AMN Healthcare Services Inc (AMN) 2006 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome to the AMN third quarter 2006 earnings conference call.

[OPERATOR INSTRUCTIONS]

I'd now like to turn the conference over to Senior Director, Investor Relations, Christopher Schwartz. Please go ahead.

I would like to welcome everyone to the AMN Healthcare Services conference call to discuss the company's earnings results for the third quarter of 2006. For the call this morning we have Susan Nowakowski, AMN's President and Chief Executive Officer and David Dryer, AMN's Chief Financial Officer. A replay of this webcast is available at amnhealthcare.com/investors and will be replayed until November 16, 2006. 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 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 future events or circumstances are forward-looking statements.

It is possible that our actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors, including those identified in our annual report on forms 10(k) for the year ended December 31,2005, our quarterly reports on form 10(q) for the quarters ended March 31, 2006 and June 30, 2006 and our current reports on form 8(k), which have been filed with and are publicly available from the SEC.

The results reported in this call may not be indicative of results for 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 Developments subsequent to this call may cause these statements to become outdated.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 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, Chris. Good morning, everyone, and thank you for joining us today to discuss AMN's third quarter results. We really do appreciate your interest in AMN and in taking the time to participate in our earnings call today.

We were very pleased with the solid performance of all of our business lines during the third quarter. Most notably, revenue from our largest business segment, nurse and allied staffing, grew over 11% from last quarter. Most encouraging in this was the growth of traveler volume, which increased by nearly 7% to over 7,000. This was the largest quarterly increase in our traveler volume in 19 consecutive quarters and the highest average traveler count achieved in the last 13 quarters.

AMN posted revenues of $283 million and diluted earnings per share of $0.28 for the quarter. This represented an increase in revenue of 8% and earnings per share of 33% over the prior quarter. Demand for all of our business lines remains relatively strong despite a continued flat admissions environment.

This speaks to the effects of a tight labor market across all clinical disciplines as well as a growing national need for physicians, nurses and allied healthcare professionals. We believe that the tight labor market is being driven in part by the continued downward trend in the national unemployment rate.

If you follow the BLS jobs data for the healthcare industry, for example, healthcare job openings have increased on a year-over-year basis every month this year through August. In our largest business segment of nurse and allied staffing, revenues grew by 21% over the same quarter last year. This was driven by a healthy combination of both volume and bill rate increases. Of the 21%, more than half came from organic growth, with the remainder coming from the addition of the MHA nurse and allied brands.

The increased pricing changes that were implemented over the past year continue to flow through to results as we place new travelers into those facilities. This is reflected by the growth in average revenue per traveler per day, which increased 3% sequentially and by 10% over the same quarter last year. Retention rates of our working travelers remained relatively consistent with the majority of volume growth coming from the placement of new travelers and travelers who have not recently worked with AMN.

On the supply side, our volume of new nurse traveler applicants continued to sustain positive momentum during the third quarter. Our new unique high-need applicants were above prior levels by more than 20% from the same period last year. This is a continuation of the supply growth we began to see in the second quarter. And it represents the most significant increase in our new nurse supply in almost two years.

We believe this improvement is due in part to the overall favorable market trend, but also due to the increased traveler compensation that is being passed along from the bill rate increases and from AMN's focused marketing and recruiting initiatives.

Turning now to our physician staffing businesses, the locum tenens business continues to perform at very strong levels with revenue of $68 million for the third quarter. This represents an increase of 12% over the same period last year on a proforma basis. This increase was due to a combination of a 9% increase in volume as well as a 3% increase in revenue per days filled.

The physician perm placement business also continued to generate solid results with revenue of over $12 million in the third quarter. While this represented a 4% increase over the same quarter last year on a proforma basis, it was a decline of 3% from the second quarter. This decline was due mainly to the reorganization and expansion of that sales group. We believe that the changes made will benefit our performance in future quarters in 2007.

Summing up, we continue to be encouraged by the favorable demand and supply dynamics we're seeing in the market today. We do believe that our leadership position in the most attractive segment of the industry has positioned us well for the future. While the market is good, our teams across the company have also been working very hard executing and delivering outstanding service to our clients while improving operating performance.

In addition to our strategy and our operating model, our talented team is one of our greatest strengths and is a key differentiator for AMN. And with that, I'd like to turn the call over to David Dreyer, who will recap our third quarter results and provide you with an update on the fourth quarter and full year guidance. David?

Well, thank you, Susan. Revenue in the third quarter increased by 8% to $283 million compared to the $261 million reported last quarter and increased by 69% compared to the $167 million reported for the same quarter last year. Diluted earnings per share this quarter increased by 33% to $0.28 compared to the $0.21 last quarter and increased by 27% compared to the $0.22 reported for the same quarter last year.

This $0.07 sequential increase in diluted earnings per share was mainly due to a higher revenue and gross profits this quarter partially offset by higher SG&A spending and an increase in income tax expense back to our normalized rate of approximately 40%. You may recall our second quarter income tax expense included a one-time $750,000 benefit due to an adjustment toward deferred income taxes.

The $0.06 year-over-year increase in diluted earnings per share was due mainly to organic growth in our nurse and allied staffing business and the inclusion of the physician staffing businesses gained through the acquisition of MHA. Revenue from our nurse and allied healthcare staffing segment increased to $202 million in the third quarter, representing a $20 million or 11% increase from last quarter. This was due to a 7% increase in traveler volume over last quarter and a 3% increase in revenue per traveler per day largely due to favorable pricing and one additional billing day.

Compared to the same quarter last year, nurse and allied revenue increased by $35 million or 21%. This increase reflected a 10% increase in travelers on assignment partially driven by the inclusion of MHA's nursing and allied brands along with a 10% increase in revenue generated per traveler per day due mostly to increases in our average billing rates.

Moving to our physician staffing businesses, revenue from our locum tenens staffing segment of $68 million for the third quarter grew 2% over last quarter. This reflected mainly an increase in days filled by our locum tenens physicians, which increased by 3% to $51,205 this quarter from $49,534 last quarter. The increase in days filled was partially offset by a 1% decrease in revenue per days filled due to a change in the placement mix of physician specialties and general practitioners.

Revenue from our physician permanent placement staffing segment this quarter was $12 million representing a 4% or $500,000 increase from the same quarter last year and a 3% or $400,000 decrease from last quarter. We expect that revenue from the permanent placement business will remain stable in the short-term.

Consolidated gross profit for the third quarter of this year was $77 million representing a gross margin of 27.1%. This compares to 26.8% last quarter and 23.7% in the same quarter last year. The 30 basis point sequential increase in this quarter's gross margin was due mainly to lower health insurance plans and our nurse and allied healthcare staffing business. The 340 basis point increase in gross margin on a year-over-year basis reflected the combined effect of a widening build a pace spread in our nurse and allied healthcare staffing business as well as the addition of the higher gross margin physician staffing businesses from our acquisition of MHA.

Gross margins by segment for the third quarter of this year were 25.4% for nurse and allied, 26.3% for locum tenens and 60.7% for physician permanent placement. SG&A expenses for the third quarter were $54 million, including stock compensation expense of $2 million compared to $52 million for the second quarter of this year and $25 million for the same quarter of last year.

The increase in SG&A expenses over last quarter was mainly due to an increase in employee expenses to support growth in the nurse and allied healthcare and locum tenens staffing businesses. The increase in SG&A expenses compared to the same quarter last year mostly reflected the addition of MHA along with increased employee expenses to support growth in the nurse and allied staffing business and stock compensation expense resulting from our adoption of Fas 123r this year.

As a percentage of revenue, SG&A expenses excluding stock compensation expense were 18.5% for the third quarter compared to 19.4% for the prior quarter and 15.1% for the same quarter last year. We continued to estimate that full year SG&A expenses excluding stock compensation expense will approximate 19% of revenue.

Net interest expense for the third quarter was $4.2 million compared to $4.3 million last quarter and $1.5 million for the same quarter of last year. The increase in net interest expense over the same quarter last year was attributable to the interest expense from additional debt used to fund the acquisition of MHA.

Turning to our financial position, we generated nearly $4 million in operating cash flow during the third quarter and reduced debt by almost $11 million to end the quarter with $199 million in total debt outstanding. Our days sales outstanding, or DSO, at the end of this quarter was 59 days compared to 55 days last quarter and 57 days for the same period last year. We believe that the increase in DSO compared to the prior quarter and prior year were largely driven by our exceptional revenue growth this quarter along with normal trends in the timing of payments received from our facility clients.

Now I am pleased to provide you with updated revenue and earnings guidance for the fourth quarter and full year 2006. Fourth quarter revenue is expected to range from $278 million to $281 million. And diluted earnings per share is expected to range from $0.21 to $0.23, which includes a charge of $0.03 for stock compensation expense.

For the fourth quarter, we expect some moderation in revenue and earnings compared to the third quarter due mainly to normal year-end seasonality in our temporary healthcare staffing businesses. For the full year, we are increasing our revenue and diluted earnings per share guidance estimates mainly to reflect the strong results we achieved this quarter. We expect 2006 revenue to range from $1.07 billion to $1.08 billion and diluted earnings per share is expected to range from $.94 to $0.96, which includes an estimated charge of $.12 for stock compensation expense.

We know many of you are focused on updating your estimates for 2007. We are feeling positive about the demand environment for our services and are increasingly encouraged by the improving supply environment. However, we are still going through our planning processes, which includes prioritizing our spending and investing goals to support continued growth in our business lines.

There are also still uncertainties regarding the immigration environment and how that might effect our international recruitment efforts, which we believe we will have a better understanding of towards the end of this year. We look forward to providing you with the details of these plans and our outlook for 2007 at next quarter's earnings call. This concludes our prepared remarks. We would now like to open the call for your questions.

Thank you.

[Operator Instructions]

And our first question is from the line of Tobey Sommer from SunTrust. Please go ahead.

Good morning. It's Mike Fitz calling for Tobey this morning. Congratulations on a great quarter. I just wanted to ask a couple questions. The volume of nurses picked up nicely in the quarter. And just wondering if you could kind of talk about how much of that you think is an actual increasing supply in the market or maybe how much you think is more a function of your increased marketing spend and lowering more nurses to AMN versus your competitors.

Thanks, Mike. Since there is not industry data available on the aggregate supply and new supply coming in, I think it's hard for us to really give you a solid answer on how much we think. But just our information with health is both. We do hear that there's more supply generally coming into the marketplace from other companies as well. But we believe that we are possibly getting more of that new supply because of the increased spending and increased initiatives.

I mentioned in my remarks that really our volume growth has come from new travelers that have just recently signed up with us, but also candidates that have been with our recruiters but maybe haven't worked with us ever or recently. So there is also a resurgence of interest of people who thought they wanted to travel maybe a year or two ago and now they're finding it to be attractive enough to actually jump in.

And kind of to follow-up on the marketing side, do you expect kind of the same level of marketing to go forward and to have the same kind of affect?

Well, that's, as David mentioned in his comments, we're still evaluating exactly what we believe the marketing spend needs to be for '07 to support the growth. Clearly, many of the initiatives we put in place this year are working well for us. We run very tight ROIs and track them very closely, so we generally know what's working and what's not. And we'll be continuing some of them into next year.

And for that matter, we will be introducing some new initiatives. We need to be constantly innovating and coming up with new ways to attract new supply. So you'll see us continue to do some of the things we implemented this year, stop doing some, but then also implement some new strategies. And that's where we say where we're still kind of finalizing those details and we'll be putting that into our operating plan, which we'll have done here in the next couple of months.

If I could just ask one more question, on the restructuring of the perm group, could you just kind of give a little bit more color on what was the reasoning there and what kind of the results in timing or on the results that you expect there?

Sure, Mike. This is actually very normal. This is how Merritt, Hawkins has really built their business and I think why they're the leaders within the industry. A key to their strategy is to continue to deepen and expand their teams in order to penetrate the market. So as a territory becomes larger, they will generally split that territory and put more team members on it to become more focused.

When you do that, you're moving producers into leadership positions, and it can have a temporary affect of reducing productivity. Generally you don't see that affect of that. We happen to do that with a couple of teams at the same time. You need to do it at the right time, not only for results, but also there are other factors that feed into the timing of that. So that's what you saw.

And the history has shown that when they do this, they do incrementally improve the business. And we believe we'll have that same affect going forward. But it did have this sort of temporary affect of creating a slight decline from second to third quarter.

So it's fair to say this is kind of growth-based and not that there was any problem with the business?

Exactly. And we do not believe it's a market situation at all. The demand is there.

Great, thank you very much.

Thanks, Mike.

Next we go to the line of Jim Janesky from Ryan Beck. Please go ahead.

Hi, yes. Good morning. A couple of questions. When we look at border versus booking trends in the market, if you can give us an idea of how that is to give us an indication of the sustainability. I mean, obviously booking trends were very good. You turned in over $20 million in sequential growth in your travel segment. But I'm trying to get an idea of what the order trends are from the hospitals to see what that is versus just new supply coming into the market on the nurse side.

Sure, Jim. The order trends have been very consistent throughout the year in terms of sort of our open orders. We certainly have far more orders than we have travelers coming off assignment every month. So we have unmet demand that we cannot fill even certainly with the increased supply that we're seeing.

Those orders have remained relatively flat throughout the year. And that's pretty consistent on the east and the west, while you certainly see changes from state to state, pretty much across the country it's been relatively flat, which is consistent with the fact that admissions have been relatively flat. But we would characterize our orders as being strong in that while they're the same order level, again, it's more than we can fill, and those orders have become more attractive because of the bill rate increases and therefore the pay rate increases and packages that we can offer the nurses.

For the last year we've been talking about the fact that our [gating] factor to volume growth has not been demand, it's really been the supply. And so, it's really been the increase in supply that's driven the volume growth that you've seen.

Okay. And looking at the fourth quarter, the top line seasonality seems to be running - the top line outlook that you have from a seasonality point of view seems to be consistent with prior patterns. But on the bottom line, it seems as if there is a more than normal seasonal effect in terms of a decline sequentially in earnings. Can you give us an idea of why you think that's happening?

Absolutely. This is David. First of all, if you look at our Q3, the $0.28, we did call out that if you looked at the nursing side that we did have a favorable experience with our healthcare insurance claim. And that was basically about a $0.02 benefit that we really didn't expect to carry forward. I'm not going to call it one-time, but it was favorable claims. And that's not what we've assumed going forward.

In addition, there is definitely normal Q4 seasonality trends that are downward trends that we've always had, in nursing especially. For example, direct costs like our housing where you see more vacates because it's the holiday at the end of December, holiday pay, which is not always billable to the client. And there's also slight seasonality, we believe, in the locum's business in the fourth quarter.

Another key point, we talked about the bill pay rate narrowing. And this clearly is having affect. We're seeing that those pay rates are going up. That's going to lower the gross profit. And then last thing I'll mention is the OGP retrogression. We have made some deliberate efforts to place nurses in Q3.

And so, that might have contributed a little bit to those favorable results of that quarter. So in essence, I can get us from that $0.28 down to $0.22 to $0.23 by taking $0.02 for that nurse insurance and rounding up to about $0.04 of items for that seasonality.

Okay, thanks. That's helpful. Last question is in terms of the permanent placement. How much would you say that the temporary decline in growth in the physician perm business has to do with moving these producers into leadership roles and then these individuals not being comfortable with that move and leading to possible turnover? Could you just give us an idea, I guess, of the turnover metrics within the division?

Well, we don't believe that that's an issue at all for us. This is again typical in how we grow this business. And so, I would attribute it to the fact that you're moving people into leadership positions, you're bringing in new sales members that are coming up behind them and just gaining their productivity traction as they move along. And it takes a few months for that to get going. It has nothing to do with attrition or team member dissatisfaction.

Okay. So, Susan, from time to time we could expect this to happen again going forward? And is there anything to do with the fall timeframe being the normal time of year that you do it? Or it just has to do with growth metrics?

It just has to do with the growth metrics and the right time to expand the teams when we see the opportunity.

Okay, thank you.

Thanks, Jim.

And our next question is from Michel Morin from Merrill Lynch. Please go ahead.

Yes, good morning. I was wondering. I might have missed it, Susan. But did you mention the organic growth in the nurse and allied segment?

Yes, our organic growth on a year-over-year basis...

Yes.

... was approximately 10%. We talked about the fact that a little over half of the 21% growth came from organic growth. And that was a combination of both volume and pricing. And the other slightly less than half of the 21% came from the addition of the MHA brand.

Okay. And then just on the supply pickup, where is the supply coming from? Are these - and I know you've already given us some color on that. But are these nurses who have - who are recently graduated, or are these people who have been working in permanent positions who are becoming - who are deciding to opt for the traveling lifestyle? Or where is the supply coming from?

We haven't seen any significant changes in those trends. It's all of those. And I'd probably want to be a little cautious from a competitive standpoint to reveal too much where they're coming from. But it is mostly the normal demographics that you see, younger career builders, maybe two to six years out of school, which is why we're actually very encouraged by the nurse enrollment and graduation increases in that we've seen over the last few years because that speaks to supply opportunities for us over the coming years.

But we also certainly continue to see our baby boomer population growing as well. It's really about us finding new, innovative ways to reach out and touch those nurses. So it's generally the same demographics that have been joining the travel nurse ranks for years. But it's finding new methods to reach out and educate them about the current opportunities available and having better trained recruiters and recruitment specialists that are talking with them about our placement opportunities.

Great. Okay. And then just finally, perhaps this is for David. I was wondering now that you're lapping the acquisition in the fourth quarter, I just wanted to get a sense for the appetite for future acquisitions in terms of how you look at your balance sheet and your capacity to look at potential acquisitions out there.

Well, clearly, our focus this year has been on the integration and organically growing our businesses. But we're always looking at acquisitions that would really strategically add value to the service offerings. And examples we've always talked about would be to add to the allied health sector, possibly a synergistic acquisition to supplement the locum tenens as well. But that is a possibility, I would say, in '07.

We have nothing identified to discuss. But clearly, those are probably more along the lines of tuck-away acquisitions. They're not going to be to the magnitude of, like, the MHA acquisition. We clearly have the capacity in terms of debt. We probably have a $300 million borrowing capacity. We have $199 million of debt outstanding currently. And so, yes, it's a possibility. We have nothing specifically identified. But it would be strategic to supplementing our businesses currently.

Great, thanks very much.

And our next question is from Jeff Silber from BMO Capital Markets. Please go ahead.

Thanks. And let me add my congratulations as well. David, in your remarks you briefly mentioned the issue of visa retrogression. Can you tell us roughly in terms of your volume growth in the nursing side this year how much of that came from internationally-sourced nurses?

Yes, we don't give the exact breakdown of our international nurses. We generally talked about it being around or slightly under 10% of our working travelers. So if that number is 7,000 today, then you can figure it 700 or slightly below. In terms of the growth that we've seen, again, we don't comment exactly where that comes from. So I don't think that we can say. But it's not been from the second to third quarter it was not a significant piece or an unusually disproportional piece of that volume increase.

Okay, thanks. That's helpful. What are your attorneys or advisers telling you about the process? What do you think is going to happen?

Well, there are a few different opportunities, as you might know. Retrogression essentially means that visas are only allocated to applications pending before a certain historical date. So it creates a little bit of a backlog in the visa processing and essentially restricts our supply or slows down our supply of people coming in.

The reality is about 12 to 15% of the [enclex] [passers] are foreign-trained nurses. So it is a critical supply channel, not just for us. It's actually smaller for us than it is for the nation. And so, it's very critical. And it's recognized through our contacts in Washington that this is a critical issue they need to deal with. And it's believed that it will be dealt with after the elections.

It's a matter of whether it can be dealt with in a lame duck session immediately after elections or whether it's pushed off a little bit further. But the education is there. The awareness is there. The impact is known amongst, I think, the key decision makers. So it's just a matter of our legislators getting back to work and getting some legislation passed. What we're, what we're trying to pitch for is to have nurses exempted from the permanent immigration visa cap or to increase the number of caps specifically allocated for nurses in the future so we don't run across this every few years.

Okay, great. I know you don't normally disclose the number of recruiters you have, but I just was curious. Since the MHA acquisition, in terms of the two larger businesses that you got from them on the perm side and the locum tenens, do you have more net recruiters now than when you did when you bought that company?

Absolutely. We have more trained recruiters and, for that matter, new recruiters in training, on the floor today than we have had in several years.

Okay, great. And then just one final question. What kind of share count are you looking for with your fourth quarter guidance?

Sure. Our basic shares outstanding this quarter, as you know, is 34.0. We're estimating Q4 estimate of 34.8 million fully diluted shares outstanding and a full 2006 annual average of 34.4 million shares.

Okay, great. That's very helpful. Thanks again.

Sure.

Thanks, Jeff.

And the next question is from Gene Mannheimer from Caris & Company. Please go ahead.

Thank you. Congratulations on a great quarter. Just in turning to gross margin at 27.1%, it looks to be very strong, in fact, the highest I've witnessed in a long time. How much more gross margin expansion do you perceive here or our bill rates get into a point where you reach that balance of potential backlash from your hospital clients? Thank you.

Actually, Gene, it's Dave. A couple of comments I really wanted to be very clear about is in the nursing area, we're actually expecting a little bit of downward pressure, as I mentioned. This quarter we had approximately $1.2 million of basically favorable insurance claims in the nursing area. And so, that's basically about 30 basis points to our nursing margin.

And also we've talked a lot about the build to pay spread is basically we're seeing pay become a higher percentage. And so, that'll have a tendency to have a lower percentage affect on our gross margin as well. So basically we're always looking to keep our expenses as efficient and as variable as we can. But I've tried to be pretty straightforward that probably are seeing at least a downward trend in fourth quarter, certainly, as a result of those two items alone.

Okay, thank you, David.

Thank you, Gene.

And, ladies and gentlemen, I'll turn the conference back to your host, Susan Nowakowski.

Well, thank you, everyone, for joining us today and for your continued support of AMN Healthcare. We look forward to updating you on our full year results and our view on 2007 during our next earnings call.

We really hope to see many of you at some of the upcoming investor conferences during the next few months, which, by the way, will also be webcast if you are unable to attend. And if we don't get the chance to see you, then please let us wish you a happy and safe holiday season with your loved ones. Thank you so much for your support.

Thank you. Ladies and gentlemen, this conference is available for replay after 4:15 p.m. eastern time today through November 16th at midnight. You may access the replay service at any time by dialing 1-800-475-6701 and enter the access code 843431.

International participants may dial 320-365-3844. Those numbers again are 1-800-475-6701 and 320-365-3844 with the access code of 843431 and is available after 4:15 p.m. eastern time today through November 16th at midnight. That does conclude your conference for today. Thank you for your participation. You may now disconnect.