AMN Healthcare Services Inc (AMN) 2012 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the AMN Healthcare full year and fourth quarter 2012 earnings call. At this time all lines are in a listen-only mode. Later there'll be an opportunity for your questions and 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 Amy Chang, Vice President, Investor Relations. Please go ahead.

Thanks Kathy. Good afternoon everyone. Welcome to AMN's fourth quarter 2012 earning's call. A replay of this webcast will be available until March 7, 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 the forward-looking statements as a result of various important factors including those identified in our annual report on form 10K for the year ended December 31, 2011 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 Developments subsequent to this call may cause these statements to become outdated.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, too 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 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.

Thank you Amy. Good afternoon and welcome to AMN Healthcare's 2012 full year and fourth quarter earnings conference call. AMN Healthcare made tremendous strides in executing on our long-term strategy during 2012. Throughout the year we experienced the synergies of market improvement, solid execution and further recognition of AMN as the leader and innovator in healthcare workforce solutions and staffing.

Full year consolidated revenue grew by 7% and adjusted EBITDA by 15% as we continued to drive improved operating leverage. Our adjusted EBITDA margin for the year was 7.7%, a 50 basis-point improvement towards our longer term goal of 10%. This improvement in leverage was achieved in spite of the increased spending on our digital sourcing, workforce solutions and technology initiative. Our performance was driven primarily by our travel nurse business which grew revenue by 22% and adjusted EBITDA by 25% over prior year. We had strong fourth quarter results as well, with consolidated revenue of $248 million which exceeded our guidance range and was up 12% year over year and 2% sequentially. We also achieved adjusted EBITDA margin of 7.8% which was slightly better than anticipated. Our performance in 2012 was driven by growth in demand from both our traditional clients as well as our MSP clients.

AMN is on track with our strategy to expand our leadership position as the nation's innovator in healthcare workforce solutions. With clinical labor making up half of a hospital's cost structure, healthcare providers are increasingly seeking sophisticated, innovative solutions to improve patient outcomes, cost management and access to talent. We continued our strong momentum in this area as we added over 20 new MSP clients with an estimated $85 million in annualized gross spend under management, which at maturity should yield over $40 million in direct revenue for AMN. Our direct revenue through MSP clients increased this year by 37% to $253 million, representing 39% of our nurse and allied staffing business. In nurse MSP contracts, we typically achieve field rates that are nearly double those in traditional contracts, which enables us to grow faster during periods of expansion, and provide some protection during down turns.

We are also benefiting from growing MSP trends in the allied staffing and Locums businesses. MSP clients now make up 18% of our allied staffing revenue, compared to 13% just a year ago. We also signed our first Locum Tenens MSP clients in 2012. We expect to see continued MSP growth in nursing, allied and Locums and feel we are very well positioned in the industry to capitalize on these trends. For 2013, our MSP pipeline remains robust and we anticipate further penetration across all of our staffing businesses throughout the year.

This year we also made progress in our other workforce solutions such as recruitment process outsourcing, electronic medical records implementation and workforce consulting. A recent study showed that 43% of healthcare organizations are rethinking and investing in their existing recruitment strategies to improve satisfaction and reduce time and cost to hire. While these service offerings are still small in revenue to AMN, they are higher margin and they strengthen our position with our clients as a strategic partner.

Now let's review our results by business segment. Fourth quarter nurse and allied staffing revenue was up 18% year over year and 5% sequentially. The largest contributor was the travel nurse business where volume was up 25% year over year and 7% sequentially. The travel nurse demand growth was in both traditional and MSP clients and evenly distributed across geographies. Clients with orders, clients with clinicians on assignment, and nurse applicant supply were also up year over year. In addition, due to client demand and very strong execution by our team, we have been experiencing a higher level of EMR engagements during the fourth quarter and continuing into 2013. Going into the first quarter, strong bookings have continued within the travel nurse business and we expect volume to be up approximately 20% year over year. There are two fewer calendar days in the first quarter which will somewhat dampen the sequential revenue performance.

Now turning to local staffing, fourth quarter revenue was down 9% compared to the prior year and 1% sequentially. The lower year-over-year revenue was due primarily to the office closures that took place in the fourth quarter of last year, as well as some cancellations from hurricane Sandy. Despite lower demand and supply constraints in certain markets the business continues to stabilize with working nurses, accounts with revenue, and bill rates flat sequentially.

The New York and Philadelphia offices that we opened in 2012 have continued to produce month-over-month revenue growth as they support MSP accounts. Based on these trends, first quarter local staffing revenues are expected to be up slightly, both year over year and sequentially. Fourth quarter allied staffing revenue was up 12% year over year, but down 2% sequentially with the year-over-year growth occurring across most specialties. Recently, however, therapy orders have declined as a result of several reimbursement impacts. Beginning back in the fourth quarter, there were changes made to the therapy reimbursement caps which resulted in a lower demand for physical therapists.

In April 2013, therapy providers are expected to experience further reductions for reimbursements that are tied to multiple procedures. As a precautionary measure, some therapy clients have reduced their use of travelers as they determine the impact of the reimbursement reductions. Therapy staffing currently makes up slightly more than half of our allied staffing revenue. Going into the first quarter, we anticipate allied staffing revenue will be up 2% year over year but down sequentially, driven primarily by strong growth in imaging, respiratory and lab staffing but offset by a decline in therapy staffing.

Locum Tenens fourth quarter revenue was down 3% year over year and 7% sequentially. The sequential revenue decline was due to typical seasonality. The year-over-year revenue drop was driven mainly by declines in our radiology, government and surgery businesses. The radiology business has experienced significant market declines over the past two years and AMN was overweighted relative to the industry in this area. Over time we have shifted away from the speciality and today it represents only about 6% of our Locums revenues.

Gross margins improved by 250 basis points year over year due to our pricing and margin improvement initiatives. Based on the demand trends and progress that the team is making towards its initiatives, we expect 1st quarter Locums revenue to be up slightly year over year and sequentially. In sufficient permanent placement, fourth quarter revenue was up 8% year over year and 1% sequentially. The year-over-year improvement was driven mainly by higher placements and active searches in the fourth quarter. We are very pleased with the continued progress of this business segment. And in the first quarter we anticipate revenue will be up in the high single digits year over year and slightly down sequentially.

We are excited about the positive outlook for 2013 and future years. The longer term trends fueling demand for our services include the growing adoption of workforce solutions, the increased demand for healthcare from the aging population and the addition of 30 million insured citizens, and the worsening clinical labor shortage as clinicians and physicians retire. To ensure we are well-positioned to maximize this future opportunity we are making increased strategic investments today in three key areas. The first is what we call our digital transformation which includes innovative recruitment technologies, job distribution platforms and mobile applications to aggressively attract more candidate supply. The second is in the continued differentiation and expansion of our suite of workforce solutions. And the third investment is to streamline our technology infrastructure for greater efficiency, scalability and agility. This higher level of SG&A spending is expected to be an important contributor to delivering industry leading revenue growth and improved operating leverage in the future.

Before I hand it over to Brian, I would like to take a moment to thank our very talented and experienced team members who have delivered the solid performance and results we are reporting today. Our team members are exceptionally passionate and committed to delivering excellence and value every day to our clients, clinicians and physicians. It's this level of engagement and execution, combined with our differentiated strategy that has set us apart in the market place and enables us to deliver greater shareholder value. I will come back to you in our Q&A section along with Ralph and Bob to help answer your questions. For now I will turn the call over to Brian.

Thank you. Good afternoon everyone. Our fourth quarter revenue was $247.8 million, up 11.6% from last year and 1.6% from last quarter. Revenue exceeded the high end of our guidance to a stronger than expected December performance. Travel nurse volumes were better than expected and the sales teams did a great job of rebooking the majority of travelers displaced from assignment due to hurricane Sandy.

For the full year 2012 we recorded revenue of $954 million, 7.5% increase from 2011. Our gross margin for the quarter was 28.5%, up 20 basis points from last year and flat from last quarter. The year-over-year increase was due to margin improvements in both the Locum Tenens and physician perm placement segments more than offsetting a lower gross margin in the nurse and allied segment. Full year 2012 gross margin of 28.3% was up 20 basis points from last year, due primarily to an increase in the Locum Tenens segment. SG&A in the quarter totaled $53 million or 21.4% of revenue compared to 22.1% in the same quarter last year and 21.5% in the prior quarter. The year-over-year SG&A margin improvement was due to improved operating leverage. The sequential SG&A margin improvement was due to lower professional-liability expenses, partially offset by higher bad-debt expenses. Full year 2012 SG&A was $202.9 million or 21.3% of revenue, representing a 70 basis-point improvement from the prior year.

Our fourth quarter Nurse and Allied segment revenue increased 18.1% from the prior year and sequentially by 5.2% to $175 million. Volume grew 14.3% year over year and 3.2% sequentially to an average of 6075 clinicians on assignment. In a side note, this is the highest volume level since 2008. Revenue per day was up 3.4% year over year, and 1.9% sequentially, due to an increase in the average bill rate and our favorable business mix. Nurse and Allied gross margin of 26.6% was lower year over year by 80 basis points, with an improved bill pay spreads being more than offset by higher housing and insurance costs. Gross margin was relatively stable sequentially.

For the full year 2012 Nurse and Allied revenue was $653.8 million, up 14.6% from the prior year. Full year segment gross margin was 26.5% down 30 basis points from the prior year due to a prior year $2 million favorable workers compensation reserve adjustment. Excluding this adjustment, gross margin was flat as housing and insurance cost increases were offset by improved bill pay spreads. Fourth quarter Locum Tenens segment revenue of $62.7 million was 2.8% below prior year, and down 7.2% sequentially. Gross margin of 28% was up by 250 basis points from the prior year, due primarily to improved bill rates and bill pay spread but was down sequentially by 40 basis points due to lower perm conversion fees.

For the full year, Locum Tenens segment revenue was $261.4 million down 5.9% from the prior year. Full year gross margin of 27.9% was higher than the prior year by 210 basis points. The margin improvement resulted from bill pay spread increases across all of our specialties. Our fourth quarter Physician Permanent Placement segment reported revenue of $10.1 million, up year over year by 7.9% and sequentially by 1.2%. Gross margin improved by 350 basis points from the prior year and 110 basis points from the prior quarter. From improved recruiter productivity and a favorable reduction to our sales reserve due to improved trending in our sales adjustments. For the full year Physician Permanent Placement revenue was $38.7 million as compared to $38.9 million in the prior year. Without the impact of deferred revenue accounting changes implemented in 2011, segment revenue was up from the prior year by 9%.

Adjusted EBITDA for the quarter was $19.2 million, representing 7.8% of revenue. This compares to $15.8 million or 7.1% of revenue in the prior-year quarter. Interest expense in the quarter was $3.2 million, which compares to $5.6 million last year, and $3.7 million last quarter. Our tax rate in the quarter was 35% which included a favorable $740,000 adjustment from the statute expiration of a state tax reserve. Excluding this item our tax rate for the quarter was 42%. This adjustment represents $0.2 of earnings per share.

We reported net income from continuing operations of $7.1 million in the fourth quarter and $16.3 million for the full year. Diluted earnings per share was $0.15 for the fourth quarter and $0.35 for full year 2012. Excluding the impact of debt refinancing, amendment costs, and Medfinders integration expenses in the prior year, adjusted EPS for 2012 was $0.47 as compared to $0.16 in 2011.

Operating cash flow for the quarter was $18.5 million and for the full year was $60.5 million. Capital expenditures for the fourth quarter were $1.7 million and for the full year were $5.5 million. Day sales outstanding were 53 days compared to 54 days in the last quarter and 57 days last year. As of December 31, our cash and equivalents totaled $5.7 million and our total debt outstanding net of discount was $158 million, a $44 million reduction from a year ago. Our year-end leverage ratio as calculated per our credit agreement was 2.4 times as compared to 3.3 times at the end of last year. The Company made $12 million of voluntary debt prepayments during the fourth quarter.

Now let's turn to our guidance for the first quarter. Consolidated revenue is expected to be between $246 million and $250 million, representing year-over-year revenue growth of 9% to 10%. This reflects two fewer calendar days in the first quarter, which primarily has an impact on our nurse staffing businesses. Gross margin is expected to be between 28% and 28.5%. SG&A expenses as a percentage of revenue are expected to be 21% to 21.5%. And adjusted EBITDA margin is expected to be between 7.5% and 8%.

For the first quarter we expect interest expense to be $3 million and non cash stock-based compensation to be $1.6 million. Our first quarter and full year 2013 tax rate is expected to be 43%. Capital expenditures are expected to be approximately $2.5 million in the first quarter and $10 million for the full year. Diluted share account is expected to be $47.6 million for the first quarter and approximately $48 million for the full year. And with that, we'd like to open up the call for questions.

Thank you.

(Operator Instructions)

Jeff Silber with BMO Capital Markets.

Thank you so much. Susan, in your remarks you alluded to some of the potential benefits from the Affordable Care Act. I was wondering if you can give us a bit more color?

Are you hearing any of that as of yet? I know it's still a little bit early but I am just wondering what your clients are saying about that. Thanks.

Sure. Great question and something we are very focused on. I think we are already seeing a little bit of a benefit because clients are wanting to really get their arms around the cost structures and find new ways to become more efficient, more agile and that leads to more sophisticated outsourcing solutions.

Since labor is half of their budget it's a big area of opportunity for them. And I think that our MSP solution, as well as recruitment process outsourcing and some of our consulting services, really helps to identify those kinds of opportunities for them. We can show clients how we can help them reduce their aggregate cost of labor and yet still maintain flexibility as their needs might go up and down over time.

In the future, we do believe, and not just us, there are a lot of reports that suggest that the 30 million more insured will be driving more demand for early diagnostic in preventative care. And that will result in more demand for primary care physicians as well as probably advanced practice nurse practitioners and physicians assistants. So those are two important areas for us. Two of our faster growing areas today and we're making sure that we have those properly resourced for the future.

We think that there are some specific opportunities and have been talking with clients about supporting them in the ACO model. It's still pretty early but we have seen an increased demand and desire to work with them by providing case managers, health coaches and other types of facilitators to make sure that they can transition that patient out of the hospital setting. And then prevent them from coming back and creating reimbursement issues.

It's really believed that the greatest growth in healthcare in the future is going to come outside of acute care. So we're very mindful of that, and we're making sure that we are expanding our client base in non acute settings such as home health, rehab, outpatient, sub acute, even tele health. So we are already staffing into those markets but we want to make sure that we are adding resources so that we are well positioned as they start to pick up even more momentum in the future.

That was helpful. Thank you. Just as a flip side to that question, I'm curious if you have calculated or estimated what the impact would be on your own business in terms of added cost for putting either your temporary employees on giving them health insurance or going into exchanges or paying the penalty.

I will have Ralph answer the clinician part of that question and then maybe have Brian talk about the corporate staff.

Hi Jeff, this is Ralph. We've been analyzing the impact of the Affordable Care Act literally since the bill was passed. And as a leader in the industry we've also been working with ASA and with other staffing industry leaders in shaping the regulations that could potentially have unfairly burdened us and our industry. AMN was really kind of well positioned for this type of change.

We provided robust healthcare to our full-time clinicians for almost two decades and we expect to continue do so in 2014. We're going to need to make minor changes to our health care benefit program that would result in a small increase in our overall cost for healthcare coverage. But we anticipate that the estimate increase that will be shared among both plan participants and our clients and that really little or no impact on AMN margins.

Yes, on the corporate side as well we already offer full benefits for our employees and for the most part they are compliant. There will be some modification we'll have to make as well but the impact is expected to be under $1 million for us. I think we're on top of it and continue to look at program changes we can make to minimize that impact as well.

Okay. Great. Thanks so much.

Thank you Jeff.

A.J. Rice, UBS.

Thanks. Hi everyone. A couple of different questions if I could. You guys were giving us a lot of information which is great. I am not that fast a writer.

Brian, on your comment about hurricane Sandy and then also the stock comp expense, can you give me those comments again?

We are just really talking about obviously our performance in the 4th quarter was a little bit above the high end of the guidance range. A lot of that did come from a very strong December. The last time we reported it was right after hurricane Sandy occurred, so we were being a little conservative on the impact.

The team did a great job. We were impacted in New York from one of our facilities but we were able to get most of those nurses rebooked into other assignments. So the impact was less than we expected.

I see. And you made a comment about stock comp expense.

Projection for first quarter, I said $1.6 million.

Okay. A couple other things in the 4th quarter. I just was curious what you would say if they had any impact.

Obviously there is a lot of flu activity late in the quarter. Does that drive any volume? I guess that's continued over into January. Have you seen anything much to speak of there?

I think one of your competitors said they had seen a pick up in strike business. I guess they're more known for that than you are but I wonder if that had any impact.

Hi AJ this is Ralph. I'll handle that one. On the flu season, you know it changes every year.

Swine flu we had a pretty good year that year but then it kind of died off pretty quick. Last year there was really kind of no, the flu was a fairly you know weak strain so we didn't see any increase. So we kind of have to estimate this. You don't know when the ICU nurse goes to work whether they're going to work on respiratory patients only that have flu or whether they'll do other work while there.

Sure.

Our best guess is that it was about 1million to 1.5 million incremental in the quarter.

Okay.

It's not going carry into Q1 unfortunately. Maybe just a little bit into Q1. In our local staffing business, not anything significant.

All right. How about on the strike business? Does that effect you at all? One of the other companies said they saw a nice pick up in the 4th quarter.

We didn't have any strike revenues in the 4th quarter. You're right, we're not big in that business.

Okay. Susan made an interesting comment about the physician retirements and I guess that's true probably for other clinicians as well. I know a lot of national statistics get published with a lag.

Have you actually seen, I know there was a lot of delaying of retirements in the recession. Have you seen at this point now where that's starting to pick up again and do you have some way to track that? Is there any data you can give us along those lines?

Unfortunately AJ there is not real-time data regarding the reason why clinicians or physicians might be leaving their current job. Or for that matter on the physician side there is not even real-time data on the attrition rate.

Anecdotally we are hearing more physicians become more comfortable in making changes. I think some of it's a little bit aided by improving housing market as well. You are seeing that translate into improvement in our physician perm placement business as well, where we have some of the highest placement productivity that we have seen historically. I think that's a result of both the teams' great efforts but also the willingness of more clinicians to actually make those moves.

On the nursing side, there are some statistics that come out regarding the number of job openings and quits. Quits are often a reflection of a clinician deciding that they want to retire or go do something else. And in the November was the last statistic reported and the number of quits were up 10% year-over-year. That's been the trend. It's been an increasing trend. That would actually translate into the anecdotal information that we received from our clients which is that they're seeing a higher level of attrition, a higher level of vacancy.

Okay. I may just slip one last one in there. You mention you are having discussions with ACO efforts and some of the new models and potentially could develop under health reform.

I know some of the other providers are being asked to take a look at their compensation structure and maybe take on risks or maybe make adjustments to the way they've historically been paid. Is there anything like that you are contemplating? Maybe that's incorporated in your MSPs. I am just curious if anything is changing in your discussions with those.

No there is not. The short answer is no, those aren't the types of conversations that we're having. In fact, even the ACO discussions are very early. I would say our participation in the actual ACO model is a bit on the fringe.

Okay.

In terms of you know how we can help them facilitate. If anything I believe that their focus on patient outcomes is resulting in a higher desire utilization of outsource solutions like MSP, which ensures that they have the staff when they need them. And being properly staffed is one of the highest correlators to patient outcomes. So I think that's motivating them as well as just the overall cost containment.

Okay. Sounds great. Thanks a lot.

Tobey Sommer, SunTrust.

Thank you. I had a question for you that kind of a follow up to your response to one of the recent ones. You had mentioned kind of turn over rates is potentially picking up. Could you talk a little bit more about that if I heard you correctly?

Sure. And the data I'm quoting comes from the jolts report that comes out usually about 60 days after the fact. And so as I said November is the last data that's been reported. It's been consistently going up, the number of job openings.

Toby I think you actually put out some of the best research on tracking the number of job postings out in the market place. And it absolutely correlates with what we're seeing is that there is a higher level of attrition with is translated into a higher number of permanent job postings that are out there. That obviously helps our PO business but it also helps our contract travel nurse and local businesses because when those positions are open, assuming they have the patient volume, they need to have a clinician at the bed side.

I think that has translated into some of the order growth that we've seen. Our travel nurse orders today are more than double what they were a year ago. Ralph, would you like to comment more on that?

Order volumes have certainly increased. Our demand in travel nursing was up about 5% over last quarter but 100% over the same time frame last year when our order volume was dropping as you might recall. I think people were worried about reimbursement issues, at that time.

I think an important part of this, Susan, is the key indicator is the med surge specialty. I talked about this before. When med surge orders start coming back I feel like the industry could return to its prior high overall.

We saw 225% increase in med surge orders. That's kind of a current statistic over what we had last year which is pretty significant. I think it's our second or third high specialty now and it's been running as low as 20th or 30th most requested speciality in the last couple of years. A lot of good positive signs there that demand is increasing. They probably hint at the turn over and quits ratio going up.

Thank you. As a follow up, could I ask a question about your--the margins in your physician staffing business? I know that this is one of the segments that you have a little bit more visibility in and you had some pricing actions that rolled into your segment last year. What are your expectations for margins in the physician business?

First of all I'll talk about the current quarter was 28%, year-over-year improvement at 250 basis points I think we mentioned in the script. That's really resulted in better margin management by the team, gross profit growers grew over prior year by $1.1 million or 6.7%. Volume going down 2.8 but gross margin goes up by 6.7% which is kind of a beautiful story for shareholders. We'd like to see the revenue grow as well but it certainly was a very significant accomplishment there. Nearly 80% of that dropped to the bottom line during the quarter.

Looking forward we do think we still lag the industry a little bit, are a little bit over weighted on government which is lower margin. And the radiology business which is becoming less and less of an impact is still a larger share of the business at lower margin. We do think there is some room for improvement. I don't think we're giving forward-looking guidance on that. But I think there is some NATO data out there that suggests that industry margins are closer to 30%.

We think longer term, Tobey, that we can absolutely improve our Locums gross margin. There will be some effect from mixed changes along the way but our longer term goal is to get gross margins in our Locums segment to the 30% plus mark.

This year will probably be minor improvements. Again you might have some mixed shifts along the way that could even mute that. When we look at our gross margins overall we really think of them as being stable. We certainly expect to get pricing increases but that will be largely offset by the desire to pass on pay increases as well as some head wins in our housing expense. I wouldn't look for tremendous profitability growth from margin expansion in the near term.

Thank you. I was wondering if you have a CapEx number for 2013? I apologize if you already gave it.

And if you can try to get a feel for demand resulting from the Affordable Care Act. Do you think you would feel it sooner in the nurse and allied segment or the physician segment? Thanks.

I'll grab the first question. This is Brian.

I think CapEx for the year will be around $10 million. That's right about if you look at guidance for the first quarter right around 1% of revenue I think for foreseeable future we're targeting right around that level.

And then talking about the impact, in terms of direct demand from more insured citizens needing that early diagnostic preventative care, that is going to hit the primary care physician, the nurse practitioner, the physicians assistant most directly and we would expect 2014 and beyond. But as I said we really believe that we're starting to feel some of the impact today across all of the businesses as our clients across all of the segments are trying to get their arms around their overall spend. Maybe the best way to describe that is to have Bob talk about the MSP pipeline and some of the changes and the trends that we're seeing there.

We are definitely seeing an increase, not just in the nursing and allied sector or nursing sector but now we've got a more diverse pipeline of allied and the Locums sector has started to pick up in terms of MSPs. The nice part of that is they're not just all very large clients. There is a lot of medium and small clients.

And I think that speaks to different hospital systems taking a look at all their work force and trying to make some determination as to how they can balance that workforce. And how they can decide how much of it should be internal, how much should be flow pool, how much should be contract labor. I think the question on the table on the Affordable Care Act is how many employees should the client keep on their staff and then how many should be in perhaps a float pool.

It's a little early on to be having that dialogue but it's certainly one we can have with our clients. With our consulting group we actually are having those kind of engagement and conversations.

Thank you.

Thanks, Tobey.

Josh Vogel, Sidoti & Company.

Hey good afternoon everyone.

Hi Josh.

I know you talked about this a little bit but as you look at the nursing allied segment in 2013 can you just talk about any additional drag you expect to see on margins from housing and insurance costs? Are you starting to pass some of this along to clients?

Hi Josh, this is Ralph. I'll start and if Brian or anyone else has anything to add they can. In the nursing allied segment the kind of demand levels we are seeing we don't really anticipate pressure on margins from the customers' side. I would expect to see increases in wages as we try to attract people back to the industry.

And then housing which we did a phenomenal job of managing. Housing increase on year-over-year basis was well below industry average. We were about 3% we think according to reports. We have seen 4% or 5% and even higher in some markets.

We did a great job there. We will see continued pressure upward there. There is just not enough units available and then on insurance.

We think all of these are going to be offset by customers' willingness to take on cost of living and bill rate increases that offset that. They are going to want the supply so they'll increase prices slightly to match that. So no margin challenges really on the nursing allied segment.

The biggest challenge in the nursing allied segment is right now the demand challenge in our allied business where our therapy business and allied roughly half of that business. Susan mentioned that clients are starting to slow down. They are used to staffing while they work the impact of reimbursement changes.

We have done a great job of managing through this already and our Q1 results are expected to be better than probably most competitors in this area. And that's primarily driven by our MSP business which kind of protects our down side in a down market. It's great for us in an up market but in a down market it also protects us. As we control the orders we use less subcontracting and we fill them with our own people.

So again we get it upside there as well. And in fact at the end of the day our market share probably will improve if the decline stays in place for any period of time. We still hope for some reimbursement relief.

It's a tough time for our customers. But it's a good time for those that are putting in place MSP programs. It helps them become more efficient in their use of contingent labor.

That's helpful. Thank you.

Susan, you talked about some initiatives for 2013. I was wondering if you can go into more detail about the quarterly trends in SG&A spending throughout the year. Is most of the spending going to be more up front or should it taper off throughout the year?

Sure. Just as a reminder there were kind of three major areas that we're focused on in increasing our spending. The first was around digital transformation and driving more supply. That began kind of mid last year and that will continue into the latter part of this year.

Most of the work will be done by the summer of 2013 and then we'll have follow on projects after that. But it's not as if there is a permanent end either. Because if these initiatives work we'll be wanting to continue to spend money in areas to drive more supply.

But it's going well. We're seeing some positive, early results by being able to get our jobs out to the market faster and more efficiently. We are seeing good signs of pay back in that.

The second area is in building out more of our workforce solutions. We talked about our launch of Locums billing last year. But we're also adding more resources in our RPO division and other areas such as consulting so that we can really position ourselves as that strategic partner for our clients.

And then the third area is around our technology systems and improving our front office systems. In bringing our multiple staffing businesses on a common platform, the same platform we've been using very successfully for our nurse and allied business. But unfortunately our Locums business and our local staffing have been on other legacy systems.

And the more that we're cross selling and having clients use multiple service lines the more important it is that we have a view of what we're doing with that business and where the opportunities are. There are also systems changes we can put into place for greater efficiency.

I know I am giving you more than you ask for but I guess I just want to give you a picture of why we're spending these dollars and the impact that they're expected to make. In the 4th quarter as an example it is about a $1 million that we spent in these areas. In the 1st quarter it will probably be a little bit less than that. But it could step back up and be a little bit more in the second quarter. It ought to start to taper off a bit towards the end of the year.

Okay. That's great. Thank you very much.

I'll jump back in the cue. Thanks for taking my questions.

Okay. Thank you.

Gary Taylor, Citigroup.

Hi, good afternoon.

Hi, Gary.

I'm sorry. I know you have talked about kind of this digital transformation in marketing, helping to drive supply. I was hoping for a few examples of that but I just had to put it on mute for a second so if you just went through that I'll skip to my next question.

I'll give you a couple more examples. I talked about job distribution and getting our jobs out to the market more real time. And prior to some of the technology we've recently implemented it was a fairly manual process and could take days to get some of our jobs out to the market. Now we're able to more seamlessly get jobs out within hours to a much broader kind of set of opportunities.

We also have the analytics to determine where we're actually getting return for those dollars and where we're getting the most leads, applicants, and ultimately placement so that we can more efficiently spend our dollars to attract new supply.

We're also updating all of our websites. In fact, if you go to our AMN Healthcare website you'll see that's been refreshed to better position our work force solutions and well as all of our businesses. We're also updating all of our recruitment sites, such as Staff Care, Med Travelers, American mobile.

Most of those are in progress now. You'll see them roll out throughout the year. They'll be utilizing some of the newer tools and technology, interactions with social media, all of that to drive a better user experience and ultimately more applicants. And a higher conversion rate of the applicants that we get.

There is also a whole mobile strategy to all of this since more and more job searches are starting on smart phones. We need to make sure that our sites are very mobile friendly. And so you'll see all of our sites have a mobile version where people can easily search jobs, apply, interact, find out what their last paycheck was, whatever they want to be doing on their break.

And then the last area is just around communications. Maybe not quite as sexy as the others. But how do we actually interact and communicate with our travelers on a daily basis?

More and more they're wanting do that through texts and other medium since they're busy on the go and at work. Making sure that's as efficient. Those tools are in the hands of all of our sales people 24/7. Is that helpful?

Yes that's helpful. That all sounds very good.

I mean how do you assess whether that's really being successfully market leading and giving you market share of supplies? Is that anecdotal? How do you kind of gauge how successful those projects are?

Definitely not anecdotal. I think in the past recruitment has been more of an art than a science. This actually brings a lot of science into the measurement systems. If you take a look at our applicant experience which was the catalyst for doing this, we wanted to change the way that people can get a job here and that application process might have taken up to four hours in the past.

You know we think we can cut that down to 30 minutes. You will come into your linked in. It will download all your linked in information. It will download to us where your friends are and where they live so we can match you up to job assignments near where your friends are.

You can download your resume' from drop box. It will automatically populate those application forms. Things go a lot smoother.

As a result we do expect to be able to grow at above industry rates and that is actually built into kind of our plans here and our compensation systems. So we do intend to measure it. If you just take a look at the last 13 weeks and we are early on in this.

We only have job distribution, some of the communication tools, and some of the improvements in that application experience finished at this point. Let's look at the 13 weeks verses the same period last year. Our RN applicants are up by 89% and our allied applicants are up by 59%. These are very high ROI and very calculable returns on investment for these, all of these initiatives.

That's great. Two other quick ones. Brian, I again am doing too many things at once but I had written a note earlier about an insurance adjustment in the 4th quarter. I didn't catch if it was 4Q 2012 or 2011.

That was actually when I was talking about full year over full year. We had a worker's comp adjustment in the 3rd quarter of last year 2011.

Okay.

That was talking about nurse and allied margin on a year-over-year basis. Full year though. 4th quarter there really wasn't any meaningful adjustments.

Got it. And my last question is where do you feel like you need to get to in terms of industry recovery, outlook, et cetera, to get back to annual guidance? I know that's probably not your favorite question but just interested in what your latest thinking is around that?

At this point we feel comfortable giving the quarterly. We really aren't thinking about doing annual guidance. We tried to give more color around the trends we're seeing in the industry, not just for the quarter but longer term as well. We try to paint that picture.

In terms of full-year guides obviously we haven't given it for 2013 and we won't intend to give guidance beyond each quarter. Obviously we visit that question each year but at this point we're not planning to change that.

Okay. Thank you.

Thanks Gary.

Mark Marcon, R W Baird.

Good afternoon. Wondering if you can talk a little bit more about what you are seeing in terms of candidates coming in to travel nursing and specifically what you are seeing specifically with your fill rates and how you think that's trending?

This is Ralph, I'll handle that one again. On the applicant side very strong there. Like I said 89% year-over-year. I'm using a rolling 13 week period for that comparison, same period of last year.

Those are the applicants in the specialities that we need them in so we have a way of identifying what the skills most in demand and we target all of our marketing efforts towards them. Some of the examples of that are the follow me ads where people click on our website. We follow them around and shoot ad data at them until they finally apply. It takes visits four or five visits to our website before we can get them to do that.

On the fill rate side, our fill rates on our MSP customers went as high as they have ever been in the quarter. I think we were almost up to 80%. Our overall fill rates were good.

We did see a little bit of a slow down in our fill rates on third parties. And just that's just when we have an order from another MSP provider or a vendor neutral provider in that space. That's probably result of having a lot of demand in our other bucket.

It is an area, one of the things we would like to address. We'd like to have our fill rates in the 40% range on those 3rd parties as well. We're working on improving that. But in our traditional and in our MSP accounts our fill rates were as good or better than they have been in prior quarters.

It sounds like from all the steps that you're taking you anticipate that would continue.

Yes, yes. As a matter of fact just a small improvement even in our Locums business. I didn't mention that. But it was a slight improvement in fill rates there in the quarter.

We think as we get more MSP business in that space that we could see more significant increases in our fill rates there. We've got the supply. The customers' demand is good. You know other than allied where they're nervous about reimbursement, I think yes we would see improved or like I said fill rates as good or better than we've had.

On the allied that's roughly about 20% of the nursing allied staffing, right.

Correct.

It's roughly 10% of the nurse allied is where the reimbursement issue is.

Yes.

Okay. And how significant do you think that's going to be? What sort of degradation would you anticipate seeing in terms of the demand over the course of the year as that's unfolding?

You know the demand is already down considerably. Think in terms of down by half. But the issue is it was so high to begin with that we haven't necessarily felt that full impact.

And then you put on top of that the fact that we have more MSP contracts in allied and that has really helped us I think better than maybe others in the industry. Because we are able to improve our fill rates at those MSP clients. I think Ralph described this earlier. That allows us to weather through those fewer orders better. Much like we have in the nursing business in the past.

Last year at this time the travel nurse business orders were down. Yet we grew because we were able to increase our fill rates at our MSP clients and increase our direct fill. We're seeing the same thing happen right now in allied for the PT business. I'm not suggesting that we can grow through it because it could last longer and be more severe but I think that we'll fair better than most and as Ralph said probably pick up some market share along the way.

But, you know, when it will end we really don't have a clear line of sight on that. We're expecting at this point it could continue through the end of the year. We're prepared for that which is why we're also ramping up our resources in other areas in allied that are growing very nicely. Our imaging lab and respiratory teams are doing an outstanding job and we're seeing great growth in new applicants and orders and see nice TOA growth to offset some of the decline in therapy.

What percentage of the current nurse in allied is currently derived through the MSPs?

It's 37% or 39%. (multiple voices) 39%.

39%. And then you ended up--you gave the figure earlier, the total billing potential that you ended up winning through the new MSPs over the course of the year is how much?

Well we sold 20 accounts that represented about $85 million in billings. And then we represent--we think that represents over $40 million worth of direct fill, meaning the AMN portion of that. But you know when we do this it's helpful to kind of understand how we think about it, maybe how you should think about it.

I will give you an example where we just recently closed some business at one client and then another client has decided to go the MSP route and we're in final negotiations. Between the two they're kind of polar opposites. One extreme example is that we virtually do no business and took it away from a competitor who had it as an exclusive. We'll be doing 100% of that business but an $8 million account. 100% of that will be incremental for us. A very large portion should be direct fill.

Another client where we're actually doing quite a bit of business, about $8 million worth of business has the potential of doing $15 million of the business. And we'll protect the 8 million and then grow on top of that. When we talk about how much of it will be billing for us on the gross billings number it's a mixture of the kinds of business that wide variance and the gains we can get by account. We like both of those scenarios. One of the reasons we like the one of course is we protect existing business we already have and have a chance to fill even more. The other someone we love it when it's incremental business.

So how much of the $40 million would you say is incremental?

We don't typically give that number but I would tell you that far more than half of that business is incremental.

Then with regards to the percentage of hospitals that you serve now, what percentage would you say are currently have an MSP in place and where would you anticipate that being in a couple of years?

I think the growth is--well as a percentage of the total clients that we serve it is still relatively small percentage. We talked about the fact that we service several hundred facilities. They're in the market place today. Our sales and marketing efforts talk about somewhere around 400 to 500 facilities so you can put the math to it. That's as a percentage of all acute care facilities out there.

I would tell you that from a growth standpoint we're seeing our pipeline is growing pretty quickly. We have seen some trends though where clients have maybe taken on an MSP and it didn't go quite so well. We actually just recently circumstance where one of our competitors sold an MSP to a client and the implementation has just not gone well. Frankly after just a few months they've discontinued it.

We can find situations where actually the client has been burned a little bit by a poor implementation. That's somewhat of a new trend and frankly a little bit concerning to us.

On our side of the house we are very, very conscious of the fact that you just have to have the best resources you can get in the industry. We believe we do in terms of implementation, the account management. So, investing in those resources is probably as important as anything we do.

Also pricing it right. Making sure that we are getting good margins. Our margins on our MSP business as we have said in the past are actually slightly higher than the rest of our business. So it's a great model for a lot of good reasons but you have to do it right.

Then can you talk a little bit about Locum Tenens? It sounds like you are basically going to see an inflexion point here in the coming first quarter. Is that basically because some of the areas that have been under pressure such as radiology are basing out or just because of the growth in the other areas?

It's really a combination of a few things, Mark. First, I certainly give credit to our team and the leadership there who have made a lot of changes and gone through a fair bit of reorganization implementing new incentive plans and different things to refocus the business on the growth areas of which there certainly are many. And also to make sure that we are not spending too much timing resource on the areas that are under pressure such as radiology.

So it's taken about a year to kind of move in that direction. But I agree. I think first quarter is a very important inflexion point for us. We see the positive trends continuing as we look at our leading indicators and would expect that that business will continue to see growth throughout the year. I do think it will be more towards the end of the year before we are what we consider to be full market growth rates but we're certainly making progress towards that.

Great to hear. Thanks.

Tobey Sommer, SunTrust.

Thank you. Just a detailed question. You mentioned fewer billing days in the first quarter. Is that sequentially year-over-year or both?

Both. So particularly for our nursing business because our nurses can kind of work any day. So we really look at the focus on the number of calendar days. So 4th quarter has 92 days. First quarter has 90 days. If you remember 2012, so first quarter of last year was Leap year so there were 91 days last year.

Then I apologize. I didn't get this detail when you were going over it in prepared remarks. You commented on the trajectory of revenue by segment. I was wondering if you could repeat that. Thank you.

Sure. Well we talked about the we went specifically within the nurse and allied business and talked about the travel nurse business being up year over year approximately 20%. And the sequential increase will be a bit muted by this two or less calendar days, two less calendar days. The allied business is expected to be up 2%. Down sequentially. Up year over year at 2%, sorry, and down sequentially because of the pressure we're feeling in the therapy piece of the business.

Local staffing will be up year over year and sequentially just slightly but they should be up as well. And then Locums we mentioned being up slightly both year-over-year and sequentially. Perm placements will be up year over year kind of high single digits, but down a little bit sequentially. That really is more a factor of the very strong 4th quarter they had. The underlying trends within perm placement continue to be very strong.

Thank you very much.

Thanks.

We have no further questions. Please go ahead with any closing remarks.

Great. Well, thank you everyone for joining us today and certainly for your continued support of AMN Healthcare. We look forward up to dating you on our progress next quarter.

Thank you. Ladies and gentlemen that does conclude our conference for today. Thank you for your participation and for using AT&T executive telly conference. You may now disconnect.