Cross Country Healthcare Inc Q1 FY2022 Earnings Call

Good afternoon, everyone and welcome to the Cross Country Healthcare's Earnings Conference Call for the First Quarter 2022. Please be advised that this call is being recorded and a replay of the 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 Josh Vogel, Cross Country Healthcare Vice President, Investor Relations. Thank you and please go ahead, sir.

Thank you. And good afternoon, everyone. I'm joined today by our President and Chief Executive Officer, John A. Martins, as well as William J. Burns, our Chief Financial Officer. Daniel J. White, Chief Commercial Officer. Buffy Stultz White, Group President of Workforce Solutions, and Marc Krug, Group President of Delivery. Today's call will include a discussion of our financial results for the First Quarter of 2022, as well as our outlook for the second quarter. A copy of our earnings press 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 beliefs based upon 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 2021 annual report on Form 10-K and quarterly reports on Form 10-Q, as well as 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 referenced 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 those calculated in accordance with US GAAP. More information related to these non-GAAP financial measures is contained in our press release. Also during this call, we may refer to proforma when 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 to our Chief Executive Officer, John A. Martins.

Thanks, Josh. And thank you to everyone for joining us this afternoon. I'd like to take a moment to welcome several new individuals to the call. First, welcome Josh, as our new Vice President of Investor Relations. We're looking forward to the value you can bring to Cross Country shareholders, leveraging your nearly 20 years as a sell-side analyst covering healthcare and business services. I'd also like to welcome our newest member of the executive leadership team, Daniel White. Daniel is someone that is well-known across our industry. And I've had the privilege to work with him at a prior company. As we shared in a recent press release, Daniel will serve as Chief Commercial Officer, a newly created role for Cross Country that we can expect will enhance our go-to-market strategy with our proven ability to deliver clinicians. We're investing heavily in driving even more new business. To that end, Daniel will look to augment our current sales team by adding even more experienced professionals from our industry to our talented bench, as well as ensure that the entire sales cycle is as efficient as possible, offering a best-in-class experience for prospective customers. Another individual joining us for the first time, though certainly not new to Cross Country is Marc Krug. Marc was recently promoted to the role I previously held as Group President of Delivery. Since joining Cross Country more than five years ago, Marc has been at the heart of overhauling and refining our delivery capabilities, having nearly tripled the number of travelers on assignment in the last three years. I truly believe that we have the best leadership team in the industry and that the company is still well-positioned for sustained long-term profitable growth. With the culture we've established as a company committed to excellence and ethical practices, it is clear to me that we're quickly becoming the employer of choice for staffing professionals. Just since the start of the year, we have hired more than 300 professionals, 95% of whom are revenue-producing or on operational support roles to fuel the continued strong performance we have demonstrated. I would especially like to thank Kevin Clark for his leadership over the last few years as CEO and since April 1st as our Chairman of the Board. As a result, Cross Country is emerging from the pandemic a digitally transformed, financially stronger company with a continued commitment to clinical excellence, quality, and service. Our ability to deliver in these tough times has solidified our brand reputation as a trusted partner to thousands of clients and tens of thousands of clinicians and professionals. I'm thrilled to be assuming the role of CEO at this pivotal time. With my years of industry experience and background as a software engineer, I see a clear path to building upon the accomplishments of the last three years and expect to establish Cross Country as a digital leader in healthcare staffing, with an emphasis on self-service for both candidates and clients. I'll touch on some of the exciting aspects of our digital roadmap in a few minutes. But first, let me briefly discuss our performance. I'm pleased to share that we've delivered yet another historic milestone in the first quarter for both revenue and profitability. Consolidated revenue was up 140% from the prior year to an all-time high of $789 million. Growth was broad-based with all lines reporting year-over-year increases, with the majority of that growth coming from a more than 100% increase in the number of professionals on assignment. Sequentially, revenue was up 23% driven predominantly by an increase in billable hours and only a relatively minor impact coming from higher bill rates. Relative to the same period in 2020, prior to the onset of the pandemic, first-quarter 2022 revenue was up about four-fold. Again, with the majority coming from growth in the number of professionals on assignment. William will discuss gross margin in more detail shortly. But as I called out previously, we've experienced significantly higher bill rates as a result of rising compensation costs across most specialties. The initial spike at the onset of the pandemic was clearly related to significant risks faced by our professionals on assignment, which continues to a degree today. However, we believe that continued pressure on labor costs is as much a function of the extremely tight labor market, with demand remaining fairly strong amidst a low to mid-single-digit increase in patient census as many of our clients, as well as health systems, struggle to maintain a level of core staff due to burnout, fatigue, and retirements. We also believe that the shortage in core staff is at least partially being driven by healthcare professionals of all ages embracing the gig economy where they can be empowered to choose when and where they want to work as a lifestyle. As a result of this historic revenue growth in our business, as well as operational efficiencies we have realized, including deploying new technologies like the applicant tracking system for our travel business, we have significantly improved our operating leverage. Our continued strong execution has allowed us to report another record quarter for adjusted EBITDA of $97 million representing the second consecutive quarter for adjusted EBITDA margins above 12%. This historic performance was made possible by our dedicated team and their unwavering commitment to the highest quality of service to our customers, clinicians and professionals. Turning to the market, overall demand remains well ahead of the prior year, though down from the peak seen during the pandemic with diminishing COVID needs. Travel orders declined during the first quarter and have stabilized at the level that supports our ability to continue to grow the number of travelers on assignments. Also noteworthy is the robust demand we continue to see across our other lines of business, including local staffing, education, home-health, RPO, and search. With health systems citing increased labor costs and a desire to see contingent usage normalized, we are proactively working with clients to assist them in building up their core staff through our recruitment processing outsourcing solution. Given the competing challenges of a tight labor force, the desire by professionals for flexibility, and the rigors of delivering bedside care, leading to more clinicians to leave the workforce, it is unclear how or when the trend towards higher utilization of contingent staff will normalize. As large health systems work to lower the cost, we continue to see a shift from acute care settings to outpatient, ambulatory care centers, and walk-ins. With our breadth of coverage across the healthcare continuum, we are well-positioned to capitalize on this trend. With demand moderating, particularly for the travel business, we're actively working with clients to normalize bill rates wherever possible. However, as I mentioned a moment ago, the persistent labor shortages are fueling higher labor costs and, as a result, higher bill rates. Given the market dynamics, there will likely be some resistance to the speed at which rates come down or to how far they moderate. Based on the bill rates for open orders in our mix of business, we're anticipating modest sequential declines in the high-single to low-double-digit range throughout the year, ending the year down approximately 35% as compared with the first quarter. Regardless of how rates may evolve, we expect to grow the numbers of professionals on assignments with our second-quarter guidance assuming a mid-single-digit sequential increase in travelers on assignment. Though the pandemic appears to be winding down or at least settling into a new normal, we're extremely proud of our approach and our partnership with our clients, especially across our many managed service program clients. We have thoughtfully and proactively engaged with these clients on their needs and challenges. And as a result, spending in our management for the first quarter was over $2 billion on an annualized basis for the capture rate of approximately 70%. Our success in MSP has been driven by our proven ability to execute and rapidly deliver clinicians to the bedside, as well as building and maintaining high relationships with our broad supplier network to assist in meeting the excess demand. And with the strength of our team and talented sales professionals, we are well-positioned to accelerate the pipeline of opportunities with new large-scale MSP programs. With speed-to-market being paramount to our growth, we're continuing to make significant investments in both people and technology. While we celebrate the more than 1,000 new employees to Cross Country hired in the last year, the investment goes much further. Leveraging predictive indices, we are improving our ability to target the best talent for specific roles. We are also giving them the tools and training they need to be effective in their jobs, so they can hit the ground running. Perhaps most importantly, we continuously reinforce core values such as innovation and accountability. I'm incredibly proud of how quickly we have been able to scale our company, which is a testament to the strength and reputation of the Cross Country brand in the market. On the technology front, we have continued to make considerable investments advancing our digital roadmap. For the first quarter of 2022, we spent nearly $4 million on technology-related projects, which was more than double the prior year. To date, the majority of our tech spend has been internally focused, but we are increasingly shifting investments to be client- and candidate-facing tools. In fact, more than half the spend in the first quarter was on externally facing solutions scheduled for lease later this year. Whether it's internal or outward-facing, we are leveraging our tech investments to drive further efficiencies with our producers, as well as engagement and enablement capabilities on the client and candidate side. Though our focus is increasingly on externally facing technologies, we still have opportunities to improve the efficiency and productivity across our business. Since deploying our market-leading applicant tracking system, we have seen double-digit productivity gains for travel nurse and allied recruiters. While we're seeing productivity gains in the number of clinicians per recruiter across the entire team, including new hires, the biggest increases have been among recruiters with more than one year of experience, who delivered yet another double-digit increase over the fourth quarter. Plans to deploy this technology to our other businesses are underway. An example of externally facing technology is our marketplace app, which connects local professionals to daily shifts. Though it was only deployed last year, it continues to gain wider adoption. New features and functionalities continue to evolve that further enhance the candidate experience across the entire engagement lifecycle. Lastly, our digital marketing approach has led to an increase in lead generation while lowering the cost for hire. We anticipate making similar investments for the rest of the year as we continue to develop the tools that we believe will not only make us more efficient but also capture more market opportunities. Looking at the second quarter, our revenue guidance of $735 million to $745 million implies another quarter of year-over-year growth in excess of 100%, with all major lines of business running by more than double digits. The single biggest driver is the increase in the number of professionals on assignments. Beyond the second quarter, we're expecting continued volume growth in all lines of business fueled by continued strong execution, organic investments in capacity, gains to be realized from the adoption of technology, and the expansion of our client base. As Kevin mentioned last quarter, we expect to exit the year on a run rate that exceeds $2 billion in annualized revenue with adjusted EBITDA margins in the high single to low double-digit range. A likely contributor to the margin will be an improved mix of higher-margin business, as well as a normalization of the bill-pay spread. It seems clear that we're fundamentally a different company emerging from the pandemic and I am excited about the future prospects for Cross Country. We see a clear roadmap for sustained growth in all lines of businesses, and we believe that our investments in people and technology are providing this foundation for the next steps in our evolution as a tech-enabled, total management, and workforce solutions company. In closing, I want to thank all of our dedicated professionals who make Cross Country Healthcare their employer of choice. And I'd also like to thank our stockholders for believing in the company and of course, our talented team who supported and embraced the changes we have made. With that, let me turn the call over to William.

Thanks, John. And good afternoon, everyone. Our historic performance for the first quarter was fueled by strong execution across multiple fronts that allowed us to once again exceed our expectations and be above the top end of our guidance regarding revenue and profitability. Every line of business contributed to this strong performance with significant growth in professionals on assignment and an increase in billable hours across the entire organization. Consolidated revenue for the quarter was $789 million, up 140% over the prior year and more than 20% sequentially. Gross margin was 22.2%, which was 20 basis points higher than our guidance and was up 50 basis points over the prior year on an improved mix of higher-margin business, such as education and home care, as well as a modest improvement in the bill-pay spread for our travel business. Gross margin is expected to gradually improve as we progress throughout the year, as compensation costs normalize in alignment with the downward trend in bill rates. Gross profit was $175 million, representing an increase of 145% over the prior year, driven in large part by the more than doubling of our FTEs in the Nurse and Allied segment. Turning to the segments, Nurse and Allied reported revenue of $766 million, representing an increase of 145% over the prior year and 23% sequentially. Our largest business travel Nurse and Allied experienced yet another record quarter with the highest number of travelers on assignment in the company's history. Sequentially, billable travel hours rose by nearly 22%, with average bill rates up in the low to mid-single digits. Let me spend just a moment on the travel bill rates. As expected throughout the first quarter, we've seen rates on a downward trend exiting the first quarter down roughly 2% compared to the start of the quarter. And coming into the second quarter, bill rates on new assignments continue to normalize. As a result, we're now projecting average travel bill rates will be down in the high-single to low double-digits relative to the first quarter. Despite the decline in bill rates, our guidance assumes that we'll see a mid-single-digit increase in the number of travelers on assignment. Our local business continues to perform well with a growing weekly revenue trend and a higher number of professionals on assignment. The sequential growth was driven in large part by higher average bill rates due to a shift in the mix of assignments from individual shifts to a greater number of local contract assignments. Also, the nurse staffing in our homecare business rose 7% sequentially as we continue to ramp our managed service outsourcing arrangements with several large providers. As a reminder, we acquired our homecare business in June of last year, and on a proforma basis, it was up nearly 45% over the prior year. Lastly, our education business also performed better than expected. As we've discussed on prior earnings calls, our education business was significantly impacted by COVID due to school closures and the move to virtual learning. We had successfully recovered the majority of that business by shifting to a tele-service model. But with the resumption of in-class learning, we've not only returned to pre-COVID growth rates but we reported the highest single revenue quarter in the company's history for this business. Finally, for the physician staffing segment, we delivered $23 million in revenue, representing the highest revenue in a single quarter in more than five years. The 43% growth over the prior year was fueled by a 38% increase in the number of billable days experienced across a wide range of specialties. Also favorably impacting the quarter was an increase in the average daily revenue per day filled, driven by modest rate increases and an improved mix of physicians relative to advanced practice specialties. Moving down the income statement, total selling general administrative expense was $76.8 million, up 66% over the prior year and 17% sequentially. As a percent of revenue, our SG&A was 10%, down nearly 400 basis points over the prior year, as we've continued to improve the operating leverage of the business. The majority of the increase both sequentially and over the prior year was driven by continued investment in people and higher compensation on the continued strong performance of the company. As John mentioned, we've continued to invest heavily in the growth of our company, adding more than 1,000 new employees in the last 12 months. Just since the start of the year, we've continued to expand the capacity of our organization by adding more than 300 new employees, 95% of whom are revenue producers and operational support roles. It's important to note that we're investing across our entire portfolio, adding capacity to all major lines of business. We believe the market backdrop continues to support future investments, and our capacity planning models are continuously being updated to target those investments that can accelerate growth. Specific to the travel business, although demand has come down from COVID peaks, it has leveled off at a point that we believe sustains our continued investment and ability to grow our share of the market. During the quarter, we realized $2.2 million in non-cash restructuring and impairment charges related to previously closed office space, interest expense was $3.5 million driven by the interest associated with our $175 million term loan and to a lesser degree, increased borrowings under our asset-based line. Finally, on the income statement, income tax expense was $25 million, representing an effective tax rate of 29%. As a reminder, we reversed the valuation allowance on deferred tax assets in the fourth quarter of 2021, and our ongoing future tax rate is expected to be approximately 30%. Turning to the balance sheet, we ended the quarter with $1 million in cash and $225 million in outstanding debt, including $174 million of subordinated term loan and $52 million in borrowings under the ABL facility. The increase in borrowings under the ABL was entirely due to growth in the business and the investment in network and capital as our outstanding receivables grew to more than $677 million. As a reminder, in late March, we doubled the size of our ABL to $300 million and as of March 31st, we were able to access the entire facility. From a cash flow perspective, we had a net use of cash from operations in the first quarter of $29 million, primarily driven by the sequential growth in the business. Day sales outstanding were 62 days, representing a four-day increase due solely to the timing of collections. Though we don't give guidance on cash flows, we expect to generate significant cash from operations for the full year. Timing throughout the year will be dependent on the run rate of our business as well as the timing for estimated cash tax payments. For the second quarter, we anticipate making estimated tax payments of more than $40 million based on the level of profitability we anticipate for the full year. This brings me to our outlook for the second quarter. Regarding the second quarter, revenue of between $735 million and $745 million represents a sequential decline of 6% to 7%, almost entirely due to the anticipated decline in travel bill rates. Though we don't typically give guidance on individual lines of business, we anticipate a low to mid-single sequential increase in volume across most businesses. In fact, the only line not expected to see a volume increase is our education business, which typically slows down in the latter part of the quarter with the start of summer vacations. Gross margins are expected to be between 22.3% and 22.8%, representing a 10 to 60 basis point improvement. With demand related to the pandemic eroding, we are working to restore our margin, especially within the travel business, but this will take time as pay rates may not decline as quickly as bill rates. Overall, the second quarter guidance assumes that gross margin will improve 40 to 90 basis points over the prior year with the primary driver being an improved bill-pay spread for our travel business. Based on our estimated revenue and gross profit, we're expecting adjusted EBITDA to be between $78 million and $83 million, representing an adjusted EBITDA margin of approximately 11%. The sequential decline in margin is entirely due to the impact of declining rates in travel as well as the continued investments in our workforce. Adjusted earnings per share is expected to be between $1.30 and $1.40 based on an average share count of 37.8 million shares. Also assumed in the guidance is an interest expense of $3.7 million, depreciation and amortization of $2.7 million, stock-based compensation of $2.2 million, and again, an effective tax rate of 30%. That concludes our prepared remarks. And we would now like to open the lines for questions.

Our first question comes from Kevin Fischbeck from Bank of America Merrill Lynch International Limited. Kevin, your line is open.

Thank you. I have a couple of questions. It seems you anticipate total fills will keep increasing. We've heard from several payers about the situation where COVID is an ancillary diagnosis, meaning that the primary reason for hospital admission isn't COVID, but patients do end up having it. Is there a way to assess this from a staffing perspective? Do you know how much of the demand is due to staff being unavailable, rather than directly treating COVID patients? For example, if there are nurses in the surgery department or ER who are out for other reasons. I'm trying to figure out if some of this demand may not be as persistent if the COVID situation continues to improve.

We are unable to identify the impact of COVID on hospital admissions once patients are hospitalized. We have observed some areas experiencing an increase in COVID cases, with a 25% rise in cases and an 18% increase in hospitalizations last week compared to the prior week. However, we lack detailed information regarding COVID cases within the hospital.

I think about it in terms of nurses being out due to COVID and being in quarantine in the surgery department or similar situations. Do you see requests coming in for that? It's not specifically for a respiratory therapist, but it is related to COVID because of the need for coverage during quarantine.

Yeah, Kevin, we're seeing very little of that type of impact on the business. And I would say even from our clinicians on assignment who are in the hospitals and obviously being exposed to potential COVID, we've seen a tremendous decline in the number of cases to where it's very minimal at this point with even our own clinicians out in the field.

Okay. And then when you think about that bill rate declining 35%, it's still is a pretty good bill rate over time since 2019. What do you think are the main factors that are propping up that rate maybe a little bit higher? Because it seems like both you and providers say that things will get better as the year goes on. Maybe the difference is that the staffing companies seem to think that that run rate that you mentioned might be the pace to grow off of, whereas the providers seem to think that there could be additional improvement in 2023. So just trying to understand why the bill rates stop by Q4 and don't see the additional pressure next year.

Kevin, this is William. Thanks for the question. So I guess what I'd say is, we don't have a great lens on 2023, but for what we can see in the market with where demand is and the supply constraint, it's sort of that leveling off of the rates in the fourth quarter as we go into 2023, that's just the best lens that we have at this point. There's obviously room that the rates could drift down a little bit from there, or they could also go up a little bit from there. It's hard to tell at this point in time. So we just see that as kind of the new normal. And it's a blend of skills; it's a blend of where the demand is. So if there's more ICU needs versus med-surg, you'll see a higher average bill rate for Cross Country. So a little bit of it plays out in the mix as well.

Okay, maybe as a last question. I mean, obviously you guys have been making all these investments you've talked about improving efficiency on the sales force, etc. Obviously, this has been happening at a time when overall demands are increasing for your services. Are you able to parse out those efficiency gains versus maybe what might have just happened? You had the same person there, but a lot more incoming requests. Just trying to figure out. Is that all efficiency somehow adjusted in that way? Or is there potentially some bill accounting in there?

Well, again, it's Bill. I'll start and maybe Marc can help clarify a bit. I think we've been investing on both fronts. We’ve added the capacity, which gives us more room to provide clinicians. We have observed, as indicated in the prepared remarks, a significant improvement in the productivity of the recruiters. It’s not just the speed at which they adapt when they join the company, but as they reach maturity, we’re seeing the production level from individuals with over a year’s experience has roughly doubled.

Yes, more than doubled. And we're seeing our new recruiters get their first placement closer to one to four weeks as opposed to 90 days in the seat. The first year of total production has doubled compared to 18 months ago.

Okay, but that's not in your view. A reflection is your volumes overall doubled over that time period too. So just trying to figure out how much of that is the industry backdrop versus clearly the benefit of the new systems?

Yeah, this is John. What I want to convey, Kevin, is that we can measure our productivity gains that are not just tied to market share. We've had this technology for 18 months and have consistently seen improvements. The increase in our recruiters' productivity is notable, and it's not solely due to the new technology. We have also revised our processes, which has contributed to this growth. With nearly 20 years of experience in this industry, I can confidently say that we're witnessing improvements due to the new processes and technology we've implemented. We have achieved over a 100% increase in productivity from the time we launched our initiatives with this technology to now.

Okay, great. Thanks.

Our next question comes from Brian Tanquilut, from Jefferies Financial Group Inc. Brian, your line is open.

Thanks, and good afternoon. Congratulations to the team. I'd like to follow up on some of the earlier questions. As we consider nurse dynamics with bill rates starting to decline, I'm curious about your observations. I know you're putting significant resources into improving recruitment, but more generally, how are you assessing the supply side? Are nurses returning to permanent placements? Any insights you can provide on this would be appreciated.

Thank you, Brian. That's a great question. What we're observing is that despite a decrease in pricing, we are receiving a significant influx of leads. In fact, year-to-date, our leads have doubled compared to last year. This indicates that clinicians still have a strong desire to travel. We believe that clinicians want to remain part of the gig economy; they experienced the flexibility of working where and when they choose during the COVID pandemic, and this demand continues. It's understandable that clinicians wish to enjoy a lifestyle that many in various sectors take advantage of. While we may see some clinicians transitioning back to permanent positions, the majority of those we are currently in contact with prefer to stay in the travel sector.

Got it. To follow up on Kevin's question, I understand you mentioned it's difficult to predict 2023 bill rates. Considering the revenue and margin guidance you’ve provided, what gives you the confidence that we can still reach $2 billion, especially since we don't have a clear understanding of where the bottom is? Alternatively, do you still believe the bottom is where you thought it was when you issued that guidance last quarter?

We are confident about our exit from 2022 due to the current demand levels. Demand is still more than 30% higher than it was before the pandemic, which was near an all-time high in early 2020. With demand exceeding that by 35%, we see significant opportunities across all our business segments. Additionally, we've recently appointed Daniel J. White as our Chief Commercial Officer, and we anticipate that this will enhance our success with MSP wins, leading to more exclusive orders and supporting our goal of reaching at least a $2 billion exit rate. We also believe we can surpass that $2 billion minimum because we've diversified our business, especially in non-travel segments. While travel bill rates may decrease and affect total travel revenue, our non-travel businesses, which provide higher gross margins, are growing at double-digit rates year-over-year. We are investing significantly in these areas to ensure we can grow consistently alongside the travel sector.

No, sorry, this is Bill. I was just going to add one other point. If I applied the fourth-quarter bill rates to the volume and mix that we have today, and even without the sequential growth that John's calling out, we're at or above the target run rate that we were calling out at the exit run rate of $500 million. So the investments we're making and the growth and the other lines of business is what gives us the comfort that we are on the trajectory to exit this year north of $500 million.

Yeah, that makes a lot of sense. For my last question, regarding the physician aspect of your business, I noticed that primary care physicians and certified registered nurse anesthetists performed well in the first quarter. Is this trend continuing, or are the hospitals, which reported a strong recovery after January, February, and March, seeing this carry into the second quarter? Any insights you could share on this would be appreciated.

Yeah, it definitely is carrying over into Q2, and the other color I'd give you is, not just in the Locums, but in all our businesses we're seeing a lot of demand for cardiac care on cardiac units. As deferred healthcare has happened over the past two years, one of the areas that was really underserved was the cardiac care units. And we're seeing a lot of cardiac cases, and we're seeing a high, high demand. And not only in cardiac cases, but that actually extends to all of the ancillary disciplines and specialties that help out with cardiac. So while cardiologists are up, and we have ICU nurses up, we have all those ancillary; we also have the allied portion that's up with labs and all the imaging that takes place when you have cardiac patients.

Got you. All right, guys. Thanks and congrats, again.

Thank you.

Thank you.

Our next question comes from A.J. Rice from Credit Suisse Group. A.J., your line is open.

Thanks. First question was related to your updated thoughts on bill rates versus placements on the travel nurse side. It sounds like bill rates you're still assuming from the beginning of the year to the end of the year, a 35% decline, maybe the second quarter and the end of the first quarter, the bill rates will decline as much as you thought maybe last quarter, but it sounds like you still think you'll end up in the same place. It sounds like to me you might be a little more optimistic on your overall placements. Now, thinking it will be positive versus sort of flat before, am I hearing that right? And would you say that's mainly because of what you are seeing with respect to patient volumes, with respect to nurses retiring? What will be the driver of that if that is true?

I think that we're seeing is we're actually going to see volume growth quarter-over-quarter into the second quarter. All right.

A.J., regarding your question about the rates, you're correct. The rates we mentioned reflect our expectations for the second quarter, which we anticipate to be in the mid to high single-digit range. As the rates decrease, it does take time, particularly in travel due to longer-term assignments lasting 13 weeks. Therefore, the impact in the second quarter isn't significant, but we do expect them to decline. If we look at this seasonally throughout the year, the third quarter is likely where we'll observe a more substantial decline, followed by a smaller decrease in the fourth quarter. However, all of this stays within the low single to low double-digit sequential declines we've projected for the remainder of the year. It ultimately depends on the timing and sequencing of when the rates decline and whether higher bill rate assignments are cancelled and replaced with new ones. The bill rate on open orders has decreased, and we've already begun to see that; however, the pace at which this affects our revenue will take a bit of time to become apparent.

Okay. And to the extent that you are a little more positive on the placements going into the second quarter. Is that being driven by patient volumes or nurses at the facility level stepping back or what?

It is demand that is evident when we consider the factors mentioned. It's really about the deferred healthcare and the return of surgeries, along with the ongoing shortages of clinicians. A study from last year revealed that 83% of healthcare executives anticipate long-term shortages of clinicians. Therefore, these fundamental shortages are the key drivers of demand and our placements.

Our next question comes from A.J. Rice. from Credit Suisse Group. A.J., your line is open.

I also want to ask; can you give us a little bit of an update on where fill rates are versus what you saw exiting the year versus now?

Sorry, A.J., could you repeat that question there?

Yeah, sorry. Any update on where you're at with respect to fill rates as you exited the first quarter compared to where you were in the fourth quarter perhaps, or some other metric. Are you filling a greater percentage of your open orders, or is it about the same what you saw in the fourth quarter?

There are numerous orders in the fourth quarter, and when we examine fill rates, it's less about the fill rates themselves and more about fulfilling the orders necessary for our growth. We consider fill rates in relation to our MSPs and the exclusive orders we must complete due to our commitments to clients. However, in the travel nurse and allied segments, the large volume of orders complicates our ability to assess the overall fill rate, as there are simply too many orders. We can achieve significant growth with fewer orders than one might expect; we don't require 40,000 to 50,000 orders to experience exponential growth. Additionally, throughout the quarter, we saw consistent sequential growth. Our travel nurses on assignment continued to increase month over month, allowing us to finish the quarter on a stronger note than we began. This upward momentum will support our performance in the second quarter due to the production levels we achieved in the first quarter.

Okay. And just a final question. Any updated thoughts on capital deployment, deal pipeline, areas you might be interested in pursuing M&A?

Yeah. We're sticking very closely to our strategic plans on M&A. We've said before, we're looking at Locums types companies, allied type companies, local staffing type companies, technology type companies. But we really take a very disciplined approach to M&A, making sure that it's a strategic fit and that it will be accretive to our business. But there's plenty of opportunities out there, and we'll be looking at those opportunities to really reinforce Cross Country and our offerings.

Our next question comes from Tobey Sommer from Truist Securities. Tobey, your line is open.

Hey, good afternoon. This is Jasper Bibb on for Tobey. I want to follow up on MSP fill rates. As the market starts to level off from an order perspective, are you seeing recruiters being able to capture more of that wallet share internally?

Hey, Jasper, this is John. We can adjust our fill rate as needed, but currently, we leverage our partner and supplier network to meet part of the demand. Our excess capacity is used to acquire new clients in additional MSPs. While we have the ability to increase our fill rate, we prefer to maintain it at the current 70% so that we can utilize the excess capacity for bringing in more clients.

Thanks. And then I was just hoping you'd speak to how you're managing customer relationships because the hospitals are saying reducing the usage of contract labor from a mix perspective is going to be a priority for them in the second half of the year.

Sure, that seems to be a great opportunity to have Daniel J. White, our new Chief Commercial Officer, give a little color on that.

Well, thanks, John. I really appreciate it and Josh, thanks for the question. Before I get into the answer, let me just first start by saying that now is a really exciting time to be here at Cross Country. As we talked about in our prepared remarks, we've had a beautiful transformation of our Delivery capability, which shows in all of these terrific results that we're achieving. And anybody who knows me very well realizes that my word is really everything to me so that when I give my word to a client, our prospect about how we're going to perform, I have 100% confidence that we have best-in-class delivery, and that's truly table stakes for us now. But when I think about my expertise here, it really starts with transforming our client-facing teams and a focus on customer obsession. So one of the reasons I chose to join John and the team here is because of the way we serve our customers and our clinicians and how we help them through all of these very difficult times. I've known John for a long time, and I'm getting to know these team members here really well, and all of us share a focus on the customer in the very same way. So for example, partially answering your question, some of the things we heard at the Becker's Conference last week were customers are looking for partners that are digital first, transparent, analytics, and performance-driven, focused on culture and other aspects that are going to help them with their whole workforce challenge, and for me that company today is Cross Country. So when I think about our client needs and diversity of solutions that we have, I believe that we're ready to help them solve those problems.

That's great. Last question for me, I was hoping you drive a bit more color on cash flow dynamics as revenue starts to come off at Q1 peak. I mean by my math, receivables are more than 70% of your enterprise value, which should give you some options from a capital deployment perspective.

Yes, Jasper, that's a valid observation. As you know, our working capital model is largely dependent on payroll, which means it primarily revolves around receivables. As our revenue stabilizes and we begin to see a sequential decline, we expect to generate significant cash flow from our revenue to support our operations. The second quarter is particularly challenging to forecast due to the anticipated decline in revenue and the introduction of substantial estimated tax payments for the first time. I mentioned in my prepared remarks that we are looking at a $40 million estimated cash tax payment. This will mark the first quarter we've faced a cash tax payment of this scale due to our company's success over the past two years, which has reduced our net operating loss. This will impact us in Q2. However, as we progress into the second half of the year, we anticipate strong cash flows as receivables decrease. This expectation is based on the rate decline we discussed, although if rates do not decrease as we hope, cash flow generation might not reach the anticipated levels. But simply calculating the figures, we had $789 million in revenue in the first quarter, and we are projecting something over $500 million for the next. If you look at the difference between those amounts and do the math, approximately two-thirds of that is likely to convert into cash flow, representing a significant cash collection. I want to emphasize that I have no concerns about our portfolio, as we are actively engaging with our clients and maintaining close relationships, which gives us confidence that we will meet our expectations.

Thanks for taking the questions, guys. I'll take the rest offline.

Alright.

Our last question in the queue comes from William Sutherland from The Benchmark Company. William, your line is open.

Thank you. Hey, everybody. Maybe give the mic back to Daniel for a second because I'd just like to hear a little bit about the size of your MSP operation at this point, and what the marketplace looks like as far as gaining new deals, is it going to be mostly having to take share or is there a fair amount of green fields still out there?

Well, first of all, I appreciate the question and nice to hear your voice again, Bill. I think in general I'll go back to the opening remarks around the business run rate right now is a little north of $2 billion in terms of our spend under management run rate. And so, what's nice about that is that the number of customers we have that don't have some of the services that we already deliver is a fairly significant percentage, so we can sell into the base that we already have that know, and love, and trust our brand, and grow simply from there. On top of that, I would say there's at least 20%-25% of the market that doesn't use any sort of MSP or VMS today, maybe more. And so there are certainly areas of opportunity for us to grow and help customers learn that they need to use programs like this. I think the pandemic really helped them understand that efficiencies of technology process improvement, augmenting their internal teams with expertise outside their organization really can help speed and add value to the health system. Of course, there's opportunity always to gain share and grow from other people's share, but I don't think that's necessary here for us to achieve the kind of numbers that we're trying to achieve, which really makes us a growth company. And at the end of the day, that's why I'm here.

Understood. Thanks for that. And then what's the rough size of the education business right now and where are you focusing the growth in that sector?

So is that a question for me? This is Bill. The business is challenging due to the summer break, so it's tough to provide a clear picture. I can't simply take the first quarter and annualize it; you have to factor in a couple of months without revenue. However, when schools are in session, they generate between $15 million and $20 million per quarter, likely leaning toward the higher end of that range, signifying rapid growth. Most of the growth in that area has been in charter schools, but we are also increasingly serving public school districts and schools outside of California. California was our initial market, stemming from the acquisition we made in 2015, but we have been expanding our school base beyond that state. We offer a comprehensive range of services, including both clinical and non-clinical support, such as special education.

And William, this is John A. Martins. What I'd add to that is we're experiencing significant demand in our education business, and we're making substantial investments there. When we observe the situation in education, it closely mirrors what occurred in healthcare over the last two years with the nursing and clinician shortages. Educators are experiencing fatigue and burnout and are leaving the profession at a high rate. This is largely due to the transition from online learning to in-person classes, where they had to contend with PPE requirements, leading many teachers to exit the field. Currently, there is a substantial shortage of teachers, which is expected to persist for the next several years. We view this as an opportunity to assist schools in ramping up their staffing, and we are committed to investing heavily to seize that market.

And it was one of the reasons behind the acquisition we completed in December for the cloud-based search tool that allows educators and clinicians to find the jobs and for schools to be able to access a large candidate database for direct hire.

So you're really going to push on the educator placements as well as the Healthcare?

As we diversify our business, education and healthcare are the two main areas where we will be investing.

And then just one last one, to get back to the core business. So as the demand for contractors inevitably eases, do you think one offset will be increasing fill rate? Because right now, the demand is so far in excess of supply, right? Will that be part of the equalizer for you guys?

Yes, increasing the rate will be part of the equalizer. However, I believe our investments will also play a significant role. We've discussed our internal investments in producer productivity, but we haven't focused much on our external investments in technologies that assist our clinicians and clients. For instance, we launched our self-service job portal for clinicians in January. This portal allows professionals to view pay packages transparently, express interest in specific assignments, self-onboard to a submission rate, check their pay rates, and update their credentials. We are optimistic that this will enhance supply, making it easier to achieve higher fill rates. Since the launch of this self-service portal, we've seen promising results. Currently, we have several thousand daily active users logging in each day, conducting over 50,000 job searches each week, and submitting over a thousand job interests daily. As we consider how to improve the fill rate, we believe this self-service technology will be key. We are still in the early stages of utilizing this technology and are excited about the continued investments, which fundamentally change how Cross Country operates.

Do the other major firms have this self-service kind of portal?

Some companies do and some do not. I want to explain how we are investing and what our plans are. Whatever challenges we face, we are confident that we will surpass them in the next few quarters.

Okay. Thanks a lot for the comment. And nice job on the quarter.

Thank you, Bill.

Ladies and gentlemen, this does conclude the Q&A period. I will now turn it back over to John A. Martins for closing remarks.

Thank you, Madison. It's clear that we are a very different company from three years ago, and it's clear that we are a very different company than just 18 months ago. As we look to the future, we're excited about our market opportunity, and I believe we are well-positioned for sustained and profitable growth. Lastly, I want to recognize and celebrate National Nurses month. And I personally want to thank every nurse out there for your hard work and dedication. Thank you, everyone, I look forward to our next earnings call.

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