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AMN Healthcare Services, Inc. (NYSE:AMN)
Q3 2019 Earnings Call
Oct 31, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and Welcome to the AMN Healthcare Third Quarter 2019 Earnings Call. [Operator Instruction] Later, we will conduct a question-and-answer session, instructions will be given at that time. [Operator Instructions] And I'll now turn the meeting over to our host, Director of Investor Relations and Strategy, Mr. Randy Reece, please go ahead, sir.

Randle G. Reece -- Director of Investor Relations

Good afternoon everyone. Welcome to AMN Healthcare's Third Quarter 2019 Earnings Call. A replay of this webcast will be available until November 14 at amnhealthcare.investorroom.com following the conclusion of this call. Details for the audio replay of the conference call are in our earnings release issued this afternoon. Various remarks we make during this call about future expectations projections plans events or circumstances constitute forward-looking statements. Each 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 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 President of Leadership and Search; Ralph Henderson President of Professional Services and Staffing; and Dan White President of Workforce Solutions.

I will now turn the call over to Susan.

Susan Salka -- President Chief Executive Officer and Director

Thank you so much Randy. Happy Halloween everyone and welcome to our third quarter 2019 earnings call. We are 2 months from the close of what has been a very remarkable decade for AMN Healthcare and the industry in general. Over this span we have recovered from a major downturn followed by a time of significant growth. The unprecedented aging population and a strong economy are creating new pressures on healthcare while increasing demand for clinicians and simultaneously constraining the labor supply. But without a doubt the most important change in our industry during the last decade has been the adoption of Workforce Solutions and talent management tools. I am incredibly proud of how the AMN team rose to the occasion and elevated AMN to become healthcare's largest and most innovative talent solutions partner.

10 years ago we had just a handful of Managed Services clients representing less than 2% of our revenue. This year we have $1 billion or nearly half of our revenue generated through managed services clients and the momentum continues with 2019 already a record year for new contracts. We are certain that the future will bring healthcare transformation far beyond anything that we've already experienced. We know healthcare organizations and clinicians are innovating beyond the traditional models by using new technologies and care delivery settings though the healthcare sector races to change the Silver Tsunami of the aging clinical population increases the difficulty of balancing labor supply with the increasing care demand. The opportunity to help healthcare providers innovate around talent strategies and care delivery offers great promise for the future of AMN.

This challenges every AMN team member to anticipate create and redefine how we add value for our clients and clinicians as the leader in total talent management in healthcare. We don't see any end in sight for the strong demand environment we're in. If anything it is likely to intensify its clinical labor shortages increase which should bode well for our long-term growth opportunities. AMN produced very good financial results for the third quarter with growth in most service lines. The growth in our staffing businesses was moderated by a very tight labor market. As you would expect we are intently focused on deploying new recruitment strategies and ramping up our recruiters to increase our fulfillment to meet this growing demand. Now let's turn to our current results for the third quarter of 2019. I'm proud to report we reached a new record high in revenue at $568 million. Gross margin was a strong 33.5% and adjusted EBITDA was $69 million or 12.2% of revenue. Our Nurse and Allied segment delivered revenue of $363 million which is 18% higher year-over-year including 6% organic growth.

Segment revenue was higher-than-expected from strength in our international and rapid response nursing businesses and a solid contribution from our recent acquisition of Advanced Medical. Our largest business Travel Nurse Staffing grew 10% year-over-year with 4% organic growth. Growth came from a combination of higher volume hours worked and bill rate. Demand for Travel Nurses has remained strong for many months currently more than 20% above prior year and at the highest levels we've seen since 2016. Bill rates have risen but at modest levels considering the extraordinary demand. Our experience has been that as this high demand environment continues clients will respond with more attractive compensation packages. In fact the increase we've seen in higher bill rate rapid response assignments is a very encouraging sign. Allied staffing was strong again in the third quarter picking up to 11% organic revenue growth.

Our new team members from Advanced also contributed $23 million to Allied revenue in the quarter. Advanced is poised for robust growth in its school of business with clinicians working in school settings up more than 50% year-over-year. Overall demand in Allied is up year-over-year. However the growth outlook in the next couple of quarters is somewhat tempered by lower staffing needs from our skilled nursing clients due to the recent implementation of the patient-driven payment model. In the fourth quarter we expect Nurse and Allied segment revenue to be up 11% to 13% year-over-year with organic results flat to up low single digits. In the Locum Tenens segment third quarter revenue was slightly ahead of expectations at $84 million. The business has stabilized after disruption from process and technology changes made last year.

Overall demand is strong and the productivity of recruiters continues to improve which should enable us to deliver growth in the next year. In the fourth quarter we expect Locum Tenens revenue to follow normal seasonality being down 3% to 4% sequentially. Our Other Workforce Solutions segment recorded third quarter revenue of $121 million for year-over-year growth of 1%. The leadership and search division which makes up more than half of this segment's revenue had a strong quarter delivering growth of 6% year-over-year. Each of the service lines in this division which include interim leadership physician perm placement executive search and RPO all produced year-over-year growth in revenue. Revenue cycle solutions revenue was down about 10% year-over-year but we do expect the relative performance to be slightly better in the fourth quarter.

Our technology Workforce Solutions which include our vendor management systems and workforce optimization performed well and grew more than 10% year-over-year in the third quarter. For the fourth quarter total revenue for the Other Workforce Solutions segment is expected to be up 4% to 5% year-over-year. We are proud to be in a market leadership position as we enter this new decade and we look forward to innovating with our clients as their total talent management partner. Likewise we continue to create innovative recruitment methods that can help our clinicians to achieve their career aspirations. I am grateful for the incredible talent of all of our team members engaged in AMN's evolution.

The foundation of our business is the quality and commitment of our people. The strength of our culture and our team's desire to make a positive impact enables thousands of talented and committed healthcare professionals to care for patients. As a good example of this we have several team members who are currently in Northern California helping our clients and clinicians as they deal with the wildfires. Every day we strive to make an impact through our work and in our communities in any way possible. Now I will turn the call over to Brian for a financial update. After which Kelly Ralph and Dan will join us for the Q&A session.

Brian Scott -- Chief Financial Officer, Chief Accounting Officer, and Treasurer

Thank you Susan and good afternoon everyone. Third quarter revenue of $568 million was above the high end of our guidance range. The biggest driver of this upside came from our higher-than-expected performance in our Nurse and Allied segment. Reported revenue was up 6% sequentially and 8% year-over-year. On an organic basis revenue was flat sequentially and up 1% over prior year. Gross margin for the quarter was above our guidance at 33.5% up 30 basis points from last year and in line with the prior quarter. The year-over-year increase was a result of higher margins in the Nurse and Allied and Other Workforce Solutions segments along with a favorable business mix shift within those segments. Third quarter Nurse and Allied segment revenue was $363 million 18% higher than prior year and up 9% sequentially and included $37 million from the Advanced acquisition.

On an organic basis segment revenue was up 6% driven by double-digit growth in our Allied international and rapid response business lines. Nurse and Allied gross margin of 27.9% was 50 basis points better than prior year and up 40 basis points from prior quarter. Segment EBITDA margin was 13.1%. Third quarter Locum Tenens segment revenue of $84 million was 17% less than prior year and up 3% on a sequential basis. Gross margin of 27.5% was 30 basis points lower than the prior quarter. Segment EBITDA margin of 7.3% was in line with our expectations at this level of revenue. Other Workforce Solutions segment revenue was $121 million in the third quarter up 1% year-over-year and flat sequentially. Segment gross margin of 54.3% increased 190 basis points year-over-year and 30 basis points sequentially due to a favorable shift in business mix within the segment.

SG&A expenses were $133 million or 23.5% of revenue compared with $121 million or 23% of revenue in the same quarter last year. The increase includes about $7 million of SG&A from the Advanced and Silversheet companies; $8 million from earn-out valuation adjustments and other integration-related costs; and higher employee-related costs partly offset by lower legal reserves. On a consolidated basis third quarter adjusted EBITDA of $69 million was 3% higher year-over-year. Adjusted EBITDA margin of 12.2% was lower by 60 basis points year-over-year and 30 basis points sequentially. We reported net income of $24 million and diluted earnings per share of $0.49 in the third quarter. Adjusted earnings per share was $0.81 compared with $0.84 in the year ago quarter. Our GAAP income tax rate in the quarter was 26% and was 30% on an adjusted basis. Our tax rate is expected to be 29% to 30% in the fourth quarter.

Cash provided by operations was $81 million for the quarter. Days sales outstanding at quarter end was 57 days a 7-day improvement from the same quarter last year. At September 30 cash and equivalents totaled $41 million. Capital expenditures in the third quarter were $9 million. At quarter end our total debt outstanding was $620 million and our leverage ratio was 2.2x:1. On October 1 we issued $300 million of 4.625% senior notes due in 2027 and used the proceeds to repay our revolving debt and term loan which totaled $295 million. Locking in this long-term unsecured debt at historically low rates puts AMN's balance sheet in a position of strength. Today the company has a total of $625 million of debt none of which matures until 2024 and unused revolver borrowing capacity of $383 million. Now let's turn to fourth quarter 2019 guidance. The company expects consolidated revenue of $573 million to $579 million up approximately 8% to 9% year-over-year.

Excluding the impact of the Advanced acquisition consolidated revenue would be flat to up 1%. This guidance does not assume any material labor disruption events in the quarter. Gross margin is projected to be approximately 33.5%. SG&A expenses as a percentage of revenue are expected to be approximately 22.5%. Adjusted EBITDA margin is expected to be approximately 12%. Other fourth quarter 2019 estimates include the following: interest expense of $8.5 million; depreciation expense of $6 million; amortization expense of $11 million; stock-based compensation expense of $3.5 million; and acquisition integration and other extraordinary expenses of about $2 million. Diluted share count is expected to be 47.6 million shares. And now we'd like to open up the call for questions.

Questions and Answers:

Operator

[Operator Instructions] And our first question from the line of Jeff Silber with BMO Capital Markets. Please go ahead.

Jeff Silber -- BMO Capital Markets -- Analyst

Thank you so much. Forgive me I joined you a bit late. I don't know if you've had an opportunity to talk about the order flow going into the winter season. I mean if we can get some comments on that I'd appreciate it.

Susan Salka -- President Chief Executive Officer and Director

Jeff we talked about orders being -- continuing to be very strong and growing being above prior year more than 20%. And we didn't talk about specifics on sort of the flow of those orders going into the winter season. So Ralph maybe you'd like to add a little more color on that.

Ralph Henderson -- President of Professional Services and Staffing

Yes. Thanks Susan. Thanks for the question too Jeff. The winter orders are coming in above prior year about 15% higher. There is kind of one interesting trend that we're seeing is a little bit later start dates so the impact on Q4 is a little less than it would have been in the prior year. But the higher demand is obviously a good sign.

Jeff Silber -- BMO Capital Markets -- Analyst

And is there any indication I know it's still early about the flu season this year? I don't know if there's any early read.

Ralph Henderson -- President of Professional Services and Staffing

This is Ralph. I'll give that a shot. Yes. The early signs it's pretty quiet right now very early in the cycle. We took a look at it actually today and it might be up a little bit over prior year -- prior periods but it's really not meaningful yet. And I don't -- very few clients are talking or expecting I think a big pop in there in the flu season this year.

Jeff Silber -- BMO Capital Markets -- Analyst

If I could just sneak one more in just a numbers question. Brian on the refinancing what do you expect in terms of interest savings going forward?

Brian Scott -- Chief Financial Officer, Chief Accounting Officer, and Treasurer

So yes interest savings at this point -- actually interest expense will be slightly higher but that trade-off of being able to lock in longer-term unsecured debt we thought was a good trade-off to make. So as I've mentioned our interest expense going forward will be between $8 million and $8.5 million the majority of which is fixed within those 2 tranches of the unsecured debt.

Jeff Silber -- BMO Capital Markets -- Analyst

Okay, great. I'll jump back in the queue. Thanks.

Operator

Our next question from the line of Tobey Sommer with SunTrust. Please go ahead.

Tobey Sommer -- SunTrust -- Analyst

This is just Joe subbing in for Tobey. Just a guidance question. I'm seeing 50 bps of improvement sequentially for both gross and operating margin but EBITDA remained unchanged. I was hoping you could speak to what items might be restraining EBITDA margins a bit.

Brian Scott -- Chief Financial Officer, Chief Accounting Officer, and Treasurer

Josh and are you referring to the Q4 guide? Because relative to Q3 the gross margin and EBITDA margin are pretty consistent in the fourth quarter guidance.

Tobey Sommer -- SunTrust -- Analyst

Yes. I was just speaking to the difference between gross and operating and EBITDA for 3Q versus Q4.

Brian Scott -- Chief Financial Officer, Chief Accounting Officer, and Treasurer

Yes. So Q3 had some additional costs embedded in SG&A some of which will go away. I mentioned on the prepared remarks we've got some true-ups on the earn-out which the case is a positive because Advanced is performing very well. So we increased the earn-out reserve. But outside of that from a conversion of GP to EBITDA margin there's really a pretty consistent performance expectations between the third and the fourth quarter.

Tobey Sommer -- SunTrust -- Analyst

Okay, perfect. Thank you.

Operator

Our next question from the line of A.J. Rice with Credit Suisse. please go ahead.

A. J. Rice -- Credit Suisse -- Analyst

Hi, everybody. Uh, First of all maybe jumping off from that last question. When you think about 2020 I know you don't give formal year-ahead guidance. But puts and takes obviously there's things happening in the margin in each of the business lines but there's also mix shift going on that's affecting your margin. Is there any early commentary about how we should think about margin trends and potential for next year and what you're sort of thinking you could accomplish?

Brian Scott -- Chief Financial Officer, Chief Accounting Officer, and Treasurer

Sure. Sure. This is Brian. Yes. As you said we don't give formal guidance for 2020. But I think that the fourth quarter guide we gave is a good launching point as we head into 2020 where we're seeing some obviously some good trends on the order side. As we look to the next year the margin expansion will be in part dependent upon the amount of revenue growth that we see next year. We'd certainly expect to get operating leverage from that. But the gross margin that we're exiting the year I think is a good starting point for 2020 and I think it'll really be about getting leverage on the revenue next year.

Susan Salka -- President Chief Executive Officer and Director

A.J. the only thing that affect that a little bit is if we are able to see even some greater volume growth in our Travel Nurse business because of this very strong demand that we have and the tight supply. If we're able to start to convert more of that demand into placements you might see our mix shift a little bit which would be very positive overall because that's going to give us more top line growth. But it could have a slightly downward pressure on the gross margin.

A. J. Rice -- Credit Suisse -- Analyst

Right. Okay. That's helpful. Another follow-up I guess would be to your comments about what's happening in the skilled nursing. We've heard that from some of the rehab providers that the impact of this new reimbursement is obviously to push more people to group and it's freeing up some physical therapists. I wondered how big is that business for you in Allied? And did you see some of that in the third quarter? I know the reimbursement went effective October 1 I believe. So is that really starting in fourth quarter? Or was there some of that even in the third quarter?

Ralph Henderson -- President of Professional Services and Staffing

A.J. this is Ralph. I'll take that. You're right the new Medicare patient-driven model payment did roll out in October. It makes up about 7% of the total Nurse and Allied segment revenues which includes the Advanced numbers in there. It declined slightly in the third quarter. We are predicting more impact in the fourth quarter decline kind of 20-ish percent but it is a small part of our business. We had anticipated that and we shifted resources to work in other specialties like our schools business which is up I think Susan mentioned 50% year-over-year and other parts of the business.

And there's lots of what we can offset that. The other thing I'd say I think about that change is this is probably the fourth or fifth reimbursement change I think I've seen in therapy over the last 12 years. And those customers tend to find ways over time to work through these reimbursement changes and begin to pick up their utilization again after a few quarters. So I couldn't say exactly when they'll get through this one but I would anticipate that still to be a good market for us in the future.

A. J. Rice -- Credit Suisse -- Analyst

Okay, that's helpful perspective. Thanks a lot.

Operator

And we'll go next to Mark Marcon with Baird. please go ahead.

Mark Marcon -- Baird -- Analyst

Good afternoon. I was wondering if you could talk a little bit more about what you're seeing in terms of the tightness in the labor market and how it's impacting the fill rates and how -- what sort of steps you could take in order to increase the fill rates. So that's the first question related to that. And then also I'm wondering how is that impacting your -- the demand for your people in terms of recruiters account managers and compensation levels that you have to provide in order to keep the good ones on board?

Susan Salka -- President Chief Executive Officer and Director

Thanks Mark. I'll start with that and then maybe have my colleagues jump in to help add in some additional commentary. So first regarding the general healthcare labor market. I know you follow the BLS data right along with us and see that the number of job quits and openings continues to be at relatively historical highs. We're still at roughly a 2:1 ratio for 2 jobs open for every job being filled. That anecdotally lines up to what we hear from our clients where they are hiring feverishly but they're also losing people in their words faster than they can bring them in. And that's why I think we're also continuing to see an extremely strong demand environment because they're just not able to keep up with the vacancies that they have.

And I'll have Ralph and Dan perhaps add in a little bit more color there. But regarding our corporate team it's absolutely a tight labor market all around for all employers in all kinds of positions. It's one of the reasons however why I talk a lot about our culture mattering because the culture that we have within the organization is very much focused on helping our team members to be successful to build a career within the organization not just to do a job but rather to really help pursue their personal and professional goals. It's our stated purpose within the organization. And so we try to make sure that we're offering more than a competitive compensation package but rather a culture and a holistic environment where people can be successful and be a part of something bigger than themselves be part of a company that really makes decisions based on our values and has a greater purpose of making a positive impact.

These aren't just words I use on an earnings call. They're words that we use every day within the organization and that attracts and retains some really phenomenal talent. Our jobs aren't easy and we know that. And there's challenges that get in the way every day. So if we provide a strong healthy nurturing culture for people we find that they want to stay and build their careers with us. So with that Ralph I'll maybe ask you to weigh in a little bit more on what we're hearing from clients.

Ralph Henderson -- President of Professional Services and Staffing

Sure. And the question behind that was kind of what's happening with fill rates in a high demand market. As you probably would anticipate fill rates are coming down. Our team does actually a very good job though of shifting the resources to those more strategic relationships which is our MSPs which continue to grow. And I think as we've talked the last couple of quarters we've got a lot of success there. Our ramp is still building on several of those. In the shortage-driven market right now that Canada still are really choosy. And so they look for opportunities that meet their career goals that fit their skills that is the right geographic location all of those sorts of things. And then once all of those boxes are checked then they compare that to their core staff job.

And right now they're -- when they make that comparison to their core staff job they're seeing rising wages there but they're seeing flat wages and bill rates with us. And so that's causing this equilibrium or an imbalance in between supply and demand right now. Now -- but we're working with our clients very closely to help them understand that. In the past I think like in 2016 we've seen the clients move that rate very quickly whenever their demand needs were not being met. We expect that to happen hopefully here in the next quarter or so but -- and seeing some early signs of movement on pricing that would then allow us to get back to high fill rates again.

Mark Marcon -- Baird -- Analyst

That's great. How much of an increase would it take Ralph do you think?

Ralph Henderson -- President of Professional Services and Staffing

Not an economist. But last time it took movement and it's still in the single digits Mark mid-single digits.

Mark Marcon -- Baird -- Analyst

Okay. Great. And then Susan I certainly appreciate your comments in terms of the culture being a differentiator in helping you to attract folks. I'm just wondering just in terms of being able to continue to grow the business is that -- is it a tight labor market from that perspective?

Susan Salka -- President Chief Executive Officer and Director

No. We're not feeling constrained by our ability to recruit great talent. One of the benefits I think we also have in being a company with a national geographic footprint we have of course clients and clinicians working in all 50 states but we also have corporate team members working all over the country. And so we have the opportunity to recruit talent in many different labor markets. And we're getting better and better at being able to have team members working in different geographies and having remote team members. So I think that's helped us a lot in having the flexibility to meet the talent where it is versus expecting it to come to us.

Mark Marcon -- Baird -- Analyst

That's great. And lastly was there any rapid response revenue in the quarter?

Susan Salka -- President Chief Executive Officer and Director

Yes. We mentioned that in our Nursing business in the Nurse and Allied segment that a couple of the star performers were our international business where we're bringing nurses into the U.S. on long-term contracts but then also rapid response which are those shorter duration higher bill rate contracts. They also had a very strong quarter.

Dan White -- President of Strategic Workforce Solutions

Mark this is Dan. I just want to weigh in a little bit more and kind of weave these 2 things together. So you were asking about what do we do what are the clients do with fill rates being challenged. The first thing we do is go to them with other solutions. We have many that we can provide here and the international nursing example is a really good one. So if fill rates are low and it's hard to get somebody in a shorter-term assignment they look to grab a different category of labor and solve this problem longer term. So it's actually a really good example of tying both of those 2 things together.

Mark Marcon -- Baird -- Analyst

Great, thank you.

Operator

Our next question from the line of Jason Plagman with Jefferies. please go ahead.

Jason Plagman -- Jefferies -- Analyst

A Good afternoon. Just wanted to touch on the comments on the Allied business and the changes in the skilled nursing segment. So do you think -- do you have the opportunity to redirect some of those candidates into other settings to kind of -- to offset that headwind so it's only a short term impact? Or do you think that's something that all kind of persists for 2 3 4 quarters?

Ralph Henderson -- President of Professional Services and Staffing

Yes. That's a good question. I guess some of the good news about this is the skilled nursing setting is what's -- actually one of the lowest-paying environments and the resources in those settings. We think we'll be interested in acute care jobs which are higher paying. It'll take a little bit of time to get through that transition from one setting to another but that's what our planning has been around this change for the past several quarters. And I would guess that virtually all of them will eventually go back to work at another assignment in a different setting. It is just a matter of how long that takes.

Jason Plagman -- Jefferies -- Analyst

Okay. That's helpful. And in the OWS segment the revenue -- you mentioned revenue cycle being a little bit challenged for the outlook in Q4. When should we expect that to get back to stability or even growth? Is that realistic for 2020? Or what's kind of the prognosis there?

Susan Salka -- President Chief Executive Officer and Director

Yes Jason it is. I think the first half of 2020 would be our target. The exact timing is a bit difficult to predict but we are seeing some really nice bright spots within the business. If you recall there's a variety of solutions that they offer coding case management CDI. And so some of those businesses are actually showing some nice trends and yet some others were having some challenges. So we think kind of early mid next year we'll be in a better stabilized and kind of positioned for growth. And then since you ask about Other Workforce Solutions I might just piggyback on that and ask Kelly to share a little bit about what's happening in leadership and search because we've got some really good trends and as you saw some really nice performance there.

Kelly Rakowski -- President of Leadership and Search Solutions

Yes. Thank you Susan. Yes we had a nice quarter and expect that to continue. And a couple of things that we're seeing from a leadership and search perspective. One is the demand remains strong as well. So the shortages extend certainly the leadership position. And as our clients are challenged to hire permanent physicians nurses and leaders as well we're seeing an uptick in that business as well. But I think a lot of our success has come from the strategy and integration that we've been working on internally. A year ago we had 9 different brands working in this space. We're down to now a clear 4 service lines and they're working together. We're combining our databases.

We are getting more traction in the market because we're having more efficient use of our sales resources. So we're getting greater coverage which is uncovering a lot more opportunities for us and are also helping with some of our more regional businesses like Phillips DiPisa gain advantage from being a part of AMN. So we're really starting to see that turnaround. And we saw that executive search business for example really grow in this past quarter. So we're very excited about now the ability to build off of that strong platform and extend the services into advisory and strategic services. And our clients are really asking us to help them from an optimization standpoint.

Jason Plagman -- Jefferies -- Analyst

Great. And one last quick one for me was Brian was there any meaningful labor disruption revenue in the quarter?

Brian Scott -- Chief Financial Officer, Chief Accounting Officer, and Treasurer

No. It was under $5 million pretty much in line with what we had put into our guidance. And that is similar as I mentioned in the -- for the fourth quarter guide don't have any material amount expected as well. Just as a reminder too when you look at our performance in Q3 sequentially Q2 did have a little over $10 million of strike-related activity but the third quarter was modest as was the prior year and the third quarter.

Jason Plagman -- Jefferies -- Analyst

Okay, thanks. That's it for me.

Operator

Thanks a team. And we'll go next to Bill Sutherland with The Benchmark Company. please go ahead.

Bill Sutherland -- The Benchmark Company -- Analyst

I was curious about this education business and the momentum there. And if you could just speak to kind of how sustainable that looks like for the -- as you go into 2020.

Ralph Henderson -- President of Professional Services and Staffing

Yes. This is Ralph. The schools business was one of the more attractive reasons why we wanted to get into Advanced. And part of our overall strategy has been -- and as a company has been to go into new settings where we see growth opportunities. Wherever healthcare goes we want to be there and so as you've seen in the past with our introduction of Home Health and some other things we've done. And we continue to do that I think not just by the line of business but also the setting -- on a setting basis. The Advanced Medical by the way got to call out their quarter. They had a great quarter and they were big contributors to our Q3 success. On a pro forma basis they were up about 15% year-over-year. And we expect them to come in there or stronger in the fourth quarter driven by both their performance and our MSPs but also the schools business. The schools business is a very fragmented market.

Market estimates are around $1 billion. We've seen bigger ones than that. And the largest players there's a couple that are kind of in the $100 million range. And we're probably in the top 3 to 5 players right now but we would anticipate even going further up that list very quickly. The team has performed very well. So -- that assignment length is very long which is also favorable. It makes it a little more predictable because it's 9 months assignment. So you get a little -- it helps us out when we're usually a little bit softer in the summer. It does get soft though so that we'll have that -- I think everybody's used to that cadence as that happens. But overall we're winning new contracts there. We are moving some of the recruiters off the skilled nursing business into the school setting so that we can take advantage of that even more.

Bill Sutherland -- The Benchmark Company -- Analyst

So when you think about the growth of that group Ralph it kind of gets set up at the beginning of the school year in a sense. And I mean not completely but the parameters. So you kind of have this as a trend line and then you see where you stand with new wins and so forth next year for the next school year?

Ralph Henderson -- President of Professional Services and Staffing

Although we do continue to fill some jobs throughout the year there are some schools that I think will have a regular leave or something like that. So we still will fill some jobs. But yes you're right it's pretty much -- it gets baked out in advance of the school year.

Brian Scott -- Chief Financial Officer, Chief Accounting Officer, and Treasurer

Bill many of those clients they use -- once we have that contract in place and we have therapists working at the school the majority of them end up using us for multiple years. So the nice thing is even if it's -- not only is it that long 9-month assignment the large majority end up having needs each year so we can continue to build on those relationships and add more as we look forward.

Bill Sutherland -- The Benchmark Company -- Analyst

And then just remind us kind of the scale of that business currently for you guys.

Brian Scott -- Chief Financial Officer, Chief Accounting Officer, and Treasurer

So the run rate -- again because it's a school it's a little bit -- it's hard to use a calendar year but the run rate run up from the fourth -- as you look at the fourth quarter forward it's north of $40 million of revenue. Now it will again it will -- it's highest at the -- for the Q4 and Q1 and then you get that a little bit lower. But we're in the $40 million to $50 million on an annualized basis right now.

Bill Sutherland -- The Benchmark Company -- Analyst

Okay, thanks. Sorry about that.

Brian Scott -- Chief Financial Officer, Chief Accounting Officer, and Treasurer

Thank you.

Operator

And we'll go next to Mitra Ramgopal with Sidoti & Company. please go ahead.

Mitra Ramgopal -- Sidoti and Company -- Analyst

Yes. Hi. Yeah. Good afternoon. Thanks for taking the questions. Just wanted to get a sense in terms of your MSP pipeline as you look out to 2020 and also any potential in terms of the overall fill rate improving. I think it's running right now blended around 55% to 65%. And your thoughts on maybe getting that up even higher as you look out over the next 12 months.

Dan White -- President of Strategic Workforce Solutions

Thanks Mitra. This is Dan. I think I'll start with that and see if anyone else wants to add some color. So as Susan mentioned in her opening remarks we're nearing the end of the year at this point and have really good visibility into our full year MSP sales. And I'm really happy to say that 2019 will be our best MSP sales year ever which is absolutely the right way to put an exclamation point on a decade for sure. The nice part about that is the contracts represent diverse settings excellent geographic and specialty mix. It provides a lot of opportunity for our healthcare professionals so sort of balancing a lot of things there. And then for a little bit of color the -- these deals for this year averaged about 3.5 service lines overall and that's really helped increase our average deal size quite well year-over-year.

So that's a really nice trend as well. Our pipeline is strong. We're still seeing interest from first-time buyers which for me is always a good indicator of overall market opportunity. It's probably also a good thing to just give some color around -- today we manage $2.6 billion in contingent labor spend for our Managed Service clients. The ramp remaining to be implemented and materialized from these wins is over $250 million that will probably realize over the next 18 to 24 months. And again as kind of a reminder our Managed Service Programs range from just simply providing some technology that allows companies to manage their contingent labor on their own all the way to fully outsourced programs that we manage and drive the business outcomes on behalf of our clients.

That's one of the reasons why I wanted to add color back to Mark around how we use different pieces of the puzzle to really solve the workforce optimization equation. That's one of the reasons why we keep using this total talent sort of category and phrase. So for us it's not just about fill rate on short-term needs. It's also about looking at how they build their flex pools how do they manage international assistance and so on. So it's really a broader equation than I think you're referring to.

Susan Salka -- President Chief Executive Officer and Director

We'll also bring in our RPO team who's had a great year as well. We kind of talked a lot about them but they've had a really nice uplift and added new clients. And that's because our clients need help in their permanent hiring. And we see that and we can come in. And when they're having challenges with both the perm -- but even as we're having challenges finding the contingent labor for them we can bring the recruitment processing outsourcing team in to help them make sure that they are getting the maximum benefit out of their perm hiring. So Ralph just maybe one more comment on fill rates?

Ralph Henderson -- President of Professional Services and Staffing

On the absolute fill rate which includes us and our subcontractors we're in the high 90s mid- to high-90s most -- on most clients. And then what you're referring to is more kind of our -- what we call internal capture which is the share of the revenue that we get. And it's running more toward the high end of the range that you gave right now with the exception of a handful -- well several new clients that we won in the last year which are still early in the ramp. So the first year we bring on a new client and we might capture 30% to 35% of that. And so some of the larger deals lately are right at that level and they're -- and trending upward. But we would anticipate that even with the supply challenges that our fill rates on our MSPs will hold up. It's the traditional clients that probably will have -- will be more difficult in getting their jobs so.

Mitra Ramgopal -- Sidoti and Company -- Analyst

Okay. No. That's great. And then just a quick question on the recruitment side. I know obviously you expanded the recruitment team with the Advanced acquisition. And I was just wondering as you look out in terms of the business you expect to bring on if you feel comfortable in terms of having enough of a team in place now that you can start leveraging that.

Ralph Henderson -- President of Professional Services and Staffing

Yes this is Ralph. I'll talk about the Nurse and Allied and -- but I think Kelly may want to talk about the resources she's adding as well. But in our -- you're right we've added about 20% to 25% incremental capacity with the Advanced team and our recruiter productivity is nowhere near all-time highs. It might even be at the 80% threshold so there's lots of upside there. We have lots of new recruiters over the hiring we've done over the last 2 years in all of those businesses. And we continue to hire. So we're opportunistic and we try to time those things out when we think we can find good talent. But -- so overall yes we haven't slowed down our investments at all in our recruiting team. Kelly?

Kelly Rakowski -- President of Leadership and Search Solutions

Yes. And I would add to that very similar trends in leadership and search. I think our integration has allowed us to both get higher productivity as well as to move people to where -- and flex to where the demand is. And so we're having a greater opportunity to shift our resources that way. I will say back to Susan's comments around our culture and our ability to attract we've also seen this past year a significant increase in retention. And that has allowed us to both increase productivity and slow down some of our hiring demand. But we are absolutely seeing people very interested in joining our mission. And so we're able to keep up pace with the demand.

Ralph Henderson -- President of Professional Services and Staffing

Okay, no, that's great. Thanks again for taking questions.

Operator

And our next question from the line of Alex Maroccia with Berenberg Capital Markets. your line is open.

Alex Maroccia -- Berenberg Capital Markets -- Analyst

There you Good afternoon. Thanks for taking the question. How much higher do you think you can get that 50% number for MSPs? And do you think future expansion there would primarily come from new or existing clients?

Susan Salka -- President Chief Executive Officer and Director

So the number will rise based on our ability to continue to penetrate our existing clients. As I think both Dan and Ralph alluded to we certainly have several clients that we brought on over the last year and more that we've signed but won't be launching until the first part of 2020 that will give us more runway to build that $1 billion sort of 50% of our revenue that you alluded to. But over time we would expect that we will win additional clients. As Dan said we see a lot of appetite out in the market. And as you see more of these systems merging and increasing their own level of complexity and sophistication they more and more want to turn to an organization that mirrors that and not just for contingent staffing but someone who can really be a holistic total talent partner for them. We're hearing that much more frequently today.

And I think it's showing up in the RFPs and in the conversations that we're having with them. And so we believe that both first-time buyers but also clients that might have had a more technology-only or sort of an early stage program in place will likely want and need to have something more holistic and with multiple solutions to help tackle their workforce challenges. So we think that's going to be something that will help give us more opportunity with more wins. We also believe that we have a lot more runway and opportunity to have more of our service lines and solutions being delivered through our existing clients.

And that doesn't have as much to do with the ramp and the new launch as it does doing a better job of understanding their strategic priorities their challenges and how we can actually better integrate and connect our own teams and our own businesses so that we can be offering them a more cohesive seamless set of solutions. That's what they want. They don't want to have to go to 10 different organizations to provide the different solutions that we can bring to the table. So the easier we can make it for them to work with one organization that's well integrated and connected internally as well as externally we think that gives us a lot of runway to increase the number of service lines that our more strategic clients are using.

Dan White -- President of Strategic Workforce Solutions

So if you'd like Alex -- this is Dan I'll just give you color around that example. So if you think about our top 40 Managed Service clients which they're going to represent the majority of that revenue that you're looking at 1/3 of them use 5 offerings at least. And I could see that becoming 1/2 of those clients using 6 or more over the next couple of years. There's that much room for us to grow without even adding new ones.

Alex Maroccia -- Berenberg Capital Markets -- Analyst

That's great color. And then on a separate note you mentioned the California fires during your prepared remarks. In terms of natural disasters what have you historically seen in terms of demand uptick in the affected areas? And then which parts of the business would see the greatest uptick in utilization?

Susan Salka -- President Chief Executive Officer and Director

Yes. So our first priority as you can imagine is supporting our clinicians and not even our clinicians all clinicians that are in the midst of that crisis as well as our clients. And that's what we're doing and our teams are there on the ground helping them. But then of course we're making sure that if they have additional staffing needs that we are quickly responding to that. And in some cases they may have nurses and we may have nurses that get disrupted while they're there. And so what do we do to support them in that situation? We've not seen a high number of new needs come through for clinicians in those territories. It's possible that could happen as things settle. But for right now there's been a few additional needs but not a lot. Likewise there's been a few disruptions. But I would say at this point the 2 appear to be somewhat balancing each other out.

Alex Maroccia -- Berenberg Capital Markets -- Analyst

Okay, great. Thanks a lot

Susan Salka -- President Chief Executive Officer and Director

Thanks, Alex.

Operator

[Operator Instructions] And we'll go to Jasper Bibb with SunTrust. Your line is open.

Jasper Bibb -- SunTrust -- Analyst

Thanks. It's actually Tobey Sommer for Jasper. Could you describe maybe how to lag this -- go around compares to where we've seen kind of resurgent demand but not the corresponding price reaction by customers in the market? Just kind of compare and contrast it to what you're used to. I want to try to figure out whether this is a normal duration or it's taking longer.

Susan Salka -- President Chief Executive Officer and Director

Sure Tobey. And it sounds like you've got some great trick or treaters there in the background glad that they could join us. We'll get you out with them so you can get their loots here shortly. We have -- I'm not sure we've ever had what I would call a normal cycle. And you've been there with us through most of the cycles that we've seen in terms of upticks and the declines in demand. It's taking a little longer this time for us to see the corresponding supply come back into the market. And I think there's 2 reasons for it. One is that we saw very high -- higher bill rates premium rates being used as demand rose the last time in that sort of 2016 time frame.

And then we saw premium rates come down. And because of that pay rates came down and less assignments being offered at those higher pay rates with bonuses. And as pay rates came down in Travel Nursing on an average basis the actual rates of nurses went up in permanent positions. Depending upon which survey you read it might be sort of 6% to 8% over a three-year period. And so I think nurses are looking at that going well. I've seen rising wages in the permanent environment but not necessarily rising wages yet in travel positions. So I -- until we start to see that opportunity for higher compensation packages I think our supply will be a bit constrained. Now there's lots of other things that we can do and are doing to work with clients to make sure their assignments are as attractive as possible things like standardizing credential making sure we're interviewing quickly.

And we are seeing some movement within pricing that can then translate through to compensation. But until we start to see a little more movement I think that growth will be a little bit limited. How long? It's really hard to say. I mean I'd say it's been maybe 2 or 3 months longer than I would have expected at this point. But we are starting to see some early signs both in bill rates changing conversations with clients about what their ongoing needs are going to be and then as we mentioned the rise in rapid response assignments. So hopefully that's helpful.

Operator

We have no additional questions at this time. So please continue.

Susan Salka -- President Chief Executive Officer and Director

Well thank you again everyone for joining us especially on Halloween. We hope you have a great and safe evening. And we look forward to updating you on our progress next quarter.

Operator

[Operator Closing Remarks]

Duration: 54 minutes

Call participants:

Randle G. Reece -- Director of Investor Relations

Susan Salka -- President Chief Executive Officer and Director

Brian Scott -- Chief Financial Officer, Chief Accounting Officer, and Treasurer

Ralph Henderson -- President of Professional Services and Staffing

Dan White -- President of Strategic Workforce Solutions

Kelly Rakowski -- President of Leadership and Search Solutions

Jeff Silber -- BMO Capital Markets -- Analyst

Tobey Sommer -- SunTrust -- Analyst

A. J. Rice -- Credit Suisse -- Analyst

Mark Marcon -- Baird -- Analyst

Jason Plagman -- Jefferies -- Analyst

Bill Sutherland -- The Benchmark Company -- Analyst

Mitra Ramgopal -- Sidoti and Company -- Analyst

Alex Maroccia -- Berenberg Capital Markets -- Analyst

Jasper Bibb -- SunTrust -- Analyst

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