Q3 2020 Cross Country Healthcare Inc Earnings Call
Good afternoon, ladies and gentlemen, and welcome to cross country Healthcares earnings Conference call for the third quarter of 2020 <unk>. A replay of this call will also be available through November 19, 2020, and can be accessed either on the companys website or by dialing 800 threenine.
In 1987 for domestic calls and for zero to 220 3093 for international callers and entering the passcode 202 zero.
At the conclusion of the prepared remarks, we'll open the lines for questions.
I'll now turn the call 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 co founder and Chief Executive Officer, Kevin Clark as well as Buffy White group President of workforce solutions and services that Steve Seville, Executive Vice President of operations.
Today's call will include a discussion of financial results for the third quarter of 2020, and our outlook for the fourth quarter a copy of our earnings press release is available on our website at cross country healthcare Dot com before.
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 actual results and are subject to known and unknown risks uncertainties and other factors, including those contained in the company's 2019 annual report on form 10-K, and quarterly reports on form 10-Q.
Well as in other filings with the SEC. The 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 as additional information and should not be considered substitutes for superior.
To financial measures calculated in accordance with us GAAP more information related to these non-GAAP financial measures is contained in our press release 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, our performance in the third quarter is a testament to the resiliency of our company to manage through challenging times and deliver across many fronts.
Following an unprecedented fall in demand in the second quarter, we have continued to stabilize and rebuild our business, allowing us to once again exceed guidance all while delivering on one of the most important IP projects. This company has undertaken in more than 30 years I'll go into some more details about.
At our IP strategy in a moment, but I'm thrilled to report that this project to replace the applicant tracking system for our travel nurse business was completed on time and under budget just as important feedback from our recruiters has been extremely positive and thus far we are performing in line with our expectations.
In addition, we completed the actions to achieve annual savings of more than $20 million through head count reductions and the closing of more than 30 offices.
As demand rebounded late in the second quarter and has continued to remain strong throughout the third quarter. We were successful in building back a significant portion of our nurse and allied business, which was impacted by coated.
And though not back to pre coated levels weekly headcount increased 17% for travel nurse and 16% for our branch business as compared to the start of the third quarter.
Also contributing in the third quarter was our support of a labor disruption at one of our managed service program clients, which generated approximately $8 million in incremental revenue.
Though we do not routinely staff labor disruptions. We believe it is important to support our clients when they request our help especially in the midst of a pandemic and national clinical labor shortage.
It's worth noting that even without the revenue from this project, we exceeded our expectations for the quarter, both from a revenue and adjusted EBITDA perspective.
The pandemic in many ways has reinforced our value proposition in the market for offering a flexible rapid and cost effective means for delivering critical care to millions of Americans across thousands of facilities. We expect the COVID-19, we'll continue to have a mixed impact on our business with Reed.
Little spikes in demand, especially for IC, you med surge and telemetry nurses as well as declines in some areas due to the uncertainty from cobot, such as our education and search businesses.
So what are the pandemic is though the pandemic is far from over and we are seeing spikes in more than 40 states hospitals continue to strive for a return to more normalized operations with admissions for many systems still below pre cobot levels, our clients face intense cost pressures and given the uncertainty.
Surrounding the impact COVID-19, they have on their markets. They are turning to cross country for solutions that meet their needs. We continue to work collaboratively with clients on ensuring competitive rates and flexible assignment lengths to provide the critical resources they need.
Throughout the third quarter, we have seen bill rates for the cobot assignments trend downward.
Though in general they remained higher than pre covert rates.
For the third quarter, our average bill rates in nurse and Allied segment were up more than 20% as compared to the prior year, but were down approximately 9% from the second quarter.
Bill will go into more detail on pricing and just a few minutes.
Revenue for our largest segment nurse and Allied was down approximately 12% sequentially overall volumes stabilized in the third quarter with billable hours down a modest 4% driven by the wind down of covert assignments from the second quarter as well as the decision by an optimal workforce solution client to be.
The workers back in house spend under management from our MSP clients also declined sequentially to a run rate of between 450 and $500 million more in line with pre coated levels, primarily due to the wind down some cope in search assignments capture rates at Msps remained unchanged at approximately 65.
Lisa.
Though in line with our expectations, our physician staffing business continued to experience an impact from COVID-19 with revenue down 19% over the prior quarter demand has been down across most specialties with anesthesia and hospitals being the most significant within physician staffing revenue from advanced practices.
It's actually up both sequentially and over the prior year.
From a technology perspective, we continue on our path of digital innovation across our business in today's market speed is critical both to our health care professionals and the clients. We serve our efforts over the last 21 months have resulted in the launch of our new applicant tracking system in our marketplace application earlier this year.
I am so incredibly proud of our entire organization as everyone has worked tirelessly to deliver on this vision.
And while we celebrate these major milestones we recognize that our work is not finished we are immediately proceeding to the next phase of our transformation upgrading and integrating the middle and back office platforms, and bringing the company's infrastructure and business processes onto a single cohesive platform over the next 12 to 18 months.
Once realized we expect that these initiatives will drive growth in both revenue and profitability through better operational execution enhanced productivity and a world class client and candidate experience.
Looking ahead, there remains a significant level of volatility in the market with unprecedented rapid swings in demand.
As a result, both clients and health care professionals are seeking flexibility and requesting shorter assignments.
That said leading into the fourth quarter I am encouraged by the backdrop in the marketplace with orders remaining strong across our travel business and sequentially weekly improvements in both our local and education businesses.
As a result, we are projecting revenue to be between 185 and $195 million for the fourth quarter, excluding any impact from the labor disruption in the third quarter. This guidance reflects the likelihood of continued sequential improvement in our business.
From a profitability perspective, we are guiding to an adjusted EBITDA of between six and a half an $8 million, reflecting the sequential change projected for revenue as well as investments we plan to make an additional revenue producers well.
While I'm encouraged by cross countries efforts to navigate this crisis, we are continuing to take actions to restore the company to growth and greater levels of profitability.
I'm confident that we have the right team in place that we are taking appropriate action and that we will ultimately reach our goals.
Just before I hand, the call over to bill to step through the numbers in more detail I'd like to share with you. Some comments. We received recently received from one of our nurses working the front lines of the pandemic.
She wrote being.
Being away from my family to care for patients as a choice I made seeing patients and the E. R away from their families. All loan in their moment of vulnerability has been very difficult. It has also been humbling to walk alongside them. It makes you forget your own struggles and sacrifices we'd go into work corona virus or not pandemic or not.
And we give it are all we are there for our patients.
Now this nurse exemplifies the compassion and dedication of our nurses that and that of the thousands of heroes, who risk their personal safety to care for Covance patients. They continue to be on the front lines every single day many of them moving from state to state search to surge without seeing their own families from.
Our cross country healthcare family all of them and their families. We extend our deepest appreciation for their dedication and service.
Now, let me turn the call over to Bill to walk us through the results in more detail Bill.
Thanks, Kevin results.
Our results for the third quarter reflected solid execution as both revenue and adjusted EBITDA exceeded our guidance consolidated revenue was $194 million, representing a 7% decline over the prior year and a 10% sequential decline primarily on lower volumes across the business due to the impacts from Cobank team turned.
Turning to nurse and Allied revenue was $175.2 million down, 12% sequentially and 5% over the prior year.
As expected the number of cobot assignments and the respective bill rates declined for the third quarter with.
With the decline in Kobin travel assignments travel nurse was down approximately 20% sequentially. However, it was flat relative to the prior year on.
On a year over year basis, the decline in billable headcount was offset by favorable bill rates and mix. Our local branch based business was up 14% sequentially and down just 2% relative to the prior year due primarily to the labor disruption staff in the third quarter as well as the sequential decline sorry sequentially weekly improvement throughout the quarter.
As expected education was down 30% compared to the prior year due to the virtual started the school year in most markets. We continue to generate revenue through our Tele service model, which has allowed weekly revenue to continue to expand and recover.
We're actively working with schools to assist them with reopening safely and hope to see that trend continue into the fourth quarter.
At this point that we are unable to predict when or which of the schools. We serve me reopened the school year.
Bill rates for nurse and Allied were higher across all lines of business due primarily to the impact from covance as well as the labor disruption.
Additionally, we have seen a favorable impact from mix from higher bill rate specialties and the decline in hours for optimal workforce solutions, which are among the lowest rates for the company.
We estimate that our underlying bill rates within travel nurse were up approximately 3% over the prior year look.
Looking ahead, we expect rates to continue to normalize as we move forward, but remain above prior year levels for the next several quarters due primarily to the impact from COVID-19 assignments.
As we've called out on several of our earnings calls the company established pricing guidelines for covert assignments whereby rates are determined in consultation with clients to ensure our ability to quickly provide the critical staff needed.
Always with the clients consent these rates may flex up or down depending on conditions in their respective markets.
Our physician staffing segment, which had been on a positive trajectory just prior to covert has continued to see negative impacts from the pandemic primarily in the physician specialties.
Revenue was $16.5 million, representing a 19% decline from the prior year and 2% sequentially.
Gross profit for the quarter was $48 million, representing a gross margin of 24.75%, which was 50 basis points above the high end of our guidance range.
The primary driver for the stronger than expected margin related to the labor disruption, which added an estimated 25 basis points to the overall margin.
Excluding the labor disruption margins across nurse and Allied still had been above the upper end of our guidance range in part on improved bill pay spreads as well as favorable mix.
Total SGN eight was $40.8 million for the quarter down 8% over the prior year and 3% sequentially the.
The primary drivers for the declines were reductions in headcount and the closure of offices as part of our cost savings programs.
Incremental savings realized compared to the second quarter were approximately $3 million, bringing the year to date total realized cost savings to $7 million under our 20 million dollar cost savings plan.
SGN eight for the quarter also included incremental charge of $1.6 million related to the expected performance under the company's short term incentive plan.
While we've taken out considerable cost it's important to note that the company has been and will continue to invest in revenue producing capacity based on the market outlook.
Below adjusted EBITDA, there are a few items to call out we recognize restructuring costs of $2.3 million associated with severance and other exit costs, we incurred $800000 in legal fees pertaining to an ongoing nonoperating matter.
We also recognized $1 million in noncash impairment charges, primarily related to the write off of assets associated with leases exited during the quarter and finally interest expense was approximately $600000, representing a 56% decline over the prior year and an 18% decline over the prior quarter.
Year over year decline was driven by a lower effective interest rate on the new avionics facility as well as lower average borrowings during the quarter.
From a balance sheet perspective, we ended the quarter with $3.4 million in cash and $56 million in outstanding debt under our ABL, excluding letters of credit.
From a cash flow perspective, we had a use of cash from operations due primarily to the timing for revenue during the quarter. Our days sales outstanding was 64 days, representing an increase of six days since the start of the year and 15 days over the prior quarter.
So part of the increase was anticipated following a historically low DSO in the second quarter. The increase was driven by the growth in revenue throughout the quarter as well as lower collections from several larger clients.
On a year to date basis, we reported $25 million in cash from operations in comparison to $11 million in the prior year.
Capital expenditures were $1.2 million for the quarter, bringing our year to date capex at $3.7 million.
As of September 32020, we had borrowings of $56 million under our credit facility, which was down approximately $15 million from the start of the year.
This brings me to our outlook as Kevin mentioned, we expect consolidated revenue to be between 185, and $195 million, representing a 9% to 14% decline over the prior year.
Sequentially. This guidance reflects the wind down of the labor disruption staffed and third quarter as well as the anticipated impact from the holidays on the fourth quarter.
As we discussed demand remains strong and we continue to make progress on growing our head count on assignment across nurse and allied demand.
Demand for physician staffing is expected to remain soft and we expect this segment to be flat to down 2% sequentially go.
Oh, good remains a factor and regional spikes could continue to impact our business both positively and negatively.
You're guiding to a gross margin of between 24.5, and 25% largely consistent with the third quarter.
Adjusted EBITDA is expected to be between 6.5 and $8.5 million, reflecting the impact on gross profit from the spread in the revenue guidance.
SGN, a we're not expecting significant incremental savings as compared with the third quarter given the majority of the cost saving actions were completed earlier in the year.
Our adjusted earnings per share, it's six to 11 cents.
Also assumed in this guidance are depreciation and amortization of $2.5 million.
Interest expense of $700000 stock based compensation expense of $1.1 million.
Tax expense of $200000 and a fully diluted share count of 36.5 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.
Taking the question and answer period to answer the question queue. Please press star one once again that is star one if you have a question. Please standby for first question.
Our first question comes from AJ Rice with credit Suisse. Your line is open.
Hi, everybody. Thanks for the question I'm sorry.
Could I ask.
Oh I appreciate.
Sets up and as you highlighted that remarks I'm just curious now that we've been in the pandemic for a while.
Still seeing.
Healthy number of applicants for physicians or maybe.
The trends in your Unbilled orders look like at this point are you, having a little more trouble getting nurses to step up just any thoughts on that.
Yeah.
Great question.
Look it's a supply constrained marketplace.
[music].
From the demand perspective, you know our orders are up three times.
More than where they were at the beginning of the quarter of Q3.
So we have a lot of unfilled jobs like the rest of the industry. That's cogut is surged again.
What we have done is Doug.
Doug and we have over the past two years.
Part of our digital transformation spent a fair amount of time and capital et cetera to put.
Put together a digital strategy around programmatic advertising and social media in a lot of other improvements to the company. So I feel like the company is in a very good position.
To continue to nurture and engage and develop the community of nurses that we pull our applications from so it's it's the number one thing that we focus on is.
Is this a constrained supply.
But I.
I think we're doing a very good job at it through the quarter.
Okay, I think if I, if I'm reading a here.
Tom is right.
So your pricing game that you showed in the quarter. There was an underlying bill rate I'm, assuming that's X labor disruption eggs.
Oh, it was 3% how much how much did the others other the labor disruption in the coated free members how much did those contribute to what we saw on the pricing side, particularly with the nurse and Allied.
Yeah, well what is called as we called out.
You know pricing.
Price overall is up significantly 20% year over year, but it's down from the second quarter.
But bill you might want to go into little more detail I mean, if you ex coal that bill rates are up low single digits, but bill you might want to provide some more color.
Hi, Jay itself. So as Kevin said, we did look at the overall impact of bill rates from both cobot and some of the labor disruption and when we took that part out of our business to look and see what where average bill rates doing we could clearly see rates are up about 3%. It gets a little bit trickier to start to separate between kobe than non coated.
Because clients are ours are starting to get desperate in certain locations and geographies and so we're seeing a little bit of a spike in crisis rates here and there. So it's not always lagged, particularly of the cobot water. So it's a little bit harder to answer your question about exactly how much coal that drove but I'd say, it's again, if you look at the average bill rate or the average revenue per se.
He about a 3% an increase would have been on the underlying business and the rest was driven by the mix of the orders from the hydro they specialties.
We've seen a lot of demand, particularly in ice you.
In several states throughout the country that has spiked as part of the second surgeon intra bucket you can give us some color on that but.
I think again, it's we were encouraged to see that the bill rates were still trending up.
Bite or after removing the impact that we could identify from covance.
Okay and it sounds like in your remarks that maybe a bit cogan related placements and I don't know if that's easy to distinguish how much is what our specific of unrelated placements versus non coated.
But it sounds like that step down a little bit from second to third quarter is.
Is there any way to.
Sort of parse out order of magnitude of how many of your Oh assignments right. Now are you would attribute to the cobot crisis specifically.
Yeah, I mean, I I would say Oh, let me provide some additional color, but we have seen.
The improvement in overall.
Surgeon or.
We still see elective surgeries depressed, we're seeing you know an uneven demand.
As you've probably seen on TV and so forth Cogut has spiked, especially in the mid west and the southwest States like Oklahoma, Nebraska and Wisconsin.
But Bob you want to provide a little more insight there.
Certainly I don't think that we're seeing a facilities parse out their orders the way that they did during the first coverage surge arguably into kind of what I like to call 1.5, other cobot surge, but they at this point are adjusting you see winter orders coming in I think they're probably trying to prepare to capture supply the difference now to me.
Im systems are isolating their coal bed patients into specific facilities are units that being said you can work in any facility and be exposed to kobe, so they're not necessarily parsing amount that way plus they're trying to adjust to the marketplace and raised their build rates as required in order to capture but now that we're seeing this.
Do I liddy of Kobe, plus winter, we are seeing crisis rates prior to that necessarily calling them coded. So it is a little difficult to parse out.
I will say that we are looking at the dynamics from what geographies. We are seeing the cobot increases in and speaking with our health care facilities to understand the cobot census, and they are running in some of the same markets as they did last time, Arizona, California, Florida, Texas as you can imagine now we're starting to see some other states.
Like as you have seen.
Okay last question.
You made some comments about the dsos being up sequentially and.
I think one of it was just the timing of revenues, but you also said something about a couple of.
Customers that you're working with or whatever.
Is there a concern that some of those might be at risk or is there any way to talk a little more about what you're dealing with there.
Yeah sure AJ, you know as I look at the deal So bridge that a big chunk of it was due to the timing of revenue and how much came in in September relative to the quarter in particular that the labor disruption that's haven't called out for the $8 million represents about four days at the end of the increase in D.S. So the impact from schools restarting just you know theres the billing begins.
But you don't collect for a period of time and that added about another day to that so and so when you. When you consider that we were at historically low coming into Q to a more normalized level for us is somewhere in that 56 to 58 day range. So I can ascribe probably five days just to those two items I just mentioned and then as I look at across the other.
Increases to a smaller degree the clients I was calling out but it's more about timing I don't have concerns it's not a it's not been pending right up that were foreseeing, it's really about timing for collections with them and it happens periodically I will say you know as we get into the third and fourth quarter. We do tend to see some slowdowns that happened last year as well.
And so it's I don't think there's anything other than just a industry normal cyclicality on the payment stream payment side.
Okay. Thanks, a lot.
Our next question comes from Jeff Silber with BMO capital markets. Your line is open.
Thanks, so much.
You talked a bit about some of the spikes you're seeing I think in the Midwest and southwest I'm, assuming it's in terms of of nursing demand I'm. Just curious are you seeing.
Reverse trends for physician demand in those kick in those areas.
Yeah, Hey, Jeff how are Ya physician demand is still soft we've seen growth in our cross country Locums Division in our advanced practice.
Vision so.
Nurse practitioners and physician assistants lots of demand demand is up I think 60% you know year over year for the quarter, but physician is still soft if you recall in our top four specialties, our anesthesiology emergency.
The primary care and hospitalist and of those only the emergency Department physician staffing is up year over year. So we're seeing you know its still soft.
We're encouraged that we look at these hospital volumes that are now.
At the beginning of the quarter. They were you know upwards of 90% to 95% of print called good levels now.
You know most of the reports that were seeing and hearing from clients, it's more like 95% to 97%. So we're encouraged by what we're seeing and I think a lot of hospitals are you know thinking about their enterprise you know how they do kind of parse Ur cobot patients in one part of the enterprise and still.
Also provide.
Elective surgery and create operating rooms, I noticed in Georgia.
There was a.
A effort to try to get the state of Georgia to keep the field hospitals in place for operating rooms for surgery, well you know the <unk> the acute care hospitals medicine patients there so.
That's kind of what we're seeing on a broad base I don't know Steve If you had some more color you wanted to add.
To jeffs question.
Kevin I, you've covered pretty much everything the only thing I would add Jeff would be that although the hospital admissions are gaining on their pre cobot levels and as Kevin pointed out it's about 95% pre go with.
What we're what we're not seeing it in that increase being perfectly correlated with the waters.
As we exited the quarter. The trend was was seeing a growth in our order count and that's continuing but.
But we have some some significant work ahead of us to get back to pre covance levels. Okay.
Okay that actually is a good segue to my next question I know, you're not talking beyond the current quarter, but can you give us some sort of insight into how orders are doing into early 2021.
In terms of the overall business or physician Jeff.
I'm actually more interested in nurse and allied but if you want to comment on physician that'll be great as well.
Well look you know as I commented earlier I mean, the overall number of job openings that we have for nurse and Allied is up significantly from the beginning of the quarter to the end of the quarter and candidly, we really just don't see any end in sight in terms of the demands diminishing.
I think we're going to be you know.
Operating in this type of a pandemic environment well into 2021, and you know I think we will see the movement of spikes in searches you know moved from region to region.
So what does that mean it means that these hospitals, most importantly need critical care nurses I see you and telemetry and also med surge or what it means is as we've called out earlier, the advanced practice areas nurse practitioners and T. A's are going to be in high demand and on the physician side.
You know principally around emergency so you know.
There were I think were going to also be in a supply constrained marketplace for a lot of other reasons. One just the of course, the large number of open orders.
But there's just such stress and burn out TV, among a nursing and Allied health and physician you know all of the different specialties right now and I think that's going to have in fact people are getting burned out.
But maybe I'll also ask my team Buffy maybe to comment as well and tell Jeff what you're seeing as well.
No. Kevin this is nothing I would I would completely agree with that I think that what is interesting is health care facilities are seeking.
Seeking longer term assignments, even booking assignments well into Q1, so that they can make sure that they have the supply I would agree at this point, we're seeing such fatigue. We also see the impact of health care professionals, having to care for their families.
So that is also impacting supply and supply right now healthcare professionals need a little bit more flexibility. So we see health care facilities wanting to bulk longer assignment and looking into Q1 that being said supply went some flexibility. So we're seeing a little bit of the compression in the duration of assignments.
So that people have coverage over the seasonality and well into the holidays and winter. We are seeing the orders continue on and I agree no no end in sight okay.
Okay, but anyway.
I'm sorry, Jeff just let me add to I think there's this we talk about it internally as a twin dynamic because the seasonal flu is here and we are seeing and hearing about patients that come into the yard that have both kogut in normal snow. So that that that will probably also creating an even greater spike in probably the you know January.
Every march timeframe.
Helpful.
You had talked about some of the progress and your cost management. I think you said you realize about 7 million year to date, if I remember correctly you targeted about 10 to 12 million by the end of the year on your way to 20 million is that still accurate.
Yes, Hi, this is bill yes, that's that's exactly right. So the seven realized to date, we've called out 10 to 12 to be realized and in my prepared remarks, I mentioned that we know no incremental savings coming in the fourth quarter, but that's just what we got in the third quarter would be carried forward. So it's an additional $5 million record.
So realized in the fourth quarter expected to be realized in the fourth quarter and that'll get that answer to 12 realize this year got.
Got it okay. Thanks, so much.
Right.
Our next question comes from Kevin Fischbeck with Bank of America. Your line is open.
Great. Thanks, I, just want to try to reconcile some of the comments that you're making this year the talking about demand being up you know to react.
Beginning of the quarter to the end of the quarter, we got to talk about.
Orders kind of lagging return volume growth.
So just just trying to understand you know kind of where we actually are as far as percentage of demand normal you know right now and.
You know, whether there's something to think about as far as a volume.
While the number.
Two weeks to get.
All the way back to that kind of a normal them.
Yeah, Hey, Kevin are you doing good question I mean look you know we started the year, you know and and really going back to I everything for me started in January 2019, when I rejoined the company as CEO and throughout 2019, you know the dumb.
Man side was improving each and every quarter.
In the first part of the Covance like we saw orders rise more than 20% as the pandemic unfolded and then.
As we reported it fell sharply by almost 80% as hospitals really experienced.
Much much lower census, and then orders started to rebound in June and we saw states, such as California, and Texas, and Florida, and Georgia, Tennessee.
Being the biggest increases and then you know through the third quarter. These Midwest States, like Oklahoma, and Idaho, Nebraska et cetera.
And you know it's been unprecedented we have more orders today.
The end of the third quarter than we had a win win when the coated pandemic spike occurred. So we're at a very very high level and then looking into those waters as we've talked about we are seeing with.
Items coming back with a more broad based.
Demand in places like Oh, our ore pediatrics or LNG and some of the other specialties that we cover and we think that it's going to continue to you know the spiking potentially even higher as we get through this seasonal flu. So I'm not sure if I answered your question, but that's how we kind of.
Think about demand right now, but its at all at a level now higher than what we saw in the first quarter.
I guess why isn't that kind of converting into a higher revenue number then as we head into Q4 I mean are you talking about sequential improvement if you exclude the.
Disruption, but it feels like you're talking about a demand.
A number that's incredibly high better revenue number that goes a little bit conservative.
Well, we also called out that we expect you know as the broad market increases bill rates to model. Two also subside somewhat you know and I'll just say you know from the perspective of this management team. We've you know.
Met or exceeded our guidance almost on all measures you know for.
For the past couple of years. So we are typically tend to be.
Careful and conservative in terms of our expectations around the business when you get to the fourth quarter.
You have seasonal drop off you know when the holidays occur a lot of nurses want to go home and especially this year, we think they'll be a seasonal drop off with some of the things I mentioned earlier burnout and fatigue and as Buffy mentioned, you know I think folks wanting to be with their families.
You know we've got you know health care professionals that are working.
You know a lot more hours than they typically work.
And Kevin. This is bill this is bill I'll just just one quick comment on the sequential guidance. If you think about it so last quarter, we called out that we started off with lower headcount as a result of that.
Falling demand in the middle of the second quarter, we had been rebuilding head count all throughout the third quarter and as you look into the fourth quarter implied is that we will continue to re grow headcount, but what you have to take into account from Q3 to Q4 is the impact from the labor disruption. So if you were to look at that without the $8 million on a normalized basis.
What quarter, we would show roughly flat to about a five or 6% increase in revenue sequentially and that again is not the norm as you would imagine the locums usually takes a step backwards. This seasonality in some parts of our business but.
We're still expecting that to be the trend that we are looking forward with the growth.
And let me just one other comment to that I think is interesting as you know as this code. It's endemic has unfolded, we're seeing hospitals request shorter term travel nurse assignments. For example, so typically about 10% of our travel nurse business is less than 13 weeks, which is the industry Stan.
Good for travel work assignments and in this environment, we're seeing 25%. So we're seeing shorter assignments in terms of the orders that were getting and that also makes us cautious.
Okay. So so is it.
Vandas kinda get on quarters and maybe the.
Ours is not caught up as much as the orders are.
Yeah, well hours. If you are looking at it some kind of we like to think of.
No. The typical travel nurse assignment as 13 weeks, which as you know full schedule for 13 weeks and about a quarter of those orders that were getting for 13 weeks assignment or actually not 13 weeks. There. They're shorter are there you know four weeks or two weeks or six weeks and and that's bringing down our average work assignment.
In this environment and that's also part of our you.
Analysis around our forecast.
That seems all the economics on a per day basis for you with its shorter or longer heard the.
Same kind of margin football.
It's not.
Mark go ahead.
No I I was going to say, it's not a question of margin on the orders I mean that that's probably holding up consistent with what we see on the 13 week quarters. It's a question of having your we fill that business right. So if something was going to go to three months and you're going to add to it you're looking out now and you Simon could end it sure does eight weeks or six weeks as Kevin mentioned and so it's just you know.
You've got to refill that that had sound a little faster than otherwise might have so it's a I guess it would be a change.
Change in the recruiter productivity in terms of like the number of headcount that they'll have to resell and staff over that quarter.
Okay that makes sense.
And then I guess you guys have been closing physical branches.
I was wondering if there's any data that you guys have right now about leather.
That has in any way impacted the growth at those branches versus branches that you you know.
Kept your physical presence or any change in <unk>.
Well if it into two cohorts at all.
Yeah. It's a very interesting question first of all I'd say you know none of our branches are open. So you know it's it's I can tell you that you know we're very proud of our remote workforce. You know we moved you know what we have 1400 40 employees move everybody to work from home.
Work from home situation back in March and we feel the company has been very productive and very successful and you know it was always in our five year strategic plan to to move away from brick and mortar, especially with our per diem business and during the covert crisis.
Give us an opportunity to.
Accelerate that plan because our teams are working so well and we outfitted everybody with.
Proper technology to ensure that they can work from wherever they were out of but we think you know we manage all we're very metric driven company and you know the metrics are very positive in terms of People's activity in fact, it's almost.
You probably heard this from other companies to its we we spent a lot more time on human resource issues in terms of helping our workforce not get burned out either because we find people working very very hard in.
In a work from home situation. So answer your question no I don't think that has had any impact and you know I think we're looking forward to at some point you know being a much leaner organization in the buildings, we're going to finish this year around 19 offices.
When I joined the company in January 2019, we had about 65 to 70 offices and we now have 19. So it's a big advantage for us to move you know without you know.
Overhead you know in the future.
Okay and then just last question you talked about one of your if other companies in sourcing I mean can you talk a bit about why that actually happened and then.
You know whether that's something that you think is just a one off or are there any issues that you kind of see there.
Correct.
I'm not sure I understand your question sorry.
I thought that you you said you had one client we in source during the quarter was that right Oh right.
Yeah, that's a.
Good question.
So what we have seen in this marketplace in those pockets in geographies, where hospital volumes have declined they need agency and contingent labor in a much lower.
All of them than they did of course pre coated so.
We've seen.
You select clients in those markets, where their volumes are down hole in.
You know in in source.
Certain parts of their human capital outsourced program that they had with US in this particular case. It was a client that we provided a number of patient care technologists, which are.
Like hourly worker that helps especially long term care and are chronically ill patients and that was an operation that they felt they could manage themselves are more economically and efficiently. So they they took it in house.
Okay that sounds like a more of a one off.
I think that your it was having conversations with broadly.
That's right.
Okay, that's a correct.
Our next question comes from Tobey Sommer with truly Securities. Your line is open.
Thank you.
I was wondering if you could comment on.
The labor dynamics as you're seeing it related to coal bid.
In the full time nurse staff so your hospitals.
And and.
And then maybe in that context.
Beyond where you can see in your sort of numbers in orders over the over the horizon.
What does your experience tell you about the trend in pricing as a result of some of those labor market dynamics.
Yeah. Good question I think look you know first of all I think in a lot of ways hospitals.
Through this pandemic have embraced the temporary staffing model in a much bigger way.
As a result of these spiked in surgeons I think these hospitals recognize that.
You know.
You know that the effort on a local basis or regional basis to staff all their needs.
Is somewhat insurmountable in a pandemic so.
This industry at moment for a company like cross country is we think sets up very well as one of the larger players were more important to our large clients than ever before to become their partner to help them solve these critical shortages and part of that is if you look at the data around.
The the segments.
Healthcare staffing around search and direct hire direct hire or or those firms that help for example hospitals.
Find permanent staffing their orders are way down the business is way down and we have a search business. So we can see that ourselves and you know so I think in a lot of ways, what happens to the healthcare staffing industry. It.
It becomes more important as a result of the pandemic, especially companies like cross country in terms of our ability to provide a one source or total talent solutions to our clients and we can bring our temp staffing a as well as our direct hire business or are you know business and advisory.
Services to their door stop and help them through our MSP programs managed.
A supplier panel in a very efficient way. So you know that's you know kind of what.
We're seeing and.
Feeling about the results of the <unk>.
This moment in the industry and then in terms of pricing.
You know I think that we're seeing as the broad market improves.
As we've called out were seeing some moderation in our overall pricing and we're certainly seeing a pricing for coated related supply lower than what we saw in the second quarter, but you know I think we're going to ride the roller coaster and you know we don't have a crystal ball in terms of where that's.
Going but you know so I mean, that's that's where I think I think in a way I think healthcare staffing.
Projected to grow next next year, four or 5% and you know I wouldn't be surprised if it grows more than that so that was kind of a general answer Oh, but if you want to add to that for Tobey.
No I think the only thing I was going to add is we are Kevin how are you seeing more adoption into contingent use even though after the first cobot surge there were a lot of cost pressures and identifying line items that health care facilities can impact from a cost perspective, they recognize the flexibility that they gained their contingent staffing.
Now that being said, they're all looking at core staff and how they can uplift those numbers and bring that core staff at maybe they've had impacts are through the first cobalt surge as well.
One of the areas is total talent management being able to offer them whole house of contingent staffing as well as direct staffing and then in between offering them. The conversion strategy have you have a talent pool here of contingent resources you can transition then.
Time resources on your core staff. So that's starting to bolster their hiring in addition to our search business.
Thank you that makes sense.
Could I get your perspective on.
The M.S. key markets and Youre.
Experience and what you're hearing from your largest customers and maybe specifically within that a comment on the market share trends, you're seeing from staffing, let msps versus a vendor neutral or.
Set ups.
Yeah, well I mean look we.
In terms of RMS to use you know it's been a good year for US you know our spend under management is down slightly from Q2, where we had a big spike in the markets that had the initial cobot surge our capture rate as essentially the same a year to date about 65%.
And you know I'd say that we still have we're so onboarding you know from our pipeline a recent wins, we have about 45 to 50 million that has yet to come on board.
But I think the question that you're asking is how is you know a primary supplier model I'm holding up versus say a vendor neutral model and you know.
My perspective, and I think.
Buffy and others would agree with this is that you know.
Were more important now to these hospital systems, they need to have a partner.
That knows them that you know can be there to hand holds.
You know the various spikes in the units that they need.
MSP is a lot of people don't understand about msps versus a vendor neutral tech platform.
Msps come with a at least our variety or across country with a significant commitment investment in terms of program management on site.
So we have a full time employees at many of our Msps that work in the hospital and we're on the grounds or adjacent to it and.
They're in the meetings.
Of of our clients on a daily basis, ensuring that we can help resolve their issues. I'd also say that you know again another comment about cross country.
Having scale and being one of the larger players we have a terrific supplier panel, we that hundreds of suppliers were very pro competitive.
But we have a very strong group of suppliers over a long period of time that you know we have been able to measure their quality and bring that to the doorstep of our clients. So you know we feel very passionately about the MSP model I think some systems you know.
From time to time will adopt the vendor neutral model and then they will come back to an MSP model and there's always that type of movement and a bus if you wanted to add to that.
No I agree with all of that I mean, I think we definitely have strong capture but we rely very heavily on their strategic supplier partners I think the other avenue of having a staffing firm as the MLP that truly.
Excels in the MSP spaces. We also have direct line to supply. Unlike some of the vendor management solutions that you'll see and we can offer those insights and true market demand and supply insights to our customers because we're closer to it we lived it and we work with the supply panel, but we look at where our.
Visions I think the other thing is the clinical expertise really and we partner with the health care facilities to truly manage the outcomes through the actual supply and what that how the supply can contribute to that so I think by being a part of the supply World. In addition to MSP World is a differentiator for them.
Oh. Thanks last question for me and maybe that gets you to comment on your.
Physical footprint.
Footprint reduction in.
He kind of unification in an upgrade that you're on your undertaking.
Kevin do you think that you could have a kind of hit the long term margin goal of the company without these efforts or are these.
Are these two initiatives.
Kind of integral and on a scale one to 10 or are these attend most due to kind of get to an 8% EBITDA margin over time.
Yeah, Bill and I may have different opinions on this but I would say, yes, definitely and and I'm very proud of the fact that we you know our digital transformation or a infrastructure upgrade.
We've put together a three year plan, we are exactly where we want it to be at this point in time.
We just rolled out to the biggest division in our company, our new Ats, it's been in place for five weeks and the recruiters love It Oh, let Buffy comment in a minute.
About what you know what the team is feeling about this new technology, but to your question you know.
Creating a unified tech stock in the company and having an efficient and automated way to manage our business and creating a wonderful candidate experience through our marketplace technology, which is the first proprietary technology. The company is launched in 25 years is really important to number one.
Making sure all of our employees.
Have the productivity tools, they need to manage their businesses faster.
No more efficiently we like to think about you know, we get a job orders from our clients and there's like a basketball shot clock.
You know, it's ticking and we need to fill those orders as quickly as possible because no patient care is at stake so having good tools for recruiters and account managers and all of our revenue producing employees isn't material assistance to get to this.
This 8%, which we've reaffirmed we feel confident in over the last couple of quarters, you can see greater profitability coming from cross country that we're on a successful path and we feel confident we can get there in two years and so you know we're not done we have a lot more technology to bring into the enterprise.
Over the next year and a half.
In particular, you know, we're going to be automating our per diem business next year in terms of the tools. Our employees are using were already automating the candidate experience and the customer experience through in interface. There. So you know it's <unk> and then beyond that we are moving as I mentioned in my.
Earning comments to automate or middle office, and you know, creating a single unified text stock is very important to us, but I don't know if you want to maybe give some insight because we're quite excited about or improvements.
Yes, very excited and very very proud of our organization. This was a major change for us and we've had incredibly strong adoption certainly we had a very well executed change management plan, but I'm very pleased with the production levels within only the very first few short weeks that weve been lied I'm on these systems.
And I think that it certainly helps in processing faster it improves that ultimately really because it includes productivity and processing and gets the control to their careers. It's improved our culture and overall it makes the work more enjoyable for our recruiters frankly, so it helps with the efficiencies, but then our recruiters now can really focus on.
What's really important as well as the candidate experience and helping them with their career aspirations walking them through what could work environment will be like giving them.
Support through their Onboarding process, and 24, seven access and support for clinical services. So I think that we've seen great adoption and I think it's only accelerate from there and we're already heading onshore next phase.
Thank you.
Our next question comes from Brian Tanquilut with Jefferies. Your line is open.
Hey, Good afternoon, guys. Just a question again on the guidance, obviously KOVA demand is strong across the board and I get the moving parts with the onetime labor disruption placement in Q3, but.
It is the revenue guide you to the sequential increase to the midpoint of about $4 million is that just conservatism at this point and lack of visibility into recruitment or is there anything else, we should be thinking about.
Bill you want to take that.
Yeah sure I'd.
I'd say I don't I don't think the guidance is set to be conservative and obviously, we strive to set that we believe we can meet or exceed but I think at this point as we talked we called out a lot of the issues that we're seeing coming into the fourth quarter.
Sequential step back from the labor disruption the impact of the holidays as we get into the end of the fourth quarter, a sox impact our branch business, particularly as well as our travel business. So you know starts begin to push out from December starts into January starts. So you don't get as many starts in the last couple of weeks of the of the year. So there's there's those impacts into it.
And you know as I think about just the sequential nature of the business Locums, obviously has a normal seasonal down trend from Q3 to Q4 and given the.
I'll say the weak very weak demand that we're experiencing we're not expecting to buck that trend going into the fourth quarter. So yeah. I mean, we're not we're not looking at the guidance target, but I think it's something that we certainly feel our confidence in meeting or.
Doing our best to to beat it of course, but yeah. It's I would not I would not say, it's a [laughter] so something to be viewed as a as ultra conservative guidance number.
I appreciate that and then just on the gross margin guidance.
I guess as I think about the temper the onetime labor disruption placement revenue from Q3, So mind, just sharing with US you know kinda like what's the margin profile that has and how are you thinking about the sequential margin being.
Being flat given the margin profile of that sort of onetime revenue recognized during the quarter.
Yeah, I mean, it's not again.
Its $8 million in revenue so the margin wasn't all that much higher than our normal business. So it's not it's not as I called it out it was a 25 basis point improvement to the margin.
For the quarter overall, just when you look at it with and without the impact from the labor disruption. So you know as we move into now fourth quarter. I think we are seeing favorable trends in certain of our cost items that run through cost of goods sold whether it's health insurance and the like.
Workers comp, there's some areas that have been trending more favorably of late.
Earlier in the year, we had a higher percentage of folks that were has to go on quarantine the ore body, but on assignment that we have to continue to payroll costs for so we're seeing some favorable experience and that's kind of offsetting some of the impact of the loss from the labor disruption that we'll experience going to fourth quarter and then the last piece I'll leave you with is.
Indication business as it does ramp backup and it will not be up to full year over year, a level of performance it'll still be down double digits, but it will be considerably more revenue in the fourth quarter and that typically has a gross margin higher than the average of closer to 30%. So there's an element of mix as well.
That makes sense and then Kevin I guess last question for me.
He under physician staffing side as I think about.
She or he our docks and anesthesiologists facing 8% to 9% rate cuts next year.
And also obviously he ours are still trending significantly below pre covert levels what are the conversations like with the hospitals in terms of staffing levels and then the rates that they're thinking about given the rate headwind that they're seeing into next year.
Yeah, well I'll start that and I'll, let Steve answer as well you know look we you know the conversations are you know bill rates. You know bill rates are are down demand is down you know due to the softness in the market.
You know specifically you know right now there are spikes around physicians for emergency management, you know in some of these key areas. So you know it's it's it's also very spotty in terms of where the biggest needs are as I mentioned earlier you know that's a one.
Specialty that we're seeing is up year over year of our biggest four specialties, but <unk> hospitals have had a.
The challenging year, there's a lot of financial stress in the marketplace.
One of the things that we did back in March when Coke that hit.
We were very careful to publicly.
And with our clients state that you know, we're working or is your consultative partner. We're here to help you provide the health care professionals they need at the bedside to take care of your patients and to take care of these sick Americans and so we've done everything we can.
Through this covert experience to kind of be a good partner with our with our customers and make sure that you know we're being sensitive to their financial.
Financial constraints, but Steve you might want to add to that.
Brian's question.
Thanks, Kevin Hi, Brian the only thing I'd really like to add is we've we've faced cost pressures in all segments of physician staffing over the years as a CMS is reevaluating what some measure of payment might look like for particular services ultimately as Kevin was talking US Kevin was speaking about.
Our a concentrated partner with all of our clients, we look to provide solutions that meet their financial operating and clinical requirements and we do so with their best intention and our ability to meet that intention in mind and so.
While we recognize that there are continuing headwinds that could affect demands in those categories.
We also recognize that those tend to resolve themselves as the hospitals begin to work through the paint system and we began to provide continued watch services through.
Awesome. Thank you.
Our final question comes from Kevin Steinke with Barrington Research Your line is open.
Hi.
You had mentioned a investment in revenue producers.
Please in the fourth quarter can you just.
Maybe.
Work or is that in terms of the magnitude in terms of unit or no cost or head count.
Yeah, well you know we.
We don't typically want to disclose how many recruiters are revenue producing employees that we have but I will say that we given the order flow given our ability to aggregate supply you know one of our constraints as you know our own a number of revenue producing employees in particular recruiters. So.
You know, we look for opportunistic hiring one of the opportunities we have as a business today is we think beyond.
Branches and buildings and brick and mortar so.
You know were more creative in terms of looking for talent.
But you know what we're finding is that you know a lot of talent seeks us out now.
You know given our turn around given the digital transformation given the momentum that we have in the marketplace with our customers Reputationally.
Very proud of you know cross country and how we stand within you know amongst our peers. So we actually have a steady flow of candidates with people that are experienced that want to come work or.
Business as well, but you know we're you know as we said in our comments.
We are determined to be.
A growth company and in all lines of business and you know before the pandemic hit we were growing in all lines of business for the first time in several years and we think the opportunity is to get that growth moving across all segments and we're going to continue to invest.
In the human capital side of that.
Okay. Thanks, and then lastly, I was just curious.
How much of the revenue headwind and education.
Have you been able to offset or with you or tell us services offering.
Yeah, Yeah. It's a great question I can tell you that it is and by the way you know when I answered the question before around our digital transformation, we talk about our new Ats and our infrastructure a lot and we talk about our marketplace out but the other thing that we did in 2020 was launch.
The company's first tell us services effort in our education business and you know our approach has been to partner.
With the very best you know tele health or tell a delivery companies in the marketplace and and we've signed multiple partnerships.
We're very encouraged but that one of our vendors has helped us on the visitation front and it's been a key driver I mean, I think without or.
You know tell us service around our cross country education business, where we provide virtual school nurses and other.
Health care, but also education professionals, you know our numbers are numbers awful lot worse and 30%.
One final point I'd make is we're very excited about tele health and it's up a thousand percent, it's changing the way health care is delivered in this country and Tele health enables cross country healthcare to do what we do best and that supply clinicians. So you know we are embracing a tele health.
Huge opportunity for our company and really our industry.
Okay. Thanks for taking the questions.
Thank you.
Thank you ladies and gentlemen, this does conclude the question and answer period I'll now turn it back over to Kevin Clark for closing remarks.
Yes, well. Thank you everybody, we look forward to updating with our progress.
Through the rest of the year in the next quarter, and we hope everybody stays safe and healthy out there. Thank you for joining us Tonight.
Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation you may now disconnect.
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