Good evening, ladies and gentlemen, and welcome to the Cross Country Healthcare Earnings Conference Call for the third quarter of 2019. This call is being simultaneously webcast live. A replay of this call will also be available until November 19, 2019, and can be accessed either on the company's website or by dialing 800-839-5574 for domestic calls and 203-369-3669 for international calls and by entering the passcode 2019. 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 afternoon, everyone. I'm joined today by our President and Chief Executive Officer, Kevin Clark; as well as Buffy White, President of Workforce Solutions and Services; and Steve Saville, Executive Vice President of Operations. Today's call will include a discussion of our financial results for the third quarter and our outlook for the fourth quarter of 2019 as contained in our press release, a copy of which is available at www.crosscountryhealthcare.com. At the conclusion of our prepared remarks, we will open the lines for questions. Before we begin, we need to remind everyone 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 2018 annual report on Form 10-K and quarterly reports on Form 10-Q as well as in other filings with the SEC. 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 our 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. With that, I will now turn the call over to our President and Chief Executive Officer, Kevin Clark.

Thank you, Bill, and thank you to everyone for joining us this afternoon. Before I begin, I would like to welcome Buffy and Steve to the call and look forward to having them share their thoughts and insights on the business during Q&A. And I would also like to give a huge thank you to our teams across the business for another successful review by the Joint Commission with distinction, continuing Cross Country's long-standing track record and commitment to quality. For those that may not be familiar, the Joint Commission is an independent organization that accredits and certifies more than 22,000 health care organizations and programs in the U.S. each year, and we are proud to be certified by this organization. Turning to the quarter, our performance clearly exceeded our expectations for both top line growth and profitability. Even more exciting is that we saw year-over-year consolidated revenue growth for the first time since Q1 of 2018. We believe this growth is the result of both the changes and investments we are making across the business as well as the effect of favorable market conditions. Let me first address what we are seeing in the market. Demand has steadily increased across all segments of our business, most notably in travel nurse with orders growing 16% sequentially and up more than 50% over the prior year. Part of this increase in demand is attributable to the MSP wins in 2018 and 2019 that continue to ramp, but the majority is coming from the broader marketplace as health care systems continue to struggle with persistent and pervasive clinical labor shortages. Another indicator of the relative strength in the market is the growth in spend under management at our MSPs, which increased 8% sequentially and 11% over the prior year with growth coming…

Thanks, Kevin. As Kevin mentioned, performance in the third quarter was better than expected with revenue and adjusted EBITDA exceeding the upper end of our guidance ranges. Consolidated revenue for the quarter was $209.2 million, up 3% sequentially and up 4% over the prior year, driven predominantly by growth in our largest segment, Nurse and Allied. Revenue for the Nurse and Allied segment was $185 million, up 2% sequentially and up 5% over the prior year, with the prior year performance being driven by an increase in the number of FTEs on assignment as well as the impact from modest price increases and a favorable mix. Within the segment, the growth was broad-based with all service lines reporting year-over-year improvement. Physician Staffing reported stronger-than-expected revenue of $20.4 million, down 4% over the prior year but up 13% sequentially. Notably, the sequential growth was driven by increased volume across both physician and advanced practice specialties. Gross profit margin for the quarter was 24.4%, which was down 130 basis points over the prior year and 100 basis points sequentially. The lower margins are largely the result of tightening bill-pay spreads as compensation costs rose faster than bill rates. We've begun to see some upward movement in bill rates, and should demand remain at these levels, we would expect that trend to continue. Total SG&A was $44.4 million, up 1% over the prior year and down 3% sequentially. The sequential decline was primarily driven by lower salaries due to reductions in headcount as well as favorable health insurance and other professional fees. With respect to the previously announced cost-savings program, we've continued to make solid progress, identifying additional opportunities to reduce overhead and consolidate our footprint. As of September 30, 2019, the majority of the identified actions were complete, and we now expect…

[Operator Instructions]. Our first question is coming from Jason Plagman.

Just wanted to get some more details. Kevin, thanks for providing the kind of the long-term margin thoughts. But just wondering if you could provide any more color on kind of the timing there. Is that a 2- to 3-year journey to get to the 8% EBITDA margin? Any additional thoughts on the trajectory would be helpful.

Yes, sure, Jason. Look, we believe the business is in a growth phase. We believe we can grow EBITDA over the next several quarters from a longer-term perspective. With the turnaround taking hold in both revenue and profitability growing again, we believe that this high single-digit EBITDA is achievable largely from operating leverage gains, automation, the impact of the investments we're making across technology and also an improvement of the business mix. We have certain businesses, segments that have higher margin and growing into some of these adjacent spaces that we've talked about on the prior calls as part of that strategy. The wildcard for us is items like M&A. We have an M&A process at looking at tuck-in acquisitions. And that will have significant impact as we go forward as well. So look, a very positive, strong background. Economically, demand is up 50% year-over-year this quarter in terms of the volume of demand, and so it's good conditions. As I said on the call, good to be at Cross Country. We're very bullish in the next few years.

So is it appropriate to frame that target as kind of a multi-year target but you're not setting a firm target date to achieve 8%?

Yes. I mean, look, we think high single digits is the goal. It's our benchmark and we think we'll get there over the next few years. It could be a little sooner, it could be about that time frame. We don't have a crystal ball but we like the backdrop. We like the management team we have in place. The reorganization that we did this year, the investments that we've made to digitally transform the company are giving us great optimism. So we're going to get there. We called that guidance of growing our adjusted EBITDA in Q4. So it's not always linear but we expect to be growing over time.

Okay. That makes sense. And then I just wanted to switch gears a little bit to what you're seeing as far as the winter orders and kind of the outlook for demand as we head into 2020, what you're seeing there from your clients?

Yes. So I'll start that. Maybe I'll ask Buffy White to add some commentary. So far, it's been a light flu season but orders are up heading into the winter months across the board. We're seeing orders up there. We are in a very supply-constrained marketplace. We're seeing specialty nursing positions with very high demand. Our physician business has higher demand. We're seeing requests from our MSP clients to help them through various other services that we provide in our total talent solution including IRP, our Internal Resource Pools, and RPO and some of the perm actions.

Yes. This is Buffy. I would say in a few of our key accounts, we're starting to see some volume of winter orders. Typically, we see them come in, in mid-October. I would say this year, we're seeing a little bit slower activity right off the bat. We'll see a little bit more in Q4. But at this point, it's potential, we're going to see more of the volume for Q1. We are going back through all of our key clients to consult with them and look at last year trends versus this year trends. So I do anticipate a higher order flow will come, it just seems a little later this year.

Our next question is coming from A.J. Rice from Crédit Suisse.

First of all, maybe just following up on your comments around strength of the market. Are you seeing, as you're -- I know sometimes when you get a squeeze related to the flu or something, the premium pay ratchets up. But as the underlying market just seems like it's strengthening and it doesn't seem like it's driven particularly by seasonal factors, what are the clients saying about the willingness to step up the rate a bit and to fill the positions?

Yes, good question, A.J. I mean, look, we've seen -- we're starting to see some upward movement in bill rates. I think our bill rates are up about 1%, low single digits. We would expect that trend to continue, given the large demand that we've seen in the marketplace. So from a bill rate -- pay to bills are compressed. I mean I think what we are challenged by, as we called out, is our gross margin. There's a lot of competition in this marketplace. And with our customers, they are expanding and consolidating, and they are following the continuum of the patient from walk-in clinics and urgent care to large acute hospitals, which is our traditional client into ambulatory care, outpatient, post-acute care as well as home health care and hospice. So they are getting larger and they are pushing -- they have more leverage in the marketplace, and they're pushing back on bill rates as much as possible. And Buffy, you want to add to that?

No, I would agree. I mean, at this point, we're seeing such high demand in the market. Obviously, the supply continues to become constrained. Our health care professionals have options. So we are going back in, consulting with our clients on what we're seeing in the marketplace, the balance between demand and supply. My thoughts are this is not sustainable for the longer term. It's a question of when we can start to see some of those rates, particularly in the high volume. We see the volume coming more in the top 6 to 8 specialties. So we are consulting with them, seeing when there's going to be that appetite for increase.

Okay. Another question is, obviously, in the comment, I'm going to one brand and I understand that there probably are significant savings associated with doing that. I think one of the reasons the industry got into each of the main players have -- and it was that they could tailor one brand in one direction, playing vanilla travel nursing, another for a nurse that didn't need housing, another for a nurse that wanted a very tailored experience. When you go back to one brand, are you -- and what is the -- are you -- what is the time frame to go back to that one-brand approach?

Well, we already are principally one brand. Look, 60% of our health care professionals are millennials. They look for a job differently today than they did even 2 or 3 years ago or 10 years ago. The -- most people find their jobs by pulling out their mobile device and using their thumb to do a search. And so we're seeing the benefits of having one brand because we could invest more dollars into our programmatic advertising and some of our talent networks that we're building. And it allowed us to kind of focus more on reaching those millennial clients or millennial candidates when they're looking for jobs.

Okay. And then my last question would be, you mentioned a couple of times in your prepared remarks about M&A and tuck-in deals. Any -- would you enlighten us a little bit on where you think that might be attractive? What types of acquisitions would you look for? Where do you feel like you need to strengthen or broaden on product offering, service offering?

Great question. I'll let Steve take -- address that. He runs our M&A effort here at Cross Country.

Thank you, Kevin. A.J., with regard to our M&A strategy, we are looking, again, as Kevin and Bill both mentioned that improving -- we're identifying acquisition opportunities that can improve our margins. Most particularly, the sectors that have been previously called out by this organization include Locums' Allied, Education and Technology. What we've done internally is we've built a process around programmatically identifying sourced opportunities, and we're keeping that process moving and looking to execute against that when the opportunity is right, so that we have accretive deals that are complementary to our existing services or new opportunities within adjacent markets.

Our next question comes from Tobey Sommer from SunTrust.

Could you talk about your recruiter headcount? Where it sits in your eyes for the -- where you are in your turnaround? How much it's up year-over-year and where productivity is versus kind of where it can ultimately go? Just kind of give us color along those dimensions.

Yes. Thanks, Tobey. Great question. I mean, look, a lot of the investments that we're making as a company really is all focused about employee productivity and improving productivity from automation is a big goal of the enterprise. As we've talked about in prior calls, we've invested heavily in improving or increasing our revenue-producer headcount this year. And we largely caught up to where we felt that the company needs to be in Q1 and Q2. Q3, we didn't add as many recruiters and other account managers as we had in the previous two quarters, but we still have added and we'll continue to add on an incremental basis. I'd like to think that we're kind of at a steady state now that we'll be adding recruiters as the company advances with orders and our opportunity to kind of train people, onboard them and make them productive. And Buffy, you might want to add to it.

Yes, I would agree. At this point, we are at steady state. We're very proud of the team that we've assembled here. We consistently pipeline for when we see growth within our organization, and we need to complement our teams. We've been focused on training, continuing to add capacity through allowing higher productivity per recruiter, providing them some tools and we continue to nurture them. So as we move forward, we'll evaluate the need. And as demand grows, we may need to add in the future.

As the company kind of improves its internal operations and execution this year and year-to-date, how do you think about the need for market pricing to increase to kind of build momentum to sustain the unit growth in volume growth, kind of revenue growth that you've experienced so far? It seems to me like there might be a need for pricing to attract more supply to the market as well as Cross Country.

Bill, you want to take that?

Yes, sure. Tobey, yes, look, where the demand has obviously been, we've seen wages rising faster than the bill rates, and we've talked about this before, where we would expect pricing to start to move upward. It began inching upward this quarter and we would expect that trend to continue. To the point about how do we get higher margins on the bottom line, absolutely expanding the bill-pay spread is important to us to getting there. The biggest driver of getting to that 8% goal or high single digits remains operating leverage in the business, so both from a volume expansion as well as getting better margins. The margin will come from pricing to bill-pay spreads as well as improving the mix of this we have by leveraging the other high-margin businesses. So we definitely want to continue to explore that. And as our clients unfortunately are heavily cost pressure themselves, so there's that natural balance that to strike with them.

With respect to bill rates, what kind of bill rate growth do you think would be required for a meaningful increase in available supply?

Well, right now, what we see at the pay rates have risen faster than the bill rates, so we're still managing to bring supply to our customers and continue to meet the fill rate obligations. The question is on the percentage side, how fast can bill rates rise? And I don't know that we can call it out just right now. We did see an uptick sequentially in premium rates as a mix of our business. I know that was an earlier question. We have seen some movement in that regard. I know throughout the last couple of years, we had called out that premium rates have been declining as a percentage of the overall total. We've seen that trend start to reverse itself. So we're hopeful that, that will continue and move in that direction. But as far as the future for price increases, obviously, we'll be working with all of our clients and looking at where we think that, that makes sense. As Buffy pointed out earlier, negotiating on the hardest to fill jobs, the hottest and most in-demand specialties.

And two last questions for me. Could you comment on the IT migration? You sounded bullish about it, but could you update us on the time lines of the more significant brands? And I may have missed it in the discussion of the new credit facility, but how much total liquidity is available to the firm today?

I'll take the first part of that. So we're rolling out our first pilot to a smaller business unit in just a couple of weeks. But the larger part of the organization will be onboarded onto our new applicant tracking software system late spring. And we think the majority of our employees and kind of the main division will be onboarded by the end of the second quarter.

And then just specific to the new facility, Tobey, yes, we were thrilled to get that finished. It's a $120 million asset baseline. Our level availability will fluctuate on 2 things: one is our overall collections but then the other piece is how receivables are moving and what our borrowing base collateral is. When we signed up to the facility, we expected -- or we're targeting to have at least $20 million to $30 million in availability for general operating purposes and liquidity, and that seems to be where we're trending at the moment. But it's so -- it's a good facility for us and that it fits our needs to continue to operate and continue to invest in growth for the business.

Our last question in queue is coming from Kevin Steinke from Barrington Research.

So you mentioned the nice growth in MSP spend under management. Just curious about the trends you're seeing in terms of growth within existing accounts that are already ramped up. That is, are they as demand increasingly -- increasing significantly at those existing accounts versus what are you seeing from a ramp-up of newer accounts or signing of new accounts?

Yes, I'll start then Buffy can also add commentary. Kevin, look, our legacy MSPs tend to have a higher capture rate than the new ones that we bring in onboard. And I think we've called out that our capture rate is really high 50 percentages, somewhere between 57% and upward to 60%. Just to kind of review it, we manage about $420 million of spend. We have about $80 million of MSP spend that is currently being onboarded. We've signed so far year-to-date, 8 contracts with -- it's -- I would kind of label our pipeline as fairly strong. I mean we see some terrific opportunities in a lot of different parts of the market. So overall, I mean, we're encouraged by our existing basic customers and trending towards developing a higher capture rate and onboarding our new ones. And Buffy, you might want to add some color?

Yes, I would say, in our existing MSPs, we're continuing to penetrate. We're expanding the services across the continuum of what we can offer our clients. We're also seeing the MSPs that have been newer in implementation continuing to ramp up. So we're excited about the growth there. I think the conversations with some of our clients are starting to mature and progress. Clients are looking for more mature solutions, some alternative solutions from your traditional staffing. They're looking at total talent solutions. The alternatives like resource pools and resource -- or recruitment process outsourcing to complement their total talent acquisition strategy. So the conversations are changing, and I'm very excited about what potential there is within our particular larger MSP accounts in Q1.

Okay. Great. That's helpful color. And on the Physician Staffing business, really nice sequential growth there. Where do you feel like that business is in terms of the state of the turnaround, the level of investment or operational upgrade you need to do there? Just maybe an update overall on your Physician Staffing operations.

Yes, good question. Look, we're very excited. As we talked about earlier in the year, we made a management change. We felt really good about the executive leadership that we have. The business has really turned around on a quarter-over-quarter basis. The business grew 13.2%. Still down year-over-year in very low single -- low to mid-single digits but it's great improvement. So we're seeing strong demand across really our -- throughout our different major specialties. We continue to see probably the most growth in anesthesiology as well as primary care and hospital medicine. But maybe, Steve, since you manage -- Steve Saville manages our Other Human Capital Services, including Cross Country Locums, our physician and Advanced Practice division. So maybe you can add some color.

Sure, Kevin. Thank you. Kevin, with regard to our Locums division. Kevin covered pretty much how the quarter played out. Sequentially, it was very productive. We continue to invest behind revenue producers, and we've worked with this outstanding management team to build an outstanding execution strategy for the business. We expect that all of this effort and investment will lead to year-over-year growth sometime in 2020.

Okay. Great. That's helpful. I guess, Steve, as long as you're on the call, maybe -- it sounds like you're working in quite a few different areas there. But maybe just as your role as EVP of Operations, maybe just give us a little more overview of the types of things you're working on as the company looks to improve operational efficiencies and drive margins higher.

Sure, Kevin. I'm happy to comment about that. We've initiated a number of cost reductions that are non-headcount-related, examining every aspect of our operations from the way in which we engage vendors to the way in which we manage key segments of spend in the G&A category. And we've worked and continue to work and will -- and have established a regular and routine review of those categories so that we can identify cost savings and execute on them very quickly. One example that we're working through right now is our background check process. We're both examining and improving the process internally but working to identify key vendors for those services nationally.

We show no further questions right now, speakers.

Well, thank you, everybody. We appreciate your time, and we look forward to the next earnings call. Have a good evening.

Thank you for joining. You may now disconnect.