Cross Country Healthcare Inc (CCRN) 2003 Q4 法說會逐字稿

Welcome to the Cross Country Healthcare earnings conference call for the fourth quarter and fiscal year of 2003. [OPERATOR INSTRUCTIONS] At this time now, I'd like to introduce your host for today's call, Mr. Howard Goldman, Director of Investor and Corporate Relations. Sir, you may begin.

Good morning and thank you for listening in to this conference call, which is also being Web cast, 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 fourth quarter and full year 2003 results for which we distributed our earnings press release after the close of business yesterday. If you do not have a copy, it is available on our Web site at www.crosscountry.com. Replay information for this call is also provided in the press release.

Before we begin, I'd like to first 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 expects, anticipates, intends, plans, believes, 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 fourth quarter of 2003, as well as under the caption "risk factors" in our Form 10-K for the year ended December 31st, 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 does not have a policy of updating or revising forward-looking statements and therefore 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'll turn the call over to Joe.

Thank you Howard and thank you to everyone listening in for your continued interest in Cross Country Healthcare. As reported in our press release issued last evening, our revenue for the fourth quarter of 2003 increased by 8% year-over-year to just under $176 million. However, net income decreased 42% to $5 million or 16 cents per diluted share. Cash flow from operations during the fourth quarter was strong at $8.6 million, improving from cash used in operations of $3.1 million in the year-ago quarter. For the full year, we produced record revenue of $687 million, our income from continuing operations was $26 million equivalent to 80 cents per diluted share. Net income for 2003 was $26 million or 79 cents per diluted share. Record cash flow from operations increased 21% during the year to $52 million.

In our Healthcare Staffing, segment, our bill rates per hour remained above year ago levels, however, we continued to see a flattening out of these rates. Similarly our pay rates held essentially constant with the prior year. However, impacting our gross margin during the quarter was an unusually large settlement for a professional liability claim, one of the two largest claims in my 11 years in the company, which was fully expensed during the quarter. We do not expect this unusual professional liabilities expense experienced in the fourth quarter to continue into 2004.

While I can continue to view the current operating environment as difficult, I am more optimistic about an upturn in our business activity occurring during 2004 than I was on our prior call three months ago. The primary reason for my higher level of optimism is that orders for contract travel nurses from our hospital clients have continued to increase from the low point May of 2003. And importantly orders in the month of December increased throughout the month, which is the first time we have seen this dynamic in three years. In fact during the previous two Decembers when many of our clients were completing their budget cycles orders dropped sharply. This suggested that a conscious reduction in the utilization of out source nurse labor was a key topic and budget priority. This then set the stage for an unfavorable change in our business trends during 2002 and a disappointing performance for us in 2003. We are encouraged that a change in this December dynamic could signal a positive inflection in our bookings trends during 2004.

It is also important to note that for the first time in more than two years we have more open orders from our hospital clients than we had at the same time a year ago. While the aggregate number of orders is still well below the peak of activity in 2001, it does suggest that we should be able to stabilize if not grow our business. Having said that, our current lower level of organic contract staffing volume is driving our profitability below year-ago levels. We expect this trend to continue into the first quarter of 2004. While we would certainly welcome dramatically higher levels of booking activity, it will take some time for the market dynamics, I just described, to permeate the mindset of both our hospital and nurse clients and lead to a change of behavior.

Looking at these two constituencies, hospital clients are emerging from a period in 2003 where patient census was well below expectations and anecdotally we understand that many in-house hospital recruiters were admonished for being overstaffed. As a result we believe their bias on staffing is that they would rather be understaffed than overstaffed. We believe this mindset will continue until they are consistently reprimanded for being understaffed a condition that usually follows a period of higher then expected census. On the nurse side of the equation many travel nurses have been disappointed by the decline in the amount and diversity of opportunities we can present to them. This has heightened their perceived risk in our ability to keep them working contract after contract in a setting on a location that they desire. Some have chosen to stop traveling to take full or part time positions with hospitals. This may not be their first choice but until we get more comfort in our ability to employ them consistently they might not immediately return to us even as order levels increase.

A change in behavior here requires strong word of mouth encouragement from other nurses we employ and our persistent effort on the part of our recruiters. Based on our historic experience, there is a high correlation between rising order levels and increased nurse application activity. Consequently, a strengthening in demand for our staffing services will not yield immediate benefits but we are confident that a continuation of these order trends will ultimately drive improved performance.

During our past several conference calls, we have discussed a number of strategic initiatives that we believe will allow us to integrate Cross Country more deeply into our hospital clients nurse acquisition processes. From an execution standpoint we continue to be successful in obtaining exclusive vendor status at our clients that are large users of nurse staffing services. Having a greater number of attractive positions in desirable locations will also give nurses an even higher degree of confidence that we are the employer of Choice. We believe these initiatives are important to our performance in the near term as well as in the long term, when we fully expect the return to a much more supply-constrained environment.

Looking to our strategic investment in the Med-Staff business, which we acquired about midway through 2003, it has performed in aggregate within the range of estimates we developed during our due diligence process though at the lower end. While the travel staffing component of the Med-Staff business has been weaker than expected the Perdiem and military have performed at or above expectations. Today the Med-Staff travel and Perdiem components are comparable in size. We continue to actively work with the Med-Staff management team to identify opportunities to leverage account relationships and achieve operating synergies.

Overall we are encouraged by the recent favorable shift in certain key metrics of our business but remain cautious about the near term prospects for our performance. However, with evidence of a strengthening economy there is increasing light at the end of the tunnel. We firmly believe this will translate into improved job creation overall that will over time allow our nurses to return to their prior patterns of employment. Still we cannot predict the exact inflection point. In the meantime we remain operationally focused on executing our strategy and have every confidence that we will emerge in a down turn in demand as an even more formidable competitor than we entered it. As in the past our shareholders can continue to expect our candid assessment of trends in our market and with that I'd like to hand the call over to Emil.

Thank you Joe and good morning everyone. First, I will go over the results for fourth quarter and full year 2003, and then review our revenue and earnings guidance that we provided in last night's press release. As Joe indicated, Cross Country Healthcare recorded fourth quarter revenue of $175.6 million, which is 2% higher than the upper end of the range that we provided last November for revenue guidance. Fourth quarter revenue was up 8% from the prior year quarter but down 5% sequentially. The year-over-year revenue growth was due entirely to the acquisition of Med-Staff. Excluding the contribution from Med-Staff, fourth quarter consolidated revenue declined by 13% from the prior year, reflecting the difficult operating environment that we have been experiencing now for the better part of the last two years.

Our gross profit margin was 23.7% as compared to 24.3% in the third quarter of 2003. The sequential decline in margin is largely attributable to higher insurance-related expenses that Joe referred to earlier. SG&A expenses in the fourth quarter were up 16% over the prior year, driven primarily by the additional overhead related to the Med-Staff acquisition and higher legal expenses. More importantly, SG&A expenses were down 2% on a sequential basis. Interest expense was 1.5 million up from 600,000 from the prior-year quarter, primarily as a result of the re levering of our balance sheet to finance the Med-Staff acquisition, partially offset by lower effective interest rates.

Net income was 5.1 million or 16 cents per diluted share as compared to 8.9 million or 27 cents per diluted share in the fourth quarter of 2002, which included an after-tax loss of 1 cent per diluted share related to discontinued operations. The fourth quarter fully diluted EPS was 1 cent higher than the upper end of the guidance range that we provided during our November earnings call. For the year as a whole, we achieved record revenue of 686.9 million, up 7% over the prior year. Income from continuing operations was 26.2 million or 80 cents per diluted share as compared to 33.7 million or $1 per diluted share in 2002.

Our balance sheet and cash flow generation remained very strong. We ended the year with a debt to total capital ratio of 23%, and a current ratio of 2.7 to 1. DSOs were 59 days in the fourth quarter versus 55 days a year ago. The increase in DSOs reflects in part a shift in the relative mix of our business more towards the Northeast where we tend to have a greater concentration of slower-paying accounts. As receivables due from certain accounts have aged, we thought it appropriate to increase our reserves for bad debt, which resulted in a pretax charge of approximately $800,000 in the fourth quarter.

Cash flow from operations for the fourth quarter was 8.6 million, of which 1.2 million was used for capital expenditures. For the year as a whole, cash flow from operations was a record of 51.8 million, of which 3.6 million was used for capital expenditures. Cash flow from operations per diluted share was $1.59 in 2003, or 4 cents higher than the upper end of the range we estimated last November. Free cash flow, which we define as cash flow from operations less capital expenditures and earn-out payments were 45 million, or $1.38 per diluted share. During the fourth quarter, we repaid 25.6 million of senior debt, which included an optional prepayment of 24.1 million using a combination of excess cash on our balance sheet and cash generated from operations. We also repurchased approximately 131,000 shares pursuant to our previously announced $25 million share repurchase plan. These purchases were at an average cost of $13.58 per share. Under the remainder of the current authorization, we can purchase approximately 500,000 additional shares at an aggregate price not to exceed $11.3 million.

Let me drill down next to our two reporting segments, Healthcare Staffing, which comprises of our travel and Perdiem nurse staffing, allied health staffing and clinical trial staffing business accounting for 92% of revenue in the fourth quarter, and the other human capital management services segment, which is comprised of our education and training, healthcare consulting and retain surge businesses.

Revenue from the Healthcare Staffing segment was 162.3 million up 8% from the prior quarter but down 6% sequentially. The average number of FTEs was 6022, up 9% from the prior year quarter but down 6% sequentially. The segments revenue and volume growth was entirely due to the acquisition of Med-Staff. Excluding the contribution from Med-Staff, fourth quarter revenue and volume would have been down 15% from the prior year, reflecting the more cautious buying process by our hospital clients that we have noted since the second quarter of 2002. The average revenue per FTE per week was down slightly from the prior year, as modest improvement in pricing was offset by higher mix of lower revenue generating mobile contracts. The average bull rate for the fourth quarter in our core travel nurse staffing business was up 1% over prior year. Mobile contracts with the nurses on the hospital's payroll accounted for 2% of our segment volume as compared to 1% in the prior-year quarter.

Healthcare Staffing contribution income as defined in our press release was 17.2 million in the fourth quarter as compared to 21.2 million in the prior year quarter. The decline in contribution income was due to the combined effects of negative operating leverage, additional investment in the infrastructure needed to provide more value-added services to our hospital clients and higher insurance related costs that Joe mentioned earlier.

On a full year basis, revenue for the Healthcare Staffing segment grew by 8% while contribution income was down 6%. The revenue growth was due entirely to the acquisition of Med-Staff in June. On an organic basis, 2003 revenue was down 6% from prior year.

Turning now to the other human capital management services segment, fourth quarter revenue was 13.3 million, up 5% from the prior year while contribution income was up 1%. The growth came from our educational seminars and physician search businesses, partially offset by a contraction of our healthcare consulting business. On a full year basis, segment revenue was 50.5 million down 1% while the contribution income was 4.7 million was down 29% from the prior year. This brings me to our guidance for the first quarter of 2004.

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, the repurchase of any of our common stock, or pending legal matters.

As Joe indicated, although orders are increasing, they are not yet translating into improved bookings. Our bookings in the fourth quarter were approximately 17% below prior year, excluding Med-Staff. Based on these booking trends, we expect the average field FTE count to be in the 5700 to 5900 range in the first quarter of 2004. While the average bill rates are projected to be flat year-over-year, we expect average staffing revenues per FTE per week to be down 1% to 2% from the prior year due to a higher mobile mix combined with the impact of the Med-Staff acquisition.

Gross profit margins in the first quarter of 2004 are expected to remain consistent with the margins achieved in the fourth quarter of 2003. We expect a more normalized professional liability expense -- experience to be offset by the impact of the reset of payroll taxes in the first quarter of the year. Based on these dynamics, we expect first quarter revenue to be in the $163 to $168 million range, and EPS per diluted share to be in the 12 to 14 cent range. This concludes our formal comments. Thank you for your attention, and at this time, we will open up the lines to answer any questions you may have.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from James Janesky with Janney Montgomery Scott.

Hi, yes. Good morning.

Hi Jim.

Joe, can you - just give us a little perspective -- historic perspective, this is a couple of quarters where orders, you know, are up as you and Emil have stated, not really turning into the level of bookings that you would expect. I mean, what are the hospitals telling you, why that's not happening? And you know, are we, you know, on a historical perspective, at the tail end to where that should start translating into more bookings?

Yeah, I mean, just to you know, reiterate kind of the core thesis, because orders are increasing, it suggests that hospitals believe they need more nursing services at the bed side, which is fundamentally the most important thing our industry needs to drive growth in the future. Unfortunately, you're kind of coming out of a period where they didn't feel they needed as much. They had achieved a fair level of success with their own recruitment and retention, higher productivity of their core staff either through overtime or increasing the hours of their part-time labor pool. I mean, all these things have been a success for our customer, and as a result of reduced has their reliance on Cross Country. But that's changing and we see it changing in the orders that they are have. Unfortunately as they realize it is changing, but they feel they're negotiating from a position of strength, when you look at the orders we're getting they tend to be orders as opposed to the bookings, the orders tend to be closer in start date than is normal from a historical perspective, they may be shorter term assignments, eight weeks versus 13 weeks. And OK, that's great. It suggests they have a need. But the way they're -- and this is of course not across the board, the way they're presenting that is not in a way we can fill it. We are or others in this industry can fill that contract travel staffing nurse need.

So in my mind, it's just part of a process, that once the hospitals recognize they have a need and once they recognize they can't get what they want or get the service delivered in exactly the fashion they want, over time, this will result in our business, the traditional way our service is provided, rebounding. And you know candidly, there is not a lot of a historical period to benchmark against. The most recent was in the early to mid 1990 period, and this is how it worked. The hospitals wanted shorter assignment. Neither the nurses -- nurses don't want to pack up every eight weeks. So nurses nor the companies were able to deliver consistently on that kind of arrangement. And over time, the business returned to its kind of more normal 13-week, four to six week out contract beginning. So I think you know, it just, like I said it's a process. We expect it to take months, not days, or weeks. But we are on the right course. I mean, the same things were happening a year ago, and our positions were dropping. So that didn't feel as good. The fact that positions are rebounding, we have more positions than a year ago, is very encouraging. But I just -- we want to reiterate to our investors, just to be cautious in your outlook because it's going to take time for this to translate into meaningful top-line growth.

OK, fair enough. And then on the expected synergies from the Med-Staff acquisition, I mean, is this a time, you know, where are you in the time frame of being able to recognize the full synergies? Is it, you know, more it's going to take a couple of quarters, or is there a level of revenues at which that could accelerate? You know, you gave the guidance 163 to 168 for the first quarter. Should we be thinking in a level of revenues or a time frame?

I think it's really both. I think it doesn't happen all in one quarter. Just to go back over the structure of the deal, there was an earn-out; we really had kinds of a hands-off, past year, through the end of '03. So we're really only beginning a very engaged process at the start of the New Year. And again, you're not going to change their business model, their culture. There are things that, and we intended when we bought the business to maintain a separate brand but there clearly are certain things that we can leverage, account relationships, etc that will result in better leverage of overhead on an aggregate basis. But our expectation is going to be a couple of quarters before we fully realize that.

OK. Thanks. That's helpful. Thank you.

Charles Lynch with CIBC World Markets.

Thanks. Good morning. Couple of things, Joe you mentioned or Emil, I can't remember; on the DSO trend that some of that was a function of heavier weighting in the North East. Is that due to the Med-Staff acquisition or is that from suggestion of relative volume trends geographically?

It is the latter Charlie. The Northeast has been the most robust market for travel needs and that impacted both Cross Country TravCorps and Med-Staff. Now Med-Staff being located in the Mid Atlantic tends to have a regional strength, so it make further accentuate that trend but really is a trend that affects all travel companies I believe.

OK. Another thing is we go through the remainder of 2004, should we have an expectation of some, all of these being equal some seasonal pattern in staffing volumes, say first quarter through third quarter?

Historically, Charlie, that the pattern of our business is that the fourth and first quarters are the strongest from a volume standpoint. And then in the second quarter, the volume drops off a little bit, but on an almost perverse basis, the margins of our business increase and we generally generate more earnings per share in the second quarter than the first quarter on a lower base of volume of travel nurses.

OK.

I think that pattern has been pretty consistent over the years. Now masking that in certain years you have the rapid growth trend that we experienced in 2001. But generally, we do see a decline as we come out of the winter season; generally our head count drops from March to April. But as Joe indicated our profitability in the second quarter generally is better than our profitability in the first quarter.

OK. And just lastly and I'll let you go, the Med-Staff acquisition, was that a unique opportunity, such that, you know, or put differently, are you still interested in further acquisitions or consolidation, or was that something that was unique to, you know, to you?

We think the Med-Staff itself was a unique property. You know, very strong franchise, good brand recognition; it really hit a couple of what we felt were important strategic objectives for us all at once. But there are other attractive opportunities out there, and then it just becomes a matter of price and timing. As Emil suggested, we are focused in the short term on cleaning up the balance sheet, de-levering it, using the strong cash flow that we generate to put us in a position of being opportunistic, whether it's making an acquisition or repurchasing shares sometime in the future. But this is still a very fragmented market and we certainly have not filled out all the strategic objectives that we have as a company.

OK, great, thanks a lot.

: OK Charlie.

David Gruber with Messeinburg Capital (ph).

Yes Thank you. I have a few questions. First off, I want to better understand the importance of to the Med-Staff to the overall business. In the fourth quarter I estimate that the Med-Staff sales are roughly 34 million, is on the ballpark?

Yeah, on the ballpark.

And then On an annualized basis that would imply Med Staff sales in '03 roughly over a 150, 160 million or so?

That's approximately right.

OK. So then in terms of the first quarter and your guidance, is it fair to assume that the Med-Staff business be relatively flat and that the base business should be down another 15% or so in terms of sales?

I think in our guidance, we assumed that the same market dynamics that affect our base business would also affect Med-Staff. So certainly on the travel side, we expect Med-Staff to perform roughly inline with CCTC, Cross Country TravCorps. The Perdiem business on the other hand has been relatively stronger than their travel business. And has actually grown in a year-over-year basis, and we expect that those trends will continue, although the sequentially we may see a, a lower drop on the Perdiem side of Med-Staff than on the travel side.

OK. So the expectation then is that on a year-over-year basis, even Med-Staff sales will be lower?

Yes.

You don't have the baseline sales but roughly. And then the core business would be down another what, 13% year over year, 15%, excluding Med-Staff, to get to your numbers?

That's approximately right.

OK, fair enough. The second question relates to profitability and what's happening in the business. When you look at your fourth quarter results, you know, and I went to your statement, healthcare profitability contribution income, it was in the fourth quarter of '03 was 10.6%, in the fourth quarter of '02 was 14.1%. Now, you also indicate your expenses are higher, SG&A is higher. How much of that erosion is pricing versus higher spending, and then what other variables are out there, that we should be concerned with? And is pricing power disappearing in the marketplace right now?

Couple of, Emil, why don't you take a shot at those, you have a got couple of different questions I think it's important

Right. Let's try to parse it a little bit. When you are looking at it on a, let's look at it separately gross profit and SG&A, would that make sense?

Sure, however you do it.

OK. When we look at our gross profit performance, and you look at it on a year-over-year basis, the actual bill base spread in our core business improved slightly. The decline that we are seeing on a year-over-year is primarily due to higher insurance, which includes both health and professional liability, as well as somewhat higher housing costs, when you compare year-over-year, and that's due primarily from our business being -- the geographic mix of our business shifting to higher housing cost markets. And then the other factor in the gross profit changes the impact of the Med-Staff acquisition, which Med-Staff being a staffing business, has a lower gross profit margin than our non-staffing businesses would.

OK, so it sounds like the pricing is a combination -

It is really not a pricing issue.

Pricing is not the problem.

Fair enough. In terms of when you back into your numbers for pretax off the first quarter guidance, the EBITDA or the pretax, I'm sorry, was 4.8% of sales in the fourth quarter and then you have it at about 4.1% in the first quarter of '04. That is a 70 basis point reduction sequentially. What exactly is that a reflection of, how low is low and when do we hit baseline so we could see an uptick at some point?

Well, we -- as we indicated earlier, our expectation is that the first quarter typically is our low point for the year in terms of margin. So by the second quarter, we should start seeing an improvement sequentially.

OK, but is there anything fundamental that -- you know, are you spending more money now to get the same business? Is Med-Staff dragging down the margins and is that going to continue, so you annualize that? I'm trying to better understand the profit picture going forward.

No, I would not attribute that to Med-Staff dragging down the margins. It's just the general -- generally the first quarter is affected by a number of factors that are unique to it. One is the reset of the payroll taxes, which increases, reduces the gross margins for our staffing businesses. In our travel businesses, typically you tend to incur higher housing costs in the first quarter, because of the effect of the holidays.

OK, fair enough. And then one last question and I'll get back in queue, which is you know, you mentioned in the call early on you talked about hospital volumes, weak in '03. If you look at fourth quarter results for the various hospital companies, labor cost as a percentage of revenue was actually below expectation so the rate of growth of labor is actually below that of the hospital volumes, which means that the hospitals are leveraging their labor at the moment.

That's correct.

Is that going to change their fundamental shift here that has occurred in terms of the utilization of Perdiem staffing or travel staffing, and is the labor cost number an indicator of that? And then is that going to change going forward?

To me, I think again getting back to our prepared comments, the fact that the hospitals have achieved the kind of success they have, has lowered the emphasis they're placing on agency usage going forward. I mean, there's bigger -- a year ago, it was the number one issue for most of our clients throughout the country. I think today, you have issues like you know, bad debt and you know, issues related to outlier payments, I mean, more critical issues that they're addressing right now than how much agency usage they use. So I think they're taking the reins off to some degree. It's not going to be a free for all and not going to be a 60% growth business next year. Because they're less focused on it at the executive level of the organization, it's easier for us to fill the bedside nursing needs that they have without jumping through all the hoops that we've had to jump through in the past 18 months or so.

Thank you very much.

AJ Rice with Merrill Lynch.

Hi everybody, just a couple of different questions if I could ask. You mentioned bookings were down about 17% in Q4 but it sounded like when you were talking about orders that there was a distinct pattern month to month. Was there a similar pattern on bookings that you could give us and maybe, I don't know if it's too early to comment on January's trend but if there's any color on that I'd be interested as well.

That's a good question. It probably was an important dynamic within the fourth quarter, which was one of the drivers of the higher level of optimism that we have today. At the time of our November conference call, October and up till that point in November, we're running more than 20% down year-over-year. So our experience was worsening and worsening at an almost accelerating rate. So really, it was not a very comfortable place for us to be. We were seeing higher orders, but the trend lines on bookings were really a concern for us. Towards the end of November into December, there was a significant momentum shift. We were still down year-over-year but down in kind of a single digit range as opposed to 20% plus, which gave us a lot more optimism. And as we come into 2004, the momentum has -- there's been a little deterioration from what we saw in December. It's kind of low double-digit declines year-over-year. So it's not great, but at this level, it does suggest, when you look at kind of the sequential movement in our head count, a stabilization of headcount. You know, we're not ready to declare a bottom, but that, you know, as you look at the short term movement of our field head count, it is running pretty flat from the fourth to the first quarter.

OK. Obviously, you've got questions the last couple of quarters about the California minimum nurse staffing ratios, now we're sort of into it, as of January 1, I guess. Is it having any impact that can you noticeably see on your business?

At this point we've tried to de-emphasize that as an issue but I think at this point we have to recognize that these ratios are having an impact. California is probably the hottest market for demand right now. And there are a number of reasons that we're hearing from our clients. But a common one, and probably the most common one, is related to their attempts to deal with these ratios.

OK.

As we look at other important states that we supply nurses to, many have either - are in the process of considering similar legislation. I guess we would have to say this is probably a more important trend the than we have tried to emphasize it in the past.

OK. I guess, another big picture or question to ask you is we have seen nursing school enrollments the last couple of years after a six year negative trend turn around. Any thoughts about how that was that's a positive, negative, how would that impact your business if it continues the next year or two?

Well, we need nurses also. And -

Right.

Our nurses tend to be younger nurses. So the fact that, you know, more younger nurses, late 20s, early 30s would be graduating and entering the workforce is on balance probably a net positive for us. And I don't think that the kind of numbers you're talking about even though you know we talked about I think the last number I saw was about a 16% increase in enrollment last year, you know you're talking about thousands of nurses. You know, becoming enrolled, not all of those are going to graduate, not all of them are going to pass the nursing exam, the national nursing exam. But the shortage is in excess of 100,000 nurses, closer to 140,000 nurses. It is kind of the vacancy rate throughout the country. So I think on balance, it's a positive, you know but at some point it becomes a negative if you see, you know, 30%, 40% increases in enrollment, which I don't think is possible, because of the capacity at the nursing schools, that would be a negative but that's not what we're seeing.

OK, my final question, you sort of talked around this a little bit, priorities for your cash flow going forward, I guess you sounded about not one to be ready case there is a tactical acquisition opportunity you also alluded to share repurchases. Could you give us some flavor for what would the priorities for the cash flow be over the next year?

Sure, Rice. First, the best use of excess cash is a strategic acquisition. But absent a strategic acquisition, our emphasis right now is on accelerated debt repayment. This gives us more flexibility down the road, and it will also allow us potentially to put a new share repurchase program in place when the current one is used up. So in the meantime, we'll continue to be opportunistic in our share repurchase programs, and we still have as we indicated about half a million shares left under that old program.

OK, all right, thanks a lot.

Mark Allen with SunTrust Robinson Humphrey.

Hi, good morning, guys.

Good morning Mark.

Joe, just to -- kind of stay with these questions about the disconnect between orders and booking trends, can you comment about the trends in your contract extensions? I know that had been deteriorating I guess in the third quarter, and is that still a factor in terms of converting orders to bookings?

We refer to that that as our renewal rate and that is clearly a factor in what is not allowing us to leverage some other positive metrics. I don't think we discussed up to this point, we have seen in the fourth quarter a sequential uptick in conversion rates, as applicants we send in response to orders. But offsetting that is still a soft market for renewing nurses for consecutive assignments at the same facility. And as we look at kind of our book of business, this is, in the year-over-year organic declines, this is where we lost the majority of our nurses, our nurses that really weren't traveling around the country, they were kind of working at the same location, they may have actually been from that location. At our peak we probably had 25% to 30% of our nurses living and working within 50 miles of their home. Today that number is well under 10%. So it's been a big shift in our market and it really reflects the fact that it's hard to keep nurses working consecutively and consistently at the same location. That location that they want, they can't name their hospital today, they -- to be a travel nurse you have to be a travel nurse. And again, a year ago, that really wasn't the case or 18 months ago. And today, it is.

And Joe, again, not to beat to death, but is that trend getting worse, or did it stabilize at all over the past few months?

I think the trend is getting better.

OK.

But it's, you know, we're well below our historically normal renewal rates.

OK.

But they are improving from third to fourth quarter.

Got you. And then Joe I guess a question about, I guess the combination of customers trying to get travel nurses on shorter assignment links, and the mix up to the Northeast. My recollection is that in the Northeast in particular that's where you have longer leases on your housing, I guess - I just wanted to ask a question. Is there anything in the mix between, you know, more Northeast, shorter assignments that's causing you any problems on your utilization on your housing?

That's a good question Mark. I wouldn't attribute that necessarily to the shift to the North East. It is true that in a few markets in the North East it's not possible to get three-month leases. But that's very much the exception. And by and large we do - we are able to tie our lease terms to the assignment length. I think where the short assignment really hurts us is simply our ability to fill the order. The nurses themselves don't like short assignments. If we do have to engage into a short assignment, we do have other ways of arranging the housing most of the time that will satisfy the matching of revenue and housing expense.

OK. And I guess just to ask the question on the fourth quarter, I guess you mentioned there were a couple of items, one was an insurance settlement and the other was a bad debt charge. Do you happen those were a mere either pretax dollars or cents per share?

Yeah, I can give you orders of magnitudes on those, Mark. The insurance settlement that we're talking about is kind of a mid six-figure type number, little more than penny a share. The bad debt expense that we took in Q4 was $800,000, so that works out to be another penny and a half a share.

OK. And then I guess the question, Joe, you mentioned you haven't success getting more exclusive relationships with customers. Can you just maybe ballpark for us sort of, you know, today versus year ago, you know, whether it is percentage of customers or percentage of revenues that would be under, you know, exclusive relationships?

No, I don't have that at my fingertips, Mark, But and I probably do you a disservice by trying to estimate it. I would say it's a significant part of our business. And also to reiterate, there is kind of a range of services that we've introduced, so there's kind of the exclusive vendor managers at the one end of the spectrum but at the other end, technology tools, interviewing services that we offer that are less of a commitment on the part of customer to utilize us exclusively. But they give us a clear competitive advantage when they are adopted. So you know, again, for a variety of reasons I probably don't want to give you an estimate. But I'm very comfortable and I think you've done the analysis that suggests we've taken a fair amount of market share through the first three quarters of 2003, we're very comfortable with our competitive position today, and feel really good about where we are going forward in 2004.

I wish you a lot of luck this year guys, thanks.

(Operator Instructions) Emily Purvis with Deerfield Management, you may ask your question.

Hi, this is Kim Purvis.

Hi, Kim.

I had a couple of questions, one is you had talked about the fact that you are getting more orders, I don't want to beat this to death but are the orders coming in the areas that nurses want? One of the things you had cited is that nurses are disappointed about the quality and location of the orders and are you getting more orders in what would be viewed as attractive areas? Could you elaborate on that a little bit?

Yeah. I think the answer is sometimes yes, sometimes no and definitely no, in the aggregate. I mean, we still have substantially less, a smaller number of orders nationally than we had 18 months ago or two years ago. Having said that, we have more orders than we had a year ago, so you know, that's the positive news. But it's still below where it was at the peak of this business. And I think the point we're trying to make there is you know, nurse that wants to make and attractive in San Hose, we may be able to keep a handful of nurses working or may not be able to keep 50 to 70 nurses working consecutively. That's the really the reality of it. Some nurses are getting their needs met, but some aren't. Those that aren't are looking in other directions in the short term. I think there is a good chance to get them back, and I think whether we get them back or recruit other nurses, those, large number of enrollees that entered the educational system last year, longer term that's good for us because we need to keep our pipeline filled with new applicants. And the most important metric is the incoming pipeline of new nurses applying with the company. And that number fell off in the fourth quarter and I think it is a function of kind of a long period of not of inadequate positions nationally, just word of mouth is not working for the industry. Not just for Cross Country, but I think we have as many or more orders today than any other company. But again, from a comparative perspective to two years ago I think it's less. And that discourages nurses from becoming travel nurses and staying as travel nurses.

Right. And another question was could you elaborate a little bit on the insurance settlement, was that due to a staffer sent out in the field where there was a problem and is this something that is going to take your insurance costs up sort of on a permanent basis?

Let me try to give you a little bit of background, look professional liability has always been an element of our business. And the generally when nurses work on assignment, the cost to ensure these nurses is relatively low. Particularly compared to doctors. Since nurses work under the direction of doctors, under the supervision of hospital personnel. The -- when a malpractice incident occurs the nurse is typically one of many parties and typically is assigned a relatively small percentage of the responsibility. I think what was unusual about the case that we had last quarter is that in this particular incident, the nurse had a relatively large share of the culpability associated with the incident. And -- but these types of large settlements are very rare in our business. And you know, we only had a handful of cases of comparable magnitude in the last ten years. And I guess this was -- must have been the second largest settlement in my 13 years with the company. Now, as far as the impact on our P&L, our insurance program has a self-insured retention layer and we accrue for incurred but not reported losses as well as losses that have been incurred but haven't yet fully developed. And we review these by an independent actuary and also our external auditors reviewed and we are comfortable with the accrual levels. And these accruals are really there to cover large claims. But in this particular instance given the magnitude and the unusual nature of the claim, we felt it was prudent to expense the entire cost of the settlement in the fourth quarter and not try to use up any accruals.

OK. Thanks a lot.

Thank you Kim.

Jeff Silber with Harris Nesbitt.

This is Adam Ring for Jeff thanks for taking my call, just a few questions. The first one is in terms of gross margins, I know you're not going to being additional color for 2004, and you did got for gross margins to be flat on a sequential basis first quarter. Sounds like there is some one-time issues there. Should we expect gross margins to improve sequentially or sort of stay flat?

I think the first quarter, as I indicated earlier, should be our lowest gross margin quarter, just because the payroll tax effect and the housing effect is the worst in the first quarter. So typically, while we're not prepared to give full-year guidance, I can tell you that typically our gross profit margins should improve as the year progresses.

OK, great. Next question, you had Med-Staff under your belt for about seven months now. I'm just wondering what your thoughts are from a demand standpoint, comparing travel and Perdiem, if you're seeing more of a pickup in either area?

As we indicated, the Perdiem segment of Med-Staff is certainly relatively strong to the travel segment of Med-Staff. And even the travel segment of Cross Country TravCorps. I think that's partly a function of the Perdiem market but as you look at some of the public and private Perdiem companies, they've struggled significantly right alongside the travel companies. So I think it's probably a function of a couple of things. Just because of there is a relatively low number of offices that Med-Staff operates, sometimes just the luck of the draw they tend to be in hotter markets today than if they were more dispersed across the country. So they've been able to, you know, be relatively flat sequentially as the year progressed and as Emil indicated up year-over-year. I doubt that many large Perdiem companies are up year-over-year today. So I think it's good management, some good luck and being in the right locations.

OK, great, Last question, in terms of ClinForce, you provided some data in previous quarters regarding year-over-year change. Just any color there in terms of performance or general performance of that business?

ClinForce continues to show kind of sequential improvement in FTEs. The mix of those FTEs, have shifted to some extent to lower revenue generating professionals. But clearly, we're seeing more trials come out where we're involved in more bids for more trials, we've gotten some pretty big wins in the last six months. So we remain optimistic for that business. We think it's on the right track, and that 2004 will be a better year than 2003.

Great, thanks a lot.

OK, Adam.

Mike Horner with Kennedy Capital.

Thanks for taking my question as well.

Sure.

Just real quick, did you mention what your capital spending was this past year?

I think we did.

Yes, we did. The number was 3--a little under $4 million.

OK, sorry about that. And would you expect the same for this year, barring any unforeseen acquisitions or anything like that?

We have typically guided to capital expenditure levels of roughly 1% of revenues. My expectation for 2004 is that we would be at that range or perhaps at that time low end of that range perhaps a little under 1% of revenue.

OK. And any thoughts on your cash flow? I mean, would you still assume that you're going to cash flow at a -- I don't want to try and get you to mention guidance, but at similar levels to past couple years? From operations, I guess?

We expect cash flow from operations to exceed our net income per share as it has in the past years, anywhere from 25% to 50%. In other words, whatever our EPS guidance is, our cash flow per share should come out significantly higher than that, as much as 25% to 50%.

OK, that's it for me thank you.

OK, thanks.

At this time there are no further questions.

OK, well, we appreciate everyone's participation in this call and we look forward to speaking to you again in three months.