AMN Healthcare Services Inc (AMN) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the AMN Healthcare first quarter 2011 earnings call. At this time, all participants are in a listen-only mode, and later, we'll conduct a question-and-answer session. The instructions will be given at that time. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded.

I'd now like to turn the conference over to our host, Ms. Amy Chang, Vice President of Investor Relations. Please go ahead.

Good afternoon, everyone. Welcome to AMN Healthcare's first quarter 2010 earnings call. A replay of this webcast will be available at amnhealthcare.com/investors and will be available until May 26, 2001. 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, 2010, and other period 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 Developments subsequent to this call may cause these statements to become outdated.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.

On the call today are Susan Salka, our President and Chief Executive Officer; as well as Brian Scott, our Chief Financial Officer. Joining us during the Q&A session will be Ralph Henderson, our President of Travel Nurse and Allied Staffing; and Bob Livonius, our President of Workforce Solutions.

I will now turn the call over to Susan.

Thank you, Amy. Good afternoon and welcome to AMN Healthcare's 2011 first quarter earnings conference call. We good news to report today and are very pleased with the continued momentum and long-term outlook in our business.

We have now experienced four consecutive quarters of sequential consolidated revenue growth, and the trends continue to look positive for the future. Demand continues to grow across the temporary staffing segments, with the improvements being broad based across many specialties, geographies and clients.

While we were the first company in our industry to report growth a year ago, we are now pleased to hear that other companies are also reporting growth in demand and volume. Our strongest and most consistent growth during the last year has come from our travel nursing business, with other businesses showing modest improvement or stabilization.

While we have seen nurse staffing orders steadily improve throughout the country since last year, our ability to capture incremental market share has been bolstered by the expansion of our managed services program through last year's acquisition of Medfinders. This was done by leveraging our significant national and local supply of candidates and increasing the direct fill rates on our MSP contracts. Whereas, before we had to use subcontractors to fill our local per diem orders, we are now able to partially fill that demand directly through our nurse finders' local office network.

Likewise, the travel nurse orders brought over by Medfinders MSP contracts are now primarily being directly filled by leveraging AMN's large pool of travel professionals.

We have projected $2 million in annualized EBITDA synergies by the fourth quarter from this MSP direct fill synergy, and I'm pleased to report that we are currently ahead of schedule towards achieving this target.

With most of the heavy lifting complete, we are also currently ahead of schedule to achieving our targeted $8 million in annualized cost synergies. Since our last call, we have completed the integration of the Medfinders Allied brands onto our platform. We have also completed the streamlining of our client and clinical operational functions into our shared services model. And the integration of the finance function is complete.

The overall Medfinders integration has progressed very well and is exceeding our expectations. In fact, the total synergy target of $10 million, which I just spoke of, will be achieved by early in the third quarter, which is one quarter early. This could not have been accomplished without the talent collaboration shown by our dedicated team members across the entire organization, and we commend and thank them all for our great efforts.

Now, I will turn to some detail on our trends and performance. Overall, consolidated revenues for the first quarter were $229 million, up 4% sequentially and 60% year over year. On an organic same-store basis, consolidated revenues were up 17% year over year. As I mentioned, this represents the fourth quarter consecutive quarter of sequential growth consolidated revenues since the 2009 recession. It also marks the fifth consecutive quarter of sequential growth in our largest business segment of nurse and Allied staffing.

In addition to our top-line performance, we are beginning to experience the benefits of operating leverage and cost synergies, which helped deliver an adjusted EBITDA of $18 million and a margin of 7.9%. Even after excluding some unique items, we still delivered an adjusted EBITDA margin north of 6%.

First quarter nurse and Allied revenues were $135 million, up 6% sequentially, despite the fact that there were two fewer days in the quarter. Year-over-year revenues were up 79% on an as-reported basis and up 24% on an organic same-store basis. This growth was driven by the travel nurse business where revenues were up 13% sequentially. The volume growth occurred about both MSP and our traditional clients, with pricing remaining relatively stable during the quarter.

Travel nurse order levels have continued to increase for well over a year now. In fact, order levels in April were twice what they were a year ago. Demand is rising at both MSP clients as well as at our traditional clients. And the overall number of facilities with travel nurse orders continues to move up.

In April, client facilities with orders were up over 20% compared with the fourth quarter of 2010. The growth in orders is also occurring across most geographies, with our top five states spanning the West, Northeast, the Southeast and the South. Our MSP orders have been trending approximately 25% of our overall travel nursing demand, and we continue to be very successful in winning new MSP contracts at a pace faster than we anticipated.

Another small but growing service is the assistance with electronic medical record implementations for our clients. We've been delivering this service for a couple of years now, both for our MSP clients and our traditional clients. However, we have seen more significant ramp-up and opportunities during the last year.

The combination of our national supply and our local offices helps to make us an especially capable partner for our clients who are going through such a conversion. Based on the pace and stages of EMR implementation across the country, we believe there will be continued growing needs for this type of service during the next two to three years.

With the growth and demand, we are now beginning to see more movement in pricing. During the first four months of 2011, we have implemented more than double the number of price increases versus the entire first half of 2010. We expect this trend to continue and probably will gain further momentum over the next year. Keep in mind though that these increases are typically for future placements, so it takes a couple of quarters to see the full benefits show up in results.

This improved pricing will be an important factor in our ability to drive supply to meet the growing demand and to offset pressures in housing and bill-pay spreads.

First quarter revenues for the local per diem business were $23 million, which was down 3% sequentially, due largely to the high level of flu clinic business that we experienced during the fourth quarter. In addition to this seasonality, the local per diem revenues tend to fluctuate more due to the short-term nature of the business.

Demand trends in local staffing are generally increase but are less consistent across different regions of the country. The local offices continue to be an important ingredient in our success in winning and filling MSP business.

For both travel and local per diem staffing, supply will become an increasingly important area for us to focus due to the rising demand. We are pleased to see that our supply of new candidates coming into the travel business is growing. However, the available new supply in the per diem business has been a bit more challenging in some of the local markets.

First quarter Allied revenue, which made up approximately 20% of the segment revenues, was down 3% sequentially due mainly to the anticipated disruption from the Allied integration. The underlying demand trends in the Allied healthcare market appear to be solid, particularly in rehab therapy. And we expect to see growth in this business in the second half of the year.

Our locum tenens segment delivered first quarter revenues of $70 million, which was up 1% sequentially and 16% year over year. Organic same-store locum tenens revenue were up 6% compared with prior year.

We had 2% sequential volume improvement with the greatest increase occurring in primary care. Our first quarter days available for placement were also up year over year in all specialties, with the exception of radiology. Across the industry there seems to be general agreement that locums trends have stabilized and are beginning to improve.

In physician permanent placement, first quarter revenues were $11 million, up 16% sequentially and 41% year over year. Organic same-store revenues were up 29% year over year. The increase was primarily due to the adoption of a new FASB accounting standard for revenue recognition, which had a positive revenue impact of $2.1 million in the first quarter.

While we have made progress in building our sales team, we still have opportunity to capture more market demand, and so we continue to aggressively hire and train to build our sales team in this area.

In the first quarter, revenues from home healthcare services were $13.6 million, representing a 5% sequential decline. The decline was anticipated, and as expected, the most significant pressure came in Medicare. Overall, we were probably down less than most companies in the industry due to our diversity and payer mix. Medicare represents less than 20% of our total home healthcare revenues.

We are expecting revenues to be up slightly in the second quarter with improvements in all payer mixes. We are continuing to take steps to grow our Medicaid and private pay business as these typically have higher growth and EBITDA margins. While we are projecting sequential growth, there are certainly headwinds that continue to challenge the home health industry.

In addition to the Medicare reimbursement cuts that took effect in January, there were also regulations that took effect in April, requiring face-to-face physician encounters and additional documentation for therapy services. In spite of these short-term challenges, homecare will play an increasingly important role for the healthcare delivery system in the future.

Going into the second quarter with the underlying market improving and much of the integration of Medfinders complete, the organization is beginning to hit on all cylinders and enjoy the synergies of the two companies coming together. More than ever, our focus is on understanding the needs of each individual client and executing to exceed their expectations.

In growing our top-line revenues, we are setting ourselves up to hit our longer-term objective of leveraging our operating model in order to achieve 10% adjusted EBITDA margins in the next three to five years. We are also focused on continuing to reduce our debt-to-EBITDA ration.

AMN has been an innovator in the industry, which has helped position the Company for the near term and the long term. In the near term, we have been and are continuing to capitalize on the improving demand, as the market rebounds. Since combining with Medfinders, we have increased our cross selling efforts and results by dedicating resources to evaluate our clients' strategic needs and to create solutions that deliver our multiple service lines.

For example, we recently won a new contract with a significant healthcare system to deliver an MSP solution that supports all of their supplemental staffing needs for nurses, physicians and Allied professionals. We will also be providing this client with RPO services and other workforce solutions that are not yet formally introduced to the marketplace.

In the long term, we will continue to work alongside our clients to understand their changing needs. As healthcare deliver models transform to address the challenge of providing increased access to health services. While maintaining the quality and reducing cost, AMN will offer more sophisticated solutions that can deliver value and efficiencies. Whether it's through our MSP and RPO solutions or by using home healthcare to reduce unnecessary and unprofitable readmissions, AMN will continue to make strides in our long-term strategy.

I will be coming back to you in our Q&A section to help further answer your questions, but for now I will turn the call over to our Chief Financial Officer, Brian Scott.

Thank you, Susan. Good afternoon, everyone. As Susan mentioned, the first quarter revenue was $229 million. Our gross margin for the quarter was 29.6%, up 170 basis points from last year and 150 basis points from last quarter. The increase in gross margin was due primarily to a $1.9 million actuarial-based workers' compensation benefit recorded in our nurse and allied and home healthcare segments, and $2.1 million of revenue recognized in our physician permanent placement segment as a result of adopting a new revenue recognition standard.

Excluding these items, the gross margin was 28.1%, which is consistent with the prior quarter. SG&A in the quarter totaled $52.9 million, which included $1.3 million of costs associated with the integration of Medfinders. SG&A as a percentage of revenue of 23.1% increased from prior year by 80 basis points but decreased sequentially by 180 basis points. The year-over-year increase was mainly due to the addition of Medfinders' expenses.

The sequential decrease was due to lower integration costs this quarter, as well as the fourth quarter, including a $1.2 million bad debt expense related to a locum tenens client.

As Susan noted earlier, we have made significant progress on our cost synergy targets during the first four months of 2011, and the sequentially lower first quarter SG&A in part reflected these efforts and our ability to leverage our infrastructure as revenue grows.

We have been recently adding employees, primarily in sales and shared services to support our growth in travel nursing and new MSP clients. Considering this growth-based hiring and further realization of cost synergies, we expect our SG&A in dollar terms to remain relatively consistent with current levels the remainder of 2011.

Our nurse and allied segment revenue increased sequentially by 6% to $135 million. Our volume grew 8% sequentially to 5,100 healthcare professionals, and our revenue per day was flat sequentially on stable average bill rate.

Nurse and allied gross margin increased sequentially by 140 basis points to 27.5%, due in large part to the workers' compensation actuarial adjustment, most of which benefited this segment. First quarter nurse and allied segment operating income was $15.1 million or 11.2% of revenue, as compared to $10.7 million or 8.4% of revenue in the prior quarter.

Excluding the workers' compensation adjustment, the operating margin still improved sequentially by over 100 basis points due to cost synergies from integrating the Medfinders travel and nurse -- travel nurse and allied businesses and improved operating leverage. Compared to the prior year, the operating margin declined by 40 basis points due mainly to the addition of Medfinders, which carries an overall higher cost of operations for the local per diem staff business.

Our locum tenens segment revenue increased by 1% from the prior quarter, reflecting a 2% increase in days filled, offset by a small decrease in our revenue per day filled due to a specialty mixed shift. On an organic basis, the gross margin was 90 basis points below prior year due to pressure on the pay bill spread in certain specialties and higher travel and housing costs.

On an as-reported basis, gross margin of 26.2% was consistent with prior year due to the addition of the higher margin Medfinders locums business. The gross margin was sequentially higher by 80 basis points, due in part to a staffing project with a single client during the quarter. Locums operating income of $6 million or 8.6% of revenues compared to $4.8 million or 6.9% in the prior quarter.

Within our physician permanent placement segment, revenue grew sequentially by 16% due to the adoption of a new accounting standard on revenue recognition effective on January 1, 2011. Upon adoption of the standard, we recognized approximately $2.1 million of revenue in a quarter that would have been deferred under the old standard.

Excluding this impact, the revenue increased year over year by 13% due to the addition of Medfinders and declined sequentially by 7% on lower hourly billings and direct mail activity.

Physician permanent placement operating income for the first quarter was $3.8 million or 35.2% of revenue.

Our home healthcare segment generated revenue of $13.6 million and operating income of $1 million for the quarter. Gross margin on this business was 38.1% for the quarter, an increase of 110 basis points from the prior quarter due to the workers' compensation actuarial benefits.

Unallocated overhead, excluding stock compensation and integration expenses, in the first quarter was $7.7 million, unchanged form the preceding quarter and higher than the prior-year expense of $5.7 million. The increase compared to the prior year is mainly related to the addition of Medfinders.

Our effective income tax rate for the first quarter was 55%. We expect our tax rate on a full year basis to be relatively consistent with the first quarter. This rate is different than the statutory rate, in large part due to permanent differences, having a disproportionate impact as a result of our near-term lower pretax income.

On a GAAP basis, we reported a net income of $2.3 million or $0.05 per diluted share, which included a negative $0.02 income from integration charges incurred in the quarter.

First quarter operating cash flow was $5.6 million. Days sales outstanding were 54 days as compared to 53 last quarter. The capital expenditures for the first quarter were $1.7 million.

As of March 31, our cash and equivalents totaled $4 million and our total term debt outstanding net of discount was $213 million. We also had $2 million drawn on our revolver. We tend to use any excess cash flow generated through the year to pay down debt.

Going into the second quarter of 2011, the nurse and allied staffing segment continues to experience positive momentum and is expected to grow sequentially by 2% to 4%. This growth, particularly in nurse staffing businesses, is being driven by continued penetration of existing and new MSP accounts and a steady improvement in traditional client demand.

Allied staffing revenue is expected to be flat as we stabilize from the disruption of integration activity. The locum tenens division is showing signs of modest improvement in demand, which is expected to translate into sequential increase in revenue of 2% to 4%.

Physician permanent placement revenue is expected to be flat, excluding the impact of the adoption of the new revenue recognition standard. Our home healthcare division is expected to improve sequentially by approximately 5%.

On a consolidated basis, second quarter revenues are expected to be between $234 million and $238 million. Gross margin fro the second quarter is expected to fall between 27.5% and 28%, and SG&A is expected to remain roughly flat with the prior quarter of approximately $53 million.

There are no material changes to the annual financial estimates we provided last quarter for depreciation, amortization, interest, expense, share count or capital expenditures.

And with that, we'd like to open up the call for questions.

(OPERATOR INSTRUCTIONS) And our first question from the line of Tobey Sommer with SunTrust. Please go ahead.

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

Yes, we can. How are you?

Hey. Doing pretty well. I wanted to ask a little bit about 2Q guidance in terms of tax rates, share counts and interest expense. Any color you can give us there below that line?

Sure. Well, the tax rate, as I said, is going to be somewhat similar to the first quarter at 55%. Share count, as I had said last quarter for the full year is going to run in the $46 million range. And I think the last one was interest expense, and it'll be relatively consistent with the first quarter.

Okay, great. And I guess one of your peers kind of described an element of the environment going from a demand to a supply driven environment. Can you talk a little bit about the supply, and is that becoming a big factor yet? What's going on in terms of hiring and attrition?

Sure, Frank. Maybe I'll start with that and ask Ralph and Bob to chime in on the travel and local businesses because it really does depend upon the business line that you're looking at. There are some areas where we really are still very much in a demand constraint mode, as much as demand has grown across all of our segments, particularly in all of our temporary staffing segments. It's still at a relatively low point compared to historic highs.

So the positive direction and the momentum is good, but we'd still like to see demand continue to pick up because demand growth is still the greatest driver of supply growth overall. We've been fortunate and have seen growth in the supply on the travel nursing side, and that's not surprising since demand has gone up so much. Word of mouth is one of the most powerful drivers of supply. You kind of get a viral effect as more and more nurses are out there traveling in more facilities, and they're talking to other nurses out in the field.

So, Ralph, you want to add anything to the supply equation?

Yes, a couple of things, Tobey. First, I think we talked about this before, but, you know, we have a very large database, 75,000 active travel candidates. And we've implemented new tools to make them easier to reach, like voice blasts and text messaging and things like that, which is more efficient for our recruiters and for the nurses as well who like those tools.

We really do try to kind of honor the nurses that are working with us first, and our fill rate -- I'm sorry, our retention rates are back up at 2008 levels. So I think that's a great sign for the business.

Starting in Q3, Tobey, our nurse supply began to grow, and that momentum has continued to build. We will be making some investments in supply in the upcoming quarters, but I think right now we are doing a very good job overall on our supply trend.

Okay. And lastly, if I could sneak one in about the physician perm. Is it just change in mix that's driving, I guess, change in bill right there, or are you seeing any pricing issues?

It is primarily a mixture. As we noted, the volumes were actually up 2% sequentially, and so I was held back a little bit by the shift in the types of specialties working, particularly, you know, radiology, which didn't see the same level of growth. It was, in fact, the only specialty that declined sequentially from a volume standpoint, so that has the highest bill rate of all specialties and drug down the overall revenue per day filled.

Great. Thank you very much.

Frank, and just to kind of come back on the supply question because the other piece of it is in the local staffing piece. So, Bob?

Yes, just to comment there, Frank, is that, you know, travel versus per diem on the per diem side, you have to think of it as a different kind of nurse. Nurses who work per diem typically, you know, are in the market obviously and they may want a -- they may have already a full-time job and are looking for additional work. So, you know, we do have more of a supply constraint right now because more nurses that were working per diem are probably already working as much as they can work.

And so we don't have the same benefit, I think, on the supply side in certain markets that we might as travelers because we can go into our database and get travelers to reignite travel again; whereas, on the per diem side it's a little tougher. So we are seeing in pockets of the country, particularly in the West and somewhat in the East, that we are really having difficult filling all of our orders.

You know, a big benefit, remember, that we have, Frank, is that we're able to really reach into the supply candidate pool across all of our databases, which now encompasses travel and per diem. And while they aren't always or even typically the same nurse, it does give us a very deep and broad pool that we can use to try to reach out to more and more candidates.

But even just in the respective pools that we have, we have by far the largest active candidate pool within our travel nurse database, and so we have a lot of opportunity to build growing demand just within the candidate pool that we have. And particularly if you look at the area of growth in orders, such as med surg, which is a slightly easier to fill based on the candidate pool, we're -- we don't need to recruit as many in some of those areas as we would in, say ICU or labor and delivery or OR, which are obviously always in short supply.

So my guess is we may fare better on the supply front than our peers because of that broader, deeper candidate pool, and now the ability to kind of cross pollinate and reach across multiple databases.

Great. Thanks for the additional color. That's helpful.

Thanks, Frank.

And we have a question from the line of Jeff Silber with BMO Capital Markets. Please go ahead.

Thanks so much. I just wanted to shift over to the demand side and specifically in your nurse allied business. Are you seeing any diverging trends between your acute care clients and your non-acute care clients?

In our travel nursing business, the trend is still, you know, still very strong on the acute side as a primary driver of the travel nursing side of the business.

On the allied side, we had, you know, over the last really kind of couple of years started to see increases from skilled nursing facilities. But just in probably the last quarter, we're starting to see some positive trends in acute care as well on the allied side.

Does that help?

Yes, it does. I appreciate that. Just shifting gears, Susan, you talked a little bit about your EMR business. Can you give it some gauge in terms of how big that is and roughly where you think that can go over the next few years?

Sure. As I mentioned, we have actually been serving this need for several years now, both in our traditional clients but also within MSPs. Oftentimes we find an MSP knowing that the client is going to be going through an EMR conversion over the next few years. Sometimes it's even a catalyst for them to want to sign up an MSP. And so it's not something that's necessarily new to us, and that's good because we built up a really nice pool of nurses, as well as our own internal corporate staff, who now have some really great experience and how to get on the ground and really add value in these types of implementations.

And if you do a great job at a traditional client, oftentimes it can lead to a follow-on MSP. So, you know, for us it's still a small piece of our business within the nurse and allied segments. It's single digits as a percentage of our overall revenue because our revenues are, you know, significantly higher. It's our greatest piece of business. But we see it growing quarter by quarter, and particularly a lot of momentum over the last 6 to 12 months. We may have several of these types of implementations going on at varying stages at any given moment.

Okay, that's great. And then just a couple of numbers questions. You were kind enough to give us organic growth between the different divisions, but since you report nurse and allied together, is it possible to just get the organic growth rate of that segment, nurse and allied combined?

I think we gave it to you. It was 24%. Is that right on a year-over-year basis? Let me just double-check my number, Jeff.

Okay. I appreciate that. I'm sorry if I missed that.

Oh, no, that's fine. Yes, 24% on a year-over-year basis. That's for the original standalone AMN nurse and allied business. Now, nursing's obviously up more than that, well over 30% on an organic basis year over year.

Great. Okay. And then in terms of just understanding the impact of both the workers' comp adjustment and the FASB adjustment, so that entire $4 million, in essence, dropped right down to the adjusted EBITDA level?

That's correct.

Okay. And in terms of going forward, at least in the second quarter, should we expect that -- you mentioned that the perm guidance you gave excluded that. Can you give us some sort of gauge of what that FASB adjustment might be in Q2?

Yes, it's less than $1 million in the second quarter.

Okay. And are you expecting any type of accrual adjustment to workers' comp?

No, that's -- we have the actuarial study done. You know, we're doing our normal accruals each -- obviously each month, and we have the actual study done on the first and third quarter, so that's kind of a one-time thing in the first quarter.

Okay. Really appreciate the color. Thanks so much.

No problem.

Thanks, Jeff.

And we have a question from the line of Gary Taylor with Citigroup. Please go ahead.

Hi, good afternoon. I just want to go back to the FASB adjustment. I'm sorry. I was taking notes on everything you were saying, and I'm not sure I entirely understood what the deferred revenue is that now is recognized. Could you just run through that again?

Sure. So like I said, there was a new revenue standard that went into effect January 1, and it relates to a multiple deliverable arrangement. In our physician per business, you know, we do retained search model. And so we've got different elements that we bill the client for. And historically, under the old guidance or the old standard, we were required to basically bundle those together and run them through a deferred revenue model. And so we've got -- we've had always a deferred revenue balance on our balance sheet.

Under the new standard, we were able to take certain parts of the -- certain services within that physician perm and not defer them anymore. So we -- as we basically recognize them as we bill it. So revenues that would historically have been deferred or recognized over the next few quarters, was essentially recognized in the first quarter.

What'll happen is it's a kind of a couple of quarter transition period, and then our revenue will kind of restabilize at levels that you're used to seeing.

So two or three quarters out is the actual -- would the actual revenue be higher than what you would have billed over the old model?

No, it'll be basically -- it'll be driven by what -- obviously how the performance of the business is going, but if you assumed kind of stable performance, the revenue by the third or fourth quarter will be essentially very similar to what it was in the fourth quarter of 2010.

What it would have been?

It'll just run. Yes.

Got it. The second question is just on bill rates, you know, that you talked about and hopefully the increased demand environment driving an improvement in your ability there. Unfortunately, when we look at the consolidated stats, you know, we can't see any of that because you're blending in the per diem business, so it gets dragged down year over year, and it was only up per day about 20 basis points sequentially.

So could you maybe just parse out for us a little more specifically, you know, as we move into the back half, what sort of growth and bill rates do you think you can achieve? And then, you know, even into 2012, what are your initial thoughts on that?

Sure, Gary. Well, first, you wouldn't necessarily see the increase in bill rates that we are implementing now until a couple of quarters from now. And so if you look at the underlying bill rates in, say, the travel nurse business, they're pretty steady, pretty flat in the first quarter. But going forward, we would expect them to increase based on the number and magnitude of the rate increases that we're negotiating and implementing today for future starts.

As I said, it usually takes two to three quarters to really see that start to show up in results. And obviously we would need to see that continue across more clients. The fact that we've seen twice the number of bill rate increases already in the first four months, compared to what we saw in the entire first six months of last year is a really good sign. The bill rates are what you would expect. I mean, modest, appropriately so in the sort of 2% to 4% range.

But, you know, just looking at the momentum, we see that as a really positive sign. And it is indicative too of the fact that clients realize if they do have demand and want to attract that quality nurse, they're going to need to pay us a higher bill rate, so that we can, in turn, cover potential increased costs in pay, and I mentioned housing as well.

Historically, in the high-demand periods, you have the ability to raise rates faster than that. Is it too early to have a thought on 2012, whether, you know, we should be modeling higher than that 2% to 4%, or would you want us to stick with that for now?

I think I would stay in that range for now. It certainly does depend on the momentum and the size of the demand increase. But I also think that clients are much -- they're very disciplined in their approach to rate increases and increase spend overall today, compared to maybe ten years ago. And so we wouldn't expect to see more than kind of 2% to 5% rate increases over the next coming years. If it's more than that, that's fine. It gives us that much more to potentially pass on to the nurse.

We don't see rate increases as a gross margin expander necessarily. For the next year, it will be more to cover any cost pressures that we feel.

Okay, great. My last question, just on your kind of long-term objective or goal of returning to a 10% EBITDA margin, I think you said in the next three to five years, what's the -- is there a revenue base associated with that? And the reason I ask is that, you know, you -- historically, you achieve that kind of margin on a similar, slightly lower revenue base than you have today, but you're a smaller company, and the G&A was less than half of it -- of what it is now on a dollar basis. So do you have a thought on, you know, what the revenue number needs to be to get back to a 10% margin?

We do have those thoughts, but I have to say it depends on exactly where that growth comes from. If we see it where we expect to see it, primarily or mostly from the travel nurse business, that's where we have the greatest amount of leverage based on the relatively low volumes that we're at today, and the ability to add more revenue without having to add SG&A at the same pace.

So, you know, I'd say we get there faster if we are seeing greater growth on the nursing side. But we haven't had the number out there publicly yet, so I would be hesitant to provide that to you.

Okay, thanks.

Thanks, Gary.

We have a question from the line of Josh Vogel with Sidoti & Company. Please go ahead.

Thank you. Good afternoon.

Hi, Josh.

Hi. Susan, you talked about aggressive hiring and training within physician perm, but I was curious about additional capacity you had in the other businesses.

Sure. And first to address the perm placement, you know, we do think there is more demand out there that we're not tapping into because we don't have the sales personnel, primarily on the marketing side out in the field. Unfortunately, with the decline of the retained search and just generally from a placement industry over the last couple of years, we felt more attrition in that business, as did everybody. And so we're very much in the rebuilding stages.

The productivity of the markers and recruiters we have in perm placement is terrific. They've done a great job of improving our productivity across fewer sales representatives.

We do have capacity in the travel nurse business, in particular, where we have added recruiters. Some that came along with the Medfiners acquisition, but we've actually even brought back some former recruiters that left us during the downturn. But even still as we look at the number of recruiters that we have today, and they're probably the best of the best that we've ever had, they are still not back at productivity levels of 2008. They've improved year over year and sequentially, but we still haven't gotten back to that capacity that we were seeing in '08.

So, Ralph, do you want to add some more color to that?

Compared to their career best effort, you know, probably 75% of our recruiters are still below their [curve] best effort, but as Susan said, they're the best of the best.

I think the other thing that will help us, you know, drive incremental productivity on them is the surge in the med surg nurses, which our, you know -- our database has more of those nurses in them. The positions are slightly easier to, you know, kind of credential and fill the other positions.

So they're the most efficient position to fill, so we were thrilled when it jumped up to the second-highest demand level. And, you know, of course it's good for our margin overall as well because there are more of those nurses. There's less of that pay bill pressure in med surg nurses as well.

Okay. That's helpful. Thank you. Brian, I may have missed it, but if we back out the workers' comp adjustment, you mentioned that gross margin was around 28.1%, I believe. Can you just walk me through the gross margin guidance for Q2, why it's going to tick down 50 to 60 basis points possibly?

Sure. And it's -- you know, I said if -- at 28.1%, I think we're looking at a couple of different things. One, we've talked a little bit about some of the cost pressures and housing and travel expenses. And so, you know, just looking out to those. You know, another reason why we're progressively trying to have conversations with our clients on and get bill rate improvement is in the near term I think we're going to experience some pressure on those costs.

And then there is an element of just the mix, as we see our business grow quicker in our nurse and allied segment, which has a slight lower gross margin than physician perm and home health. As we see that grow, it's probably just a mix.

Okay. And how is the dialogue going in terms of pricing talks?

I think Susan mentioned that we had a large number of increases in Q1. I think it was, you know, more than we had in the first half of all of last year. You know, the -- where you still see pressure is, you know, kind of specialty driven. You know, as Sue mentioned, labor and delivery, ICU nurses are kind of hard to come by right now, and so we're getting good responses from our clients in that area on some of the other skills. Like PTs, we're starting to see some improvement in the allied business as well.

So it's still mixed. I'd say we're very early in the recovery. And, you know, while I don't want to, you know, say ramp up 2012 yet, I would still feel like we'll still -- we'll gain momentum over the next couple of quarters on that subject.

Okay, great. Thank you.

Thanks, Josh.

Our next question from the line of AJ Rice with Susquehanna. Please go ahead.

Hi, everybody. A couple of questions if I could ask them. Just maybe following up first on one question before about recruiters. You said you'd added some already. What's the expectation for this year? Do you pretty much have what you need, or is there -- I mean, if you look today versus where you'll end the year, is there going to be a meaningful further increase in recruiters?

You know, we probably will increase a few before the end of the year. It wouldn't be smart for us to suppress it too much because we want to keep an eye on the future of the business. We think that it's -- you know, the growth is, you know, consistent kind of across all segments. So, you know, we will be making some throughout this year, but it's not a significant number (inaudible).

On the Medfinders, you've sort of been through the first cycle of placements under the AMN banner. Any comment on retention rate of people rolling over with you? Has that been about as expected? Any commentary on that?

Well, our -- in terms of the travelers themselves, the (inaudible)?

Yes. Yes, that's what I'm thinking of mainly. And I guess also the customers too, but I was thinking more of the travelers.

Well, our traveler retention rate has improved significantly over the last, you know, year over year and sequentially. I do think it's partially driven by the fact we have more assignments available, which is some of the significant benefit Medfinders brought to us is some very attractive accounts and MSPs.

Bob, do you want to comment on the client side?

Yes, I think the client side has been -- gosh, I think the whole story is supercharged. I mean, we've got a much better story now than we've ever had.

Okay.

To be able to go to the client and be able to start to tell that story that we've never been able to tell as Medfinders alone nor even ANM. And I think that's where the client side of it is enormously good.

I've -- we've got a very strong pipeline on our MSP but also in the core business. Just -- Ralph's done a great job with his team to help have them add per diem to his contracts, and likewise we've had some clients where we didn't have travel added to our contract. And so there really is a great deal of cross selling going on, and the clients, I think, really appreciate the fact that we're now a full-service organization and can provide all their needs.

Okay.

AJ, I think it contributes not only to the retention of clients because we are so much more capable to fill a broader section of -- and types of their needs, but also in winning new contracts, such as MSPs. If we look back over the last year and a half, for example, basically going back to the beginning of 2010, and as we count the number of MSP contracts that have come up for bid, we believe we've won over half of those.

Yes.

And there are other great competitors out there, so you've got a group of another maybe 10 to 15 competitors who are winning the rest. But to me, that speaks pretty strongly about the value proposition that we're able to bring to the market.

Okay. On the cash flow from ops in the quarter, you were $5.6 million, very similar to fourth quarter. I'm assuming the FASB change and the workers' comp were noncash items. I don't know about the $1.3 million restructuring, but is this a good run rate to go forward with on a quarterly basis?

You know, it will vary quarter to quarter. I mean, you're right in that the workers' comp and the revenue change were noncash items. You know, I think there's -- the two biggest drivers of our operating cash this year are going to be obviously our earnings and then our growth and working capital. Clearly as our revenue is growing, we are seeing our receivables grow as well. So, you know, DSO is something that I'm keenly focused on. It's been very good. It was 54 this last quarter, and you know, we'd like to keep it that level. And if we can, then I think we'll see our cash flow be relatively consistent for the year.

Okay. And then maybe finally, this is a small piece of your business, but I know home health was sequentially down 5% but you're calling for it to be up 5% in the next quarter. Is there -- I mean, it's obviously got a good margin for you. Is there anything behind the turn that you're expecting?

Yes. Our business is -- as you know, we have about 20 locations, and as you saw in the quarter, did about $13 million. So we have a currently regionally based organization. And so we can see ebbs and flows within the market from a quarter-to-quarter standpoint. I think you should expect to see a little more volatility simply because of the size of that business unit.

But fundamentally, the reason we think things are going to improve in all four segments is just investments we've made in more salespeople, more process in terms of how we're getting out in the marketplace and selling our product.

You know, the face-to-face encounters and some of the other things, we think in another quarter those things will start to become a little bit less of a problem, and hopefully will help us drive the business in a more normal fashion.

Okay. That's great. Thanks a lot.

Thanks, AJ.

We have a question from the line of Jeff Mueller with Robert W. Baird. Please go ahead.

Good afternoon. This is [Jeff Moyler] from Baird in for Mark Marcon. Congratulations on the nice quarter.

Thanks, Jeff.

You know, good to see you guys running ahead of plan in terms of the timing of the synergies. But can you just provide a little bit more color, have you identified some additional synergies that you can actually exceed the $10 million, or is it more of just a timing issue?

You know, it's actually probably both over time. And there's the obvious timing aspect of it. And on the cost side, you were -- we're probably running a little bit ahead of that original estimate and expect to achieve more. But where the real upside is longer term is on the revenue synergies, as we continue to build upon those direct fills at the MSP contracts. We would expect that we can build upon that $2 million target that we set. In fact, as I've said, we're already ahead of that.

Okay. And maybe the strong expense synergies are masking some of this, but can you just talk about the economics of the MSP business? You've obviously had some strong growth there. You know, it sounds like there's probably some upfront implementation expense that goes in when you sign a new client, yet your OpEx management's been excellent.

Can you just talk about how intensive the implementation process is and how much expenses run revenue?

Yes, I -- this is Bob, and I -- Jeff, I think the beauty of putting the two companies together, one of the benefits was that unlike some of our peers in the marketplace, we didn't have to build the infrastructure. We already have a sales force that had it in place for three or four years. We brought those sales forces together. We had an implementation team, probably the most experienced -- certainly the most experienced in the industry.

Our account management team really represented largely by our branch offices because there's a significant amount of our MSPs are based within our branch offices. And so we didn't really have to add as much infrastructure when we brought the two companies together.

So our incremental costs on an MSP are really only when we have to add incremental people because there's incremental revenue. We don't have to fundamentally build that fixed-cost infrastructure, if you will, that's in place.

So for us, I think you'd see, you know, just even on the overall return of our business on MSP that our MSP business generally provides a higher return on sales than our traditional business does, and that's largely because we're able to leverage the infrastructure that's there. Once you get a nurse in, you can repeat that nurse over and over again. You don't have the orientation costs. You've got control of the margins -- excuse me, control of the orders. And you really don't have any marketing costs to speak of.

So it's longer term. A lot of these clients, as you may know, Jeff, have been in place -- our longest client has been in place almost eight years now. We've got many of them that are four or five years old. So we feel really good about the leverage we're able to get out of the infrastructure. And the incremental costs aren't really that extraordinary for us.

Great. Thanks for the color and congrats again on the quarter.

Thank you, Jeff.

Thanks, Jeff.

We have a follow-up question from the line of Tobey Sommer with SunTrust. Please go ahead.

Thank you. I wanted to ask a question about the revenue synergies opportunity, and I apologize because I have been bouncing between conference calls, if you already answered this. But where do you sit right now in terms of capturing some of that? And any kind of numbers you can throw at us or innings, comparisons, if you want to do baseball, would be helpful. Thanks.

Well, in turns of the original targeted revenue synergies, you're probably referring to the $2 million in incremental annualized EBITDA. And that comes from contracts that we already had in place, so it's not new contracts that have been won since the companies came together, but they were contracts that both ANM and Medfinders already had in place, and our ability to fill more of the travel and per diem orders within those contracts.

We are well ahead of schedule in meeting those revenue synergies. And we talked about overall we expect to meet those in the third quarter. Quite honestly, I could see us meeting them sooner than that.

So just to refresh my memory, it was $2 million in EBITDA?

EBITDA, correct. Incremental annualized EBITDA specifically from direct fill revenue synergies from those MSP contracts. So it doesn't include the fact that we are winning more MSPs and obviously filling those. It doesn't include the per diem business that we might bring into our traditional clients. That's incremental to that equation.

It was the per diem and travel business that both standalone companies were foregoing because of the revenue mix?

Correct. That we were subcontracting out to affiliate vendors, which we still do a portion because we can't fill all of the needs, even in our most successful MSPs. There are always going to be urgent, immediate, high-specialty needs that we need to work with affiliate vendors and partners for. Which is why those partnerships with affiliate vendors are so important to us.

Well, and to add color there, I think it speaks to why the margins are higher in those businesses. We don't really price that to be the lowest price. We -- it's an all -- the pricing for that business is -- encompasses the idea that we have an obligation to meet fill rates. And as a result of that, we have to have, you know, not only attractive rates, but we also have to have good rates for our subcontractors, to be able to have them help us.

So this is less about going into a client and telling them we can be the lowest price. This is really about going to a client and saying we can meet 90% to 100% of your needs, and here's how we're going to do that. And that's the fundamental business between an MSP model and a [VMS] or technology-based model. That's one of the reasons I think we're seeing in this demand-constrained -- or excuse me, supply constrained market that we're starting to move into, that the MSP model will be even more attractive going forward.

And I guess I had kind of a numbers question in broad terms. With the gross margin down sequentially but G&A flat, does that imply lower EPS sequentially as well, or is there some other items that are tacked or something else that could impact the bottom line?

Our revenue projects for the second quarter is up, so I think that's -- from that alone, if you just -- if you kind of do the math, it would not imply a reduction in EPS.

Sequentially?

Yes. And on the margin too, we talked earlier about kind of the reasons for the second quarter. You know, this -- we talked about before as well that, you know, we -- quarter to quarter you're going to see some fluctuation in the margin. Obviously our goal is to move that margin back up into the 28% range.

Absolutely.

We talked about that before. But you know, in the near term we're, you know, seeing some of those pressures.

Okay. Well, that does it for me. Thank you -- thanks for your help.

Thank you.

And I'll turn it back to our speakers.

Great. Thank you so much. Well, we'd like to thank everybody for your questions today and for joining us. We sincerely do appreciate your support, and we look forward to giving you an update on our progress next quarter.

Thank you. And does that conclude our conference? Okay. Very good. Ladies and gentlemen, this concludes our conference call for today. We do thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.