Q4 2019 Earnings Call

Greetings and welcome to pro forma financial Corporation's fourth quarter full year 2019 earnings call. At this time all participants are in listen only mode. A question and that's a social following the formal presentation. If anyone <unk> operators. This is during the conference VSBA stores or on your telephone keypad. Please note. This conference is being recorded I would now.

Let's turn the conference or what's your hosts prichard.

Vice President Investor Relations. Thank you you may begin.

Thank you operator, good afternoon, everyone. By now you should have received a copy of the earnings release food groups fourth quarter and full year 2019 results. If you have not a copy is available at the Investor relations portion of our website.

On today's call will be <unk>, Chief Executive Officer, and rocket Robertson, Vice President Finance and strategy.

Before we begin I'd like to remind you that somewhat comments made on todays call, including our financial guidance are forward looking statements. These statements are subject to risks and uncertainties, including those described for the company's filings with the FCC.

Actual results may differ materially from those described during the call.

All forward looking statements were made us today and the company does not undertake the uptick any forward looking statements based on new circumstances or revised expectations.

So all non-GAAP financial measures discussed during this call.

And so to the most directly comparable GAAP measures in the table attached to our press release.

Now, let's turn the call over told me Sam Lisa.

Yes, rich good afternoon, everyone and thank you for joining us for earnings call. If you haven't already please find a financial supplement on our website that provide some additional details regarding our recent financial results.

For the past several years, we've worked tirelessly to transform performance from a company that derived the success from a small number of large contracts into a highly dynamic company with diversified product offerings and client base.

We shared on our Investor website, the resources required to bring major contracts to steady state margin.

So its investments and share gains that we have made across your markets. We are entering 2020 with revenue growth and positive EBITDA.

Hard work and dedication drove strong operational results in Q4, we had revenue growth of 10% versus prior year and achieved our target profitability for fourth quarter of 2019.

We reported positive EBITDA of $6.5 million.

This is our largest positive quarterly EBITDA since 2016.

Additionally, fourth quarter EBITDA was approximately $9.5 million higher than the third quarter of 2019.

This turn from a negative Q3, two a strong positive Q4 EBITDA is due to continued operational improvements.

These improvements in the fourth quarter would not due to any large positive one time events. Rather these results are due to the hard work that we do every day.

We've talked to you on past earnings calls about inflection points needing patients and how we would need time to grow our health care business.

Just beyond the Medicare RAC contract strengthen our flooding gain market share a demonstrate quite growth.

We provided diagrams detailing a general investment return of our new contracts, particularly on the commercial side, which demonstrated the two plus years of heavy investments that are required before these contracts would show profitability and trend to steady state marches.

The fourth quarter of 2019 is the inflection point to which we have been speaking.

These results are real and are indicative of the potential that we believe our technology platform that organization will deliver going forward.

Most of our long term shareholders have patiently waited put us during this period with many of you adding shifts you're already large positions and I. Thank you for your confidence in our ability to execute on our stated strategy.

From a composition standpoint performance at the end of 2019 looks nothing what the company. It was just two years prior.

In 2017, I will be coffee business accounted for nearly 82% of our overall revenue.

Health care was just over 7.5% at the end of 2019 health care has grown to just shy of 30% of our overall revenues well recoveries remains a more balanced 60%.

Total revenue in 2019, this up 18.2 million or nearly 14% versus 2017 and health care revenues are more than four times higher than what they were just two years ago and we're currently projecting strong double digit growth in 2020.

It was a years some questions our decision to expand into the approximately four trillion dollar health care industry, where many companies have already established relationships. They questioned whether we would be able to meaningfully disrupt those relationships.

Just to clarify we're not a start up we had already made strong inroads in the health care markets going all the way back to 1999, when we worked on CMS receivables through our treasury contract.

Our analysis indicated that the dynamics of the health care markets, we're ready for the correct focus an opportunity to showcase our platform.

In this market, we would be able to demonstrate a significant uplift in results for perspective clients and establish performance as a strong competitor with a differentiated and more effective service offering which is exactly what happened.

Here's an anecdotal example, a one particular client.

We were hired by one of those nations largest m. Ceos as a second seat vendor to conduct the Medicaid reclamation.

Which is asset recovery and to expand identification of new savings in this capacity as a second seat vendor our results returned a 50% lift over the incumbent vendor.

Following this we were moved into the first position for five Trust states covering about 1 million lives and we again demonstrated impressive result, providing 75% gain over the incumbent across historical results for those states.

As a result of our hard work in strong results in 2019 that client canceled services with their incumbent vendor over 10 years and shifted all 25 of it states to perform it.

Despite early implementation challenges with the client we're happy to report that performance in Q4, 2019 was strong with robust momentum into 2020.

Similarly, our recovery operation remains a significant an important piece of our overall business.

Over the past several years, we have successfully extended recovery platform into additional markets with significant opportunities.

We had entered and are growing and diversified consumer and commercial markets.

We also continue to expand our work with clients in federal and state tax as well as federal Treasury receivables and health care recovery markets.

Related to the recovery activities for federal taxes Congress mandated the creation of the internal revenue service IRS private debt collection P.D.C. program to expand the customer surface capacity of the IRS by leveraging private sector technology and expertise to conduct outreach.

The taxpayers, who Oh, a particular subset of much needed federal tax revenue.

Tax Underpayments performance is one of four forms that firms that currently partners with the IRS for this effort.

Although the initial placement volumes were low when we commenced work under this contract in April of 2017, which reflected the iressa objective of a methodical contracts start.

The number of placements a federal tax receivables that we get from the IRS have more than tripled from what we had processed in that initial start up here.

Furthermore, since officially launching in 2017, the P.D.C. program is demonstrating significant value to the U.S. treasury.

It's driven dollars into the IRS to self fund the program and provided incremental flooding that allows the IRS to rapidly increased full time internal staff dedicated to tax collection.

Our long term strategy has always been to build a strong diversified business on our core strengths analytics innovation.

Appliance audit and recovery.

Where those capabilities combined and create unique strengths and value propositions to our clients. We believe we can win competitively and find a solid market opportunities.

Fourth quarter 2019 results were strong and we believe they show that we can accomplish and deliver great things with our rebuilt and refocus business.

Please don't typically go from reporting at EBITDA loss of $3.1 million in one quarter to positive EBITDA of $6.5 million in the next quarter.

We knew the heavy investment part of our transformation was largely complete and that we would succeed in achieving our goal of becoming EBITDA positive in Q4 2019.

We accomplished this purely on our operating success and we believe is indicative of our future results.

With that I'd love to introduce real hit redemption, Donny, our vice president of financing strategy to walk you through the results of the quarter.

Robin.

Thanks, Lisa in Q4 of 29 team, we reported revenues of 43.8 million, which was in line with internal projections and 10.3% versus prior year period.

Adjusted EBITDA in the fourth quarter was 6.5 million compared to 2.5 million in the prior year period, and a loss of 3.1 million in the third quarter up this year.

For the full year 2019 reported revenues of 150.4 million compared to revenues of 155.7 million for the full year 2018.

However, as a reminder, our 2018 revenues included a one time benefit of 20.4.

Related to the net impact of the termination of the company's 2009 CMS region contract.

After adjusting for this release full year revenues in 2019 weren't increased 18.2% over 2018 revenues of 127.3 million.

Adjusted EBITDA for the full year 29 team was a loss of 3.2 million compared to an adjusted EBITDA loss of 5.2 million in 20, <unk>, which excludes the impact of the CMS reserve release.

Overall, our operations benefited as our investments in key helped her contract starting to achieve steady state contribution margins with further growth potential and have them back when other means your contracts continues.

Health care revenues in the fourth quarter of 29 team totaled 14.3 million, which was 44.4% higher than in the fourth quarter of last year, and 32.8% higher quarter over quarter.

A sizable increase reflects the positive strides we made relevant relative to the aforementioned investments across both Cmos and our non federal client base as well and continued expansion of both our audit and coordinator coordination of benefits offerings.

For the full year 2019, healthcare revenues were 43.3 billion, an increase of 66% as compared to our 20 team health care revenues of 26.1.

Which again excludes the onetime benefit from CMS reserve release, all the prior RAC contract.

We're very excited about the progress that we made a driving growth in our health care markets as Lisa mentioned health care markets now represent roughly 30%.

Versus just under 10% two years ago and.

And we anticipate that our health care business will continue to grow both our audience.

Right.

Total recovery revenue in the fourth quarter was 25.2 billion, which was essentially flat with the fourth quarter of last year and up 24% from Q3.

For the full year 2019, we reported recovery revenue 89.6 million, an increase of 7% versus 22.

Although student loan revenues are Cameron girls as expected due to the macro trends on the guarantee you see market. Our overall diversification strategy. That's helped offset those declines we've made a strong traction and growing our diverse I can see one commercial debt service offerings, including the success of the IRS program, which has been good for government taxpayers no longer term.

Additionally, we've continued to see growth in our E contracting opportunities.

After receiving the revenue composition charts are included in the financial supplement.

Site, a recovery markets outside of guarantee agencies student loans.

Were over 50% of recovery related revenues.

That's why 2019 versus 18% recovery related revenues for 2017.

[noise] expenses.

In the fourth quarter of 39 million, well 1.2 million lower than the prior period. The decrease in cost was mostly due to our commitment to improving the productivity executing on that business development initiatives and thoughtfully engaging expense restructuring.

We conducted our annual goodwill impairment tests on 12 31090.

With that test we report a 7.2 million dollar non cash impairment charge to goodwill in the fourth quarter 2019 results.

Goodwill was originally recorded as part of open on the acquisition of Dcs in 2004. This impairment charge will not having any impact in the future operations or any effect on our liquidity cash flows or compliance with the financial covenants that North America underwritten.

With that I'd like to turn call back over to lease outs you. Some closing remarks before we open up your questions Lisa.

Thanks, Rohit, we are excited for 2020 and beyond that's our larger contracts are now actively moving into the positive EBITDA phase that we expect will strengthen and drive our business in the mid to longer term.

As a reminder, while many of our contracts have begun to turn profitable. There are number that are still in the first two years were heavier investments are required.

As we've previously announced we are reiterating our full year 2020 revenue guidance of 170 to 180 million a projected increase of 16.5% at the midpoint and adjusted EBITDA to be between 12 million and 15 million.

We are excited to continue pushing forward on our positive trajectory into 2020, and we plan on continuing to strategically invest in expansion across all markets.

We're excited about the long term prospects of performance and believed that we can achieve a 200 million revenue target into future.

As we look at driving continued sustainable growth beyond that number we may choose to make investments in the business on the expense side.

We should consider high return strategic investment opportunities, even if that means sacrificing a near term margin goal.

Lastly, we wanted to let our clients and investors know that as it relates to Kobin 19, and other health elements. We are following standard cautionary practices now were encouraging the adoption of good hygiene practices at all of our facilities with regards to ensuring the health and safety of our employees. Most importantly.

We have extensive business continuity plans that are retested annually for a variety of scenarios, including one such as this.

With that we'd like to open up the call can take your questions.

Thank you at this time will be conducting a question answer session. If you will notice question. Please press star one on your telephone keypad a confirmation so in the Carolinas and of course in Q you me per store to fuel at your move your question from the Q for participants using speaker equipment, and maybe lesser to pick up your answer before person Sarkies one more.

Leases, we pull for questions.

First question comes a lot of Brian Hogan with William Blair. Please see with your question.

Yeah.

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Hi, Brian.

My first questions actually you're gonna be on leverage.

On your and your covenants, obviously had a.

Covenant waivers.

I believe that extends through the second quarter.

But I guess could you remind me on your how comfortable you fill them.

Staying within those covenant ranges, given your EBITDA guidance and basically as I get to the quarterly cadence and.

Your EBITDA.

Obviously, you mentioned that there are some.

Contracts that are in ramp up mode. So should we expect mechanism.

Negative EBITDA in the first quarter or is it still going to be positive going on so I think we're expecting positive EBITDA every quarter brand and especially coming out of a very strong Q4, we had great operational momentum that we believe is carrying forward into 2020, I think you know as we sit here, but we feel like we.

Having really good results from operations and feel like every quarter is going to be up a very is a positive EBITDA quarter every quarter of 2020 now that said you know obviously the Ur Cobot 19 issue is evolving you know kind of almost every hour. So at this point we.

We have.

Only probably a couple of contracts, where we're we're sort of pulling back, but but most I would say almost all of our contracts are still continuing to push forward at the same momentum, but with that said I would imagine you know as we think about the impact of cobot 19 on the entire economy in the U.S.

If we have deleterious effect of the result of because Pentelic I would think that our lender would be willing to work with us on on any issues that arise out of that it would be unreasonable for a lender or otherwise not to consider what the current economy is doing and ER and the threat of the cobot 19.

So operationally, we feel very good about it but I'm clearly you know as we think about this kinda like we just.

We just we don't know yet what the impact will be we are obviously, hoping it will be minimal, but it just I think it depends on how long it lab and one other guidance as provided by federal and local government.

Sure have you seen any changes in.

Behavior, if you will lead to from.

As your outreach to.

And do in your work.

Oh.

Well not yet.

We're thinking this is a good time to find people at home and the recovery business because [laughter] most people will be at home, but we are obviously monitoring the situation and you know just just in terms of of impact to the business. So far we've but obviously none of our facility has an issue, but today that that we have.

Tried to take as many functions and operation remote.

In our health care business no I think everyone is remote and to the extent that we can do otherwise for other functions were clearly taking precautions to make sure that we keep our employee based at our contract continuing to run. So at this point I would say no but as you know every time you turn on the.

News it could change by the hour and so were very closely monitoring the situation. We have a business continuity team that has they stand up call every day and coal times a day if needed.

So we're we're managing the situation very very tightly.

Right.

Appreciate that you mentioned on the in your prepared remarks, a strength across the board to across all your businesses.

And I guess I didn't see that a student loan placement volume was a.

During the week, so I assume this some of the strength was coming from some of the subcontract a business as well.

But I guess can you expand on a particular, where you're seeing strength.

Sure well hit would you like to answer that question.

Sure.

Hi, Brian or so in that regard I think within student lending. His report the guarantee agency volumes, yes, those are declining and the related revenues declining, but something we kind of always known coming and planned for and we're seeing strength across almost every other recovery business lines, so with consumer and commercial that's on the IR.

Yes contract on our Treasury contract state tax contracts as well as some of the newer opportunities within deeper beer brand name are all showing quite strong and growing to counter that.

Sure and then or some of the treasury or the rest of was maybe no fourth quarter has historically been a little bit Oh, the seasonal bump the is that.

Well, that's the case or is that kind of inline with expectations.

They have to be yes to both of those so there is usually a little bit of a seasonal bump in the fourth quarter more so from the student loan market actually which was experience but also expected.

All right.

Switching over to the commercial health care trends.

It was a little lighter than than I expected, but they are still positive isn't.

Going the right direction I guess.

Can you discuss the pipeline. There now is that has a building and then just trends in that business.

Well it would you yeah exactly so.

Sure. So I think some of the strong commercial numbers, but maybe not as high as expected how to do with some of the implementation issues with with taking over.

For some clients any coronation of business space, it's something that we've kind of gone past now into 2020, so expecting a strong results continuing going forward and were additionally, I'm expecting double digit growth again within within the health care markets I'm totally out of existing client base, let alone a robust pipeline.

Not work continued to execute on so we're feeling very strong and got about that market.

Interesting.

And then from the CMS, particularly in the focusing on the right.

Are you.

[laughter] seen them loosen up on anything there or has there been any change or what's to come because it just solid execution.

It's so in terms of the overall program rules, we have not seen a change yet however, we still feel there's a lot of room for continued expansion within the current limits and the current cadence. They allow so it's been operational results and we expect that will continue to carries forward.

All right.

Shifting over to expenses.

I guess, how does how should we think about operating expenses going forward as you're investing a little bit more and some.

Contracts with a ramping up.

Turning the quarter was it was a nice you know under control.

Earlier impressive actually.

Given the jump on the revenues.

So I guess, how should we think about operating systems as a run rate I'm going forward.

I Wonder if I read I would think about them at stepping up slightly every corner as we continue to expand to one of our contracts as well and best in future growth.

I think where we ended the fourth quarter is probably good starting point and then it will increase from there as we're growing the business.

Alright, and then and then one last one I'm on a bigger picture.

Obviously, the markets aren't being super helpful here, but I mean.

Your interest expense is relatively high.

Interest rates.

I guess are there any opportunities out there to to refine that does.

Start Oh look up in the 20 2021 turn of EBITDA positive them, I guess, I mean comments around potentially doing that.

Yeah I think.

Yeah, Thanks throw that Oh, yeah, I definitely think where we're sort of seriously evaluating that opportunity, Brian because yeah. The interest rates a little high and as we look at sort of strong results as we head into 2020, we start to have obviously, we're going to de lever here fairly quickly. So feel like there were some pretty good opportunity to refinance the debt.

I think we're definitely looking at that we think you know, especially now where the I mean the market the debt market right. Now is I think it's changing obviously it for a very favorable terms. So as we look out into this year I think there there is there's a strong opportunity for us to to actually have Oh.

Less expensive.

Interest rate for sure.

Well we're seriously.

Evaluating that opportunity.

Interesting.

I appreciate your time, certainly looks like the businesses turning around and you can nice job navigating.

With Oh through the business today are currently been dealt a restaurant.

Thank you.

Ladies and gentlemen, this does conclude or question answer session I know well, let's turn the poor buckled released him for any closing remarks.

Thank you operator.

Hartson parents go out to all those who are impacted by Qubits 19, clearly, it's a oh serious issue. We just want every wants to know that.

That.

We're thinking about those folks we also want to thank our employees for their commitment for bringing their best to perform and we want to take our clients for letting a serve them and we want to thank our shareholders for continuing to support the growth of the company I think as we execute against our strategy and we appreciate youre being with US today. Thank you.

This concludes todays teleconference. You may now disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.