Cross Country Healthcare, Inc.

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's earnings release issued this afternoon. At the conclusion of the prepared remarks, I will open the lines for questions. I would now like to turn the call over to Josh Vogel, Cross-Country Healthcare's Vice President of Investor Relations. Thank you, and please go ahead, sir.

Thank you, and good afternoon, everyone. I'm joined today by our President and Chief Executive Officer, John Martins, as well as Bill Burns, our Chief Financial Officer, Dan White, Chief Commercial Officer, and Mark 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.

Thanks, Josh, and thank you to 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. And 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 and with respect to our board composition. We recently added two new board members to our board, Venkat Bhattadamati 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, offering exceptional, frictionless, and seamless experiences with increased efficiencies. From 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, as well as best-in-class experiences for our candidates, clients, and our teams. Last year, we launched two very significant technologies, including IntelliFi as our proprietary vendor management system and Gateway, our career portal. We believe IntelliFi will be a game-changer for a cross-country and potentially the market as a whole. Our philosophy in building IntelliFi was to start with a client and work backwards. designing it to help our clients more effectively manage and solve their most challenging people needs through data and analytics, advice, and insights. Our roadmap calls for further investments that are underway, and we believe Intellify will continue to be highly differentiated in the industry, opening 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. And 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 continue 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 Christensen, 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 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 experiences 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, and our adjusted EBITDA margin rose 110 basis points to 10.8% from 2017. 9.7% in 2021. Also in 2022, we generated a company record $134 million in annual cash flow from operations, and we completed three targeted acquisitions that built scale in the locum space, as well as diversified our offerings with interim leadership. Higher Up, 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, higher up. 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 also 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, sharing purchases, and tuck-in acquisitions that further bolster and diversify our portfolio. 30 to the fourth quarter, consolidated revenue was $628 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 called out. 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 spend, 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 do not 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 the holidays, as well as the continued normalization of bill rates. And looking at our other lines of business, we continue to see improved traction in locums, education, and home care, which all posted 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 experience 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. Though some of our existing MSTs will understandably want to explore options, Cross Country remains a trusted partner to thousands of healthcare clients. We believe that our full complement of tech-enabled offerings coupled with our commitment to deliver the highest quality of clinical care, will ultimately result in the growth of our market share. And 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 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 launch on IntelliFi at the line. IntelliFi 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 for their internal use to help manage their contingency and their core staff labors. Looking ahead to 2023, critical staffing shortages continue to be widespread. Specifically, nurse-to-patient ratios remain high, and we believe to be a driver of the labor disruptions that the industry has seen in recent months. Supply constraint is still the biggest challenge faced by our clients, and whether we look at the 2022 McKinsey study that cited a shortage of 10% to 20% of the nurses needed to care for all patients in the system by 2025 or track the monthly data from the Bureau of Labor Statistics that indicates a persistent wide gap between healthcare job openings and hires, it seems that supply and demand imbalance will persist for the foreseeable future. Looking at the first quarter, we expect revenue to be between $590 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 IntelliFi in particular, we find ourselves in a great position to build upon recent successes, but also continuing to capture share. We therefore reiterate our full year targets announced at our investor day in mid-September to deliver full year 2023 revenue of at least $2.2 billion and adjusted EBITDA in excess of $200 million. In closing, 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 the 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.

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. And 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 local attendance businesses, as well as our most recent acquisition of an interim leadership company during the quarter. Excluding the impact from 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 exiting 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, though it was mostly offset by the relatively high cost of housing for our travelers. Moving down the income statement, total selling general and administrative expense was $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 percent of revenue, SG&A was 12.9%, representing an increase of more than 250 basis points over the prior year, given the decline in bill 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 of our lines of business, but with the majority focused on meeting demand in our travel business. And though demand for travel has 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, and we're prepared to adjust course in the event that demand does continue to soften. Though the broader supply and demand imbalance remains, we obviously can't predict whether travel demand will rebound or soften further, but 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 are 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. And 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. And 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 the 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 favorable 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-to-high single-digit range, but as demand remained 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 previously called out, we have long expected travel bill rates to decline, but with continued high needs by clients and 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've seen demand for travel positions decline, and as a result, so have the bill rates. We are seeing new orders fill at a rate that is roughly 5% to 7% below the rates we experienced in the fourth quarter. If rates stabilize 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. As we've said previously, the decline in bill rates was and is expected. And though we don't have a perfect lens of 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. And our other lines of business with Nurse and Allied all reported strong results for the quarter with double-digit growth. Education and search both grew by more than 30%, and our home care 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 from the recent acquisitions, position staffing grew by 28% on an organic basis, with billable days up 9%, and revenue per day filled up 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-ins 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 under the subordinated term loan and $77 million in borrowings under our ABL facility. Currently, the subdebt is based on LIBOR, but we anticipate it will be converted to SOFR in the first half of the year. It is also worth noting that given the strong performance and positive cash flow as of the end of the fourth quarter, we had an incredibly low level of leverage with a total leverage ratio of less than 0.5 times. We remain 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 a use of cash of $85 million in the prior year, representing a swing of more than $200 million. Our day of sales outstanding increased to 72 days, due primarily to slower collections from several large clients. We continue to expect receivables and other reserves to be fully collectible and believe DSO will return to more normal levels as we progress through 2023, though that may take a couple of quarters to achieve. Also in the fourth quarter, we prepaid an additional $50 million on the term line, bringing the cumulative prepayment for the year to $100 million, or roughly 60% of the principal balance for that instrument. and we repurchased another 350,000 shares for 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 to generate a significant amount of cash, and we'll continue to see growth investments such as tuck-in acquisitions across our higher-margin businesses. During the fourth quarter, we established a 10b-5-1 trading plan to continue making share repurchases during the blackout trading windows, depending on certain conditions. And since January 1st, we 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 10b-5-1 trading plan, depending on factors such as available cash, the share price, and alternative uses for that cash, such as debt repayments or acquisitions. And this brings me to our outlook for the first quarter. We're guiding to the first quarter revenue to be between $590 and $600 million, representing a 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 are expecting adjusted EBITDA to be between $44 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 the 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%. And before we open the line for questions, I'd just like to congratulate John on being named to Staffing Industry Analyst's Top 100 Most Influential Leaders, recognition I feel certainly well-deserved. Congrats, John. And that concludes our prepared remarks. And once now, I'd like to open the lines for questions. Operator?

Thank you. We will now begin our question and answer session. If you would like to ask a question over the phone line, please press star one from your phone, unmute your line, and speak your name clearly when prompted. Your name is required to introduce your question. To withdraw your question, press star two. Our first question comes from Brian Pankelet with Jefferies. Your line is open.

Hey, good afternoon. I guess my question, just on orders and bill rates, kind of like normalizing here, in your prepared remarks, you talked about how you can right-size the infrastructure if needed. Maybe just some thoughts on number one, you know, your bill rate kind of like 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.

Sure, Brian. Good afternoon. This is John. I'll 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, we use a pretty sophisticated capacity modeling, I think we've spoken about before, where we look at each part of the business, and what we can do is we can look up or down. When we use a capacity model, we actually use it 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. And also, conversely, when we see the business that is slowing down, we'll pull those same levers to take away the resources that we no longer need to continue to have that growth. And so really it's just based on a lot of capacity model and factors of the number of open positions we have, based upon the number of velocity that we're seeing of placements happening, and of course it's all tied to the end of the day to revenue and EBITDA.

Yeah, and Brian, I'll throw in on the cost levers as well. Just 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 even some other marketing spend that may be going along lead generation activities. So there's natural levers or hedges as the business moves up or down that will just happen naturally. But 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 make sure we're getting the best return we can. With respect to bill rates, no perfect lenses here, but the market with the demand as we've seen it starting to pull back coming into the first quarter, bill rates are down. Certainly on open orders is what I look at as a leading indicator. That's where I kind of made the comment in the prepared remarks On the open orders, we're seeing bill rates starting to soften in that 5% to 10% neighborhood, but that hasn't fully baked its way through our business yet. So you look out and you say, okay, so for the first quarter, rates will be down, kind of consistent with what we saw in the fourth quarter, modest low mid-single digits. The impact will more likely be seen in the second quarter, and then after that is where it gets a little bit fuzzy as to where the rates trend after that. We did say that rates could fall a little bit further. But I think at some point, you know, the market will obviously, I think, correct itself from a demand perspective because we've seen this play out a couple of times where demand has ebbed and flowed, and we've seen it where, you know, it kind of goes down a little sharply, a little quickly, and then it starts to rebound. So, you know, we're just looking out in the back half, but I would just leave you with, we look at the full year, we reiterated the full year minimum guidance, and that $2.2 billion number that we've thrown out there, you know, we're well on pace for that, certainly coming through the first quarter. And so I think if you look at that relative to what our other comments are about rates, you can kind of see where the back half might come out.

No, I appreciate those comments, Bill. And then I guess as I think about your comment on margins for Q1, right, so I get the payroll tax and just the lower volume, 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.

Yeah, I'll start and then I don't know if John or Mark or Dan want to jump in, but when you look at the margin for the first quarter, you know, payroll tax for us hits us in the gross margin line, usually about 40 to 50 basis points. And just given the size and scale of our SG&A, the impact to SG&A is about a million dollars as well from additional payroll taxes we'll see in the first quarter. So, you know, that's a pretty sizable bite when you look at our overall seasonality and the impact of the first quarter. I think the question really is about the gross margin of 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, the payroll has been coming down. The piece that hasn't moved as fast as the pay rates has really been the housing costs. So that element that we have, the travelers on assignment, has been kind of stubbornly high. So that's kind of eaten into that pay bill improvement. And you couple with that with a couple of other items that we called out. The professional liability insurance rates are rising. That's now factored in after the fourth quarter, and you'll see that roll into, there shouldn't be an incremental increase in the first quarter off of that. Health insurance for us was sort of a year-end anomaly. We saw a spike in the number of clinicians. We are self-insured, so a spike in the number of clinicians using healthcare, so that was a bit of a rise. That should return to normal as we go into the first quarter.

This is John. I'd add that when we look at the business and our gross margin, we really look at it from a portfolio basis, as you were saying, Brian, with looking at locums and From the nurse and ally travel standpoint, on the transactional, the day-to-day deals that we're doing, we're not anticipating to see a large uptick in gross margin there. There's some, obviously, room for improvement over the next several quarters in this year that we'll pick up. But really, when we look at how we're going to improve our overall gross margins in the portfolio, it's going to be by growing the higher margin businesses, such as locums, such as our education business, our higher up, which is our new interim executive business, and also our workforce solutions group, which is our home health business. Those are all higher margin profile businesses to help us overall grow. And then the other part, which is really key to seeing our portfolio gross margins increase, is as we enter into the vendor-neutral space with Intellify. That's where, when we're looking at gross margins, those are the gross margins that are at 90% gross margins with EBITDA margins between 60% and 80%. And so in the future, what we'll see is we'll see the balance of our business as it grows in the other non-nurse, travel nurse, and allied businesses help improve the overall portfolio margins.

Awesome. Thank you, guys.

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

Hi, everybody. Maybe a couple questions if I could. I think it sounds like what you're suggesting when you lay out the quarters for 23 relates mostly to sort of the post-pandemic continued moderation in especially bill rates. Can you just remind us, do you think normal seasonality will come back as you lay out the quarters? And how would you 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?

Hi, AJ. This is John, and then I'm going to hand it over to Bill on this one. I think it's too early to say if seasonality is back yet. And so right now, yes, we are seeing from the triple threat that we saw in the fourth quarter that came in the fall of RSV, COVID, and the flu. We're obviously seeing some of that wane now as we're getting out. So you could say, oh, you could indicate that maybe it's starting to get more seasonal. But if we recall for the last two seasons, we've also seen the COVID summer happen. And so I don't think we're ready to say that we're getting into a normal cyclical traditional travel nurse seasonal business. But, Bill, you want to add to that?

Yeah, I'd just throw out, you know, when you look across the rest of our business, AJ, you know, locum tenens generally, again, this is historical, right, normally has its strongest quarter in the third quarter. And so you would anticipate to see a sequential change in that business. It usually steps back in the fourth quarter. That did not happen, and we actually surged ahead, you know, the 8% we called out, and that is on an organic basis. So I think locum tenens has a lot of runway for us right now to continue to see sequential growth quarter over quarter, despite the seasonal trends that we would normally experience. What I'll just say is I think if we look at Q2, and again, we're not guiding here, but if I was going to look at Q2, I'd say that the bill rate headwinds coming out of the travel business probably points to a sequential decline over the first quarter. And you couple that with the fact that in the education business, you get the start of the summer break plus the spring break this year falls into the second quarter as well. So, you know, just those two factors alone would point to a sequential step down to the second quarter. But then I think the seasonality of locums plays into the third quarter and, of course, when schools resume in the fourth quarter. So it's hard to say, but much will be dependent on what really happens in the travel business.

Okay. 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 got open to third parties coming in on the margin. Can you comment on where you're at today? Is your fill rate, as things are normalizing, stepped up meaningfully? Are the percent of orders going completely unfilled? Has that come down a lot? How would you describe it?

Yeah, that's come down a lot. We're in the high 90% of fill rate, and we're still at a capture rate of around 70%. And so we're filling the needs that the clients have right now.

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

Yeah, and I just add on that, AJ, one of the reasons why we keep the capture rate at that 69% or 70% is because we want to have the excess supply and capacity. Because what we do is, this is a market where we're seeing a lot of, and we called out, we had a higher than normal attrition of our clients. And typically, we have one or two clients leave in a year, and we had higher than that. But the whole industry as a whole is having that issue. And part of that reason is because usually a typical VMS or MSP contract is three years. And during COVID, people in hospitals deferred going out to bid for that COVID period. And so now we're seeing a lot of contracts all coming up, the extended contracts. All the contracts are coming up. And so... And some hospitals, actually quite a few hospitals, they were actually required to go out to bid. So right now we're seeing more hospitals going out to bid, and that creates a larger opportunity for us to win new deals. At Cross Country, we're probably, out of the larger companies, we're on the smaller side of the MSP standard of management. So while we're losing some clients, we have more opportunity to win. And as we called out in our prepared remarks, we've never had a larger pipeline in MSP and Cross Country's history. And so when we have this excess supply, what we do with this is we take this excess supply and have additions at clients to go and show that we can fill better than their incumbents. and win the business over. So that's why it's really important for us to keep that capture rate at 70% or even lower so we have that supply to win more deals.

Okay, that's interesting. Maybe just a final question on your prepared comments. You talked about being prepared to, if necessary, make adjustments to infrastructure. I guess, A, that begs the question, what would – I mean, I assume you're sort of tweaking things on an ongoing basis, but what would – prompts you to make a bigger adjustment, and then what types of things are you talking about doing if you had to?

Yeah, well, AJ, this is Bill again. So I mentioned some of the things that will happen organically. I'll say it that way. But I think it's really just about when you look across the entire landscape of all the resources we have and all the different roles that we have, every single role, whether you're looking at from a recruitment function, the supporting functions, the onboarding, everything, all of our functions, we've got capacity metrics that help us understand exactly how many resources we need. So, yeah, you know, we don't want to overreact. I think the important thing here is demand we know will ebb and flow, and we've seen this a couple times throughout the pandemic. Nothing's fixed the long-term issues in the marketplace, so we don't want to overreact and start reducing costs too fast because, again, we want to have that organic capacity to grow. And so I think it's really just one about right-sizing your cost structure across your headcount as well as some of those other third-party expenses that you have.

Yeah, 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 to low-delegate EBITDA, and that's really what drives where we're looking into resource planning.

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

Okay, great. Thanks so much.

Our next question comes from Kevin Fishback with Bank of America. Your line is open.

Hey, this is Nubia Gutierrez on for Kevin. Can you give us an update on the deal pipeline? What areas are you focusing on and how are you thinking about multiples?

Sure. Hey, this is John. I'll start with that. So, yeah, we look at the continuing health care and what is on the continuing health care for our deals. So we look at any type of organizations and businesses that are in the pre-acute to acute to post-acute care. And with our recent acquisitions, you know, the last couple years of the home health space and the PACE centers, The pay centers are still very attractive to us. And we had the two locums acquisitions in the fourth quarter, and we believe that locums is continuing to be a great place to be in, as well as some ancillary businesses that can help service our clients, just like the acquisition of higher up. So really, our strategy comes down to really two different points. One is, can we add Can we expand our share of the market by acquiring a company in a certain space, number one? And then number two, can we add additional services to enhance our service to our clients and create more services, become more sticky with our client?

Great. Thanks.

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

Thank you. I was hoping that you could describe what you're hearing from customers, hospitals, hospital systems as they try to sort of regain control that they feel like they lost during the pandemic. And in particular, two areas, vendor neutral, MSP, VMS, and if Maybe you could comment about if any of your client losses were because of sort of a philosophical change and a change not necessarily to another staffing company but to vendor neutral. And what sort of energy investment innovation are you seeing on the local side that customers are trying to do to satisfy more of their contract needs? Thanks.

Sure, Toby. This is John. I'll start, and Dan and Mark will probably go in. And, yes, so we definitely saw some client attrition that went over to Venn Mutual, but, you know, what I would say is if we look at the market, the addressable market in the staffing industry, I think SIA has 2023 at $50 billion, and, of course, that may go down if bill rates go down, right? I don't know exactly the calculation of that. But in that market, about 40% is MSP, roughly, we believe. 40% is vendor neutral, and about 20% is direct clients. And as I mentioned earlier, all these MSPs, which are typically in VMS contracts, which are typically three-year contracts, as a lot of them are coming up right now and going out to bid, a lot of clients are looking to say, hey, was the grass greener on the other side? And really, there's really four categories. It's, hey, do I do it direct? It's do I go to VMS or do I change over to MSP? And so we're seeing clients change from VMS to MSP because they want to try a different model. And then the other model that they're going to is can I take it in-house and use technology only? And so we're definitely seeing a bit of that mix happen. Now, we feel very fortunate because we launched Intellify, our vendor-neutral VMS system, late last year. And as we mentioned, we hired Eric Christensen, who is a pioneer in the vendor-neutral space, And as we start building out our vendor neutral business, we think that there's a lot of upside for us to capture that market. And so I'll hand it over to Dan.

Thanks, John. And Toby, it's Dan. I'll just add a couple of things you were asking specifically about the local business. One of the key sets of features inside of Intellify is our ability to manage internal resource pools for them that would allow for them to manage their own resources clearly, but add incremental local resources to supplement that staff as well, even before they go to a travel kind of a resource. In addition to that, we're adding capabilities. We just, for example, at the beginning of the quarter, added locums to one of our clients on the IntelliFi platform as well, which, as you can imagine, is a huge upside for us for the rest of our customer base as well. I think, lastly, when we think about the capabilities that are really important to customers for these technology platforms, whether they run them themselves or have us do that for them, is having kind of a pre-integrated set of suppliers that they can just turn on with a switch. I'm super grateful. Today we had a whole house full of suppliers here talking about their support for this platform, for our programs, and just a little bit of a shout out to them first. But for their ability to turn this on gives, again, that local flavor and the more broad flavor really great strength in terms of turning it on quickly and managing it fast.

And, Toby, this is Johnny, and I'd also add to Dan's comments that what we're seeing in the local market and the hospitals and the clients that we're in front of is that they are looking to expand their internal resource pool, and that's part of what Dan was saying, and utilizing our Intellify product to do that, but also to help them build those internal resource pools. How can we help them move quicker to get the local resources in play? And that's what we're hearing from many of our clients right now.

And then I wanted to ask about bill rates in comparison to full-time comp. And I know that's sometimes a difficult analysis because you have to try to make it an all-in number for full-time comp. How much could bill rates fall before sort of what I've always perceived as a natural, at least hourly premium for a nurse to... go to another city and sleep in a strange bed for three months before we sort of get there and get to sort of a natural differential between the two categories. Thank you.

Yeah. You know what? I don't think we don't necessarily track that side of it specifically, but what I'd say is what we've seen always is it's always going to be a little bit of a premium paid for your travel, the travel nurse. But when you look at the total compensation package for a travel nurse compared to the total all-in package of a core staff nurse, including all their benefits, all of their long-term, short-term benefits, a lot of times hospitals will look at it and see it's actually a cost savings. And because you have the flexibility to bring on talent, bring off talent, it ends up being a cheaper version of that. So we think it's, you know, and that's one point. I think the other point on that where, you know, bill rates go down where it doesn't make a difference for that nurse to sleep in a different bed. Well, what's interesting is 65% of our clinicians, actually I think the number dropped to 64% of our clinicians are millennials or less. And that means they're age 41 or younger. And we're still hearing from those clinicians they want to sleep in that bed in a different town, and they want to experience different experiences, and they want to be part of that gig economy. So there's still very much attraction to being a travel nurse and exploring and experiencing and having that travel nurse experience.

Thanks. Last question for me. What are the M&A opportunities like in the market, and would you feel comfortable, you know, buying – properties for valuations in excess of the company stock?

Well, definitely valuations we're seeing are trending down a little bit. And of course, as interest rates have spiked up, we've seen valuations come down a little bit. And in terms of what's our appetite for that, what we look at is, is it a strategic fit for the organization? Will it help us be accretive to our gross margins and our EBITDA? and how it fits in to the organization. I don't know, Bill, you want to add anything else to that?

No, I think you said it. The multiples are certainly trending to a more favorable level, but I think your inherent question was, would we be willing to pay a multiple higher than the current multiple that cross-country trades at? And I think the short answer is yes, depending on the property. If it's a strategic fit, you know, goes along with what we're trying to accomplish in terms of the continuum of care and fits our profile for higher margin businesses and the like. So, yeah, I think, you know, especially if it's going to be a competitive process where you're looking to acquire a good property that fits well, you're going to have to pay a fair market price.

Thank you.

Our final question comes from Bill Sutherland with the Benchmark Company. Your line is open.

Wow. It's the last question, guys. So, clarification, Bill, if you don't mind, on the 5% to 10%, I think, is the range you used on the open travel orders. You would normally see some seasonality, excuse me, 2Q over 1Q, wouldn't you?

Not necessarily from a bill rate perspective, Bill. So, I mean, like, you know, the bill rates don't normally ebb and flow. I mean, there's demand that spikes in certain parts of the country through the winter months. You'll see the snowbird states like Florida will see a spike in demand as that starts to wind down. You'll see less needs there. But I don't generally see bill rates moving a whole heck of a lot. I mean, Mark, you could certainly speak to this as well, but I don't generally see a lot of rate movement throughout the year, sans the pandemic, of course.

Yeah, typically we don't see the bill rate fluctuations. We do see the demand fluctuations seasonally, but the last few years especially, we have not seen that.

So if you have the 5 to 10 percent, that's just bill rates you're referring to, and so there might be some seasonal volume on top of that, if I'm thinking about 2Q?

Yeah, again, I'm saying what we're seeing right now is looking at open orders, right? What's our current book of business? What are we locking orders at? And what are the open orders? What's the average bill rate across open orders? So we looked at that across time to see how things are trending. And so what we're seeing now is that the open order average rate is starting to move downward about 5% to 10%. Week to week, it moves, of course. And there's always a mixed component. So I want to be clear about this. The open order bill rate is not necessarily indicative of what we'll experience, because we may have orders that we won't fill. And there's orders that we're going to certainly strive for, the higher bill rate orders. So I think that doesn't always play out that way. So it's a little bit of a guesswork to say, look, the bill rates of what we've locked are down about 5%. That won't impact Q1 all that much. As I've said, it's probably a similar play out to Q4, which is a down low mid-single. And then the rest of that rate decline plus the impact from the broader market is more likely to be seen in Q2. All things being equal, if rates do continue to decline, we don't anticipate them to have steep declines after our second quarter. I think they start to really start to be near the bottom. There might be a little bit of pressure into the back half, but I just think it starts to get to a point to the earlier question that Toby asked about what the market bears and what it takes to get a clinician to the bedside.

Right. And so not to pound this to death, but so on the volume side, You might see some seasonal softness into 2Q and then normally it would level into the back half.

Yes, if you're speaking to the volume side of things, I think there's a couple of things. Number one, in the fourth quarter, going into the first quarter, we did have some rapid response and a little bit of labor disruptions that you can never count on. So that's going to be a little bit of a volume headwind going into Q1. from Q1 to Q2, we don't generally have a tremendous softness. In fact, our travelers on assignment ramps throughout the first quarter, maybe dissimilar to some other companies out there. But in general, we start the year off a little softer, and then that headcount gradually ramps all throughout January and into February. So we're building that headcount up as we're moving through the quarter right now.

Okay, good. That's good clarification. The I guess the bundle that you're kind of classifying as workforce solution, and maybe that's not your words, but something on that order with education, interim, et cetera, what does that aggregate to now on a revenue run rate basis?

Yeah, we don't put education in there. I mean, you know, workforce solutions for us,

No, I think we still have Workforce Solutions Group.

Oh, Workforce Solutions Group. I'm sorry. Yeah, our internal acronym is WSG. So, I mean, they're on track, the loss of a $100 million kind of run rate now.

So the home care is a $100 million rate. The education is a $75, $80 million run rate. The solution RPO is probably on the 25%. Well, plus higher up. So higher up, that's probably about a $30 million run rate. And then, of course, locums, we have it at somewhere at about $150 to $180 million run rate. But we don't segment them out into one group. Locums is. Locums is not the other one. So we'd actually have to add them up.

So when you look at position staffing, is that including all this, or is that just locums?

Physician staffing is only locums and advanced practitioners. There's no perm placement in there. There's no interim leadership in there. That's all part of nurse and allied. So within physician staffing, the growth you saw, the $37 million that we reported in revenue for the fourth quarter was a combination of organic as well as the acquisitions of mint and lotus that were closed at the beginning of the fourth quarter. Okay. Okay.

And the last one, Bill, if you are successful in migrating Intellify to essentially all your MSPs by the end of this year. What's kind of the dollar impact of that?

You know, it's a great question. And what I would just say is, let me put it into percentages. So whatever our spend on a management is today, we're spending somewhere between, you know, on average 85 to 120 basis points. So call it 1%. I think if you just use that as a placeholder, 1% of spend on a management generally runs through a vendor management system. And that today is a fee we're paying to someone else that we will avoid.

Got it. Okay. Thanks, guys. You got it.

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

Thank you, operator. Before wrapping up, Cross Country is proud to join in celebrating Black History Month. Our company has a longstanding commitment to diversity, equity, and inclusion, including our continued financial support of the National Black Nurses Association. In closing, I'd like to thank everyone for participating in today's call, and we look forward to updating you on the progress of the company in the next call in May.

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