AMN Healthcare Services Inc (AMN) 2016 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the AMN Healthcare second-quarter 2016 earnings conference call. (Operator Instructions) As a reminder, the conference is being recorded. And I will now turn the meeting over to our host, Director of Investor Relations David Erdman. Please go ahead, sir.

Thank you, and good afternoon, everyone. Welcome to AMN Healthcare's second-quarter 2016 earnings call. A replay of the webcast will be available until August 18 at AMNHealthcare.investorroom.com, following the conclusion of this call. Details for the audio replay of the conference call can be found in our earnings press release. Various remarks and characterizations we make during this call about future expectations, projections, plans, events or circumstances constitute forward-looking statements. These statements reflect the Company's current beliefs based upon information currently available to it.

Our actual results may differ materially from those indicated by these forward-looking statements as a result of various factors, including those identified in our most recent Form 10-K and subsequent filings with the SEC. The Company does not intend to update the guidance for any forward-looking statements provided today, prior to its next earnings release.

This call contains certain non-GAAP financial information. Information regarding the reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are included in our earnings release and in the Company's website.

On the call today with me are Susan Salka, President and Chief Operating Officer; Brian Scott, Chief Financial Officer; Ralph Henderson, President of Professional Services and Staffing; and Dan White, President of Strategic Workforce Solutions.

I'll turn over the call to Susan.

Thank you so much, David. Good afternoon, everyone, and welcome to AMN Healthcare's quarterly earnings conference call. I am very proud of our team's ability to deliver another record quarter of revenue and earnings. We continue to operate in a strong market environment and are helping clients to be successful in addressing their critical and evolving workforce needs. In addition to the strong demand for staffing and placement services, we are increasing the penetration of our workforce solutions -- in particular MSP, VMS and workforce optimization services. Macroeconomic and demographic trends continue to be a tailwind for our business. The confluence of a stable economy, low unemployment, high levels of staff attrition and an aging clinical demographic continues to drive a health care talent shortage and unprecedented demand for our services.

A helpful indicator of how these forces manifest can be found in the BLS [stokes] data regarding health care employment. Over the last two years, health care job openings have grown over 40% to roughly 1 million jobs to be filled today. The sheer magnitude of this number of openings creates recruitment and retention challenges for health care organizations. And, more importantly, because of the shortage of health care professionals, the gap between job openings and the number of hires has also widened. Two years ago, approximately 30% of health care jobs across the nation went unfilled. In 2016, according to the BLS, the percentage of unfilled health care job openings rose to 50%.

As health care organizations continue to seek strategic partners to tackle these near- and long-term workforce challenges, AMN is expanding our industry-leading MSP footprint. In fact, during the second quarter 40% of our total nurse, allied and locum staffing revenues came from MSP clients. By comparison, this was 35% one year ago.

To further expand our MSP position, during the second quarter we entered into several new and expanded MSP contracts, representing a potential of over $100 million of additional gross spend under management. Today, our gross spend under management for MSP clients exceeds $1 billion. Plus, we have an additional approximate $1 billion under management through our vendor-neutral VMS services.

As we look forward, our pipeline presents significant opportunity to further expand our client base and market penetration. We continue to see strong interest from our clients to leverage the broader suite of workforce solutions that AMN offers. A great example of this is our recent expansion into the health care leadership space. Over the last year, we acquired the First String and BE Smith, leading brands in the health care executive search and interim leadership market. Both companies are doing well, and we are very proud that BE Smith was recently named the number one health care executive search firm in the US by Modern Healthcare magazine.

In January, we acquired Healthsource Global, a leading rapid-response and labor-disruption staffing firm. They are on track to have their best year ever, and the pipeline of potential projects is strong.

In June, we also acquired Peak Health Solutions in response to our clients' asking us to provide medical coding services. Accurate coding is critical to clinical quality reporting and the financial well-being of health care organizations. And AMN is committed to helping our clients effectively manage this challenge.

The integration of these recent acquisitions is progressing well, and we continue to see great cross-selling and client interest in utilizing multiple AMN service lines.

As we experience high demand for our services, we have been investing in our digital marketing and sales resources to ensure we continue to build a broader talent network to meet our clients' needs. Our recruitment team has also done an excellent job of re-engaging clinicians who applied with AMN in the past but may not have traveled recently or ever.

In order to ensure we can grow in an increasingly efficient manner, we also continue to make progress on our internal technology investments, to migrate our staffing business lines onto a common end-to-end platform. Our local staffing business has successfully been running on this new platform for three months, and we have initiated activities to migrate our locums business onto the platform in early 2017. With what we believe are sustainable, strong macro drivers for our industry, we want to be creating the most efficient and nimble infrastructure for the future.

But let's first bring it back to today. And now we will review our second-quarter results and our outlook for the third quarter. Consolidated revenue for the second quarter was higher than our expectations at $474 million, which is up 35% over prior year and 1% sequentially. Year-over-year organic growth was 19%, primarily driven by double-digit growth across all three of our reportable segments. Consolidated adjusted EBITDA was $59 million, up 50% from prior year. This reflected a margin of 12.5%, which was 130 basis points higher than the same quarter last year.

Our nurse and allied segment posted revenue of $293 million, higher by 29% year over year, primarily due to higher volume and pricing. We also had two projects in our Healthsource Global business that contributed to our beat on revenue. Excluding that project revenue, year-over-year growth was 23%, which is still above second-quarter guidance.

Trial nurse staffing revenue increased 26% year over year and declined 5% sequentially. This exceptional year-over-year performance reflects great sales execution in a robust demand environment and a prioritization on filling orders for our MSP clients. The strong year-over-year growth was driven by a 20% volume increase, with growth at both MSP and traditional clients. The sequential decline was expected due to the normal seasonal ending of winter assignments. As we begin the third quarter, we continue to see very strong demand for travel nurses.

In addition to broad-based demand for near-term assignments, we are also already beginning to receive orders for the winter assignment. Our recruitment and account management teams are doing an outstanding job of filling these orders. In fact, our July placements of future working travelers was at the highest level we have seen since before the recession.

As we look forward, we will also have the benefit of implementing several new managed services programs across a variety of geographies. Our allied staffing division achieved another record quarter of revenue, growing 10% year over year and 3% sequentially. As a reminder, this business includes the placement of rehab therapy, imaging, respiratory and laboratory professionals. We have seen growth across all categories, with particular strength in laboratory. We continue to expand our MSP relationship to include allied services, resulting in approximately 1/3 of allied's revenue now flowing through MSP clients.

Looking ahead for the third quarter, we expect nurse and allied revenue to be up over 15% year over year, driven by travel nurse revenue growth of 20%. The majority of this growth continues to be driven by volume increases. This projection does not assume any material labor disruption or project revenue for the quarter.

In our locum tenens segment, revenue of $109 million was up 12% year over year and 6% sequentially due to growth in both volume and pricing. The year-over-year revenue growth was across multiple specialties, particularly internal medicine, surgery and anesthesia. Demand trends remain very strong in most all specialties and provide plenty of room for volume growth. The primary constraint in the business is the ability to recruit, credential and place an ample number of physicians to match the geographies of our demand. Our teams continue to implement new digital marketing technologies and provide better tools to our locums recruitment team to find the best physicians to meet our clients' needs. Third-quarter revenue for the locums segment is expected to be up 5% to 6% year over year.

Revenue in the other workforce solutions segment was $72 million, which is 174% higher year over year and 7% higher sequentially. As a reminder, this segment includes our leadership, interim and placement businesses, physician permanent placement, RPO, workforce optimization, VMS solutions and our recently acquired medical coding business.

Our leadership businesses, which were acquired during the last year, are up more than 20% year over year on a pro forma basis. They are executing well in a good market and are benefitting from being added to our MSP client relationship. Revenue from our VMS businesses are up more than 50% year over year as we continue to add and expand clients.

Our physician permanent placement business drove solid growth in the quarter, with revenue up over 20% year over year, driven primarily by higher placements. Our workforce optimization offering under the Avantas brand name also produced a strong second quarter.

Recruitment process outsourcing produced year-over-year growth of 17% but declined sequentially in line with our expectations. While the utilization of RPO services is quite established in other industries, we are still in the early stages of adoption within health care. Because of this, the utilizations and revenues have fluctuated more than in our other businesses. We are very optimistic in our ability to be a leading provider as the market opportunity expands.

Overall, third-quarter revenue for the other workforce solutions segment is expected to be up more than 5% sequentially, primarily reflecting the addition of Peak for a full quarter.

Hopefully, these comments and our Q&A after our prepared remarks help to provide some color and detail regarding the key drivers of our continuing strong performance. But, in addition to our current execution, we continue to invest significant time and resources to ensure that we are building AMN to be an even stronger partner for our clients in the future.

As an example of this, you may have noted that we recently announced the addition of a new member to AMN's executive team. We are very pleased to welcome Matthew Zubiller to the newly created role of Senior Vice President of Strategy and M&A. Matt is a seasoned professional who brings extensive experience in strategy and development in the health care space. Matt lives here in San Diego with his wife, Love, and their two children. We are very excited to have them all joining the AMN family. I know Matt will be an important part of AMN's evolution and our success in the future.

We are fortunate to have an incredible culture driven by our values every single day at AMN. We have a healthy and diverse team that includes fantastic new talent like Matt along with tenured leaders and team members. Together, this team brings their unique ideas, their skills and a common passion to deliver excellence in everything we do. Our results are strong today, and our future is bright because of this amazing, hard-working team.

Now I will turn the call over to Brian for a financial update, after which Ralph and Dan will join us to be available for the Q&A section of the call.

Thank you, Susan. And good afternoon, everyone. The Company's second-quarter reported revenue of $473.7 million was 4% above the high end of our guidance as our nurse and allied and other workforce solutions segments exceeded expectations. The largest contributor to this revenue outperformance came from the two Healthsource Global projects that Susan mentioned earlier.

Our gross margin for the quarter was 32.7%, up 130 basis points from last year and 20 basis points sequentially. The year-over-year improvement was due to an increased mix of our higher-margin workforce solutions segment and improved gross margin in our locum tenens segment.

SG&A expenses in the quarter totaled $99.5 million, or 21% of revenue. SG&A expenses were up sequentially by $1.7 million, due primarily to higher employee expenses partially offset by a $2 million favorable professional liability actuarial benefit recorded in our locum tenens segment.

Our second-quarter nurse and allied segment revenue was $292.7 million, an increase of 29% from the prior year and a decrease of 2% sequentially. Volume of 8,337 average health care professionals and assignments was higher by 15% year over year, while our average bill rate was 6% higher year over year. The remainder of the increase was driven mainly by Healthsource Global. Nurse and allied gross margin of 26.7% was 50 basis points lower than prior year and higher by 10 basis points sequentially. The lower margin from prior year was due mainly to lower bill/pay spreads and higher housing costs.

Second-quarter locum tenens segment revenue of $109.1 million was up 12% from the prior year and 6% sequentially. The year-over-year growth was driven primarily by a 7% increase in the average bill rate and a 2% increase in the number of days filled during the quarter. Locum tenens gross margin of 31.3% was higher by 210 basis points in the prior year and by 30 basis points sequentially, with the year-over-year increase driven primarily by improved bill/pay spread.

Our second-quarter other workforce solutions segment revenue of $71.9 million was up 174% year over year and 7% sequentially. The year-over-year organic growth rate was 32%. Gross margin of 59% was relatively consistent sequentially but lower than prior year, due mainly to the addition of the leadership businesses that operate at a lower gross margin than our other businesses in this segment.

Our second-quarter consolidated adjusted EBITDA of $59.3 million was up 50% year over year and 1% sequentially. The EBITDA margin of 12.5% represented an improvement of 130 basis points over the prior year, which was once again driven by growth in our higher-margin workforce solutions, gross margin improvement in our locum tenens business and favorable operating leverage.

We reported net income of $26.3 million and diluted earnings per share of $0.53 for the second quarter. Adjusted earnings per share were $0.61 compared to $0.38 in the prior-year quarter. Cash provided by operations was $20 million for the quarter and $55 million year to date, which reflects a 64% increase over the first half of last year.

Days sales outstanding was 64 days, compared to 59 days last quarter. Three days of this increase was due to the large project revenue and the addition of Peak Health Accounts Receivable, both occurring near the end of the quarter. Recent cash collections have been very strong, and we are expecting a reduction in DSO in the third quarter.

Capital expenditures for the second quarter were $6 million. As of June 30, cash and equivalents totaled $21 million, and total debt outstanding was $413 million, which is a sequential increase of $37 million due to the Peak Health acquisition. The quarter and leverage ratio as calculated per our credit agreement remain consistent with the prior quarter at 1.9 times to one.

Now let's turn to third-quarter 2016 guidance. The Company expects consolidated revenue of $466 million to $472 million. This 22% to 23% year-over-year increase includes organic growth of approximately 11% to 12%. Gross margin is projected to be approximately 32.5% to 33%. SG&A expenses as a percentage of revenue are expected to be approximately 21.5%. Adjusted EBITDA margin is expected to be approximately 11.5% to 12%.

Other third-quarter estimates include a tax rate of 41%, stock-based compensation expense of $2.7 million, depreciation expense of $3.1 million, amortization expense of $4.8 million, interest expense of $3 million, acquisition and integration expenses of about $1 million and diluted share count of 49.5 million shares.

And with that, we would like to open the call for questions.

(Operator Instructions) Tobey Sommer, SunTrust.

Susan, I was wondering if you could comment on how you feel like the collection of businesses, many of which are new to AMN in recent years, are learning to cohabitate effectively and in cross-sell. Just describe what you are seeing and maybe where you think we are in the process of that. Thank you.

Thanks for the question. It's something that I think has been definitely a contributor to our strong performance. We have been talking about cross-selling since 2005, I think, when we started to really diversify the business. But it has really just been more in the last two to three, four years that I think we have really gotten some serious traction. Some of that is attributable to the clients themselves. I think the desire and appetite for them to work with larger, more strategic partners that can offer them multiple services, which creates great efficiency for them and also certainly more accountability, we can make a bigger impact on their business by working with them in multiple ways. But also the bigger credit actually goes to our internal team and their ability to coordinate those efforts.

So as an example, when we do bring a new business into the AMN family, one of the first things we do is have a sales summit where we bring in the sales leaders of that business along with sales leaders across all of the AMN businesses that would be relevant, and educate them collectively about the new business that we are bringing in. We certainly put in place infrastructure and incentives and processes for them to sell and -- or, I'm sorry, share those opportunities. But it starts with just building internal relationships and awareness about what AMN does and identifying those opportunities when they are interacting with clients.

So we've seen really nice progress really out of the chutes, in particular with some of our more recent acquisitions like The First String and BE Smith. Even with Peak, who just came into the AMN organization in June, we have already begun plugging them into some of our MSP clients. So this is a big part of our growth strategy.

Thank you very much. And I've got a couple questions, numeric ones. You talked about Healthsource Global a couple times in terms of percentages that they contributed to growth. I didn't make the calculations. How much was it in dollars, the project revenue in the quarter?

The total amount in the quarter was about $18 million. That was their total revenue. The bulk of that was working on projects. We had built in some of that into our forecast for the second quarter, but, as you can see from our results, it was beyond what we had expected. As we talked about before, it's sometimes hard to predict if those projects will occur or not. And they occurred very late in the quarter and were pretty significant in size.

Okay. Are you still anticipating a relatively busy calendar for those kinds of projects in this year, understanding that you don't know whether they will come to fruition specifically. But you can see when contract negotiations are on the calendar?

Yes, Tobey. So we build in what we are relatively certain about in contracts that we have underway with clients that are going to be entering labor negotiations and discussions. In fact, they are probably usually already underway. But what we don't build in is the actual disruption or strike itself and getting people on planes and flying them out.

I'm going to have Ralph actually jump in and talk about the pipeline and how the team is able to track that.

Yes. Tobey, this is Ralph. We just went through the pipeline yesterday with the team. There's probably seven to 10 labor disruption events that could occur within the next quarter. There's a couple that are pretty likely. And part of what Susan was talking about, the core revenues of the business are management fees we receive just for coaching them through those opportunities and what's going to happen. But we don't ever know exactly when one will drop.

And, of course, they do other events that could be weather-related or storms or a new tower goes up at a hospital or something like that, changes ownership. They could get involved in other things. So at this point we usually have a pretty conservative forecast, which is pretty close to, I think, what we set the total revenue of the Company would be when we originally acquired them. And then we just basically then try to capture as much of the upside if there is a strike event.

I'll add one other thing, which is in the case of strikes, that we often got dragged into them in our travel nurse or our local staffing businesses in the past. And so some of the revenue used to flow through there, and we would be one of five or six companies trying to help out in those events. By owning HSG, we have been able to move that, which was kind of a disruptor from our core business, and move that business all to HSG, which is, I think, providing tremendous strategic advantage so we can remain focused on each of the respective lines of business instead of jumping in and helping out on sites.

Thank you. Susan, when you were talking about orders, you mentioned July being strong but also taking orders for the winter. Is it normal to get orders for the winter at this time or did you mention that because it's a little bit early?

It is normal to start receiving our winter orders at this time. So we are glad to see them coming in. They are a little bit higher than last year, which also gives us great confidence in what we believe that we will continue to see through the fourth quarter and going into the first quarter.

And our teams are just doing an absolutely superb job of getting those orders placed. We had some of our best placement, we call them booking weeks, within our travel nurse business throughout the month of July. And they are just on fire. So I am very proud of them; have a big shout out to the travel nursing team.

Thank you. Just two last questions from me -- one, if you could comment in general about what your expectation for pricing is, understanding you have got limited visibility in the staffing businesses.

And then to what extent -- the physician staffing business has done very well, including being able to raise prices and expand margins. I'm curious if there are applications in other workforce solutions services that you see as applicable to that customer set, either now or in the future.

I'm going to let Ralph talk about the pricing environment, in particular maybe starting with travel nursing. And then we will pick up on the letter part of your question.

Yes, the quarter was a good one for pricing in a market because of high demand and rising wages of RNs. It certainly continues to be good for increasing. And we are lapping some more robust pricing jumps that we've taken over the last year. But in the quarter I think we we're up about 8%. And I think our projection for the next quarter is to be up around 6%. And then as we look further out, probably in the 4% to 5% range thereafter -- and I think we've talked kind of on a really long-term basis of it settling in at around the 3% to 5% annually. So that will give you some sense of pricing there.

You didn't ask about locums, but the market there is strong as well. We certainly had a good quarter for pricing. A lot of our revenue over the past few quarters has been driven by our pricing increases. And that's needed; if you've seen a Merritt Hawkins wage study, physicians' salaries are just going up very, very rapidly. Really, all health care salaries are, but I think physicians is even under more pressure.

And that works for us two ways. It helps to get clinicians out of their perm jobs to take a look at more contingent opportunities. And also it just makes people start thinking about their careers a little bit more. And so we see a lot of job movement not just to us but among hospitals, which we also can help backfill.

And then Tobey, the last part of your question, I just want to ask to be clear. Were you talking specifically about locums and the ability to sell other services into locums clients? Or was it a broader question than that?

Yes, to sell other services into locums clients, but it just seems to me that they are -- in recent years, hospitals have ingested a lot of physician practice groups and are managing -- are dealing with new issues as a result of that. And I'm wondering if there are additional services, whether it's recruitment process outsourcing or some sort of ongoing services, perhaps from BD Smith, that you are hearing clients ask for.

Yes, absolutely. And I think it's also a byproduct of -- it's two byproducts. One is the employment of physicians or their practices being bought. And now that the hospital or the system is responsible for ensuring any vacancies are filled, they have to be in the staffing business, which means there are also other services that might help them, such as RPO, perm placement services, scheduling perhaps, workforce optimization. Some of these things we are not even in today from a physician standpoint. But there are companies and businesses out there that focus on how do you optimize the scheduling of physicians. And that was not an issue that the hospitals had to worry about, for many of them, just three or four years ago. And so we think there's a lot of opportunity to expand our existing services that we are already providing maybe within the nursing side of the house into the physician side as well.

And the second kind of byproduct is from the systems themselves getting larger. We are absolutely seeing increased momentum in the appetite for workforce solutions. And I mean that in totality. It usually starts with MSP, but once we are at the table talking about a managed services program, it gives us a platform to talk about other ways that we could help them through scheduling, workforce optimization, perm hiring, training and development. So we are finding that a lot of these conversations take us down a few different pathways. And they may not buy all of those services today, but they are very interested. And of course it really helps to differentiate AMN since nobody has that breadth and depth of services that we have.

Thanks for your help.

Jeff Silber, BMO Capital Markets.

It's Henry Chien calling for Jeff. I was wondering if you could talk a little bit more about some of your -- what you are seeing in terms of looking at 3Q guidance and some of the slowing growth rate. Just wondering if you could talk a little bit about your assumptions there and what you are seeing in the market.

I think we provided a decent amount of color within our comments around the growth expected within the segment, where we generally provide some good directional guidance at a segment level within nursing allieds. Travel nursing is certainly the biggest driver of that, but allied is also doing very well.

Brian, do you want to share any other particular color on the guidance?

Sure. Just a little more on that segment. And as Susan pointed out, and we gave that in the prepared remarks, the nursing business certainly is seeing the highest growth rate, still, on a year-over-year basis. And allied is performing well as we are lapping some tougher comps. As we have said for the last several quarters, we got to the back half of this year, that the year-over-year growth would slow down, despite the fact that we are still seeing really good trends on both the demand and the bookings side. And so, feel really good about that segment.

On locums, as we have talked about, you see the growth rate slowing down a bit in the third quarter, really not a demand issue. And Ralph can talk maybe a little bit more about this. But the demand is solid, and we are focusing on driving volume up. But the third quarter is a little bit slower on a year-over-year basis.

And then on our other workforce solutions, again, several moving parts there. Growth with the acquisition of Peak for a full quarter and, again, seeing growth across all those different business lines, a little bit slower than the first half of the year. But, again, a lot of it is facing some tougher comps more than anything else.

This is Ralph. I'll comment -- I'll re-comment on the demand trends. We are seeing a strong demand across all of the staffing segments and the perm segments as well. So there's not really a change in the market or a slowing in the market of any kind. I just want to make that clear. We just -- I think our forecast is -- appears not to be as robust because we've had so many good quarters in a row. And then plus in the travel nursing segment we have -- or in, I'm sorry, the nursing allied segment, we have the impact of HSG, those two events not happening.

And, again, on the locums side we've seen a slowdown in a couple of large customers. And this probably gets back to Tobey's question about services. We provide transition services when a hospital moves from an insourced position arrangement to an outsourced position arrangement. And those projects can be $3 million, $4 million. And they can last up to probably about a year at a time. So when there's a lot of that type of activity going on, we benefit from those transitions. They use locums during interim periods until they staff up if they are the new provider or if they lose insourced clinicians early on in the process. So there's a bolus of business that occurs.

We've had fewer of those projects in Q3 than we had in the last couple of the quarters, really probably about the last five quarters, although our pipeline for those types of projects is very good going forward into the new year as well.

So that's probably -- and maybe that gives you a little more flavor. We didn't talk about local staffing at all. I'll throw that in there. We went live on new technology; Susan mentioned that. And it went extremely well. I've done several front-office conversions, and they can be -- have a pretty poor impact of the business for short periods of time. Ours went as well as, I think, we could have expected. It was about $1 million of business disruption above what we anticipated as new team members, about 400 people on new technologies, got used to operating in that technology, finding candidates and filling job orders, getting payroll done and things like that. So there's a little bit of softness in that business as well tucked into the nursing allied at this point. Does that help?

Got it. Yes. No, that's exactly what I was looking for. Yes. I probably mis-worded my questions, just looking for some color on trends that you are seeing (inaudible). And that's perfect. Thank you.

AJ Rice, UBS.

Maybe a couple quick questions here. I appreciate the comments you made on pricing. I just -- or how rates are changing for you. I'm wondering, do you have, at this point, visibility on what is happening to rate increases at the hospital for their own local workers? Has that started to pick up, or are you just seeing it because you are picking up on the margin, the incremental person they need?

Yes, It does tend -- this is Ralph; sorry. It does tend to happen first in the contingent labor category, and then you'll see it trickle into their float goals. And we are already seeing that. And then we've also seen signing bonuses and pretty big investments on the client side in recruiting resources. And several of our clients have, gosh, doubled or even tripled their internal recruitment staff to try to attract more candidates to them.

So we are seeing that. And then, of course, the labor events are triggered by wage and benefit increases that people are looking for. So there's a little bit of that going on. And probably because of the recession, there is a lot of suppressed wage buildup that didn't occur, and I think there's a little of catch-up period going on.

Do you have -- even if it's a little bit of a range, do you have an estimate as to what the underlying rate increases are these days?

I don't have a good source for it. My gut tells me about 3.5% to maybe 5%. I don't have a comparable (multiple speakers).

Okay. That's fine. And clearly, the other thing we hear from the hospitals and from health care providers generally is that it's all about the strength in the outpatient -- outpatient surgery and urgent-care centers, clinics, some maybe pushed-up things to even in the physician practice. How much of that, of your -- is that still a pretty small piece of your business? Or is that -- at this point, how would you describe that and how is that growing?

We have been able to continue to build our outpatient or I'll just say generally non-acute business. Acute care is still the vast majority of our placements, particularly within nursing; it's running roughly 85%, I'd say north of 80%. It's running around 60% within physician and allied. And we do believe those numbers have come down, not because acute care hasn't grown but because the other non-acute areas have grown. And that has been deliberate on our part as well. We recognize the opportunity to move to and where health care is going to be delivered, and we believe that some of these non-acute areas will grow faster. They are relatively smaller today than acute care and probably always will be. But they will likely have faster growth rates. So we are continuing to invest resources to make sure that we are growing our presence there. So home health, ambulatory surgery, urgent care, retail, clinics -- and as our clients, the systems in particular themselves become more vertically integrated, we find that we are able to pretty quickly and easily add on those additional settings under an MSP client.

In fact, Dan, would you like to comment on that a little bit? Because I know that has come up recently in some of our newer contracts.

Sure, Susan. This is Dan. So first of all, one of the shout outs I'll give is on the Avantas side we actually have four new signings. A significant one of those was for this kind of clinic setting. So, well over 100 facilities in that one arrangement alone.

Also, when we look at the deals that we have been winning, most of those include both nursing and allied. And allied almost always is included in nonclinical settings as well. We've had a really good string of add-ons and expansions to our base. We did roughly 20 different transactions overall in new, expanded and what I've referred to as add-on business. One of the add-on lines that we added quarter was specifically in-home health as well. So we are seeing a lot of this.

Okay. And then maybe just one last question. I think this is the first -- well, it is the first conference call since you completed the Peak acquisition. I know you talked about this being an area of interest for some time. Now that you actually have a presence there in a major way, can you just maybe give us a little bit more about your thoughts about that size of that business, the growth opportunity that represents? Do you need to make more acquisitions to get to the scale you want? Maybe just a little bit of margin profile down the road or opportunity, maybe flesh that out, if you don't mind.

Sure, I'll give a little color and then maybe have Brian jump in with some comments on the numbers. We are just two months in, but we have been very pleased with the management team and how they have embraced the AMN organization. I mentioned the sales summit that we always have. And they really were excited about that and have worked very closely with our sales teams across the organization to make sure that we are leveraging opportunities to get them plugged in to existing relationships that we have.

2016, I think, is a year when health care organizations are recalibrating how they are utilizing their internal and external medical coding services. And we knew that as we were coming into this year. That's why I'm actually really glad that we waited until the second quarter of this year to make an acquisition, so that we could see how that really settles out. There will be another wave of coding changes that will occur in the fourth quarter, and so we think that will also help provide more growth and more opportunity going forward.

It is a great business. It is relatively small. It is in the $30 million revenue range, so it gives us a lot of opportunity to invest and grow the Peak organization. That's our first line of sight. If we like what we see and the opportunity down the road, then we will certainly consider making other acquisitions. But it's a little premature to make that kind of a decision.

Brian, do you want to talk about some of the numbers?

Sure. Just to follow on that, too, I think what we like about the business and the way they built it is their infrastructure really has the ability to grow. And so as we are getting them plugged into some of our existing accounts, we certainly see an opportunity to take it as a platform and grow just organically. But I also think they've got the capability with a leadership team there, too. If we get another acquisition to really view a very good way to -- as a platform for growth as well.

As we mentioned, we made the acquisition -- $32 million of revenue right now and kind of mid-teens EBITDA margin. They've got a fixed cost structure right now with the team. And so if revenue grows, then they should be able to leverage that nicely to get EBITDA margin expansion as well.

Okay (multiple speakers) --

AJ, this is Dan. I just wanted to add one more thing. I'm really excited about this acquisition because if you think about all of the quivers we have -- of arrows in our quiver, if you will -- most of them are focused on cost savings. And this is one area where we can really help customers on the revenue side of things as well. And so from my point of view, if you look at revenue cost and then optimization services, we really can start to shape better what the customer outcomes are and hopefully deliver on those for them.

I should also add we did add a coding add-on to one of our MSPs in Q2. So it will happen.

That was just -- I said it was my last question. But on the MSPs, do you -- you just have to go in there and sell? Is there any sort of natural add-on that happens and that gets (inaudible) that you have got to go in there and sell in each one of those cases?

One of the benefits we have is that we don't have to go in leading with any particular solution. I get the privilege of walking in there and saying, hey, what is challenging you most right now? And so, if it happens to be nursing and allied, and we bring in an MSP around that, very quickly we start a discussion.

So if you don't mind, I'm going to riff off of what Tobey asked earlier. We had a customer, a very significant expansion this quarter, that was already a customer for RPO, Avantas and a locums MSP. They came back and added nursing and allied in a fairly significant way. And so we had that executive come and visit with us this past week. And one of the things that they wanted to talk about was how do we work on our coding and billing, and how do we work on our optimization services. And so you get this ongoing conversation about how you can continue to help people and expand. So it's not just winning the new MSP. It's also about adding on and expanding additional facilities as well. So we are hitting on all three of those cylinders very well.

Okay, great. Thanks a lot.

Randy Reece, Avondale Partners.

One thing I wanted to make clear in here -- if you had not bought Healthsource, what would this year be like for your staffing operation, dealing with the disruptions?

Just like in the -- obviously, in the Q3 our guidance, right, I'll just start there -- we would be up, actually up about 4% to 5% excluding any labor disruption in either quarter. But the impact you are trying to get to is, if we didn't do it, we probably would have had some role in those strikes and maybe $1 million or $2 million, maybe $3 million in a quarter versus capturing closer to $18 million, $19 million in the quarter.

And how does that -- how would that elevated level of activity just affect the efficiency of your operations? Is there kind of a spillover effect on other customers when you have a big customer come in screaming for emergency help?

Yes, there absolutely is, Randy. And this is what I think Ralph was saying earlier is a big benefit of bringing the Healthsource global team on into AMN is that not only can we capture, I think, more of the revenue by helping those clients with labor disruption through them providing the services more directly as the management firm for the labor disruption. But also we're not distracting our travel nurse team and our local staffing team. And they are able to a focused on our MSP clients and our traditional clients and not really dilute our efforts in that part of the business. And so I would say it helps all of our clients because it means that we can keep that strike activity fairly isolated and focused within the HSG team.

It's hard to quantify what that would be, though, to be honest. Of the strikes that they managed, would we have gotten some of that revenue? Absolutely. We probably would have placed it through our travel nurse and local staffing teams. But it also might have meant that we missed out on an opportunity to place travelers at other locations.

Randy, this is Dan. There's also a significant impact on the people in the strategic accounts team that end up focusing on that strike for that amount of time, whether it's just a few days or a few weeks. And it distracts them in a way that they really can't serve the customer in a normal way. And so from my point of view as well, it has been a really important acquisition from a non-financial point of view as well.

I wanted to focus a little on candidate acquisition costs. When we look at the rest of the recruiting universe, expenses for various forms of digital marketing and various methods of candidate acquisition have gotten more expensive and less efficient this year. And I was wondering if you could tell me how your candidate acquisition expenses have been behaving versus your plans this year.

That's an excellent question. First, I'll talk about how they are trending. Our applications -- and we use the definition of applications that fit the jobs that we have, are unique, high-need definition of them. So in our travel nursing business we are up double digits, around the 15% range year over year. Allied is up about 10% year over year. And our locums applications are up about 25% year over year.

We are certainly performing well in getting more applications in. And now we are in the process of getting out recruiters to convert them, credential them, and that process takes some time as well.

The cost to acquire -- we have been, I think, as scientific as you could possibly be in this area, having a broad set of resources that we go to to get supply, everything from referrals, which is one of our top two sources, or to how buy pay-per-click ads and things like that. Literally, we will change a source out in a day or two if it's less effective or the cost of it goes up.

So, we haven't seen any material change in our marketing costs on a year-over-year basis. But we have had to drop a few sources that raised their prices because they thought they could, and replaced them with other sources that were a little less expensive.

And finally, the permanent placement business -- it feels like just industry-wide, regardless of sector, that clients have staffed up some in-house in recruiting. And then maybe in-house is one bit of share back in terms of the number of placements that are being done, maybe put a little bit of pressure on place-and-search this year. How did permanent placement within that segment, that new segment you have -- how did permanent placement behave versus your expectations this quarter? And what is implied in the third-quarter guidance?

Sure. So regarding the second quarter, physician perm placement had an outstanding quarter. They grew more than 20% year over year. Now, some of that was from the Milliken acquisition we did last fall. But the majority, vast majority, was organic and came from Merritt Hawkins and Kendall & Davis -- Merritt Hawkins, of course, being our retained search firm, which is the vast majority of the revenue there. And they have had an outstanding year both in new searches growing, a lot from larger health care systems as well. They have done really a terrific job of building relationships and rapport with those larger systems who, yes, have increased their internal recruitment resources. But their needs are so great that they also want to partner with the large, successful firms like Merritt Hawkins. And so we have seen plenty of new search growth opportunity. And, in fact, we mentioned in the second quarter we had particularly strong placements as well.

And so I can't say that we have seen that growth in internal resource increases actually negatively impacting us. I think that our team and the health care organizations themselves are finding ways to work together as opposed to it being either/or. And so I really think that we will continue to see some really nice there, particularly with a large integrated health system. And it's not just in particular geographies. California has been, certainly, a great geography for us. But we've seen growth in Texas and Virginia and really all across the country.

Very good. Thank you very much.

Tim McHugh, William Blair & Company.

First, the comment that the nurse in allied health, the bill/pay spread narrowed a bit there -- I guess how does the project revenue impact that? And what else? Is it just the competition to find talent out there that's narrowing that spread? Just any color would be helpful.

This Brian. I'll take (inaudible) and after as well. So, separating the Healthsource Global, we are talking more just about the nursing business, particularly, as someone outlined, on a year-over-year basis that the spreads have come down. Some of that is really deliberate. As we are trying to attract more talent into our orders, we are taking bill rate increases and passing on the most that we can into pay rates. And so naturally, that does have some compression on the bill/pay spreads.

Ideally, then, as we are looking at the other direct costs, housing and travel and others, if they are rising at a slower rate we still end up very comparable margin but higher gross profit per day and better leverage as we are driving more revenue. That has really been our key strategy over the last couple of years. It's a focus on maintaining similar margins we have had, which we think are very strong in the industry.

So that spread decline is not unexpected for us. What we have seen is a little bit of increase; we talked about it in the first quarter. Our health insurance costs were a little bit higher. They have moderated some in the second quarter. We are feeling better about that. Our housing costs were also higher in the second quarter. So that was really probably the bigger surprise on the year-over-year margin decline. The bill/pay spreads is really more what we expected.

Okay. And you talked about MSPs a bit. And it sounds like you are expanding relationships and obviously won a lot of work. But can I just ask, for the large, I guess, MSPs as they come up for renewal, it's certainly a hard market to meet fill rates or meet -- at least have high fill rates, I guess. So what are the discussions like as clients come back for renewal? How has your renewal rate been on, I guess, existing MSPs? And how understanding are they of the fill rates that you can deliver in this type of environment, given the shortage?

I think I'll start with that. And then if someone else wants to add color, they certainly can. To answer you first and very directly, we haven't lost one in this first half yet. So I hope you didn't just jinx me there.

The conversations are tough, especially when it's a first-generation MSP that was focused entirely on cost savings. You then need to start having discussions about visibility and metrics and things that they can do outside of just bill rates, for example, to improve their cost basis.

So, often we get into discussions about RPO and other services to go along with that MSP to help drive savings in other areas of the business. But your point is absolutely spot-on; they are difficult discussions. And that's one of the reasons why I was highlighting the point I made earlier, which is, hey, what problem are you trying to solve today, and what can we do to bundle those things into this next generation of MSP.

And we have the best fill rates within the industry. I think that's well-known amongst the larger health care organizations, in particular. And we can show them what we are doing on the candidate sourcing side to create the talent network and have a good flow of candidates. And while it might not always meet the levels that they are seeking, I think they realize that we're going to be able to bring much more volume to the table than any other organization.

Also, the affiliate vendor network that we have is very robust, and we built strong relationships with those affiliate vendors in order to make it also a good relationship for them and a good experience and a profitable business decision for them to participate in our MSPs. And so we try to share all of which a client so that they understand how it is in their best interest to continue to work with AMN as a leader and someone that can fill the vast majority of their needs. And so far, I think that has resonated well, and we have to continue to prove that on a daily basis.

Okay, great. And the $100 million, I believe, that you said was spent under management under, I think, it was new MSP wins -- can you maybe just clarify? Was that, like, first half? Was that this quarter? And I guess how does that -- can you give us a comparison for last year? I guess trying to just size how significant it is relative to what you have won.

It was a huge impact, Tim. We have -- so that was just for the quarter. It was six new MSP transactions and one very significant expansion that I was describing earlier. Just as color, twice as big as what we did last year, all year. It comes off of a really strong Q1 that I felt like we were really doing a great job. And I just have to take my hat off to the sales team, the strategic accounts team, all of the people who connect us with these customers throughout our organization, the ability to cross-sell and go in high with new relationships from our interim businesses. This has been quite a good example of how the strategy all comes together.

That's great. Thanks.

Mark Marcon, RW Baird.

A follow-on to Tim's question with regards to the MSPs. How quickly do you anticipate that they will roll on? And what percentage of that order of magnitude are you already filling?

I'll start with some of that. Our implementation team really takes at least two months or, most of the time, three months just to get the systems up and the orders in and training done and change management beginning and that kind of thing. After that period, it's about 12- to 18-month ramp to get to a place where we feel we are filling orders at kind of a steady state, if you will.

I don't know, Ralph, if you want to add anything to that.

It goes a lot faster on where the travel nurses -- the preponderance of their utilization, that those ramps can sometimes -- it could be up to 60%, 75% in five or six months.

On the locums side, because of privileging and credentialing processes, it can be six months long. Though sometimes they are the ones that hit more towards the 18-month time frame.

And then also I think you asked about our current business within that. I think in most of these, we probably already filled like somewhere around 20% of the volume. That has been backed out of the $100 million number already. So, this is the incremental opportunity for us.

That's the incremental opportunity. And of the six new ones, how many of those are travel nurses?

All six have travel and allied in them and the expansion of locums.

Great. And then just --

Just to be clear, the $100 million of incremental growth spend -- we will fill 50% to 60% of that, depending on the business line. If it's nursing, we will -- first of all, we will fill 90% to 95% of the orders collectively with our subcontractors. But AMN's direct fills will vary depending upon the business line. So if it's travel nursing, we may fill roughly two-thirds of the jobs ourselves. If it's locums, it's going to be less than that. If it's allied, it will be less than that.

Great. And then with regards to just the guidance for the current quarter as it relates to nursing allied, if I heard you correctly at first, you said you are not anticipating any major project work. Is that correct in terms of embedded in the guidance?

We have not embedded it in the guidance. There are, as Ralph said, roughly five to seven projects that we may even be under management for to consult with them. But we just don't know if the actual strike activity will occur. And that's where you get the larger revenue amounts that are not easy to predict. You don't know until the 11th hour whether or not you are going to put people on planes and whether they are going to work the hours.

So we can see that pipeline because we are contracted with most of those and already consulting with them.

And last year, what was the level of variance in terms of the project work that you had? Obviously, you didn't have the same capabilities. But just thinking through, okay, how many quarters is it typical to not see anything?

Well, again, we -- I don't know if our prior comparison is a good apples-to-apples comparison because we were not actively going out and seeking engagements to manage strikes, which is the business that HSG is in. If we look at our second quarter last year, just as an example, we had $2 million to $3 million of strike-related revenue in our performance. And in the third quarter, I don't think we had any.

Okay. And HSG, what is their level of variance, when you go back and look at their historical track record?

It varies by year, for exactly the reasons we haven't put expectations into the quarter of a strike occurring, because you really don't know until it happens. And so if you look back, I think last year they did -- it was around $15 million of revenue for the full year. And so they have obviously done more than double that in just the first half of 2016. And they have had other years where it was lower than that and higher than that as well.

Got it. But the number of potential actions that are out there -- that's a fairly high level, isn't it?

It is. And I think it's indicative of the environment we are in with such a severe shortage of clinicians. There are always contracts coming up for renewal, but how aggressive the unions are and aren't likely depends upon the employment environment. In an environment where nurse attrition is at historical highs across the country, they feel, I believe, that they have got the opportunity to make more strides in their negotiations. And so I think it's the same reasons why we are seeing tremendous demand across all of our business lines and, in particular, in nursing.

Great. And then just can you talk a little bit more about locum tenens, just in terms of just that geographic mismatch and how that might resolve itself?

Mark, this is Ralph. It's a kind of a complex problem, but I'll try to do my best and keep my explanation short. When we have an existing customer like we just talked about, we win an MSP, we get it up to full speed, that takes some 18 months. That customer's volume -- if it's consistent, it's great. Right? And our performance doesn't -- there is no decrease in it. And we continue to capture market share. But if that client is winning fewer deals, closing down units and things like that, then their volume drops off.

I can't actually redeploy that staff, that doctor, even locally until they get privilege. Right? The process that we have to go through can take six months to get something redeployed. So we win a new MSP -- a mature MSP goes down, we a new MSP, there's a big swing in our volume because of that. So we are right now in the middle of that process of ramping up a new expansion on an MSP. And we might be filling in small 10%, 15% of the jobs at conception. So we are kind of at a low range on that. Demand is very high, overall, but the low fill rate on that. And then you have the large account; when you were particularly successful, their volume goes down. So the two just don't line up.

In nursing, it's much more simple. You are an ICU nurse and you are working one day on the East Coast, the next day you are on the West Coast. In a few days, we can get you licensed and moved. It's just much more complicated. And we need to get better at predicting where volume is going to hit. And also with licensing our professionals across various states that we think our business is going to grow. So I think there's execution opportunity in this one as well. I don't want to just blame the trend that happens at clients. I think we can fix it internally as well. Does that help?

Yes, it does. So when you think about longer-term, this quarter going up against tough comps still, which we have been -- but going longer-term, how do you think the business shakes out in terms of a growth rate on the locums side?

I think it's a little early to start predicting that for 2017 and 2018. If you look at the data points that are out there, which is predominantly the SIA, they generally have locums in the high single-digit range. And we think that is a reasonable range to look to.

Great. Thank you.

Tobey Sommer, SunTrust.

Thank you. My question has been answered.

Thanks, Tobey. All right. Well, we really appreciate everybody joining us today, and we appreciate your continued support. We look forward to updating you on our progress next quarter.

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