Cross Country Healthcare Inc (CCRN) 2012 Q4 法說會逐字稿

Welcome to the Cross Country Healthcare fourth-quarter 2012 earnings conference call. (Operator Instructions). Today's conference is being recorded. If you have any objections you may disconnect at this time. I would now like to turn the meeting over to Mr. Howard Goldman, Director of Investor and Corporate Relations. Sir, you may begin.

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

On this call, we will review our fourth-quarter and full-year 2012 results for which we distributed our earnings press release after the market closed yesterday. Additionally, as previously reported, in February 2013, we sold our clinical trial services business. Accordingly this business has been reclassified as discontinued operations and the current and historical amounts we will be discussing have been adjusted to reflect this.

If you do not have a copy of our earnings press release, it is available on our website at 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. 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 statements section of our press release for the fourth quarter of 2012 as well as under the caption Risk Factors in our most recent 10-K and 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 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 will turn the call over to Joe.

Thank you, Howard, and thank you to everyone who is listening in for your interest in Cross Country Healthcare. As reported in our press release issued yesterday, our revenue from continuing operations for the fourth quarter of 2012 was $112 million, up 3% from the prior year quarter but a slight decrease sequentially from the third quarter. Including discontinued operations we reported a net loss of $9.5 million or $0.31 per diluted share. This compares to net income including discontinued operations in the prior year quarter of $500,000 or $0.02 per diluted share. Cash flow from operations in the fourth quarter was $4.4 million.

In a few minutes, Emil will discuss the discontinued operations in greater detail along with the rest of our fourth-quarter financial results. While our fourth-quarter revenue was in line with our expectations, our results were affected by a variety of factors that combined to result in a loss from continuing operations. Excluding the impact of a professional liability expense recognized in the fourth quarter as outlined in our press release, our successful efforts to improve gross margin primarily in our nurse and allied staffing segment bore fruit more rapidly than we anticipated. This was an all hands exercise and I'm very pleased with the response of our team and their ability to get this business on a more positive pass so quickly in the challenging cost environment.

As part of our focus to improve gross margin, however, we've had to make some difficult decisions. To that end we have mutually agreed with a large hospital system to end an MSP relationship that we had been implementing over the second half of 2012. Since we began discussions with this hospital system about two years ago, demand has increased significantly which has put pressure on wages and consequently on pricing. After much discussion with the client about current market dynamics, both parties recognized that neither could meet all of its strategic objectives by continuing the MSP relationship.

While we are disappointed, we look forward to continuing relationships with several of the hospitals in these large systems on terms that are competitive with current market conditions.

On a more positive note, with the underlying tone of the stronger demand environment, our contract nursing business achieved a 2% improvement in hourly bill rates, both year over year and sequentially. This improvement largely offset the strong inflation we have experienced in our housing and insurance costs in 2012.

To some degree, the stronger demand was supplemented by hospital admissions resulting from the most severe flu season in years. Even though the flu has abated, current -- currently open orders remain significantly above the level of a year ago. Staffing related to electronic medical record technology implementations continues to be a driver of demand for our contract nurse and allied staffing services and we expect this area of demand to remain strong throughout 2013.

Fourth-quarter results and our per diem nursing business were also encouraging with staffing volume up 7% year over year and 3% sequentially. Favorable momentum in our per diem business has continued into 2013. Our physician staffing business had a strong fourth quarter with revenue up 10% year over year though down 6% sequentially from the third quarter, reflecting the normal seasonal pattern of this business.

In our other human capital management services segment, we experienced improved revenue year over year in our retained search business that was more than offset by weakness in our education and training business. On a sequential basis, both revenue and contribution income in this segment were up from the third quarter, partly due to seasonal factors.

As noted in February we sold our clinical trials services business. This decision was made after a strategic review of our operations in view of the changing landscape in this pharmaceutical R&D outsourcing industry. We sold this business for $52 million, plus an earn out of up to $3.75 million related to certain performance-based milestones which we believe was a fair and reasonable price.

I want to take this opportunity to thank our formal clinical trial services team that has guided this business over the past 12 years for us. We wish them every success in the future and with that, I would like to turn the call over to Emil.

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

As Howard mentioned earlier, in February 2013 we sold our clinical trial services business and accordingly this business has been reclassified as discontinued operations at year end. The current and historical amounts that I will be reviewing have been adjusted to reflect this.

Revenue from continuing operations in the fourth quarter was $112 million, up 3% from the prior year quarter due primarily to strong revenue growth in our physician staffing segment. Sequentially, revenue was down 0.5% due to a seasonal decline in physician staffing, partially offset by revenue growth in the nurse and allied and other human capital management segments. Our consolidated gross profit margin was 25%, down 270 basis points from the prior year but up 60 basis points from the prior quarter.

In the fourth quarter, we took a $750,000 charge for an indemnity claim for professional liability in our nurse and allied staffing segment. We have an offsetting claim with an insurance carrier against this charge which, we believe, will allow us to reverse some if not all of this expense in a future period. However, under US GAAP, we are precluded from recognizing this gain contingency until it is realized.

The sequential profit margin improvement reflected our efforts to expand the bill-pay spread in our nurse and allied staffing business to help offset the margin erosion we experienced since last year from higher housing and health insurance costs. The year-over-year margin decline was due to the aforementioned professional liability charge in the current quarter, housing and health insurance cost increases, as well as a favorable professional liability accrual adjustment in our physician staffing business in the prior year quarter.

SG&A for the quarter was $27.1 million, up 3% from the prior year and 1% sequentially. Included in this quarter's results was a one-time $680,000 expense for correcting a calculation of deferred rent which primarily accumulated from 2002 to 2010 and which would have had an immaterial impact on rent expense during each of these years. Expenses in the fourth quarter also included approximately $600,000 in equity-based compensation expenses essentially unchanged from prior year and the prior quarter.

The adjusted EBITDA from continuing operations as defined in our press release was $1.3 million, representing a 1.2% adjusted EBITDA margin.

Interest expense of $433,000 was down 36% from the prior year quarter, due to the continued delevering of our balance sheet. Pre-tax loss from continuing operations in the fourth quarter was $1.3 million on which we had incurred income tax expense of $1.7 million. The income tax expense in the fourth quarter included $2.5 million in charges related to our decision to repatriate the accumulated earnings and profits from our India-based subsidiary, including dividend withholding taxes.

Previously we planned to keep these earnings and profits offshore indefinitely to support the expansion in India of our now discontinued clinical trial services business. Net loss from continuing operations was $3 million or $0.10 per diluted share. This compares to a net loss from continuing operations in the prior year quarter of $200,000.

Net loss from discontinued operations in the fourth quarter was $6.5 million after-tax or $0.21 per diluted share and included a non-cash goodwill impairment charge in the fourth quarter of $0.24 per diluted share.

Including discontinued operations, we had a net loss in the fourth quarter of $9.5 million or $0.31 per diluted share. In the same quarter a year ago, net income including discontinued operations was $0.5 million or $0.02 per diluted share.

For the full-year 2012, consolidated revenue from continuing operations was $443 million and compares to $439 million in the prior year. We had a loss from continuing operations of $20.7 million or $0.67 per diluted share. Including discontinued operations, we had a net loss of $42.2 million or $1.37 per diluted share. The net loss included a non-cash goodwill impairment charge in the second quarter of 2012 of $12.1 million after-tax or $0.39 per diluted share related to the nurse and allied staffing business segment. It also included non-cash goodwill and trademark impairment charges in the third and fourth quarter of 2012 totaling $24.2 million after-tax or $0.79 per diluted share related to the discontinued clinical trial services business segment.

In 2011, income from continuing operations was $1.5 million or $0.05 per diluted share and net income, including discontinued operations, was $4.1 million or $0.13 per diluted share.

Turning to the balance sheet, we ended the quarter with $33.9 million of debt and $10.5 million of cash and cash equivalents. Net of cash, our debt to total capital ratio was 9.6% and the current ratio was 2 to 1. Days sales outstanding excluding the discontinued clinical trial services business was 52 days, down two days from the prior quarter and unchanged from the prior year. We generated $4.4 million of cash from operating activities in the fourth quarter compared to $3.7 million in the prior year quarter. Capital expenditures were approximately $100,000 in the fourth quarter and $2.2 million in the full-year 2012.

On January 9, 2013 we entered into a new loan agreement with Bank of America for a $65 million asset-based revolver facility which, we believe, is better suited for our current needs. On February 15 of 2013 we repaid all $29.3 million of our then-outstanding bank debt from the net proceeds of the sale of the clinical trial services business and we currently have more than $25 million of cash. As a result of the refinancing we will be writing off in the first quarter of 2013 approximately $1.3 million of debt issuance costs related to our prior facility.

Let me drill down next into our three reporting segments. We averaged 2,452 field FTEs in the fourth quarter, essentially flat with both the prior year and the prior quarter. Nurse and allied staffing segment revenue in the fourth quarter was $70.9 million, up 1% versus the prior year and 2% sequentially. Revenue per FTE per day was up 1% from the prior year and 2% sequentially. The average travel nurse bill rate was up 2% both from the prior year and sequentially. The book to bill ratio averaged 99% in the fourth quarter.

Segment contribution income as defined in our press release was $4 million in the fourth quarter, down 27% from the prior year but up 36% sequentially. The contribution income margin was 5.7% in the fourth quarter, a decrease of 210 basis points year over year but an increase of 140 basis points sequentially. The year-over-year decline was primarily due to the aforementioned professional liability charge as well as higher health insurance claims. The sequential margin improvement was due to a widening of the bill-pay spread and a favorable workers compensation accrual adjustment, partially offset by professional liability charge.

For the year as a whole, segment revenue was $278 million, down slightly from the prior year while contribution income was $13.2 million, down 41% from the prior year.

Let me turn next to our physician staffing segment. Revenue was $30.7 million in the fourth quarter, up 10% from the prior year but down 6% sequentially due to seasonal factors. Physician staffing days filled were up slightly from the prior year but down 10% sequentially. The year-over-year increase in revenue was driven by higher average revenue per day filled due to a combination of higher bill rates and changes in specialty mix, in particular, higher volume from the emergency room physicians.

Segment contribution income for the fourth quarter was $2.5 million, down 10% from the prior year and 21% sequentially. The year-over-year decrease was primarily due to higher professional liability insurance expenses in the current quarter, compared to a favorable professional liability insurance accrual adjustment in the prior quarter, partially offset by lower non-income-based state taxes. The sequential decline was due primarily to reduced operating leverage.

For the year as a whole, segment revenue was $124 million, up 4% from the prior year, while contribution income was $10.7 million, down 6% from the prior year. Revenue for the other human capital management services segment in the fourth quarter was $10.2 million, down 5% from the prior year due to lower seminar attendance in our education and training business, partially offset by higher retainer revenue in our search business.

On a sequential basis, segment revenue was up 4% with both the education and search businesses contributing to the revenue growth. The contribution income margin was down 270 basis points year over year, due primarily to the reduced operating leverage of the education business but up 500 basis points sequentially, with both the education and search businesses contributing to the sequential margin improvement.

For the year as a whole, segment revenue was $41 million, down 1% from prior year and contribution income was $1.9 million, down 39% from the prior year.

This brings me to our guidance for the first quarter of 2013. The following statements are based on current management expectations. Such statements are forward-looking and actual results may differ materially. These statements do not include the potential impact of any future mergers, acquisitions, or other business combinations, impairment charges or valuation allowances or any material legal proceedings.

We project the average nurse and allied staffing field FTE count to be in the 2,450 to 2,500 range in the first quarter of 2013. Consolidated revenue for the first quarter is expected to be in the $110 million to $112 million range, with an expected sequential revenue increase in our nurse and allied staffing segment offset by a decrease in our other human capital management services segment.

We expect our gross profit margin to be in the 24.5% to 25% range and adjusted EBITDA margin from continuing operations to be in the 0% to 2% range. Interest expense is expected to be approximately $250,000 in the first quarter. Also included in our first quarter guidance is the write-off of approximately $1.3 million of debt issuance costs related to our prior credit facility.

Our effective tax rate in the first quarter is expected to be in excess of 100%. This unusual tax rate is due primarily to the impact of non-deductibility of certain per diem payments, the effect of which is greatly magnified by our relatively low pre-tax book income. Our cash tax rate for 2013 is expected to be approximately 30%.

Based on these assumptions we expect our earnings per diluted share to be essentially at breakeven for the first quarter of 2013.

This concludes our formal comments. However, before we open up the lines to answer any questions, I would like to hand the call back over to Joe for some concluding remarks.

Thanks, Emil. I thought it would be helpful to put into perspective where our Company is at today given the two transactions we have announced already in the first quarter and in view of recent market conditions.

As things stand today we have a debt-free balance sheet with more than $25 million in cash as Emil indicated. As an organization, we are sharply focused on our nurse allied and physician staffing businesses. I believe the demand environment for our staffing services is the healthiest it's been since the recession in 2008 which bodes well for us in the near, term, and over the longer term, the combination of an aging population along with the anticipated increases in utilization of healthcare services resulting from the Affordable Care Act should drive greater demand for our nurse, allied and physician staffing services. In turn, this should enable us to achieve greater revenue and earnings in the future.

Now let's open the call up for questions. Nikki?

(Operator Instructions). Tobey Sommer, SunTrust.

I guess my first question was kind of a broad one. Joe, when you look at the business on the nurse side, for example, where do you intend to focus most of your efforts to stimulate growth? Is it on the sales side or is it on the recruiting side?

Well, the truth is, Toby, both. In January at the -- what was a -- appeared to be a spike in demand related to flu also there was kind of a crescendo of EMR-related staffing opportunities at that time. I would've answered it is all about recruitment.

Having said that, since the flu has abated, the tide has gone out a little bit. We're still up roughly 50% year over year in orders. But it is not nearly the incredibly robust demand environment that we saw -- we really haven't seen in a number of years that we operated in from call it November through January. It was -- it brought back some happy memories about how good this business can be when demand is strong.

The reality is, both those areas are important to us. Toby, historically the most important aspect of this business is to be a company that attracts nurses through word-of-mouth, through very aggressive advertising campaigns utilizing technology, social media, which has become a very important part of our recruitment strategy over the past several years. I think that remains true.

Having said that, we can't take the eye off the ball of sales. That MSP will continue to be an important part of this business. We think we have a compelling offering to our clients. As we indicated, we did walk away from a fairly significant opportunity just because as time went on, it became less and less attractive. And it is often the case that an MSP -- it's about price to begin with but over time it becomes about the service and productivity enhancement that you're able to offer your clients.

With this client which we were onboarding just as demand was reaching a -- an unprecedented over the last several years level, it just became tougher to meet the needs in an environment where costs were also not just wages but housing costs were also going up. What we've said to the client is we're not willing to do this at a loss. Even for a brief period of time. There has to be a recognition.

We laid out our expenses for the client, and I think as long as clients recognize that we are a for-profit company, the MSB opportunity is going to continue to be strong for us and as you look at our inventory and the clients that we serve today, very large prestigious systems that we have a great track record for the most part. And this, unfortunately, we were not able to leverage our experience with this client that we had felt had tremendous opportunity for us.

But MSP remains an important element of the business. Winning EMR contracts remains an important piece. But at the same time you can't be successful if you can't recruit nurses to fill the positions that you get.

Thanks. And I have another question about the physician staffing business. You had a press release out yesterday talking about the physician turnover increasing and setting a record. I was wondering what your thoughts are around where that rate of turnover can go after a period of kind of subdued turnover related to the recession, real estate, and a host of other issues. Thanks.

Yes, the physician business has been a -- in a slump really for us beginning in 2009 and, really, last year was the first year we saw a year-over-year improvement in that business. But, within the physician segments, it's uneven. We're seeing very strong growth in areas like primary care, hospitalists, ER physicians, we continue to see weakness in areas that historically were very important to our business, like anesthesia and radiology.

As physicians have become -- as it has become much more common for physicians to be employed by hospital systems, for physicians to be employees as opposed to owner operators, I do expect to see increases in turnover. I don't think fundamentally that dynamic is a negative for our business. I actually think it's a positive because physicians are much more likely to take a vacation when they are an employee than if they own their own practice.

So, I do expect to see a lot of movement within the physician space, particularly as the Affordable Care Act is rolled out. I think healthcare reform is going to have profound implications, more profound implications for our physician business than our nursing business over the next several years and I would be making up numbers if I gave you my expectations. But I think directionally, turnover will increase and it will be good for the opportunity in the locum tenens space.

Thank you very much. I'll get back in queue.

Gary Taylor, Citigroup.

Can we just -- on the MSP, does this happen to be the one contract you were talking about where you've held some FTEs at a loss while a delayed EHR was being implemented? Or is that different?

Actually, I don't recall that specific scenario. This was -- in the past we've talked about -- a couple of calls most recently, we've talked about the opportunity to onboard about $60 million of incremental MSP. This account was a large system that made up the majority of that $60 million.

But I guess I would put it in -- take a step back and put it in context. We still believe we're going to grow our nurse and allied business in 2013. We are out of the gate, through February, we're up about 5% in that business. And with a growing volume and top line for the nurse and allied business we still expect that MSP will account for a larger share of the overall activity in that segment than it was in 2012. We have other fairly significant clients that, frankly, would be easier to onboard than this system was.

The system -- it was a complex system. They didn't have an infrastructure to onboard an MSP. So, it was up to us to make it work and then, right in the middle of it, for lack of a better phrase all hell broke loose on demand and it wasn't just our nurses. Our nurses were being recruited by other companies with better opportunities than we were able to offer within the system so, it just got off out of the gate poorly. We had a lot of dialogue with the clients and again they had an expectation we were going to operate under a specific set of criteria for an extended period of time and our feeling was, if the market changes, we need to talk to you about that.

So we just had a misaligned expectations and needs and, frankly, we felt the best thing for us in our ability to create shareholder value was to walk away from the opportunity even though it was a very significant opportunity and maybe in a different time we would've been willing to grind through a period like that. It just didn't make sense because the system was so large and it was going to take a disproportionate amount of our effort and focus and there were other opportunities, really, to place nurses at much higher profitability.

Got it. Can you give us just an update on either for the 4Q or maybe even kind of an outlook for 2013 either way, but --? So MSP as a percent of nurse and allied staffing, what percentage of the business is that now?

Just under 30% and we expect it to be a little bit higher than that in 2013.

Okay. And then two other quick numbers I was looking for. I know you have talked the last few quarters about housing and insurance costs. Can you just give us either -- anything would be helpful but, whether it's easier to do just talk about kind of a quarterly run rate dollar amount or either of those as a percent of your costs of revenue or as a percent of revenue or whatever just to kind of give us an update on those two pieces?

The housing as a percent -- let me make sure I get the right numbers here in front of me. If you just bear with me for a second.

The housing as a percent of revenue has been running approximately in our nurse and allied staffing business, at approximately 16% historically and we've seen that percentage inch up, increase pretty dramatically over the past year but, in the last quarter we've seen some stabilization in that number. Health insurance has been running historically at around 2% but has increased pretty dramatically over the past year by over 100 basis points. And we believe that increase was due, really, just it was a combination of both severity and frequency in claims. We believe medical inflation was an element of the increase but it can't really explain the large 100 basis points or so increase year over year.

There really haven't been any significant changes to our plan compared to last year other than the statutorily mandated increase in the annual claim limit from $750,000 to $1.25 million.

So basically our conclusion is that we just had a bad run in large claims and over time we would expect a reversion to the mean at some point. And, in fact, our rate of increase is as in we will see some moderation in the rate of increase in Q1. It's still up year over year, but it's declining sequentially.

On the good news front, Gary, we talked about the pricing we've been able to get and again, a hot market generally results in an ability to work with clients and put in more attractive bill rates in order to offer more attractive wage rates to nurses. We have seen expansion in our bill-pay spread in the fourth quarter.

As you move into the first quarter of 2013, bill rates are -- for the first two months that we have data for, they are running 2% up just like they were in the fourth quarter which has allowed us to accommodate continued inflation in the housing and other areas of our direct costs. And, while we still have elevated health insurance and, again, some of it is bad luck. Some of it may be adverse selection just because of the -- as we have discussed in the past, we did not get a waiver of Obamacare and our primary competitor did and I think we may be getting some adverse selection of nurses that may think they have claims that should normalize and we should have a level playing field in 2014.

But if you look at the first two months, if our health insurance were equal to what it was on an hourly basis a year ago, we'd actually be driving higher gross profit dollars per hour than we did a year ago. So, we've had a lot of success in improving the umbrella and raising the umbrella to accommodate some inflation in our costs but not the extraordinary inflation that we've seen in our health insurance, which continues to run 30% to 50% up year over year in the first couple of months of 2013.

Got it. Just one quick follow-up. Thanks for the information. It's helpful. Just back to the housing. So nurse and allied is about [16]% of revenues. Do you have a rough estimate of how much that is up over the last year?

Well, if we actually look at it quarter to quarter, it's actually down about 30 or 40 basis points in the current quarter compared to the prior year quarter. That is entirely due to changes in geographic mix. So if we actually look at it on a market by market basis, we are still seeing mid-single-digit increases.

Okay, thank you.

At this time, we have no further questions.

Okay well, and we know this was short notice for this call. We do appreciate everyone on the call making time for us and we look forward to updating you on our first quarter in May. Thank you very much.

This concludes today's conference call. Thank you for participating. You may disconnect at this time.