AMN Healthcare Services Inc (AMN) 2018 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the AMN Healthcare First Quarter 2018 Earnings Call. (Operator Instructions) As a reminder, the conference is being recorded.

I'll now turn the meeting over to our host, Director of Investor Relations, Mr. Randy Reece. Please go ahead.

Good afternoon, everyone. Welcome to the AMN Healthcare's First Quarter 2018 Earnings Call. A replay of this webcast will be available until May 17 at amnhealthcare.investorroom.com, following the conclusion of this call. Details for the audio replay of the conference call are in our earnings 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 financial reports page of the company's website, which can be accessed at amnhealthcare.investorroom.com. On the call today are Susan Salka, Chief Executive Officer; Brian Scott, Chief Financial Officer; Ralph Henderson, President of Professional Services and Staffing; and Dan White, President of Workforce Solutions.

I will now turn the call over to Susan.

Thank you so much, Randy. We appreciate everyone joining us on the call today. AMN began 2018 with a strong first quarter, and I'm very proud of how our teams rallied to meet our clients' higher-than-expected staffing needs. Driven by solid execution from the AMN team and a more intense flu season, we hit record high revenue and EPS. First quarter revenue of $522 million, grew 6% year-over-year and was slightly above the high end of our guidance range.

Adjusted EBITDA was $67 million or 12.7% of revenue. In early April, AMN executed on our growth strategy by closing acquisitions that added scope and depth to our workforce solutions. We will review the addition of MedPartners, Phillips DiPisa and Leaders For Today later on the call.

Overall, demand is favorable and stable and we expect it to support our plans for continued growth. We are also making good progress in the improvement of our recently underperforming permanent placement division. And our rollout of our new enterprise staffing system within our Locum segment is going very well. We will talk later about the sequential decline in the second quarter.

Now let's review first quarter performance and trends in our business segments. Our Nurse and Allied segment posted revenue of $338 million, higher by 8% year-over-year. MSP clients comprised more than 60% of this segment's revenue.

Revenue for our largest business, Travel Nurse Staffing, grew 10% year-over-year. This growth was driven by increases in volume and hours worked, while average bill rate was slightly down due to a lower mix of premium rate assignments. Our nurse staffing did an excellent job of filling winter needs and flu-related first quarter assignments.

These seasonal assignments typically end in April or May. This more pronounced seasonality, both in volume and bill rate, is expected to resolve in a larger-than-typical sequential decline in our Travel Nurse business in the second quarter. Volume growth in traditional Travel Nurse Staffing remains solid, with volumes expected to be up 6% to 7% year-over-year in the second quarter. This is being partially offset by fewer rapid-response assignments and a continued shift away from premium rates. Rate headwinds will offset part of our volume growth until these comparisons normalize. The Allied staffing division

grew revenue 3% year-over-year in the first quarter, driven by increased volume and stable pricing. Placement trends for future assignments improved throughout the quarter, with March being our strongest month in history. This puts the division on track to deliver even better year-over-year revenue growth in the second quarter.

Now looking ahead, Nurse and -- the Nurse and Allied segment revenue in the second quarter is expected to be up 2% to 3% year-over-year. Travel Nurse volumes remain positive at an expected 6% to 7% growth rate and Allied volumes are improving. This is being partially offset by a lower mix of premium rate assignments and a decline in the local staffing revenue.

In the Locum Tenens segment, first quarter revenue of $103 million grew slightly year-over-year, which was a positive surprise. Overall, demand for Locum is still above prior year. We also have several new wins in Locum's MSP and a growing pipeline. Recently, we successfully migrated Locum Leaders and the shared services team on to our new enterprise staffing platform. The Locum's migration at Staff Care will be completed later this month. At that point, and for the first time, all of our Locum Tenens' businesses will be running on the same platform and sharing the same processes.

We expect the upgraded technology will enable the business to grow and scale more effectively, with a much-improved user interface for team members, providers and clients. Early feedback from our stakeholders has been very positive.

For the second quarter, Locum Tenens revenue is expected to remain flat on a year-over-year basis. First quarter revenue in our Other Workforce Solutions segment was $81 million, which was 3% higher year-over-year.

Interim leadership, which includes B. E. Smith and The First String, was up 5% year-over-year. The team has made great progress on MSP placements, in particular, which have surpassed 20% of this division's revenue. Our VMS businesses grew 7%. However, these businesses saw a slowing in sales momentum due, in part, to disruption from deployment of next-generation technology.

We currently expect second quarter revenue to be down slightly year-over-year. But with strong client retention, along with a strengthening sales pipeline, we do expect growth rates will improve as we move through the year.

Peak Health, our initial entry into the mid-revenue cycle market, recorded 13% year-over-year revenue growth, its best performance since joining AMN almost 2 years ago. In the past 2 quarters, Peak has added several new clients, providing confidence for continued growth. And Peak is already engaged with the MedPartners team to explore ways to create synergies.

Physician Permanent Placement first quarter revenue was below prior year by 7%, but 6% higher sequentially. Physician Perm revenue is expected to be flat year-over-year in the second quarter, and we are very pleased with the progress that the team is making. In workforce optimization, Avantas had another good quarter with revenue up 10% year-over-year. We believe Avantas is positioned for continued growth with a very compelling value proposition.

Overall, second quarter revenue for the Other Workforce Solutions segment is expected to be up approximately 2% year-over-year on an organic basis, and nearly 45% including the recent acquisitions. Expanding our leadership and innovation in healthcare workforce solutions is essential to the long-term strategy of AMN.

In April, we added MedPartners, Phillips DiPisa and Leaders For Today to the AMN family. MedPartners expanded our offerings beyond medical coding, making AMN the leading provider of mid-revenue cycle solutions. MedPartners is an innovator, having expanded into attractive skills such as case management, clinical documentation improvement and medical registry services. Phillips DiPisa and Leaders For Today bolster AMN's solutions in retained executive search and interim leadership, with particularly strong market share in the Northeast.

We are bullish about the continued growth potential of AMN. I realize that there are a few moving parts in today's report, so let me summarize the key points of our message today. After strong demand and execution in the first quarter, we are feeling the effects of a slightly greater seasonal drop in nurse volumes in the second quarter. Underlying demand remains solid, although there is a drag on revenue due to a lower mix of premium rate assignments.

There is no long-term fix to the nursing and physician shortages and the ongoing difficulties that our clients have with managing labor supply and achieving flexibility. Locum Tenens is on the verge of entering a new era, operating on one common platform with a much-enhanced sales and operating model and significantly better scalability.

We believe our permanent placement businesses are poised to turn the corner on revenue growth and harvest the benefit of organization, hiring and training changes. We have transformed beyond medical coding to become the #1 provider of mid-revenue cycle solutions. And we believe we will improve the growth potential of that business as we go forward.

The addition of Phillips DiPisa and Leaders For Today strengthens AMN's ability to pursue healthcare executive search and grow interim leadership. And we remain confident that the company can achieve our goal of a 14% adjusted EBITDA margin by 2020.

The engine of all AMN services is our highly talented and driven team. I want to take a moment to welcome our newest team members from MedPartners, Phillips DiPisa and Leaders For Today. They, along with the rest of the AMN team, make it possible for us to meet our commitment to exceed the expectations of our clients, healthcare professionals, their patients and the communities we serve.

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 session.

Thank you, Susan, and good afternoon, everyone. The company's first quarter revenue of $522.5 million was slightly above the high end of our guidance range, driven by better-than-expected performance by our Nursing and Locums business lines. First quarter consolidated revenue was 6% above prior year.

Gross margin for the quarter was 32.1%, down 60 basis points from last year, but higher by 30 basis points from last quarter. The year-over-year gross margin decline was due mainly to lower bill pay spreads in Locum Tenens and the lower gross margin in the Other Workforce Solutions segment due mainly to business mix changes.

The sequential gross margin improvement was driven by an improved margin in Nurse and Allied Staffing. SG&A expenses in the quarter totaled $104.7 million or 20% of revenue compared with 20.6% last year and 19.7% last quarter. The improved SG&A margin from the prior year was primarily the result of operating leverage. The higher sequential cost percentage was due to the prior quarter $2 million favorable professional liability reserve adjustment. First quarter Nurse and Allied segment revenue was $338.2 million, an increase of 8% from the prior year and 5% sequentially.

Volume was higher by 6% year-over-year and average hours worked was also higher. This was partly offset by a 2% lower average bill rate from the previously noted decrease in the use of premium rates. Nurse and Allied gross margin of 28% was 30 basis points higher compared to the prior year and 60 basis points above the prior quarter. Segment EBITDA margin was 15.3%, improved by 60 basis points over the year-ago period from the higher gross margin and operating leverage.

First quarter Locum Tenens segment revenue of $103.1 million was slightly higher than the prior year and down 5% on a sequential basis. On a year-over-year basis, the average bill rate increased by 6% and the number of days filled was lower by 4%. Locum Tenens gross margin was 28.7% and was down 200 basis points from the prior year, driven mainly by a lower bill-to-pay spread. The Locums team continues to place a major focus on margin and trends for Q2 indicate a modest improvement. Locum Tenens adjusted EBITDA margin was 9.7%, down 220 basis points year-over-year, due mainly to the lower gross margin and some onetime cost related to implementing our new staffing platform.

First quarter Other Workforce Solutions segment revenue of $81.2 million was up 3% year-over-year and 2% sequentially.

Gross margin of 53.6% was lower by 140 basis points year-over-year, though 50 basis points higher sequentially. The year-over-year variance was driven by a lower mix of permanent placement revenue, along with higher direct cost in interim leadership. Unallocated corporate overhead in the quarter was $15.1 million, representing 2.9% of revenue compared to the prior year expense of $14.9 million or 3% of revenue. On a consolidated basis, first quarter adjusted EBITDA was $66.5 million, was up 5% year-over-year and 3% sequentially.

The adjusted EBITDA margin of 12.7% was 10 basis points below prior year and up 10 basis points sequentially. Reported net income of $42.7 million and diluted earnings per share of $0.87 in the first quarter. Adjusted earnings per share was $0.81 compared with $0.63 in the prior year quarter.

Our GAAP income tax rate in the quarter was 14%. This included a tax benefit of $4.5 million from the accounting standard adopted last year relating to the settlement of stock-based compensation as well as a $2.5 million benefit to adjust for the tax treatment of certain gains and losses associated with our deferred compensation plan. Excluding these items, the tax rate would have been about 29%, which we estimate will be our effective rate for the remaining quarters of 2018.

Cash provided by operations was $60 million for the quarter, a record-high level for AMN, which compared with $45 million in the prior year period. Days sales outstanding at quarter end was 58 days compared with 63 days in the previous quarter and 61 days in the year-ago quarter. The lower DSO was from strong cash collections as a result of process improvements in billing and accounts receivable.

As of March 31, cash and equivalents totaled $54 million. Capital expenditures in the first quarter were $5.7 million. At quarter end, our total debt outstanding was $325 million and our leverage ratio was 1.2x to 1. In early April, AMN acquired MedPartners for $195 million and the related brands of Phillips DiPisa and Leaders For Today for $30 million. Both acquisitions include the potential for additional earnout payments and restructured to allow for tax benefits to be realized by AMN. The $30 million acquisition was funded from cash on hand, while the purchase of MedPartners was funded by a revolving credit line.

These acquisitions are favorable to our margins and expected to be immediately accretive to our second quarter and full year adjusted earnings per share. Pro forma for these acquisitions, our leverage ratio was 1.9x to 1.

Now let's turn to second quarter 2018 guidance. The company expects consolidated revenue of $530 million to $537 million. This represents top line growth of 8% to 10% year-over-year and includes $33 million to $34 million of revenue from the newly acquired companies. No material labor disruption revenue is included in this guidance, nor was there any in the prior year quarter.

We have recently been engaged to support a pending strike, but these situations are subject to change with several different possible impacts on revenue. For that reason, our guidance excludes the potential revenue from this event. Gross margin is projected to be approximately 32.5% to 33%. SG&A expenses as a percentage of revenue are expected to be approximately 21%. And adjusted EBITDA margin is expected to be approximately 12.5% to 13%.

Other second quarter 2018 estimates include the following: interest expense of $5.9 million; depreciation expense of $3.9 million; stock-based compensation expense of $3.2 million; acquisition and integration-related expenses of $1 million; and diluted share count of 49.2 million shares. Amortization expense is currently estimated at $6.5 million, but it is subject to change as we are actively working through the intangible asset valuation process for our recent acquisitions.

Before we open the call for questions, I want to echo Susan's comment in welcoming the Phillips DiPisa, Leaders For Today and MedPartners team members to AMN. We are excited to work together to deliver even greater value to our clients as well as create more opportunities to develop your career at AMN. And now we'd like to open the call for questions.

(Operator Instructions) We'll go to Tobey Sommer with SunTrust.

Wondering if you could talk about premium rates and why there are less of them in the mix as we work through 2018 so far.

Yes. Tobey, this is Ralph. Q1 was a strong quarter for Nursing, and demand was really high for us as we moved into the second quarter. But the utilization of the premium rates did begin to decrease as -- probably more because there's more RNs traveling, there's more recruiters on assignment, the industry has more capacity and demand is at good but not great levels. So you kind of have a basic economics occurring there. So it was a lower percentage and that brought us down. Now our traditional -- our core bill rates are stable. We're not seeing a deterioration of pricing overall. It's just when they pull the trigger to go to that higher rate, it's happening less frequently. And maybe that's a little bit the hospitals are a little more prepared and they're doing a better job of understanding their needs in advance, and so that drives it down a little bit as well. We did expect it, and as you see, our margins didn't suffer because of the bill rates coming down.

Okay. Would you consider the mix of premium rates in the business still at some sort of elevated level? Or would this be, kind of, middle of whatever the historical range has been?

Tobey, we've not seen this level of utilization of premium rates in any other, sort of, period of time. This sort of phenomena of adding on a temporary premium, sort of, crisis rate is relatively new over the last few years. We've done it in some historical times, but to a much lesser extent. So I'm not sure that we have a good comparison of what normal is. So it's hard to say where it might settle out. As we look forward into the third quarter, our best view is to July, and it's come down a tiny bit more but not dramatically, but we've not booked the majority of our third quarter travelers yet.

Right. Okay. If you could talk to us about MSP, and I'm curious what the general color is on new incremental demand that you've seen as well as any kind of update, any thoughts you have about how much more of the company's revenue could be derived from MSP across the different businesses.

Tobey, this is Dan. I'm going to start with some of our wins and we'll see if we can cover a good bit of what you're looking for there. I do want to start though by just reiterating the reasons that customers buy from AMN are because we solve a greater percentage of the whole human capital equation. So if you look the at the acquisitions we just made and the reference that we made in our opening remarks around 20% of leadership now being derived from MSP, that's just a really good example of maybe the question you're looking for. I'd like to say that in Q1, we're off to a really good start in terms of overall MSP wins. Between wins and expansions, we closed $67 million worth of new business, which is a nice improvement over Q4 and slightly better even than Q1 of last year. Almost 20% of that is Locum-specific, the rest is Nurse and Allied. Those deals also have a really nice geographic diversity, which really, really helps us in terms of offering options to our healthcare professionals. In terms of Q2, our outlook, again, continues to look really strong. We have well over $300 million in our pipeline at 50% or greater. 20% of that also is Locum-specific and $65 million of that is in contracting right now. We've already signed several in the quarter, and so again, we're feeling quite solid about our momentum here with our new MSP business as well.

Tobey, and in addition to that, that sort of the new, new this year, we also have 17 active implementations in progress, some of which were implemented in the first quarter, second quarter and will roll out into the early part of the third quarter. And those were largely wins from last year that are now just flowing through. And some of them are fairly significant, so we would expect that we'll start to see benefit from those primarily in the third and fourth quarters as some of them have just been recently implemented in the last couple of months. But to your question of how much further can we see penetration into MSP, we think we have a long way to go still. Obviously, Nursing has the greatest penetration, but Allied is still relatively low compared to Nursing. And then Locum actually hasn't moved much in the last year. And so we think we've got a long way to go. The fact that we have these recent wins in Locum, in particular, we think are going to help us improve that penetration. Then even with our newer acquisitions, like MedPartners and Leaders For Today, we've already signed them on to some of our larger MSPs. And so we'd expect that we can start to see some penetration there, which is essentially starting at 0 today.

Just 2 other topics for me and I'll get back in the queue. Could you give a little more color on, I think, in your comment you said that perm was getting a little bit better. And with respect to the new systems in Locum, are we, at this point, past the obvious, kind of, hiccups that can happen periodically when new systems are rolled out? Or are we still kind of in the middle of it from your perspective?

So I'll start with that one and then go back to perm. So first, just a huge shout-out to the entire team who's worked on what we refer to as the destinations program, which, as you know, we're doing across all of our staffing divisions. We've already implemented in local and in perm to some degree, but in Locum, I would say, we're well more than halfway through. There's 3 phases to the implementation. We've gone through the first 2 phases in March and April. And those included a big portion of the back office as well, and so those would have been perhaps more tricky in some ways. And then the Staff Care sales team's members that will be coming on in the next few weeks have gone through extensive training, and we've had the benefit of having already rolled on sales team members from Locum Leaders in our Atlanta and our St. Louis office. And they have really rallied. I was out there in Atlanta just earlier this week and was so impressed with how they've embraced the new system. And obviously, there's always new things that we can do. So I would say we're feeling really good about where we are in the minimal disruption. So on to -- I'll address physician perm. There, we've made a variety of changes, and the team has really embraced some organizational changes, new training, some new hiring techniques and the implementation of an enterprise sales team so that we can better partner with some of our larger enterprise systems, which needs a different kind of program and interface with us. And so I think that's the benefit, some of the benefit that you're seeing. As we mentioned, that we are expecting to be flat in the second quarter, which is, quite honestly, a bit sooner than I had expected, and I think that's a testament to the team.

Our next question from Mark Marcon with R.W. Baird.

I was wondering if you could talk a little bit about just on the Locum side in terms of the gross margins. How do you think that, that ends up changing over the course of this coming quarter and the next quarter? And is there any business that you're doing there that maybe you want to discontinue?

Yes, Mark this is Ralph. I'll handle that. The -- you're right. We were a little disappointed to see that drop in the Locum's margin, 200 basis points over the last year, after we had improved it and took the last couple of years before that to get it back up over -- into the 30s. And we do feel like the long-term objective of that business is in the 32% range. It flips because -- some of the things that Susan just talked about, going through a technology change, people changing roles, and as well when some of the demand drops off, we may not have adjusted quickly enough, clinician pay rates and things like that. So you saw some compression in pay/bill. The new tool does have better tools that help the recruiter make a real-time decision about pay rates and the rest of the package so that they can get the margin fine-tuned right on their first conversation, and then not kind of wait until after the fact to figure out whether it was a good or a bad margin. So we have those tools already in Nurse and Allied. We've had them, actually, since I came here. They're really very robust. But we've never had them in place in Locum, so we had to manage that through leader approvals and things like that. The technology now will let us do that on, I guess, kind of a real-time basis. So I expect that to start turning around probably Q4 as they get used to the new tools, and then start trending back towards that 32% in the next year or 2.

Okay. Great. And then just turning to Nurse and Allied. When we think about some of those MSP programs that are coming on, can you talk a little bit about kind of the cadence of that in terms of the ones that were recently signed and how we should think about the back half of the year and what the impact might be there?

Mark, this is Dan. In terms of when we ramp and how we ramp, let me talk first about the cadence of the implementation. So once we sign an agreement, typical implementation is 90 days on an AMN platform. That can grow a little bit longer if it happens to be a third-party platform, but just let's assume it's the first quarter. After that, we have -- we see, in general, about half of the capture, the maturity of that particular deal comes in by 6 months after that implementation and typically reach maturity within their second year. So hopefully that gives you enough color to help you with your model there.

Yes, I'll add just a couple of things there. Mark, this is Ralph. All of the deals we sold through '17 are up and implemented now. So we're not seeing a long ramp time to get them up and going. There is lots of upside, and I think we talked about this before. It just takes us a while to get used to the clients' credentialing requirements and to get our clinicians through their pipeline and get them out on assignment. So there's still a lot of upside. Two of the largest deals we sold last year implemented, really, kind of, in the last 30 to 60 days. So there is an upside there. And when I look at, like, Travel Nurse demand, it is up in MSP. While it's up, kind of, overall just slightly, in MSP it's up in double digits right now. So that's probably a good evidence that the deals that we've been winning are starting to have more impact in the latter half of the year than they did in the first half.

Great. And then just with regards to Nurse and Allied in terms of the assumption for year-over-year growth, what is that assumption? And what's the assumption with regards to the bill rate increase that you would end up seeing?

This is Brian. So again, with -- for the second quarter, we talked about the segment having kind of 6% to 7% volume growth in the Travel Nurse part of the business, and it'd be kind of mid-single digit for Allied as well. I think the offsets to that a little bit are the one that -- the less of that rapid response that we saw in the first quarter as well as that mix change from the premium rates bringing down that average overall bill rate, and then a little bit of a drag as well from our local staffing business being down year-over-year. So that's why you get that slightly lower overall growth rate year-over-year. I think as we look to the back half, there's probably some similar trends there in terms of still -- you've heard the confidence in the volume for Nursing and Allied. We just have to work through the changes in the bill rates as well and get that local staffing business stabilized.

Okay. And just on MedPartners and Phillips DiPisa, can you talk a little bit about with regards to just the seasonality of that business and what percentage of the quarter -- like are we reflecting a full 90 days in terms of a guidance there? And what are we thinking about the back half in terms of the contribution there? It was just a little bit less than I was expecting.

Yes, no problem at all. So this is Brian again. In the second quarter guidance, we mentioned about $33 million to $34 million of revenue, combined, for those acquisitions. That essentially is excluding 1 week of revenue in the quarter. So that gives you a good sense there of what the total quarter revenue would be. The seasonality, the executive search part of the business, Phillips DiPisa, usually is down a little bit sequentially in the second quarter and then gets a little bit stronger. But I'd say overall, Q2 is probably up just slightly from Q1 and then there should be stronger growth in the third quarter and in the fourth quarter as well. So that's kind of what we're looking at right now. We think also just some of the execution we're seeing from the MedPartners team particularly, they're starting to see some nice momentum as they move through this year. So we think that should also push more of that revenue in the second half of the year based on the trends that they're seeing.

Great. And then one last one. Just the pipeline for new MSPs, what are you seeing there in terms of the potential change? And then also you mentioned the potential for strike revenue in this quarter. Can you talk a little bit about that situation as well? I know you're not including it but what the potential upside is from that.

So Mark, could you just restate your question about -- I didn't follow the change. What did you mean by that?

Just on the MSP side, what are you seeing in terms of a pipeline for new contract RFPs?

So we have a pipeline that's over $300 million in total. Are you asking what's the mix typically of that $300 million or are you just looking for the number?

I was looking for the number. That sounds really good.

Yes, it's well over that actually.

And I would say a very healthy, diverse mix of different disciplines. A lot of Locums in there, which is great because that's an area where we feel we've got a lot of potential, but certainly more Nurse and Allied. A good mix of net new where they've never had an MSP before, but some are upgrading from perhaps a vendor-neutral VMS, and a few we would consider to be in competitive deals as well. So it's a good, healthy mix. And then regarding the strike revenue, there are multiple scenarios that could play out depending upon if the event actually occurs and at what stage if it goes to, sort of, the full finish line, if you will, versus if it partially occurs to some degree and people actually travel and arrive and get prepared to participate in the disruption. But out of respect to our client and because there's still many different scenarios of what that might look like, we're not providing a range. Had it occurred already, I will say it would have changed our guidance, so material enough that it would have changed those numbers had it already occurred.

And our next question from the line of A.J. Rice with Crédit Suisse.

A couple of questions, if I might. First of all, you referenced a greater-than-unusual seasonal dip coming out of the first quarter into the second. Can you give us some perspective on that? I know you're still forecasting 6% to 7% growth in Travel and Allied, I guess. What would it have been if it had been a more normalized dip, and why what -- did you get anything bubbling up that tells you what the dynamics behind that was?

Yes, this is Ralph, A.J. I'll handle that and Brian might have something to add. Normally, we decline about -- in the 1% to, kind of, 3% range sequentially on volume. And it's the winter needs that we fill, kind of, West Coast, Arizona, for our clients that have population increases that are results of seniors moving into the area and things like that, and the respiratory illness and primarily flu-related things that happen in the winter time. So clients give us those orders, we get them well in advance. Back in July. I think, this year, many of them came in. And then, we fulfill against those orders and then that pulls back when they end in April or May, usually. Sometimes they can -- it could vary a little bit based on how severe the flu is or with the timing of the flu. And so our -- kind of our -- in our own planning, I think, we didn't anticipate that they would pull back as much in Q2 as they have. Part of that is we just over-delivered. We did a great job of filling them in Q1 and feel, kind of, victims of our own success. We're going to feel the pain in Q2 as they come out. And our teams are still working on getting those nurses back out on new assignments and out into new roles. So the -- I guess, it is pretty unusual. I don't think this is something we'd see every year, unless it had been both, kind of, flu-aided at the same time. So hopefully that gives you a little bit more color.

A. J., this is Brian Scott. I'll just add, if you look at the guidance we gave for around 3% in the second quarter, I would think it -- normally, you would be looking something at least a couple hundred basis points better on a year-over-year basis. And I think it's -- we were talking a little bit with that premium rate shift that we're feeling from Q1 to Q2, that mix going down. That's influencing that year-over-year comparability, and then, again, that drag, a little of what we're seeing on the local staffing, those 2 together. If not for that, then we'd be probably talking something more in the 5% range year-over-year.

Okay. And then I know we're talking around a lot about underlying markets, so I wonder because I know there's incremental private equity come in at a small-scale in the business and you've got your bigger competitors that have been there for a while, are you seeing any change in the competitive landscape and how people are approaching the market? Is that a factor in any of this?

No, I wouldn't say it is. I think our competition is always getting better and this is -- this point in history is no different, other than it's better than it was yesterday or last year and you've got some great competitors out there. But I wouldn't say that anyone is doing anything to disrupt the marketplace that is changing things. It just causes us all to step up more and to make sure we're constantly looking to improve. Where we really have, I think, an important differentiation and a sweet spot is with those larger clients, particularly systems, that have complex workforce needs, both perm and temporary, and they want a partner who can help them not just fill roles and have quality workforce, that's important, but also to bring in other workforce solutions like our Avantas solution that can help them to optimize their permanent workforce. And I've been really pleased to see more clients wanting to have discussions, and we've even started to do some pilots around how we can do more. I mean, Avantas has been doing this for quite some time, but I'm talking even at a grander scale than what Avantas has done in the past. We're starting to approach some new innovative ways to help clients to ensure that they are as efficient as possible with their own workforce. So that's a real positive. If there's a competitive change or an industry dynamic, I would say that's been one that's been emerging more over the last couple of years that hardly existed 5, 10 years ago.

Okay. And then maybe last, just the $15 million of improvement on operating cash flow. I know you pointed in the first quarter to the improvement in DSO. Is that sort of a run rate? Or is that unusually good? Is there anything else in that $60 million of cash flow that's unusual?

Sure, A. J., this is Brian. So [actually] the new lower tax rate is one benefit, if you look on our year-over-year comparison. We also did not have any significant tax payment in the first quarter, it helped a little bit as well. But the DSO has certainly -- the continued growth in profitability, the lower corporate tax rate and the DSO were the biggest drivers of that improvement. There wasn't, I think, anything unique in terms of the DSO coming down. And again, the team has just done an excellent job working with clients to kind of -- we talked about improving processes on, kind of, from beginning to end to improve the cycle time of getting paid. And we've been working on that the last couple of years, and it's really nice to see it pay off with that DSO coming down. So I think somewhere in this $58 million -- for now, $58 million to $60 million range is probably where I'd expect it to settle. We're always pushing for an improvement from there, but I think that's where we'd -- I'd expect to see it for the remainder of this year.

Our next question from Tim McHugh with William Blair & Company.

Just on the premium rate topic, is the rate -- this is a trend you'd first observed in the last couple of months. So when we're trying to think of when you'll get past this comparison, is this a year from now? I guess, help us think about how long this could be a headwind to that part of the business.

Yes, it's very, very difficult to predict. If demand went back up, it would increase. So at this level of demand, I would say, probably stay -- another quarter to 2 quarters would be my best guess.

Okay. And on the margins, I guess, I know you were asked about the acquisitions' seasonality from a revenue perspective, but I think it was disclosed 20% margins. If I did that math, it would imply your -- even if I adjust for, kind of, professional liability adjustments, it'd imply kind of margins down organically for the second quarter. Is there anything -- I guess, is that the Locum's gross margin trend or can you talk at all about that?

Yes, again, if you look at the -- it would really just be the fact that the revenue being down from Q1 to Q2. And so the gross margin, excluding acquisitions, is relatively similar. Actually, if anything, it looks slightly better from Q1 to Q2. But just with the revenue being lower sequentially, we lose a little bit of operating leverage. If you look at the underlying SG&A assumption we gave you in the guidance, if you -- we added about $8 million of SG&A in the quarter for the acquisitions. So taking that out, the organic SG&A at $104-or-so million is very simple in the second quarter as it was in the first quarter. So we lose a little bit of operating leverage from Q1 to Q2. That's really the main difference.

Okay. And just coming back to the premium rate, I guess, not to belabor it, but you made a comment that perhaps this is sign of hospitals planning better or planning ahead for these sort of assignments. I guess, can you elaborate at all? I think part of it is we're trying to understand if this is a sign of a change, an early sign of how clients are using the service or if it's just one of the -- if this is just a comp issue that we don't -- that is less concerning, I guess.

Yes, I -- so there's positives to -- when the rates are lower, clients hopefully will utilize more of Travel Nurses. So the reason that rates -- the premium rates kick in is because we're trying to lever people out of full-time jobs to get them to come back into travel positions. And so we have to increase compensation to get them back into the industry. So the slowing down of the utilization is probably a sign that, like I said, the capacity has increased and therefore, the rates are not needed as often. So I don't know whether I'd characterize it either way that you put it, but I do think that premium rates have always played a role in the industry, and they've always been some percentage of our revenues. I think this is probably just one of those times it's had the most impact on a sequential basis.

This is Brian. I'd also add, we've had really nice success over the last 3 years in increasing the, kind of, core standard rates as well. So as we've made traction on that, it's allowed us to improve compensation packages. And ultimately, so we don't have as much friction with our clients, we don't want to be overly dependent on those premium rates. So the more we can get the standard rates to market, the more -- and the more that we can plan with our clients, and I think to Ralph's point there, if we can work with them to get their needs earlier, then we're more likely that we'll fill those position using standard rates. So I think it's been about the partnership as well that we're getting needs from our clients with more lead time so that we can use those standard rates to fill more of those orders, and I think that creates a more sustainable long-term relationship with our clients as well.

And our next question from the line of Mitra Ramgopal with Sidoti.

Yes. I was wondering if you could give us an update in terms of the renewal trends you're seeing in Nurse and Allied.

The rebook.

Oh, the rebook trend. Yes.

It's a good question because you guys said sequential drop might make you concerned, but we actually are experiencing some -- rebook rates are above normal right now, which is both a combination of people extending on their current assignments as well as booking on to their next assignment. So we're a few hundred basis points over our norm and in kind of positive territory there. Usually, that's a good sign of growth about to come. But we had to reassign a lot of people in the last quarter, and that does use up our sales capacity for a short period of time when we move people from one assignment to another. So we do expect that having that increased capacity, our recruiter and producer accounts are up year-over-year, that, that gives us, I guess, more time to get more people out on assignment.

Okay, that's great. And are you seeing any noticeable difference in terms of your trends between MSP and non-MSP?

Just that MSP orders have grown more. Now we do focus on them more, so it's perhaps that our numbers are a bit more biased toward MSP. But just for example, on a year-over-year basis, our MSP orders have grown very nicely, double digits, strong double digits, whereas the third-party orders have been generally down year-to-date. This is where we might work through another organization like another VMS. And even direct orders have been largely down, sometimes up a little bit. So I would say MSP has absolutely been the leader of our volume growth and we expect that will continue to be so.

Okay, that's great. And then finally, just also what you're seeing on the environment regarding candidate attraction and conversion, if there's any change there? Is it speeding up or no change?

We are positive on our supply trends across all of the clinician types. We have spent the last couple of quarters preparing to -- for the changes to Google jobs and we've done a really -- the team's done a really good job there updating our website so that our jobs present at the top of the list whenever you search for travel or locums assignments online. And so as a result, I think, that's probably driving some incremental applications to us.

And we'll go to Jason Plagman with Jefferies.

Just following up on A.J.'s question. You mentioned, I think, that you are working to get some of the spring roll-offs rebooked. Is there a potential for those candidates to get placed in Q2 or is that more of a Q3-likely benefit?

Yes, that's a good question. We're pushing probably at the end of their fourth week of their assignment to get them extended on to their next assignment. So we have been talking to them for a while. But I do think there is some potential towards later in the quarter to improve where we're at today. Probably not much we can do to May at this point, but maybe...

June.

Maybe June and, for sure, July. And we did grow -- last year, we grew over Q2 into Q3, although our biggest growth really kind of comes in Q4. I think we added 400 travelers or something last year. So we'll eventually get them back on assignment and then start adding to that for the base as well.

And then on the MSP ramp, just -- how should we think about the potential step-up after Q2? You talked about the second half, a lot of those implementations in maturing MSPs. Directionally, how -- order of magnitude, how significant could that step-up be beginning in Q3?

This is Brian. I mean it's hard without -- we don't really give guidance in the back half of the year. I'd just say that the -- I think the momentum we're seeing with those new accounts and the opportunities in the pipelines are what gives us confidence in our ability to continue to drive volume growth in the back half of year. I think it's difficult, at this point, to quantify. It's why we gave some color, though, on the underlying Travel Nurse expected growth in the second quarter. I think if that kind of trend could continue, that, that would be a positive for us as well.

That makes sense. It's helpful. And then, the Locum's revenue per day, I think it was up nicely year-over-year and sequentially. Is that pricing or mix or what's kind of going on in that revenue per day?

Yes, the bills rates are up about 6%. The team has done a nice job there. And it's necessary, though, to get the doctors out on assignment. So thanks for noticing.

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

I guess I'll preface my question by saying I think you know I'm relatively new to the company and I'm just trying to figure out exactly what's going on here and how I should interpret it, how I should think about the business going forward. I have to confess, a pretty substantial shortfall in Q2 guidance relative to what I and what everybody else appeared to expect. It's taken me a little bit by surprise. And I'm trying to figure out if, in your mind, this is a one-quarter phenomenon and we're back on a more normal, sort of, run rate in Q3, Q4 and beyond. Or based on what you're seeing today, would you counsel us to expect the impact to linger for a period of time?

Brooks, this is Brian. Yes, I'll do my best to answer the question. I think if you look at the, again, the guidance we gave for the second quarter, I know it is a little bit shorter than what consensus is. And we talked about, probably the biggest reason is really that -- that rate expectation that was likely built into your model. And so I think that is one that we would expect to see a continued headwind on, although I do think the underlying volume trend still feels good to us. I think that's the most important part of our ability to continue to grow. So I think that part of the story with the volume, we still feel good about. I think you will have to consider the revenue-per-day impact for the remainder of the year and how that would layer in to your model. Outside of that, we feel good about the other businesses overall and how they're performing. And just if I think about it from a sequential basis into the back half of the year, we feel good about the performance of the business line.

Okay, that's good. Let me ask you one completely different question. When I had a relatively long conversation with your friends at Cross Country earlier today, they made it sound like the shortfall they were seeing in their travel business, which has been substantial, as you probably know, was very heavily related to the hurricane impact on their business that goes back to last year. So I was assuming, A, you guys might have picked up some of that business, and maybe you could comment on whether you think you did or you didn't. And B, I guess, just hearing all the various moving parts here, I'm just trying to be sure I understand that there isn't some really substantial change in the tone of the business out there now.

Brooks, I don't think I would interpret anything we're saying as a substantial change in the tone of the business. If anything, we see many things that continue to give us really good confidence in our ability to continue to grow, really, in all of our businesses. I mean, you're always -- you always have some challenges here and there. And we've certainly had ours, and yet we're seeing improvement in those businesses that had been somewhat underperforming the last few quarters. And we think as we go into the second half of the year, we'll continue to see that improvement. Probably the one negative here is what we've been talking about throughout the call, and that is the reduction in the number of premium rate assignments in that mix. It's probably something that not only took you by surprise, but it was a greater drop-off than we would've expected in a singular quarter. Some of it was because the first quarter was exceptionally strong. But even on a year-over-year basis, that mix has probably dropped more than we might have expected. So that's probably the only thing that I would point to. Demand is still what we would consider to be strong. Could it be better? Sure. We'd always love more demand. And what that would do is that would drive more pricing and utilization of crisis rates. So we believe that is possible, but in the meantime, even with the demand that we have today, we feel that we can continue to grow. And the hurricane -- I'm sorry, let me go back to the hurricane question. I don't think we were disproportionately benefited by any loss of traveler accounts that they or anyone else might have had from the hurricanes. We ourselves were impacted a bit in the fourth quarter, and so not to the same degree, but I think that -- I couldn't point to any particular things relative to that. Now there have been some MSP accounts that have been won over the last 9 months that might have come from other competitors. And that has benefited us, and that might have, in some ways, contributed to their traveler shortfall as well, but I wouldn't attribute it to the hurricane.

Okay, that's very helpful. And then just trying to think again about this a little bit. I might guess, given the seasonality of the business, the fact we're heading into the summer period, more likely to be not a huge robust period for your business probably. It's more likely that we might see improvement in those rates in the fourth quarter. Is that the right way to think about it? Or do you think I'm thinking about it wrong?

Yes, I think you're thinking about it correctly. We do generally have higher rates in the fourth and first quarter due to those winter seasonal rates to begin with. And whether that ramp-up in volume could also drive a ramp-up in greater utilization of premium rates remains to be seen. But conceptually and directionally, I think you're thinking about it right.

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

Yes, at this point, just a couple of quick ones on OWS. What was the commentary about interim regarding the gross margin there?

I just talked about the segment itself, the gross margin being down some on a year-over-year basis, and there's kind of 2 contributors. One is the mix change with less perm revenue, which has a higher gross margin profile to it. And then within interim, this is the lesser of the 2 impacts, but we've seen some March bill pay compression. Part of it is just sort of the mix of the interims that were put to work has a lower margin profile to it, but those are the -- that was what I was referring to, it just had some impact on the gross margin of the segment.

Okay. And then the -- I also missed, I think, what you said about VMS and it's falling -- it's expected to be off a bit in 2Q?

Yes, yes, we said down a little bit, and I think it's a few contributors. One is the disruption from technology changes. We've implemented really next-generation technology, both at Medefis and ShiftWise. I'd say the Medefis implementation has gone much more smoothly. But at ShiftWise, there's been some disruption. The disruption is -- besides, perhaps, leading to less performance at our existing accounts, it's also led to a slowdown in the sales pipeline for new clients. And so that slowed down the addition of new clients on to the platform. Now the good news is, we've actually gotten through, we think, a lot of the performance issues and the changes. We've a little bit more to go in some of the newer capabilities and features on the new technology, but that's causing some of that softness. I will say they also have seen a slight slowdown in their fill rates, which is actually contrary to what we've experienced with our fill rates. Now keep in mind, they're not an MSP, they're just a vendor-neutral fill, whatever staffing providers, what candidates they submit get filled, and because we have a closer relationship within MSPs, our fill rates are always better. But it was an interesting trend to see that their fill rates actually declined, and the reasoning was that some clients were holding a bit to make sure they really were going to need that individual. It wasn't so much a demand issue as it was the actual underlying fill rate because the client was slowing down just a little bit.

And remind me, this -- the new technology that's going in, is it a platform for like a CRM or...

No, it's a new vendor-neutral VMS platform. We also happen to use it for our MSP clients as well, or many of them at least, but it is a next-generation of the ShiftWise platform that's been in place for a decade now. And this is a newer, more scalable, flexible platform.

Yes, okay. It's the actual VMS itself. Okay.

Correct.

Correct. Yes.

And then I'm curious in the perm area, just stepping back a little bit from the issues you guys have had, and you kind of look at the sector broadly, what's your thoughts on that directionally? I mean, what's -- what would you hope, once you got your unit tuned up better, to be able to do there?

Well, I'll first address Physician Perm Placement and then maybe I'll have Ralph chime in on executive search as well. But we believe Physician Perm Placement, the market remains very strong. It's not a lack of needing physicians, it's more about us realigning our operating model and our teams to be able to both sell and also deliver into the changing landscape of healthcare organizations. And we probably should have done this a couple of years ago, but we're doing it now, and we're starting to see the benefits of being more effective in working with some of the larger clients. So I would say it's not a market issue. It has really been more in internal execution, an organizational issue, but I think we're getting on to the other side of that. And Ralph maybe I'll ask you -- sorry, go ahead, Bill.

I'm just curious, what are you seeing that's changing landscape that you didn't address quickly?

The consolidations -- a great question, sorry, the consolidation and growth of larger enterprise systems that have multiple facilities, they are more and more wanting to centralize all sorts of hiring and workforce management, which is why we have all this growth in MSP and Avantas. But also in perm placements, we have seen that they're wanting to centralize how their affiliate or owned hospitals are recruiting and on-boarding their physicians. The same is true at RPO. We've actually seen some more positive trends in RPO, and it's usually the larger systems, because they want to have a more shared services centralized approach.

This is Ralph. I'll just comment a little bit on the executive space, so Susan's comments were primarily around the physician. In executive, we do that at B.E. Smith and as well in our new partnership with Phillips DiPisa, and we do expect the business there to perform better. Primary issues have been really kind of execution related, we needed to ramp up our new recruiters, executive recruiters faster. We need to provide probably a little more support to them from a sell standpoint on the customer side as well. So we've recently made some changes there and some investments there. I do think the combined entity will perform better on executive search than is has. And as well, that business was a little bit distracted because of the integration over the last year. So I think we're getting past that.

I would think all the M&A activity among your clients is -- has got to be a positive.

It is.

It is kind of funny. [I can tell you, look,] on a year-over-year basis, we will have a client that will do 5 or 6 big searches with us one year and then the next year they do nothing. I've got to say, they've merged with another facility. So we have to go out and find another client or find 5 more searches from smaller clients, and it does make it a little harder. But we -- it's interesting that you say that. We kind of have predicted that with our MSP sales team. And maybe there's an opportunity there for us to share that strategy across our organization a little bit better.

And we have a follow-up from Tobey Sommer with SunTrust.

Two questions for Brian. Brian, what do you think free cash flow will be this year? And -- because I know in the quarter it was quite strong. And then from acquisitions, is there any incremental contribution from acquisitions in the third quarter? Or does 2Q capture a full impact?

I'll maybe comment on the second one first. In terms of the -- you're talking about impact to margins like gross or EBITDA?

Frankly, I was asking here towards revenue, but I'll take whatever you'll share.

Yes, as I mentioned earlier, so the acquisitions, we -- there's 1 week missed in the second quarter guidance. So just, you can take that revenue we've given and that -- the expectations for Q2. And it will take -- that gives you something closer to $37 million -- $36 million, $37 million of revenue in the second quarter and kind of move from there. On the cash flow side, I think on a free cash flow basis, we should be up north of $150 million on the full year. So which -- again, just I think Q1 is likely to be the high point, and just -- and that's not uncommon, especially, again, we had no cash tax payments in the quarter, but we would likely be in the $40 million to $50 million-plus each quarter of the year.

And I'll turn it back to our speakers for any closing remarks.

Great. Thanks so much, Laurie. We appreciate everyone joining the call today and certainly appreciate your ongoing support. And we look forward to updating you on our progress on the next call in August.

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