AMN Healthcare Services' CEO Discusses Q2 2013 Results - Earnings Call Transcript

Oct.31.13 | About: AMN Healthcare (AHS)

AMN Healthcare Services, Inc. (NYSE:AHS)

Q3 2013 Earnings Conference Call

October 31, 2013 5:00 PM ET

Executives

Susan Salka - President and CEO

Brian Scott - Treasurer, Chief Accounting Officer and CFO

Ralph Henderson - President, Healthcare Staffing

Bob Livonius - President, Strategic Workforce Solutions

Amy Chang - VP, IR

Analysts

Tobey Sommer - SunTrust Robinson Humphrey

Jeffrey Silber - BMO Capital Markets

Timothy McHugh - William Blair and Company

Josh Vogel - Sidoti & Company

Mark Marcon - Robert W. Baird & Company

Vishnu Lekraj - MorningStar

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the AMN Healthcare Third Quarter 2013 Earnings Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. The instructions will be given at that time. (Operator Instructions). As a reminder, this conference is being recorded.

I will now turn the conference over to our host, Ms. Amy Chang, Vice President of Investor Relations. Please go ahead.

Amy Chang

Thank you, Laurie. Good afternoon everyone. Welcome to AMN Healthcare’s third quarter 2013 earnings call. A replay of this webcast will be available until November 15, 2013 at amnhealthcare.investorroom.com. Details for the audio replay of the conference call can be found in our earnings press release.

Regarding our policy on forward-looking statements, various remarks and characterizations we make during this call about future expectations, projections, plans, prospects, events or circumstances constitute forward-looking statements. Forward-looking statements are identified by words such as believe, anticipate, expect, intend, plan, will, should, would, project, may, variations of such words and other similar expressions. It is possible that our actual results may differ materially from those indicated by these forward-looking statements, as a result of various important factors, including those identified in our Annual Report on Form 10-K for the year ended December 31st, 2012, and our other filings with the SEC, which are publicly available.

The results reported in this call may not be indicative of results for future quarters. These statements reflect the company’s current beliefs and are based upon information currently available to it. Developments subsequent to this call may cause these statements to become outdated. The company does not intend however, to update the guidance provided today prior to its next earnings release. This call may also contain certain non-GAAP financial information. We make available additional information regarding non-GAAP financial measures in the earnings release and on the company’s website.

On the call today are Susan Salka, our President and Chief Executive Officer; as well as Brian Scott, our Chief Financial Officer. Joining us during the Q&A session will be Ralph Henderson, our President of Healthcare Staffing; and Bob Livonius, our President of Strategic Workforce Solutions.

I will now turn the call over to Susan.

Susan Salka

Thank you very much Amy. Good afternoon, Happy Halloween and welcome to AMN Healthcare’s third quarter 2013 earnings conference call. AMN’s leadership position as the innovator in healthcare workforce solutions and staffing services continues to be a differentiator for our clients. As healthcare providers navigate through a climate of weaker census and budgetary pressures, they are seeking trusted partners, who can enable them to create more flexible workforce models, that also help them achieve their patient care and financial goals.

In particular AMN’s strength in providing MSP, RPO and EMR staffing services, coupled with our scale and execution, has enabled the company to deliver strong performance. We continue to make important investments in our people, processes, technology and potential new products and services. These investments are critical to ensure that AMN evolves to meet the changing needs of our current and new clients.

Our ability and willingness to make these kinds of investments are a key reason for our number one market position, and we are committed to leading our industry in client focused innovation. More on this later, but let’s first talk about our current results.

In the third quarter, AMN consolidated revenue grew by 5%, with all business segments delivering year-over-year increases. Gross margin increased by 90 basis points over prior year to 29.4%. We continue to achieve leverage with adjusted EBITDA growing at a rate three times faster than revenue. Our adjusted EBITDA margin for the quarter was 8.4%, a 70 basis point improvement over the same quarter last year.

A key part of our strategy is to continue expanding our leadership position, by aggressively winning and implementing managed services programs. The course of relationships and the higher fill rates we achieve through MSP contracts enables us to grow faster during periods of market expansion and provide some protection during periods of demand softness.

In the third quarter, MSP contracts represented approximately 30% of our consolidated revenue. In addition, seven MSP clients went live during the third quarter, and 10 others are currently in the implementation stage. Another workforce solution we continue to make progress in is Recruitment Process Outsourcing. Our RPO program was recently recognized by HRO today, as ranked number one in their inaugural healthcare Baker's Dozen Award for outstanding quality and customer service. We anticipate ample runway for us to continue to expand in value added services, such as MSP and RPO in the coming years.

Now, let’s review the results of our three business segments. I will start first with our largest segment of Nurse and Allied Staffing, which has been the most affected by the soft consensus numbers and reimbursement changes put into place over the last year.

Despite a tepid demand environment, third quarter revenue for this segment was up 3% year-over-year and 1% sequentially. The largest contributor was the travel nurse business, where volume was up 2% year-over-year and revenue per traveler per day was up 5%. These increases were due mainly to higher EMR staffing revenue, which hit a record high in the third quarter. Overall, our traditional travel nurse clients continue to have a more cautious mindset, due to the effect of sequestration, budgetary concerns and soft hospital census.

Throughout the third quarter, travel nurse demand was at or below prior year levels. Throughout October however, orders have strengthened and have generally been above prior year levels and are up nearly 20% over the prior month.

For the fourth quarter, we expect travel nurse revenue to be down 3% to 4% year-over-year and sequentially. The year-over-year decrease is due to the relative softness in demand and the sequential decline is due to fewer EMR conversion projects, which is very typical during the holidays, and offset the growth, which was in our traditional travel nurse business.

These same demand triggers are also affecting local staffing, where third quarter revenue was down 6% compared to prior year and 3% sequentially. In addition to the lower census and cost of hiring by our clients, this business was also impacted by our closing of five lower performing branches. Fourth quarter revenues for local staffing are also expected to be down, both year-over-year and sequentially.

Now turning to Allied Staffing; third quarter Allied revenue was down 12% year-over-year and 3% sequentially, driven by the decline in therapy demand, offset by increases in the imaging lab and pharmacy specialties. To address the reimbursement challenges in therapy, our resources have been realigned and the team is focused on expanding our MSP footprint, increasing fill rates, and targeting the less impacted acute care and home health settings.

Going into the fourth quarter, Allied staffing revenue is expected to be down in the mid teens year-over-year and in the high single digit sequentially, due to the lower therapy demand and normal seasonal trends.

Overall for the Nurse and Allied Staffing segment, we expect fourth quarter revenues to be down in the mid-single digits, both year-over-year and sequentially. Despite the mixed demand trends and cautious client mindset, we believe that we will weather this temporary weakness better than most, due to our leadership position in MSP.

We now turn to the Locum Tenens segment, which has become a real bright spot, with third quarter revenue increasing 11% year-over-year and 4% sequentially. This performance represented a third consecutive quarter of both year-over-year and sequential revenue growth.

The year-over-year revenue improvement was driven mainly by a strong demand environment and solid execution, leading to growth in the hospitalists, advanced practice, primary care and behavioral health specialty.

Overall days available grew by 10% over the prior year, helping to fuel the growth. Gross margin of 29.3% was also a record high, representing an improvement of 90 basis points year-over-year and 30 basis points sequentially, due to improved pricing and bill pay spreads. These improvements enabled the division to achieve segment operating margin of 10%, a milestone for our Locum’s business.

The division’s focus over the last 18 months to realign resource, focus on pricing and gross margin and be first to market in Locum’s MSP, continues to pay off. Our MSP revenue mix in Locum’s is still in the single digits, but we expect the penetration of Locum’s MSP to increase, which is evidenced by our growing pipeline.

Going into the fourth quarter, we expect the Locum’s segment to experience strong year-over-year revenue growth in the mid-teens, but be down sequentially in the low single digits, due to the normal holiday seasonality.

Performance continues to be strong in our third segment of Physician Permanent Placement, where revenue was up 9% year-over-year and down 2% sequentially. The year-over-year growth was driven by solid performance and improved placement in our retained search business. The third quarter placements were at their highest level in the last five years.

Based on new client wins and search activity, we expect fourth quarter physician perm revenue to be up in the mid single digits year-over-year, and down slightly sequentially, which is a very typical seasonal trend.

So while we feel good about our current overall performance, our sights are set on the future, and how we will continue to create innovative workforce solutions with our client and improve our profitability through efficiency and scale.

Over the next decade, many factors will influence, how, when and where healthcare is delivered. It will be many targeted areas and experiments in new delivery models, some will work and some won’t. But the common goal is to improve the overall value equation of costs and quality of care.

A common ingredient in every care model, is efficient utilization of a quality, appropriately skilled healthcare workforce; because of these intensifying forces, healthcare executives are more open than ever to engaging with trusted partners, who can provide new solutions. AMN’s core competencies in recruitment, placement and credentialing, combined with our innovative culture and strong execution, position us very well to be that trusted partner.

Despite the softer than expected hospital admissions during 2013, the demand for healthcare services is still generally anticipated to expand in 2014, as the impact of the Affordable Care Act unfolds. To ensure we are best positioned to be the partner of choice for clients, we continue to invest in three key areas; the first is expanding our suite of workforce solutions.

The second is our leading edge recruitment technology, such as job distribution and mobile platforms, to aggressively attract more candidate supply and create a better experience, and the third is the streamlining of our systems and infrastructure for greater efficiency, scalability and agility. These investments are essential to delivering revenue growth and operating leverage, as we progress towards our long term goal of a 10% adjusted EBITDA margin.

The final key to AMN’s success in delivering shareholder value, is our very passionate and talented team. They are committed to delivering a differentiated experience to our clients and clinicians every single day. With the team’s consistent and strong execution, AMN has set itself apart as the market leader and innovator.

I will come back to you in our Q&A section along with Ralph and Bob, and for now, I will turn the call over to Brian.

Brian Scott

Thank you, Susan. Good afternoon everyone. The company’s third quarter and adjusted EBITDA were at the high end of our guidance range, with revenue at $257.1 million, up 5.4% from last year, and 1.2% from last quarter. Our gross margin for the quarter was 29.4%, up 90 basis points from last year and 10 basis points from last quarter. Our year-over-year and sequential increase was due mainly to margin improvements in both our Nurse and Allied, and Locum Tenen segments.

SG&A in the quarter totaled $55.6 million or 21.6% of revenue, compared to 21.5% to the prior year and prior quarter. The year-over-year increase in SG&A expenses was due primarily to increased employee headcount permissions and other expenses related to supporting growth in the business.

Our third quarter Nurse and Allied segment revenue increased 2.8% from the prior year and 0.5% sequentially to $171 million. Volume of 5,771 average clinicians on assignment was lower by 1.9% year-over-year and 2.6% sequentially. Revenue per day was up 4.8% year-over-year and 2% sequentially, with our average bill rate higher by 1.8% over last year.

Nurse and Allied gross margin of 27.4% was higher year-over-year by 90 basis points and sequentially by 20 basis points. The year-over-year improvement was due to lower insurance costs and a favorable business mix shift towards our higher margin service offering, such as RPO.

Third quarter Nurse and Allied operating margin of 11.9% was higher by 60 basis points year-over-year, and 10 basis points in the prior quarter, with improvement driven primarily by the higher gross margin.

Third quarter Locum Tenen segment revenue of $75.3 million was up 11.3% from prior year, and 3.5% sequentially. An increase in days sales drove the year-over-year increase, with an average bill rate increase of 3.4% year-over-year, offset by a mix shift to lower bill rate specialties. Gross margin of 29.3% was 90 basis points higher from the prior year, and 30 basis points higher sequentially, due primarily to improved bill pay spreads.

Third quarter Locum Tenen’s operating margin at 10% was higher by 70 basis points year-over-year and 320 basis points in the prior quarter. The year-over-year increase was due mainly to the gross margin improvement. The sequential increase was due to the higher gross margin and lower SG&A, as second quarter SG&A included an unfavorable $1.7 million professional liability reserve adjustment.

Our third quarter physician permanent placement segment revenue of $10.9 million was up year-over-year by 9% but down 1.9% sequentially. Gross margin of 62.6% was lower by 150 basis points from the prior year and 10 basis points from the prior quarter, from increase in recruiter headcount to drive future placement growth.

Adjusted EBITDA for the quarter was $21.5 million, representing 8.4% of revenue. This compares to $18.8 million or 7.7% of revenue in the prior year quarter. Interest expense in the quarter was $1.8 million, which compares to $3.7 million last year, and $3.1 million last quarter. Our tax rate in the quarter was 42%, and we expect our tax rate for the fourth quarter and full year 2013 to be 41%.

We reported net income of $8.6 million in the third quarter. Diluted earnings per share was $0.18 for the third quarter, which compares to $0.12 in the prior year quarter. Operating cash flow for the quarter was $26.6 million. The strong cash flow was driven in part by improved receivable collections, along with higher accrued compensation of other payables to the timing of our quarter close date, relative to our normal payment cycles. Days sales outstanding were 52 days compared to 54 days last quarter and last year. Capital expenditures for the third quarter were $1.1 million.

As of September 30, our cash and equivalents totaled $31.7 million and our total debt outstanding was $149 million. Our quarter and leverage ratio as calculated per our credit agreement was 1.9 times as compared to 2.6 times last year.

Now let’s turn to our guidance for the fourth quarter; the company expects the typical fourth quarter seasonal decline, combined with a moderate demand environment in Nurse and Allied Staffing, to result in consolidated revenue between $246 million and $250 million. Gross margin is expected to be 29% to 29.5%. SG&A expenses as a percentage of revenue are expected to be approximately 22%. Adjusted EBITDA margin is expected to be approximately 8%. Fourth quarter interest expense will be $1.8 million, and capital expenditures are projected to be $4 million. Diluted share count is expected to be $47.8 million for the fourth quarter and the full year.

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

Question-and-Answer Session

Operator

(Operator Instructions). And our first question is from the line of Tobey Sommer with SunTrust. Please go ahead.

Tobey Sommer - SunTrust Robinson Humphrey

Thank you. Susan, I had a question for you. It seems like we are hearing hospitals are a little bit more better able, I should say, to trim staff, if required by circumstances; and I am wondering if you had examples of a hospital that may have good admissions trends? Are they equally quick to add staff and boost demand for your services, in the event that that situation arises?

Susan Salka

Hi Tobey. I don’t know that we want to call out a particular client situation, but definitely a trend, and it’s a small one, but one that we are seeing as clients moving towards – or at least, voicing the desire to move towards lower core staffing levels, so that they can create a more flexible workforce for the future. But because of that, they need to make sure, that they have a reliable partner or way to add that staff very quickly. It’s one of the things that makes them hesitant to reduce their core staffing levels from say 90% to 80% or 70%, as they know they will need those people at some point, so how quickly can they move towards adding them on.

And so, we think that has been a driver of the demand for our workforce solutions and MSP contracts, because they want to make sure that not if, but when they need those people, they have got a partner to turn to, as instant access to temporary staff.

So again, I don’t know that I can – I apologize I am not answering specifically about a client, but definitely hearing more clients talk about that desire to have more flexibility in their workforce.

Tobey Sommer - SunTrust Robinson Humphrey

Okay. And just in terms of the factors influencing your fourth quarter revenue, if you were to parse out the typical sequential decline relating to seasonality versus the changes you have seen in market demand? How do you characterize those?

Susan Salka

Sure. There is actually some good news in this story, because our Locums division, for example, which seasonally always sees a fourth quarter drop-off, and it is expected to again this fourth quarter, it has seen a much smaller drop-off, and I think it’s driven by the momentum that they have and the excellent performance that they are delivering. So historically, we might have expected to see more of the 7% to 9% sequential decline in Locums, and as we mentioned in our guidance commentary, we are looking at low single digits, and I think that has more to do with their great performance and the strength of the market, than any seasonal changes that are occurring.

Physician perm placement is a modest decline, as it typically is. Again, they have had some nice strong year-over-year growth, so I think they are just moving through that seasonality a little more modestly than usually.

And in nursing, we are actually seeing a sequential uptick in our traditional travel nurse volume from the third to the fourth quarter, and that is a little more than we would typically see, and it speaks to the trend in how our orders declined, and the end of the second quarter, early third quarter, and then as I mentioned, has strengthened more from September to October. And so as we look at our volumes, they have also strengthened, which actually October being the biggest gap year-over-year, and that narrowing to where in December, we are currently projecting to be basically flat, year-over-year.

EMR was the other factor, we had an exceptionally strong third quarter for EMR. That team has just done a really outstanding job, it was a record quarter for us. The fourth quarter is a very strong respectable quarter as well that is above prior year, but because third quarter was so exceptionally strong and you get the normal seasonal fall-off in the fourth quarter, that will be coming down. So I might have been more detailed than you are asking for, but there is a lot of moving parts in that.

Tobey Sommer - SunTrust Robinson Humphrey

Thank you very much. I will get back in the queue.

Susan Salka

Thanks Tobey.

Operator

And our next question is from the line of Jeff Silber with BMO Capital Markets. Please go ahead.

Jeffrey Silber - BMO Capital Markets

Thanks so much. Susan, in your prepared remarks, when you were talking about some of the trends in the Nurse and Allied business, you talked about a temporary weakness, and I am just wondering, what gives you the confidence, that this is only temporary?

Susan Salka

Well some of it is because of what we have seen in the demand itself, mentioning that orders started to increase. Actually, going back to even July and August, we mentioned on our second quarter call, that we were beginning to see our seasonal orders, and that was a good sign, and that trend continued, and in fact from September to October, our orders increased almost 20%. So there has been enough weeks that we would say that it’s more than just a blip, but it is probably more of an ongoing trend.

Now I am not suggesting it’s a significant new trajectory, but it’s a positive sign that we have come out of that trough and are moving back to what would be more of a normal trend. I’ll also ask Ralph to jump in, if there is anything he’d like to add regarding the nature of the demand.

Ralph Henderson

I think a couple of things that are encouraging. First, we know bookings did bottom out in May, or kind of June, and then we have seen an upward trend since then, as the order counts came back up, and we did see the slight increase on orders overall, Q3 versus Q2. And the trend that Susan already talked about, which is October being up 20% and slightly above prior year, and that’s translating into this December lift in our travel nurse business, to get back to kind of year-over-year or at least flat to prior year growth, by the end of the quarter.

Additionally, conversations with our clients have been that – the reductions that they put in place have begun to take a toll, their overtime cut and their burn-up factor to go up, and so those conversations tend to lead to higher order counts very shortly thereafter.

Jeffrey Silber - BMO Capital Markets

Okay, that’s fair. You talked a little bit about the EMR business, I am just curious, I know that the third quarter was exceptionally strong. But aren’t most of those projects done? Don’t most of your clients have most of what they need in place, or do we expect a pickup next year in that segment as well?

Ralph Henderson

This is Ralph, I will handle that one again. I think there is a perception right, because of the way the act was structured, that people would be done through all their work by the end of 2014, and really it’s not what we are seeing in the pipeline, there’s a couple of factors there. Q3 was super strong. Q4 is actually soft, because it’s not a great time to go live. A lot of people are out on holidays and vacation and some things like that. So we expect Q1 to hit back to kind of a normal level, EMRs in the pipeline, actually we have opportunity to run through 2015 in our current pipeline.

So with just giving the technology installed and then giving it up to meaningful use. There are several different projects that occur along the way. Additionally, we are seeing some hospitals begin to upgrade technologies that are older date, and so we are seeing next generation things. While we don’t – while it probably does have a bit of a spike in it, we don’t see it as something that ever really kind of goes away completely, very similar to what you are seeing, kind of enterprise like software in corporate America. Like Oracle, doesn’t really have a downturn.

Jeffrey Silber - BMO Capital Markets

Sure. Can you give us some sort of order of magnitude, how large that business is for you, the EMR business?

Ralph Henderson

In the past, we have talked about it being about $5 million a quarter, with our run-rate. I think that was on the last call. This quarter, it was a little bit more than double that. A little bit hard to segment out exactly the total for that business, because oftentimes, clients just place orders, that is traditional travel orders that are part of that EMR project, [but where] we can identify project, and we are really implementing our full management program, that’s kind of where we get kind of the $5 million run rate number from.

Jeffrey Silber - BMO Capital Markets

Okay great. If I can just sneak in one more, I am just wondering, if the government shutdown had any impact on your business, if you can just remind us of your exposure to VA and any other government payors? Thanks.

Susan Salka

Sure. Our government, which is primarily in our Locum’s business, it’s about 12% of our Locum’s revenue, which is primarily with the VA and military facilities through subcontractors, and we didn’t see any change, because they are still providing caring services, and it wasn’t one of the areas that was particularly affected. And so we didn’t see any softness there, any behavior changes, and it’s very small, and our other businesses, travel nurse, federal government something like 1%, and it’s pretty low in Allied and Local staffing as well.

Jeffrey Silber - BMO Capital Markets

All right. Great. Thanks so much for the color.

Operator

And our next question is from the line of Tim McHugh with William Blair and Company. Please go ahead.

Timothy McHugh - William Blair and Company

Thank you. Just wanted to ask about the – I think that the bookings [trend] bottomed in May or June, are you talking about year-over-year, or kind of sequential seasonality, how do we think about that?

Ralph Henderson

This is Ralph again. That comment was about travel nursing, I will make sure it’s not about the entire Nurse and Allied Segment, the Allied segment has been pretty soft throughout, but travel nursing business sequentially bottomed out in kind of May or June, and we have seen a decent upward trend since then.

Timothy McHugh - William Blair and Company

Seasonally, it would normally effect (inaudible) upward trends, how does that vary versus – is it out of the norm?

Ralph Henderson

I could hardly hear you, but I guess you’re basically asking is, seasonally, we’d see a pickup from the second and third quarter.

Brian Scott

That is a normal – this is Brian. That is a normal pattern that we would see, and as we talk about it, we have seen our demand decline on a year-over-year basis, to where it was essentially at or below prior year levels, and it kind of bounced along with that. We have seen that pick back up again, which is a normal seasonal pattern. And so for the most of the third quarter, we were still kind of running at or below than more recently though, we have ticked back up above prior year levels.

Timothy McHugh - William Blair and Company

And then one last one, in the Locum Tenen MSP programs, can you talk about the competitors and how willing are they to participate in those programs, and how is that impacting your ability to sell those and implement those programs?

Bob Livonius

This is Bob. I am glad you asked the question. Historically what happens is, larger companies who don’t have an MSP program, will be the ones who hold out on becoming an affiliate vendor initially. And then history tends to repeat itself, and eventually they build their own programs, and we expect that to happen here as well. We expect it from a larger client. We are proud of the fact, that actually over 50% of the, what’s called the NALTO members, National Association of Locum Tenens Organization, over 50% of their members are already affiliate vendors with us, providing services to our Locum’s MSP client.

So we have plenty of vendors, some of the larger clients – some of the larger vendors would like to hold out as long as they possibly can. We kind of call it the four strategies of the four Bs, one is where you sort of bury your head in the sand, that’s one; kind of hope it goes away. Two, you’d boycott the program, hoping that by boycotting it, that’s what we are seeing from some of those providers, that it will slow down acceptance, but doesn’t seem to be the case. Third is that you burn bridges with your clients and try to pull out your doctors, that has just a pretty negative impact in the long run, and then final one is to be a good partner, and either be in a vendor in it or to build your own program. So we believe that last strategy will eventually pay off.

Just a final point is, I think that the industry itself – people think of it as an industry where there is lot of small clients, maybe only use two or three vendors, (inaudible), they need two or three doctors a year, while there is a lot of clients who have somewhere between 10 million, 20 million and 30 million, and in fact, our pipeline in Locum’s right now is double last quarter, doubled again this quarter, and represents over 25% of the total pipeline of prospects. So we are very bullish, and we don’t think that is going to have a long term impact.

Timothy McHugh - William Blair and Company

Thank you.

Operator

Thank you. And our next question is from the line of Josh Vogel with Sidoti & Company. Please go ahead.

Josh Vogel - Sidoti & Company

Thank you. Good afternoon everyone.

Susan Salka

Hi Josh.

Josh Vogel - Sidoti & Company

We saw a nice improvement in bill rates across Nurse and Allied and Locum Tenens. I was just curious, are you gaining any leverage with your clients here, or is this all just a product of the specialty mix like you mentioned?

Ralph Henderson

This is Ralph, I will handle that again. The bill rate increases we have been able to get really is a result of other cost pressures that are happening out there, rising housing costs, rising wages and those sorts of things. We are gaining leverage ourselves right, by delaying the increases to the providers, for short periods of time or negotiating better on our insurance and our housing costs. But really, there is not significant enough shortage that is driving our price increases right now.

Josh Vogel - Sidoti & Company

Okay. I am sorry if I missed it in your prepared remarks, but the margins improved nicely in Locum Tenens and the operating margin at a level you haven’t seen in years, and were there any one items there? Do you think 10% margin is sustainable going forward?

Brian Scott

Yes, this is Brian. There weren’t any material one time items in the quarter. Gross margin improvement as I mentioned, was primarily related to bill pay spread improvement. So I think that definitely our target is to stay above 10%. I think we will – it may have been slowed a little bit, as we continue to make investments in that business, we still see opportunity and we want to make sure we grow that sales team to capitalize those as well. Getting into these ranges was our target all along, and it’s nice to see them getting there.

Longer term, we expect to move those margins even higher. You look at Nurse and Allied, it’s closer to 10%, and we don’t see any reason why Locum Tenens can’t be at or above that level.

Josh Vogel - Sidoti & Company

Okay. And just lastly, can you talk about the acquisition pipeline and your appetite to make any deals, and if so, which markets you would be targeting?

Susan Salka

Hi Josh. We have kind of been saying for the last year or so, that we have been asked this question. If we were going to look at any acquisitions, of which we admittedly are in a better financial position to do that these days, with our debt coming down to such a low leverage ratio, but we are going to be very opportunistic about it, and we would be first focused on acquisitions that would help to bolster our workforce solutions offering, that are going to be most important to our clients, really helping them to find ways to better manage their total workforce costs, maybe not just temporary, but their total workforce. So they might be in the form of services or technology/services.

Second would be, there are certain areas of healthcare professionals that our clients are needing from us, that we either don’t provide today, but maybe we do, but it’s at a fairly small level and we want to bolster our position to be able to do that. And so they would be very targeted and strategic and adding on something that was really going to continue to differentiate us with our clients.

Josh Vogel - Sidoti & Company

Okay. Thank you very much.

Susan Salka

Thanks Josh.

Operator

(Operator Instructions). And our next question is from the line of Mark Marcon with Robert W. Baird. Please go ahead.

Mark Marcon - Robert W. Baird & Company

Good afternoon. The Locum Tenens progress is pretty impressive. I am just wondering, you mentioned 15% growth here in the fourth quarter. What are some of the factors that might change that trajectory, as we look out towards the next year? I mean, we are clearly gaining, as it relates to the MSP side. Are you seeing any sort of offsets to that?

Ralph Henderson

I think we said the mid-teens, I will make sure that we don’t set new expectations for it, which is a little bit less than I guess what you’re – [being] at 15. You are right though, Locum Tenen’s MSP program is probably one of the strongest things we have going for us right now. Additionally, we made incremental investments in our events, practice specialties, which we run in our Locum’s business, which are nurse practitioners, physician assistant service has grown, and so has the CRNAs which fit into that category, and those advancements have paid off pretty well.

And we have shifted other resources out of lower performing specialties, and that’s basically created the momentum that we finally got to back above industry growth rates, and the team there has done a great job. If there is any headwind, it would still be in those specialties like radiology and anesthesiology, but they are very small now. So they are not even big enough to hurt us anymore.

And in obviously any – if there was a major change in medicine in some way or technology, that’s the type of stuff – you would see that coming from miles away, to anticipate anything significant.

Other positive going for us, is a trend towards hospital employment, and our research shows that hospitals are more significant users of Locum Tenens than a traditional physician practice, because as an employee, they expect a different level of (inaudible) they did as a partner in the practice.

Susan Salka

Mark, just the other thing to remember is, we are coming off of some maybe softer comps. In 2011 and 2012, we weren’t performing as well, and while the market rate of growth is thought to be somewhere more in the 8% to 9% range, and we are looking at something in the teens, we should be performing at that level, because we have got a little bit of catching up to do.

Going forward, we would be focused on performing above market rates, but I can’t say it will be 15% of a quarter either, because we have a little bit of a catch up there.

Mark Marcon - Robert W. Baird & Company

I appreciate that perspective. But it sounds like you should do may be a little bit better than the market, just given some of the unique MSP properties?

Susan Salka

We certainly believe so, and based on the pipeline of MSPs that we have and the momentum we have in the business, I would expect to.

Mark Marcon - Robert W. Baird & Company

So as that continues, would you expect for the margins on that part of the business actually increase further?

Susan Salka

We are targeting that certainly. As we mentioned, we still have opportunities in pricing. I think there are still some areas within Locums, where we are maybe still below market, and our gross margins, while improved significantly, are still somewhat below market, we believe; and our EBITDA margins, we think can be above 12%. So that’s driven by a combination of pricing gross margin, as well as better SG&A leverage.

Bob Livonius

Just as a reminder, this is Bob again, we don’t expect our MSP business to be below where the rest of our business is. It is priced as value added offering, so we do not try to go in at a low rate in order to get the business. So we don’t expect MSP to have a negative impact on margin, it continues to have a positive impact on EBITDA, as it has with the Nurse and Allied sector.

Mark Marcon - Robert W. Baird & Company

Great. Just shifting over to Nurse and Allied, can you give us a little color in terms of how you think Allied is going to – is it getting close to bottoming out, or do you think that that some of the issues there are still going to be headwinds, as we look out towards next year and then another element as it relates to Nurse and Allied, can you talk a little bit about how we should think about the comp in the first quarter, just given how strong the flu season was last year?

Ralph Henderson

This is Ralph. I will walk about Allied as a whole. The business itself, it’s the therapy side of the business that’s really down, which is the occupational therapist and physical therapist. In that business the decline in orders just began to slow down, and we heard a few positive things from our rehab clients and skilled nursing clients, about their business shifting more into home, health specialty which is very good for us. We performed very well in filling in home, health specialties, and utilization is very high in home health. So that was a positive for us, and we haven’t had their calls yet, so we are looking forward to hearing those over the next few days. But the industry has tended to adjust and they are kind of hitting that cycle. So they are four quarters into this kind of recession for their business, and now they are beginning to make adjustments, so that’s good news.

The rest of the business is actually performing very well, and it’s helping to offset those declines in the therapy business, and so kind of overall, it’s performing better than the market. When you continue to – and we have talked about before, look into new specialties, which will help us drive incremental growth in the future, things like case management, managers, or patient care coordinators, who help hospitals become more efficient, in how they manage their patient volumes and to slow down readmissions.

So we are always looking to adjust our recruiters and our sales teams to go after those higher growth specialties. Probably not quite at the bottom yet on the therapy demand, but narrowing in on that date.

Mark Marcon - Robert W. Baird & Company

Then how should we think about those flu season last year?

Ralph Henderson

I am sorry, the second part. The flu season last year I think was particularly strong. We haven’t seen any indication thus far that we will have the same kind of flu season. Of course, the data didn’t come out for a few weeks because of the shutdown, but the levels seem to be pretty much below prior year incidents of respiratory illness at hospitals so far.

Susan Salka

But since it was in the first quarter last year, I think if you were sitting here in October, no one expected the first quarter uplift that we saw either end. So it’s still hard to tell at this point, what the impact will be good or not.

Mark Marcon - Robert W. Baird & Company

Okay. So how much of a boost do you think the first quarter received from the flu season, so that if we were not anticipating a similar flu season, we could make some adjustments to that?

Susan Salka

We will have to go back to our numbers and look at it. I know we talked about that, I think, on our second quarter call, kind of after the dust settled, and it wasn’t a significant number. I think order of magnitude, it gave us a little bit more in local staffing in particular, which is a smaller business for us, and a little bit more in nursing. And you know, admittedly, it’s hard to parse it out, because we don’t always know for certain, why we get the order, and let the uplift (inaudible). They don’t necessarily call them flu orders.

So kind of order of magnitude, I think we are looking around the table saying may be it was $1 million or $2 million at the most.

Mark Marcon - Robert W. Baird & Company

Okay. As I think about the orders picking up on a year-over-year basis in the nurse travel subsegment, just how that – obviously there is a long lead time between orders and finding and filling and then actually getting the contract started. So I was just trying to think that through. Can you talk a little bit with regards to what you are seeing in terms of fill rates? I mean, obviously you have spent a bit and showing good progress, with regards to the technological innovations in the mobile. Are you seeing the fill rates pick up materially? Is there any sign that some of the recent patient census softness may change people’s minds about whether or not they want to go into nurse travel, or what are you seeing there?

Ralph Henderson

This is Ralph again. Our fill rates have been up on MSP, but they are pretty steady overall. An interesting phenomena, when people are watching their budget, (inaudible) placing order, that they don’t really fulfill on, and that of course hurts our fill rate. They change their mind after they place the order and then the order gets shut down and our fill rates. So probably the increases in MSP offset by client behavior, that’s probably right for the times given they are trying to stay within budget, and are looking at lower census.

Overall, that investment in our digital transformation, our mobile strategy, visitors are up, gush to our website, probably triple what they were. A lot of delta are mobile visitors. Our leads, which are candidates who have an interest in the job, that aren’t yet ready to put in application in, or double what they were before, and our applications are also trending up on a year-over-year basis. So they are good investments, when the demand is stronger, I think they will help our fill rate, and improve quite a bit, and we won’t have kind of a headwind of demands or this cautiousness by the hospitals right now.

Mark Marcon - Robert W. Baird & Company

And are you seeing any sort of behavioral change at all, with regards to just anecdotal information, in terms of the nurses and their willingness to return to travel nursing?

Ralph Henderson

I feel like that issue went away almost a couple of years ago Mark. It was right after the recession, a harsh turndown for them. But the recent data, talking to recruiters and talking to nurses who work for us, I don’t think there is that much fear. I think that the fact that many healthcare systems have implemented MSP programs and have become more strategic in their use of travel nurses, if anything, helps rebuild that confidence. And we have clients who are looking to not staff up and instead just use flexible labor to meet their census – patient [outlook]. But that’s not the kind of things they were having three or four years ago. It’s just more and more frequent that we have conversations, where clients are changing their workforce strategy, to include a higher percentage of contingent labor, just for times like these. This is what our industry does. We help them get through a downturn in census, and it hurts us, right, we don’t like that part of it. But it really does help our clients manage those costs, without a separation cost, dramatic events, all of that.

Mark Marcon - Robert W. Baird & Company

Great. Thanks for the color.

Operator

I will go to Tobey Sommer with SunTrust. Please go ahead.

Tobey Sommer - SunTrust Robinson Humphrey

Thanks. Susan, wanted to follow-up on a comment you made earlier. Could you describe what you think the percentage of flexible staff is at your customers’ currently? And then, based on some of the conversations you are having, where you think that could go?

Susan Salka

I don’t know that that number exists in anybody’s database, because clients aren’t always willing to share the exact breakdown with us, nor does it exist at an industry level. What we do know, is according to BLS data, the most recent reported numbers would indicate that the penetration of temporary nurses working, is at a fairly low point today, relative to say, 10 years ago. That we think creates opportunity, as more hospitals say, we want to move more towards temporary staff, and there was a bit of a pendulum shift, where they were looking more to and were able to have more permanent kind of fixed costs in their budget, say three, four, five years ago, and they have realized, now that’s not possible going forward. So we would expect that penetration to go up over time, which qualifies exactly with what clients are saying to us, that they want to move towards lower core staff and more flexible staff.

So I am sorry I don’t have an exact number for you, because its [financing] that doesn’t exist. It’s more anecdotal at this point.

Tobey Sommer - SunTrust Robinson Humphrey

It’s fine. If you happen to get one, I am interested.

Susan Salka

Okay.

Tobey Sommer - SunTrust Robinson Humphrey

Then I just had a quick numerical question Brian. I know you are not giving 2014 guidance, but I thought you might be able to clue us in about what the trend would be in depreciation next year?

Brian Scott

Last quarter, we were a little over 1.7. I would expect it to go up somewhat. We have talked about our CapEx going up. At some point, that will move our depreciation up a little bit as well. So I think that we would get more into the 2 million range for next year for the quarter, and our amortization, (inaudible) for that, will be pretty similar to 2013, until they go down, may be 50,000 a quarter, pretty similar for 2014.

Tobey Sommer - SunTrust Robinson Humphrey

Thank you very much.

Brian Scott

Sure.

Operator

Our next question is from the line of Vishnu Lekraj with MorningStar. Please go ahead.

Vishnu Lekraj - MorningStar

Yeah, good afternoon everyone. Question here regarding reimbursements. There is some talk for some payors about obviously beating down reimbursement over the next couple of years. Combining this with more of a capitated type payments system, with – [was it] providers. Have you heard anything on that front, in terms of pressure reimbursements and pricing in addition to that, how do you view that, along with your MSP program moving out may be one or two more years?

Susan Salka

Sure; and that is the way in which we heard it from our clients, that is generally, the pressures in changing reimbursement structures that they anticipate going forward, caused them to want to really get their arms around their greatest areas of spend, which workforce is typically about half of their budget, and at least half of that is usually nursing specific. So we really think it has driven the appetite for more workforce solutions and MSPs because, it not only gives them greater flexibility, but it gives them better analytics to really understand how, when and where they are hiring workforce, and how they can be more efficient in their utilization. And so we think that’s going to continue to be a positive trend for us.

Vishnu Lekraj - MorningStar

And then here with the exchanges coming on board, obviously, there was a rocky roll-out. It looks like it’s still a full go ahead for the exchange, publications at least. Have you heard anything in terms of increasing demand, increasing census maybe because of that, or how are your clients and how are you thinking about that for the first and second quarter of next year?

Susan Salka

I don’t think we really have -- our clients are that kind of silent on the issue of the exchanges and how they are going to affect the census. I know there is a lot of noise about that right now. But the things that we continue to hear, for 2014 and beyond is, that they need to be prepared for potential spike and uptick, and demand in utilization and that’s driving more desire to partner with us and others within the industry and things like MSP and even in RPO, which we mentioned has been a nice growing business for us.

There probably has been more identification of need in the physician and advanced practice area. We mentioned that we had nice growth in those areas, and I think some of that is anticipation for continued growth and need of those types of professionals, and we certainly expect that to continue going forward. It’s a little hard to tell exactly how it will affect nursing, but there tends to be a bit of a side effect, where you are hiring more physicians and advanced practice, you are likely going to need more nurses over time. So we think that that will also drive some greater demand, but they are not as kind specific about connecting the dots to the exchanges to meeting these professionals. It’s more about the overall effect of the affordable care act.

Bob, is there anything that you have?

Bob Livonius

I was just going to say, they really do like to try to listen to our clients. So we are acutely aware of the fact that the clients are under a lot of pressure with their pricing and their cost structures. In fact, we have got some innovative ideas we are working with, with some of our more innovative clients and new grads programs, for example, with a couple of clients, they are really trying to struggle with how do I get the right workforce at the right cost levels. In fact, early next week, we have about 60 clients or more coming in for our second annual healthcare workforce summit, where really a lot of this is discussed, and we talked about what are the challenges they are having, how is the Affordable Care Act going to impact them, what do they expect happening in their census, and I think that’s one of the benefits of our investment in this thought leadership, is it allows us to kind of create some new solutions, that wouldn’t have otherwise created, and in partnership with our clients.

So some of those solutions aren’t really ready for primetime, but we are excited about some of the things that are actually in the drawing board.

Vishnu Lekraj - MorningStar

Got it. Thanks for the details. Appreciate it.

Susan Salka

Thank you.

Operator

Thank you. And I will turn it back to our speakers, for any closing remarks.

Susan Salka

Okay. Wonderful. Well thank you so much for joining us today. We do appreciate your continued support of AMN, and we look forward to updating you on our progress next quarter.

Operator

Thank you ladies and gentlemen. This will conclude our conference call for today. Thank you for participation and for using AT&T Executive Teleconference Service, and you may now disconnect.

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