Q1 2025 CBIZ Inc Earnings Call
Good day and welcome to the cheapest first quarter 2025 results conference call.
All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad.
Withdraw your question. Please press Star then two.
Please note this event is being recorded.
I would now like to turn the conference over to Laura you know that guess director of corporate relations. Please go ahead.
Laura: Good morning, everyone and thank you for joining us on today's conference call to discuss <unk> first quarter 2025 results.
Laura: A reminder, this call is being webcast and a link to a live webcast along with today's press release and Investor presentation can be found on the Investor Relations page of our website <unk> Dot com a.
Laura: A replay and transcript will also be made available after the call.
Laura: Before we begin we would like to remind you that during the call management may discuss certain non-GAAP financial measures.
Laura: Reconciliations of these measures can be found in the financial tables of today's press release and Investor presentation.
Laura: Today's call May also include forward looking statements regarding our business financial condition results of operations cash flows strategies and prospects.
Laura: Forward looking statements represent only our expectations estimates and projections as of this date of this call and are not intended to give any assurance of future results.
Laura: 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 except as required by law.
Laura: A more detailed discussion of such factors can be found in today's press release and in our financial filings with the Securities and Exchange Commission.
Jerry Chriscoe: Joining us for today's call are Jerry Chriscoe, President and Chief Executive Officer, Brad Makiya, Chief Financial Officer, and Christopher Real President of our financial Services Division.
Speaker Change: I'll now turn the call over to Gerry and Chris go for his opening remarks Jerry.
Jerry Chriscoe: Thank you Lori and good morning, everyone I am pleased to be able to provide an overview of our strong first quarter performance and results along with an update on our progress with integration following our acquisition of Markham in November of last year.
Jerry Chriscoe: Overall, our integration efforts are on schedule and we are encouraged by the outstanding collaboration we are experiencing among our teams as we build on the best of both legacy organizations.
Jerry Chriscoe: To position ourselves as the premier provider of professional services to the middle market.
Jerry Chriscoe: Now before I turn to our results I wanted to take this opportunity to highlight the key attributes of our business model and how these attributes enable us to perform relatively well even in more challenging economic environment such as the one we faced in the first quarter.
Jerry Chriscoe: Burst.
Jerry Chriscoe: Approximately 77% of our services are essential and recurring meaning that our clients need these services regardless of business climate.
Jerry Chriscoe: We also have strong and consistent cash flows high client retention rates, our broad geographic footprint serve businesses across a diverse set of industries and are not overly concentrated in any one market or industry.
Jerry Chriscoe: Also inherent to our business model has a high degree of variable expenses.
Jerry Chriscoe: At surface levers, we can pull to manage our expenses in response to changing conditions.
Jerry Chriscoe: Including our compensation structure tied to growth profitability and other key performance metrics.
Jerry Chriscoe: Those attribute of served us well throughout challenging economic environments in our history.
Jerry Chriscoe: Whether it was through the great financial crisis or the pandemic.
Jerry Chriscoe: Our historic performance during those times demonstrates our ability to successfully position our business to deliver relatively strong earnings results and at the same time improve the strategic positioning of our company to emerge even stronger when conditions improve.
Jerry Chriscoe: When assessing our revenue results for the first quarter. It is important to recognize that we find ourselves in a rapidly evolving ever changing and increasingly uncertain economic and geopolitical environment.
Jerry Chriscoe: While the essential nature of many of our services makes us.
Jerry Chriscoe: More resilient, our overall business and our clients are not entirely immune to the challenging business climate and our Q1 revenue results and full year outlook should be viewed through that lens.
Jerry Chriscoe: With that said I'm very pleased to report that our business model enabled us to continue to deliver very strong results for the first quarter among.
Jerry Chriscoe: Among the high notes the essential compliance portion of our core accounting and tax business generally performed as expected through the traditional busy season.
Jerry Chriscoe: There are a number of areas of our business that we expected some revenue softness due to a special project work that we performed in the first quarter of 2024 that we knew would not recur to the same degree in 2025.
Jerry Chriscoe: Our revenue was also impacted by the anticipated loss of a number of clients due to conflicts that prohibited us from continuing network related to the transaction.
Jerry Chriscoe: In addition, the current economic and geopolitical environment has had a significant impact on a number of industries that affect our clients.
Jerry Chriscoe: Including the capital markets and not for profit industries.
Jerry Chriscoe: As well as on certain of our advisory services, which tend to be more project based and discretionary.
Jerry Chriscoe: On a positive note our government healthcare consulting business continues to build out a strong pipeline of new projects and posted very strong revenue growth in Q1, and our benefits and insurance business also performed very well with growth coming from nearly every service line.
Jerry Chriscoe: In summary.
Jerry Chriscoe: We are very pleased with how the business performed for the first quarter with strong earnings and consistent cash flows.
Jerry Chriscoe: As we look forward to the rest of the year, we recognize that we may continue to be operating in a more challenging economic environment and we are taking all appropriate steps to continue to protect and grow our earnings in the event that the business climate does not improve.
Jerry Chriscoe: Based on the fundamental attributes of the business that allows us to protect profitability. We are pleased to be able to confirm and maintain our previously announced guidance for adjusted EBITDA and adjusted EPS.
Jerry Chriscoe: However, based on the business climate, we experienced through the first quarter continued uncertainty for the months ahead and the proportion of our work that is more discretionary through much of the remainder of the year.
Jerry Chriscoe: We are widening our revenue guidance to be within a range of $2 8 billion to $2 $95 billion.
Speaker Change: At this point I would like now to now introduce Brad Lochia, our new Chief Financial Officer, who joined US in March following the retirement of Ware Grove.
Speaker Change: We welcome Brad to our team at a time of incredible opportunity as we integrate Markham and position our company for accelerated long term growth.
Speaker Change: Brad brings nearly 30 years of experience within larger complex companies across a broad range of financial disciplines, including capital markets M&A Treasury financial planning and analysis and Investor Relations.
Speaker Change: I'm pleased to welcome Brad to the call today, and look forward to connecting him with our shareholders and analysts following the call.
Speaker Change: I'll now turn it over to Brad.
Thank you Jerry and good morning, everyone I'm happy to have the opportunity to join you today on my first CBS earnings call and I'm excited to work along Gerry the entire <unk> team and our investment community.
Speaker Change: Before I discuss our first quarter financial results I want to start by providing a few reminders regarding some financial reporting impacts we highlighted on our last earnings call that resulted from the Markham transaction.
Speaker Change: First to be consistent with our 10-Q M DNA and due to complexities associated with providing accurate comparability, we will not be providing same unit comparisons in 2025.
Speaker Change: These complex. These include a number of factors such as accounting policy differences impacts associated with integrating businesses teams systems and business processes.
Speaker Change: We plan to reassess our ability to provide same unit comparisons once we lap into our 2026 financial reporting periods.
Speaker Change: Second to facilitate a better understanding of our operating performance. We are reporting adjusted non-GAAP financial metrics, which include adjusted EBITDA adjusted net income and adjusted diluted earnings per share.
Speaker Change: For 2025. These adjustments were will relate to acquisition and integration related costs noncash intangible acquisition amortization expense and facility optimization charges.
Speaker Change: Reconciliations to these non-GAAP measures are provided in the supplemental schedules included in our earnings release published earlier this morning.
Speaker Change: Lastly, our 2025 results will reflect the impact of higher share count <unk>.
Speaker Change: And higher interest expense, both of which are directly connected to the funding of the Markham acquisition.
Speaker Change: With that I'll turn to our results.
Speaker Change: As Jerry indicated our overall performance met our expectations and with a full quarter of the acquisition now reflected in our results. We are beginning to experience the scale and accretive benefits associated with this transformative acquisition.
Speaker Change: We are equally pleased to see the combined team collaborating to pursue the unique growth opportunities that are enabled by the <unk> service client offering.
Speaker Change: On a consolidated basis first quarter revenue increased 70% from 494 million to $383 million due primarily to the acquisition.
Speaker Change: Adjusted EBITDA doubled from 119 to 238 million.
Speaker Change: Reflecting the strong margin and scale the attributes of our business model as well as the meaningful accretive impact of the acquisition.
Speaker Change: Please note going forward, we expect to focus our profitability reporting using adjusted EBITDA, given higher interest expense levels.
Speaker Change: In the past, we focused primarily on pre tax income and margins and we targeted 20 to 50 basis point improvements annually on that pre tax margin.
Speaker Change: Going forward, we will target 20 to 50 basis point improvements of annual adjusted EBITDA margin improvement.
Speaker Change: Pretax income was 173 million up $69 million or 66%.
Speaker Change: When we announced the Martin acquisition, we said, we expected it to be 10% accretive within the first year. Therefore, we are pleased to report adjusted diluted EPS increased approximately 40% in the first quarter from $1 63 to $2 29 per share.
Speaker Change: The lower drop through rate from adjusted EBITDA to pretax income to adjusted net income and EPS is explained primarily by higher interest and tax expense.
Speaker Change: Interest expense was 21 million higher than last year due to increased borrowing and borrowing rates, resulting from the acquisition funding.
Speaker Change: Our effective tax rate increased approximately 300 basis points, reflecting $5 million and higher tax expense.
Speaker Change: The increase in our effective tax rate is primarily driven by the addition of legacy Markit revenue coming from jurisdictions with higher rates.
Speaker Change: Higher interest expense and tax rate represented an impact on GAAP diluted EPS of approximately 23 and <unk> per share respectively.
Speaker Change: Our financial services segment first quarter revenue was $714 million up $341 million or approximately 92%.
Speaker Change: Financial services, adjusted EBITDA doubled to $230 million, reflecting an adjusted EBITDA margin of 32%, which was similar to last year.
Speaker Change: In our benefits and insurance segment delivered revenue of $113 million up $5 million or approximately 4%.
Speaker Change: C&I adjusted EBITDA was $30 million up $3 million or 10%.
Speaker Change: <unk> adjusted EBITDA margin was 27% up nearly 150 basis points versus last year.
Speaker Change: The revenue and profitability improvements were driven by nearly all DNI service lines.
Speaker Change: And our B and I team is engaging aggressively to pursue a strong pipeline of Markham related cross serving opportunities.
Speaker Change: In terms of cash flow and net debt and consistent with prior years, we experienced seasonal peak levels of working capital usage during the quarter.
Speaker Change: Dsos were 96 days five days lower than prior year, driven by improved collections.
Speaker Change: Total debt at the end of the quarter was approximately 1.5 billion and we had approximately 385 million of unused capacity on our 2 billion facility.
Speaker Change: As a result, our leverage at the end of Q1 was approximately four times or approximately a half turn higher than year end.
Speaker Change: This increase is consistent with what we experienced prior to the <unk> acquisition.
Speaker Change: And as we discussed on prior calls and.
Speaker Change: And assuming we use all or most of our free cash flow to reduce debt, we estimate our leverage could be two to two and a half times by the end of 2026.
Speaker Change: Turning to our outlook and guidance items are adjusted EBITDA and adjusted EPS guidance is unchanged.
Speaker Change: However, the uncertainty in the current economic and geopolitical environment.
Speaker Change: <unk> already led to softness in our nonrecurring service lines and that is a trend we expect to continue.
Speaker Change: Nonrecurring services now represent approximately 23% of our revenue.
Speaker Change: Given this uncertainty and the company's limited visibility into forecasting demand for these services for the balance of the year. We now expect full year 2025 revenue to be within a range of 2.8 to 2.95 billion.
Speaker Change: And as we have previously said, we have a range of variable cost items.
Speaker Change: We can fairly quickly adjust to mitigate the uncertain impacts of our topline.
Speaker Change: We expect approximately $60 million of payments in 2025 related to prior acquisitions, primarily earn out payments of which $30 million was paid in the first quarter.
We expect another $30 million of payments related to prior acquisition related earn outs in 2026, and approximately $10 million in 2020 seven.
Speaker Change: And we continue to estimate between 20 and 25 million in capital expenditures for 2025 of which 5 million was incurred in the first quarter.
Speaker Change: Depreciation and amortization was nearly 25 million for the first quarter and we estimate approximately 100 million for the full year.
Speaker Change: And we continue to expect approximately 25 million in synergies with the majority to be delivered in year two and beyond.
Speaker Change: Finally, as a reminder, approximately 4.4 million shares will have been issued to former market partners and will become eligible for resale effective may 1st 2025.
Speaker Change: After may 1st there will be an additional approximately 300000 shares delivered monthly through 2027.
Speaker Change: All of these shares are subject to our our first our right of first refusal and we're authorized to repurchase up to 5 million shares.
Speaker Change: We'll be prudent and disciplined in managing our share repurchase program.
Speaker Change: And with that I'll turn it back to Jerry.
Jerry Chriscoe: Thank you Brad before we move to Q&A I want to provide further update on our progress with integration and our M&A strategy going forward.
Jerry Chriscoe: As we are wrapping up our traditional financial services busy season in most of the time sensitive client deadlines will soon be behind US. We now have the opportunity to accelerate our integration efforts deepen collaboration and move forward with key initiatives and strategies that will begin to unlock the synergies and growth potential of our exciting combination with <unk>.
Jerry Chriscoe:
Jerry Chriscoe: A major area of focus in the months ahead will be the integration of our technology systems and moving our teams onto a unified technology environment.
Jerry Chriscoe: This is one of the most critical enablers to operational improvements process standardization and our ability to drive consistency in everything from delivery of client services to our clip to our team member experiences.
Jerry Chriscoe: Once in place these integrated systems will allow us to streamline and automate processes.
Jerry Chriscoe: Enhanced data visibility and analysis and ultimately deliver greater value to all of our stakeholders.
Jerry Chriscoe: As with every step in our integration process, we will continue to take a thoughtful and intentional approach balance.
Jerry Chriscoe: Balancing progress with change management and training to support a smooth transition for our entire team.
Jerry Chriscoe: As we reflect on the past few months I'm incredibly proud of the progress we've made on many fronts from identifying a group of incredibly talented leaders to drive our most impactful strategic initiatives to establish a new operating models for.
Jerry Chriscoe: For our people, we continue to see high retention and strong engagement and we're gathering feedback and input along the way.
Jerry Chriscoe: In terms of future M&A with the successful completion of the Markham transaction and our continued progress with integration, we're seeing an increased interest in C beds as an acquirer of choice.
Jerry Chriscoe: We expected this outcome and are thoughtfully evaluating a number of opportunities that will continue to build out our geographic presence in key markets and add strength to our existing service lines.
Jerry Chriscoe: Finally, I wanted to touch on two items that that Brad touched on I touched on in my opening remarks, specifically relating to organic revenue growth and our guidance for the year.
Jerry Chriscoe: As it relates to organic revenue growth as you know, we've historically provided that guidance annually throughout the year.
Jerry Chriscoe: The reason that we were not able to do that this year is because when we look at the market numbers.
Jerry Chriscoe: They were private obviously before they joined <unk>, it's very difficult for us.
Jerry Chriscoe: From an apples to apples comparison to to have a good baseline for them a good reliable baseline on their organic growth.
Jerry Chriscoe: And so we just really don't have good line of sight.
Jerry Chriscoe: More importantly, we've already as you would expect and we expect we've already begun to bring these businesses together.
Jerry Chriscoe: Regionally, we're combining their offices with ours, we have combined leadership, we're combining our teams. So while we do have a little bit of line of sight in the first quarter, that's going to be historic that can be even more difficult as we progress throughout the year.
Jerry Chriscoe: With that said, we did have some line of sight in the first quarter and I want to learn that to you based on the internal analysis that we have.
Jerry Chriscoe: Very encouragingly as expected the recurring portion of our accounting and tax business, both within legacy <unk> and legacy Markham performed as expected in that mid single digit range.
Jerry Chriscoe: As well as our benefits and insurance group performing within that mid single digit rate. So I just wanted to convey that message that we're pleased with the performance of the business through the first quarter.
Jerry Chriscoe: And where we expected it to be strong it was strong that being in our seasonally kind of predictable more heavily.
Jerry Chriscoe: More recurring business in the first quarter.
Jerry Chriscoe: I'll also want to touch on a couple of things I noticed that debt.
Jerry Chriscoe: There were some comments around our revenue not hitting guidance.
Jerry Chriscoe: Or I'm, sorry expectations consensus for the year that really falls into two buckets as.
Jerry Chriscoe: As you know, we don't guide quarterly we guide annually annually. So let me kind of bring a little bit of color to that.
The two buckets are the known things we knew some things that that we couldnt conveyed to the analysts.
Jerry Chriscoe: Created consensus and that resulted in about a 30 million dollar.
Jerry Chriscoe: Change and it's really pacing and timing on the year, but we had about $30 million in category, one being the stack business, we've talked a lot about this.
Jerry Chriscoe: Markham within their capital market's practice traditionally did a lot of stack work that work predictably has been winding down.
Jerry Chriscoe: From a peak in 2023 and we saw at.
Jerry Chriscoe: A decline of 24.
Jerry Chriscoe: And expectedly declined again in 'twenty five.
Jerry Chriscoe: We're not concerned about that we know that we'll sell over theres. Other parts of the business that are in fact, increasing but we knew that backed business wood wood.
Jerry Chriscoe: Wind down.
Jerry Chriscoe: The other thing that we expected we've talked about this we haven't quantified. It is there were a couple of portions of the business that that we were going to have complex with most notably on their health care side, Mark them had a health care practice.
Jerry Chriscoe: That was in conflict with the conflict with our government health care consulting practice, that's another piece of that and then of course as you know we announced last year, we sold our K a consulting business.
Jerry Chriscoe: That was in last year's number isn't in this year's number that's about <unk>.
Jerry Chriscoe: Impact on the quarter of about $30 million of known items.
Jerry Chriscoe: The unknown portion of it was really related to the the economic climate and while there is a number of items. There I would just say it was the impact on the capital markets. So are our SEC audit practice and the work that we would traditionally do there when that when that when the market is just kind of hit the pause button as it were.
Jerry Chriscoe: As a result of some of the policies of the administration.
Jerry Chriscoe: That work just kind of halted no one saw that when we began the year and of course it had a like impact on our advisory practice. So those two things are about $20 million. So combined about $50 million again, we don't guide the quarters, but when I saw the comments that we missed the consensus I would say it wasn't far off our <unk>.
Jerry Chriscoe: Salt weren't far off our internal expectations certainly on the items that we knew and expected.
Jerry Chriscoe: Lastly, turning to guidance.
Jerry Chriscoe: We're really pleased and again the model affirms that debt.
Jerry Chriscoe: Despite some of some of the softness on the top line, we're able to yet affirm our earnings guidance for the year.
Jerry Chriscoe: In other earnings related metrics.
Jerry Chriscoe: From a topline we don't want the message to be concern over optimism or health of the business. That's why we didn't guide down on the top end of that the guidance is really just a result of kind of a pragmatic look at what we've seen so far in the year and what we expect to see.
Jerry Chriscoe: Through the continuance of the year, if conditions don't improve again with 23% of our revenue really being more advisory project discretionary side. We thought it was prudent at this point too to widen that range on the revenue side, because we know some things now that we do.
Jerry Chriscoe: No when we gave that guidance, but in no no term should it be viewed as a lack of optimism about the prospects for the range of the business and in fact, we in fact, we have some line of sight that if if things improve a little bit we will in fact hit that original guidance, but we wanted to to broaden that range so with that.
Jerry Chriscoe: I'll turn it over to Q&A.
Jerry Chriscoe: We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
Jerry Chriscoe: You are using a speakerphone please pick up your handset before pressing the keys.
Jerry Chriscoe: My question has been addressed and you would like to withdraw your question. Please press Star then two.
Jerry Chriscoe: At this time, we will pause momentarily to assemble our roster.
Christopher Moore: Comes from Christopher Moore with CJS Securities. Please go ahead.
Speaker Change: Hey, good morning, guys. Thanks for taking a few questions and maybe I'll just start with with where you left off Jerry in terms of the the nonrecurring services represent about 22% of revenue you you called out capital markets.
Christopher Moore: Are there.
Christopher Moore: It started about there.
Christopher Moore: Would it be.
Christopher Moore: Softer if you were to be closer to the low end of that revenue range. Yeah. Chris. Thank you for the question I would say capital market is a big piece of that the other thing is anything deal related as you know we have a pretty sizeable.
Christopher Moore: Private equity practice, that's really relies heavily on deal flow we've seen that's a mixed bag right we saw.
Christopher Moore: Kind of.
Christopher Moore: Through part of this year through the first kind of quarter. We saw some softness we're actually seeing some encouraging kind of activity in the pipeline and it's almost kind of month by month writers as tariffs are imposed activity slows this kind of 90 day.
Christopher Moore: It's actually increased our pipeline. So it's just very difficult to predict so that's a sizable part of our practice and then we do a lot of other work that's kind of harder to quantify and identify but related to transactions. When our clients are selling of course, we help them in their process. When our clients are buying we help them in their practice, it's not all within that.
Christopher Moore: Practice, it's kind of within our core advisory and core accounting business. So there is a pretty heavily heavy reliance on an M&A and we just don't have a lot of visibility into what that might look like this year I will also comment on that note that you know.
Christopher Moore: We serve predominantly in middle market client that client tends to be very optimistic and resilient kind of regardless of business conditions, but what they do need is line of sight right and I think the thing that's been unique to this that started this year is the is the uncertainty almost week to week and certainly month to month that there.
Christopher Moore: We're seeing if we get more predictability in kind of what the landscape looks like.
Christopher Moore: Then our then our optimism as to as to.
What those project works will look like will obviously improve its just been a very uncertain environment for us.
Speaker Change: Got it very helpful.
Speaker Change: Hugh you mentioned strong government health care consulting during Q1.
Speaker Change: Just given the current conditions.
Speaker Change: Just trying to get a sense, whether you expect that to continue and is there potentially an opportunity here from you know some of the just.
Speaker Change: Some of these Sis are government entities.
Speaker Change: More help from you if if some of the cut back section.
Speaker Change: Yes, Chris that's exactly the way we're looking at the question that we get sometimes is how much of your total revenue is tied to these federal contracts within that government health care consulting business. It's about 40 million directly related but theres also an indirect relationship in that the work that we do on the Medicaid side is is in part dependent on getting that.
Speaker Change: From the federal government, so, but as we sit here today, we actually are on the I think the the right side of the dos and the efforts around cost containment and savings because.
Speaker Change: In fact, the work we do.
Speaker Change: His work that supports that right, making sure that.
Speaker Change: That the programs are in compliance and making sure that that debt.
Speaker Change: I's are dotted and t's are crossed so when we talk to our team on that side of the business. They are quite encouraged right now by not only how the business performed through the first quarter, but the outlook for the business for the remainder of the year.
Speaker Change: Got it maybe just last one for me so.
Speaker Change: Integration costs related to acquisition, it's obviously, a big piece of the add backs I think it was $15. Seven this quarter can you just can you break that down into a few more.
Speaker Change: Primary buckets, and and you know maybe give us a census.
Speaker Change: When that will start to May include decline is that next year is that later this year or just how youre looking at.
Speaker Change: Yeah, I think the total amount that we have kind of earmarked for again kind of excluding excluding real estate is about $75 million.
Speaker Change: We will come this year, but we will have a significant will have a significant IP related portion of that kind of into 'twenty six but a large portion of the 25 will come into into this year I'm sorry, the 75 will come into the 2025.
Got it.
Speaker Change: Appreciate it I'll leave it there.
Speaker Change: Chris This is Brad I, just want to point out on the facility based integration, we haven't provided any outlook on that at this point in time.
Speaker Change: We're starting to obviously get the integration team is starting to get its arms around.
Speaker Change: What that's going to look like how its going to unfold kind of market to market.
But those facility optimization costs will probably be more more pronounced next year. So obviously when we're at a point, where we can provide more information we have better line of sight to that we will but.
Speaker Change: But that currently is not incorporated.
Speaker Change: Just generally speaking and what we've provided just want to remind you of that.
Speaker Change: Got it and I appreciate that.
Speaker Change: I'll jump back in line thanks, guys.
Speaker Change: The next question comes from Andrew Nicholas with William Blair. Please go ahead.
Andrew Nicholas: Hi, good morning, Thanks for taking my questions.
Speaker Change: First question just to clarify.
Speaker Change: On the revised revenue guide can you speak to kind of a condition that that the bottom end of the new range would assume Jerry you talked about I think $20 million of headwind.
Speaker Change: That was a little bit unknown in the first quarter FCC audit practice, maybe they're seeing some transactional headwinds there.
Should we assume that.
Speaker Change: Continuation of that would get you to the bottom end or is there some cushion if things were to get worse from from.
Andrew Nicholas: Yeah, Andrew we think it's it's a it's a pretty.
Speaker Change: Reliable range at this point and here's how we got there right. We basically to your point, we looked at kind of how the business has performed so far in the first quarter, we kind of annualize that through the rest of the year.
Speaker Change: And again, we're certainly hopeful that things will improve but we said if they don't what could that look like again with 23% of our revenue kind of tied to so kind of more project and discretionary work. We also looked at how the business performed in kind of the two most analogous periods that we've seen most note.
Speaker Change: <unk>, our most recently with kind of Covid and Covid that portion of the practice was down 10% to 15%. If you do the math on that so we basically looked at our range that we had originally provided which we're very very comfortable with obviously at that time.
Speaker Change: But through that lens, we said look the environment is a little bit different today.
Speaker Change: When we go and say how did it perform the business performed during that period of time again, Covid down 10 to 15, what would that look like.
Speaker Change: How did the business perform in the first quarter with annualized that again kind of a pretty pragmatic approach to let's just widened that range again I will I will emphasize that we have line of sight to the hitting the original guidance, but we just thought it was such a tight range that we'd rather kind of address it now than then throughout the year.
Speaker Change: Yeah makes sense that's helpful.
Speaker Change: Obviously.
Speaker Change: I just ask a question about about revenue.
Speaker Change: But you are maintaining the earnings guide even despite those potential.
Speaker Change: Headwind. So can you maybe just spend a little bit more time talking about the puts and takes there like what are the things operationally that you were doing if anything to offset some of those pressures.
Speaker Change: As you know things that are inherent to the model in terms of variable comp and the like and then also if there are any synergies that are included in the 25 that you have visibility on that you might not have a handful.
Speaker Change: Handful of months ago.
Speaker Change: Okay. Yeah. So let me, let me before I get to that kind of but related let me, let me talk a little bit about pacing right. So the other thing we didn't do is raise our guidance on the earnings side for the rest of the year. So while we're ahead of guidance right now, we're being pretty pragmatic and looking.
Speaker Change: We're ahead of consensus I guess, we're we're pretty pragmatic and looking at the rest of the year and basically saying as we.
Speaker Change: As we suggested at the year end call. The pacing is going to be a little bit different than what you've seen historically.
Speaker Change: Just because of the acquisition and the seasonality of the business now. So so we're maintaining that full year guidance expect despite the fact that I think were ahead of consensus really on that side, so, but but to more specifically answer. Your question I think naturally as you've seen with our business, even when we have a more challenging economic.
Speaker Change: Our business climate that affects our revenue week, we nonetheless have a considerable number of levers that we can pull to protect the the earning side of the business. They come in these buckets really one is around kind of our people in comp costs.
Speaker Change: Our comp structure is designed to reward growth and when we get that growth there is meaningful upside bonus and other consideration that.
Speaker Change: We're pleased to be able to reward the people.
Speaker Change: We kind of accrue that ratably throughout the year.
Speaker Change: And so in periods of time, when we're not seeing that growth obviously.
Speaker Change: Those amounts can be reversed right that we wouldn't accrue if we're not getting the growth that we're not getting the performance also.
With kind of a little lighter demand for certain of our services, we're not filling head count to the same degree. So so it affects compensation that way we've also had.
Speaker Change: Early encouraging progress on outsourcing and our reliance on outsourcing that favorably impacts.
Speaker Change: Impacts those metrics as well so theres a number of kind of on the people side and I would say that's about two thirds of the of the adjustments that we've been able to make or savings we've been able to occur and then the other third is around what you would just expect on discretionary side TV advertising recruiting costs. Those types of things are all kind of naturally lower.
Speaker Change: During this period of time, so I would say two thirds, one third and we experienced that in the first quarter and we'd expect to be able to continue to pull those levers. If we if we don't see improvement in the top line.
Speaker Change: Very helpful. Thanks, Gerry and then maybe just one last one on capital allocation.
Speaker Change: I think you've talked since the market announcement about our willingness to buy back some shares if the opportunity presents itself also kind of save up or.
Speaker Change: Consider deal maybe later this year early next.
Speaker Change: In light of the current environment.
And what you've seen so far with markdowns in the first half year or so if you could just kind of give us an update on prioritization amongst all the different <unk>.
Speaker Change: Adams that'd be great. Thanks again.
Speaker Change: Yeah, Hi, Andrew Brad here.
Speaker Change: Appreciate the question, so listen I think I'll start by saying in the quarter.
Speaker Change: I'll remind you kind of what I said previously which is you know we're working capital usage was consistent with what we expected and consistent with our prior patterns that we saw from a just a general legacy Cvs perspective.
Speaker Change: And really our cash generation.
Speaker Change: Cash usage I should say in the quarter.
Speaker Change: Was a little better than what we expected. So we were encouraged by that turning to your question I guess from a capital allocation perspective remember.
Speaker Change: Historically, we prioritize organic and inorganic opportunities. So you know in terms of using free cash flow for those opportunities and then really that was kind of.
Speaker Change: Followed by shareholder returns right and then keeping our leverage usually around two five times or below.
Speaker Change: Flexing for higher higher higher leverage for strategic opportunities. So that was our historical capital allocation priority I'd say going forward here for the next year or two Andrew you know we are focused on getting our leverage back down. So we'll be continue to focus on getting our debt down to you know underneath two and a half times and.
Speaker Change: We feel like I said with free cash flow generation.
Speaker Change: We should be able to get there by the end of 2026.
Speaker Change: But we're also going to be very very opportunistic.
Speaker Change: And B, you know kind of ready and flexible to do some things strategically if the right opportunity presents itself.
Speaker Change: And then as you said we have.
Speaker Change: We have the opportunity to deal with are our share repurchase program, we have shares coming back on the road for potentially and we feel like we're very very well positioned to be able to to do the right thing there and be prudent and financially disciplined so those will be our priorities here over the next year or two.
Brad Lochia: Thanks, Brad.
Speaker Change: Again, if you have a question. Please press Star then one.
Operator: Our next question comes from Marc Riddick with Sidoti. Please go ahead.
Marc Riddick: Hey, good morning, everyone.
Speaker Change: Brad welcome looking forward to working with you going forward.
Marc Riddick: Just wanted to touch a little bit.
Speaker Change: As.
Speaker Change: The mentioned on the.
Speaker Change: Clients.
Speaker Change: Reception and I guess, it's sort of a combination right. There's the general retention, which seems to be fine and then the color and context, which some of which are obviously to be expected can you talk a little bit about how the as you sort of discovered where the conflicts are and how they've risen to this point.
Speaker Change: What your thoughts are as to the timing of those impacts and how that played into guidance.
Speaker Change: Guidance for the remainder of the year do you think you can kind of through most of that or how should we think about that as sort of you.
Speaker Change: And I'll.
Speaker Change: Go to that process.
Speaker Change: Mark I'll take it.
Speaker Change: Let me.
Speaker Change: Deal with the client side first let me let me start here.
Speaker Change: Whenever you combine two organizations of our size, it's inevitable youre going to have some.
Speaker Change: Client conflicts you can't continue that work, we knew about the healthcare practice, we modeled that in.
Speaker Change: And by the way the numbers that we experienced which are all behind us at this point are.
Speaker Change: Within the model. We also expect that there would be some de minimis amount of additional client conflicts that were going to occur and it might be as simple as.
Speaker Change: Were doing a test work for the engagement and.
Speaker Change: That was legacy market was doing that a test work and legacy <unk> may have been providing a commissioned insurance product.
Speaker Change: The independence rules prohibit us from doing those types of things. So we have to shed the client. So I will tell you it's not a large number in the scope of our total revenue and it's also within the range that we had within our model at least what we've experienced so far and we don't think we think most of that's behind us as well so.
Speaker Change: Again as expected within the model, but year over year, it certainly did impact.
Speaker Change: The comparable numbers year over year.
Speaker Change: Okay, and then I was sort of curious as to the.
Speaker Change: <unk>.
Speaker Change: I guess, maybe the timing of when you began to see impacts on the audit practice and in advisory.
Speaker Change: At work I mean.
Speaker Change: It's interesting because it's some things you can sort of pointing to and say okay that was when the tariffs were announced or what have you is there sort of any particular signposts or was it sort of a gradual.
Speaker Change: As far as the timing of when when some of those impacts were.
Speaker Change: I see.
Speaker Change: Truthfully I did not asset specific question, but but what I've learned.
Speaker Change: And again, just remember that that's a practice that kind of FCC PC Ob practices, one that that legacy Mark brought to us by the way great practice, great people great opportunity, we're excited about it but not one that we had before so.
Speaker Change: As to how that.
Speaker Change: The client work evolves and comes the timing, though some of those things it just new to us as well, but when we asked the question was logical right that the responses that many of the clients that we're serving there are going out.
Speaker Change: Regularly for for financing they need comfort letters right, if theyre not raising funds. They don't need those comfort letters. They are filing S ones hold considerable amount of work to be done when they do those things if that work stalls that work doesn't get done now that's not to say that work won't come it will come I think natural.
Speaker Change: As the market improves and as optimism improves we just can't predict the timing so theres a little there's a little more uncertainty around even that portion of the practice and we've historically experienced.
Speaker Change: Okay. That's that's very helpful and I was sort of curious as to I'm not sure. If we discussed the pricing environment have you seen any.
Speaker Change: Any changes there or anything thats different than what you would've originally expands as far as just general pricing trends.
Speaker Change: Yeah, I guess I have two responses to that Mark great comment as you know we I think ahead of others in the industry have really a very disciplined approach to pricing and making sure we have pricing in.
Speaker Change: And processes behind it and reporting and follow up and training all of those things. So we have had considerable success in pricing over the past couple of years, we've actually seen in yield as kind of a proxy for pricing, we've actually seen really nice lift in <unk>.
Speaker Change: Our pricing.
Speaker Change: Through the first quarter. The second part of that I said there were two parts. The second part is inevitably if the if the market continues to be a.
Speaker Change: More challenging environment and work is harder to come by people look to to keep their people busy and oftentimes that translates into.
Speaker Change: Enter into people lowering rates, so we haven't seen that yet but but.
Speaker Change: I wouldn't be surprised.
Speaker Change: That we'd see a more challenging environment in.
Speaker Change: In the future if the if the business climate.
Speaker Change: Any further.
Speaker Change: Understandable. Thank you very much.
Speaker Change: This concludes our question and answer session.
Jerry Chriscoe: I'd like to turn the conference back over to Jerry <unk> for any closing remarks.
Jerry Chriscoe: Sure. Thank you as we wrap up today I always as we always do I want to thank our shareholders and analysts for joining us and for your continued support.
Jerry Chriscoe: There's a headline that I that I would like to leave you with today and that is the business. Despite.
Jerry Chriscoe: Revenue from some revenue and some macroeconomic.
Jerry Chriscoe: Kind of pressures on the business the business performed very well and it performed as it should in this climate.
Jerry Chriscoe: Very strong earnings number right and so even environments, where the revenue might be off a consensus a little bit we were able to deliver very strong earnings and in fact ahead of consensus.
Jerry Chriscoe: The other high note as the core business the core recurring business, both on the benefits and insurance side and on the core accounting and tax side continued to perform as expected and within the range of the mid single digits that we had guided again very encouragingly. The integration again, it's no easy task to bring two organizations of this size.
Jerry Chriscoe: And scale together.
Jerry Chriscoe: Unscheduled and by all accounts going very well, we have a very disciplined process behind that I'm doing I'm, having regular check ins with our team and things are on schedule and very pleased we kind of look at it every week as a red yellow green and it's almost green always across the board. So we have a strong team working on it and a strong leadership.
Jerry Chriscoe: Chip working on it and very happy there and then maybe most encouragingly just kind of a cultural alignment you don't know what youre going to find when you bring two organizations together and just the I wouldn't say cultural identical the cultural alignment has been far better than expected legacy marcum.
Jerry Chriscoe: Brought to us really strong leadership they brought exceptional talent. They brought a really strong culture that combined with our extraordinary culture. You can feel it you can feel when you go in the office as you can feel as the team sit around the table and clip.
Jerry Chriscoe: Around the table and collaborate so we couldnt be more pleased sitting here today in light of all the work that that everybody has put into getting us to where we are with how we're how we're.
Jerry Chriscoe: How were proceeding through the first quarter more importantly, and I've said this to our team and I will say to you. The future's never look brighter just as a reminder, as to why we brought this together we now have scale that we never had before that scale will allow us to make investments in the firm to continue the growth and success in all the areas.
Jerry Chriscoe: That we need to continue.
Jerry Chriscoe: Best in the business it will provide us with the ability to go to market and provide our clients and our prospects with.
Jerry Chriscoe: With services and solutions that we feel are unmatched by any of our competitors in the industry.
Jerry Chriscoe: And equally important position us to be able to win that war for talent by offering people career opportunities that they would never have had.
Jerry Chriscoe: In a smaller organization or or one that doesn't have the culture and the commitment to people that see this has.
Jerry Chriscoe: I mentioned the client side.
Jerry Chriscoe: On top of scale, if you consider CBS today compared to anyone else that might be in our peer group. We are unmatched not only in our geographic presence and.
Jerry Chriscoe: And our breadth of services, but in our industry expertise and unmet industry side. We now have eight industry groups with revenues between 100 $300 million, we actually have identified 12 industry groups.
Jerry Chriscoe: The power of bringing our breadth of services our depth of expertise a holistic approach to the solutions that we can bring to those clients again unmatched and so.
While there is no question a lot of work that still needs to be done we sit here today more excited today than we've ever been about the prospects of the business and even more excited than we were on November one when we announced the closing the transaction.
Speaker Change: I'd be remiss, if I didn't acknowledge the tremendous effort and adaptability and resilience of each of our team members. That's been involved in this process everything that we've accomplished every milestone every client win is made possible as a result of your hard work your.
Jerry Chriscoe: Commitment your dedication to the team and to the clients.
Speaker Change: As I mentioned.
Speaker Change: I've never been more excited for the future of the business and I'm incredibly proud of all that you've accomplished to date and I am excited to be on this journey with you in the future with that I'll conclude the call and thank you for thank you for joining us today.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.