AMN Healthcare Services Inc (AMN) 2003 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the AMN Healthcare Services 2003 third quarter earnings call. (OPERATOR INSTRUCTIONS) As reminder, this conference is being recorded. I would now like to turn the conference over to our presenters. On the line with us today we do have Steven Francis, Chief Executive Officer, Susan Nowakowski, President and Chief Operating Officer, Donald Myll, Chief Financial Officer, and our first speaker today, Joseph Marino, Director of Investor Relations. Please go ahead.

Good morning. I would like to welcome everyone to the AMN Healthcare Services conference call to discuss the Company's earnings results for the third quarter of 2003. A replay of this webcast is available at www.amnhealthcare/investors, and will be replayed until November 19, 2003. Additional information regarding non-GAAP financial measures may be available from time to time at this same website. 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 there are remarks that we make about future expectations, plans and prospects that constitute forward-looking statements. Forward-looking statements are identified by words such as believe, anticipate, expect, intend, plan, will, may and other similar expressions. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements.

It is possible that our actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those identified in our quarterly report on Form 10-Q for the quarters ended March 31, 2003 and June 30, 2003, and the risk factors discussed in our annual report on Form 10-K for the year ended December 31, 2002, all of which have been filed with, and are publicly available from, the SEC.

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 beliefs and are based upon information currently available to it. We advise that developments subsequent to this call are likely to cause these statements to become outdated with the passage of time.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.

I will now turn the call over to Steven Francis, AMN Healthcare's Chief Executive Officer.

Thanks, Joe. I would also like to welcome everyone to AMN Healthcare's third quarter 2003 earnings conference call. We really appreciate your interest in AMN Healthcare, and thank you for your participation in today's conference call.

This morning we provided you with some insights regarding our financial results for the third quarter of 2003 that we reported yesterday. In summary, we also would like to say that we're pleased with our strong earning results for the quarter, the progress we have made on our market-driven initiatives, and the stabilization that we have seen in our market.

Let me begin with some financial highlights for our third quarter. First of all, the quarter was solid both operationally and financially. We generated revenue of $171.5 million, and diluted earnings per share of 22 cents. With these results -- and most importantly to our clients -- AMN continues to be the leader within the travel healthcare staffing industry.

During the quarter we had an average of over 6,700 temporary healthcare professionals working on assignment at over 950 facilities across the country. This volume is right in line with our guidance for the third quarter. Year-to-date through the third quarter of 2003, we generated revenue of $555 million, representing a slight decline of 2 percent from the $569 million reported last year. For the same nine-month period we reported diluted earnings per share of 78 cents compared to 80 cents in the same period last year. And we believe that in today's market, these are solid results.

AMN continues to have more traveling healthcare professionals working than any other staffing provider. And we have contracts with over 40 percent of the country's acute care hospitals. Our large base of available healthcare professionals and geographically diverse hospital clients provide us with a significant referral source to continue to attract and place new travelers.

We believe that our number one industry position reflects hospitals' preference to utilize high-quality nurses and allied healthcare professionals, and to seek value-added services from their staffing partners. We believe these key hospital decisions factors continue to provide AMN with a competitive advantage.

Throughout 2003 we have described changes occurring in hospital staffing patterns which led to a reduction in the demand for our services earlier this year. Since the second quarter we have seen stabilization in demand as client orders, a leading indicator of demand for us, has remained steady. In fact, recently there has even been a slight uptick in demand. Even more encouraging for us are the signs of an improving U.S. economy.

In addition, recent reports from several public hospitals over the last weekend indicated solid hospital admissions with an overall flat or slight increase over the third quarter of last year, which I will add was a very strong third quarter. This all leads to why we continue to believe the long-term drivers of our industry are strong, clear and proven, and we look forward with optimism to the beginning of 2004.

In October we successfully completed our $180 million tender offer for AMN Securities. This transaction illustrates our commitment to enhance shareholder value and our confidence in the long-term opportunity of AMN. We evaluated several alternatives in coming to our decision to execute our tender offer, and we determined that the best course was to utilize the strength of our capital structure and cash generation ability to provide immediate value to all of our shareholders.

As a result, or as many you recall, we have been debt free, and we had $56 million of cash at September 30th of this year. And that was after pursuing a relatively aggressive stock repurchase plan since last November, where we purchased $74 million of our own stock.

In the tender offer we purchased approximately 10 million shares and stock options. We financed this transaction through an amended credit facility, which included a new $130 million term loan, and $15 million of borrowing under our $75 million revolving credit facility, and approximately $40 million of cash.

We believe this adjustment to our capital structure benefits all shareholders immediately and in the future. The transaction was well-received in both the debt and equity financial markets. And we believe that the level of debt brought by the tender offer is modest. In addition, we believe our capital structure provides us with excess capacity to pursue our strategic growth plans.

Before I hand the call over to Susan Nowakowski, I do want to mention an announcement that we made in September. This is when Susan Nowakowski, AMN's President and Chief Operating Officer, was elected to AMN Healthcare Services Board of Directors. As a new member to our Board and a long-term member of our management team, Susan will bring operational insight to our seasoned Board of Directors. But even more importantly, she will provide strategic leadership at the Board level.

With that, I'll turn the call over to Susan.

Thank you, Steve. You know that I really appreciated your support and the other Board members. And I am looking forward to my new responsibilities as a member of the Board of Directors.

On our last earnings call we would characterize our outlook at that time as cautiously optimistic based on the stability that we were seeing in the demand for our services. Three months later today, we have definitely shifted more towards the optimistic end. This optimism has been driven by the continued stability in our demand, stability in our placement volume, and now stability in our travel accounts.

The current market environment really presents opportunities for AMN, and we intend to to continue to capitalize on these opportunities. We know that our hard earned leadership position was gained over the last decade by differentiating our services from the competition. We think that there are three elements that have allowed AMN to achieve this leadership position I have often talked them.

The first element is our strategy, the way that we market to and deliver services differently to our two clients, our hospitals under our travelers. The second element is our flexible business model, the way we run the business -- the way we organize our sales and service teams to ensure we are delivering differentiated and superior service. And the third element, not to be underestimated, is our team. As the needs of our hospital clients change, we have effectively adjusted these three elements. Let me give you a few examples.

As our hospital clients have asked for interviews and assignment confirmations closer to their start date, we have adjusted our processes to deliver. In some cases, hospitals have asked for shorter assignment lengths, or sometimes enhanced credentialing services, and we adjusted our processes to meet their needs.

By far, the most important area where we're making adjustments and investments is within our hospital client management group. In order to establish those deeper and more collaborative partnerships with our hospital clients, we have recently expanded our client service teams by over 30 percent, which is about 12 team members. This expansion allowed our team to spend more time interfacing with each client. This helps AMN to better understand the needs of our hospitals, and to be certain that we are maximizing our opportunities to deliver services.

As hospitals seek to streamline their outsourced staffing, and continue to rationalize the vendors that they're partnering with, we have been able to strengthen our relationships, and we believe gain market share, at those hospitals.

Another way in which we are adjusting and making investments to better deliver to our clients is on the technology side. We continue to be the innovation leader in healthcare staffing by providing online tools to help hospitals streamline their process flow for securing staffing services.

At the Nursing Management Congress Conference, which was held in San Diego last week, we introduced our staffing service center. This is a comprehensive online resource for hospitals to better manage their outsourced staffing. The early feedback from hospitals who are utilizing this online tool has been very positive. We think that these investments and our focus on client-centered initiatives provide AMN a real opportunity to build a stronger market position with longer-term benefits. In a time when some smaller competitors are struggling to just deliver in this tighter market, AMN is focused on providing differentiated value to hospitals to help them to be more successful.

And now let's talk about some operational trends. On our last conference call in July, I explained that the leading indicator of demand from our hospitals, what we call our orders, has been steady since April. This stability continues through today with orders being flat from April of this year through the third quarter. In fact, orders have actually upticked slightly over the last two months. In addition to orders being up ever so slightly, our placement volume activity was also sequentially slightly up for the third quarter. These are obviously positive signs for us.

So if demand has been demand has been steady, why did our traveler count dropped sequentially in the third quarter? Well, since we contract with our travelers weeks in advance, and then our traveler work for an average of three months, it does take several months for the full impact of a change in demand to translate into increases or decreases in traveler count. This is why our traveler count has directionally lagged behind our demand changes.

In fact, even if you look at the third quarter, we continue to see declines through the quarter from July through September. The good news is that it appears to us that the lag effect has played itself out. For the first time this year traveler count is expected to be flat from month-to-month. October and November are expected to be about the same traveler counts as September.

Our guidance for the fourth quarter does include a sequentially down traveler count from where we ended in the third quarter, but this is primarily due to the seasonal impact in December, when traveler count typically dips as nurses end assignments before the holidays to take a few weeks off and spend with their families.

Another bright spot in our business is our international placement brand, O`Grady-Peyton, which if you recall, places nurses from English-speaking countries into the U.S. During the fourth quarter we have had a record number of new international nurses starting new assignments. We have been able to increase the number of orders from existing clients, as well as increase our new hospital client base for international traveler by over 15 percent.

Now, while this is a very small segment of our business, it is just another positive indicator for the overall demand for our services. So we are feeling quite positive about our business and our industry. Demand has been stable for nearly six months now and albeit, small numbers, has recently shown glimpses of a possible inflection upwards. Our traveler count has finally flattened out as the lag effect cycles through, and our placement volume has now become stable.

We think all of these are positive market indicators, and they're also the results of the initiatives our team has been putting in place throughout the year. Our sales and service team have done an awesome job, which is reflected in our stabilizing traveler count revenue. Don Myll, our Chief Financial Officer, will now discuss our financial results and guidance.

Thank you, Susan. As Steve mentioned earlier, AMN continued to generate strong financial results in the third quarter of 2003 at the upper end of our revenue guidance, and exceeding our earnings guidance. Our revenue for the third quarter exceeded $171 million, representing a decline of 16 percent from the second quarter of last year. Diluted EPS for the third quarter was 22 cents, representing a decline of 27 cents from the 30 cents reported last year.

Our revenue for the nine months ended September 30 of 2003, 555 million, represented a decline of 2 percent from the same period last year. Diluted EPS for the first nine months of 2003 was 78 cents, representing a 3 percent decline from the 80 cents reported last year. Diluted earnings per share exceeded our guidance due primarily to higher than expected revenue per traveler per day, and slightly lower SG&A costs, nearly across the board.

Gross profit for the third quarter was $39 million, at 22.8 percent gross margin. This gross margin represents a decline from the 24.4 percent recorded in the third quarter of last year, but was in line with our expectations, and remains steady with the second quarter's gross margin of 22.9 percent.

We continued to effectively manage our selling, general and administrative expenses during the third quarter, which was only slightly higher than the $22 million reported in the second quarter of 2003, as we offset increased insurance and facility cost with reductions in variable SG&A expenditures. On a year-over-year comparison, SG&A expense declined for the third quarter by 12 percent, or nearly $3 million from the third quarter of last year.

Income from operations was $15 million for the third quarter of 2003, a decline of 34 percent, compared to the $23 million reported for the third quarter of 2002. Income from operations margin for the third quarter declined 250 basis points to 9 percent, due primarily to higher direct wage and benefit costs for travelers compared to the third quarter of last year. As expected, income from operations margin declined only 110 basis points compared to the second quarter of this year.

As usual, I will now provide some additional insight in our key drivers of revenue for the third quarter. The $32 million decrease in revenue, or 16 percent from the third quarter of 2002, was primarily driven by the 16 percent decrease in travelers working, from 8000 last year to 6700 for the current year's third quarter.

The third quarter's average revenue per traveler per day of $277 remained steady with the third quarter of last year, and was 1 percent higher than the $274 reported in the second quarter of this year. Bill rate increases have moderated from the rates experienced last year, but continue to increase slightly, up 20 basis points over the second quarter, and 2 percent over the prior year.

The slight increased mix of flat rate, traveler contract compared to payroll contracts drove an offsetting very small reduction in revenue per traveler per day. The mix of flat rate contracts remains similar to the previous quarter at approximately 6 percent, and increased from the 3 percent over the last year's third quarter.

Looking at our financial position, AMN's balance sheet continues and remains strong. We generated 13.4 million in free cash flow during the third quarter. As you recall, we define free cash flow to include net cash provided by operating activities of $17.5 million, less capital expenditures of 4.1 million. At September 30th we had cash and cash equivalents of $56 million, and our DSOs stood at 61 days, showing a year-over-year increase of 3 days from September 30th of last year.

As Steve referred to a moment ago, our $100 million share repurchase program, which was initiated last November, was stopped in anticipation of our tender offer, and as a result, we use only $2.5 million to acquire 183,000 shares during the third quarter. Since inception of the program, we have used $74 million to repurchase 5.2 million shares of AMN stock from the open market.

I would now like to look at and discuss our revenue and earnings guidance for the fourth quarter. Our guidance for the fourth quarter reflects the general stability and demand in traveler bookings, as Susan described. Based on recent bookings, we expect the number of travelers on assignments to remained relatively stable for September through November at around 6500 travelers before the normal seasonal dip in December. We expect the average number of travelers on assignments for the fourth quarter of 2003 to range between 63 and 6450 travelers. This represents a sequential decline in travelers from the third quarter of about 46 percent.

Average revenue per traveler per day is expected to be relatively consistent with the second quarter, ranging from 272 to $274, and down slightly from the third quarter, due primarily to the slight pricing pressures, and to the December seasonal effect. For the fourth quarter of 2003, the Company expects to generate revenue ranging from 158 to $162 million. The sequential decline in revenue from the third quarter is expected to range between 5 and 8 percent, primarily due to the normal seasonal pattern.

The Company expects net income to range between 5 and $6 million for the fourth quarter of 2003, resulting in net earnings per diluted share to range from 15 to 18 cents, after excluding the two cent fourth quarter stock compensation charge of $1.1 million pretax related to the tender offer. Including this onetime charge, earnings per diluted share is expected to range between 13 to 15 cents. The Company also expects to have approximately 33.2 million shares after diluted shares outstanding for the fourth quarter.

While we expect the tender offer to be accretive to EPS going forward, a benefit is not reflected in our fourth quarter guidance due to the timing of the increased interest costs prior to the settlement date of the repurchase of securities. The fourth quarter's average shares outstanding do not reflect the full quarter's benefit of the tender offer.

A modest $1.5 million sequential quarter increase in fixed SG&A expenses is expected, and is a result of consolidation to a new corporate office facility, increases in professional liability insurance costs, and expansion of our sales and marketing team. Unlike our previous arrangement, where our facility costs were variable, our new fixed cost facility costs provide us a good cost leverage opportunity with our anticipated future long-term growth. We expect gross profit margins to remain relatively stable.

And finally, interest expense for the fourth quarter is expected to be approximately $2.1 million. We have fixed $110 million of our floating rate debt at approximately 5 percent, and this excludes the amortization of deferred financing costs.

I will now turn the call back to Steve for some closing remarks.

Thanks, Don. First, I must say that we have had another solid quarter with encouraging revenues and earnings results ahead of expectations, along with good expense management. Second, our industry fundamentals are still solid, and we continue to preserve our industry-leading share through our very deep relationships that we have established with leading hospitals across the country.

And finally, I would like to say that industry demand and traveler volume have stabilized. We believe we are near an inflection point from which our industry-leading position and industry fundamentals will benefit the Company and its shareholders. I think that we are ready for questions at this point.

(OPERATOR INSTRUCTIONS) Jeff Silber with Harris Nesbitt Gerard.

This is Jeff Silber. Steve, in prior calls I know you have talked about the impact of the economy on your business, and I guess you're looking a little bit more optimistically with some of the signs of an economic pickup. I was wondering if you can give us a little bit of color on that? What specifically do you think a pickup in the economy will help? Will it help in terms of increased demand for your services? Or maybe we have seen some mitigation of some of the supply constraints where some of the nurses that maybe were working part-time came back to the workforce? What do you think will happen first, the supply constraints tightening up again, or demand picking up?

I think it will be both. It is hard to say exactly which one will pick up first. I will say though that the surveys that we have done internally, the surveys that outside organizations have done clearly shows that when you are in a bad economic situation, nurses will allow themselves to take on more patients, will volunteer for more overtime, that part-time nurses will work full-time, and nurses will tend to allow hospitals to float them to various units outside their specialty areas. When a person has economic uncertainty, they will do a lot more to stabilize their job situation.

And so I believe very strongly that when the economy picks up, and that more people working, and that nurses' husbands or wives are fully working, that you're going to see this tendency to cut back on working on the overtime, or cut back on working -- from going back to part-time when they were working -- now that they are working full-time. A lot of nurses are women, about 94, 95 percent of all nurses are women. A lot of them are mothers, and they really don't want to work full-time. And that is why you have such a part-time workforce in the nursing community.

When this economy picks up, I think you're going to see a lot more people going back to part-time. And I think that you're going to see then an increase in demand. As far as on the hospital side, of course, if the economy is picking up there will be more money into the system. Medicaid coffers will start to fill up again. And there will be more money out there for the hospitals. So we just think, generally speaking, when the economy picks up we are going to see a positive trend in our business.

Okay. If we can kind of switch gears and just talk about what is going on right now. I'm just wondering geographically if you have seen any pockets of strength and/or weakness? I'm specifically focusing in on California, which I know is one of your bigger markets. And also what you think the impact of the new law in terms of mandated staff patient ratios will be beginning next year?

We're very encouraged by that law that was passed. And as you know, the bill was passed many years ago. It is finally going to be put into effect January of this year. And ratios that was set -- they were set by the state. To us we were a little surprised how low they were, to be honest with you. They expect on medical surgical units, a 1 to 6 ratio for nurses to patients. And in 2005, it could go to 1 to five. And these are pretty low nurse to patient ratios.

What we have been told by the state is that there was going to be sort of a six-month kind of grace period, in which they are not going to be too stringent on enforcing this new law on the hospitals. But as we get closer into the January, and then beyond January, where hospitals will just have to staff up in order to keep their beds open, we expect that we will see an uptick in demand in our business in California, which happens to be a very big state for us. So we are pretty positive about that law.

And what is more encouraging to us as well is that as this law takes effect in California, we anticipate that this well go out to the rest of the country. I'm not saying that I think all 50 states will adopt this kind of legislation, but certainly there are states like Florida, New Jersey which have bills in their legislatures that are talking about this. In fact, even on a national level there was a bill recently introduced in Congress talking about appropriate staffing levels for nurses. The laws are talking about limiting the ability of hospitals to work nurses mandatory overtime.

I think the important message here is that the states and the federal government are looking at this situation. They realize that when you have fewer nurses working in a hospital, you have more patient deaths. The New England Journal of Medicine came out with a report, as you recall not too long ago, that talked about that. And so when you have the government looking at this and saying, hey look, you have to have so many nurses for so many patients, and you mandate it by law. We think that over the long-term, this is going to be very positive for our industry.

In I'm sorry geographically so far have you seen any pockets of strength or weakness?

I think just what we mentioned on the last call continued to be true, Jeff, in that southeast relative to other regions of the country has been weaker over the last 6 to 9 months. California and the West Coast in particular have been stronger relative to the rest of the country. Other pockets, the Northeast continues to be relatively strong for us.

Rick Sing (ph), Cars Capital Management (ph).

Actually this is Michael Kirsch on the phone. First question I have is regarding the buyback that you did, the tender. Can you please discuss the balance from a Board perspective between satisfying your largest shareholder, who fully subscribed to deal and the price that you paid, which was a significant premium to where it is now, roughly $18, and how you balance that between knowing what the current business trends were and the likelihood that you're going to be able to achieve the estimates that were out there for the Street, and being willing to pay a significant premium and lever your balance sheet?

Well, I'm going to answer part of that question, and then I'm also going to allow Don to answer part of that question as well. In regard to your question about our Board and our largest shareholder, which is HotSuite, which is an investment firm in Dallas, they have been our financial sponsor for a long period of time, since 1999 -- have always been active in the growth of our Company. As an equity sponsor, they have a responsibility to return capital to their investors over time. They still have a large stake in the Company, and own about 46 percent of the shares outstanding. In addition, HotSuite is, I will tell you, is still very optimistic and committed to the long-term growth of AMN Healthcare.

As far as the purpose and the impact, we're not able to pick a timing of when we do such transaction. We do it whenever it is feasible and doable. With the interest rates as low as they are, with our share price being where it is, and you have heard us talk about the optimism we have in the long-term and the short-term. We have to do it when it makes sense to do it, whenever we can. That is as simple as it is. Who knows when the capital debt markets will --?

What I'm asking is, was there a discussion -- how did you decide on $18 to start with?

Well there is a variety of ways. One is just comps on similar transactions. One is on relative future anticipated share price for us. And one is at what price can we execute a transaction which has the benefit of increasing accretion to our shareholders in a material amount.

We had, as you know, $100 million share offer repurchase plan, and we had been aggressive at that. Steven and I both mentioned on the call here, we spent over $74 million at it. And while it has been helpful and increased earnings per share, it has sort of been incremental, and I think it was wise.

This transaction, we wanted to make it a material significant transaction. We wanted to adjust our capital structure to the benefit or our shareholders long-term. And you don't want to do this kind of transaction for $1 million or some minimal amount, you want to do it for a material amount that (indiscernible) can handle.

But did you have a discussion about where your business was at that point, where you had decided -- you have better information at that point than the market. Did you discuss where you stood relative to expectations, where you thought your next couple of quarters were? And did you discuss whether you thought where the market would trade your stock if they knew what the numbers were relative to their current expectations?

The only thing we really pay the most attention to what we communicate to the Street and about our business. And we are very comfortable with our decisions relative to that.

I would think one of the advantages of sitting in your seat would be that your knew -- that you would had a better sense that business conditions were weak, and that if you didn't live up to expectations that you would be able to have a tender at a lower price. And why wouldn't you want to have the Street at least know the full information? Then you can buy your stock at a better, therefore, more accretive price. You could do your tender today several dollars lower than you get it only a couple of months ago.

I'm not sure how to answer that. We're not in the business of looking in the rearview mirror. Our decision as managers of the Company, and the board in directing the Company is to make the best decisions possible going forward. The same is true as if the business were not declining like it has been in the last year. The same question would be at anytime, anytime you have a volatile situation the question can come up. So the Board also sought advice from independent outside sources, and we relied on those experts to help us make the decision.

Steve Halper with Thomas Weisel Partners.

Relative to your numerous comments about stability beginning to settle into the market, and orders starting to pick up ever so slightly, when do you think you'll in a position when you'll be able to provide guidance for a full year out, as opposed to just one quarter?

Well, Steve, our decision to provide guidance is not necessarily dependent on whether our business is growing or softer than the last year. So we have not made a decision to change our policy on guidance going forward.

You always talked about having the lack of visibility to project out for a year, but the business model is such that you feel comfortable projecting out for a quarter. Do you ever think you get sufficient visibility to project out to the year?

Well, if you look back since we have gone public, and we have consistently estimated -- when we gave more forward-looking guidance -- we beat our guidance some quarters by 3 cents. So you could almost argue that in an environment where you're going so fast, it has been difficult for us to estimate on the upside and on the downside. So I don't know that we have been any more accurate when the market is vigorous than it is when it has been soft.

I don't think you're answering the question. You don't think you'll ever get to the level of visibility that you will be able to provide a forward year's guidance number?

We're not prepared to decide on that today. We may make the decision based on a corporate governance basis or based on visibility. But right now we're not planning to change our guidance policy.

But I would assume as part of your corporate agenda, the managers of the Company need to present to the Board a detailed budget with a range for the following year. Correct?

Correct. Right.

If that would be good enough for you, I think that would be good enough for us too.

I hear your comment. I'm not sure that our internal operating plan is something that the Street would know how to digest. It is a management tool to run the business, not to estimate earnings for the Street.

Mark Allen with Sun Trust Robinson Humphrey.

Just FYI there was an article in the New York Times today talking about the dangers of having nurses work longer hours. First question would be on the seasonal bounce back. You talked about December dipping down a little bit because of the holidays. Can you give us little bit of color on the month of January? How long does it take for nurses who leave for the holidays to sort of get back on the job?

Sure, Mark. January is much like December in that you're correct, a lot of the travelers, not all of them, but a good chunk go home over the holidays to be with their families. And then they start back at either their prior assignment or a new assignment in January. And a similar effect is in December. People start to take off mid-December, and a lot of them take off right before the Christmas holiday. And then they start coming back the second and third week in January. So you sort of have this ramp down at the end of December and this ramp back up in January, and you start to rebuild your traveler counts then into February and March.

Within the hospital itself, my understanding is most of the travelers work in the critical care areas. Have you detected any between emergency room and intensive care and coronary care, any shifts in the mix between those departments at hospitals?

No. A great question though, Mark. There hasn't been. We have been in the same specialty mix now for a couple of years. There aren't any particular specialties that are significantly strong or significantly week. Clearly the largest group, just by the fact that the largest number of nurses are your medical surgical nurses and your intensive care nurses.

Relative to pricing pressure, I guess my basic question would be, would pricing pressure in the per diem segment have any type of indirect impact on pricing pressure for the travel segment?

We haven't seen that correlation, and we haven't competitively felt that in our discussions with the hospitals. And it could be just because the dynamics and the needs that we're serving in travel versus per diem is different.

And a final question, a financial question is, I guess essentially it is a question about your comfort zone with leverage. How do you approach how much debt you could put on the Company? It is a function of EBITDA or something else? Maybe a little color on that.

Yes, Mark, our attitude is pretty conventional about our approach to debt in it ought to be based on an ability to comfortably service the debt, and execute the operating strategy. So we look at multiples of EBITDA. Where we are today on a pro forma basis with our debt from the tender offer of $145 million based on trailing fourth quarters is about 1.7 times. So it is pretty light. That is kind of anchor. That is where we are today.

We did not anticipate -- we're more comfortable with a modest level of debt. We do not anticipate to become a highly leveraged company. But we're very comfortable with the debt we are today, and slightly higher. And we're not at the peak of our comfort zone for sure. In the past, this Company has been highly leveraged. Prior to being public, it was over four times. And certainly that is not an area we would -- a leverage level we would expect to get to. Is that specific enough for your question, Mark?

Thanks. And nice to see your stability. Thank you.

Nicolas Aberlee (ph) with Karris and Company (ph).

Steve, during the last conference call you hinted that per diem staffing space was looking increasingly appealing because of the growth rates; it started to come in line with travel growth rates. Now that the tender offer has been announced and completed, and the balance sheet is not as flexible, obviously, can we assume that the idea of this diversification in terms of product offering is no longer in the cards?

I wouldn't assume that, and I do think we still have flexibility with our balance sheet to be able to go into the per diem business if we choose to. And you're right, I did talk about that in the last call, that the growth rates have come more in line. And because of that, it becomes an industry that could be attractive to us. But we don't want to go out and buy a per diem company just to buy a per diem company. It needs to make long-term strategic sense to us to do it. And as opportunities present themselves to us, or as we seek those opportunities, we will evaluate those on a case-by-case basis.

So the answer to your question is, we will still look at that. It is not something we have closed the door to. But also I don't want to leave the impression that we're out there actively trying to get into that industry as well. It is a bit of a different business than we're in right now. And there would have to be, I think, a compelling reason for us to go into that industry.

Would you say that the lack of reasonable evaluations, perhaps, for per diem staffers on the public and private level could be a variable customer -- was a variable in the decision to utilize cash and debt for a tender offer instead of an acquisition?

Yes. In terms of an option to benefit our shareholders immediately, that would the decision we made, so you can imply that was the offsetting opportunity.

A quick question for Don. Looking at the EPS guidance provided, and then you had also mentioned that there would be a slight pricing pressure in Q4. I guess what I'm trying to figure out is what is the difference sequentially, because we saw a little bit of pricing stabilization in Q3, what is the difference sequentially in the pricing environment?

Well the revenue per traveler per day for the third quarter, as I mentioned, was about $277. And we expect in our guidance about 272 to $274 revenue per traveler per day. Pretty much flat pricing from Q3, and just a little bit over last year. And there's many influences in that revenue per traveler per day. It is a mix of flat versus payroll contracts. It is geographical mix. It is clinical mix. So is not exact, and all those issues impact margins too. But basically it is a flat pricing environment.

Jason Williams with Holly Brown Asset Management (ph).

I'm just struggling a little bit with, I guess, the commentary you guys are giving on the call about seeing the business stabilize, and even talking about a slight uptick in orders versus the guidance you are giving for the fourth quarter. I mean, you are guiding revenue down almost 23 percent year-over-year, 7 percent down sequentially.

There just seems, in my mind, to be a huge disconnect between what you're saying you're seeing in the business, and how it is stabilizing versus the guidance you are giving next quarter. I know that you have talked about the fact that December is usually a little bit weaker, but it was my understanding that overall the fourth quarter was actually your strongest quarter, and that October and November historically the strongest month. So again I just would appreciate some help understanding the disconnect.

You are correct in the past when we were in a growth market the fourth quarter we would see our traveler count rising in October and November. And then we have always had this December effect. And that rise in October and November, based on the growth of the market, would typically drive the traveler count in the fourth quarter to be flatish to slightly up.

Well, we are not in a growth market today. And the disconnect, I am going to try to connect to a dot for you on the orders translating into traveler count, that relates to the lag effect that I mentioned earlier. Any change in orders is not instantly felt in your traveler count. It takes several months for an increase or a decrease in orders, or a flatness in orders, to manifest itself into your traveler count. And that is because we are booking people weeks in advance. They are then on assignment for three months at a time. We are then extending them for a few weeks. And it takes several months for a decline in traveler count to manifest itself into a decline -- I'm sorry, a decline in orders to manifest itself into a decline in traveler count.

And likewise, as we have set our orders, our demand has been stable since April. It is taken several months for that stability and demand to translate itself into stability in traveler count. And that is why we're now very pleased that for the first time this year, we have seen stability in our traveler count from September to October to November. It is the first time that has happened this year, and we think that is very positive.

So as I mentioned the slight uptick in orders that we have seen, that is only to directionally differentiate from a decline at the beginning of the year, stability through the summer. So even though it is small, a slight uptick we believe is positive. You're not going to see -- first of all, it is small. And secondly, you're not going to see the effect of that for several months. Just as we didn't see the effect of the stabilization in demand for several months. Does that help?

A little bit. Maybe let me ask you a differ different way. If you're seeing the stabilization, you're seeing the slight uptick in business then when does the topline stabilize? So now, if I'm understanding what you're saying, if it takes 3 or 4 months then is it fair for me to say that, okay then in Q1 we should either see the topline stabilize to increase at least sequentially? When does the business -- when does this stuff roll through and you see topline stabilization in your business? Because for the last three quarters we haven't seen that. And your guidance, again, is substantially down topline?

Jason, as you know we're providing guidance for the current quarter and not providing future guidance. So in answering that question, we would be making an attempt to provide guidance into next year, and we don't think what we really have the visibility to do that.

Richard Adams with Bennet and Lawrence (ph).

Most of my questions have been answered, but I am wondering if you can comment at all on the Institute of Medicine report released yesterday that suggested that health-care facilities avoid using nurses from temporary agencies because of their unfamiliarity with the work environment? I know it is just been recent, but have you had any feedback from your clients on that? Do you expect any impact from that at all?

The report said that the reason why temporary health-care workers were not desirable was because of the fact that they lacked a familiarity with the work environment. And I think that speaks -- and this report really speaks to per diem agencies and not travelers, because a traveler -- one of the positive aspects about using a traveling nurse in a hospital is that they do become familiar with the work environment.

They get familiar with the patients because of the continuity of care and the consistency of care. They become familiar with the facility and the surroundings and just where -- how the facility works, and where all the supplies are, and the policies and procedures of the hospital. They become familiar with the other nurses that are working side-by-side with them.

So I would say that this report that you are speaking of, which came out by the Institute of Medicine, really speaks positively for travel nurses. It doesn't speak positively for per diem agencies, because of the fact that when we send a nurse in just for a day or two, these are the problems that occur. That is why travel nurses are always a preference to a hospital if they could project need beyond that day to day usage.

Richard, the report also wasn't just focused on temporary staff. As you know, it also focused on the fact that hospitals should be limiting the number of hours that all nurses work. I think they were limiting it to 60 hours per week and 12 hours in a 24-hour period. Other suggestions were to reduce excessive paperwork. And one of the suggestions that they put forth was to give nurses the authority to turn away patients if they didn't feel that they were adequately staffed. And obviously that is a revenue issue for the hospital. So I think it is obviously very thought-provoking and has a variety of ideas out there.

I will just add that these kinds of report that come out, whether it is by the New England Journal of Medicine that talks about patient deaths if there's not enough nurses, or whether it is this report you're referring to that talks about temporary workers as far as their lack of familiarity with the work environment, whether it is California putting forth legislation,

I think the important point here -- I think it is a very important point, is that people are waking up to the fact that when you don't have enough nurses it causes poor patient care. And that if you overwork your nurses by having them work unreasonable overtime, or stretching their patient load out too much come, that all you're going to do is drive nurses out of the profession.

And I think you even hear about in the presidential campaign right now. I know that Howard Dean's, the physician, governor, presidential candidate is talking about the fact that there's a huge nursing shortage in this country. And that is going to cause a long-term problem if we don't address it. And we think that the fact that people are now becoming more aware of this is eventually going to drive more demand for our nurses into the hospitals, because we're such a good solution for hospitals when they need nurses. And that is why we're so optimistic about the long-term drivers of our industry.

(OPERATOR INSTRUCTIONS) Jeff Silber with Harris Nesbitt Gerard.

These are going to be some number oriented questions. I know you guys aren't providing guidance for next year, but just to kind of help us out a bit. A couple of things you had mentioned in the fourth quarter, I just wanted to see how to normalize them going forward.

Don, you mentioned about the $1.5 million increase in SG&A. Is that going to continue next year, or is that just kind of a onetime issue in the fourth quarter?

It is not a onetime issue for the fourth quarter.

In terms of normalizing interest expense going forward, I'm assuming that it will probably be closer to 2.3 or $2.4 million per quarter? Is that correct?

Yes. Five percent on the assumption of what the debt balance will be based on our cash flow is a variable that you'll have to estimate, but you're thinking about it right.

And then finally the share, again, on a normalized basis beginning in the first quarter, are we looking for something around the $32 million number?

Yes, it is about 900,000 shares lower than the average shares outstanding for the fourth quarter guidance I gave you.

And in terms of DSOs do you expect those levels to trend down in the fourth quarter and remain somewhat stable?

Good question. The fourth quarter tends to be the most challenging DSO quarter because it is the holiday period. People polish their balance sheets and defer payment. So we typically have run 60, 61 days at the end of December 31. And we don't anticipate any significant changes to that.

At this time there are no further questions in queue. Please continue.

We just want to thank everyone for participating in this call today. And we look forward to our next call to talk about the result of our fourth quarter of this year. And with that, we will close this conference call. Thank you very much.

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