Cross Country Healthcare's (CCRN) CEO William Grubbs on Q2 2016 Results - Earnings Call Transcript

| About: Cross Country (CCRN)

Cross Country Healthcare, Inc. (NASDAQ:CCRN)

Q2 2016 Earnings Conference Call

August 4, 2016 9:00 AM ET

Executives

William Burns - Chief Financial Officer

William Grubbs - President and Chief Executive Officer

Analysts

Randy Reece - Avondale Partners

Mitra Ramgopal - Sidoti & Company

William Sutherland - Emerging Growth Equities

Tobey Sommer - SunTrust Robinson Humphrey

A.J. Rice - UBS

Operator

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 pass-code 2016.

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

William Burns

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 U.S. 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’ll now turn the call over to our CEO, Bill Grubbs.

William 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 lower revenue growth than anticipated, we exceeded our guidance on gross profit margin, adjusted EBITDA margin, and adjusted EPS.

The softer 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’m happy with the results.

I’ll come back to the revenue topic in a little bit, because I believe, we will be able to improve our growth rates fairly soon. But 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’ve 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 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 anytime since I’ve been here. I want to reiterate that again by saying that, I feel even more positive about our future than even three months ago. The reason I feel this way is, because we’re really starting to see the – our hard work over the 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, is extremely satisfying to see the results of those efforts. Turnaround in an underperforming company is complicated and takes time.

As I mentioned, we’ve done a lot in the past 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’ve acquired an integrated three strategic companies, and we’ve 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 continue to make improvements, for example, we’re building a centralized shared service center. We’ve created a more accountable and customer-focused sales organization, more robust account management structure. We developed a culture where all of the businesses are working together and cross-selling. We’ve restructured our debt and we’ll talk about that today.

We streamlined our financial reporting and strengthened our internal controls, created better operating metrics and business dashboards, developed innovative value-added workforce solutions, improved our go-to-market strategy and upgraded several technology systems, including new front-office systems for the three of our businesses and other changes, I’m sure I forgotten even to mention.

But even with all of these accomplishments and a significantly improved financial position, we’re 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’ll 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’ve laid out a couple of years ago.

This is a perfect example of how the business benefits for 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’d set a goal to get to 16 this year with the changes in improvements that started two years ago. Through the end of June, we have won a 11 new programs with potential revenue above our average for existing programs. Again, it’s 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’ll 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’re making. We also have a volume shortfall in our Nurse and Allied segment. Revenue was 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 volume, which we expect to show results starting in Q4 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 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’ve stated in previous quarters, we’ve been adding recruiters now for over a year. 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 of travel nursing close to 15%. Given the size of the 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 improvements 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 it 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 with 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 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. While 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 to straight path for the remainder of 2016. These are the right actions to take and the right investments to make, but that 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 and this is all about revenue and are needed to get out 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 it might most likely not into the range we have 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 onto the market conditions. Demand for our services remains very robust and it will 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 investor 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’re very pleased with our branch operations that consist 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 was doing a great job and is making many 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 could 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 from the previous period. But we are seeing progress in our search business, which had a 3% sequential growth from Q1 although 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’re looking at ways to expand the public and charter school services to other parts of the countries that will most likely be in 2017 initiative.

Moving to our value-added services, we continue to see more and more success in our workforce solutions. Our equipment process outsourcing, although, still small while we ramp up our infrastructure, we added two new recruitment process outsourcing projects. We added an interest for our optimal workforce solutions service. We’ve 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 till the end of June and anticipate we’ll exceed our target of 60 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’re on a very good track to continue our improving profitability and shareholder value. And I can’t say it enough, I feel really good about where we are at the 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. As I mentioned, we will continue to benefit from these improvements as they come to fruition. And no different that the pricing initiatives that have paid off and the MSP sales initiatives that are paid off, we expect our new volume initiative will improve our revenue growth going forward.

We’re on the right track and continue to work toward our goals of a $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.

William Burns

Thanks, Bill and hello, again, everyone. As Bill mentioned, our second quarter continued to benefit from the strong pricing we have 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’d expected. However, we continue to be encouraged by the level of demand in our largest segment, as well as positive indications that are 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 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 the 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 gain traction throughout the quarter and should be contributing to revenue growth later this year. Additionally, we continue 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, our share price resulting 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 were 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’s worth noting that, we expect to see interest expense decline approximately $20,000 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 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 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 across three business segments. Revenues for our Nurse and Allied segment was $172 million for the quarter, up 13% year-over-year. Revenue was up 6% on a 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 6,884 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 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 a 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 for 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. 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 mentioned, we refinanced our debt structure and replaced both our $85 million asset baseline 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 continued 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 build-out 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’d 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 there are necessary to drive volume growth in nurse and allied, as well as continue to expand our solutions offerings with clients. 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 was 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 rate [ph] has primarily been from pricing and we’ve 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. At at this point, I would like to open up the lines for questions. Operator?

Question-and-Answer Session

Operator

Thank you. We will now begin a question-and-answer session. [Operator Instructions] One moment please for the first question. Our first question is from Randy Reece of Avondale Partners. Your line is open.

Randy Reece

Good morning.

William Grubbs

Hey, Randy. Good morning, Randy.

Randy Reece

You mentioned disruption due to changes in the locum tenants 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 till now in that business?

William Grubbs

Yes, that – 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 in a direction that they’re going and understanding what they need to do to be successful. There are others that don’t. And so, although, we’re not changing how we run the business, changing the level of accountability and driving productivity has made some disruptions, and they’ve had to change out some people and [hedges to] [ph] build that back up again.

Randy Reece

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

William Grubbs

So in locum tenens, the biggest change we’re 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’re 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’re billing about a 100 less customers a month than we did 18 months ago. And they’re 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’re 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 it is, again, I don’t expect to see any of that show up in the revenue until next year.

Randy Reece

Okay. 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 sufficient for the full-year in your revised guidance?

William Grubbs

Yes, I think Bill said that in…

William Burns

I mean, 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’s more of a – we’re looking at it sequentially, and I think we’ll continue to see that growing each quarter throughout the year when exactly Cross is back to year-over-year growth and probably be towards the latter part of the year. So it’s really, I think, the nurse and allied is going to be fueling most of the top line growth.

Randy Reece

All right. Thank you very much.

Operator

Thank you. Our next question is from Mitra Ramgopal of Sidoti & Company. Your line is open.

Mitra Ramgopal

Yes. Hi, good morning. First, could you talk a little more in terms of how far you’re long in the parts of bringing on more recruiters on the Nurse and Allied segment?

William Grubbs

Yes, we’ve done a pretty good job there. We’re 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’ve now – that we’ve 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 added a decent level of recruiter. We’re going to continue to add, because the market – we’re still growing into the market demand. But we’re at a sufficient level now that that we think we can handle the additional candidate flow that is required to get us to a level of growth that we believe we should be adding.

Mitra Ramgopal

Thanks. And I know you mentioned you’re certainly seeing a 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 to 24 months?

William Grubbs

Yes, I mean really most of the pricing increases we’re seeing this year were implemented in Q3 and Q4 of last year. We’ll talk 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 so forth.

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

We always get pushback on price increases. Some of it is driven by us being proactive in markets where we think that 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’m not getting my submittals, I’m not getting my job still, what do I have to do? And we could come back with market information that usually means that there are competing hospital down the road, increased our rates by $1 or $2 and if they want to be competitive, they’ve got to keep up with the Joneses. And so we always get pushback, hospitals under a lot of pressure to save money.

And that that has allowed us to start changing the conversation with our customers and bringing our workforce solutions to the tables. We have several ways to help our customers to save money. I don’t think we’re 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’s part of the reason why we’re having so much success in our workforce solutions is we’ve changed the conversation to the market for contingent labor is what it is, let us help you save money in other ways.

Mitra Ramgopal

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

William Burns

Sure, Mitra. This is Bill Burns. As we talked about earlier in the – after we released Q1, we were spending at our 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 mentioned this earlier.

We’ve now completed the first phase, which was a large assessment as to the new technologies, comparisons on features, functions, and gaps for our proxies, things that it would take et cetera that’s wrapped up. We’ve also now are in the process of negotiating and we expect to sign a perpetual license agreement.

If you recall and comments I’ve made previously, we had thought that the – 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.

We’re not – at this point it’s still a long-term project. It’s 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 will be looking as we go forward. But it’s going to be I think originally I said $4 million to $6 million in total investments that will probably be the development costs we expect and then there is – there will be a license fees that we’ll pay on top of that, so not a big shift in the numbers just really where it’s geography on the P&L.

William Burns

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

William Grubbs

That’s a very good point. We are now – I’m looking at the investments from both a non-recurring and a recurring perspective. They will continue to be some non-recurring investments in the business, not all of the technology that we’re implementing is going to move to a perpetual license. So there will be continued costs. But we – 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 reckon them.

William Burns

It will be fine, once the revenue catches up with it, right now it’s a leading cost.

Mitra Ramgopal

Okay. Thank you very much.

Operator

Thank you. Our next question is from Bill Sutherland of Emerging Growth Equities. Your line is open.

William Sutherland

Thanks. Good morning. Would you – Bill Grubbs, would you say the churn that’s been triggered in the locum business with the accountability et cetera is largely behind you?

William Grubbs

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

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

William Sutherland

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

William Grubbs

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 rather he make the right changes and get the right people and have the right operating metrics and place than to worry about whether I make $2 million or $3 million more in revenue this year.

William Sutherland

Just curious, do you guys focus on all specialties in locum, or I mean, certainly others some are growing much faster than others?

William Grubbs

Yes, probably not all specialties we have. 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.

William Sutherland

Those are good ones, aren’t they?

William Grubbs

They’re good ones absolutely. Unfortunately, we’re 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 their activities, they need to do, I feel good that that those are three good areas that we should be going better than they are today.

William Sutherland

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

William Burns

Just – I guess, the point we’re 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 in – of cash available to us. So it’s just showing that we, in the month of July alone, we’ve doubled the cash from where we ended June.

William Grubbs

Yes. 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 was – it’s kind of 1:1 for a trailing 12 months perspective.

William Sutherland

And no borrowings under the revolver?

William Grubbs

Yes, that’s one you talk about. The other one we talked about in July was the candidate.

William Sutherland

Right, right, I was curious about that.

William Grubbs

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 have 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’re exceeding – we exceeded that for both June and July. So I feel really good about it. If we can keep our conversion rates of apps – applications to – that convert to placements, which I believe will hold up. This is a really good trend for us.

William Sutherland

And then last, Bill Grubbs, on the optimum workforce solutions that you said two, al right, at least the two that you’ve talked about prior was like 500 or so slots?

William Grubbs

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 particular hospital system as we’ve seen with some of the results, I have various issues that they’re dealing with and they want to deal with some of those issues before they give us with the projects, so the bigger 500 person, I don’t know if it’s 500, between 300 and 400, I think it was – is pushed out a little bit. And so we’ll come on I think a little bit earlier, but a lot of it’s going to be pushed out a little bit later.

William Sutherland

And so you’re still obviously seeing a lot of interest, even though you don’t have a big referenceable account yet, but OWS is still attracting lot of interest?

William Grubbs

Yes, it has multiple benefits for the customers. It takes away some of the non-core competencies around logistics with people when hiring and orienting, and credentialing these paraprofessional skills. But there’s also a cost savings initiative for them, and I think that’s what we’re getting the significant interest, since they can’t save money on contingent labor right now, so they’re looking at other way.

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

William Sutherland

Okay. And then HCM in total with the MSPs et cetera, about where is as a percent of revenue at this point?

William Grubbs

Let’s start with what the percent of revenues are, MSPs are, which actually has gone up from last quarter. So last quarter, we kind of have three metrics down. If you look at our total nurse and allied, it’s about 30%. Bill, you did hit the numbers…

William Burns

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

William Grubbs

Up from last quarter, it was…

William Burns

Up from 33% last quarter.

William Grubbs

And of our total revenue?

William Burns

And for total revenue, it’s now roughly 30% of total consolidated revenue versus 28.5% in Q1.

William Grubbs

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

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

William Sutherland

Great, thanks for the color guys.

William Grubbs

You’re welcome.

Operator

Thank you. Our next question is from Tobey Sommer of SunTrust. Your line is open.

Tobey Sommer

Thanks. I’ve alluded kind of follow-up on that last question and maybe you can 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’re increasing your exposure to fill rates, because MSPs are growing then kind of how is that getting achieved in maybe a little bit more color on the moving parts on that? Is that seeming tension between those two things? Thanks.

William Grubbs

Yes, I think I get it. So yes, our revenue overall is going at MSPs, although our fill rate is down to about 60% now. So that means that our other revenue want to manage, but there is obviously going out significantly as well. All of that we feel good about it.

But if MSPs are growing at that much, that means to run on MSP customers, it must be declining and there is something true to that. If we don’t have a preference, relationship with the 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 predominantly 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 is doesn’t participate in our MSPs and it grew up 19% year-over-year. So I guess yes, I mean 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. Is that answers the question. And Bill, do you want to add anything?

Tobey Sommer

Thank you. You did a better job answering and I did trying to spit it up. In terms of the recruiters, I’m curious you talk about having started to invest, I guess in earnest, a year or so ago. Demand really picked up with the end of 2014 in terms of orders and whatnot. Could you maybe talk to us about that and if you increase recruiters a year ago, I guess or accelerated the increase, have you had to – are you financing people, because without volume increases, they’re probably not earning a ton yet?

William Grubbs

Yes. So the [indiscernible] that, 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 increase to the level of recruiter – recruitments and about a year ago, a little over year ago.

But it takes six to nine months for 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 this figure on and bring in more candidate flow. So yes we’ve been financing recruiters that are less productive than our average productivity historically and, but we had to get there again chicken and egg they 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 and not being able to get back to them that would ruin my reputation in the market. So yes, I have to do one before the other and we now feel that we’re at a point where we have enough resources that know what they’re doing, they’re up to speed that we can now invest in the candidate attraction piece of it. Now we may have not at that clear about the sequential way we do that, but that’s kind of the reality of it.

Tobey Sommer

Okay, and then what’s your outlook for price in kind of the 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 it is a very strong year-over-year growth in Q2 and wondering – I assume some of that was a little bit a catch-up to market? Thanks.

William Grubbs

There was a little catch-up. As we mentioned, we got on it late, but that an extra we just paying off, again these were 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 or once some of them are facing 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 is 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 100 or 150 basis points from where it is now, but I don’t think it’s going to drop much more than that. And if we can drive the volume that we think we can then this should grow faster than it has been for the last few quarters.

Tobey Sommer

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

William Grubbs

At 7 over 7% for nurse and allied overall and 11% for travel nursing, yes, I think so.

Tobey Sommer

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

William Grubbs

Yes, I mean I’ll say that the interesting point someone made earlier was do we get a lot of pushback from clients? So we still have some of our larger clients where we’re still negotiating those price increases. So they have yet to materialize not in our numbers, but as those will come online as we start to lap tougher quarter. So I think Bill point about that the mid single-digit kind of price increases looking sustainable to space them what we can see, where we’re still working with client to get the price increases put into place. But on a blended average, I would say we’re pretty close to where we need to be.

William Burns

Yes.

Tobey Sommer

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

William Grubbs

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

Tobey Sommer

You get them deferred in the fees.

William Grubbs

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

So if you look at the other pieces of it optimal workable solutions is $20 million $30 million today. So I’d like that to be $100 million in the next few year. 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 that’s only because I don’t have the infrastructure. I get 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…

William Burns

That’s probably on a run rate of about $16 million – $15 million, $16 million.

William Grubbs

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

Tobey Sommer

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 staffing business that has a well oiled recruiting engine be more beneficial to you at this stage?

William Grubbs

Yes. I think we would like to do both. I have some acquisition goals that I would mind achieving on the workforce solutions side that could boost RPO or optimal workforce solutions or – and certainly on the education 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 have – 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 margin. So search would be an area I would look at local allied businesses over 30% gross profits. So there are some strategic areas on staffing that I wouldn’t mind boosting as well.

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

Tobey Sommer

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

William Grubbs

Yes, I saw that as well. Although, I did see some of them also talk about strong outpace in services, which is a growing area for us. We have not seen any of that in our orders. In fact, I originally have said that we had passed our previous peak of nurse and allied orders in this quarter.

And one of finest people went back and looked and actually those one week, like last year, it 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 percent to our revenue. We’re now down to about 70%. So we certainly are growing and that business is growing. So it means that, we’re 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 brand infrastructure, we’re well-positioned to take advantage of that growth in ambulatory and outpatient. So that hasn’t bothered us a whole lot and we haven’t seen a drop of it in demand because of it.

Tobey Sommer

Thank you very much.

Operator

Thank you. And our last question is from A.J. Rice of UBS. Your line is now open.

A.J. Rice

Yes. Hello, I make a couple of questions if I could, just trying to triangulate the comments on the recruiter additions over the last year, I – you made it for a while they ramp up in the timeframe you talked about six to nine months, and you’ve seen a little progress, it sounds like in latter or some progress in the last two months.

Are you, if you think back to where you were thinking you’d be in the beginning of the year even as you’re starting to ramp this up, or would you say that the performance of those incremental recruiters is lagging what you thought, are you – are they sort of progressing as you thought, how – I’m not really sure I’m walking away with an understanding of whether they’re having the impact yet that you thought they were going to have?

William Grubbs

Yes, so that’s a good question. So it’s a combination of them getting up to speed and being ready and a combination of the total number. And so, yes, we’re 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 turn to speak it 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. And so we didn’t turn that that 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.

A.J. Rice

Okay. And then when you think about the – what you’re going to do for candidate attraction. Is that similar to what you saw three, six months ago, or are you thinking about doing incremental things and I guess is there anyway to put a dollar amount on what you’re doing. It sounds like it’s mostly raising the company’s online profile, but I wonder if there were any other broader things you highlight there?

William Grubbs

Yes, this is – there are several things that I’m not going to talk about all the particulars, because it’s a bit competitive. But I think the several aspects of it, there are quite a few things that we knew we needed to do that than we just delayed until we were ready for them. We are trying some new things that have come from the external consultants that we haven’t thought of before. Some of those are working, some of them aren’t. But we’re very pleased that we’re getting exposure to things that we haven’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 revenue will catch up to these costs. But those are kind of the three things that we had – that we look at. Yes, we knew certain things we had to do. We were holding them off until we were ready, some new things we’re trying that are paying off and then it’s costing a little bit more than we had anticipated.

A.J. Rice

Okay, now you gave a number of metrics on pricing, but I’m just – I didn’t hear it, maybe I missed it. On the branching side, more of the per diem type of stuff, what is the price increase you’re seeing there? Is that similar to travel?

William Grubbs

We were up 6.6% year-over-year in our branch pricing. That’s the combination of per diem and local allied.

A.J. Rice

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

William Grubbs

Our fill rate – our MSPs is almost 100%. It’s in the high 90s overall. It’s our…

A.J. Rice

Okay.

William Grubbs

It’s 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’re getting is up quite a bit, even though our percentage is gone down from what used to be in the high 80s to 60%.

A.J. Rice

I gotcha, okay. And then just last, Bill Burns, you mentioned the opportunity that potentially refinanced $25 million convert next year are becomes callable. You 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 $25 million note, would you end up having needing to refinance and in terms of capital or other debt and then what might get this savings opportunity beyond that at this point, anyway you can talk about that?

William Burns

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

William Grubbs

But we can choose off our cash.

William Burns

But we can choose off our cash, right, which they would – I mean that’s the backup if the shares were trading below the strike, right.

A.J. Rice

Right, right.

William Burns

The reality is to make sure that they will convert and they were to fixed rate of 8%. So the savings were straight 8% on the $25 million that you see, and it obviously cleans up a bit of the noise in the financials within better derivatives go away.

William Grubbs

So the debt piece will go away, a couple million dollars of interest will go away and those converts are already not diluted share account anyway.

William Burns

Yes.

William Grubbs

And we sized the new facility with that in mind that the converse would go away not requiring any cash, but we have we feel we have enough liquidity and dry powder, as I mentioned we have no borrowings into the $100 million revolver. One thing we didn’t mentioned on this call, but it’s in our other disclosures is that we do have an accordion feature built into the step that structures 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’re very well financed right now.

A.J. Rice

Okay, great. Thanks a lot.

William Grubbs

Okay, thanks AJ.

William Grubbs

Thanks everyone for joining us this morning. And I look forward to updating you with our third quarter results in August. Thank you.

Operator

Thank you. A replay of today’s conference will be available through August 18, 2016. You may access the replay by dialing 1-800-395-7443 or 203-369-3271. Please use the passcode 2016. Thank you for joining. You may now disconnect.

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