Cross Country Healthcare, Inc. (CCRN) Earnings Call Transcript & Summary

Conference with Cross Country Healthcare. Cross Country is one of the largest providers of temporary nurse staffing and allied staffing in the U.S. Presenting today, we have John Martins, who's the President and CEO; Bill Burns, who's the CFO; and Josh Vogel from Investor Relations. So we're just going to jump right into Q&A if that's good. All right. Excellent.

So labor has been a huge theme throughout this conference. I'm sure it will continue to be through the rest of the conference. So I guess I'd love to hear your perspective on where we are in the labor market, maybe contrast it from where we were pre-COVID, where we are now and then thoughts on where we kind of all just settle out over the next year or 2?

Sure. Well, I'll start by saying we're seeing really strong demand right now. And when -- of course, in the travel nurse, in the health care industry world, we obviously had some highs in our demand during the pandemic. And so now we're leveling off, we're definitely down from our high, but we're still significantly up, but we're probably 35% higher than we were pre-COVID. So demand is pretty robust. And we really see demand continuing because of the structural issues that have happened in nursing over the last really 20 years. We've talked about -- I've been talking about shortages in nursing. I started in the industry 18 years ago, and they're still the same shortages, right? So we have to figure out a way how to solve these issues long term. But more on like where we see the market, especially in travel nursing and how we size the market up, it's pretty interesting. SIA, Staffing Industry Analyst, just came out with their market sizing for 2023. And for travel nursing alone, they gave the market size at $14.5 billion. Now if we take what they say was 2018's market size was $5.6 billion. And if you look at what the average bill rate was in 2018, $74, $75, and you take the $5.6 billion, divide that by the average bill rate, which was $74, $75, divide that by the 36 hours a nurse would work in a week, divide that by the 13 weeks of assignment, a lot of math here, and then divide that by the 4 quarters in a year, you could size that the market was about 40,000 travelers in 2018. In 2023, if you do the same math based upon the bill rates where people are expecting them to be, 35% down from pandemic, 35% up from pre-COVID. So you can do the math and figure out what that rate is. The market size dividing that by the $14.5 billion would mean that there's over 80,000 travelers. So the market size will have doubled in the 5-year period. And what really gets us excited about that part of this is we look at Cross Country, we had the misfortune of having a turnaround during COVID. And so we turned around our business in COVID and a lot of people think it was the COVID tailwinds that we had. But in reality, we had a lot of structural changes and fundamental changes. So what we see is, we had this great turnaround, but we're not giving that. People are saying, "Hey, this is really not coming from what you've done." And so even if that was true, and you go from pre-COVID number and double the number of nurses, not even allied professionals and everything else, we would double our travel nurse business just by keeping the same market share. But we think that because of the demand that's out there, there's -- that we'll be able to really not only capture market share, but be able to continue to grow the business.

That's really helpful. I want to get back to that point about what's the turnaround versus what's the COVID lift. But to round out this markets doubling from 2018 to 2023, I mean what is underpinning that? And how sustainable do you think that is? Like if we -- I cover 18 providers and 2 staffing companies. And the providers seem to have a little bit more optimistic view about things coming down at the end of the year, which you would generally agree with, but then maybe even getting better in 2023 and getting back to normal. It sounds like you're saying doubling in 5 years is not necessarily normal. It's the new normal. And so I'd love to kind of understand why is that the right number? And why is that going to be sustainable?

Sure. So I think a lot of the providers are being optimistic as we're transitioning to a post-COVID world that the usage of contingency labor will go down. And we agree it needs to go down. It's way too high. And I think if you look at what HCA had said in the earnings call, that they were about 11% contingent labor with the goal of getting down to 7%. That's still higher than the 4% that they were pre-COVID. So I think hospital systems are recognizing they're not going to be able to eliminate or even get back to the COVID number, it's going to be higher than the COVID number. And the reason for that is, we had to look at the Affordable Care Act, which took place in 2014-'15, right, we have so many more people who have insurance now. We're actually getting in health care. So between that, between the baby boomers that are coming on and having -- and meeting medical care, we see a large opportunity for continued demand in the future.

Yes. And I guess like how do you think about the -- I guess, we all kind of go back and say 2018 to 2023, volumes normalize, we can see slowly improving demand from the hospital side from -- just for nurses overall. It sounds like from the staffing companies that there is a supply shock, maybe that's a little bit bigger and more durable, whether it's burnout or a change of mindset about flexible workforce. Like help us think about what -- how the supply side is thinking about things?

Well, I think what we're seeing is 2/3 of our clinicians are all millennials or younger. So when you look at the younger demographic going into the travel nursing business, I would say 10 years ago, 15 years ago, when I first got into the industry, it was a much higher range of travel nurses, more empty nesters. So we're seeing a younger labor force coming into travel. They're more adaptable to working into a more flexible gig economy. And I think -- but all of this are, if we look what happened to the pandemic over the last 2 years, how many people will not go back to their office at all. At Cross Country, we're a work from where your most productive. And that means if you're more productive at home, work from home for your entire career. If you're productive in the office, come and work in an office. If you're in a city where we don't have an office, we'll get you an office. But you know what happened? We found out 99% of our employees want to work from home because they want the flexibility to have the agility to work from home. And we see that in our clinicians as well, right? They want to be able to have that flexibility. And so while -- we added a lot of new clinicians into the market. As we said, we're going to go from 40,000 to 80,000, there's probably even more right now out there. Some of those clinicians will go back and return to the full-time work, but a lot of clinicians were exposed to an opportunity to be able to live in the "gig economy," and we think that they're enjoying that economy, they're younger. They're going to say, this is a new lifestyle and what the difference is compared to a pre-COVID of people wanting to work in a more mobile area is now because there's so many jobs from work from home, their spouse, loved one, they can work with them no matter where they are. So they can travel and their partner can also work and work wherever they're at.

And so when you think about that flexibility, do you specifically mean that you provide that flexibility? Or do you mean that the hospitals have to provide that flexibility, which means that it will now take 2 nurses for every 1 nurse job and that just exacerbates this supply shortage?

No, the industry affords them that flexibility. But hospitals -- and if you look at the total number of travelers, even if we peg it at 80,000 on -- we talk about 3 million nurses in the country and about 1.7 million nurses work in acute care. So we look at the numbers, it's a very small number of 80,000 of that 1.7 million. So it's not like we're creating a shortage. We're giving flexibility to a small portion of that population.

Okay. Now let's pivot to the point you were making about how difficult it is sometimes from the outside to kind of see how much of the turnaround is happening because of the initiatives you're taking versus kind of what that broad-based COVID look as we are, I guess, in that camp as well as having a difficulty separating the 2. So I think it's interesting kind of think about the industry growth being strong and getting there. But are there other kind of metrics on the outside where you'd say, here's other proof points that is not just the rising tide for us. We're doing something different.

Sure. I'd like to triangulate it. So if we take the SIA data of going from 40,000 to 80,000, we all kind of agree with that data that the market is expanding. Then I look at where our publicly traded peer was at in their growth rates for 2021, first quarter of this year and guidance for second quarter, we far outperformed them in every quarter and each year. And so when we triangulate where the market is growing and expanding but we've outpaced our competitor, we see that we've actually gained market share. That's 1 area I can point to. The other area I'd point to is while we have a large travel nurse business, we also have a nontravel nurse business. And that business, all of those businesses, that's our local business, that is our locums business, that's our education business and our home health business, all of those businesses have had double-digit growth this year, and all those businesses have -- are now at higher revenue now than they were pre-COVID. So we're at the height of all those revenues. And so -- and all those businesses, the nontravel businesses, all of them had a negative impact with COVID. So there were no tailwinds for those businesses. Matter of fact, schools were closed down. We had, in our education division, they were decimated because you had online in-person learning, and they did need the services of substitute teacher, special education teachers, SLPs and all the services that we provide. And so now that we're at higher revenue, we see a whole growth area for our nontravel business as well.

And how does that translate from a margin perspective? I guess that's one of the questions that we often get to is kind of like even like in the provider said, okay, this is what your margin was in 2019. Why is [ 9 to 11 ] the right number for you guys when you hadn't been above 5% since like 2010 or whatever the number was?

That one's a great question. And what I'll say is, for the past several companies I've worked at, the expectation of EBITDA margins was to be at that high single, low double-digit numbers. And I would say Cross Country, as an organization, we underperformed. And now that we've built out the economies of scale, we've actually invested in a lot of technology in our back office. We talked about a lot on our earnings call, we invested in a lot of technology in our ATS, that created a higher production per person for our producers. And so now we're gaining economies of scales, we're gaining efficiencies and optimization, and that's helped us increase our margins. And now what we've also done is, we've created a pretty sophisticated modeling system where we're able to make sure that we ensure those margins as we go up or down, optimizing our spend. So one of the things I think in the past we hadn't done is had to model like that. And this will allow us to really be proactive to ensure that we keep those margins.

I guess one of the things that we've seen is that when you grow so quickly, there's often a compression on gross margin but there's G&A leverage. And I guess like that's -- the G&A leverage feels like if you're right that the demand is where it is, the revenue is sustainable, and the G&A leverage is sustainable. So that should be the part that we can all kind of, I guess, hang our hat on if that's sustainable. The efficiency side, though, I guess, it's a little bit harder to kind of, I guess, parse out because I always wonder when you say like, hey, we've done something, and we're getting more staffing jobs per person. It's like, well, the number of staffing jobs is just growing exponentially. So during that time period, even if you didn't do anything, wouldn't you be seeing more leads or things? So why isn't that the case?

Yes, I'll give you a specific example. So when we talk about our producers and how many travelers they could handle, we saw that number double since the implementation of technology. And there's only a certain amount of capacity a person can do. But the number that we were at before was at the mid-level of what the industry was. And working at high-performing companies, we're now -- we've changed that number to where we're at the high performance level of companies. And so if you look at our average -- and we don't give that number out, but if you look at our average, and we compared it against other companies, we're now at the high end of that number. And we were -- pre-COVID, we were not at that number. And we were at that number for a decade at that same number, with no improvement. Other high [ performing ] organizations, you will see over time, increase that productivity per person over time. Now do you have some tailwinds with COVID? Yes, there's a little bit help with COVID. But overall, we've seen a lot of structural changes that have helped improve that efficiency.

Okay. That's helpful. And I guess, as we think about the sequential decline throughout this year from a bill rate perspective, how much of that is just kind of reduction in COVID, kind of urgent staffing versus kind of normalization and rate. And how do you think about rate updates in 2023, 2024 off of this new base?

I'll start, and then I'll hand it over to Bill on that. But again, a lot of the pricing that we saw that was driving up, it was dripping up because of COVID demand because these are crisis orders, and these are crisis needs. And it's interesting because if we really think back 2 years ago, I think sometimes we forget, when these first clinicians were going to New York City and you're going into the Pacific Northwest, they were going there with no PPE. They were going there with no vaccines. They were going to hospitals that had refrigerated trucks outside that had corpses in them because they didn't have enough places to put bodies. And so these nurses were going in, where we're paying prices paid. And what happened was then we started going -- we got over the first wave, if everyone remembers by June, we thought we were done. And then we had another wave come on. And it started popping up, we used to call it whack-a-mole because you take all of these clinicians and you'd fly them to another city and solve the problem there. And all of a sudden, we have another hotspot problem. So we were going around the country. So that's how wages started to go up higher as we needed this. And then all of a sudden, instead of having 2 or 3 hotspots, we had hotspots around the country. And then eventually, as we got -- as we came into January of 2021, we had more of a widespread issues with COVID instead of being localized or regionalized, and then we went to the summer and had the Delta variant last year that started in the Southeast but spread throughout the country. And then we had Omicron that came in, in November. And so those are what really caused the wages to increase. And now at that point, you're on in COVID for 2 years. And we had burn out from core staff, burn out from even travelers, right, who are -- I don't want to do anymore assignments. So what happened is wages go up. It's a supply and demand imbalance. And these wages that we had in the crisis times, they were that hospitals and hospital systems needed these clinicians not in a month, not in 3 weeks, but they needed them in 3 days. And so that drives up the cost of the market to account for the speed. Now as we're coming down off of these crisis rates into normal rates and we have more time and lead time, the rates are going to come down as well as we'll see the pay rates obviously come down in lockstep. And interesting that what we're hearing from our nurses, and we didn't think this was going to be the case. We thought when they -- when the bill rates were coming down, we thought they may not understand that pay rates would come down, but they've been very receptive that they understand that when they were in this crisis situation, yes, they were getting the prices pay. And as we're going to more normal rates, they're aligned with having the pay come down.

And then I guess one of the other themes that we see a lot during this conference has been the shift of volume from the inpatient setting to the outpatient setting. And if your customer, your core customer is a hospital, how are you positioning yourself to take advantage of that shift?

We're actually very well positioned on that. And part of it is our nontravel business. So our travel business is focused heavily into acute care and primarily in acute care. But we're one of the largest local businesses in the country. And that business has a lot of outpatient ambulatory care business. It's a very local market-type business. And we're well positioned on a local staffing front. We're also well positioned with our home health business that we acquired last year. Again, that's most of the home or pay centers which are more outpatient centers. And then we add on education, right, which again is health care, but going into a different variant and then going into Locums where interestingly enough, a good portion of our Locums business is actually in clinics and outpatient. So we see -- we're already in moving into that as an organization of investing in those businesses that are less dependent on acute care.

Yes. Okay. And then, I guess, when you think about the company over the last couple of years, you spent a while deleveraging. Your cash flow -- your margins are now higher. You're generating cash flow. The working capital benefit this year, as the growth slows, should be pretty powerful. How are you thinking about capital deployment? Where does that money go to?

Well, I'll start it off, but this time, I'll really hand over to Bill. So we're in a great position, right, where we have a lot of options. But first and foremost, we want to -- we're a growth company. And obviously, we're going to invest organically into our business, right. Into technology, we said we're going to double our technology spend year-over-year, and we're going to continue to invest as a growth company. We hired over 1,000 people in 2021 additional, and we were up over 300 people in Q1 of this year. So we continue to invest in the business. We have some expensive debt still that we could probably refinance, and Bill can talk more about that. What we'll do on that. M&A is definitely a strategy, but it has to be the right deal. We're very disciplined. I think that there's a lot of overpriced assets right now that I want to make sure we're very disciplined. It has to be a strategic fit, has to be accretive to the business. But it has to be price right. We're not just going to go out and go buy something to buy something. And then finally, we could talk about repurchases of stock. That's an option on the table as well. I don't know, Bill, do you want to add anything to that?

Yes. I mean, look, obviously, working capital for our business is such that we have a payroll, right? So there's not like a huge accrued liability. It's all sitting in the receivables. And if you just play out the scenario that we called out, which is we exit the year at a run rate north of $500 million, from our Q1 run rate, that's, call it, $200-plus million of a sequential decline from Q1 to Q4. And at least 2/3 of that should be coming in at positive cash flows during the quarter, all things being equal. So it's going to throw off a fair amount of cash, we think, in the back half of this year. And I think as you look at the capital allocation, John explained it, it's organic, it's acquisitions. We have a subordinated term loan that's kind of fairly high interest cost to it. So if we have the ability to pay some of that off with the excess cash flow generate, that's certainly there. On the share repurchase side, we do have an authorization for about 0.5 million shares right now, still remaining for us to be able to buy back. And it is on the radar for us to be talking about how do we explore that and increase that in the back half.

Excellent. I guess another thing that you guys have talked about is the MSP business and the growth that you've had there. Can you talk a little bit about the success you've had in doing that? And is it because you're gaining share in there? Or was it because that the labor crisis has made more hospitals kind of where they need a partner for this?

So I think it's both. I think part of it is bill rate increases, right? I think that definitely helped our overall spend under management. But we've won new accounts at MSPs, and we've also added new services. Just we've added services in Locums and allied to our MSPs. And we continue -- we have a little bit different model than some of our competitors or how we look at the service offerings we offer to our MSPs and how we expand services. And if you will, I'll use it as almost an Amazon analogy, where what we do the best, we provide ourselves, so travel nursing, local nursing, Locums, and things that we may not be as adept at, what we'll do is we actually partner with the best in the industry to offer those services. And so we can go very wide and deep in the services we offer our MSPs, knowing that we're bringing the best. And I would liken the analogy to a Sears, Roebuck, right, where Sears had everything. They had perfume, they had jeans, they had tools, batteries, tires. None of them are the best, but you get everything. And we just believe in a different model that I want to make sure that our clients are getting the best services. So if we can provide that best service, we'll do it. And similar to Amazon, when Amazon first started, they didn't make T-shirts. They outsourced that because they had better T-shirt, people who could manufacture better than make it themselves. But over time, they realized they could actually make a better T-shirt, and it will be more profitable for them. And so over time, they actually made their on T-shirts. And now, when you buy an Amazon T-shirt, it's actually Amazon. And so that's how we look at the business. When there are services that we can offer to our clients, we'll go in there, offer the best in the industry, whether it's us or a partner, and then look at that and say, well, can we offer it better than our partner if the partner is not living up to the standard that we want.

And I think that one of the other things that people get a little bit concerned about with the staffing companies is the impact of recession. That last recession. I mean it was called the Great Recession, had a name. So it was probably unusual, but at the same time, during that time period, we saw a demand drop. We saw nurses come back into the system. How do you think that you or the industry are positioned this time if we were to see a recession next year?

Well, I think we're a different company than we were during the -- a question much was during the first -- the Great Recession, our MSP program is much more robust. We have much more spend management, which can insulate us because we have those exclusive orders, so we can fluctuate our capture rate, if we need to. Those are always last resorts, what you do. But part of, I think, the other fundamental changes that we've seen between the Great Recession and a potential recession coming up now is the issuance of the Affordable Care Act With the Affordable Care Act in place now, there are many more people in the country that have insurance and will be utilizing services. So we think that, that is one way that will offset some of the -- what happened last time in the recession. The other thing is we also look at our diversity of our business. And our nontravel businesses are a little bit -- insulate us a little bit from a recession. Specifically, if you look at our education business with teachers, there is a great shortage of teachers. What most people don't realize is that during the pandemic, just like health care became a very great crisis of shortage because of burnout and fatigue of nurses and clinicians at the bed side, the same thing happened in schools where educators who were going in and who were teaching online in person or rather not in person, they got burned out. They got fatigued. Then they had to come back to school. They didn't have PPE. They had to worry about getting COVID. And a lot of teachers who were near retirement said, "You know what, I'm done. We're retiring early." And so there's this great teacher shortage and that will bode very well in a recession. We still need teachers to teach our kids. And then our local business also, during recession, and we saw that last time in the Great Recession, in the right markets, you can increase your local business because the hospitals would rather use just-in-time delivery as opposed to taking [ 13-week ] contracts.

Yes. And so I guess, when you mentioned the MSP and that capture, you can flex it. I mean, I think you guys said that you were about 70% now. So where can that number go? My understanding is that you always want to have some amount for your subcontractors or else they're going to leave. And when you need them, they won't be there, they'll go to someone else. So how much buffer is there in that?

Sure. I think you can get up to 85% if we needed to. It's not some place I would go. As a matter of fact, I think our 70% capture rate could actually be on the high side right now. Because when I look at capture rate, I'd rather be somewhere 60% to 70% because we can take the excess capacity of our own recruiters and take those clinicians and move them to direct client contracts and then build the pipelines of new potential MSPs. So that's currently what we do. So having a strong part of the network is really important so they can move and they can share in our orders. And only as a last resort, do you move that number up to 85%. We still would want to make sure that our partners have enough orders that they're still good partners with us. And so really, the idea is really do everything else besides that, but because we have the excess orders, we have the ability to do that, but it's something that would be much of a less resort.

Okay. And then is there anything on the horizon when you think about broad-based solutions to this problem. I mean we've got this supply-demand shortage that has been forecast to get slightly worse every year anyway. We got the shock to the labor side. Are there any fixes that are obvious? And what kind of time frame could they actually be implemented in?

I don't think there's 1 panacea that's going to cure this all. And I think we have to be careful of some of the solutions that we talked about. For example, while international nursing could be part of the solution, I do worry that we talk about that. We have to do it the right way. And there are some companies that do it very ethically, and it's very important. But we talk about health equity a lot in this country. And how could we have health equity worldwide if we're taking clinicians from somewhere else? Now there are some companies that will do it, and they'll bring in clinicians from other countries, and then they'll help fund new clinicians being trained in that country. We just have to be careful, and that's just going to be a part of it. I think one of the things where I think there's a greater opportunity is when you graduate as a nurse from nursing school, if you don't get into an acute care hospital, you then go into a subacute doctor's office, skilled nursing facility. And if you work there 2, 3 years, if you try to apply to a hospital, they look at you and say you don't have the acute care experience. So therefore, you cannot be an acute care nurse. We'd rather go and train a nursing grad. The -- technologies -- they are familiar with the new technologies. And so you kind of go to the backdrop. Now we have an opportunity to upskill these clinicians, and we actually do that currently with some of our clients. So with our MSP clients, we work to upskill nonacute care clinicians to become acute care clinicians. And so we believe one of the fastest ways to help increase and build the supply is to take those not -- those subacute care clinicians and make them acute care clinicians and train them up.

Okay. But there's just no way to kind of train an extra 100,000 nurses or like to really change that trajectory in any kind of near term?

No. And if we look at WHO, W-H-O, they say there is about 13 million nurses worldwide. And they say for an equilibrium of the number of nurses we need in the world, it needs to be 28 million nurses. So we have a worldwide nursing shortage. And so I don't think we're going to be able to solve that in the next 3 to 5 years. I think this is a decade long. And that's if we can act now and if we can bring in more preceptors and educators to hospitals so that we can train more nurses because in the next 10 years, out of the 3 million nurses we have, 1 million of them are the -- will hit the age of retirement. So we will really essentially create a worse problem in the next 10 years if we don't graduate and train up enough nurses.

All right. It looks like that's all we have time for. So I appreciate you coming.

Thank you.

Thank you. Thank you, everyone.