AMN Healthcare Services Inc (AMN) 2017 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the AMN Healthcare Fourth Quarter 2017 Earnings call. (Operator Instructions)

As a reminder, the conference is being recorded. And I'll now turn the meeting over to our host, Director of Investor Relations, Mr. Randy Reece. Please go ahead, sir.

Good afternoon, everyone. Welcome to AMN Healthcare's Fourth Quarter and 2017 Earnings Call.

A replay of this webcast will be available until February 28 at amnhealthcare.investorroom.com following the conclusion of this call. Details for the audio replay of the conference call are in our earnings release issued this afternoon.

Various remarks we make during this 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. Information regarding and reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are included in our earnings release and on the Financial Reports page of the company's website, which can be accessed at amnhealthcare.investorroom.com.

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.

Thank you so much, Randy. 2017 was another milestone year for AMN Healthcare and we are very proud to end on a strong note with revenue and profitability ahead of our expectations for the fourth quarter. Through the year, AMN proved that we could respond to short-term surprises while increasing long-term investments. Our strategy to evolve our workforce solutions portfolio and extend our capabilities benefits our clients, our health care providers, team members and our shareholders.

Over the last 5 years, AMN Healthcare has doubled annual revenue and more than tripled adjusted EBITDA and our enterprise value. The addition of higher-margin service lines that expanded value to our clients enabled us to improve our margin profile. Our scalable business model also resulted in improved operating leverage in all of our businesses. 2017 was a year with less than optimal market conditions, and yet, AMN and our industry continued to deliver critical value to the health care community and the patients that they serve.

For the full year, AMN grew revenue 5% to nearly $2 billion, despite a 2% headwind from minimal labor disruption business. This was led by 8% growth in our largest business of travel nursing. Consolidated adjusted EBITDA grew 8% and reached a margin of 12.9%, improving by 40 basis points year-over-year.

The lead story for AMN last year was our success in MSP. In 2017, we won new MSP clients with over $230 million in gross spend under management. We are on a solid path for 2018, starting the year with a robust MSP sales pipeline.

We had a strong fourth quarter with revenue and adjusted EBITDA beating the upper end of our guidance. Our revenue of $509 million was 4% higher year-over-year, led by strength in Travel Nurse and Allied. The quarter also included 4% year-over-year revenue growth for our Locum Tenens segment. Our adjusted EBITDA was $64 million and represented a margin of 12.6%. The overall demand environment remains favorable and macro drivers support continued growth in our business.

We work daily to evolve our business model to stay ahead of clients' needs and the competition. We are investing back into the business to fuel future growth, to retain and recruit the best talent and to build on our competitive advantages. Innovation and investment are essential to the future of AMN and to achieving our goal of a 14% adjusted EBITDA margin by 2020.

Now let's review fourth quarter performance and trends for our business. Our Nurse and Allied segment posted revenue of $321 million, higher by 4% year-over-year. Revenue for our largest business, travel nurse staffing, increased 8% year-over-year. This growth was driven primarily by volume increases. Our investments in digital marketing and recruitment of new candidates also are paying off with applicants and new traveler starts up year-over-year. In recent months, the demand environment for travel nurse staffing showed improving momentum. Although overall demand still remains below prior year, that gap is narrowing and new orders are growing at a double-digit rate, with particular strength in our MSP clients.

In the fourth quarter, the Allied staffing division achieved revenue growth of 6% year-over-year, driven by volume increases. We had double-digit growth in imaging, and the team has done a great job of growing specialties across a variety of settings. MSP clients represented about 45% of this division's revenue, driven by higher fill rate.

Looking ahead to the first quarter, the Nurse and Allied segment is expected to be up 7% to 8% year-over-year. In the Locum Tenens segment, fourth quarter revenue of $108 million grew 4% year-over-year. Many specialties sustained growth, though primary care, psychiatry and hospitalists were down. Overall, demand for Locum is strong and slightly above prior year, and we are seeing an increase in MSP wins that include Locum. While we are pleased with the upside results achieved in the second half of 2017, keep in mind that the Locums business is in the midst of a model and technology upgrade. In the near term, these changes have been disruptive to productivity, which is reflected in our first quarter guidance. However, we are confident that the long-term benefits of these changes will justify the short-term impact.

For the first quarter, Locum Tenens revenue is expected to be slightly down year-over-year. Fourth quarter revenue in our Other Workforce Solutions segment was $80 million, which was 5% higher year-over-year. Growth was led by our interim leadership, VMS, health information management and workforce optimization businesses, which collectively grew over 10% year-over-year. Our permanent placement related businesses declined year-over-year, although at a slower rate than last quarter.

Interim leadership, which includes B.E. Smith and the First String was up 11% year-over-year. The team has really made great progress on MSP placements, which have reached nearly 20% of the revenue. Our VMS businesses, which are largely vendor-neutral, grew 15%. The team has done a great job of adding new customers and expanding services to meet the changing needs of clients. For example, Medefis launched new capabilities in the fourth quarter to support Locum and nonclinical staffing. ShiftWise also recently launched their next-generation platform. Our health information management business, Peak Health, posted 8% revenue growth. The ramp of new client wins gives us great confidence in continued growth for 2018. Physician Permanent Placement fourth quarter revenue was below prior year by about 10%, but in line with our expectations. This business is regaining its footing, with revenue expected to be down in the single digits year-over-year in the first quarter.

Our workforce optimization business, Avantas, had a solid quarter with revenue up double digits over prior year. Consulting and analytics services continue to be in high demand and are differentiating AMN. Building off 2017 momentum, Avantas will introduce a new product release in the first quarter, including mobile functionality and an online analytics dashboard. We feel well-conditioned in this business as we move forward.

Overall, first quarter revenue for the Other Workforce Solutions segment is expected to be up approximately 3% to 4% year-over-year. Our long-term strategy of investing in our talent, technology and workforce solutions is the right thing for all of our stakeholders.

Recent federal tax reforms have enhanced our ability to reinvest from a position of even greater strength. A substantially lower tax rate increases our cash flow, giving AMN the flexibility to accelerate these growth strategies. Much of the tax benefit will immediately flow through to shareholders in increased earnings. At the same time, we also intend to accelerate investments in key strategic areas such as digital and mobile capabilities, employee productivity tools and process improvements.

We also will be using this opportunity to further increase investment in our team members with a variety of initiatives that will focus on training and development, our work environment and compensation and benefits programs. As an active supporter to many important social and non-profit causes, we will also be increasing our charitable contributions, in alignment with our clients, team members and the needs of our communities. We estimate the increased spending from these initiatives will impact adjusted EBITDA margin by about 20 basis points in 2018, with an EPS impact of about $0.09. We expect the long-term benefits of these investments will more than justify the cost.

Since we created our workforce solutions strategy almost a decade ago, AMN has dramatically evolved our client engagement model. We are earning a more collaborative position in helping our clients manage and optimize their clinical workforce, which is their single largest operating expense. On the talent side, AMN is evolving with the health care workforce in new and better ways. The value we bring to health care professionals is just as important as serving our clients. At the heart of everything AMN does are 3,000 talented and energetic corporate team members. They embody our commitment to doing things right and putting in the extra effort to exceed the expectations of our clients, our health care professionals and the communities we serve.

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, and good afternoon, everyone. The company's fourth quarter revenue of $509.1 million was $5 million above the high end of our guidance range, with outperformance in all 3 segments.

As expected, labor disruption revenue in the quarter was $3 million as compared to $12 million in the prior year. Excluding this labor disruption revenue, fourth quarter consolidated revenue was 6% above prior year. Gross margin for the quarter was 31.8%, down 70 basis points from last year and 50 basis points from last quarter. This year-over-year margin decline was due mainly to lower bill pay spread in Locum Tenens and a lower gross margin in the Other Workforce Solutions segment, due mainly to business mix changes. The sequential gross margin decline was driven by seasonal revenue mix changes, along with a lower Locum Tenens gross margin.

SG&A expenses in the quarter totaled $100.4 million or 19.7% of revenue, as compared to 20.7% last year and 20.3% last quarter. The improved SG&A margin from the prior year was primarily the result of the operating leverage. Fourth quarter Nurse and Allied segment revenue was $321.4 million, an increase of 4% from the prior year and 6% sequentially.

Volume was higher by 5% year-over-year, while the average bill rate increased by 1%. Nurse and Allied gross margin of 27.4% was 10 basis points higher compared to the prior year and prior quarter. This segment recorded a $2 million favorable professional liability reserve adjustment in both the current quarter and the prior year quarter.

Fourth quarter Locum Tenens segment revenue of $108.1 million was 4% higher than the prior year and down 3% on a sequential basis. On a year-over-year basis, the average bill rate increased by 6% and the number of days filled was lower by 1%.

Locum Tenens gross margin of 29.3% was down 150 basis points from the prior year, driven mainly by a lower bill-to-pay spread as position pay rates have been increasing faster than bill rates.

As a reminder, the Locum Tenens SG&A in the prior year quarter included a favorable professional liability reserve adjustment of over $3 million. Excluding this adjustment, Locum Tenens EBITDA margin was relatively consistent with their prior year but down sequentially on a lower gross margin.

Fourth quarter Other Workforce Solutions segment revenue of $79.6 million was up 5% year-over-year and down 1% sequentially. Gross margin at 53.1% was lower by 260 basis points year-over-year and 100 basis points sequentially. The year-over-year variance was driven in large part from a lower mix of permanent placement revenue, along with higher direct cost in interim leadership.

Unallocated corporate overhead in the quarter was $15.5 million, representing 3.1% of revenue, compared to the prior year expense of $18.6 million or 3.8% of revenue. As a reminder, the prior year included an unfavorable legal reserve adjustment. Excluding this, corporate overhead was relatively consistent with the prior year and prior quarter.

On a consolidated basis, fourth quarter adjusted EBITDA of $64.4 million was up 6% year-over-year and 4% sequentially. The adjusted EBITDA margin of 12.6% was an improvement of 10 basis points over prior year and prior quarter. We reported net income of $41.2 million and diluted earnings per share of $0.84 for the fourth quarter. Adjusted earnings per share was $0.63 compared to $0.62 in the prior year quarter. In calculating adjusted EPS, our tax rate in the quarter was 42%, which was higher than our expected rate of 39%, lowering our EPS by $0.03.

Our GAAP income tax rate in the quarter was 15%. This included a $14 million tax benefit on the remeasurement of our deferred taxes from the Tax Cuts and Jobs Act. For 2018, in consideration of the tax law changes, the company estimates its effective income tax rate will be approximately 29%.

Cash provided by operations was $19 million for the quarter and $115 million for the full year, which compares to $132 million in the prior year.

The fourth quarter included a $34 million transfer of certain self-insured reserves to our captive insurance entity, which was accounted for as a reduction in our operating cash flow. Excluding this transfer and net of an associated reduction in cash taxes, 2017 operating cash flow was approximately $140 million.

Days sales outstanding at quarter end was 63 days compared to 64 days in both the last quarter and the last year.

As of December 31, cash and equivalents totaled $15 million. Capital expenditures were $27 million for the full year. At year-end, our total debt outstanding was $325 million and our leverage ratio was 1.3x to 1.

During the fourth quarter, we repurchased 300,000 shares for a total of $13 million. As noted in the press release, we issued earlier this week, on February 9, we entered into a new $400 million revolving credit facility, replacing our previous facility. This 5-year agreement includes improved terms and a reduction in pricing by at least 25 basis points at all leverage levels.

Now let's turn to first quarter 2018 guidance.

The company expects consolidated revenue of $516 million to $522 million. This represents top line growth of about 5% year-over-year. There was no labor disruption revenue included in this guidance, nor was there any in the prior-year quarter. Gross margin is projected to be approximately 32%. SG&A expenses as a percentage of revenue are expected to be approximately 20%, and adjusted EBITDA margin is expected to be 12.5% to 13%.

Other first quarter 2018 estimates include the following: Interest expense of $4.7 million, excluding any one-time expenses related to the new credit facility; depreciation expense of $3.7 million; amortization expense of $4.4 million; stock-based compensation expense of $2.9 million; and diluted share count of 49.1 million shares.

Before we open up the call for questions, I just want to echo Susan's appreciation for the great work of our AMN team. Their passion for our clients, health care professionals and each other is the key to AMN's success. And we're excited to be investing more going forward and helping them achieve their professional and personal goals as part of the AMN family.

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

(Operator Instructions) Our first question, from the line of Tobey Sommer with SunTrust Robinson Humphrey.

I was wondering if you could review the importance of new orders versus total orders? And I think I've got a grasp on it, but we do talk about both metrics when it seems like new orders are fresh and likely to be filled and some of the orders that have been around for a while may be a bit stale and kind of not that pertinent?

Tobey, it's a good question. You're right, we have begun to emphasize, even more so over the last probably 8 quarters, the importance of new orders versus the total order count. Within the total order count we have, they may not be stale but you have orders that are extremely difficult to fill or ones that maybe the client is less serious about filling and so, sometimes, that number is a little bit less predictable of our future than the new orders are. We've begun to kind of pay quite a bit more attention to new orders in terms of determining our trend. The new orders are strong. I think we talked about it being up double-digit in our Travel Nurse business. They also were up recently in our Allied business and demand is good on our Locum's business as well. So I think that's why you hear some confidence about moving forward in our forecast as well as probably in our tone. The one other thing on the total order count that I think is important, during the time of dramatic growth, the industry didn't have the capacity to grow at the rate that client needs for growing, and that capacity has been built up, particularly like us, increasing the number of recruiters we have. And so, therefore, the total orders may never actually get back to some of the all-time highs. It doesn't mean we couldn't grow really fast, it's just they get filled more quickly. So I think we talked about this last call, we were a couple of days faster in filling orders. Again, this quarter, we're another day quicker in filling orders, so those are all positive things for our business.

Great. Could you expand on the comments you made about maybe some of the leading indicators for Locums being encouraging to you beyond the 1Q guide since you did just do a system migration?

Yes, we are in the process of this system migration. Actually takes place beginning of Q -- or sorry, end of Q1 through almost all of Q2. And with that, there's process changes that come that we've been implementing over the last probably, I guess, 3 months now. Things were -- people's roles changed to become -- to move more into roles where their skills matter more, so they're selling skills versus kind of admin skills. A lot of the admin work goes away with the technology. Back to your original question of leading indicators, we are seeing an increase in the demand based on the number of days our clients are requesting from us in the Locums business. I would -- I wish it was in our sweet spot, it's a little bit in more difficult to fill specialties, so things like psychiatrists, we're seeing cRNAs, those are growing pretty fast and give us confidence. They're just, right now, they take us a little longer to fill, and hence, also, have a slight impact on our margin as recruiters try to get clinicians into those assignments and sometimes have to pay a little bit more to get them there.

Tobey, probably the other strong indicator we have around demand and our ability to execute well on that demand is the strength that we see in more Locum's contracts with 4 MSP clients. And we have the strongest pipeline we've ever seen in terms of clients wanting to migrate to their first MSP arrangement and through us ideally. And so that tells us that they see the demand continuing for Locums. And obviously, we perform well in those environments.

Great. And then, maybe a question for Brian and I'll get back in the queue. Brian, could you talk about cash flow conversion in '17 and maybe what your outlook is for cash flow conversion from EBITDA in '18?

Sure. As I mentioned in the prepared remarks, the cash flow in 2017 was dampened a bit by that transfer we made into our captive. Otherwise, it would have been a nice growth from 2016 to 2017, mirroring the growth in the EBITDA as well. So historically, we've been more in the kind of 40% to 50% conversion of EBITDA to operating cash flow. It will be north of 60%. There's always going to be some variation with working capital, but just through the tax rate reduction, that will be north of 60% going forward.

And how much of that north -- how much of that delta is a function of the tax rate change versus the normal...

That's the majority of it. Otherwise, I mean, the EBITDA margin obviously is going to -- will go up over time a little bit, but the kind of the vast majority of that is really being driven by the lower tax rate.

And our next question, from the line of Jeff Silber with BMO Capital Markets.

The media has been paying a lot of attention to the flu outbreak this season. I'm just curious, what impact you think it had on your business last quarter and what's embedded in your guidance for the current quarter?

Thanks for the question, Jeff. We get asked this, I think, every year, but particularly in a year like this where we know there's been a greater epidemic and impact. We really didn't hear the same thing even directly from our clients, but it's interesting that it doesn't seem to have a material impact on our business. It's very difficult -- to be fair, it's very difficult for us to measure exactly the reason for every order coming in, but the places that you see it most predominantly would be in local staffing as well as our rapid response businesses. Our best estimate would be, in the fourth quarter, we might have seen an extra $1 million to $2 million from incremental flu-related business and similarly in the first quarter. Now remember, in the fourth quarter, however, we also had a negative impact from the hurricanes at the beginning of October. And so those 2 probably somewhat offset each other in the fourth quarter. If you were going to bake anything into the first quarter, it would be, at best, we think, $1 million to $2 million.

Okay. Great. That's very helpful. Shifting gears to the Locum Tenens business, I understand your guidance for revenue to be down slightly. I know you're not giving guidance beyond the current quarter. But is it realistic to expect that business to start growing again in the near future?

This is Ralph. It's a good question, Jeff. It surprised us on the upside in Q3 and in Q4 from our original projections. So the new leadership, the changes they're making, the ability to shift their focus quickly on recruiting new specialties and in new markets, the expansion of the physician license, there's lots of really good things going on. As a matter of fact, we saw demand increase in 7 of the specialties, with only 4 being down in the fourth quarter. So it is reasonable to expect us to get back to growth. Predicting how much disruption we have, I mean, you have people who are in new roles using a new piece of technology and exactly when they'll exit that is -- I wish there was a science around it as we would answer the question. So we've been kind of leaning toward seeing growth more towards the fourth quarter of the year, after the changes have taken effect and had the people had 2 or 3 months with the new technology and in their new roles. And we expect to be positive, both from a revenue and a margin perspective.

Okay. Great. That's helpful. And then, just a couple of numbers question. Brian, you talk about a refinancing. Is it possible to give us some sort of guesstimate what the impact is going to be on interest expense going forward? Or should we just use the first quarter guidance number as the run rate for the rest of the year?

Yes. Even the first quarter is at a reasonable expectation. Keep in mind, we have $325 million unsecured [revolver], which that is the majority of the interest expense we have today, and that will continue forward. The new facility is undrawn at this point. So it has really no material impact at all on our run rate interest expense going forward. One of the things we generate more cash through the year, we can actually create some interest income, so there could be a little bit of a reduction in the interest expense, but the $4.7 million for the first quarter might go down to $4.6 million, $4.5 million by the end of the year.

Okay. Great. That's fair. And then, one final one. What should we be modeling for capital expenditures for the current year?

I think, mid-20s. So we had $27 million as we talked about in 2017, it will likely be a similar level in 2018. One is we continue with the implementation as with Locums going live as Ralph talked about. And then, we have work to do for Nursing and Allied through this year. We're also continuing to invest in some of the areas that Susan alluded to around some of our digital and mobile capabilities and some of the initiatives that we have in line for kind of accelerating some of our growth strategies. So into that -- through all that, it'll probably end some being somewhere in the mid-20s again.

And our next question, from the line of Mark Marcon with R.W. Baird.

Wondering, with regards to Nurse and Allied, I mean, you're projecting a pickup in terms of the growth rate. What's the primary attribution to -- is it the growth that you're seeing on the MSPs? Is there any more unexpected pickup in terms of orders or any sort of regional variances? And then, I've got a few others.

This is Ralph. I'll start and sure others in the room may want to talk more about this. You're spot on. The MSP demand is up more than other demand. So there's a very favorable mix there. Obviously, higher fill rates we have on our MSP orders, that helps accelerate the demand increase into revenue. And then, the -- really no other kind of refill changes. I mean, things are strong in California, New York, Florida, Texas, places where we are particularly strong geographically. And in specialties where we're good, we've talked about this before, med surg, tele, ICU, we have extremely high internal fill rate. So I -- actually, a little bit of the story as well in Allied, MSP volume increasing, so kind of a favorable shift to MSP there and higher fill rates in our Allied business as well. So that's -- those 2 factors are probably the main drivers for the Nurse and Allied growth.

And some of that connects back to the fact that we had an exceptionally strong year in 2017 in winning new MSPs. The majority of those were nursing and Allied, we certainly had some Locums in there as well. And those MSPs were won later in the year than actually we might have wanted. However, they are now rolling out in 2018. And so we'll actually see the majority of the benefit from those wins in '18 and '19. So we're starting to get some of that benefit in the first quarter.

Great. And then, with regards to the new orders accelerating, can you give us a feel for like what the pace of the new orders are increasing on a year-over-year basis so far this year? And how does that look in terms of just if you were looking at it sequentially by month? Is it -- is the pace increasing at an accelerating rate?

Mark, this is Ralph. We do that -- we look at it in 2 ways. One is like a 13-week rolling trend and the other is a 4-week rolling trend. And probably as much flavor as we could give is that the 4-week rolling trend, which is the most recent trend, is stronger than the 13-week trend.

Okay. And how much is the 4-week rolling trend up?

That's, I think, a level of granularity that we typically don't provide publicly. Sorry, Mark. Nice try.

I got to try. My sense is things are getting stronger. Just I -- we'll talk off-line about that. In terms of the Locum Tenens, the gross margins there, the expectation longer term is for that to go up. Is that still a reasonable expectation? Is there something that's going on from a very -- from a short-term perspective that's driving the gross margins down? Or is that maybe a function of MSP but the EBITDA margins should eventually even out? Just how should we think about that?

Yes, good question. We -- our long-term view is still that margin in that business ought to be around 32%, kind of our target long term. We certainly were disappointed to fall below that. You're right. In the past, right, we've had to pay a little bit more to implement new MSP business and that dropped our margins for some period of time. That's not really what happened here. We've just seen a kind of a mix in specialties and also just the disruption of having team members who are -- they're testing software, they're in training, and so they don't have that same amount of time to focus on it. So the physician pay rates are just -- grew just a little bit faster than the client bill rate. And the good news is they recognize the issue and we're starting to, even in the last few weeks, see improvements in the trends that are coming out. It's going to take us a while though to get through it because those -- people are on assignment a long time in that business.

Okay. Great. And then, just what are you seeing in terms of wage and bill rate inflation? It sounds like wage inflation is picking up, broadly speaking. And so therefore, in an area where there are shortages, you would expect it to be even higher. And I'm wondering if you could also discuss your internal staff and what you're seeing there in terms of pressures?

Sure. This is Brian. so we've talked a bit about the physician market, which is a little more dynamic as you're kind of negotiating pay and bill rate as you're making placements. And so we've seen more of it there. On the Nursing and Allied side, I'd say we haven't necessarily felt the same type of wage pressure of late that you may be hearing more in a broader permanent side. And I think that's probably a reflection of the growth we've seen in pay over the last couple of years through the (inaudible) increases as we try to bring more supply into the industry. So we're probably a little bit ahead of that, and so we're feeling in a good place right on the balance between supply and demand and compensation packages being very attractive as an industry. So I wouldn't equate those 2 things exactly to what you're hearing on a permanent side. Internally, I think, you're hearing generally a little more wage inflation across the U.S. We certainly feel some of that. However, we tried to stay on top of that over the last couple of years as well. Susan talked about with the tax reform, we are using this as an opportunity to invest in our team members. They're kind of the lifeblood of how we operate every day and we want to make sure we're giving them the tools, the training, development and compensation and benefits to make sure that we're the employer of choice. And so that, I think, will -- that will help us stay kind of at or ahead of the curve relative to our competition.

So there's still high level of confidence in terms of getting to the 14% EBITDA margin?

Yes.

And we have a question from Tim McHugh with William Blair.

Just on Workforce Solutions, you talked about perm starting to show, I guess, a little bit of signs of improvement. And the trend in the rest of your business sound strong. So can you reconcile that with, I guess, as we go into next year, 3%, 4% growth, just -- I guess, it would feel like it should be stronger based on the qualitative commentary.

Hey, Tim. This is Brian. I will cover that one first and if Susan want to follow along. But it's not obviously much different than the fourth quarter actuals. But the perm is improving. It's still down year-over-year, that's been added as a drag. Our other business lines are all performing well. We look at leadership in the [VMS] and Avantas, but they have really -- they have very strong fourth quarter. So those growth rates will be down just a little bit in the first quarter but still strong overall. But then, kind of net all those together and you end up with a slightly lower rate of growth in the first quarter. I think, as we move through the year and continue to see those perm trends improve, that will move up that consolidated (inaudible) workforce solutions growth rate more into the upper, single or double-digits as we would expect it to be running in normal environment.

Okay. And then, can you just comment on the, I guess, the acquisition environment given -- and how you think about how aggressive to be with buybacks as we go into next year given where the balance sheet is trending at this point?

Tim, maybe I'll start with the acquisition environment and our strategy there and then we can talk more about where that leaves us with buybacks. So we still are actively looking and, as you would expect, having discussions with a variety of organizations, some of which are so-called on the market and others that we're having more preliminary conversations with about potential opportunities down the road. And it's primarily around acquisitions that can help us to enhance and expand our workforce solutions portfolio, but it could also be creating more scale and capabilities within some of our existing businesses where we feel that, that would benefit us and our clients. And then, third would be potential consolidation opportunities. And I would put them in that exact order. As you would expect, the workforce solutions opportunities are fewer and likely more expensive. Most of them have a technology element to them and that is part of what makes them very attractive and that they have, at maturity, at least more recurring revenue and higher margins, but many of them are also very early stage and may even be pre-profitability. And so we've always been very careful about that to make sure that we enter a service line or a product at the right time with the greatest level of certainty for success. So we're evaluating a whole host of those opportunities. I would say that valuations are stronger than what we've seen in the past. It's true for everybody, including us. And so we have to be willing to step up to those valuations within reason. But you know us, we've always been very disciplined and that's why we've perhaps not pursued certain things. But I would characterize it as very active and a nice number of very attractive opportunities and I would expect that there will be more as we continue through the year. We will also, by the way, look at some minority investments. We've done one so far in a digital online staffing business, and we will potentially look at others. It's not our preference, but sometimes, it's appropriate and we'll make that decision. We still have a buyback in place that the board has authorized and still have actually the majority of that available, and so you would expect that we'll be using that as we see appropriate when we can be opportunistic in the market.

And we have a question from A.J. Rice with Crédit Suisse.

Just a couple questions if I could ask. So -- and some of these are sort of detailed number questions, but so the tax rates forecast to follow that 11 percentage points from 40% to 29% largely because of the tax reform, obviously. I guess, the statutory rates dropping 14 percentage points, is there any reason why wouldn't it drop a little more than what you've said? Is there some offset that -- in the tax law that we should think about?

Sure, A.J. This is Brian. I know there's been a few pieces noise in our tax rate in the last couple of years, but our -- again, our underlying rate, if you were to remove that in 2017, is closer to 41%. There are some discrete items that are industry-related that keep our rate above that. We typically think of a more statutory rate of around 39% kind of under the old tax. So if you take that as the starting point, the 14% federal reduction, it also reduces the shield on the state rate, so the net of that is about 13%. There are a few other items in the new tax code that have a modest increase in the rate as well. So you kind of take all those together, that's where you end up, closer to 29%.

And do you have a figure for how much cash benefit you're going to get from the tax reform, roughly, do you think, this year?

It will be in the 25-ish range.

Okay. All right. And you said you're going to plow obviously back in some initiatives to enhance employees and digital tools and so forth. Did I get the number right? You're saying that's a 20 basis points drag on EBITDA. Is that right?

Yes, that's correct.

And is that -- so the 12 6 for the first quarter reflects a 20 basis point drag from these investments?

Not really. So we're just starting to -- we've been working through those ideas and so more of them will roll out in the second quarter and beyond. So a very modest impact in the first quarter but it will still -- if you look at kind of the quarters through the rest of the year, we wouldn't expect at this point for it to be more than 20 basis points in any one quarter but that's kind of how it rounds out for the full year as well.

Okay. And then, on the SG&A side, you're down 100 basis points as a percent of revenues, I think, in the fourth quarter. And I know you have a seasonal step up often in, I think, SG&A going into the first quarter, but you're down 50 basis points in the first quarter year-to-year. Any -- where are you at on SG&A? Was there anything unusual in the fourth quarter? And what's driving the improvement? And what is the outlook, do you think, looking out a little longer term?

Sure. This is Brian again. So in the fourth quarter, I mentioned that there was an actuarial benefit in the Nurse and Allied segment, but we also had some other reserve increases, so the net of all that was pretty nominal. So the fourth quarter was relatively clean from an SG&A standpoint. And the guidance we've given in the first quarter, there's nothing unusual in that. So I think, it's a reasonable starting point for the year. We would expect over time to generate leverage. But in the near term, we also -- we could generate more leverage, we're also investing in the business and investing in some of these initiatives as well. You may not see quite as much of that operating leverage for the next couple of quarters as we make those investments, but it's a good clean start in that guidance for the first quarter.

Okay. And then, this is my last question on the MSP, [Tom]. And I think I jotted down, you said about 45% of revenues were coming from MSP-related contracts. I don't know if that's overall or that's a specific subsegment. But I guess, that grows as you get more MSP contracts, as you get a better fill rate on the MSPs you have, can you just maybe give us a little bit more flavor as to what are the -- what is contributing to that becoming a higher and higher percentage at this point? How much of it is just new MSPs and how much is better fill rates or something else that maybe I'm not thinking of?

Sure. So the 45% we were referring to was actually specifically for Allied. And so our Nursing is higher and Locums is lower. If you look at AMN's overall revenue, consolidated revenue, MSP revenue now constitutes 40% of that revenue. And it's coming from both increased fill rates but also increasing our gross spend under management and it goes back to the wins that we've had over the last year.

Okay. Do you have any sense what that 40% would have been maybe a year ago or something, roughly?

It was around 35%. And the year before, probably close to 32%, 33%. Of course, 10 years ago, it was nothing. And so this is -- as you well know, A.J., this is extremely positive for AMN's business model and our ability to not only execute well and serve our clients better but also it does provide cushion and a mitigation in times when orders may be softer. And so we see it as a great way to create a healthier, stronger profile for the organization which it's done. And the more we can increase that, not only we are better partner for our clients, and we can pull through other service lines, which we've done, but we can also protect ourselves during any future periods.

And just the last question on that. Is the gross spend, do you have any sense of maybe say your MSP contract -- clients, how much of that might be up year-to-year across the board?

So one way we look at it is our gross spend under management across our VMS and our MSP businesses, which is over $2 billion, I don't have that percentage right off the top of my head, we could probably get it for you before we hang up this call.

Yes. Just was thinking about -- yours is going up because you're capturing more MSPs too and a variety of things, but I just wondered, sort of a proxy for the underlying growth for the sector maybe. Your best clients, how much are they spending this year versus last year would be an interesting dynamic. But yes, okay. That's good. All right.

Again, this is Brian. I think the total spend on (inaudible) I think is up north of 20% year-over-year. But that -- keep in mind, that also -- that includes both the growth maybe within existing accounts but also new wins that have been rolled into that number as well.

Right. Yes. No, I was thinking about is there any way to get the -- a sort of a proxy for industry growth by looking at sort of gross spend on an apples-to-apples basis, but okay. No, that's good.

And we do have a question from Jason Plagman with Jefferies.

So on the MSP topic, the last 3 years now, you've been in the $200 million in total MSP wins per year or north of that. Is that -- should we expect that to continue for the next few years? Is that a typical win rate you're expecting?

Jason, this is Dan. And I'll just give you a little bit more color. So 3 years ago, it wasn't nearly that high. Last year, we had roughly $185 million. And this year, it was 25% improvement on that. So the trend, I think, is more what you want to look at. I think that, clearly, this is a challenging market. But one of the things that really kind of warms my heart at this point is the recent movement towards seeing Locums. So again, color for last year, Susan mentioned the 230, about 10% of that was Locums. With really strong competitor pushing against that in terms of headwinds, we can already see at least half as much of that in our Q1 pipeline that's in contracting already. So we're seeing a lot of movement in Locums and consistent new buyer, new MSP buyer activity, so there's nothing in -- from my point of view that makes me feel like it's going to slow down at all.

That's helpful. And just on the travel nursing outlook, very strong for Q1. What are kind of some of the moving parts that you're thinking about as we get later into the year that would allow you to either maintain that or stay in that neighborhood?

This is Ralph. Brian probably has a good sense on the seasonal trends but I'll start out. We do pull back a little bit in Q2. Do a lot of winter needs in California, Arizona, Florida that -- knowing those assignments come to an end, and we redeploy a majority of them into other places but it does -- volume does prop up just a little bit then. I think the reason we felt good about the rest of the year is, when you were just talking with Dan about, is the wins on the new MSP and we've had such great success in accelerating the implementation of those programs, it used to sometimes take us 120 days, it seems like we're down now below 90 days on average in getting them up and running. And so we had kind of ran a Six Sigma project that accelerated the pace of getting them up and running. So that's been good. And even just the kind and type and size of those deals, the geographic distribution, that all makes us feel good about it. I guess, probably, the last kind of anecdotal piece is in our conversations with health care administration, we're not hearing as much pressure on utilization of temporary help as we did last year at the beginning of the year. It's quite a bit less. I think they're less concerned about reimbursement and more concerned about capturing volumes, patient safety than they were last year.

Jason, the other thing I would do is kind of overlay the macro environment and other demographic trends that are playing in our favor. So we talk frequently about the number of health care job openings versus the number of hires, which if you look at December, continues to be at pretty much an all-time high ratio of 1.9 physicians for every hire made. That does not seem to be abating. In fact, if anything, I think from our clients' perspective, there is concern that, that could get worse because of the competition for great clinical labor or really any kind of workforce within health care. And then, you also layer in there that other separations, which are primarily retirements continue to be on the rise. This is one of the BLS statistics that, I think, many people overlook. But if you look at the number of separations, just in December alone, it was 53,000, which was up 29% over prior year. And this, again, the vast majority of that are retirements. For the whole year, it was up, I think, close to that as well. So I think it's something that's not going to get easier. It's going to get more challenging for our clients to both recruit and retain but then also deal with these aging demographics of their own workforce.

And we have a question from Mitra Ramgopal with Sidoti & Company.

Yes, just following up on the MSP. First, I know you mentioned you have a great pipeline in terms of new MSPs, but I was just wondering in terms of the existing business. I know back in 4Q, regarding Premier, you were able to add on RPO, VMS, et cetera. How much opportunities you have among existing clients for layering on such additional services?

So there's probably a number of ways I can talk about that. This is Dan, Mitra. Just on RPO question you have, we had a really nice win in Q4 that puts them up a little over $2 million worth of long-term programs that were signed that are really helping us move into 2018 with some strong enthusiasm. Another way to think about that cross-selling kind of activity is when I look at our top 20 strategic accounts, and I look at -- we have 15 distinct offerings that we can sell into those customers, 75% use more than 5 of those offerings, which is up from 45% a year ago. So tremendous effort not only from the teams to introduce those but also to our customers looking at the whole, what I'd like to call, the entire human capital equation. One last nice bit of news is when you look at Avantas, which is our workforce optimization business, we're actually pushing and pulling the cross-selling. So in Q4, their revenue was up. And for all of '17, 40% of their new client revenue came from MSP clients. In addition, 2 of the larger wins in the second half of the year were existing Avantas clients. And so we're sort of getting the best of both worlds out of that particular customer base.

That's great. And on the new MSPs, are you also selling more initial services?

When you say more initial services, you mean more...

Yes, you already bundling in RPO, VMS, et cetera?

No. Typically, we have Nurse and Allied that come together. More often, we're seeing Locums being considered at the same time. But typically, those things that would fall into Other Workforce Solutions would be considered add-on sales. And again, just to give you a sense, last year, we had 17 of those -- 17 million, excuse me, of those kinds of add-on service lines go through to our existing base.

And we have a question from Bill Sutherland with the Benchmark Company.

I think I've got one left. The perm trend, talk to me a little bit about kind of what the dynamics are for that improving and when you do think it's possible to -- what are kind of the issues to getting to positive comps again?

Sure, Bill. So I'm going to talk primarily about physician perm placement because that's where we've seen the greatest impact over the last couple of quarters. And as we've said, it is improving going into the first quarter but still under prior year a bit. And so the things that we're seeing improve are new searches. Everything starts with the searches and you have to be bringing in new searches in order to have the opportunity to make the placement, obviously. We did have a very difficult comp into -- in the second half of 2017 because we had the largest client for MHA reduce its number of searches because we filled them. It was a great new story, quite honesty, and we filled them but there was not an ongoing tail of recurring business there to backfill it and we had difficulty replacing those searches with enough new clients. The team, however, has really done a great job of reorganizing and re-approaching the market to look for more of those larger opportunities. And I have to say, to give credit, our academic and physician executive search teams in particular have had phenomenal growth over the last year. So we have to find more of these larger system clients in order to really have the more sustainable searches at this size of business. The other thing that occurred is our placements per recruiter dropped in the second half of last year and we're starting to see that improve. And that's obviously an important metric not only for us but for our clients to make sure that we're getting those jobs filled very quickly. So those things are improving. It's going to take a couple of quarters. I've mentioned before that we are reorganizing some of our teams a bit and also just generally making sure that we're doing the best job possible in recruiting and onboarding our new team members. And so we completely revamped our onboarding and training programs for our recruitment and marketing teams. So we're hopeful that we will begin to see the benefits of that as those individuals start to actually move into their roles and become productive. So I hope that, that's helpful.

No, that's very helpful. So the placements per recruiter last year coming down a bit, was that just kind of the general tone of the market as far as longer decision-making? Just longer cycle times with the clients? Was that the issue?

No, I don't really think so, Bill. We really believe it was more on us, to be honest. We were getting the demand where we had good coverage out in the market. We also were short-staffed in terms of our marketers, which are the client sales-facing individuals with the market. So we weren't getting enough searches, but more than that, we weren't necessarily executing well on our placements. We weren't getting the candidates to clients to be interviewed even for the searches that we had. But again, that tide is turning and we're starting to see some better metrics so we feel better, but it's going to take a couple of quarters for us to get to a positive year-over-year position.

Okay. And then, one just stepping back question. So you're looking at a trend line for Nurse and Allied that, on a year-over-year basis, seems it could be sustainable, maybe not quite as good as Q1. You've got, definitely, a better trend outlook for Locum and also for OWS in the latter part of the year. Is that kind of how we should think about the whole year?

Yes, I think that's a good way to encapsulate it.

And we have a question from Brooks O'Neil with Lake Street Capital Markets.

I get to ask maybe the last question and perhaps the most important one from an investor perspective. I saw some things that suggest that people think you missed the consensus adjusted EPS estimate. I think, Brian, I heard you say that was probably entirely related to a different tax rate than you assumed. Could you just help us to be sure we understand what's going on there, that 39% to 42% rate you talked about?

Sure, Brooks. So my understanding is that consensus was $0.63, which is what we came in at. And we pointed out the tax rate impact and partly because we have obviously been on the top line and so in line consensus, wanted to make sure that we addressed that, that was driven 100% by that tax rate being a bit higher than what we've seen in the consensus, which was, I think, the consensus was around 40%. We came in at 42%. There were a couple of different things that hit in the quarter just kind of year-end true-ups on some state rates and no one big item but just a few things that ended up being a bit larger. So the rate in the quarter was above what we had guided for Q4 and above what had been modeled in consensus. And really, every 1% higher is about $0.01, so the guidance we've given of 39% versus what we came in at 42%, that's a $0.03 impact. So adding that back, it would have been a $0.66 adjusted EPS.

Great. That's what I was thinking. And then, just lastly, I seem to recall that you were having some issues in the hospitalist business and I haven't heard you say much about that business on the call. So I was hoping to just get an update on what's happening there now?

Yes, this is Ralph. Hospitalist did improve sequentially in the quarter but they're still below prior year. And we had some recent wins lately in that space because of some new customers coming on and that's helpful. But it's still a bit of a drag. And we're seeing a shift. Facilities going to advance practice specialties, physician assistants, nurse petitioners in those roles, which have been good for that side of the business, but that's had a lower bill rate, unfortunately, than the hospitalists. So not -- we're not out of the woods yet, I guess, on this one. But certainly, a little less dependent on it. It's about 22% or so of our Locums business, so if it's starting to improve, we'll let you know right away.

And we have no additional questions in the queue. I'll turn it back to our speakers.

Wonderful. Well, we like to thank everyone for joining us today on the call and certainly for your ongoing support. We're very much looking forward to updating you on our next quarterly earnings call.

Thank you. And ladies and gentlemen, this will conclude the teleconference for today. Thank you for your participation and for using AT&T Executive TeleConference service. You may now disconnect.