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Edited Transcript of CCRN earnings conference call or presentation 2-Mar-17 2:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Cross Country Healthcare Inc Earnings Call

Boca Raton Mar 2, 2017 (Thomson StreetEvents) -- Edited Transcript of Cross Country Healthcare Inc earnings conference call or presentation Thursday, March 2, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bill Burns

Cross Country Healthcare, Inc. - CFO

* Bill Grubbs

Cross Country Healthcare, Inc. - President and CEO

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Conference Call Participants

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* Randall Reece

Avondale Partners - Analyst

* Jeff Silber

BMO Capital Markets - Analyst

* Bill Sutherland

The Benchmark Company - Analyst

* Kwan Kim

SunTrust Robinson Humphrey - Analyst

* A.J. Rice

UBS - Analyst

* Brooks O'Neil

Lake Street Capital - Analyst

* Mitra Ramgopal

Sidoti & Company - Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the Cross Country Healthcare earnings conference call for the fourth quarter and full year of 2016. This call is being simultaneously webcast live. A replay of this call will also be available until March 16, 2017, and can be accessed either on the Company's website or by dialing 800-391-9854 for domestic calls and 402-220-9828 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.

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Bill Burns, Cross Country Healthcare, Inc. - CFO [2]

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Thank you and good morning, everyone. Before I begin, I'd like to just share how thrilled I am to be back from my medical leave. And I'd like to thank Chris Pizzi for filling in as our active CFO while I was out.

The call will include a discussion of our fourth-quarter and full-year results for 2016, as discussed in our press release, and will also include a discussion of our financial outlook for the first quarter of 2017. After our prepared remarks, you will have an opportunity to ask questions. Our press release is available on our website at www.crosscountryheathcare.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 2015 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 US GAAP. More information related to these non-GAAP financial measures is contained in our press release.

In order to facilitate a better understanding of the underlying trends, we may refer to pro forma information on this call, giving effect to acquisitions and divestitures as though transactions had occurred at the start of the periods impacted. As a reminder, we divested our education seminar business during the third quarter of 2015 and completed the acquisition of Mediscan in October of 2015.

With that, I will turn the call over to our CEO, Bill Grubbs.

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Bill Grubbs, Cross Country Healthcare, Inc. - President and CEO [3]

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Thank you, Bill. Thank you, everyone, for joining us this morning. Although there were some unusual aspects to our numbers this quarter, we had solid revenue growth, ahead of where we thought we would be, and with momentum that we believe will support continued strong growth in 2017. We've been working diligently to get at or above the market growth and we are now on a trend that we believe achieves that.

However, there is some noise in our fourth-quarter numbers and in our guidance for the first quarter that needs clarification. So let me start there. In the fourth quarter, we had higher workers compensation and health insurance experience of about $2 million that we do not expect to carry on into 2017.

We're also guiding our first quarter to a lower gross margin due to an increase in direct operating costs of between $2 million and $3 million that should normalize by the second quarter. And lastly, in our first-quarter guidance is an increase in SG&A related to investments required to ensure we are able to take advantage of the strong market, and in particular the new business wins, which are well above what we had anticipated. We will address these in more detail as we go through the numbers.

So starting with revenue, I am pleased that at this point in our turnaround, revenue trends are accelerating. The market remains strong, the economy is stable, and we continue to execute on our strategy.

Our biggest challenge is how we keep up with the demand we are generating as a result of a significant number of new business wins. We won 24 new managed service programs, MSPs, in 2016 and another 10 year to date in 2017. That's 34 programs in the last 14 months.

Given this, our focus on investments are directing at implementing and delivering on these opportunities. Let me spend a little time on this because it's extremely important. We had won 8 new MSPs in both 2014 and 2015. Our target number of MSP wins for 2016 was 16, and we ramped up our delivery capabilities to ensure we could support that number of wins.

We did not anticipate that we would significantly exceed that target not only in total wins, but the revenue opportunity they represent. Thus, we've started 2017 strong as well.

Due to these successes, we will be adding costs into the business for a couple of quarters that will not show an immediate return. Those costs will be mostly related to MSP implementation resources, new recruiters, and candidate attraction initiatives. And although these types of investments happen every quarter, and we had already increased them in 2016, we needed to step them up again because of the volume of new business we have secured.

Again, as we saw these come in, we did start increasing investments in Q4, so some of this is already in the Q4 run rate. But we will need to add incremental investments at least in Q1 and possibly into Q2.

Since I started the call discussing MSP programs, which are our largest workforce solutions service, let me stay with workforce solutions for a minute. In January, I promoted the head of workforce solutions to a president-level position reporting directly to me. This gives me more direct involvement in this business line.

We also acquired a small recruitment process outsourcing, RPO, business in early December. We had been growing our RPO capabilities organically, but with the level of demand we have, we were not getting up to speed fast enough and we needed additional capabilities.

The company we acquired has been doing this for quite a while exclusively in the healthcare space. The acquisition has given us the infrastructure to start growing this business at a faster pace and support the level of demand we are experiencing.

Now let me go back and review the numbers. This is certainly one of the strongest growth quarters since I've been here. Overall, we grew revenue by 15%, led by our nurse and allied segment growing at 20%. Within nurse and allied, our legacy business, which means without the Mediscan acquisition, grew at 16% organically. And Mediscan grew at 28% on a pro forma basis, which is a real like-for-like comparison as if we had owned it for the full quarter in 2015.

When I gave guidance for the fourth quarter, I stated that revenue growth in our nurse and allied business should start to be fueled by both volume and price. And we were successful in achieving that, with volume contributing 20% of the growth and the other 80% coming from pricing as well as a favorable mix of higher-bill-rate specialties. We believe we will continue to see growth in 2017 from both volume and price.

In addition, after 2 quarters of approximately 20% year-over-year declines in revenue, our physician staffing segment grew significantly by slowing their year-over-year decline to 9% in the fourth quarter and virtually flat sequentially from their normal seasonally strong third quarter. That's very good progress.

We are seeing an increased level of activity in addition to our new employees ramping up. This gives us a comfort level that we will continue to see improvements in this business throughout 2017. We believe we can get this business back to growth by the end of 2017. I want to thank the physician staffing team for all the hard work they have done to start getting this business back on track.

Our search business, which is the only business within our other human capital services segment, also saw an improvement from the previous quarter by reducing their decline in revenue to 3% year over year and up 12% sequentially. We are also seeing good activity and strong demand in this business and we believe this will have positive revenue growth for all of 2017.

Our adjusted EBITDA for the fourth quarter was $12 million, although without the higher workers compensation and health insurance experience, it would have been at $14 million, above the high end of our guidance. Bill Burns will discuss the impact of this in more detail.

The guidance for the first quarter includes continued double-digit growth for our nurse and allied segment, with both volume and price growth. We should also see continued improvement in physician staffing and other human capital services.

As you can see from our Q1 guidance, we are forecasting a lower gross margin. So let me address that. In late 2016, we made a decision to increase the compensation packages at certain large customers to account for the increase in new order flow. Because of the length of assignments, there will be approximately $2 million to $3 million of incremental cost in the first quarter.

Since the start of the first quarter, we have been normalizing these compensation packages, and as a result, we expect to have sequential improvement in our second-quarter gross margin of approximately 100 basis points. We do not believe the compensation change has a significant impact on our revenue for the fourth quarter.

Although some of the things I discussed previously cloud our underlying performance in the fourth quarter and the first quarter, I do not believe they will be issues going forward. I am more focused on our revenue trends.

For the past couple of years, we have not been participating as well as we should have in the strong market growth, and now is our time to outgrow the market. We have been working on this for quite a while and it's very satisfying to see it come together. We certainly remain on track for our medium- and long-term goals. This level of growth should create a significant increase in shareholder value in the next couple of years.

Moving to the full-year numbers, we had another good year of leverage and progress towards our financial goals. Revenue grew at 9%, adjusted EBITDA grew at 19%, and adjusted EPS grew at 28%, so we had good leverage. That's a good year, I think, by anybody's standards.

Over the past 4 years, we've added almost $400 million of revenue and increased our adjusted EBITDA from $4 million to $45 million, with improvements every year along the way.

During that time, we experienced several bumps in the road, but bounced right back and got on track again. Therefore, although I don't see the things that are going on now as a bump, they do kind of look like a bump. But none of the unusual items we mentioned in the fourth quarter or the first quarter take us off course, no more than in the past.

In fact, with current revenue trends, we could reach $1 billion of revenue by 2018 and almost certainly by 2019, a year or two earlier than originally anticipated. During that time, we expect to continue to improve adjusted EBITDA margins. The good news is that it will be on a larger revenue number.

So let me wrap up my comments. Overall, we continue to experience very strong demand for our services, partly due to the strong market trends and because of the significant number of new customer wins. So we made some decisions that were right to make, but will depress our margins in the short term.

But we also see a stable, if not improving economy, a strong jobs market, and seeing our new investments starting to bear fruit. This combination of high demand, of stable economy, and better execution should bring us another year of strong revenue growth and improved profitability.

So let me turn the call over to Bill Burns, who will review the quarter and the full year in more detail.

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Bill Burns, Cross Country Healthcare, Inc. - CFO [4]

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Thanks, Bill. As Bill mentioned, we are generally pleased with our overall performance this year, having met or exceeded many of the goals we set for ourselves. Revenue grew nearly 9% for the full year and accelerated in the fourth quarter, growing by 15%.

Our full-year adjusted EBITDA was $44.7 million, representing a 19% increase over the prior year, as we've continued to get operating leveraging in our business while funding many of the investments necessary to sustain long-term growth.

Throughout the year, we saw continued strength in our largest business, nurse and allied staffing, fueled through both price and volume as well as the addition of the Mediscan business. Overall, demand for our services remains strong and we saw year-over-year price improvement in all of our segments.

Turning to the quarter, total revenue was $222.5 million, up 15% from the prior year and up 4% sequentially. The year-over-year increase was driven predominantly by growth in nurse and allied staffing as well as the impact from the Mediscan acquisition.

Gross profit margin for the quarter was 25.9%, down 20 basis points from the prior year and down 120 basis points sequentially. While pricing remained strong for the quarter, gross margin was weaker than expected, predominantly due to a decline in margins for our nurse and allied segment.

As Bill mentioned, we had a higher-than-anticipated level of both workers comp and health insurance, which resulted in approximately $2 million of additional costs. These charges were related to our fourth-quarter experience and are not necessarily indicative of an ongoing trend in our business.

Excluding the effect of the health and workers comp insurance costs, our underlying consolidated gross margins would have been approximately 90 basis points higher in the quarter. I think it's also worth mentioning that while these costs spiked in the fourth quarter, we still experienced an overall decline in both of these insurances for the full year, despite our growth in FTEs out on billing.

The second driver for the decline in our margins is related to the increases in the total compensation packages for healthcare professionals at certain large accounts, which went into effect throughout the quarter. While not of significance to the fourth quarter, these investments will put continued pressure on our first-quarter gross profit margin.

We estimate the total cost in the first quarter to be between $2 million and $3 million. And as we return to more normalized compensation packages at these accounts, we do not believe there will be a significant impact on our ability to continue growing the business going forward.

Moving down the income statement, SG&A for the quarter was $46.3 million, representing an increase of 16% year over year and 1% sequentially. These increases were largely due to investments in our revenue-producing headcount and marketing spend on candidate attraction.

Adjusted EBITDA was $12 million, representing a 10% increase over the prior year. As a percent of revenue, adjusted EBITDA margin was 5.4% compared with 5.7% in the prior year. The year-over-year decline was predominantly due to the lower gross margin I mentioned previously. It's worth noting that excluding the spikes in health and workers comp, our adjusted EBITDA margins would have been approximately 6.3% for the quarter.

Below adjusted EBITDA, we recorded a $14.2 million non-cash loss on the embedded derivative from our convertible notes. The change in the value of the derivative was predominantly due to the increase in our share price over the period. As a reminder, the convertible notes become callable in July 2017.

Depreciation and amortization expense was $2.2 million, flat year over year and up slightly sequentially. Interest expense was $1.4 million, down $200,000 from the prior year and flat with the prior quarter. The year-over-year decline was due to the refinancing of our senior debt in mid-2016.

Income tax expense for the quarter was $800,000, which is primarily related to the impact from the amortization of indefinite-lived intangible assets for tax purposes. As a reminder, the Company maintains a full valuation allowance on its deferred tax assets and net operating losses.

With the improvements in profitability over the last several years, we believe that all or a portion of the valuation allowance may be reversed in the coming quarters. On that event, we will realize a significant tax benefit and our ongoing effective tax rate will be more normalized.

As result of the loss of the embedded derivative I mentioned earlier, we reported a net loss attributable to common shareholders of $7.9 million or $0.24 per diluted share as compared to a net loss in the prior year of $6.1 million or $0.19 per share.

Adjusted EPS was a positive $0.20 compared with $0.18 in the prior year and $0.24 in the prior quarter. For the full year, adjusted EPS was $0.69 compared with $0.54 in the prior year.

Let me next review the quarterly results for our three business segments. Revenue for our nurse and allied segment was $194.1 million, up 20% year over year and up 4% sequentially. The year-over-year growth was primarily due to the strong performance from our legacy nurse and allied business, which grew by 16%, and to a lesser extent the impact of our Mediscan acquisition. Pricing remained strong, with a mid- to high-single-digit increase across the business, led by travel nursing, where bill rates were up 9%.

For the segment, we averaged 7,156 field FTEs for the quarter, up 5% from the prior year and up 3% sequentially. Revenue per FTE per day was $295, up 14% year over year and up 1% sequentially.

Segment contribution income for the quarter was $18.1 million, representing a 9.3% contribution margin, down 20 basis points year over year and down 110 basis points sequentially. The year-over-year and sequential declines were largely due to the higher cost for workers comp and healthcare.

Turning next to our physician staffing segment, revenue was $24.8 million, down 9% from the prior year and down 1% sequentially. Both the year-over-year and sequential declines were due to a lower volume of days filled.

Normally in the fourth quarter, we experience a mid-single digit sequential decline in physician staffing, as the third quarter is seasonally our strongest. We believe the positive traction in the second half drove better performance and supports our belief that this business will return to growth in 2017.

Generally, pricing remained strong, with revenue per day filled of $1,599, representing a 15% increase over the prior year. Segment contribution income for the fourth quarter was $2.3 million, representing a 9.1% contribution margin, down 70 basis points from the prior year and 50 basis points sequentially. The decline in contribution income was attributable to the lower volume of days filled.

Finally, revenue for the other human capital management services segment was $3.7 million, representing a 3% decline over the prior year and a 12% sequential increase. The sequential increase was driven by strong performance in retained executive search. Segment contribution income was a loss of $300,000 as compared to income of $100,000 in the prior year and a loss of $200,000 in the prior quarter.

Turning to the balance sheet, we ended the quarter with $20.6 million of cash, and our net working capital increased nearly 50% from the prior year on the strong growth we experienced. We had $64.5 million in outstanding debt at par, including $39.5 million under our senior secured term loan and $25 million of convertible notes. As of year-end, we did not have any amounts drawn on our $100 million revolving credit facility.

During the quarter, we used $2.1 million of operating cash, primarily as a result of the timing to collections. Our days sales outstanding, net of subcontractor receivables, was 55 days, representing a 2-day improvement over the prior year. For the full year, we generated more than $30 million in cash from operations, even with the investments in net working capital I mentioned earlier.

Capital expenditures were approximately $1.5 million, including $1 million incurred to build out our corporate offices. We will continue to incur higher capital expenditures related to the construction through the first half of 2017. For the quarter, we received approximately $400,000 of reimbursements from our landlord related to those capital improvements.

This brings me to our guidance. For the first quarter of 2017, we expect consolidated revenue to be $209 million and $214 million, which assumes a year-over-year growth rate of 6% to 9%.

While we don't provide specific guidance on segments, we expect nurse and allied will grow in the low-double digits through a combination of price and volume. Physician staffing is expected to see a year-over-year decline in the low-single digits, and finally, search is expected to grow in the mid-single digits.

Turning to gross margins, we expect consolidated gross margin to be between 24.7% and 25.2%. On a sequential basis, this margin assumes a 60-basis-point to 70-basis-point decline from the annual reset of payroll taxes, a 90-basis-point to 100-basis-point decline from higher compensation costs, and an 80-basis-point improvement from the lower health and workers compensation costs.

Going forward, we will be providing a dollar range for adjusted EBITDA, as opposed to a margin range. We believe this change will provide more clarity and precision to our guidance.

For the first quarter, we expect adjusted EBITDA to be between $5 million and $6 million. This range assumes $2 million to $3 million of incremental direct operating costs pertaining to the higher compensation costs we discussed earlier, as well as continued investments in both revenue-producing headcount and candidate attraction.

Sequentially, the guidance assumes approximately $1.5 million to $2 million related to the annual payroll tax reset, impacting both gross margins and SG&A.

From an EPS perspective, we expect adjusted earnings per share to be between zero and $0.02 for the quarter. While we are no longer issuing full-year guidance, we continue to expect full-year revenue growth of between 7% and 8%, with continued margin expansion and EPS improvement.

This concludes our prepared remarks. And at this point, I would like to open up the lines for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Randall Reece, Avondale Partners.

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Randall Reece, Avondale Partners - Analyst [2]

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You are talking about double-digit growth in nurse and allied this year. I was wondering if you could give us a little more guidance about expectations for how you expect volume growth to trend versus pricing improvement, just the unit revenue per head.

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Bill Grubbs, Cross Country Healthcare, Inc. - President and CEO [3]

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That's a good question. Because although we had about 20% of our growth came from volume this quarter and 80% from price, we think that will slowly shift through the year. By the end of 2017, we think it will be more in the 50/50 range.

So growing at mid-single-digit volume and mid-single-digit pricing by, say, the end of the third into the fourth quarter. So that will shift slightly as we go through the year and lap some of the bigger price quarters that we had last year.

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Randall Reece, Avondale Partners - Analyst [4]

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That's very helpful. I wanted to get a little more understanding on the $2 million to $3 million increase in compensation that you guided to in the first quarter. Are you planning to recapture that in the pricing adjustment? Is that just a lag time with some of these customers, or how should we expect gross margin to improve through the rest of the year?

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Bill Grubbs, Cross Country Healthcare, Inc. - President and CEO [5]

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Yes. So no, it's not through pricing adjustments. We do this, actually, quite often. But we've never talked about it because it's never shown up in our numbers getting to any point where we needed to identify it.

So quite often when we have big projects or new MSP implementations, we do change the compensation packages so that we can ramp up quickly and make sure that we fulfill the needs of our customers. The reason we need to talk about it this time is that we are just talking about bigger numbers now.

Not only bigger numbers of transactions that we don't normally have and with a bunch of new wins that we don't normally have, but also we had a higher rate of extensions on these assignments because people are hanging onto their healthcare professionals a little bit longer. That's why this is kind of carrying on into Q1 with a bigger impact than normal.

But this is a normal practice that we have to ramp up new programs and big projects. But we do believe it will normalize maybe not 100% in Q2; it's probably going to be completely normalized by the month of May. So we may have a little bit of a drag in April. But generally, it will be back to normal bill pay spreads that we were experiencing before we saw such a large number of wins.

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Randall Reece, Avondale Partners - Analyst [6]

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And finally for me, the remarkable increase in your MSP wins. Over time, do you expect this to have any kind of favorable impact on either gross margin or operating leverage or other dynamics as opposed to just sheer top-line growth?

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Bill Grubbs, Cross Country Healthcare, Inc. - President and CEO [7]

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No, I think it will help us to leverage the adjusted EBITDA bottom line. This is more efficient business for us and we have better relationships. And MSPs run a lot smoother for us and are more profitable than some of our other business.

To give you a little bit of a scale, we came into 2016 probably managing a little over $400 million of spend under management. And we ended 2016 with a run rate of managing over $500 million.

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Bill Burns, Cross Country Healthcare, Inc. - CFO [8]

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$500 million, that's right.

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Bill Grubbs, Cross Country Healthcare, Inc. - President and CEO [9]

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I'm looking at Bill to make sure I don't get the numbers wrong. The new wins, the 34 new wins in the last 14 months, have an opportunity of $150 million to $200 million of additional spend under management. So it is a big deal for us. It will help the volume side a bit. But we definitely get leverage with this kind of volume. This is profitable business for us.

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Randall Reece, Avondale Partners - Analyst [10]

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Very good, thank you.

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Operator [11]

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Jeff Silber, BMO Capital Markets.

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Jeff Silber, BMO Capital Markets - Analyst [12]

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Just wanted to follow up on those MSP wins. Again, it was a very impressive number. Why do you think you got this huge growth? Is it that the market has expanded more dramatically than you thought? Are you gaining more share than you thought? Or is it a combination of both?

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Bill Grubbs, Cross Country Healthcare, Inc. - President and CEO [13]

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I think we are gaining more share than we have in the past, and part of that is where we are in our turnaround, where we've hired new people, upgraded staff, improved our processes. And so some of it is just where we are in our turnarounds.

But I think we are seeing some pretty big opportunities in MSPs. I think with the continued strong demand in the market. And with the shortage of healthcare professionals, our customers are finding that they can't keep up with this on their own. And they are going to companies like ours in order to help them manage it more efficiently because they're just not getting their needs met.

So we do believe that MSPs will continue to be a growth opportunity. And as you know from following the general staffing business for many years, this came late into healthcare staffing compared to other segments of staffing. And I think it's now currently coming into its own.

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Jeff Silber, BMO Capital Markets - Analyst [14]

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Okay, great. Just shifting gears a bit, with the talk about some potential changes to the Affordable Care Act, I'm just wondering, in your discussions with clients, are you seeing any type of changes in attitude? Are they planning anything different if we do get some changes in that regulation?

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Bill Grubbs, Cross Country Healthcare, Inc. - President and CEO [15]

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Yes, we've had a lot of discussions with our customers about the Affordable Care Act and what they see or don't see. We have seen a little bit of slowdown, let's take a wait-and-see attitude.

We did a little bit of slowdown in some customers, nothing that changed our overall demand. We still have close to a record number of orders. But some of them are taking a little bit of a wait-and-see attitude to see what the current administration may do.

But almost everyone, though, feels somewhat comforted by what the administration has said so far, which is we are going to keep pre-existing conditions, we are going to allow children to stay on to their parents until they are 26, that we are not going to yank insurance away from 20 million people, we're going to find a viable alternative for those people. And so I don't think anybody sees that there's going to be a big change, certainly not in the short run.

2017 is kind of baked. The open enrollment period has passed already, and the people that have insurance have insurance. And I'm not even sure that they, we believe, will make significant changes by 2018.

So most everybody is thinking that as long as these people stay insured that the level of demand for healthcare in the hospitals and in their healthcare facilities shouldn't fall off from where it is today.

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Jeff Silber, BMO Capital Markets - Analyst [16]

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Okay, that's helpful. And then just a couple quick numbers questions. For your first-quarter adjusted EPS guidance, I'm wondering what you are assuming for taxes and share count.

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Bill Burns, Cross Country Healthcare, Inc. - CFO [17]

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Sure. So the share count is the roughly 32.5 million shares that we would normally be using. From a taxes -- again, we don't have a rate. We usually publish a dollar amount. So it's between $800,000 and $1 million is what we usually see per quarter on tax expense.

And then, of course, there's the other items below adjusted EBITDA, like stock compensation, depreciation and amortization, and there's a couple of other small line items. But those don't vary materially from quarter to quarter. So what you've seen in the last several quarters would be expected to recur again in Q1.

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Jeff Silber, BMO Capital Markets - Analyst [18]

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Okay, great. And what should we be building in for capital expenditures for the year? You mentioned the ramp-up a little bit in the first half of the year.

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Bill Burns, Cross Country Healthcare, Inc. - CFO [19]

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It will continue to be elevated in the first half because of the buildouts we have still going on at our corporate offices. They are winding down now. We have a little bit of a carryover into 2017. Historically, we spent between $2 million and $3 million. I would say we are probably looking at somewhere between $3 million and $4 million for the full year.

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Bill Grubbs, Cross Country Healthcare, Inc. - President and CEO [20]

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Yes, a little bit higher in the first half.

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Bill Burns, Cross Country Healthcare, Inc. - CFO [21]

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Right, a little bit higher than the normal run rate in the first half.

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Jeff Silber, BMO Capital Markets - Analyst [22]

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Okay, great. Thanks so much.

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Operator [23]

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Bill Sutherland, The Benchmark Company.

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Bill Sutherland, The Benchmark Company - Analyst [24]

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On the MSP spend, Bill, you were saying that you had like $500 million on a run rate basis at the end of this year? I'm sorry, of 2016?

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Bill Grubbs, Cross Country Healthcare, Inc. - President and CEO [25]

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Yes, that we manage. That has not been the revenue number in our numbers.

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Bill Sutherland, The Benchmark Company - Analyst [26]

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Oh, I know. No, right. So what's the fill rate, then, for you guys like?

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Bill Grubbs, Cross Country Healthcare, Inc. - President and CEO [27]

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I think at the end of Q3, we were filling about 52% of it, and I think we are at about 56% now.

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Bill Burns, Cross Country Healthcare, Inc. - CFO [28]

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That's right.

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Bill Sutherland, The Benchmark Company - Analyst [29]

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Okay, so it bounces around between high 50s%/low 60s%?

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Bill Grubbs, Cross Country Healthcare, Inc. - President and CEO [30]

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Well, when I got here, it was high 80s%. It has been going down during this high-demand area as we get more strategic about where we make our placements and then where we don't. But we've had a conscious effort, based on these wins and the ramp-ups, to try to start filling a little bit more of it ourselves. So that's where we've gone from the 52% to the 56%, which I think is a good thing.

So the fact that we've gone from managing $400 million at the beginning of the year to $500 million at the end of the year and we have another $150 million to $200 million of opportunity and we are filling more, a higher percentage of it, supports our growth comments for the next year.

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Bill Sutherland, The Benchmark Company - Analyst [31]

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And the 10 wins year to date represent a total potential spend of $150 million to $200 million? Is that --?

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Bill Grubbs, Cross Country Healthcare, Inc. - President and CEO [32]

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No, no. That's the total 34 that we won, all in the last 14 months.

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Bill Sutherland, The Benchmark Company - Analyst [33]

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Oh, I got it. Okay, got it.

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Bill Grubbs, Cross Country Healthcare, Inc. - President and CEO [34]

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We won 10 -- 100 --

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Bill Burns, Cross Country Healthcare, Inc. - CFO [35]

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That we won, yes.

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Bill Sutherland, The Benchmark Company - Analyst [36]

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And then wanted to understand, to make sure I heard clearly what you guys said about the Q2 gross margin, how to think about it.

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Bill Grubbs, Cross Country Healthcare, Inc. - President and CEO [37]

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Yes. I'll let Bill talk about it, but we expect to get back to $2 million to $3 million of extra compensation costs. Should be mostly normalized in Q2. We get back most if not all of the payroll tax reset as well.

So I don't know what that means overall.

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Bill Burns, Cross Country Healthcare, Inc. - CFO [38]

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You're looking at probably between, I'm going to say at the gross margin level, 60 basis points to 70 basis points for payroll tax that will likely -- call it 50 basis points to 60 basis points because it winds its way out throughout the quarter. 50-basis-point to 60-basis-point improvement just from payroll tax reset and then the wind-down of the $2 million to $3 million of incremental costs.

If you assume the low end and some drag into Q2, you are looking at about another 90-basis-point to 100-basis-point improvement.

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Bill Sutherland, The Benchmark Company - Analyst [39]

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Okay. The payroll tax reset is just an annual thing, right? I'm kind of --

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Bill Grubbs, Cross Country Healthcare, Inc. - President and CEO [40]

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Yes, it happens all the time.

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Bill Burns, Cross Country Healthcare, Inc. - CFO [41]

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That's right.

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Bill Sutherland, The Benchmark Company - Analyst [42]

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Yes, I wasn't sure why that was getting called out. Okay. And what else did I have here? Oh, that Mediscan growth is so impressive, Bill. How do you actually think about that going forward?

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Bill Grubbs, Cross Country Healthcare, Inc. - President and CEO [43]

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I'm excited about it. We are actually talking to them about how we make that even higher number. We are looking at some -- because they are having such good success, we want to build on that success.

We've got a good management team there. We do think that both the public and the charter schools across the nation are underserved in the market, and we think we can take some market share there. So we are looking at some small bolt-on acquisitions, we are looking at some organic step-up for growth.

But just to temper that a little bit, everything tends to work in the school year. So all the plans we are making now would start in September of this year, and you would see the growth in the fourth quarter. You wouldn't see anything incremental till then. But we are a big believer in it. This is a business that we can continue to grow and take advantage of some opportunities in the marketplace.

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Bill Sutherland, The Benchmark Company - Analyst [44]

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That's good to know for modeling, that the Mediscan has a step function in the fourth quarter as far as growth. That's it for me. Thanks, guys.

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Operator [45]

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Tobey Sommer, SunTrust Robinson Humphrey.

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Kwan Kim, SunTrust Robinson Humphrey - Analyst [46]

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This is Kwan Kim on for Tobey. Thank you for taking my questions. Regarding capital deployment, aside from increasing investments in staff, how would you rank your priorities in utilization of cash in 2017?

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Bill Burns, Cross Country Healthcare, Inc. - CFO [47]

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We obviously have a very strong balance sheet at this point in time. We are active in the marketplace.

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Bill Grubbs, Cross Country Healthcare, Inc. - President and CEO [48]

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And we generated $30 million of cash.

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Bill Burns, Cross Country Healthcare, Inc. - CFO [49]

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We generated $30 million of cash. So if we continue on this trajectory, we will be in a very strong cash position with hardly any debt because the convertible notes will likely go away in July of 2017.

I think we are certainly looking -- besides the organic side, M&A or acquisitions are a primary focus for us. We are actively looking at any number of targets in every given quarter.

We are selective about the companies we want to pursue. We look for companies that fit our growth strategy, that have the right elements that we think can fit real well with us. Either they are growing us geographically, they are growing us into new specialties, or they have a higher margin profile than the rest of our business.

That would be the predominant use of it. We don't have much debt right now, so there's not -- I can't say I would actually go back and early pay off the term loan.

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Bill Grubbs, Cross Country Healthcare, Inc. - President and CEO [50]

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We are paying off the term loan at about $500,000 a quarter.

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Bill Burns, Cross Country Healthcare, Inc. - CFO [51]

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Yes, there's the normal [amortization].

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Bill Grubbs, Cross Country Healthcare, Inc. - President and CEO [52]

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And then we will need to fund working capital if we continue to grow at high-single digits if not getting into double digits. We seem to be throwing off enough cash to offset that as well.

But acquisitions is what we would like to do. We have had good success with our acquisitions before. Looking at Mediscan that we acquired 15 months ago, growing at 28% year over year right now I think is a good sign that we could continue to expand in that area. So I think acquisitions is probably the number-one use of it for us.

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Kwan Kim, SunTrust Robinson Humphrey - Analyst [53]

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Thank you. And on physician staffing specifically, are you anticipating the first half of 2017 to be a period of turnaround in that area? And do you see any signs that could accelerate that turnaround?

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Bill Grubbs, Cross Country Healthcare, Inc. - President and CEO [54]

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So it was down 20% in the second quarter of last year year over year. It was down 19% in the third quarter. Now it's down 9% in the fourth quarter. We expect it to get less worse in the first and the second quarter.

But it will still have a declining revenue in the first half of the year. We do think we can get back to low-single-digit growth in the second half of the year. Maybe in Q3, maybe it will wait till Q4. But it will continue to show slow improvement going forward. It's on a good trajectory right now, but they're not 100% there yet.

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Kwan Kim, SunTrust Robinson Humphrey - Analyst [55]

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Thank you.

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Operator [56]

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A.J. Rice, UBS.

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A.J. Rice, UBS - Analyst [57]

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I know you've been asked about this a couple times, but I just want to make sure I understand. So of the MSP wins, the 34 over the last 15 months or so, are those mostly new MSP contracts where a hospital -- or health system has decided they needed to go to MSPs if they haven't historically? Or is there the competitive landscape changing in some dynamic where people that already have MSPs are deciding to change?

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Bill Grubbs, Cross Country Healthcare, Inc. - President and CEO [58]

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The vast majority were new. Certainly more than half of them were new. I won't know the exact percentage. I know one of the largest one was one that switched.

Quite a few of these are new. I'm looking at a list now. Quite a few of them are new. If I had to guess, I'd say, I don't know, 60%-70% of them are new. The rest of them were taken from the competition.

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A.J. Rice, UBS - Analyst [59]

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Okay, all right. I know a few quarters ago, we talked about the need to step up investment in your online recruiting and some of your other use of social media to recruit. Can you just give us an update on that? And how are you seeing -- is that having an impact on your access to new applicants and so forth? Can you give us some flavor for that?

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Bill Grubbs, Cross Country Healthcare, Inc. - President and CEO [60]

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Yes, that's -- it's actually worked very well. We started that in June. We said it would take 90 to 120 days to really work its way through the system before you started to see revenue from it. We do believe that that's a big factor in the growth that we saw in Q4 was the fact that we are attracting more healthcare professionals. And we feel good about that.

And the reason -- so we stepped up that. And we have been hiring recruiters as well. As you know, you've got to have -- there's no use attracting candidates if you don't have the people to process them.

The reason why we are -- and I know you didn't ask this question, but it's kind of a follow-on. The reason why we feel the need to step it up again now is that -- Bill, you correct me. But of the 34 wins in the last 14 months, 19 of them came in the fourth quarter or the first quarter.

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Bill Burns, Cross Country Healthcare, Inc. - CFO [61]

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That's right.

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Bill Grubbs, Cross Country Healthcare, Inc. - President and CEO [62]

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So more than half of the wins came in the last two quarters. So we haven't even started to implement and ramp those up yet, which is why we are stepping up the level of investment or we just won't be able to handle the extra volume. But that initiative with digital media, search engine optimization, driving more candidates into the system has worked very well for us.

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A.J. Rice, UBS - Analyst [63]

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Okay. And on these new MSPs and just in the tone of business in general, I think there's been some discussion about alternate site and other nontraditional menus seeing some growth there. Can you update us on whether that's at all a factor in any of this?

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Bill Grubbs, Cross Country Healthcare, Inc. - President and CEO [64]

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It's not so much in the MSP wins. But that's actually a good story that I probably should have highlighted. We've talked a long time about why we wanted a national footprint of branches around the country because we are seeing the jobs growth in healthcare. It's three to one in the ambulatory and outpatient facilities compared to the acute care environment. And that means that's where the jobs are, and that's where we should be able to service.

Our branch business, which services the local marketplace, grew at what, Bill? Pretty big number.

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Bill Burns, Cross Country Healthcare, Inc. - CFO [65]

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Branch was up a lot, yes, substantial, high double -- over 20% growth.

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Bill Grubbs, Cross Country Healthcare, Inc. - President and CEO [66]

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So our branch business is growing at over 20% right now. And we think that's a very positive thing for us. Some of that may be helping to support a local MSP, but most of it is local market business in these ambulatory and outpatient facilities where we are seeing some growth opportunities.

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A.J. Rice, UBS - Analyst [67]

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Okay. And just a last question -- on the locums business, you say you've got it moving in a better trajectory now. What needs to be done to get it? Is it the underlying market needs to show some improved strength, or is there certain specialties that you need to ramp up your recruiting in?

Give us a little flavor for -- I know you made management changes there. But what is left to be done that needs to be done?

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Bill Grubbs, Cross Country Healthcare, Inc. - President and CEO [68]

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It's actually fairly simple. We did need to make management changes, we had to upgrade some of the staff, and we had to improve our operating model. All those things are in place.

It really is down to the fact that we had to replace some of the producers, the salespeople and recruiters. And they are just not up to speed yet. It's really about people getting up to speed and coming into their own. And that's really the last thing to be done.

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A.J. Rice, UBS - Analyst [69]

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Okay, all right. Thanks a lot.

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Operator [70]

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Brooks O'Neil, Lake Street Capital Markets.

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Brooks O'Neil, Lake Street Capital - Analyst [71]

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Good morning. I have a couple questions. I unfortunately want to focus on a couple things I don't understand. One is in Q4, it appears that you had these elevated healthcare and workers comp expenses. It doesn't appear they were in the models.

So I'm just trying to understand exactly what that is and what drove it. And maybe if you can help us understand why it was unexpected.

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Bill Grubbs, Cross Country Healthcare, Inc. - President and CEO [72]

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Yes. So we obviously accrue for the expected workers compensation costs in every given quarter and every single month at a rate that historically has been our experience rate. And by the way, coming out of Q4, we don't see our workers comp experience is any different than what we have historically accrued to.

We did have, and I think it was specifically four large claims for workers comp in Q4 that pretty much drove the big variance. Is that right, Bill?

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Bill Burns, Cross Country Healthcare, Inc. - CFO [73]

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Yes. Workers comp is a function of the number of claims.

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Bill Grubbs, Cross Country Healthcare, Inc. - President and CEO [74]

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But we don't see that as a trend.

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Bill Burns, Cross Country Healthcare, Inc. - CFO [75]

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Right. It was a handful of claims that had come through, four or five claims that had come through in the quarter, for workers comp that were a little bit higher than the norm.

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Bill Grubbs, Cross Country Healthcare, Inc. - President and CEO [76]

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So what we look for is if you see a change in workers comp, is that a general change? Are we doing riskier business? Are we doing something that will create an ongoing need to accrue at a different level?

And now that we are a couple months into 2017, we don't see any change from our normal workers comp accrual. This looks like it was very specific to Q4.

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Bill Grubbs, Cross Country Healthcare, Inc. - President and CEO [77]

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Okay, that's good. Secondly, I'm trying to understand -- in Q1, obviously a pretty big impact relative to what people expected in terms of your expense level and the resulting impact on margin and EPS. So I'm trying to understand why that is a one-time type phenomenon, given the ongoing positive trends in the business.

And probably more importantly for me, I just want to understand exactly what those expenses are and how they work. It sounded like it's kind of a normal course of business type thing, but it seems elevated here in Q1.

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Bill Grubbs, Cross Country Healthcare, Inc. - President and CEO [78]

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No, it's definitely elevated. And part of it is the reason I just talked about on the previous question about how many MSPs we won in Q4 and Q1. So part of this is just an increase in headcount in order to deal with the number of wins we've had and take advantage of that.

I think that the big picture is that we are seeing good momentum that we've been working hard to get to for a long period of time. And we had to make some business decisions that unfortunately don't conform to this three-month window that public companies have to live in, but are the right decision to make for the Company long term.

And I have to make those decisions. And I don't want to three months from now say, yes, we won a bunch of business, but we didn't get any revenue out of it because we didn't make the right level of investments that we needed to.

So I made the decision that we needed to do this, we needed to ramp up the extra comp packages in Q4 that tails into Q1. That we needed to hire additional staff. And we needed to continue a higher level of investment in digital media and search engine optimization and social media and so on and so forth.

Those are the right things to do. It will mean we'll have a slightly depressed margin for a quarter, maybe a little bit into Q2. But in the end, we will end up with -- we'll get back on track to growing our adjusted EBITDA to 8%, and we will do it on a much higher revenue number. So it's the right decision to make. I know it looks lumpy, but I had to make that decision.

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Brooks O'Neil, Lake Street Capital - Analyst [79]

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Sure. So again, I'm just trying to understand here. So the likely pace here is -- it's not like you made one-time cash payments to people. The expenses are going to continue on beyond Q1, but the revenue is likely to kick in beyond Q1 so that the margin is better. Is that right?

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Bill Grubbs, Cross Country Healthcare, Inc. - President and CEO [80]

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Kind of. The compensation cost will actually normalize by Q2, so that will not carry on. It will come back to the levels that they were at before, so that goes away after Q1.

The investments will stay. And yes, we expect to grow into those investments so that the bottom line comes back to a level that we want it to be at. But the compensation costs that we changed to ramp up certain large projects and large customers, that will rightsize.

We already see that in the numbers we see, all the new places every week, and all the places that are happening now are for April and going forward. And those are back to normalized rates for us. So we are comfortable that we will be back to normalized rates in Q2.

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Brooks O'Neil, Lake Street Capital - Analyst [81]

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So those are like recruiting bonuses or something you paid to attract people to fill those spots?

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Bill Grubbs, Cross Country Healthcare, Inc. - President and CEO [82]

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Yes. There were certain things we did based on geography, certain skill sets where we upped the pay rate. We may have for geography where housing was getting more expensive, we may have increased the housing allowance in certain locations. It was a total pay package; there's multiple variables in there. It was not particularly a bonus or a cash payment or housing or M&I, it's a combination of all of those things.

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Brooks O'Neil, Lake Street Capital - Analyst [83]

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Sure. I don't mean to be dense, Bill, and I apologize for this. But I'm just trying to understand how that type of an expense is one-time is going to fade away after Q1.

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Bill Grubbs, Cross Country Healthcare, Inc. - President and CEO [84]

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Well, because all these assignments are 13-week assignments, and when they change out, we put the people back onto a more normalized pay package. So we have that ability to make our new placements at the rates that we want and renewals at the rates that we want. So we have control over getting those back to where we want them to be.

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Brooks O'Neil, Lake Street Capital - Analyst [85]

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Sure. Okay, that's helpful. So the last thing I wanted to ask about -- if I'm hearing you correctly, there's a nice acceleration in momentum in your business. Growth is accelerating. The things you have been doing to strengthen the operating performance of the Company are paying dividends. Fourth-quarter revenue up 15%.

I think your guidance for 2017, while it was obviously more generalized, but it's for a low to -- I guess, a mid- to high-single-digit growth rate. So I'm trying to understand what I'm missing in the picture of powerful and consistent ongoing tailwinds. But you think revenue growth is going to be a bit slower as the year goes along. Help me to understand that.

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Bill Grubbs, Cross Country Healthcare, Inc. - President and CEO [86]

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There's a couple of things in there. So, although we expect nurse and allied to grow double digits in 2017, it still will be pulled down a little bit by our physician staffing either still declining in the first half or not growing at the same level. So it depresses the overall Company growth. And I know we had that in Q4 as well.

But Q4 was boosted a little bit by some of the project revenue that we talked about in Q3 that carried over into Q4 as well that will not be recurring going forward. So that also has a little bit of an effect on not staying at the 15% level.

But we also get beat up a lot when we don't hit our revenue numbers. And although I think we are being cautious to say the Company will grow at 7% to 8% for all of 2017, do I think there's an upside to that? I do think there is an upside for that, but I'm not going to go stick my neck out and tell you that we are going to grow double digits for the whole Company next year.

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Brooks O'Neil, Lake Street Capital - Analyst [87]

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All right, that's very helpful. I really appreciate it and I'm looking forward to a good year.

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Operator [88]

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Mitra Ramgopal, Sidoti & Company.

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Mitra Ramgopal, Sidoti & Company - Analyst [89]

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Just a couple of questions. First, I was just wondering if the IT spend that you started in 2016, if that's behind you now.

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Bill Grubbs, Cross Country Healthcare, Inc. - President and CEO [90]

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Yes, that has ended. We have a new CIO now, you may have noticed. And we still have a big IT project. I don't believe we will start it up this year. We will start the planning process this year and most likely start that project in 2018. And we will let everybody knows what the capital and/or P&L impact of that is as we do the exploration and do the upfront work. But I think otherwise, we are back to kind of normal.

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Bill Burns, Cross Country Healthcare, Inc. - CFO [91]

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And the money we spent in the first half of 2016 on that project is -- while it was all expensed, because at that point in time we were looking at a cloud-based solution, a lot of the expenses were really in the assessment, the documentation, looking at the existing system. All of that still has value to us as we go forward. So I don't expect a recurrence of those types of expenses.

And as Bill mentioned, we will know as we go further into this which solution we ultimately pick, how we choose to contract for it, and whether the ongoing costs will be capital in nature or more cloud-based and therefore an operating expense. But right now there's no project spend -- no significant project spend. There's always ongoing IT projects in the business, a combination of CapEx and OpEx. But nothing significant to call out for Q1 of 2017.

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Mitra Ramgopal, Sidoti & Company - Analyst [92]

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Thanks. And then just quickly on the RPO business you acquired back in December, if you can give a sense as to how that's come along. If you got any contribution in the fourth quarter. And as you look potentially to make some acquisitions, are there areas you really feel you need to be in in terms of driving increased growth?

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Bill Grubbs, Cross Country Healthcare, Inc. - President and CEO [93]

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Yes. So the RPO business has done well for us. As I mentioned, it's given us the infrastructure to be able to deal with some of the demand we have. They've won a couple of projects already early in this year that we are pleased to see.

But it's still very small and will take a little while to ramp up. So I think as it starts to get to be a little bit bigger, we will start to identify some of the particulars around that. But it really was about getting the infrastructure in place.

From an acquisition standpoint, originally I was looking at school businesses, which, as I mentioned, are just growing very rapidly and we would like to add onto that. And we are looking around there. Allied is still -- our local allied business is still fairly small for us. I wouldn't mind adding on to local allied business in the local marketplaces as well.

And because of all of the wins and the demand that we have today, originally I wasn't looking at travel nursing operations. But I could use some extra capacity right now that takes a long time to grow organically. So we would look at some travel nursing operations as well.

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Mitra Ramgopal, Sidoti & Company - Analyst [94]

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Thanks, that's very helpful. And finally on the MSP -- obviously, you have won a lot of business over the year-plus. And I was wondering if there's anything different you are doing that has resulted in that, or is this a discussion of more timing and things coming together?

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Bill Grubbs, Cross Country Healthcare, Inc. - President and CEO [95]

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I think a lot of it is timing. We upgraded the management a couple years ago. As I mentioned, I promoted the head of workforce solutions to a full president title, reporting to me now. The team has done a great job in getting out there. We've done a good job on our existing MSPs that act as references for us.

And I think the market is moving in this direction because of the dynamics of high demand and a shortage of supply. So I do think we are taking market share now. The market probably took share from us for a couple years before this. I think we are just coming into our own. I think it's more timing than anything else.

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Mitra Ramgopal, Sidoti & Company - Analyst [96]

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Okay. Thanks, guys, for taking the questions.

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Operator [97]

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Randall Reece, Avondale Partners.

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Randall Reece, Avondale Partners - Analyst [98]

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I had just one follow-up. Was there a significant difference in gross margin between nurse and allied and physician in the fourth quarter? Was all of the hit you were talking about from insurance concentrated in one segment over the other?

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Bill Grubbs, Cross Country Healthcare, Inc. - President and CEO [99]

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Yes. Both health and workers comp affected the nurse and allied segment. The physician side is all 1099s, so we don't have health insurance costs or workers compensation cost there.

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Bill Grubbs, Cross Country Healthcare, Inc. - President and CEO [100]

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But physician staffing was a couple hundred basis points ahead of nurse and allied. It was for that quarter. They will be probably more in line as we normalize in future quarters.

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Randall Reece, Avondale Partners - Analyst [101]

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All right. Thank you very much.

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Bill Grubbs, Cross Country Healthcare, Inc. - President and CEO [102]

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Okay. Thank you, everyone, for joining us this morning. I look forward to updating you with our first-quarter results in May. Thanks again. Bye.

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Operator [103]

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Thank you. A replay of today's conference will be available through March 16, 2017. You may access the replay by dialing 1-800-391-9854 or 1-402-220-9828. Please use the passcode 2017. Thank you for joining. You may now disconnect.