Cross Country Healthcare Inc (CCRN) 2016 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Cross Country Healthcare's conference call for the second quarter of 2016. This call is being simultaneously webcast live. A replay of this call will also be available until August 18, 2016, and can be accessed either on the Company's website or by dialing 800-395-7443 for domestic calls, and 203-369-3271 for international calls, and by entering the passcode 2016.

I will now turn the call over to Bill Burns, Class Country Healthcare's Chief Financial Officer. Please go ahead, sir.

Thank you and good morning, everyone. With me today is our CEO, Bill Grubbs. This call will include a discussion of second-quarter results for 2016 as disclosed in our press release and will also include a discussion of our financial outlook for the third quarter and full-year 2016. After our prepared remarks, you will have an opportunity to ask questions. Our press release is available on our website at www.crosscountryhealthcare.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 in our business, we will refer to pro forma information on this call, giving effect to acquisitions and divestitures as though the transactions had occurred at the start of the periods impacted. As a reminder, we divested our education and seminar business during the third quarter of 2015 and completed the acquisition of Mediscan in October 2015.

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

Thank you, Bill. Thank you, everyone, for joining us this morning.

Let me start with a quick overview of the numbers. Although we had slightly over lower revenue growth than anticipated, we exceeded our guidance on gross profit margin, adjusted EBITDA margin, and adjusted EPS. The software revenue was mostly driven by a bigger decline in our physician staffing segment and slightly slower growth in nurse and allied than we had anticipated. But, generally, we had a very good quarter, and I am happy with the results. I will come back to the revenue topic in a little bit because I believe we will be able to improve our growth rates fairly soon. With our investments in new recruiters and candidate attraction, we should start to see our nurse and allied revenue grow faster starting in the fourth quarter.

But first, about a month ago, I passed my three year anniversary as CEO of Cross Country Healthcare. Each year at this point I give a kind of State of the Union on the business, and I would like to do that again this year.

Over the past three years, we have made significant progress in turning this Company around. It has not been a straight line from where we started, which was a Company that had revenue of $440 million, was not growing, and was late making less than 1% adjusted EBITDA, to where we are today with an annual run rate of $800 million and 5.5% adjusted EBITDA. We are ahead of the original plan we had developed for our Board of Directors when I arrived.

Last quarter, I made a statement that I felt as good about where we were as a Company than at any time since I've been here. I want to reiterate that again by staying saying that I feel even more positive about our future than even three months ago. The reason I feel this way is because we are really starting to see our hard work over the last past three years come to fruition. When doing a turnaround, not all of the improvement efforts come online at the same time. But, as we continue to improve the different aspects of our business, it is extremely satisfying to see the results of those efforts.

Turning around an underperforming company is complicated and takes time. As I mentioned, we have done a lot in the past three years, and I would like to highlight some of those here.

In addition to me and Bill Burns here with me today, we have an almost completely new management team, both at the executive level and senior management level. We have improved internal processes. We have acquired and integrated three strategic companies, and we have achieved over $20 million of acquisition synergies and cost savings. Most of those were done between 2013 and maybe mid-2015. By carrying on in 2015 and 2016, we have continued to make improvements. For example, we are building a centralized shared service center. We have created a more accountable and customer-focused sales organization, a more robust account management structure. We have developed a culture where all of our businesses are working together and cross-selling. We have restructured our debt, and we will talk about that today. We streamlined our financial reporting and strengthened our internal controls, created better operating metrics and business task boards, developed innovative value-added workforce solutions, improved our go-to-market strategy and upgraded several technology systems, including new front office systems for three of our businesses, and other changes I am sure I have forgotten even to mention.

But even with all these accomplishments and a significantly improved financial position, we are only about 60% of the way to where we want to be because these things don't happen all at once. They phase in over time as we execute our plans. Let me discuss a couple of examples of additional recent areas of improvement to demonstrate that point, and then I will outline what else we intend to do going forward.

So one example is, we were behind the market on pricing at the beginning of 2015. As our improvement efforts took hold, we started to see better pricing in Q3 and Q4 last year and are seeing it really come to fruition in 2016 and especially in Q2 with very strong pricing overall and specifically in travel nursing, our largest business.

Our legacy nurse and allied business -- and that means it doesn't include Mediscan -- our legacy nurse and allied business, pricing was up 7.2% year over year in Q2 with travel nursing up 10.8% year over year. As a result, the Company's gross profit margin improved to 27.5%, up over 200 basis points from when I first started. Improving our gross profit margin is part of our overall strategy to get to our 10% adjusted EBITDA goal, and we are ahead of the original internal plan we laid out a couple of years ago. This is a perfect example of how the business benefits from our turnaround efforts as they get implemented.

Another example of improvements that are starting to come online is our MSP sales. We won eight programs in 2014 and eight programs in 2015. We had set a goal to get to 16 this year with the changes of improvements that started two years ago. Through the end of June, we have won 11 new programs with potential revenue above our average for existing programs. Again, it is great to see this hard work starting to pay off.

Now, these are just two examples of improvements that have phased in over the past few months. We expect to see further improvements as other changes and initiatives come online. The two initiatives that will get us to 80% or 90% of our plan are increasing our nurse and allied revenue growth through volume as opposed to just pricing -- and I will talk about that in a minute -- and improving physician staffing.

So, as I mentioned, revenue for both Q1 and Q2 this year has been somewhat softer than we anticipated. Although some of that is from our physician staffing business that has had disruptions due to changes we are making, we also have a volume shortfall in our nurse and allied segment. Revenue is growing, but most of our revenue growth is coming from price, not volume. So one of the biggest initiatives we have currently is around driving nurse and allied volumes, which we expect to show results starting in Q4 of this year and should give us momentum going into 2017.

So let me explain. Nurse and allied revenue without Mediscan grew at about 5% year over year in the second quarter. But, as I mentioned previously, we had a 7.2% price increase in this business. You can do the math. Volume has actually declined, and all of our growth has come from price. Since we have sufficient demand and new MSP programs ramping up, growing volume is not about getting more orders. It is about increasing the number of candidates we attract. But there is no benefit from driving more candidates if we don't have the staff to process them. It requires both an increase in recruiters and an increase in applications in order for this to work.

As we have stated in previous quarters, we have been adding recruiters now for over a year. And although we will continue to add more recruiters going forward, we feel we have sufficient resources to handle the required increase in candidate applications to improve our volumes in nurse and allied. Even a small volume increase on top of the current 7.2% nurse and allied pricing improvement should yield over 10% revenue growth. And, within nurse and allied, any modest volume increase on top of the current 10.8% price improvement for travel nursing could get growth in travel nursing close to 15%. Given the size of this segment, this has the potential to have a significant positive impact on our business.

So what are we doing? As I mentioned last quarter, we hired external consultants to help us improve our digital and social media presence to drive more applications. We implemented several new approaches in Q2, and we have seen significant improvement in candidate applications in June and even more in July. We expect that will continue to improve in the coming months as these initiatives gain even more momentum. We are very excited to see all of this come together. This is just another part of the turnaround that is coming online.

But there are some aspects of this that need explaining and will affect our results for a quarter or two. First of all, the time lag from when you first start increasing your applications to when they turn into revenue generally takes a few months. Therefore, this new initiative is really about driving revenue and volume growth in Q4 and going into 2017. That means we will see similar revenue growth for Cross Country Healthcare in Q3 that we saw in Q1 and Q2. That is behind where we originally expected it to be when we set full-year guidance, and that also means that we will have increased cost in Q3 to drive these new candidates without seeing any results within that quarter.

I mentioned earlier that the path to our goals was not a straight line. Well, this is one of those times where we need to take action for the medium- to long-term benefit of the Company that puts us off the straight path for the remainder of 2016. These are the right actions to take and the right investments to make, but it means that we will end up with less revenue this year than we originally expected.

Overall, though, we should be well ahead of our goal for gross profit margin and on track for adjusted EBITDA margin and adjusted EPS. This turnaround initiative is all about revenue and are needed to get at or above the market trends. But even with slightly lower -- even with slightly slower growth, we expect to grow from $767 million in 2015 to over $800 million in 2016, although most likely not into the range we had set for the year of $820 million to $840 million. Bill Burns will add more detail of the guidance later on the call.

Let's move on to the market conditions. Demand for our services remains very robust, and we remain near all-time highs for nurse and allied orders during the quarter. Supply remains tight, but as I mentioned, that is driving up pricing, and we have the new initiatives to attract more candidates and increase volume along with price. The economy seems stable, and employment growth within healthcare continues to be strong. The market is certainly in our favor, and we will continue to take advantage of those trends, especially as our improvement initiatives take hold.

Our nurse and allied segment, including Mediscan, continues to drive our overall revenue growth. This segment is now 86% of Cross Country Healthcare's revenue.

In my investment meetings, I get asked a lot about our branch operations, which is part of our nurse and allied segment. So let me talk about them here. We are very pleased with our branch operations that consists of local allied, per diem nursing, and local contract nursing. This business grew 8% year over year with both volume and price increases. We believe our branch operations, which is 73 locations, continues to be a differentiator for our business, allows us to support the growth in ambulatory and outpatient services, and gives us access to more healthcare professionals nationally.

Physician staffing remains the biggest drag on our revenue. The new president that was hired in April is doing a great job and is making the needed changes. These changes have produced some disruption, which I believe has contributed to an even steeper decline in revenue. But these changes are needed to get this business back on track, and I can see that they are already making a difference, although we don't expect to see that reflected in the numbers until 2017.

Other human capital services, which is now only our search business, looks a bit strange because the education seminars business we sold in August last year is still in the numbers for the previous period. But we are seeing progress in our search business, which had a 3% sequential growth from Q1, although it had declining revenue year over year. We expect it to be back to year-over-year growth in the second half.

Mediscan, which is in our nurse and allied reporting segment but worth mentioning separately, continues to perform well growing by 19% year over year. We expect this business will continue to grow at these levels in Q3 and Q4. We are looking at ways to expand the public and charter school services to other parts of the countries. That will most likely be a 2017 initiative.

Moving to our value-added services, we continue to see more and more success in our workforce solutions. For recruitment process outsourcing, although still small while we ramp up our infrastructure, we added two new recruitment process outsourcing projects. With added interest for our optimal workforce solutions service, we have added two new senior executives to this group and have won two new programs and an expansion of an existing program this year. And, as I already mentioned, we have won 11 new MSPs through the end of June and anticipate we will exceed our target of 16 new programs this year.

The pipeline remains strong for all of our workforce solutions, and we continue to make investments in new sales and operations staff.

As Bill Burns will explain later, we refinanced our debt in June. In addition to lower interest costs, we have more availability, and we continue to look at strategic acquisitions. Our leverage ratio is fairly low, and we believe there are some great opportunities for consolidation in the market.

So to wrap up, we are on a very good track to continue improving profitability and shareholder value, and I can't say it enough. I feel really good about where we are as a Company right now. I see all of the hard work over the past three years starting to pay off. Not all at once, but in a kind of phased approach and, as I mentioned, we will continue to benefit from these improvements as they come to fruition. And no different than the pricing initiatives that have paid off and the MSP sales initiatives that have paid off, we expect our new volume initiative will improve our revenue growth going forward. We are on the right track and continue to work toward our goal of $1 billion of revenue and $100 million of adjusted EBITDA in 2020.

Let me turn the call over to Bill Burns to review the quarter in more detail.

Thanks, Bill, and hello again, everyone. As Bill mentioned, our second quarter continued to benefit from the strong pricing we had seen at the start of the year resulting in gross margin, adjusted EBITDA and adjusted EPS being at or above the upper end of our guidance range. Total revenue, however, was below our expectations as physician staffing continued to underperform, and our nurse and allied business did not get the volume growth we had expected. However, we continue to be encouraged by the level of demand in our largest segment, as well as positive indications that our initiatives to attract more healthcare professionals are gaining traction.

Turning to the financial results, total revenue was $199.4 million, up 4% from the prior year and up 1% sequentially. The year-over-year increase was driven entirely by growth in nurse and allied staffing, as well as the impact from the Mediscan acquisition. Mediscan has continued to perform well with revenue growing by 19% over the prior year. Both our physician staffing and search businesses experienced a year-over-year decline of roughly 20%.

Gross profit margin for the quarter was 27.5%, up 240 basis points from the prior year and 150 basis points sequentially.

Margins expanded in every segment, driven primarily by pricing and growth in workforce solutions.

Moving down the income statement, SG&A for the quarter was $44.7 million or 22% of revenue, representing a year-over-year increase of 9% and a sequential increase of 4%. Throughout the quarter, we continue to make investments in our business, adding additional recruiters, attracting more candidates, and continuing to build on our workforce solutions. Sequentially, we significantly increased our spend on candidate attraction to grow our pool of qualified candidates. The initiatives gained traction throughout the quarter and should be contributing to revenue growth later this year.

Additionally, we continued to make investments in our IT infrastructure, having completed the first phase of the project to replace a legacy system in our nurse and allied business. We expect now to execute a perpetual license arrangement in the second half of 2016, and the related license fees and future development costs will qualify for capitalization in accordance with GAAP.

Adjusted EBITDA was $11.1 million, representing a 35% increase over the prior year and 30% over the prior quarter. Our adjusted EBITDA margin was 5.5%, slightly above the high-end of our guidance range for the quarter. Below adjusted EBITDA, we recorded a $24.3 million impairment charge on intangible assets related to our physician staffing segment. The physician staffing business underperformed our projections throughout the first half of the year and, as a result, triggered the impairment analysis. While we can't give assurances that further impairments won't be required if the business continues these trends, we do remain optimistic with the new leadership and the strategies being implemented. We recorded a $3.6 million non-cash loss on the change in the fair value of the embedded derivative from our convertible notes. The loss was a function of the increase in our share price over the period and was partly offset by the improvements in our credit risk, due in part to the refinancing of our debt structure.

As a reminder, every dollar movement in our share price results in approximately a $3 million change to the value of the derivative. The convertible notes themselves become callable in July of 2017.

As I just mentioned, during the second quarter, we refinanced the majority of our debt structure to reduce our overall borrowing costs. As a result, we incurred a $1.6 million loss on the extinguishment of the old debt comprised of unamortized debt issuance costs and early prepayment penalties.

As reported in the tables to our press release, these amounts are excluded from adjusted EBITDA and adjusted EPS.

Interest expense was $1.6 million, down approximately $200,000 from the prior year and flat sequentially. It is worth noting that we expect to see interest expense decline approximately $200,000 per quarter on the lower rates under our new debt structure. Depreciation and amortization expense was approximately $2.5 million, which increased $500,000 year over year, entirely due to the impact of the Mediscan acquisition in late 2015.

Income tax expense for the quarter was a benefit of $6.6 million, which included a discrete benefit of $7 million related to the impairment charges. Net loss attributable to common shareholders was $17.2 million or $0.54 per diluted share as compared to net income in the prior year period of $2.6 million or $0.08 per share.

Lastly, adjusted EPS was $0.16, also above the high-end of our guidance range compared with $0.10 in the prior year and $0.09 in the prior quarter. Next, let me review the results for our three business segments. Revenue for our nurse and allied segment was $172 million for the quarter, up 13% year over year. Revenue was up 6% on our pro forma basis with the majority of the growth coming from improved pricing. Bill rates were up 7.2% for the quarter, led by our travel nursing business being up 10.8%.

On a sequential basis, segment revenue was up 2% entirely due to pricing. We averaged 6884 field FTEs for the quarter, up 4% from the prior year and up 1% sequentially. Revenue per FTE per day was $275, up 8% year over year and up 1% sequentially. Segment contribution income for the quarter was $17.6 million, representing a 10.2% contribution margin, up 180 basis points year over year and 30 basis points sequentially.

Turning next to our physician staffing segment. Revenue was $23.9 million, down 20% from the prior year and 2% sequentially. Both the year-over-year and sequential declines were entirely due to a lower volume of days filled with a modest price increase across most specialties. Segment contribution income for the quarter was $2.1 million, representing an 8.6% contribution margin, up 110 basis points year over year and 220 basis points sequentially.

Finally, revenue for the other human capital management services segment, which now only includes our search business, was $3.5 million, representing a decline of 66% over the prior year, primarily due to the divestiture of our education seminars business in the third quarter of 2015.

On a pro forma basis, search revenue declined 20% year over year and increased 3% sequentially. The year-over-year decrease was primarily attributable to lower revenue from retained executive searches.

Based on the investments we are making and the demand we see in the market, we continue to believe this business will return to year-over-year growth in the second half of the year. Segment contribution income was approximately $100,000 as compared with income of $700,000 in the prior year and a loss of $100,000 in the prior quarter.

Turning to the balance sheet, we ended the quarter with $10.2 million of cash and $65 million of debt, including a $40 million senior secured term loan and $25 million in convertible notes. As I've mentioned, we refinanced our debt structure and replaced both our $85 million asset base line of credit and our $30 million subordinated term loan.

In addition to the new $40 million term loan, we also have a $100 million revolving credit facility, which had no amounts drawn as of June 30, 2016.

During the quarter, we generated $10.3 million in cash from operations, largely on continued improvements in collections. We continue to generate positive cash flow from operations through the month of July, now with more than $20 million in available cash as of the end of the month, and we expect that trend to continue throughout the third quarter.

Our days sales outstanding, net of subcontractor receivables, was 54 days, representing a three-day sequential improvement. Capital expenditures were approximately $1.6 million, including $1.2 million incurred for the buildout of our corporate offices, which will be reimbursed by the landlord. As we discussed last quarter, our capital expenditures will be inflated over the next several quarters as tenant improvement allowance reimbursements will appear in cash flows from operations.

Additionally, during the quarter, we paid $2.1 million in deferred purchase price from the MSN acquisition in 2014. This brings me to our guidance. For the third quarter of 2016, we expect consolidated revenue to be in the $200 million to $205 million range, which assumes a year-over-year growth rate of 2% to 5% on a reported basis. While we don't provide guidance for -- specific guidance for segments, we expect our legacy nurse and allied business to grow in the mid single-digit range and our Mediscan business to grow in the double-digit range. Consolidated growth continues to be impacted by the underperformance in our physician staffing business, which is expected to decline double digits for the third quarter.

Turning to margins, consolidated gross profit margin is expected to be between 26.7% and 27.2%, and adjusted EBITDA margin is expected to be between 5% and 5.5%. I would like to spend a moment on the adjusted EBITDA margin. While we were slightly above the upper end of the range for the second quarter, we anticipate making incremental investments in the third quarter to drive candidate attraction and to continue to build our workforce solutions capabilities. While these investments will not have a significant impact on third-quarter revenue, we believe they are necessary to drive volume growth in nurse and allied, as well as continue to expand our solutions offerings with client.

From an EPS perspective, we expect adjusted EPS to be between $0.13 and $0.15, assuming a diluted share count of 32.8 million shares.

With respect to the full year, we now believe that revenue will be lower than our original anticipated range. The lower revenue is driven in large part by continued declines in our physician staffing business and a lag in the growth of our largest segment, nurse and allied. As we mentioned, the growth to date has primarily been from pricing, and we have made investments to drive a level of candidate attraction, which is growing rapidly, but not expected to have a significant impact until the fourth quarter.

As a result, our revenue for the full year is expected to be between $800 million and $815 million. For adjusted EBITDA, we expect the full-year margin to remain unchanged from our previous guidance of 5.5% to 6%.

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

(Operator Instructions) Randy Reece, Avondale Partners.

You mentioned disruption due to changes in the locum tenens business, and I was wondering if you could just give us more of an idea of what went on there and what, if anything, changed from the last time we spoke until now in that business?

Yes. Adding more color to that, I think, is important. When the new President came on, we determined fairly quickly that we didn't need significant changes to the operation as far as what our go-to-market strategy was, what our internal structure was, the compensation plans we had put in place, the way we operate. All of that was in line. But, what the new President found was that there really was a lack of accountability from an activity standpoint and from a productivity standpoint. And so this is all about leadership and execution, and the new President has been putting in new guidelines for key performance indicators for the team. There are some people that don't like having those things put in place, and so there are many people that are completely on board and are pleased to have stronger leadership and a direction that they are going in and understanding what they need to do to be successful. There are others that don't.

And so although we are not changing how we run the business, changing the level of accountability and driving productivity has made some disruptions, and they have had to change out some people, and he needs to build that back up again.

And when you look at the competition in the environment for people in locum tenens, have you made any specific strategic changes to try to improve the growth of your contractor database?

So, in locum tenens, the biggest change we are making, I think, is to our sales efforts. We think our recruiting team is in good shape. We are adding new people, some more junior that we are training; others that come from the competition that have some more experience.

The two initiatives we have are to have a more accountable sales organization. They just didn't have the targets and quotas needed to drive the orders. The other thing is during the transition from our old model to the new model, over the last 18 months, we lost some of our smaller customers. We did the analysis, and we are billing about 100 less customers a month than we did 18 months ago, and they are all small local customers that didn't get transitioned over to the new salesperson in the new environment.

So we have new, more sales-focused individuals out there driving orders, and we are trying to rejuvenate these customers that we used to do business with that we don't do business with anymore. And we are starting to see some successes, but, again, I don't expect to see any of that show up in the revenue until next year.

Now, finally, when you revised the revenue guidance, can you give us a feel for what you expect the revenue split to be between nurse and allied and physician for the full year in your revised guidance?

Yes, I think Bill has got that in front of him.

Yes. Most of the growth through the back half is going to continue to come from nurse and allied, which now is 86% of our business. As I mentioned on the call in the prepared remarks, we do continue to expect physician staffing to see a year-over-year decline. So nurse and allied, most of the growth will come out of nurse and allied. The legacy business is expected in the mid-single digits, and it should accelerate as we get into the fourth quarter. Mediscan is continuing to drive double-digit growth through third quarter and is expected to do so again in the fourth quarter.

Our search business, at this point it is more of -- we are looking at it sequentially, and I think we will continue to see that growing each quarter throughout the year. When exactly it crosses back to year-over-year growth, it will probably be towards the latter part of the year. So it is really -- I think the nurse and allied is going to be fueling most of the top-line growth.

All right.

Mitra Ramgopal, Sidoti and Company.

First, could you talk a little more in terms of how far you are along in the process of bringing on more recruiters on the nurse and allied segment?

Yes. We have done a pretty good job there. We are certainly up double digits on a year-over-year basis through the second quarter. We don't really disclose what the actual numbers are, but we feel very good that we have now -- we have been doing this maybe 18 months of adding new recruiters after we started to see the increase in orders at a sustainable level by the third quarter of 2014.

So we believe we are at a decent level of recruiter. We are going to continue to add because the market -- we are still growing into the market demand. But we are at a sufficient level now that we think we can handle the additional candidate flow that is required to get us to the level of growth that we believe we should be at.

Thanks. And I know you mentioned you are certainly seeing very favorable pricing. I don't know if you could add a little more color in terms of the environment, or are you seeing any pushback now in terms of clients, or is it still an environment we should expect to continue to be good for pricing over the next 12, 24 months?

Really, most of the pricing increases we are seeing this year were implemented in Q3 and Q4 of last year. We've talked about this before. It takes a little while for these things to rotate through the assignments and to take hold with new assignments and new contract renewals and so on and so forth.

So most of these efforts were efforts that happened in 2015 that are just coming into the numbers this year. That is why we believe that there is some sustainability of these through the next few quarters because it is already built into the kind of run rate that we are experiencing today.

We always get pushback on price increases. Some of it is driven by us being proactive in markets where we think it warrants a price increase in order for us to be competitive and service our customers correctly. Quite often, it comes from the customer where they call us up and say, I am not getting my submittals; I'm not getting my jobs filled. What do I have to do? And we come back with market information. And it usually means that their competing hospital down the road increased their rates by $1 or $2. And if they want to be competitive, they have got to keep up with the Joneses.

So we always get pushed back. Hospitals are under a lot of pressure to save money, and that has allowed us to start changing the conversation with our customers and bringing our workforce solutions to the table.

We have several ways to help our customers save money. I don't think we are going to save the money on contingent labor. The market demand is too high, and the supply is too short. But we do change that conversation. I think that is part of the reason why we are having so much success in our workforce solutions is we have changed the conversation to the market for contingent labor is what it is; let us help you save money in other ways.

Thanks. And, finally, I was wondering if I can get an update -- I might have missed this if you mentioned it -- in terms of the $4 million to $5 million being spent on upgrading the IT platform at the end of the first half. How far along are we there?

Sure. This is Bill Burns. As we talked about earlier in the -- after we released Q1, we were spending at a clip of about $1 million a quarter. That trajectory continued through the second quarter, but was really part tied to the first phase. I did mention this earlier. We have now completed the first phase, which was a large assessment as to the new technologies comparisons on features, functions and gaps to our processes, things that it would take, et cetera. That has wrapped up.

We have also now -- are in the process of negotiating, and we expect to sign a perpetual license agreement. If you recall in comments I had made previously, we had thought that it would be a subscription cloud-based arrangement, which wouldn't allow for development costs to be capitalized. We now, from this point forward, expect that the cost will be able to be capitalized. So those investments will shift actually from operating expense and become more of a capital expense for the business.

At this point, it is still a long-term project. It is still a 24 to 18 -- sorry, 12 to 18 month project from this point forward. So the total cost of the project is something that we will be looking at as we go forward, but it is going to be -- I think I originally said $4 million to $6 million in total investments. That will probably be the development costs we expect, and then there will be the license fees that we will pay on top of that.

So not a big shift in the numbers. Just really where it is geography on the P&L.

But I think it is important, also, to note that, although some of that original investment we had talked about that was going to hit the P&L will now be capitalized, we are certainly more than offsetting that change by additional investments in candidate attraction and workforce solutions. So you are not going to see a benefit of the capitalization of the IT investments because we are actually spending that money on other investments, and it definitely more than offsets the capitalization.

That is a very good point. We are now -- I am looking at the investments from both a nonrecurring and a recurring perspective. There will continue to be some nonrecurring investments in the business. Not all of the technology that we are implementing is going to move to a perpetual license, so there will be continued costs. But, as Bill mentioned, we do have a higher footprint of recurring investments that we expect to make in the business that are made in advance of the revenue generation that we expect from them.

Which will be fine, once the revenue catches up with it, but right now it is a leading cost.

Okay. Thank you very much.

Bill Sutherland, Emerging Growth Equities.

Thanks. Good morning. Would you -- Bill Grubbs, would you say the churn that's been triggered in the locum business with the accountability, etc., is largely behind you?

It's hard to answer a little bit, because, yes, I think the actual shock to the team and the fallout of people that aren't on board and those that are on board -- I think a lot of that has kind of settled in. But that doesn't mean that he is now clicking on all cylinders and he's got all the resources he needs and he's got revenue back on track again.

There will be a little bit of a lag as his key performance indicators and his activity levels and the changes he's making in how we measure people and drive performance. It still takes a quarter or two to come in to play, but yes, I think that everybody has gotten their head around the fact that there is a new world of accountability that didn't exist before. And that has kind of settled down somewhat.

So basically, we may see a little bit of the uptick in Q4, but really meaningful, it is going to be next year?

I think it's all about next year at this point. I'm trying to give the new president enough time to -- without undue pressure on him to perform better financially. Because I would rather he make the right changes and get the right people and have the right operating metrics in place than to worry about whether I make $2 million or $3 million more in revenues this year.

Just curious: do you guys focus on all specialties in locum? Or certainly, others -- some are growing much faster than others.

Yes. It's probably not all specialties. We have 17 specialties that we've kind of consolidated down into a lower number. Our biggest ones are emergency medicine, hospitalists, and primary care.

Those are good ones, aren't they?

They are good ones -- absolutely. Unfortunately, we are not participating in the market. But the good news is we have great capabilities in those three areas that should be growing. And as the new president gets the people doing the activities they need to do, I feel good that those are three good areas that we should be growing better than they are today.

Not sure if it was you or Bill Burns talked about the July trend. Would you mind? I didn't quite get that, if you don't mind.

I guess the point we were trying to make is we've continued to have positive cash flow generations through the month of July. And in fact, the point I was really bringing up is that we now have over $20 million of cash available to us. So it's just showing that in the month of July alone, we doubled the cash from where we ended June.

So if you looked at our net debt today, we have the $40 million term loan, $25 million converts at par, and then over $20 million of cash. So our net debt is very low. Our real leverage ratio is kind of 1-to-1 from a trailing 12-months perspective.

And no borrowings under the revolver.

If that's the one you are talking about. The other one we talked about in July was the candidate [transfer].

Right. I was curious about that.

So we have seen -- I'm not going to give the exact numbers, but a significant improvement in candidate flow in June over the first five months of the year and even a bigger increase in July. We had set a specific target that we believe we needed to get to in order to start driving double-digit growth for our nurse and allied segment.

We are exceeding -- we exceeded that for both June and July. So I feel really good about it. If we can keep our conversion rates of applications to that convert to placements, which we believe will hold up, this is a really good trend for us.

And then last, Bill Grubbs, on the optimal workforce solutions, you said two new. Are these the two that you talked about prior with 500 or so slots?

No, there are two smaller ones. And the bigger one that was originally anticipated to go live on July 1, part of it will come on on a smaller scale in September. And I think the bigger piece of it will either be November or it will get pushed into next year. There's just been a delay that that particular hospital system, as we've seen with some of the results, have various issues that they are dealing with. And they want to deal with some of those issues before they give us the project.

So the bigger 500 person -- I don't know if it was 500. It was between 300 and 400, I think it was -- is pushed out a little bit. Some of it will come on I think a little bit earlier, but a lot of it is going to be pushed out a little bit later.

And so you are still obviously seeing a lot of interest, even though you don't have a big reference pool accounts yet. But OWS is still attracting a lot of interest.

It has met multiple benefits for the customers. It takes away some of the non-core competencies around logistics, with people in hiring and orienting and credentialing these power professionals skills. But it's also a cost savings initiative for them. I think that's where we're getting the significant interest. Since they can't save money on contingent labor right now, they are looking at other ways.

So we did hire, as I mentioned, a couple of senior executives that come from this kind of outsourcing world. And they are out there now kind of talking to our customer base. We may win a couple more this year that take a month or six weeks to get implemented. I'm not sure it will make a huge effect on the second half of the year, but I feel very positive going forward that this is going to be a good growth engine for us.

Okay. And then HCM in total with the MSPs, etc. About where is it as a percent of revenue at this point?

Well, let's start with the percent of revenue the MSPs are, which actually has gone up from last quarter. So last quarter, we kind of have three metrics now. If you look at our total nurse and allied, it's about --

Total nurse and allied is about 35% now, including the Mediscan business.

Up from last quarter, it was --

Up from 33% last quarter.

And of our total revenue?

For total revenue, it's now roughly 30% of total consolidated revenue versus 28.5% in Q1.

So within workforce solutions, certainly our MSPs are growing significantly faster than our non-MSP customers. And as a result, you are seeing it show up as a higher percentage. And that's even with a lower fill rate than we used to have on our existing MSPs.

We feel really good that MSPs will be a good growth engine for us. Not only the existing ones have been growing quite a bit, but all these new ones that we've won this year haven't even been implemented yet. And that bodes well hopefully going into Q4 and into next year as well.

Great. Thanks for all the color, guys.

Tobey Sommer, SunTrust.

Thanks. I wanted to kind of follow-up on that last question. And maybe you could give us a flavor for the fill rates at MSPs. Because if your volume is in fact down a little bit year over year, yet you are increasing your exposure to fill rates because MSPs are growing, then kind of how is that getting achieved? Maybe a little bit more color on the moving parts and that seeming tension between those two things. Thanks.

Yes. I think I get it. So yes, our revenue overall is growing at MSPs, although our fill rate is down to about 60% now. So that means that the revenue on demand is obviously going up significantly as well. All of that we feel good about.

But if MSPs are growing at that much, that means some of our non-MSP customers must be declining. And there's some truth to that. If we don't have a preferential relationship with a customer, it is hard to service them in this environment. And we certainly put a lot of our efforts into the MSP side of it.

If I break it out a little bit, so our branches, which is -- a lot of it is predominately non-MSP -- actually grew at 8% year over year, as I mentioned earlier. So we do have non-MSP business that's growing as well. Mediscan doesn't anticipate in our MSPs and that grew at 19% year over year.

So I guess yes, the math says that our non-MSP customers are declining. And it is harder and harder to service those customers in this kind of environment, if that answers the question.

And Bill, if you want to add --

Thank you. You did a better job of answering than I did trying to spit it out. In terms of the recruiters, I'm curious. You talk about having started to invest, I guess, in earnest a year or so ago. Yet demand really picked up at the end of 2014 in terms of orders and whatnot.

Could you maybe talk to us about that? And if you'd increased recruiters a year ago, I guess, or accelerated the increase, have you had to -- are you financing people? Because without volume increases, they are probably not earning a ton yet.

So I did say over a year, but you're right: it started about 18 months ago. As we saw the increases in 2014, we saw the real peak come at the end of Q3. And then when we saw that it was fairly sustainable, it really was about 18 months ago that we started to bring more recruiters on.

But you're right. We escalated that or increased the level of recruiter recruitment about a year ago, little over a year ago. But it takes six to nine months for a recruiter to get up to speed. And yes, there is this kind of chicken-and-an-egg thing, which is they need to get up to speed and be functional before we turn the spigot on and bring in more candidate flow.

So yes, we've been financing recruiters that are less productive than our average productivity historically. But we had to get there -- again, chicken and an egg. You can't do one without the other. The worst thing I could do was to have increased my candidate flow and then not been able to place the people or not be able to get back to them. That would ruin my reputation in the market.

So I had to do one before the other. And we now feel that we are at a point where we have enough resources that know what they're doing that are up to speed that we can now invest in the candidate attraction piece of it. We may not have been as clear about the sequential way we do that, but that's the reality of it.

Okay. And then what's your outlook for price in bill rate growth over the medium term? And you don't need to provide a specific number, but sort of general color would be useful. Because a very strong year-over-year growth in Q2. And wondering -- I assume some of that was a little bit of catch-up to the market. Thanks.

It was a little catch-up. Because as we mentioned, we get at it late, but that initiative is paying off. Again, these are all the turnaround things we've been spending time on for the last few years that kind of come together. Some of them are coming together all at once and some of them are being phased in over time.

I think generally, nurse and allied pricing will stay above 5% year-over-year price increases for the next few quarters. I don't see that dropping below that. Nurse and allied -- sorry, travel nursing was almost 11%. Will it fall below 10%? There's a possibility, but I think it has some sustainability for the next few quarters as well.

So I think we're going to be pretty close to these. It may drop 150 basis points from where it is now, but I don't think it is going to drop much more than that. And if we can drive the volume that we think we can, then this business should grow faster than it has been the last few quarters.

Do you feel like you are at market now or are you still a little bit below?

Over 7% for nurse and allied overall, and 11% for travel nursing. Yes, I think so.

Not in terms of growth rates, but in the dollars, which we are not talking about are you at the bill rate dollar prices in the market?

I'm going to say at average. The interesting point someone made earlier was do we get a lot of pushback from clients? We still have some of our larger clients where we're still negotiating those price increases. So they have yet to materialize and earn in our numbers. But those will come online as we start to lap tougher quarters.

So I think Bill's point about the mid-single digit kind of price increases looking sustainable just based on what we can see for where we are still working with clients to get the price increases put into place. But on a blended average, I would say we are pretty close to where we need to be.

Okay. Thank you. And then two last questions for me. You commented about workforce solutions a couple times, but I don't think I heard you specify how big that business is at this point. And maybe if you could comment on how big you'd aspirationally like it to be?

It depends on whether you include all the MSP revenue into workforce solutions or just the kind of fees we get.

I guess I'm referring to the fees.

So we get fees for our MSPs that we -- but our MSPs are growing and that's fine. And I think that will end up continuing to grow as a percentage of our overall revenue -- of our nurse and allied revenue. So I'm going to just remove that from the workforce solutions.

So if you look at the other pieces of it, optimal workforce solutions is $20 million to $30 million today. I'd like to be that to be $100 million in the next few years. It's a great value proposition for us and we think there's some traction with our customers looking at it.

Predictive analytics is still kind of in pilot mode and isn't generating a lot of revenue right now. Our recruitment process outsourcing is, I don't know, $300,000 to $500,000 a quarter, maybe. But that's only because I don't have the infrastructure yet to do more. I could win five of those a month if I had the infrastructure. So it's again, a chicken and an egg. I need to invest in the infrastructure, but I'd like that to be tens of millions of dollars in the next couple of years.

And then the other one is our healthcare education services, which is mostly the charter school business. And that's --

It's probably on a run rate of about $15 million, $16 million.

It's $15 million, so $4 million or $5 million a quarter at the most right now. I really want to expand that nationally; I'd like to get that to $50 million or $100 million over the next couple of years. So we think there's some growth opportunities in these, but they are more medium to long term than they are in the next few quarters.

Okay. And last question for me. You mentioned the net debt being very reasonable and perhaps even low on a long-term basis. Is this workforce solutions area where you would prefer to deploy capital or would acquiring a staffing business that has a well-oiled recruiting engine be more beneficial to you at this stage?

I think we'd like to do both. I have some acquisition goals that I wouldn't mind achieving on the workforce solution side that could boost RPO or optimal workforce solutions or -- and certainly on the educational side. I would love to do an acquisition in any of those three areas.

But I also would like to do some additional acquisitions on the staffing side. We're still under the scale from what I would like to be on both allied overall and physician staffing. And there are several of our businesses built within our organization that have higher gross profit margins.

So search would be an area I would look at. Our local allied business is over 30% gross profit. So there are some strategic areas on staffing that I wouldn't mind boosting as well.

So look, we got enough firepower. Our covenant says we can get to 3.5 times leverage. We are well below that today, and we are in a good market condition. So we are out there actively looking to see what's available.

Last question for me, if I may sneak one more in. Some of the public hospital companies talked about slower admissions growth in 2Q. Is anything like that evident in your order flow? Thanks.

I saw that as well, although I did see some of them also talk about strong outpatient services, which is a growing area for us. We have not seen any of that in our orders. In fact, I originally had said that we had passed our previous peak of nurse and allied orders in this quarter. And one of my finance people went back and looked, and actually, there was one week like last year that was a little bit higher.

But we're really at the all-time high of orders. We have not seen any drop off based on the numbers that we reported in the public hospital systems. We used to be almost 90% acute-care hospital as a percentage of our revenue. We are now down to about 70%. So we certainly are growing, and that business is growing. So it means that we are growing on non-acute care business faster than our acute-care business.

And I like that. I like that diversification and I like that split because that's how healthcare is being delivered today. And I think with our branch infrastructure, we are well positioned to take advantage of the growth in ambulatory and outpatient. So that hasn't bothered us a whole lot and we haven't seen a drop-off in demand because of it.

Thank you very much.

A.J. Rice, UBS.

A couple of questions, if I could. Just trying to triangulate the comments on the recruiter additions over the last year. You've been at it for a while; they ramp up in the time frame you talked about, six to nine months. And you've seen a little progress sounds like in the -- or some progress in the last two months.

Are you -- as you think back to where you were thinking you would be at the beginning of the year or even as you started to ramp this up? Or would you say that the performance of those incremental recruiters is lagging what you thought or are they sort of progressing as you thought? I'm not really sure I'm walking away with an understanding of whether they are having the impact yet that you thought they were going to have.

So that's a good question. It's a combination of them getting up to speed and being ready and a combination of the total number. And so yes, we are behind where we expected to be. I expected to pull the trigger on higher candidate attraction a little bit earlier in the year, which is why we had in essence implied a significantly higher revenue number for the second half.

But between the total number of recruiters and whether they were up to speed or not came in a little bit later than we had anticipated. So again, as I mentioned, there was no value in turning the spigot on for more candidates and increasing the number of applications we had if I didn't have sufficient or capable resources to process them.

So yes, we were a little bit behind the number and a little bit behind those that were coming up to speed. So we didn't turn that out on until the beginning of June. And that's a couple of months later than we anticipated. So that couple of months of extra growth gets pushed into next year and we end up slightly slower growth than we had originally guided to.

Okay. And then when you think about what you're going to do for candidate attraction, is that similar to what you thought three, six months ago? Or are you thinking about doing incremental things? And I guess is there any way to put a dollar amount on what you are doing? It sounds like it's mostly raising the Company's online profile, but I'm wondering if there are any other growing things you'd highlight there?

There's several things that I'm -- I'm not going to talk about all the particulars because it's a bit competitive. But I think there's several aspects of it. There are quite a few things that we knew we needed to do that we just delayed until we were ready for them.

We are trying some new things that have come from the external consultants that we hadn't thought of before. Some of those are working, some of them aren't, but we are very pleased that we are getting exposure to things that we hadn't thought of on our own.

And the third one is it is costing significantly more than we had anticipated. The market is so robust that there's a lot of competition out there. And the cost of attracting candidates has certainly gone up year over year. So this is costing us more than we had originally anticipated.

I'm okay with it, because the results are showing really, really good trends and that revenue will catch up to these costs. But those are kind of the three things that we looked that. Yes, we knew certain things we had to do; we were holding them off until we were ready. There's some new things we are trying that are paying off, and then it's costing a little bit more than we had anticipated.

Okay. Now you gave a number of metrics on pricing, but I didn't hear it. Maybe I missed it. On the branch side, more the per diem type of stuff, what is the price increases you are seeing there? Is that similar to travel?

No, we were up 6.6% year over year in our branch pricing. That's a combination of per diem and local allied.

Okay. And then another definitional thing, maybe. You said you got about a 60% fill rate in the MSPs. Is that you are filling those positions or does that include your subcontracting to third parties to fill? And I wondered how much are you actually filling?

Our fill rate at our MSPs is almost 100%. It's in the high 90%s overall. Our share is about 60% of the business that's available at the MSPs. So our overall spend under management is up quite a bit and the overall revenue we are getting is up quite a bit, even though our percentage has gone down from what used to be in the high 80%s to 60%.

I got you. Okay. And then just last, Bill Burns, you mentioned the opportunity to potentially refinance a $25 million convert. Next year, it becomes callable. You were just out in the market getting a little bit of a sense of where the markets are, if rates stay the same.

I'm trying to understand. It's a $25 million note. What would you end up needing to refinance that in terms of capital or other debt? And then what might the savings opportunity be on that at this point? Any way to talk about that?

Absolutely. So if you think about it, those are convertible notes. And so there was a strike price on the shares of $7.10. So they are well in the money. We would -- they become callable, and so we could choose to pay cash or we could choose to force the convert.

Or we could just offer cash.

Well, we could choose to offer cash, which they would -- that's the backup if the shares were trading below the strike. But the reality is they will convert. And they're at a fixed rate of 8%. So the savings was straight 8% on the $25 million that you see. And it obviously cleans up a bit of the noise in the financials with the embedded derivative going away.

So the debt piece will go away; a couple million dollars of interest will go away. And those converts are already in our diluted share price account anyway.

And we sized the new facility with that in mind, that the converts would go away, not requiring any cash. But we feel we have enough liquidity and dry powder -- as I mentioned, we have no borrowings under the $100 million revolver.

One thing we didn't mention on this call but is in our other disclosures is that we do have an accordion feature built into this debt structure as well for an additional $50 million. So that would require going back to the lenders, but at least it's there. So we have -- we feel we are very well financed right now.

Okay. Great. Thanks a lot.

Okay. Thanks, A.J. Thanks, everyone, for joining us this morning and I look forward to updating you with our third-quarter results in August. Thank you.

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