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

AJ Rice - Credit Suisse Jason Plagman - Jeffries Bill Sutherland - Benchmark Company Tobey Sommer - SunTrust Jacob Johnson - Stephens.

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

A replay of this call will also be available until November 15, 2018 and can be accessed either on the company's website or by dialing 800-944-9725 for domestic participants and 402-220-3524 for international callers and by entering the pass-code 2018. I will now turn a call over to Mr.

Christopher Pizzi Cross Country HealthCare, Chief Financial Officer. Please go ahead sir..

Thank you and good afternoon everyone. 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 third quarter of 2018 as disclosed in our press release as well as a discussion of our financial outlook for the fourth 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 which would only affect our year-to-date results due to the acquisition of Advantage RN in July 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 today. This is the first time I've had a chance to address everyone since the announcement of my retirement. First, let me thank all of you that reached out to me. I appreciate it.

Secondly, I wanted to let you know that the process of identifying my replacement is on track that the board of directors has been working diligently with our outside search firm.

Our financial performance for the third quarter was as expected and within the guidance ranges as we have provided despite a further reduction in premium rate business and some higher than anticipated healthcare costs. Without those items both our revenue and adjusted EBITDA would have been towards the higher end of our guidance ranges.

Due to the seasonality in our Nurse and Allied staffing segment our fourth-quarter performance has normally shown a slight decrease in revenue from the third quarter, although we are hoping to pop that trend this year our guidance for the fourth quarter is in line with what we provided for the third quarter and although we do expect additional cost savings in the fourth quarter, we're also making investments in producer headcount that is offsetting those savings.

Let me explain what is driving the investment. In August, we stated that we had started to see an increase in travel nurse all through July after a pullback in the second quarter. The growth in orders escalated further in August, September, and October.

At the end of October our order count is at the highest level for all of 2018 and up over 50% from the end of June. The travel nurse orders are at the highest level since March of 2017.

The good news is that we're seeing an increase in orders pretty much across the board from some of the MSP customers that had pulled back previously, from established MSP customers, from MSP that are continuing to ramp and from newly MSPs that are coming online and from the general marketplace.

We are very encouraged by these trends and want to make sure that we're staff to take advantage of them going forward as most of the increase in orders will have an impact on 2019.

Although, we have not yet offset the decline in billable headcount that we experienced in the fourth quarter last year we have solid opportunities to grow from our current base of revenue things that I just talked about the new MSPs that are just getting implemented now and Bill Burns will give an update on that, ramping up the previously one MSPs increasing the capture rate at our existing MSPs and of course the general increase in orders across the board that I just mentioned.

Bill Burns and the team have put initiative in place which we believe will ensure we execute well in all of those areas and even though they are not reflected yet in our numbers we are very encouraged with the progress of these initiatives and recent performance from our teams in particular travel nursing team.

But a lot of these efforts are for starts in early 2019. So we may not see the fruits of their labors until that. With that let me turn the call over to Bill Burns who will review our operational focus in more detail..

Thanks Bill and good afternoon everyone. I'm going to spend just a few minutes talking about the third quarter performance and then I'm going to touch on the fourth quarter outlook and how we're positioning the company for success. Total revenue was down about 12% year-over-year and 2% sequentially.

Year-over-year declines will largely due to the headwinds for Nurse and Allied coming into the year and through the first half of the year and to a lesser extent continued softness from our physician business.

Nurse and Allied our largest segment reported revenue of $176 million which was down sequentially about 2% due to the seasonal impact from the summer break for our school business. Excluding the impact from the summer break revenue for Nurse and Allied was up 1% sequentially.

In addition to this sequential improvement we saw a Nurse and Allied there are many positive indicators that the business is continuing to move in the right direction.

Revenue from travel nurse was flat sequentially though the head count out on billing for travel nurse slowly recovered throughout the quarter and was up about 4% compared to the start of the quarter.

Revenue from branch operations was up about 1% sequentially as they continue to gain momentum and finally Travel Allied was up 9% sequentially which has continued to see strong demand. On a year-over-year basis we had two businesses show double-digit revenue growth.

Travel Allied was up 24% and education healthcare grew by 30% and we expect those trends to continue as we move into 2019. Physician staffing revenue was down nearly 15% year-over-year and flat sequentially. Unfortunately the turnaround for physician staffing has taken longer than we would have liked or expected.

Although the financial results have not shown the desired improvement we continue to take appropriate actions to refine our market strategy and see some positive trends within that business which we believe will help us return the segment to positive revenue growth.

Though is still a fairly small part of the total physician staffing mix advanced practitioners continues to outperform with year-over-year revenue growth of 15% and we expect that trend to continue as well.

Turning to our executive and physician search business which is reported in other human capital management segments we experienced 3% growth over the prior year which was due to a higher level of active executive searches. We expect this business will continue to reflect the positive trends given a demand environment.

Looking ahead we believe market conditions remain favorable for us and demand seems to be heating back up. As Bill noted both total orders and MSP orders for travel positions have risen steadily through the third quarter and into the start of the fourth quarter.

Given the normal lead time for when we receive these orders to when it translates into revenue we expect this will have a bigger impact as we enter 2019.

From an MSP perspective we've won 10 new MSP programs this year with expected incremental annual spend on a management of approximately $70 million between the spend from programs yet to go live and programs still ramping we believe there's approximately $80 million to $85 million of opportunity.

Sequentially spent on a management remain largely unchanged at an annualized level of between $400 million and $450 million.

While we would certainly expect top-line revenue growth from the anticipated increases in spend on our management we're also proactively working to improve our capture rate or the revenue that we’ve recognized from this whole spend on the management.

The capture rate of MSPs was just above 60%, up nearly 300 basis points year-over-year and a slight improvement sequentially. A significant part of the increase in year-over-year capture is due to the impact from Advantage RN which has steadily increased its fill at RMSPs by more than 100 FTEs since its acquisition in July of 2017.

In addition, we continue to refine candidate traction campaigns aimed at geographies and modalities where we believe opportunity exists to capture a larger share of the spend and we are investing in more dedicated resources to source new candidates for these programs.

Though not reflected the numbers yet we are seeing positive indications that the capture rate continues to move upward based on forward-looking metrics like net week's booked which should be a source of growth in 2019.

Finally, our guidance for the fourth quarter reflects revenue and profitability consistent with the third quarter, while our education staffing business is expected to see sequential growth due to the start of the new school year. Physician staffing is expected to decline due in part to normal seasonality.

Excluding education the rest of Nurse and Allied is expected to be flat sequentially on continued softness from premium rates as well as the impact from holidays, partly offset by the continued recovery in the billable headcount.

As a reminder premium rate orders began to decline as a percentage of total orders starting in 2017 and has continued throughout 2018. Though we could see this trend reverse on the rising demand it will likely remain a headwind as we move into the first half of 2019.

As I mentioned previously, however demand especially in travel nurse seems to be picking back up with increasing orders which should support our ability to grow. Given these favorable underlying trends and demand we're making incremental investments in direct revenue producers to better position the company for a solid start to 2019.

Coupled with the opportunity for revenue growth from higher spent on a management the potential to further improve our capture rate and the positive momentum and education staffing, Travel Allied and advanced practices we believe the company will return to consolidated organic growth for 2019.

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

Thanks Bill. Revenue was slightly above the midpoint of our guidance range for the quarter and our gross profit margin adjusted EBITDA and adjusted EPS were all within our quarterly guidance ranges. For the quarter total revenue was $200.7 million down 12% from the prior year and down 2% from the prior quarter.

The year-over-year decrease was due to volume declines primarily in travel nurse and to a lesser extent in branch operations coupled with volume declines in our physician staffing business. The sequential decrease was primarily due to the seasonal nature of our education healthcare staffing business which is impacted by the summer break.

Our quarterly revenue was also impacted by further declines in our premium rate business which contributed to both the year-over-year and sequential declines. Gross profit margin for the quarter was 25.7%, down 80 basis points from the prior year and down 50 basis points sequentially.

The year-over-year margin decline was due to lower bill pay spread primarily in travel nurse coupled with an increase in employee benefit costs. The sequential margin decline was primarily due to higher healthcare costs. SG&A for the quarter was $44.1 million, down 7% from the prior year and down 3% sequentially.

Both improvements were driven by our cost savings and efficiency initiatives. We remain focused on improving our profitability by identifying and eliminating inefficiencies within our businesses and corporate functions. In connection with these initiatives we incurred a restructuring charge of $1.4 million during the quarter.

This charge was primarily related to severance cost in addition to exit cost incurred consolidating our office locations. Adjusted EBITDA for the quarter was $8.1 million or 4% of revenue as compared with 6% of revenue in the prior year and 4.3% of revenue in the prior quarter.

The 200 basis point year-over-year margin decline was driven by lower volumes primarily in travel nurse. The 30 basis points sequential margin decline was mainly due to seasonal trends in our education healthcare staffing business.

Depreciation and amortization expense was $2.9 million for the quarter essentially flat with both the prior year and prior quarter. Interest expense was $1.5 million for the quarter a year-over-year increase of $300,000 and a sequential increase of less than $100,000.

The year-over-year increase was due to a higher base rate on our floating rate term loan coupled with a slightly higher rate on our fixed interest rate swap. During the quarter we repaid $6.3 million on our term loan including $5 million optional prepayment.

Income tax expense for the quarter was $1.4 million driven higher by a mix issue of permanent tax differences and lower profitability. During the quarter the ratio of income taxes on our non-deductible expenses to our expected annual profitability increased driving up our effective tax rate.

As a result we expect our 2018 annual effective tax rate to remain higher than anticipated due to our low level of profitability. We still have considerable NOLs remaining that we expect to utilize over the next couple of years.

As a result we believe the amount of annual cash taxes paid will range between $1 million and $1.5 million during this time frame.

For the quarter the net loss attributable to common shareholders was $400,000 or a loss of $0.01 per share as compared with net income of $6.7 million or $0.19 cents per diluted share in the prior year and $1.5 million or $0.04 per diluted share in the prior quarter.

Adjusted EPS for the quarter was $0.02 cents compared with $0.23 cents in the prior year and $0.05 cents in the prior quarter; both the year-over-year and sequential declines were primarily driven by lower profitability and a higher tax rate. Next let me review the quarterly results for our three business segments.

Revenue for our Nurse and Allied segment was $176.3 million down 12% from the prior year and down 2% sequentially. The year-over-year decrease was primarily due to volume declines in travel nurse and branch operations.

Our Travel Allied and education healthcare staffing service lines continue to perform very well this quarter reporting strong year-over-year double-digit growth. The sequential decrease was mainly due to the seasonal nature of our education healthcare staffing business.

Revenue per FTE per day for the quarter was $276 down 2% from the prior year and flat sequentially. We averaged 6953 field FTEs for the quarter representing a 10% decrease in the prior year and a 3% decrease in the prior quarter.

Segment contribution income for the quarter was $16.5 million representing a 9.4% contribution margin down 90 basis points from the prior year and flat sequentially. The year-over-year margin decline was primarily due to lower travel nurse volumes and to a lesser extent lower travel nurse bill rates. Turning next to our physician staffing segment.

Revenue was $21.2 million down 15% from the prior year and down 1% sequentially. The year-over-year decrease was primarily due to a lower number of days filled in physician specialties which was partly offset by growth in advanced practice.

Revenue per day filled of $1582 was down 1% from the prior year and up 2% sequentially predominately due to a shift in mix. Segment contribution income for the quarter was $1.3 million representing a 6.2% contribution margin up 80 basis points from the prior year and down 30 basis points sequentially.

The year-over-year margin improvement was driven by higher gross profit margins coupled with lower SG&A expenses from our cost savings initiatives. The sequential margin decline was due to slightly lower gross profit margins.

Lastly revenue for our other human capital management services segment was $3.2 million representing a year-over-year increase of 3% and a sequential decrease of 18%. The year-over-year increase was mainly due to growth in executive search partly offset by a decline in physician search.

While the sequential decrease was primarily due to a decline in physician search. Segment contribution income was $100,000 as compared to break-even in the prior year and $300,000 in the prior quarter.

The year-over-year improvement was driven by revenue growth coupled with lower SG&A expenses while the sequential decline was primarily due to lower physician search revenue. Turning to the balance sheet we ended the quarter with $28.1 million of cash and $91.3 million of term loan outstanding at par.

As of September 30 we did not have any amounts drawn on our $115 million revolving credit facility. As I mentioned earlier we made $5 million optional prepayment on our term loan during the quarter. In addition earlier this week we amended our credit agreement.

The combination of the amendment and the prepayment provides us with the additional borrowing availability and flexibility as we move forward. For the quarter our operating cash flows were $3.8 million up from $3.2 million in the prior year and down from $4.7 million in the prior quarter.

On a year-to-date basis our operating cash flows were $21.8 million as compared to $28.7 million in the prior year. Our DSO was 61 days as compared to 57 days in both the prior year and prior quarter driven by slower collections from several large customers.

Based on senior level discussions held with these customers we expect these amounts to be fully collectible. We are also encouraged by our average weekly collections in October as we've seen an uptick during the first four weeks of the quarter as compared to our third quarter average.

We believe our DSO should be below 60 days and we will continue to work diligently in the fourth quarter to reduce it. Our capital expenditures were $1.1 million for the quarter and we're in line with our expectations.

We repurchase 33,000 shares for an aggregate price of $300,000 during the quarter which brings our year-to-date repurchases to 432,000 shares for an aggregate price of $5 million. We still have 510,000 shares remaining under our existing share repurchase program and any future buybacks are subject to limitations within our credit agreement.

We will continue to review our capital allocation strategy which includes targeted organic growth investments, strategic acquisitions, debt repayments, and opportunistic share repurchases. This brings me to our fourth quarter guidance.

As discussed earlier the further decline in premium rate business we experienced in the third quarter will impact our fourth quarter revenue guidance.

In addition in order to capitalize on recent demand trends we will be investing in revenue producers during the fourth quarter and we now expect to begin seeing the benefit from that demand in the first quarter of 2019.

Our guidance also assumes higher healthcare costs will continue into the fourth quarter based on recent trends as well as normal seasonal trends. Our fourth quarter guidance reflects the following ranges. Revenue of $195 million to $205 million. Gross profit margin of 25.0% to 25.5%.

Adjusted EBITDA of $8 million to $9 million and adjusted EPS of $0.01 to $0.03. In addition our guidance assumes the following estimates. $2.9 million of depreciation and amortization expense. $1.5 million of interest expense. $1.4 million of stock compensation expense in a diluted share count of 36 million shares.

Finally during the third quarter we entered into an agreement for the development of a new front end system which will support our legacy travel nurse operations. We anticipate the cost of this project to range between $10 million and $12 million and the time frame to be 18 to 24 months.

The non capitalized will cost related to this project will it be will be expense as incurred and excluded from our definition of adjusted EBITDA until the project is complete which is expected to be in the second quarter of 2020. Now let me turn the call back over to Bill Grubbs to wrap up our prepared remarks. .

Thanks Chris. Before we close the call I'd like to make a comment on our 8% adjusted EBITDA target. This is a goal I said a couple years ago and I've been pushing hard to achieve that run rate by the fourth quarter of 2019.

Well I still believe this is the right target for the company given our current mix of business I want to provide my success of the opportunity to reassess the timeline given his or her priorities in the meantime we are continuing to take the steps necessary to improve our profitability as outlined earlier on the call.

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

Operator?.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from the line of AJ Rice from Credit Suisse. Your line is now open..

Thanks. Hello everybody and Bill I know you may be on some future calls but we wish you well on retirement there. I just tried to put in perspective this notion that you've seen a 50% increase in orders over the last three months since the end of the second quarter.

Is, I mean, it seems like there's other data points to say there's just a little bit of a strengthening heading into the a year end but a 50% increase seems like a lot.

Is there anything company specific that would sort of account for that we should take into account before we think that the market overall is seeing that kind of pick up or do you think the underlying market? I guess last year hurricanes would have impacted potentially the order book but you're talking about a sequential quarterly increase.

So any perspective you could provide there would be helpful. .

Yes. We went through the same thought process and so we try to analyze it every which way up and down and sideways and that's why in the prepared statements side I wanted to make sure I stressed that this looks like it's across the board. Some of the customers that pulled back have started to increase the orders again.

Existing MSP is that we've had for a long time have started to increase their orders again. The ones that we won last year that are still ramping continue to ramp.

In fact some of the new ones that we won Bill Burns went back and did analysis and we think they're going to be bigger than what we thought when we initially won the deal and then our general customers that are under it MSP also increased orders.

It looks across the board to us at this point so and remember first of all it's low base in Q2 that's why the 50% of sounds like so much. I think that the beta data point is it's the highest number since March of 2017. So we're back towards the end of the really busy periods in the market. So I do think it's here to stay.

I do think it sustainable we said in August we didn't think it was sustainable for our customers to pull back the way they were and we've seen it before and that we thought it would bounce back and that seems to be the case.

Bill you want to any color there?.

Yes. I just echo that I think we looked at this between total orders and orders coming from MSPs. We don't provide those two data points but they're both up in a very consistent fashion. So it's very encouraging. .

Okay and you mentioned as you think about 2019 obviously you're not guiding for 2019 or anything but is there any way to think about what you think the underlying would get back to more of a normal environment? Is it right to think about the Nurse and Allied being sort of a normalized growth rate putting aside any comments about recession or economic strength but just normalized sort of mid-single digits? Is that in your mind with the underlying growth would support in the industry?.

Yes. I think you should forget the fact of the headwinds that we had in the fourth quarter and whether we're ever going to build it back up again because those kind of step changes are hard to build. Just assume that our new basis is this low $200 million per quarter.

Yes we think we can grow low single digits off of the current base of business we have, sorry mid-single digit off of the current base of business we have today..

Okay. Just maybe one or two quick more. The press release and I think prepared remarks said that the premium rate business was still declining. I see Nurse and Allied the average rate of 276 that's stable versus second quarter.

So is it really sort of declining year to year but flat sequentially or we sort of at a base level here where there's really not much more premium to lose in your mind?.

So I'll give you a little bit of color and then I will turn over to Chris. He may have a little bit more. You have to remember the 276 number this is a mix of business and specialty areas and geographies and things that that move that number around.

So there's not a direct correlation necessary to the premium rate side of it but if you remember I said a couple quarters ago I said I wasn't going to talk about the premium rate business anymore because it was about a million dollars per quarter that was declining. We didn't think that was enough to talk about.

Well it more than doubled this quarter to between $2.5 million to $3 million on a year-over-year basis. That was sequentially. So it was a big enough number that it surprised us. We expected about a million or a little over a million that we had normally been seeing and it ended up being more than twice that.

So that's why we wanted to make sure we talked about it. It is getting down to a level where it seems to be more normalized. I think we'll have a little bit of that headwind which is in our guidance and in Q4. I don't think we'll be surprised in Q4 and then we believe it should normalize somewhere as we get into the first half of 2019.

We don't give the exact number but we're getting to a point where it's going to have to stop at some point. .

Sure. No I understand. Okay well I think I'll pass it on at that point. Thanks for the answers. .

Okay..

And our next question comes from the line of Jason Plagman from Jeffries. Your line is now open. .

Hey good afternoon. So I just wanted to dig in a little bit more on the demand trend.

So in your discussions with your clients I mean have they given you any color on what kind of caused the inflection over the last three or four months? Is it strong census or what's going on at the hospitals?.

It's a variety of things. I will let Bill give a little bit as well. I'll start it out with the stories are kind of varied by customer and a bit contradictory with we go into a quarterly business with you and the first thing they say is we need to cut costs. We have pricing not pricing pressure.

We have reimbursement pressures and cost pressures that we need to address but in the meantime we're busy and we need a whole lot more nurses. So it's kind of a weird conversation to have but similar to what we said last quarter is that the things that they were doing when they had pulled back just weren't sustainable.

They were either doing without an increasing their nurse to patient ratio, the patient to nurse ratio or they were asking their permanent nurses to work overtime and fill in the gap and neither one of those is going to be sustainable.

So some of this is just getting back to more normal business where they had hoped to try to do it with less and they find out that they can't because they're getting poor quality scores and they're getting dissatisfaction from the patients. So Bill you give a couple of color..

I think that's right. I think what we saw earlier in the year where clients were certainly clamping down hard for cost purposes and we obviously have a better line of sight on the MSP portion of the business that's where we have the direct relationship and we can understand what's happening and so there's a variety of reasons why it's tick back up.

Part of it is this rebound this artificial pullback that we saw where they were holding off on costs and the demand has always been there. They just were holding off on it. So that's a piece of it and on the MSP side we also are continuing to ramp on the program that we have won recently.

So we have – we went live on another program in the third quarter. We have seven left yet to be implemented of all of our wins that we've historically done.

So we've got more opportunity to see where it grow there but I think the thing that's particularly encouraging is that the order flow coming from the non-MSP relationships where we don't have that direct relationship is up consistent with that. So it's not just on the back of wins that we've had.

This seems to be something in the marketplace where demand is rebounding. .

That's helpful.

Thanks and then in locum segment are you seeing demand growth there as well? And then just what actions are you taking to try and improve the profitability there by returning the growth or cutting costs if necessary to improve the profitability in that segment?.

Yes. I will add Jason it's Bill Burns. So when we look at the physician side it seems that demand is still there. It may not be as seeing the same kind of trend that we've seen on the Nurse and Allied side but demand seems strong. We've had a couple of new MSP wins where they have included locum tenants. So there seems to be adequate demand on that side.

I think a little bit of what we saw in physicians coming into the back half of 18 what's in the Q3 actuals and the fourth quarter is a little bit of attrition that was maybe not what we would have liked to see so we had been taking out some cost actions earlier in the year.

There's a little bit of regret attrition sometimes when that happens and so our headcount there on the direct revenue producer side we're reinvesting and continuing to build that back up but you lose a little bit of ground there and what that happens..

It went on to a level that there was probably lower than we needed it to be and so they're building that back up again. So a little bit of the fourth quarter is a reflection of that. .

Okay. That's all for me. Thanks..

Thank you. And our next question comes from the line of Brooks O'Neil from Lake Street. Your line is now open..

Hey guys this is Frank [indiscernible] on for Brooks O'Neal. Thanks for taking my question. I know you guys aren't giving any fiscal year ‘19 guidance out yet but I was kind of curious on how you kind of expect all of these -- all this order growth to ramp into 2019.

My assumption is if you are thinking you're going to return to organic growth that it's going to most likely be skewed more towards the second half of the year but any additional insight in that area would be greatly appreciated..

Yes. I'll start again and turn it over to one of these two guys if they want to add some color. It's – we normally have a sequential decline from Q4 to Q1.

We're hoping that some of this increased demand and some of the production we're seeing in the last few weeks that are really replacements in early 2019 that we can offset some of that normal decline. So if we do then that means we'll start to see some improvement even in the first half.

So I don't think I push it all out to the back half but I'll turn over to Chris or Bill..

I'll just add a little more color on the operation side of things.

So Bill's right the demand is going to likely line up to a ‘19 impact as just that the orders are coming in with the start dates we're obviously putting investment in on the recruiters and the account manager so we have the resources to capture as much of it as possible but I would just reiterate what we talked about earlier which is a premium rates that continued to decline throughout it started we first called it out in probably Q2 of 17 and I think it has continued this sequential decline through the third quarter.

So we have a little bit of that to [indiscernible] as we get into the first quarter for year-over-year comparisons and a second quarter it obviously diminishes throughout the year. So it'll be interesting to see but I think the demand being where it is and coming into the year so strong could get us back to --.

That's a good point. The headwinds from premium rates will start to go away the first half of the year and start to normalize. So we're talking about $2.5 million to $3 million sequentially this quarter that's a headwind of almost 1.5% on our revenue. That starts to go away with these increase in orders.

I think we could start bucking the trend going on the other direction..

And just one more point our school business usually gets a second bite at the apple to see that school year sequential trend.

So they've started off this year strong in the third quarter as we saw and what we're guiding into the fourth quarters that they'll continue to see their double-digit growth they get another chance usually as the second half of the school year stars.

So we could see some sequential increase from Q4 to Q1 from our school business that could do well for ‘19..

Okay. great. That helps a lot.

And then my second question and last question just kind of has to do with how you guys are feeling about Florida with you guys losing I think you mentioned 550 billable headcount in Q4, 17 I'm just kind of curious if you are starting to see some of that come back now?.

Yes. I said a little bit earlier you don't see step changes in our business very often and losing 550 people in one quarter is kind of a step change. You can't just step change your production and build it all back again.

So we have Bill talked about the other headcount out on billing from the end of the second quarter to the end of the third quarter and Travel Nurses up about 4%.

So we are building back some of it but I think the way to look at it is that we're not going to go back and find those 550 people and start doing $20 million more business for a quarter that we lost when that happened.

I think the way to look at it is this is our new base, this $200 million to $205 million of revenue and can we start to grow off of that and get leverage along with our cost savings along with some of our higher margin businesses growing a little bit faster. What can we get to based on that and that's kind of how we're looking at 2019. .

Okay. That makes sense. Thank you very much and that's all I have. .

Operator:.

.:.

Thank you. Hey everybody. What – when you look Bill at your whichever Bill when you look at the plans on in terms of cost takeouts kind of bring us up to date with what's been done, what will be incremental and then of that incremental what will be the, I guess the net incremental if you're netting against investments that you are planning. Thanks..

So we've identified about $11 million of annualized savings and we expect to realize about $5 million of that this year and $5 million next year incremental and then we had talked about the replacement of our legacy travel nurse business. We're going to see about a million dollars come out in probably coming out starting in 2020 when that goes live.

So for next year about 5 million incremental but as we had talked about we are putting investments in revenue producers back into the business starting this quarter and we'll continue into next year. It'll probably be a few million dollars I would say NOIs..

Yes.

So the fourth quarter is the one where it kind of all washes out between the investments and new producers and the increase in the healthcare cost that we talked about and obviously a little bit lower revenue than what was in most of your models out there is what's driving the kind of flat profitability because we would have expected profitability to go up from Q3 to Q4 just on the back of cost savings but between the increase in healthcare costs and the new investments that's kind of a wash in Q4 but that should change because we don't expect the healthcare cost to carry on.

In fact nobody's asked the question on the healthcare but it really is you have the right wording for –.

Yes. It's just a handful probably single digit number of the specific claims, high-dollar claims that spiked up in the second half or late in the third quarter..

Yes. This isn't an ongoing increase in healthcare cost moving forward. This is specific to claim. So we don't expect that to carry on into next year. So the cost savings should start to kick in next year we shouldn't get the repeat of the increased health cost a little bit offset by the investments in [process].

So we will see some of that into next year about probably up to $500 million. So is that –.

Yes. $500 million. .

Though the investment is in business development?.

We call on direct revenue producers. These are folks that really are actively involved in the sourcing placement, scheduling, on boarding of candidates and so bringing them all the way through the cycle to putting them out on assignment and working through the retention and renewal.

So these are folks that are really close to the fulfillment and delivery. .

Okay. In education remind us kind of what the size is of that now and you're saying it's just sending along a low double-digit rate and that's all just winning new contracts I guess both public and charter..

Yes. It's a combination of public and charter. When we bought the business at the end of October of 2015 the school based business was about $20 million and it's grown organically to about $40 million just to the double-digit growth every year. So we're and by the way it's good gross margin and it's a very good bottom-line margin as well.

So we'd like to continue to grow that at double digits and maybe supplement that with an acquisition if we can but we're very bullish on that business because they are doing a great job. It's still mostly California-based well not completely but mostly. .

Yes. About 90% or –.

Yes..

So one on the capital allocation question.

How are you thinking about that as you go into next year?.

Yes. So I think it's still the three areas of what maybe four so I guess investments in headcount for the increase in demand that we're seeing I guess that's not really a capital expenditure but certainly that's where some of our cash flow will go. We're certainly looking at more share buybacks and probably will do some more pay down of debt.

Those in the three years that we traditionally looked at but we're not ruling out acquisitions.

We're not out especially since we're in transition with CEO we are not out without knocking on doors and we certainly wouldn't do anything transformational while we're in a CEO search but we're not shying away from things that make sense strategically for us that come to us through the market and so we will continue to look at those and see if there's something that makes sense.

Schools would be the most logical one for us. Maybe some other value-added services that we've been trying to add into our workforce solutions but we're still looking at them and we're not ruling those out. .

Okay and then I'll finish up with just revisiting this premium rate. Now so it's obviously a smaller issue for you than competitor. So you're saying it only applies to –did you say it applies to just 2 million or 3 million of your revenue --.

Yes. So the reduction in the percent of our total hours that was premium last quarter to this quarter we felt it $2.5 million to $3 million headwind on revenue. .

That's different than what I am thinking. So you are not talking pricing. .

No. It shows up in pricing but it's a revenue issue..

Okay. So when you just look at pricing and I guess we should just talk overall pricing.

Would you call it starting to stabilize quarter-over-quarter when you look at your Q4 book versus Q3?.

Yes. So and Chris correct if I get wrong. So year-over-year our Nurse and Allied price bill rates were down about 2.5%, 2.4% but sequentially they were up just slightly for $0.04 per hour. So yeah sequentially they seemed pretty flat both bill rates and pay rate sequentially were flat.

So that gives me a good comfort level that we're not seeing a fall off of a cliff. Year-over-year it's different but a lot of that year-over-year does have to do with these premium rates and things that we've talked about earlier..

Okay. Now I understand. Thanks for clarification. Thanks everybody. .

Thank you and our next question comes from the line of Tobey Sommer from SunTrust. Your line is now open..

Thank you. Apologize I did join the call a little bit late.

How you apportion the headwinds to your top line between sort of market forces and internal execution just in broad strokes your to allocate like percentages?.

Yes. So actually I don't – the only internal execution from the revenue perspective to me is our physician staffing. That's what Bill is looking at right. You are going to answer the right way. And we are executing it very well on all of other sectors; education, search, travel, allied, travel nurse.

Travel nurse just looks bad because of the headwinds from the fourth quarter of last year but our execution is very good.

We've had some very good production weeks based on this increase in orders as we've gotten to the end of Q3 and into Q4 not as well starts for next year but I'm very pleased with our overall production but Bill can you – I mean you look every day. So –.

You hit spot on. That's exactly right.

I think internally when we look at the rest of the businesses they are performing incredibly well a week over week including our branch business has continued to gain momentum we didn't really talk about that much but their weekly production and revenue that we see is continuing to move in the right direction as well.

We think that's a huge opportunity for us and we're going to continue to invest there as well..

What's the trend this year in your direct fill rates in the MSP business, in just in the context of the revenue decline? I'm wondering how your fill rates compare?.

Yes. Remember the revenue decline is almost all from the fourth quarter of last year hurricane headwinds but I will let Bill to –.

Yes. So Tobey it's a great question.

I mean the capture rates continue to improve in our prepared remarks we call that that we're up about 300 basis points year-over-year on a capture basis but it's relatively up sequential so we're making progress there and I think the sequential piece is the bigger point to talk to because year-over-year the spend profile is different.

We have that pullback in the second quarter from the larger MSP customers.

So that's – so capture sometimes can look a little bit different based on the pool of spends you have out there but sequentially we're making progress and on a forward-looking basis we've got we obviously track metrics even before it becomes revenue and we're looking at that and it's moving continuing to move in the right direction.

So I'm encouraged. I think as the spending of management grows and if we keep moving the capture in the right direction it's going to –.

We expect both the revenue under management to grow and our capture rate to continue to inch upward..

That's right..

Okay. If you were to kind of, give me your top three green shoots representing signs of potential improvement and revenue growth.

What would those top two or three items be?.

Bill?.

Well, I would say the top three opportunities for revenue growth right now besides the growth engine so we have several parts of our business growing in very nice high single or double digit territory. We would think that would continue.

Travel, allied, education, advanced practices but if I think about the larger picture it's going to be the backdrop of demands, the orders recovery that we talked about. It's going to be the wins of the MSPs and the ramping of the spend and the opportunity on the capture rate. Those are how we think of the big opportunities for revenue growth..

If you average the last three years of wins for us and we can also forget the number of wins because it's really about the dollars. We're averaging about $80 million of new MSP wins each year and so that's a $40 million to $50 million revenue opportunity at the current capture rates but we hope that goes up as well. So I think Bill's right.

We have three or four of our smaller businesses but high margin business is growing at double digits but [indiscernible] is going to come down to new MSPs and increase in capture rate..

Okay..

Yes. Branch also services the MSPs. .

And that does leads me right to my next question. Are you happy with the current branch infrastructure in footprints or does anything about the change in the business year-over-year granted because of the hurricanes caused you to reconsider and think about trimming that branch network to boost profitability more quickly..

Yes. I would say no we're not looking at trimming down the branch portfolio but we regularly and routinely go through a portfolio analysis to look at where the branches are. We will open branches.

We will close branches as needed if the market isn't supporting it but in general we're continuing to think that's a great opportunity for us and you mentioned Florida I mean that's the hurricane really that's not a branch issue.

That was more of our travel where our travel headquarters is but no, we think branches will continue to be an opportunity for us as we look at new MSP businesses, I can tell you one of the accounts we were just out talking to like the fact that we had a local presence and I think that they had another hospital in their system that we said, look if the business is there we would look at having a branch there too.

So it's the kind of thing where I think if it's going to service our clients and we think the opportunity is in the right marketplace we will keep going out..

I think there's two things there. One is the shift in treating patients out of the acute care environment into these ambulatory and outpatient facilities we need to be in the local markets to service those. So we're happy that we are there. We're seeing the improvement there and an improvement in our mix of businesses as well.

So that's one and I have been to several customer presentations where we won our MSP because we were the only competitor bidding that had local presence already and knew the local marketplace, had local candidates and it's made a difference to us. So Bill is right we're happy. They're growing and we think strategically they're needed anyway..

And just one point Toby on your comment about profitability. They're not less profitable. I mean they cover their infrastructure in their cost. We have branches of all sizes. We have very small branches to very large branches of it but in general they run the same level of contribution income as we see in our travel nurse business.

So it's a good business for us..

Okay.

From a strategic standpoint Bill Grubbs I guess but doesn't have to be, from a capital deployment standpoint should we expect a kind of whole stand pat in light of the your announced transition out of the business at least for the next handful of months?.

Yes. I don't think so I mean look it's probably only going to be a few months before somebody else is here.

So but if there's some small tuck-in or whether there's something that makes sense, we will move forward with that like I said I don't think we go do anything big because that should just wait for somebody new but there are some things that are just kind of no-brainers and so if it's out there we'll explore it and participate like we should.

We don't want to miss an opportunity just because we're transitioning. We don't have any gaps here and we have good resources and I have a strong team underneath me that it's not completely dependent on me or be transitioning to a new CEO.

So look we're not going to go out there and make something happen but something could happen even in the transition period..

Okay. Thank you very much..

And our last question comes from the line of Jacob Johnson from Stephens. Your line is now open. .

Hey thanks for taking the questions. Just a couple for me really quickly. First it sounds like the healthcare costs or make perhaps a non-recurring expense.

Any chance we can get a magnitude of what those were in the quarter?.

Yes sequentially they were up about $700,000 and about 600,000 higher than we had guided..

And that's contemplated to be at a similar level in the fourth quarter but no change sequentially?.

A little higher. .

Yes. They will be a little bit higher sequentially just because we are seeing that these claim levels will continue into the fourth quarter as well as just normal seasonal trends fourth quarters typically the highest quarter..

Okay got it.

And then Chris on the new finance system for the travel nursing business, is this back office only or that will impact your sales effort and then is this going to be a gradual rollout or are there any dates we need to be aware of?.

So it's actually not a financial system. It's not a back office system. It's a front-end recruitment system for our travel nurse business and it won't affect the business at all until we start to roll it out which probably won't be until the first quarter, second quarter of 2020.

We will face some of it and do the testing a little bit earlier but we are still a year away from starting to do anything with rolling it out. So it's going to be a development for at least a year and we have a very good change management organization.

There may be some modules that can be implemented earlier for maybe credentialing and few other things so that we have to go a big bang but we're still a long way from that..

Okay. Great. Thanks for color..

Okay. Well thank you everyone. We appreciate you joining us and we will talk to you again in I think early March for the fourth quarter and full year results. Thank you..

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