AMN Healthcare Services Inc (AMN) 2012 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to Q3 2012 earnings call for AMN Healthcare. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator instructions). Also, as a reminder, today's teleconference is being recorded.

At this time I will turn the conference call over to your host, Vice President of Investor Relations, Ms. Amy Chang. Please go ahead.

Good afternoon everyone. Welcome to AMN Healthcare's third quarter 2012 earnings call. A replay of this webcast will be available until November 15, 2012, at amnhealthcare.com/investors. Details for the audio replay of the conference call can be found in our earnings press release.

Regarding our policy on forward-looking statements, various remarks and characterizations we make during this call about future expectations, projections, plans, prospects, events, or circumstances constitute forward-looking statements. Forward-looking statements are identified by words such as believe, anticipate, expect, intend, plan, will, should, would, project, may, variations of such words, and other similar expressions. It is possible that our actual results may differ materially from those indicated by the 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, 2011, and our other filings with the SEC, which are publically available.

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 Developments subsequent to this call may cause these statements to become outdated.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.

This call may also contain certain non-GAAP financial information. We make available additional information regarding non-GAAP financial measures in the earnings release and on the Company's website.

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 Q&A will be Ralph Henderson, our President of Healthcare Staffing, and Bob Livonius, our President of Strategic Workforce Solutions. I will now turn the call over to Susan.

Thank you, Amy. Good afternoon and welcome to AMN Healthcare's 2012 third quarter earnings conference call. I would like to start by thanking everyone for joining us on the call today, especially given the storm activity that occurred earlier this week. We know that many of you, as well as some of our clients, patients, clinicians, physicians, and team members have been affected, both personally and professionally.

The New York City hospitals are collaborating to ensure that patient care and proper staffing is their top priority. We are working with multiple facilities to deploy temporary and permanent nurses to where they're needed most. Our hearts go out to everyone who has been impacted, and we wish all a speedy recovery and return to their everyday activities.

Despite the challenges occurring earlier this week, we do have some good news to share with you today. As you will hear in our discussion, AMN Healthcare is on track with our strategy to expand our leadership position as the nation's innovator in healthcare workforce solutions and staffing services.

The third quarter marked yet another solid financial performance with revenue, gross profit, and adjusted EBITDA all growing sequentially year-over-year, and meeting or exceeding the Company's guidance. These results reflect the benefit our leadership position in providing managed services programs. They are also a reflection of the outstanding efforts of our sales and service teams.

Due to our strong delivery reputation, we believe we are extremely well positioned for the continued momentum we are seeing in the demand for workforce solutions. The benefits of this growth and the profitability of our delivery model also enable us to continue improving the leverage of our core staffing businesses.

As the same time, we firmly believe that greater market demand lies ahead in the next few years. So it is imperative that we make strategic investments today to ensure we are increasing our ability to recruit more candidates for the future. We will discuss these and other important investments we are making later in the call.

But let's turn first to the results of the third quarter. AMN Healthcare's consolidated revenue was $244 million, which exceeded our guidance range and was up 7% year-over-year and 3% sequentially. We also achieved a consolidated adjusted EBITDA margin of 7.7%, which was slightly better than anticipated.

Our recent performance has been driven by several key factors. First it is clear that our evolution from being the leader in healthcare staffing to now also being known as the innovator in workforce solutions is paying off. Managed services programs provide our clients with measurable cost efficiencies and quality improvements. These are 2 areas of great focus today and in the future.

But this growth in MSP relationships has also been very good for AMN. Over the last 3 years we have been able to boost our market share and improve operating leverage in the nurse and allied segment. This is primarily a result of the efficiency of higher fill rates with our MSP clients, which are typically double compared to traditional accounts.

Our sales pipeline for MSP opportunities continues to be robust. We are on pace to close a similar or greater number of new MSP accounts than we did last year. These new MSP accounts are expected to have the same or better gross billings opportunity. We also recently renewed 2 of our largest MSP clients for multiyear contracts.

As we have been predicting, we've begun to see the MSP trend increase in allied and begin to gain traction within the locum tenens market. Just last month, for example, we signed a new MSP contract with one of the nation's largest providers of contract rehab therapy services. The recruitment and availability of allied clinicians is vital to their ability to grow and deliver quality patient care. This is one of the largest allied MSPs that we are aware of, and it has expected gross billings of over $25 million annually once fully implemented.

In addition to adding some new locums tenens MSP clients, we were also recently selected to be the single source provider of locum tenens staffing service and MSP by Novation, the nation's largest healthcare group purchasing organization. AMN has been a Novation supplier in nurse and allied for several years, and we were named their 2011 Purchase Services Supplier of the Year for our commitment to delivering exceptional value and quality.

During the last few years this has been a valuable relationship for AMN and instrumental in winning several of our nurse and allied MSPs. We anticipate this expanded relationship will be beneficial in helping us to build our locums MSP client base.

Another key factor in our recent strong performance and differentiated value is our ability to provide clients with the right combination of workforce solutions they seek. A recent example is a Texas hospital system and long-time staffing client who signed an MSP contract for nursing and local staffing with us last year, and then they expanded into allied. We were also engaged by the client to perform consulting services where cost savings were identified for them by addressing staffing inefficiencies. Last month we also added locum tenens services to this MSP. Examples like this are an important proof point in our ability to become a more holistic partner with our clients.

Now, let's get into the details of our results by business segment. Third quarter nurse and allied staffing revenue was $166 million, up 13% year-over-year and 5% sequentially. This growth was slightly better than expected in our guidance and was driven in large part by the travel nurse business where volume was up 19% year-over-year and 5% sequentially. The travel nurse growth was driven by modest order growth, strong fill rates, strong re-book rates, and increased sourcing spend to grow the supply of nurse candidates.

Clients with orders and clients with clinicians on assignment were also up, both year-over-year and sequentially. Going into the fourth quarter, strong bookings have continued and we expect to see our travel nurse volume up 20% year-over-year.

Turning now to local staffing, third quarter revenue was down 7% compared to the prior year but up 5% sequentially. The lower year-over-year revenue was due primarily to the office closures that took place in the fourth quarter of last year. Despite lower demand and supply constraints in certain markets, the business is stabilizing. The third quarter saw 1% to 2% sequential improvements in working nurses, bill rates, and accounts with revenue.

This quarter we also made a leadership change and promoted Becky Kahn to President of Local Staffing and Strategic Accounts. Becky has been with AMN for over 10 years in key sales and operational leadership roles within the travel nurse business. She has a proven track record in building strong relationships with our clients, which is key in the local staffing business. We are confident that Becky will bring the same leadership strength and ultimate success to the local staffing division.

Third quarter allied revenue was up 11% year-over-year and 5% sequentially with growth occurring across most specialties. The allied team continued to deliver strong fill rates, re-book rates, and improvements in sales productivity. Going into the fourth quarter we anticipate over 10% revenue growth year-over-year but slightly lower revenues on a sequential basis due to the typical holiday seasonality.

Locum tenens third quarter revenue was $68 million, down 6% year-over-year and flat sequentially. Gross margins improved by 240 basis points year-over-year and 50 basis points sequentially. This was due primarily to improved bill pay spreads resulting from our recent margin enhancement initiative. The year-over-year revenue decline was driven mainly by radiology and anesthesia, both of which have experienced significant declines within the market and our specialties where AMN is over-weighted relative to the industry.

Going into the fourth quarter, overall locums revenue is expected to be down sequentially in the mid to high single digits due to typical seasonality. We believe our locums business has significantly more opportunity to improve volumes, pricing, and margin management. The team continues to make good steady progress towards our goal of achieving consistent year-over-year increases in revenue and double-digit EBITDA margins.

In physician permanent placement, third quarter revenue was $10 million, up 9% year-over-year and 4% sequentially. We are very pleased with the progress of this business segment and how our teams are creating stronger relationships and ongoing search opportunities across various healthcare provider settings. In the third quarter new retained searches were up significantly year-over-year due to an improved demand environment and increased marketer headcount. However, some of the contracts are large search agreements, which take longer to activate and will have less near-term impact on placements. We anticipate fourth quarter physician perm revenue will be up in the low single digits year-over-year and down sequentially due to normal holiday seasonality.

Our leading industry position and overall improving financial performance is also enabling AMN to make important investments to fuel our long-term growth. These investments will enable us to continue building our market share, our workforce solutions capabilities, and the supply of quality clinicians to meet the accelerated demand for healthcare labor that is anticipated.

According to the US Census Bureau, not only will the nation's overall population increase by 10% between 2010 and 2020, but the number age 65 and older will increase by 36%. This is expected to significantly accelerate the demand for healthcare services since the rate of hospital stays for those age 65 and over is 3 times more and the number of annual physician office visits is double for this age group. At the same time, our educational system will not keep pace with the number of clinicians and physicians that retire.

Another driver of future demand is healthcare reform, which is anticipated to increase the number of people with access to health insurance by 30 million over the next 5 years. To position AMN to capitalize on these future demand trends, we are making strategic investments, which we believe will pay off in both the short term and the long term.

The first area of investment is in our innovative recruitment approaches centered around mobile, online, and social media technologies to aggressively drive more candidate supply. The second is in the continued differentiation and expansion of our workforce solutions offering to meet the evolving needs of our healthcare organizations. And over the next year we will also increase our technology infrastructure investments to ensure that we have a scalable, more efficient and agile platform from which to deliver best in class service to our clients and clinicians.

We feel confident in the demand growth expected over the next few years, and we believe these investments will further set us apart and enable us to more efficiently deliver the quality and quantity of clinicians our clients need. This higher level of SG&A spending from these initiatives is expected to be an important contributor in our ability to continue driving industry leading revenue growth and improve our operating leverage.

The solid performance we are reporting today and the continued progress on our workforce solutions is a direct result of the passion, commitment, and solid execution of our outstanding team. I would like to recognize and thank our AMN team members for their continued focus and drive for excellence. It is this level of talent and engagement combined with our clear and differentiated strategy that has set us apart in the market place and ultimately enables us to deliver more shareholder value.

I will come back to you in our Q&A section along with Ralph and Bob to help answer your questions, but for now I will turn the call over to Brian.

Thank you, Susan. Good afternoon everyone. Third quarter revenue was $243.9 million, up 6.5% from last year and 3.4% from last quarter. Our gross margin for the quarter was 28.5%, up 70 basis points from last year and up 10 basis points from last quarter. The year-over-year and sequential increase was due to an improvement in the bill to pay spread in our locum tenens segment and an increased gross margin in the physician permanent placement segment with a generally stable gross margin in the nurse and allied segment. The fourth quarter gross margin is expected to be down slightly due to both normal seasonality and an increase in worker's compensation rates impacting the nurse and allied segment.

SG&A in the quarter totaled $52.4 million or 21.5% of revenue compared to 21.6% in the same quarter last year and 21.3% in the prior quarter. The year-over-year percentage change was due to improved SG&A leverage and lower bad debt expense partly offset by the increased spending on strategic initiatives to grow candidate supply and expand our workforce solutions. We also incurred some severance costs related to ongoing back office efficiency projects and a leadership change made in our local staffing business. The sequential increase in SG&A spending was driven by these costs along with increased headcount and commission and bonus costs tied to business growth.

Our nurse and allied segment revenue increased 12.6% from the prior year and sequentially by 4.9% to $166.3 million. Volume grew 11% year-over-year and 5.2% sequentially to 5,884 average clinicians on assignment. Revenue per day was up 1.4% year-over-year and down 1.4% sequentially. The sequential decline was primarily the result of slightly lower average hours worked.

Nurse and allied gross margin of 26.5% was lower year-over-year by 10 basis points with improved bill pay spreads being offset by higher housing costs and a prior year worker's compensation actuarial benefit. Gross margin declined sequentially by 20 basis points and a small increase in direct costs.

Third quarter nurse and allied operating income was $18.8 million or 11.3% of revenue. The operating margin was 100 basis points higher than prior year on improved operating leverage and 30 basis points lower than the prior quarter due mainly to the lower gross margin.

Our locum tenens segment revenue of $67.6 million was 6.2% below prior year and flat sequentially with the sequential results reflecting a 1.9% decrease in days filled offset by an equal increase in revenue per day filled on higher average bill rates. Gross margin of 28.4% was up 240 basis points in the prior year and sequentially by 50 basis points due primarily to improved bill pay spread. The locum tenens segment reported operating income of $6.3 million or 9.3% of revenue, 60 basis points higher than the prior year and 30 basis points better than the prior quarter.

Within our physician permanent placement segment, revenue increased year-over-year by 8.7% and sequentially by 4.3%. Gross margin improved by 360 basis points in the prior year and 420 basis points in the prior quarter mainly as a result of higher billable recruiter productivity and lower candidate sourcing cost. Physician permanent placement operating income for the third quarter was $2.2 million or 22% of revenue, down 130 basis points from prior year and higher by 230 basis points from the prior quarter.

Interest expense in the quarter was $3.7 million, which compares to $7 million last year and $13.6 million last quarter. The second quarter included $9.8 million of cash and non-cash costs related to refinancing our credit facility. For the fourth quarter we expect interest expense to be approximately $3.2 million. Our tax rate in the quarter was 42%, slightly lower than our full-year and fourth quarter projected tax rate of 44%.

On a GAAP basis, diluted earnings per share from continuing operations was $0.12. Excluding the impact of debt refinancing and amendment cost and Medfinders' integration expenses in the prior year, adjusted EPS was $0.11 in the prior quarter and $0.04 in the prior year.

Operating cash flow for the quarter was $11.5 million and capital expenditures for the third quarter were $1.5 million. Day sales outstanding were 54 days compared to 53 days in the last quarter and 55 days in the same quarter last year.

As of September 30th our cash and equivalents total $3.8 million and our total debt outstanding net of discount was $170 million. Our debt to LTM adjusted EBITDA leverage ratio as calculated per our credit agreement was 2.6 times. The Company made $24 million in voluntary debt pre-payments during the third quarter and has made an additional $12 million of pre-payment subsequent to quarter end, bringing our debt balance as of today to $158 million.

Now let's turn to our guidance for the fourth quarter. Consolidated revenue is expected to be between $240 million and $244 million representing year-over-year revenue growth of 8% to 10%. This guidance incorporates the impact of Hurricane Sandy including some lost revenue and the potential delay of an EMR project in the Northeast. Gross margins are expected to be approximately 28% to 28.5%. SG&A expenses as a percentage of revenue are expected to be approximately 21.5%, which includes continued investments of about $1.0 million for the previously noted strategic investments. Adjusted EBITDA margin is expected to be approximately 7.5%.

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

Thank you very much. (Operator instructions). And our first question in queue will come from A.J. Rice. Please go ahead.

Thanks. Hi everybody.

Hi, A.J.

Hi, A.J.

First I guess just a point of clarification on the guidance, and maybe you mentioned the strategic investment and that's the variance, but if gross margin is going to be 28% to 28.5% and SG&A is 21.5%, I guess that would imply a 6.5% to 7% EBITDA margin, but you're calling it adjusted at 7.5%. Is there something else that goes in the mix there?

Yes. It's our normal. The SG&A, by definition, includes the stock compensation expense, so that's always in --

Got you.

For our adjusted EBITDA. That's about 0.6%.

Okay. Okay. Obviously you put a priority of paying down debt, the $24 million in the quarter and then the revelation of the $12 million post the end of the quarter. Can you talk about is that going to be a priority to continue to get the debt down or is there room for tactical acquisitions? Do you think this is the time to be looking at acquisitions? I guess there was a report today that one of your competitors might be looking to get rid of its medical staffing business and I wondered if you had any thoughts about consolidation activity in the states.

Right, A.J. Appreciate the question. As you've heard from us in the last couple of quarters, we really believe that we have the right components and the right strategy in our business today and we are making investments to make sure that we can continue to really build that momentum in workforce solutions in particular, with MSP and RPO and other kinds of solutions for our clients, as well as making sure that we have the supply coming in to meet the increased demand really across all of the business segments.

So I would say our priorities are one, making sure that we are appropriately investing in the future growth of our business, and that means increasing a bit of spending, some OpEx but more even on the CapEx side maybe going forward. And Brian's talked about that before. We don't feel that it is necessary or that we would get any meaningful benefit by making an acquisition to just add volume to our business today. We think we can make those investments internally and do that more effectively. So we have nothing near-term in our sights.

Okay.

And so aside from investing in our business, paying down debt is obviously the next place for our cash.

All right. And then just maybe lastly on a technical question on the working capital fluctuation. I know you had a big cash flow quarter last quarter and you had a good cash flow this one, but it wasn't quite as much as last quarter. And it seems like that's receivables bouncing around. Is that just a normal noise from quarter to quarter and seasonality or is there anything else going on in the receivable side worth mentioning?

No. We saw our DSO come down nicely. Great job by the team on the collections side in really working with our clients. So our DSO came down from 56 in Q1 to 53 at the end of Q2, and that's where we saw the operating cash from the second quarter larger than normal at this level of profitability. So the third quarter I think is more indicative of the type of operating cash that you'd see at our current levels. So DSO went up a little over half, but nothing else unusual. And like I said, you're going to have the normal working capital fluctuations but don't expect anything really abnormal on a go-forward basis as well.

All right. That's great. Thanks a lot.

Yes.

Thank you.

Thank you. Our next question in queue will come from Gary Taylor. Please go ahead.

Gary?

Sorry. Too many buttons to push.

No problem.

Nice quarter. I think I -- Brian, you might have said this right at the tail end of your comments and I was writing stuff down but I think I missed it. Did you comment on the tax rate for the fourth quarter?

Yes. I said it would be about 44%, which is consistent with our full-year effective tax rate.

And as we think about '13, I know there's essentially these permanent differences which essentially drives the effective tax rate higher when earnings are declining toward the level and as they pick up and then the tax rate starts to look more normal again. Is there an easy way to think about that movement as you head into '13?

I think I just generally can say we could expect to see the tax rate come down a little bit more as to the things you pointed to in terms of some of those permanent differences becoming a smaller impact as our pre-tax income goes up. So we won't get necessarily down to 39%, 40%, but I think we have the room to go down a little bit more from where it is right now.

Okay.

And you've seen that even as we've gone through this year. We were --

Right.

Earlier in the year we were thinking it was going to be more in the mid to upper 40% as our pre-tax income has come in nicely. We've also been able to work with our clients contractually to try to mitigate some of those permanent differences as well. That is also impacting the rate and why it's lower as well.

Great. And can you remind us in the nurse and allied segment how seasonality affects that revenue sequentially into the 4Q and the 1Q. As I was looking back at my model I think maybe one time in the last decade has -- does revenue pick up sequentially into the fourth quarter, so the guidance you gave of flat is a pretty strong and consistent with what your typical seasonality is, but then normally seasonality would sequentially, assuming the business environment stays as good as it is, typical seasonality would have that revenue up sequentially in the 1Q. Is that correct?

That is basically correct, Gary. And I'd say in our allied and locums businesses, and even perm placement, we are probably feeling the effects of the normal seasonality with a bit of a decline in the fourth quarter. But in the nursing business, travel nursing in particular, they are overcoming what might be some normal seasonal pressure.

And as you saw in the fourth quarter, we're actually looking to pick up our momentum year-over-year because of just the strength of the model that we have there. It's certainly an outcrop of our strength in the MSP relationships that we have and our ability to continue to fill more in those contracts and add more of those contracts. But it's also within the traditional non-MSP business that we've seen order growth and our ability to increase our traveler count and the number of clients with open orders.

So I would just say that the travel nurse all around is probably outperforming certainly the market but also the normal seasonal trends. Ralph, do you have anything to add to that?

Probably just that it's our 11th consecutive quarter of growth in nurse and allied. If we could get it up next quarter again that would be 12. That would be certainly a record for us. So we're feeling pretty good about the growth, and lapping the normal seasonal impact, which as you noted was pretty -- it used to happen pretty regularly and we've just been able to stay ahead of it for the last 3 years.

Good. My last question. Brian, I'm not sure I understood or quite heard all the comment about the worker's comp actuarial benefit that you were referencing?

Yes. That was just comparing the nurse and allied gross margin year-over-year. In the third quarter of last year we had about a $700,000 actuarial benefit. In the third quarter of this year we actually had a small negative adjustment. And so I made a point as well on a go-forward that we are seeing our rates up a little bit based on the latest actuarial report, so that's a direct cost that we'll start to see. We saw a little bit up from the actuarial report, but we'll see a little more of that pressure on a go-forward as well, so we'll have to make sure we're counteracting that with either adjustments to our other direct costs or going back to our clients to cover that.

Got it. Yes, I didn't see anything in this quarter's numbers that led me to think there was something in this quarter so I was confused.

It was very small in the quarter. And again it's a pretty small impact overall going forward, but enough to note though on a go-forward basis.

Yes. Okay. Great. Thank you.

Thank you, Gary.

Thank you. Our next question in queue will come from the line of Jeff Silber. Please go ahead.

Yes. Thanks so much. I apologize, I was cut off, so if this question was asked before. In terms of your nurse and allied business, you've been growing it at a fairly sizable rate. Do you think the market is growing at that rate, or do you think you're actually taking share?

That's a good question, Jeff. I think we've said several times now that we've been taking market share, but we also feel like the demand is increased. Actually more recently, even after this quarter, we've seen about 6 weeks of an increasing trend in our orders, so we're feeling like demand is beginning to pick back up again. We saw a little bit of a pull back in Q1. That was kind of the last time we saw any declines in the market, and then the market then took back off again and kind of grew throughout the year.

So it's a combination of both, but we've definitely seen some share increases, which is primarily a result of our MSP strategy so at these levels of demand we can fill very, very high percentages of the overall number of orders that we get.

Sure. Great. And in terms of the end markets, are you seeing any difference either between different geographies or different types of buyers?

Did you say EMR?

End markets. I'm sorry.

I mean that is certainly strong in California, New York, and Texas, but no real changes substantially. I'd say probably the one thing that's kind of been interesting is a little more diversification among the other states, but that's really it.

And probably the other kind of trend is in the MSPs and the workforce solutions themselves, and the continued momentum that we see in the appetite for MSPs both within the nursing market but also in allied and locums, so maybe Bob, if you want to comment on that?

Yes. We think the momentum in nursing is continuing at about the same pace, but the growth really is starting up in the allied side. It's still a smaller percentage than it is in the nursing, but we're also beginning to build that pipeline for locums and starting to see some anticipation of growth in that area as well. So it's a bit of a mix change as well as just a geographic change.

Great. That's great to hear. And then just a couple of numbers questions for you, Brian. What share count should we be using for the fourth quarter?

It would be just probably about 47 million, maybe just a tad above that.

Okay. And in terms of capital spending, what should we be budgeting for the fourth quarter?

It'll be probably a little bit closer to $2 million for the quarter.

Okay. Again, I know it's a little bit early to discuss 2013, but do you have a rough estimate of what you think you'll be spending on capital spending next year?

Yes. As Susan mentioned, we are making some investments in both our supply acquisition as well as some of our core infrastructure, and so if you go back historically we have trended more -- closer to 1% of revenue. So I think that's a more realistic expectation for next year. That would put us closer to around $10 million or so.

Okay. Great. That's helpful. Thanks so much.

I want to make a real quick comment. You had asked about the share count as well. One thing I wanted to note as well is during October particularly Goldman Sachs, who was a shareholder that had come through the Medfinders acquisition, and you've seen at different times they've been selling down their position in smaller amounts. They accelerated that during October, and as of now they have now exited their position with AMN other than a very small amount still from a holdback related to the original acquisition.

Thank you very much. Our next question in queue will come from Tobey Sommer. Please go ahead.

Thank you very much. I just wanted to ask you when you sign on a new MSP client are you still generally moving your wallet share kind of in spend up to kind of an 80% or 90% level of fills or has that changed over time?

The fill rates haven't been that high in nursing and allied. I don't think we've ever quoted 80% or 90% in terms of fill rates. But our fill rates, depending upon the maturity of the account, can get to that level after you get to a point where 6 months, 9 months into that, and then certainly in that second and third year. But on average our fill rates are a little bit less than that on the nursing and allied side.

Allied in particular in certain sections, like therapy is slightly even lower because it's just harder to find the demand. And then as you move into the locums side, even more so. So I think the overall fill rates for the Company will continue to probably trickle down a little while as we build up more in the nursing and the allied side. But overall the number is growing in a very positive way.

That's right. What he is talking about is our direct fill, so obviously our fill rates overall with the clients, and maybe that's where he is referring to 90% plus of all of the orders that we get, so we obviously want to fill as much of that as we can directly. But to the extent that we can't, we'd then use our subcontractors.

In a locums example, let's take that. What would be the differential between what you may receive in terms of orders or kind of have in market share with a customer prior to an MSP, and then potentially what would you aspire to increase that to once an MSP has been implemented and is maturing?

I think to be quite honest, Tobey, it's a little early to tell what that top potential direct fill rate might be with locums because we've just signed our first locums MSPs in the last few months. And so our intent would be to potentially double them the way that we can do in the nursing business. But at this point we're being more conservative in our own estimates when we bring those contracts in as to what we might directly fill ourselves.

So if your average locums fill rate is normally in the 40% to 50% rate, we would hope that we could get that to 70% or 80%, which would be comparable to the nursing business. But again, it's still a fairly new model and so I think we're going to want to make sure that we have a strong affiliate vendor network, which we do in the nurse and allied business because our commitment to the client is to fill more like 90% or 95%. And that is our number one goal, is serving the client well.

So in the beginning we may initially still fill more like 40% or 50%, and then over time as we get things moving and more efficient at our end, then we would like to move that up to 60%, 70%, 80%.

Thank you. And then how much runway do you think you have in MSP growth? And I ask the question from the perspective of without knowing kind of the concentration of your clients by metro market or state. I would presume there's some sort of natural limitation where you can only serve so many clients who are side by side almost in the same market and do so effectively. Any kind of color you could give us on how to think about that would be helpful.

I'll start, but I'd like Ralph to help me out because I think he's got some real statistics. He may have talked about it before. But we actually found just the opposite. We find that when we're in a market and we can do multiple MSPs that the actual fill rate goes up for all of us. We also find that even our non-MSP clients in the same markets have higher fill rates. It's partly because we're bringing more nurses to the market ourselves and so while there may be some client concern as we go through the sell cycle, we always want to try to go back to the client again and show them examples where that's actually potentially to their benefit.

So the answer to your question I think more on the longer-term potential, we're finding that the acceptance level and understanding of how MSP can impact them just continues to grow as a result principally of the reference base. So the strong support we get from Novation, they've certainly got a very large pipeline of clients who have yet to implement MSP and they're out there trying to help us get into those clients as well. So our outlook certainly for the next year or so is certainly very strong.

This is Ralph. I'll add in, we really are nowhere near the penetration cap, if there even was one. So we're way behind -- it's a long ways off. I think in other industries you're looking at 60% penetration of MSP in the market place, and our industry is half of that probably, maybe even less.

Secondly, I'll reiterate Bob's point. In markets where we have multiple MSPs, our fill rates on those MSPs are higher when we have multiple MSPs. And surprisingly also our traditional business fill rates go up at the same time. We become kind of the source that can move people around and find them multiple opportunities, and so we can serve their kind of entire career, right? They can work locally for us for a while in our Nursefinders brand. They can work a long-term travel assignment. So we can move them around a lot better and find them more opportunities.

And that's the secret to keeping candidates happy is just keeping them working and keeping them on good assignments and giving them kind of challenging new opportunities even if they're at different facilities within the same city.

Thank you. Very helpful. The re-pricing were able to in physician staffing, has that been folded into the P&L with third quarter results or is that more of a multi-quarter process with more to come?

I want to make sure I understand the question.

It was part of an initiative and a process that began in the fourth quarter of last year where we really reorganized our groups and quite honestly put greater accountability on how we were pricing our locums business and managing the gross margins. And we started to see the benefit of that in the second quarter when you saw our gross margins increase significantly, and that has sustained and even improved a little further into the third quarter.

With that said, we still think that we have room to grow. If we look at what competitors are doing with their gross margins, we think that we have another 3 to 4 percentage points that we can improve our gross margins over time. A little bit of it is mix. We are more weighted in the government business, for example, which tends to have lower margins. But that's part of what Ralph and the leadership team are addressing within the locums business is to over time adjust our mix to be more weighted in the higher growth areas and not to be, quite honestly, any over-weighted in any particular specialty that might be susceptible to declines in the future.

And so it will be a multi-quarter process, and while we might see some nice jumps from quarter to quarter, it won't necessarily be a steady progress. Certainly our goal is to get our gross margins above 30%. It's going to take that in order to get our EBITDA margins where we believe they can and should be.

Thank you very much. Very helpful. Just 2 last questions from me. Do you anticipate any impact from either the election or federal government sequestration on the business? And then I was wondering if you could comment about strike activity at your hospital customers and whether you're seeing kind of more of that than you have historically and if you would expect that to continue? Thank you very much. I'll get back in the queue.

Okay. Maybe I'll take the kind of overall question regarding the political environment and movement, and I think most would agree it's hard to predict exactly what will happen other than they're going to have to, regardless of who wins the election, they're going to have to address some of the issues that exist with reimbursement changes and sequestration and things that are sitting out there. There's a lot of uncertainty, and our clients are feeling it, and it even affects their behavior right now in holding back until they have better clarity.

But whoever moves into office will need to mobilize very quickly to address some of those issues. If they don't, there will be much bigger issues than what AMN has to worry about and so we're pretty confident that they will address at least the reimbursement-related issues. They're not going to be in a position to be denying care to millions of people as of January 1. So I think they're going to have to move pretty quickly to address at least the most critical issues.

And how they address them is uncertain. And so we don't see anything in particular that we think is likely. I mean there's always the disaster scenarios that people predict out there. What if, what if, what if? But again, those are so severe that I have to believe that they will be addressed. And so on the more probable front, we don't see anything that would have a material effect on our business and the trajectory of where we think that we're going.

I'll just add in on sequestration. I think our clients have had a couple of years of visibility into that one, so I would suspect that's already built in to current demand levels. So I don't think that's going to be anything that surprises them. I think the things that throw them off are kind of things that come up shorter term, quick changes to regs. But honestly the entire industry has done a very good job of reacting to those changes and kind of bouncing back from them.

So you may have some lumpiness occasionally while people are trying to figure out how to deal with the changes, but the industry tends to get out of it within a couple of quarters.

Want to comment on the strike? What you're seeing, Ralph?

On the strike front, slow down in activity there. I think some of the stuff we were seeing on both coasts has really just kind of almost gone away for all intents and purposes, although there is a little bit of activity we're seeing kind of in the Midwest and some possibilities there that are more towards midyear this year. We don't provide very much strike business. We only support our MSP clients when they go into a strike and help them manage that process and keep their expenses low and remain efficient and with high quality during those times. So I wouldn't anticipate that's going to have much of an impact on our numbers over the next 2 to 3 quarters.

Thank you very much.

Thank you. Our next question in queue will come from Mark Marcon. Please go ahead.

Good afternoon. I was wondering if you could talk a little bit about what you're seeing in terms of nurse behavior, just the number of nurses that are more willing to act as travelers? It's unclear as to whether or not you're gaining travelers from other potential players because of your strong supply in terms of high quality client base or are you actually starting to see an improvement in terms of the behavioral trends there?

This is Ralph. I'll handle that one too. We are seeing some pretty significant growth in our applicant trends, and the number that are new to the industry have gone up slightly from what we had seen in the past. A lot of them though were returns that dropped out of the industry in 2008/2009, so they're not as much taking somebody who's active with somebody else away but as reigniting the passion in travel nursing for somebody who used to do it and used to really like that as part of their career and kind of gave it up in 2008/2009 when everything slowed down a lot.

I don't know if we give a number but I guess we're up in the 20% to 40% range when you look at it for our supply trends. So it really says that they're feeling better I think about travel nursing as a career option. It also says they're probably feeling a little bit better about the economy and their jobs as a whole. I did notice in the BLS data that the quits had gone up. That's usually a sign that people are getting must more and more comfortable with job changes, so it feels like we're seeing some positive momentum there as well.

So that combined with the increase in demand makes me feel very good about the travel nurse business.

Great. And on the locum tenens side, when do you think that you'll kind of base out in terms of radiology and anesthesiology?

Radiology we are I think getting close. It's 6% of our locums mix today, and the industry average is around 4%. And so we are probably a quarter or two away from being at the industry mark in terms of how much of our business it constitutes. Anesthesia we're still a tad high. It's about 10% of our business, and for the industry it tends to run more around 5%. So there again we've got a little more time I think before we get -- although you know anesthesia is one of those areas where we occasionally see the business go up for a couple of quarters. So it hasn't actually been as much of a constant decline as radiology. It declines and then it rises.

So there is a baseline amount that makes sense for us to have in our portfolio because it will be an ongoing need for many clients, and so we want to make sure we're there but just would prefer to have a little bit less of our business there.

Great. And can you give a little more color with regards to the Novation's contract with regards to how large it is?

Yes. The contract is an endorsement by the group purchasing organization known as Novation. It's the largest out there. What they do is they evaluate various vendors that are out there in the market place. We've been fortunate to have their endorsement, and they have a sales force that's actually embedded oftentimes in the clients' locations. Oftentimes that sales force resides in the finance department and has contact directly with the CFO. So therefore actually having that relationship with them allows us to get contact levels we might not otherwise get and more expeditiously and to tell our story with the support of their group purchasing organization.

And many of these clients are very aligned with them. They're on the Boards, they're partners with them, there's a real strong alliance to these buying groups. And in particular, Novation has been a very, very good partner with us. The fact that they endorsed us on the locums piece is very exciting for us. This is the first time that our locums business has been endorsed. They've endorsed other competitors in the past and have actually made a switch from another competitor to us.

But what's more exciting is that they've also looked at us as kind of the company that has a very broad range of services. Like you're trying to figure out nursing, allied, locums all in one package I think really appeals to them in their clients. It's kind of like the who you going to call type story of who would you go to if you were in this business and you wanted to find somebody that could provide all the services.

So by bundling that along with some other new services like the [locums] billing program and the MSP, they're excited about I think the partnership and going out to represent our products to their clients, so a lot of leads come from that relationship.

Great. And can you talk a little bit about what you're seeing in terms of rental expense? You mentioned obviously the gross margins this quarter being impacted there. What's your expectation going forward?

The team's done a good job. If you look year-over-year in the third quarter our rents were up probably around 4%, which is not that far off from kind of the overall industry rent increases. Where they've done a really good job though is work on reducing our vacancy rates. We've seen that come down, so the overall impact to our costs haven't been as significant, and we continue to look for new property vendors and others where we can keep those costs lower.

So I did not mention the fact sequentially it really was not much of an impact to the business. So first half of the year was a greater impact year-over-year. We saw that still in the third quarter. I think at this point we've done a really good job of stabilizing that. But it will continue to be a pressure for us that we need to be mindful of and continue to look for ways to have that cost grow at a slower rate than the market overall and again use that as an opportunity to re-engage with our clients and talk about why we need to have fill rate increases to cover those costs.

That's great. I'll follow up offline.

Thank you, Mark.

Thank you. Our next question in queue will come from Josh Vogel. Please go ahead.

Thank you. Good afternoon everyone.

Hi, Josh.

Hi, Josh.

How are you?

Great.

I'm sorry, I was bouncing between a couple of calls here, but I had a question regarding the SG&A spending. You talked about the strategic initiative to expand future candidate supply. I was curious, is this an extra $1 million of spending you expect to see for several quarters or is this more of just a Q4 event?

It will continue at some level, Josh. And in the third quarter, these strategic initiatives, which are primarily to drive candidate supply but also is around expanding our workforce solutions offering and making sure that we are improving our position as that workforce solutions innovator. It was roughly $800,000 in the third quarter, and it's going to be just a tad over $1 million in the fourth quarter. And going into next year we'll probably see it kind of continue at that pace for a quarter or two.

But a lot depends upon the results that we see because we absolutely expect to see revenue benefit from this, in fact starting in the first quarter and more so into the middle of the year. And so we'll be able to calibrate our continued spending depending on the returns that we're seeing, particularly around the candidate applications and supply. But assuming all in we complete the projects that we have on our slate, you would start to see it taper off towards the lateral part of next year in terms of that candidate supply piece because some of it is truly up front expense and investment, and then whatever we have on an ongoing basis will be supported by the incremental revenue that it's driving.

Okay. That's helpful. Thank you. And Brian, did you say you expect interest in Q4 was going to be $3.2 million?

Correct.

Okay. And I know you don't -- or you're not talking about 2013 yet, but just wanted to get a sense of your priority with debt repayment next year or if you could just give us some sort of idea in and around where you expect interest expense to fall next year?

Yes, I'll definitely give more color on that on our next call, but you've seen it come down from the third quarter into that fourth quarter forecast. So as we continue to make debt payments you'll see that go down. It's not going to be big chunks each quarter, but it'll work its way down every quarter during 2013.

Okay.

And as we said earlier on the call, right now we've talked about some of the investments we're making really in the business, but outside of that any excess cash we'll use to continue to pay down debt.

Okay. Now shifting gears a little bit. Could you give us a revenue breakdown by geography?

You know, we really haven't done that in the past, giving specific numbers. Certainly we've talked about California being our largest market, not only in nursing but overall it's a big market for the Company. And then other areas that have seen particular strength for us are Texas, which has always been strong in the physician market, but actually saw some nice increases in the nursing business as well. So I'd kind of characterize that as a strength.

And then the Northeast has certainly been a strong suit for us as well as the Midwest. So it's not just a West Coast or an East Coast phenomena. I'd say we have about the best geographic dispersion I think I can remember for the Company. But you've got particular growth happening in the Northeast and probably on the West Coast and Texas.

Okay.

Does that help?

Yes. Definitely. I guess I just wanted to lead in to the impact from Sandy, if there was any way to quantify what that did to your guidance for Q4 given the disruption there?

Sure. We mentioned briefly in the script that we have incorporated into our guidance as we can best estimate, and there is probably $300,000 to $500,000 of lost revenue days when hospitals were closed, particularly with per diem shifts where you just won't make those up again. And then we have an EMR implementation that was scheduled to occur in the Northeast that might be delayed. So that's not lost revenue, it's more of a potential delay either later in December or it might even get pushed into the first quarter. And that's upwards of $1 million.

So we carved that out of our guidance. Now they could still occur, and that would be some upside for us, but we felt it was probably more conservative to pull it out.

We are working very collaboratively with our clients in New York City. We've got a large MSP there in particular where a lot of patients are being diverted to, and so we've been working with a lot of the hospitals to help really deploy both temporary nurses, not only ours but others, as well as permanent nurses from some of the closed hospitals and help get them deployed to where they're needed most.

I have to say the New York hospitals have really joined hands and are working together very closely to make sure that the patient is their number one priority and that they have the proper staffing to take care of the patients that are being brought in to some of the larger facilities that are still open.

Got you. All right. I'll jump back in the queue. Thanks a lot.

Thanks, Josh.

Thank you very much. At this time we have no additional questions in queue. Please continue.

Okay. Great. Well Josh, maybe we'll pick up that other question offline then if you have another one. We'd certainly like to thank everyone for joining us today and for your continued support of AMN Healthcare. And we look forward to updating you on our progress next quarter. Thank you.

Thank you. Ladies and gentlemen, that does conclude your conference call for today. We do thank you for your participation and for using AT&T's Executive Teleconference. You may now disconnect.