Cross Country Healthcare Inc (CCRN) 2013 Q1 法說會逐字稿

Welcome to the Cross Country Healthcare first quarter 2013 earnings conference call. At this time all participants will be in a listen-only mode until the question and answer session of the call. (Operator Instructions). Now, I would like to turn over the meeting 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 Chief Executive Officer, Bill Grubbs, our President and Chief Operating Officer, and Emil Hensel our Chief Financial Officer. On this call we will review our first quarter 2013 results for which we distributed our earnings press release after the close of business yesterday.

If you do not have a copy, it is available on our website at www.CrossCountryHealthcare.com. Replay information for this call is also provided in the press release. Before we begin, I would first like to remind everyone that this discussion contains forward-looking statements. Statements that are predictive in nature that depend upon or refer to future events or conditions, or that include words such as expects, anticipates, believes, appears, estimates, and similar expressions are forward-looking statements.

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 first quarter of 2013 as well as under the caption risk factors in our 10-K for the year ended December 31, 2012, 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 in 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.

And now, I will turn the call over to Joe.

Thank you, Howard. And thank you to everyone listening in for your interest in Cross Country Healthcare. As reported in our press release issued last evening our revenue from continuing operations for the first quarter of 2013 was $110 million up slightly from the prior year reflecting a 5% improvement in our Nurse and Allied Staffing segment that more than offset declines in our other two business segments. Net income in the first quarter was $1.2 million, or $0.04 per diluted share which includes results from the discontinued Clinical Trial Services segment.

This compares to a net loss in the year-ago quarter of $0.02 per diluted share including discontinued operations. Our loss from continuing operation was $1.3 million or $0.04 per diluted share and includes $0.03 related to the write-off of loan fees following the replacement of our prior credit facility in January. Cash used in operations during the first quarter was $1.5 million.

Our consolidated revenue and earnings were in line with our expectations. In particular, the performance of our Nurse and Allied Staffing business resulted in year-over-year and sequential increases in segment revenue due to higher travel and per diem staffing volume, as well as higher bill rates. Our travel staffing volume was up 2% both year-over-year and sequentially. Our per diem operations also contributed to revenue momentum with staffing volume up 10% from prior year and 8% sequentially.

Our efforts to restore margin in the segment continue to be effective. Both housing and health insurance costs per hour declined sequentially which combined with a favorable $800,000 professional liability accrual adjustment, as well as higher volume, bill rate increases, and continued focus on controlling overhead resulted in a 44% improvement in segment contribution income from prior quarter. The professional liability adjustment was not included in our first quarter guidance.

The underlying case moved further through the legal system and provided greater clarity on our exposure. We experienced incremental demand for our Nurse and Allied Staffing services resulting from a very strong flu season that drove higher hospital admissions early in the quarter. Staffing related to electronic medical record technology implementations was also a driver of demand in this segment during the first quarter. Currently, EMR activity is running below the first quarter.

Despite the current low, we expect this driver of demand to strengthen as we get deeper into 2013 as hospitals must demonstrate meaningful use of medical record technology by 2015. Our Physician Staffing business was below expectations in the first quarter with revenue down 4% year-over-year and down 8% sequentially. We continue to believe this segment will grow revenue in 2013 but have limited visibility given the shorter term nature of contract placements in comparison to our nursing business.

Our other Human Capital Management Services segment also saw a decline in year-over-year revenue and contribution income as both education and training businesses and our search business had weaker performance. We believe our search business is currently gaining traction whereas our education and training business continues to struggle with the decline in the number of behavioral health professionals seeking continuing education from us. Employment of these professionals by states has declined in recent years due to budget pressures.

So in summary we had good execution in our Nurse and Allied Staffing segment which has gone a long way toward restoring our margins in this segment. However, overall demand has pulled back from higher levels seen early in the first quarter following the end of a very strong flu season and reflecting a current lull in EMR staffing as well as the normal seasonality of this business. As a result, we look for second quarter volumes to be down moderately sequentially.

Our Physician Staffing business had a weaker first quarter than we anticipated but in the second quarter we expect this business to return to a positive trend line with improved year-over-year and sequential performance. Lastly, after 20 years serving Cross Country as Chief Executive Officer I intend to retire later this summer. It has been an honor for me to lead this company and I want to thank our employees, Board of Directors, and shareholders for their tremendous support these past few decades. Upon my retirement in July, Bill Grubbs, an experienced staffing industry executive who joined Cross Country on April 1 as President and Chief Operating Officer, will become our Chief Executive.

Based on our time together and his track record, I feel very good about leaving this Company in Bill's capable hands and I believe he will lead this Company to a very bright future. Before proceeding to a deeper review of our financial results by Emil, I would like to introduce Bill to this audience. Welcome, Bill.

Great, thanks, Joe. Happy to be here. Cross Country Healthcare has a great history and a great reputation. And having been in the industry for many years I have received a lot of phone calls since I have been here from previous colleagues and even competitors and all of the comments have been very positive about Cross Country, our people and our prospects.

So I'm excited about the opportunity to work with the team here and help the company to grow and take advantage of the positive market trends and after five weeks I'm encouraged by what I have seen so far and I'm looking forward to the future. And on a personal note, Joe, I want to thank you for your help and support during this transition period. And with that, I will now to turn the call over to Emil.

Thank you, Bill, 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 of 2013 that we provided in the press release issued last evening. Revenue in the first quarter was $110 million, up slightly from the prior year but down 1% from the prior quarter.

The first quarter had one less billing day than the prior year quarter and two less billing days than the fourth quarter. Revenue per day was up 3% year-over-year, and 2% sequentially with revenue growth in our Nurse and Allied Staffing segment offset by revenue declines in our Physician Staffing and other human capital management segments.

Our gross profit margin was 26.2%, down 30 basis points from the prior year primarily due to changes in segment mix and higher field compensation expenses partially offset by a favorable professional liability accrual adjustment in the current quarter. Gross profit margin was up 120 basis points sequentially due to lower professional liability expenses as well as lower housing and health insurance costs partly offset by the reset of payroll taxes and changes in segment mix.

SG&A for the quarter was $27.1 million, down 3% year-over-year, and flat sequentially. SG&A expenses in the first quarter included approximately $600,000 in equity based compensation expense essentially unchanged from both the prior year and prior quarter. Adjusted EBITDA from continuing operations as defined in our press release was $2 million, representing a 1.8% margin. Interest expense of $280,000 was down 56% from the prior year quarter and 35% sequentially reflecting the repayment of our revolver balance from the proceeds of the sale of the Clinical Trial Services business in mid quarter.

As previously disclosed during the first quarter we entered into a new asset based lending facility with Bank of America and as a result, we rolled off $1.4 million pretax of loan fees associated with our previous loan facility. Including this loan fee write-off our pretax loss from continuing operations was $1.8 million in the first quarter. The income tax benefit from continuing operations was $500,000 representing a 27% effective tax rate.

Our loss from continuing operations after taxes was $1.3 million or $0.04 per diluted share and included $0.03 related to the write-off of loan fees. Income from discontinued operations after taxes was $2.5 million or $0.08 per diluted share and includes a $1.9 million after tax gain on the sale of the Clinical Trial Services business. Our net income, including discontinued operations, was $1.2 million or $0.04 per diluted share.

Turning to the balance sheet. We ended the quarter with $21 million of cash and cash equivalents, no revolver debt and a current ratio of three to one.

Days sales outstanding was 56 days, up 3 days from the prior year quarter and 4 days from the prior quarter. Cash used in operations was $1.5 million, primarily due to the buildup in accounts receivable at quarter end. Since then, we experienced improved collections during April. Capital expenditures totaled approximately $200,000 in the first quarter.

Let me drill down next into our three reporting segments. In our Nurse and Allied Staffing segment we averaged 2,522 field FTEs in the first quarter, up 3% versus both the prior year and the prior quarter. Segment revenue in the first quarter was $72.7 million, up 5% versus the prior year and 3% sequentially. Revenue per FTE per day was up 3% from the prior year and 2% sequentially. The book to bill ratio averaged 98% in the first quarter. Segment contribution income, as defined in our press release, was $5.3 million in the first quarter representing a 7.3% contribution margin, up 210 basis points both from the prior year and sequentially. The year-over-year margin improvement was due to a combination of lower professional liability expenses and housing costs, as well as improved operating leverage, partially offset by higher bad debt expense.

The sequential improvement reflects the impact of a reserve for a specific professional liability claim in the fourth quarter that was reversed in the current quarter based on an arbitration ruling which is expected to result in a full insurance recovery. Also contributing was lower housing and health insurance costs in the first quarter partially offset by the reset of payroll taxes. Let me turn next to our Physician Staffing segment.

Revenue was $28.1 million in the first quarter, down 4% from the prior year and 8% sequentially. Physician Staffing days filled were down 9% from the prior year and 7% sequentially. The year-over-year decrease was due to lower staffing volume in certain specialties including anesthesia, primary care and surgery partially offset by bill rate increases.

The sequential decline was due to lower volume particularly in primary care and emergency medicine. Segment contribution income for the first quarter was $2.2 million, representing a 7.7% contribution margin, down 50 basis points from the prior year due to a combination of higher physician compensation and an increase in recruitment headcount partially offset by a recovery of bad debt and lower health insurance costs.

Sequentially, segment contribution margin was down 30 basis points primarily due to the reset of payroll taxes in the first quarter and higher physician compensation expenses, partially offset by lower professional liability expenses and the recovery of bad debt. Revenue for the other Human Capital Management Services segment in the first quarter was $9.5 million, down 14% from the prior year and 7% sequentially with both the retained search, and education businesses declining. Segment contribution income was $300,000, down $800,000 year-over-year and $200,000 sequentially.

The year-over-year decrease reflected lower revenue and is primarily attributable to negative operating leverage in the retained search business. The sequential decrease was due to lower revenue and negative operating leverage in the retained search business partially offset by an improvement in the education and training business and also reflected a favorable state non-income based tax adjustment in the fourth quarter of 2012 in the retained search business.

This brings me to our guidance for the second quarter. 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, evaluation allowances, or any material legal proceedings. We project the average Nurse and Allied Staffing field FTE count to be in the 2,375 to 2,425 range in the second quarter of 2013.

Consolidated revenue for the second quarter is expected to be in the $110 million to $112 million range reflecting a mid single digit sequential revenue decrease in our Nurse and Allied Staffing segment due to market dynamics including seasonality that Joe discussed earlier, offset by seasonal increase in our Physician Staffing segment. We expect our gross profit margin to be approximately 26% and adjusted EBITDA margin from continuing operations to be in the 1% to 2% range. Interest expense is expected to be approximately $200,000 in the second quarter. Income tax expense is expected to be in the zero to $300,000 range. Based on these assumptions, we expect a loss per diluted share from continuing operations in the $0.01 to $0.03 range for the second quarter of 2013.

So in summary, we believe operationally on a consolidated basis that our second quarter looks a lot like the first quarter with the exception being that we expect to incur a tax expense as opposed to a tax benefit we realized in the first quarter. This concludes our formal comments.

At this time we will open up the lines to answer any questions that you may have. Angela?

Thank you. (Operator Instructions). The first question comes from Jeff Silber, with BMO Capital Markets.

Thanks so much. I wanted to focus on the nurse allied business, if you could talk about how your MSP business is going, what percentage of your business comes from that annual and how you is that affecting pricing? Thanks.

Hi, Jeff, good morning. The MSP business as a percent of our nurse and allied revenue is right around 30%. That has been a pretty consistent percentage for us over the last year. I would say, directionally, it has been somewhat favorable to pricing. As you know, we mutually agreed to walk away from a fairly large opportunity that we were on-boarding as demand was peaking in December and January. That tended to be a lower price contract. So as that has left the MSP, pricing generally has increased but in addition to that we are having some opportunity to improve pricing and improve our ability to deliver high quality professionals to our MSP clients.

Our pipeline, there are opportunities for us. We have one contract that have not yet been on-boarded that will move the needle as we get deeper into the year. The story is still the same on the MSP side. We believe we have a very competitive and attractive story to tell prospective clients and we think there is attractive opportunities in front of us. Jeff?

I'm sorry, can you hear me?

I'm sorry. Did you have another question?

I do. Just moving on to the other Human Capital Management business, I know it is small, but the way trends have been going it seems to be a drag on the total company. Is this something that still fits within Cross Country?

It is a fair question. The two pieces -- really three pieces to the business. There is an education and training business, the largest on a revenue basis and then within our retained search business there is physician retained search and healthcare executive retained search. Physician being about three quarters of the revenue and the executive search somewhere between 25% and last year was as much as a third of the business. The executive search is by far and away the best performing of those three businesses.

The physician piece strategically is important to us. One of the things Bill is going to really focus on is delivering a more integrated solution to clients than we have historically. We think we have a great brand in physician retained search. Unfortunately, given the current market being kind of the Tiffany brand in retained search is not necessarily a great place to be when a lot of clients are looking for a contingency solution. So, the team which is a great experienced team is looking at what we can do within our solutions to adapt to the current market conditions. The executive piece I expect to continue growing. It has great traction.

Also strategically very important to us as you have an opportunity to place prospective clients at your client facilities for future business. The education piece really, it is not just a behavioral health story but behavioral health historically was 40% to 45% of the revenue generated by this business. There has been a lot of pressure on behavioral health. A lot of our behavioral health professionals were employed by state and local governments.

State and local governments have been peeling back as everyone is aware employment since the credit crisis in 2008. We believe in the future of this business. It is not necessarily a strategic business. Right now we are focused on getting it back on track but somewhere down the road I can't rule out the possibility that we would divest the business, but that is not the current plan, Jeff.

Okay, great. And then just to get a gauge of the size of the education and training business roughly?

Right now it is in the high $20 million revenue and doing less than $1 million of contribution.

Okay, great. That's helpful. And just a couple of numbers questions for Emil. Moving on for the rest of the year, what should we be modeling for tax expense and capital spending for the balance of the year?

Let me tackle the easy part which is the capital expense. We had about $200,000 of CapEx in the year. Our target is roughly $2 million. I'm not sure we will actually hit that number but that will be probably a good number for modeling purposes for the year as a whole. The tax expense is a complicated story. It really has to do with the fact that we have some nondeductibility of certain per diem expenses related to field compensation in our nurse and allied business and there is also an impact from state taxes that are not always based on pretax income. Sometimes they are based on gross profit.

There's also some foreign tax effects. The net result is that our tax rate is significantly higher than you would expect on a statutory basis. When you have a tax loss that means that your tax benefit is lower than you would expect otherwise. This quarter we used an alternative method to calculate our tax expense which is the one that is the preferred approach when you have a low pretax income number and expect the changes from a loss to a profit position during the course of the year. Which creates tremendous -- under the traditional method, when you project out a full year rate and use that rate every quarter, well, that created a lot of volatility in the quarterly numbers.

So, the preferred approach in these situations is to base it on year-to-date results. For using this year-to-date method in the second quarter we come out with an expense of zero to about $300,000, as I indicated in the prepared remarks, despite the fact that we are projecting a small pretax loss on a book basis. But for the year as a whole if we include some sort of expected discrete items in the latter part of the year, we expect our tax rate to be in the mid 60% range.

And that is for the year as a whole, not just the second half?

That's for the year as a whole. That's correct.

Okay, great. I appreciate that, and Emil, I apologize that you had to go through that.

We apologize for having to equate it.

No problem. And Joe, I just wanted to wish you the best of luck and thank you for all of your help over the years. I appreciate it.

That means a lot to me, Jeff. It has been great working with you and also the best to you.

Okay, great. I will jump back in queue. Thanks.

(Operator Instructions). Our next question comes from Tobey Sommer, with SunTrust.

Thank you. Wanted to ask a question about using the balance sheet to get more EBITDA and allow you to leverage the revenue a little bit better in the G&A. What areas would you look to deploy capital now that you are in a net cash position?

Great question, Toby. And that is our primary focus for the cash and the balance sheet capacity that we have. The truth is we would look at any of our core activities. Strategically they are all important to us. We would like to grow our allied business but as you know allied right now is under some pressure. We are down about 17% in our allied staffing year-over-year largely because of what is going on in the rehab space. We would like to be stronger in allied going forward but in the short-term we would be just as happy to deploy cash for a fairly significant per diem acquisition.

We have a very good tuck-in model to our core contract nurse staffing business that yields a lot of synergy. If an attractive opportunity were to present itself and we very much would like to grow our Physician Staffing business. So that's probably a little broader than you want to hear but at the end of the day it all comes down to the value we are able to drive. We are looking for an acquisition to be accretive immediately and that has been the challenge is getting sellers' expectations in line with where we think the current market opportunity is.

Joe, if you were able to execute on a per diem acquisition, would there be positive effects on your competitiveness for MSP business?

Well, it depends on the opportunity. I don't mean to be coy. Really what we are looking to do is to not so much aggressively grow our per diem footprint. Right now we have about 19 offices. That business as we described in the formal comments is our best performer right now. We have very good management. We have a good model. Cost-effective, rampup model. But, really what we are looking to do is to support and increase the opportunity for new MSP business. Given the relatively small footprint that we have that you're not able to leverage the local relationships into future MSP relationships. We think strategically if we can enhance our ability, or improve our odds of achieving that, we are better off.

Again, we don't just want to have offices everywhere, we want to have to offices where there is the opportunity to have important strategic relationships. Bill, I don't know if there is anything you want to add to that? I think as we've described over many years, the business fundamentally is -- the economics are a little less attractive than the nursing business but when the business is at its peak in the per diem market, you are recruiting from the deepest part of the pool of nurses. Whereas contract nursing is always going to be recruiting in a relatively shallow part of a very large pool. In contract nursing you are looking for young single nurses who can travel around the country and less than 30% of nurses are single.

So a per diem company can, because the nurses are typically living and working locally, can recruit nurses that have families and are looking to just pick up additional income for the family. It tends to have different dynamics at different stages of the market. It is a market we like and we think we should grow our presence. We are a relatively small player among the hierarchy of per diem providers in the country and we want to move up into the top three eventually.

As just a follow-up. How many of your per diem markets do you have MSP relationships in?

Less than five.

And then I wanted to get your sense and maybe a little bit of color on how you see EMR deployments trending over the next few quarters and that demand for that for you and whether you think there will be kind of a longer tail to demand for this, given some of the rules where I think hospitals get to self-diagnose whether they have met some thresholds? Thanks.

Great question. And I'm going to sort of be careful how I answer it. Right now there is a lull as we described. I'm actually surprised there is not more activity because I do think there is a sense of urgency on the part of hospitals to get this technology in place. There's both a carrot and a stick element to the way the government's incentivizing deployment of electronic medical record technology.

Having said that, not all these deployments are going to be successful. I know I have talked to nurses and I think I've described it on past calls a nurse in the neonatal unit, they deploy these hand-held devices that really aren't designed for the kind of rigorous sterilization that is going to occur in a hospital setting. I mean they are intended to be wiped off with a cloth but in a hospital they are going to be cleaned with bleach.

And it is not uncommon for the diagnostics to be unreadable after one cleaning with bleach. So, I think there is going to be some iterations of the technology that some are going to be ripped out and replaced. A lot of what is going on today are technologies that have been ripped out and are being replaced with what are perceived to be better technologies. I don't think it is necessarily over in 2014. I do expect it to tail off.

I don't think it will be like a year 2000 dynamic where in November of 1999 there was no more work. I think this is likely to have some legs and you know in addition to the ICD 10 roll-out I think there is going to be a lot of technology work and we are going to benefit from some of that.

We have some professionals engaged in ICD 10 consulting engagements employed by technology consulting firms. So I think there is going to be business here, Tobey. I just think it is likely to tail off as we get into 2014. There has to be a period in which the hospital can demonstrate that the technology has been deployed successfully and has been utilized uniformly and they need time to remediate if that is not the case. The peak will be in the second half of 2013, maybe the first quarter of 2014. We are aware of engagements that we are going be involved in beginning in the summer and into the third quarter. But right now it is very quiet on the EMR front.

Another broad question for me and I will get back in the queue. Regarding the Affordable Care Act, what are your thoughts on which of your businesses is going to see the most pronounced benefit from customers and market changes that result?

My expectation, Tobey, is that physician extenders, nurse practitioners, physician assistants will be the big beneficiary of the roll-out of healthcare reform. You're going to have -- the last estimate I saw was 27 million newly insured patients in 2014 who will look a lot like Medicaid patients from a primary care physician standpoint. They are not going to be necessarily desirable new patients. I think all of us are going to become more and more accustomed to seeing nurse practitioners, physician assistants in non-emergent care.

I think the demand for their services will increase dramatically because of the economics and the integration, the vertical and horizontal integration of healthcare delivery systems. We will learn how to deploy these professionals economically and efficiently and in the context of providing high quality care to their patients. That is my expectation.

Today that is a relatively small part of our mix. It is included in our nurse and allied segment. It is currently growing rapidly and we expect it to continue and accelerate as the years go on. I do think hospitals, not having to deal with so much uncompensated care, is going to benefit all our businesses. It will benefit the nurse and allied business. It will benefit our traditional physician locum's business.

I have every expectation that that is going to be true. If you are asking me what is going to benefit the most, I think on a relative basis it's clearly going to be the physician mid-level professionals that will support the substantial increase in Medicaid-like patients that are going be added to the system.

Thanks very much. And Joe, it has been a pleasure dealing with you over the years. I hope you go on to great things.

Thanks so much, Tobey. Right now, I'm looking forward to the beach but I'm sure we will talk at some point. Thanks for participating in the call and it has been great working with you for the past ten years. Angela, is there another call?

There is no further questions.

We want to thank everyone for their participation in this call and we --- Bill will look forward, and Bill and Emil will look forward to updating you on our second quarter performance later this summer. Take care.

This concludes today's conference. Please disconnect at this time.