AMN Healthcare Services Inc (AMN) 2013 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the AMN Healthcare full year and fourth quarter 2013 earnings conference call. (Operator Instructions) Also, as a reminder, today's teleconference is being recorded.

And at this time I will turn the conference call over to your host, the Vice President of Investor Relations, Ms. Amy Chang. Please go ahead.

Thanks, Tony. Good afternoon everyone. Welcome to AMN Healthcare's fourth quarter and full year 2013 earnings call. A replay of this webcast will be available until March 6, 2014 at AMNHealthcare.investorroom.com. Details for the audio replay of the conference call can be found in our earnings press release. Regarding our policy on forward-looking statements, various remarks and characterizations we make during this call about future expectations, projections, plans, prospects, events or circumstances constitute forward-looking statements. Forward-looking statements are identified by words such as believe, anticipate, expect, intend, plan, will, should, would, project, may, variations of such words and other similar expressions. It is possible that our actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors including those identified in our Annual Report on Form 10-K for the year ended December 31, 2012 and our other filings with the SEC, which are publicly available.

The results reported in this call may not be indicative of results for future quarters. These statements reflect the Company's current beliefs and are based upon information currently available to it. Developments subsequent to this call may cause these statements to become outdated. The Company does not intend, however, to update the guidance provided today prior to its next earnings release.

This call may also contain certain non-GAAP financial information. We make available additional information regarding non-GAAP financial measures in the earnings release and on the Company's website.

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

Thank you so much, Amy. Good afternoon, everyone, and welcome to AMN Healthcare's 2013 full year and fourth quarter earnings conference call.

In 2013 AMN made significant strides in executing on our long-term strategy. Despite the somewhat challenging healthcare environment we continue to deliver solid revenue and profitability growth, as well as further differentiating AMN as the innovator in healthcare workforce solutions and staffing services.

Our full year consolidated revenue grew by 6%, adjusted EBITDA grew by 16%, and earnings per share increased 97%. We continue to drive operating leverage, with adjusted EBITDA margin for the year increasing to 8.4%, a 70-basis point improvement towards our long-term goal of 10%.

Our top line growth was led by our Locum Tenens and Physician Permanent Placement businesses, both of which delivered strong revenue growth of 10% and 9%. A key part of our strategy is the continued expansion of our leadership position in workforce solutions. In 2013 MSP penetration was up across all of our staffing businesses. Full year direct revenues through MSP contracts represented nearly 30% of our consolidated revenue. We were particularly encouraged with the increased appetite for Locum's MSP and expect this trend to continue into 2014 and beyond. The closer relationships and higher fill rates we achieved through MSP contracts enables us to grow faster during periods of market expansion and provides some protection during periods of demand softness.

In November we acquired ShiftWise, the leading provider of vendor management technology in healthcare. ShiftWise's VMS enables clients to efficiently manage their contingent staffing needs on one centralized platform. ShiftWise is the largest vendor neutral technology solution within healthcare, and it can also be used by staffing companies to be the technology engine of MSP offerings. AMN is beginning to integrate ShiftWise into our MSP offerings, and we expect our clients and affiliate vendors will see a tremendous advantage from implementation of this technology.

We believe there is quite a bit of runway for further penetration in both vendor neutral VMS and MSP within the healthcare market. ShiftWise also offers technology that allows clients to manage their in-house resource pools more efficiently and automates credentials management, scheduling and timekeeping. ShiftWise is a perfect complement within AMN's portfolio of workforce solutions, and we are very excited to have the ShiftWise team members as part of the AMN family.

Throughout 2013 we experienced robust double-digit growth in our other workforce solutions, such as Recruitment Process Outsourcing and EMR staffing. Similar to ShiftWise these two value-added services are smaller in revenue, but they are higher in operating margin, and they help strengthen our position as the strategic partner who can respond to our clients' diverse needs.

Now let's review the fourth quarter results of our three business segments. I'll start first with our largest segment of Nurse and Allied Staffing, which has been the most affected by the softer hospital census and reimbursement changes over the last year. Fourth quarter revenue for this segment was down 6% year-over-year and 4% sequentially. Margins remain a strength, with fourth quarter margins coming in 110 basis points over prior year and 30 basis points over prior quarter.

Our travel nurse fourth quarter revenue was down 5% year-over-year and 4% sequentially. Our traditional travel nurse volumes and revenue did increase sequentially during the fourth quarter, however, this was more than offset by the seasonal slowdown in our EMR staffing revenue. Although orders increased from the third to the fourth quarter, overall demand was still softer year-over-year.

Since the beginning of 2014 weekly orders had been consistently trending upward. January orders were still below prior year levels, but February orders have improved nearly 20% and are now slightly above prior year. We expect this demand pickup to translate into increased volumes in the second quarter.

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

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

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

Overall Allied orders have somewhat stabilized going into the first quarter and are currently flat with prior year. First quarter Allied staffing is expected to be down in the mid teens year-over-year and in the mid single digits sequentially.

Overall for the Nurse and Allied Staffing segment we expect first quarter revenues to be down in the mid single digits year-over-year and to be up 1% to 3% sequentially. Despite the mixed demand trends and cautious client mindset, we believe that we will perform better than most due to our leadership position in MSP and workforce solutions. We're also encouraged by the increases in demand that we've seen over the last six weeks.

The Locum Tenens segment was a bright spot for the fourth quarter, as it has been throughout 2013. Fourth quarter revenue was up 18% year-over-year and down 2% sequentially due to seasonality. In the fourth quarter we were engaged in two large client projects, which favorably offset the typical seasonal decline of 7% to 9%. The year-over-year revenue improvement was driven mainly by growth in the hospital advanced practice, emergency medicine, and primary care specialties. Overall days available, which is our measure of demand, grew by nearly 10% over the prior year, helping to fuel the growth.

The Division's focus on pricing continues to pay off with gross margin reaching a record high of 29.9%. While we're pleased with these improvements in gross margin, we believe we are still under market in pricing and there is additional room for gross margin expansion.

In addition, our efforts to be the first to market in Locum's MSP continue to pay off. In the fourth quarter we closed two more Locum's MSP contracts, with implementation currently underway. Our MSP revenue mix in Locum is still in the single digits, but we expect the penetration to continue growing based on our sales pipeline and strong client interest.

Going into the first quarter we expect the Locum segment to experience year-over-year revenue growth in the mid single digits, but to be down sequentially. Part of the sequential decline is due to the completion of the two client projects that I mentioned. The remainder is due to weaker placements. The positive impact of new Locum's MSP clients will help this segment to increase revenue momentum during the remainder of 2014.

Now let's turn to our Physician Permanent Placement segment, where fourth quarter revenue was up 4% year-over-year and down 4% due to holiday seasonality. The year-over-year growth was driven by higher placements in our retained search business. Based on increasing new search activity we expect first quarter perm placement revenue to be up in the high single digits year-over-year and also up sequentially.

With 2013 well behind us, the AMN team is very focused on 2014 and the opportunities that lie ahead. Healthcare providers have tightened spending for several quarters now and, as a result, many are operating with a very lean workforce today. We find that when they do approve an order with us their needs are very urgent. Over time we would expect demand for temporary and permanent staff to increase as general unemployment continues to decline, more individuals enroll and become eligible for insurance, patient volumes increase, and clinician shortages worsen.

In a recent AMN survey nearly two-thirds of hospital executives said they believed the influx of newly insured patients will increase the need for physicians and nurses at their facilities. With clinical labor representing half of a hospital's cost structure, providers will continue to seek and adopt more outsourced workforce solutions so that they can more efficiently address their labor needs.

The demand for healthcare services is generally expected to expand in 2014, as the impact of the Affordable Care Act unfolds. To ensure that AMN is best positioned as the partner of choice for clients and to capitalize on the future demand trends we continue to make investments in three key areas.

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

Finally, I would like to thank our AMN team members for their dedication and passion in serving our clients and clinicians and for their strong execution. We have a very healthy, performance driven and value space culture within AMN. Our team members take great pride in our contributions to the healthcare industry and the patients that they serve. They also take great pride in our commitment to our communities and corporate social responsibility. We are proud of our talented team and the impact that they make every day on our clients, our clinicians, our shareholders and the world around us.

I will come back to you in our Q&A session, along with Ralph and Bob, to help answer your questions, but for now I will turn the call over to Brian.

Thank you, Susan. Good afternoon, everyone.

The Company's fourth quarter revenue of $248.7 million was up 0.3% from last year and down 3.3% from last quarter. Our gross margin for the quarter was 29.8%, up 130 basis points from last year and 40 basis points from last quarter. The year-over-year and sequential increase was due mainly to margin improvements in both our Locum Tenens and Nurse and Allied segments.

SG&A in the quarter totaled $54.5 million or 21.9% of revenue compared to 21.4% in the same quarter last year and 21.6% in the prior quarter. The year-over-year increase in SG&A was due primarily to higher expenses related to driving growth in the business and additional ShiftWise SG&A for the post-acquisition period. SG&A expenses declined sequentially due to lower professional liability and employee related costs, more than offsetting the additional ShiftWise expenses.

Our fourth quarter Nurse and Allied segment revenue decreased 6.2% from the prior year and 4% sequentially to $164.1 million. Volume of 5,609 average clinicians on assignment was lower by 7.7% year-over-year and 2.8% sequentially. Revenue per day was up 1.6% year-over-year, with our average bill rate higher by 0.6% over last year. Nurse and Allied gross margin of 27.7% was higher year-over-year by 110 basis points and sequentially by 30 basis points. The year-over-year and sequential improvement was due to improved bill pay spreads and a favorable business mix shift to higher margin workforce solutions, including the newly acquired ShiftWise business. These positive trends more than offset continued higher housing cost pressure.

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

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

Gross margin of 29.9% was 190 basis points higher than the prior year and 60 basis points higher sequentially due primarily to improved bill to pay spreads and a mix shift to higher margined specialties.

Fourth quarter Locum Tenens segment operating margin of 9.9% was higher by 220 basis points year-over-year and down 10 basis points from the prior quarter. The year-over-year increase was due mainly to the gross margin improvement, while the sequential decrease was due mainly to higher bad debt expense.

Our fourth quarter Physician Permanent Placement segment revenue of $10.5 million was up year-over-year by 3.6%, but down by 3.8% sequentially due to seasonality. Gross margin of 63% was lower by 220 basis points from the prior year and up 40 basis points from the prior quarter. The year-over-year decrease was due to a sales reserve reduction recorded last year and an increase in recruiter headcount this year to drive future placement growth.

Physician Perm Placement fourth quarter operating margin of 21% was higher by 50 basis points year-over-year and 70 basis points from the prior quarter, with a year-over-year increase due to improved SG&A leverage.

Interest expense in the quarter was $1.8 million, which compares to $3.2 million last year and $1.8 million last quarter.

Our tax rate in the fourth quarter and for the full year was 41%.

We reported net income of $8.4 million in the fourth quarter and $32.9 million for the full year.

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

Operating cash flow for the quarter was $15.5 million and for the full year it was $58.6 million.

Days sales outstanding were 55 days compared to 52 days in the last quarter and 53 days last year.

Capital expenditures for the fourth quarter were $2.6 million and for the full year were $9 million.

As of December 31st our cash and equivalents totaled $15.6 million and our total debt outstanding was $158.7 million, which included $10 million drawn on our revolver in conjunction with the ShiftWise acquisition. The yearend leverage ratio is calculated per our credit agreement was 2.0 times to 1, as compared to 2.4 times at the end of last year.

Now let's turn to our first quarter 2014 guidance. The Company expects consolidated first quarter revenue of $244 million to $248 million. This guidance includes an estimated $2 million to $3 million revenue impact from the winter storms.

Gross margin is expected to be between 30% to 30.5%, reflecting a full quarter of our higher margined ShiftWise business.

SG&A expenses as a percentage of revenue are expected to be between 22.5% to 23%, which includes a full quarter of ShiftWise expenses, as well as certain strategic investments to drive long-term operating efficiencies and expansion of our workforce solutions.

Adjusted EBITDA margin is expected to be between 8% and 8.5%.

First quarter interest expense is expected to be $1.9 million. Depreciation expense for the first quarter will be $2 million, and amortization expense will be $1.9 million.

The effective tax rate for the quarter and full year is expected to be 44%, with a full year cash tax rate expected to be in the low 30% range.

Capital expenditures are projected to be $3 million to $4 million for the quarter and approximately $12 million to $14 million for the full year.

Diluted share count is expected to be $48 million for the first quarter and $48.2 million for the full year.

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

(Operator Instructions)

A.J. Rice with UBS.

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

Two ways to look at that, A.J. If we look at the kind of aggregate national market data the number of job openings and quits have actually been under prior year for the last several months. And so there was a bit of a slowdown. I think somewhat reflected to cautiousness about the general economy and unemployment, et cetera. And we saw that reflected in our orders. It was interesting, as we were on our third quarter call we talked about orders rising in October, but then we actually started to see them fall off in November and December. And now in January we've started to see them pick back up very consistently, in fact every single week we've seen our demand and orders improving. So we're certainly more optimistic, but I think part of what you saw at the end of the fourth quarter was maybe a reflection of fewer jobs that were open, fewer people quitting because they weren't so certain about where that next job would be.

What we do hear from our clients and then I think it shows up in our orders with them is that they have cut their workforce very thin and they are in many cases operating very lean with their core staff and even in some cases making a more conscious decision to lower their core staff and deliberately use more temporary staff to fill in the gaps when their census increases or they have fluctuations. We haven't necessarily seen that uptick yet, I think in general census to drive that, but it's probably been reflected in fewer people leaving because they realize that they're probably fortunate to have that permanent job that they have.

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

A.J., this is Bob. Just as a thought on how the customers are reacting at ShiftWise is very, very positive. We did a very good job I think of communicating the importance of maintaining the vendor neutrality, which was essential to doing the deal with ShiftWise to begin with. We knew that clients really want both a vendor neutral solution in some cases or they want an MSP, and there's not a lot of gray area in between. And so we were very careful to say that we're going to buy and make this acquisition of ShiftWise because of its vendor neutrality and because a very large segment of the market is still going after that vendor neutrality approach, and I would say that we've been very diligent about doing that and the client reaction has been very positive because we've gone to each one of them and made sure they understand that.

The second thing I think is our using it doesn't mean we necessarily have to immediately undo what we've already got out there. We have a very good platform, our clients like the platform they use, however, we know that ShiftWise will be a better platform for us going forward. We were in the process of upgrading our platform, so this will just avoid us having to do that, and it's obviously a cost benefit to do that, but it's also we know that there's functionally more capability for ShiftWise. So all new clients will go on to ShiftWise, and then little by little or one at a time we'll go back to those clients where moving them off of our existing platform has a benefit to them. There's really no benefit to us to have to take them off the platform right away. Over time we think that'll happen, but the impact of that I think is negligible.

Okay, all right. Thanks a lot. That's great.

Thanks, A.J.

Jeff Silber, BMO Capital Markets.

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

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

Bob, anything else?

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

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

We really aren't and, in fact, Jeff, I had heard the same comment and so I checked in with our team about it. And our kind of viewpoint is kind of the opposite, we see the in-house recruiters as a great client for us. And, in fact, we've taken great strides or made great strides in creating stronger relationships with the in-house recruiters because they do a great job of fulfilling in many cases a large portion of the physician recruitment for their organizations, but there are often particular positions that they need help with. And so we can enable them to be even more successful by coming in and helping them with particular searches that are really critical to the organization.

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

Okay, great, and then just quick numbers questions I guess for Brian. You gave us the first quarter guidance for both interest and depreciation, should that be the numbers we use roughly for the rest of the year?

I think the depreciation would likely move up a little bit as the year progresses. As you see the flow through of some of the increases in our capital expenditures, so maybe a couple $100,000 higher quarterly by the end of the year. Probably the opposite on the interest expense, you'd see a similar decline as you go through the year.

Okay, fantastic. Thanks so much.

Tim McHugh, William Blair.

Thanks. Just on ShiftWise, the guidance expressly calls out the impact on the gross margin, so I guess can you help us understand revenue margins relative to last quarter or year-over-year or just an absolute basis what the impact is on a full quarter basis as we go into Q1 here?

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

That's the full quarter, got you, correct?

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

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

This is Ralph, I'll handle that. I'll walk you through the whole history for just a second. We did see orders start to trend down in November, but they did bottom out in week 52 of 2013, so January orders improved weekly. We're on our sixth consecutive week of watching the orders grow, and they finally got back up over prior year recently, and I'm talking just travel nursing in this case. Very few of them were flu related orders, last year we actually had flu orders in November that were not the specialties or such that we don't think it's just flu related, we are seeing some pretty good increases there.

Other encouraging signs in other businesses are Allied orders are kind of flat, and that's a good sign for us. That business has had a rough couple of years because of reimbursement. And then our Locum's trends just watching our MSP signings, our recent MSP signings at Locum are expected to have a good impact for us in the back half of this year. So while there are some discouraging things, and you look in the last part of the year that was a bit discouraging, most of the signs we're seeing today lean towards improvement as we get through the year. Does that help?

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

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

Thank you.

Thanks, Tim.

Josh Vogel, Sidoti & Company.

Thank you, good afternoon, everyone.

Hi, Josh.

I know it's only been a few months now, but can you talk to the pipeline of new and potential MSP clients? Has it improved markedly since the ShiftWise deal closed?

Yes, this is Bob, Josh. I think what we were very pleased to see was that we have two separate sales forces, we've kept the businesses independent. We want to have that vendor neutrality sales force and then our MSP sales force, but naturally as I've had a chance to review the pipelines I'm very pleased to see that there's not a lot of overlap, frankly. There's a lot of new opportunities in both segments, and then there have been some great opportunities for us to collaborate and perhaps win business that we might not either one of us have won if we hadn't come together.

So I'm very excited about the energy, and the whole Company has I think taken a notch up on both ShiftWise sales team and our sales team about the enthusiasm around being able to collaborate when we need to and compete on RFPs we wouldn't otherwise be on, so pretty energized.

The other thing to add, Josh, is that we have already seen some early signs where there could be some clients that are currently vendor neutral, VMS clients that were wanting more services and someone to really take on more of the management of their contingent labor process and move more towards an MSP. And so it makes it a much easier referral and handoff if they're already on the ShiftWise technology and they want to talk with AMN about adding on an MSP. It is a somewhat natural progression for many organizations, and likewise we may receive inquiries from clients' prospects that might think they want an MSP, but as we talk with them it's really maybe more of a vendor neutral technology solution that would best serve their needs and so we can refer those things back and forth.

What I've also seen in the last couple of months, it's been really exciting, is the ability to go and have conversations with some of the larger systems at a very high executive level about how they're going to be tackling their workforce challenges going forward, and these are large organizations that are very diverse, they are delivering care in multiple kinds of settings and multiple regions, and they're trying to take a fresh approach to how they're really integrating their kind of continuum of care. And so the workforce becomes a very critical part of that, but starting with just getting a view of what, when and how they're spending their dollars on workforce.

And so we can go to a client, like that, and have a discussion about the ShiftWise technology and how it can be used at an enterprise level to really give them the analytics and the view that they need across the company, but then they can plug and play different services that make sense for each business unit. It could be in one business unit a vendor neutral technology solution is all they need. In another business unit they may need a full-blown MSP or they may need RPO, but it gives them a common platform that they can use to really get better visibility and control into their overall labor spending.

Okay, that's helpful, thank you. Next question, probably for Brian, you were talking about some spending or as you expand ShiftWise and you have some strategic investments, I was wondering if you could give us some direction on where you see cash flow in 2014?

Yes, the cash flow for the year, I would expect it to be on the operating cash flow to be somewhat similar to 2013. Obviously, we expect to see our profitability improve, but the working capital fluctuations will really dictate whether or not the number goes up or not. So the free cash flow we are increasing our CapEx a small amount from 2013, but I wouldn't expect any really significant differences between 2013 and 2014. And I mentioned the cash tax rate and that is very similar to our cash tax rate in 2013, as well, so that's really not going to have much of an impact on it, as well.

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

RPO is still less than $10 million on an annualized basis, so relatively small but very strong margins. We mentioned before operating margins north of 25%, in fact, more than 30% now, but we think a more sustainable margin for that business is probably north of 25%. And they had double-digit growth, you know, very strong double-digit growth in 2013, expect to continue to see stronger growth from them, but admittedly very small.

For the EMR business, again, a fabulous year in that business unit in 2013, was driven by investments that we made to build-up the sales team and to penetrate the market better, but also we had a couple of very large engagements, particularly in the second and the third quarter. You may recall, we talked about the third quarter being exceptionally strong for EMR. It probably runs at more of a $4 million to $5 million per quarter level, and that's about what it was in the fourth quarter, and that's about what we're expecting it to be in the first quarter. So if that gives you sort of a gauge.

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

Okay, great, thank you.

Mark Marcon, R.W. Baird.

Good afternoon. Thanks for taking my question. With regards to ShiftWise is that all falling within the Nurse and Allied segment?

Right, yes, we're going to report that in our Nurse and Allied segment, that's where it was in the fourth quarter and going forward.

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

Yes, first, on the shortages, I would say that the increase in the orders is a reflection of what Susan said, right? You can only work people overtime for so long, burnout kicks in or you take a look at the costs and you realize just how inefficient that is, so some of the demand is coming from that.

There's a couple other factors going on there, the percentage growth of the new grads is actually slowing, so in the single digits, and the [inclecs] pass rates were actually declining, as well. So, kind of several things that don't make for a perfect environment for those healthcare systems that were planning on new grads to meet all of their future needs, so that the demand, itself, is reflective of just what you're saying, right? We're not seeing many quits yet, that would of course accelerate the pace of change.

In terms of fill rates, our fill rates are very strong. In times when orders are down they're even stronger because of our MSP clients, but our fill rates are up a couple hundred basis points year-over-year, kind of across all of our businesses, and that's primarily because of our MSP penetration, our digital sourcing initiative from last year, and just great effort by our sales teams.

So fill rates, you know, probably the only market thing we haven't talked about is a little bit of a reluctance to post orders on a timely basis. Generally, clients will post them earlier, and we have more time to work on those orders, but we're seeing them wait and so the start dates are closer to the date we get the assignment. That causes a little cautiousness in our forecast and you probably hear it in our tone, but and rightfully so because those orders are harder to fill because we've only got a few weeks to get them done. But I think all of those are signs, like I said, they're encouraging, they're not strong or robust, but they're good signs for market growth.

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

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

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

It is better, it's healthier for sure, both in terms of the duration and kind of the timing of how many weeks orders have been up very consistently, but if you -- and we're talking about nursing, specifically, but it's true for all of the Divisions that orders have been better. But within nursing as you dive into those orders we have not only more aggregate orders, but we have more orders at more facilities and at more units within those facilities.

And then if you even look at the makeup of the orders we're getting far more gross new orders, which is kind of the new orders in a week. So it's not just that we have old orders that we're not filling, as Ralph just said, our fill rates are actually very strong right now, so we're filling them very quickly, as soon as the client will agree, at least, but we're also getting a lot of new orders in so that gives you more to work with in the future, they're not just older orders that you've had trouble filling, they really are new urgent need for the future.

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

We're seeing for the last couple of years, obviously, with our rental rates going up and the team has done a really great job of reacting to that and identifying properties to keep our rental costs below the market overall. I think for 2013 overall national rents were up about 4% and in some of the key markets were up more than 5% to 6%, so we did a little -- we did better than that for the year overall, but we're up in the low single digits in the fourth quarter.

As you look to 2014, again, looking at the industry expectations it's about a 4% increase again, and so our goal would be to be at or below that number as we look ahead, as well. So it's really critical, again, that we continue to talk to clients about that, educate them to get the increases to offset that, as well, and the team has done a really good job of educating our clients.

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

Well, the penetration today is very low.

Right.

Of course, we're starting off low. This is Bob. I think if we had to try to do a crystal ball and figure out where it can go to, I think penetration is probably 2% or 1% or 2% or 3% today, but I think it certainly can get to 30%, 40%, 50% penetration. We've seen in other industries where it gets as high as 80%. We certainly think that the Nursing Allied can get well above 50%.

But in some cases with the Locums there isn't enough spend to perhaps justify it, so in this case, though, we feel very positive about the client and the pipeline that we've got, and it's a very healthy pipeline. We've got plenty in the pipeline that are actively seeking to contract with us today.

And the other thing about it, though, I think we're very encouraged by is that we were concerned initially about getting enough people to sign up as subcontractors. And we've got plenty in the pipeline now. In fact, we've got a couple clients that started us out with some pilots in one or two locations just to see if we could make the fills. And they've all expanded, in 100% of the situations they've all agreed to expand to other markets. We're more than exceeding their fill rates that they had in the past, in fact, the time to fill at a shorter period of time and at an overall average lower cost per hour. So there's an incredibly good reference base already being built, and we're very pleased with it.

Great. Thank you.

Thanks, Mark.

Thank you. At this time there's no additional questions in queue. Please continue?

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

Thank you. And, ladies and gentlemen, that does conclude your conference call for today. We do thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.