Cross Country Healthcare Inc (CCRN) 2010 Q2 法說會逐字稿

Hello and welcome to the Cross Country Healthcare second-quarter 2010 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 2010 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, believes, 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 second quarter of 2010, as well as under the caption Risk Factors in our 10-K for the year ended December 31, 2009, and our other Securities and Exchange Commission filings made during 2010.

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 this morning for your interest in Cross Country Healthcare. As reported in our press release issued last evening, our revenue for the second quarter of 2010 was $118 million, down 21% from a year ago. Net income was $1.2 million down 49% from the year-ago quarter. EPS was $0.04 per diluted share versus $0.07 in the year-ago quarter and cash flow for the second quarter was $13 million.

On a sequential basis, revenue was down 3% while net income was up 4% from the first quarter. As I stated on our last earnings call in May, I believe we have weathered the worst of the downturn in our operating environment. While demand for our nurse, allied and physician staffing services is well off levels of two to three years ago, we expect our sequential performance to improve beginning in September and to continue into the fourth quarter. We base these expectations on improving trends in our nurse and allied staffing business which represented 51% of total revenue in the second quarter.

In this segment, we have seen significant improvement in demand in most areas of the country over the past two months, which is very encouraging to us. More importantly, we continue to add attractive new hospital systems to our roster of vendor management clients, which should allow us to take an even larger slice of an increasing market opportunity as we move through the second half of this year.

In our physician staffing business, revenue was up slightly on a sequential basis from the first quarter, essentially mirroring the normal seasonal pattern of this business. As such, we cannot yet ascribe revenue momentum in the segment to improvement in underlying demand trends. However, the typical fourth-quarter seasonal drop in activity in the physician staffing business should be more than offset by building momentum in our nurse and allied staffing business.

In our clinical trials services segment, we have increased revenue by 4% sequentially as our staffing activity continued to rebound. The strength in staffing was offset partly by continued weakness and drug-safety monitoring, outsourcing and regulatory consulting activity. Staffing activity accounted for 95% of our clinical trial segment revenue in the second quarter, substantially above the 75% contribution in the year-ago quarter.

Even with this somewhat unfavorable shift in mix for our clinical trial segment, gross profit margins for the Company as a whole were 200 basis points favorable to the year-ago quarter. Our continued focus on profitability and cash flow allowed us to make the remaining earn-out payment in April of nearly $13 million to the sellers of MDA, which we acquired in 2008, without increasing the Company's debt outstanding in the second quarter. There are no more earn-out payments facing the Company.

Subsequent to the payment of the earn-out, with the support of our lenders, we elected to amend and extend our revolving credit facility to be coterminous with our term-debt facility in September 2013. While Emil will get into more detail in a few moments, I would like to point out that we were able to accomplish this without affecting the rate we pay on our remaining $56 million of term loan outstanding, which carries interest rates currently below market.

To summarize, investors can expect sequential revenue improvement in the coming months from Cross Country Healthcare. In addition, we believe there will be consolidation opportunities coming off the deepest trough in our industry during the period 15 years. However, having said that, we will maintain the same disciplined approach toward evaluating acquisitions and managing our balance sheet that our shareholders have come to expect from us. And with that, now I'd like to turn the call over to Emil who will update you in more detail on our second-quarter financial 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 $118 million, down 21% versus the prior year and 3% sequentially. The revenue decline reflects primarily the soft demand in our nurse and physician staffing businesses earlier this year, which we believe was caused by the weak national labor market.

More recently, we have seen an improvement in demand for travel nursing services, which should allow us to generate sequential revenue growth in the fourth quarter based on normal lags in this business.

Our gross profit margin was 28.6%, up 200 basis points over the prior year quarter and 90 basis points sequentially. The margin improvement was due to a change in business mix among segments, coupled with improvements in the bill/pay spread as well as lower housing and professional liability expenses.

SG&A expenses in the second quarter were down 14% from the prior year, reflecting our actions taken to reduce overhead expenses during the past year. On a sequential basis, SG&A expenses were down 2% reflecting lower payroll taxes. Our SG&A expenses in the second quarter included a approximately $700,000 in equity-based compensation expenses as compared to approximately $400,000 in the prior-year quarter.

During the second quarter, we reversed approximately $200,000 of bad debt expense reflecting an improvement in the quality of our receivables. Net interest expense was $1.1 million down 26% from the prior-year quarter, reflecting the continued delevering of our balance sheet made possible by our strong operating cash flow.

As Joe indicated, during the second quarter we amended and extended our revolving credit facility to be coterminous with our term debt, so that they are now both maturing in September of 2013. At the same time, we reduced the size of the currently undrawn revolving facility from $75 million to $50 million. We were able to accomplish this extension without modifying the below-market rate on our term debt. The interest rate spread, which is based on our leverage ratio, is currently 200 basis points over LIBOR on the term debt and 350 basis points over LIBOR on the revolver.

The effective income tax rate was 48% in the second quarter as compared to 14% in the first quarter. The higher tax rate was anticipated when we provided our guidance for the second quarter and resulted from certain one-time discrete items that affected us favorably in the prior quarter. For the remainder of the year, we expect our tax rate to remain in the mid to high 40% range.

Net income in the second quarter was $1.2 million or $0.04 per diluted share. This compares to $0.07 in the year-ago quarter and $0.04 in the first quarter. Turning to the balance sheet, we ended the quarter with $56 million of debt and $10 million of cash and short-term cash investments. Our leverage ratio, as defined in our credit agreement, was 2 to 1, while under the 2.5 to 1 ratio allowed. Net of cash, our debt-to-total-capital ratio was 15% and the current ratio was 2.7 to 1.

Day sales outstanding were 50 days, unchanged from both the first quarter and the prior-year quarter. We generated $13.4 million of cash from operating activities in the second quarter including a $5.6 million federal tax refund. Capital expenditures totalled approximately $400,000. During the second quarter we completed the last earn-out payment on the MDA acquisition of $12.8 million.

Let me draw down next into our four operating segments. Revenue for the nurse and allied staffing segment was $59.8 million down 24% versus the prior year and 8% sequentially. We averaged 2,163 field FTEs in the second quarter, down 21% versus the prior year and 9% sequentially. The year-over-year declines in staffing volume reflects the steep drop in demand that was experienced in 2009, which we believe was caused by a combination of a weak national labor market, a reduction in surgeries, and the impact of the liquidity crisis in our hospital clients.

The sequential volume decline reflects the relatively weak bookings we experienced in the first quarter that we discussed on our last earnings call in May, and also reflects normal seasonality. Net weeks booked in the second quarter were relatively flat compared to the prior year. However, relative bookings, which measures net weeks booked as a percentage of average field FTE count, improved from 88% in the first quarter to 97% in the second quarter and have averaged 114% so far in the third quarter. If the third quarter booking trends persist, we would expect a 5% to 10% sequential volume increase in our nurse and allied staffing segment in the fourth quarter.

Segment revenue per FTE per day in the second quarter was down 3% from the prior year, but was up slightly on a sequential basis from the first quarter. Average hourly bill rates in our travel nurse staffing business were down 3% from the prior year, partly due to changes in the geographic mix and they were essentially flat sequentially.

Contribution income as defined in our press release was $6.1 million in the second quarter down 16% from the prior year but up 3% sequentially. Segment contribution margin was 10.2%, up 100 basis points for the prior year and 110 basis points sequentially. The year-over-year margin increase is due to improvement in the bill/pay spread and lower housing expenses, coupled with the steps we took during the past year to reduce overhead expenses. The sequential margin improvement was due to seasonal factors related to the reset of payroll taxes and the impact on housing expenses of one less day in the first quarter.

Let me turn next to our physician staffing segment. Revenue was $31.1 million in the second quarter up slightly on a sequential basis but down 23% from the prior year. Physician staffing days filled were down 18% from the prior year, but up 5% sequentially reflecting normal seasonal trends. The recession and the weak housing market appear to have delayed the retirement plans of many older physicians. These factors, along with a reduction in the number of surgeries, has resulted in a decrease in demand for temporary physicians. The decline in demand was particularly large in anesthesiology, which historically has been one of MDA's largest specialty areas.

Segment contribution income for the second quarter was $3.7 million representing a-- an 11.9% contribution margin, up 170 basis points from the prior year and 260 basis points sequentially. The margin improvement was due to a favorable professional liability accrual adjustment reflecting a change in mix to lower-risk specialties and geographic locations, as well as better-than-expected loss development.

Revenue in our clinical trial services segment was $15.8 million, down 19% from the prior year but up 4% sequentially. The year-over-year decline reflects the conclusion of a large clinical trial that we were contracted to manage in the third quarter of 2009. The core staffing component of our clinical trials business, which accounted for 95% of the segment revenue in the second quarter, grew both on a year-over-year and sequential basis, reflecting higher average bill rates.

Contribution income was $1.7 million down 25% from the prior year but up 8% sequentially. Revenue for the other human capital management services segment was $10.9 million, up 6% from both the prior year and the prior quarter. Contribution income was $800,000, down 22% sequentially but up 143% from the prior year. The year-over-year improvement in contribution income reflects the strong performance of our education and training business.

This brings me to our guidance for the third quarter of 2010. 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, impairment charges or valuation allowances or any material legal proceedings. We project the average nurse and allied field FTE count to be in the 2,100 to 2,150 range in the third quarter.

Consolidation revenue for the third quarter is expected to be in the $114 million to $117 million range. We expect a gross profit margin of approximately 28% and an EBITDA margin in the 4.5% to 5% range. Interest expense in the third quarter is projected to be flat sequentially. Depreciation expense is expected to decrease sequentially by approximately $400,000, as certain older assets become fully depreciated. Based on these assumptions, earnings per diluted share are expected to be in the $0.01 to $0.04 range. Additionally, we expect our debt-leverage ratio at the end of the third quarter to remain around 2 to 1, well below the 2.5 to 1 allowed under our credit agreement. This concludes our formal comments. At this point, we will open up the lines to answer any questions that you may have. Lori?

(Operator Instructions). Our first question comes from Paul Condra with BMO Capital Market.

Hi, guys. Thanks.

Hi, Paul.

I just want to talk about the-- some of the operating margins that you're seeing in the nurse and allied and also the physician staffing segments, and I wonder if you could just give a little more detail around how sustainable you think those levels are, looking at the rest of the year, for the contribution margin?

Well, Paul, let me focus first on the gross profit margins. We had a 200-basis-point improvement year over year and about a 90-basis-point improvement on a sequential basis. Some of the year-over-year improvement can be attributed to mix. I would estimate roughly 80 basis points out of the 200 has to do with changes in segment mix, as our higher-- most profit margin segments had a higher percentage of the overall revenue contribution.

The remainder is probably evenly split between-- or roughly evenly split between three other factors. Improvement in our bill/pay spread in our nurse and allied segment is one of those factors; lower housing expenses, also in the nurse and allied segment; and lower professional liability expenses in our physician segment. These factors are sustainable in my opinion, although there was an element of a one-time accrual adjustment in the professional liability having to do with better-than-expected loss development and lower risk specialty mix in our physician staffing business. And overlaid on top of all of this is the lower SG&A burden that all of our operating units are carrying as a result of the steps we have taken in the last-- during the last year.

Okay.

If you look at it from a sequential standpoint, the gross profit improvement has-- a large part of it has to do with the professional liability accrual adjustment in our physician staffing segment.

Okay.

(inaudible) or payroll taxes in the second quarter.

Okay, great. And you're talking about some increases in volume going into the third quarter, are you going to be able-- I mean, how does that in-- impact the SG&A expenses and (multiple speakers).

Well, we expect our SG&A expenses at this point to be relatively flat on a sequential basis, so on a-- in the short term, we don't expect a significant impact on SG&A.

And just to be-- just to clarify, Paul, we expect volume to be really increasing beginning in September, so towards the end of the third quarter but carrying through into the fourth quarter, and that's really a function of the book-to-bill information that Emil provided in his prepared comments. We had pretty weak production, and particularly in the first quarter. It was just okay in the second quarter, but below 100%, which is needed to sustain the level of volume that we have, so we had weakness heading into the third quarter, but things have been pretty strong since June, therefore we expect volumes to pick up in September, but really begin to show up more materially in the fourth quarter, reflecting the historical-- the couple of months of bookings, but also reflecting some pretty attractive new VMS clients that we're bringing on in the fourth quarter.

That's great. Are you seeing that more in the travel or on the per diem side, if you could make any comments there?

It is-- travel is by far and away our biggest subset within the nurse and allied segment, but it will affect both. But the greatest absolute benefit will be felt in our travel nursing business.

Okay, great. That's it for me. Thanks.

Thanks, Paul.

Thank you. Our next question is from Chris Rigg with SFG.

Hey, good morning, guys.

Hey, Chris.

I was just wondering if you could give us some color about the structure of the staffing contracts particularly in the travel nurse staffing business, has anything changed, sort of the length of time or the lead time to booking? Any color there would be great.

Emil, I don't know if you want to-- Chris, as far as I'm concerned, while at the onset of the decline in the business, we did see a modest reduction in the length of contracts. If anything, that has begun to go the other way. We're seeing longer contracts more typically. And I would just say as vol-- as the number of open orders has increased over the last couple of months, and it's been a significant increase on the order of let's say 60% from early June to where we are today, so a noticeable increase, the quality of the orders appears to be improving as well. So it's a-- it's definitely cause for some encouragement for us. Unfortunately, it doesn't really show up in our third-quarter guidance, but we do have a high level of confidence that our fourth quarter is going to look better, and conceivably can be-- show some year-over-year gains for the first time in a number of quarters. Emil, anything you want to add to that?

I think that pretty much covers.

Okay. Yeah, no, and to your point there, so you are expecting-- or you feel reasonably confident that you could see year-to-year revenue growth in Q4?

It's not guaranteed, but it is certainly a possibility.

Okay. And you would characterize that, at this point, it's much more than just the normal seasonal uptick from Q3 to Q4, there's truly a rebound in demand?

Yes, I mean when you talk about seasonal demand in the nursing business, you're really talking about the key sunbelt states of Florida and Arizona, and that is not what is driving the increase. It's really national. It's in regions that historically are important to us. We're seeing improvement in New England, in the Northwest, California is-- which was-- had been weakening is recovering. So we're encouraging. I mean, we-- Arizona, which had been approaching zero, a key state for us historically, typically one of our top five, is almost three times the level of activity today that it was a year ago and we're in the heat of summer and particularly in the Phoenix market, so that's encouraging.

So we think there are a lot of good things happening and it is pret-- it is widely geographically dispersed. A year ago we had a similar uptick and we talked about it, I believe, in our third-quarter call last year. In hindsight and the benefit of more information, that uptick appeared to be largely correlated to the number of-- or the percent of physician business with H1N1 indications. If you overlaid the increase in our orders to the increase in physician visits with H1N1 indications and then the tail-off towards December, it was almost the same chart.

So in hindsight that was largely a function of H1N1. Today, there's really no-- nothing you can correlate it to. There's nothing in the news that would suggest what it is. We hear from the hospital, the public companies and our private clients, that surgeries continue to be weak. So we think there is some level of fatigue in nurses that have been working more hours than they were accustomed to. I think that's beginning to show up in the numbers.

Um-hmm.

The labor markets have been positive but not-- not strongly positive but you're not seeing job losses, you're-- you are seeing job gains, typically, year over year. So we're encouraged that this is real and likely to be sustainable.

And just to add to that, Chris. When we look at our demand, it's not only the absolute number of positions that has been increasing, but also the number of active accounts has been increasing as well. So it's not just our needs are coming from a concentrated subset of hospitals, it-- the breadth of demand is also broadening.

Okay, that's great color. Thanks a lot, guys.

Okay, Chris.

Thank you. Our next question is from Tobey Sommer with SunTrust Robinson Humphrey.

Thanks. A quick follow-up to the last question. You talked about a 5% to 10% potential sequential pick-up if the bookings trends remain in the travel segment in the fourth quarter. He-- what would normal seasonality, to the extent we can remember what that's like, do sequentially from 3Q to 4Q in the travel business?

Well, really the seasonal effect is primarily felt in the second half of December. Typically, the fourth quarter-- the first couple of months in the fourth quarter remain quite strong and then it drops off very steeply around the middle of December, right before Christmas and New Years. Generally, we have about a 20% drop in the second half of December.

I think, just to add to that, Tobey, seasonality-- normal seasonality would show up in the third quarter. We would typically see a slight increase in activity in the third quarter. Our guidance does not suggest that is going to happen this year. And I would put the normal seasonal increase from the third to the fourth quarter in a low single-digit range.

Okay. And just to clarify, if you were going to see a seasonal uptick in third-quarter revenue, you would have already seen it in the bookings, correct?

Correct.

Okay. And then I had a question about M&A, we've got what once was a significant industry player, and still is out there, in bankruptcy. And we've seen some activity in the space recently. Does the change in your available liquidity suggest anything about your appetite to participate?

I think in our prepared remarks, Tobey, we believe the condition of the market increases the likelihood of the potential for acquisitions. I would just caveat that by saying we have historically maintained certain disciplines, so-- certain return criteria that we look for, and we'll stick to those. The fact that the industry recently had a fairly significant consolidation event, we think will be good for us. In the absence of us doing anything, we think that's actually a benefit to us as it eliminates a competitor, a key competitor in many [RFP] processes by large systems that are coming out looking for a vendor manager, someone to manage their clinical-- temporary clinical staffing activity.

I-- we don't feel we have to do something. We feel we're in a good position right now. We-- VMS is a key trend within our business but we have had a lot of success in winning VMS contracts. We have a-- today a breadth of offerings that covers travel nurse, travel allied, per diem nurse, and we have a pretty robust platform to manage VMS contracts. So we don't feel like we have to do anything strategically to improvement our position. So I would describe our interest as being opportunistic. If we believe we can add value to our shareholders in the short and long term, we're going to do that, and we have the capacity to do it. But if we are unable to find an attractive acquisition at the right price, that-- we'll-- we're prepared to grow the business organically as we go forward.

Thank you. Two questions and I'll wrap it up. One, what is the total available liquidity now, given the changes in some of your capacity? And then, Joe, could you comment about how-- the number of recruiters you have now and how you view the available capacity in those recruiters to serve a larger revenue base? Thanks.

Right.

Let me address the liquidity question, Tobey, first. The current revolver capacity is $50 million. We have about another $10 million or so in cash and short-term investments. Now, offsetting some of that is about $12.5 million of letters or credit backed up by our revolver. Having said all of this, for a small acquisition, we obviously have the capacity to do it out of our revolver, but if it's-- for a significant acquisition, we would expect to go back to our banking syndicate and for a new term debt. Our leverage ratio is 2 to 1, so we have ample capacity to increase our senior debt.

And to answer the second part of your question, Tobey, our recruiter count is down about 40% from the peak. By comparison, our volume is down about 60% from the peak-- the recent peak, so I believe we have very substantial capacity to add without adding recruiters, and it would be our intention not to add significantly to our recruiter count. And where we have lost recruiters, it has typically been in those-- the least tenured who just couldn't earn an adequate living. We're highly commissioned in the way we compensate our recruiters. So our best people, our most tenured people with the most capacity are the ones we have, and I think we have enormous capacity. I-- if we had a 20% improvement in volume, I don't think we would add a recruiter to accommodate that.

Go-- as we go forward, and if the industry trends look sustainable, look attractive, then we'll start thinking about adding recruiters. But right now I think we're very comfortable with who we have and the number we have.

Thank you very much for the update.

(inaudible) Tobey.

And the next question is from Gary Taylor with Citigroup.

Hi. Good morning.

Morning, Gary.

Hi.

Just a couple quick ones. The lower professional liability expense, I guess, the positive development, how large was that?

Well, it was about 50 basis points of gross profit margin improvement can be attributed to that. It came really from our-- entirely from the physician staffing segment, where professional liability expenses were trending down to a change in mix among specialties and also geographic areas as well as some favorable loss development.

Yes, I guess, the (inaudible)-- as an example, anesthesiologists are among the most expensive to insure. That has-- that's where we've seen the greatest decline. For example, our-- anesthesiology, historically, was our number-one specialty. Today, it's not in the top two. The silver lining is, our professional liability goes down commensurately.

Right. I was just trying to make sure I understood if-- I certainly understand the mix trend and what the right run rate expense should be there. I was just trying to understand if there was kind of an extra benefit in the quarter that maybe wasn't go-forward, but sounds like you're primarily saying because of the change in mix, this will continue to be lower than it has been historically?

We certainly would expect that for the remainder of this year, Gary.

Okay. And my only other question, just coming back to M&A a little bit, and I know you've made a couple comments on it already, I think kind of my significant question, particularly seeing how the market has responded to the other transaction we saw is what are your thoughts around using your stock as currency with the stock price down, roughly cut in half from where it was two years ago before we started into this downturn?

Historically, Gary, we haven't used our stock in transactions. Having said that, in the-- in this environment where we've had a couple of head fakes, I don't want to say that what we're experiencing now is a head fake, but I don't want to-- I wouldn't want to bet our shareholders that we've got it figured out and it's a trend line up from here. So I'd be more inclined to be conservative in the structuring of a transaction and I think every transaction is different and we would just want to make sure that we are-- we're not adding too much leverage to the business, not counting on too many synergies to make the-- an acquisition work. And one way to lower the risk profile is to use equity. So I don't want to tell you that we would never use it but it-- it's not-- hasn't been our historical MO to use stock to grow the business through acquisition.

Do you--

Does that answer the question, I--

Yes, it does pretty well. I guess, maybe another slightly different angle is people that are willing to sell their businesses in this environment, if they believe there's a cyclical upturn out there somewhere, might be more attracted to having stock that would benefit from that cyclical upturn, versus having cash, which may not. So is there any-- do you sense any change or preference in appetite among sellers who presumably are selling business that have probably been pretty depressed over the last couple of years as well?

Yes, I think there's a little bit. I think every deal is different, Gary. And I think it's a-- it depends on who the sellers are and what their objectives were and are going forward. That's why I would hate to paint myself into a corner, as far as deal structuring.

Um-hmm.

we just-- I guess what we would commit to is we're going to do our darnedest to make sure that it's a good deal for our shareholders. But we are maintaining a discipline and achieving the kind of return objectives that we've looked for historically.

Okay. Thank you.

Thanks, Gary.

At this time there are no further questions.

Okay, thank you, Lori. And thank you everyone listening in for your time and attention and we will look forward to updating you in November on our third quarter. Thanks very much.

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