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Good morning, and welcome to the CBI

Good morning, everyone, and thank you for joining us on today's conference call to discuss CBI

Thank you, Lori. Good morning, everyone. Earlier today, we announced our agreement to acquire Marcum, the 13th largest accounting firm in the country. When this transaction closes, our combined businesses will have revenues of approximately $2.8 billion, comprised a team of over 10,000 professionals and serve more than 135,000 clients. Together, we will solidify our position as a leading provider of professional advisory services to middle-market clients and become the seventh largest accounting services provider in the nation. We plan to devote a considerable amount of our time this morning walking through some of the specific details around this transaction. But before I do that, I want to first outline our financial performance for the second quarter, and then we'll ask Ware Grove, our CFO, to provide additional details on our results. So let's begin with our financial results. We are pleased to report that our second quarter results were generally in line with the term expectations, and that the overall health of our business remains strong. For the second quarter, total revenue was up 5.4%, with total revenue up to 7.2% for the first half of the year. To better understand our performance to date and some of the factors impacting our results, I want to start by unpacking some of the unique headwinds we faced this quarter. As a reminder, we typically caution against comparing any given quarter in the year to the same period in the prior year, as we occasionally experience more volatility in our financial results quarter-over-quarter. I want to start by describing a specific event within our property and casualty insurance business. Our results for the second quarter and first half include the impact of the exit of a small team of producers and support personnel within this business, and the loss of a number of clients served by this group. Fortunately, this type of event is very rare for CBI

Thank you, Jerry, and good morning, everyone. Of course, the big news today is the announcement that we have reached a definitive agreement to acquire Marcum with revenue of approximately $1.2 billion. This transaction is a major step forward for CBI

Thank you, Ware. We want to use our remaining time to walk through the details of the transaction, the largest in our history and to answer any questions you may have. We anticipate transaction to close during the fourth quarter. And until that time, we will continue to operate as separate entities. Throughout our presentation today, we'll be referring to our objective of stronger together, which has been our theme for this transaction as well our long history of other successful acquisitions. I kicked off today's call by outlining what the combined organization will be, including revenue of approximately $2.8 billion, more than 10,000 team members serving over 135,000 clients with a strong focus on the middle market and positioning us as the seventh largest provider of accounting services nationwide. But more than that, our announcement today is a significant milestone in our nearly 30 day -- 30-year journey to solidify our position as a leading provider of professional advisory services to middle-market businesses by offering a breadth of service and depth of expertise unmatched in our industries. This acquisition provides us with the scale to exponentially accelerate our growth strategy, and to focus our collective resources on areas that will bring even greater value to our team, our clients and other key stakeholders. By joining forces, new organization will be better able to attract and retain the best and brightest talent in our industries by investing in their growth and development, equipping them with the latest and most effective tools and technology to help them perform at their best by providing meaningful work in helping clients in their most important opportunities and challenges. It will also offer unmatched breadth of services and depth of expertise to our clients including our ability to develop new and innovative and actable solutions. It will enable us to access new sectors and to expand our presence in target industries and to invest in technology to support data-driven insights and solutions, while driving innovation, increasing efficiency and enhancing performance. Some of the key transaction terms and features include an enterprise value of approximately $2.3 billion, which is a multiple of 12 times adjusted EBITDA or 10.1 times including the value of the tax asset that was a feature of the transaction. The consideration will be paid approximately 50% in cash and 50% in CBI

Thank you, Jerry. Marcum is a highly regarded accounting firm, whose routes stayed back to 1951. The firm is headquartered in New York City and has a long successful track record of organic growth coupled with acquisitions. Speaking of acquisitions, they completed 45 since 2008. Today, Marcum is the 13th largest accounting firm in the U.S. with $1.2 billion in revenue. They have over 3,500 employees and 35,000 clients. Marcum serves their clients through 43 offices, which are primarily located in New England, New York, Philadelphia, Florida and California. Like CBI

Thank you, Chris. Well, the work to-date has been largely around due diligence and structuring the transaction immediately starting today through closing, we'll be focused on the integration. Our combined -- at closing, our focus will be on first people, making sure that we understand the talent that we're acquiring and make sure that they're properly on-boarded and integrated with our teams. Our approach to client service and aligning that as well as elevating our brand. Also beginning quickly following the closing and continuing the first 18 months, our focus will be on common systems and processes making sure that we have an approach going forward that will create a common and consistent and aligned on CBI

Thanks, Jerry. For those of you who are on audio only. I'm on Page 19 of the deck, if you have that in front of you, and if it's not on your screen. But the combination of CBI

Yes. Thank you, Ware. Just before we go into Q&A, I just want to say that this acquisition is going to position our company for accelerating growth, not only today, but into our future. And when we think about the advantages and why we're so excited about this. I think it's around the opportunities that it provides for us to bring even more valuable innovative solutions to our clients. The value, obviously, that will bring to our shareholders as a result of some of the attributes that were mentioned. But most importantly, the opportunities it's going to provide for our team members. When we think about the work for talent and we think about what's important to our team members, it's all about supporting them and their growth and their development, their career opportunities. It's about providing them with the tools and the equipment that are best-in-class to be able to apply their trade, and it's about showing appreciation to them through competitive compensation and benefits and allowing to come up the value chain to the clients and provide even more interesting work and more consultative work. And we're on a journey to do all of those things, and this accelerates that journey. So we're particularly excited about the opportunity that this presents to our workforce. And with that, I will turn it over for Q&A.

Ladies and gentlemen, at this time we’ll begin our question-and-answer session. [Operator Instructions] Our first question today comes from Chris Moore from CJS Securities. Please go ahead with your question.

Good morning guys. What’s going on? Congratulations, looks interesting. Maybe we will just start with Q2, and then we can ask a few questions perhaps on Marcum. So we were -- EPS was about $0.18 below kind of where the Street was looking at right or wrong. The impact is roughly $0.06 from the P&C issue there. And so estimates are coming -- your guidance is coming down about $0.06. Where kind of ran through some of the breakdown there. Some that looks like it's not necessarily going to pick up in the second half of the year, some will. Just maybe if you could go a little bit deeper in terms of your ability to just lower the guide by $0.06, were we looking at the quarter incorrectly? Or I know timing can be difficult?

Yeah, Chris, this is Ware. I'll just talk about the timing. And it's unfortunate in the second quarter, we had a collection of items that really adversely impacted quarter-over-quarter comparisons. Some of them were predictable as we stated, we expect it to not really achieve. And I know we had a conversation at the end of first quarter about the seasonality and be careful. But as it stands, we expected the quarter to be relatively flat, compared to last year, and then we got hit by a couple of unplanned items, including the property and casualty issues. I think we've got an opportunity that as we lap those year-over-year comparisons, which are headwinds. For example, the staffing up on the benefits and insurance side will be an easier comp in the second half. Some of the project work that was maybe first half loaded last year may continue to be a difficult comp, but not so much in the second half as the first half. I think some of other businesses are basically looking at a very strong second half as we forecast the second half of the business. And we're very comfortable at this point in time, [indiscernible] that $0.06 impact from Property & Casualty, we're very comfortable maintaining -- otherwise, maintaining the balance of the business, the same guidance as we had before.

Got it. That's helpful. And just -- and I know it's a tough one from a quarterly -- from cadence standpoint, is it -- you expect some of that improvement that will build throughout the second half? Or is there -- just trying to -- any thoughts you can have in terms of kind of the Q2 and -- Q3 and Q4 strength?

I can just give you a little color. It's not uncommon when we make acquisitions that after the first year, when we've implemented some of the new systems and basically integrated. There's a bit of a slump until people regain traction. And to the extent that, that happened with the Indianapolis acquisition last year when they were very, very strong in the first half, the cost or the effect of some of the integration activities has weighed them down a little bit, slowing down a little bit, but we expect a good second half from them and they should regain the momentum. So that's just one example of why we're more optimistic about the second half.

Got it. I appreciate that. Maybe a couple on Marcum, you've -- starting to go into a little bit, besides scale, geography. Are there one or two areas specifically of expertise at Marcum that will be readily and easily transferable to CBI

Chris, do you want to take that one?

There are several -- just to name one, they have a very attractive outsourced IT HR finance practice to not-for-profits. And it's a big segment of ours as well. So that's an area we think we can leverage. Also their technology practice, which provides a lot of outsourced IT, system implementations and whatnot is another area that we're really excited about. And lastly, just the industries that they're in, that we've been wanting to get into such as alternative investments, digital assets, food and beverage and others, we'll be able to leverage and capitalize on those as part of the transaction. So those are just a few. There's a lot more.

Got it. That's a good start. And maybe just to make sure I understand in terms of the -- so the stock component is going to be 25% on close, 75% over three years. Is that -- and that is that 75% is not performance-related, correct? I mean, it happens smoothly over 3 years or just anything else you can tell us there?

It does, Chris. That's a great question. And the share count immediately will reflect all of those shares. They're just paid over a 36-month time period, and that's -- I'll call it, a tax-friendly structure for the seller.

Got it. And just -- I don't know, Marcum well. In terms of who's actually getting the stock. It's just hundreds or thousands of partners or just trying to understand that a little bit?

Hey Chris, this is Jerry. So Marcum has a traditional partnership. The partners who are, in essence, owners of that firm will be receiving the shares.

Got it. And last one for me. If a partner left after one year, they would still get their remaining years two and year three shares, correct?

That's correct.

Okay.

The only caveat there is that performance share pool, they would forfeit the right to that because that's a four-year cliff vesting, and that's a tool to encourage people to stay in the course through the full four years.

Got it. I will jump back in line. Appreciate guys.

Thanks Chris.

And our next question comes from Andrew Nicholas from William Blair. Please go ahead with your question.

Hi, good morning. Thank you for taking my questions. I'll take a similar approach, start with the second quarter and then hit Marcum afterwards. I guess just focusing specifically on the revenue guidance and maybe more specifically the organic growth outlook. I'm trying to get a sense for kind of what happened in the second quarter that was in line with your -- or I guess not in line with what you had expected going in? It sounds like the producer issue was one component. I think you said $2.5 million of revenue. I can obviously extrapolate that through the end of the year. But are there any other things that you could quantify both for the second quarter and through the rest of year that have slowed? I think you mentioned client delays, delays in payroll or some kind of delayed implementation work. Just a little bit more color because -- to be perfectly transparent, it looks like the second half outlook is still awfully strong, and that seems to run counter to what we saw in the second quarter?

Yes. There were a couple of unusual things in the second quarter. I think the headwinds that we talked about with the project work were foreseeable and they were planned, and so that's not a surprise. And that's one reason why we, ourselves, had we provided quarterly guidance, we would have definitely moderated the expectation for second quarter. Clearly, the property and casualty item was a surprise, and I kind of gave you some details kind of before and after of what the impact that was. The migration of clients, and we've talked about this often as we migrate and basically coal clients that are underperforming vis-à-vis profitability thresholds and things like that, that's a bumpier process, and it's harder to predict. So, we did make some intention -- we always are making some intentional decisions to call clients, and we have other more profitable clients, stage employees to ramp up, but it's not always a perfect smooth, predictable process. So, that contributed a little bit to the first half. Also, I think the headwinds experienced by the Indianapolis operation were foreseeable, but maybe a little stronger than we thought they would be and we're looking for a second half stronger performance out of the Indianapolis operation. I can tell you that the government health care consulting business and that segment continues to be very strong, and they have a very strong second half predicted as well for forecasting.

Got it, that's helpful. And then I guess I'll switch over to Marcum. What can you tell us in terms of the business's historical growth. I think if you look at some of the data that's out there publicly, the growth is exceptionally strong, but hard to figure out how much of that is the M&A that you referenced versus organic growth?

Yes, Andrew, that's a great question. And that's certainly something we looked at pretty carefully in diligence. Their growth has been largely driven by -- they've been very, very acquisitive in recent years and successfully so. But as you strip away, those -- the impact of those acquisitions and kind of look at the remaining organic growth over that same time period, it's a very healthy higher-single-digit rate that we saw. So that gave us great comfort as we looked at all of that in history. So that was our takeaway.

Got it. That's encouraging. And then I guess a similar question on the margin profile. Obviously, we can get to some implied margin percentage based on the information you have. But just kind of curious how their operating margins or EBITDA margin, whatever you think is most helpful compares to yours? And maybe where Marcum sits relative to CBI

Yes, great question. Very similar. I think Marcum is a little further ahead in some areas, such as offshoring, maybe they're a little deeper in offshore than we are, and we're looking forward to leverage and capitalizing on their experience in offshoring. And they also have a very, very good set of monthly, if not weekly metrics that they use -- age and monitor. So, it's a well-run business. Having said all that, I think we -- and their margin profile, it's hard to compare apples-to-apples because of the partnership structure versus our structure, but after the first year, those structures will be combined, and we think we offer a very similar opportunity compensation and reward wise to the new partners coming on board from Marcum. But the operating leverage is really corporate structure, facilities, infrastructure. We can always improve pricing and efficiency in terms of client, service delivery. And so there's a great focus on that. So that is some source of operating leverage, but the primary source is in the back office functions and the facilities and those kinds of things that we've achieved in the past.

Yes. Andrew, this is Jerry Grisko. Just to add a little bit more color. We have said that it's hard to compare kind of the profitability apples-to-apples, but as best we can, they appear to be a very profitable firm. And we think that our margins will expand even greater as a result of some of the efficiency we'll get to the combination.

Awesome. And maybe one more if I could squeeze it in. Just on the synergies, actually, maybe the accretion math, you said $25 million of cost synergies. I think it was by 2026. I didn't catch what you said in terms of what might be baked in on that front in the 2025 accretion number. And then also the 10% earnings accretion in 2025, does that include or exclude purchase price amortization from the Marcum deal?

Yes. Great question. First of all, the synergies very, very little of the first year. In the first year, we're really focused on integrating the businesses and some of the duplicative costs start to come out, but they really don't gain traction until the second year and into the third year. And when you compare apples-to-apples, you are, in fact, right that if you remove the impact of the accretion that's acquisition-related, that's where that's acquisition-related, that's where you get -- the amortization you get the accretion before and after. And you also get accretion building because as synergies kick in and as the company delevers and interest rates and interest costs come down and as operating leverage margin improvement we can achieve that in year two, three and four, the accretion builds from that initial 10% a year.

I'm sorry, you are adding that back to get to the 10% or you're not?

Yes. In fact, to be clear, we are adding that back as an adjustment. That's a non-cash acquisition driven amortization expense that would be driven by the amortization of the intangible asset, the client list and other intangible assets that are result in an amortization expense, that's a gap amortization expense.

Understood. Thank you very much.

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

Hi. Good morning.

Good morning, Marc.

So I wanted to, I guess, maybe you have a similar sort of cadence here as far as we'll start with the quarter and commentary for year first and then move over to Marcum. I was sort of curious, it seems as though from your answers on the prior questions. I wanted to talk a little bit about with the full year guide relative to the 2Q results, it seems as though some of the project work or some of the things that were delayed since you had, I guess, maybe some level of visibility. With the EPS guide, it certainly seems as though you're taking into account the opportunity to adjust expenses, not necessarily that all revenue is just going to shift the back half of the year. Is that a reasonable way of looking at the full year guide relative to the second quarter results?

Yeah, Mark, I'm glad you asked that question. We do have a number of variable expenses where we can pull levers as appropriate as needed. So yes, in terms of the full year guidance, we'll do what we need to do in terms of managing the variable components the expense for sure.

Okay. Great. And then the things that you saw, and I guess it's a little specific, I guess, but the things that you saw clients delay or sort of push to right, I guess, on what the types of projects? Were there any -- was there a commonality to the types of projects that are being delayed or whether it was the types of projects or the types of clients that were delaying these projects? Or was it sort of general?

Yeah. So Marc, before every call, we go out and ask our offices, ask our regions, ask our service lines, what they're experiencing in the market. I will tell you that as you would expect, and as you are reading in the news and as we've experienced, small middle market businesses continue to be largely optimistic. What we did experience though, during the first half is that on the margin, some of the more discretionary expenses that they eventually will make -- an investment that they'll make, they were somewhat tepid in making those decisions in the second half. And that's really what those comments were about things around systems, things around payroll, anywhere where they can put that decision off for some period of time and continue to run their business, we did experience some of that, and that's what we heard. But I think the message is that -- and certainly one that that we're looking to in the second half is our clients remain largely optimistic about their prospects for the remainder of year as a group.

Okay. That's helpful. And I appreciate the comments there. And now shifting over to Marcum, as I wondering if you could sort of maybe -- first of all, I really appreciate all the detail and the dual slide decks and everything that you provided. You obviously, put a lot of work and thought into sharing the information that you've shared today and I really do appreciate that. I wanted to sort of maybe -- if you could spend a little time sort of talking about sort of how this transaction sort of came to be in your -- I think in your prepared remarks, you made some commentary around some of the use cash decisions that you've made year-to-date that maybe had this in mind around share repurchase. But maybe you could talk a little bit about sort of give us a little bit of the back story as to sort of when all of this started how it got started and the like?

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 closing remarks.

Great, ladies and gentlemen. But thank you, as I always do, I want to end today's call by thanking our shareholders and analysts for your continued support. I also want to thank our team. Today, as you can imagine, is a monumental day in our history and in many ways, the beginning of not only an exciting time today, but a new chapter of opportunities for growth, growth for you, growth for our business, growth for our clients. The announcement is also a testament to the collective dedication and resilience of our team and our shared commitment to excellence is on CBI