Cross Country Healthcare Inc Q3 FY2021 Earnings Call

Good afternoon, everyone, and welcome to the Cross Country Healthcare's Third Quarter 2021 Earnings conference call. 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. I would now like to turn the call over to Mr. Bill Burns, Cross Country Healthcare's Chief Financial Officer. Thank you, and please go ahead, sir.

Thank you, and good afternoon, everyone. I'm joined today by our Co-Founder and Chief Executive Officer, Kevin Clark, as well as Buffy White, Group President of Workforce Solutions and Services; and John Martins, Group President of Delivery. Today's call will include a discussion of our financial results for the third quarter of 2021 and our outlook for the fourth quarter. A copy of our earnings release is available on our website at crosscountryhealthcare.com. Please note that certain statements made on this call may constitute forward-looking statements. These statements reflect the company's current beliefs based on information currently available to it. As noted in our press release, forward-looking statements can vary materially from actual results and are subject to known and unknown risks, uncertainties, and other factors, including those contained in the company's 2020 annual report on Form 10-K 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. Additionally, we reference non-GAAP financial measures, such as adjusted EBITDA or adjusted earnings per share. Such non-GAAP financial measures are provided as additional information and should not be considered substitutes for or superior to measures calculated in accordance with U.S. GAAP. More information related to these non-GAAP financial measures is contained in our press release. Also during this call, we may refer to pro forma or normalized numbers pertaining to our most recent acquisition as though the results were included or excluded from periods presented. With that, I'll now turn the call over to our Co-Founder and Chief Executive Officer, Kevin Clark.

Thanks, Bill, and thank you to everyone for joining us this afternoon. As we reported today, our third-quarter results once again exceeded expectations, achieving yet another milestone for our company, with consolidated revenue of $374.9 million and adjusted EBITDA of more than $30 million. Equally impressive from a year-to-date perspective, we have surpassed the $1 billion mark for consolidated revenue and achieved more than $80 million in adjusted EBITDA, and our fourth quarter is expected to be even stronger, with year-over-year and sequential growth in all major lines of business. In particular, the number of Nurse and Allied clinicians on travel assignments is expected to more than double in the fourth quarter over the prior year. This historic performance is driven by solid execution across our entire organization. I do not believe, however, that we are simply riding the COVID wave of higher bill rates. I believe our growth is also being fueled by the many actions we have taken over the past two years to digitally transform our company and improve the operational effectiveness of the entire organization. The changes and improvements we have made have allowed us to quickly respond to the record level of demand that we are continuing to see across a wide range of specialties, such as operating room, emergency room, pediatrics, labor and delivery, and medical-surgical services which are not directly related to our clients' COVID needs. It all begins with our people. And it's because of their dedication and willingness to embrace change that we are able to deliver such strong performance. I am so incredibly proud of our entire team for bringing a record number of clinicians to the bedside during this extraordinary time in both our company and our nation's history. As we move through the third quarter, it became apparent that the Delta variant would continue to drive both higher demand and bill rates. Bill will get into the numbers in more detail, but as we called out on the last earnings call, we had expected bill rates for our travel division to decline sequentially in the high single to low double-digit range. Instead, average bill rates rose slightly over the third quarter and are expected to rise again in the fourth quarter. COVID is certainly playing a role in the rising bill rates with regional spikes in demand related to the Delta variant as well as the impact from states and healthcare systems enacting vaccination mandates, which is further stressing an already tight supply environment. However, COVID is only part of the story in the higher bill rates; a growing need in non-COVID assignments, coupled with greater numbers of clinicians leaving the bedside due to factors such as burnout or retirement are also contributing to the increase in bill rates. Although the number of new COVID cases and hospitalizations from the Delta variant are on the decline, we continue to see demand near all-time highs with tens of thousands of openings across the nation in all specialties and across all of our divisions. To give you some context, entering the fourth quarter, we have seen the number of unique facilities requesting travelers double since the first quarter, and our total travel orders have nearly tripled over that same timeframe. Given the broader market conditions of the continued high demand and a very tight labor market, we expect rates will trend down in 2022, but more slowly than we had anticipated last quarter and likely more slowly than the pace at which they increased. Throughout the pandemic, Cross Country has led the way in partnering with our clients to deliver flexible solutions aimed at solving their immediate and long-term challenges. Many have shared their deep appreciation for our support in delivering clinicians and for providing data, industry insights, and market analytics to guide their decisions on the appropriate rates necessary to attract clinicians. One of our core values is to act ethically and responsibly in all that we do, and it has been especially important to have the greatest transparency possible with our clients. We are in this for the long term. While COVID has negatively impacted all of us in so many ways, we have viewed it as an opportunity to build long-lasting relationships with our clients. We will continue to do what is right for our nation, our clients, and the patients they treat as well as our shareholders by preserving, protecting, and building the value and integrity of our business. In addition, our approach to the market continues to fuel our pipeline for new business with both existing and new clients. Sales activity in the third quarter was the strongest we have seen since the pandemic began, securing numerous new direct clients, including several competitor accounts. In addition to new direct staffing contracts, we have also secured a record number of new recruitment process outsourcing arrangements as clients seek to rebuild their permanent staff. Looking ahead, our pipeline for managed service programs remains robust, and I believe that we are well positioned to continue to win a number of sizable programs, which will further grow our spend under management. We have made significant investments in this part of our organization, and I feel we now have one of the most talented and credible sales teams in the market who are able to clearly articulate Cross Country's value proposition. From a candidate perspective, it is clear that Cross Country presents a unique value proposition driven by competitive compensation packages, attractive opportunities, and a commitment to the highest level of service. Our brand is resonating in the marketplace in a big way. One data point we're sharing is the number of first-time travelers with Cross Country has more than doubled and currently makes up more than 40% of new weekly travel assignments as clinicians, specifically millennials, continue to embrace the flexibility and personal control that come from being on temporary assignments. We believe that Cross Country is well positioned to capitalize on this emerging trend. Our commitment to excellent service, along with ensuring diversity and inclusion, have resulted in Cross Country receiving a number of recent awards as one of the top staffing companies for women, an award for best places to work, and five top workplace awards from Energage, including an award for top diversity, equity, and inclusion program. Turning to the businesses, let me just spend a moment on our segments. Our largest segment of Nurse and Allied more than doubled over the prior year and was up more than 13% sequentially, both driven primarily by an increase in the number of billable hours and professionals on assignment. Again, I want to reiterate that the continued growth is a direct function of the improved productivity stemming from the changes we have implemented over the past two-plus years. The digital transformation of the organization and the continued investments we have made in incremental revenue producers throughout 2021. We look forward to making continued progress as we continue to execute against our strategic plan. Our local business, which has been re-imagined through the introduction of our marketplace candidate app and restructured with the elimination of redundant organizational infrastructure and its office footprint, is making solid progress and recently has experienced some of the strongest performance weeks since the pandemic started. This business has performed better than expected, with third-quarter revenue up 11% over the prior year, and we are expecting continued sequential weekly revenue growth throughout the fourth quarter. As expected, the education business declined sequentially due to the impact from summer holidays. However, similar to our other lines of business, outperformed relative to our guidance and the prior year. With the start of the new school year, we are excited at the prospects for this business to continue its return to pre-COVID growth rates. Also contributing to the third quarter were the results from our most recent acquisition of Workforce Solutions Group, which closed in June of this year. As a reminder, WSG expands our footprint in the home care market and aligns with our strategy of following the patient by delivering quality clinicians across the entire continuum of care. In addition to traditional staffing, WSG offers managed service outsourcing arrangements or MSOs, which function similarly to our managed service programs, except that they provide clinical support in home health. On a pro forma basis, WSG continues to experience significant growth, with revenue up more than 75% and a gross margin several hundred basis points above the segment average. Looking ahead, we continue to expect above-average growth, having recently implemented two new MSO programs and with an active pipeline for future opportunities. With respect to our integration, we are taking steps to ensure we maximize the cross-selling and fulfillment opportunities across the organization by leveraging the full complement of resources at Cross Country, including tapping into our extensive database. This acquisition also expands our go-to-market strategy and expands service offerings to our clients. From an operational perspective, integration efforts remain on track to be largely completed by the end of this year. We are also encouraged by the turnaround and trajectory of the local tenants business as it continues to recover from the impact of COVID. Locum's revenue was up 20% sequentially and 14% over the prior year, with the majority of the growth coming from an increase in volume from primary care physicians and nurse practitioners. Our managed service programs, or MSPs, continue to represent a significant portion of our business, representing 48% of consolidated revenue for the quarter. Total spend under management was nearly $1 billion, up 6% over the prior quarter, and our capture rate was approximately 69%. Given the combination of strong demand and a proven ability to execute, we have continued to make significant investments in our business, both in additional resources and in technology. From a resource perspective, we have grown our organization's headcount by nearly 30% in 2021, with more than 90% in revenue-producing roles. The majority of these resources are ramping quickly, and I believe we now have a deeper bench of revenue producers than at any time in the company's history. From a technology perspective, we continue to make solid progress with enhancing and further deploying our applicant tracking system, or ATS, with further deployments scheduled over the coming quarters. In addition to the ATS, we continue to make significant investments in both client and candidate-facing tools. From the candidate perspective, we are continuing to build out a complete self-service portal that candidates can use across the entire engagement life cycle. Overall, I'm highly encouraged by the progress we have made in just a couple of years to digitally transform this company, positioning this company as the innovative leader. Looking ahead, our fourth quarter guidance points to another record quarter in the company's history. We expect consolidated revenue between $580 million and $590 million representing sequential growth of 55% to 57%, while practically all lines within nurse and allied are anticipated to grow sequentially, most of the growth is expected across travel nurse and allied. Although average bill rates for the travel business are projected to be up 25% to 30%, the majority of the sequential growth is expected from a continued rise in hours worked as we continue to take market share and expand the headcount on assignment. From a profitability perspective, we anticipate adjusted EBITDA to be between $63 million and $68 million, representing an adjusted EBITDA margin of between 11% and 11.5%, well above the 8% achieved this quarter. As we look beyond the fourth quarter, we expect headwinds from declining rates in 2022 and the pullback in demand for certain specialties such as respiratory therapists. However, we also expect to see continued volume growth across our portfolio as we continue to grow our market share. Although we don't provide guidance beyond the next quarter, I believe that given our current level of production, our revenue run rate for the first two quarters in 2022 should remain higher than our third quarter. Finally, we at Cross Country recognize the disparities certain communities face in health outcomes due to their racial makeup and ethnicity. The pandemic has certainly highlighted these challenges in marginalized communities, and we are especially proud that our recent acquisition of Workforce Solutions Group specifically targets these underserved communities and is making a positive impact by providing an opportunity for patients across every spectrum to live a healthy life. I want to thank our thousands of health care professionals and our corporate employees who promote health equity every day. I couldn't be more proud of the work they are doing. Now let me turn the call over to Bill to walk us through the results in more detail.

Thanks, Kevin. As Kevin mentioned, we once again exceeded expectations for both revenue and adjusted EBITDA as the company continues on its trajectory of solid execution across multiple fronts. Our ability to attract and place candidates, coupled with favorable bill rates is leading to our fourth quarter not just being the strongest quarter of the year, but in our history. I'll speak to the guidance in just a moment, but first, let me review our results for the third quarter. Consolidated revenue was $374.9 million, up 93% over the prior year and 13% sequentially. While average bill rates have increased over the prior year and sequentially, the majority of the growth has come from an increase in billable hours across our entire portfolio. Looking at the segments, revenue for Nurse and Allied was $356.1 million, representing an increase of 101% over the prior year and 13% sequentially. Within the segment, the travel Nurse and Allied businesses were the primary drivers for the growth. On a sequential basis, the hours for these two businesses were up approximately 10%, while the increase in average bill rates was in the low single digits. As we came into the quarter, bill rates looked to continue the downward trend we have seen throughout much of the first half. But as we progressed through August and into September, we saw continued spikes in urgent needs related to the Delta variant and later to the needs to backfill pertaining to the vaccination mandates. This upward trend is expected to continue into the fourth quarter before peaking late in November or early December. At this point, demand related specifically to the Delta variant for the vaccination mandates has declined, but our overall travel demand remains well above the pre-pandemic levels and near our historic highs. Though we have limited visibility into when or how quickly rates may start to retreat, we expect that they may come down more slowly than they increased and to hold well above pre-pandemic levels for the foreseeable future. Our local business continues to recover from the impact of the pandemic and was up 11% over the prior year, with both rates and volume contributing to the growth. Average bill rates remained relatively flat for this business compared to the second quarter, though still 8% above the prior year. Also, part of this segment, our education business performed better-than-expected despite the anticipated sequential decline from the summer school break. This business grew 77% over the prior year, entirely due to an increase in billable hours as rates remained relatively flat. We're off to a strong start and expect to see double-digit year-over-year growth in the fourth quarter once again. Our only other segment, physician staffing, saw double-digit growth, both sequentially and over the prior year. The growth was broad-based across a wide range of specialties, including primary care and hospitalists, as well as advanced practice specialties such as nurse practitioners. Gross profit for the quarter was $83.8 million, representing a gross margin of 22.4%, which was up 50 basis points sequentially and down 230 basis points versus the prior year. As we've called out previously, gross margin continues to be impacted by the mix of rapid response assignments related to the pandemic as well as the higher-than-normal compensation costs due to the extremely tight labor market. The sequential improvement was driven by both higher-margin for our travel business as well as the favorable impact from the WSG acquisition, which has a margin well above the average for the segment. In general, we believe the gross margin will continue to improve, especially for the travel business as COVID continues to subside. Despite the year-over-year decline in gross margin, the gross profit dollars were up 75% over the prior year, further improving our operating leverage. Total SG&A was $52.8 million for the quarter, up 5% sequentially and 30% over the prior year. Excluding the impact from WSG, SG&A was flat sequentially and up approximately 21% over the prior year. The primary driver of the year-over-year increase is related to the investment in revenue producers from higher salaries and commissions earned on the record performance of the company. With demand remaining strong, we expect to continue making investments in revenue producers to fuel continued organic revenue growth in the coming quarters. There are several other items worth calling out in the income statement. We increased our allowance for doubtful accounts by $1.4 million in connection with the growth in our receivable portfolio, and we incurred approximately $300,000 in continued restructuring costs related to the leases exit over the last two years. Below operating income, interest expense was $2.2 million, primarily attributable to the carrying cost of our new $100 million subordinated term loan entered in connection with the acquisition of WSG. From a balance sheet perspective, we ended the quarter with $800,000 in cash and $104 million in outstanding debt, excluding letters of credit, including subordinated term loan and $4 million in borrowings under our ABL facility. As of September 30, the company was able to access the full line under the ABL. From a cash flow perspective, we had a use of cash from operations of $3 million due to the investments in net working capital associated with the strong sequential growth of our business. Our days sales outstanding were 61 days, up three days since the start of the year. The increase in DSO was largely due to the timing of revenue recognized throughout the quarter given the strong sequential monthly growth throughout the third quarter. Capital expenditures were $1.9 million for the quarter, principally related to the continued investments in our digital transformation. This brings me to our outlook. We expect consolidated revenue to be between $580 million and $590 million, representing a 169% to 174% increase over the prior year and between 55% and 57% sequentially. The majority of the sequential growth is expected to come from an increase in the number of professionals on assignment as well as a sequential increase in the bill rates for our travel Nurse and Allied businesses. Billable hours for travel Nurse and Allied are expected to grow by more than 40% over the third quarter as our investments in revenue producers continue to ramp, and we continue to experience improved productivity. We're guiding to a gross margin of between 22.2% and 22.7%, which represents a 20 basis point decline to a 30 basis point improvement on a sequential basis. Overall, gross margins continue to remain lower than the prior year, primarily as a result of margins realized on rapid response orders related to COVID and an incredibly tight labor market. As a result of the historic organic growth, our adjusted EBITDA for the quarter is expected to be between $63 million and $68 million, representing an adjusted EBITDA margin of 10.9% to 11.5%, and our adjusted earnings per share range is $1.01 to $1.11. Also assumed in this guidance are depreciation and amortization of $2.7 million, interest expense of $2.6 million, stock-based compensation expense of $1.6 million, and 37.7 million shares outstanding. Finally, given our fourth quarter and full year performance, we now expect to fully utilize our federal net operating losses in the current year, nearly two years ahead of our projections. Also, as a result of profitability, we expect to reverse the related $24 million valuation allowance as a credit to our income tax expense line. Our adjusted EPS guidance excludes this credit and reflects an effective tax rate of between 30% and 31%. And this concludes our prepared remarks. At this point, we'd like to open lines for questions.

Our first question comes from Kevin Fischbeck from Bank of America Securities.

I guess it's been a while since you guys have done any kind of meaningful deal. So I would love to see if you could kind of maybe break out the revenue growth this quarter and maybe in the Q4 guidance between kind of what is organic and what is coming from acquisitions?

Yes. Sure, Kevin. This is Bill Burns. Hopefully, you can hear me. As we talked about on the last call, we had about $5 million of revenue in the second quarter, given how late in the quarter the deal had closed. And the current quarter was a run rate of about $20 million.

Okay. And it should be in that $20 million range in Q4 as well?

Yes. We haven't given specific guidance to that, but yes, we are looking towards forward for some sequential growth, but that's a reasonable range.

Okay. And is there any reason to believe that, that business will act any differently? I guess, when we think about home health, it clearly seems to be an acute staffing issue there as well. Do you sort of have the same kind of trends around bill rates and demand? Or should that act any differently versus the core Nurse and Allied business?

Yes. I mean, in terms of bill rates, I mean, we're not seeing the higher bill rates in that business than we're seeing, for example, in the travel business or in some of our other segments. And the story with WSG is it's the market leader in providing home health care staff to seniors, specifically around federally qualified health care centers and pay centers. And it's growing its footprint of customers rapidly, and it's a wonderful story because it's providing both diversified staffing services to these health care clinics. And then through this MSO contract, which we pointed out in our comments earlier, we provide home health caregivers that follow the patient into the home and manage the care plan. Now in that segment, Kevin, as you know, throughout this pandemic, if any part of the labor pool is challenged, it's the hourly worker. And there's a lot of patient care techs and CMAs that work by the hour. And so the challenge in that business is to keep up with growth and find the supply, which does parallel, of course, all the other segments as well, extremely tight labor pool.

Yes. Definitely. And I guess maybe last question, I appreciate you going a little bit beyond what you normally do as far as guidance with that commentary about the first half run rate. I guess, so when we think about 2022, overall, do you think that 2022 will be a top-line growth year? Or do you think it would still be down year-over-year?

What we don't know is how bill rates will evolve. However, we believe that in the first half of the year, our performance will exceed the numbers we reported for Q3. We're observing a decrease in hospitalizations related to the Delta variant, yet we're also facing vaccination mandates. We're cautious about the flu season, which currently seems unlikely to be severe. All these factors influence our guidance. Our strategy is effective; the plan we implemented in 2019 is yielding positive results, and we are once again leading the market. This year, the market is valued at $20 billion, projected to rise to $25 billion next year. We have a concentrated strategy focusing on the continuum of care, from wellness to acute care to outpatient and home health. We are the only company that offers this comprehensive range of services. With strong demand, a limited supply of labor, and a well-defined strategy, we are witnessing significant gains in employee productivity. We continue to grow at Cross Country, with healthcare clinicians employed by the company doubling in Q4 compared to last year. Emerging from the pandemic, we are now a more focused company that has digitally transformed, upgraded our management team, and significantly increased our revenue generators. We are enthusiastic about our future and believe there will be ample demand for a successful year. Based on our guidance, Cross Country Healthcare is likely to achieve an annual run rate of between $2 billion and $2.5 billion in the fourth quarter, indicating strong momentum.

Our next question comes from A.J. Rice from Credit Suisse.

I'm trying to understand the ongoing strength in placements despite the decline in the COVID surge. Can you provide insight into how many of your placements are related to COVID hotspots versus non-COVID assignments and how you see this trend evolving in the fourth quarter and into the first half of next year? Are there assignments from the peak surge in September and October that are likely to extend into the fourth quarter? I'm interested in understanding how placements remain strong even as the surge appears to be diminishing quickly.

I'll begin by addressing that question and ask the team to provide additional insights since it's quite significant. Firstly, we're witnessing a surge in demand across various specialties as deferred costs are finally being addressed. The overall labor market is thriving, with notable increases in job openings in areas such as electric surgery, operating rooms, pediatrics, and emergency medicine. For instance, our Locum's division has experienced a 200% increase in job orders. This widespread demand is accompanied by a shortage in all these specialties. Additionally, amid the ongoing effects of COVID-19, this quarter has seen vaccination mandates that are tightening supply in various regions. While not all states and healthcare systems have these requirements, many do, and this has impacted our business in the fourth quarter. Furthermore, some mandates now include flu shot requirements. We've noticed that in certain areas, these mandates are being delayed or postponed. In the pediatric sector, children’s hospitals currently face a significant challenge, with a dramatic 300% rise in deferred healthcare needs alongside COVID and winter respiratory illnesses. Also, our school business has rebounded, with all students back in school, which is promising especially now that the CDC has approved vaccinations for children, making it unlikely that schools will close again. Given the stress and burnout experienced by many of our clients and the considerable pent-up demand for paid time off, we anticipate being very busy. Buffy, would you like to elaborate on what you're hearing from our clients?

Sure. Thank you, Kevin, and I hope you're doing well, AJ. There are a couple of points to note. While we are still observing some isolated instances of COVID, the impact is much smaller than before. Currently, staffing shortages are mainly related to vacancies within our core staff. Healthcare facilities are experiencing burnout and attrition, and they are working to provide their core staff with the paid time off they missed while managing patient care. They are trying to address these vacancies, partly due to postponed services. Additionally, hospitals are beginning to resume operations, progressively offering elective and preventive services. Some patients may delay treatments until January if they have not met their deductibles yet, which relates to your second question about what to expect in January. There is also concern about coverage as we approach winter, especially since flu activity has been low so far, but we can expect an increase in January, which is typical. The implementation of vaccine mandates is having a significant impact as many healthcare facilities are enforcing them for both core and contingent staff, with deadlines throughout October, November, and December. Some facilities are providing exemptions for religious or medical reasons but typically require weekly testing for those who are exempt. We are observing some variations in these policies. Overall, this situation highlights a low supply of workers, as even temporary staff are feeling fatigued, while there remains a high demand reflected in elevated bill rates. As we enter the holiday season, staffing needs are becoming even more critical, leading to assignment lengths extending back to over 11 weeks, with many looking for longer-term assignments into Q1. Once we reach January and flu cases increase, we can expect a growing need for services that were previously preventive but may now become urgent, as people will begin to address their deferred healthcare needs and work down their deductibles. I agree with everything Kevin mentioned, and I hope this adds some additional insight.

Sure. Maybe if I could just follow-up on that. Can you just comment on how you're doing on fill rates and maybe how that's trended over the last few quarters? It sounds like you're getting a number of more clinicians willing to take these assignments. So I'm wondering, is that keeping up with the demand? Or are you able to fill more of the orders that you fill a higher percentage of the orders that you get right now versus what you could do a quarter or two ago?

John, you want to take that?

Certainly. The demand, particularly as we enter Quarter 3, has reached historic levels. When comparing this surge to the one in Q4 of last year, the number of jobs is nearly double. While bill rates and fill rates can be tricky indicators—due to factors like vaccine mandates and COVID needs—there are thousands of job openings in certain hospitals, and millions overall. We've observed an increase in both volume and the number of clinicians being deployed to these accounts, but the job availability is at an unprecedented level. Therefore, fill rates can be a challenging measure, largely due to the sheer volume of available jobs.

All right. Maybe the one last question would be on the bill pay spread, it sounds like at times in this surge. You guys have been willing to try to help your clients out a little bit to take a little bit of a pressure on the bill pay spread. What's happening with respect to that now? Are you able to hold that? Or is the dynamics of the market such that you're having to give a little concession admittedly at much elevated rates. But what's the trend with bill pay spread?

Kevin?

Yes. From the beginning, we have positioned ourselves as the market leader by establishing price guidelines. Our goal was to support our partners and clients during this unprecedented pandemic, ensuring we attracted the necessary supply and passing most of the bill rate to the healthcare professionals to fulfill orders. As the pandemic subsides, and with the easing of the Delta variant and bill rates, we expect the artificial suppression of approximately 200 to 300 basis points to rebound in line with the broader market. The supply remains tight, which is a favorable situation. We’ve made the right decisions to support our customers, who have shown tremendous loyalty. Recently, I visited one of our largest clients, a major healthcare system, and they expressed their appreciation for our core values and ethical approach. I believe that our decisions will yield positive results for many years ahead. Bill, did you want to add something?

Yes. I mean, covered, I was just going to say, to your point, Kevin, that throughout the pandemic, when we were sending people into the hotspots, specifically around the spikes for COVID, we were certainly looking at ensuring that we were paying what we needed to get the supply where they had to go regardless of what the bill rates were. As we're seeing the mix of demand kind of normalize, I'll call it, to a more normal mix. It's still elevated. To one of your earlier questions. I mean, even as we come into this quarter now, demand still is at least 2x where it was a year ago coming into the quarter. So there's plenty of opportunity there. And I think as that plays itself out, we should start to see the margins normalize. Pay rates certainly went up faster and by a higher percentage than bill rates. I don't know that they'll play out exactly in the reverse order that way. But over the longer term, we would expect periods and bill rates to more normalize.

Our next question comes from Brian Tanquilut from Jefferies.

Congrats on the quarter. This is Jack Slevin speaking for Brian. I wanted to ask about the trends you're observing with nurses taking multiple assignments or repeat assignments with your company. Industry studies suggest that newer nurses in travel staffing tend to have a better experience and are generally more satisfied than those in permanent positions. I'm looking to understand how you track this information. While some of this is tied to bill rates, I'm interested in any insights you have regarding the retention and engagement of newer staff with Cross Country.

Yes, Jack, that's a great question. There are a couple of points to address. Firstly, our renewal rate has remained strong throughout the pandemic, with many of our healthcare clinicians continuing to work with us on multiple assignments. One key point is that most of the current travel nurses and therapists are millennials. This generation is part of the gig economy and tends to prefer flexible contract work over permanent employment for several reasons. They have the freedom to choose when and where they work, earn competitive pay, and have more control over their careers. This trend is significant and will likely persist for many years, especially in the healthcare sector. Additionally, as mentioned earlier, 40% of our new travel assignments are first-time travelers with Cross Country Healthcare. These are experienced nurses who have previously worked in the travel industry. It's important to highlight that Cross Country Healthcare is a preferred employer, as demonstrated by our recent awards. We're noticing that the market is gravitating towards us. We implemented a strategic plan nearly three years ago that effectively transformed the business. We've upgraded our operations and restructured our processes. The experience for healthcare clinicians seeking jobs has dramatically improved; they can now find a job in minutes or hours instead of days, streamlining the hiring process significantly. While we’re excited about the guidance for the fourth quarter, we're still ramping up our efforts at Cross Country Healthcare. We aspire to be the top player in the market again, and our mission is clear. We have competitors who are currently focused on their past performance, but we are gaining ground. Reflecting on our recent sales achievements, we had an exceptional quarter with numerous contract wins across all segments. The unified Cross Country brand is truly resonating. John, do you have anything to add from your perspective?

Thank you, Kevin. Your response was spot on. The only thing I'd add for you, Jack, is that clinicians are looking for three main things, still right, and this is why they're continuing to renew with us looking for competitive pay. They're looking for the quickest process from the door to the floor of their assignments, and they're looking for the flexibility in assignment lengths, whether it's a shorter-term assignment or longer-term assignments. And of course, they're still looking for making sure that they have the right location and the right facility where they want to work at. But I think it's key to be able to get the clinicians and create that incredible experience for them. Is getting them to renew with us more and stay with us as a company. And it's all about really having a frictionless process and an easy button to get the clinicians to stay onboard. And as Kevin mentioned, it really is a lot of these millennials that are working now in the industry, and they've really been baptized in their careers during this pandemic. As you mentioned, they came in there as first-time travelers, and they're really enjoying this gig economy, this experience of being able to go and be on demand where they want to work, when they want to work, and being able to really call their career and really make inroads on how they want to develop their career.

Okay. Got it. Really, really helpful. And then one quick follow-up for me, just on the volume assumptions for 2022 and the commentary there. Just so I understand it right, is that 9,000 average providers on assignment that you put up in Q3 a decent base to think about being able to sustain through 2022? And then second, it looks like, with my kind of back of a napkin math, somewhere between 20% and 30% productivity gains on your sales force relative to the prior year, depending on how much you attribute to WSG. Is that sticky? Or are you going to have to bring more staff on? What's kind of the viewpoint there in order to maintain those volume levels?

Bill, do you want to comment?

Yes, sure. Great question. So the goal, obviously, as we look into 2022 is to maintain and grow our headcount. So really, what we're looking at is we expect, even in the first half, rates will start to trend down, okay? But to Kevin's point, as we exit the fourth quarter with the level of staffing that we'll have at our clients, we expect that to continue and to grow from that point forward. So because we're still gaining productivity, and we're still having our revenue producers ramp from the significant investments we've made throughout the year. It's like you heard in Kevin's script. We've grown our workforce by 30% on an organic basis, and 90% of those were revenue producers. So we've been hiring all throughout the year, and folks are in all stages of tenure. So we'll continue to see productivity gains from that, coupled with the productivity side of just continuing to roll out and deploy new technologies.

Our next question comes from Tobey Sommer from Truist Securities.

I was wondering if you could give us a little bit more granularity into the increase within the sales force itself because you did say 90% of a 30% increase of overall employees. And I understand why you might not want to give us the hard numbers specifically, but if you could be more specific on the growth rate as well as maybe can give us your perspective for how much productivity enhancements you could get over time as they get tenure?

Yes, you're right. Go ahead, Kevin.

Sure, I'll begin. Thanks for the question, Tobey. Our productivity has significantly improved since we embarked on our digital transformation. We've highlighted this, and we continue to see benefits from the technologies we've implemented, including our cloud-based ATS system and many other tools that we prefer to keep confidential, as they are part of what gives us a competitive edge. We are allocating between $12 million and $15 million annually for capital expenditures, not only enhancing the tools available to our employees but also simplifying the job search process. Our marketplace technology, for instance, likely played a role in the strong performance of our per diem MSN division this quarter. We are continuously working to improve and believe there is still considerable potential for increased productivity. Regarding the composition of our workforce, we have substantially expanded the recruiter base in our Cross Country nurses and Cross Country Allied divisions. In fact, every division has seen growth with more recruiters, enhanced training, additional account managers, and a larger sales force. Now, I'll turn it back over to Bill.

Thanks, Kevin. Yes. So it's hard to give you percentage growth in each of the functions, but I can just kind of give us some sense of it spans all types of revenue producers, right? So recruiters chief among them in the area where we've been investing, obviously, account managers as well as additional salespeople and some other revenue-producing support roles in credentialing and onboarders. But that majority of it has been in the first two I mentioned, the recruiters and account managers. But it's been pretty broad-based. And it's not in one particular business. We are investing across the entire portfolio. And so we are adding capacity to all lines of business, I would say.

Yes. Based on typical headcount mix that pre-pandemic, at least, it's 90% of overall 30% increase. It sounds like it's something in the 70%, 80% range. Is that a reasonable estimate on my behalf?

For growth alone, I believe investing in sales-related roles makes sense. The employment mix has clearly changed since pre-pandemic times. During our restructuring in early 2020, we focused on cost reduction, which impacted revenue, leading us to scale down. However, with the market staying strong, we have also made investments. The company's capacity has significantly evolved as we look ahead, contributing to our growth narrative.

So my follow-up question would be margins are great. The revenue growth is very strong. The balance sheet is under-levered. What is your appetite and preference as far as acquisitions? Or is this market just making it difficult to assess the durability of potential acquisitions in their kind of revenue and profit streams?

Yes, Tobey, that's a good question and you're correct in your inquiry. Our pipeline is strong, with many potential targets in education, home care, Locums, and some technology areas. However, valuations are high. We've mentioned this before, but it took us a couple of years to make our first acquisition. We want to pursue more opportunities, but we prioritize value-based investing and do not want to overpay. Our corporate development and finance teams are excellent in analyzing opportunities. I'm in agreement with you that we have a fantastic balance sheet situation right now, and we have great partners in Blackstone and Wells Fargo. We have significant resources available, so stay tuned.

Our next question comes from Kevin Steinke from Barrington Research.

Good afternoon. Just wondering if you've seen any data on how significantly the vaccine mandates are constricting the supply of clinical labor.

Buffy, do you want to talk about labor disruption?

Sure, Ryan. Thank you. We have definitely observed some activity over the past year. Through our Crew 48 organization, we focus on addressing significant staffing challenges due to labor disruptions, such as vacancies. There has been some movement regarding labor disruptions this year. We expect to see more developments in the first half of the year through union contracts and other announcements. We are prepared for this, as we have a division that can quickly mobilize and allocate dedicated resources, managing the entire program including logistics. We feel very ready for what lies ahead in the first half of the year.

Ladies and gentlemen, this does conclude the Q&A period. I'll now turn it back over to Kevin Clark for closing remarks.

Thank you, Jordan. We look forward to continuing to build shareholder value, and we want to thank everyone for joining us this evening, and we look forward to updating you again on our fourth quarter call. Stay safe, everyone, and please get your vaccination. Thank you.

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation. You may now disconnect.