Cross Country Healthcare Inc (CCRN) 2005 Q4 法說會逐字稿

Good morning and welcome to the Cross Country Healthcare earnings conference call for fourth quarter and year-end 2005. All participants will be in a listen-only mode until the question and answer session. This conference is being recorded. If there are any objections, please disconnect at this time.

Now, I would like to introduce your host for today's call, Mr. Howard Goldman, Director of Investor Relations and Corporate Relations. Sir, you may begin.

Good morning, everyone and happy Valentine's day. Thank you for listening to this conference call, which is also being webcast and for your interest in the Company.

With me today are Joe Boshart, our President and Chief Executive Officer, and Emil Hensel, our Chief Financial Officer. On this call, we will review our fourth quarter and full year 2005 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 website 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 such words as "expects, anticipates, intends, plans, believes, estimates, suggests," 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 2005, as well as under the caption "Risk Factors" in our prospectus supplement filed pursuant to Rule 424(b)(2) on April 15, 2005.

Although we believe that these statements are based upon reasonable assumptions, we cannot guarantee future results. Given these uncertainties, the forward-looking statements discussed on this teleconference might not occur. Cross Country Healthcare does not have a policy of updating or revising forward-looking statements, and thus it should not be assumed that our silence over time means that actual events are occurring as expressed or implied in such forward-looking statements.

And with that, I will 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 2005 was $164 million, up 3% from a year ago and our net income was $4.9 million or $0.15 per diluted share. Excluding the impact of a non-operating charge related to our new credit facility, earnings per share in the fourth quarter would have been $0.03 higher. Additionally, I believe, our results in the fourth quarter would have been more favorable were it not for the impact on our business caused by Hurricane Wilma in late October.

Nonetheless, these results are encouraging to me and reflect generally improving conditions in the travel nurse staffing market. At the same time, my enthusiasm is tempered by what appears to be a continuation of flat admission patterns at acute care hospitals, which is the principal market that we serve. Consequently, we continue to believe that the favorable dynamics that we are seeing in our travel nurse staffing business are being driven primarily by an increase in turnover of nursing positions.

A few of the more noteworthy results of the most recent quarter include, bill rates as measured by revenue per hour in our travel nursing business increased 4% year-over-year, the most significant improvement since 2003. Gross margin as a percent of revenue was up 80 basis points year-over-year in the fourth quarter, reflecting higher bill rates while pay rates were held substantially in check and staffing volume excluding the clinical trials and per diem staffing businesses increased 2% year-over-year and 1% sequentially from the third quarter of 2005.

Recruitment headcount in our travel staffing business was down slightly for the fourth quarter but was up 21% for the year. We believe more experienced recruitment capacity will be an important element in driving volume and operating margin growth in a supply constrained environment.

During 2005, demand for travel nursing services grew much more rapidly than the available supply of nurses willing to travel. Even so I am encouraged by the continuing success of our vendor management program. One would expect that the increasing overhang of demand oversupply would put pressure on our ability to meet the staffing needs of these hospital clients. Nevertheless, we believe the most important of these relationships are secure and now represent the majority of our top 10 clients nationally.

I believe Cross Country is positioned exceptionally well to continue providing a win-win solution for clients seeking improved efficiency and execution in their outsourced nurse staffing efforts. That being said, our travel nurse staffing performance is still far from its potential. But I'm very pleased to see momentum moving in a positive direction.

Turning to our non-nurse staffing businesses, our allied health staffing and education businesses saw growth and improved margins in the fourth quarter in comparison to the prior year quarter. However, our clinical trials staffing and retained search businesses came in below expectations in the fourth quarter. Our clinical trials staffing business in particular was impacted by the unexpected halt during the quarter of a relatively large Phase III drug trial it had been engaged in. I believe these declines in these businesses are temporary in nature and I look forward to them resuming growth in the near future.

With that, I would like to now let Emil update you in more detail on our financial performance.

Thank you, Joe and good morning, everyone. First, I will go over the results for the fourth quarter and full-year 2005 and then review our revenue and earnings guidance that we provided in last night's press release.

As Joe indicated, consolidated revenue came in slightly higher than the upper end of our guidance range at $164 million, up 2.7% from the prior year quarter and up 0.4% sequentially. The revenue performance reflects improvement in our core travel staffing business partially offset by lower revenue in our clinical trials staffing, per diem staffing, and retained search businesses.

Our gross profit margin was 23.5%, up 80 basis points from the prior year quarter, and up 30 basis points sequentially. The margin improvement is due primarily to a widening of the bill pay spread in our travel staffing business. SG&A expenses in the fourth quarter were up 3.5% from the prior year, but down 2.5% sequentially. In particular, unallocated corporate G&A was essentially flat on a year-over-year basis and down 6% sequentially.

Net interest expense was $636,000, down 43% from the prior year quarter and down 33% sequentially, reflecting the delevering of our balance sheet made possible by our strong operating cash flow and lower interest rates resulting from the debt refinancing that occurred in November. In conjunction with the refinancing, we took a 1.4 million pre-tax charge related to the write-off of loan fees associated with a prior credit facility.

Income from operations was 9.9 million, up 4% from the prior year. Income from continuing operations was 4.9 million or $0.15 per diluted share including a $0.03 per share after-tax charge related to the aforementioned debt refinancing. Our fourth quarter EPS from continuing operations was $0.01 per share above the upper end of the guidance range that we provided in November. Net income was $4.9 million or $0.15 per diluted share. This compares to $0.17 per diluted share in the prior year which included a benefit of $0.02 per share from a tax adjustment.

Our balance sheet remained strong. We ended the quarter with a debt to total capital ratio of 7% and a current ratio of 2 to 1. DSOs at year-end were 61 days, up 2 days from the end of the third quarter due to seasonal factors. We generated $9.9 million of cash from operating activities during the fourth quarter of which 1.7 million was used for capital expenditures. We had 25.4 million of total debt outstanding at the end of 2005, a 5.8 million reduction from the end of the third quarter.

We also repurchased approximately 110,000 shares of our common stock during the quarter, at an average cost of $17.73 per share. Under our current board authorization, we have purchased approximately 1.3 million shares at an average cost of $14.58 per share. Under the remainder of the current $25 million authorization, we can purchase approximately 234,000 additional shares at an aggregate cost not to exceed $6.5 million.

For the year, as a whole, our revenue was $645 million, down 1% from the prior year. Net income from continuing operations was $15.3 million or $0.47 per diluted share as compared to $20.6 million or $0.63 per diluted share in 2004. The 2005 EPS from continuing operations includes a $0.10 charge per share for professional liability that we took in the second quarter as well as the $0.03 per share charge in the fourth quarter related to the debt refinancing. In 2005, we generated $30.8 million in cash flow from operations, of which 7.6 million was used for capital expenditures.

Let me drill down next on our two reporting segments. Healthcare Staffing, which comprises our travel and per diem nurse staffing, Allied Health Staffing, and clinical trials staffing businesses, accounting for 93% of revenue in fourth quarter, and the other Human Capital Management Services segment, which is comprised of our education and training and retained search businesses.

Revenue for the Healthcare Staffing segment was $152.5 million, up 3% on a year-over-year basis and up 0.7% on a sequential basis. We averaged 5,551 field FTEs in the fourth quarter, 0.2% below prior year and down 0.4% sequentially. The slight decline in field FTEs was largely attributable to our ClinForce business resulting from the unexpected halt of a Phase III clinical trial.

Focusing only on our core travel staffing business, volume was up 2% year-over-year and up 1% on a sequential basis, despite the disruptions caused by Hurricane Wilma. The average revenue per FTE per week was up 3% versus prior years and up 1% sequentially reflecting the improved pricing environment in our core travel nursing business. Mobile contracts, where the nurses are on the hospital's payroll, accounted for 1% of our segment volume, down slightly from approximately 2% a year ago.

Healthcare Staffing contribution income, as defined in our press release, was $16.8 million in the fourth quarter, up 8% compared to the prior year and up 5% sequentially. The segment contribution margin was up 11%, up 50 basis points versus prior year, reflecting an improvement in the gross profit margin due primarily to a widening of the bill pay spread in our core travel nurse staffing business.

Turning now to the Other Human Capital Management Services Segment. Fourth-quarter revenue was $11.2 million, down 2% from the prior year. Segment contribution income was $1.8 million, down 26% from the prior year. The decline in revenue and contribution income was due to lower placement activity in our retained service business, which had a particularly strong quarter a year ago.

This brings me to our guidance for the first quarter of 2006. 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.

Booking activity in the fourth quarter was down 6% from the prior year, partly due to the loss of productivity resulting from Hurricane Wilma. While this hurricane occurred in the fourth quarter of last year, we will experience the majority of its impact in our field FTE count in the first quarter of 2006.

Consequently, based on these booking trends, we project the average field FTE count in the first quarter of 2006 to be in the 5,400 to 5,500 range. We expect average staffing revenue per FTE per week to be up approximately 3% on a year-over-year basis. Revenue for the first quarter is expected to be in the $157 million to $160 million range.

We expect our gross profit margin to be approximately 23% in the first quarter, reflecting the historical seasonal impact of the resetting payroll factors as well as two less days than in the fourth quarter, which also impacts our ability to leverage housing expenses, partially offset by lower insurance expenses.

SG&A Expenses are expected to be up 3 to 4% sequentially, primarily as a result of higher payroll taxes. We expect a further 25 to 30% sequential deduction in interest expense in the first quarter, as we realized a full quarter's benefit of the debt refinancing that took place in November. EPS per diluted share is expected to be in the $0.12 to $0.14 range.

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

[OPERATOR INSTRUCTIONS]

Our first question comes from Jim Janesky with Ryan Beck and Company.

Yes. Good morning.

Morning, Jim.

A couple of questions. When you look at volumes potentially going up throughout 2006, what do you see on the horizon that could turn around your volume? Not hospital volume, because what I am hearing is that hospital volumes are -- there is really nothing on the horizon that could turn hospital volumes around significantly. But if you look at your prospects for volume going up, what do you think could drive those higher?

Well, more than anything else, it's having more experience -- more and more experienced recruiters on the phone with nurses. Given an available pool, the company that is on the phone with the nurse when she has maybe crossed the psychological hurdle and is ready to take a travel assignment, will get that nurse working for her more often than not.

So I think, Jim, in answer to your question is it's probably the biggest factor we have going for us and that we're really counting on to drive modest volume improvement in 2006.

Okay. And the pricing historically has preceded -- pricing increases has preceded volume increases. It's somewhat of a leading indicator. About how long of a delay is there between your company and the industry getting price increases and then, you know, nurses being pulled in to the industry because of better pay rates?

If I look back historically, Jim, I would have expected to see some kind of volume improvement by now, to be honest. And I think partly it's a reflection of our more intense focus on margin improvement in the short term. We really believe that improving the margins is the lowest hanging fruit that we can reach for to improve profitability.

We do believe as long as this environment holds and even without, as you pointed out -- even without -- strengthening of admission patterns at hospitals, we think that volume will follow. But to be honest, I'm a little disappointed we haven't seen it to-date.

Okay. And then, finally, was the -- just to get a clear understanding, the issues of the -- from the sequential move from the fourth quarter to the first quarter, are payroll, housing, and you said this year, there is kind of -- there is somewhat of a two quarter effect for productivity declines from Hurricane Wilma. Is that correct?

Jim, that's correct. Let me try to give you a little color on these seasonal factors, the largest of which are the resetting the payroll taxes. The payroll taxes are generally highest in the first quarter, when you reset your FICA and your state and federal unemployment taxes. And they are the lowest in the fourth quarter when many employees reach their FICA limits.

So the payroll tax rates in the first quarter are expected to be 1.8 percentage points higher than in the fourth quarter, which, by the way, is exactly the same payroll tax increase that we experienced last year. Since our total quarterly compensation expense for field and corporate employees is around $100 million, this translates into approximately $1.8 million of additional expense in the first quarter, or roughly $0.035 per share.

Now, in addition to that, the first quarter has two fewer days than the fourth quarter, which means that we have less gross profit over which to leverage our housing and overhead expenses. So we estimate that the impact of the two fewer days to be roughly $0.02 per share. And then the sequential comparison is also affected by our check of search business, which typically has a relatively high number of retained searches that are conclusive prior to yearend.

And then as I included in the prepared remarks, the majority of the impact of Hurricane Wilma will be felt in the first quarter revenues accounting for approximately another $0.01 per share sequential impact on EPS. Now, partially offsetting these unfavorable seasonal factors are the generally improving margins, which are in due part to lower expected insurance costs, as well as lower interest expense.

Okay. That's very helpful. Thank you.

Thank you.

Our next question comes from Chris Rigg with Merrill Lynch.

Hi. Good morning, guys.

Hi, Chris.

I guess with regard to nurse recruitment in the supply side, historically you've talked about doing some things on the international front in addition to just hiring and beefing up your internal recruiters. Is there anything going on in that front at this point?

Yes, there is, Chris. We initiated that effort in 2001. It was significantly impacted by the changes in immigration dynamics that occurred after 9/11 of that year. We -- as the industry softened in 2002, midyear 2002, we had people in the pipeline, a lot of nurses in the pipeline and because the demand dynamics shifted unfavorably, it was more difficult to place those foreign-trained nurses relative to a domestically trained nurse. So we pulled back in our recruitment efforts and really scrubbed our pipeline to make sure we had the most placeable nurses in that pipeline.

So we've really only recently reinvigorated our foreigners recruitment. Roughly 1.5 to 2% of the nurses we have working for us today were recruited by us in foreign countries other than Canada. Canada is a much more significant recruitment area for us, historically. But the opportunity to bring nurses in on a green card, again, was only initiated in '01. It was significantly impacted in the interim and has been reinvigorated. We hope to get ultimately 300 to 500 nurses per year recruited to the country from -- that were trained in foreign countries.

What's the lead-time to actually getting them placed? How long does it take from start to finish when you first establish a relationship to actually bring them into the country?

Chris, it's always a fluid number. But I set my expectations north of 20 months.

Okay. That's from start to finish. Okay. And then, I guess, during the fourth quarter, one of your major competitors completed an acquisition of a locum tenens business. I was just wondering what your guys -- what you guys are thinking or what you're seeing in terms of potential acquisitions, if you would look at anything at this point or you're really just focused on growing the business organically today?

Well, Chris, I think we've been pretty consistent in this. We have generated strong cash flow. Our most desirable use of cash is an acquisition that will generate a return on the capital invested higher than our cost of capital. So I would say we are, at any given time, looking at anywhere from two to five acquisitions.

I think our issue has been, really, finding a common ground with sellers as far as their price expectations and our need to get an adequate return. And when we can't do that, we use our excess cash in other ways, and primarily, that's been to repay debt. But in recent quarters, we have been repurchasing shares as well.

It is still our primary desire -- our number one objective is to find an acquisition that will add more value to shareholders going forward by providing an adequate rate of return. We haven't really limited ourselves, Chris, we have said for several years that the locum tenens area is of interest to us. The clinical trials area is a business segment. While it's hit a bump in the road in the fourth quarter, we were very committed to that business. We really like our business, like our management of that business, and feels it's very scalable going forward.

So we're certainly looking to grow in that area, and we're also looking to grow in our core business. We're thing we are on the cusp of a much more favorable environment going forward. And as a result, it's a good time to be adding to our core nurse staffing business as well.

Okay. Thanks a lot.

Okay.

Our next question comes from Tobey Sommer with SunTrust Robinson Humphrey.

Hi. Good morning. It's actually Mike in for Tobey this morning.

Hi, Mike.

A couple of quick questions. Regarding the bill rate saw some nice improvement there, just wondering if you could discuss the trends a little bit, was the kind of 4% a typical increase or did it kind of build through the quarter?

I think, again, consistent with what we've said on prior quarters, as we have gotten -- as we went through 2005, we went from having an expectation early in the year of trying to get 1% to 3% rate increases to offset some of the margin pressure we've experienced in recent years. And as the year unfolded, we found ourselves with the opportunity to achieve higher rate increases, which in some cases allows us to pay a higher wage to nurses and attract more nurses to facilities that have greater sense of urgency of filling open positions.

So around midyear, we kind of set the bar higher in the mid-single digits for expectations for price increases. We were able to achieve that. I think we reported that on prior calls. But increases like that don't immediately happen. They affect only future business. When the contracts renegotiate, it's only renewals of nurses on assignment or new contracts subsequent to that contract increase that are affected. So it kind of gradually builds. I think we're getting to a point that I would expect kind of the, again, 4% to 6% average increase, which certainly is our hope to achieve in 2006. And I think we're certainly on a track to do that.

And now that you've kind of seen some of the margin expansion that you're looking for from the bill rates do you foresee pay rates maybe ticking up little bit?

If we are able to achieve 4 to 6% on average then we would expect pay rates to pick up. Again we're going to get -- we're going to restore our margins, that's our number one objective. But with those kind of increases you can expect that we will be able to pay higher wages to nurses as well, which we think will help to recruit nurses into back to the travel nursing market.

Okay. And then one last question. Have you seen any noticeable changes in your retention rates through the quarter and then leading into January?

Because of the activity we talked about, the hurricane, I would say, we softened somewhat in the fourth quarter. We don't think it's the start of a trend, we think it was really an act of God or somewhat self-inflicted. For the year, our retention rates were up meaningfully versus the 2004 year.

Okay. Thank you very much.

Okay. Thanks Mike.

Our next question comes from Jeff Silber with Harris Nesbitt.

Thanks. I just wantd to clarify something on the guidance, Emil. I'm assuming your guidance includes stock based compensation costs for the quarter. Can you tell us roughly what they'd be running in first quarter and for 2006?

Yes. Jeff, you are right. It does include that. It is a relatively modest number for us. Just to clarify, in the fourth quarter we accelerated the vesting of all our outstanding options and incurred about $116,000 P&L hit on that. That's reflected in our fourth quarter numbers. So we're going into the year, basically the cost will come from new options that will be granted as well as any additional long-term stock based compensation plans, such as restricted stock.

Historically, we have not granted a large number of options. I think we've averaged about 160,000 option grants per year over the last four years. So if we continue at that rate our full year cost would only be about a penny a share. On top of this we may also put in place some additional long-term incentives using restricted stock but I don't not expect our total equity based compensation expense to be more than $0.02 per share in 2006. So on a quarterly basis it will be a fraction of a penny.

Okay. Great. That's helpful. Getting back to the core business, Joe, in your prepared remarks, you talked about turnover rates being one of the key drivers. It seems from [inaudible] that turnover rates have been picking up over the past year, year and half or so. Have supply constraint is inhibited all?

We had a good year for applicant activity. Really, for the first 10 months, the last two months we are not that strong for us on a year-over-year comparative basis. And January was somewhat weak. February has been better for us. So I think we are back on track. I am not sure I can explain it to you. Jeff, I mean, I certainly think, all the hurricane activity throughout the country, not just in Florida, had some impact just on people's psychology, their willingness to be away from home.

But I'm not sure I can put my finger on it. I think, I would have expected the trends that we saw through the first 10 months of 2005 to continue through the last two months, but they didn't. I am encouraged that we seem to have -- if it is a bump in the road, we seem to be back on track in February. So I am reasonably optimistic that we will be able to find more nurses willing to travel, and now that we have stabilized the business that will be a contributor to ability to grow volumes.

Okay. Great. If I can shift gears, to some of your non-core business, specially the clinical trials and retained search. Can you just remind us roughly what they are as a percentage of revenues, how they differ on a margin perspective relative to the travel business? And any more color on what happened there? You mentioned in clinical trials the halt, but I wondering why retained search was down as well?

Good questions. Clinical trial is about 7% of our mix and retained - the retained physician and executive search is about 3% of total revenues. On a margin basis, both are higher than the average company. The clinical trials business is modestly higher. And the retained search business is significantly higher. Operates at essentially 100% gross margin given the way in which we account for that business.

The clinical trials business, it's had a great run. We still, as we look at the market and some of the competitors that are public and we're able to kind of gather competitive information, we feel that there is nothing fundamentally wrong with the business. However, as we have said in the past, that segment of our business is more prone to event risk than is the nursing business, that there's a much higher concentration of revenue. And we did have what was a very favorable contract, a long-term contract that ended earlier than we expected it to. And that is just a risk of that business.

As I said, we really like that business and we think the dynamics of that business re going to improve as we go forward as the benefits of all the biotech advances and genomic advances are played out in the commercial field and more drugs are bought to market because there are more compounds that can be -- research can be conducted on. So we like that business but it's something we recognize in that business.

On the physician side, it's not a clear picture. We have seen the business pick up a little bit in the first quarter. Historically, the fourth quarter is by far the strongest quarter for that business. And it just didn't happen this year. One of the differences, if you look at the locum tenens businesses and the physician placement business, we are only in the placement side. The placement side you're typically looking for younger, more mobile physicians, earlier in their career.

And those are harder to find than nurses -- excuse me -- than doctors at the end of career, which oftentimes make up the inventory of a locum tenens business. A physician that's kind of finished his own practice, but wants to keep his hand in the game will often be available to a locum tenens Company, but it is not a placeable candidate necessarily for a physician placement business. So I don't -- I am not sure I have a crystal clear answer, but that's probably the best I can do today Jim -- excuse me -- Jeff.

Great. Just a couple of quick numbers questions, and I'll let somebody else jump in. What interest rate should we be using going forward, and in terms of unallocated corporate G&A, it did go down sequentially. Roughly what should we be remodeling going forward there as well?

Well, as far as the interest rates, the refinancing resulted in a reduction in our LIBOR spreads of roughly 150 basis points. I think in the guidance I indicated that we expect our interest expense for the quarter to be, on a sequential basis, down an additional 25% to 30%. So that should give you a good number for that.

As far as corporate G&A, we are focused on controlling that. And SG&A as a whole we expect it will rise by roughly 3% to 4% sequentially. I think the corporate G&A piece of that will kind of mirror it. A lot of that increase is really just the impact of payroll taxes resetting..

Okay. Great. Thanks again.

Thank you Jeff.

Our next question comes from Bilal Basrai with Stanford Group.

Yes. Hi, good morning. Can you provide a little more color into the per diem business, if you can talk about how it's performed on a sequential basis, perhaps, where you see it going in terms of 1Q guidance?

And also, if you can, kind of, nail down the markets that have -- where you have the most presence, and really what has been problematic?

Okay. Bilal, that's -- those are good questions. As we look to the first quarter, that business has been weaker than the other businesses typically have been throughout 2005. As travel nursing has strengthened, we really haven't seen a commensurate increase in activity in the per diem sector.

As we look at the January over the fourth quarter run rate, we have seen an increase in hours, and candidly -- seasonally we would expect to see an increase in hours in the first quarter versus the fourth quarter. Unfortunately, when we look at the makeup of the hours, it's shifted to a somewhat less favorable mix of the lower skilled professionals. This is really the only area where we work with LPNs and certified nurse assistants in a meaningful way.

So that's not a positive, but the increase in hours is, certainly is a positive and may suggest some stabilization although on a year-over-year basis we're still high single-digits down year-over-year in the per diem business. The dynamics, Bilal, on a big picture, the per diem business competes much more head on with our hospital customer, and the hospitals have been much more aggressive in making their in-house pool of temporary labor more attractive, vis-à-vis, per diem companies.

And the same competitive dynamics don't exist between a hospital customer and the travel nursing customer, that you're generally bringing nurses in from out of market today. So you're not really competing with the hospital for labor in its own market where -- which the per diem companies are.

As I look specifically at the larger markets, Philadelphia is the largest market for MedStaff, and that has been a very weak market for both per diem and travel. We understand that when you look at the Philadelphia market, there's a lot more -- a lot higher concentration of nursing schools in that market. So they're graduating more registered nursing candidates, and that hospitals are putting them to work, effectively.

And we've also seen an increase in the utilization of third party electronic vendor managers, which are generally not conducive to creating an attractive recruitment environment, as -- just as the rest of the country seems to becoming more focused on creating a more attractive recruitment environment. So the activity in Philadelphia in particular is down significantly. It's the weakest market that we have nationally on both the travel and the per diem side.

South Florida has been generally soft. Some of it is account specific in South Florida, which may not translate to other companies but it certainly has affected our company. Northern California is weak whereas Southern California has actually been pretty strong for our per diem business. And those are really the largest markets that we serve, Bilal.

Okay. Great. And now moving on to the balance sheet, you guys have done a great job in paying down debt with only 7% debt-to-cap. If you were to look to make acquisitions, going forward, let's say, decent sized, I mean, how much more leverage would you put on the balance sheet?

Well, we certainly believe that our balance sheet can support a lot more leverage than it currently have. I personally would be comfortable with a very significant increase. Given our strong and predictable cash flow, I think, 25% could be -- 25% debt to total capital would be a very manageable level for us, maybe, even north.

Okay. And then lastly, can you give us the number of recruiters you have? I think you mentioned up 21% year-over-year and are there any productivity metrics that you can give us, please?

On the core travel staffing business, we have approximately 163 at year-end. That's down slightly from the end of the third quarter but up, as you said, about 21% from the end of 2004. The productivity, I don't want to give that to you, Bilal, because it really varies significantly by brand. The highest productivity is achieved in our cross-country TravCorps brand and lower productivity is achieved at NovaPro and MedStaff. And the mix will vary by where the strength in recruitment has been.

The ClinForce business operated in 2005 with approximately -- in the neighborhood of 400 FTEs. And the MedStaff business as we've said is approximately -- the per diem business approximately 10% of revenues. So you can pretty much do the math on your own to get a rough estimate, but I'd rather not give you -- provide that as a precedent and a number we're going to give every quarter.

Okay. Thank you.

Okay. Bilal. Thanks for calling in.

Our next question comes from [James McCormack] with Tracer Capital.

Riley. Hello?

Mr. McCormack, your line is open.

I'll go to the next question. [Billy DiArman] with Atlas Capital, your line is open.

Hi, guys. Just one quick question. You talked about FTEs being down in the first quarter. How much of that is related to the cancellation of the Phase III contract that you had versus the nursing business?

[inaudible] about 20%, about 20 to 30%.

Okay. Thank you very much.

As I would say the bigger impact, Bill, was the legacy of the impact of Hurricane Wilma, which did cost us, say, a significant number of nurses, some of which was felt in the fourth quarter but the majority, the bulk of it was felt in the first quarter.

And the -- in terms of the effect on the hurricane, are you back now to level where, you feel like somewhere recruiting standpoint that you are where you need to be in terms of being able to get nurses and that just was one quarter effect?

We don't feel we're going to get those. We've lost those nurses. They're working for someone else, and typically nurses have a -- do have a pattern of loyalty. So we may get, and if historical norms apply, maybe 25% of them back at some point in the future. But in the short term it's just not our expectation that's a lost opportunity.

But the hurricane is behind us, I mean, we certainly will prepare ourselves, we're going to make some capital investments in 2006, to better prepare the company for another hurricane. Any hurricane will have an impact on the business but we would expect it to be - to have made some changes that will allow us to be more productive, going forward.

And I do believe we have enough recruiters at this point. I think -- and we are, as I said we -- had a good activity and new activity in 2005. I'm hopeful, if not confident that we'll get an uptick again in 2006 as long as the demand environments holds where it is currently or improves going forward.

And do you think that the bulk of the loss was related to the fact that a lot of your recruiters were based in Florida, so it was tougher for them to get to nurses? Or do you think that -- can you explain that a little bit more?

I'd say it's the primary reason we -- at least two-thirds of our Cross Country TravCorps employees are here. NovaPro is in Tampa, wasn't as much affected, but the systems were affected to a degree. And the employees that could get to work and get on the phone were really managing the needs of the kind of the day-to-day needs as opposed to aggressively recruiting new nurses. So even nurses -- even our recruiters and employees that could get on the phone in Massachusetts and Tampa and Philadelphia couldn't make up for the loss and the disruption in South Florida.

And let me just clarify that. The direct impact of the hurricane was more of a two-quarter phenomenon for us. Given when it occurred in late October and given the typical one-month lag between bookings and assignment starts and then the 13-week length of our typical assignment, we're estimating that roughly a third of the impact of the hurricane was felt in the fourth quarter and the remaining two-thirds or about $4 million in revenues fell in the first quarter. So, had it not been for the impact on the production by Hurricane Wilma, we estimate that our projected field count in the first quarter would have been about 100 to 150 FTEs higher.

Which would have put it on related or I guess relative to fourth quarter, where about kind of --?

It would have put it ahead of the fourth quarter by about 100 FTEs.

But it still would have been up sequentially?

Yes.

Okay. Thank you very much.

Bill, looking at the core -- I know you are -- but I want to make one last comment. As you look at the core travel staffing business, it was up sequentially third to fourth quarter. So we feel good about the stabilization of the business and we needed it to stabilize in order to grow it in the future. And we still have a level of confidence that we will grow it in 2006.

Yes. And it sounds like minus hurricane it actually was stable to growing even fourth quarter to first quarter. So that's a positive sign.

Yes. It's a fair statement. Thank you.

Thank you.

Riley McCormack with Tracer Capital, your line is open.

Hey, could you hear me now?

Yes.

So two questions, one to follow-up on that last question. If I adjust about 150 FTEs for the hurricane, that would show for the first time in a while guys are year-over-year positive, or would have been year-over-year positive in FTE. I know you guys don't guide two quarters out, but is there any reason to think then June we shouldn't continue to see that trend and see a positive year-over-year trend in FTEs?

Well, actually there, Riley, there is normally a seasonal step down in activity from the first quarter, really the end of March to the April month, where nurses that really only work for us in the winter months, a lot of them are from Canada, come down, enjoy the sunshine and then go back home and work per diem or take the summer off. So there is typically a 2%-5% decline in headcount going from the first to the second quarter.

There have been years where a strong secular growth in the business can outweigh that, but those -- there have not been many. So we would expect to see a modest decline in volume in the second quarter based on seasonal patterns. And then if we are in a growth mode, we would expect the third quarter to be higher than the second quarter and the fourth quarter to be higher than the third.

Okay. I was talking about year-over-year.

Oh I see, I am sorry.

So is there -- but I am not sure looking back to your 2005, you didn't have that -- at least on an FTE count that same sort of tick down.

We had a modest pick down in 2005.

Right, but not that 3% to 5% you were talking about.

Right. It was more like 2%. It's my recollection.

So the question is on a year-over-year, is there any reason why it's just been different seasonally in '06 versus '05? Or considering that you guys ex-hurricane would be running about flat, could Q2 be the first year-over-year growth, year-over-year?

Yes. Again, without providing guidance, it certainly could. I will tell you that the January hasn't been great for us. We're down modestly year-over-year in bookings. But one month doesn't make a quarter and the most important month of the quarter will be March. So we're focused on really having everybody focused on a very strong month of March to carry us into the second quarter. So I would say it's certainly possible that we will show a year-over-year increase, but I wouldn't want to commit to that at this point.

Sure, okay. And my second question is if I look at your fourth quarter just reported and I adjusted for the bad debt expense versus Q4 of '04, it looks like your EBIT margin was up around 70 basis points. And if I look at your guidance for Q1, again adjusting for the different areas of the range, it looks like it's around 50, 60, 70 basis points again year-over-year, canceling out the bad debt -- the change in bad debt.

How much of this, call it 50 to 70 basis points is due to lower insurance? How much of it's due to higher bill pay spread? And how much of it more importantly is -- can we carry it forward into the next couple of quarters as sustainable as opposed to something that we may just see in Q4 and that you guys are seeing again in Q1?

Well, I think virtually all of that improvement in the EBITDA margin is coming from the gross profit margin. And the two significant drivers of that improvement -- the trends that we're seeing are the widening of the bill pay spread and generally lower insurance costs, particularly professional liability insurance costs. We don't see any reason why those trends would not continue, although I am reluctant to give guidance beyond the first quarter.

Okay. But there is nothing -- of that 50-70 basis points, most of that's made up by those two things?

Right.

Okay.

Riley, we've talked about it in the past, it's probably a good point here in the call to reiterate, we have -- we obtained much more favorable coverage for our nurses for professional liability that is occurrence based, so as the tail of the prior claims made policy gets farther in the distance that's really what's driving the favorable trends in our professional liability. And as a result, we do expect it to continue.

Okay. Fantastic, guys. Thanks a lot.

Okay, Riley. Thanks for calling.

Our next question comes from [Andrew Cuevo] with MAK Capital.

Good morning. I was wondering if you might be able to quantify any shift in the revenue mix between the travel nursing and the per diem nursing in, say, '05 versus '04?

I don't believe there has been a significant shift. I would say -- I don't have it right in front of me.

I think travel is a slightly higher percentage of our total revenue mix, because as Joe indicated earlier, our per diem business was declining in high single digits during the year. But I don't think in the overall scheme of things that the difference is all that significant.

Okay. And do you disclose what that mix is?

The per diem accounts for roughly 9% of our total revenues.

Thank you.

Our next question comes from Matt Ripperger with Citigroup.

Hi. Thanks very much. Just a couple of questions. Related to the widening bill pay spread and the need to attract more applicant volume into the business, how much would you have to raise your pay rates to influence meaningfully the applicant volume that you're current seeing in the industry?

And then secondly, are you seeing any competitors out there that are taking a different posture than you and focusing more on volume growth as opposed to maximizing bill pay spread?

I would say, and again, we haven't done any empirical analysis of the elasticity of supply of nursing, but we do know there is some upward sloping of the supply of nursing. And the only way to move up that curve, that existing curve is to offer a higher wage. So I would say that any increase in pay rate that we can extract by increasing bill rates will result in our improving our ability to attract nurses to come work for us, so I'd just -- anything works and higher the pay rate, the more we would expect to attract.

And we've had some clients that have increased bill rates at or above 10%. So what we talk about kind of an average of 4 to 6%, clearly, we are seeing some significant clients increasing bill rates substantially higher than that with an expectation that we will meaningfully increase the pay rates of nurses coming to their facility.

When I look at the competitive landscape, the reality is we only have one competitor that really matters. And particularly, as we achieve more and more success in getting large users of travel nursing services to become exclusive vendor managed accounts of Cross Country, even that competitor can influence, what we do and what we pay.

Now, clearly, we have to be competitive nationally, but most of the competition occurs with nurses that want to go to a specific facility and those companies that can offer a nurse an assignment at that facility can influence each other's pay packages. When you are the only company offering an opportunity for a nurse to go to a facility, you have more control of that. So I actually -- I feel very good about where we are from our competitive standpoint, our ability to control our destiny and continue improving margins because of the success we've had on the vendor management side.

And do you have a sense of how your pay rates would compare to an average full-time salary rate for a nurse right now?

Order of magnitude, I am going to just give you rough numbers, I am not giving you exact numbers. We are in the, call it 30 to $31 an hour range and nurses nationally are in the 25 to $27 an hour range. So a 15 to 20% premium in pay rate but then, of course, on top of that, there is the other elements of our package, which can be --have significant value to the nurses that come work for us.

Okay.

Vis-à-vis what a hospital can offer.

Okay, great. And then second question, I just wanted to come back to an earlier point you made about your balance sheet, with your sort of debt to EBITDA at 0.5 times and debt to cap at 7% and with the new credit facility, if acquisition expectations remain irrational, I mean, are you potentially open to considering something related to a larger share repurchase? Or are you just wanting to keep your dry powder for a day when an acquisition does come about?

I think we are open to creating shareholder value and doing -- using the strength of our balance sheet to achieve that in the most efficient and the highest return way. So I don't close any doors, Matt. Emil, do you have any --?

I think that's correct. I mean basically we always evaluate alternatives to build shareholder value. And as Joe indicated earlier, invariably we come to the conclusion that a strategic acquisition is really our best option, but we will look at share repurchases and we will look at additional debt repayments as well.

And your new credit facility that you financed what is the -- is there any change in covenants or flexibility that would give you more opportunity to use that going forward relative to your prior credit facility?

Well, one of the nice features about the new facility is that it has a $50 million accordion feature. So we can expand our borrowing capacity, hopefully, without much difficulty. We currently have a $75 million revolver, which is essentially untapped other than some amounts less than $10 million set aside for letters of credit. So we can upsize that and potentially add another $50 million on top of it. So we think we have adequate borrowing capacity.

Okay. Great. And then the last question, I just wanted to clarify, you mentioned that Hurricane Wilma impacted your bookings by about 6%?

Right.

And you said, a third of that was reflected in the fourth quarter and two thirds is reflected in the first quarter?

Right.

But once you get past the first quarter, the impacts from that hurricane on productivity and placements should be gone?

Well, only sort of the secondary impact on renewals. Those nurses obviously that we lost, that did not take assignments with us, absent -- had they taken those assignments with us, a high percentage of those nurses would have renewed for new assignments. Obviously, we are starting from a lower base. But the direct impact of the hurricane, in terms of specific assignments that were lost was in Q4 and Q1.

But in fairness, we'll stop whining about the hurricane in the second quarter. We do feel there was a clear and calculable or estimatable impact in the fourth and first quarters. But I think your point is fair that we're going to put it behind us and move forward from here.

And if the second quarter in a normal year is seasonally down from the first, but this year your first quarter is abnormally depressed because of the hurricane, then is it fair to assume that the seasonal weakness in the second quarter of placements would be less this year?

It's probably not fair metrics because so much of our activity is driven by renewals. To Emil's point, we're not going to whine about it, but it's just a reality. Those nurses are not available for us to renew. The biggest driver of placement activity is related to nurses coming off contract and if they're not on contract, you can't renew them.

Okay. All right. Thanks very much.

Okay.

Our next question comes from Jeff Silber with Harris Nesbitt.

Thanks. Just a quick follow-up. What tax rate guidance are you giving in your first quarter guidance?

Roughly 38.5%.

And we should use that for the rest of the year as well?

I think that will be a good number.

All right. Great. Thanks.

Our next question comes from Billy DiArman with Atlas Capital.

Sorry, guys. One follow-up. You keep saying on the nurses that were lost and not available for recruitment anymore, where did those nurses go? Did they just go back to hospitals or did you lose them to competitors and what are your thoughts on that?

We would assume those nurses that were really available to travel went to other companies. We think if they really wanted to travel and went back to a hospital, we could get them a couple of weeks later. It's the ones that were ready to commit that week following the hurricane when we were not on the phone with them that we've lost forever.

So those are two like another competitor like a --?

100% went to another competitor.

Okay. Thank you very much.

You're very welcome, Billy.

At this time, there are no additional questions.

So we thank everyone for participating in our call. We appreciate your interest in Cross Country Healthcare, and we look forward to updating you in three months. Take care.

Thank you for joining today's conference. That does conclude the call at this time. You may disconnect.