Good morning, and welcome to the CBIZ's Third Quarter 2023 Conference Call. [Operator Instructions] Please note that this event is being recorded today. I would now like to turn the conference over to Lori Novickis, Director of Corporate Relations. Please go ahead..

Good morning, everyone and thank you for joining us for the CBIZ's third quarter and nine months 2023 results conference call. In connection with this call, today's press release and investor presentation have 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 can be found on our website. An archived replay and transcript will also be made available after the call. Before we begin, 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 the financial tables of today's press release and investor presentation. Today's call may also include forward-looking statements, regarding our business, financial condition, results of operations, cash flows, strategies and prospects.

Forward-looking statements represent only estimates on the date of this call and are not intended to give any further assurance of future results. 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 CBIZ assumes no obligation to update these statements. A more detailed description of such factors can be found in the filings with the Securities and Exchange Commission.

Joining us for today's call are Jerry Grisko, President and Chief Executive Officer; and Ware Grove, Chief Financial Officer.

Jerry?.

Good morning, and thank you for joining us for today's call. We're pleased to share our third quarter performance and to discuss our outlook for the remainder of the year. For the third quarter our businesses performed as expected and we experienced strong organic growth over the same period last year.

The same goes for our year-to-date results, as we successfully built on the positive momentum demonstrated earlier in the year. Encouragingly, we continue to see nice growth across all major service lines and demand for those services remain strong.

I do want to take this opportunity to follow up on two items that we mentioned during our earnings call for the second quarter. The first was unanticipated contract delays in our Government Health Care consulting business and the second being the extension of tax filing deadlines in California, which is a major market for CBIZ.

For the third quarter, our Government Health Care consulting business rebounded and we benefited from the launch of a number of new projects and the addition of new business that enabled us to achieve our expected growth targets.

For the California market, as expected much of the work that was delayed in the second quarter was completed in the third quarter. California also ended up extending the tax filing deadline again and we expect to see some of this work shift into the fourth quarter as well. Ware will go into more detail during his remarks in a few minutes.

Now turning to the performance of our two primary practice groups. Our Financial Services division continued to experience strong demand for our core accounting and tax services and our more project-based advisory services. We've also been able to maintain our pricing initiatives and are seeing the impact of those efforts in our results.

Within our Advisory business, we experienced growth across nearly all of our major service lines due to the healthy demand for many of our services including transaction services, risk advisory services and valuations.

In the Transaction Advisory space, a good portion of this demand is being fueled by an increase in the volume of transactions that we're seeing albeit smaller deals. We're also pleased to see some signs that the IPO market is returning, which benefits the services we provide to help businesses prepare to go public.

Within our Benefits and Insurance business, we continue to achieve growth across all major service lines in Q3. For our Employee Benefits and our Property & Casualty businesses, increased service revenue from new production and strong client retention are among the factors contributing to our growth.

Our producer count is also up for both of these service lines compared to last year as we see traction from investments that we made in our internal recruiting team and external agencies to grow our pipeline of new producers.

For our Payroll business, higher interest rates on client deposits, continued strong demand for our upmarket payroll platform and continued success with our pricing initiatives have all contributed to our growth.

The growth in our Retirement and Investment services business is coming largely from a continued uptick in project work for our actuarial team.

Based on the performance throughout the third quarter, I'm pleased to reaffirm our revenue and adjusted fully diluted earnings per share guidance for the full-year that we announced at our investor call for the second quarter.

With this, I will turn it over to Ware Grove, our Chief Financial Officer to provide additional information on our financial performance for the third quarter and year-to-date.

Ware?.

we expect total revenue to increase within a range of 10% to 12% for the year. On an adjusted basis, we expect 2023 adjusted earnings per share to increase within a range of 11% to 13% over the adjusted earnings per share of $2.13 that was reported in 2022.

GAAP reported earnings per share is expected to increase within a range of 15% to 17% over the $2.01 reported in 2022. The effective tax rate for the full-year of 2023 is expected at approximately 28%. This rate could be impacted either up or down by a number of unpredictable factors.

And lastly, the fully diluted weighted average share count is expected within a range of 50.5 million to 51 million shares for the full-year of 2023. So with these comments I'll conclude and I'll turn it back over to Jerry..

Thank you Ware. Before we move to Q&A I'd like to provide a brief update on our M&A results for the year. So far in 2023 we've completed three acquisitions and two smaller tuck-in acquisitions.

I'm pleased to report that we're making steady progress with the integration of these acquisitions and remain encouraged by their performance and contributions to date. On our more recent earnings call we talked about the impact of private equity on M&A within the traditional accounting and tax industry.

We're actually seeing activity from private equity in the space appear to wane in recent weeks as some potential deals have fallen through or been put on hold. We continue to monitor this trend and the opportunities that it may provide in our own M&A efforts.

In the meantime our M&A pipeline remains healthy and active and we have the capacity to pursue other opportunities. With that we'll turn it over to Q&A..

We will now being the question-and-answer session. [Operator Instructions] And our first question here will come from Chris Moore with CJS Securities. Please go ahead..

Hey. Good morning, guys. Thanks for taking a couple of questions. So pricing obviously has been more dynamic in 2022.

Can you maybe just talk a little bit more about pricing through the first nine or 10 months of 2023? Is that looking more normal and kind of what that suggests for 2024?.

Yes. Chris, I think, it's too early to really think about or talk about or predict '24. But so far for 2023 we've been very pleased with our ability to continue to get pricing.

And as we've talked about in a number of calls we have built processes systems reporting training around -- all around pricing throughout our core accounting offices and business and we're pleased with the outcomes that we're getting there..

Got it. Appreciate it. SG&A looks much lower year-over-year sequentially even after adjusting for the deferred comp.

Why was that? And how should we look at that moving forward?.

Yeah Chris I think it would probably see some volatility quarter-to-quarter just depending on spend on legal matters and things like that that may spike from time-to-time. But generally speaking, if you look at the year-to-date number we should be leveraging G&A some modest amount each year maybe 10 basis points or better.

And I think over time that's what we see..

Got it. And maybe the last one for me is just B&I gross margin continues to be strong at 20.6% in Q3.

Is a 20% annual gross margin at some point possible for this business and what would it take?.

I'm sorry Chris. Were you asking about B&I? The –.

Yeah, Benefits and Insurance. Yeah, I'm sorry. The gross margin there was very solid 20.6% in Q3 and I'm just -- it's usually lower in Q4. But from an annual perspective trying to figure out if a 20% threshold on gross margin there is possible and kind of what it would take to get there..

Yeah. We're not going to identify any particular ceiling or threshold and we're going to continue to strive to get more scale and leverage in each and every business. We do that through a variety of ways.

So in both B&I and in Financial Services, we should see a continued just like I commented on G&A we should see a continued leverage maybe not a steady leverage each and every year because of periodic investments.

But we'll just recap that by saying in total we should expect and we expect 20 basis points to 50 basis points a year and it comes from multiple sources..

Got it. I'll leave it there. Appreciate it, guys..

[Operator Instructions] Our next question will come from Andrew Nicholas with William Blair. Please go ahead..

Hi. Good morning. Thanks for taking my question. First one I wanted to ask is just around the project-based services and advisory services in particular. I appreciate the color in the prepared remarks around on some of the things that you're seeing there.

But if you could just speak a bit more to the pipeline for fourth quarter and maybe more broadly on the health of your clients in that industry as we look ahead to potentially more macroeconomic uncertainty in 2024?.

Yeah. Andrew, this is Jerry. As you know, there's a number of different businesses that comprise our advisory services and they serve different clients. Oftentimes when we talk about our advisory services a lot of our discussion is around our private equity group. So let me start there.

As we mentioned in our remarks, what we're seeing this year compared to last year -- and by the way we're very pleased with the results that we're seeing albeit it's coming in -- in a little bit of a different form last year and the year before with the very hot M&A market frothy M&A market we tended to see fewer but much larger transactions and we are working on those platform type transactions.

This year, we're pleased to see again strong demand albeit smaller projects for a much larger number of engagements. So it's just coming in a different form. When you look forward you asked about Q4 and into 2024, it's very hard for us to really predict. As you know that, work is project-based.

It tends to be more or less predictable -- I'm sorry, less predictable. So far this year, we're really pleased with what we're seeing. The pipeline remains encouraging for as far out as we can see it, but we really don't go into -- we don't have much visibility into -- I don't think we have any visibility candidly into 2024.

Across the rest of the other service lines our risk and advisory services as you know we made a really nice acquisition there last year. That transaction has gone very well. The combination of those businesses with our legacy business has gone very well. We continue to see strong demand there. We also see strong demand in our valuation work.

So it's a number of different services provided to somewhat different clients but overall quite pleased with what we're seeing so far this year..

Great. Thank you. And then maybe just a question on leverage. I understand, the resilience of the model and the high percentage of recurring revenue why you're comfortable kind of in that net debt-to-EBITDA range that you've historically talked about.

But I'm just curious if in the context of higher interest rates and the higher interest expense load if there's any inclination towards prioritizing debt paydown in the current environment since interest expense is dampening your earnings growth to a certain extent right now. Just kind of broader thoughts on the capital structure. Thank you..

Yeah. Great question. We're not uncomfortable at 1.8 and I think we're a little higher at the end of the second quarter. Our cash flow comes in annually on a seasonal basis. We tend to use cash in the first and second quarters. And then, we generate cash in the third and even more cash in the fourth.

So net for the year, we should be generating a multiple of net income versus free cash flow, okay? In terms of the comfort level and the prioritization and the way we're thinking about it, yes, the cost of money has gotten a little more painful and we've kind of called out the headwind that we faced this year, as a result of that.

But I will tell you, that we still have plenty of strategic acquisition opportunities in using a fully leveraged cost of money and cost of capital in there. We're still looking for IRR targets in the 12% to 15% range, generally. And we'll continue to do that and we've got plenty of capacity.

You'll probably note, that we've moderated our share buyback activity, a little bit. Last year, we bought more shares than we bought this year. So that's the lever, we can certainly pull more actively. And so we pulled back a little bit on that, not over any concern over the amount of leverage.

But just the economics of share buybacks become less attractive, with the cost of money and with the success of our higher share price in combination, with the cost of money. .

Great. Thanks very much..

And our next question will come from Marc Riddick with Sidoti. Please go ahead. .

Hi. Good morning, everyone..

Hi, Mark.

So you guys really covered everything else that I was thinking about.

But one thing, I wanted to touch on if you had a moment to maybe share some thoughts on what you're seeing with the client industry verticals and maybe certain areas that -- and client demand that you've seen and whether or not there's been much of a shift at all in particularly things like retail, and auto as it relates to the strikes.

I was wondering, if there's anything that -- any call outs that you've seen in those areas or any others within the client industry verticals..

Yes, Mark. Thank you. Let me just remind you that we're not overly concentrated in any one industry or any one geography. So the -- my comments are all kind of to start there which is no material impact on our business. Our clients as you know, tend to be middle-market businesses. They tend to be a pretty optimistic and resilient group.

We go out every quarter and informally survey our offices and ask them to give us feedback on what they're seeing with their clients. So that's really the backdrop for the comments, I'm about to make.

I would say, that our clients remain generally optimistic about their ability to navigate in this environment although I would say, somewhat tempered from the prior quarters more recent quarters that we've talked about it.

Some of the items on their list, on their talk track around of course is everyone else inflation and interest rates access to credit. With all of that said, demand for our services continues to be strong.

Our core services and as I commented earlier, we're also pleased with the demand for the more project-oriented services which can be more discretionary at times. So, across the board very pleased with what we're seeing, as far as the demand. And as far as industries are concerned, again, not overly concentrated in any one industry.

If I had to say as you would expect, the one industry that we're kind of hearing some notes of caution relates to construction and real estate. And that's really just the cost of capital and access to capital. Again, not an overly concentrated industry for us, but if I had one area where we're getting some cautionary notes, it would be there.

Ware?.

Yes. The only thing, I'll add on real estate. And yes, we've got our eyes on that. And most of our exposure, if we talk about serving real estate clients, most of the exposure there is on residential multifamily real estate as opposed to commercial.

So I wouldn't consider our commercial real estate exposure to be extremely high, although as Jerry mentioned, we've got our eyes on it. .

Great. And then actually the M&A commentary and we really appreciate you spending time and giving color on that. The M&A commentary was actually somewhat encouraging, even though they're smaller deals, but there seems to be activity out there.

I was wondering, if there are any particular industries that are kind of leading the way on that or is that generally across the board?.

Yes, Marc, I didn't ask that specific question. I think we tend to -- just like the rest of our business within that segment of our business our PEA advisory business tends to be pretty broad-based so geographically and industry based. So, I don't -- there's no concentration that I've heard of that's driving those comments..

Okay. Great. Thank you very much..

You’re welcome..

And this concludes our question-and-answer session. I'd like to turn the conference back over to Jerry Grisko, for any closing remarks..

Thank you. As we always do, I want to start by thanking our shareholders and our analysts for your continued support and confidence in the company. I also want to take an opportunity to thank our team members, who may be listening in today.

When I reflect on our very strong performance so far this year, it always comes back to the unwavering commitment among our team members to provide exceptional client service and to support each other in all that we do.

The commitment is obviously evident in the results that we posted and those wouldn't be possible without your dedication and support. So I just want to close by saying, thanks to each of you. And the broader audience, thank you for listening in on today's call and enjoy the rest of your day..

The conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect your lines..