Cross Country Healthcare Inc (CCRN) 2014 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Cross Country Healthcare conference call for first quarter 2014. The call is being simultaneously webcast live. A replay of this call will also be available until May 22nd, 2014 and can be accessed either on the Company's website or by dialing 866-429-9464 for domestic callers and 203-369-0918 for international callers and by entering the passcode 2014.

I will now turn the call over to Bill Burns, Cross Country Healthcare's Chief Financial Officer. Please go ahead, sir.

Thank you, and good morning, everyone. As many of you know, I joined Cross Country Healthcare as CFO on April 1st of this year, and I'm very pleased to welcome you all to our first quarter conference call. With me today is our Chief Executive Officer, Bill Grubbs.

This call will include a discussion of Q1 results as disclosed in our press release and will also include a discussion of our financial outlook for the second quarter of 2014. After our prepared remarks you will have an opportunity to ask questions. I'd like to remind everyone that the press release is also available on our website at www.crosscountryhealthcare.com.

Before we begin, we need to remind you that certain statements made on this call may constitute forward-looking statements. As noted in our press release, forward-looking statements can vary materially from actual results and are subject to known and unknown risks, uncertainties and other factors, including those contained in the Company's 2013 Annual Report on Form 10-K and Quarterly Reports on Form 10-Q, as well as in filings with the SEC. I would encourage all of you to review the risk factors listed in these documents. The Company undertakes no obligation to update any of its forward-looking statements.

Also, our remarks during this teleconference reference non-GAAP financial measures. Such non-GAAP financial measures are provided as additional information and should not be considered substitutes for or superior to financial measures calculated in accordance with US GAAP. More information related to these non-GAAP financial measures is contained in our press release.

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

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

First, I'd like to start by welcoming Bill Burns to the Company as our new CFO. Bill comes to us from Gartner, where he served as Group Vice President and Controller since 2008. Bill started on April 1st and he's spent the last five weeks working to get himself oriented with all of the business operations and finances of Cross Country Healthcare. So welcome, Bill; we're very pleased to have you on board.

So let's get to the quarter. Overall I believe we had good underlying positive trends in the quarter and made continued progress in our strategic initiatives, but I am disappointed that our reported numbers do not reflect this.

First of all, I believe that the weather had a more negative effect on our numbers than we originally thought; however, we also had a couple of items that reduced EBITDA below guidance. There was a decrease in gross profit in our Physician Staffing business related to specific professional liability claims and an increase in our Corporate SG&A due to additional audit fees. Bill will talk more about these later. However, these items are not expected to affect subsequent quarters. Without these two items our adjusted EBITDA would have been at the high end of our 1% to 2% guidance.

So let me talk about our underlying performance. Throughout the quarter in our Nurse and Allied business we saw increased demand for our services, as well as growth in healthcare professionals on assignment. This was driven by three things -- new staffing, managed service program, and electronic medical record wins, increased demand out of our existing customers, and a higher fill rate for our managed service provider orders. These positive trends are a direct result of our investments and strategic initiatives implemented late last year. And although we're not yet hitting on all cylinders, I feel very good that we're already starting to see positive trends from these efforts.

Our largest segment, Nurse and Allied, had year-over-year growth in the quarter that was mostly driven by the acquisition we made in December. Not counting the acquisition Nurse and Allied ended the quarter with year-over-year growth and strong trends going into Q2. Travel nursing, in particular, had strong demand and grew throughout the quarter. In fact, we ended March with the highest number of travel nurses on assignment since 2009. We had a strong book-to-bill ratio in Nurse and Allied in Q4 of 2013 at 102%, which drove a 7% sequential revenue growth in this segment, not counting the acquisition.

In Q1 we've also experienced a strong book-to-bill ratio in Nurse and Allied at 104%, and as a result we expect to see sequential growth from Q1 to Q2. This sequential growth should also translate into year-over-year growth for the segment.

The acquisition we made in December has performed well in Q1. Although we did integrate the small amount of permanent placement business and some of the travel business added into other operations, the core branch business increased 4% on a pro forma year-over-year basis. Integration is progressing well and will be completed by the end of May.

The teams in our Nurse and Allied segment have continued to do a great job with pricing. For the fifth quarter in a row we've experienced year-over-year increases in our billing rates and our bill pay spreads. Again, that's not including the acquisition.

In our Physician Staffing business I had announced in March that revenue was up on a year-over-year basis through February. Unfortunately, this did not translate into year-over-year growth for the quarter, as the strong revenue in March 2013 was difficult to beat. Demand is still not where we'd like it to be, and we saw less demand from government customers offset by an increase in commercial customers. In particular, we saw declines in emergency medicine and pediatrics, although we are experiencing strong growth from our advanced practices, nurse practitioners and physician assistants.

In addition, we made our investments in Physician Staffing late in Q4 and early in Q1, a little bit later than I had anticipated, so we'd expect to see some year-over-year growth as a result of these investments in the second half of 2014 and some sequential growth from Q1 to Q2. And lastly, related to Physician Staffing, as I mentioned earlier, the gross profit and contribution of this business was negatively affected by professional liability claims and, again, Bill will discuss that a little bit later.

Revenue from our Other Human Capital segment was down 8% year-over-year, mostly driven by a 20% decline in our search business. In April we made a management change in that business, and the new President is in the process of putting together plans to get back to growth.

Our education business was flat year-over-year, mostly due to the impact of bad weather; otherwise, we would have expected it to be up slightly year-over-year.

Our workforce management solutions are showing good progress. We're very pleased with the progress in our workforce management. Specifically, managed service programs, or MSPs, are performing well, and now account for 26% of our total Company revenue and 38% of our Nurse and Allied segment revenue, and that does include the acquisition.

Our pipeline is up. We won two new MSPs, including one awarded in Q1 but signed early in Q2, and we've added incremental services or additional facilities to another nine of our existing MSPs. The average number of healthcare professionals working at our MSPs in Q1 was up 19% from Q4 because of increased demand and a continued improvement in the percentage of physicians directly filled by Cross Country Healthcare, which was up 400 basis points in the quarter. Also in workforce management solutions we were awarded two new electronic medical records projects. One is already underway, and the other is expected to get up and running by the end of Q2.

So I'm pleased with our underlying performance in the quarter, despite the reported numbers and the items that reduced our EBITDA. Our Nurse and Allied segment has a growing pipeline of opportunities, improved pricing, and an increase in headcount on billing. Physician Staffing has positive trends for advanced practices, and we expect sequential growth in Q2. And we anticipate our investments to start positively impacting this business in the second half. And in our Other Human Capital segment we see positive trends in education, and I'm excited about introducing new management into the search business. As you will see from our guidance, these positive trends will start showing in our Q2 results.

Well, let me turn it over to Bill Burns to go into the numbers in a little bit more detail.

Thanks, Bill.

Let me first review the consolidated results for the quarter. Total revenue for the quarter was $118.1 million, up 7% from the prior year and up 8% sequentially. Excluding the impact from our recent acquisition, organic revenue was down 2% from the prior year and up 2% sequentially. As we noted on our last earnings call, the seasonally light quarter was adversely impacted by weather, forcing closure of certain branch locations, fewer hours worked, and the cancellation of seminars. Despite this impact we exited the quarter on a positive trend, with robust demand for our services in our largest segment and the highest number of healthcare professionals on assignment since 2009.

Gross profit margin was 25.8%, down 40 basis points both year-over-year and sequentially. The decline in the gross profit margin was largely attributable to higher costs related to professional liability claims in our Physician Staffing business. Let me spend a moment on these charges. Though we maintain insurance for professional liability, we are self-insured for a portion of a claim until a certain deductible is reached. Progression of any claim is difficult to predict, and as such can impact normal operating results in a given quarter. As a result, we had an estimated additional charge of approximately $1.1 million for the first quarter of 2014 compared to a favorable adjustment of $800,000 in the prior year.

Moving down the income statement, SG&A for the quarter was $29.5 million, up 9% both year-over-year and sequentially. The biggest driver of the year-over-year increase and, to a lesser extent, the sequential increase relates to the impact of our acquisition. Also impacting the results for the quarter were additional audit fees related to the closure of our 2013 audit, which, as Bill mentioned, are not expected to affect subsequent quarters.

Adjusted EBITDA was $1 million, representing a 0.9% adjusted EBITDA margin. Excluding the impact from the higher than anticipated charges for professional liability and the audit fees, we would have been at the higher end of our previously reported guidance range for the quarter.

Interest expense was $255,000, down slightly over the prior year and up sequentially, reflecting the borrowing cost to fund part of the acquisition of the Allied Health business in the fourth quarter of 2013.

Loss from continuing operations net of tax was approximately $800,000 or approximately $0.03 per share as compared to a loss of $1.3 million in the prior year or $0.04 per share.

Turning to cash, we ended the quarter with $7.2 million of cash and cash equivalents, $19.5 million of debt, and a current ratio of 1.7 to 1.

Days sales outstanding was 55 days, representing a four-day increase from the fourth quarter, which is consistent with the increase we saw in Q1 of the prior year.

Net cash used in operations was $9.2 million, reflecting the four-day sequential increase in DSO, as well as an investment in the working capital of our recent acquisition.

Capital expenditures totaled approximately $2.6 million, which included $1 million of tenant improvements at one of our offices, which was funded by our landlord.

Let me next review the results for our three business segments. Starting with Nurse and Allied Staffing, revenue was $80.2 million for the first quarter, which included $9.8 million from the Allied Health acquisition. On an organic basis segment revenue was down 1% from prior year and up 7% sequentially. We averaged 3,107 field FTEs for the first quarter, including 660 FTEs from the acquisition. On an organic basis our average field FTEs were down 1% from the prior year and were up 8% sequentially. Organic revenue per FTE per day was $320, up 1% from the prior year and sequentially. Total segment contribution income was $6 million in the first quarter, representing a 7.4% contribution margin, up 10 basis points from the prior year and up 50 basis points sequentially.

Let me turn next to our Physician Staffing business. Revenue for this business was $29.1 million in the first quarter, down 2% from the prior year and 6% sequentially. The decline was largely due to lower volume, as the total days filled were down 3% from the prior year and 1% from the prior quarter. The year-over-year decline was partially offset by a higher average revenue per day filled for physicians of $1,423, up 3% year-over-year and 1% sequentially. Segment contribution income for the first quarter was $751,000, representing a 2.6% contribution margin, down as compared to both prior year and the prior quarter. The year-over-year margin decline was primarily attributable to the professional liability charges I mentioned earlier and, to a lesser extent, the decline in revenue.

Finally, revenue for the Other Human Capital management services business was $8.8 million, down 8% from the prior year and 3% sequentially. The year-over-year revenue decline was primarily due to fewer retained searches in our physician search business. Segment contribution income was $166,000, representing a contribution margin of 1.9% as compared to 3.1% in the prior year.

This brings me to our guidance for the second quarter. We expect consolidated revenue to be in the $121 million to $124 million range, representing 9% to 12% growth year-over-year. Despite our normal seasonal downward trend for the second quarter, this range assumes sequential growth over the prior quarter. Gross profit margin is expected to be between 26.5% and 27%, representing a 140 to 190 basis point improvement year-over-year. Lastly, adjusted EBITDA is expected to be between 2% and 3%, representing between 50 and 150 basis improvement year-over-year.

While we do not provide specific guidance for each segment, we expect sequential revenue growth in both our Nurse and Allied business and our Physician Staffing business to be in the low to mid single digits, with our Other Human Capital management services in the low double-digit range. With respect to our largest business, Nurse and Allied, we project the average Nurse and Allied staffing field FTE count to be in the 3,075 to 3,125 range for the second quarter.

This concludes our prepared remarks, and at this point I'd like to open the lines for questions. Operator?

(Operator Instructions)

And our first question comes from Josh Vogel, Sidoti & Company.

Thank you. Good morning, guys. I was wondering if you could just give some commentary about the MSP pipeline. And, Bill, you said that fill rates were up on your MSP accounts. Can you just talk about the fill rates -- where they stand today, and where you think they can go?

Yes, sure. I think I had mentioned when we started making investments into our MSP that it would take six to nine months before some of those kicked in, and that's mostly the sales resources. So although we're seeing very positive trends and an increased pipeline, most of what the improvement has been is in our fill rates and how we're dealing with our existing MSPs. So the investments on sales -- we still expect to see positive results as we go into the second half. But for the existing MSPs, we've done a good job of expanding our services with additional facilities, as well as additional addendums, adding in new services.

The fill rates, in particular -- and you won't remember the numbers, so I'll remind you -- back at the beginning of Q3 of 2013, we filled, ourselves, 76% of all the job orders we had at our MSPs. We had increased that by about 400 basis points by the end of Q3 to about 80%. We're now running in the 84% to 85% range of the jobs that we get from our MSPs. So the number of people we had in billing, as I said, was up 19% on average from Q4 to Q1. That was a combination of we had increased orders because of some of the expansion of the services we had and a better fill rate.

Okay, that's helpful. Thank you. Outside of investments in sales, can you remind us where else you were investing? And what are your planned investments for 2014?

Well, I think most of the investments that we're making are built now into our SG&A. Bill could tell you a little bit about where some of the increase in SG&A has come from, and that's mostly in the sales front. So it really is sales is what we've invested in for the most part. There's a little bit of social media and some technology investments to make sure we can contact people appropriately through texting and other electronic methods, but for the most part our investments are in sales. We've made most of those investments through Q1, and I think we'll stick with those at this point.

Bill, you had a little bit of a breakout of some of this?

So if you look at our SG&A year-over-year, we're up about $2.5 million. $2 million of that is related to our acquisition, and if you look at the remaining organic increase, you'd see field sales or selling expenses up about $600,000, and our G&A is actually down about $200,000. And that's despite those additional audit fees I mentioned. So you're seeing better leverage across our G&A in order to fund part of the investment in the selling expenses.

Okay, and on the text and electronic front, are you seeing any traction there? Do you think that's a really viable avenue over the long term to make placements?

We do, actually; we're seeing a lot of traction on several fronts with some of the technology advances we've made. We were surprised -- we heard that physicians are not in LinkedIn; physicians don't do anything electronically. To be honest with you, we found that not to be the case. We've been involved with a couple of websites that funnel us candidates that come out of the military and armed forces. We've had good success in our texting and getting responses back. Facebook seems to be a very strong choice for nurses. So, yes, we've found quite a bit of success through the other different avenues, rather than just trying to phone people up.

Okay, and just lastly, you seem to have some nice financial flexibility. Do you have a share buyback plan in place, and what are your thoughts on potentially buying back stock with the shares down like this in the last couple months?

Well, we do have an authorized share repurchase program with about 924,000 shares remaining. We're capped with the amount of buybacks we can do under our asset borrowing line at $5 million.

We're not planning on anything right now, Josh. I mean, I like our guidance for Q2, and as I mentioned last quarter, we'll start to see nice continued improvement on quarter-over-quarter basis as we go through the year, but we're not at a level of profitability at this point where I want to start spending the money to buy back shares. I think I need to make sure I get my operational improvement in line before we start doing that. I would like to start buying back shares to offset dilution from equity grants, but I don't think we're there yet.

Okay, makes sense. Thank you very much.

Next question, Tobey Sommer, SunTrust.

Hi, this is actually Frank in for Tobey. I wanted to ask about the EMR projects; you highlighted two new projects. Can you talk a little bit about the ramp there, as well as the pipeline looking forward in the remainder of the year?

Yes, so actually -- we actually participated in about 17 EMR projects in the quarter, but most of those came from existing projects before the quarter came in. We did win new, two new EMR projects. One is already starting to ramp now, and it'll probably be between $1 million and $2 million total revenue before we finish it. The other one is going to ramp up in mid-June, and that will probably be $1 million to $2 million of revenue, as well, by the time that one finishes over a three or four-month period of time.

We have, we are bidding on some additional EMR projects, and the pipeline is still pretty good. They've extended the deadline for some of the EMR -- the deadline has been extended by the government for some of the EMR conditions that they had set before penalties kick in and some of the funding that the government has provided. So I think we'll continue to see certainly through the rest of this year, and I believe into next year, continued growth in our EMR projects.

Okay, great. And on the Nurse and Allied side can you give us a little color about trends within the quarter, maybe on a monthly basis, or how things look going into the early part of 2Q?

Do you have that, Bill?

I don't have the actual quarterly trends. Obviously, we were seeing that in -- the FTE counts are up and still trending up going into the second quarter. Our bill pay spreads are also -- have continued to trend upwards.

But in Nurse and Allied, from -- I think, and if you could back up the number -- I think from the beginning of the quarter to the end of the quarter, we increased FTEs by about 450 out on billing. And we ended -- travel nursing was up on billable headcount in February and on a year-over-year basis, February and in March. And Nurse and Allied overall was up in billable headcount in March. So we did see growth in our people out on assignments throughout the quarter. I don't know if I have the exact --

Yes, I'm sorry, I don't have it handy right now.

Okay, that's fine. And one last question. You mentioned the new leadership and what's going on there in search. Can you talk a little bit about the size of that business? And what are your goals for that going forward?

Yes, so search, we think, is an important part of our business. It's a core business, and it is complementary to our staffing businesses. It adds two pieces to it: it has a physician search business, and it has an executive search business. A couple years ago -- it's at a run rate of about $14 million to $15 million. The breakout is about $10 million of physician search business and about $5 million of executive search business. We think it's an important part. It should be able to put 20% on the bottom line. It's been running close to breakeven, so we believe with new management we can get it back to growth and back to a decent level of profitability.

Great. Thank you very much.

Next question, Jeff Silber, BMO Capital Markets.

Hi, Jeff. You're on mute, Jeff.

Hey, sorry. It's Henry Chien; I'm calling in for Jeff.

Okay.

I just had a question around bill pay spreads; you mentioned they were improving over the quarter. I just wondered if you could talk a little bit about any wage pressure, and also the pricing environment in the Nurse and Allied Staffing business? Thanks.

Yes, I'll start, and Bill Burns may be able to add some color. So we've had a big push on now since the beginning of last year to improve our bill pay spreads. So if you look at our Nurse and Allied without -- and we take out the acquisition we made in December, because the average bill rate in that business is in the low 30s -- so taking that out, so on our core business that existed before the acquisition in December, our bill rates were up year-over-year about 1.2%. And actually, the pay rates were down about 1.6%, so overall on an organic basis our bill pay spreads were up about 5%, a little over 5%.

So we feel pretty good that we're not getting a lot of pay pressure and that we are able to exercise some pricing pressure, and that's a little bit of mix of business between EMRs and MSPs and our regular primary and general customers. But the team has done a good job at trying to drive improvement in our bill pay spreads. And, actually, we're seeing a little bit of bill pay improvement also in our physician side this quarter. We did not see that last quarter, but we had a slight improvement on the physician bill pay spread, as well, but on the Nurse and Allied we're not getting a lot of pricing pressure at this point.

That's great. Thanks. And I guess more from a modeling perspective, in terms of SG&A and taking out the audit fees that you mentioned in acquisition costs, I guess, would you be able to provide us a guide of what run rate we should model in going forward? Thanks.

Yes, I think if you look at SG&A, we would expect it to remain relatively flat to where we've seen it as it was in the first quarter, probably somewhere in the 24.5% to 25% of revenue level.

Got it. And just a couple more housekeeping questions; what's your D&A and CapEx expected for the second quarter?

Depreciation and amortization would be roughly flat with the first quarter; we might have a slight uptick in depreciation because of a new facility we moved into with one of our segments within the Physician Staffing business, so it should continue to be roughly flat with the first quarter. I'm sorry, what was the second part?

CapEx?

Yes, CapEx I would expect somewhere in the about $700,000 range, between $600,000 and $700,000.

Great. And what tax rate should we expect?

Yes, taxes are obviously a complicated story for us. As we've disclosed in the past, we use the actual rate method, which is using the year-to-date results; so the tax rates tend to be a little more volatile for us. It's really very difficult to predict, which is in fact why we are not presently giving EPS guidance.

Got it.

At our level of profitability, putting a tax rate onto -- a standard tax rate just doesn't work at this point. So as we increase our EBITDA, I think we'll be able to give -- we'll probably start giving EPS guidance, but we'll also be able to give you a better idea as to what our tax rate will be.

Right, and just excluding certain discrete items, you would tend to see our rate might be a little bit higher than you might expect on a statutory basis. There's certain items that are not deductible for us, predominantly from our per diem business; and as well some of the state and local income taxes are not necessarily always income based, so you may have a tax expense despite not having the income there, as well.

Got it. Okay. Thanks so much.

Next question from Ty Govatos, TG Research.

Yes, most of my questions have been answered. You're lucky; you already got the tax question. Do you have any guess at the stock comp?

Yes, it should be about flat with the first quarter, which -- it should be about $450,000 I believe, $450,000 to $500,000 for the second quarter.

Do you have any hesitation in telling us how much those audit fees were, the extra audit fees?

No, not necessarily. The extra charges we bore in the quarter were about $300,000.

So if you're flat, I can assume that's continued investment or commissions?

No, we actually have another kind of similar cost in the second quarter related to some senior people leaving the business where there's some exit costs related to those, so that's why it kind of stays flat.

Okay, that makes sense. Thanks an awful lot, I appreciate the time.

(Operator Instructions)

At this time I'm showing no further questions.

Okay, great. Well, I appreciate everybody joining us this morning. I look forward to updating you with our second quarter results in early August. Thank you very much, and good-bye.

Okay, thank you, that does conclude the call for today. You may disconnect your phone lines at this time.