AMN Healthcare Services Inc

Ladies and gentlemen, thank you for standing by. Welcome to the AMN Healthcare First Quarter 2019 Earnings Call. At this time, everyone joining by phone will be in a listen-only or muted mode, and then later we will conduct a question-and-answer session. If you do have a question, you may press star then 1 on your touchtone phone, and you may remove yourself from the question queue at any time by pressing the pound key. If you are using a speakerphone, please pick up the handset before pressing the numbers. Once again, if you are getting into the question queue, you would press star then one on the phone keypad. If you do need operator assistance at any time during the call, you may press star and then zero on the telephone keypad. As a reminder, the conference is being recorded. I'll now turn the meeting over to our host, Director of Investor Relations, Mr. Randy Reese. Please go ahead, sir.

Good afternoon, everyone. Welcome to AMN Healthcare's first quarter 2019 earnings call. A replay of this webcast will be available until May 16th 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 our financial reports page at amnhealthcare.investorroom.com. On the call today are Susan Salka, Chief Executive Officer, Brian Scott, Chief Financial Officer, Kelly Rakowski, President of Leadership and Search, 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 are grateful that you could all join us today and glad to have some positive news to share. We're pleased to announce financial results that are above our guidance for the first quarter, with all segments performing slightly better than our expectations. We're optimistic that many of the positive themes that you'll hear from us today will carry forward through the remainder of the year. We're also thrilled to discuss our recent announcement regarding the execution of an agreement to acquire Advanced Medicals. which is one of the top allied therapy staffing companies in our industry. Advanced also has a strong position in the placement of nurses in some of the most critical and chronic shortage specialties our clients need. They have made particular strides in growing their capabilities in the delivery of therapy services in schools. They serve school districts across the country and have extended their delivery through the launch of a teletherapy technology platform This acquisition will bring complementary offerings and the ability to increase the talent network to serve our collective clients. We are also very excited about the talented team at Advance. The organization, led by Jennifer Fuccelli, is one of the most innovative and entrepreneurial teams I've ever met. We share common values and the passion, drive, and genuine caring for patients. This is an opportune time to bring the ADVANCED organization into the AMN family as we see the demand for travel therapy and nursing grow. ADVANCED has a team of extremely capable recruiters and account managers to ensure we are serving these clients well and exceeding their expectations. They also have built a strong client base that presents an opportunity for us to introduce AMN's portfolio of workforce solutions. The acquisition will go through the normal HSR regulatory review, and we expect to close the transaction by early June. Until then, the organizations will remain separate. However, we have begun planning for a post-close integration. Brian will share more color on this transaction later on. Now getting back to our results and the market environment. The labor market continues to be tight within healthcare, with vacancies at all-time highs, and turnover in the double digits for many organizations. In addition, while healthcare hiring is up, the leakage from attrition means that many healthcare organizations struggle to meet their desired staffing levels. We've seen orders rising in many of our staffing businesses with particular strength in travel nursing, allied and interim leadership. Another key theme is that healthcare systems and large enterprises are searching for sophisticated partners who can help them address workforce management strategies. AMN has a strong track record of delivering results with such large, complex organizations. So far in 2019, we have signed new MSP and expanded several existing MSP relationships, totaling over $150 million in gross spend under management. with excellent service line and geographical mix. The pipeline for the future is also strong, as we have eight new clients in contracting that will add another $160 million of gross spend to our portfolio. We certainly do not win all opportunities. However, we're very pleased with and proud of the strategic partnerships we are building. Now let's review our latest results and outlook. First quarter consolidated revenue of $532 million grew 2% year-over-year. Growth margin was 33.2%, and adjusted EBITDA was $66 million, or 12.4% of revenue. Our nurse and allied segment posted revenue of $337 million, which was flat year-over-year, despite comparing against a very strong quarter a year ago. Revenue for our largest business, travel nurse staffing, was flat year over year. However, this is a better story than the numbers might suggest. The year over year comparison in nursing revenue was particularly difficult due to a surge in winter assignments and a very strong flu season in the first quarter of 2018. In addition to these tough comps, we mentioned when we gave guidance that one of our largest clients had a reduction in demand. Excluding this one client, travel nurse staffing revenue grew about 5% year-over-year in the first quarter. Demand in travel nursing continued to strengthen as we exited the first quarter, and today it's at the highest levels we've seen in two years. In fact, travel nurse orders are currently up more than 25% compared to prior years. Allied staffing continued its winning streak with revenue growing 10% year over year on strong volume and improved trends in our therapy business and continued strength in our imaging lab and respiratory disciplines. Order growth and bookings lead us to expect continued mid-single-digit growth or better in the second quarter. We have several new MSP clients being launched throughout 2019, and most of these include nursing and allied services. Based on the positive environment and these great MSP client additions, we expect demand to remain strong as the year progresses. Even though we're in a supply-constrained environment, we should be able to drive volume growth and see some modest pricing expansion. As we look to the second quarter for this segment, we expect total nurse and allied revenue to be down 3% to 4% year over year, This negative variance is completely driven by a $25 million labor disruption event in the second quarter of 2018. Excluding this prior year event, this segment is expected to be up about 4%. In the locum tenens segment, first quarter revenue was slightly better than we expected at $80 million. This is still 22% below prior year as we continue to work our way out of the disruption created by process and technology changes we made last year. On this call, I'm glad to say we can talk more now about progress. Productivity, as measured by weekly net days booked, stabilized in the first quarter, and April was further improved. Our total demand within this segment remains strong, but there are specialties like emergency medicine and hospitalists that remain significantly under prior year. One area of particular strength is our locums MSP performance, where both new demand and fill rates are above prior year. We have increasing confidence that our locums team is on track for improved performance. For the second quarter, locum tenants revenue is expected to grow about 2% sequentially, but will still be down significantly year over year. First quarter revenue in our other workforce solution segment was $115 million. Year-over-year growth was flat organically and up 42%, including our April 2018 acquisition. Our interim leadership and permanent placement businesses comprise about half of this segment's revenue. These business lines collectively grew 10% year-over-year with the organic comparison flat. The pipeline and placement activity for interim leadership and physician perm has grown as we've progressed through the year, and we expect both to deliver year-over-year growth in the second quarter. Kelly Rakowski, who joined AMN as our first President of Leadership and Search Solutions last year, is here with us today to help answer any questions that you might have about these businesses. She has done a terrific job bringing the teams together to develop a unified go-to-market strategy, and we are certainly benefiting from her knowledge of the healthcare industry and how we can become an even more consultative partner for our clients. Welcome to your first earnings call, Kelly. Other workforce solutions also includes our VMS business, where revenue was flat year over year in the first quarter. However, trends have also improved here, and we expect year-over-year growth in the second quarter. Our workforce optimization and predictive analytics team at Avantis reported another solid quarter of growth, improving both revenue and EBITDA year-over-year. This growth was driven by several client expansions and new client wins. In the second quarter, total revenue for the other workforce solution segment is expected to be up 1% to 2% year-over-year, with growth in most business lines somewhat offset by a small decline in mid-revenue cycles. As we think about characterizing the industry environment and AMN's position, I would offer these thoughts. Our market appears to be relatively strong, with demand up across most business lines. And while there's always concern of a future economic downturn that could change this environment, our current order trends and last week's GDP numbers suggest that a slowdown is not likely to occur in the near term. Second, the growing complexity and size of healthcare organizations require them to seek equally sophisticated and innovative partners. AMN's suite of solutions puts us in a unique position to be that strategic partner. Our continued success in winning new clients and expanding existing relationships is a positive indicator that we have the right solutions for this transformative time in healthcare. Third, we continue to take a caring and disciplined approach to how we grow the AMN enterprise to serve all of our stakeholders. This year, we are making important investments in our businesses to ensure that we have the technology platforms and digital capabilities to engage and serve our clients and healthcare professionals. We are also further evolving AMN's work environment and adding resources to develop our team and ensure they are reaching their goals. All of these investments are made to fuel organic growth. We are also deploying capital in new and expanded capabilities through acquisitions, like Silver Sheet in advance, using our balance sheet to further diversify and strengthen our offerings. AMN Healthcare has a long history of innovating, and delivering increasing value to our clients, healthcare professionals, and our team members. Anyone who knows AMN Healthcare well knows that we are a purpose-driven organization and committed to making a positive impact through our time, our talents, and resources. As a trusted partner in the care of patients and families, we are on the same journey as our clients to deliver the best patient outcomes possible and to lower costs, increase healthcare equality, and improve the experience of healthcare professionals. At AMN, we also take our passion and purpose beyond our core services into the local communities and to support important social issues. We take pride in doing our part as a national leader in diversity and inclusion, gender equality, and serving others in need through community service. I'm particularly proud that AMN is an active partner with global leaders on these issues such as the Bloomberg Gender Equality Index, the Human Rights Campaign, the 30% Club, and our investors such as the Hermes SDG Fund. We've been able to partner with these and several other organizations to sharpen our focus and learn best practices from other companies who are making a positive impact in these critical social issues. So when you think of AMN Healthcare, I hope you recognize that we are an organization with a dual purpose, to make a positive healthcare and social impact, and to deliver attractive returns for our shareholders. Now I will turn the call over to Brian for a financial update, after which Kelly, 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 $532 million was 4 million above the height of our guidance range. Although all three segments performed better than expected, the biggest upsides came from our nurse and allied segments. Gross margin for the quarter was consistent with our guidance at 33.2%, up 110 basis points from last year, and 60 basis points better than the prior quarter. Of the year-over-year increase, 80 basis points resulted from a second quarter 2018 change to recognizing certain physician-per-emplacement recruiting expenses in SG&A that historically were in cost of revenue. And our April 2018 acquisitions were 30 basis points accreted year-over-year to our consolidated gross margin. SG&A expenses in the quarter totaled $120 million, or 22.5% of revenue, compared with 20% last year and 21% last quarter. The year-over-year increase in SG&A margin was primarily the result of an increase in stock compensation expense, the physician perm placement cost shift, higher integration expenses, and higher legal costs. First quarter nurse and allied segment revenue was $337 million, essentially flat with the prior year and 2% higher sequentially. Nurse and allied gross margin of 27.9% was down 10 basis points from the prior year, so up 70 basis points from the prior quarter. Segment EBITDA margin was 14.2%. Segment revenue and gross margin were favorable to expectations, in part due to a few small but high-margin projects. First quarter locum tenant segment revenue of $80 million was 22% less than the prior year and down 2% on a sequential basis, both driven by lower volume. Locum tenant's gross margin of 27.7% was down 100 basis points in the prior year, though better by 50 basis points sequentially. Locum tenant's adjusted EBITDA margin was 7.1%, down 260 basis points year-over-year, driven by the lower gross margin and deleveraging on the low revenue. First quarter of the workforce solution segment revenue of $115 million was up 42% year-over-year, but down 2% sequentially, with year-over-year growth coming from the acquisition. Gross margin of 52.6% was lower by 100 basis points year-over-year, but up 90 basis points sequentially. The year-over-year variance was due to the acquisition of MedPartners, partly offset by the physician firm placement reclassification. On a consolidated basis, first quarter adjusted EBITDA with $66 million was down 1% year-over-year. Adjusted EBITDA margin of 12.4% was lower by 30 basis points year-over-year and 20 basis points eventually. We reported an income of $34 million and diluted earnings per share of $0.71 in the first quarter. Adjusted earnings per share was $0.75 compared with $0.81 in the year-ago quarter. Our gap income tax rate in the quarter was 13% and was 29% on an adjusted basis. Our tax rate is expected to be 29% in the second quarter as well. Cash provided by operations was $36 million for the quarter. Day sales outstanding at quarter end was 62 days, two days better than last quarter, and compares with 58 days in the year-ago quarter. At March 31st, cash and equivalents totaled $19 million. Capital expenditures in the first quarter were $7 million. During the quarter, we repurchased 370,000 shares of stock for $18 million. As we have executed on the majority of the prior share repurchase program, the board recently added $150 million to our open-ended repurchase authorization. At quarter end, our total debt outstanding was $475 million, and our leverage ratio was 1.9 times the once. As Susan mentioned, earlier this week, AMN executed on an agreement to acquire Advanced Medical for $200 million, plus the potential of up to an additional $20 million based on achieving certain 2019 financial targets. Advanced is currently operating at an annualized revenue run rate of approximately $140 million and adjusted EBITDA of $20 million. Just over 60% of their revenue is allied staffing across settings including hospitals, schools, skilled nursing, and home health. The balance of the revenue is from travel nurse staffing, with a particular focus on hard-to-fill positions in areas including surgical units, emergency room, and pediatric care. Combining advanced into AMN is expected to reduce our consolidated gross margin by about 30 basis points, but should be slightly accretive to our adjusted EBITDA margin and be immediately accretive to our adjusted earnings per share. Transaction is expected to get regulatory approval to close by early June. and we intend to fund it through our existing bank-led credit facility. The performer for this acquisition, our calculated leverage ratio is expected to be 2.4 times the one. Now let's turn to second quarter 2019 guidance. The company expects consolidated revenue of $518 to $524 million, down 6% to 7% year-over-year due primarily to a prior year $25 million labor disruption event in the nurse and allied segment and a decline in the locum tenant segment. Excluding the impact of the prior year labor disruption event, consolidated revenue would be down about 2% due to the lower locums revenue. This guidance reflects the normal seasonal sequential decline in our nursing business and does not assume any material labor disruption event. Gross margin is projected to be approximately 33.5%, and SG&A expenses as a percentage of revenue are expected to be approximately 23 to 23.5%. Adjusted EBITDA margin is expected to be approximately 12%. Other second quarter 2019 estimates include the following, interest expense of $5.8 million, depreciation expense of $5.3 million, amortization expense of $6.8 million, stock-based compensation expense of $4.5 million, and acquisition, integration, and other extraordinary expenses of about $4 million. The alluded share count is expected to be 47.5 million shares. This guidance does not include the pending acquisition of advanced medical. When the acquisition closes, we will be able to provide an estimate of the impact to our second quarter revenue and earnings. And now, we'd like to call for questions.

Ladies and gentlemen, if you would like to ask a question, please press star then one on your touchtone phone. You'll hear a tone indicating you've been placed in a queue and you can remove yourself from the question queue by pressing the pound key. If you are using a speaker phone, please pick up the handset before pressing the numbers. Once again, for any questions, press star, then 1. And our first question from the line of A.J. Rice with Credit Suite. Please go ahead.

Hi, everybody. Thanks for the questions here. First of all, just maybe expand your thoughts a little bit on what's happening in the market, the strength you're seeing in nursing and allied services. It sounds like you're doing a lot with the MSP. It almost sounds like maybe it's been a pickup and MSP wins. Is it deeper penetration with your existing accounts? Is it stealing share from others? Or what do you think is happening with the underlying tone of the market, I guess?

Hi, AJ. This is Ralph. That's a good question. Yeah, MSP is certainly a large part of the story. But we are seeing growth also in our other relationships. Third parties was our direct relationship, so it's kind of across the board. I think we are seeing an overall lift in the marketplace, but I would agree with you that there's probably a little bit of share movement there as well, given our recent large MSP win.

Okay. I'll pick up that on an allied, for example. We've had really strong growth across all specialties in allied. IRL being, I would say, the strongest, but the surprise has been the bigger pickup in the therapy business over the last couple of quarters in terms of the demand. And as we all know, it's a chronic shortage area. And this is why the advanced medical acquisition is all that more timely so that we have the opportunity to really leverage our combined databases to help both there but also our existing clients. Many of the new MSPs that we're winning include both Nursing and Allied. I mentioned that. So we have a lot of demand now but actually expect that that will even pick up over time.

Okay. Maybe two more specific questions. I know for the last year we've been talking about the headwind around the premium rate Is that you're pretty much done? I think you had talked about certainly first quarter it would be a little eased, and then second quarter you'd be pretty much done with all of that. Is that still the thinking, and how much does that factor into the numbers here?

Hey, Jay, this is Brian. I'll answer that quickly. Yeah, it's played out kind of as we expected, and we talked about the last couple of quarters. The first quarter average bill rate in nursing was down about 1%. And that really was the mixed change from a year-over-year basis. But as we get to the second quarter and we lap that decline we saw in the second quarter of 2018, we are looking at being pretty much flat on a year-over-year basis. And, again, that's really more mixed. The underlying pricing trends, we've seen a modest pricing growth over the last few quarters in a core rate. But as that mix has stabilized the last few quarters, we're pretty much lapped out by Q2.

Okay. Okay. And then just the last question I have, and I'll pass it on to the next person, is you've highlighted again this large account that's seeing less volume or enrollment or whatever. Is that sort of a permanent thing that you would just say, let's factor that into the year's outlook, or is there some reason that that was sort of a couple quarters and it might revert back to where we were?

Hi, AJ. This is Ralph. I appreciate the question. It's not a permanent thing. It's not like a strategic shift in the client's behavior. It's the reason why our clients use us is for that flexibility. And if unanticipated changes in their volumes or if their internal recruiting performs well, all of our clients kind of make these shifts. It just so happens this shift is in one of our largest clients. We do anticipate it to continue to impact this. for the next couple of quarters, and it's not a strategic shift. They'll continue to, I think, be a user of considerable amounts of contingent labor to shield themselves against economic downturns and other things.

Okay. All right. Thanks a lot.

Thanks, AJ. Our next question from the line of Toby Sommer with SunTrust. Please go ahead.

Thanks. I'd like to start by asking about... either your year-over-year growth or intended year-over-year growth by the end of the year in sales-generating headcount in different lines of business? And could you also make a comment about turnover of those sales-generating folks? Because, you know, in a strong labor market, as the company's top-line trends, you know, decelerate or decline, that directly impacts those people's earnings power. Thanks.

Thanks, Toby. I'll start with that and then perhaps have Ralph and Kelly chime in. But, you know, first remember with the acquisition of Advanced, we will be immediately adding some fantastic trained sales team members both on the recruitment front as well as account management. And we are very much looking forward to that because while we have great recruiters and have even some capacity still within our existing sales teams, the fact that we can kind of instantly add that capability for fill rates is going to be very helpful. So you can plan on us being up year over year for certain, and then we'll continue to see how each of the respective businesses grow to determine how much more we'll need to add. So maybe I'll ask Ralph and Kelly if they have any other color to add to that.

On the headcount side and travel nurse business, you know, we're kind of mid-single digits up in producer headcounts. our outlying business, kind of low double digits. And then, gosh, we had talked, I think, about our locums business needing to get back to a certain level. We did complete that very aggressive hiring plan in April, and so our income is up there as well, you know, considerably from last quarter. So on the turnover side, which is part of your question as well, our first quarter turnover was a little higher than we'd hoped in the locums business, but More recently, as April's come around, it's begun to come down. And then the other businesses, our turnover was actually quite the better than before. Kelly, you want to talk about interim executive?

Yeah, this is Kelly. I'll add to that from the leadership and search portfolio, which, again, is our interim management, leadership search, and physician perm. And our PO businesses, including two acquisitions over the past year, we've had very steady and stable acquisitions. headcount, very low turnover rates, less than 5% in the first quarter, which is just tremendous when you're going through some change. We've had strong both sales and recruiter engagement and certainly plan to add to our headcount, particularly on the demand side as we look to strengthen our account management and sales of large accounts. We anticipate adding to our sales force to help better serve the market.

Thank you very much. Could you comment on the MSP pipeline in specifically MSPs of size? And I don't know exactly where the break point should be on that, but maybe 30, 40, 50 million or higher in annual spend.

Thanks. Sure. So, Toby, this is Dan. As we kind of shared in our prepared remarks, we have in just the pipeline today a little over $160 million in gross spend. There's eight of those. Two of those would be in the category that you just asked about, so two fairly significant ones. What's nice about this and what's probably good color to add is when all of those are signed, that would be a 30% improvement over the full year of last year's MSP wins. is already greater than 60% of last year's count at a far greater average deal size. One of the things that I think is obvious is that the average number of service lines in those new deals is now up to three and a half service lines from two about 18 months ago, which is a good reflection that we're getting adoption of these sooner. The implementations of these is also 10% faster than it was last year, and so the time to revenue is improving. A lot of that is really based on very purposeful actions that we've made to grow not only our sales teams, but also improve our processes. So I feel really, really good about this, and one of the things that I think might be helpful, too, is just 13 to 15% of the pipeline now is locums, which, as you heard about before, is picking up nicely in that business, too, which gives me, you know, a lot of really great pride in the team, the way they've been acting.

Thank you. If I could just couple of travel nurse questions. Beyond your own revenue, I'm trying to think if you could add you know, the MSP spend to it, how much either staffing direct bill revenue or client spend in travel nurse do you now get to see?

Let me make sure I understand the question.

How much travel nurse spend do you manage in your MSP is a different way to say it.

Oh, boy. I don't know about specifically travel spend. We have a little over $2.6 billion right now under management. Toby, this is Dan. I'm sorry. So I would imagine... That's between MSP and our VMS. Yes, which I think was a question.

Yeah, if you look at the market overall, more and more is coming through for MSP or VMS. Within this MSP, it's still about a little over $1.2 billion, which is the largest part of the nursing, but it also includes allied and locums as well.

Okay. Susan, can you comment, or whoever's going to field it, comment a little bit more about the year-over-year growth that you quoted for travel nursing? Has that been a consistently high number in recent months, a building number? Just trying to get a sense for how that's developed. I am.

Yes, so it was really building through the first quarter and picked up more steam in March and April. And what's nice about it is it's a really great geographic spread as well as across specialties. And it's not overly concentrated, I would say, in terms of the incremental pickup in any one particular area. The other positive is that we've seen The specialties across the board continue to grow. And med-surg, which is one of the most typical specialties that we have demand for, has grown to the number two position. And that's always a really good sign in terms of the strength of the demand and the fact that not only are our clients having challenges with the specialty nurses, but they're having difficulty finding specialists the medical surgical nurses. So usually that's a sign of demand that's going to sustain.

Terrific. Thank you for answering my question.

Thank you, Toby. Our next question from Jason Plagman with Jefferies and Company. Please go ahead.

Hey, good afternoon. We have Kelly on the call. I thought I'd ask about the OWS strategy and outlook to kind of reinvigorate organic growth in some of those businesses, both in the second half and then into 2020.

Great. Thank you, Jason. This is Kelly. We're very excited about the strategy and our ability to align what has been really disparately run businesses with AMN all around STIRCH and leadership as well as on the physician side. So we spent the last several months doing a few things. One is aligning our portfolio. We did have some overlap of offerings, which was creating some market confusion and, quite frankly, some internal confusion. So we've gotten that aligned, and that's helped those businesses perform and fulfill needs better, which is why we've seen some MSP improvements. fulfillment rate increases, but more importantly allowed us to really align and get some better lift out of our sales resources in the market. So we were calling, sometimes had three or four different sales folks calling on the same clients, and we're resolving that and also getting more focused on segmenting the market and aligning our offerings to their needs. So the way we are supporting some of the larger systems differently than the way we're supporting, for instance, more ambulatory practices and getting much more specific around that. So we definitely expect to see some organic growth from those efforts. In addition to that, we're also looking at more consultative services that we can add to the portfolio, which will create more value for our clients and create more stickiness for us. So things like leadership development and coaching and succession planning, which allow us to be engaged with our clients in between transactions. So we expect to see some lift from that in this fiscal year, but a lot that will also carry out into subsequent years.

Great. That's helpful. And I wanted to ask about the pace of a couple of bigger contract wins that you talked about in prior quarters, the Kaiser expansion into new geographies and additional specialties and service lines, and then also the tenant MSP win. If you could give an update on those two, that'd be helpful.

So without trying to use too many people's names here, I'm really, really excited to say that all of the business that we had closed in the first quarter has been live as of last weekend. So the business has gotten to us faster than we were expecting, and all signs are very, very positive in that regard. And then for other implementations that are underway as well, I feel really, really good about some of the expansions and also the service line additions and growth as well. We're seeing pickup, albeit slightly early days, if you will, in both allied and locums, but we feel very good about the second half of the year for that.

Great. That's it for me.

Our next question from the line of Jeff Silber with BMO. Please go ahead.

Hey, everybody. It's Henry Chen calling for Jeff. I wanted to ask about the advanced acquisition. I was wondering if you could, I mean, you touched on it a little bit, but what attracted you to that organization? If there's any differentiating kind of features that makes them unique in the in the allied and therapeutic space?

Thanks, Henry. This is Susan. I'll start with that, and I know Ralph and I have a lot to say as well. As I mentioned, we've watched this organization grow and continue to do innovative things in the market. We've had the benefit of being able to work with them because they were a fantastic affiliate vendor within our MSP program, so we could also see the quality of their clinicians, the quality of their team, how responsive they are. And so it was just a wonderful opportunity to really add in what's complementary and what they do into our organization. And I actually believe they'll help us continue to innovate and do some really interesting things as they've begun to do through a little bit of teletherapy. It's early innings on that, by the way, but they've had some really nice early success and also in the school business. We love the school business because it's serving very important patients, our children, and it also tends to have longer-term contracts, usually for the full school year, so it has a recurring revenue element to it, and there's generally stickiness in terms of renewal of those contracts, and they've had really nice success in building that business rather quickly. Our allied team had also done a good job of building a base of business. So the ability to bring that together and to perhaps create some of the opportunities like we've created across travel nursing will be really interesting. I mean, I see that market as travel nursing 20 years ago. So I think there's a lot of opportunity for consolidation, still very fragmented, innovation. And so those were some of the attractive elements. Keep in mind, they have a a really great nursing team as well as allies. So I'm going to let Ralph pick up and talk more about some of the finer points.

Thank you. Well, I'll reiterate what Susan said. We got to know them because they were one of the top, if not the top supplier, and they've won our Supplier of the Year Award as an affiliate vendor. So we got to know them and their management team, the quality of their work through that. We've always been very impressed by them. I think from a capacity standpoint, the acquisition does help us expand both our nursing and our travel allied capacity. They have a large recruitment team that, while they're doing a great job in producing, we think under our model, there's an upside there, and that that would be beneficial. Also, they had margins that were very much in line with AMN and a pricing philosophy that was in line with ours and So that made it favorable as well. One of the things I think our customers like the most is that I think because of their market position, they specialize in these hard-to-find specialties in both their nursing and in their allied businesses, and they didn't just go after low-hanging fruit. And so our customers will benefit from their capabilities in surgery, speech, FLT, emergency room, women and children's. places where AMN does well, but they certainly have a lot of strength there that will sit on top of the AMN capabilities. I like that teletherapy, the platform there. I think, you know, both starting in schools today, but I think there's an opportunity to expand that down the road as those regulations loosen up a little bit and allow for more teletherapy. So you can tell we're kind of excited about it. I could probably go on and on, but hopefully that answered your question.

Yeah, no, that's great. Thank you so much.

And we'll go to Tim McHugh with William Blair. Please go ahead.

Yes, thanks. I just want to follow up maybe a little bit on advance. Can you talk about the growth rate that they're seeing, maybe from an overall perspective, and then within the travel nursing versus maybe the allied side of that business?

Yeah, sure. Hey, Tim, this is Brian. It's a great question because they're on a really nice trajectory right now on their growth rate. If you look back into 2018, They had made a couple of acquisitions in the nursing space a couple of years ago. And last year, as they were integrating that, they had a little bit of a slowdown in the nursing business. But the allied business has performed very well through that. So they were up last year double digits in the allied side of the business. And that's continued into 2019 as well. And that schools business we talked about, although still, you know, only kind of mid-teens mix of their overall revenue growing very quickly. It doubled last year. And they're looking at about 50% growth again this year as well. So the overall grades are interesting, and that school kind of fits into the allied umbrella. You're looking at double-digit growth. Last year, expecting the same in 2019, very consistent with the market we're seeing as well. And the nursing business now stabilizing and getting on track. And I think as we, as Ralph talked about, with the capability they have, they've invested a lot in their team as well in adding more resources. It's kind of perfect timing with the amount of environment we have and giving them access to our orders. there's a lot of opportunity for them to get that nursing business growing more quickly as well.

Okay, great. And then I guess just when we think about that, though, I get if the demand is up, there's more supply, but is there any way to think about the overlap in terms of their capacity on the nursing side with your capacity from a geographic or I guess, you know, specialty line. I know they were kind of specialized, but parts of your business are specialized as well. So I'm trying to understand, I guess, the overlap, if you think about that.

Well, one way to think about it, Tim, is while there might be overlap in candidates, there always are to some degree as we compare databases. So much of it is about the recruiter relationship and capabilities. And so even though we may have the same candidates, in both of our databases, their recruiter may have a stronger relationship with that individual. We don't think there is, first of all, that much overlap, and second, I think that they're going to be able to pretty quickly ramp up the placement of the candidates that they have that perhaps they haven't always had a position for by gaining access to our MSP clients. We really see this as being pretty much completely incremental to both our nursing and therapy business.

Okay, great. And then last question, I'm sorry, did you say that they were part of some of your MSP programs? I guess I'm just trying to understand how much they were a subcontractor in the past for those.

Yes, so this is Dan, Tim. They have been a supplier under our MSP programs to the extent that Those MSP programs were specifically focused on allies for the most part. And at the same time, I think Ralph mentioned briefly before, they're one of our award winners as well. So not only from a high-performance point of view, but also do business the way that we respect.

Thank you.

And our next question, Jacob Johnson with Stevens, Inc. Your line is open.

Hey, thanks for taking the questions. I guess going back to the demand environment, as you suggested, it kind of seems like this demand pickup for nurse and allied is kind of widespread. From the data we track, it suggests that nurse job openings are picking up at the health systems. Your competitor yesterday was talking about an improved demand backdrop. So I'd just be interested, you know, if there's anything anecdotal or any color you can add to what's driving this demand. Is it increased hospital volumes? Are we getting to the point where this aging clinician population is leading to shortages? Or is it just turnover?

Yeah, this is Ralph. I'll start. Others may have something to add to that. Hospital volumes have actually been pretty good, but they're not a lot stronger. And interestingly, our demand doesn't always fluctuate proportionately to that. But I think probably as we saw some of that slowdown last year was probably some pent-up demand that wasn't executed against either by their internal hiring or by use of contingent labor, and hence our flat volume. I do think that the quits have accelerated from what I'm hearing from customers in acceleration of retirement and job changes, both of which create opportunities for us. So, you know, even though there's like kind of a flu season is a lot weaker, you know, we're seeing higher demand. That's kind of an unusual, you know, thing to happen. So I would guess it is probably underlying patient volumes combined with their ability to recruit internally.

And I'll just add to that. This is Kelly from the recruiting process outsourcing perspective where we're managing mostly clinical hires. We've seen a similar level of demand as the contingent side. So our open new requisitions were up about 10% year over year. So I think it is a trend that we're seeing throughout all of their hiring needs in the hospitals.

Got it. That's helpful. And then maybe thinking about the trajectory of the locum segment from here, I think last quarter we talked about getting back to 100 million quarterly revenue run rate. Kind of as we sit here today, do you feel more confident in your ability to get there than we were on the last conference call? And then, you know, any commentary you want to give on maybe potential timing of that?

Yeah, I think we've talked about kind of this year being in kind of that 80 to 85 million and a rebuilding year. for us on a quarterly basis. You know, we definitely do see in the future getting back to that $100 million, but we don't have a date on that yet. But we do have, I think, the team, the technology, the processes in place to get there. The trajectory, you know, right now we're just going to be a little cautious, I think, about how it unfolds. We have, you know, a lot of new recruiters who are very early in their ramp. So far they are doing, you know, very well, but it takes both. months, you know, for them to really produce anything meaningful, you know, and so that retention of that group and getting them up to speed will probably define our future success. So good question to probably ask us every quarter how that group is doing.

We'll do. And then last question, since you all mentioned teletherapy, I attended a telehealth conference last month and was kind of surprised to see some of your locums peers there touting their telehealth abilities. I'd just be interested, you know, is that something you're doing currently with your locum segment or something you're looking into potential opportunity down the road?

Yeah, we've been exploring teletherapy for, gosh, almost four years. We've looked at, you know, various, you know, acquisitions and various models. So far, we've just been supporting customers who are doing that type of work. It's mostly in the behavioral specialty, but haven't found a good entry point for us to become a provider or to have a model. I wouldn't rule that out in the future for us.

Great. Thanks for taking the questions.

Our next question from Mitra Ramkapal with Sidoti & Company. Please go ahead.

Yes, hi, good afternoon. I just wanted to follow up some more on the advanced medical acquisition and try to get a sense in terms of the end market opportunities as you look at school staffing and also teletherapy in terms of how big those market opportunities can be and, again, the growth profile there.

Sure. Hey, Mitchell, this is Brian. So, I mean, it's a very large market. It's probably equivalent to some of our other categories. And it's highly fragmented today. So that's, as Susan mentioned, we look at where it is today and the evolution we've seen in our nursing and allied really bring more sophisticated solutions, more consultative approaches towards staffing of those schools. So we think it's a large market with a lot of opportunity to just grow within it, but it's also growing as well. There's great needs in the schools, and so we are looking forward to to really accelerate. Again, I mentioned they're already growing 50% this year in 2019 and seeing really good acceleration there and opportunity that's not a demand issue. So I think combining it with our school business, we see a lot of good things ahead. And again, it's not just the market and filling the jobs. It's really about how we can help those customers ensure that they have the right talent at the right time. We talk about tail therapy. Sometimes it's very difficult to find the right skilled laborer to to meet the needs in some of the rural areas. So this is a great way to address that as well. So that's the innovation we're talking about with Advance. We think they can do some really good things to bring sophistication to that market.

Okay. And in addition to the revenue opportunity, I think from Ralph's earlier comment, it seems like there should be some synergies from both the sales force and a recruiting standpoint. Is that fair?

Yeah, there should be. We would expect them to – participate at a higher level in our MSP programs. And as we talked before, we have those orders for some period of time exclusively. So that would improve their revenue growth probably, particularly in their travel nurse business from where they're at today. And then also, I think there's some opportunity for us to sell other services like Kelly's lines of businesses into their customers, the interim executive and those They're search businesses, so there's some cross-selling opportunities, probably both ways there. I think that's good. You know, the TAM question, there's not a good source for that, so I want to go back there for just a second. We have seen numbers that range from kind of $2 billion to $7 billion, but a lot of the school systems don't have any of these type of employees. They've never had to hire one, and so they're really kind of trying to address the legislation and provide that support for students, so, you know, That's part of the reason why the market is growing so fast, but it also, I think, is very large, and it's unlikely that the school systems are going to be able to figure the problem out on their own. So we do feel like it's a pretty big market.

Mitra, as you probably are familiar, there is a huge focus on helping to support schools in behavioral health categories, and so there's a lot of funding there. going towards schools to help bring in more resources for school psychologists, which quite honestly, we're not really doing now. That's a whole other channel of opportunity. Right now, the primary areas are speech therapy, occupational therapy, a little bit of PT, but once you have a platform, there's an opportunity to then think about how do we add in other categories. We're excited about how we can build upon what they already have at existing clients, but maybe think about more of a platform relationship, more consultative relationship with these school districts.

Okay, no, that's great. It seems like the acquisition certainly fills a number of needs or things you are looking to do. And finally, I'm just wondering, I know you still haven't closed, really close on it yet, but as you look forward, I mean, in terms of your overall offering now, should we expect really consolidating your existing businesses, or are there still some areas you still would like to explore or get into?

When we think about our acquisition strategy, if that's what you're referring to and where we might continue to be looking for opportunities, it's really still very focused on really three categories. One is workforce solutions. And Silver Sheet was a great example of something we did earlier this year to help our clients in this area of credentialing and compliance. So anything that helps our clients be better at recruiting, onboarding, credentialing, optimizing, and maybe developing and retaining their staff are areas that we want to look at. Second would be to really create more scale in areas where we see strong demand, where perhaps we ourselves are not at scale yet. So schools was a great example of that. We have a great therapy division, but it can certainly be even bigger and even have higher fill rates. So this helps us achieve that. And then certainly the nursing piece is always helpful when demand is growing. So we'll continue to look at categories. where we feel that we can either add important talents, innovation, or in some cases some scale to an area where we see future growth.

Okay, that's great. Thanks again for taking the questions.

Thanks, Mitra. Our next question from the line of Mark Marcon with RW Baird. Please go ahead.

Good afternoon. I was wondering if you could talk a little bit about, a little bit more granularly about the school placements. What types of people are being placed and typically how long are the assignments and who's the competitive set? How do we think about the economics in that particular area? And Ralph, when you said that two to seven billion, was that specifically as it relates to the school area or was that including the therapy?

That's the schools. You're right, the therapy market is probably around another two to three billion on its own. but the school's market is as big, we think, as the rest of the therapy market. Primary specialties right now are speech and other behavioral therapies. The assignment lengths are about nine months long, same as the school year. That's probably something we, probably when we close the deal, we should give you some guidance on how to look at that because the summer months, they don't need the help, so we could probably provide that at a later date. But we think there's opportunities beyond those specialties. We don't really do much in school nursing right now, but these school districts also need support in that area. So there's other upsides to it as well.

Getting to the competitive landscape, we think that it's very fragmented, and all of the players, we believe, are under $100 million in revenue. So that gives us plenty of opportunity to certainly have growth ourselves. And the market's growing. But also as we might think about future opportunities, there are other acquisitions that we could tuck into this to continue to build out our footprint.

Great. And then with regards to just their coverage on a national basis, how would you describe that and how much would you look to invest to, you know, increase it?

Yeah, this is Brian. They are already a national provider across their nursing and allied, and even within the schools, they're in multiple states today, and that's growing as well. So they're continuing to win new school districts. They're in a lot of the states you would imagine, some of the bigger ones, but they're really looking to be a national player in the space, and their platform really allows them to serve any market very efficiently as well. The other part we like about this is once they get in, it's a little more, like I said, it's very fragmented, a lot of local kind of mom and pops in each of the markets. So when they come in and they can bring more sophistication and more consistency, they're finding that the districts really want to expand that relationship with them and have put them in a more preferred relationship. So some really good tailwinds, and it should create more recurring revenue for them over time, is once you're in and you're doing a good job, you're more likely to have that school year. As the next school year comes up, they're going to come back to you again if there's need. So we think it actually will create more consistency in our revenue model over time as well.

Great. And then just the margins on that part of the business, how is that going to impact? Because that sounds like it's going to be the fastest growing. Is that correct?

Yeah, the margins are pretty similar. I think over time, as they have technology enablement, it probably can allow for a slightly higher margin. But the gross margins for the business overall are very much aligned with our nurse and allied segments. As I mentioned, on a consolidated basis, it brings down the margins slightly, but within the nurse and allied segment, it's very consistent with our existing one. So, again, in all cases, as we grow, we can get more scale, but in the near term, it'll fit right in with our current margin profile.

Okay, great. And then just with regards to the comment with regards to demand picking up, do you see, first of all, what are the constraints to filling that demand, number one? And number two... Could we start seeing a resumption with regards to the premium pricing, or how do you think about that, just if the demand is really outstripping supply?

Yeah, I think we're going to have to see a little more sustained timeframe for that demand to remain at high levels before it starts to impact pricing, so I'll just address that one first. Right now, the big issue for us is this supply-constrained environment, and so we're you know, two things with the, you know, new demand is never exactly where you want it. You know, it's never from the same client you served yesterday. So it always takes us a little bit of time to pivot our recruitment efforts to align to the new demand, excluding the MSPs where I think we see it coming well and where we can get in front of it. So, you know, I don't No, if there's any other way that we could characterize the demand other than we have, it is, you know, widespread. It's both MSP and non-MSP. It's across, you know, all specialties. And it's not geographically centered anyplace.

Yeah. And the long-term, this is Brian, from a premium standard, we really would prefer if the demand is at the level that's at for a sustained period is to work with clients to really get their standard rates where we need them. And that will allow us to attract more supply in the industry as well. We don't want to draw on the premium rates. It creates a little more volatility for both us and for the client. Ideally, as we continue to have really strategic dialogues, we can make those appropriate pricing changes to allow us to be able to fill their needs more consistently as well.

Brian, on that point, how quickly do you think you could potentially do that?

Well, that's a continuing dialogue we're having with our clients all the time. And as I mentioned, our underlying core rates have been increasing modestly. If it was growing a little more quickly, then we would be able to probably attract even more supply. But that's a continuing dialogue. It's one of the real benefits of our MSP programs is that we have that daily ability to encounter and talk to our customers about the market conditions, and we can more quickly adjust to that with them as well.

Mark, I think, as you know, this is something that is really a discussion with the client, and they make the decision ultimately on pricing. It's a consultative discussion. We share data with them about what's happening in certain specialties across the country, within their region, and then ultimately they decide on what the pricing should be. So it's difficult for us to say exactly when and how much since we're really not controlling that.

Thank you. Our next question from the line of Bill Sutherland with the Benchmark Company. Please go ahead.

Thanks. Hey, everybody. Just a couple here. On Locum, do you feel like you've got the system functionality up at the level, like at 100%, you know, so that everyone can be productive at this point?

Yeah, I appreciate the question. It dominated the last call, so I'm glad that it's not something that's a drag on us right now. We had several system releases since the last call, all of which were enhancements to increase the recruiter productivity, the placement speed, and we're starting to see the benefits of that. I do think we have a system that we can grow with. at this point. The other issue there was, remember, the user adoption of it. So they have to get used to using the new system. So we've got three months more behind us now. We recently went through some kind of assessment process of the individual users to see where they stood. Usability and their adoption to the tools was good. And then I want to highlight here for our IT team, They delivered a new search functionality that I think may be one of the best in the industry at finding just the right candidates in the database and filtering and sorting those so that we can turn them around to clients. And that has resulted in some very strong top-of-the-funnel or early-in-the-pipeline progress. So the number of candidates we're submitting is up. The number of candidates who clients are screening and interviewing is up. And so the last step is just the number of candidates that we get out on assignment to be up. And maybe we'll see a little sequential increase here in Q2 and hopefully bigger things in the back half of the year. Got it. And are you getting back up towards 250 producers? We are. I think we're at the targeted number of producers. We talked about the last call. So with account managers, the account's closer to 370. But on the recruitment side, you're pretty close there, yeah.

And I guess just a couple for Kelly, maybe. When you look at the mid-revenue cycle business, how do you think about that going forward?

Bill, this is Susan. And since that doesn't report to Kelly, I won't make her answer that. No. So mid-revenue cycle, we see really good demand within that business. As you recall, we have the peak health organization and then med partners, which we acquired last year. And so We've been bringing those two businesses together. We have now a fantastic leadership team, both the founder of Peak and we moved a leader over from our allied business, a woman who's been very successful there growing the sales organization and helping build the allied team. The two of them together are co-leading mid-revenue cycle. We also have the benefit of other leaders that have been with both PEAK and MedPartners for quite some time that give us that consistency and strength. So I mention that because you might recall we did go through some leadership changes there. The unfortunate accident by the president of MedPartners when she was in a plane crash last year. The good news is she's doing fabulously. But she chose not to come back to that role. And she's certainly always there for a phone call if we need to reach out to her. But the leadership team in place now is off and running. They've done a terrific job of getting the back office integrated over the last year. That's actually behind us now and working just fine. But I only mention that because it does create a little bit of disruption. And that business was down in the first quarter. year over year, and we mentioned in the second quarter it's still down a bit. I would chalk that up to disruption from the integration, a little bit of the leadership changes that we were making along the way, and there was one large client that made a decision to bring their coding services in-house rather than outsourcing it, and so we're feeling the effects of some of that.

Okay. Here's one for Kelly. When you want to expand in the consultative service area, can you just do that with just a normal hiring process, or do you think you want to try to find a boutique or something to add?

Great. Thank you, Bill. Good question. You know, we're first starting with the market perspective on what services we think are most relevant for them and most aligned with our capabilities today. We do have some I would say some talent inside the organization today that provides those services more on a one-off basis, so we want to build off of that. But we are looking to either strategic partnerships. I would say if we do an acquisition, it would likely be on the smaller side, and we might do a couple of them and roll them up in order to have some meaningful critical mass there. So it's probably going to be a combination of growing from – some strength in town that we have today, and then rolling up a couple. But we don't have any specific plans for that yet, and we'll certainly keep you posted as we do our market analysis and make some decisions in that area.

Got it. Thanks, everybody. Thank you. Thanks, Bill.

And we have a question from the line of Alex Marasia with Barenburg. Your line is open.

Hey, good afternoon. Most of my questions were answered, but I just have a quick one on M&A. When you're looking at potential acquisitions, what multiples are you seeing in the marketplace right now, especially with potential workforce solutions targets?

Alex, thanks. It's Susan. As we've discussed in the past, and you probably well know, any time you put a technology element into an acquisition opportunity, it increases the multiple, and some of the workforce solutions targets opportunities that we've looked at and that are likely to come about probably do have a technology component. So those can run anywhere from 15 to 20 times EBITDA or even more. And we're willing to look at those. There have been times when we felt there was too much work to be done to perhaps make that multiple appropriate for us. And so we backed away, but we will at the right time, I think pay a higher multiple if we think it's absolutely the right solution and service for us. And then on the staffing front, it's probably ranges between eight to 10 times would be sort of the range I would put out there. It depends on the margins of the business, the growth of the business, the categories that they're in, a variety of factors. So hopefully that helps.

Yeah, it's helpful. Alex, this is Dan. I just wanted to give you a little bit of a kind of client color around that. We've had some really fabulous early discussions with clients about SilverSheet as an example. And in each of those discussions, the client walks away saying, based on where my data is around our time to revenue and what we think we can do here, it's often an improvement of 50% time to revenue improvement or greater. So when you talk about, you know, the potential for those kinds of returns with customers that are really starving for nickels, frankly, it's a really fabulous way for us to add some serious value.

Awesome. Thank you. I appreciate it.

Thanks, Alex. Thank you. And I'll turn it back to our speakers for any closing remarks.

Thank you, Lori. We really appreciate everybody joining us today, and we look forward to updating you on our progress during our next earnings call.

Thank you, and ladies and gentlemen, this will conclude our teleconference for today. As a reminder, the conference call is being made available for digitized replay. The replay begins today at 7.30 p.m. Eastern Time, running until May 16th at midnight Eastern. You can access the AT&T teleconference replay system by dialing 1-800-475-6701 enter the replay access code 466135, and international participants may dial 320-365-3844 with that access code 466135. And that will conclude our teleconference for today. Thank you for your participation and for using AT&T Executive teleconference services, and you may now disconnect.