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AMN Healthcare Services Inc. (NYSE:AHS)

Q3 2008 Earnings Call Transcript

October 30, 2008 05:30 pm ET

Executives

Christopher Schwartz - VP of IR

Susan Nowakowski - President and CEO

David Dreyer - CFO

Analysts

Jeff Silber - BMO Capital Markets

Jim Janesky - Stifel Nicolaus

A.J. Rice - Soleil Securities

Dawn Brock - JP Morgan

David Bachman - Longbow Research

Operator

The AMN Healthcare Third Quarter 2008 Earnings Conference. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, with instructions being given at that time. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host Vice President of Investor Relations Mr. Christopher Schwartz. Please go ahead sir.

Christopher Schwartz

Good afternoon. I would like to welcome everyone to the AMN Healthcare Services conference call to discuss the Company's earnings results for the third quarter 2008. For the call this afternoon, we have Susan Nowakowski, AMN's President and Chief Executive Officer, and David Dreyer, AMN's Chief Financial Officer.

A replay of this webcast is available at amnhealthcare.com/investors and will be available until November 13, 2008. Details for the audio replay of the conference call can be found in our earnings press release.

I would also like to mention our policy regarding forward-looking statements. As we conduct this call, various remarks that we make about future expectations, plans and prospects constitute forward-looking statements. Forward-looking statements are identified by words such as believe, anticipate, expect, intend, plan, will, may and other similar expressions. Any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements.

It is possible that our actual results may differ materially from those indicated by these forward-looking statements. As a result the various important factors, including those identified in our annual report on Form 10-K for the year ended December 31st, 2007, and our current reports on Form 8-K, which have been filed with and are publicly available from the SEC. The results reported in this call may not be indicative of results for future quarters.

These statements reflect the Company's current beliefs and are based upon information currently available to us. Developments subsequent to this call may cause these statements to become outdated. The Company does not intend, however, to update the guidance provided today prior to its next earnings release.

I will now turn the call over to Susan Nowakowski, AMN Healthcare's President and Chief Executive Officer.

Susan Nowakowski

Thanks, Chris. Good afternoon, everyone, and thank you for joining us today. For those of you who know the AMN team, you know that we are quite disappointed to be reporting results, which fell below our expectations for the quarter. This is the first time in our history as a public Company that our earnings were below the low end of our expectation. However as we'll share today there were certainly positive results in the business and progress in building market share and launching new service offerings, particularly within our nurse staffing division.

In addition to the normal operating results, there were also some non-recurring charges and tax adjustment that impacted the quarter. I am going to focus on the operating results and industry trends. And David will discuss the other adjustments later in the call.

So now let's turn to the business. AMN's revenues for the third quarter was 315 million 5% higher than the same quarter last year, while adjusted EBITDA excluding those non-recurring charges from this quarter, decreased about 2% compared to last year. This quarter’s gross profit was up 2% over last year though gross margin fell about 90 basis points, due mainly to a change in our revenue mix. The drop in margin was mostly due to the lower contributions from our international travel nurse business and the physician permanent placement business.

The team is doing a very good job of managing expenses amidst the slower revenue growth environment, while still staying committed to making investment in emerging market opportunity. This is best reflected by our relatively flat SG&A as the percent of revenue and gross profit excluding those non-recurring cost associated with the pharmacy business.

In our largest segment of nurse and allied staffing, revenue grew 6% over the prior year and 1% sequentially. Year-over-year the addition of Platinum Select was the biggest contributor to this growth, while the volume declined in our international business continued to be the biggest drag on growth.

Our travel nursing division, performed very close to expectations for Q3. With revenue up 2% over prior year and 2% over prior quarter, we believe this performance is well ahead of our competitors. During the quarter, placement volumes for future assignments in the travel nurse division were also up about 1% over prior year.

NurseChoice which is our quick start, short-term staffing business, experienced strong double-digit revenue growth year-over-year and this exceeds growth rates reported by other companies in this particular niche.

While our competitors in the larger traditional travel nurse segment have yet to report, we do believe that our results will reflect a noticeable gain in market share. This is a real testament to the strength of our multi-brand strategy and the talent and hard work of our nursing sales and service team.

Looking forward however, the demand environment does appear more challenging as we’ve seen open orders for future assignments decline during September and October. The largest decline has been in the South-east particularly Florida, California has also softened a bit although not to the extent of Florida and other East Coast states.

Our bright spots are the Mid-West and the North West where we are seeing some strong year-over-year increases in orders. In our travel allied business, rehab therapy showed strong double digit year-over-year growth in volume and revenue. However the continued softness in demand for imaging discipline has created some off setting decline to address this shift in the market, we have continued to move and reallocate resources from imaging to therapy and into other growing specialty such as lab technician.

For both nursing and allied staffing, pricing continues to remain stable or growing depending upon the specialty.

Our ability to recruit new supply quality Canada attract very closely to last year and we book rates of existing travelers are also attracting inline with the prior year. Gross margin and the nurse and allied staffing business narrowed by about 60 basis points compare to last quarter. However, the underline profitability of the core business remained relatively stable, if we exclude the fact of the international division. As you recall, we acquired our pharmacy Staffing business in 2007.

Well, relatively small piece of our revenue, we do believe that this service line is an important strategic offering to our client. Unfortunately this group had been under performing relative to our expectation and so we made some critical leadership changes and Staff reductions during the third quarter to reposition the organization. We've already seen improvements in the business.

Now, turning to our Locum Tenens Staffing business, although short of our expectation the division did achieve revenue growth of 3% compare to last year on 2% compare to last quarter, this growth was mainly driven by volume which rose 3% annually. Revenue per day filled was virtually flat year-over-year mostly due to the lower mix of some of the higher bill rate, specialty such as Radiology.

Drilling down in to our different specialty groups. Behavioral health showed by far the strongest growth followed by primary care. Each produced double-digit revenue growth year-over-year and increase volumes and pricing. Dentistry they're still relatively smart continue to show a lot of promise for the future delivering double digit year-over-year volume and pricing growth.

Radiology on the other hand continues to see a negative from lower reimbursement rates to imaging centers. In addition, there is anecdotal evidence suggesting a growing trend on the part of patients to delay elected procedure, which likely explains the slightly softer results we are seeing in surgery and anesthesia. Pricing continues to be relatively firm in Locum with the exception of Radiology.

On a sequential basis overall revenue per day filled increased about 0.5% which was lead by primary care and surgery. We do believe that even in the mid the external factors that are effecting our Locum Tenens Staffing business. We could be performing better with improved processes and sales strategy. To this point on October 20th, Tim Boes joined us as the new President of our Locum Tenens business replacing Joe Caldwell, who recently decided to retire.

Joe, build a strong team at Staff Care and lead the company from inception to the number one position within a Locum industry today. And although, we are set Chicago, we believe that Tim is the right leader to continue the evolution of Staff Care and to build on our performance in this expanding segment. Tim brings to AMN a proven track record and highly successful career in sales and marketing, most recently as National Vice President of Sales for Cardinal Health Pharmaceutical Distribution Services Division. Tim joins us at an important time and we look forward to its leadership impacting Staff Care and the overall AMN sales strategy.

In our physician permanent placement segment, revenue in the third quarter fell by 5% compared to last year and 7% sequentially most of this short fall was due to an adjustment in the sales allowance, still even the otherwise relatively flat result were not what we expect from this business longer term. There are no public comps specific to physician permanent placement, however it does appear that other firms in the larger general retain search market are also experiencing reduced or slower revenue in volume trends.

We continue to make infrastructure changes to improve our performance and build stronger relationships with our clients and our physicians. As I mentioned earlier in the year, we have several initiatives focused on further diversifying our product line and broadening our client base in order to expand our revenue growth opportunities. Some of these initiatives will generate minimal revenue for 2008, but most are expected to drive incremental revenue in 2009 and beyond. An example, of a current expansion is the launch of our surgery center staffing business which was introduced in June. Another is the launch of a recruitment process outsource offering which was announced earlier in October.

AMN, RPO will manage the entire recruitment screening and selection from job requisition through new higher on boarding for facility clients, AMN experience in recruiting and credentialing 1000 of clinical professionals every year will allow us to improve our facilities time to hire and the quality of the candidate pool, resulting in reduced hiring cost.

We plan to focus on nursing first and to work with partners to support the non-clinical hospital recruitment. Spending on this initiative contributed to a modest increase in SG&A this quarter. However, we believe these efforts are well timed to continue building the business to match the changing trends of health care.

And at this point, I'd like to turn the call over to David, who will give you a bit more detail on the third quarter and the fourth quarter outlook, David?

David Dreyer

Well, thank you Susan and good afternoon. Consolidated revenue for the third quarter was 315 million 5% higher than the third quarter of last year and 1% higher than last quarter. The year-over-year increase in revenue was due mainly to the acquisition of Platinum Select in February of this year and volume growth in the Locum Tenens staffing segment. The sequential increase in revenue was mainly due to growth in our short-term nurse business and locum tenens segment.

Third quarter revenue came in 2% lower than our revenue guidance given on August 6, mostly from volumes slowing during the second half of the quarter. Consolidated gross margin in the third quarter was 25.7%, down 90 basis points from last year and 70 basis points from last quarter.

The year-over-year decline in gross margin was driven mostly by lower gross profit contribution from our higher margin businesses, such as international nursing and the physician permanent placement and a shift in the mix of specialties within our local tenens staffing segment. We anticipate gross margin to remain fairly stable in the fourth quarter and end the year at approximately 26%.

SG&A expenses in the third quarter were up 8% over last year and remain relatively unchanged from last quarter. The increase in SG&A compared to last year was mainly attributable to the acquisition of Platinum Select in February along with the charges for both restructuring and legal expenses associated with our pharmacy staffing division.

These charges also contributed to the increase in SG&A compared to last year. Excluding the restructuring legal and other non-recurring expenses associated with the pharmacy business, SG&A as a percentage of revenues would have been 18.6% flat compared to the same quarter last year and down compared to last quarter.

Depreciation and amortization expenses in the third quarter was 3.8 million, up 26% over last year and up slightly from last quarter. This expense is comprised of 2.6 million in depreciation and 1.2 million in amortization, compared to the same quarter last year, depreciation increased by 600,000 due mainly to internally developed software projects, the placement service in late 2007.

Amortization increased 200,000 compared to last year due mainly to the acquisition of Platinum Select. Depreciation and amortization in the fourth quarter are expected to remain stable with the third quarter as a percentage of revenue.

Net interest expense in the third quarter was 2.5 million, down 17% compared to the same quarter last year and down 4% compared to last quarter. The year-over-year decrease reflects the pay down of 36 million of our term loan and lower LIBOR rates over the past year.

The effective income tax rate for the quarter was 34% below the 40 to 41% rate that we have guided throughout the year. This was the result of our identifying an income tax matter that impacts to traveler healthcare staffing industry.

Since nearly the inception of the industry over two decades ago, it has been common industry practice for companies to offer logging per diem payments. However, we recently became aware that a portion of these per diem payments may not be fully deductible for income tax purposes.

We have determined that the impact of this matter for AMN was immaterial to previously issued financial statements. This quarter’s financial statements along with future financial statements will reflect adjustments for this tax changes.

The company has recorded in its current consolidated financial statements, income tax benefits cause in the effective rates to be 34% and 33% for the third quarters of both 2008 and 2007 respectively. These changes will also cause some variation in our future quarterly tax rates including the fourth quarter of 2008, when we estimate our projected quarterly effective tax rate could increase to as much as 49%. However, for the full year 2008, our effective tax rate is expected to only increase to approximately 43 or 44%.

Earnings per share up $0.28 was 12% higher than last quarter with 17% lower than last year, after reflecting tax adjustments in the second quarter of 800,000 and the benefit in the third quarter of 2007 up $2 million. Earnings per share at this quarter included a 3 penny charge for restructuring and legal expenses in our pharmacy staffing division and $0.01 charge for establishing a sales allowance in our permanent placement business offset by the $0.04 impact from the logging per diem tax benefit.

As Susan mentioned, this quarter’s earnings per share was also 3% below the low end of guidance. Fully diluted share is outstanding during the third quarter with 33.9 million down 3% from last year and 1% from last quarter. We repurchased 1.2 million shares of our common stock during the third quarter and our cost of approximately 22 million. After taking into account to repurchases completed so far, we have 9.6 million available for repurchases under the plan through the first quarter of 2009.

The company generated 21 million of operating cash flow during the third quarter, which one combined with 6 million of net cash on hand and a 112 million of revolver draw downs, we used primarily the fund share repurchases, pay estimated tax and service our debt. We ended of the quarter with $158 million of debt. Our leverage ratio is 1.7 times trailing adjusted EBITDA as compared to 1.6 times a year ago. DSO at the end of the quarter was 56 days, down 4 days from last year and down 2 days from last quarter, reflecting continued improvement in our collection efforts.

Now, turning to our business segments, revenue in the Nurse and Allied segment this quarter was $217 million, up 6% over the prior year and 1% sequentially, travelers on assignment averaged 7,185 this quarter, up 4% year-over-year and stable with last quarter.

Gross profit for traveler per day in the third quarter decreased 1% year-over-year and 4% sequentially driven by a reduction in our international traveler account and the narrowing bill pay spreads. The adjusted EBITDA margin for this segment was 6.3%, down 140 basis points from last year and 150 basis points from last quarter, due to lower gross margin and higher SG&A related to the restructuring of legal expenses associated with the pharmacy staffing division.

Revenue in the Locum Tenens segment increased to $85 million this quarter, up 3% from last year and 2% from last quarter. The year-over-year increase was driven by higher volumes in our primary care and behavioral health divisions. Days filled volume overall for the Locum Tenens business increased 3% year-over-year and 1% sequentially.

Gross margin was 26.6% down 40 basis points from last year and up 80 basis points from last quarter. The adjusted EBITDA margin was 7.8%, down on a 130 basis points from last year and up 270 basis points from last quarter to mainly to last quarter's higher insurance cost and bad debt expense along with our higher gross margin this quarter.

Revenues for the position permanent placement business were $12.6 million, down 5% from last year and 7% from last quarter. Included in this quarter revenue, was the addition of sales reserve adjustment of $500,000. Excluding this adjustment, revenue would have been stable with last year and down 3% from last quarter.

Gross margin was 57.5%, down 270 basis points year-over-year and down 220 basis points from last quarter. Although placements and new searches were down over prior year, they were up sequentially over last quarter. Adjusted EBITDA margin for this business was 22%, down 80 basis points from last year and 660 basis points from last quarter.

Now, I'll provide you with our revenue and earnings guidance for the fourth quarter and the full year.

In light of the uncertain economic conditions and the potential impact on our industry, we are reducing our previous expectations for the fourth quarter. Revenue is expected to range from $295 million to $300 million, and diluted earnings per share is expected to range from $0.20 to $0.23, which reflects a tax expense adjustment of $0.02 for lodging per diems.

For the full year we expect revenue to approximate $1.22 billion and earnings per share to range from $0.99 to $1.02 which reflects a full year impact of $0.03 tax expense for lodging per diems. If we exclude this quarter's, $0.03 charge for restructuring and legal expenses in our pharmacy division and the $0.01 charge for adjusting the sales allowance in our permanent placement business and the full $0.03 full year tax expense impact of the lodging per diems, the pro forma full year earnings per share is expected to range from $1.06 to $1.09.

Now, I'll turn the call back over to Susan.

Susan Nowakowski

Thank you, David. Despite the challenges we've discussed, we are making very good progress and continuing to strengthen the business for the future. During these times we have rededicated ourselves to focus on three key aspects of our strategy. First, continuing to capture more market share; second, to innovate and drive efficiency and productivity gains which should further reduce our cost structure in the future; and third, continuing to expand and diversify our business by pursuing emerging market opportunities and responding to the changes within healthcare delivery. We are working to ensure we remain nimble in the short term, but at the same time we are continuing to make appropriate investments to be well positioned in the long term.

And with that, we would like to open up the call to your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) and our first question comes from Tobey Sommer of SunTrust Robinson. Please go ahead.

Unidentified Analyst

Hi, this is Frank in for Tobey. Can you hear me?

Susan Nowakowski

Hello frank.

Unidentified Analyst

Hi, I wanted to try and get an update from you on what you see going on in kind of the H1-B Visa situation, and what are your thoughts about that going forward?

Susan Nowakowski

Well, we haven’t seen a lot of movement and there is H1Bs which actually don't -- really aren’t so relevant for our nurses. Nurses are generally coming over on green cards and so there hasn’t been any new progress, may we have had legislation attached to a variety of bills over the last few months and they've just not made any movement, as has nothing really I think on the hill and so we don't expect there to be any immediate changes within the immigration legislation. As you'd expect, we continue to adjust our infrastructure kind of relative to the size of that business.

Unidentified Analyst

Okay and going forward in terms of your use of cash, how are you looking at that balance from repurchases versus looking at opportunities?

Susan Nowakowski

We still have our repurchase program open through the end of the first quarter of '09 but we are also looking at strategic acquisition opportunity in those areas that are going to be important to us in the future, don't want to discuss specific items but, when we talk about our desire to expand and diversify into some of the emerging growth area and also to continue to position as to be a stronger, longer-term partner with the hospitals we are very serious about looking at target opportunities that would help us make those steps. So, that would be our first priority if those opportunities exist, otherwise we have to start buyback in place.

David Dreyer

And you know generally speaking Frank, we are accumulating cash so that’s kind of our trend. We of course pay our debt down as we've always done and we'll continue to do that. We have a revolver $75 million revolver, but so we're of course focusing in on the conditions and the key there would be pretty much collecting and holding onto cash.

Unidentified Analyst

Okay, great. And physician firm was down a little bit, year-over-year. Can you talk about some of the drivers of that, and give any more color on that?

Susan Nowakowski

Sure, one of the drivers was this kind of one time sales adjustment that we took in the third quarter. But even if you strip that out, the business was relatively flat on a year-over-year basis. We really don't believe it’s a market opportunity situation, although you have to believe that there is some hesitancy and uncertainty amongst those, the hiring facilities and the providers themselves that can be having some impact. As I alluded, there are other large retain search firms that certainly are seeing that impact in kind of in general professional areas, but we do think we can be doing better than flat on a year-over-year basis, and so we continue to make some infrastructure changes and some sales strategy changes that we think will help position us better in the market place.

Unidentified Analyst

Okay and if I could sneak one last numbers question and what is your, I guess share count for your guidance for 4Q any additional number?

David Dreyer

Yeah our fourth quarter our estimate right now would be about 32.9 million shares fully diluted. And on a full year and average of about 33.8 million shares.

Unidentified Analyst

All right great thanks so much.

Susan Nowakowski

Fine.

Operator

Thank you and our next question comes from Jeff Silber of BMO Capital Markets. Please go ahead sir.

Jeff Silber - BMO Capital Markets

Thanks so much. I was wondering if you could give a little bit more granularity in terms of your guidance by segment. I know you don’t usually do that. But even just some general trends would be helpful, thanks.

Susan Nowakowski

You are right we don’t provide that level of guidance. Directionally the fourth quarter does typically see a downturn in the nursing, allied and even locums business due to the seasonal effect of people taking off time over the holiday. So there is a certain amount of that decline which is expected normal seasonal impact. But we do believe it's slightly more exaggerated this year because of the uncertain economic environment. So kind of hard to give you anything more specific than that Jeff because you know again we don’t provide that segment specific guidance, but maybe that's a way of saying it's kind of across the Board.

Jeff Silber - BMO Capital Markets

Okay. That's fair enough. In terms of bill pay spreads. Can you give us a little bit more insight in terms of what happened in nursing allied as well as Locum Tenens and what do you think will happen in the current quarter and going forward.

Susan Nowakowski

Sure. Generally we expect our margins to be relatively stable going forward. Some of the kind of the expansion in the pay-the-bill spread we’ve seen on a year-over-year basis was somewhat deliberate. And that we did start to raise pay rates at the end of last year and the beginning of this year as you recall we had a bit of a lag last year when we were getting some decent pricing increases but weren't getting them passed on as quickly to the nurses. So it's not as though we’ve changed any strategy in a particular way it’s a little bit of a catch-up from some of the straight targeted pay rate changes that we made, kind of late '07 and early '08 and as you start to place more people into those assignments you are seeing that effect.

Within the allied business it’s a little bit more of a mixed shift issue. Certainly it is very competitive particularly in rehab, where you have a huge-huge demand for therapists and a very tight supply. But I think more of the impact that we’ve seen there on margins is because of the mix shift from a declining imaging business to more on the therapy side.

Locum going forward we expect it to be relatively consistent with what we've seen over the last couple of quarters.

Jeff Silber - BMO Capital Markets

Okay. Great. I wanted to circle back to the tax issue David, may be this one is for you. I just want to make sure, I understand it, so you took up benefit for this issue in the third quarter and there is going to be a negative impact in the fourth quarter is that correct?

David Dreyer

That’s correct. And that, you know, there was a benefit third quarter of this year and also a benefit third quarter of last year, we're expecting an expense, we're around, lets say half a million of tax for the quarter. And as I have suggest when you look at the full year, this year its going to be probably under a million dollars, again, that’s an estimate but there is a bit of a variation as to quarter-to-quarter for the impact of this adjustment.

Jeff Silber - BMO Capital Markets

Are they going to be any other adjustments retroactive, any of the prior quarters?

David Dreyer

We're – the question is restraint, no.

Jeff Silber - BMO Capital Markets

Yeah. Restraint, sort of, I mean, I am sorry.

David Dreyer

We are not doing that, when we give comparatives though we will reflect that, so you have a, apples-to-apple comparison now.

Jeff Silber - BMO Capital Markets

Okay. Great. That will be helpful. And I know you're not giving '09 guidance, but what kind of normalized tax rate should we be using going forward?

David Dreyer

Little bit tough to estimate right now. I mean certainly for the year, at this year as I mentioned is probably there's 43 to 44% for the '08 year. I think for '09 it's little early for us to give guidance on that.

Jeff Silber - BMO Capital Markets

Okay. Just a couple of quick numbers questions then. In terms of third quarter revenue growth, if you could strip out the acquisitions, what was it?

David Dreyer

Organic growth on a both year-over-year and a basis -- pretty small, I think the year-over-year is pretty much flat as its slightly positive when you strip out the acquisition.

Jeff Silber - BMO Capital Markets

And all the acquisitions were booked in the nurse and allied division.

Susan Nowakowski

Yes.

David Dreyer

The primary one is the Platinum Select.

Jeff Silber - BMO Capital Markets

Right, because the Rx Pro, while we get 40th, anniversary for that. Okay. And then finally in terms of CapEx for the fourth quarter what are you looking for?

David Dreyer

Pretty much at the similar rates, fourth quarter we're estimating anywhere about 2.7 million, I'm sorry, yes -- I'm sorry 2.4 million for the forth quarter that’s a little higher than this last third quarter which is about 2 million.

Jeff Silber - BMO Capital Markets

Great. All right. I let somebody else jump on. Thanks.

Susan Nowakowski

Thanks, Jeff.

Operator

Thank you. Our next question comes from Jim Janesky from Stifel Nicolaus. Please go ahead.

Jim Janesky - Stifel Nicolaus

David, following up on Jeff’s question, you're saying we should use an effective tax rate of 49% in the fourth quarter?

David Dreyer

We are saying it could be up to that, so we're not giving the exact number but, yes, this is that point, yeah, there is a variation quarter-to-quarter but, yes, right now for fourth quarter that would be a conservative estimate to use.

Jim Janesky - Stifel Nicolaus

So that 20 to $0.23 range incorporate 49% at a $0.27 number and may be a lower number at the $0.23 number. Is that accurate?

Susan Nowakowski

It's incorporate to 49 for…

Jim Janesky - Stifel Nicolaus

Yeah.

Susan Nowakowski

Both side of the range.

Jim Janesky - Stifel Nicolaus

Okay. So the range more has to do with revenues and expenses.

David Dreyer

Yeah.

Jim Janesky - Stifel Nicolaus

Were you ultimately come in the range?

Susan Nowakowski

Correct.

David Dreyer

That's correct.

Jim Janesky - Stifel Nicolaus

Okay. But I mean, for next year well it's too early. I mean, would it hurt to say that it's going to be 43 or 44%. It would -- are there things that you could do that that could bring that lower is that what you were saying?

David Dreyer

Well, that could be and I think those are the things that are unknown right now. But you're absolutely right, there are things that could be done and we're definitely in assessment phase, that what those things are. So we really can estimate because it's still early for us to figure out exactly what actions we’re going to take.

Jim Janesky - Stifel Nicolaus

Okay. And now shifting to the Locum segment is that segment within AMN, continues to kind of lag the industry growth rate. Can you give us an idea of what steps you're taking to trying to bring that growth rate back up and then what time frame we might expect that the changes might, if there are any, you're going to take it back.

Susan Nowakowski

Sure, Jim. Very valid question and one we been obviously working close to with our team on. The first is we have been, I believe more impacted by the radiology changes then probably the rest of the market. We has built up a huge radiology business over the last three years, it was growing 25 plus percent year-over-year for a couple of years there and so we are probably following harder then some of our competitors in that particular piece of the business.

In addition to that though, we've had some challenges within a couple of our region, where our teams are just -- have not been performing at the levels we believe they are capable. I'm impressing not at the level that they historically performed that. And so during 2008, we've made some leadership in infrastructure changes within those particular division and we're starting to see some good result sequentially.

So little bit early to tell, but definitely from second to third quarter some of those divisions made some very significant improvement. The other saying, I believe is that we do need to continue to evolve our sales strategy within that group and as I mentioned, Tim coming on board I think would be a great benefit to that group to help to take our sales strategy to the next level for the organization. We've grown very quickly, going from, starting in 1992 to today the industry leader at over 300 million in revenue and so we need to continue to evolve the strategies that are necessary to take it to that next level.

We see no reason this segment can’t become a $400 million to $500 million segment overtime, but we do need to make some internal changes, building process, sales strategy. I think in order to make that happen we’ve identified what some of those are but I also think Kim will help add to that.

And probably the last item that I would mention is that we’ve made a strategic decision about four years ago actually prior to us owning the business. But I believe it was the right decision to not be in the emergency room staffing business due to at that time the high exposure to malpractice claims. And so that is a segment of the industry is that from what we understand is doing extremely, extremely well because of the fact that more patients have going through the emergency room for their care as oppose to maybe going to physician’s office and so emergency room visit have generally been up where some of your other areas like surgery have been down.

So I think, we possibly missed out on an opportunity there. We’ll see long-term and it probably a still right decision from a risk exposure, but we will continue to re-evaluate that as we think about how we grow the business.

David Dreyer

I would just add and just for the benefit of the division there are some parts of the business like primary care, that’s been a having a good year behavioral health. It has been a strong segment for us, and we've always talked you about radiology and that’s definitely been a material part of our business that is depressed. So I would not suggest that across the board, we have some pretty strong divisions that are definitely.

Susan Nowakowski

Growing double digit

David Dreyer

Exactly.

Jim Janesky - Stifel Nicolaus

Is Tim going to be in charge of both physician temp and perm?

Susan Nowakowski

No, he is President of Staff care of the Locums divisions.

Jim Janesky - Stifel Nicolaus

I didn’t catch that, okay. Shifting to Nursing & Allied, but really this question more has to do with Nursing & Allied. Obviously its been a very tough industry for years, with maybe some growth spirits here or there and due to some regional difference or the minimum nurse to patient ratio loss, for example in California. So looking out over the next couple of years, what do you think can get this industry going again, what do you think it's going to take domestically. I understand the international challenges and let's exclude that for the moment, but domestically what do you think it's going to take to get this industry going?

Susan Nowakowski

First of all I think our team is doing an absolutely fabulous job of driving growth and market share and you are right a very tight market today and as I mentioned the short- term travel nurse segment and division of the company has driven growth in an environment where I hear other competitors talking about decline on a year-over-year basis or at least flat. So that tells me that a lot of the tactics and initiatives that have been put in place over the last couple of years but even since the beginning of the year are making an impact. So we believe correlative to the market growth, we can grow at a faster pace within the traditional travel nurse industry. For that matter our QuickBook short-term assignment business Nurse Choice is doing extremely well growing double-digit.

But I realized the investors are looking for more than 2% year-over-year. We think we need to continue as a business to expand our partnership with the hospitals and be not just, kind of that, fixed for a short term 8-week or 13-week assignment but to be more of a partner and how they manage their overall recruitment and labor needs. And that’s why the launch of our RPO business is so important because we have to get to the heart of really one of the biggest pinpoints and that’s the recruitment of permanent nurses. I preferred numbers something like 95 plus percent of all nurse hires in the U.S. remain into permanent positions in hospitals. And we don’t participate or help our hospitals and do a better job of that. So we think that we can grow not only our market position but actually, kind of, grow the overall staffing flash service segment of the industry by launching that service line.

Jim Janesky - Stifel Nicolaus

Okay. Thanks.

Operator

Thank you. And our next question comes from A. J. Rice of Soleil Securities. Please go ahead.

A.J. Rice - Soleil Securities

Thanks. Hello everybody. Just to may be take-off from the last comments you were making. First of all, you have in the press release as well as in your prepared comments said that you had some of the best market share gains possibly -- most of your market share gains was experienced year-over-year in sometime. Is that basically in the nurse staffing area in your mind or is that in the travelers or is that across the Board and maybe flush out a little bit what's the basis for making that comment and is it a regionally oriented comment or what?

Susan Nowakowski

No, it’s a national comment. And it is based on our traditional travel nurse 13-week assignment type of business which is the biggest piece of the overall industry of course in travel nurse staffing. You do have the smaller niche, kind of the quick start short assignment, which we do as well, but it's just a smaller piece of our business and a smaller piece of the overall market. And how we track market share, admittedly, there’s not a lot of public data available other than what our competitors to our public might announce. And as we look back at the second quarter, it was very clear that we took market share both in terms of our volume growth in the second quarter, but also in terms of the placement volume we were experiencing for future starts versus what our competitors were claiming. We also do get some limited reporting from some of our larger clients as to how our market share is stacking up against the competitors and its pretty clear we’ve made some gains over the last year in building a stronger piece of the business within those clients.

A.J. Rice - Soleil Securities

Okay. And then the other sort of bigger picture question I was going to ask is, typically, you guys and the other, especially the travel oriented companies, the quarter ahead is pretty much a given when you give guidance and its really sort of what is your updated relatively outlook for the next quarter, because your placement come with some visibility for the next three months. But I guess, this is the first time I can remember that, you guys are coming in and saying in the actual quarter, we hadn’t make the guidance we've given. Is there some dynamic, either the way, the business is expanded or otherwise that now makes it less predictable even for the quarter ahead. Can you give us some flavor on that?

Susan Nowakowski

Yeah. There is not been a change in necessarily how the clients are booking, but relative to our history, we do have a larger piece of our business in the physician and allied segment. And you do have more short-term and sometimes quick bookings particularly in allied, where they may get an order and they want somebody to start in four or five days versus nursing where you’re generally booking kind of three to four weeks in advance. So I'd say, in the allied business in particular there is less visibility and that’s what we saw, that was one of the impact in the third quarter. We were moving a long as expected kind of through the mid part of the quarter and then we saw our allied business volume drop off, well, not meet our growth expectations I should say in the last half of the quarter.

A little bit within the physician side too, while a majority of our physician business is pre-booked and longer-term, there is a certain amount that is a little bit per diem and more local placements and short-term assignments. And so it’s a little bit harder to predict then say, the nursing business.

A.J. Rice - Soleil Securities

Okay. And then maybe finally I'll try this aspect of it. I know this seasonally because of the holidays, fourth quarter can be lighter, but there is also the dynamic at least in some markets than hospitals are anticipating, [snowbird] volume or whatever. I guess that's more in Florida than the western part of the country I guess. Europe will tend to be strong. But how is that dynamic? Have you seen any normalcy there or are people being very cautious about there?

Susan Nowakowski

People are being cautious. I think I mentioned in my prepared remarks that, we have seen softer demand in Florida in particular and when we get feedback from our clients, it's generally been that there is uncertainty around their admission levels based on the economic environment or whether or not they will get the same tourism patient population that they've seen in the past.

A.J. Rice - Soleil Securities

Is Florida the only market where that would really be relevant or the primary one?

Susan Nowakowski

That's the primary one. I mentioned that we also have seen some softness, not to the same degree, but some softness in California.

A.J. Rice - Soleil Securities

Okay. All right. Thanks a lot.

Susan Nowakowski

Okay. Thanks A.J.

David Dreyer

Thanks A.J.

Operator

Thank you. And our next question is comes from Michel Morin from Merrill Lynch, please go ahead.

Unidentified Analyst

Hi, this is David (inaudible) for Michel. Why did pay bill spreads narrow for Nurse and Allied segment?

Susan Nowakowski

They narrowed because we had made pay rate adjustments earlier in the year. I think this goes back to the prior question that was asked where we’re getting bill rate increases and we were making pay rate adjustment, but it takes a while for those pay rate changes to actually translate through to bookings. And so, we have seen that narrow and catch-up.

Unidentified Analyst

Can you just give us what -- I guess now that you told us what pay rates were up and what bill rates were up today that wouldn’t necessarily translate until a couple of months later?

Susan Nowakowski

Correct, and it does depend up on where you ultimately place people and what is spread is at that. For example, kind of our peer bill rate year-over-year was up in nursing about 3% and pays rates were up about 3.4% on an aggregate level. But that again, that's a bit of that catch-up that we are playing.

Unidentified Analyst

Okay. So then over time, would you expect this trend to continue, in other words for the pay bill to continue to narrow or have we seen -- is the current gross margin in the quarter sort of the new level?

David Dreyer

I think we are suggesting it's going to stay more stable. But the effect of having raised rates to some degree may have a moderate effect going forward, but the trend would be stable.

Unidentified Analyst

And are you seeing pay rate pressures?

Susan Nowakowski

Not beyond the typical pressures that we see.

Unidentified Analyst

Okay. Thank you very much.

Susan Nowakowski

Thanks David.

Operator

Thank you. And our next question comes from Dawn Brock of JP Morgan. Please go ahead.

Dawn Brock - JP Morgan

Hi guys, how are you doing?

Susan Nowakowski

Hi Dawn.

Dawn Brock - JP Morgan

I'm going to ask just one more question on the pay-to-bill spread. Do you foresee any structural changes, either that you're getting pressure and feel as though you can pass on some of that pressure to the nurses or getting pressure from the nurses because it is probably in their favor right now to not do travel and to stick with their FTEs. Is there anything structurally that you see foresee changing that would shift the pay-to-bill spread?

Susan Nowakowski

Not at this time, Dawn. We certainly work with that struggle everyday and that’s why we are having well trained recruiters who can, I think, negotiate and sell the package that we offer and show the value of that package. Hopefully it helps us to maintain what we think as an appropriate pay-to-bill spread. We don’t see the shifting to any major degree in the foreseeable future.

Dawn Brock - JP Morgan

Nothing along the lines of potentially going to double occupancy apartments again or anything along those lines.

Susan Nowakowski

No, well, that might be nice for us to be able to offer that. I don’t see that as being practically accepted by the nurse population. I think we kind of crossed that bridge a while ago.

Dawn Brock - JP Morgan

Okay. The second question is on NurseChoice, the quick book. You've been talking to the last couple of quarters about the market share gain and the double-digit increase in this business. I guess my question is, are you walking the line there of prediem in any way?

Susan Nowakowski

I don’t believe so. It is a bridge in some ways between travel and prediem. Not that these people are local, but, and the facility only wants or needs them for two to four to maybe six weeks. So it does help us bridge a kind of shorter term interim need at the facility. But as you know, these people are recruited from typically outside of the area. They are usually very highly specialized nurses and they command a higher bill rate and pay rate because of the hospital's urgent need for someone with maybe significant experience in a specialty area who can get there within three to five days or maybe a week. So, I think it’s a particular and expert serves as a slightly different purpose for the facility and for that matter is often a slightly different nurse and there aren’t many nurses who can just pick up and go in five days to under work assignment.

So for us it gives us the opportunity to offer what I think is a valuable service to our facilities, but also for nurses that might not want to make that longer-term commitment, we have this kind of shorter-term interim offering. And as I said, we've seen great growth there. Now it's small for us, relative to us, it's small. But, relative to some of the competitors that are in that space, I think it's pretty clear we're making some gains.

Dawn Brock - JP Morgan

Okay. All right, thank you, that’s all I've got.

Operator

Thank you, and our next question comes from David Bachman of Longbow Research. Please go ahead.

David Bachman - Longbow Research

Hey, good afternoon, everybody.

Susan Nowakowski

Hi, David.

David Bachman - Longbow Research

That’s locums, could you just give us some, at least a rough breakout on kind of by specialty in that division, obviously radiology is very important, but just get a better handle on and what that looks like, remind we what that is?

Susan Nowakowski

Sure, we'll maybe just give you kind of order of magnitude the size of the different divisions, so that will be a good starting point? Primary care is by far the largest division and it’s a little over a third of the business in terms of day sales. Second to that is anesthesia, little over 20%, radiology which has fallen a bit, is in the teens and then you kind of fall below that.

Well, the big gainer here though I tell is behavioral health. Their growing, well, in this last quarter, they grew over 20% year-over-year. The team is doing a fabulous, fabulous job, but there's also a great market opportunity there. So those would be kind of the big categories, we also have of course surgery, as I've mentioned, its just by nature smaller but, from the bill rate perspective very important.

David Dreyer

And the primary care has been obviously a good part of the business and it's been performing well this year as well.

David Bachman - Longbow Research

Okay, that’s very helpful. I appreciate that. And then, just back to pricing in the nurse and allied, the revenue per traveler per day was a bit lighter than we had been expecting. Is that, just, is that a makeshift question? What's going on there? Maybe you've touched on this earlier and I missed it?

Susan Nowakowski

It is a couple of things, one is there were actually slightly lower hours work by our travelers in the third quarter. We usually get a little bit more of a pickup in the number of hours worked by nurse by day and we didn’t quite see that typical pickup in August and September of this year and then the second is the makeshift within allied where as we move to a higher percentage of therapy versus imaging the bill rates are lower there.

David Dreyer

The other thing is also our international business, because that's really becomes smaller. And that's had an effect as well.

David Bachman - Longbow Research

Okay, great. So they just took an whole as many billable hours that -- has it had in the past. I mean that's part of it at least. Okay and then some, just one last question. I appreciate all the detail. There’s some competitors out there that are pushing tax advantage plans as a recruitment mechanism. Can you just remind us what your position is on those plans and if that's something that you are looking at, I guess the pros and cons. I am just trying to rub my head around that.

Susan Nowakowski

Yeah, well I think we always have to be looking at our compensation programs making sure competitive and offering things that are valued by travelers. At the same time, we’ve had a history and will always be, I believe, very conservative in the way that we approach, how we structure our compensation packages. And there is question out there as to the appropriate way to offer these newly announced programs, it's pretty black and white that if you offer them separate and apart from your hourly wage then that is an appropriate per diem offering. Some competitors are actually restructuring their compensation and reducing the pay rate and substituting our wage for mil per diem. And we think that approaches a great area that we will continue to investigate, but something that we are not anticipating offering in the near term.

David Bachman - Longbow Research

Okay that's helpful. I appreciate all the color. Thanks.

Susan Nowakowski

Thank you.

Operator

Thank you and we have no more questions in queue. I would like to now turn the conference over to Susan Nowakowski. Please go ahead.

Susan Nowakowski

Thank you so much. And thank you everybody for joining us today. And certainly for your continued support of AMN. We look forward to updating you on our progress next quarter.

Operator

Thank you. And ladies and gentlemen that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.

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Source: AMN Healthcare Services Inc. Q3 2008 Earnings Call Transcript
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