CRH Medical Corp
Q2 2018 Earnings Call Transcript

Published: 4 Aug 2018

[Operator:]

This is the conference operator. Welcome to the CRH Medical Second Quarter 2018 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 Ms. Kettina Cordero, Director Investor Relations. Please go ahead, Ms. Cordero.

[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 and six months ended June 30, 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 and six months ended June 30, 2018, for reconciliations of non-IFRS measures to reported IFRS measures. These documents are available on SEDAR and on the investors section of our website. 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 all dollar figures referenced today are in U.S. dollars. Now, I'll leave you with Edward Wright.

[Edward Wright:]

Thank you, Kettina. I’d like to start by discussing our latest anesthesia acquisitions. Last week, we acquired a majority interest in Lake Washington Anesthesia, the first GI anesthesia practice CRH developed as part of our monitored anesthesia program agreement, or MAP program, which we announced in March of 2017 with Puget Sound Gastroenterology. This achievement marks the successful proof of concept for the program. Like Washington, marks the 18th transaction for CRH since our initial GI anesthesia acquisition in December of 2014. We now have exclusive professional anesthesia service agreements in ten states servicing 43 ambulatory surgical centers and providing anesthesia for approximately 290,000 patient cases annually. Yesterday, we announced strong revenue and earnings for the second quarter of 2018, a result of our successful execution on operational objectives and the integration of our recently acquired anesthesia practices. As our teams work together to enhance our anesthesia acquisition pipeline, we continue to benefit from the strong relationships that have been cultivated with GIs who have adopted the CRH O’Regan system. To date the majority of our anesthesia acquisitions have been a result of existing O’Regan customers. Year-to-date we've invested approximately $21 million in acquisitions and are on track to achieve our previously stated growth goals. Our acquisitions continue to be financed through our internally generated cash flows and our $100 million credit facility, which has an interest rate of LIBOR plus 250 basis points. At June 30, 2018, we had approximately $35.5 million available on our credit facility. This combined with our free cash flow provides us ample funds to continue executing on our growth strategy. Finally, it is worth mentioning that as we expected the 2019 proposed physician fee schedule released by CMS last week does not contain any mention of further changes to GI anesthesia reimbursements. And with that I will now turn it over to Richard for his commentary.

[Richard Bear:]

Thank you, Edward. I 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 the majority interest. This practice is in keeping with current accounting standards. In addition please note that effect of January 1, 2018, the company adopted IFRS 15 as a result we restated prior year revenue and operating expenses. The restatement has no impact on net income or any other forms of income. Please refer to three of our unaudited interim financial statements for more information. During the second quarter of 2018, we reported total revenue of $27.3 million. Anesthesia revenue grew 36% year-over-year to $24.7 million. Average revenue per case for the second quarter was $371, approximately 6% lower than in the second quarter of 2017. The decrease is primarily due to the impact of the CMS final fee schedule that went into effect January 1, 2018. The execution of contract to commercial payers offset by the impact of newly acquired anesthesia entities. During the second quarter of 2018, we serviced 66,537 patient cases, which is 44% more than in the same period of 2017. Sales of the O’Regan system during the second quarter were $2.7 million, compared to $2.8 million for the same period of 2017. The decrease in product sales is the result of decreased sales in previously changed practices due to changes in practice emphasis and to a lesser extent introduction of competitive products. Total adjusted operating EBITDA for the second quarter was $4.9 million, representing 47% of total revenue. Adjusted operating EBITDA attributable to our shareholders was $8.4 million. As of June 30, 2018, we had $4.5 million in cash, $12.7 million in working capital. In addition, we had $35.5 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. We continue to be busy on the acquisition front. We spent $6.4 million in early May to acquire a majority interest in Western Ohio anaesthesia, which was our first practice in the state of Ohio. In addition, as Edward mentioned we spent $5 million, last week to complete our first acquisition, under our MAC program and become majority owners in Lake Washington anaesthesia in Washington State. We established the Lake Washington anaesthesia practice in March 2017 to progressively adopt these sedation as a standard-of-care at all four ambulatory surgical centers where our partners at sound Puget Sound operate. By applying our knowledge in implementing best practices and patient care, practice management in all facets of revenue cycle management, we've been able to establish a high quality and efficient practice from day one. The $11.4 million that we spent in these two acquisitions brings our total investment for the year to $20.7 million. We are excited continue growing our anaesthesia business over the remainder of the year. Our anaesthesia growth into what now covers ten states March [ph] was quickly becomes a national footprint. We expect further growth across the country, as we take advantage of new opportunities. We continue to focus on providing investment class operations along with the ability to effectively and efficiently integrate these acquired businesses. Our platform continues to evolve as the GI anaesthesia 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. Our financial and operational resources are in place to support these continuing acquisitions and so I look forward to the remainder of the year to come. I’ll now leave you back with Edward for his closing remarks.

[Edward Wright:]

So, with that I'm going to ask the operator to open it up for questions. And we're happy to take your questions.

[Operator:]

[Operator Instructions] The first question is from Lennox Gibbs with TD Securities. Please go ahead.

[Lennox Gibbs:]

I am considering the make-up of your acquisition pipeline in addition to – building you out into the market what trends might we expect in terms of your deal mix going forward and I'm thinking about that metrics like ideal size, locations of some of the transactions you might engage in, therapeutic I know, there have been some talk previously with ophthalmology valuation, first question.

[Jay Kreger:]

So, Lennox this is Jay. Thank you for the question. I think you can expect certainly in the short-term more of the same, the size of the deal that we’ve encountered are representative of what we are seeing in pipeline. For the rest of this year and into next year.

[Lennox Gibbs:]

Any comment specifically on MAC development, transactions that would include MAC development.

[Jay Kreger:]

So, I think first of all we're very excited to have completed the process of not only developing the program but then transacting on the Lake Washington anesthesia program. As you know from that program it included an option that could conclude after a year of the development of the program. And, so those transactions would not take place any time within the next 12 months, but we continue to talk to groups that would be a prime candidate for those.

[Lennox Gibbs:]

And secondly, can you explain the sequential decline in the operating margin here presumably reflecting a similar decline in anesthesia margins, but I'm wondering exactly what caused the drag and if you can give us a sense as to whether that is the typical quarter-to-quarter fluctuation or perhaps more than that.

[Edward Wright:]

What’s driving the trend in operating margins is primarily going to come from the changes in CMS and change is as we contract, as it is, if it were acquired prior to this year, go from non-contacted to contracted. So, the margins we believe again going back to the press release that we put out last year, we believe that we still have some margin profile. And, I think what you're seeing here is again a reflection of CMS change as well as moving and non-contracted to contracted.

[Lennox Gibbs:]

Right, but I'm referring to the sequential trend Q2 over Q1 2018. So I don't think that's reimbursement.

[Jay Kreger:]

Well it sounds like it’s going to be related to – because we're – again we're constantly moving from a non-contacted to a contracted space again offset by new acquisitions. I won’t expect that number to change dramatically as we continue through 2018.

[Lennox Gibbs:]

Thanks very much, Richy.

[Operator:]

The next question is from Richard Close with Canaccord Genuity. Please go ahead.

[Richard Close:]

Great, thanks for the questions. On the MAC program is there any other metrics you can provide us in terms rather than just a high level continuing to talk to groups. Like anything like the number of potential programs that you could have on an annual basis in terms of just trying to gauge how active the MAC program could be?

[Jay Kreger:]

So Richard, I think, that the MAC program opportunities are a function of a couple of things. We talk about the adoption of anesthesia deep sedation as the standard-of-care. And I think that’s a moving target as certain geographic regions in the United States open up to deep sedation or watching those markets closely. And as they adopted they were a prime candidate to go in with those programs, but that can be a vacancy. The other side is groups that maybe looking to make a change from a third-party or groups that do decide the change right now. But it’s region by region and group by group. A lot of times the smaller group that will be looking to make that change because the larger groups have already adopted deep sedation if they're in a market where it is the standard-of-care already. Does that help?

[Richard Close:]

Yes, and then in your comment Jay with respect to acquisitions, obviously at Ohio and that was a new state, but it sounded as though there could be additional new states there. Maybe talk a little bit about geography, maybe where you're seeing more discussions bubble up on potential M&A, is there anything you can point to on that front?

[Jay Kreger:]

Sure. Well, as we've said, we’ve always been opportunistic with our acquisition opportunities. And given that our O’Regan customers are in all over 48 states, we have the five-point if you will to talk to anyone anywhere. So I would say that we were in at least preliminary discussions almost everywhere and that's why I feel that we will continue to expand beyond the ten states that we're in.

[Richard Close:]

Okay.

[Jay Kreger:]

There’s not a specific state or a region though that we focus on.

[Richard Close:]

Okay. And I understand your comments with respect to the size, typical size of deals. And are there any significantly or outsized deals out there in the marketplace that you're currently having conversations with, either preliminary or far along just trying to gauge whether there could be anything of significance at some point here over the next year?

[Jay Kreger:]

Nothing eminent at this time.

[Richard Close:]

Okay. Alright, thank you.

[Operator:]

The next question is from David Martin with Bloom Burton & Co. Your line is open sir.

[Unidentified Analyst:]

Hi, hello this is Antonia on the line for Dave. I just got one question and its related to the CMS related cuts that were supposed to have a full impact in January. So have all of those cuts then baked in the 2Q numbers, or are there still some private payors who haven’t yet adjusted down and we can expect those in third and fourth quarter?

[Jay Kreger:]

Based on everything that we've seen to date we've believe that the cuts announced by CMS have been fully incorporated into all the private payor systems as well as the federal system. So what we've seen is what we’ll continue to see.

[Unidentified Analyst:]

Okay thank you.

[Jay Kreger:]

You’re welcome.

[Operator:]

The next question is from Ammar Shah with National Bank Financial. Your line is open.

[Ammar Shah:]

Hey guys thanks for taking my questions and congrats on the quarter.

[Jay Kreger:]

Thank you.

[Ammar Shah:]

So just hoping if you could touch again on the margin front, but particularly with the product segment I know you mentioned higher product support costs. I was just wondering is that something that should be viewed as one time or something that would be ongoing in the next few quarters.

[Jay Kreger:]

I would look at that product this way that we have seen where we are launching initiatives to increase the usage from previous training practices so we’re make investments in kind of reeducating, retraining, lighting the fire because these are practices, they have done a lot of hammering in the past and we believe our candidates to continue to increase the growth. So the margins that you see in Q2 2018 approximately 52% would be the margins that I would expect plus or minus a point or two, for Q3 and Q4.

[Ammar Shah:]

Okay, that’s it from me. Thanks.

[Operator:]

The next question is from Richard Close with Canaccord Genuity. Please go ahead.

[Richard Close:]

Great, thanks. I was wondering if you could give us some perspective as we look into the back half of the year in terms of just thoughts on procedure trends, anything related to volume, maybe thoughts on same-store sales or same facility volumes in and around of that?

[Edward Wright:]

Yes, that’s a good question, Richard. I mean for the three months ending, we did 56,000 cases. So if you look at what made up that, that was 100% of all of the deals that we did up through Q1, in two months of Western Ohio. So we’re going to get three months of Western Ohio, when we have the third quarter, plus we are going to get play in Lake Washington Anesthesia, so headcounts will go up from a seasonality perspective. I think we’ve stated before the Q2 seasonality is less than 25% so just on a normalized basis. We’d expect headcounts to go up in Q3 and Q4. Talking about our organic growth, I mean, low single-digits as we’ve said organic growth of kind of the base which remains consistent. And then the great work of between the team we continue to do acquisition and add patient cases.

[Richard Close:]

Okay. And then with respect to the metrics I think on commercial and federal in the documents you provided. Have you guys reclassified anything or?

[Richard Bear:]

There is a small, I mean there is a notice in the bottom of the page, there’s a small reclassification related to one of the properties, Community Anesthesia. Community Anesthesia was just an entity that the billing was done by that entity up until January 1, 2018 and it came over to our side. And when it came over to our side, we had a little bit better view of making sure that the classification of between federal and commercial was more consistent with all the other properties which had a minor change in some historical numbers which we noted.

[Richard Close:]

Okay. I guess, my final question is on the new CMS payment rules that came out. I think there's some stuff in there with respect to hospital outpatient and changes there in terms of reimbursement. And as that compares to – I guess ambulatory standalone clinics. And Jay, I was wondering maybe if you could just provide your thoughts on how that impacts potentially the business going forward in terms of the setting of care where people receive procedures, whether it's a positive or negative for you guys maybe?

[Jay Kreger:]

I think if the reimbursement in the hospitals was impacted. I don't think that changes where a patient goes because the patient goes where their doctors normally go. And just a few physicians were invested in anesthesia than invested in their outpatient setting, their ambulatory surgery center. So I don’t think it has an impact on volumes at all.

[Richard Close:]

Okay. Now could it be something where maybe GIs align themselves with hospitals previously, maybe because they could get paid more in terms of salaries or something like that and drive volumes. And now that maybe there's lower reimbursement on that side that they decide, hey, maybe it's better to go into private practice and begin to shift maybe out of hospitals and potentially set up new businesses, GI practices and ultimately anesthesia services as well.

[Jay Kreger:]

I think you’re talking about…

[Richard Close:]

Am I my reaching this…

[Jay Kreger:]

I think you're kind of talking about monumental shift of care that is many, many years away if it would ever happen. Yes, GI historically have not been purchased by hospitals and when they have, they’d gone back to independent, because it didn’t work. Certainly history is no proof of the future but I think what you're suggesting is nothing that we need to be concern about any time soon.

[Richard Close:]

Okay. Great, thanks.

[Operator:]

This concludes the question-and-answer session. Thank you for participating in CRH Medical’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.