ASGN Inc (ASGN) 2010 Q2 法說會逐字稿

Good afternoon. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the On Assignment Second Quarter 2010 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

Thank you. I would now like to turn the conference over to Jim Brill, Chief Financial Officer. Please go ahead, sir.

Thank you. Before we begin, I'd 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 words such as forecast, estimate, project, expect, believe and similar expressions. We believe these remarks to be reasonable, but they are subject to risks and uncertainties that could cause actual results to differ materially from the forward-looking statements.

We describe some of these risks and uncertainties in today's press release and in our filings with the Securities and Exchange Commission. We do not assume the obligation to update statements made in this conference call.

I'd now like to introduce Peter Dameris, our CEO and President, who'll provide an overview of our second quarter results. Peter?

Thank you, Jim. Good afternoon. I would like to welcome everyone to the On Assignment 2010 second quarter earnings conference call. With Jim and me today is Mark Brouse, President of VISTA, our physician staffing business.

During our call today, I will give a review of the markets we serve and our operational highlights, followed by a discussion of the performance of our operating segments by myself and Mark. I will then turn the call over to Jim for a more detailed review and discussion of our second quarter financial performance and our estimates for the third quarter of 2010. We will then open the call up for questions.

All markets we serve, except healthcare, continued to improve during and exiting the second quarter. All divisions, except physician staffing, grew sequentially. In addition, June consolidated revenue of $37.4 million was the highest monthly consolidated revenue generation for our company since March of 2009.

Included in our second quarter consolidated revenue was approximately $2.1 million of revenue earned by our Nurse Travel group from supporting a customer which experienced labor disruption during the quarter. Our absolute basis divisional sequential revenue growth performance in the second quarter was 15% for our IT group, 11% for our life science group, 4% for the healthcare group and negative 2% for our physician group.

Exiting the quarter, revenue growth in our non-healthcare related groups, i.e., information technology, engineering and life sciences, which made up 64% of our total second quarter revenues, was good and continues to improve.

As we stated during our first quarter conference call, the healthcare staffing market is still very challenging. But in the second quarter, we saw modest signs of improvement in demand that was greater than the change in demand that we saw in the first quarter of 2010.

We hope these changes in demand will permit sequentially growth in the third and fourth quarter of 2010 for our healthcare groups. Although healthcare staffing is currently a drag on our revenue growth, we firmly believe these end markets will provide some of the greatest growth opportunities in 2011 and beyond.

Consolidated gross margins of 33.8% was a new record for the company. Temporary labor at large continues to see greater growth prospects than full time labor. In addition the secular growth that we expected to experience in this recovery due to greater government employment mandate is beginning to evidence itself.

As the recovery continues to develop, we are seeing classical cyclical recovery trends developing in the professional staffing markets we serve.

On July 19, we announced the acquisition of Sharpstream Ltd. Sharpstream is an eleven year old retained search firm that focuses on recruitment of executive to middle level managers in the life sciences sector globally. Sharpstream had approximately $5 million in revenue in 2009.

Martin Reynolds, the founder, will continue to manage the business and will report to Emmett McGrath. Although this acquisition is relatively small, we believe it is important in that it increases our ability and value to serve our life science customers.

In addition, beyond normal accretion, we hope to eliminate certain back office cost and thereby increase the profitability of this group. Jim Brill will share more details regarding the acquisition later on in the call.

As we advised you earlier in the year, we recently completed the development of a five-year strategic plan to get to $1 billion in revenue. The plan requires us to grow approximately 10% compounded annually, with approximately $50 million a year in acquired revenues.

While fiscal year 2010 is less than an optimal operating environment, our growth in our non-healthcare businesses and our two acquisitions to-date have kept us on track to realistically have an opportunity to achieve our stated revenue goal.

While the US labor markets have not improved significantly over the last two years, we believe that the actions we have taken over that period of time have positioned us well. By increasing our gross margins, substantially paying down our debt with cash generated from operations, adjusting our non revenue generating costs and expanding our service offering, we have performed -- we will perform very well again.

While none of us would have cared to experience this difficult decline, we believe the company has never been positioned better for growth and profitability.

Now to the second quarter. Revenues in the second quarter increased 2.6% over the second quarter of 2009. Net income was $900,000 or $0.03 per diluted share.

Revenue generated outside the United States was $6.2 million or 5.9% of consolidated revenues in the second quarter, versus $4.8 million or 4.8% in the second quarter of 2009.

Consolidated gross margins in the second quarter were 33.8%, up from 32.8% in the second quarter of 2009. Adjusted EBITDA was $7.1 million or 6.8% of revenue for the quarter, down from $7.5 million or 7.3% of revenue in the second quarter of 2009.

Once again, our financial performance was achieved without any significant contribution from permanent placement.

Exiting the quarter, demand for our services strengthened in most divisions, and nurse travel and physician staffing are starting to see better demand trends.

Our consolidated revenues in June were $37.4 million, which included approximately $2.1 million of labor disruption revenue and nurse travel. Our weekly assignment revenue, which excludes conversion, billable expenses and direct placement revenues averaged $7.34 million for the last three weeks, which includes the 4th of July holiday.

This is up 8.2% from the same period in 2009, and up 2.3% from the same period last quarter, which did not include a holiday.

Before turning the call over to Mark, I would like to give you a brief review of operations. Nurse travel second quarter results were impacted by both opportunity and adversity. First, as I earlier disclosed, the group accepted an opportunity to assist a customer with labor disruption staffing. This project generated approximately $2.1 million in revenue during the quarter.

Second, continued adverse economic trends contributed to a decrease in number of travelers on assignment, open orders and average bill rates during the quarter.

Quarterly revenues of $9.5 million, including approximately $2 million in revenue from labor disruptions was up sequentially 5.8% but down 32.1% year-over-year.

Gross profit of $2.5 million represented a 25.2% increase sequentially, and a 27.8% decline year-over-year. Gross margin of 26.5% represented a 410 basis point sequential increase, and 159 basis point increase year-over-year.

Excluding the approximate $2 million in labor disruption revenues, Q2 revenues were down 16.9% sequentially. However, the gross margin would have been 22.9%, a 48 basis point sequential improvement.

While growing travelers on assignment has been challenging in the second quarter, we are seeing signs of increased demand in recent weeks. Since June, the volume of open orders is up 50%. Booked weeks are also up by 49%. This has helped drive a more favorable trend in the number of travelers on assignment.

In the beginning of July, we experienced a higher placement rate than in recent months. At the same time, the average hours worked per week remained fairly constant compared to the prior quarter. This suggests to us that hospitals continue to have strong needs for the specialized nursing personnel we provide.

Finally, we will have additional labor disruption revenue of about $2.2 million in the third quarter of 2010.

Some specific operating results for the second quarter in nurse travel are as follows -- Our average bill rates were down year-over-year by 4.8% to $68. Average hours worked per nurse remained relatively stable.

Bill pay margins expanded by 223 basis points sequentially, and 273 basis points year-over-year. And new open order volume increased 4% sequentially and 45% year-over-year.

Turning to life sciences, revenues for the life science segment grew on an absolute dollar basis over the first quarter to $25.5 million, which represents a 10.7% growth sequentially and a 12.1% increase year-over-year. Excluding the recent acquisition of Cambridge Group, revenues grew 4.4% sequentially and 5.8% year-over-year. The sequential increase further illustrates the improving operating environment.

On a divisional basis, US operations generated $22.4 million in revenue, increasing 15.5% sequentially and 14.6% year-over-year. Excluding Cambridge, US operations grew 8.1% sequentially and 7.3% over the prior year. Cambridge has no foreign revenues.

Foreign revenues were $3.1 million for the quarter representing a 15.1% decline sequentially and a 3.2% decrease year-over-year. We attribute the decline in European revenues to the economic climate, the volatile exchange rate of the British Pound and Euro and [pure] billable days sequentially.

Gross margins for the life science segment were 31.8% representing a 17 basis point increase sequentially, and essentially flat year-over-year. On a divisional basis, US gross margin was 31.3%, up 51 basis points over the prior quarter, and virtually flat year-over-year.

Foreign gross margin was 35.4%, decreasing 72 basis points sequentially and up 39 basis points year-over-year.

Moving to the third quarter of 2010, demand for both contract and permanent placement services remained steady, and the business climate in most of our markets continues to stabilize and improve. The acquisition of the Cambridge Group in our clinical research division has been successful, and the combined teams are focused on building new business relationships and leveraging affiliated life science customers.

Early in the third quarter, we are encouraged with the steady flow of job orders, number of weekly assignments and permanent placement activity.

Furthermore, the recent acquisition of Sharpstream Life Sciences with its focus on retained executive level permanent search services supports our strategy to provide critical professional level talent to our life science customers and will strengthen our competitive position and enhance the profitability of the division.

Now, I would like to turn to the Allied Healthcare Group. Revenues for the Allied Healthcare division were $9.8 million, which represented a 2.1% increase sequentially and a 6.1% increase year-over-year. Although the operating environment showed signs of improvement, growth was constrained by the following specific factors.

One, continued reduction in demand for elected procedures. Two, a greater number of patients choosing a more cost effective form of treatment such as self medication over more costly medical procedures. Three, hospitals' reduced usage of contract professionals in response to declining cash balances and patient admissions. And four, reduced demand for less critical allied skilled modalities.

The Allied Healthcare Group's gross margin for the quarter was 33%, which represents a 218 basis point sequential increase, but a decrease of 84 basis points year-over-year.

Turning to the third quarter of 2010, the markets in which we operate continue to be challenging, but signs of improvement do exist. Demand for our core clinical lab, medical financial, local nursing, allied travel, rehab therapist, and contract health information management professionals continues to improve.

Our focus continues to be on new business development, gaining greater presence in higher level skill disciplines, permanent placement, preservation of gross margins and employee productivity.

Now let's turn to IT. We witnessed a slow and steady increase in our client budgets and spending for capital projects and new product development throughout the quarter. As a result, second quarter revenues for our IT and engineering segment were $41.2 million, a 15.1% sequential increase over the first quarter of 2010, and a 26.8% increase over the second quarter of 2009.

In addition, during the quarter we experienced growth in each of our respective segments; IT, software and hardware engineering, mechanical and electrical engineering and telecom. The year-over-year increase is due to a significant increase in the number of billable consultants on assignment, partially offset by a lower average bill rate.

During the second quarter of 2010 we averaged 724 billable consultants on assignment, an increase of 13% over the average of 641 in the first quarter of 2010. The average bill rate in the second quarter of 2010 was $106 per hour compared to $113 in the second quarter of 2009, and $107 in the first quarter of 2010.

Our gross margin for the second quarter of 2010 remains strong at 36.7%. Our permanent placement business unit, Centerpoint, which we re-launched in late 2009, continued to gain momentum throughout the quarter, as we increased our total placement fees from $141,000 in the first quarter to $387,000 in the second quarter.

During the second quarter, we were also successful in continuing our strategy of diversifying our business across clients and industries, billing over 680 different client companies, with no single client accounting for more than 2.6% of our revenue, and revenues from our top 10 clients representing only 15% of our total revenues for the quarter.

From an industry perspective, demand for our IT and engineering consultants continues to increase, from semiconductor, machinery, appliance, pharmaceutical and manufacturing companies. Our business was down slightly from medical equipment companies, utilities and educational institutions.

From an operational standpoint, our internal sales consultants drive our business, and are a significant investment necessary for current and future growth. The average number of sales consultants reached a high of 447 in June of 2008. That number declined throughout the second half of 2008 and all of 2009.

However, since then we have intentionally increased our staff from 275 sales consultants in December 2009 to 344 at the end of June of 2010, a 25% increase over the time period. In addition to increasing the size of our sales staff, our sales consultant efficiency and productivity has also been steadily improving.

Our aggregate new assignments per day are approaching pre-recessionary levels, with the sales staff size at about 29% less than our peak in June of 2008. As a result of our strong and steady performance in the past three quarters, which has continued into July, we are selectively adding staffing consultants to our Oxford International and Oxford & Associate offices.

We monitor our operational activity daily, and we continue to align the size of our sales staff with current and future economic conditions.

One of the investment areas we mentioned last quarter is in healthcare IT. We are making steady progress and continue to add staffing consultants to focus on this opportunity. The aging U.S. population, the need to make our healthcare system more efficient, and the U.S. government's investment in health information technology presents a compelling opportunity for our IT business.

To summarize, for our IT and engineering segment we have seen an increase in consultants on-billing and a resultant increase in weekly sales since September 2009, reflecting the slow and steady economic recovery.

We experienced the normal seasonal drop off at the end of December and early January in terms of consultants on assignment, but have made steady progress since then. And the Oxford Index, our forward-looking quarterly survey, indicates our clients' anticipate increasing their temp hiring in the third quarter.

Based on the index and on our solid results into July, we will experience sequential revenue growth in the third quarter over the second, as well as growth over the third quarter of 2009.

I will now turn the call over to Mark Brouse, the President of VISTA staffing, our physician staffing business. Mark.

Thank you, Peter. It is fair to say that this has been a rough couple of quarters for the physician staffing segment of the industry. At VISTA, we have focused on building strong relationships with clients and physicians during the downturn with the goal of increasing our market share as the market turns up. We are guardedly optimistic going forward. We believe we have skimmed the bottom and started a gradual climb.

Here are some details. Revenue was $18.4 million in second quarter of 2010, a 21% decline year-over-year, but slowing to a 2% decline sequentially from Q1. Gross profit also suffered year-over-year with a 17% decline. However we saw a 5% increase sequentially this quarter over last. Much of this can be attributed to the hard work we have put into building and maintaining our gross margin, which was 34.1% in Q2. That's up from 32.5% in the same quarter last year.

We measure sold days, requests for coverage, to track our opportunity to place doctors and generate revenue. Our sold days were down 26% year-over-year in Q2. That decline slowed to a 4% sequential decline from first quarter to second quarter of 2010. In response to a decrease in sold days, we have focused on increasing the percentage of sold days we are able to fill.

Our fill rate increased to 57.5% this quarter, up from 53% in the same quarter last year. This number represents one of the most dramatic shifts in our business. Throughout the history of locum tenens fill rates have hovered at around 30%.

We see this as a fundamental change in the business, made possible by more effective processes and expert staff with an improved ability to match available physicians with practices in need. Like the rest of the locum tenens industry, our specialty mix is shifting away from high bill rate specialties such as radiology, anesthesiology and surgery, and two lower bill rate primary care specialties.

This is having an impact on our average hourly bill rate for locum tenens, which is down 3% year-over-year. Again, we believe we have seen the bottom, as this rate stabilized in first quarter and grew 1% in second quarter of 2010.

Another factor unique to the staffing industry is the negative impact of permanent conversions when a doctor accepts a permanent position with a locum tenens client. While this is a natural outcome of many placements, this effectively takes a physician out of our inventory and reduces the number of potential days we have to fill.

Conversion revenue has increased by 6% in the first half of this year versus last year. We see this as an ongoing sign of physicians opting for permanent jobs in an insecure economy, and we expect it to turn around slowly with the economic recovery.

In the meantime, the focus on permanent recruitment and placement reinforces our diversification strategy. Our physician search and consulting division continues to grow. We acquired Fox Hill Associates in October 2009 and added seven experienced professionals to this team.

They've made a significant contribution and helped us create a presence in the important upper Midwest region with our new Milwaukee office. On Assignment's recent acquisition of the Cambridge Group brought two more experienced physician recruitment consultants and has strengthened East Coast presence. This division grew revenue 98% year-over-year in the second quarter of 2010.

Our international placements division is also making great strides, strengthening the VISTA brand. It has particularly attracted physicians looking for one agency to support all their career options. We have opportunities in many specialties throughout Australia, New Zealand and Bermuda, and continue to grow even in the tough start of winter Down Under months of May and June. Our gross profit was up 281% in Q2 2010 versus the second quarter of 2009.

Looking forward, we agree with staffing industry analysts' most recent healthcare staffing growth update. They've predicted hospitals have cut contract labor expenses about as much as they can, but that hospitals will remain very cost conscious, and increases will be slow in coming. We're seeing the first signs of an uptick among our national account clients.

These are our largest clients, primarily large hospital systems and integrated delivery networks. Interestingly, these clients were also the first to tighten their belts and do without supplementary staffing when the economic crisis began. Based on recent discussions with top level leaders in these organizations, we know that recruiting and retaining physicians is again their top strategic priority.

The increase in fill rate I discussed earlier plays in here as well, as a higher percentage of requests for coverage of filled healthcare organizations, particularly large complex organizations, will gain greater confidence in locum tenens as a reliable strategic staffing option. Leadership at these organizations has started to recognize that flexible strategic physician staffing is going to be critical as the physician shortage intensifies, and as healthcare reform dries up the demand for access to care.

Locum tenens is a natural part of the solution to the mal-distribution of physicians. And we know from experience that having flexible work options like locum tenens keeps physicians in the workforce longer. We see a rekindled interest in building partnerships and strengthening contracts from these clients.

Total sold days with our National Account Clients have trended up gradually this entire year, and even more significantly the pace at which we are booking future days with them has increased 16% in the first half of the year.

That said we have no doubt that the challenges will continue across healthcare staffing. However, we are guardedly optimistic that we will see slight improvement in the third quarter.

I'll now turn the call over to Jim Brill. Jim?

Thanks, Mark. As Peter mentioned, consolidated revenues for the quarter were $104.5 million, up 2.6% from the second quarter of 2009. There were approximately 64 billing days in this quarter, 63 in the first quarter, and approximately 64 in the second quarter of 2009.

However, for Nurse Travel, there were 91 billing days this quarter, 90 last quarter, and 91 in the second quarter of 2009. And the quarter included about $2 million of revenue related to a labor disruption of one of our customers.

Foreign currency had about a $300,000 negative impact on revenue relative to last year's second quarter, and a $500,000 negative impact on revenue relative to last quarter.

Now let me address some of the variances and their related explanations to the extent Peter or Mark has not. In the physician business, bill rates and bill pay spread increased from the first quarter, while the bill pay margin was down. Relative to the second quarter of 2009, the bill rate, bill pay spread, and bill pay margin all decreased.

In Life Sciences, the bill rate increased 3% and the bill pay spread increased slightly, but the bill pay margin was down from the first quarter. The bill rate was down slightly and the bill pay spread was down about 2% from the second quarter of 2009, while the bill pay margin was down slightly.

In Allied Healthcare, the bill rate and the bill pay spread relative to the first quarter were up about 3%, and the bill pay margin increased as well. Relative to the second quarter of 2009, Allied Healthcare's bill rate was up 5% and the bill pay spread and the bill pay margin expanded.

Peter addressed the Nurse Travel and IT rates. Conversion in direct higher revenues totaled $2.8 million in the quarter, or 2.7% of revenue as compared to $2.2 million or 2.2% of revenue in the first quarter and $1.9 million or 1.9% of revenue in the second quarter of 2009.

Total SG&A expense for the second quarter was $32 million or 30.6% of total revenues, which is up from $29.8 million or 31% last quarter, and $30 million or 29.5% in the second quarter of 2009.

The increase from last quarter is in part related to an increase of $600,000 in equity based compensation, $300,000 in severance expense, an increase in commissions related to increased revenue, $100,000 in acquisition related expenses and $700,000 associated with Cambridge.

Also included in SG&A in the quarter is $400,000 in amortization and $1.5 million in depreciation. Our operating income was $3.3 million or 3.2% of revenues for the quarter, compared to $1 million or 1% of revenues last quarter, and $3.4 million or 3.4% of revenues in the second quarter of last year.

Our tax rate for the quarter was 46.6%, and we had net income of $900,000 or $0.03 per diluted share. We believe it's meaningful to compare EBITDA and adjusted EBITDA when comparing the current quarter's results to prior quarters. As outlined in today's press release, EBITDA for the quarter was $5.3 million.

Excluding equity based compensation expense of approximately $1.9 million, adjusted EBITDA was $7.1 million or 6.8% of revenue. Adjusted EBITDA was $4.4 million or 4.5% of revenue last quarter, and $7.5 million or 7.3% of revenue in the second quarter of 2009.

We ended the quarter with cash and cash equivalents of $30.5 million, which included using $5.4 million to acquire Cambridge. This is up slightly from $30.3 million last quarter, and we generated $8.1 million in cash flow from operations.

CapEx was approximately $1.5 million, up from about $1.3 million last quarter and up from $900,000 in the second quarter of 2009. Net accounts receivable was $51.2 million at the end of the quarter, and day sales outstanding were 46 days, down from 48 days last quarter, and even with the second quarter of last year.

Now turning to productivity, which we define as quarterly gross profit generated per staffing consultant. For the second quarter, we averaged 619 staffing consultants, and gross profit per staffing consultant was $57,000, up slightly from the second quarter of 2009, and up from $53,000 in the first quarter.

The Life Sciences segment generated $79,000 in gross profit per staffing consultant, down slightly from last quarter. The Healthcare segment generated $51,000 in gross profit per staffing consultant for the quarter, up from $44,000 last quarter. The Physician segment generated $77,000 in gross profit per staffing consultant for the quarter compared with $68,000 last quarter. And the IT & Engineering segment generated $47,000 in gross profit per staffing consultant for the quarter, compared to $44,000 last quarter.

Looking at the third quarter revenue expectations, it continues to be very difficult to estimate what will happen to revenues because of the worldwide economy. So given that backdrop, based on LIBOR markets not getting any worse than they are today, and normal seasonal trends we currently estimate consolidated revenues of $111 million to $115 million for the quarter ending September 30th 2010.

This estimate includes $1.3 million in revenue related to Sharpstream, our recent acquisition, and $2.2 million in Nurse Travel related to labor disruption at one of our customers. We are estimating consolidated gross margins of approximately 35%, which includes an increased margin related to the labor disruption business, SG&A of $33.7 million to $34 million, which includes approximately $800,000 at Sharpstream, equity based compensation expenses of approximately $1.9 million, approximately $500,000 in amortization of intangible assets, and depreciation of about $1.5 million.

We estimate net income of $1.8 million to $2.5 million, and earnings per share of $0.05 to $0.07 with an effective tax rate of about 47%. Adjusted EBITDA is estimated to be in the range of $9 million to $10.2 million.

Now I'll turn the call back over to Peter for some closing comments before we open up the lines for questions. Peter.

Thank you, Jim. We believe that we are well positioned to take advantage of what we believe will be a historic, secular and cyclical growth for the staffing industry over the next three years to five years. While the entire On Assignment team is very proud of our performance in this difficult economic environment, we remain focused on regaining our peak levels of profitability.

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 like to now open the call up to participants for questions. Operator.

(Operator Instructions) Your first question is from the line of Tobey Sommer of SunTrust Robinson Humphrey.

Hi this is Frank in for Tobey. Wanted to talk about the life science business. Can you give us any color in terms of the end user environment? There had been some weakness there. How much visibility do you have in terms of demand in that segment?

The average length of assignment tends to be three months to five months. What we've seen recently is that starts for each week are exceeding terminations. We are seeing greater strength -- through the first six months of the year there was greater strength in what we call our commercial customers, the food and beverage companies, the personal care companies, the petrochemical, agricultural companies. But recently we've seen a little pick up in demand from the larger pharmaceutical companies.

Biotech had been suppressed because of the funding drop that had occurred in 2009. And it's not to prior levels of funding, but we are starting to see progress in Biotech as well.

Okay, great. And on the IT & Engineering side, you mentioned a strong environment kind of across the board there, a nice increase in billable, On Assignment. Any color on the hiring environment, or your ability to get new workers and your -- your feeling is on kind of headcount at this point?

You know, Frank that's where we excel is in tight resource environments. We are a world-class recruiting organization, so in environments where fulfillment is more of a challenge than orders we grow faster. And I think that's indicative of what you are seeing. We grew 27% in the second quarter, and we are telling you that -- we gave you guidance that we are going to be around 40% for the third quarter year-over-year.

And so it's always a challenge to find the type of skills that we place, but we're a world-class recruiting organization and we focus more on recruitment than we do on sales. So this is the type of environment we like to operate in.

Okay. And the last question here is about sales. In terms of your sales staff, that's increased nicely. I think you mentioned 344. In terms of coping with demand and capacity there, how do you view yourself?

Well that number, when we talk about staffing consultants, that's both sales people and recruiters. But we are adding each month where we can see growth. And it's a little -- the headline number is a little misleading as it relates to absorption of excess capacity because some of the growth in headcount at Oxford for instance has to do with aggressively expanding our healthcare, IT initiative or re-launching our Centerpoint product offering.

So we've had a fair amount of growth in those areas that have nothing to do with people are tapped out, and we have to hire more people who want to grow.

Great. Thank you very much.

You're welcome.

(Operator Instructions) Your next question is from the line of Jeff Silber of BMO Capital Markets.

Thanks so much. Wanted to focus on gross margins. You guys have done a terrific job increasing gross margin in a real tough environment. And it looks like the guidance you're giving for the third quarter is a continuation of that. Can we get a little bit more color how you're able to do that and how long do you expect to continue to do that?

Yeah, Jeff, a couple of things; one, the margin expansion has been driven by multiple factors. One is mix, our fastest growing segment, and second-fastest growing segments happen to be our highest gross margin businesses. And the division that's shrunk the most, nursing, is our lowest gross margin business.

The second thing is that perm placement fees and to a smaller extent, conversion fees have started to pick up, and that's a bigger percentage of total revenues than it has been previously.

The third thing that I would point out is that the Sharpstream acquisition will be very expensive to the gross margin permanently for the Life Science Group. It could move the consolidated life science margin anywhere from 100 basis points to 200 basis points permanently.

And finally, the team has just been -- you know, we have the privilege of being able to execute this strategy, because we look more like Robert Half than we look like Manpower; we are just not a box seller of human capital, and we respect every order, and we've been very, very successful in having our clients pay us for a job well done.

Jeff, one other item that I mentioned was, as you saw and as I had estimated, the nurse travel gross margins are very high as a result of this labor disruption business. So that's --.

That's a one-time event.

Right. True for the second quarter; it's also true for the third quarter, but to the extent that goes away, the gross margins will be more normalized in that business.

But there'll be, even stripping that out they will be expanded over the second quarter of 2010.

All right, good. That's a great help. I appreciate that. In the remarks about the locum tenens business, you had talked about fill rate improvement and gave us some benchmarks how the fill rates have been tracking relative to history. I don't expect you have all that detail in front of you regarding some of the other segments, but I'm just wondering generally how that -- how the fill rates there compare to other segments.

Is there anything that you can learn from what you've done, improving fill rates of locum tenens and transfer that to the other segments?

Right. So let me see if I can just kind of give you approximations. I think that you would see fill rates at Oxford, our IT group, being substantially similar if not a little bit higher than what you see at the physician group because we scrub the order book very tough.

We just -- we won't put every order in the book. Unless we've got confirmation that the customer has hiring authority, budgeted dollars for it, they're prepared to interview the candidate, we don't put it in our order book.

With regard to Life Sciences, again, we scrub the book but we compete with a different set of competitors. So at times we are submitting blind resumes. So I would tell you, the fill rates probably in the 30%, 40%. And then on the nursing side, I would tell you, you've got to bifurcate it, and it depends on whether it's our retail business or whether it's working through a BMS like Broadlane or somebody like that.

If it's our retail business, which is the vast majority of our revenues, we have a very, very high fill rate. If its commodity work that's through a Broadlane or a Comforce or a Medfinders, they show that to the world, and the fill rate typically is below 20%.

Okay, great, that's helpful. And again in terms of the improvement that you've done in locum tenens, anything you can transfer to the other segments, or is locum tenens such a different animal?

No, I mean one of the things -- and Mark, why don't you comment after I finish? One of the things that we have tried to do through our acquisition strategy and the acquisitions is shared best practices and not just use that as buzzwords.

I mean, Mark has shown how specialty focus by teams of recruiters helps with fill rates. We've helped Mark with his margin by making sure that we fully understand all the costs that go into the gross margin on the front end versus when the assignment's ended.

But we are -- we are learning from one another. I mean, we are making that -- we won't name the customer, but we're making a joint bid right now, and Mark's group is weighting the coordination of all the marketing materials.

So we are getting those soft synergies, where industry knowledge is being shared across the enterprise. You want to add anything, Mark?

Yes, really when we -- when we joined On Assignment, we took advantage of the opportunity to do some best practices with some of the other divisions. And so, for example, on gross margin we found that there are really two elements to improving your gross margin; one was information and the other is discipline.

And if we can keep our people highly informed about the outcomes of the kinds of transactions they are creating, then we can hold them accountable. We can give them the discipline to negotiate effectively. And it's worked very well in terms of raising our margin some 300 basis points since we were acquired.

The same is true on the -- with the fill rate, where we bring greater focus on the needs of individual clients so that it becomes critically important for us to meet a client's need. And as a result, we've seen those fill rates climb dramatically.

And you know, Jeff the other thing I'd also like to add is that we have -- about three months ago, we appointed Katie Abby who was one of the founders of VISTA to head up our nursing practice, and she's taking some of the best practices from locums and applying it now to our recruiting efforts over -- and sales efforts over on the nurse side. So we hope to see some improvements there as well.

All right, thanks, that's very helpful. Thanks so much.

You bet.

There are no further questions at this time. Presenters, do you have any closing remarks?

We appreciate your time and attention, and look forward to reporting our third quarter earnings results.

This concludes today's On Assignment second quarter 2010 earnings conference call. You may now disconnect.