AMN Healthcare Services Inc (AMN) 2017 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the AMN Healthcare Second Quarter 2017 Earnings Call. (Operator Instructions) As a reminder, the conference is being recorded. I'll now turn the meeting over to our host, Senior Director, Investor Relations, Mr. Neil Thomas. Please go ahead, sir.

Thank you, Laurie. Good afternoon, everyone. Welcome to AMN Healthcare's Second Quarter 2017 Earnings Call. A replay of this webcast will be available until August 17 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 issued this afternoon.

Various remarks 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 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. I will now turn the call over to Susan.

Thanks so much, Neil. Good afternoon, everyone, and welcome to our quarterly earnings conference call. The Workforce Solutions strategy that we set forth nearly 8 years ago continues to evolve and deliver significant value to our clients, the industry and certainly to our shareholders. AMN's portfolio of staffing, recruitment and workforce solutions enables us to help health care organizations in multiple ways as they deal with an incredibly tight labor market and the need for cost control.

With a strong macroeconomic backdrop and clinician shortages, the AMN Healthcare team delivered another solid quarter. As importantly, the momentum we are experiencing with our current MSP clients and new implementations gives us great confidence as we look to 2018.

Now let's review our current results. Second quarter revenue of $490 million was 7% higher year-over-year, excluding the labor disruption business. Our largest segment, Nurse and Allied solutions, and our Other Workforce Solutions drove the growth. We hit a record high adjusted EBITDA of $67 million, which was 13% higher than prior year and represented a margin of 13.7%. This result included a $4 million professional liability adjustment. But excluding this, our margin was still 12.9%.

The profitability growth we have enjoyed is due to the increasing contributions from our Other Workforce Solutions as well as strong margin and expense management. We believe our professional liability costs are below the averages of the health care market and our industry, which reflects our strong quality and risk management programs.

We continue to make good progress on changing the economic sensitivity, recurring revenue and margin profile of the company. By growing our Other Workforce Solutions, which typically have higher margins, we are able to improve our profitability, while providing our clients with more value-added and strategic services. At the same time, we are relentless in our commitment to superior customer service and delivery. With our solid performance, we are able to continue making essential investments back into the business. The combination of these factors are keeping us on track to achieve our stated goal of a 14% adjusted EBITDA margin by 2020.

As I mentioned earlier, the overall operating environment remained positive. During the quarter, we won new MSP deals with an estimated $85 million in gross spend under management. About $65 million of this is clinical spend, of which the majority is incremental for us. Our VMS technology businesses also continued to expand and add new clients. Our MSP and VMS pipelines are robust and expected to deliver continued revenue growth.

Now let's take a look at performance and trends in our major businesses. Our Nurse and Allied segment posted revenue of $301 million, higher by 3% year-over-year. Excluding the significant labor disruption revenues last year, this segment grew 9% year-over-year. Second quarter revenue for our largest business, Travel Nurse Staffing, increased 9% year-over-year. This is all organic growth driven by volume and price increases, and it reflects another quarter of exceptional delivery by our sales, service and clinical teams. We remain focused on serving the needs of our clients with a prioritization on our MSP partnership. As a result, approximately 65% of our Travel Nurse Staffing revenue was from MSP-related placements.

Since there has been some question from our investors regarding demand for Travel Nurse Staffing, I'm pleased to report that the demand environment seems to be improving compared to earlier in the year. Since our last earnings call, we have seen several weeks of increasing new orders and strong placement activity for future assignment. We also started receiving our winter orders, and most clients are on pace to have needs similar to prior year. At this time, we expect demand to continue in line with normal seasonal patterns. In addition, we have several new MSP contracts that will be going live during the remainder of the year, and they should drive additional demand opportunity.

In the second quarter, the Allied staffing division achieved another record quarter revenue, growing 12% year-over-year. The growth was primarily driven by volume increases. The focus on our MSP clients has been a key driver of the revenue growth in Allied as well with over 40% of this division's revenue now coming from MSP contracts.

We also hired our President -- our new President for this division, Robin Johnson. She brings 21 years of experience in the staffing industry and an excellent combination of recruitment operation, MSP management, marketing and sales leadership experience. We are very excited to have Robin on board.

Looking ahead to the third quarter, the Nurse and Allied segment is expected to be up about 6% to 7% year-over-year and up 1% to 2% sequentially. In the Locum Tenens segment, second quarter revenue of $108 million is slightly down year-over-year, with price increases partially offsetting volume declines. Overall demand for locum is positive, with many of our specialties experiencing year-over-year growth.

However, a couple of our larger specialties, such as hospitalists and internal medicine subspecialties, have experienced declines. On a sequential basis, 8 of our 10 specialty categories grew volume and revenue. As you may recall, we have bolstered our leadership team, and they are making operational and organizational changes to return us to a growth trajectory. As it will take some time for these changes to take effect, for the third quarter Locum Tenens revenue is expected to be flat on both a sequential and year-over-year basis.

Second quarter revenue in the Other Workforce Solutions segment was $81 million, which is 12% higher year-over-year. This segment is a bit of the tale of two cities. We are experiencing strength in our interim leadership, the VMS, and workforce optimization businesses, which grew collectively about 18% year-over-year. However, our perm placement-related businesses are facing challenges associated with slightly softer demand and sales execution. And they experienced a revenue decline of about 20%.

Let me break this down for you in a little bit more detail. Revenue in our leadership division was up 11% year-over-year in the second quarter. Strong growth in interim leadership placement was partially offset by softness in the search business. We continue to win new deals as a result of cross-selling across our division, and we remain positive on this space and believe we should experience year-over-year growth of over 10% for this division in 2017.

Second quarter revenue from the VMS business was up 31% year-over-year. We now have $1.3 billion of vendor-neutral spend flowing through these technology platforms. Both of our technologies, Medefis and ShiftWise, continue to make investments to develop new features and functionality as well as improve their customer experience. Our VMS brands remain positioned to deliver another year of strong growth in 2017.

Avantas, our workforce optimization offering, continues to expand into new clients and settings and grew second quarter revenue by 21% year-over-year. Like many of our Other Workforce Solutions businesses, we believe that they too are on track for another double-digit growth year in 2017.

Physician Permanent Placement second quarter revenue was down 15% year-over-year due to fewer searches and placements though momentum experienced as we exited Q1 unfortunately flowed during Q2. We believe the lower-than-anticipated performance is primarily execution related and that the current underlying market should enable top line growth. We are moving quickly to address the areas where we believe we can evolve our business model and our talents to deliver growth. We would expect to see more positive results from this business in 2018. Peak Health solutions, which joined the organization last June, is performing well and grew sequentially with several new wins in the quarter.

Overall, third quarter revenue for the Other Workforce Solutions segment is expected to be up approximately 5% year-over-year.

Over the past decade, we have transitioned AMN Healthcare from a staffing company to a strategic workforce partner for our health care clients. This evolution has allowed us to become more collaborative with our clients, creating greater trust and allowing for more opportunities for AMN to innovate. We are continuing our investments in our system and infrastructure to create a more efficient and scalable platform that will allow us to better serve our clients and grow our business more profitably.

Our drive for continuous improvement would not be possible without the dedication and passion of our team members. It is their talent and commitment that gives us confidence in our ability to evolve and innovate. I want to thank our team for their hard work, dedication and outstanding customer service.

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

Thank you, Susan. Good afternoon, everyone. The company's second quarter reported revenue of $489.8 million was just above the midpoint of our guidance range. There was no meaningful labor restructuring revenue this quarter as compared to about $18 million in the same quarter last year.

Excluding any labor restructuring revenue, consolidated second quarter revenue was up 7% year-over-year and down 1% sequentially. Gross margin for the quarter was 32.9%, up 20 basis points from both last year and last quarter.

SG&A expense in the quarter totaled $96.7 million or 19.7% of revenue as compared to 21% last year and 20.6% last quarter. As Susan noted previously, this quarter included a $4 million favorable professional liability actuarial adjustment, the majority of which impacted the Nurse and Allied segment. This compares to a $2 million favorable adjustment in the prior year quarter, which was recorded in the Locum Tenens segment. Excluding this adjustment, SG&A this quarter was consistent with our guidance of approximately 20.5%.

Second quarter Nurse and Allied segment revenue was $300.7 million, an increase of 3% from the prior year and a decrease of 4% sequentially. Excluding labor restructuring, revenue was higher by 9% over prior year and lower by 4% sequentially. Volume was higher by 5% year-over-year, while the average bill rate increased 3%. Nurse and Allied gross margin of 27.8% was 110 basis points higher compared to prior year and 10 basis points higher sequentially. The year-over-year improvement was due to lower direct costs.

Second quarter Locum Tenens segment revenue of $108.2 million was down 1% from the prior year and up 5% on a sequential basis. On a year-over-year basis, the average bill rate increased by 5% and the number of days filled was lower by 4%.

Locum Tenens gross margin of 30% was down 130 basis points from the prior year and 70 basis points from prior quarter driven mainly by lower bill-to-pay spreads. Second quarter Other Workforce Solutions segment revenue of $80.9 million was up 12% year-over-year and 3% sequentially. Gross margin of 55.7% was lower by 320 basis points year-over-year and higher by 70 basis points sequentially. The year-over-year variance was due to the addition of the lower-margin Peak Health business in June 2016 and revenue mix changes within the segment.

Second quarter consolidated adjusted EBITDA of $67.2 million was up 13% year-over-year and 6% sequentially. The adjusted EBITDA margin of 13.7% represented an improvement of 120 basis points over the prior year and 90 basis points over the prior quarter. Excluding the previously noted professional liability benefit in both years, the EBITDA margin was higher by 80 basis points compared to prior year due to both gross margin improvement and operating leverage. We reported net income of $31.3 million and diluted earnings per share of $0.63 in the second quarter.

Adjusted earnings per share was $0.67 compared to $0.61 in the prior year quarter. Our income tax rate in the quarter was 39% and included a $1 million benefit from the adoption this year of a new accounting standard relating to the settlement of stock-based compensation. Excluding this benefit, our tax rate was 41%.

Cash provided by operations was $18 million for the quarter and $71 million year-to-date, which compares to $55 million in the first half of last year. Day sales outstanding at quarter end was 62 days compared to 61 days last quarter and 64 days in the comparable prior year quarter. As of June 30, cash equivalent totaled $23 million. Capital expenditures for the second quarter were $6 million. At quarter end, our total debt outstanding was $343 million, and our leverage ratio was 1.4x to 1.

Now let's turn to third quarter 2017 guidance. The company expects consolidated revenue of $490 million to $496 million. This guidance assumes no material labor restructuring revenue in the quarter, which is the same as last year. Gross margin is projected to be approximately 32.5%. SG&A expenses as a percentage of revenue are expected to be approximately 20.5%, and adjusted EBITDA margin is expected to be approximately 12.5%. Other third quarter estimates include interest expense of $4.8 million, depreciation and amortization of $8.1 million and diluted share count of 49.5 million shares.

That concludes our prepared remarks, and now we'd like to open up the call for questions.

(Operator Instructions) Our first question from the line of A.J. Rice with UBS.

First off, maybe just to get some color on the commentary around -- I know coming out of the first quarter and early in the second quarter you guys had taken on a little softness. Now you're saying in the last few weeks you've seen some strengthening. When you talk to the clients, what are they attributing all of that to?

This is Ralph, A.J. Thanks for the question. I'm assuming you're asking about Travel Nursing there. When we do talk to the nurse managers, they're telling us that their internal efforts to find full-time nurses aren't keeping up with the demand that they have and -- but they're getting downward pressure from hospital leadership to keep costs under control. And so we saw this happen, I think, in early 2014. It seems very similar to what we saw then and -- but we have started to see in the last few weeks orders begin to improve. The good news for us is that it hasn't impacted our booking trends. And so while our orders may still be below where they were in prior year when (inaudible) there, our ability to increase our fill rates with our MSP clients has more than offset that demand decline.

Okay. That was actually my next question was can you just tell us what are your add-on fill rates in your MSPs and Nurse and Allied? I know you've given us some of those -- some feeling for that in the past. Has that moved around much?

Yes. It's a good question. What I normally give I think is very specific number, but they're up over prior year, with our MSP accounts, probably in the neighborhood of 1,000 basis points right now, and there is upward room. And we're not at historical highs or anything like that left for us to continue to book into higher fill rates or MSPs if we saw further softening of demand, but we don't anticipate that. We think that demand is beginning to improve.

Okay. In the Locum Tenens business, I guess you're hiring hospitalists and internal medicine. That seems familiar to me that, that's been an area of somewhat softness for a little while now. Is it a matter do you think of anniversarying that and then you'll start to see growth because the other areas will predominate? Or I mean, what percentage of your placements are now in those 2 specialty categories?

So hospitalists make up about 20% of our Locum revenue right now. So that's the one that's really kind of the biggest drag there. And we -- you're right, we've been talking about it for about 3 quarters now, maybe almost 4, but the demand there continues to trend downward. We're not going to quite lap it for a little bit of time yet. The 2 issues there that we're hearing from clients is that the number of transitions to physician practice management have been decreasing. And so that used to cause us some turmoil, which creates the need for Locum Tenens. And so when they're not switching between TeamHealth and internal staff, they just need more Locum. So -- or they need less Locums. So that's part of it. The second part of it is a bit of a change in how hospitals are deployed. The hospitals are starting to use advanced practice professionals and primary care doctors in those roles. And so they've kind of increase the supply, which also has decreased the demand on that specialty. You'll see that our advanced practice numbers are up year-over-year 25% or something like that. So we have -- we're able to offset it a little bit. But the bill rates are different, so that hurts. And I'd said, it's not a perfect science. Internal medicine have specialties, which is all the -ologies, is the other area that -- we have been talking about that one for a while, and I hate to -- I wish I had superpower and I could fix it very, very quickly. But it's been a long turn for us to kind of master the craft in that area, and so we've made some leadership changes to that business. We've increased our recruitment efforts. Our sales efforts and are very polished, I know. I do expect that at some point, we'll get that turned around. But that's not a market issue. I think that really is more of a "we could do a better job there" issue.

Okay. Maybe I'll slip one last one in. On the -- I jotted it down quickly. There was a lot of numbers there. I think Brian said 3% bill rate increases in Nurse and Allied. I know that can be partly the type of Nurses and Allied you're placing as opposed to outright wage increases, underlying wage rate increases. Can you just give us some flavor for which you're seeing on nurse wages and how that's trending? Is it eased up a little bit with maybe the easing a little on the order front?

Yes, that's a good question. It's Ralph again. The -- we talk -- Brian was talking about the bill rate increases that's being about 3% in that segment. And we are seeing nurse wages increase at about the same rate, maybe 50 basis points difference in them. So they're, we're not -- we don't -- haven't really seen a lot of upward pressure on wages or erosion of spread or anything like that. I wouldn't think that we were going to see any going forward with demand being a little bit softer either. So it's in good balance. The team does a good job of keeping at an order level a balance between, right, getting the customers' needs filled, finding the right nurse, paying them just the right amount of money and the bill rate itself. As a matter of fact, the margin for that business increased year-over-year about 100 basis points. They've had a little softness Q1 last year, and they can kind of lap that now, and that margin's back to a good place. So I wouldn't say there's any unusual compression going on.

And our next question from the line of Tim McHugh with William Blair.

Just to follow up on the comment about the last few weeks, I guess. I know going in the last call you had seen some signs for a few weeks of improvement, but you weren't, I guess, as confident in seeing them declaring that it sounds better. So I guess, can you talk a little bit about, I guess, why it feels differently now, it sounds like, than what you saw for the last quarter?

Sure, Tim. What we're seeing is the number of new orders coming in being stronger on a year-over-year basis. And our ability to quickly book into those orders has gone exceptionally well. Our recruitment and account management team within Nursing has just really been a heroic effort of quickly being able to convert those orders into placements. Now some of them, in fact, many of them are for future winter starts, which is a good thing. It really sets us up very strongly as we finish out the year and enter into 2018. But the ability to quickly convert those orders and our clients' indication that they believe their needs are going to be strong not just now but 4, 5 months from now, I think, is what really gives us even more confidence in the trends that we're seeing.

Okay. And on the perm placement piece, I guess -- I know you talked a bit about it. But can you just elaborate, I guess, what -- you basically said it was execution issues, I guess. But why do you feel like now you're having kind of some execution challenges or the market's different, I guess?

Yes, I think a few things are happening there. I do believe we need to continue to adjust our business model and the way that we organize ourselves to interact with clients at the different levels that they expect. So we need to have perhaps a different structure and individuals interacting with the large enterprise, very sophisticated accounts versus those that maybe more -- the mid-market or versus the rural hospitals. And we hadn't yet really created that stratification, and we need to do a better job of allocating our resources to where we're going to see the most opportunity, not for just current orders but more repeat business. So that's work that we need to do, and it involves both perhaps the go-to-market strategy and structure but also the type of people that we have in those roles. Second thing is we've just been understaffed, particularly in that marketing function where we are interfacing with the decision-makers, and we need to get ahead of that. And then on the recruitment site, a little bit of understaffing, but I think also making sure that the recruitment team has the right tools and resources to access the right candidates as quickly as possible. And we discovered some internal things that were actually shielding them from being able to see all of the opportunities that were available for their candidates. So probably more detail than you want, but I do believe it's primarily execution related. And it will take a couple of quarters for us to make those changes. And what's different? Well, I think the model that we have had in place, largely for the last couple of decades, got us to where we are. But this business should and I think could be a $100 million business. And to get there, we're going to have to make additional changes in our structure, processes and even our talent to some degree. We've had to do this in other businesses and now it's for perm placement's time.

And if I could slip one more in. The comments, it was helpful the way you broke out workforce solutions in terms of two cities -- tale of two cities. In terms of Locums, I guess, what would growth have been without hospitalists and internal medicine? And I think you said hospitalists is 20%. Is internal medicine -- how big is that piece?

And we're doing a quick calculation here. And those 2 were...

Mid-single digits, perhaps mid-single digits. To get it, about a quarter?

We've had this problem before -- I -- where one specialty waxes and another wanes, and we -- it does take us a couple of quarters to go through that because of this long credentialing process to get somebody ready for assignment. In the Travel Nurse business, you have a labor and a delivery nurse is no longer needed in California. We see them with a new license, and we send them to Arizona. In the physician business, that could take us 90 to 120 days on average. So we have the supply, right? We have people who want to take those assignments, but we don't -- we're not yet ready to switch them off of their assignments. In some cases, they -- and we do need people with different specialties as well, and we have to reramp our recruitment in a certain specialty as it kind of waxes and wanes. We've seen some improvement in radiology and anesthesiology, which 5 years ago we're the ones that were [declining] like 20% themselves, so -- and we had to pivot out of that into those that are growing faster.

And we'll go next to Brooks O'Neil with Lake Street Capital Markets.

I'm sensing just a little bit of caution in your third quarter guidance. And I'm curious, a, am I reading that correctly? And b, if I am, what is it that might be driving that caution in your mind?

Brooks, this is Brian. Well, I think we've covered actually a couple of areas that reflect that. In the Locum's business and the perm placement businesses, have been probably the major area that we have underperformed than we originally expected. And so that's probably the major reflection of the guidance being, I know, a little bit lower than what the consensus is out there. That's the biggest piece. But within Nursing and Allied, it's actually performing relatively in line with our expectations.

Great, that's very helpful. And then secondly -- and I confess I don't cover HCA, but I've been told that their outlook is for a particularly strong second half of the year. I'm curious if that reflects a general sentiment that you hear from your hospital clients. And if there's anything you might point to that would be driving that, what would it be?

Bruce, I think the one thing we could point to would be those new orders that I mentioned and the fact that those are orders for individuals that would start generally a couple of months from now and in some cases even early 2018. And so that tells us that they believe their census is going to be at or above what their expectations were and they need the typical seasonal workforce that they might bring online, but perhaps they might be caught off guard even with their permanent positions. And we've heard only a little bit of that anecdotally across clients that they weren't expecting census to be at a certain level, and then they get surprised, and then that, of course, can drive some demand for us as well.

Our next question from the line of Tobey Sommer with SunTrust.

The leverage in the business continues to decline. I was wondering if you could refresh us on your capital allocation strategy and if there are any thoughts you have about minimum leverage in the business for capital efficiency.

Thank you, Tobey. Well, we do believe we have opportunities certainly within our credit capacity to continue to make investments through acquisitions, so we are absolutely looking. I have talked in the past about our priorities being, number one, workforce solutions, areas where we can help our clients be more effective in the way that they recruit, onboard, meeting credential and then optimize their workforce, not just contingent but also their actual bigger workforce costs, which is their permanent staff. And so we continue to look at those opportunities. They are, admittedly, typically smaller, and some of them are emerging, so we're just trying to be very careful with what we might invest in and add into the portfolio. Second, we might look at new categories where we are adding in new capabilities. You could look to the leadership businesses we added in the last couple of years as well as the coding businesses, new things. So we're certainly looking at those as well, maybe bolstering areas where we maybe have more challenges with fill rates and would like -- and yet we see great growth and would like to bring on some additional capacity. So those are the areas that we're looking to add externally, and maybe have Brian talk a little bit more about capital allocation.

Yes. Thanks, Tobey. Yes, we are obviously at 1.4x now, at a low point for quite a number of years. And we are still focusing more on acquisitions but certainly have the capability to look at other alternatives if we don't find those right targets over the next couple of quarters. And as you know, we authorized the share repurchase plan. We've executed on that to a small degree in the last 6 months. And so that's still an option for us as well that we want to have available. I don't know if we can describe a minimum leverage ratio. But as we pay off our payable debt, then I think that share repurchases could become a more viable option. We want to make sure we maintained maximum flexibility to look at external options as well.

And then on the workforce solutions business, particularly the software businesses, what does the competitive landscape look like now? You mentioned investing to add new capabilities. Just want to get a sense for where you see those businesses positioned in the market?

Well, we believe we are still -- it's not just us believing, but our clients tell us we still have by far the greatest breadth and depth of capabilities to offer to our clients. And yet we want to make sure that as we add new things on they are of the same quality and execution caliber as our existing businesses. I know there are certainly competitors that suggest that they do some of the same things that we do, but they are admittedly new and sort of fledgling, I would say, offerings that are trying to find their way whereas we have a track record and infrastructure and many times technology and team with many years of experience to back up what we do. So I'll say that in terms of our existing competitive landscape, we haven't really seen that change a lot. If anything, I'd say that our strength has gotten to be more of a differentiator for us, and I haven't seen anyone necessarily crop up. Now we are doing things that will continue to extend our existing offerings into new markets and experiment with where we might find additional channels for revenue. I'll give you an example. ShiftWise recently signed a deal with Medacs in the U.K. to be the provider of their VMS technology. Now we are not staffing in the U.K. and don't intend to. But it gives us a way to extend our technology footprints and offering into a new market and a new opportunity to explore growth. That's just one small example, but it's could trend in something bigger.

If I could just ask one last question. If you're getting slightly like an uptick in orders farther out in the future, if that -- is the better census that you're hearing from some customers does materialize as we work our way through the back half, is there an outlook for kind of better pricing because maybe there'll be a little bit more of that kind of crisis pricing to feed into the bill rate growth?

Yes, this is Ralph. I'll start, and Brian may have something to add on that one as well. The -- our crisis pricing hasn't seen really a decline, so we're -- it's been pretty steady over the past several quarters and in line with last year's, as a matter of fact just slightly higher than last year, the utilization of it. We wouldn't expect to see a lot of increases in it unless you had some tightening of -- some rapid increase in demand or a sharp decrease in supply, so -- but it's at a level that it's comfortable. I think you probably can infer that from our guidance that we continue to think that our bill rates will grow up over the next couple of quarters.

Yes, this is Brian. I'll just add, I guess, it's a little too early to tell at this point. Obviously, our goal is to help fill as many of our clients' jobs as we can. And we start trying to fill as many of those at the standard rates. And then as we're getting closer to those assignment dates, then we will tend to use those more as our clients' needs are going there. So I think we -- it's too early to call that. We'll have to wait until the next quarter plays out.

Our next question from Jeff Silber with BMO Capital Markets.

It's Henry Chien calling in for Jeff. Just a question, one of your competitors noted that they were seeing some of their clients renew slower and some of their clients taking longer to make decisions because of uncertainty around ACA. Just curious if you guys are seeing anything like that or anything that's ACA related more broadly.

Thanks, Henry. We actually have a really great story to tell around this. And so I'm going to pass it off to Dan to talk about our renewals as well as the pipeline that we have for MSP.

Thanks, Susan. And thanks for the question, Henry. I wasn't sure if I was going to get a word in edgewise here. I'm really thrilled actually about our renewal activity. We've -- just based on sort of the timing of how contracts have worked over the last 3 years, we came up on a pretty big chunk of renewals, and we've been extremely successful. In fact, I want to call out [Beth Casillas] specifically. She's been sort of the superwoman of renewals. We have, to date, so through July, renewed over $135 million -- excuse me, is that right? I mean, get my number right. That's $235 million. I mean, going to read this. Yes, $240 million in revenue, and we've got a good bit left to do here in the second half that we feel really comfortable with that are all in contracting. So feel really strong about that capability. If you add that on top of the great new win performance that Susan highlighted a bit earlier, we're really set up nicely for the second half and then into 2018. Our pipeline does reflect that too. So for Q3, our MSP pipeline is still over $90 million in gross spend for prospects that are in contracting today both new and expansion activity. The other thing I'd like to highlight just for a little bit of color is that we have excellent geographic diversity on these MSPs as well. We're getting some nice expansion in the Midwest. We have some really nice new business in the Florida market. And so there's -- in addition, Hawaii. So we're really excited about offering our clinicians better places to go as well.

Got it, okay. That's great. And is there -- so I'm assuming there's no real slowing or anything related to ACA sort of noise that you guys are seeing?

From a sales point of view, we are not seeing any slower activity at all. The only thing that we see that's different than it was perhaps last year is just a lot more involvement by procurement because these deals tend to be much larger than we've had traditionally. And so that might be lengthening the sales cycles slightly but nothing different in terms of demand.

Okay, great. And if I could ask about the -- just shifting to the EBITDA margins. If I heard you correctly, even excluding the benefit from the professional liability, the 80-point margin expansion of 13.2%, that's quite strong. I was just wondering what drove that? And just curious why that's not going to be extended going forward?

Sure. Again, this is Brian, Henry. So the -- on a year-over-year basis, you can -- instead of taking out the malpractice adjustments, that issuance was $4 million in the second quarter of this year and $2 million last year. We're still up 80 basis points, and it was really a combination of gross margin improvements in part as we've seen the Other Workforce Solutions segment increase as a percentage of our total revenue. That has increased our gross margins, and to a lesser degree some improvement on the Nurse and Allied margin as well despite the lower Locums, with that improvement in Nurse and Allied offset that. And then we've seen nice operating leverage as well, so we've been able to grow the top line and have -- and continue kind of taking out those malpractice adjustments, just a very small change in our SG&A, so it was nice to see that. As we look into the third quarter, we are expecting, as you see in the guidance, the gross margin at around 32.5%, so that would imply a little bit down for the second quarter. I think the Nurse and Allied margin in Q2 was even a little stronger than we expected, so we're anticipating that coming down just a little bit and part, just things like health insurance as they -- as that normalizes off a very favorable quarter. And then we are still making selective investments in the business as well. So those selectively, I think there's no major changes from Q2 to Q3 when you exclude that interim adjustment.

And we'll go to Mark Marcon with Robert W. Baird.

One is just with regards to the order growth that you're seeing. Is that occurring beyond the new MSPs that are coming on board? And how widespread is that in terms of that pickup that you've been seeing over the last few weeks?

So first, yes, it is outside of those new MSPs. We've implemented some new MSPs the first half of 2017, and they were predominantly ones that were won last year. The larger MSPs that we've won this year are coming online in August and October, sort of the 2 big dates with a bigger number of opportunities in order. Some when we talk about this order uplift, that's really more same-store existing clients. As I mentioned, a good portion of it was winter orders. And that's a really good thing because we would expect to start to see those this time of year for some of our larger clients. We actually got them a little earlier, and they were very strong, and others just still sort of trickling in. But even with that, the number of new orders was up over prior year for most of the weeks over the last, I think, kind of 6 to 8 weeks.

Great. And can you remind us, Susan, the number of MSPs at the total contracted value that you ended up winning in the MSPs last year? And then with the additional win that you had here in the second quarter, wins in the second quarter, what the first half looks like?

So Mark, this is Dan. So last year, for the full year, we had $185 million worth of MSP business wins. That would be new contracts and expansions and base accounts. For the first half, is that your question?

Right.

So for the first half then, we've had deals over $155 million in gross spend, again a combination of new wins and expansions to existing accounts.

Great. And then when we -- so how much of that $185 million that you won last year is already incrementally flowing through as opposed to, as you were describing, the August and October ramps kicking in?

So in terms of percentage of the contracts, is that your question?

Right. So of the $185 million, I mean, you're obviously already filling a portion of the business just given your size and breadth within the market. So you're going to have some incremental that's going to come through. And just wondering how we should think about the cadence of that.

So I would say, incrementally, for this year, of the chunk that we -- that I just described, the $155 million, we'll probably get maybe 20%, 25% of that in this calendar year. And of the $185 million from last year, if you think about the normal cadence of kind of 30 days to go live and kind of incrementally higher after that, then I would say somewhere in that sort of 30%, 40%, depending on the client percent in this year.

Okay, great. And then can you -- just on the workforce solutions. The portions of the business that were contracting, what percentage of the revenue does that comprise?

Between -- this is Brian. Between perm, RPO and then there's the executive search part of our leadership business, it's probably a little over 20% of that segment.

Okay. So 20% is contracting and 80% is growing?

Yes. It's probably 22%, 23% is contracting, and the rest is growing. That's correct.

Okay. So I mean, just given the pacing with regards to just going back on the MSPs, is there any reason why we shouldn't continue to see a little bit of a ramp here as those MSPs come on in terms of mid to the mid-high single-digit growth on a sustained basis as we look out beyond the third quarter? I'm just talking about Nurse and Allied.

That's a reasonable expectation. Obviously, other things in the market need to be continuing to give us some good tailwinds and positive trends, but that's a very reasonable expectation.

We have a question from Bill Sutherland with The Benchmark Company.

Brian, a [few questions] just got nailed on Mark, which was great. So one last one on the workforce solutions side. The growth into Q3, I understand the moving -- the good and the bad there. But as you kind of think about the potential of the businesses, I don't know, on a -- looking over the horizon a little bit, is it a -- should we think about it in terms of double digits? Or is it more of a 5% to 10% as you -- as these pieces evolve? And there's always a little bit of good and bad in the (inaudible) period of time.

This is Brian. I'd say it's more the latter. And I think there will be businesses within our suite of services that we would expect to grow double digits for at least next several years as they're maturing and gaining market share, I think. But overall, if you look at the collective businesses, I think that 5% to 10% is probably more likely.

Okay. Sums that one up. And then since a -- I'm curious what you all think of this new model out there. It's one company called Nomad Health. And as I called around a little bit to the HR folks in hospitals, a couple have used it but certainly not thought of as something as an alternative to what you guys provide. But curious what you think about it and potentially maybe a product line extension for you all at (inaudible).

We agree though. We think it's very interesting, and they're not the only ones. And I think you'll continue to see these start-up digital online staffing platforms emerge, and we believe we need to be a player in that space for 2 reasons. One, there could be some subset of the market. I do think it will be relatively small because of the complexity particularly around credentialing and with physicians privileging and then the housing, logistics and all of that. But there will be some staff that wants to conduct business in this way, both the clients as well as the clinicians. And we think we need to be a part of that solution. But at the same time, we also think it helps to inform us about how we can continue to evolve the way we engage with our clinicians. Gosh, I go back to when I started and, of course, there was no Internet and no cellphones, and everything was done by fax and mail. And so this whole notion of evolving the way that we interact with clinicians and moving more to a mobile and digital platform is something that is absolutely happening and going to happen at a greater degree. So even for our concurrent core staffing businesses, Nursing, Allied, Locum and perm placement, we need to evolve our mobile and digital presence, and that's what we're doing. That's why we spend a lot of money on our marketing technologies. And you may see us make investments even in firms like this to learn but also to perhaps tee up a potential acquisition opportunity down the road. It's very early innings. So I think we want to be cautious not to do too much, but we certainly need to be attentive to it.

And we have a question from Mitra Ramgopal with Sidoti & Company.

Just a couple of quick questions on the MSP business. Given the pipeline you have and the wins you've been getting, where do you stand in terms of having the resources in place in terms of the additions coming on as it relates to the recruitment side?

So this is Dan, Mitra. Those resources really come in the form of kind of 2 different groups. The first is the management of the client relationship, what we internally call our strategic accounts group. And today, I think we're in very good shape in terms of how that's organized, who is leading it, how it structured, our interfacing with clients. So I think we're in actually really good shape. I would say about 2, 2.5 years ago we put a lot of effort and investment into kind of reorganizing that group for this growth. And a part of -- the other half of that group is really Ralph's delivery teams, which again have produced, I would say, heroic efforts, right, in terms of delivering for our clients every single day, day in, day out. Susan mentioned our customer service at the beginning during her prerecorded marks -- remarks, excuse me. We are absolutely delivering every single day for our clients.

Dan, on our capacity to grow, our recruiter productivity is about 20% below max. So there's quite a bit of upside without a lot of incremental investment, although we are up our recruiter headcount across all of our businesses on a year-over-year basis, so there's capacity to take that on. And there is not a lot of other internal investments that have to come on as we add more MSPs, and so we'll get some leverage out of that as well.

Okay. And regarding the MSPs you're seeing, is it fair to say most of it is really from customers who are implementing these programs for the very first time? Or is it also a fair share of competitive wins?

Yes, I would say a good chunk of it is new, although we're seeing a good -- also our fair share of competitive wins as well, several of the larger ones especially. And this might be a related answer. In terms of settings that they're in, 85% is traditional acute where we would have won them in the past, but we're also seeing some uptake in nonacute settings, which would be brand new for sure.

And our last question from the line of Tobey Sommer with SunTrust.

Two actually, if I could. One, could you give us some -- a flavor for the year-over-year changes in your sales-generating internal headcount recruiters, et cetera, across the businesses? And then could you update us on the time line for internal sort of systems improvement that you expect to contribute to margin expansion kind of over the medium term?

Sure. Tobey, I'll -- let me take the first one. We usually don't give exact numbers, but we are up in our kind of producer headcount, if you will, our sales teams across all of our businesses. Nursing in particular is up double digits. But as Ralph just mentioned, in addition to the actual number of people being up, we believe we've got more capacity, particularly since you've gotten [New Orleans]. I'm really proud of the team because they've done a great job of also improving the training and onboarding programs. And we're getting the new recruiters up the learning curve and productivity curve much faster than what we've done in the past.

This is Brian. On your second question, Tobey, in terms of the system. So we're -- as you know, we're always investing in our systems and we continue to come out with new features with our platform that we develop that's for local staffing but also other system features that are -- we're using right now today. So the bigger, longer-term investment we've talked about that is part of that longer-term EBITDA margin target, we are heads down right now with the development on the Locum's platform and expect to go live with that early next year. As you recall, we went live with local staffing on the new platform in the second quarter of last year. Went through that; took a little bit of a pause just to make sure we were organized right for Locums, as we got the team in a really good place now working on that. So that will drive benefit in the back half of 2018. And then at the same time, we'll start soon on -- we've already done some work, but we'll really start to put a bigger investment of the Nurse and Allied business and look to go live with that after Locum. So the big payouts on that will come more in 2019. But in the meantime, we're also similarly really excited about some of the investments we're making today that are already helping to improve efficiency, improve experience, accuracy, et cetera.

And I'll turn it over to Susan Salka for closing remarks.

Okay, great. Well, thank you so much, everyone, for joining us today. Before we sign off, I want to say a special thank you to Neil Thomas, who is here with us on his last earnings call. He's only actually been in this job a few months or a few quarters, and we're saying goodbye to him. But Neil has been an integral part of our team for over a decade now. And I know I speak for the broader team when I say we'll certainly miss him. He's going on to a really exciting opportunity with a small start-up company here in San Diego. And when he came into to AMN, he was bright eyed and ambitious and smart. He's a little older now but still has many of those same characteristics. But it has been a privilege and a joy to work with you but even more than that to watch you pursue your personal and professional goals. Since I met Neil, not only has he gotten many, many promotions and certainly learned a lot, he's gotten married. He has a beautiful child. He's in a beautiful home and just a wonderful role model for anyone who knows him. So I hope his parents are listening right now because I know they're proud of him. His wife's proud of him. We're proud of him, and he should be proud of himself. So with that, we'll sign off, and I look forward to updating you all on our progress next quarter.

Thank you. Ladies and gentlemen, this concludes the teleconference for today. Thank you for your participation and for using AT&T Executive TeleConference. You may now disconnect.