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

I want to thank everyone for joining us today. It's my pleasure to be introducing Cross Country Healthcare. Cross Country is one of the largest nurse staffing and health care staffing companies in the country. Presenting today, we have John Martins, who's the President and CEO; Josh Vogel from Investor Relations, is also in the room.

Maybe just to jump right into questions.

Sure.

So we'd love to get kind of an update on just kind of where you see the business is today. There's been a huge acceleration during -- COVID now with normalization, where are we in that normalization process?

Sure. So we -- right now, when you look at -- look, take a couple of different parts of our business, right? So we do, obviously, travel nurse and travel Allied, but we also have other parts of our businesses such as locums, education, home health. And we kind of go into that demand where we're seeing right now, and we're seeing tremendous demand in the locum side right now. We're also seeing tremendous demand in education. And our education business is power professionals and professionals that are placed in the schools, along with health care professionals into public schools, charter schools. And we're also seeing fresh demand in our home health businesses where we focus on PACE centers. Now when it goes to the travel nurse and Allied, there, we definitely have seen -- we will expect it from the height of COVID to see a pullback in demand. And we definitely saw that accelerate a little faster than we had thought in the first quarter. But we do think it was overcorrect in some was artificially created by the hospitals as they were under immense cost pressures to reduce the labor. And so even when we start looking and seeing that, we think we hit the trough in demand [ that we're seeing in the last 4 weeks ], were up about 7% in demand and nursing and about 16% in Travel Allied. Our Allied business is now -- demand is similar to where it was in January to start the year. So I think Allied's back. But then if we look a little bit deeper and see what the publicly traded hospitals are saying, I think it was a tenant who said that they are at 7% contingency labor, trying to get down to 6%. But then they thought the 6% would be something that they would see throughout 2024. And I think we've seen a couple of the other public traded companies that have similar ranges. Now when we look at those numbers where they were pre-COVID, those were more in the 3% or 4% range. So they're still using a lot of contingency labor. We think that they're going to continue to use contingency labor. And I think a couple of those hospitals also have said that now that prices are moving down, and we anticipate these prices to model, we model the prices to be down, it makes strategic sense and these are the hospitals saying, it's not us, but it strategically, it makes sense for them to start using more contingency labor at the price of the rates right now. So we think that we will continue to see demand pick up. And then, of course, we do see and expect to see demand pick up this summer as a hospital prepare for flu orders. And those -- the flu orders, we start seeing at the end of June and into July, and then those orders will then be for placements in late third quarter, call it, from September through October into the new year.

So I guess when we think about it from the investor perspective, we're up -- you start to see sometimes things go well for 4 weeks. They go probably 4 weeks like it's a good trend. It's the start of a trend. But it sounds like the Q2 results, you'll be in a better spot to kind of really say that things have come back and that we've reached that stabilization?

We do. And we do -- we've called out, we think that the trough for us on volumes will be in Q3 because it takes you somewhere between when you receive an order and then when you place that order then the person goes to work, it's somewhere between 4 and 9 weeks before they go to work. So we think that the trough of what we'll see is in the third quarter. We'll have great visibility by the time we get there to the second quarter.

And so when you say that the industry demand was kind of overcorrected, how does that functionally work? Like how is the hospital operating through that labor shortage where they're saying, we don't want any more...

And this is why we believe it was overcorrected. When we look at our renewal rates or retention rates for a clinician at a hospital, they're at historic highs right now. And that means that the hospital can afford to get rid of that nurse, or health care professional, they need to keep them. And in addition, our cancellation rates are at historic lows. And traditionally, if hospitals were looking to not utilize professionals, they would start canceling clinicians that we're not seeing that all, matter of fact, we're seeing the opposite. They're retaining them at any cost. And so what we believe is happening and some of what we're talking to our clients, there's been internal conflicts in hospitals between the finance side and the nursing side, where the nursing side needs the people to take care of patients on the bed side. And the finance side is going and trying to reduce and control that contingency labor costs.

Yes, that's interesting. I guess to get to the dynamic that I think sometimes from the [ fresh ] perspective, it's like, well, how does demand drop or actually how does pricing continue to normalize, but demand increase. Like it seems like if demand is increasing, the pricing should be stronger. So you mentioned a little bit about kind of Tenet's comments, but maybe just walk kind of through why demand should keep going up even if pricing or bill rates still have to normalize a little bit?

Yes. Well, good question. I think we had this unprecedented increase in bill rates. You kind of got to go back to the beginning of COVID, where bill rates were at crisis rates. And we saw this incredible increase in bill rates double of what it was pre-COVID. And I'd like to remind people, if you look and think why bill rates were so high in -- during COVID. If we go back to March of 2020 when COVID first broke out, and I'm sure many of you know people that were lysoling their Amazon packages, they were lysoling their vegetables, their groceries. And we didn't know how you even catch COVID and people forget that. And so when these nurses were going in to a burning building literally, they were saying bye to their families because they thought they were like I'm going to die. And so it sounds dramatic, but that was the truth. We just -- 2 years ago, we lose the reality of what it was. I don't know how many people are from New York City here, but in New York City at 7:00 every evening, they ring a bell and people would cap, right, because the nurses were going and taking care of patients. And so these nurses deserve that today, right? They went in there. And of course, then what happened was after the first surge of COVID happened in the Northeast, then it moved to -- the Northeast and the Northwest, Pacific Northwest, then started popping up all around the country, and we needed to take these nurses and move them that's why bill rates to stay at a higher rate. And pre-COVID, we only had about 40,000 to 50,000 travel nurses in the industry. Now probably argue there's 150,000 to 200,000 nurses. And so there's a much larger pool of nurses, which is why bill rates are now normalizing. But when we say bill rates are normalizing, we think the bill rates will hit their normalization in the fourth quarter. And then from there, there'll be stagnant and then grow throughout the years to come. But that normalization floor will be 30% to 35% higher than where it was pre-COVID. So there's still a tremendous differential gap even if you consider inflation of where those rates are. And the other thing I think we have to consider about why bill rates going down, but demand will go up is that there is a fundamental shortage and structural shortage that hasn't been fixed. And I think I called out on our earnings call, McKinsey had a study that said there's going to be [ 425,000 ] shortage by 2024 and 1 million shortage in the next 10 years. No one is solving that problem yet. So there is still such a large demand. Hospitals don't have the staff. I think the NSIs -- there's an NSI report, there's a retention report. And they were very much in line with what the public traded hospital saying that attrition rates are about 23% to 24%, and they surveyed 3,000 hospitals and came up with that number. And that's, I think, very similar to what the public hospitals has said. But was more interesting, nurses in their first year, not a new nurse graduating, but nurses who joined a new hospital, their attrition rate was 33%. So nurses are not staying. And so this is a leaky bucket that hasn't been solved for. And so that's why there continues to be opportunities of demand rising as bill rates are going. And clinicians, it's interesting before -- during COVID, we hit our highest percentage of millennials or younger coming into the workforce for travel nurse. 65% of our new nurses coming in, where millennials are younger. And so we're bringing in a whole new basket of clinicians into this workforce. If you think we went from 50,000 nurses to 200,000 nurses, a lot of those nurses will not go back into the old workforce and go into becoming the core staff. And then if you look at the whole number, there's only 3 million nurses according to the BLS in the United States. 1.7 million nurses are in acute care. And we're talking 200,000 nurses or travelers that work in both acute care and in the subacute space. So it's a very small population of nurses that actually travel. So we believe that's why we can still continue to find supply because they are embracing this new lifestyle of work, and we believe that demand will still pick up as the shortages.

Yes. I guess maybe talk a little bit more about that because it also kind of seems kind of intuitive, it's like hospitals can't find nurses, but you can. So like so where do you find the nurses? What's the draw to keep that going?

Well, we're a national reach, right? Look at hospitals. I usually use this for a client side, but I'm going to give you the same example. If you picture the map of the United States and you look at the old commercials between Verizon, T-Mobile, Sprint, they show all little pixels of the coverage they have. A hospital that has 3 hospitals in one city, their coverage to find nurses is very small. They don't have the outreach because they're not looking for nurses to work in San Francisco, if they were in New York, they're looking for nurses who want to just work in New York. We have the national reach of having nurses working in all 50 states, and we're constantly looking for nurses nationally where a hospital is usually looking very locally, so we'll have a much further and deeper outreach.

But I guess, so like bill rates have dropped. There is going to be -- still there be 30%, 35% above pre-COVID are down still 30% from the peak. So I guess there's a thought that, that bill rate was what drove nurses to want to be travel nurses. So now that this has come out, have all of them left the system now? And how do you think about that?

Well, I think -- like I mentioned, more nurses have been exposed to the travel industry. So more people know about it. I think there's a couple of factors. First of all, it's a new lifestyle that -- how many of us in this room now work from home mostly or full time? And if you spouse, a nurse and your spouse is now working full time, and the reason I call this story, my neighbor came across the other day. So I mean, said, hey, you work in that travel nurse business. My niece is a nurse. And her husband works for some large company, and he is able to work remotely. And now they're going full time traveling. And that's what we're experiencing. I think part of it is this gig economy that really has really accelerated during COVID is allowing nurses and their families to work from around the world. You'll see so many nurses and travel nurses now being in RVs and camper vans and traveling with their families, home schooling kids, and we're seeing a whole new market emerge of new nurses into the industry.

And one of the, I guess, concerns that we get a lot around this industry is about the growth during a recession. How do you guys think about what the impact of recession would be on the business?

Well, I think we are in an unprecedented territory because the last time we had a recession, we didn't have the Affordable Care Act. So I think there is some impact that we have many more people in the country with insurance and what does that really do to care and are people still utilizing the health care facilities and doctors. So I think that's going to have a little impact. I think the other impact that we have is for Cross Country, it's the diversity play. We're much more diversified than we were in the last recession. And I think when you look at how deep recession is going to be. When we look at a recession, it depends how deep the unemployment is. And I think there's a certain percentage of unemployment, then it really impacts our business much deeper. I don't know what that number is, but I would hedge it and say it's probably -- 8% is probably the over-under. You're 8% or above, that will probably have a deeper impact into our business. If you're 8% are under, I think you'll have hospitals won't be able to find enough commissions. And when you get to that 8%, 9%, 10% or higher unemployment, that's where people defer their retirements. That's where their spouses are losing jobs, and they end up working longer or more or they come out of retirement to work. I think if you get 8% or less year to have less impact on it. So I think it really -- to answer your question, it really depends how deep the recession is, but I do think the world is in a different place so that because of the Affordable Care Act, we have more people on insurance. And I do think for Cross Country with our at least with Intellify or vendor-neutral platform being able to gain market share in new spaces, the vendor mutual space that we've called out is a $20 billion market that Cross Country has never played in before. If we could capture 10% of that market, which is not unrealistic, we just won our first client last month, we have a pretty robust pipeline. The way vendor-neutral works is it's -- we get 5% of all the spend that goes through our program. So if you have $2 billion and you have a 5% spend, you'd have $100 million of revenue. The gross margins on the vendor-neutral technology are very high, the 90% gross margins and your EBITDA is between 60% and 80%. So we could have a $2 billion at 5%, $100 million of revenue, 60% on the low side of EBITDA, you're going to add $60 million of EBITDA. And again, that would even happen in a down market in a recession if we can keep capturing market share.

Yes. So I guess when we think about some of these dynamics a little bit more, demand stays more stable during the recession because of the Affordable Care Act, that makes sense. When you think about the MSP relationships that you've been doing, can you talk a little bit about how that is potentially like a buffer to demand dropping?

Sure. We -- theoretically, we could increase our capture rate for MSP. So the MSPs, we control all of the contingent labor spend for a hospital. We currently capture between -- I think last quarter was 68% of capture, which I think is too high. I think we should be at 60% because I want to use my excess capacity to win more MSPs to direct clients and then convert them into MSPs. We could -- in a very severe market, we could go from a 68% capture rate to an 80%, 85% capture as we wanted to. We choose not to do that. We want to make sure that our partner networks and those the people, the other agencies that support our programs, we want to make sure that they are well fed, so to speak, and that they continue to support us and that we're very important to them. Some of our competitors don't do that. They go in and that they will increase -- in a time like this, they'll increase their capture rate higher for a short-term gain. And we look at it as a more of a long-term play. Everything we do, we really try not to look quarter-to-quarter and really look at a long-term plan to have great relationships so that we can -- as we're winning more and more deals, we have the support of our partner network to fill our needs.

Okay. And then on the VMS side, I guess, can you talk a little bit more about that opportunity? Because, I guess, why weren't you there? Why are you hoping to do it now? And why would somebody choose you versus something else?

Sure. So we've never done it before because we didn't have our own technology. We were renting our competitors' technology, which is not the brightest idea if you're going to try to get into this business. So what we did was for years, we can only be an MSP because we're paying the tech fee to our competitors who had the technology. And so 2 years ago, 2.5 years ago, we launched to build our own internal system, our own VMS. And at first it was just for MSPs. When I got here, they started building it, I moved it over and said, not only is it for MSPs, which is very important, but we have to move into this vendor-neutral space because according to SIA, the 2023 health care staffing market will be $50 billion. If you take that $50 billion, it's in 3 different categories. We can argue 4 now, but there's 3 different models. There is the direct model, which is about 20% of the market, 40% is the MSP market and 40% is the VMS vendor-neutral market. With Intellify, we are now able to access that 40%. Now what differentiates Intellify is, we believe, of course, we built this, of course, when I say this, we believe it's the best technology out there. But beyond that, if you look at our competitors, no one is producing as much technology as we are on a consistent basis, we believe that we're going to see more than anyone in the industry right now. We think that the technology and from what our clients that are on it, I think it's incredible. We now have over 4,000 users. Remember, we just launched it in January. We have over 4,000 users, a couple of dozen clients, some of them -- obviously, we've converted our own clients, and we also have 250 partner networks on our system. So to try -- the system has been tested. It's a solid system, what differentiates Intellify from our competitors is, Intellify uses insights and analytics to help clients make the right decision of when and how much labor to use. So it's more of an analytics tool. The other thing that differentiates Cross Country on the VMS side, we still -- Cross Country was founded by a clinician, cofounded by a clinician, a nurse. And that is -- the quality of the clinicians that always informed to us. We have what we believe and I've worked with all the larger companies, we have what we believe is the lowest clinical cancellation rate in the industry. It's less than [ 0.005% ]. We also have the highest what we believe, highest on-time start rates of 95% from the clinician starting, which we believe is the highest in the industry. So not only do we have a high-tech offering, but we also have a very high touch offering.

And I guess when we -- is still kind of thinking about the recession dynamic. Actually, when I think about the COVID dynamic, it feels like from the provider side, there's always a disconnect between how they talk about temp staffing -- temp staffing companies talk about things that you guys talk about trying to be partners and helping companies reduce spending and they kind of view it as this number that we have to reduce to 0 if we can. It feels like that kind of at least ahead during COVID. And I guess we're hearing anecdotally about more and more hospital systems looking for just new solutions. So can you talk about like how you're seeing that? What are customers today are looking for? How is that different? And then how are you positioned to target thereafter?

So as I mentioned, there were 3 models out there, the direct vendor management, vendor-neutral model or the MSP model, there's really a fourth model reemerging. It's a model that's been around before, but it's becoming the Vogue model today, and that is a self-managed program where hospitals are saying, we're going to do it ourselves. We're going to be our own travel nurse companies. And there's -- I think HCA does a great job with their own internal travel company, but they still only fill 30% or 40% of their needs, and they have to use their partner network to build the rest of it. And so -- and they have 180 hospitals in 26 states where they can draw a lot of firepower, but definitely still fill or capture 30% to 40%. And so hospitals can go and attempt to try this. And we're going to be there to support them and how we can actually support them is through Intellify technology so that they can manage their platforms on a technology, or travel technology and also help them manage their internal resource pools. Most hospitals believe it or not, they manage their internal resource pools on Excel spreadsheets and paper and pencils. And so by us being able to offer them Intellify, giving them the internal resource pool, which is tied to our latest technology that we just launched in the app stores this month, which is experience. The experience is a travel, a travel app for travelers upload documents and to also to self-submit to orders, but it also is integrated with our IRP for, our internal resource pool that, of course, that can pick up [ ships ] at their hospital right through the app as well. So by giving them that technology, we can now play in this fourth emerging model, the self-managed model as a technology player.

And so I guess, you've kind of mentioned that there's a little bit more churn people are looking at like, are you -- is that showing up? Are you losing clients? Are you seeing clients switch from one to the next? And what does the profitability look like if you go from an MSP to a self-managed model?