William Grubbs - CEO William Burns - CFO.

AJ Rice - UBS Jeff Silber - BMO Tobey Sommer - SunTrust Bill Sutherland - Emerging Growth Equities Randy Reece - Avondale Partners Matt Blazei - Lake Street Capital Markets Mitra Ramgopal - Sidoti.

Good morning, ladies and gentlemen. And welcome to the Cross Country Healthcare Conference Call for the Fourth Quarter and Full Year of 2015. This call is being simultaneously webcast live.

A replay of this call will also be available until March 24, 2016 and can be accessed either on the company's website or by dialing 800-395-7443 for domestic calls and 203-369-3271 for international calls, and by entering the passcode 2016. I will now turn the call over to Bill Burns, Cross Country Healthcare's Chief Financial Officer.

Please go ahead, sir..

Thank you, and good morning, everyone. With me today is Bill Grubbs, our Chief Executive Officer. Our call this morning will include a discussion of fourth quarter and full year results for 2015 as disclosed in our press release, and will also include a discussion of our financial outlook for the first quarter and full year of 2016.

After our prepared remarks, you will have an opportunity to ask questions. Our press release is available on our website at www.crosscountryhealthcare.com. Before we begin, we need to remind you 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 2014 Annual Report on Form 10-K and Quarterly Reports on Form 10-Q, as well as in other filings with the SEC.

I would encourage all of you to review the risk factors listed in these documents. The company undertakes no obligation to update any of its forward-looking statements. Also, comments 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 or superior to financial measures calculated in accordance with U.S. GAAP. More information related to these non-GAAP financial measures is contained in our press release.

In order to facilitate a better understanding of the underlying trends, we will refer to pro forma information on this call, giving effect to acquisitions and divestitures as though the transactions had occurred at the start of the periods impacted.

As a remainder, we divested our education and seminar business during the third quarter and completed the acquisition of Mediscan in October 2015. With that, I will now turn the call over to our CEO, Bill Grubbs..

Thank you, Bill, and thank you everyone for joining us this morning. Before I start my general comments, I would like to address our revenue growth for the fourth quarter and our guidance for the first quarter of 2016. There is a softening of our growth, specifically within Nurse and Allied.

I believe this is specific to this two quarters and is the result of isolated incidence that we do not expect to recur. First of all, we had a very large nurse project that was originally scheduled for the fourth quarter and was delayed until the second quarter of 2016.

Normally that isn't an issue as we get delays all the time, the issue here is that we had recruited for all of those positions before the delay. So not only that we waste the time to fill the positions, we had to unwind it all afterwards.

That took significant recurring efforts away from filling other positions and affects both, the fourth and first quarter revenue. The good news is, that project is now on-track for the second quarter and we don't anticipate any further delays.

But the bigger issue for Q4 and Q1 was goods with external vendors and job sites that limited the applications we were receiving from about mid-November until mid-February. That had a major negative impact on the positions we filled during that time period.

One of these external sites changed how they treated our openings and as a result many of our positions were not posted at all, this resulted in the loss of hundreds of applications.

Another site did not post -- I'm sorry, another site did post our positions but when you apply to the position you were directed to a third-party site that stated they would forward the application to Cross Country Healthcare but we never received any of those applications. This also resulted in the loss of hundreds of applications.

As of mid-February, we believe these issues have been corrected and we don't anticipate any further issues. Applications are back on-track and our fill rates are back where we needed them to be. So these issues reduced our applications in both quarters, and ultimately our revenue but nothing that is ongoing.

I felt good about where we are and our ability to achieve our full year 2016 numbers as we outlined in our guidance. I'm happy to take some questions on this subject at the end of the call as I'm sure you have several. In the meantime, let me get on to our general commentary.

2015 marked my second full year as CEO of Cross Country Healthcare, and although we have more work to do I'm extremely pleased with the progress we have made over that period of time. In fact, we are ahead of the schedule we laid out two years ago.

At that time we had set a goal to achieve 5% adjusted EBITDA by the fourth quarter of 2015; we not only achieved that one quarter ahead of schedule but we exceeded 5% adjusted EBITDA for both the third and fourth quarters.

So 2015 was somewhat of a steep change and it has brought us to a level of financial performance that we've not seen for many years. Revenue was up 24% to $767 million with adjusted EBITDA increasing a 119% or more than $20 million to $38 million, expanding 210 basis points from 2.8% in 2014 to 4.9% in 2015.

Actually it's great to see that the full year adjusted EBITDA percentage was essentially as high as the original goal we had set for just the fourth quarter. As a result of our confidence in reaching unexpected adjusted EBITDA margin of 8% by the fourth quarter of 2017, we are now targeting a 10% adjusted EBITDA by the end of 2019.

We are looking past the turnaround and recovery plan that we have been executing and have set new goals and initiatives to improve both, our gross profit and adjusted EBITDA margins. That kind of brings me to the Mediscan acquisition that closed at the end of October.

Our first two acquisitions at December of 2013 and June 2014 were about positioning us to be more competitive in the market and were part of our recovery plan to improve the financial performance of Cross Country Healthcare. And both of them have proven to be very beneficial in supporting our financial goals.

The Mediscan acquisition is our first strategic acquisition that opens new markets and gives us a growth engine outside of our traditional acute care and ambulatory customers.

Mediscan not only supports our growing staffing services in the Southern California market but it gets us into the fast growing healthcare staffing market where public schools and the workforce solutions arena for charter schools.

In addition, school systems tend to attract a different type of healthcare professional, thus expanding our ability to grow incrementally rather than taking candidates away from our traditional customers. Already in 2016 Mediscan is on-track for double-digit revenue growth and should meet or exceed the 10% EBITDA margin they experienced in 2015.

The market for all of our services remains strong, demand is robust and we continue to see shortages of healthcare professionals around the country.

Based on demand in the first couple of months of 2016, strong general employment trends, strong managed care growth and estimates of over one million additional individuals have enrolled into the Affordable Care Act. We expect demands to stay at these levels throughout the year.

We believe these favorable market conditions will allow us to grow both volume and price. We also continue to see positive momentum for our workforce solutions. Let's start with managed service programs.

Although we have been adding about two MSPs per quarter over the past two years, we've already won four in the first two months of 2016 providing us a strong start to the year and supporting our goal to win four per quarter going forward.

We still see a lot of uses in MSPs in the market as hospitals continue to adapt to market dynamics and streamline their processes. We're also getting traction with our recruitment process outsourcing, predictive analytics and optimal workforce solution services.

We signed four new RPO deals coming into 2016, and this is still a small service for us but we are experiencing high demand so we continue to build a team in anticipation of increased volumes.

Our predictive analytic service also continues to have a high level of interest from our customers and we have several large programs ramping up that we believe validate our ability to support our client's efforts to save cost across their total employee population.

For optimal workforce solutions, we have two new programs with commitments to outsource over 500 incremental positions starting in the second or third quarters of this year. We believe this is a great differentiator for us and allows us to provide significant operating efficiencies and cost savings to our customers.

Overall, the investments in workforce solutions we made last year are starting to payoff and we expect these services to be a bigger part of our revenue in the future. For the first time in years we are going to provide full year guidance.

We have a much stronger management team, better systems and improved metrics that allow us to have more confidence in longer term forecast. I feel it's important to start giving our investors more clarity not only for this full year but beyond.

Bill Burns will provide the Q1 and full year guidance later but I wanted to make some comments on the full year here as well. For 2016 we expect revenue to be in the range of $820 million to $840 million, an increase of 7% to 9% on a year-over-year basis. Adjusted EBITDA is expected to be between 5.5% and 6% but this needs further explanation.

This guidance includes additional SG&A of $4 million to $5 million for long overdue IT investments and investments in other service expansion with the operating efficiencies expected to be realized in the latter half of 2017. Although we make investments all the time, these are truly incremental and will seize once the projects are complete.

Therefore our underlying adjusted EBITDA guidance under normal operating conditions without this level of investment would have 6.0% to 6.5% for 2016. Since these investments are not included in any of our analyst estimates, we wanted to give everyone visibility to the underlying normalized transit in the business.

Looking at our numbers, with or without the investments we expect this to be another year of providing strong increases in shareholder value. Before I turn the call over to Bill Burns, I'd like to address a question we get all the time.

It's regarding the comparison between Cross Country Healthcare's performance and our largest and only other public competitor.

Generally I believe this is a fair comparison given that we are the only two large, full service, national providers of healthcare staffing and workforce solutions, and as I said the only two public companies in the sector, well, they had solid results. It's important to note that Cross Country Healthcare is still in the middle of its turnaround.

We still have process improvements to make, continued consolidation of our corporate functions and technology enhancements that are needed to help us achieve that level of performance. But our results and these positive market trends make me feel good about all the things we're doing here at Cross Country.

They certainly validate a lot of our initiatives and strategies. It also makes me feel good that we continue to have tailwinds of strong demand and shortage of supply. We are currently running ahead of the schedule we had laid out two years ago, and we will continue to move forward at our own pace.

We have thrust a tremendous amount of change on our organization and I want to make sure we don't add additional risk into the process by moving too fast. We will continue to grow both organically and through acquisition and we will continue to add value to our shareholders as we have for the past two plus years.

We believe the goals of 8% adjusted EBITDA by the end of 2017 and 10% by the end of 2019 are the right goals with the right timeline that will significant value to our investors. Our management is very strong and has managed through the change process very well.

We all remained focus on achieving the levels of performance befitting a company with a history and market position we enjoy. So let me wrap up my comments. Even though we are only a couple of years into our turnaround plan we have made substantial progress.

Run rate revenue has almost doubled in that timeframe and adjusted EBITDA has grown by over $30 million. I'm very proud of these accomplishments. The market remains strong and supports further improvements in 2016 and beyond. And I'm excited to see our value at workforce solutions contributing to our overall financial goals.

We cannot see beyond our turnaround plan and I'm more focused on our strategy to grow at or above the market and reach our goal of 10% adjusted EBITDA in the coming years. Let me turn the call over to Bill Burns to review the quarter and full year numbers in more detail..

Thanks, Bill. As Bill mentioned we're very pleased with our overall performance this year having met or exceeded many of the goals we've set for ourselves. As a result of our focus on revenue growth, margin expansion and improved operating leverage, the full year adjusted EBITDA margin was 4.9% compared with 2.8% in the prior year.

Throughout the year we saw continued strength in our largest business, Nurse and Allied Staffing, with demand remaining near all-time historic levels. And we saw a year-over-year price improvements in all of our segments. Turning to the quarter; total revenue was $193.1 million, up 3% from the prior year and down 1% sequentially.

Year-over-year increase was driven predominantly by growth in Nurse and Allied Staffing as well as the impact from the Mediscan acquisition which was partly offset by the divesture of our Education Seminar business.

On a pro forma basis, revenue is also up 3% from the prior year lead again by Nurse and Allied Staffing with Mediscan growing by 15% over their prior year results. Gross profit margin for the quarter was 26.1%, up 80 basis points from the prior year and down 20 basis points sequentially.

The year-over-year improvement was driven by gross margin expansion in both, Nurse and Allied Staffing, as well as Physician Staffing. The sequential decline was entirely due to the divesture of our Education Business which had a gross margin of more than 50%. On a pro forma basis gross margins improved nearly 190 basis points from the prior year.

Moving down the income statement, SG&A for the quarter was $40 million or 20.7% of revenue, representing a decline of 4% year-over-year and an improvement of 140 basis points as a percent of revenue.

The year-over-year decline was largely due to the sale of our Education Business partly offset by continued investments we continue to make in our business.

Sequentially SG&A increased 2% predominantly due to investments in both revenue producing headcount across all of our businesses, as well as investments in our IT infrastructure as we continue to migrate away from legacy platforms. Adjusted EBITDA was $10.9 million representing a 76% increase over the prior the year.

As a percent of revenue, adjusted EBITDA margin was 5.7% representing our second consecutive quarter above what had been our fourth quarter goal of 5%.

Below adjusted EBITDA we recorded acquisition integration charges of approximately $200,000 representing cost associated with the purchase of the Mediscan business and restructuring charges of approximately $100,000 related to actions taken under our 2015 cost optimization project.

We also recorded a $2.1 million impairment charge on intangible assets for our Physician Staffing business as revenue declined 5% for the full year.

Further, we recorded a $9.5 million non-cash loss on the change in the fair value of the embedded derivative from our convertible notes predominantly due to the increase in our share price over that time period. As a reminder, every dollar move in our share price results in approximately $3 million change to the value of the derivative.

Interest expense was $1.6 million, down approximately $100,000 from the prior year and flat with the prior quarter. The year-over-year decline was due to lower rates on subordinated term debt.

Income tax expense for the quarter was $700,000 which is primarily related to the impact from the amortization of indefinite live assets, intangible assets for tax purposes.

As a result of the charges I mentioned earlier, we reported a net loss attributable to common shareholders a $6.1 million or $0.19 per diluted share as compared to a net loss in the prior year period of $20.2 million or $0.65 per share.

Adjusted earnings per share which excludes such non-cash items as the impairment charge and the change in the value of the derivative, as well as items such as acquisition integration and restructuring cost was $0.18 compared with $0.03 in the prior year and $0.23 in the prior quarter.

For the full year, adjusted EPS was $0.54 as compared with $0.09 in the prior year. Let me next review the results of our three business segments. Revenue for our Nurse and Allied segment was $162.1 million for the fourth quarter, up 10% year-over-year and up 6% on a pro forma basis.

Consistent to what we saw in the third quarter, about half the growth came from volume and half from price with bill rates in both Travel Nurse and branch-based business up 4%. On a sequential basis, segment revenue was up 3% due to the impact of the Mediscan acquisition.

We averaged 6,792 field FTEs for the quarter up 7% from the prior year and 2% sequentially. Revenue per FTE per day was $259 up to 2% year-over-year and up 1% sequentially. Segment contribution income for the quarter was $15.1 million representing a 9.3% contribution margin up 170 basis points year-over-year and down 100 basis points sequentially.

Turning next to our physician staffing segment, revenue was $27.2 million down 10% from the prior year and down 12% sequentially. Both the year-over-year and sequential declines were entirely due to lower volume of days field across most specialties.

Our advanced practices which include physician's assistance and nurse practitioners continue to see significant growth with volume up 39% year-over-year and 4% sequentially. The advance practice specialties have a lower bill rate and as result revenue per day filled declined year-over-year and sequentially.

Overall, pricing in our other specialties remain strong with revenue per day filled all-time highs within each specialty. Segment contribution income for the fourth quarter was $2.7 million representing a 9.8% contribution margin up a 150 basis points from the prior year and down a 50 basis points sequentially.

Year-over-year improvement was primarily attributable to low pricing and higher operating costs.

Finally, the other Human Capital management services segment which now only includes our search business was $3.8 million representing a decline of 64% over the prior year and 49% sequentially, both the year-over-year and sequential declines primarily due to the divesture of our education business in the third quarter.

On a pro forma basis search revenue declined 7% year-over-year primarily due to lower physician retain search revenue. Our search physicists are now lapping some very high growth periods and had grown more than 30% in each of the prior four quarters. We continue to believe this business swill grow in the low double digits in the foreseeable future.

Segment contribution income was approximately $100,000 or 3.8% of revenue as compared with $600,000 in the prior year and $400,000 in the prior quarter. The decline in contribution margin was primarily was due to a lower gross profit margin in this segment driven by lower retained physicians search revenue.

Turning to cash, we ended the quarter with $2.5 million of cash and $63 million in outstanding debt at par. During the quarter we used approximately $600,000 in operating cash as a result of increases in working capital. Our day sales outstanding was 70 days which was 11 days higher than the prior quarter.

The increase in working capital of DSO were primarily driven by lower collections which were down nearly 7% over the prior quarter. Additionally, DSO was adversely impacted by the divesture of our education business and the acquisition of the Mediscan business which resulted in approximately of 2 days in sequential increase in DSO.

It's important to note that there has not been a significant change in the payment terms being offered to our clients that should have driven the increase in DSO we saw this quarter.

We continue to believe our DSO should be in the mid-50 day range and it is a significant focus area in 2016 as we work with our clients to ensure they are paying to terms. For the first nine weeks of 2016 average weekly collections are up 12% over the fourth quarter.

For the fourth quarter capital expenditures were approximately $600,000 in line with our expectations. We used the majority of cash at the end of the third quarter as well as incurred borrowings under asset baseline to fund the acquisition of Mediscan.

We paid $28.8 million in cash, net of cash required and included in that amount was an estimate for networking capital which was subject to a final adjustment in early 2016 and as a result we received approximately $300,000 from the sellers in the first quarter.

Total borrowings under our senior credit facility were $8 million as end of the period leaving approximately $40 million of availability. This brings me to our guidance. As Bill mentioned we are giving our usual quarterly guidance as well full year guidance for revenue and adjusted EBITDA.

After meeting and exceeding guidance for most of 2015 we have a degree of confidence that our business is performing in line with our expectations to be able to give a full year perspective.

Additionally, we believe it's important to set expectations given the level of investments we expect to make throughout 2016 to optimally position the company for long-term success. Before turning to the numbers, I will spend just a minute on the investments we are making.

Over the last 18 months we have been methodically working to update our IP application infrastructure and migrating away from legacy platforms that served us well but have outlived their utility. We are now at the juncture of having to make rather significant investments to continue following our IT roadmap.

Over the next 18 months we expect to spend between $4 million to $6 million between these IT projects. With the majority of that expense incurred for our travel nurse and allied platform. Since these systems are mostly cloud-based we are unable to capitalize the development and migration cost.

And as such, it has impacted our adjusted EBITDA performance. In addition to our IT investments, we will also be continuing to invest heavily in growing our business by hiring different revenue producing individuals such as recruiters, workforce solutions specialist and account managers.

We have seen unprecedented interest in our workforce solutions and feel that by making these investments in 2016 we will best position the company for the longer term.

For the first quarter of 2016, we expect consolidated revenue to be in the $195 million to $198 million range which has seen a year-over-year growth rate 5% to 6% on reported basis or 2% to 4% on a pro forma basis.

While we don't provide specific guidance for segment we expect that the year-over-year growth will come from organic growth in nursing allied in the mid-single digit range, as well as recently acquired Mediscan business which is growing in the low double-digits.

Turning to margins consolidated gross profit margin is expected to be between 25% and 25.5%. The sequential decline is primarily driven by the annual payroll tax reset of between 60 basis points and 70 basis points at the gross profit level. Adjusted EBITDA margins is expected to be between 3.7% and 4.2% for the quarter.

The sequential decline is driven by the annual payroll tax reset which impacts not only direct operating expenses but SG&A as well as the impacts from incremental investments we are making in the business. For the quarter we are expecting to make incremental investments of approximately $1 million.

Excluding the impact from the payroll tax reset and those incremental investments the adjusted EBITDA margin would be approximately 5% to 5.5%, more in line with the trends we experienced in the second half of 2015. Additionally, we expect adjusted earnings per share to be between $0.06 and $0.08 assuming a diluted share count of 32.3 million shares.

The sequential decline is due to the same reasons as the adjusted EBITDA margin as well as amortization for intangible assets acquired in the Mediscan business.

Turning to the full year, we are expecting revenue to be between $820 million and $840 million range representing a full year growth rate of 7% to 9% on a reported basis or 4% to 7% on a pro forma basis. Finally, we expect adjusted EBITDA margins to be between 5.5% to 6% range representing a 60 basis points to 110 basis points improvement our 2015.

Again, the full year will include the effect of these investments which are expected to be $4 million to $6 million for the full year of 2016. Excluding these investments our adjusted EBITDA margin would have been approximately 50 basis points higher or 6% to 6.5% for the full year.

This concludes our prepared remarks and at this point I would like to open up the lines for questions.

Operator?.

Thank you. We will start the question and answer session of today's conference. [Operator Instructions] First question comes from AJ Rice of UBS. Your line is open. .

Thanks and hi everybody. Maybe just first explore a little bit of what happened in the locum tenens business.

Is that, are you describing it Bill, is that with the vendor somehow dropped the ball, did you guys somehow dropped the ball in not taking up those orders somehow? Give me some background on how what happened, happened?.

That wasn't in the locum tenens business that was in the nurse and allied business.

Oh really, okay..

Yes, so the issues we had was with the nurse and allied business and it kind of two fold, one was regarding jobs that weren't getting posted and we probably should have seen that earlier.

We started to see a slippage kind of around the thanksgiving timeframe, wasn't a step change, was kind of gradual, we always have a little bit of noise and little bit of change during the holiday season.

It wasn't really until after Christmas that we realized that this looks like a sustained drop in number of applications and it took us two or three weeks to figure out what the heck was going on. So it just happened at a time of the year where the noise of the normal trends kind of got in the way of us seeing it. We do track it on a regular basis.

We have put some additional controls in place to make sure that we see it more now than we had. We will have a weekly audit process that we will have someone go check every site that has a job posting from us and make sure the process works correctly.

I was already in the process of hiring someone, the lack of a better title is “Chief Recruiting Officer” that will spend their full time on candidate attraction and application process and we put several things in place to make sure we stay on top of this at the top of my head.

But we put several things in place to make sure that we stay on top of this and monitor it going forward. The good news is our application levels are back to where they were before..

Okay. And so the extent the problems of the applications, is there any way to translate that into how much actual business you may have lost or….

It's a lot of business and we have not finished all the analysis because our focus was to get it back on track again. So we have several consultants on board reviewing what happened and why it happened.

I don't know what happened to those applications which is part of what we want to find out, where did they do, did they just go disappear into the Ethernet, do they still exist somewhere, can we capture them back again? But we haven't translated. We do know our conversion rate; we do know generally how many applications it was.

We could extrapolate that into it but we haven't finished that work yet..

Okay. Well then since it was more than Nurse Staffing, I misunderstood that. The local tenants business or the physician business where you're down sequentially and I know you've made some management changes there too. Can you tell us sort of what your assessment is? My perception is the market is doing better than you're doing.

So do you have a sense of what the issues are there and what needs to be addressed?.

Yes. So, you're right, the market is doing better than what we're doing. And what's interesting is I felt pretty good about all the actions we had taken about restructuring the team and how we were going to market and changing up some of the people and upgrading the management team, and I was kind of at a loss as to why we weren't seeing the results.

I went up there at the beginning of the fourth quarter and was reviewing metrics and numbers, and it jumped out at me that our productivity was at an all-time high and it's kind of a strange thing to look at because the team was almost happy that the productivity was at an all-time high.

The problem was it was about 10% higher than we've ever seen it before, and although maybe that's good in some ways it's not a recipe for growth. It means we were squeezing a 15% to 20% out of people from what we've historically been able to get. So it showed to me that we are underinvested in this business.

We had not been adding people along with the demand we'd seen and our ability to fill all the jobs we had. So this is not a silver bullet to solve all the problems in this business. I obviously decided I needed a leadership change as well, but I think this goes a long way to explaining why we weren't getting some of the growth we were getting.

We've now added -- I don't know if you know -- more than 10% additional recruiters into the business since the beginning of the fourth quarter, and I think we're up to the level we expect to be at now. That would be able to drive growth.

We've actually had decent, I shouldn't say decent, we've probably had the best booking two months that we've had in maybe five or six quarters in January and February of this year. It hasn't translated yet into the revenue and it probably won't until the second quarter going forward.

But I feel like we've addressed at least a couple of the big issues here and that we should get this back on track. We're not looking at a huge growth in Physician Staffing in order to achieve our full year of guidance this year.

We're looking at kind of a probably down year-over-year in the first quarter, flattening out in the second and third quarters and a little bit of growth in the fourth quarter, kind of a flat year-over-year kind of number. I hope to do better than that but I've already burnt and I'm already three or four quarters behind where I expect it to be.

So we're not planning on a big step change, but I do believe we've addressed several of the issues..

Okay..

AJ, this is Bill Burns. I'd just to add one more comment to Bill's remarks about the local business in the fourth quarter. The other thing that it's impossible to quantify but we did change their front end systems out during the fourth quarter, so they are now off their legacy system that they had been on and now migrated.

So there was some disruption to it for visibility etcetera but that' now behind us and the team is now working solely on the new platform..

Okay. Maybe I'll throw out one last question on the IT investment you're calling out there, the $4 million to $5 million.

Is that specific for this year or is that a new level of run rate that we should think about going forward? Are you going to just be spending $4 million to $5 million more because of this new system? And is there any, I know you said this was the amount you're expensing given Cloud-based focus etcetera.

Is there any incremental capital dollars that are being allocated to this project as well?.

Let's start with capital. There is not a lot of capital increases in '16 that we're planning on. This is almost all cloud-based systems that will hit our P&L. The reason we wanted to outline, if they were ongoing, it's like recruiter investment. We make recruiter investment all the time.

We're not trying to spell those out specifically because we'll continue to invest in recruiters every quarter as long as the market remain strong, and so you can't kind of pull this out and say well our underlying performance. Those are normal business type investments.

These are exceptional, I hate to say one time, but they're very specific project-based investments that will end when we convert the systems over to the new system, and they will not be ongoing. So we could not do it, and we'd go $4 million to $5 million of adjusted EBITDA this year.

But we've got a 30-year old technology system that has to be upgraded, and at some point I have to do it.

I waited two and a half years because I wanted to make sure the company was in a better place and financially strong to do it, and it's going to take about 18 months to get it done because we don't want to disrupt the business and put a lot of risk into the operation. So it will take us about 18 months and after that time that will stop being spent..

Okay, thanks a lot..

[Operator Instructions] Thank you and our next question is coming from Jeff Silber of BMO. Your line is open..

Thanks so much. Wanted to shift gears towards some of your longer term goals. You mentioned you'll still be on track to hit adjusted EBITDA margins of 8% at the end of next year and then continue on at 10% the end of 2019.

What kind of revenue growth is embedded in those kind of forecast and will we see more of the leverage on the SG&A side or you expect gross margins to go up as well? Thanks..

Yes. We're expecting kind of the 7% to 8% high single-digit growth in order to achieve the 8% and the 10%. The 8% we believe we can achieve without a lot of improvement in gross profit although it will make it easier and maybe bring it forward a little bit if we can see that improvement.

In order to get to the 10% we will need to see a gross profit improvement. We're going to lay that out in our new Investor Relations presentation that will be put up next week on our website that shows the leverage that we need to pull in order to get to the 10%. And increasing our gross profit will be partly through pricing and a lot through mix.

We have businesses that have a significantly higher gross profit than our average gross profit for the company, and in particular our local allied business is over 30% gross profit. It's only $40 million, $45 million today. We want to grow that faster than our other businesses. Our search business has a 60% to 65% gross profit.

We believe we can grow that at double-digits and that will help our overall gross profit. Part of the Mediscan business and particularly the charter school business has well over 30% gross profit. We expect that to grow faster than our other businesses. So there is several things we need to do.

But generally, it will be through about 7% to 8% revenue growth and some gross profit improvement. The 8%, we'll get there without the gross profit improvement but we expect to have some between now and then as well, and the 10% will require some gross profit improvement..

All right, that's great. I'll take a look at that presentation when it's up. I know there has been concern or some concern in the market about the potential tapering effect from ACA.

Are you hearing any of that from your customers?.

We are not so far. We have not seen any slowdown in the level of demands from our customers.

The official numbers are I think 1 million or 1.1 million new people have commended the Affordable Care Act this year but we have not seen the trends at our particular hospitals trend down with either on their hospital admissions or their ambulatory and outpatient services. So no, we have not heard that at all.

Well I hear the concern out there in the market from investors and from analyst but I have not seen it in our customers yet..

Okay, great. And then just some numbers related questions.

For 2016 overall, what should we be modelling for depreciation and amortization, interest expense, tax rate, share count and capital spending?.

That's a very good question and I'm going to let someone else answer that one..

So at this point I wouldn't change much on the interest expense from what we saw on the fourth quarter. It would continue along that trajectory faring us doing some kind of a refinance, and it has been something we've talked about, we continue to look at. We do think that we can bring our overall interest cost down.

But right now we run at about $1.6 million per quarter. That's kind of the level I would suspect going forward through 2016.

Our depreciation amortization for the fourth quarter is a pretty good indication for what you would expect through the next four quarters, though I would say you probably have to top it off by a couple of hundred thousand dollars for the Mediscan acquisition as we only had two months of amortization in the fourth quarter..

And then, sorry, tax rate and capital spending?.

Yes, so the tax rate is one we have said, the rate is impossible to give you at this point in time. We have a full valuation allowance that is still in place.

So, the only thing, the three items that affect our taxes, it's this amortization of indefinite live intangibles, its state local taxes that aren't based on income necessarily and also some international taxes.

Overall, it's between $700,000 and $1 million a quarter, we happened to close Q4 at $700,000 but I have seen it, I expect it will be in that $700,000 to $900,000 per quarter..

And I am sorry, that capital spending?.

So for CapEx again, we don't have any major planned investments, other than, I should point this out. We don't have any big IT investments planned that relate to the system migration that we talked about.

We are doing our normal PC refresh etcetera, so in a normal basis our capital expenditures are between $2 million to $2.5 million on an annual basis. This year though, there will be some anomalies on how it gets reported on the statement of cash flows.

We have our new corporate facility here in Boca that we will be building out over the next two quarter so I would expect to see some additional CapEx related to the lease hold improvements. But the interesting thing is a lot of the money comes from our landlord from tenants improvements as tenants. .

But it shows up on our capital?.

Right, it will effectively be a gross up on the income statement. So I can't give you that but we may have to advance the money to the construction before we receive it back from the landlord but overall for 2016, it should be pretty much a wash. I would expect it this way. .

The real underlying cash capital expenditures would be about what they were last year. But, the actual reported capital expenditure will look higher because of these real estate moves. .

Yes, there is a chance that we will spend a little more than tenant improvement allowances so I will model up to a $1 million above our normal spend of $2.5 million just for this year. .

Okay, makes sense.

And is shares currently keeping it flat with Q1 levels the way to go or?.

Yes, except you have to remember there is an annual date that hits right at the end of the quarter so, going out in to the subsequent quarters there will be several hundred thousand more shares at the end of March that will weigh in to the full quarter of Q3 and Q4..

Okay. Thanks..

And our next question is coming from Tobey Sommer from SunTrust. Your line is open. .

Thank you I am curious. You said that there is slippage in the external sites kind of materialized around thanksgiving.

Was it, is it a BMS kind of related issue and do you plan to continue to work with these external sites? I am curious, what triggered it, what happened, something on their end?.

Yes, so it is actually job board aggregation sites. One of them we have a very strong relationship with and once we discovered what was going on they have been very co-operative and we figured out what the issue was we got it back on track once we discovered it.

I could argue along with what you guys said, we didn't discover it fast enough, regardless of noise that normally happens around the holidays but that's pretty straight forward.

The other one is that we don't work with as much and that's the one where the application went into kind of went into it, we don't where they went and they were redirecting to a third party site. We have not been able to talk to the third party site yet. We don't know what happened to those applications.

The company has been very co-operative though and they have got it back on track again and we are now getting those applications and so I don't have all the answers as to what happened with that site and we are still exploring that.

But they have been very co-operative and they got us back on track again and we are getting the application so I don't believe we will have an issue going forward. I don't know if it's a third part site issue or is this an aggregator issue or just a broken process. But we just don't know yet.

I don't want to speculate too much until we finish the investigation and find out what the whole story was. .

Okay.

This was you sort of posting your jobs in the active recruiting and not necessarily submitting an application for job already?.

One was about job postings that we didn't get them all posted and that got fixed pretty quick. The other one was about applications.

So the first one was about postings and the second one was about applications and when you click you apply, you fill out the normal application, it looks like you're applying, it says ”Thank you for applying to Cross Country Healthcare. We will forward this to the company” and then it went nowhere, well I don't know where it went..

All right, thank you. I appreciate that.

Will the IT investments that you are making mitigate these issues and maybe other potential issues that you kind of think about, like troubleshooting process and have prior systems in your assessments restrained growth as it does seem like you are adding some infrastructure like the person that is going to be monitor this stuff on a weekly basis and I am just trying to get a sense what the goal is of the new IT systems?.

Yes, the goal is several fold. No but it's not that the current systems are inhibiting our growth, they actually do a very good job. They do everything we want them to do.

The issues is that because they are 30 years old and they were green screen systems, they are just not as efficient so first of all, the IT support required maintained that homegrown systems from 30 years ago is significantly higher than what it would be, if we change it out to another cloud based system.

Secondly, we have to have several manual processes built around an old system like that in order to interface with current media and do things the way we want them to and we believe we will get some operating efficiencies by converting from this 30 year old system into a system that has better processes, interfaces with social media, better post jobs more efficiently and keeps track of things.

So I don't think it is inhibiting us, it actually is a good system. It does everything we want it to, but it is very expensive to maintain and we have manual processes built around it that we would like to get rid of, do those are really the goals and look a 30 year old system just isn't sustainable long term.

We need to get ahead of it before it breaks on us, it doesn't look like it will break, it works very well. And we have great people here maintaining it, but in the end it needs to be changed..

Okay, thank you. Just a couple of numbers question from me. What are the trends like in your fill rates of MSP contracts? I am interested, if its impacted your performance there and I was wondering if you could remind us what the organic growth was in 2015 and in 4Q? Thank you..

That's correct, okay. So, MSP fill rates. It's interesting, as the market is really hot, our fill rates, well you have to look at fill rates in two different ways. Our fill rates from our customer's perspective have remained the same at some high 90% level.

Because we fill the jobs for the customers whether we fill them or we sub-contract them but those levels are based on service level agreements which has been the same either before or after the high-level demand is coming. But personally what we feel at the MSP is certainly what went down as the market got tighter and some of that is on purpose.

We have some places where we can put a nurse that is more financially beneficial to us or sometimes we'd rather sub certain positions at our MSPs so that we could put our nurses somewhere else that makes more sense to us. So it did go down quite a bit, maybe 10% after the market got really tight.

They have actually gone up couple of quarters little but again as we put more focus on them. And started to make sure we maintain a certain level of market share at our MSPs but overall it's reduced from before the market got hot but it's been about steady since then..

Yes, and then onto the second part of your question on the underlying results for the business.

If you were to look at our business on a strictly pro forma basis which we were to include Mediscan for the full year and exclude our Education business for the full year, we would have been a little north of $785 million in revenue which is about a 4% increase over the prior year period had the full year of Mediscan been included and the full year education been excluded.

And just some color on that. That implies the organic growth on the nurse and allied segment is in the mid-to-upper single digits, our search business would have grown at about 22% and again physician bringing down the overall average with the high single-digit decline year-over-year. .

Thank you..

Thank you and our next question is coming from Bill Sutherland of Emerging Growth Equities, your line is open. .

Thanks, good morning. I am curious on Mediscan.

I know they have a seasonality that is pronounced in terms of lower head count to third quarter, so is that going to be noticeable in your quarterly phasing?.

Well the certainly do. They're in the summer months. Obviously when you do a lot of business at school systems, you'll see a slowdown. So half of their businesses is in schools that we will see a slowdown in the summer. I'm not sure it's going to be a huge, huge impact with our ability....

Yes. I mean right now it's roughly half the Mediscan business services the education space. So there will definitely be a seasonal impact in the third quarter. I just pointed out that that's also happens to be the quarter that is seasonally the strongest in our physician business.

So overall to the combined company I don't think we'll see a dramatic change in seasonality from quarter to quarter..

Okay. And then on the Mediscan growth that you all called out, looking for low double-digit in Q1.

Is that kind of the same kind of rate that we'd expect for the full year?.

Low double-digit growth is that what you said? Yes, we expect them to grow at double-digits and it's driven a lot right now by the public school and their charter school business, but even their health care staffing we expect to have decent growth as well because we have offer services that they didn't have before and there's some cross selling opportunity.

So we're pretty bullish on their ability to grow at double-digits..

Great.

And then on workforce solutions, I know it's early to call it out but can you give some feel on the size and impact that it could start to have in the '16 model or maybe looking a little bit further out?.

Yes, so winning four MSPs at the beginning of the year is a second revenue thing.

So I know people maybe a little bit concern that we're guiding to not great revenue in Q1 but we're still looking at $820,000 to $840,000 for the year which applies some pretty good sequential growth throughout the year, and some of that is driven by some of these new winds.

A couple of these MSPs we won are pretty large and we expect to have a decent impact on the second half.

The one that you can extrapolate a little bit better is the 500 incremental positions we expect to outsource through our OWS and that's, I don't know if we want to give a range on that, that's probably a $5 million to $10 million improvement in the second half of the year just from those two projects alone. The RPO is less of an issue.

It's hundreds of thousands of dollars a quarter, it's not millions of dollars. The two big ones will be the new MSP wins and the optimal workforce solutions wins..

Okay. And then just, this is just a clarification. Maybe I didn't hear correctly how the search results in the Q4 because it sounded like they were soft but you directed us to think about low double-digit growth going forward..

Yes, I'm a little disappointed that when we got into the second and third quarter of 2015 I had pushed management to make sure that we, we knew that when we got to the fourth quarter this year we were lapping at either 38% or 40% year-over-year growth.

So I pushed them hard to get their investments in place and make the plans so that we could continue to grow even as we lap that 40% year-over-year growth. You notice we did really, really well on the third quarter last year.

Part of the reason we did is we did not get the investments in the MDA the way we should have and we didn't get investments into our search business the way we should have. So they just didn't get the investments in soon enough. The business is much better run. There is good enough demand there. We just didn't get the people in quick enough.

So we saw a little decline in Q4, we'll see a little bit of softness in Q1 but it will bounce back again. It just took us a while to get the investments in..

Okay. Thank you..

Thank you. Our next question is coming from Randy Reece of Avondale Partners. Your line is open..

Good morning..

Good morning, Randy..

First of all, I wanted to make sure I understood your EBITDA margin targets.

When you say 8% by 2017, 10% by 2019, are you talking about a fourth quarter number in those?.

Yes, we are talking about a fourth quarter number. There's a chance the 8% for the fourth quarter of '17 may come a quarter early because we were a little bit ahead this year in the run rate basis and the projects that we're doing, the investments we're making will make an impact in the second half.

But right now we're sticking to the fourth quarter of '17 and the fourth quarter of '19. So these are run rate numbers for that whole quarter..

And on the subject of job or the aggregators, it would be natural if your share of leads and share of applications from aggregators had risen over the last couple of years.

So just wondering if you could give us a feel for how much your lead flow might have shifted away from other sources and coming from aggregators over the past couple of years just to get a sense of why disruption would be significant..

I don't have those numbers. I don't know what the total jobs are through aggregators, and so I don't know what my market share is. I don't think I have any of that information..

Yes, and I don't have the data in front of me on the mix of our source of app whether it's online versus, I think word of mouth and referrals are the highest but I don't know the exact percentage..

I'm sorry, Randy, we don't have that handy with us..

So was there a disruption in your feed to in aggregator from your own job boards or, I'm trying to get a better understanding of why your job listings would have disappeared from that aggregator..

Yes. We feed one of those companies the jobs directly, and there was no disruption on that. It was just about how they got posted and what the kind of algorithm was from a quality and duplicate standpoint. We got that kind of back on track again fairly quickly. That was an easy one to fix.

It just took longer than we should have taken to figure out what the problem was. The second one was more about the application process and I still don't know what happened.

It looked very reasonable, our jobs are there, our logo is there, you click apply, it looks like you're applying, it says we're forwarding this to Cross Country Healthcare and then we never get it. So, that's fixed now but I just don't know what happened during that timeframe when we weren't getting those applications..

All right. Thank you..

Our next question is coming Matt Blazei from Lake Street Capital Markets. Your line is open..

Thanks for taking my question, guys. Again I'm following up on the search business again which has been growing as you said 30%. I think you're hoping to see that business to, that previously you're hoping to see that business do $16 million to $18 million in '16.

It's pretty precipitous drop off from plus 30 to negative seven, and obviously you're concerned you stated that's going to continue into Q1.

What should we think off in terms of the growth rate of that business going forward?.

It should be low double-digit growth, and it should be able to maintain a 15% to 20% contribution level. Even if it has a slower Q1 that I'd like it to have, there is always a little bit of lumpiness in search. Anyway it's not quite as trendable as the staffing businesses. But it's well-run, it's got a good team there. We see the demands.

It will bounce back again..

Yes, and I would just point you back. If you look back to 2014 when we began making more significant investments to it it's about two quarter ramp. It took about two quarters to get the growth. So that's why we're saying Q1 for this year will be a little bit softer..

Currently the business started in the second quarter of '14 and by two quarters later got the growth back to the double-digit, actually to 40% year-over-year. So again just getting these investments in later than we anticipated, it is a kind of a couple of quarter process..

And just to again clarify with your guidance, and say the midpoint of your guidance for Q1 you're looking for about $10 million in year-over-year revenue growth. I would assume that the Mediscan acquisition alone accounts for at least that much if not more given their growth rate..

Yes, but you lose the education business though..

Right.

So your guidance, I think you had said pro forma was up 3% or 6%?.

2% to 4%..

2% to 4%, correct guidance. Okay.

And can you talk about your expectations for free cash flow for 2016?.

Yes, we've obviously said that our free cash flow we believe should approximate EBITDA minus cash interest, cash taxes and CapEx. So I think we've kind of given you the CapEx we expect for the year.

The interest, I think our cash interest is about $300,000 left in the reported interest because of the amortization of debt issuance cost and original issued discounts. So we probably have about $1.2 million to $1.3 million of cash interest per quarter that you would model in there.

And then, cash flow from operations, if you look at 2015 we generate about $18 million on about $37 million to $38 million in adjusted EBITDA so a little behind but we did have a slippage in our DSO. And, so that's become a very big focus for us as I mentioned in the earlier portion of the calls we believe we got that back on track now.

There has been a much more concerted focus on driving collections so I would expect us to bring the DSO back in line..

We expect pretty strong cash flow this year. If we, I mean our guidance for the full year estimates another $10 million of adjusted EBITDA for the year into the high $40 million to $50 million so we should have a very decent cash flow year..

And are these incremental IT expenses, should we expect that to be a onetime 2016 issue or is that continue to be a step in the SG&A costs in 2017 as well?.

Yes, there will be a tale to this in the early part of 2017 and right now we are thinking this is an 18 month project. Some projects wrap up sooner in 2016. Again, earlier in the call I reference for IT on $4 million to $6 million on these projects. We said about $4 million to $5 million will be spent this year.

So, you can kind of extrapolate that $2 million in 2017 may trickle through. .

I see, okay thank you guys. .

Thank you and our last question is from Mitra Ramgopal from Sidoti, your line is open.

Yes, hi good morning.

I know you can't qualify the potential loss of business regarding the project delays and vendor issues but your best sense, would that have gotten you sort of the high-end of your guidance for the fourth quarter if you look back at it?.

Actually, the revenue guidance missing Q4 to answer what we have one if we wanted to in physician staffing, we would have been above the consensus but I think, yes, it was still, I do think that the loss from the lack of applications from nurse and allied may have also gotten, if we have gotten both, if we had gotten physician staffing on track and the revenue we would have gotten from the additional applications we would have exceeded consensus in the fourth quarter.

.

Thanks and if you could remind us again coming back to the glitches with the vendors, we mean roughly, how many vendors you use and how comfortable you are to something like this if it happens again?.

Well, with the controls we are putting in place I feel pretty good that it won't happen again but it looks like it really is an isolated incident that it's just a weird set of circumstances that I don't see happening again especially with some better controls and monitoring of what's happening with our jobs and our applications.

So no, I don't anticipate it happening again. I feel pretty good that we have everything in place that we need to ensure that it doesn't happen again. .

Thank you, and if you look at the end of the year in terms of MSP, roughly what percentage of your business is that and the rate of getting for a quarter in terms of the goal where do you see that by the end of 2017 when you are looking to get that 8% EBITDA margin?.

With the fourth quarter our MSP business represented almost 34% of nurse and allied and 27% of total consolidated revenue. .

And I do think, that will start to go up a little bit. As we have now exited our education business which had nothing to do with MSPs and brought on Mediscan which may be part of some of the MSPs I expect those percentages will certainly increase over the next couple of years..

Very good, thanks.

And then finally, looking at the expectation of getting from 8% to 10% in terms of margins by the end of 2019, how much of that really is going to be more about internal operational improvement versus being able to grow at a top line and mix?.

No, I mean we need some operational improvement which is why we are investing in these technology changes but most of this is about revenue growth, leverage from revenue growth and improvement in our gross products either through pricing or mix, that's where really we come from..

Okay, thanks for taking the questions..

Okay, thanks everyone, we appreciate it. Thank you for joining us this morning. We will update you with our first quarter results in early May. Thank you. .

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