Cross Country Healthcare Inc Q3 FY2022 Earnings Call

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 third quarter of 2022 as well as our outlook for the fourth 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 U.S. GAAP. More information related to these non-GAAP financial measures is contained in our press release. Also during this call, we may refer to pro forma 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 Martins.

Thanks Josh, and thank you to everyone for joining us this afternoon. Before I get started, I'd just like to take a moment to welcome the newest members of the Cross Country family that joined us this past month through our recent acquisitions of Mint and Lotus, two physician staffing companies that we believe not only expand our market presence, but bring us a talented team of professionals to join the ranks of Cross Country Locums and set the stage for accelerated organic growth. Welcome, Mint and Lotus. The third quarter marks six months for me as CEO of Cross Country, and I'm amazed and excited by what we have achieved during this time, as well as what lies ahead. As an organization, we continue to execute well across so many fronts from sales to delivery and our technology initiatives. Our unwavering commitment to always act ethically and to deliver best-in-class service has positioned us as an integral partner to the thousands of clients and tens of thousands of clinicians and professionals we serve. Our success is rooted in the dedication of our employees and their commitment to maintaining a vibrant workplace culture that stresses the importance of diversity, equity, and inclusion. The culture of Cross Country has never been stronger, as evidenced by our recent recognition with the Best Companies for Happiness Award from Comparably. We take great pride in becoming the employer of choice for so many, and we will continue to elevate and evolve our organization by investing in our people and culture. As noted in our press release today, we posted another strong quarter for both revenue and adjusted EBITDA, exceeding the upper end of the guidance ranges we shared at our Investor Day event in mid-September. In addition to highlighting our outstanding leadership team, we announced full-year 2023 minimum guidance and had the opportunity to share more insight into Cross Country's innovative technology and the impact it is having on our business. The shift from being almost exclusively and truly focused to heavier investments in externally facing technology was evidenced in the launch of Intellify, our proprietary cloud-based vendor management system. This represents a significant milestone for the company in our evolution as a tech-enabled workforce solutions company. I'll go more into details on Intellify later in the call, but first, let me provide some comments on our third-quarter results. With consolidated revenue of $636 million, we grew by nearly 70% year-over-year, with all lines of business reporting growth. The strong revenue performance coupled with stable gross margins and cost management drove adjusted EBITDA of $64 million, representing a 10% adjusted EBITDA margin. Increasingly, our revenue growth is coming from volume as bill rates have trended down throughout the year. Travel bill rates for the third quarter were down 12% sequentially and down nearly 20% since the first quarter, though still 10% higher than a year ago. With a backdrop of continued strong demand amidst the tight labor market, travel rates have stabilized over the last several months and we believe they are settling into a new normal for the market as anticipated. Bill will step through the guidance a little bit later, but it's important to note that the sequential decline in travel bill rates expected for the fourth quarter is primarily attributable to the wind-down of higher weight assignments and not necessarily due to the continued decline in the buildings. As a partner to dozens of healthcare systems, we are sensitive to their need to reduce costs for contingent labor, and we'll continue to do all that we can to help them achieve their goals, leveraging our full complement of services including helping them build up their core staff and offering them technology solutions such as Intellify that will help them better manage their spend. Today, our largest source of revenue comes from our managed service programs or MSPs, representing 55% of our consolidated revenue for the third quarter. Third quarter spend under management from our MSPs was nearly $2 billion in annualized contingent labor spend, which is four times the size of the programs we managed at the end of 2019. Generally, we filled all of our clients' needs through a combination of direct fill and through a partner network of subcontractors. For the third quarter, Cross Country's capture rate on the $2 billion spend was 71%, which was up 200 basis points over Q2. Increasingly, our MSP clients will be able to benefit from the adoption of our proprietary vendor management system, Intellify, which enhances their visibility into their program spend. As of September, we had 10 programs live on the platform with five more scheduled for deployment in the fourth quarter. As we called out on Investor Day, Intellify also lowers our cost of fulfillment and will save millions of dollars annually once it is fully deployed. We currently anticipate a majority of our clients will be converted in the next 12 to 18 months depending on our success in winning newer tenens, as they would naturally be launched on Intellify at program go-live. The anticipated benefits of Intellify go well beyond cost savings, as the technology also allows us to be more competitive in the market, giving us access to capture significant incremental client spend through vendor-neutral offerings, as well as technology extensions for direct license by the clients for their control and use. Our tech roadmap is far from complete, but we are making terrific progress. Year-to-date, we have spent more than $12 million on technology-related investments, more than half of which is focused on externally facing technologies, such as Intellify and our candidate portal, Gateway. Gateway provides candidates a superior experience with real-time matching to open positions and the ability to self-select interests and schedules. Through this self-serviced model, we believe Gateway will also significantly improve operational productivity once fully deployed. We've never really done creating technology, but our tech transformation over the last few years is impressive. We have completely redesigned our entire ecosystem from the ground up using a data-centric model that interconnects all components within the ecosystem. Having a single tech stack enables us to provide the highest level of analytics while ensuring speed to market as well as a best-in-class experience for candidates, clients, and our teams. It also provides us the foundation to build additional capabilities. On the strength of our performance, we continue to not only invest in growth through capacity and technology as well as acquisitions such as Mint and Lotus, but we are also able to deploy capital in a more meaningful way through paying down expensive debt and repurchasing our shares of common stock. As we announced in August, our Board authorized an additional $100 million repurchase program and we quickly put that to work. Through a combination of exhausting our prior authorized plan and leveraging the new plan, we repurchased more than one million shares of stock before our mandatory blackout in mid-September. The average cost of shares repurchased was $24, and we have $87 million remaining under the new program. We will continue to be opportunistic with share repurchases, balancing investments in our technology initiatives, strategic personnel, and tuck-in acquisitions that further bolster and diversify our portfolio. Looking to the fourth quarter, overall demand remains robust and well above pre-pandemic levels. It is interesting to note that despite the relatively high demand and the recent surge of pediatric respiratory cases, we are not yet seeing significant spikes in demand for seasonal needs, which could be a further tailwind as we head into the end of the year. Specific to our travel business, orders remained steady across most specialties with growing demand for emergency room, ICU, labor and delivery, and pediatrics. Supply constraint continues to be the biggest challenge faced by our clients with clinicians looking to retire early or leave the bedside due to fatigue and burnout. In fact, a recent survey by Bain showed that 25% of U.S. clinicians are considering switching careers outright, mostly due to burnout. Additionally, data from the Bureau of Labor Statistics continues to indicate a widespread gap between healthcare job openings and hires. For the fourth quarter, we expect revenue to be between $590 million and $600 million, well above the $550 million exit run rate we shared at our Investor Day. While Mint and Lotus will contribute to our performance, the majority of the increase comes from higher volumes, as well as a slightly higher projected bill rates. Our adjusted EBITDA guidance implies a margin of 9%, in line with our goal to maintain adjusted EBITDA margins in the high single to low double-digits. I've called this out before, but it's worth repeating. Though we strive for continued margin expansion every quarter, we will continue to make investments that may interrupt the trend, but we believe will ultimately drive greater shareholder value. And though we are encouraged that bill rates have stabilized, we recognize the potential for future volatility. That said, we are well positioned to continue driving organic growth, thanks to the investments we have made in revenue producers, the development of market-leading technologies, and by continuing to win new clients. We therefore reiterate our targets for 2023 announced in mid-September to deliver full-year 2023 revenue of at least $2.2 billion and adjusted EBITDA in excess of $200 million. In closing, I am very encouraged by our clients, our business, and our prospects as we approach 2023. As bill rates continue to normalize and demand remains strong, it sets up an exciting runway for long-term sustained profitable growth across all lines of business. I want to thank all our dedicated professionals, who made Cross Country Healthcare their employer of choice. I'd also like to thank our shareholders for believing in the company, and of course, our talented team who have supported our transformation into a high-performance tech-enabled total workforce management solutions firm. With that, let me turn the call over to Bill.

Thanks John, and good afternoon, everyone. Once again, we've delivered results that have exceeded our expectations with both revenue and adjusted EBITDA above the high end of the revised guidance issued during our Investor Day in mid-September. The overachievement relative to the updated guidance was driven by better-than-expected performance across several lines of business, including education, physician staffing, and search, as well as the impact from a small labor disruption we supported in the final weeks of the quarter. We continue to execute well across multiple fronts and experienced robust year-over-year growth across all our lines of business. As a result, consolidated revenue for the quarter was $636 million, up 70% over the prior year, and down 16% sequentially. The primary driver of our growth continues to be the number of professionals on assignment and, to a much lesser extent, the impact from rates. Gross profit was $144 million, which was up 71% over the prior year, and down 16% sequentially. Gross margin of 22.6% was flat sequentially, but up 20 basis points over the prior year as we continue to see a decline in COVID-related crisis orders and a normalization in bill pay spreads across our travel business. Our solid topline performance combined with improved productivity and operational efficiencies fueled another quarter of strong earnings with adjusted EBITDA of nearly $64 million representing a margin of 10%, making it the fourth quarter in a row of delivering double-digit adjusted EBITDA margins. Turning to the segments: Nurse and Allied reported revenue of $612 million, representing an increase of 72% over the prior year and a 16% decline sequentially. Our largest business, travel nurse and allied, was up nearly 90% over the prior year, fueled by an increase in the number of billable hours of more than 73%. The sequential decline in travel was predominantly driven by the expected decline in bill rates which were down 12%. Looking to the fourth quarter, we anticipate average bill rates will decline once again, though at a more modest pace likely in the high single digits. Travel demand has remained very strong, with orders continuing to be more than 10% above the start of the third quarter and well ahead of pre-pandemic levels. From a trend perspective, bill rates have leveled off and remained stable for the last four-plus months after having declined throughout most of the first half of the year. Looking into 2023, we will likely see rates a little bit higher than we anticipated last quarter. That said, rates could step down in the future if clients see lower needs for contingent labor, though at the moment, it's hard to predict when that might happen or how it might affect our bill rates considering the incredibly tight labor market. Our local business was up 9% from the prior year, though down 14% sequentially, with the sequential drivers fairly evenly split between rates and volume. The majority of the volume decline has come from a drop in local contract or book assignments returning to more normal levels for our local business following the pandemic. Also, with nurse and allied, our homecare business rose 23% over the prior year as we continue to ramp our managed service outsourcing arrangements with several large PACE providers. Lastly, our education business reported a 38% increase over the prior year and was down 11% sequentially, due entirely to the impact from summer vacation. We remain excited at the prospects for this business to continue growing organically in the high double digits into the future. In fact, we expect the fourth quarter will be the single highest revenue quarter for this business in its history. Finally, the Physician Staffing segment delivered nearly $24 million in revenue, which was up 27% over the prior year and 8% over the prior quarter. Billable days were up 8% over the prior year and 6% sequentially, with growth across a wide range of specialties. On a year-over-year basis, average revenue per day filled increased across virtually all specialties as needs continue to rise. Moving down the income statement, total selling general and administrative expense was $80 million, up 52% over the prior year and down 7% sequentially. As a percent of revenue, our SG&A was 12.6%, down nearly 150 basis points over the prior year, on the improved operating leverage stemming from the growth in our business, as well as greater productivity from our revenue producers. The majority of the increase in SG&A over the prior year was driven by continued investments in people and higher compensation on the continued strong performance of the company, as well as investments in our technology initiatives that are not capitalizable. On a sequential basis, the decline was primarily driven by lower incentive compensation associated with the sequential trend in the business, which was partly offset by continued investments in our workforce which grew by 4% over the prior quarter. We continue to believe the market supports further investments and resources, and we will leverage our capacity planning models to ensure that they are targeted to the areas with the greatest opportunities. In addition to the investments in people, we're also investing heavily in our technology with additional resources and developers to facilitate the rapid deployment of candidate and client-facing technology like our new VMS Intellify. Year-to-date, we've spent more than $12 million on technology, and given the nature of some of the projects, roughly 60% to 70% of it qualifies for capitalization or deferral. During the quarter, we recognized $2.5 million in restructuring charges and $3.8 million of asset impairments, primarily related to the closure of additional office space during the quarter. Interest expense of $3.5 million represented a decline of 9% over the second quarter on lower average borrowings across the quarter. With a majority of the remaining debt outstanding related to our subordinated term loan, our effective interest rate was 9%. As a result of the significant cash generated during the quarter and the level of availability on our asset borrowing line, we chose to make an optional prepayment of $50 million just after the end of the third quarter to reduce our interest costs further. I'll go into more detail on the capital allocation in just a moment. And finally, on the income statement, income tax expense was $14 million representing an effective tax rate of 28.5%. Based on our latest projections, we now believe our full-year effective tax rate will be between approximately 28.5% to 29% excluding discrete items. Our profitability for the quarter resulted in adjusted earnings per share of $1.07, which was 75% higher than the prior year. Turning to the balance sheet, we ended the quarter with $30 million in cash and $133 million in outstanding debt, including $124 million under our subordinated term loan and $9 million in borrowings under our ABL facility. Cash on hand was intentionally high as we were preparing to fund the closing of our two locum tenens companies, Mint and Lotus. From a cash flow perspective, we generated more than $140 million in cash from operations during the quarter, representing the single highest quarter in the company's history. Our days sales outstanding were 67 days, representing a one-day increase over the second quarter, primarily due to the sequential decline in revenue relative to the timing for collections. We expect DSO will start to normalize as we progress through the fourth quarter and into the start of 2023. With the significant cash flows we generated, we not only reduced the overall indebtedness for the company by $76 million, but we funded the acquisitions I mentioned a moment ago, repurchased more than one million shares of our stock at an average price of $24, as well as paid the first earn-out payment on our acquisition of WSG for having achieved the targeted results. Looking ahead, we expect to continue to generate a significant amount of cash in the fourth quarter, and as I mentioned a moment ago, have already repaid an additional $50 million on the subordinated term loan in the fourth quarter, bringing the year-to-date prepayments to $100 million. Regarding future share repurchases, we will continue to be opportunistic, though as we shared at our recent Investor Day, we believe the best use for cash continues to be to fund future growth. This brings me to our outlook for the fourth quarter. Regarding fourth quarter revenue of between $590 and $600 million, representing a sequential decline of 6% to 7% driven predominantly by the anticipated decline in travel bill rates, partly offset by growth in our education and the impact of our recent acquisitions from Mint and Lotus. Gross margins are expected to be between 22.3% and 22.8% largely consistent with the current quarter. Based on our estimated revenue and gross profit, we're expecting adjusted EBITDA to be between $52 and $57 million, representing an adjusted EBITDA margin of approximately 9%. The sequential decline in adjusted EBITDA margin is primarily due to the impact of lower average bill rates in travel, as well as continued investments in our technology initiatives and in our workforce. Adjusted earnings per share is expected to be between $0.85 and $0.95 based on an average share count of 37.1 million shares. Also assumed in this guidance is an interest expense of $3.2 million, depreciation and amortization of $3.4 million, stock-based compensation of $2.1 million, and an effective tax rate of 29%. This concludes our prepared remarks, and we would now like to open the lines for questions.

Thank you. We will now begin our question-and-answer session. Our first question comes from Kevin Fischbeck with Bank of America. Your line is open.

Great. Thanks. I guess maybe the first question. The quarter came in better, the guidance for Q4 is coming in better, but you haven't really changed the outlook for next year. I mean, are you still thinking then, that ultimately the bill rates stabilize at the same rate you thought before or you now certainly think that the starting point for next year is probably going to be higher and that there could be some upside for the next year outlook?

Sure. Hi Kevin, thank you for the first question. This is John. I'll start and then have Bill add some more color. But yes, when we're looking at our guidance or what our targets were for 2023, that was really the minimum target we are looking at about $2.2 billion and that $200 million of EBITDA and we at this point, again not having that perfect crystal ball in front of us. We're looking at where rates have leveled off and if we look at what happened with the rates, we saw the rates going on a decline as we went through the year. Right now, what's happening is some of the higher rates that were in the beginning of the year and through the second quarter are coming out, and we've leveled off those bill rates. As we see in the future we're thinking the bill rates will remain stable at the current rate they're at. But what I would say is there are a lot of different macroeconomic trends that could have an impact on those rates. And, of course, we will talk about rates; it wouldn't be right not to talk about the supply and demand that really causes the rates to fluctuate. Because there is such a widespread between the demand and supply imbalance, there's a lot of volatility that could happen in next year. But as of now, this $2.2 billion revenue is the floor we see and we do think that there is potential upside to this, but we're also cautious to say that there could be some headwinds of macroeconomic trends that could impact that. So, when you look at this $2.2 billion minimum floor we have, could you think about us hitting that right down the center of the fairway. Bill, would you like to add?

Yes, sure. John made the point I was going to make, which is, it was minimum guidance as we called out. There is a lot of unknowns as we look at 2023, the potential for further economic disruption. The potential pullback in some demand for contingent labor, although again not seeing that today. Is it possible rates could go down a little bit further? Of course, I mean, if you recall earlier this year we had thought it would be a sequential double-digit decline; we're now calling for a high single. So there's a little bit more room we would anticipate there, potentially on the rate side. But after four months of kind of seeing stability in the rates, it's hard to see when that might play out that way. So to John's point, there is some potential upside there; I remind you, the other lines of business are growing well. We're seeing phenomenal growth in our homecare, out of our education, our search businesses. So that's why we've not changed the $2.2 billion, but I think as we get through the fourth quarter, we'll obviously look to give you a little bit better lens on 2023.

And I guess due to that some of the variability in bill rates is due to the changes in the prices or as a percentage of total. Is there a way to kind of give us that number? Where was that as a percentage of total orders in Q3, and was that normally like 2019 and pre-pandemic?

No. Kevin, we've stopped actually tracking things as crisis orders. I'd say that in the third quarter, even if I look at the labor disruption rates we saw, they were not remarkably different than what we're seeing in the broader marketplace. So the market is settling into more of a premium rate relative to pre-pandemic. I wouldn't call them necessarily premium rates today; it's really just what the market is demanding.

Could you clarify why the pediatric respiratory cases aren't arriving seasonally as expected? There's a lot of media coverage about the surge, but are hospitals holding off on staffing until they see the situation fully develop? What’s the reasoning behind their staffing decisions?

Sure. I'll begin, and then perhaps Marc can add. As we've mentioned, we are noticing an increase in cases, and if you follow the news, you can see many patients traveling considerable distances to reach a hospital. There is a rise in pediatric specialties, but it’s not reaching the levels we anticipated with the combination of RSV, flu, and some COVID cases. We foresee a potential situation where these children may be affected by this combination of illnesses, especially as we approach the holidays, including Thanksgiving and the December festivities, along with colder weather that will drive more people indoors. We believe this combination could significantly increase demand as we close out the year and enter the New Year. However, our projections of $2.2 billion for next year do not account for these possible tailwinds. While we hope this scenario doesn’t materialize, we are well-prepared with our recruitment team and sales personnel ready to reach out to potential new clients to ensure we can support the communities, hospitals, and patients should a surge in demand arise, particularly if this triple threat moves into the adult population as well. Marc or Dan, would you like to add anything?

Sure, John. I mean, we have seen most recently a sharp increase in the pediatric respiratory orders, probably not as strong or as high as we would have expected at this point, but overall pediatric order volume has increased almost 20% since the start of Q4. So that's more in line with what we expect.

And this is Dan. What I will add is that we have a decent number of children's facilities that are in our pipeline for sales, and one of the things that we like to do is to have capacity to help those customers that are in our pipeline. So we're getting reached out to kind of in a real-time basis right now for assistance on some of those specialties specifically.

Great. Thank you.

You bet.

Our next question comes from A.J. Rice with Credit Suisse. Your line is open.

Thanks. Hi everyone. I'm trying to understand the market dynamics again. Earlier this year, it was mentioned that during the early summer, rates reached a point where some travel nurses considered returning to their permanent jobs. How significant is this constraint on the possibility of declining rates, given that they haven't decreased yet? Are we at a stage where a continued decline might encourage some nurses to go back? Additionally, we sometimes observe that nurses become anxious about the availability of their permanent positions and start to think about returning. I'm curious if the current economic environment is uncertain enough to influence this, or if it's not a factor at all. Has this concern played a role in what you are seeing with travel nurses?

Sure, it's John. When we assess the core nurses who transitioned to travel positions, some have indeed returned to their original jobs after Q2 and into Q3. However, we don’t think these nurses perceive it as a game of musical chairs where they have to rush back to avoid losing their jobs. Examining the macroeconomic landscape, unemployment remains at a historic low. According to JOLTS BLS data, since the Affordable Care Act in 2014, open positions have surged by 233%. Traditionally, the ratio of open jobs to hires has been below two, peaking at around 2.94 in March and currently standing at about 2.8 in September. The clinicians we are in contact with recognize the abundance of job opportunities, and hospitals understand the necessity to hire core staff. At Cross Country, our focus is on helping hospitals address the core staff challenges. McKinsey's recent survey indicates a current nurse shortage of 400,000 in the U.S., projected to reach one million over the next decade. The demand exists and will persist. We are exploring ways to upskill clinicians for acute care roles and to generate more preceptors and educators to boost hospital supply. There is a significant supply-demand imbalance that is unlikely to resolve soon. Even in the event of a macroeconomic downturn, it would require drastic changes, with unemployment rates needing to rise significantly for clinicians to consider returning to permanent positions. Dan?

Yes. A.J., this is Dan. I would just like to add to what John said; we have an RPO and search division that helps our customers fill their permanent positions. That business is now about $25 million to $30 million, up over 60% year-over-year. It's a huge opportunity for us to help our customers with these problems. I would say about 80% of that is our RPO business, which is more consistent in a recurring revenue. So for us, it's kind of a little bit of both sides of the equation.

And A.J., this is Bill. If I could just put a point on that, how we're seeing it relative to our numbers and we don't guide at the business level, for us sequentially in the fourth quarter we are expecting volumes to essentially be flat. We are not seeing a fall-off in healthcare professionals or clinicians willing to take assignments, and that's how we see the fourth quarter shaping up.

Yes. And A.J., just to add to all of that, we did see renewal rates drop in Q2, meaning a portion were going back to their core jobs, but at this point, we are seeing them back up, which for me means it's probably leveled off at this point as rates have stabilized.

Okay. Looking at the other side, there are reports of hospitals facing downgrades and operating losses. While you mentioned that hospitals are quickly responding, they obviously need nurses to care for patients, or it creates a difficult cycle. Are there any notable aspects of that situation or different ways they are relying on you to address the current challenges they are facing?

Yes. A.J., this is Dan. I'll maybe start to add and see if anyone else wants to chime in. Just this past quarter, we started a team that does workforce optimization for our clients. We go in, do an assessment of how their utilization is working on a unit-by-unit basis across the system, and then give them advice for how to fill those gaps, if you will. We're building technology that helps us take that currently very manual process and make it a deeper part of our Intellify platform. What we want for our customers is to manage their core staff better, supplement that with regional or local flow pool resources, and then bring on travelers to augment that. The reception on this process is really high both from existing customers and prospective customers.

Okay, great. Thanks so much.

You bet.

Our next question comes from Brian Tanquilut with Jefferies. Your line is open.

Hey good morning guys. Good afternoon guys and congrats on the quarter. I guess just a question again on the bill rates. Is there a seasonality factor that we should be thinking about it? I appreciate that it's been flattish for the past few weeks, but any thoughts on seasonality and pricing that we should consider?

Hey Brian, it's Bill. Thanks. No, I don't think there’s a real seasonality to our bill rates, certainly not across the travel business. We don't typically see that at any point in our history. I know that in the last couple of years, it’s hard to point to history and say that’s a good predictor, but we do not normally see a seasonal fluctuation in bill rates. There may be specialty needs and geographic needs that vary throughout the year, but not on the bill rates.

I would just add to that, Brian. This is John. That what Bill said is, the geographical and the regional rates have changed. When we looked at COVID during most of that two-year period, it was a national rate because everyone had the same surge in demand. Now, even with pediatric, we're seeing pockets of areas that get hit with the triple threat. Now it's spreading more and more, so it may become a national price, but I think regionalization pricing is really what we're seeing more of.

Got it, okay. And then, as I think about the locums business, I mean, any feedback so far that you've heard from your clients in terms of cross-sell opportunities as you try to get bigger and deeper in that locums space?

Yes, I'll take that one, Brian, this is Dan. We absolutely are getting tons of interest from customers for physicians that helps them on the revenue side of their equation and so on and so forth. The other thing I would say is that from a cross-selling opportunity, we don't have locums in most of our MSPs. In fact, it's one of the best areas and one of the reasons why we wanted to add this capability. From an integration perspective, we are already seeing those teams fill each other's orders. The existing locums team here at Cross Country is filling orders that were with both Lotus and Mint and vice versa. The integration leverage we're getting out of this is incredibly high which again gives us more confidence to go into our customer base.

Again, this is John. I would just add that also with the acquisitions of Mint and Lotus, that's really helped us create more capacity than we've had before and that business, if we look at where that business is trending, Brian, it's going to be roughly a $150 million business, giving us more capacity to help us bring that offering to our clients in a larger scale than we could have ever done before.

Awesome. Thanks, guys.

Our next question comes from Tobey Sommer with Truist Securities. Your line is open.

Thank you. I wanted to start on gross margins. When do you expect gross margin compression? And what kind of strategies do you have in mind to sort of recapture some of that gross margin back?

Hey Tobey, this is Bill. I believe part of the situation stems from the competitive environment; we are always competing for healthcare professionals, so we need to ensure our pay rates remain competitive. We’ve noticed that pay rates have decreased slightly quicker than bill rates. The more challenging issue has been housing costs, especially given the inflationary context, which will be difficult to address. The real opportunities lie in enhancing other efficiencies within our gross profit. For instance, Intellify is projected to save us millions in the latter part of the third quarter and into the fourth quarter. We have already started transitioning several accounts, with over $100 million in spending migrated onto the platform. This will yield annual savings of $1 million from what we've already moved. We plan to continue this throughout the fourth quarter and into the first half of 2023. Additionally, there are other efficiencies we can explore, such as professional liability insurance, workers' compensation insurance, and credentialing costs. Much of this will involve examining those opportunities. The overall impact will come from improving our mix. John, do you have any further comments?

Yes, Tobey, this is John. I just want to highlight that we will continue to focus on diversifying our business. Our Workforce Solutions Group, which operates in the pace centers and home health, is projected to exceed $100 million and has higher profit margins. As we invest in these rapidly growing peripheral businesses, we expect this will enhance our gross margins. Additionally, our entry into the vendor-neutral space with Intellify is set to significantly boost our gross margins. We disclosed at our Investor Day that we are entering this financial market, which is estimated to range between $10 billion and $20 billion, where we currently have no market presence. We are in the process of building a substantial pipeline in Managed Service Providers and our vendor-neutral business, Intellify. This will help us improve both our gross margins and EBITDA margins, as these vendor-neutral operations are highly profitable.

That's helpful from a mix standpoint. If I think about the travel and allied business as it's currently formulated, how do the gross margins, either in the quarter or implied in your guidance compare to what you think 2023 looks like in that business? Just trying to get a sense for whether there is a rebound in the offing or is there further compression that you expect.

I don't think there is further compression, Tobey. I think today, and remember, intentionally we've opted to give the majority of the compensation through to the nurse, so our margins have been depressed a little bit in that business. We've seen it in the low 2020s kind of range for our gross margin across travel. While we're still down a couple of hundred basis points, I don't anticipate getting all that back in 2023. I do think that there is room for let's call it somewhere in that 100 basis point improvement over the next 12 months.

No, I think it's going to be slow and gradual; I don't expect it to be overnight. But I don't expect any further compression. To John's point earlier, our other businesses, the education division, is a high margin business and it's actually a great story —it's up almost 70% Q3 2022 versus Q3 2019. Q4 is shaping up to be our best quarter ever and we're seeing diversification there as well. Paraprofessionals is our fastest-growing segment within the education business. Demand has shifted a little bit. Traditionally, we saw strong demand for speech language pathologists and special ed professionals, but we're also seeing strong demand today in mainstream teachers and paraprofessionals where we enjoy great margins.

Thank you. How did the volume of travelers in Q3, which looks like it's down about 7% quarter-over-quarter, compare to your expectations when you gave guidance for the third quarter?

Yes, it's a good question, Tobey. I’d say it was probably a little bit deeper decline than we had anticipated. If I go back to when we first gave our guidance, it was down just a little bit more significantly, but looking across where that came from, it was the wind down of higher bill rate assignments. We've seen good production across the weeks throughout the tail end of the third quarter as we're going into the fourth quarter; I think it was really just a step down from the crisis needs from the COVID pandemic, I don't think it was anything more significant than that.

Yes, I'd add that probably from towards the end of the second quarter to the middle of the third quarter is probably where we saw a little bit of dip in our volume production, which we didn't anticipate as deep of a volume production. Then we have the steady increase in demand, and now our production is catching up to that.

Perfect. Last question for me. John, could you share your thoughts on the timing of deploying some of this cash? You did purchase some stock and then put it on hold, and the stock surged right after your purchase, which makes sense. But are the multiples from private companies decreasing enough for you to pursue accretive acquisitions like the bolt-ons you did in the physician space?

Absolutely. Regarding the buyback program, while our stock experienced a surge, we were also in a mandatory blackout period, which is why we paused our buying. Looking ahead to 2023 and beyond, acquisitions will be a significant focus for our capital deployment. We're starting to see multiples decrease, and I expect that trend to continue, particularly if wider economic conditions become unfavorable. Nonetheless, we remain very active in the M&A market.

Our final question comes from Kevin Steinke with Barrington Research.

Good afternoon. I just wanted to ask about your plans for recruiter hiring over the next several quarters, the volume you think you have to add there. And any challenges in finding staff, any pressure on upward push on compensation costs, et cetera?

Hey Kevin, this is John. I'll start and hand it over to Marc Krug. We're always looking at our capacity model that shows recruiter productivity or producer productivity with how much demand there is; it's kind of a formula that we have an algorithm that shows what we need. But we're a growth company and will continue to invest in people where demand is. As long as demand stays strong and continues to increase, we're going to be hiring producers, not only in our nurse and allied business, but in education, in Locums, WSG business, in our RPO and search business. We will continue to invest in those. Marc, did you have anything?

Sure. Kevin, at this point, we really don't have challenges finding staff because we're virtual now, so it's a much bigger pool to select from. We're finding great talent and our compensation costs are steady; they haven't changed a lot. Recruiter productivity is still very strong, almost double what it was pre-pandemic. As long as that's the case, we are going to continue to top-grade hires and make sure we have enough capacity.

Kevin, this is Bill. Just two quick points. One, I did mention in the prepared remarks that we did grow our staff 4% in the third quarter, so that's just one quarter of sequential change that was quite an investment we made, of course, most of those were in revenue producers. Just to dovetail into Marc's comment, when you look at our comp structure, I think we're among the most competitive in the marketplace; we give our folks the ability to earn more as they grow their books of business. So I think that's part of what helps make it very attractive for folks to join Cross Country.

All right, that's helpful. And you mentioned their recruiter productivity, and I believe you mentioned that as a contributing factor to the margin improvement in the quarter. Just wondering how much more room there is to run in terms of improving our recruiter productivity. I know newer people can ramp up faster, but just as you look at the staff overall, is there more room to run there on productivity improvement?

This is John again. I'll start and then pass it to Bill and Marc. With our ongoing investments in technology, particularly with our Gateway portal that we launched last April, we see significant potential for increased productivity. As we transition to a more self-service model for clinicians, our producers will achieve greater capacity gains, which will positively impact our EBITDA by reducing SG&A and enhancing our overall EBITDA. Bill or Marc, would you like to add anything?

I was just going to say, the initial driver of the big gains we've had in productivity tied back to the applicant tracking system we put in for travel, but that's just one piece of the puzzle and there are obviously other levers that we're looking to pull.

Yes, and in addition to what they said, what John and Bill said, we're also doing enhancements to the applicant tracking system right now, and that's really helping drive productivity. We're tweaking the organization to fuel growth and ensuring that revenue producers focus on revenue-producing activity.

All right. Thanks for taking the questions. Appreciate it.

Thank you.

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

Thank you. 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 in February. See you then.

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