AMN Healthcare Services Inc (AMN) 2013 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the AMN Healthcare third-quarter 2013 earnings call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. The instructions will be given at that time.

(Operator Instructions)

As a reminder this conference is being recorded.

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

Thank you, Lori. Good afternoon, everyone.

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

Regarding our policy on forward-looking statements, various remarks and characterizations we make during this call about future expectations, projections, plans, prospects, events or circumstances constitute forward-looking statements. Forward-looking statements are identified by words such as believe, anticipate, expect, intend, plan, will, should, would, project, may, variations of such words and other similar expressions.

It is possible that our actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those identified in our annual report on Form 10-K for the year ended December 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 of 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Developments subsequent to this call may cause these statements to become outdated.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.

Thank you very much, Amy. Good afternoon, Happy Halloween, and welcome to AMN Healthcare's third-quarter 2013 earnings conference call.

AMN's leadership position as the innovator in healthcare workforce solutions and staffing services continues to be a differentiator for our clients. As healthcare providers navigate through a climate of weaker census and budgetary pressures, they are seeking trusted partners who can enable them to create more flexible workforce models that also help them achieve their patient care and financial goals.

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

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

In the third quarter, AMN consolidated revenue grew by 5% with all business segments delivering year-over-year increases. Gross margin increased by 90 basis points over prior year to 29.4%.

We continue to achieve leverage with adjusted EBITDA growing at a rate 3 times faster than revenue. Our adjusted EBITDA margin for the quarter was 8.4%, a 70 basis point improvement over the same quarter last year.

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

In the third quarter, MSP contracts represented approximately 30% of our consolidated revenues. In addition, 7 MSP clients went live during the third quarter and 10 others are currently in the implementation stage.

Another workforce solution we continue to make progress in is recruitment process outsourcing. Our RPO program was recently recognized by HRO Today as ranked number one in their inaugural healthcare Baker's Dozen award for outstanding quality and customer service. We anticipate ample runway for us to continue to expand in value-added services such as MSP and RPO in the coming years.

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

Despite a tepid demand environment, third-quarter revenue for this segment was up 3% year over year and 1% sequentially. The largest contributor was the travel nurse business where volume was up 2% year over year and revenue per traveler per day was up 5%. These increases were due mainly to higher EMR staffing revenue, which hit a record high in the third quarter.

Overall, our traditional travel nurse clients continue to have a more cautious mindset due to the effective sequestration, budgetary concerns and soft hospital census. Throughout the third quarter, travel nurse demand was at or below prior-year levels. Throughout October, however, orders have strengthened and have generally been above prior-year levels and are up nearly 20% over the prior month.

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

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

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

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

We now turn to the Locum Tenens segment, which has become a real bright spot with third-quarter revenue increasing 11% year over year and 4% sequentially. This performance represented a third consecutive quarter of both year-over-year and sequential revenue growth. The year-over-year revenue improvement was driven mainly by a strong demand environment and solid execution, leading to growth in the hospitalist, advanced practice, primary care and behavioral health specialties.

Overall days available grew by 10% over the prior year helping to fuel the growth.

Gross margin of 29.3% was also a record high, representing an improvement of 90 basis points year over year and 30 basis points sequentially due to improved pricing and bill pay spreads. These improvements enabled the division to achieve segment operating margin of 10%, a milestone for our Locums' business.

The Division's focus over the last 18 months to realign resources, focus on pricing and gross margin, and be first to market in Locum's MSP continues to pay off. Our MSP revenue mix in Locums is still in the single digits, but we expect the penetration of Locum's MSP to increase, which is evidenced by our growing pipeline. Going into the fourth quarter, we expect the Locum segment to experience strong year-over-year revenue growth in the mid-teens, but be down sequentially in the low single digits due to the normal holiday seasonality.

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

Based on new client wins and search activity we expect fourth-quarter Physician Perm revenue to be up in the mid-single digits year over year and down slightly sequentially, which is a very typical seasonal trend. So while we feel good about our current overall performance, our sights are set on the future and how we will continue to create innovative workforce solutions with our clients and improve our profitability through efficiency and scale.

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

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

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

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

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

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

Thank you, Susan. Good afternoon, everyone.

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

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

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

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

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

Third quarter Locum Tenens segment revenue of $75.3 million was up 11.3% from prior year and 3.5% sequentially, an increase in days filled drove the year-over-year increase, with an average bill rate increase of 3.4% year over year offset by a mix shift to lower bill rate specialties.

Gross margin of 29.3% was 90 basis points higher from the prior year and 30 basis points higher sequentially due primarily to improved bill pay spreads. Third-quarter Locum Tenens operating margin of 10% was higher by 70 basis year over year and 320 basis points from the prior quarter.

The year over year increase was due mainly to the gross margin improvement. The sequential increase was due to the higher gross margin and lower SG&A as second quarter SG&A included an unfavorable $1.7 million professional liability reserve adjustment.

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

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

We reported net income of $8.6 million in the third quarter. Diluted earnings per share was $0.18 for the third quarter, which compares to $0.12 in the prior-year quarter. Operating cash flow for the quarter was $26.6 million. The strong cash flow was driven in part by improved receivable collections along with higher accrued compensation and other payables due to timing of our quarter close date relative to our normal payment cycles.

Days sales outstanding were 52 days compared to 54 days last quarter and last year. Capital expenditures for the third quarter were $1.1 million.

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

Now let's turn to our guidance for the fourth quarter. The Company expects the typical fourth-quarter seasonal decline, combined with a moderate demand environment in Nurse and Allied Staffing, to result in consolidated revenue between $246 million to $250 million.

Gross margin is expected to be 29% to 29.5%. SG&A expenses as a percentage of revenue are expected to be approximately 22%. Adjusted EBITDA margin is expected to be approximately 8%.

Fourth-quarter interest expense will be $1.8 million and capital expenditures are projected to be $4 million. Diluted share count is expected to be $47.8 million for the fourth quarter and the full year.

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

(Operator Instructions)

And our first question from the line of Tobey Sommer with SunTrust. Please go ahead.

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

Hi, Tobey. You know I don't know that we want to call out a particular client situation, but definitely a trend -- and it's a small one, but one that we are seeing -- is clients moving towards or at least voicing the desire to move towards lower core staffing levels so that they can create a more flexible workforce for the future.

But because of that they need to make sure that they have a reliable partner or way to add that staff very quickly. It is one of the things that makes them hesitant to reduce their core staffing levels from, say, 90% to 80% or 70% is they know they will need those people at some point so how quickly can they move towards adding them on.

So we think that has been a driver of the demand for workforce solutions and MSP contracts because they want to make sure that not if, but when they need those people they've got a partner to turn to who has instant access to temporary staff. So again, I don't know that I can -- I apologize I'm not answering specifically about a client, but definitely hearing more clients talk about that desire to have more flexibility in their workforce.

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

Sure. There's actually some really good news in this story because our Locums Division, for example, which seasonally always sees a fourth-quarter drop-off, and is expected to again this fourth quarter, is seeing a much smaller drop-off. And I think it is driven by the momentum that they have and the excellent performance that they are delivering.

Historically, we might have expected to see more of a 7% to 9% sequential decline in Locums and, as we mentioned in our guidance commentary, we are looking at low-single digits. I think that has more to do with their great performance and the strength of the market than any seasonal changes that are occurring.

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

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

EMR was the other factor. We had an exceptionally strong third quarter for EMR. That team has just done a really outstanding job; it was a record quarter for us. The fourth quarter is a very strong, respectable quarter as well.

In fact, it is above prior year, but because third quarter was so exceptionally strong and you get the normal seasonal falloff in the fourth quarter, that will be coming down. It might have been more detailed than you are asking for, but there is a lot of moving parts in there.

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

Our next question from the line of Jeff Silber with BMO Capital Markets.

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

Well, some of it is because of what we have seen in the demand itself, mentioning that orders started to increase. Actually going back to even July and August, we mentioned on our second quarter call that we were beginning to see our seasonal orders and that was a good sign. And that trend continued.

In fact, from September to October our orders increased almost 20%, so there has been enough weeks that we would say that it is more than just a blip. It is probably more of an ongoing trend.

Now I'm not suggesting it is a significant new trajectory, but it is a positive sign that we have come out of that trough and are moving back to what would be more of a normal trend.

I will also ask Ralph to jump in if there's anything else you would like to add regarding the nature of the demand.

I think a couple of things that are encouraging. First, we know bookings did bottom out in May, kind of June and then we've seen upward trends since then as the order counts came back up. We did see the slight increase on orders overall Q3 versus Q2.

And then the trend that Susan already talked about, which is October being up 20% and slightly above prior year. And that's translating into this December lift in our travel nurse business to get back to year over year, or at least flat to prior-year growth by the end of the quarter.

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

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

This is Ralph; I will handle that one again. I think there is a perception, right, because of the way the act was structured that people would be done through all their work by the end of 2014. Really it is not what we are seeing in the pipeline. There is a couple of factors there.

Q3 was super strong. Q4 is actually softest just because it is not a great time to go live. You have a lot of people out on holidays and vacations and things like that. We expect Q1 to get back to a normal level of EMRs. The pipeline runs -- actually we have opportunities that run clear through 2015 in our current pipeline.

So just getting the technology installed and then getting it up to meaningful use there is several different projects that occur along the way. Additionally, we are seeing some hospitals begin to upgrade technologies that are older, dated and so we are seeing next-generation things.

So while it probably does have a bit of a spike in it, we don't see it as something that ever really goes away completely. Very similar to what you see in enterprise-wide software in corporate America. Like Oracle doesn't really have a downturn.

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

In the past we have talked about it being about $5 million a quarter was our run rate. I think that was on the last call. This quarter was a little bit more than double that.

It is a little bit hard to segment out exactly the right -- the total for that business because oftentimes clients just place orders as traditional travel orders that are part of that EMR project. But where it's an identified project and we are really implementing our full management program that is kind of where we get the $5 million run rate number from.

Okay, great. And if I could just sneak in one more. I'm just wondering if the government shutdown had any impact on your business; if you could just remind us of your exposure to the VA and any other government payers.

Our government business, which is primarily in our Locums business, it is about 12% of our Locums revenue, which is primarily with the VA and military facilities through subcontractors. And we didn't see any change because they are still providing care and services and it wasn't one of the areas that was particularly affected. So we didn't see any softness there, any behavior changes.

And it is very small in our other businesses; travel nurse federal government is something like 1%. It's pretty low in Allied and local staffing as well.

All right, great. Thanks so much for the color.

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

Thank you. I just wanted to ask about the comment that the bookings kind of bottomed in May or June. Are you talking about year over year or sequentially on the seasonality? How do we think about that?

This is Ralph again. That comment was about travel nursing; I'll make sure it is not about the entire Nurse and Allied segment because the Allied segment has been pretty soft throughout. But the traveling nursing business sequentially bottomed out in May or June and we have seen a decent upward trend since then.

Even seasonally wouldn't you normally expect somewhat of an upward trend? I guess how does that vary versus -- is it out of the norm?

It is kind of hard to hear you, but I think he is just basically asking if seasonally we would see a pick up from the second to third quarter. This is Brian. That is a normal pattern that we would see.

As we talked about it, we had seen our demand decline on a year-over-year basis to where it is essentially at or below prior-year levels and it kind of bounced along with that. We have seen that tick back up again, which is a normal seasonal pattern. During most of the third quarter we were still running at or below and more recently, though, we have ticked back up above prior-year levels.

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

This is Bob. I'm glad you asked the question actually. Historically what happens is the larger companies who don't have an MSP program will be the ones who hold out on becoming an affiliate vendor initially. Then history tends to repeat itself and eventually they build their own programs and we expect that to happen here as well.

We expect that some of the larger clients -- we are proud of the fact that actually over 50% of the what's called the NALTO members, National Association of Locum Tenens Organization, over 50% of their members are already affiliate vendors with us providing services to our Locums MSP clients. We have plenty of vendors.

Some of the larger clients -- some of the larger vendors would like to hold out as long as they possibly can. We kind of call it the four strategies, or the four Bs. One is you sort of bury your head in the sand, that's one; kind of hope it goes away. Two, you boycott the program hoping that by boycotting it, and I think that is what we're seeing with some of the providers, that it will slow down acceptance. That doesn't seem to be to the case.

Third is that you burn bridges with your clients and try to pull out your doctors. That has a pretty negative impact in the long run. And then the final one is to be a good partner and either be a vendor in it or to build your own program. We believe that last strategy will eventually pay off.

And just a final point is I think that the industry itself, people think of it as an industry where there is a lot of small clients that maybe only use two or three vendors and maybe they only need two or three doctors a year.

Well, there is a lot of clients who have somewhere between $10 million, $20 million and $30 million. And in fact, our pipeline in Locums right now has doubled. Doubled last quarter; it doubled again this quarter and represents over 25% of the total pipeline of prospects. So we are very bullish and we don't think that is going to have a long-term impact.

Thank you.

And our next question from the line of Josh Vogel with Sidoti and Company. Please go ahead.

Thank you. Good afternoon, everyone.

Hi, Josh.

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

This is Ralph. I will handle that again. The bill rate increases we have been able to get really are as a result of other cost pressures that are happening out there -- rising housing costs, rising wages and those sorts of things.

We are gaining leverage ourselves, right, by delaying the increases to the providers for short periods of time or negotiating better on our insurance and our housing costs. But really there is not a significant enough shortage that that is driving our price increases right now.

Okay. I'm sorry if I missed it in your prepared remarks, but the margins improved nicely in Locum Tenens and the operating margin at a level you haven't seen in years. Were there any one-time items there or do you think a 10% margin is sustainable going forward?

Yes, this is Brian. There weren't any material one-time items in the quarter. The gross margin improvement, as we mentioned, was primarily related to bill pay spread improvement.

I think that is definitely our target is to stay above 10%. It may ebb and flow a little bit as we continue to make investments in that business. We still see opportunity and we want to make sure we grow that sales team to capitalize in those as well.

But getting into this range was our target all along and it is nice to see them getting there, and longer term we expect to move those margins even higher. You look at Nurse and Allied it is closer to 12%, and we don't see any reason why Locum Tenens can't be at or above that level.

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

Sure, Josh. You know, we have been saying for the last year or so as we have been asked this question if we were going to look at any acquisitions, of which we admittedly are in a better financial position to do that these days with our debt coming down to such a low leverage ratio, but we are going to be very opportunistic about it.

And we would be first focused on acquisitions that would help to bolster our workforce solutions offering that are going to be most important to our clients, really helping them define ways to better manage their total workforce cost. Maybe not just temporary, but their total workforce. So they might be in the form of services or technology/services.

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

Okay. Thank you very much.

Thank, Josh.

(Operator Instructions)

Our next question from the line of Mark Marcon with Robert W. Baird. Please go ahead.

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

Yes, I think we said the mid-teens, so I will make sure we don't set a new expectation for it, which, you know, little bit less than what you're -- than 15%.

You're right, though, Locum Tenens MSP program is probably one of the strongest things we have going for us right now. Additionally, we made incremental investments in our advanced practice specialties which we run in our Locums business, which are nurse practitioners, physician assistants. Those have grown and so have the CRNAs, which fit into that category. Those investments have paid off really well.

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

And obviously, if there was a major change in medicine in some way or technology, that is the type of stuff -- you would see that coming from miles away. So, we don't anticipate anything significant.

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

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

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

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

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

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

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

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

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

This is Ralph. First off, I will talk about Allied as a whole. The business itself -- it is the therapy side of the business that is really down, which is the Occupational Therapist and Physical Therapist. In that business the orders -- the decline in orders has begun to slow down.

We have heard a few positive things from our rehab clients and skilled nursing clients about their business shifting more into home health specialty, which is very good for us. We perform very well in filling in home health specialties and utilization is very high in home health. So those are positives for us.

They haven't had their calls yet, so we're looking forward to hearing those over the next few days, but those industries have tended to adjust. They are kind of hitting that cycle. So they're four quarters into this kind of recession for their business and now they are beginning to make adjustments, so that is good news.

The rest of the business actually performing very well and it's helping to offset those declines in the therapy business. And so overall, it's performing better than the marketplace.

And then we continue to, as we talked about before, look into new specialties, which will help us drive incremental growth in the future. Things like case managers or patient care coordinators who help hospitals become more efficient in how they manage their patient volumes and to slow down re-admissions. So, we're always looking to adjust our recruiters and sales teams to go after those higher-growth specialties.

Probably not quite at the bottom yet on the therapy demand, but narrowing in on that date.

Great. And then, how should we think about the flu season last year?

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

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

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

You know, we will have to go back to our numbers and look. I know we talked about that on our, I think, our second-quarter call, kind of after the dust settled. And it wasn't a significant number. I think, order of magnitude, it gave us a little bit more in local staffing in particular, which is a smaller business for us, and a little bit more in Nursing.

And admittedly, it is hard to parse it out because we don't always know for certain why we get the order and what the uplift was for. They don't necessarily call them flu orders. So, kind of order of magnitude, I think we're looking around the table saying maybe it was $1 million or $2 million at the most.

Okay. I was just trying to, as I think about the orders picking up on a year-over-year basis in the nurse travel sub-segment, just how that -- obviously, there is a long lead time between orders and finding and filling and then actually getting the contract started. So I was just trying to think that through.

Can you talk a little bit with regards to what you're seeing in terms of fill rates? Obviously you have spent a bit and have shown good progress with regards to the technological innovations in the mobile. Are you seeing the fill rates pick up materially? Are there any -- is there any sign that some of the recent patient census softness may change peoples' minds about whether or not they want to go into nurse travel, or what are you seeing there?

Yes, this is Ralph again. Our fill rates have been -- they're up on MSP, but they are pretty steady overall. An interesting phenomenon, when people are watching their budgets they sometimes place an order that they don't really fulfill on and that, of course, hurts our fill rate.

They change their mind after they have placed the order and then the order gets shut down and our fill rates -- so, probably the increases in MSP offset by client behavior that is probably right for the times, given that they are trying to stay within budgets and they are looking at lower census. But, overall, that investment in our digital transformation and our mobile strategies, our visitors are up, gosh, to our website probably triple what they were. A lot of those are mobile visitors.

Our leads, which are candidates who have an interest in a job but aren't yet ready to put an application in, are double what they were before and our applications are also trending up on a year-over-year basis. They are good investments. When demand is stronger I think they will help our fill rate improve quite a bit and we won't have that headwind of demand or just cautiousness by the hospitals right now.

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

I feel like that issue went away almost a couple of years ago, Mark. It was right after the recession; there was a harsh turndown for them. But the recent data, talking to recruiters, talking to nurses who work for us, I don't think there is as much fear. I think the fact that many healthcare systems have implemented MSP programs and have become more strategic in their use of travel nurses, if anything, helps rebuild that confidence.

We have clients who are looking to not staff up and instead just use flexible labor to meet their census peaks and valleys. That's not the kind of things that were happening three or four years ago. It's just more and more frequent that we have conversations where clients are changing their workforce strategy to include a higher percentage of contingent labor just for times like these.

This is what our industry does. We help them get through a downturn in census. It hurts us; we don't like that part of it, but it really does help our clients manage those costs without big separation costs, traumatic events, all of that.

Great. Thanks for the color.

I will go to Tobey Sommer with SunTrust.

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

No, I don't know that that number is -- exists in anybody's database, because clients aren't always willing to share the exact break down with us, nor does it exist at an industry level. What we do know is, according to BLS data, the most recent reported numbers would indicate that the penetration of temporary nurses working is at a fairly low point today relative to, say, 10 years ago.

That, we think, creates opportunity as more hospitals say we want to move more towards temporary staff. And there was a bit of a pendulum shift where they were looking more to and were able to have more permanent kind of fixed costs in their budget, say three, four, five years ago, and they've realized now that that is not possible going forward. So we would expect that penetration to go up over time, which coincides exactly with what clients are saying to us, that they want to move towards lower core staff and more flexible staff.

So, I'm sorry I don't have an exact number for you because it, quite honestly, just doesn't exist. It is more anecdotal at this point.

It's fine. If you happen to get one, I am interested, so you know.

Okay.

And then I just had a quick numerical question, Brian. I know you're not giving 2014 guidance, but I thought you might be able to clue us in about what the trend will be in depreciation next year.

Yes. Last quarter we were a little over $1.7 million. I would expect it to go up some as we talked about our CapEx going up. At some point that will move our depreciation up a little bit as well, so I think that we would get into the -- more in the $2 million range for next year per quarter.

And our amortization, (inaudible) asked about that, it will be pretty similar to 2013. It's going to go down maybe $50,000 a quarter, but pretty similar for 2014.

Thank you very much.

Our next question from the line of Vishnu Lekraj with Morningstar.

Good afternoon, everyone. Question here regarding reimbursements. There is some talk from some payers about obviously beating down reimbursements over the next couple of years combining this with more of a capitated-type payment system with providers.

Have you heard anything on that front in terms of pressure reimbursements and pricing? And in addition to that, how do you view that along with your MSP program moving out maybe one or two more years?

Sure, and that is the way in which we have heard it from our clients. Just generally, the pressures in changing reimbursement structures that they anticipate going forward cause them to want to really get their arms around their greatest areas of spending, of which workforce is typically about half of their budget. And at least half of that is usually nursing specific.

So we really think it has driven the appetite for more workforce solutions and MSPs, because it not only gives them greater flexibility but it gives them better analytics to really understand how, when, and where they're hiring workforce, and how they can be more efficient in their utilization. And so we think that is going to continue to be a positive trend for us.

Then here with the exchanges coming on board, obviously there was a rocky rollout, but it looks like it is still full go-ahead for the exchange -- public exchanges at least. Have you heard anything in terms of demand -- increasing demand, increasing census -- maybe because of that? Or how are your clients and how are you thinking about that for the first and second quarter next year?

You know, I don't think we really have -- our clients have been kind of silent on the issue of the exchanges and how they are going to affect their census. I know there's a lot of noise about that right now.

But the things that we continue to hear for 2014 and beyond is that they need to be prepared for a potential spike in uptick in demand, in utilization. And that is driving more desire to partner with us and others within the industry in things like MSP and even in RPO, which we mentioned has been a nice growing business for us.

There probably has been more identification of need in the physician and advanced practice area. We mentioned that we had nice growth in those areas, and I think some of that is anticipation for continued growth and need of those types of professionals. And we certainly expect that to continue going forward.

It is a little hard to tell exactly how it will affect nursing, but there tends to be a bit of a side effect where if you are hiring more physicians in advanced practice you are likely going to need more nurses over time. So we think that that will also drive some greater demand, but they are not as kind of specific about connecting the dots to the exchanges to needing these professionals, it's more about the overall effect of the Affordable Care Act.

Bob, is there anything that you're hearing?

Yes, I was just going to say we really do like to try to listen to our clients, so we are acutely aware of the fact that the clients are under a lot of pressure with their pricing and the costs and cost structures. In fact, we have got some innovative ideas we're working with with some of our more innovative clients. New grads programs, for example, with a couple of clients that are really trying to struggle with how do I get the right workforce at the right cost level.

In fact, next week we have about 60 clients or more coming in for our second annual Healthcare Workforce Summit, where really a lot of this is discussed. We talk about what are the challenges they're having; how is the Affordable Care Act going to impact them; what do they expect happening their census.

I think that is one of the benefits of our investment in this thought leadership is it allows us to kind of create some new solutions that we would not have otherwise created, and in partnership with our clients. Some of those solutions aren't really ready for prime time, but we are excited about some of the things that are actually in the drawing board.

Got it. Thanks for the details. Appreciate it.

Thank you.

I will turn it back to our speakers for any closing remarks.

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

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