Earnings Call Transcript
AMN HEALTHCARE SERVICES INC (AMN)
Earnings Call Transcript - AMN Q1 2020
Operator, 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. 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, CEO
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 healthcare heroes, our nurses, physicians, allied professionals, leaders, and every healthcare 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 that 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 healthcare. 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 healthcare 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 healthcare services reduced across the country, many of our businesses experienced cancellations and a decline in demand. The AMN team took extraordinary lengths 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 healthcare professionals through AMN brands, our MSP and VMS affiliate partners and marketplace technology solutions. As the needs of our healthcare 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 healthcare 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 healthcare 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 allowed 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 said it 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 by 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 in 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 Scott, CFO
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 one-time 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 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 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 a reduction in COVID assignments and overall healthcare utilization. With a strong start to the quarter, along with the prior year only including 2 weeks of advanced nursing, revenue for our Travel Nurse business is projected to be up from the 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 healthcare 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, Operator
Thank you. First, we'll go to the line of A.J. Rice with Credit Suisse. Please go ahead.
Susan Salka, CEO
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, Analyst
No, I'm trying. Does that work? Is that work?
Susan Salka, CEO
Perfect. That is great.
A.J. Rice, Analyst
Glad to hear everyone is safe and well. I want to explore the nature of the discussions you're having as these markets start to reopen. For the Travel Nurse and Allied side, there is a lead time required to get people in place. However, hospitals may be hesitant to recruit in order to compensate for lost procedures that we hope will return. Can you share how those discussions are progressing? What do you anticipate as these markets begin to reopen?
Susan Salka, CEO
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. 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, 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 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, Group President and COO
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 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, Analyst
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, CEO
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, Group President and COO
Yeah. A.J., this is Landry. You might remember that if you went back the 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 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 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, Analyst
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, Group President and COO
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 healthcare 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, Analyst
Okay. Thanks a lot.
Kelly Rakowski, Group President and COO
Thank you, A.J.
Operator, Operator
Thank you. And next, we'll go to the line of Tobey Sommer with SunTrust. Please go ahead.
Susan Salka, CEO
Hi, Tobey.
Tobey Sommer, Analyst
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 sustain higher fill rates is being played out in – today?
Susan Salka, CEO
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 served 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, Group President and COO
Yes, Tobey. Thank you. The MSP strategy is very effective for us. When demand decreases slightly, which we've noticed in certain specialties, it gives us the chance to meet the existing demand with our own nurses. To give you a clearer picture, in our Nurse and Allied segment, our MSP business generated 70% of our Q1 revenue mix, and we expect that to rise to about 75% in Q2. This illustrates the overall effectiveness of our strategy within MSP accounts and assists us during times of reduced demand.
Tobey Sommer, Analyst
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, Group President and COO
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, CFO
Yes. This is Brian. I would say we're currently seeing demand in the mid-teens range. We find ourselves at an interesting inflection point where demand is decreasing due to the decline in COVID-related assignments. Hospitals are beginning to plan for reopening and increasing their utilization, but it's still too early to determine the extent and timing of that recovery. We're starting to see some demand related to this, but it will take a few more weeks to understand how quickly it will rebound. As we look toward June, based on the data we currently have, we anticipate nursing volume to be down in the mid-teens. This should give you a sense of the magnitude as we exit the quarter.
Tobey Sommer, Analyst
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, CEO
It's certainly challenging to provide a precise estimate. During typical economic downturns, a rise in unemployment usually leads to a decrease in nurse attrition and vacancies. However, the current situation is different due to the pandemic's impact on the clinical workforce, especially nurses. We've gathered feedback from nurses through surveys and from our clients, revealing that many nurses are feeling burned out. This sentiment has been evident in the news as well, where nurses express frustration over their experiences but also pride in their work, though many are contemplating a break from the field. A recent survey highlighted that clinicians heavily involved in the crisis feel the need to take a step back from nursing. Additionally, the nursing workforce today is generally older than it was a decade ago, which could influence their willingness to return to patient care, especially given the fears they may have about potential challenges post-pandemic. While every nurse is eager to care for patients, those with options may prefer nursing-related jobs that do not involve the same pressures. It's important to remember that we were already facing a significant nursing shortage before these circumstances arose. All these factors should be considered when thinking about how things might evolve and how quickly things will recover. Currently, our clients are cautiously optimistic about resuming patient services and procedures. Several clients are discussing expanding their operating room and ambulatory surgery center utilization to address the backlog, particularly in oncology. They are extending working hours and considering weekend shifts, although their existing staff might be hesitant to participate in these adjustments. We can assist with this expansion. While we don't have definitive answers, we believe the situation will be different from previous economic downturns.
Tobey Sommer, Analyst
Thank you.
Susan Salka, CEO
Thank you, Tobey.
Operator, Operator
Thank you. And next, we'll go to the line of Jeff Silber with BMO Capital Markets. Please go ahead.
Jeff Silber, Analyst
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, CEO
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, Group President and COO
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, Analyst
Okay. That's helpful. And again, order of magnitude, your crisis rates versus normalized rates, what's the delta?
Brian Scott, CFO
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 double if it's for a really hard-to-fill position or really quick need. And that's where we’d see more of a labor disruption type of rate environment.
Jeff Silber, Analyst
Okay, great. That's helpful.
Brian Scott, CFO
Q2 has a mix of both, obviously, standard assignments and then a variety of different levels of those crisis assignments.
Jeff Silber, Analyst
Okay, great. Just shifting gears operationally. You talked about intra-quarter, how demand shifted away from COVID-related assignments to other assignments. Can you shift your recruiters accordingly among the different specialties?
Susan Salka, CEO
Yes, that's a great question because it takes us back to what we implemented during the early stages of the crisis when we needed to reallocate a few hundred of our team members to assist our nurse placement team. This wasn't limited to recruitment and account management, although those areas were certainly crucial. It also included credentialing and customer service and support across various functions. I want to express my gratitude to our team for successfully relocating over 200 members internally in just two weeks, getting them trained and productive to ensure clinicians were placed, credentialed, and paid, with adequate support behind them. So, big thanks to them. It demonstrated our capability to pivot effectively. Regarding recruiters, we have been evolving our training and recruiting programs for the past year to better adapt within our existing business lines, such as Allied, Locums, and Nursing. We also aimed to move recruiters across different sectors, for instance, from Locums to Nursing or from Allied to Nursing, and we successfully accomplished that.
Jeff Silber, Analyst
Okay, great. That’s helpful. Thanks so much.
Susan Salka, CEO
Thanks, Jeff.
Operator, Operator
Thank you. And next, we'll go to the line of Jason Plagman with Jefferies. Please go ahead.
Jason Plagman, Analyst
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, CFO
Yes, Q1 gross margin was 33.5%, which is in line with our expectations. There haven't been any significant changes at the business unit level. In terms of nursing and pricing, most of that will be passed along to the clinician. Looking at nursing and Allied, margins in the Locum division are expected to remain fairly consistent from Q1 to Q2, and we anticipate that trend will continue. However, at the consolidated level, we expect the gross margin to decrease slightly in the second quarter due to a mix change. With a higher proportion of Nurse and Allied in Q2, which have below-average gross margins, we anticipate it to drop to around the 33% range.
Jason Plagman, Analyst
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, Group President and COO
Hey Jason, it's Kelly. I'll share a few insights around that. First of all, we had a very strong start before the crisis with a solid first quarter that included new contracts and several expansions. We were pleased with the strong pipeline. You're correct that there was a slowdown during that period, but we were able to onboard new VMS customers who had significant staffing needs. We provided them with our open marketplace solution, which enabled quick contracting and access to staffing, and we anticipate that this will continue post-crisis. However, our larger MSP clients did experience a slowdown. The positive news is that we are beginning to see a level of re-engagement, with about 70% of our pipeline reconnecting to discuss their future needs and make decisions. We also received several verbal commitments from our existing MSP clients regarding renewals and expansions, which were influenced by the support and relationship strengthening that Susan mentioned earlier. We're pleased with that progress. While we expect Q2 to be slower, we are optimistic about a rebound.
Jason Plagman, Analyst
Okay. Thank you.
Operator, Operator
And next, we'll go to the line of Mark Marcon with Baird. Please go ahead.
Mark Marcon, Analyst
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, CEO
Absolutely, Mark, and thank you. We are well, and I hope your family is too. I'll discuss Locums and then have Kelly take over some of the other leadership aspects of the business. As I mentioned, we had a strong start to the year. It's unfortunate that there were disruptions for various reasons, but we were really performing well at the beginning of the year, and we felt confident we would exceed year-over-year results, with most specialties showing strength. There was some weakness in ER and hospitalists at the start of the year, but many other areas performed quite well. We experienced strong demand across the business overall, and we were starting to see productivity improvements from our team. During the crisis, there was an immediate slowdown or even halting of dentistry, which is minor for us, but it quickly diminished in a few weeks. Surgery, primary care, oncology, and many subspecialties also experienced a significant decline, though not completely. This was partially offset by increased needs in ER and hospitalists due to COVID-related nurse practitioners and PAs. We were particularly active in regional hotspots, and some staffing was uncertain because of financial concerns about the duration of the needs. We developed good relationships with states as they set up temporary facilities, expecting more patient flow—not all related to COVID—as they anticipated hospitals being filled with COVID patients. Our locums team did an excellent job staffing, especially in California. In other states, we established capabilities that fortunately weren't needed, as they didn't see the expected patient flow, but we were prepared. Many of those states are interested in maintaining those relationships and capabilities for potential future surges. Additionally, we strengthened partnerships with telehealth providers, who had initial COVID-related needs. This was a great opportunity for us to demonstrate our capabilities and leverage our national physician network. While the demand has decreased, there are still ongoing needs, and we anticipate continuing business with them as we aim to be their staffing partner for future volume increases, alongside our other telehealth capabilities. Lastly, in non-traditional settings, we were among the first to work with payers and different types of organizations, such as retailers and tech companies, on return-to-work strategies and testing. Although some of that may be short-term, we believe that several large employers will have ongoing needs. We're working to develop sustainable partnerships and broader solutions to support us during the rebound. With that, I'll have Kelly discuss some of the other leadership areas.
Kelly Rakowski, Group President and COO
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, Analyst
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, Group President and COO
This is Landry. I want to emphasize that we should be cautious about the number of orders. If we reflect on last year, there was a point when demand surged by around 30%, but the business did not keep pace with that growth. I approach the current situation with the same mindset regarding decreased demand. A key indicator will be the trends in hospital censuses, which are currently down significantly, in the range of 40% to 50%. Therefore, as we see those numbers improve, I anticipate that our order demand will also increase.
Susan Salka, CEO
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? 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 the workforce. Through our technology offerings, we can help them better understand where, when, and how they need to have the right person and 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, Analyst
It is. Thank you.
Operator, Operator
Thank you. And next, we'll go to the line of Tim Mulrooney with William Blair. Please go ahead.
Tim Mulrooney, Analyst
Good afternoon. Can you hear me okay, Susan?
Susan Salka, CEO
Yes, we can. Tim, thank you.
Tim Mulrooney, Analyst
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, CEO
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 than 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, Analyst
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, CEO
Absolutely. We believe it will experience a quicker rate of adoption, and regulations have played a significant role in that, which we expect to continue. We are excited because we have invested in telehealth capabilities, particularly in the schools sector with Elevate. We've successfully adapted our clinicians to increase the number of speech therapists using our telehealth platform. We anticipate this trend will persist, enabling us to provide essential services to students regardless of whether schools are in-person or operating online. Additionally, we have enhanced the capabilities of Stratus and plan to add even more in the future. With the launch of AMN Care, we see it as a great opportunity to build relationships with other telehealth providers. Our extensive network of clinicians across the country, along with our knowledge of their licenses and preferences for telehealth work, positions us well to partner with other telehealth companies.
Tim Mulrooney, Analyst
Understood. Thank you.
Susan Salka, CEO
Thank you, Tim.
Operator, Operator
Thank you. I have no further questions in queue at this time.
Susan Salka, CEO
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, 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.