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AMN Healthcare (NYSE:AHS)

Q1 2013 Earnings Call

May 2, 2013 5:00 p.m. ET

Executives

Amy Chang – Vice President, Investor Relations

Ralph Henderson – President, Healthcare Staffing

Bob Livonius – President, Strategic Workforce Solutions

Susan Salka – President and Chief Executive Officer, Director

Brian Scott – Chief Financial Officer, Chief Accounting Officer and Treasurer

Analysts

A. J. Rice – UBS

Tobey Sommer – SunTrust Robinson Humphrey

Gary Taylor – Citigroup

Josh Vogel – Sidoti & Company

Mark Marcon – Robert W. Baird

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the AMN Healthcare first quarter earnings conference call. At this time, all participants will be in a listen-only mode. (Operator instructions). As a reminder, this conference is being recorded.

I’d now like to turn the conference over to our host Ms. Amy Chang, Vice President of Investor Relations for AMN Healthcare. Please go ahead.

Amy Chang

Thanks Wai. Good afternoon, everyone. Welcome to AMN Healthcare's first quarter 2013 earnings call. A replay of this webcast will be available until May 17, 2013 at amnhealthcare.investorroom.com. Details for the audio replay of the conference call can be found in our earnings press release.

Regarding our policy on forward-looking statements, various remarks and characterizations we make during this call about future expectations, projections, plans, prospects, events or circumstances constitute forward-looking statements. Forward-looking statements are identified by words such as believe, anticipate, expect, intend, plan, will, should, would, project, may, variations of such words and other similar expressions. It is possible that our actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those identified in our Annual Report on Form 10-K for the year ended December 31, 2012, and our other filings with the SEC, which are publicly available. 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 it. Developments subsequent to this call may cause these statements to become outdated.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.

This call may also contain certain non-GAAP financial information. We make available additional information regarding non-GAAP financial measures in the earnings release and on the Company’s website.

On the call today are Susan Salka, our President and Chief Executive Officer as well as Brian Scott, our Chief Financial Officer. Joining us during the Q&A session will be Ralph Henderson, our President of Healthcare Staffing and Bob Livonius, our President of Strategic Workforce Solutions.

I will now turn the call over to Susan.

Susan Salka

Thank you so much Amy. Good afternoon and welcome to AMN Healthcare's first quarter 2013 earnings conference call. The strong first quarter results we will be discussing today were the outcome of overall solid market conditions, the continued benefit of our focus on delivering differentiated workforce solutions and excellent execution by our team. Our first quarter P&L performance reflects strength on top to bottom with year over year revenue increases, gross margin improvement and operating leverage across all business segments.

Consolidated revenue grew by 11% and adjusted EBITDA by 21%. Our adjusted EBITDA margin for the quarter was 8.4%. The largest contributor to our growth was the travel nurse business which grew revenue by 19% and adjusted EBITDA by 27% over prior year. But all segments delivered very solid performance including our local tenant business which achieved both year over year and sequential revenue growth. We continue to make progress with our strategy to expand our leadership position as the nation’s innovator in healthcare workforce solutions. In addition to the benefits of MSP wins from 2012, we’ve continued to add more new clients in 2013 and are very excited about the pipeline and potential new contracts we should close over the remaining of the year.

It’s clear that healthcare organizations are seeking innovative ways to better manage their labor costs and ensure access to high quality clinicians when they are needed. The economic and patient care benefits of utilizing an MSP model are becoming more widely and we believe penetration will increase across all staffing segments. We are particularly excited about the momentum we are seeing in the adoption of Locums MSP. We now have a total of six Locums MSP clients in various stages of implementation.

Approximately 30% of our first quarter consolidated revenues came from MSP contracts. Since our fill rates for MSP clients are higher than those in traditional clients, we were able to grow faster during periods of market expansion and it provides some protection during periods of demand softness. Now I will dive into our first quarter results by business segment.

Nurse and allied staffing revenue was up 15% year over year and 1% sequentially, the largest contributor to growth was the higher volume in the travel nurse business which was driven in part due to year over year increases in orders, clients with orders and clients with clinicians on assignment and upside surprise was the exceptionally strong revenue from EMI engagements during the first quarter. Still a relatively small part of our overall business, our track record in helping clients to successfully work through EMI implementation with proper staffing and training is certainly becoming more notable. We also experienced an above normal flu season during January and February which contributed to higher orders and travellers on assignment.

Going into the second quarter our MSP travel nurse orders have stayed relatively steady since the beginning of the year. However our non-MSP orders have declined sequentially due to a decline in winter seasonal demand and flu orders. In addition, there was some order fall-off due to the completion of a couple of large EMR projects in the first quarter. Although the EMR pipeline is strong for the second quarter it is unlikely to hit the peak level we experienced during the first quarter.

In addition to these specific trends, our hospital clients have recently been exhibiting a more cautious mindset from the lower census in the first quarter and general confirms around the impact of sequestration. However recent reports indicate that hospital census is back up in April which may indicate this demand softness will be short lived. Based on the current demand environment, we are being conservative and expect volume in the travel nurse business to be up in the low teens year over year but down sequentially. This is primarily due to the exceptionally strong EMR and flu related business in the first quarter.

Turning now to local staffing, first quarter revenue was up 4% compared to the prior year and 1% sequentially. Volume was flat both year over year and sequentially with the revenue increase being driven primarily by a mix shift toward higher skilled clinicians and increased bill rates. Going into the second quarter, local staffing revenues are expected to be up slightly year over year and down sequentially. First quarter allied staffing revenue was up 6% year over year but down 5% sequentially with the year over year growth driven by the strength in the imaging and lab specialties. Despite a decline in therapy orders driven by reimbursement cuts, therapy volumes were still slightly up year over year due to the stronger fill rates and growth in our allied and peak plans.

Going into the second quarter allied revenues are anticipated to be down slightly both year over year and sequentially due to the therapy weakness. Locums tenant first quarter revenue was up 3% year over year and up 4% sequentially. This sequential increase was due mainly to the growth in hospital and internal medicine sub-specialties as well as the advanced practice specialties such as nurse practitioners and CRNAs. This increase was offset by declines in the government and surgery specialties.

With healthcare reform trends pointing toward advanced practice professionals having a greater role in primary care we have been investing in this area over the past year and are now beginning to see a pay off. Going into the second quarter Locums revenue is expected to be up year over year and up sequentially. In physician permanent placement, first quarter revenue was up 10% year over year and down 2% sequentially. The year over year improvement was driven by increased search activity and increased placements. The leadership team in this segment is doing an excellent job of diversifying into underdeveloped markets and continuing to leverage our expertise in relationship for the placement of physician leadership positions. They have also been creating new more effective methods of recruiting through our investments in digital marketing and social media.

First quarter new searches were up sequentially and so going into the second quarter we anticipate that revenue will be up in high single digits year over year and sequentially. We continue to be excited about the positive outlook for the next several years. Discussion regarding the healthcare workforce impact of the additional 3 million in census and coupled with a 30% increase in people aged 65 and older is expected to drive increased demand for healthcare services and hospitals determine how they will meet this patient care demand in the midst of working the labor shortage, they are increasingly adopting workforce solutions that provide cost benefits while enabling access to quality commissions.

At the same time it appears that more clinicians are looking to make adoption. Based on a recent CareerBuilder survey over a third of healthcare workers plan to look for a new job in 2013 and that’s up from 24% last year. Nearly half plan to look for a new job over the next few years. To ensure we are ready to maximize this future opportunity we have remained committed to our strategic investments in three key areas. The first is our digital transformation initiative to aggressively attract more clinician supply through innovative recruitment technologies, job distribution platform and mobile applications.

The second is the continued differentiation and expansion of our suite of workforce solutions, and the third is streamlining our technology infrastructure for greater efficiency, scalability and agility. We expect these investments to be an important contributor to delivering industry leading revenue growth and improved operating leverage in the future.

Before I hand it off to Brian I would like to take a moment to thank our very talented team for the solid execution and passion for delivering excellence and quality to our clients and clinicians every day. Combined with our differentiated strategy our team member’s level of commitment have set AMN apart as the leader in the marketplace and enabled us to deliver strong results and greater shareholder value. I will come back to you in our Q&A section along with Ralph and Bob to help answer your questions. But for now I will turn the call over to Brian.

Brian Scott

Thanks Susan. Good afternoon everyone. First quarter revenue was $252.1 million, up 11.4% from last year and 1.7% from last quarter. Revenue exceeded the high end of our guidance on better than expected performance across all of our segments with the largest upside coming from the stronger EMR revenue as Susan mentioned earlier.

Our gross margin for the quarter was 29%, up 110 basis points from last year and 50 basis points from last quarter. The year-over-year increase was due to improvements across all business segments with an 80 basis point increase in the Locum Tenens staffing segment. There was also a $1.2 million actuarial based workers’ compensation benefit in the nurse and allied segment recorded during the current quarter.

SG&A in the quarter totalled 53.6 million or 21.3% of revenue compared to 20.8% in the same quarter last year and 21.4% in the prior quarter. The increase in the prior year was due primarily to higher spending in support of revenue growth including employee headcount, commissions and other growth driven costs as well as our prior year $2 million refund received in connection with the settlement of an assessment with the California EDD and was partially offset by improved operating leverage.

Our first quarter Nurse and Allied segment revenue increased 14.9% from the prior year and sequentially by 1% to $176.8 million. Volume grew 14.2% year-over-year and 2.3% sequentially to an average of 6,215 clinicians on assignment. Revenue per day was up 1.7% year-over-year and 0.9% sequentially due to an increase in the average bill rate and our favorable business mix. Nurse and Allied gross margin increased year over year by 110 basis points and sequentially by 90 basis points to 27.5% due primarily to the previously noted workers’ compensation reserve adjustment and lower health insurance costs.

First quarter nurse and allied operating margin was 12.7%, an increase of 160 basis points from the prior year on improved operating leverage and the higher gross margin. Sequentially the operating margin was 50 basis points higher due to the favourable workers’ compensation reserve adjustment.

First quarter Locums tenens segment revenue of $65.5 million increased 3.1% compared to the prior year and 4.3% sequentially. Patient volume was lower by 1% from the prior year but higher by 2% sequentially. Revenue per day sales was higher by 5% year over year and 2% sequentially on average bill rates and a specialty mix shift. Gross margin of 27.9% was up by 80 basis points from the prior year due to improved bill rates and bill-pay spreads.

The Locum Tenens segment reported operating margin was 7.5% and increased 50 basis points from the prior year but lower by 20 basis points in the prior quarter. The sequential margin decline resulted in part from additional hiring for growth. We continue to believe there is opportunity to significantly improve the operating margins at our Locums business.

Our first quarter Physician Permanent Placement revenue was $9.9 million, up year-over-year by 9.8% and down sequentially by 2%. Gross margin improved by 310 basis points from the prior year due to improved sales productivity but was down by 260 basis points from the prior quarter due mainly to the prior quarter reduction to our sales reserve.

Physician Permanent Placement operating margin was 22.6%, above the prior year by 370 basis points on the improved gross margin. On a sequential the operating margin improved by 210 basis points with the lower gross margin being more than offset by lower SG&A. Adjusted EBITDA for the quarter was 21.1 million, representing 8.4% of revenue. This compares to $17.5 million or 7.7% of revenue in the prior year and 19.2 million or 7.8% of revenue in the prior quarter.

Interest expense in the quarter was $2.9 million, which compares to $5.5 million last year and $3.2 million last quarter. Our tax rate in the quarter was 43%, which was in line with our guidance, based on our current projections, we expect the same 43% rate for the second quarter and for the full year 2013.

We reported net income of $7.6 million in the first quarter. Diluted earnings per share was $0.16 for the first quarter which compares to $0.07 in the first quarter of last year. Cash used in operations for the quarter was 2.7 million driven by growth in working capital from higher revenues and increase in DSO. Days sales outstanding were 56 days compared to 53 days in the last quarter and 57 days last year. The sequential increase in DSO was a result of higher EMR staffing revenue which typically has a slower payment cycle and higher revenue later in the quarter which would be collected during the second quarter. We do anticipate DSO will decline in the second quarter and expect positive operating cash flow for the remainder of 2013. Capital expenditures for the first quarter were $2.2 million.

As of March 31, our cash and equivalents totaled $1.9 million. We had 1 million drawn on our revolver and a long term debt outstanding was $158 million, a $35 million reduction from a year ago. Our leverage ratio as calculated for our credit agreement was 2.3 times as compared to 2.2 times last year. The company’s amendment to its credit agreement went to effect on April 9 reducing the interest rate on the term loan by 200 basis points to 3.75%. The rate on the revolver was reduced by 150 basis points to 2.5%. In conjunction with the amendment we will charge approximately $1 million through interest expense in the second quarter.

Now let's turn to our guidance for the second quarter. We expect consolidated revenue to be between $251 million and $255 million, representing year-over-year revenue growth of 6% to 8%. Gross margin is expected to be approximately 28.5%. SG&A expenses as a percentage of revenue are expected to be 21% to 21.5%, and adjusted EBITDA margin is expected to be between 7.5% and 8%.

For the second quarter, we expect interest expense to be $2 million excluding the $1 million charge associated with the credit agreement amendment. Non-cash stock based compensation expense is expected to be $1.5 million. Capital expenditures are expected to be approximately $2.5 million for the second quarter. And diluted share count is expected to be $47.9 million for the first quarter and $48 million for the full year.

And with that, we'd like to open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question is from the line of A. J. Rice with UBS.

A. J. Rice – UBS

First of all just kind of a one on that, interest rate reduction, is the entire 158 million subject to the better terms that you described or is that somewhat less than percentage of that –

Brian Scott

Actually the full amount is subject to that, so that you can be in 158 million of current debt, that’s about $800,000 a quarter of interest savings.

A. J. Rice – UBS

I guess you called out the EMR engagements and talked about that they were strong early in the quarter and maybe some of the same volatilities of the flu, can you just give us some perspective on how meaningful a portion of the business. I assume that’s mainly in the travel nurse segment that’s been over the last years, that was the absolute spending life of this but it’s just not been clear to me exactly how much do you guys have seen that as part of the strengthen the business as sort of reserve driver of incremental year to year growth or is it served by out at this one?

Brian Scott

We continue to see a really good pipeline of opportunities, it’s still small overall in relation to the segment that it has. That does impact not only the travel business but a little bit sometimes in local and allied as well but primarily in travel and never ever given exact amount but it’s usually under 5 million or so a quarter. I believe more than that in the first quarter, that’s why we called it out. And that’s doubled from what it was last year. And so again the pipeline going forward still looks some very good but we don’t expect that the second quarter to be quite a strong as the first quarter.

A. J. Rice – UBS

And then just maybe finally, maybe a broad question about the competitive landscape. It seems like your leading competitor in travel nurse seems bigger, had experiencing a lot of turmoil at this point. So I am trying to figure out (inaudible) the underlying growth in the space versus just maybe market share gains that you have been able to achieve, can you give us any flavour for the competitive landscape and your relative market share position?

Susan Salka

Sure AJ, it is difficult even for us to really parse that out on a real time basis. And certainly we can look at market growth from our orders and sales and when we have an MSP relationship and see the orders growing or not growing and that’s a good sense of what’s happening in the market itself, although you have to remember that MSP clients are more often the larger the more sophisticated clients and they tend to be more strategic users of temporary staff, they don’t make us many kneejerk reaction changes to their staffing plans. And so as I mentioned we’ve actually seen pretty good steady order growth and kind of order flow from those MSP clients since the first of the year.

From the non-MSP clients so that would be traditional competitive account and third party accounts, for those would be VMS types of relationships through vendor neutral, more technology related types of providers, we’ve actually seen the orders come down. They are still up year over year but since the beginning of the year we’ve actually seen them come down. So it’s really hard to parse out whether they are losing market share or whether there is actually an underlying kind of falloff in the market demand. In terms of relative to our competitors I would say in the MSP competitive world, that particular company you are talking about, is actually much of a strong competitor for that MSP business today and we still take them very seriously. And they are usually there at the table competing for the business but we feel some stronger momentum from some of these vendor neutral companies that are out there and some clients want to go that route rather than a full service MSP.

Bob Livonius

I think Susan, to your point I think there the competition is broader than just one company that’s out there, certainly there are couple companies, Quasa MSP and pure vendor neutral space and we certainly pushed back all of our competitors but we are doing very well in the market and our pipeline in MSP is just about as robust as ever been. We have added recently to our sales force last year, we added a couple of people and so we are now up to pretty sizable organization. We expect our pipeline to be bigger and it certainly is.

Susan Salka

I really think AJ we have a really good window of opportunity over the next couple of years as hospitals are feeling all of the pressure and turmoil from reimbursement cuts and amidst the shortages across all of the clinical disciplines, they are hungry for some type of solutions that will help them get their arms around the aggregate cost of their workforce and how to manage that better. And so that’s why we are seeing greater interest and appetite for these types of MSP and other workforce solutions.

Operator

And our next question is from the line of Tobey Sommer with SunTrust.

Tobey Sommer – SunTrust Robinson Humphrey

I wanted to ask you a broad question Susan about you had growth now in many of the businesses and now closed all of them, for sometime and I wanted just to get a sense for how you feel the investments that have gone, even investing all along or do you feel that the opportunities in front of you require kind of step up pace of investment? I am just trying to get a sense for how you are going to balance margin expansion together with pursuing growth.

Susan Salka

You recall we talked a year ago about some particular strategic initiatives that we were going to be increasing and expanding them because we wanted everyone to know that we were going to increase our SG&A and CapEx spending in order to help ensure that we would get those growth opportunities as well as gain better efficiencies in our back office through system improvements, process changes etc. So we have been doing that over the last year, the last year has been more about the digital transformation project which is the improvements in our website, our mobile media, job distribution, those types of things and we are continuing to be rolling those out over the next year. But we are also in the midst of improving some of our back office systems in order to better connect our sales teams, reduce redundancies that we have manual processes that we have throughout the company which add costs and also make it challenging to deliver service in an accurate and timely fashion.

And so we will be continuing those investments over the next couple of years. You will see those primarily pop up in the form of CapEx since they are more systems related but we will have this higher level of SG&A that we started last year for a period longer.

Tobey Sommer – SunTrust Robinson Humphrey

On a couple of questions on the MSP front, did you quote a percentage of revenue derived from MSP business and if so, could you give a reference point for what it was, year ago or couple of years ago?

Susan Salka

We did mention that 30% of our consolidated revenue to date are – I think last quarter we talked about it being 27%, so you can see us continuing to creep up and probably a few percentage point every quarter and I would expect that to continue over the coming years.

Bob Livonius

That includes – this is Bob. That includes the entire segment, when we talk about consolidated it obviously includes our Locums business in there as well and of course we are just now beginning to penetrate that sector. So as a percentage of the other sectors it’s definitely higher and it’s just now beginning to penetrate the Locums sector.

Tobey Sommer – SunTrust Robinson Humphrey

In thinking about the different businesses, is there a natural threshold or something different about how far you think MSP could go within physicians versus how far it’s gone in the nurse and allied side?

Bob Livonius

We’re a bit of a pioneer in that space, so I will just give you our predictions and that’s based upon you have the history of course, but also what we have seen in the nurse and allied sector, I don’t see any particular reason why the penetration wouldn’t as high. The only caveat to that is that some of our locums business is actually done in physician offices and not in hospital practices. And so a portion of that business is done in physicians’ offices, it’s not likely to be subject to an MSP. But if you just look at the hospital sector I would say that the penetration is reasonably – I think over the next two or three years, grow pretty quickly.

Tobey Sommer – SunTrust Robinson Humphrey

I have one last question on MSP, I will get back in the queue. So about 30% of your business in MSP call it roughly $300 million on an annualized basis, how much – what’s the relative size of the non-clinical spend for those MSP customers? I am just trying to get a sense for what it might be on the other side of the coin that really is business that you can’t help your customers fill on that side?

Bob Livonius

We took contract that business, so there are MSP clients who do ask us to manage the clinical spend. The non-clinical spend and just remind you when we talk about 30% of our revenues being a direct revenue, that doesn’t really account for the growth, think along through our sub-contractor network both clinical and non-clinical. So we’ve got five or 600 sub-contractors on the clinical side, we’ve got half a dozen or dozen non-clinical providers. But just to give a sense of the size we have been seeing that on the IT space in particular there is a pretty significant growth out of our clients and we do see that the spend on that side on the IT side is growing. It’s actually good for us in the sense that drives attention to contract labor more broadly and since we can do the IT spend it seems to be more positive for us to help grow that all-in under one platform or under one program. Even when we are not the leader in doing that, we can partner with other IT companies and have done, so where they take the IT and we do the non-IT on the clinical side. And it seems to work very well.

Tobey Sommer – SunTrust Robinson Humphrey

And so just to ballpark it, is the non-clinical piece since you do have a glimpse into it and made sub-contractors out, it did seem size or smaller or just even a rough estimate would be useful.

Bob Livonius

But we have some examples where it’s substantially higher and then you have other examples where it is lower. But –

Ralph Henderson

I think we have an integrated system where they – I have an insurance arms of the organization, you might see the point being about the same but when you kind of look at the operating expense of a typical healthcare system about 50% of it is employee expenses, about half of that is nursing. So you really get down to probably 10% to 15% of their clinical spend on average in a normal system. So unless they have an insurance environment or something.

Tobey Sommer – SunTrust Robinson Humphrey

Was the workers’ comp – it benefit in the quarter, could you quantify that if you did out in your prepared remarks, I apologize.

Brian Scott

Yeah, 1.2 million, it was in the nurse and allied segment and cost of sales.

Operator

And our next question is from the line of Gary Taylor of Citigroup.

Gary Taylor – Citigroup

Just a couple questions. So when we look at the revenue sequentially the guidance for approximately flat sequential revenues, when you look at that by region, or type of client is there anything that’s noteworthy there?

Susan Salka

I think the most noteworthy thing is as we mentioned we had some – I don’t know if I comment usual, because it’s part of our business but exceptionally higher amount of EMR business which won’t necessarily be fully repeated in the second quarter. Those aren’t necessarily region, it’s just more project driven, and then we had higher flu related business and those orders are largest order state were from California, Texas, Northeast, probably more population driven than anything. But there were certainly some states that felt the flu impact greater than others. As we look at our overall orders, it’s actually still a very good distribution, between kind of east and west if you cut the country down the middle and the trends haven’t changed that much between the two. So the flattish performance and really gets -- the decline in the nursing business is driven by those exceptionally strong unexpected business in the first quarter which won’t necessarily be repeat.

We took those out of the equation, we would actually be more flat to up in that segment. Ralph, do you have anything to add?

Ralph Henderson

I would add one more thing, this is Ralph, on California we have several clients who use travel nurses to fill in big seasonal jump that they have, where they typically refer to as their winter needs. And those are going to start to come off their assignments towards the end of March and into April. And that’s the impact of those nurses coming off this, that’s even larger than the EMR decline. And we actually budget that way for this quarter to come down. We just actually have been able to outperform that over the last few years so it doesn’t show up in the last couple years. If you go further back you might see some of that a little bit. And we are hearing a little bit from hospitals as well about budgetary concerns and so I think they were nervous about reimbursement and rules changes that were being contemplated. And so you see a very quick kind of reaction to catch jump labor, it happens, seems like every single year, and we did see a little bit of that as well.

Gary Taylor – Citigroup

Right, you did beat your midpoint of your 1Q revenue guidance, you did exceed that by 4 million. When we look at nurse and allied staffing segment what percent of those FTEs reside inside your MSP clients?

Susan Salka

About 40% of our revenue in that segment, so that would equate pretty closely to the volume as well.

Gary Taylor – Citigroup

And in your prepared comments, you suggested non-MSP FTEs would be down sequentially MSP orders steady. So do you feel like your MSP clients have a lower order book sequentially but you are still gaining share or are we just getting too specific in that given quarter to think about that?

Susan Salka

Yeah it might be a little too specific although I kind of mentioned that the MSP clients tend to be more steady and really used travellers and local staffing kind of strategically as part of their ongoing workforce planning. So you don’t see as many of these kneejerk reactions to what might be happening with census or the environment around them. So I think that’s one reason we have seen steady orders in the MSP clients since the beginning of the year. With that said, you do have some seasonality even within those clients because some of them are located, sent up state or in the northeast, or in California where you get this drop-off that Ralph described in the second quarter. But I think you have seen more stability in those orders generally over time.

Gary Taylor – Citigroup

So when I think about EBITDA margin, I guess 8.4% reported this quarter, kind of normalizes to 7.9 if we view that workers’ comp as non-recurring and the sequential guidance is 7.5 to 8, so that modes sequential decline is primarily seasonality or did I miss something in your comments?

Brian Scott

I would say, I would call it as a seasonality, we continue to invest in the business as well. So as we are trying to keep a longer term view. So if you look at the SG&A projection it’s more than – that’s why we give that range. So there is going to be some variability on the gross margin and SG&A margin each quarter but we really do continue to invest in the business, our recurring headcount is up in our Locums business and nursing business. Bob mentioned, continue to invest in the MSP sales team and so those are – we continue to make, as we think those are going to drive long term value to the organization. And so the variation of 10 to 20 basis points per quarter and just the next quarter out is not our overarching concern.

Operator

Our next question is from the line of Josh Vogel with Sidoti & Company.

Josh Vogel – Sidoti & Company

I guess a follow up on the line of questioning on the MSP before, I just wonder if you could – we are seeing obviously this business growing at a healthy cliff. I was just curious how big this market is and the opportunity for you, what percent of healthcare systems are currently not sourcing through your competitors?

Bob Livonius

There are business surveys that are out there, that staffing industry analysts have done to try to test the waters and you get ranges from 30% to 40% of the -- hospital systems have some form of an automated approach to their contractor labor or VMS or MSP. But we still think there is plenty of opportunity and I would also just continue to point out that in our particular model we continue to add services. So we might start out with just nursing and then we can go from nursing to allied and then from allied to locums. And more often we also were able to bring in some of the more sophisticated RPO or some other service lines that can be additive. So I think there is quite a bit of room for growth and we’d obviously -- even if you are not winning more contracts we think that, that with the affordable care act and with more people being covered, the general overall population growth for our services will continue to grow even within our MSP accounts.

We are seeing a lot of nice consolidations. So for example, some of our hospital systems got way up other hospital systems and that’s just like a new win for new hospital that we didn’t have to do anything for, and that we like that when that happens and that’s why we are concentrated as much as we can with some of these more sophisticated and prestigious hospital systems that are out there today, ones we mentioned in the past.

Susan Salka

Josh, remember that while in nursing the hospitals and the larger systems are certainly the largest employers of temporary nurses. Within the allied business your rehab facilities and skilled nursing facilities actually are utilizing a large number of temporary staff or travellers, and per diem as well. So we are finding that they are great clients and great prospective MSP clients particularly for your larger national and regions firms that are trying to get their arms around their workforce planning and their workforce spend. It’s very hard for them when they have all of these different sites across the country and where they decentralize and an MSP is a perfect solution for them to create more of a centralized approach and to give them the analytics.

Likewise within locums you have other types of employers such as contract management companies that utilize locums. So we think of the market for MSP far beyond the hospital market.

Josh Vogel – Sidoti & Company

Switching gears a little bit, last year you did a great job keeping housing and insurance costs in check especially versus what we saw in some of your competitors put up. What are you doing differently and are you seeing any pressures or are those costs still fairly contained?

Brian Scott

Well, I think that the housing, overall the market for housing continues to be a challenging one. Vacancy I think is again at an all time low. So we are finding opportunities to reduce, sometimes it’s very difficult. The team has done a phenomenal job of holding housing costs in check. And so we have seen sequentially and year over year our housing costs are generally stable. And so that’s allowed us to take the door increases that we have seen and investment back into attracting more supply. But it is a kind of dated battle to make sure we are always trying to find new housing partners to keep those costs in check.

The other area that we have mentioned were health insurance costs, where again I think we have made some changes to our plans every year. As we continue through the year we make plan design changes and we have made some additional ones for 2013 in part in preparation for healthcare reform next year. The impact of that has reduced our health insurance costs a little bit and we have just seen good – had good experience over the last couple of quarters in that area as well.

Josh Vogel – Sidoti & Company

Lastly you did a nice job delevering the balance sheet last year and just curious if that was still your number one priority for cash.

Brian Scott

Yes it is. Yeah we will continue to take our free cash flow. Again as Susan mentioned earlier, little bit of step up in our capital expenditures this year, so when we look at the free cash flow, that will be our strategy to continue to delever the balance sheet.

Operator

Our next question is from the line of Paul Condra with BMO.

Paul Condra – BMO

I just wanted to ask you about the locums, how much do you think the growth there has been driven by the locums MSP?

Ralph Henderson

In the process of implementing a fixed brand new locums deal, and none of them actually – they are thinking about approaching go live day, that’s been recently. So the growth in Q1 was related to the run-up on those, so clients were in contract negotiations with us began doing more business our way, until it was – it was definitely helpful to the quarter overall. We also had I think a tremendous success from the recruitment side when we restructured the organization to focus on specialities, the teams really became I think just better at filling jobs within their speciality. So that restructuring helped, the last thing would be investment we have made in the advanced practice which was made about three quarters ago, has begun to pay off. That’s now our best highest performing specialty and again advanced practice is one of those things that’s frequently requested in the MSP program. So it really was a combination of things, I think in the future quarters we are going to talk a lot more about the impact of MSP locums on our growth. In this quarter it’s only a portion of it.

Paul Condra – BMO

And is there anything that might change about the margin profile that when you compare the MSP locums versus the more traditional?

Ralph Henderson

I think our locums margin overall are kind of below where they probably should be given the market and the value of that service to our clients, so I think there is plenty of upside in our margin overall for locums. I do think that the MSP margins per locums will be several to couple hundred, maybe 300 basis points north giving that as flag here when I look around the room. But that’s where we are seeing in travel nurse and allied.

Paul Condra – BMO

Are you talking about gross margins?

Ralph Henderson

Gross margin, yes, operating margins on locums, actually it’s the same, we think there is upside to the operating margins. We branded higher operating margins in the past, and we do think that those are two, 300 maybe even more below where they should be. We need to of course grow our business a little bit and get to a point where we can leverage our investments in it. Before we get there, so it’s going to take a little bit of time. But I think you will see both top and bottom line growth. In locums MSP we talked about this on prior calls but it’s a very efficient delivery methodology, you don’t have to compete. Your fill rates go up, you have more time to book housing. It’s a lot of efficiencies are driven in the back office and the sales organization when the client is on MSP program versus working in a traditional environment where you’re slugging it out with seven, eight competitors on a single order.

Paul Condra – BMO

And do you find that it’s client – existing MSP clients that you are able to follow send to, or are there in two accounts?

Bob Livonius

I think it’s a mixture of both. We’ve got good success going on in both arenas and interesting enough there is not the sector that Susan mentioned would be physician contract management groups who have a substantial amount of spend and a lot of it is very urgent because as they open up these new sites every time they get a new contract with a new client. In a difficult market they almost always start with locums. So they are the most chaotic environment because they have urgent needs that are very difficult to plan for and they spend a lot of money locums and we found that we have a very good story there. We also have a way to help them contain those costs. So it’s kind of back to our bigger piece of the smaller piece mentality. We think we can help clients who want to try to control those costs but yet pick up substantially more volumes for ourselves.

Operator

We will go next to Mark Marcon with Robert W. Baird.

Mark Marcon – Robert W. Baird

I was wondering about the margin performance in physician perm, it’s quite solid, how sustainable is that?

Susan Salka

Are you talking about physician perm placement or locums?

Ralph Henderson

We have been in that in the 20% range for quite some time where the physician perm business and in it, just because of the size of the business and we operate it, it has a variability kind of plus or minus a couple hundred basis points. So we certainly feel like that, that range of 20% is very sustainable longer term and I mentioned in the first quarter we had low SG&A as they trued up last year as a result in the fourth quarter a little bit. It was little bit lower but that’s right in that range I think we are more focused on growing the top line there, obtaining that current level of profitability that we have.

Susan Salka

In order to grow the top line in that business you have to be hiring new grade talent, new marketers, new recruiters and you have got to have a good training program and a cohort in place to be putting them out into the market and increasing your capacity. And that’s where the team has really done a great job there in Texas in helping to grow our new producers, new marketers and recruiters and get them productive more quickly.

Mark Marcon – Robert W. Baird

It sounds like a more specialized focus is also advanced structure.

Susan Salka

Yes.

Mark Marcon – Robert W. Baird

And then on the locums, you covered this a little bit before but it sounds like we are pretty early in terms of the inflection point, obviously just started, how are you thinking about locums long term?

Ralph Henderson

We obviously have spent a lot of effort on this the last few quarters trying to get this business repositioned just we were headed, after several disappointing years when it was overly invested in a couple of specialties that didn’t perform very well. We feel very, very good about the specialities we are in and as well the – our ability to track what specialities are going to perform well going forward. So it’s just the resources should help us grow. At this point we are – it’s nice to see year over year growth and sequential growth for the first time in almost a couple of years. I think we should have a good quarter again next year. We are hoping to see kind of industry average growth rates by the time we execute for of this year. So what your – 9 to 10% most of the sources that I have talked to.

Susan Salka

And as we have said many times we believe our margins can be better, so in addition to the top line growth, we should be able to achieve some gross margin expansion over the next two years. We know we are under market in our pricing and in our bill pay spread and so we have opportunities there and if we get the top line growth we should be able to get the leverage and improve our EBITDA margin. So it won’t happen overnight and it’s something that’s going to take a couple of years but we obviously at 300 basis point improvement in gross margin and as Ralph said, something north of that in EBITDA or contribution margin improvement.

Mark Marcon – Robert W. Baird

MS physiology and radiology actually stabilized, are you growing just because of some of the popular areas such as hospital?

Ralph Henderson

On a sequential basis actually radiology did with, we are pretty stable, it didn’t shrink any further. It represents a much smaller percent of our total, at one point it was close to 20% of our revenue came from radiology, now it’s in the 3.5 to 4% range. So that’s probably about where it should be and overall I think that’s accurate. We saw some growth in the MS physiology mostly in the advanced practice side of that, CRNAs. And we saw that to grow on a both the sequential and I think year over year basis, I don’t have that number in front of me. So that was a positive sign for us. They didn’t hurt us this quarter and we don’t expect them to. They are not big enough any longer to really hurt us. So with the other ones performing some at double digit growth rate like hospital, the advanced practice specialties. We should be able to last any drag that those things have caused on us for us in the past.

Mark Marcon – Robert W. Baird

And then with regard to the – you are under a market in terms of pricing, in terms of increasing capital spread, what’s the timing for that, how should we think about that?

Ralph Henderson

It’s a couple of things, one reason – one main reason for under the market is because we were again over indexing in government and so we have been working on being more selective, choosing the right government partners and getting that business at better rates. So it’s completely different focus there which I am very excited about, we have a great government team. They know how to sell, and so we can find ways to make money on that and I do expect it to be roughly maybe 10 to 12% of our revenue in the future. So that comes down to the margin because they improve. The other element is adjusting our bill rates and so just to give you some color on that, our bill rates year over year got a 4.5% which is a good start. So far we have had to reinvest it in other cost of sales primarily in physician compensation, we did find our way into some of these specialties where we weren’t very large before. But we are seeing I think – really great success in some of the specialities. I think there is four or five specialities that we have year over year double digit pricing increases on.

So the team is really I think doing a great job executing there. So it may not be as visible yet because of the physician pay but I do that there is some traction there and we are already probably a good way down the track to getting back to market level.

Mark Marcon – Robert W. Baird

Do you think that, in terms of getting to the 30% gross margins, I think that’s out a year or two years, three years?

Susan Salka

We’ve really not put a timeframe on that Mark. Obviously we are trying to give a sooner than later and so I think in the next year it would be unreasonable to think we could get there that fast. So I think your two to three year timeframe is more reasonable. I know the team there in Irvin and in St. Louis and they will be pushing for it much after, actually our lindy brand – we have two brands, which in our locums business cafeteria and lindy and lindy already has gross margin over 30%. So we know it can be done, it’s not just the rest of the competition, we have our own brand that’s performing at that level. And so I know the team in Irvine with staff care and very focused on getting up to that level and maybe even surpassing that same.

Mark Marcon – Robert W. Baird

And then lastly in your opening comments you referenced the softness in the census we heard from some of the hospital companies, as it relates to the quarter but then the indication that April picked up again, are you seeing that in your order flow?

Susan Salka

We are not seeing it yet. I am not surprised because there is often a delay or lag in the behaviours of our clients. I think that’s a bit of what we even saw coming off of the first quarter where lot of the hospitals were talking about lower census in the first quarter and it took a while for that to filter through to them maybe wanting to request less temporary staff in some of these traditional and third party accounts I was talking about. And so likewise as it takes back up I think it takes a while for them to feel the pain of more patients in the house and stretching their staff to spend, they will quickly have to react to that and start to staff back up. So that’s why we are cautious but we also don’t see it being likely to last very long if indeed census is picking back up as they say it is.

Mark Marcon – Robert W. Baird

With regards to the recruiting efforts, what are you seeing in terms of fill rate and behaviour in terms of willingness to take travellers –

Ralph Henderson

On the applicant side, we are still seeing increases in applicants. Some of that related to our digital transformation but it’s some of it I think just – our products are becoming more popular again, people are little less nervous about economic conditions. Additionally on the physician side, we are seeing increases in the number of applications there. Our fill rate themselves have trended up, our MSP fill rates we discussed an all time highs and our traditional fill rates have been very solid as well. I think we are not concerned about supply right now as something that would be a barrier to accelerated growth.

Susan Salka

We think of that access to supply the willingness of clinicians to leave a permanent job and coming into the travel industry might be increasing, we are certainly seeing increased applications but I mentioned the career builder survey that came out just a couple of days ago and they talked about the burn out of healthcare workers and how they are going to be looking for a job this year, half are going to be looking for a job change next year. It’s burn out, it’s having to take on too many patients, working too many hours and juggling multiple patients needs, it takes their toll on morale and attention. And we are starting to see that anecdotally crop up, job openings. We have seen that continually tick up for our end. So we think we are getting to this point where most of the permanent staff are getting frustrated with being stressed. You just can’t do more with less.

Just great report put out by the advisory board that talked about bending the labor curve and they talked about how taking short term Capex and cost cutting on your labor force and particularly your clinical labor force, will have only a temporary relief and it’s not a sustainable strategy. In fact, I guess there was a study that was put out by the HMA that summed that hospitals, the healthcare systems that had across the board cuts, there is no surprise research and proven many times that the ratio of clinicians to patient have been very direct effect on patient outcome and mortality. So once they start to feel that pain of being too thin and their attrition starts to go by being it causes them to once they watch more strategically about how they manage their workforce.

Operator

Next question from Tobey Sommer, SunTrust.

Tobey Sommer – SunTrust Robinson Humphrey

Equivalent impact to be in the EPS.

Brian Scott

Its about penny and half.

Tobey Sommer – SunTrust Robinson Humphrey

What sort of milestones in course of inflection should we look for that market to kind develop and accelerate more fully given the history that you have on the nurse and allied side.

Brian Scott

We are kind in a unique blend of opportunity right now. That’s actually a good thing, some milestone I think when we two or three competitors being in the locums, there are certainly VMS companies who have expanded their capabilities to do that so. And our current window of opportunity is to sell that in conceptual environment. But as we move past the conceptual environment to what I would call a more reference sales where we have four or five clients that we can refer to and we also then move into environment where we see competitors entering the marketplace and you hear other companies like us talking about it.

Operator

I will turn it back to our speakers for any closing remarks.

Susan Salka

Thank you very much, while we appreciate you all joining us today and we certainly appreciate your continued support of AMN Healthcare and we look forward to updating you on our progress next year.

Operator

Thank you. Ladies and gentlemen, that concludes your conference call for today. Thank you for your participation and for using AT&T’s Executive Teleconference. You may now disconnect.

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