AMN Healthcare Services Inc (AMN) 2008 Q2 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by, and welcome to the AMN Healthcare Services second quarter 2008 earnings conference call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session. Instructions will be given to you at that time. (OPERATOR INSTRUCTIONS) I would now like to turn the conference over to your host, Mr. Christopher Schwartz, Vice President of Investor Relations. Please go ahead.

Good afternoon. I would like to welcome everyone to the AMN Healthcare Services conference call to discuss the Company's earnings results for the second quarter 2008. For the call this afternoon, we have Susan Nowakowski, AMN's President and Chief Executive Officer; and David Dreyer, AMN's Chief Financial Officer. A replay of this webcast is available at AMNhealthcare.com/Investors and will be replayed until August 20, 2008. 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 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 10-K for the year ended December 31, 2007, 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 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 Developments subsequent to this call may cause these statements to become outdated.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 next earnings release. I'll now turn the call over to Susan Nowakowski, AMN's Healthcare's President and Chief Executive Officer.

Good afternoon, everyone. Thank you for joining us today. As we enter the second half of what has no doubt been a year of uncertainty for the financial markets, we are feeling very good about our performance and our ability to grow revenues and achieve solid earnings growth for the year. Healthcare services is proving to be one of the most resilient markets in the overall economy and the AMN business model and competitive strategy continues to build our market share and deliver superior long-term shareholder value.

AMN's revenue for the second quarter of 2008 was $313 million. 6% higher than the same quarter last year. While diluted earnings per share of $0.27 increased 4% over last year. Revenues in all of our business segments grew on a year-over-year basis with the biggest contributor being the addition of allied revenues from the Platinum Select acquisition we completed in February. But we also achieved organic growth in our Travel Nurse, Travel Allied and locum tenens businesses.

Despite a tight economic environment, we've been able to achieve increases in pricing in gross margin. Revenue for healthcare professional working increased 4%. Reflecting the relatively healthy demand for quality clinicians. Just as important, we've been able to grow gross margins by expanding bill pay spreads and lowering healthcare insurance costs. This quarter's gross margin was up almost 90 points over last year, resulting in overall gross profit growth of 10%. The higher gross margin contributed to growth in EPS but earnings per share grew at a slower rate of 4% due mostly to SG&A costs including spending and support of strategic initiatives to further diversify and augment our growth. David will discuss other contributors later.

In our Nurse and Allied staffing business, revenues grew 7% over the prior year and 6% sequentially. The addition of Platinum Select was the biggest contributor to this growth, however, our organic Travel Nurse revenues were also up 2% sequentially and 2% year over year. These increases were offset by the continued decline in International nurse revenue due to Visa retrogression. Gross margin in the Nurse and Allied staffing business increased 120 basis points compared to last year. Our ability to achieve price increases continued to trend within our expectations, translating into revenue per traveler per day growing at 4% year over year.

We have also seen good trends regarding housing costs. Last quarter, we saw early indications that our average daily represent costs were stabilizing. This favorable trend continued into the second quarter and when combined with the great work by our internal team, our housing expenses began to decrease as a percent of revenue. Demand for Travel Nurses has been steady in aggregate but mixed across the country. We've seen the greatest increases in the West with California leading the way with orders up double digits year over year. At the other end of the spectrum, some historically strong states such as Florida and Arizona are down in orders. We do expect a pickup as we approach winter and in fact, we are starting to receive some of those orders now and expect more over the next two months.

There is certainly strong demand in other attractive regions such as the northwest and central states and our recruitment and account management teams are doing a great job in directing our candidates supply to where it is needed most. We believe that our strategy to have more orders in more diverse locations and low customer concentration is benefiting us during this type of market. We expect to be able to direct our supply accordingly and continue to grow nurse volumes in revenues, albeit at a modest level throughout the remainder of the year. Our allied business also grew organically on a sequential basis. Although it remained flat year over year. Our strongest growth in the second quarter came from our high margin rehab therapy specialties which grew double digits in volume and revenue on both comps.

The placement of imaging specialists continues to be below expectations due to the lower demand, a trend that has been felt across the entire industry. Since the beginning of the year, we have reallocated resources from imaging to therapy and other new specialties like lab technicians in order to maximize the growth of this group long-term.

Now, turning to our locum tenens staffing business, this division experienced revenue growth at 5% compared to last year and 10% compared to last quarter. Days filled volume for the quarter rose 10% sequentially, reflecting an important gain in momentum for this division. We do not believe that our year over year growth at 5% is reflective of the market potential within the locum industry. In fact, if we dissect our different specialty groups, several are growing double digit year over year. Primary care, our largest division and behavioral health are both at more than 15% year over year. Our aggregate performance though is being pulled back by two issues which we discussed last quarter.

The first is lower demand for radiologists due to changes in reimbursement and financial pressures felt by our clients. From trends we've seen in our radiology division over the past few months and some very hard work by our team, we believe we have passed the bottom of this effect and we're now seeing modest but measurable gains in the business. The second impact is performance shortfalls in the western divisions of our anesthesiology and surgery specialties. As we enter the third quarter, we're seeing performance improvements in these divisions and do expect sequential growth. Based on the current market and our July placement trends, we're expecting to deliver stronger year over year growth in our locum segment during the second half of the year.

Pricing continues to be solid across all physician specialties with the exception of radiology. A year over year basis, revenue per days filled increased a total of 4.4%, led by primary care and surgery. While pricing for radiology was up year over year, there was a downward trend from the first quarter. All of the specialties experienced sequential growth in pricing, a good reflection of a continued, healthy demand environment and our ability to sell our value as a high quality physician provider. Some of our newer divisions such as dentistry are ramping up in line with expectations but at this stage, they're still too small to move the aggregate growth needle. In our physician permanent placement business, revenue in the second quarter increased by 7% compared to last year and 2% sequentially. There are no public comps to know how this growth compares to industry trends but we believe that the market opportunity should allow for stronger growth in the future. As the leader in this industry, our sites are focused on top line growth in excess of 10% in the long-term.

New searches and placements during the second quarter were below our expectations. However, as we begin the third quarter, we are on a better track and new searches for the month of July were up 17% from our second quarter average. As I mentioned earlier, we have several initiatives focused on further diversifying our product lines and broadening our client base in order to increase our growth opportunities. Some of these initiatives will generate revenue in 2008 but most are expected to drive incremental revenue in 2009 and beyond. An example of a current expansion is the launch of our surgery center staffing business which was introduced to the market in June. Spending on these initiatives contributed to a modest increase in SG&A this quarter. However, we believe that these efforts are well-timed to continue to build the business to match the changing trends of how and where healthcare services are delivered. And with that, I would like to turn the call over to our CFO, David Dreyer. David?

Thank you, Susan. Good afternoon. Our consolidated revenue for the second quarter was $313 million, 6% higher than the second quarter of last year and 7% higher than last quarter and within our guidance range. The year-over-year increase in revenue was due mainly to the addition of Platinum Select and growth in our physician staffing businesses. The sequential increase in revenue was due to volume growth in our locum tenens segment, organic growth in our Nurse and Allied segment and a full quarter of revenue from Platinum Select.

Consolidated gross margin in the second quarter was 26.4%, up 90 basis points from last year and unchanged from last quarter. The year-over-year improvement in gross margin was driven by a more favorable bill pay spread in our Nurse and Allied segment. Although this was the second quarter in a row that we achieved a strong year over year increase in consolidated gross margin, we anticipate our gross margin to remain fairly stable.

SG&A expenses in the second quarter were up 12% over last year and 9% over last quarter. The increase in SG&A compared to last year was mainly attributable to the acquisitions of Platinum Select and RX Pro Health along with higher insurance costs in our locum tenens segment while the increase compared to last quarter was due mainly to the higher insurance cost. Also, contributing to the increase this quarter was an increase in bad debt expense related to a bankruptcy involving a large former locum tenens radiology client and higher expenses in support of the strategic initiatives that Susan just mentioned. Despite the growing reimbursement pressure from our nonhospital base radiology customers, we do not believe that we have overall exposure to -- I'm sorry, our overall exposure to bad debt loss has not increased.

Looking to the second half of the year, we will continue to carefully manage SG&A expenses in relation to gross profit in order to achieve our full year earnings expectation. Depreciation and amortization expense in the second quarter was $3.7 million, up 31% over last year and 12% over last quarter. This expense is comprised of $2.5 million in depreciation and $1.2 million in amortization. Compared to the same quarter last year, depreciation increased by $500,000 due mainly to internally developed software projects placed in service in late 2007. Amortization increased by $400,000 compared to last year due mainly to the acquisitions of Platinum Select and RX Pro Health. Depreciation and amortization in the third and fourth quarter is expected to remain stable and with the second quarter as a percentage of revenue in line with what was previously considered in our 2008 guidance.

Net interest expense in the second quarter was $2.7 million, down 50% compared to the same quarter last year and down 5% compared to last quarter. The year-over-year decrease reflects the pay down of $38 million of our term loan and reductions in LIBOR rates over the past year. Including the effect of our interest rate swap agreements, the interest rate on our term debt decreased to 5.7% this quarter, down 100 basis points compared to the same quarter last year. In order to continue to minimize our exposure to interest rate fluctuations, we entered into a number of new LIBOR swap agreements this quarter. The effective income tax rate this quarter was 41.5% as compared to the 41.2% reported last quarter. For the full year 2008, we continue to project an income tax rate of approximately 41%.

The primary reason our effective tax rate has increased from last year's 40% rate is due to our acquisition of Platinum Select. Net income in the second quarter was $9.4 million, consistent with last year and last quarter. Earnings per share of $0.27 was up 4% over last year and at the midpoint of our guidance range. Earnings per share this quarter decreased $0.01 from last quarter, due mainly to the combined effect of higher insurance costs along with the expenses in support of the strategic initiatives mentioned earlier.

Fully diluted shares outstanding here in the second quarter were $34.3 million, down 3% from last year and steady to last quarter. We repurchased 368,000 shares of our common stock during the quarter at a cost of approximately $6.4 million or $17.49 per share. After taking into account the repurchases completed during the second quarter, we have $32 million available for repurchases under the plan. We generated $12 million of cash flow from operations during the second quarter which, when combined with $8 million of cash on hand, and $11 million of revolver drawdowns were used primarily to pay estimated taxes, partially settle an acquisition hold back reserve and fund the stock repurchases. We ended the quarter with $154 million of debt. Our leverage ratio is 1.6 times trailing adjusted EBITDA compared to 1.8 times a year ago. DSO at the end of the quarter was 58 days, down 2 days from last year and last quarter, reflecting continued improvement in our collection efforts.

Now, turning to our business segments, revenue in the Nurse and Allied segment this quarter was $215.3 million, up 7% over the prior year and 6% sequentially, travelers on assignment averaged 7,207 this quarter, up 3% year over year and 5% sequentially due primarily to the addition of Platinum Select. Gross profit for traveler per day in the second quarter increased 10% year over year and 3% sequentially driven by the wider bill pay spread. The adjusted EBITDA margin for the segment was 7.8%, up 100 basis points over last year and 20 basis points over last quarter.

Revenue in the locum tenens segment increased to $84 million this quarter, up 5% from last year and 10% from last quarter. The year-over-year increase was driven mainly by the higher average bill rates across all specialties. Compared to last quarter, the higher locum tenens revenue was due to growth in days filled, particularly in our primary care and behavioral health divisions. Days filled volume overall for the locum tenens business increased 10% sequentially. The adjusted EBITDA margin was 5.1%, down 370 basis points from last year and 230 basis points from last quarter due to the higher insurance cost and the bad debt expense. Our insurance costs can vary significantly from quarter to quarter. However, over the longer term, we anticipate these costs will remain relatively stable as a percent of revenue.

Revenues in the physician permanent placement business were $13.5 million, up 7% from last year and 2% from last quarter. The adjusted EBITDA margin for this business was 28.6%, up 550 basis points from last year and 340 base points from last quarter. This is mainly due to a reduction in SG&A expenses which included a favorable claims settlements.

Now, I'll provide you with our revenue and earnings guidance for the third quarter and the full year. Based on trends, experienced in July, along with seasonal patterns expected to pick up during the third and fourth quarters, we reaffirm our projected diluted earnings per share growth of 11% to 16% or $1.16 to $1.22. We're also narrowing our projected revenue growth for the full year to 6% to 8% from 1.23 billion to $1.26 billion. For the third quarter, revenues expected to range from 320 million to $323 million and diluted earnings per share to range from $0.31 to $0.33. Now, I'll turn the call back over to Susan.

Thank you, Dade. There are many positive trends in our business today that point to continued health in our markets and growth opportunities for the future. And again, we expect all of our business segments to achieve year-over-year and sequential growth in the third quarter.

While there have been no changes in the long-term fundamentals that drive our business, there are certainly some short-term challenges. All in, our full-year revenue growth should exceed the industry average. Even more importantly, our expectation to grow earnings at a stronger pace of 11 to 16%, reflects our team's commitment and ability to continue to carefully manage costs and deliver stronger shareholder value. Because our diversified business model, we are able to constantly evaluate our market and reallocate resources to pursue the best opportunities. In addition to our focus on efficiency and daily execution, we're also continuing to make investments in some of our newer, faster-growing services to continue to drive new revenue channels. All of these things we've discussed, our solid execution, and the continued development of new business opportunities are clearly a reflection of the strength of our leadership and sales and service teams. I want to thank all of the AMN team members for sharing their great talents and their commitment and hard work to continue to serve our clients and to deliver greater shareholder value. Now, we'll take your questions.

(OPERATOR INSTRUCTIONS) Our first question comes from Tobey Sommer with SunTrust Robinson Humphrey.

Thank you. I had a question for you about kind of -- Susan, philosophically, how are you approaching the bill rates that you're increasing in the split between Company's desire to retain that in the form of gross margin and your clients' needs for additional nurses and therefore, them kind of desiring you to pass it on to the nurses in the form of higher pay rates?

Sure. Good question, Toby. We believe we're in a very good place right now to be able to pass on a very reasonable amount of those pricing increases directly to our travelers in wages. As you know, we were held back from that a little bit over the last year and a half because of rising housing costs but as we mentioned, that's subsided a bit. So that gives us a little bit more room to raise pay rates as we get those bill rate increases. Going forward, we expect our margins to remain relatively stable. And by stable, you can have 10, 20 basis point deviation from quarter to quarter and we are certainly strategically out there looking for opportunities to both increase pay rates and where appropriately, decrease pay rates and that can have a little bit of a variance effect. But overall, we expect gross margins to be relatively stable going forward.

I don't know whether you gave this, I apologize if you did. Did you give an organic rate of growth for the travelers in the quarter?

We did not give just the travel and Allied organic growth. One thing that we called out was our travel nurse business in particular which grew a little over 2% both sequentially and on a year-over-year basis. The Allied business actually grew more than that on a sequential basis. It was relatively flat year over year because of the offset in the imaging professionals. But on a sequential basis, we've seen tremendous growth in Allied.

Thank you. That seems like a real good performance in light of what we've seen from some others talking about the market. Could you give us a sense for how the expected growth for the locum tenens business now that you've kind of I guess worked past some of the issues, how that may proceed because it does seem like the market is fairly attractive in presenting some opportunities to grow a little bit faster than you have recently.

We completely agree with that. I think it is a couple of contributors as we discuss the radiology situation which we think is largely behind us. Although it's not going to come back with a vengeance, our team is doing a great job of really driving the business that's available out there. And then, as I mentioned, those Western divisions are already seeing some better performance as we enter into the third quarter. We expect our third and fourth quarters to be our highest year over year growth rates for the locum's division. As we look from the first to second quarter, we saw some great sequential growth. I mention the 10% sequential growth from Q1 to Q2. We expect to see good sequential growth in Q2 to Q3. So, we think we're on a more positive track there.

I will say, also, that we have deliberately chosen to not play in a couple of segments within the locums industry. One in particular is in the emergency department segment. If you look at a lot of the hospitals that are reporting performance, most all of them are talking about emergency rooms being up in terms of admissions and activity. No surprise as people use that as kind of their first line in avoidance of actually going to their primary care doctor. And so we think that that industry, in particular, is a high utilizer of locums and it could be helping to augment the overall growth rates. And as I said, we do provide emergency room doctors in our government business but have chosen not to do that in the private industry because of the historical malpractice exposure. We still believe, as of today, that's a good long-term strategy. But we'll continue to evaluate it going forward.

Thank you very much.

Thanks, Toby.

Thank you. Our next question comes from Jeff Silber with BMO Capital Markets.

Thanks so much. Just wanted to follow-up a little bit on the locum tenens side. Can you give us some gauge in terms of how large your radiology practice is, also in the Western area that you talked about. Just want to get an order of magnitude of how much that impacted you in the quarter?

We've not broken out the actual percentage of the business. A couple of drivers though, just to put it in perspective. It is currently -- and has historically for the last couple of years been our second largest division in terms of actual revenue. It actually has a lower per day filled because these have very high bill rates historically. One of the dynamics that we've seen is while volumes have come down, more so, the pricing has had to come down in order to help generate and support the demand that is out there. So, what you've also seen is a little bit of a mix change in our revenue per day filled. Which has been hit a little bit harder because radiology has historically had the highest bill rates within the locum segment.

And how about on the Western territory that you mentioned?

Again, these are sub groups of our anesthesiology and surgery divisions, they're not the entire division, they're just a regional portion. We don't break out the percentage of those. So, I would hate to start doing that now. As we -- because then we might need to do it going forward.

Okay. That's fair enough. Looking out, again, just focusing on locum tenens, where do you think you can get a normalized EBITDA margin to?

Well, a normalized we had said is pretty much we've managed it to an 8% target which we're more or less trending to. We've said all along, we think the business has potential to be at a 10% level. But again, we've been balancing investments to grow it longer term. I think to get to a 9% EBITDA margin is realistic but again, it is not going to be next quarter. That's probably with continued growth going forward.

Our kind of three to five year target of 10% hasn't changed for the business. It is going to require some stronger market growth opportunity on the nursing side of the business in particular to make that happen.

Okay. I guess you answered the question for the Company overall which was great. I just was curious on the locum tenens segment itself?

No, actually, I was referring to that as well.

Okay, great. Sorry about that, Dave. In your prepared remarks, you talk about the next second half of the year, trying to keep SG&A in line with gross profit. Can you tell us maybe some examples of how you think you're going to be doing that?

Well, we are seeing efficiency gains throughout the Company, specific investments that we've made and it is not one big bullet or one big project that is creating these. It really is the continued investment and focus and our team really looking for those operating efficiencies. One example, if you're looking for an example is that we -- this isn't just specific to a particular quarter but on a go-forward basis, we've recently implemented a new document imaging system which will not only help us to more efficiently deliver our documents to our clients and help -- it will more so even help us internally in the distribution of paper and by the way, it is a nice, green project which our employees love. But it will help us to reduce our FTEs and also provide a more scalable model as we go forward. So, we're constantly looking for those kinds of investments to increase our productivity and operational efficiency.

Okay, great. Just one quick numbers question. What was capital expenditures during the quarter and what should we be looking for for the rest of the year?

Capital spending this last quarter was about $2.5 million. We said all along, it is pretty much trending at about -- not quite 1% of revenue so let's say like 0.9 and I would say if you assume that going forward, the third quarter, fourth quarter, you're very close.

Fantastic. Thanks so much.

Sure.

Our next question comes from Jim Janesky with Stifel Nicolaus. Please go ahead.

Hi, Susan and David. Couple of questions. First, on the -- on your outlook for tightening up the revenue range for the rest of the year, it sounds like when you consider your comments, that that outlook was tightened up mainly because of the Nurse and Allied segment, is that correct?

No. I would say it was a little bit from each segment. The biggest contributor, definitely from Nurse and Allied because it is the biggest piece of business for us. We had -- while we are certainly expecting a sequential pick up from the second to the third quarter, it is not as great as we originally anticipated at the beginning of the year. And so that's the biggest contributor. Second would be locums and some of the issues that we discussed and then even term placement to a smaller degree.

So, it not only your outlook from the beginning of the year but even from last quarter is well within nursing. I'm just trying to get my arms around where -- was it because an area that you were growing in hasn't done well? Or would you attribute it more toward -- done as well or would you attribute it more toward more overall weakness in the industry as the year progressed?

I wouldn't characterize it as weakness. We're seeing growth opportunities in the nursing business. They're just not as great as we expected. So, we're growing but it is not as robust as we had thought it could be at the beginning of the year. And even in March and April as we were looking forward. Within locums, we still believe with the exception of radiology, there is just as much market opportunity as we saw at the beginning of the year. So, it is not a market weakness issue. I would characterize it as. As you know, as much as -- as I mentioned in locum, some performance-related issues.

Okay. David, within the -- the margins within locum, you say they're not going to recover next quarter. Does that imply that bad debt expense is going to continue and is this isolated to any one group of hospitals or why wouldn't we see the -- why wouldn't we expect to see the margins recover sequentially?

Well, basically, bad debt, we were trying to suggest was not going to be a trend that we expect to continue going forward.

Okay.

So, that was -- to clarify that. In terms of gross margins, overall, the message is really that we're going to trend it consistently. Including in the locum tenens segment as well. So, it wasn't that we were expecting deterioration, not at all. I think it is basically expected to trend at that 26% to 27% range that we pretty much suggested all year. So, the main message there was just that we don't see a trend. The radiology businesses again in reimbursement risk is not our direct risk. But I think we've done a pretty thorough analysis, our credit procedures are sound so we have one isolated situation, that is not to say it couldn't happen again. We don't see this as a recurring issue affecting our business.

Okay. And Susan, in terms of strategic initiatives from just a very big picture perspective, can you give us an idea of not specifics of what you're doing but as I mentioned from a big picture perspective, how you expect these investments in strategic initiatives to drive your business? Is it a new line of business? Is it more efficiently delivering the services you currently offer?

I would say it is more the former, the latter we're always doing and always should be doing and so we don't consider those of major strategic new offering per se. It is more a continuous improvement of what we already do. The ambulatory surgery centers offering that I mentioned is probably a good example of one of the types of new offerings where we're taking our business model and expanding it into a new client base.

Right.

Especially looking at those where we think you'll see greater growth. They're admittedly, small markets today. But they're areas where there's believed to be greater growth in the future. It does two things for us. It gives us a new client but a client that's very similar to our existing client. And helps to maybe mitigate risk of some of the patient load that might shift from the acute care setting to those settings over time or from the physician's office to those settings but also gives us another work environment to offer to our healthcare professionals and we believe that's been a real part of our draw is being able to offer our clinicians a very broad, diverse set of work assignments and this just adds to the continuation of that strategy.

Why haven't they used the service in the past? Has it been?

I don't think there's been as much of a demand because -- in fact, many of the nurses in the hospital settings have been drawn to those surgery centers.

Sure.

But they are now also finding themselves in a position of shortages and also, as you see more regional and national players emerge through consolidation, it provides more opportunity to serve those markets in a more efficient manner. There are 5600 licensed ambulatory surgery centers nationally and they've been growing at 12%. It is a great market but it historically has been very fragmented. We think that it is starting to come together which will provide us a good opportunity to take our national offering and take it to the 5600 facilities. The other side to that opening up more clients, opportunities for us and more work assignment. New disciplines that we can branch into, again taking what we already do well and then -- and expanding that into a new clinical area mentioned dentistry a few times, something we did last year. We launched into lab technicians earlier this year and we'll continue to look for those opportunities.

Okay. Thank you.

Thanks, Jim.

Thank you. Our next question comes from Michel Morin from Merrill Lynch.

Hi, Michel.

I wanted to follow-up on a earlier margin on the locums margin. At the contribution level, David, did you say that you feel that you are trending toward the 8% goal for this year?

Yes. We have been low but basically, our trend line is to get there. It is a going forward. I mean this last quarter there was pretty high insurance expenses, et cetera. We had the bad debt charge. So, that's not representative on a go-forward basis. Absolutely, we still intend it to be hovering to the 8% going forward.

Could you -- would you be able to quantify what the bad debt situation was in the quarter?

It was about $600,000 total. And so that's the impact that they had on the gross margin. The insurance effect was a little bit higher than normal. They probably had under $2 million but probably about $1.5 million of higher expenses than previous quarters. And so we expect that to normalize next quarter as well. So, those two events were not representative going forward. Insurance, if I could just spend one second on that, we'll see it have its peaks and valleys. We do partially significantly self-insure and so you'll see it kind of -- wavy a little bit on a quarter to quarter basis as you've seen historically but when you look at the percentage of revenue on a full-year basis, it has been fairly consistent. The locums, it is running about 2% of revenue. And that's been pretty consistent on a year-over-year basis. So, as we grow in size, obviously, the revenue growth helps to keep that as a more steady percentage as well.

And the insurance portion, does that also fall in the gross margin line?

No, it is in the SG&A. EBITDA margins there.

Right. Okay. And then on the perm side, you had a favorable claims settlement. Could we quantify that as well?

Sure. Basically, it is about close to $1 million.

Okay.

I'm sorry. Our piece of that, I'm sorry, is $250,000. I apologize.

$250,000. Okay. The strategic initiatives, the increased spending on that, is that something that would continue at the rate that we saw in the second quarter or is it a little bit more of a one-time spend?

It is a little bit of both. We will absolutely be continuing to invest in these new areas and we don't -- certainly have the revenue and margin generation yet to fully cover them or at least not at the normal EBITDA levels. So, certain amount, we absolutely will continue every quarter. But there was a little bit extra in the second quarter to help us get some things off the ground. And I don't think we really want to quantify that.

Okay. That's fair. And then just finally, Susan, you did a good job of walking us through kind of from a geography perspective how things look from a demand perspective. Did you find supply of candidates to be a constraint to your growth this quarter?

I think it is always a constraint. We can always use more supply to fill that demand. So, yes. It is an issue. But it is not as significant of an issue as I think I've heard out in the market place. Our unique new applicants are down single digits year over year so it's certainly a little bit of a hold back for us. But it is not that much of a driver. And what's interesting is as we look at our new placements, our new travelers that are going on assignment is actually up year over year. That's not all just new supply. Actually, the percentage that's brand new applicants, as a mix is down a little bit but what's up are individuals that have applied with us in the past. Say more than six months ago and have never traveled with us. That's our largest component of new travelers on assignment. So, that's -- and that's a good reflection of our recruiters, really digging in deep to the travelers that they've known and tried to build relationships over the years. And getting them to convert from perm to travel at this time.

And your renewal rates, how have those held up?

They have been pretty steady to last year.

Okay. Great. Thanks very much.

Thanks, Michel.

Thank you. Our next question comes from Ty Govatos of C.L. King.

Hi, Susan, hi, David.

Hi, Ty.

Back to the SG&A for a second, those are pretty big swing factors on the insurance. Can I expect the SG&A to decline sequentially in the third quarter or will we use the cushion for more investment spending?

SG&A as a percentage of revenue, is expected to decline in the third quarter. I think, our run rate, as I mentioned in terms of insurance, was again settles out fairly quickly. So, third quarter, you'll see it lower in the locum tenens segment. Our baseline we've been running has pretty much been the 18.5% to 19% as a percentage of revenue consolidated. And we just finished a much higher 19.2%. So, yes, you'll see it come down third quarter and I think we anticipate the trend in the mid 18% range going forward.

Okay. So, in other words, it is going to stay pretty much at the $60 million absolute level.

Thereabouts, yes.

Okay. Thanks an awful lot. I appreciate it. By the way, great quarter.

Thanks, Ty.

Thank you.

Thank you. Our next question comes from David Bachman with Longbow Research.

Yes, good afternoon. I want to follow-up, I think on some of Michel's line of questioning about dynamics on the supply front. Is there something unique with what you're doing that would be attracting travelers away from competitors or we would assume that Nurse and Allied travelers would be talking to a number of different customers and when it comes down to making that decision, what are the things they're really focusing on?

Sure. I do think it makes a big difference and it is probably one of the reasons why -- in a tight market, we'll admit it is a tight market and very competitive, that we seem to be taking some market share. First and foremost is really the recruiter and the relationship that the recruiter is able to build with that traveler. And that comes from hiring great people but also developing and training them so that they can build those relationships and that you've got good follow-up and service mechanisms. Second would be being able to offer a more diverse set of assignments to your candidate. Travelers don't usually want to travel on just one assignment so it is great if you've got that sweet exclusive. But really, they want to take three, four, five assignments. So, our strategy has been to have more assignments in more locations across the country and I think that that is a draw for travelers, especially when the demand might seem to be tighter across the country, that we've got more to offer them. The other thing is that we have a very competitive benefits offering and by that, I don't mean that we pay a lot more than others. I think we're competitive in our pay practices. Where needed, we do try to juice it up a little bit. But overall, we're pretty balanced. But what we have done is we've tried to invest in other areas that we feel can differentiate us and create a stickier relationship with the traveler long-term. Realigning our benefits to really appeal to those people that are going to be with us longer term, investing in our technology to provide important services to travelers so that they can stay connected with us. It might seem like small things but when a traveler is trying to make a decision of who to go with, they're going to look at all of these little added features that we can offer and so I think that those benefits and investments that we've been making over the last few years are starting to pay off for us.

Okay. And so would you say that those three things or so that you've listed there, that you would say that you've come significant distance on improving those over the last couple of years? Or since maybe the last kind of downturn?

I think that we have incrementally made some very important changes. We've also realigned our teams internally and because of that, I think they're working more closely and in a more efficient collaborative manner and that's helped as well. So, some of it is internal. Execution as well as it is maybe apparent externally to our travelers.

Okay. I guess what I'm just getting at is sometimes it is some of the softer stuff that's being done that actually shows up on the bottom line.

You're absolutely right.

Well, I think most of my questions have been answered but did you give me guidance on the share count assumptions for the third quarter?

No, I can give you that though. Basically, we're still -- second quarter, we finished at 34.3 and we're pretty much estimating about 34 for the third quarter and actually, the full year average will probably be close to 34 as well.

Okay. For the full year. Okay. Then just one last question. You mentioned the ambulatory surgery centers. Are there some other customer groups or end markets that we should be thinking about that you've seen any -- getting any new traction in over the recent months?

There are but since we haven't launched them in the market place, I would prefer not to reveal them on the call if you don't mind.

Got it. Thank you very much.

Thanks so much.

Thank you. And our next question comes from Michel Morin with Merrill Lynch.

Just a quick follow-up. On the gross margin front, when you look at your Nurse and Allied segment, how much -- I realize that the outlook for the rest of the year is relatively stable. But as we -- if we take a longer term view here, Susan, is there still some room for these margins to go further if you maybe look at this in a historical context?

Yes, if the demand and pricing pick up more significantly. I think based on our current demand and the current pricing we're seeing and kind of the 3% to 5% range to maintain stable margins is probably, for us, our best strategy. Should demand pick up more significantly and we're able to get pricing above 5%, I think we could expand our margins. That's what you saw if you're referring to kind of the early 2000s.

Right. Then did Platinum Select have an impact on your margin in the segment?

Very little. Not really.

Okay. Great. Maybe just finally, Susan, I don't know if you've shared this before but if you could, it would be great. California is your biggest market. Could you quantify how big that is for you and maybe the top three states, how big they are for you?

Yes, we have usually 20 to 25% of our business in California. For nursing, it tends to be a little closer to the 25% and that's been pretty steady over the last couple of years. Even with some of the fluctuations we've seen in demand. It has been pretty steady. Then because we do a little bit less business in Allied and Physician, our overall number tends to be around 20%. In terms of the top states, it is interesting. It used to be California, Florida and Arizona. Were the top states. And now we've mentioned Texas coming on very strong. Some states in the northwest. I don't want to name them specifically. Even though we know our competition is there. We're making some great progress. So, I'll just say it is not Arizona and Florida anymore. That's for sure.

Great. Thanks very much.

Thanks so much, Michel.

Thank you. And our next question comes from [Jason Amuro] from King Investment Management.

Already been answered. Thank you.

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We would like to thank everybody for joining our call today and for your continued interest in AMN. And we look forward to updating you on our progress next quarter.

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