Cross Country Healthcare, Inc.

Good afternoon, everyone, and welcome to Cross Country Healthcare's second quarter 2021 earnings conference call. 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 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 Mr. Bill Burns Cross-Country Healthcare's Chief Financial Officer. Thank you, and please go ahead, sir.

Thank you. Good afternoon, everyone, and welcome to Cross-Country Healthcare's second quarter 2021 earnings call. I'm joined today by our co-founder and Chief Executive Officer, Kevin Clark, as well as Buffy White, Group President of Workforce Solutions and Services, and John Martins, Group President of Delivery. Also joining us today is Pamela Young, Division President of our most recent acquisition, Cross-Country Workforce Solutions Group. Welcome, Pamela. Today's call will include a discussion of our financial results for the second quarter of 2021 and our outlook for the third quarter. A copy of our earnings press release is available on our website at crosscountryhealthcare.com. Please note that certain statements made in this call may constitute forward-looking statements. These statements reflect the company's current 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 2020 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 financial measures 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 or normalized numbers pertaining to our most recent acquisition as though the results were included or excluded from the periods presented. With that, I will now turn the call over to our co-founder and chief executive officer, Kevin Clark.

Thanks, Bill, and thank you to everyone for joining us this afternoon. Before I get into the business results, I'd like to start by welcoming Pamela Young to our call this quarter. Pam was the CEO and founder of our most recent acquisition, Workforce Solutions Group, an entrepreneurial woman-led business, and she brings a wealth of industry experience to our company. As our first acquisition since my return, it was important to me that we were very deliberate in identifying a company that not only has a strong track record for growth, but also would be a great cultural fit. We are highly encouraged by the team of talented individuals who join Cross Country, as well as the trajectory of this business. And we believe it will be a platform for continued growth as we enter the home care market in a more meaningful way. This acquisition aligns with our strategy of following the patient and delivering quality clinicians across the entire continuum of care, thereby allowing our clients to deliver on their mission of improving population health and delivering care to disadvantaged or economically challenged communities. Turning to the business, a robust demand environment coupled with Solid execution allowed us to once again exceed expectations for both revenue and profitability. Despite the pressure from declining bill rates receding from their COVID peaks, we again managed to expand the number of healthcare professionals on assignment throughout the quarter with volumes up sequentially in every business. Consolidated revenue for the second quarter of $331.8 million represented another milestone for cross-country. reaching a new all-time high for revenue in a single quarter. Adjusted EBITDA of $24.3 million also exceeded the high end of our guidance, representing an adjusted EBITDA margin of 7.3%. As expected, our adjusted EBITDA margin pulled back from the 8% experienced in the first quarter, as we continued to rapidly invest across most areas of our business. I'll touch in a moment on the nature of these investments, but let me next give you a sense of what we are seeing in the broader market. From a demand perspective, we continue to experience record high levels of orders with continued growth in ER and surgical specialties. Travel nurse orders were up nearly 50% from the start of the quarter, which we believe is driven by both a rise in demand for healthcare services, as well as challenges in building and maintaining core staff levels by many hospital systems. During the second quarter, we have seen declines in orders for intensive care and respiratory therapists, as well as declines in orders for COVID-related positions, such as vaccinators and screeners. Although specific COVID orders have been declining, we are starting to see rising needs in certain markets tied to a rise in hospitalizations stemming from the new COVID variant. Since peaking in the first quarter, we are continuing to see bill rates come down, a trend we expect to continue through the second half of 2021. However, with the persistent shortage of clinicians, we continue to see elevated compensation costs, which may result in bill rates remaining higher than pre-COVID rates for the foreseeable future. As always, it is our goal to remain flexible and competitive while ensuring we can provide the clinicians that our clients need to deliver the highest standard of care. Turning to the segments, revenue for Nurse and Allied rose by 58% over the prior year, fueled by double-digit growth across our major line of business. Throughout the second quarter, we continued to grow the number of healthcare professionals on assignment, and as a result, billable hours were up nearly 9% sequentially on an organic basis for the segment. The majority of our organic growth was in our largest business, Travel Nurse. Despite the 15% sequential decline in bill rates, we grew the number of professionals on travel assignments and experienced a 13% increase in billable hours. We attribute this growth in headcount to solid executions. further investments in revenue producers, as well as continued improvement in productivity. Since the deployment of the applicant tracking system in late Q3 of last year, we have experienced significant growth in the average number of professionals on assignment per recruiter, with the most significant improvement seen with recruiters having one to three years of tenure. As a result, for the second quarter in a row, we have achieved another milestone for the highest number of professionals on assignment in more than 20 years. Also, within the nurse and allied segment, our travel allied business experienced strong sequential growth of more than 25%, almost entirely due to an increase in billable hours as bill rates were essentially flat for that business. Our local business was down approximately 4% entirely due to a decline in bill rates as they had fewer COVID-related orders. Before I move on to physician staffing, let me just give you some color on the performance of our most recent acquisition. Given that the deal closed so late in the quarter, we only recognized $5 million in revenue for Q2. On a pro forma basis, this business has nearly doubled from the prior year and has a strong growth trajectory for the balance of the year and into 2022. WSG is a leader in providing temporary clinical staff in the home care market with an emphasis on caring for the elderly, which expands our client base, thereby providing additional opportunities for our clinicians. We are obviously very encouraged by the performance of this segment, as well as by the progress we have made on developing and deploying technologies. Although we certainly can't predict whether there will be another surge of COVID orders, as cases seem to be on the rise, we do expect this segment will continue to experience sequential volume growth throughout the second half. Our only other segment, physician staffing, was down 4% over the prior quarter, primarily as a result of bill rates and mix. as the number of days filled were up slightly. We continue to see an upward trend in both primary care and anesthesia, as well as strong demand for advanced practices such as CRNAs. With the continued recovery of this business from the pandemic and more physicians projected to take vacations this year, we expect to see sequential growth for the third quarter above the historic seasonal trend of low to mid-single digits. From an MSP perspective, spend under management for the quarter was down approximately 1%, primarily as bill rates continued to decline, though partially offset by higher demand. Our capture rate at MSPs was approximately 74%, a slight decline from the first quarter, though well above our historic levels. As the number of MSP orders continues to rise well above pre-COVID levels, our focus remains on ensuring that we deliver the critical staff to our clients with the highest needs. As a result of the higher spend under management and the increase in our capture rate, staffing revenue from MSPs rose 79% over the prior year and represented nearly 50% of our consolidated revenue. From a technology perspective, we continue to make progress on further enhancements to our applicant tracking system for travel nurse and travel allied, as well as adding functionality to cross-country marketplace, our proprietary mobile application. Other projects, including the replacement of our payroll and billing systems, as well as the rollout of the applicant tracking system to our local business in the first half of 2022, will position the company well for sustained revenue growth and improved profitability. I remain encouraged that the digital transformation we set about two years ago is on track, and we are seeing the benefits from these investments. Looking ahead, we expect to see demand remain at these elevated levels, especially as systems face continued labor shortages. Though COVID rates will likely continue to decline, the exceptionally tight labor market may offer some resistance to declining rates. In partnership with our clients, we continue to collaborate on strategies aimed at managing their temporary labor spend, offering them comprehensive solutions. In recent months, we have seen higher interest in our recruitment process outsourcing services among both existing and new clients. This is a prime example of our one source total talent solution where cross country brings its 35 plus years of deep political experience and full suite of services leveraging our extensive candidate database, as well as what we believe to be best-in-class tools for attracting candidates to assist clients in filling their core staff needs. For the third quarter, we expect revenue to be between $310 and $320 million, representing a 60% to 65% increase over the prior year, and a sequential decline of between 4% and 7%. The primary contributor to the sequential decline remains the trend for normalizing travel nurse bill rates. As I mentioned previously, the scarcity of clinical labor is leading to higher compensation costs and, as a result, lower gross margins. Gross margin for the third quarter is expected to improve modestly over the second quarter as pay rates continue to normalize. Also impacting the sequential comparison is the impact of summer vacations on our higher margin education business. Improving our gross margin remains a focus area for us as we seek to gain efficiencies from our technology investments and continuing to improve the overall mix. From an overall profitability perspective, we are targeting adjusted EBITDA of $18 to $20 million, representing an EBITDA margin of 5.8 to 6.3%. With demand remaining near historic highs and our ability to ramp new producers, we are continuing to invest in additional revenue-generating capacity to fuel faster growth in the coming quarters. In the first half of 2021, more than 90% of our new hires have been in revenue-producing roles, such as recruitment or account management. And we expect to continue investing throughout the third quarter to satisfy the growing needs of our clients. Before I hand the call over to Bill, I just want to add how proud I am of our entire team. We recognize that the milestones achieved were during a time of extraordinary volatility and increased bill rates. but I have no doubt that it is the ability of this great team to execute that has made everything we have accomplished possible. I am excited about our direction and remain personally committed to lead the company and our strategy we set out and achieve our stated goal of reaching an 8% adjusted EBITDA margin by the fourth quarter of 2022. We have a passionate, service-oriented team who work tirelessly every day to deliver the best experience for our clients and the professionals we place. Now, let me turn the call over to Bill to walk us through the results in more detail. Bill?

Thanks, Kevin. For the second quarter, Cross Country continued on its trajectory of improved performance, with both revenue and profitability significantly higher than the prior year and well above our guidance ranges. In addition to the strong performance, we consummated our first acquisition in several years and secured attractive terms for new subordinated financing. We believe the new $100 million term loan not only brings a strong partner into our financing structure, but also creates some additional firepower for future investments. Consolidated revenue was $331.8 million, up 50% over the prior year and 1% sequentially. As Kevin mentioned, revenue was driven by a combination of both higher bill rates as well as an increase in professionals on assignment across most of our business. Turning to Nurse and Allied, revenue was $316.2 million, representing 95% of our consolidated revenue. As compared to the prior year, revenue for the segment was up 58%, with approximately 63% of the increase attributable to an increase in billable hours. Sequentially, the segment was up 1% due to an increase in the billable hours, as well as the impact from the acquisition of WSG. Average bill rates were up roughly 16% over the prior year, though down more than 12% sequentially, primarily due to the impact from rapid response orders related to the pandemic. Bill rates within our travel nurse business were down 15% sequentially, primarily due to the decline in rapid response orders for COVID and the continued efforts to normalize our rates for clients. Throughout the pandemic, we've worked closely with our clients, flexing bill rates up and down as appropriate to ensure that we can provide the clinical staff they need. While COVID cases seem to be on the rise, driven by the new variant, we continue to expect a further sequential decline in bill rates for the third quarter. As Kevin mentioned, a rising demand environment, coupled with the needs for rapid response clinicians stemming from the new variant, could impact the bill rates as we go through the second half. Our local business continues to recover from the impact of the pandemic and was up 26% over the prior year, with roughly half of that growth coming from an increase in billable hours. Similar to travel nurse, we have seen higher bill rates over the prior year, which have been trending down since reaching a peak earlier this year. Also within the nurse and allied segment, travel allied continues to see robust growth, having doubled over the prior year, placing that business on an annual run rate of well over $100 million. Roughly two-thirds of the growth in this business has come from an increase in professionals on assignment, primarily in the areas of respiratory therapy and imaging. Lastly, revenue for education business was up 132% over the prior year, entirely attributable to volume as the business recovered from the COVID-related school closures last year, We are ready for the start of the new school year when many of our education clients will resume in-person learning, though we expect to continue providing virtual services wherever necessary to ensure that every student receives the services they need. Turning to physician staffing, revenue is down 4% sequentially and 7% over the prior year. The number of days filled rose slightly on a sequential basis as the business continues to recover from the impact of COVID. We remain encouraged with the underlying trends and expect to see double-digit sequential revenue growth in the third quarter. Gross profit for the quarter was $72.6 million, representing a gross margin of 21.9%, which was up 20 basis points sequentially and 150 basis points lower than the prior year. Our gross margin continues to be impacted by the mix of rapid response assignments related to the pandemic, as well as the higher the normal compensation costs due to the extremely tight labor market. As anticipated, pay rates, especially in our travel nurse business, have declined slightly faster than the bill rates, as we are working with clients to return to more normal bill rates and to restore gross margins. Despite the year-over-year declines in gross margin, the gross profit dollars were up 43% over the prior year, further improving our operating leverage. Total SG&A was $50.3 million for the quarter, up 19% over the prior year and 9% sequentially. The primary drivers of the increase are costs related to the investment and revenue producers and higher healthcare costs as individuals resume more normal use of care, as well as the addition of WSG. Relative to the prior year, another strong driver relates to higher incentive compensation costs driven by the strong performance in the current year. As Kevin mentioned, demand remains strong, and given the improved productivity across our travel business, we expect to continue making investments in revenue producers to fuel continued organic revenue growth in the coming quarters. There are several other items worth calling out on the income statement. We recognize restructuring costs of $900,000 associated with severance and other costs, and $1.9 million non-cash impairment charges in connection with the exit of certain leases. We also incurred approximately $900,000 in acquisition-related costs pertaining to the recent transaction. Interest expense was approximately $1.2 million, representing an increase of $500,000 both sequentially and over the prior year. The increase was driven by the interest cost associated with our new $100 million subordinated term loan secured in conjunction with the acquisition of WSG. The proceeds from the $100 million subordinated term loan were used to pay the $25 million cash consideration and fees related to the acquisition and to pay down our ABL, which can, of course, be re-borrowed. From a balance sheet perspective, we ended the quarter with $18.1 million in cash and $116 million in outstanding debt, excluding letters of credit. As of June 30th, the company was able to access the full line under the ABL. From a cash flow perspective, we generated $15.5 million in cash from operations following the use of cash in the first quarter driven by the sequential growth in the business. Excluding the impact from the acquisition, our day sales outstanding was 56 days flat to the first quarter and down two days since the start of the year. Capital expenditures were $1.8 million for the quarter principally related to continued investments in our digital transformation. This brings me to our outlook. We expect consolidated revenue to be between $310 and $320 million, representing a 60 to 65% increase over the prior year. Demand remains strong across Nurse and Allied, and we continue to make progress on growing our headcount on assignment across Nurse and Allied. Our guidance assumes a sequential decline in bill rates for our travel nurse business. with most other businesses remaining fairly consistent. We expect to see a mid single digit sequential increase in volumes as we continue to ramp new producers and capitalize on the enhanced productivity from our technology investments. As always, there will be a seasonal impact on our education business with the summer vacation, which is partly offset by stronger demand for physician staffing. We're getting to a gross margin of between 21.8 and 22.3%, which represents a 10 basis point decline to a 40 basis point improvement on a sequential basis. Gross margins continue to remain lower than the prior year, primarily as a result of the lower margins realized on rapid response orders related to COVID and the incredibly tight labor market we mentioned earlier. Adjusted EBITDA is expected to be between $18 and $20 million, reflecting an EBITDA margin of 5.8 to 6.3%. The combination of lower operating leverage from a decline in revenue, coupled with continued investments in revenue producers, are the primary drivers for the sequential decline. Our adjusted earnings per share range is 30 to 35 cents. Also assumed in this guidance are depreciation and amortization of $2.6 million, interest expense of $1.9 million, stock-based compensation expense of $1.6 million, tax expense of $800,000, and a fully diluted share count of 37.1 million shares. And this concludes our prepared remarks. And at this point, we'd like to open the lines up for questions. Operator?

Thank you. And if you would like to ask a question, please press star 1. If you wish to withdraw your question, press star 2. Again, to ask a question, please press star 1. And it will take a few moments for questions to come through, so please stand by. All right. And our first question comes from Brian Tranquillit with Jefferies. And your line is now open.

Hey, good morning, guys. Congrats on a strong quarter. I guess my question is on the comment you made about your expectation for rates going forward. I mean, it sounds like with Delta picking up, hospitalizations picking up, and just broader demand for the hospitals remaining high, and even the publicly traded hospitals saying that they're still using a lot of contract labor, is this just conservatism, or is there something you're seeing quarter to date as it relates to bill rates?

Yeah. Hi, Brian. Good question. Look, you know, the one thing that's been interesting about, you know, this summer is we've seen the market change and shift almost on a daily basis. And we've seen the demand go up, you know, almost hour to hour. So, you know, it is a very fluid situation, as we all know, through the country. What we're seeing right now are regional spikes, especially in states like Florida and Texas and throughout the southeast. And in those markets, we're seeing bill rates again begin to spike. You know, the broad market, you know, has also come back, you know, of course, you know, since the decline in COVID from the first quarter. And, you know, those bill rates obviously have declined as we've called out. As we, you know, I would reaffirm that, you know, we think that the overall bill rates are going to remain higher than pre-COVID. And I think there's going to be, you know, some noise as perhaps the Delta variant spikes through the next few months.

Got it. And I guess my follow-up on the flip side of the recruitment side, right? I mean, it's obvious that we got some nurses to come out of the woodwork and, you know, work travel nursing during the pandemic. Are you seeing a reversal of that yet as it relates to your ability to recruit nurses specifically?

Yeah, not, not at all. I'll start that and maybe I'll throw it over to John as well. I mean, you know, cross country, you know, over the past two and a half years, I mean, we are coming out of, um, you know, the pandemic with, I think, um, and it, you know, flying colors two and a half years in terms of our digital transformation. I think we've become the number one company for talent attraction. We've, um, instituted a lot of different technology to be really good at acquiring the candidates that we need for our clients. As you point out, first-time travelers are up significantly this year. That trend continued through the second quarter. I think cross-country has clearly become the company that healthcare professionals are turning to as well as large hospital systems to partner through this pandemic and now the Delta variant. I don't think so, but John, do you want to add to that?

Yes, sure, Kevin. I think you covered it pretty thoroughly. But I would say one of the things we're seeing, Brian, is that our renewal rates have been held steady all throughout the pandemic and still have been. And so that's an indication that we're still keeping those those clinicians, as well as Kevin said, we've had an increase in first-time travelers across country. So we've definitely done that, and also, as Kevin also mentioned, in calling out just our marketing team has done an incredible job of creating more leads for us, and that's really helped us to help our producers bring in more clinicians to help to supply to our hospitals.

That's awesome. Thank you, guys. Congrats again. Thanks, Brian.

Thank you. And our next question comes from Kevin Fishbeck with Bank of America and your line is now open.

Okay. Uh, thanks. Um, I guess, uh, the labor constraint is something that a bunch of companies have complained about. Um, and they're seeing pressure on it to varying degrees. I guess the companies who are more optimistic about this, um, getting better in the back half point to, you know, the supplemental benefits, unemployment, you know, expiring in September. Do you guys think that that's going to be a, you know, an impact to supply and potentially hurt the demand for your services in any of your service lines? And if so, you know, which ones may be most at risk?

Yeah, I'll start that and I'll ask Buffy to comment as well. Look, we have, Kevin, we've seen exploding demand, right? We've just seen demand increase in every specialty. The impact of the subsidy from the federal government on CNAs and the step-down professional areas is an area that does concern us because orders are so high right now. So I think it would be viewed as a big positive if that supply comes back into the healthcare marketplace. We need it. And, you know, we have, you know, thousands and thousands of fun-filled jobs. But, Buffy, you might want to add to that.

Yeah, certainly. So, I think at this point, clients see the criticality to have a sound workforce solution strategy. The need for contingent staffing really is not going to go away. They need the ability to flex. So, albeit a lot of facilities and systems are trying to rebuild their core staff. And we mentioned that the benefit there is we do have an integrated solution where we can help them with their contingent search or their RPO. recruitment process outsourcing, there's always going to need to be a level of contingent staffing. So we've really taken a position to consult on what is that optimal contingent staffing, what's the percent of contingent staffing against their FTE and salary cost as it pertains to their patient care revenue. So I think those insights along with the business intelligence and analytics we can provide, we help establish what is the right level of contingent staffing. Again, it gives them that nimble workforce moving forward to manage to the seasonality, the flu, the different cycles that they're seeing. But I do think that heading into these next couple of quarters, we're seeing some of that mix. They're still going to see high demand because of COVID variants and because of some of the indirect results of COVID, and we're uniquely positioned to fill them.

Okay, great. You mentioned a couple of times that COVID is starting to come back in certain markets. I guess, what does your guidance assume for COVID in the back half of the year? And is it right to assume that if COVID does spike again, that it would be upside to the guidance? Or is there any mitigating factor or anything that would make another spike not act the same way that it drove the upside last year?

Well, you know, good question. I mean, we don't have a crystal ball, of course. You know, we've done the best possible job with the data that we have to forecast our guidance. We feel, you know, we have the right guidance range. But, Bill, maybe you want to add some thinking to there.

Yeah, sure, Kevin. How are you? And this also goes to some of the question that Brian was asking as well about rates. So what we are expecting is that as we start this quarter, bill rates will decline sequentially as they did throughout the entire second quarter. Month over month, we saw the travel nurse bill rates coming down. What we've got modeled in is that they level off coming in from the month of July. So not a further continued decline off of where we start the quarter, but obviously a decline over the second quarter. So that's factoring in to a degree that there's some leveling off in there and that some of these COVID assignments will create a likely uplift in some of the bill rates as we go towards the latter part of the quarter. But we are obviously a month in. So it really comes down to, I think, the mix and how many orders we're able to fill of these COVID spikes from the variant that could drive a different outcome for the bill rate and for revenue. But for now, for what we've modeled in as kind of a stable bill rate throughout the third quarter.

Okay, thanks. And we just last question. You've mentioned that the local business was down 4%. I think that was a revenue number is mostly due to pricing. What was the volume number there? I guess what why isn't local seeing the same kind of strong broad based demand that the other services are seeing? And, you know, I guess we always kind of wonder, any any impact there between the sites in areas where you've closed or consolidated the site versus areas where you didn't consolidate the site?

Yeah, maybe I'll start there and Bill can weigh in as well. I mean, look, we're seeing big demand on the local marketplace, but two things. One, interestingly, you asked the question about CNAs and patient care assistance in those step-down professional areas. That has been an impact on our local business in the sense that the labor supply there is even more constrained, right? And the second piece I would say there, Kevin, is also that division was doing, especially in the first quarter, a lot of business providing vaccinators and screeners to testing facilities. And that business has really wound down. So those two factors, you know, and the decline in bill rates, which you noted, are really what are contributing to kind of, you know, what was, you know, relatively a flat quarter. if you take the bill rate into consideration. But, Bill, you might want to add to that.

I think you answered it perfectly. I'll just add some color on the year over year. So if you remember back to what we saw last year during COVID, our local business really was the hardest hit as, you know, kind of hospitals were shutting down and furloughing workers. So when you look at the year over year on our local basis, the volumes are up double digits. So while sequentially they're up about 1%, On a year-over-year basis, our local business was up about 13%. So despite the fact that we've seen pullbacks and difficulties in filling some orders, we are obviously still inching forward on growing the headcount on assignment there. Okay. Thank you. That's helpful.

Thank you. And our next question comes from AJ Rice with Credit Suisse, and your line is now open.

Thanks. Hi, everybody. A couple quick questions here. I know you're giving us sort of the aggregate trend in what you expect and what you're seeing in bill rates. When you zero in on those Delta hotspots and seeing some marginal demand coming in there, are those having the same premium rates in those situations that you saw in the other areas of COVID hotspots previously, or are those more normalized rates?

Yeah, that's a good question. We're seeing, you know, in those, you know, specific areas spikes up in the bill rate, which, you know, are, you know, closer to what we saw in Q1 than what we've seen over the course of Q2. So we are seeing some, you know, higher bill rates above where kind of the the the median bill rate has been you know, because those areas are, you know, been severely impacted in terms of supply. But maybe it would be good to just provide a little color around, you know, some of the markets that, you know, in addition to what I said earlier, you know, Texas, Florida, the Southeast, but, you know, there's some, some interesting insights we can provide.

Certainly. So definitely we're seeing it in Florida. The Southeast is one of the highest areas. We're starting to see more in the central region. Texas, and some of the states just north, also starting to see it in California. And prior, it was maybe Q2, you saw a lot of ICU, med-surg tally. We are seeing increase in ER. And just given the timing of COVID, we're still seeing L&D activity. There are hospitals still continuing on with their OR services and elective services, so we're still seeing that demand. But This, we're really facing upcoming, what we typically see is the flu season. So now we're, you know, back to facing the twindemic where you've got potential flu, you have winter season, you have holidays coming. So there's a need to secure staff through that period of time, plus the unknown of COVID and where we're seeing that. We're monitoring all of the infection rates, the hospitalizations that just in the last two weeks has increased by 79% across the nation. So I do suspect that we're going to see some more demand there. and we're continuing to monitor so that we're working on our sourcing pipeline.

Okay. And then if you parse out the other way, so it seems like there's still, in fact, increasing and fairly robust demand for the non-COVID placements you're seeing out there. I'd be interested to know, A, if you have – a sense of what's driving that. Do you think that nurses coming out of the pandemic are taking time off to start or expand families? Are you seeing an increase in retirees with those types of nurses? Are there other things that are causing that? I know we've got some picked back up in deferred procedures, but I'm just curious what you're hearing with regard to that. And then given how tight that non-COVID demand seems to be or how robust, Are you seeing rates on that side of it increase at a faster than traditional inflationary rate of increase when you parse out the COVID aspect of it?

Let me tackle the last part first. The non-COVID bill rates, to Bill's earlier comment, have been steadily declining and we see them at a premium to where from a pre-COVID perspective is, but we don't see a meaningful spike in those non-COVID bill rates. And to answer your question, the issue with supply is the fatigue and the turnover and the burnout that the pandemic laid on the whole supply. You know, and now with Delta worsening, you know, these are big strains on the marketplace. But we're also seeing, you know, from the pandemic, a substantial pent up demand. For example, you know, some of our children's hospitals have, you know, what we think about as triple headwinds. There's, you know, the typical acute needs and trauma and injuries. But then there's preventive care. A lot of kids were not, you know, provided care during the pandemic. And now, you know, the third factor that's really kind of, you know, creating a lot of shortages for HCPs given the demand side is this respiratory sinus and flu-like symptoms that, you know, the young people are getting in a period of time where most aren't vaccinated.

Okay. That sounds great. Thanks a lot.

Thanks, AJ.

Thank you. And our next question comes from Toby Summer with Truist Securities. Your line is now open. Hello, Mr. Summer. We cannot hear you. Do you have us on mute?

Thanks. Could you bridge a couple of variables that we see as key to hitting that 8% EBITDA margin? Namely, I'm kind of thinking of retracing some of the gross margin compression during this pandemic and then getting SG&A leverage out of the revamp in real estate, investments in tech, and other areas? Thanks.

Yeah, thanks, Toby. Yeah, look, I mean, in terms of, you know, our 8%, you know, as we said in our earnings script, you know, we're reaffirming. We think we have a path to get to 8% by the end of next year, and that's on the back of the substantial revenue digital transformation that we have underway. We're spending on an annual or investing in an annual basis $12 to $15 million in CapEx. We substantially upgraded the tools throughout the enterprise, which our employees use. As we called out, we're seeing tenured recruiters with substantially high double-digit improvement in terms of their book of business as a result of you know, working in a modern, innovative infrastructure. So we feel really confident about that. You know, the other dollars that we're spending, you know, aside from infrastructure are about, you know, the whole candidate experience, right? We are, you know, creating an experience for candidates so that, you know, any healthcare professional over the course of our digital transformation will be able to if they can't already look for a job with their iPhone and in very, you know, a few, a few swipes, find the job that they're interested in, submit their credentials and interview, you know, in minutes, if not the same day. And, you know, all of that, you know, acceleration of our algorithm and compressing the business process and speeding up the, the, the hiring process for our customers is, we think dramatically improves our operating leverage as a company and the efficiency that we can bring to the marketplace. Couple that with, you know, we just closed, you know, our first major transaction since 2017, the first under my watch, this wonderful company, Workforce Solutions Group. It has a higher gross margin profile than our overall business. It's, you know, as we called out, the business has doubled over the last 12 months. It's in an exciting marketplace. Cross-country healthcare today is the only major company that offers nursing allied and physician workforce solutions in a focused offering through our one source total talent solution that tracks where patients are getting their care. So we want to be the company that provides clinicians to wherever that continuum of care is. So, we break that continuum of care into three pieces. The pre-acute care piece where, you know, we're talking about, you know, the wellness, urgent care clinics, ambulatory centers, cross-country locums, we could provide physicians. Cross-country allied, we can provide allied therapists. Medical staffing network, our local business, we can provide those local clinical and even in some cases non-clinical. Acute care, that's our core business. Travel nursing, travel allied, we've got that covered in a meaningful way. We have nearly a billion dollars of labor under management in our MSPs. 50% of our revenue now comes from our 80 to 85 MSPs. And then now with Workforce Solutions Group, and in a minute I'll introduce Pamela, we have a substantial offering in the post-acute care And we're the only major company that can provide care to seniors and elder in skilled nursing facilities, home health care and hospice right to the home. We have now with Workforce Solutions Group over 2,000 caregivers providing care to patients in their home. So we have a substantially focused approach to the marketplace. You know, there's other companies that are larger, they're more diversified. but we go to market with our one source strategy, Total Talent Solution. So we're excited to bring higher margin businesses into that path to 8%, more productivity amongst our talented professionals that work at the company, our ability to bundle services and provide a mix of services, including, as Buffy called out earlier, our RPO division and other services that can grow our margins across enterprise. But maybe I'll just, for a moment, if you don't mind, Toby, introduce Pamela Young, because she's the founder and the president of our Workforce Solutions Group. But maybe, Pamela, you can introduce a little bit about your business. It's on a terrific growth path, and we have these wonderful MSOs, which are very similar to our MSPs, now part of the cross-country family.

Sure. Thank you, Kevin. We provide clinical and non-clinical temporary staffing, RPO, and direct hire search to a diverse client base that includes the elderly and others that are in economically challenged and underserved communities. We also support market-specific health systems. Our model initially targeted the specific population and business sector in California. However, we have successfully expanded that model throughout the West, Midwest, and the Northeast, and our partnership now with Cross Country has enabled us to support clients from coast to coast, so we're very excited about that. Our MSO model is the first in the industry, and we essentially assume the responsibility for delivering the clinical and non-clinical temporary staffing of large systems across a wide range of specialties. I think one key differentiator between our MSO model and the MFP model is that there are fewer suppliers. And additionally, we do offer a broader range of services within that model. It's similar to locals versus travelers. That's a brief overview of our organization.

Thank you very much. What are you hearing from customers about nurse retirements? Earlier on the call, it was kind of mentioned that clinicians came out of the woodwork to come contribute to fighting the pandemic we saw some pretty significant data I think about excess retirements above what would be a normal trend in the first quarter so wondering what hospitals are saying sorry about the background yeah that's a great question I think you know one of the mega trends that we're seeing though which counterbalances some of the you know supply constraint to turn over the burnout people leaving is

is a greater adoption of temporary staffing as a career choice. And the evidence there is the first time travelers that we've seen all year as part of our workforce. So we think that that's an important component. And I think the flexibility of being able to work in states, for example, The state of California, you know, is the highest, you know, RN salary average in the United States. It's also the largest state, $120,000. The average nurse makes on a per year basis, you know, in their states like New York, which are about $90,000 a year, et cetera. So these are attractive compensation benefits and having the flexibility to work when and where you want in the environment that you want, we think, bodes well for cross-country healthcare, what we provide. I'd also say that we created a much stronger value proposition to healthcare systems through the pandemic and now the spike where they recognize they need a partner like cross-country to stand with them to help supply the labor and redistribute it from one part of the country to where it's needed most. You know, it's, you know, our journey is becoming, you know, the best in class around talent attraction, talent acquisition, being able to nurture talent pools for our customers, being able to have just-in-time staffing, or direct hire or RPO, and all those services we think will be attractive, especially to what is now mostly millennial healthcare professionals, especially in the nursing world. I don't know, John, if you have anything you would want to add to Toby's question on that.

I think you covered it pretty well there again, Kevin. But the other thing I would say to Toby is that you're definitely correct that there's definitely been a burnout and fatigue amongst clinicians. and that has caused hospitals to be really short on core staff, and I think that was a JOLTS report you were referring to in the first quarter that came out with higher quits than average, and that is something that has definitely affected hospitals and has one of the reasons we've seen such an increase in demand for orders in these last previous several months. And so as we continue to attract nurses, what we're doing is our clients are are looking for us to fill those voids of that core staff. And as Kevin mentioned, it's a very attractive lifestyle to be a traveler. And these nurses that are leaving the core staffing and the industry to get out of bedside full-time and coming and being able to enjoy a more flexible lifestyle, maybe not to work 12 months out of your bedside, but to work several assignments a year and be able to then not have to work those assignments the rest of the year. So I do think that we are seeing a uptick in these first-time travelers, which will benefit the hospitals to have that flexible supply for months. Thank you very much.

Thank you. And our final question comes from Kevin Steinke with Barrington Research, and your line is now open.

Good afternoon. Thank you. I wanted to follow up with a question on WSG. Bill, I I think you mentioned that $5 million contribution in the quarter from the acquisition. So is that kind of the run rate we should think about as we move forward in our modeling? I guess it's also a rapidly growing business, but just kind of any framework you can provide for the revenue contribution, we should be thinking about from that acquisition going forward?

Thanks, Kevin. Yeah, that's a really good question. I think if you're right, if you take the $5 million in revenue that we called out for the, call it three-ish weeks that we owned WSG and you were to turn that into a quarterly number, you'd come up with ballpark around $20 million. So I think if you use that as a placeholder in our Q3 guidance, that's a good starting point, but it is a rapidly growing business. And as Kevin pointed out, it's been doubling over the prior year. And even during COVID, this business managed to continue to grow in double-digit territory. And that was not from a COVID bump. That was continued expansion of the programs and putting people to work. So WSG did not have the kind of same impact that we might have seen per se in our travel business. So it's really quite impressive that they were actually able to continue to see that kind of growth, even during the pandemic. And obviously now that kind of things have stabilized and there's been a resumption of healthcare and we've managed to stand up more programs. They're on a really solid trajectory. So, you know, just going one quarter out, I think 20 million is a good place holder for now.

Okay. Thanks. That's helpful. And can you just give us a little bit more of a status update on the education staffing business in terms of just the, you know, the mix of what you see clients are doing in terms of, you know, fully in classroom versus virtual versus some hybrid sort of model?

Sure, Kevin. You know, first of all, we're, you know, cross-country education, our education business has exceeded our expectations in a very tough market. You know, it's our highest gross margin staffing business. We've been investing in the business as it's coming out of the pandemic and You know, what's interesting is that school systems are receiving unprecedented levels of funding. And the key modalities that we provide, you know, including speech, which is our number one segment, as well as healthcare professionals and special education providers, all can be delivered, you know, either in person or through a virtual offering, which Powered us through the pandemic with many of our clients in terms of their key orders So we're you know, very bullish on the segment But John you might want to provide some additional insight for Kevin on you know, we're you know, how the business is performing Sure, so definitely Kevin especially on the on that mix of where we're seeing in person versus virtual and what we're seeing right now beginning of the school years in person is increasing into this new school year and

and there's continued demand as well for virtual services because not all the students are going to be able to return to in-person this school. There's definitely still staffing constraints that will continue to pressure schools to think about alternative ways to be able to provide for their students as a lot of, we've seen a lot of teachers have resigned also in the last year due to the pandemic and the COVID concerns. And so there will be still a part that we'll have virtual that is going to be very key part of this school season. And the other thing we have to consider is now that we're seeing this surge of the Delta variant, some schools may change how they operate in the next couple weeks. So as this surge has just started coming in the last couple weeks, we're going to be paying very close attention and being in constant contact with our schools to see how that's going to affect them and how that will change their options of moving from in-person learning to virtual learning.

Okay, thank you. And then just one last question for me. We've obviously talked a lot about the shortages of clinical labor, but as you're out there recruiting for new revenue producing headcount in terms of recruiters and account management Are you seeing any constraints to labor supply there? You know, kind of how hard or is there any difficulty in finding those people?

Yeah, Kevin, it's a great question. It is a real challenge to find employees, no matter if you're a hospital system or your workforce solutions company, or I'm sure Amazon feels the same way. Having said that, we've hired hundreds of new employees this year. Our turnover rate has never been lower. And what I'm most excited about, you know, are a lot of the revenue producers that we've attracted as well as mid and senior management have come from some of our peers. Cross Country is clearly the company that employees want to work at. We are, you know, a company that prides itself on strong core values and ethical stance throughout the pandemic. All of those things are important. The fact that we are fast becoming the most innovative company in the marketplace, that we're investing our capital in our employees' tools and in all this technology to the marketplace. um, makes cross country, you know, you know, the, the, the, it company to be at. So, you know, uh, although it's a struggle, uh, we've been very successful and we're having a terrific success as our employer brand, uh, grows substantially in the marketplace.

Great. Thank you very much.

Thank you. And ladies and gentlemen, this does conclude the Q and a period. I'll now turn it back over to Kevin Clark for closing remarks.

Yes, thank you everyone for joining us this evening. We look forward to updating you again on our third call. Please stay safe everyone.

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