All right. Good morning, everyone. Thanks for joining us today. My name is Andrew Nicholas, and I'm the research analyst covering consulting, HR technology, and information services here at William Blair. Before getting started, I am required to inform you that for a complete list of research disclosures or potential conflicts of interest, please visit our website at williamblair.com. With that out of the way, I'm very pleased to welcome CBIZ CEO, Jerry Grisko, and CFO, Ware Grove, to our 44th Annual Growth Stock Conference. Thanks to each of you for joining us, and I'll hand it over to start the presentation.
Yeah. Thank you, Andrew. Thank you for joining us. I'm Jerry Grisko, President and CEO at CBIZ. As Andrew indicated, to my right here is Ware Grove, our Chief Financial Officer. In the back of the room is Lori Novickis, our Director of Corporate Relations, and just pleased to spend time with you this morning. CBIZ is a leading provider of accounting, insurance, and other professional services, mostly to middle-market businesses across the country. The slide that's up on the board just shows kinda how unique we are. We are unmatched in our industries for not only our geographic reach, but our breadth of services and depth of expertise, with over 7,000, just under 7,000 team members, over 120 offices located, really throughout the continental US.
What we do, our two primary divisions are within accounting and tax and related financial services, representing about 73% of our revenue, 24% of our revenue on the benefits and insurance side. The reason we, those two divisions, fit together within our group is that if you think about middle-market businesses, the business owner, the business-level executives, whether they're manufacturing, distribution, professional services, they wanna focus on their core business, and they turn to outside accountants, they turn to outside insurance providers, they turn to outside other consultants and advisors to help them with all the other things that they need to support their business. And we have, as I mentioned, a breadth of services that are unmatched to help them support their growth going forward.
If you look at CBIZ, we are, I think, coming up on our 28th anniversary, and over a long period of time, sustained growth in both favorable and unfavorable economic times. What allows us to do that are some of the attributes that are up on the slide here. First and foremost, essential services. So if you think about what we do, accounting and tax, insurance services, payroll, those things, as long as our clients are getting up every day and going to work and conduct their businesses, they're gonna need those services, and they turn to someone outside to help them with their accounting and tax work, their insurance services, and all the things we do. That represents about 75% of our revenue is recurring in nature and essential in nature.
We also have a very broad geographic footprint, as you saw on the map earlier, spread out around the country so that when there's an economic impact in various geographies, depending upon what's going on in the economy, we are less impacted by those things as a result of our broad geographic footprint. Strong and consistent cash flow. We're really a human capital business, right? So very low CapEx results in very strong cash flow, year in and year out. Very high client retention rates. You know, clients don't change their accountants often. They don't change their insurance providers often. So we have about a 90% client retention rate, year in and year out. Very diverse client base.
We are not overweighted to any one industry, and significant variable expenses, so that in times of more challenging business climates, we can take our foot off the accelerator on some of the investments that we're making and still hit the bottom line numbers that we commit to year in and year out. I mentioned that recurring revenue stream, about 75% of our revenue. And if you think about accounting and tax, group health benefits, property and casualty insurance, the host of services that we provide largely are recurring year in and year out. We have about 25% of our revenue that tends to be less recurring, and that is more project-oriented consulting advisory services.
From time to time, our clients turn to us for compensation consultants, consulting, executive search work, financial consulting, lit support, a host of other services that tend to be more discretionary, but complement the other, the other services that we provide. I mentioned our clients really being middle-market businesses. We have over 100,000 clients. About 60,000 of those are business clients. The remainder are the C-level executives, the business owners, pass-through entities on certain real estate investments, et cetera, but we really focus on those 60,000 business clients. Where we distinguish ourselves competitively in the market is we like to say we out-national the locals, we out-local the nationals.
What that means is, from time to time, we're going up against the Big Four, not our primary competitors, but when we're going up against that very large national competitor, we like to say that we out-local them. What that means is that we're gonna put a more seasoned, experienced, team against the engagement. We're gonna give that client, a higher degree of attention, client attention, and so we will, we will service, out-service that local, or that national provider. More often than not, we're going against a local market competitor or a regional competitor, and as I mentioned, we like to say we out-national them. The way we do that is by providing a broader array of services and deeper subject matter expertise than are often available by that local market competitor or regional competitor.
Somehow I'm.. Doing a little deeper dive into those two divisions, I mentioned financial services, about 74% of our revenue, a very balanced service offering between core accounting, tax, advisory services. We also have a government healthcare consulting business, which is really kind of a standalone specialty business, and what we do there, it's almost a $200 million business for us, is we represent virtually all the states, 50 states, in some aspect of their Medicaid administration program. So it's a financial services, but really specifically geared to state governments in their Medicaid program. On our benefits and insurance side, also a very balanced kind of portfolio of service offerings there, mostly serving the HR department within our clients. So we'll help them with their, put their health benefit plan in place. We'll help them with their 401(k) and other retirement benefits.
We'll help them with their payroll and a host of other services. In addition to those things, we also have a very robust property and casualty and full-service property and casualty business. I mentioned earlier, we're in the people business. We're a human capital business, and the way that you differentiate yourself in human capital businesses is that you provide compelling value proposition to our workforce. I would say among many of our competitors, we spend more time, effort, resources on training, developing, career pathing, and really kind of trying to address the things that are important to the workforce to give them a very rewarding career. As a result of that, we pride ourselves on the number of Best Places to Work awards that we receive year in and year out.
Last year, we eclipsed 100. So, throughout the country, over 100 Best Place to Work awards. Our growth comes really in a very balanced, again, categories. First, organic, of course. Second is share of wallet. We call that cross-serving, and then we have a long history of successfully acquiring and integrating additional firms into our practice. The combination of those things, we typically target 8%-10% top-line growth year in and year out.
As you can see, compounded over the past 5 years, we've eclipsed that at almost 14%, and we know that if we do that, grow our top line at, you know, that 8%-10%, or in this instance, almost 14%, we, through there, there's great margin expansion in the business, and so we can do even more on our EPS and grow our EPS at a faster rate. We talked about acquisitions. Highly fragmented markets, both within the accounting and the accounting industry and the advisory industry, and the benefits and insurance. Actually, if you follow us, every acquisition we make, and we typically make, you know, 5-7 acquisitions a year, we put the strategy in the news release, in the press release.
It's either falls into we're expanding our geographic presence, we're strengthening our presence in an existing market, we're adding a service that is in high demand by our clients, or we're bringing on talent into the team. The attributes, culture first. We've learned over the years that if we don't get the culture part of it right, the rest of it tends to not work out for us. But if we get that part right, and we spend a lot of time on it, then the rest of it does tend to work out.
So we look for a very successful, highly regarded, kind of the most highly regarded, firms in the local market, strong cultural fit, strong leadership, and the, their interest in being something bigger and, and, offering that breadth of service and depth of expertise, doing more for their clients than they can do on a standalone basis. The consideration is typically a combination of mostly cash, 80%-90% cash. We do require a little bit of a stock component just to align interests with our shareholders. We pay 50%-70% upfront, typically, the remainder over a three-year period of time based on an earn-out, and we found that that's a very successful way of aligning everyone's interests, and, and, and we've had a great deal of success there, again, over our long history.
At this point, I'll turn it over to Ware to talk about the financial and I'll come back for some Q&A at the end. Ware?
Thanks, Jerry. Good morning, everyone. Jerry did a great job laying out the business model, the strategy, who our clients are, how we serve our clients, our competitive advantage. Let me take a few minutes and tell you how we think about the business and how we drive the value drivers that you're interested in. When you think about the business, it's a fairly mature business, a combination of organic and inorganic growth. The really nice features about the business, it's a very steady, essential mix of services that tend to be recurring, and we have a 90% or more client retention every year. So the risk profile from a business model perspective is fairly modest, in my opinion. And so we've got a lot of leverage built into the business.
The operating leverage is probably not unlike your businesses that you're part of, and so that as incremental revenue comes in, we can leverage most of our costs, so long as we pay attention to the compensation ratio and the compensation costs. We wanna staff jobs and staff engagements properly and pay people properly. So our, our margins are not about working people harder or paying them less. It's about margining and, leveraging those costs like, T&E, facilities, and other office-related expenses, corporate expenses, included, so that as we grow, we will say that we wanna improve our margins by 20-50 basis points a year. We have a long track record of doing exactly that.
So the result is you get a business model with a fairly modest risk profile, good metrics on the bottom line, and, you know, good growth track record, with good cash flow metrics as well. So when you look at the history, and Jerry kind of laid some of this out, you've got nearly 13%-14% top-line revenue, about half organic and about half inorganic. And then when you look at the adjusted earnings per share, you've got 17.5%. Not exactly 2x, but we've been through the pandemic, where you see a little choppiness in some of the cost structures. It just naturally unfolded post-pandemic as costs normalized after that impact. And then in Adjusted EBITDA, same thing.
You've got a pretty good metric on Adjusted EBITDA. For this year, for the first quarter, our revenue was up, organic revenue is up 5.9%, and you see the mix there between financial services and benefits and insurance. And then you have total revenue up 8.7%. Our guidance this year is 7%-9%. Now, why is that lower than it has been? I just showed you a slide that's almost 14%. We do not forecast and guide to any acquisitions that are not yet pretty much done. So what you see here is largely an organic, driven primarily by organic revenue growth. And as we accomplish and close acquisitions, and we typically do 4, 5, 6 a year, that gives us an opportunity to improve guidance and change guidance.
But, given the fluid nature of the M&A pipeline, and we're no different than anybody else, until a transaction is signed and closed, it's just, you know, a little bit fluid. So it's not something that we include or bake into our guidance. And then you've got adjusted EPS up 12%-14%, and obviously, inferred in that is some margin improvement. So we've got that in there. We're looking at interest rates. It's a component. It's a topic of discussion. We're looking at interest rates relatively flat year-over-year, whereas last year we had a huge headwind on interest rates, 2023 versus 2022. This year it's kind of flat and kind of neutral. So we're seeing, again, a resumption of our ability to improve margins. The capital structure, how do we deploy capital?
We generate a lot of free cash flow just from our operating activities. We don't use a lot of cash for capital spending. We don't need to use a lot of cash to grow the business the way you've seen it here. So how do we use our capital, and how do we use our balance sheet? We deploy it primarily for strategic acquisitions, some tuck-ins and some new geographies, a new ancillary service from time to time that fits into the model. But you see strategic acquisitions as a major user of capital. After that, we have plenty of cash flow, and we have the flexibility to do share repurchases. So we've been very actively involved in the open market share repurchases. We've bought back between 15% and 20% of our shares since 2019.
So that's a steady, you know, 1, 2, 3% a year, just depending on, you know, the dynamics of the market and what we're faced with. CapEx, you can see that's relatively modest given the size of the business. And then the debt and the leverage, even with all this spending, it's, it's tracked between 1 and 2 times. It's 2 times at the end of the first quarter because we have a seasonality to our business, and we also have a seasonality to our cash flow. We typically build up working capital and therefore use some cash in the first half of the year, and that working capital liquidates to cash in the second half of the year.
So you'll see an ebb and flow, and you have a little bit of a peak in working capital and debt in the first half of the year, and then it comes right back down. So you look at the year-end comparisons, 1.5 to 1 is where we've been typically. As you look at the investment highlights, and as I kind of laid out before, I think this is a an opportunity for you to find a business model that's relatively modest in risk, but gives you disproportionately larger return opportunities for all the reasons I just described, with a lot of basic solid cash flow underneath it. So the operating leverage is built in. We work at it every year. We also make decisions, not unlike any other management team.
We invest, and we have had investment programs in new producers and other types of programs, where we, you know, consciously reduce or compress margins on a short-term or enhance longer-term opportunities. But we balance that. So you see a pretty steady progression, not each and every year, but you see a pretty steady progression of margin improvement over a period of time. I've also talked about some of the financial attributes, the strong balance sheet, consistent cash flow that underpins the business, and all the other metrics here that bring stability to the business. Then, of course, the results speak for themselves. You've seen kind of a progression of the top line that's, you know, for a mature business that's essential and recurring, that's organic and inorganic, gets you into the low double-digit, if not higher range.
And then you've seen even a higher rate of growth on adjusted earnings per share, and that should be in the mid to higher teen range, but a multiple of the top-line growth. Excuse me. So how have we done the shareholder returns? And I'm sure your screens, and you're well aware, you see CBIZ, naturally. You probably can't see this clearly from your chair, but guess what? It's the top line compared to our peers, compared to the index. We're really pleased to see that, and it, this is by design. We intentionally want to outperform our peers for the business model reasons and the way we think about the business. The way we try to run the business gives you these kinds of results, and we believe that's sustainable in the future.
So our financial goals, we would just circle back and again say, fundamentally, this is a business. Through the combination of organic and inorganic growth, we should see, 8%-10%, if not greater, growth on the top line, and you've seen 13.4 on the top line, or 13.8, I believe. So, so we can, we can achieve a relatively good growth rate top line, and then through unlocking the operating leverage that's inherent in the business model, get a faster rate of growth. Not 2x every year, year in, year out, but, at a multiple. And so you see that as well, and we also believe that's sustainable. We're often asked: Well, where's the plateau? How much longer can this happen? We don't really see a 10.5%, 11% pre-tax margins.
We don't see a plateau anytime soon, and even a 50 basis point per year for the next decade would give us 15%, and that seems very achievable, and then some, to, to us as we sit here today. So with that, let us conclude. I think we've got a little extra time for a Q&A, and that would conclude our remarks.
Yeah, great. So, we'll just hit a few questions here. If you have questions yourselves, obviously, you can join us for the breakout afterward. But maybe I'll start with organic growth. I think, there's a lot of different levers, as you can see in kind of the financial goals and what you provided. A lot of different levers for growth, but organic growth in particular has meaningfully accelerated over the past several years. So maybe just for the audience, if you could talk a little bit about the drivers of that. What has been especially successful in driving that growth higher versus maybe, you know, the 2010s time frame?
Sure. And those drivers are different for the two divisions. Let me take the financial services division first. What we learned over the years in going out and making acquisitions is pricing was more art than science for many of these accounting firms. So if you look at two partners in the firm, and you look at their history with regard to their billing of their clients, one might be getting nice pricing increase year-over-year, 3%, 5%. One was not nearly as successful in getting that. So we built systems to be able to measure profitability by client, by managing director, by service line, and really, we empowered them.
When we went back out then to the offices, we gave them the tools, we gave them the reporting, we gave them the visibility into pricing, and then we trained them up on how to have conversations with clients around pricing. That's been a key driver for us year over year over year in getting really nice growth. And oftentimes the conversation a couple of years ago where labor costs are going up considerably, how are you offsetting that? We were more than able to offset the labor costs through our pricing and obviously, the clients understood that. On the benefits and insurance side, actually, if you go back maybe 10 years ago, our organic growth wasn't nearly at the rates that it was today, and it was really that the financial services side was doing pretty well, growing organically.
The insurance brokerage side was actually declining or flat year-over-year. The reason for that, I'll give you by way of example, we didn't have enough producers. So if you have a $100 million business with a 90% retention rate, you're gonna lose $10 million worth of business every year. Our people, our producers, we had a sufficient number to fill that kind of divot, right? That $10 million divot, but not enough to grow on top of that. So we turned back again, this was 7 or 8 years ago. We made a very conservative, concerted effort to understand the type of people who were gonna be successful in that role, go out there, proactively hire those people, onboard them, train them, support them, sales manage them, and that's an ongoing process for us as well.
So now we get really nice organic growth year-over-year on the benefits and insurance side. We get nice growth on the financial services side, and the combination is giving us the results that you've seen here over the past 3, 5 years.
Yeah, let me add a couple of things. We generate new logos, we generate new volume, plus pricing. So over time, we believe the model should give us growth that's about half driven by pricing and half driven by volume. So I think that's a fairly healthy mix. In recent years, the pricing component has been outsized just because of inflationary pressures, and we've taken advantage of that, so it was a nice opportunity for us. But on a go-forward basis, if you think about inflation plus 1 or 2%, that might be the pricing component. And then, of course, the volume component would be kind of an equal amount.
Perfect. We have about 7 or 8 minutes, so I want to make sure that we talk about kind of the M&A opportunity. A bunch of different things that we can go into here, but maybe just to start off, can you talk about why the market is consolidating the way that it is? I think historically, it's always been a highly fragmented market with some consolidation, but it does seem like from my seat and maybe from yours, that that has picked up some over the past several years. So can you just take a high-level look at why the market is consolidating, why it makes sense for smaller firms to move towards a bigger firm like yourself?
Yeah. So I'm gonna answer that question really on the accounting side, core accounting side. Benefits and insurance, for those of you who are investing in that space, that's been consolidating for a long, long time. On the financial services side, particularly on core accounting, we've seen private equity come into that space over the past 2-3 years now, and you're seeing a considerable amount of activity there and more consolidation. Why is that happening? I think it's a couple of things. First of all, our competitors and markets are realizing that our clients have increasingly complex needs, and these services need to be more than just provide more than just core accounting and tax. They need to provide the type of advisory services that we're providing. That's what our clients are looking for.
Those take substantial investments, and oftentimes in a partnership model, those investments come right out of the pockets of the partners. Since you have a spread of, as partners get closer to retirement, there's some resistance to making those investments 'cause they're not gonna see the return. So oftentimes, we'll come into those firms, and we'll talk about where we see them go, where they see themselves going in 3-5 years, where we're going, the investments that are being made, and they'll join a firm like ours, who are committed to growth, committed to making those investments, to provide that breadth of services and that depth of expertise to their clients. On top of that, it's a very competitive space for talent... and obviously talent is attracted to the larger firms.
It provides a greater opportunities for them from a career pathing standpoint. So they find that they're not as able to win the war for talent on their own as they are by joining a firm like CBIZ.
Perfect. And some of the things that you're talking about there kind of give credence to the fact that scale matters. What about your competition relative to companies of similar size? And I'm thinking about it more from the consolidation, kinda going back to the consolidation theme. Like, what makes CBIZ a different home than maybe a private equity-backed platform? Because increasingly, I would imagine you're going against those types of firms at the deal table, or maybe not. You can comment on that as well.
Well, listen, we have this conversation all the time. You're right. Virtually every deal, we have private equity on the other side, and what we offer is stability and a long track record of success. Oftentimes, they join us, a private equity firm, even if they're comfortable with the partner at the table, they know they're gonna have a new partner in 3-5 years. We can look and point to a 28-year history of being committed to this space and of successfully integrating firms. The other thing is we hand them... We've probably made 200 acquisitions throughout our history. We hand them the list of the most recent, those that have been with us 5, 10, and 15 years, and we basically say, "Call.
We're proud of what you're gonna hear." And when they come back, they basically say the firms, you know, by and large, are very, very happy to be part of CBIZ. Proud of our culture, happy with the investments we make, happy with the way that we support the offices, happy with the increased level of service they're able to provide to their clients, and happy with the results for their team. So that gives us, I think, credibility that today, the private equity firms, they just don't have that track record that they can point to.
Perfect. And maybe I'll squeeze one or two more in, where you mentioned the margin expansion opportunity, you know, 50 basis points a year at the top end of your kinda long-term framework, and at least, you know, what was it? 10 more years of that kind of runway.
Sure.
Can you talk about the sources of margin expansion? What are the things that are driving that under the hood?
Yeah. Basically, I talked about labor costs, and we're always trying to manage engagements more efficiently, and that doesn't mean pay people less or anything like that, but it means leveraging staff properly against senior people and perhaps using more offshoring resources and things like that that might give us some margin opportunities on the labor component of our cost structure. But then beyond that, you've got rent, utility, office supplies, things like that that are very leverageable. And then, of course, the G&A infrastructure. We've got a fairly substantial infrastructure built in that can support a lot of growth, and so that, too, is a component.
Can you talk a little bit about the talent environment? As you said, there, you know, a lot of CPAs, which there seems to be an increasing shortage of, look to bigger firms for growth opportunities, for career path. But can you talk about the talent environment, how hard it is to get people in the door or into the profession, holistically, and then also how maybe you compete relative to others for that same talent?
Yeah, so if you read articles on the accounting industry, baby boomers aging out, fewer students selecting in, and, you know, five years ago, that was a big discussion. How, who's gonna do the work, right, that has to be done? We mentioned offshoring. Everyone in the industries, CBIZ included, are expanding our offshoring capabilities and really kind of viewing the workforce as a global workforce. So we're ramping that up. There's technology, you know, generative AI and blockchain and other advances in technology that allow us to do the lower value work more efficiently. And in addition, I think the types of services that we're providing don't require as many CPAs. They require MBAs, and they require data techs and a number of other disciplines, right?
So the combination of all of those things have allowed us to maintain the workforce that we need to support the business model that we've created. On a competitive side, like you said, scale matters. We're, depending upon who measures us, we're either eleventh or twelfth in the industry, which gives us sufficient scale, and we lean into those best places to work awards. We lean into our associate engagement surveys and their experience, career pathing, et cetera. So culturally, I think we distinguish ourselves, and we have lower turnover than many of our peers in the industry as a result of that.
Perfect. I think e're out of time for the most part. Thank you to both of you.
Okay.
F or joining us, and I believe we're heading to Jenner B for anyone interested in participating in the breakout session. Thank you.
Thank you for joining us this morning.
Thank you.