Earnings Call Transcript
AMN HEALTHCARE SERVICES INC (AMN)
Earnings Call Transcript - AMN Q3 2024
Operator, Operator
Good day, and thank you for standing by. Welcome to the AMN Healthcare Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Randall Reese, Senior Director, Investor Relations and Strategy. Please go ahead.
Randall Reese, Senior Director, Investor Relations and Strategy
Good afternoon, everyone. Welcome to AMN Healthcare's third quarter 2024 earnings call. A replay of this webcast will be available at ir.amnhealthcare.com at the conclusion of this call. 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 with me today are Cary Grace, President and Chief Executive Officer; and Jeff Knudson, Chief Financial Officer. I will now turn the call over to Cary.
Cary Grace, President and CEO
Thank you, Randy, and welcome to today's call. AMN Healthcare continues to build an attractive long-term story while we simultaneously deal with a challenging post-new market for our industry. Financial results for the third quarter of 2024 were above expectations. Revenue of $688 million was above the upper end of our guidance range, and adjusted EBITDA of $74 million was above the consensus of sell-side analyst estimates. Excluding some beneficial discrete items, our revenue was in line with guidance. We continue to see signs of a stabilizing market with increasing demand for travel nurse staffing and healthy demand in most other staffing markets. We have also seen relatively stable bill rates for clinicians placed across our nurse, allied, and locums businesses, and new order bill rates among our top clients are evenly divided between raising and lowering rates. The fact that some clients are raising rates is a significant change from the past six quarters. Nurse and allied travelers on assignment have been stable since July. Demand for travel nurse staffing in recent weeks was 60% above the low point in April, though still about 35% below the 2019 order level. Any areas of improvement in market dynamics have had little effect on near-term performance, but we expect them to be recently visible as we go through 2025. While competition to fill these orders has compressed industry gross margins this year, an increasing number of orders are priced below levels anyone will fill. Unfilled orders for nurse and allied, as well as vendor-neutral programs, increased from about 9% last quarter to 14% currently. Suppliers are increasingly not filling orders priced at levels that don't make economic sense, and clinicians expect to pay in line with broader wage and housing inflation. Our estimates indicate that travel nurse bill rates in the fourth quarter of 2024 have reached the low end of the 15% to 20% premium they maintained over the cost of permanent nurses prior to 2020, which could help explain the increase in unfilled orders in the industry. As conditions for healthcare labor continue to normalize, we expect margin pressure to subside as it did in past cycles. In some cases, the cost of alternatives to contingent staffing are already more expensive. Reaching this point is likely an important milestone for our industry's return to an improved operating environment. Across our businesses, AMN is responding aggressively to the current state of our industry. We are committed to being the most capable partner for helping clients develop and reach their workforce goals. Our progress on internal fill rates across nurse and allied has been positive, though affected by the same market dynamics that have resulted in an increase in unfilled orders. While we are ensuring that our pricing is competitive, we are doing so while delivering outstanding value and quality to our clients and healthcare professionals. We continued to build powerful solutions around our outstanding technology. Since I joined AMN eight quarters ago, the team has moved us from a lagging technology position to an empowered position where our clients and prospects have access to leading tools and technology to help them manage their healthcare workforce. In the past few months, we moved to net positive on the MSP win-loss score for 2024, elevated by our improved competitive stance. Our recent client summit in Dallas resulted in a great reception for our new integrated technology suite we call WorkWise. WorkWise integrates workforce planning and reporting, predictive scheduling, vendor management solutions, and candidate engagements. Our client demos last month resulted in consistently positive feedback, and we are energized about our market positioning. Throughout this year, we have seen increasing demand for total talent solutions, and our average number of solutions used by our top clients has risen to approximately 10. Because of our broad solution set, we are uniquely positioned to help clients build a sustainable workforce strategy. Now, let's turn back and review our third quarter results by business segments. Nurse and Allied Solutions reported $399 million in revenue in the third quarter, 4% better than consensus, due primarily to several beneficial factors that increased revenue by approximately 2%. Core performance was as expected with about 1% upside in volume, offset by bill rate in hours slightly below forecast. Segment operating margin of 8.8% was positively impacted by approximately 180 basis points from the favorable items. Physician and Leadership Solutions revenue for the quarter was $181 million, in line with consensus. Locum tenants revenue of $142 million was up 26% year-over-year, including the MSCR acquisition, and down 3% organically. Volume for our organic locums business was modestly better than we had projected. Interim leadership in search continued to have lower demand. Segment operating margin of 10% was lower than we had expected due to gross margin pressure primarily from mix. Technology and Workforce Solutions recorded third quarter revenue of $108 million, in line with consensus. Language Services, which had revenue of $75 million, up 13% year-over-year, saw several client disruptions caused by the Crowdstrike event and hurricanes in the third quarter that our teams helped them manage through. We continue to see strong client interest in our language services solutions. VMS revenue was $25 million in the third quarter, in line with our expectations. Now, I'll turn the call over to Jeff for more details about our results.
Jeff Knudson, CFO
Thank you, Cary, and good afternoon, everyone. Third quarter consolidated revenue was $688 million, above the high end of guidance. Revenue was down 19% from the third quarter of 2023 and down 7% sequentially, primarily due to lower volume in nurse and allied, interim, and search businesses. Consolidated gross margin for the third quarter was 31%. Year-over-year, gross margin decreased 290 basis points, driven by lower margins across all three segments, partly offset by a favorable revenue mix shift. Sequentially, gross margin was flat. Consolidated SG&A expenses were $150 million or 21.8% of revenue compared with $163 million or 19.1% of revenue in the prior year period, and $149 million or 20.1% of revenue in the previous quarter. The decrease in SG&A expenses year-over-year was primarily due to lower employee and professional service expenses. Sequentially, SG&A expenses were flat. Adjusted SG&A, which excludes acquisition, integration and other costs, legal settlement accrual changes, and stock-based compensation expense was $141 million in the third quarter, or 20.5% of revenue, compared with $157 million or 18.4% of revenue in the prior year period and $137 million or 18.5% of revenue in the previous quarter. Third quarter nurse and allied revenue was $399 million, down 30% from the prior year period and 10% from the previous quarter, primarily driven by lower volume and rates in travel nurse and lower volume in allied. Average bill rate was down 8% year-over-year and 2% sequentially. Year-over-year volume decreased 24%, and average hours worked were flat. Sequentially, volume was down 11%, while average hours worked were flat. Travel nurse revenue in the third quarter was $244 million, a decrease of 37% from the prior year period and 12% from the prior quarter. Allied revenue in the quarter was $141 million, down 16% year-over-year and 7% sequentially. Nurse and allied gross margin in the third quarter was 25%, a decrease of 250 basis points year-over-year, primarily due to deleveraging of housing and travel expenses. Sequentially, gross margin increased 120 basis points, mainly due to beneficial discrete items. Segment operating margin of 8.8% decreased 570 basis points year-over-year, mainly due to lower gross margin and deleveraging of SG&A expenses. Sequentially, segment operating margin decreased 160 basis points, driven primarily by prior quarter favorable insurance actuarial adjustments and continued deleveraging on lower revenue. Moving to the Physician Leadership Solutions segment. Third quarter revenue of $181 million increased 13% year-over-year with the growth coming from the MSDR acquisition. Sequentially, revenue was down 3%, driven primarily by lower volume in the search business. Locum tenants revenue in the quarter was $142 million, up 26% year-over-year, driven by the MSDR acquisition. Sequentially, revenue was flat. Interim leadership revenue of $29 million decreased 7% from the prior year period and 5% sequentially. Search revenue of $10 million was down 38% year-over-year and 23% sequentially. Gross margin for the Physician Leadership Solutions segment was 28.3%, down 510 basis points year-over-year and 220 basis points sequentially. The decrease in gross margin is primarily attributable to a lower bill-pay spread in locum tenants and a revenue mix shift. Segment operating margin was 10%, which decreased 350 basis points year-over-year, primarily due to lower gross margin, partially offset by SG&A leverage from higher revenue. Sequentially, operating margin decreased 160 basis points due to lower gross margin. Technology and Workforce Solutions revenue for the third quarter was $108 million, down 11% year-over-year as the revenue growth in language services was more than offset by the decrease in the VMS business. Sequentially, revenue was down 4%, primarily attributable to the VMS business. Language services revenue for the quarter was $75 million, an increase of 13% year-over-year and flat sequentially. VMS revenue for the quarter was $25 million, a decrease of 34% year-over-year and 9% sequentially. Segment gross margin was 57.9%, down from 65% in the prior year period, primarily due to a revenue mix shift away from the VMS and Outsourced Solutions businesses. Sequentially, gross margin declined 230 basis points, mainly due to lower margin in language services and a revenue mix shift. Segment operating margin in the third quarter was 39%, a decrease of 310 basis points from the prior year period, driven primarily by lower gross margin, partially offset by expense management. Third quarter consolidated adjusted EBITDA was $74 million, a decrease of 45% year-over-year and 21% sequentially. Adjusted EBITDA margin for the quarter was 10.7%, down from 15.7% in the prior year period, primarily due to lower gross margin and deleveraging on lower revenue. Sequentially, adjusted EBITDA margin was down 200 basis points driven by the favorable actuarial adjustments for professional liability insurance in the prior quarter and the de-leverage on lower revenue. Third quarter net income was $7 million, down 87% year-over-year and 57% sequentially. Third quarter GAAP-diluted earnings per share was $0.18. Adjusted earnings per share for the quarter was $0.61 compared with $1.97 in the prior year period and $0.98 in the prior quarter. Days sales outstanding for the quarter was 60, three days lower than the prior quarter and one day lower than a year ago. Since the start of 2024, we have reduced our DSO by 10 days. Operating cash flow for the third quarter was $67 million, and capital expenditures were $19 million. As of September 30, we had cash and equivalents of $31 million, long-term debt of $1.1 billion, including a $285 million draw on our revolving line of credit, and a net leverage ratio of 2.8 times to 1. During the quarter, we paid off $60 million of revolver debt, bringing the year-to-date paydown to $175 million. We proactively increased the maximum leverage covenant on our revolving line of credit from 4 times to 4.5 times through the end of 2025. We remain focused on paying down debt and returning to our target leverage ratio of 2 times to 2.5 times. For the fourth quarter, we project consolidated revenue to be in a range of $685 million to $705 million, down 14% to 16% from the prior year period. Gross margin is projected to be between 29.3% and 29.8%. Reported SG&A expenses are projected to be 21.5% to 22% of revenue. Operating margin is expected to be 1.8% to 2.5% and adjusted EBITDA margin is expected to be 9.2% to 9.7%. Average diluted shares outstanding are projected to be approximately $38.4 million. Additional fourth quarter guidance details can be found in today's earnings release. Now, I will hand the call back to Cary to further discuss fourth quarter guidance.
Cary Grace, President and CEO
Thank you, Jeff. As Jeff finishes his final earnings call at AMN, I want to thank him for everything he has done for the Company in his three years as CFO. Jeff embodies AMN's strong core values and has been a steady hand through a wide range of market conditions. I personally appreciated his partnership as I joined AMN and I can say with certainty that he will be missed, and we wish him much success in his new endeavor. Our fourth quarter outlook includes headwinds and tailwinds characteristic of current market conditions. The low end of our revenue guidance range for the fourth quarter is 1% higher than the consensus estimate. This revenue outlook includes $45 million in revenue we don't expect to recur in Q1, driven by labor disruptions. For the fourth quarter, our outlook for nurse and allied solutions revenue is 4% higher than the prior quarter. The other two segments have a revenue outlook about 5% below consensus estimates. For physician and leadership solutions, we're calling for revenue to be 4% lower sequentially in Q4, in line with normal seasonality. In Technology and Workforce Solutions, we expect the revenue trend for language services to remain seasonally flat in Q4, while VMS should trend sequentially lower in volume in hours, in line with the staffing market. At the midpoint of our adjusted EBITDA margin guidance of 9.2% to 9.7%, there is an approximately 125 basis point benefit due to the nurse and allied revenue that we do not expect to recur in Q1, including a benefit of 60 basis points to consolidated gross margins. While the market remains competitive after nearly two years of downward pressure, we see broader evidence of normalization in the staffing market, which could help us as we go through 2025. Our number of travelers on assignment declined through the first seven months of the year. In September, traveler count was slightly higher than July, and this stabilization has continued in the fourth quarter. Some clients are starting to raise bill rates in certain hard-to-fill specialties, as well as in areas where they need to increase capacity to meet strong patient demand. These are reasons for optimism, and we expect labor scarcity to reemerge as one of our industry's driving forces next year. Now, operator, please open the call for questions.
Operator, Operator
Thank you. At this time, we will conduct a question-and-answer session. Our first question comes from Trevor Romeo with William Blair. Please go ahead.
Trevor Romeo, Analyst
Hey. Good afternoon. Thanks so much for taking the questions. First of all, Jeff, great working with you the past couple of years. Best of luck going forward. I wanted to, I guess, maybe first just circle back on the margin outlook, maybe based on some of those comments at the end from Cary. I think we've heard a lot about gross margin pressure across the industry. It sounds like the guidance also includes some one-time benefits you called out; maybe excluding that, maybe it's in the 8s for EBITDA margin, if that kind of makes sense? Just thinking ahead, if we don't see much improvement in gross margins, can you kind of talk about some of the puts and takes for SG&A going forward, maybe for one, just how you plan to balance recruited capacity and such? Ultimately, I guess, trying to get at whether you think sort of that maybe 8%, 9% is the new normal or just any thoughts on that would be really helpful.
Cary Grace, President and CEO
Yes, Trevor, thanks for the question. To start, the factors that would contribute to an improvement in gross margins include a combination of mix and pressure related to bill-pay spread. Looking back, a positive impact could come from a recovery in some of our higher-margin solutions across each segment. This would include VMS in our TWX solution and search and interim in PLS. Additionally, we have a significant high-margin international nurse business that has faced challenges this year and will continue to be affected next year by visa retrogression, which we expect to ease by the second quarter of 2025. The first element that could enhance our gross margins would be a favorable mix of our businesses as we begin to see growth. We are facing very competitive conditions across all our sectors, and any improvement in bill-pay spread would also be beneficial. Lastly, regarding our EBITDA margin, we anticipate that as we see some of these improvements, we will find ways to offset the natural pressures from labor costs and leverage our SG&A as we grow this higher-margin business.
Trevor Romeo, Analyst
Okay. Thanks, Cary. That's helpful. And then maybe hitting on that broader solutions point. On language services, I just wanted to ask on that as that continues to, I guess, kind of become a larger part of the company from a revenue, but it seems like especially an EBITDA perspective. I was just wondering if you could share any updated metrics there, maybe your growth outlook for say the medium-term, including how much cross-selling runway you have left? And then also what kind of margins that business is running at nowadays?
Cary Grace, President and CEO
Yes, so we love the language services business. We continue to see very healthy client demand in that space. It is a high-margin business for AMN; within the TWS segment, it is a lower-margin business. If you look at Q3, our quarterly revenue growth was affected by a delayed ramp of a single large new client that we've talked about through the course of this year, partially due to hurricanes. We expect the ramp-up of the client to resume in Q1, so you should expect as we go into next year to see a ramp-up of growth in that business.
Randall Reese, Senior Director, Investor Relations and Strategy
Double-digits and 40-plus percent gross margins.
Trevor Romeo, Analyst
Got it. Okay. And then just maybe one really quick other one would be, I think you mentioned, Cary, the discrete items benefiting Q2 revenue or Q3 revenue by 2%. Could you just expand on what those were?
Cary Grace, President and CEO
Yes, I'll turn it over to Randy and you can give some details.
Randall Reese, Senior Director, Investor Relations and Strategy
They were primarily sales allowance and SLA true-ups in the Nurse and Allied segment in the third quarter. The consolidated gross margin excluding the discrete items would have been 30%, so it benefited by about 100 basis points.
Trevor Romeo, Analyst
Got it. Okay. That's all I had. Thanks so much.
Cary Grace, President and CEO
Thank you.
Operator, Operator
Our next question comes from Mark Marco with Robert W. Baird. Please go ahead.
Mark Marco, Analyst
Hey, good afternoon, and thank you for taking my questions. Jeff, I wish you the best in your future endeavors. It's been a pleasure working with you over the last three years, and I really appreciate all your help. Can we discuss the guidance for the fourth quarter? Specifically, if we focus on travel nursing and exclude the $45 million benefit related to labor disruption work, what would the fourth quarter guidance look like for travel nursing?
Jeff Knudson, CFO
Most of the revenue in that $45 million is due to the labor disruption. There are a few other factors, but essentially, if you remove the $45 million from travel nursing or from nurse and allied services, it will have a significant impact.
Mark Marco, Analyst
Right. I got that, Randy. I just meant if we just look at just the pure travel nursing, what would the year-over-year decline be? Or said another way, what percentage of nurse and allied would you expect to be travel nursing?
Randall Reese, Senior Director, Investor Relations and Strategy
Yes, let's take that offline.
Cary Grace, President and CEO
Hey Mark, if I refer back to the guidance we provided for nurse and allied last quarter, we indicated that we might see some scenarios where we would expect to be slightly down, flat, or slightly up, excluding the impact from the strike guidance we provided. In relation to that earlier guidance, our outlook for core NAS from Q3 to Q4 is expected to be flat to down low single digits, which aligns with what we discussed last quarter.
Mark Marco, Analyst
Okay. Great. That's really helpful. I appreciate that. And can you talk a little bit more about just what you're seeing, both in terms of, you know, the orders that you feel are relevant and fillable, and pricing, and also supply? And thinking about beyond the fourth quarter as we start thinking out towards the first quarter, because in a certain sense, it seems like things are basing out and we're starting to hit a bottom, but there's a couple of elements that make you wonder a little bit about that. And so I'm just trying to get a better sense for how you're thinking about that when you parse through all of the elements and specifically with regards to travel nursing.
Cary Grace, President and CEO
Yes. So if you take some of the comments that I made generally about some of these signs that we're seeing broadly around stabilization, whether that's in bill rate stability, the demand getting back to very well in actually the low-end range of contingent premium spend to permanent cost. The things, Mark, that you would still want to see are we still see clients underneath that in different places. And so we have some clients who, to get orders filled, will increase bill rates. We have some that are still trying to decrease them, and we see clients in different places on utilization as well. So while we've certainly seen progress, we want to see continued progress on that front. We have seen, I mentioned in my opening comments, an uptick in unfilled orders, which I think is significant given that it is an incredibly competitive environment. On balance, we probably have overcapacity in the travel nurse industry right now. You're starting to see some of that rationalize out. But you still see a very competitive environment and unfilled orders increasing. So I think you'd want to see some of those orders getting cleared by getting better matching expectations between the clients and the clinicians.
Mark Marco, Analyst
Great. What are your expectations on the VMS side? This would also indicate general order levels since you're filling your orders first. Additionally, what are the broader trends on the MSP side?
Cary Grace, President and CEO
Yes. And so what I would say on the VMS side is that does track the broader market. VMS was down in the third quarter; we expect it to be down in the fourth quarter. And I would say we're seeing plus or minus some similar patterns across the industry. Again, you have clients in different places. So underneath any of the trends, we would have some MSP clients that may be increasing this quarter and we have some that would be decreasing. If that's the industry trend, the other piece that we are seeing is we have been very focused on growing our portfolio. So we have moved in MSPs to a net win position year-to-date this year versus a net loss position last year.
Jeff Knudson, CFO
Mark, we also mentioned in the prepared remarks that within our vendor-neutral and VMS business, there had been an increase during the quarter in unfilled orders, which is an indication of how many orders might be mispriced versus the market. In addition, in our VMS business, we are hopeful and see a path to resuming sequential growth in revenue sometime next year.
Mark Marco, Analyst
Okay, great. And then one last question. Regarding the deleveraging you're experiencing in relation to SG&A and the margin profile, is this partly due to maintaining some capacity with the belief that we're seeing some stabilization? Do you feel you have excess capacity at this point in terms of recruiters, account managers, etc.? If that's the case, how should we consider the incremental margins when conditions eventually improve?
Cary Grace, President and CEO
So you should think about our capacity on two fronts. One, we would expect to get some productivity off of our current producer base as market conditions improve. So we do think that there is capacity, particularly as we complete some of the automation projects that we've been focused on over the past couple of quarters. We also have embedded capacity within our international nurse business. And so we have been very intentionally during this temporary period of visa retrogression to keep all of our candidates in line and ready to go. So as the retrogression dates improve, we can immediately get our candidates placed in the clients that have requested them. So there's capacity from that front, Mark, that we would expect you to start seeing in 2025.
Jeff Knudson, CFO
Mark, when...
Mark Marco, Analyst
Thank you.
Jeff Knudson, CFO
If we were to add $100 million back of international nurse revenue, we believe it would improve our consolidated adjusted EBITDA margin by 100 basis points. That's one of the best levers that we will have in terms of improving operating leverage. And we would expect to resume growth in 2026.
Mark Marco, Analyst
That's very helpful. Thank you.
Cary Grace, President and CEO
Thank you.
Operator, Operator
Our next question comes from A.J. Rice with UBS. Please go ahead.
A.J. Rice, Analyst
Hi, everybody. A couple of ones and then I might just ask you about '25, make sure I get the run-rate we're exiting the year at. But specifically, you're saying you picked out your net wins on MSP, but we're also talking about increased competition on the bill-pay spread and other places. Is there anything about MSP economics that's become more competitive? Is the competitive landscape reflecting itself a competition for MSPs as well?
Cary Grace, President and CEO
The competitive landscape is intense across all service models. A number of features of MSPs, particularly the lead-time changes during COVID, have contributed to this. I wouldn't say there's anything unique about MSPs compared to the overall market; the entire market is competitive.
A.J. Rice, Analyst
Okay. And on the Locums business, I think you mentioned the specialty mix dynamics was having some impact on margin. Can you comment on what types of placements you're making? Where the strength of placements is right now in Locums and maybe elaborate a little more on that, if I got it right that, that's a margin pressure?
Cary Grace, President and CEO
There are two key points regarding the locums space. Firstly, we are experiencing the same billing pressure seen elsewhere, which is the primary issue. The payment expectations in locums are particularly severe compared to nurse and allied placements due to the physician shortage and the associated revenue demands. Consequently, this has created a wider billing spread. Despite this, we continue to see strong demand in certified registered nurse anesthetists, although they generally offer lower margins than some other specialties. Overall, the main takeaway is that we are facing the same pressures affecting other areas of our business.
A.J. Rice, Analyst
Okay. Last question for me would relate to the comments you made, and obviously doing math on the fly always gets me in trouble. But you're saying, I think, if you take out the strike revenue for the fourth quarter and have a run rate, then you apply like an 8% EBITDA margin to that, that would sort of suggest on an annualized basis, you're jumping-off at a $200 million EBITDA run rate. And now I know Randy just said that if you could get the international back, that would be 100 basis points, which would make a difference. But is that the jumping-off point? And then are there obvious places to look for improved performance off of that exit year run rate from '24 to '25?
Randall Reese, Senior Director, Investor Relations and Strategy
When you go to modeling 2025, I suggest that you do normalized Q4, but it's a little bit different than the way you present it. The midpoint of revenue guidance, excluding the revenue that we don't expect to recur, would be $650 million. The midpoint of the adjusted EBITDA margin guidance would be about 8.3%. So you're several million higher on the quarterly run-rate of EBITDA there.
Cary Grace, President and CEO
And then, A.J., the other things that we took out, because it's hard to predict is strike. And so we have the largest labor disruption pipeline since I've been here. There's a number of CBAs that are up next year. It's hard to predict, but it is a very strong pipeline. We just don't put that in there.
A.J. Rice, Analyst
Right.
Cary Grace, President and CEO
And then you would start to see modest growth coming off the fourth quarter, particularly in businesses like PLS and language services that are seasonally low in the fourth quarter.
Randall Reese, Senior Director, Investor Relations and Strategy
Yes, we normalized Q1 in a conservative way, just taking out all of the labor disruption revenue, but we expect to have material labor disruption revenue next year.
A.J. Rice, Analyst
I got you. All right. Thanks, that's some helpful starting points.
Operator, Operator
Thank you. Our next question comes from Tobey Sommer with Truist. Please go ahead.
Tobey Sommer, Analyst
Thank you. I wanted to ask about the changes in the volume of orders related to the current billing rates for travelers on assignment. I want to ensure that we are using data that truly reflects demand that can be effectively met, rather than including unusually low rates that would not be profitable to fulfill. Perhaps you have already refined the data and presented it in that manner, but I'm not certain.
Cary Grace, President and CEO
If we look at finding clinicians interested in those roles, some positions are simply unfillable, while others fall into a middle category, and then there are those that can be filled. I don't have a specific number of orders that fit into each category because the underlying pay expectations are very variable. Currently, annualized RM pay is in the high single digits. The expectations from the first quarter of this year have also changed. However, we have observed that the number of orders that we believe will not be filled has increased from one quarter to the next.
Randall Reese, Senior Director, Investor Relations and Strategy
We did note, Tobey, that in our vendor-neutral and VMS business, we saw 14% of orders unfilled in Q3. That's probably representative of the proportion of orders that are kind of an extreme on the pricing.
Tobey Sommer, Analyst
So when you convey the percentage change in orders and compare them to prior periods or pre-pandemic, are you adjusting and filtering out orders that are sort of at nonsensical price for the market conditions?
Randall Reese, Senior Director, Investor Relations and Strategy
No.
Tobey Sommer, Analyst
Okay. What's a fair conversion of kind of assumption from EBITDA to free cash? And how do you see CapEx, because we just had some pretty heavy-lifting for CapEx, and with declining margins, I'm just trying to refine what the free cash profile looks like at the Company?
Randall Reese, Senior Director, Investor Relations and Strategy
We would typically expect a 65% conversion rate from adjusted EBITDA to operating cash flow, followed by capital expenditures. We anticipate that our CapEx will be lower in the fourth quarter, aligning it with revenue reductions. However, we have completed numerous projects this year, which accounts for the higher capital expenditures we've experienced.
Cary Grace, President and CEO
Hey, Toby, I want to provide some details on the projects we’ve finished. We’ve discussed ShiftWise Flex extensively and we are nearly done with the re-platforming of our VMS clients by the end of this year. We will mostly complete our MSP clients on ShiftWise Flex and finish that by Q1. The same goes for our applicant tracking system, which we aim to complete this year. We have several significant projects in place that will be completed. Consequently, along with our overall revenue situation, our CapEx will decrease next year.
Randall Reese, Senior Director, Investor Relations and Strategy
You may have noticed our operating cash flow as a percentage of adjusted EBITDA has been quite good this year-to-date. And we did have a three-day improvement in DSO in the third quarter. Our operating cash flow this quarter included an outflow for legal settlement. So it would have been a really boom quarter without that.
Tobey Sommer, Analyst
Thank you. If I may ask one more question. Over the past year and a half, you have renewed your focus on sales with the market and customers you previously engaged with. You have brought several brands together; what kind of progress are you seeing from that? Is this fully integrated into the business as of the third quarter, or do you believe you are still in the process of reengaging with non-core customers from three or four years ago?
Cary Grace, President and CEO
I believe we are still in the ramping phase, largely due to the typical sales cycle. For language services, this cycle tends to be shorter, while for MSPs, it can extend to a year or more. We are seeing positive indicators from our efforts to reengage not just with clients and prospects but also by broadening our market alignment. Our sales pipeline has shown quarter-over-quarter growth, primarily driven by an increase in vendor-neutral prospects. Since the launch of ShiftWise Flex at the start of the year, we have successfully built a pipeline around those capabilities and have seen progress with those opportunities. We are currently in a net win position year-to-date for MSPs, which marks an improvement from last year. Additionally, we've increased the average number of solutions we provide to our top clients. Our goal is to integrate our solutions into the pipeline and subsequently expand our offerings to those clients.
Tobey Sommer, Analyst
Thank you very much.
Cary Grace, President and CEO
Thank you.
Operator, Operator
Our next question comes from Joanna Gajuk with Bank of America. Please go ahead.
Joanna Gajuk, Analyst
Hi, thanks so much for taking the question here. So maybe first a follow-up, maybe I missed it, but when it comes to the demand trends, I know you compared it to 2019, but did you talk about, I guess, year-to-date or sequentially where are you seeing the demand? And I guess as it relates also to seasonal orders, any commentary there?
Cary Grace, President and CEO
Yes. If we examine demand across different sectors, travel nurse demand has risen since the start of the second quarter, and this trend has continued into the fourth and part of the third quarter. Demand was influenced by seasonal orders. While this increase has been positive since April, it still remains about 35% below pre-COVID levels. We are observing strong demand in allied services, surpassing 2019 levels, whereas locum demand is lower than last year but still remains above 2019.
Joanna Gajuk, Analyst
Okay. That's helpful. And I guess another follow-up on the discussion around the gross margins. So you're saying that the rates are stable, but there's still this pressure on compensation. So how do you expect this to play out into next year? I understand there could be some mix benefits if this international business comes back and such, but kind of just on maybe just the nurse piece, how you expect the gross margin? Because also you talked about competition there. So is there any indication of any change in competition, as in like easing that pressure?
Cary Grace, President and CEO
When you examine the current cycle, you may notice an overcorrection that eventually resolves itself, leading to some improvement in margins. We anticipate that this will occur, although it will take some time. An element of this situation stems from an oversupply of suppliers following COVID, which we have begun to observe. For instance, a supplier has retracted from the travel nurse segment in the third quarter, indicating that some rationalization is taking place. This reflects the demand aspect. On the mix side, our primary challenge in the nursing sector has been the international nurse situation and visa delays, which we expect to start easing in the second quarter of 2025. As we move towards the end of 2025, we anticipate some growth, which should accelerate in 2026. As that business begins to stabilize and transition back to growth, we expect it will positively influence gross margins and EBITDA margins for both our nursing and allied sectors, as well as our overall results.
Joanna Gajuk, Analyst
Do you anticipate that assets might be acquired due to consolidation, considering the competition and some companies exiting the market or not providing that specific service?
Cary Grace, President and CEO
I think if you just look at the shape of the industry and some of the fragmentation, along with clients wanting more tech-enabled solutions. I think those two things will drive consolidation in the industry. For us, we always look at opportunities that are going to either give us some unique capabilities that we don't have or would give us an ability to scale something where we see significant opportunities.
Joanna Gajuk, Analyst
Great. Thank you so much for the color.
Cary Grace, President and CEO
Thank you.
Operator, Operator
Thank you for your participation in today's conference. This concludes the program. You may now disconnect.