AMN Healthcare Services, Inc. (NYSE:AMN) Q1 2023 Earnings Call Transcript

AMN Healthcare Services, Inc. (NYSE:AMN) Q1 2023 Earnings Call Transcript May 5, 2023

Operator: Good day, and thank you for standingby. Welcome to the AMN Healthcare First Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker presentation there will be a question and answer session. Please be advice that today’s conference is being recording. I would now like to hand the conference over to our speaker, Randle Reece, Senior Director of Investor Relations. Please go ahead.

Randle Reece: Good afternoon, everyone. Welcome to AMN Healthcare’s first quarter 2023 earnings call. A replay of this webcast will be available at ir.amnhealthcare.com following the conclusion of this call. Various remarks we make during this call about future expectations, projections, trends, 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, because of various factors and cautionary statements, including those identified in our most recently filed forms 10-K and 10-Q, our earnings release and subsequent filings with the SEC.

The company does not intend to update 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 ir.amnhealthcare.com. On the call today are Cary Grace, Chief Executive Officer, Jeff Knudson, Chief Financial Officer; Landry Seedig, Group President and COO of Nursing and Allied Solutions; and James Taylor, President and Chief Operating Officer of Physician and Leadership Solutions. I will now turn the call over to Cary.

Cary Grace: Thank you, Randy, and welcome, everyone. AMN continues the strong partnership with our clients and clinicians in rebuilding a post-COVID sustainable workforce, which is evident in our solid first quarter results reported today. The industry landscape is changing, and we are moving quickly to bring clients to the breadth of our solutions to help them with their workforce challenges and needs. The healthcare workforce landscape was shaken by the pandemic. Clients emerge seeking more sustainable and controllable solutions to achieve their growth targets, while balancing quality and cost. We see clients more open to change, looking at new ideas that could help them create a more sustainable workforce. Healthcare professionals are also in transition, focusing on control, flexibility and well-being in their work and open to new options to achieve those goals.

All of this change is complicated by the continued shortage of healthcare professionals, which we expect to be a challenge for some time. Our latest position in nurse surveys shows rising numbers of professionals who plan to change jobs or leave the profession. We expected a direction change in the market this year, and we are making decisive moves to operationalize our growth plans, including technology and analytics to enable more comprehensive and sustainable workforce solutions, greater client focus and enhanced speed and efficiency in bringing all our solutions together to benefit our clients and clinicians. We said last quarter that our solution set would become even more comprehensive and differentiated and it is happening. In recent weeks, our leadership team came together to develop a 12-month plan to accelerate the evolution of our businesses, starting with Nurse and Allied.

We are moving swiftly to the implementation phase with changes that will boost our speed to deliver, provide a unified sales experience our clients desire, and strengthen our value proposition. To drive further engagement with a broader pool of clinicians, we already built AMN Passport into the top rated and powerful mobile app for nurse job search and career engagement, enabling our recruiters to grow their clinician base more effectively. AMN Passport is the only app that combines customized jobs search and engagement, AI job matching, credentialing self-service, and time and pay. We will continue to elevate Passport to be a digital staffing solution for all health care jobseekers at any stage of their careers across all AMN businesses. To help our clients with workforce management, we rolled out several new features this year with more companies to shift-wise, which we believe is the only scalable enterprise VMS platform made for health care.

We have modernized the architecture of our VMS platforms using advanced cloud services and newer web and mobile technologies, bringing a fresh user-friendly interface. Our data cloud for predictive and advanced analytics is powered by Snowflake and other AI technology partners. We also advanced our capabilities to integrate with our clients’ HR system to drive digital and automation efficiencies. We have a strong history of flexing our cost structure to meet changes in demand. In this current demand environment, we are closely managing our resources, while also sustainably scaling our cost base through platform integration and automation across AMN. We believe these efforts, coupled with a favorable revenue mix shift will sustain an adjusted EBITDA margin above 15% for the full year.

Our priorities in capital management remains focused on disciplined growth. This year, we plan to spend approximately $90 million on capital expenditures prioritizing the key technology and operational initiatives I outlined. We are also announcing an accelerated share repurchase program given the long-term growth opportunities we see ahead. Our team remains focused on M&A opportunities as well and we are confident in our ability to continue to use M&A to strengthen our solution set and enhance shareholder value. Finally, new leadership will bolster our accelerated transformation with three extremely Qualified executives reporting directly to me, leading areas that empower our delivery of tech-enabled workforce solutions and our focus on client centricity and growth.

Meredith Lapointe is taking a newly created role as Chief Business Officer responsible for strategy, workforce optimization, marketing, and client relations. Meredith is well known for helping build the health care process at McKinsey for the past 16 years. She know the best workforce strategy is being implemented today and is uniquely qualified to foster strategic conversations with executives across the health care sector. Meredith was drawn to AMN by our powerful set of workforce solutions and technology, the opportunity to create value in our client partnerships, and the strong values and culture of our organization. Pat McCall is coming to AMN to serve as our Chief Growth Officer. Pat’s background as a senior strategic sales leader with People 2.0, Randstad Beeline and other top players already brought him recognition as one of the staffing industry’s most influential leaders.

Pat is the ideal leader to develop and operationalize and enterprise-wide growth acceleration focused around innovative technology and services. Similar to our other two segments, our Technology and Workforce Solutions segment will now have a dedicated leader. This important segment will be led by Nishan Sivathasan, who served most recently as our Chief Strategy and Experience Officer, including business strategy and M&A. Meredith, Pat and Sean are the leaders we need to accelerate our progress in key client and tech-driven solutions to become a central partners enabling the future of care. Now, I’ll turn the call over to Jeff for the details about our results and outlook, after which I will return for some final comments.

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Jeff Knudson: Thank you, Cary, and good afternoon, everyone. First quarter revenue of $1.126 billion was near the high end of our guidance range with the Technology and Workforce Solutions and Physician and Leadership Solutions segments performing above expectations. Consolidated revenue was down 27% from the peak quarter of the pandemic last year and flat sequentially. Gross margin for the quarter was 32.8% and up 80 basis points from the prior year period, mainly due to a mix shift in revenue towards higher-margin businesses. Sequentially, gross margin decreased 50 basis points primarily driven by the Nurse and Allied Solutions segment. Consolidated SG&A expenses were $206 million or 18.3% of revenue compared with $258 million or 16.6% of revenue in the prior year period and $219 million or 19.5% of revenue in the previous quarter.

The decrease in SG&A expenses year-over-year was primarily due to our efforts to adjust expenses in the current demand environment, along with less variable compensation with lower revenue. Sequentially, lower credit loss expense, variable expenses and legal expenses were the primary reasons for the decrease. Adjusted SG&A, excluding certain non-recurring expenses and stock-based compensation expense was $191 million in the first quarter or 16.9% of revenue compared with $239 million or 15.4% of revenue in the prior year period. The increase in adjusted SG&A margin year-over-year was mainly driven by lower revenue, offset in part by our expense management initiatives. In the first quarter, Nurse and Allied revenue was $824 million, down 33% from the record high of the prior year period and flat sequentially.

Average bill rate was down 22% year-over-year and sequentially was up 3%. Year-over-year, volume was down 11% and average hours worked were down 11%, and average hours worked were down 3%. Sequentially, both volume and average hours were flat. Travel Nurse revenue during the first quarter was $593 million a decrease of 39% from the prior year period and up 2% versus prior quarter. Allied revenue during the quarter was $196 million, down 8% year-over-year and flat with prior quarter. Nurse and Allied gross margin during the first quarter was 25.9%, down 30 basis points from the prior year period and down 70 basis points sequentially. Year-over-year, gross margin was lower, primarily due to lower average hours work. Quarter-over-quarter, higher pay packages and less labor disruption revenue weighed on the margin comparison.

Segment operating margin of 13.8% was 210 basis points lower year-over-year due to lower operating leverage. Sequentially, operating margin increased 110 basis points, primarily reflecting lower credit loss expense. Physician and Leadership Solutions revenue in the first quarter was $166 million, a decrease of 8% year-over-year and 1% sequentially. The Locum Tenens revenue was $107 million, down 5% from the prior year or growing by 11%, excluding pandemic-related assignments and up 3% sequentially. Interim leadership revenue of $40 million decreased 9% from the prior year period and was down 11% from prior quarter. Search revenue declined 16% from prior year and was flat sequentially. Interim and search revenue were down from prior year due to lower demand as hospitals focused on expense management.

Gross margin for the Physician and Leadership Solutions segment was 35.2%, up 20 basis points, both year-over-year and sequentially. The slight margin increase year-over-year was primarily due to improved gross margins for interim and locum tenens, partially offset by mix. Sequentially, margin growth was driven by the interim business. Segment operating margin was 15.1%, which increased 370 basis points year-over-year, mainly driven by lower SG&A expenses. Sequentially, Operating margin decreased 160 basis points, primarily due to favorable prior quarter professional liability and other adjustments. Technology and Workforce Solutions revenue during the first quarter was $136 million, down 6% year-over-year and up 2% sequentially. Within this segment, Language Services generated revenue of $62 million, an impressive increase of 25% year-over-year and 6% quarter-over-quarter.

BMS revenue of $54 million decreased 28% year-over-year and 2% sequentially. Segment gross margin was 71.4% and down 530 basis points from the prior year period and down 190 basis points sequentially. The decrease in gross margin year-over-year was primarily attributable to lower BMS revenue compared with the record high from a year ago. Sequentially, gross margin was lower, driven by a mix shift to language services. Segment operating margin in the first quarter was 49.3%, a decrease of 510 basis points year-over-year and down 90 basis points sequentially. The Consolidated first quarter adjusted EBITDA of $180 million decreased 30% year-over-year and increased 3% sequentially. Adjusted EBITDA margin of 15.9% was 70 basis points lower year-over-year and up 40 basis points sequentially.

First quarter net income was $84 million, down 42% year-over-year and up 3% sequentially. First quarter GAAP diluted earnings per share was $2.02 in the quarter. Adjusted earnings per share for the quarter was $2.49 compared to $3.49 in the prior year period and $2.48 in the prior quarter. Day sales outstanding was 55 days, in line with the prior quarter and two days lower than prior year. Operating cash flow for the first quarter was $43 million and capital expenditures were $17 million. As of March 31, we had cash and equivalents of $29 million, long-term debt of $990 million, including a $140 million draw on our revolving line of credit and a net leverage ratio of 1.3 times to one times. Today, we announced that we intend to enter into a $200 million accelerated share repurchase program in the coming days.

Year-to-date, we have bought back 2.4 million shares of stock for $225 million, excluding brokerage fees and excise tax on share repurchase. As of today, $427 million was outstanding on the repurchase program authorized by our Board of Directors. Moving to second quarter 2023 guidance. We project consolidated revenue to be in a range of $970 million to $1 billion, down 30% to 32% from the prior year period. Gross margin is projected to be 33.4% to 33.9%. Reported SG&A expenses are projected to be 19.1% to 19.6% of revenue. Operating margin is expected to be 10.6% to 11.2%, and adjusted EBITDA margin is expected to be 15.4% to 15.9%. Average diluted shares outstanding are projected to be approximately $39 million. Additional second quarter guidance details can be found in today’s earnings release.

Last quarter, we talked about 2023 returning to a normal seasonal pattern after a greater than seasonal drop in second quarter revenue. The pullback in spending by hospitals intensified in recent months. The level of travel nurse demand in March and April lead us to expect the third quarter to be our lowest revenue quarter of the year. Travel nurse demand improved modestly in each of the past four weeks. We expect to finish 2023 with approximately $4 billion in revenue and an adjusted EBITDA margin of approximately 15.5%. This view assumes modest improvement in demand from current levels. Now I’d like to hand the call back to Cary.

Cary Grace: Thank you, Jeff. Before we move to Q&A, I want to recognize the great work that our health care professionals and team members are doing on the job every day. Thank you all for your dedication and your consistent excellence. I also want to give special recognition to our nurses, as we celebrate National Nurses month. Recently, our health care leadership solutions team, known under the AMN and B.E. Smith brand was recognized by Modern Healthcare as the industry leader in executive search. Our congratulations go out to the whole leadership solutions team, which is well positioned to help clients implement their own change efforts in the fast-moving post-pandemic environment. The foundation of our company is our shared values, which are demonstrated in our second annual ESG report.

For AMN, this is not a year reporting exercise. We demonstrate how responsible governance drives better health and wellness, diversity, equity, the quality and inclusion and sustainability across AMN and our community. AMN is an industry leader in ESG performance and disclosure, and that’s something we are very proud of. Now, operator, please open the call for questions.

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Q&A Session

Operator: Thank you. At this time, we will conduct the question-and-answer session. Our first question comes from Kevin Fischbeck of Bank of America. Your line is now open.

Kevin Fischbeck: Great. Thanks. I appreciate the color on the seasonality through the rest of the year. I guess part of the reason why you were expecting some improvement was because you felt like there was kind of a disconnect, I think, between kind of the orders that are coming in and the fundamental demand that the clinicians were seeing, I mean, do you still feel like that is there? And if so, why is it persisting a little bit longer than you thought?

Cary Grace: Hey, Kevin, thanks for the question. What I would say overall and particularly if you look at some of the public comments the CEOs of some of the largest healthcare systems have said over the past two weeks. I think we were all going into this year knowing and frankly, we are partnering with our clients to reduce spend on a portion of their workforce that had gotten very escalated in the tail end of the pandemic in the first quarter of last year. So that was something we were doing in partnership. We worked through that in the last half of last year and into the first part of this year. And so we think we’ve made progress. I think, again, if you hear the public comment that some of those hospital executives will say as well as what we’re seeing with clients.

We think it’s going to continue to be an area of focus from a management standpoint. But we’re now getting to the end of how do we really start thinking about how we build our workforce more sustainably and more holistically to grow.

Kevin Fischbeck: Okay. Thanks. And I guess we’re hearing a bit more about customer churn, you mentioned I guess a little bit to your customers are looking for new solutions. And it sounds like you’re trying to respond to that. Do you think or do you expect additional contract losses from this type of valuation from the customer base, or do you see this as an opportunity to gain share from where you are, does your guidance assume any puts or takes from that dynamic? Thanks.

Cary Grace: Yeah. Let me kind of step back and talk a little bit about what we’re seeing in overall market dynamics because the same dynamics reflect clients who are coming to us as potentially looking for solutions away from us. Overall, clients are really taking their heads up post-pandemic and looking at how they’re going to rebuild their workforce for the future. And so as I mentioned in my opening comments a minute ago, the focus really had been over the past year about, how do we really think about cost management and getting costs — workforce costs into a sustainable level. We’re starting to see the end now of how do I really think about building a sustainable workforce for the future. And so, we are seeing clients be very open to new ways to do that.

And so, what this means is, we have probably the biggest pipeline from a depth and robustness standpoint that our team has seen of new opportunities. We’ve also had clients who have gone to new solutions. And so the things and the themes that clients are looking for are they want transparency, control and sustainability. There’s not one thing that clients are looking for in terms of the change that they want to make. It’s very specific to their starting point and the type of control that they potentially want over their workforce and how they’re going to build their workforce. The biggest part of our pipeline is MSP. So we’re continuing to see a tremendous amount of strength and interest in MSP programs overall. And where I’d say, when we think about the evolution of how clients are thinking, if a new client comes on to one of our platforms, typically, their incumbent could still be very involved in serving them in the future as a supplier.

And the same thing would be true, if we had a client where we were one of several MSPs and they were consolidating that we could still serve as a supplier or be part of the solution set. So, I would say, overall, when we look at our solutions, our scale, our brand reputation, our team, we feel like as clients are looking for sustainable total talent workforce solutions, that type of environment tends to favor us.