ASGN Incorporated

Thank you for signing by. This is the conference operator. Welcome to the ASGN Incorporated first quarter 2020 earnings call. As a reminder, all participants are in listening mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then one on your telephone keypad. If you need assistance during the conference call, you may fill in the operator by pressing star and zero. I would now like to turn the conference over to Kimberly Estikin, Investor Relations. Please go ahead.

Thank you, Operator. Good afternoon, and thank you for joining us today for ASGN's first quarter 2020 conference call. With me are Ted Hansen, President and Chief Executive Officer, Rand Blazer, President of APEC Systems, George Wilson, President of ECS, and Ed Pierce, Chief Financial Officer. Before we get started, I would like to remind everyone that our commentary contains forward-looking statements. Although we believe these statements are reasonable, they are subject to risks and uncertainties, and as such, our actual results could differ materially from those statements. Certain of these risks and uncertainties are described in today's press release and in our SEC filings. We do not assume any obligation to update statements made on this call. For your convenience, Our prepared remarks and supplemental materials can be found in the Investor Relations section of our website at investors.asgn.com. Please also note that on this call, we will be referencing certain non-GAAP measures, such as adjusted EBITDA, adjusted net income, and free cash flow. These non-GAAP measures are intended to supplement the comparable GAAP measures. Reconciliations between the GAAP and non-GAAP measures are included in today's press release. I will now turn the call over to President and Chief Executive Officer, Ted Hanson.

Thank you, Kim, and thank you for joining ASGN's first quarter 2020 earnings call. We hope that everyone listening today is staying safe and healthy. ASGN had a very solid Q1, with revenues and adjusted EBITDA both falling within our guidance ranges for the quarter. First quarter 2020 revenues of $990.5 million, were up 7.2% year-over-year. Adjusted EBITDA of 103.5 million increased 6.6% over the prior year. This growth was led by continued above-market performance in our ECS segment, which generated industry-leading year-over-year growth and revenues of $212.7 million, up 26.6% over the prior year, and by our APEX segment, where despite the impact in March from COVID-19 crisis, revenues of $629.1 million improved 3.8%, with APEX systems growing 4.4% on tough, double-digit year-over-year comps. Through February, we continued to see growth across our business at or above our expectations for the two months. As we entered March, and the onset of the public health crisis took hold, our businesses serving commercial market accounts leveled off, and in some cases saw slight retractions, while our federal government business continued to see strong growth. During late February and early March, I met, albeit virtually, with ASGN's Board of Directors and our senior leadership to execute our business continuity plans, as well as to deploy the necessary measures to ensure the safety, and well-being of each of our employees. Our teams moved quickly to understand and address the individual safety protocols and service requirements of our clients. Leveraging our strong technology platforms, we shifted our internal workforce to 100% remote. Then, over the month of March and into early April, over 80% of our billable consultants transitioned to remote work, with just a small portion of essential staff still working on site in compliance with the required safety protocols. The past eight weeks have been challenging, but fortunately for us, over this same time period, we've seen the benefits of the strategic initiatives we've undertaken to evolve and strengthen ASGN's business. We've become much more IT-centric, and in doing so, have expanded our large account portfolio, which now includes over 50% of the Fortune 500s, as well as key federal defense and civilian government agencies. We've increased our high-end IT solution capabilities, and as a result, our customers continue to rely on us not only to fulfill existing contracts, but also bring innovative ideas in cloud computing, networking, and mobility to enable their employees to work safely and efficiently off-site. Lastly, but certainly not least, we've gained significant exposure to the federal government marketplace an industry that is often more insulated from economic volatility than commercial industry segments, and we are now the prime contractor on many mission-critical assignments for the federal government. Each of these strategic developments has positioned us not only for stability during the current downturn, but also for strength in the future recovery. Our flexible cost structure and solid free cash flow generation provide further stability to our business. In the first quarter of 2020, we generated $48.8 million in free cash flow, up 33.9% year-over-year. At the end of Q1, we also had modest borrowings under our $250 million revolving credit facility, mainly due to our acquisition of Blackstone Federal in January, along with shareware purchases, which we have since ceased. A moderate amount of debt has always been part of ASTN's balanced capital allocation strategy and supported our ability to make acquisitions. I'm pleased to note, however, that as a result of our strong free cash flow, we paid for our most recent acquisitions, InterSys Consulting and Blackstone Federal, essentially with cash and did not need to take on any additional leverage. Even in the current market condition, our acquisition pipeline is active, and acquisitions remain a part of ASGN's long-term growth strategy. Continuing on with Strong's our strong financial position. As you may recall, in the fourth quarter of 2019, we improved our capital structure, issuing $550 million in senior unsecured notes due 2028 and amending our senior credit facility due 2025. As a result of these actions, we fixed the interest rate on half of our indebtedness, we lengthened our debt tenor by 2.3 years, and we increased our borrowing capacity under our revolving credit facility by 50 million to 250 million. These efforts could not have been timelier as they provided us with increased flexibility to direct funds in the best interest of our employees, our clients, and our stockholders. Importantly, we have no principal payments due on any of these borrowings until they reach maturity. With that as background, let's now talk about our performance in the first quarter. APEX, our largest segment, which includes APEX Systems and Creative Circle, services clients across multiple commercial and markets. For the first quarter of 2020, the APEX segment generated revenues of $629.1 million of 3.8% year-over-year on a very difficult double-digit count. As you may recall, the APEX segment grew 12.5% year-over-year in the first quarter of 2019, with APEX systems leading the way at 14.1% growth over the prior year period. Fair Circle posted very slight growth for the quarter. Early growth levels slowed in March, attributable mostly to the crisis-driven reduction in ad, event, and per-placement revenues. Only digital-related skill placements held steady through the quarter. APEX Systems revenue grew 4.4% year-over-year. Revenue for APEX Systems, while holding steady in March, demonstrated some notable trends for the final month of the quarter. Revenues in financial services, business services, consumer industrial, despite weakness in retail, energy, hospitality, and transportation, specifically airlines. And aerospace, defense, and life sciences were all up in March year over year. Keep in mind that APEX has a limited exposure to the airline oil and gas and hospitality industries. Revenues in healthcare, telecommunications, and technology accounts were down in March year over year. Revenues in skill areas such as cloud, digital, software engineering, project management, software maintenance support, Java, and mobile development performed the best, while electronic health records modernization, information security, scientific, QA, and business intelligence were down in March compared to the prior year. We are seeing some green shoots being created in financial services. As stimulus funding pushes through commercial banks, It is creating a heightened need for our clients to implement new IT measures. APEX systems' large exposure to the financial services industry should provide both growth opportunities and stability to our business going forward. APEX segment top accounts achieved high single-digit growth rates for Q1, while branch-centric accounts declined low single digits. APEX segment gross margin totaled 29.3% for Q1, consistent with our expectations. Importantly, segment margins remained steady throughout March. Consulting work for the Apex and Oxford segments totaled $104.1 million for the first quarter, up 22.2% year-over-year. Margins for our consulting work outperformed overall margin rates for both the Apex and Oxford segments. We expect that our high-end consulting offering will continue to be an important source of the value we provide our clients going forward. As we continue to grow our consulting revenues organically, we also broadened our capabilities through new opportunities presented by Intersys Consulting, which we acquired in the fourth quarter of 2019. With the integration of Intersys, we've been able to bid on an increased amount of work together. Most recently, as a joint effort, Apex Systems and Enersys supported a large consumer production company with their transformation efforts to cloud computing and more modern data capabilities. Apex Systems and Enersys also led a large consumer services provider in their journey to modernize their IT product set and fully integrate the system with the client's CRM. We are also seeing great traction with Intersys Near Shore Mexican Development Center, which is well positioned to serve many of the APEX and Oxfords US clients. Interestingly, under current market conditions, we've witnessed a growing number of clients looking to reshore their capabilities, as outsourcing companies are finding it difficult to transition their offshore staff to remote work. Our Near Shore Mexican Development Center provides a great alternative when traditional outsourcing to offshore may not be feasible or come with newfound risks. Let's now turn to ECS, which provides mission-critical solutions for the federal government, including the Department of Defense, intelligence agencies, and other civilian agencies. ECS continued to achieve industry-leading revenue growth for the first quarter of 2020 and reported revenues of $212.7 million up 26.6% year-over-year, primarily driven by continued high demand from federal government customers for machine learning and artificial intelligence services, an increased volume of cloud services and solutions, and new opportunities presented by strategic M&A. ECF did not see a slowdown in revenue in March. In fact, the segment saw a slight pickup in revenues in the final month of the quarter, as is consistent with ECS's March performance. We are fortunate to have seen no material changes to revenue or backlog in ECS in the first quarter of 2020 as a result of the COVID-19. In an economic downturn, government work tends to be more stable, and thus ECS provides a nice safety net to our business. We also often see the federal government spend more money during recessionary times to stimulate the economy, ECS's new business pipeline remained robust with no slowdown in customer requests for proposal during the first quarter. The segment achieved a strong book-to-bill of 1.4 to 1 and received $294 million in new contract awards. Key contracts won in Q1 include high-end technical solutions for a global public safety network within the Department of Defense, a significant expansion of machine learning services under a new contract also within the Department of Defense, and the significant expansion of professional services provided to the U.S. Postal Service. This strength in the first quarter awards increased contract backlog to $2.7 billion at the end of Q1, or a healthy coverage ratio of three times ECS's trailing 12-month revenues. As it relates to M&A, we've continued to be acquisitive in the government markets. In January, we welcomed Blackstone Federal to ECS, adding new prime contract pathways with the Department of Homeland Security. Blackstone has now been fully integrated into ECS, and both ECS and Blackstone's customers are seeing the benefits of the combined companies. In times of global crisis, the work ECS performs for our federal government becomes even more vital. Towards the end of March, ECS was tasked with aiding the U.S. Navy's COVID-19 relief efforts on the West Coast. Members of the ECS team are now serving as the IT mission lead, as well as the division officer for automated data processing and communication on the U.S. Navy ship Mercy, a ship equipped to provide rapid, flexible, and mobile acute medical and surgical services. We are proud to support our government in meeting critical challenges during such a trying time for our nation. Turning to our last segment, Oxford, Oxford offers on-demand consulting talent for commercial IT, healthcare, life sciences, and engineering clients. Oxford reported revenues of $148.7 million for the first quarter of 2020, down slightly year-over-year, while the segment's permanent placement revenues were up 1.8% over the prior first quarter. Keep in mind, however, the permanent placement work comprises only 3.4% of our consolidated ASGN revenues. As we enter the second quarter of 2020, we know that the effects of COVID-19 will last well beyond the impact ASGN first began to experience in mid-March. Given this uncertainty, we will not be providing our typical quarterly guidance for the second quarter. Instead, we will offer several revenue scenarios in our supplemental materials which you can find on our investor relations website. Ed Pierce, our CFO, will provide additional details on these scenarios. Even without our typical near-term visibility, our scale, high-end service offerings, and large and diverse client base, including a significant portion of business that relates to the stable federal government work, position us well to not only address the immediate challenges related to COVID-19, but also to drive longer-term value, Our flexible cost structure provides further stability to our business. As a reminder, ASGN carries little if no bench. As a result, when our assignment revenues decline, our cost of sales fall proportionately. Our cash SG&A expenses are also variable, with one-third of these expenses comprised of incentive-based compensation tied directly to gross profit or adjusted EBITDA. With that said, when our revenues decline, we see a higher conversion of our free cash flow to adjusted EBITDA due to lower working capital requirements. I will now turn the call over to Ed Pierce to speak more about these revenue scenarios and discuss our first quarter financial performance in further detail. Ed?