AMN Healthcare Services, Inc. (AMN) Q3 2018 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the AMN Healthcare Third Quarter 2018 Earnings Call. At this time, all telephone participants are in a listen only mode. Later we will conduct a question-and-answer session. Instructions will be given at that time [Operator Instructions]. As a reminder, the conference is being recorded. And I'll now turn the meeting over to our host, Director of Investor Relations, Mr. Randy Reece. Please go ahead sir.

Good afternoon, everyone. Welcome to AMN Healthcare's Third Quarter 2018 Earnings Call. A replay of this webcast will be available until November 14th at amnhealthcare.investorroom.com, following the conclusion of this call. Details for the audio replay of the conference call are in our earnings release issued this afternoon. Various remarks we make during this call about future expectations, projections, plans, events or circumstances, constitute forward-looking statements. These statements reflect the Company's current beliefs based upon information currently available to it. Our actual results may differ materially from those indicated by these forward-looking statements as a result of various factors, including those identified in our most recent Form 10-K and subsequent filings with the SEC. The Company does not intend to update the guidance or any forward-looking statements provided today prior to its next earnings release. This call contains certain non-GAAP financial information. Information regarding and reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are included in our earnings release and on the financial reports page of the Company's Web site, which can be accessed at amnhealthcare.investorroom.com. On the call today are Susan Salka, Chief Executive Officer; Brian Scott, Chief Financial Officer; Ralph Henderson, President of Professional Services and Staffing; and Dan White, President of Workforce Solutions. I will now turn the call over to Susan.

Thank you so much, Randy. A happy Halloween to everyone, and welcome to our earnings call. In the third quarter, AMN met our short-term financial goals, while also very important groundwork for our long-term growth strategy. In this tight labor market, many healthcare organizations are struggling with workforce hiring, flexibility and optimization. AMN's significant evolution and diversification over the last decade has positioned us very well for complex and progressive healthcare organizations. One of the most meaningful trends we have seen in the last year is the impact of consolidation within healthcare. The creation of larger more sophisticated health system increases their need for a strategic workforce partner. To that end, we added three fantastic new businesses to the AMN family earlier this year, enhancing and further diversifying our service offerings and enabling growth through strategic capital deployment. For the near term, we are not without our challenges, but there are also many bright spots across the business. We will be sharing some of these with you today. And as usual, we will do our best to provide a balanced and transparent review. So, let's now turn to our current results and outlook. Third quarter consolidated revenue of $527 million grew 7% year-over-year. Gross margin was 33.2% and adjusted EBITDA was $67 million, or 12.8% of revenue. Growing our strategic client relationships continues to be at the forefront of our delivery strategy. As an example, this year, we have added 32 service lines at new and existing MSPs. Our implementation team has been doing a fantastic job with six new MSP clients going live during the third quarter and nine more new clients are in the implementation process. AMN's leading position in delivering MSP continues to be recognized through new contract wins and expansions. A terrific example of this is the renewal of our largest client, Kaiser Permanente, for whom we have had the honor of serving as the MSP partner for the last nine years. Kaiser Permanente went through a very thorough and formal RFP process to determine which organization would be their best clinical MSP partner for the next five years. We are very excited to share with you that AMN has been selected as that strategic partner. This new MSP award will also expand into additional service lines. We are very proud of the strategic partnership we built with Kaiser Permanente, and look forward to continuing to work with their team to develop innovative ways to meet their goal of having a highly skilled and diverse labor force to deliver excellence and patient care. Now, going back to the quarter. Our Nurse and Allied segment posted revenue of $306 million, which grew 1% year-over-year. Revenues for our largest business travel nurse staffing was flat year-over-year. Volume was higher while the average bill rate was down due to a lower mix of premium rate assignments. As expected, the premium rate mix has stabilized. Earlier in the year, we noted some demand headwinds affecting growth in the business. In recent weeks, the travel nurse environment has improved with both new and total orders up more than 10% year-over-year. As bookings have picked up, we expect travel nurse volumes to grow 4% to 5% year-over-year in the fourth quarter, partly offset by 2% lower overall bill rate. Allied staffing was a shining star with revenue growing 8% year-over-year on strong volume and stable pricing. Orders are up double digits year-over-year and booking trends are supporting continued growth in the 6% to 8% range. For the fourth quarter, we expect improved revenue growth for the nurse and allied segment of about 1% to 2% year-over-year. In the locum tenens segment, third quarter revenue of $101 million was 9% lower year-over-year. Positive pricing was not enough to offset a volume decline. Demand for hospitalists, which is one of our largest specialty has been declining. However, demand in most other specialties is healthy. Our revenue decline is primarily the result of disruption and challenges that emerge after we moved locum to a new technology platform in the second quarter. Although, this transition has been more disruptive than expected, we continue to make system enhancements and process changes to regain growth in 2019. We also continued to invest in on-boarding new sales resources and have gained additional traction in winning new locum NFP contracts. Most of which will be important to drive future growth. For the fourth quarter, locum tenens revenue is expected to be down 12% to 14% year-over-year. Third quarter revenue in our other workforce solutions segment was $119 million. Year-over-year growth was 49%, including the benefit of our April acquisition and up 2% organically. Leadership and search solutions, which include our interim leadership and permanent placement divisions, make up about 50% of this segment. Revenues for these businesses grew 14% year-over-year with organic growth of 2%. Within this group is physician permanent placement, which returned to growth as anticipated with revenue growing mid single digits year-over-year. Our mid revenue cycle division produced $40 million in revenue in the third quarter; Peak Health had its third consecutive quarter of double digit growth; MedPartners, who joined us in April, continued to experience healthy demand and also had a solid quarter, particularly in light of managing through multiple integration activities and the unexpected temporary loss of their leader. MedPartners' co-founder, Marcy Wilham and her husband Steve survived a plane crash last month and are recovering from their injuries. We are very pleased to report that they are both making a fast recovery. We are fortunate to have a strong team and other great leaders at MedPartners, and they have stepped up in a very impressive way. Other workforce solutions also include our VMS business where revenue was down year-over-year in the third quarter. As we look forward, fourth quarter revenue for the other workforce solutions segment is expected to be up approximately 2% to 3% year-over-year on an organic basis, and up nearly 50% overall. Lastly, I want to give a big thank to our entire AMN team for their outstanding work and inspiring dedication to our clients our healthcare professionals and our communities. Our team members respond to any opportunity or challenge with great initiative drive and heart. The last couple of months, I have the chance to listen to and chat with a majority of our team members across the country as I have visited many of our offices. And I am so proud of this incredible team have even more confidence in our ability to make a positive impact, going forward. Now, I will turn the call over to Brian for a financial update, after which, Ralph and Dan will join us for the Q&A session.

Thank you, Susan and good afternoon everyone. The Company's third quarter of $527 million was in line with expectations and just above the midpoint of our guidance range. Gross margin for the quarter was also at the higher end of our guidance at 33.2%, up 90 basis points from last year and higher than last quarter by 80 basis points. Our April acquisitions were accretive to our consolidated gross margin, representing about 40 basis points of the year-over-year increase. And as a reminder starting last quarter, our physician permanent placement business began recognizing certain expenses in SG&A that were historically in cost of revenue, representing 60 basis points shift. On a sequential basis, the margin increase was due mainly to the prior quarter, including a large labor disruption event that carried a lower gross margin. SG&A expenses in the quarter totaled about $121 million, or 23% of revenue compared with 20.3% last year and 20.7% last quarter. The year-over-year increase in SG&A margin was primarily the result of the physician permanent placement cost shifts and the $12 million increase in legal reserves for two recent claim settlements. Third quarter nurse and allied segment revenue was $306 million, an increase of 1% from the prior year and down 8% sequentially. The sequential decrease was almost entirely a result of the $25 million labor disruption event last quarter. Year-over-year volume was higher by 2% and hours worked also increased. This was partly offset by 3% lower average bill rate. Nurse and allied gross margin of 27.4% was consistent with prior year and 110 basis points higher than the prior quarter. The sequential increase was primarily due to the prior quarter labor disruption events having a below average gross margin. Segment EBITDA margin was 13.8%, up 30 basis points from the prior year. Third-quarter locum tenens revenue of $101 million was 9% lower than prior year and down 6% on a sequential basis. Locum tenens gross margin of 28.4% was down 170 basis points in the prior year and 140 basis points sequentially. Some of this margin decline was related to system conversion issues and we expect an improvement in the fourth quarter. Locum tenens adjusted EBITDA margin was 10.9%, down 210 basis points year-over-year, driven by the lower gross margin and some negative operating leverage on the lower revenue. Third quarter other workforce solutions segment revenue of $190 million was up 49% year-over-year and 1% sequentially, driven mainly by the recent acquisitions. Gross margin of 52.4% was lower by 178 basis points year-over-year, but was up 20 basis points sequentially. The year-over-year variance was primarily the result of the acquisition of MedPartners, which has a lower gross margin than the segment average. On a consolidated basis, third quarter adjusted EBITDA of $67 million was up 9% year-over-year. The adjusted EBITDA margin of 12.8% was 30 basis points above the prior margin and up 20 basis points sequentially. We reported net income of $28 million and diluted earnings per share of $0.58 in the third quarter. Adjusted earnings per share was $0.84 compared with $0.63 in the prior year quarter. Our income tax rate in the quarter was 27%, and is expected to be 27% in the fourth quarter. Interest expense and other in the quarter was $4.6 million, which included a $1.4 million gain on a fair market value adjustment of a minority investment. Cash provided by operations was $45 million for the quarter. In the first nine months of 2018, cash flow from operations totaled $171 million, up 67% year-over-year. Day sales outstanding at quarter end was 64 days compared to 58 days last quarter, and consistent with the year ago quarter. At September 30th, cash equivalents totaled $19 million. Capital expenditures in the third quarter were $10 million. During the quarter, we repurchased 580,000 shares of stock for $32 million and repaid $5 million of debt. At quarter end, our total debt outstanding was $475 million and our leverage ratio was 1.7 times to 1. Now, let’s turn to fourth quarter 2018 guidance. The Company expects consolidated revenue of $534 million to $542 million. This represents top line growth of 5% to 6% year-over-year. On an organic basis, revenue is expected to be down 1% to 2%. No significant labor disruption revenue is included in fourth quarter guidance. Gross margin is projected to be approximately 32.5% to 33% and SG&A expenses as a percentage of revenue are expected to be approximately 21% to 21.5%. Adjusted EBITDA margin is expected to be approximately 12% to 12.5%. Other fourth quarter 2018 estimates include the following; interest expense of $6 million; depreciation expense of $4.6 million; amortization expense of $6.6 million; stock based compensation expense of $3.3 million; integration related expenses of about $1 million; and diluted share count of 48 million shares. And now, we’d like to open up the call for questions.

[Operator Instructions] Our first question is from the line of Jeff Silber with BMO Capital Markets. Please go ahead.

I wanted to focus on the locum tenens segment first. I know you mentioned some of the conversion problems. But what gives you the confidence that this is something that's fixable, it is more positioning in the market or you really think this is more of an internal shift?

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

If I could switch over to the travel nurse side, I think Susan in your prepared remarks you said that the decline -- and I think you said the decline in the premium rate was stabilizing. I think those were your words. Is that coming from the demand side or the supply side? Meaning, are you having any easier time finding nurses so you don’t have to pay the premium rate, or hospitals just pushing back in terms of charging those premium rates? Thanks.

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

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

There's no reason why we wouldn’t expect that. We've talked about locums. In our early times, we’re seeing an improvement there. That’d be the one thing that the caution I guess is where is we’re still looking into the first quarter. But outside of that, there’s no reason to think we wouldn’t see that normal seasonality. And again with the nursing demand improving, that gives us little more confidence as we move into the year along with some of the color that Susan gave on the implementations of new MSP program. So, all of that sets us up well as we think about the start of next year.

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

And our next question is from Tobey Sommer with SunTrust.

How do we think about your long term targets in the timeline to get to them, again the internal disruption that are relaying a little bit more than we had thought in the locums business? Thanks.

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

With respect to the demand increases that you’re seeing in travel nursing. What are you hearing from clients that is driving that?

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

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

Your math is correct. And at this point, as we continue to generate very strong cash flow, we wouldn’t be surprised if we continue on the path we have talked about with blend of share repurchases and debt reductions. We still have ability to repay more of our revolver and create even more balance sheet capacity as we look to acquisitions down the road as well. But at these levels, we are still likely the buyers of our own shares as well.

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

On the first one, the allied, the biggest increases are in respiratory and in radiology -- tech physicians primarily. And we are starting to see some improvements in all of the therapies. So speech, occupational are probably a little bit stronger than the others, and so pretty solid across the board in allied. On the locum side, Susan mentioned, hospitalists are down and emergency room is down, which is physician management practices. There is just less movement right now, which creates some demand there that’s I think one of the headwinds for our locums business. Strengths are in the internal medicine subspecialties, all of just -- we also are seeing some strength largely in radiology primary care, so the opposite and maybe of what we have talked about in the past. And also, all of the advanced practices, the demand is very good there as well. And now our dentistry business is actually performing pretty well. So, they'd be the main ones.

Our next question from the line of A.J. Rice with Crédit Suisse. Please go ahead.

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

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

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

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

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

And then my last would be…

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

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

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

On the fill rate side of that question, the fill rates have improved across the MSPs. And I think we've talked about at stable demand level. We continue to capture more internally than we have in the past. And that’s consistent with in our nursing business, our allied business, our locums business. And now, we are starting to see the greater penetration into other segments. Our interim executive business and then now we are going to get our web cycle management partners added to many of those agreements as well. So, there is still upside there but we have improved fill rates across the board.

And we will go next to Tim McHugh with William Blair and Company. Please go ahead.

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

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

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

Yes, hospitalists -- couple of years ago was one of our fastest growing specialties and is definitely in our top five, and it has been pretty consistently about three years. The issue is related to the just what’s happening -- I think you’ve seen the privatization of Envision and Team Health, and some of the activities there related to their profitability, they’ve been not as active in the market place, but converting emergency rooms over to outsourced emergency rooms. And so we did get a significant amount of our business from those specialties and we’ve just really seen that slowing down. Our hospitalists -- I have talked to others and of course we talk to our customers, we also talk to others that provide hospitalists and staffing, and most are talking about significant double digit declines for that business.

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

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

Our next question is from the line of Mark Marcon with R.W. Baird. Please go ahead.

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

It is both at double-digit is the year-over-year increase, the sequential, I don’t think we gave it, but it's good as well. I think, I mentioned this in their same stores and MSP driven, which is good. The number of facilities also jumped quite really in the last six to eight weeks, we've seen it really take up more so than it did in the quarter. It is -- the specialties are in line with our prior tough telemetry, ICU, med surge, so that's been good. PCU is actually one of the ones growing faster than others. Those are getting more efficient and understanding how to use that specialty. So regionally and geographically, well distributed as well and maybe a little bit some in the east than the west, but that would be probably it. So that’s the color or are you looking for more…

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

And then reconciling that with the guidance from nurse, from allied and allied has been doing well. I take it that's just because of the normal lags between when orders are placed relative to when they get filled combined with still the reduction in terms of the premium rate assigned. Is that correct?

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

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

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

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

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

I think -- in Q4?

Yes.

We’re closer to the 29% range. We’re up little above 29% in the second quarter, on the lower 28%. So I think we’ll be -- it should be something closer to 29%. There’s still some work to do there as well but that’s what we’re looking at right now.

And the operating margin, you mentioned…

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

And as you’re going through this data migration issue. Has that caused any client issues at all in terms of -- I mean, you mentioned but I am just talking about in terms of, are they understanding, are they staying with you, or are competitors trying to take advantage?

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

Ralph, when do you think you’re going to get through in terms of like where we think we’ll get normalized on locums and just from an operational perspective and then building from there?

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

I just meant in terms of the data migration issue being completely fixed or solved?

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

And then last question. Since nobody asked about it. Does the $12.1 million in legal reserves, what's that referring to? And is that going to be a cash outflow? How should we think about it?

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

Just as a follow up to that, Brian. Does that impact SG&A at all going forward or in terms of adjustments?

No, we had adjusted the reserves to the settlement amount.

I meant as it relates to future practices.

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

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

So first question on the out of U.S. segment. So do you expect we'll see some acceleration as we head into 2019, given that you will start to lap some of the softness you've seen in the VMS revenue that impacted your growth this year? Or how should we be thinking about -- where you see that headed in 2019?

So, the short answer is yes. We would expect that we will start to lap that and we are already seeing some positive changes within our VMS businesses. Certainly, just in terms of the underlying clients and utilization in fact in October, some of the issue was we had previously in the year seen the volumes decline, utilization decline. And we saw that start to turnaround a bit in October, the volume was actually up at least in one of the VMSs. So that goes back to the commentary in travel nursing as well. They go a little bit hand-in-hand. So that’s a positive sign and we think we should continue to see improvement there. We have had really good client retention, really above 90%. It's been more a matter of, in shift wise in particular, not being able to add new clients, because we were going through some technology changes and enhancements. And good news there, we're on a much better pass, many of those enhancements have been launched. And there are new features on the roadmap pretty much every quarter within shift wise in Medefis, and a lot of really exciting things that I think will make us even more competitive in the market place. So that should come once as a drag for us. And then as I mentioned interim, while a little bit flat; we expect to see growth going forward; perms doing well; mid-revenue cycle, we should see growth there; Avantas is doing very nicely; and RPO, is actually small but mighty, they are doing a nice job of turning that business.

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

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

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

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

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

It's a nice spread. Actually, the highest one in there might be in the $35 million-ish range. So it’s a really nice spread of customers.

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

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

I think hospitals or any healthcare organization always trying to find new ways and do a better job of engaging and retaining clinicians. So, I don’t think they stopped doing anything. It’s just that some of the tactics, such as working their existing clinicians more over time were not necessarily sustainable. And you see that reflected in the BLS data. And if you go back to this August, healthcare job openings remained up year-over-year, did not -- they never quit, were actually up 23% year-over-year, which I think is the highest on record. Separations are also up. We were on track and that separations included, by the way, things like retirement. And we think that perhaps the highest on record as well and should be for the full year. So we don’t think that some of the tactics they’re using are enough to retain people. And in some cases, they’re actually working against them. If you are planning to cover your shift by just working people more over time even if you pay people more, that usually only lasts so long. So I think we’re just seeing perhaps some of those things play out a bit of their natural course.

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

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

I really appreciate the color, and I am excited for the future.

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

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

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