Earnings Call Transcript - CCRN Q4 2022

Operator, Operator

Good afternoon, everyone. Welcome to the Cross Country Healthcare's Earnings Conference Call for the Fourth 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 on the company 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.

Josh Vogel, Vice President of Investor Relations

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 fourth quarter and full year of 2022 as well as our outlook for the first quarter of 2023. 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 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.

John Martins, CEO

Thanks, Josh. And thank you, everyone, for joining us this afternoon. As we reported today, our fourth quarter results met or exceeded our revenue and profitability expectations, closing the full year with the highest revenue and profitability in our history. As a digitally innovative enterprise, with comprehensive Workforce Solutions, and an unwavering commitment to clinical excellence, we were able to maintain our momentum, even as COVID hospitalizations and demand softened. Entering 2023, we are a fundamentally stronger organization with greater financial health and a record of superior execution. Over the last year, we have been relentlessly focused on continuing to build out our sales and delivery capabilities, as well as furthering our digital transformation. In addition, I've been working closely with our board on furthering our environmental, social, and governance initiatives, with particular emphasis on governance. We continue to be thoughtful in our approach to succession planning for all key roles within the company. With respect to our board composition, we recently added two new board members to our board, Venkat Bhamidipati and Dwayne Allen, both exceptional leaders bringing new skill sets, ideas, diversity, and broad expertise across verticals such as technology and healthcare. We believe these appointments will serve Cross Country well as we continue to advance our technology strategy of creating a world-class digital platform for professionals and clients, making exceptional, frictionless, and seamless experiences with increased efficiencies. For many perspectives, 2022 was an unprecedented year, and I'd like to take a moment to highlight just a few of our achievements. Starting with technology, we have been redesigning our entire ecosystem from the ground up using a data-centric model that enables us to provide the highest levels of analytics while ensuring speed to market and best-in-class experiences for our candidates, clients, and our teams. Last year, we launched two very significant technologies, including Intellify, our proprietary vendor management system, and Gateway, our career portal. We believe that Intellify will be a game changer for Cross Country and potentially the market as a whole. Our philosophy in building Intellify was to start with a client and work backwards, designing it to help our clients more effectively manage and solve their most challenging key needs by leveraging data, analytics, advice, and insights. Our roadmap calls for further investments that are underway, and we believe that Intellify will continue to be highly differentiated in the industry. This opens up a new addressable market for Cross Country, giving us access to billions of dollars of potential spend under management in the vendor-neutral space. Gateway offers healthcare professionals the ability to find the right job through real-time, frictionless experiences on their terms. We have thousands of daily active users, and we expect that number to grow as we continue to deploy new features and functionality. In addition to our key technology initiatives, we continued to invest in our people, growing our headcount by more than 15% across virtually all lines of business, with the vast majority being revenue producers. We also brought aboard many industry leaders like our newest hire, Eric Christianson, who joined us last month as the Senior Vice President for Intellify Solutions. Eric is a pioneer in the vendor-neutral space with a proven track record of delivering innovative tech-based solutions. We are confident that he and his team will help accelerate Cross Country's growth trajectory by leveraging our SaaS-based higher margin vendor-neutral platform. From an operations perspective, every line of business experienced robust growth, driven primarily by the number of professionals on assignment, with only a modest impact coming from the rise in rates. With strong execution and continued productivity gains, our consolidated revenue was up 67% over 2021 to a record $2.8 billion. Adjusted EBITDA surged to $302 million from last year's record of $162 million. Our adjusted EBITDA margin rose 110 basis points to 10.8% from 9.7% in 2021. Also in 2022, we generated a company record $134 million in annual cash flow from operations. We completed three targeted acquisitions that build scale in the local space and diversified our offerings with interim leadership. HireUp, which closed late in the fourth quarter, brings us a talented team with deep expertise in leadership staffing and strong relationships that are a perfect complement to our robust network. Welcome to the family, HireUp. In August, we announced a $100 million share repurchase program, and through the end of the year, we repurchased 1.4 million shares, or roughly 4% of the outstanding shares. We prepaid $100 million on our term loan during the year to reduce our total leverage as well as our interest costs. We will continue to balance investments in our technology initiatives, strategic personnel, share repurchases, and tuck-in acquisitions that further bolster and diversify our portfolio. Turning to the fourth quarter, consolidated revenue was $620 million, approximately 5% above the upper end of our guidance, while adjusted EBITDA of $57 million was at the upper end of our guidance range, representing a 9.1% margin. Bill will get into more detail on the bill rates. But as expected, travel bill rates declined sequentially, although at a slower pace than we previously indicated. The slower decline was driven in part by steady demand throughout most of the quarter amidst the continued labor shortage. As expected, we began to see demand for travelers begin to come down exiting the fourth quarter and going into the start of the new year. With COVID retreating and systems increasingly seeking to lower their contingent labor standards, we expect to see continued pressure on orders and bill rates, though both continue to be above pre-COVID levels. The persistent labor shortage remains, and we cannot see anything changing the backdrop in the near term. That said, if there is a continued softening in the market, we are prepared to act swiftly to right-size our infrastructure while ensuring our ability to grow. Following a similar trend coming off COVID highs, our local business experienced a slight sequential decline, in part due to the impact from holidays, as well as the continued normalization of bill rates. Looking at our other lines of business, we continue to see improved traction in locums, education, and homecare, which all witnessed an increase in hours and revenue on a sequential basis. Locums, in particular, was up nearly 8% sequentially on an organic basis, which goes against the normal seasonal trend for that business. It also reinforces our belief that this space will continue to see strong demand and further supports the rationale for acquiring Mint and Lotus in the fourth quarter. Looking at the market today, health systems that experienced major cost pressures throughout the pandemic are assessing their unique situations and seeking alternatives on ways to lower costs and ultimately, their reliance on contingent labor. Some of our existing MSPs will understandably want to explore options. Cross Country remains a trusted partner to thousands of healthcare clients. We believe that our full complement of technical offerings, coupled with our commitment to deliver the highest volume of care, will ultimately result in the growth of our market share. Though we have recently experienced a higher than normal level of client attrition, our pipeline for new opportunities has never been stronger. I believe that we have an incredible value proposition for clients, and that with the investments in both people and technology, we are well-positioned to win a significant amount of new business in the coming quarters. Today, more than 50% of our revenue comes from our MSPs, and as of December, roughly 15% of total spend under management has been migrated to our Intellify platform. As we continue to migrate other clients to the Intellify platform, it will save us millions of dollars annually in license fees paid to third parties. We anticipate that the majority of our MSP clients will be converted in the next 12 months, depending on our success in winning new accounts since they would naturally want to join Intellify. Intellify also opens a significant market opportunity in the vendor-neutral space, giving us the ability to capture significant incremental client spend as well as technology extensions for direct license by clients to help manage their contingency and their core staffing needs. Looking ahead to 2023, critical staffing shortages continue to be widespread, specifically nurse-to-patient ratios remain high, and we believe this contributes to the labor disruptions that the industry has seen in recent months. Supply constraint is still the biggest challenge faced by our clients. When we look at the 2022 McKenzie study that cited a shortage of 10% to 20% of the nurses needed to care for all patients in the system by 2025 and track the monthly data for the Bureau of Labor Statistics that indicates a persistent wide gap between healthcare job openings and hires, it seems that the supply and demand imbalance will persist for the foreseeable future. Looking at the first quarter, we expect revenue to be between $590 million and $600 million, which remains well above the level needed for us to achieve our minimal full-year revenue target in 2023. We remain optimistic that we can deliver on our commitments and generate significant shareholder value. We have a proven ability to execute across many fronts, and with the rollout of Intellify in particular, we find ourselves in a great position to build upon recent successes while also continuing to capture share. We, therefore, believe our full-year targets announced at our Investor Day in mid-September will deliver a full-year 2022 revenue of at least $2.2 billion and adjusted EBITDA in excess of $200 million. In closing, 2022 was a tremendous year, and we will build on this progress by making strategic investments that we believe will best position Cross Country for long-term, sustained profitable growth across all lines of business. I want to thank all of our professionals who make 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 I am so proud of. I'm pleased to report that for the third year in a row, we were recognized by Energage with a 2023 Top Workplaces USA award. We also recently received multiple 2023 Best of Staffing Awards for Excellence from ClearlyRated. Achievements like these are a testament to our corporate culture and focus on supporting and growing our employees from within while consistently attracting and retaining top talent. With that, let me turn the call over to Bill.

Bill Burns, CFO

Thanks, John, and good afternoon, everyone. I'm pleased to share that with the full year now complete, 2022 was the strongest year of performance in the company's history. For the quarter, we once again met or exceeded our expectations for both revenue and adjusted EBITDA. Our strong results were fueled by solid execution across most lines of business, as well as higher than expected travel bill rates. I’ll dive into the rates in just a moment. Consolidated revenue for the fourth quarter was $628 million, down 1% sequentially and 2% over the prior year. As a reminder, we completed the acquisitions of two locum tenens businesses, as well as our most recent acquisition of an interim leadership company during the quarter. Excluding the impact of those acquisitions, consolidated revenue was down approximately 4% over the prior year and 3% sequentially. Gross profit was $139 million, which represented a gross margin of 22.1%. The sequential decline in gross margin of approximately 50 basis points was primarily driven by higher health insurance costs incurred in the year, an increase in professional liability insurance rates, as well as an actuarial adjustment for workers' compensation. As expected, we did experience a slightly stronger bill pay spread with pay rates continuing to normalize within the travel business, although it was mostly offset by the relatively high cost of housing for our travelers. Moving down the income statement, total selling, general and administrative expenses were $81 million, up 1% sequentially and 23% over the prior year. The majority of the increase in SG&A over the prior year was driven by continued investments in people and higher compensation on the strong performance in 2022, as well as investments in our technology initiatives that are not capitalizable. On a sequential basis, the increase was primarily attributable to the impact from our recent acquisitions. As a percentage of revenue, SG&A was 12.9%, representing an increase of more than 250 basis points over the prior year, given the decline in fill rates as well as the increased investments necessary to support the volume growth in our business. Throughout 2022, we continued to invest in people, adding revenue producing resources across all our lines of business, but with the majority focus on meeting demand in our travel business. While the demand for travel is certainly softened coming into the new year, we still see continued growth in other parts of the business such as education, home care, and locum tenens that will likely support further investments in those areas. That said, we manage our business very tightly through capacity metrics. We are prepared to adjust course in the event that demand does continue to soften. The broader supply and demand imbalance remains, and while we obviously can’t predict whether travel demand will rebound or soften further, we're well positioned to manage our costs over the near term to protect our level of profitability. 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 Gateway and Intellify. In 2022, we spent an estimated $16 million on IT projects, an increase of more than 30% over the prior year. Of that investment, roughly 30% was recognized as expense during the year, given the nature of some of the projects. Our solid top-line performance fueled another quarter of strong earnings with adjusted EBITDA of $57 million, representing a margin of 9%, consistent with our goal to maintain margins in the high single to low double-digit range. Interest expense was $3.5 million, which was up 25% over the prior year, driven entirely by rising interest rates on outstanding debt. Our effective interest rate for the quarter was 8.8%, which would have been higher had we not opted to make the $50 million prepayment on our subordinated term loan at the start of the fourth quarter, bringing the full year optional prepayments to $100 million. I'll go into more detail on cash flows and our capital allocations in just a moment. Finally, on the income statement, income tax expense was $7.6 million, representing an effective tax rate of 16.3%, bringing the full year effective tax rate to 26.5%. The decline in tax expense was driven by finalization of the full year tax provision, as well as the release of an uncertain tax position pertaining to the deductibility of certain items. The combination of our strong performance and triple tax adjustments resulted in an adjusted earnings per share of $1.09, up slightly over the third quarter and well above the upper end of our guidance range. Turning to the segments, Nurse and Allied reported revenue of $591 million, representing a decline of 5% over the prior year and 3% sequentially. Our largest business, travel Nurse and Allied, was down 5% both sequentially and over the prior year. The sequential decline was primarily driven by a 3% drop in average bill rates and 2% from volume. As John mentioned a moment ago, bill rates were expected to decline in the mid-single to mid-high single digit range, but as demand remains strong throughout most of the quarter, we experienced slightly higher bill rates on assignments, as well as a favorable mix. With respect to the comparison to the prior year, the decline was entirely due to lower average bill rates as volumes were up more than 15%. As we've previously called out, we have long expected travel bill rates to decline, but with continued high needs by clients and a persistent labor shortage, rates declined more slowly than we had expected. Now as clients are starting to right-size their contingent labor more effectively, we see demand for travel physicians decline, and as a result, so will the bill rates. We are seeing new orders bill at a rate that is roughly 5% to 7% below the rates we experienced in the fourth quarter. If rates stabilized at these levels, the impact will mostly be seen in the second quarter, with a more modest impact in the first quarter given the length of assignments. We have said previously that the decline in bill rates was and is expected, and that we don't have a perfect lens on where they will settle. We believe rates could decline another 5% to 10%, implying they would be roughly 40% higher than pre-pandemic rates. Our local business was in line with our expectations, with revenue down roughly 4% sequentially, primarily due to the impact from holidays. Average bill rates were up 3% sequentially, principally on the mix of the business. Our other lines of business, the nurse and allied all reported strong results for the quarter with double-digit growth. Education and research both grew by more than 30%, and our homecare business rose 11% over the prior year. We continue to expect these businesses will experience robust growth based on the market and the needs of our clients. Finally, physician staffing delivered another strong quarter with $37 million in revenue, representing an 84% increase over the prior year and 56% sequentially. Excluding the impact of the recent acquisitions, physician staffing grew by 28% on an organic basis, as billable days were up 9%, and revenue per day filled increased nearly 18%. The increase in rates was extremely broad-based across virtually every specialty. With the continued growth we've experienced in this business, we anticipate further investments in capacity, as well as targeting tuck-in acquisitions that can further grow our presence in the market. Turning to the balance sheet, we ended the quarter with $4 million in cash and $151 million in outstanding debt, including $74 million on the subordinated term loan and $77 million in borrowings on our ABL facility. Currently, the sub debt is based on LIBOR, but we anticipate it will be converted to SOFR in the first half of the year. It's also worth noting that, given the strong performance and positive cash flow as of the end of the fourth quarter, we have an incredibly low level of leverage with a total leverage ratio of less than 0.5x. We remained well positioned to make further investments, as well as repurchase more of our stock since we believe the company continues to be undervalued. From a cash flow perspective, we generated $4 million in cash from operations during the quarter, bringing the full year to $134 million as compared with the use of cash of $85 million in the prior year, representing a swing of more than $200 million. Our day sales outstanding increased to 72 days, due primarily to slower collections from several large clients. We continue to expect receivables, net of reserves, to be fully collectible and believe DSO will return to more normal levels as we progress through 2023. This may take a couple of quarters to achieve. Also in the fourth quarter, we've prepaid an additional $50 million on the term loan, bringing the cumulative prepayments for the year to $100 million or roughly 60% of the principal balance for that instrument. We repurchased another 350,000 shares at a total cost of $11 million, bringing our cumulative share repurchases in 2022 to 1.4 million shares at a total cost of $35 million. Looking ahead, we expect to continue generating a significant amount of cash and will continue to see growth investments such as tuck-in acquisitions across our higher-margin businesses. During the fourth quarter, we established a 10b5-1 trading plan to continue making share repurchases during the blackout trading windows, depending on certain conditions. Since January 1st, we have repurchased an additional 200,000 shares at an aggregate cost of roughly $5 million. We expect to continue to be opportunistic with future share repurchases outside of the 10b5-1 trading plan, depending on factors such as available cash, the share price, and alternative uses for that cash, such as debt repayments or acquisitions. This brings me to the outlook for the first quarter. We're guiding to the first quarter revenue to be between $590 million and $600 million, representing the sequential decline of 4% to 6%, driven predominantly by the anticipated decline in travel bill rates, partly offset by growth in education and the impact from recent acquisitions. We expect adjusted EBITDA to be between $44 million and $49 million, representing an adjusted EBITDA margin of approximately 8%. The sequential decline in adjusted EBITDA margin is primarily due to the impact of lower gross profit on a sequential decline in revenue, as well as the impact of the annual payroll tax reset in most of our businesses. Adjusted earnings per share is expected to be between $0.70 and $0.80, based on an average share count of 36.5 million shares. Also assumed in this guidance is a gross margin of between 21.5% and 22%, interest expense of $3.2 million, depreciation and amortization of $3.4 million, stock-based compensation of $2 million, and an effective tax rate of 29%. Before we open the line for questions, I would like to congratulate John on being named to Staffing Industry Analysts' Top 100 Most Influential Leaders, a recognition I feel is certainly well-deserved. Congrats, John. That concludes our prepared remarks, and I would like to open the lines for questions.

Operator, Operator

Our first question comes from Brian Tanquilut with Jefferies.

Brian Tanquilut, Analyst

Hey, good afternoon. I guess my question just on the orders and bill rates kind of normalizing here. In your prepared remarks, you talked about how you can right-size the infrastructure if needed. So maybe just some thoughts on number one your bill rate going cadence expectation for the remainder of the year. And then second, what those levers would be that you can pull to offset that because, obviously, you're maintaining guidance here for the year.

John Martins, CEO

Sure, Brian, good afternoon. This is John. I will talk a little about the levers we can pull, and then I'll hand it over to Bill to talk more about the bill rates. But what we utilize is pretty sophisticated capacity modeling. I think we've spoken about this before, where we look at each part of the business. What we can do is we can look up or down, and when we use capacity models, we actually use them as we're growing to see the number of resources that we need to continue on the path to grow. We look at where our future business is and how we're growing the business, and where we anticipate and model out to grow the business. Conversely, when we see the business slowing down, we'll pull those same levers to take away the resources that we no longer need to maintain that growth. It's really based on a lot of capacity modeling and factors of the number of open positions we have based on the number of velocities we're seeing with placements happening. Of course, it's all tied to the end of the day to revenue and even EBITDA.

Bill Burns, CFO

Yes, Brian. I’ll just throw in on the cost levers as well. Ordinarily, as you would expect, as the business scales up and down, there are certain items that you're going to see rise and fall, whether that's variable compensation or some other marketing spend that may be involved in lead generation activity. So there are natural levers or hedges as the business moves up or down that will just happen naturally. To John's point on the cost side of things, obviously, we are constantly looking across the organization to rebalance those investments we've made and ensure we're getting the best return we can. Regarding bill rates, there's no perfect lens here, right? The market, with the demand we have, is starting to pull back coming into the first quarter. Bill rates are down significantly on open orders. This is seen as a leading indicator, and that’s where I made the comment in the prepared remarks that on the open orders, we're seeing bill rates starting to soften in that 5% to 10% neighborhood. But this hasn't fully baked its way through our business yet. So as we look out at the first quarter, rates will be down, consistent with what we saw in the fourth quarter, modest low to mid-single digits. The impact will be more likely seen in the second quarter. After that, it starts to get a little fuzzy as to where the rates trend after that. We reiterated our full-year minimum guidance at $2.2 billion for the revenue figure, and we're well on pace for that, certainly coming through the first quarter. So you can kind of see where the back half might end up.

Brian Tanquilut, Analyst

Now appreciate those comments, Bill. I guess as I think about your comment and margins for Q1, I get the payroll tax and just the lower volume and lower bill rate, but how should we be thinking about margin trend post-Q1? And then maybe factoring in as well the business mix with locums becoming a bigger portion of your business with the last two acquisitions?

Bill Burns, CFO

Yes, I'll start, and then John or Marc or Dan can want to jump in. When you look at the margin for the first quarter, payroll tax for us hits us in the gross margin line, usually about 40 to 50 basis points. Given the size and scale of our SG&A, the impact to SG&A is about $1 million as well from the additional payroll tax. That's a sizable bite when you look at our overall seasonality and the impact of the first quarter. I think your question really is about the gross margin in the business, and obviously, I called out in travel what we're seeing, the pay-bill spreads are normalizing as the bill rates come down. Payroll has been coming down. The piece that hasn't moved as fast as the pay rates has been the housing costs. That element for the travelers on assignment has been stubbornly high. That's been impacting the overall pay-bill improvement. This all, combined with a couple of other items like the rising professional liability insurance rates, is another factor. We shouldn't see an incremental increase in the first quarter off of that. Health insurance saw a spike in the number of clinicians; we are self-insured, and losses have risen amongst the number of clinicians consuming healthcare. That was a spike that should normalize as we go into the first quarter.

John Martins, CEO

This is John. I'd add that when we look at the business and our gross margin, we look at it from a portfolio perspective. As you were saying, Brian, we're looking at locums. From the nurse and allied travel standpoint, on the transactional and day-to-day deals we are doing, we're not expecting to see a large uptick in gross margin. There’s a bit of room for improvement over the next several quarters, and we'll incrementally gain that. However, when we look at how we're going to improve our overall gross margins, we believe it will come from growing our higher margin businesses. This includes locums, our education business, our new HireUp interim executive business, and our Workforce Solutions Group, which is our home health business. Those will have higher margin profiles that will help improve overall growth. Additionally, a key aspect driving our gross margin increase will be connected to our entry into the vendor-neutral space with Intellify. These margins indicate gross margins that are around 90% with EBITDA margins between 60% and 80%. Overall, we will see the balance of our business grow in these other non-nurse traveler and allied businesses to improve our overall portfolio margins.

Operator, Operator

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

A.J. Rice, Analyst

Hi, everybody. Maybe a couple of questions, if I could. I think it sounds like what you're suggesting when you lay out the quarters from ‘23 relates mostly to the post-pandemic continued moderation in especially bill rates. Can you remind us if you think normal seasonality will come back as you lay out the quarters? And how would you lay out? It's been a while since we've had a normal seasonal year. How would you lay out the quarters generally from a seasonal perspective in a normal year?

John Martins, CEO

Hi, AJ, this is John. I will hand it over to Bill on this one. But I think it's too early to say if seasonality is back yet. Right now, yes, we are seeing signs of a seasonal trend from the triple threat we saw in the fourth quarter with RSV, COVID, and influenza. Since then, some of that has waned; it could be interpreted that we’re getting more seasonal. Still, we recall for the last two seasons we’ve also seen the COVID summer during our traditional seasons. So I think we’re not ready to say we’re getting into a cyclical, traditional travelers-business season.

Bill Burns, CFO

Yes, I’ll just throw out, when you look across the rest of our business, the locum tenens generally has its strongest quarter in the third quarter. One would usually anticipate a sequential change in that business. It usually steps back in the fourth quarter, but that did not happen last year, as we actually surged ahead with the 8% we called out. Locum tenens has significant runway for us right now, and we should be able to see growth and build on that, despite seasonal trends we would normally experience. When thinking about Q2, while we’re not guiding for that, if I look at Q2, it would likely see the travel business bearing headwinds from bill rate declines, coupled with the start of the summer break and spring break in education that typically falls into the second quarter. Those two factors could point to a sequential step down in that quarter, though we expect locums in the third quarter will follow traditional demand patterns as schools resume in the fourth quarter.

A.J. Rice, Analyst

That's great. Thanks for the commentary about the MSPs and 50% of your revenues coming from that. I know in the pandemic, there was difficulty filling orders, and a lot of orders got subcontracted, maybe even some MSPs opened to third parties coming in on the margin. Can you comment on where you're at today? Is your fill rate, as things normalize, stepped up meaningfully, or a lot or percent of orders going completely unfilled? Has that come down a lot?

John Martins, CEO

Yes, that's come down a lot. We're in the high 90% fill rate, and as we were still capturing around 70%. We're filling the needs of clients out right now.

Bill Burns, CFO

AJ, this is Bill. We didn't call it out in the prepared remarks, but the capture rates declined about 1%. So we were a little over 70% in the third quarter. We were at 69% in the fourth quarter. So that was holding steady and has bounced in and out of that range.

John Martins, CEO

Yes, and I would just add, AJ, one of the things, reasons why we keep the capturing at that 69% or 70% is because we want to have the excess supply and capacity. We see a lot of client attrition. Typically, we have one or two clients leave in a year, and we had higher than that, but the whole market is experiencing this issue. Part of the reason is many BMS or MSP contracts run three years. During COVID, many hospitals deferred going out to bid, and now we're seeing those contracts coming up all at once. Many hospitals are going out to bid. We’re seeing an opportunity to win new deals. Across Cross Country, we are on the smaller side of the larger companies, and with losing some clients, we are also more opportunistic in winning new ones. Having never seen a larger pipeline in MSP in Cross Country’s history is a testament to our efforts. Keeping that excess supply allows us to show potential clients that we can perform better than incumbents and win their business.

A.J. Rice, Analyst

Okay, that's interesting. Maybe just a final question on your prepared comments. You talked about being prepared to win, and if necessary, make adjustments to infrastructure. That begs the question, what would prompt you to make a bigger adjustment? And then what types of things are you talking about doing if you had to?

Bill Burns, CFO

AJ, this is Bill again. So I mentioned some of the things that will happen organically. I think it's really about when you look across the entire landscape of resources we have and the different roles, every single role, from recruitment functions to support functions to onboarding, all of our functions have capacity metrics that help us understand how many resources we need. Yes, we don’t want to overreact. The important thing here is that demand will ebb and flow. We've seen this play out a couple of times throughout the pandemic, and nothing has fixed the long-term issues in the marketplace. We don't want to overreact and start reducing costs too fast, because we want to maintain that organic capacity to grow. It's really about right-sizing your cost structure across your headcount, as well as some of the other third-party expenses you have.

John Martins, CEO

Yes, and this is John. I would just add that, as we've said, consistently for the last nine months or a year, that we're going to maintain a high single-digit and low double-digit EBITDA. That’s really what drives our resource planning.

Bill Burns, CFO

One last comment, AJ, before I turn it back to you if you have another question. If you think about it, there's a natural level of attrition in any business. The capacity metrics allow us to also think carefully about when to backfill and when not to backfill. So attrition through those avenues will be another way in which we see costs self-correcting themselves without us taking action. We won't backfill if we don't have the need for those roles.

Operator, Operator

Our next question comes from Kevin Fischbeck with Bank of America.

Unidentified Analyst, Analyst

Hey, this is [inaudible] filling in for Kevin. Can you provide an update on the deal pipeline? Which areas are you concentrating on? And what are your thoughts on multiples?

John Martins, CEO

Sure. Hey, this is John. I'll start with that. We look at the continuum of health care and what is on that continuum for our deals. We consider any type of organization and business that falls between pre-acute, acute, and post-acute care. With our recent acquisitions of home health space and pace centers, the pace centers are still very attractive to us. The two recent locum acquisitions in the fourth quarter are encouraging, and we believe locums will remain a key focus of ours, as well as ancillary businesses that can help service our clients. Essentially, our strategy has two main points: can we add or expand our share of market by acquiring a company in a certain space, number one, and number two, can we add additional services to enhance our service to clients to create a stickier relationship with them.

Operator, Operator

Our next question comes from Tobey Sommer with Truist Securities.

Tobey Sommer, Analyst

Thank you. I was hoping that you could describe what you're hearing from customers, hospitals, and hospital systems. In particular, two areas: vendor-neutral, MSP, VMS, and if you could comment on whether any of your client losses were due to a philosophical change and a shift from staffing companies to vendor-neutral. What sorts of energy and investment innovation are you seeing on the local side that customers are trying to utilize to satisfy more of their contract needs? Thanks.

John Martins, CEO

Sure, Tobey. This is John. I'll start, and Dan and Marc will probably go in as well. Yes, we definitely saw some client attrition that moved towards the vendor-neutral opportunities. However, what I would say is that when we look at the market, the addressable market in the staffing industry, I think SIA has 2023 at a figure around $50 billion. Of course, that may drop if rates decline. I’m not sure on the specifics. In that market, about 40% is MSP, roughly the same 40% is vendor-neutral, and about 20% is direct clients. As we mentioned earlier, these MSPs, which are typically under VMS contracts, are usually three-year contracts. Many of them are coming up right now and going out to bid. Clients are reassessing their choices and considering various models. It’s not uncommon for clients to switch between VMS and MSP, exploring different options, while some even evaluate going in-house and relying on technology alone. We feel fortunate, though, because we launched our Intellify, our vendor-neutral VMS system late last year. As has been mentioned, we hired Eric Christianson, who is a pioneer in the vendor-neutral space. We’re optimistic about building our vendor-neutral business and think there’s significant upside potential to capture that market.

Dan White, Chief Commercial Officer

Thanks, John. Tobey, it’s Dan. I'd just like to add a couple of points regarding the locum business. One of the key sets of features inside of Intellify is our ability to manage internal resource pools effectively, which allows clients to manage their resources while still supplementing those with additional local resources prior to going to travel as a resource. Additionally, we’re increasing our capabilities. For example, we added locums to one of our clients on the Intellify platform recently, which we believe brings a huge upside for the rest of our customer base as well. Importantly, when we think about the capabilities that our customers are looking for in these technology platforms, whether they run them themselves or we assist them, having a kind of pre-integrated set of suppliers allows them to activate it quickly. I’m grateful today; we had a whole house full of suppliers here to discuss their support for this platform for our programs. They can quickly turn this on, providing local flavor and broad flavor, which is a pretty strong component.

Unidentified Company Representative, Representative

And, Tobey, this is Johnny. I’d just like to add that what we’re seeing in the local market and the hospitals, and with the clients that we’re in front of is they’re looking to expand their internal resource pool. That correlates with what Dan was saying regarding the utilization of our Intellify product. For our clients, we are helping them to build these internal resource pools. We’re being asked how we can expedite the movement of local resources. We’re hearing this from many of our clients currently.

Tobey Sommer, Analyst

Then I wanted to ask about bill rates in comparison to full-time compensation. I know that's a tough analysis to make because you have to compute an all-in number for full-time compensation. How much could bill rates fall before we reach what has traditionally been a natural hourly premium for a nurse traveling to another city and staying in unfamiliar accommodations?

John Martins, CEO

Yes, I don't think we track that aspect specifically. What I can say is we’ve always observed that there is a premium paid for travel nurses. However, when observing the total compensation package for a travel nurse compared to the all-in package of a core staff nurse, including all of their benefits, hospitals often view it as a cost savings. The flexibility to bring on and remove talent means it can often be cheaper. The other point is, regarding where rates go down, it seems the attraction to being a travel nurse and the gig economy remains strong; 65% of our clinicians fall into the millennial category or younger, and they report wanting to experience different places and lifestyles.

Tobey Sommer, Analyst

Thanks, and last question for me. What is the M&A landscape like currently? Would you feel comfortable purchasing properties for valuations that exceed your company stock valuations?

John Martins, CEO

Yes, valuations are trending downward a bit, and naturally, as interest rates have risen, we're seeing this ease a bit as well. In terms of our appetite for acquisitions, we look at whether it’s a strategic fit for the organization. Will it help us enhance our gross margins and EBITDA? I don’t know if Bill wants to add anything else to that.

Bill Burns, CFO

I think you said it well. The multiples are indeed trending toward more favorable levels. The inherent question was whether we would be willing to pay a multiple that exceeds our current multiple at Cross Country. I’d say the short answer is yes, depending on the property. If it’s a strategic fit that aligns with our objectives in the continuum of care and increases margins, then yes, we’d be inclined to engage competitively to secure well-valued properties.

Operator, Operator

Our final question comes from Bill Sutherland with The Benchmark Company.

Bill Sutherland, Analyst

Wow, it’s the last question, guys. So clarification, Bill, if you don’t mind. On the 5% to 10% range you used for travel, regarding the open travel orders, you would normally expect some seasonality between 2Q over 1Q, correct?

Bill Burns, CFO

Not necessarily from a bill rate perspective, Bill. There are demand spikes that may occur in specific parts of the country within the winter months. Those might see a spike in demand in snowbird states like Florida. That leads to lower needs in other areas, but I wouldn’t expect bill rate fluctuations throughout the year, except for what we saw during the pandemic.

Marc Krug, Group President of Delivery

Yes, typically, we don't see the bill rate fluctuations seasonally. We tend to observe demand-driven variances. That said, especially over the last few years, we have not witnessed those historic patterns.

Bill Sutherland, Analyst

So the 5% to 10% can be solely attributed to the bill rates that you're referring to. There might be some seasonal volume on top of that, as I’m thinking about 2Q?

Bill Burns, CFO

Yes, when it pertains to the volume side, I think there's a couple of points. In the fourth quarter transitioning into the first quarter, we did have some rapid response and labor disruptions that you can’t overlook. That will present a volume headwind going into Q1. From Q1 to Q2, we generally do not experience a tremendous downturn. In fact, our travelers on assignment ramp up throughout the first quarter unlike other companies, likely growing through January and into February. We’re building that headcount up as we progress through the quarter currently.

Bill Sutherland, Analyst

Okay, good. That’s great clarification. The bundle you're classifying is Workforce Solutions, and that’s not quite your words, but it seems to include education and room, etc. What does that aggregate to now on a run-rate revenue basis?

Bill Burns, CFO

We don't incorporate education in that. The Workforce Solutions Group specifically, we're talking about a run rate over low $100 million right now.

John Martins, CEO

I'd say our Workforce Solutions Group is nearing a $100 million run rate, while education is around $75-$80 million. Search and RPO sit around the $25 to $30 million run rate. Locums has been approximately $150 to $180 million. We don't categorize them all into one group.

Bill Burns, CFO

Locums did.

Bill Sutherland, Analyst

Okay. And lastly, Bill, if you are successful in migrating Intellify to essentially all your MSPs by the end of this year, what’s the dollar impact of that?

Bill Burns, CFO

It's a great question. I would put it into percentages. Our spend under management typically incurs fees ranging from 85 to 120 basis points, or about 1%. This current fee is what we pay to third parties, which we will avoid upon migration.

Operator, Operator

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