AMN Healthcare Services Inc (AMN) 2008 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the AMN Healthcare Third Quarter 2008 Earnings conference. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session with instructions being given at that time. (Operator Instructions). I would now like to turn the conference over to our host, Vice President of Investor Relations, Mr. Christopher Schwartz. Please go ahead, sir.

Good afternoon. 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 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 web cast is available at AMNhealthcare.com/Investors and will be available until November 13, 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Developments subsequent to this call may cause these statements to become outdated.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 its next earnings release.

I will now turn the call over to Susan Nowakowski, AMN's Healthcare's President and Chief Executive Officer.

Thank you, Chris. Good afternoon, everyone. Thank you for joining us today.

For those of you who know the AMN team, you know that we are quite disappointed to be reporting results which fell below our expectations for the quarter. This is the first time in our history as a public company that our earnings were below the low end of our expectations. However, as we'll share today, there were certainly positive results in the business and progress in building market share and launching new service offerings, particularly within our nurse staffing division.

In addition to the normal operating results, there were also some non-returning charges and tax adjustments that impacted the quarter. I'm going to focus on the operating results and industry trends and David will discuss the other adjustments later in the call.

So now let's turn to the business. AMN's revenue for the third quarter was $315 million, 5% higher than the same quarter last year, while adjusted EBITDA excluding those nonrecurring charges from this quarter decreased about 2% compared to last year.

This quarter's gross profit was up 2% over last year, though gross margin fell about 90 basis points, due mainly to a change in our revenue mix. The drop in margin was mostly due to the lower contributions from our international travel nurse business and the physician perm placement business.

The team is doing a very good job of managing expenses amidst a slower revenue growth environment while still staying committed to making investments in emerging market opportunities.

This is best reflected by our relatively flat SG&A as a percent of revenue and gross profit excluding those non-recurring costs associated with the pharmacy business.

In our largest segment of Nurse and Allied staffing, revenue grew 6% over the prior year and 1% sequentially. Year over year the addition of Platinum Select was the biggest contributor to this growth while the volume declines in our international business continued to be the biggest drag on growth.

Our travel nursing division performed very close to expectations for Q3 with revenue up 2% over prior year and 2% over prior quarter. We believe this performance is well ahead of our competitors.

During the quarter, placement volumes for future assignments in the travel nurse division were also up about 1% over prior year. Nurse Choice, which is our quick start, short-term staffing business, experienced strong double-digit revenue growth year over year. It - and this exceeds growth rates reported by other companies in this particular niche.

While our competitors in the larger traditional travel nurse segment have yet to report, we do believe that our results will reflect a noticeable gain in market share. This is a real testament to the strength of our multi-brand strategy and the talent and hard work of our nursing sales and service team.

Looking forward, however, the demand environment does appear more challenging as we've seen open orders for future assignments decline during September and October. The largest decline has been in the Southeast, particularly Florida. California has also softened a bit, although not to the extent of Florida and other East Coast states.

Our bright spots are the Midwest and the Northwest where we are seeing some strong year-over-year increases in orders.

In our travel allied business, rehab therapy showed strong double-digit year-over-year growth in volume and revenue. However, the continued softness in demand for imaging disciplines created some offsetting declines. To address the shift in the market, we have continued to move and reallocate resources from imaging to therapy and into other growing specialties such as lab technicians.

For both nursing and allied staffing, pricing continues to remain stable or growing, depending upon the specialty.

Our ability to recruit new supply of quality candidates tracked very closely to last year and re-book rates of existing travelers are also tracking in line with the prior year. Gross margin in the nurse and allied staffing business narrowed by about 60 basis points compared to last quarter. However, the underlying profitability of the core business remained relatively stable if we exclude the effect of the international division.

As you recall, we acquired our pharmacy staffing business in 2007. While a relatively small piece of our revenue, we do believe that this service line is an important strategic offering to our clients. Unfortunately this group had been underperforming relative to our expectations. And so we made some critical leadership changes and staff reductions during the third quarter to reposition the organization. We've already seen improvements in the business.

Now turning to our Locum Tenens staffing business, although short of our expectations, the division did achieve revenue growth of 3% compared to last year and 2% compared to last quarter.

This growth was mainly driven by volume, which rose 3% annually. Revenue per day filled was virtually flat year over year, mostly due to the lower mix of some of the higher bill rate specialties such as radiology.

Drilling down into our different specialty groups, behavior health showed by far the strongest growth followed by primary care. Each produced double-digit revenue growth year over year and increased volumes and pricing.

Dentistry though still relatively small continues to show a lot of promise for the future, delivering double-digit year-over-year volume and pricing growth. Radiology on the other hand continues to see a negative impact from lower reimbursement rates to imaging centers. In addition, there is anecdotal evidence suggesting a growth trend on the part of patients to delay elective procedures, which likely explains the slightly softer results we are seeing in surgery and anesthesia.

Pricing continues to be relatively firm in Locums with the exception of radiology. On a sequential basis, overall revenue per day filled increased about 0.5%, which was led by primary care and surgery.

We do believe that even amidst the external factors that are affecting our Locum Tenens staffing business, we could be performing better with improved processes and sales strategies.

To this point, on October 20, Tim [Bose] joined us as the new President of our Locum Tenens business, replacing Joe Caldwell, who recently decided to retire. Joe built a strong team at Staff Care and led the company from inception to the number one position within the Locums industry today. And although we are sad to see Joe go, we believe that Tim is the right leader to continue the evolution of Staff Care and to build on our performance in this expanding segment. Tim brings to AMN a proven track record and highly successful career in sales and marketing, most recently as National Vice President of Sales for Cardinal Health's Pharmaceutical Distribution Services Division.

Tim joins us at an important time and we look forward to his leadership impacting Staff Care and the overall AMN sales strategy.

In our physician permanent placement segment, revenue in the third quarter fell by 5% compared to last year and 7% sequentially. Most of this shortfall was due to an adjustment in the sales allowance. Still, even the otherwise relatively flat results were not what we expect from this business longer term.

There are no public comps specific to physician permanent placement. However, it does appear that other firms in the larger general retained search market are also experiencing reduced or slower revenue and volume trends.

We continue to make infrastructure changes to improve our performance and build stronger relationships with our clients and our physicians.

As I mentioned earlier in the year, we have several initiatives focused on further diversifying our product lines and broadening our client base in order to expand our revenue growth opportunities. Some of these initiatives will generate minimal revenue for 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 in June. Another is the launch of a recruitment process outsource offering, which was announced earlier in October. AMN RPO will manage the entire recruitment, screening, and selection process from job requisition through new hire onboarding for facility clients. AMN's experience in recruiting and credentialing thousands of clinical professionals every year will allow us to improve a facility's time-to-time and the quality of the candidate pool, resulting in reduced hiring costs.

We plan to focus on nursing first and to work with partners to support the non-clinical hospital recruitment.

Spending on these initiatives contributed to a modest increase in SG&A this quarter. However, we believe these efforts are well timed to continue building the business to match the changing trends of healthcare.

And at this point, I'd like to turn the call over to David, who will give you a bit more detail on the third quarter and the fourth quarter outlook.

David?

Well, thank you, Susan, and good afternoon.

Consolidated revenue for the third quarter was $315 million, 5% higher than the third quarter of last year and 1% higher than last quarter. The year-over-year increase in revenue was due mainly to the acquisition of Platinum Select in February of this year and volume growth in the Locum Tenens staffing segment.

The sequential increase in revenue was mainly due to growth in our short-term nurse business and Locum Tenens segment.

Third quarter revenue came in 2% lower than our revenue guidance given on August 6, mostly from volume slowing during the second half of the quarter. Consolidated gross margin in the third quarter was 25.7%, down 90 basis points from last year and 80 basis points from last quarter.

The year-over-year decline in gross margin was driven mostly by lower gross profit contribution from our higher margin businesses such as international nursing and the physician permanent placement and a shift in the mix of specialties within our Locum Tenens staffing segment.

We anticipate gross margin to remain fairly stable in the fourth quarter and end the year at approximately 26%.

SG&A expenses in the third quarter were up 8% over last year and remained relatively unchanged from last quarter. The increase in SG&A compared to last year was mainly attributable to the acquisition of Platinum Select in February along with the charges for both restructuring and legal expenses associated with our pharmacy staffing division. These charges also contributed to the increase in SG&A compared to last year.

Excluding the restructuring, legal, and other nonrecurring expenses associated with the pharmacy business, SG&A as a percentage of revenues would've been 18.6%, flat compared to the same quarter last year and down compared to last quarter.

Depreciation and amortization expense in the third quarter was $3.8 million, up 26% over lest year and up slightly from last quarter. This expense is comprised of $2.6 million in depreciation and $1.2 million in amortization. Compared to the same quarter last year, depreciation increased by $600,000 due mainly to internally-developed software projects placed in service in late 2007.

Amortization increased $200,000 compared to last year, due mainly to the acquisition of Platinum Select.

Depreciation and amortization in the fourth quarter are expected to remain stable with the third quarter as a percentage of revenue.

Net interest expense in the third quarter was $2.5 million, down 17% compared to the same quarter last year and down 4% compared to last quarter. The year-over-year decrease reflects the paydown of $36 million of our term loan and lower LIBOR rates over the past year.

The effective income tax rate for the quarter was 34%, below the 40% to 41% rate that we have guided throughout the year. This was the result of our identifying an income tax matter that impacts the travel healthcare staffing industry. Since nearly the inception of the industry over two decades ago, it has been common industry practice for companies to offer lodging per diem payments. However, we recently became aware that a portion of these per diem payments may not be fully deductible for income tax purposes. We have determined that the impact of this matter for AMN was immaterial to previously issued financial statements.

This quarter's financial statements, along with future financial statements, will reflect adjustments for these tax changes. The company has recorded in its current consolidated financial statement income tax benefits, causing the effective rates to be 34% and 33% for the third quarters of both 2008 and 2007 respectively.

These changes will also cause some variation in our future quarterly tax rates, including the fourth quarter of 2008 when we estimate our projected quarterly effective tax rate could increase to as much as 49%. However, for the full year 2008, our effective tax rate is expected to only increase to approximately 43% or 44%.

Earnings per share of $0.28 was 12% higher than last quarter but 17% lower than last year after reflecting tax adjustments in the second quarter of $800,000 and a benefit in the third quarter of 2007 of $2 million.

earnings per share this quarter included a $0.03 charge for restructuring of legal expenses in our pharmacy staffing division and a $0.01 charge for establishing a sales allows in our permanent placement business offset by the $0.04 impact from the lodging per diem tax benefit.

As Susan mentioned, this quarter's earnings per share was also 3% below the low end of guidance.

Fully diluted shares outstanding during the third quarter were 33.9 million, down 3% from last year and 1% from last quarter. We repurchased 1.2 million shares of our common stock during the third quarter at a cost of approximately $22 million.

After taking into account the repurchases completed so far, we have $9.6 million available for repurchases under the plan through the first quarter of 2009.

The company generated $21 million of operating cash flow during the third quarter, which when combined with $6 million of net cash on hand and $112 million of revolver draw-downs were used primarily to fund share repurchased, pay estimated tax, and service our debt. We ended the quarter with $158 million of debt. Our leverage ratio was 1.7 times trailing adjusted EBITDA as compared to 1.6 times a year ago.

DSO at the end of the quarter was 56 days, down 4 days from last year and down 2 days from 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 $217 million, up 6% over the prior year and 1% sequentially.

Travelers on assignment averaged 7185 this quarter, up 4% year over year and stable with last quarter. Gross profit per traveler per day in the third quarter decreased 1% year over year and 4% sequentially, driven by a reduction in our international travel count and the narrowing of bill/pay spreads.

The adjusted EBITDA margin for this segment was 6.3%, down 140 basis points from last year and 150 basis points from last quarter due to lower gross margin and higher SG&A related to the restructuring and legal expenses associated with the pharmacy staffing division.

Revenue in the Locum Tenens segment increased to $85 million this quarter, up 3% from last year and 2% from last quarter. The year-over-year increase was driven by higher volumes in our primary care and behavior health divisions. [

Days filled volume overall for the Locum Tenens business increased 3% year over year and 1% sequentially. Gross margin was 26.6%, down 40 basis points from last year and up 80 basis points from last quarter.

The adjusted EBITDA margin was 7.8%, down 130 basis points from last year and up 270 basis points from last quarter due mainly to last quarter's higher insurance costs and bad debt expense, along with the higher gross margin this quarter.

Revenues for the physician permanent placement business were $12.6 million, down 5% from last year and 7% from last quarter. Included in this quarter's revenue was the addition of a sales reserve adjustment of $500,000. Excluding this adjustment, revenue would've been stable with last year and down 3% from last quarter. Gross margin was 57.5%, down 270 basis points year over year and down 220 basis points from last quarter. Although placements and new searches were down over prior year, they were up sequentially over last quarter. Adjusted EBITDA margin for this business was 22%, down 80 basis points from last year and 660 basis points from last ():q.

Now I'll provide you with our revenue and earnings guidance for the fourth quarter and the full year.

In light of the uncertain economic conditions and the potential impact on our industry, we are reducing our previous expectations for the fourth quarter. Revenue is expected to range from $295 million to $300 million and diluted earnings per share is expected to range from $0.20 to $0.23, which reflects a tax expense adjustment of $0.02 for lodging per diem.

For the full year, we expect revenue to approximately $1.22 billion and earnings per share to range from $0.99 to $1.02, which reflects a full-year impact of $0.03 tax expense for lodging per diem.

If we exclude this quarter's $0.03 charge for restructuring and legal expenses in our pharmacy division and the $0.01 for adjusting the sales allowance in our permanent placement business and the full $0.03 full-year tax expense impact of the lodging per diem, the pro forma full-year earnings per share is expected to range from $1.06 to $1.09.

Now I'll turn the call back over to Susan.

Thank you, David.

Despite the challenges we've discussed, we are making very good progress and continuing to strengthen the business for the future. During these times, we have rededicated ourselves to focus on three key aspects of our strategy -- first, continuing to capture more market share; second, to innovate and drive efficiency and productivity gains, which should further reduce our cost structure in the future; and third, continuing to expand and diversity our business by pursuing emerging market opportunities and responding to the changes within healthcare delivery.

We are working to ensure we remain nimble in the short term, but at the same time we're continuing to make appropriate investments to be well positioned in the long term.

And with that, we would like to open up the call to your questions.

Thank you. (Operator Instructions).

And our first question comes from Tobey Sommer of SunTrust Robinson. Please go ahead.

Hi. This is Frank in for Tobey. Can you hear me?

Yes, Frank.

Hi. I wanted to try and get an update from you on what you see going on in kind of the H-1B visa situation and what your thoughts are about that going forward?

Well, we haven't seen a lot of movement. And there's H-1Bs, which actually don't - really aren't so relevant for our nurses. Nurses are generally coming over on green cards. And so there hasn't been any new progress made. We have had legislation attached to a variety of bills over the last few months and they've just not made any movement, as has nothing really I think on the Hill. And so we don't expect there to be any immediate changes within the immigration legislation.

As you'd expect, we continue to adjust our infrastructure kind of relative to the size of that business.

Okay. And going forward in terms of your use of cash, how are you looking at that balance from repurchases versus looking at opportunities?

Well, we still have our repurchase program open through the end of first quarter of '09. But we are also looking at strategic acquisition opportunities in those areas that are going to be important to us in the future. Don't want to discuss specific items, but when we talk about our desire to expand and diversify into some of the emerging growth areas, and also to continue to position us to be a stronger longer-term partner with the hospitals, we are very serious about looking at target opportunities that would help us make those steps.

So that would be our first priority if those opportunities exist. Otherwise we have the stock buyback in place.

And generally speaking, Frank, we are accumulating cash. So that's kind of our trend. We, of course, pay our debt down as we've always done and we'll continue to do that. We have a revolver, a $75 million revolver. But - so we're, of course, focusing in on the conditions. And the key there would be pretty much collecting and holding onto cash.

Okay, great. And I guess physician perm was down a little bit year over year. Can you talk about some of the drivers of that and can you put any more color on that?

Sure. One of the drivers was this kind of one-time sales adjustment that we took in the third quarter. But even if you strip that out, the business was relatively flat on a year-over-year basis. We really don't believe it's a market opportunity situation, although you have to believe that there's some hesitancy and uncertainty amongst both the hiring facilities and the providers themselves. That can be having some impact. As I alluded, there are other large retain and search firms that certainly are seeing that impact in kind of the general professional area.

But we do think we can be doing better than flat on a year-over-year basis. And so we continue to make some information changes and some sales strategy changes that we think will help position us better in the marketplace.

Okay. And if I could sneak one last numbers question in, what is your share count for your guidance for 4Q (inaudible).

Yes, our fourth quarter, our estimate right now we would be about 32.9 million shares fully diluted. And on a full year-end average of about 33.8 million shares.

All right, great. Thanks so much.

Thank you, Frank.

Thank you. And our next question comes from Jeff Silber; BMO Capital Markets. Please go ahead, sir.

Thanks so much.

I was wondering if you could give a little bit more granularity in terms of your guidance by segment. I know you don't usually do that, but even just some general trends would be helpful. Thanks.

You're right, we don't provide that level of guidance. Directionally the fourth quarter does typically see a downturn in the Nursing, Allied, and even Locums business due to the seasonal effect of people taking off time over the holidays. So there's a certain amount of that decline, which is expected, normal, seasonal impact. But we do believe it's slightly more exaggerated this year because of the uncertain economic environment.

So kind of hard to give you anything more specific than that, Jeff, because, again, we don't provide that segment-specific guidance. But maybe that's a way of saying it's kind of across the board.

Okay, that's fair enough.

In terms of bill/pay spreads, can you give us a little bit more insight in terms of what happened in Nurse and Allied, as well as Locum Tenens and what do you think will happen in the current quarter and going forward?

Sure. Well, generally we expect our margins to be relatively stable going forward. Some of the kind of expansion in the pay-to-bill spread we've seen on a year-over-year basis was somewhat deliberate in that we did start to raise pay rates at the end of last year and the beginning of this year. As you recall, we had a bit of a lag last year when we were getting some decent pricing increases, but weren't getting them passed on as quickly to the nurses.

So it's not as though we've changed any strategy in a particular way. It's a little bit of a catch-up from some of the very targeted pay rate changes that we made kind of late '07 and early '08. And as you start to place more people into those assignments, you're seeing that effect.

Within the Allied business, it's a little bit more of a mix shift issue. Certainly it is very competitive, particularly in rehab where you have a huge, huge demand for therapists and a very tight supply, but I think more of the impact that we've seen there on margins is because of the mix shift from a declining imaging business to more on the therapy side.

Locums going forward, we expect it to be relatively consistent with what we've seen over the last couple of quarters.

Okay, great. I wanted to circle back to the tax issue. David, maybe this one's for you. I just want to make sure I understand it. So you took a benefit for this issue in the third quarter and there's going to be a negative impact in the fourth quarter. Is that correct?

That's correct and that there was a benefit third quarter of this year and also a benefit third quarter of last year. We're expecting a expense (inaudible) let's say $0.5 million of tax for the quarter. And as I suggested, when you look at the full year this year, it's going to be probably under $1 million. Again, that's an estimate. But there is a bit of a variation as to quarter to quarter for the impact of this adjustment.

Again, are there going to be any other adjustments retroactive to any other product orders?

We're - if the question is to restate, no.

Yes, restate, that's what I mean, I'm sorry.

No, we're not doing that. When we give comparatives, though, we will reflect that so you have a apples-to-apples comparison now.

Okay, great. That'll be helpful.

And I know you're not giving '09 guidance, but what kind of normalized tax rate should we be using going forward?

A little bit tough to estimate right now. I mean, certainly for the year, this year as I mentioned it's probably the 43% to 44% for the '08 year. I think for '09 it's a little early for us to give guidance on that.

Okay, just a couple quick numbers questions, then. In terms of third quarter revenue growth, if you could strip out the acquisitions, what was it?

Organic growth on a both year-over-year and annual basis, pretty small. I think the year-over-year, it's pretty much flat. It's slightly positive when you strip out the acquisition.

And all of the acquisitions were booked in the Nurse and Allied division?

Yes.

Yes. The primary one is the Platinum Select.

Right, because Rx - right, Rx Pro, well, you've already anniversaried that, okay. And then finally in terms of CapEx for the fourth quarter, what are you looking for?

Pretty much the similar rates. In the fourth quarter, we're estimating right now about a $2.7 million -- I'm sorry, yes, I'm sorry, about, yes, $2.4 million for the fourth quarter. That's a little higher than this last third quarter, which is about $2 million.

Great. All right, I'll let somebody else jump on. Thanks.

Thanks Jeff.

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

David, following up on Jeff's questioning, you're saying we should use an effective tax rate of 49% in the fourth quarter?

Well, we're saying it could be up to that. So we're not giving an exact number, but yes, so the point is there is a variation quarter to quarter, but yes, right now, for fourth quarter, that would be a conservative estimate to use.

So that $0.20 to $0.23 range incorporates 49% at the $0.20 number and maybe a lower number at the $0.23 number? Is that accurate?

That - well—

It incorporates the 49% for both ends of the range.

(Inaudible) right.

Oh, okay, so range more has to do with revenues and expenses.

Yes, it does.

Where you ultimately come in in the range.

Correct.

That's correct.

Okay. But, I mean, and for next year, while it's too early, I mean, would it hurt to say it's going to be 43% or 44%? It would be - are you things that you could do that could bring that lower? Is that what you're saying?

Well, there could be. And I think those are things that are unknown right now. But you're absolutely right. There are things that could be done and we're definitely in an assessment phase of what those things are. So we really can't estimate because it's still early for us to figure out exactly what actions we're going to take.

Okay. And shifting to the Locum segment, that segment within AMN continues to kind of lag the industry growth rates. Can you give us an idea of what steps you're taking to try to bring that growth rate back up and then what time frame we might expect that the changes might - if there are any are going to take effect?

Sure, Jim, very valid question and one we've been obviously been working closely with our team on.

The first is we have been I believe more impacted by the radiology changes than probably the rest of the market. We had built up a huge radiology business over the last three years. It was growing 25%-plus year over year for a couple of years there. And so we're probably falling harder than some of our competitors in that particular piece of the business.

In addition to that, though, we've had some challenges within a couple of our regions where our teams are just not - have not been performing at the levels we believe they're capable of and frankly not at the levels that they've historically performed at. And so during 2008, we've made some leadership and infrastructure changes within those particular divisions and we're starting to see some good results sequentially, so a little bit early to tell, but, you know, definitely from second to third quarter, some of those divisions made some very significant improvements.

The other thing I believe is that we do need to continue to evolve our sales strategy within that group. And as I mentioned, Tim coming onboard I think will be a great benefit to that group to help take our sales strategy to the next level for the organization. We've grown very quickly going from - starting in '92 to today, the industry leader at over $300 million in revenue. And so we need to continue to evolve the strategies that are necessary to take it to that next level. We see no reason this segment can't become a $400 million to $500 million segment over time. But we do need to make some internal changes, both in process, sales strategy I think in order to make that happen. We've identified what some of those are, but I also think Tim will help add to that.

And probably the last item that I would mention is that we have made a strategic decision about four years ago, actually prior to us owning the business, but I believe it was the right decision to not be in the emergency room staffing business due to at that time the high exposure to malpractice claims. And so that is a segment of the industry that from what we understand is doing extremely, extremely well because of the fact that more patients have been going through the emergency room for their care as opposed to maybe going to the physician's office. And so emergency room visits have generally been up whereas some of your other areas like surgery have been down. So I think we possibly missed out on an opportunity there. We'll see long term. It probably is still the right decision from a risk exposure and - but we'll continue to reevaluate that as we think about how we grow the business.

I would just add that - and just for the benefit of the division, there was some parts of the business, like primary care, that's been having a good year. Behavioral health has been a strong segment for us. And we've always talked to you about radiology and that's definitely been a material part of our business that is depressed. So I would not suggest that it's across the board. We have some pretty strong divisions that are definitely—

Growing double digits.

Exactly.

Yes.

Is Tim going to be in charge of both physician temp and perm?

No, he's President of Staff Care, the Locums division.

Oh, only - I didn't catch that, okay. Shifting to Nursing and Allied, but really, this question more has to do with Nursing than Allied, obviously has been a very tough industry now for years with maybe some growth spurts here or there due to some regional differences or the minimum nurse-to-patient ratio laws, for example, in California. Looking out over the next couple of years, what do you think can get this industry going again? What do you think it's going to take domestically? I understand the international challenges, so let's exclude that for the moment, but domestically what do you think it's going to take to get this industry going?

Well, first of all, I think our team is doing an absolutely fabulous job of driving growth and market share. And you're right, a very tight market today. And as I mentioned, the short-term travel nurse segment and division of the company has driven growth in an environment where I hear other competitors talking about declines on a year-over-year basis or at least flat. So that tells me that a lot of the tactics and initiatives that've been put in place over the last couple of years, but even since the beginning of the year are making an impact. So we believe kind of relative to the market growth, we can grow at a faster pace within the traditional travel nurse industry. For that matter, our quick book short-term assignment business, Nurse Choice, is doing extremely well, growing double digits.

But I realize investors are looking for more than 2% year over year. We think we need to continue as a business to expand our partnership with the hospitals and be not just kind of that fix for a short-term 8-week or 13-week assignment, but to be more of a partner in how they manage their overall recruitment and labor needs. And that's why the launch of our RPO business is so important because we help get to the heart of really one of their biggest pain points and that's the recruitment of permanent nurses. I think I've heard numbers something like 95%-plus of all nurse hires in the US are made into permanent positions in hospitals. And we don't participate or help [our] hospitals [and] do a better job that. So we think that we can grow not only our market position, but actually kind of grow the overall staffing/services segment of the industry by launching that service line.

Okay, thanks.

Thank you. And our next question comes from AJ Rice of Soleil Securities. Please go ahead.

Thanks. Hello everybody. Just to maybe take off from the last comments you were making, first of all, you have in the press release, as well as in your prepared comments (inaudible) some of the best market share gains possible (inaudible) market share gains we've experienced year over year in some time.

Is that basically in the nurse staffing area in your mind? Or is that - in the travel nurse? Or is that across the board? And maybe flesh out a little bit what's the basis for making that comment and is it a regionally-oriented comment (what it means)...

No, it's a national comment. And it is based on our traditional travel nurse, the 13-week assignment type of business, which is the biggest piece of the overall industry, of course, in travel nurse staffing. You do have the smaller niche of kind of the quick start short assignments, which we do as well, but it's just a smaller piece of our business and a smaller piece of the overall market.

And how we track market share, admittedly there's not a lot of public data available other than what our competitors who are public might announce. And as we look back at the second quarter, it was very clear that we took market share both in terms of our volume growth in the third quarter, but also in terms of the placement volumes we were experiencing for future starts versus what our competitors were claiming.

We also do get some limited reporting from some of our larger clients as to how our market share is stacking up against the competitors. And it's pretty clear we've made some gains over the last year in building a stronger piece of the business within those clients.

Okay. And then the other sort of bigger picture question I was going to ask you, typically for you guys and the other - especially the travel-oriented companies, the quarter ahead is pretty much a given when you give guidance and it's really sort of what is your update relative to that (inaudible) next quarter because your placements come with some visibility for the next three months. And I guess this is the first time I can remember that you guys are coming in and saying in the actual quarter we haven't made the guidance we've given. Is there some dynamic, either the way the business has expanded or otherwise that now makes it less predictable even for the quarter ahead? Can you give us some flavor on that?

Yes, there has not been a change in necessarily how the clients are booking, but relative to our history, we do have a larger piece of our business in the physician and allied segments. And you do have more short-term and sometimes quick bookings, particularly in allied where they may get an order and they want somebody to start in four or five days versus nursing where you're generally booking kind of three to four weeks in advance. So I'd say in the allied business in particular, there is less visibility. And that's what we saw. That was one of the impacts in the third quarter. We were moving along as expected kind of through the mid part of the quarter and then we saw our allied business volume drop off -- well, not meet our growth expectations I should say in the last half of the quarter.

A little bit within the physician side, too. While the majority of our physician business is pre-booked and longer term, there is a certain amount that is a little bit per diem-like and more local placements and short-term assignments. And so it's a little bit harder to predict than say the nursing business.

Okay. And then maybe finally I'll try this aspect of it. I know (inaudible) holidays, fourth quarter can be lighter, but there's also the dynamic at least in some markets that hospitals are anticipating Snow Bird volume or whatever. And I guess that's ore in Florida than the Western part of the country I guess where you tend to be stronger. But how is that dynamic? Is that - have you seen any normalcy there? Or are people being very cautious (inaudible)—

People are being cautious. I think I mentioned in my prepared remarks that we've seen softer demand in Florida in particular and when we get feedback from our clients, it's generally been that there is certainty around their admissions levels based on the economic environment and whether or not they'll get the same tourism patient population that they've seen in the past.

Is Florida the only market where that would really be relevant or the primary market.

That's the primary one. I mentioned that we also have seen some softness, not to the same degree, but some softness in California.

Okay, all right. Thanks a lot.

Okay, thanks AJ.

Thanks AJ.

And our next question comes from Michel Morin from Merrill Lunch. Please go ahead.

Yeah, this is David Ridley Lane for Mice.

Why did bay/bill spreads narrow for the Nurse and Allied segment?

They narrowed because we had made pay rate adjustments earlier in the year. I think this goes back to the prior question that was asked where we were get getting bill rate increases and we were making pay rate adjustments, but it take a while for those pay rate changes to actually translate through to bookings. And so we've seen that gap narrow and catch up.

And can you just give us what the - I guess now that you've told us what pay rates were up and what bill rates were up today, that wouldn't necessarily translate until a couple of months later.

Correct. And it does depend upon where you ultimately place people and what the spread is at that. For example, kind of our pure bill rate year over year was up in nursing about 3% and pay rates were up about 3.4% on an aggregate level. But then, again, that's a bit of that catch-up that we were playing.

Okay. So then over time, would you expect this trend to continue? In other words for the pay/bill to continue to narrow or have we seen - is the current gross margin in the quarter sort of the new level?

I think we're suggesting it's going to stay more stable. But the effect of having raised rates to some degree may have a moderate effect going forward. But we're the trend is to stay - be stable.

And are you seeing pay rate and - pressures?

Not beyond the typical pressures that we see.

Okay. Thank you very much.

Thanks David.

Thank you. And our next question comes from Dawn Brock with JP Morgan. Please go ahead.

Hi guys. How're doing?

Hi Dawn. Great.

Hi.

I'm going to ask just one more question on the pay-to-bill spread. Do you foresee any structural changes? Either that you're getting pressure and feel as though you can pass on some of that pressure to the nurses or getting pressure from the nurses because it is probably in their favor right now to not do travel and to stick with their FTEs? Is there anything structurally that you foresee changing that would shift the pay-to-bill spread?

Not at this time, Dawn. We certainly work with that struggle every day. And that's where having well trained recruiters who can I think negotiate and sell the package that we offer and show the value of that package. Hopefully it helps us to maintain what we think is an appropriate pay-to-bill spread. We don't see this shifting to any major degree in the foreseeable future.

Nothing along the lines of potentially going to a double-occupancy apartments again or anything along that - those lines?

No, I - well, that might be nice for us to be able to offer that. I don't see that as being practically accepted by the nurse population. I think we kind of crossed that bridge a while ago.

Okay. The second question is on nurse trace, on the quick book. You've been talking for the last couple of quarters about the market share gain and the double-digit increase in this business. I guess my question is are you walking the line there of per diem in any way?

I don't believe so. It is a bridge in some ways between travel and per diem, not that these people are local, but in that the facility only wants or needs them for two to four to maybe six weeks. So it does help us bridge a kind of shorter-term interim need at the facility.

But as you know, these people are recruited from typically outside of the area. They are usually very highly specialized nurses. And they command a higher bill rate and pay rate because of the hospital's urgent need for someone with maybe significant experience in a specialty area who can get there within three to five days or maybe a week.

So I think it's a particular niche that serves a slightly different purpose for the facility and for that matter it is often a slightly different nurse. And there aren't many nurses who can just pick up and go in five days to a new work assignment.

So for us, it gives us the opportunity to offer what I think is a valuable service to our facilities, but also for nurses that might not want to make that longer-term commitment, we have this kind of shorter-term interim offering us the opportunity to offer what I think is a valuable service to our facilities, but also for nurses that might not want to make that longer-term commitment, we have this kind of shorter-term interim offering. And as I said, we've seen great growth there. Now it's small for us. Relative to us, it's small. But relative to some of the competitors that are in that space, I think it's pretty clear we're making some gains.

Okay. All right, thank you. That's all I've got.

Thank you. Our next question comes from David Bachman of Longbow Research. Please go ahead.

Hey, good afternoon, everybody.

Hi David.

Back to Locums, could you just give us at least a rough breakout on kind of by specialty in that division? Obviously radiology's very important, but just to get a better handle on what that looks like, remind me what that is.

Sure. Well, maybe just give you kind of order of magnitude the size of the different divisions, would that be a good starting point?

Yes.

Primary care is by far the largest division. And it's a little over a third of the business in terms of days filled. Second to that is anesthesia, a little over 20%. Radiology, which has fallen a bit, is in the teens, and then you kind of fall below that. The big gainer here, though, I tell you, is behavioral health. They're growing, well, in this last quarter, they grew over 20% year over year. The team is doing a fabulous, fabulous job. But there's also a great market opportunity there.

So those the - kind of the big categories. We also have, of course, surgery as I've mentioned. It's just by nature smaller, but from a bill-rate perspective very important.

And primary care has been obviously a good part of the business and it's been performing well this year as well.

Well, okay, that's very helpful. I appreciate that.

And then just back to pricing in the Nurse and Allied, the revenue per travel and per day was a bit lighter than we had been expecting Is that just - is that a mix shift question? What's going on there? Maybe you touched on this earlier and I missed it.

It is a couple of things. One is there were actually slightly lower hours worked by our travelers in the third quarter. We usually get a little bit more of a pickup in the number of hours worked by nurse by day. And we didn't quite see that typical pickup in August and September of this year. And then the second is the mix shift within Allied where you - as we move to a higher percentage of therapy versus imaging, the bill rates are lower there.

Yes, the other thing is also our international business because that's really become smaller and that's had an effect as well.

Okay, great. So a day just doesn't hold as many billable hours as it had in the past. I mean, that's part of it at least.

Uh-huh.

[Crosstalk]

...Okay. And then just one last question and appreciate all of the detail -- there's some competitors out there that are pushing tax-advantaged plans as a recruitment mechanism. Can you just remind us what your position is on those plans and if that's something that you're looking at or price the pros and cons. I'm just trying to wrap my head around. that.

Yes, well, I think we always have to be looking at our compensation programs, making sure we're competitive and offering things that are valued by our travelers. At the same time, we've had a history and we'll always be I believe very conservative in the way that we approach how we structure our compensation packages.

And there is question out there as to the appropriate way to offer these meal allowance programs. It's pretty black and white that if you offer them separate and apart from your hourly wage, then that is an appropriate per diem offering. Some competitors are actually restructuring their compensation and reducing the pay rate and substituting wage for meal per diem. And we think that approaches a gray area that we will continue to investigate, but something that we're not anticipating offering in the near term.

Okay, that's helpful. Appreciate all of the color and I'll hop off. Thanks.

Thank you.

Thank you. And we have no more questions in queue. I'd like to now turn the conference over to Susan Nowakowski. Please go ahead.

Thank you so much. And thank you, everybody, for joining us today and certainly for your continued support of AMN. We look forward to updating you on our progress next quarter.

Thank you. And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference service. You may now disconnect.