Q4 2019 Earnings Call
Greetings and welcome to the American renal Associates fourth quarter 2019 earnings Conference call.
At this time, all participants Arnie listen only mode. A question and answer session will follow the formal presentation.
Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded I'd now like to turn the conference over to your host Garen Clarke Senior Vice President. Please go ahead Sir.
Thank you operator, good afternoon, everyone and welcome to our fourth quarter 2019 earnings conference call and webcast. Joining me for today's presentation, or Joe Carlucci, or chairman and CEO, Mark Herbert for interim CFO Dr. Dawn Williamson our COO.
Also joining on the call today, our seed come all our president enjoying Bernard our controller or.
I want to remind everyone that we may make certain remarks today the constitute forward looking statements within the meaning of the federal Securities laws.
The company's actual results may differ materially from such statements due to a number of risks and uncertainties, including those described in our most recent form 10 k. any forward looking statements made in this call are effective only as of today and the company undertakes no obligation to revise or update any forward looking statement for any reason to.
Today's call, we will refer to certain non-GAAP financial measures.
Reconciliations of these non-GAAP financial measures the most comparable GAAP measures or 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 the Investor Relations section of our website <unk>.
Eric and renal dot com.
On today's call we will be we will also be discussing our guidance for 2020 I want to know that our guidance ranges could be impacted by variety of factors that are discussed in greater detail in the risk factors and her FCC filings, including our most recent 10-K and press release I also want to remind you.
That our adjusted EBIT, all lessens the I calculations do not include the cost.
Certain legal and other matters, including cost relating to certain litigation and the essence FCC investigation with that I'm pleased to turn the call over to Joe Carlucci.
Thank you Darin and good afternoon, everyone.
The Corona virus has proven to be challenging for our entire country and our health care system and I'm humbled by the dedication and hard work of all healthcare workers and especially the efforts of our organizations preparedness for cold at 19.
Hey array caregivers across 27 states are playing a critical role day to day to keep patience and staff healthy unsafe during this time.
Dr. Dawn Williamson, we'll be providing more detailed remarks on this topic in his prepared remarks, but I want to start by saying. Thank you to our staff physician partners for everything they're doing it in this rapidly evolving public health crisis.
Before I get into the quarter.
Want to make a fuel remarks about my decision to retire as CEO.
I have enjoyed of wonderful 42 year Korea, and the health care industry.
Co founding El Rey, some 20 years ago, and leading the growth of this organization for so many years has been the highlight of my career.
It has been an incredible privilege to work with so many exceptional in dedicated staff and physician partners.
Over these 20 years at El Rey I've been fortunate to see our company grow from one small clinic in Western Pennsylvania to nearly 250 dialysis clinics across 27 states.
We've accomplished this alongside the best position partners in the Nephrology community and the best operational and clinical professionals in the dialysis industry.
I'm so proud of what we have achieved in this time together and think now is the right time.
I am a new leader, who can further realized the company's growth opportunities in a way that's still prioritizes, our core values, which are so near and Dear to me and our entire companies culture.
In terms of my timing, there's never a perfect time to announce retirement.
But I wanted to make this announcement now to facilitate the search process for my successor, so that the transition can occur by the end of 2020 as intended.
I have agreed to remain with a array in my current role until a successor has started and I look forward to assisting in ensuring a smooth transition.
In the meantime, I'd say, great comfort in the strength of our team. The continued leadership within our senior management team and I remain optimistic about areas future.
Now onto the fourth quarter.
At least to share some of the progress experienced during our fourth quarter at a very high level, we delivered fourth quarter and year end 2019 results that were inline with the adjusted EBITDA less MCR guidance. We provided in November at the time of our third quarter 2019 earnings.
For the fourth quarter and for the year 2019, we delivered strong normalize told treatment growth.
We also produced very strong volume growth in home modalities, which reached double digit gains in Q4.
Our fourth quarter commercial treatments mix trends were stable with that of the second and third quarters of 19, and we have reached stability with or not with yet with our in network mix at yearend.
We made further progress to improve operating efficiencies during the fourth quarter with certain expense initiatives and anticipate these will result in additional savings in 2020.
While our yearend 2019 leverage moved up slightly from September 32019, due primarily to the timing of payments related to our restatement, we remain committed to strengthening our balance sheet over the course of 2020 by reducing debt and improving leverage from current levels.
Let me outline the key elements of our fourth quarter in 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 our market share and take great care for even more patients into the future.
We're very pleased with our treatment growth performance during 2019.
Volume trends continue to track above many of our industry peers and this fact demonstrates that more patients continue to choose a array for their dialysis care.
During the fourth quarter of 2019 normalize total treatment growth was 6.0% and for the full year of 2019. This growth metric was 7.3%, which is consistent with our 7.0% to 7.5% guidance range for two.
2019.
Acquisitions accounted for 1.6% of the 6.0% growth in Q4, 2019, and 2.0% of the 7.3% growth in fiscal year 2019.
We benefited in 2019 from the ramping of Denovos that experience certification delays in prior years as well as strong gains in home dialysis modalities.
We have invested additional resources in our home programs and our physician partners continue to be strong advocates for home therapies. When it is the right choice for the patient.
Normalized for clinic, the divestitures, our Q4 2019 home therapy treatment growth was 13% and for the full year 2019, it was 10%.
Normalized for clinic sales.
Our Q4 2019, Hong treatment mix improved to approximately 11% from 10% in Q4 of 2018.
As we look ahead into 2020 hour normalize treatment growth outlook of 4.5% to 5.0% growth and excludes any impact from acquisitions and also reflects the more moderate denovo opening pace, we've experienced over the past 12 months.
Second.
Our commercial treatment mix was approximately 12% during the fourth quarter and it remains stable with the second and third quarters of 2019.
Our in network commercial treatment volume mix for the year 2019 was 79%.
We exited the year in Q4 with an in network commercial treatment mix of approximately 82% and we expect to remain around this level for 2020 based on our contracting efforts.
Our revenue per treatment for the full year, 2019 was $334 or 4% below the $349 rate per treatment reported for full year 2018.
And this was slightly below the 2% to 3% decline assumed in our guidance.
As Mark Herbers will discuss Q4 2019 rate per treatment was slightly below our experts expectation due to weaker collection performance.
We have action plans in place improved collections for 2020.
Third our Q4 performance benefited from favorable expense trends.
At the clinic level, we've maintained discipline with our processes to thoughtfully manage label product labor productivity, while also sustaining low clinic level staff turnover.
Our 2019 voluntary clinics turnover rate was 7.8%, which is consistent with the turnover rates, we experienced during both 2017 and 2018.
Low clinic staff turnover not only helps us will operate more efficiently, but it is important as we think about delivering high quality care chronically ill patients who received the benefit of having good continuity with their local dialysis facility caregivers.
At the corporate level. We've also made further progress with our cost initiatives, which have included targeted reductions in certain GE and I expenses increased virtual meetings to reduce travel and other actions that have reduced the cost structure within certain departments in our corporate office.
Our operating plan for 2020 includes other actions designed to improve our operating efficiency and reduce manual processes. While also investing strategically in certain areas such as home therapies finance accounting and I'd say.
For.
We are providing a 2020 outlook for adjusted EBITDA less NCR that is consistent with the preliminary outlook first established in September 2019.
We expect 2020, adjusted EBITDA less MCR to be in the range of 90.0 million to 95.0 million representing growth of 3% to 8%.
Backers will provide some additional thoughts about our 2020 outlook in his section, but I want to emphasize that this range contemplates a meaningful reduction in calcimimetic revenue as a result of the reimbursement and the eight ASP changes for this drug class 2012.
With that I'm pleased to turn the call over to Dr., Don Williamson, our Chief operating officer to provide a clinical update Don.
Thank you Joe.
I'm pleased to join everyone today to provide the fourth quarter 2019 clinical update.
As you know Iras business model allows us physician partners to direct the care up their patients in this position driven model. Our goal is to provide the highest quality of care.
You may already be familiar with the two clinical metrics weve routinely been sharing in our quarterly press releases, so I'm going to focus my comments on recent developments related to home therapies. Our performance in 2019 on hospital days and close with some thoughts regarding the Corona evolve.
Chris outbreak.
The two clinical measures in our earnings press release, our Kt over the greater than 1.2 and profound catheter use.
I'm pleased to report these measures remain fairly consistent with recent results and are being well manage.
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 equal focus on the topic of home therapy within the kidney care community at large since the presidents executive order this past summer.
From a corporate perspective, I already has been developing more corporate 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.
During the second half of 2019, our home therapy treatment growth accelerated markedly and reached 13.4% in the fourth quarter up from 11.0% and the third quarter.
For the full year 2019, our normalized home treatment growth increased.
9.7% as compared to 5.0% in 2018.
During the fourth quarter of 2019.
10.6% of Iras treatments were in home therapies up 30 basis points from the third quarter of 2019, and up 70 basis points from the fourth quarter of 2018.
Home therapies include both parents and Neil dialysis and home Hemo dialysis.
Given the additional focus in this area by our Nephrologist and coupled with a arrays commitment to increasingly corporate support we believe it is likely that iras home therapy.
Treatment mix.
Should continue to move higher in the coming quarters and May outpace in center treatment growth given this additional focus.
With respect to hospitalizations I'm pleased to share that our 2019 performance.
Erase company wide average hospital days per patient was 10 days and this compares to an industry average of 13.65.
According to 2018 CMS data.
We believe these results demonstrate that a already affiliated nephrologist and local caregivers are working in that coordinated fashion to keep patients as healthy as possible. So they can minimize expensive hospital stays.
These efforts saved money for the Medicare program and commercial payers alike.
Finally, with respect to the Corona virus.
We have not yet experienced any operational disruptions as a result of the covert 19 outbreak.
It is hard to predict the extent of the outbreak and impact on our operations in the future.
I would like to take a moment and thank all of our staff and physician partners for the SEC exceptional effort that has been put forth on this rapidly emerging public health prices.
Over the last several weeks IRA executives senior management, along with our physician partners have been in many discussions to develop additional policies procedures and guidelines to assure that our patients and staff in our clinics and at our corporate office.
Protected and the best prevention procedures are in place and being followed.
Now as always we are committed to maintaining the highest standards of infection control on our dialysis clinics.
Following the CDC and CMS guidelines and adapting as new guidelines are released.
We are screening every patient for signs and symptoms of coated might teen before they entered the treatment floor and our restricting access to the treatment floor and waiting rooms to only patients.
This spring includes travel history exposure to any one known to have cobot night team and symptoms consistent with kind of at night team.
If the screen indicates that an individual may be infected.
The individual is placed in a designated isolation area and not allowed to enter the treatment floor.
We are not accepting international transplant patients at this current time.
We have implemented in steps to be make sure our clinics have additional protective equipment for the safety of our staff.
Based on the most recent information from our key suppliers, we are not yet experiencing any shortage of supplies and we will be monitoring closely our supply chain.
That concludes my remarks for the clinical section. So let me now I'll turn it over to Mark Herbers, our interim Chief Financial Officer.
Thank you Dr. Williamson and good afternoon, everyone.
I plan to cover three key topics today.
First I'll provide some additional details regarding our fourth quarter financial and operating trends.
Second I will review, our balance sheet position and cash flow performance for the fourth quarter and the year.
And third I will review, our 2020 outlook.
First let me cover the fourth quarter trends.
Our volume performance remained strong in Q4 in terms of normalized treatment growth the fourth quarter 2019 treatments increased 6.0% consistent with our expectations.
Our fourth quarter non acquired treatment growth was 4.4%.
And acquisitions contributed 1.6% to our total normalized treatment growth.
Full year 2019 normalized total treatment growth was 7.3% consistent with our expectations and this was up from 6.1% for the full year 2018.
Volume trends during 2019 were driven by a combination of same market growth.
Ramping de Novo performance and the three acquisitions, we completed during the fourth quarter of 2018, and the first quarter of 2019.
Our non acquired growth decelerated during the fourth quarter.
Due to our more moderate de novo opening pace over the past year. Although this growth rate is more consistent with the level, we expect for 2020.
We expect this reduced gross growth rate to continue into 2020.
Fourth quarter 2019 revenue per treatment was $328.
And our full year 2019 revenue per treatment was $334.
Although our commercial treatment mix and then network trends were consistent with our expectations.
Revenue per treatment was approximately $10 below third quarter levels due primarily to weaker collections performance.
We ended the full year, 4% below the full year 2018 revenue per treatment of $349.
And this performance was approximately 100 basis points below the 2% to 3% decline assumed in our guidance, although we were able to offset the impact with lower cost trends.
Revenue per treatment from Calcimimetic during the fourth quarter 2019 remained fairly consistent with the first three quarters of 2019 at around $30 per treatment.
In terms of patient care costs, the fourth quarter 2019 patient care cost per treatment or $246, which was a $1 per treatment improvement year over year and $1 per treatment improvement quarter over quarter.
With respect to personnel costs, we are seeing consistent efficiency and labor productivity and experiencing normal wage increases.
The improvement reflects lower ancillary costs, including essays in Calcimimetic as result of greater generic availability of the oral form.
As well as savings and other lab, such as laboratory testing.
In terms of general and administrative expense.
Fourth quarter 2019, adjusted gene a expense per treatment was $34.
Which was an $8 per treatment improvement year over year.
And as expected $2 higher from $32 in Q3 2019.
Due in part to the bonus reversal in the third quarter as well as the timing of our medical director meeting in the fourth quarter.
We implement at certain gene a savings initiatives during the first half 2019 and experienced additional savings during the second half of the year 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 GNS delineated on page 11 of our press release in the supplemental business metrics table.
For the fourth quarter of 2019, our adjusted EBITDA was 32.0 million.
And adjusted EBITDA, less and see it was 23.0 million.
As compared to 36.5 million and 24.7 million respectively in the fourth quarter of 2018.
For the full year, our adjusted EBITDA was 127.5 million.
And adjusted EBITDA, less and CIO was 87.6 million as compared to 141.3 million and 90.0 million respectively for the fiscal year 2018.
I will now move onto a review of our balance sheet and cash flow.
At December 31, 2019, we had consolidated cash of 34.5 million in consolidated debt up 587.6 million net of unamortized discounts and fees.
Our consolidated debt balance decreased by approximately 5.8 million and our consolidated cash decreased by 25.7 million quarter over quarter.
Adjusted for our pro rata ownership of clinic cash and the pro rata portion of the clinic level debt that we guarantee.
Our adjusted owned net debt was 515.2 million at December 31, 2019.
Up from 497.4 million at September Thirtyth 2019.
The increase in our net debt was result of cash payments primarily related to the restatement as well as the impact of working capital changes during the fourth quarter 2019.
Our leverage ratio defined as adjusted owned net debt divided by the last 12 months adjusted EBITDA less NCR was 5.9 times at December 31 2019.
And this is 0.3 times higher from the third quarter of 2019.
Trailing last 12 month, adjusted EBITDA, less NCR decreased 1.7 million quarter over quarter due to our weaker first quarter 2019 results and the stronger fourth quarter 2018 result, rolling off the last 12 month calculation.
Moving onto capital expenditures.
For the fourth quarter of 2019 capital expenditures totaled 5.2 million.
As compared to 15.9 million during the fourth quarter of 2018.
Development Capex in the fourth quarter 2019.
Lets 2.6 million as compared to 13.2 million in the prior year quarter and routine Capex was 2.7 million, which was consistent with the prior year quarter.
Our capital expenditures continue to reflect more moderate development activity.
Careful prioritization of our routine capex needs.
Our development pipeline remains active and we plan to continue to expand our footprint into new markets as well as 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 strengthen the balance sheet over the near and medium term.
During the fourth quarter, we opened two denovo clinics for the full year 2019, we opened seven denovo clinics and acquired two clinics and divested for clinics.
Moving onto legal and professional fees.
Professional fees associated with the restatement.
See investigation and other legal matters that we believe do not reflect our core business operations totaled $2.5 million during the fourth quarter.
Down from $9.6 million during the third quarter of 2019.
On a full year basis these costs totaled 25.8 million.
Given the timing of our 2018 10-K filing on September 5th the heaviest activity related to the restatement was during the second and third quarters.
However, cash payments related to the restatement work and the timing of certain working capital items contributed to approximately $19 million of cash used during the fourth quarter that we consider to be unusual in nature.
Excluding these items our cash flow from operating activities would have been approximately 22.7 million.
Set of the 3.7 million reported.
During the fourth quarter of 2019.
Finally, as it relates to the remediation associated with the restatement effort. We are pleased to report that we continue to make progress and that the processes. We put in place are functioning for financial reporting purposes.
As indicated in our 10-K filing the material weaknesses identified during the restatement.
And subsequently will be considered on remediation it until it's sufficient period of time has passed.
Through testing, we've determined that the controls were operating effectively.
We expect that timeframe to be at minimum one year from the time of our 2018 10-K filing on September five 2019.
Let me conclude my remarks, with a brief discussion related to our guidance.
We expect 2020, adjusted EBITDA less NCR to be in the range of 90 million to 95 million barring any future impact from cope at 19.
This outlook remains unchanged with the preliminary outlook, we first issued on September five 2019.
Our 2020 guidance takes into account the following key assumptions.
Normalized treatment growth of 4.5% to 5.0%, which excludes any impact from acquisitions.
Five to 10, Denovo clinic openings spread throughout the year.
Revenue per treatment or RPT that is expected to be flat to down approximately 1% as compared to full year 2019 of $334.
This assumes relatively stable commercial treatment and in network mix with Q4 2019 levels.
Please note that revenue per treatment from Calcimimetic is expected to decline approximately $10.
Offset slightly by the Medicare rate increase and other payer increases.
We expect NCS as a percentage of adjusted EBITDA to be in a range of 34% to 35% for the full year 2019.
We expect depreciation and amortization expense to be between four and a half and 5% of net patient service revenue.
During 2020.
Excluding 5.2 million of impairments related to assets held for sale.
Including 4.2 million in Q4.
DNA was 4.8% of revenue in 2019.
We expect interest expense to be approximately 11 million per quarter during 2020, and noncash stock based compensation to be approximately 2 million per quarter during 2020.
We expect capital contrail expenditures to be between 2.5, and 3.0% up net patient service revenue during 2020.
We expect leverage to improve by 0.3 times and 0.6 times at year end 2020, as compared to December 31 2019.
With that let me turn it back to Joe for closing remarks.
Thank you Mark and closed in closing I want to thank our entire team for their contributions, especially during this co bid 19 public health crises.
With that I'm happy to turn.
The call over to questions. Operator can you. Please open up the QNX session. Thank you.
This time, we will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad confirmation tone would indicate your line is in question Q you May press star to if you'd like to remove your question from the Q for participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys one moment. Please.
Well, we pull for questions.
Your first question comes from line of Andrew Mock with Barclays. Please proceed with your question.
Thanks first congratulations to Joe on your retirement than my question I. Appreciate the color on your screening efforts for the currently virus can you discuss in more detail what measures you plan on taking it when you're patients become infected.
Yes, Andrew Thanks, very much it's Joe I appreciate your comments.
I'd like to ask Soc that Don just to take that question. Thanks, Yes. Thank you Andrew.
All of our patients are.
Determined to possibly have covered that team we are referred for appropriate testing.
And at this time, we refer them to an acute care hospital for dialysis. We are currently working on a plan to final that finalize a plan to Dol laws. Our co bid night team all positive patients safely in the outpatient setting using cobot 19.
Only shifts.
If that is required.
These additional shifts will be set up and geographic locations to provide care. So that all the patients will be able to receive there.
Alice's treatments.
Regardless of whether they are cobot positive.
Or not and Andrew it's Joe we've been working very hard as you can imagine then.
We've set up a whole team here too.
To direct and work cooperatively with up physicians at the local level to continue to provide care to the chronically ill patients safely.
So thanks for that question.
Got it do you have any concerns cases, so far in the us.
No.
Okay. That's helpful and then I guess moving on the quarter your normalized non acquired treatment growth at 4.4% declined about 100 basis points from the prior year to date trend any additional comments on what you're seeing on volumes that contributed to the sequential decline.
Derek can take that hi, Andrew Yes, So I think would you saw in the fourth quarter is really what.
We would expect to see in 2020.
There was a deceleration and we've talked a little bit this year about.
The fact that we had seen.
Some pent up.
Ramping of clinics that were open in previous years that we're able to get their certifications and that deceleration was expected. So when you think about four and a half the 5% next year.
In terms of our growth outlook.
That excludes any acquisitions and would assume a more normal type of trend with non acquired treatment growth.
Also take into account the fact that we've seen a little more moderate opening pace.
Over the last year.
Got it that's helpful and then on the rate side, Joe You mentioned weaker collection performance in your prepared remarks can you elaborate on your experience there and what you're doing to improve the situation.
Yes, Joe I'm going to turn that over to Darren and Mark Herbers.
Thanks, Andrew Yes, so I think the collections performance was partly explained by really just a lot of activities.
From the remediation.
We think the collections team now has much greater focus on day to day activities and so we would expect to see some improvement in that area in 2020.
So again expecting an improvement.
From what we saw in the fourth quarter and really just that comes from greater focus from that entire team.
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Got it Okay and then last question on home dialysis, you mentioned that you're adding resources to your home programs can you give us a little more color on the types of investments that you're making and what are your expectations for home treatment growth in 2020.
I'll start it off a little bit where we're really looking at growing the home therapies program from the bottom up without physician partners, but we have invested nationally I'm going to turn it over a dog Williams for more information that yes, we have we've added another.
Home.
Care nurse manager here.
So that gives us.
An additional person here that's focused just on home to continue to grow we've had multiple conversations with our physicians. They are very much engaged after the presidents on announcement and so we continue to see our home growth.
Going very well in into next year and I'd, just like to add to that what we did was that we stratified all of our home programs and we.
Really looked at best practices in some of the locations throughout the United States on were replicating while trying to replicate what they do so this tremendous emphasis.
The local level at the national level and within our regional staff.
Alright appreciate all the color. Thanks.
Thank you.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad. As a reminder, if you would like to ask a question. Please press star one on your telephone keypad one moment, please while we poll for questions.
Hector I don't think we have any other questions in queue. So.
We'd like to thank everybody for participating.
Paul and wish you all well a safe. Thank you. Thank you all thank you.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
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