AMN Healthcare Services Inc (AMN) 2002 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the AMN Healthcare Services 2002 second quarter earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session with instructions to be given at that time. If anyone should require assistance during the conference, please depress zero, then star. As a reminder, this conference is being recorded.

I would now like to introduce our speakers for today's call. We have Steve Francis, President and CEO, Susan Nowakowski, Executive Vice President and Chief Operating Officer, Don Myll, Chief Financial Officer, and Chris Vlautin, Director of Investor Relations. At this time I'd like to turn it over to our host, Mr. Chris Vlautin, Director of Investor Relations. Please go ahead.

Good morning. And welcome to the AMN Healthcare Services conference call to discuss the company's earnings results for the second quarter of 2002. I would like to remind everyone that a replay of this Webcast is also available at www.amnhealthcare.com/investors, and will be replayed until August 13th, 2002. 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 for purposes of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. 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 public filings with the SEC in connection with our Initial Public Offering.

Many of the results reported in this call are for a partial year, and may not be indicative of results for future quarters, or for the year. These statements reflect the company's current belief, and are based upon information currently available to it. Be advised that developments subsequent to this call are likely to cause these statements to become outdated with the passage of time. The company does not intend, however, to update the guidance provided today prior to its next earnings release and conference call.

Steven Francis, AMN Healthcare's President and Chief Executive Officer, will now review the company's second quarter highlights.

Thank you Chris. Hello, and welcome to AMN Healthcare's second quarter 2002 earnings conference call. We appreciate your interest and participation today.

Last evening we reported record financial results for the second quarter. Today, we'd like to provide you some insights regarding our strong results and update you on recent developments in AMN.

Let me begin by reviewing our financial results. We couldn't be more pleased with our strong financial performance through second quarter. The results reflect a continuation of our rapid revenue and earnings growth. Revenue for the second quarter of 2002 was 191.2 million dollars which is an increase of 65 percent over the second quarter of 2001.

This revenue growth translated into solid earnings growth. Second quarter 2002 net income increased to 12.5 million dollars or 26 cents per diluted share as compared to 1.4 million dollars or 4 cents per diluted share for the second quarter of 2001.

As has been a pattern in previous quarters, our operations continues to be driven by strong fundamental industry dynamics yielding exceptional organic growth. 91 percent of our total increase in revenue for the quarter was organic. Both the volume of travelers and the revenue per traveler per day exceeded expectations in the second quarter.

AMN further expanded its position as the largest temporary healthcare staffing company in the United States with an average of over 7600 healthcare professionals on assignment during the second quarter of 2002. A 38 percent volume increase over the same period last year.

In addition to this volume and revenue growth, our earnings were also enhanced by increased leverage of our size and scale which resulted in earnings growth that exceeded our top line revenue growth.

At this time, I'd like to comment on some additional developments that took place during the quarter. As reported earlier in a press release this quarter, we completed the acquisition of in April and we're well underway in integrating these operations into AMN. We are confident of the benefit of this expansion in our multi-brand recruitment strategy and the opportunity to grow the brand.

In May we successfully completed a secondary offering of AMN stock increasing our float by 100 percent and bringing the total shares publicly held to 23 million or over 50 percent of our total shares outstanding.

Demand our services continues to be strong. Hospitals continue to utilize travelers for the traditional reasons of managing their flexible staffing models, seasonal fluctuations, covering for staff and unit openings, but the current nursing shortage estimated at 126,000 vacancies which translates to 10 percent of the hospital nursing workforce continues to dwarf all of these traditional demand factors as hospitals request travelers in order to keep their beds staffed and to maintain a safe level of patient care.

Recently, some publicly traded hospital chains have reported an easing in their staffing challenges resulting in slower growth in contract staffing costs. It appears to us that this trend applies primarily to non-skilled labor and perhaps contract nursing. We believe our continued strong growth rates indicate a continual preference and a trend towards utilization of travelers as a high quality cost-effective staffing solution.

To meet this high demand, we have also been successful and continue to grow our pool of qualified traveler candidates. During the second quarter, all of our travel brands continued to see an increasing number of new traveler candidates applying. This increase in applications is fueled by word-of-mouth referrals from our large and growing number of working travelers. We believe that the growing reputation of our brands are aided by the large number of attractive assignments we have offer, the desire by nurses to seek flexible alternatives to permanent positions, the competitive compensation package that we offer and our increased brand awareness.

Through our marketing efforts, we have continued to be successful in developing creative new ways to attract a growing supply of traveler candidates. During the second quarter we acquired RN.com, adding to our other nurse communities and portal internet websites like NurseZone.com, TravelNursing.com, and NursingJobs.com. These sites have been very successful in increasing our brand awareness and we will continue to seek new ways to broaden exposure of our travel brand and to reach out to the over 2 million nurses here in the United States and even more abroad. Before I turn the call over to Susan Nowakowski, the company's Executive Vice President and Chief Operating Officer, I would like to reiterate our confidence regarding the strength of our industries underlying fundamentals. The growing demand on our healthcare system driven by aging demographics combine with a pervasive nursing shortage provides, in our opinion, a long-term and predictable growth opportunity for AMN Healthcare. I believe that our results just further support this belief. And with that, I'll turn it over to Susan.

Thank you, Steve. As Steve mentioned, all three of our key metrics, travel accounts and revenue and gross profit per traveler per day were strong during the second quarter. I would like to provide you with some further qualitative details that, hopefully, will give some insight on the drivers of these positive results. This many sound somewhat like a replay from last quarter because the good news is that there is no big, new news. Our sales and service teams continue to deliver outstanding results. And the second quarter was another great example of how our focused operating model continues to aid us in achieving solid volume growth, revenue growth and increased in growth profit. The organic volume growth in travelers working during the second quarter was 33%. This strong organic volume growth is a result of the continued increases in new traveler applications, our retention of existing travelers, a growing sales team and the benefits of increased sales training that was introduced last year and is still continuing today. The other contributing factor is the increased productivity that we have been able to achieve as some of the newer AMN family brands continue to assimilate the AMN operating model and take full advantage of the shared orders and improved systems that have been implemented. We expect these sales productivity gains at newly acquired brands to continue.

Traveler retention rates remain strong in the second quarter, indicating that our travelers continue to be pleased with our delivery of customer service, our selection of assignments and our competitive compensation and benefits package. However, in our effort to continually improve the level of service that we're providing to our clients, we introduced a company-wide customer service-training program to all employees during the second quarter. This program is called "Team Service Success" and has been received with overwhelming positive response and we believe, is already contributing to improved service to our traveler and hospital clients. While our historical growth has, no doubt, been a result of excellent customer service, AMN wants to further distinguish its leading reputation in the industry by delivering noticeable superior customer service. In our business, great customer service translates into happy travelers and hospitals. And happy travelers stay traveling with us, and refer more new healthcare professionals to our brands. We believe we can further increase our already strong retention rates, and word of mouth referrals through this heightened customer service program.

Revenue per traveler per day grew 20 percent over the second quarter in 2001. About 85 percent, or 17 of that 20 percent was due to an increase in the average rate, which is a sign of the continued strong demand for travelers. Remember, since our pricing is largely market and demand driven, due to the hospitals' need for increased supply of travelers, we passed on the majority of rate increases to the travelers in the form of pay rate increases. This is a positive situation for us, since increasing pay rates allows us to attract more travelers to be placed at those clients.

A result of this dynamic is that revenue per traveler per day rises at a faster rate than gross profit per traveler per day. This is why you have seen that our growth margin percentage during the first and second quarter of 2002 has been consistent at about 24.3 percent, but slightly lower than the same quarters during 2001. We view this as a positive for AMN, as we are able to offer healthcare professionals improved compensation packages, due to the hospital's demand. This dynamic assists our volume growth, and still provides for increases in our gross profit per traveler per day.

We continue to be pleasantly surprised by the better than expected leverage that we are gaining from our size and scale, and through our consolidation of information systems. SG&A was approximately 200 basis points lower in the second quarter of 2002, than in the second quarter of the prior year. And while there have been some specific line item savings that we have generated through greater purchasing power negotiations, the vast majority of the savings come from the productivity benefits that we've seen from streamlining our processes among our brands, improved employee training programs, and computer system enhancements that have been made over the last year.

We are well underway on the integration efforts of our latest acquisition of HRMC Travelers. In fact, this last weekend HRMC went live on our operating system, known as the American Mobile Information Exchange, or AMIE. The early signs are very positive, that HRMC will produce growth similar to the other AMN acquisitions. The management and staff at HRMC are high quality, and hold the same passion and commitment to excellence that exist at all of the AMN travel brands.

Let me now turn this over to Don Myll, our CFO, who will discuss our financial results for the quarter, and guidance.

Thank you Susan. I will spend a few minutes providing some specific background on our results for the second quarter, and I will also provide some additional insight on the increased revenue and earnings guidance for 2002. As Steve mentioned briefly, our financial results for the quarter were strong, exceeding our expectations for travelers revenue and earnings.

We reported second quarter earnings of $12.5 million, or 26 cents per diluted share, which compared to $1.4 million, or four cents per diluted share for the second quarter of last year. These earnings results were primarily driven by a 65 percent increase in revenue for the quarter, to $191.2 million. Adjusted EBITDA as defined in the earnings released increased 72 percent to 22 million over the second quarter of 2001. The adjusted EBITDA margin of 11.5 percent for the quarter reflects an improvement over the 11.0 percent reported for the second quarter of last year and the 11.2 percent reported in the first quarter of this year. This improved EBITDA margin was due primarily to the increased leverage in SG&A expenses and our constant gross margins.

Let's look a little bit more deeply at our revenue for the quarter. The components of the 65 percent increase in revenue, an increase of 75.1 million dollars, as compared to the second quarter of 2001, resulted primarily from organic drivers. These include, first, the pure organic volume increase in the average number of travelers working through out existing brands contributed 38.2 million dollars of the increase in revenue. As Susan mentioned, this represents a 33 percent organic growth in travelers over the second quarter of last year.

Second, strong demand from hospitals resulted in an increase in the average bill rate charged to our healthcare facility clients and contributed 24.1 million dollars of the increase in revenue. And, also as Susan mentioned, this represents an increase of 17 percent over the second quarter of 2001.

Third, a shift in the mix of payroll versus flat rate traveler contracts contributed 6.1 million dollars of the increase in revenue. 97 percent of our travelers today are under payroll contracts for the second quarter, which compared to 91 percent for the second quarter of 2001.

Mix shift and rate increases yielded a total increase in revenue per traveler per day of 20 percent. In total, 68.4 million or 91 percent of our total revenue growth was non-acquired pure organic growth.

It is worth mentioning that our organic growth in revenue and related earnings does not require additional permanent capital as we believe that our current operating cash flow is sufficient to support our current and anticipated further growth.

The second quarter also was benefited by an increase of 6.7 million dollars in revenue attributable to the acquisitions of our foreign nurse recruitment operations that we acquired in May of 2001 and the acquisition of which was acquired in April, 2002.

Gross profit for the quarter increased 55 percent and gross profit per traveler per day, a key driver to our profitability, increased 12 percent over the second quarter of 2001.

Gross margin for the quarter was 24.3 percent, was in line with our expectations and was consistent with the first quarter. As expected, the second quarter's gross margin was lower than the 25.9 percent gross margin reported in the second quarter of last year due to a number of factors.

These include, first, the impact of the integration of the then recently acquired brands last year, second quarter. This has been a recurring benefit after we acquire a new brand, when we accelerate the new brand's growth in travelers, revenue and gross profit as we transition to the new -- to our AMN brand or AMN model.

In addition, the shift in the mix of payroll versus flat rate traveler contract has been a consistent transition over the last several quarters resulting in increased gross profit.

Finally, a greater pass through of hospital pricing increases to travelers in 2002. While this lowers our gross margin percentage, it does not reflect a negative sign of eroding gross profit. In fact, as I mentioned, our gross profit per traveler per day increased nicely during the quarter.

Remember, our model is primarily a cost plus pricing model where client increases in bill rates occur so that we can increase pay rates to our travelers. This greater pass through has enabled us to grow both our volume of travelers and gross profit dollars while maintaining a consistent gross margin compared to first quarter of this year.

During the second quarter, our revenue per traveler per day rose faster than we expected and we passed on a significant part of this increase to the traveler. If you look back at the gross margin percentage in 2001, you will notice the relative anomaly of the gross profit margin in last year's second quarter. It does not serve as the best comparison. Last year's second quarter gross margin was 120 basis points above the other quarters for the year.

Turning to SG&A, as Susan mentioned, our expense leverage was evident as our selling, general and administrative expense declined to 12.8% of revenue. That's compared to 14.8% for the second quarter of 2001 and 13.1% for the first quarter of 2002. Looking at the balance sheet for a second, AMN finished the quarter well positioned and continues to be debt free. Day sales outstanding and account receivable was 63 days June 30th, consistent with the prior year and first quarter of this year. Our earnings and management of our balance sheet provided over $11 million in free cash flow from operations during the quarter. This quarter's operating free cash flow more than paid for the acquisition of HR&C and our normal cap ex during the second quarter.

I would now like to discuss and turn to our revenue and earnings guidance that was provided in your earnings release. This revised guidance reflects increases from our previous guidance provided on April 23rd. As a reminder, our policy is to provide updated guidance only when we release our quarterly earnings results. AMN is continuing to experience growth in traveler account, revenue and earnings. Our earnings release includes specific guidance for 2002, including net income ranging from $51 to $52 million or $1.08 to $1.10 per diluted share. This is an increase of 3 cents from our previous guidance for the year.

For the third quarter the company expects significant net income growth to a range of 28 to 29 cents per diluted share. We anticipate a continuation of the historical seasonality of our business, which results in increasing traveler volume in the third and fourth quarters. This guidance reflects revenue and adjusted EBITDA growth of over 45 to 50% over the third quarter of 2001.

We normally, and will today provide some guidance on our three key operating metrics. The first key operating metric is our volume of the average number of travelers on assignment. This is expected to increase in the third quarter of 2002, ranging from 27 to 29% over the third quarter of 2001. For the full year of 2002, the average number of travelers on assignment is expected to increase ranging from 30 to 32% over 2001.

The second key operating metric is average revenue per traveler per day, which is expected to increase to approximately $279 for the third quarter. That's a 16% increase over the third quarter of 2001. For the full year of 2002, average revenue per traveler per day is expected to increase ranging from 15 to 16% over 2001. This includes the impact of both pricing increases with our the client and traveler contract mixed shift. The third key operating metric is average gross profit per traveler per day, which is expected to continue to increase to approximately $68 for the third quarter. That's a 12% increase over the third quarter of 2001. For the full year, 2002, average gross profit per traveler per day is expected to increase ranging from 9 to 10% over 2001, maintaining a relatively consistent gross margin throughout the year. This revenue and earnings guidance excludes the impact of any potential future additional acquisitions during 2002.

At this time we are happy to stop and take any and all of your questions.

Ladies and gentlemen, if you do wish to ask a question, please depress one on your touchtone phone. You will hear a tone indicating you've been placed in queue, and you may remove yourself from queue at any time by depressing the pound key. If you are using a speakerphone, please pick up your handset before pressing any numbers. Again, ladies and gentlemen, if you do have a question, please press one at this time. We do have a question from the line of with Robert W. Baird. Please go ahead.

Good afternoon. Good quarter. A couple questions here. First off, when you look at the model, I know some of your competitors have taken on more of a fast staff type model, where they charge premium prices for a faster response in a shorter duration, similar to an NHPO type model. Have you looked at that, and is that something that you would be interested in, or does it conflict with your current business model?

We don't, we don't think that that charging hospitals a very inflated price, and then trying to pass it on to the, to the nurse with a high bill, with a high pay rate in order to gain market share is a good long-term strategy. I mean, there's only so many hospitals that would be willing, that are willing to do that. So I think that that, you know, that that works for some hospitals, and for some nurses, but as far as growing a company, as far as growing up the volume, we just don't think that's the right strategy.

And that's not something any of your brands have a focus in then?

No. We don't, we don't, none of our brands have a focus with that at all.

OK. And then you made a couple comments on productivity. I wonder if you could help us out a little bit there. When you look at that on a travelers per recruiter, or some sort of qualitative basis, can you give us some idea of where that stands today versus maybe the beginning of the year, or year over year?

Hi . I will answer that as best as I can, but let me go back and also add something to what Steve said. You know, the only companies in the industry right now that are following the model that you described are those companies that are in the strike busting business, like U.S. Nursing, that's who Fast Staff belongs to, and I think HTO has a component, has a strike component, and they've adopted that model. So there are strategies that might make sense, because that actually is closer to the line of business that they're in, but I think if you looked at any of the larger travel nurse companies, they're not following that model, and that's because we want to provide a cost-effective quality solution to the hospitals on a long-term basis.

So, and then moving on to the recruiter productivity issue. You asked that question very nicely because you know that we don't provide any recruiter productivity statistics. And very, and one of the reasons we don't is that it varies from quarter to quarter. So even to compare our recruiter productivity in the second quarter to the first quarter would not make sense for us, because every quarter somewhat stands on its own. What I will say is we were very pleased with our second quarter recruiter productivity numbers, and as I mentioned, we see a significant upside in some of our newer travel acquisitions as they continue to assimilate the operating model and take advantage of the, of the shared order process.

OK. Fair enough. That sounds good. And then one final question. I guess when you look at your progress I terms of adding new clients, how would you characterize that and has that changed at all in terms of how you approach the client, or have you enhanced your ability to penetrate new -- new accounts?

We -- I wouldn't say we really have changed our approach. We've always taken a very professional approach with the hospitals in partnering with them to make sure that, again, we're providing that qualify, cost-effective solution for them and, you know, we've not tried to use the leverage of this supply demand imbalance to gain, you know, to gain on them. So, I'd say that our approach is very similar.

We've been very pleased with the number of new clients that we continue to add. I mentioned that in the first quarter and then in the second quarter, that continues to be true. In fact, we just added two new staff positions to our hospital marketing and client service department to be able to handle the volume of prospective new clients that we're talking to.

OK, very good. Good information today and good quarter, congratulations.

Thank you.

We do have a question from the line of Matthew with JP Morgan. Please go ahead.

Yes, thanks very much. I've got a few questions here. First of all, given your internal growth in excess of 33 percent in the quarter which is above what periodicals quote the overall market growth at, I just wanted to see if you could help characterize the overall market? Are you taking market share from anyone in specific, or do you see an acceleration in the overall market growth?

Well, I think that we're seeing that there are more nurses that are joining the travel nursing ranks than ever before. I think with the demand that's going on and more nurses joining the ranks, I think you're seeing an expanding market.

As far as taking market share from competitors, you know, we have a multi-brand strategy that is very unique and we believe that that is something that is working very effective for us. I think we know that that has helped our growth and since a lot of these companies are private that are out there, our competitors, it's hard to -- to quantify exactly, you know, what we're taking from them. But we believe that we are gaining market share.

OK, great. And then the second question, another competitor in the industry spoke about housing costs declining in the latter part of this year, I wanted to first of all see if you could just quantify for us what your housing costs are as a percent of revenue and secondly see if you are seeing any kind of declining trend in terms of what you are going to pay for apartments?

Hi, Matt, this is Don. The housing costs represent no less than 15 percent of our gross revenue and it has been declining fairly steadily over the last several years, but it's not, you know, a dominant cost -- it's one of our larger cost elements, but it's not a dominant one.

We had not noticed, you know, a significant reduction in costs on our apartment by apartment basis so, although it does help leverage our margin, has helped some, it's not a real driver and it would have to change a lot to be noticeable. Being only 15 percent of revenues. So, it's kind of a similar message on the margin, it's a little bit better, but it's not a real driver.

And that would run through direct costs on your P&L?

Yes, sir.

OK. Last question for you, Susan, have you see any increase in the number of travelers that are willing to stay in market and not travel?

Not a significant change. We, you know, that's not a strategy of ours, to try to recruit local nurses to work at local hospitals. It happens and as the, as more nurses are joining travel nursing it continues to happen so I think we see it more but on a percentage basis I'm not sure it's really happening that much more. I know I've heard our competitors talk about a large percentage of their travelers working locally and I have to say that's not the case for us.

OK. Thanks very much.

Thanks, Matt.

We do have a question from the line of Mark Allen with SunTrust Robinson Humphrey. Please go ahead.

Hey, Susan, Don, congratulations on an outstanding quarter.

Thank you.

Getting nice price increase of 70% increases is kind of a high-class problem. I wonder if you could kind of discuss your strategy. You seem to be deliberately passing through more of the price increases to increase your volume. Why would you not try to keep some of that for your margins. Obviously, it's a trade-off between margin and volume, but maybe you could put a little color on your strategy behind that?

Sure, Mark. Remember, the reason that we are gaining those price increases is because the hospitals are wanting to recruit more and more travelers. And one way that they can do that is by being more competitive with the bill rate so that we can in turn increase the compensation that's being offered to the traveler. So the reason, the fundamental reason that rates are going up is demand and so we are able to take those rate increases and pass them on to travelers. One, because that's the reason for them, so that's what we ought to be doing, but second, it helps us in attracting more travelers so that we can fill that hospital's demand. So it's really, you know, it's really more of the rising pay rates are a result of the increasing bill rates.

And with your gross margins in the mid 24% range, is there, do you guys have a target level of gross margin percentage or is there a floor gross margin, which you wouldn't want to drop below?

Well, I don't think you're going to see it change significantly, you know, unless prices, you know, went up to, you know, went up to, you know, $90 or $100 per hour and that's not the service that we're trying to deliver. You know, we're, again, trying to provide a cost effective solution for our hospitals so we are going to respond and work with them on pricing increases that make sense for them. We're not going to be approaching them and trying to gouge them by increasing prices to a higher rate and we're going to work with them to be appropriate rate level so that we can increase the prices. So I don't think you're going to see, you know, you're not going to see it go from 24 to 20%. You know, if there was another basis point reduction in gross margin, would I be concerned? No. Because as long as revenue per traveler per day is rising, if we're passing on the majority of that to the traveler and as long as our gross profit per traveler per day is either remaining constant or of course, rising, because we'd like to add to that, too, then we're happy.

OK. Last question. Relative to your Allied Staffing business, what percent of your revenues this quarter was Allied and is that growing faster or the same rate as your travel nurse business?

You know, Allied has been about 10% of our business for a long time. So it's growing at about the same rate as the nursing business. Which is good news, because there is, you know additional growth opportunities in those areas as well.

Final question. On seasonality. It looked like the sequential increase in the number of travelers this quarter was not quite as high as the prior couple of quarters. Is that just that the June quarter is seasonally not that strong relative to the colder weather months?

You're right on it , the June, the quarter to quarter change from Q1 to Q2 is always the, that's the slowest quarter to quarter growth rate. To give you some statistics, last year's Q2 grew 2.2 percent over Q1. This year it grew 2.4 percent over Q1. So that's a, whereas the other quarters are almost seven to ten percent in adjacent quarters. But the second quarter of this year was actually a little bit faster. And I think last, when we, when we provided the guidance as of first quarter, we provided very specific comments about the second quarter being, you know, we used the term kind of flat. And that's normally seasonally healthy.

You know, you don't have the snowbird travel, you don't have the flu season.

Exactly. Yes. And see the hospital census is I think nationally is the lowest in that quarter.

Appreciate it, good luck. Thank you.

.

We do have a question from the line of with Capital. Please go ahead.

Hi. Just a couple questions. One, how much cash you have actually spent on acquisitions through the first six months?

We've only made one acquisition this year, and that was the acquisition of HRMC in April of this year, and we spent about nine and a half million dollars on that acquisition.

OK. And on the productivity metrics that you put out, when you have the revenue per day per traveler, is that on an eight-hour average day? Or is it fewer hours than that?

It's per day. I mean, it's actually, it's simple division. It's the number of travelers we have on average on a daily basis for the quarter, divided into the total revenues.

Right, but if you were going to break that down to an hourly, you know, average hourly revenue number, on a per hour basis, would that be an eight-hour work day that you use? Or is it ...

Typically it's a 36-hour week basis, you know.

OK. And then do you have any comments on the idea of, you know, state legislatures in various states trying to put a cap on contract labor?

The only state that really went a little far with that is the state of Massachusetts. And they actually, in the bill that has gone through the legislature, and I believe is actually awaiting Governor's signature, exempts or allows their state health agency, the government agency that's going to be setting rates to exempt agencies that are providing nurses for more than, that are working for more than 13 weeks, or about 13 weeks. 90 days.

And the reason there, and the reason there's an exemption there is that because the state recognizes that if they were to somehow cap the rate, that that's going to suppress nurse wages, and that those nurses in the travel business are going to go somewhere else. They're going to go to another state. Now Massachusetts, there's a bill in their legislature similar to what has happened in California as far as a nurse to patient ratio, staffing levels, where the state actually are going to mandate that you have to have so many nurses for so many patients.

So they recognize that in order to be competitive nationally, which is what travel nursing, that they can't have those kinds of regulations in place. So I think this is a good example of why States aren't going to be doing this. Now, it may, you know, a lot of times these rate caps are really, when you -- when you look at it, it's really they're set up more for home help or for not home help but for skilled nursing facilities, not really for hospitals and then, again, for the one case in Massachusetts they are basically in the legislation allowing an exemption for travel nursing.

OK, thanks a lot.

We do have a question from the line of Bud with Wells Fargo Securities. Please go ahead.

Nice quarter, guys.

Thank you.

Just a couple of questions, more sort of on the environment for nurses that you're seeing right now. In terms of that, in terms of your sourcing for the program there, are you finding that you're having to work harder for the growth or are you actually enjoying some economies of scale now that you've -- you know, that you're over 7500 nurses in the program?

Well, having a lot of nurses working out in the field certainly gives us, we think, a competitive advantage since about 50 percent of our new traveler candidates come from word of mouth and I think that's true across the industry. So if we have, I think about 30 percent more travelers working than our closest competitor, that means we have 30 percent more people out in the field telling other nurses and healthcare professionals about our brands and referring them back to us, so it does become this sort of self-referring continuous process.

But, as you also know, Bud, we are -- that's not good enough for us, we're also very, very aggressive in new marketing strategies and that's why we are by far the most aggressive company out on the Internet. Both through our travel brand web sites, but also through our Nurse Community and portal web sites which have been very successful for us. And we do get some leverage in those sites by having multiple brands that we can position on the sites. We get some economies of scale. If you think about it, really no other competitor could have a site like that and have the credibility that we have because we can offer the nurses choices on those sites. Choices of brands to sign up with. If you're a competitor with one brand, you can't really offer the nurses the choices that they want. So we think it's very powerful.

OK, well with that said, then, with the 300 -- roughly 300 new nurses you picked up quarter over quarter, then I guess we can say that about 150 of those came from -- directly from referrals and if that's the case, is there any way you can maybe provide a breakdown of the sourcing of those 300?

Well, we can internally. It's something that we certainly track very closely, but it's not something that we report out to the street. You know, again, I kind of use those, you know,

Right.

-- that approximately 50 percent and I think that's a good rule and that's not unique to us.

OK. So, I mean, at least in terms of acquisitions going forward, that's going to remain, sort of a minority source or new nurses, I guess on average going forward?

Acquisitions?

Right.

Well, there are no acquisitions included in our guidance or in our forecasts, so --

Well, I know that, but I'm just -- in terms of the assumptions going forward, that would obviously be, sort of, a lower part of the overall growth being that referrals are so high. I guess I'm answering my own question here. But, OK. And then, also, I was wondering, you don't give any nurse retention rates; correct?

We do not, but I think I mentioned on the call that we continue to have strong nurse retention rates in the second quarter.

OK, so those nurse retention rates have been somewhat stable over the last several quarters? Have you noticed much change there or?

They've actually been increasing a little and again, those you do have to look at year over year as well because there are nuances that go on during certain quarters, but you know, year over year they've increased.

Great. And then, finally, Don, can you maybe just give a little bit of gross margin guidance going forward? Should we expect to see it somewhat stable here maybe, tick down just a few basis points going forward?

I think the guidance provided assumes fairly stable gross profit margins.

Great, great. Well, in terms of gross margins themselves?

Yeah, in gross margin.

Great. Thanks very much.

Thanks, Bud.

We do have a question from the line of Jeff Silber with Gerard Klauer. Please go ahead.

Thank you. Actually, I've got a couple macro questions. There have been a couple developments in the industry since your last conference call that unfortunately affected your stock price. I was hoping you would address them. One's been the reported increase in malpractice insurance rates and the other is a more recent development in terms of a bill passing in the senate to throw money to try to alleviate the nursing shortage and I was wondering if you could talk about the potential impact of both of those on your business going forward.

Sure, Jeff, I'll address the malpractice question. Early in the quarter, there was a company in our healthcare sector that reported a disappointment event where their malpractice costs were going to increase significantly and the market responded to it. Our reaction is pretty clear cut. The malpractice element really is not that significant of an item, and the reason is as follows. Our business model provides that we do extensive on all of our nurses before they go to an assignment, work for a hospital. They work under the direct supervision of the hospital's nursing staff and the policies and procedures of the staff. They're trained by the hospital and the, every nurse is interviewed by the hospital.

So the selection process is a very joint event between us and the hospital. If there is an event causing a malpractice claim, typically it involves a combination of the physician, the hospital and sometimes us. So if there is an event that that, this point an event occurs, there's a shared responsibility. We have never had a malpractice event that has come close to piercing our coverage limit and we are very well covered. Up to 21 million in coverage. So having said all that, I would then follow it by telling you that because malpractice insurance is less than a half a percent of our revenues, even if you assumed a gross increase in rates this year and we are assuming that there will be a 10 to 20% increase in malpractice coverage in the next year, plus. So we kind of felt we put this to bed and are not concerned about it. We spend a lot of the time doing clinical and review and support of our nurses and in negotiating good insurance coverage, but we don't think it should be of significant concern to investors.

And the second part of your question, Jeff, is probably related to the nurse reinvestment act that was just recently passed and as you know, that's been actually been going on in the house and the senate since last year and provides for scholarships for nursing students, establishes a comprehensive geriatric training grants for nurses. A lot of it's geared towards geriatric nursing, I think. Offers grants for nursing schools and faculty, which is a great thing because there aren't enough faculty members to teach new nurses out there. And overall, this provides for sort of a public service campaign to promote the nursing profession. And we think all of this is good. It's good for the nursing profession and it's good for us. Now, there weren't any dollars attached to the bill, that need to go back and of course, they'll argue over how much can be appropriated so we'll kind of see where that goes.

But, you know, I think this is a concrete example of just how serious the nursing shortage is, the fact that the government is stepping forward and saying we really, we need to try to do something about this. If you look at, there was a, there was another, there was another series of grants that were approved by the Department of Health and Human Services earlier this year in June. And that was for $30 million, I think they actually attached dollars to that for similar types of grants and faculty subsidies. And when you run the numbers of that 30 million, it ends up helping anywhere from 500 to maybe 3,000 nurses.

And as Steve said, there are 126,000 vacancies out there for nurses. So, you know, we think that these measures are good, they're steps in the right direction, but it just goes to show how, you know, $30 million doesn't go very far. And the fact is many of these nurses probably would have joined the nursing profession anyway. So maybe it's even only helping half of those. So in general we see it as positive, but it's really a drop in the bucket, you know, towards fixing the problem.

OK, great. If I could just ask one more quick follow-up. I know there's also been a lot of concern in the general market about expensing stock options, and I was wondering if you could tell us what the impact would be if your company decided to follow that route?

You bet. the impact of stock options, if we were to adopt it beginning of 2002, would have, would have a two cent earnings' charge for the full year of 2002.

OK. Great. Thank you.

Thanks.

We do have a question from the line of with Duquesne Capital. Please go ahead.

Hi. I have a couple of questions. First, in terms of the new travelers that you attracted in the quarter, where did they come from? Were they coming from other agencies, or were they new to the business? And the second question is about the growth margin, which quarter, or the gross profit per traveler per day, which had a huge quarter over quarter increase.

And if I look at the amount of your revenue that was on payroll contracts, it went from 96 percent in the first quarter to 97, which really doesn't explain the big increase. I'm kind of wondering what else is going on there? Was there something that either artificially depressed the first quarter, or was there something else going on in the second quarter that made it, that made it go up so much? Thanks.

, I'll take that first one in terms of where the new travelers are coming from. Obviously it's a mix of coming from the competition and coming from, you know, coming from permanent positions. While we don't, again give specific numbers, we believe that a significant portion of the growth is nurses joining, new nurses joining the travel ranks. And it gets into that expanding market, and the fact that the market is growing at a faster rate than what people probably thought before. And that's because you have more nurses joining the travel ranks, and they're coming from permanent positions, possibly from per diem as well, and deciding to travel for a period of time.

on the, this is Don Myll, addressing your question on the gross profit per traveler per day. I'm glad you pointed it out. The gross profit per traveler per day increased in the second quarter to $66.75 per traveler per day, and that's up about 4.4 percent over the gross profit per traveler per day for the first quarter, which we reported, which was $63.93. And the reason why it went up is primarily because of the pricing increase that occurred during the quarter.

Now it's a great question because where some investors look at the gross profit margin compared to last year, and ask why it's going down, and we've addressed that, is it's really being a positive to our model. It shows that while we are, have grown our rate increases in the, in the, in the quarter, and as a point of reference our rate increase is up about 17 percent over last year, we do pass a large percentage of that to the traveler, but it still grows our gross profit per traveler per day. It's really, really important. That's almost a 3 dollar increase there. So it's primarily the -- the short answer to your good question is due to the impacts of rate increases and the fact that we do keep a substantial portion of the margin.

Thank you.

We do have a question from the line of with Management. Please go ahead.

I have a couple of questions. Just to finish off all the discussion on gross margin. Susan, if I understand your strategy, the -- if the total rate increase were passed entirely on to the nurse then obviously gross margins would go down. If some of it is retained by AMN and most of it's passed to the nurse, they could remain stable and you said that you did not want the gross margin per -- per nurse per week to go down, so I assume that whatever you pass along to the nurse and keep yourself would make sure that the actual gross profit per engagement per nurse did not go down, even though, depending on the size of the rate increase, it could depress the gross margin as a percentage, is that the kind of the strategy that's in place?

That is correct.

OK. The other question I had is, what was the rate increase on a quarter to quarter basis?

Well, the rate increase -- let's see. The rate increase -- let me give you a couple of data points. I'm not quite sure I know that. The rate increase for the first quarter was about 14 percent over the prior year's first quarter and the rate increase for the second quarter was about 17 percent over the -- so the period increase was probably about 3 or 4 percent over the Q1.

OK. Now, how do you expect that to continue? Now, you gave us a figure for the year as a whole, is this -- I have to go back to my notes to see what it was so I think -- what did you say the year over year rate increase would be?

For the period revenue rate, we expect the rate increase is probably to increase for the rest of the year, you know, 12 to 16 percent ish.

That's year over year?

Correct. You know, that's about -- if it's annualized, you know, 12 percent, it's maybe, you know, 3 or 4 percent, you know, 3 percent per quarter, quarter to quarter.

OK. Does your crystal ball allow you to make some guesses on what the rate situation might be next year?

Well, we think about it, but we're not in a position to provide guidance on it. We have been pretty steadfast in our belief, and our desire as a strategy, for our rate increases to normalize at some long term rate increase rate, somewhere around maybe the hospital GDP percentage, 5, 6 percent. And we don't expect that our rate increases will continue at this annualized high rate. It's -- we just don't expect it. So, we've provided guidance that long term it's probably 5 or 6 percent. When it will get to that level of lower rate, don't really know. I would say that as we sign contracts today for nurses contracts that have -- will start to go on place next week, next month, next year, we're seeing a slower -- lower rate increase than our current contract negotiations. So we're headed towards that, you know, more normalized rate, but we can't tell you when it will be.

Yeah, and what's the outlook for SG&A over the next year, would you say?

The guidance we provided for 2002 is as far as we go and that guidance provides for a continuation of a similar SG&A percentage that we have now of 12.8% which in the second quarter increased to improving slightly.

OK. Just one other question, Don, and that, do you give this bill in the California legislature much hope in mandating ratios or I'm not sure exactly where that stands, but there is in both directions with that.

I mean, it is, is has passed the legislature. It's, they continue to have hearings on setting the ratio, the California Department of Health Services and the Service Employee International Union have sent to the governor for consideration, some proposed rates for example, would be one to six, ER one to three, pediatrics one to three, ICU one to two, the hospitals are still making their recommendations, but you know, it's expected that these ratios are going to be in place in January of next year. So we see this as a positive, well, we think that it is very positive for our industry because it's going to continue to drive demand for us.

OK. Steve, thank you very much.

Thank you.

We do have a question from the line of Todd Richter with the Banc of America Securities. Please go ahead.

There are two questions. First, I understand the guidance near term and G&A and I'm not looking for specifics, but let's say longer term, 4, 5 years down the line, I mean you're making heavy investments in things that should yield some economies. So longer term directionally. You know, could you see G&A improving by you know, a couple of hundred basis points over a longer period of time?

Todd, this is Don. I, you know, you made a comment that we are making large investments. I don't know, you know, we make, significant incremental investments every quarter. It's not like we're, our business is very scaleable but it's also highly variable even at the SG&A levels, so it makes our margins very predictable and our EBITDA margins very predictable over time. So I don't think you're going to see us, you know, depress our EBITDA margin in any quarter because we have to lump some investment in some new element. We're constantly doing that every day. So, but that should tell you is that we think our EBITDA margin is driven by our SG&A improvement to just marginally improve every quarter. How, you know, did it go 2/10 of a point every quarter for 8 quarters and get you down to single digits? I don't know, we are not providing that kind of guidance. We certainly would love to see that and we are aiming for it, but I wouldn't have that expectation yet.

OK. Next question. I've always felt that the 13-week assignment is somewhat arbitrary. I mean I think I understand where it came from. Have you seen any changes in the market place. I know in Allied assignments, depending on sector you know can be quite a bit longer than that, can be 15, 17 weeks. Are you seeing any changes in the length of assignments?

Not in a material way, Todd and even thought the length of the assignments that are being offered are 13 weeks, our average traveler takes an assignment that's longer than that because they usually extend for a period of time, so our average assignment is not 13 weeks, it something greater than that. And certainly that's something we're always striving to increase because it's better for us, better for the hospital and maybe better for the traveler if they just stay where they are for an additional assignment or additional few weeks.

There are companies out there that are trying to really push 17 or 20-week assignments, and we offer that as well. We offer any duration for that matter, so if that's what the traveler wants, and that's what the hospital wants, that's what we'll do. But we, you know, we're not trying to force travelers to take longer-term assignments. But it does happen.

Thanks.

This is , I'm here with . I was wondering if I could ask a quick question? There's been some news coming out of HCA pertaining to travelers and per diem, and I was wondering if you could comment on that, how that effects you? And second, kind of along those lines, competition on the mid tier level firms, within the staffing industry, if you could comment on if you see growth there?

OK. Well maybe I'll start with the HCA question, because actually there's somewhat mixed information out there amongst the public companies. Some of them say their utilization of contract staff has increased, some of them say it's decreased. Wherever they provided a little bit of color or detail they tend to point towards increase or towards decreases in the areas of non-skilled labor, or when it is specific to nursing, they'll mention per diem. So, you know, that makes me think that those are probably the areas that they're focused on.

HCA in particular has their in-house staffing division called All About Staffing, which they've had for six or seven years, and they've been very successful with that down in Florida, both on the per diem side, and we've worked with them on the travel side for six or seven years. And what they've done over this last year, is they've taken that model, that's been so successful in Florida, and rolled it out to their other hospitals across the country. Now ...

What's going on? Who have you been speaking to?

For the, for the travel side what that means is they are, they're doing group contracting. And trying to decrease the number of vendors that they're working with in those areas, and making sure that all the, all the suppliers of nurse staffing play by the same rules, and have the same contract terms. And what ends up happening is some of the smaller startup competitors get ruled out because they can't meet the qualifications. So, you know, long-term we think that's probably a positive for us. Does that answer your question ?

Yes. And also, on the mid tier firms, within staffing?

As far as, could you repeat that question now?

Just the growth. If you see any growth within that mid tier firms, the number?

Yes, I mean, as far as the number of firms joining the, I mean, there are, there are some more, I mean, when you have a market like this, you certainly are going to have other players that are going to, that are going to get into it. Most of them are, you know, mom and pop type players, and I think that in this market in which you have a growing industry, more, you know, the demand and more nurses joining the ranks of travel nursing, I think that these companies are doing well, as well as we are. I mean, I don't know if they're doing as well as we are, but I think that they're doing well.

And just one follow-up questions for Don. Do you have the net of tax number for the transaction costs associated with HRMC?

Yes, it'd be about $75,000.

OK. Thank you.

We do have a question from the line of with . Please go ahead.

Hey guys, good quarter. Just a quick question. How much visibility do you have going forward for the next three months or however far you have, and what are the signs so far for the quarter?

Well, the nature of our industry and our operating model is that we have very good visibility. It's one of the things that we enjoy because we are booking our travelers 4 to 8 weeks in advance. In fact, here we are in the third quarter in the middle of the third quarter almost, and the majority of travelers that will be working during the third quarter are either already on assignment or they're already placed and are going to be starting an assignment in the future. So our visibility for the next 3 months is very good. Never 100 percent but it's very strong and the people that we're placing today will be working even as far out as 4, 5, 6 months. So we feel out to 6 months we have a pretty good eye on what we should be doing.

And the other fundamentals of our business, whether it be the number of new applications coming in, the demand for our services, our placement volume, our recruiter productivity, all those things, you know, are positive for us and, you know, give us comfort past 6 months.

Great, thanks.

We do have a question from the line of John with Capital Management. Please go ahead.

Hi, can you address -- I came on late to the call, so you may have talked about it, but given the focus of AMN relative to the other traveler companies on some of the international nursing participants and the rhetoric going around today with regards to concerns in the Philippines and in Africa and us taking -- stealing if you will, the nurses and depleting them, is there any sort of legislation concerns of backlash beside, you know, a 60 Minutes special and things like that that could cause concern to you guys?

Not that we're aware of. I mean, first off, we're not recruiting nurses from the Philippines. We do have an office with our brand in South Africa which recruits some nurses into the US. But, you know, we don't -- I mean there's -- we're not hearing anything, any kind of backlash or anything like that. Most of our -- a lot of our nurses -- international nurses, actually come in from the UK.

Oh, OK. OK great, thanks a lot.

Thank you.

We do have a question from the line of David with . Please go ahead.

Yeah, good afternoon. I wondered if you could just give an update on acquisition strategy? What we should expect going forward and if you could also talk about valuation matrix in acquisition market?

Well, as far as in our acquisition strategy, I mean, we're always looking for opportunities. Always looking for good companies. We have very high standards. We -- when we look at a company we look at its culture, we look at its management, we look at its growth rates. We're not going to make acquisitions that aren't going -- that are somehow compromise our terrific growth. So, you know, we have high standards and if a company doesn't have those standards, we won't pursue it. I mean, it's that simple. And, you know, there are lots of smaller companies out there and we'll continue to look and talk with these companies.

And valuation?

You want to take that one Don?

Yeah, we target something around, you know, 6 to 8 times EBITDA as our kind of our maximum. We don't -- we have paid more than that, we have paid less than that and I think that the current market correction will probably help us in our acquisition strategy but there's -- again, nothing is in our guidance that has any acquisitions included in it.

Thank you, very much.

There are no further questions. Please continue.

We'd like to thank everyone who participated in our conference call today and we look forward to talking to you again when we announce our third quarter results. Thanks again and this completes today's call.

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.