ASGN Inc (ASGN) 2003 Q4 法說會逐字稿

At this time I would like to welcome everyone to the On Assignment fourth-quarter 2003 earnings release conference call conference call. (OPERATOR INSTRUCTIONS). I would now like to turn the conference over to Dr. Joe Peterson. Please go ahead, sir.

Hello, everyone. This is Joe Peterson. I am the President and CEO of On Assignment. With me for our call today are Peter Dameris, Executive Vice President and Chief Operating Officer, Ron Rudolph, Executive Vice President and Chief Financial Officer, and Mike Holdaman (ph), Senior Vice President of Finance. Ron.

Before our conference call today and going into details about the quarter, the year and our plans for 2004, I would like to read the forward-looking statement and our qualifier in that regard. Some statements included in today's call are strictly historical in nature and involve important risks and uncertainties that could significantly impact anticipated results in the future. Such statements are forward-looking and are only predictions, and actual events or results may differ materially from any forward-looking statements made during today's call. Factors that could cause actual results to vary from these forward-looking statements are more fully described fully described in our annual report on Form 10-K as filed with the Securities and Exchange Commission for the fiscal year ended December 31, 2002, under the heading "risk factors." Forward-looking statements made during today's call represent our current outlook only as of today's date. We do not undertake any obligation to update or supplement any forward-looking statements to reflect subsequent events or circumstances. We cannot assure you that projected results will be achieved or that predicted events will occur.

Now let me discuss our fourth-quarter results and provide some detail of what we experienced in our business as we finished a very difficult year. Revenue for the fourth quarter was 47.1 million compared to 50.5 million in the third quarter. In the fourth quarter, we retained 98 percent of the temporary professionals On Assignment from the fourth quarter to the fourth, and nurse travel and lab support both experienced smaller seasonal revenue declines than in prior years. Our progress in stabilizing revenue and assignment performance in the quarter was, however, overshadowed by a fourth quarter net loss of 8 cents per share, which resulted from the following -- seasonal and competitive pressure on gross margin, accounting for 4 cents, decreased revenues accounting for 2 cents, higher expenses worth a penny per share, including unemployment insurance, and further field office consolidations and year-end Accounts Receivable adjustments of a penny per share. Fourth-quarter revenues from nurses On Assignment, which are traditionally lower during the holidays, decreased 4 percent from the third quarter, a substantially milder decrease than the 15 percent fall from Q3 to Q4 in 2002. The stronger 2003 year-end performance was due to a more focused client management program and a more efficient than cost-effective nurse retention program than that employed in 2002. Gross margins in our nursing business declined to 17.4 percent in the fourth quarter from 22.7 percent in the third. Roughly half the decrease resulted from year-end bill-pay compression. The remainder resulted from higher workers' compensation and the impact of year-end nurse retention and recruitment programs. We do not expect similar bill-pay rate compression of our margins going forward, as these bill-pay compression and the costs of these nurse retention and recruitment costs are particular to the winter holidays. Further, we continue to change our nursing mix to include greater proportions of best traveler nurses with their intended higher gross margins. In addition to keeping our nurses On Assignment, we are adding new clients to our roster, and this has decreased our concentration of nursing revenue in our top 10 clients by more than 10 percent since the third quarter.

We have taken on the solid finish to the year in nurse and extended it into the beginning of 2004. Nurses On Assignment are currently at their highest levels since February 2003. We expect to further expand our nurse assignments and revenues through 2004 because of improved offerings and service to our clients and nurses, not because of changes in the marketplace for nurse staffing. In fact, we have yet to see a definitive improvement in the short-term demand for nurses. And our current view of the demand in the marketplace for temporary nurses is unchanged from prior quarters. Throughout the year, we expect to continue to move the mix of clients and assignments to include greater proportions of our best traveler or drive-in nurses. Lab support also ended the year with a solid finish ahead of our internal forecast, with $21.5 million in revenue and maintaining a fourth-quarter gross margin of 30.6 percent. The fourth-quarter performance in lab support reflects improved assignment orders and fill rates for the same. Growth of our placement of engineering and clinical research occupations during the quarter was encouraging. Like our nurse divisions, lab support is stabilizing despite minimal improvement in its end markets.

Our local health care division had fourth-quarter revenues of $4.8 million compared to 6 million in the third. Gross margins decreased to 27.5 percent from 31.7 percent in Q3. This change of 4.2 percent includes 1 percent impact of higher unemployment insurance costs and a 3.2 percent impact of more aggressive pricing strategies. Despite lower quarterly revenues, assignments and revenues in our larger markets appear to be stabilizing. In a very competitive marketplace, this will be our most challenged division in the year ahead. However, we are confident that with our new and experienced field managers, we can stabilize and fortify our local staff and leadership and their results in the year ahead.

We controlled our SG&A expenses and capital expenditures during the fourth quarter and for the year. Although SG&A was up $1 million from Q3 to Q4 2003, you will recall that Q3 -- the SG&A we reported for Q3 -- we characterize as abnormally low. Throughout the year, we continued the construction of a modern infrastructure for On Assignment, primarily by advancing the implementation of our PeopleSoft ERP and the tools our field force used every day in performing their tasks. Along the way, we added efficiency to both our external and internal operations and with this automation, we have greatly reduced our dependence on our internal manual processes. We entered Q1 in 2004 performing more effectively in our nurse travel and lab support businesses and working to recover growth in our local health-care operations. We are after market share in 2004, and, therefore, are investing in experienced performers from the staffing industry. This initiative began in November when Peter Dameris joined the Company as Executive Vice President and Chief Operating Officer, adding his experience and energy to lead the revitalization of our operations and build on our new-found stability. Many of you know Peter from his very successful contributions at Core Staff, later Metamore (ph), and at Quanta Services. Let me introduce him now as On Assignment's new Chief Operating officer, and let him describe our plans to you.

Once Peter has explained our revitalization plan, we will provide more financial details about 2003. Some guidance as to what we plan to deliver in 2004 and some general guidance for 2005. We will then open the call up for questions. Peter.

Good afternoon. As many of you know, I joined the Company in late November 2003. Today, I will direct most of my prepared comments towards the current conditions of our operations and the future operating plans versus discussions of the fourth-quarter performance. Today On Assignment's performance is more dependent on internal operational issues that we control rather than end-market demand and external market forces. Each of the end markets we serve, scientific, health care, life sciences and health information management, are projected to have acute shortages from 2004, kicking into 2010. During the fourth quarter and continuing into the first quarter, we have experienced greater selling activity with our clients and a larger demand for our services. This is particularly true for our lab support and nurse travel divisions, which represents approximately 84 percent of our total revenues. In lab support, starting at the end of the fourth quarter and continuing through today, we have seen an increase in reactivated clients, many of whom due to lack of demand have not done business with us for over a year. These client companies are now experiencing growth, which often translates into added hiring needs. Also, our open order to fill ratio has gone up, a clear sign that demand is continuing to increase. In addition, our new service lines, engineering and clinical research, are performing at or above expectations.

In our nurse travel business, our nurse travel business continues to stabilize. We also had some operational successes in this division that will permit better and more reliable growth going forward. The number of nurses working in February 2004 is at the highest level in over a year. Over the past two quarters, we of increased revenues derived from 13-week travelers versus four-week express nurses. As many of you know, HPO, our nurse travel acquisition, was predominantly a four-week nurse company. These nurses tend to be more expensive and the overall market opportunity in this segment is smaller versus 13-week nurse assignments. We have and are hiring account managers and recruiters to focus exclusively on growing our revenues in this segment. Second, we have lowered the total percentage of revenues generated from our top 10 customers. This client diversification makes us less vulnerable to any unexpected termination in purchasing of our services from a single customer. Finally, we are focusing on lowering our housing and travel costs, thereby increasing our gross profits.

In our local health care division, measuring demand for our services is more difficult because much of what has impacted this division's performance is specific to our company and not a result of lower demand for these type of services. This division represents our biggest operational challenge short-term as well as our biggest growth opportunity. Turnover in this has been higher than previously experienced, and many markets remain underrepresented from a sales perspective for too long a period of time. During 2003, in an attempt to respond to lower demand for these types of services, we made a number of changes in management, closed offices, and permitted budgeted sales positions to remain unfilled. While these efforts lowered our fixed costs, they have impacted this division on a go-forward basis. In order to revitalize this division, we immediately implemented an operational plan to stabilize our revenues and strengthen our field management. First, we have added Holly Petrafessa (ph) and Palara (ph) Hayes to the local health care team. Both Holly and Palara were leaders for On Assignment several years ago in helping to build the local health care division. They left On Assignment and achieved high levels of success with other staffing organizations, and have now decided to re-join our team. Holly and Palara have over 23 years of combined experience in the healthcare staffing industry, primarily in managing field sales functions and growing markets on the West Coast. We also had the pleasure of hiring Tom McKenna (ph) and Christine Polion (ph) and to the local health care management team. Tom comes to us with over 25 years of experience in healthcare staffing and will be driving our Southwestern and Southeast regions. Christine has over 10 years of staffing experience and a proven track record of growing revenues rapidly in the health care information management arena.

Within the lab support division, we have also made great strides and strengthened our existing strong management team. First, we hired Peter Brikfiast (ph) as our western regional vice president. Peter spent seven years building and ultimately running Kelly's (ph) Scientific Resources. Peter grew and managed in excess of 190 million in revenue at KSR. He will be responsible for operating and growing one of our largest regions in the lab support group. We also hired Jim Calvin (ph) as Vice President of our newly developed Clinical Research Division. Jim has 10 years of staffing experience, eight of which is in the clinical and preclinical sciences, and most recently, as director in the clinical resource derision of Kelley Services, managing revenues in excess of $30 million. He will be responsible for growing our clinical research group, which as you know, has much higher margins and bill rights than the traditional preclinical lab support business.

Within the nurse and Allied Travel division, we have hired Jacob Cordova (ph) as our Vice President of Sales. Jacob was president of NI Health Care and was instrumental in developing, selling and managing large accounts at hospitals such as Cleveland Clinic.

And last, we've engaged Shawn (ph) Moore to help us rebuild and strengthen our internal sales and field operations training programs. Shawn managed sales training and field support services for On Assignment in 1997. After working for On Assignment, Shawn led the scientific division for K-Force, growing revenues from inception to a revenue run rate exceeding 20 million in just over two years. His most recent role was as a corporate officer and vice president of sales and marketing for Remedy Temp. Shawn is a proven staffing leader and has already made significant contributions during the first month consulting for On Assignment.

The strength of On Assignment lies an our ability to attract and retain good management. These recent additions are a testament to our continued dedication to attracting, training and retaining the highest-quality talent in the marketplace and we welcome Holly, Palara, Tom, Christine, Peter, Jim and Shawn to our existing team. Our focus for 2004 and beyond is to establish clear, executable operating objectives and eliminate any disruption in the business. By doing so, we can keep our field management focused on their clients, which should allow them to generate higher sales volumes in a more receptive marketplace. By stabilizing and training the existing and new hires with the field force, we will be -- we believe that higher levels of revenue-generating activity and productivity can be achieved more rapidly and on a more consistent basis over time.

As many of you know, On Assignment, even through this labor market downturn, has a great reputation for quality, service and reliability. Our focus will be to upgrade our selling skills so we can recapture lost market share. We will introduce or accelerate, where appropriate, new service offerings that exist harmoniously with our core businesses, which should create incremental revenue growth versus replacing revenue from core offerings. Examples of those offerings are selling engineering skills, clinical research and LBNs (ph). None of these offerings conflict with our core offerings or how our core offerings are purchased by our customers.

Upon joining the company in late November, I did a detailed assessment of the existing state of the business and what needed to be changed to permit the business to grow again. On Assignment serves great end-markets, life science, pharma, food, agricultural and health care. Like many other staffing companies in the late '90s up till 2001, demand for our services outpaced available supply, a situation which permitted year-over-year growth without a concentrated focus on sales or marketing functions. For the last three years, the imbalance in supply for qualified personnel versus demand for employees has been in favor of our customers, a situation which has allowed lower price, bulk sellers of human capital to temporarily gain market share. During this time, we have experienced a dramatic decline in our reported revenues and profits. But our gross margins held up relatively well. Our plans going forward are to revitalize our business, not transform it. Unlike the larger commercial staffing companies, we do not have to migrate the majority of our business, i.e. commercial or light industrial, into higher vocational skills. Our annual consolidated and reported gross margins in '03 were 27 percent, gross margins most staffing companies would enjoy having. Over the last six weeks, the senior management team has been focused on building a solid and implementable revitalization plan. This plan was built from the bottom-up, market by market and division by division. The plan was approved by our Board of Directors on February 12, '04, and we are now aggressively acting against the plan. The vast majority of the plan is centered on improving our sales culture, marketing efforts and depth of management. We are also focused on completing the implementation of our ERP system and strengthening the training and productivity of the front-end system. Over the last six weeks, we have tactically hired many industry veterans to augment our already experienced field management team. Our revitalization plan provides for us to hire 24 sales and fulfillment personnel in local health care, 22 in lab support and ten in nurse travel. The plan also provides for upgrading training and mentoring of the new and existing personnel. Each new hire has a specific productivity and revenue quota that we believe will permit us to post positive revenue growth on a year-over-year basis. Assuming labor market conditions that are similar to the conditions that exist today, timely execution of the training and hiring plans that we have agreed upon and consistent execution of our operating objectives, we are forecasting a revenue run rate of 245 million exiting in the fourth quarter of 2004, and revenues between 210 and 220 million for the full year of 2004. Ron Rudolph will walk you through the specific numbers in a minute. While we are not satisfied with the results that we produced in the fourth quarter, we are taking steps to change our performance and in certain divisions, have started to see improvements from our actions.

I would like to thank our existing managers and staffing consultants who have managed our business through this difficult period, and the way they have eagerly embraced me and the other new members of the On Assignment team. Without their focused dedication and commitment, we have would not have been able to survive this difficult operating environment.

In closing of my remarks, I believe On Assignment is well positioned to post revenue and earnings growth going forward. Much of what is required to re-grow our business is entirely within our control, focus, good management selection, sales training and communication of our operating objectives. The end-markets we serve are recovering and starting to expand. Our balance sheet and capitalization is strong; there is much work to be done, but it's all achievable over a reasonable period a time. I would like to now turn the call over to Ron.

A quick run through some of the financial highlights -- Q4 revenue, 47 million, was down approximately 29 percent from a year ago. and approximately 7 percent sequentially. The 7 percent sequential decrease compares to a sequential drop in the year ago Q4 to Q4 period of almost 12 percent. On average daily revenue basis, revenues dropped 3.7 percent versus a year ago -- I am sorry, sequentially, average daily revenues in the third quarter was 795,000 and in the fourth quarter, were 766,000. The number of billing days corresponding to those numbers is 63.5 in the third quarter and 61.5 in the fourth quarter. So comparing average revenues on a quarter-to-quarter basis, revenues were down 3.7 less than the 6.7 (ph) that we are showing on a consolidated basis. Gross profits for the year and the quarter, gross profits for the Company, sequentially, dropped from 27.7 percent to 24.5 percent from Q3 to Q4. That drop is principally due to approximately -- 2 percentage points of that drop is due to compression between bill and pay rates; another percentage point is from combined effects of higher workers' comp and higher unemployment insurance rates.

Looking at gross margins by segment, the lab segment margins pretty much held up terrifically, actually from the third and the fourth quarter. 31.3 percent was the third-quarter gross margin for lab, and 30.6 in the fourth quarter. That sequential drop of 0.7 percent is explained partially, but only to a slight extent, by compression of bill pay rates. Most of that drop in the year-over-year comparison, which is about one percent, and the sequential comparisons is 0.7 percent. Most of that -- most of those differentials are attributable to higher unemployment insurance and other benefit costs. For the year as a whole, lab support was approximately equal to the gross margin of 32 percent in 2002, and just under 32 in 2003.

Looking at health-care segment revenues, sequential drop was 5.3 percentage points from 24.7 to 19.3. And comparing to the fourth quarter a year ago, it's 5.7 percent drop from 25 to 19.3. Most of that drop is due to bill pay rate compressions, approximately 4 percent comparing in the fourth quarter to the fourth quarter a year ago, and 3 percent comparing sequential quarters. The rest of the drop in excess of 5 percent consolidated on a combined basis is attributable to higher workers' comp expenses and higher state unemployment insurance expenses.

The margins for HPO specifically, since we are still breaking that out, were 22.7 percent in the third quarter and 17.4 percent in the fourth quarter, approximately 5.3 percent sequential drop, 2 percentage points of which is attributable to bill pay rate compression; 1.2 of the combined effects of workers' comp and state unemployment; and about 1.4 percent due to seasonal holiday pay and incentives to traveling nurses. Local health care experienced a drop from 31.7 percent in the third quarter to 27.5 percent in the fourth quarter, a sequential drop from 4.1 percent, 2.7 percentage points of that 4.1 attributable to bill pay rate compression; 1 percent due to higher state unemployment. On a year over year basis, the drop was attributable to 3.5 percentage points on the bill pay rate compression; higher SUI of about 1.4 percent; and other miscellaneous benefits.

Some other data points here, foreign revenues in the fourth quarter were 2.8 million, down nine percent from a year ago and 4 percent sequentially. Conversion fees were $487,000, up 18 percent sequentially, down 1 percent from a year ago. Operating fourth quarter was an operating loss of 3.1 million compared to operating income of 2.9 million a year ago. EPS in the fourth quarter was 8 cents plus compared to 7 cent profit in the year ago quarter. SG&A for the quarter was 14.6 -- 14.7 million, down 4.2 (ph) percent from the year ago fourth quarter, up 7.5 percent sequentially. And for all of 2003, SG&A was 59,435,000, up 8.7 percent over the prior year. Depreciation and amortization in the quarter was 1.653 million, split between depreciation of 787,000, amortization of 866,000. Cash from operations during the quarter was 239,000 versus 4.9 million in the third quarter. Capital expense in the fourth quarter was 1.167 million. Capital expense for the year was 4.9 million compared to 4.6 million in 2002 period. Stock buyback in 2003 totaled 4.5 million versus $3.1 million in the 2002 period. Cash in the fourth quarter decreased fractionally from 35,355,000 in the third quarter to 35,134,000, and was up 3 percent from the beginning balance of just under 34 million. Accounts Receivable on a gross basis was 28 million, almost 29 million in the fourth quarter, down 3 percent sequentially and down 12 percent from the year ago figure. Days sales outstanding was 56 days in the fourth quarter, up from 54 in the third quarter, and up from 48 in the year ago fourth quarter. That's it for the highlights of the financial review of our call today.

I would like to switch to guidance for 2004. We have not provided guidance since I think sometime in 2002. So as noted in our press release, the Company expects revenues for the year 2004 to be in the range of 210 to 220 million, with a corresponding gross profit range of 55 to 60 million, with positive EBITDA for the full year. We do not expect, however, to generate positive net income for the full year 2004. And we are also not providing any near-term quarterly guidance due to the lack of visibility regarding a number of factors, including the timing and the addition of our experienced field personnel increases in productivity of the new employees as well as our current employees, our current field employees, product mix in our different businesses, conversion rates on new business and conversion fees arising from temp to perm conversion. Amanda, I would like to open it up for questions at this time.

(OPERATOR INSTRUCTIONS). Jim Janesky, Janney Montgomery Scott.

The first question I have is on the bill to pay rate compression, could you go into a little bit more what is the driving force behind that?

In the fourth quarter, specifically, as you know, there is an all out warfare for the nurses and there are some acute shortages. In order to induce some of the nurses to work in specific geographical territories and to move on very short notice, it was really a negotiation of how much of our bill rate we were going to pass along. So in trying to maintain relationships as we get more into a balanced situation where our customers' short term strategies of containing costs backfire on them, we took a little bit of compression. The other issue is, as you know, HPO was at a very profitable, high-priced, rapid response nursing solution. And the legacy and the heritage of the business was really kind of we will get you a nurse in four to five days. Whereas the 13-week travelers, they were willing to wait 13 to 16 weeks. We, in certain instances, were using a more expensive nurse to fill a 13-week assignment.

The rest of the companies in the industry were really not experiencing this to such a great extent. Did any of it have to do with on the bill rate side, is that more stabilized than the pay rate as you looked at the numerator and denominator?

I would not want you leaving the conference call thinking that we had to buy business. That was not the issue. It was more the pay rate than it was the bill rate.

Do you think that they will stabilize in the first quarter as we move into 2004? And what do you think is -- where those could move over time in 2004 and beyond?

Clearly, we are not going to be satisfied with 17.5 percent gross margin in the nurse travel business. As shortages becomes more acute, we will have a little more flexibility. The first stage is that the customer is going to allow us to pass along the wage increases without a margin and then they are going to allow us to pass along the wage increase plus the margin. We are just now getting to the point of paying where people are starting to listen up a little bit. You know how it goes through these cycles. We lose bargaining power with the customer, they gain it then they lose bargaining power with the supplier and we gain it. I would tell you that there are a couple of issues that will short-term impact our business that any sort of cooperation from the customer. The first is getting a better control over our travel and housing costs, better absorption and a cheaper solution. And the second is using less expensive nurses on 13-week assignments.

You have always had -- HPO has always had a pretty substantial market share in California. With the nurse to patient ratios, certainly we are hearing that the pace of business in the state of California is more brisk than anywhere else in the United States. Are you experiencing the same?

Our development (inaudible) with customers and our expansion into existing customers has been pretty good.

Sandy Smith, CIBC World Markets.

Your SG&A was quite a bit higher than we expected given your comments last quarter that 13 million was kind of a run rate for those expenses. And although you said that was abnormally low, I am just wondering what was the cause of the increase and what would you expect going forward?

Sort of the breakdown in the increment from Q3 to Q4 -- I want to underscore again the comment about the third quarter being lower than usual. And one factor that affected the full third quarter was the effect of all the cuts we made in the second quarter. We cut a substantial number of people in field operations as well as in support functions. And in the fourth quarter, we didn't make any more cuts. In fact, we started staffing up and giving some overdue raises. So part of the increase sequentially was (inaudible) of salaries. We had higher than usual legal expenses. We had a project -- you heard us comment on -- part of the margin degradation is coming from unemployment insurance increases. Part of the fourth-quarter spend was on audit and tax fees and consulting in connection with a state unemployment insurance project that will save us over $1 million in the next two years. but that probably cost us $250,000 in the fourth quarter of this year. We had some incremental expenses around rents and office equipment and a little bit of increased amortization of PeopleSoft, as we complete projects there. Then we also increased marketing expenses in the fourth, to the tune of about 300,000, and added headcount -- some headcount additions in the field that added about 50,000. So I think if you add all that together, it is going to explain most of what happened from the third to the fourth quarter. As far as going forward and with the aggressive hiring that's built into the revitalization plan and the marketing in support of that, clearly, we are not heading down. And we are not making any more cuts. First quarter SG&A will be something on the order of fourth quarter or higher.

And in terms of your anticipated hiring over the next year, would you expect that to come roughly evenly over the course of the year, be front-half loaded, or more color on that?

It is dictated based on each division -- each division in each market. We have some specific required hire dates in March. The vast majority of it kind of comes from May to June. But it's layered in each month, specific headcount starting in March and some of them actually ending in September.

Last question on gross profit margin compression, you said that you don't expect bill pay compression to last or to continue through 2004. Is that what you have seen to-date in this quarter?

The trends in this quarter were -- clearly the first quarter, we don't have the incentives that were paid in the fourth quarter. And we still will experience some of the more expensive nurses on a 13-week assignments. But part of our revitalization plan is specifically -- and we have established -- some recruiting pods that focus on the traditional 13-week traveler versus the four-week. And that will reduce some of the compression.

Ben Wivelick (ph), Deutsche Bank.

I just wanted to ask you, Peter, I think you said that it was going to be 24 new sales and field service folks in local health care?

Right.

How many have you got there right now?

Let me see if I have got that number in front of me, otherwise I will call you back.

While you are at it, I am just trying to figure out just what level of revenues the incremental staff is supposed to support, and what kind of time frame we can look for on that increase?

Let me give you a little bit of the philosophy behind it. I told you that each carries a quota. For purposes of the guidance that we gave you, which is I think pretty good growth, it does not assume that we are going to have the type of historical headcount carried by each person that we have experienced in better markets. I think it's a more realistic headcount number. But to give you a broad swag, we think that a good staffing consultant should be able to carry anywhere from a low of -- this would not be a good person -- a low of 16, to, if the market is white hot, around 30. We currently have 52 in the local health care group.

Those metrics are going to fly across the board, right?

Actually, the headcount can be -- it differs in each market place. The nurse travel, lab support, lab support UK and local health care, each have different targeted productivity levels.

One last question on the headcount. It looks like you are going to be hiring I guess ahead of the upswing in demand. But can you tell us which divisions are going to be staffed up sooner?

Right. I would characterize it just a little bit different. Upswing in demand, a lot of what we are trying to do in '04 is recapture market share. The market does not even have to grow in order for us to grow. We have lost -- to be honest with you -- market share. It is not because of quality, to a degree it's because of price. But a lot of it has just been, there has been a lot of things that were required to be done at On Assignment to allow it to be similarly situated with the other staffing companies in the forward years. We had a different infrastructure; we had a different management infrastructure; and all that stuff had to get realigned in '03. Now we are externally focused. So our growth plans really do not assume that the end markets are growing 5 or 7 percent. If we had the same -- if we hire well, we manage well, we don't disrupt and the current label labor markets continue, we think we can grow our revenues in these marketplaces, because our current productivity is not what I would consider average.

Really the way to think of it is you are filling seats that kind of are empty now and you are going to increase productivity.

That is correct. Markets were underserved and there is market share that has either been defaulted or has been taken away from us and that we can recapture it. Realistically we should be able to recapture it, because we do have a great name.

Dan Dittler (ph), Lehman Brothers.

My question is in regards to your legacy health care financial staffing practice. I know that you've tossed around over the past couple of years whether you could perhaps get rid of it or whether you want to grow it. And most recently, you said you may want to use it as perhaps a loss leader and cross-sell other services from there. Where are you with that decision process right now?

The HFS business -- On Assignment really was the leader in it way back when. And the entry-level coder billing pay rates, 24 or $25 an hour. What we are trying to do is re-inflate the marketplace with higher bill rates, ICD-9s, certified coders, medical record examiners, that whole HIM space is still very productive. We are going to keep our core business. But these people that you will hear and read and see about have carried books of businesses where the bill rate is north of $55 hour. So what we are trying to do is, in that space, grow it productively in the market spaces that are defendable versus the commoditized business.

Maybe I will add to that a little bit more editorial color as well. I think Peter is being very fair. I think your question is very correct to say that this is a business that we have looked at from a lot of different angles, and we have tried to be real forthcoming about that over time. I think our conclusion at this point is that while On Assignment did HFS one way for a very long period of time, other people were learning to do it in a better way, and to end up with a business that continues to grow. We got stuck in the commodity part of that business. And we think we see a window primarily through some of the key staff wavering on. We see a window to a better portion of that business, and that's where we are going. We expect it to grow going forward. It's the first time we have spoken with some excitement about HFS in a long time.

Question for Peter, could you discuss staffing consultant turnover in the fourth quarter, and how that has trended throughout 2003, and how you plan to implement any sort of change in the upcoming year.

It's a combination of voluntary terminations and involuntary terminations. as labor markets accelerate. I think that you probably, with all the companies that you follow, realize that job satisfaction is probably at peak levels. That is good news for us, that is also bad news for us. I don't think we are experiencing anything that has surprised us. In fact, most people who have been with On Assignment would like to stay with us for a variety of reasons. We are an ethical organization; we have great capitalization and balance sheet; and a great platform. And they realize that it feels very much like 1993/1994, the beginning of an expansion period, and that with the renewed focus on sales and marketing, that there is a chance to recapture some market space. And the chance for them to personally show year-over-year improvement is good. And they have great tenure with the Company. We are having -- we are upgrading the sales force. We brought some people in in '02 and '03 who we have given a chance to perform. And for a variety of reasons, they may need to do something else. The new people that we are adding, we have been incredibly pleased by the reception that we have received of being able to attract some really talented people to work with our existing talented workforce. And it's receptive because in some of the other public competitors, there is some disruption with their changing their business model, at least the sales channels. And with us, we are really focused on growth and not fixing balance sheets. We have also -- the historic performers -- there is a lot of this that is hard to get out in a press release or in this conference call. But in lab support, overshadowed by the revenue decline year-over-year, is we have a number of offices, not just a handful, a number of offices, that had year-over-year growth and had historical levels of revenue. So we really do have some talented people that are still performing. What has overshadowed us the most in all honesty is what has happened in the local health care group, which was self-inflicted starting in '03, and kind of the irrational containment decisions that the hospitals have made, which I personally believe are going to boomerang against them.

Michael Warner (ph), Kennedy Capital.

I was just kind of curious, if you look out more than the next year or even two years, can you kind of give me a sense as to what type of operating -- let me ask this first. The SG&A levels, would I assume that those have been and are going to be inflated for the next year, maybe 24 months, 18 to 24 months. What level do you think that the SG&A -- the absolute dollar amount -- should be running at if you are in a period where you have everything -- where your sales force is, where you think they need to be, and you don't think you need incremental spending to get your businesses where you think they need to be?

We are looking for better SG&A absorption. So as the topline growth, that number will come down. But I can tell you from a historical perspective, the beauty of our model is a 27 or 28 percent gross margin -- if we get to like a 20 percent SG&A, that drops 7 to 8 points to the EBITDA line. You go compare that with some of the other companies that have 16 or 17 percent blended gross margins and you have a 14 or 15 percent SG&A level, there's just not as much leverage in their model as ours. So our focus in '05 and beyond is optimization of profits and of cost-containment. But as you appropriately said, we are going to have to spend a little bit in front of the curve to get that revenue growth going again.

On a more robust sales level again, once you have -- you think your model is in place and once the demand environment is coming back to you, do you think that a 20 percent spend level on the SG&A side is relevant or is it appropriate? Is that where you think that should be?

Yes, again, I do believe that 20 percent on a business that is growing is an acceptable SG&A level. It's not too tight, it's not too loose. Kind of 17 branch level, and then cut 3 or 4 points to cover the corporate overhead.

Would that imply that you are maybe -- I am not going to try to pin you to longer-term guidance. But kind of get a sense from a blended operating margin level, assuming that you do keep all your -- all three of your business or however many you have -- under your umbrella at this point, is a high-single digit operating margin -- is it something that you think is what you are lining up to be a company operating at at this point, or longer-term again, any comments on that?

I think longer-term, our objective is to be in the higher margin, higher operating leverage business and not to be a commodity player, because we don't have the scale or the size. We, as well as others, have generated those type of EBITDA margins in the past. And when the markets become more productive and more traditional purchasing power from the respective parties, I think that we can get closer to historical profit levels.

You think you can get back to like a 12 or 14 percent operating margin?

That was the difference. I'm sorry. I'm interjecting because I was here at those levels. (inaudible). That was with a different mix of business. We can't replicate that with the businesses we have chosen to pursue here. But high-single digit operating margin -- implies -- with (inaudible), we have something higher than that. So we are shooting for positive EBITDA this year, and certainly we expect next year to advance that and leverage the investments. Exiting this year, we will be projecting higher -- we will be achieving and projecting higher productivity. And us Peter pointed out, better absorption, better leverage on all the indirect costs. So I think you'll see improvement coming out at the end of this year.

One other thing I think I have for you. You mentioned that this year, you are after market share. And if you could reiterate for me -- that does not mean that you're going to try and -- the people when you go into a specific geographical segment and say I want to get my marketshare back to where I think it needs to be and your competitors are already there, does that imply you are going to try to compete on price? I guess I don't understand how you are going to take that back.

Let's start with the simple answers and move onto the more detailed ones. We absolutely will not be competing on price. We have not in the past, and we won't going forward. We have been characterized in successful markets in the past by quality and level of service to both clients and temporary employees. I think we still offer -- have a superior offering of both, and we intend to deploy that. 2003 was a retrenchment year of costs against declining revenues in a tough market. We now find ourselves facing an issue of simply, in some cases in geographic coverage. We have markets in which we believe we can compete effectively with the quality and the service we have always delivered, and we just don't have a body there.

How far along are you in the implementation of your ERP system?

I would say we are down to the short strokes at this point. The majority of the business and the transactions internal to it run successfully on the PeopleSoft system. If you know the PeopleSoft ERP, it has a series of kind of accessory modules in AP, AR, CRM and other modules that will help companies like us with internal efficiencies. And we are down to the point where all the core operations run on PeopleSoft and we are really doing two things. We are bringing those modules online during the course of the year, to help us a bit with reporting. We are very Sarbanes-Oxley compliant. That will help continue to keep us ahead of the curve in that regard, and may bring some efficiencies along the way. The other IT investment we're making this year is just cleaning up some of the connectivity and systems speed issues that are a bit of a hangover on an aggressive implementation of PeopleSoft across two centralized operations in over 60 local offices.

Jim Janesky, Janney Montgomery Scott.

Could you go over the accounts receivable charge you had in the quarter? As a follow-up to that, the operating expense trends that you are talking about in 2004, are they off of the more core operating expenses X the office closing and accounts receivable? Or are they off of the absolute number you reported this quarter?

Off of the absolute number. We are not projecting sequential drops in total spending, including whatever aberrations might have impacted the fourth-quarter level. What is the first question?

Accounts Receivable?

The accounts receivable adjustment was, through the audit process, not anything discovered by the auditors, but in the course of our going through our review of unreconciled items in receivables and unbilled receivables and things like that, we discovered that we needed to make an adjustment of 460,000, in one case; and had another sort of more normal quarter-to-quarter adjustment of 50 to 60,000. So it was just audit-related, year-end adjustments that were a little more than quarter-to-quarter swings -- quarters one through three. But I think if you looked at last year, we also had some fairly sizable workers' comp and AR adjustments at year-end.

Based on the revenue per day trends that you are experiencing now and this far into the quarter, would you characterize them as accelerating, stable or decelerating versus the fourth quarter?

Nurse travel is doing pretty good. Lab support, both in Europe and in the U.S. is doing pretty well. We had a little bit of, I think, some of the other staffing companies have probably stated some weather-related issues. And we had, in one very large pharmaceutical client, a shutdown of the entire manufacturing line because of their own issues. But those are not real big issues. I would tell you that lab support is doing well. And local health care is still having issues. That's the one that obscures our kind of acceleration of growth. But things continue to feel better than they did, even six, seven or eight weeks ago, as far as the discussions, the level of activity, and also, the people, quite frankly, that we are hiring, and their impact -- how quickly they impact our business.

(OPERATOR INSTRUCTIONS). Dan Dittler, Lehman Brothers.

Peter, in your prepared remarks, I believe you mentioned that you definitely have seen some increased competition from the global staffing providers. I was wondering if you could provide some more color on that as far as, what areas are becoming the most commoditized areas and which areas are you seeing little competition from the larger players?

It's clearly not on the nurse side. We have a different set of competitors there. I would say it is on the -- where they can create the most havoc is on the entry-level skill sets, on lab support or local health care, financial services, types like that. Actually, a perfect operating environment in some regards, for the large commercial staffing companies and marketplaces like we've experienced the last 18 months, because their staffing and consultants do not have a lot of career alternatives. They can push through some changes with regard to benefits etc. But when the market tightens up, it's harder to get the difficult skill sets placed. So I would tell you it's in the lower entry-level skill sets and lab support and local health care, predominately, health care information management systems.

A quick one for Ron, so he is not neglected. Where did you see bill rates in the fourth quarter, both in the lab support and nurse staffing as far as year-over-year change?

I think the lab support bill rates were actually flat sequentially and up about three percent from a year ago. The nurse travel bill rates were actually pretty flat to a year ago, but we have a different mix of business now. We have more of the travel costs built into the bill rates than we did a year ago, and where we used to bill some of those things separately. So it is sort of corrupted, the comparison of all-inclusive bill rates versus exclusive bill rates. So if you look at the average bill rate, it's fairly flat to a year ago. So the conclusion would be that we have had some higher (inaudible) on the cost side. But it's a little more difficult in answer than I just gave just because you have to extract some of these indirect costs on travel, housing, car rental and things like that.

Looking to 2004, it seems as though we are seeing another similar increase in terms of state unemployment accrual rates in 2004, as we saw in 2003. How do you see that impacting gross margin?

I don't think you'll see any increments for us because we are going to get the benefit of this project. We did spend multiple hundreds of thousands of dollars in the fourth quarter, as we realigned in the post HPO acquisition phase here, our (ph) legal entity. So we will be affecting some lower unemployment insurance rates. And also, making more efficient use of allocation of corporate expense out to the states, so we minimize our aggregate state tax rate, as well. We are not projecting any more increase in unemployment insurance than what we've experienced here or what we have shown in the fourth quarter. In fact, it should go down.

At this time, there no further questions. Are there any closing remarks?

Thanks, everyone, for your time and attention today. 2003, a tough operating environment, we managed costs and protected our balance sheet and we did it with some great efforts from all our local offices, very dedicated teams in Europe, in Cincinnati in Tupelo and in Calabasas. We appreciate all their efforts. We look forward to speaking to you again after the close of the first quarter, if not before. Thanks.

This concludes today's conference call. You may now disconnect.