Cross Country Healthcare Inc (CCRN) 2009 Q2 法說會逐字稿

Welcome to the Cross Country Healthcare second quarter 2009 earnings conference call. (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 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 second 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 "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 statement section of our press release for the second 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. Thank you to everyone on this call for listening in. As reported in our press release issued last evening, our revenue for the second quarter of 2009 was $149 million, down 13% from a year ago. Excluding the contribution of the MDA acquisition, which closed in the third quarter last year, the decrease in revenue would have been 38%.

Net income for the second quarter was $2.3 million, 64% below the year-ago quarter. Earnings per diluted share were $0.07 for the quarter, as compared to $0.21 in the prior-year quarter. Cash flow for the second quarter was substantial at just under $25 million.

While the market challenges we face remain significant and the falloff in our business activity over the past three quarters has been unprecedented, for the first time since the third quarter of 2008 we can see signs that the extreme pressure on our business is easing. Specifically, orders for travel nurse jobs have more than doubled since early June. This uptick in demand had resulted in July bookings exceeding the average number of FTEs on assignment during the month, the first time this has occurred since September of 2008.

Our per diem nurse business generated 5% more hours of activity than it did in the prior-year quarter. Our retained physicians search business average sales in June that were 65% higher than the average of February through May of this year, and also in June our physician staffing business saw a year-over-year increase in pro forma revenue for the first time in 2009.

Notwithstanding how bad our business environment has been in the past year and how far volumes of working personnel have fallen, I am encouraged that the seemingly unrelenting declines appear to be abating. We believe the causes of our decline are well known but they are worth repeating. First, the dramatic deterioration in the economy and the national labor market since the third quarter of 2008 encouraged full- and part-time staff nurses to work more hours directly for hospitals, thus greatly reducing the hospital industry's reliance on the kind of outsourced labor we provide.

Physicians have postponed retirement plans because of the significant declines in their net worth over the past year. Hospital admission trends have, until recently, been weak, especially for elective surgeries, resulting in less need for contract nurses and temporary physicians.

Borrowing costs for our hospital customers are still well above where they were for most of this decade. Most not-for-profit hospitals have seen material declines in the value of their endowment funds, and the pharmaceutical industry has focused on M&A activity and been distracted by the healthcare reform debate, which has resulted in a slowing of R&D spending and clinical trial activity, at the same time demand from small biotech companies has been unfavorably impacted by the financial market environment.

We are encouraged that despite this very weak operating environment we have controlled costs and sustained margins more successfully than we have in past downturns. As a result of effective margin management, cost controls, and a reduction of receivables, our strong cash flow has allowed us to rapidly de-lever our balance sheet. During the second quarter we reduced our debt outstanding by $24 million while making earn-out payments on prior acquisitions of $7.5 million. And from September 30th, 2008, to June 30th, we have reduced debt outstanding by more than $51 million.

We intend to continue to aggressively prepay our debt in the coming months, but we are sobered by where we find ourselves after the unprecedented steep decline in demand over the past nine months. I am encouraged that we are seeing signs of the bottom and can be cautiously optimistic that growth is not far off.

And with that, I'd like to turn the call over to Emil, who will update you in more detail on our second quarter performance. Emil?

Thank you, Joe, and good morning, everyone. First, I will go over the results for the second quarter and then review our revenue and earnings guidance for the third quarter that we provided in the press release issued last evening. Revenue in the second quarter was $149 million, down 13% versus the prior year and 15% sequentially. On an organic basis, revenue declined 38% year-over-year. In varying degrees, each of our businesses faced a 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 27.4%, up 70 basis points year-over-year and 170 basis points sequentially. The year-over-year margin improvement was due primarily to expansion of the bill/pay spread as well as lower housing expenses. The sequential improvement is also due to a widening of the bill/pay spread as well as seasonal factors.

SG&A expenses in the second quarter were up 2% over the prior year, but down 5% sequentially. The year-over-year increase in SG&A is due entirely to the acquisition of MDA. On an organic basis, SG&A declined 18% from the prior-year quarter as a result of steps we have taken to reduce overhead expenses in the current business environment.

Our SG&A expenses in the second quarter included approximately $400,000 in severance 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 $1.5 million as compared to approximately $500,000 a year ago, and $1.7 million in the first 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 repayments made possible by the very strong cash flow generated during the quarter, as well as lower interest rates.

Depreciation and amortization expenses were up 37% from the prior year, reflecting the acquisition of MDA. The effective income tax rate was 21% as compared to 40% in the prior-year quarter. The lower tax rate was due to certain discrete one-time items. For the year as a whole, we expect the tax rate to be approximately 39%.

Net income in the second quarter was $2.3 million or $0.07 per diluted share, $0.01 above the upper end of the guidance range we provided in May. The below-average tax rate contributed $0.01 per diluted share to the quarter's EPS.

Turning to the balance sheet, we ended the second quarter with $93 million of debt, and $11.5 million of unrestricted cash, reflecting a reduction of our debt outstanding by $24.4 million from the end of the prior quarter. Our leverage ratio as defined in our credit agreement was 1.85 to 1 at the end of the second quarter, well under the 2.75 to 1 ratio currently required under our credit agreement.

At the end of the third quarter of 2009, the debt leverage ratio requirement under our credit agreement becomes 2.5 to 1, and remains at that level for the duration of the credit agreement, which expires in September of 2013. We expect our debt leverage ratio at the end of the third quarter to be similar to our debt leverage ratio at the end of the second quarter.

Net of unrestricted cash, our debt-to-capital ratio was 24% and the current ratio was 2.8 to 1 at the end of the second quarter. DSO's were 50 days, down 7 days from last year, and 4 days sequentially.

In the second quarter we generated $25 million of cash from operating activities, partly due to a $19 million reduction in operating working capital. Year-to-date, our cash flow from operations is $50 million, which is nearly as much as we generated in all of 2008. Capital expenditures were approximately $700,000 in the second quarter. The excess cash was used to repay a net of $24.2 million of debt during the quarter, as well as $7.5 million in earn-out payments on the MDA and Akos acquisitions.

Subsequent to the end of the second quarter, we made a $5 million optional prepayment on our term debt as a result of our continued strong cash flow.

Let me drill down next into our four operating segments. Revenue for the Nurse & Allied segment was $78.6 million, down 41% versus the prior year, and 25% sequentially. We averaged 2,747 field FTEs in the second quarter, down 40% versus the prior year, and 25% sequentially.

The decline in staffing volume is consistent with a decline in bookings that we reported previously in our earnings call in May, and it reflects the weak national labor market and the demand for our services as well as the impact of the liquidity crisis on our hospital customers that Joe referred to earlier. Net weeks booked were down 58% during the quarter.

On a more positive note, we are beginning to see some evidence that stabilization of the Travel Nurse staffing business. The number of open positions, while still low by historical standards, is more than double what it was as recently as early June. Relative bookings, defined as net weeks booked as a percentage of the average number of FTEs on assignment, averaged 108% during July as compared to 73% in the second quarter. If these recent trends persist, we would expect to see sequential volume growth in the fourth quarter.

The average revenue per FTE per week that we reported in the second quarter declined 2.1% from the prior year, due to a higher mix of per diem staffing, coupled with a change of mix within the per diem product line to lower-skilled professionals. However, the average hourly bill rate in our Travel Nurse staffing business increased by 0.6% year-over-year.

Contribution income, as defined in our press release, was $7.2 million in the second quarter, down 48% from the prior year, and 28% sequentially. Segment contribution margin was 9.2%, down 130 basis points from the prior year, and 30 basis points sequentially.

The decrease in margin is due to negative operating leverage, partially offset by continued improvement in the bill/pay spread and lower housing expenses.

Let me turn next to our newest segment, Physician Staffing. Revenue was $40.7 million in the second quarter, up 6.5% sequentially. Physician Staffing days filled were down pro forma 8% from the prior year, but up 5% sequentially. The recession, the stock market decline, and the weakened housing market appear to have delayed the retirement plans of many older physicians as well as reduced the number of elective surgeries.

This has resulted in a decrease in demand for temporary physicians in such specialties in anesthesiology and radiology that were partially offset by volume growth in other specialities, such as emergency medicine.

Contribution income for the second quarter was $4.1 million representing a 10.1% contribution margin as compared to 8.5% in the first quarter. The sequential margin increase was due to improved operating leverage and an increase in the bill/pay spread.

Revenue in our Clinical Trial Services segment was $19.4 million, down 22% from the prior year, and 8% sequentially. Contribution income was $2.3 million, down 49% from the prior year but up 4% sequentially.

The environment for Clinical Trial Services has been weak during the past three quarters, stemming from a slowdown in clinical trials caused largely by economic factors and financial market conditions, along with uncertainty concerning research and development activities following recent pharmaceutical and biotechnology company mergers and acquisitions. However, we have recently seen an improvement in access to capital markets for biotechnology companies, which we view as a positive sign for our business.

Revenue for the Other Human Capital Management Services segment was $10.3 million, down 23% from the prior year and 7% sequentially. Contribution income was $329,000, down 84% from the prior year and 65% sequentially. The 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.

The retained physician search business is our business with the relatively highest fixed-cost structure. When revenue decreases, it suffers a disproportionate decline in contribution margin, and conversely it should produce a disproportionately strong margin improvement when revenue increases.

This brings me to our guidance for the third 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 or valuation allowances, any material legal proceedings, or any significant repurchases of our common stock.

We project the average Nurse & Allied field FTE count to be in the 2,200 to 2,250 range in the third quarter. Revenue for the third quarter is expected to be in the $130 million to $133 million range. We expect our gross profit margin to be in the 27.5% to 28% range in the third quarter, and our EBITDA margin to range from 4% to 4.5%.

Interest expense is projected to be approximately $1.4 million. Based on these assumptions, EPS per diluted share is expected to be in the $0.00 to $0.02 range. Additionally, we expect our debt leverage ratio at the end of the third quarter to be similar to our debt leverage ratio for the second quarter.

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

Thank you. We will now begin the question-and-answer session. (Operator Instructions). One moment, please, for the first question. Our first question comes from Tobey Sommer from SunTrust. Your line is open.

Thank you. I had a question about gross margins, which had been very, very resilient. I was wondering whether you think they are sustainable, in terms of the bill/pay spread, and just kind of quantify the extent to which the expansion has been reliant on the expanding bill pay rate spread of the contribution from decline in the housing rental expense? Thanks.

I believe the margin expansion is sustainable. In fact, our guidance implies a slight sequential improvement in gross profit margin between the second quarter and the third quarter. The bill/pay spread is one of the elements of this. The housing market is another. But also the mix of our businesses is another contributor to the improvement in the consolidated gross profit margin. The Nursing & Allied segment is a relatively smaller component of our total business mix than it was historically and this is the segment that has the lowest gross profit margins of all of our businesses.

I guess, as a follow-up, could you discuss the underlying gross margin trend within the Nurse & Allied business and kind of how you see that going into the third quarter? Thanks.

Well, we see some further opportunities for improving the bill/pay spread and the trends that we have seen in housing are expected to continue into the third quarter.

And I had another question, kind of shifting gears towards the orders, which, I guess, have picked up real nicely here over the last 10 or 12 weeks. Could you give us a sense for what the ratio is of orders to nurses on assignment, and maybe frame it in the context of the different kind of ratios you've had in good and bad times historically? Thanks.

Yes, Tobey, I would say where we are, the number of open orders is enough to sustain the business at the current level here in early August. Now, that's not where we want to be, I mean, we've had a very steep decline in volume and in order to turn the volume in a more positive direction, we would like to see the orders not just stay where they are but modestly improve as we go forward.

And, I guess, the-- we know why they declined, and then the question becomes why are they improving, and I think at some point the actions that hospitals have taken to really compress the level of the utilization of temporary staff is, at least to some degree, reliant on doing more with less, or doing more with the same, whether it's working nurses overtime, or increasing nurse-- excuse me, patient-to-nurse ratios. At some point those actions become unsustainable in my view, given the demographics of the nursing profession, which is aging at a more rapid rate than the overall population. I just think that is a-- in the short term, you can do it and you find nurses willing to work more hours, but at some point just the physical demands of the job become such that those nurses that have stepped up their productivity, if you will, burn out to some degree.

So I think we're starting to see that. We are still, as Emil indicated, well below what we would describe as a normal demand environment. But, clearly, it has begun to move in a more favorable direction.

Thank you very much. Last question and I'll get back in the queue. Could you give us an update on how your vendor manage relationship client base is performing and, if you could, let us know how big a percentage of segment revenue that is? Thanks.

It is order of magnitude about 25% of segment revenue. I would say we would not want to know what it would be like without that vendor management client base. Their utilization of contract labor is down year-over-year, just as it is throughout the segment. But within that group, our utilization-- our fill rate, if you will, has gone from roughly 80% historically, we would fill 80% of the jobs ourselves, and subcontract out 20% to a number more like 96% or 97% that we are filling ourselves and subcontracting the remaining 3%. In many of our vendor manage clients, we're filling all the jobs ourselves.

We do have a enthusiastic and hungry group of subcontractors, which we would love to see more orders come their way from these clients, but in the current environment we found that we can fill the vast majority of them ourselves. I would say that the dynamics within the segment are that more large users of travel nursing are-- appear to be looking more and more, not just for a vendor manager, but a vendor manager that provides service, more than just an electronic vendor manager, and there is a number of those that we work with in the segment.

We feel that large users really feel that there is a benefit of not just having just one point of contact, but one point of contact that is going to be committed to filling the jobs themselves. And that's an important trend, one we think benefits Cross Country disproportionately.

Thank you very much for the color.

Okay, thanks for calling, Tobey.

Our next question comes from Bonnie Cybulko with Longbow Research. Your line is open.

Good morning, thank you for taking the call. My first question is regarding the H1N1 virus. How do you see that playing out for the back half of the year and your orders early into 2010? Do you see that you're-- this might provide a reasonable boost to orders in what's otherwise a really weak environment?

Well, it is likely to be a driver of inpatient admissions. That's-- directionally, it's favorable for admissions. I wouldn't say that we're hanging our hat or organizing ourselves for a dramatic increase in admissions. Again, a lot of times those that have come down with the H1N1 virus are being quarantined and it's really only when they have complications that they would generate inpatient admission.

Certainly there is going to be a lot of ER activity. We have seen certainly a pick-up in ER orders from our hospital clients. So directionally, it's probably a positive for the business, certainly not for those that are impacted. But we wouldn't want to suggest that it's going to be a significant driver of demand going forward.

Okay. And as far as the kind of mix that you spoke to earlier, you mentioned ER visits being up in the hospitals, how do you see that changing then, in terms of your Nurse & Allied demand? I mean you've got your guidance for-- the count going down in the quarter but do you see a more favorable shift, given the kinds of skills that are needed in ER environment, versus some of the other settings in a hospital?

The guidance we have for the third quarter is really driven by the momentum of our business, and the momentum for the last nine months has been negative, and negative to a degree that I haven't experienced in my 17 years. I think we need to stem the decline. We need to stop the ball from rolling downhill before we can start pushing it back up.

And I think the results in July are exactly what we need to begin moving the momentum of our business in a more positive direction. Again, I don't think it's driven by the ER. There's other-- the increase in our demand has been really across the board, with probably the exception of the medical-surgical area where we've seen much lower levels of demand than we have historically.

But in the ICU areas, the OR, we're seeing very-- relatively stronger demand vis-a-vis the last nine months, certainly not in the context of historical standards. So, again, where we are today is really a function of where we've been in the last couple of quarters. We-- the dynamics and internally the momentum morale has, I would say, improved dramatically in July from what it was and that to me is the most important indicator of what the next several quarters, not necessarily the third quarter, that is pretty much in the bag at this point, but what the next several quarters might hold for us.

Okay, thanks. That's really helpful.

And just finally, real quick, on the physician side, I mean, that had traditionally been a pretty strong area in the healthcare staffing market and given what's going on now with physicians delaying retirement, as you mentioned, do you see that as perhaps lagging a bit behind the recovery of other segments in terms of when we might see more favorable growth in that segment?

No, I would actually describe that segment as being relatively favorable within healthcare staffing. It's off for us, low single digits year-over-year, the June month was actually up year-over-year. So I'm much more optimistic about that segment than I am about the Nurse & Allied staffing and the Clinical Trial staffing as far as the ability of that segment to resume more attractive growth.

That has been historically a 10% grower, so it's really not a-- wouldn't be Herculean to get that business moving and back to that trend line as we go forward. I think, again, the physicians, their behavior and psychology has been impacted by what's happened to their investment portfolios. Physicians that had intended to retire and sell their home are having difficulty doing that at a value that they had calculated as being the relative value of their home.

So there's just a number of dynamics that are likely to improve sooner rather than later, certainly that the stock market has recovered to a significant extent during 2009 from where it was in March, and I think that's helping. And I just think the dynamics of that business appear to be better than they were in the March-April time frame, which was less attractive than it is right now.

Okay, thank you very much.

Thanks, Bonnie.

Our next question comes from Paul Condra with BMO Capital. Your line is open.

Hi guys, thanks. I just wanted to return to the guidance, if possible, and I wondered if you could give us any more details, just going through the segments, in terms of revenues and contribution margin, maybe what you're looking for directionally just on a sequential basis? Like, I don't know how specific you can be, but I guess the more specific the better.

Paul, we generally do not provide guidance at the segment level. There are a number of factors that can impact movements and it's just easier and better for us to kind of look at the aggregate picture, because what tends to happen is small misses in one area tend to be offset by gains in another area--

Right.

--and it's just kind of counterproductive to try to nail down the guidance at that level of detail. But, directionally, I think what we said is that, as Joe just indicated, we think the Physician Staffing business is probably on the strongest footing to show year-over-year growth down the road. We believe that nursing is-- kind of lags. There is a certain lag built into our Nurse & Allied business that would result in a sequential decline from Q2 to Q3, but then if the current trends persist, we should start seeing stabilization and perhaps sequential improvement in Q4, and we're also seeing the Clinical Trials business as showing some signs of stability.

Okay, great. Thanks. I also wanted to ask with regard to the bookings for nurse travel, how far ahead do those look and what's your visibility on those?

Our average lead-time between booking to assignment start has been roughly four to five weeks historically. More recently we've seen a shortening of that lead-time to perhaps three to four weeks.

Okay, and what's the mix now, just in terms of per diem versus nurse travel?

Within the travel-- within the Nurse & Allied segment, per diem accounted for approximately 11% of revenues in the second quarter.

Okay, great. And then I have just one more question, what was your stock compensation expense in the quarter?

The stock compensation for the quarter was approximately $400,000 and for the full year we anticipate approximately $2 million.

Okay, great. Thank you very much, that's everything.

Okay, Paul.

Our next question comes from Mr. Chris Rigg with Soleil Securities. Your line is open.

Good morning, guys.

Hey, Chris.

My first question relates back to the demand outlook. I mean, clearly a doubling of demand is a positive sign but I guess I was wondering, could you give us some perspective, in a more normalized year, from say the beginning of June to where we are today, would it be correct to assume that you would see the demand increase just because of sort of the seasonal factors in the business, and if you were to see a demand increase in a more normalized year, how much would the demand normally pick up, say the beginning of June to where we are today?

That's a very fair question, Chris. I would describe some of the pick-up in demand that we saw being jobs further out than they would normally be, which is generally six to eight weeks out. Having said that, a year ago we didn't see that pick-up, and that pick-up could occur as early as July. In a normal year, you would expect really to see it more in the August to September timeframe.

Okay.

But, clearly, when I look at the orders as they come in, there were some with start dates farther out. So that is a fair point. I would say last year we didn't see any. So to see some seasonal demand, which allows nurses to plan better for their future and to let them know that there are jobs beyond the current contract that they're on, or that they're talking about with their recruiter at Cross Country, that is-- I think it's an important element of this business because it psychologically lets them know that, yes, it's been bad, demand-- there are a lot less jobs than there were a year ago, or there was-- they could expect historically, but after I finish this job there's another job that I think I might find to be very attractive.

If I would categorize the overall increase in demand, it wasn't driven by seasonal factors; it was really driven across the board by higher level of order activity than we had for most of 2009.

Okay. Okay. And then we've heard anecdotally from some of the hospital companies that, and you guys have talked about this, as well, how nurses are just willing to work more part-time-- nurses that had been working part-time are now working full-time again, and I guess, what I'm wondering, has that impacted your supply side at all, meaning historically you've had a level of demand, but you haven't always been able to fill that demand. Are you still seeing that dynamic at this point or is there an ample supply of nurses to meet the demand that you currently have?

Where demand currently is we have an ample supply, Chris.

Okay.

That's not-- we are submitting our nurses as aggressively as we can for the jobs that are out there. Obviously, many of the jobs are competitive in nature and it's about the quality of your applicant vis-a-vis the quality of applicants submitted by other companies. Supply, for one of the few times in my experience in this business, is not the issue. Today the issue has been demand and so it's very-- the more important metric is what are hospitals doing, how are they looking at their business, are they to your-- to the point you had at the beginning, are nurses still willing to work as intensively as they were? And I think the answer is, it's beginning to pull back a little bit.

We have heard anecdotally that June was a better month for admissions than most of 2009 was. And certainly that's a factor, I think, in the psychology that hospitals approach utilization of our service with, that if they're caught a little short, they begin to scramble to try to find supplemental staff. That's a positive for us. We think it's directionally a contributor to the disproportionate performance that we've gotten out of our per diem business, that they can get calls in the morning and provide someone that same day, whereas the lead times in the nursing business are longer.

We think those are, again, generally positive signs, but I would just like to take a step back and say we're not pounding the table. One month doesn't necessarily signal a turn in the business. This has been, in our view, an environment that is unprecedented in our experience. It's been very brutal on the downside and we're not entirely sure how it's going to-- what the dynamics will be as we come out of this period.

Okay. And then my last question is, are there any additional earn-out payments that we should expect in the future or does the $7.5 million finish off everything you owe on the two acquisitions?

No, we do have one more earn-out payment on the MDA acquisition. It is based on the EBITDA performance of MDA for 2009, and we expect to make that payment in the second quarter of 2010.

And how much-- is there a potential range for that earn-out payment?

I can give you an order of magnitude number. Obviously, as it will depend on what the actual results of MDA--

Right, right.

Take their current run rate and annualize it, the earn-out formula would yield-- the formula would yield an earn-out payment of approximately $10 million.

Okay. All right, thanks a lot.

Okay, Chris.

Our next question comes from Josh Vogel with Sidoti. Your line is open.

Good morning, thanks for taking my questions. You've discussed the M&A activity and pending healthcare reform, how that's impacted the level of opportunities with biopharm clients, but I was just curious, is there any light you're seeing at the end of that tunnel, have things turned up at all on that front?

There are signs that we look at, Josh, that are encouraging, particularly in the-- the staffing is most of what we do and I would say the orders have picked up to some degree and the interview-to-fill ratio has improved. It actually has improved in the nursing business. Our conversion rate of applicants has improved in nursing. So those are two pretty powerful metrics that we look at to say that things are improving.

Having said that, in the Clinical Trials business probably the biggest headwind for that segment, historically 15% to 20% of revenue has been driven by CRO activity. We just had a very large trial that is wrapping up as we speak, in August, that we were able to lock it on time and on schedule, so that certainly is a positive, but that has been the focus of our energies and we don't have a lot behind that trial.

So that's why, as Emil indicated, we're encouraged by the ability of biotech companies to access credit markets, which really wasn't the case in the fourth quarter and the first quarter of this year. It's very encouraging to us that it will give them the liquidity and really the confidence to pursue some of the compounds that they have been pushing through their R&D.

So I'm optimistic that at some point we get to a better place. And now we have a really very strong track record to refer to which two years ago we didn't have, on the CRO piece of the business. But, as we speak, for the second half of this year, there's not a lot behind that project and, therefore, there are some headwinds in the Clinical Trial space for us, but in what has been the traditional bulk of the business in Clinical Trials, the staffing fees, I'm actually encouraged by some more favorable metrics.

Okay, that's helpful, thank you. Now, obviously strong cash flow has helped you pay down a good chunk of debt in recent quarters and I was wondering, at this point, given how you've de-levered the balance sheet, is that still your key focus or would you start to look again at acquisitions and if so, which markets look the most appealing to you?

I think I'll let Emil follow-up, but we are completely focused on de-levering the balance sheet. As Emil indicated, we do have what we think is a highly probably earn-out payment due in the second quarter of 2010 and we are going to aggressively de-lever between now and then to give us the cushion, the capacity to make that earn-out payment. Emil, did you want to add--?

I think just a little.

Okay, great. Just lastly, are you seeing any significant defaults from some of your clients with DSO's maybe older than 50 or 60 days?

We haven't really seen any significant defaults; in fact, our collections have been remarkably strong in this environment. The 50-day DSO number, for us, is close to a historic low, partially because of a mix shift, but also because of really good collections, particularly in the older receivables. We do see a little bit of a bump in kind of the 90- to 180-day bucket, but the really old stuff has decreased as a percentage of total.

Okay. That's all I have right now. Thank you very much.

Our next question comes from Gary Taylor with Citigroup. Your line is open.

Hi, good morning.

Good morning, Gary.

A couple questions, I guess, probably like most, really impressed with the gross margin performance this quarter and I just wondered, just going back to bill/pay spread, is anything happening there besides just deflationary environment, is there any programs or initiatives that you want to highlight there, or is it really just the environment?

I think year-over-year, Gary, if you recall, in August of last year we redesigned, really, our compensation to have a component that is a per diem allowance. And so that's kind of the watershed action that we took to make what we offer our nurses more attractive to them, and so we're-- in the third quarter we begin to annualize that but that really doesn't get fully annualized probably until the first quarter of 2010.

Having said that, there is really -- probably for the first time in my experience -- there are not a lot of inflationary forces in our direct cost structure that-- housing, which historically is a 5% to 15% inflationary item for us, is actually modestly deflationary in this environment. The only thing I would point to as being problematic for us is health insurance, which continues to be a high single-digit inflationary item. Emil, is there anything you want to add to that?

The other thing that helps is professional liability expenses have been trending down as well.

What is your quarterly housing spend in dollars at your current run rate?

Well, order of magnitude, the housing cost is roughly 15% of the Nurse & Allied staffing segment revenues. So, I guess, you can do the math. It's roughly $10 million.

Okay. And can you remind us, per diem is picking up a little bit but what's that percentage of that segment?

Approximately 11% of the Nurse & Allied segment.

Okay. And the mix shift within per diem that you've seen, is that like a RN-to-LPN dynamic or a tech-to-nurse dynamic?

It's an RN-to-CNA dynamic for the most part, Gary. We've seen-- I don't know if the hospital customers are trading down from licensed professionals to unlicensed professionals, trying to utilize lower-cost personnel to supplement higher-cost care.

And then, finally, just in the July booking, anything you can say on geography there, any parts of the country that seem to be doing a little bit better?

We think California, when you look at where the orders are coming from, California, Texas. Again, this is more of a sequential analysis.

Right.

Year-over-year, everything is ugly, but those areas appear to be a little stronger. The Northeast, we're seeing some pockets of strength. Some of that may be a function of our VMS activity, but some is just, I'm sure, the orders that other companies are seeing as well.

But, just not Florida yet, it sounds like?

No, Florida is really a struggle for us, Gary. It's historically our most important market and when we look at the working counts year-over-year they're down 60% in that market. So that is something that probably hurts us disproportionately.

Having said that, when we look at the results of the public companies and we're interpolating some of them, we seem to be gaining market share. So I guess that's our-- the one solace we can point to is we're maintaining-- doing, I think, a terrific job maintaining margin, and even growing margin, and we're not doing it at the cost of our relative share of a much reduced buy.

Okay, great. Thanks.

Our next question comes from Tobey Sommer of SunTrust. Your line is open.

Thanks. Just a couple of follow-ups. On the physician side, I wanted to get a sense for whether you think your top-line performance is similar to the rate of change in the overall market or whether you've got some company-specific initiatives that are allowing you to perhaps do a little bit better?

I think every company in the space probably has historically different specialties that they've focused on. As Emil indicated, historically, anesthesiology has been the biggest contributor to MDA's results. I don't think that's true of all companies that we compete with.

I think we're performing in line with the market. I don't think we're taking copious amounts of share or losing copious amounts of share. I think we're certainly holding our own in a challenging environment and I think it's a credit to the management of that business, they really-- they have a lot of experience and know which levers to pull when the dynamics change.

Okay, thanks. And then on the nurse supply front, could you give us some color on kind of what renewal rates are like, have you seen any changes there, and maybe from a demographic perspective, if you've noticed any different behavior or-- relative to the older pool of nurses versus the younger new graduates? Thanks.

A couple of things. Obviously, renewal rates are well down from where they have been historically. We would typically expect to renew 70% to 75% of the nurses as they come off contract, either at the same contract or another facility. That is not the case currently. I don't want to quote a number because everybody has probably different ways of calculating that statistic, but they're off substantially, and that's really the problem in the business there-- for a nurse that really doesn't want to travel far, there is a lot of difficulty in placing them within near proximity of the contract they're just coming off of.

To be a travel nurse today, you need to be willing to travel to where the jobs are. Therefore, the demographics have shifted somewhat to a younger cadre of nurses. That's not surprising to us at all. And the good news is as the business does recover, and we fully expect that it will recover, given the demographics of the profession, that we would expect to have a well that we can draw from, of nurses that don't really want to travel but want to work relatively close to home, that once we have an opportunity to keep them close to their permanent residence, they'll be more willing to kind of dip their toes back into the travel nursing employment market.

Thank you very much.

Okay, Toby.

At this time we have no further questions.

Okay, well, I'd like to thank everyone for participating in this call and we will look forward to updating you on our third quarter in early November. Take care.

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