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ExamWorks Group, Inc. (NYSE:EXAM)

Q4 2013 Results Earnings Conference Call

February 25, 2014, 05:00 PM ET

Executives

J. Miguel Fernandez de Castro - Senior Executive Vice President and Chief Financial Officer

Richard E. Perlman - Executive Chairman

James K. Price - Chief Executive Officer

Analysts

Ralph Giacobbe - Credit Suisse

Mike Matson - Needham & Company

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2013 ExamWorks Group Earnings Conference Call. My name is Brittney and I will be the operator for today.

At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session (Operator Instructions). As a reminder this call is being recorded for replay purposes.

At this time I would now like to turn the presentation over to your host for today, Chief Financial Officer, Miguel Fernandez. Please proceed, sir.

J. Miguel Fernandez de Castro

Thank you. Hello, everyone, and thank you for joining the ExamWorks fourth quarter and full year 2013 earnings conference call. An audio replay of the call will be available on our website at investorrelations.examworks.com later this evening. A copy of our earnings release is also available on our website.

In the course of this conference call management may make statements that contain forward-looking information within the meaning of the Private Securities Litigation Reform Act of 1995, such as statements regarding future events or company performance or estimates relating to the future.

Although the company believes that the assumptions underlining any forward-looking statements are reasonable I caution you that any of these assumptions maybe inaccurate and therefore the company's actual results could differ materially from those that maybe projected in management's discussions.

Additional detailed information concerning a number of factors that could cause actual results to differ from the information that management may give you is detailed in the company's filings with the SEC. Copies of these reports are available upon request.

I will now turn the call over to our Executive Chairman, Richard Perlman.

Richard E. Perlman

Thanks, Miguel and good evening everyone. In addition to Miguel, Jim Price, our CEO is here with us tonight. Needless to say we are extremely pleased with our results for the fourth quarter. We exceeded revenue and EBITDA expectations while growing in pro forma revenues organically by 11.2% or 12.7% on a constant currency basis. We are particularly pleased with the U.S. revenue growth of 13.9% compared to 6% in the third quarter of 2013.

Even taking out the estimated $3 million impact of Hurricane Sandy in Q4, 2012 U.S. growth exceeded 10%. We experienced consistent currency headwinds reported in previous quarters, but a result on a constant currency basis indicate excellent performance in all three of our international markets. This performance illustrates every dimension of the business model that we have discussed in our prior calls. Market share gains leading to attractive organic revenue growth across all markets, scalable technology solutions that drive operating leverage and expanding margins and significant cash flow.

Our IT platform continues to be a major differentiator that sets ExamWorks apart from the rest of the competition. The assurances of security, privacy and confidentiality are central features of our services that clients cannot be without given the high cost of data breaches and remediation.

As indicated on our prior calls we resumed our acquisition program at the end of 2013 and into the current quarter. Our focus has been on targets that meet our strategic financial and operational requirements at purchase price multiples that are consistent with previous acquisitions. I’ll comment briefly on the acquisitions the latest of which we closed on February 14 and which was not included in our press release of February 4th.

The six companies add approximately $53 million of annual revenue and adjusted EBITDA of $50 million for which we paid approximately $100 million. I will speak to the largest acquisition Gould & Lamb and Jim will address the five additional acquired companies in his remarks. Consistent with our overall acquisition strategy in addition to smaller tuck-ins we target market leaders as with the case with MES Solutions in the US, Premex Group in the UK and MedHealth in Australia. Gould & Lamb is also a market leader in the Medicare compliance services and the [VAR] industry. We paid multiple of 7.9 times which is in line with prior acquisitions of these market leading companies.

I would like to illustrate in simple terms that the Medicare set aside business generally consists of our new to Medicare secondary payer statutes and related guidance ensures settling or paying worker’s compensation, liability and disability claims meeting certain criteria could have exposure if they don't take the interest of Medicare into account in their settlement process. The law was put in place to prevent claimants from double dipping by accepting a lump sum payment for their claim from a private insurer but at the same time requesting Medicare reimbursement for medical conditions or injury caused by the same injury or accident.

Gould & Lamb is engaged by insurance companies to provide complicated analysis of what portion of the settlement should be satisfied by the claimants to either reimburse Medicare payments already made or to pay for future expenses. The insurers still typically make a lump sum payment and the claimant or the representative is required to file a Medicare set-aside account to pay for expenses that are not or should not be the responsibility of Medicare. But by engaging us for this analysis any further obligation or exposure of the insurance company is mitigated.

There are several services that Gould & Lamb provides to address these and other compliance issues including assisting insurers with reporting obligations to Medicare required by the law. The Gould & Lamb acquisition is strategic in that we share with the same clients. While Gould & Lamb has enjoyed a strong reputation for innovation, technology and service we believe that because of our scale and customer base on both local and national basis we can drive attractive revenue growth after the integration process this year. Unlike our IME business where a large portion of our expenses are variable Gould & Lamb’s expenses are fixed so that our anticipated revenue growth initiatives would result in attractive profit contributions.

In combination, we can offer our customers a more robust full featured solution and provide higher security assurances to the Gould & Lamb client base than they enjoyed previously. The Medicare compliance business similar to our IME business bears no government reimbursement risks. As with our other market leading subsidiaries that have stellar reputation built over many years, Gould & Lamb will continue to operate as a separate brand led by a team of Medicare compliance industry experts.

To conclude, we believe that our corporate and customer based senior management teams are the industry's best, they have successfully led and continue to lead the consolidation of still fragmented industry and during 2013, we continue to focus on qualitative improvements across all operations globally producing these outstanding results. We are well positioned to continue to expand in 2013 and beyond as our brands and innovative services will continue to gain market share in the IME industry.

With that, I would like to turn the call back over to Miguel.

J. Miguel Fernandez de Castro

Thank you, Richard. Now starting with the income statement, we generated revenues of $158.8 million in the fourth quarter, an increase of 13.8% over the prior-year quarter. Acquisitions completed in the fourth quarter contributed approximately $300,000 of revenue.

Organic growth was 11.9% and was led by strong results in our U.S. business. On a pro forma basis revenues this quarter were $160.1 million, an increase of 11.2% over the prior-year quarter pro forma revenues of $144 million. On a constant currency basis, this growth would have been 12.7%. Pro forma revenues assumed that the 2012 and 2013 acquisitions were completed on January 1, 2011 and 2012 respectively. Adjusted EBITDA for the fourth quarter of 2013 was $25.6 million or 16.1% of revenues, an increase of 26.1% over the prior-year quarter.

Acquisitions completed in the fourth quarter contributed $30,000 to adjusted EBITDA. Revenues for the year ended 2013 were $616 million over the prior year ago revenues. And again, acquisitions completed in 2013 contributed approximately $300,000 of revenues.

Organic growth for the year was 7.3% and it was driven by growth in our U.S. and UK businesses. On a pro forma basis revenues for the year were $622.3 million, an increase of 7.5% over the prior year pro forma revenues of $578.9 million. On a constant currency basis, revenues would have grown at 8.8%. Adjusted EBITDA for the year ended 2013 was $97.5 million or 15.8% of revenues, an increase of 22.2% over the year ago EBITDA.

Our cost of revenues were $105 million, an increase of 13.4% over the prior year quarter. The increase was primarily due to increased medical penalties resulting from higher revenues. Our cost of revenues as a percentage of revenues for the quarter was 66.1%, a slight improvement over the prior year quarter percentage and a result of increased revenues and positive operating leverage. The fourth quarter of 2012 and 2013 respectively included $750,000 and $700,000 of stock-based compensation expenses.

Now SG&A expenses in the fourth quarter were $34.9 million, an increase of 20.8% over the prior year quarter. The increase was primarily due to the higher share-based compensation expenses for 2013 over the prior-year quarter. Included in SG&A expenses in the fourth quarter of 2013 are $4.3 million in share-based compensation expenses and $1.7 million in acquisition-related transaction and other costs.

Depreciation and amortization expenses were $14.7 million, a decrease of 9.8% over the prior year quarter. This decrease was due primarily to intangible assets becoming fully amortized in 2012. For the fourth quarter, depreciation expense was $1.5 million and amortization expense was $13.2 million. Interest and other expenses net in the fourth quarter were $7.1 million, a decrease of 9% from the prior year quarter. We repaid $51.8 million of debt in 2013 resulting in lower interest cost compared to the prior year.

On a consolidated basis our DSOs in the fourth quarter were 113 days and in line with our historical trends. In our largest market, the U.S., our DSOs were approximately 45 days. In the U.K., our DSOs were approximately 300 days, In Australia approximately 30 days and in Canada approximately 50 days. All of these are in line with historical trends and our expectations.

We generated $13.6 million in operating cash flow in the quarter and $36.4 million for the full year and that's after the bond interest payment of $22.5 million made in January and July of 2013. We repaid $19 million of debt this quarter and $51.8 million for the year and we ended the quarter with $12.8 million of cash on hand and total debt of approximately $333 million. As of the end of the quarter, our total leverage was 3.43 times which is well below the 4.75 times allowed under our credit facility.

Our total committed revolver availability as of the end of the year was $230 million of which a $130 million was immediately available and the balance of approximately $100 million was available to execute on our acquisition strategy. Now taking into account the recent acquisitions our total committed availability is now a $145 million of which a $110 million is immediately available and the balance is available to execute on our acquisition strategy.

Now onto the business outlook, for the first quarter of 2014 we expect to report revenues of between a $165 million and a $170 million, which implies growth of between 11% and 14% over the prior year reported results of a $148.7 million. Organic growth is expected to range between 5% and 7% and includes some currency headwinds and the impact of severe weather in the U.S.

Our adjusted EBITDA margins for the first quarter are expected to be approximately 16% of reported revenues and include the impact of certain seasonal expenses such as employer taxes. For the full year of 2014 we expect to grow revenues about 13.5% to 15.5% over our reported revenue of $616 million. We expect to grow organically between 6.5% and 8.5% on a constant currency basis and the balance of the growth coming from the acquisitions we have completed to-date. Additionally our overall growth assumes that the acquisitions we just completed will remain flat on a year-over-year basis. This guidance does not include any future acquisitions that we may complete.

For the full year of 2014 we expected reported adjusted EBITDA margins ranging between 16.5% and 17.5% of reported revenues. As we progress through the year our reported adjusted EBITDA margins may fluctuate between 16% and 18%.

Now with that, I’d like to turn the call over to Jim Price.

James K. Price

Thank you, Miguel. Good evening everyone. I would like to first begin by thanking all of our employees who continue to work hard and deliver exceptional service to our clients. Additionally I would like to welcome our 300 new employees to the ExamWorks family. Today we operate out of 62 service centers in four countries with over 2,400 employees that process in excess of 1 million transactions per year.

Turning to the acquisitions, let me start here at home. In the U.S we acquired two IME companies based in Northern California, Evolution Resource Group and Newton Medical. Both companies have exceptional medical panels, strong local market presence and serve the workers compensation market in California. As we've previously commented we believe this is the largest workers comp market in the U.S. and this increases our presence and opportunity in this market.

In the United Kingdom we acquired AGS Risk Solutions and Cheselden. Both of these acquisitions complement our existing service offerings in the UK. AGS offers claims research and analysis giving our clients critical information to properly manage clients and Cheselden enhances our public sector offering for disability claims.

In Australia, we acquired Assess Medical, a highly regarded IME company that strengthens our market presence in medical panel in New South Wales. In line with our historical purchase price multiples we paid an average of 4.6 times adjusted EBITDA for these five acquisitions. These acquisitions are representative of the types of companies that we expect to continue to join the ExamWorks family in the future.

We continue to be pleased with our progress on our national account program, both our existing accounts and potential new accounts. We believe that our national account program coupled with our local sales efforts and wins will continue to drive organic growth. We continue to invest in our IT infrastructure and data centers on a worldwide basis to ensure the security and optimize workflow processes are always available to our clients.

As Richard said, every dimension of our business model is borne out in our results. The differentiation in quality of our services enables our clients to choose from among the strongest and largest portfolio of brands in the industry. We anticipate that the momentum and innovation will continue into 2014 and beyond.

And operator with that we would like to open up the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions). And your first question comes from the line of Ralph Giacobbe with Credit Suisse. Please proceed.

Ralph Giacobbe - Credit Suisse

Thanks. Good afternoon, guys. So the organic your pro forma growth, 11%, 11.2% was pretty impressive. I guess when I look at the guidance for 2014 you have got 6.5% to 8.5% baked in. You know aside from the 1Q weather any other things to call out as I would think that this past quarter might be a better reflection of the organic growth we’re just starting to see in terms of national account rollout.

Richard E. Perlman

Yeah look Ralph I think we couldn’t be happier with these results obviously and we kind of anticipated your question because the Q4 numbers relative to our guidance I think would lead people to believe that we’re being fairly conservative and we are. I mean that’s still our bias here. There is nothing at all that troubles us globally in any of these markets. We are quite bullish and we are hopeful that as the year progresses we’ll take the numbers up but we want to start the year in anticipation of unexpected things like the weather in the first quarter.

Ralph Giacobbe - Credit Suisse

Okay, it makes sense, just want to make sure. And then obviously you have stepped up deals of late, anything to call out on exactly why is the landscape changing at all you know how much you are willing to do, how much more are you willing to sort of stop maybe and digest some of this recent flurry of deals so stay question on sort of the overall backup and your position at this point?

James K. Price

Yeah I was just going to say we always -- as we have said in the past we have a robust pipeline and it continues to be robust. We are very discipline in selecting our acquisitions and we said on the last call that we would be announcing all of these acquisitions which have been working for quite a while. So we are happy with it and at the end of every quarter hopefully in the future we’ll be announcing future acquisitions.

Richard E. Perlman

Again, again I think Ralph there is a clear strategic rationale behind every one of these deals we try to get some of that across in our comments and we are going to as Jim said continue to be very disciplined but at the same time opportunistic. We think we are in a very, very strong position as this industry continues to change and people approach us literally everyday now. So it’s up to us to be smart and be disciplined buyers but there will be more deals but again as we have said also we are not going to announce them until after they are closed on a quarterly basis. We are not going to give guidance on the scope of what we anticipate for the remainder of the year, that was the path we wanted, we announced it.

Ralph Giacobbe - Credit Suisse

Fair enough. And then if I could just sneak more in I want to go to the Gould & Lamb deal. Can you maybe help frame a little bit more how easy or difficult you see sort of the integration and how kind of ties into the IME business and may be what the opportunity is for the Medicare satisfied business? And then along those lines, I think you mentioned sort of the fixed cost nature of the business, can you just flesh that out a little bit in terms of just understanding sort of the potential leverage there? Thanks.

James K. Price

Yeah so as we said in our comments, it is going to keep sort of standalone entity under its brand and they've got a very, very experienced seasoned team there that has made a wonderful reputation for the company in the Medicare satisfied segment of the business. So the real integration, the opportunity for us we see is based on our existing customer relationships, I say based on some of the Gould & Lamb's customer relationships.

It's a two way street, we think they can help us but more importantly because of the breadth of our customer relationships globally that we can help then and some of them by the way has started already. So, the real focus is going to be on revenue growth there to speak of that the operating leverage, we put the numbers there, got a 32% EBITDA run rate right now and because this fixed cost component of their business, the incremental revenues are very, very impactful.

So don't know if Miguel wants to give you a few metrics on what we expect as we ramp up, but the contribution margin is quite significant.

J. Miguel Fernandez de Castro

Yes. So Ralph, I think to add to that, I think as you look at our full year guidance, the EBITDA margin ranges between 16.5% and 17.5%, so gives a mid-point of 17% and we end the year 2013 at 15.8%. So that's 120 basis points improvement we would equate roughly half of that to operating leverage and organic growth and the balance would be off of these acquisitions and the fact that they are over -- they are averaging us out.

Now to Richard's comment, the bulk of the expenses within Gould & Lamb are fixed. So as we see incremental revenues flowing through the business we should see incremental EBITDA margin out of that operation.

Ralph Giacobbe - Credit Suisse

Okay, great. Thanks for the color.

Operator

And your next question comes from Mike Matson with Needham & Company. Please proceed.

Mike Matson - Needham & Company

Hi. Thanks for taking my question. I guess I was just wondering, with regard to your M&A strategy, I know you can't speak to specific things that you have, that you are planning to do. But I was just wondering if there are other opportunities out that like Gould & Lamb, in other words sort of some services that are adjacent to the areas that you are in, complementary areas that you are in, where you can add sort of new lines to your existing platform.

James K. Price

Hi Mike. This is Jim. Obviously, we are in the IME space, peer review a small portion of bill review and then Medicare satisfied and compliance. So, we are always looking for some that, unique as Rich said they we are all calling on the same type of clients and customers but at this point we have got a lot of opportunity in those markets. There is -- we always keep an open mind and we are looking in to four countries. So we'll see how it goes.

J. Miguel Fernandez de Castro

But I would say just to add a little more color to that, the majority of the things that we are looking at are essentially staying within our core business.

Mike Matson - Needham & Company

Okay. And then with your natural contract strategy, I was just wondering if that's just focused in the U.S. or if there is opportunities to take a similar approach in some of the international markets that you are in?

James K. Price

Absolutely, and again I think you are kind of new to the party but we do have an existing very meaningful national account in United Kingdom. There is some opportunities there also some opportunities in Australia as well that we are looking at currently.

Mike Matson - Needham & Company

Okay. And then it looks like the margin guidance, the 16.5% EBITDA margin guidance seems a little bit higher then where the consensus was and I was just wondering what's kind of driving that type of performance there, is it the Gould & Lamb acquisition or some of these other deals that you have done?

J. Miguel Fernandez de Castro

Mike, this is Miguel. So it would be, I think a combination of one where we ended the year to the positive operating leverage also the organic revenue growth. And then three the acquisitions that we completed recently and the EBITDA margin that they are contributing.

So as I said I think earlier using midpoint the 120 basis points improvement over where we ended the year in 2013 is roughly equally attributable to organic growth and then the acquisition margin improvement.

Mike Matson - Needham & Company

All right, great. That's all I have, thank you.

James K. Price

Thanks.

Operator

And your next question comes from Matthew Borsch with Goldman Sachs. Please proceed.

Unidentified Analyst

Hi. This is [Joe Bran] on for Matt Borsch. Just wanted to know your acquisition strategy around U.S. versus non-U.S. specifically in the past three months it looks like it's pretty consistent with at least I can parse out with revenue on the basic geographic breakdown, just curious if you are looking to accelerate acquisition growth in any of the select countries?

James K. Price

As we said it's a little early. We look globally obviously one of the acquisitions was in Australia, two of them were in the UK and at this point in time we will always probably see the majority in the U.S .but we are always looking at our other three countries as well.

Unidentified Analyst

Okay, great. And then for just the organic growth revenue guidance, I was curious if that's 7.5% at the mid-point which is pretty similar to the 7.3% you realized in 2013. I was just curious if this was a fairly consistent run rate we could go off of here, potentially looking to accelerate that?

J. Miguel Fernandez de Castro

It's Miguel. So I think as we look at our full year guidance there is a lot of factors that play in geographic mix, sales mix, all the business type mix and then also the geographic mix. So we tend to try to build that into the range of the guidance. Certainly we know that the high single-digit would feel like a reasonable number for us as you are looking forward, yes.

Unidentified Analyst

Okay. Perfect.

J. Miguel Fernandez de Castro

But again I mean as I mentioned to Ralph we've taken a position that we are going to slow down considerably and not get carried away with tremendous momentum that clearly the Q4 numbers indicate. And we will hope as the year does go on that we will be in a position to enhance those -- our guidance.

Unidentified Analyst

Sure, makes sense. And then finally I know you have spent a lot on infrastructure and I was just curious on the you said, you feel it's necessary to perhaps enhance, scaling your infrastructure base off of the recent acquisitions?

James K. Price

Good question. So this year we spent approximately $6 million in CapEx and a bulk of that were dollars around IT and IT infrastructure. These recent acquisitions as we look at 2014 we would spend a similar number on the base business and probably an incremental $2 million or so on the acquisitions as we layer them on into our infrastructure. So for this year we would look somewhere between approximately $8 million or so.

Unidentified Analyst

Great, thank you.

Operator

Okay. There are no further questions. Ladies and gentlemen that concludes the presentation for today's conference. You may now all disconnect and have a wonderful day.

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