AMN Healthcare Services Inc

Ladies and gentlemen, thank you for standing by, and welcome to the AMN Healthcare fourth quarter 2018 earnings call. At this time, all telephone participants are in a listen-only mode, and then later we will conduct a question-and-answer session. The instructions will be given at that time. If you should require any assistance during the call, you can press star, then zero on the phone keypad. As a reminder, the conference is being recorded online, I'll now turn the meeting over to our host, Director of Investor Relations, Mr. Randy Reese. Please go ahead, sir.

Good afternoon, everyone. Welcome to AMN Healthcare's fourth quarter and full year 2018 earnings call. A replay of this webcast will be available until February 28th 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 made 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 our financial reports page at amnhealthcare.investorroom.com. On the call today are Susan Salka, Chief Executive Officer, Brian Scott, Chief Financial Officer, Ralph Henderson, President of Professional Services and Staffing, and Dan White, President of Workforce Solutions. I will now turn the call over to Susan.

Thank you so much, Randy. Happy Valentine's Day, everyone, and welcome to our earnings call. Looking back at 2018, the themes at AMN were leadership and investments in our future, some of which created disruption. Throughout the year, we further evolved our leadership position within the industry. That meant deepening our portfolio of solutions with internal investments and acquisitions. In the marketplace, we competed very well, and for the year, AMN won new MSPs amounting to $230 million in gross spend under management. Our ability to serve clients with deep and diverse workforce solutions has continued into 2019, and we are thrilled to announce that Tennant Healthcare has selected AMN to be the MSP provider for its regions in California and Arizona. Tenet is one of the largest health systems in the United States and we're seeking a total workforce solutions partner to achieve their patient care and efficiency goals. We will serve Tenet's contingent staffing needs for nursing, allied, and interim executives. The gross spend under management for this contract is estimated at $100 million, and we are targeting a go-live at the end of April. We recently launched several other new MSP clients that signed contracts in 2018 and have more in implementation now. Our delivery teams are poised to ensure that we meet or exceed the expectations of these new clients. Throughout the year, AMN continued to recruit strong, fresh leadership talent to our team to ensure we are evolving our strategy and delivery to clients. As we previously mentioned, we were fortunate to add Kelly Rakowski and Mark Hagan to our senior leadership team, bringing decades of broad healthcare and technology experience. Most recently, we welcomed Dr. Cole Edmondson as our new Chief Clinical Officer, replacing Dr. Marcia Fowler, who is retiring after a very successful 30-year career with AMN. I'd like to personally thank Marcia for all of her contributions and what she's done to help build this great organization and to build AMN's reputation as the quality leader in our industry. Dr. Edmondson comes to us as a highly experienced and successful clinical, operational, and strategic leader. He brings innovative insights on how we can best help our clients to achieve their patient care, talent, and financial goals. In 2018, we launched important investments and change initiatives, particularly in our locum tenens and local staffing businesses. Through these necessary transformations, we also had setbacks. In locum tenens, the problems are visible in our lower fourth quarter revenue and first quarter outlook. Last spring, we converted our locum tenens business to a more scalable operating model, including new front and back-end systems. The Salesforce-based system is powerful, but it has required several months of further configuration to make it easier to navigate. There were also issues with data migration from the three legacy systems. During this time, the necessity of maintaining good customer service slowed our sales productivity. Performance was also hindered by the fact that we got a bit behind in hiring new sales producers. We began to ramp up hiring in the third quarter and have accelerated that into the new year. We expect to begin benefiting from these new hires' productivity in the second half of 2019. Returning locum tenants to growth is our top priority. Locums is an attractive market that is of high strategic importance to our clients. Now let's review our latest results and outlook. Fourth quarter consolidated revenue of $529 million grew 4% year-over-year. Growth margin was 32.6% and adjusted EBITDA was $66 million or 12.6% of revenue. Our nurse and allied segment posted revenue of $329 million, which grew 2% year-over-year. Revenue for our largest business, travel nurse staffing, increased 2% year-over-year. Volume growth was relatively in line with our expectations. The year-over-year headwind of lower premium rate assignments lessened, and the average bill rate gap continued to improve. We knew that we would experience a difficult year-over-year comparison in nursing for the first quarter of 2019 due to the exceptionally high utilization of winter assignments and a very strong flu season last year. That comparison has proven to be even more difficult due to a reduction in utilization at one of our top clients. This reduction has nothing to do with AMN's service delivery, but rather specific census dynamics for this client. Excluding this impact, nurse staffing revenue is expected to be up about 5% year over year in the first quarter. Allied staffing continued its winning streak with revenue growing 8% year over year as volume was strong again in the fourth quarter. Order growth has continued to improve and booking trends support continued mid-single-digit growth or better. For the nurse and allied segment overall, we expect revenue to be down about 1% to 2% year over year in the first quarter due to the client-specific reduction I mentioned. Excluding this impact, the segment is expected to be up about 5%. In the locum tenens segment, fourth quarter revenue of $82 million was 24% lower year over year. We had expected revenue to be down about 12% to 14%. On top of the higher than expected attrition and lower productivity we experienced, there were also greater than expected declines in the emergency medicine and hospital specialties as clients reduced demand. Ralph and Brian can provide a bit more color for this segment in the Q&A as I'm sure many of you will have questions. On the bright side, our locums MSP business continues to add clients and is now 20% of segment revenue. We have seen stable client and clinician satisfaction scores indicating that we are taking care of our providers and clients despite the challenges. For the first quarter, locum tenens revenue is expected to be down year over year, similar to last quarter. Fourth quarter revenue in our other workforce solution segment was 117 million. Year over year growth was 48%, including our April acquisitions, and up 1% organically. Our interim leadership and permanent placement businesses comprise about 50% of this segment's revenue. These business lines collectively grew 15% year over year, with organic growth of 2% driven by permanent placement and RPO. Our mid-revenue cycle division produced $38 million of revenue in the fourth quarter. Medical coding revenue was slower than expected, offsetting growth in other specialties. Other workforce solutions also includes our VMS business, where revenue was down year-over-year in the fourth quarter. Trends for VMS have improved as 2019 gets underway. And finally, our workforce optimization and predictive analytics team at Avantis continues to make nice progress, with revenue up in the fourth quarter and growth continuing into 2019. Within our VMS and Avantis offerings, we continue to make important investments in mobile capabilities, analytics, and serving additional healthcare settings. In the first quarter, total revenue for the other workforce solutions segment is expected to be up about 40% overall due primarily to the acquisitions we made last April. In January, we added an innovative new offering to our workforce solutions, with the acquisition of SilverSheet. Our clients have repeatedly told us that one of their biggest workforce pain points is credentialing for their permanent staff. This is the process of reviewing and verifying a clinician's education and training, work experience, licensure, board certifications, and malpractice history. These are compliance verifications that need to be made upon hiring, but also on an ongoing basis while the clinician works at a facility. SilverSheet has created a cloud-based platform that gives healthcare organizations a completely digital credentialing process, which makes this process easier, faster, and more reliable. We're eager to support SilverSheet's fast growth and to integrate them into our solution set. We remain intent every day on earning our place as our client's strategic workforce partner. To do that, AMN must continue to add capabilities that address all aspects of healthcare labor, contingent and permanent. The people who make this future possible are the amazing AMN team members and healthcare professionals. We owe them our deepest gratitude for their talent, enthusiasm, and can-do attitude, even in times when we ask them to do more. 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 session.

Thank you, Susan. Good afternoon, everyone. The company's fourth quarter revenue of $529 million was $5 million below the low end of our guidance range. As Susan noted earlier, this shortfall was driven mainly by lower-than-expected revenue from our locum tenant segment. Gross margin for the quarter was consistent with our guidance at 32.6%, up 80 basis points from last year, but 60 basis points lower than the prior quarter. Our April acquisitions were accretive to our consolidation. Thank you, Susan. Good afternoon, everyone. The company's fourth quarter revenue of $529 million was $5 million below the low end of our guidance range. As Susan noted earlier, this shortfall was driven mainly by lower-than-expected revenue from our low-content segment. Gross margin for the quarter was consistent with our guidance at 32.6%, up 80 basis points from last year, but 60 basis points lower than the prior quarter. Our April acquisitions were accretive to our consolidation. Thank you, Susan. Good afternoon, everyone. The company's fourth quarter revenue of $529 million was $5 million below the low end of our guidance range. As Susan noted earlier, this shortfall was driven mainly by lower-than-expected revenue from our low-content segment. Gross margin for the quarter was consistent with our guidance at 32.6%, up 80%. Fourth quarter nurse and allied segment revenue was $329 million, an increase of 2% from the prior year and 8% higher sequentially. The sequential increase stemmed mainly from 5% higher volume plus a 2% increase in bill rate. Nurse and ally gross margin of 27.2% was down about 20 basis points from prior year and prior quarter, though consistent with our expectations. Segment EBITDA margin was 13.8%, 120 basis points lower than the prior year. Fourth quarter locum tenens segment revenue of $82 million was 24% lower than the prior year and down 19% on a sequential basis, with the declines driven by lower volume. Locum tenens gross margin of 27.2% was down 210 basis points in the prior year and 120 basis points sequentially. Gross margin was negatively affected by unfavorable adjustments as a byproduct of the new system transition and an unfavorable specialty mix shift. Locum 10's adjusted EBITDA margin was 8.6%, down 290 basis points year-over-year, driven by the lower gross margin and negative operating leverage on the lower revenue. Fourth quarter other workforce solution segment revenue of $117 million was up 48% year-over-year, but down 2% sequentially, with growth coming mainly from the recent acquisitions. Gross margin of 51.7% was lower by 140 basis points year-over-year and 70 basis points sequentially. The year-over-year variance was due mainly to the acquisition of MedPartners, which has a lower gross margin than the segment average. On a consolidated basis, fourth quarter adjusted EBITDA of 66 million was up 3% year-over-year. Adjusted EBITDA margin of 12.6% was flat year-over-year and down 20 basis points sequentially. We reported net income of 36 million and diluted earnings per share of 74 cents in the fourth quarter. Adjusted earnings per share was 81 cents compared with 63 cents in the prior year quarter. Our income tax rate in the quarter was 29% and is expected to be similar in the first quarter. Interest expense and other in the quarter was a credit of $200,000, which includes a gain of $6 million on the fair market value adjustment of a minority investment. Excluding this gain, net interest expense was $5.8 million. Cash provided by operations was $59 million for the quarter. For the full year 2018, cash flow from operations totaled $227 million, up 41% year over year. Day sales outstanding at quarter end was 64 days, same as last quarter, compared with 63 days in the year-ago quarter. At December 31st, cash and equivalents totaled $14 million. Capital expenditures in the fourth quarter were $11 million. During the quarter, we repurchased 271,000 shares of stock for $14 million. At quarter end, our total debt outstanding was $445 million, and our leverage ratio was 1.7 times to 1. Now let's turn to first quarter 2019 guidance. The company expects consolidated revenue of $520 to $528 million. This represents top-line growth of 0% to 1% year-over-year. On an organic basis, revenue is expected to be down approximately 6%, due primarily to the lower locum tenants revenue. Nurse and allied segment revenue is expected to be down about 1% to 2% from the prior year, with the allied growth offset by lower nurse staffing revenue. Gross margin is projected to be approximately 33%, and SG&A expenses as a percentage of revenue are expected to be approximately 22.5%. Adjusted EBITDA margin is expected to be approximately 12%. As it relates to Silver Sheet, they will add less than $1 million of revenue this quarter. Silver Sheet is still an early-stage company just starting to gain revenue momentum. We anticipate this business will reach break-even sometime next year, and will lower quarterly EPS by one to two cents and reduce EBITDA margin by 10 basis points throughout 2019. Other first quarter 2019 estimates include the following. Interest expense of 5.8 million, depreciation expense of five million, amortization expense of 6.8 million, stock-based compensation expense of 5.5 million, acquisition and integration related expenses of about two million, and diluted share count of 47.8 million shares. The stock compensation expense is higher in 2019, in part from certain plan changes, and we expect approximately $4.5 million per quarter for the remainder of the year. Amortization expense is based on a preliminary valuation of amortizable intangible assets from the silver sheet acquisition. And now we'd like to open the call for questions.

Thank you. Ladies and gentlemen, if you would like to ask a question, press star then 1 on your touchtone phone. You'll hear a tone indicating you've been placed into queue. If you have a speakerphone, you may need to pick up the handset before pressing the numbers. Again, for any questions on the phone, you will press star then 1 on the phone keypad. Our first question from the line of Toby Summer with SunTrust. Please go ahead.

Thank you very much. I was wondering if you could start out by maybe telling us what the orders have been like in the travel nurse area. So I understand the quarter you're guiding for has a little bit of noise in it based on demand from a single client. And then if you could comment on pricing, that'd be great. Thanks.

Absolutely. I'll have Ralph jump in a little bit more on the specifics in the order trends, which have been quite largely favorable and positive still. if you sort of take out that single large client. Regarding pricing, I mentioned that we've actually seen continued favorable mixed trends, meaning that the gap that we, and the headwind that we were feeling year over year in premium rate assignments has actually gone down. And so we would expect that we'll continue to see more favorable trends kind of going into the second quarter, but those headwinds are lessening for us and actually lessening even more than we thought in the fourth quarter, but even more so as we look at the first quarter. So I'd say it's a very you know, sort of stable pricing environment, and we'll be lapping those headwinds very soon. So, Ralph, maybe a little bit more color on the travel nurse orders?

Sure. In the fourth quarter, first, they were up versus prior year. The overall mix was actually a little unfavorable with more third-party orders or vendor-neutral programs where our fill rates are lower. But on the positive side, facilities with orders were up. Then facilities with TOA were up. As we look forward into Q1, outside of the single client, we are going to see an increase in demand and orders there, but probably a little lower because of the flu season, so not super robust growth there. Probably the last components we look even further forward is as we get to the implementation of tenant and some of the other new deals, I would expect us to start having pretty significant lapse over prior year in demand. Thank you.

Ralph, just to follow up on that, does that imply that the orders for your MSP clients kind of on average is growing a little bit more slowly than those outside of your kind of direct exposure?

Yeah, oddly. Probably the first time we've seen that in a long time. It's a good question. But once you kind of exclude kind of one large client who's Just, you know, down on a year-over-year basis, and just to cover that maybe a little bit more, you know, certainly a client which will continue to grow for many years, but this is, you know, just a seasonal, you know, issue for them. I think they did not see as much, you know, enrollment in their system as they had expected, and so were, you know, impacted by that. But otherwise, I think it's pretty strong. The other third party they're up – You know, kind of it's been an interesting mix there, and we, you know, often, you know, we look at that. It's not as, you know, favorable a demand for us. Our fill rates on those third parties can be in the teens, you know, versus the, you know, 50%, 60% on our MSPs. But it's been across the board. There's nothing really different about the way that looks other than just an increase.

Okay. If I could ask a couple questions about local tenants when I get back in the queue. Susan, you mentioned sort of satisfaction scores, you know, holding steady for customers and for practitioners. But I was just curious, you can't have revenue declines very long and still hit fill rates so that the revenue trends, you know, could prove challenging for your push intent MSP. Could you talk about that and how you're, you know, kind of navigating this you know, hopefully temporary phenomenon in meeting the needs of those clients we've committed to?

Absolutely. And you're right. You know, with MSP clients, we have not only the opportunity to make the placement, but an obligation. And our number one objective is always to get their position filled, whether it be through us or through an affiliate vendor. And we're very fortunate to have a strong panel of affiliate vendor partners that help us to hit those fill rates expectations of our clients. And even internally, we have our best fill rates at our MSP clients. It's a priority that we make for our recruiters and account managers. And quite honestly, we even align incentives and other ways to make sure that everyone's focused on hitting those fill rates, which is why, again, they're much stronger for our MSP clients than they are You could argue that we are filling our MSP jobs at the expense even perhaps of some of our other direct or third party, but that's how we expect to build a business longer term. And I think the more we have MSP-based business, it actually builds a stronger, more predictable, more recurring revenue type of client base. And we're really pleased that I think I mentioned 20% of our locums revenue is now coming from MSP. So we're making good progress there, but as I said, it could be perhaps at the expense of having lower fill rates than what we think is possible. In fact, we know we have lower fill rates than what's possible at our direct and third-party orders.

Okay, last question for me, and I'll get back to you. Could you talk about your plans to roll out new systems in sort of the nurse business?

Yeah, thank you for the question. We will not be rolling out any new systems for the remainder of the year, and quite honestly, until we get stability and improved performance within our locums division. The vast majority of our technical and even sales operations resources are focused on improving the performance of the system for locums, and then we will consider how we might, if ever, bring the nursing business onto the same platform. We want to make sure we're actually getting the benefit out of the changes before we consider moving anything else. And I will say, whenever we bring them onto the system, it will be in a very different methodology in terms of how we implement in probably more phases as opposed to a big thing. I mentioned Mark Hagan joining us last summer as our new Chief Information Officer. He inherited this problem, if you will, and has done a great job of really getting his arms around it with his team, but we also have to make sure we've got the right resources, both third-party contractors and in-house talent to be able to not only fix these issues, which they're doing a good job of, but also as we contemplate doing anything more in the future. So I probably told you more than you asked, but I want to make it clear that we're not ready to embark on anything big like this in the foreseeable future.

Thank you very much. Thanks, Javi.

Our next question from the line of A.J. Rice with Credit Suisse. Please go ahead.

Hey, folks. This is Caleb Harris on for A.J. Just on the topic of the larger client, it sounds like it's related to lower enrollment in the system. So is there some way that could bleed into future quarters as well, or do we know that it's confined to Q1?

There is a certain amount of volume from this particular client that happens to spike in the first quarter pretty much every year. We've had that history, and it falls off. more going into the second quarter. Every year it's a little bit different as to whether the volume continues more in the second quarter or falls up more sharply. in, say, the April timeframe. So there will be, we would think, some amount of reduction in the second quarter on a year-over-year basis from this client, but it would likely not be as much as what we saw in the first quarter because, quite honestly, their first quarter utilization last year was exceptionally high, which makes the gap just even that much more severe for the first quarter this year. So the short answer, I suppose, is yes, there will be some amount of shortfall we would expect going into the second quarter, but it would be at a lesser amount.

Got it. That makes sense. And then you talked about the contract expansion last quarter and that that was going to roll out to areas like Allied and locums throughout 2019. Can you talk about sort of the game plan at this point and any progress that you've made so far?

Sure, Kayla, and this is Dan. So for, I think you're talking about not tenant in this case, right? Correct, right. And for the implementation there, we're currently underway. We can see that really kind of hitting their regions, if you will, in the second half of the year where we're going sort of a rolling implementation until about May, June. And so at that point, we'll probably start to pick up the volume at that point.

Okay. And then one last one, just sort of a broader topic. There's been a lot of consolidation in the industry, and I know it impacts some of your clients. Obviously, you have CHI and LifePoint and NCARE and big names like that that have been involved in deals in the recent past. And I don't know if you want to talk specifically about any clients. If not, that's fine. But just in general, when those things happen, what are the dynamics around trying to continue those relationships or even expanding the relationships with the new partner of clients that are involved in deals?

So, Kalen, this is Dan again. I'll take that one. Generally speaking, given the customer base that we have, Consolidation actually benefits us, and there's really two reasons for that. The first is that very often we have a pretty good footprint in those businesses that are combining. So you gave the CHI example. We have a good footprint on both sides of the common spirit business. house, if you will. But then even more importantly than that, we can offer to them more than just MSP services. We look at a total workforce management perspective and can throw different tools at different challenges they may have. So if they're struggling with perm resources or interim leadership resources or MSP services, depending on what their goals are, we can use a different solution to solve those problems. Okay, thanks.

Next question from the line of Jason Plagman with Jefferies. Please go ahead.

So thanks for the questions. First one, on the locums business, you mentioned the aggressive hiring of new sales talent. Can you quantify that at all or, you know, kind of what the pace has been both in Q4 and, you know, now that we're into Q1?

Yeah, Jason, this is Ralph. The kind of the producer head count in the business runs around 260, 250, 260, right? Yeah. Kind of as we entered into the Q4, we've hired about 50 people over the last few months, and then we have another 25 coming in in February, and we'll likely hire another 25 in March. So kind of nearing 100 people in less than four quarters.

Okay. And so should we expect that to place some pressure on the gross margin throughout the year as those new folks –

Not on the margin, probably more on the SG&A. You know, it's an investment prior to them being a production. A first-year production for a new producer might be like $150,000 in gross margin, but that second year is what we're really hoping for, and that's about four times that. So that's why you make the investment, but that's also why we can't commit to year-over-year improvement, you know, immediately, even though we're going to hire all those people. So that is going to take a little bit longer. There, for keeping margins in place, right, we have, you know, our technology works really well at making sure that the packages and the bill rates are appropriately set for each assignment.

Yeah, Jason, this is Brian. Let's add that that's reflected in the first quarter guidance that LOCUM's EBITDA margin will be compressed a bit for a period of time as we have those changes. those extra salespeople, and they'll really start to pay for themselves more in the back half of the year. So that is already reflected in the guide that, you know, we will feel a little bit of that pressure for a bit, but we know it's absolutely critical to getting the growth back on the right trajectory.

Yeah, and just to follow up on that, you know, given the long, you know, assignment times in the local business, How long do you think it'll take to get back to your prior run rate of $100 million plus of revenue a quarter? Is that achievable by the end of 2019, or is that more likely in 2020?

It'll take longer than in 2019. I wish we could say that it would happen that quickly. To Ralph's point, from the hiring, there's still a bit of time before those new hires drive production as well. As we think about how this year is going to play out, we've got a hill to climb here. So our goal is to start to narrow the negative gap as we go through the year. But getting back up to that $100 million, it would be – it would likely take a couple of years to get there unless we see significant increases. We look back and we've had years where we've had some pretty significant increases in revenue, and with some of the contracts we're bringing in, there's ways we can get there, but we want to be able to demonstrate more progress before we really start to chart a path to that number for you.

Okay, that makes sense. Thanks for the questions.

And we'll go to Mark Marcon with RW Beard. Please go ahead.

Good afternoon. Good afternoon. A couple of different questions. One, just with regards to the larger travel nurse client, can you talk a little bit more about if there was any sort of change at all in terms of their behavior with regards to usage of travelers, or is it just purely a function of their senses?

Yeah, this is Ralph. I'll handle that one. Yeah, they're a very strategic user of contingent labor, and so there's really no change in that behavior. I think the lighter flu season and just a little bit of a census decrease combined them, lower utilization.

Okay. And are they Are they giving you signals that everything is, you know, assuming that the census goes back to where it was that their utilization would go up? Or has there been any sort of change in terms of their recruiting strategy for full-time nurses occurred?

Yeah, that's a good follow-up question. Because they're a strategic user, a certain percent of their workforce is desirable for them to be contingent labor, so for fluctuations just like this one, to help them to adjust. And so there's really no change in their strategy there. All of our healthcare systems are working harder on hiring and retaining the staff that they have, but that's not something that would have a material impact on their you know, continued labor usage.

Okay, great. And then just going back on locums, do you, like, how far are we away from having the systems issues, you know, completely resolved? In other words, you gave us guidance for the coming quarter, but I'm just wondering how confident are you in terms of, you know, at least the year-over-year trends stabilizing?

Yeah, this is Ralph. I'll handle that one as well. We're doing new releases of the software about every two weeks now. I think we're on like our 16th release or something like that. And, you know, we get a little bit of incremental improvement with each release. It's actually the point of putting in place these systems is they're more configurable. You can change them. Things aren't hardwired. You know, so over time, you know, any of the manual workarounds can be built into the technology, whereas with our old technology, You always had to work around it. It's all hardwired. So while we're getting to some level of stabilization, we have tenured producers who are actually producing at levels they were prior to the implementation of the new system. So that gives us a sense that people are getting past that. We'll constantly, I think, be making adjustments to the system that make it, you know, a better experience for our recruiters and for our candidates as well. So, you know, it'll be a continuous evolution. But I do think, you know, I guess maybe the question is more about parity, you know, versus three disparate systems. You know, we're probably at parity, you know, maybe not on a line item basis, but we look at it in aggregate. And so it's just now that it just becomes more about the users getting used to that system. And then those enhancements, if we continue to make them, then we'll make them more productive in the system.

Okay, great. And then with regards to tenant, congratulations on that. How much are you already doing with them and would you anticipate that you would end up filling your typical percentage of their total contracted value?

So Mark, this is Dan. I'll take that one. So today we serve these regions for tenant through a third party. And as a result of that, our fill rates there are relatively small. So of that business, maybe 3 million, something like that in total would be what we would consider sort of, you know, legacy or, you know, business that's there today. And we also believe that our fill rates into this program are going to be at least as good as others. It happens that this particular client is quite good at running MSPs, and so we have a very knowledgeable user. The implementations are going incredibly well right now. I don't see any reason why we couldn't get to a normal MSP fill rate for this particular client. The other benefit to this that I'll just add is that Susan mentioned in her opening remarks, we have quite a few services being driven through here, some of which are extremely profitable. Interim exec, our international nursing business, we're running it on AMN technology, and so all of those things help us control the outcome much differently than perhaps another circumstance.

All good points. On the percent of the business we handle today, it's between 10% and 15% of their total spend today. So there's a lot of upside there.

Great. And do you think it will take like two years to ramp up to kind of full utilization?

A typical MSP is going to roll out over kind of an 18-ish month period. So you'll definitely see the full utilization sometime next year.

Okay. Great. Thanks.

Our next question from the line of Jacob Johnson with Stevens, Inc. Please go ahead.

Hey, thanks for taking the question. Maybe if we can talk about the other segment. As you lapped the deals last year, In April, how should we think about the organic growth outlook for the other workforce solution segment? Sounds like the leadership and search pieces are growing like 2% to 3%. Revenue cycle management was growing nicely, but it sounds like it slowed in the fourth quarter. Well, VMS was a drag, but it sounds like it's been improving. If you just walk through the puts and takes there.

Sure. So if we look at interim leadership, you're right. It was on an organic basis relatively flat in the fourth quarter and close to that in the first quarter. They actually have really good underlying trends. in the business in terms of new searches, and as we just mentioned, we're going to be adding new clients. They already do some work with Tenet, but I believe we'll be able to do more, as well as some of the other new MSPs that we're bringing online. So we're feeling really good about that business, and something in the mid-single-digit range is probably a reasonable place to think about it getting to, even though we're starting the year a bit behind that. Physician Perm, you know, also had very nice growth in the fourth quarter, up about 7%. And coming into the first quarter, up less than that. They've been doing really well in winning the larger enterprise clients with large volume searches. But on the flip side, they've seen softer demand in the single facility small practices. So it's sort of created a little bit of a headwind. They're still growing, but they're, again, probably something in the mid-single digits is a reasonable place for that business regardless. And then our search business, if you sort of add up, quite honestly, all of our total perm businesses, which would be physician perm and our search businesses, you know, we're looking at sort of mid to low single digit organic growth there once we sort of lapped these acquisitions. And then our mid-revenue cycle businesses had growth, but most of that was driven by the acquisition of MedPartners last year. Peak actually had a really fantastic 2018 and finished the year strong, but they did have one of their largest clients who decided to bring more of their coders in-house And so that's created a bit of a headwind in the first quarter for that division and business. But at the same time, they're adding many new clients. In fact, they just signed a full outsourcing deal with a new client. So we feel really good about the team there. MedPartners, which is part of that mid-revenue cycle, We're seeing really solid demand really across all categories, coding, case management, documentation improvement. We have had some disruption from the integration, which you would expect, but layered on top of that, you might recall we had a leadership absence due to a variety of factors, and so we're We're probably feeling a little bit more pain from that, and we are dealing with shoring that up at the moment. But the market is good. I guess the main message in mid-revenue cycle, the market's good. We see plenty of opportunity, and we're working to organize our two brands to really make sure that we're getting the synergies out of the opportunity there. So is that helpful?

Yes, very much so. Thank you. And then on margins, does the locum disruption change the goal for 14% EBITDA margin run rates at all, or does it just maybe push it out a little bit, or not at all?

This is Brian. The long-term answer is no. There's no change in our view towards achieving that with the businesses that we have. To your point, the timing, we've already said, would be pushed out, and clearly with where we're coming with locums, that is a drag to that, but the but the long-term strategy and the way we're going to get there has not changed.

Got it. And then last one from me, Susan, I think you have a new workforce institute with Kaiser. If you'd like to, you know, what's the longer-term goal of this?

Yes, thank you for mentioning that. And this is really in alignment with our commitment to innovation and helping to create new solutions that are going to benefit not just the Kaiser organization, but quite honestly, the healthcare community at large. And Kaiser being so innovative and progressive themselves, they themselves have an innovation institute. And so we're going to be collaborating on workforce-specific innovation ideas to help ensure that we're training the right clinicians, not for now, but also for the future as Healthcare continues to change, but then also looking at some things that could create more efficiency in the workforce. So we've made a commitment to them over the next five years with our contract that we will be working alongside them. So initially, it's going to be focused on some areas of training and upskilling in particular categories where there are the most severe shortages of nurses. But that will evolve over time, and we're just really excited and appreciative to be able to work with them. We're working with other clients, too, by the way, on some really interesting, innovative things. They're not the only ones, but they're a really great example of how we can both put some skin in the game to develop some innovative new things that will benefit the overall industry.

Great. Thanks for taking the questions. Thank you.

And we'll go next to Jeff Silber with BMO Capital Markets. Please go ahead.

Thank you so much. I just want to go back to the local business for a second. You know, unfortunately, I guess this segment has really been underperforming the market for some time. I realize you're going to be ramping up some of your internal hiring. Hopefully that will help. Has the competition changed? Is there something else going on, or do you really think that ramping up your internal hiring will be able to solve some of the issues?

Yeah, I mean, it is a super competitive marketplace. So when you're slowed down in the slightest, you know, a very small percentage of MSP business is 20% now, but it's still relative to our other businesses, a small percent. So each order is a lot of competition on it. And if recruiters get slowed down at all, then, you know, somebody else fills it. So that's just the nature of the business and the problem, why we need to get the people up to speed on the system and our staffing levels up. you know, some sort of other change in the industry. I, you know, well, I'll give you a couple of specialties that are, you know, have been a little, you know, slower growth. One is emergency room medicine. The shift to urgent care has, you know, created demand, you know, decreases, significant demand decreases there. Hospitalists, you know, a little bit of I think primary care doctors want to, you know, take back over those shifts. And also there's less movement in the physician management company. So hospital volumes are down, oh, gosh, close to 30% year over year. Demand for hospitals is down 30% year over year. So those are the big changes. They're not competitive ones. They're actually just market changes.

Do you think that the other companies in the space are facing at least the latter issues that you mentioned as well?

Yes, if they're in those specialties. There are some that are not. I talked to one this week that doesn't do any hospital. And, of course, they're feeling pretty good about their year. But, yeah, if they're like us and they service all specialties, they would see similar trends. Now, they would not have the disruption factor. And, you know, they're probably faster right now than we are getting a candidate on a job order. And so that's why we're spending a lot of time on this call talking about how we're going to get there.

Got it. And I know this is sometimes difficult to quantify, but did you quantify or can you quantify what the food benefit was for your company last year and what the headwind you think will be this year?

Sure. For the first quarter last year, it was probably somewhere in the $10 million range. When you think across the travel nurse extensions and some additional volume along with some rapid response demand that we had across a couple of our brands. So normally, if it's just a normal season of flu, we don't really talk a lot about it. We don't see an incremental utilization or really a decline too much. Last year was definitely an anomaly with such a significant amount of flu. So that was part of the comp headwind that we've talked about that we knew we would face. And so this year, with it being even weaker, I don't think that necessarily weakened demand, but it certainly hasn't helped us in any way.

Got it. And forgive me if I missed this. Was there any labor disruption revenue in the fourth quarter? You're expecting any in the first quarter?

Small amount in the fourth quarter and pretty similar to the year before as well. Okay, great. Thanks so much.

And we'll go next to Mitra Ramgopal with Sidoti & Company. Please go ahead.

Yes, hi. Good afternoon. Thanks for taking the questions. Just wanted to follow up on the tenant MSP business. And if the arrangement is only for nursing, or does it also include locums allied, similar to what you might have done with Kaiser earlier?

The tenant agreement includes all forms of nursing, which would be travel nursing, local per diem nursing, and international nursing. And then it includes allied as well and interim leadership.

Okay, great. And are you having increasing conversations with other MSPs clients as it relates to more full service arrangements?

So it's interesting you say that. Maybe I'll give you a little bit more color on Q4 and Q1 pipeline. So Q4, I think we mentioned in the press release that we finished the quarter at about a little over $65 million in revenue. I mean in gross spend, excuse me, making it about $230 million for the year. If you were to look at that 230 and break it down, about $75 million of that 230 is brand new customers, never had an MSP before. About $95 million of that were competitive wins, and then the rest was expansion into our existing base. And so hopefully that addresses the new and competitive I'm thrilled that there is still continuing to be brand new opportunity out there, and we're seeing that in our Q1 pipeline as well. We did mention tenant already. At the same time, we've signed a couple of others. So we've already signed over $150 million in gross spend for the quarter, and we have a really robust set of deals that are in contracting right now as well. So we feel very strongly about moving into that quarter. About a third of the revenue or gross spend that has been signed already is locum-specific. Back to the question about, you know, do we have places and room to grow, that clearly is a terrific advantage as well. So feeling really strong about our ability to compete.

Okay, no, that's great. And then a quick question on the workforce solution side, given the different businesses you have there. Just wondering if right now, in terms of how you have to implement an ERP system for locums, is that something you would have to do down the road for workforce? Yes.

No, this is Mitra. No, again, as you said, we have different business lines, and they're on, in some cases, different systems. So, you know, Peak and MedPartners, for example, are on different systems. They will be combining onto one, the MedPartner system, but that's a system they've been working on for years. Proven works really well, so that's a very small list. The interim businesses as well, they'll be migrating onto one common platform, but it's not the same one that Locums has moved onto. It's been built for the interim business, and so we feel really good about that migration as well. We'd already done it for the first string, and we'll be doing it for leadership today as well. So we are not looking to get every single business line onto one system. There's other ways that we can capture client data. We want to make sure we're using the right system for the right business line. So there's no major list going on in that segment.

Great. Thanks again for taking the questions.

And we have our next question from Bill Sutherland with the Benchmark Company. Please go ahead.

Thanks. I really just have one or two left here. In other workforce solutions, I wish we could step back just a little bit and think about the growth potential of the most important elements over more of a one- to two-year time frame. It seems like there's been a little back and forth with almost each piece of it, and I figure just Maybe Susan characterize a little bit of a longer view for that group.

Thanks. Sure, sure. And I think some of the growth rates I referred to were more for 2019 and sort of where we would expect or hope to be towards the end of 2019. When you think about the PERM placement businesses, those have historically been more volatile markets, not just for us but for anyone who is in that business. We're usually more conservative and suggest that something in the mid-single-digit growth range and in the sort of 5% range is probably a reasonable place to be. Now, of course, we're always trying to do better, but considering those businesses are usually running 20% to 25% EBITDA margins, that's still a really good leverage on a 5% top-line growth. Interim leadership should really be more than that. I would say more 5% to 10%. is a good range. A lot depends upon just generally where the market is, where the economy is. But we see continued shortages across all leadership categories. And we have a great team there. We have different teams that are right now kind of focused in different areas, and we're going to be trying to pull them together a bit more to get more organized and more cohesive in our go-to-market strategy. And I think that will also help create more momentum there because, as you notice, we've been a bit flat there But we are very optimistic, and so, again, I think something high single digits is very reasonable. They're, again, higher margins than our traditional staffing businesses, not necessarily 20 to 25, but they can be high teams for sure. And then mid-revenue cycle, I think similarly we should – it's still very much, in some cases, an emerging industry with case management and some of the other faster growing categories. I think coding in particular is probably slower growing, low single digits, but because of the higher growth in case management and other areas, you're probably looking at something more mid to upper single digits. So hopefully that's helpful for you to kind of piece that together. VMS we think has, you know, probably similar to our MSP businesses and our staffing businesses. They tend to sort of ride along with how the nurse and allied staffing businesses are growing and how the market is growing. So you're probably looking at a mid to upper single-digit growth there if that's where the staffing market grows.

That's helpful. Thank you. And I'm just curious on tenant, was that a takeaway, that business?

We're working with another provider. In fact, many of their regions are still with that other provider. And they just decided they wanted to make a change due to some of the service capabilities that we have available.

Do you think that probably plays to your strengths, certainly in those markets? Do you think you have the opportunity for other sectors of tenant?

Well, our first focus is to exceed their expectations in the markets that we've just taken on. And we feel very confident in those markets, as you say. You know, we have a very proven track record of being able to deliver and get these things ramped up quickly. So we want to be successful there first. But, yes, of course, we always believe we have opportunity to add on new clients and expand our existing clients.

Understood. Thanks so much.

Thank you. And, ladies and gentlemen, as a reminder, if you have additional questions, you may press star then 1 on your phone keypad. And we'll go to Toby Sommer. With SunTrust, your line is open.

Thank you. If I could ask you a question on the MSP front across your lines of business, what trends are you seeing between kind of vendor neutral as well as sort of your model where you can provide the service as well? both in an existing business and maybe new things coming to market? Is there a tendency for either one of those categories to win more frequently?

So this is Dan. I'll answer that one. The choice between those tends to be a little bit of a kind of a religious discussion, to be honest. But The trends for me that are probably more important to you is that the larger the system, the more likely it is that they're going to take on a program that has a very strong recruitment component to it. And that's specifically because it makes it a lot more predictable, candidly, what the outcome is going to be. When you combine that with our ability to manage the MSP extremely well, we have a vendor-neutral capability in-house, and so we certainly understand how to do that. The combination of those two things is very compelling, especially to a large system that wants skin in the game. And so, you know, typically back to the consolidation question and things like that, we see the bigger they get, the more it is in our wheelhouse.

Right. Thanks. Just a quick numerical question for Brian. Do you have a sense for the tax rate this year?

29%. I mentioned that would be the rate in the first quarter, and it would likely hold at that rate of the year.

Okay. Is that a good long-term rate, or do you expect any variation moving forward that you can anticipate at this time? I would use that as the long-term rate. Okay. And then last question for me. Susan, you just had the quarter here and said your top focus is improving internal operations and low-content business. but also consummated a small acquisition. Should we think that when we anticipate what your M&A news might be over the next few quarters, that it would be kind of singularly focused on other workforce solutions at this point and not into the staffing businesses, or is my assumption misplaced?

You know, I think yes on workforce solutions. We've made it clear that we're always looking for additional new solutions to help our clients. But they're few and far between, which is why you haven't seen us do a lot. And even with Silver Sheet, while it's very innovative and very strategic, it's still relatively small. When we think about other staffing acquisitions, I would say locums is not an area that we would be looking at right now because we obviously want to get our own house in order and have a strong platform to build upon. Allied might be an area we would be interested in. As you can tell, we've got a lot of good growth going on within Allied. We have a very strong team and leader overseeing that business, and quite honestly, there's still a lot more opportunity. It's a very fragmented part of the market. We are number one in Allied, and yet we're still a relatively small piece of the overall puzzle. And so that's just one category. If I could choose one, it would be probably be at the top of my list within staffing.

Perfect. Thank you very much.

Thanks, Toby. And our last question will be from Mark Marcon with RW Baird. Please go ahead.

A couple of quick detailed questions. Just corporate expenses, how should we think about those, the unallocated, on a go-forward basis?

It's right around 2.5% of revenue for now. Okay. Yeah.

Great. And then from the OWS, just in terms of just consolidated organic growth rate as we anniversary the acquisitions, how should we – Susan, you went through the details, but on a consolidated basis, how would that come out?

For the other workforce solutions? Yeah. Yeah, so as you think about it through the year?

Right.

Yeah, so as Susan mentioned, the first quarter, really if you – With the acquisition still in there, X that, we're pretty flat in the first quarter. We were 1% up in the fourth quarter, pretty flat in the first quarter. And as we get traction on some of the things that Susan described, as we move into the back half of the year, I think we can get back into the mid-single digits. So just track that up from where we are to that level.

Great. And then from a capital allocation perspective, how should we think about that and, in particular, buybacks and flexibility that you have with the balance sheet?

Sure. Yeah, this is Brian again. There's, I think, no real change, as Susan talked about. We are still evaluating acquisition opportunities, and we've got plenty of balance sheet capacity to do that. But in the meantime, as we generate free cash flow, we will continue to look at both share repurchases and debt reduction. We've got still over $100 million drawn on our revolver. So if we have extra cash on the balance sheet, we will use that to pay down debt. So I think we'll continue to be opportunistic. We still have room left on our share repurchase authorization, and you'll probably see similar activity that you've seen over the last couple of quarters. Great. Thanks.

Thank you. And I'll turn it back to our speakers for any closing comments.

Great. Thank you, everyone, for joining us today and certainly your continued interest in AMN. I do want to give one last shout-out to the Silver Sheet team. We are very, very excited to have you joining the AMN family. Certainly impressed with what you've built and created to date, but also everyone is excited to work with you to help take things to the next level. And I know our clients are also very excited, as we've already begun to introduce your capabilities to some of them. Thank you for joining AMN, and we will be updating you all on our progress on our next earnings call.

Thank you. And ladies and gentlemen, this will conclude the teleconference for today. We thank you for using AT&T Teleconferencing. You may now disconnect.