R1 RCM Inc.
Q1 2020 Earnings Call Transcript

Published: 6 May 2020

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the R1 RCM Q1 2020 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator instructions] I would now like to hand the conference over to your speaker today, Atif Rahim, Head of Investor Relations. Thank you. Please go ahead, sir.

[Atif Rahim:]

Good morning, everyone and welcome to the call. We will start today’s call with prepared comments by Joe Flanagan, our CEO followed by Rick Evans, Interim CFO. Certain statements made during this call maybe considered forward-looking statements pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. In particular, any statements about our future growth, plans and performance, including statements about our strategic and cost saving initiatives, our liquidity position, our growth opportunities and our financial performance are forward-looking statements. These statements are often identified by the use of words such as anticipate, believe, estimate, expect, intend, designed, may, plan, project, would and similar expressions or variations. Investors are cautioned not to place undue reliance on such forward-looking statements. All forward-looking statements made on today’s call involve risks and uncertainties. While we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. Our actual results and outcomes could differ materially from those included in these forward-looking statements as a result of various factors, including but not limited to the potential impacts of the COVID-19 pandemic and the factors discussed under the heading Risk Factors in our Annual Report on our latest Form 10-K, annual or quarterly report on Form 10-Q for the quarter ended 31, 2020.Now I would like to turn the call over to Joe.

[Joe Flanagan:]

Thank you, Atif. Good morning, everyone and thank you for joining us. We hope everyone is doing well and staying safe during this unprecedented time, I will give Q1 results in a few minutes, but first, I would like to update you on our response to the COVID-19 pandemic and the actions we are taking to mitigate its impact on our business.Let me start by saying how grateful I am to all our employees for their positive attitude and efforts in the current environment. I especially want to thank our 5,000 plus registration and hospital-based personnel who are on the frontlines of this pandemic ensuring patients have access to care in a safe and expeditious manner. I am extremely proud of our team’s quick response to the crisis and how we have helped our customers as true partners. Our actions in response to COVID-19 are centered around three key areas

[Rick Evans:]

Thank you, Joe. These last 7 months have been a tremendous experience for me and I am extremely proud of the way that finance team came together during this time. Thank you all for joining us. I will begin with a short recap of our first quarter results. I would like to remind everyone that we will be referencing non-GAAP metrics on today’s call. For a reconciliation of the non-GAAP amounts mentioned to the equivalent GAAP amounts, please refer to our press release.First quarter revenues came in at $320.5 million, up $44.6 million or 16% year-over-year driven by $21.4 million increase in net operating fees from new customers on-boarded over the course of 2019, $4.6 million increase in incentive fees as well as organic growth across our customer base. From a cost standpoint, non-GAAP cost of services in Q1 were $237.6 million compared to $246.3 million last quarter and $223.5 million a year ago. The sequential decline was driven by continued productivity improvements and lower employee expenses while the year-over-year increase was largely driven by the on-boarding of new customers.Non-GAAP SG&A expenses in Q1 were $21.3 million, down $1.3 million sequentially primarily due to lower travel and employee expenses, compared to a year ago non-GAAP SG&A expenses were up $2.3 million primarily due to investments in our sales and marketing and HR capabilities. Adjusted EBITDA for the first quarter was $61.6 million compared to $45.1 million last quarter and $33.4 million a year ago. The sequential growth was driven by a continued ramp up in profitability at on-boarded customers as well as lower employee expenses. Year-over-year growth was driven by continued progression of operating partner customers along the profitability curve offset partly by on-boarding costs for new customers. Lastly, we incurred $8.7 million in other costs in Q1 compared to $9.3 million last quarter due to $3.2 million in strategic initiative costs and $2.6 million in expenses pertaining to appreciation bonuses for the company’s frontline employees, mobilization efforts and other costs related to the COVID-19 pandemic.Turning to the balance sheet and liquidity, net debt at the end of the first quarter inclusive of restricted cash was $275.8 million up from $254.4 million at the end of 2019. The primary driver of the increase was a use of cash related to the timing of annual incentive compensation which was paid in the first quarter. At the onset of the COVID crisis, we drew down a portion of our revolver in order to maintain more cash on our balance sheet that we normally do. We also increased our borrowing at the close of the SCI acquisition to preserve cash on the balance sheet.Taking into account the additional debt from the SCI acquisition, which closed on April 1, our current gross debt is just under $580 million. We have just under $20 million in mandatory debt repayments over the remainder of 2020. We are also differing our payroll tax remittances to the federal government as allowed under the CARES Act. We expect this deferral to provide approximately $15 million to $20 million in additional liquidity in 2020. We believe this action, combined with our current cash balance and revolver availability, along with additional borrowing capacity under our current credit agreement and the cost containment actions we are taking will provide us with sufficient liquidity to withstand a wide range of scenarios stemming from the COVID crisis.Turning to our financial outlook, as Joe noted, we will continue to provide a directional revenue view during the interim period and have suspended our previously issued guidance. For the second quarter, we expect revenue to decline $10 million to $20 million sequentially, driven by lower volumes for our smaller physician customers and lower modular revenue.In closing, I am proud of how quickly the team mobilized to respond to the COVID crisis. We expect to emerge from this crisis as a leaner more efficient company that is well-positioned to drive continued strong performance for our customers as well as our shareholders.Now, I will turn the call over to the operator for Q&A. Operator?

[Operator:]

[Operator instructions] Your first question comes from Charles Rhyee with Cowen.

[Charles Rhyee:]

Yes. Hey, good morning, guys and thanks for taking the questions. And Joe, maybe I can start here I understand here that you talked about a range of scenarios in terms of how volumes are going to come back here. Despite the fact that you pulled the guidance, what is sort of maybe then the main assumption you have in terms of what you expect for utilization to come back. You talked about number of scenarios, but if you look, it looks like a number of companies have already reported so far have all tended to give some estimation for obviously a weak 2Q in terms of volume, but starting to bounce back in 3Q and 4Q, maybe start there and just get your sense on how you see the ramp in terms of a return to normalization? Thanks.

[Joe Flanagan:]

Yes. Thanks, Charles. And maybe to break that question down or to provide some additional context, Charles, both near-term and then looking to the second half of the year from what are we seeing and kind of directionally what we may think is a likely progression. For us, as you know, cash collections is really the highest correlating factor as it relates to the bulk of our business, which is those relationships that sit in operating partnerships. And so if you look at April, well, if you look at March we are basically on our plan for cash collections, not really material change. April was down about 17% and we anticipate May to be down circa 25%. Now our view is that May should be the low point and we have a fair degree of visibility in the sense that the last 10 days or so of April and that has progressed into the first couple of days in May, we are seeing restart, reboot activities in a number of our markets and we’re seeing that show-up both in transactional activity, meaning the signals for scheduling and the signals for registration and financial clearance, we are also seeing it on the leading indicators of billings and volume flowing through the various rev cycle process. So that’s – we have visibility around that and kind of that’s what we are seeing and I would say we have a fair degree of confidence again based on the past two to three weeks activity that we would expect May to be a low point and June to be higher.And so the real thing that creates the breadth of range of scenarios is the slope of the return to normal and any secondary events that may occur late summer, early fall. That’s the one thing that we just don’t have a great ability and I think our view is pretty consistent for sure in the discussions we’ve had with our provider customers, pretty consistent with their views. So directionally we would expect progression back to normal coming out of May and as I said, we are seeing that as we speak. I would characterize it as about a third of our markets. I would highlight Texas, Oklahoma, Kansas, Alabama, Tennessee, Florida, Utah as some examples of those markets where we are definitely seeing and have been seeing for the past couple of weeks, mobilization and restart, reboot. We would expect that to continue as we progress through May and head into the summer. The real question for us is just again not the direction, but it’s with any degree of specificity what does that slope look like heading through the balance of the year.

[Charles Rhyee:]

Okay. If I could just ask a couple of follow-ups, can you give, what is the key aspects of your business that allows you to see like what gives you the visibility on sort of near real-time activity? Is it really the SCI scheduling capabilities that you can see people kind of rolling in or what are the solutions in your suite of portfolio solutions that will allow you to see when that gives you the sense like always seem that we are kind of sloping here in a little bit in May?

[Joe Flanagan:]

Yes, what we see – what we see because we are truly and meaning for most of our contracts, we cover scheduling, all the way through the patient collection process. In the front-end processes, in most cases we are running the scheduling function as part of our relationship with the customers and so we are seeing real-time and in fact we are interfacing with the clinical decision making forums on how that restart should be planned and what are the algorithms, so to speak, to start to signal the schedulers to be rebooking and filling capacity. So I would say that function gives us and the fact that function gives us and the fact that we operate that function in most cases, gives us a fair amount of early indicators and that’s what I’m referring to. In some markets we have SCI installed already, in other markets we’re rapidly getting it installed because it absolutely provides that technology platform provides an ability for the providers and the clinicians and their triage decision making teams as well as in partnership with our scheduling teams to run a multitude of scenarios real-time, that technology definitely provides an advantage along those lines. And as I mentioned in my prepared comments, one of the tangential benefits looking out to 2021 and beyond, is that this event has highlighted the capability that SCI brings above and beyond what typically sits in the host system, a Cerner or Epic or the host system functionality. And as a result of that demonstration of value we are locking in and in many cases accelerating the broad-based deployment of that platform across our contracted book of business, which really fuels the bulk of the synergies that we highlighted, when we announced that deal. So I couldn’t comment enough on the scheduling as an early indicator. Pre-registration, which is basically working off that feed from scheduling and that team is doing outbound calls and outreach to patients to prepare them to comment. And that function, we’re starting to get a real sense of what is the mindset of the patients and what is their propensity to actually agree to comment. And then as you flow-through that we see charges posted and we see billings and we see collections as traditional measures. So, as noted in my comments, Charles, we feel relatively well positioned to respond in real-time based on these indicators and my hope, and as I said right now, my expectation, but that’ll be determined by kind of how we see progression through May is that when we’re on our Q2 call, we’re able to provide a bit more specificity. And I think it’s literally seeing May and June flow through and getting again a sense of how this progression back to normal hopefully is shaping out.

[Charles Rhyee:]

Thanks. And just one last follow-up, you talked about your views in terms of what you expect in terms of a rebound as you kind of come out of May, June, you know you said it’s kind of in line with how your clients are thinking. Would you also expect that we’re going to have a catch-up to, are you expecting a catch-up period for elective, so basically running greater than 100% of sort of normal procedure volume as of the year and I guess more specifically, is this sort of the anticipation from your clients as you speak to them and how they are preparing for the back half of the year? Thanks.

[Joe Flanagan:]

I don’t think we’ve assumed a necessarily a material catch-up period. In the range of outcomes that could occur, it definitely could occur. I think, this is where we get into, we, for sure from our vantage point. And I would say even the provider or customers some of the most sophisticated providers in the industry. I don’t think they necessarily have a great amount of visibility on this is a wide range of scenarios that could play through. I would say, our general planning assumption is as you would expect is a prudent return to normal profile and there definitely is scenarios that could surprise us to the upside or scenarios that equally could surprise us to the downside, we just don’t know.

[Charles Rhyee:]

Okay. Thanks a lot guys.

[Operator:]

Your next question comes from Matthew Gillmor with Baird.

[Matthew Gillmor:]

Hey, thanks for the question and thanks for what you guys are doing on the front lines here. I guess, Joe I wanted to ask about some of the emerging themes you talked about with COVID that could be driving sales activity. From a pipeline perspective, is that driving more outreach from sort of new clients to R1 to start a conversation or are those themes, things that are sort of sustaining the current conversation in the current pipeline activity?

[Joe Flanagan:]

I would say it’s both. It definitely is not solely sustaining and keeping current pipeline activities progressing, although I would say that these events in our approach to this event on current active pipeline opportunities is definitely contributing to their continued progression, but we absolutely are seeing new opportunities come into the pipeline, as we’re progressing through this COVID crisis. And I think it’s utterly logical. I mean, when you think about it. We have invested heavily. We have taken our role very seriously. In terms of building world-class infrastructure that’s resilient and can, in essence, extend real meaningful scale leverage to our customers in a compliant and reliable way and I think this event is bringing to light. If you look at how quickly we mobilized 15,000 people into a work-from-home environment did not have any material disruption to our operations and in fact have extended via modular agreements to non-current or non-pre-COVID customers. Our services in the midst of this I think is a real testament to all the hard work and all the investments that we have made over the past 3 to 4 years. If you look at our hospital-based employees whether it via technology on the mobile REG, whether it be just rapid segmentation where physical interface does have to occur being very rapid on mobilizing that, always in lockstep with our customers. I think it’s demonstrated and it’s given us some very compelling proof points to sell off, that we operate like an owner we are an extension of our customer’s organization and really that is the question mark. I don’t think the question mark never has been on value prop such as ours. Are we deeper from the RCM expertise standpoint, given that’s what we do all day long, I think we have been able to credibly answer that, this has helped us to again build on that, but I think much more importantly, it’s given us an opportunity to demonstrate our strong partnership and that is really important as current or potential customers are thinking about a transition of control. So my hope, or my expectation is that we definitely coming out of this and even real-time are seeing increased activity of new opportunities, new discussions in the pipeline and continued progression of active discussions. I also think looking more long term that, whether it be operating, co-managed agreements that we have in place or pipeline opportunities that are out trying to decide, between the trade-offs in the eyes of the customer of a co-managed or operating partnership. I think this event in the approach we’ve taken has given us a very compelling proof point, that we are good stewards when we have control of the operation. And I can’t emphasize how important that is long-term for the company and for the value creation of all stakeholders within the company.

[Matthew Gillmor:]

Got it. That’s helpful. And then as a follow-up, I did want to ask about the CARES Act emergency grant money that’s been distributed to providers, does R1 through your contracts technically have access to that money and even if you did, are you, we are growing that to support providers. Just give us some sense for how that’s getting treated?

[Joe Flanagan:]

Yes. Let me answer that across a couple of comments I should have. I should have characterized when I answered Charles question and I provided the March, April and anticipated May cash collections that those numbers include no benefit of the Medicare prepayment that acceleration of funds. Those funds, we will incur our fees when CARE is delivered. So I should highlight that just for avoidance of doubt. Relative to CARES Act, we are not participating in that. And I would say furthermore, as you heard from Rick’s comments, we’re investing in capacity to make sure that we are ready to serve our customers as they navigate those puts, but that is, that’s not something that we’ve availed ourselves too and it’s not something we’ve ever even thought to talk with our customers about.

[Matthew Gillmor:]

Got it. Fair enough. Thank you.

[Operator:]

Your next question comes from Donald Hooker with KeyBanc. Donald, your line is open.

[Donald Hooker:]

Hi, I am sorry. Can you hear me?

[Joe Flanagan:]

We can, Don.

[Donald Hooker:]

Okay, super, hey. So obviously, there was some unfortunate news in the press around Quorum having some financial difficulties. And I am sure that’s – I am sure folks are hearing that as well in the press around different provider groups and hospital struggling. How are your contract structured to protect you if things get worse, perhaps or their contractual protections in terms of incentive fees, In terms of, can you just walk through kind of how you structure the contracts. So you’re not left standing if the music stops at a particular client?

[Joe Flanagan:]

Yes. I don’t think necessarily, I mean we have talked about. Don, we have talked a lot with Quorum or we’ve talked a lot, excuse me, in past calls in Q&A just on our preparedness to navigate kind of Quorum as a specific proxy and I think we’ve always said this, and we continue to view this. We have a, we have a fair amount of visibility, just given the relationship we have cut with customers. What we do is super critical to their ongoing sustainability, meaning the conversion of billings to cash. The variability of our cost structure is quite significant. When you think about the percent of our cost, that’s labor and the labor that sits at the hourly workforce, I don’t take this lightly and but there is an amount of attrition in a fair amount of variability in that, cost structure. And then from just a fee basis we typically get base fees in advance of service. Now depending on the relationship, it depends on how far in advance that is and so there is a myriad of factors outside of the contract just on a normal operating basis that give us a high degree of confidence. Should a situation arise that we’re able to navigate it and I think Quorum is a good example of that and you may have seen in the filings, but we were deemed essential vendor as it relates to Quorum and all of our ongoing expenses have been fully approved by the courts. And so, I think that’s just an additional proof point or example of the criticality of what we do and the intimacy we have with the operations of our customers.

[Donald Hooker:]

Super. Yes, just one of the – it’s nice to hear that reassurance. And then maybe another separate question, you guys had good success despite the pandemic with some co-managed relationships with Penn, with a couple of others. Are there conversations or is there a potential progression of these relationships from sort of modular and co-managed deals to full operating relationships, for outsourcing relationships over time. Is that kind of how we should think about these? Are they sort of like, if you take the Penn deal win, are they sort of are we sort of testing the waters and then maybe that progresses into a full outsourcing relationship or how those discussions likely to evolve?

[Joe Flanagan:]

Yes. I mean Penn was just announced so I don’t want to get ahead of myself. Our focus on with Penn State is just a world-class deployment and really demonstrating the capability of our human capital, our technology and how that technology brings value above and beyond the whole system and then our central infrastructure. So our focus right now with Penn State is just a great, great deployment and we are honored and delighted that they selected us to be their partner. So what I would say, Don, is we have a very good track record. If you look at Ascension and Intermountain as two most recent examples of progression from operating partner, or from co-managed into operating partnership, and without a doubt, as you think about current end-to-end agreements we have in co-managed relationships. Our objective and we think there is significant value creation for the customers and strategic rationale is to progress those into operating partnerships. And one of the reasons, we are so focused on serving our customers in this COVID event, it’s a great opportunity for us to demonstrate again that we are very good stewards when given control of the operation as a partner. And I think, I think coming out of this, I feel very good and I’m proud of the team and the way they’ve approached those relationships that will bode well as we look to progress over time those co-managed relationships, we currently have. And as we think about our pipeline in those discussions, we have some very real-time, very compelling examples of how we operate as a partner. And I think I can’t emphasize how important that is to the long-term value of the franchiser of the company given what in our opinion is the very early innings of a structural progression revenue cycle. I would absolutely be remiss if I didn’t comment that while we have an event here if you take a step back, there is a very big market, it’s not well organized. And there is a lot of value to be delivered to the providers by rationalization of the revenue cycle infrastructure at large over time.

[Donald Hooker:]

Thank you for that. Thanks.

[Operator:]

[Operator instructions] And your next question comes from Sean Dodge with RBC Capital Markets.

[Sean Dodge:]

Yes, thanks. Good morning. So Joe, on the cost actions you are taking, can you give us a sense of how meaningful those are going to be? Is it going to total in the tens of millions of dollars or more or less? And then on timing you mentioned accelerating some planned for the fourth quarter ended the third quarter, the others like new travel, the 401(k) match, imagine those show up pretty quickly?

[Joe Flanagan:]

Yes, Sean. Thanks. From a cost standpoint, I would say the cost actions we are taking are in the tens of millions of dollars in terms of – in terms of those that we referenced we’ve put in, put in place, and are executing against. When we talk about the cost, the corporate cost action that we had originally planned for Q4 that we’ve pulled in to the start of July from an execution standpoint or the start of Q3 that planned cost action that was sitting in Q4 was not dependent on COVID. We had always been monitoring and we have always known that there was opportunity for us to assess on from our corporate standpoint, everything we’re spending money on and to gain some efficiency. And really strategically we want to be diligent on always maintaining that corporate efficiency because we do expect over time, and I would say this is a longer aperture then just 2021 to get scale leverage on our corporate costs as we grow the business. And so essentially what we are doing is pulling that in, to July, as opposed to a Q4 execution that ensures two things. One, we are cash flow positive in the year on those actions and it ensures we lock in a full 12 months of benefit in 2021. And so it’s not a reaction to COVID, the pull-in, to some degree is from just making sure we are cash flow positive on it in the year, but it’s really a proactive strategic intention of ours to maintain the efficiency from a corporate standpoint as we drive significant growth on the business. And so, that’s kind of a bit of color on that specific action.

[Sean Dodge:]

Okay, that’s very helpful. Thanks. And then maybe going back to Quorum for just another moment, your payments there that are outlined in the court filings, the interim operating budget that Quorum had filed as part of its profit, are they in line with your initial contract terms or you had to make any adjustments to the contract or any concessions over the course of all of that?

[Joe Flanagan:]

In line with our operating assumptions and no commercial adjustments that we made.

[Sean Dodge:]

Great. Thanks again.

[Operator:]

I am showing no further questions at this time. I will now hand the call back to Joe Flanagan for closing remarks.

[Joe Flanagan:]

Great. To close the call, I would like to just thank everybody for joining us today and sincerely hope everyone is and their families stay healthy and try to get through this period as best as possible. We know we will eventually get through this and we look forward to updating everyone on our future calls. Actually, thanks for all your help and we can close the call.

[Operator:]

You are welcome. That concludes today’s conference. Thank you for your participation. You may now disconnect.