AMN Healthcare Services Inc (AMN) 2013 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the AMN Healthcare first quarter earnings conference call. (Operator Instructions) And, as a reminder, this conference is being recorded.

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

Thanks, Laurie. Good afternoon everyone. Welcome to AMN Healthcare's first quarter 2013 earnings call. A replay of this webcast will be available until May 17, 2013 at AMNHealthcare.investorroom.com. 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 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, 2012 and our other filings with the SEC, which are publicly 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 Developments subsequent to this call may cause these statements to become outdated.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 the Q&A session 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 so much, Amy. Good afternoon, everyone, and welcome to AMN Healthcare's first quarter 2013 earnings conference call.

The strong first quarter results we will be discussing today were the outcome of overall solid market conditions, the continued benefit of our focus on delivering differentiated workforce solutions, and excellent execution by our team.

Our first quarter P&L performance reflects strength from top to bottom, with year-over-year revenue increases, gross margin improvement and operating leverage across all business segments. Consolidated revenue grew by 11% and adjusted EBITDA by 21%. Our adjusted EBITDA margin for the quarter was 8.4%. The largest contributor to our growth was the Travel Nurse business, which grew revenue by 19% and adjusted EBITDA by 27% over prior year, but all segments delivered very solid performance, including our Locum Tenens business, which achieved both year-over-year and sequential revenue growth.

We continue to make progress with our strategy to expand our leadership position as the nation's innovator in healthcare workforce solutions. In addition to the benefits of MSP wins from 2012, we've continued to add more new clients in 2013, and are very excited about the pipeline and potential new contracts we should close over the remainder of the year. It is clear that healthcare organizations are seeking innovative ways to better manage their labor costs and ensure access to high quality clinicians when they're needed.

The economic and patient care benefits of utilizing an MSP model are becoming more widely known and we believe penetration will increase across all staffing segments. We are particularly excited about the momentum we are seeing in the adoption of Locum's MSPs. We now have a total of six Locum's MSP clients in various stages of implementation. Approximately 30% of our first quarter consolidated revenues came from MSP contracts. Since our fill rates for MSP clients are higher than those in traditional clients, we are able to grow faster during periods of market expansion and it provides some protection during periods of demand softness.

Now I will dive into our first quarter results by business segment. Nurse and Allied Staffing revenue was up 15% year-over-year and 1% sequentially. The largest contributor to growth was the higher volume in the Travel Nurse business, which was driven in part due to year-over-year increases in orders, clients with orders, and clients with clinicians on assignment. An upside surprise was the exceptionally strong revenue from EMR engagements during the first quarter, while still a relatively small part of our overall business our track record in helping clients to successfully work through EMR implementation with proper staffing and training is certainly becoming more notable. We also experienced an above normal flu season during January and February, which contributed to higher orders and travelers on assignment.

Going into the second quarter our MSP Travel Nurse orders have stayed relatively steady since the beginning of the year, however, our non-MSP orders have declined sequentially due to a decline in winter seasonal demand and flu orders. In addition, there was some order fall-off due to the completion of a couple of large EMR projects in the first quarter. Although the EMR pipeline is strong for the second quarter, it is unlikely to hit the peak level we experienced during the first quarter.

In addition to these specific trends, our hospital clients have recently been exhibiting a more cautious mindset from the lower census in the first quarter and general concerns around the impacts of sequestration. However, recent reports indicate that hospital census is back up in April, which may indicate this demand softness will be short-lived.

Based on the current demand environment we are being conservative and expect volume in the Travel Nurse business to be up in the low teens year-over-year, but down sequentially. This is primarily due to the exceptionally strong EMR and flu related business in the first quarter.

Turning now to Local Staffing, first quarter revenue was up 4% compared to the prior year and 1% sequentially. Volume was flat both year-over-year and sequentially with the revenue increase being driven primarily by a mix shift towards higher skilled clinicians and increased bill rates. Going into the second quarter Local Staffing revenues are expected to be up slightly year-over-year and down sequentially.

First quarter Allied Staffing revenue was up 6% year-over-year, but down 5% sequentially with the year-over-year growth driven by the strength in the imaging and lab specialties. Despite a decline in therapy orders driven by reimbursement cuts therapy volumes were still slightly up year-over-year due to stronger fill rates and growth in our Allied MSP clients. Going into the second quarter Allied revenues are anticipated to be down slightly both year-over-year and sequentially due to therapy weakness.

Locum Tenens' first quarter revenue was up 3% year-over-year and up 4% sequentially. This sequential increase was due mainly to the growth in hospitalists and internal medicine subspecialties, as well as the advanced practice specialties, such as nurse practitioners and CRNAs. This increase was offset by declines in the government and surgery specialties.

With healthcare reform trends pointing towards advanced practice professionals having a greater role in primary care, we have been investing in this area over the past year and are now beginning to see it pay off. Going into the second quarter Locum's revenue is expected to be up year-over-year and up sequentially.

In Physician Permanent Placement first quarter revenue was up 10% year-over-year and down 2% sequentially. The year-over-year improvement was driven by increased search activity and increased placements. The leadership team in this segment is doing an excellent job of diversifying into underdeveloped markets and continuing to leverage our expertise and relationships for the placement of physician leadership positions. They have also been creating new more effective methods of recruiting through our investments in digital marketing and social media. First quarter new searches were up sequentially, and so going into the second quarter we anticipate that revenue will be up in the high single digits year-over-year and sequentially.

We continue to be excited about the positive outlook for the next several years. Discussion regarding the healthcare workforce impact of the additional 30 million insured citizens, coupled with a 30% increase in people age 65 and older is expected to drive increased demand for healthcare services. As hospitals determine how they will meet this patient care demand in the midst of a worsening labor shortage, they are increasingly adopting workforce solutions that provide cost benefit, while enabling access to quality clinicians. At the same time it appears that more clinicians are looking to make a job change. Based on a recent Career Builder survey over a third of healthcare workers plan to look for a new job in 2013, and that's up from 24% last year. Nearly half plan to look for a new job over the next few years.

To ensure we are ready to maximize this future opportunity we have remained committed to our strategic investment in three key areas. The first is our digital transformation initiative to aggressively attract more clinician supply through innovative recruitment technologies, job distribution platforms and mobile applications. The second is the continued differentiation and expansion of our suite of workforce solutions. And the third is streamlining our technology infrastructure for greater efficiency, scalability, and agility. We expect these investments to be an important contributor to delivering industry-leading revenue growth and improved operating leverage in the future.

Before I hand it off to Brian, I would like to take a moment to thank our very talented team for their solid execution and passion for delivering excellence and quality to our clients and clinicians every day. Combined with our differentiated strategy our team members' level of commitment has set AMN apart as a leader in the marketplace and enabled us to deliver strong results and greater 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.

First quarter revenue was $252.1 million, up 11.4% from last year and 1.7% from last quarter. Revenue exceeded the high end of our guidance on better than expected performance across all of our segments, with the largest upside coming from the stronger EMR revenue Susan mentioned earlier.

Our gross margin for the quarter was 29%, up 110 basis points from last year and 50 basis points from last quarter. The year-over-year increase was due to improvement across all business segments with an 80 basis points increase in the Locum Tenens Staffing segment. There was also a $1.2 million actuarial based workers compensation benefit in the Nurse and Allied segment recorded during the current quarter.

SG&A in the quarter totaled $53.6 million or 21.3% of revenue compared to 20.8% in the same quarter last year and 21.4% in the prior quarter. The increase in the prior year was due primarily to higher spending in support of revenue growth including employee headcount, commissions and other growth driven cost, as well as a prior year $2 million refund received in connection with the settlement of an assessment with a California EDD, only partially offset by improved operating leverage.

Our first quarter Nurse and Allied segment revenue increased 14.9% from the prior year and sequentially by 1% to $176.8 million. Volume grew 14.2% year-over-year and 2.3% sequentially to an average of 6,215 clinicians on assignment. Revenue per day was up 1.7% year-over-year and 0.9% sequentially due to an increase in the average bill rates and a favorable business mix.

Nurse and Allied gross margin increased year-over-year by 110 basis points and sequentially by 90 basis points to 27.5% due primarily to the previously noted workers compensation reserve adjustment and lower health insurance costs.

First quarter Nurse and Allied operating margin was 12.7%, an increase of 160 basis points from the prior year on improved operating leverage and the higher gross margin. Sequentially the operating margin was 40 basis points higher due to the favorable workers compensation reserve adjustments.

First quarter Locum Tenens segment revenue of $65.5 million increased 3.1% compared to the prior year and 4.3% sequentially. Days sold volume was lower by 1% from the prior year or higher by 2% sequentially. Revenue per day sale was higher by 5% year-over-year and 2% sequentially on higher average bill rates and a specialty mix shift. Gross margin of 27.9% was up by 80 basis points from the prior year due to improved bill rates and bill pay spreads.

The Locum Tenens segment reported operating margin of 7.5%, an increase of 50 basis points from the prior year but lower by 20 basis points from the prior quarter. This sequential margin decline resulted in part from additional hiring for growth. We continue to believe there is an opportunity to significantly improve the operating margins at our Locum's business.

Our first quarter Physician Permanent Placement revenue was $9.9 million, up year-over-year by 9.8% and down sequentially by 2%. Gross margin improved by 310 basis points from the prior year due to improved sales productivity, but was down by 260 basis points from the prior quarter due mainly to a prior quarter reduction to our sales reserve.

Physician Permanent Placement operating margin was 22.6%, above the prior year by 370 basis points on the improved gross margin. On a sequential basis the operating margin improved by 210 basis points with the lower gross margin being more than offset by lower SG&A.

Adjusted EBITDA for the quarter was $21.1 million, representing 8.4% of revenue. This compares to $17.5 million or 7.7% of revenue in the prior year and $19.2 million or 7.8% of revenue in the prior quarter.

Interest expense in the quarter was $2.9 million, which compares to $5.5 million last year and $3.2 million last quarter.

Our tax rate in the quarter was 43%, which was in line with our guidance. Based on our current projections we expect the same 43% rate for the second quarter and for the full year 2013.

We reported net income of $7.6 million in the first quarter. Diluted earnings per share was $0.16 for the first quarter, which compares to $0.07 in the first quarter of last year.

Cash used in operations for the quarter was $2.7 million driven by growth in working capital from higher revenues and an increase in DSO. Days sales outstanding were 56 days compared to 53 days in the last quarter and 57 days last year. The sequential increase in DSO was a result of higher EMR staffing revenue, which typically has a slower payment cycle, and higher revenue later in the quarter, which we collected during the second quarter. We do anticipate DSO will decline in the second quarter and expect positive operating cash flow for the remainder of 2013. Capital expenditures for the first quarter were $2.2 million.

As of March 31st our cash and equivalents totaled $1.9 million. We had $1 million drawn on our revolver, and our long-term debt outstanding was $158 million, a $35 million reduction from a year ago. Our leverage ratio as calculated per our credit agreement was 2.3 times as compared to 3.2 times last year. The Company's amendment to its credit agreement went into effect on April 9th reducing the interest rate on the term loan by 200 basis points to 3.75%. The rate on the revolver was reduced by 150 basis points to 2.5%. In conjunction with the amendment we will charge approximately $1 million through interest expense in the second quarter.

Now let's turn to our guidance for the second quarter. We expect consolidated revenue to be between $251 million and $255 million, representing year-over-year revenue growth of 6% to 8%. Gross margin is expected to be approximately 28.5%. SG&A expenses as a percentage of revenue are expected to be 21% to 21.5%, and adjusted EBITDA margin is expected to be 7.5% to 8%.

For the second quarter we expect interest expense to be $2 million excluding the $1 million charge associated with the credit agreement amendment. Noncash stock based compensation expense is expected to be $1.5 million. Capital expenditures are expected to be approximately $2.5 million for the second quarter, and diluted share count is expected to be 47.9 million for the second quarter and 48 million for the full year.

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

(Operator Instructions)

And our first question from the line of A.J. Rice with UBS. Please go ahead.

Hi, everybody.

Hi, A.J.

Hi, A.J.

A couple questions if I could ask? First of all, just a technical one, on that interest expense reduction so is the entire $158 million subject to the better terms that you described or is that some lesser percentage of that?

The full amount is subject to that so that -- you can do the $158 million of current debt, that's about $800,000 a quarter of cash interest savings.

Okay, good, good. And then I guess you called out the EMR engagements and talked about that they were strong early in the quarter and maybe they've had some of the same volatility as the flu. Can you just give us some perspective on how meaningful a portion of the business, I assume that's mainly in the Travel Nurse segment, that's been over the last few years? We see hospitals spending money for this, but it's not been clear to me exactly how much you guys have seen that as part of the strength in the business and sort of is it a driver of incremental year-to-year growth or is it sort of flattening out at this point?

We continue to see a really good pipeline of opportunities. It's still small overall in relation to the segment. It has -- it does impact not only the Travel business, but a little bit sometimes in Local and Allied, as well, but primarily in Travel. And we haven't ever given exact amounts, but it's usually under $5 million or so a quarter, a little more than that in the first quarter, that's why we called it out, and that's about double from what it was last year. And so, again, the pipeline going forward still looks very good, but we don't expect the second quarter to be quite as strong as the first quarter.

Okay, and then just maybe finally maybe a broad question about the competitive landscape, it seems like your leading competitor in Travel Nursing in particular has had a -- is experiencing a lot of turmoil at this point, so I'm trying to figure out how to distinguish between the underlying growth in this space versus just maybe market share gains that you've been able to achieve? Can you give us any flavor for the competitive landscape and your relative market share position?

Sure, A.J., and it is difficult, even for us to really parse that out on a real-time basis. Certainly we can look at market growth from our orders, themselves, and when we have an MSP relationship and see the orders growing or not growing then that's a good sense of what's happening in the market, itself, although you have to remember that MSP clients are more often the larger, more sophisticated clients, and they tend to be more strategic users of temporary staffs, they don't make as many kneejerk reaction changes to their staffing plans. And so, as I mentioned, we've actually seen pretty good steady order growth and kind of order flow from those MSP clients since the first of the year.

From the non-MSP clients, though, that would be traditional competitive accounts and third-party accounts, so those would be VMS types of relationships through vendor neutral, more technology related types of providers, we've actually seen the orders come down. They're still up year-over-year, but since the beginning of the year we've actually seen them come down, so it's really hard to parse out whether they're losing market share or whether there's actually an underlying kind of fall-off in the market demand.

In terms of relative to our competitors, I'd say in the MSP competitive world that that particular company you're talking about isn't actually as much of a strong competitor for that MSP business today, and we still take them very seriously, and they're usually there at the table competing for the business, but we feel some stronger momentum from some of these vendor neutral companies that are out there, and some clients want to go that route rather than a full service MSP.

So I'll ask Bob if he has any additional comments on that?

Yes, I think, Susan, to your point, I think the competition is broader than just the one company that's out there. Certainly there are a couple of companies in the quasi-MSP and the pure vendor neutral space, and we certainly respect all of our competitors. But we're doing very well in the market and our pipeline of MSPs is about as robust as it's ever been. We've added recently to our sales force. Last year we added a couple people, and so we're now up to a pretty sizable organization. You would expect our pipeline to be bigger, and it certainly is.

I really think, A.J., we have a really good window of opportunity over the next couple of years as hospitals are feeling all of the pressure and turmoil from reimbursement cuts and admits the shortages across all of the clinical disciplines. They are hungry for some type of solution that will help them get their arms around the aggregate cost of their workforce and how to manage that better. And so that's why we're seeing greater interest and appetite for these types of MSP and other workforce solutions.

Okay. Thanks a lot.

And our next question is from the line of Tobey Sommer with SunTrust. Please go ahead.

Thank you. I wanted to ask you kind of a broad question, Susan, about you've had growth now in many of the businesses and now close to all of them for some time, and I wanted just to get a sense for how you feel the investments have gone? Have you been investing all along or do you feel that the opportunities in front of you require kind of a stepped up pace of investment? I'm just trying to get a sense for how you're going to balance margin expansion together with pursuing growth?

Right. Great question, and as you recall we talked a year ago about some particular strategic initiatives that we were going to be increasing our spending because we wanted everyone to know that we were going to increase our SG&A and CapEx spending in order to help ensure that we would get those growth opportunities, as well gain better efficiency in our back office through systems improvements, process changes, et cetera. So we've been doing that over the last year.

The last year has been more about the digital transformation project, which is the improvements in our website, our mobile media, job distribution, those types of things. And we'll continue to be rolling those out over the next year, but we're also in the midst of improving some of our back office systems in order to better connect our sales teams, reduce redundancies that we have, manual processes that we have throughout the Company, which add costs and also make it challenging to deliver service in an accurate and timely fashion. And so we'll be continuing those investments over the next couple of years. You'll see those primarily pop up in the form of CapEx since they are more systems related, but we will have this higher level of SG&A that we started last year for a period longer.

Thank you, and then I had a couple of questions on the MSP front. Did you quote a percentage of revenue derived from MSP business and, if so, could you give a reference point for what it was either a year ago or a couple years ago?

We did mention that it's 30% of our consolidated revenue today. I think last quarter we talked about it being 27%, so you can see it's like continuing to creep up probably a few percentage points every quarter, and I would expect that to continue over the coming years.

That includes -- this is Bob -- that includes the entire segment of -- when we talk about our consolidated it obviously includes our Locum's business in there, as well. And, of course, we're just now beginning to penetrate that sector, so as a percentage of the other sectors it's definitely higher and it's just now beginning to penetrate the Locum sector.

Thanks, Bob. Is there -- in thinking about the different businesses is there a natural threshold or something different about how far you think MSP could go within Physician versus how far it's gone in the Nursing, Allied side?

It's, we're a bit of a pioneer in that space, and so I'll just give you our predictions, not based upon yet the history, of course, but also what we've seen in the Nursing and the Allied sector. I don't see any particular reason why the penetration wouldn't be as high. The only caveat to that is that some of our Locum's business is actually done in physician's offices and not in hospital practices. And so a portion of that business done in physician's offices is not likely to be subject to an MSP, but if you kind of just look at the hospital sector I'd say that the penetration is reasonably, I think over the next two or three years it'll move pretty quickly.

And I have one last question on MSP and I'll get back into queue. So if you have about 30% of your business in MSP, call it roughly $300 million on an annualized basis, how much -- what's the relative size of the nonclinical spend for those MSP customers? I'm just trying to get a sense for what might be on the other side of the coin that really is business that you can't help your customers fill on that side? Thanks.

Well, we subcontract that business, and so there are MSP clients who do ask us to manage the clinical spend, the nonclinical spend, and just to remind you when we talk about 30% of our revenues being the direct revenues that doesn't really account for the gross billings that go on through our subcontractor network, both clinical and nonclinical, so we've got 500 or 600 subcontractors on the clinical side, we've got half a dozen or a dozen nonclinical providers, but just to give you a sense of the size we have been seeing that on the IT space, in particular, there is a pretty significant growth by all of our clients and we do see that the spend on that side, on the IT side is growing. It's actually good for us in the sense that it draws attention to contract labor more broadly and since we can do the IT spend it seems to be more positive for us to help rope that all in under one platform and under one program.

Even when we're not the leader in doing that we can partner with other IT companies and have done so, where they take the IT and we do the non-IT or the clinical side, excuse me, and it seems to work very well.

And so just to ballpark it is the nonclinical piece, since you do have a glimpse into it and may subcontract it out, is it the same size or is it smaller, it just -- even rough estimates would be useful?

Well, we have some examples where it's substantially higher, and then you have other examples where it is lower, but, Ralph, did you --?

In fact, we have an integrated system where they might have an insurance arm to the organization, you might see the volume be about the same, but you can kind of look at the operating expense of a typical healthcare system, about 50% of it is employee expenses, about half of that is nursing. So you really get down to probably 10% to 15% of their clinical spend on average in a normal system, so unless they have an insurance arm or something.

Okay, thanks. And a last question, I apologize, one more occurred to me -- was the workers comp benefit in the quarter, could you quantify that? If you did in your prepared remarks I apologize, I missed it.

Yes, it's $1.2 million, and it was in the Nurse and Allied segment in cost of sales.

Thank you very much.

Thank you, Tobey.

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

Hi, good afternoon.

Hi, Gary.

Just a couple questions. So when we look at the revenue sequentially, the guidance for approximately flat sequential revenues, when you look at that by region or type of client is there anything that's noteworthy there?

I think that the most noteworthy thing is, as we mentioned we had some, I don't know if I'd call them unusual because it's part of our business, but exceptionally higher amounts of EMR business, which won't necessarily be fully repeated in the second quarter. Those aren't necessarily regional, it's just more project driven. And then we had higher flu related business, and those orders, our largest order states were from California, Texas, the northeast, you know, probably more population driven than anything, but there were certainly some states that felt the flu impact greater than others.

As we look at our overall orders it's actually still a very good distribution between kind of east and west, if you cut the country down the middle, and the trends haven't changed that much between the two. So the flattish performance and really it's the decline in the nursing business is really driven by those exceptionally strong unexpected business in the first quarter, which won't necessarily be repeated. If we took those out of the equation we would actually be more flat to up in that segment, so, Ralph, do you have anything to add?

I'd add one more thing -- this is Ralph -- in California we have several clients that use Travel Nurses to facilitate a big seasonal jump that they have, what they typically refer to here as their winter needs, and those nurses start to come off their assignments towards the end of March and into April, and the impact of those nurses coming off is as large or even larger than the EMR decline. Actually, we actually budget that way for this quarter to come down. We have just actually been able to outperform that the last few years so it doesn't show-up in our last couple of years. If you go further back you might see some of that a little bit.

And we are hearing a little bit from hospitals, as well, about budgetary concerns, and so I think they were nervous about reimbursements and rules changes that were being contemplated and so you see a very quick kind of reaction to cut temporary labor, it happens it seems like every single year, and we did see a little bit of that, as well.

Right, and you did beat the midpoint of your 1Q revenue guidance, you did exceed that by about $4 million. When we look at Nurse and Allied Staffing segment what percent of those FTEs reside inside your MSP clients, just kind of roughly?

About 40% of our revenue in that segment, so that would equate pretty closely to the volume, as well.

Right. In your prepared comments you suggested non-MSP FTEs would be down sequentially, MSP orders steady, so do you feel like your MSP clients have a lower order book sequentially, but you're still gaining share or are we just getting too specific in a given quarter to think about that?

Yes, it might be a little too specific, although I kind of mentioned that the MSP clients tend to be more steady and really use Travelers and Local Staffing kind of strategically as part of their ongoing workforce planning, so you don't see as many of these kneejerk reactions to what might be happening with census or the environment around them, so I think that's one reason we've seen steady orders in the MSP clients since the beginning of the year.

With that said, you do have some seasonality even within those clients because some of them are located in the sunbelt states or in the northeast or in California where you get this drop-off that Ralph described in the second quarter, but I think you see more stability in those orders generally over time.

Last question for Brian, so when I think about EBITDA margin I guess 8.4% reported this quarter, kind of normalizes to 7.9% if we view that workers comp is nonrecurring, and then the sequential guidance is 7.5% to 8%, so that modest sequential decline is primarily seasonality, or did I miss something in your comments?

I would say it's -- I would call it a lot of seasonality, I mean we continue to invest in the business, as well, so as we, you know, we try to keep a longer term view, so if you look at the SG&A projection it's more indicative of that and that's why we give that range because there's going to be some variability on the gross margin and SG&A margin each quarter, but we really do continue to invest in the business. Our recruiter headcount is up in our Locum's business and in our Nursing business, and Bob mentioned we continue to invest in the MSP sales team, and so those are the investments we want to continue to make because we think those are going to drive long-term value to the organization. And so a variation of 10 to 20 basis points per quarter in just the next quarter out is not our overarching concern.

Okay. Thank you.

Thank you, Gary.

Your next question from the line of Josh Vogel with Sidoti & Company. Please go ahead.

Hi, everyone. Thanks for taking my questions.

Sure. Thanks, Josh.

Just I guess a follow-up on the line of questioning on the MSPs before, I was just wondering if you could, we're seeing obviously this business growing at a healthy clip, I was just curious how big this market is and the opportunity for you? What percent of healthcare systems are currently not sourcing through you or your competitors?

There are surveys -- this is Bob -- Josh, there have been surveys that are out there that staffing industry analysts have done to try to test the waters and you get ranges from 30% to 40% of the hospital systems have some form of an automated approach to their contract labor, it may be VMS or maybe MSP, but we still think there's plenty of opportunity. And I would also just continue to point out that in our particular model we continue to add services, so we might start out with just Nursing and then we can go from Nursing to Allied, and then from Allied to Locums, and more often we're also able to bring in some other more sophisticated RPO or some other service lines that can be additive.

So I think there's quite a bit of room to grow and we obviously even if you're not winning more contracts we think that with the advent of more, that would be the Affordable Care Act and with more people being covered that the general overall population growth for our services will continue to grow even within our MSP accounts.

We are seeing a lot of nice consolidation, so for example, some of our hospital systems are gobbling up other hospital systems, and that's just like a new win for a new hospital that we didn't have to do anything for. And we like that when that happens, and that's why we're concentrating as much as we can with some of these more sophisticated and prestigious hospital systems that are out there today, like the ones we've mentioned in the past.

And, Josh, remember that while in Nursing the hospitals and the larger systems are certainly the largest employers of temporary nurses, within the Allied business your rehab facilities and skilled nursing facilities actually are utilizing a large number of temporary staff with travelers and per diem, as well, so we're finding that they are great clients and great prospective MSP clients, particularly for your larger national and regional firms that are trying to get their arms around their workforce planning and their workforce spend. It's very hard for them when they have all of these different sites across the country and it's very decentralized, and MSP is a perfect solution for them to create more of a centralized approach and to give them the analytics. Likewise, within Locums, you have other types of employers, such as contract management companies that utilize Locum. So we think of the market for MSP far beyond the hospital market.

That's helpful. Thank you. Switching gears a little bit, last year you did a great job keeping housing and insurance costs in check, especially versus what we saw some of your competitors put up, but what are you doing differently and are you seeing any pressures or are those costs still fairly contained?

This is Brian. Well, I think that the housing, overall the market for housing continues to be a challenging one, vacancy I think is again at an all-time low so finding opportunities to reduce those costs are very difficult. I think the team has done a phenomenal job of holding housing costs in check, and so we've seen sequentially and year-over-year our housing costs are generally stable, and so that's allowed us to take the [inaudible] increases that we've seen and invest them back into attracting more supply, but it is kind of a daily battle to make sure we are always trying to find new housing partners to keep those costs in check.

The other area that we'd mentioned were health insurance costs where, again, we've made some changes to our plans. Every year as we get to a new year we make plan design changes and we made some additional ones for 2013, in part in preparation for healthcare reform next year. The impact of that has reduced our health insurance costs a little bit, and we've just seen good, had good experience over the last couple of quarters in that area, as well.

Okay, and, lastly, you did a nice job delivering the balance sheet last year and was just curious if that was still your number one priority for cash?

Yes, it is, yes, so we'll continue to take our free cash flow. Again, we've -- Susan mentioned earlier a little bit of a step up in our capital expenditures this year, so but we look at free cash flow, that will be our strategy to continue to de-lever the balance sheet.

Okay, great. Thank you very much.

Thank you, Josh.

Thank you, Josh.

Our next question from the line of Paul Condra with BMO. Please go ahead.

Hi, everybody.

Hi, Paul.

Hi, Paul.

I just wanted to ask about the Locums, how much do you think the growth there is being driven by the Locum's MSP, if at all?

It's kind of funny because we're right in the process of -- this is Ralph, sorry -- in the process of implementing that six brand-new Locum deals and none of them actually kind of are either kind of approaching go live dates or they've just been recently, so the growth in Q1 was related to the run-up on those, so clients that we're in contract negotiations with us began steering more business our way, and so it was definitely helpful to the quarter overall.

We also had I think tremendous success on the recruitment side when we restructured the organization to focus on specialties, the teams really became I think just better at filling jobs within, in their specialties, so we, you know, those -- that restructuring helped.

The last thing was the investment we made in advanced practice, which is only about three quarters ago has begun to pay off, that's now our fifth highest performing specialty. And again advanced practice is actually one of those things that's frequently requested in the MSP program. So it really was a combination of things. I think in the future quarters we're going to talk a lot more about the impact of MSP Locums on our growth. In this quarter it's only a portion of it.

And is there anything that might change about the margin profile when you compare the MSP Locums versus the more traditional?

I think our Locums' margins overall are kind of below where they probably should be given the market, and the value of that service to our clients, and so I think there's plenty of upside in the margins overall for Locums, I do think that MSP margins for Locums will be several, a couple hundred, maybe 300 basis points north, I'm giving a swag here and a look around the room, but we're seeing in Travel Nurse and Allied.

And are you talking about gross margins or operating margins?

Gross margins, yes. Operating margins on Locums we've kind of -- actually, feel the same, we think there's upside to the operating margins. We've ran at higher operating margins in the past, and we do think that those are 200, 300, maybe even more below where they should be. We need to, of course, grow our business a little bit and get to a point where we can leverage our investments in it before we get there, so it's going to take a little bit of time, but I think you'll see both top and bottom line growth.

Locums' MSP we've talked about this on prior calls, but it's a very efficient delivery methodology, you don't have to compete, your fill rates go up, you have more time to book housing, a lot of efficiencies are driven in the back office, in the sales organization when a client is on an MSP program versus working in a traditional environment where you're either slugging out with seven, eight competitors on a single order.

That's great, and do you find that it's clients, it's existing MSP clients that you're able to sell this into or are these new accounts?

This is Bob, again. I think it's a mixture of both. We've got good success going in both arenas and, interestingly enough, the sector that Susan mentioned with the Physician Contract Management Groups, who have a substantial amount of spend and a lot of it is very urgent because as they open up these new sites every time they get a new contract with a new client and a difficult market they almost always start with Locums. So they're the most chaotic environment because they have urgent needs that are very difficult to plan for and they spend a lot of money in Locums. And we've found that we have a very good story there, but we also have a way to help them contain those costs. So it kind of gets back to our bigger piece of the smaller pie mentality, we think we can help clients who want to try to control those costs, but yet pick-up substantially more volume for ourselves.

Okay, great, that's great. Thank you very much.

Thank you, Paul.

And we'll go next to Mark Marcon with R.W. Baird. Please go ahead.

Good afternoon.

Hi, Mark.

I was wondering about the margin performance in Physician Perm, it's quite solid, how sustainable is that?

This is Ralph, and Brian may want to add something on it --.

I'm sorry, are you talking about Physician Perm placement or Locum?

I'll let Brian handle it.

Physician Perm?

We've been in that 20% range for quite some time with the Physician Perm business, and it -- just because of the size of the business and the way it operates it has that variability kind of plus or minus a couple 100 basis points, so we certainly feel like that range of 20% is very sustainable longer term. I mentioned in the first quarter we had a little lower SG&A as we trued up last year's results in the fourth quarter, it was a little bit lower, but that's right in that range. I think we're more focused on growing the top line there.

Sure.

And maintaining that current level of profitability that we have.

And in order, Mark, in order to grow the top line in that business you have to be hiring new great talents, new marketers, new recruiters, and you've got to have a good training program and a cohort in place to be putting them out into the market and increasing your capacity, and that's where the team has really done a great job there in Texas in helping to grow our new producers, new marketers and recruiters, and get them productive more quickly.

Great. I mean it also sounds like a more specialized focus is also quite beneficial?

Yes.

So, and then on the Locums, you covered this a little bit before but it sounds like we're pretty early in terms of the inflection point, obviously, it just started. How are you thinking about Locums long term?

And you're talking in terms of growth rates or?

Right.

We obviously have spent a lot of effort on this the last few quarters trying to get this business repositioned because we were, had terrible disappointing years when it was overly invested in a couple of specialties that didn't perform very well. We feel very, very good about the specialties we're in and, as well, our ability to track what specialties are going to perform well going forward. So that shift of resources should help us grow.

At this point it's nice to see year-over-year growth and sequential growth for the first time in almost a couple of years. I think we should have a good quarter again next year. We're hoping to see kind of industry average growth rates by the time we exit Q4 of this year, so which are 9% to 10% according to kind of most of the sources that I've talked to.

And as we've said many times we believe our margins can be better, so in addition to the top line growth we should be able to achieve some gross margin expansion over the next few years. We know we're under market in our pricing and in our bill pay spreads and so we have opportunity there, and then if we get the top line growth we should be able to get the leverage and improve our EBITDA margin. So it won't happen overnight, it's something that's going to take a couple of years, but we ought to see at least a 300 basis point improvement in gross margin and, as Ralph said, something north of that in EBITDA or contribution margin improvement.

Great. And then has anesthesiology and radiology actually stabilized or are you growing just because of some of the other more popular areas, such as hospitalists?

That's a good question. On a sequential basis, actually radiology did -- was pretty stable, it didn't shrink any further. It represents a much smaller percent of our total. At one point it was close to 20% of our revenue came from radiology, now it's in the 3.5% to 4% range, so that's probably about where it should be, and in the overall mix I think that's accurate.

We saw some growth in anesthesiology mostly in the advanced practice side of that, the CRNAs, and we saw that grow on both a sequential and I think a year-over-year basis. I don't have that number in front of me. So that was a positive sign for us, so they didn't hurt us this quarter and we don't expect them to -- they're not big enough any longer to really hurt us, so with the other ones performing some of at double-digit growth rates, like hospital, the other advanced practice specialties, and we should be able to lap any drag that those things have caused on us for us in the past.

Great. And then with regards to the -- you are under the market in terms of pricing, in terms of increasing that pay bill spread, what's the timing for that, how should we think about that?

Yes, there's a couple of things at work there. One of the reasons and one of the main reasons we're under the market is because we were, again, over investing in government.

Right.

And so we've been working on being more selective, choosing the right government partners, and getting that business at better rates, so it's a completely different focus there, which I'm very excited, by the way, we have a great Government Team, they know how to sell, and so we can find ways to make money on that and I do expect it to be roughly maybe 10% to 12% of our revenue in the future. So if that comes down then the margins begin to improve.

The other element is just in our bill rates, and so just to give you some color on that, our bill rates over the year have gone up 4.5%, which is a good start. So far we've had to reinvest it in other cost of sales, primarily in physician compensation, in order to fight our way into some of these specialties where we weren't very large before, but we are seeing I think some really, really great success in some of the specialties. I think there's four or five specialties that we have year-over-year double-digit pricing increases on. So the team is really I think doing a great job executing there.

So it may not be as visible yet because of the physician pay, but I do think that there's some traction there and that we're already probably a good way down the track to getting back to market levels there.

So I mean do you think that in terms of getting to the 30% gross margins, do you think that's out a year, two years, three years?

We've not really put a timeframe on that, Mark. Obviously, we're trying to do it sooner than later, and so I think in the next year would be unreasonable to think you could get there that fast.

Yes.

So I think your two to three-year timeframe is more reasonable. I know the team there in Irvine and in St. Louis, and they'll be pushing for it much faster. Actually, our Linde brand, we have two brands within our Locum's business, Staff Care and Linde, and Linde already has gross margins over 30%. So we know it can be done, it's not just the rest of the competition, we have our own brand that's performing at that level. And so I know the team in Irvine with Staff Care is very focused on getting up to that level and maybe even surpassing it soon.

Great. And then, lastly, in your opening comments you referenced the softness in the census that we heard from some of the hospital companies as it relates to the quarter, but then the indication that April picked up again. Are you actually seeing that in your order flow?

We're not seeing it yet, and I'm not surprised because there's often a delay or a lag in the behaviors of our clients. I think that's a bit of what we even saw coming off of the first quarter where a lot of the hospitals were talking about lower census in the first quarter, and it took awhile for that to filter through to them maybe wanting or requesting less temporary staff in some of these traditional and third-party accounts I was talking about.

And so, likewise, as it picks back up I think it takes awhile for them to feel the pain of more patients in-house and stretching their staff too thin, and they'll quickly have to react to that and start to staff back up. So that's why we're cautious but we also don't see it being likely to last very long if, indeed, census is picking back up, as they say it is.

Great. And then with regards to the recruiting efforts that you've put in place, what are you seeing in terms of fill rates and behavior in terms of willingness to take travel assignments? That's obviously been a key part of your strategy?

Yes, we've -- on the applicant side we're still seeing increases in applicants, some of that related to our digital transformation, but some of it I think just our products are becoming more popular again, people are a little less nervous about economic conditions, so that's been helpful.

Additionally, on the physician side we've seen increases in the number of applications there, so our fill rates, themselves, have trended up, our MSP fill rates we've discussed, that's almost at all-time highs, and our traditional fill rates have been very solid, as well. So really no -- very positive things there. Even had a two point improvement in our Locum's business in their fill rates recently, so I think we're not concerned about supply right now, as something that would be a barrier to accelerated growth.

If anything, we think that that access to supply and the willingness of clinicians to leave a permanent job and come into the travel industry might be increasing. I mean we've certainly seen the increased applications that I mentioned, the Career Builder survey that came out just a couple of days ago and they talked about the burnout of healthcare workers and how a third are going to be looking for a job change this year, half are going to be looking for a job change in the next year, and they cite the same things that we hear from our nurses when they call in, it's burnout, it's having to take on too many patients, working too many hours, juggling multiple patients' needs, it takes a toll on morale and retention.

And we're starting to see that anecdotally crop-up in higher quits, job openings. One of the analysts that covers us does a great report on job openings, and we've seen that continually tick-up for RNs, and so we think you're getting to this point where more of the permanent staff are getting frustrated with being stretched too thin, and you just can't do more with less.

There was, just one more thing, there was a great report put out by the Advisory Board that talked about bending the labor curve, and they talked about how taking short-term tactics and cost-cutting on your labor force and particularly your clinical labor force will only have a temporary relief and it's not a sustainable strategy. They refer to wholesale labor cuts as causing harm to the workforce stability and quality of care.

And, in fact, I guess there was a study that was put out by the HMA that found that hospitals and healthcare systems that had across-the-board cuts were nearly twice as likely to experience increases in patient mortality. And it's no surprise, it's been researched and proven many times that the ratio of clinicians to patients, in particular nurses, has a very direct affect on patient outcomes and mortality. And hospitals know this, so once they start to feel that pain of being stretched too thin and their attrition starts to go up I think it causes them to want to think more strategically about how they manage their workforce.

Great. Thanks for the color.

Thanks, Mark.

And our next question from the line of Tobey Sommer with SunTrust. Please go ahead.

Thanks. Just a follow-up on the workers comp benefit in the quarter, what would the equivalent impact be in EPS? I wasn't sure if there was a different tax treatment for that?

It's about a penny and a half.

Okay, and one last follow-up on the MSP, emerging MSP opportunities in the physician business, what sort of milestones and points of inflection should we look for that market to kind of develop and accelerate more fully, given the history that you have on the Nurse and Allied side, maybe you could point to areas that we should look at as that market develops? Thanks.

We're kind of in a unique window of opportunity right now. I think where we have the ability to be out first in the marketplace and identify where there's pain points within our clients. I think one of the inflection points and one of the milestones is when do other competitors follow you? And one of our other publicly traded competitors talks about being in the Locums business and so that's actually a good thing, it's a milestone I think when we have two or three other competitors touting being in the Locums business. There's certainly some DMS companies who have expanded their capabilities to do that.

So when you move from a concept sell, which is where we are today, and our current window of opportunity is really to sell in that concept sell environment, but as we move past the concept sell environment to what I would call a more reference sales, where we have four or five clients that we can refer to and we also then move into an environment where we see competitors entering the marketplace and you hear other companies like us talking about it, I think the milestone is is that it's really taking off.

We know and historically there have been competitors in the past who have resisted, wanted to get into this sector for all kinds of reasons, it doesn't fit their model or they don't want to make the investment or they genuinely believe it's not good for the client, and so or good for the industry.

In our case we've always had the philosophy that efficiency really pays off. So I think once you see one or two of the even bigger players say we're going to be getting into that business, that's a another huge milestone, and I think that will happen, it's just a matter of time.

Thank you very much.

Thank you, and I'll turn it back to our speakers for any closing remarks.

Thank you very much. Well, we appreciate you all joining us today, and we certainly appreciate your continued support of AMN Healthcare, and we look forward to updating you on our progress next quarter.

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