CDI's (CDI) CEO Scott Freidheim on Q2 2016 Results - Earnings Call Transcript

| About: CDI Corporation (CDI)

CDI Corporation (NYSE:CDI)

Q2 2016 Earnings Conference Call

August 04, 2016 08:30 A.M. ET


Vince Webb - VP, IR

Scott J. Freidheim - President and CEO

Michael S. Castleman - CFO


Marco Rodriguez - Stonegate Capital Markets

Steve Cole - Mangrove Partners Fund


Welcome to CDI Quarterly Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions]. Today's call is being recorded. If you have any objections, you may disconnect at this time. Now I would like to turn the call over to your host, Mr. Vince Webb. Sir, you may now begin.

Vince Webb

Good morning, and welcome to CDI's second quarter conference call. At this point, you should have a copy of the earnings press release. If not, please call our office at 215-636-1162, and we will be happy to email you a copy, or you can find a copy on our website at Please also refer to our website for information concerning a replay of today's call.

On the line with us today is Scott Freidheim, Chief Executive Officer; and Michael Castleman, Chief Financial Officer. We will begin with some prepared remarks from Scott and Michael and then we will open the line for your questions. I'd like to remind you that today's conference call is being recorded and includes forward-looking statements that are subject to risks and uncertainties. We would therefore like to point out the cautionary language regarding forward-looking statements contained in the news release and remind everyone that the same language applies to any comments made during this morning's conference call.

Also, comments today may reference non-GAAP financial measures such as constant currency, EBITDA, adjusted EBITDA, and adjusted earnings per share. Additional information concerning these measures, including reconciliations to the most directly comparable GAAP financial measure is contained in the press release tables related to this call.

Remarks this morning may refer to certain metrics such as book to bill and production headcount consistent with CDI's commitment to transparency these metrics provide shareholders and analysts with additional information to monitor the company's progress. These metrics may evolve over time and should not be viewed as completely determinative of near or long-term performance. The information being shared in this call is effective as of today's date, August 04, 2016, and will not be updated. Actual results might differ materially from those projected in these forward-looking statements.

So, at this time, I would like to turn the call over to Scott Freidheim. Scott.

Scott J. Freidheim

Thank you, Vince and good morning to all. As you recall from our last earnings conference call we entered the second quarter with a sense that we moderately received stabilization in our business. The current quarter environment turned out to be slightly more challenging than expected, primarily due to softness in the UK, delays in funded government contracts, and sustained pressure from low oil prices. Yet despite this environment we continue to believe that on the whole we are seeing stabilization.

Here is one way to put that into context. The midpoint of our Q1 revenue guidance was 225 million but as we said we posted better than expected Q1 revenue. In Q2 we delivered 226.7 million, the midpoint of our Q3 guidance is 225 million. The challenges and risks of our existing footprint remained and matched the results of our investments from sales, delivery, client service. However, these investments are beginning to offset those challenges delivering greater stability.

We have a plan, we are focused on executing that plan, we are also managing our resources consistent with our plan but dynamically based on changes in the environment and return on investment. That also means that while we invest appropriately in sales and delivery capabilities, we will reduce our costs to provide both support for these investments and for improved profitability. We estimate producing $11 million of annualized operating expenses savings from these efforts.

Turning to the quarter, in the second quarter CDI generated revenue of $227 million down 8.2% from the prior year quarter. This most recent quarter includes 11 million in contribution from EdgeRock. Sequentially CDI revenue was down 2.9% for the quarter, reflecting in large part expected seasonality in our Canadian pipeline staffing business as well as some of the pressures I referenced a moment ago. Nonetheless, our growth related investments such as in specialty talent and technology solutions are beginning to offset those pressures.

Adjusted EBITDA for the quarter was a loss of 2.7 million versus adjusted EBITDA of 4.7 million in the prior year quarter. Adjusted EPS was a loss of $0.33 during the second quarter compared to zero adjusted earnings in the prior year period. We are intent on ensuring that CDI maintains an appropriate level of operating profitability and capital availability to deliver on our CDI 2020 strategy. Accordingly we are reducing our costs. These actions will produce improved operating profitability during the second half of 2016 but these actions will not inhibit our investment plans nor our ability to deliver future growth.

We continued to execute our investment plans during the second quarter making progress on key elements of our turnaround even as we respond to the challenging market and client conditions. In EdgeRock, our specialty talent business we sustained improvements in front end activity cited in our last call leading to 9% sequential revenue growth in the quarter on a higher number of active consultants. We continued to add sales and delivery capacity to support future growth. At the end of Q2 production staff was over 40% higher than December.

We are also implementing new training, sales management, lead generation capacity to create more consistent performance and growth. And technology solutions increased business development capacity and discipline are contributing to growth in new award volume. Second quarter total contract value including the new roles grew 4% sequentially. In government services we maintained our focus on winning new business, particularly targeting prime contracting opportunities. Through the second quarter we submitted more than double the total value of proposals submitted in all of 2015.

Government awards related to several large contract bids are expected in the second half of 2016. In aerospace, our added business development capacity is now generating increased bids including from manufacturing and software engineering as we begin to participate more actively in the cyclical shift from new product development to production. We also largely completed the implementation of our work sharing platforms that enable more efficient use of our existing facilities across new and existing clients which will contribute to better utilization and margins.

Within North America staffing, we completed our transition from a client centric to a skill based recruitment model in support of our strategic focus on higher value added skill sets. We redefined all jobs within the new delivery model, aligned technology platforms, and core operational processes and executed communications and training plans. As a part of this transition we implemented a multi-country offshore sourcing and screening capacity. We aligned our sales organization to a two tiered structure complimenting our recruiting model.

Our enterprise sales force augmented with a new industry experienced team and leadership members, we are focused on larger volume opportunities. In addition leveraging best practices from EdgeRock we established a national sales team in Atlanta, a primary recruiting hub to target high value, skilled entry points into medium and large enterprises in consort with our skills based staffing model.

Lastly in MRI, following the introduction of new leadership earlier this year we are implementing a strategy to enhance our value proposition, service offering, and future growth. This strategy contains several components tailoring services in support to distinct segments of our franchises, introducing new value added services to our franchise network, and creating a more powerful and impactful new franchise sales model.

The progress we have made in turnaround plan is not reflected in our second quarter results. To reiterate my comments from our last call, it will take time to overcome the various challenges inherent in CDI's positioning, including industry exposure, client concentration, and portfolio complexity. But we are seeing positive signs from our performance improvement plans and expect to continue to communicate more each quarter. Now let me turn the call over to Mike.

Michael S. Castleman

Thank you Scott and good morning everyone. Consistent with our messaging on last quarter's earnings call it will take time to overcome the various challenges inherent in CDI's position, end market exposure, and concentrated client base. Accordingly, progress on our turnaround maybe uneven. As Scott noted we are intent on ensuring that CDI maintains an appropriate level of operating profitability and capital availability to deliver on our CDI 2020 strategy.

During the second quarter we faced additional pressures associated with our end markets and concentrated client footprint. Yet we demonstrated progress in key areas of our turnaround which is contributing to general stabilization of our aggregate revenue trends. As we discuss our results in more detail please note that this is our second quarter reporting under the new segmentation aligned with our CDI 2020 strategy. For those new to this segmentation it is outlined in detail in our SEC filings particularly in our 8-K filed in April 2016.

Now to the results. CDI reported revenue of $226.7 million during the second quarter, down 8.2% from the prior year period and down 2.9% sequentially. In constant currency, CDI revenue declined 7% year-over-year as the dollar strengthened against both the Canadian dollar and the British pound. Conversely currency positively impacted our sequential results by approximately 60 basis points as strength in the Canadian dollar offset continued weakness in the pound.

We saw almost equal dollar contribution to year-over-year revenue declines from engineering solutions and enterprise talent. These declines were offset in part by the inclusion of EdgeRock now specialty talent which contributed approximately $11 million during the second quarter and for which results are not included in the prior year period.

Revenue in our enterprise talent segment declined 10.7% from the prior year quarter. Within this segment, North America staffing declined $10.2 million or 8.3% with the stronger dollar contributing to 100 basis points of the decline. On a sequential basis, North America staffing declined 3.2% including a benefit of 135 basis points from currency. This sequential decline was largely expected due to seasonal declines in Canada associated with the spring thaw. However, our Western Canada pipeline inspection business continues to face volume and rate pressures associated with lower oil and gas prices.

Total W2 billable hours in North America staffing were 1.93 million, compared with 2.08 million in the year ago period and 1.96 million in Q1. The average bill rate for North America staffing was approximately $55 compared with $56 in both the prior year period and Q1. UK staffing declined $5.7 million or 21.8% versus the prior year period and 15.8% in constant currency. Sequentially UK staffing revenue declined 10.7% including nearly 100 basis points of drag from currency.

During our first quarter earnings call we highlighted softness in the rail safety critical sector that accompanied a governmental review of rail programs, as well as more general softness in the construction contract staffing sector. During the second quarter these general market conditions were exacerbated by high degrees of uncertainty leading into and following the Brexit referendum. We continue to see the impact of general, economic, and regulatory uncertainty on our UK staffing business. Furthermore, the significant deterioration in the value of the pound post referendum will impact our dollar denominated results in Q3.

Turning now to our specialty talent and technology solutions segments where revenue of $19.1 million was up 142% year-over-year attributable to the specialty talent vertical. Specialty talent currently comprised of EdgeRock contributed $11 million of the 11.2 million segment increase year-over-year. Sequentially, specialty talent was up 9.3% from Q1. To sustain future growth we are focusing intensely on disciplined front end sales and delivery activity by existing production staff. In addition we are investing in increased production capacity.

Average production staff comprised of sales and delivery reps and related managers was 64 during the quarter up from 60 in Q1 and we are on boarded additional production staff in July. We expect new staff members to begin to contribute positively to results within nine months of on boarding. As a result increased production staff creates a short-term drag on profitability. However, we expect this investment ultimately to deliver a strong ROI.

Average active placements were 138 in Q2 versus 134 in Q1. Bill rates averaged approximately $153 for both the second and first quarter of 2016. Our technology solutions vertical grew 3.5% year-over-year on increased spending with existing clients in a new win with a large educational institution that is now ramping to full scale. These increases were partially offset by project completions, reduced service management call volume, and lower billable headcount at certain clients that reduced activity levels to manage their own profitability. These offsets also contributed to the small sequential decline of 2.3%.

We are beginning to realize the benefits of increased investment in business development capacity and solutions leadership as total contract value including renewals signed in the quarter grew to $9.4 million, compared with $9 million for Q1 2016. As we further grow business development headcount and pipeline, we expect to see more progress and cumulative signed contract value to have a greater impact on top line growth.

Moving to our third reporting segment, engineering solutions posted revenue of $61.2 million, a decline of 20.1% attributable to our energy, chemicals, and infrastructure, and aerospace and industrial equipment verticals. EC&I declined 27.9% versus last year, and 2% sequentially as lower oil and gas prices continued to impact capital spending activity in energy and chemicals.

As we noted in the first quarter there are early signs of new project spending among downstream clients anticipated for later in 2016. However, we also are seeing increased competition in the smaller mid cap project markets from larger players that are reaching down market in search of work.

Infrastructure spending in Q2 was negatively impacted by delayed starts for certain awarded architecture projects while Pennsylvania transportation spending remains strong. In addition we are seeing a strong increase in new business pipeline activity within the correctional facility sector with several new contract awards pending for the second half. For EC&I book-to-bill for the trailing 3 and 12 month periods was 0.8 and 0.9 respectively. Total new award value in the quarter was $28.2 million.

Our AIE vertical declined 27.9% versus prior year and 4.6% sequentially as we continued to experience the negative effects of spending and price reductions by our largest client. As we noted last quarter we implemented operational and business development changes to increase our prospects with new and existing clients, including expansion into manufacturing engineering and other higher margin services. We are seeing positive developments as a result that will remain early in the turnaround of the revenue trajectory of this business. Trailing 3 and 12 month book-to-bill rates within AIE were 1.2 and 1 respectively. Total new award value in the quarter was $11.3 million.

Lastly within engineering solutions, government services revenue increased 4% versus the prior year, driven by the ramp of recent U.S. Navy wins. Sequentially government services was down 5% due to delays in the release of tax and other work orders associated with funded contracts. We continue to engage in significant proposal activity particularly targeting larger prime contracting opportunities. Government services book-to-bill for the 3 and 12 month period were 1.4 and 1.1 respectively. New award value in the second quarter was $16.7 million reflecting improved funding of existing and new contracts.

Our final segment MRI reported revenue of $12.9 million, a decline of 0.5% from the year ago period, primarily driven by reduced royalty revenue. Sequentially MRI grew 5.7% partly on seasonal increases in royalties as well as growth in contract staffing.

Turning to gross profit, second quarter results totaled $42.1 million, down 9.8% from year ago levels primarily on volume declines. Gross margin rate declined 30 basis points year-over-year from 18.9% to 18.6% reflecting rate pressure from certain clients particularly in North America staffing in the mix of projects and service work performed. Sequentially gross margin was up modestly despite an unexpected increase in medical claim expenses which had 15 basis point drag on gross margins.

Adjusted EBITDA for the quarter was a loss of $2.7 million compared to positive $4.7million in the year-ago period. The decrease was a function of volume driven declines in gross profit, in our organic business. Adjusted operating expenses in the quarter were $44.7 million versus $41.9 million in the prior year period, and $44.1 million in Q1 2016.

The increase over last year results are from the inclusion of EdgeRock operations. On an organic basis adjusted operating expenses were flat versus the prior year period. Consistent with our plans we increased personnel related investments in management sales and delivery within select business verticals such as North America staffing, government services, and technology solutions. These investments were offset by lower personnel and support cost in other verticals particularly EC&I and UK staffing and further by reduced corporate expenses primarily associated with international business development.

Adjusted earnings per share were a loss of $0.33 per diluted share in the second quarter versus zero in the year ago period. The effective tax rate for three months ended June 30, 2016 was negative 8.3%. Our tax cost and negative effective tax rate resulting taxes on profits in Canada and certain state taxes while losses in the United Kingdom and United States do not produce any tax benefit recognizable under GAAP.

Turning to our balance sheet and liquidity, CDI ended the quarter with $4.7 million in cash and cash equivalents versus $9.8 million at the end of first quarter 2016. Net cash generated by operating activities for the first quarter was a deficit of $7.7 million versus $12.2 million in the prior year's quarter.

DSOs increased by four days versus Q1 and eight days versus last year. The increase in DSOs continues to be driven in part by delayed collections performance related to a few specific clients with the specialty complex and customized operations. We also experienced higher than expected end of quarter payment delays by certain clients with collections following quickly in the first two weeks of July.

Total debt outstanding was $25.9 million at June 30, 2016 versus $18.8 million at December 31, 2015. In addition during the quarter we repurchased 638,000 shares of common stock at an aggregate cost of $3.9 million. In total since inception through August 1, we have repurchased nearly 1.2 million shares at an aggregate cost of $7.3 million. Total liquidity, including availability under CDI’s credit facility was $120.9 million at June 30th versus $136.6 million at the end of the Q1 and $98.1 million at June 30, 2015.

Looking ahead, we expect revenues for the third quarter of 2016 to be in the range of $220 million to $230 million. This guidance assumes business conditions and mix generally consistent with our second quarter and includes the current expected impact of the Brexit referendum on our UK business. This impact is estimated at between 1.5 to 2 points of drag on quarterly sequential growth. We further anticipate that gross margin rates sequentially will be flat to up 25 basis points.

Adjusted operating expenses are expected to decrease between 3% and 4% from that experienced in the second quarter of 2016. As we stated we are intent on ensuring CDI maintains an appropriate level of operating profitability and capital availability to deliver on our CDI 2020 strategy. Accordingly we have taken actions and are currently evaluating plans to reduce our costs. While our plans are still evolving they could result in a third quarter restructuring charge of between $1.5 million and $2.5 million. We currently estimate that these plans and other actions being taken could produce annualized savings of approximately $11 million.

While we would begin to realize savings as early as Q3, the bulk of savings and efficiencies gains would begin in Q4 and into 2017. We will continue to aggressively identify opportunities to lower our cost to serve via process optimization, automation, and simplification. In addition we will continue to manage and prioritize any investment or savings actions consistent with our CDI 2020 strategy. Thank you for your time this morning and I now turn the call back to Scott.

Scott J. Freidheim

Thank you, Michael. Sheena, if you could please open the lines for Q&A.

Question-and-Answer Session


[Operator Instructions]. Our first question comes from Marco Rodriguez, Stonegate Capital Markets. Your line is now open.

Marco Rodriguez

Good morning guys. Thank you for taking my questions. I was wondering if we could talk a little bit more about the guidance that you have there. I wasn't able to catch everything. The gross margin impact, what were the numbers that you had discussed that you will see on a sequential basis?

Michael S. Castleman

Flat to up 25 basis points Marco.

Marco Rodriguez

Okay. And you did mention that the British drag there. Is that inclusive of that in that guidance there?

Michael S. Castleman

Absolutely Marco, it is inclusive. As you can imagine the UK is a fairly fluid environment right now. We saw the PMI index come out every week with a pretty steep decline month-over-month and in a pretty low level relative to even where we were in 2009. Just to give you some context, in that sort of environment there is a bit of running for shelter until people start to calm. We are seeing some increases in pipeline activity and people starting to come out of the shelter and look out okay, what are we going to do next, how are we going to execute our businesses. But it is still fluid and we expect both a volume impact and foreign currency impact.

Marco Rodriguez

Got you, okay, that's helpful. And then moving on to the reduction of costs that you plan on implementing here, $11 million in annualized type savings, have a charge here in Q3, but I believe you said the bulk of that $11 million annualized savings will come in kind of Q4. Is this just a timing aspect or is it going to take time to kind of put those restructuring efforts into place, can you kind of help me think through that on the timing aspects?

Scott J. Freidheim

Sure, so there is two components Marco. There is plans we are evaluating that would result in a restructuring charge. That takes time and it takes time to implement and the savings to be realized. We have not been sitting still at all. As environment changes for example in the UK, we moved in second quarter and into the third quarter to materially change our cost structure. We have reduced cost in that business by upwards of 15% on a monthly basis. So, we are starting to see that roll forward and roll through the third quarter. Other actions were taken similarly.

As we can implement and as we can realize we are doing it with speed but we are also doing it with discipline. Some of the savings and some of the plans are related to contracts that are getting renegotiated or rolling off and we are renegotiating as they roll off. Others are related to the implementation of headcount or facility reductions which also has some timeline in terms of implementation and then realization.

Marco Rodriguez

Got you and then can you kind of help me think through, if you're doing contract negotiations versus headcount, kind of difference there, how should we think -- is it like a 50/50 mix, 20/30 -- I mean 20/80, excuse me?

Michael S. Castleman

I would say it is more 70/30 in terms of things that headcount facility and other expenses we can quickly move on and then incrementally there are areas and it is a continuous improvement focus. Incrementally there are areas that we will continue to drive savings on, for example, communications cost, printer copier cost. We are looking at across the business as the business has changed, as our revenue has changed, and the environment has changed how do we change our costs to reflect that and reflect driving improved profitability and cash flow going forward.

Marco Rodriguez

Got it, and then you have a few end markets that are a little weak here, under pressure. Obviously, the oil and gas sector and the oil prices are pretty weak here, it seems to be impacting some of your growth. But then also obviously you've got the UK issue with the Brexit. I'm just kind of wondering, in terms of what you are seeing out there right now, I mean how is it impacting the pricing of your contracts and how are you kind of putting that or baking that into your assumptions going forward?

Scott J. Freidheim

It varies by market. When you look out for example Western Canada, Marco, we have seen both volume and rate pressures there. The pipeline companies have been under significant pressure of their own and in any large volume procurement driven environment there is normally rate pressure. It is significantly higher in this sort of market.

Within something like EC&I from a pricing perspective, we are maintaining discipline. It is about finding the right clients with the right projects and providing the right value added services. As we change our costs however, it gives us more flexibility to drive profit and margin at different prices. So, our ability to reduce underutilization whether it is facilities or its through indirect labor allows us to price to a market and maintain margin. But we are not focused in that market on driving price as a point of differentiation, quality and value added is the point of differentiation.

So, again back to your original question, it really varies by market. The key for us is pricing discipline and profit discipline and making sure we have the right review, we have the right risk management, and we have the right cost to serve and value add it so we can drive improved profit and growth.

Marco Rodriguez

Got you.

Michael S. Castleman

Marco one other thing before we leave you, related to the last two questions, something that we have been saying consistently. From a strategic perspective one of the key pillars is about efficiency and productivity. So, the $11 million that we talked about is the sum of a series of analytic based activities that relates to an operating philosophy that we have talked about which is managing dynamically and with a focus on return on invested capital. Therefore what I don’t want you or other investors to be thinking is that there was some process that was pro rata or passing the half.

Rather it was looking at each one of the businesses which we do on a regular basis. That is why you have differences in things like an Anders where we have scaled down to the tune of 15%, at the same time that EdgeRock, you noted that since the -- since December end of the quarter production staff is over 40% greater. So, it is based on the operating philosophies in light of the portfolio of the visit that we have that we are going to be managing dynamically and based on return on invested capital.

Marco Rodriguez

Got it, very helpful. And last quick question, I just want to talk a little bit about balance sheet and cash flow. Cash flow from operations for the first six months, slightly negative. And I know you guys referenced some collection issues that I guess rectified themselves after quarter end. How are you guys thinking about cash flow from operations for the fiscal year, and your current cash level kind of low in comparison to your historical last couple of years? Just help me kind of think through that.

Michael S. Castleman

Sure Marco. Look, let's start with the first half of the year and second quarter. I am not pleased with where DSO's are. There are number of different dynamics going on there, one we talked about is specific client complexity and performance related and we are working through that with our clients as partners to get those things resolved.

Second, and this happened this year for the first two quarters is our quarter ended on a Thursday. Thursday is a payroll day, Friday is often and typically a collections day for several of our large clients where they are depositing funds related to invoicing during the course of the day. So, as of the end of the quarter it shows higher receivables. That actually changes in the third quarter, the third quarter ends on a Friday. So, we should see some pickup in the third quarter related to that.

The third dynamic was during the first half of the year we actually had higher gross revenue than our reported -- growth in gross revenues than our reported net revenue. That is related to pass-through's and things we do through our sub contractors or supplier associates. So, when we report our DSOs on net revenue it appears somewhat higher. So, we actually when you look at the growth in DSOs on a gross revenue basis it is about half of what that growth is on a net revenue basis. So, I can explain more of that offline if you would like. But maybe to say the net revenue mix the DSO change look a little worse than reality.

Moving to the second half, we expect improvement in cash flow. We look at -- are now looking to positive cash flow both as we bring down the DSOs. Fourth quarter typically is a lower quarter when you look historically in terms of DSOs. And we have strong collections. We also look as our improvement and profitability in savings plans, that should contribute positively to free cash flow and overall our collections efforts. So, we would look at the second half of the year as positive cash flow from operations and should be positive free cash flow. Ultimately the relative magnitude of growth will determine whether we are free cash flow positive for the year in aggregate or more neutral.

Marco Rodriguez

Got you, thanks a lot guys. I appreciate your time.

Scott J. Freidheim

Thank you Marco.

Michael S. Castleman

Thank you.


Our next question comes from Steve Cole, Mangrove. Your line is now open.

Steve Cole

Hey, good morning guys. Thanks for taking the question. I guess I had a few here. One, Michael, let me talk a little bit about the availability. I know you guys talk about liquidity and managing capital availability on one side. What restrictions, if any, are in place on that availability, so, can you use that money for working capital, share repurchases, acquisitions, can you frame that for me a little bit?

Michael S. Castleman

Sure, there are natural consents and they are fairly standard in our credit facility agreement and that credit facility agreement is filed as an 8-K, so you have access and we can share it with you that 8-K. From a covenant perspective which is the real constraint, there is a fixed charge covenant ratio test that springs under different circumstances based on excess availability in the line. So, for example your question regarding dividends or share buybacks, we are not subject to a restriction except to the extent excess availability goes below 25% and then we would be subject to the fixed charge coverage ratio test.

In terms of acquisitions we are not subject to restrictions unless excess availability goes below 17.5% and then we are subject to the fixed charge covenant test. So, we are obviously very mindful of where those breakpoints are in terms of managing our capital and we are very mindful generally of our capital availability and balance sheet strength in terms of sustaining the business and the strength through the turn around and executing our overall strategy.

Steve Cole

Okay, let me talk about something else. So you guys have spent a lot of time over the last number of quarters chatting about really a couple of things, how you allocate capital, having a proper focus on return on invested capital, making capital allocation decisions. So let's look at specialty talent for a second. You made an acquisition of EdgeRock. You're beefing up production capacity dramatically, yet revenues are up 10% sequentially. Some of this is timing, but I'm just curious. When you look at this return on invested capital threshold, what are you looking for, so when we look at the amount of money that's being dumped in on the production capacity, what level of business do you have to attain to get a sufficient payback on LSI [ph]? This is an example in this one line, because obviously that's a focus for you guys.

Michael S. Castleman

When you look at specialty talent and you look at the margin profile of that business which generates 28% to 29% gross margin and on the incremental gross profit dollar generates upwards of 60% to 70% conversion. Again on the incremental dollar or GP and you can take production staff and make them net positive within nine months. You are looking at a very high return on invested capital. The key is getting all of those people productive. Not a 100% of the people you are going to add are going to hit the targets you set, you have to manage that performance since you have been in the industry for a long time and you know this very well. You have to manage that performance on a daily, weekly, monthly basis and make smart and quick decisions around composition of your production staff. That is the discipline we are adding to EdgeRock or increasing in EdgeRock to ensure we get that return on invested capital. But the margin profile of the business and the contribution potential of each incremental dollar is very high return.

Scott J. Freidheim

Let me elaborate a little bit, Steve. The lack of announcements doesn’t equate to absence of activity. We are highly focused on driving the operational performance and our teams have prioritized the issues accordingly. But we have got a dedicated corporate development team that is standalone to make sure that we minimize any business disruption. And per your point, yes, we are going to be disciplined allocators of capital which by definition means we are going to be disciplined buyers and potential sellers. This environment is challenging and we have to make sure that we focus on the operational performance turnaround because it directly correlates to our ability on any potential monetization. But it is a very disciplined process in terms of vetting opportunities. We evaluate all aspects, company specific hit broader environment. On the staffing side for example that you brought up, we have very focused and specific skill sets that we are looking for and vetting on a regular basis that relates to the margin profile, the growth trends, and strategic fit with our strategy.

Michael S. Castleman

I hope that helps gives a little bit of context in accordance to what you asked.

Steve Cole

It does, thanks. And last question and I'll hop out. The buyback, can you give us a little bit of a sense, obviously, you provided some framework on what you bought through August 1. What is the thinking, obviously, the stock had been up towards $7. Now we are under $6 coming in post the earnings here. I take it, obviously, if I'm doing my math right, and I'm getting a little bit older and my vision is getting impaired, but it looks like your average is about 6.10 across both of those buckets that you're looking at. Is one right to assume that you would be aggressive buyers then consequently at this price if the stock stays here?

Michael S. Castleman

Yeah, I don’t really want to be specific on forward-looking but you are right, we have actively repurchased $7.3 million out of the $20 million that was authorized, 6.07 is the average price. But it is clearly an area of focus relative to how we are thinking about other uses of capital. Michael alluded to it a little bit earlier. It is the balance of ensuring that we have the right capital availability through the turnaround to deliver on the CDI 2020 strategy which means you have the balance of very discreet opportunities in lead purchase, secular and cyclical degrees of freedom, and acquisition opportunities.

Steve Cole

I understand, thank you guys very much, appreciate the time.

Michael S. Castleman

Thank you, Steve.

Scott J. Freidheim

Thank you Steve, I know it is late there.


And as of the moment we show no further question on queue at this time. [Operator Instructions]. At the moment we show no further questions at this time. Now I would like to turn the call over to Scott for closing remarks.

Scott J. Freidheim

Thank you all for joining. We look forward to updating you on our continued progress and performance next quarter.

Michael S. Castleman

And thank you Sheena you can close the call.


And that concludes the conference for today. Thank you for your participation. You may now disconnect.

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