Q3 2019 Earnings Call
Welcome to the seabed third quarter 29, <unk> results conference call.
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Thank you I leave.
Good morning, everyone and thank you for joining us for the see this third quarter in nine months 2019 results conference call in connection with this call. Today's press release has been posted on the Investor Relations page of our website Www Dot CB IC dotcom.
This call is also being webcast link to live webcast as well as the replay can also be found on our website.
Before we begin their presentation, we would like to remind you that during the call management need 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 and managements expectations as at the state and do not guarantee future performance.
Forward looking statements. All also involve certain risks uncertainties assumptions that can be difficult to predict.
Actually just felt can 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 or Jerry Grisko, President and CEO , and where growth Chief Financial Officer, I'll now turn the call over to Jerry for his opening remarks Jerry.
Thank you Laurie and good morning, everyone.
With this mornings release of our third quarter and I look results ended September Thirtyth 2019, we're pleased to report their earnings per share from continuing operations was up by 33.3% for the fourth quarter.
And it was up by 16.2% for the first nine months of this year.
For the third quarter total revenue was up by 6.9% due for the nine months revenue grew by 3.1%.
Oh this revenue growth same unit revenue represented 5.6% in the third quarter and 3.1% for the first nine months to.
The growth in revenue in the third quarter reflects continued strong demand for our core recurring services offered through both our financial services and our benefits in insurance groups.
Well as strong contributions from our number of our more project oriented businesses.
Consistent with the expectations that we outlined at the end of the second quarter.
Revenue growth has accelerated over the first half of this year largely as a result of the strong same unit revenue growth that we experienced in the third quarter of this year.
We're especially pleased to report 160 basis point improvement in pre tax margin for the first nine months as we leveraged our topline growth to produce a 16.2% increasing earnings per share.
We do however, expect our full year pre tax margin to be somewhat lower than our current year to date margin as a result of a number of planned investments in the fourth quarter intended to fuel the future growth of the business.
Even with these investments we expect to be near the high end of our full year guidance of 10% to 12% growth in earnings per share.
We continue to actively pursue potential strategic acquisitions to date. This year, we've closed six acquisitions, which net of divestitures. She contributed $3.1 billion to third quarter revenue.
<unk> point $3 million to revenue for the first nine months.
Over the past 12 months.
We have closed seven transactions with annualized revenue contribution of approximately $19.4 million.
Turning to the performance of our financial services group.
Total revenue increased by 5.2% in the third quarter end by 3.1% for the first nine months.
Same unit revenue growth for that period.
For the third quarter was 5.1% and 3.2% for the nine month period.
Performance of our core accounting and tax business remains strong.
As anticipated tax work that had been delayed due to tax reform.
It was largely competed in the third quarter and we expect some modest residual amount to occur in the fourth quarter as well.
Revenue growth in our government healthcare consulting business is in the mid single digit range for the first nine months of this year.
As a curse of this business from time to time administrative delays have slowed workovers. Several engagements. This year in growth is slightly below our historic rates for the first nine months.
We expect the delays to be clear later this year than the normal pace of work under these contracts to resume.
Even with these delays the business continues to perform very well and we ever robust pipeline of potential new projects that will continue to drive future growth within this business line.
Our private equity business was one of our fastest growing service lines over the past two years.
Finished 2018 at record levels.
We're pleased that this year the business has been able to achieve the approximate revenue levels recorded last year, although it has not experienced topline growth beyond clubs.
However, even with relative relatively flat top line. This business has been able to achieve a substantial improvement in its pre tax aren't abuse.
Although the nature of the business is such that we have a narrow window into client demand for these services the pipeline a future projects appears to be improving and we continue to experience high growth rates in us in a number of the service lines within this business.
Turning to our benefits in insurance group.
As we commented at the end of the second quarter.
Improving client retention, coupled with strong first half new business production, let us do expect stronger revenue growth rates in the second half of this year compared with the first half results.
Consistent with those expectations total revenue within our benefits in insurance group increased by 9.8% in the third quarter in same unit revenue increased by 5.8% in that period.
Third quarter revenue was enhanced by project work that we do not expect to recur at the same levels in the fourth quarter.
For the first nine months total revenue within this group increased by 2.4% would same unit revenue growing 8.2%.
Within our payroll business, we're in the early stages of introducing our large client human capital management platform to the market and the reception has been very positive.
While our for payroll platform continues to perform very well for small to midsized clients with less robust needs, we see significant opportunity to serve larger more complex clients with our new integrated payroll and HCM product offering supported by our advanced technology platform.
So with these comments, let me turn it over to where growth our CFO . Thank.
Thank you Gerry and good morning, everyone.
Our third quarter results were very strong.
For the nine months, we're pleased to be able to leverage our topline growth into a 16.2% growth in earnings per share.
As Jerry outlined there'll be further investment spending in the fourth quarter and our full your expectation for earnings per share continues to be near the higher end of our full year growth of 10% to 12% over the prior year.
Cash flow performance of the business continues to be very strong adjusted EBITDA is up by 13.1% for the nine months to $117.9 million from $104.3 million a year ago.
At September 30, if we had borrowed $160 million on our 400 million dollar unsecured credit facility.
This results in leverage of approximately 1.4 times EBITDA with $234 million of unused finance financing capacity.
Our first priority for the use of capital is to make strategic acquisitions to date. This year. We have closed six transactions that will contribute approximately $17.4 million of annualized revenue.
And over the past 12 months, we have closed seven transactions that will contribute approximately $19.4 million of annualized revenue.
Through September Thirtyth, this year spending on acquisitions, including the payment of earn outs on previously closed acquisitions is approximately $37.1 million.
Over the remainder of this year, we expected use an additional $1.2 million for earn out payments on prior acquisitions.
For 2020, we expect to use approximately $16.2 million and for 2021, approximately $8.6 million and then for 2020 to approximately $5.8 million for earnouts on previous acquisitions.
We do have plenty of financing capacity to pursue strategic acquisitions.
And we always have a full pipeline of potential acquisitions under review.
We have the capacity and flexibility and we'll also continue to evaluate the use of cash for share repurchases.
Through September Thirtyth, we have repurchased approximately 1.1 million shares of our common stock at a cost of approximately $21 million. We continue to project a fully diluted weighted average share count within a range of 55.5 to 56 million shares for the full year this year.
Day sales outstanding on receivables stood at 93 days at September Thirtyth this year compared with 87 days a year earlier.
The increase this year is largely driven by invoicing activities that are associated with a number of tax extensions that we dealt with earlier this year.
As is our normal seasonal pattern, we expect the day sales outstanding well reduce significantly by the end of the year as client payments are received on outstanding receivables.
Capital spending at sea. This is largely driven by facility related tenant improvements that are associated with lease renewals or moves plus some maintenance level of I T related purchases for the nine months ended September Thirtyth capital spending was approximately 10.3 million dollar.
And for the full year, we estimate spending within a range of $12 million to $15 million.
Capital spending in the third quarter was approximately $3.4 million.
Now adjusting reported results to eliminate the impact of accounting for gains or losses on the assets held in our deferred compensation plan for the nine months ended September Thirtyth has the adjusted operating income margin was 13.6% compared with 12.4% a year ago.
As always the footnotes in the earnings release outlined a components for these adjustments.
The effective tax rate for the quarter was 25.2% and for the nine months. This year. The effective tax rate was 25.7% at this point, we continue to estimate a full year effective tax rate of approximately 25%.
However, as a reminder, the effective tax rate is impacted by the accounting for stock compensation expense and this can be either higher or lower than our estimate depending on a number of unpredictable variables.
Looking toward the balance of the year fourth quarter is more dependent upon project work and therefore can be more difficult to estimate.
Plus as Jerry commented, we expect to incur additional spending on strategic initiatives in the fourth quarter.
Considering these factors, we expect growth and earnings per share for the full year to be near the higher end.
Have a range of growth, 10% to 12% over the prior year.
Our core business is healthy and is performing very well.
To reiterate our guidance at mid year, we expected the second half growth rate in revenue to be greater than the first half growth rate. The third quarter was particularly strong aided by the early timing of second half project work in several business units.
Lets nine months revenue growth at 3.1% compared with the prior year, we continue to expect full year revenue growth within a range of 3% to 4%.
Our full year effective tax rate as I commented earlier is expected at approximately 25% at again this could be either higher or lower for the reasons I outlined earlier.
But the impact of the share repurchase activity to date.
You're expecting fully diluted weighted average share count within a range of 55 and a half to 56 million shares for the full year. This year. So these comments I will conclude and I'll turn it back over to Jerry. Thank you, where I thought it's been a couple of minutes, just providing a little bit more color on a couple of areas of the business.
Our third quarter numbers reflect early returns in a number of key investments that we've made over the past couple of years the fuel the future growth of the business.
By way of example, within our core accounting practice, we've made substantial investments in training systems and tools that allow our office leaders and practitioners to be more data driven resulting in better management of productivity revenue revenue and profitability of client engagements. We have also built an interim team that works with each.
Our offices to optimize the use of these tools and processes.
The support expanded resources that we are now providing to our offices have been very well received and enable us to make more informed decisions and the management in pricing of client engagements.
In addition, we're pleased to see continued positive results from the investments that we've made to increase the number of producers within our benefits in insurance group.
Well it will take some number of years through the production of our recent hires to match the productivity of our more seasoned producers. The trend line is encouraging the collective efforts from our new producer group are already beginning to contribute to our organic revenue growth rates.
Now turning to acquisitions in the third quarter, we welcome five new welcome acquisitions to RC This family.
In addition to pay time, and Gabby on which we discussed on our second quarter call.
August 1st we added Cuvier benefits located in Westlake, Ohio, and Ericsson Cpis located in San Luis Obispo, California.
Cuba is it employee benefits from serving small and middle market businesses.
She has an outstanding reputation and significantly enhances our benefits in insurance service offerings here in northeast, Ohio.
Ericsson Cpis strengthens our team of top quality tax professionals, serving our clients in central California.
In addition.
Indeed, tailoring Zimmerman located in San Diego, California joined US on September 1st.
DTZ Briggs adaptive expertise and forensic accounting litigation consulting and business valuation services that complements our existing server or existing service offerings in that market, while adding important capacity in these high demand areas.
While each of the companies that have joined US has addressed an important strategic opportunity for us and we're pleased with the number of transactions that we've completed.
The annual revenue of these firms does not entirely represent the size of many of the transactions that we reviewed in pursuit.
We continue to focus on acquisitions as a meaningful way to grow our business. We have a robust pipeline of deals both large and small and the capacity on hand to evaluate these deals thoroughly inefficiently.
We've expanded our M&A team over the past 18 months and refined our approach to be more strategic an aggressive in the deals that we pursue.
We remain most interested in acquiring firms that brings strategic capacity and expertise as well as demonstrated strong cultural alignment and fit.
I am confident and how we're positioned ourselves in terms of having the ability to invest being attractive to potential acquisition targets and being competitive in the market.
Is worse said, we have plenty of capacity to close deals with over $234 million of funds and our 400 million dollar facility.
So at this point I'll close and turn it over for questions and answers.
We will now begin the question and answer session.
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Our first question comes from Jim Macdonald with first analysis.
Hey, good morning, guys.
Hey, Jim Jim.
Yeah. So you talked about some transactional advantage on the tax side and accounting was there anything else and accounting and what was the.
Nature of the transactional.
Items and benefits that helped you.
So.
A couple of things Jim.
Encouragingly from on the tax and accounting side, we saw that.
Consistent increase in revenue from the most of our larger offices and so when we see that that's a signal for high demand for the core services kind of across the board cross industries across our client base.
As far as the transaction businesses within benefits in insurance it was really a mix.
Our transaction services, so our compensation.
And executive search did very well, we happened to have hi.
Hi project work out of our retirement plan services. So there was really a number of areas.
That performed very well there are real estate advisory practice within our financial services Group also had a strong quarter.
So it wasn't.
The benefit bonuses.
This quarter.
No no nothing like that no no no real impact from contingent commissions.
And you mentioned government consulting and then sort of mid single digits for the year is that similar in the third quarter.
Yes, I think across the board kind of mid single digits. This year as you know, we typically perform couple of hundred basis points higher than that.
And it's really just been delays and some sizable contracts.
Okay and then.
You talked about some investment spend in the fourth quarter could you give us some more details about that and then I'll, let someone else asked.
Yes, again, I would say, there's a number of categories there, including our branding campaign. We just finished the flight.
Recently that into the fourth quarter they'll be spend associated with that I also mentioned the investments that we've been making in our what we call. Our office practice management office on our financial services side to provide better visibility and tools and processes around pricing a client profitability. We're we're continuing to make investments in.
That area and those are those are two of the areas, but there are number of hours.
And maybe just sneak it in a.
Any can you give us an order of magnitude of what that what the investment costs will be in the fourth quarter.
Yes, Jim I think.
We're signaling that there will be some impact in the fourth quarter and without getting too too detailed about it.
With the margin up as it is today, you're going to see a little bit of the compression on a full year basis for the 12 months versus the nine months.
So.
Okay. Thanks, Yeah.
Our next question comes from Andrew Nicholas with William Blair.
Hi, Good morning, I was actually Trevor Romeo and for Andrew Thanks for taking the call first question would just be.
The margin performance was very strong again this quarter, just wondering kind of what are the most important factors.
Driving the magnitude of that improvement and how much of your internal productivity and efficiency initiatives helping.
Yeah, Andrew this is where.
It's a number of things were commenting on the strategic initiatives and the things we're investing in the business. This has been ongoing for a couple of years. So the good news to US is we are gaining traction and seen more leverage in the business.
We commonly talk about 20 to 50 basis points a year over a long period of time and then some years were more in an investment mode and other years, we get reap the benefits of that so so while we're continuing to invest we're also gaining traction and it's just the utilization.
And the back office efficiencies on a number of things that are just try and are starting to gain traction for us.
Okay, Great and then.
Could you just give us an update on your progress with cross serving particularly interested in what kind of success you're seeing corn.
Selling the core accounting services to benefits clients and vice versa.
Yes, its Roberts Jerry Grisko.
What I would say is our cross serving activity. This year, it's consistent with what it's been how we performed over the past.
Number of years, we do not see as much activity going back and forth between our financial services group and our benefits and insurance group, we see more activity within the group. So by way of example.
Within our benefits and insurance group, it's not uncommon for us to.
First procure a payroll client and then work on procuring a.
Broker a record on our benefits and insurance side, and then potentially for one case. So a full suite of services around the HR department, but probably not going down the hall or not often enough going down the hall and also getting work from the Cfos off so where it's more synergistic where were within the CFO .
Department of the CFO , the CFO as office or controller up as we sell multiple financial services products and within the HR suite, we typically sell more related products there as well.
Okay got it I guess do you see do you see that is kind of a long term opportunity to increase the cross server across the segments all.
Yes, it's important to us on a number of fronts first of all it's embedded in our culture. It's the way that we go to market. We have we have drew our CRM system.
Identified each of our clients that are that are more susceptible or more.
Attractive from across every perspective, we have active.
Client stewardship meetings around those those clients we talk about.
Where we provide services, where some of our services or our work some of our competitors may be providing services and we have active.
Active plans around.
Reducing additional services to all of the clients that are.
Most most attractive in that way so it's important to us.
Culturally it's important to us the way, we distinguish ourselves in the market.
For those clients that are receiving multiple services. There is a higher retention rate and also a higher satisfaction rate. So it is it's important to us on a lot of fronts.
Okay got it thanks, and maybe just one more if you could.
Maybe just expand a little on your broad view of the small midsize business environment, you see right now.
Just from a macro on business confidence perspective, maybe there you know their willingness to spend on discretionary products or services right now.
Yes, so let's kind of level set here.
We are.
Over the past couple of years at all time record high levels of confidence among SMB with that said they can't help but it be influenced by the headlines that we're all reading in the papers in hearing on the news around terrorist another uncertainty both in the global markets and on the National stage.
They are also by the way most influenced by what's happening in their own local economies and in their state economies and if you. If you you cascade that kind of most interested in most confident in what's going on locally in their confidence level I'm goes down as a as they move beyond those international.
Mobile markets. So what we're seeing is still.
Strong optimism among our clients, which is SMB in their own local economies.
And strong confidence in their own businesses, albeit.
Heightened caution around the short mid term and certainly longer term prospects for the national and global economy, and what that's translating into is really a mixed bag in certain industries and into certain markets, we see greater growth, but I think its tempered growth over what we've experienced.
A year ago at this time and certainly two years ago that at this time.
Okay, great that makes a lot of sense all right well. Thank you very much for the color there.
Sure.
Our next question comes from Chris more.
CJ Securities.
Hi, Good morning, this is Stephan us Chris calling for Chris.
Hi, Stephen US how are you it's Jerry.
Just wanted to talk little about M&A. So could you walk me through the math.
Roughly how much additional revenue would you guys need to acquire over the next few months to generate.
Three or 4% revenue growth from M&A in 2020.
The wrap around is what you're talking about so.
Year to date $17.4 million, but some of that's already done and it will incrementally increase by that amount. So you do the math.
At.
I'll, just say approximately $950 million of revenue.
You need 27, the $30 million of you know net new revenue on a wrap around so so we'd have to do a considerable more to get that 3% target.
As an increase incremental increase next year versus this year for from M&A alone. If Thats. Your question Yeah got it. Thanks.
You guys also said, there's a full pipeline.
How big is that pool of potential.
Dozens of company hundreds.
<unk>.
Well it didn't hear interesting question depends on how you break it down I will say that we have we have we have looked at over 100.
Company, so far this year.
That's not to say, we put any a's and on each of those and certainly haven't gone down the path and a lot of those so the pipeline is.
I would say consistent with the pipeline that we've had over the past several years.
There are a mix of larger acquisitions in that pipeline mid size acquisitions, and smaller acquisitions and our ability to get the type of growth that we target year over year.
Is largely dependent on how those transactions work their way through the pipeline and as you can appreciate it's very difficult to predict.
This year, we've we're pleased with the number we wish the revenue contribution was higher but we've we've really brought onboard some very high quality organizations with terrific cultural fit is we're excited to have them on board. There are a number of of larger transactions that we pursued that for a number of reasons that.
Not get done this year.
Some of them may come back.
There is some others that are still in the pipeline. So if we're fortunate to get some of those larger transactions done than them. Then I think we'll hit the mark.
Great.
One more quick one.
Are there are there any geography is in the U.S.C. business underrepresented and the growth opportunity looks pretty significant.
Yeah, we've actually talked about this from time to time. The answer is yes. So for example, if you look at the Pacific Northwest, we're not represented at all there and we really need a presence there.
Silicon Valley underrepresented.
The state of Texas strong demographics really underrepresented there there's a number of other markets and we have a very.
As you would expect kind of focused effort on those strong demographic markets and an active dialogue going on with many of the candidates in those markets.
All right. Thanks, guys I'll go on the Q.
Thank you.
Again, if you would like to ask a question. Please press Star then one.
Our next question comes from Marc Riddick with Sidoti and company.
Hi, good morning.
Well there are.
Wanted to touch on a go back to a little bit on the the investments that you're talking about for the fourth quarter I was wondering if you could.
I know you talked a little bit about that but I wanted to get a sense from a timing perspective.
Should we think about those types of investments as one that or maybe more concentrated in the fourth quarter because of.
Being ahead of seasonal activity or do you think thats something that could move into the early part of next year and then I've a couple of <unk>.
It Mark it's a combination of things some of these things are ongoing for example, the investment in new producers is ongoing but sometimes the timing of when the hires occur creates kind of a greater year over year difference and that will occur and.
Fourth quarter this year compared to the fourth quarter year ago, because we now have more people onboard and that layer.
We have some marketing spend which is a bit episodic we don't do it on a straight line basis, we tend to do a first half flight and that a second half flight.
The could be either third or fourth quarter, but this year it'll be more in the fourth quarter.
Some of the other spending we do have projects and initiatives as Jerry commented on kind of the practice management tool chest that we are building.
Has some pricing analysis and tools and we're.
Building a system with the health of an outside consultant to help us. So there will be some spending on that.
That we believe will certainly pay back dividends in future years. So it's a combination of things.
Okay, Great and then I think you mentioned this a little bit but as far as.
Late activity that.
Flowed through the year toward more showing that there go up I think you touched a little bit on this that there might be some that still ongoing into the fourth quarter. Just wonder if you could put some some color on that.
We should we should think about that additional maybe slightly off seasonal activity.
Yes, so markets Gerry.
That was really referring to the delayed work from the tax Reform Act and I will get into all of the conversation we had about that in the first and second quarter, but suffice it to say that we were expecting more revenue in the first quarter as a result of the the traditional unexpected level of tax work that we do as result of some delays there.
That work got pushed in later the year, we had signaled earlier on our most recent call that are the second quarter call that we expected that to occur in the third quarter. It did in fact come in the third quarter based on the number of returns in the revenue impact. So we've seen the vast majority of that the only comment that I made was there is some.
Small amount that we would expect to have in the fourth quarter, but it's not material.
Okay, and then last one from me for now at least the.
Commentary around the.
Ending spend I was wondering if you could touch a little bit on I guess, maybe what it looks like doesn't mean this time last year you guys. It sort of just launched here your national television campaign. So I wanted to get a sense of it are we looking at ideally spending the same were slightly more but now now that you've got those costs out of the way having more of those dollars.
Just be specifically on the actual AD spend or how should we think about maybe how that how the constitution of those dollars look.
This year going forward versus last Oh, yes, Mark that's a great question first of all the total spend is approximately the same year over year, but you're absolutely right last year in a start up there is more production and design work and probably fewer media purchases. This year, there's a little more media.
Exposure, because we've now invested and we're spending approximately the same dollars.
We're getting more media exposure.
And have you been happy with sort of how that.
Where that exposures played out or have you felt any need to sort of move around like where those dollars go or how should we think about how that messages being.
The market Jerry when you talk about where the dollars are going today.
It's a broad based campaign really we spend more money in markets and offices, where we have a larger presents some lesser amount of money in in smaller markets, but we are really covering all markets of any significance within see because we would expect that we would continue to have a similar approach going for.
Award.
As far as impact is concerned as you can appreciate these things are long term investments that show impact over a longer period of time, we do survey the market as as to brand awareness.
Periodically we're in the middle of one of those surveys now the last time, we did it we did see.
Nice improvements in our brand awareness.
Period over period, So we would expect to see continued results.
That type.
When we when we get the result from the survey as well.
Okay, great. Thank you very much.
Again, if you would like to ask a question. Please press Star then one.
Okay.
As we have no more questions in the Q.
Conclude our question and answer session.
Let's turn the conference back over to Jerry Grisko for any closing remarks.
Thank you Charlie I, just want to close by thanking our analysts or investors as we always do for their continued support.
Particularly our team members for an outstanding third quarter.
We look forward to speaking with you again after we report our full year earnings results. Thank you everybody and have a nice day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.