CRH Medical Corp
Q3 2019 Earnings Call Transcript

Published: 8 Nov 2019

[Operator:]

Welcome to the CRH Medical Third Quarter 2019 Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]I would now like to turn the conference over to Richard Bear, Chief Financial Officer. Please go ahead, sir.

[Richard Bear:]

Thank you, operator and good morning everyone. I am joined today by our CEO, Dr. Tushar Ramani; and the President of CRH Anesthesia, Jay Kreger.Before we start, I’d 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 10-Q for the three months and six months ending September 30th, 2019.During this call, we will discuss non-GAAP financial measures as indications of our performance. You can refer to our Management’s Discussion & Analysis for the three months and six months ended September 30th, 2019 for reconciliations 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 use the abbreviation GI to refer to gastroenterologist. Finally, please be advised that our reporting and functional currency is the US dollar, and that all dollar figures referenced today are in US dollars.With that, I will now hand the call over to Dr. Tushar Ramani.

[Tushar Ramani:]

Thank you, Richard. Thank you also to everyone on the call for joining us as we discuss CRH’s third quarter. We reported last night that we generated yet another quarter of year-over-year double-digit shareholder EBITDA growth and closed on two more acquisitions from our robust pipeline.CRH continues to display strong fundamentals and while we remain pleased with our continued progress and execution in 2019, we’re also continuing to position the company for a sustainable long-term growth. And as I had outlined in the last quarter, we would focus on three areas where we can drive future growth; Anesthesia Services, O’Regan System and Ancillary GI Services.So first, our Anesthesia Services business remains increasingly well positioned for both organic and inorganic growth. Our expanded scale that over the last several years has allowed us to proactively engage with our payer partners and others to optimize our long-term profit potential and improve overall visibility there.Our clinical capabilities, our sizing of financial flexibility all combined, supported our acquisition strategy. We have an increasing percentage now of deals in our expanded pipeline that are either pending, closing or in late-stage negotiation. Moreover, we’re adding additional resources to help support our business development strategy. We expect deal activity to accelerate in the coming quarters.And second, with respect to the O’Regan System, we’re increasingly confident that the size of the hemorrhoid market – the hemorrhoid treatment, excuse me, greatly exceeds our historical view, thereby warranting additional investment and attention on this segment.Along these lines, among other things, we’re seeking to for the first time in the company’s history of hiring a dedicated senior executive who will preside over that segment. And then third, we’re working to identify opportunities that will allow us to further support the GI community from an Ancillary Services standpoint. This effort remains in its early stages.I will hand it up first to Jay and then to Richard to review the third quarter in a little bit more detail.

[Jay Kreger:]

During the third quarter, Anesthesia revenue grew 7% to $28 million. As Tushar said, we completed two transactions during the quarter, [technical difficulty] being the majority interest in the new acquisition, Crystal River Anesthesia, while the second, the Central Colorado Anesthesia Associates was the acquisition of the remaining 49% increase interest in the prior transaction.Through the end of the third quarter, we spent over $18 million on acquisitions which still does not include our MAC development program in North Carolina that we expect to acquire controlling interest shortly.I continue to have the same optimism about our future growth that I expressed last quarter, as our planned transactions remain on our near horizon. In addition to those expectations, the pipeline remains full with deals at all stages including several under letter of intent that are expected to close late this year or could go into early next year.Also in the pipeline are many more non-transactional opportunities that we believe will drive EBITDA growth for all of our shareholders. This is particular makes me bullish for 2020 and beyond. Lastly, we are adding two more resources to our deal team, and individuals which will ensure execution of these opportunities which effectively doubles our resources.I’ll now turn it back to Richard for his commentary.

[Richard Bear:]

During the third quarter of 2019, we reported total revenue of $30.4 million, a 6% increase compared to third quarter of 2018. For the nine months ended September 30th, 2019, total revenue has increased 12%. Total adjusted operating EBITDA attributable to shareholders has increased 10% for the three months and nine months ending September 30th, 2019 compared to the same periods in 2018.For the three months ended September 30th, net cash flow from operating activities was $10.7 million and free cash flow defined as net cash flow from operations less distributions to non-controlling interest was $7.1 million. Free cash flow for the nine months ended was $21.9 million. For the nine months ended September 30th, free cash flow represents 75% of adjusted operating EBTIDA attributable to shareholders.As of September 30th, 2019, we had $5.2 million in cash, and $68.4 million in total borrowings. On October 23rd, we announced a new revolving credit facility led by JP Morgan which provides were up to $200 million in borrowing capacity, doubling the size of our previous facility, but the new facility also provides us with greater flexibility, and lower expected interest rates than our prior facility.We currently have a $131.6 million in unused borrowing capacity. We expect the new facility which carries a current interest rate of LIBOR plus 125 basis points to 175 basis points to reduce our annual expense at current borrowing level by approximately $550,000.I will now turn it back to Tushar for his closing comments and questions.

[Tushar Ramani:]

Thanks, Richard. So I would like to provide some color on expectations for the Anesthesia business across the balance of 2019 and 2020. First, we expect 2019 Anesthesia revenue per case to be approximately $333, that’s down slightly from our prior expectation of $340.Second note, our preliminary expectation is that, our 2020 revenue per case will be consistent now with 2019 levels, maybe a slight lift. We note that our revenue per case projections do not contemplate additional M&A transactions.And then third, based on the how the year has gone so far, we expect that our organic case volumes will be at the high end of the typical 1 to 3 range in our fourth quarter and in 2020 also has demand for colonoscopy continues to grow. Just as a note, the deals that we completed to-date, now represents 350,000 annual cases going forward.And then fourth, we continue to deal our historical capital deployment as an appropriate guide going forward, however as Jay alluded to, we do expect to augment that investment with non-acquisition opportunities that will further drive shareholder EBITDA growth.So with that, we will go ahead and open up the call for questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Richard Close with Canaccord Genuity. Please go ahead.

[Richard Close:]

Great, thanks. Congratulations on the quarter. Couple of questions, first, maybe Tushar or Jay, can you just talk a little bit about the two people who added to the deal team there, what’s their background exactly? What will they be focused on? We’ll start there.

[Jay Kreger:]

Thanks, Richard for the question, this is Jay. Effectively we had two people working on deal before, as you know, we have traditionally and historically been more of an acquisition story as we evolve into the different models that we talked about that may or may not be non-transactional. We try to diversify the team.The two people that we’re bringing in, one has more of a specific background in Anesthesia, and management thereof, while the other has more of an investment banking background and deal-specific, not necessarily GI, but certainly adaptable.The idea here is, again to diversify the team so that be able to serve our markets and I believe that they will do that, they’re just coming on in fact, one, this week and one next month. So we believe 2020 we’ll be able to take advantage of all the opportunities that we got in the pipeline.

[Richard Close:]

Okay, great. And then you mentioned several transactions under LOI to close maybe here in the next couple of months or early 2020. Can you guys size that at all in terms of like what those opportunities are maybe from a number of cases per year or any thoughts in and around that to give us some perspective?

[Jay Kreger:]

I mean I can throw out a range for you. I think that probably represents on a go-forward basis, 75,000 to 100,000 cases annually that we can – we are having by virtue of the different models. I think that’s a reasonable range. We obviously want to do as much business as we can with our new borrowing line and the scale of people that we’ve now created, we can handle the growth is usually as any time in our past.

[Richard Close:]

Right, so that 75,000 to 100,000 total for all the deals that are under LOI?

[Jay Kreger:]

Well I was speaking more of on an annual level, but I think those that are under LOI is probably in the either 75,000 range.

[Richard Close:]

Okay. And then Tushar, you said something about on the Anesthesia Services side, growth opportunities outside of M&A are transactions. What specifically are you referring to there?

[Tushar Ramani:]

Yeah, Richard. So that our goal is to increase the number of associations we have with gastroenterologists to providing Anesthesia Services at their centers right and so we can do that in a couple of ways, primarily we’ve done that through a lot of the M&A transactions, acquiring equity in their existing Anesthesia Services.What we’ve identified fairly significant whitespace where GIs are interested in creating those Anesthesia Services what we call de novo or MAC program and that have gained significant traction and it’s actually one of the areas that we want to resource better. So I do expect that we’ll do more of those type of transactions going forward.

[Richard Close:]

Okay, so we should expect I guess you’ve done two MACs over the last three years or so. Is that something we should think of maybe two in 2020 or more than that or how should we think about that?

[Tushar Ramani:]

Yeah, we’ll look to do more than that. Our pilots have been extremely successful, well received, it’s very capital efficient for us. So it’s yeah absolutely.

[Richard Close:]

Okay, thank you I’ll jump back in the queue.

[Operator:]

Our next question is from Doug Cooper with Beacon Securities. Please go ahead.

[Doug Cooper:]

Hi, good morning. I just want to follow-on from the prior question about the pipeline. Just to clarify. So the LOIs is representing 50,000 to 75,000 cases, but the total pipeline might be in advance of that, I guess. And is there any reason to think that the M&A program can’t I guess materially accelerate given you’re doubling the infrastructure and you’ve got to double the money.

[Jay Kreger:]

Doug, this is Jay. We do believe that will accelerate. What’s within the pipeline now and I actually just totaled it up, it was 60,000 cases, coming back to Richard’s question. Those all closed, and we will be well above the $35 million target that we stated before, that are all under LOI currently.Next year, we believe we’ll accelerate significantly, but how those breakdowns between capital spend versus non-transactional EBITDA and the growth that comes from our MAC development program, will be across the board.

[Doug Cooper:]

Right and I guess I just wanted to clarify this. I mean these are sort of plug and play, there’s no real integration issues, is there anything stopping if you find the right companies or a right company that look to solder their practice. Is there any – there’s no integration issues per se that could slow down the pace of acquisitions?

[Jay Kreger:]

No, I think that’s where we put a lot of our investment over the last 18 months is that, infrastructure so that we can bring these groups on regardless of what type of transaction or deal that we put together.

[Doug Cooper:]

And I guess so in the past you’ve done a number of minorities buying 51% presumably that’s because maybe the GIs weren’t a 100% comfortable with offloading the entire business to a third-party. Is the industry becoming more accepting of the practice of essentially outsourcing their Anesthesia which could also help to accelerate the pace of acquisitions?

[Jay Kreger:]

Well let me clarify your first point and that is, that the acquisitions that we made over those minority portions I think that more of a validation that we believe in this business. And that it was in our best interest and our shareholders’ best interest to buy those up.And so and those other opportunity is similar we may have in the future as well. I think the acceptance of the GI space is as high as it’s always been and we expect it to continue to go in the same direction yes.

[Doug Cooper:]

Okay and Richard, just one point maybe can you help just on a modeling perspective. The shareholder EBITDA in the first quarter represented 67% of total EBITDA, this quarter was 72% presumably because you’ve ended in the remaining 49% of a couple of those prior acquisitions. What do you anticipate in absence of doing any further acquisitions in 2020? What from a modeling perspective, what percentage of EBITDA in 2020 would be shareholder versus minority interest?

[Richard Bear:]

I think what was the date of that Central Colorado acquisition, Jay?

[Jay Kreger:]

August 31st, I think it was.

[Richard Bear:]

Yeah, so that’s – so it will increase slightly as we go into fourth quarter, because Q3 only represents one month at Central Colorado at 100%. So you could expect that to be a little bit higher in the fourth quarter than the third quarter and assuming for the base business that will remain and then depending on the deals we do that will change in 2020.

[Doug Cooper:]

Right, so I think 75% is that a half decent number for 2020 assuming no other acquisitions?

[Richard Bear:]

Yeah, or a couple of ticks higher, yeah.

[Doug Cooper:]

Okay. Great, thanks very much, gentlemen.

[Operator:]

[Operator Instructions] Our next question comes from Stephen Kwai with National Bank Financial. Please go ahead.

[Stephen Kwai:]

Hey, guys. Thanks for taking my question. I’m just calling in for Endri Leno. Just a couple from me, so I was just wondering if you could provide a bit more details on your Ancillary Services' initiatives?

[Tushar Ramani:]

Yeah, this is Tushar. Thanks for that question. So that’s something that we identified last time as an initiative that we believe [technical difficulty] should extend into, given the extremely favorable relationship and trust that we enjoy in the GI market.We actually also often asked by our GI partners about other ways we can help support and so it continues to be an open area of probably investigation for us. We want to make sure that we come to market with something that’s sustainable and high value for outside of that. I don’t have anything more specific than that, but just some of the color around it.

[Stephen Kwai:]

Okay, great. Thanks and I guess a similar question regarding the products I mean because I really looked at couple of quarters ago you mentioned you see a lot of potential growth there in the market side and everything like that. Could you give a bit more details maybe like a timeline on when you’re expecting to put through your initiatives?

[Tushar Ramani:]

Yeah, we remain extremely bullish on that segment in a way maybe that the company has not been here before that a large part of that of course is the prevailing tailwinds and awareness about hemorrhoid treatment that’s happening currently in the United States.As the market leading treatment for this condition, we’re well positioned and well poised to be able to capitalize on that. As we get set for 2020, as I mentioned we’re in stages of identifying segment leader that will help bring experienced and continuous focus developing our plans from next year. And I think that as we said our budgets flew, we began to see what that develops into, but as far as an inflection point on that, I don’t have a time for you.

[Stephen Kwai:]

Okay, that’s fine. Okay, great and just my last one just on margins. How do you see those developing going forward? If I’m not mistaken, I think EBITDA margins were a bit lower year-over-year?

[Jay Kreger:]

Yeah, so for Q3 EBITDA is around 43%, and it’s about 44% for the year based on fourth quarter’s seasonality which positively impact both our products and Anesthesia product line. We’d expect to end the year at 45% margins and I think that’s probably a solid number actually that going into 2020.

[Stephen Kwai:]

Okay, probably that’s all my questions. Thanks.

[Operator:]

Our next question is from Douglas Miehm with RBC Capital Markets. Please go ahead.

[Douglas Miehm:]

Hi, good morning. Just one sort of a group of questions associated with reimbursement. I know you already really touched on this with respect to the outlook you gave, but could you talk more specifically about what you’re seeing in terms of reimbursement with your commercial and government take and if you expect any changes to that over the next call it, 12 months to 24 months and why? And I’ll leave it there. Thanks.

[Tushar Ramani:]

Yeah, Doug this is Tushar. We’re not seeing anything – any material trend that we can identify up or down. And all of our focus at the company as I outlined in my initial comments, are really focused on maintaining our current case rates and we’ve got good visibility on that for the next year. So I think we are in a pretty good position.

[Douglas Miehm:]

Right, so the odds of anything changing like we saw few years ago are very low in your opinion?

[Tushar Ramani:]

Yeah, as far as we know there is nothing on the horizon at CMS or regarding another revaluation of GI services that few years back settled the issue.

[Douglas Miehm:]

Okay, great. Thank you.

[Operator:]

Our next question is from David Martin with Bloom Burton. Please go ahead.

[David Martin:]

Hi, good morning. I kind of wanted to follow-on Doug’s question there. So you have the reimbursement cut a couple of years ago, but your revenue per case hasn’t stabilized yet and in fact that it dropped the most this quarter sequentially than it had in any quarter since the reimbursement cut.So I know you have the out-of-network coming into in network, but as your revenue base grows, that impact should be less I would think. So did anything happen this quarter that was unusual and when do you think the revenue per case is going to stabilize?

[Tushar Ramani:]

It’s not so much what happened I think it’s more what didn’t happen. We didn’t have the level of acquisitions that we had anticipated. And if you remember, CRH’s prior model has been that the new acquisitions would come in, they would be very heavier, non-contracted which would carry little bit of a higher case rate and that actually brought up our average blended rate.Since we didn’t have that level of acquisition add on, our prevailing case rate trended more towards our base rates. As far as going forward, Doug as I indicated, we’ll end up this year somewhere in the $330s and that’s exactly where we end up – where we’re projecting 2020 to be, we’re fairly confident about that.

[David Martin:]

Is that $330 for Q4 or $330 on the year?

[Jay Kreger:]

On the year.

[Tushar Ramani:]

The year.

[Richard Bear:]

Remember, David in Q4 we have a strong payor mix so in Q3, 58% of our cases were commercial, 42% federal. Historically Q4 at 64% commercial, 36% federal, which has a very positive impact on our revenue per case.

[David Martin:]

Okay. As far as the just figuring out what your base reimbursement as, if everyone was in network now, a 100% across your network, where do you think your revenue per case would be?

[Tushar Ramani:]

Yeah, I think we projected that, that’s what we expect, the $330s or so for next year, yeah.

[David Martin:]

I mean that’s all a 100% in network?

[Tushar Ramani:]

Effectively, that’s the way we’re modeling it, yes.

[David Martin:]

Okay. Okay, thank you.

[Operator:]

This concludes the time allocated for question-and-answer session. I would like to turn the conference back over to Dr. Tushar Ramani for any closing remarks.

[Tushar Ramani:]

Thank you. I just want to finish by saying that, I have the privilege of speaking for the company but the real work here is done by the hardworking team of clinical administrative staff at CRH and my thanks go out to them for another great quarter and for the exciting future prospects we have here at the company. Thank you all for joining.

[Operator:]

This concludes today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.