ASGN Inc (ASGN) 2003 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the On Assignment first quarter earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will follow at that time. Should you require assistance during today's conference call, please press star zero and a conference coordinator will be happy to assist you. This conference call is being recorded for replay purposes.

I will turn the program over to your host for today's conference, Dr. Joe Peterson. Please proceed.

Thank you and welcome everyone to our first quarter 2003 earnings conference call.

With me today is Ron Rudolph, our Chief Financial Officer. Ron will provide the financial highlights of the first quarter and then I'll give a brief overview of current industry dynamics, as well as to provide color and in sight into the progress of our strategy. Ron will present more details on the financials after which we will take questions. Ron?

Before we go over the highlights, I will go over the forward-looking statements.

Some statements included are not historical in nature and involve important risks and uncertainties that could significantly affect results in the future. Such statements are forward-looking statements within the meaning of Section 27(a) of the Securities Act of 1933 and section 21(e) the securities exchange act of 1934. These forward-looking statements are only predictions and actual events or results may differ materially from any forward-looking statements made during today's conference call. Factors that could cause actual results to vary from these forward-looking statements are more fully described in our annual report on form 10-K as filed with the SEC for the fiscal year ended December 31, 2002, under risk factors. Forward looking statements made today represent our current outlook only as of today's date. We do not undertake any obligation to update forward-looking statements to reflect subsequent events or circumstances. We can not assure you that the projected results will be achieved or predicted events the will occur.

For the first quarter highlights.

Consolidated revenue in the first quarter of 2003 was 57,825,000. That's up year-over-year 37.3%. And that includes the results of HPO. On a sequential basis, revenues were down 12.4%.

Earning per share for the quarter was a loss of two cents, compared with 12 cents profit a year ago. And seven cents in the fourth quarter of 2002. Our guidance for the quarter had been one to two cents profit.

During the quarter as noted in our press release we took a restructuring charge of $413,000, approximately one cent per share related to local health care.

HPO revenues during the revenue were 25,559,000. Down on a pro forma basis from a year ago first quarter by 12% and down sequentially by 15%.

Cash and equivalents at the end of the quarter were 29 and a half million. That's after capital expenditures of 1.62 million, and stock repurchases which totaled 3.75 million.

Now I would like to turn it back to Joe to continue on with his industry overview and strategy update

Thank you, Ron.

Suffice to say it has been a difficult market to reshape On Assignment. Nonetheless, I am confident that the changes we have made position us to compete more effectively in all our markets.

While market dynamics similar to those we experienced in the latter part of 2002 including uncertain economy and an evolving marketplace, continue to affect our clients' decision making processes and spending levels, we believe we have developed a compelling value proposition to address our clients' needs.

In our process, and as circumstances have prompted we continue to reduce costs and address inefficiencies. In response to a very new level of competition for entry level HFS, staff we closed offices and reduced that field and headquarters staff dedicated to supporting lower value, commodity HFS occupations. Instead we will support these clients and these temporary professionals from a lower cost centralized operation. Centralizing this support has resulted in the closure of ten offices and reduction of 35 staff. Costs associated with these actions resulted in the charge for this quarter of $413,000, and equally significantly going forward this centralization will afford $600,000 in quarterly savings.

At the same time we continue to do solid high value HFS staffing with corresponding mark-ups in margins in many of our offices. We will continue to energetically support that business.

As previously stated our goal is to become a true one-stop service provider of mission critical staff to our health care clients. As our industry is maturing, its new demand side dominance we are acting out our strategic decision to implement a model that goes beyond leveraging the shortage of healthcare staff against health care clients and enhances our relationships with key hospital and health care clients.

The central (inaudible) of our strategy have been built directly from the priorities our clients have expressed. Those are, service, simplicity and efficiency. To meet the demand for simplicity by offering a single vendor solution, we have created a single health care sales force supported by local and travel fulfillment operations. We are in the final phase of implementing this strategy and in this final phase from our Calabasis headquarters an order disbursement team collects leads generated by the sales force and delivers them to the office most approximate to the client as well as the travel operations.

For especially hard to find occupations orders are addressed by multiple local staffing offices and their teams. In addition to the primary local office.

Our PeopleSoft enterprise platform allows us to seamlessly deliver, coordinate and track the order distribution process. In addition, PeopleSoft allows us to provide web account access, web access to profiles and a single invoice to each client for all temporary staff.

Throughout, every client receives the detailed face-to-face local service that has always characterized On Assignment commitment to clients. When completed, our simple personalized interface will provide rapid access to the fulfillment capacity of centralized travel fulfillment center in Cincinnati and 30 local health care offices.

This true centralized and local staffing solutions are able to recruit allied professions, nurses in high value medical occupations. Thirteen occupations in all, each at multiple price points. For each of our clients we will be able to provide the fullest solution, the most effective solution to meet their specific requirements and in doing so, we will have achieved our goal of collaborating with our clients and fundamentally improved our position from vendor towards partner.

Our task is simple. We are raising the level of service our clients depend on us for their needs and becoming the de fact to service provider. In addition to service and simplicity our model offers clients the potential for valuable efficiency.

By engaging On Assignment fully across multiple occupational needs, our clients can benefit from volume an commitment related reductions in the unit costs of temporary staff. Clients that engage us fully in our, and are engaging us fully reduce the time an hassle they spend on large numbers of vendors and reduce temp. staff costs over time.

All our internal efforts are concentrating on completing the implementation of this very client driven strategy.

Ron?

Thank you, Joe.

Now to some details for the first quarter.

Last segment revenues were 24,514,000, down 17 percent year-over-year. And down six and a half percent sequentially.

Lab segment revenue represents 42 percent of total revenue. Health care revenue was 33,311,000 during the quarter, including the results of HPO. That's up 164 percent year-over-year. And down 16 percent sequentially. Health care segment revenue represents 58 percent of total revenue. HPO represents 45 percent of total revenue.

International revenue, which is all lab support, was 2.73 million during the quarter, down 15 percent year-over-year. Down 12 percent sequentially. Represents 4.7 percent of total revenue. And 11 percent of lab segment revenue.

Conversion fees were 604,000, down 35 percent from a year ago, up 23 percent sequentially.

Consolidated gross margins were 26.77%, down 83 basis points sequentially. Gross margins in lab, 32.26% up 66 points sequentially. Up 66 basis points sequentially.

Gross margins and health were down, were 22.73%, down 227 points sequentially. Gross margins and HPO 19.9%, down 271 basis points sequentially.

SG&A during the quarter was 16.34 million, includes 400 -- includes the 413 million -- 413,000 in restructuring charges. That's up 75 percent year-over-year. Up 6.7 percent sequentially.

Operating loss for the quarter was 863,000. Again including the 413,000 restructuring charge.

Cash an equivalents, 29 and a half million down 70 percent from year ago, down 13 percent sequentially. That's after the 1.6 in cap-ex expense and 3.75 million in stock repurchase. We repurchased 920,300 shares during the quarter. The effect on the quarter, effective impact on the quarter was about 300,000 shares because when we began and ended the purchase.

Accounts receivable, 35 million at the end of the first quarter.

DSOs for the quarter, 59 days compared to last year 50 days and to the fourth quarter of last year of 49 days.

As to guidance, we continue to provide -- not to provide any assistance to the analysts with their detail models an giving the uncertain outlook at this point we are providing no quarter to quarter guidance.

Now we would like to entertain questions from our listeners at this time.

Thank you. Ladies and gentlemen if you have a question at this time [gap in audio] please press star one for your questions.

The first question is from Brandt Skakakeeny Deutsche Banc.

Good morning. Numbers are obviously fairly grisly. As you look out to this quarter, understand the, not wanting to put out any guidance, but can you let us know sort of how the trends have acted? We are almost halfway through the quarter. What is happening in HPO? How April behaved, so that we can extrapolate at least the first quarter trends into the second quarter numbers?

I don't think we are in a position to do that today, Brandt. We had an up-tick in revenues last week. We haven't had that many in the month of April. To comment further at this point bridges into guidance that we are not comfortable giving at this time.

Okay. Let's see. How about in terms of the DSO issue? That was up -- can you explain why that was up? Was that a mix issue? Were there potentially, were there potentially a charge coming or something?

That's a systems issue. We successfully turned on PeopleSoft beginning of January and then had some delays in billing.

So it's not a collections problem. It's just that we created a GAAP that we are -- you know, that we are working off of and catching up on. We had a few weeks behind at the beginning of the quarter, getting bills out with the new system. It's a technical, usual technical details post implementation. It did delay billing for awhile. That's the, you know, sole explanation for the run up in DSOs we should to see it come down in the second quarter.

Okay, then finally, you are sending about 120 million in good will from the HPO acquisition. Given the deterioration in revenues and margining there, is there a risk that will get written down at some point soon?

Well, soon, certainly at the end of the quarter we are in now we will have to look at that again. We reviewed it, there was no obligation to do anything with that or no need to do that now. Obviously, you know, our market cap stays where it is, we will have to address that at the end of the second quarter.

Okay. I guess I'm sorry, one final question. I mean, we've talked about cost cutting initiatives. We obviously layered a lot more on the SG&A line from '02 to '03. We are up a couple million dollars.

How soon can you guys address that to take that down to a level where you can generate more profits at this revenue run rate?

Well, we are working towards that.

The cuts in local health care are about 600,000 a quarter. The increase sequentially in SG&A, obviously part of that was the restructuring charge, the $413,000. The remainder was equally split between field expense and corporate. We did add in, we did add people in lab support in the field. We also are now expensing the cost in the first quarter of this year related to PeopleSoft. You know, we are amortizing the investment and expensing salaries that were being capitalized before as part of the development process.

So none of this expense is in terms of indirect terms or corporate is related to head count additions. We are squeezing that down as much as we can.

You know, the lack luster performance in the whole mix of things has been the local health care, particularly HFS. That's why we took the initiatives we did in the first quarter.

But to predict, you know, how many more cuts need to be made to, you know, to balance the expenses with revenues is a little difficult to do at this point in time. We are looking at it every day.

Okay, great. Thank you very much.

The next question is from James Jenesky of Janney Montgomery and Scott.

Ron, getting back to a bigger picture volume were you present on grant's question about operating expenses, if you take out the amount of the $413,000 charge, your operating expenses were about 16 million in the quarter. Could we assume then that the run rate will be $600,000 less? Or do you think there's more that can be pulled out of the business?

Oh, it will be in the second quarter it will be at least 600,000 less. I would think we can get close to, you know, close to 15 million, a little over 15 million in the quarter.

Okay. And then when you look at -- when you look at the demand environment, let's take this from again a macro perspective. Can you comment? Obviously travel nursing, I guess on two things, Joe.

Travel nursing is now almost half of your business. You know, there's been almost all of your competitors in that space have reported, maybe not direct competitors, but the other players in the space. You know, the trends there are not very positive. And while you admitted another thing you were going to do is kind of get involved in the driving travel segment, did that put you up -- that does put you more up against directly some competitors.

Could you comment about what you are seeing out there in the market and how you think you can respond?

Sure, Jim. I think I'll take the question in two parts.

We are seeing the same thing in the market that everybody is feeling. We are seeing primarily a -- there is decrease demand coming off a cold winter. Many if not most of our clients, I think, census requirements are down and elective procedures are down and staffing is down.

Secondly, there certainly is a -- I think a reasonably uniform effort by our clients, by all the health care clients in this particular environment to take advantage of the somewhat lighter need for temporary staff to try and organize themselves to have to use less expensive resources going forward.

We are not seeing displacement from return of nurses to the nursing force. So to the extent that that has been suggested at times as a causal factor, that's not something that is affecting us today.

In terms of what our strategy is going forward, we obviously offered a much more simplified view of what we are doing than we have in the past in a direct attempt to make it very clear we are building and continue to build what we believe is a, is the correct strategy to sustain us for the years ahead.

So there is a -- there is still an ongoing need for the short-term staffing that HPO does we have a fraction of our assignments that are drive only assignment that are more similar to those offered in traditional nurse staffing. All of those are portions of becoming this full service provider to our existing and our potential future clients.

So we continue to head down a path that to us is very clear. That is the idea of being a full service provider and whether we can be the one-stop shop or the first-stop shop depends on which the facility is.

In any case, we started with HPO for a very specific reason in the short-term nursing space. Now we are complementing that with drive only nurses that are obviously at a lower price point. That is because our process in many ways has been one of charting the demand within any hospital or system for different kinds of staff, including nurses. For nurses at different price points. Our goal is to be able to supply a facility with nurses at different price points.

Okay. Then on the restructuring trends, a two fold question: Do you think you're done restructuring? Secondly, what effect has it had on turn over within the company?

Hmm, you know, I don't -- there is not a -- there is no restructuring mile post that is in the plan today. But commenting on what the future looks like has historic risks to it. So I guess that's what I would say. There's no restructuring mile post or target in the plan.

The basis for that primarily is, as I alluded to in the statement, was the fact that the low of value, HFS occupations, that space has been aggressively entered by both general and accounting staff providers as they get hungry and look for new places to grow their business. They obviously compete at margins much lower than ours.

So we, that is -- so that is the reason for that restructuring. I don't believe that we see another mile post at this point down the road.

In terms of turn over, obviously restructuring events create certain anxiety in people. We have been communicating with them on the strategy behind it. I mean, the reasons behind it. Not the strategy, but they need to align costs with near term revenue expectation. Certainly there isn't any detectable increase in turnover.

In the field the Lab Support turnover is the lowest in eight years.

Okay.

Turn over overall is good and obviously people are anxious in many companies and many industries right now. But we don't detect any problems in that area.

Jim, to put an additional point on that that is probably worth adding into the view of your business is, while it's always a difficult thing for any company to do, their people and names and personalities that are affected, certainly in my speaking with the both the people who were affected by the change and people who remain after the change, I don't think it came as a particular surprise in the sense that we were losing some of those battles with entry level HFS staff every day.

Okay. Thank you.

The next question is from Dan Dittler from Lehman Brothers.

Good morning. Could you provide some of the standard metrics on the first quarter with respect to staffing, and productivity measures by segment?

We are not going to provide that information anymore.

It is just not apples for apples with the mix of HPO. Maybe we can get back into when we anniversary past the acquisition date which was April and we get a quarter where it's comparable, we may reinsert those into our commentary.

We are not going to comment on head count either temporaries or field staffing consult at this point.

Could you comment on bill rate trends by segment, then?

Just in general I'll comment. We are not going to provide specific. Obviously the margins excluding HPO, the margins are at the same levels they were approximately a year ago. So bill rates have either held steady or increased year-over-year and certainly have not decreased sequentially. In terms of bill rates for HPO from fourth quarter to first quarter sequentially, they were flat.

Okay. Could you then comment on the gross margin compression at HPO on a sequential basis?

Gross margin compression and HPO?

Yes.

Was primarily a spread of bill rate pay rate issue and higher costs for the nurses. More incentive pay for the nurses. You know, not only impacted fourth quarter December, but the first quarter in January. So there's some one-time element to some of the incentive pay that was paid either in incentive pay or retention bonuses.

First quarter, obviously the nurses, wage rates are going up for the nurses. With bill rates being flat quarter to quarter, the drop in margins sequentially for HPO was all on the cost of paying and delivering the nurses to these assignments. We expect recovery in HPO margins during the second quarter. I won't predict the magnitude of that, but that's the explanation for the sequential drop.

I see. Moving on to PeopleSoft, could you give us an update as to where you are in total with the project? I know you turned it on for your core businesses on January 1. I think if my notes are correct on the last call, you said you did not plan on implementing it for the HPO business. But it appears as though you are making some moves in the s Cincinnati office.

No, we are leaving it in the staffing offices and the back office in California for the time being. And so in the context of where, of that particular project and implementation, I think the easiest way to describe it is, we implemented the big basic pieces, billing, payroll, our ability to run detailed and general financial statements from the system.

And now our internal effort is to begin to -- we have, you know, a task list of applications of PeopleSoft that are driving value, specifically drive value either back to our clients or towards the temporary professionals. In the very near term, within days I think we will launch a new Web site. There's been quite a bit of time spent on PeopleSoft backing up to that Web site. For the first time we will have real web interactivity with our temporary employees and temporary professionals and customers, something both groups have been clamoring for.

As far as HPO and PeopleSoft is concerned, as you heard slightly during the call, our goal is to continue to build out our full service proposition.

We are very close to the end of that and at the moment there has been no reason to distract the centralized fulfillment operations in Cincinnati. From what they are doing in order to implement PeopleSoft. It will occur at some point in the future. We are neither losing money by not doing it now nor losing productivity. It will happen, but this is not the time to distract that group

Thank you very much.

Thank you, Dan.

Next question is Tom McKay (ph) from Symplom Partners (ph).

Thank you very much. It looks like in the quarter you just reported you've gone from being cash flow positive to cash flow negative from operations. So that now you are burning cash and the stock repurchases aside, the cash balance is going to start to come down.

My question is really much more fundamental than anyone asked so far, but how much longer do you think you can keep the company in business given the developing cash burn rate?

Go ahead, Joe.

I think that's the answer you just had on the fundamental level.

There is not a plan on our table that we are executing that has accelerating over any length of time cash burn involved in it.

I think we have been charged with doing two things. In a difficult environment. One of them is to reshape a company that was headed in the wrong direction when this management team arrived. The second one is to set a strategy that works in the medium and long-term in the health care market. We feel like we made very good progress on both of those. And we have a very -- sort of step-wise plan towards light, if you will, at the end of the tunnel.

To us there's no particular haziness to our future. It is a difficult environment in which to give mathematical guidance going forward. That shouldn't be interpreted as a absence of a plan and I am progress against it

No, I didn't mean that. You are cash flow negative at the moment.

The cash flow is negative in the quarter for all kinds of reasons. The decrease in receivables.

I'm talking about EBITDA.

EBITDA is not negative.

It is.

It is not.

It is slightly negative for the first time in about -- that I've seen.

How are you calculating EBITDA?

Adding back depreciation to operating profit.

How about amortization?

And that as well.

Well, we've got the information disclosed in the press release that has amortization of 1.1 million and depreciation of 648,000. So ... operating income is 863. So adding those two back to operating income would be EBITDA positive.

Operating income is a negative number.

Yes, and adding back the EBITDA and depreciation, I get a positive number out of that.

That's right. So you are barely positive after reporting 24 million EBITDA --

Barely positive is a little different than burning cash.

Well, it's just that the trend is alarming.

Okay, that's your conclusion. You know, we're not projecting to burn cash. We had a very decent cash quarter in spite of the negative cash from operations.

I think, Tom, to fill out your answer, the reason to answer your question about a macro view and then in terms of the line-by-line math is that, you know, I think to understand where the company is going and where the trends are, you look at it in the context of what a service company turn around or reshaping generally requires.

And you know, if you take my calendar, take the management team's calendar, take the strategic initiatives over the last 12 to 18 months an put them on a calendar. If you compare that to most companies going through this kind of transition, much less in this market, you'll see that we are probably following a pretty common trend.

Well, yeah. I guess with respect to the lab business, I can understand that. But with respect to On Assignment, you bought that company. That company had about 20 million of EBITDA or so when you bought it. That seems to have gone to zero. Or close to zero in less than a year.

Talking about HPO

Well, the combination of HPO and lab. I can't tell what the two segments are. But the combination has gone to zero. That's the business that you bought. So presumably that was not broken.

I don't think any of the part of the business, Tom, at this point is broken.

I think that our segments are facing different economic realities in this particular quarter. And that includes both the -- we really view the business as we discussed before in terms of the lab support segment, the local health care segment and the travel segment. Each of those is marching down their own path and our challenge is not -- is, I guess, at this point is the coordination of pieces and that overall repair.

But I think we would be happy to spend some time with you, you know, going forward, fleshing out some of the history and the path to our strategy that we've described in the past

All right, thanks.

The next question is from Steven Cole (ph) of Matador Capital (ph). Your question?

How much was the shift over on the PeopleSoft and implementation costs from being capitalized to expensed on the quarter?

It's mutt m hundreds of thousands of dollars. I don't have the number in front of me. Did you have another question?

Yeah, yeah. A bigger picture question. You know, and I'm fairly new to the story, but just trying to understand. I know you articulated a little bit on the travel nurse staffing area. I guess when you look out, you know, let's say forgetting about a quarter we have clearly seen a difficult environment, seen the hospitals react to the marketplace.

How do you see the viability of this business model as we look out? What types of returns do you guys think we can get back to? What needs to happen with the hospitals an the if I practices from a macro perspective as you see it today?

Stephen, we'll go in reverse order on your question here.

I think that it will be helpful to everyone in the health care staffing and also to us to see the patient census continue to rise which over a broader snapshot than 90 days it will. I think there's always been a fundamental danger in looking at health care based enterprises, particularly service enterprises on a quarter by quarter basis. That's an awfully short period of time in the health care version of this business.

But we certainly feel as though the consummation, I guess, of the operating pieces of our model will lead to both growth and improved returns for us. We have taken not a shy approach towards building what we believe is a much more forward looking model for clients.

We expect to improve returns obviously with this model going forward. Part of that will be aided by an improvement in the health care demand side which is inevitable and part of that will be aided by just a completion of our process. Ron, do you have more specific metrics here?

No. I mean, it's a question of what types of returns we might get back to and when, you know, given our reluctance to give guidance at all at this point it's a little bit --

Hard question to answer.

Hard question to answer. Certainly our goal, you know, a year or more out our goal is to get back to high single digit operating profits and whatever returns are derived from that. I mean, the days of double, mid -- returns that are in the double digit range are away off. Not runs, but operating margins that are double digits. You know, multiple quarters out. But we are expecting to be in the high single digit operating income level.

Another question. On the scientific business, you've obviously held margin. How much of that is you are really conscientiously not getting caught in pricing panel battles or cases where there's less business out there because of the economy or other factors impacting your markets?

You know, in our legacy On Assignment business is lab and the local health care. We religiously held the line on margins almost to our -- you can conclude to our detriment. We watched commoditization of the lower layer of health care financial staffing business and proudly held our margins at levels higher than lab support, 32 to 33%.

So we, could we have hung on to more business than 28? It's not clear. Certainly we could have played the pricing game a little bit more aggressively and hung on to some revenue. So you know, it's an accomplishment for our people to stick to their guns on pricing. We trained them to do that. We probably need to build in a little more flexibility on the local health care in particular, the HFS business that we are still doing because we have the ability to deliver good people.

We just can't compete with the low mark up, low margin providers. The numbers speak for themselves. Our margins in all but, you know, the non-HPO business of On Assignment are all at or higher than the levels they were a year ago.

I will tell you in the reshaping of On Assignment and its strategy, we have been, we have both, I guess, pressure tested in the market and reached our own conclusion that a lot of margin preservation in this economy and in an improved economy has to do with more careful targeting than the company has done in the past. So that's one -- that's a big part of our reason for maintaining our high margin strategy.

Okay. Thank you very much.

The next question is from Steve Rudd (ph) of U.S. IP.

Can you tell me how many shares you have remaining under the repurchase authorization.

About 500,000.

In the past quarter, what were we paying per share?

920,000 plus shares we bought was $4.07.

Just an observation/question. It seems we are at least a good few quarters away from being where we want to be. I'm curious if you would consider holding back on the repurchases just because it doesn't seem like right now the best deployment of cash. Just your thoughts on that.

Yeah. I mean, we haven't committed to any sort of automatic restart on the buy-back program. Joe and I and the board need to discuss this again. We may reach the same conclusion you have, that it's not the best use of cash. We haven't made our final decision on that for what our near plans are

Thanks very much.

The next question is a follow-up question from Tom McKay. Please go ahead.

Thank you. I want to ask you if you can tell me or tell us why Karen Brenner (ph) resigned from the board of directors or decided not to stand for re-election

Tom, I think as we said in our release, there's nothing hidden or mysterious or dastardly about this. Karen paid attention to the company for a decade. I think that she is making a decision that is based on where she wants to go professionally. It's as simple as that.

There is no disagreement about management team?

Nope.

No?

No.

All right, thank you.

Once again, ladies and gentlemen, if you have a question, please press star one on your touch-tone phone.

Okay, Natasha, it sounds like we're done for the day. Thank you for your participation in this quarterly earnings conference. We look forward to speaking to you going forward.

Thanks, everyone.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Good day.