Welcome to the CBIZ Second Quarter 2020 Results Conference Call. All participants will be in a listen-only mode. [OperatorInstructions] After today's presentation, there will be an opportunity to ask questions. [OperatorInstructions] Please note, this event is being recorded. 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 second quarter and first half 2020 results conference call. In connection with this call, today's press release has been posted on the Investor Relations page of our website cbiz.com. This call is being webcast. A link to the live webcast, as well as the replay and transcript 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 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 for his opening remarks. Jerry?

Thank you, Lori, and good morning, everyone. Before I discuss our results for the quarter and year-to-date, I thought it would be helpful to review certain of the key attributes of our business that we discussed at the end of the first quarter. Including that, approximately 70% of our revenue is generated from essential services including our tax services, insurance services, payroll services and a host of others that we provide to our clients regardless of economic conditions in the market. We generally retain approximately 90% of our clients from year-to-year. We have a broad geographic footprint. We serve a diverse client base in terms of size and industry. We enjoy strong and consistent cash flow. We have a substantial amount of variable expenses in our business, including a considerable amount of variable compensation based on the performance of the business. We have a strong balance sheet with ready access to capital and we entered into the current environment with very low amount debt and in a very strong financial position. And it's those attributes that make us confident that our business will continue to perform well in our current environment. And in fact that's precisely what we experienced in the second quarter and year-to-date. For the second quarter of 2020, revenue increased by $1.4 million over the same period in 2019. Earnings per share increased by 30% from $0.30 per diluted share for the second quarter last year compared with $0.39 per diluted share for the same period this year. And our adjusted EBITDA for the second quarter was $35.9 million compared with $28.8 million for the second quarter of 2019, an increase of 24.7%. As we expected, our business performed best in those areas where we provide the essential services that our clients need regardless of the business…

Well, thank you, Jerry and good morning, everyone. I want to take a few minutes to run through the highlights of the numbers released this morning. Further, I also want to talk in more detail about some of the actions we continue to take, as we respond to the changing business environment and the impact of the COVID-19 pandemic. Total revenue for the second quarter was $236.9 million, an increase of 0.6% over second quarter a year ago with same unit revenue declining by 1.4%. With the margin on income from continued operations before tax improving to 11.9% compared with 9.3% for the second quarter a year ago, earnings per share were $0.39 compared with $0.30 a share a year ago in the second quarter. Adjusted EBITDA was $35.9 million or 15.1% of revenue in the second quarter this year, a 24% increase over $28.8 million a year ago. For the six months ended June this year, total revenue grew by 1.8%. As a result of improved margin on income from continuing operations before tax at 15.2% compared with 14.5% a year ago earnings per share were $1.05 compared with $0.97 for the six months a year ago. Adjusted EBITDA was $92.9 million or 18.1% of revenue and this is up 7.4% over a year ago. Total revenue within our Financial Services business was down 0.2% with same unit revenue down 1.0% in the second quarter this year. For the first six months Financial Services revenue grew by 1% with same unit revenue up by 0.2%. Turning to the Benefits and Insurance services. Total revenue grew by 2.5% in the second quarter with same unit revenue decreasing by 2.2%. For the first six months, Benefits and Insurance revenue was up 3.5% with same unit revenue declining by 1.4%. As Jerry…

Thank you, Ware. I'd like to touch on a couple of additional areas before we turn it over for Q&A, including a brief update on our response to COVID-19 and where we stand today. Our priority continues to be the health and safety of our team members and our clients. At the outset of the pandemic, we shifted approximately 95% of our team to working from home starting in mid-March. We are pleased with how quickly our team adapted to this change especially with the adoption of new technologies to support video conferencing and virtual collaboration. We're now in the process of reopening our offices nationwide and welcoming our team members back. Starting in May, we began a phased approach to reopening our offices which included new safety guidelines and protocols. We are now actively enforcing social distancing and requiring the use of mask in all shared and common office spaces. Overall, we are being measured in our approach so we can continue to adapt and learn as we go. Further, we are using everything we've learned so far through this experience to inform our planning for the future. This includes establishing the appropriate systems and guidelines to introduce more flexibility into where, when and how we work going forward. Next I want to briefly discuss our efforts around M&A. So far this year, we've completed four transactions and we started 2020 with a full pipeline of potential opportunities, including several pending transactions we placed on hold at the outset -- onset of the pandemic. We elected to put these transactions on hold at the time to both conserve cash, but also to ensure that we could support the complete integration of these businesses into CBIZ. We strive to create the best possible onboarding experience for our acquisitions. And we…

We will now begin the question-and-answer session. [OperatorInstructions] And our first question will come from Andrew Nicholas of William Blair. Please go ahead.

Hi. Good morning.

Good morning, Andrew.

I wanted to start with just an update on client retention. Is there any detail you can provide on that front how it progressed over the course of the quarter? Any color on July trends? I'm just -- I guess, I'm particularly interested to the extent to which pressure on the SMB market and your existing client base could impact the outlook for first half of next year?

So Andrew, it's Jerry. As I said at the -- in my comments, opening comments, we generally have about a 90% retention rate across all of our clients. And we're experiencing similar retention in this environment. There are a couple of small pockets of our clients that are being more impacted than others. We have a specific part of our Property and casualty business that is specializes in program business for the hospitality, Airbnb and that type of an industry, as well as action water sports and those types of things. That has been more impacted, although, again, when you take the aggregate amount of all of our clients in those spaces, it's less than 5% of our total revenue. And we also saw a -- some impact on the -- some of our smaller clients within our payroll business, which hit its kind of peak as far as attrition in April, although, it's recovered significantly since then. So all told what, I would say, is I believe the 90% retention rate across the board is holding for us. And I think the really positive note is that like we experienced in 2008 and 2009, we're also seeing in this environment that our clients are extraordinarily resilient and we're seeing that in this environment.

Great. That's helpful. And as my follow-up and I apologize if I missed this, there's a lot of good detail in the prepared remarks. But could you quantify how much revenue in the government health care consulting business fell out of the second quarter? And what your current expectations are in terms of realizing that revenue over the next two or three quarters?

Yes. Hi, Andrew. And I think the second part of your question is key, because that revenue is not lost, it just gets pushed out. So what's happened is basically with the slowdown cost reports and access to client information has slowed down into us. So our efficiencies have suffered a little bit as a result. For the first half, this business was relatively flat. And we typically say, this grows in the mid to high-teen range. So we expect stronger…

Mid to high single-digits.

Yes. Yes. I'm sorry. I misspoke. Mid to high single-digit range. So given that it was a flat first half for us that's the deferral of revenue that will spill into the second half, if things normalize and the conditions are more normal in the second half.

And just as a follow-up, I mean, is your expectation now that third quarter will be more like traditional mid single, high single-digit-type growth? Or is this kind of the type of thing that would build up again next quarter and really kind of all catch up in the fourth quarter and early next?

Yes. It's a little hard to tell Andrew just given the pace of recovery and when we can get back on-site and the receptivity of our clients to allowing us to do more of this work virtually. But there is an expectation as were said that this work will get done whether it's the third quarter, fourth quarter or kind of flowing into 2021, it is essential services. We haven't lost these contracts. And we will get this work done. Timing is a little bit more difficult to predict.

Great. Thanks a lot.

Our next question comes from Chris Moore of CJS Securities. Please go ahead.

Hey, good morning guys. It was quite a good quarter.

Thank you, Chris. Good morning.

Good morning. Maybe a bit of a loaded question, but what's the biggest uncertainty at this point from keeping you guys from reinstating guidance? Obviously, another big flare is one. But are there other areas where just visibility is just isn't there at this point in time?

Yes. Chris as you know, the second half of our year is more heavily reliant on project work. That work tends to be driven in large part by activities among our clients, acquisitions, capital expansion, expenses and improvements. Those things tend to be based on the confidence level of our clients as to market conditions and their opportunities within those market conditions. And as we go out and speak with them which we always do what we're hearing from them like others kind of throughout the country is that while they always tend to be optimistic about their business and what the prospects are they're less confident about what's going on today in the economy and they really can't predict or are reluctant to predict when they might again begin to expand their businesses and make those types of investments. So, all of that translates into that will impact one way or another the amount of project work we do in the second half. And we just don't have a basis for trying to estimate what that might be.

Fair enough. Makes sense. Towards the end of your prepared remarks Jerry you were talking about the M&A opportunity. And you can't get too specific, but it sounds like things really were or are ramping there. You have a sense yet whether or not some of these targets are still available? And is that potentially should we look to be seeing more in the second half of this year?

Well, as always, it's difficult to predict the timing of the closing. But let me answer your first question first which is are they still in the pipeline? The answer is yes. None of the transactions that we -- of any size that we were having discussions with prior to the onset of the pandemic have dropped off that list. In fact we've reengaged in all of those conversations. We're encouraged actually in a number of areas where -- while the mix of their revenue may have shifted their revenue has held up quite nicely in this environment which gives us confidence that with the stability of that business in those in particular are our discussions that we are pursuing more actively in this environment. In addition, we believe as we said at the in the first quarter notes that there's going to be opportunities for us to have discussions with very highly regarded competitors, particularly on the accounting side where in the past we would speak with them and they -- there was a real connection with CBIZ. They liked our story. We had ongoing dialogue but they were doing so well that there was no need for them to really make a decision at that point. They -- many of them have now seen how advantageous it is to have the scale, the geographic diversity, the industry diversity, the breadth of services that we've all been able to bring -- or CBIZ has been able to bring to our clients and that message is resonating with them today in ways that it may not have resonated before. And so we're now initiating conversations with some of those really highly regarded prospects in the market that we're very, very encouraged by.

Very helpful. Very promising. I'll jump back in line. Thanks guys.

Thanks Chris.

[OperatorInstructions] And our next question comes from Marc Riddick of Sidoti & Company. Please go ahead.

Hi, good morning everyone.

Good morning Marc.

Hi Marc.

I was wondering if you'd touch a little bit on -- and I know it's a very different circumstance. But as you recall last year we had the delayed filing activity. And I think if I remember properly I think you had maybe mentioned that there was about a 10% -- I'm trying to remember if it was 10% that had chosen to -- 10% growth year-over-year of those who have chosen to file extensions. Did you -- I was wondering if you had anything similar if you could sort of talk about maybe what the filing extension activity is this year versus last? And how it might be the same and how it might be different? And then I have a follow-up on that.

Yes. Thanks Marc. That's a good question. We do measure that the number of extensions the percentage of returns that are on extension and for different reasons they are at about the same levels this year compared to last year. Last year, it was a result of tax reform, this year, it's the result of the CARES Act, but we're at about the same levels.

Okay, great. And then I was wondering -- shifting gears into some of the client needs and sort of how that's morphed and evolved during the course of the year. And the challenges that they face. I was wondering if you could talk a little bit about the pricing of those -- addressing those needs and sort of how you -- what -- how we should be thinking about what that pricing dynamic might look like and what it might look like going forward should further COVID-19-related small business needs evolve. I was wondering if you could spent a little bit of time talking about that.

Yes. Let me take it in two pieces here. First of all, the immediate work that we did for our clients to help them assess the relief package that were in the market and particularly the work that we helped them with in applying for the loans. That tended to be lower margin work for us. But it was important nonetheless because certainly it helped to preserve the client. It certainly helped to strengthen the client relationship. It also helped us to get in front of prospects that weren't receiving that level of support from the competitors in the market, from their other service providers. And so it was important to us on a lot of fronts albeit at a somewhat lower realization rate. The second part and again more encouragingly is that our pipeline as a result of all of the work that we did the spadework that we did during that period of time the webinars, the thought leadership, the digital outreach our pipeline the top of the funnel for prospects is at an all-time high. Now historically that -- it takes a while to convert that pipeline into closings and we're seeing that right? We're working through that pipeline. But that work that is converting is at our -- is at a higher rate than the initial work that we did and at the rates that we would expect to receive. So a little early to tell how this all shakes out. But important for us to do the work that we did in the early stages to help support our clients for all the reasons we indicated and very encouraging from both the size of the pipeline and the work that we're -- that's coming out of that tends to be higher rate higher margin. Q - Marc Riddick Okay. Thank you for the color. That's certainly helpful. And then in a way that kind of segues into what I kind of always ask about is, I was wondering if you could talk a little bit about your marketing plans and spend and maybe what you've seen there or if you have any thoughts there? The tricky part of these things as far as gaining new customers is it's sometimes hard to parse out what to give credit to. But certainly, you'd undergone the brand building efforts. And I was wondering if you could sort of update us on that and what that would look like going forward? Thank you.

Yes. So the discussion over the past several years has been around our national branding campaign. As we indicated in the first quarter, when COVID started we put that on hold really to conserve as part of our focus on conserving cash as we've reported as were reported. We feel very comfortable there. So if you took the political cycle out of here which means that advertising during that period of time third quarter and fourth quarter is going to be very costly. We would be considering at this point reinitiating some of that because we have the ability to do it and we think it's important to continue to do that on an ongoing basis. Although, we have suspended our national branding campaign, I believe we've more than made up for that in all of the other things that we've done during this period of time that I've referenced earlier which is the webinar programs which have been highly successful. We continue them to this day. The digital outreach, we've had and other efforts that we've had to go into the market and really tell our story because of this unique environment has really I think gone a long way in helping to build our brand across the board.

Okay. Great. And then the last one for me. I was wondering and thank you for giving the details around the -- how you see the acquisition pipeline developing in those conversations. Is there any particular regional mix that you're seeing any differently than maybe you might have looked at the beginning of the year as far as targeted areas or opportunities or anything that might be driven by different regions experiencing different financial characteristics? Thanks.

No. The answer is we really -- our strategy holds. Our strategy is to look at very attractive geographic markets based on the demographics of that market. We're always interested in those and remain interested. We have not seen a particular -- we've not been in discussions with a particular target in a geography that has been disproportionately impacted based on this environment if that's really the question. So as I responded earlier, in fact, a number of the more promising acquisitions targets that we've been talking to have actually held up quite well in this environment. They're in different geographies, but they've actually held up quite well. So we're encouraged by that.

Great. Thank you very much for the color.

You’re welcome.

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

Okay. Thank you. In conclusion, I just wanted to thank our analysts and investors as we always do for joining us on the call today and for your continued support. And mostly, I'd like to thank our team members who may be listening in on today's call for their resilience throughout the last 20 weeks from being flexible to alternative work arrangements, to staying focused on supporting our clients and each other. This team continues to rise to the challenge in every respect. And for that I couldn't be more grateful. Thank you everyone. Stay healthy and we look forward to talking to you at the end of the third quarter. Thank you.

The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.