Cross Country Healthcare Inc (CCRN) 2011 Q2 法說會逐字稿

Thank you for standing by, and welcome to the Cross Country Healthcare second quarter 2011 earnings conference call. Participants will be able to listen only for the duration until the question and answer portion. (Operator Instructions) Today's conference is also being recorded. If you have any objections, please 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 second quarter 2011 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'd 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.

These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results and performance to be materially different from any future results or performance expressed or implied by these forward-looking statements. These factors were set forth under the forward-looking statement section of our press release for the second quarter of 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, forward-looking statements as expressed on the 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 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.

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 Country. As reported in our press release issued last evening, our revenue for the second quarter of 2011 was $126 million, up 7% from a year ago and up 3% sequentially from the first quarter with all four of our business segments showing sequential revenue improvement. Net income in the second quarter is $1.6 million or $0.05 per diluted share. This compares to $0.04 per diluted share in the year-ago quarter and $0.01 per diluted share in the first quarter. Cash flow from operations for the second quarter was $10 million.

Our second quarter results reflect the continued recovery in the markets we serve with the strongest momentum being generated in our Nurse & Allied Staffing segment which accounted for 54% of consolidated revenue. Year-over-year Nurse & Allied segment revenue is up 14% for the quarter and up 2% sequentially. Currently the number of FTEs on contract in this segment is up more than 20% year-over-year.

Meanwhile, due in large part to the broad-based resurgence in demand, the dynamics in our Nurse & Allied Staffing business are considerably different and more favorable than they were just one or two years ago when gaining managed service provider accounts was the single most important factor.

While our MSP staffing service and staffing for electronic medical record implementations continue to be staples of our business, I am very encouraged by the significant increase in demand from other accounts that have largely been dormant over the last few years. In fact, non-MSP clients currently account for a substantial majority of our open nurse staffing job orders which provide our healthcare professionals with many more options to choose from. This greater diversity in job orders should enhance our ability to recruit and retain even more nurses.

On that score, applicant activity during the second quarter was approximately 23% ahead of year-ago levels, and Nurse & Allied professionals taking their first assignment with Cross Country accounted for 26% of all booked contracts in the most recent four weeks compared to 22% during all of 2010. Overall I believe momentum will continue for us in this segment and I anticipate another solid increase in sequential revenue in the third quarter. Emil will have a more detailed discussion about this in a few moments.

Turning to our clinical trial services business, it also saw topline improvement in the second quarter both sequentially and compared to a year ago, and we expect this improvement to continue into the third quarter. However, margins in this segment are under some pressure as two large recent contracts awarded to us have had a less favorable mix of staff. Despite this margin pressure, I am encouraged by the trends in this business and I expect to see improvement in operating profitability in the coming quarters.

In our physician staffing business, revenue was down 2% year-over-year but up seasonally by 4% from the first quarter. This segment which accounted for 24% of second-quarter revenue has shown encouraging signs of recovery in recent months. Nevertheless, I remain only cautiously optimistic given the headwinds this segment has faced, particularly the increased willingness of physicians to become employees of hospital systems at a time when hospitals are placing greater emphasis on hiring physicians. Despite this and other near-term challenges, I believe the longer-term outlook for this business remains very promising, largely due to demographic trends impacting an aging population and an aging physician workforce.

What is also particularly encouraging to me was the much improved performance by our retained physicians placement business in the second quarter which has been impacted by the same dynamics as our physician staffing business. The results of our retained search business are included in our other human capital management segment.

Gross profit margin for the Company as a whole declined 110 basis points from the year-ago quarter. This was due primarily to higher housing costs in our Nurse & Allied Staffing business along with the shift in mix of our consolidated revenue towards the faster-growing but lower-margin segment. We expect that improved pricing trends in our largest segment, Nurse & Allied Staffing, will provide some margin relief later this year.

So in summary the recovery from the very steep decline in demand following the credit crisis continues for us. We still face challenges, including the potential for a continuation of weakening national labor markets, but the improvement in our topline performance should allow us to achieve greater operating leverage in the coming quarters.

Additionally, while much has been said recently about changes to Medicare reimbursement affecting many sectors of the healthcare services, I want to remind investors that Cross Country has no direct Medicare reimbursement exposure.

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

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

Revenue in the second quarter was $126 million, up 7% versus the prior year and 3% sequentially. The year-over-year revenue growth was driven primarily by our Nurse & Allied Staffing segment and secondarily by our Clinical Trial Services segment.

As Joe indicated earlier, each of our four business segments contributed to the sequential revenue improvement. Nonetheless, revenue was at the low end of our guidance range due to the combination of two factors.

First, the postponement of two electronic medical record implementations initially scheduled to start in June. The larger of the two engagements got pushed back into the third quarter and is proceeding as planned and is factored into our guidance. The other engagement has been delayed until early next year. The second factor is our Clinical Trial Services segment. There was slower than expected ramp-up of two recent contract awards that were discussed on our prior quarterly conference call.

Our gross profit margin was 27.5%, up 50 basis points sequentially but down 110 basis points from prior year. The year-over-year margin decrease was partly due to a change in business mix with a higher percentage of revenue coming from the Nurse & Allied Health Staffing segment which has the lowest gross profit margin among our four business segments. This was coupled with higher housing costs and the reduction in the bill pay spread in our Nurse & Allied Staffing and Clinical Trial Services segments. The sequential margin improvement is primarily a result of the reset of payroll taxes in the prior quarter.

SG&A as a percent a revenue was up 20 basis points from the prior year but down 30 basis points sequentially. The sequential decline is primarily due to a decrease in payroll taxes while the year-over-year increase reflects investment in the infrastructure to support our MSB services.

SG&A expenses in the second quarter included approximately $830,000 in equity-based compensation expenses as compared to approximately $680,000 in the prior year quarter. Adjusted EBITDA as defined in our press release was $6.1 million as compared to $7.2 million in the prior year quarter or $4.5 million in the first quarter.

Interest expense was $722,000, down 38% from the prior year quarter and less than 1% 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 de-levering of our balance sheet. The current borrowing rate on our $49 million term debt is 200 basis points over LIBOR.

Net income in the second quarter was $1.6 million or $0.05 per diluted share as compared to $0.04 per diluted share in the prior year quarter. The effective income tax rate was 19% in the second quarter as compared to an estimated 42% tax rate for the full year 2011. The lower than expected effective tax rate in the second quarter was due to discrete items including the favorable resolution of uncertain prior year tax positions.

Turning to the balance sheet, we ended the quarter with $50 million of debt and $16 million of cash and cash equivalents. Our leverage ratio as defined in our credit agreement was 2.17 to 1 as compared to the 2.50 to 1 ratio allowed. Net of cash our debt to total capital ratio was 11% and the current ratio was 2.6 to 1.

Days sales outstanding were 50 days, unchanged from both the first quarter and the prior year quarter.

We generated $10 million of cash from operating activities in the second quarter, which included $4.6 million income tax refund. Capital expenditures totaled approximately $1.4 million in the second quarter.

Let me drill down next into our four reporting segments. Revenue for the Nurse & Allied Staffing segment in the second quarter was $68.3 million, up 14% versus the prior year and 2% sequentially. We averaged 2,461 field FTEs in the second quarter, up 14% versus the prior year and 2% sequentially. The year-over-year increase is reflective of the improved demand environment in general and the success we had achieved with our MSB solution and staffing of electronic media record implementations in particular.

The book-to-bill ratio averaged 108% in the second quarter, and so far in the third quarter is averaging 109%. Based on these booking trends we expect continued sequential revenue growth in the third quarter. Segment revenue per FTE per day in the second quarter was up slightly from the prior year but down 1% sequentially.

Contribution income as defined in our press release was $5.6 million in the second quarter, down 1% from the prior year but up 12% sequentially. Segment contribution margin was 8.3%, down 120 basis points from the prior year and 80 basis points sequentially. The year-over-year margin decline was due primarily to higher housing costs and higher SG&A expenses predominately related to our MSB activity as well a contraction in the bill pay spread that was partially offset by lower field insurance expenses. The sequential margin improvement was due to seasonal factors related to the reset of payroll taxes in the first quarter.

Let me turn next to our physician staffing segment. Revenue was $30.6 million in the second quarter, down 2% from the prior year but up 4% sequentially. Physician staffing days filled were down 5% from the prior year but up 5% sequentially. The uncertainty surrounding healthcare reform and the increased emphasis by hospitals to acquire physician practices 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. The demand appears to be stabilizing and we expect another modest sequential increase in revenue in the third quarter.

Segment contribution income for the second quarter was $2.9 million, representing a 9.5% contribution margin, up 10 basis points from the prior year quarter but down 240 basis points from the prior year which benefited from a favorable for professional liability accrual adjustment. Higher compensation expense as a percentage of revenue due to changes in specialty mix as well as the effect of negative operating leverage also contributed to the year-over-year margin decline.

Revenue in our Clinical Trial Services segment in the second quarter was $16.5 million, up 4% from the prior year and 5% sequentially as two new contracts began to ramp up in the second quarter, although at a slower rate than we initially expected. Contribution margin was 9.4% in the second quarter, down 140 basis points from the prior year but up 110 basis points sequentially. The year-over-year margin decline was due to a less favorable mix including lower permanent placement activity. Sequential margin improvement was due to improved operating leverage.

Revenue for the other human capital management services segment in the second quarter was $10.7 million, down 2% from the prior year but up 6% sequentially. Year-over-year revenue decline in our education business was largely offset by strong revenue growth in our physician [surge] business. Contribution income was $900,000, up 19% from prior year and 143% sequentially, driven by the turnaround of our physician surge business.

This brings me to our guidance for the third quarter of 2011. The following statements are based on current management expectation. 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, evaluation allowances, and any material legal proceedings.

We project the average Nurse & Allied field FTE count to be in the 2,500 to 2,550 range in the third quarter. Consolidated revenue for the third quarter is expected to be in the $128 million to $130 million range. We expect our gross profit margin to be approximately 27% and adjusted EBITDA margin to be in the 4.5% to 5% range. SG&A expense including bad -- excluding bad debt as a percentage of revenue is expected to decline approximately 100 basis points sequentially due to improved operating leverage.

We expect interest expense to remain sequentially flat in the third quarter and depreciation and amortization expense to decline by approximately 10% sequentially. Based on these assumptions, earnings per diluted share are expected to be in the $0.03 to $0.05 range. EPS guidance range is based on an estimated effective tax rate in the 48% to 49% range in the third quarter.

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

Yes. (Operator Instructions) We do have our first question. It comes from Paul Condra, BMO Capital Markets.

I wanted to ask you about the gross margins. Given that you had mentioned you expect some pricing improvement in the back half of the year and your third quarter guidance [were off] 27%, I'm wondering if you can give any detail around the fourth quarter, whether you might think margins might go up from there.

Well, there -- we are seeing some price increases, Paul. That is a process that takes time to flow through in the Nurse & Allied segment to be specific. We're not necessarily seeing them in the other segments. But in the Nurse & Allied segment, price per hour is starting to rise really for the first time in a couple years. It takes -- it does take time for that to flow through to the P&L because it only affects new contracts. It doesn't affect anybody on assignment at that time.

Right.

So as you can see, our third quarter which I think is largely driven by the continuing shift in mix towards the lower gross margin Nurse & Allied business. We don't provide guidance two quarters out, but it would not surprise me to see a little bit of an improvement in the fourth quarter, although the fourth quarter has some unusual items such as the time off around the holidays in our clinical trials business. But in our Nurse & Allied segment, I do expect to see a bill rate improvement and the margins begin to move in a more favorable direction in the fourth quarter.

Okay, great.

Yeah, I think in terms of the guidance for the third quarter, we are guiding to a 50-basis-point decrease in gross profit margin which is entirely driven by mix, the Nurse & Allied segment taking a larger percentage of the revenue and other human capital which is our highest gross profit margin segment having a lower percentage of (inaudible).

Okay, thanks. That's great. And I guess I also wanted to ask about the operating environment being quite constrained. You mentioned it last quarter. I assume that that's still kind of driving the situation now, and I wondered if you could talk about what kind of things you're doing to fill those positions. How do you compete in terms of making sure that you have the availability of nurses, and is there anything you do other than just -- other than just pay rates, are there any other levers that you can pull?

Well, it's a function of the dollars you put into recruitment, and I'm not going to be specific about the kinds of strategies we employ. The tools we use have shifted over time, Paul, from trade press advertising to more job board and more recently social networking. And the dollars we're employing in whatever strategy we're pursuing are increasing, and you can see in the applicants received number up 23% year-over-year, we're having some success. And you're also seeing improvement in the trend line, as I indicated in my prepared comments, in the percent of first-time nurses working for us.

We also track past working, that have worked for us in the past, maybe we didn't have a job for them a year and a half ago. We now have a job, they're coming back. That's a separate statistic, but nurses who have never traveled with us, that number was 26% in the most recent four weeks which is substantially higher, roughly 20% higher than it averaged during all of 2010.

Okay, thanks. And then just one more. I wanted to ask about the capital expenditures. I guess it looks it went up a bit relative to the first quarter. What was the increase and then can you tell us what you might expect for the rest of the year?

Yeah, there were certain one-time items in the second quarter. Our total CapEx for the quarter was $1.4 million. We did -- we are in the process of beefing up our computing infrastructure. We are investing in disaster recovery capabilities. We have a desktop refresh program. The fact is over the last few years we put a lot of discretionary CapEx on hold waiting for our business to improve and now it's time to reinvest.

However, having said that, I think Q2 was probably a bit of an anomaly in terms of the total expenditures. For the year as a whole my expectation is around $4 million of CapEx, which is still well under the 1% of revenue target that we have for capital expenditures.

Great. Thank you very much.

Okay. Thanks, Paul.

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

Thanks. In the quarter what was the EPS impact of the I guess discrete items that influenced the tax rate?

$0.02.

$0.02, okay. And you probably gave it in your prepared remarks but I think I missed it. What were those related to?

They were related to the favorable resolution of some uncertain tax positions due to the lapse of the applicable statute of limitations, and the effect of which was actually magnified by the relatively low pre-tax income.

And, Emil, what sort of tax rate should we contemplate for the back half of the year?

For the full year as a whole 42%. Next quarter as we indicated in the prepared remarks we anticipate our effective tax rate to be in the high 40s, kind of 48% to 49%, so that's pretty much our run rate for the back half of the year.

Okay. And, Joe, what did the month of July look like? We've seen news flow, macroeconomic data soften up in recent months. Is anything in the orders or booking trends or nurses on assignment type, non contract, is any of that altered in July versus what you reported in 2Q?

Tobey, I'm not going to tell you I'm not concerned about some of the recent economic data. Having said that, as far as our business is concerned, again typically we always talk about the momentum of the business, and the momentum has been strong and it continued to be strong into July.

Emil, I don't think we spoke specifically but we are running at the same kind of book -- backlog to working nurse ratio that we have. I think it's actually a little bit higher, it was 109% so far in the third quarter, and that compared to 108%, 107% in the last two quarters. So, so far in July it's actually accelerating, which is very encouraging to us, but one month does not make a quarter.

The order levels are right within the range. They haven't continued to increase, Tobey, but they are right in the range, and the mix has shifted. We've kind of turned away some of the volume of orders that we had that really weren't very viable for us. So I actually think it's a much higher quality order base than it has been historically. And it is more than sufficient to continue growing the business as long as on a macro level -- the job market is in the tail end right now but it's also not a headwind, and as long as the job market doesn't become a headwind I think we're going to continue to show the same kind of momentum that we have.

Thanks. And then on the clinical trials business, we read that Pfizer I guess in 2Q is consolidating vendors to a couple of standalone publicly traded CROs. What sort of impact might that have on your business? And maybe if you can make a comment generally on how consolidation among the customer base is influencing your business.

Pfizer today has very little impact on us. Where we do serve large cap pharma, it's other names. Pfizer in the past has been a very large customer for us but it is not currently. We may be serving them through a vendor management arrangement. I'm not aware that -- I know it's not material, and I'm not aware that there's any to be honest with you. But that doesn't mean there isn't. I just am not intimate with the overall breakdown.

Consolidation is bad, Tobey. It typically results in the two companies that are integrating to kind of step back and reevaluate their pipeline of compounds that they're developing. So it may slow the progress of a compound to market, which is not good for that segment. Having said that, as we just discussed in our prepared comments, momentum of the business is pretty good.

I think the management of that business has done a pretty good job of diversifying more towards the smaller players, the biotech and the ones where there's more opportunity to place smaller numbers. I mean, we're not getting large engagements with the smaller players in pharma, but it does give me comfort that our eggs aren't all in one basket.

And net-net, the Pfizer announcement I expect to have no impact on our expectations for this business over the next six months.

Thanks, Joe. Last question, in terms of the debt coverage, you still have a decent cushion there but we're dropping off some quarters of EBITDA and just had a -- we wanted to ask your sense is your expectation that the EBITDA that you're dropping off in prior years' quarters will be exceeded by future quarters' EBITDA at least over the near term?

That is my expectation. Tobey, if we're looking forward, and we don't provide guidance in this area, but I would not be surprised if we are able to bring down the leverage ratio below 2.0 by year-end.

Thank you very much.

Tobey, we have -- historically we've always used excess cash to prepay debt. Given the very favorable credit agreement that we have, we're paying a little more than 2% on what's outstanding. We're not aggressively prepaying that. We're actually building up cash which we can use at our discretion within the confines of the covenant, the credit agreement.

Thank you.

(Operator Instructions) Your next question comes from A.J. Rice from Susquehanna Financial.

Maybe just a couple of questions on the -- I don't think you have much exposure here, but I wanted to ask. The nursing homes obviously are subject to a fairly significant reimbursement change in Medicare in the last week that's been announced. You don't -- do you have much business with nursing homes?

We don't, Tobey. Excuse me, A.J., sorry. It has never been a strong sector for us. In the past we have had some rehab professionals in a working stint. Most of the rehab professionals we have working today are working in acute care facilities.

Okay. When we think about in some of your more seasonal markets, that traditional sort of winter month pickup that you see, I know those orders come in earlier. Can you just remind us when you would start to expect to see those orders come in, and if it's not too early is there any early indication on whether you'll see that seasonal pickup that you sometimes see in the fourth and first quarter?

You're going back in the heydays of the business, A.J. We would start to see those orders in July, and we'd see a lot of them in August. And the nurses would seasonally want to begin 13-week contracts typically before the third week of September so they can be off and home for the holidays. Over the last several years that dynamic has changed significantly and seasonal orders are coming in in September and October.

I would say today we don't have a lot of seasonal job orders, but I would offer that in Florida, for example, which has always been one of our most important states, typically one of our top two, although it hasn't been in recent years. In July the number of nurses we had working was up 115%, so significant improvement on kind of a starting point basis. So we do have some optimism that the seasonal business in Florida may be more robust than it has been in recent years.

Okay. You mentioned that the employment of docs by hospitals is having an impact on the physician business. I wondered if is it across the board or is it in particular service specialty lines where you're seeing the slacking in demand or I guess just some more color if possible.

Yeah. We've talked in the past that what's really been impacted for our business is the anesthesia area which was the -- by far and away the most important specialty area for MDA. We did actually see some recovery which gave us some optimism in the first five months of the year. June unfortunately we saw a downturn in anesthesiology which was disappointing because it really seemed like it was regaining its footing. Another area that I think is important to us where we've seen some softness is in the ER area, and I think it's due to a variety of reasons.

Offsetting that has been in a lot of strength in areas like hospitalists, psychiatry, not all the specialties are down, but ER and anesthesia have been two very important ones, and both of them are a little -- are soft. Anesthesia looked like it was recovering, but June was really kind of a countertrend data point and then I temper my comments because of that.

Okay. And then just finally I think Emil you mentioned, and I may just have misunderstood, but it sounded like you said there was an adjustment in professional liability I guess in the quarter. Is that true and can you give us a little more flavor on what happened there and the order of magnitude.

Well, it was actually in the comparison year-over-year.

I see. Okay.

The prior year quarter for our physician professional liability (inaudible) had a favorable accrual adjustment with the order of magnitude year-over-year was about $300,000 favorable swing -- I mean unfavorable swing when comparing the current year to the prior year. Not because the current year is bad. In fact, our professional liability rates are very -- are moving in the right direction, but the prior year quarter has a large favorable adjustment.

Okay. All right. That's helpful. Thanks a lot.

Thank you, A.J.

And the next question comes from Paul Condra, BMO Capital markets.

Oh, hey. Thanks. Just one follow-up. I wanted to ask about the -- you mentioned the delay in the EMR contract, and I wondered if that was something -- well, if you could just explain what happened there, something we should pay attention to or is it just an anomaly? Thanks.

I don't think it was anything unusual. I would actually say it's not unusual at all for these implementations to have some movement as to when they kick off. Most of our customers haven't been through something of that magnitude historically, and it's a project management issue. There are some that begin right on schedule and others where we see some movement.

Where we get involved, I would say the majority of the nurses we have currently engaged in electronic medical record implementations, we're controlling the intake. We're working hand-in-hand with the customer and really controlling who gets there, what kind of experience they have, the experience they have on the particular software that's being implemented. There are others where we're just one of a number of companies supporting the implementation.

The one that -- the biggest one, the biggest impact on June was rolled into July. Actually that implementation is well into its -- we're about halfway through the initial phase of it and then typically there's a renewal phase where nurses coming off contract, the hospital thought everybody would be ready but a lot of nurses are adult learners, they need a little more handholding at the bedside. So we renew and sometimes a significant portion of the nurses to continue to provide support and bedside care as the core staff nurses become more familiar with the technology.

The one that was delayed until next year, we were -- we had -- there was approximately 10 to 12 contracts, not insignificant, and I have every expectation when that engagement is started up in 2012, we'll probably have as many or more nurses working on that engagement. But it wasn't one that we controlled and therefore didn't have as much impact on our business.

Thanks for that detail.

Okay.

And, sir, I'm showing no further questions at this time.

Okay, Melissa, thank you. And thank you to everyone dialing in for your interest in Cross Country. We look forward to updating you on the third quarter in the coming months. Take care.

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