AMN Healthcare Services Inc (AMN) 2011 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the AMN Healthcare third quarter 2011 earnings call. At this time, all participants are in a listen-only mode and later we will conduct a question-and-answer session. The instructions will be given at that time.

(Operator Instructions)

And, today's conference call is being recorded. I would now like to turn the conference over to our host, Ms. Amy Chang.

Good afternoon everyone. Welcome to AMN Healthcare's third quarter 2011 earnings call. A replay of this webcast will be available at amnhealthcare.com/investors and will be available until November 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 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 Developments subsequent to this call may cause these statements to become outdated.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, everyone and welcome to AMN Healthcare's 2011 third quarter earnings conference call. We are pleased to report our sixth consecutive quarter of sequential growth, with consolidated third quarter revenues of $242 million, which is up 3% sequentially and 37% year-over-year.

On a pro forma basis, consolidated revenues were up 11% over prior year. In addition to the top line growth over the past year, we have also experienced improvements in gross margin and reductions in SG&A as a percentage of revenue. This leverage has translated into an increase in our adjusted EBITDA margin.

A significant driver of our improved to leverage has come from the benefits of our growing MSP client base. Our business trends and our outlook haven't changed significantly since we reported earnings in August.

Our strongest driver of growth today continues to be our travel nurse business, which still has a lot of runway for growth since we have only returned to approximately half of the pre-recession volumes. We do, however, expect growth in all of our staffing and workforce solution businesses in 2012 and beyond. This is driven largely by the continued aging demographic shift and the increased utilization created by healthcare reform.

This increasing growth in demand for healthcare professionals was revalidated by the recently published bipartisan health project report, which was on future challenges in healthcare workforce planning. The report lays out the daunting equation of expected 23% growth in healthcare jobs from 2008 until 2018, which contrasts with the significantly slower growing workforce supply.

Not surprisingly, the demand for nurses is leading the way, but significant growth in demand for physicians and allied providers is also cited. The report points out that this growth in demand is at odds with the workforce supply constraints, such as the aging clinical population itself, a preference by younger professionals to work fewer hours, and the lack of additional capacity in the education and training systems.

These trends are temporarily being masked by the uncertain and challenging economic environment, but they will become increasingly evident as the macro factors improve and the magnitude of the demand growth simply overtakes the already stretched capacity of the workforce.

With these trends in sight, we continue to evolve our business model and our service offerings to help our clients to deal with this increasing challenge of access to talent, workforce planning, and simultaneously reducing costs. We believe that our continued growth in overall market share and our industry-leading and improving business results are positive signs that our differentiated value proposition is resonating with clients.

So now, let's turn to our current results and talk about the short-term trends. While overall, things are going well, you'll see that we also believe that there is room for improvement going forward. For the third quarter, nurse and allied revenues were $148 million, up 6% sequentially, and marking the seventh consecutive quarter of growth in our largest business segment.

Year-over-year revenues were up 59% on an as-reported basis, and up 24% on a pro forma basis. This growth was driven mainly by the travel nurse business, where revenues were up 6% sequentially and 33% year-over-year on a pro forma to basis. As of today, travel nurse orders are still up approximately 50% year-over-year and have been relatively steady since the third quarter.

We continue to be successful in winning new MSP clients. So, far during the second half of the year, we have executed new contracts with an estimated gross spend under management of over $35 million. Approximately 90% of this is incremental revenue opportunity.

At 3 of these contracts we replaced an incumbent MSP provider, and in all 3 cases, our contract included improved rates and financial terms. These recent wins reflect continued opportunity for future market share gains and recognition of our stronger value proposition and fulfillment capabilities.

Our larger national network of candidates and the very important affiliate vendors we work with are also critical during a time of growing demand and tight supply of candidates. In addition to attracting new supply of candidates into the travel industry, an important part of expanding our available candidate pool is through extensions and repeat travelers.

The quality and the quantity of our available assignments has improved the opportunities for nurses to take repeat assignments with us. And, this has translated into improving rebook rates. Our rebook rates during the third quarter are at the highest levels we've seen since the second quarter of 2008. The number of unique new candidates has also improved with new applications up 11% sequentially in the third quarter.

Third quarter travel nurse average bill rates were up nearly 2% sequentially, as we began to see a benefit from increases that were put in place since the beginning of the year. We do expect to make modest, but continued progress on bill rates and gross margin spreads in the coming quarters.

Our local staffing offices continue to be a contributor to our success in winning and filling MSP business. Third quarter revenues for local staffing were $24 million, which was up 1% sequentially and 16% over prior year on a pro forma basis. The year-over-year growth was driven primarily by increased fill rates at new and existing MSP clients.

We also experienced modest sequential third quarter increases in supply. Going into the fourth quarter, we continue to see volume growth, which is driven primarily by the recent implementations of new MSP's, as well as the normal seasonal flu business. Third quarter Allied revenue was $31 million, which was up 8% sequentially and 6% year-over-year on a pro forma basis.

The sequential improvement was driven primarily by an increase in productivity by the Allied team, now that the integration is fully behind us. The majority of our volume growth, both year-over-year and sequentially, was in our therapy business, with modest growth in our imaging, radiology, and lab businesses. We do expect to experience a typical seasonal decline in the fourth quarter, due to fewer billing days since many of our clients run at reduced service levels during the holidays.

Our locum tenen segment delivered third quarter revenues of $72 million, up 1% sequentially and down 4% year-over-year on a pro forma basis. As you may recall, we originally expected this segment to grow at least 3% sequentially during the third quarter. The shortfall came primarily from lower than expected fill rates, as well as softer than expected demand in behavioral health and radiology.

Primary care, anesthesia, and emergency medicine experienced sequential volume increases during the quarter. However, these were offset by declines in other specialties. Overall days sold were down slightly in the third quarter, and this is in line with the typical downward seasonality we anticipate in the fourth quarter. In addition to our focus on improving fill rates, we believe there is also opportunity to improve bill rates and to expand gross margin across most of our locum specialties.

In physician permanent placement, third quarter revenues were $9 million, down 3% sequentially and flat year-over-year on a pro forma basis. Without the impact of the deferred revenue accounting changes, revenue would have been up 1% sequentially and up 1% year-over-year. 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 making greater efforts in progress to partner with these clients to augment their internal efforts, and we are working hard to attract supply through more innovative social media channels.

In the third quarter, revenues from home healthcare services were $13 million, representing a 5% sequential decrease and an 8% year-over-year pro forma decrease. These results are indicative of the challenges of predicting the impact of regulatory and funding changes in the home health industry.

Although home healthcare will play an increasingly important role in the transformation of patient care, we believe that future success in this industry would require further investment to create greater economies of scale. As we mentioned in our press release, we have signed a non-binding letter of intent with a strategic buyer to acquire our 19 home healthcare offices.

The potential buyer is a very reputable, large, privately-held home healthcare company with a complementary business model and mix. Such a combination would allow them to create further synergies and economies of scale that were not as readily achievable by AMN.

We intend to execute an agreement with Aspire during the fourth quarter, with a target close date during in the first quarter of 2012. AMN will continue to own and utilize the Nursefinders brand name for our local staffing and franchise operations.

As the regulatory environment continues to drive transformation in healthcare, hospitals are seeking sophisticated and innovative solutions to manage key operating drivers, such as their clinical workforce. In a recent staffing industry analyst survey, it was reported that the current penetration rate of healthcare staffing MSP's in large hospital systems is 10%.

And now, they are anticipating that number to grow to 40% over the next 2years. That would be a threefold increase in just 2 years. Likewise, they reported that the penetration rate of RPO is expected to grow from minimal today to over 20% in the next few years.

As a recognized industry leader and innovator in MSP and RPO, we believe that AMN is very well-positioned to meet these growing needs of our clients. Before I turn the call over to Brian, I would like to thank our team members for their strong continuing efforts to build our market share and our leadership position. We know that a very, very important differentiator in the market is our team members.

Their passion, their talent, and their daily commitment to our clients and to the Company make our strategy a reality. With our recent integration now behind us, the team is more focused than ever on solid execution, particularly around growing market share, tightly managing pricing and margins, and improving our operating leverage. I will come back to you in our Q&A section with Bob and Ralph to help further answer your questions but for now, I will turn the call over to our CFO, Brian Scott.

Thank you, Susan. Good afternoon, everyone. As Susan mentioned, third quarter revenue was $242.3 million. Our gross margin for the quarter was 28.4%, up 100 basis points from last year and up 70 basis points from the last quarter. The increase in gross margin was due primarily to $1.1 million of favorable workers compensation adjustments in the third quarter based on better claims experience.

Excluding these adjustments, gross margin was up 20 basis points sequentially and 50 basis points year-over-year. This gross margin improvement was driven in large part by increasing bill rates on relatively stable direct costs.

SG&A in the quarter totaled $53.8 million, which included $200,000 of cost associated with the integration of Medfinders. Excluding integration expenses, SG&A, as a percentage of revenue, up 22.1%, decreased from the prior year by 90 basis points and increased 20 basis points sequentially. The sequential increase in SG& A about $2 million was related to several factors.

First, we completed the wind down of operations in our UK office, which resulted in about $400,000 of one-time costs in the quarter. The third quarter also included the impact of merit increases granted in July and higher professional liability costs related to both volume growth and higher than usual adverse development in our self-insurance reserves.

In addition, we added head count to the forward growth in our Business, with the majority related to the implementation of several new, large MSP contracts. With an expectation of normal levels of professional liability expense and no ongoing UK office operating costs, we expect SG&A in the fourth quarter to decline in absolute dollars, but increase on a percentage basis due to the seasonally lower revenue.

We are anticipating that fourth quarter SG&A will include integration costs of about $400,000. This will be the last quarter that we will call out any Medfinders integration related expenses.

Our nurse and allied segment revenue increased sequentially by 6% to $147.7 million. Volumes grew 3% sequentially to 5,300 healthcare professionals, and revenue per day was up 2% on higher sequential bill rates and a small increase in average hours worked.

Nurse and allied gross margin increased sequentially by 80 basis points to 26.6%, due in large part to the previously noted workers compensation adjustment, a great deal of which benefited this segment, as well as improved bill pay spread. Third quarter nurse and allied operating income was $15.2 million or 10.3% of revenue, as compared to $14.4 million or the same 10.3% of revenue in the prior quarter.

The flat operating margin was due to the previously noted SG&A increases, offsetting the higher gross margin. The operating margin improved by 110 basis points year-over-year, due in large part to cost synergies from integrating the Medfinders travel nurse and allied businesses and improved operating leverage.

Our locum tenen segment revenue increased by 1% for the prior quarter, primarily reflecting an increase in days filled. Gross margin of 26% was up 70 basis points from the prior year due mainly to the addition of the higher margins, Medfinders locums business, and some improvement in bill pay spread. The gross margin was sequentially up by 50 basis points due to the higher bill pay spread.

Locums operating income of $6.3 million or 8.7% of revenues compares to $5.5 million or 7.7% in the prior quarter, with the increase related to the higher gross margin and some SG&A leverage. Within our physician permanent placement segment, revenue declined sequentially by 3% due to the adoption of the new revenue recognition standard effective January 1.

We recognize approximately $2.1 million of revenue in the first quarter, $0.7 million in the second quarter, and $0.4 million in the third quarter that would've been deferred under the old standard. Excluding the impact of this change, revenue increased both year-over-year and sequentially by 1%. Physician permanent placement operating income for the third quarter was $2.1 million, or 23.3% of revenue.

As of the end of the third quarter, the impact from the adoption of the revenue recognition standard is now substantially complete. Our home healthcare segment generated revenue of $13.3 million and operating income of $0.7 million for the quarter. Gross margin on this business was 38%, an increase of 350 basis points from the prior quarter, due primarily to the workers compensation benefit.

As the recent federal and state regulatory and reimbursement changes have had a more severe than expected impact on our home health business and the entire industry, we lowered our near-term projections for the home healthcare segment, which prompted us to perform an impairment test during the third quarter. Based on this assessment, we recorded a non-cash, goodwill, and other intangibles impairment charge of $31.2 million.

Unallocated overhead, excluding stock compensation and integration expenses in the third quarter, were $7.5 million, consistent with the prior quarter and higher than the prior year expense of $6.4 million. The increase compared to the prior year is due to the addition of Medfinders, partially offset by cost synergies achieved by integrating the companies.

As I mentioned on the last call, in July we executed an amendment to our credit facility. In conjunction with the amendment, the Company incurred fees of approximately $2 million. We recorded $1.1 million of these fees as interest expense in the third quarter and capitalized the remaining $0.9 million as debt issuance cost to be amortized over the remaining term of the credit facilities.

We reported a net loss before income tax of $27.3 million for the third quarter due to the impairment charges. As a result, we recorded an income tax benefit with a GAAP tax rate significantly impacted by a large portion of the impairment charges being permanently non deductible for tax purposes.

Our adjusted tax rate for the quarter and projected full-year, which excludes the charges associated with the impairment, integration, and credit facility amendment, is approximately 56%. Also, excluding the impairment charge from the calculation of pretax income, our full-year cash tax rate is anticipated to be less than 20%, due to utilization of the NOLs that came with the Medfinders acquisition.

On a GAAP basis, we reported a net loss of $0.67 per diluted share. Excluding the impairment, integration and credit facility amendment costs, adjusted earnings per share in the third quarter was $0.05. Third quarter operating cash flow was $4.9 million and days sales outstanding were 55 days compared to 54 days in the last quarter. Capital expenditures for the third quarter were $1.1 million and are expected to be a similar amount in the fourth quarter.

As of September 30, our cash and equivalents totaled $4.6 million and our total debt outstanding under our credit agreement, net of discount, was $209.6 million. Going into the fourth quarter, most of our business segments will experience typical seasonal declines with the exception of the nurse and allied healthcare staffing segment, which is expected to be flat sequentially.

On a consolidated basis, fourth quarter revenues are expected to be between $232 million and $236 million. Gross margin is anticipated to be between 27.5% and 28%. SG&A expenses are expected to be approximately 22.5% of revenues. As a result, adjusted EBITDA margin is projected to be approximately 6%. And with that, we would like to open up the call for questions.

(Operator Instructions)

Tobey Sommer, SunTrust.

Hi, Tobey.

Hi, thank you. Wanted to get your thoughts on the hiring environment for nurse and allied. What are you seeing in terms of supply out there, and is there any pressure in terms of pay rates?

Well first, maybe, we'll step back and look at what's happening in the overall healthcare community. There has been some movement in the number of healthcare job openings. Of course, we can't get it real-time for nurses specifically, but if you just look at the data on the number of job openings and [quits], we've seen an uptick on the latest data, which is reported in August. And, that's not surprising based on what we are hearing from our clients, and based on the increase in new applications that we have seen.

I mentioned that we have seen a nice sequential pickup from the second to the third quarter, so we do think we are starting to see some movement. I also think if you look at the general environment of the strikes that have been occurring over the last several quarters, it's indicative of nurses getting frustrated, burned out, feeling overworked, and starting to push back. So, we think that is starting to translate into a slightly higher level of attrition. Ralph, maybe you can pick it up with what we are seeing in our specific numbers.

If you take a look at the travel nurse business, we could always use more nurses. So, always start there. But, we have begun to see an increase in the number of unique candidates with the difficult-to-fill specialties, which is where we target all of our spending efforts. We don't go just for general applicants because there a lot of nurses out there that just don't travel well or we can't place on travel assignments. So, our focus is on those individuals the match up to client order requirements. In the travel nurse business, for now, we are feeling like the increases in candidates apply are keeping up with the increases in order demand on the client side.

The second part of your question was about increases on pay rates, and we are beginning to hear from existing travel nurses, as well as prospective travel nurses, that it is going to take a little bit more to leverage them out of their existing permanent jobs and get them back into travel jobs. As we've mentioned the last couple of calls, been working on bill rate increases that would translate into pay rate increases so we can get those people back into the travel nurse pool. Our current candidate database, we have over 20,000 people who have traveled with us before that are currently in perm roles, and the ability to track the back into the industry is what will really drive future growth, as well as new supply who have never traveled before.

Great, that's helpful. If I could get some color on 4Q, what are your thoughts in terms of tax rate? And the share count went down a little bit, is that related to stock-based comp and share count thoughts for 4Q?

The share count is still about 46 million, if you are looking on the press release. Because we reported that GAAP loss, calculations to the (inaudible) don't count certain shares so you just get into basic share count of 40 million. But, I think for modeling I would use the 46 million shares still in the fourth quarter. The tax rate, again, I gave the adjusted tax rate of about 56%. The GAAP rate for the fourth quarter is still heavily influenced by the impairment charge, so it's really not as meaningful for the fourth quarter.

Okay great. Any trends in terms of travel or housing expenses?

We've actually seen those stabilize. There is certainly still pressure out there, and as we read the industry information, there is expected to be continued pressure because of the lack of availability or the desire to go into permanent housing. There is still pretty low vacancy across the overall industry, but we have seen more stabilization in our average daily rent cost, as well as in our vacancies, which is very critical to make sure that we don't have any open rooms and spending where we aren't generating revenue. Good news there is that while there are headwinds, we seem to have been able to stabilize them within our Business.

Great, I will jump back in the queue.

Thank you.

Jeff Silber, BMO Capital Markets.

Thank you so much. Just a follow-up on the last question regarding supply. Ralph, you had mentioned trying to increase pay rates to entice nurses to travel. Are there any other things your Company is doing in order to alleviate that issue?

Yes, increasing pay rates is only one of the things. That's a good question. We have been working with our clients to increase the number of hours that a nurse works within a given week to offer longer assignments, which in effect, increases the amount of take-home pay that they have. And then obviously then, diversifying the locations that we have to offer jobs. We recently added a very large client in New York and that's a very attractive opportunity for nurses.

Our Florida orders have increased, that's good as well. And, the good news, I think, about those 2 cities is they are less constrained on the rent side than we've seen in California. So, put those 2 questions together, California is probably the markets having the biggest issue with rent. And then also increases -- surprising increases lately, in Arizona where we hadn't seen much demand over the last 2, almost 3 years. Having more opportunities for them, having opportunities for them to work more hours, having an assignment for them to go to after they've finished this one, all of those things I think are helping our supply trends.

And if I remember correctly, those are fairly large markets for you?

They are.

Jeff, just an addition to, everything Ralph described are certainly the most important things that are ultimately going to trigger that nurse to make the decision. But, we also have to get the message out and that's where having well-trained recruiters and our expertise in marketing, particularly on the Internet with social media, has been very beneficial for us. And, we have increased our investment in marketing and advertising and doing some very creative things in social media, which is where most of the nurses are looking and talking about jobs and opportunities. Not only do we need to be educating them on what's available and the attractiveness, but they need to be educating one another. That's actually more powerful, and we are starting to see that happen more.

Great. In your prepared remarks, you talked about adding head count. I was wondering if we get a little bit more color. Where are you adding head count, what types of positions, and what should we expect over the next few quarters or so?

Sure. We certainly are still adding sales personnel where we see growth and opportunity. We want to make sure that we are driving that. Although, we still have capacity in travel nursing; well, our recruiters have just done a stellar job and their productivity is up considerably, there is still capacity and room for that to grow more. But, we want to make sure that we have the bench strengths and new star recruiters coming in behind them as well.

So, we have added a bit on the sales team, but then the other adds that Brian was referring to were more in direct support of some of these larger MSPs. If we had a smaller, even midsize MSP we may not need to add any resources that are directly tied. We can absorb it more within our existing infrastructure, but if you get to an $8 million plus type of contract, then you need to add very dedicated resources to ensure that you can be implementing and executing well on it. In those examples, it's things like a onsite supervisor, a clinical director that's tied directly to that account. That's unique to us and we think it's a very critical part of our success with these particularly larger MSPs, as well as just your basic credentialing and operations personnel.

Good. The perm healthcare divestiture, I'm just curious, it's been operated into a separate unit, if I remember correctly. I'm just wondering, how easy it is to divest it from total operations?

Hey Jeff, it's Bob. Yes, it is easy. We've had those separated into completely different offices. They actually operate on an entirely different front office platform, and we do think that, while the regulatory issues will always be a little more challenging just because you have to transfer Medicare licenses, the actual divestiture, or if you will, the sale of that business will be very easy for us to do relative to the rest of our Business.

One just last one for Brian, I just want to double check, the guidance for the current quarter, that includes home healthcare?

Yes.

Okay

(multiple speakers) We wouldn't likely close until the first quarter, so we will have the full quarter of those home health results in the fourth quarter. It does include that.

And, in the first quarter, assuming the deal goes through, is this going to be recognized as discontinued operations then?

We're still working through the accounting on that, but -- if we have to sign the purchase agreement in the fourth quarter, that would be a likely scenario.

Great, thanks so much.

Thank you, Jeff.

(Operator Instructions)

Mark Marcon, Robert W. Baird.

I was wondering, do you have the total pro forma number for year-over-year growth in terms of revenue?

That is the 11%. Oh, that was our third quarter, I'm sorry. No, I don't think we gave -- it is 9%, right? I don't think we actually calculated it, but --.

Great. And then, can you talk a little bit about -- just trying to get a feel for the gross margin trends by division. The impact of the workers comp accrual reversal, how does that fall across the divisions?

About 0.75 of it fell into nurse and allied. And then, the remainder of it, the majority, the remainder went into home health. So, I had mentioned the home health margin was up in the third quarter about 350 basis points, that was really, primarily from that workers comp adjustment, and then in nurse and allied, I think the impact was 50 basis points. So, nurse and allied, excluding that, was still up 30 basis points sequentially.

Okay. In terms of the guidance that you are giving for the fourth quarter, is there any anticipation of additional workers comp accrual adjustments?

No, we have the actual studies done for workers comp in the first and third quarter, so that's why that adjustment occurred in the third quarter.

Okay great. And so, you're seeing a nice improvement with regards to the gross margin. The one thing is we don't have Medfinders in the year ago period for the full time. Is there anyway to tell us how it looks like on a pro forma basis in terms of the gross profit because it looks like it was up? But, I'm not sure what the right comparison number is. And, I'm talking about nurse and allied.

Just the nurse and allied segment?

Yes

I would say there's -- it went up a little bit, but it's relatively stable overall, over the last year. Really what you saw was -- we saw in the first part of the year a little bit of a slip in the margin, over the last -- we've seen a little bit of improvement back in this third quarter as we've seen so many impact of the bill rate increases. They kind of come maybe a little bit full circle from where we were a few quarters ago.

Great. And then, how should we think about the VMS projects in terms of how quickly they will roll on? You mentioned that you signed $35 million worth. When do those really crank up? When would they start contributing? And, how should we think about the pricing for those in the gross margins for those relative to the non VMS business?

Sure, Mark. First, in terms of the addition of revenue in the second half, it is actually not that great because many of them were implemented mid-and later in the fourth quarter. And so, we will see a much greater impact from them, of course, in the first quarter and going into 2012. And so, we're not really seeing the full -- definitely not seeing the full impact, and that's why, even the addition of resources in the third quarter for example, we had no revenue against many of those and still have pretty low levels in the fourth quarter. So those specific contracts, you could say that they are at lower than average profitability levels. But as they mature into 2012, we would expect them to be at or above our average profitability levels. Bob, maybe I will let you jump in and talk about why that is.

A couple of things. One is that initially you have some start up costs associated with -- so on a pure profit margin level, they're initially not quite as profitable, but that is really only the very large accounts. The smaller ones we can absorb pretty quickly. The gross margin numbers within those accounts are surprisingly not that far off the base of our total margins. Remember, too, that we have the benefit of the margin that we get from our affiliate vendors that rolls into that.

So, the overall margin, frankly, on our MSP accounts is substantially higher as a gross profit percent, and then there's some more SG&A that is associated with it. But, from an account basis, we actually believe that our profitability on these accounts is on average better than most of the accounts that we would normally service. That is contrary to what you would normally think about as it relates to that kind of business. You typically think of it as a high volume business, low pricing, but that's not how we sell it.

We sell it as an added value with all of the advantages I think we have like, for example we own our own software and proprietary software, and things like that, that we have -- that we have over 400 sub-contractors that we have figured out how to efficiently, not only bill and take orders from them but get them paid and get us paid, and all of that acrues to a more profitable overall operation for us in the long run.

Mark, I think it's pretty safe to say, or at least is certainly our belief, that we can operate these MSPs, particularly the larger ones, more profitably than smaller companies because of the infrastructure that we already have in place. And also, as Bob suggested, we have our own internal software that had been developed by Medfinders years ago, and we don't have to then typically pay for an outside software package to run these. Sometimes we do, if the client really wants that, but in most cases, we are using our own internal software.

And then again, our systems have been set up to be able to scale up very quickly without adding the direct expenses. And so, if you look at our profitability over the last year, we've clearly added a good number of MSPs, and yet, we have improved the leverage of our travel nurse business considerably over the last year. If you just step back and look at the big picture, that would tell you that these MSP contracts help us gain leverage and are more profitable for us.

The only point I would make is that this is -- you're asking about the $35 million and how it will roll in. Just keep in mind that, that has been much what our run rate has been almost every quarter. This is not atypical of what we have been doing and reporting on. What we sold in Q1 and Q2 has rolled into Q3, and we -- certainly our performance and our improvement and overall profitability is a reflection of not just this quarter, but multiple quarters of having that success.

I appreciate that. That's part of the reason why I was wondering. I was wondering for 2 reasons. 1, this to Susan's point, I did notice that the margins are improving, despite the fact that the VMS percentage is increasing, so it would suggest that things -- that it is more profitable and that's part of the reason why I was asking about the year ago on a pro forma basis, just to make sure on that. And then, the second thing I was wondering about was the sequential revenue guidance for nurse and allied. I realize there is fewer billing days, but given that -- what you're rolling on, I was just wondering if there was any chance that it could actually increase sequentially.

Our current guidance, as you know, we mentioned that nurse and allied is expected to be flat, so we have taken into consideration these new contracts, but we've probably admittedly tried to be conservative because as you are rolling them on, you still have the issue of incumbent providers that have nurses there that were pre-booked before you implemented the contract. So, if we implemented a contract October 1, for example, a good number of the people working in the fourth quarter were already booked before October 1, and so we are just starting to pick up the new orders and the new business. It is a relatively small piece of the overall opportunity that we are really capturing in the fourth quarter.

Got it. Then, with regards to the home health business, any disclosure in terms of terms? What sort of cash can we get back?

Not at this point. We're only in a diligence LOI stage right now, and we certainly believe that the terms are market in the current environment, but we'll have to wait to get further along down the path to be able to give more color on that.

I will jump back in the queue, thank you.

Thanks a lot Mark.

Josh Vogel, Sidoti and Company.

Thank you. Good afternoon, everyone. With regard to home healthcare, I think it has been about a year now since the Medfinders deal closed and I'm just curious, when you originally made the deal, did you have in the back of your mind that this was a business you'd potentially exit at some point?

No.

And, given the unfavorable reimbursement rate environment of funding pressures, could that potentially be a drag on any of your other business units?

The reimbursement and regulation pressures on our contracting businesses?

Just any of your business lines because you noted that, that was what was leaning on the -- your future outlook for home healthcare.

No, we don't see the same magnitude of impact. If anything, we believe that healthcare reform in general could be net positive for our staffing businesses, as you bring more patients into the system, particularly needing more primary care physicians. There's projections out there that there will be more physicians needed, more nurses needed.

Certainly there's going to be cost pressures put on a system, but that's where having these workforce solutions where our goal is to help our clients reduce their overall spending and have the right clinician, at the right time, for the right duration, whether it be daily, weekly, monthly, or permanent. We think helps address those cost issues for them. Even if their overall spending is less, if we have a greater percentage of it then we feel that it's a better win-win situation.

Okay. Now, with regard to bill pay spreads, do think there's additional expansion that you can achieve here?

Yes, I think we're probably just at the tip of the iceberg in terms of our bill rate increases starting to impact our margins. But, the big question there is how much of it will have to go into employee pay. I don't want to get you guys too far out ahead of us by giving too robust a prediction there. Clients -- our clients are very educated; they understand the correlation between getting their jobs filled and bill and pay rates. And so we just work with them to set those at the appropriate levels and there's not going to be a wild swing in our profitability from those conversations. It's just some incremental improvement.

Okay, and I may have missed it, but did you give out the revenue for travel nurse?

The revenue for the third quarter? I think that we did. For the third quarter -- (multiple speakers) -- a little over $92 million.

Okay, great. Thank you.

Thanks Josh.

Tobey Sommer, SunTrust.

I wanted to ask a question about how you square the basic driver of hospital admissions, not necessarily moving in the right direction, or at least certainly uniformly, in the industry. In the fact that demand for temporary professionals seems to be increasing. Just a general commentary on how you reconcile those 2 seemingly [desprite] pieces of information.

The [census] and admission levels have been a non-impact on our volume and demand for probably the last couple of years, to be honest. Just as we've seen rebound in our orders and census has remained relatively stag or even gone slightly backwards from year-to-year. I think a difference that we are seeing is that we are having more demand in the higher, unique specialty areas that are always going to be challenging to fill, regardless of where your census is.

Areas such as OR, ER, ICU, labor and delivery, ER are some of our highest demand areas. Of course, we love to see more demand in general med/surg, which would be indicative of general census going up. Usually when general census goes up, they can't not only recruit the highly specialized nurses, they can't even get the med/surg nurses. But, right now they can because of the labor market. I think that maybe explains a little bit of the disconnect, that the demand growth that we've seen has largely been in these high specialty area. Ralph, anything else?

What I would probably add is that you are seeing an increased utilization, a strategic utilization, of staffing in the hospital environment. Where hospitals -- because of the census fluctuation now realize that they need to depend a little bit more on temporary help-type solutions to staff their hospitals up and down as the census fluctuates. Seen just a slight increase there and as well, a lot of our increases are coming from settings outside of the hospital which aren't in the number you are talking about.

So, having a much bigger allied business and having our local business and, as you know, we also introduced some additional lines of business over the last couple of years to get deeper into other settings. I think that there's a benefit there as well. That's where the jobs are being created right now. They are outside of the hospital environment.

The only other thing that I would add is just too, that, you mentioned earlier Susan, that the strikes. Nurses are getting tired. It's been a lot of pressure, a lot of overtime. Hospitals have been trying to keep their costs down, they've been working -- and I think we've done a good job trying to educate them, frankly, especially in our MSP clients to show them actually where their costs are higher when they use overtime than if they use our staff. I think it's a great opportunity for us to re-educate clients, as Ralph was just saying, on really the value of temporary labor at the right level within hospital systems. Certainly, a lot more business outside the [cue] care setting isn't being measured the way everybody measures hospital census.

Thank you. There's been some M&A and consolidation within the hospital sector, some noteworthy sales of nonprofits to for-profit firms. Do you see a change in demand from those institutions under new ownership? Do they have a lower and/or higher utilization of temporary services?

This is Ralph. I will try that one first and then I'll let Bob weigh in as well. It is a situation by situation -- our experience differs. If you have a consolidation, for instance, of 2 children's hospitals in the same market and they consolidate, utilization we'll see go down. As well, when you see consolidation to some of the larger players, they're some of the ones who actually understand the strategic benefits of travel and local staffing, and so then we can see utilization then go up over time whenever it migrates to some of the larger players. It is a mixed bag. think, in general, it's good for us because we're focused on the large accounts and the MSP programs, and so is probably better for us than if we would just focused on purely the traditional business or local opportunistic business.

The complexity of some of the mergers and then the complexity of the integration of those mergers is an area that we have some good case studies on how well we've helped clients to take on additional locations and merge them in and help them, actually be easier for them to do that in terms of how to set up an MSP that will encompass this new business they've already acquired. It really plays to our strengths to see that kind of thing happen, at least in the MSP world.

Thank you very much.

Thanks Toby.

Mark Marcon, Robert W. Baird.

Wondering if you could give a little bit more color with regards to the 3 VMS contracts that you mentioned that you had won from incumbents with better terms. Can you give us any more feel there in terms of how that came about?

I don't think we want to give too much specifics and name clients, but I will say they were all very attractive clients in terms of the prestige of the facilities themselves, the attractiveness of the locations, and the attractiveness of the terms of the agreements. And, that's not always strictly around bill rate. As I mentioned, in the 3 from the incumbents, we had better rates and financial terms across them, but it's also about who they think can actually deliver on the needs that they're going to have and who is the best partner for them.

And so we find that in these conversations, there's actually far less about bill rates, and even financial terms, although everyone is always cognizant of that, but it's more about how can you meet my needs? And, in this market where demand is rising across the country and supply is tight, they want to work with a primary player that has a strong database of candidates and ability to deliver on that supply when they need it.

And obviously, being almost twice as large as our closest competitor, we have a very large capability to deliver on that and they know that. But, we also need to have strong relationships with affiliate vendors. Other competitors, essentially, that sign up with us to also deliver on that contract, and this is where we have differed than some of the other MSP providers in that we see our affiliate vendors as very much a client and an integral part of being successful in these MSPs. We don't just hang our hat on 20 or 30 affiliate vendors, we have, I think, over 400, and our relationships with them is very critical. And, Bob you want to --.

Just to tag onto that, we might have, even in these 3 examples, we end up with over 100 different subcontractors supporting us and each one of these individual clients. And the reason for that is because we know that it is hard to fill some of these difficult assignments, actually has a very positive impact on the relationship when you can tell the client that we have 100 companies trying to find this ICU nurse for you, and we can't find one, perhaps we don't have a big enough bill rate. It does help us to educate the client and adds to our credibility when it comes to talking about what kind of rates we should have in marketplace, and how can we be competitive with the local -- the competitors that you have the market place.

It's very much the focus that we find in these wins that we have had. Almost entirely all of these wins and other wins that we have had pretty much throughout this year have been focused on clients who really are frustrated in the fill rates, not being able to get their orders filled in a timely fashion, and that really has far overshadowed their big focus on bill rates. Because frankly, we've been able to get some improved rates, not only from our existing clients, but even as we've set up these new clients.

Appreciate that. And then can you talk a little bit about, as we look forward, how you think about the incremental margins flowing through? Because it sounds like you still need to make some investments behind some of these MSP programs that are coming through, so much do think drops down to the EBITDA line?

I certainly think we have the opportunity to expand our EBITDA margins, particularly looking into 2012. So, we saw nice growth in our margins through this year, and even with the fourth quarter with revenue down, we saved a little bit of decline sequentially, that as you look into 2012, or even looking over the prior year, we've still seen a nice improvement in our operating margins. And, we would anticipate that continuing into 2012, as we drive our revenue up through implementing more of these accounts.

Then, some of the margin expansion on the gross margin line is expected and really that SG&A leverage, even with these incremental additions -- those are built into the ROIs that we do for these accounts. And, those additions are very critical for those accounts, but outside of those, we can still deliver a lot more leverage with the remainder of our infrastructure, or all of our corporate expenses. Those will not need to change a whole lot next year, and so as we grow that top line, you'd expect more and more to drop to the bottom line.

Great, thank you.

Mark, you didn't ask, but I will actually chime in and mention that I think we have even greater leverage and margin improvement opportunity in our locums business. We have probably not been as aggressive with our bill rate increases as we could or should have been over the last year or so. And so, we think there is some opportunity to increase our bill rates and increase our spreads over the coming quarters. And it's not just our belief, we have seen some external data points that point us to that.

And so, that's an area of focus for us over the next year as well, and we would expect to see some improvement there. Not as much from volume, while we expect to see volume increase, the nursing leverage will come even more in the way of volume, and how we can grow our top line faster than SG&A, but in locums, it will come from managing our pricing and margins better.

That's great to hear. Thank you.

Thanks Mark.

Thank you. I will now turn it back to our speakers and Ms. Salka for any closing remarks.

Okay, well thank you so much, everybody, for joining us today. We really do appreciate your continued support of AMN, and we look forward to updating you on our progress next quarter. Hope everyone has a very Happy Thanksgiving with your family and friends.

Ladies and gentlemen, this will conclude our conference call for today. We thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.