All right, good morning. Welcome again to the 2024 Jefferies Global Healthcare Conference. I'm Brian Tanquilut, Healthcare Services Analyst here at Jefferies. And with us this morning is Cross Country Healthcare. They're one of the largest nurse and allied staffing companies in the U.S. And with us this morning are Bill Burns, Company CFO, and Josh Vogel, the Company's Head of IR. So maybe, Bill, thank you for joining us today, by the way, you guys. And so to kick things off, maybe if I can just start with temp staffing demand, it's obviously on people's minds right now. There have been a lot of questions about whether we've hit bottom or normalized levels. And where would you say we are in terms of that normalization process?
Sure. Well, good morning, everyone. And thanks, Brian, for having us. You know, it's certainly unique times in the industry. I think we've seen drastic, volatile swings in demand coming out of 2023. Demand was trending down throughout the entire year. And then, of course, coming into the year of 2024, we saw further declines. It's at a point now where I would use the word stable. So we're not seeing continued deceleration or declines in the number of open orders that we have and that we can fill. But I don't call it normal. And I don't call it normal because there's still some disconnect there in the marketplace where the needs that we see in open orders are below where we were even prior to the pandemic. Yet we all know that ourselves and many of our competitors have more clinicians on assignment.
And it doesn't sync up when you see the fact that we are not seeing cancellations rise, we're not seeing renewal rates fall. So there's some still structural disconnect there where the number of orders seems to have some room to rebound. When that happens is anyone's guess. We're not necessarily holding out for that as a company. I think that it really comes down for Cross Country from a demand perspective about the quality of the orders. And so we've won some new business in the last couple of quarters, that is still ramping. And so even if total orders don't change, the quality of the order is as important as the total number of orders. But the market would seem to have some runway to start to rebound as we move to the back half.
Bill, maybe how do you square the fact that the hospitals today are, you know, trending at what seems to be record level utilization rates or volume trends, and they're still cutting, right? I mean, we're still hearing instances of reductions in temp utilization. So how do you put those two together? How's that happening?
Yeah, well, I think clients in general still want to get their contingent labor utilization down. And that makes sense. It is an expensive form of labor for them. But at the end of the day, you know, I don't think anybody's quite solved the problem. I know coming out of the pandemic, health systems certainly staffed up their core staff a lot to attract the nurses that had left perm positions to go into the travel industry and then now are kind of swinging back into the perm side of things. You couple that with healthcare systems that are continuing to try to find ways to reduce reliance on contingent labor. And that can be from standing looking at virtual nursing as an opportunity that we've heard a lot of clients start talking about is how do you scale clinicians over a larger base of patients.
And then you couple that with some health systems, and this is only part of the solution as to what they've done, is some health systems have looked to stand up their own internal travel pools. And with that, they've always had internal resource pools, which was meant to fill like, urgent clinical needs on the per diem side, like a single shift. But now increasingly clients have coming out of the pandemic have talked about standing up internal travel pools. Even that won't solve all their problems. And some clients have done it, and some clients have talked about it. And just now that they're not on the burning platform, we don't see that as a solution that many are embracing right now. But, those that have done it, they have a degree of success.
But whether it's going to be long-term success remains to be seen because when you stand up one of your own travel pools, you can convert nurses who are there as travelers at that moment. But maintaining a pipeline of clinicians that want to come to you, if you don't have that national reach, can be a challenge. So there really isn't a solution yet as to what the health systems are going to do long-term. It comes down to, quite candidly, a bit of it is just brute force of do without, right? So they're asking their clinicians to work more, cover more patients. And so they haven't really solved the structural issues on the supply side.
Bill, maybe one of the things that we've you and I have talked about in the past is just how we're seeing more vendor-neutral agreements, how MSPs are either being canceled or they're converted to vendor-neutral. Number one, what are you thinking has been the driver of that? And then number two, how do you adjust your business and win business in that environment?
Sure. Well, there's no exact numbers as to what percentage of the industry goes through a vendor-neutral or managed service program. And so just to make sure everybody understands, a managed service program is where you have exclusivity and you have service level agreements, to meet the needs of your clients. And then the vendor-neutral side is, you basically are bringing them the technology and a pool of qualified vendors. You generally don't have the SLA components to it. So there's really no delineation in the marketplace. But what I will tell you is that coming out of 2023 or coming into 2023, we saw a lot of clients pick their heads up, right? And our business model prior to that had been predominantly MSP-based, why we didn't have a vendor management system.
In both of these businesses, MSPs or vendor-neutrals, the core of the technology at play is a tool called a VMS or a vendor management system. We didn't have our own. So we launched ours in early 2023. But right coming out of the pandemic, so we saw more attrition initially because clients were picking their heads up saying, "Gosh, I got to do something different. Let me look at the vendor-neutral model and going that route." Unfortunately, at that time, we didn't have the technology in play. It was just being launched. So, we had a little bit higher attrition in 2023.
But what's changed now, and I think the lines are starting to blur between vendor management and MSPs, because what we're hearing from clients is, yes, we want the technology, and yes, we want you to bring a qualified pool of vendors to the table, but we also want the service level agreement. So it's becoming a blended world where you're seeing increasingly clients want the best of both worlds. But nevertheless, for us, you know, the runway is that we were never able to really participate in the vendor-neutral opportunities. Our option was really to convince clients that MSP was a better model. But now with the advent of our technology, with Intellify, we're able to actually participate in that part of the market. So, from our lens, you know, it's a huge opportunity for us to grow our spend under management.
We've had pretty good success thus far. We've won a couple of pretty sizable clients in the last couple of quarters. The pipeline's pretty robust.
Bill, how do you compete in that market? Like, what makes you the winner for a placement?
For a candidate or for the client?
I guess for both, right?
Well, I guess it'd be. It's probably not that dissimilar. I mean, let's talk about the candidate first. So if you think about candidates, I think, you know, Cross Country certainly has its proprietary ways in which we go to market to attract and bring candidates aboard. And you've always got to have a competitive wage. And it goes the same for the client side. You have to be competitive on the bill rate side, or you certainly won't win the day there. But it goes beyond that. And if all you do is compete on wages with a candidate, you're not going to be able to retain that candidate. You might be able to lure them in for an assignment or two, but eventually they'll leave you.
So it really comes down to the experience that the candidate has across the entire journey of their assignments with Cross Country. And so a lot of that comes back to the brand, the reputation, and the experience that they have with the recruiters. We've got tenured recruiters with, you know, deep relationships with the candidates. And some clinicians have worked nearly their entire career for Cross Country. So it's impressive what you can experience when you have that kind of relationship. But I think as far as the experience goes, it also comes down to speed. You have to be able to make it easy for the clinician to find the job they want, apply for the job, submit their time, find the renewals.
So you have to have the breadth of opportunities as well because a clinician doesn't just come to you for one assignment. They're looking for a career sometimes. And so you want to be able to be able to offer them the opportunities nationwide. If I contrast that to the client side, it's very similar from the client side. When we are selected by our clients, it comes down to, of course, the bill rates. It comes down to your brand reputation, the fact that Cross Country operates with the highest utmost integrity and ethics when it comes to handling our clients and being transparent with them and sharing with them information about the relationship, including, you know, the level of our profitability and, you know, what we're seeing from that and how we can share back in that with them.
but it also comes down to their experience. And so when we look at our clients and we are, we onboard or win a new client, a lot of times it also comes because of the technology that we're bringing to bear. And again, I mentioned Intellify earlier, but there's two pieces to our tech stack right now. The candidate-facing tool is called Experience. That's where candidates can go and find their opportunities and submit themselves and do their credentialing and submit their time. And, it's a great portal and a great lens for them. On the client side, it's the vendor management system known as Intellify. So there's a lot of the same elements in both whether you're talking clients or candidates. But it starts with being competitive on the bill and the pay side.
Bill, so just maybe drilling down to the dynamics of a vendor-neutral agreement as the world shifts more through that, right? Is it a better margin book of business? And how does the, you know, revenue per contract, you know, what does that look like?
Yeah, it's a very good question. I don't think there's much of a margin disparity when it's our client between whether it's vendor-neutral or MSPs. I think you'll see the market forces at work there. In general, there's no difference because if it's our vendor-neutral, we don't pay somebody a fee. If I submit my candidate to somebody else's vendor-neutral program, I have to pay an access fee or a SaaS fee or a tech fee or whatever you want to call it to participate in the program. But when it's our client, the margins tend to be very similar across the two. What is different is really the capture rate. And so what I mean by that is, if a client has $100 million and spent under management, in an MSP environment, generally speaking, we will fill ourselves 65%-75% of that.
And so that's what I call capture. The other 25%-35% is handed off to sub-vendors to fill. And in a vendor-neutral environment, you know, the capture tends to be a bit lower. And, you know, I think you're looking at somewhere between 10%-30% kind of a capture on a vendor management offering. But in both cases, the sub-vendor portion of it attracts a fee. So when you look at the two of an MSP versus a vendor-neutral offering, the vendor-neutral side of it tends to have a higher profit margin because more of the business is handed off to sub-vendors. And the business that's handed off to sub-vendors has a fee attached to it and it ranges. There's no specific set fee. It varies by client, by geography.
But using a range of 3%-6% is kind of what you see as norm in the market. So just for round numbers saying it's a 5% fee, if it's a $100 million account and 70% of it, $70 million is handed off to sub-vendors, you're getting a 5% fee on that and very little cost structure in between. So vendors, management, vendor-neutral offerings can tend to have a higher margin, but perhaps a little bit less revenue. So when you do an MSP, you've got a lot more staffing revenue at play, and you'll get your typical staffing margins off of it, but there's less volume being driven by the sub-vendor portion of it. So that's one thing structurally on the profit side of it.
The vendor-neutral offerings can also tend to be larger, whereas within an MSP, you might have a single facility within a network or a system that you have the managed service program for that, whereas on the vendor-neutral side, you might be talking across a whole swath of the system or a large region of the system. So the spend under management on the programs can tend to be a little bit larger. And that's kind of borne itself out in the most recent wins we've had.
No, that's awesome. Bill, as we shift gears towards bill rates, it feels like it's stable or is it are you still seeing downward pressure? I mean, just curious what you're seeing there.
Yeah, the bill rates, you know, when I mentioned demand, I said we're stable but not normal on the bill rates. I'd say we're stable and what seems to be more of a normalized level. And I say that because when you look at bill rates, you can't just look at what we report because that's the average bill rate. There's a lot of mixed elements that go into that. There's carryover of assignments that had different bill rates that still have blended into your portfolio.
But when I look at open order rates, and I'll even take it down a level, and I'll say if I look at open order rates at two of the most prominent specialties of med-surg and ICU, the open order rates declined all through 2022 and into the start of 2023 and kind of bottomed out for those two modalities in around late second quarter, I'll call it May to June, and have run eerily steady for the last 8+, 9+ months. So we've seen a lot of stability in the bill rates. I say that. So the stability is great. Why do I say it's normal? Because we aren't increasingly hearing clients say, "Hey, I need to drop the bill rate on my active assignments," or you just, you know, we're being charged too much.
In fact, we hear the reverse, which is, "Okay, we've got the bill rates under control. We still need to work on the utilization side of things." So from our lens, the bill rates aren't continuing to decline. If anything, underneath the hood, they're they're up a little bit, but not enough to really, wildly be something I would say is a tailwind yet. But bill rates on those open orders are trending better. The dynamic for Cross Country, when it comes to bill rates, you'll hear us talk about a sequential decline. Well, how can that be if the bill rates are steady? Well, because we're still it comes back to the earlier point. You have 13-week assignments. Some of those renew one or two times. And so you're still blending down your portfolio. That's part of the story is that we're seeing the portfolio rates blend down.
And then, as important, because the universe of orders is down, right? You have a smaller pool to fish in. So we're locking new orders closer to the market rate for all open orders. Historically, your lock rate exceeds your open order rate. Natural, right? Because you've got opportunities with higher bill rates, you're going to go after those, fill those first. Well, as the population has shrunk, the pool of orders has shrunk, you're needing to fill orders closer to the average. So you've got that dynamic, and that's what's kind of blending in quarter-over-quarter for Cross Country. But it's moderated now to the point of being low single-digit sequential impact because we're nearing what I would say is the bottom on the bill rate trend.
Bill, just to that point, it feels like or it looks like bill rate inflation versus pre-COVID levels is lower than what nurses are making on a permanent basis. So is that impacting your ability to recruit or just the pool of nurses that are looking to travel?
Well, I still think there's a disparity on the travel side for nurses. They still tend to fare better than being on the core staff. If you strip out, you know, signing bonuses and the like for nurses, I think that the traveler generally does a bit better. And that has to do with the subsidy they receive for their meals, incidentals, and lodging, which is a sizable amount of money for them. So, you know, to be a traveler, you still have a premium at play there. And I think, what we've seen over the last two years, over the maybe I'll say the last nine months, bill rates have come down and pay rates have come down faster than bill rates for travelers, which is a good sign. And we knew that that needed to happen.
What has not happened is that the meals, incidentals, and lodging subsidy has not come down commensurate with the pay rates or the bill rates. As you'd expect, in a high inflationary period, it costs a bit more to send a nurse to where they need to be. So the housing is a bit more expensive. The meals and incidentals is more expensive. So what we were originally anticipating was that bill pay housing spreads. I'll bring in housing into that term. But what we were envisioning was that bill pay spreads would rebound. Cross Country throughout the pandemic did not raise our margins. We were not looking to have those level of profit on the backs of our clients. And in fact, we actually saw margins decline. And the expectation was we would see that rebound. But that's happening, but not as fast as we'd like.
Until, like, in the first quarter, we called out a 30 basis point improvement in the bill pay housing spread. That was, you know, sort of the bill-pay rates just declined a little bit fast enough to see some margin appreciation there. But it's not something we're envisioning as a long-term trend right now. Until we get to more of a normalized environment behind demand and barring any kind of unusual fluctuations in needs by health systems, whether that's a labor disruption or, you know, heaven forbid, another spike in the pandemic, you know, we won't have the bill rate leverage that we would anticipate. I think bill rates, as I said, are stable. If you apply to CAGR on that, they're probably 4%-5% annually pre-pandemic to today, netting out to something in the 20%-25% increase over that time frame.
So bill rates are stable. We're not having trouble filling. I would say it's not as though nurses haven't embraced the fact that pay rates have had to come down. So right now in today's environment with where the orders are, there is not an inability for us to fill the needs that we have in front of us.
No, that makes sense. Maybe I'll shift topics a little bit here. You know, I remember when you did your investor day, there was a lot of excitement over locums and education. So let's touch on those markets. What are you seeing in locums, for example?
Yeah, look, two very attractive markets for us. Locums, we were very fortunate to have done and completed two acquisitions right at the end of 2022. That was Mint and Lotus, to bolster our offerings. And so we've had a very good run rate, trajectory on the locum space. 2023, I would say I would characterize the demand as being white hot. And though it may have cooled a bit, it's still a very strong market backdrop for locums and advanced practitioners. So a space we continue to invest in. I think it's an acquisition opportunity for us if we can find the right properties at the right price point. That said, though, you know, we are looking at organic growth within that space.
If you look across our modalities, you know, we offer all modalities, but we're heavily concentrated in primary care, hospitalists, emergency medicine, anesthesia, and the advanced practitioners like physician assistants, nurse practitioners, and CRNAs. And so the opportunity is to grow into higher margin specialties. We know that there's a fair amount of business to be done there, and those generally carry a bit higher average daily revenue and higher margins. So that's where we're looking to grow organically if we can. If not, we'll certainly be looking for acquisition targets that will bring us that. On the education front, if I contrast it, the backdrop of the education market is just very favorable right now. You know, there's a shortage of professionals in the school systems for teaching, special education, speech therapy, behavioral therapists. So the market conditions are very favorable for that.
The business we got into education, we've always done a small amount of education, but we got into education, and I think it was 2015, we bought a business out in California called Mediscan. Mediscan had a small part of their business called DirectEd. Sorry to kind of go into the weeds here, but that line of business for us was at the time sub-$15 million. So since we really got into that in a more focused way, we've grown that to nearly $100 million in revenue. Education for us remains a top priority of focus area, both organically and inorganically, if we can again find the right properties at the right price. But even within, you know, the organic opportunities, we've got we're only in slightly more than 20 states right now.
We do business with a handful of the top charter schools in the country. So there's certainly lots of greenfield opportunity for us to go and expand into both geographically and across the client base. But, you know, one of the very, very robust markets to be in right now. The margins in both of these, specific to education tends to be quite a bit higher than what we see in the rest of Nurse and Allied. Margins there tend to be in the high 20%-low 30% range. So, you know, very good opportunity for us and certainly an area of focus.
Bill, maybe just on the locums, how hard is it to attract or hire doctors at this point?
Yeah, I mean, it's always been a slower market from, you know, from bringing a doctor into putting them on the floor. It's always a little bit, there's fewer of them. So it depends on the modalities, obviously. It's so that's why I think we've historically focused on the primary care, hospitalist, emergency medicine kind of doctor positions. There's more of those out there. So they're harder to find. And then you've got a bit longer lead time to bring them to the client. So first is the credentialing part of it, and then they have to get privileged at the hospital. So you're at the client's mercy to get the doctor's privilege. So it isn't that there aren't a lot of them out there.
I mean, sorry, it's part of that's the story, but part of it is also just the time frame it takes to bring them to the floor. And, you know, there's several large competitors out there, most notably CompHealth Group, has the lion's share of the market right now in that space. But, I think increasingly we're seeing larger and larger locums companies. The space is getting a bit more crowded now.
So you touched on opportunities for acquisitions potentially. But as we think about capital deployment, you've got an unlevered balance sheet. You're generating healthy amounts of cash. How should we be thinking about your capital deployment strategy and cap structure goals?
Yeah, well, look, I think right now I'm very happy to have no debt. At the end of the first quarter, we were zero debt and we had a, you know, $6 million in cash on the balance sheet. The opportunity is we're still operating at a DSO level at the end of the first quarter that was above our norm. I would expect that to normalize as we move through the rest of 2024. And just getting, you know, every day of DSO for us on a net basis is 4 million-4.5 million of revenue. So if I can bring DSO down, you know, let's just say 10 days, that's, you know, $40million-$45 million of positive cash flow above and beyond our normal working capital. Having a clean balance sheet is great. It gives us a lot of firepower.
We're obviously, hopefully, the first priority for that would absolutely be on the M&A front. But it's predicated on what targets are available and what the price point is because there's limits to what we're willing to do. We look at a lot of deals. We have a business development team that is out farming and mining for these deals all the time. We get them either brought to us or we'll find them on our own. But a lot of times, you know, you don't bring a deal over the finish line for one reason or another. We generally can get to the final rounds in bidding on transactions. So it isn't a matter of whether we can afford them. It's a matter of whether they're the right fit for Cross Country. So that'd be the primary use.
Beyond that, I mean, the share repurchases remains a very attractive opportunity for us, especially at these valuations where we are right now. We buy stock back routinely under we have a $100 million authorization plan. I think it was $70 million remaining at the end of 2023. We have we have a 10b5-1, so it triggers in the blackouts, and that'll be that's the set it or forget it set it and forget it plan. And then we are also trying to be opportunistic under a 10b-18. Barring an opportunity to find more share repurchases, sorry, to find more acquisition opportunities, share repurchases will continue to be a very attractive use of cash right now. So I think it's a topic that comes up every single quarter with our board. We're routinely talking with them about, you know, are we doing enough? Can we be doing more?
Should we look at accelerated share repurchases? I know AMN did one last year. That's been on the table, but we've been successful at buying back a lot of stock in a very short period of time over the last 18 months. I know we've bought back something close to, I think, $100 million or more of stock. So we've done a good job at rebuying shares. But I have to say, like today, the price we're trading, the multiple seems very attractive for us. So we're going to be opportunistic where we can.
So maybe on that point, any closing remarks that you want to share with the audience as they think about the stabilization and growth reacceleration story for Cross Country?
Yeah, look, I think the market's been challenging. In any market, good or bad, there'll be winners and losers. I think Cross Country is well situated. We have the balance sheet. We have the firepower. We have the technology. We've been winning more than we've been losing in the last several quarters, which is a good sign for us. You know, some of the metrics we don't talk about externally, like net contract value, we look to see wins, losses, and contract expansions and how we're faring on that front. And I've seen very positive trends for us. We've got a deep pipeline of client opportunities that we're going after. The sale cycle has normalized what was, seemed to be burning platforms. Clients were looking to make fast decisions has slowed a bit, which is fine.
It's more of a return to the normal, but the pipeline is very, very deep there. And I think our opportunities to excel and to continue to drive margin appreciation are significant. We've been very proactive at taking out cost all along the way as the market has normalized. And we're not finished. I mean, the two things that I would say right now, besides carrying excess capacity and investing in technology that's still being a weight on our SG&A, the opportunities to do even better. We're looking at major automation projects and offshoring. So we've got an operation in India that we've been leveraging. We've more than doubled the headcount there in the last six or nine months. And, you know, there's millions of dollars of savings to be had there.
Our long-term goal remains to bring ourselves back to that high single-digit margin, EBITDA margins. It might take a little bit longer in today's market, but that's our goal and trajectory.
Awesome. Bill, Josh, thank you so much. Thank you to everyone.
Thank you, everybody.