CBIZ Inc. Q1 2023 Earnings Call

April 27, 2023

[music].

Hello, and welcome to Ebay's Q1, 2023 earnings call.

All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad.

With drugs. The question queue. Please press Star then two please.

Please note this event is being recorded.

I'd now like to turn the conference over to Lori <unk> director of corporate Relations. Please go ahead.

Yeah.

Good morning, everyone and thank you for joining us for the <unk> first quarter 2023 results conference call in connection with this call today's press release and quarterly Investor presentation have been posted to the Investor Relations page of our website <unk> Dot com.

As a reminder, this call is being webcast and a link to the live webcast can also be found on our site.

Archived replay and transcript will also be made available following the call.

Before we begin we would like to remind you that during the call management may discuss certain non-GAAP financial measures reconciliations of these measures can be found in the financial tables of today's press release and Investor presentation.

Today's call May also include forward looking statements regarding our business financial condition results of operations cash flows strategies and prospects.

Forward looking statements represent only estimates on the date of this call and are not intended to give any assurance of future results.

Because forward looking statements relate to matters that have not yet occurred. These statements are inherently subject to risks and uncertainties.

Many factors could cause future results to differ materially and see this assumes no obligation to update these statements.

A more detailed description of such factors can be found in our filings with the Securities and Exchange Commission.

Joining us for today's call are Jerry Briscoe, President and Chief Executive Officer, and Ware Grove, Chief Financial Officer, I will now turn the call over to Jerry for his opening remarks.

Thank you Laurie good morning, and thank you for joining us for today's call.

We are pleased to share our first quarter performance for 2023 and to discuss our outlook for the remainder of the year.

Now as I outlined during our last earnings call. We started 2023 following the second year.

Year of record performance for our business.

From nearly every measurable perspective, our results last year were exceptional and provided strong momentum going into this year.

I'm proud to share that our growth has continued with another strong quarter to start this year.

To highlight our results for the first quarter. Our total revenue increased 16, 1% and our adjusted EPS is up 23, 7% compared to the same period a year ago.

That growth is a result of outstanding performance from both of our major divisions.

Our financial services Division experienced total revenue growth of 18, 8% and organic revenue growth of 10, 5% in the first quarter.

As Youre aware the first quarter is the traditional busy season for our accounting and tax businesses and demand for those services remained robust.

Our revenue growth in the first quarter reflects our ability to continue to capture price increases.

An increase in the volume of work.

And the contribution of our most recent acquisition, Somerset, CPA and advisors, which joined US effective February one.

We also benefited from demand for a number of services that we provide to assist our clients with emerging opportunities such as the employee retention tax credit.

As well as continued strong demand across nearly all of our major project oriented advisory services, including our risk and advisory services, our valuation services.

Our services focused on the private equity industry, and our forensic accounting services.

We also experienced growth over the last year within our government health care consulting business.

As we discussed on prior calls long term multiyear projects make up a sizeable component of this business.

So timing on the start of those contracts and then he paused the network can impact revenue growth in a particular period.

And in fact, we did see some delays in project timing through the first quarter, but we expect those delays to be short lived and for those projects to get back on track later this year.

Over the past couple of years, the accounting industry has experienced labor constraints, which somewhat reduced the rate of growth that would have occurred had more capacity been available to meet the high demand for those services.

We are pleased to see that the talent appears to be more readily available in recent months and we're happy that the investments that we've made in our recruitment team over the past several years have put us in a position to attract top talent to our team.

Now turning to our benefits and insurance Division.

Where we are also off to a very strong start to the year with total revenue growth of eight 2% compared to the prior period.

The growth within this division came from all four of our major service lines, largely fueled by strong sales production and favorable client retention rates.

We also benefited from rising premiums within our employee benefits in our property and casualty insurance service lines.

Increased pricing for our payroll services.

And increased project work within the actuarial group.

Embedded within our retirement investment services business.

Now before I turn it over to where I'd like to make a few comments on our full year guidance that we provided in February .

To remind you in February we guided full year revenue growth within a range of 8% to 10% and adjusted EPS growth within a range of 11% to 13% over the full year results delivered in 2022.

Based on our exceptionally strong performance in the first quarter. This year. We currently anticipate that our full year results will come in at the high end of that range.

So with this I'll turn it over to Ware Grove, our Chief Financial Officer to provide additional information on our financial performance for the first quarter and more details on our full year guidance, where.

Thank you Jerry and good morning, everyone.

Let me take a few minutes to talk about key highlights of the first quarter numbers. We released this morning.

The strong momentum we saw through our business in 2022 has continued through the first quarter of this year.

Total revenue in the first quarter increased by 16, 1% over first quarter a year ago St.

Same unit revenue was up by 10% with acquisitions contributing another six 1% growth compared with last year.

Within financial services for the first quarter total revenue grew by 18, 8% and same unit revenue for the first quarter was up by 10, 5% with strong revenue growth throughout traditional core accounting advisory services and government health care consulting services.

Within benefits and insurance same unit revenue for the first quarter was up by eight 5%. We continue to see strong client retention and strong new client production the.

The investments we have made in recent years to hire new business producers has continued to gain traction as we see increasing new business production.

We remain committed to further enhancing growth capabilities within the benefits and insurance group and we will continue to make investments in hiring additional producers.

Effective February one we acquired Somerset Cpas and advisors that is based in Indianapolis.

With estimated annual revenue of approximately $55 million in 2023, we expect to record approximately $52 million of revenue from this acquisition.

<unk> transaction closing costs, plus one time integration related expenses associated with this transaction.

In a similar matter that reporting from our expanded acquisition related costs last year. We will report an adjustment to eliminate these acquisition related costs from GAAP reported results to report adjusted results this year.

You will find a reconciliation of these items has a schedule included in the earnings release we.

We are extremely pleased to have the Somerset came onboard and the business is performing in line with our expectations.

With a view towards presenting meaningful comparable information eliminating the impact of these items adjusted earnings per share for the first quarter. This year was $1 46 up 23, 7% compared with adjusted earnings per share last year of $1 18.

Adjusted EBITDA, considering the same adjustments was $113 $3 million for the three months this year up 22% over adjusted EBITDA of $92 9 million last year.

After seeing artificially low levels of expenses through the pandemic. We have previously talked about the level of health care and benefits travel and entertainment expenses and marketing expenses that are normalizing to higher levels. We continue to see year over year impacts and for the first three months of this year. These.

<unk> represented a 60 basis point headwind to margin on income before tax compared with last year.

We continue to project that these expenses will settle in lower than pre pandemic levels, but for a period of time the year over year comparison presents a headwind.

Interest expense also presents a headwind this year as rates have increased from a year ago.

In the first quarter increased borrowing levels, coupled with higher rates caused interest expense to increase as a percent of revenue by approximately 50 basis points.

And for the full year this could represent a headwind of approximately 75 basis points to margin.

For the quarter, we reported an increase in interest expense of $2 $4 million and that impacted earnings per share by approximately three and a half cents per share.

Despite these headwinds we are leveraging costs, eliminating the impact of the one time acquisition and transaction integration costs for the first quarter. We can report a 100 basis points increased in adjusted pre tax income margin.

We will continue to say that over time, we expect to achieve a 20 to 50 basis point annual increase in pre tax income margin and in recent years. Our performance has exceeded the higher end of that range.

For the full year 'twenty three we expect the margin on pre tax revenue will fall within this range of 20 to 50 basis points of annual improvement.

As always details of the impact of accounting for gains and losses in our nonqualified deferred compensation plan are outlined in the release.

Because we are comparing a period in 'twenty, two with capital marks as losses compared with capital markets gains. This year. There is a significant impact to the GAAP reported numbers as you look at both gross margin and operating income.

As a reminder, pre tax income margin is not impacted by this accounting.

Turning to the cash flow items in 'twenty, two we amended our unsecured credit facility to increase the availability from $400 million to $600 million and extended the maturity by five years.

On March 31, this year the balance outstanding on the newly Upsized $600 million unsecured facility was $403 $7 million with about $190 million of unused capacity.

The balance sheet at March 31, this year was strong with leverage of approximately one nine times adjusted EBITDA.

This provides plenty of capacity continue to continue our strategic acquisitions and provides the flexibility to continue with share repurchases.

In the first quarter of this year with the Somerset transaction.

And with earn out payments on previously closed transactions, we used approximately $67 7 million for acquisition purposes. We.

We expect to use $27 $4 million over the remainder of this year and approximately $56 $4 million in 2020 for approximately $33 $4 million in 2025, and then approximately $6 $7 million in 2026 for these estimated earn out.

<unk>.

Deploying capital for strategic acquisition purposes continues to be our highest priority.

Since the end of 2019, we have closed 17 transactions and we have deployed approximately $348 million of capital for acquisition purposes, including the earn out payments over time.

Through March 31, this year, we have repurchased approximately 428000 shares of our common stock in the open market at a cost of approximately $28 million.

Since March 31 under our <unk> program, we have repurchased an additional 210000 shares making the total shares repurchased through April 26. This year approximately 640000 shares.

To recap repurchase activity in recent years since the end of 2019, we have repurchased approximately $8 7 million shares and that represents slightly more than 15% of the shares outstanding compared to the end of 2019.

Approximately $308 million of capital has been used towards this open market repurchase activity.

Over that period.

Days sales outstanding on March 31. This year was 94 days and that was the same as it was the first quarter a year ago.

Bad debt expense for the first three months. This year was 10 basis points of revenue compared with 14 basis points a year ago.

Depreciation and amortization expense for the first quarter. This year was $8 $6 million compared with $8 $2 million last year for.

For the full year, we expect depreciation and amortization at approximately $36 million this year compared with approximately $33 million last year.

Capital spending for the first quarter was $3 $6 million.

Greater spending as planned later this year for tenant improvements related to our anticipated third quarter move toward new headquarter facilities.

Most of our capital spending is associated with leasehold improvements and furniture for office facilities.

For the full year this year, we're expecting capital spending to be approximately $15 million to $20 million.

As a reminder, we are a major tenant in our new headquarters building with a long term lease we're not an owner of the building.

The effective tax rate for the three months. This year was 26, 5% up from 24, 9% a year ago.

The increase in the effective tax rate was primarily a result of exploration of certain grandfather tax benefits that were associated with stock based compensation expense as provided in the tax Reform Act of 2017.

Plus there was an increase in non deductible expenses in 'twenty, three as compared to last year.

The impact of the increased tax rate in the first quarter was approximately three pennies a share and with a full forecasted full year effective rate of 28%, we expect a full year impact at approximately eight <unk> per share the.

The increased effective tax rate in 'twenty, three as a headwind and thats unique to this year compared with 2022.

In future years, we expect the effective tax rate to be relatively level at approximately 28%.

So there'll be no further year over year headwind beyond this year.

The recurring and a central nature of many of our services provide stability through economic cycles. At this point as we look at employment driven metrics in our benefits and in our payroll businesses. We are seeing continued signs of steady and strong employment within our clients.

But as we look ahead and consider the potential for economic slowdown.

We experienced pressure on revenue growth, we have a number of variable items in our cost structure and we can take measures to mitigate the impact.

The tools and systems, we have put in place in recent years have enabled us to increase pricing and keep pace with underlying cost pressures leverage costs and protect margins.

The investments, we made and are continuing to make in new business producers, particularly focused within our benefits and insurance group have gained traction and we're seeing strong new business, coupled with strong client retention and that is driving revenue growth.

Now before I turn it back over to Jerry I want to provide you with our thoughts on full year guidance.

Our first quarter results came in very strong and at this early stage of the year. We are very comfortable guiding at the high end of our full year ranges. We set in February for both revenue growth and for growth in adjusted earnings per share.

The results from the Somerset acquisition that was acquired in February contributed to the first quarter results in a very meaningful manner.

It is common to see a seasonally strong first quarter from our core financial services operations and the initial results from the newly acquired Somerset operation were particularly strong in.

In the second quarter after a busy tax season, we plan to address system another integration issues with Somerset.

We will also work to gain greater visibility on full year forecasted expectations, and we will revisit annual guidance at the end of the second quarter the.

The increased tax rate this year, which is unique to 2023 when compared with the prior year presents estimated headwinds equal to approximately eight cents per share for the full year.

We also commented on the headwinds presented by increased interest rates and 23 versus prior year and in the first quarter increased interest expense impacted earnings per share by approximately $3 five pennies and we expect increased rates may have a similarly, a similar quarterly impact on full year. This year as we compared to the prior.

A year.

Now despite these headwinds that are unique to 'twenty three the underlying operating results for the first quarter extremely strong.

Revenue growth was stronger than expected in the first quarter, but with a second half more dependent upon project oriented business. At this early stage of the year. It is too early to update our annual guidance.

So to recap our full year guidance, we will say the following.

We expect total revenue to increase at the higher end of the range of 8% to 10% growth for the year.

On an adjusted basis, we expect 23 adjusted earnings per share to increase at the higher end of the growth range of 11% to 13% over the adjusted earnings per share of $2 13, and that was reported in 2022.

Now GAAP reported earnings per share is expected to increase at the higher end of the range of 15% to 17% growth over the $2 one penny reported for 2022.

The effective tax rate for the full year of 'twenty three is expected at approximately 28% now this could be impacted either up or down by a number of unpredictable factors.

And lastly, the fully diluted weighted average share count is expected within a range of 50 and a half to 51 million shares for the full year 'twenty three and you should note that this share count is now slightly lower than our initial estimate.

So with these comments I'll conclude and I'll turn it back over to Gerry.

Thank you Ware as I generally do.

Like to take a few minutes to provide an update on our M&A results for the first quarter.

Since the start of the year, we completed two acquisitions.

The first was a small litigation support firm located in Irvine, California.

That firm was already working closely with our litigation support team on the West coast and will bring expertise and talent to our growing practice in that market.

Also as were referred effective February one we were pleased to announce the acquisition of the non the test assets of Somerset, and accounting tax and advisory firm headquartered in Indianapolis and with additional offices in Fort Wayne and Michigan City, Indiana in Nashville, Tennessee.

Summer site is what we would consider a platform acquisition.

Is it allows us to enter a growing and attractive geographic market.

With a firm that provides us with significant scale and a terrific team of professionals at the outset.

Along with immediate opportunities to offer additional services to their clients and our clients.

Combined these two acquisitions added approximately 245 professionals and $58 million in annualized revenue to see this.

In addition to those two most recent acquisitions Emma.

M&A pipeline remains healthy and we continue to be proactive in evaluating new opportunities.

With that said.

We will move it over to Q&A.

Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.

Thank a speakerphone please pick up your handset before pressing the keys.

Withdraw from the question queue. Please press Star then two.

Time, we will pause momentarily to assemble our roster.

Today's first question comes from Chris Moore with CJS Securities. Please go ahead.

Hey, good morning, guys congratulations on another great quarter.

Thanks for taking a couple of questions.

I'm one of the areas. We've discussed frequently you just touched on it a little bit earlier was how <unk> will do in the next big Turndown.

Organic growth was down roughly 6% in 2009, the last big one partially offset by your ability to sell.

<unk> costs in that situation. So I guess the question is how would you compare the revenue base today versus 2009, both from a recurring revenue as a percentage of revenue standpoint, as well as in terms of the sustainability of the project work D is the mix of the project work much different currently is that.

More or less vulnerable to a slowing economy.

Yes, Chris This is Gerry it's a great question and one that we get from time to time as you know.

What I would start with this.

We are a different company today than we were in.

During that period of time, we've made substantial investments in the business. When we look back over that period of time, not only has the mix of recurring versus nonrecurring at different today.

About 75% of our work tends to be within that the recurring category. It was higher back then we have also looked back and said at that time, when we declined as you said even at its.

Lowest period, it was only off 6% compared to many others, but within that 6% was a significant impact from our benefits and insurance group what was causing that was really we did not have enough producers at that time to overcome.

The natural attrition rate in that business over that period of time, we've made substantial.

Improvements and substantial investments in that area and you're seeing that in the.

The rate of organic revenue growth that we're getting kind of across the line within our benefits and insurance division. So I think we're a very different company today than we were back then I think our mix is different.

Our recurring versus nonrecurring and I think we've made investments that would that would.

Provide us with substantially stronger outcomes in a similar environment today.

Yes got it.

The only thing I would add is I think it's important and instructive to look back to 2009 2010.

And as Jerry comments, we're a much different company with different tools to manage the business at this point in time, but it's also instructive I think to look at the year 2000, and the pandemic here that was kind of a recession like environment.

Our same unit revenue was flat that year, so to Jerry's comment that the <unk>.

Benefits and insurance group as we've invested it's gained more traction so the positives there kind of outweighed the project oriented vulnerabilities that we saw in 2000 and so.

Don't know what lies ahead, but I think those two data points are important to consider.

Perfect. Thanks, guys that's very helpful.

One of the things you talked about in your prepared remarks was the labor challenges slowed the accounting industry organic growth a little bit have you seen any any estimates in terms of what that number was that are we talking you know.

Or 200 basis points or just not sure. If there was any statistics out there yes.

I didn't hear it quantified.

Maybe where is a different response here, but we didn't see it quantified, but as we went.

As we always do and spoke with our offices. The overriding response that we were getting over the past couple of years is that we had more work kind of in the pipeline than we could always respond to just based on.

<unk>.

The number of heads that we had to do that work, we see that easing you've seen some announcements from the big four recently, where they've they've reduced their workforce, we've heard of those things at other.

In other areas so while it is.

It has been is and will always be a I think.

Competitive work environment, we see some of those challenges that made it <unk> competitive over the past couple of years starting to ease.

Got it alright, guys I appreciate it I'll leave it there.

Thanks, Chris.

As a reminder, if you have a question. Please press Star then one.

Our next question comes from Andrew Nicholas with William Blair. Please go ahead.

Hi, good morning, Thanks for taking my questions I'll start with <unk>.

On the M&A question.

It seems like the pipeline is still good I'm not sure. If you have any update on market pricing, but maybe most importantly from my perspective, how should we think about capacity.

Don't necessarily mean that in terms of.

Financial capacity, but.

More operational capacity is it fair to assume that you'd be concentrating primarily on tuck ins to the rest of this year as you integrate <unk>.

Or is it possible that you would do a chunkier deal with with the financial capacity that I think you have.

Later in 2023.

Yes, Andrew this is Gerry let me start here.

My comments in no way reflect any.

Any prediction of what actually will get closed throughout the remainder of the year, but what I would say is we certainly have capacity to be able to absorb another firm of the size of Somerset through the rest of the year. If that one would present itself. We also of course would have capacity to do.

More of the ordinary course types of transactions as well. So we don't find ourselves, particularly are resource constrained at this point.

But it all depends on timing and it depends on.

The individual kind.

Kind of circumstances around a particular deal, but I don't I don't see that we're we're really resource constrained at this time.

That's helpful. Thank you.

And then.

The project based revenue in the period typically in financial services.

I guess I was surprised how strong.

Demand was or at least the commentary around how strong demand was in the quarter. I think you noted strong demand in <unk> services as well, despite what I thought would be.

Declining deal activity as a potential headwind so could you just unpack.

Some of that growth or the strength in project based revenue in the period and maybe any other tidbits you can provide on kind of how thats progressing in April and how you think it will move through the rest of this year.

Hi, Andrew This is where just to give you a little more color. We've described the advisory.

Piece of the business is approximately a $200 million of our collection of business services and within there.

We include our risks and advisory service, that's internal audit Sox co sourcing outsourcing that was very very strong.

The valuation team has good demand and a lot of that business tends to be recurring as does the <unk> business.

We also have the P/e consulting.

Consulting business that is.

Divided into two pieces one is due diligence.

Transaction services that remains very very strong.

No prediction on the balance of the year, but that's very strong.

A bit of a softness in the west coast based business that provides staff augmentation and advisory services to the venture capital business. So we've had eyes on that but the <unk>.

<unk> outweighs the hits in the messes. So net we saw some good strength and good growth in that advisory transaction business services.

Great.

It's also very helpful. And then maybe if I could squeeze one more in I think in the past you've talked about.

The strength and competitive positioning of your real estate practices across various regions and offices I think marks panels also had a sizable real estate practice within it that you were excited to cross sell into given some of the headlines and concerns about the impact of vacancy rate.

And higher interest rates on the commercial real estate market more specifically I was hoping you could flush out your exposure there and if there's any risk that you see to the.

The health of that end market.

It would be this year or in the coming years. Thank you.

So Andrew this is Jerry.

Prior to every call or at the end of every quarter. We go office to office and ask those types of questions.

The people, who are client facing and I.

We were actually expecting to see.

Higher level of.

Caution from from our real estate group, we're not hearing that.

Speaking it may be in existence in a particular market or a particular type of.

Of real estate that they are holding but we did not hear that in our in the responses that we are receiving from our clients. They are.

Of course interest rates impact that side of the business in some instances what we heard is that provides opportunities for those with larger portfolios and more scale compared to those that may not have access to.

<unk> the way that the larger organization to do so right now I think it's a wait and see.

But we're not hearing it we certainly didn't feel it in the first quarter and we're not really hearing it across the board with our construction and real estate clients.

That's helpful. Thank you very much.

Yes.

The next question comes from Marc Riddick with Sidoti. Please go ahead.

Hey, good morning.

Hi, Mark Hi, Mark.

So I think you've touched a little bit on the.

Technology clients.

But I wonder if you could talk if there are there.

That was sort of industry vertical standouts amongst your clients, maybe what youre seeing in some things that maybe we might not be thinking about.

On an industry vertical basis or regional basis for that matter.

Yes, Thanks, Mark Let me, let me start here as we've stated in the past one of the one of the I think the very attractive attributes of our businesses. We are not overly concentrated in any particular geography or any particular industry.

And I think that helps us in kind of all business environment.

With all of that said you mentioned it.

With the exception of the business that that were referenced which is really kind of a very silicon valley focus prep for IPO technical accounting business, which did see a little bit of softness.

Certainly over the past three to six months and we are now.

Not see across the board or in any particular material way.

Any one of our geographies or client concentration groups.

That are material to our overall results.

Being impacted by the current environment.

Okay, and then I was wondering if you could talk a little bit about maybe whether it's something you are seeing now where maybe you anticipate going forward as far as the pace of client behaviors. When it comes to the macro having an impact on <unk>.

Outsourcing decisions or engaging on additional service offerings and alike as well as maybe sort of a competitive dynamic maybe that you're seeing relative to.

Local competitors.

Yes, I am trying to predict I am trying to anticipate.

Around your question, but what I would say is that.

Look I think we are always trying to keep our finger on the pulse of the needs of the market and what we're what we're anticipating today is that there is some more uncertainty in the future business climate than we've seen over the past couple of years and we are very proactive.

In reaching out to our clients on a digital outreach through thought leadership through seminars through webinars on the types of topics that are of greatest interest to them. So how to how to prepare in the event that there is a recession those are things around.

Cash flow analysis access too.

Capital in the market.

And other services that we provide and we have a pretty regular cadence of those types of programs and we see significant interest in those programs by our clients and by prospective clients. So when you. When you asked the question around how we compare.

Relative to our competitors another key attribute of our business is not only the depth of expertise that we have certainly relative to some of our smaller more regional competitors, but the breadth of services that we have which I think is unique to us compared to the entire market and so that breadth of expertise I'm sorry, yes.

That depth of expertise and breadth of services positions us well to be able to serve our clients in a unique way.

Certainly in a more challenging business environment.

Great and then the last thing for me is I was sort of curious as to where we should be thinking about.

Any particular timing of investments.

Investment spending whether it would be an additional technology additional.

Hedge that are not related to acquisitions.

Or anything along those lines that we should be thinking about from a timing perspective or anything potentially lumpy.

What you're seeing in the following quarters. Thanks, yes.

Yes, Hi, Mark this is ware.

I don't think there is any lumpiness ahead, the one thing.

I wanted to draw your attention to it.

As the capital spending and as we occupy our new headquarters there may be a lump of capital spending but.

In aggregate for the year.

We're casting a $15 million to $20 million spending level and typically in a normal year, it's $10 million to $12 million. So it's not a big item.

We don't see anything on the technology, our hiring side.

We are constantly looking for good people and we have a good recruiting team out there thats.

Improving our capacity.

It's a good position to be in.

We commented earlier on the fact that.

We are a bit capacity constrained last year, but that tended to ease in the second half of the year and we're seeing a similar circumstance right now so I think we're in good shape with.

Don't see any.

Any issue there with some lumpiness on investment ahead.

Great and then can I sneak in one more I guess, because I used to ask this often but they are now.

Thoughts on marketing spending or what we might see throughout the year and those kind of plans.

Yes, Mark Great Great question.

For anybody on the call you may have noticed we are running a wave of TV AD campaigns right now so youll see the see this adds on CNBC.

If you watch PGA and other sporting events Youll see them there.

<unk> has gone dark for a while on that so we're restoring that in a good way.

And.

With respect to other items on the marketing side.

We're more effectively using webinars and other virtual tools, along with digital marking Lee campaigns and things like that so we're really using technology.

And I think.

A very efficient manner. So our marketing spend is not a significant part of the expense structure.

Ladies and gentlemen, this concludes our question and answer session I would now like to turn the call back to President and CEO , Jerry <unk> for any closing remarks.

Thank you I want to thank our shareholders and analysts for joining us today and as always for your continued support I also want to thank our <unk> team for a fantastic start to the year and for all of your efforts to build on the momentum that we had coming off of our.

Record performance last year in 2022, Thank you everybody and enjoy the rest of your day.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

[music].

Yeah.

[music].

Hello, and welcome to the <unk> Q1, 'twenty two 'twenty three earnings call.

To withdraw from the question queue. Please press Star then two.

Please note. This event is being recorded I would now like to turn the conference over to Lori <unk> director of corporate Relations. Please go ahead.

Okay.

Good morning, everyone and thank you for joining us for the <unk> first quarter 2023 results conference call.

In connection with this call today's press release and quarterly Investor presentation have been posted to the Investor Relations page of our website <unk> dot com as.

As a reminder, this call is being webcast and a link to the live webcast can also be found on our site and archived replay and transcript will also be made available following the call.

Today's call May also include forward looking statements regarding our business financial condition results of operations cash flows strategies and prospects forward.

Forward looking statements represent when we estimates on the date of this call and are not intended to give any assurance of future results.

Because forward looking statements relate to matters that have not yet occurred. These statements are inherently subject to risks and uncertainties.

Many factors could cause future results to differ materially and see this assumes no obligation to update these statements.

A more detailed description of such factors can be found in our filings with the Securities and Exchange Commission.

Joining us for today's call are Jerry Briscoe, President and Chief Executive Officer, and Ware Grove, Chief Financial Officer, I will now turn the call over to Jerry for his opening remarks. Thank.

Thank you Laurie good morning, and thank you for joining us for today's call we.

We are pleased to share our first quarter performance for 2023 and to discuss our outlook for the remainder of the year.

As I outlined during our last earnings call. We started 2023 following the second year.

Year of record performance for our business.

From nearly every measurable perspective, our results last year were exceptional and providing strong momentum going into this year.

I am proud to share that our growth has continued with another strong quarter to start this year.

To highlight our results for the first quarter. Our total revenue increased 16, 1% and our adjusted EPS is up 23, 7% compared to the same period a year ago.

That growth is a result of outstanding performance from both of our major divisions.

Our financial services Division experienced total revenue growth of 18, 8% and organic revenue growth of 10, 5% in the first quarter.

As you are aware the first quarter is the traditional busy season for our accounting and tax businesses and demand for those services remains robust.

Our revenue growth in the first quarter reflects our ability to continue to capture price increases in.

An increase in the volume of work.

And the contribution of our most recent acquisition, Somerset, CPA and advisors, which joined US effective February one.

We also benefited from demand for a number of services that we provide to assist our clients with emerging opportunities such as the employee retention tax credit.

As well as continued strong demand across nearly all of our major project oriented advisory services, including our risk and advisory services, our valuation services.

Our services focused on the private equity industry, and our forensic accounting services.

We also experienced growth over the last year within our government healthcare consulting business.

As we've discussed on prior calls long term multiyear projects make up a sizeable component of this business. So.

So timing on the start of those contracts and then he paused a network can impact revenue growth in a particular period.

And in fact, we did see some delays in project timing through the first quarter.

But we expect those delays to be short lived and for those projects to get back on track later this year.

We're pleased to see that the talent appears to be more readily available in recent months and we're happy that the investments that we've made in our recruitment team over the past several years have put us in a position to attract top talent to our team.

Now turning to our benefits and insurance Division.

Where we are also off to a very strong start to the year with total revenue growth of eight 2% compared to the prior period.

The growth within this division came from all four of our major service lines, largely fueled by strong sales production and favorable client retention rates.

We also benefited from rising premiums within our employee benefits in our property and casualty insurance service lines.

<unk> pricing for our payroll services and.

And increased project work within the actuarial group.

Embedded within our retirement investment services business.

Now before I turn it over to where I'd like to make a few comments on our full year guidance that we provided in February .

To remind you in February we guided full year revenue growth within a range of 8% to 10% and adjusted EPS growth within a range of 11% to 13% over the full year results delivered in 2022.

Based on our exceptionally strong performance in the first quarter of this year. We currently anticipate that our full year results will come in at the high end of that range.

Sure.

Thank you Jerry and good morning, everyone let.

Let me take a few minutes to talk about key highlights of the first quarter numbers. We released this morning.

The strong momentum we saw through our business in 2022 has continued through the first quarter of this year.

Total revenue in the first quarter increased by 16, 1% over first quarter a year ago same unit revenue was up by 10% with acquisitions contributing another six 1% of growth compared with last year.

Within benefits and insurance same unit revenue for the first quarter was up by eight 5%. We continue to see strong client retention and strong new client production.

The investments we have made in recent years to hire new business producers has continued to gain traction as we see increasing new business production.

We remain committed to further enhancing growth capabilities within the benefits and insurance group and we will continue to make investments in hiring additional producers.

Effective February one we acquired Somerset, CPA and advisors that is based in Indianapolis.

With estimated annual revenue of approximately $55 million in 2023, we expect to record approximately $52 million of revenue from this acquisition.

There are transaction closing costs, plus one time integration related expenses associated with this transaction.

In a similar matter that reporting from our expand with acquisition related costs last year. We will report an adjustment to eliminate these acquisition related costs from GAAP reported results to report adjusted results this year.

You will find a reconciliation of these items has a schedule included in the earnings release we.

We are extremely pleased to have the Somerset came on board and the business is performing in line with our expectations.

Adjusted EBITDA, considering these same adjustments was $113 $3 million for the three months this year up 22% over adjusted EBITDA of $92 $9 million last year.

<unk> represented a 60 basis point headwind to margin on income before tax compared with last year.

We continue to project that these expenses will saddle in lower than pre pandemic levels, but for a period of time the year over year comparisons presents a headwind.

Interest expense also presents a headwind this year as rates have increased from a year ago.

In the first quarter increased borrowing levels, coupled with higher rates caused interest expense to increase as a percent of revenue by approximately 50 basis points and.

And for the full year this could represent a headwind of approximately 75 basis points to margin.

For the quarter, we reported an increase in interest expense of $2 4 million and that impacted earnings per share by approximately three and a half cents per share.

Despite these headwinds we are leveraging costs, eliminating the impact of the onetime acquisition and transaction integration costs for the first quarter. We can report 100 basis points increased in adjusted pre tax income margin.

We will continue to say that over time, we expect to achieve a 20% to 50 basis point annual increase in pre tax income margin and in recent years. Our performance has exceeded the higher end of that range.

For the full year 'twenty three we expect the margin on pre tax revenue will fall within this range of 20 to 50 basis points of annual improvement.

As always details of the impact of accounting for gains and losses in our nonqualified deferred compensation plan are outlined in the release because we are comparing a period in 'twenty two with capital markets losses, compared with capital markets gains. This year. There is a significant impact to the GAAP reported numbers.

As you look at both gross margin and operating income.

As a reminder, pre tax income margin is not impacted by this accounting.

Turning to the cash flow items in 'twenty, two we amended our unsecured credit facility to increase the availability from $400 million to $600 million and extended the maturity by five years.

<unk> 31, this year the balance outstanding on the newly Upsized $600 million unsecured facility was $403 $7 million with about $190 million of unused capacity.

Balance sheet at March 31, this year is strong with leverage of approximately one nine times adjusted EBITDA.

This provides plenty of capacity continue to continue our strategic acquisitions and provides the flexibility to continue with share repurchases.

In the first quarter of this year with Somerset transaction.

Combined with earn out payments on previously closed transactions, we used approximately $67 $7 million for.

<unk> purposes.

Payments.

Deploying capital for strategic acquisition purposes continues to be our highest priority.

Since the end of 2019, we have closed 17 transactions and we have deployed approximately $348 million of capital for acquisition purposes, including the earn out payments over time.

Through March 31, this year, we have repurchased approximately 428000 shares of our common stock in the open market at a cost of approximately $28 million.

Since March 31 under our <unk> program, we have repurchased an additional 210000 shares making the total shares repurchased through April 26. This year approximately 640000 shares.

Approximately $308 million of capital has been used towards this open market repurchase activity.

Over that period.

Days sales outstanding on March 31. This year was 94 days and that was the same as it was the first quarter a year ago.

Bad debt expense for the first three months. This year was 10 basis points of revenue compared with 14 basis points a year ago Dupree.

Depreciation and amortization expense for the first quarter of this year was $8 6 million compared with $8 $2 million last year.

For the full year, we expect depreciation and amortization at approximately $36 million this year compared with approximately $33 million last year.

Capital spending for the first quarter was $3 $6 million greater spending as planned later this year for tenant improvements related to our anticipated third quarter move toward new headquarter facilities.

Most of our capital spending is associated with leasehold improvements and furniture for office facilities.

For the full year this year, we're expecting capital spending to be approximately $15 million to $20 million.

As a reminder, we are a major tenant in our new headquarters building with a long term lease we're not an owner of the building.

The effective tax rate for the three months. This year was 26, 5% up from 24, 9% a year ago the.

Plus there is an increase in non deductible expenses in 'twenty, three as compared to last year.

The impact of the increased tax rate in the first quarter was approximately three pennies a share.

With a full forecasted full year effective rate of 28%, we expect a full year impact at approximately eight <unk> per share.