Q2 2020 CRH Medical Corp Earnings Call

[music].

Good morning, ladies and gentlemen, welcome to the C. On each medical Q2 2020 results conference call.

At this time all lines I know listen only mode.

Following the presentation, we will conduct a question and answer session.

If at any time during this call you need assistance. Please press star so for the operator.

This call is being recorded on August 11, 2020, Oh now, let's turn the conference over to attack. Please go ahead.

Thank you operator, and good morning, everyone.

He joined today by our CEO Dr. T shirt remind me the President's your each anesthesia Jay Krieger.

And our vice President of commercial development, Tom Sanders before we start like to remind everyone that certain statements you. What's your today constitute forward looking statement.

Within the meaning of the applicable security laws for important assumptions definitions and cautionary statements about forward looking information and the risk inherent to our business. Please restrict the cautionary notes.

Our annual 10-K.

During this call we ever discuss non-GAAP financial measures this indicators performance.

Can you speak for term managements discussion and analysis.

Three and six months ended June Thirtyth 2020.

A reconciliation of non-GAAP measures to reported GAAP measures.

These documents are available on CR Edgar and investors.

Mr section of our website.

In addition, please note that we will be using abbreviation g. I refer to Gastroenterologist. Finally, please be advised that are recording a functional currency is the U.S. dollar and that all dollar figures records.

Our in us dollars with that I'll now turn the call over to Dr. T shirt, Vermont.

Thank you Richard.

Thank you also to everyone on the call for joining us to discuss CRH is second quarter 2020 result.

Like most of you were again doing this call tomorrow. So please bear with US an event that we experienced any technical issues. During this call.

So let's get started on our first conference call in May.

First quarter conference call excuse me, we attempted to provide as much color as possible on the attempt on the impact that covert 19 was exerting on our customer base and our business.

Paul that in April our anesthesia volumes are around 10% of pre its pre cobot expected volumes, whereas by early may at the time of that call. Our volumes had rebounded to roughly 25% or pre covert <unk> levels and we're improving.

We're pleased to report that as we stand here today, well use that further rebounded to approximately 90% of of our pre cobot expected levels I'm very optimistic at these levels will remain sustained as our assay partners have implemented strict safety protocols and are likely to be ideal locations for non emergent procedures as we go forward.

But of course, we remain mindful as we entered the.

All in winter months, we remain mindful that continued uncertainty with respect to this evolving trajectory of cobot 19.

Although the pandemic has pressured our customer base and our business. We believe we experienced as highlighted the attractiveness of our model.

Our ability to quickly respond to these types of challenges and adapt as volumes normalized.

As it before here, let me just provided an update around three primary pillars of our business strategy that we're focused on first we continue to remain in active dialogue to implement our rate strategy and optimize our contracted case mix.

We remain committed to reducing our non contracted case volumes on the strength of our capabilities in our commitment to patient care as well as our expanding scale now across 13 states. We expect that further progress on our rate strategy will continue to improve revenue stable stability and profit visibility for anaesthesia segment.

No cobot 19 has temporarily slowed some of our progress here, but we expect to deliver continued progress throughout the balance of 2020.

Second as we've demonstrated in recent weeks, we remained quite active with respect to our business development pipeline recall that earlier. This year, we temporarily halted our acquisition related capital spend due to the impact of covert 19. However, since June Eightth, we've announced for majority acquisitions and one de novo expansion startup joint venture.

With the acquisitions, bringing down nearly $10 million in consolidated revenues.

On an annualized basis into our anesthesia business.

Looking out from here, we believe the financial and operational pressures on G.I. associated with covert 19 have helped to spur additional business development opportunities for our company and we would continue to characterize our pipeline as robust we're optimistic that our business development momentum continued through the remainder of 2000 2020.

Then finally, we remain focused on implementing strategies to accelerate growth.

Oh Regan segment, while our Regan business was a bit slower to rebound relative to our anesthesia segment. It has done so and we would describe our engagement level with target practices as very strong and remain confident in our plan to capitalize on what we believe remains a compelling addressable market opportunity.

So overall, despite what was it immediately a challenging quarter in terms of our financial results I could not be more proud of how our team has navigated an incredibly difficult operating environment. I believe it's only served to boost our reputation among our current and potential G.I. partners and as further validated our business model or.

Ongoing execution across these primary strategic priorities will now help position CRH for strong long term growth [noise].

So with that I will turn this call over to Jay Krieger, our president and CRH anesthesia.

Thank you to Charlotte and good morning, everyone. Thank you for joining us on todays call.

I'd like to provide some highlights for the anaesthesia segment during the second quarter, which is obviously a challenging one for CRH as it was for nearly all of our fellow industry participants.

Second quarter end, Steve your revenue fell 55.7% from the second quarter 2000, $19 million to $12.4 million. The second generated adjusted operating EBITDA of $3 million, which was a drop of 77.6%.

Versus the prior year second quarter.

As to Sean mentioned and as we announced in our last quarter call. We had suspended acquisition spending while this unprecedented endemic impacted both our business and the economy in general.

As a methodical reopening starting to occur in May we made sure that we had strict guidelines in place to assess the level of our acquisition targets go forward case volumes and to assure that valuations were appropriate.

Only then did we begin to resume or acquisition spending on a case by case basis.

With that I'm pleased that we've been successful in completing a number of business development activities since our last conference call.

June we completed two acquisitions and one startup joint venture so.

Subsequent to the quarter end, we also completed two more acquisitions, including our first acquisition the state of Virginia, which expands our operational footprint to 13 states.

To date, we've completed $17.2 million an acquisition spending.

And we now provide anesthesia services at 64 locations, which is up from 58 A.S. sees that we had at the end of the first quarter.

Our business development teams looking forward to building on the momentum for the rest of the year and then on into 2021.

Sure I noted through difficult times really highlighted the value proposition fear age anaesthesia partnership can bring to our G.I. physician partners and we're encouraged by their willingness to hear our offerings.

Lastly, I think it's worth noting that at this point all of our affiliates are opened in operational with many of these operating.

At or near 100% of their pre covert expected volumes, we continue to working close partnership with our G.I. associates to ensure that assay operations are always safe and efficient for patients and staff alike.

I'll now turn the call overtime Sanders, you overseas or Oregon business segment.

Thank you Jay good morning, everyone second quarter or Reagan sales totaled 1.2 million.

Drop of 52.9% versus second quarter 2019 segment generated adjusted operating EBITDA 0.4, 6 million drop at 65.1% versus.

Second quarter 2019, we've found that as the restrictions on non emerging outpatient procedures were lifted in may of course on job and Jan Gee I prioritize their office staffing and see operations towards restoring endoscopy bottles.

As a result, the clinics are not yet operating at 100% of capacity, which has impacted the ramp up in the boss rig procedures. We are how we're seeing a positive train the July 2020, Reagan so being at 84%.

Parents to July 2019.

In addition, we've been progressively trending higher even into the past week during the past quarter, we were able to evaluate future needs of our partners more deeply and her team focused in on three key initiatives.

First is the GE Mark do you have market looks for diversification for the practices through better treatment options for their patients, including revenue opportunities. We're increasingly April two or piecing able to this whole Reagan county might treat that as a welcome ancillary service line. This ancillary strategy includes Codeveloping turnkey hemorrhoid treat program.

Initially for larger regional practice partners interest for the programs have been very encouraging thus far.

Secondly, we're developing a digital strategy I'm quite hard to support our parks partners patients in the medical community. This is aimed at identifying closing cared gaps in the practices existing patient base as well as identifying supporting patient demand for high might treat.

Lastly, we continue to have proven develop our CRM infrastructure for applied process automation.

Yes, its enhanced reporting decision support tools. This will allow us to prioritize are basically crisis in highly specialized resource and personnel for maximum.

We want to reaffirm, especially that after the 10 Demicks Henry marker remains is massively under treated as ever and we're well positioned to execute on the strategy is to take advantage of our market leading position.

Now turning the call over here, Richard there, our Chief Financial Officer.

Thanks, Tom.

We reported consolidated second quarter revenue was 13.6 million decreased to 55.4% versus the second quarter 2018.

Anesthesia revenue per case for the quarter came in up to 90. However, I would note that this includes a roughly 600000 dollar negative adjustment recorded in Q2 from prior periods. Excluding these adjustments our revenue per case.

Would have been approximately 303 compared to nine you step and we quoted in the first quarter.

Total adjusted operating EBITDA for the quarter.

6.9 million compared to 13.3 million in the second quarter of 2018.

We note that our second quarter 2020, adjusted operating EBITDA includes 4.9 noise related to capital.

Since programs, including the Paycheck protection program and funds received from the carriers Act HHS stimulus that adjusted operating EBITDA attributable to shareholders. During the quarter was 4.7 million.

Compared to 9.79.

In the prior Terry.

We finished the quarter with 5.2 million in cash and equivalents and 65.5 million in total borrowings.

Generated 9.2 million in cash flow from operations.

Well, that's 6.7 million in free cash flow.

And we invested 8.2 million during the quarter doesn't include what we did post quarter in acquisitions.

As of the June as of June Thirtyth, we have drawn approximately 66 nine from our credit facility. As a reminder, that facility includes 125 million committed portion and an accordion teach it actually increased 200 million <unk>.

Importantly, we note that the company remain in compliance with all credit covenants at the end of the second quarter.

I will now turn the call over to sharp for his closing comments.

Thanks Richard.

Before I finish out here, let me just reemphasize that our treatment volumes as of last week, both in the anesthesia and your Regan segment are now in the 95% range. So rebound has been a.

Steady across the company.

So I'd like to expand on just a few topics that we highlighted earlier in the call first with respect to our rate strategy.

We would like to provide investors with some insight into our progress in our expectations here, our non contracted case mix.

Currently represents approximately 16% of our second quarter total volume.

Dare to 19% backing fourth quarter of 2019.

We note that covert 19 has negatively impacted timing on our year to date strategy progress, but our objective remains on track to further reduce this non contracted case mix to less than 10% of our overall cases.

As we've stated in the past, we believe that our plan here will prove it accretive to our consolidated revenue per case.

And will greatly improve both our revenue stability and our profit visibility we look forward to updating you on that progress as our search as circumstances weren't.

Second given the unpredictable in evolving nature of the Koby 19 pandemic, we're continuing to refrain from communicating forecasts on revenue per case, but we can say we're encouraged by the stability that we've seen in this metric since the fourth quarter 2019, albeit during a period of greatly reduce case volumes.

And then finally, we remain bullish on our ability to extend our BD momentum through the balance of 2020 and beyond but as we indicated on our first quarter conference call given the lack of.

And transactions during the first several months, Oh, 2020 or acquisition related capital spending 2020 may not reach our recent historic levels.

So with that thank you for hearing our prepared remarks, and I'll turn this over to the operator for your question.

Thank you.

Ladies and gentlemen, we will not take questions from analysts should you have a question. Please press the star followed by the one on your Touchtone phone you well here with me Tom problem technology other classes.

If you I used to speakerphone, please flip the handset before pricing and <unk>.

One moment, please say first question.

Next question comes from Richard close from Canaccord Genuity. Please go ahead.

Great. Thanks, Congratulations performance in the quarter, despite a challenging environment. So to sharp just on a 16% case mix versus 19%.

At the end of last year fourth quarter of last year.

What is the time timeline to getting to less than 10% has that changed at all that pushed out like into.

Or call it mid 2021, or just any thoughts there.

Yeah, Richard I think previously we had communicated that we would.

We would strive to finish that in 2020, but as I'm, indicating.

Pandemic has certainly affected timelines I think our goal remains the same.

But I had the ability to predict that I think its oh has waned.

Okay and does the level of acquisitions impact.

The percent of case mix that's.

Not work versus in that work I know.

When you do an acquisition and you know it changes the ownership so oh God the existing contracts from the acquired essentially.

Go away and your operating our did not work or off contract I guess does that impact the percentages that at all.

Oh, Hey, Richard I'll I'll pick that one it will have a slight impact but you know.

If you think about our old model when we set up a new company, we started to contracting process at that entity level. What we're talking here is you know its contract that will be in place that we can just attached to a new entity. So so it'd be much shorter period of time anytime at all that they remain in that Uncontracted state when we set up a new entity.

[music].

Okay.

Appreciate that maybe a question for Jay in terms of you know as you look at the pipeline.

Is there anything to call out in terms of the quality side anything along that line.

Control opportunities.

I think the a what we're looking that today Richard is has been consistent with what we've been looking at the last couple of years you know the I think we have oh.

A mid size practice group that seems to be our sweet spot groups that that we can provide a lot of value to as a partner and that continues to be.

The primary piece of the pipeline.

As we go forward.

Okay, and then a follow up on that pipeline I'm. Just curious your you you called out or you know financial difficulties or operational difficulties or pressures I I guess is the right word during this time.

Yeah, I'm curious are you getting more inbound calls from practices, saying, Hey, you know, we'd like to talk to you or yes. It is the current environment driving some of that thanks.

Well I think I've made the following comment a in past quarters in years and that's that a you know any kind of chaos Creek can create opportunities. You know there was a month April where many physicians had more time on their hands. Unfortunately, you also couldn't meet.

With them in person I think that did create some increased interest and speaking with us and so I think we haven't will continue to use that as a springboard for future opportunities.

Okay I'll jump back into queue. Thank you.

Thank you. The next question comes from Amar Shaw from <unk> capital. Please go ahead.

Hey, good morning, guys and thanks for taking my questions. This morning.

Got it starts with.

The the color that you'd given on the sort of I guess.

Utilization levels to show you sort of said, 95% or 90% says the most recent number wondering if.

You can sort of.

Give us your take on what you think that a that average might be for.

Or for Q3 and onwards like do you think that let's say by Q4, we could.

It's it's reasonable to assume that that number 100% or do you still think that we're going to hover sort of you know almost at pretty called it but but you know 90% Mark for some time.

Yeah, Mark it thanks to the question good morning.

We actually do believe that we're going to see continued progress towards 100% a in fact this week as well we've seen a slight lift from last week.

Great and then right now going away. So I should say that or you know we have to condition all of our answers with the great unknown right without a you know any any external impact from a second recurrence or unexpected responses to the second recurrence could consider.

Only impact our business, but.

Absent that we continue to see a trend towards 100%.

Absolutely absolutely I think.

The question. This morning, we probably should.

Caveat holding that variable yeah.

[laughter], but I guess is just staying on that topic.

You'd kind of alluded to the fact that.

Oh scolded.

They'd be more demand for things like hemorrhoid treatment and.

The services you guys to but.

No well that line of thinking or you know.

Is that something that is more longer term or do you actually you think that that you know sort of pent up demand, let's say a see it's up to an aircraft, but how should we think about that.

No actually that is it.

Sort of continued longer term sustained trend I don't a I don't think this is a result than any catch up in pent up demand or anything.

Got it and then just just finally.

Sort of still thinking on that it's called the 19 topic do you think I guess just wanted to get some color on you know obviously.

Every business that that has been sort of service elements now have to take into account, social disentangle et cetera, et cetera, how should how does that sort of impact operating efficiencies. Good then with incentives and or how do you think about that or how should we think about.

And I'll turn it back up.

Yeah sure I can I take that.

The Jay sure.

You know I think initially or because of social doesn't seem a I think we thought we would.

I see some inefficiencies, but you are physicians credit and our providers and everyone that provides patient safety and quality. What we've seen is that the efficiency hasn't really waned a I think that some groups have have gotten very creative in this this starts with.

You know even the initial how do they see a patient before and endoscopic procedure, where they are using tele health to bringing patients a and then they're scheduling has has been altered slightly but it really hasn't created in <unk>, a large negative impact on.

Our scheduling and how our providers our schedule also our pay structure I think allows for sunroom, whether that's longer days or or even additional days or within the clinic scheduling.

Thanks, guys.

Thank you, ladies and gentlemen, as a reminder, should you have any questions. Please press star followed by one.

The next question comes from entry Lino from National Bank. Please go ahead.

Hi, Good morning, Thanks for taking my questions I I got a couple from me first I'll start a little bit more under biggie or anti Ajay you mentioned that.

There were some are more interested that yourself on my Doctor, especially on April one thinks we're down to just wanted to clarify so that'll.

At least acquisition that you did late June early July were there from a leader in April or what are they a bit more sort of longer term in that pipeline. A and then the second question <unk> key sharp is that you made a comment you said that you might not reach the recent deployments that you've seen intensive kind of the ACA.

Position, even method is positive and you are getting Marty bounces saga have an unlevered balance sheet why wouldn't you deployed.

To levels that you have about what.

[noise], Let me go first what's your.

Sure sure in regards to the the core acquisitions that we did as well as the startup.

In the last two months.

All of those conversations or Rittenberry endpoints.

Think of it but also they had started prior.

Our sales cycle is it's normally longer than just a couple of months.

So I think it's fair to say they were already in our pipeline.

So what I think you'll see is is that those conversations have started in April.

With that does include bear fruit or either late this year or [laughter] Weve <unk>.

We've consistently talked about a robust pipeline and that's only strengthened due to this time.

[noise], Thanks, Jay and Andrew as far as the second part of your question.

All we're doing we're just.

Looking back on our guidance that we had previously indicated where we would spend historic levels [noise].

Yes development activities.

We got a little bit of a late start as a result of Kobe This year. So.

Yes.

We're not I guess, we're not guiding that we will complete that number of deals. This year. Our momentum mean remain strong our goal is still the same [noise].

[noise], we're just now.

[laughter] putting them [noise].

[noise], Okay, great. Thanks for the color and a one last one for Richard our days sales outstanding I mean, they picked up in the corner I. Suppose. This first we're also working well working remotely as well, but how have you seen in developing at least a E Q3, and a and I guess the rest of the year.

Yeah, I mean, so yes, the dsos picked up in Q2, you know primarily the result of the equation revenue was down.

That being receivables named relatively steady as is.

Timing of payments.

The latest artico, but we expect to get back down to you don't pre cope at levels by the end of year I don't have any indication that that's going be any different at this time.

And your you're making good progress I'm, assuming in Q3, you are starting to see some of those though.

Payments.

Yeah, we're starting to see collection were starting to see collections pick up yes.

Great. Thank you that's it for me.

Thank you at this time there no further questions you May proceed.

Thank you again, it's just like thank everybody this morning for.

Joining us on the call appreciate Everybodys interest in Ah CRH medical.

And with that I will we'll complete the call. Thank you again.

Thank you.

Thanks.

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