Cross Country Healthcare Earnings Call Insights: MSP Business, Q1 Revenue Performance

On Thursday, Cross Country Healthcare, Inc. (NASDAQ:CCRN) reported its first quarter earnings and discussed the following topics in its earnings conference call. Here’s what the C-suite revealed.

MSP Business

Tobey Sommer – SunTrust Robinson Humphrey: I had a question for you about the MSP business. The contracts that just signed up that will be ramping what kind of either volume in nurses or value could that have when it’s fully implemented?

Joseph A. Boshart – President and CEO: Well I am not sure that we want to give that level of details. I would just put it in some perspective. It’s certainly one of the two largest we have ever won and is likely to have more immediate impact than the prior largest that we won, order of magnitude somewhere in the 10% of current volume, when fully implemented and possibly more.

Tobey Sommer – SunTrust Robinson Humphrey: Could you comment about what the trends if anything your expectations are for MSP pricing kind of this year and may be over the longer-term?

Joseph A. Boshart – President and CEO: If you look at our bill pay spreads, Tobey they are increasing largely because the bill rates are increasing, increased roughly 3% year-over-year in the first quarter. Our expectation this year is not for 3%, it’s more in the 1% to 2% range. So that was a better than expected outcome in the first quarter, some of which maybe the geographic mix of our business. At this point, I’m not expecting MSP to weigh on either pricing or bill-pay spreads.

Tobey Sommer – SunTrust Robinson Humphrey: Last question for me, I will get back in the queue. Could you give a little bit more color as to what you think is driving the expected improvement that you commented on vis-a-vis the physicians business?

Joseph A. Boshart – President and CEO: I just think the physician business has been under pressure from the changed behavior of doctors, in particular who have been much more willing to become employees of healthcare systems. When you look at the universal physicians in the country, the percent employed by healthcare systems – hospitals and healthcare systems has gone from roughly a 0.25 to more than 0.5 in roughly five years. So it’s an extraordinary change, I guess in the psychology of physicians. Since healthcare systems make up more than half of the revenue we derive in our physician business, it has been a headwind to that segment. Having said that, I think the dust is starting to settle, and I don’t think fundamentally whether the doctor is self-employed or employed by a healthcare system, they are still going to need to take vacations, they are still going to have leaves and that’s really what drives that business. So as long as we have less doctors knocking on the door of healthcare systems, looking for employment, we would expect the business to return to a more normal trend line of growth, which historically has been 10% plus. We are not expecting that in 2012, but we do expect the business to grow for the first time in several years.

Q1 Revenue Performance

Jeffrey Silber – BMO Capital Markets: Just to delve a little bit further into the first quarter revenue performance. You mentioned a number of issues I was wondering if we could possibly try to quantify a rank to different issues in terms of their impact on the quarter.

Joseph A. Boshart – President and CEO: It’s difficult to do Jeff, my own belief is that budget pressures were the most significant impact on that roughly, more than one-third pullback on orders we saw from November to mid-February. I talked about the loss of a fairly significant MSP account. That was on the order of roughly 100 FTEs, but as it relates to the physicians. There were no positions from that account in November and therefore it didn’t affect the decline. So to me it was an underlying pullback in demand driven by hospitals more focused, because of the budget the fact that the budget process highlights the increased usage of temporary nurse and allied labor. It’s not unprecedented that they would go back to HRSA, that’s more than we expected you’re not doing what you’re supposed to be doing. Why aren’t you recruiting more effectively so there is a little bit of snap back as the HR responds or the nurse staffing responds? So we are going to run some more career builder ads, we are going to run some ads in nursing spectrum. When those ads come back four to six weeks later and not delivering the desired results eventually our phone rings to a greater extent again, and if you just look at the number of accounts, the open orders, they really followed a pretty significant pattern from again, seasonality contributing maybe 20% to 30% of that from November to February, there is always a seasonal decline in orders as snowbird states Arizona and Florida get through their winter season they are not looking to bring on more temporary labor. But to me by far in a way the biggest impact was the budgetary impact. Census was also quoted by our clients, to be honest, I know the flu season was particularly weak and we did hear from clients that census was particularly weak round year-end. And my experience a lot of time census when we hear census fences – when we hear census it’s really budget. So it’s difficult to kind of parse those two. So if I had to rank them budget far in a way, the seasonality and then census.

Jeffrey Silber – BMO Capital Markets: In your comments talking about the nurse and allied segment, I think you had mentioned that the hours per FTE went down. Could we just get a little bit more color on that?

Emil Hensel – CFO: Yes, Jeff, to us that is generally an indication that the nurses are called off – our clients have the option of calling our nurses off few shifts during their assignment and when the census is weak if that’s to happen. So it’s kind of an indication. It would correlate with our assumption that the weak flu season was a contributing factor to the revenue performance in the nurse and allied segment.

Jeffrey Silber – BMO Capital Markets: Is that something you just started seeing this quarter, forgive me, was this something you had seen last year as well?

Emil Hensel – CFO: Well, we were actually comparing it to last year. So when we say that the hours per FTE decreased they were compared to last year. Last year we had the reverse, the hours were stronger than we expected.

Jeffrey Silber – BMO Capital Markets: Throughout most of 2011 or just the first quarter 2011?

Joseph A. Boshart – President and CEO: It tends to fall in a kind of a normal seasonal pattern during the year. Normally in the first quarter you tend to see higher utilization in terms of hours per FTE and we did not see that this year.

Jeffrey Silber – BMO Capital Markets: In terms of the gross margin were there any unusual adjustments either positive or negative during the quarter?

Emil Hensel – CFO: None on the gross margin line. The only thing noteworthy is that when you compare our gross margin in sequentially versus Q4 there are two things that we need to keep in mind that are significant. One is the impact of the reset of payroll taxes and then the other one the large favorable accrual adjustment for professional liability that we benefited from in the fourth quarter of 2011. But other than those two factors there was nothing unusual.

Jeffrey Silber – BMO Capital Markets: You mentioned the new credit facility coming up this quarter. Are there going to be any one-time charges associated with that?

Emil Hensel – CFO: We are likely to write off some unamortized loan fees. I anticipate that number to be in the $200,000 to $300,000 range, so it’s not a big number and that is not included in our guidance.

Jeffrey Silber – BMO Capital Markets: Then just one other guidance related question. What should we be modeling for capital spending for the rest of the year?

Emil Hensel – CFO: We had spent only about $0.5 million in the first quarter which is a little lower than what we expect on a run rate basis. I think for the year as a whole we still think we are going to be in the $3 million to $4 million range probably at the lower end of that range.