AMN Healthcare Services, Inc. (AMN) Earnings Call Transcript & Summary

AMN is one of the largest providers of staffing services in the U.S. Presenting today, we have Susan Salka, who's the CEO; Jeff Knudson, the CFO; and Randy Reece, Senior Director of IR and Strategy. I think, is there anything you want to start off with or should I jump right into Q&A.

We can just jump right in. We had our earnings call just a couple of weeks ago, so it's perfect timing.

Yes. Definitely. So labor has been one of the key themes throughout almost all the presentations that we've had today. So would love to just kind of understand where you see the state of the labor market today, maybe compare it to where it was pre-COVID and then where you think things leveled out from here?

Sure. So we shared on our call that our demand across all of our businesses is at much higher levels than pre-pandemic. Nurse and Allied, which is our largest segment, about 80% above pre-pandemic levels for the same time period. Locums, certainly strong demand, higher than pre-pandemic. Interim leadership, the same. So really strong fundamentals relative to pre-pandemic levels. Now during the last couple of years, of course, we saw a variety of surges where demand was going up and down. And even in some of our businesses at the beginning of the pandemic, they really took an initial nosedive, and we recovered much faster from that than we expected and are actually exiting much stronger than we expected. In nursing, in particular, we had expected that we were going to be peaking towards the end of 2021, but of course, the surge occurred again in the first quarter and we saw peak demand and placement levels, but also that drove much higher pricing levels than we anticipated. I know there's a lot of questions around bill rates and where that's going to land, and we'll get to that, and I'll probably have Jeff chime in on that. But as we look forward, the fundamental shortage of clinicians is expected to worsen over time. And I think that's something that folks have to wrap their head around. Actually had one health care executives say, I see light at the end of the tunnel, and there's a train coming right at us. And it's very unfortunate because the shortages are expected to worsen across almost all clinical disciplines with more clinicians retiring, not enough coming through the education system or residency programs, all hitting at a time when health care utilization is expected to grow. Just next year, health care spending is expected to grow 5% to 6%, but that will likely accelerate over time as the general population continues to age. And of course, you have workforce preferences, which are changing. I think the pandemic accelerated and exacerbated the workforce preferences that were going to occur anyway because so many clinicians became burned out, they retired or the younger workforce, and even I'd argue those that maybe mid-career realized that perhaps they could have more flexibility in their career. So as we look forward, exiting 2022, we fully expect that these shortages are going to be not just sustainable, but will likely worsen over time. Now we have fortunately come down off of that peak in the first quarter when we saw a lot of crisis-related demand and orders. And so demand is now at what we think is kind of the new norm, sustainable level, will likely grow from here. And as I mentioned, in Nursing and Allied as an example, still 80% above pre-pandemic levels. So hopefully, that helps set the stage for some of the underlying macro trends, which drive a need for change, within health care, and our clients are asking us to collaborate with them to develop new models, new ways to optimize the precious workforce that we have, the limited workforce. It's not as if we can flip a switch and suddenly create more nurses and physicians and allied professionals overnight. With the education and certification requirements, even if you could magically increase capacity, today, you wouldn't see the benefit of that for 5 to 12 years from now, depending upon the discipline.

I guess maybe to better understand, I think you were talking about a bill rate drop of 35% from Q1 to Q4. You're saying most of that is just really a reduction in the urgent staffing dynamic rather than a real change in underlying price dynamic?

Well, it's a bit of both. There are the crisis, urgent needs, short-term assignments, but that was trickling through into travel very much as well and just a high bar set overall based on the extremely high demand, an insatiable demand that the industry couldn't even meet, and it just kept driving the compensation expectations of clinicians higher and higher. So now that demand has come down off those peak levels, those compensation expectations are coming back down more in line with the new norm, not back to where they were, but in line with where I think the demand is settling in at. And maybe Jeff can add some more color on our view on that bill rate deceleration.

I guess when we think about that, everyone always had to go and say, what was pre-pandemic and what is it today? So down 35% sounds reasonable in a lot of ways, maybe go from 2019 to 2022, it's like up 10% per year. So like is that how you think about things? And is that the right, to your point, new normal? Is that's the way to think about growth in 2023 and beyond?

Yes, Kevin, we thought about it a couple of different ways. So Q4 35% off of the Q1 peak and that would be up just under 30% over Q4 of 2019. And so on a CAGR, that would be just over 8%. And when we think about where nurse wage inflation was in the fourth quarter annualizing at 11% going back even further to 2010. So from the 2010 to 2019 time frame, nurse wages increased on an annual basis, 2.5% on average. So a 3.5% CAGR from 2010 to 2022. And then from our perspective, Q2 being down double digits, expecting a larger sequential decline in the third quarter and then a much more modest decline in the fourth quarter. What we're seeing in the second quarter right now from a revenue and a bill rate and a volume standpoint, absent the labor disruption revenue that we're expecting in the quarter of roughly $65 million to $70 million. The second quarter is playing out exactly the way we thought it would from the beginning of the year.

And so I guess, directionally, you and the providers are saying things get better as the year goes on. It seems to me like there's a slight differential in magnitude that they think will maybe a little bit better improvement, but just a little bit better. And the real delta is about what happens next year, that they think that there might still be additional improvement next year, whereas you think this is the base and it goes from there. Is there -- I mean, it's hard to put yourself in their shoes. But is there anything where you say we have a better insight in this than they do to kind of give us that confidence and maybe they're missing X, Y, or Z?

I actually think we're more on the same sheet of music than might appear at first glance. So when you think about this trajectory of kind of where we'll exit the fourth quarter, that's our book of business. I'm sure there are other providers out there, other companies within the industry that we're going after higher rates than even kind of the normal market, right? And for some of the providers, they maybe have an MSP in place that we're serving along with our large affiliate vendor network. And yes, our rates went up. But guess what, we couldn't even meet all of their needs with our large network. And so they would bring in yet another provider at an even higher rate than what we could serve. And it was probably in their best interest to do that rather than have us increase our program rates to an even higher level. And those will be the kind of even higher -- uber-higher rates, then that will be the first probably to go or decline. So they may achieve a 50% rate reduction by the fourth quarter. It doesn't mean it would all be coming from our programs, it might be coming from other providers. In terms of going into next year, that's going to be a challenge. Yes, on the travel front year-over-year, of course, there's going to be a decline in the first quarter. So I don't know if there's this expectation that from the fourth quarter, it will continue to go down from there. Amidst this shortage environment, we're dealing now with almost 3 open jobs for every job that gets filled, and it's not expected to improve much over the next year. So I can't imagine in that environment why there would be a further decline in demand is what you would be saying, right? If anything, our clients are asking for more longer-term solutions, our international staffing division to bring in nurses that won't even be here for 2 years or permanent placement through our recruitment process outsourcing business, which helps them bring in permanent staff. So I don't think they're wrong. It's their best view within their business. But in terms of where we end on the rates, I think we're actually more close than meets the eye. And then going into next year, it's all about whether you believe the clinical shortages are going to persist. I referenced the Conference Board research that just came out that talked about the health care industry being the worst shortages not just today, but worsening shortages over the next decade across pretty much all disciplines; nurses, of course, being near the top. And it's because of the increased utilization of health care, the increasing retirements of the workforce, the constriction that you have at the front end of not enough people coming through the education or residency system. And you have more people leaving than can possibly come into the industry. So I think most of the research really supports a long-term shortage environment. And the nurse executives and HR executives that we speak with at our clients very much see this, which is why we're doing much more long-term planning with them. Because they can look into their own workforce, which is, of course, a bigger part of their expense and budget than even travel nursing. And they know that that's going to be a continued challenge for them. So what can they do to make sure that they've got the staff, not just fourth quarter of this year or first quarter of next, but 2 years from now, 3 years from now. So I think there is probably, in some ways, a little bit of hope that things just get better, but I don't know that it's predicated on any actual changes that are occurring yet.

All right. And so then to think about your answer to this, you talked about trying to get more holistically involved with helping these companies solve their staffing problems. What exactly does that mean from a business perspective? Is that a real revenue opportunity? Is it a real margin opportunity? What does that mean for the company going forward?

Yes. So a lot of the MSP and strategic client opportunities that are in our pipeline, but also our existing strategic MSP clients, we're talking about what other services can we bring to the table, again, these mid- and longer-term offerings that we have. But then what net new can we do? So the ability to optimize their local staff is very important. We do have a local staffing division, which is a great service offering. But we're often asked, well, don't you want to grow that exponentially and we really don't. We want to grow it with market. We want it to be an important service offering for our clients, but we don't necessarily want to compete with them in market for the same nurses that are going to just work in their local region. But we can help them through our technology offerings. So we've been doing float pool management by providing technology, but also we can come in and actually provide the management and the oversight of those programs. Those kinds of conversations are not surprisingly picking up. How can a health care system in a particular region increase the optimization of the workforce that they have? And there's been reluctance in the past to do that by the individual hospitals within a system because every hospital wanted to see their workforce as kind of their own asset and that they didn't want to lose them to another facility even if they were in the same system. Well, they don't have that luxury anymore. They have to allow the clinicians to work when and where they want across the entire system, and we can help with that. We have the platforms and the technology to help them with that float pool management. Now the discussions are even around multiple systems that used to be or still are competitors within a region. And how can you create an independent float pool at a local level that can help move people around within a particular region? And we can help with that through our technology. Now we can augment the staff as well. We can even bring travelers in, that can help be additive to that float pool. So we see those as tremendous opportunities to take programs that have existed for decades. Float pools have been around forever, but to supercharge them and create a broader platform that maybe didn't exist before. And we're not the only ones. There's health care systems that are already doing things like this. So we see those kinds of programs as being part of that next evolution for our industry. It's not the only one, but it's the kinds of things that we can do. Another would be just through telehealth. You might recall, we acquired Stratus, our Language Services division almost -- it's been 2 years ago, Oh my gosh, time flies. And has been a fantastic acquisition for us, providing a video, remote language interpretation services, which is a very fast-growing segment within the industry. We're now the leader in video interpretation services, and we have a platform that we can plug in other things. So we can add in other services to that iPad or whatever device they're using, if they're using their own to kind of augment and add on. Some of the EMRs are wanting to add in capabilities that we can plug right into and integrate. So we think that we've got some very interesting technology platforms, that we can continue to evolve and add additional services into.

I think about our top 30 MSP clients use on an average of 8 of our services and a portfolio approaching 20 offerings. There is certainly the opportunity from a margin enhancement standpoint, that many of those, whether it be an [ RPOS ] or a technology and workforce solution, which is much higher than our consolidated EBITDA margin that as we can continue to cross-sell those services that it would enhance the overall gross margin and adjusted EBITDA profile of the business as well.

Yes. Can you talk a little bit about the MSA progress? I mean, there's obviously been a significant growth in revenue under management by MSA -- sorry, MSP. So the MSP growth, how much of that is because just the market's growing, bill rates are growing? And how much of that is kind of market share as far as adding new systems and getting a bigger share of their wallet? Any way to break that up?

It's been both definitely. When we -- certainly, the bill rates and pricing have been a component of that. We expect that to come down. But Back in 2019, we were at -- we just looked up this number, we were under $3 billion in revenue -- I'm sorry, gross spend under management. And now our first quarter run rate is $15 billion. The last 12 months at a run rate was about $10 billion. And those relationships will continue. It's both adding on new but also continuing to expand the services within those individual relationships, as Jeff said, kind of an average of 8%. But the number of facilities of -- like you look at our top 30, the number of those MSP clients that have more than 8 was only 3, just 3 years ago, and now it's 13%. So we've been able to really continue to add a lot of services over the last few years, and yet the runway is still quite long. Our language services business that I mentioned, were only 15% penetrated into our MSP relationships. So there's a lot more opportunity to add more. Locums, another great example where this -- already this year, we've added 2 fantastic new locums MSPs. One was an add-on to an existing MSP. One was an MSP that is more purely locums. So there's a lot of new emerging opportunities for MSP type of relationships. And again, more and more, they're wanting these other services added in.

That's excellent. And then as we think about where the company is going and where capital deployment is going, obviously, the leverage that you guys have using some flexibility, it looks like as the top line starts to slow, there's going to be a nice working capital lift. The cash flow is going to improve nicely over the next 12 months. So where does that capital go towards? What type of service offerings do you need to kind of round out your platform?

Yes. So the balance sheet, you're right, is in incredible shape right now levered at 1x on a trailing basis. We have ample liquidity, $400 million undrawn revolver, over $100 million of cash. In addition, about $1 billion of receivables that needs to work its way through the system and unwind through the course of this year. So 2022 sets up to be a very nice free cash flow year for us with only $70 million to $75 million of capital spend. So from an M&A standpoint, we'll continue to be focused on those technology-enabled solutions, but also staffing assets would be a close second. So whether that be in the travel nurse, Susan mentioned international nurse, Locums, Allied. The M&A pipeline is starting to pick back up right now. And certainly, we're seeing a disproportionate share in those staffing assets, a little heavier volume there than on the technology side. And then absent a compelling M&A opportunity, we'd continue to look to return capital to shareholders via share opportunistic share repurchase. We repurchased 228 million shares in the first quarter and still have $250 million left on our outstanding authorization.

And the technology assets, when you say that, I mean, I guess, I wasn't thinking about virtual transcription services. But like, I guess, I'm not really sure what that means for the next step? And what are the types of things that technology can help that you're not already doing today?

Well, there could be add-ons for some of the things that we're already doing additional like to double down in language interpretation, that's still very much a cottage industry and there's other companies that are doing similar things, but also a little bit more different things that we're doing kind of generally in that space. So that could be interesting. Anything that helps a health care client to optimize their existing staff is very attractive. So we already have Avantas, which, of course, does nurse scheduling. We continue to expand that service offering. But if we can make an acquisition that exponentially expanded that capability, that could be very interesting and certainly predictive analytics, anything that helps a health care organization to better predict and plan for what their staffing needs are going to be, enables them to not be caught off guard last minute. Right now and constantly for the next few years, it's just going to be about how can I possibly get the staff I need, to some degree, agnostically wherever they come from. Now there's always a preference to I want to have at least 50% of my staff be permanent and core. But more and more, I'm hearing health care clients talk about wanting to be more open to how they resource their staffing plans and looking to, whether it be international or travelers or local, just trying to be more open-minded because again, as in addition to the shortage, that's the preference of the workforce to have that flexibility.

Yes. And I guess one of the dynamics that people have been focused on is how much of the -- you mentioned earlier the desire for flexibility of the labor force, the younger labor force. How much of that is kind of that permanent mindset of that younger labor force versus, well, bill rates were so high and that it just make compelling economic sense and that if bill rates moderate the way that you expect, that economic incentive is no longer there, and then these nurses will go back to the labor force and that will just accelerate the shift back to permanent versus temporary staffing.

Yes. I think we saw some of that in the first quarter when we had such record high demand and rates across the industry. And as that has settled down and we've started to see demand normalize, we saw a spike in our applications of candidates in the first quarter. They were already running well above pre-pandemic levels, but it spiked up, and now it's come back down still well above pre-pandemic levels and even above prior year, but I think that was an indicator of, okay, now that those crisis rates are gone, what is the new application flow going to look like? And what's the retention rate going to look like? And the good news is, in addition to applications continuing to be up well above pre-pandemic levels that our retention rates, what we call our rebook rates where somebody is taking an extension or another assignment, those are back nearly to pre-pandemic rates as well. We actually saw them fluctuate a fair amount during the pandemic when people might just come in for an assignment and lead. And now we're starting to feel like that's normalizing and in good shape.

I mean, I guess we have a labor shortage you're talking about. And so it's kind of counterintuitive to me to think about you being able to fill more and more spots over time, when everyone is having a hard time finding labor. So who's drawn to the temporary job versus the permanent job. So how do you keep getting those assignments needed to grow the business going forward?

Yes. Well, first, I'll just put the numbers in perspective, and I shared this on the earnings call, is, we've got over 3 million nurses in the country, a little over 1.7 million working in hospitals. So if travelers are -- and it's a best guess because there's no real data out there, but best guess if travelers are 65,000 of that right now, it's still a relatively small portion of the overall workforce and cost, which is why it shouldn't surprise me after so many years, but sometimes still surprises me that there's so much focus on our industry and the cost of a travel nurse when the bigger ticket by far, is the permanent workforce. And with such severe shortages, the pressure on wage inflation, which is deserved by these clinicians, by the way. The fact that they've had 2% to 3% wage increases in most years, historically; some years, none. The fact that, Oh my gosh, it might be 8% or 10% when cybersecurity professionals are getting like 30% raises, I just think it's well deserved. So when we think about going forward, if we see a shift of even just another 10,000 clinicians, it's not going to really be that meaningful to the overall workforce, but it can be very meaningful to our industry just to move the needle by less than 1% in terms of the number of people that make that decision. And so they are not big ships. And when you think about just the shortage environment alone, shortages often drive this move to more flexible roles, which we've seen historically. I've been through a variety of these cycles. And whenever there is a shortage, it drives more people into flexible jobs and they're empowered to leave and go do something else for a while knowing that they can always come back. But on top of that, I just think the changing workforce preferences. I mean, I don't know about all of you, but even within our corporate ranks, we are not bringing people back to the office full time, 5 days a week. There's a lot more flexibility and a lot less requirements about where they are. It's just more about get the job done. So I think nurses are of that mindset, particularly younger nurses like I can go anywhere I want and make the money I need, do what I love to do, but I don't have to be beholden. But it doesn't take much to kind of move the needle. So I don't think this has to be a win-lose scenario, right? I think if 2%, 3%, 4% more of the workforce decide to move into more of a flexible environment, whether it be local or on a travel basis, that can still be a win for everybody.

And one of the themes that we've seen throughout this offer so far is just a shift to outpatient. So as volume moves out of the hospital to other locations, how are you positioned to take advantage of that in that space?

I think we're positioned very well. We already have some excellent client relationships in that space when there are large systems that own surgery centers, we're already there probably with an MSP, and we can just expand that MSP and that offering into those settings. And then, of course, there's others that are just stand-alone and we've been adding them as clients over the last several years. So we've seen nice progress in the growth of those categories. There's others like home health, which are more challenging. We've been adding home health clients, but filling those jobs is very, very difficult because the reimbursements are so constrained, and they just -- it's difficult to attract the labor to work in those settings. And many times, you have to train them. And when they're competing with even just physician offices and other settings where the pay is significantly higher, I think it's going to continue to be a challenging labor market.

And then I guess the other thing that people are increasingly worried about is a recession. And it's always hard to take The Great Recession, which has a name, so it was unusual since we all know the name of it and say that that's the way things are going to happen. But like how do you think about your business today and how it perform during the recession, if one were to happen next year versus maybe how it's worked in the past?

We're a very different business profile today than we were then. In fact, coming out of that, I remember thinking the next decade, we have got to change the profile of our business and also, I think, to meet the changing needs of our clients. And fortunately, the two intersected beautifully where, at this time, workforce solutions and MSP were just starting to come into the health care industry. They've been around in commercial staffing in corporate America for many years. And so we were at the forefront of that, made a great acquisition in 2010, Medfinders. And we're able to kind of leapfrog into the leading position of providing MSP. And so we had almost no opportunity to benefit from that falling demand and higher capture rate. In fact, when we study Medfinders, we could see that they fared much better than we did during the recession, and that gave us greater confidence that this would be a great model when you saw demand fluctuations. So that set us on a path to continue to build out our MSP footprint to, again, today being the leader, most significant in terms of the number of MSPs, but the size and gross spend under management, both for staffing-led MSP, but also we've acquired 3 of the leading VMS platform. So for clients who say, we don't need all the full services, but I need a technology that can enable me to be more efficient in a vendor-neutral environment. We have those platforms for them as well. We've also added on other tech-enabled solutions. Avantas, I mentioned. You've got to schedule your nurses whether you're in a recession or not. Our language services business, which has gone very nicely, likely wouldn't be hit at all or very little during a recession. So the profile of the business is very, very different. And just to recap on the MSP piece, if demand falls, it gives us the opportunity, if we need to, to increase our internal capture rate. We don't have the need to do that right now because demand is so strong and so high, and we have a fantastic affiliate vendor network and we want to be great partners and make sure that they get their opportunity to fill as well. But should that situation occur down the road, I think we've got some good levers to pull that we didn't have back then.

I guess we're running out of time, maybe just to finish that thought, on the supply side, so you talked a lot about how the supply demand balance today is about people leaving the workforce, searching for alternative jobs, looking for flexibility. During a recession, does that mindset change? Or is that a permanent mindset that people aren't coming back for an extra few dollars because their spouse lost their job. They're out for other reasons and won't come back in.

I think some would come back, but I think the pandemic has left scars that run very deep within the clinical profession. And they've moved on to another career outside of bedside nursing. They're not likely coming back. And by the way, they're probably making more money there, so they don't need to come back. And they probably would look for work -- majority of them, I think if they had to come back to find a job, they would look outside of that setting because what they're remembering is what they went through during COVID.

All right. That's all we have time for. Thank you very much.

Thank you, Kevin. Appreciate being here.