Bill Grubbs - President, Chief Executive Officer Bill Burns - Chief Operating Officer Chris Pizzi - Senior Vice President, Chief Financial Officer.

Brooks O’Neil - Lake Street Capital Markets Tobey Sommer - SunTrust Jason Plagman - Jefferies Henry Chien - BMO Capital Markets AJ Rice - Credit Suisse Mitra Ramgopal - Sidoti & Co..

Good morning ladies and gentlemen and welcome to the Cross Country Healthcare earnings conference call for the fourth quarter and full year of 2017. This call is being simultaneously webcast live.

A replay of this call will also be available until March 15 of 2018 and can be accessed either on the company’s website or by dialing 866-357-1431 for domestic calls and 203-369-0118 for international calls, and by entering the pass code 2018. I will now turn the call over to Chris Pizzi, Cross Country Healthcare’s Chief Financial Officer.

Please go ahead..

Thank you and good morning everyone. With me this morning is our Chief Executive Officer, Bill Grubbs, and our Chief Operating Officer, Bill Burns.

This call will include a discussion of fourth quarter and full year results for 2017 as disclosed in our press release and will also include a discussion of our financial outlook for the first quarter of 2018. After our prepared remarks, we will open the lines for questions.

A copy of 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 2016 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 made during this teleconference reference non-GAAP financial measures such as adjusted EBITDA or adjusted earnings per share.

Such non-GAAP financial measures are provided as additional information and should not be considered substitutes for 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.

Lastly, in order to facilitate a better understanding of underlying trends, we may 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 reminder, we completed the Advantage RN acquisition effective July 1, 2017 and the results of its operations have been included in our reported results for the third and fourth quarter. With that, I will now turn the call over to our Chief Executive Officer, Bill Grubbs..

Thank you, Chris. Thank you everyone for joining us this morning. This was a disappointing quarter for us as we experienced weaker than expected results due in part to a mix of what we believe are short term pressures on our business, particularly with respect to our nurse and allied segments.

While we expect some of these pressures to affect results in the first quarter of ’18, we also believe that they are ultimately short term in nature, that the overall trends for the business are strong, and that performance will improve as the company moves further into the fiscal year.

As we will go into later on the call, we’re also taking concrete steps as an organization to improve our operations and bring greater focus, accountability and consistency to our performance. Turning to the quarter, our nurse and allied business was down year over year and sequentially.

We believe there were three trends that negatively affected our business in the quarter that I want to provide some context around. First, Hurricane Irma had a larger than anticipated drag on our business in Q4.

We initially projected the effect of Hurricane Irma to be about $4 million in revenues based on the number of days our offices were closed in Boca Raton, which is where our nurse and allied travel nursing business is headquartered, during and immediately following the storm.

What became apparent later in the quarter, however, was the additional effect that the disruption caused by school closings, prolonged fuel shortages, internet outages, power outages, etc. had on candidate recruitment and productivity, which resulted in the decline in placements in the quarter.

Overall, we believe this disruption resulted in an additional loss of approximately $2 million in revenues for the quarter, bringing the total Hurricane Irma impact to $6 million. Because our placements typically last for 13 weeks, we expect that the lower Q4 placement levels will result in a lower base for Q1.

The second trend that we believe came to a head in the fourth quarter was lower renewal rates We did not lose any customers in the fourth quarter but a select number of large MSP customers pulled back their contingent labor spend to adjust to market dynamics, which resulted in the reduction in our renewal rates.

While our capture rate at our MSPs increased in the fourth quarter, it was not enough to offset the reduced renewals.

So far in the first quarter, however, renewals have rebounded and are back to more normalized levels, and the number of travel nurses out on billing has grown from the year end each week as we’ve gone through the quarter, and our capture rate is up and we believe we have the ability to grow that even more.

Finally, the third trend that negatively affected the performance of our nurse and allied business in the fourth quarter was the decline in our premium rate business. We’ve talked about this before, but during this quarter revenue from premium rates declined sequentially by approximately $2 million.

We have seen reduction in our premium rates for several quarters, and from what we’re seeing, this unfavorable trend appears to be an industry-wide issue as demand for premium placements in higher margin specialties continues to normalize from the elevated levels we experienced in 2015 and 2016.

We anticipate this decline will level off in the second half of 2018. Turning to our other segments, after starting to see a path to recovery for physician staffing in Q2 and Q3, we had lower than expected results in the fourth quarter. Revenue decline was predominantly due to mix while volumes actually held up fairly decently.

We do believe that demand for locum tenens services remains strong and we have a strong competitive position with respect to our premium accounts, and we are continuing to improve our operational efficiency. We expect the business to grow at low single digit percentage in 2018. We also expect to see a much improved contribution level moving forward.

The story is similar for our other human capital management segment. This is our search business, which had a difficult 2017 primarily due to disruption from personnel changes. We believe that we are now beginning to see positive trends in the market and in our own performance, and we expect this business to grow year over year in 2018.

So far, it appears we’re off to a strong start. This business is also expected to improve its contribution levels. While we faced a number of challenges in the fourth quarter, Cross Country also realized some key successes that are worth noting.

First, our operating cash flow was very strong at $17 million for the quarter, bringing the full year number to $46 million, an increase of 51% over the prior year. Also, our orders in Q4 were up from Q3, and our orders are up again in Q1.

Our school healthcare staffing business continues to perform well with revenue growing at double digits and a strong contribution level. In particular, our DirectEd business serving charter schools is growing at over 30% year-over-year and we expect that to continue. We’re very bullish on our school business.

Lastly, in the fourth quarter we believe we have corrected the issues we had with Advantage RN. Part of the reason for making this acquisition was to get more support for our MSPs. We did not see that in the third quarter because of technology and process integration issues.

I’m happy to say that we have that back on track and the amount of revenue that Advantage RN is experiencing at our MSPs was up over 30% from the third quarter to the fourth quarter. We believe we can continue to improve on this throughout 2018 to support a higher capture rate at our MSPs.

Overall, we believe the market remains strong with favorable tailwinds to support better performance in 2018.

Over the last four years, the company has experienced tremendous growth and we believe the key challenge for us moving forward is how we can more efficiently and effectively convert these favorable trends of demand into greater placements and renewals.

While we believe that a number of the headwinds we faced in the fourth quarter will dissipate as we move through the year, we also recognize that we have reached a stage in our development where we need to place more emphasis son sharper execution and greater efficiency to capitalize on this opportunity.

So what are we doing to meet that challenge? First and foremost, we believe the management changes announced in January are critical to our long-term strategy. It is the right thing to do for where we are in our growth and development.

As we’ve gotten bigger and more diverse, the need for a more streamlined, agile and accountable management structure has become more apparent. Let’s start with the Chief Operating Officer role.

We expect having a dedicated executive in this role will streamline our operations, make us more agile in responding to market developments, and will provide us with greater capacity to focus on strategies, differentiations, acquisitions, investor relations, and other public company activities.

I was a chief operating officer for more than 10 years before coming to Cross Country, so I know what a positive impact a role like this can have on a company’s performance. I’m excited that we had such a stronger internal candidate in Bill Burns for the role, and I want to congratulate him on his promotion.

We also separated our travel nurse and allied business from our branch operations. Again, the main reason for this was to drive additional focus on operational excellence. The travel business has a different operating model from the branch operations.

As both businesses grew, we came to the view that a president-level executive independently focused on each model was the best way to improve results. Travel nursing is our largest business and the largest segment in the market.

We believe this business will benefit significantly from having its own management team driving growth and improving the bottom line. In addition, we continue to see a shift from treating patients in the acute care setting to ambulatory and outpatient facilities, which are serviced from our branches.

Our branch operations have performed very well over the past few years, propelling us to be the largest provider of per diem nursing and driving additional local allied business. We not only believe we can continue to build on this success but that this is a competitive differentiator for us.

Again, I was very pleased that we had a strong enough management team to fill both of these president roles internally. Congratulations to Buffy White, the new President of our Travel Nurse and Allied Business, and Marisa Zaharoff, President of our Branch Operations.

I want to also mention that as a result of Bill Burns becoming our new Chief Operating Officer, Chris Pizzi, formerly our Corporate Controller, has been named our new Chief Financial Officer. Again, we’re thrilled that we were able to fill the role from our deep internal bench, and I would like to congratulate Chris on his promotion.

These organizational changes are part of our commitment to achieve an adjusted EBITDA margin of 8%. We recognize that we are behind our original schedule in meeting this goal, and this will be an area of focus for Bill Burns as Chief Operating Officer, Chris Pizzi as Chief Financial Officer, and the rest of the management team.

We had hoped to get more leverage from growth over the last few years to achieve this milestone, but growth is not getting us there fast enough. Having said that, we are focused on taking the reins and accelerating our progress through decisive action.

In just a moment, Bill Burns will provide more details on how we are positioning ourselves to achieve this milestone. To conclude, while we’re not satisfied with last quarter’s results, we believe there is significant opportunity ahead of us as an organization and a clear pathway to getting there.

I am confident in our team and the changes we have already made, and believe we will build momentum as we move through the year. With that, let me turn the call over to Bill Burns, who will review our operational focus in more detail..

Thanks Bill, and good morning everyone. As Bill mentioned, the fourth quarter did not turn out as we’d expected; however, we do remain very optimistic about our future.

We continue to be in a relatively strong market with favorable conditions, and as I will explain in a few moments, we’re taking the necessary actions to get our business to where we want it to be. We’ve said previously that 8% is the right adjusted EBITDA margin for us to target in the near term, and that is still the case.

Eight percent is not the endgame, of course, but rather a milestone for us, and our path to 8% is dependent on several things. Let me give you a little more insight on some of the specific things we need to do. First, we have to return the company to market growth which creates some improved operating leverage.

Though our organic growth has slowed in part to the business, we believe we have sufficient demand across all parts of our business and our challenges have been predominantly on the supply side. I’ll get a bit deeper into that and the things we are doing to address it in a moment.

Generally, we can put about a third of our organic incremental gross profit, or about 15% of incremental revenue, to the adjusted EBITDA line, which assumes normal investments in SG&A to continue to grow the business. However, normal operating leverage alone will not be enough for us to achieve the 8% goal in the near term.

The other part of the formula involves right-sizing our cost structure. There are really three areas of focus. The first is really on improving the profitability of our physician staffing and search businesses. Both of these businesses have a cost structure that is capable of supporting a much larger book of business.

Returning these businesses to a contribution income of just 10%, which is still below our optimal level of profitability, is expected to produce approximately $5 million in additional profit for the business at their current size.

Clearly, it’d be our preference that we grow into these costs by continuing and accelerating the positive underlying trends we’ve seen; however, we recognize that this has been a process that’s taken longer than we anticipated and we are looking into ways to align and optimize the cost structure for these businesses that give them the best chance for both growth and improved profitability.

The other big area for improvement has to do with operating efficiencies in both our field operations and corporate functions. For a variety of reasons, we have not fully realized the opportunity from standardizing, automating and centralizing various functions and processes.

For example, from an operations perspective, our staffing businesses have some degree of overlap in activities like candidate vetting, on-boarding and credentialing, yet they continue to operate fairly decentralized with disparate processes and tools.

We’re actively working on plans to drive necessary improvements that will result in better productivity, scalability, and ultimately profitability in 2018. Costs are generally easier to get at, since there is often a direct line of sight, so let me return to the things we need to do to drive top line growth.

I mentioned earlier that at this point in time for us, it’s all about supply. We need to continue to refine our candidate attraction efforts to the most efficient and cost effective means of attracting talent.

We’re actively looking at all of the touch points in the candidate life cycle to make sure that we are as competitive and easy to work with as possible. In this market, speed of engagement is critical to success and we want to make certain that every candidate is presented with the best opportunities as quickly as possible.

Another area of focus that we expect to drive organic growth is candidate retention, or improved renewal rates as Bill mentioned.

We had seen a decline in the renewal rates on 2017, particularly in our travel nurse and allied businesses, driven by a pullback spend predominantly by several of our large clients as they continue to wrestle with their costs.

While our renewal rates have already started to improve in early 2018 and are more in line with historic experience, we believe there is room for further improvement.

Higher retention obviously means more of our new candidates will be incremental, and so we are actively working on initiatives to continue the improvements we have already started to see this year. Before I turn the call over to Chris Pizzi, I’d like to just share a slightly more personal note.

I have been with Cross Country Healthcare now for four years, and as the Chief Financial Officer I’ve gained insights into the business and developed an appreciation for how we can operate more effectively as a company.

Looking across our portfolio of businesses, we have tremendous opportunity for working more collaboratively for cross-selling, for improving and streamlining many of our core processes. While my career has predominantly been spent in finance, I’ve worked in many different industries with some incredibly successful companies.

Those experiences have prepared me well for the task at hand in my new role. While our focus remains on delivering significant value to our clients through our staffing solutions, we recognize clearly that we need to execute well across all fronts.

Seeing the opportunities we have for improvement and being in a role where I can focus specifically on that with the majority of my time is precisely why I am so excited about taking on this new role. I look forward to sharing more insights with you on our plans and updating you on our progress as we move throughout 2018.

Now let me turn the call over to Chris Pizzi, who will review the fourth quarter and full year results..

$2.9 million of depreciation and amortization expense, $1.3 million of interest expense, $1 million of stock compensation expense, $300,000 of tax expense, and a diluted share count of 36.3 million shares. Before we open up the lines for questions, I would like to turn the call back over to Bill Grubbs..

Okay, thanks Chris. To wrap up, although we had headwinds in the fourth quarter, some of which will carry on into Q1, I am encouraged about the underlying trends driving our business. Demand in the market remains strong and we are seeing an increase in orders across all of our businesses.

Our organizational changes should give us renewed focus on execution and operational improvements. Advantage RN is on track and making strides to support our goal of a higher capture rate at our MSPs. We still have approximately $75 million of business to ramp at MSPs we won last year, and our pipeline for new MSPs remains strong.

Although we saw a lower renewal rate on our nurses in Q4, we have seen an improvement back to more normalized levels in Q1. We’ll continue to work diligently to build on that and to drive shareholder value. This concludes our prepared remarks, and at this point I’d like to open up the lines for questions.

Operator?.

[Operator instructions] Our first question comes from Brooks O’Neil from Lake Street Capital Markets. Your line is now open..

Thank you, good morning.

Can you hear me okay?.

Yes, no problem..

Okay, great. Bill, you mentioned in the press release and I think in your prepared remarks that you were going to take steps to reduce costs further, and then you also commented about a new travel system in your largest business.

When do you think those initiatives will be completed, and when do you expect to see benefits from them in your operating results?.

Let me start with the second one first. So replacing the legacy system in our travel nursing business won’t be complete probably until towards the end of 2019. I’ll let Bill Burns tell you about the cost savings initiatives, because that’s his baby..

Yes, so Brooks, as you heard us say, there is really three areas of focus here.

One is on right-sizing the cost structure in our two businesses that have struggled, which is physician staffing and search, so we’ll be looking at that over the next several months to understand what’s it going to take to either accelerate the growth or to right-size that cost structure. We have already begun having those conversations.

The other parts of the cost action--.

We’ll get most of that $5 million in this year..

Yes, I mean, it won’t be all realized this year, but we should have a substantial chunk of it recognized by the fourth quarter - that’s our goal, anyway. Then if you look at the rest of what we’re talking about, there’s really two pieces I mentioned. One is on the operations and one is on the corporate side.

As we look at--I’ll just give you the back of the envelope here, but as we look at our corporate expenses, generally speaking, we think that there is opportunity there of probably somewhere in the mid single millions of dollars of savings, just as we continue to streamline our organization and centralize our functions, etc.

We’ve recently completed an effort to get onto one ERP system for our back office, so these things should drive some of the savings we expect on the corporate side. The real challenge is going to be on the operational side. I mentioned some of the things that we have in common across all of our businesses.

When you look at things like credentialing and on-boarding, that’s certainly an area of focus for us. When you look at things like candidate sourcing and how we go about getting that, I mentioned that’s not only a key to organic growth but it’s also a way in which we want to continue to find the most cost effective and efficient means.

They don’t all have the same conversion rates, so we don’t publicly give the conversion rates but that’s something we’re definitely targeting as we go through the mix of our activities on candidate attraction.

So there is operational efficiencies that are driven off of those type of activities, and then the second portion of operational activities is somewhat tied to the system implementation for our travel nurse business that Bill mentioned. That project will take a bit more time to get through, but that also should yield additional savings.

Maintaining an old 30-year-old homegrown green screen system is more costly in both the people we have to have on board as well as the efficiency and the ramp time and productivity of our recruiters and revenue producers, so we’ll expect to see more improvements on the operations side as those systems or tools go live. .

Okay, and then I’m curious - I have to confess, the Q1 guidance surprised me a little bit. I understand the impacts in Q4.

Can you talk just a little bit about seasonality and how that might be affecting your outlook for Q1, and then I know you’re not giving guidance for all of 218, but just maybe speak to us a little bit about your expectation for what I assume is fairly significant improvements Q2 and beyond..

Yes, so let me start with the second one. We do believe we will grow organically in 2018, and we do believe we will have an improved adjusted EBITDA margin for the year, partly from the revenue growth and partly from the cost savings that Bill talked about.

We debated about giving full year guidance - we decided not to do that, and yes, it looks like we’re starting weak in 2018, but that’s all due to the fact of these disruptions on Q4.

Once you set the base in Q4 to a lower number, and our travelers out on assignment from Q3 to Q4 were down over 200, and once that base is reset, you just don’t rebound in one quarter. I feel very good that our operations are strong, that this was not an execution issue in Q4.

We are seeing our capture rate go up at our MSPs, we are seeing our conversion rates hold fairly well, we’re seeing our renewal rates back to normalized levels in Q1. You just don’t rebound that quickly when you reset the base in Q4.

So the softer Q1 is not about execution, not about underlying market trends, not about anything else other than the base got reset in Q4 and we just have to build back up from that base. So I feel good about where we are, even though the numbers aren’t showing that..

Okay, that’s very helpful. Thank you very much and good luck this year..

Okay, thanks..

Our next question comes from Tobey Sommer from SunTrust. Your line is open..

Thank you very much.

Could you describe your current fill rate and fill rate trends in recent quarters, and if possible delineate between the total company and the MSP business?.

Okay, well at our MSPs, we call it a capture rate - I think that’s what you’re referring to from a fill rate. I’ll give you the relative. We said it was in the mid-50s before the fourth quarter. It’s gone up a couple of hundred basis points, so it’s more towards the high 50s now. It has not passed the 60% mark.

We expect to go above 60% in 2018 from a capture rate perspective, so the portion of our MSPs that we’re filling ourselves is going up - as I said, a couple hundred basis points sequentially, and we expect that to continue going forward.

The problem is some of those MSPs pulled back somewhat in Q4, which is why our renewal rates were lower, and that increased capture rate was not enough to offset the lower renewal rate, or the pullback from key customers. One of these other guys here will tell you what the percentage of our total revenue is from our MSPs today.

Because of the pullback, it did go down a little bit, I believe, in the third quarter. It went from 29 to 27--to 28%, basically--well, that was Q4 of last year to Q4 of this year. It was from 29 to 28, and let me look at sequentially..

Sequentially it’s about flat - 27.8 to 27.7%..

So sequentially, it’s flat, about 27%. If I missed part of your question, Tobey, just remind me please..

No, I’m just trying to understand the dynamic here between MSP and the rest of the book of business. Maybe I could ask another question.

Is the company in a good position to continue to pursue new MSP business, or maybe you’d need to put in place an increased ability to kind of substantially increase placements first? The reason I ask it that way is I’m trying to understand how you can balance making new commitments to guaranteeing placements for MSP customers without an already established pattern of organic growth..

Right, that’s a good question, and we’ve had that question before in various formats. I don’t think it needs to be an either-or answer. I do believe that we can do both, and we’ve actually done very well at our new MSPs. I don’t think that’s holding us back.

Yes, Bill Burns mentioned that candidate attraction is a big focus for us and we believe we can get better at attracting candidates and retaining candidates, and I think that will help us not only ramp up new MSPs but also to increase our capture rate. So I don’t think it needs to be one or the other, we don’t need to stop doing one for the other.

Our pipeline is strong for MSPs, we have a good value proposition, our customers are very happy with the service we’re delivering to them we’re meeting all our service level agreements. We don’t have any issues with our MSP relationships, and as I mentioned, we didn’t lose any customers in Q4, so it’s not like we’re not performing at that.

It’s these underlying disruptions that are affecting the numbers, not the fact that we have MSPs and we’re winning new ones.

Bill, do you want to--?.

I guess I would just say, Tobey, I would say yes, we want to continue to expand the spend on our management.

We think, as we’ve talked about, that gives us an opportunity as we go forward to continue to increase the capture rate as we get other operational things moving in the right direction and we leverage the full business to get the supply growing faster. But as Bill mentioned, we’re not having any service issues with the large accounts.

We’re able to leverage our network of either subcontractors to continue to meet the full SLAs, and as I said, if we get our recruiting back on track and our renewal rates growing in the right direction, we’ll continue to raise our capture rate and grow [indiscernible]. .

So without the Irma disruption and resetting our base to a lower number of people out on billing, if we continue to increase our capture rate by 200 basis points a quarter, that’s a huge difference for us. We believe we can continue to do that.

To put Bill’s comments about candidate attraction and those efforts, it’s not like we’re not doing it, we’re not doing enough to grow the business, forget all the disruptions. We just think we can get better at it and that we can get back to at or above market growth. So it’s not about we’re not doing a good job of it, it’s just about improving it..

Right, and we believe that there is always an opportunity, no matter how good you get at this, to continue to improve, so we’re re-challenging and looking at everything that we do to make sure that we’re, as Bill mentioned, as agile or as fast as we can be with engaging with the healthcare professionals..

Actually, that’s probably the best point that’s not in our prepared remarks, is to me, our biggest challenge isn’t the market and isn’t these things that I think will be short term in nature regarding the disruptions to our business, it’s the fact that we have not been agile enough or nimble enough to adjust to either changing customer needs or changing market needs, and this is why we’ve put this new structure in place.

With Bill Burns focusing 100% on day-to-day operations and separating our travel nurse from our branch operations, we believe that will make us more nimble and able to make decisions faster and adjust our business to the changing marketplace..

Okay, thanks.

Could you give us some new color--additional color, excuse me, about the investment in new systems, that migration, cost savings and other goals that you hope to achieve as well as the expected timing?.

Sure, so the expected timing is going to be fully ramped up between the second and fourth quarters of this year, and then the first three quarters of next year, and we anticipate in 2018 about $5 million to $6 million of spend and again $5 million to $6 million of spend in 2019 with about 20% of that being operating expense.

I think the overall targeted savings is about a few million--.

Yes, we haven’t sized it specific to the system implementation..

Okay, but there will be millions of dollars of savings from the implementation of this system that will be the final step that gets us over the 8% adjusted EBITDA, so we do need this to be completed to get to that 8%. But it’s about a $10 million to $12 million total project with about 80% of it capitalized over a two-year period..

Okay.

I know you don’t guide for the year, but should we think about 2018 as a flattish EBITDA year, or with the investments and just the lower starting place in the first quarter, is it more like a slightly down year potentially?.

No, I don’t expect it to be flat and I certainly don’t expect it to be down. I do believe we will get growth in Q2, Q3 and Q4. Bill Burns will get better profitability out of our physician staffing and our search business.

We have some cost savings initiatives on top of that, so we already have some cost savings that we put in in the fourth quarter here that will carry through into subsequent quarters in ’18. So no, I expect we’ll have a decent increase in adjusted EBITDA dollars and percentage in 2018..

Okay.

Last question from me and I’ll get back in the queue, what’s your appetite, Bill, at least near term for acquisitions?.

It would be very targeted. Although we got off to a slow start with Advantage RN in Q3, that’s back on track now, so I feel very good that that’s starting to make a difference and help us to increase our capture rate. But my biggest target would be on the school business.

Our school business is growing at--we said over 30% year-over-year and it has a great bottom line. We have some great talent in that business that we think has room to grow and expand, so I think right now that would be my number one area to look at.

Would I be opportunistic if something else came across the table that looked good and that made sense? Yes, but from a strategic standpoint, probably schools at this point and then the rest of my focus would be on making sure that we do see the improvement in revenue and bottom line for 2018..

Thank you very much..

Our next question comes from Jason Plagman from Jefferies. Sir, your line is now open..

Good morning, guys. Bill, I just wanted to drill down a little bit further on market demand.

Are you seeing any difference in order flows between your MSP clients and the non-MSP business?.

A little bit. As we mentioned, in the fourth quarter we had a few of our larger MSPs pull back a little bit, but generally our MSP orders are going up.

In fact, they’re up quite a bit year over year and they’ve been going up sequentially almost every quarter, up until the--well actually, our orders are still pretty strong in Q4, even though we saw the pullback in several customers.

So no, we see--I don’t have the exact stat, but my guess is that the increase that we’ve seen from Q3 to Q4 and Q4 to Q1 is probably half general market and half new MSPs that we’ve won..

Okay, but you are seeing growth in the non-MSP order flows as well?.

We are, yes..

Okay.

Then I just wanted to--as far as your outlook for--your performance in Q4 and outlook for Q1, was there any difference in performance between the travel nurse and the branch operations that you’d call out, or what are the dynamics in each of those two sub-segments?.

In Q1? This is Bill Burns. I would say that the impact in Q1 for the guidance that we’ve delivered is predominantly due to the softness we experienced coming out of the fourth quarter in our travel nurse business, and that’s what’s really impacting most of the first quarter. We actually have reasonable growth coming still from our education business.

We have continued soft performance in our physician business, and we’re actually expecting pretty decent performance out of our search business, so--.

And travel allied has grown..

--and travel allied as well, so it’s really been about travel nurse and how they exited the year, coming into this year. As Bill mentioned, those orders take time to--once you exit at that new run rate, it takes time to build back up the core..

You know, if you’re down a couple of hundred nurses in Q4, then you’re carrying off into Q1 obviously that lower rate plus a high percentage of those 200 extra nurses would have renewed going into next year as well, so you kind of have a double whammy that you just have to build back up from.

We have seen it build - since the first quarter, first month, week of this quarter up through the end of February, we have seen constant growth in our billable headcount in travel nursing. It’s just harder to make up the shortfall from the disruption in Q4. .

Yes, that makes sense.

Did you see--you know, the branch operations, is that declining less so or flat, or is that growing? How has that been performing during this period?.

It’s been growing very well. We don’t give specific guidance on the subsectors in the go-forward basis, but branch operations up until the fourth quarter, I know had been growing at high single digit numbers, and if you remove the project business out of that--.

Yes, that’s the only challenge right now, is that it had a lot of the project business. .

But if you take the project business out of there, it’s growing at high single digit numbers..

That’s right..

Great.

Then the last one from me, gross margin guidance for Q1, are you seeing any pressure there, or is that more just seasonal mix for the Q1 guidance for gross margin? How are you feeling about that for 2018?.

Yes, the decline that we’re anticipating in the first quarter is really mainly due to the payroll tax reset, which we’re expecting to be between 70 and 80 basis points. .

But we’re not seeing particular pricing pressure on customers negotiating lower rates, or that we’re having to pay nurses higher wages that are negatively affecting our gross margin. We’re simply not seeing that.

The overall rates are being affected by a lower percentage of our overall hours being in premium rates, and I’ll give you a little bit of color on that. Premium rates, the percentage of our total hours that were premium rates year-over-year is down 500 basis points, and sequentially from Q3 to Q4 it’s down 140 basis points.

We thought it had been at a point where it was starting to level off, and that’s obviously not the case, so we think we may have another quarter or two of some leveling off of premium rates and then it should normalize by the second half of the year..

Thanks for all the color..

Thank you. Our next question comes from Jeff Silber from BMO Capital Markets. Your line is now open..

Hey, good morning guys. It’s Henry Chien calling for Jeff. .

Morning Henry..

Hey guys.

I had a question, just wanted to clarify that I’m understanding correctly the--well, I understand the impact from the hurricane, but on the lower renewal rates and the decline in the premium rate business that you talked about earlier, can you elaborate a little bit on what’s going on there in terms of why clients are having lower renewal rates and why you’re just not seeing as much demand for premium rate or higher margin staffing?.

Yes, so renewal rates in particular were really specific to the pullback of a few customers, so whatever the number was, we had a few customers that decided that they needed to cut back on their contingent labor spend before the end of the year, so the healthcare professionals that they normally would have extended didn’t get extended in the fourth quarter.

So our overall renewal rate went down - in fact, it went down sequentially by 630 basis points, which is a big decline. When I first saw that, I said, well, that’s a terrible trend, but it’s now back.

We’ve grown back that 630 basis points to a more normalized level in Q1, so it looks like it’s very specific to a select number of customers that just did not want to renew their contract as in Q4, because they had sticker shock on how much money they were spending on contingent labor. It looks back to normalized rates now.

To be honest with you, my whole five years here, it has been almost the exact same percentage for every quarter I’ve been here up until this fourth quarter, so we do think it’s very specific to those specific customers.

Premium rates, we went back and looked at before the market really got busy in ’15 and ’16, and we looked to try to see what percentage of our total billable hours were at premium rates in 2014, what was it in 2015, what was it in 2016.

In the heyday of ’15 and ’16 when everybody was fighting over healthcare professionals, certain clients were willing to bid higher or pay higher to be able to get the healthcare professionals.

Now, the market has levelled off to a more normalized demand level, and as such they don’t need to pay as much premium rates as they used to, so we’ve seen it slowly come down, about 200 basis points a quarter through each of the quarters of 2017.

But it’s now getting to a point where we believe it will be normalized after the next quarter or two to a level that will probably be a normal percentage of our billable hours in premium rates. So it’s just a resetting of the market based on that demand levelling off from the heyday of ’15 and ’16..

Got it, okay. That’s helpful, thanks for that.

I understand that you’re not giving any full year guidance and it’s probably difficult to try to predict that, but I’m just curious and trying to get a sense of what would be a normalized growth level, whether that’s if you look at the change in your orders for this quarter or any kind of metric that you look at of what growth could look like later in the year for nurse and allied..

Yes, so given an even playing field without the disruptions, we think a 4% or 5% year-over-year growth is where we should be getting to. So we get things back onto a more normalized level after Q1, we think we can get back to close to mid single digit growth..

Got it. Okay, great. Thanks so much..

Thank you. Our next question comes from AJ Rice from Credit Suisse. Your line is now open..

Thanks, hi everybody. A couple questions. You didn’t mention it - the flu, but obviously it’s got a lot of press, and I guess I could see that it could have had some impact on your branch or per diem business.

Was there any flu impact or do you see any in the first quarter?.

We do, actually. The branches did benefit from the flu. Actually our travel allied with a lot of respiratory therapy was actually--is part of the reason why our travel allied is growing in Q1.

So we did see it, but it certainly wasn’t enough to offset the disruptions that are carrying on into Q1 from Q4, but we did see a positive impact from the flu season and we’re still seeing it now.

We track it certainly every week and it’s starting to come off of its peak, but it’s still a pretty strong flu season, so even though that is helping to offset the disruption from Q4, it’s not enough to overcome it..

When I hear you talking about some of the challenges in the nurse and allied, it sounds like you’re couching those as mostly company specific. You’re saying the underlying tone of the market is still pretty good. On locums, would you say that that’s--that sounds like that’s more a market.

Am I hearing you right on that, or how would you describe what you sort of see in--I know it’s not nearly as important a segment, but it’s 10% or so.

What are you seeing there?.

Yes, so I told Bill Burns [indiscernible], but I’ll start out and I’ll let him add his two cents. Actually--you know, sometimes it’s the perfect storm where everything kind of hits at once. I’m not that worried that we had a shift in the mix of business.

I don’t know if that’s market or just where our particular customers--you know, our physician staffing is supporting, I think four, maybe five of our MSPs now, and that may be driving the change in mix.

We had growth in several of our specialties - primary care, we had growth in psychiatry, radiology, but some of those were just at lower bill rates than some of the other areas. So the volume itself was off about 2%, and the pricing was off about 7% - I’m getting confirmation from these two guys.

So the 2% volume was really in line with Q2 and Q3 if the mix hadn’t changed so much. Sorry, Bill, go ahead..

It’s okay. .

Anything you want to add color to that?.

No, I think that was perfect. I think the advanced practice demand we’re seeing is certainly a market condition. Our execution on the physician side is not because there is softness in the marketplace, it’s more around our ability to execute on that side, so we’re still recovering and getting the team up to speed.

I think that we’re doing all the right things. I believe we have the right metrics, the right visibility. It’s really now just about execution. .

But as Bill mentioned, they have an infrastructure that probably supports $115 million, $120 million business, so if we don’t see both the volume and the revenue coming back, Bill will make sure that we right-size the cost base..

Okay, and then I know you’ve commented a lot about MSP, but I just wonder are you seeing the competitive landscape around MSPs shift for any reason? Is that part of the dynamic - it’s either becoming more difficult or not, or any thoughts on what the competitive environment looks like?.

Yes, we do have some smaller players that have come up through the heyday of the big growth years in our industry, that are starting to dip their toe in the water of providing MSPs, and we see them a little bit more than we used to. It hasn’t seemed to affect our win rate percentage and it certainly hasn’t affected any lost customers.

I think our number for this year was we won 23 new programs, and I think we lost two, so we netted positive 21 - Chris is just going to double check my numbers..

Yes..

So I mean, if I keep winning 20 and losing two a year, I’m pretty good with that, so I don’t think it’s causing any additional pressures on us at this point. .

Okay.

My last question, I know you reaffirmed your target margin of 8%, any update on thinking about when you might see that?.

Yes, I think we need the final push to get over that line, is with that technology change in travel nursing, and since that’s not going to be until the third or fourth quarter of 2019, we would look to get to a run rate of 8% by the end of ’18--sorry, by the end of ’19. So I think that’s what will push us over the edge, is that final element..

Okay. All right, thanks a lot..

Thank you. Our last question comes from Mitra Ramgopal from Sidoti & Company. .

Yes, hi--.

One moment, sir. .

Are you there, Mitra?.

One moment, sir. I will just go ahead and check on Mitra..

Okay..

Mitra, please go ahead..

Hello? Yes, hi. Just wanted to follow up on the MSPs. I know you’ve averaged about 20-plus in the past two years, and you’ve made significant investments to support that.

I was wondering where you stand as it relates to implementation of the existing ones and how comfortable are you that you can continue to win another 20, for example, over the next few years without having to make significant investments to support that?.

I don’t think we need to make significant investments. I think we have a decent amount of resources to achieve what we need to. I’m not sure I’d predict another 20 a year win this year. We’ve won a couple already so far, one that is a pretty decent size.

We’re being a little bit more selective on some of them to make sure that they fit the profile that makes sense for us from a cultural standpoint as well as from a geography standpoint, as well as a rate standpoint. But no, we have a good pipeline and we expect to continue to win our fair share this year.

We’re more focused on the dollar amount than we are the number of wins, and so we may win less than 20 this year but I think the target is to try to win another $100 million of revenue..

Mitra, this is Bill Burns. We have a handful that are not yet live, that were recent wins. For the ones that are that we did win throughout ’17, I forget the exact number but there is probably a dozen or so that are still continuing their ramp.

We estimate or size the additional spend on the management that will be derived from that is about $75 million. .

Yes, that’s right, that’s a good point, so that’s still in progress, ramping up for this year. .

Okay, thanks again for taking the questions..

Okay, I think we’ve reached our maximum. Again, thank you everyone for joining us today. We look forward to updating you on our first quarter results in early May. .

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