Q4 2022 Cross Country Healthcare Inc Earnings Call
Good afternoon, everyone welcome to the cross country Healthcare earnings conference call for the fourth quarter 2022. Please be advised that this call is being recorded and a replay of this webcast will be available on the company's website.
Sales were accessing the audio replay can be found on the company's earnings release issued this afternoon at the conclusion of the prepared remarks I will open the lines for questions I would now like to turn the call over to Josh Vogel Cross country Healthcare's, Vice President of Investor Relations. Thank you and please go ahead Sir.
Thank you and good afternoon, everyone.
I'm joined today by our President and Chief Executive Officer, John Martin as well as Bill Burns, Our Chief Financial Officer, Dan White, Chief Commercial officer, and Mark crude group President of delivery.
Today's call will include a discussion of our financial results for the fourth quarter and full year of 2022 as well as our outlook for the first quarter of 2023 a.
A copy of our earnings press release is available on our website at cross country Dot com.
Please note that certain statements made on this call may constitute forward looking statements. These statements reflect the company's beliefs based upon information currently available to it as noted in our press release forward looking statements can vary materially from actual results and are subject to known and unknown risks uncertainties and other factors, including those.
And in the company's 2021 annual report on Form 10-K, and quarterly reports on Form 10-Q, as well as in other filings with the SEC. The company does not intend to update guidance or any of its forward looking statements prior to the next earnings release. Additionally.
Additionally, we referenced 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 substitutes for or superior to those calculated in accordance with U S. GAAP.
More information related to these non-GAAP financial measures is contained in our press release.
Also during this call we may refer to pro forma when normalized numbers pertaining to our most recent acquisitions as though the results were included or excluded from the periods presented with that I will now turn the call over to our Chief Executive Officer, John Martin's.
Thanks, Josh and thank you everyone for joining us this afternoon.
As we reported today, our fourth quarter results met or exceeded our revenue and profitability expectations, causing the full year with the highest revenue and profitability in our history.
As a digitally innovative enterprise with comprehensive workforce solutions and an unwavering commitment to clinical excellence.
We were able to maintain our momentum even as COVID-19 hospitalization and demand softened and entering 2023, we are a fundamentally stronger organization with greater financial health and our record of superior execution.
Over the last year, we have been relentlessly focused on continuing to build out our sales and delivery capabilities as well as furthering our digital transformation in.
In addition, I have been working closely with our board on furthering our environmental.
Social and governance initiatives with particular emphasis on governance, we continue to be thoughtful in our approach to succession planning for all key roles within the company and with respect to our board composition.
We recently added two new board members to our board Venkat bucket, Almaty, and Duane Allen, both exceptional leaders, bringing new skill sets ideas.
Diversity and broad expertise across verticals, such as technology and healthcare.
We believe these appointments will surplus country well as we continue to advance our technology strategy of creating a world class digital platform, where professionals and clients.
Welcome exceptional frictionless and seamless experiences with increased efficiencies.
For many perspectives 2022 was an unprecedented year.
And I'd like to take a moment to highlight just a few of our achievements.
Starting with technology.
We have been redesigning our entire ecosystem from the ground up user.
Using a data centric model that enables us to provide the highest levels of analytics, while ensuring speed to market.
As well as best in class experiences for our candidates clients and our teams.
Last year, we launched two very significant technology, including <unk> as a proprietary vendor management systems and gateway are clear portal.
We believe in Telefonica will be a game changer for cross country and potentially the market as a whole.
Our philosophy in building <unk> will start with the client and work backwards.
Designing it to help our clients more effectively manage and solve their most challenging people needs through data and analytics advice and insights.
Our roadmap calls for further investments that are underway and we believe <unk> will continue to be highly differentiated in the industry.
Opening up a new addressable market for cross country.
Giving us access to billions of dollars of potential spend under management and the vendor neutral space.
And gateway workers health care professionals, the ability to find the right job to real time frictionless experiences on their terms.
We have thousands of daily active users and we expect that number to grow as we continue to deploy new features and functionality.
In addition to our key technology initiatives, we continued to invest in our people.
Growing our head count by more than 15% across virtually all lines of business with the vast majority being revenue producers.
Also good award many industry leaders like our newest hire Aric Christiansen.
Who joined US last month as senior Vice President for <unk> solutions.
It is a pioneer in the vendor neutral space with a proven track record delivering innovative tech based solutions we.
We are confident that he and his team will help to accelerate cross country's growth trajectory by leveraging our SaaS based higher margin gender neutral platform.
From an operations perspective, everyone in business experienced robust growth driven primarily by the number of professionals on assignment.
Only a modest impact coming from the rise in rates.
With strong execution and continued productivity gains our consolidated revenue was up 67% over 2021 to a record $2 $8 billion adjusted.
Adjusted EBITDA surged to $302 million.
From last year's record of $162 million.
And our adjusted EBITDA margin Rose 110 basis points to 10, 8% from nine 7% in 2021.
Also in 2022, we generated a company record $134 million in annual cash flow from operations and we completed the week targeted acquisitions that build scale in our Logan space as well as diversified our offerings with interim leadership.
Higher up which closed late in the fourth quarter brings us a talented team with deep expertise and leadership staffing and strong relationships that are a perfect complement to our robust network welcome to the family higher up.
In August we announced a $100 million share repurchase program and through the end of the year, we repurchased one 4 million shares or roughly 4% of the outstanding shares.
We also prepaid $100 million on our term loan during the year to reduce our total leverage as well as our interest cost.
We will continue to balance investments in our technology initiatives.
Strategic personnel share repurchases and tuck in acquisitions that further bolster and diversify our portfolio.
Turning to the fourth quarter consolidated revenue was $620 million approximately 5% above the upper end of our guidance, while adjusted EBITDA of $57 million.
Was that the upper end of our guidance range, representing a nine 1% margin.
Bill will get into more detail on abilities.
But as expected travel bill rates declined sequentially, although at a slower pace that we previously called out.
The slower decline was driven in part by steady demand throughout most of the quarter amidst the continued labor shortage.
As expected we began to see demand for travelers begin to come down exiting the fourth quarter and going into the start of the new year.
With Covid wood, treating and systems increasingly seeking to lower their contingent labor spend.
We expect to see continued pressure on orders and bill rates, though both continued to be above pre COVID-19 levels.
The persistent labor shortage remains and we do not see anything changing the backdrop in the near term.
That said if there is a continued softening in the market. We are prepared to act swiftly to right size, our infrastructure, while ensuring our ability to grow.
Following a similar trend coming well hope at highs our local business experienced a slight sequential decline in part due to the impact from the holidays as well as the continued normalization of beliefs and looking at our other lines of business.
We continue to see improved traction in Logan's education, and homecare, which all posted an increase in hours and revenue on a sequential basis.
Locums in particular was up nearly 8% sequentially on an organic basis, which goes against the normal seasonal trend for that business.
It also reinforces our belief that this space will continue to see strong demand.
And further supports the rationale for acquiring <unk> and Lotus in the fourth quarter.
Looking at the market today.
Systems that experienced leisure cost pressures throughout the pandemic, our assessing very unique situations and seeking alternatives on ways to lower costs and ultimately their reliance on contingent labor.
So some of our existing MSP use will understandably want to explore options.
Cross country remains a trusted partner.
<unk> of health care clients.
We believe that our full complement of tech enabled lotteries.
Coupled with our commitment to deliver the highest quality of clinical care.
Will ultimately result in the growth of our market share.
And though we have recently experienced a higher than normal level of client attrition our pipeline for new opportunities has never been stronger.
I believe that we have an incredible value proposition for clients.
And that with the investments in both people and technology, we are well positioned to win a significant amount of new business in the coming quarters.
Today more than 50% of our revenue comes from our MSP.
And as it does in December roughly 15% of total spend under management has been migrated to our telephone platform as we continue to migrate other clients to the <unk> platform. It will save us millions of dollars annually in license fees paid to third parties.
We anticipate the majority of our MSP clients will be converted in the next 12 months, depending on our success in winning new accounts.
They will naturally launch on <unk>.
<unk> also opened the significant market opportunity in the vendor neutral space.
Giving us the ability to capture significant incremental client spend as well as technology extensions for direct licenses by clients for their internal use to help manage their contingency and their core staff labor.
Looking ahead to 2023 critical staffing shortages continues to be widespread specifically.
Specifically nurse to patient ratios remain high and we believe to be a driver of the labor disruptions that the industry has seen in recent months.
Supply constraints is still the biggest challenge faced by our clients and whether we look at in 2022 Mackenzie study excited a shortage of 10% to 20% of the nurses needed to care for all patients in the system by 2025 or track the monthly data from the Bureau of Labor statistics that indicates a persistent.
<unk> gap between healthcare job openings and hires it seems that supply and demand imbalance will persist for the foreseeable future.
Looking at the first quarter, we expect revenue to be between $590 and $600 million.
Which remains well above the level needed for us to achieve our minimal full year revenue target in 2023.
We remain optimistic that we can deliver on our commitments and generate significant shareholder value.
We have a proven ability to execute across many funds and with the rollout of <unk> in particular, we find ourselves in a great position to build upon our recent successes, while also continuing to capture share.
Therefore, we believe our full year targets announced at our Investor day in mid September to deliver full year 2022 revenue of at least $2 2 billion and adjusted EBITDA in excess of $200 million.
In closing 2022 was a tremendous year and we will build on this progress by making strategic investments that we believe will best position cross country for long term.
<unk> profitable growth across all lines of business.
I want to thank all of our professionals, who make cross country healthcare their employer of choice.
I'd also like to thank our shareholders for believing in the company and of course, our talented team who I am so proud of.
I am pleased to report that for the third year in a row, we were recognized by <unk> with the 2023 top workplaces USA Award.
We also recently received multiple 2023 best of staffing awards were excellent.
<unk> achievements like these are a testament to our corporate culture and focus on supporting and growing our employees from within while consistently attracting and retaining top talent with that let me turn the call over to bill.
Thanks, John and good afternoon, everyone I'm pleased to share that with the full year now complete 2022 was the strongest year performance in the company's history.
For the quarter, we once again met or exceeded our expectations for both revenue and adjusted EBITDA.
Our strong results were fueled by solid execution across most lines of business as well as higher than expected travel bill rates.
And to the rates in just a moment.
<unk> revenue for the fourth quarter was $628 million down, 1% sequentially and 2% over the prior year as.
As a reminder, we completed the acquisitions of two local tenants businesses as well as our most recent acquisition of interim leadership company during the quarter.
Excluding the impact from those acquisitions consolidated revenue was down approximately 4% over the prior year and 3% sequentially.
Gross profit was $139 million, which represented a gross margin of 22, 1% the.
The sequential decline in gross margin of approximately 50 basis points was primarily driven by higher health insurance costs occurred in the year, an increase in professional liability insurance rates as well as an actuarial adjustment for workers' compensation.
As expected, we did experience a slightly stronger bill pay spreads with pay rates continuing to normalize within the travel business, but was mostly offset by the relatively high cost of housing for our travelers.
Moving down the income statement total selling general and administrative expense was $81 million or 1% sequentially and 23% over the prior year.
The majority of the increase in SG&A over the prior year was driven by continued investments in people and higher compensation on the strong performance in 2022 as well as investments in our technology initiatives that are not capitalized.
On a sequential basis, the increase was primarily attributable to the impact from our recent acquisitions.
As a percent of revenue SG&A was 12, 9%, representing an increase of more than 250 basis points over the prior year given the decline in <unk> as well as the increased investments necessary to support the volume growth in our business.
Throughout 2022, we continue to invest in people, adding revenue producing resources across all of our lines of business, but with the majority focused on meeting demand in our travel business.
And though demand for travel has certainly softened coming into the new year, we still see continued growth in other parts of the business such as education, homecare and locum tenants that will likely support further investments in those areas.
That said, we manage our business very tightly through capacity metrics and we're prepared to adjust course in the event that demand does continue to soften.
So the broader supply and demand imbalance remains we obviously can't predict whether travel demand will rebound or soften further, but we are well positioned to manage our costs over the near term to protect our level of profitability.
In addition to the investments in people. We are also investing heavily in our technology with additional resources and developers to facilitate the rapid deployment of candidate and client facing technology by gateway and qualify.
In 2022, we spent an estimated $16 million on it projects an increase of more than 30% over the prior year.
Of that investment roughly 30% was recognized as expense during the year given the nature of some of the projects.
And our solid topline performance fueled another quarter of strong earnings with adjusted EBITDA of $57 million, representing a margin of 9% consistent with our goal to maintain margins in the high single to low double digit range.
Interest expense was $3 5 million, which was up 25% over the prior year driven entirely by rising interest rates on outstanding debt.
Our effective interest rate for the quarter was eight 8%, which would've been higher had we not opted to make the $50 million prepayment on our subordinated term loan at the start of the fourth quarter.
Bringing the full year optional prepayments to $100 million.
I'll go into more detail on cash flows and our capital allocations in just a moment.
And finally on the income statement income tax expense was $7 $6 million, representing an effective tax rate of 16, 3%, bringing the full year effective tax rate to 26, 5% the.
The decline in tax expense was driven by the Finalization of the full year tax provision as well as the release of an uncertain tax position pertaining to the deductibility of certain items.
The combination of our strong performance and favorable tax adjustments resulted in an adjusted earnings per share of $1 nine up slightly over the third quarter and well above the upper end of our guidance range.
Turning to the segments nurse and Allied reported revenue of $591 million, representing a decline of 5% over the prior year and 3% sequentially.
Our largest business travel nurse and Allied was down 5% both sequentially and over the prior year.
The sequential decline was primarily driven by a 3% drop in average bill rates and 2% from volume.
As John mentioned <unk> mentioned, a moment ago billings were expected to decline in the mid single mid to high single digit range, but as demand remained strong throughout most of the quarter, we experienced slightly higher bill rates on assignments as well as a favorable mix.
With respect to the comparison to the prior year. The decline was entirely due to lower average bill rates as volumes were up more than 15%.
As we've previously called out we have long expected travel bill rates of decline, but with continued high needs by clients and persistent labor shortage rates declined more slowly than we had expected.
Now as clients are starting to rightsize their contingent labor more effectively we've seen demand for travel physicians decline and as a result of the buildings we.
We are seeing new orders fill at a rate that is roughly 5% to 7% below the rates, we experienced in the fourth quarter.
If rates stabilize at these levels the impact will mostly be seen in the second quarter with a more modest impact in the first quarter given the length of assignments as.
As we've said previously the decline in billings was and as expected and that we don't have a perfect lens on where they will settle we believe rates could decline another 5% to 10%, implying they would be roughly 40% higher than pre pandemic rates.
Our local business was in line with our expectations with revenue down roughly 4% sequentially, primarily due to the impact from holidays.
Average bill rates were up 3% sequentially, principally on the mix of the business.
In our other lines of business within nurse and Allied all reported strong results for the quarter with double digit growth.
Education and search both grew by more than 30% and our homecare business rose 11% over the prior year.
Continue to expect these businesses will experience robust growth based on the market and the needs of our clients.
Finally physician staffing delivered another.
Strong quarter with $37 million in revenue, representing an 84% increase over the prior year and 56% sequentially.
Excluding the impact from the recent acquisitions position staffing grew by 28% on an organic basis with billable days up 9% and revenue per day filled up nearly 18%.
The increase in rates was extremely broad based across virtually every specialty.
With the continued growth we've experienced in this business, we anticipate further investments in capacity as well as targeting tuck ins that can further grow our presence in the market.
Turning to the balance sheet, we ended the quarter with $4 million in cash and $151 million in outstanding debt, including $74 million under the subordinated term loan and $77 million in borrowings under our ABL facility.
Currently the sub debt is based on LIBOR, but we anticipate will be converted the sofa and the first half of the year.
Also worth noting that given the strong performance and positive cash flow as of the end of the fourth quarter, we have an incredibly low level of leverage with a total leverage ratio of less than five times.
Well positioned to make further investments as well as repurchased more of our stocks since we believe the company continues to be undervalued.
From a cash flow perspective, we generated $4 million in cash from operations during the quarter, bringing the full year to $134 million as compared with a use of cash of $85 million in the prior year.
Presenting a swing of more than $200 million.
Our days sales outstanding increased to 72 days due primarily to slower collections from several large clients.
We continue to expect receivables net of reserves to be fully collectible and believe DSO will return to more normal levels as we progress through 2023.
So that may take a couple of quarters to achieve.
Also in the fourth quarter, we prepaid an additional $50 million on the term loan, bringing the cumulative prepayments for the year to $100 million or roughly 60% of the principal balance for that instrument.
And we repurchased another 350000 shares for a total cost of $11 million, bringing our cumulative share repurchases in 2022 to $1 4 million shares at a total cost of $35 million.
Looking looking ahead, we expect to continue to generate a significant amount of cash and we'll continue to see growth investments such as tuck in acquisitions across our higher margin businesses.
During the fourth quarter, we established a <unk> one trading plan to continue making share repurchases during the blackout trading windows, depending on certain conditions and since January one we've repurchased an additional 200000 shares at an aggregate cost of roughly $5 million we.
We expect to continue to be opportunistic with future share repurchases outside of the <unk> one trading plan, depending on factors such as available cash the share price and alternative uses for that cash such as debt repayments or acquisitions.
And this brings me to our outlook for the first quarter.
Adding to the first quarter revenue to be between $590 $600 million, representing a sequential decline of 46% driven predominantly by the anticipated decline in travel bill rates, partly offset by growth in education and the impact from recent acquisitions.
We are expecting adjusted EBITDA to be between 44 and $49 million, representing an adjusted EBITDA margin of approximately 8%.
The sequential decline in adjusted EBITDA margin is primarily due to the impact of lower gross profit on the sequential decline in revenue as well as the impact of the annual payroll tax reset and most of our businesses.
Adjusted earnings per share is expected to be between 70 and 80.
Based on an average share count of $36 5 million shares.
Also assumed in this guidance is a gross margin of between 21, five and 22% interest expense of $3 2 million.
Traditional amortization of $3 4 million stock based compensation of $2 million and an effective tax rate of 29%.
Before we open the line for questions I'd, just like to congratulate John on being named to staffing industry analyst Top 100, most influential leaders recognition I feel certainly well deserved congrats John .
That concludes our prepared remarks, and once I'd like to open the lines for questions operator.
Thank you we will now begin our question and answer session. If you would like to ask a question over the phone lines. Please press star one from your phone on mute your line with speak your name clearly when prompted you name it.
Required to introduce your question to withdraw your question Press Star two.
First question comes from Brian <unk> with Jefferies. Your line is open.
Hey, good afternoon.
I guess my question just on orders and Bill rates.
Kind of like normalizing here.
In your prepared remarks, you talked about how you can rightsize the infrastructure if needed. So maybe just some thoughts on number one.
Your bill rate.
Cadence expectations for the remainder of the year and then second what those levers would be that you can pull to.
Offsetting that because obviously you are maintaining guidance here for the year.
Sure Brian .
Good afternoon. This is John .
I'll talk a little about the levers we can pull and then I'll hand, it over to bill to talk more about the bill rates, but what we utilize we use a pretty sophisticated capacity modeling I think we've spoken about before where we look at each part of the business and what we can do is we can look up or down.
He has a capacity model, we actually use it as we are growing to see the number of resources that we need to continue on the path to growth, we look at where our.
Our future, where our future business is and how how we're running the business and where we anticipate and model out to grow the business and also Conversely, when we see the business that is slowing down we will pull those same levers too.
Takeaway the resources that we no longer need to continue to have that growth and so really it's just based on a lot of capacity model and factors of the number of open positions. We have based upon the number of velocity that we're seeing are places happening and of course, it's all tied to that.
The date to revenue and EBITDA.
Yes.
Brian I'll, just I'll throw on the cost levers as well.
Narrowly as you would expect as the business scales up and down there are certain items that youre going to see ryzen fall, whether thats variable compensation or even some other marketing spend that may be going along lead generation activity. So there is natural levers our hedges as the market as the business moves up or down that will just happen naturally but to jon's point on the cost side of things. Obviously, we are constantly looking across.
The organization to rebalance those those investments we've made and make sure we're getting the best return, we can with respect to bill rates.
Look no perfect lenses here right, but the market with the demand as we've seen it starting to pull back coming into the first quarter Bill rates are down certainly on open orders is what I look at it as a leading indicator.
Relative to that's where I kind of made the comment in the prepared remarks that on the open orders, we're seeing bill rates starting to soften in that 5% to 10% neighborhood, but it's not that that hasnt fully baked its way through our business yet. So when you look out and you say, okay. So for the first quarter rates will be down kind of consistent with what we saw in the fourth quarter modest low to mid single digits, the impact will more likely be seen in the <unk>.
Second quarter, and then after that is where it gets a little bit fuzzy as to where the rates trend. After that we did say that rates could fall a little bit further, but I think at some point the market will obviously I think correct itself from a demand perspective, because we've seen this play out a couple of times, where demand has ebbed and flowed and we've seen it kind of comes down little sharply little quickly and then.
It starts to rebound so.
We're just looking out in the back half, but I would just leave you with we look at the full year, we reiterated the full year minimum guidance and that $2 $2 billion number that we've thrown out there we're well on pace for that certainly coming through the first quarter and so I think if you look at that relative to our other comments are about rates you can kind of see where the back half might come out.
No I appreciate those comments Bill and then I guess just anything about your comment on margins for Q1 right. So.
I get the payroll tax and just lower volume lower bill rate, but how should we be thinking about margin trend post Q1, and then maybe factoring in as well as the business mix with Locums, becoming a bigger portion of your business with the last two acquisitions.
Yes, I'll start and then.
John .
Mark or Dan want to jump in but when you look at the margin for the first quarter payroll tax for us hits us in the gross margin line, usually about 40 to 50 basis points and just given the size and scale of our SG&A the impact to SG&A is about $1 million as well for additional payroll taxes will see in the first quarter. So.
It's a pretty sizable bite when you when you look at our overall seasonality and the impact of the first quarter.
Your question really is about the gross margin in the business and obviously I called out in travel what we're seeing.
Pay bill spreads are normalizing as payer as the bill rates come down the payroll has been coming down the piece that hasn't moved as fast as the pay rates has really been the housing costs. So that element that we have the travelers on assignment has been kind of stubbornly high so thats kind of eaten into that payable improvement coupled with that with a couple of other items that we called out.
The professional liability insurance rates are rising.
That's now factored in after the fourth quarter and Youll see that roll into there should be an incremental increase in the first quarter off of that health insurance for us was sort of a.
At year end the anomaly, we saw a spike in the.
The number of clinicians we are self insured so spike in the number of questions using health care. So that was a bit of a rise that should return to normal as we go into the first quarter and this is John I would add that when we look at the business in our gross margin, we really look at it from a portfolio basis as you were saying, Brian with looking at Locums and from the nurse and Allied travel standpoint.
On the transactional the day to day.
Deals that we're doing we're not anticipating to see a large uptick in gross margin. There are there is some obviously room for improvement.
For the next several quarters in this year that will pick up but really when you look at how we're going to improve our overall gross margins in the portfolio, it's going to be by growing the higher margin businesses, such as Locums, such as our education business are higher our higher up but which is our new <unk>.
From.
Executive business and also our <unk>.
Workforce solutions group, which is our home health business. Those are all higher margin profile businesses to help us overall grill and then the other.
They're part, which is really key <unk> our portfolio gross margins increase is as we enter into the <unk>.
Vendor neutral space within <unk>, that's where we're looking at gross margins. Those are the gross margins that are at 90% gross margins with EBITDA margins between 60, and 80% and so in the future. What we'll see is we'll see the balance of our business as it grows and the other non nurse travel nurse and Allied businesses helped improve the overall portfolio.
So margins.
Awesome. Thank you guys.
Our next question comes from AJ Rice with credit Suisse. Your line is open.
Hi, everybody, maybe a couple of questions if I could.
I think it sounds like what Youre.
Suggesting when you lay out the quarters from 23 relates mostly to sort of the post pandemic continued moderation in especially bill rates.
Can you just remind us do you think normal seasonality will come back as you lay out the quarters and how would you.
It's been a while since we've had a normal seasonal year, how would you lay out the quarters generally from a seasonal perspective in a normal year.
Jay This is John and then I'm going to hand, it over to Bill on this one but.
I think it's too early to say if seasonality is back yet and so right now yes, we are seeing from the triple threat that we saw in the fourth quarter that came in the fall of RSV of Covid and the flu. We're obviously seeing some of that Wayne now as we're getting out. So you could say oh indicate that maybe it's starting to get more.
But if we recall for the last two seasons. We've also seen the Covid summer happen and so I don't think were ready to say that we're getting into a normal cyclical.
Traditional travel nurse seasonal business, but bill you want to add to that I'd just.
When you look across the rest of our business AJ.
Local locum tenants generally again this is historical rate normally has its strongest quarter in the third quarter and so you would anticipate to see a sequential change in that business. It usually steps back in the fourth quarter that did not happen and we actually surged.
8%, we called out and that is on an organic basis. So so I think locum tenants has a lot of a lot of runway for US right now to continue to see sequential growth quarter over quarter. Despite the seasonal trends that we would normally experience. What I'll. Just say is I think if we look at Q2 and again, we're not guiding here, but if I was going to look at Q2, I would say that the bill rate headwinds coming out of the travel business probably point.
To a sequential decline over the first quarter and you couple that with the fact that in the education business you get the start of the summer break plus the spring break this year falls into the second quarter as well. So just those two factors alone would point to a sequential step down to the second quarter, but then I think the seasonality of Locums plays into the <unk>.
Third quarter and of course when schools resumed in the fourth quarter. So it's hard to say, but much will be dependent on what really happens in the travel and the travel business. Okay. That's good.
Great.
Thanks for the commentary about the MSP and 50% of your revenues coming from that I know in the pandemic. There was difficulty filling orders and a lot of orders got sub contracted maybe even.
Some MSP has got opened the third parties coming in on the margin.
Can you comment on where you are at today is your fill rate.
As things are normalizing stepped up meaningfully or a lot of the percent of orders going completely unfilled has that come down a lot how would you describe it.
That's come down a lot we're in the high 90% is still right and as we are still in a capture rate of around 70%.
And so we're filling the needs of the clients have right now yes, a J. This is bill we didn't call it out in the prepared remarks, but the capture rate declined about 1%. So we were a little over 70% in the third quarter, we were at 69% in the fourth quarter, So holding steady and it's kind of move bounce in and out of that 69% to 70% range.
Add on that a J one of the thing.
<unk> reasons, why we keep that.
The capture rate at that 69, or 70% is because we want to have the excess supply and capacity because what we do is this is a market where we're seeing a lot. Although we called out we had a higher than normal attrition of our clients.
Typically we have one or two.
Clients leave in a year, and we had higher than that but the whole industry as a whole is having that issue and part of that reason is is because usually a typical vms or MSP contract is three years.
And during Covid people in hospitals deferred going out to bid for that Colby periods and so now we're seeing a lot of contracts all coming up the extended contract. So all the contracts are coming up.
And so.
And some hospitals.
Actually quite a few hospital they were actually required to go out to bid. So right now we're seeing more hospitals going out to bid and there creates a larger opportunity for us to win new deals now at cross country, where probably a larger company as one of the smaller side of the MSP spend under management. So what we are losing some clients we have more opportunity to win and as we called out in prepared remarks, we have net.
<unk> had a larger pipeline in MSP and cross country history, and so when we have this excess supply what we do with this is we take this excess supply and have additions.
At clients to go and show that we can still better than their incumbents and win the business over so that's why it's really important for us to keep that capture rate at 70% or even lower so we have that supply to win more deals.
Okay. That's interesting maybe just a final question on your <unk>.
Prepared comments, you talked about being prepared to.
Necessarily make adjustments to infrastructure.
I guess that begs the question what would I mean, I assume you are sort of tweaking things on an ongoing basis, but what would <unk>.
Prompt you to make a bigger adjustment and then what types of things are you talking about doing if you had to.
Hey, Jay This is bill again, so I mentioned some of the things that will happen organically also I'll say it that way, but I think it's really just about when you look across the entire landscape of all the resources. We have in all the different roles that we have every single role whether youre looking at from a recruitment function the supporting functions. The onboarding everything all of our funnel.
We've got capacity metrics that help us understand exactly.
How many resources, we need so yes, we don't want to overreact I think the important thing here is demand, we know will ebb and flow and we've seen this a couple of times over the throughout the pandemic.
Nothing's fixed long term issues in the marketplace. So we don't want to overreact and start reducing costs.
Too fast because again, we want to have that organic capacity to grow and so I think it's really just one about right sizing your cost structure across your head count as well as some of those other third party expenses that you have yes. This is John I would just add that as we've said consistently.
The last nine months, a year that we're going to maintain a high a high single digit to low double digit EBITDA and thats really what drives where we're we're looking into resource planning.
One last comment a J before.
Ill turn it back to you for another question just if you think about it there is a natural level of attrition in any business and so the capacity metrics will allow us to also think be thoughtful about when to backfill and not to backfill. So attrition through those avenues will be another way in which we'll see costs self correct themselves naturally without us taking action but.
We won't backfill if we've got the if we don't have the need for those roles.
Okay, great. Thanks, so much.
Our next question comes from Kevin Fischbeck with Bank of America. Your line is open.
Hi, this is going to be a good chance on for Kevin.
Can you give us an update on the deal pipeline what areas are you focusing on and how are you thinking about multiples.
Sure Hey, this is John .
I'll start with that.
So yes, we look at the continue with healthcare and what is on the consumer health care for our deal. So we look at any type of organizations and businesses that are in the pre acute to acute to post acute care.
With our recent acquisitions, though last couple of years of the home health space and the pace centers.
The pace centers are still very attractive to us.
We had the two locums acquisitions in the fourth quarter and we believe that Locums is continuing to be a great place to be in.
As well as any some ancillary businesses that can help serve as our clients just like the acquisition of higher up so really our strategy comes down to really two different two different points. One is can we add can we add.
Expand our share of the market by acquiring a company in a certain space number one and then number two can we add additional services to enhance our service to our clients to become Crete and create more services become more sticky with our clients.
Great. Thanks.
Our next question comes from Tobey Sommer with true Securities. Your line is open.
Thank you I was hoping that you could describe what youre hearing from customers.
Hospitals hospital systems as they try to.
Sort of regain control with that they feel like they lost during the pandemic.
In particular two areas.
Vendor neutral.
MSP Vms and if maybe you could comment about if any of your client losses were because of sort of a philosophical change in a changed not necessarily to another staffing company, but to vendor neutral and what sort of energy investments innovation are you seeing on the local side.
Customers are trying to do.
Do just satisfy more of their contract needs. Thanks.
Sure Tobey.
This is John I'll start and Dan and Mark will probably go in and and yes. So we we definitely saw some some client attrition that went over to the neutral but.
We have what I would say is if we look at the market.
The addressable market.
In the staffing industry I think has 2023 at $50 billion and of course that May go down if the rates go down right I don't know exactly your calculation of that but.
That market about 40% is MSP roughly we believe 40% is vendor neutral to that 20% is direct is direct clients.
And as I mentioned earlier.
All of these mlps, which are typically in Vms contracts are typically three years three year contracts.
Lot of them are coming up right now going out to bid.
A lot of clients are looking to say hey, it was a grass greener on the other side and really there is really four categories. It is hey, do I do it direct it's do I go to BMS or do a changeover in MSP and which we're seeing clients changed from Vms MSP because they want to try a different model and then the other model that they're going to is can I take it in house and use technology only and so.
We're definitely seeing a bit of that mix happen now we feel very fortunate because we launched <unk> our vendor neutral Vms system late last year and as we mentioned in our prepared remarks, we hired alright, Christiansen, who is a pioneer in the vendor neutral space and as we start building out our vendor neutral business, we think.
There's a lot of upside for us to capture that market.
And so I'll end it hand, it over to Dan.
John Toby it's Dan I'd, just add a couple of things you were asking specifically about the local business.
One of the key sets of features inside of <unk> is our ability to manage.
Internal resource pools for them that would allow for them to manage their own resources, clearly, but add incremental local resources to supplement those that staff as well even before they go to.
Travel kind of a resource.
In addition to that we are adding capabilities. We just for example at the beginning of the quarter added Locums to one of our clients on the <unk> platform as well, which as you can imagine is a huge upside for us for the rest of our customer base as well.
Lastly, when we think about the capabilities that are really important to customers for these technology platforms, whether they run them themselves or have us do that for them as having a kind of a pre integrated set of suppliers that they can just turn on with a switch.
Super Grateful today, we had a whole house full of suppliers.
Suppliers here talking about their support.
For this platform for our programs and just a little bit of a shout out to them first but.
Their ability to turn this on gives again that local flavor and the more broad flavor.
<unk> great.
Great strength in terms of turning it on quickly and managing it fast and Tobey. This is Johnny and I would also add to Dan's comments that what we're seeing in the local market with the hospitals that in clients in front of US is that they are looking to expand their internal resource pool and thats part of what Dan was saying and utilizing our <unk> product to do that.
Also to help them build those internal resource pools, how can we help them move quicker to get the local resources in place and that's that's what we're hearing from many of our clients right now.
And then I wanted to ask about the bill rates.
In comparison to.
Full time comp and I know that sometimes a difficult analysis, because you have to try to make it an all in number for full time comp.
How much could bill rates fall before sort of the.
What I've always perceived as a.
Natural.
At least hourly premium for a nurse to go to another city and sleep in a strange bed for three months three months before we sort of get there and get to sort of a natural.
Arbor day.
Perennial between the two categories. Thank you.
Yes.
I don't think we don't necessarily track that side of it specifically, but what I'd say is we've seen it always there's always going to be a little bit of a premium paid for your travel the travel nurse, but when you look at the total compensation package for a travel nurse compared to the total all in package of a course.
<unk>, including all of their benefits.
All of their long term short term benefits.
Lot of times hospitals will look at it and see is actually a cost savings and because you have the flexibility to bring on talent bring off talent. It ends up being a cheaper version of that so we think.
That's one point I think the other point on that.
The bill rates go down where it doesn't make a difference for that nurse to sleep in a different Ed well. What's interesting is 65% of our clinicians is actually I think the number dropped to 64% of our questions are millennials or less and that means reached 41 of the younger and we're still hearing from clinicians.
Want to sleep in that that are different in a different town and they want to experience different experiences and they want to be part of that good economy. So there is still a very much attraction to being a travel nurse and explorer exploring and experiencing.
And then having that travel nurse experience.
Thanks last question for me.
What are the M&A opportunities like in the market.
And would you feel comfortable.
Buying prop.
Properties for valuations in excess of the company's stock.
Yes, we will definitely evaluations.
Seeing our trending down a little bit.
And of course as interest rates have spiked up we've seen valuations come down a little bit.
And in terms of what's our appetite for that but we look at it is it a strategic fit for the organization.
It will help us be accretive to our gross margins and our EBITDA.
And how it fits in to the organization I know Bill you want to add anything else to that no. I think you said it the multiples are certainly trending to a more favorable levels, but I think youre inherent question was would we be willing to pay a multiple higher than the current multiple that cross country trade that I think the short answer is yes, depending on the property if it's a strategic fit.
It goes along with what we're trying to accomplish in terms of the continuum of care and fits our profile for higher margin businesses and the likes so yes, I think if especially if it's going to be a competitive process, where youre looking to acquire a good property that fits well youre going to youre going to have to pay a fair market price.
Thank you.
Our final question comes from Bill Sutherland with Benchmark Company. Your line is open.
The last question guys.
Yeah. So.
Clarification, Bill if you don't mind on.
The 5% to 10% I think it's the range you used on the travel on the open travel orders.
You would normally see some seasonality.
<unk> <unk> over <unk> with new.
In terms of total early from a bill rate perspective, Bill So I mean like we do.
The bill rates don't normally ebb and flow I mean, theres demand spikes in certain parts of the country through the winter months Youll see the Snowbird States like Florida, we will see a spike in demand as that starts to wind down youll see less needs there, but I don't generally see bill rates moving a whole heck of a lot I mean, mark you could certainly speak to this as well, but I don't generally see a lot of rate movement.
Throughout the year Sans the pandemic of course, yes, typically we don't see the bill rate fluctuations, we do see the demand fluctuation seasonal but.
The last few years, especially we have not seen that.
So if you have the 5% to 10% that's just bill rates you're respecting.
Referring to and so there might be some seasonal volume on top of that if I'm thinking about <unk>.
Yes, well again, I am saying, what I, what we're seeing right now is looking at open orders right. So we track what's our current book of business. What are we locking orders at and what are the open orders, what's the average bill rate across open orders. So we looked at that across time to see how things are trending and so what we're seeing now is that the open order average rate is starting to.
Move downward about 5% to 10% week to week. It moves of course, and there is always a mix components I wanted to be clear about this the open order fill rate is not necessarily indicative of what we'll experience because we may have orders that we won't fill in meso others that we're going to certainly strive for the higher bill rate orders.
So I think that doesn't always play out that way. So it's a little bit of guesswork to say look the bill rates of what we've locked are down about 5% that won't impact Q1, all that much as I've said, probably a similar play out to Q4, which is down low mid single and then the rest of that rate decline plus the impact from the broader market is.
More likely to be seen in Q2.
All things being equal I don't.
If rates do continue to decline, we don't anticipate them to have steep declines after our second quarter I think they start to really start to be at or near the bottom there might be a little bit of pressure into the back half, but I just think it starts to get to a point to the earlier question that Tobey asked about what the market bears and what it takes to get a question to the bedside.
Right and so that the pound is to death, but so on the volume side, you might see some seasonal softness into <unk> and then it normally it would level into the back half.
So if you are speaking to the volume side of things I think Theres a couple a couple of things number one in the fourth quarter going into the first quarter. We did have some some rapid response and a little bit of labor disruptions that you can never count on so that's going to be a little bit of a volume headwind going into Q1 from Q1 to Q2, we don't generally have.
Tremendous softness in fact, our travelers on assignment ramps throughout the first quarter and maybe dissimilar to some other companies out there, but in general we start the year off a little softer and then that head count gradually ramps all throughout January and into February . So we're building that head count up as we're moving through the quarter right now okay. Good that's good clarification.
<unk>.
I guess the bundle that you are kind of classifying as workforce solution or maybe thats not your words, but something on that order with education.
Interim et cetera, what does that aggregate to now on a run rate on a revenue run rate basis.
Yes, we don't we don't put education in there.
Workforce solutions for US I think recently of workforce solutions group, our workforce solutions group I am sorry.
Yes, our internal acronym is WSJ so.
They are on track over 100, little north of $100 million kind of run rate now.
So the home care is a $100 million right.
Education is a.
$75 million to $80 million run rate.
The <unk> is probably on the 25%.
Plus higher up yet so that higher up.
$30 million run rate.
And then of course, Locums, we had it at somewhere around that.
About $150 million to $180 million run rate.
Although we don't segment about into one one grew locums as well.
The other ones, we would actually have to add them up.
So when you look at physician staffing is that including all of this or is that just locums.
Physician staffing is only locums and advanced practitioners there is no perm placement in there there is no interim leadership in there thats all part of nurse and Allied.
Within physician staffing the growth you saw the $37 million that we reported in revenue for the fourth quarter was a combination of organic as well as the acquisitions of mental notice that were closed at the beginning of the fourth quarter. Okay. Okay, and then last one bill.
If you are successful.
And migrating and telephone to essentially all your MSP.
This year, what's kind of the dollar impact.
Yes.
It's a great question and what I would just say is let me put it into percentages so whatever our spend under management is today, we're spending somewhere between.
On average $85 to 120 basis points, so call. It 1% I think if you just use that as a placeholder at 1% of spend under management generally runs through a vendor vendor management system and that today is a fee we're paying to someone else that we will avoid.
Got it.
Okay.
Thanks, guys.
Got it.
Ladies and gentlemen, this does conclude the Q&A period, I will now turn it over to John Martin for closing remarks.
Thank you operator before wrapping up cross country is proud to joining celebrating black history month, our company has a long standing commitment to diversity equity and inclusion, including our continued financial support of the National Black Nurses Association in closing I'd like to thank everyone for participating in today's call and we look forward to updating you on it.
Progress of the company in the next call in May.
Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation you may now disconnect.
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