Cross Country Healthcare Inc (CCRN) 2006 Q2 法說會逐字稿

Good morning, good afternoon, and thank you for standing by. Welcome to the Cross Country Q2 2006 Earnings Conference Call. All lines remain in a listen-only mode for the Q&A session. [OPERATOR INSTRUCTIONS] Today's conference is being recorded for instant replay purposes.

I will now turn the meeting over to your host, Mr. Howard Goldman. Sir, you may begin.

Good morning. 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 CEO, and Emil Hensel, our CFO.

On this call, we will review our Q2 and year-to-date 2006 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," "suggests," and similar expressions are forward-looking statements. These statements involved 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 Statement" section of our press release for the second quarter of 2006, as well as under the caption "Risk Factors" in our Form 10-K for the year ended December 31, 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 now I'll turn the call over to Joe.

Thank you, Howard, and thank you to everyone listening in for your continued interest in Cross Country Healthcare.

As reported in our press release issued last evening, our revenue for the second quarter of 2006 was $157 million, down 2% from a year ago. Our net income was $4.4 million, or $0.14 per diluted share, which represented a substantial improvement from the prior-year quarter, which was impacted by an unusually large charge for professional liability expense. Overall, cash flow continued to be strong in the second quarter at $9.9 million, which allowed us to further reduce our outstanding debt of $10.4 million at June 30th.

We believe the continuation of essentially flat admission patterns at acute care hospitals, which is the primary market that we serve, along with slower applicant activity in the first quarter, impacted our staffing volume and booking activity during the second quarter. Applicant activity has been trending more favorably as the year has progressed, registering a 16% sequential growth in the second quarter and year-over-year growth in June and July. However, given the lead time needed to put new applicants to work, we do not believe this improving trend is enough to enable us to achieve staffing volume growth sequentially in the third quarter. That being said, we do not anticipate -- excuse me, we do anticipate continued improvement in bill rates throughout the country.

While organic volume growth in our nurse staffing business remains elusive, we are pleased to have announced in July an attractive add-on to our clinical trials staffing business, when we disclosed a pending cash acquisition of all of the assets of privately-held Metropolitan Research Associates, which is based in New York. We believe this dynamic company will expand the range of services we can offer our clients in the pharmaceutical market and will increase the importance of clinical trial staffing to our overall performance. We expect the excellent management team at Metropolitan Research to continue leading this business after this transaction closes.

As Emil will describe shortly, we expect this acquisition to be modestly accretive to our 2006 earnings and more so in 2007. Even without the benefit of any top-line synergies, which we believe are likely.

Turning to our other non-nurse staffing businesses, our retained search business continued to see growth in the second quarter and is on track for another record year in 2006. Our allied health staffing business was also up in revenue and contribution income from a year ago, while our education business was somewhat weaker in the second quarter compared to the prior-year quarter, due primarily to a reduction in seminar attendance.

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

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

As Joe indicated, consolidated revenue in the second quarter was $157 million, down approximately 2%, both on a year-over-year and a sequential basis. Our per diem nurse staffing, clinical trial staffing, and education and training businesses registered year-over-year revenue decreases that were partially offset by revenue growth in our travel staffing and physician search businesses. The sequential decrease reflects the softness in nurse staffing volumes.

Gross profit margin was 23.1%, down 30 basis points sequentially, but up 350 basis points from the prior-year quarter. The year-over-year margin improvement is due primarily to the $5.3 million pre-tax professional liability charge that we took in the prior-year quarter. Excluding this charge, gross profit margin improved 20 basis points on a year-over-year basis, partly due to a slightly higher mix of other human capital management businesses, which operate at higher gross profit margins than our healthcare staffing businesses.

Also contributing to the year-over-year gross profit margin improvement was a widening of the bill-pay spread in our core travel nurse staffing business, offset by higher health insurance and housing costs. The sequential decline in gross profit margin is due to a combination of a slightly lower mix of other human capital management businesses, as well as higher health insurance and housing costs, both of which I will provide additional details in a few moments, that were partially offset by lower payroll tax expenses and a widening in our bill-pay spread.

SG&A expenses in the second quarter represent 17.1% of revenues, up 50 basis points on the year-over-year basis, primarily due to increased compensation and advertising expenses in our physician and healthcare executive search business. On a sequential basis, SG&A expenses, as a percent of revenue, was down 50 basis points, due primarily to lower compensation and payroll tax expenses.

Net interest expense was $320,000, down 66% from the prior-year quarter, and down 17% sequentially, reflecting the further delevering of our balance sheet made possible by our strong operating cash flow.

Net income was $4.4 million, up 255% from the prior year. EPS per diluted share was $0.14, as compared to $0.04 per diluted share in the second quarter of 2005, which included a $0.10 impact from the aforementioned professional liability charge.

Our balance sheet remains strong. We ended the quarter with a debt-to-total-capital ratio of 3% and a current ratio of 2.4 to 1. DSOs at the end of the second quarter were 56 days, down 5 days from year-end and down 2 days from the end of the first quarter. We generated $9.9 million of cash from operating activities during the second quarter, of which $2.3 million was used for CapEx. The total debt outstanding at the end of the quarter was $10.4 million, a $15 million reduction from the end of 2005.

We also repurchased approximately 46,000 shares of our common stock during the quarter at an average cost of $17.34 per share, pursuant to the repurchase plan authorized by our board of directors in November of 2002. To date, we have purchased approximately 1,350,000 shares out of 1.5 million shares authorized in November of 2002 at an average cost of $14.75 per share.

In May of 2006, our board of directors authorized a new stock repurchase program of up to an additional 1.5 million shares to commence upon the completion of the prior stock repurchase authorization.

On July 13th, we announced the signing of a definitive agreement to acquire the assets of privately-held Metropolitan Research Associates and Metropolitan Research Staffing Associates for $18.6 million in cash, but a potential earn-out of $6.4 million, based on 2006 and 2007 performance. We intend to finance this acquisition, which we expect to close during the third quarter, using our revolving credit facility. We expect the acquisition to be accretive to our 2006 earnings by approximately $0.01 per diluted share.

Let me drill down next on our 2 operating segments - healthcare staffing, which comprises our travel and per diem nurse staffing; travel allied health staffing and clinical trial staffing businesses, accounting for 92% of revenue in the second 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 $144.9 million, down 2% both on a year-over-year and a sequential basis. We averaged 5,240 field FCEs in the second quarter, down 6% versus the prior year and down 3% sequentially. The majority of the year-over-year decline in field FCEs was attributable to our per diem nurse staffing and clinical trial staffing operations. The sequential volume decline is due primarily to weak bookings during the quarter, particularly in April and May. Given that the average lag time from booking to the start of an assignment is approximately 1 month, weak bookings in April and May impacted the FCE counts in May and June.

Bill rates, as measured by revenue per hour in our core travel nurse staffing business increased by 5% year-over-year, continuing the favorable trend in this metric. Including all of our staffing businesses, the average revenue for FCE per week was up 4% versus prior year. Mobile contracts for the nurses on the hospital's payroll accounted for approximately 1% of our segment volume, both in the current quarter and in the prior-year quarter.

Healthcare staffing contribution income, as defined in our press release, was $13.4 million in the second quarter, up 50% compared to prior year. Segment contribution margins were 9.3%, up 320 basis points versus prior year, but down 10 basis points sequentially. The year-over-year increase is due primarily to the $5.3 million pre-tax professional liability charge that we took in the prior-year quarter, and secondarily, to a widening of the bill-pay spread in our core travel nursing business, partially offset by higher health insurance and housing expenses.

While we did anticipate an increase in our health insurance costs for 2006 that were in line with national averages, the actual $1.3 million year-over-year increase in field health insurance cost was substantially higher than we anticipated. The majority of this increase was driven by 3 claims, which are approaching their individual stop-loss limits under our plan.

On the housing side, our average housing expense in the second quarter increased more than 9% year-over-year, reflecting a shift in mix to it's higher cost market, such as New York, as well as the much publicized condominium conversion trend, which has reduced supply in the apartment rental market and driven rents higher.

Turning now to the other human capital management services segment, second quarter revenue was $11.8 million, essentially flat with prior year, as revenue increases in our physician and healthcare executive search business was offset by revenue declines in our education business, driven by lower seminar attendance. Segment contribution income was $2.3 million, up 10% from the prior year, reflecting strong placement activity in our physician and executive search business.

This brings me to our guidance for the third 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, other than the pending acquisition of Metropolitan Research, the repurchase of our common stock, or pending legal matter.

Booking activity in the second quarter, particularly in the early part, was relatively weak, although it improved gradually during the quarter. For the quarter, as a whole, bookings were down approximately 9% from the prior year. Based on these booking trends, we project the average field FCE count in the third quarter to be in the 5,200 to 5,300 range. This excludes any volume derived from the pending acquisition of Metropolitan Research. We expect average staffing revenue for FCE per week to be up approximately 4% versus the prior year on an organic basis.

The following guidance is subject to the completion and timing of the pending acquisition of Metropolitan Research. Revenue for the third quarter is expected to be in the $160.5 to $163 million range. We expect our gross profit margin to be in the 23 to 23.5% range in the third quarter, with continued improvement in the bill-pay spread, partially offset by higher housing expenses.

As a result of the Metropolitan Research acquisition, we expect SG&A expenses to be up 3 to 4% on a sequential basis. EPS per diluted share is expected to be in the $0.13 to $0.15 range.

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

Thank you. [OPERATOR INSTRUCTIONS] Jim Janesky, Ryan Beck

A couple of questions. I don't know if you would agree with me, but it is a little bit of an odd environment where pricing is strong and volumes remain weak. What do you think is happening that is allowing this to occur? I mean, why aren't hospitals, if the demand for travel nurses is not very strong, why are they giving you better pricing?

That, clearly, is the disconnect in 2006, Jim. Hospitals will not give us the kinds of increases we're getting, and as we've said, we're getting kind of mid-single digit increases. July continued that trend. Actually it was on the high end of that range when we looked at the kind of weighted average increases that we were able to achieve in that month. So hospitals don't give you those kinds of increases if they are getting their needs met by us or anyone else in the industry, any other vendors that they are utilizing, or they are looking forward, anticipating their needs, and want to make sure that their hospital is competitive, both regionally and nationally, for travel nurses. That's the really good news and that's what I would describe as the tailwind of this business. That's what's driving it forward.

The headwind of the business is what I think has been a continued pattern of hospitals overestimating, even if it's marginally overestimating, their admissions in the recent quarters, it's going to have a disproportionate impact on their sense of urgency related to the applicants that we, or anyone else in the industry, do send them. So it's not a bad environment, it's just a -- I would describe it as a modestly disappointing environment because when we get price usually very good things happen in this industry, and it, clearly, hasn't happened so far in 2006. But we continue to get price, so as long as we're getting price, we have optimism. And at some point we would expect, given the aging of the population, for more patients to start showing up at the doors of hospitals, because certainly we're not alone in that expectation because hospitals continue to build more beds for the first time in a couple of decades. It just hasn't happened yet, Jim.

And as long as they're missing on their admissions, there is going to be a lack of urgency. And when there is a lack of urgency, we send them an application, just give you a sense of the dynamics, they may sit on that applicant. So there is a nurse that is that applicant and she has a sense of gee, I'm not getting any kind of feedback. We submit her to another hospital very quickly. So we're working hard. It's not a very productive exercise, but we're working hard to get that nurse a job. But as long as that's her perception that gee, hospitals are really committed to bringing on travel nurses, she's not going to be referring other nurses to us, she's not going to be referring other nurses to join the travel nursing industry. So we really need that dynamic to be more favorable, to see a little bit more of a sense of urgency on the part of hospitals, who I think create the inflection point that is close but clearly hasn't happened yet.

The second question is to the extent that you are seeing I think what Emil referred to as a gradual improvement going in, not early in the third quarter but maybe a little bit later in the third quarter, what do you attribute that gradual improvement to? I mean, what do you think -- is it -- are there certain parts of the country or are there certain specialties that are -- or do you see it across the board?

When we talk to our hospital clients, our sense is that when you look at the second quarter, April was the weakest month within the quarter, and that was certainly consistent with our own experience. April bookings were not strong. They continued to trend negatively but less negatively into May. And as Emil described, our lead time from a booking to a nurse starting is 4 to 6 weeks. So as we get into May and June and into July, the trends in our business, applicant activity, bookings trends, particularly recently, have been more favorable. Unfortunately, a couple of weeks don't make a trend, positively or negatively, but we have -- we're feeling more comfortable today than we were certainly back in April. So it does appear to be improving and that would lead us to believe that there is potentially more upside than downside going into the third and fourth quarters, but given our experience in the second quarter, we don't want to be overly optimistic.

Tobey Sommer, SunTrust Robinson Humphrey

A couple of quick questions. Looking at the clinical trials, kind of surprised to see that one not a little bit stronger. Can you give a little bit of color on what's going on in that side of the business?

As I think we've described, Mike, in some prior quarters, that business tends to be somewhat more exposed to the success of individual trials that they work on. There is a higher customer concentration in that business. And we had 1 trial in the fourth quarter of '05 that ended, as expected. Unfortunately, we had another trial that ended, or was suspended prematurely, certainly vis-à-vis our own expectations. We expected that trial to last for several more quarters. So we had kind of an abrupt downturn in the fourth quarter.

When we look at the business, the booking activity, there are much longer lead times in the booking activity in the clinical trials business than the nursing business. The backlog that that business has been building is very favorable. As we go into the second half, we do expect sequential improvement in the clinical trials business. We remain very committed to the business. We like it a lot. We like the management that we have. And we think it is going to be an important division and source of revenue and operating profit as we go forward.

And this acquisition that we're making is very synergistic. It is much stronger in the drug safety area than our core platform has been. I think they have a different customer mix than our core business does. So we think there is a lot of upside to cross-sell the services of Metropolitan Research and add more fire power of the much larger existing platform in the clinical trials area that we have.

So we go into the second half with a fair amount of optimism for the clinical trials business. We've, again, been conservative in our revenue expectations, but as we look at the potential for upside and downside events, there is a lot more upside in clinical trials in the second half than there is a downside.

If I could just dive down a little bit more on the per diem side of the business. Could you just kind of discuss any kind of trends in the market? I know admissions are weak and it doesn't seem like -- volumes are probably going down a little bit. Can you just discuss what you're seeing currently in the market and maybe what kind of pricing trends you're seeing in per diem, as it seems like kind of the travel side of the business has seen some nice price increases.

Yeah. Our experience in nurse staffing, again we've been a travel staffing provider for many years and a per diem staffing provider for a shorter period, only for the last 3, is that travel tend to come out of a downturn more quickly and stronger than a per diem business will. Per diem companies tend to be more competitive locally with hospitals that they serve for the nurses that they place.

A part-time nurse may be applied with both a per diem company and a hospital pool of temporary workers. The hospitals tend to have language in their contract which precludes a per diem company of placing a nurse that's worked directly for that hospital in the last 6 to 12 months. So it's a lot more adversarial and competitive with the customer, which causes that business, again, to typically have a more difficult time getting traction coming out of a downturn.

The per diem business tends to outperform travel at the peak of the market because they're recruiting into the deepest part of the nursing pool, whereas travel companies tend to have very specific demographics that they look for. Typically younger, single nurses or older empty nesters tend to be the most important demographic cadres that we place.

So when we look at our per diem business, it's profitable and I would say it's more profitable than most of the larger players in the business. We've focused on markets where we can gain or able to achieve significant share and relatively high revenue per branch, which has allowed us to maintain profitability, even in this downturn. We see very little pricing power. Only recently has the management of that business talked about any kind of pricing improvement potential going forward, whereas travel, as we've been discussing the last several quarters, has been improving pricing for the last -- more than 12 months.

So we don't expect these trends to change materially. We do expect it to get gradual traction, but on a slower -- on a lag basis to the travel business, Mike.

Great. And one last question. Could you just kind of talk about what you're seeing from a supply standpoint in the market, particularly on the travel side? Are you finding that kind of -- at least applicant activities are kind of going up, but is kind of the availability of nurses coming up as well?

Well, when you look at the raw statistics of new entrants to the workforce, it's very encouraging and over a long period nothing correlates more closely to our applicant activity than the number of new entrants to the nursing workforce. And over the last 5 years that's been a progressively improving trend. So we're encouraged by that and the implications that it has for our ability to bring on new applicants.

In the first 9 months, 10 months, of '05, we had very strong trends in applicant activity year-over-year and that abruptly changed in October. It was right after the hurricane. I think some of that may have been our issues related to the power being out down here in South Florida, our employees being unable to get to work. So we had a -- I would have expected a disruption in our ability to attract nurses. What I didn't expect was that disruption to last really through the first quarter, where we were down double digits year-over-year in new applicant activity.

As we described in our prepared comments, sequentially, that activity improved and in June and July we're again up year-over-year. Now, some of that, we've taken some specific actions, changed our advertising theme and focus and some other actions, which I'd rather not describe for competitive reasons, but we are constantly looking at our package to make sure that the resources that we make available to the nurse have the greatest perceived value. We're not looking to increase the value of the package dramatically, certainly consistent with our pricing we will improve our package, but there may be things within the package that we can do to make our offering more attractive to nurses. We think we've done some of those things and we believe that is bearing fruit in the stronger trends that we've seen in the last month or so.

Matt Ripperger, Citigroup

This is [Armon Guorgan] sitting in for Matt. I have two questions. First, was the softness in volumes confined to a particular region or was it spread across the country? And second, if you were to strip out the per diem and clinical trial businesses, what year-over-year volume trends would you see in the core travel business?

Armon, I'll take the first question and I'll let Emil answer the second.

As always, our business fluctuates regionally. Unfortunately for us in the first half, we did see weakness in 2 markets that are particularly important to us. We're down in double digits in both Florida, which is our second largest market and probably a market that we dominated relative to other companies in the industry, and in Pennsylvania, which has been on a kind of a long secular decline since 2003. Again, those tend to be relative areas of strength for us, but unfortunately just the tide has gone out on those markets.

Conversely, there are other markets that are very strong. The northeast, which again is an area where we tend to have strength, has been strong, really down through the Mid-Atlantic States. It's only when you get to the southeastern states, the Carolinas down through Florida that we see relative weakness year-over-year in our trends in both physicians posted and working nurses.

The west coast tends to be flat to modestly down. Arizona, California, Washington State, and then Texas, a state historically that was very important to us but has been very weak for several years, has been strengthening on a trend line basis for the last 12 to 16 months, and we're encouraged by that. So really it's been kind of a mixed bag.

Emil, do you want to take the --

Yeah, Armon, the year-over-year volume comparisons for our travel businesses was down a little under 4%, between 3 to 4% down.

[OPERATOR INSTRUCTIONS] At this time, sir, I show no further questions.

Okay. Well, we want to thank everyone for participating in this call and we will look forward to updating you on our third quarter results. Thanks very much.

Thank you. That concludes today's teleconference. Have a great rest of the day and you may disconnect.