AMN Healthcare Services, Inc. (AMN) Q2 2017 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the AMN Healthcare Second Quarter 2017 Earnings Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given at time. [Operator Instructions] As a reminder, the conference is being recorded. I will now turn the meeting over to our host, Senior Director, Investor Relations, Mr. Neil Thomas. Please go ahead, sir.

Thank you, Laurie. Good afternoon, everyone. Welcome to AMN Healthcare's second quarter 2017 earnings call. A replay of this webcast will be available until August 17th at amnhealthcare.investorroom.com, following the conclusion of this call. Details for the audio replay of the conference call can be found in our earnings press release issued this afternoon. Various remarks we make during this call about future expectations, projections, plans, events or circumstances, constitute forward-looking statements. These statements reflect the company's current beliefs, based upon information currently available to it. Our actual results may differ materially from those indicated by these forward-looking statements, as a result of various factors, including those identified in our most recent Form 10-K and subsequent filings with the SEC. The company does not intend to update the guidance or any forward-looking statements provided today, prior to its next earnings release. This call contains certain non-GAAP financial information. Information regarding and reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are included in our earnings release and on the company's website. On the call today are Susan Salka, President and Chief Executive Officer; Brian Scott, Chief Financial Officer; Ralph Henderson, President of Professional Services and Staffing; and Dan White, President of Strategic Workforce Solutions. I will now turn the call over to Susan.

Thanks so much Neil. Good afternoon, everyone. And welcome to our quarterly earnings conference call. The workforce solutions strategy that we set for nearly eight years ago continues to evolve and deliver significant value to our clients, the industry and certainly to our shareholders. AMN portfolio of staffing, recruitment and workforce solutions enables us to help healthcare organizations in multiple ways as they deal with an incredibly tight labor market and the need for cost control. With the strong macroeconomic backdrop and clinician shortages, the AMN Healthcare team delivered another solid quarter. As importantly, the momentum we are experiencing with our current MSP clients and new implementation gives us great confidence as we look to 2018. Now let’s review our current results. Second quarter revenue of $490 million was 7% higher year-over-year excluding the labor disruption business. Our largest segment Nurse and Allied Solutions and our Other Workforce Solutions drove the growth. We hit a record high adjusted EBITDA of $67 million, which was 13% higher than prior year and represented a margin of 13.7%. This result a $4 million professional liability adjustment, but excluding this our margin was still 12.9%. The profitability growth we have enjoyed is due to the increasing contributions from our Other Workforce Solutions, as well as strong margin and expense management. We believe our professional liability costs are below the averages of the healthcare market and our industry, which reflects a strong quality and risk management program. We continue to make good progress on changing the economics sensitivity recurring revenue and margin profile of the company, by growing our Other Workforce Solutions which typically have higher margins we are able to improve our profitability while providing our clients with more value-added and strategic services. At the same time, we are relentless in our commitment to superior customer service and delivery. With our solid performance we are able to continue making essential investments back into the business, a combination of these factors are keeping us on track to achieve our stated goal of a 14%adjusted EBITDA margin by 2020. As I mentioned earlier, the overall operating environment remained positive. During the quarter we won new MSP deals with an estimated $85 million in growth spend under management, about $65 million of this is clinical spend, of which the majority is incremental for us. Our VMS businesses also continued to expand and add new clients. Our MSP and VMS pipelines are robust and expected to deliver continued revenue growth. Now let's take a look at performance and trends in our major businesses. Our Nurse and Allied segment posted revenue of $301 million, higher by 3% year-over-year. Excluding the significant labor disruption revenues last year this segment grew 9% year-over-year. Second quarter revenue for our largest business, Travel Nurse staffing increased 9% year-over-year. This is all organic growth, driven primarily by volume and price increases and it reflects another quarter of exceptional delivery by our sales, service and clinical teams. We remain focused on serving the needs of our clients, with a prioritization on our MSP partnership. As a result, approximately 65% of our Travel Nurse staffing revenue is from MSP-related placements. Since there have been some questions from our investors regarding demand for Travel Nurse staffing, I am pleased to report that the demand environment seems to be improving compared to earlier in the year. Since our last earnings call we have seen several weeks of increasing new orders and strong placement activity for future assignment. We also started receiving our winter orders and most clients are on pace to have this similar to prior year. At this time, we expect demand to continue in line with normal season pattern. In addition, we have several new MSP contracts that will be going live during the remainder of year and they should drive additional demand opportunity. In the second quarter, the Allied staffing division achieved another record quarter of revenue, growing 12% year-over-year. The growth was primarily driven by volume increases. The focus on our MSP clients has been a key driver of the revenue growth in Allied as well, with over 40% of this divisions revenue now coming from MSP contracts. We also hired our President, our new President for this division Robin Johnson. She brings 21 years of experience in the staffing industry and an excellent combination of recruitment operation, MSP management, marketing and sales leadership experience. We are very excited to have Robin on board. Looking ahead to the third quarter, the Nurse and Allied segment is expected to be up about 6% to 7% year-over-year and up 1% to 2% sequentially. In the Locum tenens segment, second quarter revenue of $108 million is slightly down year-over-year, with price increases partially offsetting volume declines. Overall demand for Locums is positive with many of our specialties experiencing year-over-year growth. However, a couple of our larger specialties, such as hospitalists and internal medicine sub-specialties have experienced declines. On a sequential basis eight of our 10 specialty categories grew volume and revenue. As you may recall we have bolstered our leadership team and they are making operational and organizational changes to return us to a growth trajectory. It will take some time for these changes to take effect, for the third quarter Locum tenens revenue is expected to be flat on both a sequential and year-over-year basis. Second quarter revenue in the Other Workforce Solutions segment was $81 million, which is 12% higher year-over-year. This segment is a bit of the tale of two cities. We are experiencing strength in our interim leadership VMS and workforce optimization businesses, which grew collectively about 18% year-over-year. However, our perm placement related businesses are facing challenges associated with slightly softer demand and sales execution and they experienced revenue of about 20%. Let me break this down you in a little bit more detail. Revenue in our leadership division was up 11% year-over-year in the second quarter. Strong growth in interim leadership placement was partially offset by softness in the search business. We continue to win new deals as a result of cross selling across our division and we remain positive on this base and believe we should experience year-over-year growth of over 10% for this division in 2017. Second quarter revenue from the VMS business was up 31% year-over-year. We now have 1.3 billion of vendor neutral spend flowing through this technology platform. Both of our technologies Medefis and ShiftWise continue to make investments to develop new features and functionality as well as improve their customer experience. Our VMS brands remained positioned to deliver another year of strong growth in 2017. Avantas, our workforce optimization offering, continues to expand into new clients and settings, and grew second quarter revenue by 21% year-over-year. Like many of our Other Workforce Solutions businesses we believe that they too are on track for another double- digit growth year in 2017. Physician permanent placement second quarter revenue was down 15% year-over-year, due to fewer searches and placements. So momentum experience as we exited Q1 unfortunately slow during Q2. We believe the lower than anticipated performance is primarily execution related and that the current underlying market should enable topline growth. We are moving quickly to address the areas where we believe we can evolve our business model and our talent to deliver growth. We would expect to see more positive results from this business in 2018. Peak Health Solutions, which joined the organization last June is performing well and grew sequentially with several new wins in the quarter. Overall, third quarter revenue for the Other Workforce Solutions segment is expected to be up approximately 5% year-over-year. Over the past decades we have transition AMN Healthcare from a staffing company to a strategic workforce partner for our healthcare clients. This evolution has allowed us to become more collaborative with our clients, creating greater trust and allowing for more opportunities for AMN to innovate. We are continuing our investments in our systems and infrastructure to create a more efficient and scalable platform that will allow us to better serve our clients and grow our business more profitably. Our drive for continuous improvement will not be possible with the dedication and passion of our team members. It is their talent and commitment that gives us confidence in our ability to evolve and innovate. I want to thank our team for their hard work, dedication and outstanding customer service. Now, I will turn the call over to Brian for a financial update, after which Ralph and Dan will join us for the Q&A section of the call.

Thanks Susan. Good afternoon, everyone. The company's second reported revenue of $489.8 million was just above the midpoint of our guidance range. There was no meaningful labor disruption revenue this quarter as compared to about $18 million in the same quarter last year. Excluding any labor disruption revenue, consolidated second quarter revenue was up 7% year-over-year and down 1% sequentially. Gross margin for the quarter was 32.9%, up 20 basis points from both last year and last quarter. SG&A expenses in the quarter totaled $96.7 million or 19.7% of revenue as compared to 21% last year and 20.6% last quarter. As Susan noted previously, this include a $4 million favorable professional liability actuarial adjustment, the majority of which impacted the Nurse and Allied segment. This compares to a $2 million favorable adjustment in the prior quarter, which is recorded in Locum Tenens segment. Excluding this adjustment SG&A this quarter was consistent with our guidance of approximately 20.5%. Second quarter Nurse and Allied segment revenue was $300.7 million, an increase of 3% from a prior year and the increase of 4% sequentially. Excluding any labor disruption, revenue was higher by 9% over prior year and lower by 4% sequentially. Volume was higher by 5% year-over-year, while the average bill rate increased 3%. Nurse and Allied gross margin of 27.8% was 110 basis points higher compared to prior year and 10 basis points higher sequentially. The year-over-year improvement was due to lower direct costs. Second quarter Locum Tenens segment revenue of $108.2 million was down 1% from a prior year and up 5% on a sequential basis. On a year-over-year basis, the average bill rate increased by 5% and the number of days filled was lower by 4%. Locum Tenens gross margin of 30% was down 130 basis points from the prior year and 70 basis points from prior quarter, driven mainly by lower bill-to-pay spreads. Second quarter Other Workforce Solutions segment revenue of $80.9 million was up 12% year-over-year and 3% sequentially. Gross margin of 55.7% was lower by 320 basis points year-over-year and higher by 70 basis points sequentially. The year-over-year variance was due to the addition of the lower margin Peak Health Solutions in June 2016 and revenue mix changes within the segment. Second quarter consolidated adjusted EBITDA of $67.2 million was up 13% year-over-year and 6% sequentially. The adjusted EBITDA margin of 13.7% represented an improvement of 120 basis points over the prior year and 90 basis points over the prior quarter. Excluding I previously noted professional liability benefits in both years, the EBITDA margin was higher by 80 basis points compared to prior year, due to both gross margin improvement and operating leverage. We reported net income of $31.3 million and diluted earnings per share of $0.63 in the second quarter. Adjusted earnings per share were $0.67 compared to $0.61 in the prior year quarter. Our income tax rate in the quarter was 39% and included a $1 million benefit from the adoption this year of a new accounting standard relating to the settlement of stock-based compensation. Excluding this benefit, our tax rate was 41%. Cash provided by operations was $18 million for the quarter and $71 year-to-date, which compares to $55 million in the first half of last year. Days sales outstanding at quarter end was 62 days compared to 61 days last quarter and 64 in the comparable prior year quarter. As of June 30, cash and equivalents totaled $23 million. Capital expenditures for the second quarter were $6 million. At quarter end, our total debt outstanding was $343 million and our leverage ratio was 1.4 times to 1. Now let's turn to third quarter 2017 guidance. The company expects consolidated revenue of $490 million to $496 million. This guidance assumes no material labor disruption revenue in the quarter, which is the same as last year. Gross margin is projected to be approximately 32.5%. SG&A expenses as a percentage of revenue are expected to be approximately 20.5% and adjusted EBITDA margin is expected to be approximately 12.5%. Other third quarter estimates include interest expense of $4.8 million, depreciation and amortization of $8.1 million and diluted share count of 49.5 million shares. That concludes our prepared remarks and now we'd like to open up the call for questions.

Thank you. [Operator Instructions] Our first question from the line of A.J. Rice with UBS. Please go ahead.

Hello, everybody. Thanks for taking the questions. First off, may be just to get some color on the commentary around, I coming out the first quarter early in the second quarter you guys have signaled little softness, now you are saying the last few weeks you are seeing some strengthening. When you talk to the clients, what are they attributing all of that to?

This is Ralph, A.J. Thanks for the question. Assuming you are asking about Travel Nursing there.

Right.

We do talk to the nurse managers. They are telling us that their internal efforts defined full-time nurses are not keeping with the demand that they have and but they are getting kind of downward pressure from hospital leadership to keep costs under control. And so with all this happening I think in early 2014 it’s seems very similar to what we saw then and but we have started to see in the few weeks orders begin to improve. The good news for us is that it hasn’t impacted our booking trends and so, well, our orders will still be below where they were in prior year when we experienced. There -- our ability to increase our bill rate with our MSP clients has more than offset that demands decline.

Okay. That was actually my next question was, can you us where you are at on fill rates in your MSPs and Nurse and Allied. I know you have given us some of those, some feeling for that in the past is that moved around much?

Yes. It’s a good question. And normally give, I think, our very specific number but they are over prior year within our MSP accounts, probably in the neighborhood of 1000 basis points.

Yeah.

Right now and there is upward room and we’re not at historical highs or anything like that left for us to continue to book into fill rates or MSPs, if we saw further softening in demand, but we don't anticipate that, we think that demand is begin to improve.

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

So, hospitalists make up about 20% of our Locum’s revenue right now, so that’s the one that really kind of the biggest drag there and we are like -- we have been talking about it for -- about three quarters now, maybe almost four, but the demand there continues to trend downward. We’re not going to quite lap it for a little bit on that. The two issues there that we are hearing from client is that, a number of transitions for physician practice management have been decreasing and so that usually cause us some turmoil which creates the need for Locum Tenens until when they are not switching between team health and internal staff. They just need more Locums. So they need less Locums. So that’s part of it. The second part of it is a bit of a change in how hospitals are deployed, hospitals are starting use advanced practice professionals and primary care doctors in those role and they kind of increases supply which also has decreased the demand on that specialty. You will see our advanced practice numbers are up year-over-year 25% or something like that. So we have -- we are able to offset little bit. The bill rates are different, so that hurts and if it’s not a perfect sign. Internal medicine have specialties which is all the ologies is the other areas that we have been talking about that one for a while and I hated that we should had super power and I could fix it very, very quickly. But it's been a long-term for us to kind of master the craft in that area and so we made some leadership changes to that business. We have increased our recruitment efforts, our sales efforts are very polished, people expect that at some point we get that turnaround. But that’s not a market issue, I think, that really is more of a -- we could do a better job there issue.

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

Yeah. That’s a good question. It’s Ralph again. The -- we talk -- Brian was talking about the fill rate increases have been about 3% in that segment. Actually nurse wages increased about the same rate maybe 50 basis points difference, so there are -- we are not -- we don’t had really seen a lot of upward pressure on wages or erosion of spread or anything like that. I wouldn’t think that we were going to seeing here going forward with demand being a little bit software either. So it’s in good balance. I think there is a good job of keeping at an order level a balance between, right, getting a customer’s need filled, finding a right nurse, paying just a right amount of money and the bill rate itself, as a matter fact the margin for that business increased year-over-year about 100 basis points. They had a little softness Q1 last year and they have kind of lap that now and that margin is back to a good place.

So, I wouldn’t say there is any unusual compression going on.

Okay. Great. Thanks a lot.

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

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

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

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

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

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

Yeah. And we are doing a quick calculation here. Those two were…

Mid-single digits, perhaps, mid-single digits.

Okay. To get it about a quarter.

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

That’s helpful. Thank you.

Thanks.

We’ll go next to Brooks O'Neil with Lake Street Capital Partners. Please go ahead.

Good afternoon. I am sensing just a little bit of caution in your third quarter guidance and I'm curious, A, am I reading that correctly; and B, if I am, what is it that might be driving that caution in your mind?

Hi, Brooks. This is Brian. Well, I think, we have covered actually of the areas that that reflect that in the Locums business and perm placement business, it has been probably the major areas that we have underperformed we wasn’t expected and so that's probably the major reflection of the guidance being on a little bit lower than what the consensus out there, that’s the biggest piece. But we think Nursing and Allied is actually performing relatively in line with our expectations.

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

Brooks, I think, the one thing we can point to would be those new orders that I mentioned.

Yeah.

And the fact…

Yeah.

… those are orders for individuals that would start generally a couple of months from now and in some cases even early 2018 and so that tells us that they believe their census is going to be at or above what their expectations were and they need the typical seasonal workforce that they might bring online, but perhaps, they might be caught off guard even with their permanent positions. So we heard a little bit of that and totally across clients that they want to expect these censuses to be at certain level and then they get surprised and then that, of course, we can drive some demand for us as well.

Great. Thank you very much.

Thank you, Brooks.

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

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

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

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

Thanks. And on the Workforce Solutions business particularly the software business is, what is the competitive landscape look like now, you mentioned investing to add new capabilities, just want to get sense for where you see those business -- businesses positioned in the market? Thanks.

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

Excellent.

But we could explain with something later.

Okay. Susan, one last question, if you didn’t slightly like an uptick in orders further out in the future, if that -- if the better senses that you are hearing from customers does materialize as we work our way to the back half, is there an outlook for kind of better pricing, because maybe there will be a little bit more that kind of crisis pricing to feed into the bill rate growth?

Yeah. This is Ralph. I will start and Brian may have something to add on that. Well, the -- our crisis pricing hasn’t seem really a decline. So we are -- we have been pretty steady over the past several quarters and in light with last year’s metrics, so slightly higher than last year, the utilization of it. We wouldn’t expect to see a lot of increases in it unless we have some tightening of some rapid increase in demand or sharp decrease in supply. So -- but it’s at a level that it’s comfortable. I think probably can refer that from our guidance that we continue to think that our bill rates will go up over the next couple of quarters.

This is Brian. I’ll just add, I guess, it’s a little too early to tell at this point. Obviously our goal is to help fill as many of our client’s jobs, again, we -- and we started trying to fill as many of those at the standard rates and then as we get closer to those assignment dates then we will tend to use those more less clients need over there. So, I think, we -- it’s too early call that. We will have to wait until the next quarter plays out.

Okay. Thank you very much.

Our next question from Jeff Silber with BMO Capital Markets. Please go ahead.

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

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

Thanks, Susan, and thanks for the question, Henry, I wasn’t sure I was going to get a word in edgewise here. I'm really thrilled actually about our renewal activity. We have just based on some of the timing of how contracts have worked over the last three years, we came up on a pretty big chunk of renewals and we've been extremely successful, in fact, I want to call out [ph] Dr. Casilias (39:45) specifically. She has been sort of the super women of renewals. We have to-date, so through July renewed over $135 million, excuse me, sounds right, I mean, my number right at, $235 million, I mean, I know you read this, yes, $240 million in revenue and we've got a good bid left to do here in the second half that we feel really comfortable with that are all in contracting. So feel really strong about that capability. If you add that on top of the great new win performance, that Susan highlighted a bit earlier, we are really set up nicely for the second half and then into 2018. Our pipeline does reflect that too, so for Q3 our MSP pipeline is still over $90 million in gross spend for prospects that are in contracting today, both new and expansion activities. The other thing I would like to highlight just for a little bit of color is that we have excellent geographic diversity on these MSPs as well. We’re getting some nice expansion in the Midwest. We have some really nice new business in the Florida market and so there is in addition Hawaii, so we are really excited about offering our clinicians better places to go as well.

Got it. Okay. That’s great. And is there, so I am assuming there is no real slowing or anything related to ACA sort of noise that you guys are seeing.

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

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

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

Got it. Okay. All right. Thanks so much for the color guys. Thanks.

Thanks, Henry.

And we will go to Mark Marcon with Robert W. Baird. Please go ahead.

Good afternoon. Thanks for taking my questions. One is just to, with regards to the order growth that you are seeing, is that occurring beyond just the new MSPs that are coming on board and how widespread is that in terms of that pickup that you have been seeing in the last few weeks?

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

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

Hi, Mark. This is Da. So last year -- for the full year we had $185 million worth of MSP business wins, that will be new contracts and expansions and base accounts. For the first half, is that your question?

Right.

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

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

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

Right. So of the $185 million, I mean, you obviously already filling a portion of the business just given your size and breathe within the market.

Yeah.

So you are going to have some incremental that’s going to come through, just wondering how we should think about the cadence of that?

So I would say, incrementally for this year of the chuck that we -- that I just described the $55 million will probably get maybe 20%, 0.5% of that in this calendar year and of the $185 million from last year, if you think about the normal cadence of kind of 30 days to go live and kind of incrementally higher after that, then I would say somewhere in that sort of 30%, 40%, depending on the client percent in this year.

Okay. Great. And then can you just on the Workforce Solutions the portions of the business that were contracting, what percentage of the revenue does that comprise?

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

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

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

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

It’s a reasonable expectation, obviously, other things in the market need to be continuing to give us some good tailwinds and positive trends. But that’s a very reasonable expectation.

Great. Thank you.

Thanks, Mark.

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

Thanks. So MSP question just got nailed by Mark, which is great. So one last on the Workforce Solutions side, the growth in the Q3, I understand they are moving, with the good and the bad there. But really as you can think about the potential of the businesses and I am looking over the horizon a little bit, is that, so we think about it in terms of double digits or is it more of the 10% as you -- as this business evolve and there is always a little bit of good and bad with the client?

This is Brain. Hey, Bill. I would say it is more the latter and I think there will be businesses within our suite of services that we would expect to grow double digits for the next several years if they are maturing and gaining market share. I think, but overall, if you look at the requested businesses, I think that 5% to 10% is probably more likely.

Okay. And on that one up then, just I am curious what you all saying of this new model out there, it’s one company called Nomad Health and as I called around a little bit to the HR folks in hospitals, a couple have used it but certainly not part of this something an alternative to you guys provide. But curiously you think about it and it actually has in your product line extension for you all, am I…

We -- yeah, we agree, Bill, we think it’s very interesting and they are not the only ones and I think you will continue to see these startup digital online staffing platform emerge and we believe we need to be a player in that space for two reasons. One, there could be some subset of the market, I do think it will be relatively small, because of the complexity, particularly around credentialing and physician privileging and then the housing, logistics, and all of that. But there will be some subsets that want to conduct business in this way, both the client as well as the clinician and we think we need to be a part of that solutions. But at the same time we also think it help to inform us about how we can continue to evolve the way we engage with our clinician, gosh, I go back to when I started and of course, there was no Internet and the cells phones, and everything was done by fax and mailing. So this whole notion are evolving the way that we interact with clinicians and moving more to a mobile and digital platform is something that is absolutely happening and going to happen at a greater degree. So even for our concurrent core staffing businesses, Nurse and Allied, Locums and perm placement, we need to evolve our mobile and digital presence and that’s what we are doing, that’s why we spend a lot of money on our marketing technologies and you may see us make investment even in firms like this to learn, but also to, perhaps, tee up a potential acquisition opportunity down the road. It’s very early innings, so I think we want to be cautious not to do too much, but we certainly need to be attentive to it.

Thanks, Susan. Thanks again.

Thank you.

We have a question from Mitra Ramgopal with Sidoti & Company. Please go ahead.

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

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

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

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

Yeah. I would say, a good chunk of it is new. Although, we’re seeing a good -- also our fair share of competitive wins as well, so all the larger ones especially and this might be a related answer in terms of settings that they are in, 85% is traditional acute where we would have won them in the past, but we’re also seeing some uptake in non-acute settings, which would be brand new, for sure.

Okay. Thanks again for taking the questions.

Thanks, Mitra.

Thanks.

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

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

Sure. I’ll -- Tobey I will maybe take the first one, we really not giving exact numbers, but we are up in our kind of producer headcount if you will, our sales team across all of our businesses, nursing in particular is up double-digit, but as Ralph just mentioned, in addition to the actual number of people being up, we believe we’ve got more capacity particularly since you have got new ones, I am really proud of the team, because they done a great job of also improving the training and ongoing program, and we’re getting the new recruiters up the learning curve and productivity curve much faster than what we’ve done in the past.

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

Thank you very much.

Thank you. And I will turn it over to Susan Salka for closing remarks.

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

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