CRH Medical Corp
Q1 2018 Earnings Call Transcript

Published: 2 May 2018

[Operator:]

Welcome to the CRH Medical Q1 2018 Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. [Operator Instructions]. I would now like to turn the conference over to Kettina Cordero, Director of Investor Relations. Please go ahead.

[Kettina Cordero:]

Thank you, operator and good morning everyone. I'm joined today by our CEO, Edward Wright; our CFO, Richard Bear; and President of CRH Anesthesia, Jay Kreger. Before we start, I would like to remind everyone that certain statements you will hear today constitute forward-looking statements within the meaning of applicable securities 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 financial report for the quarter ended March 31, 2018 and the Risk Factors section in our most recent annual information form. During this call, we will discuss non-IFRS measures as indicators of our performance. You can refer to our management's disclosure and analysis for the quarter ended March 31, 2017 for reconciliations of non-IFRS measures to reported IFRS measures. These documents are available on SEDAR and on the Investors section of our Web site. In addition, please note that we use the abbreviation GI to refer to gastroenterology. 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. Now I’ll leave you with Edward Wright.

[Edward Wright:]

Thank you, Kettina. I would like to start by talking about our second anesthesia acquisition of 2018, which we announced this morning. Our long-standing relationship with this O’Regan customer dating back to 2009, created the opportunity for us to acquire a 51% interest in Western Ohio Sedation Associates, a customer based in Dayton Ohio. We continue to leverage our O’Regan relationships to drive anesthesia growth. Today CRH has 17 anesthesia practices with exclusive professional service agreements servicing 39 ambulatory surgical centers and is providing anesthesia to approximately 272,000 patient cases annually. It is important to note that 15 of the 17 acquisitions we have completed since December of 2014 are a result of the relationships we have with our O’Regan customers. Yesterday we announced positive results for the first quarter 2018, an outcome attributable to the successful management and organic growth of our existing anesthesia business. The relationships we’ve cultivated with gastroenterologist who have adopted the O’Regan system continue to be a strong conduit for anesthesia acquisition pipeline. In 2018, we expect to invest a similar amount as we did in 2016 and 2017 in anesthesia acquisitions. These acquisitions will be financed through internally generated cash flows and our $100 million credit facility, which has an interest rate of LIBOR plus 250 to 300 basis points. At March 31, 2018, we had approximately 40 million available on our credit facility. This combined with our free cash flow will give us ample funds to continue executing on our growth strategy. I will now turn it over to Richard for his commentary.

[Richard Bear:]

Thank you, Edward. I'd ;like to start by reminding everyone that in accordance with International Financial Reporting Standards also known as IFRS, we report consolidated financial statements, which means that our financial statements include those of the subsidiaries in which we hold a controlling interest such as the anesthesia practices that we own or in which we hold a majority interest. This practice is in keeping with current accounting standards. In addition, please note that effective January 1, 2018, the company adopted IFRS 15 as a result we restated prior-year revenue and operating expenses, the restatement had no impact on net income or any other forms of income. Please refer to Note 3 of our unaudited interim financial statements for more information on this. During the first quarter of 2018, we reported total revenue of $24.7 million, anesthesia revenue grew 19% year-over-year to $22.1 million. Average revenue per case for the first quarter was $383, 12% -- 12.5% lower than in the first quarter of 2017. The decrease is primarily due to the impact of the CMS final fee schedule and the execution of contract with a number of our commercial payers at previous -- for previously acquired anesthesia entities. During the first quarter of 2018, we serviced 57,657 patient cases, which is 36% more than in the same period of 2017. Sales of the O'Regan system during the first quarter were $2.6 million compared to $2.8 million for the same period of 2017. Total adjusted operating EBITDA for the first quarter was $12.4 million, representing 50% of total revenue. Adjusted operating EBITDA attributable to our shareholders was $8.2 million. In the first quarter of 2018, we generated $4.4 million in free cash flow. We define free cash flow as cash provided by operations, less payments made for interest and other finance expenses, and less distributions to non-controlling interest. As of March 31, 2018, we had $4.8 million in cash, $11.4 million in working capital. In addition, we had just over $40 million available on our credit facility to fund future growth. With that, I will leave you with Jay for his update.

[Jay Kreger:]

Thank you, Richard. As Edward stated earlier, we were active on the acquisition front lately. During the first quarter, we acquired 100% of Shreveport Sedation Associates, which was our first acquisition in the State of Louisiana. And then earlier today, as Edward said, we announced the acquisition of a 51% interest in Western Ohio Sedation Associates, also our first acquisition in that state. In total, we’ve now spent approximately $15 million on acquisitions so far in 2018. CRH Anesthesia is now present in nine states, the states and the footprint that they represent has been a product of the opportunities that have been presented as well as an acceptance of anesthesia as a standard of care within each geographic region. As the standard of care continues to expand nationwide, we expect that our footprint will broaden accordingly. As we’ve discussed before, our MAC Development Program which is in Washington State, is a result of the standard of care acceptance. As you'd expect, more MAC program should be in our future and as far as the Washington program goes, it's still on track and we expect to exercise our purchase option later this summer in 2018. Given these recent acquisitions and an active second half of 2017, we are continued to focus on our operations and the ability to effectively and efficiently integrate newly acquired businesses. Our platform continues to evolve as we support best practices as the GI Anesthesia Partner of choice. Our business development team is continuing to work closely with our O'Regan team each day in order to further grow our acquisition pipeline and uncover new opportunities for the rest of 2018 and beyond. As Edward stated earlier, we're very optimistic that we will continue our investment pace from the last couple of years. Our financial and operational resource is on place to support discontinued acquisitions, and so I'd look forward to the remainder of the year to come. I will now leave you back to Edward for his closing remarks.

[Edward Wright:]

Thanks, Jay. We look forward to reporting our second quarter results in approximately 90 days. And with that I will open it -- the call up for questions.

[Operator:]

Thank you. [Operator Instructions] The first question comes from Lennox Gibbs of TD Securities. Please go ahead.

[Lennox Gibbs:]

Good morning. Thank you. So in November you estimated the cost of the CMS reimbursement cuts at 12%. So having seen the Q1 results, are you holding to that guidance?

[Edward Wright:]

So, yes, in the second -- it's prior to our first quarter results where we estimated the impact being 12% based on data in the first quarter that we analyzed and studied. We believe the impact is going to be 10.5% and don’t say any reason why that would change throughout the rest of the year.

[Lennox Gibbs:]

So we should not look at, this is 10.5% going forward.

[Edward Wright:]

Correct.

[Lennox Gibbs:]

Good. Okay. Secondly, can you step us through what the revenue growth trajectory might look like for your recent acquisitions. So starting with the bump that you usually get -- you typically get from revenue cycle management, once you go in. Then the reset as you move so in contract terms, and finally the sustainable organic growth phase. If you could just kind of illustrate what that might look like.

[Edward Wright:]

Good question. Let me -- with that it's hard to quantify, because each market is different, but -- so in the case of Western Ohio Sedation Associates, that’s a new entity that was created for the sole purpose of the joint venture with the GI Group that we're partnered with. So right now that entity as of today would be non-contracted with all the major payers. Working with the GIs, we would develop a payer strategy which payers will go after first, we may be contacted by certain payers, it's part of the normal course, but it will take months, sometimes quarters or longer to get to a point where we are fully contracted and in some cases when that required to be fully contracted. So we'd expect during the initial phase of Western Ohio Sedation Services, not different than any other entity that will be non-contracted. And as a result, we will have a higher revenue per case and that will ultimately over a period of 12, 18, 24 months , again depending on the market, go down as we contract to what we would call a steady state. Just to add to that, if that steady state where we think we will end up as how we value that business. We don't value the business on anything that we expect in a non-contracted environment.

[Lennox Gibbs:]

So talk a little bit more about that steady state. I guess, what I’m wondering about is can you give us a sense as to what long-term sustainable organic revenue growth might look like?

[Edward Wright:]

So, -- we always talk about 3% to 5% in terms of organic growth. The revenue at any specific site is going to vary based on the payer mix of that site, commercial, the federal, and even within the commercial because there are -- each payer has a different reimbursement strategy and when we contract with them, rates can be -- some rates in a contracted environment can be 2x others who are also contracted in the same market. So, it is difficult to really get on that steady-state [indiscernible] on an individual entity basis.

[Lennox Gibbs:]

[Indiscernible] thought about it overall on a corporate level, how do you look -- how should we think of the long-term sustainable organic revenue growth?

[Edward Wright:]

Again, it depends -- that’s going to depend on just a makeup of our payer mix with the new entities that we acquired. That’s not a -- not -- we would be able to say 3% to 5% on the case growth. But the revenue -- we don’t have an and I don’t have the visibility into the future to tell you how acquisitions would impact our overall revenue per case.

[Lennox Gibbs:]

Okay, good. Thanks very much.

[Edward Wright:]

You’re welcome.

[Operator:]

The next question comes from Noel Atkinson of Clarus Securities. Please go ahead, Noel.

[Noel Atkinson:]

Hi, good morning. Thanks for taking my call. On specifically on the GIA side, did you see any negative peer mix impact or in reimbursement rates that are similar to what you saw in Q1 of 2016 and 2017.

[Edward Wright:]

I’m happy to report that we did not have any payer mix -- have no impact of payer mix changes in GIA in the first quarter of 2018.

[Noel Atkinson:]

Okay, great.

[Richard Bear:]

And -- on the -- trying to bring the payers from the 2016 acquisitions and network. So it didn’t happened in Q1. What’s your expectation for how it rolls out in the rest of the year, I’m sorry, if I miss this already.

[Edward Wright:]

So we at -- in our last call, last reporting, we talked about the 12% in CMS cuts which is now 10.5%. And we also talked about a 5% decrease in the revenue per case as we built out going from non-contracted to contracted for acquisitions prior to December 31, 2017. We still believe that 5% to be a fair number. There are contracts that will go into effect during Q2 and others that I -- others that will go into effect later in the year, the results of our conversations, so we stand by that -- stand by those numbers that we provided.

[Noel Atkinson:]

Okay. The IFRS 15 adjustments, so moving the bad debt from OpEx to, I guess, netting against gross revenue, would that been a 6% number in the quarter against gross revenue?

[Edward Wright:]

Yes. I mean, the simple example that I’d like to use is prior to IFRS -- the adoption of IFRS 15, we would record a $100 in revenue, $6 in bad debt, which is reflected as anesthesia -- its reflected in OpEx for a net of 94. Now we just reflect the 94 as revenue. Interesting, it does certain income -- operating income, EBITDA attributable to shareholders, any form of income doesn’t change. So when you look at margins, the numerator, the income on top of the equation stays the same, but the denominator revenue is decreased which results actually on a comparative basis that we get three extra points of margin. Please keep that in mind, it's not that the margins for the business are improving, it's -- that is a mathematical equation as a result of IFRS 15.

[Noel Atkinson:]

Okay. And then finally, just on the acquisition side. So, now that the CMS reimbursement changes have flow through into revenue and all the different practices we’re seeing how things have gone, what does the acquisition pipeline look like? Has it changed at all as some of these GIs have seen what has happened on the anesthesia side?

[Edward Wright:]

Jay, would you take that call -- that question, please?

[Jay Kreger:]

Sure. Noel, good question. I think what we've seen, number one is our pipeline, its strong as it's ever been. And some of that may be a result of the physicians who have experienced these cuts and realizing that there is payer risk or proceed payer risk into the future. I think also the fact that we have just continued to grow and get our name out there as well as our continued strength from O’Regan relationships has led to that stronger pipeline. Therefore I don't -- we don't see the CMS necessarily as a good thing or bad thing from an acquisition standpoint. The values have been reflected that we are paying from CMS going forward. So it doesn't affect valuations at all. We just look at as another talking point when we speak to physicians about the value proposition that we can present to them.

[Noel Atkinson:]

Okay. Well, nice quarter. Thanks very much for taking my call.

[Edward Wright:]

Thanks, Noel.

[Operator:]

The next question comes from David Martin of Bloom Burton. Please go ahead.

[David Martin:]

Good morning. First question, so the adjusted EBITDA was higher than we expected and we know that was in part because you got no new commercial payers shifting to network from other network and a lower impact to the CMS cuts. But I’m also wondering where there any expense reductions that you're able to achieve that exceeded your plan?

[Richard Bear:]

No.

[David Martin:]

No, okay.

[Richard Bear:]

There was no expected reductions that -- there's no material expense reductions. The -- there is two sets of numbers, resets. There's consensus that each of the individual [indiscernible] that there number is, then we have our numbers. I would say the results can be very close to what we expected and we’re pleased with the results, except for the -- with the exception of the CMS change.

[David Martin:]

Okay. So maybe differently, maybe [indiscernible] what I expected, did you trim in any areas and are those trims expected to be sustained or were they one-time?

[Richard Bear:]

Yes, every opportunity we have, David, we look at how we can do things better, fast to keep our, it's -- there's nothing to note that have a significant benefit over something else. We are looking at every opportunity to manage expenses -- in manage expense growth, but obviously the focus is ensuring that we’re providing the highest level of service to our patients into our customers.

[David Martin:]

Okay. Second question, going back to one of the -- one that Lennox asked, when you make an acquisition and you who indicate what you expect the revenues to be at that acquisition, is that the revenues immediately out of the gate while you still have everyone or most of them out of network or is that the steady-state revenues you expect for them, ones -- if everyone [indiscernible] in network?

[Richard Bear:]

That -- its more of the latter, the steady state, because until we have reimbursement history, it will be difficult for us to say what the revenue that we collected on a contracted basis, because it truly is different by state, by payer. What we’re able to receive non-contacted from united in Texas is going to be different than where we had non-contacted united in Ohio.

[David Martin:]

Okay. And I guess the books that you see of the -- this consensus that [indiscernible] reflect a steady state of payers in network and they just shift out a network as you made the transition?

[Edward Wright:]

Sometimes. I mean, sometimes they reflect in contract, sometimes they reflect non-contracts, mostly what they reflect is a lack of knowledge of how to really build for anesthesia. And so, when we look at what -- when we look at the things that we can do, it's not just rates, it's not just our ability to contract, its -- it goes, it's a full gambit [ph] of process improvement based on our best practices that many individual [indiscernible] organizations are just -- don't have any proficiency at.

[David Martin:]

Okay. Last question, when I started covering you guys it seems like Deep Sedation was more popular on the East Coast than on the West Coast. Are you seeing any increase in use of Deep Sedation on the West Coast?

[Edward Wright:]

Jay, would you take that call please?

[Jay Kreger:]

Sure. As I alluded to, David, that continues to be the case. But the further West we go, it is starting to change as I mentioned the State of Washington Medical Necessity was an issue just a few short years ago and that’s now not the case. We would expect the remaining states that have an accepted Deep Sedation as a standard of care they will continue to do that over the next few years, which of course will present new opportunities for us.

[David Martin:]

Okay. That’s it. Thank you.

[Edward Wright:]

Thank you, David.

[Operator:]

The next question comes from Doug Cooper of Beacon Securities. Please go ahead sir.

[Doug Cooper:]

Hi. Good morning, guys and congrats on a nice quarter. I just want to get back to a point David brought, just in the costs, Richard, I didn’t notice that cost per case was down about 7% driven by employee related costs per case is down almost $11 as case I guess. So, is it just more efficiency to driving that employee related cost down?

[Richard Bear:]

You’re comparing Q1 2018 to Q1 2017?

[Doug Cooper:]

Correct.

[Richard Bear:]

Okay. And [indiscernible] those are adjusted numbers, adjusting for IFRS 15?

[Doug Cooper:]

Correct.

[Richard Bear:]

[Multiple speakers]. Yes, I mean, so every market is actually a little bit [indiscernible]. So I would say that when we look at Central Colorado, when we look at [indiscernible] when we look at Alamo, there cost per case and the employee cost per case in those markets are cheaper than where the average was prior to those acquisitions. So when you look at it -- what you're looking at it, it's really more of a -- the mix of our -- the cost position of our portfolio in Q1 2018 compared to the cost position of our portfolio of properties in Q1 '17 that’s driving that. We are always looking for ways of streamlining and doing things again better, faster, cheaper, but that’s primarily what we are seeing. Jay, anything to add?

[Jay Kreger:]

Yes, I would also -- just to [indiscernible] back on Richard's point there, every center has a different staffing model. We have centers that use anesthesiologists in Unison with CRNAs, which is a more expensive staffing model and then other centers that use only CRNAs which of course would be less. All of the acquisitions that we did in 2017 were of the latter example, only CRNAs that would be less. So that may account for a very small portion of that. Again, the staffing model is something that were for the most part inheriting based on the ability of the comfort level of the physicians that we are working for or mandated by the states or the commercial payers that would require anesthesiologists.

[Doug Cooper:]

Okay. And then just going forward -- per case it was 3.83, you talked about the -- you still think the 5% is going to come, so the 5% off the 3.83 for modeling purpose 3.63, 3.65 rev per case, is that is sort of a good number to go with?

[Richard Bear:]

Yes, I mean, our adjusted revenue per case for 2014 -- for 2017, its [indiscernible], it's 10.5% off of that versus CMS and that’s 3.70% to 5% off with other changes that we talked about, it's 3.52%.

[Doug Cooper:]

Okay. And just on the CMS [indiscernible] to the cut in January of this year, when were they re-examine for future cuts? Is that something that can happen any time or are they -- when is the next time they re-examine that?

[Richard Bear:]

I mean the next natural cycle of it, the next cycle of that would [indiscernible] come up for any examination would be five years. And that’s a deal that there is a [indiscernible] technology has changed or the skill set changed or its been changed in how they survey that, we [indiscernible] any changes for that review.

[Doug Cooper:]

Okay. So pretty much get through five years leasing?

[Edward Wright:]

We think [indiscernible] beyond that, but -- yes.

[Doug Cooper:]

Okay. And just on the acquisitions, it looks like [indiscernible] you paid about 2.7x sales, Dayton maybe 2.1x sales, is that, I guess, if you paid 5.6 for your 51% share. Is that sort of the ballpark somewhere in that range? And what would reflect the differences in that 2.1x versus 2.7x price?

[Richard Bear:]

Just as you know we -- sales is one component, expense is another component and we value on the third component which is income. So sales, not all entities are graded equal. They have different reimbursements, different staffing -- for cost of staffing, so we look at income and we definitely [indiscernible] on an effective basis to 4.5x and 5x, and these fields are consistent with that.

[Doug Cooper:]

Okay. So together, the Shreveport, in Dayton on a consolidated basis, on an EBITDA margin profile, is it essentially in line with what you just reported?

[Edward Wright:]

I mean, if you look at the individual, so what we report -- what we just reported would be anesthesia revenue plus anesthesia expenses gets to an entity to margin and that margin divided by revenue will get to a percentage. Keep in mind that’s a -- in fact there's anesthesia expenses and I simply said the individual entities, but the expenses of -- Jay and his team are operating through. So when we look at the margins of Shreveport or Western Ohio, you would expect those be higher than our average because we are not burdened with that overhead.

[Doug Cooper:]

Right. Okay. That’s it for me. Thanks very much.

[Edward Wright:]

Doug, thanks.

[Operator:]

The next question comes from Doug Miehm of RBC Capital Markets. Please go ahead, Doug.

[Douglas Miehm:]

Thanks. Richard, just a single question here and it has to do with the mix between the types of procedures you're seeing. We have seen a change since last year and then most recently you indicated the 50%, 14% split. Have you seen doctors changing the way they're treating based on the change in units? So if those numbers changed again, are they consistent with what you -- the guidance you just gave last time?

[Richard Bear:]

So, I am not quite sure what you’re referring to …

[Douglas Miehm:]

What I’m trying to understand is the mix between 8x1s, 8x2s 8x3s, because …

[Richard Bear:]

Yes, so -- okay. So just for [indiscernible] we call 8x1 which is 811 is a diagnostic screening meaning that they found something. 8x2 is a [indiscernible] screening. 8x3 is a double where they do it upper and lower endoscopy at the same time. [Indiscernible] are really at patient convenience, because the patient needs both an upper and lower endoscopy, it's easier for the patient to come in at a single timing [indiscernible] it's also better for them from an out of pocket experience, so we don’t expect that to change, but again that’s not our decision. That would be the decision of the doctors [indiscernible] the facilities. 811 versus 812, the coding is really based on did we find something or did we not. And so, those are -- they’re not -- its not a judgment call.

[Douglas Miehm:]

So just to be clear, nothing has changed since the last time you provided the breakdown of those cases? What I’m trying to get at …

[Richard Bear:]

[Indiscernible]. So we have -- I haven't looked at -- I haven't -- we haven't looked at the exact breakthrough. That break down that we provided was based a lot on what the feedback we got from our GI partners prior to the CMS change. We were collecting the data to get to that level because it wasn't necessary for our billing. We haven't communicated that information since then and -- we’re looking to update you on that and communicating that, if that’s important information for people to have.

[Douglas Miehm:]

Yes, I’m just trying to understand if that’s the reason for the difference between the [indiscernible].

[Richard Bear:]

Fair enough.

[Douglas Miehm:]

Okay. Thank you.

[Operator:]

[Operator Instructions] The next question comes from Prakash Gowd of CIBC. Please go ahead, Prakash.

[Prakash Gowd:]

Thanks very much. Richard, I just wanted to clarify your expectations for dollar per patient case. I think you kind of alluded to it a little bit on an earlier question. If we fast forward 12 months, for example, and assume no further changes in reimbursement beyond what is already expected and we assume no further acquisitions, what is your best guess of revenue per patient case in that steady-state?

[Richard Bear:]

Yes, I mean, it's -- I can only answer that question to how we’ve answered in previously [indiscernible]. If you’re looking at our acquisitions prior to December 31, 2017, we would expect that range to be around 350. I don’t have enough data on the new acquisitions Shreveport and Dayton to be able to blend that and give you a blended number.

[Prakash Gowd:]

Okay. And the 350, I would also assume that whatever contracting happened also happens, correct?

[Edward Wright:]

Yes.

[Prakash Gowd:]

Okay.

[Edward Wright:]

I would assume that -- that assumes the contracting that we are expecting to occur during 2018.

[Prakash Gowd:]

Perfect. Okay. That’s all. Thank you very much.

[Operator:]

There are no more questions at this time. This concludes the question-and-answer session. I would like to turn the conference back over to Edward Wright for any closing remarks.

[Edward Wright:]

Just like to thank everyone for joining us. And as I said earlier, we look forward to updating you on our Q2's in about 90 days. Thank you.

[Operator:]

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