AMN Healthcare Services Inc

NYSE:AMN

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the AMN Healthcare Quarter One 2020 Earnings Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Randy Reece, Director of Investor Relations. Please go ahead.

[Randy Reece, Director of Investor Relations]

Good afternoon, everyone. Welcome to AMN Healthcare’s first quarter 2020 earnings call. A replay of this webcast will be available at amnhealthcare.investorroom.com following the conclusion of this call. Details for the audio replay of the conference call also are in our earnings release issued this afternoon.

Various remarks we make during this call about future expectations, projections, plans, events or circumstances constitute forward-looking statements. These statements reflect the company’s current beliefs based upon information currently available to it. Our actual results may differ materially from those indicated by these forward-looking statements as a result of various factors, including those identified in our most recent Form 10-K, our earnings release and subsequent filings with the SEC. The company does not intend to update the guidance or any forward-looking statements provided today prior to its next earnings release.

This call contains certain non-GAAP financial information. Information regarding and reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are included in our earnings release and on our Financial Reports page at amnhealthcare.investorroom.com.

On the call today are Susan Salka, Chief Executive Officer; Brian Scott, Chief Financial Officer; Kelly Rakowski, Group President and Chief Operating Officer of Strategic Talent Solutions and Landry Seedig, Group President and Chief Operating Officer, Nursing and Allied Solutions.

I will now turn the call over to Susan.

[Susan Salka, Chief Executive Officer]

Thank you, Randy, and welcome, everyone. We appreciate you making the time to join us today. The world has changed dramatically over the past two months, creating challenges and collaborations that might have been previously unimaginable. But by far, the greatest impact in sacrifice has been made by our country's health care heroes, our nurses, physicians, allied professionals, leaders and every health care worker that puts themselves on the front lines and at-risk to care for patients.

The selfless perseverance of these heroes and the healthcare organizations who enable life-saving compassionate care deserve our eternal gratitude. They inspire us, they give us confidence and they push us to go beyond what we ever thought possible to make our greatest contributions.

I am always proud of the AMN team and the passion and talents they pour into our responsibility to enable quality health care. But these last few weeks have given me and all of us, an even greater sense of pride, purpose and gratitude. The AMN team stepped up and collaborated in ways, I think even surprised ourselves. The spirit of the team, combined with a solid business continuity plan enabled us to quickly move our team members to work-from-home within a matter of days.

We were then able to redeploy our talent to where they were needed most. We always prioritized the safety and health of our team members and clinicians and provided them with support as they and we, as a team, navigated through the crisis. COVID-19 has been highly disruptive to the health care community, and the effects on our business have been fast changing. Soon after the crisis took hold in the U.S. in late March, demand for nurses and respiratory therapists surged as hospitals prepared for anticipated COVID-19 demand.

With COVID-19 patient census, elective surgeries and other health care services reduced across the country, many of our businesses experienced cancellations and a decline in demand. The AMN team went, took extraordinary links to serve clients while also supporting our team members.

In March, our business leaders and IT department did an amazing job transitioning over 3,000 team members to remote work. Investments were previously made in equipping our team members with laptops and system enhancements, which paid off during this time. We quickly redeployed and trained internal team members and added temporary resources to augment our nurse placement credentialing and support functions to ensure we had all hands on deck to get every clinician to where they were needed most.

In total, since mid-March, we deployed over 10,000 health care professionals through AMN brands, our MSP and VMS affiliate partners and marketplace technology solutions. As the needs of our health care professionals, clients and state organizations intensified, we also quickly brought new or expanded solutions to market.

We expanded our scalable VMS solution, open talent marketplace, allowing a multitude of health care facilities to quickly staff and manage their entire range of contingent talent. Answering the demand from local and state governments, we mobilized a rapid facility response, a full-scale solution for the quick start-up, staffing and management of medical facilities.

We accelerated the launch of AMN Passport, our mobile app for healthcare professionals. AMN Passport enables clinicians to access jobs, submit credentials, and enhance the healthcare professionals' experience, all through an easy-to-use AMN branded app.

We added functionality to our Stratus platform, enabling clients to utilize our technology and hardware for a variety of other telehealth and screening capabilities. We launched AMN Cares, a telehealth platform that enables care teams to interface with employees or patients at home.

And we expanded and created new relationships with tech, retail, and other organizations who need talent and a solution for testing, screening, and other resources to enable a safe return to work environment.

I have quite frankly been in awe of how the entire AMN organization evolved at a speed unlike anything I've seen in my 30 years with the company. And we're hopeful that some of these changes we've achieved will create long-lasting benefits.

AMN was instrumental in helping educate state and federal officials on the importance of more streamlined and reciprocal licensing of clinicians. We enabled more comprehensive 24/7 support of our health care professionals and our clients. We collaborated with our clients to develop streamlined credentialing and onboarding requirements to accelerate the placement process.

Our permanent placement services were able to rapidly gain client adoption of virtual interviewing which allow recruiting efforts to continue. We were more quickly able to collaborate with existing and new clients to add vital solutions in a matter of days instead of months.

More than anything, this is a time when the values-based culture of AMN and the common purpose and passion we share across the company enabled us to stand together and go far beyond what we ever dreamed possible. Many team members set was as if we had trained our entire careers for this moment and the opportunity to serve and make an impact, and I couldn't agree more.

While most of our discussion today will be on the second quarter trends and our road ahead, I want to spend a few moments on the first quarter. Before the COVID-19 crisis began, we had a terrific start across the company to the year. The first two months showed great promise and strong results by most measures. We were also very fortunate to welcome the Stratus team into the AMN family, with that acquisition closing mid-February.

Of course, everything changed in March. Even with the turmoil that began in March, our first quarter revenue still set another record high for the company at $602 million with adjusted EBITDA of $74 million.

Our Nurse and Allied segment produced revenue of $424 million, up 14% year-over-year with 3% organic growth. Under our new segment reporting structure, Nurse and Allied includes our revenue cycle solutions business.

Our largest business, Travel Nurse staffing, grew 12% year-over-year. Allied staffing revenue was up 41% year-over-year. The year-over-year increase was a combination of organic growth and the acquisition of Advanced Medical last June.

Allied therapy, including our schools offering and revenue cycle solutions felt an immediate impact from the closing of schools and other healthcare settings and the relaxation of clinical documentation requirements.

The teams did an excellent job during April in pivoting our Allied sales resources to support higher demand for respiratory therapists and transitioning over 90% of our school therapists onto our teletherapy platform.

Our second largest segment, called Physician and Leadership Solutions, recorded first quarter revenue of $138 million, which was up 1% year-over-year. Within this segment, our Locum Tenens Solutions business started the year strong, only to be disrupted by the pandemic and resulting cancellations.

While previously on track for year-over-year growth, this business completed the quarter with a revenue decline of 2%. The second largest part of this segment, our interim leadership business grew 3% year-over-year in the first quarter. While they felt some disruption in March from the crisis, they saw fewer cancellations and we were able to provide dozens of leaders to serve during the crisis.

Our permanent placement businesses were up 4% in the first quarter despite the slowdown in March. Our third segment, Technology and Workforce Solutions reported revenue of $40 million, up 84% year-over-year, including the acquisitions of Stratus Video in February and b4health in December. This segment was up 13% organically.

One of the standout performers of this group was our VMS business, which grew revenue 26% year-over-year in the first quarter. Our newly acquired language interpretation business, Stratus Video contributed $14 million of revenue in the quarter, slightly less than expected as its volumes were disrupted by clients' reduced patient census in late March. Prior to that disruption, they were performing better than expected. Our predictive analytics business had strong revenue growth in the first quarter.

We have modified our formal guidance due to the uncertainties created by COVID-19 and the economic environment. However, we want to still be as transparent as possible and provide you with some insights on recent trends and our outlook for the next few months.

When the crisis first hit, the demand for clinicians who could care for COVID-19 patients spiked and our industry cast a call to action for nurses and other clinicians to come forward and help. We were amazed and inspired by the response. Many thousands of clinicians raised their hands to go where and when they were needed most.

Still, there were also clinicians and physicians that were suddenly without work due to the decrease in elective procedures and the closure of other healthcare settings. While we still have new demand for COVID-19 related clinicians coming in, it has declined, which is very good news for our country.

Some clients, particularly in hotspots like New York, are still in need of hundreds of existing and additional clinicians to serve the patients they have and expect. Across the country, many clients are starting to resume services, including opening operating rooms, rehab centers and physician offices. We are receiving needs for clinicians to help ramp these services and expect more in the coming weeks.

We are also working with clients to ensure that we can all pivot, again, quickly, should there be another surge of cases. Some major healthcare systems view this as a real possibility. We are incorporating lessons learned to ensure we can collaborate and work even more swiftly and efficiently together.

Some clients are also indicating that they are seeking to create a more flexible labor plan. This will enable them to respond to patient volumes and best match their workforce spending with the revenue ramp. Utilization of travelers and temporary clinicians will be a valuable tool for them during this time. We can also help clients to better manage their internal float pools through our technology offerings like b4health.

AMN's revenue should ramp, as hospitals resume their more normal procedures and patient census and they seek opportunities to optimize their workforce through the use of technology solutions. In the meantime, our second quarter revenue is projected to be down sequentially. And we will exit the quarter at the lowest revenue trend year-to-date.

Fortunately, we have created a flexible cost structure, and we'll be able to respond to marketplace changes as necessary. We have successfully navigated periods of demand decline before, exiting these times as a stronger organization. And AMN is a more diversified company today than it was during the previous downturn. Our addition of multiple Workforce Solutions and more strategic partnerships strengthens the resilience of our business and further differentiates us.

To adjust our cost structure to the temporary decline in revenue, we have already taken several steps to eliminate nonessential costs, such as travel, events and professional services. We also reduced staffing levels through attrition and a small layoff of our less tenured team members and suspended our retirement matching program.

These collective efforts, plus the natural reduction in variable spending that occurs with lower volumes, enabled AMN to reduce our SG&A by about 15% from our pre-crisis run rate in February. Our cost structure is highly flexible, and we will continue to make the needed investments to advance our total talent strategy to ensure that AMN is well positioned for the future. We always owe a debt of gratitude to our healthcare professionals. But at this time, that gratitude is more meaningful than ever.

As the industry leader and one of the world's most vocal supporters of nurses and other clinicians, we feel an immense responsibility to ensure that we and others are doing the right things to care for and support our clinicians. During this crisis, I am so proud of how our team and clients partnered to ensure we were rising to this responsibility.

And finally, to our incredible AMN team members, I am simply in awe of you. You have overcome barriers and found creative solutions for our clients and healthcare professionals and perhaps the most dynamic environment we've ever seen. We ask a lot of each other and you more than delivered. You inspire me every day, and I truly cannot thank you enough.

In a few minutes, Kelly and Landry will join us for the question-and-answer session. But for now, I would like to turn the call over to Brian, who will provide more insight into our financial results. Brian?

[Brian Scott]

Thank you, Susan, and good afternoon, everyone. I would also like to express my sincere gratitude to the frontline healthcare workers across this country who risk their lives to care for our families. And I am also so proud of the AMN team for their passion and efforts to support our healthcare professionals, clients and each other every day.

Before I talk about the results and guidance, I wanted to quickly recap our updated reportable segments effective this quarter. Our Nurse and Allied Solutions segment now includes our revenue cycle solutions business. Our new Physician and Leadership Solutions segment includes our Locum Tenens, interim leadership and executive and physician permanent placement businesses.

Our Technology and Workforce Solutions segment includes our Language Interpretation, VMS, Predictive Analytics, RPO and Credential Link businesses. Historical financial information for these new segments is posted in the Investor Relations section of the AMN website.

First quarter revenue of $602 million was at the midpoint of our guidance range. Our Nurse and Allied Solutions segment performed in line with expectations. Physician and Leadership Solutions and Technology Workforce Solutions segments were modestly below our expectations due to the impact of COVID-19.

Reported revenue grew 3% sequentially and 13% year-over-year. On an organic basis, revenue was flat sequentially and up 3% year-over-year. Gross margin for the quarter was 33.5%, up 30 basis points from the same quarter a year ago and down 10 basis points from last quarter. Gross margin rose year-over-year due to a favorable segment mix shift.

Consolidated SG&A expenses were $146 million or 24.3% of revenue compared with $120 million or 22.5% of revenue in the same quarter last year. The year-over-year increase includes about $9 million of additional SG&A from the acquisitions of Stratus Video, b4health and Advanced Medical, $7 million in onetime acquisition-related expenses and $2 million higher integration and other nonrecurring expenses.

The increase also included growth of about $5 million of employee-related expenses and a $2 million increase in bad debt expense as we took a conservative stance towards our reserves in light of the COVID-19 impact.

First quarter, Nurse and Allied segment revenue was $424 million, 14% higher than prior year and flat sequentially. On an organic basis, segment revenue grew 3% over prior year with solid growth in Travel Nurse Staffing, partly offset by declines in revenue cycle solutions and local staffing.

Nurse and Allied gross margin of 28.5% was flat compared with the prior year and down 50 basis points from prior quarter. The sequential drop stemmed from a decline in labor disruption revenue. Segment EBITDA margin was 14%, which was down 30 basis points from prior year and down 40 basis points sequentially.

First quarter Physician and Leadership Solutions segment revenue of $138 million was 1% below prior quarter and up 1% from prior year. Gross margin of 36.7% was 10 basis points higher than the prior year, but down 50 basis points sequentially due to the decline in permanent placement revenue. Segment EBITDA margin was 10.6%, down 100 basis points from last year and down 310 basis points sequentially and driven in large part from an increase in bad debt reserves.

Technology and Workforce Solutions segment revenue was $40 million in the first quarter, up 84% year-over-year with organic growth of 13%. Segment gross margin was 75.7%, lower year-over-year and sequentially due to the February acquisition of Stratus Video, which has a lower gross margin than the rest of the segment. Segment EBITDA margin was 38%, also down because of the Stratus acquisition.

Consolidated first quarter adjusted EBITDA of $74 million was 12% higher year-over-year. Adjusted EBITDA margin of 12.3% was 10 basis points lower year-over-year and down 60 basis points sequentially. We reported net income of $13 million and diluted earnings per share of $0.27 in the first quarter. Adjusted earnings per share was $0.79 and compared with $0.75 in the year ago quarter.

Our GAAP income tax rate in the quarter was 47% and was 32% on an adjusted basis. The high GAAP tax rate was driven by the nondeductible effects of changes in the value of our deferred compensation plan, partly offset by excess tax benefits on the vesting of stock-based compensation, which are both excluded from our adjusted tax rate.

Day sales outstanding at quarter end was 57 days, a 5-day improvement from the same quarter last year. The 2-day increase from last quarter was entirely driven by the mid-quarter acquisition of Stratus. Also wanted to provide some color on AMN's solid position as it relates to our balance sheet, cash flow and liquidity.

As a reminder, in conjunction with our acquisition of Stratus Video in February, we amended our credit facility with a new 5-year tenure that included a $250 million term loan and $400 million revolving credit facility. As of March 31, we had $175 million undrawn on the revolving credit facility and $98 million of cash on hand.

The remaining $625 million of our debt consists of unsecured notes that don't mature until 2024 and 2027. The weighted average cost of our debt is currently at just below 4%, and our leverage ratio at quarter end was 3.1 times to 1, well below our maximum leverage covenant.

Subsequent to quarter end, we paid down $50 million on the revolver, providing more than $200 million of current borrowing capacity. First quarter operating cash flow was $51 million and free cash flow was $37 million, reflecting a strong EBITDA to cash conversion.

Although we are closely monitoring the financial challenges our clients face during this crisis and even with a few clients delaying payments and asking for extended terms, our April cash collections exceeded our internal goal. We are currently tracking for another quarter of strong free cash flow, which we will use to further reduce our debt balance. Overall, we are confident that our cash flow is sufficient to fund our operations, capital and strategic investments and continued reduction in our debt.

Turning to second quarter guidance, Travel Nurse demand in placements were very strong until late April, but then decreased significantly from reduction in COVID assignments and overall healthcare utilization. With a strong start to the quarter, along with the prior year only including 2 weeks advanced nursing, revenue for our Travel Nurse business is projected to be up from prior year by around 25%.

Overall, we expect the Nurse and Allied Solutions segment to be above prior year by 7% to 10%, with a higher Travel Nurse revenue, partly offset by declines in revenue cycle solutions and labor disruption.

For the segment, the trajectory of volumes and revenue is declining through the quarter, and we expect volumes for Nurse, Allied and revenue cycle to be below prior year in June.

For our physician and leadership solutions and Technology and Workforce Solutions segments, April revenue for most service lines was below prior year levels by about 10% to 30%. Revenue has stabilized and in some cases, started to pick up, with a more meaningful improvement in revenue expected as elective procedures resumed and overall health care utilization increases. Based on the above trends, we are projecting second quarter revenue to be in a range of $550 million to $570 million. This wide range reflects the uncertainty of business activity.

As Susan noted, in response to this market environment, we have quickly made certain adjustments to our cost structure. Thus far, we have reduced our annualized SG&A by about $80 million. As these actions were taken over the last couple of weeks, about two-thirds of this benefit we realized in the second quarter with the full impact achieved in the third quarter.

In consideration of these factors, we expect second quarter adjusted EBITDA margin to be above 12%. And even with these cost adjustments, we will continue to invest in and remain focused on our long-term strategy to ensure, we emerge from this situation as a stronger and more agile organization.

Other second quarter estimates include the following; depreciation expense of $7.5 million, noncash amortization expense of $15.6 million, interest expense of $10.7 million, integration expenses of $4 million to $5 million, and an adjusted tax rate of 32%.

Before we open the call for questions, we want to recognize AMN nurses and all nurses across the world as we come to the conclusion of nurse's week. We've been celebrating with a wide variety of events to recognize the incredible impact they make every day. Tomorrow, in special recognition of the 200th birthday of Florence Nightingale, AMN will be celebrating nurses through a virtual opening bell, bringing at the New York Stock Exchange. We hope you can tune into that event.

And with that, we'd like to open the call for questions.

[Operator]

Thank you. [Operator Instructions] First, we'll go to the line of A.J. Rice with Credit Suisse. Please go ahead.

[Susan Salka, Chief Executive Officer]

Hello, A.J.? We are having difficulty hearing you, A.J. We might need to have you get back in the queue. Are you there?

[A.J. Rice, Credit Suisse]

No, I'm trying. Does that work? Is that work?

[Susan Salka, Chief Executive Officer]

Perfect. That is great.

[A.J. Rice, Credit Suisse]

Okay. Sorry about that. Glad to hear everyone safe and well. Sorry about that. First of all, just maybe exploring a little bit the nature of the discussions you're having as these markets start to reopen. Obviously, for the Travel Nurse and Allied side, it takes a little bit of lead time to get people in there. But alternatively, I could see that hospitals wouldn't want to recruit to make up some of the loss procedures that now hopefully will come back. So are they -- how is that discussion going? And what do you expect to see as they reopen some of these markets, is there any way to talk about that?

[Susan Salka, Chief Executive Officer]

Sure, A.J. So I'll start and then maybe my colleagues can chime in if they have more to add. But absolutely, we're talking daily, if not multiple times a day with clients about what their expectations are.

And as I mentioned, we're starting to see orders come in, which we expected as they were discussing the reopening of whether it be ambulatory surgery or rehab centers or physician offices. And then as you would expect, our most strategic MSP clients are talking with us about their plans. In some cases, it's a matter of moving patients that had been perhaps COVID patients occupying OR suites that are now moving back into ICUs. And, therefore, they're able to open up their ORs, and they want to make sure that we have the staff to help them open.

Their staff is pretty burned out, even those that have been perhaps sitting on the sidelines a bit. They're turning in some cases, not all, but in some cases, first to travelers to help them open, particularly if we had travelers there previously. And then likewise, on the physician front, we're already receiving orders from several clients as they are beginning to open. And we get a little bit of a preview through even our Stratus organization, when you think about it, the -- we mentioned the interpretation minutes were down for the first few weeks and then started to rise. And that was really a sign of some of those care settings opening up and procedures beginning. And so that was some of the pre-op work that was going on. And so we feel pretty confident that every week, we should continue to see some more orders coming in from those increased needs.

As we look to our clients, just as an example, we did a bit of an informal survey with our clients, and just sort of looked at different parts of the country, and a good number of them are expecting that by June. They will be moving into more full swing, meaning sort of 50% to 70% opening. And then by July, opening at an even faster pace than maybe even at full capacity. They may be optimistic about that. I don't know. They would know best, but at least it gives an indication of how fast, they hope that they'll be moving along. So maybe with that, I'll just ask, if Kelly has anything she'd like to add to the discussion.

[Kelly Rakowski]

Yeah. Thank you. And A.J., I think it's – I know uncertain is a word that's being overused at this point. But we are seeing a lot of regional variation. We've seen some organizations that are ready to go that didn't have quite as much of an impact from COVID. But the – they're watching their state orders, as they're lifting, but also operationally to get back online. They have to bring staff back. They have financial challenges. They have testing challenges, supply challenges. But I do – another, I think, opportunity that we have as we're working with clients is as they experience a lack of flexibility in their staff. You saw the level of furloughs and things like that. So as they build back up their staffing plans, working with us to incorporate more of that flexibility into their staffing plans going forward. So as that uncertainty increases, they're able to flex a little bit easier to the demand, both up and down.

[A.J. Rice, Credit Suisse]

Okay. And maybe just sort of another question along these lines, I know coming into the year, one of the challenges was getting more travelers and more people willing to take the temporary assignments. You mentioned, and obviously, it's been reported that people have come out of the woodwork to help serve and help address needs. Do you have any sense that, that might result in a continuing number of people that would be willing to take these assignments on a long-term basis? Or is that a surge that just was specific to the crisis?

[Susan Salka, Chief Executive Officer]

I'll have Landry pick up on that, A.J., because, as you well know, Landry has been building the nursing business and has been responsible for the great success that we've had in the last several years. And so a lot of investments have been made that, I'm sure he's going to want to talk about. So Landry, you want to take that?

[Landry Seedig]

Yeah. A.J., this is Landry. You might remember that, if you went back prior year, we actually had a little bit of a headwind, where we had quite a bit of demand out there and needed to generate some more supply to match up with that demand. Made a lot of investments over the last 12 months to 18 months and those investments really paid off whenever – whenever we saw a surge in demand, primarily due to some of the COVID-19 orders that we're getting and there were times whenever we were working through the end of March and the beginning of April, where we would see our new application numbers be at least two times, and even some weeks it was three times greater than what we were used to. So above prior year as well as what our goals were. So generating that amount of supply, it really helped to build our database that, we'll be able to use for future placements. Of course, we were also able to place some of those clinicians out on assignment to help with the crisis. So, all in all some great investments and some really good numbers of new applicants and new nurses in our database.

[A.J. Rice, Credit Suisse]

Okay. And maybe just a last question around Stratus. There's been discussion intra-quarter, and you mentioned it again today of some retooling and all to do more telehealth. Can you expand a little bit on what you're doing there? And has that then become a potential revenue source independent of the translation services? Or is it all sort of intertwined together?

[Kelly Rakowski]

Yeah. A.J., it's Kelly. Thanks for that question. It's a combination of both. We really saw the versatility of the platform we are able to expand its ability to do secured messaging and communication. On behalf of our clients, we were able to shift some of their own interpreters onto our platform to support that. And then, we were able to use the platform itself to do some other things. For example, we're launching AMN Cares, which is a closed-loop capability that allows us to do communications, testing, support telehealth visits, track and document progress of an individual's progress through the disease and communicate that back, and we're applying that in settings outside of health care as well.

So we do see a lot of versatility, A.J., on both growing and deploying the interpretation services, but also some other uses for how we leverage those devices and that secure communication to apply to other settings.

[A.J. Rice, Credit Suisse]

Okay. Thanks a lot.

[Kelly Rakowski]

Thank you, A.J.

[Operator]

Thank you. And next, we'll go to the line of Tobey Sommer with SunTrust. Please go ahead.

[Susan Salka, Chief Executive Officer]

Hi, Tobey.

[Tobey Sommer, SunTrust]

Thanks. Hi. Could you comment about to the extent you have been able to discern in a short period of time, how the company's performance has been in and among MSP clients, particularly as demand has started to soften and see whether the theory of being able to sustained higher fill rates is being played out in – today?

[Susan Salka, Chief Executive Officer]

Great question. I'm so glad you asked it, because we have a good news story to share there. We certainly were able to get closer to our MSP clients during this difficult time and certainly, serves them well through the crisis itself.

But because of that, we were able to, I think, forge stronger relationships with them and add in other capabilities, other services I mentioned like literally within days and weeks rather than maybe normally taking months to add in other services. And I think that will enable us to do more for those clients over time.

But in addition, as their COVID orders decline, which is a good thing, we are working with them to plan what that rebound is going to look like and making sure that we have the clinicians ready to staff into those.

And I'll let Landry talk first about the success that we've had in Nurse and Allied. But maybe I'll first mention that Locums, in particular, has done an outstanding job of this.

In just the last month, as an example, they have had their highest direct fill rates that we have ever seen across their MSP clients. I'm so proud of them with that. And some of them are COVID-related, but some of them aren't necessarily. And so we think that's a good example of how we can, not only serve those clients well, but mitigate our downturn, which is what you're referring to, during times of demand softness. But Landry, why don't you talk a bit about Nurse and Allied.

[Landry Seedig]

Yes, Tobey. Thanks Susan. So, yes, the MSP strategy really does help a lot. Whenever that demand goes down a little bit, which we certainly have seen for certain specialties. Whenever that happens, we're -- it allows us the opportunity to fill the demand that's there with our own nurses.

So, more directional, but just to kind of give you a sense, with the Nurse and Allied segment, our Q1 revenue mix in our MSP business was 70%. And right now, we're projecting Q2 to be around 75%. So, it really does kind of show that overall strategy within our MSP accounts. And it really kind of helps us whenever the demand's a little bit softer.

[Tobey Sommer, SunTrust]

Could you give us a little bit of color for your nursing business in proportion of business or travelers that's associated with COVID assignments, just so we can get a sense for what the decline looks like as you work your way through 2Q and sort of time vanilla regular way business?

[Landry Seedig]

Yes, I don't know if I have that number in front of me on the kind of, I guess, COVID-19 placements versus the non. As you would expect, whenever we were exiting Q1, we did see quite a few cancellations of areas such as like OR as elective procedures went away also in our Allied business, within our skilled nursing facilities.

So we did see quite a few cancellations with businesses where, quite honestly, the facility might have been closed or there was just no sense for those types of specialties.

Whenever we went towards the end of Q1 and beginning of Q2, a lot of our demand was around ICU, ER, respiratory therapy and the teams really did come to the table, and we're able to help our clients significantly in many areas across the U.S., primarily in some of the hotspots that you've seen.

As you exit Q2, we are seeing a lot of those COVID-19 placements come off, and our volumes are coming down. So, right now, our volume in our Travel Nurse business in June is expected to be below prior year.

[Brian Scott]

Yes. And just in order of magnitude. Tobey, this is Brian. I'd say we're looking at somewhere probably in the mid-teens range from what we're seeing right now. And we just are at this interesting inflection point where you have the demand going down from COVID assignments again, hospitals are starting to plan for reopening and increasing their utilizations. But it's a bit early to know the amount, timing, and magnitude of that recovery.

So, again, we're starting to get some demand coming in related to it. And it's just -- but it'll take a few more weeks then to see how quickly that will rebound. So, right now as we look to June, based on the data we have, we're down mid-teens and the nursing volume. So, this should help at least you a sense of the magnitude we're exiting the quarter.

[Tobey Sommer, SunTrust]

Absolutely. Last question for me. Could you give us your best guess in perspective about how the demand for temporary clinicians, principally nurses, but you can comment on the other categories as well, amid high unemployment, which historically has been sort of this gravitational force, but I understand your customers talking about building more flexibility into their workforces and needing to start-up.

[Susan Salka, Chief Executive Officer]

Yes. So, it's really -- it's difficult. I know you're asking us to make our best educated guess, and we certainly have those, Tobey. More typically during just a pure economic downturn, we -- if you see a spike in unemployment -- general unemployment, you would see nurse attrition go down and vacancies go down.

In this environment, there are some differences that I think are important, the reason for the downturn being the pandemic and the stress that that's put on the clinical workforce already, particularly nurses.

One of the things that we're hearing from the nurses themselves, through surveys we've done, but also from our clients is that the nurses are very burned out. And you see this, I suppose, even in the news in the media, where nurses are frustrated about what they've gone through and, certainly, very proud of their work, but perhaps needing a break from that environment. And this was just reinforced in a survey we did over the last week, which indicated that those clinicians that were most involved in the crisis feel that they need to take a break from nursing. So we think that will be a factor.

The other is that the nursing workforce today is older than it was 10 years ago, on average, and that could play into their willingness and ability to go back to the patient's bedside, particularly on the heels of the pandemic, where they may be fearful of what they might need to face and the demands. Fear might be the wrong word, because I think every nurse wants to step up and take care of those patients. But if they have choices to take other types of nursing-related jobs, they might prefer that.

The other thing to keep in mind is we were already in a very severe nursing shortage before we came into this environment. So, you just sort of have to factor all of those things into how might this play out. And, also, quite honestly, how fast things are going to rebound.

Right now, I think, that most of our clients are cautiously optimistic about how quickly they'll be able to bring patients back in and rebound their procedures. In fact, several clients are talking about expanding the utilization of their ORs and the ambulatory surgery centers, so that they can deal with the pent-up demand.

It's very big in oncology, in particular. And so they're extending hours on a daily basis, talking about opening on the weekends and their existing or previous staff might not be willing to do those things. So we can help augment that expansion. So, hopefully, that's helpful. We don't have a crystal ball. We don't have all those answers, but I do think it will be different than the prior economic contractions.

[Tobey Sommer, SunTrust]

Thank you.

[Susan Salka, Chief Executive Officer]

Thank you, Tobey.

[Operator]

Thank you. And next, we'll go to the line of Jeff Silber with BMO Capital Markets. Please go ahead.

[Jeff Silber, BMO Capital Markets]

Thanks so much. I wanted to focus on billing rates for a second. Is it safe to assume that the folks you were putting on assignment that were more COVID-related, were billing out at a higher rate and if it's possible to give us some sort of order of magnitude there?

[Susan Salka, Chief Executive Officer]

Jeff, yes. So that was primarily a factor in our nursing business and a little bit within Allied where we had respiratory therapy. We didn't experience that in locums as much. Now, granted the need wasn't as great. It was primarily hospitalists and ER, nurse practitioners, a bit of CRNA. And there was sufficient supply of clinicians that were willing to come into those settings. So we didn't really have a rate uplift in locums, but I'll let Landry speak to the Nurse and Allied business.

[Landry Seedig]

Yes. Thanks. So I would just remind us that we had some pretty strong year-over-year bill rate increases before all this started. So across Nurse and Allied, most of those businesses in Q1, their bill rates were up year-over-year, anywhere kind of in the 2% to 5% range.

Of course, whenever the COVID-19 crisis hit, those placements moved more toward what we would consider our, kind of, crisis rates or our labor disruption rates. So now we are seeing those placements. So, of course, the rates will be coming down, as we exit the quarter. And not to give too much around Q3, but the best way to probably think about Q3 is that we would get back to bill rates similar to what we were seeing in Q1.

[Jeff Silber, BMO Capital Markets]

Okay. That's helpful. And again, order of magnitude, your crisis rates versus normalized rates, what's the delta?

[Brian Scott]

This is Brian. Hi, Jeff. It really varies based on the geography and the urgency of the position, but it can be anywhere from 25% premium all the way up to of doubling, if it's for a really hard to fill position or really quick need. And that's where we’d get -- we'd see more of a labor disruption type of rate environment.

[Jeff Silber, BMO Capital Markets]

Okay, great. That's helpful.

[Brian Scott]

Yes. Q2 has a mix of both, obviously, standard assignments and then a variety of different levels of those crisis assignments.

[Jeff Silber, BMO Capital Markets]

Okay, great. Just shifting gears operationally. You talked about intra-quarter, how demand shifted away from COVID-related resignments to other assignments. Can you ship your recruiters accordingly among the different specialties?

[Susan Salka, Chief Executive Officer]

Yes. That's -- it's a great question, because it goes back to what we even did during the early stages of the crisis where we needed to shift a few hundred of our team members to help our nurse placement team. And it wasn't just in recruitment and account management, although, those were certainly important areas. It was also within credentialing and customer service and support in all kinds of areas.

So I just want to give a big shout-out to our team, where we were able to move over 200 team members internally within a matter of two weeks and get them trained up and productive to help ensure we were getting those clinicians placed, credentialed, paid and certainly have the support behind them. So big thanks for them. And it showed that we could do it, too.

You're asking specifically about recruiters, yes. We've actually been changing our training programs, our recruiting programs and profiles over the last year, so that we could be better at pivoting both within our existing different business lines like Allied and Locums and Nursing, but also with the eye that we could move recruiters from different businesses like from Locums and into Nursing or from Allied and into Nursing. And we were absolutely able to do that.

[Jeff Silber, BMO Capital Markets]

Okay, great. That’s helpful. Thanks so much.

[Susan Salka, Chief Executive Officer]

Thanks Jeff.

[Operator]

Thank you. And next, we'll go to the line of Jason Plagman with Jefferies. Please go ahead.

[Jason Plagman, Jefferies]

Hey good afternoon. I wanted to ask about question on gross margin outlook. Is any change in your expectation for Q2 compared to the recent trends? I noticed it wasn't mentioned in the guidance certainly any color there?

[Brian Scott]

Jason, this is Brian. I'll take that one. Yes, Q1 gross margin at 33.5%, pretty much in line what we expected. There's no significant changes at the business unit level. So within our – we talked about nursing and pricing, a lot of that is being used to -- obviously, it will pass along to the clinician. So I think if you look within nursing and Allied, Locum's a different divisions the margins are going to be pretty consistent from Q1 to Q2, and we expect that to continue going forward.

The gross margin at a consolidated level, you'd expect to be down a little bit in the second quarter just because of the mix change. With a higher mix of Nurse and Allied in Q2, it is a below-average gross margin that will bring it down probably somewhere more in the 33% range.

[Jason Plagman, Jefferies]

Got it. That's helpful. And then other one for me was, any update on MSP contract next activity going on, assuming that was the pace of discussions slowed during the COVID outbreak. But just any commentary you could provide on MSP new contracts and if you're having increased discussions given what we just – the healthcare system just went through.

[Kelly Rakowski]

Hey Jason, it's Kelly. I'll share a few insights around that. So first of all, we did get off to a very strong start prior to the crisis. So we had a good Q1 of both new contracts as well as some expansions. We're very pleased with that and had a very strong pipeline.

And you're right. It did slow down during that time, although we were able to bring on new VMS customers who had very high needs. Clients that have had high needs for staffing, and we were able to offer them our open marketplace solution that allowed for very rapid sort of contracting and access to staffing, and we expect those to sustain following the crisis.

But our MSP -- our large MSP clients did slow down. But the good news is we're starting to see a level of reengagement. About 70% of our pipeline has reengaged with us, starting to talk about their future needs and moving them back to decisions. We also had several verbals on our existing MSP clients around renewals and expansions.

And in fact, some of those were based on the kinds of support and relationship deepening that Susan mentioned earlier. So very pleased with that as well. So it will be slower in Q2, but expecting that to pick back up.

[Jason Plagman, Jefferies]

Okay. Thank you.

[Operator]

And next, we'll go to the line of Mark Marcon with Baird. Please go ahead.

[Mark Marcon, Baird]

Good afternoon. Hope everybody's well. Just wondering with regards to physician and leadership solutions, can you talk a little bit about the trends, particularly within some of the Locum specialties in terms of what you're seeing?

[Susan Salka, Chief Executive Officer]

Absolutely, Mark, and thank you. We are well, and I hope your family is too. We -- I'll talk about Locums and then have Kelly pick up on some of the other leadership parts of the business.

So as I mentioned, we saw certainly a strong start to the year. It's so unfortunate that they felt that disruption for many reasons, but they were really hitting on all cylinders at the beginning of the year, and we felt pretty confident we were going to be above year-over-year and really most specialties were strong.

Still saw a bit of weakness in ER and hospitalists as we began the year, but really a lot of other areas where we're doing quite well. And we had very strong demand across the business overall, and we were starting to see the productivity improvements of our team.

So through the crisis, we saw in a pretty immediate slowdown or almost halting of dentistry, which is small for us, but still, it pretty much went away in a matter of a few weeks and then we had surgery, primary care, oncology and many of the subspecialties that came to a pretty quick halt, not altogether, but we saw pretty significant declines there.

That was offset somewhat by increased needs in ER and hospitalist. These were COVID-related nurse practitioners and PAs, CRMAs and we are kind of regional in particular hotspot and some of them were shorter finance because they weren’t sure how long they would be going on.

We also were able to force them really nice relationships with states as they were standing up temporary facilities and capabilities expecting more patient flow that -- not all COVID, it was somewhat to take care of normal patient senses since they thought the hospitals would be full of COVID patients. So we had some good success there in staffing, in particular, in California, the locums team did a great job. But we had some other states, where we to capabilities. Fortunately, they didn't need them, because they didn't see the patient flow in all areas, but we were ready. And in many cases, those states are wanting us to keep those relationships and capabilities ready in case they see another surge.

The other thing that, they did was really to build some stronger relationships with telehealth partners, we saw some initial needs that were COVID-related from our telehealth partners, and that was a great way for us to showcase what we are capable of and really leveraging our national network of physicians. That has tapered off, but there's still ongoing needs, since they were able to see how we could really assist them to expand their businesses. We do expect that we will have ongoing business and relationships with them and can be their staffing partner to build what they believe is going to be stronger volume going forward, in addition to our own other telehealth capabilities.

And then just finally, these non-traditional settings, they were actually one of the first movers within AMN to begin working with payers and other types of settings, such as retailers, tech companies, on return-to-work strategies as well as screening and testing. And while some of that might be a little short-lived, we think several large employers will have ongoing needs. So we're working to create partnerships and a broader solution that will have some sustainability and will help us through the rebound. And with that, I'll have Kelly chat about some of the other leadership areas.

[Kelly Rakowski]

Yeah. I'll piggyback off of that on interim leadership, again, coming in with a strong quarter, we were able to mitigate a lot of the roll-offs and cancellations. Our first need was really to keep our interims in place. A lot of them were traveling with some of the travel restrictions, really working with them and clients to make sure they were capable of continuing to support and stay on their assignments. Similar to locums, we had several of our interims deployed in these rapid facilities, in some cases, whole leadership teams were mobilized to support those in conjunction with our clients or the states.

So that was just a tremendous way we saw leaders come forward. And even with some of our MSP clients, where we were seeing a lot of deployment of nurses into maybe areas where they weren't as familiar with or newer grads. We've leveraged our interim leaders in some places to serve as mentors or support onboarding from a remote location. We actually used our Stratus platform to create a safe and secure communication, so some really creative use of that kind of leadership talent to support the market. So they're down probably on the lower end of our range of around 10% coming out of Q2, and not as many new orders coming through as organizations are getting back online.

The perm businesses, physician perm, executive search. Again, a lot of things put on hold. We're seeing our new search volumes down pretty significantly. The good news is we've been able to maintain our search volumes that were existing. So, only about 20% to 25% of our searches – active searches were put on hold. We're starting to see some of those come back online. And we were – we deployed unique and innovative ways to maintain the pace of those, and we were able to place a lot of physicians and leaders during this time doing that all remotely. But those businesses will stay constrained and a little bit longer to bounce back, probably sometime in Q3 and Q4.

[Mark Marcon, Baird]

Thanks for the color, Kelly. On the Nurse and Allied side, where would you say orders are right now relative to a year ago in terms of active orders that have just recently come in? Just trying to get a sense for the contraction.

[Landry Seedig]

This is Landry. Yeah. So I mean, I guess, I would caution us a little bit to think about the number of orders. If you went back to sometimes last year, demand was up at some point, 30%. And the business just didn't follow it that way. So I have to think of it the same way whenever demand is down. The best thing to point to would be watching hospital synthesis and as those – right now those are of course, are down quite a bit, anywhere from the 40% to 50% range right now. And so as we see those censuses come back up, I would expect our order demand to follow.

[Mark Marcon, Baird]

Great. And then, Susan, you've been through multiple cycles. There's obviously multiple reports about how some of the hospital systems are stressed financially right now. How are you thinking about like as we go through the second quarter, going to the third and fourth quarters, how are they going to manage differently? How can you help them? And what are going to be some of the factors that are going to guide your decision-making in terms of managing the business, both from an expense and productivity perspective, production capacity when we get on the other side of this?

[Susan Salka, Chief Executive Officer]

Sure. Sure. So maybe, I'll start first with how we are interfacing with our clients and where we see the opportunities. And you will know, we've been through these downturns for different reasons before, and we have a history of using them as a catalyst for further differentiation. Good or bad, we know very well how to work through the cost structure and the cost side of this equation and make sure that we maintain the financial health of the organization.

But what I've also learned is we must continue to invest in the future, and we must continue to invest in and support our team because that team and the talent we have is going to be absolutely essential for us to rebound and grow back out of whatever decline that we feel.

And fortunately, for us, that team is much bigger today from a differentiation standpoint and an offering. We have, by far, a more comprehensive set of solutions than we had a decade ago. That's made us more resilient. It helped us, I think, to mitigate the downturns that we may face going ahead and with our clients.

It means we can bring a different value proposition to them than what we could bring to them a decade ago. So we can help them, yes, with their staffing needs and recruitment needs, but we can also help them to optimize their cost structure as it relates to workforce.

Through our technology offerings, we can help them better understand where, when and how they need to have the right person, how they can optimize their own internal flex pool and internal pool, which is very important right now so that they can deploy people only when and if they need them, whether it be their people or contingent staff into those different settings.

So a lot of discussions going on right now about float pool management and any sort of technology we can bring to bear. By bringing together multiple solutions, we think we can offer a more integrated way for them to think about partnering with us that can save them cost. And that's – right now, they're number two areas of focus beyond patient care, which is always number one. But next would be how do they ramp the revenue. So how do we help them do that? Through our businesses that can get them up and running quickly and expand their hours and their capabilities.

And second is reducing cost. So looking at that flexible labor planning is really one of the key conversations that we're having with them now. How can they flex up? But when needed, how can they flex down? So I feel like we're in a much better position today than we were a decade ago to really be that more holistic partner with them. And it's already happening.

And in fact, when we were going through the crisis, it gave us an opportunity to really showcase those more comprehensive integrated capabilities to our existing clients, but even as Kelly referred to, to prospective clients that maybe were in the pipeline and they were considering who they were going to choose as their partner we could really bring our best foot forward and show them all the things that AMN can do for them.

So I think that's what the future will look like in terms of how we work with our clients to help them rebound out of this and how we can make it a catalyst for us to create further differentiation. In terms of the cost structure, as I mentioned, we've managed through these situations before. We've taken swift action already on those expenses that we feel that we can reduce at least for a temporary period of time. And there's certainly more that we can do if we need to.

Some of it will be happening naturally because of the variable cost structure. But there are additional actions we can take. But we'll always want to be focused on also retaining and engaging our team and making sure that we continue the investments that are important to our future. So hopefully, that's helpful.

[Mark Marcon, Baird]

It is. Thank you.

[Operator]

Thank you. And next, we'll go to the line of Tim Mulrooney with William Blair. Please go ahead.

[Tim Mulrooney, William Blair]

Good afternoon. Can you hear me okay, Susan?

[Susan Salka, Chief Executive Officer]

Yes, we can. Tim, than, you.

[Tim Mulrooney, William Blair]

Yes. We’re running up against the hour here. So I am going to make this quick. On the nursing business, can you talk about your mix in the travel nursing business, what percent of your travel nurses are typically OR assignments versus ER and ICU-type assignments? And was it possible for you to reassign a certain percentage of your OR nurses to an ER setting during this pandemic?

[Susan Salka, Chief Executive Officer]

Yes. Great question. So we don't give the percentages necessarily. I think we usually share that our top five specialty areas in nursing are in the critical care areas, OR, Med Surg, Tele, those are typically the top five, in this environment, we absolutely were working with clients and our clinicians to determine who could flex their skill set and work in different settings.

And sometimes it was a nurse that was working and floating to another area. It could have even been in allied, quite honestly. We had a nurse who used to be a respiratory therapist. And so they move back down into the ER to help with respiratory therapy. And then even physicians in advanced practice professionals were able to flex.

You can usually flex to an area that is lower then your license and skill set. It doesn't always translate, but in many cases, they can. And so we were certainly trying to work with our clients to make sure that, that enabled us to pivot people more quickly.

[Tim Mulrooney, William Blair]

Okay. That's helpful. Thank you. And one more for me on telehealth. So do you think this pandemic will hasten the adoption of telehealth visits? And if so, how do you think faster adoption of telehealth ultimately impacts your business? I've been getting this question more often from investors these days. And would love to hear how you guys are thinking about this?

[Susan Salka, Chief Executive Officer]

Absolutely. Well, we think it's – yes, it will grow at a faster rate of adoption. And I think regulations have and will continue to help that. And we're excited about it because we have certainly made investments ourselves into telehealth capabilities. So far, it's been in the schools area with elevate. And Landry mentioned that, I think, or maybe I did about how we've been able to pivot our clinicians quickly to have more of them working, more of our speech therapists working over our telehealth platform. We expect that adoption to continue, which means that whether schools are open or working online, we'll be able to deliver those critical services to the students.

And then within Stratus, we've been able to add additional capabilities. And as we look forward, we're going to add more. And then as we mentioned, we launched AMN Care. So we see it as an opportunity and then building relationships with other telehealth providers. We have this incredible network of clinicians all across the country and we know who they are, where they're licensed and in particular, who would like to do telehealth work. And so I think it puts us in a great position to be a partner for other telehealth companies as well.

[Tim Mulrooney, William Blair]

Understood. Thank you.

[Susan Salka, Chief Executive Officer]

Thank you, Tim.

[Operator]

Thank you. [Operator Instructions] I have no further questions in queue at this time.

[Susan Salka, Chief Executive Officer]

Okay. Thank you very much. Well, we appreciate everybody joining us today, and we will certainly be updating you on our progress as we move forward. Be safe and be well. Thank you.

[Operator]

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