Cross Country Healthcare Inc (CCRN) 2003 Q2 法說會逐字稿

Welcome to today's second-quarter 2003 earnings conference call. Following today's presentation, there will be a formal Q&A session. At that time, instructions will be given should you wish to ask a question. Until then, all lines will remain in a listen-only mode. As a reminder, today's call is being recorded for replay purposes; should you have any objections, you may disconnect at this time. I would now like to introduce Howard Goldman, Director of Investor Relations for Cross Country Healthcare.

Good morning, and as I was just introduced, this is Howard Goldman. I'm Director of Investor and Corporate Relations for Cross Country Healthcare. Thank you for listening in to this conference call, which is also being webcast, and for your interest in the Company.

With me today are Joe Boshart, President and Chief Executive Officer, and Emil Hensel, Chief Financial Officer. On this call, we will review our second-quarter 2003 results, for which we distributed our earnings press release after the close of business yesterday. If you do not have a copy, one is available on our website, www.crosscountry.com. Replay information for this call is also provided in the press release.

Before we begin, I would like to remind everyone that this discussion contains forward-looking statements and that certain terms may represent non-GAAP financial measures. Statements that are predictive in nature that depend upon or refer to future events or conditions, or that include words such as expects, anticipates, intends, plans, believe, estimates 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 or performance expressed or implied by these forward-looking statements. These factors were set forth under the forward-looking statements section of our press release for the second quarter of 2003, as well as under the caption "risk factors" in our form 10-K for the year ended December 31, 2002.

Although we believe that these statements are based upon reasonable assumptions, we cannot guarantee future results. Given these uncertainties, the forward-looking statements discussed on this teleconference might not occur. Cross Country Healthcare does not have a policy of updating or revising forward-looking 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. And now, I will turn the call over to Joe.

I am pleased to report on Cross Country Healthcare's second-quarter results. Our revenue of 165.9 million in the quarter grew by 5 percent over the prior year quarter. Income from continuing operations was 21 cents per diluted share and included a previously-disclosed charge associated with the write off of certain loan fees related to our prior credit facility, which gained at 2 cents per share. Additionally, excluding the net impact of the earlier than expected completion of the Med-Staff acquisition, which closed on June 5, these results were in line with our second-quarter guidance -- though at the low end of the guidance range -- and down from 25 cents in the prior year quarter.

Adjusted EBITDA during the quarter, as defined in our press release, was down 16 percent from the prior year period, due to increased investment in our core healthcare staffing business, including substantial expansion of our hospital-focused Cross Country staffing sales and marketing organization. Adjusted EBITDA was also impact by the loan fee write off, as I just described. In addition, the contribution from our other human capital management business was also lower than in the prior year quarter.

Looking at our healthcare staffing segment in isolation, quarterly volume in our core travel staffing business improved both sequentially and year over year, due entirely to the Med-Staff acquisition. Excluding Med-Staff, we would have experienced a normal sequential seasonal decline in FTE's from the first quarter, as well as a year-over-year decline of approximately 4 percent.

Also in our healthcare staffing segment, on a year-over-year basis, we sustained gross margins as we continued to demonstrate discipline in the spread between our bill rate and pay rate, as only a portion of our 4 percent price improvement was needed to attract nurses. Importantly, in the context of the current soft operating environment, we believe we have gained market share while maintaining our gross margins. Nevertheless, our business continues to be affected by the current economic environment and the degree to which it is influencing the willingness of full and part-time nurses to work additional hours at prevailing wage rates for hospital employers. We remain optimistic for a near-term turnaround, but cannot predict whether the inflection point is one or two quarters away or one or two years.

One reason we believe a turn may be coming sooner rather than later is that while demand for our services weakened during the early part of the second-quarter and the volume of placements was below year ago levels, we experienced an increase in the number of open orders from hospital clients since the end of May. While modest, this improvement has been consistent week in and week out, and has also been corroborated by Med-Staff's travel staffing division, some others in the industry through anecdotal observations and a recent research report of an uptick in hospital patient census later in the quarter.

On the other hand, our conversion rate of the applicants that we send in response to our hospital clients' orders has continued to move unfavorably. Thus, while we are receiving adequate members of new applicants on the supply-side and we are submitting those applicants to our hospital clients in numbers significantly above year ago, our volume of placements continues to run below last year's levels; this is a condition which we now expect to continue through year end, as Emil will discuss in a moment.

In this environment, the focus of our activities continues to be to position Cross Country Healthcare to become the primary provider of service to the major users of travel nurse staffing services throughout the country. We are very enthusiastic about several new programs that we have recently begun to roll out to the market. I commend our team for recognizing early the significant change in demand trends, and for seizing the initiative to improve our positioning within our largest clients -- actions which we believe have resulted in our increased market share.

As we first mentioned one year ago on our earnings call for the second quarter of 2002, the buying process for outsourced labor on the part of acute care customers has become very cautious, and actually has become increasingly so in the intervening year. While I believe some of the dynamics that are currently playing out are temporary in nature, such as the use of higher patient to nurse ratios, others, such as the more structured relationships with vendors, are likely to be with us even when the demand environment improves.

While a more decentralized buying process is more favorable for the growth of the industry as a whole, I contend that a more structured environment actually favors the industry leaders. I believe the dynamic is that an industry leader like Cross Country Healthcare, with few exceptions, gets a seat at the table while the rest of the industry scrambles for the few and reduced remaining seats. This dynamic reduces the ability of less rational competitors to influence our business. I believe this dynamic is playing out as we speak and will continue into the future.

On the pricing front, our price inflation continues to moderate, as expected. Average bill rates in the Cross Country TravCorps nursing brand were up 4 percent in the second-quarter from the year ago period. For the balance of 2003, we expect year-over-year rate increases to continue to moderate into the low single digit levels.

As we announced on June 5, we completed the acquisition of Med-Staff, one of the largest remaining privately held nurse staffing companies. We expect the acquisition to be accretive to earnings this year. Med-Staff added 10.9 million in revenue to our second-quarter results. To recap our strategic rationale for the acquisition -- first, it provides Cross Country with a large travel nursing brand with which to better segment the travel nurse population, with a benefit package that is more targeted to nurses who prefer to travel without a roommate; second, it provides us with a more substantial platform in the per diem staffing segment than our organic efforts are likely to generate over the next 24 months.

With this market positioning, we believe Cross Country can be more successful in offering a comprehensive suite of services that make us an even more effective provider of primary or exclusive staffing service to our hospital clients. The last rationale for the acquisition is that it gives us an entry point into the attractive staffing market for nurses provided to clinics and hospitals on military bases. We believe Med-Staff is the second largest player in this niche. As Emil will describe in a moment, our cash flow remains very strong and we are very comfortable with the level of debt taken on in this transaction.

With that, I will turn the call over to Emil for a more detailed discussion of our financial results. First, I will go over the results for the second-quarter and then review our revenue and earnings guidance that we provided in last night's press release. As Joe indicated, Cross Country Healthcare recorded second-quarter revenues of $165.9 million, up 5 percent of the prior year quarter. The revenue growth was due entirely to the acquisition of Med-Staff, which closed on June 5. Excluding the contribution from Med-Staff, second-quarter revenues declined by 2 percent from the prior year, reflecting the weaker demand for our services that Joe referred to earlier.

Our gross profit margin was 24.7 percent, as compared to 25.6 percent in the prior year quarter. This 90 basis point drop in margin is entirely attributable to the higher mix of staffing businesses, which operate at lower gross profit margins than our other human capital management businesses. On a sequential basis, gross profit margins improved by 20 basis points, reflecting seasonal factors. SG&A expenses represented 15.9 percent of revenues, up 60 basis points as compared to the prior year quarter.

The primary drivers of the increase in SG&A were -- first, the substantial expansion of our hospital-focused sales and marketing organization; second, the investments we made in the second half of last year to increase our production capacity, and the initiatives we undertook to ramp up nurse sourcing activities. These initiatives yielded a 20 percent year-over-year increase in the number of applications received during the second-quarter, and positions us for enhanced growth when the demand for travel nursing improves; third, is our continued investment in our developmental businesses.

Adjusted EBITDA, a non-GAAP financial measure, as defined in our press release, was 13.6 million, including a $960,000 write off of loan fees associated with the early retirement of debt as part of the refinancing done in conjunction with the Med-Staff acquisition. The loan fee write off equates to approximately 2 cents per share and was in line with the estimate we provided in our earnings release in May. Excluding the loan fee write off, adjusted EBITDA would have been down 10 percent from prior year. Interest expense declined by 35 percent from the prior year quarter, primarily as a result of the expiration in February of our interest rate swap agreement, which resulted in a 400 basis point reduction in our effective interest rate, as partially offset by the deleveraging of our balance sheet late in the quarter to finance the Med-Staff acquisition.

Our new credit facility consists of a $125 million term debt and a $75 million revolver, which replaced our previous $30 million revolver instrument. We expect quarterly interest expense for the remainder of the year to be in the 1.5-$1.7 million range. Income from continuing operations was 6.8 million in the second-quarter. Excluding the loan fee write off, income from continuing operations would have been 7.4 million, or 23 cents per diluted share, in line with second-quarter guidance we provided in May. Net income was 6.8 million, or 21 cents per diluted share, as compared to 8 million, or 24 cents per diluted share in the prior year quarter.

Our balance sheet and cash flow generation remains strong. We ended the second-quarter of 2003 with a debt to total capital ratio of 29 percent and a current ratio of 2.9-1. At the end of the second-quarter, we had 14.3 million of cash, essentially unchanged from the beginning of the quarter, and our $75 million revolver remains undrawn. Days sales outstanding, adjusting for the effects of the Med-Staff acquisition, was 53 days, down one day from the prior year quarter. Cash flow from operations for the second-quarter was $12.4 million, of which $900,000 was used for capital expenditures during the quarter.

During the second-quarter, we repurchased approximately 154,000 shares pursuant to our previously-announced $25 million share repurchase plan. These purchases were at an average cost of $12.33 per share. We continue to believe that the share repurchase program provides excellent shareholder value in the current market environment. We have approximately $17.1 million remaining for the share repurchase under the current authorization.

Let me drill down next to our 3 reporting segments -- healthcare staffing, which comprises our travel and per diem gross staffing; our allied health staffing and clinical trial staffing businesses, accounting for 93 percent of revenues in the second-quarter; and the other human capital management services segment, which is comprised of our education and training, healthcare consulting and (indiscernible) businesses.

Revenue for the healthcare staffing segment was $153.5 million, 6 percent higher than the prior year quarter. Average number of FTEs was 5735, up 5 percent from the prior year quarter. The segment's revenue and volume growth was entirely due to the acquisition of Med-Staff. Excluding the contribution from Med-Staff, volume would have been down 4 percent from prior year and 5 percent sequentially, reflecting the more cautious buying process by our hospital clients, as we have noted since the second-quarter of last year. The segment's revenue, excluding Med-Staff, would have been down 2 percent versus prior year. This organic decline in revenue was due to the aforementioned 4 percent decline in volume and to a slightly higher mix of lower revenue generating mobile contracts, partially offset by improved pricing.

The average bill rates in our core travel nurse staffing business was up 4 percent on a year-over-year basis. Global contracts for the nurses on the hospital's payroll accounted for 2 percent of our volume, as compared to 1 percent in the prior year quarter. In our clinical trial staffing business, the sequential decline in volumes at our ClinForce (indiscernible) began to experience in the second half of last year appears to have bottomed out, and ClinForce is now projecting a sequential increase in volume based on contracts associated with new Phase III drug trials.

Healthcare staffing contribution income, as defined in the press release, was 19.3 million in the second quarter, down 1 percent from the prior year quarter. The contribution margin for this segment was 12.6 percent versus 13.5 percent in the prior year quarter. This 90 basis point decline in contribution margin was due in large part to the expansion of our hospital focused sales and marketing team, along with our investments in additional recruiters and sourcing initiatives.

Turning now to the other human capital management services segment, second quarter revenues for this segment were 12.4 million, down 10 percent from the prior year. Contribution income for this segment was 1.2 million versus 2.1 million in the prior year quarter. The decline in the segment's revenue and contribution income is attributable primarily to the weak demand for physicians search and lower revenues from our physician consulting practice.

This brings me to our guidance for the remainder of 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 and other business combinations, or the repurchase of any of our common stock. As Joe indicated, the demand for travel nursing remains soft as a result of a more cautious buying process by hospitals.

Our bookings in the second quarter were approximately 6 percent below prior year. Based on these booking trends, we expect the average field FTE count to be in the 6400-6500 range in the third quarter. We expect pricing to be up approximately 3 percent year-over-year, and that our mobile mix will be up 1-2 percentage points over the prior year. Gross profit margins in the third quarter are expected to remain consistent with the margins achieved in the second-quarter. Based on these dynamics, we expect third-quarter revenues to be in the 184-190 million range, and EPS per diluted share to be in the 22-24 cents range. Assuming that the current demand environment continues during the remainder of 2003, we expect fourth quarter revenues to be in the 184-$198 million range, and EPS per diluted share to be in the 22-26 cents range. We intended to update our guidance when we announce our third-quarter results.

This concludes our formal comments. Thank you for your attention, and at this time we will open up the lines to answer any questions that you may have.

(CALLER INSTRUCTIONS). Jeff Silver of Harris Nesbitt Gerard.

One of your competitors on their conference call talked about the lead time in the travel business shortening and how that may or may not impact their visibility. And I am wondering if you are seeing those same kind of dynamics in your business as well?

Certainly, we have seen a decline in the time from which we actually book a nurse until she starts her contract. But for us, that lead time is still more than four weeks. I think if we look at it year-over-year, we've seen maybe a 10 percent reduction in that lead time. But a four week -- a more than four week lead time prior to start is still going to give us pretty good visibility one quarter out, and again, at this point we are fairly comfortable with the guidance that we have out there for the next two quarters. But again, it's clearly a dynamic -- there is a more cautious process. They are waiting longer, but I do not think we have seen a dramatic decrease in lead times.

Now with the Med-Staff acquisition, you are a little bit more exposed to the per diem market than you were beforehand. Are you seeing any major differences between per diem and travel, either in terms of pricing, in terms of volume trends, etc.?

That is a good question. I would say that volume trends are more favorable in per diem, I would say margin trends are less favorable. I think the top players in the travel sector I think have been -- I think there's been last competitive behavior, that there's more margin than market share focus. While we have seen margins drop among some of our largest competitors, when we are in the trenches competing for nurses, we are not seeing irrational behavior -- at least that has been our perspective, and I think our margin performance bears that out.

On the per diem side, there's a lot more players; you are more exposed to little guys who are more local. Having said that, the customer tends to be leaning more towards a shorter term assignment. One of the dynamics, I think, that has hurt this year and has continued to hurt this year has been a lower than expected census level among our hospital clients. While it does not affect the nurses you have on contract as a travel nurse provider, while they are on contract, it certainly impacts the psychology of renewing those nurses, extending those nurses under contract. Because oftentimes when the patients aren't there, they are sending their own nurses home in order to keep your travel nurse employed for the terms of the contract with the vendor.

So there, clearly, I think, psychologically has been a tilt towards per diem, and we think it is important to be in both sectors. We think ultimately that over time there has been a convergence of per diem and travel providers, that more of the travel business has become local in nature and more of the per diem business has become kind of fixed contracts or kind of local contracts that look very much like the travel contracts that we have historically provided. Again, I do not want to over-answer your question, but I think directionally, volume is stronger in per diem, the margins are stronger in travel.

When you mentioned margins being a little bit weaker in per diem, roughly what percentage of your revenues on a pro forma basis would per diem be now?

On a run rate basis, about 75 million.

Would you think you might see some pressure on your margins as you shift more towards per diem?

Not from where we are. I do not think we are seeing significant sequential decline in per diem. Year-over-year, we are seeing more of a decline, not sequentially. Emil, is that a fair statement?

That's fair.

Jim Januski (ph) of Janney Montgomery Scott.

When we look at the Florida market as we enter the winter seasonal period, Joe, could you characterize what is going on in the market? Are orders coming in later this year? What are your expectations for the market, and what are expectations for the overall market and what are expectations for Cross Country, in terms of share?

If you recall from last year, we typically begin to see significant seasonal orders -- those for the winter months, and oftentimes beginning in September we start to book nurses for seasonal contracts in Florida -- historically, before last year, we would see those in certainly July and definitely in August. And we didn't last year, and with the exception of one or two accounts, we have not seen significant orders (indiscernible) season this year, either.

Anecdotally, in speaking to the customer and getting a sense of what there expectations are for the needs that they will have this year, it is pretty clear that there is going to be a reduction in the overall level of demand from Florida customers. If we look at our current level of business in Florida, it is down in the single digits year-over-year. Having said that, while the demand may be down, and maybe down significantly in Florida for the coming season, it is pretty clear to us -- given the discussions that we are having -- that we are going to be very well positioned to increase the share of the business that we are going to get from those customers. That is -- again, on an aggregate basis it may be down 25-30 percent, but we believe that Cross Country Healthcare will have a significantly larger share of the business than we even had last year, which we think we dominate Florida.

We think we are going to dominate it to an even greater extent this year. Again, in a more cautious environment, given the dynamics that have played out, they are playing into our hands and they are playing, certainly, well to some of the innovations that we have brought to market over the last several quarters, and we expect to bring to market over the next quarter in particular.

How would you characterize the guidance you have given for the third and fourth quarter of -- clearly we're already almost 2/3 of the way, or at least halfway through the third quarter -- but characterize the guidance that you have given in the fourth quarter with respect to expectations in Florida?

I would just say generally, we have seen a negative trend in the second quarter as it relates to booking. We are very encouraged by the pickup in orders. At the end of the day, orders lead this business. Without orders, there is not much hope for the future, so to see a consistent week over week pickup in the number of orders that we are seeing from clients gives us some encouragement. Our guidance really reflects the current trend lines that we are on that are negative, and increasingly negative vis-a-vis the first and second quarters. So is there a potential for -- in the worst-case scenario, I think that's reflective of the Florida market -- is the potential to have some upside? I think the answer is yes, but the last thing we want to do at this point is pound the table. The turn is one quarter out. I believe that 2004 is going to be a better year for this industry, but I think the momentum of the business right now is not very encouraging and is reflected in the guidance that we have out there.

Just to elaborate on that -- what drives our forecast, our guidance for the rest of the year, is really our booking trends, as Joe indicated. And our bookings in the second quarter were down 6 percent year-over-year. When we project out the trends for the rest of the year, we have assumed the slightly worsening of the trend line. But -- still in kind of a negative territory, but in the high single digits.

Doug Simpson of Merrill Lynch.

I apologize if you have already hit on this, but could you discuss your outlook for your revenue per week, factoring in both the pricing expectations as well as the mix shift -- just how you see that playing out over the next 6 months?

What we are projecting is that revenues will -- the pricing will continue to be up year-over-year, although at a decelerating rate. Our price year-over-year increases is projected to be approximately 3 percent. Offsetting that is our projection that the mobile mix will remain higher than it was last year at this time, and our volume trends are projected to be negative year-over-year.

Following the Med-Staff acquisition, do you have any specific expectation for further movement in DSO's, looking out over the next 3-6 months?

We believe that our DSO's our typical in the low to mid 50 -- 53-55 day range, and we expect it to stay in that range. We expect a seasonal increase at the end of the year, which is very typical in our business, as hospitals typically delay payments in the May/December Timeframe.But that is built into our forecast.

Mark Allen of SunTrust Robinson Humphrey.

A question on -- let me ask you a dumb question, which is -- if your orders have been picking up -- I understand bookings are trending negative, and that is what the forecasts are built off of -- but can you help reconcile that for us? Why are orders picking up and yet bookings going down?

I think some of the dynamics are that after our customer comes out of a period of lower than expected census, while they will put the orders out there, they are even more cautious in confirming the nurse. Secondarily, while orders are picking up, they are picking up off a very low level. Year-over-year, we are still down significantly where we were a year ago, and we were not happy with where we were a year ago. I do not think orders are at a level where we're, again, we're overly bullish. That is why we are trying to be very cautious in the guidance that we have out there.

But what is encouraging is that orders have not picked up and then leveled off -- orders continue to pick up for us week after week. Some of that is clearly macro related, and as I parse it in the different regions that we supply service to, it is really in all regions, with the exception of perhaps the Carolinas; the Carolinas continue to be a particularly weak area for us. So that is very encouraging. Some of the growth is internal initiatives that I think are unique to Cross Country and are somewhat creative, but may not be shared by others in the industry. But there is no question that, anecdotally, that there has been a firming of demand. And that ultimately, that should translate into higher bookings. It hasn't yet, and until it has, we do not want to get overly optimistic.

On the gross margin, I think you had commented the drop in overall gross margins was really just due to mix between your two divisions. But can you give us any color or just confirm specifically -- you are saying in your healthcare staffing business that your gross margins were comparable this year compared with last year?

That is absolutely correct. Our gross profit margin in that staffing segment was essentially flat year-over-year, on an organic basis. The change in the overall gross profit number really has to do with 2 factors, both related to mix -- the higher mix of staffing versus human capital management; then, within the human capital management services segment, the particular weakness of a couple of our high gross profit margin business units -- such as our search business and our consulting business. So within that segment, we also had the mix issue.

An update on your relationships -- I think you had some new relationships with some group purchasing organizations like VHA, and just a question as to what kind of revenue traction you are getting through those relationships?

If we look at where we were, we obviously supplied service through VHA hospitals before. We had a formal relationship with VHA that began last November. And when we began that relationship, I think our VHA share was approximately 20 percent. Today, it is over 30 percent. So there is clearly -- it has been beneficial to us. Again, it has given us an opportunity to sit down and discuss what we think are very exciting tools that we can provide and services that we can provide for our clients, and have those discussions at much higher levels of the customers' organizations than we might have had otherwise. So it is, I believe, allowing us to achieve the kind of market share gains that we're getting, and I think those market share gains are likely to accelerate as we go forward.

Charles Lynch of CIBC World Markets.

Joe, you have talked about a couple of regional items about the Carolinas and Florida. Can you just add some more color around the different regions where you're operating, what you're saying in relative trends?

Volume is generally negative. Even California, which in past calls we have pointed out has been one of the areas of significant and robust strength for demand in our business, we are seeing weakness in California, particularly Northern California. We are down, when we look at the headcount in the latest month, year-over-year.

So again, kind of a stalwart for the business is no longer providing that kind of basis. Florida is down year-over-year. Where we are seeing particular strength is in the areas of the Northeast, for example. Certain northeastern metro areas such as Philadelphia, New York are up significantly. So there are areas of strength, but I would say that the pain is pretty widespread across the various regions that we serve. And like I said, conversely, the upside is that the uptick in orders that we have seen over the last 8 weeks is pretty widespread, as well.

I don't know if you can answer this well, but I would imagine that in your conversations with hospital customers you are going to see pressures on demand for agency staffing coming both from hospital utilization and from financial decisions by the hospitals. Can you try to give some color about the bias of those two different factors?

Clearly -- if I can parse what I believe has happened over the last 18 months, it began with -- to us -- was an expected pushback on the part of hospital administrations, particularly the financial officers saying wait a second, we can't go on like this, and we need to look at other alternatives. That is always going to happen even in the best of markets after a period of robust growth, at least based on my 10 year experience in this business.

Following that, and probably the most -- I don't think that would have driven our business into negative year-over-year volume comparisons; I think that would have slowed our growth, but not really taken us off the tracks of the 10 year growth that we have experienced. Compounding that was a soft economic environment, which again, when there was an actual recession we performed very well comparatively year-over-year -- our bookings were very strong -- but a declining job market ultimately has driven nurses back into the workforce, with the intention of looking for more hours in order to supplement family income. And I do not believe that dynamic has changed.

I guess the jobs report, the unemployment -- new claims for unemployment were at a six-month low; that is encouraging to us. But until we see really strong growth in jobs outside of healthcare, I do not think you'll see nurses go back to their prior mode of behavior. And again, if they didn't want to work these wages before, presumably they are not really that excited about working for them now, it's just that they have to. And then thirdly, I think this -- beginning in December, you had an anomalously -- across the country -- low period of inpatient census. And even worse, I think if you parse where patient admissions have been reduced, it has been in some of the areas that are most important to us, like cardiac care, surgery -- those are the areas where hospitals look at the cost benefit of bringing on a contract nurse and say, well, it is a compelling economic advantage to bring on that nurse if the alternative is to turn away that procedure.

So if the two biggest declines in admissions are in cardiac and surgeries, that is going to be particularly bad for a travel staffing provider such as ourselves. So I think, again, that -- to me, those are the three dynamics. I think census is turning around. I think that will help us in the short-term. I think it has been reflected, certainly, in an element of the pickup in orders. But to me, you won't see resumed growth in this business back on the track of 15-20 percent annual compounded growth -- that we still believe is the long-term growth track of this business, and this company in particular -- until you see job creation in the economy.

Can you repeat the operating cash flow and CapEx numbers?

12.9 is cash from operations, and $900,000 was the CapEx.

Jim Januski of Janney Montgomery Scott.

Could you talk a little bit -- you mentioned in the press release about the stock buyback program. Do you think at these levels you would be inclined to finish it, and what you and the board think about possibly authorizing more if the stock stays at these levels, and we see some momentum building into 2004?

We have every intention of completing the buyback that is currently authorized, and I think we would take up with the Board what alternatives we have with the continued strong cash generation that the Company affords. Having said that, we are restricted by some of the covenants related to our new debt facility.

Our new debt facility certainly provides us the ability to complete the existing program, and we continue to believe that it is an excellent use of capital and represents excellent enhancement of shareholder value. Beyond that, we do have some ability to continue for the new program in place. Some carve-outs have been built into our credit agreement that would allow us to put such a facility in place, such a buyback program in place. But we have not yet reached the point where that decision needs to be made. We still have $17 million left in our current authorization.

But nothing in your covenants prohibits you from finishing that?

On the contrary, it explicitly allows us to do so.

I would also like to just correct the number I gave Charlie before -- it's not 12.9, it's 12.4 million is the cash flow from operations.

Jeff Silver of Harris Nesbitt Gerard.

I know the human capital management business is a relatively small business in the scheme of things, but I am just wondering -- in your guidance for the next couple of quarters, do you think that business will continue to deteriorate sequentially, or are we going to go through some sort of stabilization period over the next six months?

We expect the consulting business to still have one relatively difficult quarter in the third quarter, but then we would expect by year end that business to recover to its normal levels. And the surg business is showing -- is expected to remain essentially flat for the remaining two quarters.

And consulting on a run rate is roughly how much revenues annually?

Annually, the consulting business is at roughly a $15 million run rate.

On ClinForce -- also the same question in terms of the run rate for ClinForce revenues, and what did ClinForce revenues do year-over-year?

ClinForce revenues are on a run rate in the low 32-$33 million run rate. We see an improvement in that into the fourth quarter, as the new clinical trials come on stream. Year-over-year, ClinForce is still going to show a modest decline, perhaps in the 5 percent range.

How much was ClinForce down in the second quarter?

In the second quarter, ClinForce's revenues were down in the 15-20 percent range.

Tim (indiscernible).

I just wanted to know what the depreciation and amortization was in the quarter?

We will look that up.

The other question I had was how did the sales of the acquisition do year-over-year so far, since you have had it since June 5?

The acquisition is really tracking the industry. The travel staffing division is down, and down at a greater rate than the Cross Country TravCorps brand is, which, again, is not surprising to us. The worst place to be in this environment is kind of a second or third tier player that I talked about there. As hospitals narrow the number of vendors that they use, it is those companies that have the most to lose in a lot of the accounts. Conversely, the per diem business, given currently the dynamic where there is a little more bias towards utilizing shorter term resources to fill needs -- that business is actually up year-over-year. So on a mix basis, it is pretty much where we thought it would be when we bought the business. The valuation, the price that we ultimately paid, certainly anticipated a decline in revenue during the course of the year.

To follow up on your question on depreciation and amortization -- the second quarter, depreciation was just over $1 million, and amortization was about $818,000.

Where do you see depreciation and amortization now that the acquisition has been complete? Is that going more to 3 million a quarter?

No, it will be less than that. The amortization expense for the third quarter and the fourth quarter should run approximately $1 million a quarter, and depreciation should run roughly about $1.2 million a quarter.

Mark Allen of SunTrust Robinson Humphrey.

A question regarding the Assignment America division. The question is regarding the demand in that sector. Is there increased demand because that is a low-cost resource, or is there decreased demand because of the overall demand picture? And where I'm going with that is, what is your visibility on being able to place nurses that you bring to the US?

It is more the latter than the former. We don't price the Assignment America nurses below the -- our ordinary bill rate. Typically that is not our custom. As we develop that program, the expectation was we would bring the nurses and place them on 6-9-month contracts with our hospital clients. In this environment, the longer the commitment, the less enthusiasm we have found for taking those nurses on. So essentially, when we do bring the nurses over, we are putting them on typical travel nurse contracts, more often than not.

The third quarter guidance -- you did give us a range for FTEs. Is there any way to get that number -- what would it be excluding Med-Staff? I guess I'm asking what would be your organic headcount decline?

On an organic basis, headcount would be down roughly 5 percent. And the improvement is coming, again, entirely from the Med-Staff acquisition.

A competitor had commented that they had seen over the last few weeks an increase in the number of extensions -- nurses who completed their assignment and then were extended. Have you seen any uptick in your extensions on current contracts?

I don't think we would make that same comment, based on our business.

Matt McFerrin of Brookside Capital.

Just a clarification on the FTE number, the down 5 percent. Does that pertain to Q3?

Yes. (inaudible)

The same question for Q2 -- what was the organic FTE number, versus a year ago?

Organically, we are down 4 percent.

Per your guidance for the year, what does that imply -- from your perspective -- on cash flow and CapEx?

Our cash flow from operations should be in excess of our EPS per share by 20-30 cents a share. CapEx for the remainder of the year -- CapEx is currently running at roughly $1 million a quarter, and we expect a similar run rate for the rest of the year.

Joe, you mentioned that in thinking out to 2004, you are pretty optimistic that 2004 is going to be better than 2003. 2003 was obviously -- has been so far a pretty tough year. Can you talk through what gives you that optimism, based on what you see today? What are the things that make you feel that way about 2004?

Again, just reiterating the three things that have driven a downturn in demand from the very high level that you saw in 2001 -- (indiscernible) is not going to go away long-term. I do not think this is a 30-40 percent growth business, because I think ultimately hospital administrations gag on that kind of growth and the utilization of outsourced labor. I also do not believe that the economy -- which I think is the biggest driver of the negative trends in the business today -- just the greater willingness of nurses to provide service at prevailing wages.

There never was a shortage of nurses, there was a shortage of nurses that were willing to provide service at wages that hospitals wanted to pay them. That is the dynamic that has changed the most in the last 18 months. That's because the nurse has gone from being a secondary wage earner to a primary wage earner, or their husbands are working at a lower paying jobs, and they are forced to step up and provide more hours in order to bring more income into the family.

I believe in a stronger economy, just looking at demographics, not just in nursing -- you have a demographic issue in this country -- a few years ago we talked about a war for labor, not just in healthcare. So I think ultimately, there will be job creation that is going to be resumed. There has been a very anomalous era of a couple of years of economic growth -- growth not significant enough to create jobs in the economy; and in fact, you've seen continued job loss in the economy. And I do not think that goes on. I think that at some point that turns around, and it is more likely to turn around in the next two quarters than the next two years. Alan Greenspan, I would say, has a better handle on it than I do, and he seems pretty optimistic for a turn.

Lastly is the issue of the hospital census, which also hurts our business. Psychologically, there is a little bit of scarring that goes on when they bring on a travel nurse and the patients don't show up, in particular in some of the high revenue areas, like cardiac procedures and other surgeries. Having said that, I do not think anything fundamentally has changed -- particularly on the elective side, hip replacements, knee replacements -- I think those surgeries have been postponed. But at some point, you're going to get a real upturn from people that have waited so long they now have to have those procedures done. And I think that will be very helpful to our business. So it has to happen, I just can't tell you exactly when it is going to happen.

In general, would you say that healthcare outsourcing, the nurse outsourcing, tends to lead or lag other outsourcing businesses -- staffing businesses or whatever it might be? Where does it tend to fall on the continuum in the recovery -- id it lead, does it lag?

I would have argued historically that there is not much relationship, that they are very different businesses. Having said that, given that the economy is such a big part of our business today -- I think if you look at the overall temp staffing metric, they are starting to turn pretty favorably. And I believe our business is going to lag, because I think it is going to be some time before a nurse really has the confidence that her husband's new job is going to stick, that this -- there's not going to be an immediate reduction in the level of hours that are provided by nurses directly to hospital employers.

I think there is going to be some time before it really builds in momentum. So we are not going to immediately, I think, return to 20-30 percent growth; I think it is going to be a process that we build momentum, but you will be able to see that momentum building, because we report our bookings numbers. Again, those bookings numbers are still negative. When they start to turn positive, I believe that is the start of a significant and long improvement in our business.

You talked a little bit about conversions, and I assume that is conversions of when you send in a -- somebody sends you an RFP and you send back a candidate -- that is the conversion that you are talking about?

Correct. And that ultimately becomes a booking and a working nurse down the road.

How does that look, both sequentially and year on year, just the percent conversions?

We were down about 5 percent in the conversion rate from the first quarter to the second quarter. And again, not surprising in an environment where the hospitals have taken on travel nurses, and they are sending their own nurses home because patients aren't showing up to the degree that was expected -- they are going to be gun shy in converting the orders that they have out there to an even greater degree. It is not a surprising dynamic, but I just wanted to put -- the actual number is down 5 percent sequentially.

On census -- is it your sense that census is continuing to improve in July and early August, relative to June?

That's what we're hearing.

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(CONFERENCE CALL CONCLUDED)