CRH Medical Corp
Q1 2020 Earnings Call Transcript

Published: 13 May 2020

[Operator:]

Good morning, ladies and gentlemen and welcome to the CRH Medical Q1 2020 Results Conference Call. At this time, all lines are in a listen-only mode. Following the presentation we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on May 13, 2020.I would now like to turn the conference over to Richard Bear. Please go ahead.

[Richard Bear:]

Thank you, operator and good morning everyone. I’m joined today by our CEO, Dr. Tushar Ramani; President of CRH Anesthesia, Jay Kreger; and Vice President of Commercial Development, Tom Sanders.Before we start, I would like to remind everyone that certain statements you will hear today constitute Forward-Looking Statements within the meaning of the applicable security laws. For important assumptions, definitions and cautionary statements about forward-looking information and the risks inherent to our business, please refer to the cautionary notes in our Annual 10-K.During this call, we will discuss non-GAAP financial measures as indicators of our performance. You can refer to our Management’s Discussion & Analysis for the three months ended March 31, 2020 for the reconciliation of non-GAAP measures to reported GAAP measures. These documents are available on SEDAR, EDGAR and the Investors section of our website.In addition, please note that we will be using abbreviation GI to refer to gastroenterologist. Finally, please be advised that our reporting and functional currency is the U.S. dollar and that all dollar figures referenced today are in U.S. dollars.With that, I will now turn the call over to Dr. Tushar Ramani.

[Tushar Ramani:]

Thank you, Richard. Thank you also to everyone on the call for joining us to discuss the CRH’s first quarter 2020 results. We hope everybody's safe and healthy as we work to navigate through these unique and challenging times out there. Like most of you were doing this call from our home, so please bear with us in the event that we experience any technical challenges here during this call.So before we address the financial and operational metrics for the first quarter, I would just like to address the effect of the COVID-19 pandemic, which is exerted significant pressure on the global healthcare delivery system and more directly upon our business. While we began to see a sharp impact of COVID-19 in mid March on our procedure volumes, we do expect the impact in the second quarter to be even more pronounced.As you are aware, many states, many health systems in response to the pandemic implemented guidelines that restricted elective procedures that most health facilities in order to prioritize hospital resources towards the care of COVID-19 patients. This dynamic coupled with the restrictive distancing policies has significantly impacted the number of patients that the ASCs that are [indiscernible] businesses serve.Exactly how long we experienced the decreased volumes remains uncertain. Most of the regions in the country are still under some measure restrictive sheltering and distancing. But we are cautiously heartened to see a number of ASCs customers are beginning to open now, at least in part, or they have set opening schedules throughout the rest of this month.Now, once they are reopened. We think it will take a number of weeks for these ASCs to return to normal patient levels throughout most of April our anesthesia volumes were down 90% from our normal operating volumes whereas this week our volume deficit has improved to around 75%. So we are still down 75% from what we would consider a normal, but further improvements are scheduled and barring any relapses or delays, we do expect that to continue to increase.Also, as you might expect, the pandemic has decreased demand for our region segment as many physician offices are open now just for essential visits. That too has started to increase as these offices open up. But we hope that we can see continue to increase there. Our hemorrhoid treatment volumes have therefore been limited to so far to the more urgent cases.In order to mitigate the financial impact of this lower demand for our products and services we have worked to reduce costs. We have taken steps to bolster our liquidity in advance of the heightened uncertainty in the financial system as well.Richard will address some of those measures later, but we remain confident that we have an enduring business that will survive this crisis and we continue to forge ahead with the key initiatives that we have fully prepared to service our ASC partners as these volumes begin to normalize.And let me just address a couple of our primary initiatives. First, with respect to our payer negotiations and rate strategy, we remain in active external dialogue to optimize our contracted case mix. Recall that on our last conference call we discussed some of the challenging payer dynamics that impacted our fourth quarter of 2019 results. Given the delays in the passage of the surprise billing legislation in Congress.We had contemplated the passage of that legislation this May to facilitate our contract and transition throughout 2020. However, with the passage of certain Medicare provisions in the CARES Act, ones that were originally coupled to this passage of the surprise billing legislation, we no longer anticipate the passage of the billing legislation in near-term.Yet we continue to make progress on our rate objectives largely because of a more positively bias provider backdrop here in light of the pressures on the healthcare industry in this pandemic. As a result, we believe that our rate strategy has been decoupled from the surprise billing legislation and we continue our work to strengthen our long-term tie ups with our payer partners, which we believe will improve the overall revenue and pricing visibility of our business.Also supporting our ongoing payer strategy we would like to point out that Brian Griffin has recently joined our Board of Directors. For those of you who may not know Brian, he has extensive operational and strategic experience at some of the largest payer related entities in the country. And we are keen to get his guidance and leverage his expertise and insight.Second, we remain optimistic with regards to our business development pipeline. Our team remains in discussions with all our prospect of targets and partners. We have actually been moving deals forward during the space. As you may suspect, we have temporarily paused capital deployment towards acquisitions a result of this pandemic though. We believe that many smaller providers facing unprecedented financial and operational pressures may actually drive more BD opportunities for CRH as we emerged from the pandemic.Finally, we are focused on implementing strategies to drive growth in our O’Regan segment. We continue to believe the segment has a market opportunity well north of the current level of business that we are seeing. And Tom Sanders will talk about more about O'Regan shortly.So with that, I will turn this call over now to Jay Kreger who will talk more about the anesthesia business.

[Jay Kreger:]

Good morning everyone. I would like to echo Tushar’s comments and thank all of our shareholders for their support and for joining us today. Additionally, I want to thank our employees and our provider partners for their continued devotion to patient care during these difficult times.Our first quarter anesthesia revenue fell 13% to $23.2 million on a 0.6% increase in cases. Revenue per case of $297 represented a 1.3% sequential improvement from the fourth quarter of 2019. The anesthesia segment generated adjusted operating EBITDA of $8.1 million representing a 37.6% drop from the first quarter of 2019.Prior COVID-19 same-store cases in January and February 2020 were actually up 4% when compared to the same period in 2019; however, as Tushar noted, after a solid start to Q1, we began to see COVID-19 related pressures on our business in March. That pressure only worsened in April as procedure demand continued to decelerate.Let me provide some color on these trends. In terms of our ASC footprint, we finished 2019 providing service at 58 ASCs. The number of operational ASCs fell to 30 by the end of Q1 and then to 20 by the end of April.Let me caution you that the term operational is not necessarily uniform across all of our ASCs. In some cases, it could mean fully operational status. While in most cases, it means only partial operational status. For example, limited days when a centre is open or reduced capacity or potentially both.As a result, whereas our weekly volume had fallen to below 40% of normal by the end of Q1 and as low as 10% of normal during April, we are now at approximately 25% and improving. Although we can't yet predict the sustainability or the extent of any improvement at this point.We are encouraged at some states and helped us and said now just recently started to lift restrictions on elective procedures. We are diligently monitoring procedure scheduling patterns, but it just remains too premature to reliably communicate any expectation around when our case volume could begin to rebound in meaningful way.With respect to business development, while we remain in active dialogue with potential targets and partners as Tushar noted. We temporarily suspended acquisition spending until we are sure our prospective partners have restored operations to an adequate level.We expect to resume normal travel and increase BD activity once some of this uncertainty lifts. But we are currently unable to predict when this might occur. Our team remains engaged. Actively prospecting for acquisition in de novo prospects. We hope to share more with you during the second quarter earnings call.As inside, while the circumstances are unfortunate, we think some of the financial strain on many of our target provider groups could actually work to drive more BD opportunities to CRH as these businesses begin to view their anesthesia operations as transactable sources of liquidity for their core operations.I will now turn the call over the Tom Sanders.

[Tom Sanders:]

Thanks, Jay. Good morning, everyone. Prior to the COVID outbreak, O’Regan revenue for January and February was up 9% over the same period of 2019, as we are experiencing the fall off in mid March due to pandemic impact on GI visits. First Quarter O’Regan sales totaled $2.3 million decrease of 5% in the first quarter 2019.We reported segment adjusted operating EBITDA of $1.2 million representing a 54.1% margin. Coming into 2020,we would begun to initiate additional practice support measures aimed at identifying and treating more patients to drive revenue growth.The targeted program places greater emphasis on maximizing the real potential of our installed base, retraining physicians, particularly in practices where usage had decreased. As we ramp back up, we will continue to engage in retraining initiatives, or qualify new inquiries to identify the most efficient opportunities to deploy our training and support resources.In addition, we have utilized available downtime to evaluate process improvement opportunities for sales and training. We are working collaboratively with some of our top partner practices to identify best practices and hemorrhoid treatment growth opportunities.This includes working with them to better understand the patient data and to identify the proper patients, educate providers on curative treatments and grow hemorrhoid banding volumes in response.Within the last week we are beginning to see our customer practices engaged as indicated by our orders and rescheduled trainings. We believe post COVID the opportunity for CRH O’Regan remains as high as ever.I will now hand the call over to Richard Bear our Chief Financial Officer.

[Richard Bear:]

Thanks, Tom. We reported consolidated Q1 revenue of $25.5 million, a decline of $12.6 million compared to the first quarter of 2019. Total adjusted operating EBITDA for the quarter was $7.5 million, compared to $13.1 million in the first quarter of 2019. Adjusted operating EBITDA, attributable to shareholders was $4.9 million during the quarter.We finished the first quarter of 2020 with to $13.3 million in cash in equivalence and total borrowing of $17.5 million. We generated free cash flow $5.6 million after distributions and non-controlling interest. We note that these distributions were suspended in mid-March as a result of COVID-19.I would like to comment a bit more about steps we have taken that will help us mitigate some of the impact of COVID-19 on our operational and financial metrics. We have reduced staffing costs as much as possible primarily in our 1099 in third-party provider workforce. Additionally, we reduced by monthly pay for much of our senior executive team and to a majority of non-provider employees.Prior to March 31st, we drew down $5 million from our credit facility, deferred distributions to joint venture partners, took the necessary steps to participate in several relief programs. Additionally as Tushar and Jay both noted, we temporarily suspended our anesthesia acquisition program and we also decreased capital allocated to our share buyback program to further preserve liquidity and maximize operational readiness.As of March 31, 2020 we get drawn $70.5 million on our credit facility. That facility includes $125 million committed facility with an accordion feature to increase available credit to 4200 million.I will now turn it over to Tushar.

[Tushar Ramani:]

Thank you, Andrew. In closing, I would just like to comment on a couple of the targets that we had provided on our fourth quarter earnings calls. First, with respect to revenue per case, although we were pleased with our first quarter revenue per case, we are pleased that it met the expectation that we had communicated on our last conference call.We are temporarily withdrawing our 2020 target ranges given the current nature of the operating environment that we are in now and the reduced ability to communicate a reliable rate expectation.We assure investors we are continuing to make progress on our rate strategy, but unpredictable volume, unpredictable case mix dynamics here will likely yield rates in the upcoming period that just would not provide stakeholders with a useful insight on the progress we are making.Second, as we have noted a few times during this call, we have curved the pace of our acquisition program. As such, our acquisition related capital spend may not achieve the recent historical levels as we indicated we might before.In closing, I want to thank our leadership team and employees for their hard work during this crisis. We remain confident in our long-term strategy, remain committed to providing the outstanding service and care to our customers.The necessary steps that we have taken to mitigate the costs and conserve capital shouldn't allow us to navigate this crisis while at the same time ensuring that we can be in a state of readiness as volumes begin to normalize.So with that, we will take your question.

[Operator:]

Thank you. [Operator Instructions] Your first question comes from David Martin with Bloom Burton. Please go ahead.

[David Martin:]

Good morning everyone. A couple of questions for you. The first one is prior to COVID, did your ASC partners have much excess capacity? So if there has been a backlog built up during the shutdowns, do we expect a spike in business following COVID?

[Jay Kreger:]

I can take a shot at that. This is Jay Kreger. David, thanks for the question. I think generally speaking, most ASCs run at a 75% to 80%, capacity level, they also have the ability to run Saturdays if they want to or later hours, if they wanted to increase that capacity more. So I think the pent up demand is something that we could see actually at least the short-term bump in historical volumes - just historical. Thank you.

[David Martin:]

Alright. Next question. How much can you titrate down your anesthesia service expense if an ASC closes can you furlough the employees without any salary, without any severance?

[Richard Bear:]

Let me start with that one. This is Richard. So we have three types of staffing models. We have 1,099, we have third-party providers and we have W2 providers. So the easiest expenses for us to control would be the 1,099 and then the third-party providers and W2, we did a furlough as many of those as possible.

[David Martin:]

Okay. Do you have any visibility on what your anesthesia service expense is going to be in Q2?

[Richard Bear:]

We are doing everything in our power to control the cost. Most of the costs on the anesthesia expense side relates to providers. So as it relates to 1,099 and third-party providers, those expenses are dropping down as far as possible. And there will be some costs associated with maintaining at some level the W2 providers. But we are not providing specific guidance on what that number is going to be for Q2.

[David Martin:]

Okay. And my last question is, the rates strategy, you mentioned that it will improve visibility on pricing. You know, once we are beyond COVID and you execute the full rate strategy. Is it expected the rate per procedure will go down or will go up with the increased visibility?

[Tushar Ramani:]

David it is Tushar. It is hard for us to project that, which is the reason that we have sort of withdrawn our guidance. We are not anticipating changes in our previously communicated expected rates, but we really just don't know if - we don't know if and when we are going to be able to get the payers to negotiate and engage. So I think timing is an issue for us.

[David Martin:]

Okay. Thank you.

[Operator:]

Your next question comes from Richard Close with Canaccord Genuity. Please go ahead.

[Richard Close:]

Yes, thanks for the questions. I'm curious, you operate in various states, I assume some are reopened, some are not. So, yes, with respect to the 25% level that you have mentioned, can you maybe - I assumed that the company average across all the centers, can you maybe provide some details in terms of, maybe what the percentage is in the states that have opened up. Obviously, Georgia and Florida you guys are in I think South Carolina as well those are open. I assume Texas, but maybe the Washington is not open and Massachusetts, I assume, as well. So anyways, any details there that could be helpful in terms of what is happening in the reopen states?

[Jay Kreger:]

Yes. Richard its Jay, thanks for the question. To clarify that 25% represents a case volume, not an ASC opening volume. And so what you may have is, you may have a multi-site group who only has one or two of their multi-sites open because they are consolidating volume. So it is hard to say.And we track every single site on a daily basis. So we have a look into what our forecast is, at least in the next few days. Of course, it is ever changing with COVID. Some of those states you mentioned like Washington, Massachusetts are just beginning to open this week or next.Whereas some of those other states that we are heavy in such as Georgia, Texas, Colorado, have been opened for some time, and it is just a matter of their volumes getting back up to normal levels. So but the 25% really just represents the percentage of volume as compared to our baseline.

[Richard Close:]

Okay. And then as we think about O’Regan, I suspect that because of the fall off overall for volumes, not only O’Regan, but other procedures, do you envision that may be the value proposition as you go out and try to market that improves as providers try to maybe catch up or increase revenue streams. Not sure if you have had discussions during the emergency situation or not just trying to gauge in terms of maybe if you will benefit from this once things do open up?

[Tom Sanders:]

Sure. Tushar I'm going to take this, this is Tom Sanders.

[Tushar Ramani:]

Yes. Please go ahead.

[Tom Sanders:]

So yes, we have spent a lot of time the O’Regan team has, because we have had time to really look and do a lot of analysis and actually still engage with quite a few of our practices. So to your point exactly as I think there is an opportunity O’Regan because it is not - because it need to be performed in a surgical centre.There is opportunities and practices are looking now to like you said to the gain, look for revenue opportunities both in existing services that got where we sit nicely there and do ancillaries where we also can strategically set because of an banding as more of an ancillary.So the word optimistic and it is been kind of basically backed by some of the discussions we have had with our practices, I believe there is a really good opportunity for us there. And we are ramped up to kind of change the messaging that format so.

[Richard Close:]

Okay. And then maybe a question for Richard in terms of the distribution, understand holding that off. What are your thoughts in terms of when the distribution starts back up? Is that, when you hit a certain in a steady state in terms of cases or any thoughts with respect to that?

[Richard Bear:]

Good question. Richard. So distributions will commence when we are comfortable that collections have commenced and we can meet future working capital needs without requesting capital calls from our joint venture partners.

[Richard Close:]

Okay. Thanks for the questions and answers.

[Operator:]

Your next question comes from [Douglas Miehm with RBC Capital. Please go ahead.

[Douglas Miehm:]

Yes, thank you. A couple of I guess the first one is, are you getting a sense of how your patient population that is typically over 50 is thinking about going back to healthcare sites? We have observed that outside of COVID a lot of hospitals and other types of clinics are well below normal. Do you think that that could remain that way? Until we get to maybe 2021 or after vaccine. Thank you.

[Tushar Ramani:]

Doug this is Tushar. Again thanks for the questions, good morning. So I think this is one giant experiment, right? I don't know that anybody really knows the psychology of the patient groups, what the dynamics are going to be as they come back. What patient flow looks like, the new procedures for shielding, et cetera.But at the same time, there is some level of urgency to some of the procedures that are performed, to any of the procedures that are performed and they can be deferred for some point, but at a certain time, they do need to get done. And so I think that there is going to be a base level of demand and based step based level of volume that just has to get done.Some of the stuff at the margins will depend on not just people's comfort, but the efficiency that these centers can operate on once we are back up and running. There is a lot of uncertainty there I guess is really what I'm trying to say.

[Douglas Miehm:]

Yes, no, that is what I thought but just was wondering if you had a better gauge based on commentary or anything, but that is fine. The second one you touched on briefly just with respect to commercial utilization. I know that Jay mentioned normal’s around 75 to 80, but if social distancing measures or some other types of measures have to be put in place, what is that 75 to 80 likely to drop to or in the event they do have to do that they would open up on the Saturday or something like that. I know this is all sort of notional, but could you give me an idea?

[Tushar Ramani:]

I will let Jay provide some of that color, but I will tell you that all of our partners are prepared to be able to extend their hours and try and capture as much of the pent up demand as possible. But Jay, go ahead.

[Jay Kreger:]

Sure. Well, I will clarify my comment about 75% to 80% first, and I don't know that that is a planned occurrence. Generally, physicians build their endo centers to meet their needs. And that includes how many rooms they have, how big the center is.Some of these centers are built with larger footprints that will accommodate potential screening areas or social distancing that you referenced. Others may not and it may require them to either make some changes functionally or even construction wise. But others may just do it with their time schedule.Like Tushar said, I think it is too early. We have groups right now that have told us that they are already up at a high percentage, greater than 75% running and they are not seeing any difference in the efficiency of how their center is running. And then those that haven't gotten to that level yet, we don't know what is going to happen. Will they fall into that category or will they be less efficient? I think it is just too early to tell.

[Douglas Miehm:]

Okay. That is a great answer. My final question just has to do with - on the private pay side, do you have any idea of how many people may have lost insurance that you would consider potential clients?

[Jay Kreger:]

We wouldn't have visibility into that. We know that unemployment levels are at an all time high. And it is primarily service industry related, but to correlate between, what type of insurance service related industries have versus other related industries, we don't have that level of information.That is one of the reasons why we are withdrawing guidance because the payer mix dynamics is something that we just don't have visibility into right now.

[Douglas Miehm:]

Thank you.

[Operator:]

Your next question comes from Endri Lenowith National Bank. Please go ahead.2

[Endri Leno:]

Hi, good morning. Thanks for taking my questions. So a couple for me. First, I was wondering if you have any visibility in the conversation you have with your partners of how are-bookings are going let's say for June or July or August, beyond that any of the procedures that are being canceled? Are they being booked at all, any visibility or comments there?

[Jay Kreger:]

I will answer Endri, it is Jay. Thanks for the question. All groups are every day booking new cases, it is just a matter of how far out in the future they book them. And what we are hearing is that they all have two to three months backlogs at a minimum and so it is really more matter of when they can book them and how long it takes to catch up to that pent up demand.I'm sorry, what was other part of your question?

[Endri Leno:]

I was just wondering if they are seeing any kind of uptick, right, like so yes, there is a backlog but are those cases that were being canceled, been rebooked at all? I don't know if you have that kind of visibility at all.

[Jay Kreger:]

Yes, I think initially when COVID started, no one knew how long it would take. And so they were rebooking those cases at the time. And then once it became apparent that there was an unknown to the end, they just started canceling the cases, with the idea that they would rebook at a future date.That has now begun, there seems to be a light at the end of the tunnel for most of these groups. And so they started rebooking again, but how their priority is taken? I don't really know, because each group does it a little bit different, but they are filling the schedules as much as they are open.

[Endri Leno:]

Okay. Thank you. That is a great answer. The other question is on the O’Regan side, have you seen or do you expect any issues in terms of inventory or production there at all? Once things start ramping up?

[Tom Sanders:]

Richard, this time I will jump in.

[Richard Bear:]

Go ahead, Tom.

[Tom Sanders:]

Yes. Go ahead Richard.

[Richard Bear:]

Yes, no issues. I mean, we maintain a number of months of supply of the O’Regan system. And we are always looking on new builds with our contract provider. So no impacts to inventory during this shutdown.

[Endri Leno:]

Okay, great. That is it from you. Thank you.

[Operator:]

There are no further questions at this time. Please proceed.

[Tushar Ramani:]

Okay. Well, with no further questions. Thank you operator and let me thank everyone again, for participating this morning. Thank you for your interest in CRH. And we look forward speaking with you again next quarter. Thank you.

[Richard Bear:]

Thank you.

[Operator:]

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.