AMN Healthcare Services, Inc. (AMN) Q2 2022 Earnings Report, Transcript and Summary

Good day, and thank you for standing by. Welcome to the AMN Healthcare Second Quarter 2022 Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your moderator today, Randle Reece, Senior Director of Investor Relations. Please go ahead.

Good afternoon, everyone. Welcome to AMN Healthcare’s second quarter 2022 earnings call. A replay of this webcast will be available at ir.amnhealthcare.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, 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 because 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 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 ir.amnhealthcare.com. On the call today are Susan Salka, Chief Executive Officer; Jeff Knudson, Chief Financial Officer; Kelly Rakowski, Group President and Chief Operating Officer of Strategic Talent Solutions; Landry Seedig, Group President and COO of Nursing and Allied Solutions; and James Taylor, Group President and COO of Physician and Leadership Solutions. I will now turn the call over to Susan.

Thank you so much, Randy, and welcome, everyone. Throughout the second quarter, the AMN team, our health care professionals and our partners once again delivered outstanding and critical service for our clients. The over 70,000 quality health care workers placed by AMN and our supplier partners in the quarter cared for many thousands of patients across the U.S. While the health care staffing industry is a small fraction of the overall workforce, our contributions are very meaningful, and will become even more so as these labor shortages are expected to worsen and persist for years to come. The health care delivery model that is highly dependent on the skills, passion and many hours worked by clinicians is being tested beyond its limits. Open health care jobs in the U.S. continue to pace beyond 2.5x the number of hires each month, and there is no quick fix. Health care organizations are challenged to resume full capacity of patient care, including a backlog of surgeries. Almost all are dealing with a high number of vacancies, attrition rates and intense competition in hiring, all amidst rising costs across their delivery systems. In past times, one response to cost pressures would be to reduce contingent and permanent staff. But that’s not a viable option when they are already understaffed. Fortunately, there is some cost relief due to bill rates declining in the travel nurse market as we expected it would. Last winter, the urgency of the market’s need for contingent labor reached an extreme level. And now the excessive demand for last-minute staffing has mostly subsided. With more time to recruit and place health care professionals, we are helping clients maintain their contingent workforce while also reducing the cost. This progress will be more fully visible in our third quarter results, where we are guiding revenue to be about 23% lower than our second quarter. This is better than the expectations we laid out in February and May. The strong demand we are continuing to experience across all businesses gives us confidence we will exit 2022 with an annualized revenue run rate of more than $4 billion. So now let’s talk about the quarter that we just finished. Our strong second quarter results delivered revenue of $1.43 billion with an adjusted EBITDA of $233 million. This was slightly stronger than we expected, with revenue up 66% over prior year and 8% lower than the first quarter, due primarily to the expected decline in nurse bill rates. All three of our operating segments exceeded expectations, which shows the breadth of how our clients engage us for comprehensive short and long-term talent solutions. In Nurse and Allied Solutions segment revenue was $1.1 billion, up 76% year-over-year. Travel Nurse Staffing revenue grew 70% year-over-year, balanced between volume and bill rate growth. Allied Staffing grew revenue 54% year-over-year, driven mainly by higher volume. Revenue growth was similarly strong in therapy, imaging and laboratory specialties. As anticipated at the beginning of the second quarter, demand for travel nurses and a few allied modalities declined from the all-time high in Q1. As the quarter progressed, demand grew significantly due to the persistent vacancies and labor shortages faced by health care organizations. At these high levels of demand and the trajectory of bill rates for future placements, we believe the average bill rate will bottom out slightly higher than we previously expected. We were thrilled to welcome the Connetics team to the AMN family during the quarter. With the demand for international clinicians at record levels, we know that their successful sourcing and direct hire model will be a well-timed option for clients. This team will continue to be led by the same outstanding leaders who built the business and will take it to the next level within AMN. For the third quarter, we expect Nurse and Allied revenue to grow 24% to 28% year-over-year, with the increase coming primarily from a higher number of clinicians on assignment. Physician and Leadership Solutions recorded second quarter revenue of $176 million, 26% higher than a year ago. Locum tenens revenue growth improved 36% year-over-year, overcoming the end of pandemic-related assignments earlier in the year. Demand is strong across all specialties, and one notable trend is the growth in our primary care telehealth placements with clients. Interim leadership delivered another record quarter. And physician and executive search revenue posted outstanding 28% growth. Our physician perm team reached an all-time high for placements. More and more, AMN is partnering with health care organizations on large multi-search long-term engagements. In the third quarter, we expect Physician and Leadership Solutions revenue to grow approximately 15% year-over-year. Technology and Workforce Solutions hit another record with second quarter revenue of $149 million, up 59% year-over-year. Our VMS technology business led the growth again with revenue up 144% versus prior year, based on higher volume and fees. Language services and RPO were also nicely ahead of expectations. The growth in these higher-margin service and technology businesses gives us confidence in our ability to expand AMN’s margins over time. Third quarter revenue for Technology and Workforce Solutions is projected to grow approximately 30% year-over-year as VMS revenue moderates along with market-wide trends. As we have expected for several quarters, the Q3 revenue decline is mostly driven by Nurse and Allied, where pandemic-related crisis compensation and bill rates have come down. The largest sequential step-down in bill rates for clinicians on assignment is occurring in the third quarter. Over the last 18 months, we have invested heavily in our client and clinician relationships, our teams, our technologies and our communities. That level of spending naturally steps down as business moves closer to the new normal. We have planned well in anticipation of these changes in the market, and our team has positioned us to absorb a decrease in revenue without a need to reduce staff. In fact, we are still recruiting to build the strongest AMN team possible. We are more enthusiastic than ever about the long-term potential for AMN to be an even greater innovator and contributor as the health care system deals with higher demand and difficult labor supply. Whatever comes our way, I know the AMN team is more than up to the challenge and will always lean on the foundation of our values and inclusive culture to make a difference. The heart and soul of AMN is stronger than ever, which is evident in our outstanding results we reported today. But it is also evident in the personal and professional support our colleagues give to one another each and every day. In just a few minutes, James, Kelly and Landry will join us for the Q&A session. For now though, I would like to turn the call over to our colleague, Jeff, who will provide more insight on our financial results.

Thank you, Susan, and good afternoon, everyone. Second quarter revenue of $1.43 billion was 4% above the high end of our guidance range, driven by outperformance from all three segments. Consolidated revenue increased 66% year-over-year and decreased 8% sequentially. Excluding $83 million of labor disruption revenue, consolidated revenue decreased 14% sequentially. Gross margin for the quarter was 32.3%, 40 basis points lower than prior year and up 30 basis points sequentially. Year-over-year, the margin was lower from less hours in nurse staffing and a revenue mix shift toward our lower-margin staffing businesses. Sequentially, the revenue mix change was favorable to gross margin. Consolidated SG&A expenses were $244 million or 17.1% of revenue, compared with $157 million or 18.3% of revenue in the year-ago quarter and $258 million or 16.6% of revenue in the previous quarter. SG&A expenses increased year-over-year primarily due to higher expenses for growing, rewarding and supporting our team members. Adjusted SG&A, excluding certain nonrecurring expenses and stock-based compensation expense, was $229 million this quarter or 16% of revenue, compared with $148 million or 17.2% of revenue in the year-ago quarter. The improvement in SG&A margin came from operating leverage on the revenue growth. On a sequential basis, adjusted SG&A was lower by $11 million due to lower performance compensation. In the second quarter, Nurse and Allied revenue was $1.1 billion, 76% higher than prior year and down 10% sequentially. Our Travel Nurse business grew revenue 70% over prior year and declined 20% sequentially. Travelers on assignment grew 33% year-over-year and declined 3% sequentially. Allied revenue was $207 million, growing 54% from the prior year and down 3% sequentially. Allied volume was up 34% over prior year and down 2% sequentially. Nurse and Allied gross margin of 25.7% was 90 basis points lower than prior year and down 50 basis points sequentially. The year-over-year change was due mainly to higher compensation for clinicians. Sequentially, the margin decline stemmed primarily from lower hours and higher insurance costs, partially offset by labor disruption revenue and favorable changes in negotiated package. Segment EBITDA margin of 14.6% was 30 basis points higher than prior year and 130 basis points lower than prior quarter. Year-over-year, lower gross margin was more than offset by the SG&A leverage from higher revenue. Physician and Leadership Solutions revenue in the second quarter was $176 million, 26% higher year-over-year and down 2% sequentially. Locum tenens revenue was $106 million, 36% higher than prior year and down 6% sequentially. Locums had $14 million less pandemic-related revenue in the second quarter versus the first, while core revenue grew 8% sequentially. Interim leadership revenue increased 8% from prior year and was up 7% sequentially. Search revenue increased 28% from prior year and was down 1% sequentially. Gross margin for this segment was 34.2%, 240 basis points lower than the prior year and down 90 basis points sequentially. The year-over-year margin decline was primarily due to revenue mix changes and lower gross margins for locum tenens and interim leadership. Segment EBITDA margin was 11.4%, down 430 basis points from last year and flat sequentially. The year-over-year decline in EBITDA margin was primarily due to lower gross margin as well as a higher performance compensation accrual. Technology and Workforce Solutions revenue was $149 million in the second quarter, growing 59% year-over-year and up 3% sequentially. VMS revenue of $75 million grew 144% year-over-year and was flat sequentially. Language services and RPO also exceeded our growth expectations for the quarter. Segment gross margin was 78.3%, up from the year-ago margin of 67.7% and up 160 basis points sequentially. The year-over-year increase was due to the growth of the higher-margin VMS business. Segment EBITDA margin of 55.2% was up 980 basis points year-over-year and 80 basis points sequentially. Consolidated second quarter adjusted EBITDA of $233 million was higher by 74% year-over-year and down 10% sequentially. Adjusted EBITDA margin of 16.3% was 70 basis points higher year-over-year and down 30 basis points sequentially. We reported net income of $124 million and diluted earnings per share of $2.77 in the quarter. Adjusted earnings per share was $3.31 compared with $1.64 in the year-ago quarter. Days sales outstanding was 50 days, in line with the prior year and 7 days lower than last quarter, due to strong collections and the cadence of revenue through the quarter. Operating cash flow for the quarter was very strong at $224 million, and capital expenditures were $17 million. As of June 30, we had cash and equivalents of $79 million, long-term debt of $850 million and a net leverage ratio of 0.9x to 1x. From a capital allocation perspective, the company used $174 million of cash to repurchase 1.9 million shares of our stock in the quarter at an average price of $92.65. As of June 30, $326 million remained under our stock repurchase authorization. We continued our acquisition strategy in the second quarter with the purchase of Connetics, a fast-growing, high-margin business that helps us better address client needs for permanent recruitment of international nurses and allied professionals. The acquisition was completed in mid-May and added $2 million of revenue in the quarter. Now turning to third quarter guidance. We are projecting consolidated revenue to be in a range of $1.08 billion to $1.11 billion, up 23% to 26% over prior year. This revenue guidance includes $7 million of labor disruption revenue. Third quarter gross margin is projected to be 33% to 33.5%. At the midpoint, consolidated gross margin would be approximately 100 basis points higher than the second quarter level. This increase is due to improvement in Nurse and Allied along with a favorable revenue mix shift. Reported SG&A expenses are projected to be 18% to 18.5% of revenue as we lose some operating leverage due to the expected lower bill rates. Operating margin is expected to be 11.8% to 12.4%, and adjusted EBITDA margin is expected to be 15.5% to 16%. Other third quarter guidance details can be found in today’s earnings release. On May’s call, we said we expected the average bill rate for Nurse and Allied to decline in the low double digits sequentially in the second quarter, with the largest drop coming in the third quarter. The Nurse and Allied average bill rate for Q2 came in 9% lower than the first quarter, and we still expect the third quarter to experience the largest sequential decline of the year. Our current expectation is that we will exit the year with Nurse and Allied bill rates stabilizing at approximately 30% lower than the first quarter level, better than our prior expectation of 35% below the Q1 peak. The trends across our business segments give us confidence that fourth quarter revenue will come in greater than $1 billion with an adjusted EBITDA margin of at least 15%. And now we’d like to open the call for questions.

[Operator Instructions] Our first question comes from Tim Mulrooney with William Blair. Your line is now open.

Susan, Jeff, Kelly, Landry, James, Good afternoon.

Hello there.

So yes, two quick questions. So as I look at your volume numbers, I see Nurse and Allied travelers on assignment was down, I think only 4% sequentially from the first quarter. I think you’ve telegraphed some expected moderation in volumes for a while now. But I’m curious how you’re thinking about Nurse and Allied volume cadence as we move through the third and the fourth quarters of this year?

Hey Tim. How’s it going? It’s Landry. Yes, the Q2 to Q3, of course, as Jeff mentioned, we’ve got a revenue decline there. Primary driver there is the bill rates that are declining. And then outside of that, yes, we do have some volume declines sequentially from Q2 to Q3. Part of that, typically you would see some seasonal declines. If you go back both during the pandemic as well as before the pandemic, we would see those seasonal declines. And we’re seeing that same thing or expecting that same thing today as we look at Q3. A part of that, though, is schools. So just seasonally, that volume will decline. And then another thing that we’re seeing is that our clinicians are not immune to some of the burnout that’s taking place in the marketplace. Whether you’re working perm or travel or per diem, we’re experiencing some of that. So they’re taking a little bit of time off. We actually have a metric that we track, and it tracks the time off between assignments. And we can see that, that metric has increased. So they’re taking a little bit longer break, a little bit longer vacation. So you add all those things together, and that’s what you get on the Q2 to Q3. And then sequentially from Q3 to Q4, we expect volumes to come back up.

Come back up. Okay. All right. That’s not what we have in our model. I’ll update that. Thank you, Landry. And then just one more. One of your competitors reported results yesterday saying the bill rates are, I guess, coming down a little faster than pay rates, which is squeezing their margins. Are you seeing the same thing in your Travel Nurse business? And if so, was that a dynamic you expect to play out for a few more quarters? Or is that not necessarily something that you’re seeing?

Yes, Tim. This is Jeff. When you look at our second quarter over first quarter gross margins, that was primarily driven by revenue mix. However, within Nurse and Allied, we did see lower hours coming off of the Q1 peak. And we also had some workers’ comp insurance true-ups in the quarter. There was some favorability in Q2 over Q1 from a sequential perspective, both due to the labor disruption revenue as well as some modest impacts from negotiated package. Moving forward into the third quarter, we said that we expect consolidated gross margins to be up roughly 100 basis points. Again, that’s driven by a shift in the revenue mix with the bill rate declines. But again, there is some favorability in that negotiated package with that Nurse and Allied as well.

And Tim, just a little more clarity on the reduction in bill rates. And I think you’re maybe referring to specifically if a bill rate is reduced in the middle of an assignment, we typically will peg the pay rate to that bill rate. So if a client provides their appropriate notice in the middle of an assignment that the rate is going to change, then we’ll have that conversation with the nurse to talk about whether they want to stay at that lower rate, or perhaps they can move to a different assignment. And because of the vast orders that we have across the country, oftentimes moving is a better option for them. So that’s how we manage it. So we don’t expect to feel gross margin compression from that specific issue that you’re referring to.

That’s great color. Thank you.

Thank you, Tim.

Thank you. And our next question comes from Kevin Fischbeck with Bank of America. Your line is now open.

Great. Thanks. I was wondering if you could provide a little more color on the increase during the quarter about new orders that you mentioned. It sounds like you’re expecting that out as unusually strong. Can you maybe help us put some context to the magnitude of that versus what you would normally see? And obviously, what’s happening is COVID started to increase again. I mean, how are you thinking about how much of that is that burnout dynamic and shortage dynamic versus hospitals may be afraid of COVID creating an issue and trying to put in orders in front of that?

So great question. We’ll give color on that. I’m pretty sure you’re referring to Nursing, but I’d like for Landry to also give some color on the Allied business, and then perhaps James can talk about our Physician and Leadership businesses as well and the demand trends.

Kevin, it’s Landry. So I guess, first off, kind of starting with the end there. You had mentioned how much of the increase right now might be related to the COVID spike that we’re seeing. And we don’t correlate any of it really as it relates to the COVID spike. What we’re hearing from our clients is that it is the shortages that they’re dealing with. So right now, Travel Nurse and Allied demand is currently today more than 2x the amount of demand that we would have seen before the pandemic at the same time period. On the travel nursing side specifically, we did see those declines coming off those really high numbers that we saw at the very beginning of the year. And then demand declined through April. And then over the last 13 weeks, we have seen sequential increases every single week for the past 13 weeks. So right now, demand for travel nursing, it’s actually up more than 80% since the low point that we saw at the beginning of the second quarter. James?

Thank you, Landry. To attach to what Landry’s saying concerning the Physicians and Leadership, we are expecting our demand to remain high across all the majority of our Physician and Leadership Solutions businesses even as the COVID-related projects as they – the demand diminishes. Just by some perspective here, Locum’s quarter two demand in terms of gross days available was up 75% year-over-year, specifically driven by primary care CRNA, surgery, hospital and dentistry. In our interim business, our engagements reached 492, which is the highest ever, which was 7% higher year-over-year and 5% higher sequentially. In our Search business, we continue to see a strong pipeline across the practices. The Leadership pipeline also was up high – single digits over – quarter-over-quarter. And our physician perm business is up also high single digits sequentially. Our fill rates are very strong in both term, our interim business and also our search business. They are achieving high single digits and sequentially quarter-over-quarter. But we do see a decrease from a fill rate standpoint in our Locums business, and that’s purely driven by the high demand that we have in the Locums business and the constraint that we have on supply.

All right. That’s all helpful. I guess given that, it sounds like you guys expect a bigger decline in bill rates in Q3 than in Q2, even though demand has been consistently increasing throughout Q2, I think kind of giving you a bigger buffer into Q3. So why are bill rates going to drop even faster in Q3 than Q2, given the ramp in demand? Thanks.

Kevin, it’s Landry again. There’s a lag there. And so – and maybe I can just speak to a correlation between fill rates and bill rates together. And we have been expecting that these bill rates would come down from the peaks that we saw in the first quarter, the really high bill rate months, of course, in the February and March time frame. And it’s exactly what’s been happening. The trajectory, as we mentioned, it’s not as steep as what we thought that it might have been. And then with the bill rates coming down, of course we’ve also seen the pay rates come down. And those have now come down to a point to where we’re starting to see it have a negative impact on fill rate. So that’s why we think that we’ve actually probably hit an inflection point at this point. So it takes a little bit of time for all of that to work its way through. And the trends, and it’s a little bit too early to call, but that’s what it looks like what’s happening out in the marketplace, which is leading us to make the statement and kind of updating our number for Q4 that Jeff mentioned.

Kevin, the other bit of information that might give you some insight in our confidence is that we are getting our winter orders in. They’re fairly dwarfed by the large number of orders that we already have. But as we’re getting those orders in, they’re really as strong, if not stronger than prior years. And the rates are largely in line and even some clients talking about higher rates. So I think that’s another sign that we’ve probably seen that trough in rates. Now we’ll be booking those people into the fourth quarter. But as we look at our bill rate trends for travelers on assignment going into the fourth quarter, they’re looking stable to, in some cases, a little stronger, but at the very least, stable.

All right. Great. Thank you.

Thank you.

Operator?

Thank you. And our next question comes from A.J. Rice with Credit Suisse. Your line is open.

Hi, everybody. A number of questions I could ask. I’ll focus in on, when you look at where your contracts are rolling over in July, the bill rates on those, is that about where you’re assuming the whole quarter plays out? Or are you still well above and have leeway for it to drop further intra-quarter to get to the numbers you’re putting out today?

Yes, A.J., as we think about moving through the third quarter there, we’re still expecting sequential declines every month all the way through September and then a very modest decline in the bill rates into the fourth quarter to settle out at that 30% below the Q1 peak.

But to be clear, A.J., most of those people are already booked and have either started their assignment, which is why we have good visibility, or they’re soon to start their assignment.

I got you. Of course, that’s true. The other thing I was going to ask you is about the perception was hospitals were getting all this COVID relief money, CARES Act, add-on payments, Medicare sequestration relief. And they were plowing that back in to get nurses to make sure they could fill, meet their demand and were willing to pay very high prices. A lot of that money is rolling off now. And I know they need the nurses. But we’ve seen a little bit nursing homes aren’t a big customer for you all, but some of the people that deal with nursing homes, which are admittedly in worse shape than hospitals, are saying that nursing homes are just – they’re going without, frankly, in some cases and to the point of pushing the limit on staffing levels and all. I don’t think hospitals are at that point. But I wonder, what is your conversation with them about the pain factor? We’ve seen some downgrades of major health systems. We’ve seen at least one large system announce that they’ve swung to a loss now. What are you hearing from your customers about not just their desire, obviously, to have nurses, but what’s the pain level that they’re feeling as this COVID money runs off?

Well, this is Susan. I’ll start and then have Kelly jump in since she’s talking with clients much more on a daily basis about these exact issues. But I’d say that there was more optimism within the health care community back in maybe the March, April time frame that they could use some of the extra money to recruit and retain clinicians and curb the attrition and the vacancies, which is why our orders declined. Some of it was just the crisis assignments falling off. And some of it was their optimism that they could put a dent in their vacancies. And it just didn’t really come to fruition to the level that they had expected. And some of it is nurses not willing to come back into the employment market at all. And certainly, the cost to recruit them back in, I talked about this on the last earnings call, that it’s a very expensive proposition for a hospital to permanently increase the compensation for their permanent staff. If you do 10% across all nurses working in hospitals, you’d be at something like $15 billion. So it’s just really quite cost-prohibitive when their cost pressures are really already so great. So the conversation now is, this is the new norm. And they are looking for other mid and long-term solutions to deal with it. So I’ll turn it over to Kelly and have her fill in how we’re helping them do that.

Yes. Thank you, Susan. Hi, A.J. I think you have it exactly right. I think their level of optimism was met with some realities in the market of just the supply that was available to hire into full-time staff. They’re still experiencing levels of attrition due to burnout. I think as Landry mentioned earlier, I think the summer months are particularly challenging as well, to hire anew. So they are continuing to attack us from all fronts. We’ve seen our RPO business increase due to that need for assistance and bringing in permanent staff. Our orders and placements are at an all-time high for that business, and we continue to add new clients needing that assistance with talent acquisition. They’re continuing to look at how they optimize the workforce that they have, certainly becoming more efficient in their processes, as you mentioned, trying to create some more capacity and take away some of that constraint. And then certainly, they are still turning to a contingent workforce to help them, both in the local market as well as we see that in our travel needs. I will say, A.J., the level of criticality where we’re seeing the need for predictive understanding of the supply, because that is informing decisions where they may have to shut down services either on a temporary or a longer-term basis, particularly in some of their procedural areas. So it’s becoming very important that they have our assistants and others around staffing those, so that they’re able to continue to keep their doors open, services open to serve their communities.

Okay. Thanks a lot.

Thank you. And our next question comes from Brian Tanquilut with Jefferies. Your line is now open.

Good afternoon, guys. Congrats on the quarter. I guess just to clarify some of the comments you made and try to tie a few things together. So I think, Susan, you made a comment that the bottom is – you think that rates will bottom out higher than you had previously expected. So is that just given the demand dynamic? And then maybe just tying that to a comment that you guys made about how the run rate is still kind of like $1 billion of revenue. So just trying to figure out how to put those two comments together when it sounds like you’re expecting the bottom of rates to be higher than before.

Yes, Brian, it’s Susan. And I would say it’s slightly higher. We had said 35% below. Now we’re thinking closer to 30%, and we get that visibility based on where we see the stability in bill rates over the last several weeks and then starting to see future placements at that rate. And most of the larger clients are discussing, can we hold at this rate, or do we need to go higher? Not, do we need to go lower. I think there’s – with the additional orders that Landry discussed rising so much through the second quarter and still coming in today, I think there’s a reality that they may need to, in some very targeted areas, even raise rates if it’s curbing their ability to deliver critical services. So I guess that’s why we get the confidence in where we think that we will so-called bottom out. You could argue we’ve sort of bottomed out now. But because of the lag Landry discussed, those – the assignments that were booked and maybe started a few weeks or months ago, those will play out. And some clinicians haven’t even started that were booked at higher rates. And that’s why there’s a little bit of a slope going into the fourth quarter.

Got you. And then as I look at just the Technology and Workforce Solutions segment, margins were obviously very strong. I’m just wondering how you’re thinking about the sustainability there? Or is there any call out explaining kind of like peak margins for that group?

Yes. I think what you need to keep in mind there as we move through the back half of the year, our VMS business, we will start to see sequential revenue declines there. And the third and fourth quarter as the same bill rate dynamics that impact Nurse and Allied make their way through the VMS business. And that’s the highest-margin business that we have within the segment. So that will start to impact not only the gross margins, but the adjusted EBITDA margins into the back half.

All right. Got it. Thanks guys.

Thank you. Our next question comes from Ryan Griffin with BMO Capital Markets. Your line is now open.

Actually, I think it’s Jeff Silber with BMO. I must have used the wrong PIN. Sorry about that. I appreciate you taking my question. Susan, I think in your prepared remarks, you talked about internal hiring. I may have misheard you, but if that was true, can you talk about where that hiring, which division, what type of physicians are you really focusing on right now?

Absolutely, Jeff, and thanks for asking. We have physicians open pretty much all across the organization. I mean, you certainly have some amount of attrition. Although I will say our second quarter attrition was perhaps the lowest in our company history, or as long as we’ve tracked it to this level of accuracy. So we’re really pleased with where we are in our ability to develop and retain our staff. And I think it also very much speaks to our culture and people’s desire to be a part of our mission and what we’re trying to accomplish. But with that said, occasionally people leave, so you’re hiring for that. And then we’re adding positions pretty much across all divisions and departments. Certainly, in our technology-related divisions, where we’re seeing some really nice growth, we are adding. And then even in our staffing businesses with the volume increases that Landry referred to, and we are expecting volume increases over time. And in Physician and Leadership, we’ve got to have the trained recruiters and account managers and staff there to support them. So it’s really across the company.

Okay. That’s helpful. As long as we’re talking about recruiting, maybe we can talk about you recruiting professionals. I know, obviously, there’s been a tremendous amount of volatility on the Nurse and Allied side. At a high level, are you seeing new types of travelers coming in specifically from a demographic perspective, in terms of younger nurses traveling that they may not have traveled beforehand?

Jeff, it’s Landry. So we don’t capture age at the time of application, but we do track it at placement. And we’re certainly seeing a larger percentage of our overall new placements with clinicians that are under 40. So right now, under the age of 40, it makes up about two-thirds of our new placements. Also in the second quarter, we saw our largest increase in new placements for clinicians that were actually between the age of 21 to 25. So that data does suggest that we’re starting to see a shift towards a younger demographic, where what we’ve been talking about, what we see out in the market or other industries, their preferences are to work in a more kind of flexible work arrangement.

All right. That’s great to hear. Thanks so much.

Thank you. [Operator Instructions] Our next question comes from Tobey Sommer with Truist. Your line is open.

I’d ask a follow-up question on the – thank you. I wanted to ask a follow-up question on the pricing. As you look at travel nurse pricing in terms of whatever visibility you do have at this point into the balance of the year, when you make your comments are – is that including winter needs and what seasonally can be higher-priced bill rates and assignments? Or are you trying to normalize for that when you’re rendering a judgment and describing a bottoming? Thank you.

Yes, I would say, Tobey, we did look at where those winter need orders were coming in. And then we also looked at history and where "normal" orders were in Q4 versus winter needs. And given the visibility that the winter needs were giving us, that is why we made that commentary on the fourth quarter.

Okay. Thank you. And then I wanted to ask a question about – there have been a lot of labor disruptions and/or contract negotiations in recent months. And I think there’s more to – a pretty decent amount of activity for the balance of the year. I’ve noticed as a result that the union agreements contemplate pretty significant wage increases for full-time staff, not just mid-single digits, but high for a number of years. When you step back and look at the labor complex as a whole, full and part time, do you consider more rapid wage growth for unionized employees to be supportive or disruptive to pricing for travel nurses over time?

We haven’t really seen historically, Tobey, those negotiations and any resulting changes in comp structure be impactful or disruptive. Now it may be for that client, but it doesn’t necessarily spill over and affect the entire nurse profession and industry. And of course, you know the number as well. It’s about 20% of nurses fall under union agreements. So maybe it’s not surprising that it doesn’t have an immediate or even long-term effect when those things occur. So just because you’re seeing an 8% increase or even a 10% increase at a particular facility or system, I doubt that you’re going to see that ripple across the entire health care ecosystem because it just becomes very cost prohibitive. It’s a difficult equation for them to sustain, especially when they have all the other cost pressures. So it’s a long way of saying I don’t think it’s going to be disruptive. What it is, is telling of how much the nurses and other clinicians are empowered to push back and demand changes that they think would be good for their profession and for patient care. And oftentimes, at the top of that list is staffing ratios. And whether they’re regulated or not, clinicians, particularly nurses, want to know that there’s appropriate staffing. In fact, if you put compensation aside, staffing levels are – and flexibility are two of the top things that clinicians are seeking. And those things would be net positive for us if they’re being pushed to hold to higher levels of staffing ratios.

Thanks very much.

Thanks, Tobey.

Thank you. Our next question comes from Bill Sutherland with The Benchmark Company. Your line is now open.

Hi, everybody. Susan, I think on the supply issue, I’d like to see what you’re thinking looking out over the horizon a bit, and I know there’s some program expansion going on. But how do you think it trends as far as supply finally beginning to expand a bit?

There is a lot of work being done to expand education. They prioritized nurses for visas, not giving them a special visa, but prioritize them to try to get them through immigration in some sort of normal time frame. With that said, it’s going to be years, years. And most health care leaders and nurse executives are thinking in the 5 to 10-year range before we’ll see any lessening in the shortage. In fact, the common thinking and research papers that I read suggest it will get worse before it gets better, because there really just is not a quick fix. It doesn’t mean we shouldn’t be partnering and aligning with others to do things. It starts with retaining the precious workforce that we have, which is why AMN is aligning with our clients in a variety of organizations, and starting right at home with our own clinicians in providing them with support to make sure that they have the – whether it be mental health support, wellness support, rejuvenation, resiliency so that they can stay in the workforce. Landry mentioned earlier, they need more time off in between assignments. So we need to be supportive of that. So we think we all need to do our part to try to retain the precious workforce that we have, upskill the workforce that we have. So we are working with some clients on some programs to try to get clinicians the specialty training that they need. But I’ll say, Bill, all of this is not going to fix anything in the near-term. They are the right things to do. They will make an impact, but it won’t be a measurable impact. It’s really going to take a longer-term cycle.

Right. Yes. And a totally different topic of capital allocation. How would you rank your priorities? I think I know the top priority, but if Jeff could address that?

Yes. Thanks, Bill. So we are still very focused on executing against our M&A pipeline. And all else being equal, we would prefer to deploy our capital to a high-margin accretive business. Absent anything compelling on the M&A front, we will look to repurchase shares opportunistically. I mean, we’ve spent – we’ve deployed over $400 million of capital in the first half of the year, including $174 million in the second quarter, to share repurchases. And we still have $326 million left on our authorization, and the balance sheet is in great shape. There’s no prepayable debt. The leverage ratio is below 1x, and there’s ample free cash flow coming in the back half of the year to not only support share repurchases but also M&A. Those two things aren’t mutually exclusive.

I would expect your cash flows are going to increase quite materially over the next 12 months.

Well, our conversion ratio in the second quarter was about as good as it’s been in quite some time. So I think that’s indicative as these revenues come down, the free cash flow generation power that this company has.

Great. Thanks everybody.

I would now like to turn the conference back to Susan Salka for closing remarks.

Thank you so much. We very much appreciate you all being with us today and for your interest in AMN and our mission and what we’re accomplishing here. Again, a big callout to our amazing team members, our clinicians and all of our partners. We are all in this together, and yes, making a significant impact, but we still have a lot ahead of us. And so I just want to thank everybody for their hard work.

This concludes today’s conference call. Thank you for participating. You may now disconnect.