AMN Healthcare Services Inc (AMN) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the AMN Healthcare second 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) And as a reminder, the conference is being recorded.

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

Thanks, Laurie. Good afternoon, everyone. Welcome to AMN Healthcare's second quarter 2011 earnings call. A replay of this webcast will be available at amnhealthcare.com/investors and will be available until August 25, 2011. 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 important -- various important factors, including those identified in our annual report on Form 10-K for the year ended December 31, 2010, and other 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 Developments subsequent to this call may cause these statements to become outdated.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.

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 Nurse and Allied Staffing; and Bob Livonius, our President of Workforce Solutions.

I will now turn the call over to Susan.

Thank you so much, Amy. Good afternoon and welcome to AMN Healthcare's 2011 second quarter earnings conference call. We are continuing to experience a steady recovery and are pleased to report our fifth consecutive quarter of sequential revenue growth. Customer demand continues to pick up in our largest businesses of nurse staffing and locum tenants, and the benefits of our enhanced value proposition are resonating well with existing and new clients. As a result, we are seeing continued momentum in building both our MSP and traditional clientele.

While top-line growth is progressing, we have experienced some headwinds in our direct costs, such as higher apartment rents, travel expenses due to fuel costs and some increases in clinician compensation packages. We anticipate these margin pressures to continue at this level for the foreseeable future, but we are making progress in reversing these trends through bill rate increases and tighter management of our direct costs.

While placement volumes rose in the second quarter, we were able to hold SG&A relatively steady, which enabled us to experience a modest improvement in operating leverage.

Now, let's get into some of our trends in the financial performance. Overall, consolidated revenues for the second quarter were $235 million, up 2% sequentially and 57% year over year. On a pro forma basis, consolidated revenues were up 10% over prior year. In addition to our top-line performance, we were able to leverage our infrastructure and the cost savings from the acquisition to further reduce SG&A as a percentage of revenues.

With gross margins of 27.7%, we were able to deliver adjusted EBITDA of $15 million and a margin of 6.5%. Second quarter, nurse and allied revenues were $140 million, up 4% sequentially. This marks the sixth consecutive quarter of sequential growth in our largest business segment and further grows our market position in this segment, where we are more than twice the size of our largest competitor. It's also noteworthy, since the second quarter is sequentially down in this segment.

Year-over-year revenues were up 85% on an as-reported basis, and up 20% on a pro forma basis. This growth was driven mainly by the travel nurse business where revenues were up 5% sequentially and 36% year over year. The volume growth occurred at both MSP and traditional clients.

Travel nurse order levels have been increasing for well over a year now and have generally been running more than 75% above prior year. As we saw orders jump in the second half of 2010, we may see this gap narrow a little bit later this year. Demand is rising at both MSP clients as well as at our traditional clients. In June, the number of facilities with travel nurse orders was up over 40% with last year. The growth in orders is also geographically dispersed, with our top five states spanning the West, the Northwest, Northeast, the Southeast and the South.

Another good sign for the next few quarters is that we have already begun to receive a significant number of winter orders for some of our larger clients. We continue to be successful in winning new MSP contracts. During the last 12 months, we have been awarded 30 new MSP contracts, adding approximately $75 million in annualized gross spend under management.

We had a particularly strong second quarter, adding ten new contracts. In some of these MSP clients, we've replaced an incumbent provider. These wins are recognition by clients of our stronger value proposition and continued validation that AMN and Medfinders are truly better together.

Another validation we recently received is the prestigious peer review designation by the Healthcare Financial Management Association. The HFMA is a highly recognized association that supports healthcare CFOs. This objective evaluation of our MSP program consisted of a rigorous, multi-step review and was based on our proven effectiveness, our quality, value and customer support. We are excited to be the only MSP provider in our industry to receive this designation.

Our local staffing offices continue to be a key part of our success in winning and filling MSP business. Second quarter revenues for local staffing were $24 million, which was up 3% sequentially and 7% over prior year. Although demand trends in local staffing are generally increasing, they are less consistent across different regions, and there are challenges in recruiting and supply in certain markets. For both travel and local nurse staffing, supply is becoming an increasing constraint to meet the rising demand.

While we do have an advantage in the market with our substantial candidate database, we are also making incremental investments in candidate market to target additional supply.

Second quarter allied revenue was $29 million, which was up 1% both sequentially and year over year on a pro forma basis. This slower growth was due mainly to the disruption of the allied integration in April. With that integration now behind us and complete, we are already experiencing improved performance in this business and expect to deliver stronger growth in the second half of the year. Recently, there has been a pickup in imaging, respiratory and lab demand, but a slight slowdown in rehab therapy demands.

Our locum tenant segment delivered second quarter revenues of $71 million, up 1% sequentially. Year-over-year revenues were up 9% on an as-reported basis and down 2% on a pro forma basis. The greatest sequential volume improvement we experienced was in our largest specialty of primary care. The other specialties were relatively steady, with the exception of anesthesia, which experienced a volume decline.

While we might see this type of quarterly volatility in some specialties, we anticipate continued modest improvement in the overall locum tenants business. A good indicator of this future growth is our days sold, which continued to tick up modestly in the second quarter. Year over year, pricing remains stable in this business, with the exception of radiology, which declined.

To further endorse our commitment to providing quality physicians, AMN recently applied for and was awarded certification status as a credentialed verification organization with the National Committee for Quality Assurance. The NCQA certification assures clients that our credentialing processes are consistent with the highest standards of physician and practitioner credentialing in the industry. It also allows our clients to reduce their workload when bringing an AMN physician into their organization. We expect that this designation will open some new doors for us, as some locum buyers will give preference to NCQA certified providers.

In physician permanent placement, second quarter revenues were $9 million, down 13% sequentially. Without the impact of the deferred revenue, accounting changes, which were implemented in the first quarter, revenues would have been flat with the prior quarter. The physician search market has been steady but is still not growing. While hospitals are hiring more physicians, many of them have significantly increased their internal recruiting resources.

We are beginning to see more openness recently in conversations with hospital systems that have grown impatient with their internal recruiting results. We are also seeing some success in offering alternative service relationships where we work in more of a partnership with the internal recruitment team.

In the second quarter, revenues from home healthcare services were $14 million, representing a 2% sequential increase and a 9% year-over-year decrease. The sequential improvement was driven primarily by volume increases. Our average episodic rate for Medicare was flat for the last quarter but was down 9% year over year due to the reimbursement rate and coding changes that went into effect January 1.

Although Medicare represents less than 20% of our total home healthcare revenues, the rate in coding reductions and the new face-to-face requirements are still challenging to the business. At the state level, we've also experienced some Medicaid rate pressures. Nevertheless, we anticipate the revenues will remain stable going into the third quarter, and, in the long term, we continue to take steps to grow our Medicare and private-pay businesses as these typically still have higher growth and EBITDA margins.

With penalties for readmissions beginning in October 2012 and the planning for ACOs, hospitals are more focused than ever on reducing readmissions. We belong in the long run, home healthcare will play an increasingly important role in these efforts.

As we approach the one-year anniversary of our acquisition of Medfinders, I can't help but think what a difference a year makes. During the last year, we have experienced significant improvement in our larger business segments. Clients are rewarding our commitment and superior offering with increased market share. And we have proven the tangible benefits of the Medfinders acquisition.

As we reported last quarter, we are ahead of schedule in achieving the $10 million in annualized EBITDA synergies from the acquisition. Going into the third quarter with the underlying market improving and the integration of Medfinders complete, we are able to focus even more attention and resources on everyday execution to maximize volume and profitability in the improved demand environment.

Longer term, as lower reimbursement levels and mounting costs continue to pressure hospital operating margins, providers are seeking strong partners and innovative approaches to their care delivery and business processes. With clinical wages representing, on average, 40% of hospital revenues, our clients are looking for ways to flex and more tightly manage their workforce. As the leader and primary innovator in healthcare staffing and workforce solutions, AMN is well positioned to help our clients achieve their financial, quality and patient goals.

Before I turn the call over to Brian, I would like to thank our team members for their tremendous efforts over the past year to help us further build our position as the leader in healthcare staffing and workforce solutions. I will come back to you in our Q&A section to help further answer your questions, but now I will turn the call over to our CFO, Brian Scott.

Thank you, Susan. Good afternoon, everyone. As Susan mentioned, second quarter was $234.5 million. Our gross margin for the quarter was 27.7%, up 10 basis points from last year, but down 190 basis points from last quarter. The sequential decrease in gross margin was due primarily to a first quarter $1.9 million Workers' Compensation actuarial benefit. The gross margin was also impacted by the adoption of a new revenue recognition standard in our physician permanent placement segment, which added $2.1 million of revenue in the first quarter and $700,000 of revenue in the second quarter.

SG&A in the quarter totaled $52.6 million, which included $1.2 million of costs associated with the integration of Medfinders. Excluding integration of expenses, SG&A as a percentage of revenue of 21.9% decreased in the prior year by 50 basis points and sequentially by 60 basis points. We accomplished the majority of our cost synergy efforts by the end of the second quarter, and the improved SG&A percentage, in part, reflected these efforts and our ability to leverage our infrastructure as revenue grows.

We are prudently adding team members, primarily in sales and operation, in connection with growth in travel nursing and the implementation and ongoing support of new MSP contracts, as well as increasing our investment in targeted marketing programs to add supply to meet growing demand.

During the third quarter, we also reinstated merit increases for the majority of our team members. Therefore, in the second half of the year, we expect SG&A to grow in absolute dollars but remain relatively consistent as a percentage of revenue.

Our nurse and allied segment revenue increased sequentially by 4% to $140 million. Volume grew 2% sequentially to 5,200 healthcare professionals, and revenue per day was up sequentially on slightly higher bill rates and a favorable staffing mix, offset partly by lower hours worked.

Nurse and allied gross margin decreased sequentially by 170 basis points to 25.8%, due mainly to the first quarter Workers' Compensation actuarial adjustment, most of which benefited this segment, as well as higher health insurance costs in the second quarter.

Second quarter nurse and allied segment operating income was $14.4 million or 10.3% of revenue, as compared to $15.1 million or 11.2% of revenue in the prior quarter. The operating margin improved by 70 basis points year over year, due in large part to the cost synergies from integrating the Medfinders travel nurse and allied businesses and improved operating leverage.

Included in the nurse and allied segment is our O'Grady Peyton international division, which currently represents less than 1% of consolidated revenue. Although the primary business of this division has been and will continue to be the placement of foreign trained healthcare professionals into opportunities in the US, we also have a small office in the UK that provides direct placement services in foreign markets.

Due to lower client demand and poor financial performance, we are in the process of closing this UK office, which will have an impact on both revenue and SG&A and reduce third quarter EBITDA by approximately $600,000.

Our locum tenant segment revenue increased by 1% from the prior quarter, reflecting a 3% increase in days filled, probably offset by a decrease in our revenue per day filled.

Gross margin of 25.5% was down by 70 basis points in the prior year from pressure on the pay bill spread and certain specialties, partially offset by the addition of the higher margin Medfinders locums business. The gross margin was sequentially lower by 70 basis points due to a high margin staffing project with a single client during the previous quarter. Locums operating income of $5.5 million or 7.7% of revenues, compares to $6 million or 8.6% in the prior quarter, with the decline related to the change in gross margin.

Within our physician permanent placement segment, revenue declined sequentially by 13% due to the previously noted adoption of a new revenue recognition standard effective on January 1. We recognize approximately $2.1 million of revenue in the first quarter and $700,000 in the second quarter that would have been deferred under the old standard. Excluding the impact of this change, revenue increased year over year by 5% due to the addition of Medfinders and was consistent with the prior quarter.

Physician permanent placement operating income for the second quarter was $2.5 million or 26.5% of revenue. Our home healthcare segment generated revenue of $13.9 million and operating income of $0.4 million for the quarter. Gross margin in this business was 34.5% for the quarter, a decrease of 360 basis points in the prior quarter, due primarily to the Workers' Compensation benefits recorded in the first quarter.

Unallocated overhead, excluding stock compensation and integration expenses in the second quarter was $7.5 million, a slight decrease in the preceding quarter of $7.7 million and higher than the prior year expense of $5.9 million. The increase, compared to the prior year, is due to the addition of Medfinders.

Our effective income tax rate for the second quarter was 69%, which reflects a true-up of our tax expense to the full-year projected tax rate of approximately 60% to 62%. This is higher than the previously estimated full-year tax rate, due in part to the decision to close our UK office, which limits the deductibility of losses in this operation, as well as costs associated with amending our credit agreement. We still anticipate that our full-year cash tax rate will be in the 26% range.

On a GAAP basis, we reported net income of $800,000 or $0.02 per diluted share. Excluding integration costs, adjusted earnings per share was $0.03.

Second quarter operating cash flow $2.4 million. Days sales outstanding were 54 days, unchanged from last quarter. Capital expenditures for the second quarter were $800,000.

As of June 30, our cash and equivalents totaled $7.9 million, and our total debt outstanding under our credit agreement, net of discount, was $215.8 million.

As I mentioned, on July 25, we executed an amendment to our credit agreement to increase our revolver from $40 million to $50 million and adjust certain financial covenants to maximize our operating flexibility for the longer term. As a result of the amendment, the Company incurred fees of approximately $2 million, the majority of which are expected to be charged through interest expense in the third quarter.

Going into the third quarter, the nurse and allied staffing segment continues to experience positive momentum with 2% to 4% sequential revenue growth anticipated. Travel nurse, allied and local staffing are all expected to contribute to this growth, with travel nurse volumes again expected to be above prior-year pro forma levels by more than 30%. Locum tenant segment revenues expected to increase 3% to 5% sequentially.

Physician permanent placement revenues are anticipated to be stable, and home healthcare services segment revenues are expected to be up 1% to 3%. On a consolidated basis, third quarter revenues are expected to be between $241 million and $245 million. Gross margin is anticipated to be between 27% and 27.5%. SG&A expenses are expected to be approximately 22% of revenue. And adjusted EBITDA margin is projected to be approximately 6%.

There are no material changes to the annual financial estimates we provided earlier in the year for depreciation, amortization, share count or capital expenditures.

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

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

Hi, this is [Frank], in for Tobey. I wanted to talk a little bit about the locum tenant guidance. As you look at that 3% to 5% guidance, where do you see that falling out in terms of the mix of volume increases, mix shift or bill rate, pay rates?

Hi, Frank. You know, really we see most of our specialties continuing to grow into the third quarter. I'm always hesitant about the two that have been most volatile like radiology and anesthesia. But the trends would show that pretty much all specialties at sort of a high level are expected to grow, and it'll be volume driven.

We do believe that there's opportunity for pricing increases, and we're seeing some small signs of improvement in that, but we're really not going to see it flow through in the third quarter. I expect that to be more of a fourth quarter or 2012 event.

Okay. And then on the travel nursing side, I guess the first part, any color you could give us on orders in July? And also talk a little bit about maybe the supply environment.

Sure. And you know, Ralph is here, so I'll have answer the majority of it. But as I mentioned in my comments, we're seeing continued strong orders, really across both MSP and traditional clients. The majority of our orders have always come from traditional clients, but we've seen good growth in both. And a really good sign is we've started to receive some of our winter seasonal needs, sort of a little earlier even than anticipated, and we expect to receive more as we're talking with our clients. And that gives us greater confidence, as we look forward to the coming quarter.

So Ralph, you want to give us some more color on orders?

Sure. Definitely travel orders are up in July, and as Susan mentioned, we are -- for the past three weeks we've started to see some pretty big jumps amid seasonal needs from our West Coast clients thus far. So I would say demand is -- continues in kind of the same upward trajectory that it's been on over the past two to three quarters.

Okay, great. And maybe some quick numbers questions. Any expected acquisition-related costs in 3Q?

There'll be some integration expenses. They'll come down pretty significantly from the last couple of quarters. I would guess probably more in the $300,000 to $400,000 range.

Okay. And CapEx expectations for the year?

You know, we've given a range of kind of $6 million to $8 million for the year, so I'd say we'll be at the lower, middle range of that.

All right. Great. Thank you very much.

Thanks, Frank.

And our next question from the line of Paul Condra with BMO Capital Markets. Please go ahead.

Hi, good afternoon.

Hi, Paul.

Hi. I just wanted to ask about the -- sorry if I missed this, but the bill pay spread on average for the Company. How did that trend in the quarter? And then how does that look going into the third quarter?

Well, probably better to dissect it by business segment as opposed to talk about it as a whole because there are different characteristics overall in the locums division. Sequentially, we saw a worsening in the spread, if you will, but some of that was because we had a pretty sizeable client engagement in the first quarter that had very high gross margins and basically a lower bill pay spread, more favorable bill pay spread for us. So that kind of drove a sequential decline.

But overall, we don't see a lot of changes happening there. It is very competitive in some of the more challenging specialties like surgery and radiology. So that's where we tend to get a little bit more pressure. But don't expect it to change significantly going forward. If anything, as I said, with bill rate increases, we would expect we can actually improve those spreads going forward in the locums business.

Okay, great. And then I just wanted to ask about what you're seeing in terms of hospital acquisition trends and how that might be impacting your business.

Sure. Let's go back though and give you that same answer for the nurse and allied business.

Oh, great.

Hey, Paul, it's Ralph. On the nurse and allied business we're seeing, you know, a very steady trend on our pay bill spread, and an actually downward trend just slightly in our allied business. So it's been, you know, pretty favorable there. Where the impact is coming in is really kind of in our housing costs where we're seeing an increase in housing and insurance costs there, so that's kind of impacting margins.

We are feeling pressure from the healthcare professionals, but thus far, kind of the attractiveness of the assignment and all of the options we can offer has allowed us to steer people towards ones who are -- we're not taking a hit on bill pay spread.

And then your latter question on hospital consolidation. You know, we see that as a continued favorable trend for us, particularly for our MSP and other workforce solutions offerings like RPO. Those clients are typically looking for more of a strategic partner and wanting to really get their arms around their total spend and find ways to reduce their cost but maintain their quality. So that's usually a good thing for us when there's consolidation occurring.

Have you seen a notable increase in consolidation?

I can't think of a notable consolidation that has affected us recently.

Okay. All right. No, that's great. Those are all the questions I had. Thanks a lot.

Okay. Thanks, Paul.

Thanks, Paul.

We go next to the line of Josh Vogel with Sidoti & Company. Please go ahead.

Thank you. Good afternoon. Susan, you were talking about housing insurance costs being a bit of a headwind, and I was just curious if -- and you said you were hoping to pass it along in terms of pricing. Have you begun this dialogue? And if so, are you seeing any pushback?

We absolutely have begun that dialogue. In fact, it began very much at the beginning of the year and probably even the latter part of last year, and it's driven by two things. One, yes, we saw our costs starting to rise and realized that was going to be a continuation in particular in housing. But also it's driven by demand.

As demand goes up and you have more challenges in filling those needs, you're able to better educate your clients that they need to raise bill rates in order to not only offset rising costs, but in order to keep the pay rates competitive and to attractive the limited supply that's out there, particularly in areas like OR, which is one of our highest demands. If they can't fill those OR positions, they may have to close the OR, which was lost revenue for them. So those are actually the easier conversations to have when there are revenue drivers.

So the team did a great job of really aggressively beginning that education process and those conversations late last year, early this year, and I think we mentioned on our last call that we had made great progress in bill rate increases.

Ralph, I don't know if you want to provide a little more color on how the first half shook out.

Sure. For the travel nurse business, we've had about 250 facilities so far that have agreed to price increases. And then we have cost-of-living increases in about 175 other facilities in total. So you know, we are having some success there. That's three to four times the number of price increases we were able to get in 2010, which is pretty significant. The size of the increases is usually 3% to 5%. Where the pushback comes, as you said, is in the timing of that. So it usually doesn't apply till their next assignment. It's hard to get them to increase on existing assignments. So we're probably not going to see a whole lot of impact on that until later in the year or even into the new year on those.

On the allied side, we have seen some improvement in our pricing there as well. They're -- you know, to help offset the housing and insurance cost increases. A little more immediate there, and we're hoping to see a little bit of improvement we could talk about next quarter.

Future booking trends are trending positive from a bill rate basis, so it just -- now it's just a little bit more of continuing to grind away at and waiting some time for the assignments to end and new assignments to start.

Okay. That's helpful. Thank you. You guys had a good quarter of adding new MSP contracts. I believe you said there were ten new contracts in the quarter. Were all ten is where you were replacing the incumbent provider? I was just curious how you went about doing that or how are you -- what you were offering that the incumbents weren't. Was it slightly better pricing or, you know, just wanted to hear comments there.

I'll have Bob jump in and answer that one, Josh.

Thanks, Josh. Yes, we're -- on the ten contracts, actually about a third of those were replacements of existing incumbents. But actually our pipeline right now and contracts that are in final negotiations today for the third quarter includes even more as a percentage going forward. And I think the primary reason for that is we really have a proven track record.

And some clients who have been with their incumbent, vendor -- in some cases, some of our largest competitors, where they've been in place for several years. What tends to happen is that over time we have continued to improve our program, and one of the things we've got is just a really, really strong reference base and a very strong account management team. And so the reference base is upon renewal of those contracts when they go out to bid or if they get considered time for renewal. When they go out to bid, they find that there are some better solutions in the market.

I would argue it's not about price. I really don't think that we're finding that we have to lower the rates. What we are able to do because we're now together as one Company is be able to provide the full spectrum. And it's not only the travel side that we used to be able to provide very effectively but now we can do also the per diem. We can manage the flow pool. We can provide RPO services. And so the whole range of workforce solutions.

It's just a story that's resonating with clients, that it's truly a workforce solutions model, not just a pricing model. So I think we're -- we have been successful in winning some new ones from competition, and actually that's increasing this next quarter as well.

But the majority are still hospitals that are deciding for the first time to implement an MSP program.

That's right.

Okay, great. That's all I have right now. Thank you.

Thanks, Josh.

And our next question from the line of Gary Taylor with Citigroup. Please go ahead.

Hi, good afternoon. A couple questions. Just going back to the forward integration costs, you were saying perhaps $300,000 to $400,000 in the 3Q. Where does that run out? Do you see something in the 4Q as we get into 1Q at [12]? You know, are you still spending on that, or is that largely rundown?

Well, it'll definitely rundown by the end of the year. We have no anticipation of anything in the first quarter of next year. If we're doing things, they're just part of the business to continue to become more efficient, but I think the third quarter we still have a few small projects. As we've mentioned before, we're -- in terms of the big projects, we're completed with those and are hitting our cost synergy targets. We kind of completed that, and we're on track to be hitting those numbers in the third quarter on an annualized basis, but there are just a few things we're wrapping up with continued opportunities to improve our operating model. So there's just some small costs in that third quarter. Beyond that, in the fourth quarter, it'll be very small, if anything.

Okay. And just going back to the tax rate, I haven't tried to calculate on the fly, but you're saying 60% to 62% on a GAAP basis for the full year. I think you had 55% and 69%. So can you kind of ballpark what your expectation is for 3Q, or maybe you did and I missed that.

Well, I would use -- for Q3 to Q4 I would use that kind of 60% to 62% range in the model. So that higher rate in the second quarter was to get the year-to-date rate closer to 60, and it'll be in that range for the remainder of the year.

And then my last question, Susan, could you just maybe take a broader view and help us think about what macro risks there may be? I guess what I'm seeing from macro perspective is that, you know, obviously we've had a little bit of pickup in unemployment, a little bit of a reversal of some of the job growth. To me, that tends to suggest some pressure on you sourcing supply of nurses. And then on the hospital side, you know, the last three months we've seen weaker patient utilization through the channel. I think June was the first month in over two years that hospital employment actually declined. So it would seem to imply a little more demand pressure. What's the risk that this recovery that you guys have underway, you know, gets derailed by what's happening on a macro basis?

We certainly see those same external macro factors and track them and watch them, and they concern us as well, just generally, for the economy and our business. With that said, we don't see them affecting our business today. And some of the reasons could be that the unemployment rate, for example, that the additional supply that was brought in to the permanent nursing market, the way that hospitals were able to really stretch their permanent later or maybe bring in retired nurses back into the workforce, that's kind of run its course.

I mean, I still think some of those people are in permanent positions, are still working more hours. But many of them have also gotten burned out and have said, no, I can't do this anymore. You've seen that as -- translate into greater strikes. We've had more strike activity in the country in the nursing profession than I've seen in many, many years. And I think that's indicative of the burnout and the frustration of those nurses saying no more. So it's unclear to me how much unemployment would have to go back up before you could entice those nurses that have said enough, and entice them to go back into the workforce and work more hours.

So at some point, yes, if unemployment went back up to 12% or 14%, I think we would see an effect. If it goes back up another 50 basis points, I'm not sure we would really feel an impact because it's actually sort of already done that in (inaudible). And we've seen nothing but progression in the growth and demand and in our ability to grow volumes. So I realize that's not an answer in predicting the future, other than to say we share those same concerns. I think we have to be flexible and ready for sort of any scenario.

Right now the scenario that we're seeing and that we're going after is a growth scenario, and so that's how we're positioned. But you know, we need to remain flexible if we see that change.

And in the very near term, you know, the demand that you're seeing -- I mean, it sounds like it's been pretty constant. It hasn't fluctuated of late with some of the weaker June data?

No. You know, maybe from week to week you might see a small variation, but as Ralph said, you know, in nursing we're up in July. In fact, we're starting to get orders for two, three, four months from now. So that tells you the facilities themselves are planning ahead for that need.

And in our locums division, our days sold are up on a quarter-over-quarter basis and continuing to tick up in July. We're not seeing it affect us right now.

Okay, thank you.

Thanks, Gary.

We have a question from the line of AJ Rice with Susquehanna Capital. Please go ahead.

Hello. Thanks. Hello, everybody.

Hi, AJ.

On the -- you mentioned a couple of times some early winter seasonal demand. Can you just remind us, in a normal year at least, if there's such a thing in this business, what would you -- how would you see that trend? When do you start to get your peak orders for the winter season coming through? And maybe so we can keep our eye on that.

Well, you're right. We haven't seen normal in a long time, though it is hard to really compare it to anything. If I go back five to ten years ago, we would start to receive our so-called winter orders in the August timeframe. So the fact that we've started to receive some of them in late July is actually, we think, a really good sign that our -- again, our clients are planning for their future needs, and they're already so tightly staffed that they don't want to wait until the last minute to count on getting the staff that they need.

So we're -- we think, again, that that trend is a positive one. In terms of how that translates through into volume, you would usually see your volumes start to really pick up in the October/November timeframe. Now, we have some clients on the West Coast that use quite a bit of additional staff throughout the, what you'd call entire winter, December, January, and that doesn't start to take down until February.

Ralph, is there kind of more color to add there?

No, I would -- the only thing I would add is that the number of facilities posting is up, as you said, 40%, so the increases we're seeing are not just seasonal. You know, the (inaudible) increases have just -- people beginning to use travel nursing and allied staffing and local staffing again, so there's some (inaudible) going on. And then --

Okay.

I think where we -- and we anticipate -- the winter needs we looked at it from kind of the large what we've seen so far seasonally are actually coming in at higher numbers than they came in last year. So and don't think the hospitals are too worried about the economic conditions. I think they're more worried about staffing their hospitals appropriately right now, and so they're getting ahead of those needs.

Okay. And just to confirm -- I don't think you guys have much of this -- but in the travel or per diem side, is there any to speak of nursing home volume that you do?

There's a very small amount in our allied division, where we have rehab professionals, PTs primarily, that might be in the skilled nursing facility. As we looked at the business it was, you know, like 5% to 10% of our clinicians might be working in a setting like that. It's less than 1% of our overall revenue, and as we've dug in deeper, it turns out that our primary clients don't usually use the group therapy model. And so we think our exposure is very limited.

But with that said, we were aware that this was a possibility that they would be changing the reimbursement rules. And actually if you recall, they changed some of them more towards the beginning of the year. So we had already -- our team in allied had already done a great job of redirecting a lot of our rehab professionals and PTs into other settings, so that we could reduce and mitigate any impact or exposure that we had.

Okay. And you had singled out a couple of expense items, which people have already asked about, but you also said travel expenses. I guess I hadn't really focused on that as being a huge cost item for you, and I kind of doubt it is, but can you just give a little more color as to what you're seeing there and year-over-year impact and so forth, and any mitigation you can do with it?

And when I say travel, we're talking about the travel reimbursement for our clinicians, not our corporate travel, per se. So Ralph?

Right. Yes, no, I know, I assumed that.

We do reimburse travelers at the beginning and kind of end of their assignment for starting -- to get them on the road and get them relocated to a new market because of gas prices primarily. We've been seeing some pressure there to include those in packages more often, or we've seen some slight increases, you know, just in -- because of, you know, the direct cost to the traveler.

It is a fairly small percentage, but -- I don't know what the exact is. I'm looking at something less than 1% of margin.

Okay. Yes, I thought that would probably be small. I was sort of surprised you singled it out.

AJ, on the locum side it's also the airfare for our physicians that more often will fly into an assignment and then rent a vehicle and drive. So we sort of get hit in both areas. Now, some of that is billed directly through to the client, but some of it is an all-inclusive type of daily or hourly bill rate. So we do have some exposure there.

Okay. And then I was just interested in your comment about doing the amendment with the bank deal and getting more flexibility out of the covenants. Can you just expand a little bit on what covenants maybe were changed, and what is the more flexibility you were looking for there?

Sure. I guess as we look a little further out at our covenants, and primarily focusing on our leverage ratio, we felt that it was -- that the cushion was not at a level that we -- that was appropriate. So saw a good opportunity in the market at a good cost to be able to make those adjustments now, so that we don't have to worry bout them later on. And so the main one again is our leverage ratio and our fixed-charge coverage ratio. And those changes now just really give us, we feel, a more than adequate cushion looking forward.

Okay. So it's sort of like a debt to EBITDA type of number or something?

Exactly, yes.

Okay. And so it's not so much that you want to be able to do something that you weren't able to do. It's more just looking out and saying, hey, you know, variability in the business, we just need a little more flexibility on our covenants.

Yes. I think you characterized it very well.

And then my final question would be just on your cash flow expectations. I know obviously if we get growth in earnings, that pretty much directly obviously benefits your cash flow. But if we look at the back half of the year and even into next year, are there any other sort of non-earnings driven things that will -- that we should be thinking about for benefiting your cash flow? I don't know if that's cash tax rates or working capital. I guess you're sort of stable, it looks like, quarter to quarter, on working capital, but any other way -- areas where it will affect the cash flow trends for the Company?

I think you hit -- you hit the big ones there (inaudible). As I mentioned, our cash tax rate we're projecting to be about 20% this year, so that gives us some benefit there. And we will, looking ahead the next couple of years, as I've talked about before, we have some NOLs that we're able to utilize from the Medfinders acquisition, so we're going to continue to get next year and the next couple of years about $5 million a year of cash tax benefit. So that will keep our cash tax rate pretty low.

And then I think, again, a lot of it gets back to working capital. Like on a quarter to quarter we can have some variation with a lot of our payables are tied to accrued compensation, and so depending on the number of days we've got accrued on just (inaudible) when the quarter ends, it can have some pretty big variability (inaudible) in the last couple of quarters that impact. And as our revenue keeps growing, it's obviously billing our AR and that's what's impacting us here in the near term. As that stabilizes over a longer period of time, we'll start to see our operating cash flow improve as well.

But is the DSO number itself, will that -- obviously when revenues grow you're going to -- the working capital needs would grow. But is there an opportunity to improve that DSO number of time, you think, or is it sort of a steady percentage?

We're at 54 now, and that -- historically that's a good number. We certainly continue to try to drive that down. Is there opportunity to move it down? Probably a little bit more, but we've seen good in-flows right now. We're comfortable at the level we're at, but we obviously continue to try to push the -- to move that down. And to the extent that we're able to, it would -- you know, in that period that we do it, it would increase our operating cash flow.

Sure. Sure. That's great. Thanks a lot.

Sure.

Thanks, AJ.

And we have a question from the line of Mark Marcon with RW Baird. Please go ahead.

Good afternoon. I was wondering if you could talk a little bit about the fill rates that you're seeing on the travel nurse side. I was wondering if part of the reason for getting the winter orders early is because of potentially it being more challenging to fill positions. Does that have anything to do with it?

I would say it is more challenging to fill positions. I'll start with the fill rate question. We were consistent with our first quarter fill rates, and we've talked about this before. We fill about a third of our traditional orders and about two thirds of our MSP orders we fill ourselves, so you can do the math and figure out where we come in. It's almost statistically the same quarter over quarter. And we actually improved our fill rates in the most recent months, which in June just kind of finalized our fill rates there.

The -- what we're seeing though is the time it takes us to fill is taking a little bit longer than hospitals are used to, so what we used to fill somewhere in the neighborhood of 20% of the jobs within the first seven days, we're filling like 17%. So they kind of feel that, and as a result, they then are a little bit more open to bill rate discussions, which is good news for us, but also they begin to place their orders just a little bit more in advance, and they add flexibility.

So it's kind of -- you know, it's a good news, bad news story. As we slow down a little bit, then the clients respond and get involved in helping us get those fill rates back up.

I'd also (inaudible) just one of the reasons I think we get these winter orders is the more -- the changing relationship you have with the clients when you're an MSP. You're working with them to plan for their needs, as opposed to being reactive as one of many. So one of the things we like about this model is that it gives us more partnership around when those needs are going to come.

And with some of our MSPs, of course, we've got several years of history, so currently we just finished a presentation today with one of our clients where we can talk to them about here's what you've done in the last three years, and so we can tell you already what we think your needs ought to be. And it changes the paradigm quite a bit, allows us to get out ahead of it.

Great. And then just in terms of increasing the bill rates, can you talk a little bit about that? How substantive are those discussion at this point? And also how much more does it cost to fill positions on average now?

The cost to fill positions, our administrative costs, our internal costs are going down, and we continue to gain leverage. Most of that's integration related. The things that are going up are really kind of the insurance, which Brian mentioned, the housing costs, which we've talked about for a couple of quarters now. And then just feeling some pressure on wages. And part of that is we're trying to get people to come back in to travel again.

You know, we had at one point probably 30,000, 40,000 active travelers across the country in any given quarter, and those numbers went back into perm jobs. So as we try to attract them out of perm jobs, just a little bit more pay will help bring them back to travel, as well as seeing, you know, kind of the huge numbers we're seeing in terms of total orders. We can give them a sense it's a stable place to put their careers.

So, you know, we're talking single digits in most cases, quarter over quarter, but it always -- you know, something we just feel we should tell you guys about if we feel just a little bit of pressure. And the bill rate increases, you know, the conversations are substantial. I would guess they're probably being held with 100% of the users of those services. You know, recent contracts probably already have it embedded in them, but older contracts we have gone back to, you know, and in many cases we had cost-of-living increases that we were able to just put the housing costs back into those contracts.

So I'd say they're very substantial. It's a -- you know, our salespeople are probably spending a good portion of their date talking to clients about it. It helps us keep the fill rates up. It helps people -- supply come back into the market. And it helps the hospitals then meet their staffing needs, so it's not a win-lose kind of proposition for anyone. It's a win all the way around.

It should be. I was just also wondering, you mentioned there used to be 30,000 to 40,000 active travelers. How many would you estimate there are now?

Well, if you actually look at the number that was working, kind of the equivalent FTE, it was probably more like 20,000 to 22,000. What Ralph is referring to more is you have people coming and going, so in terms of bodies it might have been 30,000. And today, if we're sitting here with -- well, if you combine our total nurse and allied business, we're at 5,200, and you figure about 60%-ish of that is nursing, so we are well over I think a third of the overall market. So you're probably somewhere between 10,000 to 12,000 travelers working out in the marketplace today.

(Inaudible) lots of room for expansion.

Lots of room. Remember, we were at 8,400 nurses working in the marketplace, so we've got a lot of runway here that we can continue to grow into if the market is there.

Yes. In terms of the -- you know, in terms of the recent studies that have come out relative to the value of travel nursing, relative to cost of FTEs, there have been those studies that have been -- that have come out. Ralph and Susan, I know you have lots of discussions with the hospitals. What's the reception there in terms of that thought process?

You know, we've had some great conversations. Recently we were at the Healthcare Financial Management -- or what is it?

HFMA.

HFMA show. And we had a lot of people come by and pick up this study, and mostly the financial types, who in the past have always questioned the value of travel nursing. I think nurse managers, you know, have also -- they like the study. They have been asking for copies of it. The number of hits on our website, we put a calculator up last -- two weeks ago now. We've seen a lot of activity there. People who basically come in and register to use that calculator, so we do capture some marketing information when they're there. So they're using it as a tool to determine things. I think we'll even see more activity around that when they start to set their budgets for next year. And we've had people ask for kind of their own customized versions of it, so I guess the longwinded answer, we are seeing a lot of people who are glad that somebody is getting that issue out in front of the healthcare systems, and it should help drive the overall volume for the industry.

And then in terms of just the nurse and allied, any subspecialties that are particularly hot?

On the nursing side, OR, which is a very positive because that drives revenues for hospitals, so we like that one. Labor and delivery right now, which is a little seasonal, but it's up more than normal. Telemetry specialties and acute care specialties as well.

On the allied side, I mean, rehab and occupational therapies are, you know -- physical and occupational therapies are always very in high demand. And some of the hardest ones to fill but the biggest increases lately have been in imaging and lab business.

Great. And can you just talk a little bit more about the synergies? It sounds like you're on track to achieve them sooner. What's the driver there?

The primary driver has been the revenue synergies from the direct fill initiative, from the contracts that we already had in place that AMN brought to the table, Medfinders brought to the table, these MSP contracts where we were now able to fill more of their travel needs or their local needs. And our teams got off to a great start on that in the fall of last year, and we already knew at the end of the fourth quarter we were running quite a bit ahead of schedule on that initiative.

And the other is the cost synergies, which also were right on plan. Those were more kind of on plan, whereas the revenue synergies were ahead of plan. So at the beginning of the third quarter, July effectively, we are running at that annualized synergy of $10 million.

Great. Thank you.

Thanks, Mark.

Thank you, and I'm going to turn it back to Susan Salka for any closing remarks.

Great. Thank you so much. Well, we really appreciate everybody joining us today and for your continued support. Again, a huge thanks to our team members. It's because of their commitment, hard work and their talent that we're able to report these solid results today and why we're optimistic about the future. So we look forward to updating you all on our progress next quarter.

Thank you. And ladies and gentlemen, this concludes our conference call for today. We thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.