Kforce Inc (KFRC) 2002 Q1 法說會逐字稿

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. If you would like to ask question during this time, simply press star, then the number one on your telephone keypad, and questions will be taken in the order they are received.

If you would like to withdraw your question, press the pound key. Thank you.

I will now turn the conference over to Michael Blackman, vice president of investor relations. Mr. Blackman, you may begin your conference.

Good morning. Welcome to the KFRC's first quarter confernce call. On the advice of legal counsel, I read to you the following:

Certain statements made during this call relate to the future results and events and are otherwise forward-looking in nature. Such statements are based on the company's current expectations. Actual results or events from the future are subject to a number of risks and uncertainties and may differ materially from those currently anticipated or desired as a result of a number of factors, including those risks and uncertainties that have been or will be identified from time to time in the company's reports filed with the Securities and Exchange Commission.

Additional discussions of these and other factors affecting the company's business and prospects are contained in the company's filings with the Securities and Exchange Commission. Listeners are cautioned that any such forward-looking statements are not guarantees of future performance and that actual results and events may differ from those indicated herein. Such differences may be material.

I would now like to turn the call over to Bill Sanders, our Senior Vice President and Chief Financial Officer. Bill?

And then Dave Dunkel, our CEO, will provide you his comments.

You can find additional information about KFRC in our 10Q and 10K filings with the SEC. Press releases and the aforementioned SEC filings are also available on our Web site, KFRC.com.

Our press release contains two additional pages of key statistical data in addition to our normal press release.

The positive spin on our financial results for the quarter can be best characterized by the adage of CFO's that revenues must first stop going down before they can go up. Revenues for the quarter have begun to stabilize. Our key performance indicators and sentiment indicators have a positive trend.

That said, revenues continue to be under pressure because of the macroeconomic environment. Revenues for the first quarter were 131.7 million, which represents a sequential decline of 1.4 percent and a year over year decline of 32.6 percent.

First quarter revenues and revenues for all quarters presented were increased to include expenses paid by us and billable to our clients in accordance with the FASDE staff announcement D103. Billable expenses included in revenues for Q1 were $2.8 million.

32:39

These acquisitions, netted against our Gold Legal Staffing and educational training units and closed e-solutions business increased revenues for the first quarter by approximately 1.8 million net year over year and $4.1 million net sequentially.Much of this drop was a result of the lower GP from acquired companies.

Every quarter we do a volume rate analysis.

The latest transfer for our IP business unit indicates lower rates of decline with stabilization possibly occurring during the second half of 2002.

Historically, the fourth and first quarters are the best quarters for FNA. During the first quarter FNA appeared to stabilize, and search placement volume also showed some indications that the bottom may not be too far away.

Lastly is the health and life sciences group, which now represents 31.8 percent of revenues versus 17.6 percent for the same period of 2001.

32:39

Unlike the other two business units, we have good visibility and benefit from strong market dynamics in HLS. Particularly noteworthy is that nursing revenues wee up again for the quarter and appear to be on a stronger trend line. In April, first-time nurses orientations were the highest two weeks back to back ever. This indicates more nurses are in the pipeline. In the second quarter we will begin to reposition our nursing footprint. Short-term, this may negatively affect growth rates.

Also noteworthy is the lower GP percent and scientific staffing due to the quality of business in our recent acquisition. The acquisition is now fully integrated and showing some stability in April, and we expect GP improvement as the year progresses.

Our current trend indicates that HLS will continue a growth pattern for 2002, with pharmaceuticals being particularly strong.

While we were early in realizing the benefits of the cost-cutting process which we began 18 months ago, we concluded that this extensive process in early January of this year with a complete restructuring of [unintelligible] management and combining our IT and FNA offices. In the process we closed ten offices and consolidated those locations with other operations in the same geographic area. We also completed the total overhaul of our corporate platform. We are now only making tweaks to continue to improve productivity and leverage efficiency enhancement to reduce SG&A expenses.

One of our focuses has been on strengthening our balance sheet.

36:39

BSO continues its decline to a record of 38.8 days, down almost five days from last quarter of 43.2 days.

Given the early indications of a potential turn in the business cycle, we continue to plan for stabilization and invest in capacity in our search business.

In the second quarter of 2002, we believe HLS will continue to grow in revenues and possibilities. FNA should stabilized but experience some issues with seasonal factors and the possible Arthur Andersen impact. IT has been weak and continues to be unpredictable, but should begin to stabilize later in the year.

The firm is also searching for a bottom that may be sooner rather than later, based on April data.

Overall, we believe second quarter 2002 revenues should show some stabilization and may be in 125 million to $135 million range.Revenues near the $140 million per quarter level is our break even point.

While the near term outlook is cautious, we do see signs of life in the numbers.

38:39

We are most pleased with our restructuring and happy to report that our reallocation of resources should produce productivity gains and drive higher operating leverage as revenues increase.

I will now turn it over to our CEO, Dave Dunkel.

Thank you, Bill.

During the first quarter organizational changes completed at the end of the fourth quarter began to yield positive results. Our cross-selling activities across all service offerings is at an all-time high. This has resulted in new customer relationships for many of our locations and the opportunity for more significant account penetration.

Our customer footprint has been and continues to be adjusted towards industries that offer the greatest prospects for both short-term and long-term growth. We are doing this while still keeping a close relationship with our long-term customers in technology, telecommunications and other industries that have been negatively affected by the recession.This effort has helped to energize many of our account managers to increase their outbound activity and improve their technique. We expect that this initiative will yield increasing results as we move into the second half of '02 and into '03.

We are beginning to selectively hire in certain markets where performance is improving and our productivity level supports additional head count. We are also moving resources internally to hire growth service offerings to enhance revenues.

As Bill mentioned, during the quarter the rate of IT declines in flex slowed, and it appears we are approaching a period of stabilization as we move into Q2. FNA too is beginning to stabilize, notwithstanding normal seasonal factors. Within HLS pharmaceutical had a great quarter.The assimilation of the acquisition in scientific is complete and we're seeing stabilization there.

At KFRC we have a seasoned management team with extensive experience in managing through these cycles.Our cost cutting is now complete and we are managing to maximize our operating leverage as revenues improve.

At this time I would like to extend my personal thanks an those of the board of directors to all the hard-working field and corporate associates who have persevered through these difficult times while delivering exceptional customer service. We appreciate your efforts and continued commitment to the success of KFRC.

Melissa, at this time we will open up the call to any questions.

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

Your first question comes from the line of Randy Mehl with Robert W. Baird.

Good morning, Dave, Bill and Michael. Nice progress in the quarter.

I would say a small amount on both of those. It took us a little bit longer to integrate the acquisition from increasing their GP percentages as well as some of the other tasks that we performed or activities that we completed during the quarter.

So all those components put together, I still feel good about where SG&A is.

Randy, this is Dave. Unintelligible] interrupt quickly that it's probably in our original expectations we thought we'd get a little more out of the search group. And if you look at it, I would say the impact of our original expectations in search probably is also a piece of that.

Okay. Good. And then congratulations on getting the restructuring behind you here.

Will the 5 million in savings be recognized - I know it's an annualized number. Will it be recognized evenly throughout the remainder of the year? And how much of that would have been, how much was saved in the first quarter?

The 5 million relates primarily, to a large extent, anyway, to people.But that happens pretty much evenly over the year.

Okay. And one more question here. You mentioned some changes in the HLS side. It sounds like some margin improvement initiatives. What exactly are these actions that you're taking in the quarter and maybe you could quantify or at least give some time frame on the impact.

Randy, this is Dave. We've been, obviously these has been a lot of activity in the whole nursing space, and we have been spending quite a bit of time the a marketing level and operational level in studying that space and identifying where the opportunities are going to be going forward. And clearly there's been an influx of competitors.And I would characterize it as a tweaking of the business model, adjustment of the business mix that we will be embarking on here in the next several weeks. We'll carry on for the next couple of quarters.

Okay. And just one point of clarification on the guidance. HLS growth, is that sequential as well as year over year that you're talking about?

The guidance of - I didn't give any guidance on HLS alone.

You said HLS will continue to see growth.

Yes.

And does that mean sequential as well as year over year?

You bet.

Thanks a lot, and also really appreciate the added detail in the press release.

Your next question comes from the line of Rick [unintelligible] with Columbia Management Group.

Good morning. Two questions. Last quarter on HLS we talked about the internal growth, the organic growth of 20 percent. You didn't hit that this quarter. Are you still committed to that for this year or are you backing off that?

No, we're not backing off of that, Rick. We do have seasonal activity that does influence us, though. Since our nursing is in hot weather states, we have the snow bird effect where we have more activity in certain periods than we do in others.

We also have some seasonality to our scientific staffing group, where a lot of those companies close down towards the end of the year.

So we have some things that drive us to fits and spurts, if you will, in the growth patterns. No, we still continue to believe in our prior guidance for the overall group for the year.

What are the implications for the second quarter? I guess, you know, you've got to average more than 20 percent for the balance of the year. So does that mean the second quarter gets the 20 percent or what are your plans?

We don't, we haven't been giving guidance for each business unit by quarter. It's difficult enough to get the whole company to move in the right direction at one time in these low markets.

I will say, though, that the summer - different units of HLS move at different speeds and different fits and starts. So, yes, since we didn't hit it for the first quarter we expect more growth in the last three quarters is the best answer I can give you.

And can you talk about your thoughts on acquisitions and what the pipeline looks like?

This is Dave. We're continuing to pursue acquisitions. We have a pipeline of activity. We are looking at them obviously with very careful scrutiny.We still have a number of prospects in the pipeline and the pipeline as we go into Q2 and into Q3 we expect some of those will fall off and some in fact may move to the next level of due diligence.

So it is an area that we are focused on. However, I wouldn't consider us to be an acquirer, a consolidator, if you will, as a primary source of growth.

That implies that you're willing to use your stock in these levels and that's a little concerning to us.

So those that are looking at it for the long term are certainly more inclined to consider stock.It's very difficult for us to play in there.

We're not looking for dilution, nor are we going to in any way be careless with the value of our stock. But I would use ERS as an example of ways that we could go away doing that with a collared approach in using the stock and considering the value that we're giving up. Accretion of course is still very important to us and we're not looking to do any diluted deals.

Your next question comes from the line of John Mahoney with Raymond James & Associates.

Hi. I just have a couple of questions. First of all, with regard to the perm business, is that likely to continue to decline sequentially in the second quarter?

John, this is Dave.

You know, it's a little bit of a wile card. I believe the term has been used [unintelligible] is lumpy. I don't know that I would call it lumpy. Unpredictable I think would be a good call. You know, from one week to the next, one month to the next it changes. We were encouraged at various times in the first quarter that we thought we were going to see better search numbers. I would tell you at this point that the rate of decline has clearly slowed. We're either approaching bottom or have hit bottom. I'd be very hesitant to make a call on search for the quarter other than to say that I wouldn't look for it to vary too much from what we did in the first quarter.

And the other question is more for Bill.You know, 35 percent on the loss basis here. Is it going to be 35 if we lose money again, as you indicated the second quarter?

We chew it up every quarter, of course, as we have more information. But our best guess at the moment is we will be around 35 percent for the year unless something highly unusual happens.

And just, you were talking a little bit about the seasonality of [unintelligible] Health and Life Sciences. You talked about it growing sequentially in the second quarter. What would your expectation be for the third quarter for that business, given the seasonality and the organic, you know, it's kind of normal growth? If it was just flat sequentially, it would still show 23 percent year over year growth. If it was flat Q2 to A3, assuming just like a two percent sequential increase in the second quarter.

Well, we expect it to continue to grow. Now, that doesn't mean all units will grow at the same speed or at the same time. Pharmaceuticals really jumps around in its growth spurts. Scientific has some seasonality to it. And now that nursing is significantly in three states, it will have some seasonality to it.

So it's going to jump around. But we haven't given a specific percentage for that unit by itself and are not really prepared to do that at this point, John.

Your next question comes from the line of Jay Wigdale with Lakefront Partners.

Has that changed?

Well, Jay, it continues, the break even point continues to come down from higher percentages. That includes maintaining a search capacity that is in excess of what we are currently doing, because we think that is the prudent thing to do for the future. So we're maintaining capacity in certain areas, particularly in search, for the turnaround.We think that we are not all that far off from the break even point.

And then secondly, addressing an earlier question as it related to potential acquisitions, could you maybe go through your banking arrangement and what restrictions that you have as it relates to that in terms of making acquisitions?

Sure. We have two primary constraints when you talk about that. One is, of course, our board, and the second is the banks. The banks have restrictions from the standpoint that they need to participate and review acquisition activity prior to consummating the deal. So if that's what you're suggesting, yes, there is a requirement within the bank agreement for them to review that activity.

As long as -- we are not in violation of any covenants and no covenants come into play until we borrow more money than would be available to us under certain benchmarks on receivable bases. And therefore, since we do not borrow more money than is allowable under a percentage of our receivables, we do not have any covenants.

Yes. Scientific Solutions we purchased in December of last year, had a very low GP. In fact, when it came in I think it had an 18-19 percent GP at its prior location. And did a type of business - part of it was a type of business that was not within our normal footprint. And therefore we are starting to increase that - the quality of the business and the type of business that fit our footprint and brings that GP margin up to the 26-27 percent that we expect. And we think that that will happen through this year and into next year that we will improve that business.

That's why we were able to buy that unit at such an incredibly low price.

Are you - when you say it wasn't in your normal footprint, I mean, are you trying to establish [unintelligible] vertical with this?

No, they were just doing a type of business that - a part of their business was not the type of business that we do and that we believe should be within that footprint.

What do you see, what's the game plan if there is no pickup in revenues and we just kind of plod along the bottom here over the next couple of years? What's the strategy?

Dave, maybe you could address that.

That's kind of, it's an interesting question. By definition I'm obviously much more optimistic. You know, we as a management team don't think about maintaining status quo and we believe that we can affect the outcome.

If you're saying total market doesn't grow, then I would answer by saying that we expect to be able to compute away market share and grow the business. If the overall market declines, then I would tell you that I'm going to compute away market share and stay even. If the world ends, then I'm going to tell you I know where I'm going.

I mean, I don't know how to answer the question other than that. I think the market is showing signs of life. I retain confidence in the overall economic picture, and I think that we're going through the back end of a cycle.

I would characterize where we are today in comp to '90-'91, and the term that's been used is the jobless recovery. I think we've seen that by and large many of our customers have done a lot of what we've done, which is get the bare bones, hold on to their best people and delay any hiring activities until such time as they get confident and see actual revenues layering on top of their infrastructure, and, as they do, then begin hiring flex. And I think we're approaching that point.

So I remain optimistic, and we haven't developed a scenario that says that the world is going to stay exactly the way it is in the next couple of years.

Your next question comes from the line of Randy Mehl with Robert W. Baird.

Hi. A quick follow-up here.What is that for the second quarter? Were you saying a three to five cent loss or were you saying an eight to ten cent loss for the second quarter?

Three to five cents for the quarter, Randy.

And then you mentioned something about an Arthur Andersen impact. Is that a positive or a negative impact for you?

Unfortunately it's going to be a negative impact, particularly in F&A search.And therefore a lot of our clients are sifting through those resumes as another variable that affects F&A search, with 50, 60 percent of our search placement. And therefore we believe that that may have a negative impact upon us.

This is Dave. I want to add something. Obviously the other side of that is that those audit clients are going somewhere. It's our expectation that some point in the future there will be a need for additional head count at the remaining bug whatever you want to call them any more. So the outcome clearly is very much up in the air. But near term this flood of supply in the market clearly will have an impact on us.

And there's no, the whole trend to move business away from auditors, non-audit business away from auditors, you're obviously not seeing any positive benefit from that?

I wouldn't say that we're not seeing any positive benefit. I would say that it's clearly not, it's not at scale yet, would probably be the best way to describe it. I think a lot of companies have made the decision that they're not going to buy non-audit services from their current auditing firms. Whether or not they choose to go to the remaining Big Three or to go to other firms that offer high level financial people, either permanently or flexibly, has not yet developed into a discernable trend. Clearly and logically it makes a lot of sense. And I think once we remove the noise of the economic client and start to develop some patterns we may benefit from that as well.

And then a small detail question here on the pharmaceutical business. Obviously good, very good results there. When you look at the hours, it looks like it was a very small increase sequentially in hours. And I'm just wondering if there's a seasonal fall-off that you see in that business in the first quarter or if there's a natural flowing.

Randy, pharmaceutical is made up of, their business is made up of a lot of large clients and larger projects, and that really is volatile from the standpoint that it can move around in fits and spurts. It also has holiday impact in there, the two periods.

And so I don't see any troubling trend there, if that's what you're asking. Actually, we have very high hopes and everything that we see suggests that they will fulfill those high hopes for this year.

Thanks very much. I appreciate that.

Your next question comes from the line of John Mahoney with Raymond James & Associates.

I hate to do this, but I just want to clarify on that last question. Bill, the last person asked if you expected to make three to five cents or lose three to five cents in the second quarter, and I think you answered you would make. But earlier in the call you said your break even was 140 million in revenues.

Yes, John, he asked me would it be an additional five to three cent loss or would it be just a three to five cents loss. And our guidance is three to five cents loss at 125 to 135 million in revenues for the quarter.

Just out of curiosity, why are you guys providing guidance in the call but not in the press release?

No particular reason.

Good morning. Thanks.

I'm wondering if you could talk a little bit about the general landscape in the IT market now and the competitive landscape in particular, given that that business has been in kind of a secular decline for, I don't know, call it 18 to 24 months. Whether you can give us some sense, for example, of what your head count or what your office count looks like in the IT business specifically now relative to where it might have been at the peak, and whether you feel like that overall market is still sort of in an overcapacity situation, or if we've finally kind of flushed out enough of the smaller players so that business should start to pick up for kind of the remaining participants, assuming that technology comes back a little bit over the next 12 month or so.

Martha, this is Dave. I would say if you look at us today and you look at our total office capability that IT is represented in virtually every location that we have.

Looking at it from the macro picture, I don't think we've lost a whole lot of capacity. IT clearly has gone through in the last 18 months a radical change. Our sense is to a large degree that it's a reflection of the trifecta, if you will, which has been widely publicized and written about, of having the Web and Y2K and all of those things converging.

We still are very much of the belief that IT is at the heart of our staffing business. We do have belief that IT will recover. There's clearly a tremendous amount of capacity that has come out of staffing IT. There has been a shift, I think, in the customer makeup and in the nature of the IT business itself. Telecom was a big consumer of IT services and we've seen many of the large buyers of IT staffing have reduced their IT contract head counts 50, 75 percent.

Mitigating that on the other side are clients that are in other industries that are prospering. Farm, of course, health care. And even certain manufacturing industries that are starting to recover, bringing on additional IT resources.

If you look at it from a skill set standpoint, there's been clearly a discernible shift towards infrastructure. Within our end clients, traditional clients there's still a demand for Web skills and Java, and some of the traditional productivity-generating customer service-focused applications.

So it's our belief that IT will return to a period of growth, and more likely than not will look more like the late Eighties and the early Nineties, where it's more of a consistent year over year growth. Whether it's eight to ten percent or 15 to 20 percent remains to be seen. But our bias is on the higher end of that range, because we believe that technology is still very much a part of the productivity and the customer service plans of most of our customers. And the capacity that has come out of the system will have a major impact on those that are remaining.

In our view, the IT staffing companies that have survived this, if you will, are going to benefit substantially when it turns the other way.

That's really helpful. Thanks.

One other sort of philosophical question, if you can talk a little bit about what you would anticipate happening in search relative to flex. You've addressed it, kind of touched on it a few times during the call. But given that perm tends to benefit from, call it, a strong economy as opposed to a recovering economy, would you anticipate if you start to see flex get a little bit better over the next couple of quarters that it takes, you know, well into the fourth quarter or maybe eve nearly 2003 before you start to see real sequential improvements in search? Or is there some indication that you think perm and flex are closer together in terms of the timing of the improvement and when they respectively start to rebound?

I would tell you that traditionally the lag is a couple of quarters in which flex would turn and search would follow. The unknown, of course, is the short memories or the long memories of those that just went through the big IT ramp-up of skills and the hiring that took place in 2000. It's difficult to measure just how far the benches have been decimated and how willing they'll be to bring on what I would consider to be a permanent staff.

My sense is that it has changed, and that there is a recognition that they will want to hire permanently in conjunction with flex. I think the fire drill, if you will, or the emergency and the irrationality of the market to hire everybody permanently and hold onto them, given the market conditions, I think that has substantially abated. And the staffing plans are much more strategic and looking at the mix of how many are part of their core staff and how many are part of their flex staff.

So with that being said, I would expect that certainly no worse than a couple of quarters of lag and it may actually be even better than that.

At this time I would like to remind everyone in order to ask a question please press star then the number one on your telephone keypad.

I'm wondering if you can expand on some of the growth margin decline in health and life sciences business. I know you talked about the scientific business. But how about the nursing business and if you'd expand a little bit more on the slight growth margin weakness in the pharmaceutical business.

The flex GP for the nursing business is down, let's see, 110 basis points. I don't think there is anything really particular with that. It's down 30, 40 basis points due to some acquisition activity. But there's nothing unusual other than the normal activity that you would see in a weakening economy.

And what was the other one? Oh, pharmaceutical. Pharmaceutical, those are very large customers. And depending upon the large projects that we are involved in with those particular customers, it varies also all over the lot.

So nothing that has concerned us at this point in time other than general economic trends.

I would add on the health care nursing side, one of the things that we have identified is the mix of the staffing and that's one of the opportunities that we alluded to earlier, whether it's [unintelligible] and so forth. So we see some opportunities there and what we've discussed is adjusting our business mix, which also we think will have a positive impact for us going forward.

I think clearly supply and demand within nursing remains out of balance. You have this kind of an interesting dynamic tension between the reimbursement companies, either insurance companies or the government, trying to hold prices down. You have hospitals trying to hold prices down, and you have market conditions trying to force prices up. And then, in addition to that, you have legislation requiring nurse to patient ratios, which is also having an impact.

So there's a lot of really interesting market dynamics happening here. And those are some of the things that we've identified as opportunities as we position our nursing business.So the bias is up and not down.

At this time there are no further questions.

Thank you very much.

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