Cross Country Healthcare, Inc. (NASDAQ:CCRN) Q1 2024 Earnings Call Transcript

Cross Country Healthcare, Inc. (NASDAQ:CCRN) Q1 2024 Earnings Call Transcript May 1, 2024

Cross Country Healthcare, Inc. misses on earnings expectations. Reported EPS is $0.07781 EPS, expectations were $0.17. Cross Country Healthcare, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon, everyone. Welcome to Cross Country Healthcare’s Earnings Conference Call for the First Quarter 2024. Please be advised that this call is being recorded, and a replay of this webcast will be available on the company’s website. Details for accessing the audio replay can be found in the company’s earnings release issued this afternoon. [Operator Instructions]. I will open the lines for questions. I would now like to turn the call over to Josh Vogel, Cross Country Healthcare’s Vice President of Investor Relations. Thank you, and please go ahead, sir.

Joshua Vogel: Thank you, and good afternoon, everyone. I’m joined today by our President and Chief Executive Officer, John Martins; as well as Bill Burns, our Chief Financial Officer; and Marc Krug, Group President of Delivery. Today’s call will include a discussion of our financial results for the first quarter of 2024 as well as our outlook for the second quarter. A copy of our earnings press release is available on our website at crosscountry.com. Please note that certain statements made on this call may constitute forward-looking statements. These statements reflect the company’s beliefs based upon information currently available to it. 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 2023 annual report on Form 10-K and quarterly reports on Form 10-Q as well as in other filings with the SEC.

The company does not intend to update guidance or any of its forward-looking statements prior to the next earnings release. Additionally, we 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 those calculated in accordance with U.S. GAAP. More information related to these non-GAAP financial measures is contained in our press release. Also during this call, we may refer to pro forma when normalized numbers pertain to our most recent acquisitions as though the results were included or excluded from the periods presented. With that, I will now turn the call over to our Chief Executive Officer, John Martins.

John Martins: Thanks, Josh, and thank you, everyone, for joining us this afternoon. As you can see in today’s press release, our first quarter 2024 revenue and adjusted EBITDA were in line with expectations. I’m pleased that our team continues to perform well in this difficult environment as demand for travel assignment softened further since the end of last year. And while the market for Nurse and Allied remains challenging, our focus is on growth opportunities across all of our portfolio, including our locums, education, home care staffing, search and recruitment process outsourcing businesses, with our pipeline for new business and continued investments in technology as well as our strong balance sheet, I believe that Cross Country is well positioned for future growth.

Looking more closely at our travel business, while demand is down across the market in the high double digits since we exited 2023, our weekly production is only down in the mid- to high single digits, indicating our ability to execute. Open order rates for travel have been fairly stable for several quarters, although average bill rates continue to decline as we blend down towards the current market rates. Accordingly, travel rates in the first quarter were down roughly 2% sequentially and are expected to decline in the low single digits for the next couple of quarters as the market finds its floor. Similar to travel, our local or per diem business has faced market headwinds. In the first quarter, we saw a double-digit sequential decline in volume and a mid- to high single-digit decline in REITs. We are focused on expanding our local services deeper into non-acute care settings, including within our own offerings.

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Q&A Session

The local business remains a key part of our value proposition, and we will continue to offer these services in the markets where it makes sense based on client needs and opportunities. Shifting gears, we continue to see strong performance in several of our other lines of business. Physician Staffing, for example, reported first quarter revenue up double digits year-over-year. Driving this was a combination of higher billable days and revenue per day filled tied to a growing mix of higher building specialties. Contribution income increased both year-over-year and sequentially. And as a percent of revenue, was up more than 250 basis points, reflecting the improved mix and our efforts to proactively manage costs. Our home care business was up mid-single digits, both sequentially and year-over-year in the first quarter on the heels of the recent wins and program implementations that we highlighted on the February call.

I’m pleased to note that this division now staffs over 1,700 FTEs, up high single digits year-over-year. We believe that this business is poised for robust growth in 2024. Lastly, our Education business continued to perform well, up low double digits sequentially. This business continued to expand nationwide as we are now in more than 20 states. I’d like to take a moment to talk about what we are seeing in the market. And more importantly, what we are doing to remain competitive while also being mindful of preserving shareholder value and profitability. It is clear that health systems have reduced their reliance on continued lead, yet there remains structural staffing shortages and high turnover within these settings. Accordingly, we believe that a stronger travel environment could emerge sometime in the back half of this year.

Having said that, given the current market headwinds, we have taken actions to better align our cost structure to the demand environment. As of today, our U.S. head count is now down more than 20% since the beginning of the year. While these decisions are never easy, I am confident that we have sufficient capacity to capitalize when the market rebounds. It’s also important to note that part of the catalyst behind these reductions is the fact that we’ve been able to further leverage our operations in India, which will yield millions of dollars in annualized cost savings. Additionally, we expect to drive further efficiencies company-wide by leveraging our technology, such as artificial intelligence and robotic process automation. Lastly, we will see additional savings as the remainder of our legacy clients are migrated on to Intellify, our vendor neutral technology platform.

Looking forward, we will continue to make targeted investments in technology and businesses that serves to enhance our competitive positioning and operational excellence. As we discussed on our last earnings call, the line between MSP and VMS continues to blur as clients seemingly want to have the best of both worlds. This is where Intellify has become a critical component of our value proposition, since it can be deployed both as utilized as both a VMS and MSP. Overall, we continue to see strong interest in the market today for this technology, and we are confident that Intellify’s value proposition will drive additional business opportunities across country. In fact, we are excited to share that yet another Intellify client was signed last month.

Now turning to our outlook for the second quarter. Given the current demand backdrop in travel, we anticipate that second quarter revenue will be between $330 million and $340 million, with adjusted EBITDA coming in at $10 million to $15 million. Our goal remains to achieve a high single-digit adjusted EBITDA margin. And as we navigate the headwinds from the pullback in Nurse and Allied demand, we expect to see mid-single-digit adjusted EBITDA margins near term, while maintaining capacity when the market rebounds. We remain confident in our ability to capture market share by leveraging both our leading client and candidate-facing technologies as well as our expertise in delivering high-quality clinical and nonclinical professionals, coupled with our diversified platform that includes locums, home care and education, we expect to emerge a stronger more agile and profitable organization once the current travel market pressures dissipate.

We’re also focused on putting our healthy balance sheet to work through ongoing strategic technology investments, share repurchases and potential M&A. On the M&A front, in particular, our goal has not changed. We look to close on several accretive acquisitions that we believe will further diversify our platform, enhance our value proposition and improve our margin profile. In closing, I’m encouraged by our prospects for growth and improved profitability. As we execute our strategy as a tech-enabled workforce solutions provider, we are seeing strong momentum in many of our business lines outside of travel, and we continue to execute on our initiatives across the organization. I am impressed by the dedication and hard work of all of our employees, and I am very proud to announce that we were recently named as 1 of Newsweek’s Greatest Workplaces for Diversity in 2024.

A recognition like this is a testament to our workplace culture and the reason why we have such a deep pool of talent that is made across country their employer destination of choice. I want to thank all of our employees and our health care professionals for your continued hard work and contributions, as well as our shareholders for believing in the company. With that, let me turn the call over to Bill.

Bill Burns: Thanks, John, and good afternoon, everyone. As highlighted in our press release, performance for the first quarter was largely in line with expectations with revenue near the high end of guidance and adjusted EBITDA towards the midpoint of our range. Consolidated revenue for the first quarter of $379 million was down 8% sequentially and 39% over the prior year, driven primarily by declines in travel and local assignments in large acute care settings. I’ll get into more details on the segments in just a few minutes. Gross profit for the quarter was $77 million, which represented a gross margin of 20.4%. Gross margin was down 150 basis points sequentially and 200 basis points over the prior year. The sequential decline was primarily due to the annual reset in payroll taxes as well as a rise in certain burdens such as health insurance and workers’ comp and an adjustment for professional liability insurance costs that is not expected to recur.

Relative to the prior year, the decline in gross margin was principally due to the tightening of the bill pay spreads for travel and local assignments, as well as the burdens that impacted the sequential change. Moving down the income statement, selling, general and administrative expense was $63 million, down 6% sequentially and 25% over the prior year. The majority of the decrease relates to lower salary and benefit costs associated with our reductions in headcount, as well as lower incentive compensation over the last 2 years. We have proactively managed our costs to align with the broader market while seeking to preserve adequate capacity for future growth and to maintain the cadence of investments in longer-term projects. In the first quarter, US head count was down 9% from the start of the year, and we’ve taken actions in the second quarter to reduce head count by an additional 15%.

Over the last 18 months, we’ve reduced total head count in the U.S. by 40%. While these reductions reflect the headwinds experienced across both our travel and local businesses, it’s important to note that a good portion with a result of enhanced productivity and offshoring to our center of excellence in India. As of the end of the first quarter, we grew head count in India by 45% since the start of the year, and we’ll continue identifying future opportunities to capture incremental savings. While we are keenly focused on managing our total cost structure to the most efficient level possible, we will continue to make investments in those businesses where we see opportunity for growth, like education and home care staffing. Our SG&A for the first quarter includes more than $1 million of costs pertaining to the implementation of our ERP system.

The costs were higher than prior quarters as we have been working simultaneously on 2 phases of the project. I’m proud to share that as of today, we’ve successfully completed the first phase of the project, which is the foundation that will allow us to realize significant efficiencies once the second phase is completed in mid-2025. Excluding these implementation costs for our ERP system, SG&A was down more than 7% sequentially and 26% from the prior year. We reported adjusted EBITDA of $15 million for the quarter, representing an adjusted EBITDA margin of 4%. Though revenue was at the high end of our expectations, our adjusted EBITDA was impacted by a lower-than-expected gross margin, which was partly offset by lower SG&A through tighter cost management.

Interest expense in the first quarter was $500,000, which was down 21% sequentially and 87% from the prior year. The decline was entirely driven by lower average borrowings throughout the quarter. The majority of the interest expense reported for the first quarter was related to the carrying costs for the ABL and fees related to outstanding letters of credit. The effective interest rate on amounts drawn under our ABL was 7% as of March 31. As a result of our strong cash flows, we ended the quarter once again with no debt outstanding. And finally, on the income statement. Income tax expense was $1 million, representing an effective tax rate of 27%, which was slightly lower than our expectations due to the impact from discrete items recognized in the quarter.

Our overall performance resulted in an adjusted earnings per share of $0.19 via the midpoint of guidance. Turning to the segments. Nurse and Allied reported revenue of $332 million, down 10% sequentially and 43% from the prior year. Our largest business, Travel Nurse and Allied was down 11% sequentially and 48% from the prior year. Billable hours were down 9% sequentially on the softer demand, while bill rates were down 2%. Given the continued softness in travel demand, we expect to see a further sequential decline for revenue for the second quarter in the mid-teens. Similar to Travel, our local business has also been impacted by the softness in demand for continued clinical labor. First quarter revenue was down 36% from the prior year and 19% sequentially.

The majority of the decline came from fewer billable hours and to a lesser extent, lower bill rates. Though core Nurse and Allied staffing is facing headwinds, several other businesses continue to experience organic growth. Home Care staffing was up 4% sequentially, while Education was up 11%. And given the growth prospects of both of these businesses, they remain focus areas for further investments. Specific to the Home care staffing business, we continue to win new PACE clients across the nation and have 7 programs currently being implemented and another 2 contracts likely to find in the coming quarter that should be catalysts for continued growth. Finally, Physician Staffing once again delivered a strong top line reporting $47 million in revenue, which was up 16% over the prior year and flat sequentially.

Year-over-year growth was evenly split between price and volume, with a number of days still increasing across specialties such as anesthesiologists, primary care, physicians, CRNAs and nurse practitioners. Turning to the balance sheet. We ended the first quarter with $5 million in cash and no outstanding debt. With the health of our balance sheet and strong cash flow, we remain well positioned to make further investments in technology and accretive acquisitions, as well as to continue purchasing shares under our $100 million share repurchase plan. From a cash flow perspective, we generated $6 million in cash from operations in the first quarter, which was impacted by the timing of payments for annual incentives as well as payroll taxes. Collections were largely in line with expectations, though our days sales outstanding increased to 74 days as a result of a single client which added 5 days to this metric.

Specific to that client, we did see collections resume this quarter and expect that trend to continue. Our goal remains to operate with a DSO of 60 days, which is more in line with our historic performance, and we expect to make progress towards that in the coming quarters. Cash used in investing activities was $2 million, primarily reflecting continued technology investments, predominantly for Intellify and our new ERP system. From a financing perspective, we repurchased an additional 300,000 shares during the quarter under both our 10b5-1 trading plan and our 10b-18. This brings me to our outlook for the first quarter. We are guiding to revenue of between $330 million and $340 million, representing a sequential decline of 10% to 13%, driven predominantly by the expected decline in both billable hours and rates for travel.

We’re guiding to an adjusted EBITDA range of between $10 million and $15 million, representing an adjusted EBITDA margin of approximately 4% at the midpoint of guidance. Adjusted earnings per share is expected to be between $0.10 and $0.20 based on an average share count of approximately 34 million shares. Also assumed in this guidance is a gross margin of between 21% and 21.5%, interest expense of $500,000 and depreciation and amortization of $5 million, stock-based compensation of $2 million and an effective tax rate of between 30% and 32%. And that concludes our prepared remarks, and we’d now like to open the lines for questions. Operator?

Operator: Thank you. Ladies and gentlemen, before we open the lines for questions, I want to turn the call back over to John Martins for another word.

John Martins: Thank you, operator. I want to recognize that today is the start of National Nurses month. This month serves not only as a celebration of nurses unwavering dedication and tireless efforts but also as a point reminder of the invaluable role they play in health care and our society. Nurses are the compassionate and steadfast pillars of patient care. Their contributions extend far beyond the confines of hospital walls, touching the lives of countless individuals and families around the world. Nurses are truly the heroes and the lifeline of the health care system. I want to personally thank every nurses out there for your hard work and dedication. And now I’d like to turn it back to the operator for Q&A.

Operator: [Operator Instructions]. Our first is from Trevor Romeo with William Blair. And your line is open.

John Romeo: The first one is if you look at the Q2 guide, I think historically, you haven’t seen as big of a drop is what you’re guiding to in terms of revenue. It looks like maybe it’s a little more than 10% below Q1. Consolidated, I think Bill had said maybe down mid-teens for travel. So I was just kind of wondering if you could talk about demand trends for the first 4 months of the year this year and maybe what’s different versus years in the past? And I guess further — do you believe the entire industry is experiencing a similar level of decline? Or are there additional competitive headwinds you’re facing? Or anything more you could say on that front would be really helpful.

Bill Burns: Sure. Thanks for the question, Trevor. This is Bill Burns. You’re spot on. When you look at our second quarter, it is not following historic patterns, and it’s entirely driven off of travel. As we progress through the first quarter, demand remained soft and still has not yet rebound. We do think there’s some opportunity there and programs that we’ve won are still ramping, but that’s putting the drag on the second quarter. Bill rates for travel are projected to be kind of in the same range of a low single-digit, 1% to 2% sequential decline going into Q2 and possibly into Q3, and we don’t guide out that far. But rates are trending exactly where we expected them to be. This has really been a volume story across Travel Nurse. And John, I mean, if you want to comment on the market.

John Martins: Yes, Trevor, I would just add, this is definitely the market conditions. And — when we look at the different information that’s out there, we can see that demand has fallen off pretty sharply over this first quarter and into the second quarter. Now I would say, over the last 6 weeks, we’ve seen demand level off. While I think it’s too early to say that this is a trend, we are cautiously optimistic that we are seeing a flattening demand, but it’s still too early to call it.

John Romeo: And then I guess on the Locum side of the house, what are you seeing in terms of the supply side with the willingness among physicians and advanced practice providers to take those assignments, I guess, where are we longer term in that adoption curve of the clinicians wanting to take more of the temporary flexible assignments? And how much room is there for that to increase going forward?

John Martins: Sure. Well, there is, I think, 800,000 physicians in locums — I’m sorry, in the U.S. total physicians and Locums is certainly a small part of that. But just like we’ve seen in travel nursing and other staffing industries, we’re seeing physicians are more looking to have a more freedom of work, and they’re able to really embrace the locums space. And so we think that there is still a long runway for more physicians to enter the locum space as we see that in hospital systems, this is the key component for hospital systems to drive revenue is having physicians. So as long as that dynamic remains there, we feel very bullish on the locum space.

Operator: Our next question is from Brian Tanquilut with Jefferies. Your line is open.

Brian Tanquilut: Maybe John, I’ll go back to the demand question. I mean, in your prepared remarks, you mentioned it sounds like you have an optimistic or more optimistic for you in the back half of the year. But what’s the feedback? When you talk to hospital CEOs or chief nursing officers, how much more cutting is there? I mean given the strength in demand or volumes at the hospitals, like how does this all blend in, right? And so curious what those conversations are and where your optimism is going from.

John Martins: Yes. Interesting question because you are right. They’re hospitals are still looking to see where that demand levels off. But if we look at what the publicly traded hospitals, I said over the past several weeks, they’re seeing to be comfortable with where the contingent labor is right now. And when we look not only at hospitals being comfortable, but then we see that census is up, we’re seeing surgeries are increasing. The need and demand for nurses should really continue. We recently — actually, we launched it out today, our annual nurse survey that we conduct in collaboration with Florida Atlantic University, a link College of Nursing. And we asked we surveyed over 1,100 nurses and nursing students. And some of the same trends that we’ve seen over the last 3 or 4 years, Brian, 43% of nurses are saying that they’re still strong with understaffing at their facilities, and 37% are facing a stressful work environment.

Now these numbers are a little bit better than they were during COVID, but they’re still so high. And so what we’re seeing and why we think that — look, if the trends can continue of stabilization of demand, when we look at the programs that we’ve won and we’re ramping up, we look at the macro data of the underlying nurse shortage. And we start seeing hopefully that we can take those tailwinds and start seeing the back half of the year month-over-month volume growth as we get into the back half of the year. I think that’s where my optimism comes from is that it’s the execution of what Cross Country is doing, our Intellify platform and how it’s resonating in the market space. And then thirdly, we’re speaking to the hospital systems, they certainly need our services now.

And so I think as we get there, and then the other component to that is as we start heading towards the summer months of July and August, we’ll start seeing the winter needs come in as well. So when you put all those pieces together, it’s not one piece that makes me optimistic when I look at the whole picture is why I get optimistic about the back half of the year.

Brian Tanquilut: And then maybe just shifting gears to the locums business, obviously strong during the quarter. So how do you think about the sustainability of that strength? Maybe number one. And then second, what do you need to do to continue driving that growth, right? I mean in terms of recruiting and things like that. So just curious what that looks like that you try to strategize around locums.

John Martins: We’ve had — and as the industry has had several years of great growth in locums and we’ve outpaced where the industry was. I wouldn’t anticipate that pace that we’ve had over the past few years to continue this year. But I think we can get more to a stable pace, I believe staffing industry analysts is predicting about a 12% increase year-over-year. And I think when we look at that is probably more in line where we’ll see growth coming. I don’t think we’re going to see the 30% growth that we saw in the last couple of years. But it’s still a very sustainable growth period. And in terms of what we need to continue to grow, it’s just the same thing where in any industry where you’re having growth, making sure you are able to attract the right candidates and being able to have the right quality jobs.

And we talk a lot about demand even on the travel nurse and allied side. But the same thing on the physician side, there’s demand and then there’s quality of jobs of demand. And you need to make sure you have the quality of job that has the right — to be able to offer the right compensation packages for these physicians offering the flexibility they need. And if you can get that quality of a job, and then it’s much easier to match a position with that job.

Operator: Our next question is from A.J. Rice with UBS. Your line is open.

A.J. Rice: On the gross margin for the quarter, I think at 20.4%, it was a little below the guidance of 21%, 21.5%, usually have pretty good visibility on the quarter ahead. I know in the prepared remarks, you said the gross margin pressure in general was because of the bill pay spread. Did anything happen as the quarter progressed toward the end of the quarter, the put incremental pressure? Is that just maybe the mix of locums business being strong or relatively speaking or something else? Any comments there?

Bill Burns: Yes, A.J., this is Bill. Thanks for the question. Yes, I think in the prepared remarks, you heard me say there were some burden charges. And I think that was probably one of the bigger surprises which you don’t really get to until the end of the quarter. The 3 biggies there are health insurance, which costs continue to rise, people are seeing the doctors more frequently, et cetera. But I think the ones that are actuarial-driven workers’ comp and professional liability were kind of a quarter-end adjustment that we weren’t necessarily anticipating. So that was a little bit more of a surprise to us. But as I mentioned, I don’t anticipate much of that. And health insurance will continue as we move forward. But the majority of the burden that we saw in the quarter from — say, from PL is not expected to recur.

So I think we’ll see a little bit of an uplift. And that’s why we’ve guided back. If you noticed the guidance inflection is for a sequential change that is larger than just the payroll tax reset. The payroll tax reset this quarter was about 65 basis points. That, too, is a little bit higher than we’ve historically seen. Certain jurisdictions had a little bit of a higher payroll tax burden in the year than we expected, most notably California. We saw that was a little bit higher than what we had seen in past years. So a little bit surprised on the payroll tax and the burdens which, as I said, I think the burdens normalize coming into Q2.

A.J. Rice: And the longer-term issue on the whole bill pay spread seems to be, in some ways, competitor behavior, the people that grab some share in the pandemic, we’re trying to still hold on to. And I know you’ve talked about your biggest peers talked about that. Are you seeing some easing of that competitive pressure? Or is that still pretty prevalent out there?

Bill Burns: Well, I guess I’d say the pressure is still there. It’s obviously always a market competing for the talent and with the client on the go rate side. We don’t expect to see a lot of bill rate uplift, although interestingly, the open order rate did tick up a couple of points, if I look sequentially and versus the fourth quarter against the year-over-year, not enough to write home about, but a couple of points is still a positive direction for us on the open order bill rate. And then you look at the compensation side of things. And again, it’s a highly competitive market, there’s a lot of transparency around the pay packages that nurses can garner. What’s embedded in the numbers sequentially for us, while payroll tax and burdens were actually a bit of a hit to us.

The bill pay housing spread, and I lump in housing when I say the bill pay spread. Bill pay housing spread was actually favorable for us sequentially from the fourth quarter to the first quarter. Again, small 20 basis points, 30 basis points, but still move in the right direction. Year-over-year, still tremendous pressure there. Don’t expect that to ease anytime soon. And I’ll just repeat remarks I made from the last earnings call, which was the most — the majority of the bill pay spread pay rates are coming down, it commensurate, if not faster than the bill rates, the piece that’s been stubborn has been the M&I component, the housing component.

A.J. Rice: Maybe a last question on the availability of your supply. I know we’ve talked that nurse expectations — rate expectations for travelers may be needed to reset. Are you seeing that? What is — how our expectations for the new travelers as those re-upping anything else to talk about in terms of your availability of supply, people re-upping on assignment, et cetera, et cetera.