On Assignment, Inc. (NASDAQ:ASGN)
Credit Suisse 15th Annual Global Services Conference
March 12, 2013 12:30 pm ET
Peter T. Dameris - Chief Executive Officer, President and Director
Michael J. McGowan - Chief Operating Officer and President of Oxford Global Resources Inc
Edward L. Pierce - Chief Financial Officer, Executive Vice President and Member of Audit Committee
All right. We're going to move on to the next presentation. We're happy to have Pete Dameris, the CEO of On Assignment. He will kick off the presentation and then turn it over to the team.
With that, Pete, thanks.
Peter T. Dameris
Thank you. Good morning. With me today is our Chief Operating Officer, Mike McGowan. He'll go through our verticals, as well as, Ed Pierce, our Chief Financial Officer.
So there's a lot of information on these slides and I'm not going to walk you through all of them. But we are a professional staffing firm that is focused in some of the highest value and most scarce resource areas of the marketplace. We spend all our time in math and science skills. We're a large provider of professional staffing services. 95% of our revenue comes from North America.
We have a differentiated platform which features mostly high-margin, high-skill, mission-critical skill sets. We have a domestic footprint, as I told you, of about 150 branch offices. With significant scale, we've made an enormous amount of investment over the last 3 years and have substantially enhanced our operating leverage and still have a lot to go.
We have an experienced management team that's been together for a while, that has lived in the public markets, as well as the public staffing company markets for a long time, and have a track record of creating shareholder value. And we have very attractive financial characteristics.
We have about a 10% free cash flow yield. Our EBITDA grew 158% last year. Our revenues grew organically 18% last year and each of the last 3 years since 2009 have been record years for the company, and we'll walk you through that.
So once again, we spent all our time in the professional staffing space. Commercial staffing is the smallest segment of the overall staffing industry now. I think it makes up about 43% of the marketplace, whereas professional staffing makes up the remainder. The staffing market is estimated to be a $134 billion in 2013. I've heard estimates as high as $168 billion by 2018.
We did $1.460 billion in 2012. We gave guidance that we could do on the high end, I think, $1.660 billion in 2013. We have about 1,600 consultants and 130 branch offices in the United States, Canada, the U.K. and the Benelux.
The spaces that we participate in are Physician Staffing, Engineering, Scientific Staffing, Allied Healthcare, and then our largest segment is IT. If you look at the bottom of this screen, you'll see the margins that are attributable to each of the divisions. These are the highest gross margins in the industry and they're also derived with the least amount of permanent placement contribution. We have a slide later on that shows you that.
Again, if you focus your attention to the bottom of the slide, this is the opportunity. In 1995, commercial staffing was the biggest end market opportunity in the staffing world. Today, it only makes up 40% of the overall opportunity. There are real big secular drivers that are causing the professional staffing market to grow faster than the commercial staffing market, and there's no abatement of those drivers. Specifically in the IT world, we see IT staffing growing faster than the other specialization in the staffing world. And that's because corporations have realized the most efficient way to deliver a technological solution within an organization is not to outsource it, not to give it to a consulting firm on a project basis, but to augment their internal staff.
As technology is being developed more rapidly and the discovery and the development cycles are shorter and shorter, the challenge of a CIO managing 1,000-person technology group at the corporation is becoming more challenging because you could literally have vast numbers of people whose skills become obsolete overnight. So CIOs are looking at keeping core technologists on the workforce full time to do the technology solutions determination and the technology selection, but bolting on contract labor to do the actual implementation.
This slide really just depicts the public company staffing universe. And as you can see from the top left corner of it, our fiscal year pro forma revenue growth was 18%. That is driven by our specialization, 1 and 2, our geographical coverage. You heard earlier before me that Manpower, which is a very relevant company, is still very challenged to try to get back to their 2007 numbers. On a pro forma basis, we've exceeded that and we've given guidance to do 10% to 15% growth in 2013. So it's a different picture because of our specialization and our geographical coverage. The same with our EBITDA margin, they strive to do 4% on a historical basis. We did 10.3%.
Again, the footprint is well developed. We don't have to do any sort of cost savings. We're not behind the curve with investment. We actually, on each quarterly conference call, tell you the number of people that we've hired. We hired over 150 people in the fourth quarter alone on average year-over-year, and are very well positioned to continue to bring those people up to productive levels and get operating leverage from them.
The management team's been together for a long time. This is my third public company. The first one I sold in March of 2000. It was a staffing company called Metamor Worldwide. We sold it for $1.9 billion. Then I ran a company called Quanta Services. And I've been in On Assignment since 2003.
Mike McGowan ran Oxford prior to the acquisition of it for 7 years, and then he's been with us for 6 years now. He assumed the role of Chief Operating Officer. So all divisions, except Apex, report through Mike. And he'll walk you through our business later on.
And then Ed Pierce has been with us for about 8 months. He was previously the Chair of the Audit Committee. And Ed and I worked together at Metamor where he was senior VP and CFO.
This slide really just depicts the breakout of the various divisions and brands that make up On Assignment. The takeaway, and if you have a pen, you might want to write this down is, Apex, on an organic basis grew 15% year-over-year; Oxford grew 29% year-over-year; Life Sciences grew 5% year-over-year; Physician Staffing was 27%, and then our Healthcare group grew 27% as well. Again some of the highest end markets, and if you compare those growth rates to the industry projected and published growth rates at the bottom of the slide, you can see that we are taking market share.
So for public investors, a couple of financial slides. The industry as a whole is a huge free cash flow generator. We have generated an enormous amount of cash and continue to do so. We acquired Apex Systems in May of 2012. And at the time, we placed 3.83x leverage to trailing 12 month adjusted EBITDA on the company. And we were quite clear with the rating agencies, as well as our shareholders that we would generate a lot of cash and that we would be able to delever quickly.
Since -- in the first 6.5 months of ownership of Apex, we've delevered the company over 1 full turn of leverage. So we're now at 2.75x leverage at the end of the year, and we think we'll probably be at 2.5x by March.
We've also publicly stated to our shareholders, our of debt is very cheap. It's 4.67%. We probably will reprice it. The repricing of our debt at our current levels, probably would yield about a $10 million cash savings to us. But at 2.5x leverage, there's probably a better use of our capital than just rapid deleveraging. So we'll either -- if we're fortunate enough to find the right companies, do some more acquisitions or return to shareholders in the form of, probably, a share repurchase. We also have publicly stated that we believe we can generate $400 million to $500 million of free cash flow over the next 5 years.
So when you use the word acquisition, people get scared because it is difficult. Things can go wrong. We're buying people businesses. So we're very thoughtful about it. The first question we always ask is, is the business acquirable? Not, is it accretive? And will the cultures and the service lines harmoniously coexist? And we have the benefit of history and time to show that we are disciplined acquirers. Each of the 3 major acquisitions that we've done VISTA, Oxford and Apex, have all gone very well. We've retained ownership. We bought business models. We didn't buy revenues and we've been able to support and grow those and their growth rate has been faster post-acquisition than pre-acquisition. So you can expect us to repeat that discipline.
The wisdom behind acquiring Apex was we were already in the IT space. But our average bill rate in the IT space was $122 an hour, whereas the normal IT staffing bill rate is about $60 an hour. So if you think of the IT staffing market as a bell curve, a grade bell curve, there are more Bs and Cs given out than As and Fs. Oxford resides and it doesn't -- the grade doesn't connotate quality. But Oxford resided in the A category, which was the thinnest part of the bell curve. It's a $4 billion market, but it's not a $16 billion market. And we wanted to get into the fattest part of the bell curve, the fattest part of the market. So we asked ourselves, could we migrate Oxford into that space, and the answer was no because of its brand. Its margin's 36%. The average market gross margin and that end market is about 28%, 29%.
So if we were going to participate in that competitive space we, we had to buy a dominant player. And we are able to do that. And the reason that Apex fits so well with Oxford and On Assignment is there's no channel conflict. Typically the orders and the work that Oxford's working on, Apex never sees and vice versa. The work that Apex typically is asked to perform, Oxford never is asked to perform. So it's really 1 plus 1 equals 2 versus 1.5. And that's why you've seen our acquisitions go so well because there's no channel conflict.
With that, I'm going to turn it over to Mike McGowan and he's going to walk you through, quickly, kind of each of the segments that markets we operate in and give you an overview.
Michael J. McGowan
Thanks, Peter, and good morning. As Peter mentioned there's a lot of information on these slides. So I encourage you to go to our website which is -- to get a soft copy of this or if you want to print out a hard copy. But what I'll do is I'll go through some of the -- each one of the industries that we focused on and then a little bit on each one of the divisions.
So first of all, in terms of the IT market, it was 12% growth realized in 2012 to $23 billion, and is forecasted to grow about 8% in this year to almost $25 billion. So it's our biggest segment that we operate in and one that we've had obviously some success in.
Apex, as Peter mentioned, was just acquired last year. They are now about 54% of our revenue or almost $800 million. They focus on the lower-skill levels compared to what you'll see Oxford does in a couple of minutes, primarily systems admin folks, network engineers, application developers, help desk folks. Their average bill rate is about $60 an hour. In the box on the right you can see the revenue mix by industry. So it's pretty diverse across most industry lines. They have about 6,500 contract professionals on assignment at any given time with about 600 clients.
Oxford, which Peter mentioned, was acquired in 2007, is the segment that comprises now about 25% of our overall revenue. Last year, we did about $345 million. As Peter mentioned, we're at the high, high end, more critical-skill-kind-of-focused, hard-to-find skills. Average bill rate is about $122 per hour. And we've focused in the areas, from a revenue standpoint on the right-hand side, primarily 37% in the IT space. So that's more the ERP kind of focus, CRM, et cetera, the engineering space, a lot of regulatory and compliance activities, is about 27% of our business. Software hardware engineering is about 20%. Healthcare IT is actually our fastest growing business segment and it's now -- we just started a couple of years ago, it's over a $60-million run rate. And then Telecom is actually an area that's become more commoditized, so we actually have gotten out of some of that business as it becomes commoditized. So we have an average bill rate of $122 an hour. Our average length of assignment is about 5 months. And as of right now, we have a little 1,800 clients on assignment at 900 clients. So we only have, in effect, on average about 2 consultants working per client. So it is really a onesie-twosie game focused on the high-end critical skills.
The next segment we operate in is the Life Sciences. The clinical staffing arena was almost $2 billion in 2012. And as you can see by the chart on the lower right-hand side, it's been growing since 2009, estimated to be $2.1 billion in 2013.
This segment that we actually operate called Life Sciences is under primarily 3 areas: Lab Support, clinical research and Sharpstream, which is retained search. And Lab Support really is the genesis of On Assignment. So those are the scientists that worked primarily in these industries on the right-hand side, everywhere from biotech companies to pharmaceutical, food and beverage. Emmett McGrath, who is the Division President of this group, says it best: "Anything that you put on your body or in your body, most likely one of our scientists has touched." And that's really what we focus on. The bill rate, as noted here on the lower left-hand corner, is a little bit less, $35 an hour. And pretty much 3 to 4 clients -- 2 to 3 rather consultants on assignment per client. In this case, we now have about 900 clients and over 2,200 contract professionals.
The next segment that we offer our services in is the Allied Healthcare market. It was $2.9 billion, almost $3 billion, in 2012. And just like the Life Sciences segment, it's continuing to grow since 2009 and '10, estimated to be $3.2 billion in 2013. These are specialty nurses, HIM professionals, technicians, therapists, hygienists, et cetera.
And within our segment we offer business along several areas of specialty: local Healthcare Staffing, the HIM arena, Allied Travel, allied search. We did about $58 million in business last year, about 4% of our business. Similar to Life Sciences, this is about $37 an hour. And we have about 1,000 contract professionals at 500 clients.
And then the following -- the final, rather, industry that we focus on is in locum tenens or Physician Staffing. Also, coincidentally, about $2.1 billion in 2012, estimated to go up to $2.3 billion this year. The biggest issue here, and we'll see that as we look at ObamaCare going forward, is going to be the shortage of trained and obviously, physicians going forward. So a big opportunity here within this market segment. This group was also purchased in 2007, same time as Oxford was. We did $103 million in 2012, which is now about 7% of our business. We have about 30 specialty areas. The leading ones are located here on the right from internal medicine, emergency medicine, et cetera. And we have about almost 300 physicians on assignment on a given day with an average bill rate of about $185 an hour.
Ed, back to you.
Edward L. Pierce
Thanks, Mike, and good morning. This first slide shows financial performance over the last 3 years or 4 years. And these numbers have been adjusted to give effect to the acquisition of Apex and the elimination of Nurse Travel. So that's reflected in all the periods presented.
As you can see from the top right slide, very high top line growth. In fact, top line has more than doubled since 2009. And the -- as you can see our margins are stable, roughly at about 30%. Our gross margins are roughly 30% -- or slightly higher than 30%. And the adjusted EBITDA tripled over the same period. So you can say there's a tremendous amount of operating leverage in the business.
And the next slide, you can see that we have one of the highest operating margins in the industry and this is -- we're comparing here to 2 of the other premier professional staffing companies. I think an important takeaway here is that we have higher operating or adjusted EBITDA margins compared with these 2 companies. And one of the other big takeaways is the conversion of gross profit into adjusted EBITDA, which is significantly higher than these 2 companies.
And as it relates to the gross margin itself, our gross margins are slightly below these 2 companies and we're significantly under index as it relates to the mix of permanent placement. You can see we run about 2% of our total revenues in permanent placement, whereas these 2 companies are more than double or 4x the level. And so the bottom half of that slide shows what gross margins would be if you adjusted or if you excluded the permanent placement from the revenue base.
This shows our financial performance for Q4, very strong quarter. We exited the quarter much stronger than we entered and we have very strong momentum going into 2013.
And it's -- what's not depicted here is that if excluding Nurse Travel, our pro forma revenue growth in Q4 was 16%. Also excluding Nurse Travel, our pro forma adjusted EBITDA margin was 10.7%. Now for the full year, you can see that on a pro forma basis, and Peter already mentioned this, that revenue growth was 18% year-over-year and very good margins pretty much across the board.
Now if you look at the pro forma, you can see that year-over-year pro forma gross margin was flat. So we held our margins on a pro forma basis. Adjusted EBITDA margins, 11.1%. If you exclude Nurse Travel, it was slightly below that at 10.9%.
These are our estimates for 2013, both for Q1 and for the full year. And as you can see, we're expecting very high growth off our pro forma base, at the low end of the full year, we're expecting 10%, at the high end, it's close to 15%. Our margins are going to come in roughly on a gross margin basis, roughly what they were in 2012. And our adjusted EBITDA, we're expecting to be $164 million to $170 million which is about 10%.
We've added one thing to this slide and that is adjusted EPS, which I'm going to talk about now. And this an attempt to give or to highlight some of the significant items related to these acquisitions that we've made: Apex, Oxford and HCP. And as you may recall from Q4, there was a significant level of amortization related to identifiable intangible assets. And this is a noncash item and so we are adding it back here. And we're also giving effect to the cash tax savings related to a tax shield that we have on goodwill and trademarks. And as you may know, those that follow us, that the 3 acquisitions that I mentioned earlier, we had -- we were able to effect 338(h) (10) election which gives us full tax basis in the assets acquired. And that roughly, as it relates to those 2 assets, is roughly $593 million. And so the annual amortization related to that is roughly $40 million and the tax effect is roughly $15.4 million.
Unfortunately, for GAAP purposes, it sort of masks the cash benefit or the economic benefit of that deduction because there is a like increase in your deferred tax liabilities associated with that. So clearly, that should be added back. And when -- in trying to get a measure of the true sort of operating or the sort of the operating power of our asset base, and you can see a comparison at the bottom of that table of the -- as adjusted to the GAAP and on an as-adjusted basis, we're looking at $1.68 on the high end versus $1.09 on a reported basis.
This shows a comparison of the analyst estimates compared with our recent guidance. And the prior reflects what the estimates were for 2013 before released earnings. And in the earnings release, we had, obviously, we had a very strong quarters, as I mentioned earlier, much higher than expected sort of growth in the business. But unfortunately, there was some noise in the numbers related to the amortization of the intangibles and the slightly higher effective tax rate. So this is comparing what it was to what it is currently and it relates mainly to -- the change relates mainly to Nurse Travel, the exclusion of that, which will now be treated as discontinued operations, and the effects of the amortization -- of the intangibles.
I think we're out of time. Okay, thank you.
Peter T. Dameris
Can you elaborate more on the impact you see of implementation of the Affordable Care Act having on your business?
Peter T. Dameris
Yes. So there's been a lot written and spoken about it. No one really knows. I did hear the answer from the Chairman and CEO of Manpower and I do agree. This is a statutory expense. We've been dealing with statutory expenses since the beginning of the staffing industry in the form of state unemployment insurance rates going up and down and workers comp. So we'll pass that along. As it relates to being a driver to business, we'll find out as it unfolds. But we do a lot of work with biotech companies that get venture funding. And there's 3 ways that staffing can help someone avoid the implementation of mandatory health care coverage. The first is definitionally, the Act says if you have 50 or fewer employees, you're not covered. So people who are right at 50 are going to try to use contract labor as much as they can to stay under that 50.
The second is the regs define a part-time employee as someone that works less than 30 weeks -- 30 hours a week on average for a 12-month look back. When you see that we're dealing with scientists, engineers, high-end IT programmers and physicians, these people are working in these positions, not because they can't find a full-time job. It's a work-life balance, it's a way to keep their skills, they're highly tuned in on the leading edge. So a lot of our employee base does not work on average 30 hours per week. They may work 40 hours while they're on billing, but they may take 2, 3 months off in between assignments intentionally. So a lot of our temps will, when we do the calculation, not hit the 30-hour mark. So that person may be more attractive than a full-time employee because you don't have to provision health care for them.
And then the final point is, even if we have to pass the cost of health care along to the customer, remember a lot of the secular drivers for the use of our temps is that they're highly skilled professionals that you don't need around 365 days a year, 24 hours a day. You need them for the implementation of a project, for the submittal of an FDA trial, the opening of a new unit or ward at a hospital. And when you're done with that, you get rid of them. So if you use my temp for 7 months, which is the period of time that is required to get the project installed, you may pay 7/12 of the health care benefit instead 12/12. The comparison I'm trying to make is if you hired a full-time project leader to do a project that's going to last 7 months, you're paying that health care every month until you fire him. If you hire a contract personnel to do that project leadership for 7 months, when the project's over with, you call me up and say, we're done, take him back. You've only paid for the period of time that they we're on billing through us at your facility. So we see it as anything, a net driver if you look at the socialized countries like France, Germany and the U.K., contract labor penetration is higher than other -- than full-time labor penetration in other countries because people are trying to get around restrictive labor laws.
I think we're out of time. We'll be at the breakout room. It's the Pine Room. So thank you.
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