Cross Country Healthcare, Inc. (NASDAQ:CCRN) Q3 2023 Earnings Call Transcript

Cross Country Healthcare, Inc. (NASDAQ:CCRN) Q3 2023 Earnings Call Transcript November 1, 2023

Operator: Good afternoon, everyone. Welcome to Cross Country Healthcare’s Earnings Conference Call for the Third Quarter 2023. Please be advised that this call is being recorded and a replay of this webcast will be available on the company’s website. Details for accessing the audio replay can be found in the company’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.

Josh Vogel: Thank you and good afternoon, everyone. I’m joined today by our President and Chief Executive Officer, John Martins as well as Bill Burns, our Chief Financial Officer; Dan White, Chief Commercial Officer; and Marc Krug, Group President of Delivery. Today’s call will include a discussion of our financial results for the third quarter of 2023 as well as our outlook for the fourth quarter. A copy of our earnings press release is available on our website at crosscountry.com. Please note that certain statements made on this call may constitute forward-looking statements. These statements reflect the company’s beliefs based upon information currently available to it. As noted in our press release, forward-looking statements can vary materially from actual results and are subject to known and unknown risks, uncertainties and other factors, including those contained in the company’s 2022 annual report on Form 10-K and quarterly reports on Form 10-Q, as well as in other filings with the SEC.

The company does not intend to update guidance or any of its forward-looking statements prior to the next earnings release. Additionally, we reference non-GAAP financial measures such as adjusted EBITDA or adjusted earnings per share. Such non-GAAP financial measures are provided as additional information and should not be considered substitutes for or superior to those calculated in accordance with US GAAP. More information related to these non-GAAP financial measures is contained in our press release. Also during this call, we may refer to pro forma when normalized numbers pertain to our most recent acquisitions as though the results were included or excluded from the periods presented. With that, I will now turn the call over to our Chief Executive Officer, John Martins.

John Martins: Thanks, Josh, and thank you to everyone for joining us this afternoon. Overall, I was pleased with our continued ability to execute in what remains a challenging market. For the third quarter, consolidated revenue was $442 million, with adjusted EBITDA of $27 million, primarily reflecting a tightening in built-in spreads within our travel business. I’ll touch on some of the market dynamics in a moment. But I want to stress that we continue to manage the business for long-term success and strategically position ourselves for future growth opportunities as we see in the market. As expected, travel revenue was down 22% from the second quarter, driven by both lower rates and fewer travelers on assignments. Average travel bill rates declined approximately 8% sequentially, in line with our estimates for a mid-to-high single-digit decline, in both the third and fourth quarters.

Demand for travelers remains fairly stable throughout the third quarter after having rebounded from the lows we experienced in the second quarter. [Inaudible] needs remain below expectations, so we do still anticipate that we’ll pick up as we progress through the fourth quarter. Regardless, the relative softness in demand will likely impact the number of travelers we have on assignment over the near term. As we have pulled out previously, bill rates for open orders have largely stabilized, but in many cases remain too low to attract candidates needed to fill them. As a result of the pullback in bill rates this year, amidst elevated compensation expectations for nurses, we are seeing some margin of pressure due to a tightening in the bill pay spreads.

So this appears to be a broader issue across the industry that may persist for the next several quarters we will strive to remain competitive in order to preserve our market share while protecting our profitability. Our local or per diem business has also felt the impacts from the softness in demand as clients continue to seek to reduce reliance on contingent clinical staff. Turning to our other business lines, physician staffing continued its strong performance with reported revenue of more than 90% year-over-year, putting us quickly on pace to hit an annual run rate of $200 million. And on organic basis, physician staffing was up 21% from the prior year, continuing to outpace the low double digit growth projected by the staffing industry analysts.

Driving this was a combination of higher billable days and an improved mix of higher bill rate specialties. As one of our fastest growing businesses, we continue to make investments that will fuel organic growth and though the contribution income from the business remains below our target, we believe the continued ramp in production, combined with targeting higher margin specialties, will ultimately lead to improved profitability in 2024. Within nursing ally, our Education business returned from summer break and started off the new school year strong, considering its trend of double digit year-over-year growth in the third quarter. Our Homecare business also performed well in the third quarter. Up mid-single digits, both sequentially and over the prior year.

On the back of five homecare MSD wins since our last call, this business is poised to reaccelerate entering 2024. Now, let me spend a moment on Intellify, our proprietary vendor management system that we believe is a market leading platform for clients that provides data analytics and real-time insights. As we previously shared, Intellify not only saves millions of dollars, but with our MSP accountants, but it opens up a multi-billion dollar opportunity in the vendor neutral space. Since launch, we have not only converted more than half of our MSPs onto Intellify, we have won five new vendor neutral programs, two of which that are live today. This showcases our ability to implement programs in rapid succession. Our most recent win is also our largest to take, with annual spend expected to be in excess of $100 million, once fully implemented.

On the back of this win, we are continuing to expand the functionality of Intellify by introducing predictive analytics and time and attendance, building on our robust baseline feature set that already includes industry-leading dashboards and reporting, internal resource pools, internal travel programs, MSPs for nursing allies, per diem, locums, non-clinical, and RPO. These new add-ons will greatly enhance the value proposition for our clients. Shifting gears, although that pay transparency has been important to the industry in recent years, today I’m excited to announce that we have created a new company called Cross Country DAS, which introduces bill rate transparency by utilizing data analytics to provide healthcare systems with independent, objective, real-time insights.

We believe the data analytics tool offered by DAS is the first such solution in the market. This new offering can be embedded within Intellify for a license on its standalone basis. In fact, we recently licensed DAS to a large national healthcare system, which is utilizing the tool to price-check providers on a local, regional, and national basis. This client has credited DAS with helping save them millions of dollars from their current staffing providers. Though not yet material in dollars to Cross Country, it is significant in terms of the value we bring to healthcare systems. This further showcases our ability to develop and deploy innovative technologies to advance healthcare and help hospitals rationalize their costs. This brings you to our outlook.

Given my earlier comments on the current market backdrop, including recent demand trends and industrywide work presses, we anticipate that fourth quarter revenue will be between $400 million and $410 million, with adjusted EBITDA coming in at $19 million to $24 million. For the full year, the guidance implies we’ll generate between $143 million and $148 million in adjusted EBITDA, representing a margin above 7%. As previously noted, we will continue to balance investments with cost savings to preserve profitability while ensuring we maintain sufficient capacity to fuel long-term growth. Though we are not providing guidance for 2024 this time, we have seen stability in the broader market and believe we can achieve similar margins for the full year in the high single digits, given the expected tailwinds for recent wins, continued growth from higher margin businesses like education and homecare staffing, as well as enhanced productivity driven by our technology investments and leveraging our low-cost center of excellence demand.

I am confident in our ability to drive long-term sustainable, profitable growth and we remain focused on increasing shareholder value through our deployment capital. As noted in today’s press release, our cash generation was solid in the third quarter, allowing us to continue repurchasing our shares as well as paying down all of our debt. We will look to leverage our technology investments and healthy balance sheet to further enhance our platform, as well as diversify our offerings as we follow the patient across the continuum of care. In closing, we are confident about our prospects exiting the year, specifically our ability to build upon the early momentum from Intellify, which we believe will be a meaningful driver of long-term revenue growth and margin expansion.

I want to thank our devoted employees for their ongoing hard work and contributions. We were recently named to the top most 100 Loved Workplaces by Newsweek, as well as the 2024 Best Companies to Work For by US News and World Report. These recognitions validate our efforts to foster a culture of growth, inclusion and well-being. Lastly, thank you to all of our professionals. Who made Cross Country their employer of choice, as well as our shareholders for believing in the company. With that, let me turn the call over to Bill.

Bill Burns: Thanks, John, and good afternoon, everyone. As John highlighted, our consolidated revenue for the third quarter of $442 million was within our guidance range, albeit towards the lower end. As our local business experienced softer demand for per diem assignments than we anticipated. Compared to the prior year and prior quarter, revenue was down 30% and 18% respectively, driven in large part by the continued normalization in both travel demand and bill rates. I’ll give it to more detail in the segments in just a few minutes. Gross profit for the quarter was $97 million, which represented a gross margin of 22%. Gross margin was down 75 basis points sequentially due to the compression of bill pay spreads in both the travel and local businesses, as well as an increase in burdens such as healthcare insurance and workers comp.

As John mentioned, the industry remains very competitive and the pay rates have come down slightly faster than bill rates, the cost of housing remains very high, driving down the overall margin. Moving down the income statement, selling, general and administrative expense was $70 million, down 12% sequentially and 13% over the prior year. The majority of the decrease relates to lower variable compensation following the historic performance throughout the pandemic, as well as the reductions in salary and benefit costs we mentioned in prior quarters. We continue to proactively balance investments with current market conditions to maintain our profitability while ensuring we have sufficient capacity for future growth. Including actions taken throughout the third quarter into the start of the fourth, we’ve reduced our internal headcount by approximately 20% since the start of the year.

While continuing to invest in areas of the business with the highest growth potential, as well as in our technology team. Based on the cost actions taken to date, as well as lower compensation associated with the sequential decline in revenue, we anticipate total SG&A will decline in the low to mid-single digits for the fourth quarter. And as a percentage of revenue, SG&A was 16%, up from 15% last quarter and 13% in the prior year. With the revenue at the lower end of our expectations in a tighter gross margin, we reported adjusted EBITDA of $27 million, representing an adjusted EBITDA margin of just over 6% for the quarter. As we’ve stated before, we are managing this business towards long-term sustainable profitability, which necessitates certain investments be made to ensure sufficient capacity to achieve those goals.

We believe there’s new Intellify programs ramped and we continue to drive productivity improvements across the business that we can achieve our stated goal of high single to low double digit adjusted EBITDA margins in the coming quarters. Interest expense was $700,000 which was down nearly 80%, both sequentially and from the prior year. The decline was entirely driven by lower average borrowings throughout the quarter. The majority of the interest expense reported for the third quarter was related to the carrying costs for the ABL and the fees on our outstanding letters of credit. Though we ended the quarter with no outstanding debt, we may continue to see amounts drawn and repaid under the ABL during the coming quarter, but we expect interest expense will continue to decline as we’re likely to be in net cash position for most of the quarter.

The effective tax rate on the amount drawn under ABL was 6.8% as of September 30th. Also on the income statement, we reported $4.5 million in depreciation and amortization, which continues to grow as our technology projects are completed and put into use. And we also recorded an additional $2 million in bad debt expense, which was down 25% sequentially. And finally on the income statement, income tax expense was $7 million, representing an effective tax rate of 34%, which was a little higher than we expected. Based on the current mix of business, we now anticipate a full-year effective tax rate of approximately 31%. Our overall performance resulted in adjusted earnings per share of $0.39 near the midpoint of our guidance. Turning to the segments, Nursing allied reported revenue of $397 million down 20% sequentially and 35% from the prior year.

Our largest business, Travel Nursing Allied, was down 22% sequentially and 39% from the prior year. Bill rates for travel were down 8% sequentially while billable hours were down 15%. Looking to the fourth quarter, we expect that travel to decline sequentially in the high single to low double-digit range, with rates and volumes anticipated to be down in the mid-single digits respectively. The decline in billable hours is driven by the continued softness in overall travel demand and delayed seasonal needs. With our current capacity, the possibility remains that we could see sequential growth across the quarter as new Intellify programs ramp and seasonal orders are received. Our local or per diem business continues to feel the impact from the softness in demand, with revenue down approximately 14% from the prior quarter and 32% from the prior year.

The majority of the decline comes from a reduction in billable hours, as rates were down about 4% sequentially and over the prior year. Also within the nursing and allied segment, both our education and homecare staffing businesses reported year-over-year growth. Our Education business, which was impacted by the summer break, is poised to see a strong fourth quarter returning to higher double-digit growth. And finally, Physician staffing once again delivered robust performance reporting $46 million in revenue, which was up 92% over the prior year, excluding the impact from the Mint and Lotus acquisitions completed last year. The business was up 21%. Average revenue per day filled continued to improve as we focus on higher rate specialties and continue to experience stronger growth across the locum specialties relative to lower bill rate specialties within advanced practices.

Turning to the balance sheet, we ended the quarter with $14 million in cash and no outstanding debt. With the help of our balance sheet and strong cash flow, we remain well positioned to make further investments in technology and acquisitions, as well as to continue repurchasing shares under our $100 million share repurchase plan. From a cash flow perspective, we generated $70 million in cash flow operations in the third quarter, which represented a 260% conversion on adjusted EBITDA. On a year-to-date basis, we generated $236 million in cash flow operations by far our strongest performance in a nine-month period. Driving this performance was strong collections as the business continues to normalize. DSO was 67 days down five days since the start of the year.

Our goal remains to bring DSO below 60 days, which is more in line with our historic performance, and we believe that we can continue to make progress towards that in the coming quarters. As I mentioned, we’ve done a good job of collecting on our receivables and believe opportunity remains for further improvement. Cash used in investing activity was $3 million, reflecting investments in our technology initiatives. From a financing activity perspective, we paid down $30 million on the ABL and repurchased an additional 617,000 shares. And this brings me to our list for the fourth quarter. We’re guiding to revenue between $400 million and $410 million, representing a sequential decline of 7% to 10%, driven predominantly by the expected decline in both rates and billable hours for travel.

We’re guiding to an adjusted EBITDA range of between $19 million and $24 million, representing an adjusted EBITDA margin of approximately 5% at the midpoint of guidance. As John mentioned previously, we’re managing business for longer term success, not to a single quarter, and continue to believe that we can achieve and maintain high single digit adjusted EBITDA margins. Adjusted earnings per share is expected to be between $0.25 and $0.35 based on an average share account of 34.4 million shares. Also assumed in this guidance is a gross margin of between 21.5% and 22%, interest expense of $500,000, depreciation and amortization of $5 million, stock-based compensation of $2 million, and an effective tax rate of 31%. And that concludes our prepared remarks and we would now like to open the line for questions.

Operator?

Operator: [Operator Instructions] And our first question is from Brian Tanquilut with Jefferies.

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Q&A Session

Brian Tanquilut: Hey, good morning, guys, or afternoon. I guess my first question is I think about the seasonality of demand and what you’re seeing Q4 and maybe weighing that versus just the fundamental demand for core contract nurse staffing. How do you think about those dynamics going forward? Maybe just looking at it even past Q4.

John Martins: Hey Brian, this is John. Good evening to you as well. So what we’re looking at a demand in the fourth quarter, I think we’ll start back in April when we saw the low of demand hit in the beginning of April this year. Then we saw demand to tick up to today about 30% where we sit up from where we were in the low of April. And we’re up about 7% from August. Now we were all anticipating much larger volumes of winter demands that never really materialized. And so the majority of the orders that we have now up 30% from April are the one majority are non-winter needs or core staff. And so we really feel at this point demand has stabilized in the market moving forward. And while there may be a little bit of winter orders in these numbers, it’s not more than 5% in this – in the numbers that we have right now, and that we continue to be stable in orders moving forward.

And again, maybe a little tick down of these winter orders that are in the mix of the orders we currently have.

Brian Tanquilut: Got it. And then maybe as I think about your margin commentary for Q4, as I think about what you had previously stated as goals for kind of to stay in double digit margin levels, obviously not there today, how should we be thinking about the ability to drive that up as we think about 2024? Or maybe Bill, just any comments you can make in terms of how we should be modeling factors to think about as we model 2024?

Bill Burns: Yes, sure, Brian. Good evening to you. So I think when you look at the third quarter’s performance, the pay bill spreads were a bit more compressed than we would have anticipated at the start of the quarter. At the function of a few things there’s a lot of still heavy competition for the candidates. bill rates, though they’ve stabilized on open orders, still seem to be a bit lower than where we’d like to see them in order to generate the margins we’d like. But really when you look under the hood, it’s not that the bill rates have come down, the pay rates are coming down, it’s that the housing costs still kind of remain pretty stubbornly high and it’s also a mix of where we’re sending our clinicians. So there’s a little bit of that going into the pay bill spreads.

The other things that really impacted the quarter, we had a little bit of an uptick in health insurance. A few more people went to the doctor and was anticipated, so our health cost rose a bit more than we were looking forward to. And then we also had some actual adjustments to workers comp. So those are the three big drivers to the kind of 75 basis point decline we saw sequentially. And so we’re not modeling that to bounce back going into Q4. As we move through 2024, I think there is some opportunity that pay bill spreads could improve. I think the mix of the businesses as locums continues to grow, homecare continues to grow well, education, high double digit growth is expected for the fourth quarter going right back to the trajectory they were on.

And then you move beyond that and you say, okay, so what else drives the margins? Well, Intellify, we talked about this numerous times, but obviously the more we can grow spend on a management from the neutral programs, you got the capture on that spend, but then you also have the fees that are attracted to the portion you’re not capturing. So we just had our biggest win, the $100 million account. We’re real excited about that. That account is actively in implementation. Hopefully, we won’t probably go live if it does late Q4, early Q1 at this point in time, but it’s moving forward in the queue. So I think that’s another opportunity. And then we still have a handful of accounts that have not converted. And when I say a handful, there’s relatively few, but there are some of the larger ones that are on third party tech that we just had to kind of delay because we’ve been kind of busy implementing the other new wins that we’ve had.

So as we talked about, we’ve always said we would prioritize new wins to migrate to Intellify before we kind of move old programs off. But that’s another opportunity as we go into the new year. But realistically, beyond the mix, beyond Intellify, I think you start looking at SG&A, and I can tell you there’s a real concerted effort internally for us to look at how do we become more efficient as an organization? How do we improve productivity across the organization? There’s a lot of levers we can pull. Again, we’ve talked about this a little bit as well. We have a nice, very good center of excellence in India that we can certainly leverage more than we have. We have a few hundred people there today. The idea here is there’s much more we can do with that group.

So we’re looking at that. I think also that we’ve got the back office systems and the middle office systems that we’ve got that long-term Oracle project that we’ve been doing. That will be ramping and going live throughout 2024 and into 2025. That will drive some efficiencies as well because today, unfortunately, a lot of our middle office is on different platforms. So that means billing, collections, cash apps, payroll are all done through different platforms. So as we kind of migrate to one common platform, we’ll have more efficiencies as well. But John, anything you want to throw in there?

John Martins: Well, yes, we just add the investments we’re making in the technology with Intellify and experience and as we’re creating a very, and we have an integrated system that allows our clinicians to self-service more and more, that will also create some efficiencies on our recruitment and production side as well.

Operator: Our next question is from Kevin Fischbeck with Bank of America.

Kevin Fischbeck: Great. Thanks. Maybe just to follow up on that, because it looks to me, you guys talked a lot about bill pay spreads in the quarter, which are obviously a pressure, but it does look like since the revenue peaked in Q1, you’ve had six straight quarters as a sequential decline in revenue, but you’ve also had six straight quarters as a sequential increase of SG&A as a percentage of revenue over that time. So it feels like most of the market compression has actually been on that G&A side, and although you’ve done a great job taking dollars out, so the dollar number is certainly trending down as a percentage of revenue is not coming down fast enough relative to the revenue drop. So like, I mean how do you think about that going forward if bill rates or total revenue drop?

Is that where the deleveraging happens? Where is the biggest opportunity if you think about high single digit margin sustainably? Where does that G&A number have to be to make that all work out? And In think how do you get there if the revenue run rate is in a $1.7 billion, $1.8 billion range?

Bill Burns: Sure. Well, Kevin, this is Bill. A couple of things. First, you’re right. The SG&A is a percentage of revenue has ticked up. It’s more a function of the revenues come down, but it’s been a rate issue more than anything else, and so the clinicians, you’re still staffing those clinicians, you still have the body count associated with that, so everything from recruitment to account management to the folks that are responsible for onboarding, et cetera. So you wind up having that issue of the declining average revenue per FDE simply because of the bill rate compression that we’ve seen. But yes, looking ahead, I do think that the SG&A is the number that we’re going to have to squeeze on and continue to find the opportunities to drive it down.