AMN Healthcare Services Inc (AMN) 2002 Q3 法說會逐字稿

Welcome to the AMN Healthcare Services 2002 third quarter earnings call. At this time, all lines are in a listen-only mode. Later, there will be an opportunity for questions and Instructions will be given at that time. If you should require assistance during the call, please press "0", then "*", and as a reminder, this conference is being recorded. I would now like to turn the conference over to our first presenter Director of Investor Relations, Chris Vlautin. Please go ahead.

Good morning and welcome to the AMN Healthcare Services conference call to discuss the company's earnings results for the third quarter of 2002. I would like to remind everyone that a replay of this webcast is available at www.amnhealthcare.com/investors and will be replayed until November 11th 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 the 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. 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 Be advised that developments subsequent to this call are likely to cause these statements to become outdated with the passage of time.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 third quarter highlights.

Thank you Chris. Hello and welcome to AMN Healthcare's third quarter of 2002 earnings conference call. We appreciate your interest in AMN and your participation in today's call. Last evening, we reported record financial results for the third quarter. Today, we'd like to provide you with some insights regarding our strong results and to provide you with guidance regarding our anticipated growth prospects.

Let me begin by reviewing our financial results. AMN Healthcare continued to generate strong financial results through the third quarter. Our financial performance continues to be driven by healthy macro industry fundamentals, AMN's unique multi-branding and Internet recruitment strategies, our efficient and productive operating model, and solid execution by our sales and service schemes. AMN further expanded its position as the largest temporary travel healthcare staffing company in the United States with an average of nearly 8000 healthcare professionals working on assignments during the third quarter of 2002. This is a 28% increase over the third quarter of last year. We believe that our significant market share leadership position provides AMN with a competitive advantage, which continues to fuel our growth prospects. We believe that we have approximately 40% more traveling healthcare professionals working at hospitals across United States compared to our closest competitor. We believe this large base of satisfied healthcare professionals provide us with a significant referral source to continue to attract new travelers and drives us with a broader and less geographically sensitive dispersion of business.

Revenues for the third quarter of 2002 exceeded $203 million, an increase of 47% over the third quarter of 2001 and a 6% growth over the second quarter. This solid revenue growth translated into solid earnings growth. Net income in the third quarter of 2002 increased to $14.3 million or 30 cents per diluted share as compared to $2.7 million or 9 cents per diluted share for the third quarter of 2001. Our third quarter earnings reflect increasing earning margins as compared to the prior year and prior quarter. These expanding earnings are a result of a small increase in gross profit margins and continued leveraging of selling general, and administrative expenses. Our achievement of these improvements yielded earnings that exceeded our guidance.

At this time, I would like to revise some perspectives on the recent quarter and our prospects for the future. We are pleased that traveler, revenue and earning growth during the third quarter were either in line with or slightly exceeded the high end of our expectations. This performance and our anticipated results for the foreseeable future reflect the continued strength of our industry and reflect the predictable continued migration to a long-term sustainable growth rate as compared to the growth rate experienced during the last two years. This natural progression to a long-term sustainable growth rate is right in line with our prior predictions. Independent government and industry estimates continue to quantify the current nursing shortage at 10% with a doubling or tripling of this shortage by 2020. The effects of this shortage are reiterated by several of the public hospital groups as recently as the last few weeks as several hospital groups reported their quarterly earnings and discussed continued increases in admissions. Many of these groups reported continued labor pressures from the nursing shortage and utilization of temporary nurses to handle the increasing admissions.

Additionally, more states and even certain large hospital groups are continuing to make changes that result in the limitation of mandatory overtime and the establishment of minimum nurse-to-patient guidelines. We believe that both of these initiatives result in an increased demand for nurses. The strong long-term demand environment combined with our industry-linked position provides a prospect for continued long-term attractive growth for AMN in our industry and is reflected in our earnings guidance. AMN provides a value to our hospital clients in helping them accommodate increasing admissions and in seasonal staffing challenges and cost effectively managing flexible staffing needs. This environment and our industry-leading position translates to our guidance for revenue growth in 2003 ranging from 19-24% over 2002. This translates to diluted earnings per share growth of approximately 20-25% over 2002 or $1.32-1.38 per share for the year. Don Myll, the company's Chief Financial Officer will provide additional information regarding our guidance for the fourth quarter and for 2003 in just a few minutes.

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 belief in the strength of the healthcare staffing industry's long-term fundamentals and our ability to successfully compete in this attractive sector. The healthcare systems' long-term increasing demands for nursing services combined with a pervasive nursing shortage continues to provide, in our opinion, a long-term growth opportunity for AMN Healthcare. I believe that our results in the third quarter and our future prospects further support this belief, and with that I will turn it over to Susan.

Thank you Steve. Our three key metrics, travel accounts, revenue and gross profits per traveler per day was strong during the third quarter. I would like to provide you with some further operational details that will give you some insight on the drivers of these positive results. The third quarter was another great example of how our flexible and focused operating model continues to give us a competitive edge and aids us in achieving solid volume growth, revenue growth, and increases in gross profit dollars. The organic volume growth in travelers working during the third quarter was 26%. This strong organic volume growth is a result of the continued increases in new traveler applications, retention of existing travelers, solid sales productivity, and continued focus on customer service.

During the third quarter, all of our brands continue to achieve strong year-over-year growth in a number of new healthcare professionals assigned with us. While word of mouth certainly continues to be our strongest referral for us, we continue to develop our Internet strategy as an important tool to reach out to the millions of nurses across the country. During the third quarter we expanded the offering on several on several of our websites to provide greater value to the nurse visitors. Most notably was the addition of a more comprehensive offering of online continuing education courses on RN.com, one the 13 nursing websites that we own and operate. The recognition of our travel brand website and our nursing quarter website like RN.com, NurseZone.com, and TravelNursing.com have continued to drive a growing number of new healthcare professionals signing up with AMN to seek travel assignment. The second quarter introduction of a new comprehensive customer-service training program continues to positively impact our operation. While our historical growth has no doubt been a result of excellent service, AMN wants to further distinguish its leading reputation in industry by delivering noticeably superior customer service. Whenever possible we measure and internally track our progress on improving service to our traveler and hospital clients.

A reflection of our staff hard work and commitment has resulted in some measurable positive impact during last six months. Several of our department including benefits, payroll, and quality management have reported favorable trends of improved service delivery. Our sales and service team really deserve credit for their continued commitment to delivering outstanding service. As you know AMN also operates the largest international temporary nurse recruitment brand, O'Grady-Peyton International, which recruits nurses to the United States for 18-month assignments. Because we believe the international markets are an excellent source for the recruitment of the new travel nurses, we continue to expand in international operation. For example during the past several months, we have increased our staff and sales efforts in various countries. We have also opened a new office in Canada and we expect to open new offices in Sydney, Australia, and London very soon. We have also extended our primary office in United Kingdom to a new facility to accommodate our sales staff. While our supply of travelers continues to grow, AMN continues to sign a significant number of contracts with new healthcare facility clients. These new clients are fairly, evenly dispersed around the country and across two regions, the new contracts coming from the southeast and the mid-west state. These increases in our client base have been driven by an overall increased awareness by hospital management regarding the cost effective benefits of utilizing travel nurses, coupled with increasing admissions by hospitals and the deepening of the nursing shortage. I'd mentioned on our first quarter call, that we added new positions to our facility client service department in the early part of the year. We're enjoying the benefits of this increased strength in our team and have seen the results of an increased client base. Regarding our operating expenses, we continued to gain leverage from our size and scale and through our consolidation of information systems, as SG&A expense declined approximately 50 basis points from the second quarter of 2002 and was 130 basis points below the third quarter of the prior year. Although there has been some specific line item savings that we've generated through purchasing power, the vast majority of our savings comes from the productivity benefit that we've seen from streamlining our processes among our brands, improved employee training program and computer system enhancements that have been made last year.

To reiterate our trends, our increasing supply of travelers is exceptionally strong and the demand for our services is also healthy. The attractiveness of our industry dynamics has also attracted new competitors over the past few years and while no new competitor has gained any relative sizable traction, the increased competitiveness does create pressures that we must be constantly monitoring. In addition to the most important factor, service, I've mentioned previously that the AMN operating model is focused on the expediency and probability of placing a traveler on an assignment. There are dozens of recruitment, sale, placement and service techniques and processes that can differ from company to company. Our operating model is very flexible and we are constantly making sweeps through our processes and approach to respond to the competitive environment and achieve optimum growth rate and operating margin. I mentioned that because we believe that it is becoming increasingly apparent that not all market strategies and operating models will reach the same results in our industry. We believe our strong results for the third quarter and for that matter for the last several quarters, are evidence that the AMN marketing strategy and operating model does make a difference, and its the best strategy in this environment, for our travelers, our hospital clients and our shareholders. Now let me turn it over to Don Myll, our CFO, who will discuss our financial results for the quarter and discuss guidance.

Thank you Susan. Good morning. I'll provide an overview of our third quarter financial results, as well as specific background on key metrics for the quarter. In addition, I will review revenue and earnings guidance for the fourth quarter 2002 and for the full year 2003. As Steve mentioned our financial results for the quarter grew strongly on an as reported and an organic bases, exceeding our earnings guidance. Third quarter revenue and earnings results increased both on a year-over-year basis and sequential quarter basis. Revenue grew to $203.4 million, a 47% increase over the same period last year. We reported third quarter earnings of $14.3 million or 30 cents per diluted share as compared to 2.7 million or 9 cents per diluted share for the third quarter of 2001. Adjusted cash earnings per diluted share grew 41% to 31 cents as compared to 22 cents for the third quarter 2001. Adjusted cash earnings as we described in the press release provides a meaningful comparison of operating performance between 2002 and 2001, as its excludes charges primarily related to the company's initial public offering last year, other non-recurring transaction costs, and the amortization of goodwill and other intangibles. Adjusted EBITDA as defined in the press release increased 55%, to 24.6 million over the third quarter of 2001. Adjusted EBITDA margin of 12.1% for the quarter reflects an improvement over 11.5% reported for the third quarter of last year and the 11.5% reported for the second quarter of this year. This improved EBITDA margin was due primarily to increased leverage and selling, general, and administrative expenses and relatively consistent gross margins.

Let's look more deeply at our revenue for the quarter. The components of the 65.5 million or 47% increase in revenue as compared to the third quarter of last year were primarily the result of organic drivers. First, the pure organic volume increase in the average numbers of travelers working through our existing brands contributed $35.9 million or 55% of the total increase in revenue. This represents a 26% organic traveler growth over the third quarter of last year. Second, strong demand from hospitals growth and increased in our average bill rates and contributed $22.3 million or 34% of the total increase in revenue. This represents an increase in the average bill rate of 13% over the third quarter of 2001. Third, a shift in the mix of pay role versus flat rate traveler contract contributed 3.7 million or 6% of the total increase in revenue. 97% of our travelers worked under payroll contracts for this quarter and the previous quarter of this year as compared to 94% for the third quarter of 2001. As mentioned in the last couple of quarterly conference calls, the mix shift had and we expect it will continue to have a nominal impact on our revenue growth going forward. In total, organic growth accounted for $61.9 million or 95% of our total year-over-year growth in the quarter. We also benefited in the third quarter from an increase of 3.6 million in revenue attributable to our April 2002 acquisition of HRMC. I believe it is worth re-emphasizing here that our organic growth in revenue and related earnings does not require additional permanent capital, as we believe that our operating cash flow is sufficient to support our current and anticipated future organic growth.

Moving to gross profit for the quarter, it increased 44% and gross profit per traveler per day, a key profitability metric increased 12% over the third quarter of 2001. Gross margin for the quarter of 24.4% was in line with our expectations and slightly above the second quarter. As expected our gross margins have remained stable for the last four quarters. As Susan mentioned, our operating expense leverage was evident as our selling, general, and administrative expenses declined to 12.3% of revenue as compared to 13.6% for the third quarter of 2001 and 12.8% for the second quarter of this year. Because of the normal seasonal build up in travelers during the third quarter, our expense leverage normally experiences it's greatest quarter-to-quarter improvement between the second and third quarter.

Turning to the balance sheet, AMN continues to improve its already very strong financial position and remains debt free. The company generated over $30 million in free cash flow during the third quarter yielding cash and short-term investments of $70 million at September 30th. Nine month year-to-date free cash flow totaled almost $45 million. This strong cash generation was driven primarily by our operating earnings results, combined with an improvement in our day's sales outstanding and accounts receivable. At quarter end, our DSO's improved to 58 days compared to 60 days at June 30th and also at yearend, 2001. CAPEX totaled 1.2 million or 0.6% of revenue for the quarter.

I would now like to discuss our revenue and earnings guidance that was provided in our earning release. As a remainder, our policy and expectation is to provide updated guidance only when we release our quarterly earnings results. AMN is continuing to experience solid growth in traveler account, revenue, and earnings. Our earnings release includes specific guidance for the fourth quarter 2002 including revenue growth ranging 29-31% over the prior year generating net income ranging from 14.4 million to $14.8 million. And that results in diluted earnings per share of 30-31 cents for the quarter. This guidance reflects continued EBITDA growth over the prior year ranging from 37-40%. Fourth quarter guidance translates into total year 2002 guidance for earnings per share of a $1.10-1.11. Guidance on our three key operating metrics for the fourth quarter is as follows. The first key operating metric is the average number of travelers on assignment. This is expected to increase in the fourth quarter ranging from 17-19% over the fourth quarter of 2001. The second key operating metric is average revenue per traveler per day. This is expected to increase 9-10% over the fourth quarter of 2001. And finally, the third key operating metric is average gross profit per traveler per day. This is expected to increase approximately 8-9% over the fourth quarter of 2001 maintaining a relatively consistent gross margin for the third quarter.

Now lets look at our revenue and earnings guidance for 2003. AMN expects to continue to generate strong growth in traveler's revenue and earnings for 2003. This guidance is based on our assessment of the continued long term macro industry demand and supply drivers. While our future growth rates are lower than our historical growth rates, they are in line with our past expectations and we believe are more sustainable than the growth experienced over the last several quarters. For the full year of 2003, we expect to generate revenue growth rates ranging from 19-24%, and diluted earnings per share growth ranging from 20-25% as compared to 2002. This results in a range of earnings per share for diluted share of a $1.32-1.38 for the full year.

Let's move to our guidance on our three key operating metrics for the full year 2003 as we did a moment ago for the fourth quarter. For 2003, the average number of travelers on assignment is expected to increase in the range of 13-17% over 2002. Average revenue per traveler per day is expected to range between 5 and 6% over 2002. And the average gross profit per traveler per day is expected to increase in the range from 5-6% over 2002, again maintaining a relatively consistent gross margin as compared to 2002. Consistent with our previous guidance, this revenue and earnings guidance excludes the impact of any potential acquisitions.

We appreciate your patience and at this time I'll turn the call back to the team. We are happy to take your questions.

Thank you. Ladies and gentlemen, if you'd like to ask a question please press the "1" on your touchtone phone. You will hear a tone indicating you have been placed in queue. You may remove yourself from queue at anytime by pressing the "#" key. If you are using a speakerphone please pickup your handset before dialing. Our first question comes from the line of Mathew Ripperger with JP Morgan. Please go ahead.

Yes. It's Matt Ripperger, JP Morgan. I just got three questions for you this morning and the first is, given your very strong free cash flow in the quarter of over 30 million and the fact that you have 70 million in cash on your balance sheet with no debt and given the fact that your stock now is trading under 14 times next year's earnings, I just wanted to see if you can give some color as to besides acquisitions what other potential uses of that cash would be, in particular potential stock buybacks?

Well, Matt, acquisitions has always been something we are actively looking at. We completed the latest one in April, so that's always a potential use of cash. As far as the stock buyback, there is a number of other things we could consider and that is one we may consider and the possibility of a dividend and something of that sort that's also something that could be considered. But everything -- all opportunities are being thought of to date, nothing decided on.

And generally, just related to the acquisitions, the range of in terms of size of acquisitions, you know, the historical range in this industry has been, I mean if you could some color as to historical range of acquisitions sizes?

Yeah, the range is quite broad actually. In our history of the acquisitions we had done had ranged from 13 million to 75 million. We see that kind of range or even a broader range is still possible, so it's a, you know, if you ask for a number, it probably would be 15-150 million. I mean it's pretty broad range.

Okay. The second question, just I realized, just talking about your guidance for '03, I realized the need to have some conservatism and related to, you know, volume trends and pricing going out '03. I guess I wanted to ask you specifically about the EBITDA margin assumption. It would appear from your guidance today that you are assuming that EBITDA margins, which have been showing a nice improvement year over year, would be flat in '03 versus '02? Is there any reason why, as you add more volume and get further price increases that you can't further leverage your fixed cost and show some kind of EBITDA margin improvement next year?

We -- you are right; it looks a relatively conservative SG&A leveraging. A part of the lack of leverage you may see there is that next year, in the middle of the year, we are finally consolidating our operations here in San Diego into one facility. So there will be a one-time a catch upon SG&A transition cost and so on. So that's late in the year. That's not a huge item and it's really, kind of a one-time event. In addition to that, we continue to make sure that we're investing in systems, not starting anything from scratch, but continue to do invest in our foreign operations, in our IT systems and integration, that would cause us to be conservative on our SG&A targets.

Okay great. And then the last question I have is for Susan. There are two bills that have been proposed in the house related to eliminating mandatory overtime, I think it's HR 3238 and HR 1686, can you give some color as to if these bills are actually approved, what the implications would be for the industry in terms of increased staffing levels?

We've already seen that occurring on a state level Matt, and I think there are roughly 7 or 8 states that have actually passed that type of legislation. And even certain hospital chains have implemented self-imposed limitations on mandatory overtime. Clearly we believe is that those steps, as well as the nurse to patient ratio minimums that are out there, will create additional demand for our services in the future.

In addition to that Matt, there is 10 additional states that have actually, on top of the 7 that Susan's mentioned, that have a proposed legislation now to eliminate mandatory overtime. So we, you know, we believe that will create demand in our industry.

And just a follow up there. I guess -- realizing it's very rough to give a percent number, but can you give a rough a approximation for how pervasive mandatory overtime is, at the typical facility right now?

I am not sure, we're in the position to do that, you know, probably talking with the hospital groups would be a better source for that information.

Okay great, thanks very much.

Thanks Matt.

Thank you, next question comes from Mark Allen with SunTrust Robinson Humphrey. Please go ahead.

Hey congratulations, nice job in the quarter, guys.

Thank you.

This will be a question on the competitive environment. Could you just give us some color I guess, you know, are there more competitors now in the traveler nurse base? And what's the basis for competition with yourself, is it in pricing to the hospital or higher wages to the nurses? But just -- I guess, just have a discussion of how -- what you're seeing out there and how you're responding.

Okay Mark. Well, the competitive environment has always been very competitive in our industry, but because of the attractiveness of the industry over the last couple of years, especially you've seen more new entrants into the market. And as I said earlier, no one has really gained any sizable traction in the industry. But, nevertheless they are out there competing against us attracting nurses. Now that stands good for the industry and that it has, as well as we have grown substantially and attracted a lot of new nurses into the industry. The competitors are out there attracting more nurses into the industry as well. And that's why we believe that the market has grown faster than people expected or even thought it had been over the last year, and we've gained a lot of side over the last year.

I said also earlier that I think, in this environment it's more important than ever when it's competitive that you have an operating model that's very flexible, where you can respond to competitive pressures that are out there. And our model is very flexible and we are constantly making little tweaks and adjustments to respond to that competitive environment. I think our results speak to that and speak to the success of our operating model in that environment. How do we compete against those competitors -- well you know, there is a reason why these competitors haven't gained traction. It is -- at the end of the day, it's very difficult for them to compete against an AMN that has set a large pool of assignments to offer to the nurses. And on the hospital side, it's hard for them to compete with us, and our ability to offer a large pool of nurses to the hospital. And that's why it is hard for them to really gain any traction. We don't compete on price per se. We believe that we provide a strong value to -- a strong cost-effective value to our hospitals. We're not known as being the most expensive, but we're not known as being the least expensive either. We want to provide a cost-effective value opportunity for our facilities. To the nurses, we want to offer the most competitive compensation and benefit package in the industry. And as the largest provider and the largest employer of traveler nurses, we believe that we get some purchasing power and benefit and can offer a slightly better package to our travelers. But beyond all of that it really comes back to the service to the travelers and to the hospitals and having the infrastructure in place, to be able to provide superior service to these nurses and hospitals on a day in and day out basis.

A follow up question on the -- you mentioned you had signed up a number of new hospital clients over the last year, but can you give us any color or breakdown on the growth in terms of, I guess, your number of nurses working? How much of that would be essentially growth with existing customers where they are using more nurses from you, versus growth with brand new customers?

That's a number that we don't provide externally, but what I can say is we're very pleased with that mix. Certainly we -- not every new client is utilizing travelers, but you always want to be signing up new clients, because you never know which new client might be one of your top new, you know, top 10 clients into the next year. So we're very pleased with our mix of new clients and existing clients where we've expanded our business.

Thank you very much.

Thanks, Mark.

Thank you. We'll now move on to Bud Leedom with Wells Fargo Securities, please go ahead.

Good morning guys. Just a couple of questions here. First in terms of pricing, are you seeing any push back at this point? Or is it still, in terms of your ability to raise prices, do you see it, sort of, as it was historically? Or are we starting to run into a wall based on some of the competitive pressures out there?

Well Bud as you know, we've certainly said all along that we do not expect to sustain the high-teens, mid-teens pricing increases that we've historically seen and that's why we provided guidance for next year in the 5-6% range. And the answer is yes, we are -- if you look at even in the fourth quarter guidance we're giving, we're looking at 9-10% revenue per traveler per day increases. So we're seeing those pricing increases come down. That's from two effects. One is just the sheer law of large numbers as that -- as the bill rate gets higher, you would expect to see that growth in pricing moderate. But also hospitals are focusing on their output and they have been for the last of couple years especially, and so we're seeing, you know, a focus on those pricing increases. So, we believe that the 5-6% is a sustainable, appropriate level for pricing going forward.

Okay fair enough. And I was just wondering in terms of cross country, are you starting to feel any affect of the move to build up recruitment in California or any of your other key markets? Are you starting to feel any of that or is it still as abstract over the last few quarters?

Bud, we haven't seen any pressure on that in that regard at all, so I am not sure exactly what they are doing here in California. I know they mentioned that on their last conference call but we haven't seen any effects at this point.

Okay and then just finally on -- from what we saw with Tenant in Florida in terms of the consolidation of their staffing and services over there, do you see any trends you know possibly California or in other markets and not just from Tenant but other hospitals that you deal with in terms of their wanting to consolidate that or at least feeling out some rumbling there?

I mean you now you do have that somewhat with some hospital groups. Nothing and I would say that there is not a huge move in that direction at all, and when we are in a situation like that, we work with these clients and work very hard to be part of that process and I think we have been very successful with that. But to answer your question, we haven't seen a huge move in that direction, but you do see it a little bit.

Okay, thanks very much.

Thank you.

Thank you. Our next question comes from Jeff Silber with Gerard Klauer. Please go ahead.

Good morning and let me add my congratulations as well. My question deals with your revenue guidance for the fourth quarter. If I compare the numbers that you are giving out now compared to I guess what we kind of backed into as of last quarter it looks like the numbers are coming down by about 5-10 million -- not a lot, but nevertheless you know going in the wrong direction from an investment perspective. I am just wondering has anything specific happened over the past three months to cause you to tamper those expectations back a little bit?

No Jeff, I think that is a reflection of the visibility that we have and of course we did not provide fourth quarter guidance before. When we provided our third quarter guidance at the end of July, we were five months out from the end of the fourth quarter, now we are two months out from the end of the fourth quarter so clearly we have better visibility on the fourth quarter numbers you know only being two months out from the end of the quarter. We wouldn't think that you know 2.5 you know -- we are talking roughly at 2% change and that's you know but not material in our mind. What's important to us is that we have not changed -- if you notice we have not changed our earnings guidance for the fourth quarter and that's what most important.

Okay, fair enough. On DSOs, if we could switch to that for a second. You got there some great improvement both for year-over-year and sequentially, how low do you think you can get that number to go in future?

This is Don, Jeff. I don't -- we will strive to improve it. I don't think it will get to 50 days if, you know, to put an outside barrier; 55 would be a great result in this business. If it didn't get much lower than 58, I don't think we will be disappointed, but we are working at it.

Okay, great. If I could just ask one more, I am just wondering if you can give us a little bit of color in what your are seeing in terms of real estate cost trends.

The -- nothing very substantial in our apartment costs. It's not really even measurable in our margins. It's a little bit beneficial, but it's not, it's not material.

Okay great, thanks.

Thank you, we now have a question from Dan Brady with Presidio Management. Please go ahead.

I have a couple of questions as follow-up. Don as a referral question to ask you to kind of give us a ballpark estimate assuming you are doing nothing with your cash and either acquisitions, dividends or whatever. What would the cash be saved by the end of 2003 if you are beyond target with the guidance you have given? Can you give us a feel for that?

Well, we don't provide cash, but I can help you figure out yourself. If you take EBITDA for 2003 and grow receivables by the percentage of revenues assuming constant DSOs, tax effective, our tax rate, you can get to EBITDA -- total cash for next year. It's pretty simple.

You are not going to make the calculations for me, okay [inaudible].

No.

Okay, the other question was you obviously have good visibility on the quarter ahead as we all understand, I am wondering if you can give us some of the factors that went into your thinking in estimating 19-24% revenue growth. Just how much of that is visible, what are the, you know, industry conditions or data point software that leads you to that conclusion versus some other?

Well Dan the 19-24 is driven by two primary factors, one being the increase in revenue per traveler per day, which we projected at 5-6%; clearly that's below where we stand and where we are projecting for the fourth quarter, but we believe that's the direction we're going in. We were very comfortable with that range. There is nothing changing dramatically in the macro drivers of our business that would lead you to believe that you know it would change much more than that, but you know we are very comfortable with that. The other factor of course is the volume travel account and in terms of visibility if you look at our fourth quarter, we are looking at a traveler account growth in the 17-19% range and so moving to a 13-17% range in -- or next year is -- it seems to be an appropriate level, clearly there are factors that we can use to create visibility for that -- our current placement volume, the number of applications that we are receiving which I mentioned earlier is very strong, the healthy demand from our facilities, you know, a variety of factors succeeding to our comforts and the sustainability of that growth rate.

So is that a matter of some actual necessarily trend in place or some data points out there that -- it's a conservative and realistic reduction in the growth rate that you see for this quarter, which I think is a reasonable way to do it.

And based upon what we are seeing shape up for the first quarter.

Yeah, yeah, okay. Thanks Susan.

Thanks Sam.

Thank you. We'll now move on to Michael Runyaner with Trison Capital Management. Please go ahead.

Hi, yes good morning. Within the next couple of months, most of analysts will be estimating O4 growth for you as well as the earnings power of your company. I understand it's early but if one reviews the fundamentals of your industry and the fact that the mandatory overtime limitations as well as limitations in terms of nurse per patient is in place, combined with the inability by the industry to graduate the nurses, one would assume something close to 20+% volume growth should be in place for the industry for the perceivable future, which would be comfortable in commenting that -- that trend will continue for you for O4 and we are talking about something north of $60 at this time?

Well, it's -- you said yourself, Michael, we are not going to be commenting or providing guidance on O4, but maybe to speak to that you're really talking about the long-term sustainable growth rate of this business and if you look at what drives this business in the long run, at a macro level it's the increasing hospital admissions and increasing acuity, and facilities which is being driven largely by the ageing population. If you believe that those dynamics are going to continue, there will be a continued increasing in demand for nurses. On the other side of the equation, we already have a nursing shortage of approximately 10%, that's expected to double to 20% and go from about a 126,000 to 400,000 by 2020. There is a gap between the increasing demand and the supply is expected to widen, not get better. If you look at our industry at a micro level, we continue to sign contracts with more hospital clients and we continue to have four new healthcare professionals applying with us. So all the dynamics are very healthy and are certainly giving signs that this should be a long-term sustainable growth rate.

I'll also like to mention that the states are really starting to focus on this nurse-to-patient ratio being at an appropriate level. I know that these legislatures are hearing from their constituents and they are going to hospital and there are not enough nurses there. So, they -- and they are also concerned about patient safety. So, that is why California passed a bill to -- to have mandatory nurse-to-patient ratios. That is -- actually the Department of Health Services for California just put up the regulations on that with a 12-18 month and for medico-surgical units to be 1-5, and on ICUs 1-2. That's going to go into effect later on in 2003 or no later than January 1st 2004. Also the Journal of American Medical Association or JAMA, maybe you read this. It was actually recorded in the New York Times, USA Today, talking about the study they put up, talking about an estimated 20,000 people die each year because of a lack of nurses. And I can tell you that, now that there is a study about that, I am very confident that more states are going to be looking at this issue, and requiring appropriate minimum nurse-to-patient ratios, and we believe if that occurs, which I am very confident it will and it already has occurred in California, that this will drive demand.

One follow-up. As one looks at the volume growing to 13-17% on pricing or 5-6, you are in the service business. It is very difficult to not experience significant operating leverage from this type of growth, and your estimates in terms of pricing are very much in line as to what the hospitals are getting in terms of price per bed. So, aren't you being overly conservative at this point in time to really tell us that there is no operating leverage in your business model?

Well, the actual guidance does have operating leverage. It's relatively modest, but there is operating leverage in the model. And Yeah, I had said that we tend to be conservative because we are an execution focused business, and as Susan mentioned thoroughly in her comment, service is where you win and where you lose. So, we are not going to un-invest in service to make sure we drive those revenues for a long term.

One last question on free cash flow. You generated roughly $30 million this quarter and the question earlier in terms of, you know, the cash at the end of '03. One could assume basically that you would be generating something close to whatever the net income is going to grow. So, in theory you will be end over a $100 million at the end of this year and then something close to 200 million next year plus. At what point do you begin to address your capital structure, not just the opportunities in terms of acquisitions? When do you begin to really address this?

Well we informally are thinking about it and exploring it today.

Okay, thank you so much and congratulations on solid results.

Thank you.

Thank you. Our next question comes from Jeff Silber with Gerard Klauer. Please go ahead.

Thanks. Just a quick follow-up. I noticed that the tax rate declined slightly from the prior quarter. I was wondering what tax rate you are using for your guidance going forward?

Going forward 39.5% tax rate is a good rate to use. We have made some improvements as a result of some tax planning strategies, some fairly modest and mundane ones in the past that were having real effect today, and so therefore declining the rate from about 40% where you probably will report as sensible.

Okay great thanks.

Thank you. If there are any further questions please press "1" now. We do have a question from the line of Matt Grossman with Sigma Capital. Please go ahead.

Hi, good morning.

Good morning.

Just a couple of quick questions. In your revenue per traveler per day calculation June quarter, September quarter, and December quarter, its kind of looks relatively flat. What does this mean both in terms of how hot the market is right now and ability to provide higher prices to your nurses charging, higher prices to your customers etcetera?

I think, what you see here is the migration to the long-term rate increase that we have been talking about for many quarters now. If you look back, we have been expressing guidance to a 5-6% growth rate in our bill rates for a while and just been slow to get there. It's now approaching there. You know, I'd say, on par we probably have the opportunity of course have higher than that is, there's a chance. But really, we're headed for a 5-6% rate and we're there today. So, if you see 1-1.5 per quarter increase in the average revenue per traveler per day, that's where we will be long term.

Okay. Second question is, can you talk a little bit about the seasonality that we're gonna see both in gross profit per traveler per day and just traveler accounts for both the December and March quarters?

Sure. The size of our company today certainly has mitigated the variability in our core business that we used to see when we were smaller. However, we still have a seasonality, where the traveler count will grow modestly from Q3-Q4 with similar earnings in profit measures assuming gross profit margins, and SG&A. Then you come into the first quarter and we do have, we typically have traveler account growth in the first quarter at that start of the New Year. But the margins tend to be pressured a little bit because of the -- I call it frictional -- the frictional currents of lots of new starts, you know, after the first year a lot of new starts occur and not many people going to participate. So, there's a little bit of pressure on margins. But the size of our company today really mitigates that. It may not even be noticeable, but I'd expect some decline in operating margin. And then during the second quarter, that's the summer period, the traveler account is pretty flat. You know a flat Q1-Q2 on traveler is a normal seasonal pattern. I wouldn't be disappointed with that. And then we get back after the second quarter added into the quarter we just finished, the third quarter, which is the largest percentage quarter-to-quarter growth. So, the seasonality will be similar, but it will be dampened.

Okay. Can you talk a little bit about what you've done in terms of on your recruiter side, adding new recruiters, just getting ready for, you know, next year to get 13-17% type traveler growth. It's gonna be an aggregate of the largest number of travelers you'll add in an absolute number basis. Can you just talk a little bit about what you've done on the infrastructure side to prepare yourselves for that?

We're always acquiring new recruiters Matt, and we're always estimating what we think and want our traveler account to be 6 months out, because it takes about 6 months to train a new recruiter before they're really productive. So, we're hiring today for what we anticipate our traveler account to be 6 months from now, and that is across all brands. Now, we also know that we will continue to get some productivity gain at some of our newer brands where we've implemented our operating model and our placement model in our systems over the last year and their recruiter productivity is increasing and will continue to increase over the next year. So we won't have to add as many recruiters as we will be adding travelers, but nevertheless we'll be adding.

I've to say that we're very comfortable with the number of recruiters that we have working now and also in training to accommodate the growth that we expect.

Great and last question when was the last time you had a sequential decrease in your travel account on an organic basis?

Let's see, I'd say that look's back to before 2000 -- before the year 2000 where we had a sequential decline quarter-to-quarter.

You've been around for a while so -- 1992,1995.

Well we'll have to get back to you on the exact point in time.

I only mention 2000 because that's all I have in front of me.

Yes, I know I believe that's all we do also. So that's why I am asking the question. What about on an annual basis? I mean just think of a picture. When was the last time the industry saw contraction?

Well I think there was -- the time that the industry saw contraction was about 1993-1994 and that's when the hospitals were doing a lot of cost cutting consolidating after the government led by the Clintons were going to what somewhat nationalize healthcare so to speak. At that time, hospitals were doing some contracting and contract staffing and as a result of what they were doing back then, this also helped create the nursing shortage today because nursing back then sort of got a bad rap and I think most people knowledgeable in this area will tell you that. So -- but that started to turn around actually I would say around 1995, later part of 1995, and then grew very strongly since then.

Yes. Thanks very much.

Thank you our next question comes from Justin Feriyorning with [inaudible]. Please go ahead.

Good morning guys. I want to dive a little bit into the cash conversation that we've had so far and just, you know, back of the envelope you have $70 million in the balance sheet at this point, you'll probably have north of a 120 at the end of '03, you know, given that there is no sizeable investment and what not and taking into the consideration that you've been pretty clear in your message in the past that you want to stay pretty focused on the nurse traveler business and potentially allied travelers in general. Is there any change in that message? Should we expect any investment in different businesses that are necessarily in your silo so to speak?

No, we are not focusing on different business that are not on our silo and, you know, we believe very strongly in our industry. We believe that we're the best performers in our industry, we are very confident in future and we think it's appropriate given our results to focus on the travel healthcare staffing industry right now. I'd like to say that we'll never look at something else but for now we think this is the appropriate place to be.

That being said then is there -- of the other types of traveler in our Allied businesses out there. I have got to believe that's it's a pretty fragmented business. You know, we are not talking about a whole lot of between cash and potentially stock consideration, you'd have to make for acquisitions? Is that a fair assessment? Not picking up a lot of value out there?

Well though I'd say there is plenty of value out there. I say.

I don't mean value as in value of the business as in total capitalization value. Is there a substantial amount in the marketplace to be considered essentially good pickings?

Yes absolutely. Yes. I mean that business is not just travel nursing but it is other travel healthcare sectors, nurses, several of them. So, I think, there is plenty. And I think one of the nice things, you know - competition, you know, is something that, you know, that we deal within a day-to-day basis. You know, I've been doing this for 17 years and have been dealing with this for 17 years. So, I will say that some of these new companies that have come along, lets say, if -- they do gain any attraction which - like we said before is very difficult to do. But, if one gets some sort of moderate success than we would generally be talking with them about their company and then -- and looking at companies like that for future acquisitions.

Okay. Thank you.

Thanks Justin.

Thank you. We now have a follow up from Mathew Ripperger. Please go ahead.

Yes thanks. Just one follow-up, it's related to the number of new nurse applicants that you are receiving. It looks like there are really three pools of potential new applicants, one being permanent nurses leaving and going to temporary. Two, nurses who have been out of the profession coming back to temporary. And three, being new nurses who are graduating going to temporary. I just wanted to see given those three [chances], have you seen any acceleration or deceleration in terms of the number of applicants that you're seeing in your temporary backlog in each of those three areas?

Well, we are seeing an increase in the number of new applicants overall. The majority of them come from permanent positions and that has been the case for a long time. We require one year of recent acute care hospital strength. So, we really don't have nurses signing up us with us who have been out of the profession for a period of time wanting to come back in to the profession. And also just to note on that and some people have mentioned that before, the nurses who are licensed but not working, the majority of them are over 50 and so when they come back into the workforce they generally prefer not to come into the acute care setting because it's certainly by far the most rigorous environment. They come back into the workforce it might first be in the home health or insurance companies or just less rigorous or may be per diem, where they can just work part time. In terms of new graduates, since we require for our general pool of travel nurses, we require a minimum amount of experience we are getting a large number of new graduates. So with that said, we are actually ramping up our new graduate program. We've kind of had it in place for last year but because of demand from the facilities, we are going to be introducing an expanded offering of that here just in the next month.

Okay, great and then one follow up. Can you comment on just a backlog of nurses you have from your international O'Grady-Peyton operations?

Just to say that it's growing. Certainly, we are expanding our operations. I think, I'd mentioned that on the call that we are expanding into some new region to expand those efforts. So, we have a growing pool of people and we expect that business to be growing next year.

Okay great. Thanks very much.

Thanks Matt.

Thank you and we have no further questions at this time.

Well, thank you. We'd like to thank all of the participants in our conference call today and we look forward to talking to you again when we announce our full year results on February 2003. And so with that, that completes today's call.

Ladies and gentlemen. That does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.