I'm a little more cautious, but between $30 and $40 million.

Alright.

Thank you.

Our next question comes from Jim Macdonald from First Analysis.

Please state your question.

Just to follow-up on that last one -- I just want to make sure -- you are still calculating EBITDA including some income -- interest income -- from your client funds, right?

That's included in the EBITDA?

Yes, that's right, Jim, and what we exclude from EBITDA are the gains and losses--.

Right.

--from the sale or divestiture of assets of assets or businesses.

With respect to income on short-term investments, which are predominantly the payroll cash, we're looking at the accounting for that, and I know that some others in the industry account for that on a revenue line.

So, we're looking at that as a potential change in accounting for 2006.

As we consider that, and if we make that change in 2006, we'll begin reporting it that way at the end of the first quarter, and, of course, we'll talk about it, disclose that if and when we make that change, but that would not change the EBITDA number, by the way.

Alright.

The way you calculate it.

Okay.

Exactly.

And the other income line this quarter, it was up a little bit more than normal, is there anything in that number, or just the end-of-the-year affect, or--?

Well, the majority of that number, as we just talked about, relates to the investment income on the cash-related payroll operations, and as you know, interest rates have been trending upwards.

That's been helpful to us in terms of that line item on the income statement.

We also received payments on prior year divestitures that are a form of an earn-out, if you will, for us, and some of the payments we've received have been good, and we received a level of payments in the fourth quarter, but it was a bit more than we expected.

Now, that may not continue, so we're not planning, and we're not setting expectations based on a continuation of that trend.

Can you -- is about $60 million a reasonable idea for the client balances, and what kind of interest rate are you getting these days?

$60 million is high.

I think more like $40 to $45 million is more normal, and our interest rate today is roughly 4.5% to 5% on that portfolio.

And one other -- the margin this quarter seemed to be a little higher on the national practice' side.

Were there some corporate finance fees in there or anything more one-time?

No.

There were no M&A transactions, if that's what you're asking.

Basically, it was the strength of our evaluation business in the fourth quarter.

They had just a great year and closed a lot of business in the fourth quarter.

That's been a -- that's been a wonderful growth area for us in the last three years.

Great.

Thanks very much.

Our next question comes from Robert Kirkpatrick from Cardinal Capital.

Please state your question.

Following up on Jim's comments -- why were client assets up to 65 million, and why is a $40 to $50 million number more natural, so to speak?

I think you had a year-end impact of processing payroll that fell on a Friday, and December 31, just captured, because of the timing and the cut-off, captured a lot of client cash that hadn't yet been disbursed.

So, it was simply a timing thing for the snapshot we took at December 31.

As we look at that trend, $40 to $45 million of investable cash is typically what we have.

The business has been growing, and the cash has been growing with it, but $60 million is simply an abnormality.

Okay.

And your bad debt expense in the fourth quarter a year ago was about a 1.25 million -- was it at that level or substantially different from that, either higher or lower?

No.

We are -- we've -- our bad debt expense is fairly steady.

You may recall in some prior years, we talked about it more specifically, but it is about that level again this year.

Okay.

And what is the debt level of the Company today?

It is, roughly, $48 to $49 million.

I'm not sure where we're going to close the day today, and, again, it's due to some payroll processing cut-off items for the fifteenth of the month.

Okay.

And, then, do you have -- or can you give us any type of reading for the fourth quarter for the businesses on a same-store basis, for ATA and benefits?

I'm sorry, Rob.

Could you repeat the question?

Sure.

He asking to the same-store for each of the groups.

In the fourth quarter.

Yes.

In the fourth quarter.

We can -- off the top of my head, I can tell you that all four groups were up.

Yes, let me talk about that just a minute.

Yes, for the year, everyone was up.

The accounting group was up between 4.5% and 5%, and -- in the fourth quarter -- and, also, in the accounting group, you see the impact of the San Diego ATA group, which was newly acquired and is not included in the same-unit revenue numbers that we're talking about.

Okay.

That growth is higher than the 4.5% to 5% that I just talked about.

Benefits and insurance was between 5.5% and 6%.

Our MMP Group is a fairly clean shot; that has no acquired business for 2005.

So that's -- that is what is reported in the segment report, and I think that number comes out at 8.5% to 9%, in that range.

Then, the balance of other national practices come in between 6.5% and 7%.

And the medical practice management business has been growing fairly steadily at a faster rate than it did in the fourth quarter.

Is there any particular reason for that?

There's a little bit of timing, just as to revenues come in, we have -- basically, we collect on business days, and it just so happens that the last day of the month was a Saturday this year, and so, any given period of time where we have fewer business days in the month, you're going to see our collections dip a little bit with a business that does ninety-some million dollars in revenue.

So, what you're saying is you had fewer business days this quarter than you did in the December quarter a year ago?

That's correct.

Fewer collects days -- that's correct.

Alright.

Thank you very much.

Our next question comes from [Howard Gross] from Wunderlich Securities.

Please state your question.

Gentlemen, congratulations on the quarter.

I still am confused about a couple of things.

Accounts receivable -- 99 million two years in a row -- bad debt is a 1.2 million both years?

We accrue bad debt based on revenues, and it is a percent of revenues, and while we do specific analysis on aged receivables throughout, the bad debt expense is relatively equal to what it was a year ago.

Okay.

The SEC is proposing a potential change in the Sarbox for smaller companies.

What impact would that have potentially?

It will have -- it could conceivably have a longer term impact after 2006 depending on how the rules finally come out. 2006, I think, we're projecting reasonable growth in the business because there's still a lot of companies that have to be compliant, and there are a lot of companies that are going through a second and third round now, where they have some things to clean up.

We target the smaller businesses, so long-term, it could have some impact, not likely to affect us in '06.

What's the next inflection point -- another acquisition?

Well, I think we're looking at '06 at -- at two things -- I think we're looking at continued growth in all our core businesses; and certainly, we're actively reviewing our M&A pipeline to see what transactions could close.

If you are looking for an inflex -- a significant inflection point, it would have to -- it could only come from a major acquisition.

Thank you.

We have another follow-up question from Jim Macdonald from First Analysis.

Please state your question.

Hopefully, my last one -- just want an update on anything regarding the insurance business and the investigation there.

Sure.

I'll be happy to do that.

There's really been no change from the last report.

As we reported, we received, like all of the large brokers, a subpoena from the Attorney General of New York.

The -- we have been in the process of data collection and transmission.

I believe we have transmitted to them all requested information.

We've looked at it.

We don't find that we have any problems with it.

We've not heard back from them in any way, and I think at this point, we're in a low period until they have a chance to absorb the mountains of information that we gave them and come back to us.

They are, as you know, looking at, at least, the top 20 brokers in the country and maybe more.

So, I think they're being swamped with data.

The good news is we've gone through our records, as we found no evidence of anything that smacks of the kind of problems that had been reported in the newspapers that others may have had, but at this point, you really never know exactly how they're looking at or how they're going to come out.

So, we have complied fully with their requests.

We're being as cooperative as we can, and we're waiting for the phone to ring.

Thanks very much.

[OPERATOR INSTRUCTIONS]

Sir, there are no other questions at this time.

Well, I thank you.

I'd like to, at this point, thank all of our banks who were so supportive of our new facility.

I'd like to thank our shareholders who have been supportive over the last few years.

We are working very hard to improve the value of this Company, and I think 2005 was a plateau year for that growth, and I think we're now positioned to grow even faster, and we're working hard to do that.

Most importantly, I'd like to thank our employees who are listening in.

It was your hard work and your efforts that achieved the $0.28 per share.

So, we thank you, especially, and, now, we're looking forward to improving that for 2006.

With that, I thank everyone who called in, and we will -- look forward to speaking to you after the first quarter.

Thank you, ladies and gentlemen.

This concludes the CBIZ 2005 fourth quarter and year-end results conference call.

You may now disconnect.