ASGN Inc (ASGN) 2006 Q1 法說會逐字稿

Good morning. My name is Michael, and I will be your conference operator today. At this time, I would like to welcome everyone to the On Assignment First Quarter 2006 conference call. [OPERATOR INSTRUCTIONS] At this time, I would like to turn the call over to Mr. Mike Holtzman, Chief Financial Officer of On Assignment. Mr. Holtzman, you may begin your conference.

Thank you, Michael. Before we begin, I would like to remind everyone as we do each quarter that our presentation contains predictions, estimates and other forward-looking statements representing our current judgment of what the future holds. These include words such as forecast, estimate, project, expect, believe and similar expressions. We believe these remarks to be reasonable, but they are subject to the risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. We described some of these risks and uncertainties in yesterday's press release, in our filings with the Securities and Exchange Commission. We do not assume the obligation to update statements made in this conference call. Peter Dameris, our CEO and President, will now provide an overview of our first quarter results. Pete?

Thank you, Mike. Good morning. I would like to welcome everyone to the On Assignment 2006 First Quarter Earnings Conference Call. With me day are Mike Holtzman, Senior Vice President and Chief Financial Officer; Emmett McGrath, President of Lab Support; and Shawn Mohr, President of Healthcare Staffing. During our call today, I will give a review of the markets we serve and our operational highlights followed by a more detailed discussion of the performance of our operating segments by their respective presidents. I will then turn the call over to Mike for a more detailed review and discussion of our first quarter financial performance, and our financial guidance for the second quarter of '06 and the full year. We will then open the call up for questions.

Consolidated revenues for the quarter grew year over year by $16.9 million, or 34%, to $66.7 million. Consolidated gross margins were 25.5% Gross margins expanded year over year MF&A and Nurse Travel, but declined in Lab Support. Our consolidated bill pay spreads increased year over year, however our consolidated gross margin declined 50 basis points in the quarter due to an increase in state unemployment insurance, a greater percentage of our consolidated revenues coming from our lower margin but higher bill rate Nurse Travel division, lower conversion fees and higher holiday pay. Lab Support was also impacted by an unfavorable workers' comp adjustment due to an increase in a claim reserve related to a prior policy year. Excluding the increased SUI cost and holiday pay, consolidated gross margins would have been 26.3% for the quarter, up 30 basis points year over year. Our consolidated margin expanded throughout the quarter, and was 26.1% in March.

In January 2006, we altered our contract employee appreciation and holiday plans with an effective start date of March 1, 2006. These changes should have a positive impact on our gross margins going forward. However, due to certain grandfathering of payment terms of the old plans, these expenses were higher than budgeted for the months of January and February of '06. Operating income for the quarter was $198,000, compared to an operating loss of $3 million in the year ago period. For those investors who followed our company in the mid and late '90s, sequential growth in revenues first quarter over fourth quarter on a pro forma basis has rarely occurred. And our operating performance this quarter is a testament to the strength of our business and the labor markets we serve. Entering the second quarter of 2006, our business continues to be strong and the markets we serve continue to be very productive.

For the first three weeks of Q2 2006 our weekly revenues have, on average, been $5 million excluding conversion and direct replacement revenues. We averaged $4.2 million in weekly revenues for the same period one year ago. In addition, our number of hours billed, billable head count and client count continued to be at or near the highest levels of '05. I am very pleased with revenues, EBITDA and net income per share that we posted for the quarter, as they were once again above the high end of previous guidance. I am also pleased that our consolidated gross margin is expanding as we move through our expected seasonally impacted first quarter. During the quarter, we increased our year over year staffing consultant productivity by nearly 20%, and we achieved the fourth consecutive quarter of net income. All of our divisions positively contributed to our revenue growth and net income generation. To fully appreciate the performance of our company during the first quarter, investors should evaluate each operating group's performance separately.

Our Lab Support segment generated $26.5 million in revenues, up 21.2% year over year, and had gross margins of 30.5% Lab Support billed 1334 clients, up from 1307 in the prior quarter, and added 236 new or reactivated clients in the quarter. The average number of contract professionals on billing increased by 272, or 16.2%, year over year. The average bill rate for this group increased 2% year over year. Our European operations generated $3.6 million in revenues, up nearly 13% from the year ago period, and had gross margins of 34.4%. During the first quarter, our top 10 customers represented 12.7% of Lab Support segment's of total revenues, and the average number of staffing consultants was 115, up 5 sequentially.

The Medical Financial and Allied group generated $11.6 million in revenues for the quarter, up nearly 40% year over year. MF&A billed 1033 clients, up from 1012 in the prior quarter, and added 253 new or reactivated clients in the quarter. The average number of contract professionals on billing increased by 175, or nearly 26%, year over year. The average bill rate for this group increased 7% year over year. For the first quarter, our top 10 customers in MF&A represented approximately 20.5% of total MF&A revenues. And the average number of staffing consultants was 85, up 1 sequentially.

The Nurse Travel group generated $28.7 million in revenues, up 46% year over year. Gross margins were 20.2%, a 110 basis point improvement over the first quarter of '05. Gross margins are traditionally negatively affected in the first quarter due to fewer days that the nurses are willing to work because of slow returns from their Christmas and New Year holidays. The number of nurses billed averaged 732, compared to 509 in the year ago period. And the total number of clients billed was 202, up 77 from a year ago period. The average bill rate for this group increased 2.7% over the year ago period. For the first quarter, we added 48 new or reactivated clients. And our top 10 clients in Nurse Travel represented 53.2% of Nurse Travel revenues versus 67.8% in the year ago period. During the week of April 23, we billed nearly 170 customers and had billed 650 nurses on assignment. New nurse orders continue to be at highest levels.

We remain focussed on our newer lines of business including HIM, Clinical Research, Engineering, Local RN and Direct Hire. These lines of business generated $4.3 million in revenues, or 6.5% of total revenues for the quarter. If you remember, most of these business lines were launched in '04 on an organic basis. I would continue to describe each of the end markets we serve as productive and improving. The labor markets have not tightened to the point that we are experiencing rapid contract employment -- employee wage inflation that cannot be passed along to our clients. Both of our segments experienced increases in bill rates and hourly bill pay spreads year over year.

This is the seventh consecutive quarter that the Company has met or exceeded its operating objectives, and remained consistent with the operating plans that management set forth previously. Going forward, our focus will remain on growing our EBITDA faster than our gross profits, and growing our operating income faster than revenues. Our fourth consecutive quarter of net income was achieved by continuing to increase revenue, maintaining good gross margins and focusing on our SG&A expense. Towards the end of the call today, Mike will walk you through the forward guidance that we announced in our earnings release. As for 2006 guidance, we continue to remain excited about the groundwork we have laid and the strength of the end markets we serve. I would like to turn the call over to Shawn and then Emmett for a more detailed review of operations. Shawn?

Thank you, Peter. On Assignment Healthcare's Q1 results continue to show progress. Our market share growth and client penetration over the last several quarters, combined with clear increases in demand for our healthcare staffing services, all resulted in a 44% year over year increase in Healthcare Staffing revenues. Highlights of the Q1 results from our Medical Financial and Allied business unit are as follows. MF&A revenues were up 40% year over year. This performance continues as the trailing average assignment numbers for the last three weeks in MF&A were $900,000 in revenues, nearly 920 professionals on assignment, and over 550 clients billed. All of these results are above the first quarter averages, and are being achieved with 85 staffing consultants, an increase of only 1 from Q4 2005.

Our newer Health Information Management and Local Nurse practices, combined with our re-established Allied Travel practice, represented nearly 25% of MF&A's total revenues for Q1 2006. The market demand for all of our Healthcare professional services remains strong. We continue to regain prior year's lost market share, and the positive market momentum continues. Now let me turn to our Nurse Travel division. Nurse Travel revenues for Q1 increased 46% year over year, excluding $211,000 in revenue for staffing hospitals with labor disruptions in Q1, Nurse Travel revenues achieved 4.9% sequential growth. Q1 revenues are below the prior quarter's results because, historically, nurses take off time after the New Year before seeking new travel assignments. In prior years, we've seen this ramp up period take most of Q1 to return to previous levels of nurses on billing. And that is why Q1 is typically one of our most challenging quarters.

In Q1 of 2006, we experienced a much faster ramping of nurses earlier within the quarter, as several of our largest clients had sizable needs at the start of the year that we were able to fill. Some of these clients now have returned to more normalized nurse count levels, and we are working to reassign these available nurses to other facilities. Demand continues to remain strong, as the trailing average wage numbers for the last three weeks of Nurse Travel were $2 million in revenues, 665 nurses on assignment, and 167 clients billed. Our client count high for Q1 was 175, representing a 224% increase off the 2004 lows. Our top 10 clients in Nurse Travel represented 53.2% of revenues, versus 67.8% in the year ago period. This client mix shift has been a conscious effort over the last year and a half in order to become more diversified and not so susceptible to large client demand changes. We have focused on broadening our client base with great success while, at the same time, working to increase our nurse reassignment rate. Also our order activity continues to rise, with 45% year over year growth in this category.

We are experiencing increases in market demand within the types of highly skilled nurse disciplines that we place, and our biggest challenge is always in continuing to attract new highly-skilled nurses to our supply pool. We are experiencing some challenges early in Q2 growing from current head count levels due to a tighter than normal nurse pool, which we feel will loosen during the second half of the year. And although our Nurse Travel revenues have remained relatively level in the last few weeks, we believe this to be a temporary combination of customer mix shift and a tight labor market, both of which should improve throughout the year. Our value propositions, consistent delivery model, and focus on placing high-demand and highly-skilled nursing positions make us uniquely different than other Nurse Travel companies, and will allow us continued growth opportunities. With that, I'll pass the call over to Emmett McGrath, our President for Lab Support. Emmett?

Thank you, Shawn. And good morning. As you have heard today, the Lab Support segment's revenues increased over 21% year over year, and were flat sequentially in what is historically our most challenging quarter. Revenues for the segment represented nearly 40% of the total revenues for the quarter. I attribute this performance to a number of key operational factors. First, our immediately focus during the quarter was to recapture the preholiday momentum and more quickly overcome the seasonal challenges. This accelerated our ramp up time without the historical first quarter drop in revenues, and positioned us well for the second quarter. Second, we increased the number of client engagements during the quarter, billing over 1330 clients. In addition to increasing the number of clients during the quarter, we made strides in increasing our billable head count with existing clients through improved client development techniques.

Third, I'm pleased to report that we are executing against a previously stated strategy to migrate to higher level positions and, as a result, all three business lines expanded their respective bill pay spreads in the quarter. Specifically, our Neuroengineering and Clinical Research business units gained greater traction, generating a larger number of higher level placements. Revenues for these two business lines increased 100% year over year, and over 3% sequentially. Fourth, direct higher activity in the U.S. and Europe continued to complement our revenues and support our margins. Direct hire fees grew 84% percent year over year to $690,000. Fifth is our continued emphasis on new business development, specifically in the small to middle markets where attractive margins are more attainable. And finally, continued focus on better pricing, expansion of new business lines and tighter controls over our cost of services. As stated earlier, gross margins for the quarter were negatively impacted by such items as holiday pay, increased SUI rates and workers' comp claims.

Operationally, we continue to manage our risk effectively and we expect SUI expenses, especially in a state of California where we have the highest concentration of our business, to decline as our contract professionals hit the salary cap and workers' comp expenses to normalize through the remainder of 2006. Early in the second quarter of 2006, I'm encouraged with our contract and direct hire placement trends, job order flow, contract awards and the pipeline of new business opportunities. To ensure continued profitable growth, we remain committed to operational excellence in 2006. In addition to fundamental sales and recruiting activities, key focus areas are greater operational leverage, margin expansion, better client penetration, new business development and successful deployment of the Recruitmax front office sales and recruiting tool. I am confident that we have the necessary leadership, field staff and demand for our services to make the second quarter a success. I would now like to turn the call over to Mike. Mike?

Thanks, Emmett. Consolidated revenues were $66.7 million, up 3.1% sequentially. Excluding $211,000 revenues derived from staffing hospitals experiencing labor disruptions in the first quarter, consolidated revenues were up 2.8% sequentially. There were no such revenues in the fourth quarter. There were 64.5 billing days in this quarter compared with 63 days in Q1 '05 and 61.5 days in Q4 '05. For Nurse Travel, there were 90 billing days, compared with 90 days in Q1 '05 and 92 days in Q4 '05. Lab Support segment revenues were $26.5 million, up 0.4% sequentially, and represented 40% of total revenues. Lab Support revenues were $3.6 million, down 8.8% sequentially. On a constant currency basis, revenues were essentially flat year over year, and down 22% sequentially. Lab Support's revenues were 5.4% of total revenues for the quarter.

Healthcare Staffing revenues were $40.3 million, up 5% sequentially, and represented 60% of total revenues. Within Healthcare staffing, Nurse Travel revenues were $28.7 million, up 5.7% sequentially, and represented 43% of total revenues. Excluding $211,000 of revenues derived from staffing hospitals experiencing labor disruptions in the first quarter, Nurse Travel revenues were up nearly 5% sequentially. MF&A revenues were $11.6 million, up 3.2% sequentially, and comprised 17% of total revenues. Conversion and direct hire revenues total $1 million, compared with $858,000 for Q1 '05 and $1.2 million in Q4 '05. Conversion and direct hire revenues represented 1.5% of total revenues, versus 1.7% for Q1 '05 and 1.9% in Q4 '05. Consolidated gross profit was $17 million for the quarter and consolidated gross margin was 25.5%, compared with 26% in Q1 '05 and 26.2% in Q4 '05. Lab Support gross profit was a $8.1 million for the quarter, which was a gross margin of 30.5%, compared to 30.1 -- 32.1% for Q1 '05 and 32.5% for Q4 '05. The 160 basis point decrease year over year was primarily due to an unfavorable adjustment in works' comp in the quarter due to an increase in a claim reserve from a prior year, an increase in state unemployment insurance, higher holiday pay and lower conversion revenues.

Healthcare Staffing gross profit was $8.9 million for the quarter, which was a gross margin of 22.1%, compared to 21.3% for Q1 '05 and 21.9% for Q4 '05. Within the Healthcare Staffing segment, Nurse Travel gross profit was $5.8 million which was a gross margin of 20.2%, compared to 19.1% for Q1 '05 and 19.7% for Q4 '05. The 110 basis point increase year over year was primarily due to higher bill pay spreads, lower travel and housing costs, offset by higher state unemployment insurance and higher per diem and others costs of services. For MF&A, gross profit was $3.1 million for the quarter which was a gross margin of 27%, compared with 26.4% for Q1 '05 and 27.4% for Q4 '05. The 60 basis point increase year over year was primarily due to lower workers' comp expense offset by higher state employment insurance, higher travel and housing costs, and lower conversion and direct hire revenues. Total SG&A expense for the first quarter was $16.8 million, or 25.2% of total revenues. Excluding $324,000 in accelerated depreciation related to the write down of the front office module, PeopleSoft, as a result of the implementation of a new front office system and $459,000 related to FAS 123-r expense.

SG&A was $16 million, or 24% of total revenues. For Q1 '05, SG&A was $16 million, or 32.1% of revenues, and did not include any accelerated depreciation or FAS 123-r expense. The sequential increase was $546,000, primarily related to FAS 123-r expense. Depreciation expense for the quarter was $1.5 million, compared with $1.2 million in Q1 '05 and $1.4 million for Q4 '05. The year over year increase is principally due to accelerated depreciation explained previously. Amortization expense in the quarter decreased to $235,000 from $281,000 in the year ago period, and it was $281,000 for Q4 '05. The year over year and sequential decrease was a result of a step down in the accelerated amortization of customer relations. Our operating income was $198,000 for the quarter compared with an operating loss of $3 million for Q1 '05, a year over year improvement of $3.2 million.

Based on our decision to book a nominal tax provision until a valuation allowance is no longer needed and due to our higher levels of depreciation related to prior year's IT initiatives, we believe it is meaningful EBITDA when comparing the current quarter's results to prior quarters. EBITDA for the quarter was positive $1.9 million, or $0.07 per share. Excluding FAS 123-r expense of $459,000, EBITDA was $2.3 million compared with the negative $1.5 million, or negative $0.06 per share, for Q1 '05 and positive $2.4 million, or $0.09 per share, in Q4 of last year. We ended the quarter with cash, cash equivalents, and restricted cash of $27.4 million, up from $25.4 million at December 31, 2005. For the quarter, cash provided by operations was $2.5 million, cash provided by stock option exercises and employee stock purchases was $1.2 million, and cash used for investing activities was $1.7 million. CapEx was approximately $1.6 million, up from $700,000 in the prior quarter primarily due to the implementation of a new front office system and the implementation of PeopleSoft at Nurse Travel. Net accounts receivable were $37.2 million at the end of the first quarter, an increase of approximately $1.9 million sequentially. On a consolidated basis, days sales outstanding were flat sequentially at 52 days.

During the quarter, there were no repurchases of our shares in the open market. Now turning to productivity, which we define to be the quarterly gross profit generated per staffing consultant. For the first quarter, we averaged 252 staff consultants and they each generated 67,400 in gross profits, a 2% sequential decrease. In the previous quarter, we averaged 247 staffing consultants and they each generated 68,800 in gross profit. Each consultant had an average of 14.1 contract professionals out on assignment, down from 14.3 in the previous quarter. Lab productivity was 16.9 versus 18.2 in the previous quarter. And MF&A was flat at 10.1. Nurse Travel was 14.3 versus 12.8 in the previous quarter. Productivity was impacted by normal seasonal factors and higher head count.

Turning to guidance. For Lab and MF&A, there are 63.5 billing days in the second quarter, compared with 64.5 for Q1 '06. For Nurse Travel, there are 91 days, compared with 90 days in the prior quarter. Based on the first three weeks of the second quarter of 2006, we currently expect revenues of $68 to $69 million for the quarter ending June 30, 2006. We are projecting gross margins of approximately 26.5% and SG&A of $16 to $16.2 million, excluding approximately $550,000 in FAS 123-r expense. Using effective tax rate of 30%, we project earnings per share of $0.03 to $0.05, which includes FAS 123-r expense of approximately $0.02 per share. For the year, assuming fairly stable labor markets and no loss of major clients in Nurse Travel, we are revising our guidance for revenues to $270 to $275 million from $268 to $275 million, which represents growth of 13.5 to 15.6% over 2005. We are projecting average gross margins for the year of 26.5 to 27%, SG&A of $64.5 to $66 million, excluding approximately $2.5 to $2.8 million in FAS 123-r expense. And revising our earnings per share guidance to $0.15 to $0.18 from $0.14 to $0.18, including FAS 123-r expense of $0.08 per share.

We'll continue to review our annual guidance on a quarterly basis and update it as appropriate. As you know, these estimates are subject to the risks mentioned in yesterday's release and at the beginning of this conference call. Now back to Pete for some closing comments before we open the lines up for questions.

Thanks, Mike. On Assignment's growth opportunities are still largely dependant on our own internal execution, and not on any improvement in the end markets we serve. This quarter's performance substantiates the strength of our diversified business model and are a result of the operational and management changes we've made over the last 27 months. I would like to, once again, thank our many loyal, dedicated and talented employees whose efforts have allowed us to progress to where we are today. I would now like to open the call up to participants for questions. Operator?

[OPERATOR INSTRUCTIONS] Your first question comes from Jim Janesky of Ryan Beck & Company.

Yes. Good morning. Couple of questions. You had an increase in consultant head count sequentially, despite having the lower productivity metrics. Is this kind of following through on your plan to put -- even though overall productivity in the Company can go up, there were pockets where you saw if you put more consultants on the ground that you'd be able to do more business. Is that where the hiring was? And what are the plans for the rest of the year?

Right. Jim, good morning. As we've told our investors, it's a Tale of Two Cities. We don't have -- Some of our markets are performing very well, meaning they are hitting our targeted levels of productivity and the markets are actually demonstrating to us that there's more room for growth. So, for instance, you take a San Bruno market force where we may have four people working and they're all carrying 22 temps per head. But we're also seeing huge demand. If we add one or two people, we could get up another 50 people, potentially in that market. And then you compare that to a Houston, Phoenix, Dallas, where we're underperforming for a variety of reasons, and we're not adding in those markets. In instances where we've given the market adequate time and it's not turning, we're looking at maybe taking resources and reallocating them. So as I've said, if investors want to fault us, it's holding onto some resources in markets that haven't turned as quickly as we might have hoped. But again, I'm not trying to make my productivity numbers look good by just making the denominator smaller. I'm trying to get my absolute numbers up. Houston and Dallas are big metropolitan markets, and I believe in those markets. And I believe that they'll return with the right teams.

Okay. In the Lab market, can you talk a little bit about seasonality in the second and third quarters? And even though you said you're not counting on the end market, any change in the end markets to drive your demand, what is going on from our point of view in the end markets in Lab?

I'll start off and then I'll turn it over to Emmett. I will tell you 21.2% growth in revenues off of an up year in 2005 is -- shows the strength of the market. If you look at the growth that some of our competitors posted in their scientific space, it's not nearly as robust. Second and third quarter are always the best quarters just because of the normal buying patterns of our customers. so we feel pretty good about what we're seeing in those markets. We've added a couple of new team members that are really talented that we think will drive even better opportunities in our Clinical Research group. Emmett, why don't you add a little bit?

Good morning, Jim. I just want to echo what Peter said. We don't really see much seasonality in the second and third quarter. Those are really our strongest quarters. I'm very encouraged with our trends in direct hire staffing and contract labor already, early into the second quarter. We have some new contract awards, Jim, and others that we're very proud of. And we expect to see a lot of acceleration in our business from those new contract awards. And to Pete's point about Engineering and Clinical Research. These are new businesses that are really regaining traction. So I'm pretty optimistic about the second and third quarters.

Okay. Shifting to the nursing market, just to kind of wind things up. Shawn, could you tell us why you feel -- Although moving into the second quarter which is, for the entire Nursing Travel market, could be lower seasonally -- why you feel so confident about back half of the year? What are you seeing? Are you signing up orders for that point? Or just the normal move from the second into the third quarter?

Yes, Jim, that's a good question. Good morning. We do obviously, for the second half of the year, see some strengthening in our business based upon the pipeline of opportunity that we have. We do see a lightening of the supply occurring here during that period of time. It's just been a very tight supply pool right now. And as you know, going through April through June-ish, it is traditionally a little more difficult within Nurse Travel. But based upon our pipeline and our highest level of order opportunity yet, we're looking for again a little bit of a back end opportunity here within the second half of the year.

Okay, thanks.

Your next question comes from Josh Vogel of Sidoti & Company.

Good morning. Thanks for taking my call. You guys have mentioned in the past that you had about $65 million in legacy business in Lab Support clients. Do you have any visibility there? Was any of that recaptured in the quarter?

Yes. We're growing probably faster than the market. I won't name my competitor, but one of my competitors showed a 9.7% decrease quarter over quarter. So much that, Josh, as I've said consistently for seven quarters -- We still haven't hit the high water mark for Lab Support. That's how far, unfortunately, this gold label division had fallen under the dark years of 2001 through 2003. So I think we've got to hit 29 million a quarter to kind of get to the highs. So we're pedaling fast and we're not seeing any sort of obstacles. The markets are good. There's a renewed emphasis on science. There's been plenty of funding in the life science and the biomedical businesses. So things are good.

Okay. And shifting gears a little bit. The spike in the CapEx, is that associated with the PeopleSoft rollout?

Absolutely. And it's pretty consistent with what our budget is for the full year.

How is that rollout tracking?

Well we're at the final throws of rolling it out. We've tested it. We've run mock payrolls to make sure that the front end system is loading into the payroll system, and we have a projected go-live date in the next couple of weeks. So we've done the training in the field. Training, actually, is wrapping up in the field as we speak today. So we're pretty encouraged by the testing and the immediate usability of it based on our training exercises.

Josh, just to be clear. It's not PeopleSoft. It's another software system that we're using that has been developed specifically for the staffing industry.

Right, okay. And finally, I may have missed it, but what percent of revenue was perm in the quarter?

1.5% Okay. Are you currently turning away any perm business? Let me see if I can address that. Are we turning it away? We are controlling our staffing consultants' daily activities. As you know, we did not intentionally -- Other -- Everybody has their own business model. To avoid huge profitability fluctuations, we've elected to limit the amount of search revenues we're going to have. Others are doing extremely well with it right now. The market is fast and furious. But we did not -- We have not ramped up. Any new hires we have are not dedicated exclusively for perm placement. They are carrying, predominantly, a very large percentage -- I'm saying 90% plus, contract labor and then they're allowed to fill in search with the remaining portion of their time. So when we say are we turning it away? That would be, maybe, an overstatement but we're controlling it.

Okay, thank you.

Your next question comes from Tobey Sommer, Suntrust Robinson Humphrey.

Thank you very much. Maybe we could start on the Nurse Travel side. I was wondering if you could comment on what renewals, the level of applicant activity and order flow look like from your customers.

Right. Well, to start with -- One, we haven't lost any accounts. And, Tobey, we gave you the number of new accounts. We are at the highest rate of billable clients on a weekly basis, and we also are at the lowest level of client concentration since we -- since this management has been running the business. The second thing is -- We haven't given this data out publicly and I won't give you a percentage, but we have on renewals been successful in expanding the bill rate. Finally, on applicants. We hit a low for about four weeks, but applicant flow has increased over the last three weeks.

Okay. And orders from your customers? Whether you can give us a specific percentage or sort of order of magnitude changes?

Yes. I would tell you they're at the -- I don't know if we've given the exact amount in the past, but we are at the highest levels. Then again, that whole order level even as it relates to us, you've got to look at it on a daily basis and really scrub it and see how long the order's been open, how difficult the skill set profile is, what the pay rate is. Because I could show you an open order number of 6 billion. But unless you really scrub it, you know, it's not a really good forward indicator.

I'm not sure if I heard this correctly or not, but did you suggest that you're seeing a tighter supply relative to just a few months ago in terms -- when you look at 2Q in Nurse Travel? Anything kind of changed there?

Yes. We have seen a little bit of a tighter supply. And that, I think, was partially because of our own doing and maybe falling a little bit below the level we needed to on applicant flow, and part of it attributable to our growth rate and part of it just attributable to the general tightness in the market. It's started to loosen up a little bit. And I would tell you the reason we're talking about it this time with you, Tobey, verses ever before is because it's been -- This quarter, the last month or so it's been tighter than what we've seen in past.

Okay. When you look at your recruiter, the staffing consultant productivity -- You've commented on it, but I may have missed the ratio now to people you have in the field. You know, temps that are billing and earning money for you and the staffing consultants. Can you refresh us on where you want to go with that and how we should think about that progress generally?

Yes. I'll make a general comment, and then Mike will follow up. We're still committed to trying to add one incremental billable temp per staffing consultant per quarter over the next kind of seven quarters. We added -- I think we're up incrementally -- Is it eight?

Year over year? Or --

We're at 252 this quarter, right?

We're at 252. We were at 247 in Q4 and we were at 228 in Q1 of '05.

Right. So in presentations that we've made, we've kind of used the 247 number. I think that 247, 252 is kind of the range that we're going to be in over the next six months or so. We think we want to get these people up one incremental head per quarter. And if we do that, that's kind of seven incremental heads which would get our product level to kind of around 22 by the end of '07 in billable temps.

Tobey, just going through the numbers. On a consolidated basis, the productivity was 14.1. Then when you look at the respective lines of business, the Lab segment was 16.9. MF&A was 10.1 and nurse travel was 14.3.

Okay, thank you. Now you generated some cash in the quarter and the cash balance went up. Wonder if you could update us on what opportunities, if any, you're seeing to maybe deploy some of that cash and increase the pace at which you're able to absorb the SG&A?

We're looking in a very, very disciplined fashion at things that would be complementary to our core business and live harmoniously with our core business. That falls into different camps. One, we could add a third leg to our stool. Another alternative is just to do some incremental acquisitions that can cohabitate in our existing fixed-cost infrastructure. And then the third is just to do what we've been doing, which is incrementally add recruiters and organically start some new lines of business. We have the luxury of growing at a faster rate than anything we can acquire right now. We have the luxury of generating cash now. Just as we were unwilling to do any acquisitions during the period of time in which understanding of our business and the strength of our brands and models could have confused people. I want to start showing how we can generate cash, because don't forget this business generated $110 million of cash that found its way on the balance sheet from basically 1985 through 2000. We're starting to generate cash. We will find the right opportunity eventually. But we're going to be patient.

Okay. I was wondering -- You commented a little bit, I think, about Europe. Just wondering if you could give us any more color on how operations are going there and how you see that progressing over the balance of the year.

I'll make an opening comment, and then let Emmett echo if he feels it's necessary. It's going good. It's one of our higher gross margin businesses. In the scheme of things, it's $15 million of revenue. But it really does add a cache to Lab Support when we're dealing with Glaxo Smith Klein or some of the other global pharma companies. We've actually given them permission to tune down the margin a little bit to see if they could grow a little bit. But that's a very controlled, focused effort. Old habits are hard to break, I'll tell you that. Translation currency's been hurting them versus benefiting them in kind of like '04. But things are strong there. Emmett and I are going over there this Monday to do an op review. But things are strong. Emmett?

I'd just add to that, Tobey and Peter. As I said about the U.S. operations, I'm very encouraged about our trends early into the quarter. And order flow, both on the contract temporary assignments as well as direct hire. Direct hire was fairly new there and they've embraced it well and they're accelerating in that area. I'm very encouraged, again, with their new business development. They're looking at larger clients where we can get a larger volume of placements. Like Pete said, high margins. They'ree a wonderful operation. There's less competition there. They're focussed on similar markets like in the U.S., the small to middle market where we can obtain higher margins. So, again, I'm encouraged about the trends I'm seeing and I expect to report good results in the coming quarters.

Thank you very much.

Your next question comes from Jeff Silber of Harris Nesbitt.

Thanks. Most of my questions have been answered. You gave some color on bill rates increases by division, and you said the consolidated bill pay spread had increased. Can you tell us just generally how pay rates are trending in the different divisions?

Yes. I mean, I guess we, Jeff, have not been nearly as aggressive as others with regard to increasing our bill rates. If you look at some of the increases that others are quoting, it's 5, 6%. I think in Nurse Travel ours was 2.7%. So we're looking at it. We do have a conscious approach to have some thoughtful conversations with our customers about getting ahead of the curve and the natural effect of -- or reaction to push back when someone is talking about pricing is probably not the most productive thing because wage inflation is going to finally creep in, and they don't want to be the last one to throw the towel in because they won't get the towel that they want. So, Mike, why don't you give him the specific growth quarter over quarter. And I guess from my perspective, we're going to do as and when we can do it appropriately and to stay competitive with regard to delivering the best talent we will do it. But I wouldn't factor anything other than what we've been doing.

Jeff, for the Lab segment, year over year the bill rate was up 2.1%. For MF&A, it was 7.2% and for Nurse Travel 2.7%.

Again, I'm sorry. Those were bill rates, not pay rates?

Those are bill rates.

Okay. And the pay rates went up at a lower proportion. Is that what you were saying?

Yes, because we said the bill -- For a variety of reasons, because -- Not universally. We had to pass a little bit more onto the nurses. But, yes, the pay rates did not increase -- We didn't pass it all along to the billable temp.

Okay, and just focusing on the Nurse Travel side. Some of the other players in the States claim that one of the reasons they've been raising -- willing not to take the bill rate increases so much is they use that to attract some nurses. Do you find maybe that's one of the reasons there was a tighter than normal supply, because you weren't increasing bill rates and wage rates as much as the others?

That could be. Remember we don't directly compete with American Mobile and Cross Country. Whatever pay rate increases they do don't equate to what we pay a nurse. We did -- I will tell you it's the same phenomenon that we always compete with. In all companies, when you have a mom and pop organization or you have a fallen angel organization that's not worried about their gross margins, sometimes they can share more of the bill rate. To give you an order of magnitude, Jeff, it's maybe -- We may have saw 20 or 25 nurses where literally a brain dead, bankrupt staffing company was willing to do business at 10% gross margins. And the reason the margin was so light is because they were giving a disproportionate amount of the bill rate to the nurse or the pay rate just to generate revenues. And we're hoping that eventually that that's going to clean up in the marketplace. But that's the only specific assistance I can give you where what you were alluding to may have occurred.

Okay, great. You mentioned in your earlier comments about the grandfathering of this employee appreciation plan increasing expenses a little bit. Roughly what was the magnitude of that?

I think it was around 100 and -- over the two month, I think it was about $125,000.

So relatively minor?

Right.

Okay. Great. Thanks again.

[OPERATOR INSTRUCTIONS] We do have a follow up from Jim Janesky of Ryan Beck and Company.

Yes. Thank you. At the end of the -- or at the beginning of the year when you reported your fourth quarter, I increased the amount in operating expenses because of some of the additional hiring that you folks had talked about. And you made a comment that in terms of head count, it might be flat to even down as we move throughout -- consultant head count, as we move throughout 2006. Could we then -- If that does come through, could we expect some additional operating leverage possible before the end of the year or by the end of the year?

Jim, I wouldn't want you to take that away. I guess we've given you guidance in SG&A. I'm very proud of what the front office and the back office has done with running us at around 16 million. My comment earlier on this call was really to lead you to believe our level of scrutiny about the budgeted incremental heads has probably gone up a level or two in the fact that we've held on to some people in markets that haven't turned. So we may may turn heads over and replace verses incrementally add. But I still think there's room for improvement. We've found some areas to improve on some things this quarter that offset other investments. I still do believe we have room for improvement on the SG&A side, but I wouldn't have you changing kind of the numbers that we've given you for guidance purposes for the full year.

Okay, thanks. That's very helpful.

There are no further questions at this time. Are there any closing remarks?

We appreciate your attendance and look forward to reporting our second quarter results. And have a good afternoon.

This concludes this morning's conference call. Thank you for attending. You may now disconnect.