AMN Healthcare Services, Inc. (AHS) Credit Suisse 15th Annual Global Services Conference March 11, 2013 4:30 PM ET
Susan Salka - Chief Executive Officer
Unidentified Company Representative
Our next presentation is from AMN Healthcare. Presenting for us is CEO, Susan Salka. With that I’ll turn it over to Susan. Just to note that the breakout session is in the Pine Room.
Thank you so much and thank you to Credit Suisse for having us here. We are actually sure we haven’t been to this conference before, so excited to listen to some of the other presenters, but also have some great one on one meetings.
And thank you all for being here. We know you all have choices as to where you could be and what companies you could be listening to, so we really do appreciate you taking time out for us. Hope you’ll find it worthwhile. It’s a very interesting time for our industry and a particularly exciting time for AMN Healthcare.
For those of you who have followed our story, we made a pretty significant [invest] [ph] in our market palace and investing in our business through an acquisition in 2010 and it has paid off beautifully. So we’ll like to share with you kind of where we are today and where we expect to be going forward.
So just first, our forward-looking statement; you can read that on our website or in the presentation that Amy is passing out.
So a little bit more about AMN for those of you who aren’t as familiar with our story. And for many years, a decade or more AMN’s been known as the leading provider of healthcare staffing across the country. We’ve actually been in business 27 years, but really took over that number one leadership position in about 2000.
But what we’ve seen evolve over the last five to seven years is the increased demand for what’s known as workforce solutions within healthcare and this is where we become more of a strategic partner for our clients and they choose one large provider with an infrastructure and capability to outsource all of their supplemental staffing. We are going to dive into that more, because it’s becoming a bigger part of our business; a reason for our improved profitability and a reason for our improved performance relative to the market.
So when you think about AMN, think about that holistic, strategic partner for any client, particularly hospitals and healthcare providers that might need to hire clinical labor, nurses, physicians, allied professionals on an ongoing basis. We help them with their direct hire, but the bigger piece of our business is really in the temporary staffing things like travel nurses, locum tenens and a little bit of local staffing, and as I mentioned, that evolution into the more strategic offerings of workforce solutions.
We even embed this into our culture. Everything that we do is about how we can be that innovator in healthcare workforce solutions and remembering that we are there to add value by providing not only a quality clinician and quality service, but we need to do it cost effectively. And this mentality and positioning and capability has really helped move us from being sought of as that necessary evil or gee, I’d like to use less of your services, to really being more of a strategic partner that enables our clients to reach their goals of quality patient care, as well as cost reduction.
We look as how this has played out for us in the last couple of years. I mentioned that coming out of the recession we made an important strategic acquisition and acquired the largest provider of workforce solutions, Medfinders, and we’ve been able to come out of that recession then faster and stronger than anyone else in our industry.
This last year in particular we grew revenue just a little under 7.5%. Just as importantly, we were able to grow our bottom line factor at 15% and improve our EBITDA margin to 7.7%. Our longer-term goal in the next two to four years is to get our EBITDA margins back up to 10%. We think that’s very feasible based on our trajectory and the improving market conditions that we see ahead of us.
Looking at the fourth quarter specifically we reported a couple of weeks ago and had a very strong end to 2012 with fourth quarter revenues up 12% year-over-year and 2% sequentially. While not everyone in our space has reported, we are pretty sure that that will again lead the market in both top line, as well as if you look to our profitability improvement.
This has really been driven by our largest business segment of nurse and allied staffing which grew 18% year-over-year and 5% sequentially. I started to say 20%, because our nurse staffing business which is embedded in this segment actually did grow 22% year-over-year and so we are really seeing some great market dynamics and underlying trends, but we are also seeing the ability for our team to take market share and grow faster, because of our focus on these workforce solutions such as Managed Services.
We won 20 new MSP clients throughout 2012 and we are able to really capitalize on that by increasing our fill rates. At these MSP contracts our fill rates are generally twice that as at traditional competitive accounts that we serve and so it's really a great way for us to not only be able to serve those clients and control more of the demand, but also improve our efficiency by improving our productivity and fill rates internally.
Because of the growth that we are seeing today, but even more importantly going forward, we are making some increased investments in our supply acquisitions, specifically on the marketing side, by revamping all of our websites that are focused on recruitment, really creating a more interactive personal experience for candidates and any existing clinicians that are working with us, as well as creating more of a mobile presence.
More and more job searches start on a SmartPhone and so we want to make sure that we are very accessible for those clinicians that are considering making a job move. We also know that even in transacting with our clinicians that are out on assignment, there are a lot of things that they don’t want to have to do through the phone or fax or email and so enabling more of those on mobile devices will improve not only the clinician’s satisfaction, but will certainly improve our own internal efficiency as well.
As we look at the competitive landscape, we’ve really seen quite a change over the last five years. I’ve actually been with AMN and the industry for 23 years and in the first 15 years or so it was really more of a traditional competitive environment where we were competing head to head for the same clients, for the same clinicians, offering roughly the same services.
And there is still a fair amount of that business today that we call that traditional competitive business, but more and more you are seeing the larger providers, AMN in particular are really leading the way and providing more of these workforce solutions, and that’s created a different dynamic on the competitive landscape.
You have the pure staffing companies that do nothing, but that daily and weekly or monthly staffing and then you have those that do staffing plus offer workforce solutions and we are finding those that have workforce solutions capabilities are able to take on more market share, win more of the particular bigger systems and bigger facilities, and its really been driven by the desire for those clients to become more sophisticated in the way that they approach their labor challenges.
So in some ways I actually consider the competitive landscape to be more co-dependent today, because we need those smaller players in order to help us meet our commitments and fill rates on our MSP contract.
When we sign an MSP contract, we’ll commit to fill 90% to 95% of their staffing needs. We can’t necessarily do that by ourselves, even as big as we are, and so we need the sub-contractors to work alongside with us. It benefits them, because they have access to these contracts that they wouldn’t otherwise have. They also don’t need to have quite the same sales force and operations in order to actually transact and fill those clients. So it’s been definitely a changing landscape.
So a little bit deeper dive into our three reporting segments. Our largest is nurse and allied, about 70% of our reported revenue, and for us that’s great, because it's also the fastest growing right now. I mentioned travel nursing in particular being in the 20%-plus year-over-year growth grange; now that’s us. The market is growing in probably more the 15% to 20% range, but as I mentioned, we’ve been able to grow faster because of our strength in MSP.
We have multiple brands that we use within nurse and allied to focus on different demographics. You have different types of nurses that want different things and different regions that they’ll travel. They might be a young career builder that wants to work at multiple facilities to build their skills and their resume, and they might be attracted to our American Mobile Healthcare brand.
At the other end of the spectrum you might have the empty nester who has been at the same hospital for 20 years. They finally have some flexibility in their life and they want to travel and see a bit more of the country. Maybe even want to get near a grandchild, and so NursesRx might be a more interesting brand that markets more specially towards that demographic.
We also have different brands for our allied division; Med Travelers and Club Staffing focused on the rehab therapy and the imaging radiology and lab types of clinicians. They generally like to work with a brand that’s specific to allied or specific to their modality and not necessarily be mixed in with the nurse recruitment brand.
So we try to use these different brands to differentiate ourselves relative to the type of clinician we are recruiting, but also relative to the type of demographic and what that particular type of clinician might be seeking to achieve in their life. We believe this helps us to capture more of the supply that’s out in the market by having different brands and different recruiters really focused in and become the expert on their particular type of clinician and that particular type of demographic.
You will see that this business grew nicely in 2012 and again improved profitability on the bottom line. We have arguably the best profitability across our industry, both on a consolidated level, but its really driven largely by this segment where we’ve seen very nice improvement over time. Again, it’s a largely related to our continued growth in the MSP contract, which tend to allow us to get better leverage and efficiency within our operating model.
Our second largest segment is Locum Tenens. This is the placement of physicians on contract, either weekly or monthly types of contacts. Our client facilities range from hospitals to physicians offices, to the VA Medical Centers, and it's all types of physicians and advanced practice professionals; primary care doctors, behavioral health, radiology, anesthesiology, surgery, nurse practitioners, physician’s assistance and even dentist and we’ve seen this market grow.
But unfortunately we have under performed the market in the last couple of years. Our revenue has not grown because of two factors; one is our business mix. The fact that we were over weighted in certain specialties such as radiology, which had been declining as a part of the market for the last couple of years, as well as anesthesiology.
Well, also we admittedly had some of our own execution issues and so we changed out the leadership in this segment about a year ago. We’ve seen nice improvement. We’ve made some structural changes in the business realigning our teams, realigning incentives, and the good news is we’ve seen that improvement in profitability, stabilization in the top line and in the first quarter.
In fact we recently gave guidance that we expect to be up, both sequentially and year-over-year, ever so slightly, but sill directionally up and we think that’s a good inflection point and a good sign that the changes that we put in place are having their desired effects.
Our smallest segment, but our most profitable in terms of EBITDA margin is our physician search business, and this is where we do retained searches for the physician industry. In fact we’re by far the largest within physician retained search. So just think of us as the Korn/Ferry of physician search.
We also have our contingency placement firm called Kendall & Davis, very small, but for those clients that prefer the contingency option, we have that to offer. It’s really a marquee brand for us, very well respected. They do a lot of research in physician recruitment, salary surveys, really look to as being the thought leader, not just within the recruitment industry, but just within physician trends themselves, who partner a lot with the other types of organizations like the physicians foundation to do annual research, and we think that this just adds further to our credibility and therefore our ability to be that more strategic partner with our clients.
When you look at the financials on this business, it may appear as though the revenue was kind of sideways in 2012. Actually that was more due to an accounting change in 2011 with deferred revenue, and so actually if you look at the underlying business, our revenue and profitability absolutely did grow in 2012, if you take away the impact of those accounting changes. And in fact in the fourth quarter the revenue was up about 9% year-over-year.
So what drives our business longer-term? There are really three key factors and then all of that has to be driven by great strategy and execution. The three macro factors are the economy itself, what’s happening in the growth of GDP. Hospital census, a little bit of an impact but actually hasn’t been the greatest driver. And then certainly unemployment, and where we are seeing employment growth.
As we look forward, healthcare is expected to have some of the strongest increases in demand that we have ever seen, and this is really being driven by an aging population, driving more demand for healthcare services. If you are a 65 or older you’re using three times more healthcare services than your younger counter part. At the same time our clinicians are aging, and so you don’t have the same growth in the physician and nursing and allied profession. All of this is expected to drive significant shortages across the healthcare disciplines.
Some of the greatest growth areas are going to be in physical therapist, physician’s assistance, as well as nurse practitioners, registered nurses, pharmacist and primary care physicians. Again, all areas that we serve and whenever there’s an increased shortage, it certainly drives greater demand and greater margin opportunity quite honestly for our services.
You layer on top of these macro factors, the impact of healthcare reform and it really just adds a little more fuel to the fire for us. With healthcare reform bringing in $30 million plus previously uninsured, they are going to now have access to preventative and early diagnostic care, driving demand for primary care physicians. That’s going to be good for us, because that’s one of our largest specialties in our physicians staffing businesses.
It also though drives healthcare providers, hospitals in particular, but really all kinds of providers to think about how they can really approach their labor acquisition and management in a more sophisticated way, and its one of the reason we’ve seen a lot of growth and momentum in the demand for managed services programs and any kind of work force solutions.
Half of a hospital’s budget is labor and half of that is nursing. So it’s a big target for them to focus on. At the same time healthcare reform and reimbursement changes bring about an increased focus on quality; quality of care, patient outcome, not returning to the hospital and all of that bodes very well for us, because our solutions, particularly in the world of workforce solutions is really centered around how do we help you maintain or ideally improve that quality of care, by ensuring you have the right clinician at the right time.
Being understaffed has a very detrimental effect on patient outcome. So you want to be properly staffed, but you want to use the right clinician at the right time from a cost perspective and so we can really come in and help a hospital do a better job planning for their staffing, as well as making those daily decisions about where and when they add staff.
They know that its going to be more challenging going forward with the labor shortages, and so they know that they need to partner with a firm that has not only that outsourcing capability, but has the fundamental staffing capability to have access to a nationwide network of clinicians.
So when we think about our business, you can think of it in kind of two ways. One is, we certainly want to have more recurring revenue from our clients to build our business. If we just placed every clinician once, we would be about a quarter of the size that we are. We really build our business by recruiting clinicians, placing them on assignment and then rebooking them and placing them on repeat assignments. We also grow it through word of mouth, so we have to do a great job of serving those clinicians while they are on assignment.
The more we have these managed services types of arrangement, the more long term relationship and visibility that we have in creating that recurring revenue with our clients. At the same time we know that clients may have individual projects, workforce consulting projects and planning projects, so we do a little bit of that. They are not that frequent and it’s a very small amount of revenue, pretty profitable, but it really helps us move up that strategic chain.
So for any given client, we can be that transactional staffing provider that they want, if that’s all they need for their purposes, but we can also be the more strategic partner that can help them really tackle their labor challenges in a more holistic way.
So we see the market and certainly our business as moving towards more of these outsourced solution in being that holistic provider. It’s not just us hoping and believing it’s going to happen. There are a lot of surveys and analysts reporting that the penetration of workforce solutions is really still in the early stages.
This report was put out by the SIA a little over a year ago and they did a survey of large hospitals and projected that only about 10% of them had MSP contracts and that was going to go to 40% in two years. We think that’s probably a little low on terms of the starting point, because you have to believe that the larger, more sophisticated facilities were early adopters, since it makes so much sense. But still, even if you’re at 20% and you go to 40%, it’s a great growth trajectory.
Likewise for recruitment process outsourcing, this is where we come in and help a facility with its permanent staffing. We can work alongside their permanent recruiters or in some cases actually replace them and we can be more cost effective, but also just get better results for them.
So over the last year when we look at the growth in our MSP revenues in particular, and again, this is where we really lead the market, we saw about 37% growth to $253 million of our $954 million of revenue and that, its about 39% of our nurse and allied segment, which is where its really concentrated.
We are starting to see MSP pick up in the locum segment. It’s very early on. We were the first company to sign the first MSP contracts in the locums industry last year, so we think you’ll see the same type of traction over the next five years in locum.
This picture is really maybe more of a take-away if you have the presentation. It really describes the benefits of an MSP model to our clients, to us and to the affiliate vendor. So the contractors, the subcontractors and competitors, they work alongside of us all. I’ll let you read that on your own. I think I’ve talked about most of it already.
But our clients really see a strategic value in this and so when you look at the clients that we worked with, and this creates a great reference base for us, because we’re on bidding on new MSP opportunities.
It’s very beneficial to be the leader and have over 100 MSP contracts already in place. We have three times more than the closest competitor and so this adds a lot of credibility and just a lot of transparency in the ability for potentially new MSP clients, to reach out to clients at other facilities that have been using these types of services for five or more years and be able to ask them how its going? How we’re doing? Help them save money.
So we see our reference base as not only something that we are proud of in terms of partnering with these facilities, but also just add to our strength and differentiation as we are bidding on new business.
The impact of focusing on workforce solutions is probably pretty obvious by now from the things I’ve said. It helps grow revenue faster, certainly during the upturns, but even during the downturns. I guess I’ve been in this business long enough, been through three downturns. I see great growth ahead of us for the next coming years, but at some point, somehow, somewhere we will see a downturn and we want to make sure that we are better positioned for that. So having more recurring revenues and MSP contracts really help to dampen and protect you from some of that downturn.
Having MSP contracts give the strength in gross margins, we actually charge a small fee to our affiliate vendors for subcontracting through us, so it helps augment our gross margins, which are generally about the same as our traditional accounts and in fact in our MSP contracts we have slightly better gross margins, because we get this extra little fee on top. And certainly it helps improve our EBITDA margins on the bottom, because we are able to get better leverage out of the operating model.
So because of this strength that we see in the business today, but even more so the trajectory that we believe will unfold in the next two to four years, we want to make sure that we are prepared for that kind of demand growth and so we are making investments today, to make sure that we have the fire power to attract the supply of clinicians that we could fill that increase in demand.
So we talked a lot with our investors and on our earnings call about making investments and this digital transformation, which includes that revamping of our websites, mobile technology, communication lines with our clinicians.
You know I remember when I started in this business, you would mail things out, maybe might even FedEx them, we bought our first fax machine and now a clinician barely wants to talk with you on the phone; they want to be texted, which makes sense. They are working, they are busy and they want it to be easily accessible for them, when and where they want it. And so really making sure that we’ve got the technology in place to have that kind of communication that makes this very easy to work with 24/7.
So I’ll talk a bit about our financial performance. The fourth quarter I think I gave you some of the highlights; up 12% in revenue, up 22% in EBITDA and if we look to the balance sheet it was a very strong year for us. We produced about $61 million of operating cash flow, which enabled us to pay down about $50 million in debt, really bringing our leverage down significantly you can imagine.
Both investors and our creditors like that. If fact you might have noticed that we recently filed an 8-K that we are amending our credit facility to bring our interest rate down from 5.75% to 3.75%. So going forward, starting in the second quarter, that’s going to save us about $3 million in interest payments per year. So the performance that we’ve had and the strength of our market really has benefited us in being able to not only pay down the debt, but as I said, get better terms.
At the hallmark of this business and this industry, you really kick off a lot of cash flow once the engine gets turning. I’ll look for the first quarter where we recently gave guidance as likewise positive, continued year-over-year growth in the 9% to 10% range, stable gross margin.
We are guiding EBITDA margins to be between 7.5% to 8%. Remember they were at 7.7% for last year. While we do have a target of getting back to 10% EBITDA margins in the next three to four years and we think it will take about $1.3 billion to $1.5 billion of revenue to get there.
We’ve been cautious to say this year, while we expect very good top line growth in gross margin, we are going to be making those investments I mentioned and so we don’t think it’s the year to be trying to squeeze out a lot of increased leverage, because its important for us to make the investments that we are making, to have that supply and that growth opportunity going forward and telling us that we are very fortunate to be in that position, because not everyone in our industry has had the performance that we’ve had and so we feel it’s a real window of opportunity for us, to be able to make these investments and take further market share, both short term, as well as long term.
So that’s our prepared presentation. I think we are out of time in here, but we have a breakout session in the Pine Room, correct, and would certainly love to see you all there. Thank you for coming.
[No Q&A session for this event].
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