Q4 2019 Earnings Call

Hi, good morning, ladies and gentlemen, and welcome to the CRH Medical's fourth quarter 2019 results conference call. At this time all lines are in listen only mode. Following the presentation. We will conduct a question and answer session that anytime during this call you require immediate assistance. Please press star.

Zero for the operator this call is being recorded on Thursday March 12, 2020, I'd now like to turn the conference over to Richard There. Please go ahead.

Thank you Jessica and good morning, everyone I'm joined today by our CEO Dr. T shirt remind me.

The president at Siri Transfusion, Jay Krieger, and Vice President of course, what they call me Tom Sanders before we started like to remind everyone that certain statements you will hear today constitute forward looking statements within the meaning of the applicable security laws.

Portal assumptions definitions and cautionary statements about forward looking information and their risk inherent to our business. Please refer to the cautionary notes in our annual 10-K.

During this call will discuss non-GAAP financial measures indicators are performance you can refer to our management's discussion and analysis for the three in 12 months ended December 31st one night team for the reconciliation of non-GAAP measures to reported GAAP measures.

These documents are available at cigar Edgar.

And the Investor section of our website. In addition season note that we'll be using abbreviation G.I. to refer to Gastroenterologist. Finally, please be advised that are reporting and functional currency is the U.S. dollar that all dollar figures referenced today are in us dollars with that I will now turn the call over today.

Dr to sharpen money.

Thank you Richard Good morning, everyone. Thank you all such everyone on the call we know that there's some.

Very important things going on in the world, but we appreciate you joining us here as we discussed CRH its fourth quarter and year end 2019 results.

We're pleased to report that we've generated yet another highly profitable quarter on the back of 17% anesthesia volume growth and we closed two acquisitions from our robust pipeline. Despite a challenging finished 2019 will note that our continued progress in execution as we manage our threw out through excuse me through our payer related headwinds in order.

The best positioned the company for sustainable long term growth.

These headwinds impacted our fourth quarter growth and profitability more than we had anticipated and while frustrating to us. It also strongly they also excuse me strongly validated our earlier decision to transition away from non contracted volumes in order to become a more fully contracted provider.

Let me just discussed this and other initiatives and some further detail so first.

With respect to business development during the fourth quarter 2019, we doubled the size of our business development team. In addition to expanding this BD team. We also expanded a variety of approaches that we can use to engage with perspective targets.

We envision growing or anesthesia business now through portfolio approach with the mix of de Novo deals coupled with more traditional capital deployment related transactions.

We view these novels as an attractive means of development as they tend to be a cashless sweat equity means of entry into market.

That being said, we have multiple multitude excuse me of deals in our expanded pipeline.

That are either pending closing four in late stage negotiation and we're actively working to close those deals we expect our acro acquisition capital spending in 2022 approximate our recent historical levels and spend.

Second a key part of our anesthesia plan revolves around our payer contracting strategy and in mid 2019 ready to transition towards more fully contracted case mix with an eye towards revenue per case and margin stability and visibility, especially given the heightened industry focused on non contracted billing and we find ourselves right now very.

The much in the middle of that transition when the original surprise building legislation with its very air favorable a framework seem likely to pass towards the end of 2019.

Payers sensed a they're upper hand.

Became very aggressive in driving down uncontracted payments throughout the industry significantly more than we expected.

Well this validated our strategy to transition to more fully contracted business mix. It did have the effective reducing our 2019 or case revenue and profitability as we adopted a less aggressive response, so that we don't impair our payer relations that for a go forward state as compared to our peers, who have employed litigation and.

Hi, patient balance billing among other tactics in their responses.

The other affected that in pending legislation, though is that it appears to us a pairs are not engaging in good faith negotiations until a final bill is passed and with the slippage in the timing of the final legislation to now May 2020.

This dynamic is create some headwinds for us that have extended into the first part of 2020.

Fortunately a the current versions of the surprising building legislation appear much more provider friendly and we look forward finale within the next couple of lunch facilitating our continued transition back two or more fully contracted book of business.

Third initiative for us involves implementing strategies to generate growth in hemrick treatment volumes and more fully maximizing the potential of our own Regan segment, Tom Sanders, who has been leading the Ireagan segment now since January will introduce himself. So a little later in this call.

And then finally, we look to evaluate other ways.

Third the G. I practiced community a these efforts remain ongoing and we continue to actively exploring new opportunities.

I'll now hand, it off to Jay and then Tom before turning it over to Richard to review our financial since in more detail.

Thank you to sharp as Sean noted, we completed two transactions during the fourth quarter first was the exercise of an option to acquire controlling interest in a prior Mac development program tried to nation Associates second transaction was the acquisition of a majority interest in Florida Panhandle Anaesthesia associates.

As I mentioned on the last quarter's call and is to Charlotte. It you earlier. In addition to our core acquisition oriented BV activity are expanding pipeline contains an increasing amount of nontraditional opportunities that we believe can contribute to shareholder EBITDA.

We believe it that our path forward is to grow from being nish acquirer of embedded anesthesia services into a market leading provider acquire and developer these services.

Providing Anastasia services 58, Associes across 11 states and serving now nearly 400000 patients per year provides us a scale that no one else in the G.I. spaces earned or employed or enjoys.

We believe that the portfolio approach towards business development that the sharp spoke of gives us greater flexibility as we go to market.

One such non traditional approach, we expect to be employing more is our de novo approach, where we developed a new antsy antsy jointly with the target Gastroenterologist group without a corresponding acquisition capital outlay, which yields Eurasian modest minority interests in these entities I.

I note that these de novo's, which have more of a below the line impact initially present future accretive acquisition opportunities for the company.

At the end of 2019, we effectively doubled the size or business development team again is to show noted and we look forward to executing across multiple business development fronts as we go into 2020.

We expect our acquisition capital spend this year to approximate recent historical spending levels and I will now turn call over to Tom Sanders.

Thank you Dan I'd like to start by saying how excited I am joined CRH in January although it's still fairly early in my tenure I've been very impressed with the team and our capabilities.

You know I've been charged with overseeing the old Reagan franchise, which the first time series is named a dedicated executive in charge of already got Reagan, it's far and away the leader for him right treatment within that you had community we have great relationships with the jet community having trained over 3000, you acquisition user Reagan and we're actively looking to strength.

Deepening those relationships even further.

We remain extremely excited about the long term market opportunity for Reagan as we expect patient demand to continue to grow although I'm still wrapping our arms around a reagan week, great synergy potential what the anesthesia business and we're actively developing initiatives that will once again in April Reagan to realize its growth potential.

Back to have more details to share with you later this year. Thank you.

Thanks, Tom or we reported Q4 revenue of 30.4 million a decline of 5.2% compared to the fourth quarter of 2018.

Anesthesia revenue declined 4.5% on.

On a 22% decline in revenue per case, while this is and why this is an unusually large declining revenue per case, we faced a number of headwinds in the fourth quarter related primarily to the issues that too sure outlined earlier with the pending surprise building legislation payers have aggressively reduced non contracted payments more than we expect.

The resulting in us having to adjust our 2019 estimated hair rates in the fourth quarter. We've been frustrated by these dynamics, we believe visibility into these trends has improved and should continue to strengthen following the expected passage of surprises going legislation in 2020, we service a record 94 three.

2503 patient cases in the fourth quarter, representing a 17% increase over the same period in 2018.

Sales of your Reagan system, or 2.7 million for the fourth quarter.

Drop of 11% as compared to the fourth quarter 2018.

Total adjusted operating EBITDA for the quarter was 12.3 million compared to 15.9 million during the fourth quarter of 18, adjusted operating EBITDA attributable to shareholders was 8.8 million.

During the quarter compared to 10.7 million for the fourth quarter of 28 team in total adjusted operating EBITDA margin was 40% in Q4 2019.

We finished 2018 was 6.6 million in cash cash equivalents and total borrowings of 20 of 69.3 million, we generated 29.1 million and free cash flow after distributing to noncontrolling interest during 2019, an increase over the 21.7, knowing that we generated during 2018.

We have $130 million unused borrowing capacity available to us through our syndicated debt facility.

I'll now turn it back to sharply for closing comments and then we'll open it up for questions.

Thank you Richard.

So I'll finish here with some additional color for the anesthesia business specifically for in 2020.

First we're projecting now full year revenue per case brand if you get.

In the range of 300 to $310 per case.

This contemplates a continued conservatism around estimated reimbursement rates, reflecting the current standstill environment that the payers are in given the legislative delays.

We believe that our cooperative approach towards payer relations will yield positive results as doing legislation is passed and payers resume working with us towards a more holistic contracting likely before mid year.

Second in terms of the quarterly cadence of our 20 joining financials.

We would expect that first quarter and second quarter revenue per case will be in line with fourth quarter 2019.

And we expect that as we progressive we transitioned throughout the year towards a more fully contracted case mix our strongest revenue per case for the year will deliver towards the end of 2020 at what we estimate to be around 330 per case.

And then third.

I mentioned earlier, we expect to deploy a sneak at least as much capital towards acquisitions in 2020 as we have in recent years at the same time, we're expecting to communicate other non traditional forms of BD activity in the coming weeks that will nicely complement our acquisition related growth, we expect that throughout the year as well.

And then finally at the healthcare company, we do have a particularly interesting the progression at Cobiz 19, Corona virus as its now throughout our geographic footprint in 11 states in the United States.

It has the potential to affect our Gastroenterologist partners and customers are providers are frequently traveling administrative staff and our patient population.

And given the daily even hourly updates on the spread of covert 19. These days.

And the resulting responses were unable to estimate the likely impact to our business.

I'm a business standpoint, we acknowledge there is a high potential for four disruption to our case volumes.

While we remain concerned for the well being of our employees in our patients.

We're watching these developing very closely and we will take any actions as they become necessary for the safety of our constituents.

I'll now turn it back to Janice just getting to Jessica for questions.

Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press the star followed by the one on your Touchtone phone you will hear three tone prompt acknowledging you request and your questions will be pulled in the order. They are perceived should you wish to decline from the pulling process. Please press the star followed by that.

And if you're using a speaker phone please lift the handset before passing any keys. Your first question comes from Richard close of Canaccord Genuity. Please go ahead.

Yeah, Thanks for the questions.

First of all on the payer contracting to shards Wonder and I think you're a commercial book of business or percentage of cases was around 60% in the fourth quarter is there any way to give us some sort a range in terms of.

How much of that 60% was related to non contracted cases.

Richard <unk> yeah. Thanks to the question you know, we normally do not disclose our non contracted mix you know, it's it's a ever changing a and as you know strategically we want that to be a declining number.

And.

Typically you'll see the effects of our strategy in our increasing revenue per case number throughout the year, but that's.

It's not a data point that we've disclosed.

Okay, and then with respect to I guess this question might be for Jay, but with respect to the pipeline, including non traditional opportunities and you mentioned denovo or.

Are there any other non traditional opportunities or is it just didn't know BOE and then how many didn't know boat.

Projects or yeah projects I guess, it's the right word do you expect to amounts are start up during 20 Twond.

Oh, Hey, Richard Thanks for the question I think I mentioned on the last quarter's call that the breakdown between than those in acquisitions was now starting to approach more of a 50 50 mix.

And I think that is we'll hold for this year.

And so half of half of the deal that we do we'll be in this de Novo category.

I think there the range with what we call de Novo, though is there's there's more flexible.

Structures on those the sweat equity model that I think we referenced.

It is a big one but to the extent that we're flexible on how much that sweat equity is.

How we work with groups is is what enlarges the market as we go forward.

Okay and my final question.

Co bid my team I know you did have wanted the back program is that you ultimately you acquired and the Washington in the state of Washington area can you give any thoughts in terms of what the impact.

Case volumes was maybe where as we sit here in the you know what second week of March Uh Huh.

No <unk> provide any indication, obviously, Washington was Uh huh.

Most states so far.

Obviously, our operators are in almost daily contact with our group out in Washington, as they are all of our sites.

It's a changing daily Ah report I don't think we've seen a a substantial difference at this point, but next week and next month or can be different stores as the sharp you know alluded to I think it's just too early to tell.

Okay. Thanks, I'll jump back to the Q.

Your next question comes from Angeleno National Bank. Please go ahead.

Hi, Good morning got it. Thanks for taking my question first of all started with a net in network I negotiations how long do you expect a these negotiations to last and Oh I mean, why would you expect appears to be a rushing to get to get you guys network around the second around second half a year.

Andrew Thanks.

Thanks for asking that you know we expect the pairs should resume those discussions I remember, it's a resumption in discussions most of these are things that were sort of in process before they kind of pulled back towards the end of 2019.

We anticipate that we should be able to pick things backup once their once they've kind of understood lay the land is with the new legislation.

The reason for them wanting to do it is fairly easy.

They it's important to payers that they have a as completed network as possible. A you know for their own sponsors are for their own internal book of business. So they can better compete for their own contracts with employer sponsored plans et cetera. So.

I'm not having complete networks not having contracted providers a in their key markets is.

Obviously, not not ideal for their business itself. They have they have a strong motivation to get to the table as well.

Okay. Thanks for that and out one more question, but is there any state or region in particular, where you had more of these out if not contracts.

Or are they all over the life.

Yeah, I think it's fairly disbursed throughout our network.

Okay. Thank you and last one for me I'd days sales outstanding or perhaps for Richard I do see that worry a little bit higher in Q4, I know, we had a a I can get guided to a bit of a lower range like how do you see the developing in 2020.

I think I think as we move to being more fully contracted 2020, we'll see that number go down.

I think that number that you see that has gone after is representative of the aggressiveness on a non pair on a non contracted payers. It's just taking longer for us to get paid and we're getting paid less.

Okay. That's it for me thank you.

Ladies and gentlemen, as a reminder, should you have a question. Please press the star followed by the White.

[noise]. Your next question comes from <unk> Capital. Please go ahead.

Hey, good morning, guys and.

Thanks for taking my questions.

The first question I had was I'm just hoping you could provide some color on the increasing case volumes just on the perspective of.

Kind of what you saw organically versus from a from acquisitions.

Yeah, we during during the year.

If we look at <unk>, if we look at the entities. If you look at the entities that we hit own at the end of 18.

But those did in 18, a we saw a pretty close to 5% organic growth rate overall on those at 3% was a growth rate quarter fourth quarter compared to fourth quarter 2018. So then the rest of the growth would have come from acquisitions.

Great and.

The majority my questions right.

So I'm just one final one is I'm, hoping you could provide a little bit of context in terms of.

Maybe this is for Tom I, just you know the kind of the go to market strategy and just the strategy in general and on how you anticipate a you know product sales.

He returned back to growth just any color there would be great [laughter].

Yeah. Thanks, So as we as I mentioned earlier I'm about 60 days and so it's early right now we're really in the mode of kinda discovering and planning meeting with both existing and prospective practices. So identifying areas of opportunity. We were probably in the next 30 to 60 days will a formulated more of our strategy and.

Plan.

To approach the market.

Thanks, guys I'll turn it back.

[noise]. Your next question comes from Richard close of Canaccord Genuity. Please go ahead.

Okay, great. Thanks for the follow up to show our I I guess I'm the Guy you Dan.

With respect to their rate change some of the progression through.

20, Twond me you know just help us out with your confidence.

In in setting those rate range is a you know what what provides you back confidences that you know based where the negotiations were before they stalled out.

Is that based.

Any final wise negotiations or using that as a rule of thumb just what are your thoughts there.

Oh, Yeah, Richard so the the way you should think about that is that you know will go into 2020 sort of at par with where we finished 2019.

Normally we would actually see a drop between fourth quarter and first and the following first quarter, because our case mix changes, it's more of a Medicare Medicaid mix.

This year, we have already seen the benefit of some of our contracting strategy, that's going to start to take hold in the in Q1. So we're not forecasting that drop because I think with good visibility into a into the new rates. It one of our compares.

As we progress throughout the year and again the wildcard of course is getting that legislation done, but as we as we progress throughout the years back to complete negotiations with several of the other major pairs a confidence comes around what weve been led to believe.

The range of Oh of outcomes I would say in those negotiations will be based on some really discussions we had already been having a basin something some things that were being advised with our from our partners on as well so as those pop in and then as we get credentials as we get providers credentials.

Of course, it a year, you'll see our Ah our revenue per case rate go up as I mentioned, we expect to exit 2020 at a at 330 for Kate.

Yeah, let me okay.

Richard Let me just add something to that I mean, we as we as we exit 2020, we will we won't we won't we won't be fully implemented so we'll continue.

As we head into 2021, completing our implementation strategy and.

Which we expect will yield even yield additional improvements and revenue per case.

Okay, and then as we think about you know I mean, obviously there is I guess for major players out there is there any.

Yes. It is that a majority of the 60% of your commercial Chase is.

Or maybe you could help us out with the size of that book to business or Bose for Payors insurers.

Yeah. The majority actually is probably Blue cross Blue Shield.

And it varies.

Siblings have the a the blues and then of course, United Cigna, Aetna makeup and Humana make up the a large part of the rest and then we have any number of sort of smaller splendor pairs throughout the throughout the portfolio that probably are maybe 5% to 7%.

Okay and my final question would be the legislature in itself.

It's really hard together.

Legislation passed.

All right I would assume ship here, although I guess this is one area that there is bipartisan support but still hard you got signal path. So.

Just give us your thoughts in terms of what are the key points, but legislation.

You know for you guys are for CRH and.

You deal with you know and associations or Abu RBS yourselves that or provide in perspectives. The status. So the legislation in terms of.

What makes May you know maybe the the magic.

Magical day and whatnot, so so they're in and around the legislation.

Yeah. The you know the important thing to us is that any any surprising legislation be as has there as possible to providers as well as payers. Obviously, we advocate more strongly for the provider side, but it needs to be a level playing field.

Which I think the original one that looked very close to passing a at the end of 2019 was not it was very pair oh. It was very pair friendly in that it didn't allow for it didn't left for an arbitration process. If indeed, the payer and provider hit an impasse in trying to negotiate an out of network or non contracted.

Bill.

That's an important provision for us to be able to have that that arbitration opportunity.

Not because strategically we expect to be adjudicating, a whole bunch of non contracted mill, but the ability to be able to do that forces in more I'm more fair a negotiation process in order to to achieve a <unk> direct contract with the insurer and that's ultimately our RCR ages ago I can't speak to other.

Our provider as a provider sets.

And so we'll be watching that legislation very carefully to make sure that the arbitration provision that's in there currently persist and that the that it's a.

Truly accessible pathway or again, not because we expect to be a using it are hitting it often but we do want that.

Well, we do want that to create a again a fair negotiating arena right.

Okay. Thank you.

Well, yes, no further questions at this time. Please proceed.

Well I think we'll close that out. Thank you everybody again for the time and attention this morning and a world.

Caution to be safe and healthy out there.

Take care everyone.

Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines.