Cross Country Healthcare Inc (CCRN) 2013 Q3 法說會逐字稿

Welcome to the Cross Country Healthcare Third Quarter 2013 Earnings Conference Call. (Operator Instructions) Today's call is being recorded. If you have any objections, you may disconnect. I would now 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 third 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'd first like to remind everyone that this discussion contains forward-looking statements. Statements that are predictive in nature, that depend upon, or refer to future events or conditions or that include words such as expects, anticipates, believes, appears, estimates, and similar expressions are forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results and performance to be materially different from any future results or performance expressed or implied by these forward-looking statements. These factors were set forth under the forward-looking statement section of our press release for the third 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 please.

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

Okay. Thank you, Emil, and thank you to everyone who is listening and for your interest in Cross Country Healthcare. I will provide a review of the quarter as well as an update on the strategic initiatives I discussed in August.

Let me start with a quick overview. First, our pre-tax income from continuing operations was positive for the first time since the end of 2011. And although revenue was slightly below expectations this quarter, I'm pleased with our financial discipline, pricing improvements, new business pipeline and increased profitability. Our strategic initiatives are on track and I expect these to positively impact our growth in 2014.

As reported in our press release, our revenue for the third quarter was $108 million, down 4% from the prior year with all of our business segments reflecting decreases. The revenue shortfall versus expectations was mostly driven by softness in our physician staffing business. Income from continuing operations, before income taxes, was $800,000. Income from operations after taxes in the third quarter was $1.5 million or $0.05 per diluted share.

Our third quarter adjusted EBITDA exceeded our expectations due to a combination of lower SG&A expenses, lower insurance costs resulting from favorable claims development. SG&A was down $1.3 million or 5% year-over-year and $1.1 million or 4% sequentially. We had previously announced a $4 million to $5 million cost cutting plan that has mostly been implemented and we are starting to see the impact of these efforts in our numbers. We are reinvesting some of these savings into revenue-generating initiatives. We had another strong quarter of cash generation with $7.2 million of operating cash flow.

In our nursing and allied staffing business, year-over-year revenue was down 3% and flat sequentially. However, for the third quarter in a row, the actions of our team in our nurse and allied segment have shown good year-over-year results in two areas; one, an increase in bill rates; and two, a positive impact on our gross profit margins from an increase in bill/pay spread. We experienced a decline in demand for our nurse and allied staffing services earlier in the quarter and demand was generally soft across the board due to lower hospital admissions and delays in EMR projects, but we are now starting to see positive trends.

Demand for travel nursing at the end of Q3 was up 13% from the beginning of the quarter. That trend continued and is up an additional 27% in the fourth quarter so far. Also the number of healthcare professionals working at our managed service programs, MSPs, increased 18% in the third quarter due to higher demand and a 4 percentage point increase in market share at our MSP customers.

Our book-to-bill ratio was 111% for the quarter and averaged a 123% in the last five weeks of the quarter. This general increase in demand, our recent strong book-to-bill ratio, along with two MSP and four large electronic medical records wins should benefit Q4 somewhat, but will mostly help us to get a good start in our nurse and allied business in 2014.

After a strong Q2, our physician staffing business had a decrease in demand throughout the third quarter. This was partly due to physicians willing to accept permanent opportunities. Revenue was down 4% year-over-year and sequentially. We saw declines in many of our specialties, but particularly in our primary care sub specialties and OB/GYN, although we did experience growth in anesthesia and oncology specialties. The overall soft demand environment has continued into Q4. A positive trend though for physician staffing was an increase in revenue per physician day $1,515, up 5% year-over-year.

Our other human capital management services segment was down 7% year-over-year and 11% sequentially. Both our education and training business and our search business showed weakness throughout the quarter. As Emil will discuss in a few minutes, we do expect sequential growth in this segment in Q4.

So, let me turn to the strategic initiatives that I outlined last quarter. They were focused in five areas; sales, expansion of per diem and allied services, cost reallocations, MSPs, and acquisitions. Let me provide an update on those. On the sales front, we've just about completed our sales restructuring as well as adding some resources and this should be completed this month and we expect to gain momentum going into 2014.

For per diem and allied, on the per diem front, we have opened two new per diem offices and our organic expansion plan is on track. On the allied front, we hired a new leader for our allied business who started at the end of September and we are finalizing our growth plan for this business. Cost initiatives; I mentioned earlier that our SG&A was down $1.1 million sequentially and $1.3 million year-over-year, again we are investing some of those into new sales resources in Q4.

For our MSP operations; demand has increased and our market share in our MSP accounts has improved. This initiative is already starting to produce results. And as for acquisitions, we have no debt, $32 million of cash and availability under our credit facility giving us the financial ability to grow by acquisitions. There is activity in the market and we are actively looking at what is available. If we identify a strategic opportunity at the right price, we will look to execute on this initiative preferably in the per diem or allied sectors. We will continue to focus on all of these areas throughout Q4 as we budget and plan for growth in 2014.

So in summary, revenue was below expectations, but profitability improved and I feel comfortable that we'll get back to growth in 2014. And although not where it needs to be completely, our sales pipeline is up and we are seeing new wins for MSPs and EMR projects. Demand in our nurse and allied business was up in Q3 and has continued to increase in Q4. Our nurse and allied book-to-bill ratio averaged well over 100% in the third quarter, reaching an average of 123% during the last five weeks of the quarter and is running at 114% in Q4. Again, we had good financial discipline with improved pricing in our staffing businesses and strong cash flow. And finally, our strategic initiatives are on track, which should position the Company well going into 2014.

At this point, I'd like to turn the call over to Emil Hensel, our Chief Operating Officer to go over the third quarter in more detail and our fourth quarter guidance.

Thank you, Bill. Let me first turn to the results for the third quarter. Revenue in the third quarter was $108 million, down 4% from the prior year and 2% sequentially. Revenue in the third quarter came in within our range of expectations in all of our businesses except for physician staffing, which saw a less robust demand environment in many of our specialties in part due to the increased willingness of physicians to accept permanent employment thus decreasing the demand for locum tenens services.

Our gross profit margin was 26.1%, up 160 basis points from the prior year and 100 basis points sequentially. The margin improvement was due to a combination of lower field insurance costs in our staffing businesses and a continued expansion of the bill/pay spread in our nurse and allied segment.

SG&A for the quarter was $25.5 million, down 5% year-over-year and 4% sequentially primarily due to lower compensation expenses partly reflecting the impact of cost reduction measures as well as lower health insurance costs. The SG&A expenses in the current quarter exclude approximately $100,000 in severance costs related to the restructuring program that we initiated last quarter. Equity-based compensation expense was $450,000 in the third quarter, down 26% from the prior year and 23% sequentially.

Adjusted EBITDA from continuing operations, as defined in our press release, was $2.9 million representing 2.7% margin. Interest expense of $190,000 was down 73% from the prior year, reflecting the repayment of our revolver balance from the proceeds of the sale of the clinical trial services business in February. Pre-tax income from continuing operations was approximately $800,000, as compared to a loss of $2 million in the prior year and $1.7 million loss in the prior quarter.

Tax benefit on income from continuing operations was $0.6 million in the third quarter, which included $1 million net tax benefits from discrete items. The most significant of this discrete items related to a reversal of accrued US taxes on foreign earnings made possible by the divestiture of our clinical trials business. Excluding discrete items, our third quarter tax expense was $0.3 million, representing a 43% effective tax rate, which is higher than the statutory rates due to the partial non-deductibility of certain per diem payments.

Earnings per share from continuing operations was $0.05 per diluted share. Net income, including discontinued operations, was $0.9 million or $0.03 per diluted share.

Turning to the balance sheet, we ended the quarter with $32.5 million of cash and cash equivalents, low revolver debt and a current ratio of 3.1 to 1. Days sales outstanding was 49 days, down five days from the prior year quarter and three days from the second quarter. Cash flow from operations was $7.2 million, reflecting the three day sequential reduction in DSOs. Capital expenditures totaled approximately $250,000 in the third quarter.

Let me drill down next into our three reporting segments. In our nurse and allied staffing segment, we averaged 2,282 field FTEs in the third quarter, down 7% from prior year and 3% sequentially. The volume decline reflects relatively weak bookings in the second quarter partly caused by a temporary lull in EMR implementation contracts, which carried over into the first half of the third quarter. However, we have seen a strengthening of booking activity in the latter half of the third quarter. For the quarter as a whole, the book-to-bill ratio averaged 111%. It should be noted that a significant portion of the third quarter bookings are for first quarter starts, which is consistent with normal seasonal patterns.

Segment revenue in the third quarter was $67.6 million, essentially flat on a sequential basis, but down 3% versus prior year. Revenue per FTE per day was up 4% from the prior year and 1% sequentially. Segment contribution income, as defined in our press release, was $5.2 million in the third quarter, representing a 7.6% contribution margin, up 400 basis points from the prior year and 210 basis points sequentially. The sequential margin improvement was due to a combination of lower insurance costs resulting from favorable claims development, lower SG&A expenses and an expansion of the bill/pay spread. The same factors also drove the year-over-year margin improvement further aided by lower housing costs.

Let me turn next to our physician staffing segment. Revenue was $31.5 million in the third quarter, down 4% from both prior year and prior quarter due to lower volume, partially offset by pricing improvement. Physician days filled were down 8% from prior year and 6% sequentially. The average revenue per physician days filled felt was up 5% from the prior year and 1% sequentially.

Segment contribution income for the third quarter was $2.2 million, representing a 7% contribution margin, down 250 basis points from the prior year and 50 basis points sequentially. The year-over-year margin decline was due primarily to a $700,000 accrual for sales taxes based on the revised estimate of the liability. The sequential margin decline was due to the aforementioned sales tax accrual partly offset by lower professional liability expenses.

Revenue for the other human capital management services segment in the third quarter was $9.1 million, down 7% from the prior year and 11% sequentially. Revenue decline was due to fewer retained search sales in our physician search business and fewer seminars held by our education business during the seasonally slow third quarter. Segment contribution income was $55,000, as compared to $534,000 in the second quarter and $25,000 last year. The sequential decline in segment contribution income is due to negative operating leverage.

This brings me to our guidance for the fourth 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 and allied staffing field FTE count to be in the 2,250 to 2,300 range in the fourth quarter. Consolidated revenue is expected to be in the $107 million to $110 million range. We expect low-single digit sequential revenue growth in our nurse and allied segment, mid-to-high single-digit revenue decrease in our physician staffing segment primarily due to seasonality and mid-single digit sequential revenue growth in our other human capital management segment.

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 $170,000 in the fourth quarter. Income tax benefit is expected to range from $0.8 million to $1.2 million. Based on these assumptions, we expect EPS per diluted share to range from $0.00 to $0.02 per share in the fourth quarter.

This concludes our prepared remarks. At this point, I would like to open up the lines for questions. Jane?

Thank you. (Operator Instructions) Josh Vogel, Sidoti.

Thank you, good morning guys. I'm not sure if this is difficult, but of the 160 basis point increase in gross margin year-over-year, is it possible you could parse out what came from the lower insurance costs versus bill/pay spread expansion?

Sure. Well, let me give you the main contributors to the increase. The largest contributor actually was in the housing area. That was roughly 60 basis points out of the 160 basis points and it's really driven by lower [rent costs], but also by very high efficiency in our housing area. We achieved almost 97% occupancy in the third quarter, which is at the high end of our historical range.

The bill/pay spread added another 40 basis points and the rest of it came from a variety of sources, including insurance. And in the insurance area, the professional liability had, what I would consider, about 25 basis points improvements related to an unusual claim that had a favorable resolution in the third quarter where we are able to recover all of our costs of defending our position in that particular lawsuit.

So the majority of the improvement came from housing, bill/pay spread, followed by professional liability insurance and health insurance.

Okay. That's really helpful. Now just outside of those items, are there any other levers that we should be focused on over the next several quarters that could help out margin expansion?

Well, I think we are seeing a continued favorable trend in bill/pay spread expansion. I think that is an area of focus. We are very much focused on gross profit and I think the results are starting to show up.

Okay. And I'm sorry I missed it. With your revenue guidance, the nurse and allied segment, sequentially you expect it to be up in the low-to-mid single digits?

That's correct.

Okay. I'm curious why your gross margin guidance is expected to be down sequentially. Can you just discuss that?

I think we're being a bit conservative on the gross profit guidance. So there's another chance, we could do a bit better than what we've guided.

There are two things that have to be factored into our guidance. One is, historically the fourth quarter has lower housing efficiency. During the holidays, we have a lot of our travelers going back and we generally find it more cost effective to keep apartments vacant knowing that they will be returning in January. So, it will be more costly for us to close out an apartment and open it up again in January. So, we do have a drop in efficiency in December. So, that's one piece of it.

Another piece of it, as I mentioned, there is about 25 basis points of our gross profit that I would consider to be unusual in nature in Q3. So we eliminate that and the rest of it, Bill is probably right, there was probably a bit of an element of conservatism. We did anticipate -- while we believe that our health insurance costs have reverted back to what is a more normal pattern for conservatism we did not necessarily forecast that we will achieve the same low levels we had in the third quarter. So that's kind of an open question and probably an area of conservatism in our forecast.

Okay. And just one last one, and I'll jump back in the queue. You talked about the physician volumes being down, they're accepting more permanent physicians and can you just talk to that a little bit, is this like a fundamental shift you're seeing now in this market and just any commentary would be great?

Yes, so I mean to be honest with you that's all anecdotal. I don't know for sure if that's the number one reason. We certainly performed off of our own expectation as Emil said as he was going through the different segments. This is the one that fell outside of our own internal range, our estimates for the quarter. So, I'm disappointed in our locum tenens at this point and I need to look into why that's happening.

We are seeing more physicians willing to take permanent roles certainly at the acute care facilities that we service. Whether that's the number one reason or not, it's hard to tell. I think I need to drill down into a little bit more and find out what's happening in the marketplace. The softness for us in demand has continued though into October. So, we're still seeing the same trend that we saw in Q3.

Okay, well thanks for taking my questions. Appreciate it.

Okay.

Jeff Silber, BMO Capital Markets.

Thanks so much. In focusing on the nurse and allied segment, you noted an increase in booking activity in the latter half of the quarter and it seems to have continued so far in October. Can you give us a little bit more color what's driving that, is it external factors or is it internal execution, any help would be appreciated?

Yes. I think, it's a little bit. We've made a push on our MSPs to pay more attention to what we're doing there and we had, as I said, an 18% increase in healthcare professionals at our MSP accounts through the quarter. So some of the demand has come from our MSP accounts. The delayed EMR projects that we talked about in Q2 have now started to come in and we have a little over 800 orders.

Most of those are 13-week assignments for travel nurses in the EMR projects, in fact I'll give you a little bit of that. There's a little bit that start -- there's about 80 of them that start in 2013, but the bulk of them start in January and February next year on these EMR projects.

So our account has gone up, but if you look at the overall travel nursing orders, it's more across the board in general. So I think some of that is just our focus on getting out there and driving more market share at our existing customers. So, I feel pretty good about at that trend, but I think it's driven from several things mostly probably by the MSPs and the EMR projects.

And can you just remind us how many MSP contracts you have in place?

We have 24.

24. Okay, great.

We service about 170 acute care facilities and a little over 500 ambulatory centers.

Okay, great. That's very helpful. Now, I know you're not giving guidance beyond the current quarter, but just to help us modeling, historically, you've had or been able to have some sequential growth in revenues between 4Q and 1Q. I know last year that didn't happen. Given the momentum in the business so far, do you think we can see sequential growth in revenues between 4Q and 1Q next year?

I would be very disappointed if we don't have sequential --.

I mean when I look at these EMR projects and some of the orders we have and the dates they are supposed to start, I just talked about, we have about 800 EMR orders and 90% of those are starting in January and February and they go through the end of May, some of those orders that we have. So I'd be surprised --.

The only thing that is the one unknown was we had a very robust flu season last year and our January was very strong even though February and March were a little bit weaker and we had the trend as you described earlier. January was very strong because of the flu season. And I just don't know how strong the flu season will be here. That will be the only thing that would offset the trend that we see today, but I agree with Emil, if we didn't grow sequentially in nurse and allied, I'd be surprised.

And given the costs that you've taken out of the model, I'm assuming if you can generate more revenues than you're expecting in the fourth quarter that the business should be profitable on a quarterly basis?

Yes. Pre-tax profitability you mean?

Yes.

Yes. So, I mean based on the $107 million to $110 million, I mean that would be pretty close to be honest with you. If we do a little bit better than what we've guided to, I think we would be pre-tax profitable. But we're running right on the edge there. The reason I freed up some of these dollars, and it's great to have $2.9 million of EBITDA and $2.7 million relative to what we've been doing. We've been running at about 1.5% EBITDA. 1.5% EBITDA doesn't give me any money to invest in the business. I needed to free up some dollars to invest in the business.

So we'll start putting some of that money back into the business in order to get us to grow, but I'm not expecting that to happen in Q4. Everything I'm doing is focused on 2014 and beyond. So, we'll manage the business well and in Q4 we'll make sure we have a decent level of profitability, but we're planning for 2014 going forward.

All right. That's great to hear. Thanks so much for the color.

Tobey Sommer, SunTrust.

Hi, this is Frank in for Tobey. I wanted to ask about the recent improvement in nurse and allied volume, is that different from the normal season pattern and what do you think seasonality is going to mean in 1Q and 4Q?

I think the improvement that we're projecting in the fourth quarter is fairly consistent with historical patterns. The improvement in bookings that we're seeing currently will primarily affect our Q1 numbers and barring -- as Bill indicated, the only unknown really is the flu season, but on a sequential basis, we should see a stronger-than-normal sequential improvement from Q4 to Q1.

So I think there is some seasonality in our orders, although I think -- well, I know they're running above year-over-year off of the actual orders we have in place today. So, I feel good about that, but we had a very robust demand in the first two weeks of December last year and that was the flu season kicking in.

And of course we won't know whether we get that again until we get into the December timeframe. But right now, we're running ahead of where we would have expected to from an order perspective, but again, as Emil said, you'll see most of that in next year not in Q4.

Okay. Great, that's helpful. And is it possible to quantify the impact of last year's flu season?

That's a hard one, because when clients post orders with us, they don't actually designate them as being flu-related orders. We just have to look at the kind of the macro picture and I think in my mind, there was probably a couple of million dollars of incremental revenue that came from -- that was flu related, but I can't prove it out scientifically.

Okay, great. And finally, could you talk a little bit about how you're looking at acquisitions now that you've kind of been with the Company for a little bit and have done a little bit of a survey of what's going on in the land and where your priorities may lie?

Yes, absolutely. We do have the financial ability to do an acquisition and there are some things out there. There are businesses that are in the $30 million, $40 million and $50 million revenue range that may be regional or may have a national footprint mostly in the allied and the per diem sector. We would entertain in all of our sectors but we have a decent market share in travel nursing, and a decent market share in locum tenens.

I'd like to beef up my per diem and my allied. We've talked in the past that we don't fill our share of our per diem and allied positions at our MSPs alone, never mind at our regular customer base and so I'd like to beef up a little bit more like the market and beef those up. So there are things in the market, we are looking at them and if we find something that fits us and is at the right price, we'll do something.

All right. And my last question is, you mentioned education and training and searches is seeing some softness, but you expect it to turn up going forward. What gives you some visibility in terms of the improvement in that group?

Yes. So the search business, I'm not seeing as strong a trend as I'd like to. So, we're still fairly soft on the physician search and the executive search side. But on the education side, we've had some strong bookings and they've been booking now for their first quarter seminars and they feel pretty good about the bookings they have going into the first quarter.

Some of that, they are going to get into the fourth quarter, so that's why we see a little bit of sequential increase from Q3 to Q4. But they've had some very strong booking orders. They have the schedule of seminars in Q1 and very strong bookings so far. So, we feel pretty good about going into the year with our education business and some of that we're seeing in Q4 as well.

All right, great. Thank you very much.

Gary Taylor, Citigroup.

Hello, Gary.

Can you hear me?

We can hear you now, yes.

Okay, I'm sorry. I just want to ask a very specific micro question and it's just about in the physician staffing business, I know you called out the $700,000 seller accrual for sales taxes and I think we've seen something called out there, I think four of the last nine quarters. So I guess I'm starting to get a little confused on how I should kind of look at that as recurring versus non-recurring? My assumption is when you call it out, you're somewhat suggesting that a portion of the accrual perhaps is catch-up related to prior periods. But if you could just remind us what you are actually paying sales taxes on in that unit and just kind of how we ought to view these periodic call outs of the accrual? That would be helpful.

Gary, this is Emil. The sales tax accruals that -- back in late 2011, we did a comprehensive study of our sales tax liabilities and we accrued based on the estimates that we made back then and we revised a couple of times those estimates as more information became available. We, at this point, we believe we are fully accrued for any liability. We have filed voluntary disclosure agreements with all the relevant state jurisdictions.

In the process of filing these, we have concluded that our estimate in one particular state related to physician locum tenens services was too low and we corrected that estimate in this quarter. You are absolutely right that it pertains to prior periods. Virtually -- almost the entire $700,000 accrual pertains to prior periods. But we do not see any additional accruals at this point.

And what exactly generates -- just the process of selling your service to the client generates a state sales tax liability that you pay?

That's correct. And the sales tax liability is a fairly complex grid of parameters that you have to look at. It varies by line of business, the type of service we provide, whether it's employees or independent contractors, whether it's to a for-profit or a not-for-profit facility and it does vary state-by-state. So, there could be -- and that complication is what created the initial need for the study and for the accruals that we booked at the end of 2011.

So it sounds like, as you kind of look at the quarter, you had suggested maybe there were 25 basis points in gross margin related to a favorable insurance, I don't know if you actually said reversal or a claim and then this $700,000 versus really what you see was a recurring G&A is above and beyond that. Is that correct?

That's correct.

Okay, great. That's all I had. Thanks.

(Operator Instructions) I'm showing no further questions from the phone lines at this time.

Okay, great. Well, thank you, everybody. We appreciate your attending today and we will be updating you with our fourth quarter and full-year results in February. Thank you.

That does conclude today's conference. A replay will be available through November 21. You may access the replay by dialing 800-234-2079, that's 800-234-2079 or 402-220-9687, that's 402-220-9687. Please use the pass code 2013. Thank you for joining. You may now disconnect.