CBIZ, Inc. (CBZ) on Q1 2021 Results - Earnings Call Transcript
Operator: Good morning. Welcome to CBIZ' First Quarter 2021 Results Conference Call. Please note that this event is being recorded. I would now like to turn the conference over to Lori Novickis. Please go ahead.
Lori Novickis: Good morning, everyone, and thank you for joining us for the CBIZ first quarter 2021 results conference call. In connection with this call, today's press release has 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 as well as an archived replay and transcript, can also be found on our Web site. Before we begin our presentation, we would like to remind you that during the call, management may discuss certain non-GAAP financial measures. Reconciliations of these measures can be found in financial tables of today's press release and in the investor presentation on our website. Today's conference call may also include forward-looking statements, including statements regarding our business, financial condition, results of operations, cash flows, strategies and prospects.
Jerry Grisko: Thank you, and good morning, everyone. With the release of our first quarter results this morning, we are pleased with our strong start to the year. We experienced growth in total revenue, same unit revenue, earnings per share and adjusted EBITDA for the first quarter of 2021. These results provide important momentum for the remainder of the year. Our results demonstrate the fundamental attributes of our business model that I've emphasized throughout the past year. These characteristics continue to enable our positive performance during both favorable and less favorable business conditions. These attributes include the proportion, representing approximately 70% of our revenue that comes from essential and recurring services, including our tax services, insurance services, payroll services and a host of others that our clients rely on us to provide regardless of business conditions. Our high client retention rates, our broad geographic footprint, the diversity of our client base in terms of industry and size of business, our strong and consistent cash flow and the substantial amount of variable expenses in our business. We continue to capitalize on the stability that our business model affords. Throughout the last year and into the first quarter of 2021, we have watched how these attributes provided us an opportunity for growth regardless of economic environment. In addition, we continue to be extremely vigilant in managing our overall expenses and discretionary spending. Practices we focused on at the start of the pandemic and carried into the first quarter of this year. As recovery continues, and we return to some level of normalcy, these expenses will begin to return as well, albeit at somewhat reduced levels compared to 2019.
Ware Grove: Thank you, Jerry, and good morning, everyone. I want to take a few minutes to run through the highlights of the numbers we released this morning. With total revenue growing by 8.4% in the first quarter, revenue growth from acquired businesses accounted for 4.8% of that growth, with same unit growth up by 3.6%. After facing uncertainty in 2020 coming into this year, we were unclear how the year-over-year comparison to 2020 would unfold in the first quarter. The core business has continued the steady performance that we saw through much of last year. And as expected, the advisory and transaction-oriented business services that were more vulnerable to the conditions encountered last year have largely stabilized, and we are positioned to record growth this year. Our Financial Services group recorded total revenue growth of 8.1%, with same unit revenue growth of 4.5%. With no industry concentration within our core services clients, the diverse set of clients we serve lend stability to this business. The acquisitions we closed last year are performing extremely well, with the only soft comparison being the private equity focused advisory business where the first quarter this year compares with a strong first quarter a year ago. We currently have a full pipeline of prospective work within this group and we expect to report growth for the full year. Continuing to work under remote conditions, our government healthcare consulting business had a strong first quarter. Turning to the benefits and insurance group, total revenue grew by 9.6%, with same unit revenue growth of 1.6% in the first quarter this year. Some of the transactional-based businesses, such as payroll services, are soft in comparison with first quarter a year ago. But after reporting a same unit revenue decline of 3% for the full year last year, the 1.6% first quarter same unit revenue growth within benefits insurance this year is noteworthy. As Jerry commented, our investment in additional producers that has occurred in recent years is resulting in stronger pipelines of new business. We are continuing to invest in bringing additional producers onboard to further enhance growth prospects. When coupled with strong client retention, we are well positioned for growth. As Jerry discussed, we remain vigilant in managing our expenses, which include for example, lower levels of expense for travel and entertainment that given the constraints caused by the pandemic are directly tied to our remote work. Also, as a reminder, in the first quarter a year ago, we recorded an additional $2 million of bad debt expense. And so with the improvement in client receivables we are seeing, bad debt expense was lower this year.
Jerry Grisko: Thank you, Ware. I'd like to touch on a couple of additional areas before we turn it over for Q&A. First, in regards to M&A, we started 2021 with the strongest M&A pipeline we've had in many years. Already this year, we've completed one acquisition within our core accounting and tax practice and another within our retirement plan services business. I mentioned the acquisition of Middle Market Advisory Group during our last call. M&A provides tax, compliance and consulting services to middle market companies and family groups in a number of attractive industries and is located in Denver, Colorado. This acquisition complements our rapidly growing Denver based practice. I'm also pleased to announce the acquisition of Wright Retirement Services, a provider of third-party administrative services to retirement plan clients across the country. Located in Valdosta, Georgia, Wright Retirement services has a longstanding relationship with CBIZ as a client, and we are excited by the opportunity to offer their clients a broader array of services.
Operator: Our first question is from Andrew Nicholas from William Blair.
Andrew Nicholas: I wanted to start with the question on M&A. And I mean it with respect to the broader market, not CBIZ specifically. Obviously, it was in, I think, record levels throughout the first quarter. Is there any way for you to maybe help me or help us dimensionalize how much it positively impacted your growth in the period? And also, how you think about your exposure to that dynamic for the business as a whole?
Jerry Grisko: So Andrew, this is Jerry. When you think about how it impacted our growth, that would be difficult to really tell and I'll tell you why. There's really 2 pieces of our business that really are highly dependent on, specifically highly dependent on acquisitions. The first is the obvious one, the private equity advisory business that we have. That's now about a $50 million business. In that business, we provide quality of earnings, we provide FP&A, we provide a host of other services principally and primarily to private equity funds for their portfolio companies in assessing acquisition opportunities. That $50 million is obviously highly tied to the general broader overall M&A activity market. But we also do an awful lot of work with our clients within our traditional accounting practice around helping them structure and consider capital, large capital investments of all sorts, certainly including M&A. And that's a little bit more difficult for us to assess as to how the direct dollar impact. But I will tell you that a more robust economy, a more favorable business climate for M&A certainly helps us in our growth for the year.
Andrew Nicholas: And then I know you touched on it a little bit in your prepared remarks where, but gross margins at the segment level looked to beat records by a pretty sizable amount for each segment. So I was kind of hoping you could spend some time walking through what's driving that improvement and maybe speak to the sustainability of that level of performance in future years, understanding that Q1 is seasonally high and that there are some costs that you'll layer back in as the pandemic kind of hopefully fades away. But any color there would be helpful.
Ware Grove: Yes, the gross margins and pretax margins were extraordinarily high in the first quarter, and they were aided by a couple of year-over-year comparisons, which quite frankly, won't be sustainable throughout the year. They were unique to comparing this year and the expense levels versus last year, which was largely pre- COVID expense levels. So first of all was the bad debt expense, roughly $2.2 million swing. That's a onetime first quarter comparison that won't be sustainable for the balance of the year. Also we had, on the benefits and insurance side, we typically get in the first quarter the carrier contingents and carrier bonuses that relate to the prior year of client retention and claims experience and things like that. So that also was kind of a onetime nonrecurring favorable thing to the first quarter, and that was a $1.4 million item. And then when you just look at the other expense items like travel and entertainment, it continued to be very low this year as it was most of last year. But in the first quarter, remember, COVID really didn't start to impact our expense levels until about midway through March when to stay at home orders and those things started to impact the business. So once again, you have kind of a favorable year-over-year comparison in the first quarter with respect to the expense levels. So the key takeaway would be that, yes, we're very pleased to see that big margin expansion for the first quarter. But we're going to experience some choppiness this year as we signaled with the original guidance. We're going to see some choppiness this year with respect to the year-over-year comparisons just because -- and another example we talked about was the marketing media campaign. We totally paused and pulled that out of the mix last year on a discretionary basis just to protect the business. This year, we think it's the right thing. It will enhance long-term opportunities. So in the second quarter, you're going to see the impact of that expense, whereas last year you wouldn't have seen it. So I think it's fair to say that we will see margin expansion this year. We commonly say on a long-term basis, it's our goal to get 25, 20 to 50 basis points improvement each and every year. And I think that will occur this year, but it certainly won't be upwards into the 300-plus basis points just because of the things I talked about.
Andrew Nicholas: And if you wouldn't mind me squeezing one more in on the government healthcare business, I think you noted in your prepared remarks some acceleration there. But I'm just wondering -- well, I guess first, could you say what the specific growth was for that business in the quarter? But also, maybe just more qualitatively, how close is that business to returning to pre-pandemic type utilization levels? And if you have any thoughts on the recovery cadence for those levels to the extent that they haven't already come through? Thank you.
Ware Grove: Andrew, this is Ware again. That business, and you may remember and maybe that's behind your question, we've often said it typically grows in the high single-digit range. But at some point, it gets big enough that the percentages get really tough, but the growth dollar-wise is still pretty impressive. Last year, as we converted to remote conditions, the good news was we saw very little disruption in client work, but some of it was pushed out and delayed just because remote work is less efficient. And so some of that will come back into this year. And we did grow in the first quarter, kind of mid-single-digit range, not high single-digit range, and that's the expectation for the year.
Operator: Our next question is from Marc Riddick from Sidoti & Company.
Marc Riddick: Wondering if you could talk a little bit about the opportunities for growth around hiring and maybe what you're seeing there and what those plans may be to sort of take advantage of future opportunities? And then I have a couple of follow-ups around that.
Jerry Grisko: Yes, more specifically, I'm going to answer it, I'm not sure I really fully understand the question, but what we're -- in our plan, in our guidance for this year is the staffing that we have today. So we think we have plenty of staffing to achieve the guidance that we set out as far as growth is concerned. We are seeing, as you see generally in the economy, that there are some constraints on resources that are available. We believe that we have a compelling value proposition to our workforce, and we think that we'll win our share. But there's no question that there is somewhat of a tightening of the labor market, certainly across the board, and that's also true in our industries. With that said, there's other opportunities, other levers in addition to just headcount that we can pull to achieve the growth that we, again, that we have put into our guidance in things including pricing, things including the types of services that we provide to our clients, the programs that we put in place to help our clients navigate things like the additional stimulus packages that are in the works. So we think we have a considerable number of levers that will help us get the growth that we've guided towards. Hiring is certainly one of them. And we talked a little bit about the producer program. We also believe that we have a real and very attractive model to recruit into on the producer side, and we're confident that we will continue to add to those numbers.
Marc Riddick: And then one of the things I wanted to circle back on, and during the course of the pandemic one of the things that you were very active with, was the outreach programs that you had for your customers as far as providing resources for information and sort of helping both your existing customers, but new potential customers sort of navigate as much as possible from an information standpoint, navigate the pandemic with information and webinars and the like. And I was wondering if there was any thought or if you've had the opportunity to sort of look at how that can sort of work going forward and maybe how that has translated into new customer growth and what that part may have played in generating the numbers that you were able to deliver today?
Jerry Grisko: We learned a lot last year, right? First of all, it was very affirming as to our business model, our approach, the value of the breadth and depth of services that we provide, the value of the depth of the expertise we provide. And as I commented last year and I think at the end, early this year, that all came together in the way that we holistically packaged our products and services through webinars and through other client outreach programs to be able to serve them in ways that many of our competitors can't. They just don't simply have the scope of services or the depth of expertise. And we've received terrific feedback from our clients and prospects through that engagement. And so to your question, that will continue into the future. We have programs that are continually being developed and hosted. We invite, again, clients, we invite prospects, key decision-makers to participate in those programs. And as a result, we are very, very pleased with the kind of top of the funnel on our new clients and additional revenue pipeline. So those things have worked for us. We learned how to execute that on those things much better in 2020 through the pandemic, and those programs will continue into the future.
Marc Riddick: And then the last one for me, and I know this might be a little tricky, but I guess a couple of years ago we had the federal delay following the company shutdown. Last year, of course, was the initial pandemic and this year a one month delay in federal. Is there sort of a way to -- so we haven't had a normal season, I suppose, in several years, but is there a way to sort of think about quantifying maybe how much potential revenue may have shifted or maybe even if there's a way to sort of think about what that difference might have been, if not versus last year because last year, of course, was unusual as well. Maybe sort of compared to what it traditionally would have been under normal circumstances.
Jerry Grisko: What we're learning is there is no typical year. We are always going to face something there. A lot of times, I think the very positive message that hopefully you've received over those periods of times, is that business doesn't go away. It may be deferred. There may be other reasons why the revenue might shift from one quarter to another or into the year. But generally, the revenue, once we have these contracts, we have long-standing relationships with these states. That work needs to be done. We're going to get that work done. And it's really just a timing issue as between quarters and years. And that's often why it's very difficult and we caution against trying to model quarter-over-quarter results for us. Because those can be large swings in a business as sizable as M&S and with regard to how large those contracts are. With that said, I think the best guidance that we can provide is the guidance that Ware alluded to in his remarks, which is we've traditionally grown that business at kind of mid to high single digits. While it will be harder in the future to keep the percentage of growth at those levels as the business gets lower, I think you could look at certainly the dollar impact of that growth being fairly consistent over longer periods of time year-over-year.
Marc Riddick: I really appreciate that, and I just want to sneak in one last one. I wanted to sort of touch on, and this is sort of more general, but I wanted to get a sense of what your feelings were as you guys have always done acquisitions and executed really well on them. And I was sort of curious as to maybe what those conversations are like? Or it seems as though you would be a more attractive destination, relatively speaking, in the eyes of potential partners, future partners following the challenges like we've seen. So I was wondering if you got a sense that the conversations that you're having now, are they different than they were maybe five, six years ago when it's sort of fresh and clear that you're an attractive destination and future partner?
Jerry Grisko: Yes, Marc, they're not only different from five and six years ago, they're different from 18 months ago as a result of what we experienced over the past 20 -- in 2020 compared to many of our competitors. So let me kind of talk about both of those things. First of all, I think what people come to appreciate and recognize is that when they look back over our performance over a long period of time, we've had sustained revenue growth, we've had sustained earning margin, and we have substantial scale. And so those attributes allow us to continue to make investments in the business, investments in practices, investments in technology, investments in people, investments in the growth and development and products and solutions for our clients that simply smaller competitors, they just don't have the resources to make those investments. And they come to appreciate those things. The difference really over the past 20 months or -- really over the past year since 2020 is, prior to that time, and we've seen this at various points in our history, prior to that time, we're only interested in bringing on the most highly regarded service providers in our markets and in our industries. And when we have those conversations with, whether it's on the accounting side or the benefits insurance side, oftentimes the response is, we know CBIZ, we like CBIZ, we really like what you're doing, we'd love to be part of it someday. But there's no compelling reason to do it today as opposed to tomorrow. What changed in 2020 is that they faced pressures that they would not typically face in more favorable economic conditions. And things like being able to maintain your workforce, being able to continue to make investments in the business, being able to bring the types of programs that we're able to bring to our clients to help them in that very uncertain and unsettling time as we did in 2020. And then the strength of our balance sheet, the strength of our cash flow, breadth and depth of expertise, all of those things, we're telling that story. We were telling that story, by the way, in 2019 as well. But we're telling it in 2020 and 2021, and they're hearing it different, and they're leaning into that message more. And as a result, as I said at the outset of this call, we have had the fullest pipeline of M&A transactions that I've seen in many, many years, and that continues, and there's a great receptivity to the message.
Operator: Our next question is from Chris Moore from CJS Securities.
Chris Moore: Just a few here. One follow-up on the gross margin. So obviously, you did a good job going through where some of that excess margin is coming from. On the discretionary side, travel expense, does it impact the segments the same or differently?
Jerry Grisko: Yes, probably the bad debt expense delta would be clearly more oriented towards the financial services side, where we've got kind of the traditional billing and trade receivables with our clients. The carrier contingents would be impactful on the benefits and insurance side. And then I think on the travel and entertainment side, which I called out, it's probably proportionately equal to kind of the sales mix or the revenue mix between the two. Without getting too -- I just don't have the details, but I think that is safe.
Chris Moore: Still, I want to make sure that I understand from a seasonality standpoint. Obviously, financial services, very seasonal. On the benefits and insurance piece, the margins you walked through where in terms of why Q1 gets impacted sometimes, etc. I guess more from a revenue standpoint, you did $87 million in revenue in the first quarter in benefits insurance, 1.6%, I think, same story you said, so some acquisitions in there. What I'm trying to understand is, is that $87 million moving forward? How does the Q1 revenue seasonality and benefits insurance, how significant is it?
Jerry Grisko: Most of the businesses that are embedded into the benefits and insurance aren't really seasonal. For instance, employee benefits it's kind of throughout the year. And the payroll business is throughout the year pretty equally. Retirement planning services, same thing. On the property and casualty side, when we see renewals that happen typically annually, you typically recognize the revenue there. So that might be a little more front-end loaded, kind of a year-end cycle as opposed to a midyear cycle. But I would say it's not highly seasonal because we have a fair share of clients that do a midyear renewal as opposed to a calendar yearend renewal. I think the one seasonal thing that we did talk about was that the carrier commissions that come through based on the prior year. And they typically come through in the first quarter.
Chris Moore: And the last one, just in terms of the 8% to 10% revenue guide, is that pretty evenly skewed between acquisitions and same store? Or is it more skewed towards to the acquisition side?
Jerry Grisko: It's probably -- it's safe to say that with the acquisitions accounting for a larger portion in the first quarter, that will continue throughout most of the year. It's probably two third, one third split as opposed to the typical kind of 50-50 split that might be more true over time.
Ware Grove: Chris, I do want to clarify though, we only count in that number kind of acquisitions that have been closed. As you know, there's a high rate, it's hard to predict. So I don't want you to think that we have future acquisitions in that number.
Jerry Grisko: We did eight acquisitions through January 1, plus just announced a new one. So it is more heavily weighted towards acquisitions this year.
Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Jerry Grisko for closing remarks.
Jerry Grisko: Thank you. I want to close today by thanking our analysts and our investors, as we always do, for your continued confidence and support. I also want to take this opportunity to recognize our CBIZ team members. Our noteworthy performance in the first quarter is a direct result of your commitment and dedication. I remain incredibly proud of what we've accomplished over the last year working together, and I'm even more excited for what we can achieve in the year ahead. Thank you and we look forward to talking to everybody after the end of the second quarter. Have a great day.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
