ASGN Incorporated (ASGN) Q1 2012 Earnings Report, Transcript and Summary

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 Q1 2012 Earnings Conference Call. [Operator Instructions] Thank you. Mr. Jim Brill, you may begin your conference.

Thank you, operator. 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 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'd now like to introduce Peter Dameris, our CEO and President, who will provide an overview of our first quarter results. Peter?

Thank you, Jim. Good afternoon. I would like to welcome everyone to the On Assignment 2012 First Quarter Earnings Conference Call. With Jim and me today is Christian Rutherford, President of VISTA, our Physician Staffing group. During our call today I will give it a review of the markets we serve and our operational highlights, followed by a discussion of our performance of our operating segments by myself and Christian. We'll turn the call over to Jim afterwards for a detailed review of discussion -- and discussion of our first quarter financial performance and our estimates for the second quarter of 2012. We will then open the call up for questions. To begin today's conference call, I thought we would give a brief recap and status update of our pending acquisition of Apex Systems. For those of you who follow our company, you are aware that on March 20, 2012, we announced that we had signed a definitive agreement to acquire Apex Systems, a leading information technology staffing and services firm. The transaction will create one of the largest professional staffing firms and the second largest IT staffing firm in the United States. On a pro-forma basis, 2011 revenue of the combined entity was $1.3 billion. This acquisition uniquely positions On Assignment to provide to its customers a broad spectrum of IT staffing offerings from mission-critical daily IT services to high-end specialty projects. Apex Systems will continue to operate substantially as it has in the past. The company's 3 cofounders will continue to focus on Apex Systems' strategy and its high-performance culture as they have done for the last 3 years. Rand Blazer and Ted Hanson, Apex Systems' Chief Operating Officer and Chief Financial Officer, respectively, and the rest of the senior management team will remain in place and continue…

Thank you, Peter, and good afternoon, everyone. While our results met our expectations for the first quarter, the results are not reflective of our longer-term expectations for revenue growth and profitability for our Physician Staffing division. Revenues in the first quarter were $24.1 million compared to $23.7 million for Q4, which represents a 1.6% sequential and 45.8% year-over-year growth. Conversion revenue during the quarter was 25.2% sequentially, and down 2.3% year-over-year. Gross margin in the first quarter was up about 100 basis points sequentially and down about 100 basis points year-over-year. The sequential margin expansion is a result of pricing strategies and mix shifts. Gross profit grew year-over-year by 41.5%, and was up sequentially 5.1%. Vista's specialty mix is following the overall market trends as reported by Staffing Industry Analysts. Primary care and emergency medicine are expanding, while radiology and anesthesia are continuing to experience demand constraints. During the first quarter, top 10 clients -- locums client revenues represented 22.1% of our overall assignment revenues. In terms of key performance indicators, VISTA's first quarter locums average bill rate was up was 4.9% year-over-year with no change sequentially. In the first quarter, our sold days increased by 11.2% year-over-year, which indicates continued growing client demand for our locum tenens services. The first quarter can be marked by 3 internal initiatives that have had a positive impact on our overall performance. First, we have continued to allocate resources to the areas of the business that are demonstrating high rates of growth. This includes adding new recruiting talent and technology that is designed to improve our ability to perform in the highly competitive market segment. Second, we have added new reporting systems and communication tools to better gauge how the company is doing against established goals. This has provided our management team greater…

Thanks, Christian. As Peter mentioned, consolidated revenues for the quarter were a record $167.1 million, up 29.1% from the first quarter of 2011. There were approximately 63.5 billing days in this quarter, 61 in the fourth quarter, and approximately 64 in the first quarter of 2011. However, for Nurse Travel, there were 91 billing days this quarter, 91 last quarter and 90 in the first quarter of 2011. Foreign currency had a $700,000 negative impact on revenue relative to last year's first quarter, and a $400,000 negative impact on revenue relative to the fourth quarter. Now let me address some of the variances and their related explanations to the extent Peter or Christian has not. Peter mentioned the bill rates at Oxford. Their bill/pay margin contracted slightly from the fourth quarter and was about 1% up, or by about 1% year-over-year. In Life Sciences, the bill rate was down slightly from the fourth quarter and the bill/pay margin increased. Relative to the first quarter of 2011, the bill rate was up 3% and the bill/pay margin increased 2%. In Allied Healthcare, the bill rate relative to the fourth quarter was up 3% and the bill/pay margin increased as well. Relative to the first quarter of 2011, Allied Healthcare's bill rate was up 1% and the bill/pay margin expanded. In Nurse Travel, Peter mentioned the bill/pay margin movement. The bill rate was down 3% relative to the fourth quarter, but up 2% relative to the first quarter last year. Christian mentioned the bill rates in the physician business, the bill/pay margin expanded slightly from the fourth quarter and contracted 3% relative to the first quarter of 2011 due to the HCP acquisition, which has a higher concentration of government accounts. Conversion and direct hire revenues totaled $5.1 million in the quarter…

Thanks, Jim. We believe that we continue to be well-positioned to take advantage of what we believe will be historic secular and cyclical growth with staffing industry over the next 3 to 5 years. While the entire On Assignment team is very proud of our performance, 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 effort has allowed us to progress where we are today. I would like to welcome our new coworkers over at Apex. And I would like to now open the call up to participants for questions. Operator?

[Operator Instructions] Your first question comes from the line of Tim McHugh.

First, a quick numbers question for you, Jim. In the press release, you have the segment level growth projections; and as I plug them in, I come out a little higher than the total revenue. I may -- maybe I'm doing it wrong, but is there -- I guess, am I doing it wrong? Is there any color you would add there?

Yes, so there was a little bit of a mistake on the Life Sciences estimated growth rates. It should be in the high single digits.

Okay, that's helpful. And then can you give us any sort of update on Apex in terms of how its Q1 fared and so we get a sense for the run rate of that business.

Tim, we can't. We don't own it yet, they're a private company. What I can tell you is that upon the closing of the transaction, an 8-K has to be filed, and we gave you a guidance as to the second half of the year for Apex, but we just can't give you first quarter at this point.

Okay. And then the Physician Staffing segment, 2 questions there. One is the growth rate of double-digit growth you talked about there, is that an organic number? And secondly, the day sold it's up nicely again, but it's not quite up as much as we saw earlier in – or I guess, late last year. Is that just tougher comps? And I guess the third part might be converting those days sold into actual revenue. I know that was kind of lagging behind last year.

Yes. We're fortunate to have Christian with us here today, so I'll let him address those questions. But on the double-digit growth, we do expect both the legacy business and the small acquisition HCP that we did in July of '11 to both grow double digits. And Christian, what would you add to that and the other question he had?

No, I , of course, would agree. Both these businesses HCP, the acquisition and our legacy business, VISTA, are positioned well to grow on a double digit basis this year. In terms of demand, I think was your question, we're seeing -- we saw the first quarter 11% increase, we're seeing that trend continue into the second. So we'd expect that in terms of demand for our core modalities to stay consistent, which will be GAAP at double-digit revenue growth through the second half of the year.

Okay. That's helpful, I guess. And then last question would just be at a high level, I mean, you gave us a lot of the details around Oxford, but the guidance would suggest that you're seeing the growth rates kind of level off here at a much higher level than I think most people would've expected. Are you seeing -- is that just a reflection of some of the hiring you've done in the last several years? Or have you seen, in your view, the environment actually start to get better even then maybe what you saw the second half of last year?

I think it's steady state. I wouldn't describe the market as better than it was last year. Tim, as we joked at one of the – one of your conferences, no one grows at 58% forever, but we continue to put up numbers that are very, very solid and we continue to make investments in the business. So we see plenty of double-digit growth ahead. I don't think it's gotten it easier. I think the place where maybe it's gotten a little bit easier, Tim, is on pricing. Because high-quality resources are becoming more scarce and I think the customers are more embracive of the fact that they want special. If they want a specific resource, they're going to have to pay for it.

Your next question comes from the line of Jim Janesky.

When you look at the first 2 quarters -- your first quarter, the guidance for the second quarter and then working in the numbers for Apex that you provided when you made the acquisition announcement, I come up with an EBITDA for 2012 that would be at or maybe slightly above the 10.3% that you reported for 2011. Where do you think that can go over a next cycle that continues to show positive momentum?

Jim, we believe that this next cycle, perm placement will be a little bit larger contributor to our overall revenues than it was in the previous peak cycle. I don't think it'll be above 5%, but remember we peaked out at 3.1% last go around. Two, as you know, we've guided to no synergy savings. And just over time, we'll figure out where the appropriate leverage is in our business models and try to utilize that leverage. But we do think that there's continued operating leverage as we've demonstrated over the last 10 quarters. And Apex has as well. I mean, they're -- Apex's EBITDA margin has gone up each quarter since the midpoint of 2009. So we're going to be focused on continuing to obtain that operating leverage, and we think that we can do it. But we're not going to guide right now to a specific percentage number of -- as a percentage of revenue.

Okay. When you look at the IT Engineering in the March quarter, the margins sequentially, they went down less than they did from December 2010 to March of 2011. What's behind that? Is that the pricing trends that you're seeing?

There's a couple of things. Some of it is pricing, as I made referenced to Tim McHugh. And I think some of it has to do with mix as well, Jim, as it relates to we had. We have been doing less of kind of telecom infrastructure work because we've been having a harder time getting the bill rate that we want. But when you look at the grow-over in the first quarter -- any comparison about the first quarter of '11 to the first quarter of '10, you have to also remember there were some HIRE Act credits. But what I can tell you, the sequential change, it's just solely related to better pricing and high valued resources becoming more scarce.

Okay. And when you look at the future of the Nurse Travel segment and in the industry of itself, how do you see that playing out as we move forward even over the next couple of years, Pete?

Yes. I do think it's going to get better. It's shrunk an enormous amount. I think that projections are only for it to be a $1.2 billion end market. I think that it's a relatively young industry as compared to -- when you compare it to commercial staffing, and I think eventually that some of the dominant players are going to wake up and realize that taking work at any price is just not very profitable. And if you look at what Manpower, Kelly and Adecco did to themselves on the commercial side, competing just on price, it turned out not to be a good strategy and they've reversed themselves and tried to get their margins back up in their kind of unskilled commercial staffing space. So I think there's probably a couple of years of thrashing, but on a demand side -- on the pricing side, but I think on the demand side, it's going to get -- it's going to continue to get better.

Your next question comes from the line of Tobey Sommer.

Pete, you've already made a couple comments about bill rates and customers maybe stepping up and recognizing that for scarce resources, they're going to have to pay. Would that commentary hold true across multiple lines of business or was that geared towards Oxford?

Well, it's -- I think you can apply that comment, Tobey, to all of our lines of business as it relates to highest bill rate modalities or skill sets. So the more commoditized a particular skill set, so a entry-level lab technician, we're continuing to see pricing pressure, whereas a field monitor or biostatistician, we're not feeling the same type of pricing pressure on. The same applies with regard to -- in the physician world, Christian. I mean, can you draw a distinction between the pricing pressures you see maybe in ER versus surgical?

Yes. I'm happy to, yes. The surgery specialty, as an example, will typically yield higher door rates along with higher margins, chiefly because of what Peter's describing, the supply and demand economics really allow for that type of pricing strategy based on the candidate supply, versus client demand. So the short answer is, yes. You look at the 40 different modalities that we offer. And fortunately, right now, the ones in high demand are the ones where we're growing the most.

And, Tobey, I would just add on the kind of mid-tier IT skill sets that Apex is world-class in delivering, it's always competitive and what I would point out is in that space, sometimes there's a little bit of a lag between the customer realizing that the abundancy of available skills is dwindling and the recognition that pay rates may need to go up, and thereby bill rate's going up. But I think we're seeing a normal progression of pricing strategies by customers in recognition of tight labor markets by customers, and it's kind of all working its way through in a natural process, at least in the IT space.

That's helpful. And you provided a lot of color in your prepared remarks, I won't to ask you anything about the business lines. But Peter, from a broad perspective, are you feeling that in moderate economic growth conditions you're going to be able to continue to throw up the kind of growth rates that you have? And I'm wondering if you could just comment on how you think the rate of growth of On Assignment would vary with economic -- without a deceleration or acceleration in economic growth.

Yes, so we gave guidance for the second half of the year. If there's no change in the macroeconomic conditions of the United States, we think we can grow double digits. If there is a change, and if history repeats itself, Apex's business performed better in the last downturn as far as revenue decline because a lot of the stuff they do is more mission critical, versus Oxford, which during the financial crisis got hit harder than we would've ever expected because they tend to be more capital expenditure driven, and when people hoarding cash, a lot of projects that would've gotten let in a normal recession, got frozen because of the financial crisis. So we think that maybe our trends will be a little bit different with Apex in the mix, favorable. And our guidance is based on no improvement in the markets that we serve. And the flip side of that is no deterioration in the markets we serve, just kind of steady state, which is we don't see "the economy" necessarily strengthening. We just see it kind of meddling along, just kind of moving along.

Your next question comes from the line from Mark Marcon.

Just wondering if you could talk -- most of my questions have been already asked and answered. But I'm wondering if you can talk a little bit about the feedback that you've gotten with regards to Apex from your existing clients and specifically, what Oxford's clients are currently hearing? And any sort of feedback that you may have heard via Apex in terms of the reaction of their top clients.

Right. So as we told you, there's very little client overlap and we really don't compete for the same business within the existing customer. We've had a couple of instances, Mark, where a client reached out to us and said, "Hey, it turns out that we use both companies and we'd like one point of contact." And we said, "Fine, we'll do that once the deal closes." And they said: "No, we actually kind of want you to do it now." And because Oxford only had one person there, we said okay. Apex will be the point of contact. And then on the Oxford side, we've been trying to coordinate with Apex where we can help them kind of on a private label basis to further substantiate their solid reputation within their customers. Apex, before the closing, has actually shown us a number of things that we normally wouldn't have seen for the -- actually, on the kind of scientific side where our scientific business kind of bridges IT and Life Sciences. So it's been good. We haven't had any kind of -- as we expected, we haven't had any kind of channel conflict, loss of business. We've had a couple of customers ask, are we going to be billed under a different federal ID number, but as we told you, we didn't expect this to be a problematic integration of 2 lines of business because we really don't compete with each other. And so far, that's proven out.

That's great. And what about the reaction from the individual consultants and staff members. Just what's trickled up work within the organization, the reaction there?

It's been great. It's been fortunate timing because we've had some presidents' clubs and we've had a couple of all hands calls. Clearly, it helps us with our communication strategies that our investors have embraced the value of the 2 companies coming together and that they look more valuable together than apart. And we did a bunch of inducement grants to our new coworkers, and those are quite enticing. And so the outreach I've gotten from my -- our current employees and coworkers and the Apex employees has been incredibly invigorating and I'm going to be with a group of them, Rand Blazer and Ted Hanson and Win Sheridan and I are going to be in Charlotte next week for a large customer event and I'm going to see a bunch of the employees. But the kind of congratulatory e-mails and communications back and forth have been very, very invigorating. They've been good. So as we expected, we haven't been fighting over who owns the customer and who's going to be the branch manager for Atlanta and things like that. So it's been all -- everyone focused forward and not internally focused on who's on first and who's on second.

That's fantastic and as expected. In terms of the things that we still need to do in order to get to the closing on May 15, I mean you mailed out the proxy statements, so we're just waiting for those and that's about it?

Yes, so we hope to -- our loan is pretty much done. We hope to do all the allocations next week. I think that's correct. And once that's done -- that's pretty locked in and all the -- all we're waiting for then is the shareholder vote that we think will occur on the 14th and a closing on May 15.

Great. And any more color with regards to the exact rate on the loan facility?

It's -- we'll give you a little more detail, but it's coming in very attractively.

[Operator Instructions].

All right, operator.

There are no questions at this time.

All right. Well, we appreciate -- I know there was a lot of information that was given, but we're going to be at 6 conferences in the next 45 days and we wanted to make sure it was all out there so we could speak openly about it. And we look forward to updating our guidance on May 15, hopefully with the closing of the Apex transaction and reporting our second quarter results thereafter. Thank you very much for your attention today.

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