AMN Healthcare Services Inc (AMN) 2016 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the AMN Healthcare third-quarter 2016 earnings conference call. (Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to turn the conference over to our first presenter, Mr. David Erdman. Please go ahead, sir.

Thank you, and good afternoon, everyone. Welcome to AMN Healthcare's third-quarter 2016 earnings call. A replay of this webcast will be available until November 17 at AMNHealthcare.investorroom.com following the conclusion of the call. Details for the audio replay of this conference call can be found in our earnings press release issued shortly -- a short while ago.

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 those 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 or any forward-looking statements provided today prior to its next earnings release.

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

On the call today are Susan Salka, President and Chief Executive Officer; Brian Scott, Chief Financial Officer; Ralph Henderson, President of Professional Services and Staffing; and Dan White, President of Strategic Workforce Solutions. So I will now turn the call over to Susan.

Thank you so much, David. Good afternoon, everyone, and welcome to our third-quarter earnings conference call. It is clear from our strong earnings report today that AMN's leading position in delivering innovative workforce solutions is making an impact for our clients. Health care organizations across the US are dealing with significant labor challenges. And our solutions help ensure that they have the health care professional and leaders they need to stay focused on delivering quality patient care.

Over the last decade, we have taken significant steps to expand and diversify our business, and we are seeing the benefits of this strategy in our results. Most importantly, for clients, we are able to provide greater expertise and a broad portfolio of solutions to help them tackle their temporary and permanent staffing challenges both short-term and long-term. But shareholders have also benefited, as we now have nearly 50% of our revenue coming from other workforce solutions and MSP-related revenue. These strategic offerings help to create stronger client relationships, more recurring revenue, greater opportunity for cross-selling and are less economically sensitive.

Demand from existing clients remains strong, and we are experiencing a record year of winning new workforce solutions contracts. As a result, third-quarter consolidated revenue was up 23% year-over-year, with the largest contributor being organic growth. We continue to grow our workforce solutions footprints and MSP business. Since the inception of our MSP program in 2008, we have grown MSP revenue from 1% to approximately 40% of our staffing revenue today. This arrangement improves fill rates, reduces the time to fill vacancies, minimizes risk and creates efficiencies that allow clients to focus on providing quality care.

From our perspective, MSP gives us a competitive advantage. It builds stronger client relationships and reduces cyclicality. Year to date, we have added MSP contracts with a projected annualized gross spend under management of over $150 million. On top of this, we have over $100 million more in contracting. MSP has proven to be an effective strategy for health care organizations to address their continued workforce challenges as they continue to deal with high turnover and persistent labor shortages.

Our VMS solutions, ShiftWise and Medefis, provide an attractive option for clients that prefer to manage the staffing process themselves. This business line continues to experience strong growth through both new contract wins and expanding existing relationships. In total, we have more than $1 billion in gross spend flowing through VMS arrangements.

As we announced in September, Stephen Rodriguez joined AMN as the President of our ShiftWise business. Stephen has over 20 years of technology-related experience, and we are excited to have him and his family joining AMN.

In addition to MSP and VMS, the growth in our other workforce solutions enables us to help clients optimize their internal recruitment and staffing efforts as well as ensure they have the right leaders in place to guide their team through so much change. The AMN Healthcare brand has never been stronger. Our clients recognize us as being a trusted and innovative partner as we implement cost-effective services to address the litany of workforce-related issues they face every day.

We recently hosted our fifth annual Healthcare Workforce Summit with leaders representing a variety of settings, including the largest systems, outpatient facilities and retail healthcare providers looking to expand their footprint. The feedback from all was consistent. Workforce challenges are severe today, and they are not going to get significantly better anytime soon. They need innovative solutions and partners like AMN to assist them in taking a fresh approach to how they manage their staffing needs.

As announced in mid-October, to further illustrate how important brand identity is to our success, we changed our common stock trading symbol to AMN to help harness the strength and recognition of our valued brand. Our vision and strategy are clear and sound, allowing us to grow both organically and through meaningful, reasonably valued acquisitions. We have a proven track record of successfully integrating new businesses into the AMN family. We also now have improved liquidity as a result of the recent bond offering. Brian will talk more about this later.

We will continue to focus on execution of organic and acquisition growth opportunities. But in order to enhance our ability to deliver shareholder value, I'm pleased to announce that our Board of Directors authorized a $150 million share repurchase program. The authorization has no time limit, and we intend to be opportunistic in our approach.

Now let's briefly review our third-quarter results and our outlook for the fourth quarter for each of our segments. Consolidated revenue for the third quarter was higher than expectations at $473 million, which is up 23% over prior year and 12% on organic basis. Growth occurred across all three reportable segments. Consolidated adjusted EBITDA was $58 million, up 27% from prior year. This reflected margin of 12.3%, which was 40 basis points higher than the same quarter last year. Our nurse and allied segment posted revenue of $287 million, higher by 16% year-over-year, which was virtually all organic growth. Revenue in the largest business in this segment, travel nurse staffing, increased 21% year-over-year. This is all organic growth and reflects another quarter of exceptional execution by our sales, service and clinical trainees in a strong demand environment.

Our leading MSP position is also a key contributor to growth in this business. The allied staffing division achieved another record quarter of revenue, growing 10% year-over-year. Again, this is all organic growth. This business includes the placement of several specialties, including rehab therapy, imaging, respiratory and laboratory professionals. We continue to expand MSP relationships to include allied services, resulting in approximately 35% of allies revenue now flowing through our MSP program.

Looking ahead to the fourth quarter, we expect the nurse and allied segment revenue to be up 12% to 13% year-over-year. This increase is being driven by over 10% volume growth from the travel nurse and allied businesses. The strong growth is being partially offset by weakness in our local staffing division. Our guidance also assumes we will have approximately $2 million of labor disruption services in the fourth quarter, which is similar to what we had in the third quarter.

In the locum tenens segment, revenue of $109 million was up 7% year-over-year. Growth occurred across multiple specialties, with the largest increases coming from surgery, emergency medicine and anesthesiology. Demand trends remain very strong in most specialties, and we believe there is plenty of room for volume growth. As I mentioned on the last-quarter call, the primary constraint continues to be the challenges associated with recruiting and credentialing an ample number of physicians to match the geographies of the demand. But we are making positive strides.

Fourth-quarter revenue for the locums segment is expected to be up 5% to 6% year-over-year, driven by volume growth of 4%. Revenue in the other workforce solutions segment was $77 million, which is 125% higher year-over-year. This segment includes our interim leadership and placement businesses, physician permanent placement, RPO, workforce optimization, VMS solutions and our recently acquired medical coding business. Our leadership businesses, which were acquired over the last year, are up 20% year-over-year on a pro forma basis. They continue to execute well and are benefiting from the cross-selling opportunities into our MSP client relationship.

Revenue from the VMS businesses are up over 30% year-over-year as we continue to add new clients and expand existing ones. Avantas, our workforce optimization offering, grew revenue by more than 50% year-over-year. Workforce optimization and the use of predictive analytics was a topic of high interest at the summit that I mentioned earlier. The physician permanent placement business was up over 5% year-over-year, driven primarily by higher placement. Recruitment process outsourcing was down year-over-year and sequentially, but appears to be stabilizing. We are expecting to resume growth in this business in 2017.

Overall, fourth-quarter revenue for the other workforce solutions segment is expected to be up approximately 90% year-over-year. Our results certainly tell a compelling story about the value that we are able to provide health care organizations and professionals every day across the country. But what is behind these numbers that makes the biggest impact is our incredible team: our clinicians, our interim leaders, our new coding team, and, of course, our internal team. They are smart, talented, always striving to be better, and, most importantly, they care about what they do and the people they serve. I am so proud of this team, and together we will continue to make an impact and serve our shareholders well each and every day.

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 third-quarter reported revenue of $472.6 million was slightly above the high end of guidance as performance from all three reportable segments exceeded expectations. Revenue was down slightly sequentially, which resulted from $2 million of revenue from labor disruption services in the third quarter compared to $19 million in the second quarter. If we exclude this service line, third-quarter revenue was up 4% sequentially.

Gross margin for the quarter was 32.7%, down 20 basis points from last year and flat sequentially. The year-over-year gross margin decline was due to a lower nurse and allied segment gross margin, which was partially offset by an increase mix of the higher-margin workforce solutions segment and an improved bill/pay spread in our locum tenens segment.

SG&A expenses as a -- in the quarter totaled $100 million, or 21.2% of revenue. SG&A expenses as a percentage of revenue declined from the same quarter last year by 50 basis points due to improved operating leverage, but increased sequentially 20 basis points due primarily to a $2 million favorable professional liability reserve adjustment reported in the previous quarter.

Third-quarter nurse and allied segment revenue of $286.8 million, an increase of 16% from the prior year and a decrease of 2% sequentially. Excluding our labor disruption business, sequential revenue was up 4%. Volume of 8,458 average health care professionals on assignment was higher by 12% year-over-year, while the average bill rate was 5% higher year-over-year. Nurse and allied gross margin of 26.7% was 80 basis points lower compared to prior year and flat sequentially. The lower year-over-year margin was due to a narrower bill/pay spread and higher direct costs, most notably higher housing costs. However, the gross margin trend modestly improved through the quarter and into our fourth-quarter booking.

Third-quarter locum tenens segment revenue of $108.6 million was up 7% from the prior year, but down slightly on a sequential basis. The year-over-year growth was driven primarily by a 5% increase in the average bill rate and a 1% increase in the number of days billed during the quarter.

Locum tenens gross margin of 31.2% was higher by 50 basis points from the prior year and down 10 basis points sequentially. The year-over-year increase resulted from improved bill/pay spread.

Third-quarter other workforce solutions segment revenue of $77.3 million was up 125% year-over-year and over 7% sequentially. Gross margin of 56.7% was lower by 220 basis points sequentially, due mainly to having a full quarter's contribution from Peak Health Solutions, which we acquired in June.

Third-quarter consolidated adjusted EBITDA of $58.1 million was up 27% year-over-year, but down 2% sequentially. The adjusted EBITDA margin of 12.3% represented an improvement of 40 basis points over the prior year.

We reported net income of $27.3 million and diluted earnings per share of $0.55 for the third quarter. Adjusted earnings per share of $0.62 compared to $0.48 in the prior-year quarter. Our tax rate was 37.5%, which is lower than our guidance, mainly due to the recognition of R&D tax credits in the quarter.

Cash provided by operations was $30 million for the quarter and $85 million year to date, representing a 52% increase compared with the first nine months of 2015. Days sales outstanding was 64 days, consistent with last quarter, but still higher than our targeted DSO.

As of September 30, cash and equivalents totaled $16 million, and total debt outstanding was $386 million. The third-quarter leverage ratio was 1.7 times the one compared to 1.9 times in the prior quarter. Capital expenditures for the third quarter were $5 million.

Before turning to guidance, let me say a few words about the bond offering we recently closed. In mid-September we announced the launch of a $300 million private offering designed to achieve multiple objectives. Most notably, we saw an opportunity to secure fixed-rate debt at a historically favorable price that extends the maturity, diversifies our capital structure, and provides financial flexibility to execute on our strategic goals. Due to significant oversubscription and favorable terms, we elected to increase the size of the offering to $325 million, the proceeds of which were applied to fully extinguish the amount outstanding under the revolver and to repay a portion of our term loan.

As of the October 3 closing of the financing we had $65 million outstanding under our remaining term loan and zero drawn on the $275 million revolver. In connection with the offering, we reduced the amount of our interest rate swap from $100 million to $40 million.

Now let's turn to fourth-quarter 2016 guidance. The Company expects consolidated revenue of $473 million to $479 million. This 18% to 19% year-over-year increase includes organic growth of about 10%. Gross margin is projected to be approximately 32.5%, which is down sequentially due to seasonality. SG&A expenses as a percentage of revenue are expected to be approximately 21% to 21.5%. Adjusted EBITDA margin is expected to be approximately 11.5% to 12%.

Other fourth-quarter estimates are as follows: tax rate of 41%, stock-based compensation expense of $2.6 million, depreciation expense of $3.2 million, acquisition and integration expenses of about $1 million, and diluted share count of 49.5 million shares, which does not include any potential reductions from the recently announced share repurchase program.

Interest expense is projected at $5.4 million, primarily reflecting the changing rate from the new bond offering. We are also expected to record $900,000 of nonrecurring costs in connection with the offering.

That concludes our prepared remarks, and I would like to open the call for questions.

(Operator Instructions) AJ Rice, UBS.

Maybe just ask a couple questions. Can you comment on what you are seeing in terms of MSP fill rates? I know you've quoted from time to time how much of the orders that you give in your MSPs and the amount that you are typically able to fill. Is that trending in any different direction than what you reported before?

Thanks for the question, AJ. We feel pretty confident that our fill rates within the industry are absolutely the highest. Our clients and new clients tell us that is why they choose AMN as their MSP provider. Fill rates have come down just a little bit at some clients, and other clients they've been steady. It's always a supply constraint environment, and orders are at a very high watermark right now, higher than last year. And in particular have a lot of orders for what we would call our winter needs. And we start to get those in the May, June, July timeframe. And so by nature, the fact that they are longer lead time orders, you would expect that our fill percentage would be lower until you get closer to the actual placement date. I hope that that makes sense. But so at this moment, our fill rates would actually be down, but it has more to do with the timing of those orders than it does our success in filling them. In fact, we just got verbal renewals on two of our largest MSP relationships. And so we feel that our fill rates, while they could always be better, are what our clients need to deal with the challenges they have.

Okay. And those comments that you made beg two of my other questions. One was in terms of the competitive landscape for MSPs, are you still characterizing -- I know you guys were really early in a lot of these segments. Would you still -- has there been much change as maybe some other competitors have come in, or is it pretty much the same? And technically, your coding business -- so can you bring that under the umbrella of your MSPs, or is that outside of the hospital MSPs?

Yes, I will start with that one, and I will have Dan pick up on the competitive landscape of the MSP environment. But yes, absolutely, the medical coding business can come in under our MSP relationships and contracts. It's one of the reasons it was such an attractive acquisition for us because many of our MSP clients were asking us if we could provide coding services. And so we've already begun that process of introducing them to those MSP clients in the process of getting them added to the contracts.

Now, it's only been a few months, so we don't actually have a lot of placements from that. But we would expect over time that will be able to accomplish there what we've done with our other add-on businesses like leadership, as an example. We have been able to add The First String and B.E. Smith into several of our MSP relationships, and that has really helped fuel their growth. They are very engaged in the process, too, of really becoming a part of that MSP strategic relationship. So, Dan, I will have you chat a bit about the competitive environment.

Thanks, Susan. Hi, AJ, this is Dan. I would say that just to characterize a bit of a continuum of offers that we see, probably ranges from a client just using a VMS software to manage the program themselves. Sort of middle of the ground might be a vendor neutral offer that that firm probably doesn't staff themselves, and then sort of the far end of the spectrum being a staffing lend program. And as you can imagine, we service clients in each one of those sort of continuum areas.

I wouldn't say that the landscape has changed much from a competitive point of view, meaning that I don't see any new entrants per se. I would say that the competitive nature of the business, though, remains very high. All of us obviously want to compete for the biggest and best of those client relationships. And clearly we are winning our fair share of those.

Maybe just one more thing to add on, I think two things that are top of mind for any new MSP prospects or potential clients, one is fill rate. Who has the greatest probability of filling the jobs that they put out? Because if you can't do that, nothing else matters much. And, again, AMN absolutely leads the way, we believe, in fill rate.

And second, multiple services -- having the ability to bring forth multiple staffing and now workforce solutions services is something that we see being discussed at the table as they are considering which partners they want to choose. And there again, AMN has the broadest and deepest suite of solutions that actually have traction and clients referrals -- so, our reference accounts. So we think that that's why we often win particularly the larger ones, because we can bring those multiple services to bear.

Okay. And then just the last one. I know, Brian, you in the prepared remarks mentioned you have some factored-in seasonality third and fourth quarter. And I know lots of times there's parts of the country, whether it's Florida, whether it's the Southwest, and maybe where you see sort of a snowbird effect and a seasonal pickup. Can you just tell us, I'm curious, this year whether what you are seeing is you characterize as normal activity any more or less or slower to build, less to build, any way you could characterize that normal seasonal pattern in the demand for nurse associated with it?

Yes, this is Ralph, AJ. I will tackle that. We are seeing really kind of a normal seasonal trend. You are right; we have increase in volume, particularly in California, but in the warm weather state. We haven't seen any increases due to flu season or anything like that. As a matter of fact, it looks pretty mild this year.

What I will say, and I think Susan was kind of capturing this in her notes, the winter orders are ahead of where they were last year, and we are pacing ahead of filling them from where we were at the same time last year. So maybe we will see a little more benefit this year than in the past from both stronger orders, slightly stronger orders and slightly higher fill rates. But it's not that different than what we were seeing in last quarter.

Okay, great. Thanks so much.

Tobey Sommer, SunTrust.

A follow-up on the most recent question. In terms of the winter needs, when do those start and typically end? Does it straddle 4Q and 1Q?

That's a really, really good question because it has slumped around. Sometimes it's based on clients worrying about the demand levels and wanting to get ahead of their competition for travelers during the winter season. So we typically get the orders in July, August and September, but the start dates really start in November through January. And so we have seen a little bit of a shift last year, right, from kind of the first quarter into the fourth. This year should be similar to last year. We are seeing a lot of starts in November, but it's just of a preponderance of the volume comes in in January.

Thanks. Wanted to ask a question about the workforce solutions businesses, kind of longer-term. There are a collection of businesses in there, so maybe I'll ask you from an aggregate perspective. On a ballpark basis, what kind of growth rate do you think the collection of businesses -- how should we think about over the long term? Not guidance, not the fourth quarter, but kind of compared to the staffing businesses.

Sure. Since most of the businesses in our other workforce solutions category -- and also I would include the MSP programs that have staffing revenue flows through them. We would expect that they would grow at a faster pace than the core direct staffing businesses.

Now, for the other workforce solutions, things like the Avantas offering, RPO, I would suggest even VMS, they are more early-stage and early in their penetration and capability to really expand and build their business. Just by nature of the fact that they have touched so few clients, really, at this stage, they ought to be seeing rapid growth. And you are absolutely seeing that. I mentioned Avantas is growing 50% year-over-year. Now it's off of a small base, but they are also looking at a very positive growth trajectory going forward.

RPO has been a little bit more lumpy. As you might recall, we had a fantastic year in 2015. It's coming down in 2016. I would actually suggest that has more to do with the early stage of adoption by the health care industry itself and the companies like us that provide those services as we learn how to work together with clients in creating more recurring revenues, sustainable relationships. So I think over time, we would expect that industry to be growing at a faster clip and a very steady clip. So overall, I guess the short answer is they should grow faster than our staffing businesses. And that means we ought to see the benefit of that both from a recurring revenue, less cyclicality, and the profitability.

Thank you. Could you update us on your plans to streamline internal systems? Any kind of benefit for cost that we should be on the lookout for as we head into next year?

Hi, Tobey. This is Brian; I will take that one. As we mentioned on the last call, we went live with our new staffing platform, which, as we have talked about before, is both an integrated solution that covers both the front- and back-office systems. And it is a multi-year project we are going through. We put our local staffing business on the system in the second quarter, and we continue to refine the system. And it's not just the technology itself but the operating model and how our teams interact with the pretty significant change from the systems they were using before.

So we are seeing good signs from it, but there's still work to be done there. We are currently going through the process of developing a system for our locums business, and we would expected to go live on that solution later in 2017. So as it relates the 2017, there won't be really be a significant amount of benefit. It really is going to start to flow through more in 2018 as we get efficiency on the locums platform and then ultimately move the travel businesses on there in 2018 as well.

Okay. Thank you. And two other questions. Wondering if you could comment on pricing across the segments. And in the labor disruption area, does the third quarter or fourth quarter represent sort of a de-emphasis of that business? Any kind of color on the levels that you saw on the quarter and are guiding to in the fourth quarter would be helpful.

First, regarding the labor disruption business -- and for those who aren't as familiar, we acquired HSG in January of this year to help us help our clients to manage through these labor disruption situations. We had been actually doing some of that in the prior years, but it became a bigger distraction. So we decided that we would bring in an organization team HSG, experts in doing this. And it would be less of a distraction, and, quite honestly, we'd do a better job of helping our clients.

And so, first and second quarter we had a couple of surprise strikes that occurred. The new team did an excellent job assisting with those. In the second quarter, the revenue from that business was $19 million. And in the third quarter, it was around $2 million. And so that is the nature of this business, where you may have some quarters where you only have consulting and advisory related fees, which is where the $2 million comes from. There were no significant strikes in the third quarter.

That's what we are projecting in the fourth quarter as well. Now, we could be surprised, and there are a few situations that are certainly hanging out there. And if they come to fruition, then we might see some upside there. But we typically don't include that in our guidance unless we are certain or actually in the midst of actually staffing the strike itself. And that will be the nature of this business, I think, going forward. And so we will typically try to be conservative. It is not a de-emphasis. As we have those situations arise, we always have to evaluate that particular opportunity. The clients, the type of strategic relationship we have or don't have with them, the economics, what other demand we have that we are trying to fill at that time. And so there could even be strikes, as there were in the third quarter, that we decided not to participate in. And so that is, I think, what you will see going forward.

Thank you for that. And if you could comment on pricing, that would be helpful. Thank you.

I will have Ralph take the pricing question.

Yes, as we talked about earlier, the bill rates continue to be strong. We are up 5% in the nurse and allied segment. Not a lot of movement sequentially there, but still a good pricing environment. Really, though, most of that, as you can see from the margins, is going back to the nurses and to slightly higher housing costs.

Locums, also strong pricing market, 5% year-over-year, and about the same sequentially. And I think -- I'm sorry, about 0.5% sequentially, so not the same sequentially but pretty even with the prior quarter. And the market there is good as well for getting prices increases. There's certainly, we think, some additional upside in the locums business. And the labor market, still almost at all-time highs in terms of jobs open. The number of jobs getting filled is not going up at any high pace. So we anticipate the pricing environment to continue to be good for our businesses.

Thank you very much.

Tim McHugh, William Blair.

First, can I ask about in the locums area, you talked about seeing some improvement in, I guess, your ability to fill the MSPs you want. How far off do you think you are before I guess you can really start to have a higher fill rate and start to see that growth rate improve?

That's a good question, Tim. This is Ralph. The -- and I think we mentioned this on the last call -- we have a couple of large physician practice management clients or MSP clients, and if you watch that space closely -- I think some of you do; I know Tobey does -- you've probably seen that there is a little less movement in and out of physician practice management over the last year or so; some settling down, I guess. Part of our business in that area is driven by when one physician practice management company replaces another or when a client decides to in-source versus outsource. And so there was a lot of revenue in some of our past quarters. We haven't seen much of that activity over the last couple of quarters, and so that has caused a little bit of slowdown.

Now, the upside has occurred really more in acute-care systems, where some of our newer wins are acute-care systems who use a like amount of locums. But they are in markets that didn't overlap really well where our physicians were already based. And so we are in the process of moving -- I would say our initial fill rates, like in the first quarter of a new locums MSP, can be like 10%, not very high, while we spend up to six months getting our people credentialed and privileged for those assignments. We do anticipate that in most cases we will get up to 50% or even higher on those accounts, and we are seeing quite a bit of progress on those at play. I think feel a little bit better about where locums is trending, and they actually did finish Q3 slightly stronger than we expected as well.

If we were to think of the $250 million of MSPs you've won or including what's under contracting, I guess, in terms of growth spend, how penetrated are you with those at this point? How much of that is ramped up versus more in the future that could contribute to growth from this point?

Tim, this is Dan. I will take that one. The new ones that are coming into under-contract, and that's about $100 million, I would say $80 million of that $100 million is incremental to us. So a good, good chunk of it is incremental for us.

Is that because it's new regions or new service areas?

They are meaning that we didn't have much direct relationship with them prior to this. So it's not necessarily about the region or anything else. It's just a different, deeper relationship, I think.

And getting back to the strike revenue or labor disruption revenue, what is the debate internally? You mentioned it sounded like you'd elected not to participate in some of those strikes. I believe there were some big ones at some hospitals you've worked for in the past. And so what is the trade-off? Is it just that they will feel confident in filling it? Is it pricing? I guess how should we think about that in the future?

Yes and yes and yes; it's really a variety of things. It's the economics of the opportunity. It is what the competing opportunities are for us at other clients, where we already perhaps have orders that we are needing to fill and not wanting to distract supply or our team from those. Even though we might have a different pool of strike-related nurses, if you will, sometimes we also tap into our broader network, as we should, our broader database. And so we need to be confident that we are not going to distract.

But I would say it's probably more to do with the economics and the management relationship. We do best when HSG is the primary manager of the labor disruption process, starting from the early advisory, consultative stages through the actual management of the strike. So when they are not the primary manager, we are less likely to participate in the strike. It doesn't mean we won't. And as you said, we have, sometimes in the past. But we are probably less likely to pull that trigger unless we really feel we need to.

Okay. Thank you.

Jeff Silber, BMO.

It's Henry Chien on for Jeff. I just had a question on while some of the public hospitals that have reported seem to be having some beginning trends in their admissions, just wondering if you could touch a little bit upon any changes if any that you are seeing from your clients in terms of demand or orders. And, maybe more broadly, for entering into a more slower type growth environment, how you are thinking strategically or how you would adapt the Company to that.

Well, we really haven't seen any sort of material change in the demand behavior for our clients. As I think we mentioned a couple times, demand is up year-over-year. And really our biggest constraint continues to be the ability to attract and credential and get placed more in the supply. Although I have to say, the team is doing an outstanding job. If you look at our travel nurse business, for example, I think about a third of our nurses working are first-time travelers with us, which would come with new applications as well as doing a better job of engaging our existing database to get those first-time travelers to work. And there's always more that what we can do, but a roadblock to growth is really not demand at this point, it's more supply related. And in getting to what we are hearing from our clients and any behavior changes, we are actually hearing that they are going to want and need more from us.

I mentioned the Healthcare Workforce Summit that we had in October, and it was such a great opportunity to sit in a room with about 150 to 200 health care leaders from a variety of organizations and settings across the country. And the message from them was very consistent. They are struggling with vacancies, turnover, and they are very concerned about the aging clinical population and what that is going to do not only short-term, but long-term.

And, yes, they are trying things, but those tactics aren't particularly new, nor are they making any sort of material difference. And so they are really wanting to think about how they can approach this in a different way, which gets to more workforce solutions, whether it be MSP, VMS, the Avantas organization that helps them with predictive analytics.

So, I know that's kind of a long answer, but we have to look at both the current data, which is strong in terms of the demand that we have, but also listening to our clients and what they are going to need from us a year-plus from now. And they are indicating they're going to need more from us. In fact, if there is ever a complaint, it's, AMN, we want you to fill more of our jobs.

Okay, that's great to hear. And just as a quick follow-up, I think you mentioned this briefly about the local base business being just a little bit weak on that quarter. I just wondered if you could clarify that.

This is Ralph. I will handle that. Our local business was down about 15% in the quarter. It is really only about 7% of the whole nurse and allied segment, so put it in perspective. The issues there are really both internal and external. On the external basis, recruiting is challenged in this market because there's so many full-time and long-term travel nursing jobs, and they sure that same supply database. And very few of them want to work one shift at a time. Moonlighting, which is one of the applicant sources for them, is down because they can get additional shifts at their core job. So that is impacting them as well.

And then, as you heard, we recently started changing the processes and the technology, and we had to pull a lot of people into meetings to help design that technology, and we think that has also impacted their business. It's an important business to us, and so we continue to make it more and more effective over time. I think if I remember, when we first got into this business we were worried about the margins. So we've optimized it quite a bit to get it back to a more healthier margin. So we continue to support growing that business.

But it's really kind of the majority of the issues there. I don't know if I missed any. Looking around the room, they are all nodding their heads; I'm fine.

Okay, that's good to hear. All right, thanks so much. Thanks for the color.

Randy Reece, Avondale Partners.

We have known for a while that you are going through a soft patch with RPO. And the permanent placement business also is a little bit slower, not just with you but with everybody. Your guidance kind of works out to flattish sequentially revenue there.

My questions were -- first of all, I was wondering what the organic growth rate of the other workforce solutions business looked like for third quarter, and what was implied in the fourth-quarter guidance.

Sure. The third quarter, I think I mentioned some of the other workforce solutions businesses like Avantas being up 50% year-over-year, the VMS businesses being up 30%. Leadership, which we didn't own all of that last year, on a pro forma basis was up 20%. And our physician business -- actually, sequentially I think you were mentioning the physician perm placement business being flat. It's usually down a little bit, and that is a very typical seasonal trend. So they ought to continue to see more normal patterns going forward into 2017.

I will let Dan address RPO because that one has been a little bit more of a roller coaster ride through the year.

Randy, this is Dan. Just a little bit of color on last year versus this year. Last year, we had two very significant one-year contracts that were about 40% of the annual revenue. And we successfully completed those, very satisfied customers, but they were annual and so they were basically done in that January/February time frame.

And so we have been very successfully kind of chipping away at that gap. And as a good example of that, just this quarter we signed five new contracts with an annual value of about $4 million. And so you can see that that, on top of last quarter's similar kind of performance, is helping us chip back into where that big hole, essentially those two big one-your projects, left us with.

On the other hand, I would also say that the market for RPO is moving from this really early-adopter, almost skeptical point of view to really much more acceptance. And these deals that we are seeing now are more common to be two and three years as opposed to just one. So I think there's a little bit of positive movement from a buying perspective. There's also, I think, terrific activity from the sales team. And then finally, our existing clients who continue to renew and expand as well.

So while it was certainly a big hole to fill, I really feel quite positive about where we are.

This is the one segment that is the most perplexing trying to forecast. There's not a whole lot of historical restated financials for it, and there have been numerous acquisitions along the way. So with the mix that you have right now, is there a typical expectation for how much -- what percentage of annual revenue would fall in each quarter of the year? Is it going to be linear-looking or is it going to be really seasonal?

Randy, this is Brian. The percentage of the total revenue -- I mean, it's about 16% -- it's really not going to move materially.

The segment revenue. If you look at the segment, the annual revenue, what percentage would be typically in the first quarter, second, third, fourth quarter? Is it going to look like a linear ramp through the year? Or is it going to be heavier in particular quarters than the others?

Sure, yes, so just more seasonality, I think you're asking. This is Brian still. The typically the fourth quarter would be down a little bit. Historically, the perm placement business, as you know, was usually down a little bit in the fourth quarter. Our leadership businesses can be as well. And so collectively, those are two of the larger businesses. It's not uncommon for it to be down a little bit, just normal seasonality. And then it should grow really from there sequentially first, second and third quarter.

Very good. Thank you very much.

Mark Marcon, Robert W. Baird.

Wondering can you talk a little bit about just the pricing environment as it relates to just the travel nursing side and what sort of inflation rate you would expect to see there? I apologize if the question has already been asked, but I've got a couple conference calls.

Thanks, Mark. Yes, we did share a little bit of color on pricing, which has been strong and consistent, running about 5% at locums, but also within nurse and allied. And we expect that to be probably consistent for the next couple quarters. We do think that going into next year, we will come down to something that looks more like nurse wage inflation. So we have generally said 3% to 5%. It could be 2% to 4%, but generally in that range.

As we are signing new contracts and some of these newer MSP deals that we mentioned earlier, they are coming in at a higher level. So that gives us confidence that we will continue to see at least that reasonable level of increase. And not surprising because, as we keep saying, demand is still at a very high level. And so in order to compete for that scarce supply, we do have to keep up with the rising nurse wages as well as housing costs and other things.

Okay, great. And then just in terms of thinking through the gross margins just on nurse and allied, how should we think about that, particularly with rental expenses?

This is Brian, Mark. As I mentioned in our prepared remarks, the gross margin in nurse and allied improved a little bit into more recent bookings. You got a little bit of a headwind in the fourth quarter seasonally as you have lower hours worked. So even as you are negotiating maybe a slightly better margin placement, it is offset a little in the quarter by just some seasonality as well.

But as we have mentioned the last couple of quarters, our margin has come down a little bit over the prior year. Some of it on the bill pay spread, we expected. As Ralph mentioned, we have been deliberately trying to increase pay rates with the bill rate increases so that we can attract more clinicians and fill more orders. We have been trying to maintain our margins, and they've come down some. But as we are looking at our packages on any placement, we are trying to chip it away at getting that margin back a little bit.

So I would say you would expect very modest improvement quarter to quarter over the next few quarters, but we are more focused on growing volumes, attracting supply and fill rate.

Got it. And then Brian, can you just repeat some of the numbers that you gave us in your prepared remarks just in terms of with regard to the guidance? Specifically, share count, tax rate, et cetera?

Sure, of course. The tax rate, I said, was 41%. It was a bit lower in the third quarter from some discrete credits we had in the third quarter. But fourth quarter at 41%, stock comp at $2.6 million, depreciation $3.2 million, share count at 49.5 million and then interest expense at $5.4 million.

Then can you talk a little bit about what you are seeing in terms of potential acquisition targets with the capital that you currently have, and you certainly have more room to pursue things?

We are absolutely looking, as we have been vocal about for several quarters now. And as you know, we were fortunate to add Matt Zubiller onto our team in July to help give us more focus and time to make sure that our acquisitions are aligning with our strategy, and to also make sure that we are recalibrating our long-term strategy as appropriate with what our clients need and where the market is.

So we are actively looking and making sure that we are aware of what is coming available, but also building relationships with organizations that we think might not be interested in selling today, but might be interested in the next couple of years. And that is quite honestly where we have had some of our most successful acquisitions is where we have built rapport and relationships over the years, as opposed to some profits that just popped up on the radar. But we will get both.

And the areas that we are looking at would be additional workforce solutions, so additional services that help us to help our client with this whole process of recruiting, onboarding, developing, optimizing their workforce.

Second would be new categories, so think of the leadership business that we recently added and the coding businesses as new categories that we weren't providing previously. We certainly could look additional acquisitions in both of those categories because we are very excited about both of those segments of the industry, and we think we can and should increase our footprint.

And then the third area would be consolidation plays, opportunities to double down on some of our existing businesses. We will be very opportunistic about that. Certainly when fill rates are so critical and we may be having challenges in areas like locums, wanting to attract and place more supply of candidates, that would be an attractive area as an example. So hopefully that is helpful, Mark.

That's very helpful. Thanks.

Matt Blazei, Lake Street Capital Partners.

Most of my questions have been asked, obviously, here over the last 30 or 40 minutes. But I did have one question. And that goes back to the gross margin outlook for the other workforce solutions. You mentioned that it has come down a couple hundred basis points this quarter because of the acquisition of Peak. And I'm wondering if that sets the baseline here for gross margins. Or is there a mix shift still to come that may alter that one way or the other?

This is Brian. I would say it's a reasonable baseline for go-forward. Certainly on a quarter to quarter based on the growth rates of each business line, it may fluctuate. But I think that where it is now is a reasonable way to look at it. And along that line, too, on the EBITDA margin we talked about it being a mid-20%s, and I think in the nearer-term, at least, that is a reasonable place to be thinking about it as well.

All right, I appreciate it. Thank you, guys.

Tobey Sommer, SunTrust.

I wanted to ask a question about how the shifting health care services landscape, where there are more outpatient clinics and more venues to receive service, impacts the demand for labor. So as your kind of more dispersed areas to receive service, do you think that is a fundamental driver of the demand? And if so, how much longer do you think that this trend impacts demand for temporary health care professionals? Thanks.

Yes, Tobey, we absolutely think it's having an impact. And it's not just us. Our clients tell us that they think some of the labor challenges that they are seeing are because clinicians have more opportunities. And as you see growth in outpatient settings and retail clinics and urgent care, they are pulling that scarce labor into those other settings. And they don't expect that to change anytime soon. In fact, they think it's going to get worse as you see greater growth in those categories.

Now, they are not necessarily large employers today. But as they continue to grow at a faster pace, they are going to continue to draw more of that labor supply away from the acute-care setting. So we actually think it's contributing now, but it is likely to be a contributor going forward as well. Now, that certainly creates a demand opportunity for us in the acute-care setting and needs that our clients have, but we also have opportunities in those alternative settings. And so we absolutely are working with clients in all of those settings.

I mentioned that the Healthcare Workforce Summit, we had many participants that were from those other settings and they are also concerned about making sure that they get the right labor. And we are actually been signing new contracts with these new kinds of organizations and organizations that perhaps didn't use any temporary labor just a couple of years ago, and now are seeing it as part of an integral part of how they manage their workforce going forward, as well as services like Avantas and our VMS solution.

And at this time, it does appear there are no further questions in queue. Please continue.

Great. Thanks, Brad. Well, thank you, everyone, for joining us on the call today. We look forward to updating you on our progress and the results next quarter.

And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using the AT&T Executive TeleConference service. You may now disconnect.