Cross Country Healthcare Inc (CCRN) 2008 Q3 法說會逐字稿

Welcome to the Cross Country Health third quarter 2008 earnings call. At this time all participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. (Operator Instructions).

Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the meeting over to Mr. Howard Goldman, Director of Investor and 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 third quarter 2008 results for which we distributed our earnings press release earlier today. If you do not have a copy, it is available on our Website at www.CrossCountryHealthcare.com. Replay information for this call is also provided in the press release.

Before we begin, I would 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, believes, estimates and similar expressions are forward-looking statements.

These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results and performance to be materially different from any future results or performance expressed or implied by these forward-looking statements. These factors were set forth under the forward-looking statements section of our press release for the third quarter of 2008 as well as under the caption Risk Factors in our 10-K for the year ended December 31st, 2007, and our SEC filings made during 2008.

Although we believe that the 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 interest in Cross Country Healthcare. As reported in our press release issued earlier today, our revenue for the third quarter of 2008 was $178 million, down 4% from a year ago. Our third quarter net income was $6 million, down 12% from the prior year and our earnings per diluted share of $0.20 were $0.02 lower than the prior year period. Cash flow for the third quarter was strong at $14 million.

The environment in which we operate deteriorated significantly during the third quarter. Year-over-year demand for our travel nurses as represented by open orders placed by our hospital customers went from being up more than 20% at the beginning of the quarter to being down more than 30% by the end of the third quarter. And demand is currently at the lowest levels since late 2003.

Just as concerning, the conversion rate of the qualified applicants that we provide to our hospital clients that may turn into book contracts also weakened. Clients have been increasingly reluctant to commit to a contract nurse. Most often, citing low patient [census] and budget reductions for their hesitation.

Our other businesses saw similar reluctance on the part of clients to commit. In our Clinical Trial Services business we saw projects scheduled to start in the third and fourth quarters pushed into 2009; and even in our retained physician search business -- which is having an excellent year through the third quarter -- we see less willingness on the part of clients to engage in new searches which reduces the expectations we had internally for the fourth quarter for that business.

We believe that the current market dynamics are largely symptoms of the severe credit market issues that have worsened during the third quarter. Having said that, on September 9th, we successfully closed our $200 million refinancing on the favorable terms as scheduled which allowed us to complete the [MDA] acquisition as planned.

Our Nurse and Allied segment which represented approximately two-thirds of total Company revenue pro forma, the MDA acquisition continued to show strong focus on margins, which helped offset a 13% year-over-year drop in staffing volume that we experienced in this segment. Clearly increasing the number of nurses that we have on contract is a key objective for this business.

To that end, in late August we rolled out a major revision to our compensation and benefit package for our nurse and allied professionals that we believe in significantly enhances our competitive position in the marketplace. While the immediate reaction in the market to this program was less than anticipated in the first few weeks of implementation, because of the program's complexity, we did see improved response in subsequent weeks.

We are getting more nurses into our applicant submission pipeline, but, unfortunately, this is occurring at a time when our hospital customers appear less inclined to commit to contract nurses.

Into physician staffing, given the timing of adding this business to our mix late in the quarter, we generated $10.8 million of revenue and $900,000 of contribution income. We are pleased that MDA continues to show year-over-year growth. We believe that this business will sustain growth because of greater demand for our physicians as they are revenue generators for hospitals and physician practice groups.

In Clinical Trials, services which represented 14% of total revenue in the quarter, results were somewhat disappointing. Similar to the situation in nurse and allied staffing, in our nurse and allied staffing business, pharmaceutical and biotech customers have become less willing to use temporary staffing and outsourcing services to meet their clinical trial objectives.

We believe this is driven by an effort to reduce expenses at all levels to conserve cash in the current economic environment. This includes research efforts which effectively delays the start of some clinical projects. However we remain optimistic about this business and we believe there are sufficient numbers of clinical trials being planned that represent opportunities for our business, both domestically and internationally.

Needless to say, the events of the past few months have been breathtaking with [story] franchises in the financial arena going out of business or being acquired for very low values. While our near-term expectations are disappointing to me -- and I'm sure to our shareholders -- we remain on very sound financial footing with a prudent level of leverage and cash flow well in excess of what is required to operate our business on a day-to-day basis.

Given the general state of the economy, I anticipate further weakening of labor markets in the near-term, which will likely result in nurses increasing their willingness to work directly for hospital employers, thus potentially further reducing demand for our temporary nurse staffing solution. But a different way it could get worse before it gets better.

Nonetheless during this period of uncertainty, our operations team will be focused on continuing to provide a high level of service to our healthcare facility customers and the healthcare professionals that look to us for assignment opportunities. Meanwhile, our management team will be focused on fundamentals such as cost control and continuing to the labor our balance sheet using our strong cash flow.

I'd like to add that over our history, we have managed through several industry downturns, and we have always generated positive quarterly earnings, moreover consistent with our strategy that we have communicated over the past several quarters. With the [MBA] acquisition we successfully diversified into a sector of our industry that has shown consistent growth over the past decade.

With that I would now like to turn the call over to Emil who will update you on more detail on our third quarter financial performance. Emil?

Thank you, Joe, and good morning, everyone. First I'll go over the results for the third quarter and then review our revenue and earnings guidance for the fourth quarter that we provided in the press release issued this morning.

Revenue in the third quarter came in at $178 million. down 4% versus the prior year reflecting the challenging operating environment that Joe referred to earlier. On a sequential basis the revenue increased 4% due to the acquisition of MDA which closed on September 9th. MDA contributed $11 million of the quarter's revenue.

Our gross profit margin was 26.6% which was essentially flat on a sequential basis, but up 190 basis points over the prior year. The year-over-year margin improvement was due primarily to the continued improvement in the bill pay spread in our travel and our staffing business and secondarily to a higher mix of revenue from our Clinical Trial Services and other human capital management businesses, which have higher gross profit margins than our nurse and allied staffing business.

SG&A expenses in the third quarter were up 6% over prior year, primarily due to the acquisition of MDA. On an organic basis, SG&A expenses were essentially flat as compared to the prior year and down 2% sequentially.

Net interest expense was $788,000, down 2% versus the prior year, but up 48% sequentially. The sequential increase that reflects the additional debt taken down to fund the MDA acquisition. Subsequent to the close of the third quarter, in October, we entered into two swap transactions that fixed the interest rate on $70 million of our term debt for the next two years at 3.04% plus the applicable LIBOR spread which currently stands at 2.5%.

We expect to see a decrease in the applicable LIBOR spread beginning during the first quarter of next year as we delever our balance sheet using our operating cash flow.

Net income in the third quarter was $6.2 million, down 12% over the prior year and 3% sequentially. The effective tax rate was 41.5% in the third quarter as compared to 38.8% last year and 39.9% in the second quarter. The increase in the effective tax rate reflects the estimated impact of the new compensation and benefits package for our Nurse and Allied Health professionals that Joe referred to earlier.

Earnings per diluted share came in at the midpoint of the guidance range at $0.20.

Turning to the balance sheet, we ended the quarter with $144 million of debt and $13 million of unrestricted cash. Net of unrestricted cash, our debt to total capital ratio was 24%. And the current ratio was 2.3 to 1 at the end of the third quarter.

DSOs at the end of the third quarter were 54 days, down seven days as compared to a year ago and down three days sequentially.

We generated $13.8 million of cash from operating activities during the third quarter, as compared to $8.6 million a year ago. Capital expenditures of the third quarter totaled $1.1 million.

With the acquisition of MDA, beginning this quarter we start breaking out our results into [four] reporting segments. Our Nurse and Allied Staffing segment accounted for 73% of the quarter's revenue and consists of our travel and per diem nurse and Travel Allied Staffing businesses.

Our Clinical Trial Services segment accounted for 14% of third quarter revenue. Other human capital management services accounted for 7% of revenue and is comprised of our education and training and (inaudible) businesses.

Physicians staffing our new reporting segment accounted for 6% of the third quarter revenue. Had the MDA acquisition occurred at the beginning of the quarter, Physician Staffing would have been our second largest segment accounting for 20% of pro forma consolidated revenue.

Revenue for the Nurse and Allied Staffing segment was $129 million, down 12% versus the prior year and 3% sequentially. We averaged 4,335 field [FDEs] in the third quarter, down 13% versus the prior year and 5% sequentially.

We believe the larger than expected decline of staffing volume reflects the impact of a weakening national labor market under demand for our services, as well as the impact of the liquidity crisis on our hospital customers' ability to fund their operations.

When the labor markets are soft, hospitals are able to fill a large larger portion of their nurse needs with permanent hires at prevailing wage rates and thus have reduced needs for contract labor. Bill rates as measured by revenue per hour in our Travel and our Staffing business increased by 2.4% year-over-year.

Contribution income as defined in our press release was $14.3 million in the first quarter, essentially flat with last year, but up 3% sequentially. Segment contribution margin was 11%, up 130 basis points from the prior year and 60 basis points sequentially. The margin improvement, which offset the topline weakness, was due primarily to the continued widening of the bill pay spread and, secondarily, to lower insurance costs.

Let me turn now to our newest segment, Physicians Staffing. The MDA acquisition closed on September 9th and, thus, the results for the third quarter reflect 22 days of activity in September. Physicians Staffing revenues were $11 million, and contribution income was $900,000 representing an 8.6% contribution margin.

Pro forma for the current quarter, Physician Staffing days [filled] increased 4% from the prior year to [28,190] and revenue per day field field increased 8% to [1,584]. MDA is growing at high single digit rates and remains on track for a record year. We expect that the MDA acquisition will be modestly accretive in 2008, despite higher interest rates than we initially anticipated.

Revenue in our Clinical Trial Services segment was $25.4 million, down 3% from the prior year, but up 2% sequentially. Contribution income was $3.8 million, down 26% from prior year and 15% sequentially. As Joe indicated, short-term momentum in this segment has slowed due to delays in the start-up of certain clinical trials.

Another short-term headwind to this business has been the decision by a major customer to begin using offshore staffing for his drug safety work as a cost-saving measure. The customer has informed us that he does not intend to renew a drug safety contract, but it expires in the first quarter of 2009.

Our relationship with this customer remains good. And we are continuing work on other contracts with this client that are not affected by this offshoring decision.

Nevertheless, we remain optimistic about the long-term prospects for this business, given the expectations for new compounds beginning to enter the clinical trial pipeline.

Revenue for the Other Human Capital Management Services segment was $13 million, down 2% from prior years. Our contribution income was $1.6 million, down 3% from prior year. Although placement activity remains strong, contribution margin and our [retained] physician search business were negatively impacted by a slowdown in new search activity.

This brings me to our guidance for the fourth quarter of 2008. The following statements are based on current management expectations. Such 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, and impairment charges or any significant legal proceedings or any significant repurchases of our [common] stock.

Travel bookings were down 17% year-over-year in the third quarter, reflecting the weak demand in our Travel Nurse and Allied Staffing business. Based on this, we project the average Nurse and Allied field [FD] accounts to be in the 4,125 to 4,175 range in the fourth quarter.

Revenue for the fourth quarter is expected to be in the $195 million to $199 million range. We expect our gross profit margin to be approximately 27% in the fourth quarter and our EBITDA margin to be approximately 7%. Interest expense is projected to be in the $2.3 million to $2.4 million range.

Based on these assumptions, EPS per diluted share is expected to be in the $0.15 to $0.17 range. For the full year we expect 2008 revenue to be in the $723 million to $727 million range; and earnings per diluted share could be in the range of $0.74 to $0.76.

These estimates exclude a potential non-cash impairment charge related to a specific $3.1 million customer relationship intangible asset, if we are unable to replace the previously discussed drug safety monitoring contract that will be ending in the first quarter of 2009. The after-tax EPS impact of this charge could be up to $0.06 per diluted share.

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

(Operator Instructions). Jim Janesky.

A couple of questions. When you looked at the fourth quarter, can you give us an idea by segment the direction of weakness? I would imagine that Nurse Travel would be probably the weakest, but let us know what the clinical trials and the other segments you think what will happen just based upon the first month or so of activity?

I think you are right. Probably the weakest, relatively weaker segment is our Nurse Staffing segment. But as I indicated in the prepared remarks we do have some short-term issues also in the clinical trial segment due to the delays of certain trials. Probably our strongest relative segment should be Physicians Staffing which is having a very good year and it continues to show good year-over-year growth in the high single digits.

So in the order of magnitudes I would rank Nurse Staffing as the weaker -- weakest and Clinical Trials in the middle and Physicians Staffing as the strongest relative segment.

The smaller of the Human Capital Management segments are essentially flat.

8.6% contribution margin for the Physicians Staffing this quarter, where should that be on a normalized basis?

I think the margin that we had in the 22 days of the quarter is fairly representative of the overall gross profit margins of the business.

Okay. (multiple speakers)

A little over our contribution margins of this business.

Okay. Thanks. So will again will it go back to just the nursing volumes being down? Why the EBITDA margins going down about 100 basis points year-over-year?

That's correct. It's really the impact of the negative operating leverage that you have when the revenues decline. I mean we are -- our SG&A does have some variability, but ultimately the negative operating leverage is the primary reason for the decrease.

But consistent with Emil's description earlier, the Clinical Trial Services business is operating with modestly lower gross profit margins in the fourth quarter year-over-year.

Okay. Then, last question is seasonality going from the fourth to the first quarter. And it seems as if that tends to surprise some folks sometimes even though it shouldn't because of the payroll costs.

How does the addition of the Physician Staffing segment affect the seasonality of revenues and earnings in the first quarter?

Jim, we are not really prepared to provide guidance for the first quarter, but your point is well taken. The first quarter does have the impact of the reset of payroll taxes. It also has two less days sequentially [than] the fourth quarter.

I believe that the addition of MDA would moderate some of that seasonal impact because they have less of an impact on these factors.

Okay -- (multiple speakers).

Certainly (inaudible) payroll tax factor.

Right. Okay, that's helpful. Thank you.

Frank Atkins. SunTrust.

Good morning. I wanted to ask about geographic areas of strength and weakness. Last quarter, you talked a little bit about Texas and if we could get an update of what is going on in Florida?

Frank, based on -- in my prepared comments, you can see that within the quarter we saw pretty significant weakening. So areas that were strong, generally, even if they are stronger year-over-year, they are not as strong as they were. Texas is actually down year-over-year.

If you're really looking for any area that has strength continuing relative year-over-year, you would focus on the Northwest, the upper Midwest where there's a number of implementations of new electronic medical record technology being put in place. And hospitals are bringing in contract nurses in order to backfill as they train their full-time staff.

But across the board, it's clearly a less favorable environment. We always point to the two significant drivers of our business, are the labor market and hospital admissions. We think both have become weaker, but I think we've also added a third elements. And what I can't do is parse how important the third element is and that's the inability or the increased difficulty of our hospital customers and financing operations cost-effectively with short-term funding.

We think that's getting better and we think that will help. I think some of what we are hearing from our hospitals regarding patient census may also be driven by, again, this liquidity issue. And it's much easier to explain issues that the patients are showing up and saying, we are willing to work, operate our business with less patients per nurse.

I think there's to some degree a little bit of both is happening just because that's the way it has to be for them in this environment. We think it is getting better. It feels like it is getting better, but it really clearly from late September into October was a significant noticeable deterioration in the communication we had with our clients and their willingness to take on contract labor.

That's very helpful. Could you talk a little bit about I guess CapEx going into 4Q and your expectations for 2009?

Our CapEx for the third quarter was $1.1 million and represented roughly [6/10] of 1% of revenues which is actually below our normal target of about 1% of revenue. For the fourth quarter I say that number being in the $1.1 million to $1.5 million range and for the year as a whole will be significantly below our 1% target.

But for next year for modeling purposes, I think 1% of revenue is a good number. Clearly if our operating environment remains weak it is an area where we have some discretion. And in an effort to conserve cash we may delay certain projects.

So it could -- depending on the conditions it could be below 1% next year as well.

I'll ask one more and then jump back in the queue.

In terms of the education and training portion of other [agency] and you noted some strength there, can you talk about how that area is doing and if hospitals and customers are looking to trim some of those budgets going forward, do you think?

It wouldn't surprise us. As we speak, the business is holding its own in the topline. We've had certainly some margin pressure from increased postage rates last year and again this year.

But for the most part, the business is holding its own, but as you kind of parse it by the different disciplines that we provide that continued education [for] we are seeing some variants. We are seeing a little less strength in the behavioral health area. That has always been our -- a really strong area for us. We are seeing where a lot of the professionals pay for the education themselves.

I think a lot of our professionals get reimbursed by their employer, but in the area of behavioral health I think there's more self pay. And we are seeing some pressure.

But, overall, this business is holding up and recent booking rates or booking of registrations for seminars to be held in the future give us confidence that it will continue to hold its own going forward.

Great. Thank you very much.

Jeff Silber from BMO Capital Markets.

You mentioned the new compensation and benefits package. I was wondering if you would be willing to give us a little bit more color on that. And also if there was any impact on that new package on the [Bill Pay] spread last quarter and what you think the impact might be going forward? Thanks.

Actually we could spend a lot of time talking about that. So we will try to give you the abridged version. We have added an element as we discussed cryptically on our last call. We were just about to roll out in August, late August -- and we did -- a revision to our compensation that really added a per diem allowance for nurses and travel status.

This is from a competitive standpoint an important benefit to many nurses. As I described in my prepared comments, initially we were selling it to our own nurses that were renewing and it's a more complex sale.

We took a sale that was what say it was -- it might have been a 15 to 30 minute sale and it became an hour to an hour and a half sale as you walk the nurse through the various elements of what was happening. The good news is, as we got further away from the launch date and as nurses that weren't working for us began to become aware of the program, our advertising kicked in.

We did see a significant increase in the number of nurses contacting us. In October -- I think we've described for most of the past year our applicant activity has been negative. While it was less negative year-over-year in the third quarter, it was still modestly down, but it strengthened within the quarter significantly.

And in October, we were up 20% year-over-year in applicant activity. If it weren't for some of the other issues we have been describing, this would be a great outcome for us. Exactly what we were looking for.

Unfortunately even though we are putting more nurses into our submission pipeline to hospitals in response to the positions they've given us, they appear to be less willing to commit even for those positions. Clearly, their psychology had changed.

Now, hopefully, as we get into late November and December, we see this begin to move in a more positive direction as the liquidity issues become less severe. So I guess I would declare it a victory, but it is kind of a Pyrrhic victory, because the demand environment is really what is driving the business right now, not the supply internment.

Emil, I don't know if you want to go into more detail. I don't --.

I think that accurately describes the dynamic of what we've seen during the quarter. But I think long-term what is important is that we will date on a much more solid footing when the business -- when demand ultimately strengthens. We believe we will have a much better package to offer and our supply should improve accordingly.

So in terms of the accounting of this new package, can you just explain how it's booked in terms of revenues and costs?

It really doesn't have -- the package is above the gross profit line. So the elements of the package are bill direct cost.

It does have an adverse impact on our tax rate which is reflected in our -- the tax expense rate that we booked this quarter as well as last quarter to some extent and our estimate for the tax rate for the fourth quarter, which is around 41 to 42%. But the elements of the package -- both the salary and the per diem -- are above the gross profit line.

Great. That's helpful. Joe, you had alluded to the -- in clinical trials, to the potential loss of a contract of one of your clients. Is there any way to quantify that for us so we can see what the impact is on our models going forward?

It's $200,000 per month or less than $1 million per quarter.

In terms of the profitability of that project, relative to other projects within clinical trials?

It was, I would say, stronger than average. But they're actually just slightly above the average for that segment. And so whatever we have as contribution income you can just kind of roll that off.

And, look, we do expect to replace some of the business. And we had the same customer ended a project in the third quarter last year, a very similar drug safety project that we had for them for a specific compound.

This customer, as we look at the very large cap pharma, as we look at our relationship with the customer over the last seven or eight years that we've been in this business, we've seen high peaks and low valleys. And we're hopeful that in the future we will have important projects that we can reengage with them.

And, again, they're doing what they can to reduce their cost in this environment. There are a lot of issues that face pharmaceutical companies politically and with the drug pipeline. But we are hopeful that in no way is the underlying relationship damaged. It's just that a value has been placed on it at the time we made the acquisition in 2006.

And as a result, this specific customer relationship that was valued, we may have to reevaluate. And we are going to engage an outside party to do that. The same one that initially valued it, we will get them to reevaluate for us.

Okay, good. Just a couple of quick numbers questions. What was stock-based compensation in the quarter and what should we be looking for in the fourth quarter?

The stock-based compensation was approximately $400,000 in Q3 and a comparable number in Q4 as well.

Great. Then in terms of the share count underlying your guidance for the fourth quarter?

It is a diluted share count of about 30.8 million shares.

All right. Then one more. Just in terms of trying to model in the MDA transaction, what kind of amortization should we be looking for in a go-forward basis?

The amortization expense for the fourth quarter should be in the neighborhood of about $1.2 million.

That's helpful. Thanks again for everything.

A. J. Rice with Soleil Securities.

First maybe just to continue on with the MDA. You are saying $0.02 accretive for the period of time in which you owned it for the whole year. Can you give us some flavor for what it did in the Q3, and sort of what you are thinking in Q4 from the contribution for that?

Actually, I think in the prepared remarks I said it was modestly accretive. It was insignificant for Q3 given that we've only had the business for 22 days during the third quarter.

The impact in Q4 is roughly $0.01 accretive. A little less than we initially anticipated primarily because of higher interest expenses that we modeled back when we first looked at this business. But it was roughly $0.01 accretive in Q4.

Over a course of -- kind of on an annualized basis, we expect about $0.08 of accretion from this acquisition.

Okay. So it wasn't really a drag in Q3? That's what I guess I was trying to get at.

(multiple speakers) it was neutral.

Maybe I'm reading your press release wrong on this as well, but I want to make sure. On your debt, your leverage covenant, you are above [two] right now so your credit agreement wouldn't allow you to buy stock. How much of a priority is it to get down to a level where you can buy stock or given the environment we faced is above the sales [ware]?

We -- you are reading the press release correctly. Under our credit agreement, we need to be below 2 to 1 before we can reinstitute our stock repurchases. We are at [2.1], 5 to 1 so we are not very far away and given our strong cash flow we should get below 2 to 1 some time in the first half of 2009.

But in the meantime we will focus on delivering our balance sheet. We always look at the optimal use of our excess cash for building shareholder value. And we continue to believe that strategic acquisitions at a reasonable price such as the MDA acquisition represent the best way to use our excess cash to build shareholder value. Historically, acquisitions have played a significant role in complementing our organic growth.

But absent acquisitions, we like to repurchase shares because it enhances shareholder value, particularly given the current share price and the relatively low interest rate environment. And the lower the share price, the more aggressive we are likely to pursue the share repurchases.

We think the stock is a very good value even relative to market multiples for private companies. And these prices are significantly accretive to our earnings. Looking at the near-term due to the limitations imposed by our credit agreement and absent any acquisitions, we expect to use our excess cash flow to aggressively the lever our balance sheet.

I know the nature of the business is such that you have good visibility on the near-term quarter. I guess when you get to the -- especially the winter months, there's typically a lot of buying -- purchasing or ordering, I guess the right way to describe it for snowbirds arriving in Florida for seasonal needs, I guess to say that may give you a little bit of visibility beyond just the fourth quarter into the early part of next year. Can you give us any flavor for what you see in there and whether the cautionary comments, how -- is that really just related to the quarter ahead or does it extend out to the early part of next year based on what you are seeing right now?

First of all when we look at our historical pattern to this business where we saw strong growth in volume from September through December. And then there would a break at the holidays and the nurses would restart early in January. We are really not seeing strong volumes in either Florida or Arizona, probably the two most important seasonal markets.

I think there's a number of factors that contribute to this. Certainly high gasoline prices did. I think gasoline prices are coming down. I think the liquidity issues did. I think that those issues are resolving themselves.

Having said that, when we talk to our clients in Florida, they are not optimistic. Now to some degree that actually sets us up for a much more favorable environment as they overshoot the weakness in admissions in the seasonal month of November through April? And we have one client on the West Coast of Florida that is expecting admissions to be down 20% year-over-year.

In my 16 years in this business I've never heard of such a thing. But clearly they are being very cautious as they look forward as far as admissions.

Now some of it is related to the economy and decline in elective surgeries. I think there's a lot of factors I think they go into this, but it's hard for me to imagine that kind of environment. So I'm hopeful that we will see an uptick. But right now as we look at where we are and nurses working in Florida, physicians given to us by clients in Florida, it is not a very favorable picture and the same is true for Arizona.

I guess quite a while back, probably [smartly], you guys went one quarter ahead guidance and obviously we have to think about what the '09 outlook might be. If you're sure that a $0.15, $0.17 run rates you are going to pick up on a quarterly basis. You are going to pick up an $0.08 annualized benefit next year from the MDS. At least $0.07 I guess if you take out the one in the fourth quarter.

But can you talk us through some others? Any other swing factors that we should consider in thinking about that move the needle big either way? I mean other things that would take even at the current run rate of contract activity which we hope improves, that you can do cost sides that materially improve the earnings power? Or is there some other dynamic that we should take into account as we think about what the '09 run -- sort of baseline forecast might be?

I'll take a first cut it is and Emil can jump in as he sees some opportunity.

I think if you look at the upside scenario, there's two things. One, the new benefit package really appears to be working. We've been really lamenting a lack of willingness of nurses to apply with us. Even in this very difficult environment we are seeing a significant upsurge in nurses looking for jobs.

Part of my fear on that one, on that particular metric, is that possibly other companies aren't getting nurses jobs and they are more open to increasing their -- the number of companies they are more open to increasing the number of companies they are contacting to find one that can get them a job in this environment.

So I'm a little cautious on that metric, but having said that it's a terrific metric. And if the demand does come back, if again if they've -- if seasonal customers have overshot in their pessimism, we could see a real uptick in demand. Because we have nurses willing and ready to work for us today. So that's a potentially exciting development as we speak, but I just -- I certainly don't want to count on it or hang my hat on it.

The other element is that the clinical trials business has really been disappointing from our expectation coming into the second half. We really had a lot of activity in a pipeline of projects that we were looking at. And that pipeline really dried up rapidly that the clients that we were working with and had pushed a lot of projects into the first half.

We think it is for a lot of the same reasons we discussed in our prepared remarks. It's just there's -- cash is a focus for many companies in this environment today and our biotech customers, a lot of reports in the media, they are just having trouble accessing financing markets. Either IPO or venture capital, whatever it may be.

So there's real pressure on this segment that didn't exist six months ago or certainly didn't exist to the same degree. That if that were to become less significant, the first half could be significantly better than the second half of 2008. I think those are upsides.

Also getting back to the nursing business, we had really -- we had seen the business kind of stabilize in late August, early September from a working traveler perspective. And then it appeared we took a leg down particularly in the last several weeks. It just seemed like there was kind of a -- everything had worked its way through the system of our clients and they just said, "ho, hold on now."

Even though things are getting better the way our dash that's the way bureaucracy within our customers words is it takes a while to get to our customer and even if things are improving as we speak, it may take a while for them to realize that we can loosen up a little bit. And we need to get nurses at the bedside. We need to have a greater sense of urgency in achieving that.

So again that was a point of optimism that is going to be slipped away from us, but it was a very good sign at that point -- that the changes we made to our compensation and benefit program really were having an impact. And you need to stabilize the business before you can begin growing again or moving the needle in a positive direction. So certainly those are possible outcomes. I just would not want to set your expectations.

I believe that the labor market is going to get weaker. And if they get weaker it could have a negative impact on our business. I think that is probably the more likely prospect in the next two quarters.

Emil I don't know if you want to add (multiple speakers).

I think you hit all the high points. I will also add that a potential area of upside for us is the physician staffing business. A keep differentiating -- key differentiator here of course is that physicians are revenue generators.

So even in a relatively weak economy, hospitals and large medical groups have strong incentives to bring these temporary physicians on board. And we have not seen any sign of a slowdown in that business. In fact it's performing at record levels.

Right. Okay. Thanks a lot.

Michel Morin from Merrill Lynch.

Good morning. Just to follow up on your last commentary, Emil, on the physicians' side of the business. Some competitors have reported some weakness which I think has been related to exposure to the imaging side. Could you remind us if you have any exposure to that particular end market?

The Radiology segment is one of the top four specialties for MDA, as well. That part of the business is weaker, but it is more than offset by very good strength in other segments such as emergency medicines, primary care, including hospital lists. And [anesthesiologist] is also improving.

Thank you. Specific to travel nursing, would you mind sharing with us what the volume percentage growth rate or shrinkage was this year? Because I think you gave us the overall segment line and in the past you've given us some color specific to travel nursing.

Let me look that up. The -- it's roughly, I don't have one line that summarizes it exactly, but it's on a year-over-year basis in the third quarter, the nursing volume was down about 15%.

15? One five?

Yes.

Following up on an earlier question on the comp package. So did I hear you correctly that there's -- the higher tax rate is something that, really, on a permanent basis going forward we should assume a higher tax rate as a net impact. But possibly a little bit of a higher maybe gross margin number? Did I read that correctly?

If so, where are you in your rollout of the new comp package? And are we at the steady state already are should we assume further [preep] as we think about 2009?

I think you are hitting the two key impacts. I think we do have a somewhat higher -- somewhat lower payroll tax expense which improves our gross profit margin and somewhat higher income tax expense.

We have rolled this program out, beginning with new assignments that started at a certain date in August. And so, we are kind of halfway through it at this point.

By the end of the year, most lower average assignment is about 13 weeks. So by the end of the year, the large majority of our assignments in our Nurse and Allied Staffing business will be under the new program. But it won't yet be in steady-state. The steady-state will be reached probably in Q1.

Great. Then just a final quick one, with respect to the possible charge in the fourth quarter, it sounds from what you said that this is a legacy client of yours, i.e., then you didn't get this client relationship in -- just in the last year and a half of -- one of the acquisitions?

We've served this client for the entire period. It was a significant component or a significant part of the revenue of the MRA, metropolitan research business that we bought in 2006. And the independent appraiser find a specific value.

I'm not entirely sure what their process was and, clearly, the revenue associated with this contract which initially increased, but then has tailed off in the last 18 months, would encourage us to reevaluate that specific client valuation. I'm not sure what the outcome is going to be. We are hopeful to get another project with them that mitigates a downside.

But as you look at that acquisition the great news was even though this was a very significant client, we have diversified the revenue stream from -- for MRA with other clients. So it's not a goodwill associated with the acquisition. It's a goodwill associated with the specific client relationship, unfortunately.

Yes, specifically, it's a client relationship intangible asset as (multiple speakers) goodwill.

Understood. Then your -- in the clinical trials business. How big is your largest customer as a percentage of revenues in that segment?

I would say on the order of 20 to 25%, but within that customer it's a number of projects. It is not any single project; it's a significant component.

Thanks very much.

Gary Taylor with Citigroup.

Good morning. Couple of questions. First of all, just on the gross margin guidance for the 4Q that's slightly better sequentially. Is that just seasonality or MDA mix of business? Is there anything significant in that? Or is it also the rollout of this compensation program or -- ?

I think it's a little bit of everything.

All of those things? Okay.

I think you have a couple of moving pieces, but by the end of the day we expect those profit margins to be relatively consistent on a sequential basis. The new compensation plan is a positive. The MDA's average gross profit margins are slightly below our corporate average.

So when you actually put a loan into the hopper you end up with a pretty flat scenario.

I think probably the biggest issue, Gary, is the mix. As the mix shifts away from the Nurse and Allied business, which is our lowest gross margin business, it does tend to have a positive effect.

Can you talk about how your bill rates are holding up? I thought earlier in the year or in the second half of '07, you had seen some nice increases and had talked about maybe being a little selective and turning some business away in order to hold up the bill rates. As the demand environment has weakened, should we expect bill rates to be weakening as well?

If we stay in this kind of environment, I would expect that bill rates will weaken. We have operated and been able to show roughly 3 to 4%, closer to 4% quarter in quarter out over the last 18 to 24 months. The most recent quarter we were looking at 2.5%.

So that's slightly below that. It's saying I'm kind of trending the wrong way. Like I said the environment is really not conducive to significant increases across the board.

Having said that, I'm still hearing that we are getting some material increases, important increases and important accounts. But my overall, my expectation is that the year-over-year increase in bill rates will start to moderate vis a vis what it has been for the last two years.

I think, Emil, you had said the full amortization on MD&A would be $1.2 million in the 4Q --.

I just want to clarify that. That's our total amortization expense. (multiple speakers)

How much does D&A pick up then sequentially, roughly?

The sequential increase in D&A is -- it went from about $2.5 million to roughly $3 million. About $500,000.

Thank you. My last question, can you I guess briefly but in a little more detail just explain exactly what the per diem payment is on just an average travel nurse, her comp package did look like this, he or she in it and it out looks like this? Is it just a -- it's a mill per diem that you're putting in there?

I'm not sure how specific we want to be for competitive reasons. It's a meals and incidental per diem and it's enough to result order of magnitude and 10% -- call it 10 to 15% more after-tax income for the nurse. While we do take a tax hit on that, it's still good value to the nurse and we think the dynamics within our applicant activity validate our assumptions. It's just like I said a Pyrrhic victory, given that the demand environment has really gone the wrong way.

I guess what I'm missing, why does it -- is it because more of it can get passed through to the client, or is it just because the tax treatment for them is different? How do they get the pickup?

How does the nurse get the pickup?

Yes.

Simply because a portion of their compensation is stated as an expense allowance for those nurses that are in travel status. Meaning that they are traveling away from their permanent residence.

Thank you.

(Operator Instructions) David Bachman with Longbow Research.

Good morning and thanks for all the details so far and your always very candid comments on both your business and the industry in general. It is very helpful.

Going back to MDA, you mentioned some of the top specialties. Can you provide us with a little bit more color on the mix of those specialties, I guess, either in days filled or revenue for MDA?

Order of magnitude, the largest single specialty that MDA has is anesthesiology. It is roughly 20 -- a little over 20% of their total mix in terms of days filled.

Emergency medicine is the second-largest, about 15%, and I would then rank the next two being primary care a little over 10% and radiology a little under 10%.

Great. That's very helpful. Most of my questions have been answered, but I just wanted to go back. You guys have been doing this a long time and, Joe, you've been in the business. You mentioned the demand weakness was as weak as you had seen since 2003.

Can you talk a little bit about what's similar this time around to then and perhaps what's different? And how you might be looking at this and either the same or differently than five years or so ago?

That's a fair question. Probably the biggest difference between the environment today versus the environment that led up to 2003 which to me was the nadir of the last downturn that occurred the beginning, let's say, in the second half of '02. Where the weakening labor market started to impact the booking activity; and then, in the first quarter of '03 we saw a shocking, shockingly low admissions number at our hospital clients which really they were not expecting; and changed the tone and tenor of the relationship they had with us.

The biggest difference today -- probably two different bigger, biggest differences, one is admissions have not been strong. If there were two shoes that dropped after the middle of 2002, there was only one shoe to drop. Admissions have been a headwind to this business since 2001 and the early part of 2002. That's A.

And B, we are a much more diversified company. Nurses are our costs and we really, we get that hospitals when they look to reduce costs, they look at where their costs are and 25% of operating costs and 50% are labor or for registered nurses. So they start to look for creative ways to provide patient care with less registered nurses.

But usually doesn't end well. I mean the nurses are the most important ingredient to a good outcome in acute care environment, but again it's almost they can't help themselves because it's such a significant cost and they don't get reimbursed for it. It's an element of their reimbursement, but they are not reimbursed specifically for nursing care. Whereas for example the physician position business, they don't admit patients unless they have physicians admitting patients.

So they tend to be a very different psychology in the demand for physicians than there is for nurses. It's really one of the reasons we have been so earnest in our desire to get into the physician staffing business really the last five years. We just were -- finally found the right company at the right price in MDA.

We really -- the more I interact with the management of MDA, the more impressed I am. They really -- they have been doing this a very long time. They understand how to provide a very quality outcome for their client. And this business, this sector as well as the specific MDA business has grown consistently over the last 10 years whereas nursing clearly has had its ups and downs.

So I guess -- hopefully, that answers your question. We are a more diverse company and there isn't as much bad news that can rain down on us. A new element that is bad is the liquidity crisis.

I believe we are most of the way through the liquidity crisis, but our experience over the last several months is it can get significantly worse very quickly with an event. But right now it just feels better. We were able to hedge our debt. I would describe it as very attractive rates. We hear bank lending is becoming looser.

So we are optimistic that whatever new element that has introduced it will be mitigated and hopefully moderated and go away over the next month or so. And we can just deal with the historical issues that we have, this management team has dealt with. And I have been doing this 16 years, but Emil has been doing it even longer.

We've seen tough markets and we've been able to manage the business through tough markets and generate positive results. Clearly when the tide goes out in this business, all the boats float a little lower. Wing you look at the companies, we are focused on our biggest, most important markets, our most important market historically where we have the biggest market share is Florida. And Florida is without question the weakest market in this environment.

So that tends to herd us more than some of our competitors, but we think the same factors are going to affect everyone.

An example is in California, a large customer has told their vendors they are going to reduce the number of nurses they have on contract. We have very few nurses there. That's kind of a good news, bad news story. In California we don't tend to have as high the market share, but this is going to affect other companies more than it is going to affect us.

At the end of the day, I think it is going to look very similar to all of the companies. We don't expect that we will continue to see the kind of share reduction that we've had over the last several quarters. Assuming our competitors continue to operate in a disciplined manner as they did through the last downturn, we will be watching carefully to make sure that we don't see somewhat trying to buy market share.

We have a lot of respect for our competitors and I think they understand what the golden goose in this industry is. And having a race to the bottom on margin has never served anybody well. And we don't anticipate seeing that in this environment.

At this time, there are no further questions.

With that we would like to thank everyone for their participation on this call. And we will look forward to updating you on our fourth quarter results in February. Take care.

Thank you for participating on today's conference. The conference has ended. You may disconnect at this time.