Cross Country Healthcare Inc (CCRN) 2010 Q3 法說會逐字稿

Welcome to the Cross Country Healthcare third quarter 2010 earnings conference call. At this time all participants are in a listen-only mode. After the presentation we will conduct a question and answer session. (Operator Instructions). This 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 third 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 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 other future results or performance expressed or implied by these forward-looking statements. These factors where set forth under the forward-looking statement section of our press release for the third 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 & 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. Thank you to everyone listening in. As reported in our press release issued last evening, our revenue for the third quarter of 2010 was $116 million, down 11% from a year ago. Net income was $900,000, down 5% from the year-ago quarter. EPS was $0.03 per diluted share, equal to the year-ago quarter. On a sequential basis revenue was down 2%, and net income was down 22% from the second quarter. Cash flow from operations for the third quarter was $1.1 million.

In our nursing allied staffing business which represent approximately 50% of our total revenue in the third quarter, momentum is building as we move through the fourth quarter against a backdrop of continued weakness in the national labor market, demand for our nurse and allied staffing services continues to be well below that of two to three years ago.

However, even at these levels we should be able to grow our staffing volume from the currently depressed levels. This segment, we are encouraged by a substantial improvement in demand in most areas of the country since June. And unlike a year ago, the rising demand does not appear to be driven by the flu season expectations to any meaningful extent. Part of the momentum we are seeing is the result of our success in winning VMS contracts at large prestigious hospital systems and healthcare facilities throughout the United States.

At the faster pace, since we began offering this service in 2003. I'm also pleased to note a long-standing vendor managed account which left us earlier this year reengaged us at the end of September, under the same terms that we had with them previously. With respect to our vendor-management service we have adopted a strategy to selectively offer the service to certain health care systems, large hospitals and healthcare facilities that are geographically diverse and large users of temporary nurse and allied staffing services.

To give you a sense of scale, we have more than 500 FTEs currently working about our vendor-managed accounts. As a result of our continued success in this area, I am very optimistic that the sequential movement we are seeing in the fourth quarter in the segment is likely to continue in to the first quarter of 2011.

Turning to our physician staffing business, while it has not yet shown signs of rebounding, there are indications that is it stabilizing and more or less following normal seasonal patterns. As such, physician staffing revenue was up slightly on a sequential basis from the second quarter, but we expect there to be a modest drop in the fourth quarter, which is likely to offset the increasing activity in our nurse and allied staffing business during the quarter.

Keeping in mind, given the shorter nature of contracts from local tenens, we tend to have less visibility in this business relative to our other staffing businesses. Meanwhile, our clinical staffing business appears to be turning the corner based on improved order levels and recent contract awards.

In the fourth quarter we expect segment revenue to show modest year-over-year growth for the first time in two years as we move past the headwinds of unfavorable comparisons resulting from the phase-out of contract research projects in the third quarter of 2009, in addition the pipeline of potential projects in this segments is encouraging as we look towards our prospects in future quarters.

Gross profit margins for the Company as a whole were 120 basis points favorable compared to the year ago quarter. I believe our operating discipline during the exceptionally challenging period we are only now emerging from, has put our Company in an attractive position relative to our major competitors. While we continue to focus on the strength of our balance sheet, we are open to acquisition opportunities that would be clearly advantageous to shareholder value creation..

In the meantime, we feel the healing of our temporary staffing markets and our excellent competitive positioning will provide us more than adequate opportunity to resume organic growth in what continues to be a healthcare market with very attractive long-term characteristics. And with they would like to now turn the call over to Emil, who will be update you in more detail on our third quarter financial performance. Emil.

Thank you, Joe, and good morning, everyone. First, I will go over the results for the third quarter and then review our revenue and earnings guidance for the fourth quarter that we provided in the press release issued last evening. Revenue in the third quarter was $116 million, down 11% versus the prior year, and 2% sequentially.

The revenue decline reflects primarily the soft demand in our physician and nurse staffing businesses earlier this year, which we believe was largely caused by the weak national labor market. More recently, we have seen an overall firming of demand across the country, and as Joe has indicated, the improvement in demand for travel nursing services, partly reflects our success in obtaining new vendor mange service contracts, which should allow us to generate sequential revenue growth in this segment in the fourth quarter.

Our gross profit margin was 28%, up 120 basis points over the prior-year quarter, but down 60 basis points sequentially. The sequential margin decline was due to unfavorable worker's compensation claims development. The year-over-year margin improvement was due to a change in business mix amongst segments, coupled with improvements in the both pay spread and lower housing costs.

Partially offset by higher worker's compensation insurance expenses. The unfavorable year-over-year worker's compensation comparison was magnified by the unusually good claim experience we enjoyed in the prior-policy year. SG&A expenses in the third quarter were down 6% from the prior year and 3% sequentially, reflecting our actions taken to reduce overhead expenses during the past year.

Our SG&A expenses in the third quarter included approximately $700,000 in equity-based composition expenses. Net interest expense was $1.1 million, down 32% from the prior-year quarter, reflecting the continued delivering of our balance sheet. The effective income tax rate was 48% in the third quarter, essentially unchanged from the second quarter.

We expect our tax rate in the fourth quarter to be in the mid-40% range. Net income in the third quarter was $900,000 or $0.03 per diluted share. This compares to $0.03 in the year-ago quarter, and $0.04 in the second quarter.

Turning to the balance sheet, we ended the quarter with $55 million of debt and $9 million of cash and short-term cash investments. Our leverage ratio, as defined in our credit agreement was two to run, 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. Days sales outstanding were 53 days, up three days from both the second quarter and the prior-year quarter.

The increase in DSOs is partly due to a temporary buildup of receivables in our clinical trial segment, which was subsequently collected after the end of the quarter. We generated $1.1 million of cash from operating activities in the third quarter, capital expenditures totaled approximately $600,000.

Let me drill down next to our four reporting segments. Revenue for the nurse and allied staffing segment was $58.3 million, down 9% versus the prior year, and 3% sequentially. We averaged 2,086 field FTEs in the third quarter, down 7% versus the prior year, and 4% sequentially.

The year-over-year decline in staffing volume reflects the steep drop in demand as we experienced in 2001, which we believe was caused by a combination of a weak national labor market, and the reduction in surgeries. The sequential decline is entirely attributable to the temporary loss of business related to the vendor-managed account that Joe referred to earlier.

With respect to booking activity, the book-to-bill ratio has been improving steadily from 88% in the first quarter, to 97% in the second quarter, to 107% in the third quarter, and is averaging 123% so far in the fourth quarter. Based on these improved bookings trends, and adjusting for the seasonal drop-off in the second half of December, we would expect a sequential volume increase in the mid-single digits in our nurse and allied staffing segment in the fourth quarter.

Segment revenue per FTE per day in the third quarter was down 3% from the prior year, and was essentially flat on a sequential basis. Average hourly bill rates in our travel nurse staffing business were down 2% from the prior year, partly due to changes in the geographic mix, and were essentially flat sequentially.

Contribution income as defined in our press release was $5.3 million in the third quarter, down 15% from the prior-year, and 13% sequentially. Segment contribution margin was 9.1%, down 60 basis points from the prior year, and down 110 basis points sequentially.

The year-over-year margin decline was due to negative operating leverage, and higher worker's compensation expense that was partially offset by expansion of the bill pay spread, and lower housing expenses. The sequential margin decline was due to an accrual adjustment to worker's comp liability, due to adverse claim development partially offset by continued improvement in the bill pay spread.

Let me turn next to our physician staffing segment. Revenue was $31.3 million in the third quarter, up slightly on a sequential basis, but down 21% from the prior year. Physician staffing days filled were down 17% from the prior year, and 2% sequentially. The lingering effects of the recession and the weak housing market have delayed retirement plans of many older physicians. These factors, along with a reduction of surgeries and a trend in which hospitals have had increasing success in directly hiring physicians for staffing positions, have resulted in a decrease in demand for temporary physicians.

The decline was particularly large in anesthesiology, which has historically has been one of MDA's largest specialty areas. Segment contribution income for the third quarter was $3.5 million, representing an 11.2% contribution margin, up 120 basis points from the prior year, but down 70 basis points sequentially.

These margin fluctuations were primarily due to changes in professional liability expenses, which decreased on a year-over-year basis, but increased sequentially. On a year-over-year basis, we have seen favorable professional liability accrual adjustments reflecting a change in mix to lower specialties and geographic locations, as well as better than expected loss development.

The impact on our margins of the lower insurance cost was partially offset by negative operating leverage. Revenue in our clinical trial services segments was $15.7 million, down 5% from the prior year, and down 1% sequentially. The year-over-year decline reflects the conclusion during the prior-year quarter of a large clinical trial that we were contracted to manage.

The core staffing component of our clinical trials business, which accounted for 93% of the segment revenue in the third quarter, grew by 5% over the prior year, due to higher average bill rates. Contribution income was $1.8 million, up 7% from the prior year, and 4% sequentially, due to a reduction in SG&A expenses in the current quarter.

Revenue for the other human capital management services segment, was $10.5 million, up 9% from the prior-year, but down 5% sequentially. Contribution income was $700,000, down 1% from the prior year, and 16% sequentially. Both the education and the physician surge business registered revenue growth over the prior year, but the contribution margin in our education business was impacted negatively by higher marketing costs.

This brings me to our guidance for the fourth 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 evaluation allows, or any material legal proceedings.

We project the average nurse and allied field FTE count to be in the 2,125 to 2,175 range in the fourth quarter. Consolidated revenue for the fourth quarter is expected to be in the $113 million to $116 million range. We expect the gross profit margin of approximately 28% and an EBITDA margin in the 4% to 4.5% range. Sequentially, the gross profit margin is expected to benefit from lower worker's compensation expense that will be offset by the impact of three additional paid holidays in the clinical trial services segment.

SG&A expenses are expected to show a modest increase sequentially, reflecting investments we are making in our VMS delivery capabilities. Interest expense in the fourth quarter is projected to be down approximately $350,000 sequentially, reflecting the termination of an interest rate hedge contract in October.

Depreciation and amortization expense is expected to remain essentially flat sequentially. Based on these assumptions, earnings per diluted share are expected to be in the $0.01 to $0.03 range. For the full year, we expect revenue to be in the $468 million to $471 million range, and earnings per diluted share to be in the range of $0.11 to $0.13. This concludes our formal comments. At this time, we will open up the lines to answer any questions that you may have. Teresa.

Thank you. We will now begin the formal question-and-answer session. (Operator Instructions). Tobey Sommer of SunTrust you may ask your question.

This is Frank in for Tobey. I wanted you to remind us a little about the seasonality in physician staffing and kind of your thoughts. You talked about a modest drop in that, Q4 in that, perhaps. How much of that is due to seasonality?

When we look at it historically, Frank, the drop-off is a couple million dollars from the third quarter revenue we achieved. The increase in the third quarter which is seasonally the typically, the peak quarter, for that business, covering vacations and -- as such, that increase was probably not as much as we would have expected seasonality, but we did see just a modest sequential improvement, and I would describe the drop-off in the fourth quarter maybe a little more than we would normally expect. So that's the one -- the segment we have -- right now, the least confidence of a resumption of growth. We feel pretty good about where we are in nurse and allied businesses and we feel pretty good about our positioning of our clinical trials our education business. The physician business is showing indications of stabilizing, but, again, given the very short nature of the contracts relative to other businesses, it's really hard to pin that down as -- nearing a turn. Like I said, it's probably a little more of a -- it's still trending a little unfavorably, but it does seem to be getting to a point where we can look to see better days ahead.

Frank, just to give you some numbers behind that, when we look at the sequential change from Q3 to Q4, last year we had a 16% drop sequentially, and the year before the drop was about 5%. Keep in mind that last year's drop reflected, what was at that time a significantly weakening market, so it was probably greater than normal, so for this quarter, our projections imply a high single-digit drop-offs from Q3 to Q4.

Okay. Great. That's very helpful. And I think you mentioned a slight bill rate decrease in nurse and allied of about 2%, and it was geographic mix was mentioned as a cause for that. Can you give us any color on kind of where the areas of geographic weakness or strengths are, and kind of how that's playing out?

Well, generally, our bill rates reflect the changes in our cost of service, which are primarily driven by housing costs. And we have had a decrease in the relative proportion of revenue derived from high housing costs markets, such as New York City or the Northeast, at the same time we had some increasing in lower-cost markets, such as Florida, Arizona, and Texas.

And Frank, just -- the decrease year-over-year was actually 3%, and as Emil indicated, our analysis suggests at least part of it is due to the decline, particularly in the Northeast, where -- which was an under-performed and was partly as a result of a temporary loss of an account we have had for a number of years, which we're pleased to say has come back to us, but there's no question the fundamentals of that business, there's not a lot of strength in pricing. It's not a market where we have the opportunity to make a compelling case for price improvement. Most of our costs, as you can see from our gross margins are direct costs, are pretty favorable. So we don't have any expectation that we're going to see a firming in price going forward, but we also don't expect the underlying price reduction to veer much from the trend line that we see.

Okay. Great. And if I could sneak one last one in? You gave some nice color in recent trend or thoughts going in to 4Q for nurse allied as well as physician, any visibility in terms of clinical trials or recent trends or indications that you have seen?

Yes, I think as we indicated we expect the number to be better than a year ago. At this point we're really comping mostly the staffing piece of the business, and the staffing piece of the business has been on a generally-improving trend line this year. We have had some recent contract wins, one in particular that we feel will give us some momentum going in to 2011. There's another, large engagement that we have put up a better than 50% prospect of winning that would move the needle to an even greater extent. So we do feel that business is on track, as been able to get some traction and is likely to grow in 2011.

And Frank, just to -- you need to keep in mind that the fourth quarter has about 5% less billing days than the third quarter as far as the clinical trial business is concerned, about three less days, so our guidance assumes essentially a flat revenue from Q3 to Q4, but that's in the context of 5% less billing days.

Great. Thanks so much.

You're welcome.

A.J. Rice of Susquehanna. You may ask your question.

Good morning. It's actually Chris Rigg billing in for AJ.

Hi, Chris.

I was hoping you could help size up the vendor management relationship that -- that you said the client left you earlier this year and came back. Can you give us a sense for when that client left, and a sense of how that effected the sequential trends from an FTE standpoint or any relevant metric, that might give us a sense for how the rest of the business tracked at least through second and third quarter of 2010?

It -- really, almost paralleled -- we knew we lost it earlier in the year, but it -- it actually left us right at the start of the third quarter -- actually -- I'm sorry -- right at the end of the second quarter in early June. So we stopped booking new nurses, but we had a fair number of nurses there and it came right back at the end of September. The sequential impact of the ramp down of our activity at that account was a little more than $3 million, accounted for more than all of the sequential decline in the nurse and allied segment. We don't know that it is going to get back, how quickly or if it will get back to the same level it was earlier this year. Any of the contracts we work with have -- they may have a electronic medical record implementation going on, so there may be things that drive activity even within an account, but, it, yes, historically was a strong account for us. We felt like we did a pretty good contract for them, and they did select another vendor, which I am not going to say didn't hurt our feelings, but was a real -- in our eyes a validation of the level of and the quality of service that we provide, that they came back to us pretty quickly, after having tested the waters with another vendor.

Okay. And so do they now have two vendors or just they got rid of the other one and rehire you guys.

As we understand it there was an overlap, going forward -- just as there was an overlap as we were transitioning out. We still had nurses when they gave it back, but it was -- a handful opposed to relatively strong numbers we had over the last several years. There will be a period where both Companies are providing service. It's our understanding we are the only ones getting the orders today.

Okay. And then a higher-level question, you have made a lot of comments about sort of how macro trends have impacted your volumes, clearly in some of this -- it fits together. Acute care hospitals admissions have been very weak as well, we have seen that from some of the publicly traded guys. We know that those volumes on the hospital side can turn very quickly positively -- or negatively, but given we're so low more likely to the positive. How quickly would you guys see a benefit, in your opinion, to the extent hospital volumes did begin to track favorably over the short-term?

We agree with your assessment that when there is higher likelihood that they are likely to be above trend line, probably more importantly to us, above expectations, we are the marginal provider of service, so the impact on demand for our service tends to be somewhat disproportionate to the -- may seem to be modest improvement in trend line for admissions. And so, there's no single answer to your question, but it would be out sized to whatever the -- above expectation -- the actual admission experience of the hospitals was if it -- if they expected to be flatter or slightly down and they came in 1% to 2% up, it could have a pretty meaningful near-term impact on demand for our service. Now we may not be able to fill all of the jobs just given to us, because you than need to convince nurses that are not engaging in the travel nursing market to engage, but we would certainly expect it to have a -- directionally, a pretty meaningful slope -- change in slope of our activity.

Okay. And then last one, just a maintenance question. You talked about a receivables billed in the quarter, and that some money was released shortly after the close of the third quarter. Can you give us a sense for how much money we were talking about there?

It explains roughly half of the increase in our DSOs, so when you do the math that works out to be just under $2 million, but in addition to that there were other factors that were timing in nature that effected our increase in DSOs. There was a shift in the revenue mix in our nurse and allied segment, where revenue generated from historically fast-paying clients was declining during the quarter, while revenue from historically slower-paying clients was ramping up. And there was timing of the payroll cycle which resulted in a fairly significant increase in un-billed receivables at quarter end, which contributed to a half to a day of the DSO increase.

Okay. Thanks a lot.

Thanks, Chris.

Joe Morin of BMO Capital Markets you may ask your question.

Thanks so much. I wanted to go over the nurse allied segment. In talking about margin you mentioned a few times about some of the adverse claims and the unfavorable worker's comp expense. Can we just get a little more color on that?

Yes, sure. Let me give you the background on how we adjust our reserves for worker's comp. At the end of this quarter, we increased our worker's comp reserve by about a $0.5 million for incurred but not recorded losses that were due to adverse loss development for the most recent policy year. Our worker's comp policy, the news in the third quarter, and the actuarial methodology that was associated with the most recent green policy changes once you reach that 12-month anniversary from its inception. Up to that point, the losses are not considered credible from an actuarial standpoint. And the estimate of ultimate losses are based more on the historical loss rates than on actual incurred losses. But after the 12 month losses, the actuarial calculations rely more heavily on industry and company-specific loss development factors. Because our losses were higher than normal in the 2009 to 2010 policy year, this resulted in a need for additional IBM accrual, and by contract -- contrast, the reverse situation occurred last year, when the 2008, 2009 policy year reached its 12-month anniversary -- since our incurred losses in that policy was significantly lower than normal. Loss development tends to vary randomly from year to year, but these types of actuarial-driven accrual adjustments need to be made periodically, both for our worker's comp and professional liability policies.

Are these true-ups are only done in the third quarter each year, is that what you said?

We do look at it on a quarterly basis, but the impact on worker's comp is typically most pronounced in the third quarter, because that's when we transition the methodology.

Great. Thanks very helpful. Joe, if historically said, if we look at the variable contribution margin for every dollar increase in revenues, I think it has been roughly been in the mid-teens, but it could be higher than that early in a recovery. Can you just confirm that I had that correct? And are there any major differences in that by segment?

You are correct. That's what we would have historically have guided to you to. Right now, we're seeing a little bit -- I think it's a little bit different situation because -- not insignificant part of our ramp-up is related to adding VMS accounts and they tend to vary in complexity, so I think we're in a situation, given that we have reduced headcount pretty aggressively when the industry was in significant downward trend line in late 2008 and the first half of 2009. We have been adding overhead, probably to a greater extent than we would see ourselves doing at an early point in a recovery, just because you need different skill sets to manage these large vendor-managed accounts. But, I would still say the incremental contribution margin would be in the 12% to 15% range, even with the additional overhead that we're adding.

Okay. And again, any major differences by segment?

Well, you would expect the segments that have a relatively high fixed cost component to have the greatest marginal benefit from an increase in revenue. For example, our physician surge business would be probably give you the highest marginal contribution income, but also keep in mind that it's also our smallest segment.

Okay. Great. That's very helpful. Thanks so much.

Okay. Thank you, Joe.

(Operator Instructions).

Okay. Teresa, are there any further questions

There are no further questions at this time, sir.

Okay. And thank you for listening in and we look forward to updating you on our fourth quarter results in February. Take care.

This concludes today's conference call thank you for your participation.