COMFORCE Corporation Q2 2008 Earnings Call Transcript

| About: Comforce Corporation (CFS)

COMFORCE Corporation (CFS) Q2 2008 Earnings Call August 7, 2008 2:00 PM ET


Marilyn Meek - Investor Relations Board

John Fanning – Chairman, Chief Executive Officer

Harry V. Maccarrone – Executive Vice President, Chief Financial Officer

Robert F. Ende – Senior Vice President of Finance


Bruce Galloway – Galloway Capital Management

[Scott Stevens – Oldfield Capital Management]


Welcome to the Comforce Corporation’s second quarter conference call. (Operator Instructions) At this time I’d like to turn the conference over to Marilyn Meek with Investor Relations Board.

Marilyn Meek

Welcome to Comforce’s conference call to discuss second quarter 2008 results. By now you should have already received a copy of the press release. However if anyone is missing a copy and would like one, please contact our office at 212-877-3777 and we will send one right over to you and make sure you’re on Comforce’s distribution list.

There will be a replay of the call which will begin one hour after the call and run for one week. The replay can be accessed by dialing 800-405-2236 or 303-590-3000. The passcode is 11118002. The live broadcast will be available on the internet at followed by an online replay also on for 90 days after the call.

On the line with us today is John Fanning, Chairman and Chief Executive Officer; Harry Maccarrone, Executive Vice President and Chief Financial Officer; and Bob Ende, Senior Vice President of Finance. Management will give opening remarks and then we’ll open the line for questions.

Before we begin, I would like to remind everyone of the cautionary language about forward-looking statements obtained in today’s release. That same language applies to any comments made during the call. With that said I’d like to now turn the call over to Bob Ende.

Robert F. Ende

We are pleased to have reported record revenues for our second quarter. Revenues for the quarter were $152.8 million compared to $149.7 million in the second quarter of 2007. The increase in revenue is primarily due to our Human Capital Management Services segment, consisting of PrO Unlimited.

PrOs revenues rose 3.5% or $3.3 million over last year’s second quarter and they also reported a gross profit of $12.8 million compared to $12.3 million for the second quarter of 2007. Staff Augmentation had a decrease in revenue of $280,000 which was primarily due to a decrease in technical services revenues. This decrease was partially offset by an increase in revenues generated by healthcare support services and information technology.

We continue to reduce our public debt, having repurchased 6.5 million principal amount of our 12% notes during the quarter. Subsequently on July 28, we announced that we will redeem the remaining 5.2 million of our outstanding 12% senior notes on August 25 of this year.

I would now like to turn the call over to John.

John Fanning

As Bob said we are pleased to report record second quarter revenues. This was particularly rewarding given the economic environment that corporate America’s facing. It has been a slowdown in the labor market over the past several months and we are not immune to these adverse conditions even as we have continued to increase our revenues and profitability this year.

As stated in the past, we believe that there is a trend for companies to rely more on providers of Human Capital Management such as those provided by PrO and right sourcing. During the quarter and for the first six months of this year, PrO continued to increase the services that they are providing to new clients. During the third quarter, PrO will begin implementing three new major accounts and assign one additional significant account that is expected to go live in the fourth quarter.

We continue to remain enthusiastic about healthcare support, which includes right sourcing and coding. Revenues in this division increased 22.4% in the first six months of this year and gross

profit grew by $1.3 million.

On our last conference call we stated that our sales funnel and right sourcing was very strong, and we are pleased to report that we have signed contracts with four new hospitals, which will begin implementation during the balance of 2008.

Before I turn the call over to Harry, I’d like to add that we have tried to position our company to better weather bad economic environments. Over the past few years, we have made investments to increase growth at Comforce. We are also focused by containing our costs and reducing our debt. And as discussed a moment ago, we will redeem all of our 12% senior notes on August 25.

The completion of this redemption should save us approximately $400,000 in annualized interest expense based on current interest rates.

We believe these initiatives better position our company to withstand the current challenging economic client we are facing as well as provide us with flexibility and considering options for future growth. I now would like to turn the call over to Harry.

Harry V. Maccarrone

Our revenues for the second quarter increased 2% to $162.8 million compared to $149.7 million for last year’s second quarter. Gross profits this quarter was $24.4 million or 16% of sales compared to $23.3 million or 15.5% of sales in the second quarter of 2007. Our operating income for the second quarter of 2008 and for the second quarter 2007 was $4 million.

Interest expense for the second quarter was $1.1 million compared to $2 million for the second quarter of 2007. This decrease was primarily due to our repurchase and redemption of 11.2 million of the 12% senior notes during 2007, and the repurchase of 6.5 million of the senior notes in April of 2008.

The company recorded income before income taxes of $2.9 million for this year’s second quarter, compared to income before income taxes of $1.9 million for the same period last year. We recognize the provision for income taxes of $1.3 million in the second quarter of 2008 compared to $806,000 in the second quarter of 2007.

Our net income for the second quarter was $1.6 million or $0.08 per basic share and $0.05 for diluted share compared to net income of $1.1 million or $0.05 per basic share and $0.03 per diluted share for this same quarter last year. Let me now discuss our results for the first six months of 2008.

The company reported revenues of $303 million for the first six months of 2008, compared to revenues of $291.3 million for the first six months of 2007. This was a 4% increase. Our revenues for the first six months of 2008 were favorably impacted by a 6.8% increase in PrOs revenues, or $12.3 million over the prior year’s first six months.

PRO recorded gross profits of $25.3 million for the first six months of 2008, compared to a gross profit of $23.7 million for the first six months of 2007. Our gross profit for the first half of 2008 was $48.2 million or 15.9% of revenues compared to a gross profit of $45.4 million or 15.6% of revenues for the comparable period last year.

Operating income was $7.5 million for the first six months of 2008, compared to operating income of $7.6 million for the first six months of 2007. We recorded income before income taxes of $4.7 million for the first half of this year compared to the income before income taxes of $3.4 million for the first half of 2007.

The company recognized a tax provision of $2.1 million for the first six months of this year, compared to a tax provision of $1.5 million for the first six months of 2007. We reported net income of $2.6 million for the first six months of 2008, or $0.12 per basic share and $0.08 per diluted share compared to net income of $2 million for the first six months of 2007, or $0.09 per basic and $0.06 per diluted share.

Bob, I’ll turn the call back over to you.

Robert F. Ende

We would like to update you on our Investor Relations program. We have met and continue to meet with investors and prospective investors. Remember, though, we are subject to regulation update. As you are aware, the SEC adopted this regulation to restrict selective disclosure of material non-public information so that all investors play on a level playing field.

Our policy is to make disclosures of material information to all investors at the same time through our press releases and SEC filings. Selective disclosure of material non-public information to select investors could put us in the position of having to make public disclosure of information prematurely, which could jeopardize our private business discussions or otherwise damage our business interests.

It has also been suggested that we institute a share buy-back program. As we announced last week, we have called the remaining 5.2 million of our 12% senior notes for redemption at the end of this month. We have long felt that it was more important to reduce our interest expense and improve our balance sheet for the repurchase or redemption of our higher interest rate public debt, and we focused on that objective.

Now that we are completing that process, we will keep a share repurchase in mind should conditions be favorable and funds become available for that purpose. In addition, the suggestion was also made that we engage an investment banker to explore strategic alternatives to create value for all shareholders. As we stated in a previous conference call, we’re always talking with investment bankers and we are receptive to proposals which on occasion we receive.

We have not received any proposals that make sense for us strategically. While this could change tomorrow, we continue to believe that the best way to enhance shareholder value is to improve our results, coupled with effective communication of our results to the investment community.

We would now like to open the call to questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Bruce Galloway – Galloway Capital Management.

Bruce Galloway – Galloway Capital Management

With regards to the new contract signed during the second quarter, could you sort of elaborate? Are these additional contracts and they’re going to be kicking in the second half? And what about the – you’d mentioned that in the first quarter you had signed up a bunch of new contracts and that was one of the reasons why the SG&A was abnormally high because you were ramping up those contracts. Can you talk a little bit about the roll out of these new contracts and the implications on revenue and growth going forward?

Robert F. Ende

We did implement in the first and second quarter two new contracts at PrO and they are still in the ramp up stage. These four contracts at PrO, three of them are being implemented in the August and September timeframe so they’re being implemented in the late third quarter so you really won’t see much of an impact until the fourth quarter. And one additional one, which is a larger contract, will be implemented during the fourth quarter. So that probably wouldn’t have an impact until quarter one of next year.

We also mentioned on the last call that we had several – we were in negotiations with several hospitals in the right sourcing arena, and we did sign four contracts that will start to be implemented in September. I believe two of them are in September, one is in October, and then one is in the latter part of the year. As we’ve always said on these larger contracts, there is a ramp up time, so it’s kind of hard to quantify what the revenue impact would be for the balance of the year.

Bruce Galloway – Galloway Capital Management

How many hospitals do you have now in total?

Robert F. Ende

I would say when these four are on, I would say it would be somewhere around 15, when these four are fully implemented.

Bruce Galloway – Galloway Capital Management

And how many more are in the pipeline? Are you focusing mostly in the California market?

John Fanning

That’s where the business seems to be, so that’s where we are focused, though we do have hospitals outside of California. The pipeline is good, so hopefully we’ll be able to report better news in the next quarter.

Bruce Galloway – Galloway Capital Management

And what is the advantage that you guys have? I guess these hospitals are outsourcing their per diem labor to you guys. What is the uniqueness of your systems, control, software that makes you have an advantage in this marketplace?

John Fanning

I think it’s all the things you just cited. I think this is an area that has been really ignored in the past and we were at the right place at the right time with a hospital in California. We made a proposal. This is going back now four plus years. And we were able to execute, and they became our biggest sponsor. They sponsored us at various conventions. They introduced us to people at various medical associations. So it’s sort of like we were there first and PrO is a related entity doing similar things.

The difference in right sourcing is that the focus is on medical and it’s done on, I guess, what is called a biased basis, meaning the Comforce nurses, Comforce line health professionals, as well as Comforce medical office support personnel are also assigned to the hospitals. In addition to managing other suppliers [techs].

Bruce Galloway – Galloway Capital Management

You also broke out the revenue growth for right sourcing. You mentioned 22%. Are you going to start giving line items for right source end of management or are you going to chunk it in with the PrO Unlimited?

Robert F. Ende

No the right sourcing is in what we call healthcare support, Bruce. And that’s where the right sourcing is. And that revenue did grow. I think the bigger number, or the number that people should be interested in is that the gross profit dollars actually grew in the first six months by $1.3 million in that sector. Of course you’ve got to remember, a lot of its fee based business so you really should focus on the gross profit dollars.


Your next question comes from [Scott Stevens – Oldfield Capital Management].

Scott Stevens – Oldfield Capital Management

As a follow up on the hospitals that you have signed, I just wanted to clarify. Earlier on during the course of the year as we have known, most of your hospital systems if not all were on the west coast and primarily in the state of California. And there was an emphasis placed on potentially ramping that up on a national basis going forward. And I was just trying to clarify if you have signed deals now outside of the west coast footprint?

John Fanning

As I said the majority of the hospitals, the 15, I can’t quote that number exactly, but the majority of them are in California. But we do have right sourcing clients that are outside of California and we do have opportunities, particularly in the state of Texas. So it seems to be that where we’re closing deals is California. That’s where we’re based and that’s where our reputation is the strongest. But we are trying to navigate outside of California.

Scott Stevens – Oldfield Capital Management

And the template that you have worked on in developing that business on the west coast is from a marketing standpoint? You’re addressing the national circuit down in Texas and maybe other places, correct?

John Fanning


Scott Stevens – Oldfield Capital Management

In your press release you do make a statement that with respect to the interest savings in the last tranche you drop about $400,000 to the bottom line given where rates are currently on that last tranche with respect to the twelve’s. That being said, that’s an interest savings and point, and we appreciate that. But I believe in the original debt documents there were some onerous covenants in there that I’m assuming will go by the board this year, once these are retired.

And you also follow up with the statement that having these gone will provide you greater flexibility in considering options for future growth. I just wanted to see if you wanted to make any comment on what those options might be? You may have addressed one already, but if you have anything to add I’d appreciate it.

John Fanning

First of all the onerous covenants that came along with the 12% indentures will be eliminated, once the bonds are retired. That will give us greater flexibility unless administration and attention to up streaming of funds and things like that. So the covenants being eliminated is a very good selling for us. It gives us greater flexibility because there are certain limitations as to what we could spend money on pursuant to the indentures.

We don’t have anything specifically to report strategically other than what we discussed earlier with respect to having greater flexibility in the future.


There are no further questions.

John Fanning

On behalf of management, I’d like to thank everyone for participating in today’s call and for your continued interest and support. If you have any additional questions, please contact Bob Ende. We look forward to speaking with you on our next call.

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