AMN Healthcare Service's CEO Discusses Q4 2013 Results - Earnings Conference Call Transcript

Feb.20.14 | About: AMN Healthcare (AHS)

AMN Healthcare Services, Inc (NYSE:AHS)

Q4 2013 Earnings Conference Call

February 20, 2014 17:00 ET

Executives

Amy Chang - VP, IR

Susan Salka - President & CEO

Brian Scott - CFO

Ralph Henderson - President, Healthcare Staffing

Bob Livonius - President, Strategic Workforce Solutions

Analysts

A.J. Rice - UBS

Jeff Silber - BMO Capital Markets

Tim McHugh - William Blair

Josh Vogel - Sidoti & Company

Mark Marcon - RW Baird

Operator

Ladies and gentlemen thank you for standing by and welcome to the AMN Healthcare Full Year and Fourth Quarter 2013 Earnings Conference Call. (Operator Instructions). Also as a reminder, today’s teleconference is being recorded.

At this I will turn the conference call over to your host, the Vice President of Investor Relations for AMN Healthcare, Ms. Amy Chang. Please go ahead.

Amy Chang

Thanks Tony. Good afternoon, everyone. Welcome to AMN Healthcare's fourth quarter and full year 2013 earnings call. A replay of this webcast will be available until March 6, 2014 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 31, 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 Developments subsequent to this call may cause these statements to become outdated.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 so much Amy. Good afternoon everyone and welcome to AMN Healthcare’s 2013 full year and fourth quarter earnings conference call. In 2013, AMN made significant strides in executing on our long term strategy. Despite the somewhat challenging healthcare environment we continued to deliver solid revenue and profitability growth as well as further differentiating AMN as the innovator in healthcare workforce solutions and staffing services. Our full year consolidated revenue grew by 6% adjusted EBITDA grew by 16% and earnings per share increased 97%. We continue to drive operating leverage with adjusted EBITDA margin for the year increasing to 8.4%, a 70 basis point improvement towards our long term goal of 10%. Our top line growth was led by our Locum Tenens and Physician Permanent Placement businesses both of which delivered strong revenue growth of 10% and 9%. A key part of our strategy is the continued expansion of our leadership position in workforce solutions. In 2013 MSP penetration was up across all of our staffing businesses, full year direct revenues throw MSP contracts represented nearly 30% of our consolidated revenue. We were particularly encouraged with the increased appetite for Locum’s MSP and expected trend to continue into 2014 and beyond.

The closer relationships and higher fill rates we achieved through MSP contracts and abled us to grow faster during periods of market expansion and provide some protection during periods of demand softness. In November we acquired ShiftWise the leading provider of vendor management technology in healthcare. ShiftWise’s VMS enables clients to efficiently manage their contingent staffing needs on one centralized platforms, ShiftWise is the largest vendor neutral technology solution within healthcare and it can also be used by staffing companies to be the technology engine of MSP offerings. AMN is beginning to integrate ShiftWise into our MSP offerings and we expect our clients and affiliate vendors will see a tremendous advantage from implementation of this technology. We believe there is quite a bit of runway for further penetration in both vendor neutral VMS and MSP within the healthcare market.

ShiftWise also offers technology that allows clients to manage their in-house resource pools more efficiently and automates credential management, scheduling and time keeping. ShiftWise is a perfect complement within AMN’s portfolio work force solutions and we’re very excited to have the ShiftWise team members as part of the AMN family.

Throughout 2013 we experienced robust double digit growth in our other workforce solutions such as recruit process outsourcing and EMR staffing. Similar to ShiftWise these two value added services are smaller in revenue but they are higher in operating margin and they help strengthen our position as the strategic partner who can respond to our clients diverse needs. Now let’s review the fourth quarter 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 softer hospital census and reimbursement changes over the last year. Fourth quarter revenue for this segment was down 6% year-over-year and 4% sequentially. Margins remain a strength with fourth quarter margins coming in a 110 basis points over prior year and 30 basis points over prior quarter. Our Travel Nurse fourth quarter revenue was down 5% year-over-year and 4% sequentially. Our traditional Travel Nurse volumes and revenue did increase sequentially during the fourth quarter however this was more than offset by the seasonal slowdown in our EMR staffing revenue. Although orders increased from the third to the fourth quarter overall demand was still softer year-over-year. Since the beginning of 2014 weekly orders have been consistently trending upward, January orders were still below prior year levels but February orders have improved nearly 20% and are now slightly above prior year. We expect this demand pick up to translate into increased volumes in the second quarter.

For the first quarter we expect the Travel Nurse revenue to be up sequentially by 2% to 3% but down year-over-year. This business along with our other staffing businesses was impacted by the winter storms earlier this year. Brian will give you a little bit more color on that during his first quarter guidance remarks.

The same demand environment is also affecting local staffing where fourth quarter revenue was down both year-over-year and sequentially. The lower revenue is due mainly to the lower senses in cautious hiring by our clients as well as some impact from the winter storm. First quarter revenues for our local staffing are expected to be down year-over-year but flat sequentially.

Now turning to Allied Staffing, fourth quarter revenue was down 15% year-over-year and 6% sequentially, the year-over-year decline was driven by the lower therapy volume partially offset by increases in imaging, lab and pharmacy specialties. The sequential decline was due to normal seasonal trends. Our team continues to focus on increasing our fill rate particularly at MSP accounts.

Overall allied orders have somewhat stabilized going into the first quarter and are currently flat with prior year. First quarter Allied Staffing is expected to be down in the mid-teens year-over-year and in the mid-single digits sequentially. Overall for the Nurse and Allied Staffing segment we expect first quarter revenues to be down in the mid-single digits year-over-year and to be up 1% to 3% sequentially. Despite the mixed demand trends and cautious client mindset we believe that we will perform better than most due to our leadership position in MSP and workforce solutions. We’re also encouraged by the increases in demand that we have seen over the last six weeks. The Locum Tenens segment was a bright start for the fourth quarter as it has been throughout 2013.

Fourth quarter revenue was up 18% year-over-year and down 2% sequentially due to seasonality. In the fourth quarter we were engaged in few large client projects which favorably offset the typical seasonal decline of 7% to 9%. The year-over-year revenue improvement was driven mainly by growth in the hospitalist, advanced practice, emergency medicine and primary care specialties.

Overall days available which is our measure of demand grew by nearly 10% over the prior year helping to fuel the growth. The divisions focus on pricing continues to pay off with gross margin reaching a record high of 29.9%. While we’re pleased with these improvements in gross margin we believe we are still under market in pricing and there is additional room for growth margin expansion. In addition our efforts to be the first to market in Locum’s MSP continue to pay off.

In the fourth quarter we closed two more Locum’s MSP contracts with implementation currently underway. Our MSP revenue mix in Locum’s is still in the single digits but we expect the penetration to continue growing based on our sales pipeline and strong client interest. Going into the first quarter we expect the Locum segment to experience year-over-year revenue growth in the mid-single digits but to be down sequentially. Part of the sequential decline is due to the completion of the two client projects that I mentioned, the remainder is due to weaker placements.

The positive impact of new Locum’s MSP clients will help this segment to increase revenue momentum during the remainder of 2014. Now let’s turn to our physician permanent placement segment where fourth quarter revenue was up 4% year-over-year and down 4% due to holiday seasonality.

The year-over-year growth was driven by higher placements in our retained search business. Based on increasing new search activity we expect first quarter perm placement revenue to be up in the high single-digits year-over-year and also up sequentially. With 2013 well behind us the AMN team is very focused on 2014 and the opportunities that lie ahead. Healthcare providers have tightened spending for several quarters now and as a result many are operating with a very lean workforce today.

We find that when they do approach an order with us, their needs are very urgent. Overtime we would expect demand for temporary and permanent staff to increase as general unemployment continues to decline more individuals enroll and become eligible for insurance, patient volumes increase and clinician shortages worsen.

In a recent AMN survey nearly 2/3rds of hospital executives said they believe the influx of newly insured patients will increase the need for physicians and nurses at their facility. With clinical labor representing half of hospitals cost structure providers will continue to seek and adopt more outsource workforce solutions so that they can more efficiently address their labor needs. The demand for healthcare services is generally expected to expand in 2014 as the impact of the Affordable Care Act unfolds. To ensure that AMN is best positioned as a partner of choice for clients and to capitalize on the future demand trends. We continue to make investments in three key areas, the first is expanding and driving growth through our suite of innovative workforce solutions. The second is our leading edge recruitment technologies to aggressively attract more candidate supply and to create a better experience and the third is the streamlining of our systems and infrastructure to create 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 margins. Finally I would like to thank our AMN team members for their dedication and passion in servicing our clients and clinicians and for their strong execution.

We have a very healthy performance driven and value based culture within AMN. Our team members take great pride in our contributions to the healthcare industry and the patients that they serve. They also take great pride in our commitment to our communities and corporate social responsibility. We’re proud of our talented team and the impact that they make every day on our clients, our clinicians, our shareholders and the world around us. I will come back to you in our Q&A session along with Ralph and Bob to help answer your questions but for now I will turn the call over to Brian.

Brian Scott

Thank you Susan. Good afternoon everyone. The Company’s fourth quarter revenue were up 248.7 million, was up 0.3% from last year and down 3.3% from last quarter. Our gross margin for the quarter was 29.8% up a 130 basis points from last year and 40 basis points from last quarter. The year-over-year and sequential increase was due mainly to margin improvements in both our Locum Tenens and Nurse and Allied segments.

SG&A in the quarter totaled 54.5 million or 21.9% of revenue compared to 21.4% in the same quarter last year and 21.6% in the prior quarter. The year-over-year increase in SG&A was due primarily to higher expenses related to driving growth in the business and additional ShiftWise SG&A for the post-acquisition period. SG&A expenses declined sequentially due to lower professional liability and employer related cost more than offsetting the additional ShiftWise expenses. Our fourth quarter Nurse and Allied segment revenue decreased 6.2% from the prior year and 4% sequentially to a 164.1 million. Volume of 5609 average clinicians on assignment was lower by 7.7% year-over-year and 2.8% sequentially.

Revenue per day was up 1.6% year-over-year with our average bill rate higher by 0.6% over last year.

Nurse and Allied gross margin of 27.7% was higher year-over-year by 110 basis points and sequentially by 30 basis points. The year-over-year and sequential improvement was due to improved bill pay spreads and a favorable business mix shift to higher margin workforce solutions including the newly acquired ShiftWise business. These positive trends more than offset continued higher housing cost pressure.

Segment SG&A in the quarter included a $1.4 million favorable actuarial adjustment to the professional liability reserve. Fourth quarter Nurse and Allied segment operating margin of 11.9% was lower by 40 basis points year-over-year and flat from the prior quarter. For the year-over-year reduction resulting from negative operating leverage on lower revenue.

Fourth quarter Locum Tenens segment revenue of 74.1 million was up 18.1% from prior year and down 1.6% sequentially. A 13.9% increase in days filled was the biggest driver of the year-over-year increase. Revenue for day sales increased by 3.7% as bill rate increases in all specialties were partially offset by a mix shift to lower bill rate specialties.

Gross margin of 29.9% was a 190 basis points higher than the prior year and 60 basis points higher sequentially due primarily to improve the bill pay spreads that a mix shift to higher margin specialties. Fourth quarter Locum Tenens segment operating margin of 9.9% was higher by 220 basis points year-over-year and down 10 basis points from the prior quarter. The year-over-year increase was due mainly to the gross margin improvement while the sequential decrease was due mainly to higher bad debt expense. Our fourth quarter Physician Permanent Placement segment revenue of 10.5 million was up year-over-year by 3.6%, or down 3.8% sequentially due to seasonality.

Gross margin of 63% was lower by 220 basis points in the prior year and up 40 basis points in the prior quarter. The year-over-year decrease was due to a sales reserve reduction recorded last year and an increase in recruiter headcount this year to drive future placement growth. Physician Permanent Placement in fourth quarter operating margin of 21% is higher by 50 basis points year-over-year and 70 basis points in the prior quarter. With the year-over-year increase due to improved SG&A leverage.

Interest expense in the quarter was 1.8 million which compares to 3.2 million last year and 1.8 million last quarter. Our tax rate in the fourth quarter and for the full year was 41%, we reported net income of 8.4 million in the fourth quarter and 32.9 million for the full year.

Diluted earnings per share was $0.17 for the fourth quarter which compares to $0.15 in the prior year quarter. Full year 2013 diluted earnings per share from continuing operations was $0.69 which compares to $0.35 in 2012.

Operating cash flow for the quarter was 15.5 million and for the follow-up was 58.6 million. Day sales outstanding were 55 days compared to 52 days in the last quarter and 53 days last year. Capital expenditures for the fourth quarter were 2.6 million and for the full year were 9 million. As of December 31, our cash and equivalents totaled 15.6 million and our total debt outstanding was a 158.7 million which included 10 million drawn on our revolver in conjunction over the ShiftWise acquisition.

The year-end leverage ratio was calculated for our credit agreement was 2.0 times to 1 as compared to 2.4 times for the end of last year.

Now let's turn to our first quarter 2014 guidance. The company expects consolidated first quarter revenue of 244 million to 248 million, this guidance includes an estimated 2 million to 3 million revenue impact from the winter storms. Gross margin is expected to be between 30% to 30.5% reflecting a full quarter of our higher margin ShiftWise business. SG&A expenses as a percentage of revenue are expected to be between 22.5% to 23% which includes a full quarter of ShiftWise expenses as well as certain strategic investments to drive long term operating efficiency and expansion of our workforce solution.

Adjusted EBITDA margin is expected to be between 8% and 8.5%. First quarter interest expense is expected to be 1.9 million, depreciation expense for the first quarter will be 2 million and amortization expense will be 1.9 million. The effective tax rate for the quarter and full year is expected to be 44% with a full year cash tax rate expected to be in the low 30% range.

Capital expenditures are projected to be 3 million to 4 million for the quarter and approximately 12 million to 14 million for the full year. Diluted share count is expected to be 48 million for the first quarter and 48.2 million for the full year.

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

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from A.J. Rice with UBS. Please go ahead.

A.J. Rice - UBS

First question maybe just on, thanks for the comments around tone of market but I will ask another one, do you’ve visibility, I don’t know if you’ve visibility on this but it look like early in the fourth quarter there were some improvement in the general employment and outlook and then it sort of softened and now it's people are sort of questioning where we’re at. Are you seeing any underlying change in turnover rates at your customer hospitals or vacancy rates or people starting to give up sort of shifts among the local guys that would open up an opportunity for you guys?

Susan Salka

There are two ways to look at that A.J., if we look at the kind of aggregate national market data the number of job openings and quits have actually been under prior year for the last several months and so there was a bit of slowdown. I think somewhat reflected to cautiousness about the general economy and unemployment’s et cetera and we saw that reflected in our orders. It was interesting as we were on our third quarter call we talked about orders rising in October but then we actually started to see them fall off in November and December and now in January we started to see them pick back up very consistently. In fact every single week we have seen our demand and orders improving, so we’re certainly more optimistic but I think part of what you saw at the end of the fourth quarter was maybe a reflection of fewer jobs that were opened, fewer people quitting because they were so certain about where that next job would be.

What we do hear from our clients and I think it shows up in our orders with them is that they have cut their workforce very thin and they are in many cases operating very lean with their core staff and even in some cases making a more conscious decision to lower their core staff and deliberately use more temporary staff to fill in the gaps when their census increases or they have fluctuations.

We haven't necessarily seen that uptick yet, I think in general senses to drive that but it's probably been reflected in fewer people leaving [ph] because they realize that probably fortunate to have that permanent job that they have.

A.J. Rice - UBS

And if I could I may shift over to actually a question about ShiftWise, first of you’ve had it for a little while. Any further color, commentary around their previous client base and the reaction to it now being part of you guys and then as you look at your clients and moving them over to the ShiftWise platform when do you think that would be fully done and what are the operating or the income implications of that transition for you?

Bob Livonius

This is Bob. Just to a thought on how the customers are reacting at ShiftWise is very, very positive. We did a very good job I think of communicating the importance of maintaining the vendor neutrality which was essential to doing the deal with ShiftWise to begin with, we knew that clients really want both a vendor neutral solution in some cases or they want an MSP and there is not a lot of grey area in between and so we were very careful to say that we’re going to buy it and make this acquisition of ShiftWise because of it's vendor neutrality and because of a very large segment of the market is still going after that vendor neutrality approach. And I would say that we have been very diligent about doing that and the client reaction has been very positive because we have gone to each one of them and made sure they understand that. The second thing I think is we’re using it doesn’t mean we necessarily have to immediately undo what we have already got out there.

We’ve a very good platform, our clients like the platform they use. However we know that ShiftWise will be a better platform for us going forward. We were in the process of upgrading our platform so this will just avoid us, happy to do that and it's obviously a cost benefit to do that but it's also, we know that there is functionally more capability for ShiftWise. So all new clients will go on to ShiftWise and then little by little or one at a time we will go back to those clients, we’re moving them up of our existing platform has a benefit to them.

There is really no benefit to us to have to take them off the platform right away, overtime we think that will happen but the impact of that I think is negligible.

Operator

Thank you. Our next question in queue will come from Jeff Silber with BMO Capital Markets. Please go ahead.

Jeff Silber - BMO Capital Markets

Actually just a follow-up on that, I know some of your larger competitors were also ShiftWise users. I’m wondering have you seen any impact on them since the acquisition?

Susan Salka

No we hope that they continue to be great customers at ShiftWise and as far as we know they are still using ShiftWise at those accounts and in fact ShiftWise is also offering their technology to other staffing companies as an MSP tool and we think that’s a great idea. It is by far the best technology tool in the healthcare VMS market today and by having more staffing companies and more affiliate vendors utilize it, it will bring greater value and efficiency to the market as a whole. So they are continuing to talk with new staffing companies that want to add ShiftWise as their engine or technology tool for their MSP offering. Bob anything else?

Bob Livonius

I just have to say, I think we have a very healthy relationship with our competitors. I think it's a competitive environment where we’re out there both respectful in the marketplace and in the particular case of the other major vendor that uses ShiftWise and we respect them and we respect their decision to keep ShiftWise and to use ShiftWise just like us, we had used some other technologies and they may find it beneficial in certain cases to do the same but our relationship we think is very good and the relationship with ShiftWise and the other MSP vendors in the market is strong. So we believe that is a great strategy, if we can get everybody on ShiftWise it can make everybody’s life simple.

Jeff Silber - BMO Capital Markets

And just a question on the Physician Perm piece I know it's a relatively small piece to your business but there was another publically held company that talked about softness in that business as hospitals were using their own internal sourcing rather than outsourcing it to a recruit company. Are you seeing those trends with any of your clients?

Susan Salka

We really are and in fact I heard the same comment and so I kept in with our team about it and our kind of view point is kind of the opposite. We see the in-house recruiters as a great client for us and in fact we have taken great strides or made great strides in creating stronger relationships with the in-house recruiters because they do a great job of fulfilling in many cases a large portion of the physician recruitment for their organizations but there are often particular positions that they need help with and so we can enable them to be even more successful by coming in and helping them with particular searches that are really critical to the organization.

So we have not seen a drop off, in fact you’ve I think heard us say that we had a great fourth quarter, it was a terrific year for our Perm Placement division. The number of placements was up over I think around 14%, the number of new searches was up well over 10% and we see those trends continuing into 2014.

Jeff Silber - BMO Capital Markets

And then just quick numbers question I guess for Brian, you gave us the first quarter guidance for both interest and depreciation. Should that be the numbers we use roughly for the rest of the year?

Brian Scott

I think the depreciation would likely move up a little bit as the year progresses, as you see the flow through of some of the increases in our capital expenditure so maybe a couple hundred thousand higher quarterly by the end of the year probably I think opposite on the interest expense you would see a similar decline as you go through the year.

Operator

Thank you. Our next question in queue will from Tim McHugh with William Blair. Please go ahead.

Tim McHugh - William Blair

Just on ShiftWise, the guidance explicitly calls out the impact on the gross margin. So I guess can you help us understand revenue margins I guess relative to last quarter or year-over-year or just on an absolute basis, what the impact is on a fourth quarter basis as we are going to Q1 here.

Brian Scott

So for the fourth quarter it had an impact of about 30 basis points on the gross margin, so if you play it forward for a full quarter it's about a 60 basis points lift to the gross margin and the revenue is quarterly, it's little over 3 million.

Tim McHugh - William Blair

That’s the fourth quarter contribution correct?

Brian Scott

Yeah fourth quarter, yes, 1.4 million for the fourth quarter and little over 3 million on a full quarter basis. And if you can take that down through it's very much in line with our strategy of delivering workforce solutions that are higher margins as well. So the EBITDA margins are well north of our consolidated margins, so we’re expecting to add about 20 basis points to our consolidated margin going forward. Really no impact on the fourth quarter though, only had it for a little over a month and then there were some cost associated with the transaction itself. So it really had no impact on our EBITDA for the fourth quarter.

Tim McHugh - William Blair

And then just a higher level question, I guess and someone touched on this earlier but you have seen pockets of strength I guess early in the third quarter I guess in October that’s anticipated and you’re saying you’re seeing pockets of strength now I guess, just to be the Devil’s Advocate, I guess what is, is there something that gives you more confidence in terms of the trends you’ve seen in January and into February here I guess you said the consistency maybe of them but I guess just maybe address that question. Is there anything that gives you more confidence or I guess would you still say it's still too hard to tell?

Ralph Henderson

This Ralph, I will handle that. Yeah I will walk you through the whole (indiscernible) for just a second and we did see order start to trend down in November but they did bottom out week 52 of ’13. So January orders improved weekly, we’re on our 6th consecutive week of watching the orders grow and they finally got backup over prior year recently and I’m talking just Travel Nurse in this case. Very few of them are food related orders. Last year we actually had food orders in November. The specialties are such that we don’t think it's just food related we’re seeing some pretty good increases there. Other encouraging signs in our other businesses are Allied orders are kind of flat and that’s a good signs for us that business has had a rough couple of years through customer reimbursement and then our Locum Tenens just watching our MSP signings, our recent MSP signings and Locum’s are expected to have a good impact for us in the back half of this year. So while there are some discouraging things and then you look in the last part of the year that was a bit discouraging. Most of the sings we’re seeing today lean towards improvement as we get through the year. Does that help?

Tim McHugh - William Blair

I guess on the gross margin for Locum’s it sounded like it's just your continued focus on pricing. There wasn’t anything one time there I guess I’m trying to get can we expect that level of gross margin to kind of continue going forward?

Ralph Henderson

This is Ralph. Yeah the team has done just an excellent job kind of benchmarking ourselves against the marketplace specialty by specialty, job order by job order, putting in place yield management tools and we do expect those margins totaled up and as Susan mentioned I think we expect them to improve overtime. We still think there is a couple of points left between us and the market average.

Operator

Thank you. Our next question in queue will come from Josh Vogel with Sidoti & Company. Please go ahead.

Josh Vogel - Sidoti & Company

I know it's only being a few months now but can you talk to the pipeline of new potential MSP clients has it improved remarkably since the ShiftWise deal closed?

Bob Livonius

I think what we were very pleased to see was that, we have two separate sales force as we kept the businesses independent. We want to have a vendor neutrality sales force and then our MSP sales force but naturally as I’ve had a chance to review the pipelines, we’re very pleased to see that there is not a lot of overall frankly. There is a lot of new opportunities in both segments and then there have been some great opportunities for us to collaborate and perhaps win business that we might not either one of us had won if we hadn’t come together. So I’m very excited about the energy and the whole company has I think taken a notch up on both ShiftWise sales team and our sales team about the enthusiasm around being able to collaborate when we need to compete in RFPs that we wouldn’t otherwise be on. So pretty energized.

Susan Salka

The other thing to add Josh is that we have already seen some early signs where there could be some clients that are currently vendor neutral, VMS clients that were wanting more services and someone to really take on more of the management of their contingent labor process and move more towards an MSP and so it makes it a much easier referral and hand-off. If they are already on the ShiftWise technology and they want to talk with AMN about adding on an MSP, it is a somewhat natural progression for many organizations and likewise we may receive inquiries from client prospects that I think they want an MSP but as we talk with some it's really maybe more of a vendor neutral technology solution that would best serve their needs and so we can refer those things back and forth. What I’ve also seen in the last couple of months but it's been really exciting is the ability to go and have conversations with some of the larger systems at a very high executive level about how they are going to be tackling their workforce challenges going forward and these are our large organizations that are very diverse, they are delivering care in multiple kinds of settings and multiple regions and they are trying to take a fresh approach to how they are really integrating their kind of continuum of care and so the workforce becomes a very critical part of that you know starting with just giving a view of what went and how they are spending their dollars on workforce and so we can go to a client like that and have a discussion about the ShiftWise technology and how it can be used at an enterprise level to really give them the analytics and the view that they need across the company but then they can plug and play different services that make sense for each business unit. It could be in one business unit, a vendor neutral technology solution, is all they need and then another business unit they may need a full blown MSP or they may need RPO, but it gives them a common platform that they can use to really get better visibility and control into their overall labor spending.

Josh Vogel - Sidoti & Company

Next question is probably for Brian, you were talking about some spending or as you expand ShiftWise and you had some strategic investments, I was wondering if you can give us some direction of where you see cash flow in 2014?

Brian Scott

Yeah the cash flow for the year I would expect it to be, I mean operating cash flow to be somewhat similar to 2013, you know we obviously expect to see our profit really improve but their working capital fluctuations will really dictate whether or not the number goes up or not. So the free cash flow we’re increasing our CapEx of small amounts for 2013 but I wouldn’t expect any really significant differences between 2013 and 2014 and I mentioned the cash tax rate and that is very similar to our cash tax rate in 2013 as well. So that’s really not going to have much of an impact on it as well.

Josh Vogel - Sidoti & Company

Okay. And just lastly I know it's a small part of your business but what percent of revenues coming from RPO and EMR and where did that stand a year ago?

Susan Salka

RPO is still less than 10 million on an annualized basis so relatively small but very strong margins, we mentioned before operating margins north of 25%, it's actually more than 30% now but we think of a more sustainable margin for that business is probably north of 25% and they had double digit growth, very double digit growth in 2013 and expect continue to see stronger growth in that, but admittedly very small. For the EMR business, again a fabulous year in that business unit in 2013 was driven by investments that we made to build up the sales team and to penetrate the market better but also we had couple of very large engagements particularly in the second and the third quarter. You may recall we talked about the third quarter being exceptionally strong for EMR. It probably runs at more of a $4 million to $5 million per quarter level and that’s about what it was in the fourth quarter and that’s about what we’re expecting it to be in the first quarter. So if that gives you a sort of a gauge.

EMR is a very nice business and adds value particularly to our MSP clients and clients we already have relationships, we have warned in the past that it is a lumpy business as it was in 2013. You can have a couple of huge projects and then you can have a couple of small to medium sized projects. So we certainly are continuing to invest in the business because we think it still has a lot of runway but from quarter-to-quarter you may see it vary a bit.

Operator

Thank you. Our next question in queue will come from Mark Marcon from RW Baird. Please go ahead.

Mark Marcon - RW Baird

With regards to ShiftWise is that all falling within the Nurse and Allied segment?

Ralph Henderson

Yeah we’re going to report that in the Nurse and Allied segment, that’s where it was in the fourth quarter and going forward.

Mark Marcon - RW Baird

And then with regards to the tone of the orders and what you’re hearing from your clients. We’re seeing some and it's regionalized but some stories about nursing shortages that are cropping up. Are you seeing any evidence of that and if so is that impacting your fill rate or would you view that as being a positive if it in fact is true?

Ralph Henderson

First on the shortages I would say that the increase in the orders is a reflection of what Susan said, right, you can only work people overtime for so long, burnout kicks in or you take a look at the cost and you realize how inefficient that is. So some of the demand is coming from that and there is a couple of other factors going on there, the percentage growth of the new grads is actually slowing so it's single digits. And the influx pass rates were actually declining as well, so kind of several things that don’t make for a perfect environment for those healthcare systems that we’re planning on new grads to meet all of their future needs so that the demand itself is reflective of just what you are saying. We’re not seeing many quits yet that would of course accelerate that pace of change.

In terms of fill rates, our fill rates are very strong, in times when orders are down they are even stronger because of our MSP client but our fill rates are up a couple of 100 basis points year-over-year kind of across all of our businesses and that’s primarily because of our MSP penetration, our digital sourcing initiative from last year and just great effort by our sales team. So fill rates, I mean probably the only market thing that we haven’t talked about is a little bit of a reluctant supposed orders on a timely basis, generally clients will post them earlier and we have more time to work on those orders but we’re seeing them wait and so the start dates are closer to the date we get the assignment, because there is a little cautiousness in our forecast and you will probably hear it in our tone and rightfully so because of the orders are harder to fill because we have only got a few weeks to get them done. But I think all of those are signs like I said they are encouraging, they are not strong or robust but they are good signs for market growth.

Mark Marcon - RW Baird

And then with regards to the orders being up year-over-year in February, where they up year-over-year in October or they were just trending up?

Susan Salka

They were up a little bit in October. Both trending up and a little bit year-over-year.

Mark Marcon - RW Baird

And the consistency over the last five weeks is that better than what you saw in October or and the breadth?

Susan Salka

It is better, it's healthier for sure both in terms of the duration and kind of the timing of how many weeks orders have been up very consistently but if you and we’re talking about nursing specifically but it's true all of the divisions that orders have been better but within nursing as you dive into those orders we have not only more aggregate orders but we have more orders at more facilities and at more units within those facilities and then if you even look at the makeup of the orders we’re getting far more gross new orders which is kind of the new orders in a week, so it's not just that we have old orders that we’re not filling as Ralph just said our fill rates actually very strong right now. So we’re filling them very quickly, the client will agree at least but we’re also getting a lot of new orders and so that gives you more to work within the future. They are not just older orders that you’ve had trouble filling it. It really are new urgent needs for the future.

Mark Marcon - RW Baird

What are you seeing in terms of rental expenses? You mentioned earlier that those are up, are you expecting acceleration or basically staying about the same?

Ralph Henderson

Seems a lot couple of years obviously with the rental rates going up and the team has done a really great job of reacting to that and identifying properties. They keep our rental cost below, the market overall. I think for 2013 overall national rents were up about 4% and in some of the key markets were up more 5% to 6%. So we did better than that for the year overall but we’re up in the low single digits in the fourth quarter. As you look to ’14 again looking at the industry expectations it's about a 4% increase again and so our goal would be to be at or below that number as we look ahead as well. So it's really critical again that we continue to talk to clients about that, educate them to get bill rate increases to offset that as well and the team has done a really good job of educating our clients.

Mark Marcon - RW Baird

And one more if I could sneak it in. In terms of the strong progress that you’re making on the MSP side with Locum, how big do you think that can get?

Bob Livonius

Well penetration today is very low of course. So we’re starting off low, this is Bob. I think if we had to try to do a crystal ball and figure out where it can go to I think penetration is probably 1% or 2% or 3% today but I think it certainly can get to 30%, 40%, 50% penetration. We’ve seen in other industries where it gets as high as 80%. We certainly think that the Nurse and Allied can get well above 50% but in some cases with the Locum’s there isn't enough spend perhaps to justify it. So in this case though we feel very positive about the client and the pipeline that we’ve got and it's a very healthy pipeline. We have got plenty in the pipeline that are actively seeking to contract with us today and the another thing about it, I think we’re very encouraged by is that we were concerned initially about getting enough people to sign up as subcontractors and we have got plenty in the pipeline now. In fact we have got a couple of clients that started this out with some pilots in one or two locations just to see if we can make the fills and they have all expanded. They have 100% of the situations, they have all agreed to expand other markets. We’re more than exceeding their fill rates than they had in the past and in fact the time to fill at a shorter period of time and an overall average lower cost per hour. So there is an incredibly good reference base already being built and we’re very pleased with it.

Operator

Thank you. At this time there is no additional questions in queue. Please continue.

Susan Salka

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

Operator

Thank you and ladies and gentlemen that does conclude your conference call for today. We do thank you for your participation and for using AT&T’s Executive Teleconference. You may now disconnect.

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