Bill Grubbs - CEO Bill Burns - CFO.

Brandon Fazio - UBS Tobey Sommer - SunTrust Bill Sutherland - Emerging Growth Equities Henry Chien - BMO Randall Reece - Avondale Partners Matt Blazei - Lake Street Mitra Ramgopal - Sidoti.

Good morning, ladies and gentlemen, and welcome to the Cross Country Healthcare conference call for the first quarter of 2016. This call is being simultaneously webcast live.

A replay of this call will also be available until May 19, 2016, and can be accessed either on the company's website or by dialing 800-678-0740 for domestic calls and 402-998-0871 for international calls and by entering the pass-code 2016. I will now turn the call over to Mr. Bill Burns, Cross Country Healthcare's Chief Financial Officer.

Please go ahead, sir..

Thank you and good morning, everyone. With me today is our Chief Executive Officer, Bill Grubbs. This call will include a discussion of our first quarter results for 2016 as disclosed in our press release and will also include a discussion of our financial outlook for the second quarter and remainder 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 2015 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 US 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 trends actually had occurred at the start of the periods impacted.

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

Thank you, Bill. Thank you, everyone, for joining us this morning. I'm very pleased with how 2016 has started. Revenue is in line with guidance and we remain on track for the full-year revenue of $820 million to $840 million that we guided to on our last call.

And in the first quarter of 2016, because of strong pricing, we exceeded guidance for gross profit margin, adjusted EBITDA margin, and adjusted EPS. Overall, we've had a solid start to the year that keeps us on track for our targets of 8% adjusted EBITDA by the fourth quarter of 2017 and 10% by the fourth quarter of 2019.

As long as the economy remains stable, we believe we can achieve $1 billion in revenue and $100 million in adjusted EBITDA for the full year 2020. Demand for our services remains very strong, still near all-time historic highs. And in fact, we saw an increase in orders in March with that trend continuing quarter to date.

Some of this increase has been generally strong market demand, but some of it is specific to our MSP and EMR wins in Q4 of last year. And in addition, this year, we are seeing even stronger demand for all of our workforce solution services.

Year to date, we've won seven new managed service programs, one electronic medical record project, two recruitment process outsourcing deals, and two new optimal workforce solutions, OWS programs, which is our outsourcing service.

This is certainly the most momentum we've seen for our workforce solutions since I've been CEO and should support stronger revenue growth in the second half of the year and going into 2017. Because of the continued strong demand and these new customer wins, we're putting significantly more focus on attracting new candidates.

Of course, we've been focused on that since the high level of demand started in the third quarter of 2014, but we are stepping that up with additional recruiters and new initiatives that are being generated with the help of outside experts engaged to ensure we are using best practices, we're being more innovative, and we're creating differentiation for Cross Country Healthcare.

Our revenue growth is being generated completely by our nurse and allied segment, led by strong pricing in our legacy business and strong volume growth in Mediscan. But before I get into nurse and allied, let me talk about the two businesses that did not contribute to our growth this quarter.

First is our physician staffing segment, which continues to experience declining revenue. We are now four quarters behind my original plan to see this business start to grow. As you know, we made a management change in this business and the new President started in April.

As I interviewed executives for this role, I obtained a lot of information about the market that validated the actions we've taken and the initiatives underway to get this business back on track. I was pleased to know that we shouldn't need wholesale changes in the business to be successful.

We need solid leadership, additional investments, and strong execution. I believe the new President will be able to make that happen and I have confidence that this business will show improvements as we get into the second half of 2016.

Secondly, our search business had a slow start to the year with revenue declines and a loss at the contribution line. I believe we have the right people and strategies in place and I believe this business will get back to double-digit growth and contribution levels later in the year.

So returning to our nurse and allied segment, we saw very strong double-digit revenue growth from Mediscan, led by its public and charter school businesses. The management team has fit in well with the company and the small amount of integration required for the back-office functions is progressing well.

I expect this business to continue with double-digit organic revenue growth throughout 2016. Our legacy nurse and allied business had slower-than-expected volume growth due to the application issues we previously identified. However, it had very strong pricing increase this quarter.

Overall, this business experienced a 5.4% increase in bill rates, led by travel nursing at 8.9%. The issue we experienced with applications were resolved in February. So with this level of bill rate improvement, any incremental volume increases we experience bodes well for this business in Q2, but even more so in the second half.

So to wrap up, we expect to continue to make great progress on improving the company's performance in 2016. I still remain bullish on the longer-term opportunities with physician staffing and I believe the new President will help us to start showing improved progress this year.

In our other human capital management segment, our search business should be back on track and we are seeing stronger trends in Q2 than we saw in Q1. And lastly, we certainly are seeing strength in our legacy nurse and allied business.

New customer wins, an increased focus on candidates, and strong bill rate trends should mean a very good year for our largest business. And Mediscan has started the year strong and I expect they will continue to build on that momentum going forward and especially as we get into the new school year.

So we believe we are on track for our full-year guidance and on track for the adjusted EBITDA goals previously identified for 2017 and 2019. It's always nice to start a year slightly ahead of expectations, especially with the momentum we are seeing in orders and new customer wins.

Before I turn to call over to Bill Burns, I would like to make a couple of additional comments. Today, I feel as good about where we are as a company than at any time since I've been here. It may not show completely in the numbers yet, but there are a lot of things coming together that give me further confidence in the company going forward.

We have a strong management team, now supplemented with the new addition at physician staffing. All three acquisitions that we've made are performing well, led by our newest Mediscan acquisition that has provided new markets for expansion and growth.

All of our initiatives in workforce solutions are coming together and we're winning new deals even ahead of our own targets and goals. We're seeing an increase in candidate flow that supports these sales initiatives. Our internal projects to improve our processes and create efficiencies are on track.

And as a result, we are seeing gross margin and adjusted EBITDA margin expansion in line with our medium to long-term goals. Taking a company that was not growing and not making a profit to where we are today is a lot of work.

But that work is now starting to pay off and we will start to see it in our numbers as we continue to execute well and get all of our businesses back to where they need to be. Let me turn the call over to Bill Burns to review the quarter in more detail..

Thanks, Bill. The first quarter of 2016 certainly continues our trend for delivering consistent results within or above our expectations. Pricing remains strong in all of our businesses and helped to improve and drive a gross profit margin of 26%. That's 50 basis points above the high end of our guidance.

Additionally, we saw continued strength in our largest business, nurse and allied staffing, with demand remaining near all-time historic levels. Turning to the quarter, total revenue was $196.6 million, up 6% from the prior year and up 2% sequentially.

The year-over-year increase was driven entirely by growth in nurse and allied staffing as well as the impact from Mediscan acquisition. On a pro forma basis, revenue was up 3% from the prior year, with nurse and allied staffing growing approximately 6%.

Our recent acquisition of Mediscan has continued to perform well, with revenue growing by 17% over the prior year. Gross profit margin for the quarter was 26%, up 70 basis points from the prior year and down 10 basis points sequentially.

The year-over-year improvement was entirely driven by nurse and allied staffing, which experienced a stronger year-over-year price increase than anticipated. On a pro forma basis, gross profit margins improved nearly 170 basis points from the prior year, reflecting a more than 200-basis-point improvement in our nurse and allied gross margins.

Moving down the income statement, SG&A for the quarter was $42.9 million or 22% of revenue, representing an increase of 4% year-over-year. As we mentioned last quarter, we expected to spend approximately $1 million in the first quarter on our IT infrastructure and other investments.

Excluding the impact from those investments, the year-over-year increase was less than 3% and primarily attributable to an increase in revenue-producing headcount. Sequentially, SG&A increased 7%, primarily due to the investments as well as the impact from the annual payroll tax reset.

Adjusted EBITDA was $8.5 million, representing a 38% increase over the prior year. The adjusted EBITDA margin was 4.3%, above the high end of our guidance range for the quarter. Excluding the impact of the investments and the impact of the payroll tax reset, the adjusted EBITDA margin would have actually been about 5.5% for the quarter.

Below adjusted EBITDA, we recorded a $16.4 million non-cash gain on the change in the fair value of the embedded derivative from our convertible notes. As a reminder, every dollar movement in our share price results in approximately a $3 million change to the derivative.

Additionally, we recorded approximately $300,000 for the accretion of the contingent consideration related to the Mediscan acquisition. As reported in the tables to our press release, these amounts are excluded from adjusted EBITDA and adjusted EPS.

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

Depreciation and amortization expense was approximately $2.4 million, which increased $500,000 year-over-year and $200,000 sequentially, entirely due to the impact from the Mediscan acquisition.

Income tax expense for the quarter was $800,000 and is primarily related to the impact from the amortization of indefinite lived intangible assets for tax purposes. Net income attributable to common shareholders was $19 million or $0.09 per diluted share as compared to net income in the prior year period of $2.9 million or $0.05 per share.

Lastly, adjusted EPS was $0.09, also above the high end of our guidance range compared with $0.03 in the prior year and $0.18 in the prior quarter. Next let me review the results for our three business segments. Revenue for our nurse and allied segment was $168.8 million for the quarter, up 13% year-over-year.

Revenue was up 6% on a pro forma basis, with the majority of the growth coming from improved pricing, with bill rates up more than 5%. Specific to travel nursing, bill rates were up by nearly 9%, representing our highest growth in a single quarter since beginning the turnaround.

On a sequential basis, segment revenue was up 4%, primarily due to the impact of the Mediscan acquisition as well as improved pricing. We averaged 6,817 field FTEs for the quarter, up 6% from the prior year and up slightly sequentially. Revenue per FTE per day was $272, up 6% year-over-year and up 5% sequentially.

Segment contribution income for the quarter was $16.8 million, representing a 9.9% contribution margin, up 260 basis points year-over-year and 40 basis points sequentially. Turning next to our physician staffing segment, revenue was $24.5 million, down 11% from the prior year and down 10% sequentially.

Both the year-over-year and sequential declines were entirely due to a lower volume of days filled. Generally, pricing remained strong, with a modest increase across most specialties. Segment contribution income for the quarter was $1.6 million, representing a 6.4% contribution margin.

The year-over-year and sequential declines for this business were largely attributable to reduced operating leverage on the lower revenue.

Finally, revenue from the other human capital management services segment, which now only includes our search business, was $3.4 million, representing a decline of 65% over the prior year, primarily due to the divestiture of our education seminar business in the third quarter of 2015.

On a pro forma basis, search revenue declined 13% year-over-year and 11% sequentially. Both the year-over-year and sequential decreases in search revenue were primarily attributable to declines in physician search.

While growth in search has slowed for the last two quarters, we continue to believe this business will return to growth in the low double digits later this year. Segment contribution income was a loss of approximately $100,000 as compared with income of $600,000 in the prior year and $100,000 in the prior quarter.

Turning to cash, we ended the quarter with $1.9 million of cash and $61 million in outstanding debt at par. Generally, we use more cash in the first quarter due to the impact from payroll taxes and disbursements for year-end compensation.

However, due to the strength in collections during the quarter, we generated approximately $2.6 million in operating cash. Sequentially, collections were up 15% and our days sales outstanding was 66 days, which was four days lower than the prior quarter.

A point worth mentioning on our DSO is that it includes amounts billed on behalf of our subcontractors through our MSP relationships. Our net DSO, which excludes amounts owed to subcontractors, is 57 days.

Going forward we will continue to report our DSO, but we will also include our net DSO since that's more indicative of the company's payment terms with its customers. Capital expenditures were approximately $1 million, in line with our expectations.

Total borrowings under our senior credit facility were $6 million as of the end of the period, leaving approximately $48 million of availability. This brings me to our guidance.

For the second quarter of 2016, we expect consolidated revenue to be in the $200 million to $205 million range, which assumes a year-over-year growth rate of 4% to 6% on a reported basis or 2% to 4% on a pro forma basis.

While we don't provide specific guidance for segments, we expect our legacy nurse and allied business to continue to grow in the mid-single-digit range and our Mediscan business to grow in the low double digits.

Consolidated growth continues to be impacted by underperformance in our physician staffing business, which is expected to decline again in the second quarter. Turning to margins, consolidated gross profit margin is expected to be between 26.3% and 26.8%, and adjusted EBITDA margin is expected to be between 5% and 5.5%.

Assumed in our guidance is an estimated $1 million of continued investments. From an EPS perspective, we expect adjusted EPS to be between $0.12 and $0.14, assuming a diluted share count of 32.8 million shares.

And lastly, for the full year, we are reaffirming our guidance for revenue to be in the $820 million to $840 million range, with an adjusted EBITDA margin of 5.5% to 6%. Excluding the estimated $4 million to $5 million of investments planned for 2016, our adjusted EBITDA margin would have been approximately 50 basis points higher or 6% to 6.5%.

This assumes the majority of the investments we are making are operating expenses, since cloud-based solutions are typically not capitalized. As we continue to negotiate our agreements with vendors, there's a chance that some of these costs may ultimately qualify for capitalization.

At this point, however, we continue to reflect those costs as expense in our full-year guidance. This concludes our prepared remarks. And at this point, I'd like to open up the lines for questions.

Operator?.

Thank you. [Operator Instructions] Our first is coming from A.J. Rice from UBS. Your line is now open..

Hi, this is Brandon in for A.J. here. Just two questions. First on your guidance for adjusted EBITDA implies about $45 million to $50 million this year.

How much operating cash flow you think you are going to get out of that? And then second, some of the for-profit providers are talking about trying to limit increases in contract labor, that sort of stuff you hear from a lot of the public players.

Have you seen any impact from that? I mean it sounds like you haven't based on your commentary, but just your general thoughts on market demand and what some of the providers are trying to do to kind of handle some of the increases in contract labor. Thanks..

So, this is Bill Grubbs. I'll answer the second question first and then I'll let Bill answer the cash question. We have not seen any impact of any of our customers trying to pull back on their dependence on contract labor. We know that they would like to do that and we've seen some of them be successful at that.

But because we are big and we are national, we look at the market as a whole. So any company that may have been able to hire some additional core staff to offset their dependence on contingent labor really is just taking those resources from somewhere else where the demand just pops up at another hospital system.

So our level of demand has actually gone up since the beginning of the year and we have not seen any impact from those initiatives. The market - the supply side in our market is fixed, so it's really - it’s hard for them to make up for it with this level of demand right now..

And, Brandon, just to answer your question on operating cash, as you know, we don't historically provide guidance on cash flow, but we do talk about how we expect cash to be generated in the business.

We usually look at adjusted EBITDA and then would say that's a good proxy for our cash generation capabilities when you back out cash interest and taxes. So cash interest runs about $1.1 million to $1.2 million per quarter and taxes are somewhere between $400,000 and $600,000 per quarter.

So if you look at those numbers, that will give you a good estimate as to how we think cash flow should be coming in for the full year. The only things that will upset that trend or that formula is we do have some significant tenant improvements that we'll be making in our corporate offices.

And the way the tenant improvement allowances will ultimately flow through the statement of cash flows, the inflows of money from the landlords will be additive to our operating cash, but the outflows will be shown as CapEx. So just to give you that for a modeling question..

Okay. Thanks, guys..

Next question coming is coming from Tobey Sommer from SunTrust. Your line is now open..

Thanks. I was hoping you could expand a little bit on the pickup in demand for your various workforce solutions? Kind of some context as to what you think the drivers are of that and what the competitive set looks like for those kind of services versus the other staffing businesses? Thanks..

Yeah, I think I understand the question. We have been winning some new customers, and so I'm not surprised that our order numbers are going up. And I think we'll continue to see that with the new wins that we've had in the first four months of this year. I don't remember the second part of the question..

So what do you think is prompting customers to turn towards workforce solutions and then, maybe if you could comment on the differences in the competitors that you compete with for those services versus staffing generally?.

Yeah, so we're seeing, I mean it's almost to Brandon's question. The growth in our recruitment process outsourcing business is kind of related to Brandon's question about customers trying to be less dependent on contingent labor.

So us helping them to hire more of their core staff, that makes sense to me and I think we'll continue to win more recruitment process outsourcing deals going forward. The MSPs, it's just hard to get commitments from vendors in this market where rates are going up and there's a huge amount of demand.

And an MSP program kind of gets control of that process and gets a commitment to be able to make sure that your jobs get the focus they desire, they need and to get filled.

So I think if the market stays with this level of demand and the shortness of supply, an MSP is a logical solution for a larger hospital system and even some of the smaller to medium-sized ones to get control of their contingent labor program and make sure that they get a commitment to get the resources by the bedside.

We are seeing - obviously we see competition out there. But we've made investments in our workforce solutions business. And as I said in my kind of closing additional comments at the end of my part of the call is that's kind of all coming together now.

And so although I think we're seeing the same level of competition that we've always seen, we've just gotten better at it. We've upgraded our staff. We have more subject matter exports experts. We are better at getting out there and winning these things. So I think we are just kind of coming into our own.

All the things that I've been talking about over the last couple of years are kind of all coming together now, which is a nice thing to see..

Thanks. Bill, from a strategic standpoint, you have expressed some optimism here on the call that things are kind of coming together in the businesses that have been underperforming or seem like they are showing signs of being on the mend as well.

How do you strategically think about what you want to do next with your capital over the next year or two to kind of even improve the Company's positioning longer term?.

So I think at this point, as long as the economy remains stable and we're not seeing any slowdown, I think the first use of our capital would be additional acquisitions. All three of the acquisitions we've done have been a great addition to our organization, they've continued to perform well after the fact. We've integrated them very well.

There's been a good cultural synergy there, and we are getting some benefits of expanded service lines, so I think acquisitions would be the first one. We have not talked with the Board about share buybacks, and I suppose it depends on where our share price stays. That could be a possibility.

But I think acquisitions is probably the number one use for our capital as we go forward..

Would it be applying things towards workforce solutions or would staffing be of equal interest to you?.

Yes. So the goal for us to get to our 10% is by making sure that we grow our gross profit from what we are guiding in Q2 to over 26%, maybe 26.3% to 26.8%. I need to get that to at least 28% or 29% over the next couple years to target my 10%.

So I would be focusing my acquisition money on workforce solutions, but also some of the staffing businesses that have higher margins.

Perhaps some additional search and perm placement business, my local allied business that runs at 30%, 31% gross profit today, my recruitment process outsourcing business that runs above 40%, and maybe some more school business with our charter school business that runs between 35% and 40% gross profit.

So I would target it in an area that helps us to achieve those financial goals..

Thank you. And then my last question has to do with the bill rates that you described in your prepared remarks. If I jotted it down correctly, overall bill rate is in the 5% range and 9% growth in travel nurse.

Could you describe that travel nurse like what the composition is and why it's so high, and if you think that both the overall and the travel nurse bill rates, what your expectation is as we work through the year?.

As you know, the second quarter of last year really was the first quarter in a long time we did not have good bill rate expansion and - bill rate and pay spread expansion. So we've been working on that since then. So over the last couple of quarters, Q3 and Q4 of last year, we made the big push to try to get more in line with the market.

And I think we've just seen that kind of all come together. But you're right, the overall nurse and allied - sorry, our legacy nurse and allied, not including Mediscan, the bill rates were up 5.4%, travel nursing was up 8.9%, our branch operations, which is per diem and local allied, was up 5.6%.

And so it's just really the initiatives that we started in Q3 of last year are now coming back. And I think we are just kind of leveling off in line with the market at this point. And we have had an increase in electronic medical records business. We're back up to about $4 million in Q1 and those tend to be a little bit higher bill rates as well..

So there's a little bit of a mix difference that's boosting the growth rates in bill rates?.

A little bit, yes..

And then do you think the mid-single digits is something that we can expect for the next several quarters?.

Yes. As we looked out for the full year to confirm - to see if we could confirm our full-year guidance, we looked at the rates in our legacy nurse and allied business, and we believe they will be able to stay in the mid-single digits, a little bit higher than that..

Thanks for your help..

Next question coming from Bill Sutherland from Emerging Growth Equities. Your line is now open..

Thanks. Good morning.

I may have missed this number, Bill Burns, but on the HCM pro forma growth in the first quarter, did you call that out?.

Sorry, the other human capital, the search business was down year-over-year, bear with me one second, I think it was down 13% year --..

Pro forma is the same as what search grew. There were only two businesses and one is gone..

Okay. So pro forma is minus 13%..

Right..

Okay. And then what's - I know you don't tend to break these out, but because this is kind of a big swing factor - well, it's not a big swing factor, but the numbers are moving around a lot.

Pro forma for this line implied in your guidance for Q2?.

The pro forma for guidance was I believe 2 to 4 - was that sequential, I got pulled off a second, I'm sorry..

No, that's fine. It was 2% to 4%. Yes..

Okay..

And then what's implied for HCM - other HCM in that 2% to 4%?.

It would be - it's sequentially up slightly, and it's probably going to be down a little bit on a year-over-year basis. Again, the numbers are pretty small..

Okay. Bill Grubbs, I was interested in your commentary about bringing in some help to - in terms of getting the recruiting muscle built up some more and the best practices that you are evaluating. I wonder if you could give us some more color on all that..

A little bit. I'm not sure on a public call I want to give away too much competitive information. But I think that for a long time, we've known that we need to step up our attraction of candidates.

And so looking at our internal resources and some of the initiatives we've been making, we thought it was worthwhile to go out and find out what we knew well and what we didn't know well.

And we brought in several companies to help us with even basic things, like search engine optimization and even maybe a better use of social media and texting and other recruiting initiatives that we had underway.

And we found out that we were really, really good at some things and we found out that there were some things we just didn't know as well as we thought we did. So we're going to engage these experts to make sure we have a well-rounded industry standard or better-than-industry standard process for attracting candidates.

So that's probably about all I can say about it at this point..

All right.

And you are looking at - I think you said mid-single digit for organic nurse and allied going forward, is that accurate?.

Into the second quarter, yes..

Our legacy nurse and allied, yes. Mediscan will grow at double-digits..

So the blend is little higher single-digit? Okay. And I think that's it for me. Thanks..

Next question Jeff Silber from BMO. Your line is now open..

Hey, good morning, it's Henry Chien calling for Jeff. I just had a question on the margins coming a bit above your prior guidance in the quarter. Is there a way that you can break out some of that upside and how much of it is related to the workforce solution services that you mentioned? Just trying to understand some of the drivers..

I think a lot of it has to do with the pricing improvement. I mean, I think our legacy nurse and allied business, gross margin was up 200 basis points year over year. That's a big part of the driver.

So our pricing came in stronger than we had originally anticipated, even though we knew we had these initiatives last a couple of quarters, but it really came in strong. I think that's probably the biggest factor..

The incremental workforce solutions, like RPO and things like that are contributing, but very small amounts through the quarter, so it's predominantly the bill rate increase..

The increase of EMR probably helped as well..

Okay. That's helpful.

And can you remind us in terms of the nurse and allied segment, how much of that is travel nurse?.

Bill?.

Yes, I know, one second. It's about half the revenue is probably the coming from travel nurse, a little bit more, maybe like 55% of it is right in the travel nurse business for the quarter..

That's not of total nurse and allied. That's without Mediscan. Mediscan is - the new access management is included in nurse and allied, but if you look at the old legacy nurse and allied, it's a little over 50%, I think..

It's a little over 50% on the legacy and it's about 50% on the combined..

Okay. Over 50% on the legacy and 50% on the combined with Mediscan..

Yes..

Got it. Okay. Thanks a lot..

Next question Randall Reece from Avondale Partners. Your line is now open..

Morning.

I was wondering if you - I know it is kind of hard to peg, but if you have an idea of how much your candidate flow issues affected volume in the first quarter and how quickly you think that that impact will reverse?.

each nurse that we place is, I don't know, $30,000 or $40,000 of revenue in a quarter. But most new applicants that come to us end up working an average of three assignments. So if we didn't make a placement in Q1, that has a little bit of hangover in Q2 and Q3 because they would have been renewed on average at least two times.

I think that's probably all I can say about it. I think it was probably dozens of placements, and there will be a little bit of a hangover in Q2 and Q3. But we didn't talk about it on purpose because really, we fixed the issue. Applications are up. Demand is up. We may offset some of that hangover anyway. Just from normal business..

In terms of your overall candidate acquisition process, what have you already changed?.

Well, again, I think it's hard to talk on a public call about the specifics of what we're doing to try to create differentiation and best practices in the marketplace. But we have made some significant changes that we are starting to see the benefits from.

So we have a few more to implement over the next couple of months, but we are seeing good results from the initiatives we've started so far. And we have a few more to implement going forward..

Did the candidate flow issues affect any specific segment of your business more than any other?.

It affected the travel nursing and the branch per diem nursing the most. I think we probably bounced back faster on the travel nursing than we did on the branch, but it's all back to the right levels. The branches were a little bit more affected than the travel nursing, but those are the two areas where it had the biggest effect..

Very good. Thank you very much..

Next question coming from Matt Blazei from Lake Street. Your line is now open..

Thank you. Bill, I'm curious on the physician staffing side. I think you mentioned that you expected it to return to a year-over-year growth profile sometime in the second half of the year from where it is.

Can you talk about how that's going to happen and what changes are being made?.

So I had originally said that when we announced the fourth quarter, I was hoping for - we knew the Q1 wouldn't be great. I was hoping for an improved Q2, and then starting to see stability and maybe some small growth by the time we got through the second half. I may call that off a little bit now.

We are not going to call off our full-year numbers because we can make up for that in other places. But I need the new president - he just started the middle of April. He's been doing a lot of great stuff, but I think I need to give him a little bit of a chance to get the business growing. So we'll have another decline in revenue in Q2.

I think we'll see improvement, is the way I worded it this quarter, in the second half the year. But whether the full second half gets back to growth or not, I don't know. If it gets back to flat year over year, I think I'd be fairly happy at this point..

And then you also mentioned that you expected the search business to come back to double-digit growth in the second half.

Is that correct?.

The search business is interesting. First of all, because it's such a small number and because it's search, it can be lumpy. At their first quarter, they just had a really, really bad January and it just made for a bad quarter. But we are seeing better trends in Q2.

This is still a little bit of a hangover for not getting our investments in quick enough before the beginning of Q4 of last year. So we still have people getting up to speed and we had a little bit of lumpiness. So I think we will see that smooth out a little bit in Q2, but we have all the confidence that there's big demand for this business.

We've got good leadership in place; they are doing all the right things. A little bit of lumpiness for a couple of quarters isn't the end of the world. I do believe they will get back to double-digit growth in the second half..

Okay. Thank you..

Our last question, Mitra Ramgopal from Sidoti. Your line is now open..

Just a couple questions. Just to follow up on the physician staffing business. Bill, I know you said it's about four quarters behind where you wanted it to be.

I don't know if you can give us a sense as to when you think you probably get to the point where you think its meeting your targets?.

Yes. I mean, we had put in place in September of 2014 the model change and I thought it would take a couple of quarters before we started to see the improvements. So I have now lapped that, so now I'm four quarters behind where I thought that would happen.

The good news is, as I mentioned in the call, that as I interviewed for the new president role, I interviewed people from most of our competitors. And it was interesting to find out that all of the model changes and new initiatives and comp changes and processes we put in place are all very industry-standard.

And I'm very comfortable that we've made all the right decisions. This really is down to execution and strong leadership. I think we've brought a very strong leader in. He spent the first three weeks having one-on-one - half-hour one-on-one meetings with all 157 employees in the business.

So if he doesn't know what's going on now when he got here, he certainly knows what's going on now after his one-on-one meeting. So I think we've got the right leader in place that can help them to execute better. It's a good team there. They all want to do better.

They don't like being the laggard in a business that's been turning around and doing well at a bigger company that's been turning around and doing well. So they are committed to making things happen. So I feel good about his first few weeks as president and that we have the right processes and changes in place.

He'll make a few tweaks and a few adjustments. What's my prediction? I would like to see continued improvement in Q3 and Q4, but if I had to really hang my hat on something, I'd say the beginning of next year before we start to see year-over-year growth..

Okay. Thanks. And then quickly, I know you mentioned use of cash would be towards acquisitions as the first priority.

I was wondering if you could talk maybe a little in terms of potential pipeline you are seeing out there? The availability of just attractive acquisitions for you?.

There seem to be some good companies out there that feel that this is the right time. A little over a year ago, maybe 15 months ago, we were seeing things that everybody wanted a 10-plus multiple and we walked away from a few things and some of the deals never got done at all. We bought Mediscan at an 8.2 times trailing 12-months EBITDA.

I think the market is about 7% to maybe 9% for a really top company. So the pipeline is pretty good. There's some decent potential acquisitions that fit the criteria. We are being picky about it because, as I mentioned, I think it was Jeff or somebody asked a question - maybe Tobey - about strategic acquisitions.

I want to make sure that we are doing it for the right reason. It's not just about volume. This is about making sure that we strategically are growing in the right areas that help us to grow our gross margin and help us to make sure we achieve that 8% adjusted EBITDA by the end of 2017 and 10% by the end of 2019..

Thanks.

And just to be clear, the guidance you have in terms of revenue, $820 million, $840 million, no acquisitions are baked in there?.

No. That's right..

no acquisition..

Okay. Thanks again..

Okay. I appreciate everybody joining us today. I look forward to updating you with our second-quarter results in August. Thank you again..

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