AMN Healthcare Services, Inc. (NYSE:AHS)
Bank of America Merrill Lynch 2013 Healthcare Conference
May 16, 2013 2:20 PM ET
Susan R. Salka – President and CEO
Amy C. Chang – Vice President, Investor Relations
Brian M. Scott – Chief Financial Officer, Chief Accounting Officer and Treasurer
Good morning. With us today is AMN Healthcare Services who provides healthcare workforce solutions and staffing services to healthcare facilities in the United States. Presenting is Susan Salka, the CEO; also with us from the company are Brian Scott, CFO and Amy Chang from Investor Relations.
So, with that I will turn it over to the company.
Thank you so much, Steven. Thank you to Bank of America for having us here, we always appreciate being invited and the opportunity to meet with new and existing investors. So, for those of you not as familiar with AMN, first of all we need our presentation I think, we could get that up, we’re going to have our forward-looking statements, you can read through those, obviously, our crystal ball is not perfect. So, we will be talking about the future, but we have no way of knowing for certain what is going to exist for us out in the economy and within healthcare.
But, we’ve an idea of what our strategy should be to make sure that we’re delivering a value added, very relevant solution and to be a strong partner with our client. So, for those of you little bit new to AMN, we’re the largest healthcare staffing company in the United States, but also known more recently as the innovator in healthcare workforce solutions. And what this means is we help hospitals and other kinds of healthcare providers to establish the right mix between their permanent and temporary staff.
We help them with contingent labor on a daily, weekly, monthly, annual basis; we also help them with their permanent hiring in the physician business in particular with the largest permanent placement company that helps with physician placement. And as I mentioned, our strategic workforce solutions which are becoming more and more important, about 30% of our revenue today flows through our managed services, contracts and clients and we see that continuing to grow as we move forward.
As the leader in our industry, we’re also looked to as the thought leader and really sought after for our expertise in helping to address challenges in the workforce not only today but even more so as we move forward and certainly is going to be more challenging for our clients in the future state of healthcare.
Our mission is to really help our clients to balance that ability to ensure they have quality labor when and where they are needed most, but to do it in a way that preserves and enhances the quality of patient care while doing it in a very cost effective way.
If you look at our financials and how our strategy is played out over the last few years, in particular, we have been leading the industry and our growth, in fact, if you look out over just the last year and we will talk more about the first quarter, we grew 11% year-over-year in the first quarter. And importantly, we continue to improve our profitability, it’s something we’re very focused on, our target is to achieve at least a 10% EBITDA margin in the future and we have been making incremental move towards that year-after-year.
Looking at the first quarter in particular, it was a great quarter for us; I mentioned that 11% year-over-year revenue growth, we also grew our EBITDA by 21% and all of our businesses contributed to this growth. Over 2012, a lot of our growth was driven by the travel nurse business and still in the first quarter travel and nursing grew very nicely about 20% top line growth. But, we’re starting to see all of our businesses pickup with our Locums business growing both sequentially and year-over-year and our physician perm placement business also growing.
As I mentioned we had growth in EBITDA, but also growth in gross profit and our gross margin which has been very strong and stable. We’ve a very strong pipeline of new MSP opportunities, this is really a reflection of where the industry is and the desire by our clients to have more sophisticated solutions and how they deal with their supplemental and contingent staffing and that’s very good for us, because we’re at the forefront of delivering those types of innovative workforce solutions. Because of the growth that we’re seeing and even more so the growth that we expect over the coming years, we’re making some important strategic investments to ensure that we’re able to continue to recruit new supply of clinicians in a growing demand environment.
If you look at the competitor landscape I mentioned that we’re the largest and I often tell our team bigger is not better unless we actually deliver something different and better to our clients and we believe we’re doing that in today’s environment. But, what strikes me as interesting is I have been with this business for over 23 years and the competitive landscape is really changing and it’s actually becoming a more co-dependent competitive landscape and what I mean by that is, you now have more of the larger players who offer both healthcare staffing but also offer workforce solutions and then you have some of the smaller second tier, mid tier players that are more in the fulfillment stage, they’re providing maybe just travel nurses or just physicians or maybe they have a combination of the two. But, they’re actually subcontractors of ours in many cases to help us to fill some of the larger MSP contracts and we’ll talk more about the going forward.
Now, taking a little bit closer look at each of our businesses, nursing and allied staffing is our largest business segment, about 60% of our overall revenue and it has been the fastest growing area of our business as well both top line and certainly very strong from a contribution margin standpoint. We have multiple brands that we use to recruit different kinds of healthcare professionals, travel nurses, local per diem nurses. We also offer allied staffing which is really anything that’s not a nurse or physician, so therapy, rehab therapist and also imaging, radiology and lab assistants and then we also place and contract pharmacist and pharmacy techs.
We use our different brands as a way to really differentiate ourselves and appeal to the different types of clinical disciplines that are out in the market. This has been very successful for us and really making sure that we’re capturing the most supply and really appealing to the different motivators of the different kinds of clinicians that are out in the marketplace.
Our Locum Tenens business which is our second largest business is the placement of physicians on temporary contract and will place the physician anywhere from a weekend coverage up to maybe a one year contract. The average is really more around 6 to 8 weeks in duration, we place physicians in all kinds of specialties, family practice and advanced practice are one of our largest specialty areas. But also emergency medicine is growing, behavioral health, we place surgeons, radiologist and anesthesiologist and this segment as a part of the industry is expected to continue to grow, in particular being driven by healthcare reform, we will talk more about that in a few minutes.
But, it’s seen nice growth, you might look back to last couple of years and if you did your homework you would notice that we actually didn’t grow as well as the overall market and that was because we had a mix of business that was not favorable to us, we were overweighed in radiology and anesthesiology which were two specialties which actually declined over the last three to four years. But today, we feel we have a healthier mix of business, we reallocate our resources and are more focused on those growth opportunity areas and in fact, I mentioned in the first quarter we saw this business grow both year-over-year and sequentially which is the first time almost two years that we’ve seen that occur.
We brought in new leadership last year to deal with some execution issues and they really are doing an outstanding job of getting this business on the right track and we expect to see continued growth top line, but also in our gross margin and in our EBITDA margin, probably one of our greatest opportunity for margin expansion that actually exist within our Locums business.
Our physician permanent placement business is our smallest in terms of revenue, it’s about 4% of revenue, but as you will see very profitable about 20% EBITDA contribution margin. And this is the retain search business for physicians, but we also have a small contingency search placement business known Kendall & Davis. Our Merritt Hawkins brand is really the flagship brand and saw after the expert in-physician recruitment and placement, kind of like the corned berry of physician placement has been in business over 25 years and it really is a great way for us to get closer to the sweet decision makers for their desire to increase their physician reach and capacity. This business has been growing nicely, grew about 10% top line year-over-year and we expect to continue to see good growth in this business going forward.
Why do we see in this growth and why more so that we expect to see growth going forward, our health employment is expected to be one of the, if not the fastest growing area of job growth expected to grow almost twice as fast as non-healthcare job and the greatest growth is expected to be in the nursing field, advanced practice, physical therapist, physicians, surgeons, all the areas that we place. At the same time we unfortunately have a shortage of these types of clinicians as we move forward, a lot it’s due to the aging clinician and physician population and the fact that we don’t have enough residency slots or school slots to educate new nurses and physicians to make up for the fall-off of retiring clinicians in the future.
You couple that with the demand growth and we could see some of the greatest shortages that this country is seeing in terms of physicians and nurses over the next couple of decades. Shortages are generally very good for our business because they drive openings, they drive demand and it might be counter intuitive but they also drive supply into the temporary industry. And so, we expect to see good growth opportunities over the next decade.
Another factor driving that growth opportunity is healthcare reform, we often ask how will healthcare reform affect your business and we think it will be a net positive in particular on the physician side of the business where you will have 30 million patients now having insurance and they’re going to have access to that early diagnostic preventative care that they didn’t before. So, it’s expected to drive demand for at least 30,000 more primary care physicians which is an issue because there is already shortage of primary care physician.
So, haven’t quite seen that impact yet, but starting 2014 we are expected to see an increase demand for primary care, advance practice and even many of the other specialties that maybe warned access before by that new insured population. But, one impact we’re seeing already that I think has been driven by healthcare reform is the fact that our clients primarily hospitals are trying to focus more on our cost structure and make sure that they’re really making the most out of every dollar and labor cost are half of a hospitals budget and half of that is nursing and so it’s a big target for them to focus and this has driven a lot of appetite and momentum for our managed services program offering where we can really help our facility to get the arms around their overall spend.
It also helps ensure that they are maintaining access to clinical labor and they’re able to continue to deliver quality care. If you think about the workforce solutions and MSP and RPO which is recruitment process outsourcing is expected to grow in penetration, we have seen a nice growth about 27% growth for us from 2011 to 2012. But, if you look at the utilization within the healthcare community, one of the surveys recently done about a year ago by the staffing industry analyst suggest that only 10% of large hospitals at that time were actually using an MSP and that was expected to go to 40% over the next couple of years. I have actually surveys since then and suggest that the starting point is little higher, but the growth is expected to potentially double over the next coming years.
Again, that’s good for us because we are the leading provider of these kinds in MSP contract. Recruitment process outsourcing is where we come into a facility or a healthcare organization and help them with their permanent. We know that is and will be the largest focus for them and so we want to help them to recruit permanent staff more efficiently, more effectively and that’s going to be a greater issue for them when the shortages start to kick in over the coming years. Very few healthcare systems have RPOs in place today, we’re one of the top providers that we know it’s a fairly small penetration and yet that’s expected to go to potentially 20% penetration within the next couple of years.
And so, we really do believe and we’re hearing from our clients that we have the right kinds of offering to help them think about having managed their workforce more efficiently going forward. We have to get ask why a hospital system turns to an MSP. I mentioned some of the factors a couple of minutes ago, the number one being just having access to quality clinicians when they need them most. In a more traditional client situation they might be working with 30, 40, 50 different kinds of agencies like AMN to fill their nursing, allied or physician needs.
And so, it’s very inefficient, decentralized for them, they have multiple points of contact, multiple contracts and they have no one organization to hold accountable to make sure that they actually get their needs met when they need someone. And so, an MSP enables them to work with one primary organization AMN and they sign one contract with us, they can streamline their communication and their contracting through one organization and they have one company to hold accountable to meet their overall fill rate and typically they want to know that they’re going to get 95% of their needs met.
And so, this really helps them to ensure that they have access to that quality clinician when they need them most, but that they’re able to control their costs. In a typical MSP they’re trying to reduce their aggregate spend and we understand and so we can help them to analyze how, when and where their spending their supplemental staffing dollar and they get their arms around, now we do this through technology, through quarterly business meeting and we can show them how they could be more efficient, how they could plan better and maybe reduce their overall spend by 10% to 15%. We get a bigger piece of the pie because we may have only been doing 25% or 30% of the business with that client previously, now we can take that up to maybe 80% of a smaller pie. So, really is a win-win situation for the client ensuring access to staff and control of their cost and for us we’re able to be a more strategic partner for them and it helps us to have a shot at filling more of their orders directly ourselves and in this way it’s actually very good for us to grow faster than the market during times of an upturn, but also protects us a bit if orders were to soften.
Now to be successful we need to have affiliate vendors or essentially subcontractors and competitors that will work with us to meet that overall fill rate and so we have a network of hundreds of affiliate vendors that we contract with and we share orders with. So that they can have access to those clients and in this way as I mentioned earlier, it actually become in some way a familiar, more co-dependent type of relationship between the large players in our industry and the smaller companies who are excellent at filling some of those highly specialized specific needs.
As we think about the clientele I mentioned that we (Audio gap) our access to clinicians and so we have been investing in really a routine out and improving our digital presence both on the internet but also in mobile media making sure that our job as we receive them are made available online kind of real time. And so, we embarked upon this digital transformation as we call it at the beginning of 2012 or about half way through it and we’re already seeing some benefit, I think going forward this will become more of a ticket to play and that you have to have a strong online presence in particularly with social media and so we think that we’re ahead of the packing for those that aren’t able to make these investments right now, unfortunately its likely to hurt them as the market really starts to gain momentum in the coming years.
We’re also making investments in our back office system to create more efficiency and make sure that we can really capture the SG&A savings as we get top line growth. A little closer look at our first quarter results, I mentioned the 11% growth year-over-year, 21% EBITDA growth year-over-year sequential growth as well. Because of our strong performance over the last couple of years in particular, we have been able to reduce our debt and today our added debt to EBITDA ratio of about 2.3 and continuing to pay that down as we go forward.
And our first use of cash is really to invest in the business and second to pay down the debt. We always look at what might be available for acquisition, but quite honestly it’s not something that we’re really focused on right now, we think, we have great opportunity to grow and build the business by investing from within.
We recently gave our guidance for the second quarter which is the year-over-year growth of 6% to 8%. Again, we think a very strong reflection of our strength within the industry itself and our leadership position, and with that I’m going to cut it short and open up the room to questions.
Okay, if you have question we will bring microphone around you, if not I can kick it off. So, as you think about how your relation your healthcare reform, can you talk about which of your businesses you feel like maybe have the most leverage to that and then if you can, as you have been able to kind of quantify how much of an increasing utilization you think you might?
Specific to healthcare reform I think one of the places we will see it first is in the physician business, I mentioned primary care, advanced practice and that’s because of that access to insurance and access to primary care physician that didn’t exist for those 30 million plus patients. We haven’t quite honestly seen that yet, but I think we will start to hear more about it towards the end of the year. I do think we’ve seen an indirect benefit and reaction from our hospital clients through their appetite for MSP contracts and that’s just their overall desire to get their arms around, their cost structure and labor being such a big portion of that to trying to take on more sophisticated new solutions and even though the MSP solution has been in corporate America and commercial America for years it still somewhat new to healthcare.
And then, when you talk to these clients, can you get a sense of what they expect then, you talked about controlling cost, but also getting the sense of what they expect their future needs to be?
Well, with the shortage of clinicians, it’s kind of two questions and the one, what do think their census growth is going to be and it still remains unseen, but within hospital I don’t think it’s an expectation for a lot of census growth. But, the patient mix within that is expected to be at a higher acuity level and so a lot of their increased needs are going to be in the specialty areas. They’re also going to need more physicians with the higher level of employment of physicians, hospitalist but other kinds of internal physicians as well. They’re going to need to start a staffing plan for how they backfill those physicians and that didn’t really exist five years ago when they were employing so many physicians. So, those are two areas that they’re starting to talk about, specialty nurses and then hospitalists and primary care physicians that they might need the backfill.
Okay. And then, when you think about physician practices one thing we have been hearing from other companies is that, they find your offering to be attractive, and other companies offerings be attractive is because they can help kind of take out a lot of the work around the complexity of healthcare reform that they’re not really, necessarily well equipped to deal with or don’t want to spend all their time doing, is that the same kind of thing that you’re hearing as well?
Yes. This with the general trend towards outsourcing and hospital saying, okay, we know that we’re experts in these areas, how can we find an expert partner to outsource this management of supplemental staffing. And particularly, since we have a history and a strong referenceable client base and able to show them how we can help them reduce their aggregate spend, I think, they’re more willing but also they just have to look at more outsourcing solutions. So, I think that’s going a continuing trend.
Okay. And then, you touched on a higher fill rate would obviously help improve your margins, can you help us think about how much is that maybe if you had a 1% increase in fill rate, if you have a perspective on how much that flows through?
I don’t know that we’ve given that exact kind of metric publicly, but just to put it in perspective, our fill rate in MSP contracts for nursing as example are about twice what they’re, in an MSP contract they’re twice what they are in a traditional competitive contracts. So, if we are in a traditional client setting where we are competing against 20 other agencies we might have a 30% to 40% fill rate because other companies are there filling those needs. And then MSP where we have first crack, we might be at 80% and we’re also seeing improved fill rate in the allied MSP business, it’s not quite double but it is certainly higher, Locums it’s a little early to tell because we are actually just now implementing the first six Locums MSPs of the industry and that we have and so we’re not quite sure. But, we’re pretty confident that the MSP fill rates will be higher and that’s what we do know is when you have higher fill rates it will translate into better SG&A leverage for the business.
Okay. And then, I guess another question, as you kind of highlight the shortage of doctors and nurses going on right now and how that’s positive to your business there, how does that also affect your ability to recruit and attract the individuals?
Well, it’s why we need to be investing in all of our marketing capabilities particularly the social media and digital capability and so, all of the things I talked about where we’re upgrading our websites and creating better mobile access to our jobs and job distribution we’re doing across all of our businesses because being able to reach out into the daily life of those clinicians and physicians to access them is going to be critical. If you have increased demand it does typically draw more supply into the industry. So, some of it should happen, naturally that’s been the history of this industry as demand goes up supply naturally comes into the industry. But, we want to make sure that we’re helping that to happen and that we have greater access because we’ve got these easier tools for them to use online.
And then, you noted, you guys have done a nice job of bringing your leverage down, [full] [ph] turn over the past year, where do you think about the longer term leverage target and I guess kind of couched in that question is also, if you could talk a bit more about how you think about your capital priorities base also?
That’s a great question for Brian to jump in.
Sure. As Susan mentioned earlier, our leverage ratio right now is about 2.3 times which is down from 3.2 times a year ago and over 4 times when we acquired Medfinders. I think, at the current level we’re very comfortable with, but we will continue to prioritize debt reduction outside of the investment for making in a business and so, we expect to see as the next year progresses we will go down below 2 times that I think, for the foreseeable future is where we will continue to head is below 2 times leverage.
Again, as we look at longer term if there were opportunities to do an acquisition, we would feel comfortable going back up again, but at this point we really think there is a lot of runway still with the existing businesses.
Okay. And then, one additional question here, I wanted to obviously, the effects of healthcare reform as you need to provide insurance to your full time employees and I think, and I was just wondering if you could talk a little bit about changes, maybe the dynamic of kind of the cost savings that you can bring to providers and how many of your employees you think will kind of be reflected under that?
Well, we’re actually in a very good position versus some other industry in that we already offer health insurance to our nurses, and [nursing allied] [ph] professional, so we will have to make some changes to the plans that we offer to comply with new requirements starting next year. But, we’re in a better position again than other industries where they maybe aren’t offering health insurance or anywhere near what it is going to be required next year. So, I think for our internal costs, we think it’s very manageable to be able to adjust to that environment starting next year. It is a good point as we think about how we can help our clients is they’re going to be thinking more about their on-boarding of new clinicians and thinking about more the outsourced model because they know they will be taking on more cost as well. So, those are the opportunities that we’re talking to our clients about is, that mix of temporary and permanent [after] [ph] using part time of [locums] [ph] and maybe we - they want to offload some of that to us. And again, we’re already positioned to be able to take that on.
Okay. And with that I think we are out time. So, thank you very much for joining us today.
Thanks for being here.
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