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F4Q and Full Year Earnings Call

March 5, 2009 10:00 am ET

Executives

Howard A. Goldman – Director of Investor and Corporate Relations

Joseph A. Boshart - President and Chief Executive Officer

Emil Hensel - Chief Financial Officer, Director

Analysts

A.J. Rice - Soleil Securities

James Janesky - Stifel Nicolaus & Company, Inc.

Frank Atkins - Suntrust Robinson Humphrey

Paul Condra - BMO Capital Market

David Bachman - Longbow Research

Operator

Good morning ladies and gentlemen and welcome to the Cross Country Healthcare, Inc. Fourth Quarter, and Full Year 2008 Earnings Results Conference Call. (Operator Instructions) I would like to turn the call over to your conference host Mr. Howard Goldman

Howard Goldman

Good morning and thank you for listening to this conference call, which is also being web cast, and for your interest in the company. With me today are Joe Boshart our President and Chief Executive Officer and Emil Hensel our Chief Financial Officer. On this call we will review our fourth quarter and full year 2008 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 web site at www.crosscountryhealthcare.com. Replay information for this call is also provided in the press release.

Before we begin I would first like to remind everyone that this discussion contains forward-looking statements. Statements that are predictive in nature, but depend upon or refer to future events or conditions, or that include words such as expects, anticipates, believes, 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 statements section of our press release for the fourth quarter of 2008, as well as under the caption Risk Factors in our 10-K for the year ended December 31, 2007 and our SEC filings made during 2008.

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.

Now I will turn the call over to Joe.

Joe Boshart

Thank you, Howard, and thank you to everyone listening in for your continued interest in Cross Country Healthcare. As reported in our press release issued last evening, our revenue for the fourth quarter of 2008 was $206 million, up 13% from a year ago and above the high end of our guidance range for the fourth quarter we provided in November. The increase is entirely due to the contribution of the recently acquired MDA physician staffing business.

For the fourth quarter of 2008 we recorded a net loss of $161 million owing to non-cash goodwill and other asset impairment charges of $244 million that were substantially due to our annual goodwill impairment testing. Emil will provide more detail on these impairment charges in a moment. Excluding the impairment charges our earnings per diluted share were $0.18 for the quarter. This result exceeded the high end of the guidance range as well. Cash flow for the fourth quarter was $10 million.

For the two year ration in the environment for our nurse and allied staffing segment, which it operates in, continued and accelerated during the past three months. Demand as expressed by the number of open orders from our hospital clients is down more than 50% since the start of this year. This is the most difficult environment we’ve seen since the mid 1990’s.

We believe the deterioration had several causes including unfavorable credit market conditions for hospitals since the collapse of the auction rate securities market and exacerbated by the bankruptcy filing of Lehman Brothers, which have significantly increased interest expense and reduced profitability for our hospital customers. Most not for profit hospitals have seen material declines in the value of their endowment funds and the dramatic deterioration in the economy and national labor market since the third quarter is likely encouraging nurses to work more hours directly for hospitals thus greatly reducing the hospital industries reliance on the kind of outsourced labor we provide. Finally, hospital admission trends have been weak according to anecdotal reports.

As a result of these factors, we find ourselves in a very weak demand environment and I see no catalyst that has the potential of reversing these negative dynamics for our nurse staffing business in the near term. Our working nurse counts have declined substantially less than demand because of our ability to renew nurses on contract at the same facility and we believe we benefit because of our industry leading vendor management service offering where we have exclusive accounts. Nonetheless we are trending unfavorably; therefore we have taken a number of steps to reduce costs in this segment so that we can optimize profitability to the extent possible in a declining volume environment. These steps include reducing employee headcount, as well as advertising expenses targeted toward new nurse acquisitions.

Employee head count at the end of January in our Cross Country Staffing division was down 15% from September 1, roughly equivalent to the decline in staffing volume for this division since that date. At the same time fourth quarter applicant activity was up 20% year-over-year. We believe this is due, in part, to the perception of nurses that Cross Country has more jobs to offer them in a very constrained job market. This is one of the few times in my 16-year tenure that we have more nurses calling us than we can place. This dynamic has me confident, however, that we can further reduce print and internet advertising spending without harming our ability to attract new applicants.

Lastly, we plan to reduce capital spending in the nurse and allied staffing segment to maximize the cash flow of this business that will in turn accelerate the delevering of our balance sheet during the period.

The performance of our other businesses in the fourth quarter fell within the range of the strong performance by our physician staffing segment and the weak performance of our nurse and allied staffing segment. We believe the performance of our physician-staffing segment reflects a dichotomy between physicians and nurses and our healthcare system. Physicians are needed to admit patients into a hospital and are therefore considered revenue generators. Nurses, by contrast, are viewed as an element of care and are not specifically reimbursed. As a result, nurses are the largest cost center within a hospital and when times are tough healthcare facility operators strive harder than ever to get revenues up and costs down, thus demand for physicians is relatively strong and demand for nurses is relatively weak.

While the past is not necessarily a predictor of the future, this concept is validated by the performance of these two sectors of healthcare staffing during and after the recession of 2001 when physician staffing grew at low double-digit rates while nurse staffing declined from 2002 to 2003.

In our clinical trials services businesses work generated by small biotech companies has clearly been impacted unfavorably by the chaotic financial environment. At the same time, pharmaceutical companies have refocuses or scaled back their R&D programs while looking more to licensing or acquiring new technologies and potential products to support their growth. However, since the start of the year we have seen more projects coming to market from stronger players and we are more encouraged generally than we were in November for the prospects of this business in 2009.

While our outlook overall is certainly not what I would hope it to be, it is important to put this picture into perspective. In the fourth quarter our nurse and allied staffing segment represented approximately 60% of our total revenue and an even lower share of our profitability and we expect this relative contribution to decline in 2009. This is due to the weak environment for this business as well as to the steps we have taken over the past several years to substantially diversify our revenue sources beyond our roots as a company with near exclusive reliance on acute care hospitals and their demand for outsourced nurse and allied staff. We have been able to do this because of the very strong free cash flow we generate from our businesses, an attractive element of our business model that we expect to continue. Thus, we remain on sound financial footing with a declining level of debt in this uncertain economic environment.

During this difficult period our operations team will be focused on continuing to provide a high level of service to our health care facility customers and the health care professionals that look to us for assignment opportunities and in so doing take market share, particularly if hospitals continue to reduce the number of vendors they work with. I believe this is occurring in our nurse and allied business and will likely accelerate as we go forward.

With that I would now like to turn the call over to Emil who will update you in more detail on our fourth quarter financial performance. Emil?

Emil Hensel

Thank you Joe and good morning everyone. First I will go over the results for the fourth quarter and full year 2008 and then review our revenue and earnings guidance for the first quarter of 2009 as we provided in the press release issued last evening.

Revenue in the fourth quarter came in at $205.9 million, up 13% versus the prior year and 16% sequentially. Fourth quarter revenue was $7 million higher than the upper end of our guidance range reflecting stronger than expected contribution from MDA. On an organic basis fourth quarter was down 13% year-over-year and 5% sequentially as a result of the deteriorating business environment that Joe referred to earlier.

Our gross profit margin was 26.4%, up 70 basis points year-over-year, but down 20 basis points sequentially. The year-over-year margin improvement was due primarily to the continued improvement in the bill pay spread and lower professional liability expenses in our travel nurse staffing business, partially offset by higher health insurance, workers comp and travel expenses, as well as a reduction in high margin drug safety related revenues in our clinical trial services segment.

SG&A expenses in the fourth quarter were up 23% over the prior year and 17% sequentially due to the acquisition of MDA. SG&A represented 19% of revenue in the fourth quarter, up 150 basis points over the prior year and 20 basis points sequentially, reflecting net of the operating leverage in our nurse and allied staffing business as well as a change in business mix.

The non-nurse and allied staffing segments accounted for about 40% of revenues in the fourth quarter as compared to 21% a year ago. These segments operate with a significantly higher SG&A burden than our nurse and allied staffing segment.

As Joe indicated, we have taken measure to reduce employee headcount and discretionary overhead expenses to bring our SG&A expenses in line with the reduced demand for our services.

Net interest expense was $2.3 million as compared to approximately $800,000.00 both a year ago and in the third quarter. The increase reflects the additional debt taken down to fund the MDA acquisition, partially offset by lower interest rates. During the fourth quarter we repaid $12 million of debt.

During the fourth quarter we conducted our goodwill impairment analysis as required on the FAS 142 and FAS 144. Based on these analyses we reported non-cash impairment charges of $244.1 million pre tax for goodwill and other intangible assets. The impairment charges relate primarily to goodwill in our nurse and allied staffing segments and result from a combination of depressed equity market values along with lower near-term projected growth rates in our nurse and allied staffing business. These factors arise from the significant down turn in the US economy and adverse labor and financial markets that deteriorated rapidly during the fourth quarter of 2008.

The majority of the goodwill impairment is attributable to our initial capitalization in 1991 which was treated for accounting purposes as an asset purchase and the remainder, the subsequent staffing acquisitions made through 2003. These impairment charges are not expected to have any impact on our cash position, expected future cash flows, or liquidity under our credit facility.

Net loss in the fourth quarter was $161.3 million, or $5.22 per diluted share. The loss related to the previously mentioned impairment charge was $167 million on an after tax basis, or $5.40 per diluted share.

Excluding the impairment charges EPS was $0.18 in the fourth quarter, $0.01 above the upper end of our guidance range, reflecting the stronger than expected contribution from MDA.

Turning to the balance sheet, we ended the year with $133 million of debt and $10 million of unrestricted cash. Our leverage ratio, as defined in our credit agreement, was 2:1 at year end, while under the 2.75 ratio required under our credit agreement. Net of unrestricted cash our debt to total capital ratio was 33.5% and the current ratio was 2.9:1 at the end of the year.

DSOs at the end of the year were 53 days, down six days as compared to a year ago and down one day sequentially.

We generated $10.1 million of cash from operating activities during the fourth quarter and $51 million for the year as a whole. This compares to annual cash flow from operations of $36 million in 2007, $33 million in 2006, and $31 million in 2005.

Capital expenditures totaled $1.3 million in the fourth quarter and $4.7 million for the year as a whole.

For 2008 our revenue was a record $734 million, up 2% from the prior year.

Cash flow from operations was up 42%.

We had a net loss for the year of $142.9 million or $4.61 per diluted share, which included the aforementioned impairment charge of $160 million after tax.

Excluding the non-cash impairment charges, net income for the year was $24 million or $0.78 per diluted share, as compared to $0.76 per diluted share in 2007.

Let me next drill down into our 40 boarding segments.

Revenue for the nurse and allied staffing segment was $123.5 million down 14% versus the prior year and 4% sequentially. We averaged 4,155 field FTs in the fourth quarter down 15% versus the prior year and 4% sequentially.

The decline in staffing volume reflects a weakening national labor market and the demand for our services, as well as the impact of the liquidity crisis on our hospital customers’ ability to fund their operations.

Bill rate, as measured by revenue per hour in our travel nurse staffing business, increased by 2% year-over-year.

Contribution income as defined in our press release was $12.7 million in the fourth quarter, down 18% from the prior year, and 11% sequentially.

Segment contribution margin was 10.3%, down 60 basis points from the prior year and 80 basis points sequentially. The decrease in margin is due to negative operating leverage partially offset by continuing improvement in the bill pay spread.

For the year as a whole nurse and allied staffing segments revenue was $525.8 million, down 9% from the prior year and the contribution margin improved by 70 basis points to 10.2% from 9.5% in the prior year.

Let me next turn to our newest segment, physician staffing.

Revenue was $45.7 million and contribution income was $4.8 million, representing a 10.5% contribution margin. On a pro forma basis physician staffing days filled increased 1% from the prior year and revenue for days filled increased 11%.

MDA staffs a broad range of physician specialties. Within the larger specialty groups, MDA had strong year-over-year volume growth in emergency medicine, primary care, and OB/GYN partially offset by volume declines in pediatrics and radiology.

Pro forma revenue for the year as a whole was $167 million, up 10% from the prior year. On an as reported basis, the MDA acquisition was accretive to our 2008 EPS by approximately $0.04 per diluted share.

Revenue in our clinical trial services segment was $23.9 million, down 5% from the prior year and 6% sequentially. Contribution income was $3.4 million, down 12% from the prior year and 10% sequentially. Short-term momentum in this segment has slowed due to delays in the start up of certain clinical trials and the scaling back of R&D projects. We are encouraged, however, by new projects that have come to the market since the beginning of the year, for which we are being considered.

For 2008 clinical trial segments revenue was $99.1 million, up 9% from the prior year, while contribution income was $15.3 million, up 6% from the prior year.

Revenue for the other human capital management services segment was $12.7 million, down 4% from the prior year, while contribution income was $1.4 million, down 28% from the prior year.

Contribution margins were negatively impacted by a slow down in research activity in our retained physicians’ surgery business and by lower average seminar attendance in our educations business.

For the year as a whole segment revenue was $52.8 million up 4% from the prior year, while contribution income was $7.4 million down 2% from the prior year.

This brings me to our guidance for the first quarter of 2009.

The following statements are based on current management’s 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, and other business combinations, any impairment charges, any material legal proceedings, or any significant repurchases of our common stock.

Travel bookings were down 27% year-over-year in the fourth quarter, reflecting the weak demand in our travel nurse and allied staffing business. Based on this, we project the average nurse and allied field FTE accounts to be in the 3,575 to 3,625 range in the first quarter.

Revenue for the first quarter is expected to be in the $173 million to $176 million range. We expect our gross profit margin to be in the 25.5% to 26% range in the first quarter and our EBITDA margins to range from 5.5% to 6%.

Interest expense is projected to be approximately $1.7 million in the first quarter and our effective tax rate is expected to be in the 43% to 44% range.

Historically the gross profit margin in our nurse and allied staffing business declined sequentially from the fourth quarter to the first quarter due to the reset of payroll taxes as well as two less days in the first quarter of 2009. This combination typically results in a sequential decrease in earnings of approximately $0.04 per diluted share.

Based on these assumptions EPS per diluted share is expected to be in the $0.08 to $0.10 range.

This concludes our formal comments. Thank you for your attention and at this time we will open up the lines to answer any questions that you may have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from A.J. Rice - Soleil Securities.

A.J. Rice - Soleil Securities

Joe, you referenced some headcount reduction as well as expense management reductions in place. Is there any way to flush that out and talk a little more in detail about how much potential savings there could be? I know you mentioned print advertising and internet advertising as well as the place you can get some savings.

Joe Boshart

Well I guess at a high level, I don’t have the exact numbers in front of me A.J. If you look at the total company head count excluding MDA, which was acquired in September, but on September 1 to the end of February or even into March, we are down roughly 160 headcount, which order of magnitude is roughly a $7 million SG&A salary reduction including benefits.

Advertising expense is down more than $0.5 million on a run rate basis year over year. And, of course, there are other discretionary items that we really screwed down that have less impact. But just to send a message to the organization that we’re doing everything we can to maximize the cash flow from this business, such as travel restrictions, we’re going to attend less trade shows, things of that nature.

A.J. Rice - Soleil Securities

Right, okay, that gives me a flavor. On the write-down of the goodwill and intangibles, I know a lot of that isn’t amortized, but is there any income statement impacts from that write off in terms of amortization expense that’s going to go away going forward?

Emil Hensel

There was a very small impact related to a customer relation intangible that we wrote off, but it’s in the order of maybe $100,000.00 or so per year.

A.J. Rice - Soleil Securities

Okay and then I know you referenced that you still have availability under the share repurchase program. You did pay down debt nicely in the quarter, are you at a point yet with the bank credit agreement that you can go out and repurchase, or what leverage ratio has to change, if you’re not yet there, to get you to that point?

Emil Hensel

It is not so much the leverage ratio that is constraining us from repurchases, but the fact that we have a basket of 40 purchases as based on our cumulative net income from the date the credit agreement was put into place. As a result of the impairment charge, absent any waivers from the lenders, we are technically not in the position now to repurchase, because we have a negative basket.

A.J. Rice - Soleil Securities

Okay, so if the charge-off counts then I guess it will be quite awhile unless you go back and redo your bank deal or get a waiver.

Emil Hensel

Or we get a waiver of amendment.

Joe Boshart

And you know, candidly A.J., even if we didn’t have that restriction we would be totally focused on delivering the balance sheet. It is an unattractive environment at this point. We can’t say that we’ve found the bottom. We think directionally momentum is still negative and as a result we’re really very focused on delevering as we go forward.

A.J. Rice - Soleil Securities

All right, thanks a lot.

Operator

Your next question comes from James Janesky from Stifel Nicolaus & Company, Inc.

James Janesky - Stifel Nicolaus & Company, Inc.

First, when you look at the segments in the first quarter would you expect that the nurse and allied segment would be down more on a revenue basis year-over-year than the bookings you experienced late in the fourth quarter meaning higher than 27%?

Emil Hensel

I think that the booking is a very good indicator as to the revenue performance that we expect for that segment in the first quarter. I think it would be roughly in line with that number.

James Janesky - Stifel Nicolaus & Company, Inc.

Okay great, thank you. And, Joe, that number, so let’s just round it up to 30%, the decline seems to be somewhat higher than what some other companies in the space that we talked to are expecting in the first quarter. You’ve always been pretty representative of the industry, you know, down 30% that’s a dramatic decline; do you expect that that is what’s happening within the industry as well?

Joe Boshart

In fact we’re taking market share. I think you need to look at the performance on a sequential basis. Sequentially our head count is going to be down roughly, order of magnitude, about 15%. We think that most players in the industry are seeing greater reductions. Look, at a high level I think we probably lost share over the last two quarters. We have been very focused on margin, as we saw the environment getting more and more difficult. Again, we are trying to optimize the cash flow from the business to look at the company as a whole and make sure we’re optimizing the value of that business to our overall result.

Having said that, we actually have a very good competitive position right now particularly because of our vendor managed accounts which are some of the largest users of travel nurse and allied staff. So, I actually think we have a strong competitive position, but it feels kind of like a pureed victory, because the pie is shrinking fairly rapidly.

I hear what you’re saying, but again, on a sequential basis I think I’m very comfortable with our relative performance to the market.

Emil, do you have anything you want to add to that?

Emil Hensel

No, sequentially, based on the information that has been provided by our competitors, it does appear that we are poised to take significant market share in the first quarter.

James Janesky - Stifel Nicolaus & Company, Inc.

Okay and Joe, do you see anything on the horizon as 2009 progresses. Possibly, I guess the president is holding a health care summit today that could allow the demand trends in and especially nurse travel, so the booking trends could improve? I mean, the new healthcare package will drive more patients into hospitals, but maybe not the types of patients that necessarily pay their bills, so there could be implications for pricing as well as bad debt expense. I was just wondering what your thoughts are or are we just kind of poised to have a very difficult 2009 for the industry?

Joe Boshart

The answer is in high levels, yes, to all your points. There are things that are going to help the business directionally, if you look at it in isolation. More Medicaid funds for states that are really, really budgetarily constrained right now and are squeezing hospitals, I think would be a positive for us.

I think a strong flu season, which we’re starting to hear some noise about a building flu season in certain areas, would be a positive just to see more inpatient counts around the country and even in various geographic areas of the country. And I think that generally the healthcare bill will be helpful to the hospital industry, which as I indicated in my prepared comments, one of the big problems right now is just the sense of hospital operators that they are really cash constrained and their cost of funds is significantly higher than it was six months ago.

If you take all of that into consideration, I still think, even with those stronger tail winds to our business, that the head winds are of a dramatically weaker labor market, which I believe is very weak and are potentially getting weaker. I don’t know what the number tomorrow is going to be, but I think it’s going to be very ugly for net job losses in the economy; that will likely encourage nurses that had really cut back on the hours they provided to hospital operators to make themselves available for more shifts, which will lead hospitals to call us less often. So, I think that head wind is likely to be stronger than the potential pick up in tail winds from the items that I mentioned and that you bring up. I hope I’m wrong, but that’s just our expectation currently.

James Janesky - Stifel Nicolaus & Company, Inc.

Okay, thanks for the comment.

Operator

Your next question comes from Frank Atkins - Suntrust Robinson Humphrey.

Frank Atkins - Suntrust Robinson Humphrey

Good morning, this is Frank in for Toby. I wanted to know if you could talk a little bit about bill pay rate trends you’re seeing and an end pricing pressure that may or may not be out there.

Emil Hensel

Well we will continue to see single digit increases in our average bill rate on the order of 2% to 3%; we expect that to continue into the first quarter. Our bill pay spread is continuing to widen, so fundamentally these are obviously positives from a gross profit standpoint and we don’t see any immediate change in the dynamic.

Frank Atkins - Suntrust Robinson Humphrey

Okay, great and could you talk a little bit about geographic areas of strength and weakness? Last quarter you mentioned Northwest and Midwest as positives with Florida still weak. Do you have any update there?

Joe Boshart

Frank, I would just say directionally everything has weakened in the context of our prepared comments. It is a weaker environment for us. There are some states in the mid Atlantic, the Northeast are directionally stronger and largely because of our vendor managed accounts in those areas. But, it is a very tough environment across the country right now.

Frank Atkins - Suntrust Robinson Humphrey

Okay great. I guess you mentioned CapEx some control there. Can you talk about your expectations going into 2009?

Emil Hensel

Well we ended the year with our CapEx of about $4.7 million I believe was the number and that’s about 6/10 of a percent of revenue. We budgeted a comparable amount for 2009, however, quite frankly, if the environment remains weak we will probably defer some of those expenditures, so we may end up with a number that’s even lower than the 6/10 of a percent of revenue that we achieved in 2008.

Keep in mind that historically our CapEx tended to be around 1% of revenue, so we are already in a lower spend rate than our historical average.

Frank Atkins - Suntrust Robinson Humphrey

Okay, great. Thank you so much.

Operator

Your next question comes from Paul Condra from BMO Capital Market.

Paul Condra - BMO Capital Market

How much debt did you repay in the current quarter?

Emil Hensel

We actually made a significant prepayment in our term debt, already, in this quarter over $6 million.

Joe Boshart

Overall debt was down about $13 million in the first two months of this year. That includes prepayments to the revolver and payments on the revolver as well.

Paul Condra - BMO Capital Market

Okay, thank you. My other question is your stock compensation for the quarter?

Emil Hensel

The equity compensation expense was approximately $300,000.00 in the fourth quarter and about $1.2 million for the year as a whole.

Paul Condra - BMO Capital Market

Can you give any expectations for 2009 stock comp?

Emil Hensel

Yes, we expect our equity compensation to go up versus ’08 and its quite frankly a conscious decision as we will be reducing our annual bonus payments and replacing them with longer term equity grants.

Paul Condra - BMO Capital Market

Okay thank you and then my last question is can you go over the earn out provisions for the MDA acquisition?

Emil Hensel

There is an earn out for MDA. We expect that to be paid in the March/April time frame and it is approximately $6 to $7 million.

Paul Condra - BMO Capital Market

Okay, thank you very much.

Operator

Your next question comes from David Bachman of Longbow Research.

David Bachman - Longbow Research

I have a couple of questions here on the bigger picture and then on the smaller picture. You mentioned taking share and competitors mentioned that as well. Where is that share coming from? Then more broadly, when you have this kind of an industry down turn it really has the potential to sort of reshape the industry moving forward. I was wondering if you could talk about where you see the industry in few years and how it comes out of this down turn.

Joe Boshart

I think when you talk about our largest competitor, like I said earlier, looking the numbers it looks like they took share certainly over the last several quarters and again, kind of qualitatively looking at the information that has been provided for the first quarter, we expect to get some share back. But, that may or may not occur depending on how the actual results come out. But, that is our current view of the business.

I am sure both of us are taking share from smaller companies that are, in addition to the overall level of job orders declining, they’re also being excluded from more and more accounts as those accounts narrow the number of vendors they work with. Generally the two largest companies continue to be vendors, because they provide the bulk of staff and the hospitals are looking to have their relationships with third party contract labor providers to be more efficient. That generally means working with less companies, so that the small guys are really struggling more on a relative basis, based on everything I’ve heard and seen. I have a relatively high level of confidence in that statement.

As we go forward, historically this business is very manageable in the context of as revenue declines, because you’re operating out of one location you can typically scale your expenses to the environment in order to survive. You make a lot less money as a small company in the travel business. I think the per diem business has different dynamics: there is more overhead because of the number of the number of offices that you operate. But, in the travel business you are able to scale your expenses enough to survive.

A couple of our subcontractors have sent us notice that they’re getting out of the business, but it is not my expectation to see some of the more significant second tier players exit the business. I think they’ll be able to get through this period and we do expect long-term that it’s going to be a very attractive business. We have to get through this very weak environment regardless of how long it takes to get to that position.

I am of a view that the worse it gets in the short term, the better it will be in the long term, because you will see hiring by hospitals decline. Wage increases for nurses will flatten out; probably become negative in real terms over the coming years. That is really consistent with how the industry has operated historically. Therefore enrollments in nursing schools will drop and at some point you will have a very rapidly aging professional RN population not being supplemented by younger nurses entering the profession, which should create a very dynamic and attractive environment for us. That is not what we’re looking at today, but we still believe that’s what we’ll see in the future.

David Bachman - Longbow Research

Okay, well that is a helpful longer term perspective. Can you provide an update on the tax advantage sort of initiative that you talked about the end of last year?

Emil Hensel

Well we’ve implemented that program back in August for assignments that were booked after a certain date in the summer. It progressed extremely well. We have seen a noticeable impact in applicant activity. Our applicant activity was up 20% year-over-year in the fourth quarter. That is unusual, because typically in an environment where demand is weak you tend to see a decrease in applicant activity as nurses are less willing to take travel assignments due to the uncertainty of another job down the road. Despite that, we saw a very substantial increase in our applicant activity; it was up 20% year-over-year. We believe that the primary driver of that is the more attractive compensation plan that we can offer to our nurses.

David Bachman - Longbow Research

Okay great, then one last question. Switching to clinical trials, can you provide a little bit more color, remind me, are there certain segments of that clinical trials business that you are better positioned in or have higher levels of competency in? I would like to understand that business better.

Joe Boshart

At a high level the business is still more than 2/3 just staffing. I mean we staff professionals engaged primarily in Phase 3 trials. That element of the business is actually performing pretty well, the staffing component is. Where it has been more of a struggle year-over-year is in the much smaller piece of the business that is what most people think of the traditional CRO activity, where you’re outsourcing the entire trial on behalf of a biotech or a pharmaceutical company bringing a new compound to market.

We were kind of a boutique in that segment. We would be generally working with smaller biotech companies rather than large pharmaceutical companies, which is really the purview of the Covances and PPDs of the world.

The biotech companies are becoming cash starved, because it is more and more difficult to raise money. So, they are really looking at what they are willing to spend money at; what kind of compounds they are going to move forward with; what they can move forward with at any time. We have seen, certainly in the fourth quarter, a pull back on the part of those companies. That is the headwind of that business primarily.

We are reasonably confident of winning a relatively significant trial that we hope will start in the second quarter. That is important because we have a relatively large trial ending over the summer. In the drug safety aspect of our business, which is in the area of $10 million of revenue, we just won a relatively large contract for that business that we expect to start early in the second quarter.

It looked very bleak in the fourth quarter where everybody had gone on a buyers strike in the clinical research area. We are now seeing compounds come back to market. It seems like things have loosened up a little bit. It’s probably not going to be as dynamic as it was for much of the last five years, but it looks like it’s going to be better than it looked in the fourth quarter.

David Bachman - Longbow Research

Okay, that’s helpful. Thank you.

Operator

At this time we have no further questions.

Joe Boshart

All right, well we appreciate everyone’s participation in this call and we look forward to updating you on our first quarter results in May. Thank you.

Operator

This will conclude today’s conference call.

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