Chris Pizzi - Chief Financial Officer Bill Grubbs - Chief Executive Officer Bill Burns - Chief Operating Officer.

Henry Chen - BMO Capital Markets A. J. Rice - Credit Suisse Brooks O'Neil - Lake Street Capital Markets Kevin Steinke - Barrington Research Group Tobey Sommer - SunTrust Robinson Humphrey Mitra Ramgopal - Sidoti & Company Jason Plagman - Jefferies Bill Sutherland - The Benchmark Company.

Good morning ladies and gentlemen, and welcome to the Cross Country Healthcare Earnings Conference Call for the First Quarter of 2018. This call is being simultaneously webcast live.

A replay of this call will also be available until May 17, 2018, and can be accessed either on the company's website or by dialing in 866-443-8011 for the domestic calls and 203-369-1122 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, sir..

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 first quarter 2018 results as disclosed in our press release and will also include a discussion of our financial outlook for the second 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.crosscountyhealthcare.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 2017 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 beginning with the third quarter of 2017. 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 good quarter for us, starting the year off stronger than originally anticipated with revenue growing in all 3 of our reporting segments and improved cost management, our adjusted EBITDA exceeded expectations.

The strong start to the year gives us a good foundation to build on and even though we still have some work to do, we believe we will show a year-over-year improvement in our financial results for the full year.

Before going into more detail on each of the businesses, I want to provide an update on the headwinds we faced on the fourth quarter of last year.

The headwinds came from the impact of hurricanes in September, a lower renewal rate or a pullback in spend from certain large customers, and a lower percentage of our billable hours for premium rate business. Let's start with the travel nurse impact from the hurricanes and from the reduction in renewal rates.

Both of these events resulted in the base number of nurses out on billing for travel nurse to be reduced. Because of the historical nature of travel nursing, it takes a while to grow back to previous levels when a step change like this occurs.

Now, obviously the impact from the hurricanes was an isolated event and we've also not seen any further pullback in spend from customers in the first quarter. Therefore, we expect to return to the previous levels in travel nursing by the second half of the year.

I was originally going to wait until the Q&A to talk about the specific numbers related to the full impact and the progress we've made, but I think adding that color here is probably important. So I'm going to go over some numbers and these are variance numbers based on the endpoint data of the period of what we had RN billing for travel nursing.

So if you start with the end of the third quarter of last year and then the end of the fourth quarter, we dropped almost 550 travel nurse assignments out on billing in that quarter. That's not the average, that's from the beginning to the end of the quarter.

That's a big change for us, that's a big drop, significantly more than you would normally see from one quarter to the next. If we had stayed at that reduced level, going forward from the end of Q4, it would have been about a $19 million per quarter impact or a $75 million to $80 million full year impact if we had stayed at that reduced level.

Now, we have continued to grow from that bottom point at the end of Q4 throughout the first four months of 2018 and we've grown back just short of about half of what we had dropped in the fourth quarter.

I had hoped to get about half of it in the first quarter and half of it in the second quarter, so we're about a month behind where we expected to be, but we believe over the next three or four months as we go into Q3, we'll be able to get back to the levels we were at before. So I wanted to give the color as to that impact and where we were.

So it's not really about the averages in each of the quarters, which is what we normally publish, it really is about the endpoints and the starting points of each of the quarters. The good news is we continue to grow back from that and we'll continue to do that through Q2 as we go into Q3.

Now moving back to the headwinds in Q4, the premium rate business, as anticipated, we did see another decline in the percentage of our billable hours from premium rate assignments. It was built into our guidance in Q1 and it came in within our expected range which was about a $2 million impact.

We expect another decline in premium rate business in the second quarter which is also built into our guidance and that's again about a $2 million impact. We may continue to see premium rate business decline for another quarter or two, but it seems to be leveling off and we believe it will not have a major impact in the second half.

In January, we announced a management restructure creating a new chief operating officer role and splitting our Cross Country staffing business into travel nursing and branch operations with a new president heading up each business.

The new structure is designed to give us additional focus on our day-to-day operations and allows us to be more nimble in decision-making. I'm very pleased with the progress being made by the new team.

The businesses have responded well to the leadership changes and this renewed focus on operational improvements has sparked several new initiatives that I'm confident will provide efficiencies and productivity improvements. Turning to the quarter, our Nurse and Allied business grew 1% year-over-year, mostly bolstered by the Advantage RN acquisition.

Pro forma growth was negative, mostly due to the headwinds discussed earlier. However, some positive trends exist within the segment. Our travel allied business was up 7% year-over-year. While aided by a small positive impact from the flu season, our underlying trends of travel nursing remain strong, partly through the inclusion in more of our MSPs.

Additionally, our DirectEd school business continues to perform well with over 30% year-over-year growth. We expect this business to continue to outperform the market overall.

And lastly our Advantage RN acquisition had another strong quarter, supporting our MSPs by increasing the number of nurses out on billing at our MSPs by more than 60% sequentially after increasing 30% from Q3 to Q4. As we stated before, we believe we can continue to build on this momentum and improve this even further in 2018.

Moving to physician staffing, we had slight year-over-year revenue growth driven by strong performance in Advanced Practices. Advanced Practices which includes nurse practitioners and physician assistants grew by over 30% year-over-year. We continue to see strong demand in this area and are making investments to ensure we maintain this growth.

Contribution income margin for physician staffing also increased year-over-year to 7% and we expect to improve that further with a target contribution margin of 10% as we exit 2018. Physician staffing has seen slight revenue growth year-over-year for two of the last four quarters.

Although we believe this business is on a good path to recovery, we expect to see some fluctuations in revenue growth in the coming quarters. Specifically in Q2, we expect to have a slight year-over-year revenue decline because Q2 2017 was a strong quarter for us.

That being said, we are making progress and believe we'll get back to sustainable revenue growth by the end of this year. Overall, we expect that the full year will show a small revenue increase. Our Other Human Capital Management Services segment which is our physician and executive search business had strong revenue growth of 21% year-over-year.

Although the search business is not as predictable as our staffing business, we expect to have a good 2018. Through strong leverage and cost controls, we improved our year-over-year contribution income by $750,000. Our Workforce Solutions business led by our managed services programs, our MSPs, continues to do well.

For our MSPs after winning $77 million of new business in 2016 and $111 million in 2017, we have secured almost $20 million of new MSP business in the first quarter of 2018.

Although we saw some pullback in spend from existing MSPs in the fourth quarter related to the headwinds I talked about, we still have approximately $70 million to ramp at programs already implemented.

Additionally, the $20 million of new business won in the first quarter is expected to be implemented this year and will have a positive revenue impact in 2018. Besides growing revenue from new wins, we expect to continue to improve our capture rate at our MSPs.

Capture rate in the first quarter of 2018 topped 60% for the first time in two years and we are working to improve on that throughout the year. We believe MSPs remain one of our key growth areas and the demand is sufficient for us to continue to grow this business.

While overall we had a good start to the year we still have some work to do in overcoming the headwinds from the fourth quarter of 2017 mostly in travel nurse. We have several initiatives to increase our billable headcount, getting back to the levels we had in the third quarter of last year.

As I stated we expect these initiatives will support our guidance for the second quarter and have a meaningful impact on our second half performance. Even with the travel nurse challenges, I am pleased with our start to the year. All reporting segments showed revenue growth and we had a significant improvement in adjusted EBITDA.

The strong start and expected improvement in the second half supports our target of achieving an 8% run-rate adjusted EBITDA margin by the fourth quarter of 2019. With that, let me turn the call over to Bill Burns who will review our operational focus in a little more detail..

Thanks Bill. As I mentioned last quarter, my focus is on driving revenue growth and identifying opportunities for achieving operational efficiencies and improved productivity. Over the last several months I spent time working with each of the businesses and visited several of our large customers.

I remain encouraged by the opportunity that lies ahead for us as we continue to grow the business and increase our market share. Let me start with revenue growth. As Bill mentioned, we exceeded our expectations for the quarter.

Now I'd like to share a little more color on some of the key drivers as well as some of the opportunities to accelerate growth. We saw a strong year-over-year growth in the areas of travel allied, education healthcare staffing, advanced practices and [retained] search.

Travel nursing reported year-over-year growth which was due the impact from the Advantage RN acquisition in mid-2017.

On a pro forma basis, revenues were down to travel nurse due to the lower number of healthcare professionals out on billing, that's the impact Bill was mentioning a moment ago, as well as the impact in the shift in mix from premium rate orders. So the business started the year off slowly due to the headwinds we mentioned a moment ago.

We continued to improve throughout the quarter with a growing number of healthcare professionals out on billing. Renewal rates which had declined in second half of 2017 and most notably in the fourth quarter have steadily risen during the first quarter and as we proactively managed assignments, schedules and in the coming weeks.

Travel nurse will continue to lag as we proceed into the second quarter, but should rebound as we progress throughout the year. The opportunity to grow as fast or faster than the market remains largely due to the strength of demand in our managed service programs and our ability to continue to increase our capture of the spend from these programs.

To that point, Advantage RN showed significant sequential improvement in both the level of activity and their fills at our MSPs which we also believe will continue to improve as we progress throughout the year. Lastly we have multiple initiatives aimed at candidate attraction and conversion which we anticipate will have a positive impact as well.

Next I'll spend a few minutes discussing our focus on efficiencies and improved productivity. Last quarter we shared that in addition to leveraged organic growth, there are three opportunities we believe there to improve our profitability going forward. Two are related to operations and the third is related to our corporate costs.

We believe the combined opportunity from these three areas of focus is approximately $15 million to be realized over the next 18 months to 24 months.

The opportunity for improving our cost structure across all three areas is expected to be achieved from streamlining processes, automation of manual tasks, increased scope of work in our lower cost operation in India and a reduction in spend with third parties.

The first opportunity of the three of is really to improve profitability at two of our businesses, physicians staffing and search, which had reported contribution income below expectations in the prior year.

The goal here is simple, return the business to market level growth thereby improving the leverage and aligning the costs with their current performance. First quarter growth was ahead of our projections for both search and physician staffing which resulted in better operating leverage.

In the case of physician staffing we saw volume increase slightly after continued steady declines over the last several years. From a contribution income perspective, we also took actions to reduce physician staffing cost by an estimated $1.5 million annually and we'll continue to evaluate performance as the year progresses.

As we closed the quarter, activity for physician staffing continued to show improvement and should result in better performance as the year progresses. As a reminder we had a particularly strong quarter last year, so we do not expect to report year-over-year growth in that segment for the coming quarter.

The second area of cost opportunity is with respect to our other operating activities which we sized at between $6 million and $7 million when fully realized. Through the end of the first quarter, we made good progress in identifying specific actions which should allow us to achieve roughly half of the target when fully implemented.

The balance of the reductions will come from further centralization, automation and ultimately when we replace our legacy travel nurse platform in late 2019. The third area of focus is with respect to our corporate cost structure.

We believe the opportunity here is between $3 million and $4 million and we are aggressively working to identify the specific actions necessary to realize these savings. We will continue to provide more information on these efforts in the coming quarters. I'd like to just finish with a comment about my first three months in my new role.

The market remains strong and the opportunity for us to grow at least as fast as the market remains. We continue to take decisive action aimed at rightsizing our cost-base and to improve our overall profitability. We have solid leadership and our teams are completely aligned and focused on the tasks at hand.

We remain committed to providing our healthcare professionals with the best experience possible and delivering value to our clients. Now let me turn the call over to Chris Pizzi who will review the results for the first quarter in more detail and provide our second quarter guidance..

Thanks Bill. I'm pleased with our overall financial performance this quarter as we experienced year-over-year revenue and contribution income growth across all three of our business segments. We exceeded our guidance ranges for revenue, adjusted EBITDA and adjusted EPS and our gross profit margin was within our guidance range.

For the quarter total revenue was $210.3 million, up 1% from the prior year and down 4% sequentially. The year-over-year increase was primarily due to the Advantage RN acquisition offset by declines in our legacy travel nurse business resulting from fewer overall placements and lower renewal rates on existing nurses.

The sequential decrease was primarily due to normal seasonal trends for this business as well as fewer placements mainly in our nurse and allied and physician staffing businesses. Gross profit margin for the quarter was 25.6%, down 10 basis points from the prior year and down 90 basis points sequentially.

The sequential decline was primarily due to the impact from the annual payroll tax reset which we experienced at the beginning of each year. Moving down the income statement, SG&A for the quarter was $45.6 million, down 3% from the prior year despite adding $3 million related to the Advantage RN acquisition.

SG&A was down 1% sequentially primarily due to the cost-savings initiatives completed over the past couple of quarters. As discussed earlier in our year-end earnings call, we are focused on achieving an adjusted EBITDA margin of 8% as we exit the fourth quarter of 2019 on a run-rate basis.

Well, this target is not the endgame, it is an important milestone for us and it is dependent upon executing on our organic growth strategies in addition to the cost savings initiatives discussed earlier. During the quarter we incurred a restructuring charge of $400,000 in connection with our cost-savings initiative.

The specific actions taken to-date are expected to generate realized savings of between $3 million and $3.5 million in 2018 and annualized savings of between $7.5 million and $8 million.

Adjusted EBITDA was $8.4 million or 4% of revenue as compared with $6.5 million or 3.1% of revenue in the prior year and $12.3 million or 5.6% of revenue in the prior quarter.

The 90 basis point year-over-year increase was due to the improved operating leverage across all 3 of our business segments, as well as the accretive impact of 30 basis points from the Advantage RN acquisition.

The 160 basis point sequential decline was due to the 70 basis point to 80 basis point impact from the annual payroll tax reset discussed earlier coupled with the impact from the volume declines primarily in our travel nurse business. Depreciation and amortization expense was $2.9 million, up $700,000 from the prior year and up $100,000 sequentially.

The year-over-year increase was primarily due to the Advantage RN acquisition. Interest expense was $1.3 million, up less than $100,000 from both the prior year and prior quarter. This sequential increase is due to slightly higher interest rates on our floating rate term loan.

Income tax expense was $1.2 million for the quarter representing an effective tax rate of 37.7% including discrete items which added 240 basis points to our rate. Excluding these discrete items, our underlying tax rate would have been 35.3%, which was higher than what we had previously stated.

We are currently taking steps in order to reduce the rate impact of certain nondeductible permanent items targeting a 200 basis point annual rate reduction by the end of 2018.

As a reminder, in the fourth quarter of 2017 we released the majority of the valuation allowance on our net deferred tax assets which now provides us with a more normalized effective tax rate. We believe that our remaining NOLs should offset the majority of cash taxes paid until the second half of 2019.

Net income attributable to common shareholders was $1.6 million or $0.05 per diluted share as compared with a net loss of $2 million or a loss of $0.08 per diluted share in the prior year.

The prior year included a $5 million loss on the early extinguishment of debt partly offset by a $1.6 million gain on the derivative in the convertible notes which were repaid in March 2017. Adjusted EPS was $0.06 compared with $0.05 in the prior year and $0.17 in the prior quarter.

Next let me review the quarterly results for our three business segments. Revenue for Nurse and Allied segment was $185.1 million, up 1% from the prior year and down 4% sequentially. The year-over-year increase was primarily due to the Advantage RN acquisition offset by declines in our legacy travel nurse business.

The sequential decrease was mainly due to lower volumes in our travel nurse business off set by growth in our education, healthcare staffing business. Revenue per FTE per day for the quarter was $275, down 2% from both the prior year and prior quarter. We averaged 7,466 field FTEs for the quarter, up 4% from the prior year and down 1% sequentially.

Segment contribution income for the quarter was $16.8 million, representing a 9.1% contribution margin, up 60 basis points from the prior year and down 80 basis points sequentially.

The year-over-year increase was mainly due to improved operating leverage, while the sequential decline was mainly due to the impact from the annual payroll tax reset coupled with lower volumes in our travel nurse business.

Turning next to our physician staffing segment, revenue was $21.6 million, an increase of less than 1% over the prior year and down 4% sequentially. The year-over-year increase was due to a higher number of days filled partly offset by the mix of business while the sequential decrease was due to normal seasonal trends.

Revenue per day filled at $1,513 was down 1% from the prior year and up 1% sequentially. The year-over-year decline was due to a shift in mix between advanced practices and physician staffing, while the sequential increase was due to improved pricing.

Segment contribution income for the quarter was $1.5 million representing a 7% contribution margin, up 310 basis points from the prior year and up 230 basis points sequentially. These improvements were largely due to gross margin expansion in our cost-savings initiative which led to higher operating leverage in the business.

Lastly, revenue for Other Human Capital Management Services segment was $3.6 million representing a 21% year-over-year increase and a 7% sequential increase. The year-over-year increase was due to growth in both executive and physician searches, while the sequential increase was primarily due to higher number of physician search placements.

Segment contribution income was $300,000 as compared to a loss of more than $400,000 in the prior year and a loss of $200,000 in the prior quarter. These improvements were due to our cost-savings initiative which led to a higher operating leverage in the business.

Turning to the balance sheet, we ended the quarter with $32.6 million of cash and $98.8 million of term loan outstanding at par. As of March 31st we did not have any amounts drawn on our $115 million revolving credit facility. During the quarter we entered into an amortizing fixed interest rate swap with an effective date of April 2, 2018.

The swap is executed on 50% of the outstanding notional principle amount of our term loan which was $48.8 million on the effective day. We generated $13.3 million of operating cash during the quarter, substantially more than the prior year.

We made very good progress reducing our DSO to 55 days representing a three day improvement from both the prior year and prior quarter which helped bolster our operating cash flow this quarter. Seasonally we tend to see an uptick in our DSO in the first quarter as collections are generally strongest in the fourth quarter.

We were pleased with our collection efforts and the resulting sequential decline in our DSO during the quarter. Generally we believe that our DSO should average in the mid-50s days with the exception of timing for collections at certain period ends. For the quarter, our capital expenditures were $1 million and in line with our expectations.

During the quarter we repurchased approximately 242,000 shares for an aggregate price of $2.9 million under our existing share repurchase program.

While it's been a number of years since we've repurchased our shares, we felt that our share price was undervalued and that our share repurchase would help offset dilution from our current year equity grants.

We will continue to review our capital allocation strategy which includes strategic acquisitions, paying down our debt and opportunistic share repurchases.

As a reminder, we still have approximately 700,000 shares remaining under our existing share repurchase program and future buybacks, if any, would be subject to certain limitations within our credit agreement. This brings me to our second quarter 2018 guidance.

We expect consolidated revenue to be between $206 million and $211 million reflecting a year-over-year decline of 2% to growth of 1%. Gross profit margin is expected to be between 25.7% and 26.2% reflecting the sequential improvement of between 70 basis points and 80 basis points related to the annual payroll tax reset.

For adjusted EBITDA, we expect to generate between $8.5 million and $9.5 million reflecting the sequential improvement from the annual payroll tax reset coupled with improved operating leverage resulting from our cost savings initiative. Adjusted EPS is expected to be between $0.04 and $0.06 for the quarter.

Our second quarter guidance assumes the following estimates; $3 million of depreciation and amortization expense; $1.3 million of interest expense; $1.2 million of stock compensation expense; and effective tax rate of 35% and a diluted share count of 35.9 million shares.

Finally as a reminder, we expect to start an initiative to replace our legacy travel nurse front-end system in the second quarter. We anticipate this system replacement to be completed by late 2019 and that the total cost will range between $10 million and $12 million over this period.

We have not modeled the impact of this initiative into our second quarter guidance because we have not finalized the agreement with our IT partner. We believe however that the potential reduction to our second quarter adjusted EBITDA would be no more than $500,000 in connection with this initiative.

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

Operator?.

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Jeff Silber from BMO Capital Markets. Your line is now open. .

It's [Henry Chen] calling for Jeff. Just a question on the 2Q guidance, just want to make sure I'm understanding this correctly. So it seems like revenues is there, it should at least stay flat sequentially and there's a chance that it could decline year-over-year.

I just want to understand is that primarily due to the drop in assignments in travel nurse offset by steady revenue growth on the other businesses, and I'm just trying to understand how to think about that potential decline?.

Yes, it's certainly is the result of the headwind from Q4 where we're still trying to grow back into the level of headcount on our billing for travel nurse and that's the biggest impact.

We expect executive and physician search to do -- to have another good quarter and there will be a little bit of decline we think in physician on a year-over-year basis because we had a good quarter last year.

So it's a bit puts and takes here and there, some of it within Nurse and Allied with physician -- sorry, with education still growing and travel allied will still grow. It's puts and takes here and there, so it looks like it's kind of flat on the sequential basis and either slightly down or slightly up on a year-over-year basis..

And on the nurse side the decline in billing rates, is that primarily due to the impact from the premium rate business or is sort of like....

It's almost all completely due to that, yes..

And shifting over to the cost side, the 3 million to 3.5 million that you've targeted that's expenses that you're targeting to be removed this year and then the additional 3 million to 4 million and 15 million that Bill mentioned earlier, that's incremental on top of that over the next few years?.

No, the amount this year is part of the total 15 million and Chris was relating the restructuring charge to 400,000 in the first quarter to the 3 million and 3.5 million.

We think we might be able to get a little bit more than that total out of this year, maybe 4 million, maybe a little more than 4 million for the full year and then next year maybe $8 million to $9 million total for the full year, but be at a run-rate of the 15 million maybe by the fourth quarter of '19.

Is that right, Chris?.

That is right..

Our next question comes from A. J. Rice from Credit Suisse. Your line is now open..

Couple of questions if I might.

First of all just -- and I know we talked a little bit about this last call, so this depth in volume and placements, remind me, are you attributing that mostly to the way the market is reacting coming out of the gains in the issues in the third quarter, are you sort of attributing that mostly to your own internal disruptions that you experienced in the sort of rebuild the order-book in the recruiting and so forth?.

Yes, there may have been some minor disruption to our customers that were in the hurricane areas like in Florida, but that was not -- that was a minor part of it.

It was really the fact that our travel nurse operation is based here in South Florida and we were closed for several days and then we had power outages and Internet outages and travel restrictions and schools closed for a couple of weeks afterwards.

And it was that disruption that really was the driver of not being able to make the normal levels placement. And as you know, once you don't make them, somebody else made them and you just don't get them back again..

And so you would say the -- your sense about the underlying tone on travel nurse segment just financially is still pretty robust, I don't know if you have a metric of positions filled, open or filled or whatever that would -- on your MSPs, give a sense of how you perceive the underlying tone of the overall market to be?.

Yes, so I'll make a short comment and I'll let Bill make a comment on how it kind of manifest itself. So dropping 550 people out on billing for the beginning of a quarter to the end of a quarter is a huge amount of heads-on billing for us. That's a step change that doesn't normally happen.

And I'll let Bill explain how it comes back again and why it takes so long..

Yes. So two things, one to just follow up on Bill's point, so you only have the capacity to do so many assignments and clocks in a particular week. And so we're certainly seeing the headcount rise steadily throughout the first quarter, but it's just very difficult to increase and try to cover that kind of a gap in a very short period of time.

It's the timeframe of getting people through the pipeline, getting them submitted, getting them interviewed at the hospital systems, the capacity and then with the teams here to do all that work. So there's a kind of a constraint on how fast you can bring it all back. But there was another point I was going to make and I've just forgotten it..

Well, let me word it slightly different than Bill did. There was a step change in our billable headcount, but you can't just automatically make a step change in the number of placements you make each week.

So we can't automatically start making an extra 50 placements a week to try to make up for the 550 that fell off because if we could have done that, we'd have been doing that already. So production is back to normal, but normal production is only going to grow so much every week until we get back to all 550..

That's right. And then you had asked about do we have forward-looking metrics and we do obviously track order volume, order counts. Throughout much of '17 as the clients were pulling back on spend, we did see orders coming down.

That sort of stabilized as we left and entered into the first quarter and it's kind of held steady at a reasonable rate now for -- to continue to grow, it's not back to the lofty days of '15 and '16, but nevertheless it still seems to be fairly robust enough for us to grow..

And then I appreciate all the comments about the cost-reduction programs you have in place.

To get to the 8% margin by yearend '18, do those cost reductions pretty much get you there? Do you need an acceleration in year-to-year revenues and sort of what order of magnitude would you need to get to the 8% margin?.

Yes, so by the way, it's the fourth quarter of '19, not '18..

I mean '19, sorry, yes, I know..

Just want to be clear. No, there is a page in our Investor Presentation that will be posted. Well, the old one has it as well. The new one actually has the dollars associated with it that will be posted either today or tomorrow on our website.

And it talks about -- it talks about, we need about $23 million -- I think $23 million in increased profitability on annualized basis by the time we get to the fourth quarter of '19.

$15 million comes from cost-cutting, $7 million or $8 million of it comes from what we believe we'll be able to grow at mid-single-digit numbers once we get past these headwinds..

And then my last question just is just around the systems reconfiguration you're doing. I know you said in the second quarter you've got a little vacant for disruption there.

I guess I'm trying to understand how disruptive is this? Who is going to experience the disruption? And do you think -- how much risk is associated with rolling this out? Sometimes system conversion rollouts can cause more disruption than is expected..

Yes, there's a couple points to make. One is over the last few years we replaced the front office recruiting systems in all of our businesses in the company except travel nursing. So this isn't a completely new process for us and I think we understand the pitfalls.

Secondly this is an 18-plus month project, the actual implementation of it wouldn't be till the second half of '19. We don't anticipate any disruption. Well, we don't anticipate any disruption at all. If there was going to be disruption, it would be in the second half of '19 when it starts to roll out.

But we believe we have a very good IT partner, we've hired a change management organization to support us. I think the management restructure that we made in January will help support it as well and we're going to phase it in using different business segments that we won't go big bang.

So we'll be able to identify whether there are issues or not and whether it's performing the way we expect it to. We believe we have a very good process here. As you know, we had started this project a couple of years ago, and I pulled the plug because I didn't think it was going to be successful. I'm very confident that we're on a good track here.

But we won't really implement it till the second half of '19. It's really development from here until then..

Our next question comes from Brooks O'Neil from Lake Street Capital Markets..

So Bill, I am just trying to be sure I understand what drove that step function decline in your travel nurse business. Obviously my sense is hospitals are doing pretty well, there was a strong flu season.

Just help us understand was this an industry phenomenon, was it an anomaly of a few of your hospitals or is it something related to your core business?.

No, it's not related to our core business. We think everything is generally on track. Our production is pretty good. Our orders, as Bill said, are fine. The bulk of it was the impact of the hurricane. And our travel nursing business is based in South Florida and at the beginning of September of last year we had to shut down.

And if the recruiters can't get online and can't make phone calls to their healthcare professionals, then we just lose a bunch of placements. And that drop off from the end of Q3 to the end of Q4 of 550 was mostly the result of not being able to make the placements during the disruption from the hurricane.

And then a little bit of some pullback at a couple of big customers that we have not seen continue on into Q1. So it seems like it's unique to us and it seems like kind of isolated incidences that are not recurring and once we build it back up to the level we had prior to the step change, I think we're in good shape..

Could you just give us a quick rundown in terms of Advantage RN integration? I'm kind of thinking there should be more left in the business related to that acquisition. And for whatever reason I'm not positive I've seen it. So help me to think about that..

Well, as we said they're doing a great job in filling our MSP jobs. We feel that we've got -- if you remember we first acquired the company July of last year. The first quarter we had, we didn't get what we wanted out of it. We fixed that and had a good fourth quarter and an even better first quarter.

So I'm not sure exactly -- we had said originally when we acquired the company that the deal wasn't done on synergies, it was done on their ability to have a different operating model and to be able to deliver to our MSPs. So we really weren't building any integration synergies into the deal.

But we -- there are some opportunities to leverage functions that exist across all of our businesses, whether it's credentialing or payroll and billing or other functions that we will look at and get over time probably built into a total $15 million cost-savings, but nothing significant from an integration standpoint..

And then I think somebody talked about the managed services business, but you're still seeing that growing robustly and do you still think there's significant opportunity in that area for you as you go through 2018 and beyond?.

Yes, the pipeline for deals is still very strong. I don't know that we'll continue the rate and pace we saw from '16 and '17. We obviously had tremendous number of wins in both of those years.

We're off to a good start this year, but as Bill mentioned on the call, if you look at the amount of spend yet to ramp plus new wins, it's still close to $100 million of opportunity for us just to take that and grow into it and get our usual capture of that, plus we do continue to expect to win a couple of MSPs per quarter going forward.

So the opportunity is still there, it's definitely a big area of focus for us. We're looking at how we continue to expand our service lines at the MSPs as well and ensuring that we're bringing Allied to the table and physician staffing and the like. So we do think this is a very big opportunity for us..

Plus the capture rate..

Plus the capture rate, moving that up, right..

And then the last question for me, in the past I've always had a sense that the education market was a reasonably good-size opportunity for you guys.

It's not something I hear about from the others, but could you help us understand how big an opportunity you think that is and whether that continues to grow robustly as it has in the past?.

Yes, I do think it will continue to grow. When we acquired Mediscan at the end of '15, the school business was only about $20 million. It's doubled now -- organically in the last couple of years, so we're very pleased with that.

We do think that -- I don't know if we have -- we did hire a consultant to do some analysis and give us a view as to where the opportunities were across the nation, I don't remember what the total dollar opportunity is, but -- I have it in the presentation somewhere, I'll try to dig it out and make it available, but we think it's significant, we think it's an underserved market, there's not a lot of competition and we seem to have a good differentiation and a good model that we can build on.

So we're looking at both organic expansion, as well as potential acquisition expansion, if we can find some opportunities..

Our next question comes from Kevin Steinke from Barrington Research Group. Your line is now open. .

So there were some discussion throughout 2017 on your calls about just some general uncertainty in the demand environment around customers having some hesitancy to commit to new travel nursing assignments due to uncertainty around the Affordable Care Act and do we feel like that kind of market pause is completely behind us now and customers are committing to new assignments at normalized rate?.

Yes, I -- yes and no.

Things seem to be back to normal trends and customers seem to -- buying behaviors seem to be back to where they were before generally from how they behave, but we are getting a lot of requests in our quarterly business reviews with our customers to help them find a way to be more efficient, save money, maybe speed up the time it takes us to get nurses or healthcare professionals on site.

They have their own challenges.

I'm encouraged by the recent hospital reports that show patient numbers are up and profitability is up and I think that helped to calm things down in the market, but we still get some pressure to help support, not really asking for price cuts, but they're asking for us to help them become more efficient and better at it.

And I think that that's a good sign for us and I think it's why we're seeing such a big take-up in these managed service programs, because managed service programs automatically create efficiencies and cost-savings for our customers and I think that's why we've seen such a big uptick over the last couple of years.

But generally yes, things seem to have settled down..

And just following up on the Advantage RN discussion, how much did they really contribute to that sequential improvement in the capture rate, and how much capacity is left for Advantage RN to continue driving their capture rate higher?.

Yes, so if I look at the numbers here, so Chris, if I look at these two numbers, so this one and this one, so what percentage of that is 2% of the total capture rate --.

Right, probably a couple of hundred..

Probably 2%, couple of hundred basis points came from Advantage RN and the increase in our capture rate.

Is that right, Bill?.

That's about right..

Okay. I [indiscernible] my math is right. So we're very pleased with that. So that is one of the ways that we believe that capture rate is going to go up, after they've proven that they're more nimble and more flexible than our old legacy system and that we can continue to help drive that up. I forgot what the second part of the question was..

No, yes, just how much capacity they have to continue contributing to that higher capture rate?.

Well, I'll let Bill answer that. I feel he spent a week there a couple of weeks ago and I've said, I want to build on this, what do we have to do to invest and build on the successes we've had, so I'll let Bill answer that..

Yes, they've got a very concerted effort and focus on aligning the account managers with our MSP programs. There's a focus at the desk level to ensure that the submissions are continuing to be funneled to the MSPs as much as possible. I do want to stress that they do have a core amount of business that's outside of our MSPs.

We're looking to protect and preserve that as much as possible, we obviously want to keep that and grow with our MSPs..

This isn't an either/or..

This is not an either/or, so we want to continue to retain their book of business that they have, but there's a very big focus on continuing to ensure that we're moving to the MSP programs, we've broken down a lot of the barriers and things that might have been challenges if only first at the deal they were sort of being handled as though they were still a subcontractor to us a third-party and that's no longer the case, the information is flowing a lot better and....

Based on what the target is for the year, we probably are targeting about a 200 basis point improvement from their involvement, MSPs for the next 2 quarters..

Yes, sequentially, yes, I would agree with that..

And then lastly you mentioned your efforts on candidate attraction and conversion so can you just provide us un update with what you're doing there now and how far along you are, and I believe you said that could contribute to the improvement growth as we move forward, so maybe the expectations is how they can contribute?.

I mean, there's a lot of things that, we won't get into the all the nitty-gritty details on this call, but there's a lot of things that we've been doing first and foremost to review our own processes for ensuring that we're making sure we're moving the candidates through the process as efficiently as possible that we're not over-credentialing et cetera.

We're looking at the tools at the desk level to ensure that our recruiters have the ability to do analysis and be able to give data live on the call with their candidates so that they're not hanging up from them and having to call them back.

So we're looking to speed up the process to getting the candidate conversion moving by having the better tools at the desk level and better flexibility for the recruiters. So those are couple of the things.

We obviously always look at our mix of spend and where our candidates are coming from ensuring that we're getting the most cost-effective and efficient sources, so, some sources are identified to have lower conversion rates.

We'll start to pull back and travel back from that and really emphasize where we're getting better conversions and better quality..

And I'll add to that as well, we had a big technology push also in the ways that we communicate with our candidates, that we do a lot more online chatting with them, so that our recruiter can engage with multiple candidates at one time, we do more texting and we have a portals for them to access information so we don't have to run around to gather data for them that they can access it themselves.

So as Bill said, we're -- it's process improvements, but also improving the candidate experience..

Our next question comes from Tobey Sommer from SunTrust Robinson Humphrey..

Could you describe changes in order levels in '18, not just in the quarter, but maybe if you could include April in terms of what you're seeing and I have travel nursing in mind..

Yes, I don't have it in front me right now. I mean I think as I mentioned earlier, we saw a downward trend through much of '17 on the order volumes, both MSP and non-MSP. Going into Q1 of '18 that has -- that deceleration has not been there...

No, we had an increase from Q3 to Q4 though..

We did, slight increases as it leveled off coming out of the year, but certainly going into the first quarter of '18, the orders have held up. I don't think we've -- they're not markedly up or down, it's kind of been in a….

Same, steady, yes..

..stable state..

What were renewal trends like in travel nursing in the quarter in April?.

The renewal rates have continued as I mentioned continue to rebound. They were -- they're always seasonally lowest in the fourth quarter, so that's one thing, but they were down….

They were down way below....

..way below where we had expected in the fourth quarter of '17. The numbers have rebounded, I'm going to probably say 500 basis points or 600 basis points sequentially going into the first quarter and are up sequentially again going into the second quarter as we're looking....

And they're near all-time high..

Yes. And we've had several weeks now of all-time high. It is a big focus of area for us. We are proactively managing the assignments as they're coming up for end making sure that we're working with the client to get the orders as quickly as possible to renew the healthcare professional.

They just don't -- they're not -- if you wait too long, they're going to move and go off somewhere else, so we're trying to get the renewals in as fast as we can and obviously it improves our productivity the sooner they get those renewal orders that they can start to focus on converting new locks..

What's the recruiter headcount like on a year-over-year basis? Has it been gross, just kind of wondering in the face of the revenue decline what the kind of sales related staff headcount looks like? And maybe if you could speak about it with and without the impact of acquisitions?.

It's a little harder. I mean recruiter headcount is certainly down as the year progressed, it's at a level of -- we still have the capacity to grow, we're going to be continuing to invest in that.

I think if you looked on a reported basis, it's probably closer to flat when you include Advantage with our legacy travel nurse business to where we were prior to the acquisition when revenues were a bit stronger..

And how do you handle the fourth quarter kind of rough patch related to the weather and impaired productivity? Did you experience turnover in the recruiters or did you kind of make a decision as a company to make them whole for that lower revenue run-rate and commission that they kind of weren't able to achieve for reasons outside of their own control?.

Yes, I mean, there's some things we do internally that we're probably aren't going to talk about on an open call, but it wasn't a big issue generally. And we did not have any more turnover than on our normal trends because of the headwinds.

Everybody was focused on trying to get back again, so we didn't see any major disruption from that at the staff level..

And last question from me, from an M&A perspective, does the slight repurchase in the quarter signal a different appetite for M&A and if not, have your areas of focus changed at all?.

It does not.

I still would like to do some acquisitions, the board is behind it, but the share price was so depressed and we're generating as you know we had, what was it, $45 million of operating cash flow last year, $13 million in the first quarter, we feel pretty good that we have enough money to do some share buybacks and not eat into what we have available to do an acquisition.

So we still have $115 million revolver that's unutilized today and I think we had cash at the end of the quarter about $33 million plus the $115 million, so I think we're okay, because we're not going to spend $10 million or $20 million on share buybacks, but if we're trying to offset dilution from share grants we might do 200,000 or 300,000 more shares at some point, but I think that gives -- still gives us enough dry powder to do an acquisition..

Our next question comes from Mitra Ramgopal from Sidoti & Company..

Just had one question, I just wanted to get a better sense in terms of the benefits we should expect from the -- on the margin, on the cost-saving initiatives relative to investments you probably still have to make in terms of building out infrastructure to grow the business.

I know you talked about the technology push etcetera and I was just curious in terms of how much more investing you have to do on that side to support the step-up in the MSPs etcetera?.

So the $15 million of cost savings is net of investments that we would need to make as well..

Well, those three buckets are in isolation, the organic growth number is net of investment [Indiscernible]. But it assumes that we're going to continue to make normal investments in the business to grow whether that's in revenue-producing heads or in technology. Not necessarily the project for the Irish replacement, that's still not modeled in there..

And then just as a follow-on in terms of investments you're making, is there -- I don't know if you could give us how far along you're in that, if that will continue well into 2019 or you expect to get most of it done this year?.

The IT investments or other....

Yes, the IT..

Yes, so the IT is total of $10 million to $12 million, Chris, 80% of it we think will be capitalized, that we're not sure....

Yes, we have not finalized the agreement, but....

-- either capitalized or deferred or [indiscernible]..

Correct..

Look, when we have all the details about the phasing and what's capitalized or deferred and what's P&L, we'll come back and make sure everybody's aware of it, but because it's not finalized yet it's really hard to nail it down.

So I apologize -- we don't have it yet until we know for sure that -- what the contract says, what the accounts say is the right accounting for it and how it's going to phase it..

And then quickly on the tax rate, how should we view that going forward?.

So we are looking, as I mentioned, for a 200 basis point reduction in the annual income tax rate for the year, but right now we're at about a 35% effective tax rate for the next couple of quarters..

We hope to get it down to about 33%..

Hope to get it down to 33% by the end of the year for the entire year of '18 and then into '19 I would use the same rate..

Our next question comes from Jason Plagman from Jefferies. Your line is now open. .

So following up on the order trend discussion, with -- did you see any difference in the order trends between MSP and non-MSP demand in the market?.

Yes, see, we look at that every week. I think MSP orders are slightly up, slightly ahead over the general market, but not a huge swing..

No..

And then on the MSP pipeline, what's the mix there of Greenfield opportunities versus displacement opportunities? Just wondering if you're seeing new clients adopt -- looking to adopt MSP or just the mix between new opportunities and displacement?.

Yes, so in '16 and '17 a high percentage of the wins we had were completely new customers that had never had a program before.

We look -- I look at the pipeline every week, if I had to put a guess, and this isn't scientific, but it's probably more 50-50 now of new Greenfield sites versus existing opportunities where someone's looking to make a change from another vendor. Bill, do you....

I'm just looking at the wins we reported this year. It's....

Exactly that way, so..

So like -- just coming into the year, the two that we talked about are Greenfield, they were not....

So everything we won so far this year is Greenfield. But there are some decent opportunities from customers that aren't happy with their existing vendor and that may make a difference going forward, but it's still a good mix of both Greenfield and existing opportunities..

And those displacement opportunities, are those primarily vendor-neutral MSPs or are they staffing led?.

It's a mix..

And then last one from me, the MSP kind of opportunity on ramping up implementation there, that's kind of hovered around $70 million for the last few quarters.

What would you say has kind of prevented you from bringing -- making material progress on bringing that lower and getting those MSPs ramped up that you've signed over the last 12 to 18 months?.

Yes, it's a little deceiving because it was $70 million and we actually billed some of that 70 million, but then new ones are coming on and bringing the level back up to 70 million, so it's not the same 70 million that's just staying flat. No, no, we increased some of them and then new ones are coming on at the same time.

So don't read it as we're not doing anything to stay stagnant. It just happens to be the same number that the new ones coming in have offset what we've increased. So we are making progress. We are moving all of those forward.

We track it very, very closely and I think we've made the statement before, if you go look at '15 and '16 and what happened in '17, usually the number we think it's going to get to, we get to. We're very good at predicting what the spend is going to be.

So I fully expect that that 70 million will ramp as well as the 20 million that we won in the first quarter and then we'll end up at whatever -- hopefully our capture rate by then is 65% to 70% and that will show off in our numbers as they fully ramp. But, no, that 70 million is not the same $70 million as was last quarter..

I was just wondering eventually can I get 40 million or 50 million just a couple of quarters worth of MSP wins, six months worth of MSP back logger should we expect it to remain kind of similar to [indiscernible] levels?.

Yes, I guess it depends on how much we win and how quickly they get implemented. It's hard to predict. 70 million to 100 million, is that the high-end of where I think it will normally be. It probably will come down a little bit especially as we increase our capture rate and get these things ramped..

Our final question comes from Bill Sutherland of The Benchmark Company. Your line is now open..

And it is literally one question. Bill Grubbs or Burns, you can help [technical difficulty] at least the mechanic of the recovery, the travel, placements [technical difficulty] to the revenue for the [indiscernible].

If you've added back half of the [indiscernible]-- so end of last month and do sequentially is [technical difficulty]-- the second quarter, I guess I'm wondering about just the mechanics [technical difficulty]-- maybe that's already focused, may I understand this?.

Yes, you broke up a little bit, but I think I got the question. I on purpose gave the data points at the end of the periods because that's really what the challenge is for us is -- but how it comes out in a quarter, so I'll talk about the fourth quarter of last year.

We actually had a good October in the fourth quarter of last year and most of the 550 dropped off in November and December, so the average for Q4 wasn't terrible, but that doesn't really tell the story. And the revenue you see is based on the average, not on the ending point.

The ending point is where the pain is at ending at 550 below where we ended Q3 and so we wanted to kind of give you what the full challenge was and how well we've done against that which is going back half.

But how we grew back that half phased in over January, February, March and April, we're not disclosing how it came in and what that -- I mean, you could tell what the average is generally in Q1, so it's hard to relate it to exactly what the revenue is within a month or within a quarter because it really depends on how it phased in.

But the message we're trying to say is that, look, it was a big number from Q3 to the end of Q4. We've gotten a bunch of it back again and we think we're going to continue that and get it all back again in the next three or four months and then we're back to where we were before which is a good thing for us. I hope that answers the question..

So I guess what I can surmise is that the recovery is more towards the April-end of that period and January and therefore the -- this impact on revenue in the second quarter is not going to be as meaningful? Is that....

Yes, it's certainly not linear and so it is hard to extrapolate it exactly the way with each of those data -- I mean the endpoint data, but, yes, certainly January started out very low and as a result -- so you're right, it won't have as much of an impact in Q2 because of what you just said. Okay. Well, I think that concludes our prepared remarks.

At this point we'll be back again in August to talk about our Q2 and Q3 guidance. Thanks everyone..

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