Cross Country Healthcare Inc (CCRN) 2006 Q4 法說會逐字稿

Welcome to the Cross Country Healthcare fourth quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS] I'll turn the meeting over to Howard Goldman, Director of Investor & Corporate Relations. Sir, you may begin.

Good morning and 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 2006 results for which we distributed our earnings press release after the close of business yesterday. If you do not have a copy, it's available on our website at www.crosscountryhealthcare.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 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 in the forward looking statement section of our press release for the fourth quarter and full year 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 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.

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 2006 was $176 million, up 7% from the year-ago quarter. Our net income was up 27% to $6.2 million or $0.19 per diluted share and was at the high end of our guidance range for the fourth quarter that we provided in November. With the fundamentals in our core travel nurse staffing having improved relative to the past few years, our fourth quarter operating results reflected this ongoing progress. We continued to experience higher pricing and our total staffing volume was up 2% year over year and 6% sequentially from the third quarter, including volume from Metropolitan Research which we acquired in late August 2006. Also contributing to this improvement was a substantial organic improvement in our clinical research staffing volume. In addition, our travel staffing volume increased slightly year-over-year and 5% sequentially. We believe the modest improvement we have experienced in our travel nurse staffing business is being driven by the favorable dynamics of the nurse labor market that are being offset somewhat by hospital admission trends that continue to be sluggish. While demand has fallen seasonally during the past two months and in comparison to the prior year it is still substantially above trough levels of 2003, and when looked at in combination with an increasing supply of applicants seeking assignment with us and a continuation of favorable pricing pricing trends we remain optimistic that we'll grow in 2007 in this market.

Turning to our clinical research staffing business, which is now on a solid organic growth track entering 2007, we believe the newly-acquired Metropolitan Research business will continue showing strong growth this year as well, accelerating our growth in this attractive market. We remain enthusiastic about our prospects in this business and continue to look for opportunities to supplement our growth through acquisition. Per diem staffing showed stable to improving trends sequentially from the third quarter but was down from the prior-year period. Nevertheless, based on feedback from our field management and improved mix and pricing trends, we have increased optimism that our per-diem business has stabilized and can contribute to our overall growth sometime in 2007. Our retained search business also showed solid top and bottom-line growth year over year in the fourth quarter and we expect this business to continue performing well in 2007. Our education business experienced some top line softness in 2006, but our management of this business has done an excellent job of controlling cost to keep the profitability of this unit growing. In 2007 we expect a combination of new seminar content and modest investments in online education to restore top-line growth to this business. So looking at the company as a whole, I'm optimistic that our prospects in 2007 are very favorable, and look forward to updating you on our progress as the year unfolds. With that I'd like to now let Emil update you on our financial performance for the fourth quarter and full year 2006.

Thank you, Joe, and good morning, everyone. First I will go over the results for the fourth quarter and then review our revenue and earnings guidance that we provided in last night's press release. As Joe indicated, consolidated revenue in the fourth quarter was $176 million, up 7% versus the prior year and 8% sequentially. Approximately 60% of the year-over-year revenue increase was due to the acquisition of Metropolitan Research that we completed during the third quarter. The remaining 40% of our revenue growth came from organic increases in our core travel staffing, physician research and clinical research staffing businesses, partially offset by revenue decreases in our per diem nurse staffing and education and training businesses. The sequential revenue increase was 60% organic and 40% from Metropolitan Research. The organic sequential growth came from our travel staffing, clinical research staffing and education and training businesses and was partially offset by decreases in our per diem nurse staffing and physician search businesses.

Our gross-profit margin was 23.5% unchanged from the prior year despite a somewhat lower mix of revenue from our other human capital management businesses which has higher gross profit margins than our staffing businesses. We continued to see year-over-year improvement in the bill-pay spread in our core travel nurse staffing businesses as well as lower professional liability costs offset in part by higher housing and health insurance costs. Our gross-profit margin was up 30 basis points on a sequential basis due primarily to lower insurance expenses which were partially offset by a higher mix of revenue from our staffing businesses.

SG&A expenses in the fourth quarter represented 16.2% of revenue, up 30 basis points from the prior year but down 30 basis points sequentially. In addition, during the fourth quarter, we incurred $154,000 of expenses associated with a 4 million share secondary offering by our remaining private equity sponsor, Charterhouse. Based on public filings, they're now our fifth largest shareholder and have approximately 2.5 million shares. Net interest expense was$485,000, down approximately $150,000 from the prior year quarter but was up approximately $210,000 sequentially. The sequential increase reflects a full quarter's impact of the Metropolitan Research acquisition. The effective tax rate for 2006 was 37.9%, or 80 basis points lower than previously estimated due to a more favorable mix of income among various tax jurisdictions. This full year true-up had a disproportionate impact on the effective tax rate for the fourth quarter which worked out to be 36.9%. Going forward, for modeling purposes we would expect our tax rate to be in the 38% to 39% range.

Net income in the fourth quarter was $6.2 million or $0.19 per diluted share as compared to $4.9 million or $0.15per diluted share in the prior year which included a $0.03 per share charge associated with the refinancing of our senior debt. Our balance sheet remains strong. We ended the year with a debt to total capital ratio of 5.4% and a current ratio of 2.2 to 1. DSOs at the end of the year 60 days, down one day from the prior year but up one day from the end of the third quarter primarily due to seasonal factors. We generated $3.2 million of cash from operating activities during the fourth quarter of which $2.9 million was used for capital expenditures. During the fourth quarter we completed the $2.5 million of milestone payments pursuant to the Metropolitan Research purchase agreement for a total purchase price to date of $18.6 million. Additionally the sellers have the opportunity to achieve an earnout of up to $6.4 million based on 2006 and 2007 performance. At year end, we have $21.5 million of total debt on our balance sheet as compared to $25.4 million a year earlier.

We also repurchased 5,000 shares of our common stock during the fourth quarter at an average cost of $16.79 per share pursuant to the repurchase plan authorized by our Board of Directors in November of 2002. To date we have purchased approximately 95% of the 1.5 million shares under that authorization at an average cost of $14.84 per share. In May of 2006, our board of directors authorized a new stock repurchase program of up to additional 1.5 million shares to commence upon completion of our prior stock repurchase authorization.

For the year as a whole, our revenue was $655 million, up 2% from the prior year. Net income was $15.3 million, up 4% from the prior year. Earnings per diluted share were $0.47 in 2006 as compared to $0.45 in 2005. EPS for the current year included a charge of $0.17 per diluted share for the settlement of a class-action lawsuit in California but the prior year included a $0.10 per diluted share charge for professional liability as well as a $0.03 per diluted share charge related to the earlier extinguishment of debt. During 2006 we generated $32.9 million of cash from operating activities, a 7% increase over the prior year.

Let me drill down next to our two reporting segments. Healthcare staffing which comprises our travel and per diem nursing staff, travel allied health staffing and clinical research staffing businesses, accounting for approximately 93.5% of revenues in the fourth quarter. And the other human capital management services segment which is comprised of our education and training and retain search businesses. Revenue for the healthcare staffing segment was $164.3 million, up 8% versus the prior year and 9% sequentially. Approximately $5 million of the $13 million sequential increase was due to the acquisition of Metropolitan Research. The remaining organic revenue increase of $8 million resulted from a combination of higher staffing volumes and improved pricing. On a year-over-year basis, approximately $7 million of the $12 million increase was attributable to Metropolitan Research while the remainder was due to higher bill rates that were partially offset by a 1% decrease in staffing volume.

We averaged 5,659 field FTEs in the fourth quarter of 2006 up 2% versus the prior year and up 6% sequentially including Metropolitan Research. Staffing volume in the fourth quarter was at the high end of the guidance range that we provided in November and reflects the gradual improvement in booking trends that we experienced in the third quarter that continued into the fourth quarter. Bill rates as measured by revenue per hour in our core travel nursing staffing business increased by 5% year-over-year continuing the favorable trends in this metric. The average revenue per FTE per week was up 6% versus the prior year. Mobile contracts where the nurse is 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 $17.4 million in the fourth quarter, up 7% versus the prior year and 14% sequentially. Segment contribution margin was 10.6%, down 10 basis points from the prior year with an improvement in the bill-pay spread and lower professional liability costs offset by higher housing and health-insurance expenses. On a sequential basis, contribution margin improved by 50 basis points due to a combination of an improving bill-pay spread and lower professional liability insurance costs partially offset by higher housing expenses. Turning now to the other human capital management services segment, fourth quarter revenue was $11.4 million, up 2% from the prior year as the revenue increase in our physician and healthcare executive search business was partially offset by a revenue decline in our education business due to lower seminar attendance. Segment contribution income was $2 million, up 11% over the prior year.

This brings me to our guidance for the first quarter of 2007. 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 or other business combinations, the repurchase of our call-in stock or pending legal matters. As I mentioned earlier, booking activity in our travel staffing business improved gradually during the third quarter and continued into the fourth quarter. For the fourth quarter as a whole, bookings were up 4% over the prior year. Based on these booking trends, we project the average field FTE count in the first quarter to be in the 5,600 to 5,700 range up 3% to 5% over the prior year. We expect average staffing revenue for FTE per week to be up approximately 5% year-over-year. Revenue for the first quarter is expected to be in the $172 to $175 million range. We expect our gross profit margin in the first quarter to be in the 22.5% to 23.0% range. We typically experience a sequential decrease in gross profit margin between the fourth quarter and the first quarter due to the combined effects of the reset of payroll taxes and two fewer days in the first quarter in which we can leverage our housing expenses. We estimate the combined pretax impact of the payroll tax reset and the two fewer days to be approximately $3 million or $0.06 per diluted share. As a result, EPS for 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.

[OPERATOR INSTRUCTIONS] Our first question comes from Tobey Sommer from SunTrust Robinson Humphrey.

Thanks. I was wondering if you could comment on what the demand environment looks like. I think in the past sometimes you've given a metric of how many you know, nurse requests you have for nurse coming off of assignment. I'm not sure that's the right metric but, however, you'd like to describe it would be great.

I would say the advance demand environment, Toby, is certainly adequate. We have five to six requests for each nurse coming off contract. It varies by week how many you have coming off and how many actual positions you have. At a high-level, the number of open orders is, as I said in my prepared comments, off sequentially which is a seasonal dynamic that occurs as you get deep into the winter months. The Sun belt demand or the very seasonal demand tends to slacken as you get deeper into the season. But year-over-year basis we are off year-over-year with a lot of that for us coming in California. More than half of the decline in year-over-year has occurred in California which appears to have stabilized. There wasn't a further ratcheting down of patient ratios. So it looks like the hospital sector has really adjusted to those patient ratios in California and we've seen a pullback in the level of demand vis-a-vis a year ago which was high on a historical basis. So looking at the nation as a whole we see pockets of strength particularly for us in Florida, the northeast, Texas, even in the Carolinas are beginning to show some strong signs of life. So we're very encouraged that where demand is strong, it tends to be in areas where we historically have had relative strength.

So turning toward supply, and I think in your prepared remarks you say, and obviously the bookings suggest, more applicants. I was wondering if you could give us some color as to which demographics of your travel nurses, which sort of groups you're seeing that increased applicant activity from and if there's any inkling that the recent pickup in new-nurse graduates in recent years is actually flowing through into your supply?

I'm not sure I can answer that with a level of assurance because you really have to survey the population. We don't ask nurses what their ages are on their applications. So you have to really go out and actually survey them to get that kind of information. But based on the long history that we have in this business, several decades of operating this business, I don't have any reason to think that it's still not the younger single nurse that tends to drive improvements in applicant activity and as you point out, Tobey, there has been an uptick in new nurse graduates which are generally denoted by nurses more likely to be young and single.

Having said that, the average age of a new nurse graduate is in the 30 to 31 year age range so they're not always right out of a four year bachelor's program. It is common for nurses entering the workforce today to be their second career or late first career entering again in their early to mid-30s, even later, based on some anecdotal reports. But we're not surprised by the improvement. We've done some things unilaterally to position the company. We feel a little better among prospective new applicants and even more encouraging to us while we're seeing an increase in new applicants year-over-year, we're also seeing a higher percentage of new applicants going to work for us which we think bodes pretty well for the rest of this year.

Two following additional questions and then I'll get back in the queue. It seems like SG&A was a little bit higher than at least we were looking for. I was wondering whether you could comment on that, whether it's just kind of bonus accruals or something, above and beyond the $150,000 the second offering cost you, and then wondering if you could comment on the physician search business and what your expectations would be as we kind of head into 2007? Thanks.

Tobey, let me take the SG&A question. The -- when we look at our SG&A, it was up roughly 8% year-over-year. The increase, about 60% of that have increase is directly attributable to Metropolitan Research. So when you strip that out, basically what we had was inflationary type increases in the order of about 3% year-over-year.

Okay. On the physician search business, Tobey, for 2006 represented the third consecutive year of record revenue and earnings for that business. The fourth quarter was the weakest quarter of the year for that business. Unfortunately, it's, of all the businesses we operate in, it's the least easy to project with confidence given the nature of the business. It really depends on how many actual fills you get, how many new retained searches which are not really as visible as the contract nature of most of the other segments that we operate in. Our guidance for the first quarter reflects a similar level of activity to the fourth quarter, so, again, relatively weak compared to the first three quarters of '06. However, our full-year expectations for the business are bullish. We think we have excellent management. We think we have an excellent brand reputation and we think overall there's no reason to think that the environment isn't strong. Hopefully, they'll exceed our expectations for the first quarter but for the full year, we have no reason to think that this will not be another very good year for our physician search business.

Thank you very much.

Our next question comes from Jeff Silber with BMO Capital Markets.

Thanks so much. Typically at year end you provide an update on the number of recruiters you have. I was wondering if you can do that. How many were hired in '06 and how many do you think in '07?

Overall the recruiter count has pulled back a little bit, Jeff. With some attrition, we have approximately 160 in our nurse and allied travel staffing business. Companywide, we do anticipate reinvigorating the pipeline in '07. As Emil just described, we are seeing modest levels of volume growth, and we want to make sure we have an adequate number of trained recruiters to marry that business to us. So there's clearly a built in level of attrition, so we need to add recruiters above and beyond that level of attrition in order to grow the business. We don't expect, I wouldn't look for us to grow on a net basis you know, more than 10% in '07, but we do expect to add on the margin with you know, trained qualified recruiters speaking to nurses that are coming to us in greater numbers.

In reference, how does that compare to the account at the end of '05, the 160 or so?

Of '05, it's approximately six to seven down. I don't have the number in front of me, but it's down from '05.

That's okay, I just want a rough order of magnitude. That's okay.

Not materially down.

Yeah, exactly. Okay. In terms of the gross margins that you posted in the fourth quarter, were there any, you know, special items, some of the other companies in the space have had, you know-reversals of accruals from professional comp or professional liability. Do you have any of that in the quarter?

Nothing really out of the ordinary. Our professional liability expenses have been declining over time since we have been able to put together a much more attractive and much more cost effective program at the end of 2004. So the professional liability has been a good news story for us. But there was really nothing unusual in terms of accrual adjustments.

Great. And really how much was stock-based compensation in the quarter and what are you looking for in '07?

It is really insignificant for us. In the entire year, we issued about 28,000 option shares so it was really de minimus impact. Going forward, we are looking to comprehensively to add our equity compensation program. And we're very -- we're evaluating various long-term incentive plan designs, some that include the use of restricted stock or performance shares with the objective of identifying the most effective and efficient plan going forward. I don't expect it to be a large expense for us but it'll probably be a little bit more than the de minimus expense that we saw in 2006.

And just drilling into the first quarter, roughly what should we expect on that line item based on your guidance.

I think you should not expect anything significant in that the first quarter.

And just a couple other things just on '07, I know you're not giving official guidance for the years but just to help us model. What should we expect for capital expenditures in depreciation and amortization.

Long term, we have's always indicated that we're looking roughly at 1% of revenues for CapEx. In the most recent couple of quarters we've been a little north that have due to some significant investments that we're making in technology that will allow us to differentiate our service offerings to both our nurses and our hospital clients. I would expect the first quarter CapEx to be a little north of 1% revenues and eventually long term it'll revert back to that 1% number. In terms of depreciation and amortization expense, that roughly equals to our CapEx, order of magnitude, so you may see a small sequential increase in depreciation, but that's just a reflection of our somewhat higher CapEx spending that we had in the last year.

Okay, great. I'll jump back in the queue, thanks.

Thanks, Jeff.

Our next question comes from Matthew Ripperger with Citigroup.

Hi, thanks very much. Hi, Joe.

Hi, Matt, how are you?

Good. Just a couple of questions. Coming back to this SG&A question. If you could possibly just frame up for us how we should look at the underlying leverage to SG&A going forward as the business continues to recover and whether we should at some point expect you to start showing some meaningful margin improvement because of the inherent leverage you've got of your centralized corporate costs?

Matt, probably the best way to look at our SG&A leverage is look at what is the contribution income that we generate on that incremental dollar revenue. And the best number that I've been able to come to is something in the neighborhood of 14% or 15% of that incremental dollar. So clearly -- and that's significantly higher than our EBITDA margin currently. So clearly we have substantial for operating leverage and you can run the math but the -- we just seeing our volume starting to turn, and starting to see for the first time in a couple of years you know, year-over-year volume increases. And, you know, as that momentum starts to build, we should start to see the SG&A leverage, the operating leverage that that can result in.

And do you think you can actually start to see that improvement and achieve those synergies even with the expansion of 10% recruiters that runs through SG&A?

That -- the recruiter cost is really not -- it's a fairly low break-even for those recruiters, Matt, so that's not, you're not talking about an enormous incremental burden on overhead. And to Emil's point, as he described in his comments in the first quarter, all other things equal, we would expect EPS to be down $0.06 sequentially which is the low end of our guidance sequentially but on the high end we are getting leverage with as Emil also described the first organic improvement that I have that we've seen in some time. So we're encouraged. We would expect to see with continued improvement in organic volumes, our leverage in the business and and improvement in EBITDA margins during '07.

Okay, great. And then the second question I had is just, in your year-over-year increasing in pricing of revenue per week of 5.7%, how much was related to the Metropolitan acquisition and how much was more organic same store?

Well, I can tell you that the average bill rate for Metropolitan is higher than the segment as a whole but about beyond that I don't want to get into that for competitive reasons. But our core travel nursing business increased year-over-year 5%.

Which compares to sort of 3%, 4% in the early part of the year.

That's correct, Matt.

That's improving as the year progressed.

Okay, great. And then so you commented that you remained very optimistic about '07. I just wanted to come back to this. If you had to sort of rank the fundamental drivers to your optimisms versus in terms of buckets, pricing, volume and sort of hospital demands and volume being applicant volume, how would you sort of prioritize those?

It's an interesting question. I think for what is driving it today, there's an adequate level of demand. I would not describe hospital demand as being robust. As I said, year-over-year, it's actually down a little bit. So I really would put applicant demand at the high end. We don't expect pricing to accelerate. It may even moderate, particularly as the mix of business shifts from higher bill rate states California, given where California is today vis-a-vis where Arizona and Florida is lower housing costs and thus lower bill rate states. But on kind of a same-store basis, we would expect pricing to level off in kind of the mid-single digits in 07. And so that's also an important element of our ability to improve margins as well, at the gross-margin level and the volume will give us the opportunity to get leverage at the SG&A level.

Great. And the last question I had is, Joe, you commented before that when the trends turn and start to improve, generally it's a longer cycle, an up cycle. Are you seeing anything fundamentally in the industry to make you at all reconsider that viewpoint.

The only thing that's not -- the answer is no, the quick answer -- and I would just qualify it is the only thing that's really not working right now is kind of a restoration of a growth trend in hospital admission volumes. I think everyone is waiting for it, everyone expects it. The hospitals are building more beds in anticipation of it, but we have not seen it and we really in our thinking don't expect it in '07. That whatever top-line growth we get will be driven by the continued favorable trends in the behavior of nurses at the bedside that again, aging population and a job that's physically demanding is likely to cause nurses to work less hours on average per week, which is generally a very favorable dynamic for our business. So that's what we think is going to drive the business. Should we get an upside surprise on hospital admissions, we would expect that to have a disproportionate benefit to us.

Great, thanks very much.

Our next question comes from Joe Gagen with Atlantic Equity Research.

Yes, hi, how are you?

Great, Joe. How can I help you?

I have a couple of quick questions. One, if you could look at the competition say right now compared to say, two or three years ago, is there less competition from like smaller companies, smaller travel-nurse companies, you know, nationwide?

Uh-huh.

Right.

I'm not sure I would say it's less competition. I think if anything, recently we've seen a modest uptick in new names in the nursing journals on the internet advertising for nurses. Having said that, I would qualify it by saying from the hospital perspective, the hospitals aren't necessarily open to welcoming new vendors as suppliers to their hospitals. I think over the last several years in the softer environment, hospitals very consciously culled the number of vendors that they would qualify as approved vendors in their facility. Generally we and our largest competitor have been approved vendors. So while there may be a larger number of competitors, we really today have only one that is -- one that could influence our decisions, that you know, can change our behavior at the margin, if they were to go in and offer a lower price, we'd certain want to rethink our pricing strategy. But you know, clearly when I take a step back, I would describe our competitive position as probably more favorable than it was two or three years ago.

So -- all right. So theres as many of these smaller competitors but you think you as a large competitor are a larger piece of the pie if you add you two together, when you compare all the other smaller ones.

That's likely to be true. Joe, I got to qualify it. There's no data that I can draw on to validate that. It's just anecdotally when you look at the -- particularly the large users where most of the business is done --

Yeah.

-- they've been apparently pretty dedicated in culling the number of vendors that they utilize.

Okay. The other question is as far as your customers, the hospitals, there's some of them going private and, you know, some consolidation, and, you know, the bad debt thing keeps going on--

Uh-huh?

-- so but as far as the normal metrics that you look at to decide how well you do, how well the hospitals do doesn't seem to matter as much as it did like three or four years ago. So you're saying that the reason why things have kind of held on is because nurses are just more willing to change jobs now than in the past. Is that the key ingredient I guess?

Well, as I said, I think nurse work behavior is what's driving the business, not necessarily just changing jobs. I think they're less likely to work as many hours in a year as they would have in the previous year. And Joe, I think there's a misnomer. Clearly there's a limit to how much financial pressure we want our customers to be under.

Yeah.

But when they are under cost pressure, and profitability pressure, that's not necessarily a bad environment. I would actually describe it within limits as a more favorable environment because they tend not to do counterintuitive things like raising nurse wages 20% across-the-board as some, you know, had indicated they had done.

Oh, okay.

Years ago. You know, they're under pressure, there's a reason why they use our service. If you ask them do you want to use our service, they'll generally say no.

Yeah.

If there's any inelasticity of supply of nursing, it makes sense to use us rather than increase the wages for all the nurses you employ. You're only looking to fill 50 or 70 or a hundred positions in a hospital employing potentially one to 2000 nurses.

So would you say that the -- I guess, the strife, the challenges going on in the hospitals is creating more demand because they don't want to make a long-term commitments say, for full-time nurses.

I'd describe it a little differently. In a business model that has -- you know, is at or near break-even profitability for many hospitals in America, they can't afford to clear the market -- the marginal wage they pay that last nurse sets the wages for all the nurses they employ.

Right.

So really what we offer them as second tier of supply that doesn't affect the rest of the nurses that they're employing. The full-time nurse doesn't look at the contract travel nurse and say, well, she's just like me, because our nurse gets a very different benefit packet, they don't get vacation time, they don't get as robust or rich a health insurance package as the hospital might pay. They look at them differently as another full-time nurse that's hired. And if that other full-time nurse is getting a higher wage, every other nurse is going to very quickly find about that and demand that same higher wage. What drives our business is the inelasticity of supply of nurses that hospitals face. And the steeper that sloop of inelasticity, the sooner they're likely to look to outsource some number of positions to provide adequate nursing care to companies like ours. And, you know, when the elasticity of supply flattens out and nurses are willing to work at wages hospitals are willing and able to pay, they don't really need us as much and that's the environment we faced in 2003. But today I don't have any empirical analysis because most of the data is pretty lagged, but I would almost guarantee you that the supply of nurses is becoming more inelastic which creates a more favorable environment for us.

Okay, thank you very much.

Okay, Joe.

Your next question comes from Michel Morin from Merrill Lynch.

Hi, good morning guys.

Hi, Michel.

Starting off on MRA, I think when you acquired it you mentioned that the margins there on a contribution bases were about 14%, almost 15%. Is that still the case?

I don't know that we every provided any information. We're not prepared to discuss that level of detail on a business line.

Okay. But it's fair to say that margins in that business are above your healthcare staffing units?

That's a fair comment.

It's just because I was a bit surprised to see, you know, in terms of the year-on-year trends that if you assume MRA is higher margin business and your margins are down year-on-year and you pointed to housing and healthcare, the flip side being that your bill pay rate spread has improved. So it looks like housing is certainly creating a pretty big headwind. I'm just trying to quantify, is that getting any worse at this point?

I think housing and health insurance have been the headwinds that we faced in the second half of '06. Housing and virtually every year of my 14 years at Cross Country, has increased. We would expect it to increase in '07. I think the think the rate of increase was somewhat higher in the second half of '06. Health insurance, however, tends to be more episodic, you can have, the accrual cycle is much lower so what your experience was in the last couple of months is going to drive what you approve for health insurance going forward. And we had a particularly bad run in the second half of '06. We do expect it to moderate somewhat into '07 but not to what was probably a very favorable period that the company experienced in '05. Emil, I don't know if you you want to add to that.

I think that pretty much covered it. The only thing I would point out is when you really look at our margins, our gross-profit margin, the contribution income, it's essentially flat year-over-year so these two factors essentially offset each other, the positives of an improving spread, bill-pay spread of lower professional liability, offset by the negative headwind from the housing, increased housing and health insurance costs.

Okay. And then, Joe, I think a few conference calls ago, you had talked about the settlement probably helping you bring in some of your legal costs down over time. Is that something you've seen already, or is that something that we should be thinking about for first quarter?

We've seen some moderation in the fourth quarter, and our guidance for the first quarter is expect a similar lower level of legal expense. Having said that, we're not yet finished with the California case. We have actually a hearing tomorrow. We would expect the benefit to probably begin to be more manifest in the second and third quarters of '07. Emil, do you want to add to that.

Thanks very much.

Okay, Michel, thanks for calling in.

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

Thanks. I was wondering if you could comment your new marketing initiatives, we heard you allude to those I think last fall and then again on the call here, to the extent that you're in a position to share what those new things are and what you hope to gain from them. I'd appreciate it.

You know what? I could go on at length and I'd probably prefer not to, Tobey, for competitive reasons, what's working and what's not working would be of great interest of all my competitors, virtually all of whom are on the call today so I'd prefer to leave it at we have shifted gears a little bit in how we spend our advertising dollars, what we focus on and the good news it is having a positive impact on the number of applicants that we're receiving.

Okay. Then just shifting gears and maybe asking the question from a P&L perspective, are the actual dollars you're spending increasing substantially, or is it more a different kind of spend?

It's a little bit of both.

Okay.

We do expect to spend more on advertising in '07 than we did in '06.

And just turning, shifting gears to ask kind of a regulatory legislative question. Any movement in any states of particular note or anything regarding perhaps the proposed budget from President Bush in any cuts that could be impactful on the business? Thanks.

Yeah, again, I think there's a lot of things that are potential in our expectations for '07, we really don't think legislation out either at state or federal level is likely to drive our business. You know we are seeing probably a more intensive level of conversation regarding nurse patient ratios in states like Massachusetts, but having said that, given the cycle that it took for California to implement nurse-patient ratios even if they were to pass such legislation in '07, it wouldn't necessarily say it would be implemented in 07. So I wouldn't make my decision regarding Cross Country on the base of what may or may not happen in the legislative arena.

And one more last question. Is the recent phenomenon where some large formerly public hospital chains are going private, again, does that impact either your business from a demand standpoint, have you seen any changes in your client behavior?

I would describe it as directionally positive. I think when they get out of arena, they are going to be less focused on driving what is perceived to be politically correct behavior of utilizing less outsourced labor. They're going to do do what allows them to pay the debt as efficiently as possible. And there's a reason why hospitals use our service, because it keeps their overall costs as low as possible. So we have seen an uptick in demand from some hospitals that were formerly public. And we see no reason to change our opinion that that is likely to increase as the environment continues to improve for us.

And I guess one last question. When you look at the pricing that you're getting from your clients, is it still fairly stratified with some clients holding flat or even maybe declining while others going up at fairly substantial rates?

That has always been the case, Tobey. In the hottest of hot markets there were hospitals that held the line on pricing so in and of itself that is not kind of a, you know, dog bites man story. We are seeing stratification, and we're not in the least surprised by it. Hospital that will increase bill rates 10% to 15% one year and may not increase it at all the next year just because they digest that higher level of spending for outsourced labor. It's not an uncommon dynamic. And what I just focus you back on is in our mix and book of our business, we would expect the pricing trend to kind of continue in kind of a mid-single digit, 4% to 6% pricing range.

Thank you very much.

Okay, Tobey, thanks for calling in.

[OPERATOR INSTRUCTIONS] Mr. Goldman, at this time there are no further questions.

With that, we'd like to thank everyone for joining us this morning, and we'd look forward to updating you on our first quarter sometime in May. Thanks very much.

Thank you for your participation. And all parties may disconnect at this time.