CBIZ Inc (CBZ) 2006 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the CBIZ first quarter 2006 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.

Mr. Gerard, you may begin.

Thank you, John.

Good morning, everyone, and thank you for calling in to CBIZ's first quarter 2006 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 if you have questions, you hold them until after the call.

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

The 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 this call we may make forward-looking statements.

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

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

Additional information concerning factors that could cause actual results to differ materially from those in forward-looking statements, are 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.

Prior to the opening this morning, we released our first quarter results.

We were pleased to release results that showed revenue was up over 10% over the prior year.

We reported our eleventh consecutive quarter of same business unit growth, and our earnings per share were up 30%.

Generally, we reported strong results from all 4 of our operating groups.

Now, I'd like to turn over -- turn this over to Ware to give you the details of the first quarter results.

And then I'll come back with some comments about our individual business units.

Thanks, Steve, and good morning, everyone.

As is our normal practice, I want to take several minutes to run through some of the highlights of the numbers we released this morning for the quarter ended March 31, 2006.

We're very pleased to report total revenue growth at 10.3% for the first quarter.

Same unit revenue growth was 7.9% or $12.2 million, and growth resulting from acquisitions in the first quarter was $3.7 million or 2.4%, compared with the first quarter of 2005.

As noted in the earnings release, during the first quarter, we moved several of our business units between groups, to be better aligned with our client base.

This client-centric approach resulted in the movement of our Valuation Services unit from National Practices into the Financial Services group, which also includes our Accounting, Tax and Advisory business units.

And we moved our Payroll Services unit from National Practices into our Employee Services group, which includes our Benefits and Insurance business units.

As a result, you now see 4 segments reported which are Financial Services, Employee Services, National Practices and Medical Management Professionals.

You will note that in the first quarter, each of these business segments reported increases in revenue that ranged from 6.7% growth for the Financial Services group to 21.8% growth for the Medical Management Professionals group.

You should note however, that TriMed, which was acquired in January of 2006, contributed $3.0 million of revenue growth to the Medical Management Professionals reported revenue in the first quarter.

In previous conference calls, we have noted that in 2006, the investment income earned on the client cash balances related to our Payroll Services would be included in revenue.

In prior years, this investment income had been reflected in the other income section of the income statement.

For the first quarter, this amount was $336,000 compared with $170,000 for the first quarter a year ago.

We have restated the 2005 results to be consistent with 2006 on this issue.

With a revenue increase of 10%, we have been able to leverage this into a 21% increase in operating income, and a 30% increase in net income from continuing operations for the first quarter.

Fully diluted earnings per share from continuing operations for the first quarter of 2006, was $0.17 per share, compared with $0.13 per share for the first quarter of 2005, an increase of approximately 30%.

As was noted in the earnings release this morning, CBIZ adopted FAS 123R with respect to accounting for stock compensation expense during the first quarter 2006.

Total stock compensation expense recorded for the first quarter was $564,000, and this expense is associated with the unvested options granted in prior years, the cost of restricted share grants, and the costs associated with performance shares granted in the first quarter.

In the first quarter's numbers, about 60% of this expense is reflected within operating expense, with the remaining 40% of this expense reflected in the corporate general administration expense category in the first quarter.

As we indicated in our conference call earlier in February, we expect that stock compensation expense will impact earnings per share by approximately $0.03 per share in 2006.

In line with our past practice, stock options granted in 2006 were granted in April.

As a result, costs for stock compensation in the second, third and fourth quarters will increase, compared with costs recorded in the first quarter, as these newly granted options become a factor in the calculation of costs.

This was anticipated in the guidance we provided earlier in the year, and as we have done today, we will continue to outline this expense for you in future conference calls, in order to help you better understand the impact of this item in 2006.

As has been the case in prior years, CBIZ seasonally uses cash in the first quarter, primarily due to the seasonal nature of our tax advisory services.

At the end of March, 2006, bank debt was $61.2 million, which was 22.2% of equity.

This compares with bank debt of $67.5 million, which was 26.5% of equity at the end of the first quarter a year ago.

I should note that during the first quarter we did not repurchase any shares of our common stock.

You will remember that we are authorized to repurchase up to 5 million shares this year, and we will continue to evaluate potential share repurchases opportunistically.

Our first priority for deployment of our cash flow and borrowing capacity, however, continues to be directed towards making strategic acquisitions.

To date, in 2006, we have now acquired 3 operations that are expected to generate approximately $20 million of revenue on an annualized basis.

At the end of the first quarter, days sales outstanding on receivables was 82 days.

And this compares with 88 days at the end of the first quarter a year ago.

As we have mentioned previously, receivables increase in the first quarter, due to the seasonal nature of our tax business.

Capital spending in the first quarter this year was approximately $1.9 million.

We are pleased with our first quarter results, and we are on track to meet our goals for 2006.

To reiterate our outlook for 2006, we expect revenue to grow within a range of 8% to 10%, earnings per share from continuing operations to increase in a range of 20 to 25%, and we expect EBITDA to be approximately 60 to $62 million in 2006.

So with those comments, I'll conclude, and I'll turn it back to Steve for further comments.

Thank you, Ware.

As Ware has pointed out, we are, as we sit here today, in a position to reiterate the guidance we gave in February for the full year.

The business outlook of each of our 4 business groups looks strong as we sit here today.

And while we're seeing some differences within the groups from what we expected, generally all of them appear to be very much on, or ahead of plan.

I'd like to stop now, and take questions from our shareholders and analysts.

John, are you there?

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

Cardinal Capital.

Good morning.

Congratulations.

Could you talk a little bit more about TriMed and the Medical Practice Management business, in terms of is TriMed as seasonal as the other Medical Practice Management businesses?

How did TriMed fare in the quarter, relative to your expectations?

Was it there for the whole quarter, were there some additional costs in integrating that business?

And then finally, on the Medical Practice Management side, how is the project going which you talked about having a depressing effect on margins this year?

TriMed was acquired effective the first of the year.

It's been in the entire quarter.

It is a quality firm that filled out a geographic niche that we needed to fill, and they are very much on plan as we expected, with no significant first quarter incremental costs that weren't anticipated.

With respect to the new computer system that we are developing, that has not yet had a -- an effect on the margins this year, as it is not yet in service.

It's still being developed.

We're taking a little bit of time to make sure we get it right, and it may or may not have an impact on this year.

There are, however, some other factors which affected the first quarter, that I think are important that you understand.

And I'm going to ask Ware to explain the details for you.

Yes, and just let me also comment, the Medical Management Practice business, including TriMed, really isn't as seasonal as some of our other businesses are.

So we have a what we expect to be a fairly steady rate of performance and growth throughout the year.

But from time to time, when we acquire new clients, we acquire a client in some cases where we bring on the existing receivables, and we collect the cash against those receivables, and we can recognize revenue virtually immediately.

In other cases, we bring on clients where we begin the billing process.

And the cash collections against the receivables associated with the billing process, really don't turn to cash, and, therefore, CBIZ revenue, until maybe 90 to 100 days later.

That was the case where a couple of new clients that came on board in January.

So what you see is perhaps a bit of margin compression in the first quarter due to that.

Because we have staffed up, we have incurred the costs, but we haven't yet recognized the revenue.

And we expect that that has probably depressed the revenue and the associated pretax by approximately $450,000 in the first quarter, compared to what the annualized run rate should be for these new clients.

Thanks so much.

Stephen Balog.

Yes, the payroll interest balance that was -- you said was now having in revenues, $336,000 versus $170,000, very nice increase.

Can you -- does that give an indication, I would assume, that the Payroll business is going well.

But can you help us -- how much of that is better interest rates, and how much is new client activity, or more payroll, more checks at the clients -- payroll checks at the clients?

It is a combination of factors.

First of all, as you commented, the interest rate environment is higher this year than it was last year.

So a good share of this is due to higher rates of interest, that we can earn on our short-term cash portfolio.

But it should also be commented, and you may remember if you have participated in earlier calls, that we made a good strategic investment in our Payroll Services several years ago.

And that is paying off.

So we are seeing good client growth and good growth in the Payroll Services business.

That's what I was -- that is underlying what I was getting at.

I know you made that investment.

And it would be a great business.

Is this accounting treatment how Paychex and the other guys do it?

That's the reason we made the change.

Up until now, the business has been relatively small.

But to be consistent with the people we compete with, we've made the change.

Great.

Thank you.

Jim MacDonald.

Yes, good quarter, guys.

Thanks, Jim.

Since you changed around the segments, are you managing the businesses any differently?

With the change in reporting segments?

Yes.

Well, we're managing the 2 businesses that were moved -- were moved out of National Practices because, as we took a look at what we provide our clients and we try to organize opposite our client need, we decided to consolidate some of the businesses that have like nature and, quite frankly, similar buying points.

So we decided to move our Valuation business from National Practices into the Accounting and Advisory group.

And they now, the Valuation group, now reports to the head of our Accounting group.

And the same with the Payroll business, where we moved it from National Practices to the, what was the Benefits and Insurance group, and is now the Employee Services group.

So they're being managed by the same people that were managing the units, they're reporting up to a slightly different structure.

Because, as you look at the products and services we provide our clients, they fall into 3 very similar buckets.

They're either financial services, employee services or technology services.

And we're trying to organize over time around that to better serve the client.

Thanks.

And thinking about some big-picture issues.

In the end of last year, the Accounting, or now the Financial Services business, was particularly strong, at least from an internal growth point of view.

And looking at the first quarter, it looks like all the other businesses are growing faster than Financial services.

Is there -- do you see a change in the marketplace?

Or how would you describe that?

No, first I would remind you that quarter-to-quarter, last year in the first quarter, we were picking up San Diego, our new large acquisition that we had made.

So I would say that the -- that our Financial Services group growth is strong.

We're seeing more and more work coming out of the related -- the affiliated Mayer Hoffman McCann Association, and the growth in the test business.

We are seeing some slow-down on the Sarbanes-Oxley work through the first quarter.

I think most people are seeing that.

There's a little bit of a time-out as people reassess that.

Our Valuation business continues to be very strong.

So I would say across the board on the Financial Services, we're seeing strength in most of our larger, what was accounting units.

We're seeing continued strength on the Insurance side, not because there are major changes in the industry, quite frankly, but because I think we're just doing a better job getting out and providing solutions to our clients.

Our MMP business continues to grow.

You saw significant topline growth that came from more than just the acquisition of TriMed.

And our other National Practices, which include our Technology businesses, our M&A business, and some of our assorted consulting businesses, are also doing fine.

So as we look at it, we're really seeing growth across the board, and we haven't really seen any slow-downs, to answer your question specifically with respect to the Financial Services group.

Sounds like the other ones are speeding up, rather than accounting slowing down.

Is that realistic?

I think they're doing better comparatively quarter-to-quarter, but don't forget we have almost 70 different business units here.

In any 1 given quarter, it is really hard to determine a market trend.

So I would really say that they're all doing very, very well as we sit here now.

It's very hard to -- we're actually comparing oranges and watermelons when we start looking like that.

Any comments going forward?

Do you expect that to continue?

Well, we're hopeful that it will continue.

We don't see anything on the horizon at a macro level that should slow down the growth that we have seen.

We think our units are well positioned in their markets.

We continue to be concerned about the availability of qualified resources on the Financial Services side.

It's a problem that all accounting firms face.

And there are obviously unknowns in the Insurance business.

But as we look at our market, which is again the mid--sized company, we are seeing continued investment, continued strength, and we think we're reasonably well positioned in that market.

Okay.

I'll come back with some other ones.

Robert Kirkpatrick.

Could you -- just following on Mr. MacDonald's question, could you give us what the kind of the same store growth levels were for the revenues for each of the 4 divisions?

We have that, Rob.

For the first quarter, the same unit revenue growth, on a consolidated basis as we mentioned, was up 7.9%.

The Financial Services group, which is primarily the old accounting group, was up 6.4%.

The Employee Services group was up 9.7%.

And, again, that now includes our Payroll Service, as well as I think we mentioned earlier, Consolidated Human Capital Management business.

MMP - and I've given you those numbers, but without the impact of TriMed, it was up 8.8%.

And then the balance of the National Practices were up 10.7%.

And what particularly drove the National Practices, as it is currently structured?

The same store growth.

What was particularly strong there?

We had some good performance in some of the Technology Services business groups.

We provide hardware/software and application support and installation.

And these are smaller businesses, so as you get larger engagements, it can have more of an impact on the growth rate itself.

We had a strong quarter there.

Plus, the business itself was--is a little bit smaller.

Yes, exactly.

The business is considered -- that business itself is considerably smaller by 50% than any of the other businesses.

So while it is up a little bit, the actual impact on us isn't as great.

Right.

And then what is the total level of acquisition spending that you'll report in the 10-Q for the first quarter?

I think we'll show approximately $16 million of acquisition spending in the first quarter.

Great.

Thank you so much.

Stephen Balog.

Too, back on [inaudible] in the accounting business, the flipside that it is hard to get people, I guess, means it is easier to raise prices.

I assume you're still in a fairly firm pricing environment?

We're in a reasonable pricing environment.

Although I will remind you what I've said on prior conference calls, the kind of pricing increases that the final 4 have been able to push through for the large corporations, does not trickle down very well to the market that we're in.

We compete with a different set of accounting firms.

So while we have been able to raise our prices as we do each year, one can't look at the reported increases that you'll see out of the big 4, and bring that down to our level.

The pricing is up, and it's up across the board for our sized firms.

Is it up more than it has been in, say, 5 years ago?

The price increase lately, is that better than the price increase 5 years ago?

I'm not sure we've tracked it all the way back to give you a good solid answer.

But generally about half of the increase you see in the revenue is due to some pricing increases, and about half of the increase you see is simply due to more hours being engaged by clients.

Okay.

And other question, different subject.

Is there any chance or any thought that you guys would add another leg to the business?

I don't know, what is it, fourth leg or fifth leg, wherever we are here, with a larger deal?

Something in business services, but not in the areas you're in?

Or are you still with your focus of tuck-ins and maybe a new geographic area in New York City, or something like that?

Well, we continue to look to expand the businesses we're in for sure.

And that's the businesses we're in, in the locations we're in.

On the last conference call, I believe I said that this year we're going to start to expand the geographic coverage into cities we're not in.

We will look from time to time, and have looked, at business service firms that may be outside of the businesses that we are in.

And if one were to come along that was opportunistic that we thought we could manage and we thought we could provide good value to our clients, we would look at that seriously.

I will tell you that as we sit here today, our acquisition pipeline is as robust as it has ever been.

And -- but there are no names on that list that would be outside of the core businesses that we're in.

We view ourselves as being in a position to do a large transaction, should one come along.

We're going to be opportunistic ,and we will expand our boundaries, if it makes sense.

But that's not going to be a primary driver.

Okay.

So you have plenty to do doing tuck-ins and product lines in the geographies you're in now, and opportunities in geographies you're not in, again, in the same business lines?

That's right.

Although I wouldn't limit any acquisition we make in an area we're in to a tuck-in.

We could conceivably make an acquisition that was actually larger than what we might have in a particular area.

I would also caution you, however, while the list is more robust than it has ever been, the mortality rate of these transactions is very high.

We only close a few a year, somewhere between 3 and 6.

And while we may be looking at slightly larger transactions, I don't want anyone to read into my comment that the number of pending transactions is so strong that they could assume we'll be doing a lot more than we normally do.

Okay.

Thank you.

Jim MacDonald.

I am going to go through my list of technical little things here.

Sorry.

But your current liabilities was down pretty dramatically, which by my calculation, means your cash flow is -- was much more negative than usual in the first quarter.

Any comments on why that was?

That's normal for us in the first quarter.

I think in some prior years, we've outlined the fact that we've gotten some tax refunds and things like that from prior-year overpayments or settlement with the IRS.

That did not occur this year.

So, and I commented that the first quarter CapEx was about $1.9 million, and we had about $16 million of related acquisition spending, cash outlay in the first quarter.

So if you look at the year-end balance on debt at roughly $32 million, and then the first quarter balance of $61 million, that $30 million increase has supported the seasonal factors within the tax business.

But it's also supported the $16 million of spending for non-operating acquisition purposes, as well.

And actually our quarter end loan balance is actually lower than we had initially planned, so we're not spending more cash than we anticipated.

And on the tax rate, was down a little bit.

Is that what you expect for the year, and any reason for that?

Well, the reason for the lower tax rate, and I think we've talked about this before, is that 18 months ago or longer, we set out to do everything we could to minimize the tax payments.

We did a number of internal reorganizations to help that out, and this is a result of those efforts.

Yes, we've done some tax planning, but there's only so much we can do.

But we have in fact, as you have observed, brought the effective tax rate down a bit.

I think if you look at it, it is 39.9%.

If you use 40% as full-year expectation, that is pretty close.

Okay.

And could you say what is now in other income, now that the interest income on client funds is kind of out of there, and how -- do you expect it to be as large as it was this quarter going forward?

We --yes, now that we've moved that interest income into revenue, we still have some things in there that, for instance, as we've sold businesses in prior years, we ourselves get either royalties, or a bit of an earn-out on those businesses based on their performance.

So we had about half of the number you see there for the first quarter, is related to those.

And I think your implication that that may not be recurring is correct.

So it's going to be larger, I think, in the first quarter, than you should expect in future quarters.

Okay.

And then I'll just ask my -- another question is with MMP getting so big and being slightly different than the rest of your businesses, any thoughts on the strategic opportunities in that sector?

The MMP business continues to grow nicely, both on the topline and on the contribution line.

We believe that there are a number of opportunities in the marketplace today to further expand that business.

And I think that's where our efforts are focused, certainly this year.

We continue to give them the resources they need to grow, both on technology, and the capital they'll need to grow in terms of transactions like the TriMed transaction.

Other than that, there are no other plans with MMP at this time.

Thanks very much.

Stephen Balog.

I was just wondering why there was no stock repurchase in the first quarter?

And I'm not being critical, you guys have bought so much back in the last couple years.

But I am noticing the stock is at a 5 year high as we speak.

Just your thoughts on the stock and the repurchase program.

Well, we've said all along that the use of our capital, in priority sense, was acquisitions first, stock buyback second.

But we also said that everything we did, we intended to be accretive.

If you take a look at the current stock price, and if you take a look at our borrowing rates, then the use of significant cash to buy back shares at this level is fractionally accretive.

So I think the best answer is, we're keeping our eye on it.

There may be some other things that would happen to help us with the buyback.

But right now, we're just watching the market and keeping our powder dry for the other side of our expansion program.

Thank you.

[OPERATOR INSTRUCTIONS] At this time I show no further questions.

All right.

Well, I'd like to thank everyone who called in.

I'd like to thank our shareholders for their continued support.

I'd like to thank all of our employees, who I know listen in to these calls.

I would remind our employees, as I do in each call, that the quarter is over.

We can stop patting ourselves on the back.

We had a good quarter, but our success is going to be a function of how we do in the next 3 quarters.

So I hope everybody just continues the fine efforts they've put in.

And to our shareholders and analysts, I look forward to speaking to you after we report our second quarter numbers.

Thank you.

Thank you, ladies and gentlemen, this concludes today's conference.

Thank you for participating, and you may all disconnect.