AMN Healthcare Services Inc (AMN) 2004 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to AMN Healthcare Services 2004 Second Quarter Earnings Call. (Caller instructions) As a reminder, this teleconference is being recorded.

Your hosts for today’s call are Mr. Steve Francis, CEO, Ms. Susan Nowakowski, President and COO, Mr. Donald Myll, CFO, and Ms. Renee Grable Mullen, Director of IR. I would now like to turn the conference over to Ms. Mullen. Please go ahead, ma’am.

Good morning. I would like to welcome everyone to the AMN Healthcare Services conference call to discuss the Company’s earnings results for the second quarter of 2004.

A replay of this webcast is available at www.amnhealthcare.com/investors and will be replayed until August 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 remarks 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 the future events or circumstances are forward-looking statements and it’s possible that our actual results may differ 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 results for the future quarters. These statements reflect the Company’s current beliefs and are based on information currently available to it. Developments subsequent to this call may cause these statements to become outdated. The Company does not intend, however, to update guidance provided today prior to its next earnings release.

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

Thank you, Renee. Good morning and thank you all for joining us today to discuss AMN’s second quarter and midyear results for 2004. We appreciate your interest in AMN and thank you for taking the time to participate in our earnings call.

Today I would like to discuss our actual results for the second quarter of 2004 and current demand trends we are seeing at AMN, which we believe are reflective of the healthcare staffing industry. Then just Susan Nowakowski, President and COO, will talk about the travel nurse supply trend, operations and strategic initiatives and lastly, Donald Myll, our CFO, will review the second quarter’s financial results and AMN’s revenue and earnings guidance for the third quarter 2004.

Beginning with the financial overview, for the second quarter of 2004, AMN generated revenue of $153m, resulting in EPS of $0.14. This was in line with our earnings targets. For the second quarter, traveler count remained relatively stable after factoring in the normal seasonal decline. However, it just fell below our expectations for the quarter.

With respect to our current business environment, we see three primary characteristics in our market: 1) overall stabilization, 2) increasing demand and 3) lagging growth in supply that is currently constricting the industry’s overall growth.

As we have mentioned for the last several quarters, our market has been stabilizing. For the last three quarters, our traveler count has been consistent from quarter to quarter, staying within a very tight range of 3% during the entire timeframe. Additionally, gross margins have essentially been consistent with the margin’s experience during 2003.

Demand has risen since the beginning of the year, as indicated by our growth in orders, with the most significant portion of the increase coming in the second quarter. Yet the slower-than-expected increase in the new supply of healthcare professionals entering the travel industry has had an impact on the expected rebound in traveler volume and revenue.

While the rise in demand is positive and creates opportunity for growth, the supply of new traveler candidates is just not growing at the same level and Susan will talk about this more in just a few moments. We believe that the inflection point from the previous periods of declining demand in our industry is behind us and supported by recent demand indicators.

First, orders increased from both existing clients and from new client facilities in the second quarter and orders are up approximately 50% over last year at this time. Yet even with this growth orders are still significantly below the peak demand experienced in 2001, which indicates to us that there’s even more room for demand growth.

While orders are increasing, hospitals’ cost containment continues to be a high priority for healthcare facility clients. But they also realize that having appropriate levels of nurse staffing are critical in maintaining an acceptable level of quality care, patient care, avoiding burnout of permanent staff and ultimately generating the hospitals’ revenue.

So, today, they continue to be focused on vendor rationalization to gain high quality staff while watching their budgets. In fact, we have seen a shift toward a more formal review and RAFP process to concentrate services from a limited number of healthcare staffing companies.

Due to our reputation and industry-leading quality management and education program for travelers, AMN has been able to further leverage our strengths in this environment and win the vast majority of formal bids in which we choose to participate.

As expected, during a growing demand and short supply environment, requests for exclusive vendor management activity is decreasing and a growing demand in a tight nurse supply environment, this type of arrangement is not as effective for hospitals since no one vendor can successfully fill the needs of a hospital.

As a leader in our industry, AMN is involved in most vendor management contracts across the country as either the primary contractor or, in some cases, as a subcontractor. But we think that the fact that this trend has slowed is another sign of the market changing dynamics.

Even as cost containment continues to rank high in hospital supply and demand trends, hospitals are feeling the affect of a tight travel nurse supply environment and they are beginning to engage in discussions about how they can attract more travel nurses through increased incentives. These incentives can come in the form of increased bill rates in order to allow for increased pay rate or bonuses. These increased incentives are helpful in attracting more supply into the industry.

While we believe that the mid- and long-term prospects for our growth in revenue and earnings remain attractive, the industry’s recovery from the decline in 2003 is taking longer than expected. We have implemented internal programs that we believe will provide additional catalysts for future growth or further growth in demand and traveler supply.

So, to update you on these nurse supply and operational initiatives, I will now turn the call over to Susan Nowakowski.

Thank you, Steve, and hello everyone.

While we are certainly glad to see the rise in demand from our clients for three consecutive quarters now, the growth in the supply of travelers in the industry has certainly not met our expectations. But I think most in the industry concur that it’s not a matter of “if” but rather a matter of “when” this growth in supply will return.

To put it succinctly, supply growth is currently lagging demand growth. It appears that it has taken longer for hospital-based nurses to recognize that travel assignment opportunities have expanded and it has taken longer for nurses to become more empowered to seek flexible career opportunities after they’ve felt the effects of a sluggish economy.

We are slightly encouraged by sequential quarterly increases in new, unique traveler applicants from the first quarter to the second quarter. However, they are still under 2003 levels. As the leader in our industry, we believe that AMN can have a positive impact on encouraging the growth in supply.

Today, I would like to share with you just a few examples of some of our supply-focused efforts.

During the second quarter, several very targeted campaigns were launched through our multiple marketing channels. These were focused on rekindling the interest in traveling from those who had migrated back into permanent positions. Our ability to leverage our multiple brand marketing channels as well as our leading nurse community Internet portals like RN.com and NurseZone should give us a competitive advantage in driving new supply.

Although most of our campaigns are still underway, we are seeing some early signs of increased applications from new travelers as well as reengaged interest from those who had traveled in the past. Through our marketing multiple recruitment channels, we believe that our probability of capturing the interested healthcare professionals is enhanced.

Having multiple brands gives AMN the ability to appeal to the different motivators in a diverse nursing pool and we are using this advantage and we are further differentiating our brand to maximize our attraction to each new healthcare professional. During prior periods of rising demand and constrained supply, our multiple recruitment brands and the utilization of our Internet portal helped AMN to place more travelers than our competitors.

Now, while our domestic recruitment brands do make up the majority of our increase in traveler supply, our international brand, O’Grady Paton, is increasing its significance to our business. A year ago, O’Grady Paton represented just 2% of our business. Today it makes up over 5% of AMN’s business. In just a year we more than doubled the number of international nurses on assignment in the U.S.

This is a unique supply source for AMN and an advantage over our competitors and we believe that this will become an even more important tool as the U.S. nursing crisis continues and hospitals create and seek strategies to deal with their staffing shortages. Not just today, but also two, three, and five years from now. In fact, the hospitals’ focus on building their future core staff has contributed to the increase in this segment of our business.

Our international nurses come to the U.S. on green cards sponsored by AMN and their intention is typically to accept a permanent position at the hospital after their initial 18-month assignment with us. This offering helps hospitals to address both their current staffing needs, but also their longer-term staffing needs.

These are just some of our supply-focused efforts, but the strongest drivers of the growth in supply will be continued rise in demand. Growing demand tends to pull more healthcare professionals into the industry and create opportunities for favorable pricing and margin elasticity.

While we are obviously seeking ways to improve our pricing margins, we don’t want to diminish the fact that the sheer ability to maintain relatively stable gross margins during the second quarter and consistency on a year-over-year basis has been no small feat. As Steve mentioned earlier, focus on cost containment at hospitals continued to keep pressure on bill rates.

Despite the constraints and competitive supply environment, our team has done an excellent job of managing the direct costs associated with placing our travelers. For example, since the beginning of the year we have been able to leverage our purchasing power and negotiate for lower housing costs, while also maintaining the quality of housing provided to our travelers. At the same time, we’ve also been able to manage other direct costs to offset the pressure that’s caused by a supply-constrained environment.

I hope our comments today have helped to explain our views on the current market environment and our third quarter guidance and while the exact turning point to resume a normal growth rate is uncertain, we are encouraged by the stability in our business, by the growth in demand since the beginning of the year. Which certainly creates opportunities for future placements, and we believe will ultimately drive the growth and the supply needed.

And with that, I’ll turn it over to Don.

Thank you, Susan.

In our earnings press release issued yesterday, we reported diluted earnings per share of $0.14 for the second quarter, which was within our guidance range and reflected the normal anticipated seasonal pattern in our industry. The current quarter’s EPS results compares to $0.27 for the second quarter of last year and $0.15 for the first quarter of this year.

Revenue of $153m for the second quarter represents a decrease of 16% from the second quarter of last year and a decrease of 5% from the first quarter of 2004. Revenue fell slightly below our guidance range, as a result of slightly lower traveler count and slightly lower revenue per traveler per day, reflecting the current tight traveler supply market.

Gross profit for the second quarter was $35m, representing a gross profit margin of 22.8%, in line with our expectations and 60 BP above the first quarter and steady with last year. The improvement in gross margin over the first quarter was due primarily to the normal steady improvement affecting traveler wages and housing costs.

SG&A expense totaled $24m, representing 15.7% of revenue for the second quarter. This was slightly lower than the first quarter SG&A of $24.6m or 15.3% of revenue. Compared to the prior year, SG&A expense increased 9% of $2m, primarily due to the expansion and consolidation of our corporate facilities last August and increased professional liability insurance costs.

Income from operations totaled $9.2m for the second quarter, declining from $9.5m in the first quarter of 2004, but remained steady as a percent of revenue at approximately 6%. Compared to the prior year, operating income declined from $18.6m reported or 10.1% of revenue. The primary driver of the decline versus prior year was the year-over-year decrease in travelers working and the higher relative SG&A expense.

Let’s turn now to some of the key drivers of revenue for the second quarter.

The $30m or 16% decrease in revenue from the second quarter of 2003 was driven primarily by the 17% decrease in average number of travelers working. The second quarter’s average revenue per traveler per day was slightly higher than prior year at $275 and decreased sequentially 1.5% from the first quarter of 2004. The 6.2% mix of flat rate contracts remained similar yet slightly improved from the first quarter.

Below income from operations, net income expense for the second quarter was $2.1m compared to $100,000 for the second quarter of last year, prior to the Company’s self-tender offer in October of 2003. The second quarter’s interest expense was steady with the first quarter, as average debt outstanding and interest rates during the second quarter remained relatively constant with the first quarter.

The second quarter’s income tax provision of 39% was in line with our expectations and not significantly different than the prior year’s or previous quarter’s tax provision.

Turning to our financial position at June 30th, we had $13.8m in cash and total debt of $129m, which was $8m lower than our debt levels at March 31st. DSO outstanding and accounts receivable were 66 days, a decrease of 3 days from March 31st.

As we discussed last quarter, we saw improvements in our collections in the second quarter and the resulting decline in DSOs at June 30th. We expect additional improvement in DSOs and in the resulting cash flow benefit in the third quarter. During the second quarter, AMN generated $15.2m of cash flow from operations.

I would like to mention that last week we expanded the available liquidity under our credit facility by amending certain leverage covenants under the credit agreement. This amendment was necessary to take [into effect] the current market conditions and provide additional borrowing availability to AMN. We expect that this change to our credit facility will not have a significant impact on AMN’s borrowing costs.

I will now turn our attention to revenue and earnings guidance for the third quarter of 2004. Our guidance for the third quarter reflects the relatively stable demand environment, combined with the continuation of the supply-constrained market conditions that Steve and Susan mentioned.

For the third quarter of 2004, we expect the Company will generate revenue ranging from $151m to $157m, approximately equal to the second quarter results. This reflects a slight increase in revenue per traveler per day and a slight decrease in travelers. The average number of travelers is expected to range between 5900 and 6100 travelers in the third quarter.

Net income from the third quarter is expected to range between $3.3m and $4.4m and is expected to generate net earnings per diluted share ranging from $0.11 to $0.14. The average diluted shares outstanding are expected to be approximately 31.5 million shares for the third quarter.

That concludes my financial review. Steve?

Thank you, Don.

As we reported in March of this year, Don will be leaving AMN to pursue his interest in leading entrepreneurial early stage companies. Don’s experience and leadership skills have played an important role in AMN’s transition as a public Company and all of us at AMN, including the Board of Directors, wants to sincerely thank him for his service to AMN and wish him success with his future endeavors. Thank you, Don.

As we previously indicated, we retained Heidrick & Struggles, the leading executive search firm, to recruit another strong financial executive who will bring complimentary skills to our management team and enhance our Company’s strategy. While Don has continued his position since the March announcement, we have finalized his last day at AMN as August 11th.

Since the recruitment time may continue for several more months, we have arranged for Susan Nowakowski to assume the responsibilities of interim CFO until the position is filled permanently. This is a role that Susan has served previously at AMN.

Serving as interim Chief Accounting Officer and Treasurer will be AMN’s current VP of Accounting and Finance, Brent Rivard. Brent has served in a leadership role at AMN’s corporate finance teams since 2001. He is actively involved in all corporate accounting, public reporting, operations planning and treasury activity. Brent’s a CPA and prior to joining AMN he worked for Deloitte & Touche.

I am confident in Susan’s and Brent’s abilities in these interim roles and AMN’s resources are more than sufficient to ensure appropriate operational and financial leadership for the Company and shareholders until we can successfully replace Don.

You know, since 1985, AMN has been focused on the traveler healthcare staffing industry and today we are the leader in this industry and 100% focused on what we do best, travel staffing. In this environment we believe that our singular focus on travel staffing will AMN the success that’s not only to sustain but to grow the business when supply returns. We have a proven record. We are confident that as the industry’s growth strengthens we will continue to expand our leadership position.

Okay, so to recap our call, overall our market has stabilized. Demand is increasing, but the growth in supply is lagging and constraining the industry growth. We are confident that the supply will increase. It’s just a matter of when a greater number of nurses will return to the travel market.

Continued order demand combined with AMN’s differentiated supply channels will competitively position AMN to increase our pool of available travelers as nurses return to the travel industry. And lastly, we will continue to stay focused on travel staffing because AMN in the best in the industry and we believe there is great opportunity for us in the future.

So, we appreciate your interest in our call today. This concludes our formal presentation and now we’ll open up the call to questions.

Thank you. (Caller Instructions.) The first line we’ll open is the line of Jeff Silber with Harris Nesbitt. Please go ahead.

Good morning. I just had a couple questions. The first one is regarding your guidance. It looks like you’re projecting relatively flat revenues sequentially, but yet you’re expecting a little bit of a downtick in earnings per share. Is it because gross margins are trending downwards or do you expect SG&A levels to be trending up a little bit?

Hi Jeff, this is Don Myll. The explanation there is SG&A is slightly higher in the next quarter, in the third quarter, primarily related to professional liability expense and additional costs that are concentrated in the third quarter related to the Sarbanes-Oxley 404.

If you’ll notice, the midpoint of the guidance, if you take a point relative to our second quarter earnings per share, there’s a pretty small difference and those two expense items account for that. Our margins for the second quarter we expect to be pretty stable, perhaps, a little better.

And when you say margins you’re talking about gross margins?

Thank you. The next line we’ll open is the line of Matt McCain with Caris & Co. Please go ahead.

Hi. My name is Matt. I’m filling in for Nick Aberle. I had a couple questions. First of all, I was wondering if you guys could provide a geographic breakdown where you’ve seen the most strength and weakness in demand, and conversely, where has supply been the most abundant?

Okay, Matt. We’ve continued to see strong activity in the West and the Midwest. However, the most significant uptick in demand and our placement of travelers has been in the Northeast, which we think is a very positive sign. I think a lot of people have focused so much on California and the West and demand really is increasing throughout the United States.

You know, on the flip side, areas of weakness or lesser demand? Florida, it upticked for a while, but now is again somewhat seasonally down, as well as some of the mountain states.

In terms of supply, where supply is coming from, that’s something that we have not reported externally in the past for competitive reasons, as you would expect. Where we’re able to recruit our supply is a very critical competitive issue for us, so it’s not something that we’re really prepared to discuss on the call.

Okay, one more question. It appears that the pricing environment remained stable in the second quarter. I was wondering when you guys expect pricing, where you expect it to trend next quarter, and do you believe it has any effect on the levels of demand and supply?

I think it has a couple of effects. First, you’re correct, it has been relatively stable and actually our average bill rate has even ticked up ever so slightly and that’s really a combination of pricing increases, but also where our travelers are working across the country.

More importantly, though, in the second quarter, as clients are beginning to engage in conversation with us about increased bill rates and incentives, in order to attract the travelers that they so desperately need.

Now the travelers haven’t necessarily been placed into those increased rates and bonuses today, but it’s certainly a trend that was virtually nonexistent a year ago and we think it’s a very positive trend and very indicative of the strong demand strength that we see out there.

Certainly, as demand grows and we continue to be in a constrained supply environment, we would expect or hope to see some pricing expansion and elasticity.

Thank you very much.

Thanks, Matt.

We have a follow-up from the line of Jeff Silber. Please go ahead.

Thanks. I don’t know why I was cut off earlier. I have a few more questions. I know you don’t give guidance beyond the current quarter, but if we can kind of just take a look at the crystal ball going out for the rest of the year, normally you get a bit of a seasonal pick up. Is it too early to tell if you’d be getting that this quarter? I was wondering if you could give us some color on that.

Well, you’re correct, Jeff. In a normal growth period, which we don’t believe we’re in right now, we would see an increase in the third quarter. The increase that we’ve seen in demand certainly provides that opportunity for growth, but with the supply not growing at the same rate it makes it more difficult to fulfill the greater demand.

So our traveler count in the third quarter is projected to remain relatively flat to slightly down. We’re already partially into the third quarter and so that’s why we have a range on our traveler count and I think we’re comfortable within that range.

Okay. That’s fair. I know there some talk in the industry about the JCAHO certification. I was wondering if you could talk about that and what impact you think that’ll have on your business.

Good question, Jeff. You know we have reviewed the proposed standards and like AMN already meets most of the standards through our existing business practice and ethic.

AMN is activity involved in assisting in the development of those standards, through our relationship with the American Staffing Association and has participated in surveys and in-person meetings sponsored by JCAHO regarding the implementation of those standards.

Right now we’re currently awaiting more information on the implications of the standards to hospitals and healthcare industries. For our business it’s not something that we -- we don’t see it as a threat. We don’t see it as a problem. In fact, we sort of see this as a positive, to the extent that the larger companies have the resources and the ability to comply with the standards.

The smaller companies are the ones that don’t have those resources and I think those are the ones that are going to be impacted by the JCAHO standards and that’s helpful to the larger companies.

Okay great. That’s helpful. One more follow-up. I think, Susan, you had talked a little bit earlier about California and I know, last quarter, we talked about that even more so. Has the euphoria there kind of died down a little bit or are people still trying to implement these new minimum staff-to-patient ratio laws and helping your demand?

The demand in California has remained relatively consistent in California, over the last quarter. I think hospitals are still struggling and seeking ways to try to comply with the laws, but I also think that they’ve settled in, to some extent, and have been utilizing travelers and other methods to try to meet those needs.

But there continues to be debate and conversation. There’s an article in the paper every week about how hospitals are struggling with the compliance. But it hasn’t impacted our business tremendously from the first to the second quarter.

I think what’s the good news about these nurse-to-ratio laws is that it is in several state legislature, right, across the country and what’s interesting also is on National Nurse’s Day, which was in May, a congresswoman introduced federal legislation addressing nurse-to-patient ratios. So we think that all of these kinds of issues and talk about nurse-to-patient ratios and what’s going on in California is actually good for our business.

Jeff, going back to California, the other interesting thing is, remember, in January the regulations actually ratchet up a notch and the requirements become slightly more strict and so I think hospitals are doing okay to day, but they’re going to have to even better come January.

And California represents roughly how much of your business right now?

We don’t give an exact number. I know we’ve said, on prior calls, it’s greater than 25% of our business and that continues to be true.

Okay great, appreciate the help.

Thanks, Jeff.

The next line we’ll open is the line of Eric Woodworth; DSM Capital. Please go ahead.

Hi, two questions for you. You mentioned that some of the issues are with finding the supply of travel nurses. In talking to maybe hospitals or former travel nurses, what is your research or survey show for that to be the case?

I mean, are hospitals doing a better job of retaining their full time nurses? Was there something in the past two or three years ago that displeased travel nurses and that’s why they’re not coming back? Just maybe wondering if you could comment there. Thank you.

There are really two drivers, Eric. The first is demand and travelers want choice and they want to be able to know that they have multiple assignments that they can choose from and go to.

Because travelers don’t join the industry to travel for just on assignment. They typically take three or four assignments before they take a break and they might even come back for three or four more assignments. So they want to know that there’s an abundance of opportunities out there.

And so, when demands declined, as it did in 2003, the selection and choice becomes more limited and traveler and new healthcare professionals hear about that and they know about that when they call in and so it deters them from joining in the industry.

The second impact is with the economy and I know Steve has talked about this on prior calls, that when the economy is tighter many nurses are less inclined to leave their permanent position. Maybe their spouse has lot their job or their income is diminished. They’ve got to send the kids to school and meet their bills, so they’re willing to work more overtime and flow to other units and just generally less inclined to leave their job.

And a certain amount of our demand does come from attrition and the churn that’s created within a hospital. It’s no secret that nurse attrition at hospitals had declined in 2002 and 2003 and that had an impact on the demand for our services.

What we’re hearing today is that a couple indicators are that 1) demand is growing and orders are growing, which increases the choice and the selection and it gets back to what’s going to drive supply in the future. Demand is going to be an important component to pull supply into the industry and 2) the economy. As the economy improves, nurses start to say no of that over time, no to floating, and are generally more empowered to leave their permanent positions.

While we’ve not seen any new statistics come out, we’ve heard anecdotally from our own clients that their nurse attrition is starting to creep up again and that should be both a supply driver and a demand driver.

Great. Thanks a lot.

Thanks.

We have no additional questions at this time. Please continue with your presentation.

Well, thanks. I just want to thank everybody for participating in the call today and we look forward to talking with you in the next quarterly call. Thank you all.

Ladies and gentlemen, this teleconference will available for replay beginning today at 10:30 A.M. and running through August 14th. You may access the AT&T Executive Playback service at any time by dialing (800) 475-6701. International participants may dial (320) 365-3844 and your access code is 737782.

That does conclude your teleconference for today. Thank you for your participation and for using the AT&T Executive Teleconference. You may now disconnect. 8