AMN Healthcare Services Inc (AMN) 2005 Q3 法說會逐字稿

Welcome to the third quarter earnings conference call. At this time all participants are in a listen only mode. Later we will conduct an Q&A session. Instructions will be given at that time. [OPERATOR INSTRUCTIONS] as an reminder, this conference is being recorded. I would now like to turn the conference over to your host, senior director of investor relations Mr. Chris Schwartz. Please go ahead.

Good morning. I would like to welcome everyone to the AMN Healthcare Services conference call to discuss the earnings results for the third quarter 2005 and the completion of our acquisition of the MHA group.

On the call this morning we have Susan Nowakowski, our Chief Executive Officer and David Dreyer, our Chief Financial Officer. A replay of this webcast is at amnhealthcare.com\investors and will be replayed until November 18, 2005. 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 also 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 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 annual report on Form 10K for the year ended December 31, 2004. Our quarterly report on Form 10Q for the period ended March 31, 2005. Our current reports on form 8K and our registration statement on form F-3, which have been filed with and are publicly available from the SEC.

The results reported in the this call may not be indicative of results for future quarters. These statements reflect the company's current beliefs and are base the upon information currently available to us. Developments subsequent to this call may cause these statements to become outdated.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 Susan Nowakowski, AMN Healthcare's President and Chief Executive Officer.

Thanks so much, Chris. Good morning and thank you for joining us today to discuss AMN's third quarter results for 2005 and the completion of our acquisition of the M.H.A. group.

We really appreciate your interest in AMN and in taking the time to participate in our earnings call today. First, we are very happy to report on on November 2, 2005 we completed our acquisition of the M.H.A. group. As you may recall from our prior announcement, through its multiple brands M.H.A is a leading national provider of low [comtenence] and permanent staffing for physicians.

They have also built an completively significant allied health staffing business and a small but growing travel nurse division. As a result of this strategic combination AMN Health will become the preeminent comprehensive provider of healthcare staffing in the United States. We believe that AMN is poised to become the first healthcare staffing company to reach $1 billion in revenue.

In addition to immediate accretion for our fourth quarter 2005 and full year 2006 earnings, our acquisition of the M.H.A. group provides considerable strategic value to our stockholders and our clients. First, the acquisition will diversify our revenue and earnings stream by broadening our staffing capabilities and expanding our customer base. We believe that the additional diversification that M.H.A. brings to our core business will also help moderate economic cyclicality that can be associated with the nurse staffing business.

Second, we now have the opportunity to cross sell physician, nursing and allied health staffing to our existing clients, and to a broader array of healthcare organizations and environments. This creates the potential to drive additional revenue growth. Finally, AMN and M.H.A. are highly complementary, with respect to our business models and corporate cultures. Which we believe will provide for an smooth integration process.

As we discussed on our last call, AMN intends to maintain M.H.A.'s unique brand identities and operate M.H.A in a decentralized manner. M.H.A. has a proven seasoned management team and a first class salesman service team. We are confident that they will continue to execute on their current operational plan. AMN Health will include financial results from the M.H.A group, effective November 3, 2005.

A little later in the call David Dreyer will provide you with updated fourth quarter and full-year 2005 revenue and earnings guidance, which will respect the M.H.A. acquisition. First, though, I'd like to review with you AMN Health's performance fort third quarter. We are pleased to report that AMN generated revenue of $167 million for the third quarter and diluted earnings per share of $0.22 cents.

These results represent the largest revenue and earnings growth for the last four quarters. During the third quarter our revenue per traveler per day increased by 2.5% and the number of temporary healthcare professionals working on assignments grew by 4% compared to last year. This marks the second quarter this year that our average traveler count has increased notably on a year-over-year basis.

Last quarter we talked about gaining pricing traction. And this quarter's increase in revenue per traveller per day is evidence of that. During the third quarter we realized the largest sequential increase in our average bill rate in the last three years. During the third quarter, we also saw continued momentum in pricing and hospital clients offering more attractive assignment bonuses in order to attract travelers within such a strong demand environment.

Still, many of our hospital clients continue to face difficult challenges as they struggle to maintain appropriate nurse staffing levels. This is evident when you look at the continued strengthening in our open orders. Hospital orders at the end of the third quarter were up approximately 80% over the same point last year, and have grown almost 60% since Jan 1.

In fact, throughout the country demand was up in 37 states since the beginning of the year. During the third quarter we saw particular strengthening in demand in the southeast, the west and the southwest regions on of the country. Many of our clients in states that have higher seasonal demand during the winter months have placed their need earlier in recognition of the tight supply market and anticipation of increased needs. Some of the greatest increases in demand from our clients have been in the higher acuity critical care specialties.

In response to this growing demand for specialty nurses, we have further prioritized our recruiting efforts to focus on the high needs specialty applicants. This shift enables us to achieve a more optimized and efficient match between hospital demand and our nurse supply. The results of this new focus, thus far, have been positive and our new applications continue to be up on a year over year basis.

However, the growth in supply still significantly lags the growth in demand. Our O.T.P. international placement make up a little over 10% of our working travelers today. The demand from hospital clients for these longer term placements continues to grow at a very strong pace, and our ability to attract supply in quality recruitment markets abroad is also continuing to expand.

We have recently, however, experienced some delays in the immigration processing. These delays seem to be caused by lingering effects of the Visa reintegration issue, which surfaced earlier this year. Even though Congress passed legislation in May to provide relief by providing more Visas to be available for nurses, the Visa processing center seem to have experienced a processing slow down likely due to the backlog that was created during the Visa reintegration period. We believe this affected temporary, and in fact as recently as this week, we have started to experience a pick-up again in the processing time.

The fundamentals of this business are very positive, and we believe that this service will continue to grow as our clients seek more longer term solutions to their staffing challenges. From a broad perspective, the fundamental drivers of our travel nurse and allied healthcare staffing businesses are strong. Demand is back at the high levels we experienced in 2002, pricing has gained traction, our supply of unique, high-need applicants continues to grow, albeit at a modest rate.

While we all wish that the growth rates were at a more robust pace, many of the key indicators reflect that we are and will continue to be in a growth environment. We also believe that the acquisition of the M.H.A. group will further enhance our future performance and growth rates.

This transaction will help us to better serve our clients by allowing us to compliment our core travel nurse and allied healthcare staffing services with the faster growing physician staffing business. From a competitive positioning standpoint, combining the resources of the nation's leading nursing and physician staffing firms will uniquely enable us to deliver new and value added solutions to our clients.

We also expect to be able to pursue opportunities to expand into new markets where we have not previously participated. This combination is right on target in supporting AMN Healthcare's long-term strategy of growth and leadership and the placement of high quality clinical staff at all levels of within the healthcare organizations.

Now, I'd like to turn the call over to David Dreyer who will recap our third quarter financial results and provide you with a update on our guidance.

Thank you, Susan. Before discussing the third quarter results I'd like to take an moment to recap a few of the financial components of our acquisition of the M.H.A group. The initial purchase price for the M.H.A. group is $160 million plus acquired debt of $5.5 million an earn-out provision expected to result in approximately $38 million of additional consideration based on M.H.A.'s final 2005 financial results.

We also incurred acquisition cost estimated at $7 million. We financed the cash portion of the transaction with cash on hand and anued 280 million senior secured credit facility consisting of a 6 year, $205 million term loan and an $75 million five-year revolver.

The term loan funds were also used to refinance the companies existing bank debt. At closing our leverage ratio was 3.2 times, as compared to 2.0 times at September 30, 2005. Because operating cash flow from both companies will be strong, we anticipate that the debt balances will be repaid quickly. M.H.A. is a very stable and profitable organization with revenue for the year ended December 2005 expected to exceed $280 million and adjusted EBITDA is expected to exceed $25 million.

I will provide updated financial guidance for AMN, including the financial impact from the M.H.A acquisition later in my remarks. Now I'd like to turn your attention to AMN's third quarter 2005 financial results. Overall third quarter results were strong with the company continuing to enjoy solid revenue growth, modest margin expansion, and improved profitability through careful management of expenses.

Diluted Earnings Per Share for AMN in the third quarter was $0.22 cents compared to $0.13 cents for the third quarter of last year and $0.14 cents for the second quarter of this year. This quarter's strong diluted earnings per share result was positively impacted by approximately $0.02 cents from favorable adjustments for professional liability and workers compensation insurance.

This netted to a benefit of approximately $600,000 on a after tax basis. Excluding the $0.02 cent adjustment, third quarter diluted Earnings Per Share would have been $0.20 cents, which was above our guidance range of $0.17 to $0.19 cents and higher than both the $0.14 cents we reported in Q3 of last year and the $0.13 cents we reported in the prior quarter.

Third quarter revenue was $167 million, a 7% increase from the third quarter of last year and an 4% increase from the prior quarter. The $11 million increase from the third quarter of 2004 reflected a 4% increase in volume and an 2.5% increase in revenue per traveller per day. The $6 million increase from the prior quarter reflected a 2.8% increase in revenue per traveller per day and one extra billing day.

This quarter's average traveller count of 6,386 was 4% above prior year and flat with the second quarter. The average traveller count was slightly below management's guidance range of 6400 to 6500. This was primarily due to the reduction in the placement of nurses in our O'Grady Peyton international brand due to the effects of delayed Visa processing.

As we discuss in the our last earnings call we have been we have been expecting more of our revenue growth in the second half of 2005 to come from pricing as bill rate increases negotiated throughout 2005 take effect. As Susan commented earlier, we also continue to see demand growing at the high level that existed in 2002 giving us more pricing expansion.

Gross profit for the third quarter was $39.5 million representing a gross margin of 23.7% ,which was 20 basis points higher than the prior year quarter and 60 basis points above last quarter. The increase in gross profit margin was due in part of favorable workers compensation claims experience. This resulted in a positive adjustment of approximately $500,000 which increased the gross margin by 30 basis points.

Without the insurance adjustment, third quarter gross margin would have come in at 23.4%, which was 30 basis points higher than last quarter reflecting modest margin expansion realized from price increases. Selling, general and administrative expenses -- G&A expenses -- total $25.2 million representing 15.1% of revenue for the third quarter compared to $26.4 million, or 16.9% for the third quarter of 2004 and $26.7 million, or 16.6% for the second quarter of 2005.

The decrease in SGA expense was largely driven by managements' continued focus on controlling discretionary spending along with the benefit from a favorable professional liability reserve adjustment of approximately $300,000. Income from operations totalled $12.9 million for the third quarter 2005, increasing from $8.7 million in the third quarter of 2004 and from $9 million in the second quarter of 2005.

As a percentage of revenue, income from operations grew to 7.7% in the third quarter 2005, compared to 5.5% in the same quarter last year and 5.6% in the second quarter of this year. Net interest expense in the third quarter was $1.5 million compared to $2.4 million in the third quarter of 2004 and $1.7 million in the second quarter of 2005.

These decreases were reflective of the company's strong cash flow and our continuing priority to use our cash flow to aggressively reduce debt balances. Turning to our financial position, AMN generated $2 million in cash flow from operations during the third quarter and as of September 30, 2005, cash and cash equivalents were $15 million while total debt outstanding was $88 million. This debt balance reflects a reduction of $14 million, or 14% since the beginning of the year.

In order to complete our acquisition of the M.H.A. group we used approximately $5 million in cash and increased our debt to $205 million, which will be reflected in the fourth quarter. DSO at the end of the third quarter was down to 59 days, reflecting our lowest day sales outstanding in two years. Now, I'd like to provide you with updated revenue and earnings guidance for the fourth quarter and full year 2005, which includes the financial impact from our acquisition of the M.H.A. group.

Revenue in the fourth quarter of 2005 is expected to range from $211 to $217 million. This includes revenue from M.H.A. from November 3 through the end of the year of $47 to $49 million, an AMN revenue of $164 to $168 million. Revenue from AMN reflects continued improvement in pricing and a relatively flat average traveller count due primarily to temporary delays in Visa processing for our O'Grady Peyton international division and temporary effects from the recent hurricane in Florida.

We expect average travelers on assignment to range from 6, 4775 to 6, 575, which includes 150 nurses and allied travelers from M.H.A. On an combined basis we expect AMN and M.H.A. to generate fourth quarter diluted earnings per share ranging from $0.19 to $0.21 cents. This range includes earnings accretion from M.H.A. of $0.02 per diluted share.

This accretion is net of approximately $700,000 after tax charge, or $0.02 cents per diluted share for the write-off of deferred financing costs associated with refinancing our previous debt. On a annualized basis we're estimating M.H.A. accretion at approximately $0.14 to $0.16 cents, which includes acquisition debt and estimated purchase price accounting adjustments. For the full year 2005 we project that AMN and M.H.A. will generate revenue ranging from $695 to $701 million diluted earnings per share ranging from $0.68 to $0.70 cents.

Full year 2005 gross margin for the combined company is expected to increase to approximately 24%. That concludes my financial overview. I'll turn the call back to Susan before we open up for questions.

Thanks so much, David. Before we open up for questions, I want to extend our thanks and heart felt gratitude for the extra efforts put forth by our employees who were impacted by hurricane Wilma. Specifically, those employees working at our preferred healthcare integrated Peyton divisions, which are located in Ft. Lauderdale and Broward County.

These team members have kept our business functioning despite the significant logistical challenges caused by the hurricane. Special thanks also to our other team members in other offices who made considerable accommodations to help their colleagues and ensure that we were able to continue to serve our clients without significant interruption.

And with that, I would like to open up the call for questions.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Howard Block from Bank of America Securities. Please go ahead.

Good morning, everyone. It's actually Matt here.

Hi, Matt.

Hey, there. I wondered if you could give us a little more color on the international nurses? I know it's a temporary thing as you said. I wonder if you're expect a flood of nurses when this backlog kind of breaks up or will this situation actually discourage nurses from applying to come to the United States to be travel nurses?

I don't think we believe it will discourage nurses. If anything we've continued to see the number of new nurses signing up with our international division continue to grow. In fact, we are expanding our recruitment operations into other countries so that we can continue to widen that pipeline of people coming to the U.S. So there's certainly not a lack of interest. It's really just been more on the state side where we've seen some bottlenecks, and I think it's caused by two things. One, that backlog that was created by the visa retrogression and just needing to work through a significant number of applicants. Not just our nurses, but many applicants. And then also there were some other minor regulation changes that didn't really effect the ability to bring people in. But anytime there's a little processing change at the I.N.S. center it takes them awhile to figure out exactly how to administer it. So both of those things seem to be moving now. We really do believe it is temporary. And as I mention in my remarks as recently as this week we've started to see that pick up again. I wouldn't characterize it as a flood of applicants coming out, so within the next few weeks, though, usually these things take a little bit of time -- weeks or months to kind of get back up to full speed, but we think that we're on our way to seeing that.

A little bureaucracy there there, I can imagine. Will see any attrition do you think in the international nurses you have? You said it's about 10%. Will that fall off at all as this is going on, or do you expect that to stay flat as nurses stay on past their original 18 month assignments?

Well, the nurses that are already here are here on green cards and so it really shouldn't effect our attrition of the nurses who are already here working. A good number of those nurses do go permanent after their 18 months assignment. And that's something that we encourage, because that's one of the reasons the hospitals are hiring them. Then others move on to travel assignments. So this Visa processing issue shouldn't effect our retention rate of those nurses.

Thanks very much. Then just a quick financial on the cash flow, I was wondering if you could put a little color on the operating cash flow on the quarter. It looks like accrued compensation benefits were a use in the quarter. I was wondering if that was a timing issue at all and kind of what we can expect for receivables and also the compensation of benefits for the next quarter. And I wondered if you would offer what your guidance incorporates for a average share count for Q4. Thanks

A couple questions there. With the operating cash flow of being $2 million this quarter, you're absolutely right, Matt, that our accrued compensation increased by $7 million and that was because we had both corporate and traveller payrolls hitting pretty much at the very end of the quarter. And two, you know, during the quarter we also had our insurance renewals and had some claims paid out. So, that was like a additional $3 million of cash outflow. So those things contributed to the smaller operating cash. We don't give guidance on operating cash flow on a go forward basis. So I wanted to also answer your question about the shares outstanding. We're estimating basically it's a $3 million -- $3,000,402 as being the estimate for shares outstanding.

Thanks very much. I appreciate it.

Thanks, Matt.

And your next question comes from the line of A.J. Rice from Merrill Lynch. Please go ahead.

Thanks. Hello, everybody. A couple of questions, if I could ask. First of all just real technical one. You've said that in the fourth quarter guidance there's some assumptions there about the fall out from the recent hurricanes. Can you give us a little more flavor for how much you think that effects the fourth quarter numbers. Whether there's any EPS adjustment for that or other way to put some arms around that?

A.J., I don't think that we are prepared to put a exact dollar amount around it. One, because the quarter is not quite done yet. And so it's hard to tell exactly what that effect is going to be. It was enough, since we have our preferred operation down there, that we did see slower bookings for a couple of weeks. And so that will ultimately have some impact on the fourth quarter. How much of that we're able to make up over the coming weeks sort of remains to be seen. But we've not been prepared to externally provide some sort of impact. What we will say is it's obviously built into our guidance. It's one of the reasons why we're looking at a relatively flat traveller count in the fourth quarter.

Right. Can you just comment on the pricing trend. The positive up to 2.5% year to year, 2.8% quarter-to-quarter. Is that a apples to apples pricing trend or is there any mix dynamic that's going on that's at play there?

There's a very small mix shift. We continue to work with some of our older what we call flat rate contracts to convert them to payroll contracts and we were successful in converting a few of those into the third quarter. But the majority of it is true pricing increase. I mentioned that our average bill rate increased the most that it has sequentially in the last three years. So that's really been the key driver. What's very encouraging is that as we look at those contracts renegotiated in the third quarter itself, they were renegotiated at a even higher pricing level which bodes well for the future.

Okay. Let me just go back to the fourth quarter guidance and think about -- ahead. I know you guys -- it's way early to be talking about '06 guidance. But if we took your number X M.H.A. for the quarter you're sort of saying $0.17 to $0.19 cents. That's obviously got some hurricane impact in there that maybe isn't ongoing, but $0.17 to $0.19 cents . And then you're saying $0.14 to $0.16 for M.H.A. on an annualized basis. Presumably there's some growth. I mean, before we take into account growth in the core business next year, you're sort of exiting this year at a earnings run rate of $0.82 to $0.92 cents? Is that the right way to think about the numbers that you've thrown out today?

Well, by giving the annual estimate of accretion for M.H.A. if you did the math with our year end guidance for AMN's Earnings Per Share which is about $0.65 to $0.67 cents. I'm really not trying to guide going forward, but I did think it was important that we clarified the accretion number for M.H.A. as we shared the fourth quarter numbers, which included of course the write-off of the deferred financing. I didn't want people to somehow misinterpret that as an run rate. And so we wanted to clarify the accretion that we had used certainly in evaluating the purchase of M.H.A So I think the math is correct using the AMN '05 estimates and what we've quoted for the accretion for M.H.A., but I guess I'm going to go short of actually trying to guide for 2006 --

Sure. Sure.

Yes. And there are seasonal quarterly differences that go on. There's extra days in the fourth quarter. And so I think you want to be careful not to just multiply that out.

Right. I'm just trying to see if we're in the ball park and the intension was to layer on in top of the core AMN, the M.H.A and it sounds like that is indeed the case.

It is. And that $0.14 to $0.16 is really somewhat of a stand alone accretion number. It does not take into consideration any synergies that we believe that we will be able to achieve and that's why we're not here in November prepared to give guidance numbers for next year, because we want to do a thorough evaluation of what we think it really will be at collectively.

Okay. That's great. Thanks an lot.

Thanks, A.J.

And your next question comes from the line of Tobey Sommer from Sun Trust. Please go ahead.

Hi. A couple of questions. Why don't we start off with looking at seasonality in the physician staffing business, it isn't kind of the April to August time frame you're usually better with maybe June being the strongest month?

Yeah. April to August is a strong period for them. They do have a little bit of the same seasonal effect that we do through the holidays. Their third quarter tends to be their strongest quarter. So pretty similar to the nursing business in terms of that seasonality.

So that would explain perhaps the difference in your annual accretion versus maybe what it contributes in the November, December time frame?

Yes.

Okay. A question for you regarding domestic volume. You did mention these retrogression issues for the international. If you were to parse out the domestic travelers, was there sequential growth in their component of your volume?

In the third quarter, yes.

Okay. So slight, but there was growth.

Yes.

Okay. And then taking a look at pay rates, you did talk about bill rates actually going up in the quarter faster than they had. In those accounts where you're getting the highest bill rate increases, are those nurses making more? And if so, how much more?

Our average pay rate is up. As we renegotiate bill rates with hospitals we're evaluating what is the entire compensation package that needs to be competitive to attract nurses to that account. Pay rate is one of those components, but other key components are housing, bonuses, and so we're evaluating what's going on with those other compensation pieces. If housing is going up, for example, we'll use part of that bill rate increase to cover that increased housing cost. So we really look at it as a total compensation package when evaluating whether or not to increase a pay rate. But bottom-line is, our pay rates are up. It's just that our bill rates are up at a stronger pace.

Sure. And if you were to think of it in terms of percentage terms, again I'm referring to pay rates, or in dollars per hour, how much more are the nurses making that are working in the accounts where you've gotten your greatest bill rate increases?

You know, I don't think for competitive reasons we want to get into that level of our compensation strategy for our travelers. And I think what's important for you and our investors is to recognize our management of the overall direct compensation package and expenses. So I hate to be elusive on that, but I mean, we do consider that pretty important competitive information.

Okay. Is it fair to say that your bias is still towards passing through as much as you can, whether it's through pay rates or housing, et cetera?

I'd say that we manage it where we think it will make an difference. If we think it will be important to driving supply, then we will pass it through. If we don't think that it's necessary, then we'll use those dollars to cover other costs or increase our margin overall. So it's really on a account by account basis.

Okay. And then the bill rate increases that you were seeing in the quarter, are you getting stuff that in some cases breaches 5% increases?

Yes.

Okay.

In fact, our average overall exceeded 5%. In terms of what we're renegotiating now, whether we place travelers at those accounts in the future you have to have the supply in order to place them there. But as I said earlier, we're getting more momentum in pricing.

Okay. And then I had a question regarding the estimated accretion on a annual basis. Does that assume stable margin or improving margin?

No, pretty stable. Basically we're assuming a stable margin there when we did that accretion analysis. And also, I just wanted to comment briefly. That number was also included of some of our 404 costs in there. We did not assume any other integration expenses, but we did include 404 costs. But we did not assume any cost savings or synergies from the cost side or revenue side. Could you refresh my memory? Is it right that EBITDA margins were suppressed a little bit over the trailing 12 months at M.H.A. and the outlook was for those to potentially improve a little bit? Yes. That's absolutely correct. The EBITDA margins finished I think around the 8%, 9% level. And it's been growing towards the tail part of the year. And so, yes, it's expected to grow and level off in essence from where the end of the year rates are.

Thank you very much. I'll get back in the queue.

Thanks, Toby.

Your next question comes from the lie of Joe Gagan from Atlantic Equity Research. Please go ahead.

Hi. How you doing? I have a couple questions, one around the SG&A and the other around the pricing in the average revenue per nurse. On the SG&A you brought that down from $26.6 million the previous quarter down to around $25.2 million, and then taking out the $600,000 for the insurance reversal that's reducing it by $900,000. And I guess my question is in the previous four quarters it was in the mid-$26.5 million range -- around there, in the mid-$26 million range. And then if you look at your competitor, they increased their SG&A by a few million, right? And according to them, they had to add salespeople to bring in the same amount of revenues that they had last year. So my question to you would be, how are you able to reduce the SG&A $900,000 excluding the insurance reversal if sales are harder to get and your competitor that's in the same business had to increase their SG&A? Then I had another question about the margin after that.

Okay. Just one correction I wanted to make, is that the favorable effect from the insurance that's in the SG&A, which is the professional liability, is actually $300,000, not the $600,000 that you had mentioned.

It said in the press release 6, is that wrong?

No. The total insurance, which again, had professional liability and workers comp -- workers comp is up in the direct expenses for gross margin, the professional liability is a SG&A. Those two combined adjustments were $600,000 net at tax. But when you break it out, the part that was in SG&A, which is professional liability, was $300,000.

Okay. Now, what's really contributed to that SG&A after adjusting for the insurance adjustment really has been our very strong focus on controlling discretionary spending of which we've real by been guiding and mentioning all year long. And that's really been one of our key management objectives all year. I really can't speak to what's going on with our competitor. But the trend that we've had is all year we've said that it was pretty much going to be in the $26 million per quarter. It's been averaging about $26.4. So this quarter reflects, again, our diligent efforts and on a go forward basis we're still guiding at that $26 million, low $26 million level. On a go forward, but this quarter you did like in the low $25's. I guess what I'm saying is that, you had the same amount of sales as last quarter, but you increase your earnings altogether, really significantly, and it was because this SG&A reduction and the gross margin reduction. So are you saying that the SG&A is going to be increased going forward from where it is now?

Yes. And we said that in the beginning that it will ultimately increase for normal inflationary things The biggest pieces of SG&A are salaries. So with merit increases, et cetera, that they will grow at more of an inflationary level. Again, we've been controlling it with tremendous control of discretionary spending, but the average has been fairly consistent. And we've also mentioned when you do look forward especially on a year to year basis, it will be growing by inflationary rates as it is mostly head count and expenses that would grow by inflation.

And Joe, you asked about capacity and how we're able to generate more revenue with the same number of recruiters and head count. Our head count has stayed relatively flat over the last couple of quarters. And we've been talking throughout the year about the fact that we believe we have increased capacity within our sales operations, because -- although we've seen improvements in recruiter productively we're still not at the peak levels that we saw a few years ago and we continue to see improvements in many areas. And so we believe we can continue to grow revenues by not adding proportionately the same number of sales staff. With that said, we're always looking for additional recruiters. And in fact we will be hiring in the future as we are today. But that's just a ongoing part of managing the business.

Okay. Now, the other question I had is around the whole pricing thing. Because in your business, the margin is not reflective of the pricing it's reflective of what you pay the nurses, right? So what I'm thinking is that for a year and a half you're you've been totting how you have a significant increased demand in nurses, but the problem has been is the supply, getting the nurses to agree to take the jobs, right? So -- And then if I combine that with the fact that the hospitals, for example, delivered terrible earnings results, bad debt results, and missions volumes results, I'm just wondering, if hospitals -- in other words, if hospitals need more nurses and they're hiring you to do it, right, but you can't get people to do it, and then the hospitals are having bad financials, how are you able to charge higher prices to number them, number 1? And number 2, how is it that the wage increases to offer the nurses isn't going up with the pricing increases you're charging the hospitals? Because I know, for example, that nurse wages have gone up 5% to 10% fort last three years, right? So how is it that you're increasing prices and there's a overload of demand, yet the price that is you're charging the hospital is going up, but the wages are not going up the same amount? That just doesn't make any sense.

Well, a few questions in there, Joe. The first is that why would hospitals pay more to get the nurses to staff their beds if it's taken a while fort the demand to get to such a high level for them to not be getting their needs met. And therefore they need to be more competitive in attracting not only permanent nurses but travelers to fill those needs. Even if the hospital is having difficulty with their own financials, they still need nurses to take care of the patients. In fact it's more costly for them if they aren't adequately staffed, because it means that their permanent staff might have to work more overtime. That frustrates them. Their attrition goes up and that ultimately costs them more. Or worse, if they are grossly understaffed it can effect patient outcomes, which becomes a risk management issue, which is also a financial issue. So it is cost effective for the hospital to have a adequate level of nurse staffing. If it means they need to pay a little bit more, there's still a economic benefit for them to have that staff as well as not having to turn the patients away. If they don't have adequate staffing, particularly here in California, they might have to actually turn that patient down the street which is lost revenue for them. And so as the demand has continued to go up across the country, more and more hospitals have stepped up and said, okay. We'll pay more in order to get the staff that we need. I think it's a sign of just how urgently they need these people. In terms of the nurse wages, you quoted a number, 5% to 10%. And while you've seen reports of nurse wages going up 5% to 10%, that's really across the board of all nurses, nurse managering, directors of nursing. If you slice that down there was a report put out about a year ago by the American journal of nursing on nurse salaries, and it actually showed that R.N. staff nurses wages only went up 2% to 3%. And so, that's just reflective of the fact that nurse labor takes 50% of the hospital's labor budget. It's very painful for them to increase that very dramatically. And so our wage increases have kept -- basically kept pace with that type of level.

All right. So you are saying that you go to the hospital and say, listen, we want to charge you more money, but we're not going to pay the nurses more money to come in here.

No. That's not quite how it happens. We're talking with them about why they're not getting their needs met. It could be that they had 10 open positions with us a year ago and today that's 40 open positions. And we're not able, nor are our competitors able to meet all of those needs. They say, what is it going to take for us to get the staff that we need? Well, we might need to raise the bill rate so that we can pay the nurses more in order to attract them. If the hospital down the street or even in the neighboring state or even across the country is raising their rates, it creates a bit of a snowball effect and starts to raise the bar all across the country. It's almost like a flywheel. Once it begins to roll, hospitals need to keep up in order to stay competitive or they just don't get the staff that they need. And so that's the conversation that you're having is what is it going to take for them to attract the nurses that they need to staff their facility adequately. The other piece in that is housing. I mentioned earlier, that as we talk with hospitals about bill rate increases, one thing that might be driving that is if housing costs are going up in the area. Hospitals know that because living in the area and they know that housing costs and apartment costs are going up. If that's happening for us we're going to the hospital talking about the need for a bill rate increase because if we don't get a bill rate increase we might need to lower the pay rate, which means they'll get less nurses than they're gotten in the past. So it's really more or a education consultive discussion with the hospital as opposed to us going to them says, guess what, we're raising your rate.

Okay. Thank you.

Thanks, Joe.

Your next question comes from the line of Jeff Silber from Harris Nesbitt.

Thanks a lot. I have a couple questions about your accretion estimate on the M.H.A group. What are you assuming for interest expense and amortization expense on a incremental basis from this transaction?

The total interest expense -- let me get to that here. Sorry. The run rate of our total interest expense is about maybe $3.6 million a quarter. So when we did that and analysis, if you look at the full cost including the amortization deferred financing, it was about that $3.6 million per quarter rate.

How about any amortization of any other intangibles?

We haven't really fully defined that yet. We made some estimate. But I'd hate to really be too definitive there because we still are not yet done with the evaluation. As a ball park, it's about what, $800,000 per quarter is amortization. Again that was just our preliminary estimates that haven't yet been finalized.

That's fine. I just needed some kind of gauge on that. Also in terms of the gross margin of that business relative to your gross margin, how does that compare?

It's been a little higher. In fact, when we did the announcement -- when we announced earlier, basically if you looked at the businesses, the [Lowcomes], you look the allied and the nursing it's in the mid-$20's, upper $20's, you know. If you looked at the permanent placement with the physician business, it's higher. More like on the 90% range. And so on average it's been more in the mid-upper 20% ranges.

Okay, great. Forgive me, I remember you did say that on the last conference call. Just turning to your core nurse staffing business, can you tell us about trends in California? Susan you mentioned the west was particularly strong. I'm specifically interested in California now that we seem to be anniversarying the nurse mandated patient ratio loss.

Sure. California continues to be our top top state. We've talk about it being 20% to 25% of our business. That's actually come down a slight notch. Not that California's declined so much -- that because actually it's -- our orders are up. It's one of the areas where orders grew the most in the third quarter. But it's actually the strength of other areas of the country where nurses have more choices to go more places. So as we've seen growth in other areas California has become a slightly -- ever so slightly smaller percentage of our business. But we don't really see anything changing within California, because the nurse to patient ratios are still intact. I think as time goes by the hospitals continue to take them very seriously. And we just continue to see very strong demand here.

Okay. Great. I was also wondering if you could give us a little color about some of the intraquarter trends. Specifically last quarter and into the quarter so far. Year and year growth trends on bookings, orders, anything you're willing to go talk about?

Well, we talked about orders being up year-over-year, over 80%. And since the beginning of the year over 60%. Last call we talked about them being up 50%. So clearly orders grew during the quarter. Actually R.N. orders are up at a even greater pace than that. But that order number I gave you, 80%, is sort of all orders. What I will say is that R.N. orders are up even more than that. So that's a positive trend since that's our core business and where we have certainly the greatest supply. In terms of bookings, you know we've not given specific booking numbers in the past. I will say that our placement volume was up on a sequential basis from the second to the third quarter. So that's certainly a trend that we're pleased with. Our retention rate remains pretty stable. Our retention rate has been up on a year-over-year basis by a couple of percentage points. We typically run between 70% and 75% in our retention of existing nurses who are rebooking with us. That's up on a year-over-year basis and is remaining pretty consistent for us.

And so far anything you are willing to share in October?

No. Other than, we continue to feel the same confidence. And I wouldn't probably change any of those comments I made.

Okay. One more final one. Last quarter you talked a little bit about your nurse choice brand. I was wondering if we could get an update. I know it's still relatively early, but was there any impact on your business or any impact on the guidance for the fourth quarter?

No impact on the business or the guidance because it's so small. But they are doing very well. They are really getting traction both on the supply side and then on the demand side. It's new. It's fledgling. But they are exceeding their original goals right now. The team's doing a terrific job. We think it will be a small but very important part of our service offering going into the future.

Okay. Great. Thanks again for everything.

Thanks, Jeff.

And your next question comes from the line of Ross Nelson from CD Capital. Please go ahead.

Hi, Susan.

Hi.

Most of my questions have been answered. Just had kind of a follow-up question on SG&A going forward. It looks -- you know -- I think a previous caller had asked about roughly $700,000 had been cut out of SG&A when you exclude extraordinary items in the quarter and that's what accounted for the $0.02 cent bead on the EPS side. I guess going forward, when I look at the baseline numbers for the base business it looks like Q4 was guided down for revenues by about $6 million in the mid-range of EPS was guided down by a $0.01. I'm wondering -- and then David gave gave some color on this -- that the SG&A levels perhaps were not sustainable. And my question was, if they were sustainable, why is there kind of a EPS mid-range guide down commenceart with the revenue guide down? Why wouldn't EPS kind of -- why wouldn't there be more leverage in Q4? So the long short of it is for SG&A in Q4, is it going to be back in the mid-$26s or is it going to be down in the kind of mid to high $25's?

There are a couple of questions in there. But clearly just the SG&A, it's in the $26's. That's the rate that we've been averaging all year. And that's pretty much what I had said going forward. So as I mentioned it's going to grow by inflationary levels. So $26 million is a good run rate for certainly fourth quarter and then going forward it ultimately grows by inflation. When you talked about basically that we're so called missing potential guidance by the revenue and earnings per share, I want to be a little correcting, that, yeah, the revenue in terms of the AMN base business our guidance before for the full year was basically $654 and $656. If you do the math, it is down ranging from, let's say, $2 to $4 million. And as we have explained some of that clearly the O.G.P. volume aspect. And that is the most significant aspect. And so we're being conservative. There's a little bit of that hurricane, but again that's a smaller, much smaller piece. When you looked at the earnings per share, though, the current just AMN guidance for the year would be $0.65 to $0.67 cents. If you did take out the $0.02 cent adjustment, you would basically be $0.63, $0.65, and our guidance basically the $0.64, $0.66. So it's actually fairly close. Maybe a so-called $0.01 difference there, but still has potential to actually come back within -- it's still very much, I think, in the mid-point of that guidance. So, I just want to be a little correcting that it's more like a $0.01 change at the EPS and more like $2 to $4 million at the revenue level. Again the key things we've explained are primarily the O.G.P volume and to a lesser extent hurricane and risk to the business from that volume impact.

Okay. Thanks a lot.

And your next question comes from the line of Russ Sylvestry from [Uretie] Capital. Please go ahead.

Hi. Thank you. I had a question in terms of the workers comp. When your actuary looks at your business, where are you guys typically reserving, in the high end, the low end of the actuary? And the second question was, as it relates to orders, if hospitals aren't getting their orders filled is there a possibility that they could be doubling their orders thinking that if they have more orders they're going to get more nurses quicker?

I'll take take the order one because that's pretty easy. No. We work with the hospitals to make sure we understand the quality of their orders. They don't gain anything by giving us twice as many orders as they think that they need. If anything, that would have a -- sort of a backlash effect on them. Because if they give us orders that ultimately they don't need people for, then recruiters and travelers learn about that and they stop submitting their files over to them. So there's a definite education that goes on with the hospital to make sure that there's an understanding of the urgency of their orders. Now, what can play into that is if they really need the people then they need to be interviewing them very quickly. And that can kind of feed into how urgently are these orders? And how quickly do they need them filled. But we don't have any concerns about the quality of our orders. If anything, I would say that we would think our orders are more robust and higher quality today than they've been in some time.

And just to complete the workers compensation reserve question, there's really no range involved. It's really the best estimate that's provided. And that's basically what we calculate our reserves with.

Okay. I guess in following up on the nurses, have there be instances where hospitals lose patients because they don't have enough nurses?

They have to divert patients to other hospitals, which means they have lost revenue. They may have a bed sitting there -- huge cost -- and if they have to divert the patient down the street to competitor it's lost revenue for them.

But overall the across the industry, do you think the hospital industry is losing patients because they don't have enough nurses.

Losing patients? Having to divert?

Well, if one hospital doesn't have nurses and another hospital doesn't have nurses, I mean, is there situations where patients potentially go uncared for because there's not a nurse at a local hospital or --

I don't think the hospitals would let that happen.

Okay.

I think they would find an way to cover that. They're very focused on quality patient care.

Okay. Thank you.

Thanks, Russ.

[OPERATOR INSTRUCTIONS] And next we'll go back to the line of Howard Block from Bank of America Securities. Plead go ahead.

Hello again. Just a quick one. I wondered if you could speak a little more specifically about how physicians will better insulate you against economic fluctuations. I understand hospitals see the physicians as more of a investment than a cost. And I wonder what is it about the physicians that makes them less sensitive? Is it just because they're more willing to go work in both good and economic times, or any kind of color I could get around that.

Sure. It is a very important point. If you look at the growth rates of the [Lowcomes] industry, even during the last couple of years when the nurse staffing industry went through a little bit of a downturn, the physician industry grew. In fact in 2003, [Lowcome] tenants grew 16%, while the travel nurse industry declined by over 8%. And in '04 it grew 11% and that's projected to continue by the staffing industry report, at least at a double-digit rate. And one of the reasons is because they -- you call them an investment. They also call them an revenue generator. Physicians drive patients into the hospital, which ultimately drives revenue. And no matter what the economic environment, hospitals need to continue to drive more patients into the facility in order to fill those beds and generate revenue. So they do seem to be slightly more insulated from economic fluctuations because the hospitals are always focused on driving admissions and generating revenue. Also, the fact that we've seen so many technology advancements over the last several years, particularly in areas like radiology, which are important margin drivers for hospitals. If they've made investments in multimillion dollar pieces of equipment, they need to be utilizing those. And having physicians that are prescribing those procedures or tests is an important way for them to continue to generate revenue and it also drives needs for physicians like radiologist.

Thanks very much. And then just a quick question on R.N. demand, the travel nurse brand there of M.H. A. Will you substantially grow that brand and keep it in intact at this point? Is that the plan? It seems like there' --I know it's a small part of their business but it's going. I wonder if your going to continue to grow it under that brand or maybe fold it into one of you existing ones?

It is a nice brand and they've done a terrific job of it in a relatively short period of time. We think it's a great name, R.N. demand. And so the current plan is to maintain it separate as at as a brand. We'll evaluate exactly how we get the sales synergies by bringing them -- by combining our resources and helping them to leverage off of the investments that we've made on the travel nursing side. And if we look historically at some of our other smaller brands that we've acquired, we believe that we'll be able to leverage some of our Internet tools and other resources to help them grow rather quickly.

Great. Thanks very much. I appreciate it. And next we'll go back to the line of Tobey Sommer in Sun Trust. Plead go ahead.

Thanks. I was wondering if you could share with us what your estimate is of the proportion of hospitals that are in compliance with the patient ratios in California.

Tobey, I don't think that anybody knows for sure. You hear reports all over the board if you read the literature here in California. I've heard anywhere from 40% to 60% are compliant. I think all would agree that it's probably not 90% just because it's not hospital for the hospitals to get all the nurses that they need. But it clearly is lower than what the hospitals or the state would like it. They continue to talk about how they're going to help the hospitals get the nurses that they need. And I think our strength in demand within California is just proof of that as well. They don't have all the nurses that they need.

Okay. And then if we look at the international Visa issue, if that resolves itself and processing times kind of go back to normal, would you expect that to be a contributor to volume growth in '06?

Yes. Absolutely.

And then one last question. I was wondering if you could quantify the number of travelers that you have kind of in the rapid response model at this stage? And I acknowledge that's it's a very new thing, but I was wondering if you've got from 0 to 10, 0 to 20, whatever it may be?

You know, it's so small. I tell you, it's under 50. Just to give you a perspective. But remember they just started July 1st. And we're very pleased with their results so far.

Thank you very much.

Thank you.

And there are no further questions at this time.

Great. Well, we want to thank everyone for joining us today and we look forward to talking with you further. David and I will be in New York next week for a couple of investor conferences so maybe we'll have the opportunity to see many of you then. And we hope you have a great weekend.

Absolutely. Thank you.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.