AMN Healthcare Services, Inc. (AMN) Q1 2018 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the AMN Healthcare First Quarter 2018 Earnings Call. [Operator Instructions]. As a reminder, the conference is being recorded. I'll now turn the meeting over to our host, Director of Investor Relations, Mr. Randy Reece. Please go ahead.

Good afternoon, everyone. Welcome to the AMN Healthcare's First Quarter 2018 Earnings Call. A replay of this webcast will be available until May 17 at amnhealthcare.investorroom.com following the conclusion of this call. Details for the audio replay of the conference call are in our earnings release issued this afternoon. Various remarks we make during this call about future expectations, projections, plans, events or circumstances constitute forward-looking statements. These statements reflect the company's current beliefs are based upon information currently of available to it. Our actual results may differ materially from those indicated by these forward-looking statements as a result of various factors, including those identified in our most recent Form 10-K and subsequent filings with the SEC. The company does not intend to update the guidance or any forward-looking statements provided today prior to its next earnings release. This call contains certain non-GAAP financial information. Information regarding and reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are included in our earnings release and on the financial reports page of the company's website, which can be accessed at amnhealthcare.investorroom.com. On the call today are Susan Salka, Chief Executive Officer; Brian Scott, Chief Financial Officer; Ralph Henderson, President of Professional Services and Staffing; and Dan White, President of Workforce Solutions. I'll Now turn the call over to Susan.

Thank you so much, Randy. We appreciate everyone joining us on the call today. AMN began 2018 with a strong first quarter, and I'm very proud of how our teams rallied to meet our clients higher-than-expected staffing needs driven by solid execution from the AMN team and a more intense we hit record high revenue and EPS. First quarter revenue off $522 million, grew 6% year-over-year and was slightly above the high end of our guidance range. Adjusted EBITDA was $67 million or 12.7% of revenue. In early April, AMN executed on our growth strategy by closing acquisitions that added scope and debt to our workforce solutions. We will review the addition of MedPartners, Phillips DiPisa and Leaders For Today later on in the call. Overall demand is favorable and stable and we expect them to support our plans are for continued growth. We are also making good progress in the improvement of our recently underperforming permanent placement divisions. And our rollout of our new enterprise a staffing system with locum segment is going very well. We'll talk later about the sequential decline in the second quarter. Now let's review first quarter performance and trends in our business segments. Our Nurse and Allied segment posted revenues of $338 million, higher by 8% year-over-year. MSP clients comprised more than 60% of this segments revenue. Revenue for our largest business Travel Nurse staffing grew 10% year-over-year. This growth was driven by increases in volume and hours work while average bill rate was slightly down due to a lower mix of premium rate assignments. Our Nurse staffing team did an excellent job of filling winter needs and flu related first quarter assignments. These seasonal assignments typically end in April or May. This more pronounced seasonality both in volume and bill rate is expected to result in a larger than typical sequential decline in our Travel Nurse business in the second quarter. Volume growth in traditional Travel Nurse staffing remain solid with volumes expected to be up 6% to 7% year-over-year in the second quarter. This is been partially offset by fewer rapid response assignments and the continuous shift away from premium rates. Rate headwinds were offset part of our volume growth until these comparisons normalized. The allied staffing division grew revenue 3% year-over-year in the first quarter driven by increased volume and stable pricing. Placement trends for future assignments improved throughout the quarter with March been our strongest month in history. This puts the division on track to deliver even better year-over-year growth in the second quarter. Now looking ahead, the Nurse and Nurse and Allied segment revenue in the second quarter is expected to be up 2% to 3% year-over-year. Travel Nurse volumes remain positive at an expected 6% to 7% growth rate and Allied volumes are improving. This has been partially offset by a lower mix of the premium graded assignments and a decline in the local staffing revenue. In the Locum Tenens segment, first quarter revenue of $103 million grew slightly year-over-year, which was a positive surprise. Overall, demand for Locum is still above prior year. We also have a several new in Locum's MSB and growing pipeline. Recently, we successfully migrated Locum Leaders and shared services team on to our new enterprise a staffing platform. The Locum's migration at Staff Care will be completed later this month. At that point, and for the first time, all of our Locum Tenens' businesses will be running on the same platform and sharing the same processes. We expect to upgraded technology will enable the business to grow and scale more effectively with a much improved user interface for team members, providers and clients. Early feedback from our stakeholders has been very positive. For the second quarter, Locum Tenens revenue is expected to remain flat on a year-over-year basis. First quarter revenue in our other Workforce Solutions segment was $81 million, which was 3% higher year-over-year. Interim leadership, which includes Smith and the First String was up 5% year-over-year. The team has made great progress on MSP placements, in particular, which have surpassed 20% of this division's revenue. Our BMS businesses grow 7%. However, these businesses saw slowing in sales momentum due inpart to destruction from deployment of next-generation technology. We currently expect second quarter revenue to be down slightly year-over-year, but with strong client retention, along with the strengthening sales pipeline, we do expect growth rates will improve as we move through the year. Peak Health, our initial entry into the mid-revenue cycle market, recorded 13% year-over-year revenue growth, its best performance since joining AMN almost two years ago. In the past two quarters, Peak had added several new clients, provide confidence for continued growth. And Peak is already engaged with the MedPartners' team to explore ways to create synergies. Physician Permanent Placement first quarter revenue was below prior year by 7%, but 6% higher sequentially. Physician Perm revenue is expected to be flat year-over-year in the second quarter, and we are very pleased with the progress that the team is making. In workforce optimization, Advantis had another good quarter with revenue up 10% year-over-year. We believe Advantis is positioned for continued growth with a very compelling value proposition. Overall, second quarter revenue for the Other Workforce Solutions segment is expected to be up approximately 2% year-over-year on an organic basis and nearly 45%, including the recent acquisition. Expanding our leadership and innovation in Healthcare Workforce Solutions is essential to the long-term strategy of AMN. In April, we added MedPartners, Phillips DiPisa and Leaders For Today to the AMN family. MedPartners extended our offerings beyond medical coding making AMN the leading provider of mid-revenue cycle solutions. MedPartners is an innovator having expanded into attractive skill, such as case management, clinical documentation improvement and medical registry services. Phillips DiPisa and Leaders For Today, bolster AMN's solutions and retained Executive search and intermittent leadership with a particularly strong market share in the Northeast. We're bullish about the continued growth potential of AMN. I realized that there are a few moving parts in today's report, so let me summarize the key points of our message today. After strong demand and execution in the first quarter, we are feeling the effects of a slightly greater seasonal drop in volumes in the second quarter. Underlying demand remains solid, although there is a drag on the venue due to a lower mix of premium rate assignments. There is no long-term fix to the nursing and physician shortages, and the ongoing difficulties that our clients have with managing labor supply and achieving flexibility. Locum Tenens is on the verge of entering a new era operating on one common platform with a much enhanced sales and operating model and significantly better scalability. We believe our permanent placement businesses are poised to turn the corner on the revenue growth and harvest the benefit of organization, hiring and training changes. We have transformed beyond medical coding to become the number one provider of mid-revenue cycle solution. And we believe we will improve the growth potential of that business as we go forward. The addition of Phillips DiPisa and Leaders For Today strengthens AMN's ability to pursue healthcare Executive search and grow interim leadership. And we remain confident that the company can achieve our goal of a 14% adjusted EBITDA margin by 2020. The engine of all AMN services is a highly talented and driven team. Let me take a moment to welcome our newest team member's from MedPartners, Phillips DiPisa and Leaders For Today. They, along with the rest of the AMN team, make it possible for us to meet our commitment to exceed the expectations of our clients, healthcare professionals, their patients and the communities we serve. Now I'll turn the call over to Bryan for a financial update, after which, Ralph and Dan will join us for the Q&A session.

Thank you, Susan, and good afternoon, everyone. The company's first quarter at a venue of $522.5 million was slightly above the high end of our guidance range, driven by better-than-expected performance for our Nursing and welcome students line. First quarter consolidated revenue was 6% above prior year. First margin for the quarter was 32.1%, down 60 basis points from last year, but higher by 30 basis points from last quarter. The year-over-year gross margin decline was due mainly to the lower ends and Locum tenens and lower gross margin and other Workforce Solutions segment and may lead to business mix changes for the sequential gross margin improvement was driven by improved margin in Nurse and Allied SG&A expenses in the quarter totaled to $104.7 million or 20% of revenue compared with 20.6% last year and 19.7% last quarter. The improved SG&A margin from prior year and was primarily a result of operating leverage. They have sequential cost percentage was due to the prior quarter 2 million dollars favorable professional liability reserve adjustment. First quarter Nurse and Allied segment revenue was $338.2 million, an increase of 8% from the prior year and 5% sequentially. The volume was higher by 6% year-over-year and average hours worked was also higher. This is partly offset by 2% over average bill rate from the previously noted decrease in the use of premium rates. Nurse and Allied gross margin of 28% was 30 basis points higher compared to the prior year and 60 basis points above the prior quarter. Segment EBITDA margin was 15.3%, improved by 60 basis points over the year-ago period from higher gross margin and operating leverage. First quarter Locum Tenens segment revenue of $103.1 million was slightly higher than the prior year and down 5% on a sequential basis. On a year-over-year basis, the average bill rate increased by 6% and the was lower by 4%. Locum Tenens gross margin was 28.7% and was down 200 basis points from the prior year, driven mainly by lower bill to spread. The Locum's team continue to place a major focus on margin and transfer Q2 indicate a modest improvement. Locum Tenens adjusted EBITDA margin was 9.7%, down 220 basis points year-over-year due mainly due to lower gross margin and some one-time cost related to implementing our platform. First quarter Other Workforce Solutions segment of $81.2 million was up 3% year-over-year and 2% sequentially. Gross margin of 53.6% was lower by 140 basis points year-over-year, though 50 basis points higher sequentially. The year-over-year variance was driven by permanent placement revenue, along with higher direct cost in interim leadership. Unallocated corporate overhead in the quarter was $15.1 million, representing 2.9% of revenue compared to the prior year expense of $14.9 million or 3% of revenue. On a consolidated basis, first quarter adjusted EBITDA was $66.5 million, was up 5% year-over-year and 3% sequentially. The adjusted EBITDA margin of 12.7% was 10 basis points below prior year and up 10 basis points sequentially. Reported net income of $42.7 million and diluted earnings per share of $0.87 in the first quarter. Adjusted earnings per share was $0.81 compared with $0.63 in the prior year quarter. Our GAAP income tax rate in the quarter was 14%. This included a tax benefit of $4.5 million from the accounting standard that adopted last year related to the stock-based compensation as well as a $2.5 million benefit to adjust for that tax treatment of certain gains and losses associated with our deferred compensation plan. Excluding these items, the tax rate would have been about 29%, which we estimate will be our effective rate for the remaining quarters of 2018. Cash provided by operations was $60 million for the quarter, a record high level for AMN, which compared with $45 million in the prior year period. Days sales outstanding at quarter end was 58 days compared with 63 days in the previous quarter and 61 days in the year-ago quarter. The lower DSO was from strong cash flow collections as a result of process improvements in billing and accounts receivable. As of March 31, cash equivalents totaled $54 million. Capital expenditures in the first quarter were $5.7 million. At quarter end, our total debt outstanding was $325 million and our leverage ratio was 1.2x to 1. In early April, AMN acquired MedPartners for $195 million and the related brands of Phillips DiPisa and Leaders For Today for $30 million. Both acquisitions include the potential for additional earn out payments and restructured to allow for tax benefits be realized by AMN. The $30 million acquisition was funded from cash-on-hand, while purchase of med partners was funded by revolving credit line. These acquisitions are favorable our margins are expected to be accretive to our second quarter and full year adjusted earnings per share. Performance of this acquisitions our leverage ratio was 1.9x to 1. Now let's turn to second quarter 2018 guidance. The company expects consolidated revenue of $530 million to $537 million. This represents top line growth of 8% to 10% year-over-year. And includes $33 million to $34 million of revenue from the newly acquired companies. Raw material labor is included in this guidance in the prior year quarter. We have recently to support a pending strike, but the situations are started to change with several different possible impacts on revenue. For that reason, our guidance excludes the potential revenue from this event. Gross margin is projected to be approximately 32.5% to 33%. SG&A expenses as a percentage of revenue are expected to be approximately 21%. And adjusted EBITDA margin is expected to be approximately 12.5% to 13%. Other second quarter 2018 estimates include the following: Interest expense of $5.9 million, depreciation expense of $3.9 million, stock-based compensation expense of $3.2 million, acquisition and integration-related expense of about $1 million, and diluted share count of 49.2 million shares. Amortization expense is currently estimated at $6.5 million, but it started to change as we are actively working through the intangible asset valuation process for our recent acquisitions. Before we open the call for questions, I want to go so Susan's comment, and welcome filled up so leaders for the day I met partners team members to aim and epic we are excited to work together greater value to our clients as well as create more opportunities to develop your career at AMN. And I would like to open up the call for questions.

[Operator Instructions]. We'll go to Tobey Sommer with SunTrust.

I was wondering if you could talk about premium rates and by there are less of them in the mix as we work through 2018, so far?

Yes, Tobey, this is Ralph. Yes, Q1 was a strong quarter for Nursing, and demand was really high for us as we moved into second quarter. But the utilization of the premium rates did begin to decrease as - probably more because there's more RM traveling, there is more industry has more capacity, and demand is in good, but not great levels. So you kind of have a basic economics occurring there. So with a lower percentage now our traditional our core bill rates are stable. We have not seen or deterioration of pricing overall. It's just we may cause that regard to go that higher rate is happening less frequently and maybe that's a little bit hospitals are prepared and there appeared doing a better job of understanding the needs of events, and so that drives us down a little bit as well. We did expect it, and as you see, our margins didn't suffer because one of the dollar rates coming down.

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

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

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

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

Tobey, and in addition to that, that sort of the new, new this year, we also have 17 active implementations in progress, some of which were implemented in the first quarter, second quarter and will roll out into the early part of the third quarter and those larger events from last year's that are now just flowing through and some of that are fairly significant. So we would expect that will start to see benefit from those. Primarily, in the third and fourth quarters as some of them have just been recently implemented in the last couple of months. But your question of how much further can be see penetration into MSP? We think we have a long way to go still. Obviously, Nursing has the greatest penetration, but I'll still relatively low compared to nursing. And then Locum's actually hasn't moved much in the last year, and so we have a long way to go back to have been recent wins and locum's in particular, we think are going to help us improve that penetration. Even be that you're acquisitions met partners, we are leaders for today, we have already signed them on to some of our larger MSPs, and so we would expect that we can start to see some penetration there, which is essentially starting at zero today.

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

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

Our next question from Mark Marcon with RW Baird.

I was wondering if you could talk a little bit about just on the Locum side in terms of the gross margins. How do you think that dart and sub-changing over the course of this coming quarter and the next quarter. Is there any business that you're doing there that may be wanted to just continue?

Yes, Mark this is Ralph, I'll handle that. You're right we were little disappointing to see that drop in the part 200 basis points over the last year after we had improved it and since the last couple of years before that to get it back up over into 30s, and we do feel like the long-term objective of that business is in the 32 range. It flips because that some of the things that Susan just talked about going through a technology change, people changing rules, and as well with some of the demand drops off, we may not have adjusted enough pay rates and things like that. So you saw some compression in [indiscernible]. The new tool does have better tools that help the recruiter make a realtime decision about pay rates and the rest of the package so that they can get the margin fine-tune's right on the first conversation and then not kind of wait until and the fact and figure out whether it was good at that margin. So we have those tools already those in Alec. We have actually since I came that big very robust pic we never had in place to locum. So we had to manage that through leader approvals and things like that. The technology now be let us do that, I guess, kind of real-time basis. So I expect that to start turning around probably Q4 I think used to the new tool. And then start trending back towards that 32 in the next year or two.

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

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

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

Great. And then just Allied in terms of the assumption for year-over-year growth. What is that assumption? And what's the assumption with regard to the bill rate increased that you would end up seeing?

This is Brian. So, again, with - for the second quarter, we talked about the segment having kind of 6% or 7% volume growth in the Travel Nurse part of the business. And we're kind of mid-single digit for Allied as well. But to offset to that a little bit are the ones less rapid response that we saw in the first quarter as well as that mix change from the premium rates bringing down that average overall bill rate. And then, a little bit of drag as well from the local staffing business being down a year-over-year. That's what you get that quite lower overall gross rate year-over-year. I think as we looked of backups, that's probably similar trends there. Was still confidence in the volume for nursing and Allied, which work through the changes in the build rates as well and get the local staffing business stabilize.

Okay. And just on MedPartners and Phillips DiPisa. Can you talk a little bit about with regards to the seasonality of that business and what percentage of the quarter like are we reflecting a full 90 days in terms of a guidance there? And what are we thinking about the back half in terms of the contribution there? [Indiscernible] expecting.

Yes, no problem at all. This is Brian again. In the second quarter guidance, we mentioned about $33 mil to $34 million of revenue, combined with this acquisition that they debt essentially is excluding one week of revenue in the quarter. So that gives you good sense thereof for the total record of revenue would be a pic of the seasonality, the Executive search part of the business usually, down a little bit sequentially in the second quarter and then gets a little bit stronger. I would say overall Q2 just slightly from Q1 and then there should be stronger growth in the third quarter and in the fourth quarter as well. So that's the kind of looking at right now. We think also just some of the execution we are seeing from MedPartners in particularly, there's nice momentum as they move through this year. So also push more that revenue in the second half of the year based on the trends that there're seeing.

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

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

Oh just - no, on the MSP side, what are you seeing in terms of a pipeline for new contract RFPs?

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

I was looking for the number really [indiscernible] good.

Yes, it's well over that actually.

Great.

And that I always say a very healthy diverse mix of different disciplines, a lot of Locum's in there, which is great because that's an area where we feel we've got a lot of potentially, but certainly more Nurse and Allied. Yes, good mix of net new where they've had an MSP before, but some are upgrading from perhaps a better neutral BMS and then a few we would consider to be in competitive deals as well. So it's a good healthy mix.

Great.

And then regarding the strike revenue, there are multiple scenarios that could play out depending upon if the event actually occurs and at what stage if it goes to, sort of, the full finish line, if you will, versus if it partially occurs to some degree and people actually traveled arrive and prepared to participate in the disruption, but out of respect to our client and because there is still many different scenarios afford that might look like, we are not providing a range. Had it occurred already, I'll say it would have changed our guidance, so material enough that would have changed those numbers had it already occurred.

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

A couple of questions about Mike. First of all, you reference to greater than usual seasonal dip coming out of the first quarter into the second. Can you give us some perspective on that. I know you're still forecasting 6% to 7% growth in Travel and Allied I guess. What it'd have if it'd been a more normalized dip, and why what - do you get probably tells you what the dynamics behind that was?

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

A. J., this is Brian Scott, I'll just add if you look at the guidance you gave for around 3% in the second quarter, I think it normally be looking something at least a couple 100 basis points better on a year-over-year basis. I think it's we were talking a little bit with that premium rate shift that we're filling from Q1 to Q2, that mix going down. That's influencing that year-over-year comparability. And then again, that drag a little we're saying on the local staff together. If not for that we'd be probably talking something more in the 5% range year-over-year.

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

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

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

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

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

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

Yes, it's very, very difficult to predict win back up increase. So this level of demand, I would say, probably another quarter to two quarters would be my best guess.

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

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

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

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

We've had a really nice success over the last three years and increasing the kind of core standard rate as well. So as we've made traction on that, it's allowed us to improve compensation packages, and ultimately, so we don't have as much our clients. We don't have overly dependent on those premium rates. So the more we standard rates to market the more - and the more we can plan with our clients and I think point there, if we can work with them to get their needs earlier, then likely we are still in those position using standard rates. So I think it's been about partnership as well that we're getting these clients with more time so that we can use standard rates to fill more of those orders. I think that more sustainable long-term relationship with our clients as well.

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

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

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

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

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

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

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

And we'll go to Jason Plagman with Jefferies.

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

Yes, that's a good question. We're pushing probably at the end of the fourth week of their assignment, extended on to their next assignment. So we have been talking to them for a while. But I do think there's some potential towards later in the quarter to improve where we are at today, probably not much we can do to at this point, but maybe June, and then July. And we did grow - last year we grew over Q2 into Q3, although our biggest growth really kind of comes in Q4, I think we added 400 travelers or something last year. So we'll eventually get them back on assignment and then start adding to that for the base as well.

And then on the MSP ramp, just - how should we think about the potential step up after Q2, you talk about second half, a lot of implementation in MSPs. In directionally, how - order magnitude how significant could that step-up be and being in Q3?

Yes, this is Brian. We don't really give guidance for the back half of the year. I'd just say that the - I think momentum we're seeing with those new accounts and opportunities in the pipelines are what gives us confidence and our confidence in our ability to continue to drive volume growth in the back half of year. I think, it's difficult at this point to quantify. color underlying Travel Nurse expected growth in the second quarter. I think if that kind of trend could continue that, that would be a positive for us as well.

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

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

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

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

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

Okay, that's good. Let me ask you one completely different question. When I had a relatively long conversation with your friends at cross-country earlier today, they made look a shortfall that we are seeing in their travel business, which has been substantial as you probably know. What's pretty well related to the hurricane impact on the business that goes back the last year. So I was assuming you guys might have pegged up some of the business and maybe you can comment on whether you're thinking you did and being, I guess, in just year in the various parts year. Just tried to be sure, I understand that there might be some really substantial change in the tone of the business out there.

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

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

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

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

At this point, just a couple of quick ones ask. What was the commentary about interim regarding the gross margin there?

I just talk about the segment the gross margin being done some on a year-over-year basis and it's kind of two contributors: One is the mix change with less time revenue, which has a higher gross margin profile to it. And then within interim, this is the lesser of those two impacts, but we've seen some March bill pay sort of the mix of the interim to work kind of lower margin profile to it, but those are the was referring to just had some impact on the gross margin of the segment.

Okay. And I also missed you said about BMS and it's falling, it's expect to be off a bit in 2Q?

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

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

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

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

Correct.

Correct.

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

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

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

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

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

All the M&A activity on your clients is got to be a positive?

It is.

It is kind of funny I would say year-over-year basis, we will have our client who will do 5 or 6 bit searches one year and then the next year they do nothing merge with another facility. So go out and find another client or find five more searches from smaller clients and it does take a little harder. It's interesting you say that, we kind of predicted that with our MSP sales team and maybe there's an opportunity there for us to show that strategy across a little bit better.

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

Two questions for Brian. Brain, what do you thing free cash flow will be this year? And I in the quarter was quite strong. And then from acquisitions, is there any incremental contribution from acquisitions in the third quarter or 2Q capture of full impact?

Maybe the second one first. In terms of the impacted margins like gross or EBITDA?

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

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

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

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

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