AMN Healthcare Services Inc (AMN) 2018 Q3 法說會逐字稿

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

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

Good afternoon, everyone. Welcome to AMN Healthcare's Third Quarter 2018 Earnings Call. A replay of this webcast will be available until November 14 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 gap 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. Happy Halloween to everyone, and welcome to our earnings call.

In the third quarter, AMN met our short-term financial goals while also laying important groundwork for our long-term growth strategy. In this tight labor market, many health care organizations are struggling with workforce hiring, flexibility and optimization. AMN's significant evolution and diversification over the last decade has positioned us very well for complex and progressive health care organizations.

One of the most meaningful trends we have seen in the last year is the impact of consolidation within health care. The creation of larger, more sophisticated health systems increases their need for a strategic workforce partner. To that end, we added 3 fantastic new businesses to the AMN family earlier this year, enhancing and further diversifying our service offering and enabling growth through strategic capital deployment.

For the near term, we are not without our challenges, but there are also many bright spots across the business. We will be sharing some of these with you today. And as usual, we will do our best to provide a balanced and transparent review.

So let's now turn to our current results and outlook. Third quarter consolidated revenue of $527 million grew 7% year-over-year. Gross margin was 33.2%, and adjusted EBITDA was $67 million or 12.8% of revenue.

Growing our strategic client relationships continues to be at the forefront of our delivery strategy. As an example, this year, we have added 32 service lines at new and existing MSPs. Our implementation team has been doing a fantastic job with 6 new MSP clients going live during the third quarter and 9 more new clients are in the implementation process.

AMN's leading position in delivering MSP continues to be recognized through new contract wins and expansions. A terrific example of this is the renewal of our largest client, Kaiser Permanente, for whom we have had the honor of serving as the MSP partner for the last 9 years.

Kaiser Permanente went through a very thorough and formal RFP process to determine which organization would be their best clinical MSP partner for the next 5 years. We are very excited to share with you that AMN has been selected as that strategic partner. This new MSP award will also expand into additional service lines. We are very proud of the strategic partnership we've built with Kaiser Permanente and look forward to continuing to work with their team to develop innovative ways to meet their goal of having a highly skilled and diverse labor force to deliver excellence in patient care.

Now going back to the quarter. Our Nurse and Allied segment posted revenue of $306 million, which grew 1% year-over-year. Revenue for our largest business, Travel Nurse Staffing, was flat year-over-year. Volume was higher, while the average bill rate was down due to a lower mix of premium rate assignments. As expected, the premium rate mix has stabilized.

Earlier in the year, we noted some demand headwinds affecting growth in the business. In recent weeks, the travel nurse environment has improved with both new and total orders up more than 10% year-over-year. As bookings have picked up, we expect travel nurse volume to grow 4% to 5% year-over-year in the fourth quarter, partly offset by a 2% lower average bill rate.

Allied staffing was a shining star with revenue growing 8% year-over-year on strong volume and stable pricing. Orders are up double digits year-over-year, and booking trends are supporting continued growth in the 6% to 8% range. For the fourth quarter, we expect improved revenue growth for the Nurse and Allied segment of about 1% to 2% year-over-year.

In the Locum Tenens segment, third quarter revenue of $101 million was 9% lower year-over-year. Positive pricing was not enough to offset a volume decline. Demand for hospitalist, which is one of our largest specialties, has been declining. However, demand in most of the specialties is healthy.

Our revenue decline is primarily the result of disruption and challenges that emerged after we moved locum to a new technology platform in the second quarter. Although this transition has been more disruptive than expected, we continue to make system enhancements and process changes to regain growth in 2019.

We also continue to invest in onboarding new sales resources and have gained additional traction in winning new locum MSP contracts, both of which will be important to drive future growth. For the fourth quarter, Locum Tenens revenue is expected to be down 12% to 14% year-over-year.

Third quarter revenue in our Other Workforce Solutions segment was $119 million. Year-over-year growth was 49%, including the benefit of our April acquisition and up 2% organically.

Leadership and search solutions, which includes our interim leadership and permanent placement divisions, make up about 50% of this segment. Revenue for these businesses grew 14% year-over-year with organic growth of 2%. Within this group is physician permanent placement, which returned to growth as anticipated with revenue growing mid-single digits year-over-year.

Our mid-revenue cycle division produced $40 million in revenue in the third quarter. Peak Health had its third consecutive quarter of double-digit growth. MedPartners, who joined us in April, continues to experience healthy demand and also had a solid quarter, particularly in light of managing through multiple integration activities and the unexpected temporary loss of their leader. MedPartners' co-founder, Marci Wilhelm, and her husband, Steve, survived a plane crash last month and are recovering from their injuries. We are very pleased to report that they are both making a fast recovery. We are fortunate to have a strong team and other great leaders at MedPartners, and they have stepped up in a very impressive way.

Other Workforce Solutions also includes our VMS business, where revenue was down year-over-year in the third quarter. As we look forward, fourth quarter revenue for the Other Workforce Solutions segment is expected to be up approximately 2% to 3% year-over-year on an organic basis and up nearly 50% overall.

Lastly, I want to give a big thanks to our entire AMN team for their outstanding work and inspiring dedication to our clients, our health care professionals and our communities. Our team members respond to any opportunity or challenge with great initiative, drive, and heart. The last couple of months, I had the chance to listen to and chat with a majority of our team members across the country, as I visited many of our offices, and I am so proud of this incredible team and have even more confidence in our ability to make a positive impact going forward.

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.

Okay. Thank you, Susan, and good afternoon, everyone. Our company's third quarter revenue of $527 million was in line with expectations and just above the midpoint of our guidance range. Gross margin for the quarter was also at the higher end of our guidance at 33.2%, up 90 basis points from last year and higher than last quarter by 80 basis points.

Our April acquisitions were accretive to our consolidated gross margin, representing about 40 basis points of the year-over-year increase. And as a reminder, starting last quarter, our physician permanent placement business began recognizing certain expenses in SG&A that were historically in cost of revenue, representing a 60 basis point shift.

On a sequential basis, the margin increase was due mainly due to the prior quarter and fully enlarged labor disruption event that carried a lower gross margin. SG&A expenses in the quarter totaled $121 million or 23% of revenue compared with 20.3% last year and 20.7% last quarter. The year-over-year increase in SG&A margin was primarily the result of a physician permanent placement cost shift and a $12 million increase in leader reserves from 2 recent claims settlements.

Third quarter Nurse and Allied segment revenue was $306 million, an increase of 1% from the prior year and down 8% sequentially. The sequential decrease was almost entirely the result of the $25 million labor disruption event last quarter. Year-over-year volume was higher by 2%, and hours worked was also increased. This was partly offset by a 3% lower average bill rate.

Nurse and Allied gross margin of 27.4% was consistent with prior year and 110 basis points higher than the prior quarter. The sequential increase was primarily due to the prior quarter labor disruption event having a below-average gross margin. Segment EBITDA margin was 13.8%, up 30 basis points from the prior year.

Third quarter Locum Tenens segment revenue of $101 million was 9% lower than prior year and down 6% on a sequential basis. Locum Tenens gross margin of 28.4% was down 170 basis points from the prior year and 140 basis points sequentially. Some of this margin decline was related to system conversion issues, and we expect an improvement in the fourth quarter. Locum Tenens adjusted EBITDA margin was 10.9%, down 210 basis points year-over-year, driven by the lower gross margin and some negative operating leverage on lower revenue.

Third quarter Other Workforce Solutions segment revenue of $119 million was up 49% year-over-year and 1% sequentially, driven mainly by the recent acquisitions. Gross margin of 52.4% was lower by 170 basis points year-over-year but was up 20 basis points sequentially. The year-over-year variance was primarily the result of the acquisition of MedPartners which had a lower gross margin than the segment average.

On a consolidated basis, third quarter adjusted EBITDA of $67 million was up 9% year-over-year. The adjusted EBITDA margin of 12.8% was 30 basis points above the prior year margin and up 20 basis points sequentially. We reported net income of $28 million and diluted earnings per share of $0.58 in the third quarter. Adjusted earnings per share was $0.84 compared to $0.63 in the prior year quarter.

Our income tax rate in the quarter was 27% and is expected to be 27% in the fourth quarter. Interest expense and other in the quarter was $4.6 million, which included a $1.4 million gain on a fair market value adjustment of a minority investment.

Cash provided by operations was $45 million for the quarter. In the first 9 months of 2018, cash flow from operations totaled $171 million, up 67% year-over-year. Day sales outstanding at quarter end was 64 days compared with 58 days last quarter and consistent with the year-ago quarter.

At September 30, cash equivalents totaled $19 million. Capital expenditures in the third quarter were $10 million. During the quarter, we repurchased 580,000 shares of stock for $32 billion and repaid $5 million of debt. At quarter end, our total debt outstanding was $475 million, and our leverage ratio was 1.7x:1.

Now let's turn to fourth quarter 2018 guidance. The company expects consolidated revenue of $534 million to $542 million. This represents top line growth of 5% to 6% year-over-year. On an organic basis, revenue is expected to be down 1% to 2%. No significant labor disruption revenue was included in fourth quarter guidance.

Gross margin is projected to be approximately 32.5% to 33%. And SG&A expenses as a percentage of revenue are expected to be approximately 21% to 21.5%. Adjusted EBITDA margin is expected to be approximately 12% to 12.5%.

Other fourth quarter 2018 estimates include the following: interest expense of $6 million, depreciation expense of $4.6 million, amortization expense of $6.6 million, stock-based compensation expense of $3.3 million, integration-related expenses of about $1 million and diluted share count of 48 million shares.

And now we'd like to open up the call for questions.

(Operator Instructions) Our first question, from the line of Jeff Silber with BMO Capital Markets.

I wanted to focus on the Locum Tenens segment first. I know you mentioned some of the conversion problems. But what gives you the confidence that this is something that's fixable? Is it more a positioning in the market? Or you really think this is more of an internal issue?

Thanks. This is Ralph. I'll handle that question. To give a little background, we talked just very, I think, briefly about the fact that we were going live in May on the new system. And we had operational challenges that came out of that implementation that impacted our productivity in Q3 and Q4 and it resulted in the slowdown of the business, which is really now expected to continue into the first part of next year. And while we expect those upgrades to provide some significant meaningful long-term benefits, that initial disruption is greater than we anticipated, primarily due to data migration and system integration challenges, which gets to your question. Those are, of course, culpable issues as well as adoption, which when the employees who've been working on the same system for, gosh, in some cases, 10 to 15 years, get used to the new system. So because of those issues though, the recruiters and account managers, they get pulled into solving problems, and they get distracted from daily sales activity and recruitment activities. So only recently, have we started to see progress back to the pre-go-live sales activity levels, which is a promising sign. Overall, we feel great about the locums' market. It's healthy. It's growing. And even our own internal measures of demand with these challenges actually have kept up pretty well with the market, and we may be a little bit flat compared to the market on demand, but the challenge has been more related to not driving demand but getting clinicians out on assignment through the credentialing process and on the shifts -- and scheduled on the shifts. So I feel very, very good about the industry itself. And I also see our MSP strategies starting to kick in. It's a positive factor for us. We're seeing double-digit growth there among those customers. Maybe one more maybe directional piece of advice, I think Susan mentioned this, but we're beginning to hire again in our Locums business. During the go-live period, we held back on hiring. We didn't want to introduce anyone new to that time frame. So we began to add and replace sales resources. We've revamped our new hired training program to support future expected growth.

Okay. If I can switch over to the Travel Nurse side, I think, Susan, in your prepared remarks, you said that the decline -- and I think you said the decline in the premium rate was stabilizing. I think those were your words. Is that coming from the demand side or the supply side, meaning are you having an easier time finding nurses so you don't have to pay the premium rate? Or are hospitals just kind of pushing back on you in terms of charging those premium rates?

I think it really goes back to the rise that we previously saw because of the tight supply, and then as demand stabilized, they came down a bit and more supply began coming into the industry. There was a -- there's still a gap between demand and supply, but that gap got a bit smaller. And so it enabled clients, in many cases, us, to recommend that they offer the assignments at a regular rate rather than the premium rate. And that process and sort of cycle started last year, and I think we're just sort of lapping it and now seeing a stabilization and sort of a floor, if you will, on that. Now it's not to say it couldn't swing a little bit up again or a little bit down again, but as we look at third and going into fourth quarter, we're seeing that mix pretty stable. Now we still have the fourth quarter and to some degree, the first quarter to lap, which is why I called out that the fourth quarter, we're still thinking about a 2% headwind on our average bill rate. But as we look forward to our bookings and we can see the rate those individuals are booked at, it feels like we've pretty much hit that stabilization.

Okay, great. And there's one more. Then, I'll get back in the queue. I know you're not giving guidance yet for 2019, but just from a seasonality perspective, is there any reason that we should not see sequential revenue increase between 4Q '18 and 1Q '19 like you typically see between 4Q and 1Q?

This is Brian. No, there's no reason why we wouldn't expect it. We talked about Locums in our -- early signs we're seeing an improvement there. That would be the one thing that -- caution, I guess, is we're still looking into the first quarter. But outside of that, there's no reason to think we wouldn't see that normal seasonality. And again, with the nursing demand improving, that gives us a little more confidence as we move into the year, along with some of the color that Susan gave on the implementation of the new MSP program. So all of that put us -- sets us up well as we think about the start of next year.

And I'll just add to that. In addition to nursing, we really are feeling more bullish than we felt in some time about the demand, and certainly that team executes strongly on a very consistent basis. But in addition to that, Allied is doing fantastic, and they've had very consistent strong performance. And that looks to be even stronger as we move forward. We're just beginning to really integrate MedPartners into our MSPs and having a more cohesive strategy around our total mid-revenue cycle strategy. We recently, as you know, brought together our leadership and search businesses under one executive, Kelly Rakowski, who joined us this summer. And we're really excited about the sales synergies that will be created. So there's a lot of bright spots ahead for 2019, and we obviously need to get locums turned around. And there's a couple of other smaller things, but a lot of good things are on the horizon.

And our next question, from Tobey Sommer with SunTrust.

Susan, how do we think about your long-term targets in the time line to get to them, given the internal disruption that lingered a little bit more than you had thought in the locums business?

Sure, Tobey. So I'm sure you're referring to the 14% EBITDA margin target that we set out by the end of 2020. We still believe 14% is an appropriate target for us, so that next milestone for us is an organization. And nothing has fundamentally changed to make us think that we can't get there. Some of that was to be driven by improvement in the Locum Tenens' gross margins as well as efficiencies that we would be getting from the new system, not only within locums but within our other businesses. And since those are delayed, we might expect that we may not get there by the end of 2020. It might be a quarter or 2 later. There are other things that could potentially speed up and get us there faster. If we're able to get our Other Workforce Solutions businesses, which have higher margins, growing at a faster pace, then that could perhaps keep us on track. But we want to be realistic too, and as you're pointing out, there are components of that target that are a little bit behind. So it doesn't mean that it's not possible to get there, but it's more probable that it would be a little bit delayed.

Okay. With respect to demand increases that you're seeing in travel nursing, what are you hearing from clients that is driving that?

Yes, you're right. Recent order levels are up about double digits, I think Susan said above 10%. Actually, both Travel Nurse and in Allied, the higher demand is across-the-board, is coming from both new accounts as well as same-store existing clients. MSP is growing a little bit faster than our traditional clients. What our customers are telling us is they're just a little more, I think, optimistic, more financially stable than what we saw at the same time last year, and so I think they also write -- repressed demand for some period of time trying to fill the jobs through their internal efforts. And you can see in the BLS numbers that they haven't been as successful as they'd hoped. So they began to open up orders, and we're seeing that. I think, probably, the only maybe headwind if you were to look at demand, is probably what is the flu season going to look like, and that's really more of a Q1 issue. But as you're filling out your models, I would -- and we know that last year's flu season was stronger than we would anticipate this year -- or should anticipate this year. And so that's, I guess, as much color as I've got right now. I think everybody's pretty optimistic about legislatively, no big changes coming in health care.

Okay. With respect to capital deployment, you repurchased an additional amount of stock, I guess, at least by my rough math, looks like a mid-50s price. How are you thinking now about your cash flow deployment, given leverage that seems to be relatively low versus the group and your historic average?

Tobey, this is Brian. I'll take your question. Yes, we've had -- your math is correct. And at this point, as we continue to generate very strong cash flow, don't be surprised if we continue on the path we've talked about with a blend of share repurchases and debt reduction. We still have the ability to repay more of our revolver and create even more balance sheet capacity as we look to acquisitions down the road as well. But at these levels, we are still likely to be buyers of our own shares as well.

Okay. And then my last question, could you mention a couple of the occupations within Allied where you're seeing the best demand? And I was curious, within locums, are there any meaningful exposures where demand is falling?

On the first one, the Allied, we're -- the biggest increases are in respiratory and embryology, specialty -- tech positions primarily. And the -- we are starting to see some improvement in all of the therapies. So speech, occupational are probably a little bit stronger than the others. And so pretty solid across-the-board in Allied. On the locums side, Susan mentioned hospitals are down and emergency room is down, which is physician management practices. There's just less movement right now, which creates some demand there. And that's, I think, one of the headwinds for our locums business. Strengths are in the internal medicine subspecialty, all of the ologists. We also are seeing some strength oddly in radiology, primary care, so the opposite maybe of what we've talked about in the past. And also all of the advanced practices, the demand is very, very good there as well. So -- and our dentistry business is actually performing pretty well. So will be the main ones.

Our next question, from the line of A.J. Rice with Crédit Suisse.

First question, congratulations on getting the Kaiser deal extended. I know that's an important contract. And there've been some -- well, you guys were commenting on it, I guess, there've been some concern in the investment community. I know when a big contract like that gets renewed, there's often an expansion of opportunity. And I think, Susan, you alluded to that. Could you maybe flesh out some of the -- if there's some new business areas that you're pursuing with them? And then sometimes a contract like that, to get a renewal, you might give up something on the pricing side. I guess, when you think about the impact going forward on margins from that renewal, would that have any ongoing longer-term impact under the new terms of the contract?

This is Ralph, I'll handle that, and if Susan or Dan want to add anything, they'll add. The net is probably where I'll start, is that we expect that to be a very positive thing overall for our profitability. There were -- you're right. There are some expansion opportunities, both regions that we weren't servicing on the nursing side as well as allied disciplines and physicians and locums physicians that we had not yet been working with those parts of the organization. Now some of those will get implemented right away. Some of them might take as much as 12 months to get up and running. So those are all of the growth opportunities. And the -- to your margin question, we didn't -- we're not quite finished up with the terms, but we don't anticipate a significant degradation of margin overall on the account. So I wouldn't plug anything in there. There might be some short-term things probably related to implementation cost and building our supply database and getting up -- I think we've talked about this before that, initially, when we win a new MSP account that we sometimes have to pay a little bit more to get the supply chain fed, but that's probably kind of a 12-month issue as well, if at all.

Yes. I will just add a few things. One, this is -- obviously, it's good for us, but it's also fantastic for our hundreds of affiliate vendors as that will also have greater opportunity to have their clinicians placed at Kaiser through our MSP contract. And so we're excited about the opportunity it opens up. While we did have and do have allied clinicians placed at Kaiser today, this opens up a much bigger, much broader group of opportunities for us, and again, for our affiliate vendors as well as in the physician area. Also, we're excited about what more we can do with Kaiser Permanente in the areas of innovation. They have been a fantastic partner for us in really pushing us but also working with us to innovate and create new ways of helping them optimize their workforce. And we've made a commitment to work even more closely together to help drive innovation, certainly for Kaiser Permanente, but that can also benefit other clients and we hope, benefit the industry as a whole.

I guess, you talked a little bit about the flu headwind year to year. That drove some volume last year, and it's not clear what we're facing in the flu season this year. I guess, the other thing that impacted, particularly the fourth quarter, and I'm trying to think through to how you're thinking about this, was the hurricane season was pretty severe last year. Now we've had some specific areas impacted by hurricanes this year. It seemed like a little less. But how do you think about that impacting this year versus last year? And what have you seen so far as a result of that?

So far, we don't think that there's any impact from this year to our business. I mean, if there is, it's minimal and certainly, we have had some clinicians and even some of our own corporate team members impacted. And our team has, in usual AMN family style, wrapped our arms around them and helped them get their life back on the road to recovery. But it's been pretty minimal to be honest.

Okay, that's good. And then my last one would be.

A.J...

Go ahead, I'm sorry.

We had pretty minimal impact last year as well, I think just because of our geography, and it didn't impact our office in the same way that others were impacted. So it was a pretty nominal impact to us prior as well. So just really, from a comp standpoint, there's not a whole lot there.

Okay. All right. And then just my last question, I know sometimes you give statistics about your fill rates and what's happening on the MSPs in that regard and also the percent of your volume in some of the segments like Nurse and Allied in particular. How much of the revenues are being driven by the MSPs versus the other buckets that you tend to isolate? Any update on those figures for this quarter?

They haven't moved materially, so it's -- may not be worth repeating, but just to give you a general sense, MSP is about 40% of our consolidated revenue. Now keep in mind, we added businesses in the second quarter that actually gave us a bigger denominator, and so it gave us a little bit of a headwind. Within our total staffing businesses, Nursing, Allied and locums, we're running about 50%.

On the fill rate -- sorry, on the fill rate side of that question, our fill rates have improved across the MSPs, and we -- I think we've talked about this. At stable demand level, we continue to capture more internally than we have in the past, and that's consistent with -- in our nursing business, our Allied business, our locums business. And now we're starting to see even greater penetration into other segments, our interim executive business, and then now we've got to get our rev cycle management partners added to many of those agreements as well. So there's still upside there, but we have improved fill rates across-the-board.

And we'll go next to Tim McHugh with William Blair & Company.

I guess, I just wanted to circle back to the question on Locum Tenens. I understand, I guess, how the change is disruptive, and it's basically just taking longer I guess. But I wonder if you could just provide more color on, I guess, what aspect of it is -- I guess, has surprised you and particularly relative to the -- I think, last quarter, you had talked about the initial cohort of people going through with it, and responded well. So how has the experience, as you played through, been different than, I guess, what you expected?

Hey, Tim, this is Ralph, I'll start, and then I'll ask anybody if I missed any points -- the team here to jump in. They -- I think if you talk about -- kind of we did anticipate and we had -- our internal plan, right, significant disruption we thought would run 90 to maybe 120 days. And that was from people coming off the Florida train or just thousands of man-hours of training that occur. There are people who get pulled into meetings to get involved in systems designs and development sessions and then just the standard go-live adoption to the system work. So that was built in and anticipated, and I actually think our math was pretty decent on that. What we had underestimated was the difficulty of moving the data from the 3 operating systems into a single operating system and how important each data element was to the next successful placement. So we carried over significant amounts of data and it will take 48 hours, I think, to upgrade the data from one system to another. It would run constantly, but we would miss things like the physician subspecialty, to give you an example. And that -- not having that subspecialty in there when it went to work in the new system, then the recruiter couldn't attach that clinician to a job order in that subspecialty because of our compliance policies and things like that. So that meant we had to do some sort of manual workaround to get that placement done, et cetera, et cetera. So imagine that type of data migration issue then being compounded a little bit by integration issues between the new front and back-office systems. Those issues were -- put a client contract into the front-office system, it tells the back-office system who to bill, what to bill and that sort of information. And those handoffs did not work as smoothly in production as they did in testing. And so we -- that's the same kind of issue that either the candidate is -- doesn't get paid exactly right or the customer isn't billed perfectly. And so we have to manually issue those, fix those issues. Usually we catch them before it gets to the clinician or the customer, but we still have to fix them manually. And we did not anticipate those 2 things compounding, I guess, the way they did, to interrupt the business.

Yes. And then the hospitalist weakness, can you tell us how big is that as far as locums? And how much of that beyond this kind of -- I guess, how much of the weakness is a market issue related to that specialty and your exposure to it?

Yes. This is Ralph. I'll handle that as well. Yes, hospitalist, a couple years ago, was one of our fastest growing specialties, and it's definitely in our top 5 and it has been pretty consistent in the past 3 years. The issue is related to the -- just kind of what's happening, I think you've seen the privatization of Envision and TeamHealth and some of the activities there related to their profitability. They've been not as active in the marketplace of converting emergency rooms over to outsourced emergency rooms. And so we get a significant amount of our business from those specialties, and we're just really seeing that slow down. Our hospitalist -- I have talked to others. Of course, we talk to our customers, we've also talked to others that provide hospitalists and staffing. And most are talking about significant double-digit declines to that business.

Okay. And then lastly, within workforce solutions, I guess, is -- so I -- the comment about, I think, leadership solutions as a whole, I think you said grew 2% organically with perm piece up mid-single digits. Can you talk about the interim piece because, I guess, the implication is probably fairly flattish? And then I didn't hear any comment about Avantas. So if you can just talk about that?

Yes. So first on interim, yes, their overall revenue was about flat. Now there were some of the brands doing better than others. And remember, we added in the Leaders For Today brand, which is off to a great start. We happen to have a very strong team up there in the Boston regions back there, doing a great job of getting added to our MSPs and whatnot, but we need a little time to get traction on that. They saw a little bit of a slowdown through the summer across our other businesses, B.E. Smith and The First String. But the good news is we're starting to see a pickup. In fact, they had a very strong beginning to the fourth quarter. So we expect those businesses to pick up. I don't think there's anything fundamentally wrong, certainly not with the businesses themselves, their execution or with the markets. We saw, again, just this kind of little slowdown earlier in midyear. So we're feeling better about those as we go into the fourth quarter and moving forward. And then Avantas is doing fantastic. You're right. We should have mentioned them because they had a great quarter and looking towards a great fourth quarter as well, continuing to add clients and expand their existing businesses. So they're adding new features, a new functionality that will not only help them to serve our current clients better but will also help perhaps decouple some of the services so that they can offer a little bit more of an a la carte set of solutions and get to market faster because they're just whole house offering that is typically a bigger, longer decision, and we want to enable them to be able to perhaps get in, prove concept, prove value. And then that can lead to other things.

And our next question, from the line of Mark Marcon with R.W. Baird.

I was wondering if you could talk a little bit about the order trends that you're seeing. How widespread is it? And in terms of the increase, is that on a year-over-year basis or a little bit on the sequential basis or both?

It is both. The double digits is for year-over-year increase. The sequential, I don't think we gave it, but it's not -- it's good as well. The -- it is -- I think I mentioned it's kind of they're same stores and MSP driven, which is good. The number of facilities also jumped quite a bit as in -- really in the last 6 to 8 weeks, we've seen it really even tick up more so than it did in the quarter. It is -- the specialties are in line with our prior top 5, telemetry ICU, med-surg, so that's been good. PCU is actually one of the ones that's growing faster than others, which is hospitals are getting more efficient at understanding how to use that specialty. But -- so regionally, geographically, well distributed as well and maybe a little bit stronger in the East than in the West, but that would be probably -- is that the kind of color you're looking for, Mark?

Yes.

The other thing I'll just add on to that, Mark, it's -- as Ralph mentioned, it's in our MSP clients, but it's also, we're seeing growth in the third-party companies that we work through. So these are the other VMS primarily but also some vendor-neutral MSP organizations. They've also seen an increase in orders, and that's a great sign for the market. It shows that it's not just our clients. It's actually a broader market increase in demand, and we think that bodes well for future growth.

Great. And then reconciling that with the guidance from Nurse and Allied, and Allied's been doing well, I take it that's just because of the normal lag between when orders are placed relative to when they get filled, combined with the -- still, the reduction in terms of the premium rate assignments. Is that correct?

Yes, you've got it right there. The lag between receiving an order and starting the candidate and the pricing are probably the 2 things that make the -- those great numbers not so as great in the fourth quarter, although stronger year-over-year than the third quarter.

Yes. This is Brian. The -- if you look at the volume projection we're giving in the fourth quarter, it is a higher level of growth than we saw in the third quarter. So I think, we're starting to see some of that flow through in the year-over-year numbers, but it gives us even -- it just gives us more confidence as we think about the first quarter into 2019, that we've got a good base between the new programs we have going live, which we've talked about, as well as these order levels. It gives us more opportunity and confidence in that growth level. And just if you look at the guidance overall in the fourth quarter, that number is still impacted even with that better performance in travel nursing and Allied, you still see a drag from the local staffing business, which we talked about last quarter. As we consolidated some of the operations there and are focusing on some key markets, that's still a drag in the revenue of about 1% year-over-year. We're excited about where we're heading with that business overall with some really great strategies we have in place, but in the near term, it's still a decline in the business in that segment.

Okay. And then with regards to the premium rate assignments, when do you think we lapped that? Or are the orders -- or are you seeing any indication that maybe some of the orders are coming back even for those premium rate assignments as demand grows?

No, it feels pretty consistent at this point. So in terms of lapping, you might recall, last year, we had a very high first quarter because of the higher winter orders but also flu -- kind of last-minute flu orders that were at premium rate, so it'll really be closer to the second quarter that we think we'll fully lap the drag. It'll get tighter and tighter as we get there, but it'll be second quarter before we think we'll be kind of out of it.

Great. And then with regards to locums, what are you projecting there in terms of the margins for this coming quarter?

Yes, I think -- oh, in Q4?

Yes.

We did 29%...

Yes, we're closer to the 29% range. So we were up a little about 29% in the second quarter, adding to the lower 28%, so I think we'll be -- shooting for something closer to 29%. There's still some work to do there as well, but that's what we're looking at right now.

And operating margin, you mentioned, what is that?

It could be probably similar or maybe slightly lower than Q3, and it's really -- even with that little bit of improvement in the margin, you -- with the revenue being down, we're still losing a bit of operating leverage, as we're still investing in that business, talked about adding more sales resources. They will drive revenue in the future, but in the near term, it adds a little more SG&A as well.

And as you're going through the state of migration issue, has that caused any client issues at all in terms of like -- I mean, you mentioned, but I'm just talking about in terms of are they understanding, are they staying with you or are competitors trying to take advantage?

Yes. That's a good question. We obviously watch the statistics very closely ourselves. And we're not seeing a lot of defection of clinicians or clients. I think on the client side, they've been through these big conversions themselves, and so they know that -- they know what the challenges are. Probably with -- where the revenue gets lost is just picking up another shift for the ER department. Maybe a competitor actually fills that instead of us. But we don't have any sort of client defection, not -- nothing material.

When -- Ralph, when do you think you're going to get through in terms of like where everything will get normalized on locums and just from an operational perspective and then building from there?

Yes. We don't really have an exact prediction on that. I would love to give one -- if I had one, I would give it. We have -- we are seeing a lot of positive trends, and one of the things is we have specialties that are above prior year. We're seeing activity levels get back to norms and all of that. But I think we had originally hoped that we would be back in Q1 -- I'm not -- I'm no longer confident in that. And so kind of maybe too early to call right now, but I'd hope by our next call, we'd be able to give you more color on when we're going to get back to growth in locums.

I just meant in terms of the data immigration issue being completely fixed or solved.

Okay. Yes, the system is actually -- it's operating really well. We talk to our team about this quite a bit. It has features that the old system didn't have. It has a portal, where clinicians can upload credentials, so it moves some of the administrative work, makes it easier, things like that. The data migration issue, we continue to upload new data from the old systems on a regular basis and make other changes to the systems. So I don't feel like that -- the migration is an issue going forward, but as you know, we're usually booking about 3 months out. So if it's not an issue today, in order for it to have a positive impact, it takes 3 months because of the credentialing cycles can be almost 120 days in many cases.

Great. And then last question, can you -- somebody asked about it. Does -- the $12.1 million in legal reserves, what's that referring to? And is that going to be a cash outflow? How should we think about it?

Yes, this is Brian. I'll take that one. It will be ultimately a cash outflow, and it relates to a couple of wage and hour claims. And I'll just start by saying we are -- take a lot of pride in having very compliant pay practices and are always focusing on ensuring that we're keeping up with and adjusting to changes in law. And with that said, though, it's in our industry, wage and hour claims, particularly in places like California, are not unusual. So yes, so these settlements are related to wage and hour claims going back all the way to 2013. And as much as we're feeling -- we feel confident about our position that we made the choice -- a tough choice to settle these claims and move beyond so we can focus on the business.

Just as a follow-up to that, Brian, does that impact SG&A at all going forward or in terms of adjusted...

No, we've adjusted the reserves to the settlement amount.

I meant as it relates to future practices.

No, no, it isn't -- we've not -- we don't really change any practices related to this. Again, we're always making sure that we're compliant. It's really more -- again, these claims are filed, and as we went through, decided to settle. But it doesn't change any go-forward practices that would affect SG&A.

Our next question will be from the line of Jason Plagman with Jefferies.

So the first question on the OWS segment. So you got -- do you expect we'll see some acceleration as we head into 2019 given that you'll start to lap some of the softness you've seen in the VMS revenue that impacted your growth this year? How should we be thinking about kind of -- and where you see that headed in 2019?

Yes. So Jason, thanks for asking. The short answer is, yes. We would expect that we'll start to lap that, and we're already seeing some positive changes within our VMS businesses, certainly, just in terms of the underlying clients and utilization. In fact, in October, some of the issue was we had previously in the year seen the volumes decline, utilization decline, and we saw that start to turn around a bit in October. The volume was actually up at least in one of the VMS. So it kind of goes back to the commentary in travel nursing as well. They go a little bit hand in hand. So that's a positive sign, and we think we should continue to see improvements there. We've had really good client retention, really above 90%. It's been more a matter of, in ShiftWise, in particular, not being able to add new clients because we were going through some technology changes and enhancements. And again, good news there, the -- we're on a much better path. Many of those enhancements have been launched, and there are new features on the road map pretty much every quarter within ShiftWise and Medefis and a lot of really exciting things that I think will make us even more competitive in the marketplace. So that should become less of a drag for us. And then as I mentioned, interim, while a little bit flat, we expect to see growth going forward. Perm's doing well. Mid-revenue cycle, we should see growth there. Avantas is doing very nicely. And RPO is actually small but mighty. They're doing a nice job of turning that business.

Great, that's helpful. And then kind of a similar question on the Nurse and Allied side, you've had the drag from the local business but -- and from the premium pricing, but as you lap those items, presumably in Q2 '19, I mean, should we expect that organic growth gets back into kind of the historic mid-single-digit type range? Is that appropriate framework?

If we can lap that pricing, yes, I think that it is. Now of course, anything can potentially change, I suppose, to change the market environment. But right now for that matter, we're looking at travel nursing volumes in the fourth quarter being up 5% to 6%. So if we just didn't have a pricing headwind, we'd already be there. And we think that's a very reasonable place to be on a go-forward basis. We just have to get through these pricing headwinds.

Great. And last one for me, just on the MSP new contract wins in Q3. Can you provide any -- the number there? And any color on the different segments that those fell into?

Sure, Jason. This is Dan. The -- I feel really good about the Q3 performance. The sales team came in with $65 million in wins and expansions for clinical growth spend. There was a little bit more in -- added for nonclinical as well. That brings our year-to-date total to a little more than $170 million in clinical growth spend. Of that, you could think about it as a little more than about $95 million is projected to be incremental direct revenue to us. That would be on top of revenue we might already have at those clients. It's a really nice geographic diversity, which is always really important to our health care professionals. About 11% of that total in the quarter was locums, which is a very nice sign. Also, might give you a little bit of color for our Q4 pipeline. It also remains very robust. Today, we have verbal awards and contracting a little more than $130 million in gross spend. That's excluding the Kaiser renewal that we talked about before. So this gives me a lot of confidence that we're going to continue to do very well in Q4, especially more than even Q3. And it puts us on pace to improve over last year. And again, as a reminder, last year's total wins and expansions were about $226 million in clinical gross spend, so we're looking like we'll be able to improve on that as well. Beyond -- I've talked about here, the pipeline looks really strong as well, below the contracting works, so I'm feeling really bullish for next year as well.

Great. And one follow-up. I think you said $130 million is what you're looking at for Q4. Does that include any abnormally large awards? Or is that just -- that's an impressive number. Just a little bit more color on that.

It's a nice spread actually. The -- sort of the highest one in there might be in the $35 million-ish range, so it's a really nice spread of customers.

And our last question will be from the line of Brooks O'Neil with Lake Street Capital Partners.

I was hoping you might talk a little bit -- I think in recent quarters, you've talked a little bit about hospital tactics designed to kind of limit hospitals spending on temporary staffing. And I don't think I've heard you say much about it this quarter, so I'm curious if the environment has eased a little bit. Have they changed their tactics? Or what's going on out there?

Thanks, Brooks. That's a great question. I think hospitals or any health care organization are -- is always trying to find new ways and do a better job of engaging and retaining their clinicians. So I don't think they've stopped doing anything. It's just that some of the tactics, such as working their existing clinicians more overtime, were not necessarily sustainable, and you see that reflected in the BLS data. And if you go back to just August, health care job openings remains up year-over-year. Did not -- the number of quits were actually up 23% year-over-year, which I think is the highest on record. Separations are also up. We're on track. And the separations includes, by the way, things like retirements. And we think that's perhaps the highest on record as well and should be for the full year. So we don't think that some of the tactics they're using are enough to retain people. And in some cases, they're actually working against them. If you are planning to cover your shifts by just working people more overtime, even if you pay people more, that usually only lasts so long. So I think we're just seeing perhaps some of those things play out a bit of their natural course.

I was thinking of one other thing. Just my sense personally is that tailwinds have continued to blow strongly for the health care staffing industry, and at the same time, I sense that there's kind of quarter-to-quarter, there's been a series of sort of disruptions and disappointments, if you will, that have kind of caused bumps in the road for you and other players in the industry. So how would you -- how do you think about it in sort of the intermediate term in terms of the balance between the ongoing tailwinds for the industry and your ability to kind of take advantage of those tailwinds and deliver what we might consider really strong ongoing results versus having to deal with these sort of episodic issues quarter after quarter?

When we think about the tailwinds that exist, I think first about the more macro trends that create tailwinds for health care but really for our business specifically, and they would be things certainly like the economy but also, the aging population driving higher level of acuity but also consolidation. I mentioned that, and I really think that's been a really important trend for us and why you're hearing Dan talk about the momentum we've seen in MSPs but also things like RPO and other forms of Workforce Solutions, because as these systems become larger, they must find ways to create more best practices, more of a shared services center and cost synergies across their different facilities. It's one of the things that Kaiser Permanente has done so brilliantly over the years, is really create some best practices across their system. And you'll see more of that at other systems across the country. And so I think that's a very strong tailwind for us because we are so well positioned in our leadership of MSP but also VMS and Other Workforce Solutions like Avantas. And we will continue to innovate, both within our existing businesses but also potentially acquire other things to really help those clients at that more system level. And it doesn't mean that we won't also focus on individual facilities, but those trends are definitely hitting our sweet spot. So I think it's important that we don't lose sight of that. And if we have good underlying trends within the labor market, which for us, good means it's a tight labor market, then that should help us not only build our client base but also our fulfillments within those clients. Now the sort of little speed bumps that we've had, the disruptions, as you've called them, such as in locums, and that's not necessarily small, but it is taking away, short term, the opportunity that we would have to grow our consolidated revenue profitability. But once we get that turned around, I think that we should be in really great shape. So I don't know if that helps answer your question.

It does.

And now we'll turn it back to our speakers for closing remarks.

Well, terrific. We really appreciate you all making time on this Halloween evening to learn more about our progress in the business. We have, as I said before, a lot of bright spots, a lot of even more recent trends that we think are very positive and a lot of things that set us up very well for 2019. We're not without our challenges, but I think, as you can tell, we're very focused on those, and our teams are working diligently. And we are indeed making progress. So we are -- we're really excited about where we're positioned and how we're moving into next year. So everyone have a great rest of your evening.

Thank you. 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.