Lori Novickis – Director-Corporate Relations Jerry Grisko – President and Chief Executive Officer Ware Grove – Chief Financial Officer.

Jim Macdonald – First Analysis Joan Tong – Sidoti & Company.

Good day, and welcome to the CBIZ First Quarter 2017 Results Conference Call and Webcast. All participants will be in a listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Lori Novickis. Please go ahead..

Thank you, Patrick. Good morning, everyone, and thank you for joining us for the CBIZ first quarter 2017 results conference call. In connection with this call, today’s press release has been posted on the Investor Relations page of our website, www.cbiz.com.

This call is also being webcast in a link to the live webcast as well as the replay can also be found on our website. Before we begin our presentation, we would like to remind you that during the call, management may discuss their non-GAAP financial measures.

A reconciliation of these measures to comparable GAAP measures can be found in the financial tables of today’s press release. Finally, remember that management may also make forward-looking statements. Such statements are based on current information and management’s expectations as of this date and do not guarantee future performance.

Forward-looking statements involve certain risks, uncertainties and assumptions that can be difficult to predict. Actual results can and sometimes do differ materially. A more detailed description of such risks and uncertainties can be found in the Company’s filings with the Securities and Exchange Commission.

Joining us for today’s call are Jerry Grisko, President and CEO; and Ware Grove, Chief Financial Officer. I will now turn the call over to Jerry Grisko for his opening remarks.

Jerry?.

Thank you, Lori, and good morning, everyone. With our first quarter results announced earlier today, we’re off to a good start for 2017, with results in line with our expectations for the first quarter and near are the high end of our guidance for the full year.

For the first quarter of 2017, revenue increased by $17.2 million or 7.7% over the first quarter a year ago, with 2.1% of that increase coming from organic revenue growth.

With improved pre-tax margin, we reported a 14.8% increase in income from continuing operations, and fully diluted earnings per share were $0.45 in the first quarter, up 9.8% this year, compared with $0.41 for the first quarter a year ago.

The acquisitions that we made in 2016 are performing well and have contributed $12.5 million or 5.6% to revenue growth in the first quarter. We also completed one small acquisition in February this year. It fits within our retirement plan services group and is expected to contribute approximately $1.4 million in annualized revenue.

Within our Financial Services segment we are particularly pleased to see a continuation of strong client demand for our core tax and accounting services. In the first quarter, revenue grew by 4.2%, on the same unit basis, was up 3.3% compared with the same period a year ago.

As a reminder, with seasonal workload related to tax and accounting work at its highest level in the first quarter, our staff is typically working at peak capacities.

This can constrain our ability to record growth in this peak time, but without that we are pleased to see increases in many of our key operating metrics in the first quarter, including an increase in yield and in total hours worked.

We also continue to see nice growth within our government healthcare consulting business, where we are a leading provider of consulting services to state Medicaid agencies and provide similar services related to Medicare to the federal government.

We remain encouraged by the outlook for this business and expect that revenue growth for the full year of 2017 will once again be in the high-single digit. Turning to our Benefits and Insurance segment, total revenue increased by 16.8% in the first quarter compared with a year ago.

The acquisitions that we made last year are performing above expectations and are contributing nicely to our growth. Although, same unit revenue declined slightly by 0.5%, this trend is an improvement over the first quarter of last year and we expect to record organic revenue growth for the full year.

We’re also pleased that the cost management actions that we took last year in the segment combined with the impact of our acquired operations have resulted in higher margin contributions for this group.

Our producer teams also continue to perform at very high levels, and new business that was generated in the early part of this year will help drive growth in the latter parts of the year. With these comments, I’ll conclude for now and turn it over to Ware Grove..

Thank you, Jerry, and good morning, everyone. As Jerry mentioned, we were very successful in closing six transactions last year, and in the first quarter of 2017 we closed one small acquisition transaction. During the first quarter we used $7.7 million on acquisition related spending, including earnout payments on acquisitions made in prior years.

Future spending for earnout payments is projected at $8.5 million over the remainder of 2017, $8.6 million in 2018, $7.9 million in 2019, and that in 2020 an additional $2 million. We are very pleased to report an increase of 70 basis points in our pre-tax income margin for the first quarter this year compared with last year.

You can find the numbers outlined in our earning release, but eliminating the impact of accounting for gains or losses on the assets held in our deferred compensation plan, the gross margin was 21.4% this year compared with 20.8% last year, and the G&A expense was 3.5% this year compared with 4.5% a year ago.

The favorable comparison in G&A in the first quarter is driven largely by lower expenses related to executive compensation in the first quarter this year compared to a year ago. Now for G&A, we expect that the next three quarters will be a more normal year-over-year comparison.

This is a very good start to the year, and as a reminder we strive to improve margin on pre-tax income within a range of at least 25 to 50 basis points every year. Last year in 2016, margin on pre-tax income increased by 70 basis points for the full year.

Seasonally, the first quarter typically results in the use of working capital for CBIZ, as day sales outstanding on receivables related to tax and accounting work increases. At March 31 this year, DSOs were at 92 days which is consistent with a year ago.

Bad debt expense for the first quarter this year was 30 basis points of revenue compared with 52 basis points of revenue a year ago. Now you may notice our first quarter tax rate was 39.2% this year compared with 40.4% in the first quarter a year ago.

A reduction in the first quarter tax rate is due to the favorable impact of adopting a required new accounting for stock compensation.

The future impact of this new accounting depends on a number of variable factors and we believe that the full year tax rate will be in a range of 39% to 40%, which is consistent with our guidance and our tax rate over the past several years.

Adjusted EBITDA in the first quarter was $48.3 million, which is an 11.6% increase over $43.3 million in the first quarter a year ago. We are pleased to be leveraging our growth and revenue. Adjusted EBITDA as a percent of revenue was 20.0% in the first quarter this year compared with 19.3% in the first quarter a year ago.

This is an improvement of 70 basis points. At March 31 this year, the balance outstanding on our credit facility was approximately $212 million. This results in leverage of approximately 2.3 times trailing 12-month EBITDA and provides us about $122 million of unused borrowing capacity on our credit facility.

Seasonally, the first quarter represents our peak usage on the credit facility and we expect to generate positive cash flow over the remainder of 2017, as receivables generated in the first quarter are converted to cash over the balance of the year.

Capital spending in the first quarter was approximately $1.8 million and we expect capital spending for the full year to be approximately $6 million. In the first quarter of this year, we repurchased 175,000 shares of our common stock at a cost of approximately $2.2 million.

As I commented, we have plenty of flexibility in our financing capacity, but as a reminder our first priority is to use capital for strategic acquisitions. We continue to take an opportunistic approach toward share repurchases.

However, with a consistently strong performance in our share price this year, our share repurchase activity was minimal during the first quarter. Fully diluted share count at March 31 this year was $55.2 million, an increase of approximately 4.7% in fully diluted share count, over the $52.7 million shares in the first quarter a year ago.

Future share repurchase activity is unpredictable. And without forecasting additional share repurchases over the balance of this year, we are continuing to project full year share count at approximately $55.5 million shares for the full year 2017. And our earnings per share guidance is based on this projected share count.

Earnings per share in the first quarter was $0.45 compared with $0.41 in the first quarter a year ago, an increase of 9.8%.

So to summarize, as we look at first quarter results and the remainder of 2017, we continue to project an increase in revenue within a range of 6% to 8% over the $799 million reported for the full year of 2016, and we are pleased to be near the higher end of that range in the first quarter.

We expect to improve margin for the year and we expect to achieve growth in income from continuing operations within a range of 12% to 14%, over the $40.6 million reported for the full year of 2016 And finally, considering the expected share count of $55.5 million share for the full year of 2017, we expect fully diluted earnings per share for the full year this year to increase within a range of 8% to 10% over the $0.76 per share reported for the full year of 2016.

So with these comments, I will conclude and I’ll turn it back over to Jerry..

Thank you, Ware. Just a little bit more color on a couple of items. As we experience in the first quarter and we are consistently hearing from our offices, we are benefiting from a more favorable business climate and a generally more optimistic business outlook from our clients.

Past experience would suggest that these factors should translate into increased advisory work for our financial services business in the seasonally second half – seasonally slower second half of the year.

In addition, our balance sheet remains strong and we have approximately $120 million of unused borrowing capacity on our $400 million unsecured credit facility at the end of the first quarter. This provides us with the capacity and the flexibility to continue with our strategic acquisition program.

As you recall, in addition to the one acquisition that we made earlier this year, we made six acquisitions last year on top of four acquisitions in 2015.

Today we continue to evaluate a full pipeline of potential acquisitions that may help us to broaden our geographic footprint and enhanced the services that we provide to our clients, and we would expect to close a total of three to five transactions in 2017. At this point, I’d like to turn it over for questions and answers..

Thank you. We will now being the question-and-answer session. [Operator Instructions] And our first question for today comes from the line of Jim Macdonald with First Analysis. Please go ahead..

Good morning, guys, good quarter..

Thanks Jim..

Hi, Jim..

Hi.

Could you update us a little bit with the ramp up on the Medicare program and did that affect your margins and the Benefits group somehow?.

Well, in fact it did, Jim, but it wasn’t really a ramp. As you’ll recall, that was a $17 million contract that we signed, it’s a five-year contract. You do the math, that’s about $3.5 million a year. We actually, obviously, we’ve won that contract.

We are off to a slightly slower start on that contract and we had anticipated, so obviously we have the staffing, we have the personnel, we have the infrastructure cost to support it; when you get a slightly slower start, that has the effect of compressing margins..

So when do you expect that contract to be at full run rate?.

We don’t have exact timing on when it’s going to ramp up, but we do believe it will ramp up throughout the year to the expected level..

Okay.

Then can you talk about the strong margins in the Benefits group and maybe was there any – anything that specifically caused that?.

Well, again what I would say is just generally better performance in that group than the same period last year combined with the performance of the acquisitions that we had at that group.

And as we’ve always talked about if we increase revenues within that group, we have the ability to expand our – obviously, much more costs are fixed, so we expand our margins and really that’s what we’re seeing in the first quarter..

And just one more from me.

Are there any quarter this year you expect sort of the insurance bonus payments, that wasn’t in the first quarter or –?.

Yes, Jim. The insurance bonus payments can be a little choppy, they typically come in kind of February through April, May timeframe, and the timing could be unpredictable and different each year. But I think the year-over-year comparison is generally a good one at this point..

Okay..

And our next question comes from the line of Joan Tong of Sidoti & Company. Please go ahead..

Hi. This is Joan Tong with Sidoti. And I just want to ask you about the pipeline of the advisory work and you mentioned that during the prepared remarks. And you also talked about the operating environment which is generally getting better.

As we know that, the small to medium sized, this is in a sweet spot and we are seeing that the confidence is coming back and just want to get a view whether it’s sustainable.

And also for the rest of the year, how should we think about that advisory work of the pipeline?.

Hey, thanks, Joan. This is Jerry. I will tell you that we track as best as we can kind of confidence within that small middle market business. And based on all the reports that we’re reading, based on our conversations with our offices, optimism and confidence among our clients is really at a five-year high.

And so that should reflect favorably on the discretionary work that we typically do in the second half of the year that is within our guidance that we’ve already announced. So I think it’s just favorably on our ability to get our guidance for the remainder of the year..

Okay. So would that be like potential upside, like given things like some of these optimism is really sustainable. We have two quarters in a row that having pretty chunk, like sentiments right now. Just want to gauge like potential upsize to the guidance..

Yes. Joan, it’s really hard to tell, because obviously that tends to be more project-oriented work. We have a shorter view of when it’s going to come in.

So we really can’t say today that it’s going to materially impact the guidance that we have for the remainder of the year, although again I would say that we just recently had a conversation with the leaders of those offices where they were all in one call.

We asked the question and they reiterated that they feel optimistic about the remainder of the year..

Okay, okay, that’s fair. And then Employee Services, it’s good to see that the year-over-year organic decline or some of the other decline is getting less and less. And so for the remainder of the year just to look at some of put and take you have different businesses within that segment.

Can you just give us a little bit color, maybe year-over-year comp is getting easier? And also want to get as sense that historically you’ve talked – in the past you’ve talked about the board or technology development within orderly offering for payroll as well as healthcare. And you have some pilot customers in the past.

And I just want to get an update with the progress of that?.

Okay. I think there’s a number of different questions there, but let me try to tackle them.

I would say at the highest level what we’re experiencing is a general improvement in each of the four service lines within Benefits and Insurance, that being Benefits payroll, property and causality and retirement plan services, all of them generally improved over the same period a year ago at some level.

What we experienced last year, actually kind of in the first couple of quarters was that, we had some project work in 2015 during those periods of time that did not recur at the same level. Obviously, once you’ve kind of cleared 12 months, we don’t have that same hurdle.

So again, kind of the year-over-year comparison is somewhat easier as it relates to the retirement plan services group and that large project work that occurred in 2015, it did not occur in the same period in 2016.

Having said that, that group is doing very well, we have a full pipeline of work and we’re very pleased with the outlook for that business as well. The last question, I believe the customer order was what we call the ESO, Employee Services Organization.

And what I would say there is that although it is still a small sampling size or small sample size, all of the metrics continue to be very encouraging for us there and very positive. So again, too small to really break it out and talk about the specifics, but we’re encouraged by the prospect..

Okay, great.

And then I have a question regarding consolidations, acquisitions, and obviously the market is very strong and I’ve just wanted to say, if you have come – run into any hurdles in terms of devaluation and some of those things in a pipeline might not be able to meet the returns because potentially devaluation had got really elevated given how strong the market is..

Yes, that’s a great question, Joan. I will tell you on the accounting in tax side not as much. So just fewer competitors out there and we found that although there is somewhat of a pricing increase in that segment of the business, it’s not material.

We have seen of late material increases or appreciation and the valuation in certain of the insurance agency lines, particularly on the benefits in the property and casualty side.

So while we believe we can still be active in that space, we are obviously going to be far more selective because there are pricing right now that just does not provide the returns that we think are appropriate..

Okay, okay. And then share buyback, historically you’re pretty opportunistic, waiting for that they’re being very prudent and obviously just feel like it that we are in a different world right now compared to six months, seven months ago.

I just wanted to say, if you have – might going forward, have a different view in terms of your devaluation of your stock that you might not be that opportunistic going forward just because just in general we are in a better operating environment, like better earning power like across the board. Maybe that should deserve a high devaluation.

I mean, we share buyback on the table other than just waiting for the dip to happen. Thank you..

Yes, Joan, that’s a great question. It’s something we ask ourselves all the time, and we’re happy. We have the strength and the share price. There’s volatility in the market all the time, we just haven’t experienced it in recent months. And typically we try to use volatility or the dip as you explained it as an opportunity to buyback shares.

So again, we’re pleased with the run up and the relatively strength strong performance of the share price, we just haven’t seen that many opportunities. So I wouldn’t say it’s completely off the table, but in recent months we just haven’t had that many opportunities..

Okay. All right, that’s fair. Thank you, guys..

Thanks Joan..

[Operator Instructions] There are no further questions. This concludes our question-and-answer session. I would like to turn the conference call back over to Mr. Jerry Grisko for any closing statement..

Okay. Thank you, Jonathan. I’d like to take just a moment to thank our analysts and our investors for their continued support and to especially thank all of our team members across the nation for their hard work and their dedication to the company and to our clients. We look forward to speaking with you again after we report our second quarter results.

Thank you and have a great day..

Ladies and gentlemen, the conference is now concluded. Thank you for attending today’s presentation. You may now disconnect..