CBIZ Inc (CBZ) 2006 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the CBIZ 2006 second quarter results conference call. [Operator Instructions] 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 second quarter conference call. Before I begin with my comments, I'd like to remind you of a few things. As with all our conference calls, this call is intended to answer the questions of our shareholders and analysts. If there are media representatives on the call, you're welcome to listen in. However, I ask that if you have questions, you hold them until 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, CBIZ.com.

You should have all received a copy of the press release which we issued this morning. If you didn't, 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 would cause actual results to differ materially from those in forward-looking statements are contained in our SEC filings, Form 10-K, and press release.

Joining me on the call this morning is Jerry Grisko, our President and Chief Operating Officer, and Ware Grove, our Chief Financial Officer. This morning, before the opening, we released our second quarter and six-month results. We are proud to report that we had a strong second quarter to go along with our strong first quarter. And in particular, that all four of our business units posted revenue gains and contribution gains for both the second quarter and the six months.

In addition, we announced that effective August 4th, we have been approved for listing on the New York Stock Exchange. We will begin trading on that date.

I'd like to turn the call over to Ware to give you the details of the quarterly numbers, and then I'll come back and talk a little bit more about the business.

Thanks, Steve. I want to take a few minutes to review the highlights of the numbers we released this morning for the second quarter and the six months ended June 30, 2006.

For the second quarter, total revenue increased by $13.1 million, which was an increase of 9.4% compared to the second quarter a year ago. Same unit revenue increased by 5.7% in the second quarter, and we experienced same unit growth in all business segments within CBIZ.

For the first six months this year, total revenue grew by $29 million, or by 9.8% compared with the first six months a year ago. Same unit revenue has grown by 6.8%, or by $20.1 million for the first half of 2006. And as mentioned earlier, we have experienced same unit revenue growth in every business segment within CBIZ.

We have acquired three businesses so far in 2006. In the first quarter, we acquired TriMed, which is now part of our medical management practice group, and Valley Global, a property and casualty business, which is now part of our employee services group. In the second quarter, we acquired BCKW, an insurance firm with a property and casualty focus that is located in St. Joseph, Missouri. And that complements our operations in Kansas City, and further strengthens our presence in the Midwest.

These acquisitions contributed $5.2 million to our revenue growth in the second quarter, and have contributed $8.9 million to our revenue growth for the first six months.

We are pleased that with this growth in revenue, we have been able to expand margins, and this has translated into a higher rate of growth in both operating income and net income from continuing operations. For the second quarter, the 9.4% growth in total revenue resulted in a 28% growth in net income from continuing operations. And for the first six months of 2006, the 9.8% increase in total revenue has resulted in a 29% increase in net income from continuing operations.

For the first six months, we have achieved a 31% growth in diluted earnings per share from continuing operations compared to a year ago.

As I mentioned in our conference call during the first quarter of this year, in 2006 CBIZ is recognizing expense for stock compensation as required by FAS 123R for unvested stock options outstanding at the beginning of the year plus expenses for any new options granted during 2006. Our total stock compensation expense for the second quarter was $1.1 million. And for the first six months, the total stock compensation expense was approximately $1.7 million. And that compares with approximately $100,000 for the first six months a year ago.

We expect stock compensation expense will impact earnings per share in 2006 by approximately $0.03 per share. And this expense was anticipated in the earnings per share targets that we have established for 2006.

Also during the second quarter, we announced that CBIZ closed a $100 million convertible note issue due in 2026. These notes have five-year call protection, and this financing has several unique features that are important to understand. First of all, the interest rate on these notes is 3-1/8% a year, payable semi-annually. In addition, there is a conversion feature that provides for the conversion to shares of common stock at a price of $10.63 per share.

However, unlike convertible note issues that may be fully convertible into shares of stock, these notes have a net share settlement feature, which has become common in recent years. This feature provides that the $100 million principal value of the notes be repaid in cash. Further, as the value of CBIZ common shares exceeds the conversion price of $10.63 over the next five years, the gain on the notes above $10.63 can be paid in either cash or settled in shares at CBIZ's option.

It is important to note that any gain settled with the issuance of shares is settled with shares valued at the appreciated value of the shares at that time.

The issuance of these notes enabled CBIZ to repurchase 6.6 million shares of common stock concurrent with the closing of these notes on May 30th. We used the remaining proceeds of the notes to pay the outstanding balance on our unsecured bank credit facility. As mentioned in the release, we have repurchased additional shares through open market repurchases by utilizing a 10b5-1 program for share repurchases. So through July 25th, we have repurchased a total of approximately 7.9 million shares, including the 6.6 million shares I mentioned earlier, combined with subsequent open market activity.

Let me summarize this information by saying that CBIZ now has the convertible notes outstanding with an interest rate of 3-1/8%, and we have completely paid the outstanding balance on our bank credit facility. To compare the interest expense, the borrowing cost under the bank credit facility would be in a 7% to 7-1/4% interest range. Our existing $100 million unsecured bank credit facility remains fully available to support CBIZ's operating needs, including potential future acquisitions.

We made three acquisitions in the first half of 2006, and we remain fully committed to continuing our targeted acquisition program as the first priority for the use of our funds.

With this share repurchase activity in the second quarter of 2006, we have repurchased approximately 10% of our shares outstanding this year. Because this repurchase activity occurred near the end of the second quarter, the impact on the second quarter and six month share count was minimal at June 30th. As we progress through the balance of 2006, this repurchase activity will further reduce the diluted shares outstanding, as the weighted average share count in the third and fourth quarters will reflect this activity to a greater degree.

Days sales outstanding on receivables stood at 72 days at June 30th, 2006, compared with 75 days at June 30th a year ago. For the first six months of 2006, capital spending was approximately $3.4 million, and debt to equity stood at 44.2% at June 30th, 2006.

To reiterate our financial goals for 2006, earlier this year we announced our goal to achieve an increase of 8% to 10% in revenue, and achieve a 20% to 25% increase in earnings per share, compared with the $0.28 per share reported for 2005. We're pleased with the results for the first half of the year. And at this point, we are on target to meet or exceed the high end of these targets. So with these comments, let me conclude, and I'll turn it back over to Steve.

Thank you, Ware. Let me make some comments about the business in general. We basically see business conditions across all of our businesses as being strong and consistent for the rest of the year. We see no significant weakness in any particular segment. And the business activity in the middle market seems to be holding up just fine.

Our cross-serving initiatives are on track. Our acquisition pipeline remains robust, although I caution the listeners that no transaction is done until it closes. And there's always a risk. But right now, we're looking at a number of businesses in each of our business segments.

As mentioned in the press release, we have been approved for listing on the New York Stock Exchange. We believe that this is the next logical step for our company as we grow and compete more aggressively with other companies. This listing reflects the market's acknowledgement of our strength and our stability, and of our business activities and our business conduct. We believe that the new -- we're not unhappy with the NASDAQ market, but we believe that the market information we will get by being listed on the New York is probably a little bit better. And equally as important, we believe that the market recognition for CBIZ with this move will help us in both our acquisition program and in our recruiting efforts.

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

[Operator Instructions] Robert Kirkpatrick is on line with a question. Please state your question.

Good morning, gentlemen.

Hey, Rob.

Hey, Rob.

Ware, what were the end of period shares that -- given that the quarterly average that you put out doesn't fully reflect the activity?

Rob, if you have page five of the press release.

Yes. I just missed it.

We've got basic weighted average shares and fully diluted as of the end of the period.

Okay. Great. Thank you. And would you, Steve, care to make any further economic observations about what is going on in the middle market community for the businesses that you serve?

No. I guess I'm taking a lesson from our new friends in Washington. Every time he says something, he sort of gets it wrong. All I can tell you is what we see. If you take a look at our insurance group, our accounting group, and our national practices group, in general, they're seeing strong backlogs and pipelines of transactions, in part, a reflection of our growing strength, and in part, the fact that the middle market has not yet reacted to higher energy prices, higher gas prices. There seems to be still significant capital for investment. And we have not picked up, either by industry or by geography, any significant weakness.

Okay. And the national practice business during the quarter looked like it had quite positive results, and I was wondering if you could shed some additional light as to what perhaps might have gone on there?

Well, we have -- there are a number of things that have gone on. First, our technology businesses are all doing very well right now. In addition, we closed in the second quarter two M&A transactions, which helped the quarter. But I will also remind you we had a very large M&A transaction in the second quarter of last year. But we did pick up some incremental revenue with the two transactions compared to the one.

Basically, what we're seeing in our national practices is all of our units are doing well.

Okay.

And just to add to that, on the technology businesses, while the revenue growth hasn't been quite as high as some of the other segments, the mix is more towards services as opposed to product sales, which is a higher margin for CBIZ.

Okay. That's great. And were there office consolidation costs during the quarter?

Nothing significant, Rob.

Okay. And then finally, Steve, you've been very aggressive in buying back your stock over many years here. You've operationally gotten the company put on solid footing. We're now listing the company on the New York Stock Exchange. Is it time to reconsider whether or not to pay a cash dividend, either on a quarterly basis, or on an annual basis, with a portion of the free cash flow, so that you can attract an additional class of investors who are prohibited from owning non-dividend paying stocks?

Rob, I think it's a very good question. It's something that we consider at least annually by the board. So it's not an idea that we don't think about and doesn't have merit. I think right now, our current intention is to use our available cash to grow our businesses in the segments that we want to be in. We see significant opportunities for acquisition growth. As you know, we have been careful. Every acquisition we've made has worked out fine. As I've announced in the first quarter conference call, we're looking at significantly larger transactions. And right now, I think the management and the board believes that the best use of our cash is to commit to reinvest in our people, (inaudible) some training, improve our systems, as well as make acquisitions.

Okay. I'll get back in line. Thank you.

Thank you.

Todd Van Fleet is on line with a question. Please state your question.

Good morning. Just a follow-up, I guess, on a few of the issues that you've already touched on. Maybe I missed it, but could you list the organic growth or same store sales for each of the various business segments for the quarter?

Yes, Todd. Of course, the blended growth was 5.7%. In our financial services group, I think you see the segment information there, which is what the same unit revenue growth is. And that came in at 6.3%. The employee services group came in at 3.9%. And then the medical management practice group came in at 9.3%. And the national practices, as we commented earlier, which is comprised primarily of technology services, the revenue growth there was 1.6% for the second quarter.

Okay. Okay. And then to follow-up, I guess, on the national practices improvement in margins, you said that there's a greater mix of service-related revenue as opposed to products. I guess I'm just wondering embedded in that, I guess, analysis, did the transactions that were closed during the quarter really contribute kind of disproportionate to their revenue size in the way of the margin?

Well, yes. I think that has to be true. Typically in this business, and part of it, remember, the Edward Jones account is embedded in this technology services group. But beyond that, we do consulting with clients in terms of software application, design, and implementation. And that consulting business, or the services business, is a higher margin business. And from time to time, we then actually acquire hardware and pass that through at a fairly low margin in order to construct and install the hardware that's related to the system needs.

But if your question is specifically on the M&A contribution, by definition, the M&A margins on the few transactions that closed are higher than the margins in our technology business.

Okay. Thanks for that. And I guess following up on the share count, then, you said 7.9 million shares have been purchased in total. That was during the quarter?

That's through July 25th, Todd. The number purchased through June 30th was -- I’m sorry. Roughly 7.2, I believe.

7.2. So you weren't restricted for a period of time, then?

We put a 10b5-1 program in, Todd, because we would be blacked out during that period of time.

So an incremental 700,000 shares after the quarter end, then, to this point?

Yes.

Okay. Thanks.

Thank you.

Robert Kirkpatrick is on line with a follow-up question. Please go ahead.

Are we -- with the sale of the discontinued operations in the second quarter now out of all discontinued operations going forward, or do we still have some businesses remaining in there?

There is a residual of a piece of the business that we discontinued last year that we're working through. It isn't very big. But there's nothing else that's substantial in there, and there's nothing right now that we're targeting to make a discontinued operation.

Okay. And Ware, bad debt expense for the quarter?

Bad debt generally is -- we accrue typically between 0.5% and 1% of revenue. And I think it was closer to 0.5% of revenue for the year. Or I'm sorry, year to date.

Great. Thank you so much.

Todd Van Fleet is on line with a follow-up question. Please go ahead.

Yes. I just wanted to ask you about the philosophy on the acquisition front. And when you think about the various business segments and you look at the -- you consider the pipeline of activity, is there any one area of the company that you're really more positive and enthusiastic about from an acquisition standpoint and if you can explain why.

We're seeing opportunities that fit our strategy in our accounting area, in our benefits and insurance area, in our medical practice area. So I would say that in most of the significant businesses that we are in that we have targeted to grow, including -- I would add wealth management to that as well -- we're seeing numerous opportunities for us at this point.

And our strategy has been to first, fill out the product array in the cities that we already have established the beachhead, and then move to other cities. I think I indicated in our first quarter conference call that we're beginning to look at some other geographies. But even within the cities that we're looking to expand, that we've already established a beachhead, we're seeing significant opportunities ahead of us.

But then again, I caution that these are opportunities. We are not close to anything that is disclosable at this time. And these transactions come and go, as all of you know. But I would say that our pipeline of significant transactions that fit our strategy is as strong today or stronger than it's ever been.

Can you talk about the allocation from a capital standpoint, when you look at your -- if you consider your acquisition pipeline, is it weighted more heavily toward one segment relative to another -- the other two?

Well, we're being opportunistic. I would say the pipeline is bigger on the financial services and employee services side than it is on the national practices and on the medical practice business. But I think that's as much a function of the industries. Those are just much, much bigger industries.

In terms of our own internal capital allocation, we're very fortunate. We're generating significant cash flow. We have $100 million unused facility. We have cash in the bank. And we will aggressively go after businesses in all of the segments that we've decided to expand, which are basically the ones I mentioned.

In the financial services end of things, are you seeing more opportunities up market? Large employers? Publicly traded companies? Or is it really you're more focused on the breadth of opportunities in the middle market?

We're going to stick to the market that we are in, because that's what we know. And I would -- we're not looking at any public companies at this time, even though we're looking at significantly larger transactions than we have done before.

I guess not just with respect to the transactions, but with respect to the aggregate new business opportunities, organic growth for those -- for financial services in particular.

Yes. The businesses that we are targeting are at the middle to upper range of our existing client base now. But we are not targeting businesses that are a substantially up market or a substantially down market from where we are today.

Thanks.

Robert Kirkpatrick is online with a follow-up question. Please go ahead.

Just following on on that, Steve, is there any thought being given at the current time to going into either a fifth leg or an additional line of business that would then get folded into the national practices area?

We look from time to time at businesses we are not in today or not strongly in today that are targeted at mid-sized companies and that are service businesses. And should something of size come along that could be a fifth leg, we would look at it. I would say that today, the backlog, the pipeline of the things we're looking at, does not fall in that category. And there are some things we have decided we don't want to be in. But if one were to come along that was a value added to our existing client base, and fit the philosophy that we have here, we would certainly look at it. And we have in the past.

Okay. And then, Ware, how much have you spent on acquisitions year to date?

The cash we've used for acquisitions is a combination of the cash we've spent on the three new acquisitions this year plus what I'll call the earn-out component of prior year acquisitions, and that would total roughly $20 million for the first six months.

Great. Thank you so much.

[Operator Instructions] [Todd Silva] is on line with a question. Please go ahead.

Good morning. Ware, would you walk through a little bit of the cash flow statement? I don't know if I missed this earlier on the call. But just cash from operations. You mentioned what CapEx was in the quarter. And then I don't know if I got the acquisitions in the quarter as well. Thank you.

Let me just walk it through without going through the cash flow statement per se, which is not part of the release, I'll just walk through kind of the debt piece and the cash piece. We began the year with bank debt outstanding at $32 million on January 1st. We've spent, through the first six months, $56 million on share repurchases. We've spent $20 million on mergers and acquisitions, or acquisitions, for new companies.

From a non-operating perspective, we also, from prior divestitures and through the exercise of stock options from a non-operating perspective, we received in approximately $12 million in cash. So the net spending on non-operating purposes would be roughly $64 million. Okay?

Add that to the $32 million of beginning debt, and you would have a $96 million debt outstanding, had the operating cash flow been neutral. Okay? At June 30th, of course, the bank debt is zero. We have $100 million outstanding balance on the convertible debt issue. But we also have $14 million of short-term surplus funds. So I'd say the net debt is $86 million. So the cash flow, free cash flow, if you look at it on a pure cash basis, generated in the first half, would be roughly $10 million.

And I would remind you that typically in the first quarter, seasonally, we use cash, primarily related to the build up in receivables in the business related to our tax consulting business. And then in the second quarter, we begin to generate cash, and we continue to generate cash through the third and fourth quarters. And we would continue to forecast and say that the free cash flow for the full year would be in the range of $30 million. So for the first six months, it's approximately $10 million.

Thank you.

[Operator Instructions] I show no further questions.

Okay. Well, I would then like to thank you for calling in. I'd like to again sincerely thank all of our employees who may be listening in. You did a great, great job in the second quarter, and we're looking really good for the full year. To our shareholders, I'd like to thank you for your continued support, and reiterate what Ware said before, which is as we sit here today, we are forecasting that we will meet or exceed the upper end of the ranges that we announced publicly in the beginning of the year. With that, I thank you all, and look forward to bringing you the third quarter report.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating.