Cross Country Healthcare Inc Q3 FY2023 Earnings Call

Good afternoon, everyone. Welcome to Cross Country Healthcare’s Earnings Conference Call for the Third Quarter 2023. 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 third quarter of 2023 as well as our outlook for the fourth quarter. A copy of our earnings press release is available on our website at crosscountry.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 2022 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 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. Overall, I was pleased with our continued ability to execute in what remains a challenging market. For the third quarter, consolidated revenue was $442 million, with adjusted EBITDA of $27 million, primarily reflecting a tightening in built-in spreads within our travel business. I'll touch on some of the market dynamics in a moment. But I want to stress that we continue to manage the business for long-term success and strategically position ourselves for future growth opportunities as we see in the market. As expected, travel revenue was down 22% from the second quarter, driven by both lower rates and fewer travelers on assignments. Average travel bill rates declined approximately 8% sequentially, in line with our estimates for a mid-to-high single-digit decline in both the third and fourth quarters. Demand for travelers remains fairly stable throughout the third quarter after having rebounded from the lows we experienced in the second quarter. Travel needs remain below expectations, so we do still anticipate that we'll pick up as we progress through the fourth quarter. Regardless, the relative softness in demand will likely impact the number of travelers we have on assignment over the near term. As we have mentioned previously, bill rates for open orders have largely stabilized, but in many cases remain too low to attract candidates needed to fill them. As a result of the pullback in bill rates this year, amidst elevated compensation expectations for nurses, we are seeing some margin pressure due to a tightening in the bill pay spreads. This appears to be a broader issue across the industry that may persist for the next several quarters. We will strive to remain competitive in order to preserve our market share while protecting our profitability. Our local or per diem business has also felt the impacts from the softness in demand as clients continue to seek to reduce reliance on contingent clinical staff. Turning to our other business lines, physician staffing continued its strong performance with reported revenue of more than 90% year-over-year, putting us on pace to hit an annual run rate of $200 million. On an organic basis, physician staffing was up 21% from the prior year, continuing to outpace the low double-digit growth projected by staffing industry analysts. Driving this was a combination of higher billable days and an improved mix of higher bill rate specialties. As one of our fastest-growing businesses, we continue to make investments that will fuel organic growth and though the contribution income from the business remains below our target, we believe the continued ramp in production, combined with targeting higher-margin specialties, will ultimately lead to improved profitability in 2024. Within nursing allied, our education business returned from summer break and started off the new school year strong, considering its trend of double-digit year-over-year growth in the third quarter. Our Homecare business also performed well in the third quarter, up mid-single digits, both sequentially and over the prior year on the back of five homecare MSD wins since our last call, this business is poised to reaccelerate entering 2024. Now, let me spend a moment on Intellify, our proprietary vendor management system that we believe is a market-leading platform for clients that provides data analytics and real-time insights. As we previously shared, Intellify not only saves millions of dollars for our MSP clients, but it opens up a multi-billion dollar opportunity in the vendor neutral space. Since launch, we have not only converted more than half of our MSPs onto Intellify, we have won five new vendor-neutral programs, two of which are live today. This showcases our ability to implement programs in rapid succession. Our most recent win is also our largest to date, with annual spend expected to be in excess of $100 million once fully implemented. On the back of this win, we are continuing to expand the functionality of Intellify by introducing predictive analytics and time and attendance, building on our robust baseline feature set that already includes industry-leading dashboards and reporting, internal resource pools, internal travel programs, MSPs for nursing allied, per diem, locums, non-clinical, and RPO. These new add-ons will greatly enhance the value proposition for our clients. Shifting gears, although pay transparency has been important to the industry in recent years, today I'm excited to announce that we have created a new company called Cross Country DAS, which introduces bill rate transparency by utilizing data analytics to provide healthcare systems with independent, objective, real-time insights. We believe the data analytics tool offered by DAS is the first such solution in the market. This new offering can be embedded within Intellify for a license on its standalone basis. We recently licensed DAS to a large national healthcare system, which is utilizing the tool to price-check providers on a local, regional, and national basis. This client has credited DAS with helping save them millions of dollars from their current staffing providers. Though not yet material in dollars to Cross Country, it is significant in terms of the value we bring to healthcare systems. This further showcases our ability to develop and deploy innovative technologies to advance healthcare and help hospitals rationalize their costs. This brings you to our outlook. Given my earlier comments on the current market backdrop, including recent demand trends and industry-wide pressures, we anticipate that fourth-quarter revenue will be between $400 million and $410 million, with adjusted EBITDA coming in at $19 million to $24 million. For the full year, the guidance implies we'll generate between $143 million and $148 million in adjusted EBITDA, representing a margin above 7%. As previously noted, we will continue to balance investments with cost savings to preserve profitability while ensuring we maintain sufficient capacity to fuel long-term growth. Though we are not providing guidance for 2024 at this time, we have seen stability in the broader market and believe we can achieve similar margins for the full year in the high single digits, given the expected tailwinds from recent wins, continued growth from higher margin businesses like education and homecare staffing, as well as enhanced productivity driven by our technology investments and leveraging our low-cost center of excellence. I am confident in our ability to drive long-term sustainable, profitable growth and we remain focused on increasing shareholder value through our deployment capital. As noted in today's press release, our cash generation was solid in the third quarter, allowing us to continue repurchasing our shares as well as paying down all of our debt. We will look to leverage our technology investments and healthy balance sheet to further enhance our platform, as well as diversify our offerings as we follow the patient across the continuum of care. In closing, we are confident about our prospects exiting the year, specifically our ability to build upon the early momentum from Intellify, which we believe will be a meaningful driver of long-term revenue growth and margin expansion. I want to thank our devoted employees for their ongoing hard work and contributions. We were recently named to the top 100 Loved Workplaces by Newsweek, as well as the 2024 Best Companies to Work For by US News and World Report. These recognitions validate our efforts to foster a culture of growth, inclusion, and well-being. Lastly, thank you to all of our professionals who made Cross Country their employer of choice, as well as our shareholders for believing in the company. With that, let me turn the call over to Bill.

Thanks, John, and good afternoon, everyone. As John highlighted, our consolidated revenue for the third quarter of $442 million was within our guidance range, albeit towards the lower end. As our local business experienced softer demand for per diem assignments than we anticipated. Compared to the prior year and prior quarter, revenue was down 30% and 18% respectively, driven in large part by the continued normalization in both travel demand and bill rates. I'll give you more details in the segments in just a few minutes. Gross profit for the quarter was $97 million, which represented a gross margin of 22%. Gross margin was down 75 basis points sequentially due to the compression of bill pay spreads in both the travel and local businesses, as well as an increase in burdens such as healthcare insurance and workers comp. As John mentioned, the industry remains very competitive and the pay rates have come down slightly faster than bill rates. The cost of housing remains very high, driving down the overall margin. Moving down the income statement, selling, general and administrative expense was $70 million, down 12% sequentially and 13% over the prior year. The majority of the decrease relates to lower variable compensation following the historic performance throughout the pandemic, as well as the reductions in salary and benefit costs we mentioned in prior quarters. We continue to proactively balance investments with current market conditions to maintain our profitability while ensuring we have sufficient capacity for future growth. Including actions taken throughout the third quarter into the start of the fourth, we've reduced our internal headcount by approximately 20% since the start of the year. While continuing to invest in areas of the business with the highest growth potential, as well as in our technology team. Based on the cost actions taken to date, as well as lower compensation associated with the sequential decline in revenue, we anticipate total SG&A will decline in the low to mid-single digits for the fourth quarter. And as a percentage of revenue, SG&A was 16%, up from 15% last quarter and 13% in the prior year. With the revenue at the lower end of our expectations in a tighter gross margin, we reported adjusted EBITDA of $27 million, representing an adjusted EBITDA margin of just over 6% for the quarter. As we've stated before, we are managing this business towards long-term sustainable profitability, which necessitates certain investments be made to ensure sufficient capacity to achieve those goals. We believe there's new Intellify programs ramped and we continue to drive productivity improvements across the business that we can achieve our stated goal of high single to low double-digit adjusted EBITDA margins in the coming quarters. Interest expense was $700,000, which was down nearly 80%, both sequentially and from the prior year. The decline was entirely driven by lower average borrowings throughout the quarter. The majority of the interest expense reported for the third quarter was related to the carrying costs for the ABL and the fees on our outstanding letters of credit. Though we ended the quarter with no outstanding debt, we may continue to see amounts drawn and repaid under the ABL during the coming quarter, but we expect interest expense will continue to decline as we're likely to be in a net cash position for most of the quarter. The effective tax rate on the amount drawn under ABL was 6.8% as of September 30th. Also on the income statement, we reported $4.5 million in depreciation and amortization, which continues to grow as our technology projects are completed and put into use. We also recorded an additional $2 million in bad debt expense, which was down 25% sequentially. Finally, on the income statement, income tax expense was $7 million, representing an effective tax rate of 34%, which was a little higher than we expected. Based on the current mix of business, we now anticipate a full-year effective tax rate of approximately 31%. Our overall performance resulted in adjusted earnings per share of $0.39, near the midpoint of our guidance. Turning to the segments, Nursing allied reported revenue of $397 million, down 20% sequentially and 35% from the prior year. Our largest business, Travel Nursing Allied, was down 22% sequentially and 39% from the prior year. Bill rates for travel were down 8% sequentially, while billable hours were down 15%. Looking to the fourth quarter, we expect that travel to decline sequentially in the high single to low double-digit range, with rates and volumes anticipated to be down in the mid-single digits respectively. The decline in billable hours is driven by the continued softness in overall travel demand and delayed seasonal needs. With our current capacity, the possibility remains that we could see sequential growth across the quarter as new Intellify programs ramp and seasonal orders are received. Our local or per diem business continues to feel the impact from the softness in demand, with revenue down approximately 14% from the prior quarter and 32% from the prior year. The majority of the decline comes from a reduction in billable hours, as rates were down about 4% sequentially and over the prior year. Also within the nursing and allied segment, both our education and homecare staffing businesses reported year-over-year growth. Our education business, which was impacted by the summer break, is poised to see a strong fourth quarter returning to higher double-digit growth. Finally, physician staffing once again delivered robust performance reporting $46 million in revenue, which was up 92% over the prior year, excluding the impact from the Mint and Lotus acquisitions completed last year. The business was up 21%. Average revenue per day filled continued to improve as we focus on higher rate specialties and continue to experience stronger growth across the locum specialties relative to lower bill rate specialties within advanced practices. Turning to the balance sheet, we ended the quarter with $14 million in cash and no outstanding debt. With the help of our balance sheet and strong cash flow, we remain well positioned to make further investments in technology and acquisitions, as well as to continue repurchasing shares under our $100 million share repurchase plan. From a cash flow perspective, we generated $70 million in cash flow operations in the third quarter, which represented a 260% conversion on adjusted EBITDA. On a year-to-date basis, we generated $236 million in cash flow operations, by far our strongest performance in a nine-month period. Driving this performance was strong collections as the business continues to normalize. DSO was 67 days, down five days since the start of the year. Our goal remains to bring DSO below 60 days, which is more in line with our historic performance, and we believe that we can continue to make progress towards that in the coming quarters. As I mentioned, we've done a good job of collecting on our receivables and believe opportunity remains for further improvement. Cash used in investing activity was $3 million, reflecting investments in our technology initiatives. From a financing activity perspective, we paid down $30 million on the ABL and repurchased an additional 617,000 shares. This brings me to our outlook for the fourth quarter. We're guiding to revenue between $400 million and $410 million, representing a sequential decline of 7% to 10%, driven predominantly by the expected decline in both rates and billable hours for travel. We're guiding to an adjusted EBITDA range of between $19 million and $24 million, representing an adjusted EBITDA margin of approximately 5% at the midpoint of guidance. As John mentioned previously, we're managing this business for longer-term success, not to a single quarter, and continue to believe that we can achieve and maintain high single-digit adjusted EBITDA margins. Adjusted earnings per share is expected to be between $0.25 and $0.35 based on an average share count of 34.4 million shares. Also assumed in this guidance is a gross margin of between 21.5% and 22%, interest expense of $500,000, depreciation and amortization of $5 million, stock-based compensation of $2 million, and an effective tax rate of 31%. That concludes our prepared remarks and we would now like to open the line for questions.

And our first question is from Brian Tanquilut with Jefferies.

Hey, good morning, guys, or afternoon. I guess my first question is I think about the seasonality of demand and what you're seeing in Q4 and maybe weighing that versus just the fundamental demand for core contract nurse staffing. How do you think about those dynamics going forward? Maybe just looking at it even past Q4.

Hey Brian, this is John. Good evening to you as well. So looking at demand in the fourth quarter, I think we'll start back in April when we saw the low of demand hit in the beginning of April this year. Then we saw demand tick up to today about 30% where we sit up from where we were in the low of April. We were up about 7% from August. We were all anticipating much larger volumes of winter demands that never materialized. The majority of the orders that are now up 30% from April are primarily non-winter needs or core staff. Therefore, we really feel at this point that demand has stabilized in the market moving forward. While there may be a little bit of winter orders in these numbers, it's not more than 5% in the numbers that we have right now, and that we continue to see stable orders moving forward. Again, there may be a little tick down of these winter orders that are mixed within the orders we currently have.

Got it. And then maybe as I think about your margin commentary for Q4, as I think about what you had previously stated as goals to stay in double-digit margin levels, obviously not there today, how should we be thinking about the ability to drive that up as we think about 2024? Or maybe Bill, just any comments you can make in terms of how we should be modeling factors as we consider our projections for 2024?

Yes, sure, Brian. Good evening to you. When you look at the third quarter's performance, the pay bill spreads were a bit more compressed than we would have anticipated at the start of the quarter. This is due to a few factors; there's still heavy competition for candidates. While bill rates, though they've stabilized on open orders, still seem to be a bit lower than where we'd like to see them in order to generate the margins that we're aiming for. It's not that the bill rates have come down drastically, but the pay rates have come down, yet the housing costs remain stubbornly high. This contributes to the challenge with pay bill spreads. Additionally, we've seen some upticks in health insurance as more people sought medical treatment than anticipated, resulting in heightened costs. We've had to adjust to our workers comp as well. Those are the three major factors leading to the 75 basis point decline we witnessed sequentially. We're not expecting an immediate bounce back going into Q4. However, moving through 2024, we see potential that pay bill spreads could improve. The mix of the businesses as locums continues to grow while homecare also performs robustly. Furthermore, our education sector is projected to achieve high double-digit growth in the fourth quarter. We can also leverage the additional Intellify programs and continue to drive productivity improvements across our operations, allowing us to pursue our goal of high single to low double-digit adjusted EBITDA margins in the coming quarters.

Great, thanks. Maybe just to follow up on that, because it looks like you talked a lot about bill pay spreads in the quarter, which are obviously under pressure, but it does look like since revenue peaked in Q1, you've had six straight quarters of sequential decline in revenue, but also six straight quarters of a sequential increase in SG&A as a percentage of revenue. It feels like most of the market compression has actually been on that G&A side, and although you've done a great job taking dollars out, the percentage of revenue is not coming down fast enough relative to the revenue drop. So how do you think about that going forward if bill rates or total revenue drop? Is that where the deleveraging happens? What is the biggest opportunity if you think about maintaining high single-digit margin sustainably? Where does that G&A number need to be in order for that all to work out? And how do you get there if the revenue run rate is in the $1.7 billion to $1.8 billion range?

Sure. Well, Kevin, this is Bill. You're correct that the SG&A as a percentage of revenue has ticked up, primarily because revenues have come down. Therefore, we still maintain the body count for our service staff associated with our clinicians, which includes recruitment, account management, and onboarding. In turn, this continues to decrease the average revenue per FDE due to bill rate compression. We recognize that reducing the SG&A number is imperative, and we need to uncover more efficiency opportunities as we move into 2024. If margins remain at 22%, a drop down to 14% is easily feasible if the proper measures are taken. We have already taken significant cost actions, reducing our workforce by approximately 20% since the beginning of the year, but we also need to maintain sufficient capacity to capture growth opportunities.

Well, yes, to add to that, we want to ensure that while we're making those reductions, we've kept enough workforce to capture the upside when the market rebounds in 2024. We're trying to balance the need to be lean, yet positioned for growth. Therefore, we can flex up or down based on market demands over the next six to nine months.

Good evening. Thanks for taking my questions here. First, just wanted to ask on the supply side, what are you seeing in terms of willingness for nurses to either move into travel roles or continue traveling? It seems like hospitals have been pretty successful in reducing turnover. Just curious to what extent you're seeing maybe travel fatigue with nurses who did travel assignments but now may have less incentive to travel given the decrease in pay rates.

Hi, Trevor. This is John. Good evening. When you analyze the macro numbers, particularly the BLS JOLTS data of openings to hires, we're still experiencing a systemic shortage of nurses that isn't dissipating. There's strong competition for clinical roles in hospitals as they strive to attract enough clinicians to meet their needs. We did see quite a few labor disruptions and employers are raising pay for core staff, which may have slowed some travel demand. However, if hospitals need to attract clinicians, they need to provide compensation packages that align with the expectations of those clinicians. As such, we're not observing many nurses transitioning away from travel roles. There was a period where we saw travelers take permanent positions, leading to market contraction, but currently, we see a fair amount of open orders available. Our renewal rates have remained stable. We track clinicians with assignments and their percentage is at historically high levels.

Thanks. I wanted to clarify something you mentioned about the high single-digit EBITDA margin still being achievable. What kind of revenue and gross margin do you assume in that comment that would yield that? Is that applicable to 2024 or a longer-term vision?

Hey, Tobey, it's Bill. I wouldn't call it a longer-term vision, but I don't see it happening in Q1. Organic top-line growth and improved gross margins both play influential roles, whether from a better mix of business, improved bill pay spreads, or more Intellify wins. We need to adopt a multifaceted approach to achieving this goal. It's not a single factor but involves optimizing several key areas.

This means we're managing gross margin to align with EBITDA, requiring careful attention to the SG&A number. Our investments in technology, sales, and marketing will help capitalize on opportunities as the market improves in 2024. This balanced approach will allow us to navigate through current challenges while positioning ourselves for future growth.

Our last question is from Bill Sutherland with The Benchmark Company.

Thanks very much, everybody. I wanted to get a clarification if I could on something I think you said, Bill, about the rates. You're looking out on the locked-in rate, and you said that could be a bit of a headwind next year. I just wanted to clarify that.

Yes, no worries. Good evening to you. If you consider our open order rates and the rates at which we're locking in rates, we've observed stability in both, which is the positive aspect. Neither is on a major downward trend now, remaining stable within a variation of plus or minus 1 or 2%. However, the overall revenue portfolio is continuing to average down in line with previous locked rates. Therefore, the average bill rate you see for the fourth quarter will closely mirror what we've achieved in the locking rates for that period. That was my point; there's a slight headwind we could experience in the first quarter based on the rates locked-in during this timeframe.

I believe we have a large number of orders and that the fill rate has capability to trend positively in the quarter moving into the next. We've seen relative stability in our production. Week over week, as we assess our added backlog in revenue, we can achieve volume growth with bill rates incrementally increasing to align more closely with market rates.

Okay, that's good. I think it feels like with all the ups and downs, Q4, as someone mentioned, is a good starting point. We should consider the Q3 results as a baseline for projections, but Q4 will be a good basis for future assessments.

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