AmSurg's CEO Discusses Q1 2014 Results - Earnings Call Transcript

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 |  About: Amsurg Corp. (AMSG)
by: SA Transcripts

AmSurg Corporation (NASDAQ:AMSG)

Q1 2014 Earnings Conference Call

April 23, 2014 9:00 AM ET

Executives

Chris Holden – President and CEO

Claire Gulmi – EVP, CFO and Secretary

Analysts

Josh Raskin – Barclays

Kevin Ellich – Piper Jaffray

Darren Lehrich – Deutsche Bank

Kevin Fischbeck – Bank of America Merrill Lynch

John Ransom – Raymond James

Whit Mayo – Robert Baird

Operator

Please stand by. Good day everyone and welcome to today’s AmSurg Corp First Quarter Conference Call. Today’s call is being recorded and a replay will be available starting today through May 2, 2014. Our number for the replay is 719-457-0820 and the code is 6082127.

At this time, for opening remarks I would like to turn the call over to Chris Holden, President and Chief Executive Officer. Please go ahead sir.

Chris Holden

Thank you very much. Welcome everyone to the AmSurg’s first quarter 2014 investor call. As always, joining me today is Claire Gulmi, Executive Vice President and Chief Financial Officer and also I’m also pleased to welcome everyone who is listening in via the webcast.

With that I’m going to turn it over to Claire to read our famous disclaimer.

Claire Gulmi

Certain statements in the conference call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect management expectations and are based upon currently available information.

These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of AmSurg to differ materially from those that are expressed in or implied by the forward-looking statements.

To the extent any non-GAAP financial measures discussed in today’s call, you will also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP in today’s news release, which is posted on the company’s website. These factors are discussed in more detail in the company’s reports that are filed with the Securities and Exchange Commission, including without limitation, AmSurg’s Annual Report on Form 10-K for the year ending December 2013 and other filings with the SEC. Copies of these filings are available upon request from AmSurg.

I will now turn it over to Chris for opening comments.

Chris Holden

Thanks, Claire. I’m going to just jump back right in and touch on a few highlights from the earnings release. Revenues for the quarter of 2014 were $263 million, increasing by 2% versus the same period in 2013. Net earnings were $0.53 for the quarter versus $0.52 for the first quarter of 2013 and net operating cash flows excluding distributions and NCI were $26.6 million for the quarter.

At the quarter end, we held $47.1 million in cash and cash equivalents and have about $237.5 million available under our revolving credit facility. And our ratio of debt to trailing 12 months EBITDA is 2.95 times.

Our acquisition pipeline has regained momentum. We acquired one center and divested one center in the first quarter. But now we have seven signed letters of intent and one de novo center under development.

Our acquisition multiples remain consistent at six to seven times and we reaffirm our center acquisition guidance for 2014.

We did develop one new hospital system joint venture with Torrance Memorial Medical Center in Torrance, California. And we have a solid pipeline of discussions with other health systems.

We ended the quarter with 242 centers, 151 GI, 36 ophthalmology and 55 multispecialty.

No surprise, weather adversely impacted same center revenue growth for the quarter, same center revenues declined by 2%. Weather impacted 38% of the centers in the portfolio resulting in a loss of 8,000 procedures. And the first week’s – if there was a surprise it was that since our last conversation, the first few weeks of March were particularly severe.

The weather coupled with the tail impact from sequestration generally explained the delta between our same-center growth guidance and the actual results. And all that said, it would add that the weather impact made it very difficult to assess whether there were any other macro utilization trends or pressures that may have also influenced the quarter.

We are revising our guidance for 2014 to reflect the impact of our first quarter results. But our outlook for the remainder of 2014 has not meaningfully changed.

With that, I’m going to turn it over to Claire to walk you through additional details on the quarter and to speak to the revised guidance.

Claire Gulmi

Thanks Chris, and good morning everyone. As Chris stated, despite the challenges of the severe weather during the quarter, we are pleased to report results within our guidance range of $0.53 excluding the $0.02 gain from the deconsolidation of a surgery center.

Our net revenue per procedure increased $675 from $659 in the prior year quarter. As Chris said, we deconsolidated one of our majority owned multispecialty centers as we brought in a new hospital partner in the California market.

For book purposes, we recognized a $2 million pre-tax gain, but because of the tax valuation allowance, the after-tax gain was $550,000 or $0.02 per share.

Our income tax rate is higher than our historical effective rate due to the tax impact of this deconsolidation gain adjusting for this item, our effective tax rate was 40.1% in-line with prior periods.

And despite the weather driven revenue shortfall for the quarter, we were able to control our center and corporate level expenses allowing us to maintain an EBITDA margin after non-controlling interest of 16.7%. This was only 10 basis points lower than the 16.8% reported in the first quarter of 2013, again excluding the deconsolidation gains in each of these quarters.

We acquired one eye center during the quarter and disposed of eye odd center, ending the quarter with 242 centers in operation. Our capital expenditures totaled $12 million, $5 million for acquisitions and $7 million in maintenance CapEx. And we reduced our long-term debt by $19 million to $565 million at quarter end.

Today we are adjusting our full year 2013 guidance to reflect the impact of the lower volumes in the first quarter and establishing second quarter guidance as follows. Revenues, in the range of $1.12 billion to $1.13 billion, net earnings per share for 2014 in the range of $2.41 to $2.45 excluding the deconsolidation gain, and net earnings per share for the second quarter of $0.61 to $0.64.

We are leaving unchanged our same center revenue growth, acquisition and cash flow guidance for the year.

And at this time operator, I’ll open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Josh Raskin from Barclays. Please go ahead.

Josh Raskin – Barclays

Hi, thanks, good morning. So, want to dig into the weather impact a little bit. I think when we spoke, I think it was February 25, 26 when you reported earnings, you said 3,000 to 4,000 procedures might be lost. I’m sorry, 4,000 to 5,000 might be lost and now it is 3,000 to 4,000 more than that. I know, Chris, you mentioned that it was more severe in the first half of March.

But I am curious, did any of those January or February cancellations get rescheduled, do you guys have some sort of mechanism where you cross-reference names to see if people came back? Do you have an outreach effort? And then has any of that even come back in April at this point?

Chris Holden

Josh, good question. We do think that the long-term – the fact that the weather stayed around for such a long period of time. And the statistics that we have seen out of physician office visits not just within our own portfolio but just nationally suggest that there is an issue with the pipeline of patients that have been generated beginning with the physician’s office encounter.

And it’s taken a while to rebuild that, we have a secondary issue that in GI, there tend to be a prep involved as well. So the rescheduling and reorganizing your life to rebook that is not as simple as it would be for say a physical or something like that.

April has started out much more healthy, but I’m cautious to say I do think there may be a tail effect on the rebuilding of the physician pipeline before it actually makes its way into our volumes. And we’re watching that closely to see. But we are feeling a lot better about April and the trends that we’re seeing there.

Josh Raskin – Barclays

Got you. So, I guess, Chris, with the totally 8,000 cancellations well caught. So I’m curious, were those scheduled and then canceled and if those were previously scheduled, is there some sort of outreach program to say hi look, I know you had something being done, an operation done in one of our GI Centers. We’d like to reschedule you guys doing similar stuff?

Chris Holden

Yes. We have a very disciplined effort around that but I’m not going to mischaracterize it and we’re no way to know for sure that we can rebook all of that in a way that it would fall in this current year.

Josh Raskin – Barclays

Okay, got you. And then, just a second question, just on the M&A, it sounds like you guys are a lot more constructive this quarter after some of the delays last quarter with the LOIs that have been signed. Should we think about this center is coming in more ratably through the year, as opposed to historically when they tend to be a lot more sort of fourth quarter closings?

Chris Holden

I think we are on pace for more closings earlier in the year. The pipeline with seven LOIs this – in the Q1 is more heavily weighted on the front end of the year to normal.

Josh Raskin – Barclays

Right. Because you guys have guidance for a contribution from acquired centers and I would assume you’d have to start closing some of these pretty quickly to make that number. So, sounds like you’ve got some visibility that you’ll have some 2Q closes as well?

Chris Holden

It looks that way.

Josh Raskin – Barclays

Perfect, thank you.

Operator

Our next question comes from Kevin Ellich with Piper Jaffray. Please go ahead.

Kevin Ellich – Piper Jaffray

Hi Chris, just – I think I missed the last part of that question. So, of the seven LOIs, against – do you have visibility on the timing when should we expect those to come through. And also, can you give us a breakdown as to what the specialties are?

Chris Holden

I have to think about that. We do – I’ve got it here, we’ve got one, two, three, four multispecialties, two ophthalmology and make that five multispecialty.

Kevin Ellich – Piper Jaffray

Five multi, okay. And then timing, at the end of that part Chris?

Chris Holden

They’ll actually be some in the Q2 it’s hard to say for sure how many would end in the second quarter. I got burned on that end of last year kind of yeah.

Kevin Ellich – Piper Jaffray

Understood, understood that’s fine. Okay, just going back to the weather impact fair to beat on this one. But how did you guys calculate, I mean, were these actual booked procedures got postponed or how did you come up with the estimate for 8,000?

Claire Gulmi

Well, what we did is we looked at the centers that were closed because most of that came from actual center of closing. And what their average procedures per day would have been on those days. And then looked at the days that they were open following that and if they had a low volume because they were unable to rebook or to schedule patients or patients had cancellations. We looked at that change. So, it’s a little bit of an art rather than a science but I think we feel pretty comfortable that we’re probably very comfortable with that 8,000 as a good number, could even be a little bit higher than that.

Kevin Ellich – Piper Jaffray

Sure, yes, I understand.

Chris Holden

Kevin, in this case, I mean, I would add in, I mean, wouldn’t you lose 40% of your portfolio’s full productivity, particularly when you look at a portfolio company. I mean, it’s – that’s a pretty dramatic impact. It also skews your ability to have the out-performers and the superstars because the weather is affecting such a large percentage so.

I would echo what she is saying and I think we were fairly conservative in our methodology.

Kevin Ellich – Piper Jaffray

Sounds like that’s helpful. And then, just wondering, Claire, was there one more business day this year versus last year, based on the timing of the holiday?

Claire Gulmi

There was, there was one more business day. The last year, the holiday was in the first quarter. And that half of our centers are open on Good Friday. And so last year was, is probably really a half a day difference but instead of a full day difference between the quarters.

Kevin Ellich – Piper Jaffray

Got you. That’s helpful. Do you guys still have any centers open on the weekend, like half-day Saturdays?

Claire Gulmi

I think we have a few, not a lot, a few.

Chris Holden

Not material.

Kevin Ellich – Piper Jaffray

Got it, got it. Okay. And then, in the press release you talked about 2.4% increase in revenue per procedure. Just wondering that looks pretty good at this point, just wondering what drove that increase as the discussion of mix or and also how should we think about pricing going forward?

Claire Gulmi

I think there are still a little bit the change in specialty mix, so that’s probably anniversarying about now. We also have the Medicare increase with almost 2% beginning January 1. So, I think you’ll see a continued increase in net revenue per procedure throughout the year.

Kevin Ellich – Piper Jaffray

Got you. That’s really helpful. On the commercial front, are you seeing about 1% to 2% on the contracting side?

Chris Holden

Yes. And it is really consistent with the past experience there.

Kevin Ellich – Piper Jaffray

Got it, okay that’s great. And then, just last question from me, hospital JV is great to see more activity on that front. I guess, what’s the visibility on other deals and I guess, what sort of impact or how should we think about the impact for 2014 when you sign these deals?

Chris Holden

We have been baked in a lot of the incremental growth beyond what’s in the guidance into the impact from those relationships. So, anything that we expected to happen through that is in the guidance today.

Kevin Ellich – Piper Jaffray

Got it. Do you think we’ll see more deals as the year goes on Chris?

Chris Holden

I feel pretty good if we could get to two, three or four down a year and that’s a long sales cycle. And they are – they have burning levels of impact, some are repositioning and some have huge opportunity for growth. It is very much a relationship building process and it takes a while to get those cycles through.

Kevin Ellich – Piper Jaffray

Sure, it makes sense. That’s all from me. Thanks guys.

Chris Holden

Thanks Kevin.

Claire Gulmi

Thanks.

Operator

Our next question comes from Darren Lehrich at Deutsche Bank. Please go ahead.

Darren Lehrich – Deutsche Bank

Thanks, good morning everybody. Few things here. On the hospital partner, sorry if I missed this, but you mentioned a new partner in California. Can you just talk about maybe name some of the key partners at this point and the ones that you think might have multiple center opportunities? Over the next several years we think about that JV pipeline?

Chris Holden

Well, we probably won’t name the ones we’re in discussion with until they’re ready. We signed NDAs and other things as we get into that process so really, I can’t say too much about those in advance.

But I will say, we have – Darren I don’t know if I’m answering your question but the pipeline of those discussions is really ramped up over the last 18 months. We’re in high number of conversations across all of our markets and in some Greenfield markets as well.

I think I may have said this in the past, but we have gotten a lot more inbound, inquiries into potential relationships as health systems begin to think about managing in the ACO environment and really thinking more about medical loss ratio and most importantly about re-weighting their net revenue towards more outpatients. And as they examine the ambulatory surgery center market, they tend to find that the best way to get that done is through a partnership and that leads to the call.

So, long answer to your question. But we feel good about the pipeline and do, we do have a significant amount of energy around trying to expand our presence in the hospital joint venture world.

Darren Lehrich – Deutsche Bank

Got it, that’s helpful. So, I also just want to get the mix by revenue and procedure volume, something that we’ve been tracking?

Claire Gulmi

Sure, sure. It didn’t change much this quarter. For revenues, 51% GI, 12% ophthalmology and 37% multi. On a procedure basis, GI is 69%, ophthalmology 9% and multi at 22%.

Darren Lehrich – Deutsche Bank

Got it, okay. And then, I know you made some commentary around volumes and certainly understand the difficulty in rescheduling GI, just given the preparation there. I’m curious if you could give us a little commentary about orthopedic volume in some of your multispecialties. Was there any progression there to speak of and maybe some of the more economically sensitive types of things, how did that look in the quarter?

Chris Holden

I don’t know that there was anything that stood out in the multi. And as I said before, the weather make it a lot more difficult to parch. I’d be speculating but I think there is still pressure on the big ticket items.

I would also, they’re not – it’s frustrating because I do believe that there has been an incremental shift maybe greater than we’ve seen year-over-year in the past towards the high deductible plans, sparked in part by all the attention around the roll-out of the Affordable Care Act. So I wanted to watch and to test out what you’re asking. But it made it difficult to do that with the weather impact. Some of our biggest centers are in the North East.

Claire Gulmi

Biggest multis.

Chris Holden

Yes, the biggest multis of orthopedics. So that’s the key issue for us to watch in Q2.

Darren Lehrich – Deutsche Bank

Yes, sure, understood. Weather is obviously an obstacle. Okay, thanks, that’s all from me.

Chris Holden

Thank you.

Operator

We’ll take our next question from Kevin Fischbeck at Bank of America, Merrill Lynch. Please go ahead.

Kevin Fischbeck – Bank of America Merrill Lynch

Great, thanks. I just wanted to understand a little bit better the earnings trajectory. I guess you are looking at the new guidance and it sounds like you think that Q1 was the primary driver to the guidance reduction. But the way that I was thinking about it anyway was that you missed the midpoint of Q1 by $0.02 and Q2 guidance looks like it is $0.02 below where consensus was.

So I feel like there is some bleed into Q2 and maybe we might have thought that there would be a little bit of benefit in Q2 just because of a delay in rescheduling what happened in Q1. So want to understand how you think about the earnings trajectory and the commentary that is mostly Q1?

Claire Gulmi

Well, I think we look at it as – we missed $0.04 from the top-end of guidance and really just rolled that into our projections for the rest of the year. In looking at Q2, we’re just so early into it and even though what we’ve seen in the first couple of weeks makes us feel pretty comfortable that we’re back on track.

We certainly – it has so little visibility because the first three months were so disrupted by the weather that we’re trying to be very cautious and how we look at the rest of the year.

Kevin Fischbeck – Bank of America Merrill Lynch

I guess maybe just to follow up on that because it sounds like you feel like the weather really made it difficult to go through and understand what was going on fundamentally versus kind of disruption from the weather. But it sounds like you also have 60% of your centers that are not impacted by the weather. So do you have any sense of kind of what the core volume same-store revenue numbers were in those centers versus the ones impacted by the weather?

Claire Gulmi

I think if you add back what the weather impact was, we were probably at zero for the first quarter across the whole portfolio. So, I think it was – the first quarter is always our seasonally lowest quarter from a same-center perspective growth.

We also had the last quarter of sequestration anniversarying in the first quarter. So, it was just very difficult to get. And even the centers that we didn’t call impacted by weather could have been impacted somewhat by the weather. We really only isolated those centers that were actually closed but there could have been other things going on. It was just hard to get a real picture of what the whole portfolio was doing and how it would be moving forward.

Kevin Fischbeck – Bank of America Merrill Lynch

Okay, but you still feel confident that the annual number is a good number to think about?

Claire Gulmi

Best we can tell right now, yes.

Kevin Fischbeck – Bank of America Merrill Lynch

Okay. And then, I guess, just to understand the hospital JV trend, I think that what you are saying makes a lot of sense about the decision process from the hospitals around looking for someone to partner with.

Can you just talk a little bit about – because there are some other companies that do a similar structure as well and can help, I mean, when you pitch your business to a hospital, how do you differentiate yourself versus those other companies that are doing the same thing?

Chris Holden

Kevin, it generally breaks on the magnitude of your current presence in the market that’s a key driver and your proximity. Another key differentiator for us is our track record and development because part of that relationship will include a commitment to continue to build out the network with that partner.

And those two of course we believe we’re strongest operator. On top of that and we have a tremendous commitment to quality that’s part of the story. We also were – our brand equity particularly amongst the GI physician communities can also be a key differentiator in the pitch.

Our balance sheet, the length, the tenure of the management team, the consistency of the organization, there are a lot of factors. And the one area that tends to ultimately differentiate us is our physician partner satisfaction is the highest. We have, when we go into the relationship, we don’t – particularly when we’re acquiring a center, we don’t ask the physicians to call a handful of – handpicked physicians to ask about the relationship.

We tell them to call anybody, call them all. And we just have that much confidence in our relationship skills with the hospital company and with the hospital joint venture partner. And the hospitals are often looking for partner who helps bridge what often times is a contentious relationship between the hospital and the physicians. And we believe that we have a track record of doing that as well.

Kevin Fischbeck – Bank of America Merrill Lynch

Okay, great. Thanks that’s helpful.

Operator

Our next question is from John Ransom at Raymond James. Please go ahead.

John Ransom – Raymond James

Well, all the good questions have been asked. My question is are you seeing any impact at all from the exchanges and is there a material difference in the co-pay structure that you can tell?

Chris Holden

John, before I answer your question, you had, you use rain in your headline and not snow. You blew a great chance to have a classic headline. And I just wondered what happened there.

John Ransom – Raymond James

I need to fire my creative director.

Chris Holden

I count on you since you haven’t topped the 10 mini-vans so you got to get, you got – you had your chance.

John Ransom – Raymond James

I’m sorry.

Chris Holden

No, we really haven’t seen a lot of impact from that yet. A lot of conversation around network, narrow network development, a lot of conversation around pricing innovation, it has, John I think the key takeaway for us is it has opened the door for us to get in front of payers, a higher level in those organizations to talk about the value proposition of service inner space.

And to consider how shifting their business to the more cost effective, value effective modality makes sense and how to accomplish that. So, that’s really been the number one impact so far of healthcare reform and in all the conversations around narrow networks, ACOs and things like that.

John Ransom – Raymond James

Do you have even a single contract yet, is there anything other than business?

Chris Holden

We kind of broke up John, what was that?

John Ransom – Raymond James

I’m sorry, do you even have even – do you have any percentage at all of your managed care in fact that there are anything other than give service at the point?

Chris Holden

Probably nothing material.

John Ransom – Raymond James

And did you expect that to be general evolving the next couple of years or do you think it’s going to be 90% less fee for service?

Chris Holden

John, I think that we have the stick in our own hand. And that’s an area that we want to explore on whether that’s an opportunity for us to. And I think the – if I were to predict where the next phase, I think we might see more paper performance, innovation.

We’re doing a lot of work around clinical registries and quality data and linking that and trying to differentiate our value proposition and the ability to create measurements that would drive that in exchange for potentially increasing our share and/or pricing.

John Ransom – Raymond James

Okay, thank you.

Chris Holden

Thank you.

Operator

(Operator Instructions). We’ll move on to Whit Mayo with Robert Baird. Please go ahead.

Whit Mayo – Robert Baird

Hi, thanks. I have got really just one question. There has been a fight in South Carolina, I think for some time now, with respects to their CON laws and I know the governor wants to eliminate it. She defunded the entire program last year. The Supreme Court upheld it and not sure exactly where that goes. But I am curious if that’s a conversation that is happening in other states and, Chris, would be curious on your general thoughts on perhaps what you make of those changes?

Chris Holden

We really haven’t seen any widespread momentum around CON I guess we call DON up in the North East. Conversations are legislative changes. That really hasn’t been a major issue. There have been work around and most of the states to facilitate the development of centers over time. There are some states that have pretty strict rules but I really haven’t seen them. A lot of energy around that.

Whit Mayo – Robert Baird

No, we haven’t talked about that in a long time and I was just kind of curious, that was interesting when I read the headlines. And I guess my last one Claire, just to maybe clarify the same store revenue guidance.

You maintained it at 1% to 2% for the full year and given that we’re down 2% in the first quarter, it would imply that you need accelerating growth around maybe 2% to 3% for the rest of the year to hit that 1% to 2% number. Is that the right way to think of it or you’re just saying you have confidence that 1% to 2% for the next three quarters is kind of a doable number?

Claire Gulmi

Okay. Well, part of it is that the first quarter had the sequestration in it. We don’t have that after the first quarter. And yes, we have to see a little bit of an acceleration to get there. But that number that range is pretty wide from a procedure account basis. So we kind of done some protections and feel like that 1% to 2% is easily obtainable if we come back to where we expect it to be through the rest of the year.

Whit Mayo – Robert Baird

Okay, now that’s helpful, just wanted to clarify. Thanks.

Chris Holden

Thanks Whit.

Operator

(Operator Instructions). It appears there are no further questions at this time. Mr. Holden, I’d like to turn the call back to you for any additional or closing remarks.

Chris Holden

All right, thank you operator. I just appreciate everyone being on the call today. And I did want to point out that the Health and Human Services, Office of Inspector General, just did recommended two CMS that they presume different ideas to improve the value proposition for the outpatient surgery provided to Medicare beneficiaries by particularly pushing those patients to the more cost effective modalities.

As they pointed out, they’re bringing the prices in line with those – with prices charged at ambulatory surgery center could save the government, could have saved the government between $7 billion to $15 billion over six years and could have saved Medicare patients $4 billion in co-payments over that same period of time.

And I know you often ask me, of the market share that is currently going to the more expensive modalities, how much would be appropriate in the ASC setting and according to the Federal data, it’s 68% of the patients 65 and older would fall into the categories of low risk or no risk.

And that they did felt like the positions would be in the best position to make those types of decisions on the proper modality. So just want to reinforce the notion that we do believe that this platform of the surgery center space is part of the solution for controlling healthcare costs. And that we do remain bullish on our outlook for the long-haul for just this type of observation that’s now being made at the highest levels in our Federal government.

So, with that I’ll end. And thanks again everyone for being on the call.

Operator

And that does conclude today’s conference. We thank you for your participation.

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