Good day and welcome to the CBIZ Second Quarter 2019 Results Conference Call. All participants today will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. At this time, I would like to turn the conference over to Lori Novickis, Director of Corporate Relations. Please go ahead.

Thank you, Chris. Good morning, everyone and thank you for joining us for the CBIZ second quarter and first half 2019 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 and 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 certain non-GAAP financial measures. A reconciliation of these 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, management's expectations as of this date and do not guarantee future performance. Forward-looking statements involve certain risks and 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 for his opening remarks. Jerry?

Yes. Thank you, Lori and good morning, everyone. With this morning's release of the results for the second quarter in the six months ended June 30, 2019, we were pleased to report earnings per share from continuing operations are up 30.4% for the second quarter and 11.5% for the first six months of this year. For the second quarter, revenue grew by 1.2% and for the six months, revenue was up by 1.4%. Within these growth rates, it's important to note that our core recurring lines of businesses within both practice groups continue to perform quite well. As we had outlined earlier this year, there are several factors that caused the year-over-year revenue comparisons in the first half of this year to reflect more modest growth over the extraordinary levels that we achieved a year ago. First, as you may recall, several of our non-core project-oriented businesses recorded unusually high revenue in the first and second quarters of 2018. While these businesses are performing well again this year, the revenue contributions are more in line with historic results. Next, we also knew that there would be an unfavorable impact on revenue as a result of the divestiture of the two small financial services businesses that we announced earlier this year. While those businesses were not material contributors to the full year revenue results, they did have a larger relative contribution in the first half of 2018. Finally, there is also some variability in contingent carrier commissions that we receive within our benefits and insurance group each year. These payments are based on a variety of mostly unpredictable factors, and we experienced a reduction in the amount of contingent carrier commissions that we received in the first half of this year compared with the same period a year ago. So, it's…

Yes. Thank you, Jerry and good morning, everyone. As Jerry described, as we went into this year, there were known headwinds in our ability to reflect the higher rate of revenue growth in the first half this year. If you normalize to eliminate the impact of these non-recurring items a year ago, including the year-over-year impact of the divestitures, the second quarter revenue growth was an adjusted 2.9% and for the six months, the adjusted revenue growth was 3.1%. Despite the modest revenue growth reported in the first half, we are extremely pleased to report higher margin with growth in earnings per share at the high-end of our expectations. A portion of what is normally the first half tax service revenue will now come in the second half this year. New business production and client retention trends are very positive within our Benefits and Insurance Services group. As a result, we expect second half revenue growth rates will accelerate and we think our growth in earnings per share for the full year will be near the high-end of our 10% to 12% growth range. In addition to the three acquisitions we have announced to-date this year, we have continued to use capital for share repurchases. In the second quarter we repurchased a total of approximately 422,000 shares of our common stock and for the six months, we have repurchased a total of approximately one million shares at a total cost of approximately $19.9 million. As a result of this first half activity, we are now reducing our estimated full year weighted average share count to within a range of 55.5 million to 56 million shares. Cash flow is on track for the first six months and adjusted EBITDA for the first half is up by 8.3% to $86.5 million or…

Thank you, Ware. I just wanted to spend a couple of minutes talking about acquisitions and our outlook for the rest of the year. Turning to acquisitions, so far this year, we've welcomed three new companies to our CBIZ team, bringing total full year revenue of approximately $10.5 million, although only a portion of that amount will impact 2019 results. Among them, we added a strong group of tax practitioners to our growing Denver, Colorado, accounting practice with the addition of the Winner Group in the first quarter. On July 1st, we also announced two additional acquisitions. Paytime, located here in Northeast Ohio, brings talent and increased expertise relating to our new software platform to our growing payroll business and Gavion located in Memphis, Tennessee brings an outstanding team of advisors and other professionals to our Retirement Plan Services group with specific expertise with alternative investments, including private equity, real estate, and hedge funds. We are excited to have these teams joining our CBIZ family. Our pipeline of prospective acquisitions candidates remained strong and we have plenty of capacity to close deals with over $225 million of available funds on our $400 million credit facility. Now turning to our outlook for the remainder of the year. While the second half of our year was more heavily reliant on discretionary project-oriented work, the level of optimism among small and middle market business owners and executives remains near-record highs, albeit, somewhat tampered compared to the first quarter and certainly 2018 and our officers are generally optimistic about the prospects for the remainder of the year. At this point, I'll turn it over for questions-and-answers.

[Operator Instructions] Today's first question comes from Jim MacDonald of First Analysis. Please proceed.

Yes. Good morning, guys.

Good Morning, Jim.

Hi, Jim.

Yes, I just want to clarify, where you – you said that the growth would've been 2.9%, adjusted for – was that adjusted for the divestiture and one-time items or just for the divestiture?

That’s, Jim, for the divestiture plus, I'll call it the extraordinary year-over-year comparison on those transactional businesses. So, it's about a 1.7% adjustment when you take those transactional business and normalize those and include the divestitures.

Okay. And it sounds positive with your increased benefit advisor activity. Do you expect the Benefits group to go positive in terms of growth later this year?

Yes, Jim. We think that this is going to start to turn really going into the third and fourth quarters. Although as we had indicated early in the year, I think for the year, relatively flat. But I think you'll see directional improvement in organic growth, third and fourth quarters.

Great. And we haven't talked about it for a while, but you just bought a payroll-related company. Tell us your general thoughts on that business and what your plans are for the payroll business.

Yes, we like the payroll business, Jim. I think it’s, particularly in our environment with our clients who provide us with an opportunity to bring real value to those clients. And part of that approach is the ability to bring not only payroll, but to combine it with technology and combine it with our benefits – employee benefits offering in a package that that many of the others in the market just aren't providing. So we like the business in general. This specific acquisition allowed us to do two things. They have a nice table of clients. They also are very familiar with this new software. They also share about the same platform software platforms that we use in our core business. And so, they had a bit of a jumpstart for us on using the new platform that we recently added to our portfolio. So we expect to be able to leverage their expertise in that – with that platform. So, it kind of lined up in a lot of different ways for us.

Okay. And just one more for me. So you are OpEx was a bit lower leading to obviously better margins than I expected. Are you having – what's accounting for that? Are you having trouble hiring or maintaining producers in this economic climate?

No. It's funny. We keep reading the headlines. Everybody else is reading about tight labor market and we certainly are seeing some of that – not specifically, I don't think on the producer side as much as in some of the other areas of our business. But we've made pretty considerable investments in our recruiting both out-of-college and in lateral hire recruiting. And so we've been able to fill our pipeline to meet our needs on the recruiting side. So, really no significant impact from the hiring pressures that are in the market.

So, is there any – what's the explanation for this sort of lower operating expenses?

Yes, Jim, it's just a combination of expense controls on the Benefits and Insurance side and staffing levels. It's a result of higher rates of utilization on the Financial Services side. And combined with some, what we'll call, offshoring initiatives. And the third thing, I think that we've talked about in the past is, we are really focused on pricing and yield. And so it's a combination of both expenses and pricing that gets us the margin improvement.

Okay. Thanks a lot.

Our next question comes from Tim McHugh of William Blair and Company. Please proceed.

Thanks. I guess, just following up a little bit on the last one. I guess, as we think forward to a year from now, will we be looking back at this period talking about how this is an unusually strong margin performance? Or are there some sort of kind of unusual factors, kind of like now we're looking back at revenue right, and it's a tough comp I guess. Just trying to understand the sustainability of the improvement in margin that you've shown this year as we think forward to the future.

Yes, Tim this is Ware. No, I don't think we will understand that the first half this year within the expense structure, we have some incremental marketing and media campaign expenses. We also have some incremental investments, which will continue both programs, marketing and investment producers will continue. But I don't think we'll look back at this as an extraordinarily high watermark.

Okay, great. And then, healthcare, I didn't – maybe if you just talked about it, I missed it, but within the Financial Services, how is the healthcare piece doing for you guys?

Well, the government healthcare consulting, yes. I am sorry Tim, yes, very strong. Continues to perform very, very strong for us, as it has for many years.

Okay, great. That's all I had. Thanks.

The next question comes from Chris Moore of CJS Securities. Please proceed.

Hey. This is Stefanos Crist calling for Chris. Good morning.

Good morning.

Good morning.

Back to M&A, so you mentioned the three deals this year. How is pricing on these compared to other acquisitions in the last three to four years?

Yes, if you recall prior conversations on this, what we've said is, that pricing in certain segments of our businesses, particularly on the insurance brokerage side, property and casualty benefit side continues to tick up and it’s quite high at this point. These three acquisitions, one was an accounting office tax practice, one was a payroll, one was in RPS. We actually signaled, I think, earlier that we've receiving far less price pressure in those areas. So, we're really looking at areas of our business where we see great strategic fit. Where we see growth opportunities and where we believe that we can be competitive in our pricing and still provide reasonable returns back to the shareholders and we found them in these three areas and we believe that that market exists in a lot of other areas as well. So we have a – as I indicated, a very attractive pipeline of transactions of the character that you saw in the – so far this year as well as some larger ones that we are still looking at as well.

Got it. Thanks. And can you also talk a little bit more about free cash flow expectations for this year versus last year?

Yes. EBITDA is up. That's a good parameter. It's not exactly translates to free cash flow. But if you look at our net income in any given year, you can probably add back another $0.30 to $0.35 effectively on a per share basis to get an indicative free cash flow. And that comes from the non-cash charges led by depreciation, amortization, which is the largest, plus other non-cash charges, minus of course the capital spending, which is $10 million to $12 million. Hopefully, that's enough. It goes up and down in any given year depending on accrued compensation and other expenses that can be a bit variable year-to-year. But I think that's a good way to think about it.

All right, thanks guys.

[Operator Instructions] Our next question comes from Marc Riddick of Sidoti & Company. Please proceed.

Hey, good morning.

Good morning Marc.

I am wondering if you could touch a little bit on the commentary around the – on what you are seeing as far as, I think you said it was about a 10% filing extension rate. And sort of maybe if you could give us a little more color on what that provides as far as, maybe how you are seeing? How that might play out as far as our contribution – potential contributions into the third or fourth – is it mostly going to be going into the third quarter do you believe? Or did you get a general sense that some of that might end up bleeding into the fourth quarter? And then I have a couple of follow-ups on that.

Yes. So Mark, I think it's probably third and fourth quarter, if you think about an October 15th kind of filing deadline date, right. So some of it'll be into both of those periods of time and as we indicated in the first quarter, it's really as a result of the delays in the guidance that was provided relative to the new Tax Reform Act impacted not only us but the entire industry, as well as the software providers to the industry that, that have the code based on their guidance, right? So, all of those things contributed to an incremental number of extensions this year, compared to prior periods or prior years and we think that – and we're seeing it. We are seeing it in the number of extensions. That work has to get done really in part third quarter and I think in small part, fourth quarter as well.

Okay, okay, it’s helpful. And then I was wondering if you could touch a little bit on, just as a reminder of the advertising campaign sort of what you did last year versus what you plan on doing this year and how we might think about – how that might impact the timing of a rollout and expenses and that type of thing?

Yes. So, Marc, we budgeted this year about the same amount of money that we budgeted last year. But we'll get more impact from it this year for two reasons. First of all, last year, in addition to just the airtime that we paid for, we had to pay for the design and the production of the campaign. We are taking those dollars and rolling them into airtime, right. So, what you saw last year was a larger expense in the second half, because we really – I believe air – started to air those advertisements really in the end of the third quarter and mostly the fourth quarter of last year. This year, we’re more evenly distributed. So we've taken the same dollars, front-ended them. So that, we're evenly split really first half, second half. So, I think from this point forward, what you'll see is a continuation of about the same amount of spend only more evenly spread kind of throughout the quarters, throughout the year.

Okay, Okay. That makes a lot of sense. And then, I guess, I wanted to sort of touch on if there was any particular regional areas of strength and weakness any particular callouts that you saw during the quarter that would be worth going over? Just wanted to see if there's anything like that. Thank you.

Yes. Not that would give us any directional guidance of course, in any given period, some of our offices perform stronger than others. But I can't attribute it - we can't attribute it kind of in looking at the results to any trends that are specific to a geographic region or a profile of a type of client. So, if you step way back at the business and looked at the quarterly results and the annual results, we are very pleased, as we indicated with the results that we are receiving from our core tax and accounting, our core benefits insurance, our government healthcare consulting and really kind of the comparative anomaly has to do with the more project-oriented businesses and the way they performed in the first half of 2018 compared to this year.

Okay. And then, last one for me. I was kind of thinking about with the announced acquisitions and I think you gave a runrate numbers, I was kind of thinking about as you look at the back half of the year and the revenue growth, if you can sort of – give us sort of a ballpark of how you are thinking about the contributions between organic versus acquisition contributions. Thanks.

Yes, Marc. This is Ware. As it was in the first half, most of the growth this year is coming from organic sources and the organic sources for all the reasons we outlined, we expect to accelerate from the first half growth rate. The acquisition impact this year to the total revenue growth rate is fairly nominal. We are happy to make three acquisitions. They are all relatively small and will have a relatively minor impact for the full year growth rate on the revenue this year.

Okay, great. Thank you very much.

This concludes our question-and-answer session. At this time, I would like to turn the conference back over to Jerry Grisko for any closing remarks.

Yes. Thank you, Chris. I'd like to close by thanking our analysts and our investors for their continued support and our team members for creating a culture that is second to none in our industries and for the exceptional job that you do in providing best-in-class service to our clients. We look forward to speaking with you again after we report our third quarter results. Thank you and have a nice day.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.