AMN Healthcare Services Inc (AMN) 2004 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the AMN Healthcare Services 2004 First Quarter Earnings conference call. On today's call, we will hear from CEO Steven Francis; President and COO Susan Nowakowski; CFO Donald Myll; and Director of Investor Relations Renee Mullen. At this time, all lines are in a listen-only mode. Later, there will be a Q&A session, and instructions will be given at that time. If you do need assistance during the call today, please press the star, followed by the zero. As a reminder, today's conference will be recorded. At this time, I would like to turn the conference over to Renee Mullen. Please go ahead.

Good morning. I would like to welcome everyone to AMN's Healthcare Services conference call to discuss the Company's earnings results for the first quarter of 2004. A replay of this webcast is available at www.amnhealthcare.com/investors, and will be replayed until May 14, 2004. 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 results that we make about future expectations, plans, and prospects constitute forward-looking statements. Forward-looking statements are identified by words such as "believe," "anticipate," "expect," "intend," "plan," "will," "may," and other similar expressions. Any statements that refer to expectations, projections, or other characterizations of a future event 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 Annual Report on Form 10-K for the year ended December 31, 2003, which has been filed with and is publicly available, from the SEC.

The results reported in this call may not be indicative of the results for future quarters. These statements reflect the Company's current beliefs and are based upon information currently available to us. Development subsequent to this call may cause statements to become outdated. The Company does not intend, however, to update the guidance provided today prior to its next earnings release.

I will now turn the call over to Steven Francis, AMN Healthcare CEO, who will review the Company's first quarter 2004 results and the current market conditions.

Thank you, Renee. And welcome to AMN Healthcare's earnings teleconference for the first quarter of 2004. We appreciate your interest in AMN and for taking the time to participate in today's call. We would like today to provide you with an overview of our actual results for the first quarter - an update on industry trends and AMN's operation and strategic initiatives. We'd also like to discuss the guidance for AMN's revenue and earnings for the second quarter.

The first quarter marked a significant inflection point in the healthcare staffing industry with AMN's number of travelers on assignment remaining stable on a sequential quarterly basis for the first time since the fourth quarter of 2002. This volume stability, combined with increased revenue per traveler per day, drove revenue to $161m.

Revenue earnings and volume results were as expected and were in line with the midpoint of our guidance. These results, especially the stability in the number of travelers on assignment with AMN, encourages us, as we believe this reflects an important market transition milestone for the healthcare staffing industry.

Continuing our leading position in the industry, we believe AMN had more travel healthcare professionals working at healthcare facilities than any other staffing provider. As a result of our client-focused initiatives implemented over the last several quarters, we continue to expand our long list of valued hospital relationships. In addition, to increase the number of hospitals under contract with AMN, we have established more relationships across multiple departments and units with our existing hospital clients, strengthening our relationships with acute-care hospitals, and providing broader opportunities for healthcare professionals.

On the legislative front, laws limiting overtime of nurses and mandating nurse-to-patient ratios continue to be a topic of discussion in many state legislatures. As of today, seven states have passed legislation limiting mandatory overtime, and seven more states that propose comparable legislation. California is still the only state with a nurse-to-patient ratio law in effect, but nine more states are currently considering like legislation.

Similar to what we reported last quarter, we have seen California's demand for travel nursing remain strong. This is likely driven in part by the new nurse-to-patient ratios. However, our clients are attributing the majority of this increased demand to a general increase in hospital patient census. Hospital admissions across the country are also showing positive signs.

During the first quarter, several publicly traded hospital systems reported strong increases in hospital admissions, and hospital industry analysts expect continued growth in admissions in 2004. Additionally, long-term admissions are expected to increase as the baby-boomer population continues to mature and consume more healthcare services. Increases in hospital admissions, combined with the long-term prospects of a pervasive nursing shortage, helps support our confidence in the short-term and long-term demand for travel nurses.

An important dynamic in our industry's history is when demand for temporary healthcare professional grows, an increase in the supply of travelers follows. In other words, demand attracts supply. Actually the reverse is also true. During 2004, as we experienced a decline in demand, compared to the previous year, the number of new travel nurses entering the industry also declined. While we have experienced a recent pickup in demand, the rebound in nurse supply is not immediate, as it takes time for nurses to individually evaluate the travel nursing opportunities.

In order to enhance our supply of travel nurses, we spend a considerable amount of time learning about the career needs of nurses. With demand for our services moving in a positive direction, they have increased these efforts. For example, as you might recall, AMN operates several national nurse community websites. One of the most popular sites is Rn.com, a nurse portal website dedicated to nurse education.

Earlier this year, Rn.com launched a nationwide survey for the general nursing population. Initial data confirms our understanding of the attractiveness of travel nursing, with 29 percent of the nurse respondents saying they would likely seek a travel opportunity in the future. This is also consistent with statistics from a 2003 survey performed by a leading national nursing journal, which confirms this high level of interest in travel nursing. We believe this information provides further validation regarding the future potential supply of travel nurses. And as other external factors improve, such as the economy, we would expect to see our supply of new nurses rise.

We remain confident in the short-term and long-term macro drivers of the industry, and we have kept focused on our core business strategies. We believe that this focus and our operational and strategic initiatives will continue to position AMN to strengthen its lead in the temporary healthcare staffing market. We believe that the first quarter's performance and our near-term outlook provide a solid foundation for our continued confidence.

And now for an overview of our operation and strategic initiatives, I will turn the call over to AMN's President and COO Susan Nowakowski.

Thank you, Steve. The first quarter came in right in line with our projections. But more importantly, it also included several positive trends, which have given us even more confidence in the future growth prospects. As Steve mentioned, quarter-over-quarter traveler volume remains steady for the first time since 2002. Orders continue to be above last year's level and I'll talk more about this later and treatment volumes showed signs of improvement. We think all of these signs are good and show signs of continued stabilization and future growth opportunities.

During the first quarter, we continued to focus on hospital and traveler initiatives, which we expect will increase our market share. We believe that the first quarter's results give some early evidence of their success. Last quarter, I introduced some of our strategies for strengthening our hospital client relationships. Our team is working in new ways to better understand the needs of our hospital clients and provide services that will make AMN their preferred partner, not only today but, as importantly, several years from now.

Our hospital clients are focused on achieving two important goals. First, delivering the highest quality patient care. And in today's environment of hospital reimbursement pressures, they are also very focused on optimal cost containment. The issue for hospitals is not so much meeting these two goals; it's meeting these goals simultaneously that causes the greatest challenge for them. Studies have shown that adequate nurse staffing ratios have a very direct impact on patient outcomes and patient satisfaction. At the same time, nurse labor accounts for a significant portion of a hospital's budget, often nearly 25 percent, obviously, making it a key expense management area.

As hospitals strive to meet these goals of quality and cost, having the right mix of permanent staff and short-term and long-term flexible staff is an importation lever for them. Recognizing this as an opportunity, we have dedicated more resources to help our hospital clients understand the quality care and cost containment benefits of including travelers as part of the staffing model.

In order to deliver solutions to meet a broader spectrum of the staffing needs of our hospital clients, we continue to build on our core business with specialized service offerings. An example of one of AMN's unique offerings is our placement of international nurses on 18-month contracts. Having just returned from our U.K. operations, I am excited to report that O'Grady-Peyton, our international recruitment division, continues to build and grow. Our O'Grady-Peyton division recruits highly skilled nurses from English-speaking countries to the U.S., offering our hospital clients a solution to fill longer-term staffing needs. This is a growing piece of our business, and we think this growth is a reflection of the quality nurses and valued services we provide and is a reflection that hospitals are thinking more and more of their staffing needs for the future, not just the next few months.

It's important to understand that the challenges faced by our hospital clients can be quite different from region to region and hospital to hospital. We have further defined our client segment and have aggressive service offerings that can be customized to meet their needs. This spectrum of offerings ranges from full service center management programs to preferred provider arrangements to electronic traveler management systems. But for some clients, customized clinical training offerings are even more important. The bottom line is that one size does not fit all.

This customized partnering approach is particularly important in the context of what we are hearing from our hospitals today. Twelve months ago, hospital comments were frequently about the reduction of temporary staff. Today, our client discussions are more often about their anticipated stable or increasing needs for travel staff. But with this comes their desire to be certain that they have the right staffing partners working on their behalf. Our clients are also very focused on what value-added services their staffing providers have to offer in the relationship. It's in this environment that AMN shines. As the leader in our industry with a clear focus and purpose, we are in a position to deliver exactly what our clients want from us.

Just as different hospital segments have different priorities and needs, the same is true for the nursing professionals we recruit. With over 1.6 million nurses working in hospitals in the U.S., the potential segmentation is even greater. Earlier, Steve mentioned some of the research we have been conducting to further understand the needs and motivations of nurses.

This information will also help us to tailor our offerings to better needs, the unique needs of the diverse nursing population. Our multi-branding strategy lends itself really well to targeting multiple segments across the nursing community. We feel that our efforts in strengthening the relationships we have with our clients and our healthcare professionals will allow us to further penetrate the market and grow market share. These efforts are obviously very important to growing our business.

However, we are equally as focused on expense management. Management of direct costs clearly has a huge impact on our ability to grow earnings. The competitive environment does drive portions of our direct costs, but we believe we also have the opportunity to better leverage these costs. And while our goal is for our initiatives to result in improved margins, sometimes our efforts merely offset other upward pressures on direct cost.

SG&A expense management is also an area of focus for us. Our team has had a solid track record of expected expense management, producing some of the highest profit margins in our industry. But we know there is more room for improvement. Some of this leverage can come in the form of productivity improvement. For example, we have seen a positive trend with recruiter productivity rising during the first quarter. We also took steps during the first quarter to further centralize certain functions, which were previously managed at each of our brand offices. We believe there are additional opportunities for further leverage and productivity gain.

One last update on our positive demand environment. Over the last couple of quarters, we reported that orders had been stable and increasing through the fourth quarter of 2003. Average orders during the first quarter were again above the fourth quarter. And an even more important marker for us is that today AMN's orders are above our total orders one year ago. Obviously, this is a good time for us. And with that, I will turn it over to Donald Myll, our CFO, who will now discuss our financial results and guidance.

Thanks, Susan. As Steve highlighted in the beginning of this call, we reported revenue of $161m for the first quarter of 2004, generating diluted earnings per share of $0.15. Revenue for the first quarter represents an increase of 1 percent over the fourth quarter of 2003 and a decrease of 19 percent from the first quarter of last year. Diluted earnings per share for the first quarter was equal to the $0.15 reported in the fourth quarter of 2003, and a decrease of approximately 48 percent from the $0.29 reported in the first quarter of 2003.

The fourth quarter 2003 EPS included $0.02 charge related to the $180m self-tender offer completed in that quarter. Our traveler volume, revenue, gross profit margin, net income, and earnings per share were all in line with the midpoint of our guidance, and we believe reflects the stabilized traveling healthcare market.

Gross profit for the first quarter was $35.8m. This represents a gross profit margin of 22.2 percent, in line with our expectations. Compared to the prior year's first quarter, gross profit margins declined slightly by 20 basis points from 22.4 percent, primarily due to increases in overall compensation and housing benefits provided to our travelers. As mentioned in our fourth quarter earnings call, and by others in our industry, first quarter margins for the traveler healthcare industry typically declined from the fourth quarter due to the impact of higher housing and traveler payroll costs, resulting from the frictional impact of the higher percentage of new traveler assignments in the first quarter.

Selling, general, and administrative expense totaled $24.6m during the first quarter, steady with the previous quarter, both in terms of total dollars and as a percentage of revenue at 15.3 percent. This is adjusted to exclude the $1.2m tender offer charged in the fourth quarter. Compared to the prior year, SG&A expense increased $1.8m due primarily to expanded corporate facility costs and professional liability insurance.

Income from operations totaled $9.5m for the first quarter and was slightly improved over the fourth quarter, both in terms of total dollars and as a percentage of revenue at approximately 5.9 percent, and was lower than the 10.3 percent of revenue reported in the first quarter of 2003. Again, the primary driver of the decline versus last year was the year-over-year decrease in average travelers working.

Let's now turn to some of the key drivers of revenue in the first quarter. The $38.5m, or 19 percent decrease in revenue from the first quarter of 2003, was driven primarily by the 21 percent decrease in average travelers working. That was partially offset by a slight increase in revenue per traveler per day. On a sequential quarter basis, the number of travelers remains stable with the fourth quarter. This reverse in trends from previous quarters is significant and positive.

The first quarter's average revenue per traveler per day increased 1 percent to $279 for the first quarter of 2003, and increased sequentially 2 percent over the fourth quarter of 2003. The year-over-year increase was driven primarily by increases in pricing to our clients in the form of slightly higher bill rates and additional hours worked by our travelers. That was offset by a shift to a slightly higher mix of flat-rate contracts. Client average bill rates increased slightly in the first quarter of 2004, or 0.2 percent, compared to the fourth quarter. The mix of flat-rate contracts remains similar in the fourth quarter at 7 percent.

Below income from operations, net interest expense for the first quarter was $2.1m, representing a significant increase over the prior year when the Company was debt-free. The first quarter's interest expense showed a slight increase over the fourth quarter due primarily to the first full quarter impact of the debt financing related to the October 2003 $180m self-tender offer. The first quarter's income tax provision of 38.5 percent was slightly improved versus the 2003 rate of 38.7 percent.

Turning to our financial position, at March 31st, we had cash and cash equivalents of $6.8m and total debt of $137m, a slight reduction from the total debt at year-end. DSO and AR stood at 69 days, showing an increase of ten days over March 31st of last year, and one day over December 2003. During the first quarter, AMN generated $5.7m in cash flow from operations. The increased DSO's were primarily attributable to our upgraded payroll and billing systems that were implemented in the fourth quarter and discussed in our previous earnings call.

As we mentioned, we extended billing and audit processes in late 2003 and early 2004 to ensure excellent client service during this transition. Although our billing processes remain on track, our collections did not improve quite as quickly in the first quarter as we had expected. We have seen improvements in our collections early in the second quarter and expect DSO's to decline by June 30th. We expect to enjoy efficiencies in payroll, billing, and collection processes from this implementation and will serve as a platform for delivering future enhanced customer service features to our hospital clients and to our travelers.

I will now turn our attention to our revenue and earnings guidance for the second quarter of 2004. Our guidance for the second quarter reflects the stable market conditions that Steve and Susan mentioned. Average travelers are expected to range from 6,170 to 6,320 travelers in the second quarter. This projected second quarter traveler volume is slightly lower than the first quarter, but is in line with expected normal seasonal patterns and is another sign of the stability in our market.

For the second quarter of 2004, we expect the Company will generate revenue ranging from $157m to $161m, reflecting relatively consistent revenue per traveler per day. Second quarter gross profit margins are expected to improve by approximately 50 basis points. Net income for the second quarter is expected to range between $4m and $5m, and is expected to generate net earnings per diluted share ranging from $0.13 to $0.16. And the average diluted shares outstanding is expected to be approximately $31.4m for the second quarter.

That concludes my financial review. We are now ready to take your questions.

Thank you very much. Ladies and gentlemen, if you do wish to ask a question, please press the star, followed by the one on your touch-tone phone. You'll hear a tone indicating you've been placed in queue. You may remove yourself from queue by pressing the pound key. If you are using a speakerphone, you may need to pick up your handset before pressing the star, and then one. Once again, if you do have a question, please press star, then one at this time.

And our first question comes from Jeff Silber with Harris Nesbitt Gerard. Please go ahead.

Thanks, and good morning. Susan, you were kind enough to give us some trend information on orders. I was wondering if I can drill down a little bit deeper. Can you tell us has the lead time that your clients have given you, has that been changing at all? And then, also in terms of the fill time, once you do get an order how quickly can you fill it again? Can you talk about trends there as well? Thanks.

Sure. As you know, we don't provide specific data, but I can at least talk directionally on where that's going.

That's fine.

The lead time that they're giving us has not expanded. However, it's taking longer to fill some of those positions, and that's because of supply constraints. We are booking people further in advance, which is a positive trend for us certainly. It gives us just a little bit more visibility. In fact, for the first time in the last year our book to - what we call our book to start date time - is above last year, and we think that is a very positive trend.

Okay, great. Now, you mentioned it's taking longer to fill because of supply constraints. Can you give us some examples of how maybe you're mitigating that? I know you talked a little bit about what you're doing on your website, but I've heard anecdotally that some nurses may be a little bit less reluctant, or more reluctant, to travel these days because of everything that has been going on in the sector. How would you convince a nurse that may be on the sidelines to start traveling again?

I think there are so many ways. You're talking really about our whole marketing and sales program there, because it ranges anywhere from our advertising campaigns and changing our messaging there to deeper penetration on our website to grassroots efforts with our recruiters and getting out there and educating. Certainly we've ramped up all of our advertising and recruitment efforts in trying to get that message out there.

But, as Steve said earlier, a lot of it is demand driven as well and it's getting the message out there that the demand is growing. There are more and more clients and hospitals are very urgent to fill their needs. So, it's kind of getting the movement out there and getting people re-interested. As much as we talk about supply constraints on an absolute basis, our new traveler applications did grow in the first quarter versus the fourth quarter. So, it's a positive directional trend, but certainly the supply growth is still below last year and it's not keeping up with the demand growth.

Okay, great. Just a couple of quick numbers questions for Don. Don, you mentioned in your guidance regarding gross margins you're looking for an increase of 50 basis points. Is that sequentially or year-over-year?

Sequentially.

Okay, great. And then what tax rate should we be using going forward?

The first quarter tax rate is a good tax rate - 38.5 percent.

Okay. Is there any reason - it was a little bit lower than we have modeled. Was there a specific reason for that?

No. We're constantly trying to manage our tax position to the best possible place and we keep making slow progress with that.

Okay, great. Thanks and I'll let somebody else jump on.

Thank you very much. We do have a question then from Mark Allen with SunTrust Robinson Humphrey. Please go ahead.

Good morning. Nice to see the stability there. The first question I have is regarding the normal seasonality of the business. You mentioned second quarter is going to be a little bit lower sequentially. That's normal seasonality. My sense is that the third quarter, or the fall season, tends to pick up a little bit seasonally. So, my question is, is that correct, with the fall pickup off of the summer? And then, internally when would you begin to have visibility on those fall season orders? In other words, you have confirmation that normal seasonality was continuing to hold this calendar year.

Sure, Mark. You're right. In that second quarter, on a sort of normalized seasonal basis, we would expect to be down sort of at this order of magnitude. So, this was really rather expected.

Third quarter, in a normalized environment, and I will caveat to say we're not prepared to say that the third quarter will be a normalized environment and if you go back to the sort of pre-hyper growth years in normalized environments we would expect the third quarter to be up in sort of the 4 to 5 percent range on a sequential basis.

In terms of predicting the visibility of that, again, as I said, we're not in a position today to say whether or not that we will achieve that. But what I will say is we're feeling as though the first to second quarter trend is appearing to be stable and really fairly normalized for our business and so we think that's positive. Whether that will continue into the third quarter remains to be seen.

Okay. And you had mentioned some other states are beginning to consider the nurse-patient ratio legislation. Last week's Wall Street Journal I think highlighted that the Leapfrog Group is going to be in doing some surveys of hospital safety. My question is have you had enough time to kind of assess the impact of that? If that becomes more prevalent, will hospitals become more concerned about how they rate in that survey and might that boost demand for nurses?

I think these nurse-to-patient ratio laws are positive trends in our industry. In California, like I said earlier, these laws have increased demand for our nurses in California. It's interesting. A survey was done fairly recently by an institute that hospitals belong to. The results were that 52 percent of hospital CEO's expect to see their states implement these nurse-to-patient ratio laws.

What's interesting in California is that these laws are making an effect in these ratios. These hospitals are working very hard to get their staffing levels up. They're doing that by working their nurses more overtime. And actually an interesting thing that I heard recently was that because the number of patients are actually down for the nurses that it's a little easier for them to work the overtime. But they're also saying that they're increasing their usage of temporary staff.

If this California model is successful, and it appears that it is producing success as far as improving these ratios and hospitals getting there, I think other states are going to be looking at this. I think these CEO's are saying the same thing, and saying that if it works in California it should work in other states. Now, like I said earlier, nine other states right now have legislation in the works to consider this type of legislation.

Got you. And a final question, if I could. Essentially there will be long-term more demand for nurses and that will be a combination of agency nurses than hospitals obviously trying to recruit more nurses. Do you think that permanent placement fees will have a bigger role in your business going forward? And what would that mean in terms of profitability?

Well, we currently don't provide permanent placement in its purest sense, Mark. We do allow our clients to hire people permanently after - it depends on the contract - about two assignments at no fee, and that's one of the reasons they use our services. They may be recruiting permanently. For international nurses, they can hire them certainly after the 18-month contract, so they can buy out their contract earlier.

So, the trend towards that, we think, actually gives us upside opportunity in terms of certainly our international placement business. And if we were to move into the permanent placement business, that would be potential incremental revenue to us. But we don't have a current mix issue, if that's what you're asking.

I guess my question is, is that something you would be more interested in going forward, and could it be an incremental profit opportunity to you?

Yes.

Okay. Thank you and good luck this year.

Thanks, Mark.

Thanks. We do have a question from Steve Halper with Thomas Weisel Partners. Please go ahead.

Yes. Hi, this is George sitting in for Steve. I've got a question first regarding SG&A. It continues to kind of creep up as revenue continues to decline. Can you talk about what you guys are doing to keep a cap on SG&A expenses?

This is Don. Our actual SG&A expense for the first quarter was pretty close to what it was for the fourth quarter. So, it was really a kind of minor increase there. So, I'm not so sure we're watching it creep up. The components of SG&A that are the items that we focus on most now are things like professional liability insurance. Those kinds of cost items have been increasing, as we talked about in the fourth quarter and also again in the first quarter.

But the other very direct manageable costs like personnel and advertising and rent and transportation and things like that, we do manage quite well, I would say, over time. Our SG&A expense, as a percentage of revenue, while it has increased, the spending has been flat or come down versus like last quarter, and we expect to continue to make progress there.

Okay. Can you talk about what's going on with your discussions with hospital administrators? We tend to hear a lot talking more about getting more efficiency from their nurses as opposed to trying to bring more nurses on. Can you speak to that?

I think that's always a focus of theirs, George, and that's what you saw a lot of over the last 18 months is trying to squeeze more productivity and efficiency out of their permanent staff. I think they've been successful in that. If you take our demand stabilization and how demand grows as an indicator that might suggest that they have not achieved everything but certainly have captured the low-hanging fruit on those efficiency and productivity gains. But they'll continue to look for those opportunities because nurse labor is such a huge component of their expense line. They should be.

Right. And can you just give us a sense of what the traveler account was exiting the quarter? Do we know it was 6,349 for the average?

You know we don't provide specific numbers on a monthly basis. But what we can say through the quarter is that you have sort of a ramp-up period in January where you have new people starting assignments in the first and second weeks of January, typically your lowest month in the quarter, and then it typically builds through the quarter.

Okay. Thank you.

Thanks. We do have a question then from Nicholas Aberle with Caris & Co. Please go ahead.

Good morning. First question was with respect to pricing. Could you just provide a little bit of color on the pricing environment? It seems like it's starting to shape up a little bit here.

Sure, Nicholas. If you look at our average bill rate for travelers working, it has continued to rise from fourth quarter into the first quarter and it's projected to continue to rise into the second quarter. Albeit a small amount. It continues to move in a positive direction.

That's really a combination of a couple of things. One is where are the travelers working, because there are price differentials across the country, but it is also a reflection of pricing. As demand builds, you do typically see a little bit more price elasticity and I'd say that we have seen that a bit in the first quarter. If you look at our renegotiated contracts in the first quarter, compared to the third and fourth quarter of last year, they were on average at a slightly higher rate.

Okay. With respect to the mix of geographies you were talking about with pricing, where typically do you see the highest prices in a region?

You know I think for competitive reasons that's something that, and just for disclosure, that's something that we haven't provided in the past and I think we prefer to pass on that. But if you consider that our bill rates are a reflection of two important cost components: (1) wages, and (2) housing costs. If you look to where the higher nurse wages and higher housing costs are, our bill rates would reflect that. So obviously New York is going to be higher than Florida.

Got it. And then, going a little bit further with the geographical breakdown, could you tell us where you're seeing strength from a demand standpoint regionally? And put into perspective, how California is playing out relative to those other regions?

Sure. Our strongest regions are in the west. We talked a fair bit about California. It certainly is an important state. Throughout the west, we've seen strength and growth in demand. Throughout the first part of the year, we've also seen a growth in demand in the southeast, which had been previously declining and actually, last year at this time it declined. So, we see that as a positive trend.

The mountain states increased a bit. We've seen stability in the Midwest. California, today, is a little over 25 percent of our business, so it is certainly an important factor for us, but we've seen growth and demand throughout the country.

What area would be giving you the most trouble at the present time?

The most trouble? I don't know that I would characterize any area as giving us the most trouble. We want to build demand in all regions and so, I don't know that there's an answer to that. We think we need to build demand in all regions.

Okay. Don, just on SG&A again, you said that the margins there are going to improve a little bit going into Q2. Is that going to be cutting on the corporate cost side? Or is that going to be some type of mitigation of cost on the liability insurance side?

I think what I said is that our gross profit margins in our guidance for Q2 was going to increase around 50 basis points embedded in our guidance. So, let me answer that question - I think - because you're question kind of combined both direct and indirect costs.

The improvement in margins in the second quarter, in our guidance, is reflected primarily with the migration into the second quarter where the frictional impact that occurs in January does not occur. We also are constantly looking at ways to more efficiently satisfy our travelers with lower housing costs and manage the bill rate and pay rate. So, that's the 50-basis-point improvement there.

On the EBITDA margin, I think is what you're getting to next, using the direct cost, the EBITDA margin is comparable and, as I mentioned earlier, the SG&A expense in total dollars is roughly pretty consistent and steady on a fairly consistent and steady revenue base.

Perfect. Sorry for mixing those up. Thank you, guys.

That's all right.

Steven Francis Thank you.

Thanks. We do have a question then from Jim Jenesky [ph] with Ryan Beck & Co ph]. Please go ahead.

Yes. Good morning. Can you comment a little bit about the competitive environment? Are you finding that you're taking market share, and if so, from whom? Are the smaller competitors kind of being driven out of business with this protracted decline in demand?

Hi, Jim.

Hi.

If you look at our guidance relative to the projections from other public competitors, the answer on market share would be, yes, that we might be taking from market share, kind of moving from the fourth quarter to the first quarter. Albeit, at low levels. But even on an account-by-account basis, we have that feeling that we are capturing greater market share, both from some of the larger competitors.

But also, as you mentioned, the competitive environment and the demand environment that we were in in 2003 really hit the smaller competitors very hard, especially as hospitals rationalize the number of staffing providers that they choose to work with. They may have narrowed down their providers from ten to three and they chose to work with the larger, established companies that have more infrastructure to deliver both the quality and the quantity of people. And so we have seen some of the smaller competitors either completely vanish or at least reduce their business significantly. So, I think that we've captured some market share from them as well.

Okay. Thanks. That's very helpful. And, as you look out over the next several years, obviously the demographics are behind you for having steady growth throughout the years, but is there a way that you feel that either you as a company or the industry can do -- what steps can be taken to kind of smooth out demand over the next several years so that we don't have years of potential hyper growth like we did over the last, well, prior to two years ago, let's just say - and then have really demand decline quite significantly. And that was across the industry, as we all know. Are there any steps that can be taken?

Let me just comment a little bit about what happened, and then we can look about what we can do in the future to help us smooth that out. I mean part of the reason there was the hyper growth was that the number of nurses that were actually taking the NCLEX exam, which is a nursing exam, was declining at the same time that hospital admissions were going up.

As we're seeing today, hospital admissions are going up like they were going up back in the years 2000 and 2001. The number of nurses that are taking nursing exams has gone up a little bit as well because of the focus on this. But the issue here is that there is a pervasive nursing shortage that is starting to occur - well, it's been occurring for a while, but it's going to get a lot worse.

What's interesting is that by the year 2010, 40 percent of all nurses are going to over the age of 50. And they are going to need a million new nurses to come into the profession between now and 2010 just to make up for the mass nurses that are going to be retiring. Nurses are becoming very, very old. So, I think as far as what can we do to sort of stop this kind of up and down, I think if the economy improves, that's going to be a factor for us, missions continue to strengthen, that's going to be a factor for us. If the shortage continues to get worse, that will be a factor for us.

So, some of these things, to be quite honest, are a bit out of our control. We can't control the economy, and the economy is a factor when it comes to nurses willing to work more overtime or hospital admissions. Some of these things we can internally do by increasing our marketing efforts, both for the hospitals and to nurses.

But this is a situation, which I think on a go-forward basis, or at least on a long-term basis, looks like it's going to be a lot more stable for us in the future. I think, or I believe, that this up and down that we felt these last few years won't be as severe in the future because of the reasons that I just outlined.

Okay. Thanks and final question. Could you comment a little bit about average length of assignment trends at the Company over the last couple of quarters?

Sure. They've been relatively stable. I think we talked last year about them improving after having declined for a while and they continue to be pretty stable today.

Okay, great. Thank you.

Thanks. We do have a question then from Kimberly Pervez [ph] with Deerfield Management. Please go ahead.

Hi. I was wondering if you could outline your CAPEX expenditures for the rest of 2004.

Hi, Kim. The guidance that we provide on CAPEX doesn't go beyond the next quarter, of course. But on our CAPEX - our history of CAPEX - it runs about a little less than 1 percent of revenues. In 2003, it was considerably higher than that because of two factors. One is we finally consolidated our operations in a single corporate facility here in San Diego, so that's increased CAPEX for 2003. And also, we had more software development in our payroll billing, as I mentioned earlier. So, those are behind us, and so we are back to our normal CAPEX, which is - I always use like a 1 percent estimate. It's usually a little less than that.

Okay. In looking at your - you have a $13m debt payment that's coming due later this year and your operational cash flow is running $5m to $6m a quarter. If we use this quarter as a trend for the rest of the year, it looks to me like your cash is a little tight. I mean your DSO's have been trending up. While you can probably adjust things here and there, with that $13m debt payment coming due, it seems to me that you might be a little pinched here in terms of trying to grow because you're existing cash flow is going to have to go towards the debt payment. Can you comment on that?

Sure. What you are looking at is the balance sheet in the release where we've got a $13m current portion of debt. That's our revolving credit facility. There's no debt payment due on revolving credit facility. On our term loan, which is $130m - $125m - it's been $130m - that, as a million and a quarter, required a debt payment. So, our real only debt service that we have coming up is the quarterly $1.5m debt service there. So, I guess I would disagree with you in terms of cash liquidity. The current debt situation in our cash flows don't, to me, appear to collide.

Thank you.

Thanks. And we do show a follow-up question from Jeff Silber's line with Harris Nesbitt. Please go ahead.

Thanks a lot. Sorry to go back to the DSO questions. You know, Don, you had said that collections didn't really improve as quickly as you had hoped in the first quarter, but they seem to be improving a little bit in the second quarter. Besides the issue in terms of the new system, was there anything going on in the marketplace? Are there any geographies or any major clients that are kind of holding back on payments? If you can just give a little bit of color there, I would appreciate it.

Sure. The easy answer is, no, there haven't been any particular regions or clients or even delay in payments. In fact, when you look at our aging of our AR based on our audited , our kind of slower billing process to serve our clients better, the actual aging of when our clients pay us after they get our bill has remained fairly consistent. So, we don't anticipate an extended continued delay in payment cycles. We don't anticipate an increase in write-offs or bad debts. It's merely a slightly slower payment cycle following this change with our clients.

Okay, great. And were there any shares repurchased during the quarter?

No, there were not.

Okay, great. Thanks a lot.

You bet.

Thanks. And once again, if anyone does have a question, please press the star, followed by the one on your touch-tone phone. At this time, I am showing no further questions in queue.

We want to thank everyone today for participating in our call, and we look forward to hearing from you on our next quarterly conference call. Thanks again for attending.

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