Welcome to the Cross Country Healthcare Earnings Conference Call for the Second Quarter of 2017. This call is being simultaneously webcast live. A replay of this call will also be available until August 17, 2017 and can be accessed either under company's website or by dialing 800-510-0118 for domestic calls and 203-369-3808 for international calls and by entering the passcode 2017. I will now turn the call over to Bill Burns, Cross Country Healthcare's Chief Financial Officer. Please go ahead, sir.

Thank you and good morning, everyone. With me this morning is our Chief Executive Officer, Bill Grubbs. This call will include a discussion of second quarter results for 2017 as disclosed in our press release and will also include a discussion of our financial outlook for the third quarter of 2017. After our prepared remarks, you'll have an opportunity to ask questions. Our press release is available on our website at www.crosscountryhealthcare.com. Before we begin, we need to remind you that certain statements made on this call may constitute forward-looking statements. As noted in our press release, forward-looking statements can vary materially from actual results and are subject to known and unknown risks, uncertainties and other factors, including those contained in the company's 2016 annual report on Form 10-K and quarterly reports on Form 10-Q as well as in other filings with the SEC. I would encourage all of you to review the risk factors listed in these documents. The company undertakes no obligation to update any of its forward-looking statements. Also, comments 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 acquisition of Advantage RN on July 5, 2017 which was effective as of July 1, 2017. Aside from certain transaction costs, there was no impact on the company's operating results for the second quarter. I'll touch further on the acquisition later in the call. With that, I'll now turn it over to our CEO, Bill Grubbs.

Thank you, Bill. Thank you, everyone, for joining us this morning. On our last 2 earnings calls, I stated that the first and second quarters of 2017 would be transition quarters to help setup for our new business wins. With the recent acquisition of Advantage RN and the investments we continue to make in fulfillment and candidate attraction, I believe that 2017 will position us well to meet the expected increasing demand from our new business wins and drive a stronger 2018. As for the second quarter, I'm happy to report that we performed at or above guidance. Revenue was within our guidance range, while gross margin came back faster than anticipated and was above the range we guided to. The gross margin increased. Good cost management and improved performance from physician staffing and Other Human Capital Management allowed us to exceed values for adjusted EBITDA and adjusted EPS. Also after the quarter end we were able to close the Advantage RN acquisition sooner than anticipated and, therefore, we will get 2 full quarters on our numbers for this year. Our new MSP implementations are progressing as the new orders ramp in the third and fourth quarter along with the delivery capabilities from the new acquisition, we expect to see stronger revenue growth as we enter 2018. For this quarter, revenue overall grew at 5% and I'm very happy to report that we had year-over-year growth in all 3 of our reporting segments. Nurse and Allied growing just over 5%, Physician Staffing just over 3% and Other Human Capital Management at about 6%. Nurse and Allied grew at 5% year-over-year predominately from volume. As previously stated, we saw a softening of demand in travel nursing through the first quarter. That softening continued into the second quarter, but leveled off in…

Thanks, Bill. We were pleased to have closed the second quarter on a positive note and start off the third quarter with Advantage RN as a part of our company and a larger credit facility providing us more financial flexibility. I'll touch on both of these in just a moment. As Bill mentioned, this was the first quarter in years where all 3 of our segments reported year-over-year revenue growth. And with respect to profitability, we exceeded our expectations for both adjusted EBITDA and adjusted EPS. Turning to the quarter. Total revenue was $209.3 million, up 5% from the prior year and 1% sequentially with growth coming from all 3 segments, as I mentioned. Gross profit margin for the quarter was 27%, down 50 basis points from the prior year and up 130 basis points sequentially. The year-over-year decline was primarily due to the higher compensation cost in our legacy Nurse and Allied business and was partly offset by higher gross profit in both Physician Staffing and Other Human Capital Management. The sequential increase was due to the impact of the annual payroll tax reset which primarily impacted the first quarter as well as the benefit from normalizing compensation costs for health care professionals at certain large accounts that we mentioned last quarter. Moving down the income statement. SG&A for the quarter was $46.6 million, representing an increase of 4% year-over-year and a decline of 1% sequentially. The year-over-year increase was largely due to higher compensation costs from the annual merit increase and continued investments in revenue-producing headcount, that was partly offset by reductions in consulting and other third-party expenses. The sequential decline was due in part to the lower payroll taxes from the annual reset, I mentioned. We continued to make investments in revenue-producing headcount which was primarily offset…

[Operator Instructions]. Our first question comes from A.J. Rice of UBS.

Just maybe I'll ask a point of clarification first. I think on the last conference call, you talked about 2 larger programs, a $23 million program that had just been implemented was in the early stages and a $30 million program that still needed to be implemented. Can you just update us on how those are flowing the numbers and whether they are up and running at this point?

Yes, the $23 million one is up and running and is ramping -- just starting to ramp up now, but it has been implemented and is in process. The $30 million one starts this month and it goes in 3 phases, call it, $10 million each. It's split by a facility, they may not be exactly $10 million each, but 1 phase will be this month, 1 will be in September and 1 will be in October. So that one has not been implemented yet. It's in the process of being implemented, but part of it will go live this month, part next month and part in October.

Okay. And I understand from the commentary about the moving parts for Q3 the right revenue and all that. But Advantage RN, just to make sure I understand what's going through, the performance, I think we've seen suggest you're sort of running it at about $2.5 million operating EBITDA contribution. And the Q3 guidance has been growing about $1.1 million to $2.1 million. So are you fully reflecting the Advantage RN in the back half of the year, just curious about that?

Yes, A.J. So we do have the expected 10% contribution from Advantage in our numbers. It's partly reflecting the loss of that revenue on the project side for the overall business in the legacy Nursing and Allied. But overall that is included in there for the quarter.

Okay. All right. And then just your comment on the Physician Staffing. I know, you guys had been making some changes there and some of the management upgrade and so forth and then there has also been some general volatility in the marketplace. So showing the year-to-year improvement, can you parse out how much of that is the changes you made and how much is the improvement and the underlying trend there in the market?

Well, I think the market has always been fairly favorable. We just were taking advantage of it. So I think I'm going to give all the credit for the Dennis and his team over at our Physician Staffing for the changes. Part of it was due to our advanced practices business which is selling mid double-digit growth in the 40% to 50% range year-over-year for our advanced practice, nurse practice and [indiscernible] physician assistants. But we did see revenue growth. The way we divided that now is 1, 2, 3, 4, 5, 6, 7 specialties. We had growth in 4 out of the 7 physician specialties but not counting the advanced practices. So we're starting to see this thing kind of kick in, but it really is all to do, I think, with our own internal improvements, but the market has been pretty strong and remains very strong.

Okay. I guess. Let me just go back to my question on the project revenue and the flow of Advantage RN. So I understand, there is a year-to-year impact from having the project revenue in the third quarter of last year and not having in the third quarter of this year. Was that same level of project revenue in the second quarter, because I guess, what we're looking at is the sequential progress of being $1.1 million to $2.3 million of EBITDA within your range and it seems like Advantage RN will get to there already?

Yes, I think the difference is that our Mediscan business with the schools has a very low third quarter. We have the summer holidays in the third quarter. And so they have a depressed level of profitability. They have a depressed level of revenue and depressed level of profitability in the third quarter as well. That's probably where most of the offset. That was the point I was about to make, A.J. Bill's right, it's the step back in our school-based business. As that becomes a larger piece of our ongoing business, we'll see that sequential step back and that's part of our Nurse and Allied business.

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

This is John on for Brooks. Just kind of looking at the new MSP wins of 22 so far this year. I think that would imply about 3 in this past quarter. Is that kind of more of a function of focusing on kind of the previous wins over the past couple of quarters in getting those ramped up as opposed to kind of the pipeline?

No. They don't always come in, in kind of a linear fashion. So the 23 we won last year were very backended in the year. Obviously we won -- of the 22 in the first half, we won most of those by the end of April -- 19 or 20 of them by the end of April. So it's -- that's all we had. In essence, we won 2 in the month of May and June. It can be that way. But the pipeline is pretty strong. We have -- in fact, I just had the pipeline review call yesterday. We still have a lot in the pipeline and I went out to a couple of customer presentations recently and I feel pretty good that we'll still. So we're not pulling back on it, but it doesn't always come in in that linear fashion.

Okay. That's helpful. And then just kind of a little bit more color on the cadence of these new wins that you're starting to get those orders. I know you kind of said, that you're getting them now. It's going to start coming in into '18. Is that primarily going to be in the beginning of '18, mid '18, just kind of some color on that -- on the cadence?

Yes. So of these new wins that are -- forget the ones that haven't been implemented yet. But the ones that are -- have been implemented and are ramping up today, I have the next 3 months of orders that -- where we should see incremental. So in the month of July, it's only 32 new travel opportunities. So it's not a huge amount. So even if we build 20 or 25 of those, it's not a huge impact on the rest of this year. That number goes up to another incremental 72 travel orders of these new wins that are ramping up in August, 132 incremental in September and a 155 incremental in October. And November and December should be higher than that as well. But all of the ones that are coming in, in August -- the 72 in August, 132 in September, the 155 incremental travel opportunities in October, almost all that revenue is 2018. So we're starting to see the orders come in, but we'll get very little revenue in 2017 out of those. But all these wins I've been talking about with the implementation phases and the timing it takes to get them up and running with technology integration and process improvements and putting on-site teams in place and so and so forth, we're now starting to see them kick-in with the incremental orders. And so that's why we -- you probably hear the confidence in my voice of why we believe that that will start to see some better growth in '18 because we're now starting to see the orders come in. And as we implement these programs, we get a feel for what the order flow is from the new wins as well. And that's not even counting some of the newer wins that came in this year that haven't even been implemented yet. So those numbers that I've just talked about should even be better as we go into 2018.

Our next question comes from Tobey Sommer of SunTrust.

This is Kwan Kim on for Tobey. First of all, what are you seeing in terms of the current trends and customer attrition levels for MSPs? And could you talk more about your strategy to accelerate the ramp timeline for MSP contracts, especially for new customers?

So attrition level for MSP customers is, boy, it's very, very low. I mean, it's certainly less than 1 a quarter, maybe 2 a year. I mean, it's -- we don't lose a lot of our customers on the MSP side. So most of these wins end up being incremental. And I think, Kwan, the second part of your question was about the ramp up which I think we talked about and I just talked about some of the ramp up of the orders that will come from these. But new -- if we win a program and we take it away from a competitor, the transition time to get that up and running is much faster. A brand-new program is just a lot of work to finalize the service level agreements, put technology in place, integrate that technology, look at process improvements, hire an on-site team, do education and orientation for the hiring managers. These are easily three months, if not longer, to get that thing up and running. And then we don't terminate all the subcontractors and all the existing assignments. And with the current environment, with renewal rates fairly high and long term travel assignments, it takes a while to work through the assignments falling off and new orders coming on and our teams getting those opportunities to be able to fill. So that's what the dynamics are in the ramp up. So it's that 3-month implementation and then that kind of 9 to 12-month of ramp up to get to kind of the maximum level of revenue that we expect to get out of it. The good news is we in our monthly reviews, we track the revenue we get from new MSP wins versus the expected revenue that we thought we were going to get. And it's eerily right on the money. So we're not -- my sales people aren't overblowing the opportunity and building it up. So when we think we're going to get $10 million about 1 year later, we're at a $10 million run rate. So I feel pretty good that we have a good handle on this.

That's helpful. And could you comment on your pricing expectations in Nurse and Allied going forward?

Yes, I'm going to let Bill Burns handle it, because he's done some analysis and that's interesting. We -- our bill rates in Nurse and Allied were up maybe 0.5 percentage point, 50 basis points this quarter which is way down from where we were certainly last year. And I had said this year that, that at what we grew, I thought, half would come from volume and half would come from price. So we get questions sometimes as well that your customers are negotiating lower prices, the answer is, no, we're not negotiating lower prices with our customers. But I'll let Bill explain why it comes out this way in the financials.

So what we're seeing is we still see price increases in general coming through the business, probably in that low single-digits. But there is an interesting mix dynamic that's happened in recent quarters which is last year when demand was quite hot, there was a higher level of premium orders which boost up the overall build rate. But when you look at what's happening underneath, price is still moving in the right direction. There is just a slight shift in the mix of the crisis in premium rate orders that we once had. Interestingly, when we look at the second quarter and the third quarter, we still are projecting volume growth. So that's the good news. And if demand does recover to where Bill had seen it or has said, we might expect it to go, I think we could see pricing get back up into that 4% or 5%, but for the near term we're looking at more low single-digit price increases, 1% to 3% probably at best.

Your next question comes from Jeff Silber of BMO.

It's Henry Chien calling for Jeff. Just a question on the impact of the RN acquisition. I was wondering if you could update us on when you expect that to be for 2017?

Yes, I mean, they're going to be reported under our Nurse and Allied segment and because we're starting to -- we're going to leave them as a stand-alone operation, but we will start to share orders and candidates and I really don't care where things gets filled and how things get build. So it's going to be a little bit hard to track it as a separate organization. There is no earn-out, so we don't need to keep the financials completely independent. So it is a little bit hard going forward to identify it as a stand-alone operation, but as we start sharing and crossing of the orders and all that. But we're starting to do that. We had -- in fact, we had a follow-up meeting yesterday to finalize the rules of engagement between our MSPs and the new Advantage RN acquisition and how we can maximize their impact on our new MSP wins as well as our overall business. So we expect them to continue to grow. They saw a little bit of the slowdown as we did. So the compound annual growth rate that you saw when we announced the deal about 1 month ago at -- in the 20% to 30% range is probably now down into the high single-digits, may be low double-digit range. But it's still growing and we expect to continue to grow and we expect it to continue to be able to maintain a double-digit EBITDA.

Got it. Okay. And so just from a modeling perspective in terms of the incremental sales and EBITDA, should we -- I'm just looking at the notes here, we had about $100 million in 2016 sales, $10 million in EBITDA for 2016. Should we use that kind of run rate and apply the growth rates that you mentioned just for modeling purposes?

Yes, I think that's a good way to look at it for modeling purposes. We do expect that Advantage is contributing about $25 million in base revenue for the back period for quarter. We do think that they'll see continued growth. If there were left completely stand-alone, their growth is still mentioned had slowed to a little -- to some extent they were growing quite rapidly in the last several years. That would probably have slowed to a mid to high single-digits if they were stand-alone. The problem will be as we marry them into our business and we start plugging them into all the MSPs, their growth rates become somewhat -- you can't compare them any longer to the historical performance, but I think as a benchmark, if you are putting -- if you need to model it, I would say the $25 million model with a mid- to high single-digit kind of growth increase would be a fair number to put in.

Got it. Okay. That's helpful. And just shifting to the MSP updates. In terms of the total number of programs that are yet to be implemented, is that -- do you have a number of that? And I remember last quarter you mentioned it was about $100 million in spend. I was just curious if you had kind of estimate of the total spend as it stands right now?

Yes, Bill has it.

Just having looked at the MSPs and the volumes. So many, many, many of the MSPs of the 43 are still in the early stages. So they are still ramping and growing. On an annualized basis we expect their spent to track very well to what we had thought. But 18 of the 43 MSPs don't have revenue yet. So these are all the more recent wins coming in the latter part of Q4 and early '17 as well.

So all of that is '18 revenue.

All of that will be '18 revenue.

And that 18 represents, how much?

And for those 18 of the 43, it represents about $85 million of spend under management which would be our share of that 55% to 60% of that. So whatever we can increase the capture rate.

Got it. Okay. And then that -- and that should come in 2018 or later in 2018?

Yes, we'll implement some of them by the end of this year. But by the time the orders come in and we fill them and the people start, it will be '18.

It should be steady growth throughout '18, as these programs continue to mature. As I mentioned earlier, it's a 9-month ramp once we're live, 9 to 12 months in some cases to get them fully operationalized and up to full speed. But we will expect to see some of the benefits in early '18, but it will ramp throughout '18.

So Bill said 18 of the 43 have no revenue yet, but even of the 40 -- of the other 25, that are up and running, some of those are still in the early stages and I gave you what some of those ramp up numbers are going to be over the next few months. So this is -- I feel pretty good that if we're ramping from 32 incremental travel opportunities in July to 155 in October and I still have $85 million that's not implemented, that number is going to go up as we go into '18.

Our next question comes from Bill Sutherland of The Benchmark Company.

So Bill, these MSPs are disproportionately focused on travel?

I'm sorry, the MSPs?

Yes. That because...

Yes, it's not completely. So I know we talk about travel a lot, because that's our biggest segment. It's the bigger segment in the market. It's a fastest-growing segment or has been maybe until fairly recently. That's why we talk about travel nursing a lot. But I don't want to discount the per diem opportunities or the allied opportunities. Almost all of our new wins, I shouldn't say almost all of them, a much higher percentage of our new wins have a wider scope to the contract than when I first started here 4 years ago, where it was predominantly travel, sometimes per diem, a little bit more Allied.

So of the existing MSPs roughly, it's predominantly related to travel. This is the weight on existing MSPs. So of the existing MSPs, 68% of all the revenue comes from travel nursing. So that's why we focus on the most. But you're right, I mean, it's not all travel nursing. So even though it's incremental orders I just talked to you about, doesn't count Allied and per diem. And per diem -- so the branch operations were about 21% of our total MSPs and that's predominantly per diem staffing. And as I said, that grew at the high single-digit numbers in the last quarter. So that's another opportunity above and beyond the travel piece. So I think that's probably 60 -- I'm sorry, 70-30 travels and nontravel is probably about the right mix.

And Bill, just to go back to your opening comments about the market backdrop. So you're -- in your business at least, the travel is quite soft as we speak in terms of incremental RACs. But per diem is high single digit?

Yes, that's exactly right. And so -- but they don't offset each other. First of all, per diem is a lower revenue number than travel nursing. So it doesn't completely offset. And their per diem rates are $20 less than travel rate. So it doesn't completely offset. But to me that's a very encouraging sign. If this was a real demand slowdown, we would see a slowdown across the board and we're not. And the fact that travel nursing is soft right now, I'm not that worried about it, because even if the market stays soft, I think I have a number of my own business to offset a lower renewal rate and offset a lower demand rate, just because I have my own specific demands that I'm driving. And I think it's market share demand from our new wins. But yes, we have seen the softening and is predominantly in travel nursing. And although it's leveled off, we haven't seen it pickup yet.

But I do want to caveat. So while we've seen a softening, its been within those premium rates, the higher rate assignments which have been just coming in just a little bit less than they had. Volume for the quarter was still -- the majority of the driver in travel nurse hours were up 4%. If you look at it, excluding premium rates, just within travel nurse, volume was actually up 9%. So it's showing that there is a lot of activity still out there, it's just in the cost containment and a little bit of softening in how hot the market was and the demand we're seeing.

So that's a good point because volume is still pretty decent, that's being offset by the -- that mix of premium versus nonpremium.

So I'm just trying to get a feel for kind of the thinking that went into how you're laying out the Q3 numbers, because obviously even adjusting for the crisis business last year, it looks like -- and with the assumptions about Advantage, it looks like a flat to slightly down quarter. And I understand Mediscan has got a bigger impact now and some other things. But on a year-over-year basis that should make a difference actually?

Yes. And you're right, I mean, the numbers are reflecting a softer Q3 and maybe that will carry into Q4. We will give the guidance when we do Q3 numbers. But I'm not that worried about that, because we have the 2 big opportunities of increasing our capture rate and continuing to see these new wins ramp up. And the capture rate, you can't just flip the switch, but we grew from 51% capture rate a few quarters ago to 55% in the second quarter of this year. I think that can go up another, I don't know, 400 or 500 basis points in the next few quarters and yet, the number we're managing $500 million to $600 million of spend. So you get an extra 3%, 4%, 5% of that extra spend, that's real revenue plus the ramping of the new opportunities. So yes, it looks softer. As I said, our growth will look muted and things will look different because of project revenue and all the noise in Q3 and Q4 of last year. But this is really about going into '18. And I know you guys need to feel comfortable about Q3 and what its underlying trends are. But it will -- it won't look as strong as you would think it would because of all the noise and all the things that are happening. But the ramp up of the 2 growth opportunities that we see which is the new wins and the capture rate, I think, is pretty compelling for next year.

And is the more muted environment creating a little more interesting candidates for your M&A pipeline, as far as the kind of value that you would like to see?

Yes, I think after the Advantage RN which we're extremely pleased with and we're very happy and all the things that we thought about them, that's proven out that that's a good strong management team, it's a good cultural fit and now that we would kind of get the rules of engagement put in place, we'll start to see them have a positive impact on growth going forward. Really, the only area right now that I'm focused on is probably the school business. I might be interested in local tenants, if I see consistency from quarter-to quarter on the local tenant side. But yes, there are more opportunities out there to look at other per diem or travel nursing operations, but I'm not sure that we're that interested at this point. I think we have enough to be able to take advantage of this going forward. But we will be active, though, in special education and school businesses and we would like to do something hopefully this year, if not next year. Bill, went over the debt -- new debt we have and where we have on the leverage ratio. So we have enough capability to do a decent deal on the school side.

Okay. And the last one. Bill Burns, amortization assumed in the Q3 projection?

Yes. So the numbers we've assumed and I'll caution this to say that we've not finished the evaluation of all the intangibles related to Advantage. So it's based on predicated on our historical experience with M&A and how the values get allocated in the past. But what we've modeled was between $2.8 million and $2.9 million of depreciation and amortization for the quarter. That could be different based on what the final evaluation reports come out to be, there I don't expect a material impact from that.

Our last question comes from Mitra Ramgopal of Sidoti and Company LLC.

As I look at areas where you might be able to improve gross margin, I was just trying to get a sense as to where you stand as it relates to what you see in the MSP business you have right now and in the pipeline if you have the resources already in place for that business, so you still need to do some significant additions?

I don't think we need to make a lot of investments now. We talked about the first and second quarter bring transition quarters and that was the fact that we had an incremental step-up in new business wins and what you have to do in order to take advantage of that, it doesn't fit in those 3-month windows. And so when you have 2 quarters in 1 year that become a transition quarters, you kind of have a full transition year. But we think we're fully resourced now to be able to take advantage of whatever the market throws at us as well as the new wins that we have. So I think we're in good shape from an SG&A perspective.

Okay. And on the physician business, clearly, it was the first, I think, year-over-year increase in quite a while. How do you see that going forward, if you think you've really turned the corner there?

I do think it is turning the corner. But I can't say that that it's going to go from 3% year-over-year growth this quarter to 5% next quarter and to 7% in the next quarter. May be it will go back to minus 1 this quarter and then it will go back to positive 4% in the next quarter. It's hard to say. It is turning the corner. And as I said, medium to long term, I expect and that will be on a growth path. I'd like it to be consistent going forward, but remember this, it took us a long time to get to this point. But its a -- this time last year, we were negative 20% year-over-year growth, we were 9% and 12% in the fourth and the third quarter. So the turnaround to 12% year-over-year decline in the first quarter to a 3% year-over-year in the second quarter, I think, is pretty good. So I feel good that medium to long term, it will go forward, but there could be a little bit of inconsistency from quarter-to quarter, but generally it does turn the corner.

Okay. And then finally, I believe, on the last call, you had indicated on executive search business, you had a couple of gaps to fill there. I was just wondering if that's behind you know?

Well, we filled the gaps with the people, but we were replacing a 25-year employee that had a very high level of productivity and production and it will take a little while for those people to offset what we lost when we lost the big producer. So they were flat year-over-year on executive search side. I think that means it's moving in the right direction and starting to get to a point where we can get them back to year-over-year growth. But I was very encouraged by the fact that our physician business grew year-over-year. And I forget what the number was that include year-over-year. But -- and it was a combination of good strong volume with some pricing increase, but that bodes well for the market generally in physicians both for the search and for the local tenant side with the Physician Staffing side of it that, that business is growing.

So physicians was up actually double digits.

So Physicians was up double digits for this quarter. So yes, I feel pretty good about it and if we can start to get those people on the executive search side productive, then this business is also off to a better trend.

No further questions in queue at this time.

Okay. So thanks, everybody for joining us this morning. I look forward to updating you with our third quarter results in November. Goodbye.