ASGN Inc (ASGN) 2002 Q3 法說會逐字稿

Good afternoon. My name is Sandra and I'll be your conference facilitator. At this time I would like to welcome everyone to the On Assignment 2002 third quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question and answer period.

If you would like to ask a question during this time then please press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. At this time I would like to turn the call over to Doctor Joe Peterson, President and Chief Executive Officer. You may begin your conference, sir.

Welcome everyone. As Sandra said, I'm Joe Peterson, the President and CEO of On Assignment and with me today is Ron Rudolph, Executive Vice President and Chief Financial Officer.

Yes, I'd like to read the statement preceding our call today that anything we say in the course of this call or any statements we make that are not purely historical are forward-looking statements within the meaning of section 21E of the Securities and 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, retain and retrain qualified staffing consultants, 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 10K as filed with the Securities and Exchange Commission.

The company undertakes no obligation to update information either contained in today's release or discussed in this teleconference. Joe.

Alright, today we'll review our recent performance, beginning with Ron recapping our third quarter results. I'll put these results into the context of our current lab support and healthcare operations and in the marketplace as they are experiencing it and following that we'll open the call up to questions. Ron, let's review the third quarter.

The third quarter revenues were $74,583.000, up 59% from a year ago. That includes the results of HPO, acquisition of which was completed on April 19. LAB segment was up from $33 million - I am sorry, down 17% from $33,665, 000 a year ago, to $28,017,000 in current quarter. The health segment, including the results of HPO, was up 251% from $13,279,000 a year ago, to $46,566,000 in the current quarter. Net income for the quarter was down 10% from a year ago, from $4,059,000 to $3,651,000. Net margin decreased from 8.7% to 4.9%. Earnings per share were down from $0.18 a year ago to $0.14. Sequentially, revenue was up 10% in the quarter, LAB segment was down 1% and HEALTHCARE segment was up 19%. I will go into more detail on the segment information, trends, and pricing margins and the rest of the details later in this call. Joe?

Thanks Ron. We are happy to be here presenting solid results despite a disappointing economy, and especially when on the heels of a major evolutionary step for On Assignment. We have been busy in the last quarter working through the reorganization that we announced in July. Now I would like to tell you how close we are to completion, and about our positive early results. LAB Support was able to achieve stable sequential revenues despite uneven demand across the industries it serves, and the historic softness of late August and early September, and I believe much of the credit for LAB Support's steady performance is attributable to the productivity initiatives and model enhancements that I described in our last call.

If you recall, those include a redesigned field management with regional managers responsible for teams of staffing consultants, all organized around major markets including a revamped consensus compensation plan now driven by team performance. The positive impact of this improved working environment was almost immediately recognized and has persisted. Staffing consultant turnover is down, and performance is up, with three of our nine regions well ahead of their internal plan.

At the same time, divisional gross margins have been maintained at 32.3%, reflecting the still most valuable levels of service we provide to our clients. For the quarter, staffing consultants formally are called account managers, productivity averaged 24 working employees per staffing consultant, despite a field force that is very young in tenure, as we have been actively adding staffing consultants in order to complete the field force reorganization.

Through September we are more than 90% done of this reorganization, and that is the process of relocating our talent to the most promising markets. As an example, it is the last major step of this process, we have closed our five Canadian offices, which between fragile employment markets and a weak currency, it had been struggling to make a positive contribution to our bottom line. I am particularly pleased with LAB Support's results at a time when the market for temporary science staff continues to reflect cautious hiring and pressure for clients to reduce across all industry segments.

The progress we are making today represents well rounded performance because it includes success in recruiting new clients, maintaining existing clients, and recapturing former clients who have been disappointed with the real abilities of general staffing companies to effectively recruit and deliver quality scientists. Enthusiasm in LAB Support division is the highest since I joined On Assignment. This is because the division's evolution was guided by the best practices of our most successful individuals, and their offices, and LAB Support is truly become their division. I HEALTHCARE segment, which includes the Healthcare Financial Staffing, Clinical Staff, and Diagnostic Imaging Staff local staffing businesses. As well as the nurse and allied travel operations of the former HPO continues to lead On Assignment's growth.

The segments results were achieved despite continued weakness in local staffing operations. While travel healthcare posted robust sequential and year-over-year growth and Diagnostic Imaging, local staffing continue to grow.

HFS and CLS posed lower revenues than for the second quarter. Consistent with our July announcement and in response to the continued under performance and HFS local staffing. And to further develop the obvious synergies between local and travel staffing.

On October 1 we completed the broad reorganization of our healthcare staffing activities by creating a consolidated healthcare division. We've integrated the management, marketing, and sales of both local and travel staffing operations with local healthcare staffing operations like Lab Support, reorganized around regional market themes.

For all of the healthcare division, management has been centralized in Cincinnati. The HPO, HFS, CLS, and DIS brands will now disappear behind the brand On Assignment Healthcare Staffing. Which will bear the HPO graphical logo.

These changes bring us closer to my goal of having a single team presenting our healthcare clients with temporary staff to fill multiple occupations. That staff's derived from both local and traveling populations as temporary professionals.

Practically speaking, this means that we've gone from five distinct healthcare divisions. Each sending staffing consultants on separate sales calls. The one healthcare sales force capable of filling nursing, allied, clinical laboratory, medical/financial staffing needs, in more than 12 discreet occupations.

These changes make our selling activities more efficient; move us clearly in the direction of offering a more complete range of staffing services to our healthcare clients. This does also mean that at this time we have decided to grow our HFS staffing business because we see persistent demand in our existing clients for the ubiquitous occupations that HFS addresses.

At the same time, we're actively adding managed care and practice management organizations to our client mix as these organizations encounter the type of variable demand that makes temporary staff essential. As with Lab Support, the evolution of the healthcare businesses was driven by the best practices from within both HPO and On Assignment.

And there's a strong sense of enthusiasm for the new operating model and our performance goals. The redeployment of the field force headcount to major markets and the completion of the consolidated sales team is about 70 percent complete.

And as with Lab Support, we are actively hiring staffing consultants. While working through this reorganization our healthcare staff has done a great job continuing to make high quality assignments which supports our continued solid gross margin of 32 percent for locally-derived temporary staff and 26 percent for traveling temporary staff.

The market our healthcare divisions are seeing for temporary medical staff continues to be as dynamic as it is interesting. Of course the overall shortage of nursing and allied staff continues to dominate marketplace dynamics. And our clients need the staff we provide in order to maintain the beds and services that drive revenue.

We're also acutely aware of the universal burden that temporary staffing costs lay on the hospitals and providers. And that those organizations engage in continuous efforts to lighten this load. Those efforts will never be stronger than in the fourth quarter of this year as hospitals approach their fiscal year-end. And this continues to be the primary reason that we're staying very close to our clients and working to adjust our strategy with them to match their circumstances and their needs.

Let me close this discussion of operations with an update on our centralized support activities. We continue to vigilantly manage costs and more closely track and adjust expenses to revenues. Our People Soft enterprise project continues to progress as we have planned and it is on budget and on schedule for implementation in the California headquarters and over 100 local offices on January second. We're looking forward to the efficiencies and the wealth of management insight that we will gather from the new data this system can deliver.

And also during the second quarter, we launched our new Web site and you'll see an almost continuous development improvement of this site including its supportive investor relations over the next year.

Finally, a word on strategy going forward, today and through the end of the year, our internal commitment is now that of focus and execute. We're confident in the evolution we have orchestrated and now our collective effort is directed to supporting the science and health care segments as the staffing of each team is completed and as these new teams and their regional managers take their new energy and capabilities to the market.

OK, Ron, let's review our results in detail and then we'll open the call us for questions.

Thank you, Joe. The results I gave a few minutes ago included the HPO division activities. I will now restate those results and also give you the results without HPO included to compare year-over-year performance.

So revenue in a consolidated in the third quarter was up 59 percent, including HPO. Without HPO's results revenue for the balance of the business was down 19 percent, to 38 million 237 thousand from the year ago third quarter. Lab segment as stated earlier, was down 17 percent to 28 million 17 thousand. The health segment, up from 13 million, 279, to 46 million, 566 thousand, with HPO, was down 23 percent to 10 million, 220 thousand, without HPO.

HPO revenue on its own was up 41 percent in the quarter, from 25 million, 725 thousand a year ago to 36 million, 346 thousand in the current quarter.

EBITDA from a year ago was up 22 percent from six million, 151 thousand to seven million, 485 thousand.

Consolidated operating income was flat from a year ago, five million, 769 thousand, to five million, 783 thousand. Net income, to restate that, was down 10 percent from four million, 59 thousand to three million, 651 thousand and the net margin for the current quarter was four point nine percent EPS, 14 cents.

On a sequential basis, consolidated revenues with HPO were up 10 percent, without HPO down four percent. Lab support was up one percent - lab segment was up one percent sequentially, down one percent sequentially. Health care segment was up 19 percent sequentially and down 12 percent without HPO. HPO was up 32 percent sequentially, comparing the third quarter to the partial second quarter results. On a full quarter-to-quarter second to third quarter comparison basis, HPO was up seven percent sequentially.

Foreign revenues were three point four million during the quarter, four point six percent of total revenue. Conversion fees, as a percentage of revenue, decreased from two point three percent a year ago to point nine percent this year. Total conversions were 555. Conversions involving fees, 123, conversion fee revenues, $646,000, average fee per conversion $5.2 thousand or $5,200. Days in the quarter were up one from the second quarter sequentially -- I mean, up one from a year ago quarter from 62 and a half to 63 and a half.

Turning to gross margins, consolidate margins for third quarter this year compared to a year ago decreased from 32.3 to 29.3. Sequentially, the gross margin decreased from 29.8 to 29.3. Comparing third quarter to a year ago, lab segment margins decreased from 32.4 to 32.3. The healthcare segment margins, including HPO, decreased from 32.0 to 27.5 and HPO as a standalone increased gross margin from a year ago from 24.7 percent to 26.2 percent.

Breaking down the margins into components contributing to the changes On Assignment, excluding HPO for the comparison of this year's third quarter verses a year, markup changed the difference in bill and pay rate is a negative 22 basis points. We had a positive impact of reduced worker's comp and benefits of 62 basis points and the impact of lower conversion fees is minus 44 basis points for a net On Assignment, excluding HPO, of minus 4 basis points.

HPO, as a standalone, increased its margins by almost one and a half percent, 66 basis points of which came from increased spreads between bill and pay rates, 83 basis points of which came from lower worker's comp and benefits expense. Overall margins, obviously, decreased from a year ago due to a higher weighted mix of -- or due to the mixing of HPO and On Assignment's businesses together.

Looking at margins on a sequential basis the drop in overall gross margin of half percent or 50 basis points from the second to the third quarter is due to increased mix of HPO in the business, from 42 percent in the second quarter to 49 percent in the third quarter.

Operating expenses for the quarter are 21.5 percent of revenue, compared to 19.6 percent a year ago and sequentially the increase is from 20.7 percent in Q2 to 21 and a half percent in Q3. Operating margin dropped from 12.3 percent to 7.8 percent in current quarter, net margin from 8.6 percent a year ago to 4.9 percent.

Cash and equivalence at the end of the quarter ending September 30, $27,152,000, down 67 percent. During that time we expended $75,000,000 on the buyback -- on the HPO acquisition and $2.9 million on share repurchase. Since July 19th we've repurchased approximately 400,000 shares of On Assignment stock.

Accounts receivable up 60 percent to $37,874,000, representing a combination of On Assignment and HPO business. DSO for On Assignment is 48 days, for HPO 46 days. Equity is $199,206,000, up 86 percent. Capex for the third quarter was $2.45 million of which $2.05 million related to the People Soft acquisition -- People Soft project, excuse me. We're not acquiring People Soft.

Depreciation and amortization during the quarter totaled 1.7 million, 550,00 of that was depreciation, and 1,150,00 is amortization, and that's amortization of identifiable and tangibles, about through the HPO acquisition. Company continues to have no debt. Now to our guidance for the quarter, the guidance that we issued in July - from July 16, we estimated for the full year, revenues of $260 to $265 million, and earning per share of $0.50 to $0.60. Our current guidance for the fourth quarter is revenue of $70 to $73 million, and earnings per share of $0.11 to $0.13. This is based on trends coming out of the third quarter, too fewer days in the fourth quarter than the third quarter, Christmas falling on a Wednesday, and the seasonal dip that affects all of our lines of business, including HPO, that traditionally occurs sometime between the week after Thanksgiving and the week before Christmas. Now, Sandra, I would like to turn it over for questions now, if you would open the lines.

At this time, I would like to remind everyone, in order to ask a question, please press '*' then the number '1' on your telephone keypad. We will pause for just a moment to compile the Q&A roster.

The first question comes from of Baird.

Hi. It is from Baird. Good afternoon. Just wanted to ask a couple questions on the healthcare side. What are your expectations specifically for HPO? Seems like the fourth quarter - it seems likes days would be maybe less of an issue for that business, in the fourth quarter is a seasonally strong quarter, so I was just wondering what the expectations were there?

Well, the - this is Ron Rudolph, Randy. Days are certainly less of a factor for HPO. Last year I did - could have been an exacerbated falloff, but there was quite a falloff between October/November levels of business and December level. So I - you know, I think over all in - our conservative estimate is we don't expect to do much more business in HPO for all of those reasons, in the fourth quarter than we did in the third quarter.

OK, and then on the cost side, you mentioned lower workers comp and benefits costs, it seems like that's bucking a trend that we are seeing with a lot of other companies. I am wondering how that's occurring and whether you think that that's sustainable?

They are not - I mean it's not because we're bucking any trends, it is just that the adjustments that are made on a quarterly basis. You know, we - actualaar - however you say that word, actuarially update those numbers, and we were over accrued a little on HPO's roster of business and under accrued on ours, and the net of all that gets adjusted each quarter, and claims get reactivated, claims get settled. But I mean it's a fairly rigorous process even on a quarterly basis of looking at what's out there, aging the claims, and coming up with the estimates and in this particular case, it's not because we've lowered premiums or taking on any more risk in managing the process, it is just that's the way the adjustments have come out for the quarter.

OK, and just a quick question for Joe. Joe, you mentioned that you've made, sounds like, some significant and positive changes in the healthcare side in terms of bringing it to one organization, and a single face here. Are we past any fallout that might occur as a result of those changes, or could we be in front of a little bit of, you know, a little bit of friction as they're implemented?

You know, our headcount changes, which are a pretty good barometer of how far we've come in the healthcare division. They're about 70 percent done. And that refers to people either moving around or to from non-productive markets into major markets or empty headcount being filled.

I'd say, Randy, I'd say we're about midway. We don't expect any large fallout from it. But this has been a big change to the divisions operations. And so I think we probably have a little bit ahead of us but we're not expecting anything precipitous to occur.

Ok. Thanks a lot you guys. I appreciate it.

Sure.

Your next question comes from Adam Waldo of Lehman Brothers.

Hi. Good afternoon Joe and Ron. Joe, you've been studying, for probably four or five months now, the longer terms prospects of the HFS business. And I wonder if you could update us on how your thinking's evolved since the July call and since the endless meeting with respect to the strategic prospects of HFS.

I'd be happy to. As I said in my prepared statement, we've made a commitment to grow the division. And we think that's the right thing to do for a couple of different reasons. First of all, you're right. We have been studying this pretty closely. It represents a good chunk of revenue for us. And it's a profitable division.

The first thing we discovered, really in our study, is that we had a series of On Assignment local offices that were making HFS work at full markup. So that gave us some hope that the fix it and grow it option was viable. When we went and looked at those offices, we realized that they were taking a bit more of a broad-minded approach to where demand for HFS employees can be expanded.

And that means the practice management, the managed care communities, where the shifting of provider contracts serves up variable demands for everything from billing to claim processing services. And so those folks need temporary staff. So we felt that there were pockets or areas of demand that we previously hadn't depreciated.

And finally, as we went back and talked directly to some our existing HFS clients, it's clear that they have some amount of need, not necessarily an expanding amount of need within any given client, but some amounts of need for the services that HFS addresses.

So those are really the three reasons that we decided to grow it. And I guess the kind of a summary comment we make internally is, you know, there are plenty of clinics that don't have a radiology suite and don't need a radiology tech.

And there are plenty of doctors offices that out source their laboratory work and they don't need any clinical laboratory technicians. But there's nobody who doesn't bill. So we find it to be a relatively ubiquitous need among our clients. And one that they'd like us to keep supplying. So that's why we're doing it.

Does the ubiquitous need then make it less relevant to pursue a potential loss leaders strategy with respect to HFS in order to facilitate cross over of other services that you postulated earlier Joe?

Yes. I think, you know, we're certainly assuming that that's not necessary at this point. To use HFS as a client entry tool to drop those margins. I'll reserve that option going forward but we're not intending to exercise it right now.

Ok. As we turn to the HPO business, I just wonder if you can give us a sense for Ron - you know, what your thinking is in terms of 2003 growth opportunities or whether you're prepared to address that on this call versus the call early next year.

No. We're not prepared at this point or in position to comment on 2003, any aspects of the 2003 at this time.

OK, and the last housekeeping item. I think in your prepared remarks, you indicated 24 average knowledge workers per, and I apologize I forgotten the new term already Joe. I'm going to say the old one just, account manager. You said 24 knowledge workers per average account and the end of the quarter. Does that include the impact from HPO and if so, could you parcel part for us what it would have looked like on a an old On Assignment stand alone basis?

This is Ron. The 24 that Joe was talking about was in his prepared remarks on lapse support.

Oh, OK, my mistake.

That's just a lapse support number. Obviously when you mix in the rest of it, with out without HPO, those numbers come down fairly dramatically. I think we had 21 was our average for the second quarter and we did not have - in the 21 we reported in second quarter was up sequentially from 19 in Q4, 20 in Q1 of this year, did not include HPO at the time. So when we put HPO into this mix, it pulls that number a little bit under 20, but I'd like to readdress that point.

You know, in January when we talk about apples for apples, comparing Q3 to Q4, 'cause we don't - we don't have a good measure of that right now.

On an enterprise wide basis?

On an enterprise wide basis.

OK. Thank you very much.

Thank you.

Your next question comes from of Salomon Smith Barney.

Hello, gentlemen. Congratulations on a good quarter.

Thanks, .

First of all, a couple of things, if I could. You just mentioned 24 assignments per staffing consultant in lab support. What was that number for the second quarter?

That's temporary professional employees per staffing consultant.

Right.

Second quarter was about the same. I mean it rounded up to 25 and this quarter rounds down to 24. So productivity was sustained in lab support from second to third quarter.

OK. And then Joe you mentioned in health care you were noticing hospitals being a little cautious about their cost controls going into the fourth quarter and you adjusting your strategy maybe a little bit to meet that. Can you give a little bit more color about what that might involve?

Yes, I mean I think our strategy right now, what you're feeling as we combine the division is a strategy that has us moving towards becoming a multi-line, if you will provider of health care staff to clients, existing and new.

And compared to many of the staffing companies that our health care clients see, the new assignment sales force actually is sporting quite a few different staff in occupations including nurses. As that new sales staff goes forward with clients, we're working with those clients more closely on a strategy that has us addressing, I guess a more strategic view of their staffing needs through the fourth quarter and beyond.

And not trying to be circumspect, but what that actually means, is that we're trying to understand and counsel them on when they should be using our short-term travel staff, verus when they should be using our local staff. And then collaborating with their private - with their permanent placement resources along the way.

Thank you.

I think anybody who's building staff, or who's building a health care staffing company, has to be moving towards strategies that have us collaborating with clients rather than antagonizing clients through high mark-ups. And that's the basic direction in which we're headed.

Staying on the travel nurse business for a little bit and health care staffing there, there's quite a lot of noise in the last couple of months about travel nursing and what, sort of what the growth prospects are there. Do you care to comment on how HPO maybe looks a little bit different than some of the competitors and what trends you're seeing relative to what maybe the competitors are seeing?

Yes, I mean we -- you know, our primary difference to the competition is the fact that our offering is short-term. That has some advantages for clients because not only is it short-term, but it's very rapid delivery. Our average time to deliver a nurse to fill a staffing assignment is still under five days and that compares to between two and four weeks for longer-term staffing companies.

What they're seeing I can't comment on, what we're seeing is just -- you know, there's a continued tremendous need for nurses and we're just careful to tailor the sales of our offering to the appropriate needs within hospitals, meaning we address sort of high demand, high acuity and in the association, high revenue generating needs.

And finally, how big was Canada? Are we going to miss that?

No. I can't tell you off the top of my head what the total revenue number was. The contribution to the bottom line was, yes, breakeven generally speaking.

Thank you very much.

Your next question comes from (Jim Nansky) of Jamie Montgomery Scott.

Yes, good afternoon. Two questions, actually three. The first one is did you say how many staffing consultants you now have in laboratory?

No, it's 101.

OK

Was the average for the quarter, not the current today, but that's the average for the quarter.

OK and then can you address, in the order of magnitude, you know the difference between what you saw in July for revenues of $260 to $265 and now revenues are somewhere around $257 or so, you know, what you're seeing going into the fourth quarter?

Well, I -- what we're seeing is we still haven't -- you know, we still haven't revitalized HFS. Clinical was growing before and it's now flat. HPO has slowed down as we get into, you know, comparisons over larger numbers and our lab forecast for the fourth quarter are somewhat conservative based on our plan. So, you know, mixing all of that in the pot we just don't feel comfortable not lowering the revenue expectations for the fourth quarter.

On the other hand, you know, our budgeting for the fourth quarter was driven by higher numbers than the $260 to $265 guidance that we gave in July. So we're pretty confident that we can manage (GPS) on these lower revenue expectations, but I mean those are the factors and then we looked harder at the issue of Christmas falling on Wednesday and the result of that is definitely taken some wind out of lab support in the fourth quarter.

Jim, just a couple of comments to put those answers in context. As far as the number of staffing consultants in lab, if you'll recall in the second quarter in lead up to our reorganization of both field forces, the local healthcare staffing offices and the local lab support offices, we knew we were going to make broad changes in the way the field operated and we let the account manager members dip just because we didn't want to hire people on and then tell them three weeks later that the job we hired them for had suddenly changed and so we let our account manager, now staffing consultant, head count slip to close to - certainly to a of quite a few quarters.

Since then, we've been - got a full throttle filling those positions, and LAB has probably has as few and open positions as it's ever had, and certainly is running at the lowest turnover number it's ever had. We've just ended up in LAB and Healthcare - the net affect of doing that is, is that the average tenure of the field's force ends up being fairly low.

And then just in terms of revenue projections and conservatism on our part, you know, in the second quarter, at really the end of the first quarter and the second quarter, every one - you and I and everyone else were still reading articles predicting that the economy was going to turn around in the third quarter, and I think that certainly the economy that we are experiencing is flat to down, and we are kind of adjusting our general outlook to match that.

OK, and then turning to the - to HPO, are you expecting - well, are you noticing any geographic strengths or weaknesses, and especially as we - you know, lets say in the current - in the December quarter, and then as we look into '03, which for example your presence in California, are you noticing that hospitals are gearing up for the - you know, there's the patient ratio law that has been past?

Well, I think - you know, a couple of comments. I don't believe that our business today reflects geographic trends. I think it's generally where the overall drive of HPO is responding to the critical level of the shortage, and so I don't thing geography drives us today. The only geographic comment about the HPO business that's ever consistently made is that we are not heavily represented in Florida, because the bill rates in that state just don't support the kind of margins that we're - that we're interested in. As far as nurse-to-patient ratios and other things like that, you know, that only helps us, particularly because we're a frequently a very short-term way for facilities to address - short-term meaning quick time of delivery - way for healthcare facilities to address needs, and I think those concerns are only going to go higher. I don't - you are probably aware, but in the October 23 issue of the Journal of the American Medical Association - the article on this topic was just released, and I think these direct correlations of nurse-patient ratios with morbidity and mortality are only going serve to drive hospitals to fill open positions.

OK. And last question kind of - I mean, you know, you both seem pretty excited about the prospects of the business next year. Will you be - you know, when your back in there - you are purchasing the rest of the 800,000 shares left on the authorization next week, or next month, or what?

Actually there is a 1,400,000 last -

Oh, you purchased 800, I am sorry.

800 of the 2.2 authorization, and we'd certainly be anxious to get back in the market, unless the stock price runs up wildly between now and Monday.

OK. Alright, thanks a lot.

Thank you.

Your next question comes from of .

Thanks, good afternoon. Just a question in terms of just some of the monthly trends, or even weekly trends in October. I am just trying to some of the comments for the fourth quarter, with just generally a more conservative view. Have you seen it all sort of - a slowing down, say - lets say the core LAB Support business from the first couple weeks of October, vis-a-vis September or how things trend generally in the businesses.

Flat.

Ok.

I mean, Lab Support is generally trending is flat. Which compared to sort of what happens with September's softness and sort of the tenure of the field force. The revenue's flat and we're reading those results as good.

Ok. And headcount was flat? Or was headcount up a little bit?

Headcount from when to when ?

I'm sorry. From the August - from August to September. Was that, on the temp side, was that flat or was that up slightly?

I think it was, you know, flat to up a little bit. And then down - it's always down, you know, following the end of the month - end of a quarter. So it was just slightly up at the end of the quarter. From the end of September from August.

Ok. And how has October behaved? Do you have any early data?

Well, I mean, you know. It's still flat in lab and HFS is still not recovering. Clinical, which had been going up, is gone sideways on us at the moment. HPO is a little slower than we would have projected in July. And then combined with all of the factors that I listed, you know --

Right.

--post script to why we're lowering our revenue expectations. I think, you know, it's the trends. It's the seasonality. It's the days. It's a lot of issues. But, you know, the business isn't, you know, robust in any particular quarter at this point.

Ok. Fine. Thank you.

Thank you.

At this time, I would like to remind everyone. In order to ask a question, please press star then the number one on your telephone keypad. Your next question comes from Martha of Banc of America Securities.

Hi. Thanks. It's Marta Nichols with B of A.

Hi Marta.

Hi there. I'm wondering if we can go back to your comments about consolidating all of the healthcare management in Cincinnati. I don't recall that being part of the re-org. What sort of drove the thinking there? Obviously you've got all the HPO guys there but was there something - is there enough of an overlap in the customers that drive each of your individual healthcare businesses that it makes sense to have a consolidated management structure there?

Hey Marta. It's less of a - certainly there's enough overlap in customers to have a consolidated division. And I'll comment more on that in a minute. And then we've had Michael Jones, the Chief Operating Officer of the healthcare division, or Chief Operating Officer of HPO, who I brought on in the first half of the year. Michael Jones, of course, has been in Cincinnati. And this is, in many ways, a statement of our - an expression of our confidence in him. And Michael's now the Chief Operating Officer of the healthcare division. And so local staffing activities as well as travel staffing activities, and sort of logically report to him.

Um-hum.

And HPO's collection of businesses account, you know, amount to or represent about 80 percent of the whole total segment at this point. So in terms of, you know, center of gravity and all that it really makes sense to run it from that location.

There isn't any thought to actually combining the, I guess, the sales people or the staffing consultants in any way though?

Well, what's happening; one level more of detail on my comments about the consolidated sales force. What we've really done today in thinking about the healthcare division conceptually now, you really have much overlap on the client side. And also much opportunity.

Frequently, we have an HFS or a Clinical Lab Staff or a Diagnostic Imaging, a former On Assignment local brands. We have an HFS contract with a particular hospital in which we don't have any nurses placed. And we're finding for that HFS contract there's a good entrée to that client to talk about nurses and other traveling staff. So, that synergy is an obvious one and that's just not going to be manifest unless we get all those clients in a single database in a single pool.

Secondly, what we - you can really think of the health care division as having a sales force. And then having two groups that can fulfill open orders. One group is a centralized group in Cincinnati that can fill an open order with a traveler. And the other group is a collection of local offices that can fulfill an open order locally. So you've known On Assignment for a good, long time now on - the local staffing activities have really been split into a group of sales people, and a group of account managers, who fulfill the traditional account manager model of finding a candidate and placing them in a position. So there's a local fulfillment group, a travel fulfillment group, and they support the clients that are recruited by common sales organization.

OK. Great. That's helpful, thanks. I'm wondering, too, if you can talk a little bit about pricing pressure. I think if there's a big picture concern, particularly about the health care non-nursing business, it's to sustain ability of your gross margins given that there has been some pricing pressure. And I think we're seeing kind of mixed trends from some of your staffing peers. And I'm just wondering if you can give us some sense of what you're seeing, whether it's getting more competitive or, you know, less so relative to earlier this year.

, did you say excluding the nursing?

Yes. I guess I'm more interested in health care, non-nursing and lab.

OK. Well, from a year ...

Universally would be helpful as well.

Yes, I mean, I certainly - you know, we didn't comment on the division margins, but just to give you a little prelude, you know, to the actual question on overall bill rates and things like that. The margins in the health divisions are pretty stable from a year ago. I mean HFS was 31.9 percent and it's 31.6 percent in the most recent quarter, clinicals down from 32 and a half, to 31.2. I mean that may represent some competitive pressure there or other issues. Diagnostic is up to 35.3 from, you know, below 32 a year ago.

To put a different slant on it, the health segment bill - average bill rate is up eight point four percent from a year ago, excluding HPO. So, I think the increase in pay rates and bill rate, inflation have moderated, but we haven't gone the other way on anything yet.

OK. And what about in nursing?

Well, I don't, you know, our, I mean, our, I mean we have, you know, the bill rates for this year and, you know, our attempts to try to compare bill rates to a year ago, you know, have been less than satisfactory from my perspective. Because I think we've changed the way we've - we fixed the way we're accounting for travel expense, related items and billing, whether those were imbedded or billed directly. And so, you know, obviously HPO was benefitting from the overall appreciation and pay rates and everyone was passing along those rates. HPO's margins are up from a year ago. I don't - I don't have good percentage comparisons for you. The average nurse bill rate at HPO, including embedded travel, is around $71.

nichols. OK.

Whether that's up 15 percent from a year ago, I can't answer you with any - with any specificity.

The overall comment, (Marty), is that I don't think we're feeling it directly today, but we like everybody else, are aware that it's out there in certain facilities and geographic regions and some portion of the future. So this is one of the reasons why I specifically comment on the fact that we're trying to keep very close to our clients and understand what their -- kind of, their environment and their perspective is like, but we're not feeling it there directly today.

OK, thank you.

Thank you.

Your next question comes from Tom McKay of (Simplon) and Partners.

Thanks. Could you just comment on the nurse headcount at HPO now verses the -- at the time of the acquisition in April?

We haven't given out headcount information.

I thought you said something about headcount in other areas, earlier. Anyway, is it a growing number or decreasing or ...

Yes, I mean it's -- I mean, certainly up from the acquisition. I mean, the revenues during the quarter of the acquisition from HPO on a full quarter basis were $34,000,000 and in this most recent quarter we're $36,300 and some thousand and so -- I mean the answer is yes, they're up. I mean, they're up -- you know, the sequential increase was about seven percent, so the headcount would be up, you know, comparably about seven percent.

So there are more nurses working at HPO now than there were at the time of the acquisition?

That's right.

Is that what you're saying?

That's right Tom and some of the other comments we were making on headcount had to do with the number of staffing consultants we have deployed in the field.

Yes. Alright, thank you.

Thank you.

Your next question comes from David Cowen of (Fairlawn) Capital.

Good afternoon, I have a few questions. One is, could you give us staff consultant's comparative numbers to the 101 for this quarter or for the overall number, have you managed to raise staff consultant numbers and if you could also talk about the turnover rates, in some ways, of the staff consultants?

Well, the overall number for the third quarter I can give you. We haven't -- we didn't have the HPO equivalent numbers for the second quarter in there, so the number for Q3 -- the average number of staff consultants for Q3 including all operations is 236. The number we reported on average for second quarter was 180, but that did not include HPO.

So I think staff consultant levels are up a little bit in the third quarter from the second quarter, but not dramatically. In terms of turnover, we don't -- I mean we don't site any particular statistics, Joe said it's come down quite a bit. That's particularly true in lab support, but you know to quantify it for you I'm prepared to do at this time.

That's great and then the second question was just on the DSOs of HPO. I think you said 46 days was a bit higher than I expected, if you could just talk a little bit about that?

Well, if you had been in our audit committee meeting yesterday I could have explained it to you in more detail, but the -- there are a couple of issues that cause an overstatement of the -- you know, of the real DSOs at HPO. It has to do with implementation of a new system and the way transactions are being processed.

There also are a couple of clients where there were some billing disputes and they're ongoing clients we have active relationships with, but until we resolved a couple of billing errors they weren't paying their bills and that's all been fixed and if we had made those adjustments you'd see DSOs for HPO back under 40, back in the 30s. So there's -- the receivables, they're in good shape and -- I mean, 46 isn't a bad number in any event, as an absolute, but it defiantly higher than we had reported earlier for HPO.

Thank you very much.

David, let me - I am going add to Joe Peterson. I want to put your turnover question - your consultant level question in a little context before we leave it, so everybody understands where we've come. When Ron says before HPO, HPO had local offices of their own, and so we - as I had said earlier, we allowed the On Assignment - the staffing consultant head count to slip as we went into the reorganization. Coming out of the reorganization, three things happened to the headcount. First of all, you have HPO local office staff get rolled into the headcount - that is described under the collective number of headcount staffing consultants. Second of all, we have, of course, a new group of managers who are now in the field, called regional managers. They now get added to the total headcount number of the group called staffing consultants. And then finally, you feel it's also hiring up in staffing consultants from Q2 to Q3. As far as the people who are actually making assignments in the field, that number is down from a year ago, and we are refilling those positions. The overall number is bigger because there is some people who used to be corporate centric managers who are now out in the field working in the field again, and we have got some HPO offices and headcount added into that.

Thank you.

Your next question comes from of Lehman Brothers.

Ron, I want to get back on your guidance will do, if I may. If we take the high end of your guidance of $73 million in revenue for the fourth quarter, I think what you are essentially telling us is the LAB Support division will be about flat sequentially. HFS will fall off in absolute revenue by a similar amount by which fell off sequentially in the third quarter, and HPO won't see any sequential increase in revenue. Give us a sense for why we would expect, first of all, HPO not to do somewhat better in the fourth quarter, harkening back to Randy's comment about the lack of seasonality. And secondly, give us a sense for with modest improvement in account manager productivity seen in the third quarter relative to the second quarter at LAB, why we wouldn't expect a modest uptake in revenue, even with the - I believe it's too fewer billing days sequentially, but flat billing days year-over-year.

Well, this - I mean, this isn't just a question of extrapolating third quarter. I mean, this is the input we are collecting from the people - you know, the people in the trenches and their management, and I think there is always a tendency towards conservatism in this sort of difficult demand environment, as it's been labeled so many times. But we are just a little bit cautious on the HPO side, because they did experience some fairly severe seasonal drop last year, and it's not quite clear whether that was a 9/11 related response or not, but a lot of nurses chose not to work in December, and their sequential drop in revenue, just from the month of November through December was on the order of like 15% or so, just from month to month. So we are a little cautious on that. The reaction on the - from the LAB Support management is that this Christmas on a Wednesday phenomenon, looking back at other times when that's happened, has a little more of an impact that we thought. The trends for it - for HFS and Clinical certainly not up at the moment, and diagnostics too small to have a material impact, even though it's growing. So the net of all that, you know, collectively between the finance department and the operations people is to put some caution in our projections on the revenue side for the fourth quarter.

OK. That's very helpful, thank you.

Hey, Adam?

Yes, Joe.

The caution on HPOC seasonality is partially related to the short-term nature of the business. So if you think about you know, a longer-term traveler who is making a 3 to 6 month commitment, you have pretty good visibility on how many travelers you are going to have out in the field coming into December and through the end of December. One of our travelers, who is traveling for somewhere between 2 and 8 weeks, you have a decreased visibility coming into the holidays because those nurses can make a relatively late November, early December decision that they don't want to travel through the holidays. And do that. And they did that last year and HPO experienced a pretty dramatic reduction in nurses On Assignment over Christmas but an equally dramatic resumption of nurses On Assignment almost immediately after Christmas. So, that's one of the, probably one of the more challenging sides of the short-term travel assignment game and we only really have one year of given HPO's youth, we only have one year of experience under our belts regarding that so we're coming conservative into December.

OK. Thank you very much.

Your next question comes from Candy Smith of CIBC World Markets.

Hi. If I recall correctly, you recently changed your compensation plans to include monthly and/or quarterly performance bonuses. Will you comment on what percentage of the staffing consultants made their performance targets in Q3 or just provide some general comments around the compensation plans?

Probably easier to provide some general comments around the compensation plan. And then let me comment on lab support. Because lab support is the only division where we've got any sort of road behind us on the new comp plan.

You know, On Assignment used to be a collection of individuals, the collective output of which was a great sort of organically growing top and bottom line. As you know, a lot of our biggest diagnosis for why we ran into, why the company ran this into some troubles in 2000, 2001, had to do with the fact that we needed to decentralize some of the management and focus on regional themes, also to get turnover down. So the nature of the plan was to give, to make the compensation first team based so that the person sitting right next to me and their presence not only next week but next month and next quarter, materially improves my own outcome on monthly and quarterly comp. To directly address the turnover issue, and kind of move some of the responsibility for helping with turnover to the local team. That and we had just enriched the whole time because the plan had fallen behind market. That's really been the philosophy underpinning the new comp plan but we're very pleased with the results of lab. We think the lot of the diminution in turnover is in direct response to the plan and I know that in the third quarter, so far, we have three of our regional teams who are enough ahead of their internal plan to be kind of locked in to the highest order incentive compensation plan and that represents 11 branch offices and I don't know what that head count is but you could guess that that's going to be about 20 people.

OK. And as another point on clinical, given that it has a relatively small size and that you had been projecting a much bigger opportunity, what are your theories for why it's flat and then what's the outlook there?

Clinical lab?

Yes.

Let's see. I'm trying to make a simplified response out of a fairly complicated problem. A lot of clinical labs growth historically, was in kind of the less paid, specialties of the clinical laboratory. And that includes phlebotomy and some - and some basic assistant rules. A lot of the growth in those positions led to the early growth of clinical lab and a lot of the optimism around the division's future. But on a little closer inspection, a couple of things became apparent.

First of all, some of the phlebotomists and related positions postings tend to be relatively short-term assignments with high turnover of clients and assignments and staff. So, there became kind of a maximum terminal velocity that one can reach as a staffing consultant in terms of placing phlebotomists.

Secondly, we really discovered that the moniker allied is what really needs to be followed. Meaning, non-nursing health care staff, rather than clinical lab. And so that's why you see us internally now with health care talking about allied.

We'll continue to supply phlebotomists for the next segment, but our focus is much more on cytotechnologists, medical tech, surgical tech, and the other people that make up allied health care. Those people have longer assignments and better margins than the traditional mix of clinical.

OK. And finally, did I hear in your prepared comments that you said that you would now be targeting managed care or was that specifically in reference to HFS?

Both. I mean we are - we are targeting it and that's an HFS focus. Practiced management concerns, third party administrators, managed care organizations are all require coders and claims specialists and other, and medical financial occupations.

OK. And that's a new area of focus for you?

It's a new area of emphasis for us. We've always had clients there, but as we went back and looked at just what HFS offices were being - were successful and maintaining 70 plus percent mark-ups, it was those offices who had a substantial focus on managed care. Because it's the managed care entities that, you know, win a, as an example, that win a system wide contract and have the variable demand that suddenly need to turn to a temporary staffing provider, like HFS, and say, look I need 12 claims processors and four medical secretaries.

OK. Thanks.

You bet.

Your next question comes from of .

Yes, thanks. I was just wondering what Q3 cash flow from operations were.

I'm glad you asked that question. Net cash provided for operations in Q3 was three point three million. I already have the cap ex number, which was two point four five million.

OK. Well thank you.

Yes.

Your next question comes from of .

Hi, . Hello?

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Gentlemen, at this time there are no further questions. Are there any remarks - closing remarks?

Yes, listen Sandra, if there are no further questions, then we appreciate everybody for taking time to attend the call today and hear where we're making progress. We look forward to speaking to you all in January and between now and then all the best to you through the holiday season.

This concludes today's On Assignment 2002 third quarter earnings conference call. You may now disconnect.