Filer: Howard Schultz & Associates International, Inc.
Pursuant to Rule 425 under the Securities Act of 1933
and deemed filed pursuant to Rule 14a-12 under the
Securities Exchange Act of 1934
Subject Company: Howard Schultz & Associates International, Inc.
Commission File No. 000-28000
PROFIT RECOVERY GROUP
Moderator: John Cook
October 31, 2001/9:00 a.m. CST
Page 1
PROFIT RECOVERY GROUP
October 31, 2001
9:00 a.m. CST
Coordinator Good morning, and welcome to the PRG conference call. All
participants will be able to listen only until the question
and answer session of the call. At the request of Profit
Recovery Group, this call is being recorded. If there are
any objections, you may disconnect at this time. I would
like to introduce your host for today, Ms. Leslie Kratcoski.
Ma'am, you may begin.
L. Kratcoski Good morning and thank you for joining us for our third
quarter earnings conference call. Hosting today's call are
John Cook, Chief Executive Officer, and Gene Ellis, Chief
Financial Officer. Before turning it over to John, we're
advised by our legal counsel that we need to read the
following statements.
Statements made in the course of this conference call that
state the Company's or management's intentions, hopes,
beliefs, expectations, and predictions in the future are
forward-looking statements. It's important to note that the
Company's actual results could differ materially from those
PROFIT RECOVERY GROUP
Moderator: John Cook
October 31, 2001/9:00 a.m. CST
Page 2
projected in such forward-looking statements. Additional
information concerning factors that could cause actual
results to differ materially from those in the
forward-looking statements is contained from time to time in
the Company's SEC filings, including the risk factor section
of the Company's form S-4 filed September 7, 2001.
The Company disclaims any obligation or duty to update or
modify these forward-looking statements. PRG and Howard
Schultz and Associates have filed the preliminary joint
proxy statement prospectus contained in PRG's registration
statement on form S-4 filed with the SEC on September 7th.
Investors of PRG and HS&A are urged to read the preliminary
joint proxy statement prospectus and any other relevant
documents filed with the SEC because they will contain
important information. Further information, including how to
obtain copies of these documents free of charge is outlined
in the additional information section of our press release
issued this morning.
I would now like to turn it over to John Cook.
PROFIT RECOVERY GROUP
Moderator: John Cook
October 31, 2001/9:00 a.m. CST
Page 3
J. Cook Thank you, Leslie. This morning we announced financial
results for the third quarter and the first nine months of
2001, which were in line with the preliminary results we
released on October 8, 2001. As such, I am only going to
summarize our financial results before moving on to focus on
other topics covered in our press release this morning.
Further details on our third quarter results can be found in
the press release and the attached schedules.
Revenues from continuing operations for the third quarter of
2001 totaled $71.6 million, compared to $79.1 million a year
ago. Net earnings from continuing operations totaled 1.9 or
$0.04 per diluted share. Revenues from continuing operations
for the first nine months of 2001 totaled $213.9 million
compared to $219.7 million a year ago. Excluding first
quarter 2001 non-recurring charges of approximately $800,000
or $0.01 per diluted share after tax related to realignment
activities, net earnings from continuing operations in the
first nine months of 2001 were $3.6 million or $0.07 per
diluted share.
Revenues from accounts payable services totaled $61.6
million in the third quarter, compared to $67.7 million a
year ago. Accounts payable revenues for the third quarter
were composed of approximately 50% from US retail, 23% from
PROFIT RECOVERY GROUP
Moderator: John Cook
October 31, 2001/9:00 a.m. CST
Page 4
US commercial, and 27% from international. For the same
period a year ago, the contribution to accounts payable
segments results from US retail, US commercial, and
international were approximately 47%, 29% and 24%
respectively.
Revenues from the French taxation service for the third
quarter 2001 were $9.9 million, compared to $11.4 million
for the same period a year ago.
For the third quarter 2001, corporate overhead of $8.1
million represented 11.3% of total revenues from continuing
operations, down from $8.8 million or 11.1% a year ago. We
have continued to take steps to achieve cost savings through
reductions in corporate overhead and SG&A as a whole, both
of which we are pleased to say were at a lower level this
quarter than in the second quarter of this year. These
reductions have resulted from an ongoing assessment of our
expected needs looking forward to 2002, and we have made
some adjustments in headcount in programs accordingly.
Since the beginning of the year, we have reduced our
corporate staff by approximately 20%. Corporate overhead was
down by approximately $700,000 from the second quarter, and
PROFIT RECOVERY GROUP
Moderator: John Cook
October 31, 2001/9:00 a.m. CST
Page 5
SG&A as a whole was approximately $2 million lower this
quarter than in the second quarter.
Net cash from operating activities for the nine months ended
September 30, 2001 was approximately $10.4 million compared
to $8.7 million in 2000. During the third quarter, we paid
down the balance on our bank credit facility by $10.5
million to approximately $153 million.
DSOs, or days sales outstanding from continuing operations
as of September 30, 2001 stood at 78 days consistent with
the same period a year ago. DSOs from our accounts payable
operation improved to 64 days as of September 30, 2001 from
68 days a year ago.
As we announced on October 8th, our operations were severely
disrupted by the September 11th tragedy at the most critical
time in our quarterly business cycle. Our revenue generation
suffered significantly, while a substantial portion of our
expenses remained fixed, resulting in the considerable
decline in earnings from the third quarter of last year.
Moving forward, I am encouraged by the fact that we continue
to see a return to normal claims production levels and
visibility following events of September 11th, and as I said
PROFIT RECOVERY GROUP
Moderator: John Cook
October 31, 2001/9:00 a.m. CST
Page 6
on October 8th, we continue to generate these claims in
records numbers for our clients.
Internally, we have implemented a highly focused, real time
process for tracking the status of all of our claims, so
that we can more effectively manage our claims pipeline and
conversions and proactively address any issues that arise
during the quarter. I fully expect that we will overcome the
near term challenges associated with the potentially
unprecedented downturn in purchasing and payment activity by
our clients, which makes it more difficult in the near term,
to convert claims into revenues.
I also have no doubt that the value proposition we present
to our clients remains powerful and consistent. The
initiatives that we are undertaking today and in the coming
months--most importantly, our planned combination with
Howard Schultz & Associates--will put us in a leading
position to capitalize on the clear, long-term growth
opportunities in the accounts payable recovery audit
industry.
I would like to take a few minutes now to update you on the
status of our strategic initiatives and other Company
developments. With respect to our discontinued operations,
we are pleased to announce the sale of our logistics
division. Yesterday we closed on a sale to Platinum Equity,
PROFIT RECOVERY GROUP
Moderator: John Cook
October 31, 2001/9:00 a.m. CST
Page 7
a firm specializing in acquiring and operating technology
organizations and technology enabled service companies
worldwide. The transaction yields initial gross proceeds of
approximately $10 million, with an additional $3 million
payable in the form of a revenue based royalty over the next
three to four years. This transaction resulted in a further
asset write-down of approximately $19 million.
As we indicated in our October 8th release, we along with
our investment banking advisors, have concluded that the
current economic conditions and other factors have had a
negative impact on the collected, expected net proceeds from
selling the discontinued operations. As a result, we have
recorded a write-down of an additional $12 million of the
aggregate carrying value of the remaining discontinued
operations as of September 30, 2001.
The other discontinued operations currently do remain for
sale. However, we are monitoring the current market
situation very carefully. If the difficult conditions
continue such, that we see further erosion in the expected
sales proceeds, we may in the future conclude that the sale
of the discontinued operations is no longer advisable and
revisit the decision to sell some or all of these
businesses. Each of these companies have a very viable
PROFIT RECOVERY GROUP
Moderator: John Cook
October 31, 2001/9:00 a.m. CST
Page 8
business model and is expected to generate a positive EBIT
DA, both this year and next year. We believe it would not be
in the interest of our shareholders to sell these businesses
at levels any further below the prices we are currently
seeking.
With respect to our French Taxation Service operation,
although no final determinations have yet been made by the
board of directors and we continue to explore our strategic
alternatives, as we have disclosed in recent SEC filings,
one alternative under serious consideration is the potential
sale of these operations, and we have seen some very
promising developments along these lines. We've received
significant interest from potential buyers and are engaged
in meaningful discussions.
On October 8th, we announced that we were not in compliance
with certain financial ratio covenants in our bank credit
facility agreement. Based on dialogue and meetings held with
lead banks and members of the bank syndicate in recent days,
we are highly confident that a credit facility amendment to
re-establish current and prospective financial covenant
ratios will be finalized prior to November 14, 2001. We do
anticipate that the amended agreement will provide for a
mandatory permanent future reduction to the facility's
PROFIT RECOVERY GROUP
Moderator: John Cook
October 31, 2001/9:00 a.m. CST
Page 9
capacity effective March 31, 2002, as well as a higher
applicable interest rate. As a result, we anticipate that a
portion of our long-term debt to banks will need to be
reclassified as a current liability in ... of these balance
sheets to be included in our form 10-Q for the third quarter
of 2001.
We are comfortable that we will be able to make the
necessary reductions in our outstanding principle balance of
our credit facility, in order to meet the aforementioned
anticipated principle reduction requirements of the amended
credit agreement, as well as to secure the bank syndicate's
approval for the HS&A transaction. We plan to achieve to
this though a combination of selling discontinued
operations, potentially selling the French Taxation Service
operations, and through additional debt or equity financing.
We are in consultation with our advisors, currently
exploring all of these alternatives.
With respect to the HS&A merger, current expectations are
that the transaction will close in early 2002. I want to
strongly emphasize that both Howard and I, along with our
entire joint management team are firmly committed to
finalizing the HS&A transaction as soon as possible. We
continue to make substantial progress with our integration
planning, and I'm pleased to report that the current
estimate for annualized net operating synergies is greater
PROFIT RECOVERY GROUP
Moderator: John Cook
October 31, 2001/9:00 a.m. CST
Page 10
than the $15 million originally projected. Based on an early
2002 close and excluding one time costs related to the
transaction, which are still estimated at up to $10 million,
we currently anticipate that the transaction will be solidly
accretive to 2002 net earnings.
In terms of financial outlook, we remain cautious with
respect to the fourth quarter of this year and the first
half of 2002 in light of the current challenging business
environment. We maintain that the long-term annualized
sustainable revenue and earnings growth rates for our
accounts payable business remains at 15% and 20%
respectively. For the fourth quarter, revenue from
continuing operations are expected to be in the range of $82
to $85 million.
Excluding non-recurring charges currently estimated to be
approximately $0.04 per diluted share and related primarily
to pre-merger costs, which are not capitalized, earnings per
diluted share from continuing operations for the fourth
quarter are expected to be in the $0.08 to $0.10 range. As a
result, excluding non-recurring charges, full year 2001
earnings per diluted share are expected to be in the range
of $0.15 to $0.17. For the purpose of comparison to our 2002
PROFIT RECOVERY GROUP
Moderator: John Cook
October 31, 2001/9:00 a.m. CST
Page 11
outlook, goodwill amortization expense for continuing
operations in 2001 is expected to total approximately $12
million or $0.15 per diluted share. If FAS142, which goes
into effect on January 1, 2002, would have been in effect
for fiscal 2001, the comparable earnings per diluted share
for 2001 would be approximately $0.30 to $0.32 after
excluding goodwill amortization expense, as will the
practice going forward.
For full year 2002, we expect our continuing operations to
generate revenues in the range of $310 to $320 million, with
earnings per diluted share in the range of $0.45 to $0.50.
We expect all the revenue growth in 2002 to be generated by
the accounts payable business and that the French Taxation
Service operation will be relative flat for next year,
contributing approximately $40 million in revenues.
It is important to note that this outlook excludes any
impact from the planned acquisition of Howard Schultz &
Associates, including revenue contributions, earnings impact
and non-recurring charges. Upon the close of the
transaction, we anticipate providing an update to our 2002
outlook, and as I said previously, we expect the transaction
to be solidly accretive to earnings in 2002. Before I turn
PROFIT RECOVERY GROUP
Moderator: John Cook
October 31, 2001/9:00 a.m. CST
Page 12
the call back over to the conference call operator, I'd like
to take a moment to summarize what I've covered in this call
today.
We've sold one of our discontinued operations and are
carefully monitoring the market conditions, to insure the
appropriate course of action with respect to our remaining
discontinued operations. We see promising developments in
the potential sale of our French Taxation Service. We are
highly confident that we will successfully finalize a bank
credit facility amendment prior to the filing of our 10-Q.
We are comfortable that we will be able to make the
necessary bank credit facility principle reductions in order
to meet the requirements of the amended credit agreement as
well as secure our bank syndicate's approval for the HS&A
transaction, and we expect to do this through a combination
of financing sources. We are committed to closing the HS&A
transaction as quickly as possible so that we can begin the
realize the significant strategic growth opportunities and
synergies that we have identified, the end result being the
financial benefit and increased return to our shareholders.
PROFIT RECOVERY GROUP
Moderator: John Cook
October 31, 2001/9:00 a.m. CST
Page 13
I'd now like to turn it over to the conference call operator
to begin the question and answer session.
Coordinator Thank you, sir. Our first question comes from Bill Duhamel
from Farallon.
A. Pant Hello, this Ashish from Farallon Capital. I work with Bill.
I have just a couple of questions--first a few financial
questions, and then a question relating to the HS&A
transaction. In terms of the French Taxation business, we've
seen a rapid erosion of margins this year, and that sort of
continued on a comparative basis in the last quarter, too.
Could you sort of talk a bit about, you gave us some
guidance on the revenue line. Could you talk a bit about the
causes again, reiterate why we've seen such rapid erosion of
margins here, and if there are factors which would cause us
to believe that this situation would improve maybe closer to
historical levels going forward in the next year? Is that
something to expect? That's the first question.
The other questions I had were with relation to accrued
expenses, which have come down in the past quarter, if you
can sort of comment on that a bit as to why we've seen that
PROFIT RECOVERY GROUP
Moderator: John Cook
October 31, 2001/9:00 a.m. CST
Page 14
effect? And then I have a couple of questions on HS&A
transaction.
J. Cook Okay, first on the French Taxation business, clearly one of
the biggest drivers of the revenue performance you see for
the quarter and for the year as been this serious decline in
the French franc relative to the US dollar, and again, that
is a very significant decline. Clearly, there are several
other factors that have been affecting us there. One has
been the social costs, and the full implementation of the 35
hour work week in France, and that definitely has impacted
the cost structure, not only for us, but I think probably
for most companies that are heavily people-related.
As far as Alma in 2002, it is reasonably earnings neutral
for us in 2002. We do not expect--in fact, we would expect
to see some modest improvements in 2002 because again at
least in 2001, we will have had the full impact of these
higher social costs and higher labor costs.
As far as the question on accrual trends, I'll turn it over
to Gene.
G. Ellis Yes, I think the question--you're probably looking at the
press release and comparing the September 30th accruals with
the December 31st accruals, and if you were to go back and
you were to look at June 30th and the balance sheet, you
PROFIT RECOVERY GROUP
Moderator: John Cook
October 31, 2001/9:00 a.m. CST
Page 15
would see that accounts payable and accrued expenses and
accrued payroll and related expenses, which are the two big
line items in that category, are virtually unchanged from
June 30th.
At year end, that is really the high water mark of our
accrued payroll and related expenses accrual, because not
only do you have the auditor's participation in the
receivables--first of all, let me tell you what's in there.
In accrued payroll and related expenses, the biggest chunk
of that is the auditor's participation in our accounts
receivable. When we collect the receivable, we will pay the
auditor their proportionate amount. So at the end of
December, you've got a very high revenue quarter vis-a-vis
most of the other quarters.
You also have annual bonuses in there. There is some portion
of bonuses that are paid out annually. So if you compare
just about any other quarter's accrual with Q4 accrual, you
are going to get a much lower number. So the point being is
that there is really nothing happening between the second
quarter balance sheet and this balance sheet you see here.
PROFIT RECOVERY GROUP
Moderator: John Cook
October 31, 2001/9:00 a.m. CST
Page 16
A. Pant Okay, thanks for that. Just on the HS&A transaction in terms
of just one sort of substantial benefit that the Company
could potentially see when we look at sort of HS&A's numbers
in itself, a significant source of profitability improvement
that lies in our ability to be able to renegotiate, but put
their auditors on a similar sort of compensation program as
at Profit Recovery Group. I was just curious to know in
terms of the progress that you might have already made in
getting a lot of those people on board with execution on
those issues. Or is that something that the management would
have to contend with only when the acquisition has been
closed?
J. Cook Yes, I think that clearly it's something that we would hope
to do either at the time of closing or maybe slightly before
closing, once we know exactly, have a firm closing date.
Having said that, we really have made wonderful progress on
all aspects of the integration planning, including the
auditor compensation issues. We have a series of post merger
integration committees set up, one of which is dealing
entirely with this issue. It's made up of members of
management at both PRG and Schultz. I think we have a very,
very well thought out game plan for it, and I'm comfortable
that we'll be able to successfully execute on it.
PROFIT RECOVERY GROUP
Moderator: John Cook
October 31, 2001/9:00 a.m. CST
Page 17
A. Pant Okay, thank you.
Coordinator Our next question comes from Adam Holt from JP Morgan.
A. Holt Good morning. I was hoping to first talk a little bit about
the remaining discontinued operations and to give us a
sense, how is the logistics business that you sold valued,
and do you expect the remaining businesses to be valued in
the same way?
J. Cook Well, I think that first, I would say our logistics business
audits transportation cost real time as opposed to many of
our businesses which are auditing in arrears. The
transportation cost is one of the probably truest indicators
of the state of the economy that you will find and so
transportation costs definitely went down significantly,
both for the year and for the quarter. As a result of that,
we have made several downward revisions in both their
revenues and earnings, and the numbers we were looking at
for the year for logistics would have been somewhere between
break-even and a small loss in operating income, if that's
helpful at all.
G. Ellis Yes, Adam, this is Gene. Each one of these businesses has
unique characteristics, unique client sets, unique
circumstances, different buyers, different geographies, so
everyone has its own stories. I'm not sure you can
PROFIT RECOVERY GROUP
Moderator: John Cook
October 31, 2001/9:00 a.m. CST
Page 18
extrapolate anything from one deal to a potential other
deal. The only thing as we've said in this release, is that
it's obvious I think to everybody that the general economic
conditions have deteriorated over the last six months, and
that affects businesses that are being bought and sold, no
matter what their underlying numbers are.
A. Holt What details if any, can you give us about the performance
of the discontinued operations in the quarter?
G. Ellis Collectively, they lost $2 million, but I'll tell you they
have been burdened by about $3 million of sale cost, of
people that are dedicated internally and externally to
selling them, to consulting fees, to stay bonuses and that
type of thing, so they were pretty much at a break even
during this past quarter, if you take them as a whole.
A. Holt And what would the revenue base be there?
G. Ellis I'm not sure we've given that out.
PROFIT RECOVERY GROUP
Moderator: John Cook
October 31, 2001/9:00 a.m. CST
Page 19
A. Holt Okay, and is there any sort of a "drop dead" date relative
to your timing with some of the debt covenants and the close
of the Schultz deal, as to when you would have to make a
decision as to whether or not you're going to sell these
business or keep them?
G. Ellis Are you talking about from an accounting standpoint, Adam?
A. Holt Or to the requirements of the debt or anything?
G. Ellis There are a multitude of factors at play here. The
accounting dictates suggest that on discontinued operations,
you need to sell them within a year. Clearly, there's a lot
more to run in that. There is the fact that, yes, we plan on
selling these in order to pay down bank debt. That
continues, but I think we wanted to make a clear statement
in this press release that we will not give these businesses
away. These are valuable businesses, and each one has their
own potential, and I think we wanted to make a comment in
this press release that we do have a lot of options in order
to raise financing to get Schultz done, and we will not give
away one of these companies in order to do it. So that was
sort of the message we were trying to convey in the press
release.
PROFIT RECOVERY GROUP
Moderator: John Cook
October 31, 2001/9:00 a.m. CST
Page 20
A. Holt Okay, and then just one follow-up question on the debt
restructuring. Can you give us any more details, as to what
you see unfolding there and what the amount would be
relative to the mandatory reduction?
G. Ellis Yes, our credit facility is now as you may recall, we put
together a five year credit facility back in the summer of
1998. That has about 18 months, give or take, left to run in
it. So what the banks want to see is some kind of orderly
reduction in the facility. Clearly, we don't need a $200
million credit facility any more. The only reason we had
that much to begin with is because we were doing a lot of
acquisitions at that particular time. But the banks want to
see an orderly pay down of the facility, and we do, too, for
that matter.
But it is not a draconian pay down; it's still under
negotiations, but it is much less than 50% of the current
outstandings. That's about the only barometer I feel
comfortable in sharing because it's still being discussed.
In other words, there is not a $150 million bullet staring
us in the face at March 31st.
A. Holt And does that assume that you closed the Schultz deal before
or after March 31st?
PROFIT RECOVERY GROUP
Moderator: John Cook
October 31, 2001/9:00 a.m. CST
Page 21
G. Ellis It's an independent discussion. The banks basically want to
see the credit facility reduced from its current level, with
or without Schultz.
A. Holt All right, great. Thanks.
G. Ellis Thanks, buddy.
Coordinator Our next question comes from Alex Paris from Barrington
Research.
A. Paris Hello, guys. Just so I understand it, the accounting
treatment for discontinued operations, Gene, you mentioned,
you've got one year. Does that take us to the end of March?
G. Ellis It does, but basically the rules get pretty fuzzy. When you
commit to sell them, you're supposed to have a reasonable
expectation and willingness to sell them within a year.
However, KPMG has advised us that there's nothing written in
concrete that if that year comes and goes, that you have to
take those back into continuing operations. Basically, the
rules as KPMG has shared them with us, is that if a year
came and we continued to be in active negotiations with
credible buyers who have the capability and the money and
the desire to buy these, and we were having discussions in
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Moderator: John Cook
October 31, 2001/9:00 a.m. CST
Page 22
prices we would be willing to accept, that we could go past
a year if it came to that.
A. Paris Okay, and then you are in serious negotiations with credible
buyers as we speak?
G. Ellis Yes, on most of these businesses.
A. Paris Okay. The net assets of the discontinued operations on the
balance sheet as of September 30th were about $59 million,
and that reflects the write-downs announced in this press
release.
G. Ellis Right, as you'll recall, that number was about $93 million
at June 30. That number with the write-down has come down to
about $58.5 million.
A. Paris And then, now that you've sold the logistics business, does
that come down by the amount you realized?
G. Ellis Yes, that comes down by $10 million, give or take.
PROFIT RECOVERY GROUP
Moderator: John Cook
October 31, 2001/9:00 a.m. CST
Page 23
A. Paris Okay, so $48 million is under GAP, your best guess or your
advisor's best guess on the aggregate of the balance of the
discontinued operations held for sale?
G. Ellis Correct.
A. Paris Okay, and then--
G. Ellis Well, let me back up. What that is, is the carrying value on
the books, but the expected sales proceeds would be higher.
What we're basically saying is that we can sell these
things, based upon everything that the advisors tell us, for
a collection of prices. If you decrement those prices by
investment banking fees, by stay bonuses, by other cash that
would have to come out at time of sale, then the net
proceeds--net, net, net--would generate the $58.5.
A. Paris Okay.
G. Ellis And now with logistics sold, it's $48.5
PROFIT RECOVERY GROUP
Moderator: John Cook
October 31, 2001/9:00 a.m. CST
Page 24
A. Paris Okay, then on the guidance that you provided for '02, I was
distracted. Did I hear you right that the estimate for Alma
is about $40 million?
J. Cook Well, I think that's probably as bad as that would be. If we
wanted to give a range it would be between $40 and $45
million, somewhere in that range. I think we've been so
badly hurt by the currency issues that I'm hesitant to go
any higher than that. And in terms of the revenues, I would
think in the $40 to $45 million range is a reasonable range.
G. Ellis And the reason we put that in there, Alex, is so that people
could do their own calculations if for whatever reason, we
did progress and we did sell Alma, people can do their own
calculations, in terms of what PRG might look like without
Alma.
A. Paris Okay, and then you also said in a follow-up comment that in
terms of in your guidance, you've treated Alma as relatively
neutral to 2002 EPS?
J. Cook Yes, and again for us, our guess is that in French francs,
we are probably looking at a range of 340 to 350 million in
revenues, and that in terms of earnings, it would be
consistent with this year. I think that always sort of the
wild card for us is what is 340 to 350 million in French
PROFIT RECOVERY GROUP
Moderator: John Cook
October 31, 2001/9:00 a.m. CST
Page 25
francs going to translate to in US dollars, and I think we
just wanted to be a little more cautious in terms of our
guidance.
A. Paris Okay, and then in the press release, it says that you're
confident in 15% long-term growth rate in accounts payable.
Is that what we're factoring in for expected growth in '02
for that business?
J. Cook No, what I had said earlier is that I am really cautious
about the first half of the year because of this very, very
sharp downturn that we have seen in purchasing in retailing
and the continued performance on the technology sector and
the telecom sector, which are key to our commercial area. So
what I would think, and we'll give a little more specific
guidance a little later, but I think just for reasonable
numbers would probably be growth in the 2% to 3% range for
the first half of the year, and growth of 13% to 15% in the
last half of the year.
A. Paris And that's on the US accounts payable business retail?
J. Cook Yes.
PROFIT RECOVERY GROUP
Moderator: John Cook
October 31, 2001/9:00 a.m. CST
Page 26
A. Paris Okay. So that means the guidance that you're giving on the
commercial is even lower growth, if growth at all in terms
of probably from a point of being conservative.
J. Cook I think we were expecting growth next year in commercial in
the 8% or so range.
A. Paris Okay, that's helpful. Thank you very much.
J. Cook Right.
Coordinator Our next question comes from Bill Duhamel from Farallon
A. Pant Hello, it's Ashish once again. I have two questions. The
first one if you could give us some color on the execution
on the commercial side of the business, just in terms of,
obviously one the challenges that remains with the Company
in growing that business is, to be able to sort of scale it
in different verticals as you've been able to in retail. Can
you talk a bit about the trends you're seeing there? That's
the first question.
PROFIT RECOVERY GROUP
Moderator: John Cook
October 31, 2001/9:00 a.m. CST
Page 27
And the second question that I wanted to talk about was to
really challenge the long-term 15% growth number of accounts
payables. I mean just from the perspective, considering that
retail is a substantial portion of the business, where is
the opportunity that you're seeing for organic growth in
that business from a volume perspective? Because just
looking at your total revenues and looking at the ratio of a
million dollars worth of payables discovered for every
billion that you audit, and we get $0.25 to a dollar of
that, we're already covering a gigantic amount of retail
volumes here. So I'm not sure to arrive at the 15% long-term
growth objective, what's behind this sort of thinking to hit
those kinds of growth rates? I presume benefit from the
Howard Schultz acquisitions are in there, but I would really
like some color on these two issues.
J. Cook Okay, I think first, to try and address your question on the
commercial model first, there's two aspects to the
commercial growth. In the original service model for
commercial was for a very basic audit, and that audit has a
much, much more limited data requirement and a much more
limited time requirement than in our retail business. That
basic model, which consisted primarily of recoveries in
duplicate payments and certain types of missed discounts,
PROFIT RECOVERY GROUP
Moderator: John Cook
October 31, 2001/9:00 a.m. CST
Page 28
but really items that one could get at an invoice level as
opposed to a detailed level, was responsible for the rapid
growth of commercial over the last three or four years.
But what has happened in that model is that essentially, you
do see a maturing out of that process. Because one of the
problems with--if all of the work you're doing is things
that can be done at an invoice level, it is much easier for
your client to take some remedial steps to correct some of
those things. And so unlike retailing where you had revenue
increases from existing clients, you didn't see that sort of
annuity phenomenon on the commercial side.
What we had been experimenting with all year, and we're
pleased with the results and we're really now ready to start
executing pretty heavily on it, is what we refer to as a
more broad scoped commercial audit, and that audit would
look much more similar to a retail audit. It requires us
getting a lot more detail from our clients in their detail
data than we do at the moment. It requires a more expansive
audit than we have done in the past, but consistent with
what we do in retailing. We are now up to, I don't know,
eight or ten clients that we have done this broad scoped
audit on. In each of those cases, the recoveries as a
PROFIT RECOVERY GROUP
Moderator: John Cook
October 31, 2001/9:00 a.m. CST
Page 29
percentage of revenues have minimally doubled, but in many
cases, went up by four to five times the amount we would
normally find, had we done only the basic model.
So what we are in the process of doing now is realigning the
sales incentives, realigning the revenue incentives,
realigning from an organizational perspective, to make sure
that we have the things in place to make very significant
progress in 2002 in the development of that broad based
commercial model. We believe based upon the evidence we have
thus far, from the accounts we done thus far, that that will
allow us to generate revenues in the 8% range for next year.
But that we believe as we continue to train and develop our
organization, will allow us to have a long-term growth model
in the commercial area of at least 15%. This is still a
rather undeveloped area when you look at these sort of
broad-based audits.
Now your second question, I think, was relative to the
growth in the US retail. I think there are three or four
elements that still give us a lot of encouragement about the
long-term growth in the retail area in the US. If you would
look at just the natural growth of retailing itself, that
probably gets you into the 3% range or so. Even once we do
Schultz, there are still lots of clients that we wouldn't
PROFIT RECOVERY GROUP
Moderator: John Cook
October 31, 2001/9:00 a.m. CST
Page 30
have, and even in a much slower client acquisition phase, I
think that we could get another 3% or so coming from growth
in new clients.
But I think where there's really enormous amount of
opportunity for us yet is in expansion of our claims
findings within our existing clients. And I think that that
can easily return to a 5% to 8% increase from existing
clients, and this requires us to one, make sure that we have
the sufficient number of auditors to maximize the potential
of the job. It requires us to do a better job and one which
we think we are doing a better job of sharing best practices
in order to insure that what we are learning on one account,
that we can take advantage in others.
So I think as sort of a long and short answer is that I'm
still comfortable in the 6% to 7% on the low end to 10% to
12% on the high end--pick some number in between. But in
terms of a long-term growth model in the roughly 10% range
that is based upon those three factors, the natural growth
of the clients ourselves, a smaller number coming from the
acquisition of new clients, and the balance coming from
growths from existing clients.
PROFIT RECOVERY GROUP
Moderator: John Cook
October 31, 2001/9:00 a.m. CST
Page 31
G. Ellis And the other, if you sort of averaged all of those together
and put together I guess from my standpoint, John's comment,
the part that he didn't talk about is international. If
you're trying to get to 15%, and how we as John said, the
retail we think, continues to have potential of 8% to 10%,
somewhere in that range--domestic retail practice. Outside
of the US, we are still very much in the infancy, and
outside of Howard Schultz and us, very few other people
provide this service, and we can probably grow as fast as we
can control it in some countries.
So a growth rate internationally for really, as far as we
could realistically see of 20% to 25% is a realistic number
in terms of a long-term growth rate. And then as John said,
commercial, once we get through with changing that model,
that has some good growth parameters, too.
J. Cook So again, if I were just going to give rough numbers, it
would be that we think a long-term model in the 8% to 10%
range for US retail as long-term growth, 15% in the
commercial area and in the 20% to 25% internationally.
A. Pant Could you sort of add to that your objectives or targets for
pricing improvements. Obviously, over the last ten years,
we've sort of seen prices go the other way. Is this a point
PROFIT RECOVERY GROUP
Moderator: John Cook
October 31, 2001/9:00 a.m. CST
Page 32
in time where we should with consolidation and the industry,
see them probably firm up and that contribute to this target
of yours?
J. Cook I think that that clearly, I would see a real slowing of any
rate erosion, but I think the issue of overall rate is much
less important than what are our recoveries and what is our
income per man-day. And one can almost read too much into a
rate reduction. Frankly with most of our clients, if to the
degree that we have very unrestricted access to data, to the
degree that we can significantly speed up our review of that
data, because we know that the closer we are to the time of
payment, the higher our recoveries will be, I will gladly,
gladly make major rate concessions in order to have the
speed of getting at those findings early. So there are so
many factors that influence that, that I think a much
better--certainly for me--a much better issue is are we
increasing our revenues per day from our audit force? And
that is much more key to me than whether the rate is up or
down a percentage point or two.
A. Pant Thanks a lot.
Coordinator Our next question comes from Thatcher Thompson from Merrill
Lynch.
PROFIT RECOVERY GROUP
Moderator: John Cook
October 31, 2001/9:00 a.m. CST
Page 33
T. Thompson Good morning, guys. Do we have any other LOIs on any of the
other businesses for sale?
J. Cook No we do not.
T. Thompson Not yet.
J. Cook No.
T. Thompson Okay, and can you give us an update, John, on the AP
business in October? You said you're getting back to normal
claims levels, but how about offset opportunities in the
fourth quarter?
J. Cook Again, I think one of the reasons we are as cautious as we
were in our revenue estimates is just that we do continue to
see an awful lot of inventory rebalancing and order
cancellations from most of the retail clients. But again
what we are doing is we've started a process now where every
Saturday morning, we are reviewing each of the areas of the
US and determining where are we in terms of claims
production, where are we in terms of revenue production, and
is there anything going wrong that we would know about? Is
there anything going right that we can move to other
PROFIT RECOVERY GROUP
Moderator: John Cook
October 31, 2001/9:00 a.m. CST
Page 34
business? So we have definitely intensified our reviews on a
weekly basis in order to make sure that we are tracking to
what we have given you in terms of an expectation for the
fourth quarter.
T. Thompson Okay, and I think earlier this month, you went on a kind of
a one week whirlwind tour of your large, particularly retail
clients and the auditors there. Can you tell us what you're
hearing from the auditor force and what you're hearing from
some of your retail clients?
J. Cook As far as our clients, clearly, this is as difficult an
environment for retailing as since the early 90s, and it's
just hard if you're in retailing to put any good positive
spin on it at the moment. So most of our clients, I think
it's safe to say are trying to make sure they are managing
their inventories and they're managing their costs and
getting out of 2001 in as good as shape as they can. But as
far as our auditors itself, when one of my main objectives
is this is a business that one needs positive, engaged,
motivated and optimistic employees to do well. I want to do
everything I can to ensure that that's the case, and I think
the trip was very, very successful.
T. Thompson Okay, thanks.
PROFIT RECOVERY GROUP
Moderator: John Cook
October 31, 2001/9:00 a.m. CST
Page 35
Coordinator Thank you sir. At this time, I show no further questions.
J. Cook Well, thank you, and if not, we were delighted to have had
the chance to explain the quarterly results and tell you a
little bit more with what's going on with the Company. We
appreciate your support. We'll continue to get back to you
as we have new developments, but we want you to know that we
are firmly committed to maximizing our shareholder value and
to getting PRG back to a very, very consistent earnings
performer. Thank you all very much.
Additional Information
PRG and HS&A, and their respective directors and executive officers, and certain
of their employees, may be deemed to be participants in the solicitation of
proxies from the stockholders of PRG and HS&A in connection with the
acquisition. These participants may have interests in the acquisition, including
interests resulting from holding options or shares of PRG and HS&A common stock.
Information about the interests of directors and executive officers of PRG and
HS&A and their ownership of securities of PRG and HS&A is set forth in the
preliminary joint proxy statement/prospectus.
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