CRH Medical Corp
Q4 2016 Earnings Call Transcript

Published: 26 Feb 2017

[Operator:]

Thank you for standing by. This is the conference operator. And welcome to the CRH Medical Fourth Quarter and Year End 2016 Results Conference Call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. [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, Joe and good morning, ladies and gentlemen. I am joined here today by our CEO, Edward Wright and our CFO, Richard Bear. We will briefly review our financial and business results. Before we start, I would like to remind our listeners of certain statements you will hear today constitute forward-looking statements within the meaning of applicable securities laws. For important assumptions, definitions and cautionary statements regarding to forward-looking information and the risks inherent to our business, please refer to the cautionary notes in our financial reports for the year end December 31, 2016 and to 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. Please refer to our management’s disclosure and analysis – management’s discussion and analysis for the year ended December 31, 2016 for reconciliations of non-IFRS measures to reported IFRS measures. These documents are available on SEDAR and on the Investors section of our website. Also please note that we use the abbreviation GI to refer to gastroenterologist and to services related to gastroenterology such as anesthesia for endoscopic procedures. Finally, please be advised that our reporting and functional currency is the U.S. dollar. All dollar figures referenced today are in U.S. dollars. Now, I leave you with Richard Bear for the financial highlights.

[Richard Bear:]

Thank you, Kettina and good morning everyone. Yesterday, we reported total revenue of $78.4 million of the year ending December 31, 2016, a 70% increase compared to 2015. Anesthesia revenue for the year ending December 31, 2016 was $67.8 million, an increase of 86% when compared to 2015. This increase is a result of the full year’s contribution of the five transactions announced in 2015 and half year’s contribution by the three transactions announced in 2016. In 2016, we invested $34.1 million in anesthesia transactions compared to $19.9 million invested in 2015. We have completed 10 anesthesia transactions since we entered the space in December 2014. This includes our latest transactions announced on February 1 of this year. During 2016, product sales contributed $10.5 million to total revenue. This represents an increase of 10% compared to 2015. Total adjusted operating EBITDA for 2016 was $41.5 million, an increase of 73% compared to 2015. In 2016, total adjusted operating EBITDA attributable to shareholders was $32.4 million and total adjusted operating EBITDA to non-controlling interest was $9.1 million. Our 2016 total adjusted operating EBITDA margin remains steady at 53%. In 2016, we generated $23.2 million in free cash flow compared to $12.1 million generated in 2015. We define free cash flow as cash provided by operations less payments made for interest and other finance expenses less distributions for non-controlling interest. The increase in free cash flow is a result of the growth in our anesthesia business and the restructuring of our debt completed at the end of 2015. At December 31, 2016, we had $9.5 million in cash and $26.3 million available on our revolving credit facility. I will now turn the call over to Edward Wright to provide an overview of the business highlights of 2016.

[Edward Wright:]

Thanks, Richard. In 2016, we continue to focus on leveraging our relationships with the GI community to generate and cease opportunities for our anesthesia business. On the O'Regan side of the business, we trained an additional 239 GIs in 2016. To-date, we have trained a total of 2,414 GIs at 930 clinical practices in all of the lower 48 states. During 2016, our O'Regan relationships continued to translate into growth for our anesthesia business. We completed three additional transactions all of which were in states where we had no previous anesthesia presence. Two of these transactions were with existing O'Regan customers demonstrating our ability to continue to leverage our existing GI relationships. During 2016, we strengthened our anesthesia team with the addition of Jay Kreger, who was appointed as President of CRH Anesthesia Management. Jay comes to us having gained valuable experience as an executive at the ambulatory surgical division of Hospital Corporations of America, one of the largest hospital management organizations in the U.S. Since joining us, Jay has made key hires in both operations and in business development establishing the infrastructure to position us for growth and ensure we provide exceptional service to our anesthesia partners. At the end of 2016, CRH had exclusive contracts to provide anesthesia services to 25 ambulatory surgical centers in 7 states and we have built on this momentum with the announcement of the transaction in Decatur, Georgia earlier this month. This most recent transaction brings the total number of ambulatory surgical centers under contract with CRH to 26. Based on our current pipeline of opportunities, the relationships that we develop through the CRH O'Regan System, the growing awareness of our anesthesia offering and the fragmentation of the GI anesthesia market, we believe we will be able to continue to transact additional anesthesia opportunities in 2017. We will maintain the disciplined acquisition strategy maximizing shareholder value by identifying high-quality anesthesia practices, where we can add value through our operational expertise. An aging population and the increased focus on regular screening for the early detection of colon cancer will continue to drive demand for our anesthesia services. The U.S. Census Bureau projected the number of Americans between the ages of 50 and 75 will rise from 91 million in 2014 to 99 million in 2020. Today, approximately 66% of adults over 50 are up to-date with their colorectal screening. The goal for the Centers of Disease Control and Prevention is to increase this number to 80% by 2018. Additionally, the use of monitored anesthesia care through endoscopic procedures has grown exponentially in recent years from approximately 15% in 2003 to approximately 50% in 2015. Performing outpatient procedures at ambulatory surgical centers is a cost effective option for the healthcare industry. It is important to note that approximately 31% of all procedures performed at ASCs are related to GI cases according to the Medicare Payment Advisory. We estimate that there are approximately 800 to 1000 ASCs dedicated exclusively to GI procedures, all of which CRH is – at which CRH is currently serving only 26. There is substantial opportunity for growth and we will work diligently towards our goal of becoming the preeminent provider or GI anesthesia. At the end of 2016, our cash position plus the amount available on our credit facility was approximately $35 million. Based on our current business, we estimate that we will generate approximately $6 million in free cash each quarter, thus providing us with the necessary capital to further grow our business. Finally, we continue our efforts to raise our company’s profile in the Canadian and U.S. capital markets. Since our last quarterly financial report, CRO, Scotiabank, TD and National Bank Financial have all initiated coverage of CRH. We continue to educate the investment community regarding our business through non-deal roadshows and other meetings. In the coming months, we have several initiatives scheduled, including participation at a number of Canadian and U.S. specialized healthcare and investment conferences. I look forward to reporting our progress as we execute on our strategies to continue to drive shareholder value. And with that, I will turn it over to the operator to open up for questions. Thank you.

[Operator:]

Thank you. [Operator Instructions] The first question is from Richard Close with Canaccord Genuity. Please go ahead.

[Richard Close:]

Great, thanks. Congratulations on great 2016. I want to just hit a couple of areas of interest here. First on the price per procedure, obviously that was really strong in the fourth quarter, payor mix plays a role in that, but if you can just go over how you think about the price per procedure, maybe anything else that drove the fourth quarter strong number?

[Edward Wright:]

Yes, good question, Richard. So, the fourth quarter – what we saw in the fourth quarter was the effective seasonality. We defined seasonality two ways. First seasonality is defined as the number of patient cases we perform each quarter, but also seasonality is defined as the relationship between commercial and federal patients that we see within those patient cases that we perform. In the fourth quarter, we saw a higher percentage of commercial payors than we did in previous quarters. And as we have talked about before, commercial payors are reimbursed at a higher rate than that of the federal payors. So that contributed to both the strong revenues in Q4 and the strong revenue per case performance. As I look forward, I would look at the average revenue for the year per case not just the revenue for the fourth quarter in terms of what 2017 would look like.

[Richard Close:]

Okay. So, but if we look at the third quarter, I think the payor mix was pretty similar if I am not mistaken, yet the price is a lot higher so?

[Edward Wright:]

No, our fourth quarter had a stronger commercial payor mix. I mean, so you got two factors, you got both the – you got a strong commercial payor mix and the number of cases, so there is more commercial patients with cases in fourth quarter as compared to third quarter.

[Richard Close:]

Okay. With respect to the calculation of the non-controlling interest, can you just go over that a little bit and what the delta was really between third quarter and fourth quarter and then thoughts on how we should look at that as you go through 2017?

[Edward Wright:]

Sure. So, non-controlling interest obviously is the share of our income related to our partners anywhere from 35% to 49%. That number is primarily driven by the revenue estimates for each of those partnerships. The revenue, as we true up or we refine our estimated revenue on a monthly/quarterly basis, it takes about 4 to 6 months of operations to really get a true indication of what the realized revenue per case is going to be for all those acquisitions we did in June that 4 to 6 months occurred in the fourth quarter. So, we were able to update our revenue projections for those. That resulted in an adjustment to our estimates, not material enough to change anything in our financials, but material enough to impact your relationship between income, adjusted operating EBITDA attributable to shareholders and adjusted EBITDA attributable to non-controlling interest. So, going forward, I would look at the relationship for the second half of the year in terms of how that relationship would look going forward. If you use Q4, your NCI number will be too high, if you use Q3, as a marker, your NCI number going forward will be too low.

[Richard Close:]

Final question from me would be how you think about same-store growth going forward whether you factor in any price increases or volume growth for the centers that you have contracts with, how you think about that going forward? And then also any update on maybe managed care pricing as we enter the New Year?

[Edward Wright:]

Yes. So, in terms of when we talk about organic growth results, we always speak to it in terms of patient cases, because that’s the easiest thing to measure and to get indicators from our partners for the upcoming year. If we look at the business that we had in for all of 2016 and all of 2015 which will be GAA, the patient – the organic growth there in terms of patients cases was 6% as we look forward into 2017 based on the size of the business that we are managing now, we would expect that number – we expect organic growth to be at a lower rate than what we experienced in 2016. In terms of managed care contracts, we are not – we believe that the revenue per unit per case or per patient per payor that we have been experiencing in 2016 will continue into 2017 we are not aware of any changes.

[Richard Close:]

Okay, thank you.

[Operator:]

The next question is from David Novak with Cormark Securities. Please go ahead.

[David Novak:]

Good morning. Thanks for taking the questions and again congrats on 2016. So, first on the acquisitions you have made in June 2016 both AGA and Arapahoe have materially outperformed your revenue estimates for these businesses both at the time of acquisition and then as of last quarter, Q3 when AGA was noticed to outperform? Now, I am all for upward surprises, but I was just wondering if there is anything management is contemplating that could perhaps increase the accuracy of predictions relating to how these businesses will perform following acquisitions?

[Edward Wright:]

Good question, fair question David. So, there is – it’s a bit of a science. We go through significant due diligence process to understand what these businesses will look like under our control. A lot of our analysis is kind of I would call it more defensive analysis making sure that we have caught everything in terms of what potential risks. It’s little bit more difficult to forecast all the upside until we are actually doing the billing and seeing the records and getting reimbursements from the payors, especially in markets such as Denver and Texas, where we had no operations before each state, each payor although we work with Aetna, United, Humana etcetera across the country. The reimbursement levels are different in each state. So, it’s difficult for us to really predict what is going to occur until we actually see the ability. So, we are pleasantly surprised by both Austin and Arapahoe for each of them to outperform for different reasons and we will continue to look at refining our processes going forward.

[David Novak:]

Thank you. That’s quite helpful. And just following on with acquisitions, specifically with respect to historical acquisitions, as the years roll by and CRH acquires more and more businesses, it will become more difficult for us, analysts, to track the performance of businesses acquired in prior years, years prior to the current reporting year as disclosure requirements only really cover current report year acquisitions. As of now, it kind of appears to us after backing out historical acquisitions that some of the businesses acquired in the past maybe slightly underperforming our personal expectations. I was wondering if you could share any commentary around what you are seeing with respect to businesses acquired in 2014 and 2015 and also is there anything that you can do going forward to help analysts track this performance of historical business combinations?

[Edward Wright:]

So – and when we look at the acquisitions in 2014 and 2015, from our perspective based on, I don’t have the luxury of seeing the detail of your models – I have the luxury of seeing the detail of our models, they are performing in line with expectations. In terms of disclosure, we are constantly looking at our disclosure, David, to make sure that we are providing disclosure that is meaningful and that is – and that we can maintain. So, as we look it down the road and there is 20 of these opportunities identifying, talking about revenue and past performance on 20 becomes more difficult, but we will continue to look at continuously improving our disclosure.

[David Novak:]

Great. Thank you. That would be helpful. And then finally just kind of a macro question, I haven’t personally heard you guys say this, but I have been relayed from some institutional investors that on your more recent road shows, CRH has been talking about an uptick in the use of deep sedation on the West Coast and management believes that, that could potentially create an opportunity, while your focus is really still east of the Mississippi, it’s an interesting jurisdiction. So while that would be fantastic when we started to look at the West Coast, particularly California, what we noticed was certain payors, such as Anthem, Alliance etcetera are now requiring prior authorization for use of deep sedation with an endoscopic procedure. Does this change review about the West Coast at all and furthermore do you believe that this could foreshadow other payors in other states making the same requirement in the future and would that impact your business?

[Richard Bear:]

I think what you are seeing in the West Coast, David, is what you would – if you would back historically on the East Coast, you exceed that as payors become more comfortable with anesthesia-assisted endoscopy, it starts with prior offs and then it goes to – then it evolves where we are today primarily in the Southeastern part of United States and east of the Mississippi. We are seeing in pockets of the West Coast with the acceptance by payors is continuing to increase. The first one was Colorado and our business is doing well there. And I think we will continue to see it increase. I mean, if you talk to the GI community base, they don’t understand why it’s not 100%. They believe GI anesthesia can get up to 100%. So, it’s just going to take some time.

[David Novak:]

Got it. Excellent. Well, thank you very much, Richard. That was very helpful. Appreciate it.

[Richard Bear:]

No problem, David. Thanks for the questions.

[Operator:]

The next question is from Alan Ridgeway with Scotiabank. Please go ahead.

[Alan Ridgeway:]

Hi, good morning guys. Thanks for taking the questions. I guess first just to sort of follow-up on something that Richard was asking a little bit about earlier. As far as the timing of the contract renewals with managed care and with the payors, when do those renewals usually come in and when do you guys know that your rates will be set for 2017 and then for 2018 etcetera?

[Edward Wright:]

Yes. So the relationships with the payors varies from some are annual, some are 2 years, some of the rates are set from longer periods of VAT. And so again it varies. Most of these – what’s typical in managed care contracting is that these rates rollover unless one of the other parties wants to renegotiate we believe the rates that we are getting are fair in most cases. We are always looking to improve. So, unless the payors wants to renegotiate, they typically rollover and that’s what our experience has been in the past.

[Alan Ridgeway:]

And that happens throughout the year or is it typically for that particular year?

[Edward Wright:]

Yes, I mean, it happens throughout the year. As we have talked about before anytime we do a transaction, in most cases we setup a Newco, so that Newco has the new tax ID and the new billing ID number and the process starts and that since we do transactions throughout the year those in the cases with those contracts, those would be spread out throughout the year for a variety of the different entities.

[Alan Ridgeway:]

Right, okay. I also have a question just on the profitability of some of the joint ventures comparing to each other. If we look at I think its Note 14, it’s pretty clear that some of the centers are doing quite well, but then the profitability of the Arapahoe, Community and Macon appears to be a lot less. Is there anything going on specifically at those three centers? Are there any – is there a reason why those centers aren’t as profitable? And are there things you can do to improve those centers?

[Edward Wright:]

The profitability is going to be primarily driven by payor mix. The relationship between commercial and federal on profitability is going to be driven by just the payor strategies in each state in terms of the reimbursements on the commercial side. Payor mix is going to be driven by productivity. We can only do as many cases as – our [indiscernible] is going to do as many cases as the GIs want to do. As we have talked about before, our role in the process is to serve demand created by GIs. The GIs do the cases and we serve them. So, there are always going to be differences on margins at each of the locations depending on those factors. And the margins we see today I would assume that those are the margins that were going to be seen in the future and keep in mind from a valuation perspective, we value these as – these are valued on a multiple trailing 12-month EBITDA. So, the cost structures and the efficiencies and the payor mix and the productivity are all included in the historical financials and that’s how we value the properties.

[Alan Ridgeway:]

Right. No, absolutely, I was just wondering if there was maybe something inherent in those practices that you guys could step in with some of your experiences from some of the other places. One follow-up to that and then I will jump off though. When you mentioned the payor mix differences, you are talking blended between commercial and government I assume and not differences in in-network versus out of network. Is that correct?

[Edward Wright:]

Yes, the primary drivers of profitability would be the ratio between commercial and federal which strives and that would be the biggest driver of profitability when you are comparing partnerships against each other.

[Alan Ridgeway:]

Okay. So, the more profitable ones don’t have higher mixes of out of network or anything like that?

[Edward Wright:]

No. Now, it’s almost attributable to the percentage of commercial compared to federal payors.

[Alan Ridgeway:]

Okay, great. Thanks, guys. I appreciate it.

[Edward Wright:]

No problem. Thanks. Good questions.

[Operator:]

The next question is from Lennox Gibbs with TD Securities. Please go ahead.

[Lennox Gibbs:]

Good morning. Thank you. So, there has been some commentary from industry observers to the effect that the hot anesthesia consolidation trend maybe cooling. Do you agree or disagree with that observation? And then secondly can you share the extent to which you think that CRH’s expansion strategy that is GI focused ASCs is coupled or maybe decoupled from the broader industry consolidation trend?

[Richard Bear:]

Sure. I will take the first part and then I will let Edward take the second part. So, I think the first comment relates to the broader market, which is the team [indiscernible] of the world who are acquiring large physician-owned anesthesia practices at hospitals and there has been – over the last number of years, there has been significant number of transactions and I don’t know how many more deals those guys can do. So, what we have talked about, it’s slowing I think that’s a fair statement. Our business model is drastically different than theirs. I will let Edward talk about why we think our opportunities will continue to grow.

[Edward Wright:]

I think that’s particularly due to the fact, Lennox that what we are partnering with our GIs that are in private practice. They own as you know either all or a portion of the ASCs where they operate. And those are the places where we have built these relationships over the last number of years. So, because of that, the relationships, because of the deal size if you look at the average price that we are paying for these opportunities in comparison to the companies that Richard just stated and the figures that are associated with those deals, they obviously don’t move the needle for those folks. So, we are in a very enviable position with the fact that we have got these relationships with these GI docs all over the country. The deal size is perfect for us, because these are amounts that we can transact quickly on. We will have a lot of competition as you know in these opportunities. And to-date, it’s a new offering. It’s a new idea in many ways that we are bringing to these people. So, we see a great appetite to talk to us and to learn more about our offering is at the moment, we have lots of people that were under discussion. So, if I take a look back at since we started this, there is certainly as many or more people that we are talking to to-date than we ever have been in the past.

[Lennox Gibbs:]

Thanks very much.

[Operator:]

The next question is from Prakash Gowd with CIBC. Please go ahead.

[Prakash Gowd:]

Thanks. Good morning, everybody and congratulations on another strong quarter. I have just a couple of questions on acquisitions. First of all, historically if you look at the acquisitions that you have done to-date, can you talk a little bit about any trends that you have seen specifically around timeline to deal execution and what you have been seeing as the rate-limiting steps and perhaps how that’s changed over time?

[Richard Bear:]

Sure. Time is interesting, Prakash. I would say time from when it may be, we get a buy-in from the group that want to go forward that can be done quite quickly, that can be executed in I would say a six-week to eight-week period, probably eight weeks will be the shortest. In most cases that is one we have been depending on the complexity, the size, number of doctors involved. But where we are in the process with many of these opportunities is initially talking with a lead doc that is or a doctor for that mater who is part of a practice that we have known for some time, in most cases unless it’s a new bound, somebody coming to us who wants to learn more. So we have a conversation with that physician from there what we are trying to do then is going and met with their executive group, make a presentation about our offering and then if we go from there to their broader group. We have seen situations last year where we spoke to somebody six months or a year before. And then came back out and said okay, we are ready, come, speak to us again now. So it’s very difficult to predict from an initial discussion to when we will – exact date of the transaction. There was many of these conversations that are in play and keep in mind what we are doing is bringing something relatively new in this partnership agreement on the anesthesia. So timing – it takes time and primarily because doctors are busy during the day. And one of the discussions that we have with them are in the evenings or on weekends initially. And so I don’t – that’s a bit of a big answer in terms of exactly how long it takes, but hopefully that adds some color around the process.

[Prakash Gowd:]

That’s helpful. I was just wondering if you have seen rate limiting steps change over time?

[Edward Wright:]

No. I wouldn’t say there is any rate limiting steps that have changed over time.

[Prakash Gowd:]

Okay. Then, in terms of future, I am trying to understand what opportunity there is to target GI practices that don’t currently use deep sedation, can you give me an estimate of how many of your O'Regan customers currently don’t use deep sedation just to give some sort of assessment of how large that opportunity might be and is that something you might consider targeting in the future?

[Edward Wright:]

I mean so first question is, we would assume and based on the data that we have that our customer base for O'Regan follows national trends where 50% of them are using deep sedation in their facility and 50% are not. We are looking at different models. There is a model from the ASC world, where the ASC organization like amb surgery [indiscernible] will go out and help a practice develop ASC because the practice doesn’t have the financial wherewithal the expertise at both their own ASC with the ability then to acquire majority over time. We are looking at models like nothing at this point to announce.

[Prakash Gowd:]

So there is still plenty of opportunity with those who are already using deep sedation is what you are saying?

[Edward Wright:]

Yes.

[Prakash Gowd:]

That’s great. Thanks very much.

[Operator:]

The next question is from Noel Atkinson with Clarus Securities. Please go ahead.

[Noel Atkinson:]

Hi, good morning, well done in the quarter guys.

[Richard Bear:]

Hi Noel.

[Noel Atkinson:]

Just a couple of quick one, so some of these massive mega mergers in health insurance in the U.S. are – look like they are not going to go through do you see that that has a beneficial affect on your business having a larger pool of insurance providers to work with?

[Edward Wright:]

Yes. I think it is beneficial to everyone. I mean the mega guys can don’t necessarily have cost efficiencies, so with power they could drive – they can drive prices down for providers and drive prices up for consumers. So I think it benefits all that those mega mergers weren’t approved.

[Noel Atkinson:]

Okay. And then just this as a follow-up from an earlier question, so GAA started 2016, there was a shift in commercial payer mix, so are you saying that you haven’t seen anything of that sort either positive or negative so far in 2017?

[Edward Wright:]

It’s really too early to tell. I mean we didn’t have a clear picture of what was going on in 2016 until we got their first four quarters. So we don’t have – no comment either way right now and again we won’t have a clear picture until the end of first quarter of 2017.

[Noel Atkinson:]

Okay, alright. Thanks very much.

[Operator:]

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

[Unidentified Analyst:]

Good morning. I am [indiscernible] on the line for Dave. And just a quick question from us, did you have any ASC contract renewal in Q4 and just subsequent to that and if so to those contracts a little over?

[Richard Bear:]

Great question. So in Q4, I think the contracts – so they are too weak. The ASC contract is just one component of our transaction. So ASC contracts associated – that we acquired and associated with Knoxville would be annual agreements that are to renew – which are renewed in Q3. The Macon one is a little bit longer. But again as we have talked about before there are other provisions in the purchase agreement that gives that we leverage to ensure the longevity of those agreements that more important in that exclusive contract.

[Unidentified Analyst:]

Thanks.

[Operator:]

Next question is from Doug Miehm with RBC Capital Markets. Please go ahead.

[Doug Miehm:]

Good morning. Two questions, one of them had to do – has to do with capacity utilization at the sites, were there any sites given the number of procedures that were done in the quarter operating what would effectively be 100% capacity utilization, I guess is the first question. Second question just has to do with very strong numbers and excellent drop to the EBITDA line but what I did note is that it seems relative EBITDA to shareholders that was less of a contribution that I would have expected relative to the margins typically associated with your business at 50%, because it looks like on $2 million out-performance relative to our numbers on the revenue side, the out performance on the EBITDA to shareholders was only $600,000, what if expected $1 million or perhaps even more given how much more was added on just straight EBITDA?

[Edward Wright:]

Okay. Doug, I will take first question regarding utilization and Rich will commit rest of the second one. In terms of utilization there is different aspects that go into the play here. Clearly there is the ability for ASC to be able to see as many patients as possible. There is also a limitation in terms of the number of physicians and how many patients that they can see. So when we take a look at 2016 and we look Q4 and particularly December across the network what you will see many days, during those days because we look at it every day by location. If you look at from that sense there is very little more that can be done in certain locations on many days in December just because the physicians that are in those particular locations are not able to see any more patients. And it would be challenging for them to bring on more doctors just at that place and time, so what we can’t just see is in December, in that latter part of December in particular is really most physicians working to the – to see as many patients as they possibly can. When we look at and we speak to our partners and we ask them to give us forecasts for the year ahead and break it down depending on what their plans are for expansion for hiring doctors so that we can get a better idea of forecasting, that’s really how we look at the utilization. There are many of these centers that have been built with expansion plans for the future. So, they may have, it could be a 3 room center, but may only be using 2 rooms currently. So, there would be lots of opportunities there, but until the physician – until the practice decides to hire another physician and whatever their plans, then we are not really in a position obviously to service those patients. So, it’s something that we from utilization point of view for forecasting, we are working closely with the partners to discuss with them what are their plans, so that we can really understand them what that’s going to go look like in the months or the quarters ahead. Does that help or do you want some more clarification around that.

[Doug Miehm:]

No, that’s very helpful. I guess in particular we did see the outperformance at AGAA and Arapahoe, I guess, it is, not just to what we were thinking. And I am just wondering at those types our sites, essentially certainly in December it looks like you are at 100% capacity, but there maybe the opportunity to build out those sites, so that you are not capped at that level in the future?

[Edward Wright:]

Yes, absolutely. I mean, we are in constant dialog about visiting in terms of what are plans for hiring additional doctors maybe expansion of sites, so a lot of it has to do with how many cases can they actually see and that’s what we are trying to get visibility to. So, I will let Richard answer the second question that you have asked.

[Richard Bear:]

Yes, Doug. Good question. And I think you must – I am guessing you came on a little late. Did you join the call late?

[Doug Miehm:]

I did, sorry.

[Richard Bear:]

Okay, sorry. No worries. So, yes, this question came up earlier and the answer to the question is we are as you know – we use estimates to record revenue and those estimates are something that we are fine-tuning every month, every quarter. It takes about 4 to 6 months of operations of new entity before we really have a high degree of accuracy in terms of what that realizable revenue rate per unit is per payor that – we achieved that with those three acquisitions that we did in June. So, in December, we made some adjustments to revenue, primarily for those entities that we had non-controlling interest in Austin, Arapahoe, Community, so that impacted the revenue a little bit in Q4, but that would have fully impacted the – would have a significant impact on the non-controlling interest for Q4. So, what we have going forward, we would suggest that you use the combination of Q3 and Q4, the second half revenue – and the ratio of those non-controlling interest to shareholder – interest to the shareholders as your benchmark going forward. If you use Q4, your NCI would be too high. If you use Q3, your NCI will be too low.

[Doug Miehm:]

Got it. Okay, makes a lot of sense. Thanks.

[Richard Bear:]

Thanks.

[Operator:]

[Operator Instructions] Next question is from Richard Close, a follow-up from Canaccord Genuity. Please go ahead.

[Richard Close:]

Thank you. Edward, you mentioned you are having many more discussions and I am curious whether you think that’s a function that you have a dedicated team in place, Jay. And I think you mentioned he hired some people as part of the operations and business development team. Is it just that you guys are knocking on more doors or is there a movement towards more businesses seeing what you guys have done so far over the last two years and that’s spurring and that’s higher interest in selling to you guys?

[Edward Wright:]

Yes. So, I will address the question maybe at a little bit more of a macro level, Richard, first of all. When I say more conversations, it’s not more, it’s both fronts. I will get to the BD side in a second, but also on the operational side, some key hires what we haven’t heard, but many people, we have certainly had some key hires like a VP of Operations and a VP of Business Development and the operation role is really important, because with 26 ASCs in 7 states, we have to be certainly meeting my preferences to exceeding customers’ expectations, because these relationships are going to be the best conduit for us for future growth on the business development side, but what is now amongst gastroenterologists. So, that’s been really key there. And then if we go to the BD side, I’d like to pay full credit to Mr. Kreger. He has been a wonderful addition to our team. In his role, he has oversight for operations and for business development. But what Mr. Kreger has assisted us greatly and I would say really towards the end of 2016 and going into 2017, is on the BD side. When he first joined us, he was very focused on the operational side of our business and I asked him to do that and make sure that he met all of our customers. He is now spending more time on the BD side. And there is certainly some inbound interest, but clearly we are still in our infancy here and the processes that we have developed per outreach primarily to rating customers, but it’s expanding beyond that now is proving fruitful. Mr. Kreger is paying a tremendous amount of time as some other people that work closely with him in terms of traveling and educating people about what our offering is. So, we are very much still in the stage of traveling around the country and ensuring that the GI practices understand what our opportunity is. So, when I say many more, yes, absolutely in terms of we have people now that are dedicated to this. There is a strategy. There is processes in place. It’s been integrated within our organization. So, that’s something that is going well.

[Richard Close:]

And then do you envision as we think about 2017 that the free cash flow generated throughout the year, you will fully use that with respect to acquisitions?

[Edward Wright:]

I would say that would be something, Richard, that I wouldn’t feel comfortable boxing us in by making a statement like that. We are going to continue to be really prudent. I mean, it’s great that we are generating approximately $6 million a quarter. And what we are going to do is continue to be disciplined in our approach, where we have got a very strong checklist of what it is that we are looking for before we transact on an acquisition. One would not know, we don’t announce otherwise. So, one would not know, when they don’t meet our criteria and we walk away from them, but we want to ensure like we have done to-date that when we execute on something that is going to have a meaningful benefit for the shareholders. So that’s how I would answer that question.

[Richard Close:]

Thank you.

[Operator:]

The next question is from Endri Leno with National Bank Financial. Please go ahead.

[Endri Leno:]

Hi, good morning. I just have a couple of quick questions. One is, if there is I mean you mentioned that a lot of sort of legacy acquisitions if we must, they are performing according to your expectations, if they weren’t, have you put this – put any consideration into disposing any of them or would you? And the other question is more kind of housekeeping and what do you expect for corporate cost for 2017? Thank you.

[Richard Bear:]

No, disposing any, I mean, there is still – I mean, these things are still highly profitable, highly effective, I don’t know why we would ever dispose of them. So, that’s not something we have ever considered. In terms of corporate expenses, corporate expenses – as we get bigger corporate expenses, well we continue to increase slightly, we don’t have significant hires on the corporate side, but as you get bigger legal expenses or regulatory expenses or audit expenses tend to increase, so you won’t see it’s just going to be more of the same if you compare cash items over cash items from 2016 to 2015 and then translate that into 2017 just based on the accounting of stock comp, there is always variability there, but all of the other stuff will kind of grow based on historical rates.

[Endri Leno:]

Thank you.

[Operator:]

This concludes the question-and-answer session. I would now like to turn the conference back over to Mr. Wright for any closing remarks.

[Edward Wright:]

I would just like to thank everyone for taking time to participate in the call and we will look forward to updating you on our Q1. Thanks very much.

[Operator:]

This concludes the conference call. You may disconnect your lines. Thank you for participating. Have a pleasant day.