Amy Chang - Vice President of Investor Relations Susan Salka - President, Chief Executive Officer and Director Brian Scott - Chief Financial Officer, Chief Accounting Officer and Treasurer Ralph Henderson - President, Healthcare Staffing.

Vishnu Lekraj - Morningstar Brandon Fazio - UBS Henry Chien - BMO Capital Markets Josh Vogel - Sidoti & Company Tim McHugh - William Blair Randy Reece - Avondale Partners Mark Marcon - Robert W. Baird.

Welcome to the AMN Healthcare second quarter 2014 earnings call. (Operator Instructions) I would now like to turn the conference over to our host, Amy Chang. Please go ahead..

Good afternoon, everyone. Welcome to AMN Healthcare's second quarter 2014 earnings call. A replay of this webcast will be available until August 14, 2014, at amnhealthcare.investorroom.com. Details for the audio replay of the conference call can be found in our earnings press release.

Regarding our policy on forward-looking statements, various remarks and characterizations we make during this call about future expectations, projections, plans, prospects, events, or circumstances constitute forward-looking statements.

Forward-looking statements are identified by words such as believe, anticipate, expect, intend, plan, will, should, would, project, may, variations of such words, and other similar expressions.

It is possible that our actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those identified in our Annual Report on Form 10-K for the year ended December 31, 2013, and our other filings with the SEC, which are publicly available.

The results reported in this call may not be indicative of results for future quarters. These statements reflect the company's current beliefs and are based upon information currently available to it. Developments subsequent to this call may cause these statements to become outdated.

The company does not intend, however, to update the guidance provided today prior to its next earnings release. This call may also contain certain non-GAAP financial information. We make available additional information regarding non-GAAP financial measures in the earnings release and on the company's website.

On the call today are Susan Salka, our President and Chief Executive Officer; as well as Brian Scott, our Chief Financial Officer. Ralph Henderson, our President of Healthcare Staffing, will be joining us during the Q&A session. I will now turn the call over to Susan..

Thank you, Amy. Good afternoon, and welcome to AMN Healthcare's second quarter 2014 earnings conference call. After a softer start to the year, market trends strengthened as we progress through the second quarter, contributing to a stronger than expected performance and broader outlook for the remainder of the year.

The solid execution by our team, delivered sequential increases in revenue, gross margins, adjusted EBITDA margin and adjusted EPS. Our second quarter revenue of $251 million and our adjusted EBITDA margin of 9.3% exceeded the high-end of our guidance.

We achieved this solid performance, while making progress on our strategic investments, which will further differentiate AMN in the marketplace and allow for improved efficiency and continued margin expansion in the future. Now, let's review the second quarter results of our three business segments in more detail.

I'll start first with our largest segment of nurse and allied staffing. Second quarter revenue for this segment was down 2% year-over-year, but up 1% sequentially. After feeling the effects of weaker hospital census and reimbursement changes over the last year, this segment is now experiencing significantly improved demand trends.

Gross margin grew 190 basis points over prior year and 10 basis points over prior quarter. For our travel nurse business, which makes up about two-thirds of this segment, second quarter revenue was down 2% year-over-year, but up 2% sequentially. Since mid-February, travel nurse orders have been above prior year levels.

However, as we mentioned on our last earnings call, clients were slower to make offers on candidates, resulting in lower placements for the second quarter.

Over the past two months, these booking trends have improved with strong execution by our team and faster offers by our clients, we have experienced double-digit year-over-year growth in bookings over the past six weeks. Today, our travel nurse orders are up about 80% over prior year, which serves as a positive foundation as we move forward.

The improving demand trends and increased urgency replacement are also translating into bill rate increases, to ensure that clients are competitive in attracting the talent they need to serve their patients.

Internally, we are adding more sales and operational resources to provide excellent service to our clients and clinicians and to maximize our growth opportunity in this environment. Based on these trends, we expect our travel nurse third quarter revenue to be up year-over-year and sequentially in the low-single digit.

If we exclude the impact of EMR projects, which were higher in 2013, we anticipate the year-over-year travel nurse growth to be about 10%. Now, turning to allied staffing, where trends are also improving. Second quarter allied revenue was down 7% year-over-year, but up 7% sequentially. This is the first sequential increase in seven quarters.

The year-over-year decline was driven by the lower therapy volumes, partially offset by increases in the imaging and lab specialties. Allied orders have been trending upward since the beginning of the year, and are currently significantly above prior year levels.

Third quarter allied staffing revenue is expected to be up slightly on a sequential basis and closing the year-over-year GAAP with a slight negative variant. Local staffing has not experience the same positive trends as our travel businesses. Second quarter revenues were down both year-over-year and sequentially.

Demand remains soft for this division, as we expect the third quarter revenues for local staffing to be down sequentially and year-over-year. We continue to align our local staffing business to support our MSP clients, where we believe there is growth opportunity.

Overall, for the nurse and allied staffing segment, we expect third quarter revenues to be flat year-over-year and up in the low-single digits sequentially. Demand and booking indictors continue to improve. The placement of first time travelers is on the rise, as is our rebook rate for existing travelers.

We continue to build our leadership position in MSP, as we won four more nurse and allied contracts in the second quarter and are off to a good start in Q3.

We also find that clients are expanding their relationships with us to include more services, and are increasingly having conversations about how AMN can support their future workforce need in more innovative ways.

Our locum tenens business experienced strong sequential growth in the second quarter with revenue up 11% sequentially and 2% year-over-year. This sequential revenue increase was driven by growth across all specialties, with the largest gains occurring in internal medicine, advanced practice and primary care.

The year-over-year revenue improvement was driven by growth in the hospitalist, emergency medicine and advanced practice specialty. The hospitalist and emergency medicine growth were due primarily to the success of our MSP strategy.

We expect these specialties to continue to grow at a faster case as a result of additional new MSP contract signed in the last two months. During the quarter, the locum's division maintained a strong gross margin of 29.8%, which represented an 80 basis point improvement over the prior year.

We anticipate third quarter locum's revenue to be flat year-over-year and to grow in the low-single digit sequentially. Our locum's MSP revenue mix reached 9% in the second quarter compared to 5% a year ago. We expect this penetration to grow, as we continue to build our business, at both our current MSP clients, but also win new MSP contracts.

Now, let's turn to physician permanent placement, our highest margin segment, where second quarter revenue was down 3% year-over-year and up 1% sequentially. The sequential growth was driven by higher search and placement volume.

Both our Merritt Hawkins retained search team and the Kendall & Davis contingency business continued strengthening their leadership position in the physician search industry. The team is making progress and expanding into new market channels and revitalizing opportunities with historically less active clients.

Based on sequential growth in new searches, we expect third quarter physician perm revenue to be up year-over-year and sequentially in the mid-single digits.

With the business environment improving and our teams executing well, we remain focused on our strategy of evolving our position, as the innovator and healthcare workforce solutions and our goal of achieving a 10% adjusted EBITDA margin.

We continue to grow our MSP business, which now represents a-third of our consolidated revenue compared to 28% in the prior year. The new MSP contract executed in the second quarter provided solid growth opportunities, as we leverage our higher direct fill rates at our MSP clients.

Our VMS business continued to expand with our ShiftWise brand adding new contract in the second quarter. We are also continuing the investments in our systems and infrastructure to create greater efficiency, scalability and agility.

In addition to helping us deliver greater revenue growth and efficiency, these improvements will enable AMN to continue delivering industry-leading service and innovative solutions. These investments are only affected, however, by having the most talented, engaged and committed team in the industry.

We constantly hear from our client and clinicians, that our team members and the tremendous effort they make every day are AMN's greatest differentiator. We are proud of our team members and thank them for the impact that they make to the healthcare community. I will come back to you in our Q&A section, along with Ralph, to help answer your questions.

But for now, I will turn the call over to Brian..

Thank you, Susan. Good afternoon, everyone. The company's second quarter revenue of $250.9 million was down 1.2% from last year, but up 4.2% from last quarter. This result exceeded our previously provided guidance of $244 million to $248 million, driven primarily by stronger than expected performance in the nurse and allied segment.

Our gross margin for the quarter was 30.8%, up 150 basis points from last year and 10 basis points from last quarter. The year-over-year increase was due to gross margin improvements across all business segments, and the addition of the higher margin ShiftWise business.

SG&A in the quarter totaled $55.6 million or 22.1% of revenue compared to $54.6 million in the same quarter last year and $54.7 million last quarter. The year-over-year increase in SG&A was due primarily to the inclusion of the ShiftWise expenses.

Our second quarter nurse and allied segment revenue decreased 2.5% from the prior year and increased 1.5% sequentially to $165.9 million. Volume of 5,565 average clinicians on assignment was lower by 6.1% year-over-year and 1.2% sequentially. Our average bill rate increased by 1.3% over last year.

Nurse and allied gross margin of 29.1% was higher year-over-year by a 190 basis points and sequentially by 10 basis points.

About half of the year-over-year improvement was due to the inclusion of the higher-margin ShiftWise business, with the balance resulting primarily from lower health insurance claims, effective direct cost management and a favorable specialty mix shift.

Second quarter nurse and allied segment operating margin of 13.3% was higher by 150 basis points year-over-year and 110 basis points from the prior quarter.

The year-over-year increase resulted primarily from the higher gross margin and the quarter-over-quarter increase was due mainly to a $1.2 million favorable professional liability actuarial adjustment. Second quarter locum tenens segment revenue of $74.3 million, was up 2.2% from prior year and 11.1% sequentially.

Compared to prior year, an average bill rate increase of 5.5% was partially offset by a 2.2% decrease in the number of days filled during the quarter. The sequential increase was driven primarily by volume increases across most specialties.

Second quarter locum tenens segment operating margin of 10.5% was higher by 370 basis points year-over-year and by 20 basis points from the prior quarter.

The year-over-year increase resulted from the gross margin improvement and lower professional liability costs, as the prior year included a $1.7 million unfavorable actuarial adjustments and the current quarter include a $400,000 favorable adjustment.

Our second quarter physician permanent placement segment revenue of $10.7 million was down year-over-year by 3.5%, and up by 1.4% sequentially. Gross margin of 63.5% was higher by 80 basis points from the prior year and 50 basis points from the prior quarter on lower direct expenses.

Physician perm placement second quarter operating margin of 20.4% was lower by 20 basis points year-over-year and higher by 20 basis points from the prior quarter.

As reported on our last call, in early April, we refinanced our existing credit facilities with a new $150 million term loan and $225 million revolving line of credit, both of which mature in April 2019. The interest rates on the new facilities adjust quarterly and are currently at LIBOR plus 175 basis points.

Interest expense in the second quarter was $4.6 million, which compares to $3.1 million last year and $1.8 million last quarter. This quarter's interest expense included a non-cash $3.1 million write-off of deferred financing fees associated with the previous credit facility.

Excluding this charge, interest expense of $1.5 million reflects the lower rate on the new agreement. Our tax rate in the second quarter was 44%, which is consistent with the expected rate throughout 2014. We reported net income of $7.2 million in the second quarter. Diluted earnings per share was $0.15 for the second quarter.

Excluding the non-cash charges associated with the new credit agreement, adjusted diluted earnings per share was $0.19. Cash provided by operations for the quarter was $6.2 million. Days sales outstanding were 55 days compared to 56 days in the last quarter, and 54 days last year. Capital expenditures for the second quarter were $4 million.

As of June 30, our cash and equivalents totaled $5.5 million and our total debt outstanding was $154.6 million. For leverage ratio as calculated per our credit agreement was 1.9x to 1x as compared to 2.1x in the prior year. Now let's turn to the third quarter 2014 guidance.

The company expects consolidated third quarter revenue of $254 million to $258 million. Gross margin is expected to be approximately 30.5%. SG&A expenses as a percentage of revenue are expected to be between 22.5% and 23%. Adjusted EBITDA margin is expected to be approximately 8.5%. Third quarter interest expense is projected to be $1.5 million.

Depreciation expense for the third quarter will be $2.2 million and amortization expense will be $1.9 million. And with that, we'd like to open up the call for questions..

(Operator Instructions) And our first question comes from the line of Vishnu Lekraj with Morningstar..

Looking at the revenue trends here and looking at the FTE trends, the demand obviously has gone up this quarter.

Is that a widespread trend or is it a couple of clients in there that is driving that trend?.

If you're talking about nursing, specifically, which is where we're seeing the greatest pickup, it is very widespread across the country. We've seen a bit more, I'd say, on the west side of the states, in particular in some of our larger states like California and Texas, but we've certainly seen pickup in demand across all of the U.S.

along the eastern side as well. Ralph, maybe you'd like to give a little more color on some of the other trends in orders..

And like Susan mentioned demand is up across all our major segments. Our local and our EMR business are the softer parts of the business. The travel nurse is up 80% year-over-year. A number of facilities that currently have orders are up 30% year-over-year. So that really does indicate very widespread.

Travel allied is also up about 50% year-over-year, and actually they crossed over 1,000 orders for the first time in about six or seven quarters. And even locum business is up there with the number of days available, up in the high-single digits..

And when we take a look at what you may see moving forward as far as demand and consolidation amongst providers, what can you tell us or what kind of color can you give us? Let's say, moving out here in the 2015, especially with the exchanges coming on line here and the demand from the exchanges and if that's going to be a material driver or not?.

I think we're seeing some of the effects of that already with those that have now gained insurance through the exchange is actually starting to use it, and that's translating into increased census and general utilization. That's really flowing through to greater demand for clinicians.

The other thing is the positive effects of the margin improvement that our clients have seen have opened up their budgets a bit and willingness to staff at higher levels, to make sure that they're tuning for the current patients.

But also the willingness to staff for maybe some future anticipated census going forward, and that's what they're telling us. As they move forward, they would expect to continue to see increases in utilization..

Our next question comes from the line of A.J. Rice with UBS..

This is Brandon for A.J. I guess questions around, in terms of the stronger demand that we're hearing from hospitals, this thing you think is more reformulated or are they seeing it, thinks it economic-related? And then as you were saying before, I think the nurse side will be up about 10% x EMR.

So I was wondering if you could give a better sense for when you annualize sort of the higher EMR revenue run rate. I think you said last quarter it was $3 million and that's the new run rate, it used to be kind of $5 million to $10 million last year.

Just trying to get a better sense for when we might start seeing some of that on an overall nurse growth rate?.

First, I'll talk about kind of the drivers, obviously, and then you guys have heard about it, but hospital results are improving and that creates kind of less uncertainty and starts to free up budgets. And so they run a little less lame, and certainly while they start putting orders in Q1, they didn't start executing against those until late in Q2.

So we're just seeing increase, because they are feeling more confident in their results. Second is the patient volumes, primarily inpatient volumes are up about 1% of those that are reported thus far this quarter. And we think that the subsequent releases will show maybe even slightly stronger results than that as those come out.

And outpatient actually up as well, maybe even slightly higher. So those are the key drivers. The things we're hearing from hospitals are the same as we're seeing in their earnings releases. The second question on EMR, you're right. We were kind of a $5 million to $10 million range last year, kind of peaked at Q3 of '13 at about $11 million.

We did about $2.5 million this quarter approximately. We expect to do maybe a $1 million next quarter. So I think kind of $1 million to $2.5 million is probably kind of the new norm..

So $2.5 million in the third quarter?.

$1 million..

And to answer your question on the lapping, fourth quarter of last year was more in the $5 million range. So we'll be starting to close that gap in the fourth quarter, and then see back to really sort of a little to no gap in the first and second quarter of next year.

But really becoming less material for us, starting in even the fourth quarter and certainly the first quarter..

And just one housekeeping item here. You mentioned, I guess, a favorable or unfavorable adjustment to this quarter. I think you mentioned two benefits of $500,000 or $400,000; one in nursing, one in locum. Is that right or can you just repeat those again? I missed just there..

Actually, it was in the professional liability, which we include in SG&A. And the total is about $1.6 million or $1.2 million in nurse and allied and about $400,000 and locum's in the second quarter..

I'm sorry, $1.6 million you said?.

Total $1.6 million. $1.2 million nurse and allied, $400,000 locum's and that at the end of last year where we actually saw an unfavorable adjustment in locum's of about $1.7 million..

As we pointed out, even excluding those from our results, it would be at about an $8.7 million EBITDA margin, which is pretty steady progress for us, a little above our expectations, due to the strong revenue growth, strong gross margin performance, and of course as always good SG&A management.

But it was still a really strong EBITDA margin, excluding that benefit..

And our next question comes from the line of Jeff Silber from BMO Capital Markets..

This is Henry Chien calling in for Jeff. I wanted to ask a little bit about the trends that you're seeing in terms of bookings. Is any of that ECA related? Just from your perspective..

Well, I think the overall demand increase that we're seeing is multiple factors that we mentioned earlier, including the increased census, the improved budget. So in terms of that, yes, it's probably a residual effect from the ACA changes.

We see them as ongoing, and in fact, probably increasing over time as you see increased utilization, at least that's certainly what our clients are saying to us..

I think the uninsured being down, it reflects ACA, but it also reflects better employment, so they're covered by their employers more frequently. And you have some increase from the increased expansion of Medicare and Medicaid.

So it's kind of all three things, just result in at least some level of reimbursement, where they used to have none, and that's probably has helped drive our business a little bit, and may also be driving the patient volumes a little bit as well..

The other very positive factor that we're seeing, Henry, is the fact that the number of healthcare job openings are increasing and that is probably a side effect from the economy improving in general, unemployment coming down, as Ralph said.

And as more nurses feel comfortable moving either out of the workforce or going from full time down to part time, that's going to create more openings, both for temporary positions, but also for permanent spots which of course, we help our clients with both..

And just a quick housekeeping question.

What was the revenue from ShiftWise this quarter?.

We don't break out the revenues specifically from ShiftWise. So it's just part of our Nurse and Allied thing. We did breakout some margin impact I think a little bit or indicate that some of the benefit was from the higher margin business..

Our next question comes from the line of Tobey Sommer from SunTrust..

This is [indiscernible] for Tobey. I have three questions for you.

First, regarding management, managed service provider penetration, where do you guys think healthcare staffing is and where do you think MSP penetration could be in five years?.

Great question, because obviously this has been a big pat of our strategy and we believe it continues to have a lot of runway and opportunity. We mentioned in our overall revenue is about a-third of our consolidated revenue comes from MSP clients.

We're probably leading the industry in terms of penetration, since we lead the industry and the number of clients and contracts and revenue that we generate from those relationships. But we think that it's got a quite a bit of runway, particularly in areas such as allied and locum.

MSP has been around in nursing now for about eight years and nearly 50% of our revenue in nursing, travel nursing comes from our MSP contracts. And in allied and locum, it really just began over the last two to four years. I mentioned in locums were at about a 9% penetration, and they're again probably leading the industry.

We see no reason why locums and allied couldn't start to at least approach the nursing penetration rates. They may not reach 50%, but they can certainly get to the 30s or even approach 40%. And so we think we're in kind of early innings, yet, for MSP.

And for us, it's been a really great area of growth, not only for signing new MSP contracts, the pipeline is very strong right now. It's very clear that clients really see value in putting an MSP in place in both getting access to the staff that they need, but also controlling their costs, making sure that they have more efficient process.

But it's also clear that we can continue to expand our relationships at MSP, when we have nursing contract in place. We have seen increase number of what we would call add-ons where our existing clients will rebuild a credibility and proven value in MSP and nursing. And allied, announcing, we'd like add to locums into the mix.

And we are also continuing to expand some of our existing MSPs that we may have signed over the last year to in either allied or locums and expand them into more regions, so a lot of runway and opportunity there to continue to penetrate.

And some of that's going to come from new contracts and new clients that have used an MSP before, but it also can come from existing client base that we built..

And my second question is can you maybe talk a little bit about how important vendor neutrality is to your VMS and MSP customers?.

We have of course, the ability to offer both for those clients that want vendor neutral solution and we recognize that there are good number of them that do. We have the ShiftWise round, which is why we made that acquisition back in November.

One of the reasons is to serve that segment of the market that for first to have to have a vendor neutral option. Their business is up year-over-year and may continue to find new contracts. It's also a great technology to use within an MSP.

And we believe it's been a real advantage for us to have the industry's best VMS technology to use as an engine for our MSPs. We don't only think that, but there are other companies within our industry that also use ShiftWise technology to see the engine for their MSP offering.

In fact that during the first part of the year ShiftWise continued to build relationships and sign up more MSP channel partners to be able to build out that part of their business.

So yes, it's important to have an alternative offering for those clients that don't want MSP, but it's also really important to have a very strong technology as a platform for an MSP. It can be a nice stepping stone. Some clients want to implement VMS initially, but then decided that they would really prefer to have the full service option of an MSP.

And so they use it as a stepping stone. It makes it much more seamless for them, if they already have that technology in place..

And my third question is can you maybe talk about a little bit of the potential impacts, increased spending by the VA on the healthcare staffing fees and maybe your business as well?.

Sure. The VA and government in general, it certainly an important client to us, but I think we had said over the last couple of calls that it has come down over the last couple of years.

In fact, our government business, which we would qualify as being VA and the defense locations used to be above 20% of our locums business and today is now around 10% to 11%. So it's a much smaller piece or mix of our overall locum business.

We have seen a slight increase in the demand within the veterans business, both for locum's but also for nursing, but it really doesn't mirror what you would expect, based on what you might be hearing out in the media.

The bill that was approved by the House yesterday provides for $5 billion for them to hire more doctors and nurses and other medical staff. We can certainly help them with that. And as you'd expect, our teams are having conversions with them about helping them with permanent hires as well as locums that can help in the interim.

And then that $10 billion that are for the emergency funds for veterans to see doctors outside of the VA system, we believe can indirectly generate more demand for both our physicians and nurses. Again, we haven't really seen much of that impact yet.

Certainly, these funds haven't flowed out into the market yet, so maybe we'll have a different story when we talk with you on our next call..

And our next question comes from the line of Josh Vogel with Sidoti & Company..

We know SG&A as a percentage of revenue has been elevated, because of ShiftWise and investments that you've been making in infrastructure and internal personnel.

I was just curious, now is this the new norm or should we see this subside a little and return to more historical levels as we get out into 2015?.

This is Brian. I think it is a different expense structure with ShiftWise, I think where we are in the second quarter, we talked about the actuarial adjustments, so if you looked at the second quarter, it was about $57 million of SG&A and that was right in line with the guidance we've given as a percentage of revenue.

If you look to the next quarter, we gave a similar guidance for percentage of revenue with the higher revenue forecast that would imply as like pick up as well. That really gets back to what Susan talked about earlier, the investments we're making with the higher demand. We want to make sure we're capturing that opportunity as well.

And so maybe Ralph put a little bit color on some of the investments we're making on the sale side as well..

Yes. We certainly are making some of the investments to capture that increase in market demand, and hopefully accelerate growth or have been adding actually already in locums' sales producers recruitment and account management job.

We have a pretty substantial push in our travel nurse business to increase the number of recruiters and account managers we have there.

And then also we have some hires for some new MSP wins that we need to make here, so certainly one an area of focus for us, and unfortunately reflects a little bit of higher SG&A cost during those first quarter when we make those investments, then we'll eventually I would expect us to get become more efficient over time.

And then, our technology investments should help us leverage those resources even further. So what's going on there, I know it's probably difficult to look at, but we see it is improving over time..

This is Brian again. I think as you're looking '14, I think it will be pretty stable, as what we've given on that for the third quarter guidance.

But then as we get into '15, if we continue to see the positive trends on the topline, and sort of get more of the benefits of the investments we've made this year in our systems and infrastructure, we would expect to start to see more leverage really in 2015..

I was just thumbing through some notes, and I saw a couple of quarters ago, you were talking about the RPO business. And I think you said it was at about $10 million annual run rate.

I think I couldn't read my scribbling, but 25% operating margins, and I was just curious, is that on progress what you're seeing today?.

Well, yes. They are doing a terrific job. In fact, that was one of the kind of untold, but really great stories. For the second quarter RPO was up 50% year-over-year. Now, it is small, it's less than $10 million in revenue, but it does have high EBITDA margins, higher than 25%.

So certainly as that business continues to grow, we believe its going to make a bigger impact, but it just shows the increased adoption by our clients.

I mentioned earlier that on some of our MSP contracts, we're seeing more of our MSP contracts come in with multiple services, when they sign up and RPO is one of those, whether it would be adding it on to an existing MSP or new MSP clients, they're doing a great job of adding that in as an additional service line..

And just lastly, could you talk a little bit about the acquisition pipeline and your appetite to make deals?.

Certainly, of course that's part of our credit facility, restructuring in the second quarter. That was one of the things we wanted to accomplish to give ourselves some room, to be able to be opportunistic and look for those deals that would help us in continuing our strategy.

Our priorities are really, first, workforce solutions, new solutions or services that would help us to serve our clients in new and different ways and helping them manage their total workforce, both contingent and prominent.

Second, would be in new staffing areas that are complimentary to our existing businesses and we see as being in high-demand with our MSP clients. There are some types of staffing specialties that we subcontract all of the demand for, and it might be nice to keep more back in-house and retain that revenue within AMN rather than subcontracting it.

And then third would be in the area of locums. We are seeing such great demand in locums, particularly in our MSP clients, looking at the pipeline of potential MSP clients that we have, if we could increase our own internal direct fill, we could keep more of that revenue internally.

The team is doing a terrific job of meeting the fill rates for the clients overall, but if we could increase our own direct fill rates that would certainly be a positive as well..

I actually had one more. I think I may have missed it.

You said that MSP and locum tenens, I think you said it was about 9%?.

Correct, in the second quarter..

And that was up from 5% a year ago.

And do you give out -- how much of your allied business is MSP today?.

About 20%. So not quite the penetration we have in travel nurse. So there is certainly an upside there..

Our next question comes from the line of Tim McHugh with William Blair..

Just a little bit following-up on that MSP discussion. With locums, I guess, if I looked at it, it's almost all the year-over-year growth and a lot of even, I guess not more so just the year-over-year growth is really coming from those MSP contracts, I guess.

And I know that's a little unfair, because you're serving some existing clients and so there is a bit of cannibalization, if I just try to do that math.

But I guess how much would you say the demand, I guess it sounds like demand is strong in your view, but I guess how would you react to this statement that most of the growth seems to coming from the MSP contracts versus I guess the market really being strong at this point?.

I would say that, I agree that a lot of the growth has come from those MSP clients. But on the rest of the business, you have this decrease in government business, that's been replaced by other demand. So it's not as weak as it appears when you do the math, the way you did it..

And the other issue, Tim, would be that remember we had a much softer first quarter, that the market, the industry, the demand was down. And so the part of the year-over-year comp is the fact that we were coming off of much softer demand trends in the first quarter and rebuilding from that..

And I guess, when you were talking about travel earlier, you talked about orders being up.

I wasn't sure if you said 8% or 80%?.

Susan and I, both, said its 80% above the same period prior year. So we were declining at this time last year, but we started seeing orders start to grow in kind of mid-February in the travel nurse business. And certainly have continued to strengthen since then..

That's obviously kind of a remarkable number.

Is that like upon day and time such that it's really unusual, or I guess just trying to figure out how I should interpret that in terms of if the order is not revenue, but I guess how do we think about driving the next couple of quarters here?.

I would think of it as directionally positive. Of course, in translating into third quarter, we talked about underlying nursing volume revenues being up about 10%.

It never is a direct one-to-one correlation, because we won't necessarily fill all of those orders and it will take some time to increase the supply sufficiently to really take advantage of the opportunity. It had been building throughout the second quarter.

Really since May, we started to see, kind of end of May, and definitely going into June and July, saw week over week increases, and really all of our order metrics, gross new orders on a weekly basis.

As Ralph said, the number of facilities, the number of units, and what became even more positive is the fact that clients were also reacting faster and willing to interview and offer at a faster pace. So we've been able to see pretty significant increases in our net weeks booked.

I think I've mentioned up double-digit, over the last six weeks on a year-over-year basis. So it will take time and it's hard to put a number to exactly how we'll translate that into revenue, but obviously it's a pretty positive trend. I've seen this before in our history and it's a good time to be adding resources.

And we feel really fortunate that we are in that position to be able to add the sales and operation resources. But we are also really glad that we made the investments that we made over the last couple of years in things like our digital marketing resourcing, because getting supply into the hands of our recruiters is really critical right now.

And so I think we'll start to see more of those investments payoff as demand continues to grow..

So I guess, I mean last quarter you talked about seeing the order flow pick up, but that, I guess the conversion of that into placements was longer.

Did you really see, I guess, that ratio between orders and placements change or is it just that the volume of orders has continued to scale at a, it sounds like, pretty quick pace? And then even with the slower kind of conversion, if you will, for placements here you're starting to see a pick up in placement?.

That's a good question. On the 80%, that's a four-week average versus probably five, so I want to make sure I cover that. And that's an important point.

But I think about six weeks ago, we really started to see clients begin to interview and offer at a faster pace than they had been in kind of the previous two to three months, where they were putting orders in, being extremely selective, and not moving on them. But in the last kind of six weeks, we're seeing some definite increase.

We can hit that 10% increase that we're forecasting into the next quarter..

And our next question comes from the line of Randy Reece with Avondale Partners..

Have you ever taken a look at your relative exposure to Medicaid expansion state? If you just look at the country, half of the country expanded, half of the country didn't.

Do you have over or under concentration in those states?.

I don't know if I have our exact concentration numbers. But I was looking at the increase in demand recently and wanted to see if it equated to those expansion states. I mean, it was interesting.

Now, there was a couple of places where the expansion like in California may have been part of the equation that drove higher demand, but really when you look at it across the entire the country, some of those like, out of the top-10 states, half of them were in Medicaid expansion and half weren't. So it doesn't seem to be having a huge impact on it.

So I would guess, I mean if you look at our mix of business overall, we don't have risk there, that that's the only thing driving it. I think employment is, as big or a bigger driver for us..

I think that's a good observation, probably accurate. It would be hard to peel one influence away from the other.

In terms of your -- you have an average number of clinicians on assignment, but how did the quarter-end number compare with the average?.

Well, we saw improvements throughout the quarter in our volume, and really as we exited the second quarter, and this is travel nursing, is really where we saw the lap for the prior year. So if that number improved, it's kind of settling from the beginning to the end of the quarter.

And we're obviously seeing that continue to progress in the third quarter, reflected in our guidance..

You talked about the progress in orders versus fills, is that concentrated in any particular part of the business?.

The greatest impact has definitely been in nursing. So if you're talking about nursing versus allied versus locums, the greatest strength and momentum has been in nursing, which is good, since it's our larger piece of business.

But also allied has seen really strong trends as well, equally strong demand trends of supply is more constraint there, but they've seen good increased bookings as well. So I'd say, again greater concentration of the momentum is within nursing and within our MSP clients, in particular.

Although, I will say the traditional competitive business is also growing at a very strong grip and that's a really good sign for the market..

I have unfortunately spent some time in the healthcare system lately, and many hospital nurses told me about how they would work for multiple facilities at the same time have a full time job, occasionally take work on weekend somewhere else, because it was so easy to get that business.

Does that kind of multiple employment increase or decrease, as the hospitals' demand for people rises?.

That certainly have been a part of the industry within local staffing in particular from many decades. It's really a lot of local per diem nurse are working in a permanent job and they are picking up extra shift.

So one of the reasons why we've actually seen that segment of the industry, local staffing, decline over time, because hospitals are wanting to build their own internal resource pools and make them bigger and stronger. And so you've seen them be more aggressive in recruiting those local nurses to sign up into their internal workforce.

We mentioned our local staffing business was down year-over-year and we think that is one of the contributors to the market..

And our next question comes from the line of Mark Marcon with Robert W. Baird..

With regard to physician perm placement, you indicated that the trend there should look a little bit better in terms of the year-over-year, in terms of the third quarter.

What are some of the underlying factors behind that, because it has been bounced around a little bit?.

And certainly, second quarter was not as comparable to some of the prior quarter they had had after a really strong 2013, being down year-over-year. And last year the second quarter was an extremely strong quarter for them. I think it was a five-year high. And so they had a pretty tough comp.

But also they had fewer searches going into the second quarter and that hurt some of their search and sourcing revenue. April was a particularly lower month for them, but they were able to come out of that and improve throughout the quarter, in fact sequentially and month-by-month their searches went up considerably.

And so going into the third quarter they are in a much stronger position. Part of the issue there too has been that we've been a little short of marketers.

And we've talked about this in the past, that there is a very direct correlation between the number of marketers you have out in the field talking with clients and generating searches, and then what the results in revenue will be. Our placements have been at kind of all-time high levels.

And for that matter, our searches per marketer had been at very high levels. We just need to get some additional sales staff, mostly marketers on board. And the team has been able to do that. We have some marketers in training that are coming on line, and we're starting to see some of the effects of that going into the third quarter..

And then could you go to the supply side with regards to travel and nursing? What are you seeing there just in terms of the behavior? You've made a lot of investments in terms of improving the recruiting methodologies.

How should we think about those fill rates over time and the proclivity for certain nurses to be willing to take travel assignments?.

Mark, I'll handle that. Yes.

Our investments that we made in web, social and mobile technologies are definitely paying off our, what we call, unique high need supply, which is really kind of supply that matches the demand that exist in the market today, is up about 25% travel nursing, and even a little stronger in allied and our locums doctors as well are in the double-digit.

So those things are paying off. I think [indiscernible] an evident, so its beginning to work, as kind of the number of first time travelers is growing a little bit faster, and people coming even back to the industry. So I think that's all positive. Our ability to max supply demand has also improved.

It's all of our recruiters can more quickly get to the supply that meets their needs. And that translates into better fill rates overall. Currently, our fill rates -- when demand goes up this fast, our fill rates don't improve a lot.

Generally speaking, the demand outruns as to just a little bit, but it's certainly within levels that we're pleased with, and above kind of the thresholds that we have in some of our contracts with clients, in their service level agreement.

So when demand goes up at this rate, we don't expect them to move really quick, but they are very strong, right, and we think that probably the best in the industry..

So you can meet the SLAs or the MSPs..

Yes..

And then with regards to, just the credit facility charge, I'm sorry I missed the specific breakdown in terms of how much of it was interest versus how much of that was the specific credit facility charge?.

The total expense in the quarter for interest was $4.6 million, $3.1 million of that was related to the refinancing. So that was the first financial piece that got extinguished during the quarter. So the real interest expense in the quarter, excluding that, was $1.5 million..

And we have no more questions in queue at this time..

Thank you, everyone, for joining us today. We really appreciate your continued support of AMN Healthcare. And we look forward to updating you on our progress next quarter..

And Ladies and gentlemen, that does conclude our conference for today. Thank you for using AT&T Executive Teleconference. You may now disconnect..