ASGN Inc (ASGN) 2002 Q2 法說會逐字稿

Good afternoon, my name is Amanda and I will be your conference facilitator today. At this time I would like to welcome everyone to the On Assignment 2002 second quarter earnings teleconference. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session period. If you would like to ask a question during this time, simply press star and then the No. 1 on your telephone key pad. If you would like to withdraw your question, press the pound key. Mr. Peterson, you may begin your conference.

Good afternoon, everyone. I'm Joe Peterson, the president and CEO of On Assignment. With me is Ron Rudolph, executive vice president and chief financial officer. Ron, perhaps you could read our statement disclaimer.

Okay. Thanks, Joe. Statements made in the course of this call that are not purely historical are forward-looking statements within the meaning of section 21 E of the Securities Exchange Act of 1934, including statements regarding the company's expectations, hopes, beliefs intentions or strategies for the future. Because such statements deal with future events, they are subject to various risks and uncertainties and actual results could differ materially from the company's current expectations. Factors that could cause or contribute to such differences include our ability to attract, train, retain, qualified account managers, the availability of qualified temporary professional employees, risks inherent in expansion into new international and domestic markets, integration of acquired operations, management of growth and other factors and risks discussed in the company's annual report on Form 10-K filed with the Securities and Exchange Commission. As to the highlights of the second quarter, our revenues including the results of HPO, Health Personal Options, from the acquisition date of April 19th through the end of the quarter, revenues were up 36 percent from 49 million 674 to 67 million 600,000. HPO revenue during the quarter is up 105 percent from its year ago second quarter. EBITDA during the quarter is up 11 percent from six million 839 to 7,613,000. Operating income is down four percent from 6,452,000 to 6,197,000. That income is down 14 percent from 4,503,000 to 3,874,000. Net margin is down from 9.1 percent a year ago quarter to 5.7 percent and earnings per share are down from 19 cents a year ago to 15 cents in the second quarter. Back to you, Joe.

Thanks for that recap. Let me tell but the structure of our call today. I'm going to provide with you a review for you a review of our divisional performance, including some very good news about Lab Support. And then a detailed review of the investments we're making to complete our transformation of On Assignment into a next chapter of scaleability, quality, superior commercial and market performance. As well as simultaneous reductions we're making in the cost of infrastructure and efficiency gains in the short-term. Following that, we'll open our call up to questions. We'll begin by discussing the performance of our divisions and begin by discussing Lab Support. I'm pleased to report that for the first time in over 15 months, Lab Support is trending solidly upwards now. We have six weeks of week over week growth, and for this portion of growth for this our business and growth in Lab Support this year is maintaining historic 32 percent gross margin. With that said, we've reduced our expectations for Lab Support's year-end revenue due to the absence of our normal post-holiday recovery and demand for temporary employees. We continue to experience depressed demand in industries in - in the industries that this division services. With that said, the new trend we're seeing in Lab Support, while too early for us to project slope of our recovery over time, it's a direct testament to the impact of the new operating model we've deployed in the past month. And the testament to its ability to restart our growth in this flat economy. In our health care divisions, and as you appropriately expected, all divisions except for HFS continue to outperform Lab Support and represented more than an important dimension to our success. HPO our travel operation based in Cincinnati continues to outperform expectations. Revenues on the fiscal year-end are expected to range 130 to 140 million dollars up 60 to 70 percent over the prior year. And this growth is entirely organic, and we expect it to continue in 2003. The integration task of HPO has been minimal. As we have discussed in the past, largely a stand alone operation and that's proceeded smoothly. Finance and accounting functions are being consolidated without disruption. And we have a cost savings initiatives underway on common telephony and systems platforms. Otherwise, this operation remains as we originally described, essentially stand alone. Our local health care staffing business is also growing. DIS, or Diagnostic Imaging Staffing, continues to grow solidly. That business, while small, is up 860 percent from this period over last year and 22 percent from the previous quarter. It's delivering excellent 33 to 34 percent gross margins. Our clinical lab staffing division is growing and productivity is up for account manager. Revenues has begun to grow. (Inaudible) did have a flat beginning to the year largely due to the loss of two experienced managers in two important markets unrelated to our business. But we have no questions about whether or not the CLS division is on its way to continue to contribute. We believe it will grow consistently going forward. I'm very pleased to inform you as I committed in the first quarter that we would organically enter new verticals and let you know today that we're in the business now of providing temporary dental staff. These are hygienists, technicians and front office staff directed at dental offices, dental clinics and dental schools. We're making assignments and actively hiring and training new account managers and I look forward to keeping you posted on the progress of dental staffing. HFS, a provider of Health Care Financial staff, has had its growth damp penned this year but its revenues remain flat and it's profitable and it's paying its way. We believe HFS will grow and we've made a conscious decision as we discussed in our analyst day to enact a strategy with HFS to correct its recent decline in revenue. That strategy is to down size the business and focus it on major markets and our new operating model we have market leaders which are local market managers more to discuss later who we believe through a great deal of individual attention can begin - can shortly begin to grow HFS again. We're managing this process very closely from the field and the headquarters operation. In summary, of the six divisions five including Lab Support are growing week over week. And the sixth which is flat which is better than we expected at this time given the challenges we've discussed surrounding HFS in the past. And we're very encouraged by the restart of our growth in local operations. Primarily because I believe they reflect fundamental changes that we've made in the organization of the fuel force and we're generating new orders in all branches despite diminished demand for Lab Support and HFS. Let me discuss a little what we're doing with this field force and field operations that we believe accounts for this new growth and is the key to our plans for the future. As you know I've been exploring this local staffing business of On Assignment and its model and (inaudible) evolutions through Q-42001 and through the first quarter of this year. On Assignment is a company that's never needed to make a major change - to make major modifications rather to its local staffing model. It never expected to do so under circumstances as challenging as and has hard to read as this economy. During this time I've reorganized and expanded the local staffing management team and I've worked with them to chart a scalable future. That's why I came to On Assignment on the first place. In this area I focused on three key field force issues. The accuracy of the (inaudible) between skill sets and functions of temporary employees. The management structure of the field force and our field force compensation scheme. Throughout, I've kept a very careful strategic focus on our central issue, which is the ability to scale On Assignment to new levels. I believe that the new management team has now defined a clear and comprehensive solution to the challenges we found that challenge On Assignment in 2000 and then early 2001. The management team, the field force the new market leaders and everyone in our headquarters operation has contributed to this plan and are all part of the solution. So on that basis I've made the decision to invest aggressively and act aggressively in the execution of this plan despite the sluggish economy and our decreased local staffing revenues. We're very happy to report that we made our second quarter earnings per share performance of 15 cents consistent with consensus expectations. We're pleased to have been able to keep on target despite the situation that we found ourselves in in the economy and in the demand profile of Lab Support and HFS. For 2002, as you have heard, our overall revenue expectations, while exceeding the guidance we provided in April, despite the underperformance of Lab Support in HFS, this is a testament to the performance of our overall operations and is the contribution of HPO. The decrease in EPS projections has its origins almost entirely in lower consolidated growth profit and in the decision to invest in our plan for a very new local staffing organization On Assignment. We're also investing in HPO to accelerate the growth of our nurse and allied travel staffing operations. Let me tell you a little bit more about this plan for scaling our local staffing operations and specifically that means Lab Support, diagnostic imaging, clinical labs staff, HFS and now dental staff. Our investment plan essentially began at the beginning of this month and did not impact our second quarter results. But it does contribute to our lowering our guidance for the remainder of 2002. Let me make certain first of all that you realize I'm not describing to you indiscriminate expenditure growth but instead describing focused steps that we're taking to implement a plan including costs cutting along the way and efficiencies we're gaining. As the new management team has than examined our local staffing business, here are the main findings followed by the investments we're making to address each one. First of all, in this economy the job of the account manager has traditionally practiced as a solo play is in most but not all markets no longer a viable occupation because of the layering on of a new selling challenge onto the ongoing recruitment responsibilities of account managers. This is driving turn over in the field and its increasing the demands placed on the local managers of operations. That said, both through current performance and views with clients I continue to tell you that the value of employing industry professionals to recruit and match candidates continues to deliver superior value to our clients. Our response to this has been teaming account managers together in large markets where they can share the responsibilities of sales and recruiting and matching. We've just begun doing this but it will eventually involve roughly 70 percent of account managers all working in multi line offices in major markets. One of the reasons we pursued this path is we discovered that in those markets that have survived this economy and continued to grow and those offices that survived continued to grow this model was already being engaged. We also discovered that this was one of our keys to scale. This model makes the job of the account manager more productive. It's clear that one account manager plus one account manager working as a team clearly equals more than two working independently. We're now revolving toward this model in several major markets we're operating on a more historic On Assignment fashion in those markets we're driving growth in offices that were previously flat. This innovation primarily costs On Assignment management time and training time and attention and has a direct impact on the cost of our travel. The size of On Assignment and the new economy also outpaced the previous in-field management structure. And overwhelmed the position known as manager of operations. These people had little management experience and no formal training but had grown in the success of making assignments in the economy leading up to 2001. But in this new more challenging environment, found it nearly impossible to contribute to the success of their team while managing their own books of assignment business. For those reasons in the month of June we eliminated the manage of ops position throughout the field and we replaced them with a lower number of higher capacity people we now call market leaders. Essentially they manage the sales recruiting and matching functions in regional markets. These market leaders are experienced managers with direct sales and management experience. So to put a fining point on this, our investment in market leaders is as the investment entails it's experience it's not an investment in head count, per se. There are now Lab Support market leaders and health care market leaders. Health care market leaders in any given region manage all health care at local staffing divisions these market leaders do not carry their own book of business but at the same time their incentivized solely on the basis of the collective performance of their teams. The structure of field management is immediately driving performance and will be our foundation for scaling our local staffing activities for several reasons. First and foremost it will decrease local account manager turnover because these account managers are finding by traveling working with account managers on a daily basis they're improving their ability to succeed. More still, leadership is also more capable of adapting our centralize ed resources and our best practices to the teams and their local environments. This is really a commentary on the change in model as On Assignment reaches over 200 million dollars in revenues and 200 account managers and our ability to pull all the strings from a central location is really - is no longer effective. So we've pushed many of those responsibilities into the field to the market leaders and we're already getting a great response from our field force on the impact of that. Still leadership is driving efficiency improvements as well in their offices and also in California. This represents then the first time we've had regionally grouped teams with collective compensation. We're investing over $200,000 of pretax money in these managers per quarter and we're already seeing gains from their efforts again through renewed growth in otherwise flat markets. The compensation of the account manager program had also become substandard primarily through a number of years of progressively slower increases in our cash compensation compared to other competitive operations, as well as our need in attempts to higher smarter people with sales experience who, by nature, demand a greater opportunity but deliver a greater result. For those reasons, on July 1 we introduced a new compensation plan across all field force employees that brings their performance based compensation to competitive levels. This new scheme cost initially 350,000 per quarter pretax but this plan becomes self-funding rapidly as revenue grows. This will directly reduce our account manager turnover over time. Consistent with our belief that the account manager job has been attractive by our ability to recruit but of late turnover has been driven by inadequate compensation. This investment and any of the progress we make on turnover specifically will have a major significance over time. Any fraction of reduction of turn over of our account managers will bring major gains in productivity and earnings. Scaleability, including our ability to diagnose trends and problems within the business to drive new efficiencies in the data intensive tests of payroll and candidate recruiting has been impaired by our current information systems. We're now investing in a single and updated platform to support the success of the overall enterprise, support future acquisitions and to drive new efficiencies into the operation. This capital investment amortized over an average of five years, and, while major, has such immediate impact on operating efficiencies and hard cost reduction that's it's essentially a neutral effect on earnings when measured solely in terms of those hard cost savings. We started investing in a plan we believe will return compelling value. At the same time we're tending to cost and efficiencies within the business. To that end our plan includes more than a million dollars in reduced costs of headquarter expense, telephony and marketing expense. So let me talk a little ability about our expected impact of the investments on the future performance of On Assignment. As you might imagine we've taken a great deal of care in the creation of this plan. In this earning strategy on scale On Assignment beyond 200 million dollars, beyond 200 account managers and into new verticals will require new investment. From the standpoint of growing business, now is the time to do it. And because we're seeing the beginnings of growth in our core business from these innovations, growth that certainly isn't common across the staffing industry and certainly isn't being helped by the economy we've made a very premeditated decision to go ahead and take our pain now, make our investment in the scaleability of On Assignment. We believe very fervently we've discovered a means of growing this company to scale it hasn't seen in the past and as was recently described to me by one of our account managers we believe that this is the most exciting time ever for On Assignment. Ron, if you could review our financial results in detail.

Thanks, Joe. Just to revisit, the revenue for the quarter was up on a consolidated basis, including HPO, by 36 percent, from 49,672,000 to 67,600,000. Excluding HPO, revenues were down 19 percent from a year ago's level to 40 million and 33,000. Conversion fees on On Assignment, excluding HPO, dropped to 2.1 percent of revenues from a year ago's level of 2.3 percent. Employees at On Assignment, excluding HPO, were down 21 percent from a year ago, and account managers was down three percent. Average account managers for the quarter were 180 and the productivity in the quarter for those 180 account managers increased from 20 in the first quarter to 21 in the second quarter, and if you recall, it was 19 in the fourth quarter of last year. Looking at gross margins, gross margin on a consolidated basis dropped from 32.2 a year ago to 29.8 in the current quarter, excluding HPO gross margins have actually increased from 32.3 to 32.7. The lab segment margins in the quarter decreased from 32.7 to 32.4. But the health care segment, excluding HPO increased from 31.5 to 33.2 this quarter versus a year ago quarter. The change in margins, excluding HPO at the assignment level, the total increase in margins in the quarter excluding HPO was 33 basis points at the assignment level. Markup level it's 14 basis points. Reduction in workers comp and benefits of 35 basis points. And the impact of lower conversion fees was a negative 16 basis points. With HPO at the market level, at the assignment level, the increase in margins is 116 basis points. 1.16 percent, but offset by higher costs, not only worker's comp and benefits, but of all the travel related expenses connected with the nurse and allied travel divisions. Sequentially revenues grew 60 percent with HPO and decreased five percent without HPO. Lab sequentially was down 10.7 percent. And health care segment, excluding HPO was down seven percent. On the operating expense front, consolidated expense ratio from a year ago was 19.4 percent, increased to 20.7 percent in the current quarter. Sequentially, that's approximately the same 20.6 percent increasing to 20.7 percent. Operating margin a year ago was 13 percent, and in the latest quarter it was 9.2 percent. Net margins dropped from 9.1 percent to 5.7 percent. Cash and equivalents is down 57 percent from a year ago. That's after approximately eight million in stock buy back and approximately 68 million that has been connected - that is connected with the acquisition of HPO. Accounts receivable is 37 million (inaudible) based on the HPO acquisition. Equity is up 84 percent to 200,811,000. Capital expense during the first quarter was 333,000. Depreciation and amortization in the quarter: Depreciation was 494,000. Amortization, 921,000 for a total of 1,415,000. Goodwill after the HPO acquisition is 120,347,000. We acquired debt in the process of acquiring HPO but that debt is funded by reduction of the cash consideration in connection with the acquisition. The guidance is stated in the press release. To break that guidance down into terms with and without HPO, we expect HPO, for the eight months and 12 days that it's a part of our 2002 numbers, to contribute 100 to 110 million for the year, thereby implying or resolving stand-alone or core business revenue expectation of 150 to 160 million for the year. The earnings per share guidance in the press release is 50 cents to 60 cents based on upside potential. The expectation is at this point in time based on our plan is 55 cents a share. The revenue split that traditionally has been 70 percent lab segment and 30 percent health, the segment is now 40 percent lab and 60 percent health. And HPO represented 40 percent of the revenue in the second quarter in the 73 days that it's included. HPO on a pro forma basis, revenues in the second quarter were 34 million, up from 29,600,000 in the first quarter of this year, up 105 percent from their second quarter a year ago. Amanda, it's time for question and answer session. Hopefully answers. If you could open up the lines, please.

At this time I would like to remind everyone in order to ask a question please press star and then the number one on your telephone key pad. We'll pause for just a moment to compile the Q and A roster. Our first question comes from Patrick Thompson with CIBC.

Good afternoon. Obviously given the stock price reaction today, investors felt a little bamboozled and you look at the numbers the revenue seemed okay and the earnings are coming off dramatically with these additional investments. Can you give us a sense of how long you've been contemplating the additional investments, when you realized how much they would cost and how far along you are at implementing them? Because it does seem like a change in the cost is surprising.

I'll review sort of the components to the decrease in projections here then I'll talk a little bit about the process.

Right. I think we have given - we've given the misimpression this is all a spending related result and it's a little more to it than that. And so just to map back, the current guidance to the guidance we first addressed in March 28th when we announced the HPO acquisition. Some of the drama behind the numbers here is that we have dramatically reduced the expectations for particularly for Lab Support and Health Care Financial staffing in the 2002 guidance from what it was back then. And dramatically increased the revenues from HPO. But the revenues from HPO were coming in at their margins, which after all all the travel related costs are 24 to 25 percent. And not enough to offset the impact of reduction in revenues on the core business wherein we're losing gross profits and gross margins at the level of 32 to 33 percent. So we actually look at the components of the decrease in earnings per share from that guidance to today's guidance, a big part of it is this sort of revenue swap in gross profit swap, which on balance nets us a little bit of nominal dollar contribution. But definitely reduced the gross margin. And that reduced gross margin is being run up against increased expenses from the levels that we had built into our guidance on March 28th. So we have a combination of better revenues but lower margins, lower gross profits and higher spending. So it's not all a spending issue.

I'm interested in the higher spending right now. You seem to outline it. I didn't get all the numbers but I'd like to go through that whether that's a change in recent weeks or months, and how far along we are in implementing this plan to create a more scalable business.

Let me address that. When we came into analyst's day earlier this spring and everybody had a clans to meet most of the members of the new team. In fairness at that time we were cognizant of the challenges we had in the field. We were exploring a number of different models by which to fix that. What we discovered in the field is that those branches in some ways those branches were geographically furthest from California had the least - most free reign to really determine how their internal operations worked. We discovered in those branches two things. We discovered they had to have local managers who were more talented than most of our local managers were and we discovered that they were already making innovations into how those account managers dealt with the new economy in terms of sharing tasks and building internal efficiencies. So as we developed our model, we were really developing the idea around the time of analyst's day. We knew we had to change the way the field was managed to achieve a scalable model. Once we decided that in fact the key to this puzzle empowering a regional manager to customize and oversee more activities on a regional basis we turned around and decided to engage that structure throughout the organization. That decision was really made in May and June. The field force reorganization took place in June and the associated assignment of account managers to teams and of account managers to market leaders and all of them receiving their new compensation structure occurred on July 1st.

So it's done. Can you run me through the individual costs of each of those decisions, additional costs?

Well, the incremental cost of the new comp plan is 350,000 per quarter, and of the market leader, the creation of this - people called market leaders is 200,000 per quarter. On an annualized basis, we're talking about 2.2 million. Cost reductions Joe enumerated on the order of a million on an annualized basis. So we're really looking at incremental expense versus the March guidance of about a million, million two related to On Assignment's business. The other part of the SG and A explanation is that at the time we gave our initial guidance for HPO we were expecting 35 percent growth or at least we announced that we expected to do at least 35 percent growth which would have been about, for the eight month end of week period would have been about 65 million. As we noted now the expectation from HPO is revenues on the order of 100 and 110 million for that eight month period. So obviously we have increased expenses relating to HPO even with some operating leverage and efficiencies on the SG and A line, combined with, as we noted on analyst day, a higher than expected amortization of identifiable and tangibles. So the net effect of that is when we go back to my earlier point on swapping revenues, the impact on gross profits, higher spending offset by some cost reductions and certainly higher spending to sustain our fastest growing and now largest division which is HPO, the net effect of that is approximately 17 cents down from that March level of guidance.

I'll let some other people ask some questions and I'll come back later.

Your next question comes from John (Lagenfeld) with Robert Baird. A question on the first on the Lab Support side. I know the last couple of quarters you talked about the four, five, major markets, some of the bigger markets that were trailing, whereas the rest of your offices were doing, were seeing the pick up. Could you explain where we're at in those four or five major markets and kind of the trends you saw in those markets during the quarter?

It's pretty simple. I think the markets that where we have felt increased orders and where we felt remained relatively strong compared to markets like Cleveland and Detroit, those markets continue to experience a pickup in orders but just now found the recovery that the company usually finds after the post Christmas depression. In other markets that sort of previously depressed, I don't believe there's any increase in demand there. I just believe this new field structure is allowing them to do a bit of a better job. So they're starting to grow their offices again. But I don't think any of those markets would turn around at this point and say that the first quarter recovery, which in the past has come as quickly as mid February or as late as mid May, ever manifested for them.

Are those four or five markets are they trending now similar to the rest of your offices, the rest of your markets?

Yeah, I'd say that's fair. I don't think anybody is seeing kind of the steepness of the recovery of the, sort of the normal post holiday depression but still the industrial markets, they're starting to grow. We take a great deal of significance out of that but they're not matching San Francisco, San Diego or Boston yet.

Okay. And then slipping over to the HFS. I want to make sure I understand where that's going. And you've talked about down sizing and focusing that on the major markets. Does that mean per se that the revenue line is going to be able to stay flat or is that going to be a challenge to even keep it flat, considering consolidation there?

We spoke very openly about this on analyst day because this has been a division that faced a lot of challenges. And beginning in the beginning of 2001, this division really took it on the chin in terms of the marketplace dynamic. We were open on analyst day to say there were lots of factors involved in the course and the progress of HFS. And we're really at that point still in a diagnosing phase. As you know, we haven't in the past been gifted with a particularly data heavy information system. We've had to work pretty hard in the field to make our diagnosis of what plagues HFS. At this point I think I can tell you our operating diagnosis in HFS really focuses more on the fact that the division was relatively loosely focused in terms of the occupations and clients that it targeted in the past. And a very steeply growing economy that was all that was necessary. That looseness of organization really hurt us coming into 2001, as the demand started to dial down, suddenly our ability to take aim and extract revenue was not nearly sufficient enough. So that's a long way of saying it's a more challenging marketplace but we also have caused ourselves our own problems there. We do now have offices that are growing in HFS and in fact continue to growth with markups between 60 and 70 percent. We're now encouraged that our financial diagnosis isn't that this is just a low margin business in a low margin division in a high value staffing company, but in fact we just have to retool our ability to extract the revenues we want from clients like practice management firms which is where we're driving a lot of business today instead of staying in the traditional hospital environment. So rather than try and make predictions on a larger division that is distributed across all sorts of different markets and had a very heterogeneous skill set in the account managers we've decided to narrow it down to the major markets that's where we have the strongest market leaders and we'll start to rebuild them.

You laid out three alternatives to that division. Sounds like you're more focused on maintaining the premium priced value out there with the services and move forward on that model, as opposed to the other alternative, which is selling it at a lower value equation.

That's right. We've been very head down on retooling where we need to redo. So I can't tell you how big I think it will be in 2006 but I think it can be substantially bigger than it is at full margin. We derived that from going out in the field and spending time in those offices where they're growing HFS and growing it at a 70 percent markup. And studying what it is they're doing in that particular office versus those that are struggling. So that's the resolution to the question we raised openly on analysts.

One last question. As far as HPO goes what was the revenue they experienced in the quarter for the full quarter and then just in terms of how that progressed during the quarter? Were there any trends intra quarter to be aware of?

Full quarter revenue for HPO was 34 million up from 29.6 million in the first quarter and if there was any trend I think the trend was once we got past the acquisition that that caused that their weakly growth in nurses and allied professionals on assignment picked up at the end of the quarter.

Those numbers are, as well as the 800 percent year over year, they're stated on an apples to apples basis including the pass through?

That's correct.

Your next question comes from Brant (Sockini) from Deutsche Banc.

Can you hear me?

Hi Brant.

On the reconciliation the earning numbers because Ron you did throw out a bunch of numbers quickly. Can you take us through the 70 to 75 original guidance down to the 50 to 60 cent guidance and specifically roughly what was the cost issue and what was the revenue issue.

Recognized that it's not just the revenue issue but a gross profit issue. I hate to keep hammering on the same three, but sort of the magnitude in decrease in projections for the core, the On Assignment, excluding HPO, was that we reduced our gross profit by approximately for the year 2002 by approximately eight million dollars while increasing, as we've noted, expenses from a higher revenue level. We still increase the expense net of savings by about a million dollars. So we're talking about a swing of about nine million dollars there. On the offset, on the upside, we increased HPO revenue expectations from original guidance which had been around 65 million to 100 million, 110 million, so that's going to contribute approximately close to nine million in gross profit. Nine million gross profit dollars, but at a higher expense, of course. Because even at a lower separating expense ratio, combined with the higher amortization of the intangibles, the net of all of this is going to cost us about seven million dollars in contribution and if you look at the factors on the gross profit side and the spending side. A big part of the story is on the gross profit side not on the spending side. But the tax effect of that seven million dollar reduction in contribution over 25 plus million shares and that's 17 cents a share. So if we look at the range back in March of 70 to 65 percent and just pick the middle of that point, middle of that range and reduce it by 17 cents you goat the 5556 cents we're talking about now.

So it's principally the mix shift among the revenues not necessarily on the cost side. So as you look out to 2003, your commentary that perhaps this should be accretive, can you just talk through sort of where you think the revenue mix is going in 2003 and specifically, too, on the cost side where you think you can cut out the costs or the completion of the ITA implementation and things like that where you might be then able to start generating the reverse of what happened this year.

Well, I don't have a lot of specific upturn in 2003. I think what drives in terms of mix, I expect that HPO for the shortened period represented 40 percent of revenue in this quarter. I think in the third and fourth quarters it will be more like 45 percent in revenue. So it's not going to lift by itself the gross profit contribution. As I've already explained. I think what makes 2003 more interesting for us, it allows us to grow, to the extent of the same ratio what preannouncement expectations were for 2003 versus 2002, is continued improvement in the productivity of the core business, continued recovery on the core business combined with an even more rapid expansion of the HPO business than we thought possible at the time of the acquisition.

Can you finally comment on share buy back and just capital structure going forward?

We still have 37 million in cash and an authorization, unused authorization from the board to buy back stock that's about equal to that. So obviously we won't use all the money to buy back stock. But given almost - I won't say unwarranted, but historically low point we are at with the stock price today, I would expect you would see some buy back activity commencing once we're out of the blackout period here.

One final question, with respect to the sale of HPO and the hangover associated with the VC ownership of that stock. Can you walk through once again what that ownership structure is and how much and what their sales constraints are each month in terms of selling activity?

Of course. The number of shares - first of all, the total shares issued in connection with the acquisition were approximately 3.9 million. And shares subject to the registration were about 3.6 million. So in the hands of nonmanagement stockholders, principally, we have 3.6 million shares. And as part of the agreement and as noted also in the S3 registration itself, is collectively in each 30-day period they can only sell 270,000 shares and on any given day collectively 100,000 shares. And I'm the gate keeper for all of that. So they put in their request to sale. I give them their allocations they report their actual sales and we update that throughout the 30-day period. So they completely sold through their allocations in the first two period. So 270 for each of the first two 30-day periods. So 540,000 shares are already gone. Obviously they were - they are totally blowing the stock out. So in the 30-day period that just concludes tomorrow they didn't get quite - I think they're down to the 270 allocation, 60 or 70 that didn't get sold or likely didn't get sold today. So now we're coming up with another period, the fourth period it will be another 270. So as of the 18th we'll have approximately 350,000 shares eligible to be sold by the non management stockholders. It takes about a 12 to 13 months to get through that overhang, if we let it proceed the way it is now.

Your next question comes from Jim (Jansky) with Janney Montgomery Scott.

The first question, Ron, did you say Lab Support was down about 11 percent sequentially and HFS was down seven percent sequentially versus year overyear? Was that correct? HFS without HPO.

Yes.

So it was sequential, not year over year?

Yes.

You said you averaged in the quarter about 180 account managers. Isn't that 25 or so below what you had originally expected?

Yes, it is below what we had expected to do. The change to market leaders, and while spending time on the model may have caused us to overemphasize the cost involved in changing to market leaders. Change to market leaders for On Assignment, it's a big change. I think it's an extremely positive change but it's a big one. It pushes a lot more empowerment back down to the individual regions. So while market leader now has the ability to hire, fire, modestly modify operating expenses within an office, emphasize one staffing occupational specialty over another in their particular market and to work with national and to work with Mike Tatum and his team on national accounts. When they can't win, they become available at margins we find acceptable. Because of that, because of the magnitude of that change and its recency we just decided we'll stop for a moment replacing account managers that we are losing through normal attrition until we get the market leader structure in place. And now we're letting those market leaders work sort of this point in repopulating their teams and supporting them administratively out of California rather than California trying to tell them who to hire and when.

How many revenue producing people in non-HPO positions do you expect to have roughly by the end of 2002, average?

I don't know if you have the plan in front of you. We expect to be above 200. Quite honest, the faster we can get there, the better.

At the analyst meeting, if I recall correctly. It might have been Mike. It might have been Ron - Mike Tatum, that is - said that Lab Support was trending at or ahead of expectations. Yet it came in well below my expectations. Did we have a gap in expectations there or did something happen in the last six weeks of the quarter that was unusual or one time, or is it ongoing? What are your thoughts?

We'd sure like to hope that it was one time. What happened was when we talked to you around the time of analyst day, we were still in sort of the boundaries, if you will, or the standard deviation of recovery from our normal sort of post holiday depression. And it has taken periods as I discussed earlier took periods of time longer than May and periods of time as short as six to eight weeks. This particular year it just never happened. So we'd sure like to hope that's an economy work (inaudible) but the recovery we had hoped to see in the demand just never manifested itself.

How are the issues going on with stock prices and companies in the bio tech market and the consolidation in the farm sued Cal industry. How do you expect that to affect primarily Lab Support sales going forward and have you taken that into consideration?

We continue to feel margin pressure from some of our A sized accounts. We continue to leave most of those behind. Our experience is that Lab Support offices that have account managers of some tenure that are well organized with a strong market leader are seeing the ability to grow their business and that now includes most of the Lab Support offices. So at this point in the economy, to us seems like it's a fundamentally bad idea I believe to start playing the margin or the price game. I think the economy is getting in our way on that. That's a slope. The company has never entered into sort of playing that game. It's not our intention to do so now. And we do believe that the improved selling skills that we invested in for the field along with this improved local management and support really of the account managers is contributing to the regrowth in that business and that the restart of growth in Lab Support has essentially nothing to do with demand. But at this point we're not contemplation lowering the margins.

Just one final question to kind of justify the gap here. In operating income. From my point of view what I understood was that while HPO had lower gross margins, that with the lack of - it had about the same EBITDA/operating margins as the rest of your business because you didn't have that - you didn't have as high fixed overhead the office field structure, et cetera. So was it that you expected such a big decline in HFS and Lab Support vis-a-vis HPO that you're not allowed that to come in line or is it really the additional costs, the additional costs issue in that you're investing in maybe HPO ahead of revenues. I guess I'm trying to get an answer there.

First of all, HPO had the same operating margin characteristics. But I think even on - but before acquisition. Then when we looked at the pro forma for the quarter end, layered in the amortization, I think that reduced the contribution coming out of HPO. Certainly on a GAAP basis. So I think the net effect here is that we're kind of neutral to positive on gross profit but we have higher expense levels in place for the core business even above what it was on a higher revenue expectation for lab and HFS and the rest. And we've added on an annual basis almost four and a half million in amortization expense to HPO. I wanted to go back to a question you asked, Jim, because (inaudible) bacteria often creeps into these numbers. The sequential decline in lab revenue, once you asked me the question, made no sense to me whatsoever. So it's actually four percent sequentially for the lab segment. And seven percent for the health segment, excluding HPO.

That's a big difference.

In orders of magnitude the lab segment is 28 million 4thousand. The health segment excluding HPO is about 11,600,000 plus and then HPO is 27 six.

Thank you.

Your next question comes from Adam (Waldo) with Lehman Brothers.

A couple of questions on the significant gross margin data. Can you give revenue for the international segment of the quarter and could you reconfirm each of the segment gross margins?

Sure, foreign revenue in the quarter was 3,348,000, which is, percentagewise - I haven't calculated it yet. It was five percent. Five percent of revenue. Five percent of the total revenue in the quarter. And then gross margins by segments, the lab segment in the quarter was 32.4. The health segment, excluding HPO, was 33.2. HPO itself was 25.7.

And just a general question for both Joe and Ron if I could. Historically, if you sort of go back to the company's 1992 IPO through early 2001, you obviously won't put up 34 straight quarters of meeting your (inaudible) straight estimates. But in that environment, the precision of the business model on a quarter to quarter basis, the trading dynamic in the stock tended to be relatively virtuous when you would release results intra day on the day of the earnings release and then hold a conference call after market close. Given all the business transformation issues underway, would you give any consideration to an after market release of results followed by conference call to allow the market to more easily digest the information imparted rather than creating intra day information asymmetries that create the kind of volatility that we saw today.

Your question only needs a one word answer, is that correct?

Sorry it's a long winded question, but it requires a brief answer.

It's a very illuminating question. The answer is yes, given the reaction we got today. I would have done it differently today. We sort of just assumed that we would do it the way we always did. In fact, the only reason we did it at 9:30 instead of 10:00 is we had an internal teleconference to review the results with the field. And so we certainly take that suggestion under strong consideration.

If you turn to the HPO business for a second, are you seeing anything in terms of employee retention trends that is out of pattern since closing? The businesses continued strong through the June quarter. But I wondered, in light of the share price, weakness of On Assignment over the last six weeks, if you are seeing anything unusual in terms of staff or management retention at HPO.

No, we haven't seen any impact at all. I think we spent quite a bit of time with the folks at HPO. Obviously not releasing earnings details and guidance. But from the very start we've made them very aware of our plan which are we knew at one point would entail investment in the business and they've been very aware of the fact that both companies are going to be investing for growth going forward. I think we've been very careful to have the staff of both companies looking. Of one company but both divisions looking very carefully at understanding that their commitment at On Assignment will be paid off in a two to three year time frame and not a six to nine month one.

Ron, you gave us AR obviously proforma at the end of the quarter at 37.7 million. Could you give us a sense for what that would have been pro forma for the year earlier quarter so we can calculate an apples to apples DSO?

I'll have to - I don't have that information in front of me. DSO for On Assignment on its own this quarter was 45 days down from 52 or so a year ago and HPO's DSOs are lower, 30 or less.

And I guess my last question is just trying to make sure I can summarize the cost of change here around the change in your new guidance relative to your mid-March guidance. Mid-March you were 70 to 75 cents EPS now you're at 50 to 60 cents. If we had to put together a summary cause of change what we would be saying is one, the change in the comp plans for the market leaders and account managers was worth about 1.1 million for the second half of the year on a pretax basis and about three cents at the EPS line. The HPO deal is turning out to be about four to six cents more accretive on a full year basis and therefore two to three cents more accretive during the second half of the year than previously expected. Pardon me. I'm sorry four to six cents more accretive for the second half of the year. So net net we've got about a 14 to 16 cent hold that's coming out of the core business that's causing the 15 to 20 cent EPS still overall. Now, if had you to sort of decompose the 14 to 17 cent hole in EPS coming out of the core business, would it be fair to say that most of that is still expected to come out of HFS given the a weakness in the quarter and could you give us a sense for the magnitude of weakness at HFS relative to Lab Support?

It's coming from, in terms of the contribution of the 14 to 17 cents is coming from both. Just comparing the lab and HFS results on their own to a year ago, lab as a division is down 21 percent from a year ago second quarter and HFS is down almost 27 percent from a year ago.

Okay.

So HFS on a consolidated basis represents only about 12 percent of revenue now.

About ten million free cash flow on the quarter, Ron.

Yes.

In that vicinity.

Yes.

Your next question comes from (Massey Roswell) from (inaudible).

If we take the mid point of the guidance range, what are the sort of the free cash flow expectations for the back half of the year.

On the new guidance?

Right. Take the 55 cent number side and the increase in the cap ex, because of the new system.

Hold on one second. I don't have a good answer for you on that. I'll have to get back to you on that.

I'll touch base off line. Thanks.

Your next question comes from Marta Nichols with Banc of America Securities.

I'm wondering, just going back to HPO, whether what we're seeing here in the sense that revenues are going up as materially as they are is that longer term the margins for that business may not be what they were call it in 2001, if they're going to require more investments to sustain that well of growth. I'm wondering if you can give us a sense whether you looked at what you think the long-term margin potential of that business is and what you think margin appreciation or degradation from these models makes sense over the next several years.

I think we can hold the margins we're getting now. I think the gross margins will stay in the 24 to 25 percent range, and they were definitely under spending and a little bit underinvested in people and infrastructure which we're addressing on the infrastructure side in our enterprise project. And we've certainly accelerated spending in the immediate return categories of account managers and recruiters and salespeople. But I think at the end of the day we'll get about the operating margin from HPO on a percentage basis that we're getting right now.

Okay. And I think you both alluded to increased capital spending. I'm wondering if you can quantify that both in terms of the amount of time you expect to be investing over and how much incrementally you would expect to spend this year. And I guess in addition to that any details that you can give us about what specific systems you're investing in so forth. I know you were a little reticent to give us any specifics at the analyst day.

We're going to be doing a separate announcement on the enterprise project. So I'm still a little reticent to get into the details on that in terms of expenses. It's neutral impact this year and a hard savings basis nominal to neutral in years going forward, just eliminating our outside payroll processing that goes a long way to paying for the cost of what we're going to be doing. Just let me ask a question. What's the capital expense this year that we'll incur for that project? A round number? For a company that traditionally has been about 300,000 a quarter on capital expense, and for combined companies that might have otherwise spent two million in capital expense for 2002, we're probably going to spend combined total of about six million dollars in cap ex this year.

Okay. And finally, I'm wondering if you can talk at all about where you're seeing strength in lab and where you're continuing to see weakness, given that we've seen some, I guess, surprising results from some of the Pharma and bio tech companies, whether you can give us a sense of whether - I think Joe you alluded to manufacturing industries still being served at the cusp of recovery and some other areas perhaps performing a little better. Can you get a little granular on that?

That hasn't really changed for us. We continue to see the best results for ourselves in Pharma and bio tech. And some of the more proximate woes of Pharma and bio tech don't seem to be affecting us in particular. Certainly some of the A size clients as I've discussed in the past and large Pharma, they're probably in anticipation of many things in their industry watching their costs as closely as they ever have that includes consolidating vendor relationships. But we continue to be able to grow in those industries. We're restarting some degree of growth in some of the more industrial cities. But that's really less an issue of demand and more an issue of our better enabling our own account managers to make progress. So I wouldn't say that the demand pattern has really changed. I think we're just doing a better job with the substrate that's there.

Can you just remind us, too, what size, as you described them, A sized clients are. Like how much revenue do they generate?

We tend to not measure them that way. We measure them according to the number of scientists in their lab. It tends to be a more reliable way for us to predict what their hiring behaviors and -

Number of your scientists or total scientists total?

Number of scientists total in their labs at any one location how we get to the A classification. I believe off the top of my head, although we'll get back to you on this. I believe the number of our A sized client for us is 30 or larger.

That's correct, Joe.

Meaning you have 30 clients?

No a client would have 30 lab sites.

30 or more clients. I got it.

30 or more scientists in their lab.

Thanks.

Okay.

Your next question comes from David (Reidell) with Sullivan Smith Barney.

This is Tracy for David (Reidell). I'm trying to reconcile some of your statements in the press release about guidance for the second half and specifically when you talk about revenues for the third and fourth quarter being sequentially flat in the core business but then you talk about the number of temporary professionals being up. I want to understand, is that mostly a mix issue or is it a billing issue?

It's sort of an issue of the average number of temporary employees on assignment. As we finish the quarter even in spite of the trends, the positive trend that began in the early part of June. We finished the quarter at a lower level of employees in the Lab Support and Health Care Financial staffing divisions than we started the quarter with. So just to get from the end of the quarter to average the same level of employees that we had in the second quarter. To go flat in revenue requires growth in employee head count. And the reason we stated it sequential employee head count growth would continue in the fourth quarter is to get to even flat revenues in the fourth quarter given that we only have about ten weeks before we hit the holiday, 10 or 11 weeks before we hit the holiday drop that it's hard to increase revenues sequentially from the third and fourth quarter anyway. So underlying statement about flat revenues in the core business particularly, and that statement is particularly aimed at lab and health care. Underlying that is the reasonable trajectory of growth for employees in each of those divisions.

The number of account managers for the quarter, the average of 180 was lower than expected. Were you surprised by that or were you expecting that?

It was certainly lower than the plan. We had some turnover issues. We had some sort of restarting the recruiting machine issues and transferring of people into new positions. The net effect was we were a little undermanned or underwomaned for the quarter than we would have otherwise needed to be and consequently we have built into the revised plan growth, not too dramatic in the third quarter about 11 net head count additions to account managers and all these numbers I'm quoting are exclusive of HPO, different model. And then another 15 or 20 in the fourth quarter of this year.

So as far as the revision of revenue guidance for the core business, would you say that that was an important factor relative to just general economic weakness?

It's a whole list of things we talked about before. It's the economic weakness. It's the competitive landscape. It's the delivery system. It's the field management efficiency. And it's account manager productivity that the turnover clearly impacts the productivity. We haven't built in what we expect to be the savings of some of these things we've put in place. But it's safe to say that right now if we maintain the level of turnover that we have had over the last 24 months, that that's costing four to $5 million a year in hard dollars. So we haven't assumed any of those savings in the plan for the rest of this year. But we certainly expect to effect some of those savings in 2003. So I think part of it is the reduction in turnover isn't only cost reduction associated with high turn over but if we can keep people around long enough we can get productivity not all the way from 21 to 30 but certainly back to the mid 20s and hopefully a little better than that. And that leverage on top of the organizational structure we've put in place and the leaned down support departments here in Calabasas should give us a pretty good base for a 2003.

Then just one last question kind of about the general overview of the reorganization you're doing. Could you give us an overview of what the field organization looked like two years ago versus what it looks like now?

The field organization - the best way to sort of get a conceptual handle on this is to understand the challenge that they were facing two years ago versus the challenge that they're facing now. Two years ago, all On Assignment's divisions worked in very high demand low supply environment . The account manager's primary job was to recruit employees. They spent probably 80 percent of their time identifying, recruiting and interviewing and placing scarce employees with clients who had a very high degree of demand. The comment in that activity is not a lot of selling, you're mostly moving inventory. And two years ago that allowed the field force to be composed of individuals who had two weeks of training, who had no previous sales experience and allowed managers in the field, because they were such universal success among the account managers, managers and I say that in the quotations in the field really collected data and passed it on much more so than they managed. Although, a few of them grew into very fine managers within the company on their own accord. Today it's a very different landscape. In most of the specialties excluding nurse travel and allied travel. Today the landscape is less demand, greater supply, more competition and a much greater need for the account managers to be able to sell. And so that does a couple of things. The account - in the face of the individual account manager - and there are exceptions to this - but in the face of the individual account manager in a market like Dallas as an example where it takes a long time to go between sales calls, they can no longer build their own business the way they used to if their job is to do all of the recruiting and all the selling. So we need to find a way to keep scientists playing the game for us because they deliver the best value. But we needed to make the model more scalable and that turned out to be allowing them to work in pairs and in teams and the way we got there and one of the reasons we are so committed to this model is because we went out and studied the very successful offices. Some of which were operating environments of surprisingly low demand. What we discovered was if they quietly went about this strategy some time ago. Secondly, these people are now faced with a much stronger set of competitors and a much greater demand to sell. And that means a couple of things. That means we now need account managers, if we possibly can, who are scientists with a sales background. Those are available but they cost more money. And we need to have a stronger ability to sort of recruit and manage and retain those people and all of that means a greater management challenge for the managers that are in the field. So our previous managers who had really been collecting data, except for a few who had independently grown into fine managers, our previous managers also could not possibly step up to the requirements for that while they managed their own book of business. So that's where we ended up saying geez we need to create a market centric team and we need to give them a leader whose time and attention is solely spent on coordinating their activities, building efficiencies and effectiveness and helping them evolve their selling skills. So that's really - I hope that's helpful. That's really a look at what the environment was like two years ago and what it's like today.

Next question comes from Jim (Jansky) of Janney Montgomery Scott.

Just a quick follow-up question. Ron, did you say cap ex this year is somewhere around six million?

Yes.

And Joe, this is kind of a question that was asked a little bit earlier and just to get an idea, where do you think you are in the spectrum of the moving pieces within the organization, all with the goal of trying to get the most productivity that you can out of the field sales force? Initially you said you shut down offices and you just started that late last year and you moved people from least productive to most productive. Now you've got this new team approach, et cetera. Is that implemented now it's up to - it's up to that coming through or are there more changes to come? So there's really not more of a risk of change going forward as much as there is that you've got to execute on that change?

The short answer is that it's executing now. The somewhat more detailed answer is that the focus on major metropolitan markets which we began before we finalized our team concept has been marching forward, with the deployment of the market leader based field force on July 1, the focus on metropolitan markets was essentially done. So we turned around that. And the offices and the regions we've defined for our account managers now, those are done. So really all that's left to do within this is hire and continue to train. So in terms of, I'm very sensitive to the number of changes we've asked everybody to both accommodate and to work intellectually to understand, the changing part now is over it's the executing part now that we're all focused on.

Thank you.

Your next question comes from Lyle (Callas) of Blackrock.

I was wondering if you could talk about the HPO business and what mix is between aides and actual RNs and what's the pricing trend you've seen in both of those?

Sure. The HPO is essentially exclusively an RN business, first of all. And we tend to be pretty heavily biased to critical care nurses. So we really act in the aide business, number one. And secondly, there are regions in the United States where RN pricing as you probably know there's always been RN pricing, Florida being one of the foremost and we're not particularly active there. But right now HPO is growing without having to bend to price pressure.

Great. Thank you very much.

Your next question comes from Steve (Coil) of (mid air) capital.

Good afternoon guys. I had a couple of quick questions just on the Lab Support business. Can you spend a minute refreshing my memory, what is the breakdown of revenues in that area by vertical. And then if you could speak to I guess really the bio tech and kind of other health care related life sciences vertical, specifically, I'd appreciate it.

Steve, we can send you more detail. If you would like big round numbers a quarter of the business is bio tech. A quarter of the business is Pharma and the other 50 percent is split among agra business, personal care products, industrial , environmental and other.

Food and beverage?

Food and beverage.

Within bio tech, I think Jim asked earlier about consolidation, some of the trends there. I just saw a survey today, looking at pretty good strength in bio tech hiring are for the back half of the year. Can you speak to within these core areas where you have seen the weakness. Is bio tech strong is Pharma strong or give us some color on this.

We were a provider of lower rather than higher numbers of staff to any given client. As you know historically we're placing two, three, four scientists per client. Because of that we don't really get buffeted very much by short-term sector trends in bio tech or Pharma. The place in bio tech and Pharma that we have been affected by is just by tighter cost management and vendor consolidation by large Pharma clients.

Would you say the weakness is more pronounced in Pharma versus bio tech?

I would say that, yes.

And bio tech is - so you're not providing Ph.D.s to do research predominantly, right?

No. Once somebody said about On Assignment, we actually sort of provide the people that do the work. The chemists that we supply are undergraduate degrees in chemistry biology, molecular biology and not the Ph.D. candidates. And because of that and the fact that we place - you're seeing generally a single digit number of employees per client, we're not really vulnerable to the bigger economic shifts. Where we're seeing additional challenges in some of our large Pharma and some large bio tech, but large Pharma clients who in general are squeezing down on prices and taking a little bit less notice of value.

The last point looking at the growth, I think you mentioned it was down four percent was the number you came back with sequentially. Was it pretty much across the board then four percent or were there some areas that were actually up or could you maybe expand on that a bit?

Steve, I don't know that I know that, the numbers off the top of my head. I know that I would expect that we're up across the board as much as anything, because I think our recent happy news about the restart of growth in lab is a function of our internal form man's and not a function of the environment.

Thank you very much.

Your next question comes from Lenny (Mealle) of Robert W Baird.

Hi Joe and Ron. Couple questions on Lab Support. Joe, you talked about lower demand increased competitiveness, vendor consolidation all contributing to higher operating costs. Why would that not also put pressure on the gross margins over the next several quarters?

Right now we believe there continues to be high margin business available that we're just not effectively getting to. So I think that the short answer is we're not big enough and don't have such a large market share that that is our issue right now. I think there's a theoretical point in the future where that becomes our issue. But we still have cities where we're at very low penetration rates in the market. And that's really because of our own performance. So I don't think we're getting to the point yet where we are outstripping the availability of our traditional business, which is marked up 60 to 70 percent above pay rate. Where we're feeling it is with the large Pharma clients. And historically our value proposition is one - it's more than marketing materials. It's something we very much believe in that in these specialty industries that providing the right science as to what we've called the right match or quality assignment the first time, that that math works. And what we have found in particular in large Pharma that the local and regional laboratory supervisors agree and they believe that that math works. As those accounts get centralized into HR based or procurement based vendor management, the hiring decisions being made much more the basis just purely of the cost and with a very low eye to quality. That's really where we're seeing our struggles in some of the larger Pharma clients.

But it sounds like a mix shift toward other types of work that is going to continue to be contributed to stability in the gross margin is your hope.

I think it's an improvement in the performance of our field force. We have a very good - we have one of our brilliant branches in Lab Support is in the San Francisco Bay Area. And they're now growing again after a very disappointing lack of recovery in the spring. So they're growing again now. And they're getting some margin and pricing pressure from large sized clients. But they're a long ways away from exhausting the supply of B and C sized clients that are quite happy to pay on assignments historic market for the quality of services we deliver. So I continue to believe it's primarily an internal issue.

And then on that note, if you were to see some of the cyclical areas, I think you mentioned metals, paints, if you were to see some of those come back, do those carry generally lower margins?

For us it's the same margin, actually. And we would like to see those come back. That would be happy happy news for everybody.

And then just one other question and I'll let you go here. Sounds like once you get the market leaders in place you'll be aggressively adding to the account manager pool. Does that and the fact that you had declining account managers throughout this quarter due to turnover, does that mean that we should necessarily expect productivity to fall throughout the year at a pretty good pace?

I think it's certainly not going to shoot up but I think we can maintain it at the current level, 21, 20 to 21.

So even though you've got - I mean you had the benefit of fewer account managers at the end of the quarter helping you here. And then you're going to add new ones this next quarter. You don't really expect revenue to do anything. So shouldn't we at least expect the math to sort of drive lower productivity? Just due to that?

The flat revenue comment relates principally to Lab Support and HFS and even HFS we have a little bit of an uptick in the fourth quarter. But the productivity for the nonHPO On Assignment business otherwise is being, it should stay at current levels because we do have some growth built into the critical and diagnostic imaging business. So they're getting more productivity pop there.

Did you mention that the turnover among the account managers has subsided? You're comfortable with where it's been over the last few weeks, is that fair to say?

We can't measure it in intervals that short. We've never been happy with the turnover level of account managers. I don't think the company has ever been happy. I mean long ante dating my arrival to On Assignment turnover of account managers has been high. I think however that hasn't married when accretion of or the accumulation of selling skills by the field was not that big a deal, I don't think the turnover really affected the business that much, because scientists know how to recruit other scientists it's like reaching back into your indigenous community. Why we're so focused on turnover is however exactly that reason. As we invest in sales training and as we invest in market leadership and in team building in the field, we will give the biggest (inaudible) to this business in addition to productivity is reducing the turnover. So we're very focused on that. No it's not at levels we like today. But we're counting a lot on the market leaders to be able to solve that and also counting a lot on our focus on hiring people with a sales back ground. Because I mean I'm very familiar with the transition, almost ten years ago I went from the medical world, if you will, to the business world. And as you know most people who transition careers, one of the things that if they least commonly like to do is sell. Particularly tough sales. And so I think that our field force turnover has been also due to, attributable to the fact that the people we've had in the field force didn't have much selling experience, didn't have the expectations of how hard it would be. And so we're really counting on the market leaders and a hiring profile that includes sales experience to address that turnover. The two real drivers for us going forward are account manager productivity and reduced turnover.

Just one more question related to that then as a follow-up. Are you fearful at all, Joe, that the market leaders will be taking the bat out of the hands of some of the very effective account managers and experienced account managers in that they've got increased responsibility obviously sounds like the account managers are essentially reporting to them. And that that's changed. Has that affected the job or will that affect the job of the effective account managers?

You know I don't think so because I think the market leader's focus is really - I don't mean to make it sound like we're treating them as commodities, but the market leader's job is or their priorities and their personal priorities are really on to acquire and train and retain effective account managers. For every reason from their orientation bias to their comp plan, the way they can best benefit themselves is by building teams of increasingly successful individuals. So I'm not worried about that. I'm counting on the market leaders taking the bat out of the hands of a lot of the managers in California. Because we really just - the reason the market leaders were implemented is that until very recently virtually everything in the company has been directed from Calabasas. And as much as anything, that has stopped working. We just reached the size and the scale where that doesn't work. So the bat I'm trying to get them to take away and that they're taking up with vigor is to give them is some guidelines but to at the moment power them to do a lot more development of their account managers, recruiting and hiring and training within their own market regions.

Thank you very much. I appreciate it.

Your next question comes from Brett (Sakini) from Deutsche Banc.

I just wanted to run over these HPO numbers briefly. Seems like could it be like that HPO is actually going to be neutral this year given the increased investment and the amortization and that the differential from the 70 cent is actually more around just the pure Lab Support and the increased spend rather than being offset by the increase in HPO accretion?

I think that's a valid conclusion. HPO at the end of the year is going to contribute about 40 percent of the revenue for this year. About a third of the gross profits. And at a relatively more efficient SG and A line. So I think HPO, when we originally did guidance in March and April, we hoped for ten cents out of HPO for the eight months a little more than eight months. And I think the reality is we're going to get 20 cents or so at the end of the year.

I'm sorry, so you think you'll get 20 cents?

Yeah.

What are HPO's EBIT margins?

Let's see. I don't have the pro forma for for the quarter in front of me. I'll have to get back to you.

Two other questions for modeling tax rate and also for the year. And also for 2003 if you do spend 10 million in cap ex can you help us understand what the depreciation schedule will be on the ten million cap ex and the impact for 2003? Thanks.

I'll have to give that back to you because I don't have the schedule for 2003.

Thanks.

Your next question comes from Martha Nichols of Banc of America Securities.

Just another quick follow-up. We talk about the productivity metrics every quarter going from 2930 in the high to 20ish now. Given you're adding people in the local markets to share responsibilities and doing more of a team approach, does that change the way you look at productivity metrics or will the people who are primarily responsible for sales, for example, not be included in the account manager metrics that you're using?

Coming out of the gate on this. We'll watch it and not have it change the way we look at it. Because the - the way we report on it to you. Because the (inaudible) here and obviously the belief for making the investment is you have two solo account managers can run 60 working employees and I'm not giving you specific projections. But in concept, then if two solo account managers can run 30 employees each, the two account managers working as a team can run 85 or 100 employees. And that's the experience of the field offices that are making this work.

Okay. So just to clarify that. When you talk about adding additional people to work as teams, you're not talking about splitting the responsibilities down a line that makes one person an account manager and one person essentially a functionally different person.

No, we are talking about doing that. But in terms of how we report back to you, the numerator is still going to be the number of employees and the denominator is still going to be the total number of those people, whether they're selling, staffing or otherwise.

Okay.

Your next question comes from Doug (inaudible) of (mid air capital).

Just a couple quick things. You mentioned on the lab side that I think we're seeing growth week over week for the last six weeks. I wondered if you could qualify that at all, if I could get some feel for how significant that is.

Ron can take a swipe at quantifying it. We're trying very hard as I mentioned in the call not to read sort of future slopes based on that. But instead are reading couple of a qualitative outcomes one is that we're seeing growth in orders across all offices. And that is growth in orders that are sort of homogeneous derived from offices that are in very heterogenous offices so that's why we're turning - that's the main reason we turn around and say this is a direct result of what we're doing with management and motivation and organization, number one. Ron, I don't know if you want to comment on quantitative things at this point at all?

The trend in this upward period was on the order of 20 to 25 employees per week, temporary employees on assignment. And that's the best trajectory and the most sustained trend we've had as you said, Joe, in 15 months or so.

I'm sorry, can you put that in context for me as far as what dates and how that compared to prior periods?

I mean first of all compared to prior periods, when, if we go back two years ago, we weren't coming off of a decline. So I think the recovery here is fairly rapid if you were to overlay this against, say, the trajectory from two years ago. But in terms of what that means in sort of percentage terms, the growth in lab, I'm just looking at a four week period here, represented an increase of about five percent in employee head count from over 2,000 to over 2100.

Okay. And I wonder, are you getting any feedback from the field as other callers have talked about, the issues impacting the pharma industry and the bio tech industry. Are you getting essentially feedback from the field people as far as whether Pharma is looking at maybe increasing spending in the second half of this year as some people have speculated? Because obviously they're (inaudible) in the pipelines are going to do something about it. Or is the feedback you're getting that really pharma is going to continue to baton down the hatches and have another look at spending as we go into 2003?

You know, it's a question I'm glad you've asked. Because our basic I think operating principle as far as projecting going forward. In all divisions other than allied staffing for radiology and in nursing staffing is that we're getting feedback that's almost impossible to read. We're getting feedback from some sectors and some people that they're just going to do the same with more. We're getting some hiring going on from clients we didn't think we would find hiring. We're finding some growth in HFS and practice management that have still be for a couple of years. So I think that at this point the best answer is to say there's quite a bit of noise and many fewer trends.

If we think at how your business responded during the last wave of pharmaceutical consolidation, the pharmacy Pfizer announced the first of kind of many consolidation waves we're going to see, how did your business respond to that in terms of the number of people you're putting into the labs and also can you go back to I guess it was '94 the last time that health care in general was under this kind of pressure back when the health care forum was being champ beyond by Hillary Clinton, can you talk about once we came out of that period, what kind of growth you saw in the last (inaudible).

Ron you'll have to take a swipe at that one.

I wasn't here in '94 so I don't recall that history. And I know there was certainly a scare coming out of Mrs. Clinton's proposed initiatives at the time. But I can't give you any color commentary on how the business reacted during that period or during the previous consolidation in that industry.

The prior consolidation, though, was fairly, it was just in the last couple of years. I didn't know if you could speak to that.

I can't speak to the impact of the consolidation, other than say it creates larger clients, larger clients tend to be a little bit more price sensitive. And I think that causes some disruption in growth of that business, just because we can't - we choose not to compete with commodity providers who provide lab sciences as part of multi-million dollar contracts that include mail room clerks to controllers. So indirectly I think it's the consolidation if it creates bigger buying entities and more requirement that we deal with HR departments and purchasing departments, they're not likely to provide a value proposition as readily as some of the mid-sized and smaller clients we deal with.

And I presume that's why bio tech is holding up better than Pharma for you guys because the bio tech companies tend not to be so centralized in their purchasing decisions and so bureaucratic, so the idea of you providing three, four, five people to a Pharma bio tech company as a value proposition there may be a lot more clear to the bio tech companies as opposed to say being reflective of really different spending trends within Pharma and bio tech.

I think that's a valid conclusion.

Thank you very much

Your next question comes from (Carlene Sigwa) of (Artesian) partners.

I just wanted to clarify what you had said about 2003, the press release you say some of the moves you're making now will be additive to earnings in 2003 and you made some reference to earlier in the call. But what exactly does that mean? Does that mean that margins will be higher than they would have otherwise or just higher than they're going to end up being in 2002 or versus what was being modelled before? The revenues don't seem to be the issue. More the revenues seem they'll be from HPO but are we going to have a permanently lower operating margin?

First of all, I don't believe we're going to have a permanently lower operating margin in the local staffing business. And I think for certainly this management team it's a very, quite honestly, a very brave decision for everybody to settle on this plan, because what we've really done is we've invested in transitioning a local office, the staffing organization from being capable of supporting 150 to 170 billion dollars of revenue to one that can support a much bigger - a much bigger local staffing enterprise revenue stream and employees and clients exchanging assignments. So I don't think that over time we're committing ourselves to a higher operating costs in terms of expenses. But certainly in the short-term that's where our impact is. But I think this all has great productivity return.

So you are going to have higher costs because there's going to be more people involved in this, but you think that the revenue contribution that you'll get from them will more than offset the increased cost?

Yes.

Okay.

Thanks.

Your next question comes from Adam (Waldo) of Lehman Brothers.

Gentlemen, just a follow-up question here on your guidance. As I look at the decomposition of it, run it through our model it occurs if we model the 100 million to 110 million revenue for HPO on a stub year basis of 2002, which inclusively guiding us to expect is low 20s to mid 20s of year over year declining revenue in the second half of the year in the core business relative to a mid to high rate of decline in the first half of the year. Would you care to comment on the relative conservativism of that outlook given the recent trends you've been seeing in the last eight weeks particularly in the Lab Support business?

I think the trend is positive that it is is coming on in the wake of a fairly steady decline that began late April and continued for all of May and in June. So in order to - so that conservative - fit may be conservative guidance but projecting flat revenues in lab and HFS are born of the reality that we have to grow the temporary employee head count in order to achieve those revenue levels. So I think we have clearly taken a lot of revenue out of those two divisions in the second half of this year. But I think it's based on the best forecasting we can do at this point.

Ron was that forecast put together before you had a look at the last four to six weeks of data of Lab Support?

It was in the middle of that. We presented a preliminary version of the revised plan to the board about the middle of June. So I think we were kind of at the end of the first, maybe at the end of the first week of uptick there. So yeah we started that process before we had this established trend in place. But even extrapolating from that plan and building in the end of quarter, end of month and 4th of July dip that we expected, that the trajectory from there after reflects growth and reflects continuation of that trend. So we were kind of in the middle of it. But we had some - a glimmer of turn around going around while we were doing that.

So in the event that revenue in each of the two core business divisions is anything better than flat or sequentially with second quarter levels on a quarterly basis during the second half of 2002, would it be fair to say that you would come in towards the high end of your knew guidance range or possibly a little higher?

At the high end, yes.

Thank you.

At this time we have no further questions.

Okay. Amanda, thank you very much. Thank you everyone for dialing in for this teleconference. We know we've presented a lot of data. We think it's a very exciting time for On Assignment. We think it's a very optimistic time for On Assignment. And certainly we've all been pressing towards the future and I think we now have a plan to take it there. So please do contact us with additional questions in follow-up and thank you again for dialing in today.

Thanks everyone.

Thank you for participating in the On Assignment 2002 second quarter earnings teleconference. You may now disconnect.