Christopher Pizzi - Senior VP, CFO & Principal Accounting Officer William Burns - Executive VP & COO William Grubbs - CEO, President.

Jeff Silber - BMO Capital Markets Kevin Steinke - Barrington Research AJ Rice - Credit Suisse Jason Plagman - Jeffries Brooks O'Neil - Lake Street Capital Markets Lalishwar Ramgopal - Sidoti.

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

A replay of this call will also be available until August 15, 2018, and can be accessed either on the company's website or by dialing 800-391-9846 for domestic calls, and 402-220-3132 for international calls and by entering the passcode 2018. I will now turn the call over to Christopher Pizzi, Cross Country Healthcare's Chief Financial Officer.

Please go ahead, sir. [Technical Difficulty].

Operator, could you do the intro again for me please?.

Sure, give me one moment, please. Good afternoon, ladies and gentlemen, and welcome to the Cross Country Healthcare Earnings Conference Call for the Second Quarter of 2018. This call is being simultaneously webcast live.

A replay of this call will also be available until August 15, 2018, and can be accessed either on the company's website or by dialing 800-391-9846 for domestic calls, and 402-220-3132 for international calls and by entering the passcode 2018. I will now turn the call over to Christopher Pizzi, Cross Country Healthcare's Chief Financial Officer.

Please go ahead, sir..

Thank you, and good afternoon, everyone. I'd just like to apologize for the technical difficulties we just experienced. Joining me today is our Chief Executive Officer, Bill Grubbs, and our Chief Operating Officer, Bill Burns.

This call will include a discussion of our financial results for the second quarter of 2018 as disclosed in our press release as well as a discussion of our financial outlook for the third 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 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 1st, 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 afternoon. As we stated in our last 2 earnings call, our focus for the first half of 2018 was to recover from the 550 billable headcount we lost in Q4 of 2017. We made very good progress in Q1 and through April of Q2, receiving approximately half of that headcount.

In May and June, we saw a pullback in spending from some of our larger customers, particularly in travel nurse. Our newer accounts have continued to ramp as expected, but that ramp has been fully offset by the decline ins pend from some of our larger existing accounts.

We've seen this pattern of behavior before where accounts pull back quickly on costs and subsequently reverse, but are unclear at this stage how long this is expected to continue. IT's a trend we are monitoring very closely and we are hopeful that it will rebound in the second half of this year.

We believe the market is strong enough for us to grow revenue in spite of this pullback, but we need to make some adjustments to account for these changes. Bill Burns and I will discuss the actins we're taking in more detail during this call. First, let me add some color to our revenue trends.

The revenue shortfall was almost exclusively the result of pullback in spend from existing customers. Solet me give you a feel for the trends based on our MSP customers which tend to be our largest customers anyway. So the numbers I'm going to talk about are the overall MSP spend under management.

So there aren't revenue numbers, these are spend under management. I can translate them to revenue numbers later if you want, but I just want you to get a feel for how things are trending. The positive news is that the new accounts we've been talking about for a while that we've won that we said are ramping up, have been ramping up.

In the first quarter of this year, they ramped up on a year-over-year basis with spend under management by $13 million. Now offsetting that in the first quarter was that our legacy existing MSP accounts pulled back in spend under management by $21 million. That was expected. That's the hangover from what happened in Q4 of 2017.

So Q1 came out about where we expected it to. We expected in Q2 that the new accounts would ramp even faster than they did in Q1 and they did. They went from $13 million of growth in year-over-year spend under management to $18 million of spend under management increase in Q2. So that's great, an additional $5 million.

But, the $21 million that we saw decline in year-over-year in spend under management in the first quarter, we expected that to say flat or maybe slightly improved in Q2 based on the growth we were seeing in the headcount the first 4 months. Unfortunately, that's not what happened.

The spend under management in our legacy existing accounts decreased by $34 million year-over-year in the second quarter. So it went from $21 million decline in spend under management the first quarter to $34 million in the second quarter. And that's where the issue is and where we got surprised on revenue.

To add a little bit more color to that, we kind of get hit doubly hard with that, because the new existing accounts that are less mature have a lightly under 50% capture rate. So even though we're growing those at $13 million in the first quarter year over year and $18 million second year, it's a slightly under 50% capture rate.

The more mature accounts have a higher capture rate, closer to 60%, so those are declining at a slightly higher rate, but they also have a higher capture rate, so we kind of get a double hit from that. But to me, the good news is that our new ramping customers are accelerated from Q1 to Q2.

We expect that to continue and we still have $75 million of new business to ramp and we're going to see that coming in in subsequent quarters. So if we get our existing customers to level off, or what we hope to do is to get them back to a growth position, that's going to get the overall company back to a growth position.

So I wanted to give you a feel for that and I'm sure it will come back in Q&A and I can translate that into actual revenue as opposed to spend under management. But that's what we're looking at is we were surprised by the pullback ins some of these large accounts in their spend in Q1.

But the shortfall is not due to any lost customers or basically not due to lost customers or to a lower capture rate. Now as I mentioned, these pullback trends happen from time to time. Based on the based, we do not believe that these are sustainable.

Customers take aggressive cost actions based on various internal pressures, but in the end, the overall market dynamics and their own patient trends will prevail. And we expect to see much of that spend come back in later quarters.

In fact, we're already seeing an uptick in orders in July from where we were trending in the second quarter which also lines up with some of the public company announcements we saw last year. Despite a challenging market backdrop for our travel nurse business, there are some positive business trends.

Let me review those first and then I will discuss the ways we are making adjustments to get the business back to positive growth. Our new accounts are ramping as expected as I just outlined. Also, as I mentioned, our capture rate is holding steady at approximately 60%. Gross margins and overall profitability held up well despite the revenue shortfall.

Our Travel Allied business had strong growth at 16% year-over-year. Our executive and physician search business had strong growth and a much improved contribution margin. Advantage RN continued on a positive track supporting our MSPs.

The Advanced Practices business within Physician Staffing, which is our nurse practitioners and physician assistant business, continued strong growth. And our school business, in particular our DirectEd business which supports charter schools continued its strong trends at mid-double-digit rate. Let me get back to the market again.

We believe that the softness experienced by some larger accounts primarily relate to cost pressures and to a lesser extent the continuing shift in patient care from acute care settings to outpatient and ambulatory facilities.

The shift in care to the ambulatory market is not a new phenomenon though we believe that some large systems may be experiencing an acceleration in those trends.

Even if a patient starts their care in an acute care hospital, oftentimes they are being transferred to another facility as fast as possible depending on the acuity of the patient in order to lower costs.

We believe this trend will continue and represent an opportunity for us, particularly since we have a large branch network that allows us to service outpatient and ambulatory facilities on a local basis.

To give you a feel for the industry trends, revenue growth over the past 4 years in ambulatory care has grown 17% versus 11% is hospitals, which has driven 150 basis point increase of market share for ambulatory care facilities.

Although we've done a good job of transitioning our mix of business over the past 5 years, from almost 95% acute care to 70% today, we are increasing our focus on nonacute care settings. A I mentioned we believe these market trends are an opportunity for us because we have the branch infrastructure to service them.

Over the last 5 or 6 weeks we've seen an uptick in revenue for our branches and are putting more emphasis in this area. Along those lines, let me touch on the opportunities we have and what are areas of focus are to improve our performance, then I'll turn it over to Bill Burns to give you some additional color on the initiatives.

(inaudible) growth in the nonacute setting has far outpaced acute care hospitals for more than 5 years. As I said, we're putting more emphasis on the branch operations to take advantage of these trends and are starting to see some results. Our branch operations have seen an increase in orders and revenue ramping for each of the last 6 weeks.

We are revamping our sales efforts with a more focused market approach across all customer types, making sure we not only win our share of MSPs, but target non-MSP customers, outpatient and ambulatory customers, correctional facilities, insurance companies, schools, etc.

We are still subcontracting approximately $200 million at our MSPs, therefore, we are putting initiatives in place to increase our capture rate at these accounts. Although it has improved quite a bit over the last 2 years, increasing from allow of 51% to 60%, we are working to move this closer to the 70% mark over the next couple of quarters.

We are also looking to invest in and build on the areas that are growing and doing well. As I mentioned earlier, these include Travel Allied, Executive and Physician Search, schools, Advantage RN and Advanced Practices.

We have good teams in those businesses with good management and good momentum and we're looking to leverage the success they are currently experiencing. We are continuing our cost savings and efficiency initiatives but with revenue not growing as expected, we will continue to right size our costs to produce a more appropriate bottom line.

And the economy remains strong. In the end, it's a strong economy that's going to continue driving revenue growth in concert with the underlying dynamics of the shortage of healthcare professionals and an aging population.

So although we are experiencing some changes, the market remains strong and we have initiatives to adjust our business to take advantage of the changes and the areas of growth that exist. We believe the market is strong enough for us to grow as we adjust for the market changes.

And with the increase we are seeing in demand this quarter, we expect to show improvement in our financial performance in the fourth quarter, setting us up for a more positive 2019. With that, let me turn the call over to Bill Burns who will review our operational focus in more detail..

Thanks, Bill. Let me start with a discussion on our segment performance for the quarter and then give some color on several initiatives and out outlook. Revenue for Nurse and Allied Staffing, our largest segment, was below expectations and down 1% year-over-year.

The biggest driver, as Bill mentioned, was the underperformance within our travel nurse division which experienced a slowdown in demand at certain large MSP accounts through the second half of the quarter and a slightly lower renewal rate for healthcare professionals on assignment than we anticipated.

Overall, our spend under management remained unchanged sequentially thought here wholesale some negative impact from eh mix that Bill mentioned between new and existing MSPs.

As Bill noted, several larger existing accounts which historically have had fairly high capture rates, reduced their spend while spend from new MSPs, which generally have a slightly lower capture rate in the earlier days of implementation, increased their spend.

Revenue for our branches was flat sequentially as the pullback in spend was not as impactful on that business. And as we enter the third quarter, I'm encouraged by the weekly trends we're seeing in our benches and expect to see continued sequencing improvement from that business.

Our Travel Allied business saw double digit revenue growth which we expect to continue moving forward. Demand remains strong and we continue to grow Allied Specialties with our MSP clients. Also with the Nurse Allied segment, our education staffing business reported strong double digit growth for the quarter.

As you might expect, demand does slow in the third quarter with the summer school break, but we are steadily ramping the headcount on billing and expect to see continued double digit growth starting with the new school year for that business.

Turning to physician staffing, revenue declined primarily due to a decline in volume as pricing remained fairly strong across most specialties. As a reminder, we did anticipate year-over-year declines for this business as the second quarter of last year was particularly strong.

Within the segment we continue to see growth in our advanced practices such as nurse practitioners and physician assistants. Though it was not enough to offset the decline from physicians.

ON a sequential basis, the business was essentially flat from Q1 as we continue to see signs of stabilization from significant volume declines we were experiencing a couple of years ago.

Going forward, we expect the positive trends within Advanced Practices to continue as demand remains strong and more healthcare professionals continue to enter those fields.

We're also actively working to expand our service offerings within our MSPs to include physicians and Advanced Practitioners which we believe will provide additional demand for our services and an ability to grow.

Our human capital management, which represents our executive and physician search business was up 6% year-over-year as new revenue producers continued to ramp. We continue to see a strong level of demand for new contracts and a high number of placement for both executives and physicians.

As Bill mentioned, we believe the pullback in spend from several of our larger customers was predominantly a measure of cost savings and partly due to the continued shift in patient care to the nonacute setting.

But regardless of the drivers, there remains a pronounced shortage of healthcare professionals which generally should fuel our ability to deliver value through our national presence.

Longer term, we don't believe the trend in facilities reducing spend on contingent labor is sustainable and although we're unable to predict exactly when that spend will bounce back from these accounts, we are continuing to take decisive action aimed at growing both our spend under management and increasing our headcount on assignment.

As you would expect in a supply constrained market, candidate attraction and retention remain a key focus area for us. We are still subcontracting approximately $200 million in spend annually to other staffing vendors and we believe we can fill a larger share of that demand internally.

As a reminder, each 1-point change in our capture rate is equivalent to approximately $4 million of revenue annually. So what are we doing? First, we continue to prioritize and rebalance our sources of leads towards those with the highest conversion rates.

By focusing on sources with the best conversion, we improve the productive of the sourcing and recruitment teams. We also believe we can better leverage our existing database of healthcare professionals through targeted sourcing efforts aimed at filling more of the higher bill rate in hard to fill specialties.

Both of these efforts should positively impact our capture rates and revenue going forward. Specific to improving the capture rate, the changes we made late in 2017 and early 2018 to recruit the Advantage RN fill at our MSPs, have certainly been affected.

We have seen double digit sequential growth through Advantage at our MSPs over the last couple of quarters and we expect that trend to continue.

Additionally, we are being very targeted in assessing opportunities to potentially be even more competitive at certain accounts and in certain specialties which we believe will further increase our capture rate and drive incremental profitable revenue growth.

From a sales perspective we are building business plans for specific market segments and assessing the investments necessary to grow and diversify our customer base even faster.

We have and will certainly continue to focus on winning our share of business with large acute systems where we deliver significant value through our leading workforce solution offerings.

In addition, we believe we can better leverage our branch operations in helping to penetrate the nonacute market as well as grow our non-healthcare customer segments like education.

We believe these efforts to improve candidate attraction, improve our capture rates, expand our MSPs and target new business in the nonacute settings will provide us the ability to return the consolidate company to year-over-year growth.

This, coupled with taking full advantage of the current growth engines within Travel Allied, Advanced Practices, education and search should drive mid-single digit revenue growth as we enter 2019.

As you know, we only provide quarterly guidance, but we're optimistic about the fourth quarter which should see sequential growth both on a revenue and a profitability basis. All of the actions we are taking for revenue and improved profitability should allow us to reach our stated goal for an 8% adjusted EBITDA margin by the fourth quarter of 2019.

Now let me turn the call over to Chris Pizzi who will review the results for the second quarter in more detail and provide third quarter guidance..

Thanks, Bill. While our revenue was slightly below the low end of our guidance range for the quarter, our gross profit margin, adjusted EBITDA and adjusted SPE were all within our guidance ranges. For the quarter, total revenue was $204.6 million, down 2% from the prior year and down 4% from the prior quarter.

The year-over-year decrease was primarily due to volume declines mainly in our legacy Nurse and Allied and Physicians Staffing businesses, which were partly offset by the Advantage RN acquisition.

The sequential decrease was primarily due to volume declines in our legacy travel nurse business and partly due to seasonal trends in our education healthcare staffing business. Gross profit margin for the quarter was 26.2%, down 80 basis points from the prior year and up 60 basis points sequentially.

The year-over-year decrease was driven by the dilutive effect the Advantage RN acquisition as well as lower bill rates in our physicians staffing business due to mis. The sequential increase was mainly due to the annual payroll tax reset which primarily impacts the first quarter of each year.

Moving down the income statement, SG&A for the quarter was $45.3 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 our cost-savings and efficiency initiatives which I will discuss in a moment.

As discussed on our last 2 earnings calls, we remain focused on targeting n adjusted EBITDA margin of 8% as we exit the fourth quarter of 2019 on a run-rate basis. This target is an important milestone for us and it is dependent upon executing on our organic growth strategy in addition to our cost savings and efficiency initiatives.

During the quarter we incurred a restructuring charge of $200,000 in connection with these initiatives. The specific actions taken in the first half of 2018 are expected to generate realized savings of between $4 million to $4.5 million in 2018 and represent annualized savings of $7 million to $8 million.

We are also currently targeting additional annualized savings of $4 million to $5 million and we expect the majority of the related actions to occur by the end of the third quarter, which will result in further realized savings in the 41 of this year.

These combined initiatives are expected to generate total annualized savings of $11 million to $13 million which should result in incremental savings of $7 million to $8.5 million in 2019 over and above our 2018 run rate.

Adjusted EBITDA was $8.7 million or 4.3% of revenue as compared with $10.9 million or 5.2% of revenue in the prior year and $8.4 million or 4% of revenue in the prior quarter. The 90-basis point year-over-year decrease was due to volume declines mainly in our nurse and Allied and Physicians staffing businesses.

The 30 basis point sequential improvement was due to the annual payroll tax reset we experienced in the prior quarter coupled with improved operating leverage resulting from our cost savings and efficiency initiatives. Depreciation and amortization expense was $3 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 $1.4 million, a year-over-year increase of $900,000 and a sequential increase of $200,000. The year-over-year increase was due to the incremental debt resulting from the acquisition of Advantage RN.

the sequential increase was due to marginally higher rates on our floating rate term loan coupled with a slightly higher rate on our fixed interest rate swap. Ad a reminder and as we described in our first quarter 10Q, we entered into an amortizing fixed interest rate swap agreement with an effective date of April 2, 2018.

Income tax expense was $1.2 million representing an effective tax rate of 39.1% for the quarter. Excluding discrete tax items, our underlying tax effective rate for the quarter was 40.3%. Our quarterly tax rate was higher than we anticipated due to a higher level of nondeductible permanent expenses.

Net income attributable to common shareholders was $1.5 million or $0.04 per diluted share as compared $4.9 million or $0.13 per diluted share in the prior year and $1.6 million or $0.05 per diluted share in the prior quarter. Adjusted EPS was $0.05 compared with $0.16 in the prior year and $0.06 in the prior quarter.

Next, let me review the quarterly results for our 3 business segments. Revenue for Nurse and Allied segment was $179.3 million, down just under 1% from the prior year and down 3% sequentially.

The year-over-year decrease was primarily due to the volume declines in our legacy Travel Nurse and branch operations businesses offset by the acquisition of 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 and partly due to seasonal trends in our education, healthcare staffing business. Revenue per FTE per day for the quarter was $276, down less than 1% from the prior year and up less than 1% from the prior quarter.

We averaged 7,143 field FTEs for the quarter, representing a slight decline from the prior year and a 4% decrease from the prior quarter. Segment contribution income for the quarter was $16.9 million, representing a 9.4% contribution margin, down 60 basis points from the prior year and up 30 basis points sequentially.

The year-over-year decline was mainly due to lower volumes in our travel nurse and branch operations businesses, while the sequential increase was mainly due to higher gross profit margin coupled with improved operating leverage.

Turning next to our physician staffing segment, revenue was $21.3 million, down 14% from the prior year and down 1% sequentially. The year-over-year decrease was due to a lower number of days filled and to a lesser extent, lower bill rates due to mix. While the sequential decline was entirely due to a lower number of days filled.

Revenue per day filled of $1,551 was down 2% from the prior year and up 3% sequentially. The year-over-year decline was due to a shift in mix between advanced practice and physician staffing, while the sequential increase was due to improved pricing.

Segment contribution income for the quarter was $1.4 million representing a 6.5% contribution margin, down 180 basis points from the prior year and down 50 basis points sequentially. The year-over-year decline was due to lower volumes as well as a shift in mix of specialties while the sequential decline was primarily due to a shift in specialty mix.

Lastly, revenue for Other Human Capital Management Services segment was $3.9 million representing a 6% year-over-year increase and an 8% sequential increase. The year-over-year increase was due to growth in physician search placements, while the sequential increase was due to a higher number of executive search placements.

Segment contribution was $300,000 as compared to $200,000 in the prior year and $300,000 in the prior quarter. The year-over-year improvement were driven by revenue growth coupled with lower expenses which led to higher operating leverage.

Turning to the balance sheet, we ended the quarter with $32.6 million of cash and $97.5 million of term loan outstanding at par. As of June 30, we did not have any amounts drawn on our $115 million revolving credit facility.

We generated $4.7 million of operating cash during the quarter, down from $13.3 million in the prior quarter and down from $24.1 million in the prior year, primarily due to timing within the quarters. On a year-to-date basis, our operating cash flows of $17.9 million decreased $7.6 million compared to the prior year.

Our DSO was 57 days compared to 51 days in the prior year and 55 days in the prior quarter. Generally, we believe that our DSO should average in the mid-50s with the exception of timing for collection at certain period ends. For the quarter, our capital expenditures were $1.3 million and in line with our expectations.

During the quarter we repurchased approximately 157,000 shares for an aggregate price of $1.8 million under our existing share repurchase program.

As a reminder, we began repurchasing our shares in the first quarter of 2018 as we felt that our share price was undervalued and that a share repurchase would help offset the 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. We still have approximately 543,000 shares remaining under our existing share repurchase program and any future buybacks, as subject to limitations within our credit agreement.

This brings me to our third quarter 2018 guidance. We expect consolidated revenue to be between $195 million and $205 million reflecting a year-over-year decline of between 15% and 10%. Our gross profit margin is expected to be between 25.5% and 26%.

We expect adjusted EBITDA to be between $8 million and $9 million, due to seasonally lower revenue in our education healthcare staffing business coupled with lower volumes in our legacy travel nurse business and partially offset by improved operating leverage driven by our cost savings and efficiency initiatives.

Our adjusted EPS is expected to be between $0.02 and $0.04 and our guidance assumes the following estimates. $3 million of depreciation and amortization expense; $1.5 million of interest expense; $1.2 million of stock compensation expense; and a diluted share count of 35.8 million shares.

Lastly, we expect to start an initiative to replace our legacy travel nurse frontend system in the third quarter and we anticipate the core system replacement to be completed by late 2019 This concludes our prepared remarks and at this point, I would like to open up the lines for questions.

Operator?.

[Operator Instructions] Our first question comes from Jeff Silber from BMO Capital Markets. Your line is now open..

Thank you so much. Just wanted to get a little bit more clarity regarding an issue you talked about at the beginning of the call. I know you went into some detail, but in terms of the pending decline on legacy accounts, you're talking about volume declines, not necessarily pricing.

Or are you talking about both?.

No, pricing is fairly flat. This is all volume, them using less headcount..

Okay, good, just wanted to doublecheck that.

And again, I know you don't have a lot of visibility and that things are a little bit choppy, but I mean there doesn't seem to be -- maybe it was a little bit new this quarter, is this something that we should expect to continue? I know you're somewhat confident that it will pick up, but why do you have that confidence?.

Well, we see these customers on a regular basis. We knew they had some internal pressures and some cost savings initiatives. And as I said we expected some of this to come through, but it came through much higher than we had anticipated.

But because we know these customers well, we go and see them on a regular basis and have quarterly business reviewed with them. Wek now that many of them, this is just a kneejerk reaction and that it will catch up to them at some point where they can't do without the people.

We know they're not finding them on a permanent basis, so what they're doing now is they are using overtime, they're doing without, they're spreading people thin. And we've seen that happen before and eventually the clinical people will win out over the cost savings people and we'll see some of this come back..

Okay, fair enough. And switching gear over to margins, you've reiterated your expectations to hit the 8% adjusted EBITDA margin target by the end of next year. We're already halfway through this year. Guidance for the third quarter might have been a little bit lighter than most people expected.

I get that it implies a pretty steep ramp up in margins or next year.

What gives you the confidence? Are you expecting a rebound in revenues? Is that on the costing side? How are we going to get there?.

Yeah, we are expecting a rebound in revenues and we need that to get to that, that target. So we can't do it by just costs. But Chris outlined $11 million to $13 million annualized cost savings.

We believe that, along with getting back some of this pullback from our customers along with the ramping of our new wins will get us back to growth next year as well. It's not an easy task to get there, but we modeled it out, we can get there, and we made that commitment to get there come hell or high water.

But we do need growth to come back in order to get here..

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

In terms of the third quarter revenue guidance, what does that imply in terms of what will happen at those clients that pulled back their spending in the second quarter? Does the guidance just assume that there's no bounce back among those clients?.

Yeah, so it pretty much implies kind of flat at those clients. And we are seeing that so far in the quarter. So we feel good about it. Our conversations with the customers, we're out there prodding them again to not surprise us and to tell us what's going on.

And we're hearing mostly that things are more level and stabilized than they were in the second quarter..

There was a comment in the press release that although you don't provide full year guidance, organic growth for the full year is still expected.

Assuming you come in line with your guidance for the third quarter, I know you said you expect a sequential improvement in the fourth quarter, but to get to organic growth for the full year, that would seem to imply a pretty dramatic ramp up in the fourth quarter.

Am Thinking about hat correctly? Or how significant or dramatic would it have to be to get to growth for the full year?.

I'm trying to see -- if that's in the press release, it's a mistake and we have 50 people read it..

It's in the outlook for the third quarter 2018..

I see it now. No, we do not expect to get full year-over-year organic growth this year. We can't recover from the headwinds that pulled us back in Q1 and Q2. We obviously expected a better Q3 and we do expect an improvement in Q4, but we will not get back to full year growth. We can't improve the fourth quarter that much. That's a mistake.

I don't know how that got in there. It must have been left over from before..

No problem, thanks for clarifying that. So you talked about some of the savings, I think $4 million to $4.5 million now expected in 2018. What -- I think you had segmented those cost savings into several buckets in the past in terms of corporate level and then within the segments and also operational improvements.

Can you just kind of segment the cost savings that you expect to realize, what buckets those are falling in and progress on each of those categories?.

Let me give you just a bigger picture then I'll let Chris, see if he has some of the detail behind it. So just so you know, the $4 million to $4.5 million that we targeted, the first trench that we targeted for this year, we've realized about $1 million so far. So we expect $3.5 million to come I the third and the fourth quarter.

So there's still some of this that we haven't seen in the numbers yet. And now we have a second wave of cost cutting that we expect to get all those costs out by the end of Q3. So we might actually see a little bit more in Q4 of this year as well related to the second wave of cost saving initiative.

Off the top of my head, I don't know where they're coming from in buckets, do you have that?.

Yeah, I can give a little bit more color on that. Ad you know, we had identified about $5 million. We had a target of $15 million, $5 million from the underperforming businesses for physician staffing and checkup and then $10 million coming from corporate and field cost savings and efficiencies. So that was the target we laid out.

At the moment we have about probably half identified from the underperforming businesses and about pretty much the entire $10 million has been at least targeted and identified for field and corporate at this point in time.

So while we're not quite all the way to the $15 million, we said we would get there by the end of 2019 and we have a pretty good line of sight on that at the moment..

Thanks, that's helpful.

Just lastly, did you add any new MSP spend under management in the quarter? How much have you added new year-to-date?.

Yeah, so we won 2 deals in the first quarter, 2 deals in the second quarter for a total of about $25 million. We expected to be at about $35 million. That's a little behind where we expected to be. We hope to win $70 million plus this year. We believe we're still on track to that, the pipeline looks pretty good.

We looked at it again right before we got on the call here and we have some good things coming up in the next, well in Q3 and Q4. So a little behind where we expected to be, but still good pipeline and we think we'll get to that $70 million plus of additional spend won this year..

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

Let me start out to just make sure I understand. So it sounds like when you're talking about this softness in these orders that you're mainly attributing that to travel nursing. But it also sounds like with some of the specific comments, that the branch network saw some softness as well.

Am I hearing that right? And was none of this softness in order flow in the branch side?.

Most of the branch was a hangover from the Q4 hurricane issue. I don't think in Q2 they were very impacted by the pullback. Probably a little bit --.

The branches were sort of down in that low single digit range year-over-year but that was expected. So they've --.

But that's still the hangover from Q4..

Yeah, again, most of the pullback that we saw in Q4 from the hurricane was primarily in our travel business. But the branches had a little softness. But AJ, to answer your question more specifically, the pullback that we've seen was predominantly and I mean the majority of it was really pointed toward the travel nurse business.

That's where they experienced it..

And branch has had a steady recovery trend ongoing throughout the second quarter and as we get into Q3, we're seeing sequential improvements weekly there. So they seem to be on a good trajectory to get back to growth and recover..

I will take you up on your comment earlier as you did your prepared remarks on the $34 million you described as MSP spend. Maybe a little more perspective on that. Either in terms of your percentage revenue decline with these accounts or even what's that year-over-year percentage decline.

With $34 million out there, it's hard to put that in perspective, but how much either year to year, I guess year to year, are we looking at in terms of a decline percentage wise?.

Let me put it in the bigger picture. When we were exiting 2016, we were bumping up on just about $500 million of spend under management. And right now, we're between $400 million and $450 million.

So even with additional business wins, the pullback from what we lost in Q4 and now the additional pullback here in Q2, has pulled us back to that $400 million to $450 million run rate range.

So it's down quite a bit over the 18-month period of time, but mostly due to the fourth quarter and the second quarter, 41 of last year and the second quarter of this year..

When you describe it as some key clients, any way to size? I mean are we -- I'm assuming these are multi hospital systems of some sort.

Any way to size how many hospitals we're talking about or how big a portion of your customer base it is?.

We always have a mix of growth versus decline and luckily over the last few years the growth has offset any of the normal declines. But there were several large ones that really drove the variance for us.

We have one large customer that we've had for a long time that we expect to have for a long time, they're down $14 million in spend under management on their own just in the first half of the year. If you take the top 5, 1-2-3-4-5, they are down about $30 million in spend under management in the first half of the year.

So it really is just a few of the big ones. When you get past the big ones, it gets smaller numbers that you'd normally expect. There's just a bunch of big ones that all pulled back at the same time..

Okay, and I know when the ones that are your traditional customers as opposed to MSPs, you don't have the same level of dialogue with them and visibility, but do you perceive that they've made the same decisions or is it really concentrated in handful of clients?.

Once you start to look at the midsized kind of smaller MSP clients you see it moving in both directions. We had some growing, some pulling back. But the dynamic really was at the larger systems and they are multi facility systems generally speaking. And our MSP customers is where we saw it.

So it's just this dynamic where you had tremendous ramp at newer accounts, slightly lower capture rate, and you had a pullback in some of the larger MSP clients..

This is why, as much as I hate missing our numbers and I hate putting guidance out there that's below where our expectations and everyone else's expectation are, I'd feel lot worse if we were missing because our delivery got screwed up or we lost a bunch of accounts and were losing market share out there or we made a bad mistake or something else like that happened.

But we're not. We're hanging onto our accounts, we still have our accounts, we're still growing our new accounts, we have a good pipeline, our delivery operations are sound. There's not much I could have done to anticipate this even with the conversations we regularly have with the customers. They still surprised us in magnitude..

I guess I'm thinking one of the theories on the MSP side was that as the order flow comes down, you might be in a position to fill a higher percentage. It sounds like you're describing the situation as you just sort of maintain the 60% fill rate.

Any comment on that aspect of it?.

Yeah, so -- and that's almost exclusively due to the mic of accounts. So we tried to explain that both in my section and in Bill Burns' section where we talked about the pullback accounts were a higher capture rate than the growing accounts. So generally, yes, our capture rate is moving in the right direction.

Except that the pullback happened at the higher capture rate accounts and that's why the overall number is staying fairly flat..

All right. Just a couple of loose ends here. ON Advantage RN, we're calculating about $18 million to $19 million quarterly run rate. And I thought prior to acquisition it was running more like $25 million. Maybe our math is wrong, but just wonder if anything has happened there..

It's not standalone anymore. We can't see it on a standalone basis anymore. We're integrated their branch offices into our branch offices. We took the small locums business and rolled it into our operators. It doesn't run as a standalone other than the travel nursing piece of it.

So we see what they do on our MSPs because there's a special delivery operation there and we can see where the travel nursing -- we don't see the whole $100 million trend that we had before, so I don't think I can do that. But I think that number is too low, I'd have to go to the pieces and add it back up again..

So the MSP business didn't get particularly hit by the phenomenon you're talking about or anything?.

No, they actually have continued to do very well at our MSPs.

Bill, you had the percentage increase I think?.

Yeah, they were increasing about 31%..

31% on the revenue side. So I mean -- and from what they're filing today at our MSPs, it's drastically up from where before we acquired them. So they've done a great job at sequentially every quarter increasing their headcount on billing at our MSPs and we expect that to continue. Where we had softness initially was we had two things with them.

One was, they felt the same kind of market dynamics late in 2017 with their legacy accounts, they had some pullback there. And we hadn't gotten out of the gate fast enough at filling at our MSPs.

We've certainly corrected that now and their trends are, from what we can tell how they're filling, their trends are slightly better than our legacy travel nurse business at the moment. Which goes to the reason why we acquired them which was we think that they can continue to move in the right direction with filling a larger share of our MSPs..

Okay, then the last question, it looks like FTE per day was relatively flat in the nursing side, Nurse and Allied. I know you talked about a headwind of a few million dollars on the premium going away.

Has that played like you expected or is that embedded in there somewhere? Anything updating us on what is happening with the premium rate business?.

Yeah, the premium rates still are going down. But as I said last quarter, we're probably not going to talk about a whole lot. It's not the driver anymore. It's leveled off a little bit more than it was, but it still is moving down.

This revenue per FTE per day, my financial planning analysis guy was in today saying I don't want to use that metric anymore. Because the change quarter to quarter tends to do a lot more with mix of Allied versus travel nursing versus branch operations. That's all mixed in together.

When we stated using that metric, we were predominantly a travel business. We really see the underlying actual bill rates. And the actual bill rates, they're pretty much flat year-over-year. Maybe down slightly. It's minor. Just a bit, but it could be a mix..

Our next question come from Jason Plagman from Jeffries. Your line is now open..

So just in following up on the questions on the capture rate, I would have thought just for those large clients where we saw pullback in demand, shouldn't the capture rate move higher for those clients isolated given that you can prioritize your candidates? Can you just explain just for this subset of clients what was the trend in capture rate?.

I don't know If I would have that particularly, but no, when this pullback -- we don't get to dictate just pull back my subcontractors and keep all my nurses. They pull back in the departments and in the areas and the shifts that they want to pull back on. So it tends to be all boats rise or sink with the change in any given quarter.

There's no manipulation of we're going to get rid of all the subcontracts and keep all our nurses. It doesn't quite work that way..

Yeah, you certainly can't adjust in the near term as fast. When the orders pull back, it depends what, it does -- as Bill said, it affects all the vendors at once..

So if we had a 60% capture rate there, all the pullback, we'd probably have a 60% capture rate today..

There's been some movement. As we look at this, we can see in certain pockets where the spend came down and the capture rate did move up a little bit. But not enough to offset. Because as I said, it takes a little time to accommodate that change when --.

We do believe that as it starts to grow back, so if somebody pulled back $5 million, and they're going to grow that crack again, we should get a higher capture rate on that business going forward. That's where the real opportunity is..

Then just on the market demand, what are you seeing form your non-MSP clients? How are orders trending there?.

They're pretty good. Bill has it right in front of him. Actually, our MSP orders were up again this quarter. So again, as we left the quarter it seemed to be showing some signs of improvement, but there was a very sharp pullback late in the quarter, from probably the second, third week of May and through June, there was s harp pullback.

It seems to be turned around the last couple of weeks and through July, but I wouldn't call it a trend just yet..

That's helpful.

And then just in Q2 and what you've seen on the non-MSP book, what are you seeing there?.

Sorry, for the second quarter did you say?.

Yeah, and for your non-MSP clients.

Just in the overall market, traditional arrangements?.

I think the pullback, as we talked about predominantly in our MSP clients. I don't think we saw any drastic changes in the non-MSP or direct business that we have. I think that's holding up fairly well..

Our next question comes from Brooks O'Neil from Lake Street Capital Markets. Your line is now open..

Good afternoon. Obviously a lot of questions have come and gone, but I'm just trying to be sure I understand. I have a sense that the hurricanes were very disruptive, kind of end of Q4 into the early part of the year. And if I'm listening correctly, that was primarily affecting the local branch business and seems to be recovering now.

At the same time, you had this sort of sudden and somewhat unexpected falloff in the travel business now.

Is that -- do I have it right kind of what you're trying to say to us?.

No. The impact of the hurricanes was predominantly travel nursing believe our travel nursing operation is based here in Boca Raton, Florida and that's the delivery operation that got impacted and we lost about 550 travelers out on billing in the 41. Which actually if we hadn't lost those, it would have mitigated some of what happened in the 41 here.

But we did lose them then and we had further pullback in Q4. But both of those issues, both the fourth quarter issue and the second quarter issue are predominantly travel nurse..

So the branch business is doing pretty well then?.

It was affected by some of the pullback, but not as much and it's recovering very well..

Basically, despite the fact that these issues were sort of unexpected in 2Q, you think there's a high likelihood that things are improved by 4Q?.

Yeah. Look, it's more volatile than we expected over the last 3 quarters which is why you see a little bit bigger revenue range for us in our guidance this quarter. We don't really have the visibility. We do believe from our conversations and from what we know about customers and the needs that they have, that we believe some of it will come back.

How quickly it will come back, it's hard to tell, but we're hoping it comes back in the third quarter and that we get appositive boost in Q4. But it's hard to tell right now..

Our final question comes from Lalishwar Ramgopal from Sidoti. Your line is now open..

Good afternoon. I just wanted to get back to the comment in terms of revamping the salesforce in light of some of the shifts you're seeing on the ambulatory care side.

Is it a case where you need to add headcount there or just because it's different call points, etc., reorganize how you're going to do the sales calls?.

I'll let Bill do it. It's a little bit of both. We're going to do a reorg and I think we're going to add some resources..

That's exactly right. It's adding resources into the regions for the branch so that we have additional salespeople to be able to call on. And it's also making sure that we've got the right focus from our national sales team. Based note customer segmentation and the markets, how we want to go after those or pursue those customers.

But there's going to be some investments necessary we would expect, but it's kind of contemplated in what we are looking at for our cost base..

Yeah, people don't understand sometimes the dynamic associated with these ambulatory and outpatient facilities. Quite a few of them are owned by the big hospital system, but they don't consolidate that spend under our MSPs. We have to actually go to those individual facilities and sell our services into them.

Now if it happens to be a hospital system that we have the MSP, it's a bit easier sell because we have a big contract with the. And if it's not, it's a little bit harder sell.

But if you look at the market, if you look at spend in healthcare in the market overall, about 42% to 43% of total spend in healthcare is at acute care hospitals and about 40% is at ambulatory and outpatient facilities.

Our business is 70% acute care hospitals and 30% nonacute care hospitals, so we'd like to balance that more with the marketplace overall. But we have to go out there and knock on the doors and be there in person to do it..

That's certainly the case for the smaller and the midsized kind of customer. But we are, and we don't call this out because it's just not something we've historically done, but we continue to expand our services at our MSPs including some of the larger accounts, to pick up per diem and allied. So that's a very big area of focus for us as well..

Okay, thanks, that's very helpful.

ON the physicians staffing side, I was wondering if you think, as you look at the first half of the year now, it seems like the second quarter almost flat sequentially, if you think you've kind of bottomed there?.

Yeah, I mean we've been talking about physicians for so long and not seeing the year-over-year improvements. We did see 2 of the last 4 quarters with small year-over-year improvements that we knew there was a tough comp in Q2. But we are looking at them more sequentially.

IF we can maintain it sequentially and then start to slowly move that upward, then we'll get to the year-over-year growth. So we are starting to see some stability. It was flat basically on a sequential basis from Q1 to Q2. It will probably maybe flat from Q2 to Q3, maybe slightly up if we get a boost in August and September.

And we're working on -- they're doing all the right things there. We feel really good. Bill Burns and I have both been up there. The attitude is better, the activity is better, it's just not showing in the numbers yet..

Thanks. Then just finally on the capital allocating and acquisitions were mentioned as one possible use.

I was just curious in terms of on that front, would you be looking to do something more on the service side or it for example on technology or software? Is that anything you feel you really need to add?.

I wouldn't look at acquisitions at all if I really thought our business was broken. This revenue decline and the headwinds we're facing today have nothing to do with how well we're running the business. So I will consider acquisitions.

Originally I was focused more on the school business and we would like to do something in the school sector if possible.

We have been looking at different technologies from a variety of reasons from a competitive standpoint, I'm not going to tell you what those are and why we're looking at them, but we think there are some technology advances in the marketplace that would create efficiencies in our business, not only internally but how we interact with our customers and how we interact with our healthcare professionals.

So we're looking at some technology businesses as well. And we love the fact that Advantage RN is servicing our MSPs so well. We wouldn't mind if there was another bolt-on to help us do that as well. Operator, is that it? Okay, then, I want to thank you very much, we'll be back in November with our third quarter results. Thank you..

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