Cross Country Healthcare Inc (CCRN) 2011 Q1 法說會逐字稿

Welcome to the Cross Country Healthcare first-quarter 2011 earnings conference call. At this time, all participants are going to be in a listen-only mode. After the presentation, we will conduct a question-and-answer session. (Operator Instructions). Today's conference is being recorded. If you have any objections, you may disconnect at this time.

Now, I would like to turn the meeting over to Mr. Howard Goldman, Director of Investor and Corporate Relations. Sir, you may begin.

Good morning, and thank you for listening to our conference call, which is also being webcast, and for your interest in the Company. With me today are Joe Boshart, our President and Chief Executive Officer; and Emil Hensel, our Chief Financial Officer.

On this call, we will review our first-quarter 2011 results which we distributed our earnings press release after the close of business yesterday. If you do not have a copy, it is available at 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, appears, estimate, and similar expressions are forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results and performance to be materially different from any future results or performance expressed or implied by these forward-looking statements. These factors were set forth under the forward-looking statement section of our press release for the first quarter of 2011, as well as under the caption Risk Factors in our 10-K for the year ended December 31, 2010, and our other SEC filings.

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. Such non-GAAP financial measures are provided as additional information, which should not be considered a substitute 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.

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

Thank you, Howard. And thank you to everyone listening in for your interest in Cross County Healthcare. As reported in our press release issued last evening, our revenue for the first quarter of 2011 was $122 million up 1% from a year ago and up 7% sequentially from the fourth quarter. Net income in the first quarterwas $207,000 or $0.01 per diluted share. This compares to $0.04 per diluted share in the year-ago quarter. Cash flow from operations in the first quarter was $1.4 million.

Our sequential revenue growth occurred, despite two less billing days in the first quarter for our largest segment, nurse and allied staffing, which accounted for 55% of revenue in the quarter. Year-over-year segment revenue was up 3% for the quarter and we had achieved monthly growth within the quarter with March alone up 10% on a year-over-year basis.

Momentum continues for us in this segment and we anticipate another increase in sequential revenue in the second quarter, even though the second quarter would normally decline based on seasonality. Emil will have a more detailed discussion about this in a few moments.

Revenue momentum is being driven by a combination of the phase-in of additional managed service provider accounts, additional staffing required during hospital electronic medical record implementations and an overall recovery in demand. At this point, the pace of our growth is being dictated almost entirely by our ability to recruit and retain nurses, something we have historically been successful at.

Unfilled orders for nurses currently are running at three times the level of a year ago. Our nurse renewal rate over the past 13 weeks has recovered to 2008 levels, but still remains below historical highs. Applicant activity is substantially above year-ago levels as well, so we very strongly believe that a continuation of or improvement in current economic conditions will result in substantial year-over-year growth in the nurse and allied staffing segment during the remainder of this year.

A significant opportunity in this business will be to better meet the needs of our non-MSP clients, where we've seen rapid growth and demand so far in 2011. In the first quarter, the majority of our FTE growth occurred at MSP accounts, which now represent more than 30% of our staffing volume. At the same time, the total number of active accounts posting job orders increased by more than 35% from the beginning of the fourth quarter.

Our opportunity to accelerate growth lies in our ability to better serve these accounts without lowering the level of service we provide to our exclusive MSP clients, who have been so important to our ability to sustain our business in a difficult environment of the past two years. Because so many clients have become active again in the past four to five months after long periods of little or no activity, I believe it is likely that we will see upward pressure on bill rates as we enter the summer months. Bill rate improvement will be important to our success in sustaining gross margins as we are starting to see modest pressure on bill/pay spreads and housing costs in 2011.

As an additional cautionary note, positive momentum in our nurse and allied staffing business can be disrupted if we see weakening in national labor markets resulting from higher energy prices or for other reasons. Turning to our clinical trials services business, it also saw top line improvement in the first quarter compared to a year ago, and we expect this improvement to accelerate significantly in the second quarter as two large recent contract awards began to ramp up late in March.

Margins are under some pressure, given that the recent awards have had a less favorable mix of staff. Nevertheless, we do expect to see this segment's contribution margin expand in the second quarter as consulting and other professional fees incurred in the first quarter diminish.

In our physician staffing business, revenue was down 5% year-over-year and up seasonally by 6% from the fourth quarter. This segment, which accounted for 24% of first-quarter revenue, continues to face challenges. In my mind, the most significant is the increased willingness of physicians to become employees of hospital systems. I believe the uncertainty regarding the future of our national healthcare system makes physicians more willing to seek the security of hospital employment until the future becomes much clearer. Nevertheless, despite these near-term challenges, I believe the longer-term outlook for this business remains very promising.

Gross profit margins for the Company as a whole declined 70 basis points from the year-ago quarter. This was due to the combined effects of a shift in mix of our consolidated revenue toward the lower-margin nurse and allied staffing segment along with contraction in the bill/pay spread in this segment. The relatively sharp pivot in this market from a demand-constrained environment to a supply-constrained environment has had a more immediate impact on margins than we had anticipated. We do expect that rising bill rates will give us some relief in the second half of this year.

So in summary, while we continue to face challenges, we are even more optimistic about our results this year than we were on our last during this call two months ago. I consider the problems we face today to be more surmountable for our business than those we faced in the terrible operating environment of the past two years.

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

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

Revenue in the first quarter was $122 million up 1% versus the prior year and 7% sequentially. The sequential revenue increase was achieved, despite two fewer days in the quarter and reflects the improvement in demand and the building momentum in our nurse and allied staffing business that Joe referred to earlier.

Our gross profit margin was 27%, which was at the upper end of our guidance range, but down 70 basis points from the prior year and 170 basis points sequentially. The year-over-year margin decrease was partly due to a change of business mix, coupled with higher housing and health insurance costs. A change in segment mix was also a factor in the sequential decrease along with seasonal factors related to the reset of payroll taxes and two fewer days to absorb housing costs.

SG&A as a percent of revenue was up 70 basis points from the prior year, but down 20 basis points sequentially. The year-over-year increase reflects our strategic investments in infrastructure to support our growing managed service provider client base. In particular, we brought on and concurrently ramped up two large MSP accounts during the fourth quarter of 2010, and those implementations continued into the first quarter of 2011.

SG&A expenses in the first quarter included approximately $640,000 in equity-based compensation expenses, as compared to $560,000 in the prior-year quarter. Adjusted EBITDA, as defined in our press release, was $4.5 million as compared to $6.1 million in the prior-year quarter. Interest expense was approximately $730,000 down 34% from the prior-year quarter and 10% sequentially. The year-over-year interest expense reduction reflects 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 $51 million term debt is 200 basis points over LIBOR. Net income in the first quarter was $207,000 or $0.01 per diluted share as compared to $0.04 per diluted share in the prior-year quarter. The effective income tax rate was 48% in the first quarter, reflecting in part the nondeductibility of certain per diem payments.

Turning to the balance sheet, we ended the quarter with $52 million of debt and $10 million of cash and cash equivalent. Our leverage ratio, as defined in our credit agreement, was 2.15 to 1 as compared to 2.50 to 1 ratio allowed. Net of cash, our debt-to-total-capital ratio was 14.1 and the current ratio was 2.81. Day sales outstanding were 50 days, unchanged from the prior-year quarter and down two days sequentially, generated $1.4 million of cash on operating activities in the first quarter. Capital expenditures totalled approximately $800,000 in the first quarter.

Let me drill down next into our four reporting segments. Revenue for the nurse and allied staffing segment in the first quarter was $66.9 million up 3% versus the prior year and 13% sequentially. We have reached 2,405 field FTEs in the first quarter up 2% versus the prior year and up 13% sequentially. The sequential increase is reflective of the improved demand environment in general and the success that we have achieved with our MSP and electronic medical record implementation service offerings in particular.

The book-to-bill ratio averaged 103% in the first quarter and so far in the second quarter is averaging 104%. Based on these booking trends, we expect a 2% to 5% sequential increase in revenue in the second quarter rather than the typical 2% to 5% seasonal decline that we have experienced in prior years. Segment revenue per FTE per day in the first quarter was up 2%, both on a year-over-year and on a sequential basis, due to higher average hours per FTE.

Contribution income, as defined in our press release, was $5.1 million in the first quarter down 13% from the prior year and 9% sequentially. Segment contribution margin was 7.7% down 140 basis points from the prior year and 180 basis points sequentially. The year-over-year margin decline was due to higher SG&A expenses related to our MSP service offerings coupled with higher housing and health insurance costs. Sequential margin decline is due to seasonal factors related to the reset of payroll taxes and the impact on housing costs on-- of two fewer days in the first quarter.

Let me turn next to our physician staffing segment. Revenue was $29.4 million in the first quarter down 5% from the prior year but up 6% sequentially due to an improvement in staffing volume and bill rates related to certain physician specialties. Physician staffing day sales were down 11% from the prior year but up 2% sequentially. The uncertainty surrounding healthcare reform appears to have driven more physicians to the security offered by direct hospital employment, which in turn has resulted in decreased demand by hospitals for temporary physicians. Demand appears to be stabilizing and we expect a modest sequential increase in revenue in the second quarter.

Segment contribution income for the first quarter was $2.8 million representing a 9.4% contribution margin up 10 basis points from the prior year but down 120 basis points sequentially. The sequential margin decline was due to a favorable professional liability accrual adjustment in the prior quarter. Revenue in our clinical trials services segment in the first quarter was $15.6 million up 3% from the prior year and 2% sequentially. As Joe indicated earlier, we expect two new contracts to ramp up in the second quarter, which should result in a sequential revenue increase in the 10% to 12% range.

Contribution margin was 8.3% in the first quarter down 40 basis points sequentially and 210 basis points from the prior year. The year-over-year decline was due primarily to a less favorable staffing mix and higher SG&A expense. Revenue for the other human capital management services segment in the first quarter was $10.1 million down 2% from the prior year and 9% sequentially. First-quarter revenue was adversely impacted by weather-related seminar cancellations.

Contribution income was $400,000 down 62% from the prior year and 70% sequentially. Margin decline was due to higher compensation costs in our physician-surg business as well as higher marketing costs as a percentage of revenue in our education business. We expect both the education and the physician-surg businesses to show mid-single digit sequential revenue growth in the second quarter.

This brings me to our guidance for the second quarter of 2011. The following statements are based on current management expectations. The 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 2,450 to 2,500 range in the second quarter. Consolidated revenue for the second quarter is expected to be in the $126 million to $128 million range. We expect our gross profit margin to be in the 27.0% to 27.5% range and adjusted EBITDA margin to be in the 4% to 5% range. SG&A expense as a percent of revenue is expected to decline approximately 50 basis points due to improved operating leverage.

We expect interest expense to remain sequentially flat in the second quarter and depreciation amortization expense to decline by approximately 4% sequentially. Based on these assumptions, earnings per diluted share are expected to be in the $0.02 to $0.04 range. EPS guidance range is based on an estimated effective tax rate of 48%.

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

Thank you. (Operator Instructions). Tobey Sommer at SunTrust. Your line is open.

Thank you. Joe and Emil, I-- I'm curious about what your thoughts are, not on just the second quarter but kind of an ongoing basis, that the business can generate in terms of incremental margin now that we've got demand sufficient to look like we've got some revenue growth ahead of us. Thanks.

Yes, Tobey, good morning. I guess I'll take a shot and turn it over to Emil. Typically, as volume begins to improve, the incremental margins, is historically in the mid-teens, mid to high teens. We haven't seen that for-- largely because we made a lot of investments in the fourth quarter-- really third, fourth quarter last year, continuing to some extent in the first quarter of 2011. And so we haven't had the leverage on overhead.

Fundamentally, I think once we stabilize what we feel is the appropriate level of infrastructure for the VMS business, I think we'll get back to that kind of incremental margin andto some degree in the second quarter, it's beginning to improve, the leverage begins to improve, but I think my expectation is the second half is when we really begin to reap the benefit of an improvement in the overall environment and our ability to leverage overhead. Emil, you want to add anything to that?

Yes, I think you've basically covered the dynamic. I would just add that generally when we see a swing from a demand-constrained environment into a supply-constrained environment, we typically have a contraction in the bill/pay spread. Our ability to raise bill rates is delayed. There's a lag between our ability to raise the bill rates and the need to raise pay rates in that type of an environment.

We expect to have success in the bill rate from-- in the second half of the year, so the headwind that we may see in the short term should start to dissipate as we are able to put through some bill rate increases, particularly since we see a much broader demand from hospital clients that have not really had any activity with us for the past few years. So as we go back to these hospital clients with new contracts, we should be able to see bill rate increases that will offset the pay increases that we're seeing in the short term.

Okay, so sort of an arc back up to what has historically been the incremental margin? Just curious from a-- from a recruiting standpoint.

Uh-huh.

Where do you feel that you are with your existing people and infrastructure in terms of capacity utilization now, do you-- what sort of additional head count do you think you could manage with the current input?

Well, I think it's a substantial increase from where we are. The recruiter head count, Tobey, has declined not quite as much as the overall FTE count, so it's down more than 50% from its peak, but we really haven't lost many of our historically top recruiters. So you've lost, at kind of the lower range of productivity, people that just couldn't continue to pay their bills. AndI think it was challenging for our top recruiters to pay their bills because they're-- we're highly commissioned in our compensation scheme.

Having said that, they are turning the corner and I think there's enormous capacity among our best recruiters to grow their FTEs and we want to see them do that and return to the kind of compensation that they were able to achieve historically. At the same time I know we've added a handful of recruiters recently. In this kind of environment where things do appear to be improving, you want to make sure that you have some new blood and some-- some folks on the lower end of the rung that are hungry and really reaching out, mining your database of colder files to make sure that we're really sweeping all the crumbs that we can off the table.

It is a recruitment story right now, Tobey. I think you're focusing on the right thing. Our application activity is picking up. I think in the first quarter it was up more than 20% year-over-year. So we are achieving the kind of-- the metrics are lining up for us to continue growing the business and continuing to have success on the recruitment front.

Thanks. I'll ask one more question and I'll get back in the queue. On the MSP, in that area, do you think that there-- are there still significant proportion of markets that the Company can still gain a presence in? I'm trying to get a sense for to what extent the growth of the MSP market may be moderating because it's been an area of focus in-- among the largest players in the marketplace, particularly on the nursing side?

Yes, on that-- Tobey, I think on a-- when you take a step back there's relatively low penetration of the kind of the clients that we want. I mean, again, we don't want to be the managed service provider to a small rural hospital, community hospital. We want to be the managed service provider to larger urban systems. And even when you look at those, there are a number.

And I think as the environment stabilizes, the companies providing that service today, typically the contracts come up for renewal every three years or so, I think you'll see companies that have been more technology oriented will come under pressure and in a more supply-constrained environment that they-- they become less and less desirable for the larger players and the smaller players to support because they tend to be more focused on reducing rate and-- while they may provide important metrics for the client, they're generally much harder to work with for vendors than working directly with the hospital.

So I think there's lots of opportunity and we're very focused and that's why we really made the investments we have in our infrastructure and our sales force, to really continue to focus on that effort-- on this area. Having said that, in the short term, I believe the biggest opportunity for us is to do a better job for the non-MSP clients, those may or may not become MSP clients in the future, who haven't been active for a couple of years, historically have been attractive accounts but may not-- may not be competitive today. So we need to really be aggressive and getting in front of those clients and letting-- and be consultative and letting them know what's happening in the market so that we can do a better job of putting in place a contract profile that allows us to recruit effectively for them.

So that's a process. That doesn't happen overnight. There's lots of those clients, as I indicated, up more than 30% just in the last quarter. And again, as a high-- the high point of orders over the last 30 months is today. So the dynamics continue to kind of push towards a requirement on our part to really do a better job of getting in front of those clients, meeting their needs and making sure they understand what they need to do to be successful recruiting for contract nurses.

Thank you very much.

Thank you, Tobey.

Paul Condra with BMO Capital Markets. Your line is open.

Hi, guys. Thank you. Maybe I can just piggyback off that question. I wanted to ask about with the-- some of the clients that you're providing the MSP for, are they new to MSP or are they renewing an old-- an old MSP that they used to have, what kind of trends are you seeing there?

In-- probably the most important dynamic is there's two large MSPs. One is one that left us and has come back, and one that is new to managed service arena, the arena, hadn't been a managed service account historically. In both those scenarios, we've gone from either high single digits or low double digits of market share at that account in-- late in the third quarter to well over 100 working nurses and allied professionals today.

And I think when you look at the margins in the first quarter, while seasonally they're down, some of the pressure we're seeing in direct cost is because the least profitable business historically is the first assignment. When you get a new job order at a new account, you may not have housing open in that area, so you have to open an apartment. It tends to be-- you have to get a nurse from one geographic location to a new location. The most profitable business for us is the renewal of a nurse at the same account. So the good news is we think we're getting these accounts to a stable level of activity, still growing, but getting to a stable level. And our expectation is-- and both those accounts, one that's come back to us and one that's new, the profitability of those accounts is likely to improve as we get them to a more normalized level.

Yes, you mentioned last quarter that MSP is about 30% of the nurse segment and it's more than that now. Looking out just over the remainder of the year, where do you think that can go and what kind of impact would that have on your gross margin?

Well, on a gross margin, we-- if anything, they tend to be a little bit higher because you're putting in place a much higher level of overhead to support the account. I mean, your-- on-site personnel, if they're requiring per diem support, individuals-- highly trained individuals to interview nurses, if that's part of the service that we provide to the hospital.

So they tend historically to be somewhat higher gross margin accounts, operating margins. At the end of the day we target kind of our normal operating environment-- operating margin, so I don't think as we grow that business it should have that dynamic as-- and we continue to grow the business, we do expect it to be a higher percent in the second quarter than it is today because the bookings have tended to be higher at these accounts and a couple of the accounts are going through electronic medical record implementations, which we-- is also important-- an important secular trend that's likely to continue for several years.

So fundamentally, that, in and of itself shouldn't affect the margins, so we think the bigger issue is leveraging the investments that we've made in the infrastructure. Again, you make the infrastructure investment at the front-end and you leverage it over time as you grow the FTE counts at these accounts. So we do expect the profitability of our business to be higher in the second half than it is currently.

Yes, can you put any estimates around that just-- and in terms of contribution margin for the nurse allied segment, I know you've been adding a lot of higher-cost employees, it sounds like that's slowing down a bit, what's going to happen there?

No, I don't think we want to provide that level of granularity, if we're only providing guidance one quarter out. I would just fall back on the statements we made previously. We would expect incremental margin to be in the mid to high teens in the second half as we continue to grow FTE counts. Emil, is there any--

No, I think (inaudible).

Okay. We're on the same page on that.

Okay, great. Well, thanks a lot, guys.

Thank you, Paul.

Gary Taylor with Citigroup. Your line is open.

Hi, Joe, how are you doing?

Good, thanks, Gary.

Just a couple questions. One, since it's been a few years since we've experienced normal seasonality, could you just run through what normal seasonality looks like on top line and on margin, and then the second part is when does that become relevant again? It sounds like that-- hopefully that won't be relevant in 2011, because you'll just see sequential growth. I'm wondering if you have any thoughts on whether normal seasonality prevails again in '12 or not?

Yes, well, we hope not. We hope the secular trends continue but we're certainly not going to look that far out. Historically, Gary, the peak of FTE volume would normally occur in the winter months, the fourth quarter and the first quarter. From the first quarter to the second quarter, we would normally see 2% to 5% volume decline in the nursing and allied staffing segment specifically, as those-- as historically nurses that came down from Canada who only were really looking to work in the warm climate for the winter would return home for the summer and work per diem in their home-- in their hometown, as the case may be.

We're not seeing that. We are seeing kind of plowing through and showing sequential growth in the second quarter in the nursing business. The bookings in the nursing business first five weeks of the second quarter, we're running more than 30% up year-over-year so it suggests-- and the bookings as a percent of head count are-- continue to be more than 100%. So it suggests we-- if we can continue that, to have momentum into the third quarter.

The third quarter-- excuse me, from the second to the third quarter, historically it tends to-- again, you have this little drop-off in April, it's flat in May and then June also flat. To the third quarter, you would have flat performance in July and August, but then September, your business begins to ramp up again as nurses who want to go home for the holidays try to lock in their contracts before the third week of September, so they want to start a contract before the third week of September so they can be home for their Christmas and New Years, which historically about 40% of nurses go home for the holidays.

From the third to the fourth quarter, again, you tend to pick up because of the snowbird activity that we normally get in Florida and Arizona. And then from the fourth-- we get the drop-off around the holidays, and then the fourth and the first quarters are roughly flat.

On a margin perspective, the second half has more days and because we're providing housing to the nurses, we're able to leverage our housing better in the second half than we are in the first half, typically three days. And therefore the-- more than 55-- 53% to 57% of our profitability tends to occur in the second half of the year because of the better margin profile of our business.

In the physician business, which is the second largest segment for us, the third quarter, the summer months, tend to be the peak of the year with a fall-off into the fourth quarter, and then you start to cycle building up again in the first and second quarter just as we're seeing this year. We're down year-over-year, but the normal seasonality of the business is playing out so far in 2011.

Clinical trials business, not a lot of seasonality except at the end of the year where we tend to have a lot of our field staff taking time off. A lot of trials shut down around the holidays. So we're-- we typical lose about two weeks of billings around Christmas and New Years in that business, but not a lot of seasonality trends in that business. Emil, any-- anything I missed?

I think you covered all the big highlights.

Thanks, appreciate it.

So, Gary, hopefully that-- it may be a little more than you asked for but--

No, no, that's perfect. We'll-- we'll get that down and I won't have to ask again.

Well, just one thing, I think 2012 is a leap year so that-- those three days, we get a day, an additional day, and additional days are good for us historically.

Yes. Second question is just trying to get a sense of kind of the supply constraint. So in the quarter, you had 2,405 FTEs in the staffing segment. What would that number have been if you could have filled your market share of every order you saw? I mean, how much was supply holding you back?

It's holding us back significantly, Gary, as it does historically. Again, we-- our best performance occurs when we're filling one in six, one in eight, one in 10 jobs. I mean, that's-- it may not sound great, but that's a much higher-class problem to have than not having enough jobs. And-- to keep the nurses that you have working.

And right now we have seven to eight jobs for every nurse coming off contract. So it's a much better environment. So if you do the math, if we could fill 50%, we'd be more than double where we are today.

Uh-huh.

So it is a recruitment issue right now. So what do we do to recruit? Weadvertise, we-- paid search, social networking. There's just a lot that we are doing to ramp up. But more than anything else, Gary, it's a word-of-mouth business. It's a nurse that's working next to one of our nurses that says, you-- you're doing what? And they pay for your housing? Historically, more than half the nurses that come to us come to us as word-of-mouth referrals.

So as the environment becomes more and more attractive, it tends to be a virtuous circle that feeds on itself. So I have every confidence we're going to be successful in recruiting and we have really attractive managed service accounts right now, and really attractive geographies, varied geographies around the country. And we expect those-- that inventory and universe of managed service accounts to grow, which are exclusive in nature and therefore is another reason for a nurse to apply and work with us, because they have kind of first access to the most attractive assignment. So it's a problem and it's one I-- I wished we filled all the jobs that we--

Yes.

-- have right now, but that's never been the case, but it is an important driver of growth in the business, and historically it has tended to feed on itself. As I indicated, this environment where hospitals are calling and kind of complaining to us that they're not getting applicants, not just from us but from the-- they're not exclusive accounts, they're accounts that are working with multiple companies. That's usually a good environment to go in and to have a heart-to-heart consultative dialogue about their bill rates relative to other accounts. So as you see bill rates rising, your [packet] becomes relatively more attractive, which as a-- basic economics 101, as you increase price, your-- the quantity supplied is going to increase.

So we're-- it is a good environment. We're operating on very low comparables, so we have an expectation that we're going to show attractive growth, as we-- as long as this environment continues. Again, our concern is high energy prices, there wasn't a very good unemployment number-- excuse me, the unemployment claims number wasn't very good today. That concerns us. That is keeping us from really pounding the table.

But the environment is getting better and we expect it, based on the recent metrics of our business, to continue getting better as we go-- get into the second half of the year.

Two more quick ones, if I can. Sorry. On the-- kind of that hit rate of kind of the one to eight, one to 10, and kind of the peaks of the downturn, did that ratio change much, or just that demand was lower and you were still hitting your kind of-- filling one of eight, one of 10, and now demand is higher, is that-- does that ratio change much from--

Yeah, it--

-- kind of the depths?

It varies.

Okay.

I mean, we-- look, we were-- we got down to one to one, and that's not a-- and it's an aggregate number, Gary, because you're--

Yes.

-- I'm saying, all the nurses we have coming off contract, whether they're telemetry, labor and delivery, ER, so it's-- sometimes there can be a mismatch. Maybe you have more telemetry nurses coming off--

Yes.

-- than you have jobs, or med-surg nurses. So again, the bigger the overhang, the more rapid the growth that we're going to see because we're more likely to have an attractive job for the nurse in the speciality that she wants at the pay that she wants and the geography that she wants. I don't recall ever giving a ratio more than 10positions for every nurse coming off contract. So we're at something that looks pretty high on a historical look-back.

Last question. On the bill rate and the optimism, just kind of looking back at kind of the last growth cycle, '05 to '08, bill rate was up about 2.4% annually and there could have been some mix impact there, and you had a couple really good years where-- '06 and '07 where you were up 3.8% and 3.3% year-over-year. But, of course, your bill rates hadn't declined, kind of 5% heading into that, they were only down 1%. So the question is, are you saying you're hopeful that your ability to drive bill rate is going to look better than last cycle or similar to last cycle and just better than what it's been of late?

The answer to that will depend on how much that overhang becomes. If you go back further, Gary, to 1997 to 2002, I think our average compounded rate of bill rate growth was 11%, which we're not suggesting we're going to get back to, but that was a very high-demand environment where we had a lot of unfilled orders. And the clients were calling us, asking us how much they needed to increase their contract rate to be competitive. And we're not there. But we're heading in-- the momentum is in that direction.

And with a lot of clients who have been accustomed to getting their needs met, accustomed to not have any needs, you-- our expectation is, in a normal environment, to get 3% to 5% bill rate improvement, just because of inflationary factors that affect our direct cost and allow us to offer more attractive-- a relatively more attractive wage to the nurse at that facility. But that's not the floor. I mean, that is--

Right.

-- it could be higher than that. I just don't want to-- I certainly wouldn't want to set your expectation that it's going to be higher. I-- a normal environment, let's just call it 3% inflationary improvement in price would really allow us to re-- keep our margins comfortably where they are and not-- and allow us to pay nurses a little bit more and allow us to attract a higher quantity of nurses into this employment model.

Okay. Perfect. Thanks so much.

Thank you, Gary.

A.J. Rice with Susquehanna. Your line is open.

Hey, everybody.

A.J.

Just, I guess, one number question and a couple of maybe more strategic ones. One the cash flow from operations, $1.4 million, that's I know down sequentially and down year-to-year. I'm assuming with the revenue pick-up, you're going to have working capital investment where you were actually generating cash out of the working capital the last couple of years. Is that it or is there anything else going on in the cash flow that depressed it this quarter?

I think that's pretty much the dynamic. If you actually look at the cash flow this quarter, we had the receivables increase by about $4 million sequentially, and it's really the slope of the increase that in the short term, on a sequential basis, that determines how much cash we'll be tying up in receivables.

Again, we're projecting a revenue increase from Q1 to Q2, so you'll see a similar dynamic as far as receivables are concerned. We do have some positive expectations of higher cash flow in the second quarter, partly due to some tax refunds that we expect to get in the second quarter. But the dynamic of the working capital that you described is pretty much the most important exogenous factor.

Okay.

One of the things to-- cash flow is always very hard to project, A.J., because it depends on where everything is when you end the quarter.

Sure.

We did see a two-day improvement in our collections, our days outstanding, which to a-- historically, pretty-- the low end of our range of collections are-- in our receivables are probably in the best shape they've been in since I've been here, and I've been here 18 years. Is that going to get better? I'm not sure. It certainly, because it's at the low end of the range, could get a little worse. My expectation, just-- I'll give you a pretty wide range, somewhere in the $5 million to $10 million of excess cash in the second quarter.

Okay. So that would be the cash flow from ops more or after-- well, I guess there's not much capital spending, so.

(Multiple speakers). Our CapEx is running approximately $800,000 a quarter.

Right.

(Multiple speakers).

Right. Okay. No, that's helpful. And can you talk about what the competitive environment looks like a little bit. I know obviously in travel nursing you've still got you and AMN out there. But even there, I think there's been some pulling back of the different service offerings, that there's probably less being offered. And then I don't know how you describe what's happening with the rest of the market. And then also, I'd be interested to hear about how you feel like the competitive landscape is in the physician side, have we seen a shakeout somewhat in this downturn?

If it is a shake-up, A.J., it's been pretty modest. So let-- focusing on the second tier of the travel nurse business, has been-- as tough as it has been for us, it's been much tougher for the smaller players in the business just because more of the big users, even though the big users are using less, they're also using less vendors. So while we're typically in, and AMN is typically in, the smaller guys are playing a game of musical chairs so some are in, some are out. In some cases, they're all out. So it's been a tough environment. As more non-MSP clients become active, that allows them to breathe a little easier. Like I said, I haven't seen a lot go away. There's been some consolidation. AMN bought Medfinders, which was a--

Yes.

-- at a second-tier travel nurse, and allied operation, that is now part of a much bigger operation. So that dynamic, I don't think, is-- I think it's becoming helpful. This-- as more opportunities avail themselves to these smaller companies, they become less desperate, and that's usually a better environment. Yes, we've had pretty good discipline. Pricing hasn't really declined that much in a pretty horrific demand environment, and we would-- which is another reason why we expect price to improve as we go forward.

In the physician business, similarly, excluding some modest consolidation, I don't think the top tier of that business segment has really changed much. Quarter to quarter, you see-- depending on what your mix of specialties is, you may see one company perform better or worse than another, but I think fundamentally in the nurse and allied business, the trend lines of all the companies tend to look pretty similar, excluding in the nursing-- the impact that the trend-- the secular trend towards greater reliance on MSP might have, the open orders, the working nurse counts tend to look pretty similar. So, again, we-- we don't think we're taking enormous, copious amounts of market share. We're probably taking a little bit, which we're not troubled by. We want everybody to be healthy in this business and that's not a bad thing.

Right. Okay. I know, long-term you've said that growth, the real turnaround on a sustained base in growth, the three factors you always look at are unemployment improving, overall sentiment around the economy and then obviously patient volumes of the customer. When you-- when you're seeing a little strengthening in demand, is-- are the-- are your hospital customers pointing to a specific one of those, or several of those, or are they just saying, we've cut too far and now we need to come back a little bit, or how would you describe what is sort of driving the strengthening of the underlying demand?

It's really the-- more the last point you just raised. The credit crisis had a pretty profound impact on the ability of nonprofit hospital systems to access capital, particularly short-term capital. And I think as a result, they cut back much more on everything. If you talk to people that were selling gauze, they were buying less gauze. Patient volumes were flattish. So let's assume there's the same amount of gauze that goes into the same amount of patients, and similarly they-- I think they were willing to sustain a little decline in patient satisfaction, maybe a lot of decline in patient satisfaction, just because there was a lot of pressure on their ability to access cash.

I think that has changed dramatically and I've been through this-- three downturns, the first two looked pretty similar. This one was far worse when you looked at the slope of decline and demand and how quickly it declined in a recession. Typically, we don't decline in a recession. It's the jobless recovery that hurts us.

So I actually-- I don't think the things that normally benefit our business are really the tailwinds driving the recent improvement. I think it's just the hospitals are healthier than they were, their ability to access cash is improved from where it was two years ago and even 12 months ago.

Hmm.

The improvement in demand began really last summer, and has continued. It's-- it hasn't flattened out, it's-- it seems like every week we have a higher number of open orders. But when you look at the agr-- the absolute number of open orders, it's still pretty low on a historical basis. So this business can get a lot better. In my-- in a discussion with Gary Taylor, a lot of the growth is just because the comps are so-- are low. We-- if we get any kind of improvement in patients volumes, a much stronger job market, I think there's a lot more upside to this business than we're currently seeing.

Okay. All right. Thanks a lot.

Okay, A.J. Thanks for calling in.

Tobey Sommer of SunTrust. Your line is open.

Thanks. I just wanted to get your updated thoughts on M&A with a market perhaps at an inflection point and MSP opportunities still out there, is it the-- given MSP momentum, is it per diem where you might need to have more offices to really have an integrated solution that you can offer in more markets?

I think that's a-- from strategically, Tobey, that's probably absolutely true. There's a couple large national per diem companies that are on our radar that-- who work with us today. Again, you hate to buy what you can obtain easily. Having said that, to the degree we could integrate a larger per diem network, we have about 17 offices today, which is-- would not be a-- probably a top-10 player, but not a-- not a top 5-player in per diem.

We think there's opportunities to grow aggressively in that business. But again, there's other opportunities. We do think the business is getting better, our balance sheet is pretty tidy, the EBITDA is likely to grow as-- particularly as we get into the second half, which will improve our leverage ratios and allow us to do some cash deals as we go forward.

We have a very supportive lender group who has really made it very clear to us, they would welcome an opportunity to support our growth through acquisition, so we're more aggressive on that front than we've been in quite some time.

As a follow-up, Joe, is there a meaningful difference in your win rate in markets where you currently have per diem versus markets where you don't?

That's a good question. I think the answer is no. But we-- we feel more confident when we do have an existing presence. One of the things we've done over the last 12 months is to aggressively open offices where we don't have a presence, but your competence level where you do have an office that's already doing $2 million to $5 million of revenue is much higher when you bring on an MSP that requires per diem. And not all of them require per diem. But it seems more and more they are requiring per diem. So again, it's something we like to have; we'd like to have more of. Where we do do it, we're-- we've been pretty successful, but where we're at risk is generally that's the area where-- that creates the risk for us of not being successful in an MSP.

Thank you very much.

Thanks again, Tobey.

Paul Condra with BMO Capital Market. Your line is open.

Thanks, again. I wanted to ask just about the electronic medical records. How big is this business for you now, what are the growth rates and how long do you think that can continue?

It's less than 10%, but it's a high single digit of the current activity that we have, Paul. A year ago, 18 months ago, it was unusual for us to have more than one going on at one time. It is much more common for us to have two to three going on at one time. I think a lot of this is being driven by the High Tech Act, which provides government funding for the imp-- introduction of electronic medical technology in hospital systems.

There's kind of a carrot-and-stick element to that legislation, that they'll provide grant money if you do put these systems in place. But if you don't, in 2015 and beyond, we're going to start penalizing you on your reimbursement. So there's a lot of focus in the hospital sector on this issue. So because the grants run through 2015, we expect it to be as good or better through that year. I think it's going to be a couple-year run of activity for us, and we're really good at it, and we have a very good solution. We have a great track record, great, great set of references, and every one we do we add more nurses that can put on their resume they have familiarity with the relevant technology, which makes us even more successful in the next implementation.

Yes, is that all in the-- is that in the allied business or is that in the nursing business?

It's both, but it's mainly the nursing business. Typically, Paul, the scenario is, while you're introducing technology, you're taking nurses off the floor and putting them in a classroom setting to allow them to be familiarized in a concentrated focused effort with how to use the technology. So they need to be backfilled while they do that.

And then when they come back on the floor, they kind of need, as adult learners, and it's not uncommon, they need some kind of hands-on, bedside assistance. So these contracts generally are two months in duration, but a-- what we've found is there's a high renewal rate beyond the two months as the hospitals realize they're-- the two months didn't do it, we still have a lot of nurses at the bedside that need remediation. So they tend to be a little longer than the hospital anticipated, and that's a good thing for us.

Again, it's a-- a lot of-- we've found with either hospitals that have been big clients historically that are doing this, where we haven't had activity, we bring our nurses in, they are reacquainted with how efficient it is to work with us and so it often reignites a dormant account to becoming a traditional user and even become a V-- an MSP account because the way we handle these is like the way we handle our MSP clients, which we-- really is much more efficient than they've been accustomed to historically. So we've converted some of these EMR accounts to MSP clients once we're done with the introduction of the technology.

That's great. And just really quick, you said less than 10% of the segment or of the total revenues?

The segment.

Okay, great. Thanks a lot.

Thank you, Paul.

At this time we have no further questions.

Okay, well, we thank everyone for their participation in this call and we will look forward to updating you later this summer. Take care.

Thank you. And thank you for joining today's conference. You may disconnect at this time.