Cross Country Healthcare Inc (CCRN) 2013 Q2 法說會逐字稿

Thank you for standing by and welcome to the Cross Country Healthcare second-quarter 2013 earnings conference call.

Participants will be on a listen-only mode until the question-and-answer portion. (Operator Instructions) Today's conference is also being recorded. If you have objections, please disconnect at this time.

I would like to turn the meeting over to Mr. Emil Hensel, Chief Financial Officer of Cross Country Healthcare. 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 is Bill Grubbs, our Chief Executive Officer.

On this call we will review our second-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 expect, anticipate, 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 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 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 Bill.

Thank you, Emil, and thank you everyone who is listening for your interest in Cross Country Healthcare.

As you are all aware, I have been Chief Executive at Cross Country for about a month now, having succeeded Joe Boshart who retired at the beginning of July after serving as CEO for 20 years. First, let me again publicly thank Joe, not only for his 20 years of service, but for the three months of time he gave to me to ensure a smooth transition. It was extremely helpful and will be beneficial for the Company going forward. I am sure you join me in wishing Joe well in retirement.

Now let's review the quarter. As reported in our press release, our revenue for the second quarter of 2013 was $111 million, up 2% from the prior year, reflecting a 7% improvement in our Physician Staffing segment that more than offset slight declines in our other two business segments. Net loss in the quarter was $1.5 million, or $0.05 per diluted share. Excluding restructuring and legal settlement charges, the net loss would have been $700,000, or $0.02 per diluted share.

Our second-quarter revenue and earnings were in line with our expectations. In our Nursing & Allied Staffing business year-over-year revenue was essentially flat. However, we reported a decrease sequentially due to normal seasonality, softer-than-expected demand, and a lull in staffing of electronic medical records projects, also known as EMR projects.

Our travel nurse staffing revenue was up 1% year over year due to improved pricing and down 8% sequentially. Our per diem operation revenue was up 3% year over year and was down sequentially by 11%.

The actions of the team in our Nursing & Allied segment have shown good year-over-year results in two areas -- one, a 3% increase in bill rates and, two, a positive impact on our gross profit margins with an increase in bill pay spread and a reduction in housing costs. While we experienced a decline in demand for our Nurse & Allied Staffing services from the first quarter, since April demand has stabilized.

Demand was generally soft across the board due to lower hospital admissions. EMR positions were also down in the second quarter, but we do expect to see an increase in demand for EMR toward the end of the third quarter and into the fourth quarter. And we are beginning to see those orders come in this month.

We also expect to generate demand from several new master service provider wins that are currently being implemented. Master service provider, or MSP programs, are programs where we take responsibility for staffing healthcare contingent labor at our customers.

Our Physician Staffing business had a strong quarter with revenue up 7% year over year and 17% sequentially. Growth was up across most specialties, but was particularly strong in primary care, anesthesiology, and emergency medicine. We believe this business will continue to grow in 2013 as new recruitment consultants we hired at the end of 2012 continue to ramp up.

Our other human capital management services segment had flat revenue year over year, but was up 8% sequentially. Our education and training business had positive trends throughout the quarter driven by a 3% increase in attendees per seminar compared to the prior year and new well-performing behavioral health seminars. Our search business showed an increase in demand for both physician and executive search.

So in summary, it was a mix quarter with our largest segment, Nurse & Allied Staffing, underperforming offset by strong performances in both the Physician Staffing and the Other Human Capital Management segments. We had good financial discipline with improved pricing in our staffing businesses and strong cash flow. Demand for nursing remained flat into the third quarter, but does have potential upside with new upcoming EMR projects, the implementation of several new MSPs, and the expansion of two existing MSPs.

At this point I would like to turn the call over to Emil Hensel, our Chief Financial Officer, to go over the second quarter in more detail and our third-quarter guidance. After that I will come back and talk about my areas of focus going forward.

Thank you, Bill. Let me first turn to the results for the second quarter.

Results in the second quarter -- revenue in the second quarter was $111 million, up 2% from the prior year, due primarily to the strong performance of our Physician Staffing business. On a sequential basis revenue was up slightly with growth in our Physician Staffing and Other Human Capital Management segments essentially offset by revenue decline in our Nurse & Allied segment.

Our gross profit margin was 25.1%, up 20 basis points from the prior year or down 110 basis points sequentially. The sequential margin decline was due to a favorable professional liability accrual in the first quarter in our Nurse & Allied segment, coupled with an unfavorable professional liability accrual adjustment in the Physician Staffing segment in the current quarter.

SG&A for the quarter was $26.6 million, down 4% year over year and 2% sequentially. This SG&A expense amount in the current quarter excludes a $750,000 accrual reflecting the agreement in principle to settle a wage and hour class action lawsuit in California, as well as approximately $400,000 in severance costs related to the restructuring program that Bill mentioned earlier.

Equity-based compensation expense was approximately $600,000 in the second quarter, essentially unchanged from the prior quarter and down 20% from the prior year. Adjusted EBITDA from continuing operations as defined in our press release was $1.7 million, representing a 1.5% margin.

Interest expense of $164,000 was down 72% from the prior-year quarter and 41% sequentially, reflecting the repayment of our revolver balance from the proceeds of the sale of the clinical trials services business in February.

Pretax loss from continuing operations was $1.7 million, which includes $1.1 million for the aforementioned legal settlement and restructuring charges. The income tax benefit from continuing operations was $257,000, representing a 15% tax rate. The relatively low tax benefit is due primarily to certain nondeductible per diem expenses as well as foreign taxes.

Net loss, including discontinued operations, was $1.5 million or $0.05 per diluted share. Excluding the aforementioned legal settlement and restructuring charges, our net loss per diluted share would have been $0.02 per diluted share.

Turning to the balance sheet, we ended the quarter with $25.9 million of cash and cash equivalents, no revolver debt, and a current ratio of three-to-one. Days sales outstanding was 52 days, down one day from the prior-year quarter and four days from the first quarter. Cash flow from operations was $5.9 million, reflecting the four-day reduction in DSOs. Capital expenditures totaled approximately $200,000 in the second quarter.

Let me drill down next into our three reporting segments. In our Nurse & Allied Staffing segment we averaged 2,343 field FTEs in the second quarter, down 3% from prior year and 7% sequentially. We believe the first quarter benefited from a relatively strong flu season.

The volume decline in the second quarter reflects a less robust demand environment, as well as normal seasonality and a temporary lull in EMR implementation contracts. However, we expect EMR activity to ramp up again in the fourth quarter.

Segment revenue in the second quarter was $67.5 million, essentially flat compared to prior year, but down 7% sequentially. Revenue per FTE per day was up 4% from the prior year, but down 1% sequentially. The book-to-bill ratio averaged 97% in the second quarter.

Segment contribution income as defined in our press release was $3.7 million in the second quarter, representing a 5.5% contribution margin, up 280 basis points from the prior year but down 180 basis points sequentially. The year-over-year margin improvement was due primarily to a combination of lower SG&A expenses and housing costs and improvement in the bill pay spread. The sequential margin decline reflects primarily the previous dimension favorable professional liability accrual adjustment in the first quarter.

Let me turn next to our Physician Staffing segment. Revenue was $33 million in the second quarter, up 7% from the prior year and 17% sequentially. The year-over-year revenue growth was due to a combination of higher volume with Physician Staffing days still up 3% and improved pricing.

The sequential revenue growth was volume driven and was greater than what we would expect from normal seasonal factors. Physician days filled were up 17% with most specialties contributed to the sequential volume growth with particularly strong performance from primary care, anesthesiology, and emergency medicine.

Segment contribution income from the second quarter was $2.5 million, representing a 7.5% contribution margin, down 120 basis points from the prior year and 20 basis points sequentially. The year-over-year margin decline was due to a combination of unfavorable professional liability claims development and higher physician compensation expenses, partly offset by improved operating leverage. The sequential margin decline was due to the aforementioned professional liability accrual, partly offset by improved operating leverage.

Revenue for the Other Human Capital Management Services segment in the second quarter was $10.3 million, essentially flat compared to prior year with low single-digit revenue growth in our search business offset by a small revenue decline in our education business. On a sequential basis, segment revenue increased by 8% with both the search and education businesses contributing to the revenue growth.

Segment contribution income was $534,000 representing a 5.2% contribution margin, up 250 basis points over prior year and 210 basis points sequentially. The year-over-year margin improvement is due in part to accrual for estimated state non-income-based taxes in the prior year quarter, while the sequential margin improvement is due to operating leverage.

This brings me to our guidance for the third 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 or valuation allowances, or any material legal or restructuring charges.

We project the average Nurse & Allied staffing FTE count to remain essentially flat sequentially. Consolidated revenue for the third quarter is expected to be in the $110 million to $112 million range. We expect our gross profit margin to be in the range of 25% to 25.5% and adjusted EBITDA margin to be in the 1% to 2% range. Interest expense is expected to be approximately $200,000 in the third quarter.

Income tax expense is expected to range from a benefit of $100,000 to an expense of $200,000. Based on these assumptions, we expect EPS per diluted share to range from a $0.02 loss to breakeven for the third quarter of 2013. So in summary, we believe that our third-quarter consolidated results will look a lot like the second quarter.

Before we open up the lines I would like to turn the call back to Bill for some concluding remarks.

So in anticipation of some of the questions I think you're most likely to pose, I thought I would talk about my areas of focus going forward. Looking at it broadly, there are initiatives in five areas -- sales, expansion of per diem and allied services, cost reallocations, MSPs, and acquisitions. Let me get into a little bit of the details.

On the sales front we did hire a new Senior Vice President of Sales and Marketing; she started in June. She has 25 years of experience in the industry, including extensive MSP experience. In addition, we are making investments into our sales organization and restructuring into three different areas.

One, enterprise sales across all business lines, giving us the capability of providing a full scope of services to our customers. Two, specialized sales resources by business or specialty. And, three, MSP-specific sales, because we expect this to continue as one of our growth engines, but also because the MSP sale is longer and more complex than a staffing sale and needs a different approach.

We are also investing into the expansion of our per diem and allied businesses. And although we have a good platform to grow from we, are underweight in both segments and it is strategically important for us to be competitive in all segments of healthcare staffing.

So on the expansion of per diem, last year in 2012 we brought in new management and that business has been performing well since that change. So now we are engaged in expanding our office footprint between now and the end of 2014. That program started in July.

As for the expansion of allied, we are also in the process of putting in new management in that group. This business has been underperforming to date. Specific expansion plans will be developed after new management is in place. We expect to have that finalized by the end of the third quarter.

On the cost side, we implemented cost reduction measures in Q2 and those have continued into Q3. And although some of those savings will fall to the bottom line, we plan to reinvest the majority in new revenue-generating initiatives.

From an MSP perspective, we are creating an independent MSP operation representing all Cross Country Healthcare businesses. Today our MSP operation is embedded within one of our divisions, but it needs to be a more visible and independent operation since this is an important part of our growth going forward as I mentioned.

Then for acquisitions. Again, we have no debt, $25 million of cash, and availability under our credit agreement giving us the financial ability to grow by acquisition. And I believe we also have an experienced management team today to ensure a smooth integration so we will be proactive in this area.

Those are the highlights of where I am focused for the rest of 2013. We will provide updates on our progress in coming quarters.

Now in addition to those specific initiatives, we are also focused on what impact the Affordable Care Act will have on our business and we have several projects underway to ensure we are prepared with what we believe will be a positive for healthcare staffing demands.

Let me just finish with a comment regarding the second half of this year. Emil provided you with the third-quarter guidance, but I wanted to make the point that we expect it to take a few quarters to implement these new investments and initiatives. And we are putting them in place to drive growth and profitability in 2014 and beyond.

So while Emil has already discussed the third quarter and we expect to see trends improve in the fourth quarter, we believe our outlook is much better for 2014.

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

(Operator Instructions) Tobey Sommer, SunTrust.

I was hoping that you could discuss pricing across the various segments and what your expectation is in terms of the trend headed into third quarter.

Sure, I will start and Emil can add some comments. Pricing has actually been pretty good. Pricing -- I will start with the Physician Staffing side.

Pricing from a bill rate perspective was up 3.8% year over year and up slightly sequentially from the first quarter. Nurse & Allied combined was up -- the bill rates were up 3.2% year over year and again slightly up from the first quarter and travel nursing in particular was up 3.5% year over year and about flat sequentially.

We have done a pretty good job. The team has done a good job in our renewals of our existing customers, as well as existing MSPs, in getting price increases as appropriate based on geography and the demand dynamics out there. I am not sure we can continue to get 3%, 4% increases every quarter going forward, but the team is focused on it and we believe there is still some room for improvement as we move forward.

Thanks. As a follow-up, within the Physician was there a positive or a negative impact as a result of specialty mix?

The specialty mix was not a significant factor in the pricing improvement that we saw that Bill referred to earlier. I was primarily -- we do an analysis where we do a pro forma adjustment for mix and it was a very minor impact from that.

Thanks, Emil, that is helpful. I guess you talked about setting up kind of an independent MSP unit. Would that include reporting segments or at this point continue with the reporting structure that you have?

No, we will continue with the reporting structure we have. This is more of just an operational change for us where we can create kind of an umbrella organization representing all of our service lines, rather than have it as part of one of the business lines where we are kind of looking for them to cooperate and work with all the different divisions, even though it reported under an existing division.

So it is really more of an internal issue than anything else, but it gives me the visibility and it gives the organization a little bit of independence to represent all of our service lines. We are seeing these MSP programs; as you know, they started out mostly for travel nursing. They expanded into per diem. They expanded into Allied and now we are seeing them expand into the locum tenens area.

I think that the need for additional services and value-added will continue, so I want to make sure we have that visibility and focus on a stand-alone unit.

Okay, thanks. My last question and I will get back in the queue relates to the temporary lull in EMR work. I was wondering if you could give us a little bit more color about what gives you confidence that we are going to see that demand in activity reignite.

And could you comment on the lags in length of demand that you see for that kind of work, kind of beyond 3 or 4Q but over a longer stretch of time? Thanks.

Sure, I do have confidence. In almost all of our discussions with our customers we are finding that -- I don't have a reason for the lull or the slowdown in Q2, but certainly we have won a large EMR project that is just starting to kick in now that will go through the end of 2014. We have another one that we are in the middle of negotiations on that would also go through the end of 2014.

I have six current EMR projects that are ongoing currently. And so the deadline is still 2015, I don't think that deadline is going to change. There is still a lot of work to be done at a lot of our customer facilities.

So between the existing pipeline we have, which is pretty good, the existing wins that we know we have now and the ones we are in negotiations with, I feel pretty good about that going forward. I only have visibility though through 2014, but right now that looks pretty good.

Thank you.

[Josh Vogel], analyst.

Thank you, good morning. Just building off some of the earlier questions on MSP. One, I was curious what percent of Nurse & Allied business is coming from MSP clients today and was this up or down from a year ago in Q2?

It is about 35%, maybe a little bit higher than 35% of our Nurse & Allied business that runs through an MSP today. I think that is slightly up from last year, but I don't have that number. Would you have it, Emil?

It was in the low 30%s.

And, Bill, you made a comment about MSP clients on the locum tenens front. Are you starting to see some traction in that market today or that is a market you are looking to get into going forward?

We have one that we are in implementation mode right now. We are in discussions with some other customers so, yes, we are seeing -- we are having the conversations and we are in the middle of implementing one program. I don't call that momentum yet, but I do think there is an opportunity there, yes.

Okay, great. I may have missed it; I apologize. But based on your guidance what were the implied sequential revenue trends for Nurse & Allied and Physician in terms of the revenue guidance?

Yes, the Nurse & Allied business is projected to be flat or slightly up sequentially and the Physician Staffing business is expected to show low single-digit sequential increase in revenue.

Okay. What percent of Nurse & Allied come from the travel nurse?

The travel -- let me just get to the exact numbers here. The travel nurse accounts for approximately -- a little less than half of our consolidated revenue and approximately 70% or so of our segment revenue.

I heard some of your peers talk about the seasonal weakness in travel nurse in Q2, but there was a pickup in July back to more seasonal trends. Did you see that as well?

So we saw declines through April in demand and then May, June, and July were all -- I mean every single week was almost just exactly stable at the same demand level all the way through July up until the last couple of weeks. And we have started to see an increase.

I don't know, Josh, if that is market or particularly because we are ramping up some MSP programs that we have a couple of new EMR projects. But we have seen an increase in the last couple of weeks.

Okay, that is helpful. I will jump back in the queue. Thank you.

A.J. Rice, UBS.

Hi, everybody. A couple of questions, if I could. First, maybe just a little bit more of an understanding -- this is a pretty specific one -- on the professional liability claims experience uptick. How big a number was that? I didn't hear you specifically break that out. And maybe a little color about whether that is likely to recur or whether that is sort of a one-off thing.

Yes, A.J., this is Emil. The professional liability accrual adjustment that we had in the Physician Staffing segment was in the $400,000 to $500,000 range. It was somewhat unusual. The nature of the claim development had some unusual elements to it, but this is the type of thing that can recur, both favorable and unfavorable.

There is some element of statistical randomness to this. But the number was in the $400,000 to $500,000 range. And if you recall, in the first quarter we had a $750,000 favorable adjustment to the Nurse & Allied segment.

Is each segment being reviewed every quarter, or is one being reviewed one quarter and then one the next? Or how does that work?

We update our accrual analysis for each segment every quarter and we have a comprehensive actuarial review a couple of times a year.

Maybe to ask you about the cash balance and obviously the pace of cash flow was good this quarter. I think there was a reference to being open to acquisitions. Maybe talk about priorities.

Is that the priority for cash flow? Any thoughts on share repurchase? And then in terms of acquisitions are there particular areas of interest or other attributes that would be something you would focus on?

So we do have authorization that is existing from the Board for share repurchases and we will consider that when we get through our Board meeting in this next quarter. I think better use of cash would be to get us to grow and get some leverage on our current infrastructure costs, which we definitely need going forward.

So I do want to look at acquisitions; I think that is probably where we will use the cash. My priority would be to right-size our Allied and per diem. We are underweight in Allied and per diem.

If you go by staffing industry analysts, we have about a 12% market share in travel nursing and we have about a 6% market share in locum tenens. But we only have a 1% market share in per diem and a 1% market share in Allied. And so I just don't compete in those areas as well as I would like to.

So if I had the choice, strategically, I would make an acquisition in either Allied or per diem, but because I need the leverage on our infrastructure anyway, I would look at any of those four areas as a potential acquisition depending on what is available in the marketplace.

Okay. I was going to, for a final question, just ask you about the per diem business since you highlighted that. What is the revenue run rate in per diem right now? You mentioned having a target to have that growth fairly significantly over the next six to 18 months. Any willingness to talk about a potential target for that, how much that might be in that timeframe?

I will let Emil give you the run rate for the revenue but, no, I don't have a potential target. If I go start knocking on doors I most likely will -- going to overpay for something. Acquisitions are somewhat opportunistic depending on what is there at any given time. But we do have some contacts and we have some people out there looking and we will see what is available, but I don't have any particular target in mind.

Emil, what is the run rate?

The revenue run rate is in the low to mid to $30 million range annualized.

All right, thanks a lot.

Jeff Silber, BMO Capital Markets.

Thank you so much. Wanted to focus a little bit on the restructuring plan. In the press release you say that you initiated a restructuring plan to reduce operating costs. Going forward how much operating costs do you think you would be able to take out of the model?

We are not going to cut our way to the right level of profitability, Jeff, as you know, but we are targeting a number between $4 million and $5 million. I would like to get towards the high end of that if possible, but, again, remember that doesn't mean we are going to make another $1 million, $1.2 million of extra EBITDA per quarter. I'm going to reinvest some of that into some sales resources and some additional staff to help us grow on some of the initiatives I talked about earlier, but the target is $4 million to $5 million.

And that would be a target on an annualized basis beginning when -- this year, next year?

No, some of it already started. We made some changes in June. We are making changes in July and August, so we will see some of that come in this year. Probably in the $1.5 million to $2 million range this year and then annualized would be next year.

Okay, great. That is helpful. Emil, just a couple of modeling questions. For capital spending what should we expect for the rest of year?

We don't have any large capital projects in the hopper, so I think if you estimate around $1 million for the full-year you will be pretty close.

Okay, great. And I know taxes bounce around a lot, but on I guess a, quote-unquote, normalized basis if we are modeling out a few years hence, what should the Company's normalized tax rate be?

Our tax rate is really distorted right now by the very low pretax profit. So once we start having a more normal level of profitability I would expect our tax rate to be higher than the statutory rates, but not in the -- probably in the 50%, 55% range. For the current year we actually will probably end up with a number that is in the 35% to 40% range due to some discrete items that we expect in the next couple of quarters.

Okay, great. That is very helpful. Thanks so much.

Gary Taylor, Citigroup.

Good morning. I was just hoping maybe you could elaborate a little bit on your comments around MSP and wanting to create an independent version, so to speak, versus the embedded version.

And maybe I am just kind of after what do you think it takes to reposition your MSP offering to be more competitive? That does appear to be a place where your primary competitors had a lot of success winning contracts, gaining share, and growing revenue. So what are you really looking to do to make your offering more competitive?

Actually I think it is already pretty competitive. We have great relationships. We deliver our services really well. We get good feedback from our customers in our quarterly business reviews and in our quality surveys.

The issue hasn't really been whether we are competitive or not. The issue has been whether we are out there selling and winning our market share, so the restructuring of our MSP operation, again, is a bit more internal. I talk about it only because our competitors do talk about their MSP operations quite a bit and it is an area of focus for us. But I believe from a delivery standpoint we are pretty competitive.

Have we been taking our market share? No. So that is more of a sales focus than it is a restructuring of our MSP. Our MSP operation performs very well, delivers its services very well, and has great customer relationships. This is a sales issue more than it is a delivery issue.

Is there a rebranding that will be involved, or just more of a concerted sales effort across all divisions I guess?

It is a bit more of a sales effort. There is not really a rebranding. I mean we may end up with calling it something different than MSP, similar to our competitors where they talk about workforce solutions and other kind of broader based descriptions of the service.

We do offer other services in addition to the MSP, other value-added services around credentialing and interviewing and other value-added services as well. But, no, there is not a rebranding associated with it.

We have a competitive offering. Quite often, when we do bid something we end up as one of the two finalists most of the time and I think we win our fair share of what we are involved with or what we are bidding on. We are just not bidding on enough of them.

Okay, thank you.

Ty Govatos, TG Research.

Question, you have talked about acquisitions. Can we expect any divestments down the road? And when you target $4 million to $5 million in cost cuts does that assume any divestments?

No, it does not assume any divestments. We don't have any divestments in mind at this point. We are happy with the business mix that we have, so no divestitures at this point.

The $4 million or $5 million does not include any divestitures, but we are out there looking at the market for what we can do as an add-on to help us grow, hopefully strategically. And it will be in one of the four staffing areas of travel -- nursing, per diem nursing, locum tenens, or allied.

Thanks, very helpful.

With that I am showing no further questions.

Okay, great. So once again, thank you for joining us this morning and I look forward to updating you with our third-quarter results in November. Thank you. Goodbye.

Thank you. This does conclude today's conference. All parties may disconnect.