David Erdman - IR Brian Scott - Chief Financial Officer Susan Salka - President & Chief Executive Officer Ralph Henderson - President, Professional Services and Staffing Dan White - President, Strategic Workforce Solutions.

Tobey Sommer - SunTrust Henry Chen - BMO Capital Markets A.J. Rice - UBS Randy Reece - Avondale Partners Tim McHugh - William Blair & Company Mark Marcon - RW Baird.

Ladies and gentlemen, thank you for standing-by. Welcome to the AMN Healthcare Second Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. And later, we will conduct a question-and-answer session. The instructions will be given at that time.

[Operator Instructions] As a reminder, the conference is being recorded. And I'll now turn the meeting over to our host, Director of Investor Relations, David Erdman. Please go ahead sir..

Thank you, and good afternoon, everyone. Welcome to AMN Healthcare's second quarter 2016 earnings call. A replay of the webcast will be available until August 18, at amnhealthcare.investorroom.com following the conclusion of this call. Details for the audio replay of the conference call can be found in our earnings press release.

Various remarks and characterizations we make during this call about future expectations, projections, plans, events, or circumstances constitute forward-looking statements. These statements reflect the company's current beliefs based upon information currently available to it.

Or actual results may differ materially from those indicated by these forward-looking statements as a result of various factors including those identified in our most recent Form 10-K and subsequent filings with the SEC. The company does not intend to update 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 reconciliation of these non-GAAP measures to the most directly comparable GAAP measures are included in our earnings release and in the company's Web site.

On the call today with me are Susan Salka, President and Chief Executive Officer; Brian Scott, Chief Financial Officer; Ralph Henderson, President of Professional Services and Staffing; and Dan White, President of Strategic Workforce Solutions. I will now turn the call over to Susan..

Thank you so much David. Good afternoon everyone. And welcome to AMN Healthcare's quarterly earnings conference call. I'm very proud of our teams' ability to deliver another record quarter of revenue and earnings.

We continue to operate in a strong market environment and are helping clients' to be successful in addressing their critical and evolving workforce needs. In addition to this strong demand for staffing and placement services, we are increasing the penetration of our workforce solutions in particular MSP, VMS and workforce optimization services.

Macro economic and demographic trends continue to be a tailwind for our business. The confluence of a stable economy, low unemployment, high levels of staff attrition and an aging clinical demographic continues to drive a healthcare talent shortage an unprecedented demand for our services.

A helpful indicator of how these forces manifest can be found in the BLS jobs data regarding healthcare employment. Over the last two years, healthcare job openings have grown over 40% to roughly 1 million jobs to be filled today. The sheer magnitude of this number of openings creates recruitment and retention challenges for healthcare organizations.

And more importantly because of the shortage of healthcare professionals, the gap between job openings and the number of hires has also widened. Two years ago, approximately 30% of healthcare jobs across the nation went unfilled. In 2016, according to the BLS, the percentage of unfilled healthcare job openings rose to 50%.

As healthcare organizations continue to seek strategic partners to tackle these near and long-term work force challenges, AMN is expanding our industry leading MSP footprint. In fact, during the second quarter 40% of our total nurse allied and locum staffing revenues came from MSP clients. By comparison, this was 35% one year ago.

To further expand our MSP position, during the second quarter, we entered into several new and expanded MSP contracts representing a potential of over $100 million of additional growth spend under management.

Today, our growth spend under management for MSP clients exceeds $1 billion, plus we have an additional approximate $1 billion under management through our vendor neutral VMS services. As we look forward, our pipeline presence significant opportunity to further expand our client base and market penetration.

We continue to see strong interest from our clients to leverage the broader suite of workforce solutions that AMN offers, a great example of this is our recent expansion into the healthcare leadership space. Over the last year, we acquired the First String and B.E. Smith, leading brands in the healthcare executive search and interim leadership market.

Both companies are doing well and we are very proud that B.E. Smith was recently named as a number one healthcare executive search firm in the U.S. by Modern Healthcare magazine. In January, we acquired HealthSource Global, a leading rapid response and labor disruption staffing firm.

They are on track to have their best year ever and the pipeline of potential projects is strong. In June, we also acquired Peak Health Solutions, in response to our clients asking us to provide medical coding services, accurate coding is critical to clinical quality reporting and the financial well-being of healthcare organization.

And AMN is committed to helping our clients effectively manage this challenge. The integration of these recent acquisitions is progressing well and we continue to see great cross selling and client interest in utilizing multiple AMN service lines.

As we experience high demand for our services, we have been investing in our digital marketing and sales resources to ensure we continue to build a broader talent network to meet our client's needs. Our recruitment team has also done an excellent job of reengaging clinicians who applied with AMN in the past but may not have traveled recently or ever.

In order to ensure we can grow in an increasingly efficient manner we also continue to make progress on our internal technology investments to migrate our staffing business lines on to a common end-to-end platform.

Our local staffing business has successfully been running on this new platform for three months and we have initiated activities to migrate our Locum business on to the platform in early 2017. With what we believe are sustainable strong macro drivers for our industry we want to be creating the most efficient and nimble infrastructure for the future.

But let's first bring it back to today and now we will review our second quarter results and our outlook for the third quarter. Consolidated revenue for the second quarter was higher than our expectations at $474 million. which is up 35% over prior year and 1% sequentially.

Year-over-year organic growth was 19% primarily driven by double digit growth across all three of our reportable segments. Consolidated adjusted EBITDA was $59 million up 50% from prior year. This reflected a margin of 12.5%, which was 130 basis points higher than the same quarter last year.

Our nurse and allied segment posted revenue of $293 million higher by 29% year-over-year primarily due to higher volume and pricing. We also had two projects in our HealthSource Global business that contributed to [our beat] [ph] on revenue. Excluding that project revenue year-over-year growth was 23% which is still above the second quarter guidance.

Travel nurse staffing revenue increased 26% year-over-year and declined 5% sequentially. This exceptional year-over-year performance reflects great sales execution in a robust demand environment and a prioritization on filling orders for our MSP clients.

The strong year-over-year growth was driven by a 20% volume increase with growth at both MSP and traditional clients. The sequential decline was expected due to the normal seasonal ending of winter assignments. As we begin the third quarter, we continue to see very strong demand for travel nurses.

In addition to broad based demand for a near term assignment we are also already beginning to receive orders for the winter assignment.

Our recruitment and account management teams are doing an outstanding job of filling these orders, in fact our July placements of future working travelers with that the highest level we have seen since before the recession.

As we look forward, we will also have the benefit of implementing several new managed services programs across a variety of geographies. Our allied staffing division achieved another record quarter of revenue growing 10% year-over-year and 3% sequentially.

As a reminder this business includes the placement of rehab therapy imaging, respiratory and laboratory professional. We have seen growth across all categories with particular strength in laboratory.

We continue to expand our MSP relationships to include allied services resulting in approximately one-third of allied's revenue now flowing through MSP clients. Looking ahead for the third quarter we expect nurse and allied revenue to be up over 15% year-over-year driven by travel nurse revenue growth of 20%.

The majority of this growth continues to be driven by volume increases. This projection does not assume any material labor disruption or project revenue for the quarter. In our Locum Tenens segment revenue of $109 million was up 12% year-over-year and 6% sequentially due to growth in both volume and pricing.

The year-over-year revenue growth was across multiple specialties particularly internal medicine surgery and anesthesia. Demand trends remain very strong in those all specialties and provide plenty of room for volume growth.

The primary constraint in the business is the ability to recruit credential and place an ample number of physicians to match the geographies of our demand. Our teams continue to implement new digital marketing technologies and provide better tools to our Locum's recruitment team to find the best physicians to meet our client's need.

Third quarter revenue for the Locum segment is expected to be up 5% to 6% year-over-year. Revenue in the other work force solutions segment was $72 million which is 174% higher year-over-year and 7% higher sequentially.

As a reminder this segment includes our leadership interim in placement businesses, physician permanent placement, RPO, workforce optimization, VMS solutions and our recently acquired medical coding business. Our leadership businesses which were acquired during the last year are up more than 20% year-over-year on a pro forma basis.

They are executing well in a good market and are benefiting from being added to our MSP client relationships. Revenue from our VMS businesses are up more than 50% year-over-year as we continue to add and expand clients.

Our physician permanent placement business drove solid growth in the quarter with revenue up over 20% year-over-year driven primarily by higher placements. Our workforce optimization offering under the Avantas brand name also produced a strong second quarter.

Recruitment process outsourcing produced year-over-year growth of 17%, but declined sequentially inline with our expectations.

While the utilization of RPO services is quite established in other industries we are still in the early stages of adoption within healthcare because of this the utilization and revenues have fluctuated more than in our other businesses. We are very optimistic in our ability to be a leading provider as the market opportunity expands.

Overall, third quarter revenue for the other work force solutions segment is expected to be up more than 5% sequentially primarily reflecting the addition of Peak for a full quarter. Hopefully these comments and our Q&A after our prepared remarks help to provide some color in detail regarding the key drivers of our continuing strong performance.

But in addition to our current execution we continue to invest significant time and resources to ensure that we are building AMS to be an even stronger partner for our clients in the future. As an example of this, you may have noticed that we recently announced the addition of a new member to AMN's executive team.

We are very pleased to welcome Matthew Zubiller to the newly created role of Senior Vice President of Strategy and M&A. Matt is a seasoned professional, who brings extensive experience in strategy and development in the healthcare space. Matt lives here in San Diego with his wife Love and their two children.

We are very excited to have them all joining the AMN family. I know Matt will be an important part of AMN's evolution and our success in the future. We are fortunate to have an incredible culture driven by our values every single day at AMN.

We have a healthy and diverse team that includes fantastic new talent like Matt along with tenured leaders and team members. Together, this team brings unique ideas, their skills and a common passion to deliver excellence in everything we do. Our results are strong today and our future is bright because of this amazing hard working team.

Now, I would turn the call over to Brian for a financial update after which Ralph and Dan will join us to be available for the Q&A section of the call..

Thank you, Susan, and good afternoon everyone. The company second quarter reported revenue of $473.7 million was 4% above the high-end of our guidance, as our nurse and allied and other workforce solution segments exceeded expectations.

The largest contributor to this revenue out performance came from the two HealthSource Global projects that Susan mentioned earlier. Our gross margin for the quarter was 32.7%, 430 basis points from last year and 20 basis points sequentially.

The year-over-year improvement was due to an increased mix of our higher margin work force solution segment and improved gross margins in our Locum Tenens segment. SG&A expenses in the quarter totaled $99.5 million or 21% of revenue.

SG&A expenses are up sequentially by $1.7 million due primarily to higher employee expenses partially offset by a $2 million favorable professional liability actuarial benefit recorded in our Locum Tenens segment.

Our second quarter nurse and allied segment revenue was $292.7 million an increase of 29% from the prior year and a decrease of 2% sequentially. Volume of 8,337 average healthcare professionals on assignment was higher by 15% year-over-year. While, our average bill rate was 6% higher year-over-year.

The remainder of the increase was driven mainly by HealthSource global. Nurse and allied gross margin of 26.7% was 50 basis points lower than prior year and higher by 10 basis points sequentially. The lower margin from prior year was due mainly to lower bill pay spreads and higher housing cost.

Second quarter Locum Tenens segment revenue of $109.1 million was up 12% from the prior year and 6% sequentially. The year-over-year growth was driven primarily by a 7% increase in the average bill rate and 2% increase in the number of days filled during the quarter.

Locum Tenens gross margin of 31.3% was higher by 210 basis points in the prior year and by 30 basis points sequentially. With the year-over-year increase driven primarily by improved bill pay spreads. Our second quarter other workforce solutions segment revenue of $71.9 million was up 174% year-over-year and 7% sequentially.

The year-over-year organic growth rate was 32%. Gross margin of 59% was relatively consistent sequentially for lower than prior year due mainly to the addition of the leadership businesses that operate at a lower gross margin in our other businesses in this segment.

Our second quarter consolidated adjusted EBITDA of $59.3 million was up 50% year-over-year and 1% sequentially.

The EBITDA margin of 12.5% represented an improvement of 130 basis points over the prior year, which was once again driven by growth in our higher margin workforce solutions, plus margin improvement in our Locum Tenens business and favorable operating leverage.

We reported net income of $26.3 million and diluted earnings per share of $0.53 for the second quarter. Adjusted earnings per share was $0.61 compared to $0.38 in the prior year quarter. Cash provided by operations was $20 million for the quarter and $55 million year-to-date, which reflects a 64% increase over the first half of last year.

Days sales outstanding was 64 days compared to 59 days last quarter. Three days of this increase was due to the large project revenue and the addition of Peak Health accounts receivable both occurring near the end of the quarter. Recent cash collections have been very strong and we are expecting a reduction in DSO in the third quarter.

Capital expenditures for the second quarter were $6 million. As of June 30, cash and equivalents totaled $21 million and total debt outstanding was $413 million, which is a sequential increase of $37 million due to the Peak Health acquisition.

The quarter and leverage ratio is calculated for our credit agreement remains consistent with the prior quarter at 1.9x to 1. Now, let's turn to third quarter 2016 guidance. The company expects consolidated revenue of $466 million to $472 million. This 22% to 23% year-over-year increase includes organic growth of approximately 11% to 12%.

Gross margin is projected to be approximately 32.5% to 33%. SG&A expenses as a percentage of revenue are expected to be approximately 21.5%. Adjusted EBITDA margin is expected to be approximately 11.5% to 12%.

Other third quarter expense included tax rate of 41%, stock-based compensation expense of $2.7 million, depreciation expense of $3.1 million, amortization expense of $4.8 million, interest expense of $3 million, acquisition and integration expenses of about $1 million and diluted share count of 49.5 million shares.

And with that, we would like to open up the call for questions..

Thank you. Susan, I was wondering if could comment on, how you feel like the collection of businesses, many which are new to AMN in recent years or learning to co-habitat effectively and cross-sell kind of describe what you are seeing and maybe where you think we are in the process of that? Thank you..

Tobey, thanks for the question. And it's something that I think has been definitely a contributor to our strong performance. And we have been talking about cross-selling since 2005; I think when we started to really diversify the business.

But, it's really just been more in the last sort of 2 to 3, 4 years that I think we've really gotten some serious traction. And some of that is attributable to their client themselves.

I think the desire and appetite for them to work with larger more strategic partners that can offer them multiple services, which creates great efficiency for them and also certainly more accountability, we can make a bigger impact on their business by working with them in multiple ways.

But also the bigger credit actually goes to our internal teams and their ability to coordinate those efforts.

So, as an example, when we do bring a new business into the AMN family, one of the first things we do is have a sales summit, where we bring in the sales leaders of those business, that business along with sales leaders across all of the AMN businesses that would be relevant and educate them collectively about the new business that we are bringing in.

We certainly put in place infrastructure and incentives and processes for them to sell and -- or I'm sorry share those opportunities. But, it starts with just building internal relationships and awareness about what AMN does and identifying those opportunities when they are interacting with clients.

So, we've seen really nice progress -- really out of the shoots in particular with some of our more recent acquisitions like the First Spring and B.E. Smith, I mean even with Peak, who just came into the AMN organization in June. We've already began plugging them into some of our MSP clients. So this is a big part of our growth strategy..

Thank you very much. And got a couple of questions, numeric ones. Talked about HealthSource Global or couple of times in terms of percentages that they contributed to growth.

I didn't make the calculations, how much was it in dollars, the project revenue in the quarter?.

The total amount in the quarter was about $18 million. That was their total revenue, the bulk of that was working on projects. We had built in some of that into our forecast for the second quarter, but as you can see from our results, they were beyond what we had expected.

As we talked about before, it's sometimes hard to predict, if they are going to -- those projects will occur or not. And they occur very late in the quarter and were pretty significant in size..

Okay. Are you still anticipating a relatively kind of busy calendar for those kinds of projects in this year, understanding that you don't know whether they really come to fruitions specifically.

But, you can see when contract negotiations are on the calendar?.

Yes, Tobey. So, we build in what we are relatively certain about and contracts that we have underway with clients that are going to be entering labor negotiations and discussions; in fact, they are probably usually already underway. So what we don't build in is the actual disruption or strike itself and getting people on planes and flying them out.

I'm going to have Ralph actually jump in and talk about the pipeline and how the team is able to track that..

Tobey, this is Ralph. We just went through the pipeline yesterday with the team, there is probably 7 to 10 labor disruption events that could occur within the next quarter.

Then there is a couple that are pretty likely and part of which is -- I'm talking about kind of core revenues of the business or management fees we received just for coaching them through those opportunities and what's going to happen.

But, we don't ever know exactly win-win will drop and of course, other events that could be weather related or storms or new power goes up at hospital or something like that changes ownership. So they can get involved in other things.

So at this point, we really have a pretty conservative forecast, which is pretty close to -- I think what we said the total revenue of the company would be when we originally acquired them. And then, we just basically then try to capture much of the upside if there is a strike event.

I would add one other thing, which is in the case of strike that we often had -- we got dragged into them and our travel nurse or local staffing businesses in the past and so some of the revenues used to flow through their and we would be one of five or six companies trying to help out in those events.

By owning HSG, we have been able to move that, which was kind of a disruptor right from our core business. To move that business on to HSG which is, I think providing tremendous strategic advantage so we can remain focused on each of the respective lines of business instead of jumping and helping out on strikes..

Thank you.

Susan, when you were talking about orders, you mentioned July being strong but also taking orders for the winter, is it normal to get orders for winter at this time or did you mention that because it's a little bit early?.

It is normal to start receiving our winter orders at this time. So we are glad to see them coming in. They are a little bit higher than last year which also gives us great confidence in what we believe that we will continue to see through the fourth quarter and going into the first quarter.

And our teams are just doing an absolutely superb job of getting those orders placed. We had some of our best placement we call them booking within our travel nurse business throughout the month of July. And they are just on fire. I'm very proud of them -- big shot out to the travel nursing team..

Thank you. Just two last questions from me, one if you could comment in general about what you are your expectation for pricing is -- understanding -- you have got limited visibility in the staffing businesses. And then, to what extent -- the physician staffing business has done very well including being able to raise prices and expand margins.

I'm curious, if there are applications in other kind of workforce solution services that you see as applicable to that customer set either now or in the future..

I'm going to let Ralph talk about the pricing environment in particular maybe starting with travel nursing. And then, we will pick up on the later part of your question..

Yes. The quarter was a good one for pricing in a market because of the high demand and rising wages of RNs, certainly, continues to be good for increasing, we are lapping some more robust pricing jumps that we have taken over the last year. But, in the quarter if you grow at about 8%, I think our projection for the next quarter to be up around 6%.

And then, as we look further out probably in the 4% to 5% range, there after, I think we talked kind of on a really long-term basis settling in around the 3% to 5% annually. So I will give you some sense of pricing there. You didn't ask about Locum's but the market there is strong as well.

We certainly had a good quarter for pricing the lot of our revenue over the past few quarters has been driven by our pricing increases. And that needed if you've seen Merritt Hawkins Weight Study, physician salaries are just going up very, very rapidly. Really, all healthcare salaries aren't but I think physicians are even under more pressure.

So once that -- two ways it helps, get clinicians out of their perm jobs to take a look at more contingent opportunities. And also, this makes people start thinking about their careers a little bit more and so we see a lot of job movement is not just to us, but among hospitals which we also can help backfill..

And then Tobey, the last part of your question, I just want to -- have to be clear, were you talking specifically about Locum's and the ability to sell other services into Locum's client or was it a broader question than that?.

Yes. To sell other services into Locum's clients, but it just seems to me that there in recent years the hospitals have ingested a lot of physician practice groups in our managing or dealing with new issues as a result of that.

And I'm wondering if there are additional services whether its recruitment process outsourcing or some sort of ongoing services perhaps with B.E.

Smith that your -- hearing clients ask for?.

Yes. Absolutely. And I think it's also a byproduct of -- two byproducts. One is the employment of physicians, so their practices been bought and now that the hospital or the system is responsible for ensuring any vacancies are filled.

They have to be in the staffing business, which means there are also other services that might help them such as RPO, perm placement services, scheduling perhaps, workforce optimizations, some of these things were not even in today from a physician standpoint.

But there are companies and businesses out there that focus on how do you optimize the scheduling of physicians and that was not an issue that the hospitals had to worry about -- for many of them just three or four years ago.

And so, we think there is a lot of opportunity to expand our existing services that we're already providing maybe within the nursing side of the house into the physician side as well. And the second kind of byproduct is from the systems themselves getting larger we're absolutely seeing increased momentum in the appetite for workforce solutions.

And I mean that in totality, it usually starts with MSP, but once we're at the table talking about a managed services program, it gives us a platform to talk about other ways that we could help them through scheduling workforce optimization, perm hiring, training and development and so we're finding that a lot of these conversations take us down a few different pathways.

And they may not buy all of those services today, but they're very interested, and of course, it really helps to differentiate AMN, since nobody has that breadth and depth of services that we have..

Thanks for your help..

Okay. Thanks Tobey..

And we have a question from Jeff Silber with BMO Capital Markets. Please go ahead..

Hey, good afternoon. Its Henry Chen calling for Jeff..

Hi, Henry..

Hey guys. I was wondering if you could talk a little bit more about some of your -- what you're seeing in terms of looking at 3Q guidance and some of the slowing growth rate.

Just wondering if you could talk a little bit about your assumptions there and what you're seeing in the market?.

Well, I think we provided a decent amount of color within our comments around the growth expected within the segments where we generally provide some good directional guidance at a segment level within nurse and allied. Travel nursing is certainly the biggest driver of that. But allied is also doing very well.

Brian, do you want to share any other particular color on the guidance?.

Yes. A little more on the segment. This is a point that we gave in the prepared remarks, the nursing business is certainly seeing the highest growth rate still on a year-over-year basis and allied is performing well there as we're lapping some tougher comps as we had said the last couple of quarters we got to the back half of this year.

The year-over-year growth rate would slow down despite the fact that we're still seeing really good trends on both the demand and the booking side. And so we feel really good about that segment.

On Locum's as we talked about the -- you see the growth rate is slowing down a bit in the third quarter really not a demand issue and Ralph can talk maybe a little bit more about this. But it's the demand is solid and we're focusing on driving volume up. The third quarter is a little bit slower on a year-over-year basis.

And then, on our other workforce solutions, again, similar moving parts there growth with the acquisition of Peak for a full quarter and again seeing growth across all the different business lines is a little bit slower than the first half of the year, but again, a lot of the spacing is from tougher comps more than anything else..

This is Ralph. I'll comment -- I'll recomment on the demand trends. We are seeing strong demand across all of the staffing segment -- in the perm segment as well. So there is not really a change in the market or slowing in the market of any kind. I just want to make that clear.

We just -- I think our forecast is appears not to be as robust because we got such so many good quarters in a row. And then, plus even in the travel nursing segment right we have -- the nurse and allied segment, we have impact of HSG, those two events not happening in again.

On the Locum side, we've seen a slowdown in a couple of large customers and it probably gives back to Tobey's questions about services.

We provide transition services when a hospital moves from an in-sourced physician arrangement to an outsourced physician arrangement, those projects can be $3 million or $4 million and they can last up to probably about a year at a time.

So when there is a lot of that type of activity going on, we benefit from those transitions we -- they use Locum's during interim period until they staff up if they're the new provider or if they lose in-source clinicians early on in the process. So, there is a bulbous of business that occurs.

We've had fewer of those projects in Q3 than we had in the last couple of quarters really probably about the last five quarters. Although, our pipeline for those types of projects is very good looking -- going forward into the New Year as well.

So, probably I mean I guess a little more flavor, we didn't talk about local staffing at all, I'll throw that in there, we went live on new technology since you mentioned that.

And it went extremely well, I've done several front office conversions and they can be pretty -- however, you have a meaningful impact on that, the business through a short period of time. Ours went as well as I think we could have expected.

It was about $1 million of business disruption above what we anticipated as new team members about 400 people, our new technologies got used to operating in that technology, finding candidates and filling job orders, getting payroll done and things like that.

So there is a little bit of softness in that business as well -- got into the nurse and allied.

Does that help?.

Got it. Yes. I know that's exactly what I was looking for yes. I probably missed more in my questions just looking for some color on the trends you are seeing and that's perfect. Thank you..

Great. Thanks Henry..

And we have a question from the line of A.J. Rice with UBS. Please go ahead..

Hi, everybody. Maybe a couple of quick questions here. I appreciate the comments you made on pricing.

I just -- how rates are changing for you, I'm wondering do you have at this point visibility on what's happening to rate increases at the hospital for their own local workers, is that started to pick up or you just seeing it because you're picking up on the margin the incremental [indiscernible]?.

Yes. It does tend -- this is Ralph, sorry. It does tend to happen first in the contingent labor categories. And then, you'll see it triple into their pools and we're already seeing that. And then, we've also seen signing bonuses and pretty big investments on the client side and recruiting resources.

So -- and several of our clients have -- gosh doubled or even tripled their internal recruitment staff did try to attract more candidates to them. So there -- we are seeing that and then of course the labor events are triggered by wage and benefit increases people are looking for.

So there is a little bit of that going on and probably because of the recession that was -- there is a lot of suppress wage build up that didn't occur and I think there is a little bit of a catch up period going on..

Yes.

But even if it was a little bit of a range, do you have -- estimate as to what the underlying rate increases are these days?.

Yes. I don't have a good source for it. My gut tells me 3.5 to maybe 5. I don't have it..

Okay. That's fine.

And clearly, the other thing we hear from the hospitals and from healthcare providers generally is that's all about the strength and the outpatient, outpatient surgery, emerging care centers, clinics some may be pushed up things and even in the physician practice, how much of that of your -- is that still a pretty small piece of your business or is that at this point how would you describe that and how is that growing?.

We have been able to continue to build our outpatient drive just generally non-acute business. Acute care is still the vast majority of our placements particularly within nursing, it's running roughly 85%, I'd say north of 80%.

It's running around 60% within physician and allied and we do believe those numbers have come down not because acute care hasn't grown but because the other non-acute areas have grown. And that's been deliberate on our part as well.

We've recognized the opportunity to move where to and where healthcare is going to be delivered and we believe that some of these non-acute areas will grow faster. They are relatively smaller today than acute care and probably always will be, but to likely have faster growth rate.

So, we are continuing to invest resources to make sure that we are growing our presence there so home health, ambulatory surgery, urgent care, retail, clinics and as our clients', the systems in particular themselves become more vertically integrated.

We find that we are able to pretty quickly and easily add on those additional settings under an MSP client. In fact Dan, would you like to comment on that a little bit because I know that's come up recently in some of our newer contracts..

Sure, Susan. It's Dan. So first of all, one of the shot out I'll give is, on our advances side we actually had four new signing, it's a significant one of those was for this kind of clinic setting. So well over 100 facilities in that one arrangement alone.

Also, when we look at the deals that we've been winning most of those include both nursing and allied and allied almost always is included in non-clinical settings as well. We've had a really good string of add-ons and expansions to our base.

We did roughly 20 different transactions overall and new expanded and what I referred to as add-on business, one of the add-on lines that we added this quarter was specifically in home health as well, so we're seeing a lot of this..

Okay. And then may be just one last question. I think this is the first time -- this is the first time, since you completed the Peak acquisition, I know you talked about this being an area of interest for some time. Now that you actually have a presence there in a major way.

Can you just maybe give us a little bit more about your thoughts about that size of that business they growth opportunity that represents, do you need to make more acquisitions to get to the scale you want, maybe just a little bit of margin profile down the road or opportunity may be flush that out if you don't mind?.

I'll give a little color and then maybe you have Brian jump in with some comments on the numbers. We're just two months in, but we've been very pleased with the management team and how they have embraced the AMN organization.

I mentioned the sales summit that we always have and they really were excited about that and have worked very closely with our sales teams across the organization to make sure that we're leveraging opportunities to get them plugged in to existing relationships that we have.

In 2016, I think is a year when healthcare organizations are recalibrating how they're utilizing their internal and external medical coding services and we knew that as we were coming into this that's why I'm actually really glad that we waited until the second quarter of this year to make an acquisition.

So that we could kind of see how that really settles out. There will be another wave of coding changes that will occur in the fourth quarter and so we think that will also help provide more growth and more opportunity going forward.

It is a great business it is relatively small, it is -- and the sort of the $30 million revenue range, so it gives us a lot of opportunity to invest and grow the Peak organization that's our first line of sight, if we like what we see and the opportunity down the road then we will certainly consider making other acquisitions but it's a little premature to make that kind of a decision.

Brian you want to talk about some of the numbers?.

Sure. Just a following that, I think we -- what we like about this business and the way they built is their infrastructure really has the ability to grow and so as we're getting a plugged into some of our existing accounts.

We're certainly seeing opportunity to take it as a platform and grow just organically, but also then they got capability with the leadership team there too. If we get another acquisition it's really be a very good way to because that platform for growth as well.

As we mentioned we made the acquisition -- 30-ish million of revenue right now and kind of mid teens EBITDA margin. So, they got a kind of a fixed cost structure right now with the team and so if revenue grows and they should be able to leverage that nicely to get EBITDA margin expansion as well..

Okay. And this is Dan. A.J. this is Dan, I just wanted to add one more thing. I'm really excited about this acquisition because if you think about all of the quivers we have of the arrows and our quiver if you will, most of them are focused on cost savings.

And this is one area where we can really help customers on the revenue side of things as well and so from my point of view, if you look at revenue costs and then optimization services, we really can start to shape better what the customer outcomes are and hopefully deliver on those for them.

I should also add we did add a coding add-on to one of our MSPs in Q2. So, it will happen..

That was just -- I said this is last my question. But, on the MSPs, do you, you just have to go in there and sell, is there any sort of natural add-on that happens and that gets that comes and receives, you got to go in there and sell in each one of those cases..

One of the benefits we have is that, we don't have to go in leading with any particular solution. I get the privilege of walking and saying, hey, what's challenging you most right now? And so if it happens to be nursing and allied and we bring an MSP around that.

Very quickly we start discussions, so if I -- if you don't mind, I'm going to sort of rip-off what Tobey asked earlier, we got customer a very significant expansion this quarter that was already a customer for RPO, Avantas and Locum's MSP.

They came back and added nursing and allied in a fairly significant way and so we had that executive come and visit with us this past week. And one other things that they wanted to talk about was, how do we work on our coding and billing and how do we work on our optimization services.

And so, you get this ongoing conversation about how you can continue to help people and expand. So it's not just winning the new MSP, it's also about adding on and expanding additional facility as well. So we are hitting on all three of those cylinders very well..

Okay. Great. Thanks a lot..

Thanks AJ..

And our next question from the line of Randy Reece with Avondale Partners. Please go ahead..

Good afternoon..

Hi, Randy..

Hi, Randy..

One thing I wanted to make clear in here, if you had not bought HealthSource, what would this year be like for your staffing operation dealing with the disruptions?.

Just like in the -- obviously, in the Q3 our guidance, I will start there. We would be up actually about 4% to 5%, excluding any labor disruption in either quarter.

But, the impact you are trying to get to is, if we didn't do, we probably would had some role in those strikes and maybe one or two million maybe three million in a quarter versus capturing closer to $18 million, $19 million in the quarter..

Then how would that elevated level of activity just effect the efficiency of your operations and is there, kind of a spill over effect on other customers, when you have a big customer come in that kind of screaming for emergency help..

Yes.

There are absolutely is Randy and this is what I think Ralph was saying earlier is, a big benefit of bringing the HealthSource Global team on -- into AMN is that, not only can be capture, I think more of the revenue by helping those clients with labor disruption through them providing the services more directly as the management firm for the labor disruption.

But, also we are not distracting our travel nurse team and our local staffing team and they are able to stay focused on our MSP clients and our traditional clients and not really dilute our effort in that part of the business.

And so, I would say it helps all of our clients because it means that we can keep that strike activity fairly isolated and focused within the HSG team.

It's hard to quantify what that would be though to be honest of the -- these strikes that they managed, would we have gotten some of that revenue absolutely, we probably would have placed it through our travel nurse and local staffing teams. But, it's also might have meant that we missed out on opportunities to place travelers at other locations..

Randy, this is Dan. There is also a significant impact on the people and the strategic accounts team that end up focusing on that strike for that amount of time whether it's just a few days or a few weeks. And it distracts them in a way that they really can't serve the customer and sort of a normal way.

And so from my point of view as well as -- it's been a really important acquisition from a non-financial point of view as well..

I wanted to focus a little on candidate acquisition cost. When we look at the rest of the recruiting universe expenses for various forms of digital marketing and various methods of candidate acquisition have gotten more expensive and less efficient this year.

And I was wondering if you could tell me how your candidate acquisition expenses have been behaving versus your plans this year?.

That's an excellent question. First, I will talk about just how they are trending. Our applications, and we kind of -- we will use a definition, applications that kind of fit the jobs that we have or kind of unique high need definition of them. So, in our travel nursing business were up double digits around the 15% range year-over-year.

Allied is up about 10% year-over-year and our locum's application up about 25% year-over-year. We are certainly performing well and getting more applications in and now we are in the process right of getting our recruiters to convert them, credential them and that process take some time as well.

The cost of acquiring, we have been -- I'm just -- I think as scientific as you could possibly be in this area having a broad set of resources that we go to -- to get apply everything from referrals which is one of our top two sources or to how we buy paper click ads and things like that.

We are -- literally, we will change a source out in a day or two, if it's less effective or the cost of it goes up too.

Seen any material change in our marketing cost, on a year-over-year basis, what we have had to drop a few sources that raises their prices because they thought they could and replace them with other sources that are little less expensive..

And finally, the permanent placement business, it feels like just industry-wide regardless of this sector that clients have staffed up some in-house in recruiting and there maybe in-houses won a bit of share back in terms of the number of placements that are being done. Maybe put a little bit of pressure on places and search this year.

How did permanent placement within that segment -- that new segment you have -- how did permanent placement behave versus your expectations this quarter? And what is implied in the third quarter guidance?.

Sure. So, regarding the second quarter physician perm placement had an outstanding quarter. They grew more than 20% year-over-year. Now some of that was from the Millican acquisition we did last fall. But, the majority -- vast majority was organic and came from Merritt Hawkins and Kendall & Davis.

Merritt Hawkins of course being our retained search firm, which is the vast majority of the revenue there. And they've had an outstanding year both in new searches growing a lot from larger healthcare systems as well. They have done really a terrific job of building relationships and report with those larger system.

So, yes, have increased their internal recruitment resources. But, their needs are so great that they also want to partner with the large successful firms like Merritt Hawkins. And so, we have seen plenty of new search growth opportunity and in fact, we mentioned in the second quarter, we are particularly strong placements as well.

And so, I can't say that we have seen that growth in internal resource increases actually negatively impacting us.

I think that our team and the healthcare organizations themselves are finding ways to work together as opposed to it being either or and so, I really think that we will continue to see some really nice growth there particularly with a large integrated health systems.

And it's not just in particular geographies, California has been certainly a great geography for us. But, we have seen growth in Texas and Virginia and really all across the country..

Thank you very much..

And our next question from the line of Tim McHugh with William Blair & Company. Please go ahead..

Thanks. First, I guess the comment of the nurse and allied the bill pay spread narrowed a bit there as, I guess how does the project revenue impact that and I guess what else, I guess it's just a competition to find talents out there that's narrowing that spread, just any color, that would be helpful..

This is Brian. I will keep reference after as well. So, by kind of separating the HealthSource Global, we are talking more just about the nursing business particularly, someone allied on a year-over-year basis the spreads have come down, some of that, is very deliberate as we're trying to attract more talent into our orders.

We are taking bill rate increases and passing on that most we can into pay rates. And so naturally that that does have some compression on the bill rate spreads.

Ideally, then as we are looking at the other direct cost housing and travel and others if they're rising at a slower rate we still end up with very comparable margin, but higher gross profit per day and better leverages are driving more revenue, its really been our key strategy over the last couple of years is to focus on maintaining similar margins that we've had which we think are very strong in the industry.

So that spread decline is not unexpected for us. What we've seen is a little bit of increase we talked about in the first quarter our health and insurance cost little bit higher, they've moderated some in the second quarter, we're feeling better about that, our housing costs were also higher in the second quarter.

So that was really probably the bigger surprise on the year-over-year margin decline. The bill pay spreads is really more what we expected..

Okay. And you talked about MSPs a bit and it sounds like you're expanding your relationships and obviously want a lot of work. But can't I just ask for large I guess MSPs as they come up for renewal. It's certainly a hard market to meet fill rates or meet at least have high fill rates, I guess so.

What are the discussions like as clients come back for renewal, how was your kind of renewal rate been on I guess existing MSPs and how understanding are they obviously kind of fill rates that you can deliver on this type of environment given the shortage?.

This is Dan. I think I'll start with that and then someone else wants to add color they certainly can. To answer you first and very directly we haven't lost one in this first half yet, so I hope you just didn't jinx me there. The conversations are tough especially when it's a first generation MSP that was focused entirely on cost savings.

You then need to start having discussions about visibility and metrics and things that they can do outside of just fill rates, for example to improve their cost basis. So, often we get into discussions about RPO and other services to go along with that MSP to help drive savings and other areas of the business, but your point is absolutely spot on.

There are difficult discussions and that's one of the reasons why I was kind of highlighting the point I made earlier which is, hey, what problem are you trying to solve today and what can we do to bundle those things into next generation of MSP..

We have the best fill rates within the industry. I think that well known amongst the larger healthcare organizations in particular and we can show them what we're doing on the candidate sourcing side to create the talent network and have a good flow of candidates and while it might not always meet the levels that they're seeking.

I think they realize that we are going to be able to bring much more volume to the table than any other organization.

Also the affiliate vendor network that we have is very robust and we built strong relationships with those affiliate vendors in order to make it also a good relationship for them and good experience and profitable business decision for them to participate in our MSPs.

And so we try to share all of that with the client, so that they understand how it is in their best interest to continue to work with AMN as a leader and someone that can fill the vast majority of their needs and so far I think that's resonated well and we have to continue to prove that on a daily basis..

Okay, great.

And the $100 million I believe that you said was kind of spend under management under, and I think it was new MSP wins, could you may be just clarify what's that like first half was that this quarter and I guess how does that -- can you give us comparison for last year I guess trying to size how significant it is, relative to what you want….

It was huge impact, Tim. We have -- so that was just for the quarter it was six new MSP transactions and one very significant expansion that I was describing earlier. Just as color its twice as big as what we did last year -- all year.

It comes off of a really strong Q1 that I felt like we were really doing a great job and I just have to take my hat off to the sales team, the strategic accounts team, all of the people who connect us with these customers throughout our organization, the ability to cross-sell and go in high with new relationships from our interim businesses, this has been quite a good example of how the strategy all comes together..

That's great. Thanks..

We have a question from Mark Marcon with RW Baird. Please go ahead..

Follow on to Tim's question with regards to the MSPs, how quickly do you anticipate that they'll rule on and what percentage of that order magnitude are you already filling?.

I'll start with some of that. Our implementation team it really takes at least two months for most of the time three months just to get the systems up and the orders in and training done and change management beginning and that kind of thing.

After that period it's about 12 to 18 month ramp to get to a place where we feel we're filling the orders at a kind of a steady state, if you will.

I don't know Ralph you want to add anything to that?.

I mean it goes a lot faster on where that travel nurses -- the preponderance of their utilization that those ramps can sometimes, it could be up 60%, 75% in five or six months. On the Locum side because of privilege in credential processes can be six months long sometimes they don't want to more towards the 18 month timeframe.

And then also I think you asked about our current business within that I mean I think most of it we probably already felt like somewhere around 20% of the volume but that's been backed out of the $100 million number already so just to spend an incremental opportunity for us..

That's the incremental opportunity.

And off the six new ones, how many of those are travel nurses?.

All six have travel and allied in them and the expansion as Locum's..

Great. And then, just….

Just to be clear that $100 million of incremental is gross spend. We will fill 50% to 60% of that depending upon the business line if it's nursing. First of all, we will fill 90% to 95% of the orders collectively with our subcontractors but AMN's direct fill will vary depending upon the business line.

So, if it's travel nursing we may fill roughly two thirds of the jobs ourselves, if its Locum's, it's going to be less than that, if it's allied it will be less than that..

Great.

And then with regards to the -- just the guidance for the current quarter as it relates to nurse and allied, if I heard you correctly first you said you're not anticipating any major project work is that correct in terms of embedded in the guidance?.

We've not embedded it in the guidance there are as Ralph said roughly five to seven projects that we may even be under management for to consult with them. But, we just don't know if the actual strike activity will occur.

And that's where you get the larger revenue amounts that are not easy to predict, you don't know until the 11th hour whether or not you're going to put people on planes and whether they're going to work their hours. So, we can see that pipeline because we are contracted with most of those and already consulting with them..

And last year what was the level of variance in terms of the project work that you had and obviously you didn't have the same capabilities, but just thinking through okay how many quarters is typical to not see anything?.

Well, again, I don't know if our prior comparison is a good apples-to-apples comparison because we weren't actively going out and seeking engagements to manage strikes, which is a business that HSG is in.

If we look at our second quarter last year just as an example, we had sort of $2 million to $3 million of strike related revenue in our performance and in the third quarter I don't think we had any..

Okay.

And HSG what's their level of variance that when you go back and look at their historical track record?.

This is Brian. It varies by year for exactly the reasons we haven't put expectations into the quarter of strike occurring because you really don't know until what happens.

And so if you look back I think last year they did -- it's around $15 million of revenue for the full year and so they've obviously done more than double that into the first half of 2016. And they've had other years where it was lower than that and higher than that as well..

Got it.

But the number of potential actions that are out there that's at a fairly high level isn't it?.

It is. And I think it's indicative of the environment we're in with such a severe shortage of clinician.

There are always contrast coming up for renewal, but how aggressive the unions are and aren't likely depends upon the employment environment and in an environment where nurse attrition is at historical highs across the country, they feel I believe that they've got the opportunity to make more strides in their negotiations.

And so I think it's the same reason why we're seeing tremendous demand across all of our business lines and in particular in nursing..

Great.

And then, just can you talk a little bit more about Locum Tenens in terms of just that geographic mismatch and how that might resolve itself?.

Yes, Mark. This is Ralph. It's a kind of a complex problem, but I'll try to do my best and keep my explanation short.

When we have an existing customer like we just talked about we win an MSP; we get it up to full speed that takes some 18 months, that customer's volume is consistent, it's great, right? And our performance doesn't -- there is no decrease in it and -- what we continue to kind of capture market share, but if that client is wining fewer deals closing down units and things like that their volume drops off.

So again actually redeploy that staff that doctor even locally until they get privilege, right? So, the process that we have to go through can take six months to get something redeployed. So we win a new MSP -- mature MSP goes down we win a new MSP, there is a big swing in our volume because of that.

So we're right now in the middle of that process of ramping up a new expansion on an MSP and we might be filling that in small 10%, 15% of the jobs at inception.

So we're kind of at a low rate on that demand is very high overall, but low fill rate on that and then you have the large account when you're particularly successful their volume goes down, so the two just don't line up. In nursing -- its much more simple.

I see new nurse and you're working one day in the East Coast, the next day you're on the West Coast in few days we can get you license and move. It's much more complicated and we need to get better at predicting where volume is going to hit. And also with licensing our professional across various states that we think business is going to grow.

So, I think there is execution opportunity in this one as well, I don't want to just blame the trend of that happens in client, I think we can fix it internally as well..

Yes.

It does and when you think about longer term I mean this quarter going up against tough comps still, which we have been, but going longer term how do you think the business shakes out in terms of growth rate on the Locum side?.

I think it's a little early to start predicting that for 2017 and 2018. If you look at the data points that are out there, which is predominantly the SIA they generally have Locum's in the kind of high single-digit range and we think that is a reasonable range to look to..

Great. Thank you..

Great Thanks Mark..

Thank you. And our last question from -- is a follow-up from the line of Tobey Sommer with SunTrust. Please go ahead..

Thank you. My question has been answered..

Okay. Thanks Tobey. All right. Well, we really appreciate everybody joining us today and we appreciate your continued support. We look forward to updating you on our progress next quarter..

Thank you. Ladies and gentlemen, this will conclude our teleconference for today. We thank you for your participation and for using AT&T Executive Teleconference Service. And you may now disconnect..