Ladies and gentlemen, thank you for standing by, and welcome to AMN Healthcare's Second Quarter 2020 Earnings Call. [Operator Instructions] Please be advised that today's conference call is being recorded. [Operator Instructions] I would now like to hand the conference over to Randle Reece, Director of Investor Relations. Thank you. Please go ahead.

Good afternoon, everyone. Welcome to AMN Healthcare's Second Quarter 2020 Earnings Call. A replay of this webcast will be available 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 expectation, projections, trends, 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 and cautionary statements, including those identified in our most recently filed forms 10-K and 10-Q, our earnings release and subsequent filings with the SEC. The company does not intend to update the guidance or any forward-looking statements provided today prior to its next earnings release. This call contains certain non-GAAP financial information. Information regarding and reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are included in our earnings release and on our financial reports page at amnhealthcare.investorroom.com. On the call today are Susan Salka, Chief Executive Officer; Brian Scott, Chief Financial Officer; Kelly Rakowski, Group President and COO of Strategic Talent Solutions; Landry Seedig, Nursing and Allied Solutions; and Dr. Cole Edmonson, Chief Experience and Clinical Officer. I will now turn the call over to Susan.

Thank you so much, Randy. And welcome, everyone, to our second quarter 2020 conference call. Since the beginning of March, the nation and the health care industry have been reeling from the onset of the COVID-19 pandemic. In the early stages of the crisis, the health care industry was grappling with the surge of COVID-19 patients and managing through a shutdown of non-emergency care. The AMN team rose to this challenge and pivoted to help health care professionals and organizations. We quickly expanded existing services and launched new solutions to help the health care sector handle ways of dramatic change. But the greatest impact was made by our health care professionals, who have been on the front lines, caring for patients throughout the crisis. They have borne the greatest burden, and AMN has dedicated even more resources to support them and understand their challenges. We recently completed a survey of nurses across the country that provided further insights into their experience and intentions. To that end, we invited our colleague, Dr. Cole Edmonson, AMN's Chief Experience and Clinical Officer, to answer any questions about what we are doing to support our health care professionals and our current engagement with clients. Today, the outlook for the U.S. economy and health care remains clouded. COVID-19 has spread and surged in states that were a little affected three months ago. Many health care organizations have resumed the full spectrum of care, with patients volume in an uptrend but still below pre-crisis levels. AMN has adjusted to this dynamic environment, and our business is positioned better than ever to handle this demand volatility and capture long-term growth opportunities. With our country under pressure from a pandemic and social upheaval, it's vitally important that AMN demonstrates our commitment to our core values. We are fortifying…

Thank you, Susan. Happy anniversary, and good afternoon, everyone. Second quarter revenue of $608 million was well above our guidance range due to outperformance in our Nurse, Allied and Language Interpretation businesses. At a segment level, Nurse and Allied Solutions and Technology and Workforce Solutions performed better than expected, while Physician and Leadership Solutions was in line with our expectations. Consolidated revenue grew 1% sequentially and 14% year-over-year. On an organic basis, revenue was down 1% sequentially and up 2% year-over-year. Gross margin for the quarter was 32.5%, down 100 basis points, both sequentially and year-over-year. The gross margin decline was due to a mix shift toward lower margin staffing revenue and a reduced margin in the Nurse and Allied segment. Consolidated SG&A expenses were $137 million, or 22.5% of revenue compared with $122 million, or 22.7% of revenue in the same quarter last year. The year-over-year increase included about $10 million of additional SG&A from the acquisitions of Stratus Video, b4health and Advanced Medical; $4 million of restructuring expenses associated with our cost reduction efforts; $4 million of integration related expenses; and a $5 million increase in the earn-out liability for the b4health acquisition. This was partly offset by a reduction in expenses to align our cost structure to the lower expected revenue in the third quarter. We expect our third quarter SG&A run rate to be about 20% lower than the first quarter of this year. We are very proud of the AMN team's agility while remaining focused on delivering great service to our clients and health care professionals in this unprecedented environment. Second quarter Nurse and Allied segment revenue was $444 million, 21% higher than prior year and up 5% sequentially. On an organic basis, revenue grew 13% over prior year, with strong growth in Travel Nurse,…

[Operator Instructions] Our first question comes from A.J. Rice with Crédit Suisse.

This is Rob Moon on for A.J. Rice. I was just wondering if you guys could talk to recovery in regions where you were not seeing COVID surges. What is demand – are you seeing demand start to recover in July and early August in the regions where things have calmed down a bit?

Rob, I'll have both Kelly and Landry weigh in on that. Kelly, from the client perspective, but also Landry, maybe more specifically for Nursing and Allied. The short answer, however, is yes, we are seeing recovery of non-COVID-related orders really across most all of our businesses, I'd say, less evident in our permanent placement businesses, but across Nursing, Allied And Locum, we are starting to see the non-COVID orders return, albeit at a slower trajectory. We are seeing some recovery, which is why we now have a combination of both the COVID-related surge orders and a growing base of what we would consider to be more normalized orders. But I'll ask Kelly first to weigh in, and then Landry.

Yes. Just to add to that – thank you, Susan. We – adding on to her perspective, just from a market perspective, we have been doing some modeling, in addition to those areas that have had a high demand. We've been modeling some other areas. And we're expecting to see regular, I would say, pre-COVID volumes in hospitals, particularly getting up to 90% to 95% levels of volume by October or November. So with that is coming the normal demand, as Susan said, both in our contingent staffing needs as well as in our perm hiring. And we are seeing in some of those markets that the permanent hiring has resumed to higher levels or getting back to pre-COVID levels as well.

Yes, and this is Landry. I would just add to that, that the area where we saw the highest need in the first surge was New York and, specifically, New York City. And in that area, right now, as Susan and Kelly mentioned, we are seeing new demand and new placements in areas such like OR. But even the ICU, our travelers on assignment is still up year-over-year in New York and, specifically, New York City. So I think that says a lot about that – the permanent nurses that were there need – still need support from our ICU nurses in that area.

Great. And then just on the follow-up. When I look at the Q3 guide, I see revenues are coming down in the 7% to 10% range, but your margin is improving. Can you kind of talk to the puts and takes on how you're getting that margin progression even in the headwinds to revenue?

Sure. This is Brian here I mean, if you look at the guidance we gave for EBITDA margin, we said over 13%. So that would be relatively consistent with what we reported in the second quarter, getting there kind of slightly differently. The gross margin, we do expect to be up a bit in the third quarter. It's in part driven by just a change in the mix. As I mentioned in our prepared remarks, the margin was a little bit lower than we expected in the second quarter as we had a higher mix of nursing revenue. As that is coming down as a percentage of the total revenue in the third quarter, it naturally has a bit of a lift in the gross margin as we see the Physician and Leadership and Technology and Workforce Segments that have higher gross margins increase the consolidated margin. And then we've gone through some cost reduction effort as you talked about. And so although we are losing a little bit of operating leverage, the team has done a fantastic job of rightsizing expenses to match the revenue. And so we – although we lose a little bit of operating leverage, we're making that up with the higher gross margins. We end up at a pretty similar EBITDA margin level quarter-to-quarter.

Great, thank you guys. Really appreciate it

Our next question is from Tobey Sommer with Truist Securities.

Thank you. I was wondering if you could give us a comment on what you're seeing from a supply standpoint across your main categories. And I'll pause there and just follow up.

Thanks, Tobey. It's a great question because as you can imagine, supply is critically important now, particularly in nursing, where we are at all-time high levels of demand, and I mean that literally in the history of the company. And so the supply that we saw come into the industry and into – our business in the early part of the second quarter has been very helpful as our recruiters continuing to engage with them. But we have to continue to recruit new candidates. We are seeing increased applicants in other areas like in Locum, some of the displaced individuals that perhaps have been forced to rethink their career within Physician and Advanced Practice, or even allied has helped bring in more supply. But I'd like Landry to comment a little bit on the nursing supply, in particular, because the team has done a really great job of making sure that we leverage the investments that we've made, including some of the digital investments we've made like in AMN Passport. So Landry, do you want to add a little more commentary around that?

Yes, sure. Tobey, yes, the supply numbers look really good, specific to Travel Nursing. Every month, this year, so far in 2020, our new applications have been above prior year and as well as just up over our goal that we set for ourselves at the beginning of the year. A lot of that has to do with some of the investments that we've been making, a lot of that's in our like digital or our mobile initiatives. Specific to the AMN Passport, that's a mobile app that's really taken off for us. And it's kind of proven that clinicians want to work with us digitally, and they can do things such as search jobs on there, they can self-select the certain jobs, they can review their weekly pay and other self-service things, like uploading their credentialing documents. So it's really help with the whole on-boarding process. But just in general, a lot of those initiatives and the digital initiatives, specifically in the mobile investments that we've made, is really helping drive supply to us.

Tobey, I think this might be a really great opportunity for Dr. Edmonson to weigh in on the Nurse survey that I referenced and sort of the sentiment of nurses and the level of burnout and how they're thinking about their career going forward, because that affects us not just now, but it affects the workforce for our clients going into the future. So Cole, if you wouldn't mind, perhaps, saying a few words about that.

Thank you, Susan. What we found, as we were serving nurses in the field, which is that 87% of them plan on continuing to work in nursing. We did see that about 26% of those that are currently working are planning on making some kind of a change in the next year. That could be a new specialty, a change in their status or even potentially their employers of their practice settings. What we think about that is that it really represents some nice stability in the workforce, but it also has some potential disruption for us in terms of the supply. But I'm also really encouraged that we continue to see the nursing school enrollments be strong. Most programs are really reporting an increase in enrollment, and they're working really hard to increase capacity in their programs. Because as we know, last year, 70,000 qualified nursing students were turned away based on the lack of faculty and the shortages within that industry. So we're very encouraged by what we're seeing, but we also realize that this is one sample that gives kind of where we are today, and as we go forward, we could see differing workforce trends as well. So it's really important we pay attention to wellness of our clinicians. And we also make sure that we're taking care of folks who are on assignment, as well as making sure that we have the ability to make their experience great with AMN, which we do.

Could you comment on what you're hearing from customers about their intentions to utilize tents and perhaps penetration within their workforce, specifically in the MSP book, and maybe you could update us on how big that is for your various lines of business, and if you're able to stitch together any of your technology services, including Stratus into MSPs.

Tobey, it's Kelly, I'll be happy to address all of those points. First of all, we continue to see a strong need coming from particularly our most strategic clients, not only to support current COVID needs but also, there is a level of strain that's on the current workforce, even for someone of those organizations that are coming out of COVID, where they've had high overtime and they're just – generally have some levels of burnout. So – and they're coming into now a more seasonal time where they have higher demand. So we are already working with some of our most strategic customers on their future winter orders and their needs, and they're very similar, if not higher than what we saw the prior year. So we believe that demand, particularly for our MSP clients, is going to continue. They've been extremely appreciative of the kind of partnership they've had with us, our ability to fulfill. Dr. Cole mentioned the level of support that we've continued to provide our clinicians while they're on assignment, supporting their safety, their mental, their well-being and the additional clinical support is really appreciated by our clients. And we have been able to extend additional services to throughout. We have a very – we're in a very good place around our renewals for year this and expansions, many if which that have expanded into providing additional services like Stratus and some of the newer components of our total talent management portfolio. So I would say we're seeing an even closer reliance, independency and much deeper relationships and partnerships with our MSP clients. We're very, very encouraged about the trajectory there.

Last question for me, maybe a numbers one for Brian. What is all this better-than-expected EBITDA going do to the leverage ratio? And when do you think you could have it back down to two times?

We've got better ways to get to two times. We're very pleased with where we sit today in terms of just our credit facility, overall, and the maturities of our debt, and we're a little above – right at three times at the end of last quarter. So with the debt reduction during the quarter, we got down to 2.7. And I'd expect it will be down closer to 2.5 times by the end of the year, maybe a little bit lower than that. It will take a bit more time to get to two times, but we're in a very healthy place in the balance sheet and feel good about it.

Thank you.

Next question is from Jeff Silber with BMO Capital Markets. Your line is open.

Thanks so much. Based on your comments earlier on the volume potential getting back to 90% to 95% by October, November. Is it safe to say that you expect 3Q to be the bottom in terms of revenues?

Well, the fourth quarter would normally be a sequential uptick for us, particularly in Nursing. And as Kelly alluded, we're starting to see the winter orders come in at a good rate, again, sort of as good, if not, in some cases, a little bit better than last year, and we're adding on many new clients. And so we would expect that can contribute to the fourth quarter. You only hear hesitancy in my voice because it's just hard to tell in this environment and the volatility, what the actual volumes might be. But I also think we're going to continue to have surges across the country. That's absolutely what we're hearing from HHS, as well as from our clients. And so I think we have to be ready for both. We have to be ready for resumption of normal care in normal settings as well as COVID patients that might have a spike in demand. So that's what we're anticipating right now.

Okay, that's really helpful. I appreciate that. You also talked at the beginning about the fact that you spent maybe investments in technology, being able to have, I won't say a smooth kind of transition here, but smoother than most. Do you think once we get through this, that the business might be structurally different than it was in the past, potentially getting your back towards that, I think, 14% margin goal that you talked about earlier?

Yes. We do think that's still a very achievable goal for us. And if anything, this crisis has forced us or enabled us to perhaps make some of the investments even faster because we needed to move quickly to get automation in place, and we saw what was possible and the benefit that could be achieved. And so a lot was accomplished already in the first part of this year, and we absolutely have our sight set on accomplishing a lot more in the next six months to 12 months. And so I think based on those investments, which create efficiency, as well as just our continued improvement of processes and making sure that we're streamlining things internally as well as externally with our clients, should lead us towards that. We're not putting a time frame on it yet, but I actually have even greater confidence in achieving that goal now, or at least sooner than I did at the beginning of the year.

Okay, great, that's really helpful. Thanks so much.

Thanks.

Our next question is from Brian Tanquilut with Jefferies. Your line is open.

Hey, good afternoon. Susan, just a follow-up on your answer to Jeff's first question. So I know your visibility is kind of limited. But if we're thinking about continued surges, right, into next year, and do you feel like that's a good baseline to be thinking about in terms of the strength of the business if this will build on from we're seeing right now in terms of Q4 demand for Travel Nursing?

Yes. So I want to I make sure I understand the question. So if we have a kind of undercurrent of normal growth and a resumption of normal services. As Kelly alluded to, the predictive analytics that we put in place using our clients' information would suggest that we'd be back to those levels. And on top of that, you would have COVID-related needs. I don't know that it means that we'd be fully back to normal in all of our businesses by the first part of next year, but we would be moving in that direction. Some, such as permanent placement, are absolutely going to take longer to achieve that. And I do think even in Locums, for example, where there's been greater disruption, it could take longer. But in other areas such as Nursing and Allied, I think we're seeing the signs of an earlier recovery.

Appreciate it. And then my second question, over the years, as people look at your story, one of the things that you guys always said is that adding the MSP angle to the story was a way to reduce risk from whether it's economic shock or external risks, right? And as we sit here, this is really the first quarter where you had a big test in terms of macro disruption to your business with COVID. As you look at it, do you think – do you believe that the strategy with MSP and growing that side of the business has worked in terms of shielding your business from increased volatility?

Yes. I absolutely do. In fact, if you look at the second quarter, in particular, where our clients, of course, our MSP clients needed us so desperately, we were able to fill their jobs and, certainly, we had great help from our strategic partners and affiliate vendors, and they also deserve a lot of credit for ensuring we got clinicians to the front lines. They were fantastic collaborative partners. But AMN also really stepped up to the plate. In fact, we have our highest levels of direct fill or capture across most of our businesses, in particular, nursing. But overall, we hit a high point for the company in terms of our direct capture of MSP revenue. So hopefully, that helps answer your question.

Brian, this is Brian. The other thing I'd just add is, MSP is really just part of our total talent strategy. So when you think about these clients and how we can help them, it's just only one element now. So we've been – as Cole mentioned earlier, really excited about our ability to add other service lines, so we can help them as well, whether it's permanent services or predictive and scheduling capabilities now with Stratus as well. So we're seeing high involvement mark from those clients and wanting to engage further beyond just that traditional MSP for contingent labor and finding other ways that we can help them deliver great patient care and be more efficient at the same time. The other thing I think for us, as you look at the DSO coming down and the strong collections, the fact that we have more of our business through some of the – the really strong large systems in the country, I think, is also a benefit for us in terms of the predictability of revenue and ability to collect that as well.

Awesome. Thank you.

[Operator Instructions] Ladies and gentlemen, this does conclude the Q&A period. I'll now turn it back over to Susan Salka for any closing remarks.

Thank you, everyone, for joining us today. We're very grateful for your time and your support of AMN and our purpose and mission across the organization. Hope you have a wonderful evening. And of course, as always, be well.

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation, and you may now disconnect.