CBIZ - Earnings Call - Q2 2019
July 31, 2019
Transcript
Speaker 0
Good day, and welcome to the CBIZ Second Quarter twenty nineteen Results Conference Call. All participants today will be in listen only mode. Please note that this event is being recorded. At this time, I would like to turn the conference over to Lori Novickis, Director of Corporate Relations. Please go ahead.
Speaker 1
Thank you, Chris. Good morning, everyone, and thank you for joining us for the CBIZ second quarter and first half twenty nineteen results conference call. In connection with this call, today's press release has been posted on the Investor Relations page of our website, www.cbiz.com. This call is also being webcast and a link to the live webcast as well as the replay can also be found on our website. Before we begin our presentation, we would like to remind you that during the call, management may discuss certain non GAAP financial measures.
A reconciliation of these measures can be found in the financial tables of today's press release. Finally, remember that management may also make forward looking statements. Such statements are based on current information, management's expectations as of this date and do not guarantee future performance. Forward looking statements involve certain risks and uncertainties and assumptions that can be difficult to predict. Actual results can and sometimes do differ materially.
A more detailed description of such risks and uncertainties can be found in the company's filings with the Securities and Exchange Commission. Joining us for today's call are Jerry Griscoe, President and CEO and Ware Grove, Chief Financial Officer. I'll now turn the call over to Jerry for his opening remarks. Jerry?
Speaker 2
Yes. Thank you, Laurie, and good morning, everyone. With this morning's release of the results for the second quarter and the six months ended June 3039, we were pleased to report earnings per share from continuing operations are up 30.4% for the second quarter and 11.5% for the first six months of this year. For the second quarter, revenue grew by 1.2% and for the six months, revenue was up by 1.4%. Within these growth rates, it's important to note that our core recurring lines of businesses within both practice groups continue to perform quite well.
As we had outlined earlier this year, there are several factors that caused the year over year revenue comparisons in the first half of this year to reflect more modest growth over the extraordinary levels that we achieved a year ago. First, as you may recall, several of our non core project oriented businesses recorded unusually high revenue in the 2018. While these businesses are performing well again this year, the revenue contributions are more in line with historic results. Next, we also knew that there would be an unfavorable impact on revenue as a result of the divestiture of the two small financial services businesses that we announced earlier this year. While those businesses were not material contributors to the full year revenue results, they did have a larger relative contribution in the 2018.
Finally, there is also some variability in contingent carrier commissions that we receive within our Benefits and Insurance group each year. These payments are based on a variety of mostly unpredictable factors and we experienced a reduction in the amount of contingent carrier commissions that we received in the first half of this year compared with the same period a year ago. So it's important to understand that the impact of these several items may cloud the solid performance of the more recurring businesses within our Financial Services and our Benefits and Insurance group. Now turning to some specific comments within our two primary practice groups. Within our Financial Services group, revenue increased by 1.7% in the second quarter and 2.2% for the first six months of this year.
Of this revenue growth, same unit revenue grew by 2.1% for the second quarter and 2.4% for the first six months. Adjusted to eliminate the impact of our project oriented real estate advisory business that had an unusually high revenue contribution in the 2018, the same unit revenue growth for this group was 3.3% in the quarter and 3.4% for the first six months of this year. Performance of our core accounting and tax business and our government healthcare consulting business remains very strong. As we noted on our first quarter call, our first six month revenue reflects the ongoing residual impact from delays in work associated with the Tax Reform Act. As a result, the number of tax filings extensions is up by approximately 10% this year.
That work which is normally performed in the first and second quarters is expected to be completed in the second half of this year. Our private equity advisory business which is also project oriented has historically grown at very high rates that are in excess of 10% in recent years, but did experience some softness in its primary service offering during the second quarter. That slowdown appears to be the result of the decline in the number of private equity transactions reported in the first half of this year. Despite some softness in the top line growth, the margin performance of this business remains very strong and the volume of private equity deals appears to be increasing. Turning to our Benefits and Insurance Group.
Total revenue declined by 0.9% in the second quarter and by 1.1% for the first six months of this year. Same unit revenue declined by 1.6% in the quarter and 2.4% for the first six months. We expected a difficult first half revenue comparisons as a result of the unusually high revenue contribution from a number of our project oriented businesses in the first half of last year. In addition, as mentioned earlier, contingent commission revenues for the first six months of this year trail the amounts received for the same period last year. We are continuing to make investments to increase the number of new business producers within this group.
This is a multiyear process and will take some time to materially impact organic revenue growth, but the early returns are very favorable. This year, we have hired 30 new producers within our Employee Benefits segment alone, and we expect to continue to add to those numbers through the remainder of the year. In addition, new business production within our Benefits and Insurance group in the first half of this year is very strong and when coupled with higher client retention rates, we expect improved growth rates in the second half of this year. So with those comments, let me turn it over to Ware Grove, our Chief Financial Officer.
Speaker 3
Ware? Yes. Thank you, Jerry, and good morning, everyone. As Jerry described, as we went into this year, there were known headwinds in our ability to reflect a higher rate of revenue growth in the first half of this year. If you normalize to eliminate the impact of these nonrecurring items a year ago, including the year over year impact of the divestitures, the second quarter revenue growth was an adjusted 2.9% and for the six months, the adjusted revenue growth was 3.1%.
Despite the modest revenue growth reported in the first half, we are extremely pleased to report higher margin with growth in earnings per share at the high end of our expectations. A portion of what is normally the first half tax service revenue will now come in the second half this year. New business production and client retention trends are very positive within our Benefits and Insurance Services group. As a result, we expect second half revenue growth rates will accelerate and we think our growth in earnings per share for the full year will be near the high end of our 10% to 12% growth range. In addition to the three acquisitions we have announced to date this year, we have continued to use capital for share repurchases.
In the second quarter, we repurchased a total of approximately 422,000 shares of our common stock. And for the six months, we have repurchased a total of approximately 1,000,000 shares at a total cost of approximately $19,900,000 As a result of this first half activity, we are now reducing our estimated full year weighted average share count to within a range of 55,500,000.0 to 56,000,000 shares. Cash flow is on track for the first six months and adjusted EBITDA for the first half is up by 8.3% to $86,500,000 or 17.1 percent of revenue, up from 16% a year ago. At June 30, we had an outstanding balance borrowed of $159,000,000 on our $400,000,000 unsecured credit facility, and the leverage when compared with EBITDA was approximately 1.5x and that results in $229,200,000 of unused borrowed capacity. And we will continue to actively evaluate share repurchases as a use of capital.
In the first half this year, we used approximately $13,100,000 for acquisitions, including payments for earn outs on previously closed transactions. We project the use of approximately $18,100,000 for the remainder of this year, dollars 11,500,000.0 in 2020, dollars 5,100,000.0 in 2021 and approximately $2,700,000 in 2022. Days sales outstanding on receivables stood at ninety days at June 30 this year and that compares with eighty seven days at June a year ago. The small increase in this measure can be attributed to the tax filing extensions as a portion of the billings for tax work has not yet been processed. Capital spending for the second quarter was approximately $1,500,000 and for the six months, it was approximately $6,900,000 This reflects spending on facility, tenant improvements associated with lease renewals and moves, plus our transition from leasing to purchasing some routine IT equipment replacements.
Full year capital spending is expected at approximately $12,000,000 At June 30 this year, there is approximately $100,000,000 held in our deferred compensation plan. This is reflected as both an asset and an equal liability on our balance sheet. As we account for the gains and losses on these investment assets, most of you already know there is no impact to our pretax income. But eliminating the impact of accounting for gains and losses on operating income, second quarter margin was 9.9% compared with 8.5% a year ago. And for the six months, the adjusted operating margin was 14.9% compared with 14.2% a year ago.
The effective tax rate in the second quarter was 24.3% and for the six months, the effective tax rate was 25.9%. We continue to project a full year effective tax rate of approximately 25%. The effective tax rate could either be higher or lower as the impact of accounting for stock compensation over the balance of the year is unpredictable. For the six months this year, we reported a significant increase in the pre tax income margin to 14.5% from 13.1%, an increase of 140 basis points compared with last year. Now a portion of this 140 basis points improvement is due to the non recurring nature of the share price related mark to market charge of $2,800,000 that was reported for the six months a year ago.
The nonrecurring charge accounts for about 60 basis points of this improvement, So there is another 80 basis points of improved margin that is being driven by operating efficiencies and leveraging expenses. We are continuing to make investments in the business, as Jerry commented, including the marketing and media spend in the first half this year plus the new producer investment spending within our Benefits and Insurance Group. Even with these investments, we are very pleased to see the results of pricing and other cost initiatives within our business that are now resulting in margin improvement. As Jerry commented, our core business is steady and is performing in line with expectations. New business production and client retention measures are very positive to date this year.
So to recap, our full year expectations are that first of all, we expect a higher rate of revenue growth in the second half this year. But considering the seasonal nature of our first half versus second half revenue mix at this midpoint in the year, we are looking for full year revenue growth in a range of 3% to 4%. As we commented earlier, the performance of the business is very good. We are pleased to report margin improvement in the first half with EPS up by 11.5% and we are looking to full year growth in earnings per share near the high end of our range of 10% to 12% growth for the full year. Our full year effective tax rate is expected at approximately 25%.
This could be either higher or lower for the reasons I explained earlier. With the first half impact of the shares repurchased to date, we are expecting a full year fully diluted share count within a range of 55,500,000.0 to 56,000,000 shares and that's a reduction from the 56,500,000.0 to 57,000,000 shares we initially forecasted earlier this year. So with these comments, I will conclude and we'll now turn it back over to Jerry. Thank you, Ware. I just wanted to spend a
Speaker 2
couple of minutes talking about acquisitions and our outlook for the rest of the year. Turning to acquisitions, so far this year we've welcomed three new companies to our CEVIS team bringing total full year revenue of approximately $10,500,000 although only a portion of that amount will impact 2019 results. Among them, we added a strong group of tax practitioners to our growing Denver, Colorado accounting practice with the addition of the Winter Group in the first quarter. On July 1, we also announced two additional acquisitions. Paytime located here in Northeast Ohio brings talent and increased expertise relating to our new software platform to our growing payroll business and Gavion located in Memphis, Tennessee brings an outstanding team of advisors and other professionals to our retirement plan services group with specific expertise with alternative investments including private equity, real estate and hedge funds.
We're excited to have these teams join our CEVIS family. Our pipeline of prospective acquisitions candidates remain strong and we have plenty of capacity to close deals with over $225,000,000 of available funds on our $400,000,000 credit facility. Now turning to our outlook for the remainder of the year. While the second half of our year is more heavily reliant on discretionary project oriented work, the level of optimism among small and middle market business owners and executives remains near record highs, albeit somewhat tempered compared to the first quarter and certainly 2018. And our offices are generally optimistic about the prospects for the remainder of the year.
At this point, I'll turn it over for questions and answers.
Speaker 0
Today's first question comes from Jim MacDonald of First Analysis. I
Speaker 4
just want to clarify where you said that the growth would have been 2.9% adjusted for was that adjusted for the divestiture and onetime items or just for the divestiture?
Speaker 3
That's Jim. For the divestiture plus, I'll call it, the extraordinary year over year comparison on those transactional businesses. So there's about a 1.7% adjustment when you take those transactional businesses and normalize those and include the divestitures.
Speaker 4
Okay. And it sounds positive with your increased benefit advisor activity. When do you expect the benefits group to go positive in terms of growth later this year?
Speaker 2
Yes, Jim. We think that this is going to start to turn really going into the third and fourth quarters, although as we had indicated early in the year, I think for the year relatively flat, but I think you'll see directional improvement in organic growth third and fourth quarters.
Speaker 4
Great. We haven't talked about it for a while, but you just bought a payroll related company. Tell us your general thoughts on that business and what your plans are for the payroll business?
Speaker 2
Yes. We like the payroll business, Jim. I think it's particularly in our environment with our clients, it provides us with an opportunity to bring real value to those clients. And part of that approach is the ability to bring not only payroll, but to combine it with technology and combine it with our benefits, employee benefits offering in a package that many of the others in the market just aren't providing. So we like the business in general.
This specific acquisition allowed us to do two things. They have a nice stable of clients. They also were very familiar with this new software. They also shared the same platform software platforms that we use in our core business. And so they had a bit of a jump start for us on using the new platform that we recently added to our portfolio.
So we expect to be able to leverage their expertise in that with that platform. So it kind of lined up in a lot of different ways for us.
Speaker 4
Okay. And just one more for me. So your OpEx was a bit lower, leading to obviously better margins I expected. Are you having what's accounting for that? Are you having trouble hiring or maintaining producers in this economic climate?
Speaker 2
No, it's funny. We keep reading the headlines everybody else is reading about type labor market and we certainly are seeing some of that, not specifically I don't think on the producer side as much as in some of the other areas of our business, but we've made pretty considerable investments in our recruiting both out of college and lateral higher recruiting. And so we've been able to fill our pipeline to meet our needs on the recruiting side. So really no significant impact from the hiring pressures that are in the market.
Speaker 4
So is there any what's the explanation for sort of lower operating expenses?
Speaker 3
Yes, Jim, it's just a combination of expense controls on the benefits and insurance side and staffing levels. It's a result of higher rates of utilization on the financial services side and combined with some what we'll call offshoring initiatives. And the third thing I think that we've talked about in the past is we've really focused on pricing and yield. And so it's a combination of both expenses and pricing that gets us the margin improvement.
Speaker 4
Okay. Thanks a lot.
Speaker 0
Our next question comes from Tim McHugh of William Blair and Company. I
Speaker 5
guess just following up a little bit on the last one. Guess as we think forward to a year from now, will we be looking back at this period talking about how this is an unusually strong margin performance or are there some sort of kind of unusual factors kind of like now we're looking back at revenue, right, and it's a tough comp, I guess. Just trying to understand the sustainability of the improvement in margin that you've shown this year as we think forward to the future.
Speaker 3
Yes, Tim, this is Ware. No, I don't think we will. Understand that the first half this year within the expense structure, we have some incremental marketing and media campaign expenses. We also have some incremental investments, which will continue, both programs, marketing producers will continue. But I don't think we'll look back at this as an extraordinarily high watermark.
Speaker 5
Okay. Great. And then Healthcare, I didn't maybe if you've talked about it, I missed it, but within the financial services, how is that the healthcare piece doing for you guys?
Speaker 2
The government healthcare consulting business, yes. Yes, I'm sorry, it's very strong, continues to perform very, very strong for us as it has for many years.
Speaker 5
Okay, great. That's all I had. Thanks.
Speaker 0
The next question comes from Chris Moore of CJS Securities.
Speaker 6
This is Stefanos Crist calling for Chris. Back to M and A. So you mentioned the three deals this year. How is pricing on these compared to other acquisitions in the
Speaker 4
last three or four years?
Speaker 2
Yes. If you recall prior conversations on this, what we've said is that pricing in certain segments of our businesses, particularly on the insurance brokerage side, property and casualty benefit side continues to tick up and is quite high at this point. These three acquisitions, one was an accounting office tax practice, one was a payroll, one was an RPS. We actually signaled I think earlier that we were receiving far less price pressure in those areas. So we're really looking at areas of our business where we see great strategic fit, where we see growth opportunities and where we believe that we can be competitive in our pricing and still provide reasonable returns back to the shareholders and we found them in these three areas and we believe that that market exists in a lot of other areas as well.
So we have a as I indicated, a very attractive pipeline of transactions of the character that you saw in so far this year as well as some larger ones that we're still looking at as well.
Speaker 6
Got it. Thanks. And can you also talk a little bit more about free cash flow expectations for this year versus last year?
Speaker 3
Yes. EBITDA is up. That's a good barometer. It's not exactly translates to free cash flow. But if you look at our net income in any given year, you can probably add back another $0.30 to $0.35 effectively on a per share basis to get an indicative free cash flow.
And that comes from the non cash charges led by depreciation and amortization, which is the largest plus other non cash charges minus of course the capital spending, is 10,000,000 to $12,000,000 Hopefully that's enough. It goes up and down in any given year depending on accrued compensation and other expenses that can be a bit variable year to year. But I think that's a good way to think about it.
Speaker 0
Our next question comes from Mark Riddick of Sidoti and Company.
Speaker 5
Hi, good morning.
Speaker 2
Good morning, Mark.
Speaker 7
Wondering if you could touch a little bit on the commentary around the on what you're seeing as far as I think you said it was about a 10% filing extension rate and sort of maybe if you could give us a little more color on what that provides you as far as maybe how you're seeing how that might play out as far as contribution potential contributions into the third or fourth is it mostly going to be going into the third quarter do you believe or did you get a general sense that some of that might end up bleeding into the fourth quarter? Then I have a couple of follow ups on that.
Speaker 2
Yes. So Mark, I think it's probably third and fourth quarter, if you think about it in October 15 kind of filing deadline date, right? So some of it will be into both of those periods of time. And as we indicated in the first quarter, it's really as a result of the delays in the guidance that was provided relative to the new Tax Reform Act impacted not only us, but the entire industry as well as the software providers to the industry that have to code based on that guidance, right. So all of those things contributed to incremental number of extensions this year compared to prior periods or prior years.
And we think that we're seeing it. We're seeing it in the number of extensions. That work has to get done really in part third quarter and I think in small part fourth quarter as well. Okay.
Speaker 7
Okay. That's helpful. And then I was wondering if you could touch a little bit on just as a reminder of the advertising campaign, sort of what you did last year versus what you plan on doing this year and how we might think about how that might impact the timing of rollout and expenses and that type of thing?
Speaker 2
Yes. So Mark, we budgeted this year about the same amount of money that we budgeted last year, but we'll get more impact from it this year for two reasons. First of all, last year in addition to just the airtime that we paid for, we had to pay for the design and production of the campaign. We're taking those dollars and rolling them into airtime, right? So what you saw last year was a larger expense in the second half because we really, I believe, started to air those advertisements really in the end of the third quarter and mostly the fourth quarter of last year.
This year, we're more evenly distributed. So we've taken the same dollars, front ended them so that we're evenly split really first half, second half. So I think from this point forward, what you'll see is a continuation of about the same amount of spend only more evenly spread kind of throughout the quarters, throughout the year.
Speaker 7
Okay. Okay. That makes a lot of sense. And then I guess wanted to sort of touch on if there was any particular regional areas of strength, weakness, any particular call outs that you saw during the quarter that would be worth going over. So wanted to see if there's anything like that.
Thank you.
Speaker 2
Yes. Not that would give us any directional guidance. Of course, in any given period, some
Speaker 7
of our
Speaker 2
offices performed stronger than others, but I can't attribute it we can't attribute it kind of in looking at the results to any trends that are specific to a geographic region or a profile of a type of client. So if you step way back if the business and looked at the quarterly results and the annual results, we are very pleased as we indicated with the results that we're receiving from our core tax and accounting, our core benefits insurance, our government healthcare consulting and really kind of the comparative anomaly has to do with the more project oriented businesses and the way they performed in the 2018 compared to this year.
Speaker 7
Okay. And then last one for me. I was kind of thinking about with the announced acquisitions and I think you gave a run rate number. So was kind of thinking about as you look at the back half of the year and the revenue growth, if you could sort of give us sort of a ballpark of how you're thinking about the contributions between organic versus acquisition contributions? Yes,
Speaker 3
Mark, this is Ware. As it was in the first half, most of the growth this year is coming from organic sources. And the organic sources, for all the reasons we outlined, we expect to accelerate from the first half growth rate. The acquisition impact this year to the total revenue growth rate is fairly nominal. We're happy to make three acquisitions.
They're all relatively small and will have a relatively minor impact for the full year growth rate on revenue this year.
Speaker 5
Okay. Great. Thank you very much.
Speaker 0
This concludes our question and answer session. At this time, I would like to turn the conference back over to Jerry Grisco for any closing remarks.
Speaker 2
Yes. Thank you, Chris. I'd like to close by thanking our analysts and our investors for their continued support and our team members for creating a culture that is second to none in our industries and for the exceptional job that you do in providing best in class service to our clients. We look forward to speaking with you again after we report our third quarter results. Thank you and have a nice day.
Speaker 0
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.