Cross Country Healthcare Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 2, 2023

There are 11 speakers on the call.

Operator

Good afternoon, everyone. Welcome to Cross Country Healthcare's Earnings Conference Call for the Second Quarter 20 23. Please be advised that this call is being recorded and a replay of this webcast will be available on the company's website. Details for accessing the audio replay can be found in the company's earnings release issued this afternoon. At the conclusion of the prepared remarks, I will open the lines for questions.

Operator

I would now like to turn the call over to Josh Vogel, Cross Country Healthcare's Vice President of Investor Relations. 20. Thank you, and please go ahead, sir.

Speaker 1

Thank you, and good afternoon, everyone. I'm joined today by our President and Chief Executive Officer, John Martins 2019 as well as Bill Burns, our Chief Financial Officer Dan White, Chief Commercial Officer and Mark Froog, Group President of Delivery. 20. Today's call will include a discussion of our financial results for the Q2 of 2023 as well as our outlook for the Q3. A copy of our earnings 18.

Speaker 1

Press release is available on our website at crosscountry.com. Please note that certain statements made on this call may constitute forward looking statements. 20. These statements reflect the company's beliefs based upon information currently available to it. As noticed in our press release, forward looking statements can vary materially from actual results 20.

Speaker 1

And are subject to known and unknown risks, uncertainties and other factors, including those contained in the company's 2022 annual report on Form 10 ks 2nd quarter and quarterly reports on Form 10 Q as well as in other filings with the SEC. The company does not intend to update guidance or any of its forward looking statements prior to the next earnings release. 20. Additionally, we reference non GAAP financial measures such as adjusted EBITDA or adjusted earnings per share. Such non GAAP financial measures 2 are provided as additional information and should not be considered substitutes for or superior to those calculated in accordance with U.

Speaker 1

S. GAAP. 20. More information related to these non GAAP financial measures is contained in our press release. Also during this call, we may refer to pro form a 2.

Speaker 1

We normalized numbers pertain to our most recent acquisitions as though the results were included or excluded from the periods presented. With that, I will now turn the call over

Speaker 2

Q2. Thanks, Josh, and thank you to everyone for joining us this afternoon. For the Q2, consolidated revenue 2.5 $41,000,000 and adjusted EBITDA of $44,000,000 were above or near at the high end of our guidance ranges. 18. Our results reflected strong execution in an environment where clients remain focused on controlling their labor costs.

Speaker 2

20. It is evident to me that our ongoing investments in technology are driving efficiency and productivity gains, 20, enabling our dedicated employees and healthcare professionals to deliver best in class service. 20. Bill will get into more detail on the numbers, but I wanted to spend a few moments discussing our 2nd quarter performance. I'll start with our largest business, Travel.

Speaker 2

Revenue is down approximately 16% in the Q1, driven by a mix of lower rates 2nd quarter. As expected, average bill rates declined approximately 7% sequentially and are expected to decline by mid to high single digits 2nd quarter in both the 3rd and 4th quarters. This would place TravelWeights on track to settle in roughly 35% above pre COVID levels 2 as we entered 2024, in line with our prior expectations. As we reported last quarter, demand troughed in April 2nd quarter. In particular, we saw notable pickups in med surg, ER, labor and delivery and pediatrics.

Speaker 2

2018. And in Allied, we saw strength in imaging and lab specialties. Though demand has rebounded, the corresponding growth in the number of travelers for the 2nd quarter has been slower than anticipated as there appears to be a gap in open order rates relative to the compensation that nurses are seeking. Accordingly, we still expect revenue for the Q3 to be the trough, though a little softer than we previously For the Q4, we continue to expect sequential volume growth in the business, in part due to the improving outlook for orders 20, as well as the likely seasonal needs we expect to see ramping in coming months. Turning to our other businesses, 20.

Speaker 2

I'd like to highlight physician staffing revenue, which was up 32% year over year organically 20% and 12% sequentially in the 2nd quarter, driven by an increase in the number of days filled across most specialties and revenue per day filled. When we include our most recent acquisitions of Minted Motus, which continue to operate above expectations, 20. Our physician business was up 105% year over year and now is on an annual revenue run rate of more than $180,000,000 18. Education also performed very well in the 2nd quarter, up 42% year over year. 20.

Speaker 2

This division is now close to an annual revenue run rate of $100,000,000 Now, let me spend a moment on our technology initiatives. 18. As you know, we have been successfully redesigning our entire technology landscape using a data centric model that provides analytics and insights 2nd quarter. In real time, with Intellify, our proprietary vendor management system at the center of our ecosystem. 20.

Speaker 2

Since introducing Intellify at our Investor Day event last year, we have successfully migrated nearly half 2 of our managed service programs onto this platform with plans to convert the balance over the coming months. As a reminder, this will save us 1,000,000 of dollars 20. However, the real driver for long term revenue growth and margin expansion, in my opinion, 20. Is the multibillion dollar opportunity Intellify opens within the vendor neutral space. When meeting with prospective clients, 20.

Speaker 2

Conversations go beyond just contingent labor by offering a comprehensive technology enabled platform 2 that empowers the user with intuitive data and analytics as well as greater levels of efficiency and transparency. 2. We believe Intellify to be highly differentiated in the industry and the feedback we've received thus far from clients, prospects 2. And our subcontracted partners has been extremely positive. For example, one of our partners recently noted that the data Intellify introduces 2.

Speaker 2

Health staffing agencies track their efficiency within the marketplace, which is a very useful tool. As I mentioned on the last call, 2. We signed our 1st vendor neutral contract in March, which went live on May 1. Today, I am thrilled to announce 2nd quarter. We have a very robust pipeline of clients interested in this technology, 20.

Speaker 2

Evident in the numerous live demos we have done so far and we look forward to updating you on our new business opportunities on future calls. 2nd. An equally exciting technology initiative underway is on the candidate facing side. In mid May, we released the latest version of our 2. Which allows travel nurse and allied professionals to utilize a self-service model, easily searching and applying for jobs with convenience, 2.

Speaker 2

Since the launch, there have been thousands of downloads with KPIs showing positive daily 2. As we pivot to a tech enabled platform, our mobile first ecosystem will assist in optimizing candidate and client experience, 2. Rationalizing business operations and streamlining our delivery models. For the full year, We continue to target an investment of nearly $30,000,000 on technology related initiatives that we believe will further improve our go to market strategy 20, as well as our efficiency.

Speaker 3

This brings me

Speaker 2

to our outlook. Given the market backdrop and the seasonality in parts of our business like education, 20. We anticipate that the 3rd quarter revenue will be between $440,000,000 $450,000,000 Beyond the 3rd quarter, 2017. Our expectations for continued improvement in travel demand as well as potential growth in many of our businesses like education, physician staffing and home care 20. Point to a full year revenue that will be above $2,050,000,000 and an adjusted EBITDA margin of approximately 8%.

Speaker 2

2. I remain confident in our ability to drive long term sustainable profitable growth and we are focused on increasing shareholder value through our deployment of capital. As you can see in today's press release, 20. Our cash generation was very strong in the 2nd quarter, allowing us to fully repay remaining $74,000,000 2019. You will also recall that we announced the restoration of our $100,000,000 share repurchase plan in May.

Speaker 2

20. With the term loan now gone and given we believe our shares are undervalued, share repurchases remain an attractive use of capital. 20. We will also look to leverage our technology investments and robust balance sheet to further diversify our platform by following 2. The patient across the continuum of care as well as by entering new markets like we did with interim leadership through the HireUp acquisition late in 2022.

Speaker 2

In closing, we are confident about our prospects and ability to build upon the early momentum from Intellify, 2017, which we believe is a game changer for Cross Country and the industry. All of our success 18 would not be achievable without our dedicated employees and I want to thank each of them for their hard work and contributions. 18. We have such an incredible team. We recently won a 2023 Top Workplace Healthcare Industry Award from Energage, 20.

Speaker 2

And I'm also humbled to highlight our recent award of Newsweek Magazine's Most Loved Workplace Certification, which recognizes organizations 20. Our workplace culture is second to none in my opinion, and this award is reflective 2. Of that, as it surveys employees on various elements such as respect, collaboration, support and a sense of belonging inside the company. 2. Lastly, I want to thank all of our professionals who made Cross Country their employer of choice, as well as our shareholders 2.

Speaker 2

With that, let me turn the call over to Bill.

Speaker 3

Thanks, John, and good afternoon, everyone. 20. As John highlighted, consolidated revenue for the Q2 of $541,000,000 was above the high end of our guidance range, 2, fueled by over performance across both physician staffing and education. Compared to the prior year and prior quarter, revenue was down 28% 13% respectively, driven in large part by the expected normalization in travel bill rates and to a lesser extent a decline in number of professionals on assignment. I'll get into more details on the segments in just a few minutes.

Speaker 3

2017. Gross profit for the quarter was $123,000,000 which represented a gross margin of 22.8 percent and gross margin was up 40 basis points sequentially due primarily to the impact from the annual payroll tax reset at the start of the year. Moving down the income statement, selling, general and administrative expense was $79,000,000 20, down 6% sequentially and 8% over the prior year. The majority of the decrease relates to lower variable compensation following the historic performance throughout the pandemic, as well as the reductions in salary and benefit costs we mentioned last quarter. Our goal remains to proactively balance investments with current market conditions to maintain our profitability, while while ensuring we have sufficient capacity for future growth.

Speaker 3

Including actions taken throughout the Q2 and into the start of Q3, We've reduced our internal headcount by more than 10% since the start of the year, while continuing to invest in areas of the business with the highest growth potential as well as in our technology initiatives. 18. Based on the cost actions taken to date, as well as lower compensation associated with the sequential decline in revenue, We anticipate our SG and A will decline in the mid to high single digits for the Q3. As a percent of revenue, SG and A was 14.6%, up from 13.5% last quarter as the decline in revenue outpaced the reductions in SG and A. The better than expected top line performance coupled with tight cost management drove another quarter of strong earnings with adjusted EBITDA of $44,000,000 representing an adjusted EBITDA margin of 8.2 percent 2, consistent with our goal to maintain margins in the high single to low double digit range.

Speaker 3

Interest expense was $3,100,000 which was down 15% sequentially 18% from the prior year. The decline was entirely driven by lower average borrowings during the quarter, partly offset by higher interest 2019. Our effective interest rate for the quarter was 12%, reflecting the reduction in borrowings under our ABL. 2017. At the end of the quarter, we prepaid the remaining balance on the subordinated term loan and therefore expect to see interest expense materially lower for the 3rd quarter.

Speaker 3

2017. And as a result of the prepayment of our term loan, we incurred $1,700,000 on the extinguishment for the write off of the debt issuance costs. 2. Also on the income statement, we recorded $900,000 in restructuring costs, primarily related to the severance associated with the reduction in headcount I mentioned a moment ago. 20.

Speaker 3

And finally on the income statement, income tax expense was $9,000,000 representing an effective tax rate of 29.6 percent, in line with 2. We expect expectations for a full year effective tax rate of between 29% 30%. Our performance resulted in adjusted earnings per share of $0.69 2. Above the high end of guidance driven by the overall strong performance and lower interest expense. Turning to the segments, Nurse and Allied reported revenue of $495,000,000 down 15% sequentially and 32% from the prior year.

Speaker 3

Our largest business, Travel Nurse and Allied, was down 16% sequentially and down 36% from the prior year. Bill rates for travel were down 7% sequentially, in line with expectations, 2017. While billable hours were down almost 10%, following the softness we experienced in orders throughout the first half of the year. The decline relative to the prior year was 2017. While billable hours are expected to decline in the low double digits.

Speaker 3

Let me just spend a moment on that. As we called out demand softened considerably coming into the start of the year before troughing in the 2nd quarter. 20. And while total orders are gradually improving, average bill rates continue to soften, which is creating a gap with pay expectations by clinicians. 20.

Speaker 3

As a result, we are not yet seeing an improvement in weekly production leading to a slightly softer third quarter than we anticipated a few months ago when we saw orders rebounding. 20. That said, we remain optimistic that as seasonal needs pick up, we will start to see our travelers on assignment grow once again. It's worth noting that we continue to have more than double the number of travelers as we did prior to the pandemic. Our local or per diem business continues to feel the impact from the softness in demand with revenue down approximately 9% from the prior quarter, predominantly due to a decline in billable hours.

Speaker 3

Also within Nurse and Allied segment, our education business continued its trend of robust growth, growing more than 40% over the prior year. 20. Home Care Staffing Services performed within our expectations, though down 2% over the prior year, predominantly due to lower needs from a single client. 20. Both of these businesses remain on track to achieve an annual run rate of approximately $100,000,000 each.

Speaker 3

Finally, physician staffing once Again, exceeded our expectations delivering $45,000,000 in revenue, which was up 12% sequentially and more than double the prior year, thanks to the impact of our acquisitions completed late last year. Turning to the balance sheet, we ended the quarter with $673,000 in cash $31,000,000 in outstanding debt under our ABL facility. Given our continued strong performance and positive cash flow, our total leverage fell to less than 0.2 times. With the help of our balance sheet and incredibly low leverage, we remain well positioned to make further investments in technology and acquisitions as well as to continue purchasing shares under our $100,000,000 share repurchase plan. From a cash flow perspective, we generated $119,000,000 in cash from operations, our 2nd highest quarter on record as compared with $18,000,000 last year $46,000,000 last quarter.

Speaker 3

The $166,000,000 in cash generated from operations on a year to date basis represented 172% conversion on the $97,000,000 in year to date adjusted EBITDA. 2. Fueling this performance was strong collections that drove a further reduction in DSO, which now stands at 63 days. Our goal remains to bring DSO below 60 days, which is more reflecting our continued ramp in technology investments. And from a financing activity perspective, we paid down $110,000,000 in and repurchased almost 200,000 shares under our 10b5-1 trading plan during the blackout windows.

Speaker 3

Having retired our expense of subordinated debt and paying down a considerable portion of the ABL, we anticipate being opportunistic in making additional share repurchases when possible in the Q3. This brings me to our outlook for the Q3. We're guiding to revenue of between $440,000,000 $450,000,000 representing a sequential decline of 17% to 19%, 20, driven predominantly by the softness in travel bill rates and volumes as well as the impact from summer vacation on our education business. We're expecting adjusted EBITDA to be between $27,000,000 $32,000,000 representing an adjusted EBITDA margin of approximately 6 2% to 7%. As John has mentioned previously, we're managing this business to the longer term success and not to a single quarter.

Speaker 3

We continue to believe this business can achieve and maintain high single to low double digit adjusted EBITDA margins. Adjusted earnings per share is expected to

Speaker 4

be between

Speaker 3

0.35 $0.45 based on an average share count of 35,500,000 shares. Also assumed in our guidance is a gross margin of between 22.5% 23%, 20. Interest expense of $1,500,000 depreciation and amortization expense of $4,500,000 stock based compensation of $2,500,000 and effective tax rate of 30%. And that concludes our prepared remarks, and we'd now like to open the line for questions. Operator?

Operator

Thank you. We will now begin the question and answer session. 18. 18 question comes from Brian Tanquilut with Jefferies. Your line is open.

Speaker 5

Hi, this is Noor in for Brian. Congrats on the Q2. I guess I just want to take a step back and get your opinion on where you think your 2. Relationship with MSPs will be moving forward. We'd love to get

Speaker 6

some clarity on that front. Thanks.

Speaker 2

Sure. Hey, Nora, this is John. MSPs are still a vital part of Cross Country strategy, 20. Look, what we've seen since probably last summer, the sentiment has changed in the marketplace where 2. Hospitals are moving more towards the vendor neutral space.

Speaker 2

And that in this industry that has been cyclical where Throughout the years, it changes, which is the flavor of the day going back from predominantly vendor neutral to predominantly MSP. And we're in a market right now where it's moving towards that vendor neutral VMS. And Cross Country, we feel very we're very excited about our prospects in the vendor neutral space right now and be able to compete in that vendor neutral space. When we launched Intellify at our Investor Day in September, 20. That was showing it was originally when we invested in Telafi.

Speaker 2

It was to be a replacement for the 3rd party VMSs we have for MSPs. 20. But as we saw the sentiment of the market change to the VMS vendor neutral space, we were able to quickly pivot Intellify into a vendor neutral platform. And we then in January officially launched our Intellify Talent Solutions business, our vendor neutral business. 18.

Speaker 2

We hired Eric Christiansen, who has been a pioneer in the vendor neutral space, to come on board. And within, as we mentioned in my prepared remarks, In the Q1, we won our 1st vendor neutral deal and by May we had implemented that deal and we are implementing our 2nd deal in vendor neutral. So we're very excited about the prospects 18. About what the vendor neutral business and Intellify brings to the market, because from what we are hearing from our prospects, 2. Our clients that are on it and our vendor partners is it is a totally differentiated 20.

Speaker 2

Model than the other vendor management programs out there in the market. So we're really excited about that aspect, but we also at Cross 20. We are still working and have a full sales team selling MSPs, but it's really making sure that we deliver to the client 2. What is the model that they want as to be most effective for them?

Speaker 7

Nora, this is Dan. I'm going to add just a little bit. As John said, 20. Our pipeline remains really strong. And I would say just thinking about the mix 20.

Speaker 7

Between the vendor neutral and MSP, there's probably close to 60%, 65% that are Q2. More in this neutral sort of desired state and maybe 35 ish, 40% in the MSP 2

Speaker 1

category. All right. Thank you.

Operator

Thank you. Next, we will hear from Trevor Romeo with William Blair. You may proceed.

Speaker 6

Hi, good afternoon. Thanks a lot for taking the questions. 18. First, I kind of just wanted to ask about your confidence and demand trends and visibility. Just kind of given the step down in revenue you're guiding to for Q3 2.

Speaker 6

And a reduction to the minimum full year guide. So just a couple of questions on that front. I guess, one, have you built any extra conservatism into the guide, kind of given the environment? And then specifically, could we dive a bit more into that comment about the gap in order rates and the compensation nurses are seeking? Could you maybe flesh that out a bit more?

Speaker 3

2. Yes. Trevor, this is Bill. Thanks for the question. I guess I'd start with your first question, which is do we build in conservatism?

Speaker 3

I mean, I think we try Our darndest to give you the numbers we have the utmost confidence that we can continue to exceed. It It was not something we took lightly to reduce the min guide to $2,050,000,000 from the $2,100,000,000 But in the context of the market and This kind of gets into the second part of the question where demand has rebounded. The net weeks booked or how we look at our production, our weekly production 20. Hasn't bounced up as high as we'd like. And so we're just seeing a little bit of a softness in that Q3 going into the Q4.

Speaker 3

We still anticipate the 3rd quarter is the trough. 20. Now that min guide that we have, if you squeezed out the numbers to what does that imply for the Q4, you would say it doesn't show a big bounce off of the Q3. In fact, it's virtually Flat if you took the midpoint of the guidance range. I would not read into that.

Speaker 3

I still think that the Q4 at this point is an upward trend off of the 3rd quarter. 20. That said, there's still some headwinds in the marketplace. We still have bill rate pressures. If there's one little silver lining, although demand has 20.

Speaker 3

Trended up over since the trough in kind of mid April. We've not seen a continued deterioration in the open order bill rate. So those bill rates have been remained pretty stable over the last call it 3 plus months. We're still winding those through our entire 2. And that's what really gives us the rate pressure going into Q3 and Q4.

Speaker 2

And I would add, Trevor, this is John Martins, What we're seeing for the second part of your question is that the nurse pay expectation, 20. There's a disparity between what the bill rates for the hospitals are right now. And it will come to an equilibrium, we believe, in the upcoming months. 20. And part of that will be as we start seeing the flu orders coming in and demand potentially spiking higher, we'll see the bill rate and pay rate 20.

Speaker 2

Equal to where it will be where both sides will come together to feel that's the adequate bill rate and the appropriate pay rate. 20. And that's when we'll start seeing really the volumes to start picking up in the back half of the year.

Speaker 6

2. Okay. Thanks, John and Bill. That was helpful color. I guess as my follow-up, just kind of on the levels of contingent or contract labor at the Hospitals right now, I think some of the public facility operators have reported in the last week.

Speaker 6

It sounds like some are kind of comfortable with the levels that they have now, 2. I might be expecting further moderation. Just kind of wondering if you could give us your view of kind of broadly how your clients are thinking about the level of contingent staff they have now and And where they are in that normalization process?

Speaker 2

Yes. I think most majority of the clients right now feel that they've gotten to the appropriate levels, 20. Bill rates are trending down, especially the bill rates that we're opening up are trending more down towards that 30% to 35% above COVID levels. 20. And in terms of volumes, I think that we're still hearing that there is still the need on the floor for more nurses.

Speaker 2

20. And so I think as we get to that right bill rate, the hospitals are more willing now to see it as a strategic key to bring in travelers to help them grow their revenue and volumes.

Speaker 6

Okay. Thank you. That was helpful. Appreciate it.

Operator

2. Our next question will come from Tobey Sommer with Truist Securities. Your line is open.

Speaker 4

20. Thanks. I wanted to ask you about the seasonal orders that typically come in over the winter, perhaps 18. For a slightly higher rate, what's your anticipation of how that will play out? 20.

Speaker 4

And do you have any visibility into that at this point or is that still forthcoming? 20.

Speaker 2

So this is John Tovey. So it's still forthcoming. What we're seeing right now, we're seeing our clients looking toward to 20. Bringing on 26 week contracts that will get them through the early part of the flu season and get them through the New Year. And so we're seeing a trickle of some of the flu or winter needs and we're seeing but we're seeing more of the 26 week needs.

Speaker 2

20. And the sentiment we're getting from our clients are that they're still waiting, and it will be a little bit more just in time, if you will, rather than preparing and planning out further as we've seen previous pre COVID of looking and really trying to get ahead of winter needs.

Speaker 4

And just to be clear, as we head into 20 24% is annualizing that kind of slightly higher 4th quarter revenue number and 2. Sustaining an 8% EBITDA margin, is that how we think about or is that in flux at this point?

Speaker 3

Hey, Tobey, it's Bill. 20. Yes. I think that's a good run rate to assume going into 2024. I think there's potential, of course, for some 20.

Speaker 3

Continued bill rate pressure, but not expecting. We've been pretty close on how we've modeled out the bill rates so far. So if that plays out that way, 2. I think that's a good jump off point. If there is a little headwind, then it really comes down to the ability for volumes to offset or the other lines of business that have been having pretty robust growth like

Speaker 4

2. And could you talk about 20. MSP churn, something we've heard about in the industry. A lot of people are describing it to move to 2. Vendor neutral, even many staffing led MSPs kind of looking and seeming like vendor neutral at this stage.

Speaker 4

20. Love to get your perspective and whether you think we're kind of more than half the way through the post 20. Pandemic churn that is likely or there's still a lot to come?

Speaker 2

Sure. This is John Tobey. I think there is we're probably not halfway through the churn going through out there in the market. 20. The sentiment has turned over the last year towards the vendor neutral moving towards the vendor neutral platforms.

Speaker 2

And 20. We've been pretty transparent that we've had a higher churn than we've historically seen as well and those losses have 2. Come to, for the most part, to the vendor neutral players. And that's one of the reasons, as I mentioned earlier, why it was important for us to launch Intellify To be able to play in that space and having our first two wins of the year and implementing both of those is key for us to gain market share in that space. And 20.

Speaker 2

It's very typical. I'll tell you back right after the great recession in 2,008, 2009, we saw a move to vendor neutral at that point as well. 10. And then once the Affordable Care Act came into play in 2014, 2015, we saw MSPs become the flavor of the day for about a 5 year period, 20. Actually probably through the pandemic where it was probably a fifty-fifty split between MSP and VMS and now it's moving towards that VMS.

Speaker 2

20. And to your point, yes, even strategically led MSPs are now looking a lot like vendor neutral. Now here's what I'll tell you why that's 2. Not bad for us. And even in some of the churn that we've had ourselves, we have developed such great long term relationships.

Speaker 2

20. And because how we've acted ethically with our clients and how we perform for our clients over the years, when we do lose a client of churn to a VMS, 20. In most cases, we actually become a preferred vendor and or even a Tier 0, which means we actually still receive the orders first. 20. And the other thing that we've seen when we do go and have this churn on these clients is that many times 2.

Speaker 2

We are only a portion of a large health systems MSP, and there'll be another MSP vendor in there. And when they consolidate under one platform, 2. We'll then be able to be Tier 0 in the whole system. We had one last year that we had lost and now we actually have more travelers on assignment 2. In that former MSP because we have access now to the whole system.

Speaker 2

So to answer your question, yes, we're definitely seeing it more towards go to vendor neutral. 2. We think we position Cross Country very well with the Intellify rollout. We believe our technology Intellify with our 20. Internal resource pool, our technology, our apps that all support clients to white label this technology for themselves, 2.

Speaker 2

To create and utilize Intellify for their own internal travel pools as well positions us well to capture market share in that Venator space. Dan, did you have something?

Speaker 7

20. Yes. Toby, I just wanted to add a little bit more color to this idea of churn. It's really important to remember that these contracts Whether they're vendor neutral or not are typically 3 years. And when you take into consideration that no one was doing anything through the pandemic, 20.

Speaker 7

It just makes sense, right, that a lot of this activity is happening because it's just 20. Sort of supply chain hygiene, if you will, right, to get back on track with that activity. So 20. We expect there to be a lot of activity. We see lots of RFPs and lots of Activity is coming from all kinds of sources.

Speaker 2

And this is John again, Tobey. I would just add the other thing is, this is probably the biggest pipeline we've had between vendor neutral and MSP that Cross 18. So there is a lot of churn in the market and it seems like healthcare systems are all reevaluating what they're going to do and which model they're moving forward with.

Speaker 4

20. Thanks for all that context. Just as a follow-up, are you winning or losing share amid 20. All of those, all that pipeline and activity in the marketplace.

Speaker 2

Right now, I think we probably lost a little bit of share, 20. You have a couple of factors, right? So you have bill rates coming down, volumes coming down. We're still 20. Well over $1,000,000,000 of spend under management in our MSPs and now we're adding on to vendor neutral.

Speaker 2

So as I think we will get a little bit, I think this is a long term gain for us. And as we're just getting into the ventral space, I think we'll quickly make that up.

Speaker 3

And Tobey, it's Bill. Look, I mean, I think you asked the question of where we are in the process. I'd say it's still early innings for Intellify. We John called out the 50% converted 2. On the MSP program, so we've got that much of our spend already live.

Speaker 3

We've obviously got a roadmap to convert more by the end of Q3. I think that number will be north of 75% and 20. We've got 1 vendor neutral live, 1 being implemented. So it's early innings for Intellify, but it's making great strides.

Speaker 1

2. Thank you.

Operator

Smart Company. Your line is open.

Speaker 8

Thank you. Nice work guys on the quarter. 20. Bill, can you go through the 4Q seasonality? Just remind us, I know education rebound strongly.

Speaker 8

What else do you see usually?

Speaker 3

2. I could say that the businesses that usually see some seasonality in the Q4 Locum Tenant and this is 20. Historical, not what we expect to play out because there's such tailwinds there. But historically, locums would see a small low single digit sequential decline going in the 4th quarter. We're not anticipating that.

Speaker 3

I would actually say we'll probably see sequential growth going into the Q4 in that business. Education, you mentioned, they come off of their lowest point of the year. In In fact, they'll be down about 25% sequentially, but the growth going into the Q4 because of the new school year that there could be 35% sequential growth. So they usually bounce up even higher than they were in the quarter before that. So I think we'll see really good growth there.

Speaker 3

The travel business, we don't tend to see a lot of seasonality in the Q4 for us. Believe it or not, that's Actually a little bit of a slower start to the Q1. And then in our local business, I'd say the holidays tend to impact us a little bit more as you go through the Thanksgiving and The year end holidays, Christmas, New Year's, etcetera. So those are the general impacts that we see into the Q4. They tend to get muted out.

Speaker 3

I mean, so you have education come back, you have a little bit 10. Headwinds on the local side and I think in this case, local tenants will be a tailwind. So I don't anticipate a big seasonal change in the other businesses. That's going to Drive the revenue numbers.

Speaker 8

Okay. Hey, John, is your physician staffing business all locums now or do you still have recruiting and placement?

Speaker 2

20. It's 99% Locum's. I think it's very little. It's a 99 point 20. 5% probably very high, Bill can give that number.

Speaker 2

It's majority of it is locums. And look, that's one of the areas We're excited along with Education and Home Care where we're growing those businesses and it's a very good market for Locums, Bill. 20. And as Bill Burns mentioned, that business is up 32% year over year organically, 105% with our acquisitions of Mint and Lotus. 20.

Speaker 2

We're going to make that business will be $180,000,000 business. And it's interesting when you start looking at the diversification of Cross Country, and as we start 20. To grow significantly into Locum's become a much more major player in the Locum space, our education business It's a business that we acquired in 2015 and has done well historically for us, but on higher revenue we grew it year over year 42% and That's a business that will be $100,000,000 business as well. Our home care business required a little over 2 years ago. That is 2.

Speaker 2

It will be over $100,000,000 businesses. So as you start looking at Cross Country and how we've really executed at such a different level over the past 4 years, 20. It's really been an amazing turnaround of what's happened. As we look at our nurse and allied business, our travel nurse and allied business, and yes, we've had these 20. COVID tailwinds, but we believe we've executed at market or above market during the whole pandemic and still currently to today.

Speaker 2

20. And as the market is the market in travel nursing right now and it's obviously it's the bill rates have come down and volumes Come down, we anticipate those take a look through the end of the year. Cross Country continues to execute at a very high level. And if we look at our nursing 2. Right, I'm sorry, our locums, our education and our home care business, those are all executing at a high level.

Speaker 2

So we're very excited about the prospects. 20.

Speaker 7

Dan? Bill, I just figured I would add some color since you were asking a little bit about sort of perm placement, if you will. 2. I think it's important to note that in addition to whatever new sales we're making, we've had really great success 2. Cross selling into the accounts that we already have.

Speaker 7

So we've had 18 different services added into our client base. 18. 6 of those are in that RPO search kind of business. But as John mentioned, interim leadership, 18. Locums are all really doing nicely in our base accounts.

Speaker 7

And I figure I would also add, 20. We had our first home care PACE program go live also on Intellify. So 20. It's really getting hitting across all of the businesses, locums, our pay centers, etcetera, are all now On that same tech platform.

Speaker 8

Dan, is that Intellify for a PACE center? Is that a 2nd vendor neutral?

Speaker 7

No, that is not a new customer. That is implemented in an existing PACE customer.

Speaker 2

And this is John, Bill. That is actually a MSO or an MSP, it's technically an MSP that one, right?

Speaker 8

Okay. Allied is, I don't think that got mentioned. I'm just kind of curious kind of how that's Doing and sides of it inside Nurse and Allied?

Speaker 3

Yes. I mean, the Travel Allied side of the business is actually faring quite well. When you look at 20. That relative to travel RNs, I'd say that the rate reductions haven't been as steep, the volume declines haven't been as steep. 20.

Speaker 3

It's on track, I would say, to be north of a $400,000,000 business and well north of that. It depends how the year trajectory 2 plays out, but it's a good size of the travel business. Yes. This is Mark. Just to

Speaker 2

add a little

Speaker 9

more. Imaging continues to see robust demand. Cath Lab, X-ray, MRI, we term it the path of the surgery, pre, post, 20. Continues to see very heavy demand. Anything related to cardiovascular services, also very high demand on the Allied space.

Speaker 8

And then just we wrap up with just revisiting this situation here with the nurses and their pay expectation. 2. So you're just figuring that as the recs go unfilled, hospitals get frustrated, 2. They start to put out the put give you the pay rates that you can actually fill the rack. That's kind of just the natural progression you're expecting?

Speaker 2

I think it's more of a combination. I think nurses 18. And rightly so through the pandemic, right, going into the burning building as we needed them, their pay had increased during these crisis needs quite high. 20. And now the expectations as these bill rates are coming down, as the pay rates are coming down.

Speaker 2

So I think there's a natural We will hit where bill rates will still settle in where we think they will 30% to 35% above pre COVID levels and the nurses We'll understand that that's where the market is now of the pay rate. And we think that will happen, as demand continues to increase. 20. So maybe hospitals will bring some of their and I would say about half our orders that we have on open demand, half of them are probably below the market 2. Of where we need to fill and half of them are probably at the market where we need to fill.

Speaker 2

So those ones that are below the market, yes, we do anticipate some of those rates will come up. We We also anticipate that the nurses pay expectation on the higher end of the market will come down more to where the market rates are, if that makes sense.

Speaker 8

20. Yes. And so what happens with the spread, John, in that case?

Speaker 2

The spread should have very little impact to us on the gross margin spread because The nurses' pay will come down as in line with the gross with the pay with the bill, I'm sorry. But 20. With that said, in a tighter market, you could see a little bit more pressure on margins. But up to this point, we have not seen a tremendous amount 20. Pressure on margins.

Speaker 2

So Bill, I don't know if

Speaker 6

you want to add

Speaker 2

that. Yes.

Speaker 3

Bill, I would just add that for the Q2, we saw bill pay housing spreads. It's important to include that as well because that was Part of what was holding down gross margin on a year over year is up over 40 basis points. So we're seeing that the bill pay spread is Holding up as bill rates are coming down, but it is slowing down some of the production for folks making a decision to take an assignment. So you've got those two 20. Need to settle into that equilibrium John mentioned.

Speaker 8

Okay. Thanks again.

Speaker 2

Sure.

Operator

2. Our next question will come from Kevin Fischbeck with Bank of America. Your line is open.

Speaker 10

Hey, Kevin. 2. I just wanted to maybe go back to another question about the visibility that you have. I guess this is the 2nd time you cut guidance this year. And when you think about kind of where that shortfall has has materialized versus your initial expectations.

Speaker 10

Where has that been? And I guess you feel like 2. You have better visibility today on that driver or is that still kind of a influx moving target that's 2. It's hard to fully pin down.

Speaker 3

Hey, Kevin, it's Bill. Look, I think the expectation was a few months ago that we would see that 2. Curve bending on the number of travelers on assignments starting to regrow earlier in the Q3. We've seen it level off and we're seeing 20. Some modest improvement throughout the quarter, but not to the degree we wanted.

Speaker 3

So that's really what it is. It's coming back to saying the Q3 seems to be still be the trough, The outlook improving. We have bill rates that have stabilized in the market, still improving demand in the backdrop. So it points to that Q4 and as you get the seasonal needs that we expect, it's something we've seen every year. So 20?

Speaker 3

It is expected to come through. That will give that extra little bit of uplift that we're expecting to make the Q4 That turning point on the volume side.

Speaker 10

And I guess maybe that earlier point that John made about the That some of these orders, these 26 week orders are people are waiting on it, and that you may expect it to be more just in time. I mean, Is there a reason why people would be waiting on it or does that increase the risk that you won't see that seasonal increase that you would normally be expecting?

Speaker 2

Yes. So I think it was 2 parts. Two parts is we're seeing the 26 week orders come in now as hospitals want to lock in the clinicians longer, but 2. For the flu season, but what we're seeing is historically pre COVID, we would see these flu or winter orders start coming in July and certainly by now entering August would start seeing them come in a much more higher volume. 18.

Speaker 2

That's not happening now and the sentiment we're hearing from our clients is that they're just waiting because these orders while we receive them now, The clinicians will start in the Q4 and then into the Q1. They're just waiting a little closer to see where their needs are going to be and how they want to manage that contingent labor. The other thing we're also hearing is that, there is for the RSV, which 22. Hit hard last year, there is now a vaccine that is going to come out on the market and get approved. It depends what age group that will be approved for.

Speaker 2

When the pediatric hospitals 2nd. Find out what age group that will be approved for, that will also depend how many clinicians they'll need because if it's approved for an infant, 2. They'll need less contingency labor. If it's only improved for a 5 year old or older, they will need more. So there's a couple of factors why they're waiting.

Operator

Will come from A. J. Rice with Credit Suisse. You may proceed.

Speaker 5

Hi, everybody. Thanks. And I missed At the beginning a little bit, so I'm sorry if I do duplicate this. But it sounds like you were down about 9% in Travelers on assignment in Q2 from Q1, if I got that right. But it sounds like you're saying orders were there.

Speaker 5

It's just that the 20. People became unwilling to fill those orders because they had higher expectation on pricing. Is that right? Or is this more 22. A go forward phenomenon that you're mainly trying to call out today.

Speaker 3

It's not a perfect correlation 20. To be clear, so I think orders had fell so sharply that the decline in TOA was going to happen. We had signaled that last quarter. The rebound in orders is there, but as we said that we're just not seeing the weekly production ramp as quickly following the order trends. So 20?

Speaker 3

It's a timing issue of building back the travelers on assignment rather than whether there's enough orders. There's the orders are there, I think, To be able to put the travelers back on assignment, but it's a little bit of what John had talked about, about the pay expectations relative to the open orders that are there today. So 20. We have every expectation that we're going to see the TOA grow as we move through the quarter and as we get into the start of the 4th quarter.

Speaker 5

2. Okay. I mean there's a couple of things and maybe these are dumb questions, but I'm going to ask. 20. We hear this anecdotal stuff from people that are travelers and they're making so much money 20.

Speaker 5

For 9 months, they take the summer off. Is any of this a phenomenon in your mind that travelers haven't engaged for the summer? And when they come back in 2. Paul, then you'll see more plentiful supply to fill some of these orders?

Speaker 9

20. Hey, it's Mark. I mean, we see a little of that. I think that's a little overblown. Most of our travelers 2.

Speaker 9

We'll do 2 or 3 assignments and take time off. It's not just necessarily seasonal. But 20. I think the notion that they made all this money and they're taking the time off is actually not true.

Speaker 5

2. Okay. Another thing we are hearing from the hospital side is that they're accelerating their hiring of permanent labor. 20. As you run through the people that you've been recruiting for travel assignments, are you finding that A percentage of them are just choosing to go back in this environment and back to their traditional permanent assignment.

Speaker 5

Is that part of what's going on?

Speaker 2

That's not a large part. Of course, there's always a portion of nurses who came into the marketplace during the pandemic, who were not travelers, who now are going back to their permanent jobs. But there's I would say there's more nurses that we've gained into the travel nurse pool 2. Because of the pandemic then we've lost going back. And so yes, so there's a small portion have gone back, 20.

Speaker 2

But most travel nurses still want to stay in the market and remain to have that flexible workforce and be part of that gig economy. 20.

Speaker 7

A. J, this is Dan. I would add though, so while it has I'm not disagreeing with anything that's just been said. I would 22. Also mentioned that our RPO customers and our existing client base 20.

Speaker 7

Absolutely are ramping up their own internal TA functions and getting better at this. 20. And that's an area so you might be mixing the 2 and you don't necessarily have to.

Speaker 2

This is John again, E. J. 20. Yes. The hospitals have done a tremendous job of reducing the contingency spend and bringing on 2 permanent nurses.

Speaker 2

But with that said, there is still such a systemic issue in the Q2. Shortage of clinicians and nurses in particular that this is a issue that's not going to be solved by bringing in some of these nurses. The hospitals that have Bringing down their contingency labor spend, they're still in most cases still double of where they were pre COVID. 18. So there's still a lot of need for contingency labor.

Speaker 2

And frankly, especially as Dan was saying with our IPO business, there's still a lot of need 2nd. For more nurses to go back permanently into the perm jobs. So I think this is why we're very Q2. Excited and very bullish upon our industry. While travel nursing has normalized moving back to normalization during COVID and now we're seeing where the bill rates will in the next 20.

Speaker 2

Couple of quarters will come in plateau and will leave 30% to 35% above pre COVID levels and we're seeing demand start to tick up 20. And we'll get that equilibrium for the pay and the bill balance, and we'll start to see those sequential growth throughout the back during the back half of the year. 2. What excites us and why we're bullish is because the systemic issues aren't going away. Whether it's 20.

Speaker 2

The BLS data or the reports, the surveys are coming out, there's just not a solution that will solve this problem 20? Yes, in the near future.

Speaker 5

Okay. Let me just ask one other one. On the comment about 2. Seeing more hospitals being willing to consider better neutral alternatives to MSPs and so forth and you're getting called in 20. To bid on that, I wonder, did you have perfect view before you had Intellify?

Speaker 5

Because it seems like to me Intellify 20. Made you competitive there and really upped your game on the vendor neutral side. So I'm wondering, are you just 18. Seeing more of what may have in some ways already been out there or is it really indeed a big Shift in the way people are thinking about whether they want to try Venerable or not.

Speaker 2

This is John A. J. And we have more visibility now 22. All the programs that hospitals are wanting that we had before because prior to having Intellify, we didn't have a vendor neutral offering. 10.

Speaker 2

And so when our sales teams and we have multiple sales teams going in from a vendor neutral perspective and from a MSP perspective, 2. When we didn't have the vendor neutral sales team, when we were calling in with the MSP, if a client didn't want an MSP, we were essentially shut down. 20. Now that we have 2 different offerings, we're able to go and have visibility onto which of the clients that are focusing on having a vendor neutral VMS and we're getting a seat at that table. Dan, do you want to add something to that?

Speaker 7

Sure. 20. So A. J, you might also think about it this way. Many customers who went into the pandemic with a vendor neutral solution 2 are now coming to us saying, gosh, I wish I had more support and more services.

Speaker 7

And whether that's 20. It's a traditional staffing led MSP or just some additional set of services. 20. They're coming to us with, I wanted something different than what I had going in. So I think a lot of this is just 2.

Speaker 7

Customers, number 1, having to go to market and number 2, seeing alternatives out there that they might not have 22. Had before. I'll use the example of an internal resource pool that real the technology for that really wasn't 20. That available prior to the pandemic and a lot of us have built some pretty sophisticated tools now 2nd quarter. That allow them to do that.

Speaker 7

So coupling on those and internal travel agency 20. Capability and just a lot more sophistication, it's very hard for me 20. To just tell you that, oh, this one is purely vendor neutral and this other one is purely a traditional 20. MSP is just not like that anymore. We have a much more sophisticated and needy In the proper sense, client.

Speaker 5

Okay, great. No, that's helpful. Thanks so much. Uh-huh.

Operator

2. Thank you. Ladies and gentlemen, this does conclude the Q and A period. I'll now turn it back over to John Martin for closing remarks.

Speaker 2

Thank you, Sheila. In closing, I'd like to thank everyone for participating in today's call. And we look forward to updating you on the progress of the company on our next call.

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Earnings Conference Call
Cross Country Healthcare Q2 2023
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