Cross Country Healthcare Inc Q2 FY2022 Earnings Call

Good afternoon, everyone. Welcome to Cross Country Healthcare's Earnings Conference Call for the Second Quarter 2022. 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 Josh Vogel, Cross Country Healthcare's Vice President of 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 Martins, as well as Bill Burns, our Chief Financial Officer; Dan White, Chief Commercial Officer; and Marc Krug, Group President of Delivery. Today's call will include a discussion of our financial results for the second quarter of 2022, as well as our outlook for the third 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 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 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 pro forma when normalized numbers pertain to our most recent acquisitions as though the results were included or excluded from the prior periods presented. With that, I will now turn the call over to our Chief Executive Officer, John Martins.

Thanks, Josh, and thank you to everyone for joining us this afternoon. The end of the second quarter was my first full quarter as CEO, and I continue to be amazed by the capability of this organization to execute across so many fronts, with an unwavering commitment to deliver best-in-class service to the thousands of clients we support and the tens of thousands of clinicians and professionals we place. The culture at Cross Country has never been stronger, as evidenced by the recent certification we received for Great Place to Work. For those that may not know, this award is based entirely on what our current employees have to say, standing workplace culture, employee experience and leadership. I believe that our commitment to core values and thirst for innovation has become a beacon for thousands of employees who have joined Cross Country in delivering on its mission. We're a company committed to clinical excellence, ethical practices and health equity, which has positioned us as the partner of choice for thousands of clients. Beyond the continued strong performance in both revenue and adjusted EBITDA, we have once again exceeded the high end of our guidance ranges. The second quarter also marks a new chapter for Cross Country as we continue to evolve our tech-enabled workforce solutions with the launch of our newest product, Intellify. Intellify is our very first proprietary cloud-based multi-tenant vendor management system that will not only be used across our managed service programs, but will also serve as the backbone for a vendor-neutral solution that will further diversify our business. I'll get into more detail on our technology investments in a few minutes. So let me first share some comments on our results. Consolidated revenue of $754 million exceeded our expectations and was up more than double over the prior year. Fueling this impressive performance was the achievement of yet another historic milestone with the highest number of professionals on assignments across our business. Growth was once again broad-based, with all lines reporting at least double-digit year-over-year increases. As expected, bill rates within our travel nurse business declined by 7% from the first quarter, which is partly offset by a 3% increase in billable hours. It's interesting to note that the sequential increase in billable hours was primarily driven by an increase in the number of professionals on a site, which was muted somewhat by a reduction in the average hours per assignments as hospitals increasingly return to the normal 36-hour contracts for healthcare professionals. Based on discussions with our clients as well as what has been reported, COVID cases are rising once again, but hospitals are not seeing the same increase in COVID-related hospitalizations, and the number of positive cases is slightly higher than what is reported due to the number of positive home tests which are not included in those figures. The takeaway is that the rise in demand we are experiencing is only partly being fueled by COVID needs today versus what we have seen during prior surges. According to a recent study by Yale, COVID seems poised to transition into an endemic, with one contributing factor being that 78% of the US population have received at least one dose of the vaccine and 67% are fully vaccinated. As COVID transitions into more of an endemic, we would expect to see more of a seasonal trend in needs, much like the flu, with spikes in demand for respiratory therapists, ICU nurses, and emergency room nurses. Though COVID demand will ebb and flow, the effects of the pandemic on the healthcare workforce will likely persist. The continued cost pressure faced by healthcare providers is a function of an extremely tight labor market and the ongoing struggle that systems face to try to maintain core staff levels amid burnout, fatigue, and retirements. The labor shortages in core staff do not appear to ease. Despite reports of decreasing patient census in acute settings, we also think the growing supply-demand imbalance at the core level is exacerbated as healthcare professionals of all ages continue to embrace the gig economy and the lifestyle that comes with it. This is evident in our travel nurse population where 65% are millennials or younger. As discussed on our last earnings call, we are in an environment where bill rates remain elevated relative to pre-pandemic levels, as a result of higher compensation costs across most specialties. With health systems citing increased labor costs and a desire to see contingent usage normalize, we continue to work collaboratively and proactively with our clients on adjusting rates to lower their costs while ensuring that they have clinicians at their bedside to deliver the highest standard of care. However, as I mentioned a moment ago, the persistent labor shortage continues to fuel higher labor costs and, as a result, there will likely be some resistance to the speed at which rates come down or how low they can go. Based on the bill rates for open orders in our mix of business, we expect travel bill rates to see a mid-teen sequential decline for both the third and fourth quarters. This trajectory would place rates roughly 30% to 40% higher than pre-pandemic levels as we move into 2023. Overall demand remains well ahead of pre-COVID levels. So, as expected, we are down from the peak seen in prior quarters. Throughout the second quarter and continuing into the third quarter, we have seen a rising trend for travel orders, most of which predated the recent spike in COVID cases. Travel orders rose by more than 50% from the start of the quarter to the end and are up another 10% as of today. The increase was seen across most specialties, with the greatest rise in need for med-surge, emergency room, and operating room nurses. Also noteworthy is that demand remains robust across our diversified lines of business, including local staffing, locums, education, home health, RPO, and surge. From an accounting perspective, we continue to see strong interest with thousands of new leads generated each week. With the deployment of our candidate-facing portal earlier this year, we have seen thousands of candidates searching for jobs and a rising number of candidates who are self-selecting opportunities of interest. From a compensation perspective, I am encouraged to see that compensation costs have come down slightly faster in the second quarter than travel bill rates, driving a modest increase in our gross margin. As we look to return to normal gross margins, one area that could be a short-term headwind for us is that bill rates could decline faster than compensation on specific assignments. Let me elaborate on this for a moment. We operate in a competitive market for talent, and we believe it is in the long-term interest of our clients and clinicians to ensure continuity of service and to insulate clinicians from unexpected changes in compensation at the site. Therefore, should we work with a client on a bid assignment rate change, we could see a temporary margin impact until those assignments wind down. I continue to be impressed by the traction we have with our managed service program or MSP clients. Through all phases of the pandemic, we have thoughtfully and proactively engaged with these clients on their needs and challenges. As a result, spending under management in the second quarter was again over $2 billion on an annualized basis, with an attach rate of just under 70%. Our success with MSPs has been driven by our proven ability to execute and rapidly deliver clinicians to the bedside, as well as building intimate close relationships with our broad third-party network to assist in filling the excess demand. Despite the market volatility and rapid swings in demand, we continue to deliver the highest levels with a clinical on-time start rate of nearly 95% and a clinical cancellation rate below half of 1%. We credit this performance not only to the technology we have deployed and the talent we have hired but also to the clinical focus we have always maintained. We have more than 50 clinicians on staff that regularly engage with clients and candidates to ensure we are delivering the best clinical care possible to our clients and the patients they treat. Health systems need an accountable partner, one that understands their challenges, one that can create unique solutions and deliver consistently at the highest levels. As a result, we are well positioned to accelerate the pipeline of opportunities with new large-scale MSP programs. Over the last 18 months, we have built one of the most tenured and talented sales organizations that have the credibility and capability to bring a significant number of new programs into our portfolio. We recently closed on three new MSPs that will add approximately $85 million in incremental spend under management, two of which were takeaways from competitors. Looking ahead, our pipeline for new programs is robust. Next, let me spend a few minutes discussing our technology investments. I opened the call with the announcement of our new vendor management tool that we believe will ultimately be a groundbreaking advancement compared to the tools currently available in the market, offering clients insights and analytics that will help them make better decisions around managing their contingent spend. The development effort was led by design to ensure superior usability, making the product simple and intuitive. We had a team of more than 40 developers writing over 1 million lines of code with dozens of business participants working through quality assurance and user acceptance testing. Feedback thus far has been extremely positive and client interest is growing rapidly. Over the next 12 to 18 months, we will continue to deploy our VMS to new and existing clients, reducing our cost of fulfillment while relying less on third-party technologies, all while we continue to add features and functionality. Intellify is just the latest technology we have added in our comprehensive multi-year digital roadmap to transform the company and our industry, coupled with our other initiatives such as the applicant tracking system deployed in late 2020 to our travel business, and the release of our marketplace in 2021 for our local clinicians to self-select and schedule shifts, along with our candidate portal released earlier this year to ensure a smooth candidate experience. We have a full complement of technologies that ensure speed to market as well as a best-in-class experience for candidates, clients, and team members. Over the last three years, we have invested heavily in digitally transforming our company starting from the inside out. We previously mentioned a doubling of our investment in technology and we are on track to do that this year. Year-to-date, we have spent more than $8 million, which is approximately double the prior year. It is evident to me that we are a more efficient, agile, and tech-enabled business than we were two or three years ago. Our tenured revenue producers have more than doubled their productivity and new hires are becoming productive much earlier in their careers. When it comes to technology, we're never truly done, and at this point, I expect a fairly balanced level of continued investment in both internally-facing and client or candidate-facing technologies as we strive to become the most efficient organization, delivering the highest level of clinical excellence and solidifying ourselves as the partner of choice for clients. As we look to the third quarter, we expect revenue to be between $605 million to $615 million, consistent with our expectations. The sequential decline is primarily driven by a mid-teen decline in travel bill rates and, to a lesser extent, seasonal fluctuations in demand in states like Florida, as well as softness in education due to summer vacations. Our adjusted EBITDA margin is expected to be between 9% and 10%, in line with expectations as rates normalize. Beyond the third quarter and as we begin to set our sights on 2023, we expect continued volume growth in most lines of business, fueled by our strong execution, organic investment in capacity, gains to be realized from the adoption of technology, and the expansion of our client base. Our outlook is unchanged as we expect to exit the year on a run rate that exceeds $2 billion in annualized revenue. In closing, I'm very encouraged by our business and prospects heading into the back half of the year, as strong demand is setting up an exciting runway for growth. I believe the street seems to be taking more notice as well in recent weeks that we are not just a COVID-driven story; we are fundamentally a different company emerging from the pandemic that services the entire continuum of care as a tech-enabled workforce solutions provider. I believe we are positioned for long-term sustained growth across all lines of business, which we believe will continue to drive shareholder value. I finally want to thank all of our dedicated professionals who make Cross Country Healthcare their employer of choice. 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 Bill.

Thanks, John, and good afternoon, everyone. Our stronger than expected second-quarter performance for revenue and adjusted EBITDA was once again driven by strong execution across multiple fronts with at least double-digit year-over-year growth in every line of business. While higher bill rates played a role, the primary driver for the growth came from an increase in billable hours across all lines of business within Nurse and Allied, as well as higher days billed for our physician staffing segment. Consolidated revenue for the quarter was $754 million, up 120% over the prior year, and down sequentially approximately 4% on the normalization of bill rates for our travel business. Our solid top-line performance fueled another quarter of strong earnings with adjusted EBITDA of nearly $84 million and a double-digit adjusted EBITDA margin of 11%. Gross margin was 22.6%, which was up 70 basis points over the prior year, primarily due to improved bill pay spread related to our travel business. Sequentially, gross margin improved approximately 40 basis points, primarily related to the annual payroll tax reset in the first quarter. Margin should gradually improve over time as the bill pay spreads continue to normalize, though as John mentioned, near-term pressures could distort that trajectory. Gross profit was $170 million, representing an increase of 135% over the prior year, driven primarily by the record number of professionals on assignment. Turning to the segments, Nurse and Allied reported revenue of $731 million, representing an increase of 131% over the prior year and a 4% decline 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 3%, while average bill rates fell by 7%. John already touched on this, but let me just spend a moment on the travel bill rates. As expected, travel rates have been declining throughout the first half of 2022 and are projected to continue that trend through the back half of the year. It's important to note that with demand for travel assignments rising, we've seen a leveling off of bill rates for new assignments and open orders. In fact, over the last several weeks, we've seen a slight uptick in travel bill rates, indicating that we may be seeing a floor for the near term as the labor shortages persist amidst continued strong demand. As a result, the anticipated sequential decline for the third and fourth quarters is primarily related to the wind-down of assignments with higher average bill rates. Our local business was up more than 20% from the prior year, though down sequentially. As the pandemic recedes, we are seeing local contractor block-booked assignments returning to a more normal level for our local business, driving down the average hourly rate. Additionally, within Nurse and Allied, our homecare business rose 3% sequentially as we continue to ramp our managed service outsourcing arrangements with several large pace providers. As a reminder, we acquired our homecare business in June of last year, and on a pro forma basis, it was up 23% over the prior year. Lastly, our education business reported a 22% increase over the prior year and was down 20% sequentially, due entirely to the impact from the start of summer vacation. We expect this business to continue to see double-digit growth as the new school year starts in the fall. Finally, for the Physician Staffing segment, we delivered $22 million in revenue, which was up 41% over the prior year and down just 4% from the prior quarter. The growth over the prior year was fueled by a 27% increase in the number of billable days experienced across a wide range of specialties. Also favorably impacting the quarter was an increase in average daily revenue per day filled driven by modest rate increases and an improved mix of physicians relative to advanced practice specialties. The sequential decline was driven by fewer billable days for physicians as our advanced practice specialties were up nearly 13% over the prior quarter. Moving down to the income statement. Total selling, general, and administrative expense was $86 million, up 71% over the prior year and 12% sequentially. As a percent of revenue, our SG&A was 11%, down nearly 400 basis points over the prior year as operating leverage has improved from the growth in our business, as well as improved productivity. The majority of the increase both sequentially and over the prior year was driven by our continued investments in people and higher compensation on the continued strong performance of the company. Our investments in people have been broad-based across all lines of business to fuel our organic growth. We continue to believe that the market supports further investments in resources, and we will leverage our capacity planning tools to ensure that they are targeted to the areas with the greatest opportunity. In addition to the investments in people, we are also investing heavily in technology with additional resources and developers to facilitate the rapid deployment of candidate- and client-facing technology like our new VMS, Intellify. As a reminder, our target spend on technology projects for 2022 is approximately $20 million, which represents a doubling from the prior year, and given the nature of some of the work performed, not all of that will qualify for capitalization. During the quarter, we realized a $1 million benefit in non-cash restructuring and impairment charges as we were able to exercise an early termination option for one of our larger closed facilities. Interest expense of $3.9 million represented an increase of 10% over the first quarter and was principally driven by the rise in interest rates as well as the additional fees associated with the increase in our asset-based credit facility completed in March of this year. Just prior to the end of the quarter, we opted to make a principal payment on the subordinated term loan of $50 million in order to lower our effective interest cost going forward. And finally, on the income statement, income tax was $21 million, representing an effective tax rate of 29%. Based on our latest projections, we now believe our full-year effective tax rate will be approximately 29%, excluding discrete items. Our strong performance for the quarter has resulted in adjusted earnings per share of $1.40, which was nearly triple that of the prior year. Turning to the balance sheet, we ended the quarter with $300,000 in cash and $209 million in outstanding debt, including $124 million under our subordinated term loan and $85 million in borrowings under our asset-based lending facility. From a cash flow perspective, we generated $80 million in cash from operations, which was net of the $40 million estimated income tax payment we called out last quarter. Days sales outstanding were 66 days, representing a four-day increase over the first quarter, primarily due to the timing and collections throughout the quarter. Collection activity remained strong as average weekly collections were up 17% for the second quarter, and the trend has continued to improve. As of today, we have paid down more than $50 million under our asset-based lending facility and maintain full access to the line. Though we do not give guidance on cash flows, we expect to generate significant cash from operations in the second half and expect to report positive cash from operations for the full year. This brings me to our outlook for the third quarter. We're guiding to third-quarter revenue of between $605 million and $615 million, representing a sequential decline of 18% to 20%, driven predominantly by the anticipated decline in travel bill rates, as well as the impact from summer break on our education business. Gross margins are expected to be between 22.3% and 22.8%, which reflects the anticipated mix for the quarter. As bill rates and pay rates continue to normalize, we expect to see continued margin improvement, which will also be impacted by the continued growth in our higher-margin businesses. Based on our estimated revenue and gross profit, we're expecting adjusted EBITDA to be between $55 million and $60 million, representing an EBITDA margin of approximately 9% to 10%. The sequential decline in adjusted EBITDA margin is primarily due to the impact of declining bill rates in travel, as well as the continued investments in our workforce. Adjusted earnings per share is expected to be between $0.85 and $0.95 based on an average share count of 37.9 million shares. Also assumed in this guidance is an interest expense of $3.5 million, depreciation and amortization of $3.2 million, stock-based compensation of $2 million, and again, an effective tax rate of 29%. This concludes our prepared remarks and we'd now like to open the lines for questions.

Thank you. Our first question is from Kevin Fischbeck with Bank of America. You may go ahead.

Great, thanks. I think everyone is trying to understand the bill rates. It's a bit difficult to discuss 2023 at this moment. However, if we consider the run rate for Q4 that you plan to exit the year with, do you anticipate growth from that number? Should we still expect a margin of around 9% to 10% in 2023 and beyond?

Yeah, I'll start and I'll have Bill weigh in. But yes, we anticipate we'd still be able to grow at those bill rates. And I think what we're looking at, first of all, I'd like to just start off by saying, we're really pleased with where we are right now in our results that we've had and we feel really good about the future. And when we look about launching our Intellify business and what that's going to mean to help us to be able to win more MSP deals, we think that's going to be really key in helping us drive more growth into the fourth quarter and beyond. And so when we look at our MSPs, we've added a lot of firepower over the last 12 months in our sales organization. We've really reorganized that organization. And as we mentioned in our prepared remarks, we landed three MSP deals recently worth over $85 million, and we have a pretty robust pipeline of more deals coming in. As a matter of fact, we have two verbal award commitments that we're contracting through right now, which will put another $70 million additional to the $85 million in the win column shortly. So we feel that there is a lot of room for growth in the future.

Kevin, your question pertains to the bill rates and their trajectory as we approach 2023. At this time, we are not anticipating a significant increase in 2023. We expect the rates to stabilize as we begin the year. Over the long term, we do expect rates to gradually rise at a normal mid-single-digit percentage increase, consistent with what we have historically seen. However, for 2023, we expect it to be a relatively steady year without much change.

Okay, that's helpful. And I guess it was interesting to get the color about the orders throughout the quarter and then again start Q3 up again. I guess I just don't know on top of my head what that should normally look like seasonally. Can you just like maybe give us some fair reference of what a 50% at the end of the quarter in July? What would that normally look like in a normal year?

Yeah, Kevin, again this is Bill. We would not have seen this kind of level of movement in a normal year pre-pandemic. We did not have this kind of order volatility. Yeah, there were normal fluctuations in demand, but it was in low single, high single, double-digit kind of movements. So it wasn't this kind of 50% swing within one quarter. And I think what we really experienced was, as we were coming out of the first quarter as the pandemic kind of stepped down from that last surge. Demand pulled back as was expected, hit that trough point as we got into the early days of Q2, and then sort of unexpectedly the demand has been inching forward every single week and has carried on into the third quarter to the point now where, to John's point in the prepared remarks, we're up even into the third quarter, up another 11%. There is really no corollary on a historic pre-pandemic basis that I could point you to. It's been more wild swings ever since the pandemic has been out there.

Yeah, I'd add Kevin that as we're moving and transitioning from the pandemic to the endemic, we don't really have a good feel for what that looks like in terms of seasonality needs, right? We'd be anticipating to see flu season orders starting to come in and that preparing for flu season. But we're also looking at seeing a higher number of COVID cases that popped up over the last six weeks. And so while hospitalizations are down, we're still seeing that portion of some need still being COVID-related. So it's a little hard to say how to place that. But at the end of the day, the number of orders we have now for the rest of our lines of business are up double from where they were pre-pandemic. And we anticipate that to continue to see the needs in the future.

And I'd just add one other comment, I think what we saw early in Q2 was probably a bit artificial as systems were trying to get contingent labor under control, delaying giving out orders and the like. So what we're seeing is really the pendulum swinging back to more normal levels for the market given the shortages.

We're seeing an increase in demand in specialties such as respiratory care, ICU, pediatrics, and operating rooms, indicating a return to more normal patterns. However, without clear visibility into the future, it remains challenging to forecast how demand will change over the next six months.

All right. Great. Thank you.

Thank you. The next question is from Brian Tanquilut with Jefferies. You may go ahead.

Good afternoon, everyone. I'm standing in for Brian. This is Taji, and I appreciate the opportunity to ask my question. First, could you share some insight on the recruiting landscape for nurses? Are you seeing a significant number of new applications, and what initiatives have you implemented to enhance recruitment and retention? Additionally, I would like to follow up on your fill rates, specifically the percentage of orders received compared to those that can be fulfilled. Can you provide an update on how this has progressed during the quarter and your outlook for the remainder of the year? Thank you.

Sure. Thanks for the question, Taji. We have experienced a record number of applicants in the last six months, and we are significantly investing in our programmatic advertising and digital marketing strategy. Currently, 65% of our travelers are millennials or younger, which includes individuals aged 41 and below. This shift indicates a larger influx of applicants entering the workforce and wanting to participate in the gig economy we have been discussing. We are very pleased with the increased supply in travel nursing as we progress. Regarding our fill rates, we focus on the rates related to our Managed Service Providers and the orders we can control and have exclusivity over. In those cases, our fill rates are in the high 90%. Moving forward, we are concentrating on our capture rate, which, as mentioned in our prepared remarks, is currently just below 70%.

And does that conclude your question?

Yes, thank you.

Thank you. The next question is from Tobey Sommer with Truist Securities. You may go ahead.

Thank you. Based on your commentary, when would you forecast Nurse and Allied revenue to sort of plateau and then inflect higher?

Yeah. So, Tobey, this is Bill. I guess I'd say based on how we're looking at bill rates, we would think that with the most significant declines coming in Q3 and Q4 for the year, our fourth quarter would be expected to be the trough on that point. Volumes are expected to continue to inch forward. They won't outstrip the bill rate reductions in the fourth quarter, but as we get into early 2023, the expectation is volume begins to overtake those rate changes.

And I wanted to ask a question about your MSP capture. You said low-60s, could you give us a little bit of context for how that has ebbed and flowed from, I don't know, pre-pandemic through the pandemic and maybe give us some context about whether you would have room to increase that should demand sort of moderate at some point? Thank you.

Sure. Thanks, Toby, for the question. This is John. Pre-pandemic, we were in the high-50s and we've increased that to the high-70s. We have the capability to bring that up even higher from the 70s, but as we stated before, we really keep it around the 70s and we don't really want to be too much higher than that because what we do is we take our excess supply and bring it to potential new clients to actually feed our pipeline of MSPs. But if we needed to, it's always a lever we could pull, but right now with the pipeline of MSPs that we have, there is really no reason we believe that we'll continue to really accelerate our wins in MSPs. The other exciting thing is, as we mentioned with the launch of Intellify, we're also going to be able to now enter into the VMS vendor neutral space, which we have never participated in before. And with that, that is a multi-billion dollar space where we offered clients currently, or prior to Intellify, just an MSP accountable model which many clients do want that service. But there is a segment of clients out there, again, in a multi-billion dollar segment that want a vendor choice program or a vendor neutral program. And for us, being able to now have that offering, we feel that it will help continue to diversify our business. And those, of course, are in a higher margin business. So we're very excited about that new offering and really being able to take some market share in that vendor neutral space.

Thank you for your insights. Regarding the transition of your own book from a third-party vendor to your own platform, could you provide an estimate of the cost savings involved and the timeframe for this transition?

Yeah, Tobey, it's Bill. I guess I'll just give you the context on the cost. I mean for us, you can imagine that the spend under management for today attracts a fee for us, right, because almost all the technology that's used there is third-party, so that cost is anywhere from 75 basis points to 1%. So round numbers, you're talking north of $10 million in annualized savings on a normalized basis. And I think the deployment or the rollout schedule, I don't know Dan if you want to speak to that a little bit.

Yeah. Hi, Tobey. How are you? We currently have 10 clients and implementation is expected to go live throughout Q3 and a similar number already scheduled for Q4, which include some of these new signings. And so we feel really good about the ability to not only convert some but add some new ones and build the capacity to actually grow faster than that as we get into next year. We're building some new muscles in that regard. And so I feel really good about where we are right now. I mean, some of that has to do with the fact that we've been able to continue to add really strong experienced talent to our already energized team. And for me, that goes all the way from sort of sales through client management, implementation, and ongoing optimization of our accounts. So I'm just feeling really good about our ability to continue to deliver value to our customers.

And Tobey, if I were going to throw, there are a couple of factors that dictate the speed at which we can convert active MSPs, one has to do with the level of wins and the number of new accounts that we have coming on. Obviously, those accounts will want to make sure that they get deployed on the technology more rapidly than we convert some of the old ones, so there's not as much disruption. But we are moving with pace to move our programs over to this technology, but some of it will also be on the clients' mix and their needs.

Yeah, this is John, Tobey. I think realistically over a 12 to 18 month period, you'll see us acquire other technologies, but we want to approach this thoughtfully. Our priority is to take care of the clients and the patients to ensure that staff is available. As we develop our software, it is an iterative process. Some hospitals are more complex, which may slow down our progress, while others may be easier and move faster. This will take time. Additionally, as Bill mentioned, it is crucial that we continue to secure new MSPs and accelerate our efforts in the vendor neutral space, which will help us gain clients more quickly. However, this may slow us down a bit with our older clients.

Thanks. Last question from me, and I'll get back in the queue. The multiple of the stock is coming under pressure even as results have surged, and we're hearing that private company M&A transactions might still be pretty respectable and in some cases higher. Are you receiving any sort of outreach and any inquiries into interested parties in acquiring the company and the business?

We believe we are significantly undervalued compared to most market assessments. The target prices set by analysts suggest we are trading much lower than we should be. We are focused on demonstrating our progress and continue to make strategic moves that will drive business growth. Before the pandemic, we generated an EBITDA of $30 million, and our trailing 12 months show nearly $300 million. We anticipate ending the year with a revenue run rate exceeding $500 million and an EBITDA in the high single to low double digits. For 2023, we expect revenue to surpass $2 billion, with EBITDA in the range of $160 million to $240 million. Our story is strong, and we expect our stock value to rise as this becomes clearer. Transitioning from a pandemic environment to an endemic one, we have successfully revamped our company. When Kevin Clark returned 3.5 years ago, we recognized that while Cross Country had a solid base, we needed to strengthen it. We addressed critical areas including personnel, processes, technology, and culture, achieving improvements in all aspects. Over the past three years, we have demonstrated our ability to turn the company around from the inside out. Now, with the launch of our accelerated MSP sales teams and enhanced technology platforms like Intellify for our clients and our internal portal for a better candidate experience, we believe that there is no better option for shareholders looking for value as we continue to deliver results.

And does that conclude your questions?

It does, yes.

Thank you. Our next question is from Bill Sutherland with The Benchmark Company. You may go ahead.

Hello, everybody. John or Bill, discuss your capital priorities going forward, particularly given the fact that the cash is going to turn positive and probably very strongly for the foreseeable future?

Hey, Billy. We both can answer here. I think, first of all, it's a topic of conversation at Cross Country more so than it ever has been, predominantly because we have more options. I think you look back to Cross Country pre-turnaround, and we were generating $20 million-$30 million of cash a year. It's a whole different ballgame when you're looking at north of $100 million in positive cash flows on a continuing basis. So options are more available to us now. I think the predominant use of cash will continue to be funding growth. So that's both organic, the investments in products like Intellify. I wouldn't be surprised if in the future we continue to ramp our spend on technology that we've already announced for this year. And then, of course, the opportunity for M&A to tuck into building scale in some of our other businesses that have higher margins is certainly a play for us. Servicing debt, we just paid down $50 million optional on our term loan because the interest cost on that is pretty significant. I would not say that the next best thing is to continue to pay down debt. There's some amount of debt that's healthy for a company like Cross Country to have on its books. Share repurchases are certainly something that's in our line of sight that we're evaluating internally, and I think that will be something that we'll look to do in the second half. If I fast-forward the clock and we were sitting on all the cash collections that we know are coming in, I think you would see a more concerted effort on the share repurchase side.

Great. I just wanted a little clarification, John. When you were discussing the puts and takes on bill rates and pay rates looking out six months and how that could move the gross margin a little up or down. I just want to understand a little more clearly what you're thinking in terms of those lead in lags, I guess, puts and takes?

As we transition from crisis rate assignments, where margins were lower, to more standard travel assignments, we expect to see an improvement in margin. In the third quarter, we experienced mid-assignment rate changes as some assignments shifted from crisis to normal travel rates. When clinicians agree to take on these travel rate assignments, we work hard to retain them, even if it means accepting a lower margin. Consequently, we anticipate a slight dip in margins for the third quarter to ensure we maintain clinician availability and support hospital needs. Moving into the fourth quarter, as we secure new assignments, we should be able to enhance our gross margin. Furthermore, our overall margin improvement is also supported by our vendor-neutral platform, which has a higher margin potential. Additionally, our home health business is growing at a double-digit rate and offers better margins. Our education business showed substantial growth of over 20% in revenue during the second quarter, compared to pre-COVID numbers, indicating strong recovery and rapid growth. Education, like healthcare, is facing serious staffing shortages due to burnout experienced during the pandemic, and we expect this situation to persist for several years. Our investments in this sector aim to bolster growth and enhance our overall margins. To sum up, we do anticipate an increase in margins for normalized travel assignments in the fourth quarter.

And then remind me, what's the size of the education platform now? I would think that would be one where bolt-ons would be very attractive given the dynamics you just discussed?

You're spot on, Bill. The education business for us is expected to reach a $60 million run rate on an annual basis, and that's excluding the summer months. So it's definitely a place that we are looking at intensely for opportunities to find the right play to add tuck-ins. It is a heavily diversified market, so some of the companies are a bit smaller out there that we're looking at. But there are opportunities there.

Thank you.

Thank you. Our next question is from Tobey Sommer with Truist Securities. You may go ahead.

Thanks. I was wondering if you could describe the complexion of new travel nurse applicants. That's kind of aren't in your database and you think are new to the market. We do get quits from the BLS, but that's emphasizing directional, and your data would be perhaps a little bit more timely.

Yes, Tobey. Are you asking about the demographics, such as the age brackets? Two-thirds are millennials or younger. We've seen an eight-fold increase in Gen Z applicants. We've had increases across the entire age spectrum, but I'm not sure if that answers the question you were looking for.

I missed part of the conversation earlier, but I heard you discuss the balance sheet and cash flow. Do you plan to maintain the current capital structure, or are there opportunities to optimize it considering the improved margins and cash flow outlook?

Yes, definitely, Tobey. We are currently assessing our debt structure. Right now, we have an asset-based loan and a subordinated term loan. We're at a size and scale that allows for more options, such as exploring the pro rata market or considering term loan Bs. There are opportunities to incorporate a more permanent, flexible, and scalable debt solution for the business. This is something we're keeping in mind. Historically, the ABL has suited our needs considering the fluctuations we've experienced in the business, and it scales with our receivables. However, at some point, an ABL may be limited by our capacity to borrow based on multiples of our EBITDA or profitability. This is definitely something we're looking into. As you may know, the capital markets have been somewhat restricted for debt lately, but it seems things are starting to improve. As we move into the latter half of the year, we will be monitoring this closely.

Okay. Thank you very much for entertaining the additional questions.

You're welcome.

Thanks, Tobey.

Thank you. As there are no further questions, ladies and gentlemen, this does conclude the Q&A period. I'll now turn it back over to John Martins for closing remarks.

Before signing off, I'd like to take a moment to recognize the life and achievements of one of our Board members, Daryl Friedman, who sadly passed in late June. Daryl had been a Director and an audit committee member since 2018, as well as a compensation committee member since mid-2020. He was a unique and inspiring soul, a highly recognized entrepreneur and executive, as well as an accomplished triathlete. He will be greatly missed and our thoughts and prayers are with his family during this difficult time. In closing, I'd like to thank everyone for participating in today's call. We look forward to updating you on our progress on the next call.

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