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Cross Country Healthcare Inc  (NASDAQ:CCRN)
Q4 2018 Earnings Conference Call
Feb. 27, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good evening, ladies and gentlemen, and welcome to the Cross Country Healthcare Earnings Conference Call for the Fourth Quarter and Full year of 2018. This call is being simultaneously webcast live. A replay of this call will also be available until March 13, 2019, and can be accessed either on the company's website or by dialing in 1800-839-5574 for domestic callers, and 203-369-3669 for international callers and by entering the passcode 2019.

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

William J. Burns -- Executive Vice President and Chief Financial Officer

Thank you, and good afternoon everyone. I'm pleased to be joining today's call. Having returned to my role as Executive Vice President and Chief Financial Officer on February 1st 2019. Joining me today is Kevin Clark, our new President and Chief Executive Officer. This call will include a discussion of our financial results for the full year and fourth quarter of 2018 as disclosed in our press release, as well as a discussion of our financial outlook for the first quarter of 2019. After our prepared remarks, we will open the lines for questions. A copy of 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 2017 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 made 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.

Lastly, in order to facilitate a better understanding of our underlying trends we may 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, which would only affect our year-to-date results due to the acquisition of Advantage RN in July of 2017.

With that, I will now turn the call over to our Chief Executive Officer, Kevin.

Kevin C. Clark -- President, Chief Executive Officer and Director

Thank you, Bill, and thank you to everyone for joining us this afternoon. First, I'd like to express how thrilled I am to be returning to Cross Country Healthcare as its CEO to see us through this next phase in our evolution. I co-founded Cross Country in 1986 and served as Chairman and CEO through 1994. At the time, we were one of the fastest growing staffing companies in America and it is my goal to achieve that once again. During my first two months, I've been meeting with our businesses and our customers, assessing our go-to-market approach, our processes and the way we utilize technology.

What I've discovered is that Cross Country is still a great brand and having recently won several Best in Staffing awards, and it is a company with strong leaders, loyal customers and dedicated teams. But it is also a company with many opportunities to improve. In particular, I am focused on expanding our use of technology in our business. The market is evolving quickly with customers seeking more from their partners and candidates, wanting quick and easy ways to evaluate opportunities and make decisions.

I am confident, we will make the necessary investments and return Cross Country to growth and improved profitability. I have also made some leadership changes as I continue to work on aligning the teams to achieve the best performance possible. It is my nature to be intimately involved with the business and therefore, made the decision to eliminate the COO role.

As you may have noted in our recent 8-K or at the start of this call, Bill Burns has resumed his role as our CFO. Bill is a talented CFO and I am confident that his experience as COO will serve him well as we continue to work on returning the company back to growth. Another change in the leadership has been the appointment of a new President for Physician Staffing, we promoted Karen Mote, who has been with the company since 1998, running our growing advanced practice part of the business. Under her leadership, advanced practice has grown double-digits for the past two years. So I am very excited to have her oversee the entire Physician Staffing segment.

Given my years of experience in managing healthcare staffing companies, I view Physician Staffing as an important part of our overall strategy. We have good talent, strong brand in the marketplace and we have continued to win or expand locum into MSPs. I have confidence in our ability to turn this business around and have it contribute to the overall growth of Cross Country Healthcare.

In addition to the leadership changes, we are also aggressively taking a look at our cost structure. The decline in revenue over the last two years has reduced our operating leverage, and as a result, we need to review all areas of spend. We intend to be very deliberate in our approach of not taking any action, which could inhibit our ability to grow and we will look to execute quickly in 2019 to minimize distractions and focus on growing the company. No company has ever cut their way to growth, so this is about right-sizing our infrastructure and continuing to invest in revenue generating activities, improving our speed to market and overall ease of engagement with clients in healthcare professionals, make no mistake, I am here to win.

Now turning to technology, before my appointment, the company announced a project to upgrade its applicant tracking system. And I'm in the process of reviewing the scope, timing and overall cost of the project and we'll look to give you more clarity as we move through 2019. There is no doubt, we need to accelerate the modernization of our platform, and if possible, I would like to realize some of the benefits sooner while minimizing any disruption to the greatest extent possible.

Bill will cover our first quarter guidance in more detail, but I would like to share some thoughts on the outlook for 2019 and beyond. My first priority, is to return the company to consolidated organic growth and expand our profitability. That said, this is a turnaround and the path forward may not be a straight line. Much work has been done, but we are still not where we need to be. We need tighter alignment between our businesses to capture the opportunities in the market and create a world-class candidate experience. We need to improve the productivity of our revenue producers, so we can increase our speed and capacity. And we need to invest in technology, so we can adapt to a rapidly changing market.

I am not anticipating a step change, though, I believe we can expand margins and improve profitability by being more aggressive in regaining our market share. As we work to develop a comprehensive strategic plan over the next few months, we will be making changes as we go to continually position us for success. While I'm familiar with many of the solutions we intend to explore, it will come down to our ability to execute quickly and make those changes that will improve both speed and productivity. I look forward to sharing more on our financial goals as we refine our strategy and go-to-market approach.

From the market perspective, overall demand as we called out last quarter has remained fairly high. In addition, we won 13 new managed service programs in 2018 with projected incremental spend under management of approximately $80 million. However, our ability to grow organically depends on execution across several opportunities, which include, expanding the spend we managed through MSPs, while maintaining high fill rates for our customers and continuing to improve our capture rate. Today, we manage approximately $400 million in spend and as of the fourth quarter our capture rate was 61%.

Additionally, we have nearly $70 million in spend from the recent MSP wins that has yet to ramp and as that comes on line, we should start to capture our share of that as well. And increasing our recruiter capacity and productivity to capitalize on the recent order trends, we are starting the year off with orders 20% ahead of where we were at the start of 2018. For those reasons, I expect to continue investing in revenue producers such as recruiters and account managers in those parts of our business where we see opportunities. In the fourth quarter, for example, we increased our recruiter count by approximately 5% as compared with the start of the quarter. And we have continued to add experience recruiting capacity in the first quarter.

Now with that, let me turn the call over to Bill Burns, who'll review our results in more detail.

William J. Burns -- Executive Vice President and Chief Financial Officer

Thanks, Kevin. For the fourth quarter revenue and gross profit margin were within guidance, while adjusted EBITDA and adjusted EPS were below our guidance ranges. Revenue was $200.9 million, down 9% in the prior year and up slightly on a sequential basis. The year-over-year decrease was primarily due to volume declines in both travel nurse and physician staffing. Sequentially, we experienced seasonally higher revenue in education healthcare staffing, primarily offset by a decline in physician staffing.

Gross profit margin for the quarter was 25.2%, down 130 basis points from the prior year and down 50 basis points sequentially. The year-over-year and sequential declines were largely driven by higher healthcare costs, specific to the year-over-year decline, lower bill pay spreads, primarily in travel nurse also contributed to the decline. SG&A for the quarter was $45.2 million down 2% from the prior year and up 3% sequentially. The year-over-year improvement was driven by cost actions taken throughout 2018, while the sequential increase was driven by higher healthcare costs and other corporate costs such as legal fees, indirect taxes and costs incurred related to our applicant tracking system.

As Kevin mentioned, we are aggressively looking at our overall cost structure and are targeting between $6 million and $7 million in annualized savings with $5 million of that to be realized in 2019. The majority of the actions were expected to be completed early in the second quarter and the main focus areas continue to be predominantly overhead and other support costs. We believe that these cost reductions coupled with tighter management and discipline on discretionary spend across all parts of our business will allow us to expand our operating leverage and continue to fund necessary growth investments.

Adjusted EBITDA for the quarter was $6.2 million or 3.1% of revenue as compared with $12.3 million or 5.6% in the prior year, and $8.1 million or 4% in the prior quarter. The year-over-year declines were primarily driven by the loss of operating leverage on lower revenues and lower bill pay spreads, higher healthcare costs and other corporate related expenses as I mentioned previously also contributed to the year-over-year and sequential declines.

Depreciation and amortization expense was $3 million, up modestly year-over-year and sequentially. Interest expense was $1.4 million, up $200,000 over the prior year and down $100,000 sequentially. Income taxes for the quarter resulted in a net benefit of $6.2 million, driven primarily by the tax impact of a $22.4 million non-cash impairment charge related to physician staffing. At December 31st, the company had $65 million in net operating losses that we expect to utilize over the next several years. As a result, we believe the amount of annual cash taxes paid will range between $1 million and $1.5 million during this timeframe.

Net loss attributable to common shareholders for the quarter was $19.7 million or $0.55 per share, as compared to net income of $28 million or $0.77 per diluted share in the prior year, and the net loss of $400,000 or a loss of $0.01 per share in the prior quarter. Adjusted EPS for the quarter was essentially flat compared with income of $0.17 in the prior year and income of $0.02 in the prior quarter, both the year-over-year sequential declines were primarily driven by lower profitability and higher taxes.

Next, let me review the quarterly results for our two largest business segments. Revenue for our Nurse and Allied segment was $179.5 million, down 7% from the prior year and up 2% sequentially. The year-over-year decrease was primarily due to volume declines in travel nurse and local staffing, partly offset by increases in travel allied and education healthcare staffing. The sequential increase was mainly due to the seasonal nature of the education healthcare staffing segment due to the summer break during the third quarter.

Segment contribution income for the quarter was $16.2 million, representing a 9% contribution margin down 90 basis points from the prior year and down 40 basis points sequentially. The year-over-year margin decline was primarily due to lower travel nurse volumes and to a lesser extent, lower travel nurse bill rates, while the sequential decline is mainly due to higher healthcare costs.

Turning next to our Physician Staffing segment, revenue was $18.3 million, down 19% from the prior year and down 14% sequentially. Both the year-over-year and sequential declines were primarily due to a lower number of days filled, revenue per day filled of $1,565 was up 3% from the prior year and down 1% sequentially, primarily due to a shift in mix specialties.

Segment contribution income for the quarter was $600,000, representing a 3.1% contribution margin, down 160 basis points from the prior year and down 310 basis points sequentially. Both the year-over-year and sequential declines were primarily driven by higher provider benefit-related expenses and to a lesser extent higher sales allowances.

Turning to the balance sheet, we ended the quarter with $16 million of cash and $83.9 million of term loan outstanding at par. During the quarter, we repaid $7.4 million in principal on our term loan, which included an optional $5 million prepayment, and for the full year we repaid $16.1 million on our term loan. As of December 31st, we did not have any amounts drawn on our revolving credit facility. For the quarter, we used $800,000 of operating cash and generated $21 million for the full year.

Our DSO for the quarter was 62 days, as compared to 58 days in the prior year and 61 days in the prior quarter. The increase was driven primarily by slower collections from a few large customers. We continue to believe that our DSO should be below 60 days. Our capital expenditures were $1.2 million for the quarter and were in line with our expectations. For the full year, we repurchased 432,000 shares for an aggregate purchase price of $5 million and we have 510,000 shares remaining under our existing share repurchase program. As we progressed through 2019, we'll continue to review our capital allocation strategy primarily focusing on organic growth investments and targeted strategic acquisitions, as well as reducing our debt and potential share repurchases.

This brings me to our 2019 first quarter guidance. Our outlook for the first quarter is revenue to be between $195 million and $200 million. We are expecting Nurse and Allied to grow sequentially in the low single-digits, which puts that business on track for a low single-digit year-over-year decline in the first quarter. While demand has remained fairly strong and we are seeing year-over-year growth in our travel allied business, travel nurse is still lapping periods with higher average bill rates.

We discussed the decline in premium rates throughout much of 2018 and we expect that, that trend should normalize in the second half of 2019. Our physician staffing business, which has continued to struggle throughout 2018 is expected to report a double-digit year-over-year decline in the first quarter. From a profitability perspective, gross margin is expected to be between 24% and 24.5% and adjusted EBITDA is projected to be between $3 million and $4 million.

The main driver of the sequential declines being the annual payroll tax reset which is estimated to be between $2 million and $2.5 million. While some of the items experienced in the fourth quarter are expected to trend at more normal levels, w continue to expect healthcare expenses to be higher than in the prior year.

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

Operator

We will now begin the question-and-answer session. (Operator Instructions) So our first question is coming from the line of A.J. Rice from Credit Suisse. You may now begin.

A.J. Rice -- Credit Suisse -- Analyst

Yeah, so welcome aboard for the new -- for the first conference call here. I guess, I would just wonder maybe expand even a little further on the comments made about positioning of the company and your view. Do you think there is expertise or talent or maybe tuck-in acquisition that needs to be made to get everything in-house to be successful going forward? Is that part of the evaluation, where there might be deficiencies? And is anything modelled to the top, at this point, there will be a particular priority area of focus?

Kevin C. Clark -- President, Chief Executive Officer and Director

Yeah. Well, thank you for that. Look, I'm very excited to be back at the company I co-founded, it's been just 45 days. But look, we're back to being what got us here being bold leading through innovation, great clinical excellence. Ultimately our aim is to recapture the number one position in our market. Personally, I'm very confident that we can get this wonderful nearly 35 year old company, growing exponentially. But I am just getting my arms around the company.

And it's clear that our employees, our operations and all of our lines of business are outstanding. What this company needs a strong leadership, a well-designed and cohesive strategic plan, which is part of my 100 day objectives. During the first 100 days focus on really what's understanding, what is driving the Company's performance, spending time with our employees our healthcare professionals, our clients, our management and even our Boards. And out of that 100 days, I expect to have and develop a strategic plan that will align with our M&A objectives.

So I want to make sure that we've done the right diagnostics and the hard work upfront to make sure things that we invest in, in the future line up to that long-term strategy and that can propel us on the arc for the next decade or so. And ultimately, what we also of course are up to is, assessing what we can do differently in order to drive rapid improvement in shareholder value.

A.J. Rice -- Credit Suisse -- Analyst

Okay, all right. Across the industry, you got obviously a large publicly traded peer. It seems like, there is generally been a struggle to reach a steady operating performance and growth trajectory in the Locum Tenens business. Do you have any thought specifically about that one? Is that core to everything else? You're doing any initial reaction to that business and how to think about it moving forward as part of Cross Country?

Kevin C. Clark -- President, Chief Executive Officer and Director

Yeah, our overall strategic -- our overall strategy is to be a full solutions provider to the marketplace. And Medical Doctor Associates is a terrific brand, it's nationally known, we have a wonderful management team there, I'm very excited to work with Karen, who's been with the company a long time and the strength of our new President there, she has been leading the growth around our advanced practice business unit there, which has been growing double-digits.

So that's a lower bill rate than the locums area, and but getting both the locums business turned around and pivoted around kind of our core segments like hospital medicine and primary care and emergency medicine and coupling that with an advancing growing -- advanced practice business, I think we can get this business turned around. When we sit down with hospital health systems, we talk about more than just being a supplier driven model.

We talk about first of all, we start with our advisory services, we can assess and provide the data around hospitals needs across a spectrum of jobs specialties from our ends to the allied health to locums advanced practice. And what's great about Cross Country is, we not only have those best-in-class supplier brands around the temporary labor, but we also have businesses like Cejka, which is the Korn-Ferry of this healthcare industry, it's a well-known retained search business. We also have an RPO business that's very successful, an additive part of our greater workforce solution.

So long answer, but the bottom line is, we want to be a full solutions provider. And what I think I'm good at is bringing strong leadership experience. I certainly understand the technology side, but I am looking forward to the challenge of turning Medical Doctor Associates around.

A.J. Rice -- Credit Suisse -- Analyst

Okay. All right. Thanks a lot. I'll pass the baton to someone else.

Kevin Steinke -- Barrington Research Group -- Analyst

Thanks, AJ.

Operator

Thank you. And our next question is coming from the line of Jason Plagman from Jefferies. You may now begin.

Jason Plagman -- Jefferies -- Analyst

Just a follow-up on the conversation about physician staffing. So what are you seeing in the market? Are you seeing softer order trends or is it just -- need for improvement and execution in your own operation. Just any particular specialties that you are seeing particular strength or weakness in the physician segment?

Kevin Steinke -- Barrington Research Group -- Analyst

Yeah, great question. I mean look, it's the locum tenens market is a $4 billion market, it's growing at 4% a year. There is no reason why we can't be participating and having that type of growth and hopefully better than that. But we're still a top 10 ranked business, we cover all the major specialty areas. To answer you specifically, hospital medicine, primary care, emergency medicine are kind of our biggest segments. Having said that, as I also mentioned advanced practice is growing very quickly as nurse practitioners and physician assistants and other healthcare professionals populate the open physicians and help these provider.

So it's a -- we have almost a 125 revenue producing employees in the locums business and there is just a lot to build on and looking forward to doing that. And I think there is also an opportunity, a greater opportunity to leverage the strength of the other brands and have an opportunity to cross-sell with our other divisions and we are also been successful recently on the MSP side for locums we actually won a decent size MSP agreement. So there's a lot of very, very positive things going on there and it's more about getting good leadership and even better execution in solving all the internal issues that might be holding that company back. Jason?

Jason Plagman -- Jefferies -- Analyst

Sorry. Thanks. And then my other question was on the travel nurse business. You mentioned lower bill pay spreads in that segment. Can you just dive into what you're seeing there as far as demand trends and then also what maybe causing that compression in the bill pay spreads?

William J. Burns -- Executive Vice President and Chief Financial Officer

Yeah. Jason, this is Bill. I'll take that one. When you look at the travel nurse business we called this out throughout a lot of '18 that there was kind of bill rate pressure from the losses on premium rate business as a percentage of overall mix of ours. So these are crisis vital rates and project revenue and kind of notable in the fourth quarter was if you look at the revenue we get from EMR business, it's typically at a higher bill rate, that was very small for us in the fourth quarter it was negligible.

So the top line pressure is been predominantly around the premium rates, overall our bill rate within travel nurse -- the Nurse and Allied segment was down about -- the travel nurse was down about 3% year-over-year for the fourth quarter, and the pay rate was up just slightly. So that's what we're talking about that the pay packages continue to have that normal market inflation where we've just seen the bill rate, the average bill rate for our services come down as a result of the declining in premium rates. We've kind of lap that now I think we're getting to the end of what we think is the ultimate decline, it should be levelling off from here on out, but obviously as we saw throughout much of '18 there was sequential declines from Q1 to Q2 to Q3 and so forth. So really, we won't be back until a roadshow more in comparable period until we get to the back half of '19.

Jason Plagman -- Jefferies -- Analyst

Thanks, that's it for me.

William J. Burns -- Executive Vice President and Chief Financial Officer

Thank you, Jason.

Operator

Our next question is coming from the line of Tobey Sommer from SunTrust. Your line is now open.

Tobey Sommer -- SunTrust Robinson Humphrey -- Analyst

Thanks. Welcome Kevin. When you hear -- when we hear about your strategy after maybe 100 days of absorbing and learning how the company operates and deciding what direction to point things. Do you anticipate kind of revealing that to us on the 1Q conference call. Are you going to have maybe a discrete event to talk about that?

Kevin C. Clark -- President, Chief Executive Officer and Director

I'd be happy, nice to hear your voice, Tobey. Happy to update you in whatever format is best, but certainly through conference calls like this or analyst calls or some of the presentations that we're making to the various conferences. But let me just answer part of the question, I mean if I skip a little bit to the chase of what this 100 day plan is, one of the main two or three themes, I mean, one of the main themes of course is the turnaround starts with our core business.

So we want to see the travel nurse business start reaching some of the growth rates in fact that we're seeing with our allied business. Our allied business has grown 21%. And we have two other segments, one, I already mentioned advanced practice which is growing double-digits and also our education brand is growing at double-digit. So we have some terrific businesses that are already accelerating and part of that strategic plan is going to focus on getting the core business turned around. And the second part of it is, as we all know, we live in the gig economy and companies such as Uber and Amazon are redefining customer expectations for all companies and all consumers.

And we have to spend our strategy around making it easy for our healthcare professionals to have an amazing and simple experience that seamlessly connects them to jobs with full transparency. I mean, travel nursing compared to what I was here 25 years ago, it's really no longer a job, it's an experience. And the experience that our travel nurses are looking for, well that -- in the future kind of state will likely start with self-service job searching, transparency around compensation, comparative employer data including user reviews, very intuitive mobile interfaces that can anticipate your next shift or contract, while having a single secure place for your licensure and credentials.

And the experience is important, right, because it's really about social today. You have to build the community of nurse experience around -- on what we're doing. So on that side of the ledger, I'm looking forward to putting more tactical plan together as part of that 100 days. And equally important will be the client side, we operate in a highly competitive marketplace. And our workforce solutions they already are, but they need to continue to strive to be

data centric. We need to continue to provide real time information to our customers that will enable them to make smart decisions around their talent acquisition and especially around contingent labor, right.

So, those are things that you'll hear and learn more about as we refine our thinking and we go-to-market with a cohesive plan that is map to our Management Team here at our Board.

Tobey Sommer -- SunTrust Robinson Humphrey -- Analyst

Great. With respect to the order climate that you described, the demand climate for Nurse and Allied, you said 20% year-over-year that seems healthy and something that when operating and armed with new strategy that could be conducive to reaccelerating growth. How do you think the systems are currently at the company? Because I'm curious about the kind of integrity of that data almost because it's so good and show so much year-over-year growth.

Kevin C. Clark -- President, Chief Executive Officer and Director

Yeah. First, let me clarify that the order trends that we called out in our earnings message was specifically around our travel nurse business. So the result of other business is like physician staffing, as we can tell are impacting our consolidated results. So order trends are up around the travel nurse side. And again, I think I wasn't here last year, I wasn't in the seat, but it appears to me that, as a company we didn't move as fast as we could have. By the fourth quarter, as we mentioned, we started adding some recruiters and one of the first things I made sure was continuing to be -- it continuing to happen here at Cross Country when I joined 45 days ago was that we were adding additional recruiters.

So right now, Cross Country has, as we define them about 850 revenue producing employees. And one of the things that we've mentioned that we have line of sight on cost reductions and so forth. We're going to make those efficiency improvements in the company, but we're going to continue to invest in our core business starting with our recruiter expansion. So the orders are up, and our ability to leverage that opportunity comes down to our ability to execute well as a company.

Tobey Sommer -- SunTrust Robinson Humphrey -- Analyst

Thanks. And then, I think you mentioned as part of the prepared remarks, it might have been Bill approximately $6 million in cost saves targeted $5 million that will hit this year. Are those figures gross or net savings because oftentimes when companies are talking about cost saves, there is some cost savings on one side, but investments on the other. So how do we think about it on a net basis?

William J. Burns -- Executive Vice President and Chief Financial Officer

Yeah, Tobey, great question. That is exactly the case, the savings targets are the gross targets for us. There obviously are investments, I think coming out of Kevin's 100 day plan and as we looking at the rest of the businesses. We'll be assessing what the needs are to put back in. A normal investments that will happen in the company just from the organic leverage of growing some some top line and reinvesting some of the gross profit will fund some of those investments.

There may be a need for additional investments beyond the normal leverage that we would expect in the business and that would be partially offset in those savings. Just, I can't give you the exact -- I can't quantify it for you today exactly (multiple speakers)

Tobey Sommer -- SunTrust Robinson Humphrey -- Analyst

I understand, but that -- saying that it's gross in that some of it may be redeployed and so forth that, that makes sense. Okay, that does it for me. Thank you for your help.

Kevin C. Clark -- President, Chief Executive Officer and Director

And Tobey, I'm just going to add one other point though, the travel nurse business being up -- orders up 20% also speaks to that, it's a very healthy market, strong economy healthy market, so it's a good operating environment to be in.

Tobey Sommer -- SunTrust Robinson Humphrey -- Analyst

Appreciate that.

Operator

Our next question is coming from Jeff Silber from BMO Capital Markets. You may now begin.

Henry Chien -- BMO Capital Markets -- Analyst

Hey, good afternoon, guys. It's Henry Chien calling for Jeff.

Kevin Steinke -- Barrington Research Group -- Analyst

Hi, Henry.

William J. Burns -- Executive Vice President and Chief Financial Officer

Hey, Henry.

Henry Chien -- BMO Capital Markets -- Analyst

Hey, guys. Kevin, I'm just curious if you could talk a little bit about way why you return to Cross Country? That's it, yeah --

Kevin C. Clark -- President, Chief Executive Officer and Director

Well, yeah, it's a great question. Well, first of all look, I guess co-founding a company and when I did back in 1986, I was -- I had three great partners and I was -- ran the business for nine years. And we sold the business went off to do other things, some very exciting things around the technology arena and also back into Healthcare. But you start a company like Cross Country, it's a little bit like having a child then you watch it grow up and expand and do some wonderful things. I was -- my former partners and I were all cheering on when the company went public in 2001.

And as the company grew over time and my work experiences, I think started stacking up having the opportunity to come back after seeing the company falter in the last couple of years and seeing kind of the gap growing between, our arrival in ourselves in the passion in me, just started coming out. I wanted this challenge, I wanted to have a, if you will pardon the reference, a Steve Jobs moment in my career. But I'm delighted to come back in some ways, there's a lot of familiarity with the company. And one of the things I was most excited about when I walk through the door was nearly 30 of our employees that were here when I left 25 years ago is still here, still doing great things in the company.

And so it's a wonderful business, it's -- over 1,500 employees we have over 70 branches, we have the number one branch per diem network business -- branch network in the industry, and that's important, because as these large health systems are changing, right. They're no longer about acute care, they're acute care hospitals, they're really pre-acute care and post-acute care, and as a partner of theirs, we have to help them file their patients through long-term care and into the home. And being able to leverage not just a travel business, travel nursing and allied business, but a locum tenens business, a search business, this branch network that can aggregate local supply and bring it to the doorstep of these hospitals.

We've got a solution nobody else does. And -- so that's exciting for me. So it's great to be back and I think there's a terrific management team here, and I'm excited to work with everybody.

Henry Chien -- BMO Capital Markets -- Analyst

Got it. Okay, great. That's great to hear. Really excited to hear your strategic plan. I'll turn it over. Thanks.

Kevin C. Clark -- President, Chief Executive Officer and Director

Thanks, Henry.

Operator

Thank you. And our next question is from Jacob Johnson from Stephens. You may now go ahead.

Jacob Johnson -- Stephens Inc. -- Analyst

Hey, thanks for taking the questions, and welcome back. Kevin. I guess the first question just following-up on the physician staffing business. Would you characterize sort of the year-over-year declines in that business is largely self-inflicted? Or are there any kind of macro factors that are pressuring that segment?

Kevin C. Clark -- President, Chief Executive Officer and Director

I would say self-inflicted. It's a great brand, at one point I think it was -- medical doctors could be wrong, I'm going back in my -- in years. But I think it was the number one locum tenens company in the industry, and it's -- if not, it was the top three. And now we're the number six company. I think it's just been a lack of execution and leadership, and I've got a fantastic leader up there now. I'll also say just holistically across Cross Country Healthcare, one of the experiences that I bring here that I think is potentially best-in-class is, I understand talent acquisition from the kind of innovation and new technology around things like programmatic advertising, built a company in that space.

So we want to be very aggressive in terms of driving the cost per applicants down, whether they're doctors or nurses or therapists and be very efficient with our marketing dollars and be able to track the ROI around data analytics and that's part of it, because there is a modern way to think about each of these business, there's a modern algorithm that you need to have in terms of the lead funnel converting leads into applicants and converting applicants to placements. And I think that's an area that Karen and I and the rest of the team here can do some diagnostics on and get a lot better at. And I'm looking forward to seeing some of those improvements start impacting the company over the next several quarters.

Jacob Johnson -- Stephens Inc. -- Analyst

And maybe following up on that. I'd be interested in your view on the per diem business kind of where it is today at Cross Country? And maybe where you see it, it going? It seems like that's another area that could be right for technology?

Kevin C. Clark -- President, Chief Executive Officer and Director

100%, look, if you kind of go back to the macro-dynamics about the $17 billion industry size about 24% of that market is per diem, $3.5 billion kind of market, it's growing modestly 2%. And we have the best business in the industry and it's been very important when you look and I've had the opportunity to meet with many of our customers in the last 45 days. I've traveled to our markets in Atlanta and Cincinnati and St. Louis, Philadelphia, New York. I've had a chance to sit down with some of the largest health systems in the country that do business with us. And their -- you've consistently see that our fulfilment is not just around travel nurse or allied, but having that local supply has been a real important part of our overall solution.

And to your question around technology, it's true, the -- we're in this gig economy, it's a disruptive world, it's not -- the future is not about bricks and mortar and recruiters, it's about really connecting people and jobs in a seamless easy way. And part of what we need to do on the per diem side and the local side is do a really good job of building mobile and intuitive technology that lets us connect to our supply on a local basis, as well as connecting them to the national basis.

It would be a great opportunity to be able to provide a registered nurse on a local basis. The opportunity to anticipate our next shift, provide comments about where she is working. And all those things were starting to deploy. So technology is going to play a big role in per diem, it's going to be transformational and the entire industry is going to go through quite a bit of transformation, I think in the next five years.

Jason Plagman -- Jefferies -- Analyst

Super helpful. And then last one for me. Kevin, you've talked some about the search business today. I think relative to your peer, but your other Human Capital Management segment is relatively small. I mean, is that an area that we could see you look to grow may be disproportionately?

Kevin C. Clark -- President, Chief Executive Officer and Director

Yeah, I think it's a very strategic part of our workforce solutions. I just was with a large client of ours and as an example, we were able to fill 75 permanent nurse physicians for them over the last two quarters, at a fraction of the cost of say the travel model. And what we really have to do for our customers is we have to solve their problem, we have to lower their spend and that's what we try to do.

So having those segments around not just physicians, but also nursing around other specialties. I mean, look we placed perfusionist, we cover kind of the whole spectrum. So we think it's important and strategic, and part of that is also our RPO offering. But let me say going back to the prior question, this is also an area that's right for technology innovation. The world is moving more toward subscription-based model versus fee-based and those are areas where I think those are opportunities for us to evolve our offering.

Jacob Johnson -- Stephens Inc. -- Analyst

Great. I'll follow up on what a perfusionist is offline. Thanks for taking the questions.

Kevin C. Clark -- President, Chief Executive Officer and Director

You're welcome.

William J. Burns -- Executive Vice President and Chief Financial Officer

Thanks, Jacob.

Operator

Thank you. And our next question is coming from the line of Kevin Steinke from Barrington Research Group. You may now begin.

Kevin Steinke -- Barrington Research Group -- Analyst

Good afternoon. Wanted to follow-up on the cost savings discussion that targeted $5 million of gross savings in 2019. You also mentioned that you're looking at the cost structure closely and you'll look to take actions quickly. So does that imply that we could potentially see more than that $5 million of savings in 2019, if you execute on further initiatives?

William J. Burns -- Executive Vice President and Chief Financial Officer

Yeah, I think right now for what we have line of sight on, the $6 million to $7 million I called out, I feel comfortable with -- we've been doing our deep dive and we know what those actions are, they've been identified, we've got dates aligned to them. So we do believe that we'll realize close that $5 million number in 2019. Is there opportunity beyond that? Yes, there is, I wouldn't necessarily call it out. And again, I want to go back to the earlier question that this is a gross savings. So there are investments we would want to put back into the business. So just keeping that in your models would be important.

But I know that there is additional upside as we continue to centralize some of our other operations and functions that we've done. Over the last several years, we've brought our back office functions largely together, our table teams, finance accounting, HR, marketing and IT. And now we're looking to do the same across the rest of our businesses as we look at opportunities for centralization. So there will be opportunities, but I also think the implications of the enablement of technology will also drive additional productivity in our operations. Now that's tied to how fast we get some of the technology improvements we talked about on the prepared remarks up and running. But that will play a role as well as to how much we can get in savings.

Kevin Steinke -- Barrington Research Group -- Analyst

Okay, got it. And then with the increase in recruiter headcount in the fourth quarter 5%. How well do you think you've been able to execute on the order -- the increase in order flow, that is, how well have you been able to convert that order flow to revenue? And is there ways -- are there ways to become more efficient as you had recruiters in converting that order flow to revenue?

Kevin C. Clark -- President, Chief Executive Officer and Director

Yeah. I mean we'll both take this one. The answer is no, we haven't done as good a job as we should be doing. And when you onboard a new recruiter they go through training. It really takes a couple of quarters for recruiters to start contributing in a significant way. So we've got some ramp time and we're going to be looking to make a number of improvements. The other point I was making earlier is, it's about getting this algorithm for travel nursing better aligned, getting our lead funnel, converting faster. The biggest thing that we can do here, I think to improve the conversion, other than hire great people is speed to market, this is a business where speed matters.

William J. Burns -- Executive Vice President and Chief Financial Officer

Yeah, and I was just going to add to Kevin's point about the ramp time, it is exactly that. They don't -- even if you put the recruiters in, in the fourth quarter and most of the hires were later in the fourth quarter. You don't really see a lot of productivity from them as Kevin point out for a couple of quarters. And even as we continue to make investments up and until the date of this call, they're also going to be kind of ramping in the first half and start showing more productivity in the back half.

I will say one other thing that we're also looking specific to our travel nurse business at kind of having a slightly different recruitment model, while we're looking at figuring out the algorithm as Kevin pointed out. But we're also looking at more order based or demand facing recruiters. So actually sourcing to orders as opposed to on the back of candidates. Historically Cross Country has relied on a candidate funnel and kind of look to place the candidates where they want to go, as opposed to actually mining our database of candidates for the high bill rate hard to fill specialties. So we began that in the fourth quarter, it's early but it shows promised, I think that having that ramp while we're doing this other things will certainly will pay dividends later on.

Kevin Steinke -- Barrington Research Group -- Analyst

Okay, yeah, that's good color. When looking at the first quarter '19 EBITDA guidance. Just want to make sure I'm thinking about the impacts correctly here on a year-over-year basis. We have, I guess negative operating leverage from the expected decline in revenue. For the recruiter investments, higher healthcare costs and then just some continued pressure on the premium rate/bill pay rate is that kind of the way to think about the year-over-year impact on profitability?

William J. Burns -- Executive Vice President and Chief Financial Officer

Yeah. I think Kevin, you're right. On a year-over-year basis, we've obviously lost operating leverage on a lower revenue base. So I think it's may be helpful to talk about it sequentially, when you look at where we're coming from the fourth quarter exiting just over $6 million in EBITDA, the main thing you'll see in the Q4 to Q1 numbers is the payroll tax reset. So we expect usually about a 90 basis point step backwards in gross profit margin and there's also an SG&A hit associated with those payroll taxes. And we've anticipated that some of the fourth quarter costs that we called out that drew down our numbers for the fourth quarter will recur in the first quarter. So that's kind of what the story is going into the first quarter, it's a little bit about lower -- year-over-year lower operating leverage and then having some higher SG&A costs than we had in the prior year.

Kevin Steinke -- Barrington Research Group -- Analyst

Okay, got it. And then Kevin, you talked a lot about technology and -- integrating and utilizing technology a lot more in the business model. I know it's still early on, but, how significant or how transformative do you think the technology investments need to be to get the company to where you want it? And obviously, I know you can't pinpoint a dollar figure or anything like that at this point. But just, how much work is there to be done on that front to transform things to the way you'd like them to operate?

Kevin C. Clark -- President, Chief Executive Officer and Director

Yeah, great question, well, as my predecessor indicated in prior earnings calls that we announced that we were going to be investing between $10 million and $12 million in our IT infrastructure and I'd reaffirm that number. How we spend that money is probably different under my management, perhaps the way he was thinking about it. But I think the investment, it's about $2 million per quarter. And it's creating software of which probably half is capitalized.

The expected kind of improvements across a large body of our employees probably rolls out more toward the end of this year, it's probably three to four quarters before we start seeing impact, but we're busy there. And let me just tell you the opportunity long-term is exceptional because when we rollout our technology later this year early 2020. We will have then, what I think will be defined as the most current technology platform. So we'll be the most innovative company and we'll be a company that is going to be leading from the way we kind of go from end-to-end in terms of our technology capability.

Kevin Steinke -- Barrington Research Group -- Analyst

Okay. That's helpful. That's all I had for now. And Kevin, look forward to working with you.

Kevin C. Clark -- President, Chief Executive Officer and Director

Likewise. Thank you very much.

Operator

And our next question is coming from the line of Mitra Ramgopal from Sidoti. You may now begin.

Mitra Ramgopal -- Sidoti & Company -- Analyst

Yes, hi, good afternoon. Kevin, just wanted to follow-up on that last question. I think earlier you talked about the MSP and 61% capture rate, as you look to improve on that, it's clearly probably a combination of technology and recruiting going forward. I'm just wondering, how you see that as you try to move that number up.

Kevin C. Clark -- President, Chief Executive Officer and Director

Yeah. And I think look we're here over 61%, I think it can move up 100 bps -- 100 basis points over the next few quarters. So we can see some improvement in the capture rate. But that's a very important part of the offering too. I mean, we partner already with some terrific companies and being able to innovate the technology platform to enable our clients to provide them real time information and enable them to make smart decisions around talent acquisition, is going to always be our goal. So it is part of the infrastructure investment thesis is to improve the client side of the business, as well as core areas like applicant tracking software.

Mitra Ramgopal -- Sidoti & Company -- Analyst

Okay, that's great. And then quickly on the recruiting side, obviously you started that in 4Q as you mentioned clearly continuing that in the first quarter here. I'm just wondering if that's going to continue over the course of the year maybe moderate a little, and how difficult is the environment in terms of being able to attract recruiters without necessarily having to pay up significantly?

Kevin C. Clark -- President, Chief Executive Officer and Director

Yeah, well, probably the most important part of recruiter acquisition is really recruiter training. As part of in this first 100 days getting my arms around our training program and making sure it's best-in-class, and I've actually met with a couple of our training classes that are here. And I like what I see, we've got great content, we've got terrific management around it. So look, I think part of it is, we will be asked to kind of like catch-up if you will and improve our base will be to improve the core. And we want to -- constantly want to be looking at topgrading our team and it is challenging. It's challenging to find good talent, but again, one of the benefits of Cross Country is, we have over 70 offices and we have recruiters in just about every single one of those occasions.

Technology is able -- is enabling us to have our recruiter stay connected even if they're not in say corporate headquarter. So all these things I think are good and it's something we know how to do well here and it's time just to make sure we're making the proper investment in the front office work team.

Mitra Ramgopal -- Sidoti & Company -- Analyst

All right. Okay. That's great. Thanks again to taking the questions.

Kevin C. Clark -- President, Chief Executive Officer and Director

Thank you.

Operator

And that's the last question that we have on queue. So speakers, you may go ahead.

Kevin C. Clark -- President, Chief Executive Officer and Director

Well, thank you everybody for your time and Bill and I look forward to updating you on our progress on the next earnings call. And I just want to shout out to our new partners in Boston, we've made an acquisition in December with AP Staffing and I want to welcome them to the Cross Country Healthcare family and also to the customers that we acquired during that acquisition as well. And it's great to be back and looking forward to updating everybody here onward and upward.

Operator

A replay of today's conference will be available through March 13, 2019. You may access you replay by dialing in 1800-839-5574 or 1203-369-3669, please use the passcode 2019. Thank you for joining. You may now disconnect.

Duration: 58 minutes

Call participants:

William J. Burns -- Executive Vice President and Chief Financial Officer

Kevin C. Clark -- President, Chief Executive Officer and Director

A.J. Rice -- Credit Suisse -- Analyst

Kevin Steinke -- Barrington Research Group -- Analyst

Jason Plagman -- Jefferies -- Analyst

Tobey Sommer -- SunTrust Robinson Humphrey -- Analyst

Henry Chien -- BMO Capital Markets -- Analyst

Jacob Johnson -- Stephens Inc. -- Analyst

Mitra Ramgopal -- Sidoti & Company -- Analyst

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