Cross Country Healthcare Inc (CCRN) 2004 Q1 法說會逐字稿

Good morning and thank you for standing by. Welcome to the Cross Country Healthcare Earnings conference for the first quarter of 2004. All participants will be on listen only until the Q&A session of the conference. This conference is being recorded.

At this time, I’d like to introduce your host for today’s call, Mr. Howard Goldman, Director of Investor and Corporate Relations. Sir, you may begin.

Thank you and good morning. 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 CEO and Emil Hensel, CFO. On this call we will review our first quarter 2004 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 first like to remind everyone that this discussion contains forward-looking statements. Statements that are predictive in nature, that depend upon or refer to future events or conditions or that include words such as "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 first quarter of 2004, as well as under the caption, "Risk Factors" in our Form 10-K for the year ended December 31, 2003. Although we believe that these statements are based upon reasonable assumptions, we cannot guarantee future results. Given these uncertainties, the forward-looking statements discussed in 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’ll turn the call over to Joe.

Thanks, 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 first quarter of 2004 increased by 7% year-over-year to just under $173m. However, net income decreased by 31% to $4.9m or $0.15 per diluted share. Cash flow from operations during the first quarter was $8.2m.

Contribution income in our healthcare staffing segment, as defined in our press release, declined from a year ago level due to pressure from higher insurance and housing expenses, as well as an increase in third party administrative fees and co-marketing expenses, which are accounted for as an offset to revenue. We were also impacted by lower operating leverage on overhead resulting from an organic decline in staffing volume. We do not expect margins in this segment to deteriorate further from these levels.

Our ClinForce Clinical Trials Staffing business and our Educational Seminars business performed particularly well in comparison to the first quarter of prior year. These businesses appear to have sustainable momentum into the second quarter.

So, while I continue to view the current operating environment as challenging, I remain cautiously optimistic about an upward turn in our business activity occurring during the second half of 2004. One reason for my optimism is that orders for contract travel nurses from our hospital clients remain will above year ago levels.

As noted in our conference call in February, we have substantially 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 have stabilized and should be able to grow our business if these trends continue.

However, despite the improving performance in certain of our business units, the softness in organic travel nurse staffing volumes is likely to result in second quarter net income in line with first quarter but below year ago levels. While we would certainly welcome higher levels of booking activity, the behavior of both our nurse clients and our hospital clients can be characterized at cautious. This cautious posture will likely temper our near term growth prospects.

Having said that we are increasingly encouraged by the success of our efforts to secure exclusive and preferred relationships with what are today some of the larger users of supplemental nurse staffing services. While most of these large customers have reduced their usage of supplemental staffing from their peak, they’re still very significant customers in the current environment.

Through the successful marketing of our unique service offerings, we have secured exclusive vendor status at a number of accounts, some of which have been among our top ten accounts, historically, as well as others that have historically used more services from our competitors.

Given the highly dispersed nature of our customer base and the time it takes to implement and benefit from exclusive and preferred agreements, we expect the benefits of this success to be reflected gradually in our operating performance going forward.

By way of an example, we obtained exclusive vendor status in October of 2003 at one of our largest long-term clients. At that time we had approximately 65% of the share of nurses at this facility in the Southeast. Eight months into this relationship, we have increased our market share at this account to 90%.

Most of the remaining nurses are those that were on contract with a competitor at the time we took over management of supplemental nurse staffing for this account and we expect them to be replaced with our nurses over time.

The only unfortunate note is that the usage of this large client has declined by one-third from year ago levels. Thus we have a bigger slice of a smaller pie and we think this experience at this account is directionally representative of the market as a whole.

Similarly, in June of 2003, we obtained exclusive vendor status at a health system in California. Eleven months into this relationship, we have more than doubled our market share at this account to nearly 90%. As a result of, we are beginning to see the benefits of these exclusive and preferred relationships in some of our operating statistics.

For example, the rate at which applicants we send to our clients that convert into contract bookings has continued to improve sequentially. This important driver of recruiter productivity was severely impacted by the more cautious posture of our clients beginning in the second quarter of 2002. Renewal rates of nurses on contract with us are also recovering from the lows of 2003.

A clear obstacle to higher growth today is an inadequate number of nurse applicants being sent to our hospital clients, which we have termed in the past “a supply constraint”. Those of you who have followed this Company and the travel nurse industry know that a supply constraint environment is ultimately a more attractive operating environment than a demand constraint one.

Looking to our investment in the Med-Staff business, which we acquired about midway through 2003, it remains accretive despite a more significant drop in volume and profit than we anticipated at the time of the acquisition.

While the travel-staffing component of Med-Staff has been weaker than expected, the per diem component has performed in-line with expectations. We continue to actively work with the Med-Staff management team to identify opportunities to leverage account relationships and achieve operating synergies.

Turning back to the big picture, even though it appears our volumes have stabilized on a sequential basis, we remain cautious about the near term prospects for our performance. While we are increasingly encouraged by the success of our marketing initiatives, we still cannot predict the exact inflection point at which our business will resume the organic growth that we saw for the 10 years previous to 2003.

In the meantime, we remain operationally focused on executing our strategy and have every confidence that we will emerge from this downturn in demand as an even more formidable competitor than we entered it.

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 the first 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 first quarter revenue of $172.6m, which is $4.6m or 3.0% higher than the upper end of the range that we provided in February for revenue guidance. Our first quarter revenue was up 7.0% from the prior year quarter, but down 2.0% sequentially.

The year-over-year revenue growth was principally due to Med-Staff, as well as greater contribution from our other non-nurse staffing operations. Excluding the contribution from Med-Staff, our first quarter revenue would have declined by 14% 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 23.3%, as compared to 24.5% in the first quarter of 2003. The year-over-year decline in margins is largely attributable to higher insurance and housing costs, as well as the increased occurrence of third party administrative fees and co-marketing expenses.

SG&A expenses in the first quarter were up 12% over the prior year, due entirely to the additional overhead related to Med-Staff. More importantly, SG&A expenses were down 2% on a sequential basis.

Interest expense was $1.2m, 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 $4.9m or $0.15 per diluted share, as compared to $7.1m or $0.22 per diluted share in the first quarter of 2003, which included an after-tax loss of $0.01 per diluted share related to discontinued operations.

Our fully diluted EPS for the first quarter of 2004 was $0.01 higher than the upper end of the guidance range that we provided during our February earnings call.

Our balance sheet and cash flow generation remains strong. We ended the quarter with a debt to total capitalization ratio of 21% and a current ratio of 2.7:1.

DSOs were 59 days in the first quarter, down one day from year-end, but up 5 days as compared to a year ago. The year-over-year 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 an additional bad debt expense of approximately $600,000 in the first quarter.

Cash flow from operations for the first quarter was a solid $8.2m, as compared to $15.9m in the prior year. The exceptionally strong cash flow in the first quarter of 2003 was due to a decrease in working capital, driven in part by a three-day sequential decrease in receivable DSOs.

We used $1.6m of our cash flow from operations for capital expenditures and a comparable amount for earn-out payments on previous acquisitions in the consulting arena. Free cash flow, which we define as cash from operations less capital expenditures and earn-out payments, was $5m for the quarter.

During the first quarter we repaid $6.2m of senior debt, which included an optional prepayment of $5m. We also purchased 16,400 shares of our common stock pursuant to our previously announced $25m share repurchase plan. These purchases were at an average cost of $15.94 per share. Under the remainder of the current authorization, we can purchase approximately 482,000 additional shares at an aggregate price not to exceed $11m.

Let me drill down next to our two reporting segments. Healthcare Staffing, which comprises our travel and per diem nurse staffing, allied health staffing and clinical trial staffing businesses accounted for 92% of revenues in the first quarter, and the Other Human Capital Management Services segment, which is comprised of our education and training, healthcare consulting and retained [surge] businesses.

Revenue for the Healthcare Staffing segment was $159m, up 7% from the prior year quarter but down 2.0% sequentially. The average number of FTEs was 6,013, essentially flat on a sequential basis, but up 9.0% from the prior year quarter. The segment’s revenue and volume growth was entirely due to Med-Staff.

Excluding the contribution from Med-Staff, first 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 1.6%, due primarily to the impact of Med-Staff, coupled with a higher mix of lower revenue-generating mobile contracts.

As a point of reference, Med-Staff’s per diem operations have a lower average bill rate than our travel businesses. The average bill rate in our core Travel Nurse Staffing business was essentially unchanged from the prior year, excluding hospital-sponsored pass through bonuses and third party co-marketing expenses.

Mobile contracts where the nurses are on the hospital’s payroll accounted for 3.0% of our segment volume, as compared to 2.0% in the prior year quarter.

Healthcare Staffing contribution income, as defined in our press release, was $15.6m in the first quarter as compared to $18.9m in the prior year quarter.

The decline in contribution income was due to the combined effects of negative operating leverage of our organic business, higher insurance and housing expenses, as well as the aforementioned increase in third party administrative and co-marketing expenses. This decline was partially offset by Med-Staff, as well as improved performance in our clinical trial staffing and international nurse recruitment businesses.

Turning now to the Other Human Capital Management Services segment, first quarter revenue was $13.7m, up 7.0% from the prior year. Segment contribution income was $1.7m, up 18% from prior year, driven by the strong performance of our educational seminars business.

This brings me to our guidance for the second 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 our bookings for future assignments remain well below year ago levels. Our booking in the first quarter, excluding Med-Staff, were 15% below the prior year. However, on a sequential basis, bookings were up 3.0%, which leads us to believe that our core travel business has stabilized.

Based on these booking trends and normal seasonal staffing patterns, we expect the average field FTE count to be in the 5,700 to 5,900 range in the second quarter of 2004. We also expect average staffing revenues per FTE per week to be down approximately 2.0% from the prior year, due to a higher mobile mix combined with the impact of Med-Staff’s current mix of business.

Gross profit margins in the second quarter of 2004 are expected to be up 50 to 100 BP sequentially from the first quarter. SG&A expenses in the second quarter are expected to be sequentially consistent with the first quarter of 2004. Based on these dynamics, we expect second quarter revenues to be in the $162m to $166m range and EPS per diluted share to be in the $0.14 to $0.16 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 that you may have.

Thank you. At this time we are ready to begin the question-and-answer session. (Caller Instructions.) Our first question is from Jim Janesky, Ryan Beck & Co. Sir, your line is open.

Yes, good morning.

Morning, Jim.

A question about your customers, Joe. You said they’re cautious. You used that word as the current environment. But when you compare the mood of the customers and their attitudes towards agencies in general, let’s say now versus a year ago, does kind of the pressure on the agencies come off? And I guess, as a follow-up to that, if you had to rank then why demand is down now, would it be more related to the supply constraints or clearly the demand is still not there?

Okay. Let me take it in the order that you asked. I would say that directionally the customers haven’t taken off the pressure. I mean, I think there’s less pressure - less focus may be a better way to describe it - on reducing outside supplemental nurse staffing than there was six to even nine months ago and certainly directionally we think that’s positive.

And partly, if you look at the macro trends we’ve talked about for some time, that job creation would hopefully improve the psychology of nurses and we have seen some job creation in the first quarter of 2004. Nurses, just demographically, are older and we know there’s been a significant increase in the amount of overtime that nurse have worked, so that well may beginning to be drying up as a kind of alternative that our customers can look to as an alternative to our service.

But having said that, I’ve been in this business for 11 years and there’s always a desire on the part of the customer to reduce their usage. The reality is sometimes different from that and that reality is driven by factors other than the customer does or does not want to use the service.

Taking another step back, clearly there’s been a desire to utilize a vendor manager to a greater extent to rationalize whatever level of outside staffing does occur and I think that’s been a very positive trend for us. Because we have had some significant wins in that arena and we expect to continue seeing that trend and continue benefiting from that trend going forward.

So, while there’s again a kind of macro reluctance to rely on outside labor, there’s a realization that it’s going to occur and if it’s going to occur, let’s do it in the most efficient manner possible and I think that benefits us.

Jim, can you give me the second part of your question again? I think I’ve --

How much is a supply constraint, how much is that holding growth back? I mean would --?

It’s still a function of both. Demand is well below the peak of activity, but its order of magnitude is about 50% higher than it was at this time a year ago, so it’s significant.

Uh-huh.

But would I rather have twice as many orders? Of course. I think that would be an even more favorable environment. But we do believe we’re in a transitionary phase where we’re beginning to see the reemergence of the impact and the dynamics that a supply constraint environment has on this industry. We as a management team certainly prefer that kind of environment.

We think we’ve positioned the Company much better to benefit from that kind of environment, given these more integrated relationships that we have with our larger clients. But it’s still a combination of not quite enough demand and maybe not enough conviction on the part of our customers, combined with the impact that a period of prolonged soft demand has had on the psychology of nurses who may or may not want to become travel nurses.

So, again, we think we’re in transition, but we think we’re heading in the right direction as it relates to kind of a more attractive environment for this Company to operate in.

Okay, fine. And Emil, can you go over the reasons for the margin decline? I didn’t catch all of them. Would you mind repeating that?

Sure. Jim, are you referring to the gross profit margins or the --?

Exactly. Yes. I’m sorry.

Okay. Well, let me preface this first that it’s not really due to pricing pressures. It’s rather to our inability to pass through cost increases in such areas as housing and insurance, as well as the impact of third party administrative fees and co-marketing expenses.

I should note here that unlike certain of our competitors who classify professional liability insurance as an SG&A expense, we classify it as a direct cost. So, increases on this line item impact our gross profit line.

Fair enough.

So while we have experienced some cost pressures, we do have a plan in place to improve margins. And our guidance reflects an expected 50 to 100 BP improvement in gross profit margin, partially due to seasonal factors and partially from proactive steps that we have taken to improve margins.

Okay. Thank you.

Thanks, Jim.

Jeff Silber, Harris Nesbitt Gerard, you may ask your

Thanks and good morning.

Good morning.

My question actually has to deal with the out-performance that you just reported in the first quarter. In the guidance you had given us you were about half way through the quarter and I know there’s very strong visibility in the travel sector, which is the bulk of your business. Was there any specific reason that the numbers came in significantly ahead of expectations? Was it a specific geography, a specific vertical? If you can give a little bit more color on that I’d appreciate it.

Jeff, this is Emil. Well, I think as the quarter unfolded, the first quarter, we started to see stabilization in our booking trends and actually a slight improvement in our booking trends, resulting in bookings for the quarter being about 3.0% higher sequentially.

So, as our bookings are generated, some of those bookings actually result in assignments starting in the same quarter and consequently our volume exceeded our estimate slightly.

So it wasn’t any specific geography that you could pinpoint?

Well, Jeff, I think we said on that call that the markets in the west, in particle California, Arizona, and to a lesser extent Nevada, are stronger relatively. The northeast and particularly the New York City market remains relatively strong and I think if you parsed the out-performance you’d see a lot of it occuring in those markets.

Okay and do you think any of the California strength is because of the new staff/patient ratio laws?

Without question.

Okay. Just kind of shifting gears a little bit, can you give us -- you mentioned in terms of the healthcare staffing area that some of the non-nurse staffing businesses did well. Can you kind of give us a breakdown, just roughly, of your healthcare staffing revenues by the major items, travel, per diem, allied, and the others?

Well, we don’t actually disclose the specific breakdowns, but order of magnitude the travel is the largest piece of the pie, in the order of about 80%.

Just under 80%.

And per diem is now becoming more significant, about 10%, and clinical staffing is in the order of about 5.0%. It sounds like I’m short about 5.0%.

Allied health.

Oh, allied health, yes, is the other piece.

Okay, great. That’s helpful. Can you also talk about billing rate and wage rate trends during the past quarter?

Yeah. I’ll be happy to. I mean, when you look at our revenue per FTE we indicated that there was a slight decline. But at the same time the bill rates are really holding steady. So, when you look at that statistic declining, it’s really due to four factors.

First, we have fewer hospital-sponsored pass-through bonuses. In prior years, hospitals sponsored these bonuses for the convenience of the hospital’s flow through our payroll system, but they were really zero margin business for us. We basically got enough to cover our payroll taxes. But these onetime bonuses have been gradually phased out as the demand has softened and we saw less of that this quarter, which impacted our average revenue per FTE.

We also had a slightly higher mobile mix, about a percentage point higher and to put that into perspective, a mobile contract, the revenue per FTE in a mobile contract is roughly in the 25% to 30% over staffing contracts.

We also had higher third party co-marketing expenses, which under GAAP need to be treated as contra-accounts to revenue, because they are calculated as a percentage of revenue. And lastly, on a year-over-year basis, the Med-Staff acquisition had an impact as well, because Med-Staff, particularly in its per diem area, has a lower average bill rate for such specialties as LPNs and Nurse’s Aids.

But fundamentally, the bill rates have held steady and we expect the bill rates to remain steady in Q2. But the statistic, the revenue per FTE may decline slightly, perhaps by 1.0% [inaudible] --

[Crosstalk]

Okay great and in terms of [inaudible] --

[Crosstalk]

-- less driven by [inaudible] increases, but really more by the phase out of such things as hospital-sponsored bonuses.

Okay, again, I’m sorry, in terms of wage rate trends?

Steady.

Steady. Okay great. I’ll let somebody else jump on. Thanks.

Mark Allen, SunTrust Robinson Humphrey, you may ask your question.

Hey, good morning guys, glad to hear things are stabilizing.

Thanks, Mark.

Yeah. The question I have is relative to the supply and with demand looking like it’s going to start picking up again, what are you doing specifically to try to get the word out to nurses that there are more travel opportunities becoming available?

Right. That’s a great question, Mark, and unfortunately the reality of this business is that the strongest driver of nurse applicant activity is word of mouth. So, more than anything else we need our current working nurses and other working nurses in the market to be talking up that there are more attractive jobs out there for nurses thinking about entering the travel nurse field.

Clearly we are stepping up our recruitment advertising. There are things such as referral bonuses that you can use that you can tweak in the short-term to get more current activity. But fundamentally, what we need is a change in the psychology. When we described the posture of the nurses as being more cautious, you know we need them to feel that there’s less risk that we won’t be able to keep them employed at attractive assignments.

Clearly, as the order count stabilizes - and I would describe it as stabile throughout 2004 - and as I indicated earlier, well above the same level a year ago, that ultimately that filters into the nursing population. And you get nurses who are eligible, kind of from a demographic profile and will be more likely to give us a call. And at that time, we hope what they find is that the really attractive jobs they’re looking for, that we’re the company that has those jobs. Because we’ve done such a good job on the demand side, the marketing side to get the most attractive hospitals to work with us either on an exclusive or a preferred basis.

Now, that’s an ongoing process, but to some degree, the longer the market stays soft the more attractive a long-term opportunity we may have. But that’s kind of how the dynamics will play out, Mark.

Okay and on geography, you’d mentioned west continues to be good and northeast and I want to ask specifically about South Florida, Joe. How would you characterize the demand environment there, say versus six months or a year ago? Is anything shifting - good, bad, indifferent - in Florida?

I would describe it as market that remains soft. We certainly don’t see good things happening.

We believe we’ve taken a lot of market share in Florida, but we haven’t seen big customers really step up their usage. When you talk about census and other factors that could potentially drive growth in demand going forward, you’re not hearing anything that gives you a lot of encouragement that that’s going to change in the short-term.

And as you know, Florida is a very important market to us and it will be in the future. Just right now, I would categorize it as one of the material markets that are relatively soft, particularly in the context of the west and some areas of the northeast.

Okay and actually Florida has pretty good seasonal swings in their demand. When would you have a sense of what the seasonal orders would be for the fall and winter season? Would that be in the month of August or September or?

In a normal year, Mark, you’d expect to see those positions coming in July actually start to trickle in June. July and August you’ll see the vast majority of them. That is not my expectation for the coming year.

I just think given the dynamics of the last several years in Florida that you will see the customers continue to attempt to push out the start dates of nurse contracts, unless there’s just a dramatic change in census dynamics in the short-term.

Okay and final question, Joe. I think there’s been some discussion about some new, I guess, accreditation or quality standards that are going to be applied to nurses. I just want a sense of whether you guys have had the chance to evaluate it. Is that going to cause you to incur extra costs and would it hit smaller competitors harder than it would hit you?

We’re actually deeply involved in that process. Obviously it’s a process that the Joint Commission is rolling out. But they’ve actively solicited input from some of the largest companies in the industry and of course we’re one of those. We think ultimately that it’s a very good dynamic for this business, not because it will limit competition but because it will put all competitors on the same footing.

One of the issues we faced two years ago is we were working really hard and spending a lot of money on a very high quality process that the customer had a level of indifference to. Of course they said they wanted high quality process, but what they really wanted was a nurse with a pulse and a license. That is not a great environment for us.

So, to the degree that the Joint Commission can set standards, that really levels the playing field for all parties, that put emphasis on reported and QA, I think that’s a great dynamic for Cross Country Healthcare.

Great. Thank you and good luck this year.

Thanks, Mark.

A.J. Rice, Merrill Lynch, you may ask your question.

Hi. It’s actually Chris Rice filling in for A.J.

Hey Chris.

How are you doing?

Good.

Just a quick question on the exclusive vendor contracts. It seems as if you’re talking about that a little more than you had in previous quarters and I guess what I’m trying to get at is both, as to a non-contract, I’m assuming you’re picking up incremental volumes possibly at the expense of bill rates. Going forward, if we saw a pick up in the demand for your services, is this at all an impediment or you think it’s still long-term this is the way you want to go and continue to build these types of relationships?

Yeah. I wouldn’t think of vendor management and the healthcare staffing arena in the same context that I would think of it in other kind of commercial staffing businesses.

The primary driver, from the customers’ perspective, is to rationalize and decrease the internal administrative burden of utilizing outsourced labor. That when you look at the large clients using 20 to 40 vendors, every invoice is different, it has to flow through their nurse managers to get approval, it really creates productivity bottlenecks within that organization.

So, what they’re looking for is a third party to come in and rationalize that. If it’s a large user of travel nursing services, they’re typically looking for someone that they have a high degree of confidence that can fill the large percentage of their volume. And if there were a kind of gap, that company would be successful in going out to subcontractors to fill those positions.

Some hospitals have chosen non-nurse staffing providers as the vendor manager. Broadlane would be an example of a company that doesn’t compete with us on the staffing front, but has developed systems and technology that will make the process more efficient for the hospital client.

So, it’s not always a staffing company that gets these orders and again, it’s not about -- typically it’s not driven by price. Price may be an element of it, Chris, but its not like you reduce price by 10% to get the business. It may be one or two percent because you have a very high level of confidence if you control the demand. If you’re not competing with five to 10, 20 other vendors for nurses to fill these positions, you have an opportunity to rationalize wages and recapture all the margin that you need to make the business attractive.

So, we don’t expect to see margins squeezed. We don’t expect to see this vendor management trend drive pricing down. I think what we’ve said in the past is we expect pricing to be flat and we continue to expect pricing to be flat, other than the issue that Emil just laid out previously.

So, I’m not concerned about vendor management being a driver of kind of margin erosion in this business. I think on the contrary, it’s a very positive trend that allows us to integrate our service much deeply into our clients going forward and de-commoditizing the relationship to whatever degree that existed.

Uh-huh. Uh-huh and then switching gears a little bit. You know we obviously saw the acquisition of rehab care staffing business and it seems as if trends in the industry, while stabilized, is still kind of at depressed levels. Any comment on what you’re hearing, seeing, feeling in the acquisition environment/activity?

Well, this is an industry that has gone through a fair amount of consolidation over the last five years. We expect that trend to continue and again, we’ve mentioned before the Joint Commission effort. We think that the customer and the regulatory environment will demand a high quality process that has excellent information systems that require a substantial investment and we think it’ll be more and more difficult for small mom and pop companies to function effectively in that environment.

So, we do expect to see continued consolidation going forward. From our perspective, the demand environment has not weakened further. We think, if anything, we’re seeing, in the last several weeks, some positive momentum in demand so that’s a good thing. We believe that the industry has stabilized and that is an attractive bottoming for us and that we hope to be able to take advantage of a more stabile environment to grow the business in the second half of the year.

But if we had complete conviction of that, we’d provide full year guidance, but we also recognize that it’s still a challenging environment and we continue to have a cautious posture with investors and hope that posture will be reflected in the analysts that cover the Company.

Great. Thanks a lot.

Thanks, Chris.

David Cohen [ph], Midwood [ph] Capital, you may ask your question.

Hi fellows.

Hi.

I’m actually a little new to the story, so some of these may be a little elementary. But maybe you could share without necessarily giving a specific number, but what trends are you seeing in the Med-Staff business, if you isolate that? Because you do a good job of isolating that out of the healthcare staffing segment to sort of show what the organic is, but what is going on within that business?

Sure. The Med-Staff travel business, on a sequential basis, is tracking the Cross Country Travel business, the core travel core brand, pretty closely. I would say it’s modestly weaker but not materially weaker.

Conversely, the per diem business is, year-over-year, down less than 10%. It sequentially was flat. We do expect to see some sequential decline into the second quarter in that business, as you come out of some of the stronger seasonal markets, that you would expect that to soften a little bit. But we’re actually very pleased with the Med-Staff per diem business. We think they’re in the right markets. We’ve never really been interested in a per diem strategy that has kind of a national footprint with offices in every large metro area.

We like to focus our activity along the East and West Coast where we have the opportunity to build $5m to $15m market positions. Which allows us to offer a completely integrated, one-stop solution to those hospitals that are looking for a complete vendor manager, as opposed to a travel-only vendor manager or a per diem-only vendor manager.

So that, going forward, continues to be our strategy, but because that’s been the strategy we think we are in some of the stronger per diem markets today and therefore haven’t suffered as much as some of the larger national companies have, both private and public.

Well, the trend, the numbers you gave down less than 10% year-over-year, sequentially flat, has that been an improving trend? I mean, you’ve owned it for four quarters now, so if you looked at each of those quarters how would this past quarter have compared?

I think we have a very similar trend from the third to the fourth quarter. I don’t have it exactly in front of me. My recollection is it was also flat sequentially. It did weaken in the first half of 2003. I think, again, some of that’s seasonal, some of that’s the secular trends of the industry in 2003.

So, the 9.0% sequential decline in that business is probably a little more that I’d like to see. I think Emil alluded to sequentially kind of 2.0% to 5.0% overall, so directionally that’s a little weaker than the overall business.

Okay.

But like I said, we’re very comfortable with where they are and the franchises they have, in the markets they’re in. We haven’t been forced to close a lot of offices because of weak demand. We have critical mass sufficient to achieve at least break-even and generally, pretty attractive profitability in the markets that they operate in.

Okay and then on your guidance for the second quarter revenue of $162m -$166m. What contribution is in there? I mean, what portion of that is from Med-Staff? So, asked another way, what is your expectation on organic volume, particularly in the healthcare staffing front?

David, Med-Staff currently accounts for roughly 20% of our revenues within the staffing segment and we expect a similar percentage in the second quarter.

Okay, so --

No change in mix, if that’s what you’re getting to.

Right. So, if I took the midpoint of the range and extracted 20%, I’d come out with a number around just over $130m, which would compare to last year’s second quarter of $153m, although you had Med-Staff in there for three weeks or so. Is that an accurate sort of comparison?

I’m not sure exactly how you got to the $130m. That number --

Well, if the midpoint of the range is $164m in revenue from second quarter and then --

Uh-huh. Oh, I see what you’re saying, for the Company as a whole as opposed to [inaudible] segment [inaudible]--

[Crosstalk]

Okay. I see I’m overstating contributions from Med-Staff. Yeah.

Right.

Because I don’t have the other.

Right.

So I guess I need to -- I won’t try to do this on the fly. Maybe I’ll call you after the fact.

Sure.

Fair enough.

Okay.

Thanks, David.

A.J. Rice, Merrill Lynch, you may ask your question.

Hello, everyone.

Hey A.J.

Just a couple of follow-up questions here on the gross margin. You said that there was a little bit of pressure there. Can you just comment, maybe, on -- or I noted that there was a little pressure to you - comment on the pay-to-bill spread? And then I think you mentioned maybe that insurance was the one area you were feeling pressure. Comment maybe a little, expand on that in the housing area, what you’re seeing there as well?

Okay. Let me tackle that, A.J. In terms of the bill-pay spread, we need to look, as I indicated earlier, at the bill rate excluding such things as pass through bonuses and third party co-marketing expenses. If you exclude that, the spread remains essentially constant.

The pressure in the housing is probably more of a mix issue, as our business has migrated towards higher housing cost areas, such as the northeast and California. Insurance has been an issue for us, particularly professional liability insurance. Again, for us that’s part of our direct costs, unlike for some of our competitors.

We are also seeing increases in the health insurance area, which I think every employer in this country is probably experiencing as well.

We did have some extraordinary specific health insurance claims, A.J. that skewed the numbers a little bit.

That you were, what, self-insured for or something?

Yes. We felt an insure --

Cap.

-- cap and we had a couple of instances where, this early in the year, a number of insured had reached their caps within the first quarter.

And that is not customary.

I see. Okay. Switching gears, can you just generally provide us an update on the program for bringing international nurses into the U.S.? Is that still moving forward, I guess Assignment America?

It is, A.J. At this point we have in excess of 50 nurses we recruited from foreign countries working on assignments throughout the country. At that level, the business is now cash positive. We would expect to continue growing the business going forward.

We have several hundred nurses still in the pipeline through the immigration process. But that has been a drain on earnings up until the first quarter of 2004 and in 2004 it was cash positive. So, we’re pretty enthusiastic about that.

We’re excited to reach that level and we think, as the industry begins to transition more and more to a supply constraint environment, we’ll be excited to have these nurses coming into the country and willing to go to the contracts that we’ve established as exclusive contracts. Which will allow us to increase our fill rate and kind of a win-win for everyone concerned.

If it were cash positive this quarter, when would it be earnings positive, probably?

It is earnings positive.

Oh it is now, okay, good. Then the last thing I was going to ask you about is I think your comments said that you thought the allied professional market had even a somewhat better demand environment. Can you just tell a little bit about the dynamics that are going on there, both from an availability of people to be placed, as well as maybe expand on those demand-related comments?

Our allied business has three components that are approximately equal in size: respiratory therapists and I would describe that market as being pretty flat, neither up nor down materially, the radiologic technologist market, x-ray techs, ultrasonographers for example.

That business, which was the hottest growth business in the late 1990’s, early part of 2000-2001, is off substantially as far as demand is concerned. So we still have a fair number working, but it’s clearly not going to grow at the rate that it did in the past.

The hottest area today is the rehab area, which is exciting to us, because again, similar demographic drivers, aging population. There’s an entitlement to skilled nursing in skilled nursing facilities to rehab services in that setting that we think can drive attractive growth into the future.

We’re seeing very strong demand for rehab professionals and we expect that segment of our allied business to grow at pretty aggressive rates this year and next.

All right. Just to maybe follow-up on that, then, on the rehab side. Does that move you into more contracting with nursing homes? Or are those maybe SNF units in acute care hospitals?

It’s both. But clearly we’re going to see more outpatient SNFs that historically have been the biggest user of contract services. That’s where a lot of the unfilled demand is today.

Okay. All right. Thanks a lot.

Thanks, A.J.

(Caller instructions.) Arthuros Mangriotis, W.M. Partners, you may ask your question.

Hi. I have a question with the sequential bookings. I think I heard we’re going to be up 3.0%. Why is the guidance for $164m in revenues in Q2 versus $172m in this quarter with higher bookings?

Yes. That’s a good question. Let me tackle that one. Well, first of all, the $162 is the low end of the range, but let me just put this into perspective. Bookings are a good but not a perfect leading indicator of volume one quarter out.

Timing can have an effect on the correlation between booking and volume. For example, a significant percentage of a given quarter’s bookings will go to work in the same quarter and conversely, some of the current quarter’s bookings may not begin assignment in the following quarter.

So, when we develop our volume projections, booking trends are a key factor but they’re not the only one. We also look at seasonality trends. Typically second quarter volumes are somewhat lower than first quarter as seasonal Sunbelt assignments come to an end.

Our guidance translates into a negative (-)2.0% to negative (-)5.0% decline sequentially and for the last two years our sequential decline in the second quarter was in the upper end of that range, in the negative (-)4% to negative (-)5%. So, when you look at our volume guidance, it reflects really our belief that the market for temporary staffing has, in fact, stabilized.

Thank you.

You’re welcome.

Sir, at this time there are no questions.

Thank you, Terri, and thank you to everyone listening in. We appreciate your participation on this call and we’ll look forward to speaking to you again in three months. Take care. 16