Q3 2019 Earnings Call
Greetings and welcome to the American Real Associates third quarter 2019 earnings Conference call.
At this time, all participants are to listen only mode.
A brief question answer session will follow the formal presentation.
If anyone should require operator systems during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host dairy <unk> Senior Vice President. Thank you Sir you may begin.
Thank you operator, good morning, everyone welcome to our third quarter 2019 earnings conference call webcast.
It's nice to be back into a normal rhythm for a quarterly reporting and we thank you for your interest in Eric.
Joining me for today's presentation, or Joe Carlucci, Chairman and CEO , Mark Herbert or interim CFO , Dr., Michael anger or National Chief Medical Officer.
Also joining on the call today, our sit come all our president Dr. Dawn Williamson, our COO enjoying Bernard our controller or.
I want to remind everyone that we may make certain remarks today that constitute forward looking statements within the meaning of the federal securities laws.
Companies actual results may differ materially from such statements.
You do a number of risks or uncertainties.
Including those described in our most recent Form 10-K and subsequent filings with the FCC.
Any forward looking statements made in this call our effective only as of today. The company undertakes no obligation to revise or update any forward looking statement for any reason.
On today's call will refer to certain non-GAAP financial measures reconciliations of these non-GAAP financial measures. The most comparable GAAP measures are available as important information concerning the use of non-GAAP measures generally in the press release and our current Investor relations presentation deck.
Both of which are available within me Investor Relations section of our website at American renal Dot com.
On today's call well, we will also be discussing our guidance for 2019, and our preliminary outlook for 2021 and note that our guidance ranges could be impacted by a variety of factors are discussed in greater detail and the risk factor section of <unk> SEC filings, including her most recent 10-K and press release.
The biggest swing factor to a financial results continues to be changes to our commercial rate in commercial treatment mix.
Also to remind you that our adjusted EBIT or less NCR calculations do not include cost of certain legal and other matters, including costs related to certain litigation in the FCC investigation.
And with that I'm pleased to turn the call over to Joe Carlucci.
Thank you Derisked and good morning, everyone.
I'm pleased to share some of the measurable progress experience during our third quarter.
Had a very high level, our third quarter 2019 results were consistent with our internal expectations.
We delivered strong treatment growth and commercial treatment mix trends with stable with the out of the second quarter of 2019.
We made further progress to improve efficiency during the quarter with operating expense initiatives.
At the same time, we strengthened our balance sheet by reducing debt and improving leverage.
Let me outline the key elements of our third quarter and a little more detail.
First and foremost we're committed to delivering high quality clinically integrated patient care and we believe our physician partnership operating model remains positioned well to sustain this commitment.
By staying true to this operating model. We believe we can continue to grow market share and take great care of even more patients into the future.
Along these lines, we remain very pleased with our treatment growth performance this year.
Our volume trends continue to track above the many of our industry peers.
And in fact demonstrates that more patients continue to choose a already facilities for their dialysis care.
During the third quarter of 2019 normalize treatment growth was 7.9% and year to date this growth metric was 7.7%.
We remain on track to deliver 7% to 7.5% normalized treatment growth in 2019, and we continue to expect approximately 2% of this growth to come from acquisitions.
Second we believe our payer contracting efforts over the past year have yielded stability with that with with our commercial pay a treatment mix over the past six months.
Commercial treatment mix remains stable with the second quarter of 2019 at approximately 12% and as a result, we believe our revenue per treatment performance for the year should be consistent with the guidance. We provided you in September .
Third our Q3 performance benefited from favorable expense trends.
At the clinic level, we've maintained discipline with our processes to thoughtfully manage labor productivity, while also sustaining low clinic level staff turnover.
Oh, Yeah. The day 2019 voluntary clinic turnover rate was 7.8% through September thirtyth.
Which is consistent with the turnover rates, we experienced during both 2017 in 2018.
Low clinic staff turnover, but not only helps us operate more efficiently, but it is important as we think about delivering high quality care to chronically ill patients who received the benefit of having good continuity with the local dialysis facility caregivers.
This is further borne out from the results of CMS just released for performance year 2018 in the ice C. H CAPHS patient satisfaction star ratings.
Based on our analysis of the CMS data.
Arrays average I caps star rating was 3.93 and is 16% above the industry average of 3.38.
That's a corporate level. We've also made further progress with cost initiatives, which have included targeted reductions in certain GE and they expenses increased the virtual meetings to reduce travel and other actions that we hit that have reduced the cost structure within certain departments and corporate office.
We believe there are still opportunities to improve our operating efficiency and reduce manual processes.
Fourth we are encouraged by our cash flow and collections performance during the third quarter 2019.
We generated 27.4 million of cash from operating activities during the third quarter of 2019.
Which compares to 25.4 million in the third quarter of 2018.
And 7.7 million during the first six months of 2019.
We reduced consolidated borrowings on our balance sheet by more than $18 million during the third quarter of 2019, including 5 million of payments made on our revolving credit facility.
We are delivering on the plan to moderate capital expenditures in the nurse near term.
The combination of.
That reduction and high a trailing 12 month adjusted EBITDA less and see I drove an important an improvement to our leverage ratio. So 5.6 times from 5.9 times at June Thirtyth 2019.
Phil.
As a result about third quarter 2019 performance and our internal outlook for the fourth quarter of 2019.
We are increasing and tightening our guidance range for 2019, adjusted EBITDA less NCR.
We now expect 2019, adjusted EBITDA less NCI to be in the range of 87 million, It's 89 million up from 85 to 88 million previously.
My carbons will provide some additional plots about our 2019 guidance and preliminary 2020 outlook in his section.
Finally, let me close by saying that we recently held our 16th annual medical directors to meeting in Boston, Massachusetts in mid October .
We had a robust attendance among opposition partners, who represented many of our affiliated nephrology groups from across the country for this to day clinical symposium.
I'm pleased to report to the opposition partners at this meeting were highly engaged.
We believe their interactions with our senior team experienced during the meeting demonstrated that our position base remains aligned with us as our clinical on business partners.
Long these lines I'm very pleased to have a national medical director Dr., Michael lender back on a quarterly earnings calls to provide the clinical update.
Mike.
Thank you Joe I'm pleased to join everyone today to provide the third quarter 2019 clinical update as you know areas business model allows its physician partners to take the lead into care of their patients in this physician driven model. Our goal is to provide the highest quality of.
Care.
You may already be familiar with the two clinical metrics, we've been sharing in our quarterly press releases. So I'm going to focus my comments on recent developments related to home therapies, and our performance with transplant readiness.
Two clinical measures in our earnings press release, our K T over v. greater than or equal to 1.2, and prolonged catheter use I'm pleased to report that these measures remained fairly consistent with recent results and are being well managed.
With respect to home therapies. This has been a significant area of focus for our organization and many of our nephrology groups and there has been even greater focus on the topic of home therapies within the kidney care community since the President's Executive order this past summer.
From a corporate perspective area has been developing additional resources for its clinics to provide additional training and support and we are exploring ways to further enhance the education process for patients prior to starting dialysis.
At our recent annual medical directors meeting in October a prominent part of our program. During the first stage covered topics related to how successful home programs are managed with strong physician and nursing leadership and how kidney disease education can be better incorporated into the overall process.
To help patients make informed modality choices.
Our A's physician driven model allows these choices to be made by patients and their families in conjunction with the support of the local caregiver team.
This is consistent with our operating philosophy and reinforces the physicians perspective that these types of clinical decisions cannot be made from a corporate office or made on a top down basis.
During the third quarter of 2019, 10.3% of Aries treatments were in homes therapies, including personnel dialysis and home hemo dialysis.
Since the fourth quarter of 2018, the home modality treatment mix has increased by 0.5 percentage points.
Given the additional focus in this area by our Nephrologists and coupled with a arrays commitment to increasing its corporate support we believe it it's likely that area is home treatment mix should continue to move higher in the coming quarters.
With respect to transplant readiness I'm pleased to share some data just released by CMS and the dialysis facility compare system, which is based on Medicare performance year 2018.
In the clinical measure for the percent of prevalent patience waitlist it for a transplant.
Aerospace company wide average was 19.2% and is above the industry average of 18.7%.
CMS also reported that Aries standardized first kidney transplant weightless ratio clinical measure averaged 1.165, which is above the industry average of 0.997.
We believe these results demonstrate that aerie affiliated Nephrologists are working closely with yes, 30 patients and transplant centers to make appropriate referrals for transplant evaluation in an effort to position as many patients as possible for transplant.
That concludes my remarks for the clinical section. So let me turn it over to Mark Herbers, our interim Chief Financial Officer.
Thank you Dr. anchor and good morning, everyone I plan to cover three key topics. This morning.
First I will provide some additional details regarding our third quarter financial.
Yes.
Second I will review, our balance sheet position and cash flow performance for Q3 and provide an update on certain legal and professional fee cost expected for the remainder of 2019.
And third I will review, our 2019 guidance and preliminary 2020 outlook.
First let me cover the third quarter trends.
Our volume performance remains solid this year in terms of normalized treatment growth.
Q3, 2019 treatments increased 7.9% consistent with the result were reported for Q2 of 2019.
Our third quarter non acquired treatment growth was 5.7%.
Acquisitions contributed 2.2% to our total normalize treatment growth.
Year to date for the nine months ended September 32019, normalized total treatment growth was 7.7%.
Our solid year to date volume trends are being driven by a combination of same market growth.
Ramping Denovo performance and three acquisitions, we completed during Q4 2018 and.
First quarter 2019.
We remain on track to deliver on the 7% to 7.5% normalized total treatment growth guidance for 2019.
And we continue to expect approximately 2% as growth to come from acquisitions. This year.
We do not expect to complete any additional acquisitions during 2019 and there are non currently in our pipeline for 2020 .
Q3, 2019 revenue per treatment was $338 and our year to date nine months ended September 32019 revenue per treatment was $337.
Recall, our guidance range for revenue per treatment is 2% to 3% below the full year 2018 revenue per treatment of $349.
Which implies a range of 338 to $342.
Based on our mix trending and expectations for quarter four revenue per treatment.
We are off we are tracking to the revenue per treatment guidance range for the year, although it has more than likely will be towards the lower end.
Revenue per treatment from Calcimimetic send the third quarter 2019 remained fairly consistent with the first half of 2019 at approximately $30 per treatment.
The lower revenue per treatment trend on year over year basis is explained it primarily by the impact from moving in that work with certain payers in a slightly higher veterans administration or be a mix within our commercial treatment mix category.
As planned we continue to see growth with in network pairs and payment rates that are generally blow that out of network pairs.
Our commercial treatment mix overall, including the VA was relatively stable year over year in quarter over quarter at approximately 12%.
In terms of patient care costs.
Q3, 2019 patient care cost per treatment were $247 or $5 per treatment improvement as compared to Q3 of 2018.
And a two dollar improvement sequentially as compared to quarter to 2019.
With respect to personnel costs, we are seeing consistent efficiency and labor productivity and experiencing normal wage increases.
The year over year comparison also reflects a more normal trend.
With respect to employee health benefit costs.
With respect to other patient care costs, we are seeing general improvements and ancillary costs, including essays labs and Calcimimetic as a result, a greater generic availability of the oral form.
In terms of general and administrative expense Q3, 2019, adjusted DNA expense per treatment.
$32 as compared to $39 in Q2 2019.
We implemented at certain gene a savings initiatives during the first half 2019.
And experience additional savings during the third quarter, driven by a number of factors, including lower corporate head count and our efforts to drive greater efficiency by reducing manual processes.
Please note our adjusted DNA as delineated on page nine of our press release in the supplemental business metrics table.
And the $32 per treatment figure excludes approximately <unk> point $8 million related to a prior year bonus adjustment.
And approximately <unk> point $3 million related to other nonrecurring items, such as the gains on the clinic sales.
On a reported basis DNA expense per treatment was $30.
From a modeling standpoint, please bear in mind that we held our medical director meeting in the fourth quarter of 2019, and there are other seasonal factors that we expect to cause our Q4 adjusted DNA to step up sequentially from the third quarter by approximately $2 on a per treatment basis.
For the third quarter of 2019, our adjusted EBITDA was 38.7 million in adjusted EBITDA less NC I was 26.5 million.
As compared to 37 point, Sixmillion and 24.3 million respectively in the second quarter of 2019.
Excluding the point $8 million bonus adjustment for prior years that is in our adjusted EBITDA less Sci.
Our Q3 adjusted EBITDA would have been 37.9 million in our adjusted EBITDA less then see I would have been 25.7 million.
I will now move on to a review of our balance sheet and cash flow and discuss the legal and professional fees associated with the non now completed restatement and other matters.
At September 32019, we had consolidated cash of 60.2 million.
Any consolidated debt, a 593.4 million net of unamortized discounts and fees.
Our debt balance includes 64.5 million of borrowings drawn on our 100 million dollar revolving credit facility, which is down $5 million from June 32019.
In the aggregate our consolidated debt balances decreased by approximately $18 million, including the $5 million revolver repayment $1.1 million of mandatory quarterly amortization payments and our term loan b the facility.
And approximately $12 million, a principal payments on a clinic level term loans.
Our quarterly principal payments on the term loan B facility will step up to 2.2 million per quarter beginning in 2020.
We will assess our cash flow performance each quarter to determine the pace at which we will continue to reduce our outstanding revolving credit facility Battle.
Adjusted for pro rata ownership of click cash and the pro rata portion of the clinic level that we guarantee.
Our adjusted owned net debt was 497.4 million.
At September 32019, or approximately $8 million lower sequentially from June 32019.
Our leverage ratio defined as adjusted owned net debt divided by last 12 month, adjusted EBITDA less and see I.
Was 5.6 times at September Thirtyth 2019.
And this is lower by 0.3 times from the second quarter of 2019 and is ahead of our plan due in part to strong cash collections.
Trailing last 12 months adjusted EBITDA less than CDAI improved 3.2 million to $89.3 million.
We now expect leveraged to remain around the mid five times level through year end 2019.
However, we expect it to begin to a proven 2020, particularly as the weaker first quarter of 2019 results.
Rolls off the last 12 month calculation.
Okay.
Moving onto capital expenditures.
For the third quarter 2019 capital expenditures totaled $3.7 billion as compared to $10.7 million during the third quarter of 2018.
Development Capex in Q3, 2019 was $2.9 million as compared to $6.6 million.
The prior year quarter.
And routine Capex was point 8 million as compared to 4 million in the prior year quarter.
Our capital expenditure reflect more moderate development activity and careful prioritization of our routine capex needs.
Our development pipeline remains active we plan to continue to expand our footprint into new markets as well its expand in existing markets with new clinics and additional capacity.
We are approaching our development activity in a thoughtful manner as we balance these growth opportunities carefully against our objective to strengthen the balance sheet.
During the third quarter, we opened one de Novo clinic and divested to clinics.
He divestitures generated $3 million of gross proceeds it after taking into account our share of the ownership.
The asset sales yield at NASSCO net cash proceeds to a array of $1.5 million.
At September 32019, we had 13.3 million of remaining assets held for sale and the balance sheet and we plan to execute on these selected assets sales over the next six to 12 months.
For the remainder of 2019, we expect to open one to three additional clinics before year end.
Consistent with our 2019 expectations to add six to eight denovo clinics plus the two acquisitions completed earlier in Q1 or 2019.
Moving on to legal and professional fees.
Professional fees associated with the restatement the FCC investigation in other legal matters that we believe do not reflect our core business operations totaled $9.6 million during the third quarter of 2019.
And have totaled 23.3 million year to date through September Thirtyth.
Given the timing of the 2018 10-K filing on September 15.
The heaviest activity related to the restatement was during the third quarter.
We expect these costs during the fourth quarter of 2019 to decline as a restatement costs wind down although we still believe there will be some ongoing expense associated with other legal matters.
Let me conclude my remarks, with a brief discussion related to our guidance.
We are updating our 2019 adjusted EBITDA less N C I to be in a range of 87 million to 89 million it.
It increase from their previous range of 85 million to 88 million.
The narrowing the range that due to the fact that there's only one more quarter remaining in the year in the primary drivers of the change are the improved visibility we have on Q4, given the stability in our commercial treating the mix in recent months.
And the point 8 million dollar favorable bonus adjustment for prior years, which is now included in the range.
Our preliminary outlook for 2020, adjusted EBITDA less N C. I range for 90 million to 95 million remains unchanged.
We issued this preliminary outlook on September 5th to provide directional visibility into next year and we believe it is prudent to table to more granular set up 2020 guidance until we complete or annual budget process as a result.
We will provide detailed 2020 guidance when we report our fourth quarter 2019 results in early March.
With that let me turn it back to Joe for closing remarks.
Thank you Mark in closing I want to think a our entire organization for their contributions.
And for their unwavering dedication to providing excellent patient care.
With that we'll be happy to take your questions.
Operator can you. Please open up the QNX session. Thank you.
Thank you we will now be conducting a question and answer session. If he would like to ask the question. Please press star one on your telephone keypad confirmation total indicate your line is in the question Q you Press star to if he would like to remove your question from the Q.
Participants using speaker equipment, it may be necessary to pick up your hands up before pressing the star keys. One moment. Please let me pull for questions.
Thank you. Our first question comes from the line of Stephen Tanal with Goldman Sachs. Please proceed with your question.
Hi, this hairs on for Steve. Thanks for the question, maybe just to start off I want to get a better sense of what drove patient care cost per treatment lower in the quarter looked like you're down 3% year over year, and maybe down a little bit sequentially. Just wanted to dig into that will then well you expect to be sustainable.
Going forward. Thanks.
Darren can you take that and then maybe mark can give some additional color. Thanks. Good morning, Harris and thanks for the question so in terms of the.
Patient care costs trending.
I think the main pieces are pretty stable.
Labour with wage rates up about 2%, there's still some benefit that we're seeing from labor productivity.
And then you know really the I think the biggest driver is from the ancillary side of things.
It would be a combination of lower USA.
Lower calcimimetic because of greater availability, the oral form in generic and and lab.
So those are the ancillary component and sequentially was down just a little bit.
We're still you know in terms of the Calcimimetic.
Not seen.
As much of a benefited you're hearing from some of our larger peers because of their much higher oral usage.
[noise] [noise] got it thanks, and then maybe going onto DNA.
Just what where are you seeing there that helped in the quarter <unk> per treatment basis looks like.
This is the lowest it's Dan on that metric and even on an adjusted basis now just wondering.
How much of that you expect to sustain going forward. Thanks.
Well I can take though.
Sure.
During the quarter, we're beginning to see the results of some of the initiatives we put into place earlier in the year.
We have replaced a lot of travel with dollar costs with video conferencing internally and for our training.
We've made other read head count reductions and efficiencies were automating a lot of our processes that were heavily labor intensive. So we're beginning to see the results are those impacts.
But we're also expecting that number and to tick up about $2 per treatment in the fourth quarter.
Because of the the bonus adjustment, we talked about earlier in the presentation.
That is now embedded in in the forecast going forward. So I would see it returns going up a little bit from the third quarter number.
It's still well below prior year, Yes. In addition to that I think in the fourth quarter will be medical directors.
Costs, which will.
Contribute to that tick up that Mark just mentioned last year, we had a medical directors moving in Q3.
Thanks, that's helpful. And then on commercial you know, we understand an uptick and in network commercial weighed on RPT for the quarter could you maybe tell us how that would have compared to twoq you if not for the uptick in.
In network commercial.
The dancing go though yes, so so Harrison, though I think really the increase in our in network mix is really more gradual sequentially. So that's that's not the driver. If you think about the third quarter RPP was 338 year to date it was 337.
The guidance for the year essentially a implies threethirty to 342, so we'd expected to be in range and that would imply that the fourth quarter.
Sequentially a little higher.
Then the third quarter in terms of the sequential trend from the second quarter. Two the third quarter. We did have a little bit of a stronger month in June and then saw the trends settle in closer to our guidance range. There's really no other major drivers to call out decide.
We refer to is the typical ups and downs and that's based on the commercial mix of the.
The plans that were seeing and also the gradual shift that I made reference to with our in network pay worse.
Great. Thanks, and then maybe going on to a.
2019 guidance, you just want to get a sense of what drove that for you guys. If that was expense driven or otherwise and then maybe a little bit on why you didn't flow that through to you reiterated 2020 guidance. Thanks.
Darryl yes, so I can take the last part first you know really the I think that on plan was to just give you the preliminary view on 2020 when we.
Filed the restatement in September and to.
Come back to more granular more detailed set of guidance for 2020, when we report the fourth quarter. So that was.
No the objective there as far as 2019.
There's only one quarter left in the year. So it made sense to tighten the range, we did increase it slightly and we did roll in.
The bonus adjustment, which was the prior year adjustment that we referred to on because in terms. The overall full year guide. It represents just a little under 1%. So wall. That's a prior year adjustment, it's not it's not moving the range in any material way.
Thanks, and maybe just one last one from me.
You know it looked like there was one additional treatment days sequentially do you have maybe a number for how much that might have held a total treatments in the quarter. Thanks fine with that.
I think it was but no I know that so that the normalization really takes that into a camera. So that's already reflected in normalized treatment growth figure that we're presenting thanks there.
Oh.
Hi, Thanks Arthur.
As a reminder, if he would like to ask a question press star one on your telephone keypad.
Our next question comes from the line of Peto, triggering with Deutsche Bank. Please proceed with your question.
Hey, good morning, it's just in Bowers on for Peto.
I'm willing to us so just good morning.
So just wanted to.
Go back on the <unk>.
You guys are taking some efforts there is so if we think about kind of the run rate is it is it fair to say somewhere like in between kind of where you guys. The level between this quarter and what you're looking at next for next quarter.
I think thats, a reasonable starting point, Justin you know that the $2 per treatment.
Step up in the fourth quarter will include seasonal factors, but we also have some seasonality as well in the first quarter of every year with higher payroll taxes and a shorter.
Or fewer treatment days.
First quarter, so I think but thats, a reasonable way to think about it.
Yeah.
Thanks, and then.
In terms of a in terms of commercial it the mix there. It's been seems like it's been fairly study you know.
Over the last.
Two years and just.
In terms of you know can you just give us a little more colour on the commercial environment like the mix. There is it you know is that something we think were.
Stable, there as well and then.
You guys have obviously, you've brought brought more folks and network you know what's kind of the contracting posture looking like for 2020 at this point.
Yes. Thanks, Thanks for the question Justin So we will give a more specific range for 2020.
Our P.T. when we issue our detailed set a guidance with the fourth quarter, but no just that being said the general framework underlying that preliminary 2020 outlook.
Essentially is number one mixes stable around 12%.
In network position also stable around 80% or just slightly above that.
We expect our like for like commercial rates stable.
Generally speaking and on the Medicare side, and we expect a tailwind from the base rate of about 1.7% or so but also expect that to be offset by the head win of the lower Calcimimetic SP reimbursement and so those are sort of the puts and takes on on the RPT side.
End of things hopefully thats.
Helpful Framework Justin.
Yeah, that's great. Thanks, Dara and then maybe just one more quick one what was the for Calcimimetic. So in the quarter on the cost side are you guys.
What was that.
Calcimimetic.
Really were a slight tailwind for us in 2019, and we expect that to be.
Headwind in 2020, we were not you know getting into the details of our per cost treatments in calcimimetic, but they've been.
Generally stable with some benefit.
In the small portion of our patients that are.
Being prescribed the oral version generic availability has increased.
A bid from the second quarter to the third quarter for us.
Okay got it thank you Don.
Thank you thanks Justin.
We have no further questions at this time I would now like to turn the floor back over to management for closing comments.
Yeah, Thanks, very much thanks for.
Participating on the call today.
We look forward to talking to you next quarter have a great afternoon. Thanks [noise].
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.