Cross Country Healthcare Inc (CCRN) 2010 Q4 法說會逐字稿

Welcome to the Cross Country Healthcare fourth-quarter 2010 earnings conference call. At this time all participants are in a listen-only mode and the call is being recorded. If you have any objections, you may disconnect at this time. Throughout the call you will have an opportunity for question-and-answer sessions. (Operator Instructions).

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 fourth-quarter and year-end 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, appears, estimates and similar expressions are forward-looking statements.

All known and unknown factors that may cause our actual results or performance to be [materially] different from any future (technical difficulty) implied by these forward-looking statements.

Factors were set forth under the forward-looking statements section of our press release (technical difficulty) year-end 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 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.

Also, our remarks during this teleconference reference non-GAAP financial measures, including non-GAAP adjusted EBITDA, non-GAAP adjusted net income, and non-GAAP adjusted earnings per diluted share. These non-GAAP financial measures are provided as additional information and should not be considered substitutes for or superior to financial measures calculated in accordance with US GAAP. More information related to these non-GAAP financial measures is contained in our press release.

Now I'll turn the call over to Joe.

Thank you, Howard, and thank you to everyone listening in for your interest in our Company. As reported in our press release issued last evening, our revenue for the fourth quarter of 2010 was $114 million, down 8% from a year ago and down 2% sequentially from the third quarter.

After recognizing $6.6 million in after-tax trademark impairment charges related to the 2008 acquisition of MDA, our adjusted net income was $600,000 or $0.02 per diluted share on an adjusted basis. This compares to $0.05 per diluted share on an adjusted basis in the year-ago quarter. Cash flow from operations for the fourth quarter was $7 million.

The fourth quarter of 2010 appears to be the nadir of the most challenging period in our Company's history, as our revenue expectation is for solid sequential improvement in the first quarter of 2011, despite two less billing days for our largest segment, Nursing & Allied Staffing, which represented more than 50% of our total revenue.

The revenue improvement in our Nursing & Allied Staffing business is being driven by our best-in-class managed service provider solution and our success in providing supplemental staffing to large hospital systems implementing electronic medical record technology.

During the fourth quarter of 2010 approximately 30% of our Nursing & Allied Staffing FTEs were working at our MSP accounts. Moreover, there are additional hospitals where we have been awarded MSP contracts, but have not yet implemented our program. This gives me confidence that the expected revenue improvement in the first quarter of 2011 is sustainable.

As a cautionary note, a headwind to this business remains the continued weakness in the national labor market. While demand for travel nurses is currently running at more than double the level of a year ago, it remains well below historically normal levels.

Nevertheless, despite the weak macro environment for this business, the focused strategy that we have employed over the past several years has allowed us to weather the worst of the industry's downturn and positioned us well for a recovery in demand as an unprecedented number of nursing professionals near retirement over the coming years.

I am also encouraged by the recovery in our Clinical Trials Services business. This recovery is the result of solid performance in the staffing component of this business, which now represents over 90% of activity in this segment. Based on recently awarded contracts, I expect this business to continue growing beyond the first quarter.

In our physician staffing business, which is our second largest segment, accounting for 25% of fourth-quarter revenue, there are some positive indicators, but we remain only cautiously optimistic due in part to the more limited visibility in this segment.

The challenges faced by physicians include significant changes in federal legislation and the weak housing market, among other issues. I believe these challenges have encouraged physicians to be much more open to becoming employees of hospital systems than at any point in the past.

While recent court decisions may render the future of health care reform more uncertain, I believe this uncertainty is likely to make physicians more willing to seek the security of hospital employment until the future becomes clearer.

Gross profit margins for the Company as a whole were 40 basis points favorable compared to the year-ago quarter. I continue to 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.

Because of consolidation and other factors, the number of qualified and experienced competitors for MSP engagements has been reduced. At the same time, the burden of our debt service is low and very manageable in comparison to our primary competitors.

We believe these factors put us in a strong position to continue as a consolidator in this industry going forward. In the meantime we will remain focused on being the highest quality provider of health care staffing services in all segments we serve.

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

Thank you, Joe, and good morning everyone. First, I will go over the results for the fourth quarter and full year 2010, and then review our revenue and earnings guidance for the first quarter of 2011 that we provided in the press release issued last evening.

Revenue in the fourth quarter was $114 million, down 8% versus the prior year and 2% sequentially. The year-over-year 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 and housing markets.

While demand for our physician staffing services is still weak, it has been improving for our Nursing & Allied Staffing business. The latter segment, which accounted for 52% of our fourth-quarter revenue registered its first sequential quarterly revenue growth since the fourth quarter of 2009, which benefited from what turned out to be a temporary spike in demand driven by a fear of an H1N1 pandemic.

This time the improvement in demand for our Nursing & Allied Staffing services appears to be sustainable, as it is driven by our growing list of managed service provider contracts and our success in supporting EMR implementations at large hospital systems. We expect further sequential revenue growth in this segment in the first quarter of 2011.

Our gross profit margin was 28.7%, up 40 basis points over the prior-year quarter and 70 basis points sequentially. The year-over-year margin improvement was due to a change in mix among business segments, while the sequential improvement was due primarily to lower workers' compensation insurance expenses.

SG&A expenses in the fourth quarter were down 1% from the prior year, but up 2% sequentially. The sequential increase reflects our strategic investment in infrastructure to support our growing managed service provider client base. SG&A expenses in the fourth quarter included approximately $700,000 in equity-based compensation expenses as compared to $600,000 in the prior-year quarter.

Adjusted EBITDA, as defined in our press release, was $6 million as compared to $8.1 million in the prior-year quarter.

Net interest expense was approximately $750,000, down 42% from the prior-year quarter, and 33% sequentially. The sequential improvement reflected the expiration of an interest rate hedge contract in October of 2010, as well as the continued delevering of our balance sheet.

The current borrowing rate on our $53 million term debt is 200 basis points over LIBOR.

In the fourth quarter, based on our annual goodwill and intangible impairment analysis, we took a $10.8 million pretax impairment charge related to the MDA trademarks which we acquired in 2008. This equates to $6.6 million after tax.

The reduction in the valuation of the trademarks is essentially driven by lower revenue projections for our physician staffing business. We concluded that the goodwill associated with the MDA acquisition was not impaired. Unlike trademarks, goodwill valuation is primarily a function of cash flow projections. And MDA has been successful in not only maintaining, but actually improving its full-year operating margins during this downturn.

Our net loss in the fourth quarter was $6 million or $0.19 per diluted share. This compares to net income of $0.01 per diluted share in the prior-year quarter.

Adjusted net income, as defined in our press release, was $600,000 or $0.02 per diluted share on an adjusted basis, and compares to $0.05 in the prior-year quarter and $0.03 in the third quarter of 2010.

The effective income tax rate was 34% in the fourth quarter, resulting from a 39% tax rate applicable to the $10.8 million impairment charge and a 64% tax rate applicable to our adjusted pretax income, as defined in our press release.

The high tax rate in our adjusted pretax income is due to certain discrete items. For the year as a whole the effective tax rate on our adjusted pretax income was 45%.

Turning to the balance sheet. We ended the quarter with $53.5 million of debt and $11 million of cash and cash equivalents. Our leverage ratio as defined in our credit agreement was 2.1 to 1, as compared to 2.5 to 1 ratio allowed. Net of cash, our debt to total capital ratio was 14% and the current ratio was 2.8 to 1.

Days sales outstanding were 52 days, unchanged from the prior-year quarter and down one day sequentially.

We generated $6.7 million of cash from operating activities in the fourth quarter and $31.5 million in all of 2010.

Capital expenditures totaled approximately $1.2 million in the fourth quarter and $2.4 million for the full year.

For the full year 2010 our revenue was $469 million, down 19% from the prior year. Net loss for the year on a GAAP basis was $2.8 million or $0.09 per diluted share. This compares to net income of $0.22 per diluted share in 2009.

Adjusted net income was $3.8 million in 2010 or $0.12 per diluted share as compared to $0.26 per diluted share in 2009, both on an adjusted basis.

Let me drill down next into our four reporting segments. Revenue for the Nursing & Allied Staffing segment in the fourth quarter was $59.4 million, down 9% versus the prior year, but up 2% sequentially. We averaged 2,124 field FTEs in the fourth quarter, down 8% versus the prior year, but up 2% sequentially.

The year-over-year decline in staffing volume reflects the relatively weak bookings in the first half of 2010 and, conversely, the sequential growth was driven by the improvement in booking activity beginning in the second half of 2010.

The book to bill ratio improved from 92% in the first half of the year to 108% in the second half. When the average book to bill ratio exceeds 100% over the course of a quarter we typically expect sequential volume improvement in the next quarter.

Segment revenue per FTE per day in the fourth quarter was down 1% from the prior year and was essentially flat on a sequential basis. The average hourly bill rate in our travel nurse staffing business was down 3% from the prior year, partly due to changes in specialty mix, and was down 0.6% sequentially.

Contribution income, as defined in our press release, was $5.6 million in the fourth quarter, down 22% from the prior year, but up 6% sequentially. Segment contribution margin was 9.5%, down 150 basis points from the prior year, but up 40 basis points sequentially.

The year-over-year margin decline was due primarily to negative operating leverage, while the sequential margin improvement was due largely to lower workers' compensation expenses.

For the year as a whole segment revenue was $242 million, down 23% from the prior year. And the contribution margin decreased by 30 basis points to 9.5% from 9.8% in the prior year.

Let me turn next to our physician staffing segment. Revenue was $27.9 million in the fourth quarter, down 16% from the prior year and 11% sequentially. The physician staffing days filled were down 18% from the prior year and 11% sequentially.

The lingering effects of the recession and the weak housing market have delayed the retirement plans of many older physicians. These factors, along with the increasing success that hospitals that have had in directly hiring physicians for staff positions, have resulted in a decrease in demand for temporary physicians.

The decline was particularly large in anesthesiology, which historically has been one of MDA's larger specialty areas.

Segment contribution income for the fourth quarter was $3 million, representing a 10.6% contribution margin, down 90 basis points from the prior year and 60 basis points sequentially. The margin decline was due to negative operating leverage, partly offset by lower professional liability expense.

For the full year 2010 segment revenue was $122 million, down 20% from the prior year. Contribution margin improved by 70 basis points to 10.7%, from 10% in the prior year.

Revenue in our Clinical Trials Services segment in the fourth quarter was $15.3 million, down 2% sequentially, but up 3% from the prior year. The sequential revenue decline is due to three less billing days in the fourth quarter, while the year-over-year revenue increase reflects improving demand from the core staffing component of our Clinical Trials Services business, which accounted for 93% of the segment revenue in the fourth quarter.

Contribution income was $1.3 million, up 46% from the prior year, but down 25% sequentially due partly to the seasonal factors related to vacation pay.

The year-over-year improvement in contribution income is due primarily to lower SG&A expenses, reflecting the cost saving measures we implemented in the past year.

For the full year 2010 segment revenue was $62 million, down 14% from the prior year. Contribution margins were up 50 basis points to 10.3% from 9.8% in the prior year.

Revenue for our other human capital management services segment in the fourth quarter was $11.1 million, up 4% from the prior year and 6% sequentially. Contribution income was $1.3 million, up 24% from the prior year and 90% sequentially. Improvement in both our education and search businesses contributed to the sequential growth in contribution income.

The year-over-year growth in contribution income was due to significantly higher operating margins in our search business.

For the year as a whole segment revenue was $43 million, up 3% from the prior year. Contribution margin was up 170 basis points to 8.8% from 7.1% in the prior year.

This brings me to our guidance for the first quarter of 2011. 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, and any material legal proceedings.

We project the average nurse and allied field FTE count to be in the 2,375 to 2,400 range in the first quarter. Consolidated revenue for the first quarter is expected to be in the $119 million to $121 million range.

We expect our gross profit margin to be in the 26.5% to 27% range, and adjusted EBITDA to be in the 3.5% to 4.5% range. Historically gross profit margin declines by approximately 100 basis points from the fourth quarter to the first quarter due to factors such as the reset of payroll taxes and the impact on housing costs from two less days.

SG&A expense as a percentage of revenue is expected to remain essentially flat sequentially. Interest expense in the first quarter is projected to be approximately $700,000. Depreciation and amortization expense is expected to decline by approximately 1% sequentially.

Based on these assumptions, earnings per diluted share are expected to be in the zero to $0.02 range. This EPS guidance range is based on an estimated effective tax rate of 50%.

The seasonal impact of the payroll tax reset and two fewer days in the first quarter -- on the first-quarter EPS is expected to be approximately $0.04 per diluted share on a sequential basis.

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

(Operator Instructions). Tobey Sommer, SunTrust.

This is Frank in for Tobey. A quick question on the other human capital segment. Nice job there. Can you talk about what is driving the education or retained search? Are you saying more visibility in terms of budgets? Any color you can give will be great.

It was a very good quarter for both those segments. The education business has had actually -- had a pretty good 2010. It was the strongest of all our businesses throughout the year, which suggests at some point people have to go out and get continuing education for either licensure or certification, so there is only so much that can be postponed.

Often the attendees at our seminars, and we were putting on over 5,500 year, are reimbursed by their employer. So that is also a good sign, we think, directionally overall for the health care market.

The physician search business has had a very tough time. The physician space generally has been tough. Our Cejka brand historically had been the Tiffany brand of retained search. And that has been a tough niche to maintain because the market has become more and more price sensitive. So they have made adjustments -- tweaks to their model. It is still a retained search, but there is more of a contingent aspect to it than there ever has been historically.

I don't necessarily think that potentially for the Cejka brand that we are out of the woods. I think physicians generally are locums, and our retained search business is still the segment that I have the lowest level of optimism for. I am much more optimistic about the other businesses that we are in.

The education business, I think we'll continue to chug along. It did have some disruption in January because of the really terrible weather, particularly in the South, Southeast. When the Atlanta Airport is shut down that tends to disrupt the ability of those that are putting on the seminars and their ability to get from city to city.

So when you look at our guidance we actually feel pretty good about our three largest segments, but our expectations for the first quarter in the other human capital management is actually down a little bit at the top line, which wouldn't normally be our expectation on a seasonal basis.

So despite the great performance we saw in the fourth quarter, we don't want to get you too excited, we think it is -- we're not quite out of the woods, particularly on the search side. Emil, I don't know if you want to add anything.

I just wanted to point out that on the contribution line the performance of the search business was especially strong as a result of the cost reduction measures that we have taken during the past year. This is our most leverageable business. So even a modest improvement on the top line reflects disproportionately on the bottom line.

I agree. That's very helpful. Maybe a couple of quick numbers questions. Clinical staffing, in that segment, I guess there were 5% less billing days in the quarter sequentially. Can you talk about billing days expected in 1Q?

I actually don't have that in front of me. But I can tell you that in terms of the revenue expectation from the first quarter, we expect the revenues to be up sequentially in the low single digits.

Okay, great. And you gave some nice color on the 1Q kind of tax rate. For the remainder of the year, the trajectory, would we expect that to normalize? Any color there would be great.

It is a tough number to really come up to because of the disproportionate impact that discrete items may have. But I think for modeling purposes I would encourage you to continue to use 50% for the rest of the year as well.

Our tax rate is impacted by certain permanent book tax differences related to our per diem plan. And given our relatively low pretax income, I think 50% is probably still a reasonable number to use.

Great. If we step back a little bit, in your remarks and even in the press release, you really highlighted the managed service provider model and success with that recently. How much visibility do you have that that will continue? And if you could maybe talk a little bit about the drivers that you are seeing in the spaces that have made that successful.

There is actually pretty good visibility. We have three or four, probably maybe more than four at this point, that we have won. We are either in the process of finalizing a contract and a timetable. It takes about three to six months to onboard a VMS account.

Part of the pressure on our SG&A expense in the first quarter is really ramping up categories of employees that we really haven't -- we wouldn't typically add coming out of a downturn, that tend to be higher cost employees, project managers. Because we are bringing on more -- at any given time we have to have more really qualified people to conduct that on-boarding process, and they tend to be more expensive types -- classifications of professionals.

Nevertheless, it is a high-class problem. We are always happy to win these. And we believe we are winning because we have a great solution. We have great references from accounts that we have served.

As I mentioned in my remarks, there has been some consolidations, some other issues in the industry which -- one of the primary criteria that a prospect for a MSP or VMS account would offer is they are looking at your balance sheet. How strong financially are you? Because one of the pitfalls of the segment had been some -- particularly some technology-oriented VMS providers going bankrupt and leaving subcontractors on the hook, and going back directly to the hospital account to try to collect their money. It has just been a disruptive issue.

So more and more we find that early on as part of the screening process hospital systems are screening for financial viability. We think no one is more financially viable, so we have -- we are really getting everything hard.

I think we believe we are -- it is a bit of an overused term these days, but we think we are winning more than our share in this segment, which has been the most important dynamic of the Nursing & Allied Staffing market over the past two years.

Great, thank you very much. I will jump back in the queue.

Jeff Silber, BMO Capital Markets.

I had a question about the gross margin, guys. I guess when we looked last year at this time your gross margins were immediately higher in the first quarter than what you're projecting for the first quarter 2011.

Now I know there is a seasonality issue, and looking in 4Q '09 you are starting to rehire basis well, but again, just comparing year-over-year gross margin trends, it looks like you're going to be down about 50 to 100 basis points in the first quarter.

Is that the kind of trend we should expect for the rest of the year on a year-over-year basis?

Jeff, when you actually look at our gross margins you really do have to factor in the impact of mix -- segment mix on our consolidated gross profit margins. Our lowest gross profit margin segment is the Nursing & Allied Staffing. And it is that segment that is actually growing now more rapidly than the other segments. So just the element of mix is going to drive some reduction in our consolidated gross profit margin.

In addition to that, we are starting to see some pressures on the housing front, which we haven't seen for the last two years. So that is going to be a bit of a head wind on the margin as well.

Actually, that is very helpful. I appreciate that. In terms of just drilling down a little bit more on the guidance to give us a little bit of color about the different segments, I am not sure if you said what you're projecting for the physician staffing business on a sequential basis. If you can provide some guidance on that, that will be great.

Well, let me give it to you for all segments so that you have a comprehensive picture. For the Nursing & Allied segment we are expecting sequential growth in the low double digits. For our physician segment we are projecting sequential growth in the mid-single digits. And for clinical trials we expect sequential growth in the low single-digit. As Joe indicated, on the other human capital management segment we expect a sequential decline in the mid-single digits.

All right, great. I appreciate that. Just a couple more guidance questions. What share count is embedded in your first-quarter guidance?

31.1 million shares.

And then how about capital spending for the year 2011, what is budgeted there?

For modeling purposes I would expect approximately $3 million of CapEx in 2011.

And then one more big picture question. Joe, in your remarks you talked about the fact that your balance sheet is getting stronger, and you expect the Company to be one of the, I guess, consolidators, as you put it. Where are the holes in your portfolio? What type of businesses might you like to add?

I guess I don't approach it from that standpoint right now. I think we are in the businesses we want to be in. If there is something that we aren't doing that we would like to do, it would probably involve billers and coders. It has always been an area that we think fits our core competencies pretty well that we are not currently doing.

We don't necessarily think doing it organically is the most efficient way to get there, so we would be in the market for a company in that segment. But there is not a lot of big companies in that segment. They would tend to be smaller acquisitions.

Otherwise, it would just be the opportunity to deploy capital with the highest potential return of the opportunities in front of us. At this point, as Emil indicated, we are building up cash, whereas for the last several years we have been aggressively prepaying debt.

The debt -- since our hedge expired in October, we are paying market rate, which for us right now is in the low 2% range. We don't think we could duplicate that if we went out to the market right now. So we are holding on to what we think is a very attractive long-term debt -- credit agreement that expires sometime in 2013. Building up cash, and hopefully deploying that cash in an attractive acquisition.

Okay, great. Thank you so much.

(Operator Instructions). Gary Taylor, Citigroup.

A couple of questions. First, just following along the lines of the last question about consolidation. Any change to your view on per diem?

Well, as you know, we are in the per diem business. We are expanding it organically for the first time really since we have owned the business going back to 2003, mostly in the context of supporting the MSP activity that we are engaged in. As we bring on these accounts we have a strong network of subcontractors that we work with. We work with hundreds of companies that support us in our MSP engagements.

But, in addition, we want to utilize the competence and really the dedicated activity of our own per diem brand. And would we be open to an acquisition in the per diem? Absolutely. It is not a bad business. It is a business that doesn't have quite as favorable the margin characteristics that the travel nursing business does or even the Allied business does. But it can be a very good business when the industry recovers.

It appears to us that the industry is recovering, although just to reiterate, we are a long way from recovery. We're halfway back to what a normalized level of demand would be. But of course, the number of nurses we have coming off contract is substantially less than it was two years ago.

So we certainly -- we are growing. If you look at where we are today, versus where we were at the peak in December, we are up about 16%. So it is really strong momentum in the business. And as we indicated, an important indicator is are booking more than we currently have working. We have booked more than we have working up to this point in Q1, which is a little unusual.

If you look back historically there are not many years where that has occurred, which gives us modest momentum even going into the second quarter, where normally we would have a seasonal decline in the business. So it is a relatively encouraging picture.

I have three more questions that I'm going to ask you to look out a few years. Just, one, related to the physician business. Obviously, the challenge from hospital employment in most circles is forecasted to continue to increase. More and more physicians, greater percentage is being directly employed by hospitals.

Do you see that as a secular challenge to the business, and does it impact some parts of the physician business more than others, whether you're filling a seasonal hole versus a temporary hole?

I think it does represent a challenge, and I think that challenge is likely to continue. Having said that, the dynamics of the business appeared to have -- to be stabilizing and may have stabilized. We just don't have the same kind of visibility in that business.

We had a pretty encouraging January in that business, particularly in the anesthesia area, which has been by far and away the biggest headwind for us. A significant portion of the revenue decline has come specifically from that one specialty, which is one of only 15 or so that we provide.

So we are modestly optimistic. We still think it is a good business. We really like the management team that we acquired with that business. But it is -- if I had -- going back to the previous question of where we would deploy capital, I think it is probably at this point the least likely that we would deploy capital in that segment, unless the acquisition opportunity were pretty compelling from a valuation standpoint.

So it is not going to go away soon. I think eventually retirements that were going to happen will happen. We certainly think, depending on how health care reform unfolds, until further notice it is still the law of the land. We think it is going to have compelling upside for demand for primary care physicians and nurses practitioners and physician assistants, which we also provide, that I think will be a strong tail wind to that business a couple of years down the road.

But right now it clearly is the most challenged segment that we have. And the issues you raise are likely to continue to be a challenge for that business. Emil, I don't know if you --

Let me just add that the -- in the long-term looking forward the fact that there is a movement into the hospital mode of employment among physicians is not necessarily a negative for us. In fact, it probably is a positive.

The real issue is whether there is a shortage of doctors that reasserts itself. The fact that they are working in a hospital setting actually plays to our strength, because that is where our marketing tends to be the strongest as a company.

So the question that we need to project out is what will be the supply and demand characteristics down the road? And all demographic indicators point towards an increasing shortage of physicians in the coming decade.

That is an interesting point. Thanks. I will just ask one more, if I can. What is your outlook for gross margin sustainability in a material recovery of demand for your services? I guess my thinking is, although it is not perfect science, but looking back at some other cycles, it appears that that wage and housing pressure creates some pressure on gross margin, even as the revenue leverage to G&A obviously drives G&A as a percentage of revenue a lot lower. You guys have done a great job through the downcycle of expanding your gross margin. How sustainable is that, do you think, in an accelerating recovery?

I will take a first cut at that and Emil usually has more information right at his fingertips. First of all, thank you for your comments. We are operating at probably a 10-year high in gross margins.

The direct costs associated with -- particularly the travel nursing business have all had very favorable dynamics because of the MSP momentum with 30% of our FTEs working at MSP accounts, you don't typically have the little companies nipping at your heels, bidding up the price and the wage for the health care professional for that particular job posting. So we don't -- our ability to expand bill pay spread has been very strong over the last several years.

Housing has been favorable. Professional liability has been favorable. It is really only health insurance that has been a negative inflationary item in our direct costs.

Having said that, clearly we are -- it is probably an important statistic. We had -- we currently have a similar number of hospitals where we have nurses working today as we had in December, but we have 70% more hospitals posting positions than we had at this point in December.

So there are a lot of hospitals calling us and saying, why aren't my needs getting met? It is not just Cross Country that is meeting their needs. These are not VMS accounts. These are non-VMS account that didn't have needs in 2010. Find themselves in a position of looking for nurses, expecting it to be pretty easy, and not getting that need met.

So it is a very interesting dynamic. If I had to project out a year I think -- and it is not currently our expectation that price really improves significantly. But if I had to say where I felt the momentum was likely to be, I would say prices are more likely to go up over the next 12 months than they are to go down because of this dynamic, and assuming this dynamic continues.

At a time when physicians normally decline seasonally as you come out of the snowbird months in Florida and Arizona, we are actually seeing the number of open positions increase.

So more and more I think I'm getting confidence that we are actually going to be able to have those conversations with clients that say, it is tougher to fill your needs. The industry is heating up. If you want to get the highest quality nurses to your facility then we are probably going to have to pay them more and that means we are going to have to bill you more.

That is a conversation we really haven't been having with our clients over the last several years. It is one that we are certainly very comfortable having, given the longer-term history of the Company. It is customary for us to get inflationary improvement in the bill rates that we have at our hospitals.

So I believe we can sustain these margins. But, clearly, as demand increases there will be some wage pressure. We are already seeing, as Emil indicated, a little bit of housing cost inflation that the rental markets has stabilized and we are likely to -- our expectation for 2011 is modest increases in housing costs.

We will be able to sustain our margin if we are able to recapture that the topline. It is not a slam dunk, but I am increasingly optimistic based on the trends in the business. Emil, you want to add anything to that?

Well, I think you have covered all the moving pieces on the gross profit. I would just like to point out also that going forward, as our markets improve and our topline grows, our greater -- our opportunity for recapturing EBITDA margin will be through operating leverage.

Conversely, as the revenues were declining in the past couple of years it was the improvement in the gross profit margin that allowed us to moderate the percent [of] the EBITDA margin decline.

But you're absolutely correct that historically there has been a lag between our ability to put through price increases as compared to the wage and housing pressures that we are seeing.

I think what will moderate that this time around was the much higher percentage of our business that is with managed service -- where we are the managed service provider, which should allow us to moderate the wage pressures.

That is a great answer. Thank you very much.

Thanks for dialing in, Gary.

Frank Atkins, SunTrust.

It is actually Tobey for Frank. I just wanted to get your perspective on maybe how important the decent job creation was last month for increasing the confidence in family incomes of your perspective travel nurses, and at the margin full-time nurses not wanting to take on that Saturday night shift incrementally going forward?

My experience -- and I have been doing is about 18 years -- is that the psychology of nurses does not pivot on one month of job creation data. But if we have a sustained period of 200,000 to 300,000 jobs -- net jobs being created each month, I think that will have a profound impact on the willingness of those nurses that are working much more than they were two years ago, and don't really want to be working this much.

I think that -- if we could sustain that for three or four months, then I think our optimism would be significantly enhanced for our ability to grow the business in 2011.

Then turning to the physician business, the trend towards more employment at hospitals, I was wondering whether from your perspective that may be creating a temporary moderation in physician turnover, because they have got perhaps signing up to one-, two-, three-year commitment as part of that initial employment contract, but as that laps then we will approach more normalized levels of turnover?

I will let Emil comment also. I think it is a fair comment. Again, I don't want to be overly optimistic on that business. It is our most challenged major business line at this point. I think there are a number of factors that have played into the really changing psychology of physicians.

15 years ago when there was a cycle of hospital acquisition of physician practices, it was very emotional. There were a lot of negative feeling among the physician population about that dynamic. It is completely different. It appears, this time around that they are much more willing participants in this dynamic.

Having said that, if you look out further, and in some cases much further, it is hard to imagine that the demographics of the physician population and the overall US population don't create an attractive environment for this business to operate in.

But I hate to project out a couple of years, and that is why you invest in the stock. I just think at this point if we can get the business to stabilize in 2011 that will be a good outcome for us, and I would be satisfied with that. Emil, do you want to add anything?

I don't have anything new to add to that. But it was a staggering statistic that showed the percentage of physicians that are employed going from the mid-20s to now what is over 52%, I think, in the latest statistic. So that is just a staggering change.

I think your conjecture that there is an element of turnover -- lower turnover resulting from the commitments that these physicians have to make as they become employees, is very much a factor. Because it is so rapid -- such a rapid increase in the number of physicians employed, and that will run its course, and we should be seeing higher turnover down the road.

And then one last question from me. I think, Joe, you mentioned you were active in about 15 specialties in the locums business. I was wondering if there may be opportunities for you to de novo a couple of additional specialties to help with your internal revenue momentum in that business?

Well, we do discuss that with the management in that business. I would rather not lay it out there. It is a topic, but at this point I'm not prepared to give any insight as to what we might want to do that we are not currently doing today.

Okay, I will ask in a few months. Thanks.

At this time I have no further questions in queue..

Thank you, Matt. And thank you to everyone for listening in. We look forward to updating you in May on our first-quarter performance. Thanks again.

Thank you for participating in today's call. You may disconnect at this time.