Q2 2019 Earnings Call
Good morning, and welcome to the emerging additions on our second quarter 2019 earnings Conference call.
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After todays presentation, there will be an opportunity to ask questions.
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Please also note todays event is being recorded.
Oh, and I want to turn the conference over to Andrew Mcwilliams, Chief Financial Officer. Please go ahead Sir.
Good morning, and welcome to our earnings conference call for the second quarter of 2009, two major Mcwilliams, Chief Financial Officer Basie Holdings.
To the extent any non-GAAP financial measures used in today's call you will find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP on our website. Following the best relations link to this morning's news release. This conference call may contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995, including statements among others regarding a sees expected annual performance for 2019.
For this purpose any statements made during this call that are not statements of historical facts may be deemed to be forward looking statements.
Well that live limiting the foregoing the words believes anticipates plans expects and similar expressions are intended to identify forward looking statements you're hereby cautioned that these statements may be affected by the important factors among others set forth in age these filings with the Securities and Exchange Commission and then the company's second quarter 2019 earnings release, and consequently, actual operations or results may differ materially from the results discussed in the forward looking statements. The company undertakes no obligation to update publicly any forward looking statements, whether as a result of new information future events or otherwise.
For portions of our call, we will be referring to the earnings release supplement that was posted on the Investor Relations section of our website. This morning, along with the earnings release.
I would like I would now like to turn the call over to our chairman and Chief Executive Officer, Michael Cartwright.
Thank you Andrew and good morning, everyone.
Before we start the earnings discussion I'd like those listening to know that Tomorrow August 30, Onest is international overdose awareness day, each of our families across the country will be hosting community events meant to raise awareness about overdose prevention and treatment.
Including the use of New York and in the case of opioid overdoses.
As a company we always seek this kind of community engagement, but especially at a time when Ob opioid overdoses are on the rise and impacting so many in towns across America.
On today's call I'll be discussing our recent operational highlights before turning the call over to Andrew to walk through our financial results.
We will then open it up to your questions.
But we still have a lot of work to do.
Overall im extremely pleased with the sequential progress that we've been making this year as we've been discussing on our previous calls we've executed several initiatives initiatives in sales and marketing, which included leadership enhancements and organizational improvements, which is giving us positive momentum in 2019.
Our in patient census, improved 37% at June Thirtyth 2019, compared to December 30, Onest 2018, and our inpatient occupancy was 81% in Q2 versus 69% in Q4.
Also as we discussed on our previous calls we took measures to implement a series of cost cutting initiatives.
These actions included the consolidation of our Las Vegas, and Southern California markets, the sell of our towns and operation, Louisiana consolidation of our lab operation and corresponding reduction in our corporate expenses.
Our cost saving initiatives to result in an approximately a 15 million dollar quarterly reduction in our operating expenses on a year over year basis, we're continuing to focus on further reductions in operating expenses and we expect a further reduction in operating expenses of $4 million over the course of the second half of 2019.
These cost savings that positively impacted our second quarter operating results and we expect they will continue to have a positive impact on the remainder of 2019.
As previously announced earlier this year, we launched a process to evaluate our strategic alternatives related to our balance sheet.
We are excited about the level of interest in the company and we're currently evaluating numerous initial proposals and engaged in discussions with multiple third party investment firms, we remain committed to our strategic initiatives to improve the balance sheet and enhanced value to all stakeholders by the end of the year.
Our goal is to utilize our existing assets to reduce our senior debt.
At least a $100 million by the end of the year in order to reduce the cost of capital. Finally, we remain engaged in active discussions with our lenders on our credit agreement and are making progress on reaching an agreement that will resolve or covenant obligations in the near term.
Im confident that we will reach an agreement, but it's favorable to all stakeholders.
I will now turn the call over to Andrew to discuss our financial results.
Thank you Michael for the second quarter of 2019 total revenue improved 15% to 63 million for $55 million in the first quarter of this year.
This improvement in total revenue primarily came from our inpatient treatment facility revenue as a result of improvements in both average daily census, and average daily revenue.
Average daily inpatient business improved 8% to two for the second quarter of 2019 from 740 in the first quarter of this year average daily inpatient revenue in the second quarter.
Improved 17% to 790 from 674 in the first quarter this year.
Partially offsetting the increase in inpatient revenue was the decrease in client related diagnostic services revenue during the second quarter client related diagnostic services revenue was negatively impacted by additional reserves recorded against our accounts receivable.
The cost savings initiatives that we discussed on prior calls related to consolidation of bed. Some facilities combined with improvements in our corporate SDMA have resulted in a reduction in operating expenses of almost 12 million or 15% since the fourth quarter of 2018, and a 15 million improvement on a year over year basis.
The improvements in revenue and operating expenses had a positive impact on adjusted EBITDA on a sequential basis. Adjusted EBITDA went from a loss of $12 million in the fourth quarter of 2018 to a loss of six and a half million in the first quarter of 2019 to positive adjusted EBITDA of $3 million in the second quarter of 2019. This represents a 15 million or 125% improvement in quarterly adjusted EBITDA since the fourth quarter of 2018.
Overall as Michael mentioned earlier on the call. While we still have a lot of work to do I am pleased with the sequential momentum so far in 2019.
Turning to our 2019 guidance, our full year guidance as revenue in the range of 255 million to 275 million and adjusted EBITDA in the range of $16 million to $21 million taking into account actual results through the first half of 2019. This implies revenue of 137 million to 157 million and adjusted EBITDA of $20 million to $25 million in the second half of 2019.
I wanted to spend a few minutes bridging our second half 2019, adjusted EBITDA guidance of 25 million, which is detailed on slide seven and eight of the earnings release supplement that we referenced earlier on this call.
And the second quarter of 2019, adjusted EBITDA was 3 million, which on a run rate basis, the 6 million for the second half of 2019.
There was an additional 7 million of adjusted EBITDA, which is expected to come from census improvement in the second half of 2019.
The census improvement assumes about a 4% increase in average daily census in the second half of 2019 coming off of Q2 of 2019 as referenced on slide five of the earnings release supplement through July 2019, we already we already have experienced a 2% increase in average daily census.
We expect another 8 million to come in the form of increased revenue from client related diagnostic services.
As I mentioned earlier on the call we recorded additional reserves to our outstanding accounts receivable for client related diagnostic services, which totaled 4 million in Q2 of 2019 as this is not expected to reoccur in the second half of 2019. This results in an incremental improvement of 8 million over the remainder of 2019.
The final component of the bridge to get to the 25 million of adjusted EBITDA in the second half comes from additional operating expense reductions totaling 4 million.
These are from a combination of vendor spend reductions and rationalization and decreases in salaries wages and benefits.
I would also point out through July 2019, we have already experienced operating expense reductions from Q2, 2019 that gives us insight and operating expenses in the second half of 2019.
This concludes our prepared remarks, I'll now turn the call over to the operator for questions.
Thank you well now begin the question and answer session.
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Today's first question comes from John Ransom of Raymond James. Please go ahead.
Hi, good morning.
If you hit your $20 million rich back half EBITDA.
What does that imply for free cash flow.
That's a good question. So if you think about the free cash flow I'm really expecting.
Cash uses in.
You know to be pretty neutral from an a or an IP standpoint.
And then if you really think that if you go and take a hard look at what the adjustments were to get to adjusted EBITDA.
Alright, really expected to reoccur such that really be that back half EBITDA is really expected to convert mostly into cash. So if you take that kind of.
I call. It 12, 12 million or so you back out maintenance capex of about 1 million.
Our CIO and then back out cash for interest and principal payments, you'll see that that's a pretty neutral.
Even cash flow at the end of the day it will come in.
Right at even.
What's the is it just the cash interest expense in the back half of the year what are you thinking about there.
It runs about it's about 8 million a quarter.
Okay got you.
And then secondly.
I know you've got a lot of moving parts and a lot of things to think about but.
Do you have a ballpark estimate of when you might get to some resolution with your your covenant issue.
Well, we're going to have every day, John I mean, I think our banks have been extremely supportive.
They see the trajectory that we're making I think we see the trajectory were making there is.
Both sides of it part part of it hinges on us unlocking some of the value of the real estate.
Which we've been actively working on we're looking at all proposals and so we certainly want to get this resolved as soon as possible.
Okay.
Okay, but no no farmed out yet and Andrew let last question for me is.
Let's say you are to get a 100 million sold.
How should we think about the trade off between rent expense and interest expense and that sort of that transaction.
Yes.
And what would be the delta that won't be the delta.
I assume you're not going to do that youre going to lower I guess something other than the interest rate you're paying but any idea you add on sort of cap rate being thought about and I know, you're also thinking about selling ringwood, which would come with the lease.
Do it as well, but how should we think about the improvement in the below the line. If you can get this done.
Big picture it definitely will reduce the cost of capital John you know the 30 million that we have is pretty high interest loan and then it drops down there. So I think it's hard to predict exactly what that will be but I'm happy to do an offline conversation with you and go walk through an exercise of multiple scenarios, but it certainly will bring down the cost of capital or would it make sense for management to do it yes, I think John you know, we're obviously very focused on that it's got to be improving the cost of capital and its got to also be a long term solution as well escalators, we'd be very focused on.
I'm not sure that we were appropriately taken in account escalators as we thought about that cost of capital.
Okay and that's all for me. Thank you also John what yes, Sir.
Okay. Thanks.
And our next question today comes from Ryan Daniels of William Blair. Please go ahead.
Hey, guys. This is Nick seek out in for Ryan going on the strategic alternatives. So is that something that you're planning.
Kind of finishing within the year and then I guess were mostly.
Through Q3, so more targeting kind of Q4 for that.
Correct, we have been added since early summer and we've had great conversations and discussions and they continue to get better as our trajectory gets better and we certainly plan on conducting a transaction for the entity.
Okay cool perfect.
And then just kind of going on the cost initiatives that looks like salary wage.
Coming down a bit.
But that professional fees and kind of made up for a little bit of that chunk should we expect.
Salary.
Kind of come down a little bit are we going to reach a steady state here.
Right around from a salary wage and benefit I think from a salary wages and benefits.
We're probably stable, where we are weve definitely done a lot of cutting.
Really appreciate our staff they work really really hard this year in terms of being more efficient in how we deliver care and so on but I think we're very stabilized there thats really vendor spend and looking at other ways that we can just be smarter as a company to reduce our overall.
Spend and keep in mind the trajectory of Q2. So when you think about Q2 to Q3.
I would expect some reduction there, but thats more from the momentum that you saw inside of the quarter headed towards June Thirtyth versus April thirtyth.
As well.
Got you and that is that kind of explain the uptick quarter over quarter and professional fees kind of your your put it a little bit more to their as you kind of reduced head count type of thing.
Yes, no no I wouldn't quite think about it that way I think it's important to take a look at some of the adjusted add backs that we had.
Inside the quarter, because a lot of those add there were certain add backs.
Nonrecurring events that occurred in professional fees that are naturally going to bring that down.
From that component.
Okay, great. Thanks.
And then I guess.
Any color on kind of your marketing initiatives I know your census is the improving I guess, if you could just talk a little bit about successes, there or with the.
Since last quarter.
I mean, I think Stephen at it's been an incredible additions to our management team he's.
Just incredibly smart at FCO and web web traffic and really just understanding all of our different web assets I think our biggest challenge was last year when Google did the algorithm update and we want to make sure that we.
Understand that well I think Steven and his team has done a phenomenal job on that we also wanted to really start doing a lot more localized marketing with our facilities and utilize the great business development team that we have across the United States more effectively by partnering with the facility. So we're starting to see a lot more local referrals than we used to see and then our call center, we're starting to get our Mojo back and get our conversion ratios back up so all things are heading in the right direction on the sales and marketing front, we feel very good about that.
Awesome, great. Thanks, as it should be good for me.
And ladies and gentlemen, this concludes our question and answer session.
Turn the conference back over to Mike for any closing remarks.
Thank you very much I do appreciate your listening today, reflecting on on.
This year.
July 1st towards my 24th year being the CEO of an addiction treatment company and I have to say this is probably more and more challenging years, starting in the back half of last year, losing about 30% of our revenue and then trying to come back out of that and people ask me all the time, how do you sustain your excitement about helping people with drug treatment and running a company like this especially in this challenging environment and I have to say I couldn't do it without.
A very very supportive board of directors very supportive management team and the hard working doctors clinicians nurses every day and we're not go out into the facilities and get to spend time with the patients and actually hear the stories from the patient to what we do which is to energize me. It reminds me every day, a while but coming up on drug counts are widely this company and why I'm trying to try to change the trajectory of how we treat people with drug and alcohol problems and so I just wanted to reach a letter from a patient of ours, because we were saved countless stories like this.
How about a year ago, you treated my husband I wanted to reach out to you today, because we are getting close to his first year of sobriety and I wanted to thank you my husband came back to us a different person. He was optimistic about what the future held for himself and his family for the families of people struggling with addiction and mental illness, we often lose hope I was hopeful AC would be able to help my husband in our family, but I knew we were facing an uphill battle.
The work that you do is so important for families just like US a wife and assign who just wanted their husband and add back.
My husband is able to do basic things again like have a conversation.
Remember to take the garbage out have dinner with his family the south sound, so small but for US. It was like changing the work continues but he is committed and so weve already makes such a difference and I hope that you know that again. This is just one example of the impact we're having on thousands of lives and families across America.
I know that as a shareholder stockholder, it's been a really tough year, but if you think about what we do on a daily basis and how many people. We held every single day every single month every single year, it's amazing to get to do what we do and so I just want to thank all the staff that are were out there working really hard to make us a great company and I promise you were on the right trajectory and we plan on having a great back half of 2019 into 2020 I Hope you have a good day.
Thank you Sir todays conference has now concluded and we thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.