AMN Healthcare Services Inc (AMN) 2016 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the AMN Healthcare fourth quarter and full year earnings call. At this time all lines are in a listen-only mode. Later we'll conduct a question and answer session. (Operator Instructions). And as a reminder, today's conference is being recorded. I would now like to turn the conference over to Senior Director of Investor Relations, Neil Thomas. Please, go ahead.

Good afternoon, everyone. Before we begin, we want to apologize for the accidental early release of some financial information. After becoming aware, we notified the NYSC who halted trading in our stock. We subsequently issued our press release with complete information as quickly as possible. Now, onto the call.

Welcome to AMN Healthcare's fourth quarter 2017 earnings call. A replay of this web cast will be available until March 2nd at amnhealthcare.investorroom.com following the conclusion of this call. Details for the audio replay of the conference call can be found in our earnings press release issued this afternoon. Various remarks we make during the call about future expectations, projections, plans, events or circumstances, constitute forward-looking statements.

These statements reflect the Company's current beliefs based upon information currently available to it. Our actual results may differ materially from those indicated by these forward-looking statements as a result of various factors including those identified in our most recent Form 10-K and subsequent filings with the SEC.

The Company does not intend to update the guidance or any forward-looking statements provided today prior to its next earnings release. This call contains certain non-GAAP financial information regarding and reconciliations of these non-GAAP measures for the most directly comparable GAAP measures are included in our earnings release and on the Company's website.

On the call today, are Susan Salka, President and Chief Executive Officer, Brian Scott, Chief Financial Officer, Ralph Henderson, President of Professional Services and Staffing and Dan White, President of Strategic Workforce Solutions. I will now turn the call over to Susan.

Thanks so much, Neil. Good afternoon everyone and welcome to our quarterly earnings conference call. 2016 was another milestone year for AMN Healthcare as we executed against our long-term strategy by expanding our portfolio of solutions and delivering record revenue and profitability.

Our revenues grew by 30% to $1.9 billion, including 17% organic growth with each of our business segments generating double digit growth. Our largest business of travel nurse staffing contributed the greatest revenue increase with 25% year-over-year growth. Our strong top line performance and targeted investment strategy resulted in adjusted EBITDA growth of 43%. And a margin of 12.5% which is 120 bases points higher than 2015. You might recall that just five years ago, our adjusted EBITDA margin was about 7%.

We've been able to improve margins over the last several years by increasing the mix of our higher margin Workforce solutions, expanding gross margins in our locum tenens business, gaining operating leverage and continuing to invest in efficiency improvements. This performance keeps us on schedule with our stated goal of achieving a 14% adjusted EBITDA margin by 2020.

During 2016, we welcomed three companies into the AMN family adding new solutions in executive leadership recruitment and staffing, medical coding, and labor disruption services. Through continued expansion of existing clients and winning new contracts, we were also able to grow our MST and VMS gross spend under management to over $2 billion. Many of our businesses achieved record high revenues and profitability.

Additionally, AMN was honored with several awards, highlighting our commitment to corporate governance, innovation, industry leadership and the engagement of our amazing team. While producing these strong results, we also remained focused on AMN's future and delivering value to our shareholders, resulting in a 24% total shareholder return.

We strengthened our capital structure by securing $325 million in new unsecured notes at historically low pricing. We also opportunistically repurchased nearly half a million shares under our newly authorized share buy-back program. No year is ever perfect but 2016 was a year that delivered many new records and great value for our clients, our healthcare professionals, our team members and our shareholders.

It was also a year where we could tangibly see our Workforce solution strategy paying dividends for all. We finished the year strong with fourth quarter revenue of $488 million, 21% higher than prior year with 10% organic growth. The year-over-year growth was across all reportable segments.

Our adjusted EBITDA of $61 million was 30% higher than prior years and represented a margin of 12.5% which is 90 basis points higher than prior year. Our nurse and allied solutions segment posted fourth quarter revenue of $308 million, higher by 17% year-over-year. These results included about $10 million of labor disruption project revenues in excess of our guidance.

Year-over-year organic growth for the quarter in this segment was 12%. Fourth quarter revenue for the largest business in this segment, travel nurse staffing hit an all-time high and increased 15% year-over-year. This is an all organic growth and reflects another quarter of exceptional execution by our sales, service and clinical teams in a strong demand environment.

They're doing an outstanding job of growing the number of travelers on assignment and in particular filling positions for our MSP clients. MSP-related placements now represent over 60% of the revenue for this business. In the fourth quarter, the allied staffing division achieved another record quarter of revenue growing 12% year-over-year, all organic growth. Volume has been the primary contributor of growth in this business.

MSP has also been a key driver of the revenue and profitability growth and now represents approximately 40% of this division's revenue. Looking ahead to the first quarter, we expect the nurse and allied segment revenue to be up approximately 5% year-over-year. Excluding our labor disruption business which you might remember had a large project in the first quarter of 2016, the nurse and allied segment is expected to be up 8% to 10% year-over-year being driven by both volume and pricing. And as a reminder, there's one fewer day in the first quarter of 2017 due to last year being leap year. This has about a 1% impact on a year over year basis.

In the locum tenens segment, fourth quarter revenue of $104 million is 5% higher year-over-year driven by both volume and pricing increases. Demand in the locums market continues to be strong. Many of our specialties experienced year-over-year growth, however this was partially offset by reduced utilization in a few of our larger locums MSP clients. We also experienced softness in our locums leaders brand which represents less than 10% of this segment's revenue.

During the fourth quarter, we promoted a proven leader into the President role of this brand and we are confident that performance will improve as we move forward. Considering these factors, first quarter revenue for locum tenens is expected to be flat year-over-year. Fourth quarter revenue in the other Workforce solutions segment was $76 million which is 89% higher year-over-year.

As a reminder, this segment includes our interim leadership and placement businesses, physician permanent placement, RPO, Workforce optimization, VMS solutions and the medical coding business. Our leadership business revenue in the fourth quarter is up 11% year-over-year on a pro forma basis.

We are experiencing both volume and pricing growth as well as benefiting from cross-selling opportunities into MSP clients. I would like to give a particular shout-out to the team at the first string who had significant growth in their interim leader volume, hitting another record high in the fourth quarter. As we begin 2017, demand remains strong for both interim leaders and permanent searches.

Fourth quarter revenue from the VMS business was up over 20% year-over-year as we continued to add new clients and expand existing relationships. We currently have approximately $1 billion in vendor neutral spend flowing through these vendor management technology platforms.

The Medefis and ShiftWise teams are in the process of adding new capabilities to help our clients efficiently manage their staffing partners and vendors in their other contingent worker category. Our VMS businesses are poised for another year of double digit growth. Avantas, our Workforce optimization offering, continues to expand into new clients and settings and grew fourth quarter revenue by nearly 30% year-over-year. Their pipeline looks robust as we begin the new year.

The physician permanent placement business fourth quarter revenue was down 3% year-over-year primarily due to lower search activation and placements in both our retained and contingent search businesses. We believe the underlying market demand remains strong and provides plenty of opportunity for growth in this business.

As we begin 2017, we are experiencing sequential improvements in search and placement trends, however since we are beginning the year at a lower starting point, we expect this business to be relatively flat year-over-year in the first quarter. Peak health solutions which joined the AMN family in June of 2016 had a solid quarter.

We were proud to recently announce that Peak health was recognized as the category leader for outsourced coding in the 2017 best in class awards. We expect steady growth in this business in the year ahead. Overall, first quarter revenue for the other Workforce solutions segment is expected to be up approximately 15% year-over-year. As we look forward in 2017 and beyond, our focus remains on growing our existing businesses, expanding our service offerings and investing in our team and internal operations to drive efficiencies.

As we evaluate the external macro drivers of our business, we continue to see many positive long-term finds. The improving economy, the aging population, and the aging healthcare work force. In addition, the healthcare industry is experiencing some of the highest levels of attrition and vacancies that we've ever seen, even at the leadership level. These factors plus other secular trends like consolidation of healthcare systems and the growth of patient care in non-acute settings are causing the need for more sophisticated and scalable solutions.

Healthcare organizations are telling us that they want a more integrate approach to the way they manage their Workforce, both permanent and contingent across multiple settings. This provides a great opportunity for AMN to further differentiate ourselves by expanding our suite of Workforce services and technology solutions. In the near term, political dialogue regarding the potential changes to the Affordable Care Act and the impact of a new administration creates some amount of uncertainty.

This has caused some apprehension in decision making across many industries, including healthcare. We will continue to find ways to remain agile and be responsive to the needs of our clients in this dynamic environment. Our strong results today and our positive outlook for the future is made possible by the hard work and dedication of AMN's very talented team members. Their passion and excitement for our business shines through in the excellent customer service they provide. We are extremely proud of our entire team and want to thank them for all of their hard work.

Now, I will turn the call over to Brian for a financial update. After which Ralph and Dan will join us for the Q&A section of the call.

Thank you, Susan. Good afternoon, everyone. The Company's fourth quarter reported revenue of $487.9 million was above the high end of our guidance range with solid performance across all segments. This results included about $10 million of labor disruption project revenue that was not included in our guidance.

On a sequential basis, excluding this excess labor disruption revenue, fourth quarter revenue was up 1%. Gross margin for the quarter was 32.5%, in line with expectations and down 20 basis points from both last year's and last quarter. SG&A expenses totaled $101.1 million, or 20.7% of revenue. SG&A expenses as a percentage of revenue declined from the same quarter last year by 170 basis points due mainly to operating leverage.

Fourth quarter nurse and allied segment revenue was $307.9 million, an increase of 17% from the prior year and 7% sequentially. Excluding our labor disruption business, sequential revenue was up 4%. Volume was higher by 9% year-over-year while the average bill rate increased by 5%. Nurse and allied gross margin of 27.3% was 20 basis points higher compared to the prior year and 60 basis points higher sequentially.

The higher sequential margin was due mainly to a higher margin on the labor disruption revenue offsetting higher than normal sales adjustments. As noted last quarter, the underlying gross margin trend for the segment has been steadily improving. Fourth quarter locum tenens segment revenue of $103.8 million was up 5% from the prior year but down 4% on a sequential basis.

The year-over-year growth was driven primarily by a 4% increase in the average bill rate and a 2% increase in the number of days filled during the quarter. The sequential decline was in line with normal seasonal expectations. Locum tenens gross margin of 30.8% was down 40 basis points from both the prior year and prior quarter. The decrease was due mainly to a specialty mix shift and lower perm conversion fees. Locum tenens SG&A in the quarter included about $3 million in net favorable reserve adjustments, the majority of which related to our professional liability reserves.

Fourth quarter other Workforce solution segment revenue of $76.1 million was up 89% year-over-year but down 1% sequentially. Gross margin of 55.7% was lower by 100 basis points sequentially due mainly to revenue mix changes within the segment. Unallocated corporate overhead in the quarter was $18.6 million representing 3.8% of revenue.

This included about $4 million in net unfavorable adjustments with the majority due to an increase in legal reserves related to potential wage and hour class action claims. Excluding these adjustments, corporate unallocated expenses were consistent with the prior year and prior quarter at 3% of revenue. Fourth quarter consolidated adjusted EBITDA of $60.9 million was up 30% year-over-year and 5% sequentially.

The adjusted EBITDA margin of 12.5% represented an improvement of 90 basis points over the prior year. We reported net income of $26.4 million and diluted earnings per share of $0.54 for the fourth quarter. Adjusted earnings per share was $0.62 compared to $0.47 in the prior year quarter.

Cash provided by operations was $47 million for the quarter and $132 million for the full year which compares to $56 million in the prior year. Days sales outstanding at year end was 64 days consistent with last quarter and last year. As of December 31st, cash and equivalents totalled $11 million. Capital expenditures for the fourth quarter were $4 million. As noted on the last call on October 3rd, we closed on a $325 million unsecured notes offering providing additional flexibility for acquisitions to expand our Workforce solutions strategy.

Interest expense this quarter was $6.4 million which included $900,000 of one-time costs related to the refinancing. At year end our total debt outstanding was $369 million. Our year-end leverage ratio was 1.6 times to one. As Susan noted earlier on the call, during the fourth quarter we repurchased just over 443,000 shares as an average price of $29.88.

Now, let's turn to first quarter 2017 guidance. The Company expects consolidated revenue of $489 to $495 million. This guidance assumes no material labor disruptions related to revenue in the quarter. Gross margin is projected to be approximately 32.5%.

SG&A expenses as a percentage of revenue are expected to be approximately 20.5% and adjusted EBITDA margin is expected to be approximately 12.5%. Effective in the first quarter, AMN is adopting a new accounting standard relating to the settlement of stock-based compensation. As a result we are currently estimating an income tax benefit of approximately $5 million in the first quarter.

Other first quarter estimates are as follows; Income tax rate of 41% excluding the previously noted tax benefit. Stock-based compensation expense of $2.7 million. Depreciation expense of $3 million. Integration expenses of $400,000 and interest expense of $5.1 million. Diluted share count is estimated at $49.3 million shares. That concludes our prepared remarks and now we would like to open the call for questions.

Okay. (Operator Instructions). Our first question will come from the line of Tobey Sommer, with SunTrust. Please, go ahead.

Thank you very much. I had a question for you. Maybe you could describe how much your revenue generating head count, internal head count is up year-over-year and maybe what your plans are for a rate of growth as you look into 2017?

This is Ralph, I'll take the first half of that. Our computer head counts are up across all of our businesses (inaudible) travel nursing about (inaudible) year-over-year. And about 5% in our locums business. Our Allied business is actually pretty flat year-over-year. They just kind of got more efficient and we had rolled a couple of businesses together, you know, to take advantage of what synergy's we could get there. In the full year of 2017 I would (inaudible) (laughter). Industry growth rate you probably have access to the same numbers we do, somewhere in the neighborhood of six to ten (inaudible).

The short answer is we expect to continue to add to our sales teams throughout the year across the Company. We do believe we have some ability to gain more productivity out of the still somewhat younger sales teams that we have. We have a higher mix of new recruiters, particularly in nursing that have been with the Company for less than a year. And as you know from following us over the years, it takes one to two years before a recruiter really is at what we consider sort of their full productivity and even beyond that. So we think we have the ability to grow our volumes without having to grow quite at a comparable rate in our head count.

Thanks. In the other Workforce solutions segment, I was wondering if you could make two comments. You've got various businesses in there and I think if I heard correctly guided to about 15% growth year-over-year in the first quarter. How do we think about this business in a growth rate longer term given the mix? And I know there are different elements contributing to that. Thank you.

Yes. So if all of the businesses were operating at the level that we think they're capable of, then we would expect to see this segment growing faster than our staffing segment. And in many cases, they are. You heard me talk about Avantas growing at 30%, VMS growing at well north of 20% year-over-year in the fourth quarter, double digits in the leadership businesses but we've had an offset there with RPO actually being done on a year-over-year basis because we had such a phenomenal 2015, in particular driven by a couple of large projects with a couple of clients and we've not been able to quite replace that.

So if we were able to get all of those businesses humming along at when they're capable of, then we would expect to see higher top line growth than in our other segments. And then, from a margin standpoint, generally we think of this collectively as north of 25% EBITDA margin. There are some that are quite a bit higher than that. But on average, that's what we look to.

Thanks. And the last one for me if you could just comment about M&A and what you're seeing to contribute to the growth in the other report solutions? Thank you.

Yes. Thanks for asking, Tobey. We're actually really pleased with the conversations and the relationships that we are building. We want to be in a position to have several attractive M&A opportunities as we go forward. And as you know, we've added to our executive team over the last year to make sure that we have a daily focus on making sure we are building those relationships as well as looking at the right categories and segments.

We're doing more work with our clients and perspective clients to make sure that we understand their biggest pain points and the areas of interest for us to help them with. And I can tell you that fortunately we were very much on track from what we heard but it helps us to dial in and be a little bit more focused on the particular areas. I'm not going to list them for competitive reasons but generally I would put them into the bucket of Workforce solutions and many of which would have a technology element to them.

But it doesn't mean that we won't look at also other staffing categories within healthcare that could help us be a stronger partner for our clients or perhaps to bolster our ability to fill our jobs in areas where we're having more challenges. And particularly, where we have MSP clients that we have commitments to. So we're looking across the board but I would say in particular building a lot of rapport with companies within the Workforce solutions space.

Thank you very much.

Thanks, Tobey.

Thanks, Tobey.

Our next question comes from the line of A.J. Rice with UBS. Please, go ahead.

Hello everybody, thanks for the question. Just a couple things actually. In the prepared remarks, you were mentioning that vacancy rates are stepping up attrition and so forth. Is it the same dynamic that you were seeing before, people were becoming more comfortable with the economy and maybe wanting to ease up on hours or even going to take that retirement that they've been postponing. Is there anything new that's going on that's contributing to that you're seeing?

Yes, it is a continuation of those themes that you've mentioned and, you know, they show up again and are validated in the JOLTS report that was issued for December. We once again as a country remained at historically high levels for the number of healthcare job openings increasing actually by 12% year-over-year. The number of hires only growing by 2% and quits remain at a very high level and that absolutely lines up with what we anecdotally hear from our clients every day.

In fact right now in particular I would say that we're hearing a lot of front line frustration from our clients because they are having such high attrition and we're at this time where perhaps their administrations are still kind of holding back on uncertainty or just kind of holding back on budgets. And so they are very, very frustrated because they desperately need that staff.

The only other new thing that we're hearing and again it's anecdotal still is the impact of the Workforce not wanting to work as many hours. And some of that is an impact of the economy. Some of it is a generational issue where some of the newer clinicians whether they be millennials or well into their 30s are not wanting to work as many hours. They're not wanting to work weekends and they're not wanting to pick up the night shifts. And so that's creating frustration as they have an aging Workforces that are pulling back or leaving. That's probably the one new thing. And it's probably not likely to change unless we see some sort of major economic changes.

Okay. And then maybe somewhat related I guess. I think if I heard Brian said right, the average bill rate in the travel segment is up about 5%. Any comment on whether you're seeing upward pressure on that? Are people in order to get nurses willing to come to you and say hey, we need rate relief, or we need to pay more to get them I guess? And then alternatively, are you finding that you have to reach to a little bit to get the staff that you need?

This is Ralph. I'll start with that. We're really kind of seen a stable pricing market around the 5% that Brian, you know, gave in the prepared remarks. One of the interesting trends, a couple years ago we started adding rapid response nursing, and our brand in that is called [Nurse Toid], to all of our regular travel nurse agreements so that in the event you couldn't attract supply, right? You didn't have to raise your bill rate, you had to actually (inaudible) the second bill rate option.

And sometimes called as a crisis rate. So the utilization of crisis rate is way up over a year-over-year bases so we have seen continued increases there. It's a bit regional in nature. Some of the markets. If you take a look at them year-over-year might look pretty flat and others, like the East Coast, seem to be stronger right now in terms of raising the rate. And it's a way for the clients to attract supply.

They're looking at vacancies, they're diverting patients, they're losing out on revenues so in most cases, the wiser ones are implementing utilization crisis rates or raising the regular bill rate so that the pay rates go up and correspondingly they can attract new supply.

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

Thank you so much. In your discussion about the locum tenens segment you mentioned I think it was reduced utilization with some large MSPs. Forgive me, is that something that just happened this quarter or has this been going on for a while and if not are there any aspects that you're looking to change there? Thanks.

We did talk about this a little last quarter. We have a lot of newer MSPs relationships which are just getting started but we have some more mature MSP relationships where utilization has come down a little bit for a number of reasons. Many of them are physician practice management companies so I think you're probably aware of the consolidation in that industry. We think that may be one of the reasons why their utilization is down.

We are starting to see a ramp on some of the newer MSPs and beginning to penetrate those clients further but it just takes us a while to pivot. You get physicians ready to go to work at those longer term clients and you could fill 100% of their shifts with internal staff at some point but the newer clients, it can take a year to two years to build up your physician supply with the right credential-ing, the privileges from the local facility. It's kind of in the middle ground now. We also, admittedly, we have some execution issues. You heard us talk about new leadership in our locum leaders business. We're a little understaffed in recruitment count there.

Their performance isn't exactly as good as we're seeing in some of our other businesses where we are seeing some big jumps but it's been offset by that execution issue there. I do think that new leadership will begin to get some traction and we'll see some growth in the locums business getting towards the latter half of the year.

Okay. Just shifting gear as little bit. Are you seeing a big impact of the flu this year relative to last year? I think the statistics that I have seen shows somewhat of an increase but I'm just wondering how that's been impacting your business?

This is Ralph. I'll handle that again. We're not seeing an increase on the client side. The CDC said it's kind of inching near higher marks than the last couple of years but we're not seeing it translate into more respiratory or nurses in the hospital systems. It probably impacts our internal staff a little bit. We seem to have had a lot of people out on short-term leave lately. Maybe one sign of, and this is probably both potentially related to just patient populations in the healthcare, but one of the positive things we're seeing is that med surge nurses have risen to the top most desired specialty, or where we have the most demand right now. And that's usually a sign of a couple of things, right?

A very strong market for our business but also potentially (inaudible) in a more flu-like symptoms but most of the hospitals are not -- they placed those orders saying these are flu related job orders.

Okay. And then just a few up numbers questions for Brian. What should we be modeling for unallocated corporate expense in the first quarter. And then on an annualized basis what should we be looking for, for interest expense and capital spending in 2017? Thanks.

Sure. This is Brian. I think right around that 3%. Maybe slightly below that. As I mentioned in the prepared remarks, we were a little bit elevated in the fourth quarter from adjustments. As we look ahead, we've been at that 3% as an adjusted level and that should come down a little bit over time as we grow our top line. Maybe first quarter, 2.8%, 2.9% and not a big change I guess through the year. Your question on interest expense as I mentioned, we're going to be at $5.1 million in the first quarter. It should drop down by about $100,000 per quarter. We have now the majority of our debt is fixed in non-prepayable. If we use excess cash to pay it on a term loan that's remaining, we'll get a little bit of benefit from that as we go through the year. On the CapEx side, we're a little over $4 million in the fourth quarter. I expect we will be somewhere in the $5 million range per quarter during 2017.

Thank you so much.

Sure.

And our next question comes from the line of Randy Reece, with Avondale Partners. Please, go ahead.

Good afternoon. My first question is about the nurse and allied solutions gross margin. In the fourth quarter, it was good because of mix. What would an adjusted gross margin have looked like in the fourth quarter if you didn't have the labor disruption revenue in there?

This is Brian. We would have been in the more in the high 26% range. As I mentioned there were a couple of puts and takes in the quarter itself so probably 26.7%, 26.8%. And as we look at the first quarter as I mentioned we're seeing some good trends overall. The first quarter will be right around that 27% range.

All right. And --

And that's likely where we would expect to see it for a while. We found a good balance again and we want to continue to strike that balance between attracting more clinicians in the industry as we get (inaudible) increases and maintain the right level of profitability.

All right. That's a good number. The MSP market, I was wondering if you could shed some light on what you're thinking about the potential for growing your MSP spend under management in 2017?

Sure, I'll have Dan answer that. But first I would just like to congratulate and thank our MSP and strategic accounts team as well as quite honestly all of the staffing and service team members in the divisions that support those MSPs because it was our best year ever in terms of both winning new MSPs but also delivering great services in a challenging environment. So I just want to thanks them. And, Dan, if you could shed a little bit more color?

Sure. So thank you for the question, Randy. This is Dan. I'll just give a little bit of color first on Q4 and the full year. Q4 we added new client deals worth about $38 million for the gross spend. And that took our total for the year to just a little over $185 million in gross spend. So again, really fantastic year and I just want to thank all of the teams that were involved in that. The best way for me to characterize how it feels going into the year, we have a very strong pipeline right now still, both in very significant client expansion and new client wins. The pipeline today is well over $100 million for the gross spend. And all of those are in this verbal award contracting phase. All of them but two are multi-disciplined so more than nurse allied but also two, those two that I mentioned are locum specific. So that gives us a strong momentum going into the year for 2017.

The best way for me to characterize how it feels going into the year, we have a very strong pipeline right now still, both in very significant client expansion and new client wins. The pipeline today is well over $100 million for the gross spend. And all of those are in this verbal award contracting phase. They're all -- all of them but two are multi-disciplined so more than nurse allied but also two, those two that I mentioned are locum specific. So that gives us a strong momentum going into the year for 2017.

Good. My last question is about the RPO business and what we could expect in terms of a trajectory from quarter-to-quarter in 2017 for that business?

Again, this is Dan, I'll take that. We've been relatively flat I would say for the last two quarters and I would say to be pretty conservative it would be about that moving into Q1. We do see a very nice sign of our pipeline improving but it's a little bit too early for me it predict. And so I would be hesitant to say anything too much more than that. But our plans for the year are definitely in kind of double digit growth for the year.

Good. Thank you very much.

Thanks, Randy.

Our next question comes from the line of Mark Marcon, with RW Baird. Please, go ahead.

Congratulations on a great year. A few questions. With regards to the $2 billion in MSP spend that you currently have under contract, how much of that are you currently filling?

Thanks, Mark Marcon. (laughter) The $2 billion that we referenced is both MSP and VMS. So VMS is about $1 billion of that and MSP is about $1 billion of that.

Okay.

Of the MSP-related spend, we're filling a little over 60% of that and that translates into something north of 40% of our total staffing related services, if that's helpful.

It is. What do you think that could get to over the next couple of years if you held on to those contracts? Is there much upside to the 60% do you think?

I do think there is because we're at higher fill rates within the nursing piece of the business which is not surprising since nursing MSPs have been around for almost a decade now and we've all improved our ability to execute and fulfill within those. Within allied we're a little bit north of 40% of our revenue coming from MSP-related clients and our actual fill rates, while not at the 60%, are very, very attractive and sort of the 40% to 50% range.

Within locums, however, while we typically do meet our fulfillment requirements on an aggregate basis with our clients, we ourselves are filling a smaller percentage of those jobs and we're relying upon our wonderful affiliate vendors in the program to help fill those. So I think over time we can make improvements to increase our fill rates particularly within the locum space. But there's so much demand outside of MSP as well and I want to make sure that I point that out. That we have significant demand in our traditional clients as well as through other third parties. And so we want to make sure that we're doing our part in improving our fill rates in those categories as well.

Great. And with regards to the guidance in terms of nurse and allied for the first quarter, obviously you had a significant strike revenue, or disruption revenue, in the first quarter of last year which makes it a tough comp. But if we think about it from an organic perspective, what are you anticipating in terms of bill rate increases on a year-over-year basis for that nurse and allied, and how are we thinking about volume?

This is Brian. So our bill rates for the first quarter we're looking at somewhere in the 4% range which is right in line with we've talked about before, this year likely to be more in the 3% to 5%. On a volume basis we're going to be somewhere in the kind of upper single digit range for nursing and allied. We've got puts and takes so the local business is still improving but it's still a bit of a drag to the overall results, but the volume will be in the upper single digits.

Great. And with regards to opportunities and particularly with regards to nursing, you mentioned that the millennials I think are expressing a lack of desire or be more active about not wanting to work nights or weekends. I think that's always been the case. But, maybe they're a little more active about it. What opportunity does that create for you?

We believe that this sort of demographic shift in preferences which I think has shifted a bit more than what we've seen historically, at least the percentage of new professionals into these areas that don't want to work as much is probably increased. But, what it also means is they want more flexibility. And that is really a positive for us because it means that they're more likely, we believe, to become a traveler.

If they're not going to want to stay in a role for five or ten years, then they're going to look to traveling more quickly as an opportunity to help build their career. And so we actually think this is going to be a positive trend for us. And I think also our clients are beginning to realize that perhaps it's a trend that's going to be challenging for them to fight. And so they're better off being realistic with the expectations of how long someone will stay and making sure that they've got a good long-term Workforce plan with us to fulfill those jobs.

So, you know, we see it actually as a positive. It creates its own challenges for everyone, but we think for our industry it could be a positive trend.

Right. And then with regards to perm placement, what are your expectations as the year unfolds there? For the first quarter embedded within your other Workforce solutions, how quickly do you think that would turn and what would the driver of that be?

I think they're already seeing some improvement in the trends of searches and placements, so that should bode well going into the second quarter. I think it will be more the second half of the year before we would be able to claim some better year-over-year growth rates. I just want to be realistic with the time that it takes in order to have those trends actually translate into performance. Because when you receive the searches, you don't necessarily activate them right away. And so we've got to see that translate through into activations which create sourcing opportunity and placement opportunity. We're also a little bit understaffed in our marketing sales team.

These are the individuals that are out in the field and talking with clients to generate those search opportunities and we need to get staffed up there in order to make sure that we're bringing in the volume of searches. We have, we believe, the right recruiter count and a great recruitment team that's producing exceptionally well. We just need to go out and get the searches so that they can do their work.

Great. And I just wand to make sure I've got one thing straight with regards to nurse and allied guidance for the first quarter. When we strip out the strike revenue in the prior year, basically the guidance comes out for nurse and allied to about 8% to 10% growth. And then if we strip out an additional since we have one fewer day, that kind of comes out to 9% to 11% all organic?

That's exactly right. Yes, Mark.

Is that nor all of nurse and allied or just for the nursing side?

That's all of nurse and allied, the entire segment.

Great. Terrific. Thanks.

Thanks, Mark.

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

Yes, thank you. Just on the other Workforce solutions, I guess mid teens growth if my math's right implies kind of an organic growth maybe in the low to mid single digits. Is that just perm being flat? Or, given the growth trends you described for other parts of that segment, I guess I would have thought of a higher organic growth rate.

You would. And it's actually translates through to high single digit organic growth. But it would be double digit organic growth if we didn't have the drag of RPO being down on a year-over-year basis. It's a fairly significant decline for RPO and so that's creating a little bit of the under performance, if you will, of the segment.

Okay. And then on I guess just is there anything competitive happening in locums just to follow up on kind of the MSP ones, or the ability to fill, I guess, how confident are you I guess that it's simply an execution issue or some consolidation trends in the marketplace that you can then kind of reverse?

It definitely is something to be reversed. We've talked to others in the industry who are seeing (inaudible) growth rate and there's not anything fundamentally different about what they're doing in the marketplace than we're doing. We do feel likes it related to those two things, the customers and the execution issues in that one brand. Demand is up over prior year and, you know, we have like I said get our supply to align better to demand. We have recently started implementing some analytic capabilities which help us do that a lot better than we could in the past so we could, you know, get a more forward-looking view of what demand is going to look like and what our database looks like and find just the right individual at the right time to get out on assignment.

So we're looking forward to seeing some pretty quick impact from that initiative. But they're hiring more recruiters, getting them up to speed faster, staying focused on keeping our existing physicians working as much as we can. Is kind of what the team is doing. They're putting a great effort into it.

Okay. And then I guess just sorry to circle back on this other workforce solution. Is Peak Health still running at like a low 30s annual revenue run rate, or is that smaller now? I think that's the only acquisition we are accounting for.

This is Brian. It's right around $30 million. When we bought them they -- the middle of last year there was a bit of a pullback in the industry overall which we anticipated but they've had a nice fourth quarter and they're on a growth trajectory but right now they're running just under $30 million on an analyzed basis.

Okay. And just on the tax rate just so I make sure I heard you right, $5 million benefit in the first quarter, will you see -- I know the rules are a little unpredictable but is that most of the benefit you would expect to see for 2017?

Yes. And again it's mainly driven by win's equity vest and you look at the difference between what your book expense versus what the tax benefit will be. And so because of the majority of our equity vests in the first quarter, that's what that benefit will occur. So the rest of the year it will be very immaterial, if at all.

So if you look, it's kind of 41%. If you exclude that it would be right around 30% is what the rate will be in the quarter with that tax benefit.

Okay, great. Thank you.

Next we go to the line of Brooks O'Neil, with Lake Street Capital. Please, go ahead.

Good afternoon, Susan, Brian and Neil.

Hi, Brooks.

How are you today?

A great day.

Great day. In Minnesota too. Couple of quick questions. I'm curious given the strong environment, are you seeing any new initiatives on the part of competition?

Well, yes. There are always new initiatives, so I think we need to expect that. Is there anything new that has surprised us?

No. Not necessarily. But I think it's such a dynamic environment, our competition continues to get better, our clients across the board continue to ask more of us and the industry. And so you see all kinds of organizations stepping up both staffing companies but also others that aren't necessarily direct competitors that are doing some interesting things.

And so, you know, one thing that we believe is it's really important that we collaborate and innovate with a variety of companies to, you know, bring innovative ideas to the market whether it be through the way that we serve clients or in our sourcing efforts. But I can't say there's anything that has kind of taken over the industry in a different way in the last couple of months.

Right. And then secondly, are there any factors that you think are going to have an unreasonable impact on either demand or pricing as we head into the spring and summer?

Not other than the factors that we mentioned. You know, there are a lot of positive factors that continue to drive a strong demand across really most all of our businesses and as we mentioned, our pricing environment we think is positive. It's come down to I think a more sustainable level in that 4% to 5% range. We were projecting this last year that we would come down from high single digits into low single digits and we're tracking towards that.

And I think that's likely where we'll be through the rest of the year. And there are underlying macro factors that are supporting that such as the shortage of clinicians, high attrition rates, the outlook for positive economy, GDP is expected to grow at a faster rate as we go forward into 2017. So all of those things generally speak to a stable growing demand environment which supports a growing pricing environment as well. And with that said, you know, there's certainly uncertainty out there with the new administration and discussion of ACA.

We don't think any of that will have any sort of material effect this year or quite honestly even into next year based on the changes that they're discussing. But it would take a pretty significant change in the macro environment I think to really move us off of the pricing environment that we're in today.

Cool. And then you talked about it and we all understand how strong the economy is out there and the employment environment is very positive, but I'm curious if in any markets that you serve, do you see any signs of softening overall employment as that seems to be one of the major factors that drove the business to have some challenges back in the 2008/2009 time frame.

I can't say that we see softness in any particular area. There are I think Ralph alluded to the fact that there are some areas of the country that are growing more than others. You know, our largest states are quite honestly the same largest states we've had for a while. California, New York, Texas, Florida, Pennsylvania has popped up as a bigger state and Massachusetts. So it's really all over the country. And some of the newer MSPs that we've won are throughout the Midwest. That's probably a newer trend that we've seen in the last 12 months that there's more appetite for both Workforce solutions but also staffing needs throughout the Midwest. I suppose if we looked at the regional markets, there could be some areas that are more flattish or even down a little bit but I don't think I would point to anything and call it soft.

The last question, we've talked a little bit about the growth of urgent care and free-standing ERs and some of the outpatient service providers. Would you talk a little bit more about how that is affecting your business, whether it's a positive or negative driver and the opportunity you see there?

Thanks, Brooks. We see that as a positive for our industry and for AMN in particular because when we have clients that are becoming more vertically integrated, whether they own ambulatory surgery and home health and other kinds of patient care settings, or they're just becoming affiliated, they want a staffing partner that can help them across all of those studies. And so that usually bodes in our favor because we're able to help them with their staffing needs and implement an MSP system and processes that help them get their arms around total demand their total spend.

We also work with many of those settings on an individual basis, whether they be rehab chains across the country, urgent care, retail care clinics. We've done some things in optometry more recently. And so we absolutely see the need to plant seeds. Where that growth is going to occur and it's going to be in alternative non-acute care settings so we want to make sure that we're there and our sales team is very focused on that.

Brooks, this is Dan. I'm just going to add one more thing. Last year we had two rather significant clients with our Avantas brand which does Workforce optimization that began to serve that market, that clinic kind of market. You can imagine how difficult it would be to resource and schedule and so on in, you know, either a retail environment or a clinical kind of environment like that. And we've found that they have some particular strengths in the consulting work and the scheduling work that they've been doing there and I think that will probably be an ongoing trend.

Great. Thank you very much. It's nice to be on the call.

Thanks, Brooks.

Thank you, Brooks.

The next question comes from the line of Bill Sutherland, with Benchmark Company. Please, go ahead.

Thanks for taking the questions. Was there anything notable about travel's seasonality in the quarter and as you entered this quarter that may have affected rate of growth and that kind of thing?

It's Ralph. I'll handle that. Every year we have what are called the winter needs, that kind of mostly California but a little bit of Arizona, you know, they have a population influx and probably also the cold weather both in California that caused them to have, you know, incremental need for (inaudible) of the specialties. And so, winter needs were in line with what they were last year so probably in the, you know, almost a thousand FTEs out on assignment on winter assignment.

So, not unusual year-over-year. I think one of the things that has been less predictable is kind of how that translates into our second quarter. So some years a majority of those go away and we'll lose maybe 400 or so RNs and we have to convert them to put them to work other places. And our business can sometimes seasonably drop just a little bit. And then other years it actually looks pretty flat year-over-year and a lot of them end up staying on assignment. What's yet to be told is how that's going to impact Q2. At this point I think we probably will see that normal seasonal decline but there's still plenty of time left in the quarter for that trend to change.

Okay.

Hopefully that was helpful. Nothing else, though. Nothing that grows volume. (inaudible) the sites we called out. That's it.

Approximately when will you start to anniversary this RPO headwind, what quarter?

This is Brian. Second quarter, the comp gets easier and by the third quarter of 2017 is when we'll have lapped it.

Okay. And Brian, did you -- I've probably missed this. Did you call out the expense as far as how it looks directionally for Q1?

We didn't give any specific information. We talked more about the segment itself and the growth rate we expect. Susan did talk about just the performance of the leadership business, which is both B.E. Smith and the First String collectively. The pro forma growth rate was up 11% and the trends that we see as we start the year are still very positive in terms of the need. We're hearing a lot about turnover of leadership within our clients so the demand is favorable for both interim and permanent positions.

Okay.

This is Dan. I would also add that of the add-on services so when I refer to expansion opportunities it's either an expansion which is same service, new geography or an add-on which is a new service, that is by far the biggest ones that we have been adding.

On our MSP contracts.

On our MSP contracts. Thank you, Ralph.

Okay. And I'll just wrap up here. We're running late. I was just going to also ask you, Brian, very quickly on the gross margin, directionally it feels like it's settled in around 32.5 plus or minus in bps. Is there a year where it just kind of settles in just based on the growth rates of your higher margin businesses, they're still higher obviously than your standard staffing. But is it enough to create an incremental, you know, lift?

I still think as we look through the year we would expect to see some incremental growth from the that 32.5 Because, as I said, the first quarter is pretty much in line with the fourth quarter. But as we talked about with RPO, we expect to see more growth in the latter half of the year, front placement as well. The locum tenens gross margin was a little bit lower in the fourth quarter. So, as we see those come online a little bit more, that would allow us to move up the gross margins a bit more from where it is right now.

Great. Thanks, everybody.

Thanks.

And our next question comes from the line of Mitra Ramgopal, of Sidoti & Company. Please, go ahead.

Just a quick question on MSP. I don't know if you have the number for 2016 in terms of what it might have been on a consolidated basis as a percentage of revenue, or maybe the percentage of total staffing? And, where do you see that number going maybe over the next if you take a five-year horizon?

This is Brian. We're still right about a third of our consolidated revenue is coming through MSP. And as Susan mentioned, if you look at our staffing businesses just looking at nurse, allied and locums, those two segments, it's closer to 40% of the revenue. We would expect that to continue to increase over time.

Maybe I'll get Susan to, try to get the crystal ball where that would go. We would anticipate it to go up in the coming years and up in the upper 30s if got over 40% that wouldn't a surprise. It's also a function of the growth we see in other service lines as well so that's partly kept that number in that low 30s. We've added other service lines that are not part of MSP but the penetration we see with existing nurse allied and locums has continued to rise.

Thank you. Just on the acquisition, I know you made some comments in terms of having some conversations. Are you looking, if you go back to BE Smith, Peak, etc. it all allowed you to enter some new areas. Are there any holes that you feel you need to address or is it a question of just consolidating the existing areas you're in?

I wouldn't say there are many holes that we must fill immediately. In fact we have a lot of opportunity to fill or add on or pull through the services that we've added just in the last couple of years. So we're very focused on that. With that said, if there were an opportunity to add in a new category that our clients were wanting within Healthcare, then we would certainly look at that. Or, if we could further add in consolidation opportunities in some of the higher demand, high growth areas we would look at that as well. But as I mentioned, we're probably first focused on sort of the talent tools and Workforce solutions areas.

Okay. Thanks again for taking the questions.

Thanks, Mitra.

And the next question we have in queue comes from the line of AJ Rice, with UBS. Please, go ahead.

Hello, AJ? I know AJ was on earlier.

Sorry about that, yes. So just maybe a follow-up question on the comments you made about what's happening in locum tenens and you're seeing some softness in certain specialties. I just wondered if you would maybe expand a little bit about what you're seeing there and then also other specialties, same specialties in terms of your own recruitment and what you're seeing in trying to get those recruits out there? Is there any new areas that you're finding that are tightening up a little bit?

Hi, AJ, this is Ralph. First I'll say, demand across the board is actually up overall. But you're right, there are some specialties that are softer which were ones which we're particularly good in. The one that probably worth highlighting is the hospitalist and those are the ones that primarily work in a physician practice management group and so there's just less movement in that industry right now so that's, you know, the key driver there.

We also, you know, when we acquired locum leaders, they had a pretty hefty share of their business was in government. You saw that change for staff care a few years ago when we unraveled out of that. All of those contracts now go to small disadvantaged minority businesses. So we are seeing some pullback in the government because of that. But, you know, our emergency room management business is up, gosh, almost 20% or something year-over-year so there's some strength in there as well. You would be surprised, even anesthesiology, we're seeing a little bit of a come back in those specialties.

Our nurse practitioners have been strong. And I think there's a lot of upside there. Psychiatry and primary care we're delivering on a flat basis. I think those markets we could do better in that's probably a good example of where recruitment needs to align better to where our jobs are. And we're making some progress there as well. It's happened to us before. I wish we could predict it better. The team that we have is experienced in shifting and making the curve into the specialties that are growing the fastest again.

Okay. And then just one other one possibly. On applications and what you're seeing there, you mentioned that some of the things you're seeing with the millennials suggest they might be more open to do traveling nursing. I know that doesn't turn on a dime. I wondered what are you seeing in terms of nurses willing to consider taking on a travel assignment?

I'll start. On all supply first, we have positive trends in nurse, allied, locums and leadership in the number of applications that we're seeing that are qualified for the type of work we have. So that's good. Well, I'll give you an example of what happened in January. About one-third of the travel nurses who went to work were first timers with us. And they actually do skew towards you know, that millennial age group, and so we are seeing a little bit of a shift. And we're always going to have kind of nurses who are at the end of their career and nurses at the beginning of their career.

We're seeing a little bit half shirt shift of people who are earlier in their career because it does offer that flexibility. All of our products do if they want. If you're a doctor and you only want to work in the emergency room one day a week, we're a great option. If you're a per diem nurse and you don't want to work at the same hospital every day, at the same bad shift, you can change your careers and do that. So, I agree with Susan totally that this trend will take a while to unfold but it should be very, very positive for attracting supply. I think that will also change the model that the healthcare systems utilize.

Today they think full-time, you know, on 98% of their hires and, you know, take a look at other industries, they might have as few as 75% of the workforce full-time labor and 25% flex. So I'm looking forward to watching those trends unfold over the next few years.

And I'll stop there before the end of the day.

Your comment made me actually think of another one. I know something you guys used to talk about was the percentage of nurses that would re-up for a second even on the same location, a second sort of tour of duty or would re-up for another travel assignment somewhere else. Has there been any change in the trend in that, the percentage of your replacements that are nurses re-upping?

It's still very strong, very solid. Pretty comparable to last year at this time.

Okay. Okay. All right. That's great. Thanks a lot.

Great. Thanks, AJ.

And that does conclude today's question-and-answer session. I'll turn it over to Susan Salka for closing remarks.

Thanks, Brian. We really appreciate all the fantastic questions. Thank you for joining the call today and we look forward to updating you on our progress on our next earnings call.

Okay. Ladies and gentlemen, that does conclude today's conference. Thank you for your participation. You may now disconnect.