Q3 2024 CBIZ Inc Earnings Call
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Speaker Change: Good morning everyone and welcome to the C-Vis third quarter and 9 months 2024 results conference call.
Speaker Change: All participants will be in a listen-only mode. Should you need assistance, please see no conference specialists by pressing the star key, and then zero on your telephone key pads.
Speaker Change: After today's presentation, there will be an opportunity to ask questions. That's a question you may press star and then one, using your telephone key pads. So withdraw your questions you may press star and two. There's also no today's event is being recorded.
Speaker Change: I'd like to turn the floor over to Lori Novickis, Director of Corporate Relations. Then please go ahead.
Lori Novickis: Good morning everyone and thank you for joining us on today's conference call to discuss C.B.S. 3rd quarter in 9 months, 2024 results.
Lori Novickis: As a reminder, this call is being webcast and leads to live webcast can be found on the Investor Relations page of our website, cittiz.com. A replay and transcript will also be made available on our website after the haul.
Lori Novickis: Today's press release and investor presentation have also been posted to the investor relations page of our website. Before we begin, we would like to remind you that during the call, management may discuss certain non-GAAP financial measures.
Lori Novickis: Reconciliations of these measures can be found in the financial tables of today's press release and investor presentation.
Lori Novickis: Today's call may also include forward-looking statements regarding our business, financial condition, results of operation, cash flows, strategies, and prospects.
Lori Novickis: Forward-looking statements represent our expectations, estimates, and projections as of the date of this call and are not intended to give any assurance of future results.
Lori Novickis: Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties.
Lori Novickis: Many factors could cause future results to differ materially, and CBIS assumes no obligation to update these statements except as required by law. A more detailed description of such factors can be found in today's press release and in our filings with the Securities and Exchange Commission.
Lori Novickis: Joining us for today's call are Jerry Grisko, President and Chief Executive Officer, and Ware Grove, Chief Financial Officer. I'll now turn the call over to Jerry. Jerry? Thank you, Lori. Good morning and thank you for joining us for today's call.
Jerry Grisko: We're pleased to share our third quarter performance and to discuss our outlook for the remainder of the year.
Jerry Grisko: This is an exciting time for our company as we're in the final stages of closing our acquisition of Markham.
Jerry Grisko: and I will provide an update on our progress a little bit later in today's call. First, I want to highlight the overall health of our business, which was demonstrated by our strong results for both the third quarter and year-to-date.
Jerry Grisko: For the first three quarters of this year, our business has generally performed as expected with total revenue of 7.1%.
Jerry Grisko: For the third quarter, total revenue was up 6.9%.
Jerry Grisko: While our first nine-month results are as expected, we did face some unique headwinds in the second quarter, which impacted our results for that period.
Jerry Grisko: As we commented on our second quarter call, we planned on our results for this quarter being stronger, and they came in as expected, another reason why we do not guide quarter-to-quarter, but only for the full year.
Jerry Grisko: Now, turning to the performance of our two primary divisions, starting with our Financial Services Division.
Jerry Grisko: The solid organic growth experience in our core accounting and tax business was primarily driven by pricing.
Jerry Grisko: Our advisory services, which tend to be more project based and discretionary, also have a solid third quarter with even stronger growth rates than anticipated.
Jerry Grisko: It's also worth highlighting that the performance of our government health care consulting business
Jerry Grisko: continues to be very strong and had a very strong year coming now from new contracts and the expansion of work for existing projects.
Jerry Grisko: Within our Benefits and Insurance Division, we also experience growth in all major service lines.
Jerry Grisko: As I've mentioned on past calls, we informally survey a cross-section of our clients at the end of each quarter to hear their sentiment on the economy, plans to invest, opportunities, and concerns.
Jerry Grisko: While client sentiment has waned somewhat compared to the same period last year, many of our clients continue to express cautious optimism through the remainder of this year.
Jerry Grisko: As anticipated, concerns around the pending national election focus on both short-term potential for market volatility and longer-term regulatory and legislative changes.
Jerry Grisko: Clients also cited continuing geopolitical concerns as reasons to wait and see how the next month unfolds before committing to material incremental investments in the coming months.
Jerry Grisko: Access to talent and concerns around inflation are top of mind for these businesses, but the general outlook on the economy is improved when compared to the same period at the beginning of this year.
Jerry Grisko: As in any time of change, we see opportunities to serve our clients as they navigate this environment, given our unmatched breadth of services and depth of expertise.
Jerry Grisko: The health of our business remains very strong and we're optimistic about the prospects for the business for the remainder of the year.
Jerry Grisko: Given our strong performance to date, I am pleased to reaffirm our guidance previously outlined for the full year 2024.
Jerry Grisko: We will provide 2025 guidance, including that impacted by Markham, when we announce Q4 and full year 2024 results.
Speaker Change: I will now turn it over to Ware to discuss more of the details on our performance of the third quarter and year-to-date. Ware?
Ware Grove: Thank you, Jerry. And good morning, everyone.
Ware Grove: I want to take a few minutes to run through the highlights of the third quarter and year-to-date results we released this morning. As Jerry commented, major conditions for closing the Markham transaction have been satisfied. We expect this transaction may close in coming days.
Ware Grove: You should note that in connection with this transaction, significant one-time non-recurring merger-related expenses have been incurred both in the third quarter and in year-to-date.
Ware Grove: These expenses are eliminated from GAAP results when we report adjusted earnings per share. You will find a reconciliation of these items outlined in the release.
Ware Grove: Many of the quarterly pacing items that impacted second quarter results earlier this year have been resolved as expected.
Ware Grove: The positive momentum established in the third quarter is expected to continue through the balance of this year. And we expect full year 2024 adjusted earnings per share to increase within a range of 10-12% over the $2.41 reported a year ago.
Ware Grove: This full year expectation, of course, excludes any potential impact from the combined CBIS and MARCM operating results should the acquisition close in the fourth quarter as expected.
Ware Grove: Total revenue in the third quarter increased by 6.9 percent with same unit revenue up by 5.1 percent.
Ware Grove: For the nine months, total revenue was up 7.1%, with same unit revenue up by 4.6%.
Ware Grove: Total revenue within our financial services group was up by 8.0 percent in the third quarter, with same unit revenue up by 5.2 percent.
Ware Grove: For the nine months, total revenue within financial services was up 7.7%, with same unit revenue up by 4.5%.
Speaker Change: As Jerry commented, all lines of service are experiencing organic growth, with increases in pricing continue to drive much of the increase in revenue.
Speaker Change: Within the benefits and insurance group, total revenue is up 3.7% for the third quarter with all of this growth being organic in nature.
Speaker Change: For the nine months, total revenue within benefits and insurance was up 4.6%, with same unit revenue up by 4.0% for the nine months.
Speaker Change: As is the case with financial services, all major lines of services are contributing to this growth.
Speaker Change: During the first nine months, we made three acquisitions, and we used $78.2 million for these transactions, plus earn-out payments on acquisitions made in prior years.
Speaker Change: For earn out payments for the balance of this year, we estimate additional payments of approximately $7.2 million.
Speaker Change: For 2025, we estimate approximately $44.1 million.
Speaker Change: For 2026, approximately $16.7 million, and for 2027, approximately $7.6 million.
Speaker Change: Day sales outstanding for the nine months was 97 days this year compared with 96 days a year ago. Bad debt expense this year is 15 basis points of revenue compared with 8 basis points of revenue a year ago.
Speaker Change: Capital spending in the third quarter was approximately 2.7 million dollars and for the nine months it was totaled approximately 9.6 million dollars.
Speaker Change: We expect capital spending for the full year to be approximately $12 million this year.
Speaker Change: Majority of this spending is focused on tenant improvements in connection with office facilities.
Speaker Change: Depreciation and amortization for the third quarter was 9.6 million dollars and for the nine months was 28.6 million dollars.
Speaker Change: For the full year, we expect depreciation and amortization to be approximately $38 million.
Speaker Change: For those of you who want to make an adjustment, approximately $24 million was associated with amortization of acquisition-related intangible assets.
Speaker Change: The amount outstanding at our 600 million dollar credit facility at September 30th was three hundred and thirty seven point three million dollars with leverage against EBITDA calculated at approximately 1.5 times.
Speaker Change: Operating cash flow continues to be strong. The balance on debt at September 30th was approximately 25 million dollars higher than the beginning of the year, primarily driven by the 78 million dollars of non-operating spending and investment in acquisitions.
Speaker Change: Over a longer period of time, we have allocated significant capital to a combination of acquisitions and share repurchases.
Speaker Change: As we look ahead toward closing the upcoming Markham transaction, we have a five-year $2.0 billion committed credit facility standing ready.
Speaker Change: This new facility is comprised of a $600 million revolver and a $1.4 billion term loan A component. The financing commitment that we announced in July has been successfully syndicated within our existing bank group of seven banks, which will represent nearly 60% of the total new commitment.
Speaker Change: plus an additional 20 banks to round out the commitment.
Speaker Change: The facility is oversubscribed by 30%, which we believe is a testament to the stability of our cash flow attributes.
Speaker Change: The newly upsized credit facility is ready to close concurrent with the expected fourth quarter close of the merger transaction.
Speaker Change: As outlined in July, initial leverage levels upon closing may be within a range of three and a quarter to three and a half times of EBITDA, with planned rapid deleveraging to approximately two times EBITDA within 24 months.
Speaker Change: This rapid deleveraging will enable CDISC to continue to allocate capital for future growth through strategic acquisitions, plus provide the flexibility to address share repurchases as opportunities arise.
Speaker Change: As we described in July, we expect to continue to achieve margin improvement within an annual range of 20 to 50 basis points.
Speaker Change: As we achieve greater scale, we expect greater opportunity to leverage growth, and we will strive to leverage revenue growth in a similar manner, consistent with our track record over time with CBITS.
Speaker Change: As we enter the fourth quarter of 2024, we are comfortable reiterating the CBiz full-year expectations for adjusted earnings and revenue growth.
Speaker Change: The Markham acquisition is not yet closed. It is not yet possible to incorporate a forecasted expectation of combined results for 2024.
Speaker Change: With a fourth quarter transaction close expected, it is reasonable to expect a similar seasonal pattern of results comparable to what you have seen with CBiz over the years.
Speaker Change: Considerable effort has gone into integration planning. Once the merger is closed, we can turn to integrated planning efforts for 2025.
Speaker Change: As is our normal practice, when we announce year-end 2024 results, we will be in a position to share the 25 expectations in greater detail at that time.
Speaker Change: So, to recap, excluding any impact from the market transaction for revenue growth or for adjusted earnings per share and for share count.
Speaker Change: The 24 expectations for CBIS remain as follows.
Speaker Change: We expect total revenue to increase within a range of 7-9% for the year.
Speaker Change: GAAP reported earnings per share is expected to be within a range 1% higher or lower than the $2.39 reported for 2023 due to the mark-related acquisition expenses recorded today.
Speaker Change: On an adjusted basis, we expect 2024 adjusted earnings per share to increase within a range of 10 to 12 percent over the $2.41 reported for 2023.
Speaker Change: The effective tax rate for the full year of 24 is expected at approximately 28 percent.
Speaker Change: This rate could be impacted either up or down by a number of unpredictable factors.
Speaker Change: And lastly, the fully diluted weighted average share count is expected within a range of 50 to 50.5 million shares.
Jerry Grisko: So, with these comments, I will conclude, and let's turn it back over to Jerry. Thanks, Ware. I want to use the remaining time today to provide an update on the strategic rationale behind the Markham acquisition.
Jerry Grisko: the largest in our history.
Jerry Grisko: We anticipate that the transaction will close in the coming days, as many of the essential closing conditions have already been met, including Hart-Scott-Rodino clearance, CVS shareholder approval, and approval by the Markham Partner Group.
Jerry Grisko: with revenues of approximately $2.8 billion, over 10,000 team members and offices in 21 major markets coast to coast.
Jerry Grisko: Upon closing, Siebel's will become the largest provider of professional services of our kind to middle market businesses, offering a breadth of services and depth of expertise on maps in our industries.
Jerry Grisko: including even deeper subject matter expertise, industry resources, service lines, insights, actionable advice, and new and innovative products and solutions.
Jerry Grisko: The combination will also better position us to win the ever-present war for talent.
Jerry Grisko: with our combined size, scale.
Jerry Grisko: national footprint, investment capabilities, industry expertise, and breadth of services, the new SEBIS will provide our team members even greater opportunities to work alongside the brightest and most talented people in our industries.
Jerry Grisko: access the latest tools and technologies, experience best-in-class learning and development,
Jerry Grisko: and do even more interesting and meaningful work for a broader way of clients and play on a bigger national stage.
Jerry Grisko: With all this said, while we're also very excited here at SEVIS about the pending acquisition, our focus over the past nine months has been on the finishing 2024 very strong.
Jerry Grisko: We look forward to providing 2025 guidance that will include the impact of Markham when we announce our fourth quarter and full year results in February. Now let's move to Q&A.
Speaker Change: and Jerome Grisko. Thank you.
Speaker Change: Ladies and gentlemen at this time we'll begin the question-and-answer session. To ask a question you may press star and then 1 using your telephone keypads. If you are using a speakerphone we do ask that you please pick up the handset prior to pressing the keys.
Speaker Change: If at any time your question has been addressed and you would like to withdraw your question, you may press star and two.
Speaker Change: Once again, that is star and then one to join the question queue.
Speaker Change: Our first question today comes from Andrew Nicholas from William Blair. Please go ahead with your question.
Andrew Nicholas: Hi, good morning. Thanks for taking my question. I wanted to maybe ask a high-level one on Markham to start. Obviously, it's been a couple months now.
Andrew Nicholas: Thank you.
Andrew Nicholas: both your internal client base, excuse me, employee base, and Markham's partners and employees have gotten to know the deal, understand the deal, and potentially get more comfortable with it. Just curious what the feedback has been internally. I imagine you've
Andrew Nicholas: have been been traveling quite a bit, speaking to various teams, just wondering what the feedback is and any kind of color on
Andrew Nicholas: what the post-integration, maybe, leadership structure might look like, or any people from Markham that you expect to play a big role in the combined firm.
Andrew Nicholas: Yeah, Andrew, thank you. This is Jerry. I couldn't be more pleased with the reception that we've had, both from our internal team here, our own team here at CBIS, as well as the Markham team. As you suggested,
Andrew Nicholas: both myself, Ware.
Andrew Nicholas: Chris Spurio, others who spent a lot of time in the Markham offices, and an even broader array of our teams have been working together over the past 90 days to.
Andrew Nicholas: to envision the opportunities that will come when we bring these two terrific organizations together. I shared an anecdote recently where my very first...
Andrew Nicholas: visit to the Markham office in downtown Manhattan, where
Andrew Nicholas: When I walked in the office, it came a day after we had done a fireside chat, the CEO of Markham and myself together. And as I walked in the office, you could just feel the excitement about the opportunities that were going to come through the combining these two organizations.
Andrew Nicholas: Together, we'll expand our industry groups, 13, I think we have now, industry groups. We have advisory services that we've worked hard to build out over the past
Andrew Nicholas: almost decade, they can now bring those services to their clients. Like I said, they have strength in advisory, I'm sorry, in industry groups that they've spent more time and energy building out. The combination couldn't be better and more complementary, and the teams fill that.
Andrew Nicholas: kind of going to your second comment, what have we been working on? We probably have 13 work streams that have been developed, everything from core accounting and tax.
Andrew Nicholas: all the functional areas, marketing, finance, and IT. We have two in a box.
Andrew Nicholas: is how we refer to it, but basically equal representation from the Markham team and the SEVIS team working side-by-side.
Andrew Nicholas: virtually know we've done it this way and you've done it that way and this is you know the way we need to go forward.
Andrew Nicholas: and the entire conversation was about how we move forward together and build a foundation and an organization that will take us to even greater heights. So super encouraging both from what I've seen and what we've experienced and the excitement around the future. It's your last question around leadership.
Andrew Nicholas: We haven't formally announced the leadership structure that's to come hopefully in the days ahead as we in the near in the next few days ahead as we get close to closing here but I will share that the
Andrew Nicholas: They have an extraordinarily strong team. Obviously, we have a very strong team. And what we'll see coming out of this is a representative sample or combination of the strength of their team, our team. I know in my direct reports...
Andrew Nicholas: if certainly if you look at the team that was here 12 months ago what we'll have is
Andrew Nicholas: you know, some members of their team joining our senior team in my direct reports.
Andrew Nicholas: some members of my team remaining, historic team, legacy team, remaining in those positions. And then a number of positions that we've gone outside and hired new in the past 12 months. So kind of a third, a third, a third, but a team that's positioned to take us to even greater heights going forward. So super excited about the opportunities.
Speaker Change: Great. Thank you very much for that. And then for my follow-up question.
Speaker Change: Jerry, I think you mentioned advisory being...
Speaker Change: a bit stronger than you expected in the third quarter. Can you unpack that a little bit? Where are you seeing pockets of strength? I think one of the things that you highlighted last quarter is something that maybe underperformed your expectations with on kind of the size of M&A transactions. So just any other...
Speaker Change: insight you can provide on that and maybe what the pipeline looks like there for the fourth quarter and early next year. Thank you.
Speaker Change: Yeah, so the strength, you know, really almost across the board, you know, the combination of all of our advisory services performed really strong in the third quarter. As you know, that's a little less predictable, tends to be more project-based, tends to be more episodic.
Speaker Change: and it really came in pretty strong across the board. We were pleased with the activity that we saw on the PE advisory side, the amount of activity there. So VeoFlow, albeit not the larger transactions, still were not as strong as they were, say, a year or two ago, but we had more transactions. So more work, smaller pieces, but very strong performance from that group. So very encouraging.
Speaker Change: Thanks again.
Speaker Change: Our next question comes from Chris Moore from CJS Securities. Please go ahead with your question.
Chris Moore: Hey, good morning guys. Thanks for taking a couple.
Chris Moore: So, in terms of, it looks like a lot of the organic growth you mentioned a couple of times was from pricing. I guess, I mean, normally think about one or two percent increase in pricing per year. Just talk a little bit about what's going on there and is it likely that we're back to the one to two percent next year?
Ware Grove: Hi Chris, this is Ware. We continue to get relatively good increases driven by pricing.
Ware Grove: and kind of more efficiencies in engagement management, combination of the two. But when you look at the organic revenue, and it's particularly easier to measure this on the financial services side, a good 80 to 90% of the increases there continue to be driven by pricing.
Ware Grove: We've got efficiencies and improved realization and yield on engagements that also drive the top line.
Speaker Change: Thank you.
Speaker Change: and Jerome Grisko.
Jerome Grisko: I think, you know, to your other question, and we've commented before that, you know, with the inflationary rate lower than it was in recent years, it's reasonable to expect the commensurate reduction in pricing.
Jerome Grisko: So, you know, pricing is not one or two percent higher than that, but it's lower than it has been in recent years.
Speaker Change: got it and government health care services sounds like it's
Speaker Change: It's back. It's growing nicely, and was that a surprise, or you could see it from what was happening out there?
Speaker Change: Yep, absolutely. Great question. We've seen that, and you're probably referencing the stumble we had mid-year a year ago. Second half last year was good, first half this year was terrific year over year, and that growth continues to grow at kind of the higher single-digit rates again.
Speaker Change: Cautionary note that as this business grows and it's now cresting 200 million dollars a year, that rate of growth on a percentage basis is harder to achieve but it's very healthy. They're having a great year.
Speaker Change: Got it. And maybe just one in terms of Markham.
Speaker Change: We're talking about leverage being somewhere 3.2 to 3.5 post-close and then 2.1 to 2.3 within 24 months.
Speaker Change: From a deleveraging perspective, is that more back half loaded? Is most of that deleverage going to happen in, say, in 2026? Or is that reasonably smooth?
Speaker Change: Yeah, a couple of things, Chris. We've got the seasonal nature of the business, so on a combined basis, the seasonal nature will be pretty similar to what you've seen with CBiz over the years.
Speaker Change: And that means that in the first quarter and the first half, we typically use cash.
Speaker Change: We build up receivables.
Speaker Change: And then as those receivables liquidate in the third and fourth quarter, we generate sufficient cash and net. It's a very positive cash flow business on an annual basis.
Speaker Change: So to that end, as we close and we initially come out of the gate with those
Speaker Change: higher leverage amounts.
Speaker Change: You might see that leverage steady to maybe even tick a little bit higher in the first half of 25. And I think we talked about that back in July. And then of course, liquidate through the second half of 25. And then a similar
Speaker Change: Pattern in 26. So by the end of the second year, it should be down, you know around a two-time leverage
Speaker Change: Of course, the first year we also were burdened with some of the transaction expenses and integration costs and things like that. But the cash flow attributes of the combined business should be very strong and very steady in a similar nature to what you've seen with CBIZ over the years.
Speaker Change: Got it. I appreciate that. I'll leave it there.
Speaker Change: Thanks, Chris.
Speaker Change: Once again, if you would like to ask a question, please press star and then 1.
Speaker Change: To remove yourself from the question key, you may press star and two.
Speaker Change: Our next question comes from Mark Riddick from Sidoti. Please go ahead with your question.
Mark Riddick: Hey, good morning, everyone. I wanted to touch a little bit on the pricing dynamic again for a moment, if we could. I was sort of thinking about, you know, the efforts that you've...
Mark Riddick: you've made over the years to strengthen pricing. And I was wondering if there was sort of a common thread or component.
Mark Riddick: and the pricing gains that you're seeing as well as maybe if there's any revenue mixed benefit that we should be thinking of, whether that ties to the commentary that you had on the discretionary project-based work or how we should be thinking about that part of it.
Speaker Change: Yeah, let me let me there's a lot to unpack there. So let me just give you some information and hopefully I'll address your questions, but
Speaker Change: You know, just to rewind the tape a little bit, we put some tools in place five or six years ago that helped us really take a granular look at our engagement, profitability, and yield, and pricing actions. And that then enabled a really targeted
Speaker Change: ability to look at specific clients and specific service lines.
Speaker Change: specific books of business and things like that with action plans to get pricing. Okay now you don't get a pricing a hundred percent of the time so there is a little blowback but minimal we've experienced minimal over the years.
Speaker Change: Interestingly, and so you've seen the pricing in recent years really be a major driver and a major contributor to the organic revenue growth.
Speaker Change: It continues to be a major contributor yet again this year. And I think the message is that we've now baked and embedded that approach.
Speaker Change: into our annual planning, our annual engagement renewal cycle, and it's to be expected. Now, it's not always going to be 7%, 8%, 9% like it was in recent years, so this year it's maybe half of that, but kind of commensurate with the underlying inflation rate.
Speaker Change: And then the other thing we can say is, you know, with respect to Markham, and I think we've said this before, they have a very similar approach. So I think this is something that together, we're totally in sync as we combine operations.
Speaker Change: Excellent. And then one quick, one of your comments made me sort of think about this and I hadn't thought about it before. Is there sort of an update that we should be thinking about as far as client retention that you're seeing and maybe if you, it might be early, but if you can speak to client retention trends that you've seen historically with Markham. Are they similar to what you've seen and and how do you think that might be combined? Thank you.
Speaker Change: Yeah, thanks Mark.
Speaker Change: To answer your question, Markov's client retention rates are very similar to ours, which is very encouraging. I think we're at the top, certainly top quartile or decile of our industry based on all the information we see, and they're at the same place. So not like there's something to fix there, they're already best in class, and we would expect that to continue for both organizations.
Speaker Change: going forward.
Speaker Change: Thank you very much.
Speaker Change: And ladies and gentlemen, with that, we'll be concluding today's question and answer session. I'd like to turn the floor back over to Jerry Grisko for any closing remarks.
Jerry Grisko: Yeah, thank you. As I always do, I want to end today's call by thanking our shareholders and our analysts for your continued support.
Jerry Grisko: I also want to thank our SEVIS team and extend our gratitude to the members of our new team from Markham as we prepare for the closing and integration of these two organizations and the vast opportunities that lie ahead.
Jerry Grisko: Our people continue to rise to the challenge in so many ways. Through our commitment to serving our clients, creating value for our shareholders, and supporting our team and each other, we're unlocking incredible opportunities for the future.
Jerry Grisko: As I've said a number of times internally and to our new Markham team, I've never been more excited for our future, and I'm proud to recognize the strength and dedication of our collective teams that have made this moment possible. Thank you all, and we look forward to speaking at the conclusion of the year. Have a great day.
Jerry Grisko: Thank you.
Speaker Change: Ladies and gentlemen, the conference has now concluded. We do thank you for attending today's presentation. You may now disconnect your lines.