Q3 2023 CBIZ Inc Earnings Call

October 26, 2023

Good morning, and welcome to the fee basis third quarter 2023 conference call.

All participants will be in a listen only mode.

Any assistance during the call. Please signal a conference specialist by pressing the star key followed by zero.

After todays presentation, there will be an opportunity to ask questions.

Please note that this event is being recorded today.

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

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

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

An archived replay and transcript will also be made available after the call.

Before we begin we would like to remind you that during the call management may discuss certain non-GAAP financial measures reckon.

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 further 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 Chriscoe, President and Chief Executive Officer, and Ware Grove, Chief Financial Officer Julie.

Good morning, and thank you for joining us for today's call.

We're pleased to share our third quarter performance and to discuss our outlook for the remainder of the year.

For the third quarter, our business has performed as expected and we experienced strong organic growth over the same period last year.

The same goes for our year to date results as we successfully built on the positive momentum demonstrated earlier in the year.

Encouragingly, we continue to see nice growth across all major service lines and demand for those services remains strong.

I do want to take this opportunity to follow up on two items that we mentioned during our earnings call for the second quarter.

The first was unanticipated contract delays and our government healthcare consulting business.

And the second being the extension of tax filing deadlines in California, which is a major market for CBS.

For the third quarter, our government health care consulting business rebounded and we benefited from the launch of a number of new projects and the addition of new business that enabled us to achieve our expected growth targets.

For the California market as expected much of the work that was delayed in the second quarter was completed in the third quarter.

California also ended up extending the tax filing deadline again, and we expect to see some of this work shift into the fourth quarter as well.

Where it will go into more detail during his remarks in a few minutes.

Now turning to the performance of our two primary practice groups.

Our financial services Division continued to experience strong demand for our core accounting and tax services.

And are more project based advisory services.

We've also been able to maintain our pricing initiatives and are seeing the impact of those efforts in our results.

Within our advisory business, we experienced growth across nearly all of our major service lines due to the healthy demand for many of our services.

Including transaction services risk advisory services and valuations.

And the transaction advisory space a good portion of this demand is being fueled by an increase in the volume of transactions that we're seeing albeit smaller deals. We're also pleased to see some signs that the IPO market is returning which benefits. The services, we provide to help businesses prepared to go public.

Within our benefits and insurance business, we continue to achieve growth across all major service lines in Q3 for our employee benefits and our property and casualty businesses increased service revenue from new production and strong client retention are among the factors contributing to our growth.

Our producer Count is also up for both of these service lines compared to last year as we see traction from investments that we made in our internal recruiting team and external agencies to grow our pipeline of new producers.

For our payroll business higher interest rates on client deposits continued strong demand for our upmarket payroll platform and continued success with our pricing initiatives have all contributed to our growth.

The growth in our retirement and investment services business is coming largely from a continued uptick in project work for our actuarial team.

Based on the performance throughout the third quarter I am pleased to reaffirm our revenue and adjusted fully diluted earnings per share guidance for the full year that we announced at our investor call for the second quarter.

Operator: Good morning, and welcome to the CBIZ third quarter 2023 conference call. All participants will be in a listen only mode. And should you need any assistance during the call? Please signify conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded today.

With this I will turn it over to Ware Grove, our Chief Financial Officer to provide additional information on our financial performance for the third quarter and year to date.

Sure.

Thank you Jerry and good morning, everyone. Let me take a few minutes to talk about the key highlights of the third quarter and the year to date numbers. We released this morning.

Lori Novickis: I would now like to turn the conference over to Lori Novickis, Director of Corporate Relations. Please go ahead.

Let me get started by saying that in our second quarter conference call earlier. This year as Jerry commented, we outlined two areas that disproportionately impacted results in the second quarter.

Lori Novickis: Good morning, everyone, and thank you for joining us for the CBIZ third quarter and nine months 2023 results conference call. In connection with this call, today's press release and investor presentation have been posted to the investor relations page of our website. CBIZ.com. As a reminder, this call is being webcast and a link to the live webcast can be found on our website. An archives replay and transcript will also be made available after the call.

First the IRS extensions for tax filing deadlines is here in California impacted first half and second quarter results.

The six months tax filing extensions granted by the IRS early this year for the state of California has shifted some of the normal first half work into the third and fourth quarters. This year.

And then secondly, the delays we encountered several engagements during the first half this year within our government health care consulting business impacted first half and second quarter results.

Lori Novickis: Before we begin, we would like to remind you that during the call, management may discuss certain on gap financial measures. Reconciliation of these measures can be found in the financial tables of today's press release and investor presentations. 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 further assurance of future results.

The delays in engagement start dates that were encountered in the first half. This year I have largely resolved a number of significant new projects are now onstream and are requiring active work.

As a result, we recorded stronger revenue growth within this business.

And this contributed to stronger third quarter results.

Aside from the occasional delay that we encounter work within this business is characteristically very steady and we expect this will continue into the fourth quarter and end of 'twenty 'twenty four.

Lori Novickis: Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainty. 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 the filings with the Securities and Exchange Commission.

Both of these issues caused what was a temporary impact results in second quarter looking.

Looking at nine months results with total revenue growth of 13, 1% and adjusted earnings per share up 15, 6% over last year, we are performing in line with our expectations well.

Jerome Grisko: Joining us for today's call are Jerry Grisco, President and Chief Executive Officer and Wear Grove, Chief Financial Officer. Good morning and thank you for joining us for today's call. We're pleased to share our third quarter performance and to discuss our outlook for the remainder of the year. For the third quarter, our businesses performed as expected and we experienced strong organic growth over the same period last year. The same goes for our year-to-date results as we successfully built on the positive momentum demonstrated earlier in the year.

Both financial services and benefits and insurance are performing well.

Total revenue in the third quarter increased by $47 $3 million up 13% over third quarter a year ago.

The unit revenue was up by eight 3% with acquisitions contributing four 7% growth compared with last year.

For the nine months. This year total revenue grew by $146 7 million up 13, 1% compared with last year.

Same unit revenue growth for the nine months was up.

Jerome Grisko: Encouragingly, we continue to see nice growth across all major service lines and demand for those services remain strong. I do want to take this opportunity to follow up on two items that we mentioned during our earnings call for the second quarter. The first was unanticipated contract delays in our government health care consulting business and the second being the extension of tax filing deadlines in California, which is a major market for SIVIS.

Seven 5% with acquisitions contributing five 6% of revenue growth for the nine months this year compared with last year.

Within financial services for the third quarter total revenue grew by $38 $4 million were up by 14, 8% with same unit revenue for the third quarter up eight 4% with strong revenue growth recorded in all lines of service, including core tax and accounting Advisory services.

Jerome Grisko: For the third quarter, our government health care consulting business rebounded and we benefited from the launch of a number of new projects and the addition of new business that enabled us to achieve our expected growth targets. For the California market, as expected, much of the work that was delayed in the second quarter was completed in the third quarter. California also ended up extending the tax filing deadline again and we expect to see some of this work shift into the fourth quarter as well, where we'll go into more detail during these remarks in a few minutes.

And the government health care consulting services.

For the nine months total revenue within financial services grew by $124 3 million up 15, 4% and same unit revenue for the nine months was up seven 7%.

Within benefits and insurance for the third quarter same unit revenue grew by $7 $5 million up eight 2% and for the nine months same unit revenue grew by seven 1%.

Jerome Grisko: Now, turning to performance of our two primary practice groups. Our financial services division continue to experience strong demand for our core counting and tech services and our more project-based advisory services. We've also been able to maintain our pricing initiatives and are seeing the impact of those efforts in our results. Within our advisory business, we experience growth across nearly all of our major service lines due to the healthy demand for many of our services, including transaction services, risk advisory services, and valuations.

Every major line of service within our benefits and insurance group recorded revenue growth for both third quarter and for the nine months, we continue to see strong client retention and strong new client production.

The investments we have made a higher new business producers in recent years has gained traction and we are continuing to make investments in hiring additional producers to further enhanced growth potential.

On February 1st this year, we acquired Indianapolis based Somerset, Cpas and advisors with estimated annual revenue of approximately $55 million.

Jerome Grisko: In the transaction advisory space, a good portion of this demand is being fueled by an increase in the volume of transactions that we're seeing albeit smaller deals. We're also pleased to see some signs that the IPO market is returning, which benefits the services we provide to help businesses prepare to go public. Within our benefits and insurance business, we continue to achieve growth across all major service lines in Q3. For our employee benefits and our property and casualty businesses, increased service revenue from new production and strong client retention are among the factors contributing to our growth.

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

In a similar matter to reporting New York based <unk> acquisition related costs last year, we are reporting an adjustment to eliminate Somerset acquisition related costs from GAAP reported results. This year to report adjusted results.

We are extremely pleased to have the Somerset team on board this year.

Both Somerset and marks patents are performing in line with our expectations.

Jerome Grisko: Our producer count is also up for both of these service lines compared to last year as we see traction from investments that we made in our internal recruiting theme and external agencies to grow our pipeline of new producers. For our payroll business, higher interest rates on client deposits, continued strong demand for our upmarket payroll platform, and continued success with our pricing initiatives, have all contributed to our growth. The growth in our retirement and investment services business is coming largely from a continued uptick in project work for our actual operational team. Based on the performance throughout the third quarter, I'm pleased to reaffirm our revenue and adjusted fully deluded earnings per share guidance for the full year that we announced that our investor call for the second quarter.

In addition to these acquisition related expenses, we recorded a gain of $1 $5 million related to the sale of the technology assets and our financial services practice group this year.

Last year, we recorded a gain of $2 $4 million related to the sale of a book of business within our property and casualty insurance line of service.

These gains were reported as other income and they represented approximately <unk> <unk> per share for 2023, and approximately <unk> <unk> per share for 2022 for both the third quarter and the nine months.

With a view towards presenting meaningful comparable information eliminating the impact of these games and eliminating the acquisition related expenses adjusted earnings per share for the third quarter of this year was <unk> 66 cents up 29, 4% compared with 51 cents a year ago.

Ware Grove: With this, I will turn over to where grow of our key financial officer to provide additional information on our financial performance for the third quarter and year to date.

Ware Grove: Where?

Ware Grove: Thank you, Jerry, and good morning, everyone. Let me take a few minutes to talk about the key highlights of the third quarter and the year to date numbers we released this morning. Let me get started by saying that in our second quarter conference call earlier this year, as Jerry commented, we outlined two areas that disproportionately impacted results in the second quarter. First, the IRS extensions for tax filing deadlines this year in California impacted first half and second quarter results.

For the nine months adjusted earnings per share is $2 67 up 15, 6% this year compared with $2 31 last year.

Adjusted EBITDA considering these same adjustments was $229 2 million for the nine months. This year up 17, 9% over $194 $5 million last year.

Ware Grove: The six month tax filing extensions granted by the IRS early this year for the state of California has shifted some of the normal first half work into the third and fourth quarters this year. And then secondly, the delays we encountered in several engagements during the first half this year within our government health care consulting business impacted first half and second quarter results. The delays in engagement start dates that were encountered in the first half this year have largely resolved.

A table reconciling reported GAAP numbers to these adjusted earnings per share and adjusted EBITDA numbers is included in the earnings release issued this morning.

Ware Grove: A number of significant new projects are now on stream and are requiring active work. As a result, we recorded stronger revenue growth within this business and this contributed to stronger third quarter results. The five from the occasional delay that we encounter work within this business is characteristically very steady and we expect this will continue into the fourth quarter and into 2024. Both these issues cause what was a temporary impact result in second quarter.

We have previously talked about the level of health care and benefits travel and entertainment expenses and marketing expenses that are normalizing the higher levels as.

As we continue to restore and expand outreach to clients and prospects by design. These expenses are trending higher than last year and we have also restarted several media campaigns and our marketing programs. This year you.

You may have seen our TV spots positioned on CNBC, PGA golf events and in other spots.

For the first nine months. This year collectively these expenses represented a 40 basis point headwind to margin on pre tax income compared with last year.

An important takeaway here is that we project that these expenses will settle in approximately 100 basis points lower than pre pandemic levels, but this year the year over year comparisons present a headwind.

Ware Grove: Looking at nine months results with total revenue growth at 13.1% and adjusted earnings per share of 15.6% over last year, we are performing in line with our expectations. Both financial services and benefits and insurance are performing well. Total revenue in the third quarter increased by 47.3 million dollars up 13% over third quarter a year ago. Same unit revenue was up by 8.3% with acquisitions contributing 4.7% to growth compared with last year.

You can also see that interest expense creates a headwind this year for the nine months ended September 30th.

Increased interest expense increased as a percent of revenue by approximately 70 basis points.

For the quarter, we reported an increase in interest expense of $3 $5 million with an earnings per share impact of approximately <unk> <unk> per share and for the nine months, we reported an increase in interest expense of $9 $8 million with an earnings per share impact of approximately <unk> 14 per share.

Ware Grove: For the nine months this year total revenue grew by 146.7 million dollars up 13.1% compared with last year. Same unit revenue growth for the nine months was up 7.5% with acquisitions contributing 5.6% to revenue growth for the nine months this year compared with last year. Within financial services for the third quarter total revenue grew by 38.4 million dollars or up by 14.8% with same unit revenue for the third quarter up 8.4% with strong revenue growth recorded in all lines of service including core tax and accounting, advisory services and the government health care consulting services.

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

As you look at both gross margin and operating income comparisons because we are comparing a period in 2022 with capital market losses, compared with capital markets gains. This year. There is a significant impact to the GAAP reported numbers.

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

We will continue to say that it is our long term goal to achieve pre tax margin improvement of 20 to 50 basis points per year.

In any given year margin improvement may be either higher or lower for a number of reasons, but over time our results have been at the higher end of this range.

Ware Grove: For the nine months total revenue within financial services grew by 124.3 million dollars up 15.4% and same unit revenue for the nine months was up 7.7%. Within benefits and insurance for the third quarter same unit revenue grew by 7.5 million dollars up 8.2% and for the nine months same unit revenue grew by 7.1%. Every major line of service within our benefits and insurance group recorded revenue growth for both third quarter and for the nine months.

Considering the significant margin headwinds that we are encountering this year, however, pretax margin may be relatively flat compared with the prior year.

Turning to cash flow and the balance sheet on September 30 of this year the balance outstanding on our $600 million unsecured facility was approximately $395 million with about $195 million of unused capacity.

With leverage of approximately one eight times adjusted EBITDA. This provides plenty of capacity continued to continuous strategic acquisitions and it provides the flexibility to continue with share repurchases.

Ware Grove: We continue to see strong client retention and strong new client production. The investments we have made to hire new business producers in recent years has gained traction and we are continuing to make investments in hiring additional producers to further enhance growth potential. On February 1st this year we have hired Indianapolis-based Somersets VPAs and advisors with estimated annual revenue of approximately $55 million. There are transaction closing costs plus one time integration related expenses associated with this transaction.

And the first nine months of this year, including the <unk> acquisition, we completed a total of five acquisitions, we used approximately $102 million for those acquisitions, including earn out payments on previously closed transactions for.

For earn out payments, we expect to use approximately $7 $3 million over the remainder of this year and approximately $58 million in 2024 $36 million $20 25, and $10 $6 million in 2026 for these estimated earn out payments deploy.

Ware Grove: In a similar matter to reporting New York-based Marks Panethac acquisition related costs last year we are reporting an adjustment to eliminate Somerset acquisition related costs from Gap-reported results this year to report adjusted results. We are extremely pleased to have the Somerset team on board this year. Both Somerset and Marks Paneth are performing in line with our expectations. In addition to these acquisition related expenses we recorded a gain of $1.5 million related to the sale of a technology asset in our financial services practice group this year, last year we recorded a gain of $2.4 million related to the sale of a book of business within our property and casually insurance line of service.

Deploying capital for strategic acquisition purposes continues to be our highest priority since the end of 2019, we have closed 20 transactions and we have deployed approximately $383 million of capital for acquisition purposes, including the earn out payments over that period of time.

Ware Grove: These gains were reported as other income and they represented approximately two cents per share for 2023 and approximately three cents per share for 2022 for both the third quarter and the nine months. With a view towards presenting meaningful comparable information eliminating the impact of these gains and eliminating the acquisition-related expenses adjusted earnings per share for the third quarter this year with 66 cents up 29.4 percent compared with 51 cents a year ago.

Beyond using capital for acquisitions, we have the flexibility to use capital for share repurchases through September 30 of this year, we have repurchased approximately 115 million shares of our common stock in the open market at a cost of approximately $58 million.

Through October 25th we have repurchased approximately 124 million shares at a cost of approximately $62 5 million.

To recap repurchase activity in recent years since the end of 2019, we have repurchased approximately $9 3 million shares and that represents slightly more than 16% of the shares outstanding compared to the end of 2019.

Approximately $335 million of capital has been used towards this open market repurchase activity over that period of time.

Days sales outstanding on September 30 of this year was 96 days compared with 93 days a year ago.

Ware Grove: For the nine months adjusted earnings per share is $2.67 of 15.6 percent this year compared with $2.31 cents last year. Adjusted EBITDA considering these same adjustments with $229.2 million for the nine months this year up 17.9 percent over $194.5 million last year. A table reconciling reported gap numbers to these adjusted earnings per share and adjusted EBITDA numbers is included in the earnings release issue this morning. 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.

Bad debt expense for the first nine months was eight basis points of revenue compared to 12 basis points a year ago.

Depreciation and amortization expense for the third quarter was $9 1 million compared with $8 $2 million last year.

Year to date, depreciation and amortization was $27 million.

Compared with $24 $7 million last year for.

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

Now for those of you who want to highlight the amortization expense, which is primarily driven by acquisition activity for the nine months amortization expense was $17 8 million and for the full year. We project it may be approximately $24 million cap.

Ware Grove: As we continue to restore and expand outreach to clients and prospects by design these expenses are trending higher than last year and we have also restarted several media campaigns in our marketing programs this year. You may have seen our TV spots positioned on CNBC, PGA golf events and another spots. For the first nine months this year collectively these expenses represented a 40 basis point headwind to margin on pre-tax income compared with last year.

Capital spending for the third quarter was $7 3 million and was $19 million for the nine months.

Greater spending is occurring this year for tenant improvements on furniture related to several significant office moves, including the upcoming November 1st move to our new headquarters facilities.

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

Ware Grove: An important takeaway here is that we project that these expenses will settle in approximately 100 basis points lower than pre-pendemic levels but this year the year-over-year comparisons present a headwind. You can also see that interest expense creates a headwind this year. For the nine months ended September 30th increased interest expense increased as a percent of revenue by approximately 70 basis points. For the quarter we reported an increase in interest expense at $3.5 million within earnings per share impact of approximately $5 per share and for the nine months we reported an increase in interest expense of $9.8 million within earnings per share impact of approximately 14 cents per share.

For the full year. This year, we're expecting capital spending in a range of $20 million to $25 million that is driven by a number of facilities moves this year within our network of 127 office locations.

Capital spending normally runs within a $10 million to $12 million annual range, and we expect spending closer to that lower level in the years ahead.

The effective tax rate for the nine months. This year was 27, 9% up from 26% a year ago.

The impact of the increased tax rate for the nine months was approximately <unk> <unk> per share with a forecasted full year effective rate of 28%. We expect the full year impact at approximately eight <unk> per share this year.

Ware Grove: As always details of the gap accounting for gains and losses in our non-qualified deferred compensation plan are outlined in the release. As you look at both gross margin and operating income comparisons because we're comparing a period in 2022 with capital market losses compared with capital markets gains this year there is a significant impact to the gap reported numbers. Now as a reminder pre-tax income margin is not impacted by this We will continue to say that it is our long-term goal to achieve pre-tax margin improvement of 20 to 50 basis points per year.

It is important to understand the increased effective tax rate in 2023 is a headwind that is unique to this year compared with 2022.

In future years, we expect the effective tax rate to be relatively level at approximately 28% and we project no further year over year tax related headwinds beyond this year.

The recurring and essential nature of many of our services provide stability through economic cycles.

At this point as we look at employment drubbing metrics within our benefits and in our payroll businesses.

We're seeing continued signs of steady employment within our clients.

Ware Grove: In any given year, margin improvement may be either higher or lower for a number of reasons, but over time, our results have been at the higher end of this range. Considering the significant margin headwinds that we are encountering this year, however, pre-tax margin may be relatively flat compared with the prior year. Turning to cash flow and the balance sheet on September 30th this year, the balance outstanding on the $600 million unsecured facility was approximately $395 million, with about $195 million of unused capacity.

Economic uncertainty continues however, and if we experienced pressure on our revenue growth. There are a number of variable items in our cost structure, where we can take measures to mitigate the impact.

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 in adding new business producers focused within our benefits and insurance group gained traction.

Coupled with solid client retention this is driving strong revenue growth.

Before I turn it back to Jerry I want to provide you with our thoughts on full year guidance. As we look ahead several factors come to mind as we look at the balance of the year compared with last year.

Ware Grove: With leverage of approximately 1.8 times adjusted EBITDA, this provides plenty of capacity to continue strategic acquisitions, and it provides the flexibility to continue to share repurchases. In the first nine months of this year, including the Somerset acquisition, we completed a total of five acquisitions. We used approximately $102 million for those acquisitions, including earn out payments on previously closed transactions. For earn out payments, we expect to use approximately $7.3 million over the remainder of this year, and approximately $58 million in 2024, $36 million in 2025, and $10.6 million in 2026 for these estimated earn out payments.

The interest expense and higher tax rate headwinds that impacted nine months results by 21 per share will persist into the fourth quarter. Despite these headwinds with 15.

6% growth in adjusted earnings per share for the nine months the business is performing very well.

Fourth quarter results. However are typically more dependent upon project work that is more difficult to project.

Also with the addition of both <unk> and <unk> panel within our core tax and accounting financial services group. The seasonal nature of these businesses may amplify the volatility between stronger first half and seasonally weaker second half results.

Ware Grove: Deploying capital for strategic acquisition purposes continues to be our highest priority. Since the end of 2019, we have closed 20 transactions, and we have deployed approximately $383 million of capital for acquisition purposes, including earn out payments over that period of time. Beyond using capital for acquisitions, we have the flexibility to use capital for share repurchases. Through September 30th this year, we have repurchased approximately 1.15 million shares of our common stock in the open market, at a cost of approximately $58 million.

The business is performing in line with expectations and we are very pleased with the results for the nine months.

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

We expect total revenue to increase within a range of 10% to 12% for the year.

On an adjusted basis, we expect 2023 adjusted earnings per share to increase within a range of 11% to 13% over the adjusted earnings per share of $2 13.

That was reported in 'twenty 'twenty to.

GAAP reported earnings per share is expected to increase within a range of 15% to 17% over the $2.01 reported in 2022.

Ware Grove: Through October 25th, we have repurchased approximately 1.24 million shares at a cost of approximately $62.5 million. To recap, repurchase activity in recent years, since the end of 2019, we have repurchased approximately 9.3 million shares, and that represents slightly more than 16% of the shares outstanding compared to the end of 2019. Approximately $335 million of capital has been used towards this open market repurchase activity over that period of time. Day sales outstanding on September 30th this year was 96 days, compared with 93 days a year ago.

The effective tax rate for the full year of 2023 is expected at approximately 28%.

This rate 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 55 to 51 million shares for the full year of 2023.

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

Thank you Ware.

Before we move to Q&A I'd like to provide a brief update on our M&A results for the year.

Ware Grove: That debt expense for the first nine months was 8 basis points of revenue compared to 12 basis points a year ago. Depreciation and amortization expense for the third quarter was $9.1 million, compared with $8.2 million last year. Year to date, depreciation and amortization is $27 million, compared with $24.7 million last year. For the full year, we expect depreciation and amortization of an approximately $36 million this year, compared with approximately $33 million last year, here.

So far in 2023, we've completed three acquisitions and two smaller tuck in acquisitions.

I am pleased to report that we're making steady progress with the integration of these acquisitions and remain encouraged by the performance and contributions to date.

And our more recent earnings call.

We talked about the impact of private equity on M&A within the traditional accounting and tax industry.

We're actually seeing activity from private equity in this space appear to wane in recent weeks as some potential deals have fallen through or have been put on hold we continue to monitor this trend and the opportunities that it may provide in our own M&A efforts.

Ware Grove: Now for those of you who want to highlight the amortization expense, which is primarily driven by acquisition activity, for the nine months amortization expense was $17.8 million and for the full year we projected maybe approximately $24 million. Capital spending for the third quarter was $7.3 million and was $19 million for the nine months. Greater spending is occurring this year for tenant improvements and furniture related to several significant office moves, including the upcoming November 1st move to our new headquarters facilities.

In the meantime, our M&A pipeline remains healthy enacted and we have the capacity to pursue other opportunities with that we'll turn it over to Q&A.

We will now begin the question and answer session.

Ask a question you May press Star then one on your Touchtone phone.

If youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

Ware Grove: As a reminder, we are a major tenant with a long-term lease in our new headquarters building. We are not an owner of the building. For the full year this year, we are expecting capital spending in a range of $20 to $25 million that is driven by a number of facilities moves this year within our network of 127 office locations. Capital spending normally runs within a $10 to $12 million annual range and we expect spending closer to that lower level in the years ahead.

Yes.

Yeah.

And our first question here will come from Chris Moore with CJS Securities. Please go ahead.

Hey, good morning, guys. Thanks for taking a couple of questions.

So pricing, obviously I've been more dynamic in 2022 can you maybe just talk a little bit more about pricing through the first nine or 10 months of 'twenty three is that looking more normal and kind of what that suggests for for 'twenty four.

Ware Grove: The effective tax rate for the nine months this year was 27.9 percent up from 26 percent a year ago. The impact of the increased tax rate for the nine months was approximately seven cents per share. With a forecast at full year effective rate at 28 percent, we expect the full year impact at approximately eight cents per share this year. It is important to understand the increased effective tax rate in 2023 is a headwind that is unique to this year compared to 2022.

Yes, Chris I think it's too early to really think about or talk about our predict 'twenty four but so far for 23, we've been very pleased with our ability to continue to get pricing and.

As we've talked about on a number of calls we have we have built processes systems reporting training around all around pricing throughout our core accounting.

Officers and business and we're pleased with the outcomes that we're getting there.

Got it I appreciate it.

Ware Grove: In future years, we expect the effective tax rate to be relatively level at approximately 28 percent and we project no further year-over-year tax-related headwinds beyond this year. The recurring and essential nature of many of our services provides stability through economic cycles. At this point, as we look at employment driving metrics within our benefits and in our payroll businesses, we are seeing continued signs of steady employment within our clients. Economic uncertainty continues, however, and if we experience pressure on revenue growth, there are a number of variable items in our cost structure where we can take measures to mitigate the impact.

SG&A looks.

Much lower year over year sequentially, even after adjusting for deferred comp.

Why was that and how should we look at that moving forward.

Yes, Chris I think.

We probably see some volatility quarter to quarter, just depending on spend on legal matters and things like that that may spike from time to time, but generally speaking if you look at the year to date number.

We should be leveraging G&A, some some modest amount each year, maybe 10 basis points or better and I think over time, that's what we see.

Ware Grove: 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 in adding new business producers focused within our benefits and insurance groups have gained traction. Coupled with solid, client retention, this is driving strong revenue growth.

Got it.

And maybe the last one for me is just being a gross margin continues to be strong up 26% in Q3.

Is it 20% annual gross margin at some point possible for this business and what would it take.

I'm sorry, Chris were you asking about DNI, the benefits and insurance, Yeah, I'm sorry, the gross margin there was it.

Ware Grove: Now, before I turn it back to Jerry, I want to provide you with our thoughts on full-year guidance. As we look ahead, several factors come to mind as we look at the balance of the year compared with last year. The interest expense and higher tax rate headwinds that impact at nine months results by 21 cents per share will persist into the fourth quarter. Despite these headwinds with 15.6 percent growth in adjusted earnings per share for the nine months, the business is performing very well.

Very solid 26% Q3 and I'm just.

Lower than Q4, but from a from an annual perspective trying to figure out if that 20% threshold on gross margin there is possible and kind of what it would take to get there.

Yes.

That kind of identify any particular ceiling or a threshold and we're going to continue to strive to get more scale and leverage in each and every business. We do that through a variety of ways. So in both P&I and in financial services. We should see a continued just like I commented on G&A.

Ware Grove: Fourth quarter results, however, are typically more dependent upon project work that is more difficult to project. Also, with the addition of both Somerset and Mark's Paneth within our core tax and accounting financial services group, the seasonal nature of these businesses may amplify the volatility between stronger first half and seasonally weaker second half The business is performing in line with expectations and we are very pleased with the results for the nine months.

We should see a continued leverage maybe not a steady leverage each and every year because of periodic investments, but will just recap that by saying in total.

Should expect and we expect 20 to 50 basis points a year.

And it comes from multiple sources.

Ware Grove: So to recap, full year guidance, we will say the following. We expect total revenue to increase within a range of 10 to 12% for the year. On an adjusted basis, we expect 20, 23 adjusted earnings per share to increase within a range of 11 to 13% over the adjusted earnings per share of $2.13 that was reported in 2022. Gap reported earnings per share is expected to increase within a range of 15 to 17% over the $2.1 reported in 2022.

Got it I will leave it there I appreciate it guys.

If you have a question you May press Star then one to join the queue.

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

Hi, good morning, Thanks for taking my questions.

First one I wanted to ask was just around the project based services.

In advisory services in particular I appreciate the color in.

In the prepared remarks around on some of the things that youre seeing there, but if you could just speak a bit more to the pipeline for.

Ware Grove: The effective tax rate for the full year of 2023 is expected at approximately 28%. This rate 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 15 and a half to 51 million shares for the full year of 2023.

For fourth quarter, and maybe more more broadly on the health of your clients in that industry. As we look ahead to <unk>.

Potentially more macroeconomic uncertainty in 'twenty four.

Yes, Andrew this is Jerry.

Ware Grove: So with these comments, I'll conclude and I'll turn it back over to Jerry.

As you know Theres, a number of different businesses.

Jerome Grisko: Thank you where, before we move to Q&A, I'd like to provide a brief update on our M&A results for the year. So far in 2023, we've completed three acquisitions and two smaller token acquisitions. I'm pleased to report that we're making steady progress with the integration of these acquisitions and remain encouraged by the performance and contributions to date. On our more recent earnings call, we talked about the impact of private equity on M&A within the traditional accounting and tax industry.

Comprise our advisory services and.

They serve different clients oftentimes, we talk about our advisory services a lot of our of our discussion is around our private equity group. So let me let me start there as we mentioned in our remarks, what we're seeing this year compared to last year by the way. We're very pleased with the results that we're seeing albeit it's coming in.

Jerome Grisko: We're actually seeing activity from private equity in the space appear to win in recent weeks as some potential deals have fallen through or been put on hold. We continue to monitor this trend and the opportunities that it may provide in our own M&A efforts. In the meantime, our M&A pipeline remains healthy and active and we have the capacity to pursue other opportunities.

And a little bit of a different form last year and the year before with the very hot.

M&A market frothy M&A market, we've tended to see fewer but much larger transactions and we are working on those on those platform type transactions. This year, we're pleased to see.

Again strong demand, albeit smaller projects for a much larger number of engagements. So it just coming in in a different form when you look forward you asked about Q4 and into 24, it's very hard for us to.

Operator: With that, we'll turn it over to Q&A. We will now begin the question and answer session. To ask a question, you may press star, then one on your touch tone phone. If you're using a speaker phone, please pick up your handset before pressing the keys. And to withdraw a question, please press star, then two. At this time, we'll pause momentarily to assemble our roster.

To really predict as you know that work is project based it tends to be more or less predictable I'm sorry less predictable.

So far this year, we're really pleased with what we're seeing.

The pipeline remains encouraging encouraging for as far out as we can see it but we really don't go into we don't have much visibility into inventory I don't think we have any visibility candidly into 2024.

Across the rest of the other service lines are our risk and advisory services. As you know we made a really nice acquisition there last year that.

Christopher Moore: And our first question here will come from Chris Moore or CJS Securities. Please go ahead. Hey, good morning, guys. Thanks for taking a couple questions. So pricing, obviously I've been more dynamic in 2022. Maybe just talk a little bit more about pricing through the first nine or ten months of 23. Is that looking more normal and kind of what that suggests for 24? Yeah, Chris, I think it's too early to really think about or talk about or predict 24.

Action has gone very well the combination of those businesses with our legacy business has gone very well we continue to see strong demand. There. We also see strong demand in our valuation work. So it's a number of different services provided to somewhat different clients, but but overall quite quite pleased with what we're seeing so far this year.

Christopher Moore: But so far for 23, we've been very pleased with our ability to continue to get pricing. And as we've talked about in a number of calls, we have built processes, systems reporting, training around all around pricing, throughout our core accounting offices and business, and that we're pleased with the outcomes that we're getting, here.

Great. Thank you and then maybe just a question on leverage.

Understand the resilience of the model and the high percentage of recurring revenue.

Why you're comfortable kind of in that debt net EBIT net debt to EBITDA range that you've historically talked about but I'm just curious if in the context of higher interest rates and higher interest expense load.

Christopher Moore: Got it. Appreciate it. SNA looks much lower, year after year sequentially, even after adjusting the deferred comp. Why was that and how should we look at that moving forward? Yeah, Chris. I think it would probably see some volatility quarter to quarter, just depending on, you know, spend on legal matters and things like that that may spike from time to time. But generally speaking, if you look at the year-to-date number, we should be leveraging GNA, you know, some modest amount each year, maybe 10 basis points or better. I think over time, that's what we see.

There is any inclination towards prioritizing debt paydown in the current environment.

Interest expenses.

Dampening earnings growth to a certain extent right now just kind of broader broader thoughts on on the capital structure. Thank you.

Yes, great question.

We're not uncomfortable at one 8% and I think were a little higher at the end of the second quarter. Our cash flow comes in annually on a seasonal basis, we tend to use cash in the first and second quarters and then we generate cash in the third and even more cash in the fourth so net for the year, we should be generating.

A multiple of net income.

Christopher Moore: Got it. And maybe the last one for me is just, being a gross margin continues to be strong as 20.6% Q3 is a 20% annual gross margin at some point possible for this business and what would it take? I'm sorry, Chris, were you asking about B and I? The benefits in the insurance, yeah, I'm sorry. The gross margin there was, you know, very solid, 20.6% Q3. And I'm just, it's usually lower in Q4, but from an annual perspective, trying to figure out if a 20% threshold on gross margin there is possible and, you know, kind of what it would take to get there.

Versus free cash flow okay.

In terms of the comfort level and the prioritization of the way we're thinking about it yes the cost of.

Money has gotten a little more painful and we've kind of called out the headwind that we faced this year as a result of that but I will tell you that we still have plenty of strategic acquisition opportunities and using a fully leveraged cost of money and cost of capital in there we're still looking for IRR toric.

And the 12% to 15% range generally and we'll continue to do that and we've got plenty of capacity.

Christopher Moore: Yeah, we're not going to identify any particular ceiling or threshold. And we're going to continue to strive to get more scale and leverage in each and every business. We do that through a variety of ways. So in both B and I and in financial services, we should see a continued, just like I commented on GNA, we should see a continued leverage, maybe not a steady leverage each and every year because of periodic investments, but we'll just recap that by saying in total, we should expect and we expect 20 to 50 basis points a year. And it comes from multiple sources.

Youll probably note that we've.

Moderated our share buyback activity at a little bit last year, we bought more shares when we bought this year.

So that that's the lever we can certainly pull more actively and so we've pulled back a little bit on that not over any concern over the amount of leverage but just the economics of share buybacks become less attractive with the cost of money and you know what.

The success of our higher share price in combination with the cost of money.

Great. Thank you very much.

Okay.

And our next question will come from Marc Riddick with Sidoti. Please go ahead.

Operator: Got it. I will leave it there. I appreciate it, again, if you have a question, you may press star than one to join the queue.

Hey, good morning, everyone.

Good morning, Mark.

Are you guys really covered everything.

I was thinking about but one thing I wanted to touch on if you had a moment to maybe share some thoughts on what you're seeing with client industry verticals and maybe certain areas.

Andrew Nicholas: Our next question will come from Andrew Nicholas, who was William Blair. Please go ahead. Hi, good morning. Thanks for taking my questions. First one I wanted to ask is just around the project-based services and advisory services in particular appreciate the color and the prepared remarks around some of the things that you're seeing there. But if you could just speak a bit more to the pipeline for fourth quarter and maybe more broadly on the health of your clients in that industry as we look ahead to potentially more macroeconomic uncertainty in 24.

And client demand that you've seen and whether or not there's been much of a shift at all.

Security things like retail and auto as it relates to the strikes since I'm wondering if there was anything that.

Any call outs that you've seen in those areas or any others within the client industry verticals.

Yes, Mark. Thank you let me just remind you that we're not overly concentrated in any one industry or any one geography. So so my comments are all kind of start there, which has no material impact on our business. Our clients as you know tend to be middle market businesses, they tend to be a pretty.

Andrew Nicholas: Yeah, Andrew, this is Jerry. As you know, there's a number of different businesses that comprise our advisory services and they serve different clients. Oftentimes we talk about our advisory services a lot of our discussion around our private equity groups. So let me start there. As we mentioned in our remarks, what we're seeing this year compared to last year, by the way, we're very pleased with the results that we're seeing albeit it's coming in in a little bit of a different form last year in the year before with the very hot and M&A market, Frosty M&A market.

Optimistic and resilient group.

We go out every quarter in informally survey, our offices and ask them to to give us feedback on what they're seeing with our clients. So that's really the backdrop for the comments I'm about to make.

I would say that our clients.

Generally.

<unk> about.

Their ability to navigate in this environment, although I would say somewhat tempered from.

The prior quarters more recent quarters that we've talked about it some of the items on their on their list on their top tracker around of course as everyone else inflation and interest rates access to credit with all of that said.

Andrew Nicholas: We tended to see fewer but much larger transactions than we are working on those on those platform type transactions this year. We're pleased to see again strong demand albeit smaller projects for a much larger number of engagement. So it's just coming in in a different form. When you look forward, you asked about Q4 and M24. It's very hard for us to really predict. As you know, that work is project based. It tends to be more or less predictable.

Demand for our services continues to be strong our core services and as I commented earlier.

We're also pleased with the demand for the more project oriented services, which which can be more discretionary time, so across the board very pleased with what we're seeing as far as the demand as far as industries are concerned again not overly concentrated in any one industry. If I had to say as you would expect.

Andrew Nicholas: I'm sorry, less predictable. So far this year, we're really pleased with what we're seeing. The pipeline remains encouraged encouraging for as far out as we can see it, but we really don't go into it. We don't have much visibility into 2020. I don't think we have any visibility. It can't only end in 2024. Across the rest of the other service lines are risk and advisory services. As you know, we made a really nice acquisition there last year. That transaction has gone very well. The combination of those businesses with our legacy business has gone very well. We continue to see strong demand there. We also see strong demand in our valuation work.

One industry that we're we're kind of hearing some notes of caution.

Related to construction and real estate and Thats really just the cost of capital and access to capital again.

Again, not an overly concentrated industry for us, but if I had one area, where we're getting some some cautionary notes it would be there.

Yes, the only thing I'll add on real estate and yes, we've got our eyes on that and.

Most of our exposure if we talk about serving real estate clients. Most of the exposure. There is on residential multifamily real estate as opposed to commercial so I wouldn't consider our commercial real estate exposure to be extremely high although as Gerry mentioned, we've got our eyes on it.

Andrew Nicholas: So it's a number of different services provided to somewhat different clients, but overall quite pleased is what we're seeing so far, here. Great. Thank you. And then maybe just a question on leverage. Understand the resilience of the model and in the high percentage of recurring revenue, why you're comfortable kind of in that debt to EBITDA range that you historically talked about. I'm just curious if in the context of higher interest rates in the higher interest expense load, if there's any inclination towards prioritizing debt paid down in the current environment since interest expenses is dampening earnings growth to a certain extent right now.

Great and then actually the M&A commentary and we really really appreciate you spending time in giving color on that the M&A commentary I was actually somewhat encouraging.

Even though they are smaller deals, but there seems to be activity out. There I was wondering if there are any particular industries that are kind of leading the way on that or is that generally across the board.

Yes, Mark I didn't ask that specific question I think we tend to just like the rest of our business within that that segment of our business our advisory business tends to be pretty broad based geographically and industry base. So I don't.

Andrew Nicholas: Just kind of broader thoughts on the capital structure. Thank you. Yeah. Great question. We're not uncomfortable at 1.8 and I think we're a little higher at the end of the second quarter. Our cash flow comes in annually on a seasonal basis. We tend to use cash in the first and second quarters and then we generate cash in the third and even more cash in the fourth. So net for the year, we should be generating a multiple of net income versus free cash flow.

There is no concentration that I've heard of that that's driving those comments.

Okay, great. Thank you very much.

Youre welcome.

This concludes our question and answer session I would like to turn the conference back over to Jerry <unk> for any closing remarks.

Thank you as we always do I want to start by thanking our shareholders and our analysts for your continued support and confidence in the company I also want to take an opportunity to thank our team members who may be listening in today when I reflect on our very strong performance. So far this year. It always comes back to the unwavering commitment.

Andrew Nicholas: Okay. In terms of the comfort level and the prioritization in the way we're thinking about it, yeah, the cost of money has gotten a little more painful and we've kind of called out the headwind that we've faced this year as a result of that. But I will tell you that we still have plenty of strategic acquisition opportunities and using a fully leveraged cost of money and cost of capital in there. We're still looking for IRR targets in the 12 to 15 percent range generally and we'll continue to do that.

Among our team members to provide exceptional client service and to support each other.

All that we do the commitments obviously evident in the results that we posted in those wouldn't be possible without without your dedication and support so I just wanted to close by saying thanks.

Thanks to each of you.

The broader audience. Thank you for listening in on today's call and enjoy the rest of your day.

Andrew Nicholas: We've got plenty of capacity. You'll probably know that we've moderated our share of buyback activity a little bit. Last year we bought more shares when we bought this year so that that's the lever we can certainly pull more actively. And so we pulled back a little bit on that, not over any concern over the amount of leverage. But just, you know, the economics of share of buybacks become less attractive with the cost of money and, you know, with the success of our higher share price in combination with the cost of money. Great. Thank you very much.

The conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect your lines.

Marc Riddick: In our next question, we'll come from Mark Ridic with Fedote. Please go ahead.

Marc Riddick: Good morning, everyone. Morning, Mark. So I, you guys really covered everything out that I was thinking about.

Jerome Grisko: But one thing I wanted to touch on if you had a moment to maybe share some thoughts on what you're seeing with client industry verticals and maybe certain areas that I'm in and client demand that you've seen and whether or not there's been much of a shift at all, particularly things like retail and auto as it relates to the strike since wondering if there's anything that any call else that you've seen in those areas or any others within the client industry of verticals. Yeah, Mark, thank you.

Jerome Grisko: Let me just remind you that we're not overly concentrated in any one industry or any one geography. So the little buy comments are all kind of stark there, which is, you know, no material impact on our business. Our clients, as you know, tend to be middle market businesses. They tend to be a pretty optimistic and resilient group. We go out every quarter and informally survey our offices and ask them to give us feedback on what they're seeing with their clients.

Jerome Grisko: So that's really the backdrop for the comments I'm about to make. I would say that our clients remains generally optimistic about their ability to navigate in this environment although I would say somewhat tempered from the prior quarters, the more recent quarters that we've talked about. Some of the items on their talk tracker around, of course, is everyone else inflation and interest rates access to credit. With all of that said, the man for our services continues to be strong, our core services, and as I commented earlier, we're also pleased with the demand for the more project that oriented services which can be more discretionary at times.

Jerome Grisko: So across the board, very pleased of what we're seeing as far as the demand. As far as industries are concerned, again, not overly concentrated in any one industry. If I had to say, as you would expect, the one industry that we're kind of hearing some notes of caution relates to construction and real estate, and that's really just the cost of capital and access to capital. Again, not an overly concentrated industry for us, but if I had one area where we're getting some cautionary notes, it would be there.

Jerome Grisko: Yeah, the only thing I'll add on real estate, and yeah, we've got our eyes on that. And most of our exposure, if we talk about serving real estate clients, most of the exposure there is on residential, multi-family real estate as opposed to commercial. So I wouldn't consider our commercial real estate exposure to be extremely high, although as Jerry mentioned, we've got our eyes on it.

[music].

Good morning, and welcome to the <unk> third quarter 2023 conference call.

All participants will be in a listen only mode and should you need any assistance during the call. Please signal a conference specialist by pressing the star key followed by zero.

After todays presentation, there will be an opportunity to ask questions.

Please note that this event is being recorded today.

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

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

Before we begin we would like to remind you that during the call management may discuss certain non-GAAP financial measures reckon.

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 further 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 Chriscoe, President and Chief Executive Officer, and Ware Grove, Chief Financial Officer Gerry.

Good morning, and thank you for joining us for today's call.

We're pleased to share our third quarter performance and discuss our outlook for the remainder of the year.

For the third quarter, our business has performed as expected and we experienced strong organic growth over the same period last year.

The same goes for our year to date results as we successfully built on the positive momentum demonstrated earlier in the year.

Encouragingly, we continue to see nice growth across all major service lines and demand for those services remains strong.

I do want to take this opportunity to follow up on two items that we mentioned during our earnings call for the second quarter.

The first was unanticipated contract delays and our government healthcare consulting business.

And the second being the extension of tax filing deadlines in California, which is a major market procedures.

For the California market as expected much of the work that was delayed in the second quarter was completed in the third quarter.

California also ended up extending the tax filing deadline again, and we expect to see some of this work shift into the fourth quarter as well.

Where it will go into more detail during his remarks in a few minutes.

Now turning to the performance of our two primary practice groups.

Our financial services Division continued to experience strong demand for our core accounting and tax services.

And are more project based advisory services we.

We've also been able to maintain our pricing initiatives and are seeing the impact of those efforts in our results.

Within our advisory business, we experienced growth across nearly all of our major service lines due to the healthy demand for many of our services.

Including transaction services risk advisory services and valuations.

The growth in our retirement and investment services business is coming largely from a continued uptick in project work for our actuarial team.

With this I will turn it over to Ware Grove, our Chief Financial Officer to provide additional information on our financial performance for the third quarter and year to date.

Sure.

Thank you Jerry and good morning, everyone. Let me take a few minutes to talk about the key highlights of the third quarter and the year to date numbers. We released this morning.

Let me get started by saying that in our second quarter conference call earlier. This year as Jerry commented, we outlined two areas that disproportionately impacted results in the second quarter.

First the IRS extensions for tax filing deadlines is here in California impacted first half and second quarter results.

The six months tax filing extensions granted by the IRS early this year for the state of California has shifted some of the normal first half work into the third and fourth quarters. This year.

And then secondly, the delays we encountered several engagements during the first half this year within our government health care consulting business impacted first half and second quarter results.

Jerome Grisko: Great.

The delays in engagement start dates that were encountered in the first half of this year have largely resolved a number of significant new projects are now onstream and are requiring active work.

As a result, we recorded stronger revenue growth within this business.

And this contributed to stronger third quarter results.

Aside from the occasional delay that we encounter work within this business is characteristically very steady and we expect this will continue into the fourth quarter and then the 'twenty 'twenty four.

Both of these issues caused when it was a temporary impact results in the second quarter looking.

Looking at nine months results with total revenue growth of 13, 1% and adjusted earnings per share up 15, 6% over last year, we are performing in line with our expectations.

Both financial services and benefits and insurance are performing well.

Total revenue in the third quarter increased by $47 $3 million up 13% over third quarter a year ago.

The unit revenue was up by eight 3% with acquisitions contributing four 7% growth compared with last year.

For the nine months. This year total revenue grew by $146 7 million up 13, 1% compared with last year.

Same unit revenue growth for the nine months was up.

Seven 5% with acquisitions contributing five 6% to revenue growth for the nine months this year compared with last year.

Within financial services for the third quarter total revenue grew by $38 $4 million are up by 14, 8% with same unit revenue for the third quarter up eight 4% with strong revenue growth recorded in all lines of service, including core tax and accounting Advisory services.

And the government health care consulting services.

For the nine months total revenue within financial services grew by $124 3 million up 15, 4% and same unit revenue for the nine months was up seven 7%.

Within benefits and insurance for the third quarter same unit revenue grew by $7 5 million up eight 2% and for the nine months same unit revenue grew by seven 1%.

On February one this year, we acquired Indianapolis based Somerset, Cpas and advisors with estimated annual revenue of approximately $55 million.

Marc Riddick: And then actually the M&A commentary, and we really appreciate you spending time and giving color on that. The M&A commentary was actually somewhat encouraging, even smaller deals, but there seems to be activity out there. I was wondering if there were any particular industries that are kind of leading the way on that, or is that generally across the board? Yeah, Mark, I didn't ask that specific question. I think we tend to dislike the rest of our business within that segment of our business. Our PE advisory business tends to be pretty broad-based, so geographically and industry-based. Okay, so I don't, there's no concentration that I've heard of that's driving those comments. Okay, great.

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

Operator: Thank you very much. You're welcome.

Operator: This concludes our question and answer session.

We are extremely pleased to have the Somerset team on board this year.

Both Somerset and Mark Spanish are performing in line with our expectations.

In addition to these acquisition related expenses, we recorded a gain of $1 $5 million related to the sale of the technology assets and our financial services practice group this year.

Last year, we recorded a gain of $2 $4 million related to the sale of our book of business within our property and casualty insurance line of service.

Jerome Grisko: I'd like to turn the conference back over to Jerry Grisco for any closing remarks. Thank you. As we always do, I want to start by thanking our shareholders and our analysts for your continued support and confidence in the company. I also want to take an opportunity to thank our team members who may be listening in today. When I reflect on our very strong performance so far this year, it always comes back to the unwavering commitment among our team members to provide exceptional client service and to support each other in all that we do.

Operator: The commitment's obviously evident in the results that we've posted in those wouldn't be possible without your dedication and support, so I just want to close by saying thanks to each of you and the broader audience, thank you for listening in on today's call and enjoy the rest of your day. The conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect your line. Andrew Nicholas, Lori Novickis, CBIZ Inc Andrew Nicholas, Lori Novickis, CBIZ Inc Andrew Nicholas, Lori Novickis, CBIZ Inc . .

For the nine months adjusted earnings per share is $2 67.

Lori Novickis: Before we begin, we would like to remind you that during the call, management may discuss certain non-gap financial measures. Reconciliation of these measures can be found in the financial tables of today's press release and investor presentations. 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 further assurance of future results.

Up 15, 6% this year compared with $2 31 last year.

Adjusted EBITDA considering these same adjustments was $229 2 million for the nine months. This year up 17, 9% over $194 $5 million last year.

Lori Novickis: 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 table reconciling reported GAAP numbers to these adjusted earnings per share and adjusted EBITDA numbers is included in the earnings release issued this morning.

We have previously talked about the level of health care and benefits travel and entertainment expenses and marketing expenses that are normalizing the higher levels.

May have seen our TV spots positioned on CNBC, PGA golf events and in other spots.

For the first nine months. This year collectively these expenses represented a 40 basis point headwind to margin on pre tax income compared with last year.

Jerome Grisko: A more detailed description of such factors can be found in the filings with the Securities and Exchange Commission. Joining us for today's call are Jerry Grisco, President and Chief Executive Officer and Ware Grove, Chief Financial Officer. Jerry? Good morning and thank you for joining us for today's call. We're pleased to share our third quarter performance and to discuss our outlook for the remainder of the year. For the third quarter, our businesses performed as expected and we experienced strong organic growth over the same period last year.

You can also see that interest expense creates a headwind this year for the nine months ended September 30th.

Jerome Grisko: The same goes for our year-to-date results as we successfully built on the positive momentum demonstrated earlier in the year. Encouragingly, we continue to see nice growth across all major service lines and demand for those services remain strong.

Increased interest expense increased as a percent of revenue by approximately 70 basis points.

Jerome Grisko: I do want to take this opportunity to follow up on two items that we mentioned during our earnings call for the second quarter. The first was unanticipated contract delays in our government health care consulting business and the second being the extension of tax filing deadlines in California, which is a major market for seeders. For the third quarter, our government health care consulting business rebounded and we benefited from the launch of a number of new projects and the addition of new business that enabled us to achieve our expected growth targets.

Jerome Grisko: For the California market, as expected, much of the work that was delayed in the second quarter was completed in the third quarter. California also ended up extending the tax filing deadline again and we expect to see some of this work shift into the fourth quarter as well. Where will go into more detail during these remarks in a few minutes?

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

Jerome Grisko: Now, turning the performance of our two primary practice groups. Our financial services division continue to experience strong demand for our core counting and tax services and our more project-based advisory services. We have also been able to maintain our pricing initiatives and are seeing the impact of those efforts in our results. Within our advisory business, we experience growth across nearly all of our major service lines due to the healthy demand for many of our services, including transaction services, risk advisory services and valuations.

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

We will continue to say that it is our long term goal to achieve pre tax margin improvement of 20 to 50 basis points per year and.

In any given year margin improvement may be either higher or lower for a number of reasons, but over time our results have been at the higher end of this range.

Jerome Grisko: In the transaction advisory space, a good portion of this demand is being fueled by an increase in the volume of transactions that we're seeing albeit smaller deals. We're also pleased to see some signs that the IPO market is returning, which benefits the services we provide to help businesses prepare to go public, with our benefits and insurance business we continue to achieve growth across all major service lines in Q3. For our employee benefits and our property and casualty businesses, increased service revenue from new production and strong client retention are among the factors contributing to our growth.

Considering the significant margin headwinds that we are encountering this year, however, pretax margin may be relatively flat compared with the prior year.

Jerome Grisko: Our producer count is also up for both of these service lines compared to last year as we see traction from investments that we made in our internal recruiting theme and external agencies to grow our pipeline of new producers. For our payroll business, higher interest rates on client deposits, continued strong demand for our upmarket payroll platform and continued success with our pricing initiatives have all contributed to our growth. The growth in our retirement and investment services business has coming largely from a continued uptick in project work for our actual wearability.

Ware Grove: Based on the performance throughout the third quarter, I'm pleased to reaffirm our revenue and adjusted fully deluded earnings per share guidance for the full year that we had now sent our investor call for the second quarter. With this, I will turn over to Wear Grove, our Chief Financial Officer, to provide additional information on our financial performance for the third quarter and year to date. Where? Thank you, Jerry, and good morning, everyone.

For earn out payments, we expect to use approximately $7 $3 million over the remainder of this year and approximately $58 million in 2024 $36 million in 2025 and $10 $6 million in 2026 for these estimated earn out payments deploy.

Through October 25, we have repurchased approximately 124 million shares at a cost of approximately $62 $5 million.

Ware Grove: Let me take a few minutes to talk about the key highlights of the third quarter and the year-to-date numbers we released this morning. Let me get started by saying that in our second quarter conference call earlier this year, as Jerry commented, we outlined two areas that disproportionately impacted results in the second quarter. First, the IRS extensions for tax filing deadlines this year in California impacted first half and second quarter results. The six month tax filing extensions granted by the IRS, early this year for the state of California, has shifted some of the normal first half work into the third and fourth quarters this year.

Approximately $335 million of capital has been used towards this open market repurchase activity over that period of time.

Days sales outstanding on September 30 of this year was 96 days compared with 93 days a year ago.

Bad debt expense for the first nine months was eight basis points of revenue compared to 12 basis points a year ago.

Depreciation and amortization expense for the third quarter was $9 1 million <unk>.

Compared with $8 $2 million last year year.

Year to date, depreciation and amortization was $27 million.

Compared with $24 $7 million last year for.

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

Ware Grove: And then secondly, the delays we encountered in several engagements during the first half this year within our government healthcare consulting business impacted first half and second quarter results. The delays in engagement start dates that were encountered in the first half this year have largely resolved. A number of significant new projects are now on stream and are requiring active work. As a result, we recorded strong revenue growth within this business and this contributed to stronger third quarter results.

Ware Grove: Aside from the occasional delay that we encountered, work within this business is characteristically very steady and we expect this will continue into the fourth quarter and end of 2024. Both these issues caused what was a temporary impact results in second quarter.

Capital spending for the third quarter was $7 3 million and was $19 million for the nine months.

Ware Grove: Looking at nine months results with total revenue growth at 13.1% and adjusted earnings per share up 15.6% over last year, we are performing in line with our expectations. Both financial services and benefits and insurance are performing well. Total revenue in the third quarter increased by $47.3 million up 13% over third quarter a year ago. Same unit revenue was up by 8.3% with acquisitions contributing 4.7% to growth compared with last year. For the nine months this year, total revenue grew by $146.7 million up 13.1% compared with last year, last year.

Greater spending is occurring this year for tenant improvements on furniture related to several significant office moves, including the upcoming November 1st move to our new headquarters facilities.

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

Capital spending normally runs within a $10 million to $12 million annual range, and we expect spending closer to that lower level in the years ahead.

The effective tax rate for the nine months. This year was 27, 9% up from 26% a year ago the.

It is important to understand the increased effective tax rate in 2023 is a headwind that is unique to this year compared with 2022.

In future years, we expect the effective tax rate to be relatively level at approximately 28% and we project no further year over year tax related headwinds beyond this year.

The recurring and essential nature of many of our services provide stability through economic cycles. At this point as we look at employment driving metrics within our benefits and in our payroll businesses.

We're seeing continued signs of steady employment within our clients.

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

The investments in adding new business producers focused within our benefits and insurance group gained traction couple.

Coupled with solid client retention this is driving strong revenue growth.

Now before I turn it back to Jerry I want to provide you with our thoughts on full year guidance. As we look ahead several factors come to mind as we look at the balance of the year compared with last year.

Interest expense and higher tax rate headwinds that impacted nine months results by 21 per share will persist into the fourth quarter. Despite these headwinds with 15.

Ware Grove: Same unit revenue growth for the nine months was up 7.5% with acquisitions contributing 5.6% to revenue growth for the nine months this year compared with last year. Within financial services for the third quarter total revenue grew by $38.4 million or up by 14.8% with same unit revenue for the third quarter up 8.4% with strong revenue growth recorded in all lines of service including core tax and accounting advisory services and the government health care consulting services.

6% growth in adjusted earnings per share for the nine months the business is performing very well.

Fourth quarter results. However are typically more dependent upon project work that is more difficult to protect.

Also with the addition of both Somerset and Mark's Panna within our core tax and accounting financial services group. The seasonal nature of these businesses may amplify the volatility between stronger first half and seasonally weaker second half results.

The business is performing in line with expectations and we are very pleased with the results for the nine months.

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

We expect total revenue to increase within a range of 10% to 12% for the year.

On an adjusted basis, we expect 2023 adjusted earnings per share to increase within a range of 11% to 13% over the adjusted earnings per share of $2 13.

That was reported in 'twenty 'twenty to <unk>.

GAAP reported earnings per share is expected to increase within a range of 15% to 17% over the $2 <unk> reported in 2022.

The effective tax rate for the full year of 2023 is expected at approximately 28%.

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

Thank you Ware.

Before we move to Q&A I'd like to provide a brief update on our M&A results for the year.

So far in 2023, we've completed three acquisitions and two smaller tuck in acquisitions.

I am pleased to report that we're making steady progress with the integration of these acquisitions and remain encouraged by the performance and contributions to date.

And our more recent earnings call.

We talked about the impact of private equity on M&A within the traditional accounting and tax industry.

In the meantime, our M&A pipeline remains healthy enacted and we have the capacity to pursue other opportunities with that we'll turn it over to Q&A.

We will now begin the question and answer session.

Ask any question you May Press Star then one on your Touchtone phone.

If youre using a speakerphone please pick up your handset before pressing the keys and to withdraw your question. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

And our first question here will come from Chris Moore with CJS Securities. Please go ahead.

Hey, good morning, guys. Thanks for taking a couple of questions.

So pricing obviously you have been more dynamic in 2022 can you maybe just talk a little bit more about pricing through the first nine or 10 months of 'twenty three is that looking more normal and kind of what that suggests for for 'twenty four.

Yes, Chris I think it's too early to really think about or talk about our predict 'twenty four but so far for 23, we've been very pleased with our ability to continue to get pricing and.

As we've talked about it in a number of calls we have we have built processes systems reporting training around all around pricing throughout our core accounting.

Offices in business and we're pleased with the outcomes that we're getting there.

Got it I appreciate it.

SG&A looks.

Much lower year over year sequentially, even after adjusting for deferred comp.

Why was that and how should we look at that moving forward.

Yes, Chris I think it.

We'd probably see some volatility quarter to quarter, just depending on spend on legal matters and things like that that may spike from time to time, but generally speaking if you look at the year to date number.

We should be leveraging G&A, some some modest amount each year, maybe 10 basis points or better and I think over time, that's what we see.

Got it.

And maybe the last one for me is just being a gross margin continues to be strong at 26% in Q3.

Ware Grove: For the nine months total revenue within financial services grew by $124.3 million of 15.4% and same unit revenue for the nine months was up 7.7%. Within benefits and insurance for the third quarter same unit revenue grew by $7.5 million up 8.2% and for the nine months same unit revenue grew by 7.1%. Every major line of service within our benefits and insurance group recorded revenue growth for both third quarter and for the nine months.

Is it 20% annual gross margin at some point possible for this business and what would it take.

I'm sorry, Chris were you asking about DNI, the bat, yeah benefits and insurance, yes, I'm sorry, the gross margin there was it.

Very solid 26% Q3 and I'm just.

Usually lower in Q4, but from a from an annual perspective trying to figure out if that 20% threshold on gross margin there is possible and kind of what it would take to get there.

Yes.

Kind of identify any particular ceiling or a threshold and we're going to continue to strive to get more scale and leverage in each and every business. We do that through a variety of ways. So in both P&I and in financial services. We should see a continued just like I commented on G&A.

We should see a continued leverage maybe not a steady leverage each and every year because of periodic investments, but will just recap that by saying in.

Total, we should expect and we expect 20 to 50 basis points a year.

And it comes from multiple sources.

Got it I will leave it there I appreciate it guys.

If you have a question you May press Star then one to join the queue.

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

Hi, good morning, Thanks for taking my questions.

First one I wanted to ask is just around the project based services.

In advisory services in particular I appreciate the color in.

In the prepared remarks around on some of the things that youre seeing there, but if you could just speak a bit more to the pipeline for.

For fourth quarter, and maybe more more broadly on the health of your clients in that industry. As we look ahead to <unk>.

Potentially more macroeconomic uncertainty in 'twenty four.

Yes, Andrew this is Jerry.

As you know Theres, a number of different businesses.

Ware Grove: We continue to see strong client retention and strong new client production. The investments we have made to hire new business producers in recent years has gained traction and we are continuing to make investments in hiring additional producers to further enhance growth potential. On February 1st this year we acquired Indianapolis-based Somerset CPAs and advisors with estimated annual revenue of approximately $55 million. There are transaction closing costs plus one time integration related expenses associated with this transaction.

Comprise our advisory services and.

Ware Grove: In a similar matter to reporting New York-based Marx-Panif acquisition related costs last year, we are reporting an adjustment to eliminate Somerset acquisition related costs from GAAP reported results this year to report adjusted results. We are extremely pleased to have the Somerset team on board this year. Both Somerset and Marx-Panif are performing in line with our expectations. In addition to these acquisition related expenses we recorded a gain of $1.5 million related to the sale of the technology asset in our financial services practice group this year.

Ware Grove: Last year we recorded a gain of $2.4 million related to the sale of a book of business within our property and casually insurance line of service. These gains were reported as other income and they represented approximately two cents per share for 2023 and approximately three cents per share for 2022 for both the third quarter and the nine months.

Ware Grove: With a view towards presenting meaningful comparable information eliminating the impact of these gains and eliminating the acquisition related expenses adjusted earnings per share for the third quarter this year with 66 cents up 29.4% compared with 51 cents a year ago. For the nine months adjusted earnings per share is $2.67 of 15.6% this year compared with $2.31 last year, here. Adjusted EBITDA, considering these same adjustments, with $229.2 million for the nine months this year, up 17.9% over $194.5 million last year.

And a little bit of a different form last year and the year before with the very hot.

Ware Grove: A table reconciling reported gap numbers to these adjusted earnings per share and adjusted EBITDA numbers is included in the earnings release issue this morning. 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. As we continue to restore and expand outreach to clients and prospects, by design these expenses are trending higher than last year, and we have also restarted several media campaigns in our marketing programs this year.

M&A market frothy M&A market, we've tended to see.

But much larger transactions and we are working on those on those platform type transactions. This year, we're pleased to see.

Ware Grove: You may have seen our TV spots positioned on CNBC, PGA golf events, and in other spots. For the first nine months this year, collectively, these expenses represented a 40 basis point headwind to margin on pre-taxing income compared with last year. An important takeaway here is that we project that these expenses will settle in approximately 100 basis points lower than pre-pendemic levels, but this year, the year-over-year comparisons present a headwind. You can also see that interest expense creates a headwind this year.

Ware Grove: For the nine months ended September 30th, increased interest expense increased as a percent of revenue by approximately 70 basis points. For the quarter, we reported an increase in interest expense of $3.5 million with an earnings per share impact of approximately $0.5 per share. For the nine months, we reported an increase in interest expense of $9.8 million dollars with an earnings per share impact of approximately $0.14 per share. As always, details of the gap accounting for gains and losses in our non-qualified deferred compensation plan are outlined in the release.

Ware Grove: As you look at both gross margin and operating income comparisons, because we are comparing a period in 2022 with capital market losses compared with capital markets gains this year, there is a significant impact to the gap reported numbers. As a reminder, pre-tax income margin is not impacted by this accounting. We will continue to say that it is our long-term goal to achieve pre-tax margin improvement of 20 to 50 basis points per year. In any given year, margin improvement may be either higher or lower for a number of reasons, but over time, our results have been at the higher end of this range.

<unk> Im sorry, less predictable so.

So far this year, we're really pleased with what we're seeing.

The pipeline remains encouraged encouraging for as far out as we can see it but we really don't go into we don't have much visibility into inventory I don't think we have any visibility candidly into 2024.

Across the rest of the other service lines are our risk and advisory services. As you know we made a really nice acquisition. There last year that transaction has gone very well the combination of those businesses with our legacy business has gone very well we continue to see strong demand. There. We also see strong demand in our valuation work.

Ware Grove: Considering the significant margin headwinds that we are encountering this year, however, pre-tax margin may be relatively flat compared with the prior year. Turning to cash flow and the balance sheet on September 30th this year, the balance outstanding on the $600 million unsecured facility was approximately $395 million, with about $195 million of unused capacity. With leverage of approximately 1.8 times adjusted EBITDA, this provides plenty of capacity to continue strategic acquisitions, and it provides the flexibility to continue the share report.

Ware Grove: In the first nine months of this year, including the Somerset acquisition, we completed a total of five acquisitions. We used approximately $102 million for those acquisitions, including earn out payments on previously closed transactions. For earn out payments, we expect to use approximately $7.3 million over the remainder of this year and approximately $58 million in 2024, $36 million in 2025, and $10.6 million in 2026 for these estimated earn out payments. Deploying capital for strategic acquisition purposes continues to be our highest priority. Since the end of 2019, we have closed 20 transactions and we have deployed approximately $383 million of capital for acquisition purposes, including near and out payments over that period of time.

It's a number of different services provided to somewhat different clients, but but overall quite quite pleased with what we're seeing so far this year.

Ware Grove: Beyond using capital for acquisitions, we have the flexibility to use capital for share repurchases. Through September 30th this year, we have repurchased approximately $1.15 million shares of our common stock in the open market at a cost of approximately $58 million. Through October 25th, we have repurchased approximately $1.24 million shares at a cost of approximately $62.5 million. To recap, repurchase activity in recent years, since the end of 2019, we have repurchased approximately $9.3 million shares, and that represents slightly more than 16% of the shares outstanding compared to the end of 2019.

Ware Grove: Approxway $335 million of capital has been used towards this open market repurchase activity over that period of time. Day sales outstanding on September 30th this year was 96 days compared with 93 days a year ago. Bad debt expense for the first nine months was 8 basis points of revenue compared to 12 basis points a year ago. Depreciation and amortization expense for the third quarter was $9.1 million, compared with $8.2 million last year.

Great. Thank you and then maybe just a question on leverage.

Ware Grove: Year-to-date depreciation and amortization is $27 million, compared with $24.7 million last year. For the full year, we expect depreciation and amortization of an approximately $36 million this year, compared with approximately $33 million last year. Now for those of you who want to highlight the amortization expense, which is primarily driven by acquisition activity, for the nine months amortization expense was $17.8 million, and for the full year, we project it may be approximately $24 million.

I understand the resilience of the model and the high percentage of recurring revenue.

Ware Grove: Capital spending for the third quarter was $7.3 million, and was $19 million for the nine months. Greater spending has occurred this year for tenant improvements and furniture related to several significant office moves, including the upcoming November 1st move to our new headquarters facilities. As a reminder, we are a major tenant with a long-term lease in our new headquarters building. We are not an owner of the building. For the full year this year, we are expecting capital spending in a range of $20 to $25 million, that is driven by a number of facilities moves this year within our network of 127 office locations.

Ware Grove: Capital spending normally runs within a $10 to $12 million annual range, and we expect spending closer to that lower level in the years ahead. The effective tax rate for the nine months this year was 27.9 percent, up from 26 percent a year ago. The impact of the increased tax rate for the nine months was approximately seven cents per share. With a forecasted full-year effective rate at 28 percent, we expect the full-year impact at approximately eight cents per share this year. It is important to understand the increased effective tax rate in 2023 is a headwind that is unique to this year compared to 2022.

There is any inclination towards prioritizing debt paydown in the current environment.

Since interest expenses.

Damn thing earnings grow to a certain extent right now just kind of broader broader thoughts on on the capital structure. Thank you.

Yes, great question.

Multiple of net income.

Versus free cash flow okay.

In terms of the comfort level and the prioritization of the way we're thinking about it yes the cost of.

Money has got a little more painful and we've kind of called out the headwind that we faced this year as a result of that but I will tell you that we still have plenty of strategic acquisition opportunities and using a fully leveraged cost of money and cost of capital in there we're still looking for IRR target.

And the 12% to 15% range generally and we'll continue to do that and we've got plenty of capacity.

Youll probably note that we've.

Moderated our share buyback activity a little bit last year, we bought more shares when we bought this year.

With the success of our higher share price in combination with the cost of money.

Great. Thank you very much.

And our next question will come from Marc Riddick with Sidoti. Please go ahead.

Hey, good morning, everyone.

Good morning, Mark.

So you guys really covered everything I was thinking about but one thing I wanted to touch on if you had a moment to maybe share some thoughts on what youre seeing with client industry verticals and maybe certain areas that.

And client demand that you've seen and whether or not there's been much of a shift at all.

Ware Grove: In future years, we expect the effective tax rate to be relatively level at approximately 28 percent and we project no further year-over-year tax related headwinds beyond this year. Recurring an essential nature of many of our services provides stability through economic cycles. At this point, as we look at employment driving metrics within our benefits and in our payroll businesses, we are seeing continued signs of steady employment within our clients. Economic uncertainty continues, however, and if we experience pressure on revenue growth, there are a number of variable items in our cost structure where we can take measures to mitigate the impact.

Particularly things like retail and auto as it relates to the strikes since wondering if there was anything that.

Any call outs that you've seen in those areas or any others within the client industry verticals.

Mark. Thank you let me just remind you that we're not overly concentrated in any one industry or any one geography. So so my comments are all kind of start there, which has no material impact on our business. Our clients as you know tend to be middle market businesses, they tend to be a pretty.

Optimistic and resilient group, we go out every quarter in informally survey, our offices and ask them to to give us feedback on what they're seeing with their clients. So that's really the backdrop for the comments I'm about to make.

Ware Grove: 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 in adding new business producers focused within our benefits and insurance group that gained traction, coupled with solid client retention, this is driving strong revenue growth.

I would say that our clients.

Main.

Generally.

Optimistic about their ability to navigate in this environment, although I would say somewhat tempered from.

Demand for our services continues to be strong our core services and as I commented earlier.

Ware Grove: Now, before I turn it back to Jerry, I want to provide you with our thoughts on full-year guidance. As we look ahead, several factors come to mind as we look at the balance of the year compared with last year. The interest expands and higher tax rate headwinds that impacted nine months results by 21 cents per share will persist into the fourth quarter. Despite these headwinds, with 15.6 percent growth in adjusted earnings per share for the nine months, the business is performing very well.

Ware Grove: The business is performing in line with expectations, and we are very pleased with the results for the nine months.

One industry that we're we're kind of hearing some notes of caution.

Ware Grove: To recap full-year guidance, we will say the following. We expect total revenue to increase within a range of 10 to 12 percent for the year. On an adjusted basis, we expect 20, 23 adjusted earnings per share to increase within a range of 11 to 13 percent over the adjusted earnings per share of $2.13 cents that was reported in 2022. Gap reported earnings per share is expected to increase within a range of 15 to 17 percent over the $2.1 cent reported in 2022.

Related to construction and real estate and that's really just the cost of capital and access to capital again.

Ware Grove: The effective tax rate for the full year of 2023 is expected at approximately 28 percent. This rate could be impacted either up or down by a number of unpredictable Actors. 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 of 2023.

Again, not an overly concentrated industry for us, but if I had one area, where we're getting some some cautionary notes it would be there where yes. The only thing I'll add on real estate and yes, we've got our eyes on that and.

Ware Grove: So with these comments, I'll conclude and I'll turn it back over to Jerry.

Jerome Grisko: Thank you where before we move to Q&A, I'd like to provide a brief update on our M&A results for the year. So far in 2023, we've completed three acquisitions and two smaller token acquisitions. I'm pleased to report that we're making steady progress with the integration of these acquisitions and remain encouraged by the performance and contributions to date.

Jerome Grisko: On our more recent earnings call, we talked about the impact of private equity on M&A within the traditional accounting and tax industry. We're actually seeing activity from private equity in the space appear to win in recent weeks as some potential deals have fallen through or been put on hold. We continue to monitor this trend and the opportunities that it may provide in our own M&A efforts. In the meantime, our M&A pipeline remains healthy and active and we have the capacity to pursue other opportunities.

Operator: With that, we'll turn it over to Q&A. We will now begin with question and answer session. To ask a question, you may press star then one on your touch tone phone. If you're using a speaker phone, please pick up your handset before pressing the keys. Into a draw question, please press star then two. At this time, we'll pause momentarily to assemble our roster.

Christopher Moore: And our first question here will come from Chris Moore with CJS Securities. Please go ahead. Hey, good morning, guys. Thanks for taking a couple questions. Pricing, obviously, I've been more dynamic in 2022. Maybe just talk a little bit more about pricing through the first nine or ten months of 23. Is that looking more normal and what that suggests for 24? Yeah, Chris, I think it's too early to really think about or talk about or predict 24, but so far for 23, we've been very pleased with our ability to continue to get pricing.

Christopher Moore: As we've talked about in a number of calls, we have we have built processes, systems reporting, training around all around pricing throughout our core accounting offices and business and that we're pleased with the outcomes that we're getting there. Got it.

Christopher Moore: Appreciate it. S-GNA looks much lower over your years sequentially even after adjusting for deferred comp. Why was that and how should we look at that moving forward? Yeah, Chris, I think it would probably see some volatility quarter to quarter, just depending on, you know, spend on legal matters and things like that that may spike from time to time. But generally speaking, if you look at the year-to-date number, we should be leveraging GNA, you know, some modest amount each year, maybe 10 basis points or better. And I think over time, that's what we see.

Great and then actually the M&A commentary and we really really appreciate you spending time in giving color on that the M&A commentary I was actually somewhat encouraging.

Oncentration that I've heard of that that's driving those comments.

Okay, great. Thank you very much.

Youre welcome.

This concludes our question and answer session I would like to turn the conference back over to Jerry <unk> for any closing remarks.

Among our team members to provide exceptional client service and to support each other.

All that we do the commitments obviously evident in the results that we posted in those wouldn't be possible without without your dedication and support so I just wanted to close by saying.

Thanks to each of you and the broader audience. Thank you for listening in on today's call and enjoy the rest of your day.

The conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect your lines.

Christopher Moore: Got it. And maybe the last one for me is just being a gross margin continues to be strong on 20.6% Q3 is a 20% annual gross margin at some point possible for this business and what would it take? I'm sorry, Chris. Were you asking about B&I? The benefits in the insurance, yeah, I'm sorry. The gross margin there was a very solid 20.6% Q3 and it's usually lower in Q4 but from an annual perspective, trying to figure out if a 20% threshold on gross margin there is possible and what it would take to get there.

Christopher Moore: Yeah, we're not going to identify any particular ceiling or threshold and we're going to continue to strive to get more scale and leverage in each and every business. We do that through a variety of ways. So in both B&I and in financial services, we should see a continued, just like I commented on GNA, we should see a continued leverage, maybe not a steady leverage each and every year because of periodic investments. But we'll just recap that by saying in total, we should expect and we expect 20 to 50 basis points a year and it comes from multiple sources.

Operator: Got it.

Andrew Nicholas: I will leave it there. I appreciate it guys. Again, if you have a question, you may prefer star than one to join the queue.

Andrew Nicholas: Our next question will come from Andrew Nicholas who was William Blair. Please go ahead. Hi, good morning. Thanks for taking my questions. First one I wanted to ask is just around the project-based services and advisory services in particular appreciate the color and the prepared remarks around some of the things that you're seeing there. But if you could just speak a bit more to the pipeline for fourth quarter and maybe more broadly on the health of your clients in that industry as we look ahead to potentially more macroeconomic uncertainty in 24.

Andrew Nicholas: Andrew, this is Jerry. As you know, there's a number of different businesses that comprise our advisory services and they serve different clients. You know, oftentimes we talk about our advisory services a lot of our discussion is around our private equity groups. Let me start there. As we mentioned in our remarks, what we're seeing this year compared to last year, by the way, we're very pleased with the results that we're seeing albeit it's coming in in a little bit of a different form last year in the year before with the very hot and M&A market for our M&A market.

Andrew Nicholas: We tended to see fewer but much larger transactions than we were working on those platform type transactions this year. We're pleased to see again strong demand albeit smaller projects for a much larger number of engagements. So it's just coming in in a different form. When you look forward, you asked about Q4 and into 24. It's very hard for us to really predict. As you know, that work is projects based. It tends to be more or less predictable.

Andrew Nicholas: I'm sorry, less predictable. So far this year, we're really pleased with what we're seeing. The pipeline remains encouraging for as far out as we can see it, but we really don't go into, we don't have much visibility into, I don't think we have any visibility. I can't believe it's 2024. Across the rest of the other service lines are our risk and advisory services. As you know, we made a really nice acquisition there last year.

Andrew Nicholas: That transaction has gone very well. The combination of those businesses with our legacy business has gone very well. We continue to see strong demand there. We also see strong demand in our valuation work. So it's the number of different services provided to somewhat different clients. But overall, quite pleased with what we're seeing so far this year. Here. Great. Thank you. And then maybe just a question on leverage. Understand the resilience of the model and in the high percentage of recurring revenue, why you're comfortable kind of in that, that net debt to EBITDA range that you historically talked about.

Andrew Nicholas: I'm just curious if in the context of higher interest rates and the higher interest expense load, if there's any inclination towards prioritizing debt paid down in the current environment since interest expenses is dampening earnings growth to a certain extent right now. Just kind of broader thoughts on the capital structure. Thank you. Great question. We're not uncomfortable at 1.8 and I think we're a little higher at the end of the second quarter.

Andrew Nicholas: Our cash flow comes in annually on a seasonal basis. We tend to use cash in the first and second quarters and then we generate cash in the third and even more cash in the fourth. So net for the year, we should be generating a multiple of net income versus free cash flow. Okay. In terms of the comfort level and the prioritization in the way we're thinking about it, yeah the cost of money has gotten a little more painful and we've kind of called out the headwind that we've faced this year as a result of that.

Andrew Nicholas: But I will tell you that we still have plenty of strategic acquisition opportunities and using a fully leveraged cost of money and cost of capital in there. We're still looking for IRR targets in the 12 to 15% range generally and we'll continue to do that. We've got plenty of capacity. You'll probably note that we've moderated our share of buyback activity a little bit. Last year we bought more shares when we bought this year so that that's the lever we can certainly pull more actively.

Andrew Nicholas: And so we pull back a little bit on that not over any concern over the amount of leverage but just you know the economics of share of buybacks become less attractive with the cost of money and you know with a success of our higher share price in combination with the cost of money. Great.

Andrew Nicholas: Thank you very much.

Marc Riddick: In our next question we'll come from Mark Riddick with Sedotti. Please go ahead. Thank you.

Marc Riddick: Morning everyone. Morning Mark. So you guys really covered everything out that I was thinking about but one thing I wanted to touch on if you had a moment to maybe share some thoughts on what you're seeing with client industry verticals and maybe certain areas that I'm in and client demand that you've seen and whether or not there's been much of a shift at all. It particularly things like retail and an auto as it relates to the strike since wondering if there's anything that any callouts that you've seen in those areas or any others within the client industry verticals.

Marc Riddick: Yeah Mark thank you. Let me just remind you that we're not overly concentrated in any one industry or any one geography so the loop by comments are all kind of stark there which is you know no material impact on our business. Our clients as you know tend to be middle market businesses they tend to be a pretty optimistic and resilient group. We go out every quarter and informally survey our offices and ask them to give a feedback on what they're seeing with their clients so that's really the backdrop for the comments I'm about to make.

Marc Riddick: I would say that our clients Remain, generally optimistic about their ability to navigate in this environment, although I would say somewhat tempered from the prior quarters, the more recent quarters that we've talked about it. Some of the items on their talk track are around, of course, is everyone else inflation and interest rates access to credit. With all of that said, demand for our services continues to be strong, our core services, and as I commented earlier, we're also pleased with the demand for the more project-oriented services, which can be more discretionary at times.

Marc Riddick: So across the board, very pleased with what we're seeing as far as the demand. As far as industries are concerned, again, not overly concentrated any one industry, if I had to say, as you would expect, the one industry that we're kind of hearing some notes of caution relates to construction and real estate, and that's really just the cost of capital and access to capital. Again, not an overly concentrated industry for us, but if I had one area where we're getting some cautionary notes, it would be there.

Marc Riddick: Yeah, the only thing I'll add on real estate, and yeah, we've got our eyes on that, and most of our exposure, if we talk about serving real estate clients, most of the exposure there is on residential, multi-family real estate, as opposed to commercial. So I wouldn't consider our commercial real estate exposure to be extremely high, although as Jerry mentioned, we've got our eyes on it. Great, and then actually the M&A commentary, and we really appreciate you spending time and giving color on that.

Marc Riddick: The M&A commentary was actually somewhat encouraging, even smaller deals, but there seems to be activity out there. I was wondering if there were any particular industries that are kind of leading the way on that, or is that generally across the board? Yeah, Mark, I didn't ask that specific question. I think we tend to dislike the rest of our business. Within that segment of our business, our PEA advisory business tends to be pretty broad-based, so geographically and industry-based. There's no concentration that I've heard of that's driving those comments. Okay, great. Thank you very much. You're welcome.

Jerome Grisko: This concludes our question and answer session. I'd like to turn the conference back over to Jerry Grisco for any closing remarks. Thank you.

Jerome Grisko: As we always do, I want to start by thanking our shareholders and our analyst for your continued support and confidence in the company. I also want to take an opportunity to thank our team members who may be listening in today. When I reflect on our very strong performance so far this year, it always comes back to the unwavering commitment among our team members to provide exceptional client service and to support each other in all that we do.

Jerome Grisko: The commitment's obviously evident in the results that we've posted in those wouldn't be possible without your dedication and support, so I just want to close by saying thank you. Thanks to each of you and the broader audience. Thank you for listening in on today's call and enjoy the rest of your day.

Operator: The conference has now concluded. Thank you very much for attending today's presentation.

Operator: You may now disconnect your line.

Q3 2023 CBIZ Inc Earnings Call

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