AMN Healthcare Services Inc (AMN) 2009 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time.

(Operator Instructions). As a reminder, today's call is being recorded. I would now like to turn the conference over to Amy Chang. Please go ahead.

Good afternoon, everyone. Welcome to AMN Healthcare Services fourth quarter 2009 earnings call. A replay of this Webcast is available at AMNhealthcare.com/investors and will be available until March 18th, 2010. 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 31st, 2008 and other quarterly and periodic reports 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 it.

Developments subsequent to this call may cause these statements to become outdated. The Company does not intend, however, to update the guidance provided today prior to its next earnings release. I will now turn the call over to Susan Nowakowski, AMN Healthcare's President and Chief Executive Officer.

Thanks so much, Amy. On behalf of the entire management team, I'd like to thank everyone for joining us today. I'm pretty sure that most of us are happy to see 2009 behind us. Last year was without a doubt the most challenging year in our industry, and in our Company's 25-year history.

As stewards of the business for our shareholders, we are of course disappointed with the financial results for the year. However, we are proud of the aggressive and forward-looking actions taken by our team during such a turbulent time. These actions allowed us to preserve the financial health of our balance sheet, to maintain our profitability and industry-leading position, to improve our operating leverage for the future, to build stronger and deeper relationships with our clients, and to continue to evolve our brand.

The benefits of these actions were evidenced by the fact that during 2009, we reduced SG&A by $73 million, or 32% less than 2008. We streamlined our infrastructure, giving us better leverage going forward as the market rebounds. Through building closer client relationships and delivering superior service, we increased the number of preferred provider client relationships three-fold, and won the nation's largest clinical deal staffing contract. We generated $99 million in cash flows and significantly paid down outstanding debt. We successfully renegotiated our credit facility, providing flexibility and capacity to invest in new opportunities.

Amidst these significant actions, we also ensured appropriate resources were dedicated to delivering on our newer and important service offerings. As we enter 2010, AMN Healthcare is in a much stronger position to deliver differentiated value the to our clients and this should be reflected in differentiated performance in the coming years. We are stronger as an organization, and are experiencing stabilization in our trends, but we are still faced with a relatively subdued market environment.

For the first quarter of this year, we are expecting revenues to be sequentially flat, which does reverse a six-quarter trend of decline. Our current view is a modest but steady recovery throughout 2010. So, now let's talk about what's been happening since our last call and the trends that we're seeing today.

Consolidated revenue for the fourth quarter of 2009 was $145 million, a decrease of 51% from prior year and 13% from prior quarter. This was in line with our expectations, and the guidance that we gave. The primary driver of the year-over-year decline was the decrease in nurse and allied staffing revenues, which was down 64% from the same quarter last year, and down 10% sequentially.

On our last call, we indicated that we believed the nurse and allied industry would hit bottom during the fourth quarter and that seems to have occurred. The sequential decline is due partially to seasonal trends, and because we were still in a fairly steep drop during the third quarter. Since October, we have seen stabilization in our nurse traveler count volume trends and have had consistent week-over-week increases since the first of the year.

Demand for nurses has been higher on a year-over-year basis since November. However, the aggregate orders are still at relatively low levels. This could potentially prolong the recovery period, and, therefore, we would characterize our near-term outlook for the travel nurse industry as being positive, but cautious.

Within this tight demand environment, we believe that we are very well-positioned to be a preferred partner with our clients. We spent considerable time in 2009 building stronger relationships with existing and new clients. This resulted in a meaningful increase in managed services and preferred provider contracts.

In these closer relationships, our fill rates are nearly double the rate at multi-provider accounts. Throughout 2009, the sales team did an excellent job of educating clients on the necessity of maintaining rational pricing and competitive wages. Their efforts have resulted in steady bill rates, in spite of the challenging demand environment.

Our Locum Tenens segment delivered fourth quarter revenues of $62 million, which is 18% lower than last year and 17% lower than last quarter. This year-over-year decline was driven primarily by two major factors. First, there was a greater than 40% volume decline in the anesthesia division. And second, there was an over 20% drop in the government business. Other contributors to the year-over-year decline were in primary care and radiology. About a third of the fourth quarter sequential decline was due to typical seasonal trends and the remaining can be attributed to anesthesia and government, as well as some general softness across most of the specialties.

There has been a delayed effect of the recession on the Locum Tenens staffing business with volumes dropping about 10% from the first half of 2009 to the second half. It does appear, however, that after this drop, Locum is experiencing a quicker stabilization. For example, our projection today is that the first quarter days filled volume will be roughly flat to the fourth quarter.

We've previously discussed the decline in the anesthesia market which began in the third quarter of last year. The contraction was widespread throughout the industry as anesthesia groups and contract management companies had fewer expansions and facilities performed fewer elective surgeries. These trends appear to have stabilized. Both anesthesia and surgery days sold have been relatively constant over the past few months. However, our near term outlook for these two specialties does remain cautious, as hospital systems have reported little improvement in surgery volumes.

We've build an industry leading anesthesia Locum's business over the past decade, and before the declines began, this division comprised about 22% of our Locum's business. Today, it is 15%. Even with the lower demand, pricing across the physician specialties remained stable, with the exception of anesthesia which encountered pressure from the drop in demand. We expect these same stable pricing trends to continue through 2010.

We made great progress over the years, and in particular last year, to integrate and improve efficiency in our operational support functions. This is evidenced last year by our ability to reduce costs and infrastructure in a rapidly changing environment. We do, however, have more opportunity to gain efficiency within the Locum's operations.

In late 2009, we launched a very focused and disciplined effort to assess and redesign our processes to be more effectively serving our clients, and to create a more flexible and scalable infrastructure which will further reduce costs in the future. We are halfway into the project and have already identified a lot of low-hanging fruit and many bigger opportunities that we will be executing throughout the year.

These efforts will have positive benefits for us in 2010, but even more importantly, will provide sustainable cost savings and productivity improvement into the future. A bright spot in the Locum Tenens division was the fourth quarter volume increase experienced in our new market expansion into emergency medicine. Although days filled volume is still relatively small, compared to our other specialties, this expanded service will enable us to serve our clients across a broader spectrum of their revenue generating services.

In Physician Permanent Placement, fourth quarter revenues were $8 million, which is 32% below prior year and 5% below prior quarter. The year-over-year variance is consistent with the third quarter, reflecting stabilization in the retained search market. The sequential revenue decline is in line with typical seasonal slowdown and the impact of more deferred revenue, due to the higher volume of new searches in the third quarter. New searches in the fourth quarter were down sequentially, primarily due to the holiday season, but were still at levels above the first half of the year.

While searches are looking stronger, placements for the fourth quarter were still below expectations. This is a reflection of the economic environment, the weak housing market and the resulting hesitancy of physicians to pack up and move to a new city and a new job. We believe we can drive stronger recruitment and placement by increasing our recruiter headcount. We began this effort in January and it will take about six months to make a meaningful impact on our placement rates.

We continue to focus on creating new types of client relationships in the perm placement business. This month, we were selected to be the sole retained physician search provider for one of the nation's largest associations of community health centers. They represent 4500 members and 6,000 health clinics. This is a great example of the positive outcomes from our team's effort to take a more strategic sales approach with our clients and develop additional preferred relationships.

Because clinical labor is such a large component of every healthcare organization, proactive and strategic workforce management will always be a critical factor to their success. As we listen to our clients, it is clear that they will have an increased focus on physician recruitment in 2010. In the near term, however, many organizations anticipate continuing to rely on their in-house ability to hire physicians and clinicians.

As the economy improves, healthcare professionals will return to their previous patterns of job movement and go back into retirement. In-house hospital recruiting resources will unlikely be able to keep up with the dual trends of increased hiring needs, compounded by higher attrition. At the same time, healthcare organizations will experience continued pressure to improve productivity without sacrificing the quality of patient care, which will draw additional interest to innovative solutions around the acquisition, retention and management of their workforce.

Not only will our core businesses be helpful, but our innovative service offerings, such as managed services and RPO will help hospitals to achieve their efficiency and effectiveness goals. We launched our recruitment process outsourcing business about a year ago and although it is still a very small business, we've made good progress. Our RPO and managed services offerings can help facilities to shorten recruitment cycle times and fill workforce gaps more quickly, minimizing revenue loss and disruption to patient care.

In 2010, AMN healthcare is celebrating our 25th year in business. We're very proud of our past and our rise to the industry-leading position. However, the reality is that AMN is a very different Company today than it was just five years ago.

There are the externally obvious differences, such as the fact that we're more diversified. Five years ago, we had primarily one service offering, travel nursing. Today, we are able to offer our clients a much broader spectrum of staffing and recruitment services across multiple provider disciplines and specialties. To this point, half of our operating income is now coming from our physician businesses, and our overall exposure to market fluctuations is certainly more balanced.

We have made many internal changes over the past five years as well that make us a more sophisticated and agile Company. This is reflected in our proven ability to launch new businesses, and more proactively and quickly make organizational changes in line with market trends. This capability is a product of our stronger and more diverse team, who is working in a more unified and collaborative way to reach our goals.

Ours is a people business, and having stronger leaders, sales representatives and operations allows us to not only execute well, but also to be more agile and make changes and investments that will evolve the business. Our team sets the highest standards in the industry, and I am quite confident in their ability to continue to expand our leadership position and to develop innovative solutions for our clients. Now, at this time, I would like to turn the call over to Barry Bailey, our CFO, who will give you more detail on the fourth quarter results and our financial position. Barry?

Thank you, Susan and good afternoon, everyone. Susan has provided you with a recap of 2009 and an overview of the top line performance for the fourth quarter. Our fourth quarter revenue was in line with the revenue guidance we provided in last quarter's earnings call. Susan already mentioned that consolidated revenue for the fourth quarter was $145 million, which was 51% lower than the same period in the prior year and 13% lower than prior quarter. For the full year, revenues declined 38% from 2008 with the decline coming primarily from our nurse and allied segment which was down 49%.

Despite the dramatic reduction in demand, overall gross margin improved 90 basis points to 26.9% for the full year 2009 from 26% in 2008. Our positive gross margin trend continued in the fourth quarter of 2009, with a consolidated gross margin of 28.4%, versus 25.7% in the prior year and 27.4% last quarter. As a side note, I think most of the companies in our sector have experienced perhaps their highest margins they have seen which seems counter to traditional supply and demand theories.

Similar to others, our overall margin in the quarter is the highest margin in our history as a public Company. Rational pricing discipline in the market has persisted and it is rooted by the underlying shortage of healthcare professionals that inherently exists. While demand for nurses in healthcare overall has not abated, it is being met by those professionals taking permanent roles, working more shifts and staying close to home.

Even with with environment, demand for nurses with specific skills and situations where the facilities have captured all they can of the nurses willing to take a permanent position, but still have openings, in their own way create a market that is constrained by supply. As we see the market come back, albeit slowly, our collective desire to fill demand will more likely result in increasing compensation and benefits to travelers to have them take such positions, rather than decreasing bill rates to increase the apparent demand. The end result will be a slight margin compression.

Looking again at our own trends, overall the increase in margin from last year and last quarter is due to continued gross margin improvement in our nurse and allied segment, partially offset by slightly lower fourth quarter gross margin in our Locum Tenens segment. Overall, margins were also benefited by our higher margin Locum Tenens and Physician Permanent Placement segments, representing a great portion of our business mix. Our nurse and allied segment benefited in the fourth quarter by improved bill-to-pay spreads and lower traveling benefit costs. As we look forward to 2010, as I mentioned earlier, we expect to see an increase in compensation required to recruit healthcare professionals which will have a moderate negative impact to our overall gross margin. We will start to see this in the first quarter of 2010 and expect margins to dip to the mid-27% range with some nominal improvement as we progress through the year.

As we are all aware, the Company took significant steps to right-size the organization and improve the overall operating structure of the Company in order to achieve sustained efficiencies. Fourth quarter SG&A expenses of $32 million reflect the impact of those changes and were 41% lower than prior year and 12% lower than prior quarter. The fourth quarter includes a benefit of $1.8 million from positive development in our professional liability exposures. We obtain actuarial reports on our professional liability twice each year. As you may recall, we recorded a similar adjustment in the second quarter of this year, but are not anticipating adjustments of this magnitude in the future.

Looking forward, we anticipate overall SG&A to be slightly lower in 2010, as compared to 2009. Our nurse and allied segment operating income for the fourth quarter was $7.7 million, representing a 61% decline as compared to the same period in the prior year. The decline in operating income in this segment is slightly lower than the revenue decline we saw, due in large part to cost of revenue decreasing at a faster pace. This was primarily due to lower labor costs.

Nurse and allied gross margin in the fourth quarter was 27%, 340 basis points higher than the same period in 2008, 260 basis points higher than last quarter. Traveler volume declined 10% as compared to the third quarter to 2,396. Nurse and allied segment SG&A was lower, reflecting the efforts taken to reduce ongoing operational costs and favorable professional liability experience.

The ability to further reduce such costs is limited by a number of them being semivariable or fixed in nature. However, as the business rebounds, we should reap the benefits of these cost reductions, most of which will not increase at the same pace as revenues. Overall, nurse and allied segment operating income margins increased to 10.4% from 9.4% in the fourth quarter of 2008.

Operating income for our Locum Tenens segment for the fourth quarter decreased by 6% to $6.5 million from prior year, despite revenues declining 18%. Operating margin increased to 10.3%, which was up 130 basis points compared to last year, and 30 basis points compared to the previous quarter. The increases is compared to prior year and prior quarter was due in part to the benefit recorded in the fourth quarter of $1.3million associated with the continued improvement in our professional liability exposures. Excluding this benefit, our Locum segment operating margin actually declined by 100 basis points compared to prior year and 200 basis points compared to the prior quarter.

The decreased operating margin was primarily due to specialty mix and labor costs within the SG&A that, while lower than the prior year and prior quarter by 24% and 9% respectively, are at levels that properly position us to grow in the future. Physician Permanent Placement operating income for the fourth quarter was $1.9 million, which declined 45% as compared to the same quarter last year, consistent with the decline in revenues for the same period. Gross margin in the fourth quarter was 60%, which was up 130 basis points compared to last year, and 230 basis points compared to the previous quarter.

In the third quarter, we began segregating costs that are not directly associated with the individual business units and reflecting them as unallocated corporate overhead. On a full year basis, unallocated overhead decreased 36% compared to the prior year as a result of the steps taken by management in response to the market downturn. You will recall that the Company recognized a benefit from the settlement of a liability arising from the MHA acquisition that had the effect of reducing unallocated overhead in the third quarter by $1.5 million. Adjusting for this item, unallocated overhead in the fourth quarter was consistent with the third quarter. We expect the savings to be largely sustained as we look forward to 2010.

As indicated in our earnings release, the fourth quarter tax provision reflects the true-up of state taxes based on actual performance by state for the full year. The true-up resulted in a reduction of our effective income tax rate from 28% reported in the third quarter to 26%. The resulting full-year 2009 income tax benefit of $43 million compares to an income tax expense of $27 million for the prior year, where we reported an effective tax rate of 44%.

The year-over-year change in the effective income tax rate was primarily attributable to the goodwill impairment charges recorded during 2009, a portion of which were permanently nondeductible for tax purposes. Excluding the impact of the goodwill impairment and restructuring charges, the 2009 effective tax rate would have been 59%, which was higher than the rate in 2008 due to the impact of the relationship of unrecognized tax benefits to pretax income. We expect our effective tax rate in 2010 to be consistent with the suggested 2009 tax rate of 59%, while we expect our cash taxes to be more in line with our statutory rate of about 39%.

For the fourth quarter, the Company is reporting a net loss of $2.7 million or $0.08 per share. Excluding refinancing related charges, the Company's net loss on an adjusted basis was $0.02 per diluted share. The Company successfully pursued collections and reduced our net accounts receivable balances from December 2008 by over 50%. At the same time, we increased our reserves in allowances by 18% reflecting the impact of market conditions to some of our clients, and in some cases organizations providing vendor management services.

For the full year, we generated $99 million of operating cash flow which was used primarily to pay down debt. Days sales outstanding of 57 days are the same as prior year. We have closely managed capital expenditures during the year without limiting important investments to position the Company. This last year, capital expenditures ran just under $4 million. We expect capital expenditures in 2010 to be about the same.

In December of 2009, the Company entered into a new credit agreement which was used to pay off our existing term debt of $77 million and cash collateralized existing letters of credit. The new credit agreement includes a $40 million revolver and $45 million accordion feature maturing in December of 2012 and a $110 million term loan maturing in December 2013. As of December 31st, 2009, total term debt outstanding net of discounts was $106 million, with no borrowings under the revolver.

Our debt to EBITDA ratio at year end was 1.9 times and this does not take into account that we could very well utilize capacity in our revolver, as we did in the past, to cover the letters of credit we cash collateralized. Instead, we have opted to preserve more capacity in our revolver for strategic opportunities. We do not see a need given our new facilities and the debt market to hedge our interest rate. I will now return the call back to Susan.

Thanks, Barry. We've already talked a bit about the current trends we're seeing so I'll try not to repeat all of them. The biggest highlight coming into the first quarter is that our nurse traveler count is showing increases week over week and month over month. Demand is above last year, but is still at relatively subdued levels. While there is modest growth across the country, we believe that during 2010 we will benefit more from the strong preferred client and managed services relationships that we secured during 2009. This is best reflected in the expected 5% to 10% sequential increase in our travel nurse count in the first quarter.

In Locum Tenens, demand and resulting volumes seem to be stabilizing after being hit in the second half of the year. Volumes are expected to remain sequentially flat for this segment in the first quarter. Revenues may be slightly down due to a shift in specialty mix. Our more leading indicator of the future is days sold and this has been trending up slightly during the past few months. In Physician Permanent Placement, active searches are expected to be sequentially flat during the first quarter, but placements appear to be lagging and are expected to be slightly down.

Based on these trends, first quarter consolidated revenue is expected to be flat with the prior quarter. Although we feel we have reached bottom and overall trends are stabilizing, leading indicators are showing mixed improvement and, therefore, we remain cautious in the near term. A question frequently asked is what will the trajectory of growth be for the healthcare staffing industry and for AMN? While there is no crystal ball to give us precise answers to future events, we certainly do study past cap dynamics of our industry and the projected future demographic drivers. We believe we have an educated view that guides us in our own long-term strategic planning and the investments we make in our business and we're happy to share those thoughts with you.

If we look out three to five years from now, the demographics that drive growth in our business look quite strong. By 2015, the number of individuals in the US over the age of 65 and requiring more healthcare services will have increased by 14%. This alone will place incremental burdens on the clinical labor supply that cannot be simply absorbed.

In addition, since the nation is at full capacity in residency programs and nursing schools, the new supply of clinicians is relatively capped and will not replace the huge contingent of clinicians that are set to retire during the next five years. 40% of nurses are already over the age of 50 and that's nearly 50% for physicians. This will only get worse along with the general aging population.

The most recent studies suggest that the gap between demand and supply of nurses and physicians will increase two-fold by 2016, just due to the aging population alone. If there were to be any healthcare reform initiatives that increased access to care or brought additional reimbursement dollars into healthcare, we would likely see this shortage occur faster and more intensely. Being largely data driven, this is all probably pretty easy to accept and plan towards.

The bigger question is what will the trajectory of demand and supply be over the next five years. Will it be the proverbial hockey stick, similar to what we experienced in the late 1990s or will it be the modest and steady growth we experienced after the last downturn in the early 2000s. The primary two factors that we believe will determine the outcome will be the recovery of the US economy and healthcare reform, the US economy being by far the most important.

It appears that the economy is improving, but at a snail's pace. This sluggish recovery including slow and small incremental improvements in unemployment rates and improving, but still volatile stock markets and a continuing weak housing market, will likely result in a near term modest and steady recovery in the demand for our core services of staffing and placement.

At some point, however, after our market has seen steady, modest improvements, we will likely see a tipping point where multiple factors have improved enough and the powerful demographic forces take hold and create a significantly higher need for our services. Based on my 20 years in the industry and our team's tenure and expertise, we believe this will happen in the next five years and could be as early as the next to to three years.

During this period of steady and modest growth over the next couple of years, there are three key components that guide us in our strategic plan. First, to continue building stronger client relationships and gain market share without sacrificing price or margins. We can do this by showing our clients that we deliver differentiated value every day.

Two, to continue to nurture our newer business lines, such as RPO, that move us from a purely transactional staffing provider to being a managed services expert and partner for our clients. We have had solid success in this over the past year. And three, to take our relationship with the healthcare community to a higher, more strategic level, by providing them with more innovative solutions to help manage their patient care quality, efficiency and the cost to provide such care. In this way, we become a more long-term strategic partner with our clients and create a more sustainable reoccurring revenue stream. We've identified several areas of opportunities to accomplish this and are in the midst of pursuing those through internal development and acquisitions.

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

(Operator Instructions). We'll go to the line of Jim Janesky with Stifel Nicholas. Please go ahead.

Yes. Thank you. Barry, just so we're clear about SG&A trends, you had roughly $160 million in total SG&A for 2009. Do you expect that number -- do you expect the number for 2010 to be down from the $160 million or was your comment more on a percentage of revenue basis?

It was related to the $160 million that you referenced. We expect it to be down slightly from that.

Okay. And if we take the first quarter revenue outlook and assume a slow but steady recovery, and take the first quarter gross margin outlook and assume a steady recovery, I then would be projecting a loss for the first quarter and all of 2010 on a GAAP EPS basis. Is this your expectation? And if so, is there anything that -- is there any changes that you might anticipate that could change that outlook?

No, we're not expecting a loss in the first quarter. I'm trying to think of how -- I don't have what you're looking at in front of you.

Right. But --

It's impacted by combination of SG&A. Again, it will be down overall for the year as we indicated.

Yes.

We talked about revenues. I'm trying to think of how to go with -- you've got the gross profit indicator, the margin.

Yes, and on roughly flat revenues on gross margin of 27.5%. We could talk about it offline, but it's clear that you're not expecting earnings per share loss in the quarter?

No.

Okay. Okay. And just shifting into the nurse and allied segment, Susan, to what -- how much do you expect your large new contract to help out the March quarter? Then how should we look at that maybe for all of 2010? What do you think organic growth would be outside of that large contract?

We've not -- we've been hesitant to quantify any particular client, even clients as large as this new VMS in terms of exactly what it will contribute. But I do believe it will drive better-than-market performance for us throughout the year, and starting in the first quarter. The first quarter we're just getting started.

Okay. And so I would expect the first quarter to be less impact, but I think it's certainly having some impact, if you just look at the percentage of business that we have done with this particular account in the past and what we're doing already in the first quarter, relative to others. I think it's meaningful enough, based on where the low order volumes are today. Okay. Thank you. And --

Sorry.

No problem. Barry, interest expense in the fourth quarter came in much higher than I expected. Was there any one-time item in there and how should we look at that on a quarterly basis going forward?

Certainly, there was an adjustment for the write-off of deferred financing costs and --

Okay.

The interest rate hedge that we had and that came to about $3.5 million.

Okay.

And going -- you should have a sense from there after that.

Right, exactly. Just back that out. Okay. Great. Thank you. That's very helpful.

Thanks, Jim.

Go to the line of Tobey Sommer with Suntrust Robinson. Please go ahead.

Thank you. I was wondering if you could comment on maybe the market positioning and how it's evolving for VMS solutions. Maybe put your -- look into your crystal ball, if you could and say, in a couple years is this going to be a much larger percentage of revenue for the business? And I wanted to get a sense for what your expectation could be for if we get in a period of revenue growth, how maybe the sensitivity to potential bill rate increases would be impacted by a greater percentage of revenue coming from VMS.

Great question. And it's a reason, Tobey, why you know we have always believed that it's most important to have more clients in more locations across the country, one, to attract supply and to have greater selection for our healthcare professionals, but also to give you that lower customer concentration and diversity so you aren't so wrapped up in a few large clients. As the orders have come down within the industry over the last year and-a-half, those larger VMS and preferred provider clients have become more important and a greater percentage of the overall orders.

But I would expect that as the market rebounds to a more normal state, you would actually see the percentage come down because more of your individual facilities would start to pick up in their demand and their orders. While there will certainly be continued interest in VMS and I think that's why we're glad that we have such a strong offering and are being recognized as a leading provider in that service, I think it's also important to remember that the greater growth from our industry will come from when orders start to rise all across the country at all types of facilities. Does that answer your question?

It does. It does. Is there a feature in these contracts generally that allows for pricing to reset as the market rates move? Or is that more a question of individual negotiations and informing your client about where the market is?

It's more the latter. Usually there is some type of language that says, if the market changes significantly, we agree that we will have discussions around what the appropriate pricing and, therefore, resulting wages should be so that they can keep their needs met. But it's really more driven by the market itself and what's happening at facilities, not only within their direct region, but all across the country.

Thanks. I'll ask one more question and I'll get back in the queue. Regarding the Locum Tenens business, I just wanted to get a sense for what the length of your visibility in the business, extent to which customers are being placed -- are placing orders farther or shorter out in the future? Thanks.

The visibility is a little bit different than nursing in that you have, yes, contracts that might be placed out for a long period of time, say a government facility, they could be for a year. But you also have a lot of very short-term, fill-in-the-gap, over-the-weekend, last minute type of work. The average length of assignment in Locums is six to eight weeks which is smaller certainly than within the nursing business. It creates a little bit more challenge in forecasting what the resulting volume is going to be.

We have three primary indicators, leading indicators that we track. We track days sold, which is what are the new assignments or days that are being requested now, whether it be for this month or next month or the following. Then you have days available, which are what's available and needs to be filled this month. And then you have days filled, which is your resulting volume from all of that.

And as I said, good news is, we've generally seen stabilization in all of those metrics throughout the last couple of months. It varies a little bit by specialty, but I characterize it as an aggregate stabilizing.

We'll go to the line of Jeff Silber with BMO Capital Markets. Please go ahead.

Thanks so much. Susan, forgive me if I misheard this, but I believe you said you're looking to increase your headcount in your recruiters in the Physician Permanent Placement business. Is that correct?

Correct.

I was a little surprised by the comment given the trends. I know it's somewhat stabilizing. Did you have excess capacity there? Did you have excess turnover there? If you could just give us some of the rational, I'd appreciate.

Sure. We started to see new searches improve in the third quarter and that continued into the fourth quarter with a little bit of seasonality. But we didn't increase our number of recruiters at that time. It takes a solid six months to get somebody trained and productive in the perm placement business.

We felt that we might have capacity within our existing recruiters, but the reality is we were probably stretching them too thin so we saw our fill rates actually go down a little bit towards the end of the year. It caused us to relook at the number of recruiters that we have on staff and that are out there, trying to drive the new supply. That was the reason. I think that we actually could have done slightly better on our placements had we had more recruiters trained and in place.

That's very helpful. I'm just curious, if your other two segments, what do you have to see in order to make the same moves there?

I'm sorry, to make the --

Take the same kind of moves, in terms of when will you be comfortable increasing your recruiter headcount.

Okay. Great question. In nursing, we have a lot of capacity within the recruitment staff that we already have. As we've said over the last couple quarters, we have down sized our recruitment staff quite a bit with the downsizing of the brands and through natural attrition. We're about half the number of recruiters we were at a year ago. And yet, those recruiters themselves are at about half the productivity they were in the first quarter of 2007. They're the same -- they are our top recruiters. These are people who might have had 100 to 120 people on assignment in 2007 and today they have 50.

It's not their fault. They're absolutely stellar recruiters, but it's just the market environment. We feel we have a fair amount of capacity and productivity improvement that we can gain within our existing recruitment staff. With that said, we're always looking for that next recruiter and hiring maybe one or two people to help fill the pipeline along the way. I would say that's somewhat true in Locums as well, but very much the case in nursing.

That's helpful. A couple quick numbers questions. This is for Barry. You mentioned the $1.8 million professional liable benefit. That's all in SG&A, is that correct?

That's correct.

In terms of the segment, I think you said $1.3 million of that was in Locum Tenens. Is that correct as well?

Correct.

The rest was where?

Predominantly in nurse.

Okay. Great. And just going back to Jim's question about trying to forecast earnings for the first quarter, and again I know you guys aren't giving guidance, but the issue comes down to taxes. You had a pretty sizable booked tax expense, even though from a pretax income perspective, it was minimal. Is that the same thing we should be seeing in the first quarter? Will we see an outside book tax expense?

I'm trying to think, when you say outside booked tax --

You gave us guidance for about a 58% effective tax rate for the year. Should that be the rate we use for the first quarter or should it be higher than that?

It should be that rate. We're anticipating that throughout the year. It should be smooth throughout the year, assuming our projections are appropriate.

Okay. Good. I just wanted to clarify that. Thanks so much.

On the first quarter, when Jim brought that up, we're going to be -- obviously, when you look at first quarter, it's going to be down very close to zero. It's -- the first quarter earnings when you run through the calculation, it's going to be very close. We said it's not going to be negative. That's our expectation. But it's going to be very close.

I appreciate that color as well. Thanks so much.

We'll go to the line of [Mark Marcon with R.W. Baird. Please go ahead.

Good afternoon. Wondering if we could drill down a little bit on the nursing allied segment. Can you go through the dynamics in terms of the gross margins for this quarter, because the gross margins were a little bit better than what we expected. Was there anything that was unusual in there this particular quarter?

This is Barry. No, there wasn't anything unusual in this quarter relative to gross margins. The split between it for the quarter, the majority of it was actual improvement in each of the businesses. We mentioned in my comments that a portion of the improvement was due to the mix of the businesses.

I just meant in nursing, not allied.

No, it's -- that was the business.

Okay. Great. Susan, can you talk a little bit more about that dynamic? Because it is truly counter intuitive to have margins go up and stay at a relatively high rate with demand being off as much as it is during the year.

Can you talk a little bit about -- a little bit more color around the specialties that you're filling, a little bit more color around what you're seeing out of your competitors. Because obviously you're well-capitalized at this point and you have a dominant size. Are you starting to see some capacity come out of the industry?

I think first, to address your question on the specialties, as demand comes down, it does tend to come down first in the lower bill rate specialties like med surge. As we are placing people today, there's a higher proportion that are specialty nurses, say in pediatrics, ICU, your critical care areas. That's going to preserve both bill rate, but also margins.

As the number of available assignments have declined over the last year, nurses who want to travel have also become more agreeable in what an appropriate wage should be. If they've chosen this as a career, they understand that there's going to be limited opportunity and, therefore, you don't see as much pressure for wages to be going up. In fact, there's been some situations where we've been able to drop wages slightly. It's generally stayed fairly, flat but as a percentage of the bill rate because our bill rates have gone up ever so slightly over the last year. And by not raising wages, we've been able to expand our margins a bit.

There's been a little bit of benefit in housing, that's come more later in the year and I think will be more of a benefit in 2010. It really is that bill-to-pay spread, and it's just the sheer availability of assignments and the supply wanting to be competitive and going after those assignments. Now, as the number of assignments increase and we're trying to recruit more supply to come into the market, we believe we will have to increase wages along with that. We don't think it will be material and significant. You might see a little bit of margin degradation over a couple of quarters, and then over time you'll see that start to rebuild.

Okay. Basically, you're starting to see the orders come up and you want to maintain the fill rates, and so it makes sense that you need to start ramping up a little bit in terms of the pay rates.

Correct. That would be the case as we see that. As I mentioned, though, we are not necessarily seeing orders rise. They're up year-over-year, but sequentially they've not taken any big tick up.

Okay. Can you talk a little bit about our big client out in California? On the last conference call, you mentioned it started up in January. Can you give us a sense in terms of how well that's going, how it's going relative to your expectations. And to what extent does that have an impact with regards to how we should think about margins going forward?

It's going well. As you would expect with any new implementation of such a sizable contract, there's always some initial bumps along the way. We feel that, and I think the client would agree, that we've worked through everything quite efficiently and to their satisfaction.

A nice surprise for us has been the number of assignments that we have been able to fill immediately, and not needing to use subcontractors. We certainly expected that to ramp up throughout the year and we still expect to get more improvement throughout the year. But just out of the chutes, our recruitment team did a better job than even we expected in getting those positions filled.

In terms of gross margin, it's not a significant impact beyond what it would have been anyway. You have the client and the market largely setting those rates, especially in those highly competitive large contracts. I wouldn't say that having that contracts has changed our margins much more than they would have been anyway going forward.

Okay. Can you discuss a little bit about what you're seeing on the competitive dynamics and how you -- what your sense is of that at this point?

Sure. We're fortunate that we have some large competitors that I think are also very sophisticated and rational, and they are in this business for the long-term, as are we. We don't see a lot of irrational pricing behavior going on out there. With that said, it does occur from time to time, especially as some of the smaller players become more desperate as demand is quite thin.

They might try to buy the business, but we've found that clients through discussion and education and just through their desire to have value and service, they're not willing to decrease the service levels just to save a couple bucks. They want quality nurses, on time, and they want to work with a Company that can stand behind what they say they're going to do. We've not seen any business really change hands due to pricing.

Okay. Great. And then can you talk a little on the Locum Tenens side, on the government portion of that, how's that evolved? How should we think about that and then at what point do you annualize the anesthesia dropoff?

Right. Government, as you might recall in our last earnings call, we talked about the reason that this came about in government subcontracting and changing out vendors. We now have contracts with five of the seven subcontractors, and are receiving orders from them and are starting to place more people.

It's hard to say when we'll get back up to the volume levels. We'll certainly lap that decline in the third quarter. Our hope is by then that we regained most of that through the relationships, and regaining the placements that we had at those particular facilities.

Anesthesia will lap that dropoff in the third -- fourth quarter, mostly of this year. It's hard to say when that will start to improve. At this point, we see it being pretty flat from the fourth quarter to the first quarter. I think it's largely dependent upon the level of elective surgeries, and opening up of new surgery centers and units at facilities. Until we see that, I wouldn't expect a lot of growth in that area.

Great. Can you please talk a little bit -- just to go back to Jim's original question with regards to the SG&A, if we're thinking about roughly $160 million, I'm assuming that we're not going immediately to $40 million. Should the assumption be that the SG&A is going to ramp up as the year unfolds and what revenue gains would you anticipate would be associated with that?

First of all, the $160 million, that is reflecting on 2009, that is perhaps a little high.

Yes.

And then you would also expect it to ramp up through the year. A lot of that is fixed or I'll call semivariable, but a portion of it certainly is going to vary with the business as it grows. We're still cautious, having gone through the challenge of 2009, to not over-burden the system early on. We're tracking that and as you go into the rest of the year, we expect it to ramp up, again, not excessively, but for the year come in at less than what we saw for 2009.

Okay. I think what was confusing and the reason why you're getting multiple questions on this is because I think there was one question initially about, should we think about it being $160 million on an absolute basis or think about the SG&A as a percentage of revenue based on what we're currently seeing out of Q4.

The reason why I steered away from a percentage of revenue is because, one, it shouldn't track just with the growth in revenue. We expect it to grow at a slower pace than revenue so that number will change over time to some extent. I wanted to be a little careful of that. It's my fault probably for not providing enough of a description, but it will come in under that number. We're expecting it to come in under that -- what we saw last year and certainly $160 million we believe will be too high. That's not what we're projecting.

Okay. If we think about this last quarter, we had SG&A that was roughly $32.3 million, but then we had the $1.8 million so that basically gets us to about $34 million which would be about 22.7% of revenue. Is that -- should we just think about that percentage building up over the course of the year?

Yes.

Okay. Great. I'll jump back into the queue.

You do have a follow-up from Tobey Sommer with Suntrust. Please go ahead.

I just had an SG&A question. Most of it's been answered, but I'll just follow up offline.

Thanks, Toby. Is that our last question?

There are no additional questions in queue. Please continue.

Okay. Great. Thanks. We would like to thank everybody for joining us today and certainly for your continued support of AMN Healthcare. We look forward to updating you on our next quarter.

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.