Cross Country Healthcare, Inc.
Q1 2013 Earnings Call Transcript
Published:
- Operator:
- Welcome to the Cross Country Healthcare First Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode until the question-and-answer session of the call. (Operator Instructions). Today’s conference is being recorded. If you have any objections you may disconnect at this time. Now, I’d like to turn over the meeting over to Mr. Howard Goldman, Director of Investor and Corporate Relations. Sir, you may begin.
- Howard Goldman:
- Good morning and thank you for listening to our conference call which is also being webcast and for your interest in the company. With me today are Joe Boshart, our Chief Executive Officer; Bill Grubbs, our President and Chief Operating Officer; and Emil Hensel, our Chief Financial Officer. On this call, we will review our first quarter 2013 results, for which we distributed our earnings press release after the close of business yesterday. If you do not have a copy, it is available on our website at www.crosscountryhealthcare.com. Replay information for this call is also provided in the press release. Before we begin, I’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 first quarter of 2013, as well as under the caption, Risk Factors in our 10-K for the year ended December 31, 2012, and other SEC filings. Although, we believe that these statements are based upon reasonable assumptions. We cannot guarantee future results. Given these uncertainties, the forward-looking statements discussed on this teleconference might not occur. Cross Country Healthcare does not have a policy of updating or revising forward-looking statements, and thus, it should not be assumed that our silence over time, means that actual events are occurring as expressed or implied in such forward-looking statements. Also, our remarks during this teleconference reference non-GAAP financial measures. Such non-GAAP financial measures are provided as additional information and should not be considered substitutes for, or superior to, financial measures calculated in accordance with U.S. 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 Joe.
- Joe Boshart:
- Thank you, Howard. And thank you to everyone listening in for your interest in Cross Country Healthcare. As reported in our press release issued last evening, our revenue from continuing operations for the first quarter of 2013 was $110 million, up slightly from the prior year reflecting a 5% improvement in our nurse and allied staffing segment that more than offset declines in our other two business segments. Net income in the first quarter was $1.2 million or $0.04 per diluted share which includes results from the discontinued clinical trial services segment. This compares to a net loss in the year ago quarter of $0.02 per diluted share including discontinued operations. Our loss from continuing operations is $1.3 million or $0.04 per diluted share and includes $0.03 related to the write-off of loan fees following the replacement of our prior credit facility in January. Cash used in operations during the first quarter was $1.5 million. Our consolidated revenue and earnings were in line with our expectations in particular, the performance of our nurse and allied staffing business resulted in a year-over-year and sequential increases in segment revenue due to a higher travel and per diem staffing volume, as well as higher bill rates as well as higher bill rates. Our travel staffing volume was up 2% both year-over-year and sequentially. Our per diem operations also contributed to revenue momentum with staffing volume up 10% from prior year and 8% sequentially. Our efforts to restore margin in this segment continue to be effective both housing and health insurance cost per hour declined sequentially were combined with a favorable $800,000 professional liability accrual adjustment as well as higher volume build rate increases and continued focus on controlling overhead resulted in a 44% improvement in segment contribution income from prior quarter. The professional liability adjustment was not included in our first quarter guidance. The underlying case moved further through the legal system and provide a greater clarity on our exposure. We experienced incremental demand for our nurse and allied staffing services resulting from a very strong flu season that drove higher hospital admissions early in the quarter. Staffing related to electronic medical record technology implementations was also a driver of demand in this segment during the first quarter. Currently, EMR activity is running below the first quarter. Despite the current low, we expect this driver of the demand to strengthen as we get deeper into 2013 as hospitals must demonstrate meaningful use of medical record technology by 2015. Our physician staffing business was below expectations in the first quarter with revenue down 4% year-over-year and down 8% sequentially. We continue to believe this segment will grow revenue in 2013 but have limited visibility given the shorter term nature of contract placements in comparison to our nursing business. Our other human capital management services segment also saw a decline in year-over-year revenue and contribution income as both education and training businesses and our search business had weaker performance. We believe our search business is currently gaining traction whereas our education and training business continues to struggle with a decline in the number of behavioral health professionals seeking continuing education from us. And employment of these professionals by the state has declined in recent years due to budget pressures. So in summary, we had good execution in our nursing and allied staffing segment, which has got a long way toward restoring our margins in this segment. However overall demand has pulled back from higher levels seen early in the first quarter, following the end of a very strong flu season and reflecting a current low on EMI staffing, as well as the normal seasonality of this business. As a result, we look for second quarter volume to be down moderately and sequentially. Our physician staffing business had a weaker first quarter than we anticipated but in the second quarter. We expect this business to return to a positive trend line with improved year-over-year and sequential performance. Lastly, after 20 years serving Cross Country as Chief Executive Officer, I intend to retire late in the summer. It’s been a honor for me to leave this company and I want to thank our employees, Board of Directors and shareholders for their tremendous support these past two decades. Upon my retirement in July, Bill Grubbs, an experienced staffing industry executive, who joined Cross Country on April 1 as President and Chief Operating Officer will become our Chief Executive. Based on our time together and his track record, I feel very good about leaving this company in Bill’s capable hands and I believe he will lead this company to a very bright future. Before proceeding to a deeper review of our financial results by Emil, I’d like to introduce Bill to this audience. Welcome, Bill.
- Bill Grubbs:
- Great. Thanks, Joe. Happy to be here, Cross Country Healthcare has a great history and a great reputation. And having been in the industry for many years, I have received a lot of phone calls since I’ve been here from previous colleagues and even competitors and all the comments have been very positive about Cross Country, our people and our prospects. So I’m excited about the opportunity to work with the team here and help the company to grow and take advantage of the positive market trends. And after five weeks, I’m encouraged by what I’ve seen so far and I’m looking forward to the future. And on a personal note. Joe, I want to thank you for your help and support during this transition period. And with that, I’ll now turn the call over to Emil.
- Emil Hensel:
- Thank you, Bill, and good morning, everyone. First, I will go over the results for the first quarter and then review our revenue and earnings guidance for the second quarter of 2013 that we provided in the press release issued last evening. Revenue in the first quarter was $110 million, up slightly from the prior year, but down 1% from the prior quarter. The first quarter had one less billing day than the prior-year quarter and two less billing days than the fourth quarter. Revenue per day was up 3% year-over-year and 2% sequentially with revenue growth in our nurse and allied staffing segment, offset by revenue declines in our physician staffing and other human capital management segments. Our gross margin profit was 26.2%, down 30 basis points from the prior year, primarily due to changes in segment mix and a higher – and higher field compensation expenses, partially offset by a favorable professional liability accrual adjustment in the current quarter. Gross profit margin was up 120 basis points sequentially due to lower professional liability expenses as well as lower housing and health insurance costs partially offset by the result of payroll taxes and changes in segment mix. SG&A for the quarter was $27.1 million, down 3% year-over-year and flat sequentially. SG&A expenses in the first quarter included approximately $600,000 in equity-based compensation expense, essentially unchanged from both the prior year and prior quarter. Adjusted EBITDA from continuing operations as defined in our press release was $2 million representing a 1.8% margin. Interest expense of $280,000 was down 56% from the prior year quarter and 35% sequentially reflecting the repayment of our revolver balance from the proceeds of the sale of the clinical trial services business in mid quarter. As previously disclosed during the first quarter, we entered into a new asset base lending facility with Bank of America and as a result, we wrote off $1.4 million pre-tax of loan fees associated with our previous loan facility. Including this loan fee write-off, our pre-tax loss from continuing operations was $1.8 million in the first quarter. The income tax benefit from continuing operations was $500,000 representing a 27% effective tax rate. Our loss from continuing operations after taxes was $1.3 million or $0.04 per diluted share and included $0.03 related to the write-off of loan fees. Income from discontinued operations after taxes was $2.5 million or $0.08 per diluted share and includes a $1.9 million after tax gain on the sale of the clinical trial services business. Our net income including discontinued operations was $1.2 million or $0.04 per diluted share. Turning to the balance sheet we ended the quarter with $21 million of cash and cash equivalents, no revolver debt and a current ratio of 3
- Operator:
- Thank you. We will now begin the question-and-answer session. (Operator Instructions). First question comes from Jeff Silber with BMO Capital Markets.
- Jeff Silber:
- Thanks so much. Wanted to focus on the nurse allied business, if you can talk about how your MSP business is going? What percentage of your business comes from that angle and how is that affecting pricing? Thanks.
- Joe Boshart:
- Hi, Jeff. Good morning. The MSP business as a percent of our nurse and allied revenue is right around 30%. That’s been a pretty consistent percentage for us over the last year. I would say directionally it’s been somewhat favorable to pricing. As you know, we mutually agreed to walk away from a fairly large opportunity we were on boarding as demand was peaking in December and January attended to be a lower price contract as that has – less the MSP pricing generally has increased, but in addition to that, we are seeing – adding some opportunity to improve pricing and improve our ability to deliver high quality professionals to our MSP clients. Our pipeline, there are opportunities for us. We have one contract that have not but yet been on boarded. We’ll move the needle as we get deeper into the year so it is – story is still the same on the MSP side. We believe we’re – we have a very competitive and attractive story to tell to our perspective clients and we think there’s attractive opportunities in front of us. Jeff?
- Jeff Silber:
- I’m sorry, can you hear me?
- Joe Boshart:
- Yes, did you have another question?
- Jeff Silber:
- Yes, I do. Just moving on to the other human capital management business. I know it’s small but the way trends has been going and seems to be a drag on the total company, is this something that’s still fixed within Cross Country?
- Joe Boshart:
- It’s a fair question. The two piece – to the early three pieces to the business, there’s an education training business – the largest on the revenue basis. And then within our retained search business, there’s position retained search and healthcare executive retained search position being about three-quarters of the revenue and the executive search, somewhere between 25. Last year was as much a third of the business. The executive search is by far and away the best performing of those three pieces. The position piece strategically is important to us. And one of the things Bill’s going to really focus on is delivering a more integrated solution to clients than we have historically. We think we have a great brand and position retained search. But unfortunately, given the current market being kind of the Tiffany brand in retained search is not necessarily a great place to be when a lot of clients are looking for a contingency solution. So, the team which is a great experienced team is looking at what we can do within our solutions to adapt to the current market conditions. The executive piece I expect to continue growing in a – has great traction, also strategically very important to us as you have an opportunity to place prospective clients at your client facilities for future business. The education piece really it’s not just a behavior health story but behavior health historically was 40% to 45% of the revenue generated by this business. There’s been a lot of pressure on behavioral health. A lot of our behavioral health professionals were employed by state and local governments. State and local governments have been peeling back as everyone’s aware employment since the credit crisis in 2008. So it’s – we believe in the future of this business. It is not necessarily a strategic business. It’s just – right now we’re focused on getting it back on track. But somewhere down the road, I can’t rule off the possibility that we would divest the business. But that’s not the current plan, Jeff.
- Jeff Silber:
- Okay, great. And just to get a gauge of the size of the education and training business roughly.
- Bill Grubbs:
- Right now it’s in the high $20 million revenue and doing less than $1 million of contribution.
- Jeff Silber:
- Okay, great. That’s helpful. And just a couple of numbers questions for Emil. Moving on for the rest of the year, what should we be modeling for tax expense and capital spending for the balance of the year?
- Emil Hensel:
- Let me tackle the easy part, this is the capital expense. We had about $200,000 of CapEx in the year. Our target is roughly $2 million. I’m not sure we actually hit that number, but that would probably be a good number for modeling purposes for the year as a whole. The tax expense is a complicated story. It really has to do with the fact that we have some non-deductibility of certain per diem expenses related to field compensation in our nurse and allied business. There’s also an impact from state taxes that are not always based on pre-tax income. Sometimes they’re based on gross profit, there’s also some foreign tax effects. The net result is that our statutory – our tax rate is significantly higher than you would expect on a statutory basis. When you have a tax loss that means that your tax benefit is lower than you would expect otherwise. This quarter, we used an alternative method to calculate our tax expense, which is the one that’s the preferred approach when you have a low pre-tax income number and expected changes from a loss to a profit position during the course of the year, which creates tremendous – under the traditional method, when you project out a full year rate and use that rate every quarter, well, that created a lot of volatility in our quarterly numbers. So the preferred approach in this situation is to base it on year-to-date results. So for using this year-to-date method in the second quarter, we come out with an expense of zero to about $300,000 as I indicated in the prepared remarks despite the fact that we’re projecting a small pre-tax loss on a book basis. But for the year as a whole, if we include certain expected discrete items in the latter part of the year, we expect our tax rate to be in the mid-60% range.
- Jeff Silber:
- And that’s for the year as a whole, not just the second half?
- Emil Hensel:
- That’s for the year as a whole.
- Jeff Silber:
- Okay, great. I appreciate that, and, Emil, I apologize that you had to go through that.
- Joe Boshart:
- We apologize for having you go through.
- Jeff Silber:
- No problem. And. Joe, I just wanted to wish you the best of luck and thank you for all your help over the years. I really appreciate it.
- Joe Boshart:
- That means a lot to me, Jeff, it’s been great working with you and also the best to you.
- Joe Boshart:
- Okay, great. I’ll jump back in the queue. Thanks.
- Operator:
- (Operator Instructions). Our next question comes from Tobey Sommer with SunTrust.
- Tobey Sommer:
- Thank you. I wanted to ask a question about using the balance sheet to get more EBITDA and allow you to leverage the revenue a little bit better in the G&A. What areas would you look to deploy capital now that you’re in a net cash position?
- Joe Boshart:
- Great question, Tobey, and that is our primary focus for the cash and the balance sheet capacity that we have. The truth is we would look at any of our core activities strategically. They’re all important to us. We’d like to grow our allied business but as you know, allied right now is under some pressure. We’re down about 17% in our allied staffing year-over-year largely because of what’s going on in the rehab space. We’d like to be stronger and allied going forward. But in the short term, we’d be just as happy to deploy cash for a fairly significant per diem acquisition. We have a very tuck in model to our core contract nurse staffing business that yields a lot of synergy if an attractive opportunity were to present itself and we’re very much would like to grow our physician staffing business. So it’s probably a little broader than you want to hear. But at the end of the day, it all comes down to the value we’re able to drive. We are looking for an acquisition to be accretive immediately and that’s been the challenge as getting sellers’ expectations in line with where we think the current market opportunity is.
- Tobey Sommer:
- Joe, if you were able to execute on a per diem acquisition, would there be positive effects on your competitiveness for MSP business?
- Joe Boshart:
- It depends on the opportunity. I don’t want to be coy. Really, what we’re looking to do is to not so much aggressively grow our per diem footprint. Right now, we’ve had 19 offices. That business as we described in the formal comments is our best performer right now. We have a very good management, we have a good model, cost effective, the ramp up model. But really, what we’re looking to do is support and increase the opportunity for new MSP business, it’s something with given the relatively small footprint that we have that you’re not able to leverage the local relationships into future MSP relationships and we think strategically if we can enhance our ability to – or improve our odds of achieving that. We’re better off. Again, we don’t want to just have offices everywhere. We want to have offices where there’s the opportunity to have important strategic relationships. Bill, I don’t know if there’s anything you want to add to that? Yes. So that’s – I think it isn’t – I think as we described over many years, the business fundamentally is – the economics are a little less attractive than the nursing business. But when the business is at its peak in the per diem market, you’re recruiting from the deepest part of the pool of nurses whereas contract nursing is always going to be recruiting in a relatively shallow part of a very large pool. In contract nursing, you’re looking for young, single nurses who can travel around the country and less than 30% of nurses are single. So a per diem company can – because the nurses are typically living and working locally, can recruit nurses that have families and are just looking to pick up additional income for the family. It tends to have different dynamics at different stages of the market, but it’s a market we like and we think we should grow our presence. We’re a relatively small player among the hierarchy of per diem providers in the country and we want to move up into the top three eventually.
- Tobey Sommer:
- Just a follow up, how many of your per diem markets do you have MSP relationships in?
- Joe Boshart:
- Less than five.
- Tobey Sommer:
- Okay. And then I wanted to get your sense and maybe a little bit of color on how you see EMR deployments trending over the next few quarters in that demand for that for you and whether you think there will be kind of a longer tail to demand for this, given some of the rules where I think hospitals get to a kind of self-diagnose whether they’ve met some thresholds. Thanks.
- Joe Boshart:
- Great question, and I’m going to – sorry, be careful how I answer it. Right now, there’s a law. I’m actually surprised that there’s not more activity because I do think there’s a sense of urgency on the part of hospitals to get this technology in place in both of carried and the stick elements where the governments incentivizing deployment of electronic medical record technology. Having said that, not all these deployments are going to be successful. I know I have talked to nurses. I think I described on past calls a nurse in the neonatal unit, they deployed these handheld devices that really aren’t designed for the kind of rigorous sterilization that’s going to occur in a hospital setting. They’re intended to be wiped off with the cloth, but in a hospital they’re going to be cleaned with bleach, and it’s not uncommon for the diagnostics to be unreadable after one cleaning with bleach. So I think there’s going to be some iterations of the technology that some are going to be ripped out and replaced. A lot of us going today are technologies that have been ripped out and are being replaced with what are perceived to be better technologies. I don’t think it’s necessarily over in 2014. I do expect it to tail off. I don’t think it’s going to be like a year 2000 dynamic where, in November of 1999 there was no more work. I think this is likely to have some legs and in addition to the ICD-10 roll out, I think there’s going to be a lot of technology work and we’re going to benefit from some of that. We have some professionals engaged in ICD-10 consulting engagements employed by technology consulting firms. So I think there’s going to be business here, Tobey. I just think it is likely to tail off as we get into 2014 and we get the, there has to be a period in which the hospital can demonstrate, the technology has been deployed successfully and it has been utilized uniformly. And they need time to remediate, if that’s not the case. So I do think there’s the peak will be in the second half of 2013, maybe the first quarter of 2014. And I am surprised however, we are aware of engagements that we’re going to be involved in beginning in the summer and into the second, into the third quarter but right now it’s just, it’s very quiet on the EMR front.
- Tobey Sommer:
- Yes, another broad question for me and I will get back in the queue. Regarding the Affordable Care Act, what are your thoughts on which of your businesses is going to see the most pronounced benefit from customers and market changes that result?
- Joe Boshart:
- My expectation Tobey, is that physician extenders, nurse practitioners, physician assistants will be the big beneficiary of the roll out of healthcare reform. You’re going to have, last estimate I saw was 27 million newly insured patients in 2014 who will look a lot like Medicaid patients from a primary care physician standpoint. They’re not going to be necessarily desirable new patients. So I think all of us are going to become more and more accustomed to seeing nurse practitioners, physician assistants and non-emergent care. I think the demand for their services will increase dramatically just because of the economics. And the integration vertical and horizontal integration of healthcare delivery systems will learn how to deploy these professionals economically and efficiently and in the context of providing high quality care to their patients. That’s my expectation for – today, that’s a relatively small part of our mix. It’s included in our nurse and allied segment. We do expect that it is currently growing rapidly and we expect it to continue and accelerate as the years go on. I do think hospitals, not having to deal with so much uncompensated care is going to benefit all our businesses. It will benefit the nurse and allied business. It will benefit our traditional local physician, clinical business. I have every expectation that that’s going to be true. But if you’re asking me what’s going to benefit the most, I think on a relative basis, it’s clearly going to be the physician mid-level professionals that will support the substantial increase in Medicaid like patients that are going to be added to the system
- Tobey Sommer:
- Thank you very much. And Joe, it’s been a pleasure dealing with you over the years. I hope you go on great things.
- Joe Boshart:
- Thanks so much, Tobey. Right now, I’m looking forward to the beach but I’m sure we’ll talk at some point. Thanks for participating in the call and it’s been great working with you for the past 10 years. Angela, is there another call?
- Operator:
- There’s no further questions.
- Joe Boshart:
- Okay. Well, we want to thank everyone for their participation in this call. And we – Bill will look forward, and Emil and me will look forward to updating you on our second quarter performance later this summer. Take care.
- Operator:
- This concludes today’s conference. Please disconnect at this time.
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