Cross Country Healthcare Inc (CCRN) 2002 Q4 法說會逐字稿

Good morning, ladies and gentlemen and thank you for standing by. Welcome to the Cross Country 4th quarter and year-end conference call. At this time, all participants are in a listen-only mode.Following today's presentation, instructions will be given for a question and answer session. If anyone needs assistance at any time during the conference, please press the star followed by 0. As a reminder, this conference is being recorded today, February 19, 2003. The press release was distributed after market closed yesterday, if you would like a copy of that, please go to our website at www.crosscountry.com. I would now like to turn the call over to Howard Goldman, Director of Investor Relations. Please go ahead, sir.

Good morning, and as I was just introduced, I am the Director of Investor Relations for the company. Thank you all for listening in and for your interest in Cross Country. With me today are Joseph Boshart, our President and Chief Executive Officer, and Emil Hensel, our Chief Financial Officer. On this call, we will review our 4th quarter and full year 2002 results.

Before we begin, I'd like to remind everyone that this discussion contains forward-looking statements. Statements that are predictive in nature that depend upon or refer to future events or conditions or that include words such as expect, anticipate, intend, plan, believe, estimate, and similar expressions are forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results and performance to be materially different from any future results of performance expressed or implied of these forward looking statements. These factors are set forth under the caption "risk factors" in Cross Country's form 10K for the year ended December 31, 2001.

Although we believe that these statements are based upon reasonable assumptions, we cannot guarantee future results. Given these uncertainties, forward-looking statements discussed on this teleconference might not occur. We don't have a policy of updating or revising these statements and thus it should not be assumed that our silence over time means that actual events are occurring as expressed or implied in such forward-looking statements. Now, I'll turn the call over to Joe.

Thank you, Howard. I'm very pleased to report that Cross Country continued to grow in the 4th quarter of 2002 with revenue up 11% from the prior year and as indicated in our press release, our full year results were a record for the company. Earnings per diluted share for continuing operations were 28 cents, in line with our guidance and up from 22 cents in the prior year quarter.

In our healthcare staffing business, we saw volume growth of 4% versus the prior year as well as improvement in our gross profit per hour during the quarter both on a year-over-year and sequential basis. Our average number of contract staffing personnel was 5,532 full-time equivalence during the 4th quarter which represented a 2% sequential improvement from the 3rd quarter. While results are in line with our expectations for the quarter, we remain disappointed with the recent and near term direction of temporary staff nursing industry.

Of late, many hospitals have taken nurse staffing actions which we believe are not sustainable over the long-term. We understand these actions include increased reliance on staff nurse overtime, increased patient ratios and high wage and compensation increases, including extraordinary sign on bonuses. We also believe that due to the present economic conditions where many nurse's spouses have been laid off, and severance and unemployment benefits have ended, many part-time nurses employed directly by hospitals who would have typically worked two shifts or less per week have increased the number of shifts worked at their hospitals and are doing so at the prevailing hospital wage.

These factors have cooled the white hot level of outsource nursing demand that drove higher than average growth in our industry over the past several years. However, we don't believe the current conditions are long-term in nature as vacancy and turnover rates for full-time nursing positions have not changed much from double-digit levels we've seen in recent years. As one chief officer said to me, we have more nurses working more hours in jobs they don't want. Even though we expect the current environment to continue for some time, we do not believe such action efficiently or effectively address the fundamental issues facing hospitals surrounding their nursing shortages. Longer term, we remain confident in the value proposition that Cross Country represents and the high quality nurses and services we deliver to our hospital clients.

As an indication of this confidence, we continue to make significant investments in our supply and demand initiatives. With regards to the short term, within this pocket of turbulence, opportunities exist for us to increase market share given our high quality service and reputation within the industry along with the brand recognition and financial strength we possess. The opportunities to increase market share in the temporary nurse staffing industry could come from internal and external initiatives and we will pursue those which are most accretive to our shareholders.

Despite the reduction of the level of demand from what we saw previously, we continue to work to fill thousands of open orders that have been placed with us by our hospital clients. On the pricing front, our price inflation continues to moderate as we expected. Average bill rates were up 7% in the 4th quarter from the year ago period. For 2003, we expect year-over-year rate increases to be approximately 5%.

As we communicated in our past quarterly conference calls, we have committed internally to five initiatives to drive increasing travel staffing and volume revenues. I'd like to update you on those specific initiatives. Our first one has been to increase the number of recruiters to create more placement capacity at Cross Country. As of December 31 we had 121 travel staffing recruiters full-time equivalence, up from 75 at year-end 2001. We feel at this point that we have adequate placement capacity given the level of demand that we see in the market. In 2003, our intention is to reap the return on our investment made last year in new recruiters.

Our second initiative is to tap new sources of nurse supply. We recently launched a nursing community website, nursevillage.com to gain additional avenues of access to nurses online. In terms of international recruitment as of December 31, the backlog at Assignment America, our international recruitment brand, totaled 351 nurses. In the current demand environment, Assignment America is targeting certain specialties that continue to have year-over-year increases in demand.

Our third initiative is to increase our advertising reach, we have increased our advertising spending significantly in the second half of 2002. We are in more journals and increased advertising in existing journals and have increased our direct mailing. Our efforts have yielded a record number of nurse applications, for example, in the 4th quarter, new applications were up 33% year-over-year.

Our fourth initiative is to segment the nurse population. Our purchase of NovaPro in January of 2002 was our first step towards segmenting a nurse population. After one full year under our management we're very encouraged by its growth and even more confident that the nurse population can be segmented by differentiated brands. The working nurses of NovaPro fit a different demographics than those of Cross Country TravCore brand proving that different recruitment models and methodologies can be effective in attracting different types of nurses to Cross Country. This success gives us greater confidence in our strategy of pursuing other segmentation opportunities.

And finally, our fifth initiative is to build upon our long standing reputation of providing quality service in order to obtain preferred provider relationships with our acute care facility clients. We continue to be engaged in a very focused effort to obtain preferred provider status with our clients.

I'm very encouraged by the potential and early results of our new relationship with VHA which we announced in November. VHA is a nationwide network that includes 1400 community owned hospitals. In the handful of meetings to date that VHA have facilitated with high-level decision makers at acute care facilities, we have yielded a very high success rate in obtaining preferred status.

Keep in mind that it will take time to realize the ultimate benefit of these initiatives, nevertheless, I remain confident in our future and our ability to continue growing. And with that, I'll turn it over to Emil Hensel for a more detailed discussion of our financial results.

Thank you Joe and good morning, everyone. First, I'd like to go over the results for the 4th quarter and full year numbers for 2002 and then review our revenue and earnings guidance that we provided in last night's press release.

As Joe indicated, Cross Country's 4th quarter revenues were 162.9 million, up 11% from the prior year quarter. Adjusted EBITDA, defined as earnings before interest, income taxes, depreciation, amortization, net of nonrecurring secondary offering costs, was flat for the quarter versus the prior year at 17.4 million. Adjusted EBITDA as a percentage of revenues declined by 1.1 percentage points due in large part to our investments in additional recruiters and our developmental businesses.

Income from continuing operations was 9.2 million in the 4th quarter, up 37% from 6.8 million achieved last year. This quarter's income from continuing operations was 28 cents per diluted share as compared to 22 cents per diluted share last year. Comparison to prior year is somewhat distorted by the adoption of FAS 142 on January 1, 2002, relative to the amortization of goodwill. Assuming FAS 142 would have been in effect in last year's 4th quarter, income from continuing operations would have been 8.7 million.

Interest expense in the quarter was down 59% from last year to approximately $600,000, reflecting the significant deleveraging of the balance sheet from the proceeds of our IPO in October of 2001. Net income, including the discontinued [East-half] operations, was 8.9 million as compared to 2.1 million achieved last year. Last year's numbers included a 4.8 million after tax charge related to the early extinguishment of debt from the proceeds of the IPO.

Our balance sheet and cash flow generation remains strong providing us significant financial flexibility in executing our long-term growth strategy. We ended the quarter with a debt to total capital ratio of 12% and current ratio of 2.6 to 1. The day sales out standing was 55 days, unchanged from the prior year.

As of December 31, 2002, we purchased 435,000 shares of our common stock for $6 million pursuant to our previously announced share repurchase plan. For the year as a whole, revenues were 640 million, up 27% over the prior year. Adjusted EBITDA was 66.2 million, up 16% over prior year. Income from continuing operations excluding after tax expenses associated with our secondary offering, was 34.2 million, or $1.02 per diluted share as compared to 14.4 million in 2001. Cash flow from operations for the year was a record, increased 131% to $42 million.

In the 4th quarter of 2002, Cross Country adopted EIPS issue number 01-14, which states that reimbursements received for out-of-pocket expenses should be characterized as revenue in the income statement. This required certain reclassifications of the company's revenue, cost of sales, and SG&A expenses and are reflected in the national results as well as those related to our financial results for each quarter and year-end period of 2002 and 2001.

The adoption of this FASB accounting guidance resulted in a 2.4 million increase in revenues for the 4th quarter and an $11 million increase for the full year 2002. There was no impact on the EBITDA or net income line. Most of the reclassification involved hospital sponsored completion bonuses which were previously recorded as an offset to compensation expense.

Let me drill down next our two reporting segments. Healthcare staffing, which comprises our travel, per diem and clinical trial staffing businesses, accounting for 92% of revenues, and the other human capital management services segment, which is comprised of our education and training, healthcare consulting and physician services businesses. Revenues for healthcare staffing segment increased by 13 million or 10% over the prior year quarter. The segments of revenue growth came from travel nurse and allied health staffing operations which were offset by a decline in revenues from our clinical staffing business due to a less favorable operating environment in the pharmaceutical industry. 38% of the revenue growth in the quarter was organic with the remainder coming from the acquisitions of NovaPro in January 2002.

Approximately two-thirds of the revenue increase came from price improvement and one-third from volume growth, including contribution from NovaPro. Average revenue per FTE per week was up both year-over-year and sequentially, 6% and 1% respectively. The average number of FTEs on contract was up 4% last year and up 2% sequentially from the 3rd quarter. Staffing contracts where the nurses were on our payroll as opposed to the hospital's accounted for nearly 99% of our field FTEs, essentially unchanged from the prior year quarter.

Contribution income for the healthcare staffing as defined as earnings before interest, income, taxes, depreciation, amortization, and corporate overhead expenses not specifically identified through reporting segment, was 21.2 million in the 4th quarter, up marginally over the prior year. Contribution margin for the healthcare staffing segment was 14.1%, down from 15.4% last year. This year-over-year decline in contribution margin is due in large part to our investment in additional recruiters and in our developmental businesses.

Our centralized per diem business, which is still operating at a loss due to its small size, is beginning to show traction, with revenues doubling over the comparable period last year. Healthcare staffing in declining contribution margin was partially offset by slightly higher gross profit and contribution margins in our core Cross Country TravCor travel nursing business.

On a full year basis, revenues for healthcare staffing segment grew by 26%, while contribution income was up 15%. Approximately 75% of the revenue growth was organic with the remaining 25% coming from the acquisitions of NovaPro in January of 2002 and the clinical trials business in March of 2001. Approximately 40% of this growth is attributable to price and the remaining 60% to volume.

Turning now to the other human capital management services segment, 4th quarter revenues for this segment were 12.7 million, an increase of 25% over the prior year. Approximately half of the revenue growth was organic with the balance of the growth coming from the acquisition of [Jennings, Ryan & Cole] business consulting business in March of 2002.

The organic growth came primarily from our growth in the seminars business, which registered a 38% increase over the prior year. Contribution income for the segment was 1.4 million versus $400,000 in the prior year, reflecting the growth of our educational seminars business as well as margin improvement in our check of physician surge business. For the year as a whole, segment revenues grew by 37% while contribution income was up 39%. Approximately 55% of the revenue growth was organic, supplemented by two small consulting business acquisitions.

This brings me to our updated guidance for 2003, the following statements are based on current management expectations, these statements are forward looking and actual results may differ materially. These statements do not include the potential impact of any future mergers, acquisitions, other business combinations or the repurchase of any of our common stock.

As Joe indicated, demand for travel nursing has moderated as a result of a more cautious buying process by hospitals. Putting this into perspective, while we still have thousands of open orders, in absolute terms, the number is down significantly since our last quarterly call. Despite this decline, our bookings in the 4th quarter were essentially flat with the prior year. Consequently, we expect relatively flat year-over-year volume growth in the 1st quarter, which translates to modest sequential growth in the 1st quarter.

Additionally, consistent with our expectations, price increases have moderated from the double digit rates we saw in the early part of last year. While we expect a sequential decrease in gross profit margins from the 4th quarter to 1st quarter due to seasonal factors, we continue to see a secular improvement in gross profit per hour as wage and housing costs increases are also moderated.

Based on these dynamics, we expect revenues in the range of 2003 to be in the $160 to $165 million range and EPS to be 22 cents to 24 cents range. Assuming that current demand environment continues during 2003 for the year as a whole, we now expect revenues to be in the 675 to 725 million range. EPS from continuing operation is expected to be in the rang of $1.10 to $1.20 per diluted share.

Given the current conditions in the nurse staffing marketplace, our guidance range is wider than what we have provided previously. We intend to update our guidance during the year as we gain more visibility on demand trends in our core travel nursing business.

Thank you, Emil. Just before we get to the questions, I'd like to point out that Cross Country has been at the forefront in communicating changes in the dynamics of our industry. While the current environment has recently become more challenging than even we anticipated, I'd like to reiterate that our long-term strategy has been to balance the needs of our nurse clients and our hospital clients.

We believe that strategy combined with several of the initiatives I discussed earlier such as our relationship with VHA, physicians across country to gain preferred provider status should allow us to perform favorably relative to the industry in 2003. This concludes our formal comments. We appreciate your attention. At this time we'd like to open the lines to answer any additional questions you may have.

Thank you, sir. Ladies and gentlemen, at this time we'll begin the question-and-answer session. If you have a question, please press the star followed by 1 on your push button phone. If you'd like to decline from the polling process, please press the star followed by 2. You will hear a three tone prompt acknowledging your selection and your question will be taken in the order received. If you are using speaker equipment, you will need to lift the hand set before pressing the numbers.

Please limit yourself to one question and one follow-up question. One moment please, for the first question. Our first question comes from the line of Jim Chenanski, please state your company name followed by your question.

This is Jim Chenanski at Janney Montgomery Scott. Can you comment. Joe, on bookings year to date in 2003? I think you or Emil had talked about the fact that they were flat in the 4th quarter, but can you give us an update on current trends?

Sure, Jim. Through the first six weeks of '03 in January and the early part of February, we are up year-over-year in the 5 to 6% range, which is higher than the 4th quarter which is encouraging to us. The five to six weeks, we don't want to trumpet it--we don't think it necessarily represents a trend, but it is certainly more encouraging than what we saw in the 4th quarter.

Is there any type of pattern to it, a geographic pattern, are you getting them from a couple of preferred vendor relationships that you signed or is it across the board?

We do see regional strength in our business. As we speak today, the Northeast in particular is the strongest market, from Pennsylvania through New England up to Massachusetts, we're up anywhere from 20 to 30%, even in the high 30s in some states, and some of these states are important to us. Massachusetts is always one of our top five states. To see year-over-year strength is very encouraging to us. California remains a strong market for us, up close to 20% year-over-year.

Having said that, in other markets, the Southeast, excluding Florida where we're basically flat, we see weakness in most of the states in particular in North Carolina and we also see weakness in Texas, so there is a geographical bent. At this point, the preferred relationships, we're not reaping the benefit.

As we get those relationships, the benefit really accrues over time as new nurses start under those contracts, so we do anticipate growth, sequential growth on a year-over-year basis, on a relative basis year-over-year, as we harvest the fruits of our labor and try to obtain these preferred relationships, but at the same time, we also expect to see regional variations given the demand environment as well..

Okay, and as a follow-up to that, what are your recruiters hearing when they're talking to the nurse staffing managers or, you know, that equivalent at hospitals? That they need nurses, but the people on the CFO type or whatever is not allowing it, or are your recruiters hearing that there's a structural change within the hospitals that they figured this out in some way either by developing their own travel nurse staffing departments or businesses or, you know, increased bonuses, What are your comments there?

The dialogue really hasn't changed. Since probably the late 2nd quarter of '02, there's been just a sense that we really need the nurses, but we're not -- we just can't bring them on. We did anticipate as we have been communicated, we anticipated a moderation in demand because typically there's a push back after a significant surge of usage of contract and outsource nursing services.

The duration of this push back and I would also say the severity of the pus back has taken us a little bit by surprise and that is a result also of the impact that a soft economy has had on job creation, really the loss of jobs outside of nursing has forced nurses, as spouses to go back, more hours than they really want to. Fundamentally, the same secular trends still drive our business. You have an aging workforce and aging population that will increase the demand for healthcare services on a very dynamic basis, but I think as we look at the current environment until we see significant job creation, a change in that dynamic in the economy, we expect to be in this soft patch, and as it relates to hospitals starting up their own travel nurse operation to compete with us, I don't think that's an important dynamic. I'm aware of certain full profit systems that have created kind of intracompany travel nursing models where a nurse from Tennessee can work as a traveler for the company in Florida.

I don't believe that is really skimming a lot of the demand off. I think a much bigger dynamic is really part-time nurses working more shifts, shifts that they don't really want to work, they didn't before and it is not likely that they want to work them now. As soon as their spouses go back to work, they'll fall quickly back to their previous pattern of employment.

Okay, thank you.

Thanks, Jim.

Thank you, our next question comes from Mark Allen, please state your company name followed by your question.

SunTrust Robinson Humphrey. Congratulations on your 2002, there are thousands of companies that would trade financial statements with you. My question, Joe, is a question on competition. Some other players in this space have cited increased competition is a factor and just would appreciate your color on that. How, if at all, is increased competition impacting your fill rates, margins, or retention rates?

Certainly there's been a lot of smaller companies, new companies nibbling at the edges, but for a hospital that has a significant need for travel nursing services, they're typically going to rely on two companies to fill the majority of those needs. As a result, I don't think the smaller companies coming in and if they offer price concessions, that really doesn't affect us because it's rare that they can turn around with those price concessions and fill the jobs that the hospital needs filled. So, I think, as long as the top tier competition continues to maintain pricing and margin discipline, I feel comfortable that our margins will be stable, if not up, this year.

And follow-up question, you have good free cash flow. Can you give us a little color, your posture towards acquisitions? Do you feel like the challenging environment requires you to keep a lot of focus on the internal operations and just wondered whether this is changing your posture towards doing some acquisitions.

As that private multiples come down, certainly the public multiples have come down far more than we would have expected. We still think this is a growth business. We think even in this environment, Cross Country is going to grow and I think our guidance reflects that albeit at slower rates than the investment community had expected. We're looking hard at what's out on the market. We are very encouraged by the success of the NovaPro transaction and our ability to segment the nursing population and open up new opportunities for a smaller brand and to grow that brand very aggressively.

We're going to continue to look for those opportunities at prices that will be very accretive to our share shareholders. Obviously at our current prices, our own stock, repurchasing our own stock is very accretive to shareholders and we'll attempt to obviously factor that in, as well.

Thanks. Good luck this year.

Thanks, Mark.

Thank you. Our next question comes from Mr. Bilal Basrush, please state your company name followed by your question.

Hi, Bilal Basrush from Solomon Smith Barney. I have a question here on some of the inclement weather we've seen December to the present. Has that had any sort of a negative effect on your business whatsoever?

Hi Bilal, how are you?

Good.

I don't believe that's what is driving the decline in orders that we've seen. We have anecdotally heard that census in many parts of the country is lower than many hospitals expect. I'm reluctant to make that statement because I know in the past that that's been challenged. It's not the primary driver of I think the dynamics of the industry. To go back to the reasons I gave previously, that's more so.

I have heard and I think it's been pretty well documented that it's been a pretty light flu season, so it hasn't helped at all, but I don't think it's the current primary driver of the current softness.

Second, can you talk about your advertising budget? I know you don't really quantify that. How much has it really increased from let's say the beginning of this year to this quarter and what your expectations are going forward?

If you compare the first half of 2002 to the second half of 2002, we spent incrementally 2-1/2 cents per share more in the second half. We felt as we compared our spending to our major competitor, again, just anecdotally, the apparent increase and application activity that they were getting vis-a-vis our own increase in application activity, that we felt we were just under investing in that area. So, we have stepped it up and as I indicated that the good news is that spending is bearing fruit on the supply side. Just to reiterate, there are always three parts of our business that drive our success, the availability of quality and quantity of orders that we get from our hospital clients and the internal capacity to match those orders to nurses that want to work those jobs.

We feel we're in very good shape on the supply front, we're in very good shape as it relates to our internal capacity, we now have capacity that we feel to grow the business given the recruiters that we have and their experience, each month they get more and more traction. To me, the most challenging issue we face in the short term, is the level of demand from the hospitals. There are still, as I said, thousands of orders out there and we believe our strategy is to wherever those orders are to have Cross Country be the vendor of choice. If they have a choice of which applicant to take from what company, we want the hospital always to choose our applicant first.

All right. Thank you.

Thank you. Our next question comes from Mr. Jeff Silver. Please state your affiliation and your question.

Good morning, it's Jeff Silver with Gerard Klauer. Since it seems to be an issue with demand across the industry, I was wondering, have you been making any changes over the past few weeks or months to try to maybe increase demand, maybe sell the value proposition of your services a little more hard to hospitals? If you could give us a little more color what you're doing in that area, I'd appreciate it.

We've been doing that beginning in the 2nd quarter where we felt the hospitals really weren't valuing our model of placement, the very high quality of the applicant that we send to them. We don't throw our applicants against the wall and hope they stick at some hospital. We match very carefully the qualities of the nurse to the attributes of the position order that we get. As we review our success, in more than 99% of the cases, we've given the hospital a very strong match and therefore they don't need to look as carefully at our applicant as we hope they look at other companies in the industry. We've had great success as the demand has become less frantic and our customers become less scattered in their selection of which nurse to bring on board, we think that actually it works to our advantage, in this environment as we look back historically, the last time the market was more demand constrained than supply constrained, Cross Country grew share and we grew whereas we believe most of the major vendors, our competitors in this space, actually declined.

We didn't do it on the basis of price. I don't expect that we will have to sacrifice price to gain share going forward. We believe we have the best model of placement from the hospital's perspective in this environment and that is going to work to our advantage.

If I can shift gears, talk about your balance sheet and cash flow. If I remember correctly, you have a debt instrument that you might be able to pay down beginning this month. I was wonder if you can talk about those plans vis-a-vis using your cash for future share repurchases?

Jeff, this is Emil. You're absolutely right, we do have a hedge instrument that will be maturing at the end of February which will enable us to repay up to 45 million of our term debt. We will continue to evaluate the best use of our cash and intend to invest in a manner that is most accretive to our shareholders. We believe our stock is a very good investment of prices, but we'll continue to evaluate all the options for the use of our excess cash.

When can you be back in the market buying shares?

I'm not sure I know the technical answer to that.

Is there an issue in terms of a window, a couple days after the press release that you can start buying stock?

The window is typically three to four days.

Did you buy any stock in the current quarter so far?

Nothing significant in this quarter.

Okay. Thanks.

Thank you, our next question comes from Jason Williams. State your company name followed by your question.

I'm with Bobbi Brown Asset Management. Quick question. I think you said you had $42 million in cash flow from operations in the year?

That's correct.

Okay, great and can you give us what cap ex was for the year?

Approximately 7 million.

Thank you very much.

Thank you, your next question comes from AJ Rice. State your company name followed by your question.

Merrill Lynch. Hello everybody. A couple of questions. First of all with the wrap-up in recruiters that you've got, I'm not sure if you said 121 or 131, but versus 75 a year ago.

121, A.J..

121. Wouldn't you expect that if they're marginally productive that you would see a pretty significant ramp over the course of this year in your bookings and so forth?

Yes. The change in our guidance, A.J. is just to reflect that the demand environment has changed since November.

Certainly I'm optimistic regarding our potential to grow the business going forward, but I think given what we're hearing from competitors, what -- the level of orders we're getting from customers, it's prudent to guide the market to a more cautious level of growth, but internally, we haven't changed our incentive plans, internally we are being driven to achieve a higher level of growth than the current guidance would suggest.

What is the life cycle of a new recruit, a lot of these came to the second half of '02 if I'm right, what would be sort of a normal progression for them to get to a mature run rate?

We would typically expect to see a new recruiter be delivering let's say five to 10 working nurses on contract after six months of employment and 30 to 40 after a full year. One comment, as you build the model, as we try to guide the market, we have experienced a higher level of turnover in new recruiters versus what we would typically experience in our tenured recruitment workforce, historically our turnover in recruitment is very low, it's around 11%, if you look back over a historically normal period. Our new recruiters are turning over at a much higher level, between 25 and 30%. So, again you can't take what we added in February and just assume after six months in a year that they're gaining traction, some of those people have shaken out, it's actually a hard and difficult job, some of our recruiters do a fantastic job, but it clearly isn't for everyone and i think that some of the new people come to that conclusion after a few months.

Okay. Just a comment on the housing market, what's the trend there and how does that factor into the guidance for this year?

We have certainly seen a moderation in the rate of increase in our housing costs. Currently they average in the kind of mid-single digits. Implicit in our guidance for next year is an expectation that our gross profit margin trends will continue to improve as they have throughout 2002. One of the factors that drove that improvement has been the moderation of housing costs as well as the moderation in the wages that we pay to nurses.

Okay. Thanks a lot

Thanks.

Our next question comes from Dan Brady, please state your company name followed by your question.

Presidio Management. I got on the call late, Joe and I apologize if you have already covered this. I think what has happened with regard to what's happened with regard to travel nurses, has been pretty well telegraphed by yourselves, pretty well explained by what you people have said and also AMN. I was curious, what happened in the per diem business for you guys this last quarter and how you see that developing?

Are the same factors affecting that to the action same extent they are the travel business or you could even make a case I guess that the outlook might be a little better for per diem in as much as the charge in the hospital gap for a per diem travel nurse, there's a certain amount of flexibility the hospitals have. Might they decide to fill it on per diem on an as-needed basis and therefore -- businesses a little better, could you comment on that?

Sure. We did say on the call that our per diem business has essentially more than doubled year-over-year 4th quarter to 4th quarter of '01 and we continue to see traction in the 1st quarter of '03.

Having said that, our business is relatively small, what we're doing we're doing on a very efficient basis. We're gaining leverage on a significant selling expense relative to the side of the business today. We would expect to grow at a rapid rate. As we look at the per diem environment nationally, it really varies very significantly by region, even by metropolitan area. In certain markets, I would point to South Florida, Texas, I think there has been a tilt towards per diem usage, but the reality is that the same dynamics that drive less demand for contract travel nurses also drives less demand nationally for per diem nurses.

Within each sector, there will be winners and losers, but the tide is lower than it was the last two years, again kind of the overall level of need has declined and there is some substitution effect for contract and per diem. I'd also point out, I know I've heard from some providers of per diem services say that pricing is now pretty much in line, pricing for per diem varies more by shift than it does for travel nurse providers and in most areas of the country, the pricing for night shift nurses is still significantly more favorable for travel nurses than per diem nurses. As we look at our own book of business, roughly a little more than 50% of the nurses we have working are night shift nurses maybe even break it down by time of day, in this environment, per diem on a national basis won't be much more successful than travel is. Both can be successful in its environment. It's still obviously our guidance that will continue to grow the business in 2003.

Thank you very much.

Thank you.

Thank you, sir. Our next question comes from Wayne Cooperman, please state your company name followed by your question.

Cobalt Capital. First, if the hospitals are running leaner than they were before, what signs do you see where they kind of come to the end of that, their ability to keep increasing the patient nurse ratios that the nurses are just really -- can't work the extra shifts?

Second question, on the buyback, what are your intentions, is the stock materially lower than it was when you first announced it, do you consider increasing the size of it after this is finished?

I'll take the first part of it. What you would look for as an investor, what we're looking for in our own business is a change in inflection in the booking activity. As I indicated regarding the question earlier, we have seen a modest uptick and that is encouraging to us.

We'd like to see that continue and accelerate before we begin to trumpet it as a change in inflection in our business and we'd also look to a change in our conversion rate of applicants that we send to hospitals, we'd like to see them convert more quickly, and I think that would be an outcome of some of the initiatives that we have in place regarding preferred provider status and other initiatives surrounding our hospital focus activities. From our perspective those are the two things we'd look to. Having said, where we are today, I've talked about the bookings, we have not seen a material change in conversion rates.

Are you getting a sense that the nurses are getting more and more fed up and something is going to happen there?

We certainly hear that the nurses aren't jumping back into the market because they're dying to get back to the bedside with a higher concentration, and there's a couple of things that relates to that.

Why we don't think that's a sustainable model, intensity of use, higher nurse to patient ratios and increased overtime, there's a lot of legislation nationally at the state level that would preclude those alternatives as alternatives for hospital employers. Additionally from the buying side, the leap frog initiative, the joint commission, even the CMS from a reimbursement standpoint is beginning to make noise that patient satisfaction and patient outcomes are going to be drivers of reimbursement going forward. Drivers of accreditation.

So just -- I think there is a floor as it relates to those actions, those alternatives to outsource staffing and we certainly expect to see it, but to be candid, we've expected to see it before now. The duration and severity has taken us a little bit aback, but the secular trends that have driven the business over the last decade are still in place and we're not in a static environment. The drivers have been so powerful for the last decade and are likely to overwhelm this short-term turbulence over the long-term. I don't know whether it's two quarters or a year. Unfortunately I can't give you that comfort level. What I can say is even in a more constrained command environment, Cross Country should be able to achieve success vis-a-vis other companies in the industry. Emil?

I'll review the status of the buyback program, which was the last part of your question. To date, we indicated we purchased under 500,000 of our shares, 435,000 to be exact. Most of these repurchases have occurred late in the 4th quarter so they did did not have a measurable impact on our 4th quarter EPS and so far in the 1st quarter we haven't --

My question was more on your intention to either finish the existing line, increase it, and what type of leverage ratio are you comfortable in?

We are roughly 25% into our current program and we certainly will continue to evaluate the best use of our excess cash. We believe that we are under levered, certainly our cash flow generation remains extremely strong and we would be very comfortable with moderate amount of leverage up to 20 to 30%, even 35% debt to total capital seems very reasonable given our steady cash flow generation.

Conceptually we find the current price very attractive and we believe repurchasing shares at this price will be accretive to our shareholders.

I guess the question -- we know what your EBITDA projection is for the year or pretty close to it. Looking at a debt to EBITDA ratio, is there a level where you feel comfortable up to?

Certainly our cash flow can support well in excess of two times debt to EBITDA with senior debt, that would be no problem, maybe even 2-1/2 to three. We're nowhere near those levels obviously right now with only 43 million of debt on our balance sheet.

There wouldn't be very many shares left if you took the leverage up to there.

That's correct. Obviously we'd have to balance the concerns of that liquidity in the marketplace.

Right. Thanks.

Like I said, we think the stock represents a very attractive buy at this point.

Our next question is from Mr. Eric Bell. Please state your company name followed by your question.

This is Eric Bell from Tazit Capital. Did you give guidance for cash flow for current fiscal year?

No, we don't give cash flow guidance, but I can perhaps help you derive one. Our business is a relatively straightforward one to model.

When you look at cash flow from operations, really what you need to look at is starting with net income, you would add back your depreciation and amortization and just kind of order of magnitude, we indicated that cap ex ran at about $7 million last year, depreciation at some point is going to kind of lags that number, but at some point will approach that number. The only other components is the dollars that we tie up in incremental capital as our revenue gross and that number has historically run at the 12 to 15 percent range, meaning 12 to 15 cents of every incremental dollar gets tied up into incremental working capital .

The last piece in our working cash flow is really the benefit we get from the tax shield relating to goodwill amortization where we can be deduct it on the tax side, but isn't showing up on the book side. When you add all of these together on a normalized basis, our cash flow from operations would typically be about 15 cents higher than our EPS would be.

Okay. Trying to get my head around some more philosophical questions. I was trying to understand, is there a base level of demand, obviously the long-term picture of the nursing shortage continues. Near term there's been pressure from nurses re-entering the workforce and hospitals trying to add overtime, et cetera.

If that were to continue, is there a level, sort of a $50 million question I guess, but is there a level of worst-case scenario for demand to travel nurses due to family leave time, migration of people to Florida, et cetera, I mean, yourself and your public competitor have shown pretty dramatic growth over the last few years. As an investor, a concern would be that some of that goes away. Obviously demand growth has been less than history has been looking for. Just trying to look for some comfort level as to a baseline load of demand that's not related to just the nursing shortage per se. Sorry for such a lengthy question.

I'd love to be able to quantify it for you, but in addition to filling chronically open positions, to me, that dynamic relates to each hospital's supply curve and how inelastic their slow boat supply is. It's flattened out for most hospitals. Nurses are able to fill more shifts at the wage they want to pay without disrupting the other -- the majority of the staff nurses they have on the payroll at that time, so as they're able to fill more shifts at the wage they want to pay, they need less of our service.

So having said that, at some point the slope steepens and it does make sense to bring in contract and per diem nurses to fill openings. It is not like the nursing shortage demand has gone away. In addition there's certain areas of the country, certainly Southeast Florida in particular, the Arizona market, California, has some seasonality, an important level of seasonality as population in those states changes dramatically from the Summer to the Winter months.

In the Summer, during vacation times in the Northeast, Northwest, and other areas, you have very predictable vacation scheduling and leave of absences that are also important drivers of our business. In addition, there's the need for nurses to fill units that were recently opened, like a facility against a certificate of need for heart procedures. They want to bring on experienced CIBCU nurses that they can begin generating revenue from those new procedures, similarly, birthing units, you want to bring labor and delivery nurses, so there are other uses, other reasons why you want to employee travel nurses beyond just the nursing shortage.

I have said for the last year certainly, that I don't think the nursing shortage is the primary driver of our business. I think this has been an continues to be an outsourcing business. The nursing shortage really hasn't really set in yet. What we had was a shortage of nurses willing to work at the wage that hospitals wanted to pay. That is less true today. I expect it becomes increasingly true as we go forward.

One final question to help me think about and others perhaps, yourself and your other competitor in the public arena have shown pretty significant growth for the past few years. How much would you contribute to the growth rate of the industry and how much would be acquisitions and/or share gains?

The industry grew significantly. The public information suggests the industry grew in the high teens, 20 percent range year over year. I think in recent years, I think there was growth in excess of that as the industry has consolidated, you look at some of the smaller competitors, it really was significant growth, 2000, 2001, the early part of 2002, and I would put that growth. In 2001, for example, I think the industry grew faster than 40%, which was why we felt there would be a push back from hospitals, historically, when demand surges and usage surges both on a volume and price basis, at the end of the budget cycle, the CFOs in our customer office is banging his fist on the table saying what are you going to do about that.

There is another side, quality of patient satisfaction, quality of outcomes, the medical director at some point comes back into our customer's office and bangs his fist on the table and says when are you going to get more nurses, my doctors are taking their procedures down the hospital that has better nurse to patient ratios and there's better patient satisfaction. That's just a dynamic that's in the industry. We do expect it to turn, but as I said on this call, we did expect it to turn before now. We're encouraged by recent trends, but we like to see those trends play out over several quarters before we're able to signal a momentum shift in our industry.

And as far as the mix, organic and acquisition growth, most of the growth has been -- certainly for us has been organic, for example, this year, 75% of our revenue growth has been organic and 25% from acquisitions. I think similar patterns exist in the other public company.

Thank you.

Thank you, sir. Next question comes from Karl Dorf. please state your company name followed by your question.

Yes, Dorf Asset Management. Could you tell me when you review the goodwill and in terms of valuing that on the balance sheet and the slowdown the business had and the impact on the value that you carry, the other dynamics that's been talked about today?

We review goodwill for impairment every quarter and year-end as well and there has been no impairment issues at all relating to the goodwill other than the charge we took against our [East Ap] business which has been classified as a discontinued operation in the previous quarter.

Thank you.

Thank you. Your next question is from Eric Miller, please state your company name followed by your question.

Heartland Advisors. Two questions. Do you expect cap ex in 2003 to run around the same 7 million? And, also, is your business 100% to the hospitals or do you do any medical outsourcing, home staffing and thus have more medicare, medicaid concerns?

The cap ex for next year is expected to be comparable to what it was in the past year, it's been running roughly 1% of our revenues. We do no home health business and have no medicare or medicaid exposure.

Thank you. Your next question comes from Jim Chenanski please state your company name followed by your question.

Jim Chenanski again. While the pipeline of Assignment America continues to be strong, it's fair to say that that has not been an easy process and I'm just wondering what your be expectations are for the business in '03?

I am glad you brought that up. We have been disappointed in our ability to get foreign trained nurses to the United States in a timely manner. The process has gone from 12 to 15 months when we began it in January of '01 and today it ranges from 20 to 24 months to get nurses to the U.S. on a green card.

As a result, we've continued to push back in expected start dates. A significant reason why our '02 -- excuse me, 1st quarter of '03 is below where we wanted it to be is that there's still investment spending in Assignment America. We do believe the business will turn cash positive in the second half of '03. That's using conservative assumptions.

We have focused more on nurses, put nurses at the front of the line that have skill sets that are -- have the highest overhang of demand that we feel comfortable that even if there's a decline from where we are today, that there will still be nurses that have attractive specialties for placement, but it has been a disappointment, Jim.

Okay. Thank you.

Our next question comes from Mr. Brian Black, please state your company name followed by your question..

Brian Black with Lamm Partners, my question has been answered, thanks. Thanks.

If there are any additional questions, press the star followed by 1 at this time. Our next question comes from, Mr. Matthew Birgert, please state your company name followed by your question.

J.P. Morgan. A couple quick questions. You mentioned the last time that you saw a slow down in demand, you were able to take market share can you help quantify what margin pricing and volume trends did during that period?

I'm not sure I can off the top of my head give you what was going on. It was a very different dynamic in the early 90s than what we see today. While we've seen a deceleration in the business we still believe there's adequate demand to grow the business.

In the early '90s as managed care made inroads and there was a lot of really chaos in the acute care sectors, hospitals were closing beds, laying off nurses, there was much more talk of a nursing surplus than a nursing shortage so I'm not sure the periods are comparable. Off the top of my head I would say there was margin compression, but having said that, at that point I believe in '94 we grew our revenue about 15% and our profitability was up closer to 20% in that year. So, again we were able to get leverage on the business.

Great. Second question about your first quarter EPS guidance, you mentioned that volumes would be up sequentially in the 1st quarter versus the 4th quarter and you implied that the gross profit for traveler was trending nicely. Given those two trends, I want to help understand the sequential reduction in earnings in the 1st quarter and what's that specifically attributable to?

The other factor that we need to consider is that we continue to invest in our developmental businesses. We are operating with more SG&A as a result of our investments in recruitment workforce year-over-year and we're also as Joe indicated investing more in our sourcing initiatives, advertising and internet based sourcing initiatives. Our depreciation expense is also ramping up as our cap ex has increased year-over-year.

On a sequential basis, if you're comparing the 4th quarter to the 1st quarter, the first quarter in the travel nursing business is always your weakest margin quarter. You have less billing days, there's only 90 days versus 92 in the 4th quarter and you pay the same housing for 92 days that you do for 90 days.

Those margins on the last two days in the 4th quarter are very attractive and not having them is also more inefficiency as many nurses go home for the holidays and he they start new assignments in January, you have less efficient housing as compared to the 4th quarter. So, it's always our expectation that all other things equal, and while we have modest head count increases in the 1st quarter versus the 4th quarter on an average basis, the profitability per nurse is less than the 4th quarter.

And are you expecting revenue per traveler per day to be up sequentially in the 1st quarter? Or revenue per week?

We expect that number to grow sequentially. The only factor is that the billable completion bonuses are now included in our revenue and we expect that the billable completion bonuses to be phased out by our hospital clients in the 1st quarter. In terms of our pricing we continue to expect mid to single digit increases but billable increases are declining. That's year-over-year, not sequential basis. We're not expecting that kind of growth.

Thank you.

Our next question comes from William Gordon, please state your company name followed by your question.

Hi, Bill Gordon, Gordon Capital. Dealing with this question again of nursing scarcity and demand at the hospital level, these basic drivers, is the hospital hiring the nurses directly or using the outsourcing services, why are we not looking sequentially at a structure change?

Whatever prompted this at the hospital level who started this nine months or a year ago looking for a better way or cheaper way of doing this and in fact doing this, cutting back some of the outsources and taking it in-house by -- the explanation being it's the recession, there are more nurses prepared to work two shifts if the husband is unemployed, why are we rerationalizing the potential situation here of a structural shift, that the hospital is now going to take more of this business in-house and can in fact do it cheaper and can find the nurses the way the outsourcing can find the nurses?

The reality is, as hospitals look at their alternatives, let us say that they're employing 500 to 1,000 nurses, and they have 10 to 50 open positions, they can see rates are in the low double digits right now, 11 to 12% nationally and they've remained at that level for a couple years. As they look at their alternatives, certainly they'd want to fill those shifts if they're kind of baseline shifts at their low point of census, they'd want to fill them with direct hire personnel.

Having said that, the willingness of nurses to switch jobs or fill those jobs varies depending on what else nurses can do. If nurses either don't want to work, work full-time, or they don't want to work at that wage, the last several years, hospitals haven't been able to do that and it made perfect sense to take that position and fill it with a outsource nurse at a higher cost because our service doesn't disrupt the wages of their 25% of their budget. And the current environment where nurses -- we hear anecdotally that they don't really desire to work more shifts, they work part-time because they want to work part-time. We believe they've been forced to work more hours. I don't believe that's a structural change.

The other methodologies that hospitals are using including, we've heard certain for profit systems report that they've increased wages by 20%. That's 25% of their budget increasing at 20%. I don't believe that's a sustainable solution. They can't do that year in and year out.

Having said that, they're going to be more successful. We fully expected that hospitals would be more successful in recruiting to more of their needs, but that need is not a static need. That need is going to grow as demand for services, inpatient admissions and demand increases and as the average age of nurses in the population continues to increase and as nurses age they offer on average less and less hours of service to hospital employers.

So it's not -- if we were where we are today and we expect the population and nurses wouldn't age, if you look at graduations from nursing schools which over the next several of years will be at very low point historically, you're not filling the pipeline with new young nurses to the same degree you had, historically. So it's not a static environment. It will be become more favorable for our service going forward and that's why we believe we haven't encountered a secular change in demand.

I hear what you're saying, but nevertheless, why can't the hospital at the hospital level leap frog the outsource and go directly to the Philippines the way Wal-Mart eliminated the middleman and went directly to the manufacturer?

I think some hospitals have. There's reports of hospitals recruiting in the Philippines and India. But you have to look at the overall vacancies in the industry, at the last report, 120 to 130,000 nursing positions, no one is bringing that many foreign nurses to this country. It is not happening. There aren't that many nurses willing to pick up and migrate to the United States and I don't think immigration will allow that to happen.

There's a number of things that hospitals can do and will do to limit their need. The studies I've seen suggest there will be a million nurse shortage in the year 2000. Others don't change. Some things do, I think hospitals will pay more, I think they'll recruit overseas so I don't think there will be a nurse shortage, but I do expect the shortage in 2010 to be greater than 130,000 nurses that we see today.

Okay.

Thank you. Gentlemen, there appear to be no further questions. Please continue with any closing remarks.

With that we'd like to thank everybody for joining us and we look forward to our next quarterly call. Thanks very much.

Ladies and gentlemen this concludes the Cross Country 4th quarter and year end investor conference call. If you would like to listen to a replay of today's conference, please dial 1-800-405-2236 or 303-590-3000 and enter access number 521820. This conference has also been webcast by CCBN and may be replayed on our website at www.crosscountry.com. Thank you for your participation, you may now disconnect.