Cross Country Healthcare Inc (CCRN) 2009 Q1 法說會逐字稿

Good morning and welcome to the Cross Country Healthcare first quarter 2009 earnings conference call. All participants will be able to listen only until the question and answer session. (OPERATOR INSTRUCTIONS) Today's conference will be recorded. If anyone has 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 our 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 first quarter 2009 results for which we distributed our earnings press release after the close of business yesterday. If you do not have a copy, it is available on our website at www.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 expect, anticipate, believe, estimate, 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 statement section of our press release for the first quarter of 2009, as well as under the caption Risk Factors in our 10-K for the year ended December 31, 2008.

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

And now I'll turn the call over to Joe.

Thank you, Howard, and thank you to everyone listening in for your interest in Cross County Healthcare. As reported in our press release issued last evening, our revenue for the first quarter of 2009 was $175 million, down 2% from a year ago. Excluding the contribution of the MDA acquisition, the decrease in revenue would have been 25%. Net income for the first quarter was $3 million, 48% below the year-ago quarter. Earnings per diluted share were $0.10 for the quarter as compared to $0.19 in the prior year quarter. Cash flow for the first quarter was a record $26 million.

All four of our business segments faced headwinds in the first quarter with the most significant being those faced by our nurse and allied staffing segments where trends remained very negative. Open orders for travel nurses appear to have stabilized in March and April, but at levels that will likely lead to continued declines in FTE staffing volume over at least the next two quarters if we do not see a pickup in demand from current levels.

Fortunately, as you can see from our segment results, nurse and allied staffing is the most scaleable of our business segments and thus has had the best relative success in sustaining contribution margin. We believe the deterioration in the environment for our nurse and allied staffing segment has several causes including the dramatic deterioration in the economy and the national labor market since the third quarter of 2008 which is encouraging full and part-time nurses to work more hours directly for hospitals, thus greatly reducing the hospital industry's reliance on the kind of outsource labor we provide.

Hospital admission trends continue to be weak, especially for elective surgeries. And not-for-profit hospital systems continue to face borrowing costs well above those seen last summer, and most not-for-profit hospitals have seen material declines in the value of their endowment funds.

As I stated on our last conference call in early March, it is difficult to see a catalyst that has the potential to reverse these negative dynamics for our nurse and allied staffing business in the near term. We believe we have taken market share in the first quarter largely because of the success of our vendor management program, but this is somewhat of a period victory given the steep decline in the overall demand for travel nursing services.

Despite the brutal environment for nurse and allied staffing services, we are very pleased with our ability to control costs and sustain margin. While revenue for this segment declined 25% from the year-ago quarter, contribution income generated by nurse and allied staffing fell at a less rapid 22% rate.

The performance of our recently acquired physician staffing business slowed from the strong performance of the fourth quarter but was relatively strong compared to the nurse and allied staffing segment. The slowdown was particularly noticeable in the anesthesiology and surgery areas reflecting the decline in hospital surgery activity discussed previously. Mitigating this was weakness was continued strong performance in the ER and primary care specialties.

In our clinical trial services business, work generated by small biotech companies has clearly been impacted unfavorably by the chaotic financial market environment. At the same time, large GAAP pharmaceutical companies have stepped up M&A activity which historically has resulted in a slowing of R&D spending in clinical trial activity by these companies. Despite the challenges we face in our current operating environment, I am encouraged by our management's ability to rapidly scale costs in the steep and unprecedented deterioration in demand that we've seen in the last six months. As a result our operating margins and strong cash flow position us to emerge from this terrible environment with a strong balance sheet and an ability to benefit disproportionately from what we believe is an inevitable market rebound and a likely industry consolidation that lies ahead.

In addition, while the recession has put a damper on our overall operating outlook at this time, we continue to believe in the long-term prospects for our business and do not believe this current environment is permanent because of an aging and growing US population combined with an even more rapidly aging workforce of healthcare professionals in this country, increasing reports of a more challenging employment market for healthcare jobs along with pressure on wage rates that are likely to discourage potential entrants in the future, and the current president's expansive healthcare agenda which includes $87 billion in increased Medicaid funding for states, over $24 billion in COBRA subsidies, and $19 billion in funding for electronic patient records.

And with that I would like to now turn the call over to Emil who will update you in more detail on our first-quarter financial performance.

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

Revenue in the first quarter came in near the high end of the guidance range we provided in March at $175.4 million, down 2% versus the prior year and 15% sequentially. On an organic basis revenue declined 25% year-over-year. In varying degrees each of our businesses faced the challenging environment during the quarter with the impact of the recession being most severe on our travel nursing business and least severe on our physician staffing business.

Our gross profit margin was 25.7%, up 50 basis points year-over-year but down 70 basis points sequentially. The year-over-year margin improvement was due primarily to the continued improvement in the bill pay spread as well as lower housing and insurance expenses partially offset by the impact of the acquisition of MDA. The sequential decline reflects seasonal factors.

SG&A expenses in the first quarter were up 8% over the prior year but down 11% sequentially. The year-over-year increase in SG&A is due entirely to the acquisition of MDA. On an organic basis SG&A declined 12% from the prior year as a result of steps we have taken to reduce overhead expenses in the current business environment as well as lower bonus accrual expenses. We continue to pursue cost-reduction efforts in order to bring our overhead expenses in line with the reduced demand for our services.

Net interest expense was $1.7 million as compared to approximately $640,000 a year ago and $2.3 million in the fourth quarter. The year-over-year increase reflects the additional debt taken down to fund the MDA acquisition partially offset by lower interest rates. The sequential decrease is due to debt repayment made possible by the very strong cash flow generated during the quarter as well as lower interest rates.

Depreciation and amortization expenses were up 35% from the prior year reflecting the acquisition of MDA. The income tax rate was 45.1% as compared to 38% in the prior year quarter due to the impact of certain non-deductible compensation expenses in our nurse and allied staffing business. Net income in the first quarter was $3 million or $0.10 per diluted share as compared to $5.9 million or $0.19 per diluted share a year ago. The EPS we reported was at the upper end of the guidance range we provided in March.

Turning to the balance sheet, we ended the first quarter with $117 million of debt and $19 million of unrestricted cash. Our leverage ratio as defined in our credit agreement was 1.99 to 1 at the end of the quarter, well under the 2.75 ratio currently required under our credit agreement. Net of unrestricted cash, our debt to total capital ratio was 27.7%, and the current ratio was 2.9 to 1 at the end of the quarter. DSOs were 54 days, down four days as compared to a year ago but up one day sequentially.

We generated $25.6 million of cash from operating activities which represents a new one for the record and includes a $19 million reduction in operating working capital. Capital expenditures totaled $1 million in the first quarter. The excess cash was used to repay a net of $15.6 million of debt during the quarter. Subsequent to the end of the first quarter we used cash on hand to pay approximately $7.5 million in earn-out payments related to the MDA and AKOS acquisitions, and made an $8 million optional prepayment on our term debt as a result of our continued strong cash flow.

Let me drill down next into our four reporting segments. Revenue for the nurse and allied staffing segment was $105 million, down 25% versus the prior year and 15% sequentially. We averaged 3,647 field FTEs in the first quarter, down 24% versus the prior year and 12% sequentially. The decline in staffing volume reflects a weakening national labor market on the demand for our services, as well as the impact of the liquidity crisis on our hospital customers.

The average revenue per FTE per week that we reported for the first quarter declined 1.3% from the prior year due to a combination of one less day in the first quarter of 2009 and a half-hour decrease in the average hours worked per week. However, on a positive note, the average hourly bill rate in our travel nurse staffing business increased by 1.3% year-over-year.

Contribution income as defined in our press release was $10 million in the first quarter, down 22% from the prior year and 21% sequentially. Segment contribution margin was 9.5%, up 40 basis points from the prior year but down 80 basis points sequentially. The year-over-year increase in margin is due to continued improvement in the bill pay spread as well as lower housing and insurance expenses partially offset by negative operating leverage. The sequential decrease in margin was due to the seasonal impact of the reset of payroll taxes and two less billing days to cover housing costs.

Let me turn next to our newest segment, physician staffing. Revenue was $38.3 million. On a sequential basis, physician staffing reported revenue declined 16%. However, as previously disclosed in our 10-K, during the fourth quarter of 2008 we mutually agreed with the seller and the third party, ESOP trustee, to adjust the closing date of the MDA acquisition for accounting purposes from September 9 to September 1st in order to facility and expedite the working capital adjustment measurement process.

As a result, an extra eight days of revenue were recognized during the fourth quarter which would have been accounted for in the third quarter had the transaction closed September 1st. Thus, after adjusting for this timing difference, physician staffing revenue would have declined only 8% sequentially from the fourth quarter to the first quarter partially to two less days in the first quarter. Contribution income for the first quarter was $3.2 million, representing an 8.5% contribution margin which is consistent with MDA's consolidated pro forma contribution margin for the full year of 2008. On a pro forma basis, physician staffing base filled decreased 5% from the prior year while revenue per day filled increased 4%.

The recession and the stock market decline appears to have delayed the retirement plans of many older physicians as well as reduced the number of elective surgeries, resulting in a decrease in demand for temporary physicians in a number of specialty areas. MDA staffs a broad range of physician specialties, and within the largest specialty groups MDA registered volume declines in anesthesiology, surgery, psychiatry and radiology. That was partially offset by continued volume growth in emergency medicine, primary care, and OBGYN.

Revenue in our clinical trial services segment was $21 million, down 16% from the prior year and 12% sequentially. Contribution income was $2.2 million, down 42% from the prior year and 35% sequentially. Short-term demand in the segment has weakened due to delays in the start-up of certain clinical trials and the scaling back of R&D projects partly as a result of recent merger activity within the pharmaceutical and biotechnology sectors. A stronger US dollar also resulted in a reduction of approximately $160,000 in contribution income from our UK based operation.

Revenue for the other human capital management services segment was $11.1 million, down 19% from the prior year and 12% sequentially. Contribution income was $929,000, down 61% from the prior year and 31% sequentially. Contribution margins were negatively impacted by a slowdown in new search activity in our retained physician search business and by lower average seminar attendance in our education business.

This brings me to our guidance for the second quarter of 2009. 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 or other business combinations, any impairment charges, any material legal proceedings, or any significant repurchases of our common stock.

Travel bookings in our nurse and allied staffing segments were down 43% year-over-year in the first quarter, reflecting the weaker demand for these services. Based on this we project the average nurse and allied field FTE count to be in the 2,800 to 2,850 range in the second quarter. Revenue for the second quarter is expected to be in the $153 million to $156 million range. We expect our gross profit margin to be in the 26.5% to 27% range in the second quarter, and our EBITDA margin to range from 5% to 5.5%. Interest expense is projected to be in the $1.5 million to $1.6 million range in the second quarter, and our effective tax rate is expected to be in the 46% to 47% range. Based on these assumptions, EPS per diluted share is expected to be in the $0.04 to $0.06 range.

This concludes our formal comments. At this time we will open up the lines to answer any questions that you may have. Tamara?

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from Paul Condra with BMO. You may ask your question.

Hi, thanks. I guess my first question is what was your stock comp expense in the quarter?

Approximately $300,000.

Okay, great. Thanks. And I also wondered your bad debt provision looks like it was reduced. Do you expect that to continue going forward?

Well, let me explain how we determine the bad debt expense. Fundamentally, despite a difficult economic environment, our collections have remained very strong. We determine our bad debt reserves through a combination of an analytical approach based on historical collection experience in various aging buckets and the specific identification of doubtful accounts.

The relative percentage in the oldest aging buckets have declined in Q1 which allowed us to reverse about $200,000 of previously recorded reserves as these oldest aging buckets have the largest reserve percentages in our analytical approach. And a good collection experience also reflects our DSOs which have declined four days from the prior year. Now, whether this pattern will repeat again itself in the second quarter is -- I'm not counting on it. We have had historically when you look back at our quarterly results a number of quarters where we had negative bad debt expense, but it's not something we necessarily model going forward.

Okay, great. Thanks. Also just on the clinical segment, I think you mentioned something about the currency impact on revenues and I wondered if you could tell us what that is.

Well, we have an operation in the UK, and as you know the British pound depreciated vis-a-vis the dollar significantly on a year-over-year basis which impacts our operating profit in dollar terms. The impact was about $160,000.

Okay.

If you wanted to look at it in British pounds, the functional currency of the UK operation, and translate it at the exchange rate that was in effect a year ago, our contribution income would have been $160,000 higher.

Okay, great. Thanks. I'll get back in the line.

Thank you. Our next question comes from A.J. Rice with Soleil Securities. You may ask your question.

Hello everybody. Just a couple questions if I can ask. I noticed in the press release the comment about the payout of the earnouts for MDA and AKOS. I guess I was curious in this environment I wouldn't have thought people would be hitting earnouts. Can you just give us some color on that and whether there are any other earnouts over the remainder of this year or even early next year that you're likely to be subject to?

Yeah, A.J. As it turns out, when you look at all the businesses that we operate, those two are relatively the strongest. As Emil just described, our UK operation within the clinical trial services is showing the strongest year-over-year growth. Unfortunately, the exchange rate has really gone against us so the earnout wasn't contingent upon the exchange rate. It was contingent upon their performance which actually was very positive as it related to the model that we had in place at the time of the acquisition several years ago. MDA as you know had a very good 2008, and this earnout was relative to their 2008 performance. There is no upcoming earnout until the potentially second quarter of 2010, yes, related to MDA.

Okay.

And there is also no additional earnouts in any other businesses including AKOS. We are done with the earnouts for AKOS.

And A.J., not to get too forward-looking, we anticipate that earnout being in a range of let's say $5 million to $10 million depending on the performance of the business.

Okay. That's in Q2 of 2010. And then just given those parameters that you went through, Emil, on the Q2 numbers, I just want to make sure, it looks like to me -- I don't know how much CapEx you're thinking you'll be in the second quarter. Probably similar to the first I'm assuming. You'll still be modestly cash flow positive $3 million to $5 million it looks like to me. Does that seem right free cash flow?

I think that's an extremely conservative estimate for what we think our cash flow will be in the second quarter. CapEx in the first quarter was $1 million. We think a comparable number in the second quarter is a reasonable estimate, but we expect significantly higher free excess cash flow from operations than the numbers that you described, probably --

Just as in the first quarter, A.J., it's largely through the free-up of working capital, the pay down of the receivables that are owed to us without commensurate new receivables taking their place. It's the beauty of this business model. We don't have inventory so as volume falls our cash flow really becomes accelerated.

And just to kind of put the numbers into perspective, we have -- already we paid $8 million of additional debt in the second quarter. We made the $7.5 million of earnout payments and we anticipate yet another debt prepayment before the quarter ends.

Okay. All right. When do you -- what was your number for EBITDA in the second quarter?

I'm sorry, I didn't --

The number for EBITDA in the second quarter. I don't think you provided that.

We don't actually -- we provided an EBITDA margin so we can back into it. The EBITDA margin we provided was 5% to 5.5% on revenues of $153 million to $156 million.

Right.

So I guess if you do the math that kind of puts you in a range of about $7.7 million to $8.6 million.

Right, right. So the -- yeah, I guess the working capital would be the -- I mean, if you just did your EBITDA and you took interest off of the taxes and CapEx you'd be down in the range I'm talking about. The working capital makes a difference I guess. But what -- that goes on for a while I guess until you rebate the business.

That's correct.

Right. Any --?

As long as volumes are falling, our cash flow should likely fall in a range of $10 million to $20 million per quarter.

$10 million to $20 million per quarter?

And if you're trying to -- A.J., the way we try to model this is we look at basically two large components of cash flow that allow us to report higher cash flow than our net income would imply. One is the non-deductible amortization which adds about $0.30 per share to our free cash flow. And then as we free up revenues, historically every dollar of revenue ties up anywhere between $0.12 to $0.14 of operating working capital.

Okay. All right. And then just last question, sort of big picture. Obviously we're in a tough environment for the core business here, and you've seen the ups and downs before. Can you sort of give us, Joe, maybe any sort of feeling for where we're at today versus maybe other downturns you've seen in sort of this incremental guidance for the middle of the year and how to take that into account with what -- put that in context if possible?

Sure. We've been through in my 16-year tenure here, this will be the third kind of really soft environment related to recessionary overall economic conditions. The rate of decline in this particular recession was probably the most violent that we've seen. Historically it's been a more gradual decline, so that is kind of a new element to this so it may not be apples to apples to compare our historical experience to what we're going through currently.

Having said that, if you look at where the demand is, the demand is near a two-decade low for our business. When you look at the number of nurses we had working on average in the first quarter, if you strip out the allied and the per-diem nurse which is really a different dynamic, and interestingly per-diem nursing is sequentially up so far in the second quarter. Now, some of that may not be a function of the overall per-diem market. It may be our specific account characteristics in the markets that we serve, but that per-diem business is actually growing today whereas the travel nursing is still in decline.

And you also exclude the nurse and allied business of MDA which we acquired last September which is largely nurse practitioner and doesn't have the same kind of demand characteristics as our travel nursing business. You have about 3,000 nurses on average in the first quarter. Each month 1,000 of those need to be placed as they come off contract. The contracts are generally three-month contracts. About 30% of those renew at the same facility, so now you're talking about 700 nurses that we need to find jobs for every month, and our position count would be close to supporting that but of course other companies have the same jobs and they're going through the same math that we are trying to replace their nurses, renew their nurses on contract.

Given the current dynamics, as I said our demand has stabilized, the positions that hospitals have given us have stabilized, but it's really at too low levels to sustain the business where it is today given those dynamics I just described for you. And we think if nothing improves but doesn't continue to decline, and at some point you can't have less than zero orders so there is a baseline to the business. There is a floor. It's not a very attractive floor, but assuming demand doesn't fall further we would expect that at some quarter in the future over the next one to two quarters our business will level off roughly 50% to 60% down year-over-year. And again this is our current thinking based on the current conditions.

That's bad but it does give us some sense of where the bottom is, and as we look at all the factors that influence our business it's a manageable situation for us, just not a particularly attractive situation for us. Does that answer your question, A.J.?

Okay. It's something to think about. Yeah, it's good.

We think, and again if a year -- if you go back to 2002, the decline in the business, the trough was reached about a year after the trough began, the decline began, and then it began to improve after that, the demand characteristics. And I would say we're about seven months into this decline, so again the past is not always a perfect indicator of the future, but that kind of two-quarter continued weakness would be consistent with what we think is the remaining duration of this really rough patch that we're in.

And A.J., just again, to kind of further put this into perspective, travel nursing at this point represents slightly less than half of our total revenues.

Okay.

And if we look at the sequential revenue decline that we're guiding to, all of that is due to decline in travel nursing. If you look at all of our other businesses, non-travel nursing, in fact they are showing slight sequential increases.

So I guess if -- and I don't want to tie up all the time here, but I guess if one of the preconditions for getting a turn at this point given the attitude of probably hospitals just to hunker down is for them to be surprised on the volume side. Then the most likely if you look out over the next few quarters scenario would be that somehow the volumes in the fourth and first quarter at hospitals pick up because of the flu or some just easier comps, and somehow they're underrepresented and that drives them to come back to you guys. Is that a reasonable way to think -- potentially think about it or --

Well, that and a more rapid improvement in the labor market than is currently being considered by most economists.

Economists, okay.

As I indicated in my prepared -- I don't necessarily think either one of those things is going to happen, but certainly either one of those things could happen. Either or both could happen, and that would improve our business. Also the credit conditions that the hospitals are facing, if they improve and they're able to access overnight credit more cost-effectively, that certainly would be a positive for our business as we think many hospitals today are running with nurse-to-patient ratios that they would rather not run at, and are doing so because they're in a position where they're forced to.

Interesting. Okay. Thanks a lot.

Okay, A.J.

Our next question comes from Josh Vogel with Sidoti & Company. You may ask your question.

Good morning. Thank you.

Good morning, Josh.

I'm sorry. I hopped on a little bit late so if you did discuss this I apologize. But housing costs are down and clearly helping gross margin. I was wondering if there was any more leverage there.

I think directionally we expect housing expense as a percent of revenue to continue to decline. We're still looking at soft housing markets throughout the country, and we also are working hard at improving our housing efficiency by reducing the number of open beds. Net-net in this environment we're in a much better negotiating position vis-a-vis landlords.

Right. Okay.

So the answer is yes, we expect improvement. Assuming that revenues hold constant or continue to inch up as they have, and our early indicators on the second quarter continue to be positive on bill rate, then that should be true.

Okay. Now, you've discussed market consolidation a little bit, and I was just curious if that's the case would you be a buyer or a seller? Because as you're looking to de-lever the balance sheet, I don't think you would want to assume any more debt here.

That's how we look at it, Josh. We don't think this a time for -- to be heroic. We are going to manage our business as tightly as we can over the next several quarters. As we stress-test our business, we have a pretty high level of comfort that we're going to get through this within the confines of the current credit agreement, and we don't feel that anything we did on the M&A side would probably cause us to reset our credit to current market conditions which are less favorable than the current credit agreement that we have, and so we just -- we feel we've just got to grind through this. We have a good mix of businesses, and when we come out we'll be in terrific shape and there probably still will be an opportunity to undertake M&A and you'll have a better sense that there are better days and improving market conditions ahead of us than we currently view.

Right. Okay. And Emil, I'm not sure if I misheard you, but you said that -- I mean, your press release note said you had an $8 million prepayment in the debt, but did you say that since the end of March you prepaid another $8 million?

No. That $8 million was actually paid in April, so that's the same $8 million we are talking about.

Oh, okay.

To touch on an earlier question, Josh, is that we are planning to make yet another prepayment this quarter which hasn't yet happened.

Okay.

And in front of it we also use cash on the balance sheet at the end of the quarter to make the earnout payments in April.

Okay. And can you just remind me whether the leverage ratio ticks down at some point later this year?

Yes. It's currently at 2.75, and it ticks down to 2.5 at the end of the third quarter.

Okay, great. And just lastly what was the contribution from MDA that hit up in the nurse and allied segment last quarter?

It was really negligible. In terms of revenues, it was in the neighborhood of less than $2 million.

Less than $2 million?

$1.5 million to $2 million.

Okay, great. Thank you very much.

Okay, Josh. Thanks.

(OPERATOR INSTRUCTIONS) Gentlemen, at this time there are no further questions.

Okay. Thank you, Tamara. And thank you all for participating in the call and we'll look forward to updating you on our second quarter results later this year. Bye-bye.

This does conclude today's conference. You may disconnect at this time.