Q3 2019 Earnings Call
Good evening, ladies and gentlemen, and welcome to the cross country Healthcare earnings conference call for the third quarter of 2019.
Oh, it's being simultaneously webcast live a replay of this call will should be available until November 19th 2019, and can be accessed either on the company's website or by dialing 800 8395574 for domestic callers and choose your Rubthree 36936.
Six nine for international callers and by entering the Passcode 2019, I will now turn the cold over to Bill Burns Cross country Healthcares Chief Financial Officer. Please go ahead Sir.
Thank you and good afternoon, everyone I'm joined today by our President and Chief Executive Officer, Kevin Clarke as well as lumpy White, President workforce solutions and services and Steve Seville Executive Vice President of operations.
Today's call will include a discussion of our financial results for the third quarter and our outlook for the fourth quarter of 2019, that's contained in our press release, a copy of which is available at Www Cross country healthcare dotcom.
At the conclusion of our prepared remarks, we will open the lines for questions.
Before we begin we need to remind everyone that certain statements made on this call may constitute forward looking statements as noted in our press release forward looking statements can vary materially from an actual results.
Object to known and unknown risks uncertainties and other factors, including though is contained in the Companys 2018 and report on Form 10-K , and quarterly reports on Form 10-Q , as well as in other filings with the SEC. The a company undertakes no obligation to update any of its forward looking statements.
Also comments made during this teleconference reference non-GAAP financial measures such as adjusted EBITDA or adjusted earnings per share.
Such non-GAAP financial measures are provided additional information and should not be considered as substitutes for 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.
Lastly in order to facilitate a better understanding of our underlying trends, we may refer to pro forma information on this call, giving effect to acquisitions and divestitures as though the transactions that occurred at the start of the periods impacted with that I will now turn the call over to our President and Chief Executive Officer, Jim Clark.
Thank you Bill and thank you to everyone for joining us. This afternoon before I begin I would like to welcome Buffy and Steve to the call and look forward to having them share their thoughts in insights on the business during QNX and I would also like to can be huge. Thank you to our teams across the business for another successful review.
By the joint Commission with distinction continuing cross country is longstanding track record and commitment to quality for those that may not be familiar the joint Commission is an independent organization that credits in certifies more than 22000 healthcare organizations in programs in the U.S. each year.
And we are proud to be certified by this organization.
Turning to the quarter, our performance clearly exceeded our expectations for both top line growth and profitability, even more exciting is that we saw year over year consolidated revenue growth for the first time since Q1 of 2018. We believe this growth is the result of both the change.
As an investment, we're making across the business as well as the effect of favorable market conditions.
Let me first address.
What we're seeing in the market demand has steadily increased across all segments of our business, most notably in travel nurse with orders growing 16% sequentially and up more than 50% over the prior year.
Part of this increase in demand is attributable to the MSP wins in 2018 in 2019 that continue to ramp.
But the majority is coming from the broader marketplace as healthcare systems continue to struggle with persistent and pervasive clinical labor shortages. Another indicator of the relative strength in the market is the growth in spend under management at our Msps, which increased 8% sequentially and 11%.
Over the prior year with growth coming from both existing and recently implemented programs.
While the market trends are clearly favorable it is important to note that we must continue to execute across many fronts to meet that demand and ultimately realize the revenue when I read joined the company. It was my priority to create a vision for us to become a leading total talent solutions provider and to ensure we have.
Cohesive strategic plan a plan that not only provides a framework to guide decision making.
But also establishes a blueprint for the changes we need to me I.
I know I've shared this previously but the core tenets of that strategy include evolving the go to market approach reinvigorating, our culture and digitally transforming our company.
As part of evolving our go to market approach, we have refreshed our brands going from over 20% spirit brands down to one core brand cross country healthcare with seven divisions, we have hired in the line the right leadership across the organization, we've invested heavily in revenue producers funded through sick.
Inefficient cost savings in overhead.
And we are continuing to improve our candidate experience.
Changes in candidate attraction engagement in marketing strengthens our ability to attract the highest quality professionals, even modest improvements in our approach to performance marketing such as lead to applicant conversions, having meaningful impact on our revenue.
In return on investment.
From a corporate culture perspective, we have made tremendous progress we are investing in our people providing them with new training and resources as well as giving folks better tools and technology to work more productively.
We have improved the decision, making at the dust level and we are seeing the results. It is truly a great time to be across country and lastly on the technology front, we have made terrific progress with both internal and external facing tools specific to our new applicant tracking system, we will be rolling out the first implementation.
This month to a smaller business unit within cross country nurses in the feedback thus far from our user testing has been extremely positive.
And from a client and candidate perspective, the market continues to shift towards more mobile enabled models in data centric tools to that end, we are working to create the easiest in most seamless way to interact with our clients. These initiatives some of which we are developing internally commenced in the third quarter in should.
I will benefit as we progress through 2020.
Looking at the fourth quarter I am encouraged by the level of demand and activity, especially in our travel business, we're expecting to see sequential growth.
In most lines of business, despite the impact from holidays in the fourth quarter.
Our education business is expected to grow sequentially coming off the summer months and going into the new school year.
From a longer term perspective, with the turnaround taking hold and both revenue and profitability growing again, we believe that a high single digit EBITDA margin is possible over the next few years with a goal to get to 8% effectively doubling our current level of profitability. The primary levers we need to pull.
Our improving operating leverage through topline growth expanding our gross margin through better bill pay spreads and improved mix as well as continuing to improve the overall efficiency of our organization with greater automation through the enterprise. We will also continue to explore strategic M&A tuck ins.
With higher margins and across all fronts, we fully expect technology to play a key role in enabling improved performance and just before I turn it over to Bill I want to comment on the successful refinancing that we just announced bill and the team did an amazing job getting all the alternatives sourcing negotiating and ultra.
Mutli closing on this new facility last month, we believe it not only secures the liquidity needed for operations, but also paves the way for us to be more acquisitive with that.
Let me turn the call over to Bill Burns, who will review our results in more detail. Thanks, Kevin as Kevin mentioned performance in the third quarter was better than expected with both revenue and adjusted EBITDA exceeded the upper end of our guidance ranges consolidated revenue for the quarter was $209.2 million up 3% sequentially and up 4% over the prior year driven predominantly by growth.
In our largest segment nurse and allied.
Revenue for the nurse and Allied segment was $185 million up 2% sequentially and up 5% over the prior year with the prior year performance being driven by an increase in the number of ft ease on assignment as well as the impact from modest price increases and a favorable mix within the segment. The growth was broad based with all service lines reporting year over year improvement.
Physician staffing reported stronger than expected revenue of $20.4 million down 4% over the prior year, but up 13% sequentially, notably the sequential growth was driven by increased volume across both physicians and advanced practice specialties.
As profit margin for the quarter was 24.4%, which was down 130 basis points over the prior year and 100 basis points sequentially lower margins are largely the result of tightening bill pay spreads as compensation costs rose faster than bill rates, we've begun to see some upward movement in bill rates and should demand remain at these levels, we would expect that trend.
Continue.
Total SDMA was $44.4 million up 1% over the prior year and down 3% sequentially. The sequential decline was primarily driven by lower salaries due to reductions in headcount as well as favorable health insurance and other professional fees.
With respect to the previously announced cost savings program, we've continued to make solid progress identifying additional opportunities to reduce overhead and consolidate our footprint.
As of September Thirtyth 2019, the majority of identified actions. We are complete and we now expect to realize gross savings of between 12 and $13 million on an annualized basis with $7 million to $8 million being realized this year.
An estimated $10 million of the gross savings has been reinvested primarily in revenue producing headcount, which has helped to drive some of the over performance. We have achieved in the third quarter for the entire year, we expect net savings to be realized it between one and $2 million.
Adjusted EBITDA for the quarter was $7.3 million.
Up the high end of our guidance range driven largely by the Overachievement on on revenue mentioned earlier.
Below adjusted EBITDA. There are few items to call out we continue to recognize restructuring costs, primarily associated with severance costs and other exit costs related to the consolidation of excess office space in connection with the office consolidations, we recognized an impairment charge of $1.8 million on the right to use assets and leasehold improvements on more than 40000 square.
Our feet of space exited as part of that effort.
In addition, we recognized $1.3 million for a loss on derivatives pertaining to the termination of an interest rate swap.
Turning to the balance sheet, we ended the quarter with $9.5 million in cash, which was down versus the prior year and prior quarter. The primary driver of the sequential decline was due to lower collections and an increase in days sales outstanding while the year over year decline resulted from 12 and a half million dollars in prepayments made on our prior credit facility.
The lower collections in the quarter were due primarily to the impact from the summer vacation on our education business, while the increase in Dsos, primarily the result of strong sequential growth experienced in other parts of the business.
Overall DSL was 58 days up seven days from the prior quarter, which is still down four days versus the end of the prior year from a debt perspective, we closed the quarter was $71.4 million in principal outstanding under the senior term loans and $20.6 million, an undrawn standby letters of credit as we announced last week we succeed.
Recently refinanced our senior credit facility to a new more flexible and cost effective $120 million asset based credit facility.
To the terms of the new facility. The company has full access to the line subject to its borrowing base collateral and contains limited financial covenants.
In addition, the new facility contains an uncommitted accordion feature that allows us to increase the facility by an additional $30 million. We believe this to be an important step in ensuring the company has the proper debt structure and flexibility to continue to invest both organically and in future acquisitions.
This brings me to our 2019 fourth quarter guidance.
Look is for revenue to be between 205, and $210 million, reflecting year over year consolidated growth of between two and 5% sequentially. The range assumes some impact from the holidays on most lines of business as well as the seasonal pullback in physician staffing.
From a profitability perspective gross margin is expected to be between 24.3 and 24.8% adjusted EBITDA is projected to be between 6.7 $7.7 million and adjusted earnings per share is projected to be between five and seven cents also implied in this guidance is $2.6 million of depreciation and amortization.
<unk> expense $1.1 million of interest expense $1 million in stock comp expense, a tax expense of $300000 and a diluted share count of 35.9 million shares. This concludes our prepared remarks and at this point I'd like to open the lines for questions operator.
Thank you we will now begin the question and answer session. If you would like to ask a question. Please press star followed by the number one and your phone and mute your phone and record your name clearly when prompted you name is Rick.
Is your question to cancel your request press star followed by the number two.
One moment, please for the incoming questions.
Our first question is coming from Jason Plagman. Your line is now open.
Hey, good afternoon, just one of the.
It's a more detailed Kevin thanks for providing the has a long term margin thoughts, but just wondering if you could provide any more color on kind of the timing there is that.
Two to three year journey to get to the 8% EBITDA margin any any additional thoughts on the trajectory would be helpful. Yes, sure Jason how are you doing.
We believe the business it was in a growth phase we believe we can grow EBIT da.
Over the next several quarters from a longer term perspective, you know with the turnaround taking hold them, both revenue and profitability growing again.
We believe that this high single digit EBITDA is achievable largely from operating leverage gains automation the impact of the investments, we're making across technology and also an improvement of the business mix.
We have certain businesses segments that have higher margin and growing into some of these adjacent spaces that we've talked about on the prior calls.
It was part of that strategy.
The wildcard for us is.
Items like M&A, we have an M&A process, you know of looking at tuck in acquisitions.
And that will have significant impact as we go forward as well so.
Look very positive.
Strong background economically demand is up 50% year over year this quarter in terms of the volume of demand.
And so it's good conditions.
I said on the call good to be across country. We're very bullish the next few years.
So is the appropriate to frame that target is kind of.
A multi year target of eight year, not setting up from target date to achieve 8%.
Yes, I mean look we think high single digits is the goal. It's a it's our benchmark and we think we'll get there over the next few years could be a little sooner could be about that timeframe.
We don't have a crystal ball, but we like the backdrop, we like the management team we have in place.
The reorganization that we did this year the investments that we've made to digitally transform the company.
Our giving us.
Great optimism so.
We're going to get there you know we called that guidance of.
Growing.
Our adjusted EBITDA in Q4.
With that it's not always linear, but we expect to be growing over time.
Okay that makes sense and then just wanted to switch gears a little bit too.
What youre seeing as far as the winter orders and kind of the outlook for.
Demand as we head into 2021, what you're seeing there from your clients.
So I'll start that maybe I'll ask Buffy white to.
Add some commentary.
So far it's been a light flu season.
But orders are up.
So heading into the winter months.
Across the board were seeing orders up there we are in a very supply constrain marketplace.
We're seeing specialty.
Nursing positions with very high demand.
Our physician business has.
Higher demand were seeing request from our MSP clients to help them through various other services that we provide in our total talent solutions.
Including I. RP internal resource pools.
And our PEO and some of the Perm actions.
Yes. Thanks, Kevin This is about the I would say in a few of our key accounts were starting to see some volume of winter orders.
Typically we see them coming in mid October I would say this year, we're seeing a little bit slower activity right off the bat, we'll see a little bit more in Q4, but at this point its potential we're going to see more of the volume for Q1.
We are going back through all of our key clients to consult with them and look at last year trends versus this year trends. So I do anticipate higher order flow will come just seems a little later this year.
Okay, great. Thanks for the question as.
Thank you. Our next question is coming from AJ Rice from Credit Suisse. Your line is now open.
Thanks.
First of all maybe just following up on your comments around strength of the market.
Are you seeing edger I know, sometimes when you get to squeeze related to the flow or something.
Premium pay ratchets up but as the underlying market just seems like you've strengthening and it doesn't seem like is driven particularly by seasonal factors what are the clients, saying about the willingness to step up the ready to bid and.
Just to fill the positions.
Yes. Good question AJ I mean look we've seen.
We starting to see some upward movement in bill rates I think our bill rates are up about 1% low low single digits.
We would expect that trend to continue given the large demand that we've seen in the marketplace.
So from a bill rate paid a bills are.
Compressed I mean, I think what we are challenged by as we called out as our gross margin. There's a lot of competition in this marketplace.
And with our customers they are expanding and consolidating and they are following the continuum as a patient from walk in clinics and urgent care too large acute hospitals, which is our traditional client into ambulatory care outpatient post acute care as well as.
Home health care and hospice so.
They are getting larger and they are pushing the envelope that they have more leverage in the marketplace and they're pushing back on bill rates as much as possible.
But that you want to add to that no I would agree I mean at this point, we're seeing such high demand in the market.
Lastly, the supply continues to become constrained our health care professionals have options.
So we are going back and consulting with our clients on what we're seeing in the marketplace the balance between demand and supply.
My thoughts are this is not sustainable for the longer term. It's a question of when we can start to see some of those rates, particularly in the high volume, we see the volume coming more in the top six to eight specialties.
So we are consulting with them seeing when there's going to be that appetite for increase.
Okay.
Another question is obviously the comment about go into one brand and I understand there probably are significant savings associated with doing that I think one of the reasons the industry.
Each of the major players.
Fans was they could Taylor one brand in one direction plain vanilla travel nursing another for nurses need housing and other partners. They wanted a very tailored experience.
You go back to one brand are you.
And what is our view.
Timeframe to go back to that one brand approach.
Well you know we already are principally one brand.
Look 60% of our healthcare professionals our millennials.
We look for a job differently today than they did even two or three years ago or 10 years ago.
The most people find their jobs by.
Pulling out their mobile device and using there.
You know.
To do a search.
And so we're seeing the benefits of having one brand because we could invest more dollars into our.
Programmatic advertising and some of our.
Talent networks that we're building and it allows us to kind of focus more on reaching those millennial clients are millennial candidates.
Where they're looking for jobs.
Okay and then my last question you mentioned a couple Thats your prepared remarks about M&A and tuck in deals.
Any.
Enlighten us a little bit on where.
That might be attractive what types of acquisitions.
Would you look for where do you feel like if you can strengthen or broad product offerings.
Service offering great question I'll, let Steve.
Dress that he runs our M&A effort here across country. Thank you, Kevin Hi, AJ.
With regard to our M&A strategy, we are looking again as Kevin and Bill both mentioned at improving we're identifying.
Acquisition efforts opportunities that can improve our margins.
Most particularly the sectors that have been previously called out by this organization include Locums Allied education and technology.
What we've done internally as we build a process around programmatically identifying.
Sourced opportunities and we're keeping that process moving and looking to execute against that when the opportunities right. So that we have accretive deals that are complimentary to our existing services or new and new opportunities within adjacent markets.
Okay. Thanks, a lot.
Thank you. Our next question comes from Tobey Sommer from Suntrust. Your line is now open.
Thank you.
Could you talk about your.
Recruiter headcount where it sits.
In your eyes for the where yard in your turned around how much it's up year over year and.
Where productivity is versus where it can ultimately go just kind of give us color along those dimensions. Thanks, yes. Thanks, Toby Great question. I mean look you know a lot of the investment that we're making as a company really as all focused about employee productivity and improving productivity from automation is a big goal of the enterprise as we've talked.
What about on prior calls we've invested heavily in improving our increasing our revenue producer headcount this year.
We largely caught up to where we felt that the company needs to be in Q1 in Q2 Q3, we didnt add as many.
Recruiters and other account managers as we had in the previous two quarters, but we still about it and we'll continue to add on an incremental basis.
I'd like to think that we're kind of at a steady state now that we'll be adding recruiters as the company advances with orders in our opportunity to kind of train people onboard them and make them productive and bump that you might want to add yes, I would agree at this point we are at steady state. We're very proud of the team that we've assembled here.
We consistently pipeline for when we see growth within our organization and we need to complement our teams.
We've been focused on training.
Continuing to add capacity through allowing higher productivity per recruiter, providing them some tools and we continue to nurture them. So as we move forward, we'll evaluate the need and as demand grows we may need to add in the future.
Thanks as.
The company kind of.
Improves its internal operations and execute execution this year to year to date.
How do you think about.
The need for market pricing to increase to kind of build momentum to sustain the unit growth in volume growth.
Revenue growth that youve experience so far.
Seems to me like that might be.
A need for pricing to attract more supplied to the market as well as cross country.
Well, let bill you want to take that yes sure high Toby.
Yes look with the demand has obviously been we've seen wages rising faster than the bill rates and we've talked about this before where we would expect pricing to start to move upward. Its began inching upward this quarter and we would expect that trend to continue to the point about how do we get higher margins on the bottom line absolutely expanding the bill pay spread is.
It is important to us to getting there the biggest driver of the of getting to that 8% goal or high single digits remains operating leverage in the business. So both from a volume expansion as well as getting better margins. The margin will come from pricing to bill pay spreads as well as improve in the mix of business that we have played by leveraging the other high margin businesses. So.
We definitely want to continue to explore that.
Our clients. Unfortunately dollars are heavily cost pressure themselves. So there is theres that natural balance that we have to strike with them.
With respect to.
To bill rate.
What kind of bill rate growth.
Do you think would be required for.
Meaningful increase in available supply.
Well it right now we've seen as the pay rates have risen facets and fill rates. So we're still managing to bring supply to our customers and continue to meet the fill rate obligations.
The question is on the percent of side.
Hi, how fast can build rates rise and I don't know that we can call. It out just right now we did see an uptick sequentially and premium rates as a mix of our business and that it was an earlier question. We have seen some movement in that regard I know the throughout the last couple of years, we had called out that premium rates have been declining as a percentage of the overall total we've seen that trend start to reverse itself. So we're hopeful that that will continue and moving.
Direction, but as far as the future for price increases obviously, we'll be working with all of our clients and looking at where we think that that makes sense as Buffy pointed out earlier.
Negotiating on the on the hardest to fill jobs.
Modest and.
Most in demand specialties.
Two last questions from me could you comment on the IP migration you sounded bullish about it but could you update us on the the timelines at the more significant brands and I may have missed it in the discussion of the the new credit facility, but how much total liquidity is available to the from today.
I'll take the first part of that.
So we're rolling out our first pilot to a smaller business unit in just a couple of weeks.
But the larger part of the organization will be onboarded onto our new applicant tracking software system.
Late spring and we think the the majority of our employees and kind of the main division will be onboarded by the end of the second quarter.
And then just specific to the new facility Toby Yes, we were thrilled to get that that finished.
It's a $120 million asset baseline.
Our level availability will fluctuate on two things one is our overall collections, but then the other pieces how receivables are moving on what our borrowing base collateral is what we what we signed up to the facility, we expected or we're targeting to have at least $20 million to $30 million and availability for general operating purposes, and liquidity and that seems to be where we're trending.
At the moment, but it so.
It's a good facility for us in that fits our needs to continue to operate and continue invest in growth for the business.
Thank you very much.
Thank you our last question in queue is coming from Kevin Stinky from Barrington Research. Your line is now open.
Good afternoon.
So you mentioned the nice growth in Mis piece spend under management just curious.
About the trends you're seeing.
In terms of growth within existing accounts that are already ramped up that as you know are they.
Demand increasingly significant.
Increasing significantly at those.
Assisting accounts versus you know what are you seeing from ramp up of newer accounts or signing of new accounts.
Start to ramp up it can also commentary.
How you doing Kevin I look our legacy Msps tend to have a higher capture rate.
The new ones.
That we bring in onboard.
And I think we've called out that our capture rate is really high 50 percentages somewhere between.
57 and upwards of 60%.
Just to kind of review it we manage about $420 million a spend we have about $80 million of.
MSP spend is currently being Onboarded weve signed so far year to date eight contracts.
So.
I would kind of label, our our pipeline as well.
Fairly strong I mean, we see some.
Terrific opportunities.
In a lot of different parts of the market. So overall I mean, we're encouraged by.
Our existing base of customers and.
Trending towards.
Developing a higher capture rate.
And on boarding our new ones.
I would add some color, yes, I would say in our existing Msps, we're continuing to penetrate we're expanding the services across the continuum of what we can offer our clients.
We're also seeing the msps that had been newer and implementation continuing to ramp up. So we're excited about the growth there I think the conversations with some of our clients are starting to mature in progress clients are looking for more mature solution. Some alternative solutions from.
You traditional staffing they're looking at total talent solutions.
The alternatives like resource pools, and resource or recruitment process outsourcing to complement our total talent acquisition strategy.
So the conversations are changing and I'm very excited about.
What potential there is within our particular larger MSP accounts in Q1.
Okay, Great that's helpful color and.
On the physician staffing business.
Really nice sequential growth, there, where where do you feel like that businesses in terms of.
The state of the turnaround you know that the level of investment or.
Operational upgrade it needs to do there just maybe.
An update overall on on your physician staffing operations. Yes. Good question look we're very excited as we talked about earlier in the year. We made a management change we felt really good about the executive leadership that we have.
The business.
It has really turned around on a quarter over quarter basis. The business grew 13.2% still down year over year, and very low single to low to mid single digits.
Thats great improvement.
So we're seeing.
Strong demand across really are.
Throughout our different major specialties, we continue to say the probably the most growth in anesthesiology.
As well as primary care and hospital medicine.
Maybe Steve since you manage Steve Seville manages our other human capital services, including cross country Locums.
Our physician and advanced practice division. So maybe you can add some color short Kevin Thank you Hi, Kevin.
With regard to our Locums division, Kevin covered pretty pretty much how the quarter played out sequentially. It was very productive.
We continue to invest behind revenue producers and we've worked with this management. This outstanding management team to build an outstanding execution strategy for the business.
We expect that all of this effort and investment will lead to year over year growth sometime in 2020.
Okay, Great. That's that's helpful.
I guess Steve is.
As long as you're on the call maybe it sounds like it year Youre working in quite a few different areas there, but maybe just as.
Your role is.
As of operations, maybe just give us a little more overview of.
Types of things you're working on is the company.
Looks to improve operational efficiencies and drive margins higher short, Kevin I'm happy to comment about that we've initiated a number of cost reductions that are non head count related examining every aspect of our operations from the way in which we engage vendor.
Errors to the way in which we manage.
Segments of spend in the DNA category, and we worked and continue to work in will stand have established a regular him routine review of those categories. So that we can identify cost savings.
An excess execute on them very quickly.
One example that we're working through right now is our background check process, we're both examining and improving the process internally, but working to identify key vendors for those services nationally.
That's great I appreciate you taking all the questions. Thank you.
Thank you Ken Fisher.
We showing no further questions.
Right now speakers.
So well. Thank you everybody. We appreciate your time.
And we look forward to the next earnings call.
Have a good evening.
Thank you for joining you may now disconnect.