CRH Medical Corp
Q2 2017 Earnings Call Transcript

Published: 5 Aug 2017

[Operator:]

Thank you for standing by. This is the conference operator. Welcome to the CRH Medical Second Quarter 2017 Results 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 am joined here today by our CEO, Edward Wright; our CFO, Richard Bear; and our 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 June 30, 2017 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 for the quarter ended June 30, 2017 for reconciliations of non-IFRS measures to reported IFRS measures. These documents are available on SEDAR and on the Investors section of our website. Please note that we use the abbreviation GI to refer to gastroenterology. We also use the abbreviation CMS to refer to the Center for Medicare and Medicaid Services. 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 Edward Wright.

[Edward Wright:]

Thank you, Kettina. In a few minutes, Richard will provide some color on our second quarter financial results. After that, Jay Kreger will follow up with an update on our anesthesia operations and our business development activities. I will close our remarks with a brief commentary on our overall performance and then open up the call for questions. I'd like to welcome the President of CRH Anesthesia Management, Jay Kreger, to our quarterly conference call. Jay joined CRH last year from Hospital Corporation of America where he had responsibility for growing their ambulatory surgical division to more than 130 ASCs through acquisitions and partnerships. Jay recently celebrated his first anniversary with us and we're very pleased with the work he has done since he joined the company. We look forward to seeing our anesthesia business grow under his direction. Now, I'm going to turn it over to Richard for his financial review.

[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 controlling interest such as the anesthesia practices that we own, along to which we hold the majority interest. This practice is keeping current accounting standards. We had a strong second quarter with year-over-year gains in both our O'Regan and anesthesia business. Yesterday we reported total revenue of $22.1 million for the three months ending June 30, 2017, a 33% increase compared to the second quarter of 2016. Total revenues for the three months ending June 30, 2017 includes the anesthesia revenues of $19.3 million, 38% more than in the second quarter of last year as we benefited from the acquisitions we completed at 2016 and the first quarter of this year. Year-to-date, anesthesia revenues were $39 million or 54% more than the first half of 2016. Changes in payer mix primarily related to GAA at practices acquired prior to 2016 have resulted in a decrease in the average payer revenue average revenue per case of 18%, compared to the second quarter of 2016 and 13% compared to the first half of 2016. The decline in average revenue per case was partially offset by increases of patient cases of 6% and 5% for the three and six months period ending June 30, 2017 respectively. This translates into a declining revenue for entities acquired before 2016 of 13% for the second quarter 2017 and 9% for the first half of 2017. Also impacting the revenue and the relationship to prior year is the mix of commercial and government cases. Historically, we see commercial cases stronger in Q2 than in Q1 and this quarter, we did not, which we believe will correct itself in the second half of the year. During the second quarter of 2017, we serviced 26,188 patient cases and during the first half of 2017, we serviced 88,551 cases. Sales of our O'Regan system during the second quarter were $2.8 million, 5% higher than in the second quarter of 2016. Year-to-date, our O'Regan systems sales were $5.6 million, 10% higher than in the first half of 2016. Total adjusted operating EBITDA for the second quarter of 2017 was $10.2 million. Total adjusted operating EBITDA attributable to shareholders was $7.4 million and total operating EBITDA for non-controlling interest was $2.9 million. Our total adjusted operating EBITDA margin for the quarter was 46%. During the second quarter, we generated $5.9 million in free cash flow. We define free cash flow as cash provided by operations, less cash payments made for interest, less distributions to non-controlling partners. free cash flow is impacted by seasonality similar to our operating margins and income. Typically free cash flow is lowest in Q1 and highest in Q4. As June 30, 2017, we had $7.8 million in cash and cash equivalents and $10.7 million in working capital. In addition, we had $57.3 million available on our new credit facility to fund future growth. With that, I will leave you with Jay for his update.

[Jay Kreger:]

Good morning. Thank you, Richard, and thank you, Edward, for the opportunity to discuss Anesthesia Business Development and Operations with our shareholders today. As Edward mentioned, I just celebrated my one year anniversary with CRH and I'm happy to say that while the year has been full of both opportunities and challenges, my decision to join the company has only been reinforced by my everyday conversations with our GI partners. My experience in both developing and running the ASCs including many GI endoscopy centers has been an excellent foundation for me for working with and developing our anesthesia partnerships. The GI Anesthesia business model is similar to that of ASCs, and would create long-term growth potential. Many of you will recall that when CRH first introduced the O'Regan system to the GI community, it was a new untapped market. And similarly, while [indiscernible] similar to that of ASCs, the concept of joint ventures and anesthesia is relatively new and similar to the paradigm shifts that created the new O'Regan business. Likewise when CRH entered the GI anesthesia market with its initial acquisition in 2014, it not only entered a new vertical market for CRH, but it also established a new business opportunity for the GIs in the GI community. It's the exact same dynamic which has continually made our O'Regan customers our best referral source for anesthesia. They and the rest of the GI community see the value in being able to monetize your anesthesia business with a partner who also provides long-term value - both operationally and financially. I spent much of my first six months meeting our existing partners, reviewing our operational platform and confirming that we were in fact fulfilling our promise of delivering value and operational excellence. Like for our O'Regan customers, these partners represent our best resources and references for new business as we go forward. Also as part of this process, we assess our strengths and weaknesses and in so doing made some key additions to our anesthesia leadership team. To the first two quarters of 2017, we have in part seen the value of these additions and we've invested $7.5 million in two acquisitions. Then just earlier this week, we added our third acquisition of the year investing $5.8 million in a West Florida group. This joint venture was consisted with our mentioned [ph] partner with the best gastroenterology physicians and practices across the United States. Last year we invested $34.1 million to grow our anesthesia business and I remain confident that we will meet or exceed that number through the rest of 2017. It is the strength of our pipeline, the relationships with our O'Regan customers and the current anesthesia partners that feed this confidence. It's also worth noting that we believe that the previously disclosed proposed 2018 CMS changes should in no way be a deterrent in our ability to grow this year and into the future. The investment we're making in our team will reap long-term rewards with both our GI partnerships and our overall patient care. Earlier this year, we also launched our first Monitored Anesthesia Care program or MAC with PG [ph] gastroenterology in the state of Washington. Again, our people and processes are ensuring the successful launch. This MAC program is a new initiative that helps us expand into a segment of GI practices that do not currently use [indiscernible]. This venture also include a future transaction feature whereby CRH has the option to purchase the majority interest in the business after a year of operation - in this case, in 2018. I'm confident that we'll be able to expand this program by their practices in future quarters as new groups accept MAC as their standard of care. We've had a good start to the year and I look forward to updating you on our progress at the end of the third quarter and I will now leave you with Edward for his closing remarks.

[Edward Wright:]

Thanks, Jay. Our second quarter results demonstrate the strength of our business. We generated $10.2 million in adjusted operating EBITDA, thanks to revenue gains both O'Regan and anesthesia. We've also expanded our credit facility from $55 million to $100 million and added a new lender to the syndicate. The new facility includes $50 million with Scotiabank, $25 million with U.S. Bank and we're delighted that JPMorgan decided to participate as our partner with $25 million after a very thorough review of our business. The credit facility along with our strong free cash flows which was $5.8 million in the most recently completed quarter will continue to fund future acquisitions. The credit facility has further strengthened our ability to execute our anesthesia growth plans while lowering our cost of capital to approximately 3.25%. This has also allowed us to retire to crown debt early. We're very confident that the remainder of 2017 will be significant in terms of acquisitions. Yesterday we announced our third acquisition of 2017 which is our fourth acquisition in the state of Florida and our 12th overall. As Jay mentioned, we're also confident that we will achieve our goal to match or exceed our 2016 acquisition spending of $34.1 million. I'm very optimistic about our future and I'd like to thank our shareholders for their continued support. With that, I'll now turn it back to the operator to open up the call for questions. Thank you.

[Operator:]

Thank you. We will now being the question-and-answer session. [Operator Instructions] The first question is from Lennox Gibbs of TD Securities. Please go ahead.

[Lennox Gibbs:]

Good morning. Thank you. I just want to get your views on two broader trends in the marketplace as it pertains to CRH. The first is the growing trend towards higher deductible plans and the second is the growing number of insurers and possibly patients that are leaving the exchanges in various states and region.

[Richard Bear:]

Thanks, Lennox. This is Richard. I will answer your questions. The first one is the growing trend in deductibles. As we know, healthcare cost in the U.S. continues to rise. Most people in the U.S. received their insurance through their employers. Employers are earning some of the cost of those increases, but in many cases, pass on the cost to their employees through high deductible plans. Those high deductible plans is what actually create seasonality in U.S. healthcare as a whole and specifically for us where we typically see that the percentage of patients with commercial insurance increase between Q1 and Q2, then Q2 to Q3 and Q3 to Q4 and interesting enough, we didn't see that increase just in Q1 and Q2 this year like we've seen in all other years. And as we talked to our GI partners, they're suggesting that that's because of these construct of these partial plans where deductibles are getting higher and we expect that the second half of the year will be much stronger from a commercial payer's standpoint than in the first half of the year. It could potentially be stronger than what we saw in the second half of 2016. In terms of your second question, as we've stated previously, we have very little exposure to Affordable Care Act patients. Those plans just don't pay well, so our GI partners don't participate in those plans, so I heard people who are coming off those plans or insurance companies are choosing not to participate in certain states. We don't believe that widely impact our business.

[Lennox Gibbs:]

One last quick one. What are your thoughts on diversifying the leave [ph] from GI as a means of better managing reimbursement risk and obviously, I'm asking in light of the July 14 proposal of CMS.

[Edward Wright:]

Lennox, that's something that we currently continue to look at. We think that the runway in front of us in GI Anesthesia is extremely meaningful. As we stated even with the CMS cuts that are coming into effect at the beginning of next year that our business will still be in the very strong to the 40s in terms of margin. We like the space, we like the relationships and as Jay has mentioned earlier today in terms of our pipeline and where that is - if you look at the business today, 12 transactions from the last three years, close to $6 million in free cash this past quarter, the $100 million now in-line with the facility. We believe strongly in this business. It has proved to be very meaningful in the last two and-a-half, almost three years that we see significant runway in this. We have looked and that we continue to look at other things. We have looked at anesthesia and a couple of other verticals as well outside of GI and while I wouldn't rule it out down the road, the decision at the moment would certainly to be stay focused in this arena.

[Lennox Gibbs:]

Thanks very much.

[Operator:]

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

[Richard Close:]

Yes. With respect to the average revenue per case, I think you noted GAA lead to a 12% or contribute to a 12% decline in the first quarter. I think you've said in the second quarter it was an 18% decline impact. Did you know that the second quarter was going to be worse than the first quarter? If so, why not communicate that to the Street? And then as a follow-up to that, what do you think the impact from GAA is going to be in the third and fourth quarter? Is the 18% in the second quarter the bottom here and things should improve or less of a negative impact? Any thoughts in and around that item?

[Edward Wright:]

Yes. First, I'll try to take your questions in order, Richard. The increase in the pair mix impacted GAA has less to do with what we disclosed in Q1 with the single payer issue that we had there in 2017 as also 2016 because the contribution of that single payer remain consistent in Q2 compared to Q1. This has more to do with what appears to be a shift in commercial cases to [indiscernible] the year, the result of this high deductible plans that's causing the additional decrease compared to prior periods in the revenue per case and the ultimate revenue that we're recording for these entities. And we have stated previously would expect that to correct itself in the second half of the year with commercial being higher in the second half than we actually saw in previous years. Did I get them all?

[Richard Close:]

So are you saying that actually this commercial not coming in as strong, GAA went ahead roughly similar impact, the 12% negative impact in the first quarter because of the single payer there than services [ph]?

[Edward Wright:]

Yes. It's history...

[Richard Close:]

So when you think about in the 12% related to the single payer and then 6% of that decline related to the high deductible plan?

[Edward Wright:]

In previous years, we've seen as much as 3% shift increase in commercial. These are the government between Q1 and Q2 and this quarter, that's flat. So that makes up for that difference.

[Richard Close:]

Okay. With respect to these high deductible plans and the shifting commercial, seeing it flat year-over-year in the second quarter, did you look at every practice -- practice-by-practice? And you saw across the board that it was flat, or were there specific practices, maybe GAA in this case that created most of the change?

[Edward Wright:]

We looked at all the practices that we have data for to look at and I would say it's fairly consistent. Some are worse than others. They're not all operating identically, but it's fairly consistent.

[Richard Close:]

Okay. With respect -- just real quick -- M&A, Jay, you mentioned that significant confident in the pipeline and that you guys are going to spend $35 million or more potentially throughout the rest of the year or come in for the year at $35 million or more -- can you really put more meat on the bone there? Why are you so confident? M&A is hard to predict in terms of getting deals closed and just so, you can give us any more details in terms of why you guys are so confident? And then also as you look at the businesses that you're buying, obviously you've seen the financials. Is it similar margin profiles as your previous acquisitions? What are you seeing there with the business as you're looking at?

[Jay Kreger:]

Thank you, Richard. The first part of that question, as far as the pipeline goes - and you're right, obviously you can appreciate that the pipeline is a never-moving fluid thing. So there are many deals in the pipeline that are different points in the process. It's fluid. At this point, where we are on the various stages of those deals is different from what it was, say, one quarter ago or two quarters ago. It's that point in the process that I can point to and feel confident. As far as the pricing goes, all of our deals before and after the most recent announcement have been priced conservatively and fairly and as we go forward, I believe that will continue to be the same.

[Richard Close:]

And the margin profile is similar, 45% to 55%?

[Jay Kreger:]

Yes and with the margins per practice of course is based on payer profile. But they seem to be in-line with what we've acquired in the past.

[Richard Close:]

Okay. All right. I'll jump back in. Thank you.

[Jay Kreger:]

Sure.

[Operator:]

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

[Alan Ridgeway:]

Hi, good morning, guys. I just want to make sure that I fully understand the difference between Q1 and Q2 at GAA and its impact. When you say in Q1 it was a 12% hit and in Q2, it's an 18% hit. Is that revenue per case including all cases at GAA so that not having the shift toward fewer government cases is really what the difference is year-over-year? Am I taking that the right way?

[Richard Bear:]

What we say in our disclosure, Al, is that we looked at all of the properties that we acquired prior to 2015 where we would have apples to apples comparison between 2017 and 2016. So that would include predominantly GAA, but also not still [indiscernible] and other properties. Those numbers would include declines and the declines in revenues per case offset by the increasing cases would be for that family of properties as a whole, GAA being the largest and as we look at those family of whose practices as a whole and we look at the realized revenue that we received per unit, there has been very little changes in that. So that's why we're comfortable saying that it's a shift. What's causing this is a shift, what we believe is it's changing the government to commercial that will offset, that will correct itself in the second half.

[Alan Ridgeway:]

So 18% then, it's actually not directly comparable to the 12% from Q1?

[Richard Bear:]

No.

[Alan Ridgeway:]

Because Q1 was GAA?

[Richard Bear:]

Yes. Not directly comparable to the 12% in Q1. Correct.

[Alan Ridgeway:]

Okay.

[Richard Bear:]

Additive because of the payer mix change.

[Alan Ridgeway:]

Okay. I also want to just ask on the estimate changes as far as the $900,000 and the $200,000 moves. How big of those magnitudes of estimate change has been historically? But prior to Q1, how big were they in the four quarters in 2016?

[Richard Bear:]

They vary in size. They vary in terms of their impact. We haven't disclosed what those were previously because it didn't impact the comparability of the financials. These impact, its comparability to financials primarily because we haven't reported any acquisitions or a number of acquisitions, we felt that was necessary to talk about what is a fairly routine correction that anybody managing a deeper service healthcare company would have to best describe and interpret the financials. So we haven't disclosed those in the past.

[Alan Ridgeway:]

Just to be clear that I'm doing my math correctly, we have to reduce Q1 by $900,000 and increase Q2 by $200,000 if we want to get to the real revenue per case?

[Richard Bear:]

Correct.

[Alan Ridgeway:]

Okay. So based on the Q1 number then, the revenue per case that the Street was using was inflated by the $900,000?

[Richard Bear:]

Yes. Sure. Yes.

[Alan Ridgeway:]

Okay.

[Richard Bear:]

I don't know if I like the term inflated, but I'd say yes.

[Alan Ridgeway:]

Well, I think if you divide through number of cases across the business, had a $900,000 higher rate, then it comes to look like the business is generating more revenue per case than it actually was?

[Richard Bear:]

Fair enough.

[Alan Ridgeway:]

Okay. I'll leave it at that. Thanks, guys.

[Operator:]

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

[David Martin:]

Good morning. First one, I think Jay said CRH hit $5.8 million for the most recent acquisition, the 55% of West Florida and the press release have said $3 million in expected revenues. It looks like the price to revenue multiple you paid there is higher than other acquisitions you've made. I'm wondering with the reimbursement cuts that are ahead, would you not be making offers lower priced to revenue multiples going forward?

[Edward Wright:]

David, yes. As we go forward where we look at the cuts in 2018 and include that in our valuation as we did with this transaction, this transaction is unique compared to other transactions. With this transaction, the professional services agreement between the anesthesia entity and the ASC that we acquired has a 15-year life on which then that's very long-term contract that would dictate a little bit higher multiple.

[David Martin:]

Okay. Second question. Are there any deferred considerations or note obligations that will be reduced for CRH because of the reimbursement cuts that are anticipated?

[Richard Bear:]

The only deferred consideration or notes that we have related to earnings is for GAA. As you recall, when we acquired that business in December of 2014, that was $58 million in cash upfront, $14.6 million on deferred payout and the deferred payout was based on that entity achieving accumulated EBITDA of $73.2 million in four and-a-half years. We have gone through and done testing as we do every quarter on the probability of that repayment and it's stated in our financials, the probability repayment has not changed and we have also gone through [indiscernible] testing not every single one of our acquisitions with the new revenue estimates based on the changes of CMS in Q1 and don't have any impairment charges related to any of our entities either.

[David Martin:]

Okay. Last question going back to Alan's question about the revenue estimate adjustment. I just want to understand the mechanics of it. This quarter for instance, you had the negative adjustment at $200,000, your reported revenue was $22.06 million. I assume that before the announcement, you started with the revenue number of $22.26 million and then you adjusted them by the $200,000. What does the $22.06 million represent and then what does the $200,000 adjustment represent?

[Edward Wright:]

Okay. It's a little bit complicated. We are building and collecting revenues obviously all the time. So at the end of every reporting period, monthly, quarterly reporting period, we have to estimate what we're going to get per unit, per payer, per site and then each quarter, each month, we then compare that to what we've historically received to make sure that the relationship between what we have recorded in revenue and what we've actually received in revenue is representative. So that way we know that our receivables are fairly valued. In some cases, we find that our historical collection rates may increase from one quarter to another, one month to another that results in a change in estimate which has to be made, otherwise, our receivables won't be fairly valued or might go the other way that our net realizable revenue is less than we expected. Those have to run through - again, time to get to accounting details here - they have to run through revenue, otherwise, receivables will not be fairly valued. So these would be considered ordinary course adjustments for anybody managing a deeper service business.

[David Martin:]

So the $200,000 adjustment that was made this quarter actually relates back to $200,000 that you expected you would have got from Q1, but you didn't gather in the collection?

[Edward Wright:]

No. We're still collecting moneys from 2016 and sometimes we see moneys coming in from 2015. These change in estimates, these updates to our estimates reflect back to multiple periods, not just the most previous period.

[David Martin:]

Okay. But it is the previous periods? It's nothing really to do with this period?

[Edward Wright:]

No. Because if it was this period, it wouldn't be an adjustment.

[David Martin:]

Okay. I'll get back in queue.

[Edward Wright:]

I'll look forward to it.

[Operator:]

The next question is from Endri Leno of The National Bank of Canada. Please go ahead.

[Endri Leno:]

Hi. Good morning. Thanks for taking my questions. The first question that I have, it relates to this [indiscernible] enhancement of seasonality. I would say as to have more commercial insurance shifting towards the second half of the year. So if you look at the groups of insurers across the states where you operate, they're practically the same perhaps except Massachusetts. Where do we expect this kind of shift in seasonality, say next year, even in the acquisitions that were done after 2016?

[Edward Wright:]

Time will tell. Seasonality right now is an estimate. We won't know exact seasonality for 2017 until we get done with 2017. Typically we don't see significant changes because we just think about demographics. You'll see changes within the commercial payer mix through the renewal process, but you don't see shifts between commercial and federal happen year-over-year, that's something you see more on a decade-by-decade basis because it's way more demographically drift in any market. So difficult to answer what we'll see, but since we're see a consistency over our 2016, our acquisitions prior to 2016, I'm going to assume that that also is going to impact our 2016 acquisitions as well.

[Endri Leno:]

Okay, great. Thank you. The other question that I have, it's regarding the guidance that you gave following the CMS array cut. This was based on 2016 margin of 53% that is expected to come down to 47%. Now that 600 basis point change, that does not include what happened in this first half of the year, right? If we are to keep a lower margin business coming out of 2017, that 600 basis points would be an addition to that. Right? So it would likely be closer to 40% perhaps?

[Edward Wright:]

No. It's interesting. We spend a lot of time on those disclosures and read them, and read them, and read them and think that they'd say what we believe that they should say. As I review that one, I look at it now and I look at it a little bit differently because the way we came up with those numbers was really taking our 2017 business to date. So we looked at basically what we have done through Q1 and Q2 because at that time, we put out that press release, we had a pretty good idea what Q2 is going to look like. We then annualize that, meaning we took that book of business and we looked forward assuming that's all of our business we have in 2018 and the impact we provided was based on that. So the comparison to 53%, which is really a 2015 number to 47% was not fairly communicated. We believe that our business will be at 47% or maybe plus or minus percent business at 2018 and this really is not a 600 point decline. That was not a fair representation.

[Endri Leno:]

Okay. Thank you very much. That's all the question I had. Thanks.

[Operator:]

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

[Doug Miehm:]

My question just has to do with acquisition multiples and those sorts of things. Based on where the shares are trading today, we estimate that you're trading at about 7x EBIT/EBITDA and if I were to simply look at the most recent acquisitions, $3 million in revenue, let's say it has even 65% margin. So $2 million in EBITDA of what you're entitled to, about $1 million. The multiple is in around just shy 6x without performing as it relates to the reduction next year -- maybe 6.5x pushing closer to 7x. The acquisitions you expect to do in the future, are they going to be dubbed 7x or are we looking at things that are going to be pushing now towards your creating our new EBIT/EBITDA on multiple basis?

[Richard Bear:]

I think what you're going to see in the future because our valuation is taking consideration the proposed changes for 2018, it's that we're going to be in that 4.5x to 5x range that we've always been. Now as we spoke earlier, this one was tied to an incredibly long-term agreement that resulted in a little bit higher multiple.

[Doug Miehm:]

Okay. So the end of the day, this was a bit of an outlier and looking forward, you're still comfortable with 4.5x to 5x?

[Richard Bear:]

Yes, we are.

[Doug Miehm:]

Yes. Even relative to your depressed multiple today? Okay, that's great. That's my only question, thanks.

[Richard Bear:]

Thanks. Good question.

[Operator:]

Next question is from Alan Ridgeway of Scotiabank. Please go ahead.

[Alan Ridgeway:]

Thanks for taking the follow-up. I just wanted to touch on any changes that may have been happening at any of the individual commercial payers. Have you guys seen any rate changes from your commercial payers?

[Richard Bear:]

Yes. We see changes, Al, in that realizable revenue which impacted some of our adjustments. But none of the changes are material enough that would require disclosure.

[Alan Ridgeway:]

Okay. And so would you characterize those change as though our rates being pressured downward - I guess is what my question really is.

[Richard Bear:]

In some cases we see downward pressure, but in other areas, we're seeing improvements. Typically in a contract situation or contracts have a three-year contract with $5 escalators per unit every year. So they go back and forth.

[Alan Ridgeway:]

Okay. And then the other thing I'm trying to see, if there's any way we can get some information related to the impact of these high deductible plans? I would think that as the year moved along, you might start to slowly see a shift toward commercial and I know you guys get monthly data. If you looked at the quarter or did you look at the quarter and see if you were seeing a trend where the percent of commercial cases was increasing throughout the quarter?

[Richard Bear:]

For Q2 or for Q3?

[Alan Ridgeway:]

Well, for Q2. Commercial increasing from April, May and June.

[Edward Wright:]

Yes. We monitor our business at a number of different levels. We track cases on a daily, weekly basis. We track payer mix and financials on a monthly basis and a dollar rolls up [ph] into our quarterly financials. It's sometimes hard to really understand the impacts for each month because a month can make a difference and to communicate something without that full quarter would be difficult. Again, they're not until the full quarter is done till we see the impact and we communicate that during these calls.

[Alan Ridgeway:]

Right. I appreciate that. I guess what my question is are you guys seeing data that gives you confidence that H2 will be better commercially?

[Edward Wright:]

Yes, sorry, Al. Right now, we haven't seen - we're just in the process of closing July. We won't get any of our billing reports for another week and-a-half or so. That would then start to give us a sense of what we're going to see. The quarter is made up of three months and we won't really have a full picture until that third month.

[Alan Ridgeway:]

Okay. Thanks. I appreciate the answers. Thanks, guys.

[Edward Wright:]

Thanks, Al.

[Operator:]

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

[Prakash Gowd:]

Thanks. Good morning, everybody. A couple of items. First for Richard, can you disclose what the level of materiality is before you would actually make the comment about payer changes?

[Richard Bear:]

We're at impact to comparability of the financials. Materiality is always subject to subjectivity. But when we believe that that information would need to be disclosed to understand the comparisons between reported financial periods, that's when we disclose it.

[Prakash Gowd:]

Is there a specific percentage decline over a quarter or over a year that would make that trigger?

[Richard Bear:]

Not that we've seen to date.

[Prakash Gowd:]

Sorry. In your internal level of materiality, is there a percentage change that will trigger your requirement to disclose any payer reimbursement changes?

[Richard Bear:]

When we look at our financials and we look at the comparison, we look at the relationships to prior quarter, prior year and then the other comparable periods, if we feel that there's a great change that requires disclosure to understand those, we would then disclose it.

[Prakash Gowd:]

Okay, that's fine. And then for Jay, if I can maybe ask Jay. In your discussions with GI ASCs, can you shed a little bit of light about how they're feeling about the recent CMS change especially now that the delta between moderate sedation, deep sedation has narrowed. What sort of impact has it had on their willingness to engage in discussions with you and to reach a certain selling settlement? Could they be potentially be waiting for subsequent changes that maybe in the work that seems?

[Jay Kreger:]

Sure. Good question. I think the first part of that or really the second part of your question is the GIs were not initially informed of the announcement. They have quickly become educated that the proposal has been made across the board, they're of the belief that it will happen as we have disclosed. So they realize that the impact on their business is a - for lack of a better word - a sure thing in 2018. As it relates to how it would impact their decision-making process to partner or not partner and why I say it's not a deterrent, when a physician decides to partner with us or sell their business whether it's an ASC or the anesthesia business, they're doing so for really two reasons - the liquidity event and long-term value. We provide value relative to the current value of those businesses, so while the proposed changes do cut reimbursement, it doesn't change the positive outlook of the business as a whole. So my belief at what we're seeing and hearing is that it really doesn't impact their decision-making process at all.

[Prakash Gowd:]

Do you see any that are possibly going back to doing some moderate sedation?

[Jay Kreger:]

No, not at all.

[Prakash Gowd:]

Okay. Thank you very much.

[Jay Kreger:]

Sure.

[Operator:]

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

[Richard Close:]

If you look at your pipeline with respect to acquisitions, I think the Florida one that you just announced was not an O'Regan customer. How does your potential acquisition, the breakdown in terms of - are most O'Regan customers or are there number of non-O'Regan customers in the pipeline?

[Jay Kreger:]

Richard, this is Jay. I will help answer that. With regards to Florida, the group there has actually been trained on the O'Regan. And this is somewhat typical at times, we were first introduced to them almost a year and-a-half ago or actually introduced us at our booth at an ACG show where we were exhibiting the O'Regan system. I think you could argue that it was because of our standing with the O'Regan business that they came to us. And that continues to be consistent - I think we've disclosed before, every one of our customers except for every one of our anesthesia partners with the exception of one were a direct result of our O'Regan relationship and I see that trend continuing.

[Richard Close:]

Okay. Richard, with respect to the true ops that were made in the first and second quarter, $900,000, $200,000, do you have the true ops for the first quarter and second quarter 2016?

[Richard Bear:]

Those have not been disclosed because they're not material to the understanding of those numbers.

[Richard Close:]

So essentially in first quarter '16, what kind of significant is the $900,000? I guess I'm asking why disclosed the $900,000 for the first quarter if you didn't disclose it in the first quarter?

[Richard Bear:]

Great question, Richard. The reason we've disclosed it is because without the disclosure of the $900,000 and the $200,000, anesthesia revenue would have been flat between in Q2 as compared to Q1. We've been getting significant amount of questions why anesthesia revenue is flat and we can't talk about the reason. We couldn't talk about the reasons without it being disclosed. So we disclose those things that are important for us to be able to answer questions from viewing others and don't disclose everything that's out there because it's not material.

[Richard Close:]

Okay. But like on a revenue per case last year, you were at $468 in the first quarter. This year you're at $467. You exclude $900,000 as was pointed out earlier, that $466 goes down to $440 which is a pretty notable decline.

[Richard Bear:]

$445, which a lot will be driven by GAA.

[Richard Close:]

Okay. All right, thank you.

[Richard Bear:]

Thank you.

[Operator:]

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:]

Okay. We just like to thank everyone for their calls and us all with Richard and myself are available to speak to you and look forward to hearing from you. Thanks very much. Bye, bye.

[Operator:]

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