ASGN Incorporated
Q4 2009 Earnings Call Transcript

Published: 19 Feb 2010

[Operator:]

Good afternoon. My name is Christine and I will be your conference operator today. At this time I would like to welcome everyone to the On Assignment fourth quarter 2009 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) I would now like to turn the call over to Jim Brill, Chief Financial Officer; please go ahead sir.

[Jim Brill:]

Thank you, Christine. Before I 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 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 would now like to introduce Peter Dameris, our CEO and President, who’ll provide an overview of fourth quarter results. Peter.

[Peter Dameris:]

Thank you, Jim. Good afternoon. I would like to welcome everyone to the On Assignment 2009 fourth quarter earnings conference call. With Jim and me today is Michael McGowan, President of IT and Engineering Group. During our call today, I will give a review of the markets we serve and our operational highlights followed by a discussion the performance of our operating segments by myself and Mike. I will then turn the call over to Jim for a more detailed review and discussion of our fourth quarter financial performance, and our financial guidance for the first quarter of 2010. We will then open the call up for questions. The market we serve remain constrained in the fourth quarter, but where much more productive than any other quarter of 2009. Despite there being approximately three fewer billable days in the fourth quarter, consolidated revenues grew $1.9 on an absolute basis over the third quarter of 2009 and approximately 6% on a same number of billable day basis. Our absolute basis divisional sequential revenue growth in the fourth quarter was 11.7% for our IT Group, 1.6% for our Life Sciences Group and 14.8% for our Allied Healthcare Group. During the fourth quarter, Nurse Travel contracted 11% on an absolute basis and our physician group contracted 11.2% on an absolute basis. The severe economic downturn that occurred in 2009 affected all staffing firms differently, ironically those staffing firm with healthcare exposure were the most adversely affected. In addition, companies with the greater exposure to small and medium size businesses were more severally impacted as well. On Assignment, small and medium size businesses and the healthcare industry are important components of our business. Although, these components of our business are currently headwind to growth, albeit at a much smaller level we firmly believe as the economy continues to stabilize that each of these markets will be points of strength for our company. As we reflect back on 2009, we take great pride that our gross margins are at record levels. We generated $42.8 million in cash flow from operations before debt reduction and earn out payments. We reduced our term loan by $48 million. We payout the remaining $9.8 million due on our earn out obligations, we did not report a net income loss or take any restructuring charges, our adjusted EBITDA margin for the full year was 7.7% and finally our talented team remained intact. We firmly believe that by having preserved our gross margins, during this economic crisis, we will return to peak EBITDA levels more quickly than others. As we have often said, our main challenge in 2009 has been a macro economy issue. Going forward, what were once challenges to growth should be contributors to growth, much attention is and will be given to helping small and medium size businesses grow. Healthcare and biotech will not disappear in this country and the short term decisions made by many of our healthcare customers, out of necessity will not sustainable in 2010 and beyond. Looking more broadly, contract labor should perform very well in what appears to be a slower than normal economic and labor market recovery. This belief is based on the assumption that so many of the decisions that corporate America was forced to make in 2009 cannot be sustained long term. Employee staffing and productivity levels are at record low and high levels respectively and the average age of many employees is much higher than in prior periods. In addition, the payment challenges experienced by corporate America in 2009 will not be forgotten quickly and that mindset should be a big positive for the staffing industry. Of the 8.6 million jobs loss since the beginning of the recession, a good many were temporary. Our industry worked at the level to permit businesses to ramp employee headcount down quickly. The industry should now also work to permit businesses to ramp employee headcount quickly. Exiting this very difficult financial and economic crisis, our company has never been in a better operating position. As I stated earlier, gross margins are at record levels, three new practice areas have been launched and because our debt has been reduced by $48 million over the last year, we are now able to pursue strategic acquisitions. As we reflect on our financial and operating position at the beginning of this economic expansion period versus the last, we feel that a few comparisons to prior periods are informative

[Michael McGowan:]

Thank you, Peter. I’m pleased to report fourth quarter revenues for the IT and Engineering Group was $35.6 million and 11.7% sequential increase over the third quarter of 2009. This revenue increases in a reversal of the prior quarterly trends most recently being a 2% decrease in quarter three over quarter two. The improvements reflects monthly increases on our average weekly sales starting in September, 2009 and were the result of a significant increase in the number of billable consultants On Assignment. Some what offset though by continued decreases in our average bill rates. On a full year basis, 2009 revenues for our IT and Engineering Group or $138.1 million, a 36.9% decrease over the $218.7 million we realized in 2008. The decrease in revenues compared to 2008 was due a few billable consultants On Assignment, lower bill rates and decreases in bill expenses and conversion revenues. As we’ve discussed on previous calls, Oxford specializes on recruiting senior consultants and contractor in four technical disciplines

[Jim Brill:]

Thanks Mike. As Peter mentioned consolidated revenues for the quarters were $99.9 million, down 32.3% from 2008. There are approximately 61 billing days in this quarter, 64 in the third quarter and approximately 62 in the fourth quarter of 2008. However for Nurse Travel there were 92 billing days this quarter, 92 last quarter and 92 in the fourth quarter of 2008. Foreign currency had about a $700,000 positive impact on revenue relative for last years fourth quarter and $180,000 positive impact on revenue relative to last quarter. Now let me address some of the variances and their related explanations to the extent Peter or Mike has not. The travel nursing group, the bill rate relative to the third quarter was essentially flat and the bill pay spread as well as the bill pay margin expanded. The bill rate was down 6% from the fourth quarter of 2008 and the bill pay spread contracted. However, the bill pay margin expanded. The bill rate, bill pay spread and margin in Life Science was essentially flat with the third quarter. The bill rate was down 2% from the fourth quarter of 2008 as was the bill pay spread, while the bill pay margin remained relatively flat and Allied Healthcare the bill rate relative to the third quarter was up 3.5%, the bill pay spread was also up, but the bill pay margin was down. In physician staffing, we saw a slight decrease in the bill rate and the bill pay spread relative to the third quarter as well as fourth quarter of 2008. The increases in gross margin were driven primarily by a decrease in medical mall practice expense and an increase in direct higher fees. At our It and Engineering division, Mike mentioned that we saw drop in gross margin from last year which was driven primarily by a drop in the bill pay margin and a decrease in conversion revenue. Conversion in direct higher revenues totaled $2.1 million in the quarter or 2.1% of revenue as compared to $2 million or 2% of revenue in the third quarter and $2.9 million or 2% of revenue in the fourth quarter of 2008. Total SG&A expense for the third quarter was $29.6 million or 29.6% of total revenues, which is up from $28.5 million or 29% last quarter and $38.2 million or 25.9% in the fourth quarter of 2008. The reduction from the fourth quarter of 2008 was in part related to lower employee cost due to the reduced number of employees and $870 million reduction in amortization of intangibles related to the acquisitions. The increase from the previous quarter was in part due, insurance settlement gain were about $300,000 and positive adjustment to old works compensation claims of about $150,000, experience in the third quarter which did not reoccur in the fourth quarter. Also included in SG&A in the quarter is $1.4 million of depreciation and $1.3 of equity based compensation. Our operating income was $3.6 million or 3.6% of revenues for the quarter, compared to $4.3 million or 4.4% of revenues last quarter and $10.3 million or 7% of revenues in the fourth quarter of last year. Our tax rate for the quarter was 47.7%. Net income was a $1 million or $0.03 per diluted share. We believe it’s meaningful to compare EBITDA and adjusted EBITDA when comparing the current quarter’s results with prior quarters. As outlined in today’s press release, EBITDA for the quarter, was $6.5 million, excluding equity based compensation expense of approximately $1.3 million, adjusted EBITDA was $7.8 million or 7.8% of revenue. Adjusted EBITDA was $8.7 million or 8.9% of revenue last quarter and $15.6 million or 10.6% of revenue in the fourth quarter of 2008. We ended the quarter with cash and cash equivalents of $26 million, down from $35.1 million last quarter, while we generated $2.2 million in cash flow from operations during the quarter, we used $5 million to pay down our term loan and $4.8 million to make the final earn out payment related to our acquisition. CapEx was approximately $900,000, down from $1.1 million last quarter, and down from $1.9 million in the fourth quarter of 2008. Net accounts receivable was $50.2 million at the end of the fourth quarter, and day sales outstanding were 46 days, the same as last quarter, but down from 48 days in the fourth quarter of last year. Now turning to productivity, which we defined as quarterly gross profit generated per staffing consultant. For our fourth quarter we averaged 570 staffing consultants, and gross profit per staffing consultant was $58,000, down from $66,000 in the fourth quarter of 2008, but up slightly from the third quarter. Biosciences segment generated $78,000 in gross profit per staffing consultant, unchanged from the $78,000 last quarter. The healthcare segment generated $54,000 in gross profit per staffing consultant for the quarter as compared to $55,000 last year. The physicians staffing segment generated $75,000 for the quarter, compared $92,000 last quarter; and the IT and engineering segment generated $47,000 in the quarter, as compared to $41,000 last quarter. Looking at the fourth quarter revenue expectations this year, it continues to be very difficult to estimate what will happen to revenues because of the worldwide economy. So given that backdrop, based on labor markets not getting any worse than they are today, and normal seasonal trends which do not include the impact of the recent or future winter storms, we currently estimate consolidated revenues of $95 million to $99 million for the quarter ending March 31, 2010. We are estimating consolidated gross margins of approximately 32.4% to 32.6%, which includes the reset of employment taxes. SG&A of $29.4 million to $30.2 million including equity base compensation expense of approximately $1.3 million, approximately $600,000 in amortization, intangible assets and financing costs and depreciation of approximately $1.5 million. We estimate net income of $700,000 to a loss of $500,000, and earnings per share of $0.02 to a loss of $0.01 at an effective tax rate of about 47%. Adjusted EBITDA is estimated to range from $4 million to $6.3 million. Now I’ll turn the call back to Peter for some closing comments before we open it up for questions.

[Peter Dameris:]

Thank you, Jim. We believe that with a benefit of hindsight history will show that 2009 will turn out to be the most challenging year for the entire staffing industry. The gross and adjusted EBITDA margin that we reported today against such a back drop is the true measure of the strength of our company. While the entire on-assignment team is very proud of our performance in this difficult economic environment, we are now focused on positioning the company for accelerated growth coming out this recession. I would like to once again thank our many loyal dedicated and talented employees whose efforts have allowed us to progress where we are today. I would like to now open the call up to participants for questions. Operator.

[Operator:]

(Operator Instructions) Your first question comes from Jim Janesky - Stifel Nicolaus.

[Jim Janesky:]

A couple of questions around margins; when you look to the first quarter obviously there’s payroll resets, and then pretty dramatic increases in state unemployment taxes; we have seen that from everyone, but as we go throughout 2010, we should expect that the margins will go up, but they will be under some pressure because of state unemployment taxes; is that a way that we could look at it?

[Peter Dameris:]

That’s a fair analysis Jim. We are starting to tighten the margin profile back up in IT, that’s going to be a slower progress. It’s undeniable that it’s a very, very competitive marketplace. The Nurse Travel marketplace which thank God is only 9% of our revenue is probably the most price sensitive right now, and some of the larger competitors are really racing to the bottom. We feel that there could be some compression, potentially on our margin, but we don’t think it will show up because of the improvements we are making in another areas, as well as we’re hoping that conversion and additional emphasis on permanent placement will be a contributor to expanding the margin.

[Jim Brill:]

Jim, just one other thing to add on employment taxes; generally speaking over the course of the year employment taxes will tend to drop off. The big question I think will be whether or not the unemployment taxes continue to get reset upward through the year or whether the reset will not happen until sometime in the beginning of next year.

[Peter Dameris:]

Just grading the pricing, not strength, but just rational behavior in the markets we service. Locum’s IT, Life Sciences and even Allied Healthcare are manageable, but it’s pretty irrational right now in nursing industry.

[Jim Janesky:]

Longer terms however, obviously that’s going to depended up on the mix your IT and Engineering segment. If that continues to out perform then we should see margins expand, but I mean do you have a long term kind of goal for gross profit margins; is it over a 33%?

[Jim Brill:]

They are higher than they are right now, but I wouldn’t quote here; we’re not giving kind of full year. We are going to be Jim, sharing with you as I said kind of our five year plan later in this year with you, but as I said what I can’t share with you is we’re not planning on deviating from our gross margin profile significantly.

[Jim Janesky:]

Then a final question on operating expenses; the range that you gave from the first quarter is up from the fourth quarter. Are you making investments somewhere that would cause that to blip up for the year?

[Peter Dameris:]

I’ll go first and I’ll let Jim add. We have added a couple of people, and we are spending several hundreds of thousands of dollars with this outside consulting firm, building our five year growth plan. Jim, you want to add anything to that?

[Jim Brill:]

There also some bonuses that are included in this year’s plan that were not included in last year.

[Peter Dameris:]

Just normal cycle of how our audit and SOX expenses flow in the first versus fourth.

[Jim Brill:]

That’s true.

[Operator:]

Your next question comes from Tobey Sommer - SunTrust Robinson.

[Tobey Sommer:]

I think if I caught it correctly, you gave a lot of details in the prepared remarks, but you talked perhaps about sequential growth in the top line throughout the year. I was wondering if you could comment, are you seeing any lengthening of assignments or orders placed perhaps for longer lead time?

[Jim Brill:]

We’re actually Tobey seeing a shortening of assignments on the nursing, and we’re seeing just last overtime call work for the physicians right now, which is on the physician’s side not significant, but whereas traditionally we could assume that there would be a certain amount of overtime call work, but we’re just really not seeing that right. The Allied and the Life Sciences, I would say are progressing nicely and are stable, and on the nursing, the hospitals are trying to cut it down to the bear minimum and have the most flexibility of the shortest time period they have to commit to in order to get a traveler. So they’re block bookings, they’re trying to use per diem instead of a travel nurse. Mike you want to address the IT side?

[Michael McGowan:]

Tobey on the length of assignment it’s been five months for a quite sometime and is actually still is about that, so we really aren’t seeing much change in that. In terms of the lead time in your question, we’re starting to see a little bit more lead time, because some of the clients are improving capital projects, which are obviously more planned out longer term. So we’re starting to see some a longer lead time if you will, on when they’re going to need consultants, but that’s not even appreciably more than what we normally see.

[Tobey Sommer:]

I had another question for you. There’s been some talk of an evidence of a pick up in a CapEx kind of upgrade cycle broadly for IT, and I know that those kind of initiatives aren’t necessarily you’re daily work. We’ll you’re going to place a lot of people on a particular project, but could you describe if you’re seeing evidence of that yourself and how On Assignment may play in that kind of environment?

[Michael McGowan:]

We actually are starting to see it. We started seeing a little bit up tick in the fourth quarter, not an awful lot in the ERP market especially we started seeing it, and six weeks now in the New Year we’re actually starting to see clients that are having those capital projects improved and they’re going to need consultants. As you’re aware, we don’t put five or six people on, but we’ll do the one or two and we’re now starting to see that in the SAP, PeopleSoft, Oracle, etc. projects. So we’re starting to see it. It’s not a rocket, but as I mentioned in my prepared comments, it’s just kind of steady at this point.

[Tobey Sommer:]

Peter, I wanted to ask you a question about the staffing market broadly. Are you hearing from clients that they are going to rely more heavily on temporary staffing and try to increase the flexibility of the labor force at this point, are they saying all the right things and then I want you to also characterize the actual behavior, and maybe see if that behavior is matching the words at this point?

[Peter Dameris:]

Right, the answer is, yes. I firmly believe that the staffing industry in general is going to benefit from this kind of slower growth and uncertainty. I mean, we are entering this new expansion period at levels of productivity Tobey, and levels of just shared number of employees that really we haven’t seen in prior recessions and that bodes very to its customer base, it’s coming out with a very, very good reputation. If you look at corporate America, they were able to react and recalibrate their expense in their employee levels very, very quickly and it was because the staffing industry, service offering work the way it was positive. So there’s a very positive belief on the usage of staffing and I think that’s just kind of grow. As it relates to customers, it’s really by discipline. Life Sciences and IT are performing very well, it’s still pretty irrational on the healthcare side, and that is going to be a boomerang and I will tell you that, there’s going to be a day of reckoning for this kind of a rational buying that’s occurred, and we don’t think the healthcare business can really do much harm to us in 2010, but it’s just a tough slot right now and I’m not seeing really any kind of significant change in behavior. I’ve spoken with a lot of customers as well as vendor management programs and the irony of it is that the wholesale business, the BMS business is down even harder than the retail business. So it will work itself through, it always does but right now I think we are probably, my gut tells me we’re 60% through the tunnel to get to the other side of the tunnel on the nursing side at least. The Allied Healthcare side is starting to feel a little bit better and as we said, we didn’t want to overstate the strength, we had an incredible fourth quarter, but we had a nice little pop from a reoccurring seasonal flu service business, but even stripping that out and just looking at our other business, it’s making steady progress and we’re seeing some nice progress in some of our newer practices, rehab therapy and health information management. The more kind of value added services are growing faster than kind of the commodity skill sets.

[Tobey Sommer:]

One last quick question; Jim, you mentioned that there’s a possibility that payroll taxes could get reset throughout the year. I was wondering how you assess that risk and just getting some color there? Thanks.

[Peter Dameris:]

There are certain states that off cycle increases and that could happen, we think we’ve taken that into account in our budgeting process. The majority of states reset on a regular basis.

[Michael McGowan:]

So Tobey, we didn’t go into the year, just saying it was ex-percent in the State of Pennsylvania in 2009 and that’s what we’re going to use for 2010. We raised it, so the potential risk is, did we raise it enough? But we have raised it, even though we haven’t gotten notification of what it’s going to be for 2010.

[Operator:]

Your next question comes from Jeff Silber - BMO Capital Markets.

[Jeff Silber:]

Just wanted to go back to your first quarter guidance a bit, you’re looking for a slight sequential drop in revenues. I’m just wondering are we going to see it in any specific segment more than others.

[Peter Dameris:]

Yes, I mean we are actually seeing and budgeting for sequential growth and pretty much everything except nursing and locums. As I said in prepared remarks, Jeff we think locums will return to growth at the late second quarter. So it’s really just nursing at this point.

[Jeff Silber:]

Just one more quick numbers question, what’s the share count that you are using for your guidance?

[Jim Brill:]

It is 37.1.

[Peter Dameris:]

Let me correct one other thing that I just said. I said it was mostly just nursing; that is a 100% correct. The Allied business maybe down slightly, sequentially, but that’s because of the removal of the flu vaccination services.

[Jeff Silber:]

I was just going to ask on that. If you could quantify that what the impact was on the quarter that would be helpful?

[Jim Brill:]

Well, maybe about a $1.5 million.

[Peter Dameris:]

I think that’s probably a good number.

[Jeff Silber:]

In terms of adding new sales consultants this year, I know it’s early, it sound like you’re starting to do that in IT and I may have missed it. Are you talking about doing that in any other areas as well?

[Peter Dameris:]

We might see a little bit of that in the Life Sciences space. As we said in our prepared remarks, we are at the highest headcount in the history of our locums business. Unlike others we have not may have single reduction in staff and our doc business. We added at the sales force, but we really don’t envision adding to the sales to the recruiting force in nursing business and Allied business, it would be at the minimums add, it would just be the strength in some of our new practices. So the real growth that you would see in headcount would be in the IT followed by Life Sciences, but not nearly as large growth in Life Sciences as we might seen in IT.

[Jeff Silber:]

Then just one final question, from a balance sheet perspectives can you just remind us, are there any constraints on your debt repayments?

[Peter Dameris:]

No

[Jeff Silber:]

So in theory you could start paying down debt as you continue to generate more free cash flow?

[Peter Dameris:]

Yes

[Operator:]

Your final question comes from Tobey Sommer - SunTrust Robinson.

[Tobey Sommer:]

I had a numbers question as well, just wanted to make sure I understood the amortization and depreciation. The $1.5 million of depreciation and the $600,000 amortization you talk about for the first quarter. Is that all in for D&A or could you refresh me on, is the tail from identifiable intangibles from the acquisition is that pretty much over.

[Jim Brill:]

The amortization is what’s left over from the acquisition, so that’s kind of where we are with regard to the first quarter..

[Peter Dameris:]

But can you quantify Jim, its relatively small compared to previous years right?

[Jim Brill:]

Yes its down significantly, even compared to last quarter, its down from $900,000 last quarter. Base on the way it works Tobey, it going to drop down again in the third through the fourth quarters to closer to $400,000.

[Tobey Sommer:]

Another numbers question, I may have missed is there point and which you get a step down in interest or anything like that as a result of bringing the debt levels lower?

[Peter Dameris:]

Not lower than this, no.

[Operator:]

(Operator Instructions) There are no further questions at this time, please proceed with any further comments or closing remarks.

[Jim Brill:]

Once again we thank for your attention and interest in our company and look forward to reporting our first quarter results. Thank you for this afternoon.

[Operator:]

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