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ExamWorks Group, Inc. (NYSE:EXAM)

Q1 2014 Results Earnings Conference Call

May 06, 2014 05:00 PM ET

Executives

Miguel Fernandez - Chief Financial Officer

Richard Perlman - Executive Chairman

Jim Price - Chief Executive Officer

Analysts

Ryan Daniels - William Blair

Mike Matson - Needham and Company

Jonathan Chan - Credit Suisse

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2014 ExamWorks Group Earnings Conference Call. My name is Gabriel 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. As a reminder this call is being recorded for replay purposes.

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

Miguel Fernandez

Thank you Gabriel. Hello, everyone, and thank you for joining the ExamWorks first quarter 2014 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 Perlman

Thanks, Miguel and good evening everyone. In addition to Miguel, Jim Price, our CEO is here with us tonight. We are pleased to share our first quarter results which set new milestones in terms of revenue and adjusted EBITDA. Once again we exceeded revenue and adjusted EBITDA expectations growing organically by 9.3% or 9.8% on a constant currency basis.

We continue to report our performance on a constant currency basis which we feel is the truest indication that we are successfully executing our strategy across all our geographies. While all three international markets contributed double digit organic growth we were particularly pleased with the strong performance of the U.S. which posted 8.5% organic growth despite the severe weather and its impact on many of our operations during the quarter.

We believe that part of our growth is attributable to the rapidly changing landscape in our industry through contractive service level agreements our clients in the industry continued to increase the demand they place on their vendors. With our national footprint focused on local service expensive medical panel, technology platform and financial resources we are uniquely positioned to meet and exceed these heightened requirements.

Today we believe that we have validated the central premise of our business model and strategy. Creating national footprints and brands through acquisitions and integration for the emphasis on technology and local service, the result, it’s been a financially strong company that as our outlook indicates will continue to grow organically in the future.

In addition significant opportunities continued to exist to do selective acquisitions in all our geographies and it’s indicated in our last earnings call, we resumed our acquisition program at the end of 2013 and into the first quarter acquiring five small tuck-ins and the market leader in the Medicare compliant space.

Jim will speak the status of these recent acquisitions in his remarks. However I would like to provide some additional color regarding the strategic fit on the quarter’s largest acquisition Gould & Lamb. Medicare compliance niche is estimated to be approximately up $300 million per annum business, Gould & Lamb is the market leader with approximately 9% market share and here too the competitive landscape is comprised of many small pleasures.

We believe that given our common client basin scale we can drive attractive revenue growth once the integration is completed with year. The margin profile and lack of reimbursement risk associated with any of the service provided our other attractive attributes of this business. We are excited about the compelling growth opportunities of the combination with Gould & Lamb offers and we look forward to expanding our presence in this niche.

Looking at the year ahead, the momentum and consistent performance is reflected in our revised upward guidance for 2014. Full year revenues are expected to increase between 14% and 16%. The organic growth component on a constant currency basis is expected to range between 7% and 9%. And the adjusted EBITDA margin is expected to be in the range of 16.5% to 17.5% representing a 70 to 170 basis point increase from 2013 with roughly half of the increase driven by organic growth.

We are excited about the multiple growth opportunities that are ahead of us. To remind you all, we believe that the aggregate market in the BRIC countries in which we operate approximates $5 billion per annum. And with projected revenue this year in excess of $700 million, we are the clear leader. The market is still highly fragmented with over 600 smaller competitors leaving $4.7 billion per year to capture, as our brands and innovative services drives standards, redefine markets and continue to gain market share.

With that I’d like to turn the call back over to Miguel.

Miguel Fernandez

Thank you, Richard. And starting with the income statement, we generated revenues of $173 million in the first quarter, an increase of 16.3% over the prior year quarter, 9.3% of the growth was organic and the balance of 7% was acquisition growth. On a constant currency basis, organic growth would have been 9.8% and the result of strength across all four of the geographies in which we operate.

On a pro forma basis, revenues this quarter were $176.7 million, an increase of 9.2% over the prior year quarter pro forma revenues of $161.9 million. Constant currency pro forma growth would have been 9.8%. Pro forma revenues assume that acquisitions completed in 2013 and 2014 were completed on January 1, 2012 and 2013 respectively.

Adjusted EBITDA for the first quarter of 2014 was $28 million or 16.2% of revenues, an increase of 21.7% over the prior year quarter of $23 million. Acquisitions completed in December 2013, January 2014 and February 2014 which we are collectively calling recent acquisitions in the earnings release contributed approximately $10.5 million of revenues and $2.8 million of adjusted EBITDA during the quarter.

Our costs of revenues were $111 million for the first quarter, an increase of 14% over the prior year quarter. The increase was due to increased revenues and resulting in higher medical panel fees. Our costs of revenues as a percentage of revenues for the quarter were 64.2%, an improvement over the prior year quarter percentage and the result of positive operating leverage from higher revenues.

SG&A expenses in the first quarter were $40.5 million, an increase of 21.6% over the prior year quarter. The increase was due to acquired SG&A and higher share based compensation expenses for 2014 over the prior year quarter. Included in SG&A expenses in the first quarter of 2014 are $4.7 million in share-based compensation expenses and $1.2 million in acquisition related transaction costs.

Depreciation and amortization expenses were $14.3 million, a decrease of 12.3% over the prior year quarter. This decrease was due primarily to intangible assets becoming fully amortized in 2013. For the first quarter, depreciation expense was $1.4 million and amortization expense was $12.9 million. Interest and other expenses net in the first quarter were $7.6 million and comparable to our prior year quarter.

Now turning to DSOs. On a consolidated basis, our DSOs in the first quarter were 114 days, in line with our historical trends. In our largest market, the U.S., our DSOs were approximately 45 days. In the UK, our DSOs were approximately 300 days and Australia, approximately 30 days and in Canada approximately 50 days. All of these are in line with our historical trends and our expectations.

We generated $3.2 million in operating cash flow impacted by the semi-annual approximate $11 million bond interest payment and a $4.3 million improvement over the prior year quarter. We ended the quarter with $8.5 million of cash on hand and total debt of approximately $408.5 million. As at the end of the quarter, our total leverage was approximately 3.6 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 quarter was $155 million of which a $130 million was immediately available.

Now turning to the business outlook, for the second quarter of 2014 we expect to report revenues of between a $182 million and a $188 million, which implies growth ranging between 16% and 20% over the prior year reported results of a $156.1 million. And these include approximately $2 million of favorable currency compared to the prior quarter. Organic growth is expected to range between 7% and 10%.

Our adjusted EBITDA margin for the second quarter is expected to range between 16.6% and 17% of reported revenues. For the full year of 2014, we are raising our guidance and expect to grow revenues by 14% to 16% over our 2013 reported revenue of $616 million. This guidance does not include any future acquisitions that we may complete.

We now expect to grow organically between 7% and 9% on a constant currency basis. For the full year of 2014, we expect to report adjusted EBITDA margin ranging between 16.5% and 17.5% of reported revenues. As we progress through the year, our reported adjusted EBITDA margin may fluctuate between 16% and 18%.

Now, I'd like to turn the call over to Jim.

Jim Price

Thank you, Miguel. Good evening everyone. I would like to first begin by thanking each of our 2,400 employees who continue to work hard and deliver outstanding client service to our clients. Today we operate from 63 service centers in four countries and process in excess of 1 million transactions per year.

Looking at the acquisitions made during the quarter from a financial perspective, we made four acquisitions in three of our geographies, three of which were tuck-ins including the two acquisitions complete in December 2013. We spent $100 million acquiring $53 million of annual aggregated revenue and $15 million of adjusted EBITDA.

The disciplined pace with which we have executed our acquisition strategy has resulted enough paying an average of 4.6 times adjusted EBITDA for the five, for five of the six acquisitions and 7.9 times adjusted EBITDA for Gould & Lamb, the market leader in the Medicare compliance space.

As you know we no longer provide acquisition guidance but our acquisition pipeline continues to be robust consisting of tuck-ins at our historical multiples as well as unique strategic opportunities that might require higher multiples.

Turning to our integration progress our two acquisitions in the U.S. evaluation resource group and mid medical group are complete and they are now on our private cloud based accounting and operational platforms. California represents the largest workers comp market in the U.S. and these acquisitions bring our service center count list state to four with three locations in northern California and one in southern California. We believe we are now the leader in the California workers comp market.

Gould & Lamb’s integration is underway and will continue throughout 2014. We have completed the accounting and management information systems integration and expect to migrate into our IP infrastructure later this year. With this acquisition, we believe we're now the leader in the Medicare compliance market.

To remind everyone in the United Kingdom, we previously acquired AGS Risk Solutions and Cheselden. Both of these acquisitions complement our existing service offerings in the UK. Our integration of these acquisitions is substantially complete.

In Australia, we acquired Assess Medical, a highly regarded IME company, strengthening our market presence in medical panel in New South Wales. This is our newest acquisition and our integration process is currently underway led by our Australian management team.

Due to the strength of our global management teams, we remain confident in our ability to integrate multiple acquisitions simultaneously. The integration process for each of these acquisitions is overseeing to manage by each of our in country management teams.

At the corporate level, we receive non-necessary management information to properly manage and develop these businesses and to progress to date is on track. Our execution into the three existing U.S. based national accounts continues to deliver increased penetration with very high levels of client satisfaction.

Even with the success of our national account strategy, we're equally gratified by our success at the local and regional level with insurance companies PPA to law firms, which still comprise the vast majority of our industry today.

Data security continues to be a major concern of our clients and we have recently completed the SOC 2 audit as part of our continuing effort to raise the bar and differentiate ourselves from our competitors. Our investment in our IT infrastructure exceeds $35 million and our IT staff of 90 people largely exceeds the total staff of most of our competitors.

As you would imagine we are thrilled with our start in 2014 and we look forward to sharing more great news with you all in the future. So operator with that we would like to open up the call to questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question is going to come from Ryan Daniels with William Blair. Your line is now open.

Ryan Daniels - William Blair

Yes good evening, guys. Thanks for taking the questions. Let me start with one on the domestic market. I'm curious now that you've had the three national accounts in play for some time, are you seeing any competitive disruption where you are going in and perhaps taking a larger piece of business from smaller entities in a market and in turn that's leading to additional market share gains outside of those large national accounts in any areas?

Richard Perlman

Hey Ryan. We absolutely are seeing that because the same request of the national RFPs with the data security, the prudential doctor panel, the high quality timeframe and processing, but IME is the number one drivers and we deliver that up and down because….

Jim Price

But again we’ve talked about what the impact would be Ryan if you think about a $5 million or $8 million company that was perhaps the beneficiary business from one of accounts that we have now won and all the sudden they lose 500,000 or 800,000 or $1 million that’s all the profit in those companies and in this business as you can well imagine the operating leverage works as quick going down as it does going up. So we are getting the positive benefit of what you're talking about every single day. We've seen that in certain markets around the United States where some of the little guys are just kind of closing their doors frankly, so helping to fuel growth.

Ryan Daniels - William Blair

Yes, very helpful color. And then I guess the second order effect of that maybe this hasn't manifested yet, but I'm curious for your thoughts. Is there any potential for you to leverage pricing power with the doctors, as you become a bigger piece of the business in a given market and work with national accounts, maybe get some volume discounts there? Can you push any of that to the appraised concessions on to the doctors or is that not something you've looked at yet?

Miguel Fernandez

We haven’t look at it yet. Again our focus has been on quality and service. And we really don't want to raft the boat at this point in terms of using our leverage. We've grown and continue to grow really because people are so delighted with the customer service. And as Jim kind of talked about these three rollouts has gone very, very well the customer satisfaction levels on the national level are quite high and we don't want to do anything that could possibly disrupt that.

Ryan Daniels - William Blair

That's fair. And then maybe two more quick ones, just any update on the pipeline for nationals. Are you seeing anybody else for the references at this point given the positive commentary, you're getting on your current accounts?

Jim Price

Ryan, we're always dealing with the handful of accounting in RFP process, we're seeing the demand with RFP they are getting much more stringent, the customer service levels are very high. And it is not a good time to be a small IME competitor in this industry. We would be happy as we said before, if we secure one or two new accounts a year, will be very satisfied, because you know the rollout in this traditional takes up to six quarters.

Ryan Daniels - William Blair

Yes.

Jim Price

But I think this company operates fairly independently. The good news is though that one of things we are sure about is that the word has spread and our reputation continues to become enhanced. So, we think we're really in a very, very strong position with the RFPs that are out there right now.

Ryan Daniels - William Blair

Okay great. Last one and I'll hop off here. Sorry for all the questions. But UK growth, looks like a pretty nice acceleration there despite the toughest year-over-year comp you are going to face this year, was there anything you need to set the year there?

Miguel Fernandez

Ryan, it's Miguel. No we discontinued solid execution by the team there. We discontinued again market shares fantastic team and a great market for us.

Richard Perlman

And then I think the team, if you look across all these geographies is kind of the same, I think we are out executing the smaller competitors frankly and just continued to take market share. And I think it's very important to remember, kind of Jim touched on this. Is that the lion share of this business is still done the old fashioned way hitting singles and doubles across the board on the local level and we're just doing a fabulous job on that and that carries over to both the United Kingdom and Australia, as well as even Canada. So, we're very proud of what the team has been able to do for us here.

Ryan Daniels - William Blair

Okay, thanks guys. Nice work.

Richard Perlman

Thanks.

Operator

Our next question will come from Mike Matson with Needham and Company. Your line is now open.

Mike Matson - Needham and Company

Thanks for taking my questions. I guess, I was just wondering, I know last year you'd given sort of an estimate of the impact that you expected from the national contracts that you had won. And I was just wondering, just in the past two quarters, given the strength of your organic growth, if you could just give us any insight into the impact of what those, how much of that growth was coming from those national accounts.

Richard Perlman

Yes, roughly about a third of the growth comes from the national accounts. So again consistent with what I just said, I mean we are thrilled that more than two-thirds of the growth comes from just hand-to-hand combat in the local markets and we continue to really excel there as well.

Mike Matson - Needham and Company

Okay, thanks. And then question for Miguel on the gross margin or the cost of revenue, I guess I was the little surprise to see leverage so much because I guess my understanding was, if the cost there are pretty variable. So can you maybe explain how you are able to generate so much leverage on that line?

Richard Perlman

Yes, so Mike. Quarter is impacted by the acquisitions and I think you heard us talk about Gould & Lamb and the operating leverage within that business it’s predominantly fixed cost not containing the medical panel component. So that’s part of the big difference versus prior year, there was operating leverage within the organic growth on the core business as well.

Mike Matson - Needham and Company

Okay. And then I know this is probably be a difficult question to answer, but you mentioned, if you called up the weathers is having an impact in U.S. and do you have any feel for just how big of impact that was on your growth in the quarter?

Richard Perlman

I mean it’s difficult to estimate, I mean for certain U.S. would have growing in the low double-digits versus 8.5 is definitely impacted us in North East big broader there.

Mike Matson - Needham and Company

Okay, all right. That’s all I have. Thanks a lot.

Richard Perlman

Thanks.

Operator

Our next question will come from Ralph Giacobbe with Credit Suisse. Your line is now open.

Jonathan Chan - Credit Suisse

Hey, guys. It’s actually Jonathan Chan [on] for Ralph today, congrats in the quarter. So I guess just one question I had on, if I might have missed this, just how penetrated are you guys with the three national accounts that you’ve fund in the U.S. for 2013?

Jim Price

Yes, the original one we announced first were at this point about approximately 80% complete and rolled out, the second one that we announced after that were approximately little over 50% rolled out and then the final one we announced were a little over 20% rolled out.

Jonathan Chan - Credit Suisse

Got you. And just a question on the Gould & Lamb acquisition, I guess just any bigger picture comments around like where you can take that portfolio of services, maybe leveraging broader EXAM platform? Any big picture comments there would be useful.

Miguel Fernandez

Well, again what we are -- we try to kind of emphasize in our comments is that the opportunity there is to grow revenues because of our existing footprint and our sales force and our existing relationships on the ExamWorks side of the house. So we're very excited about it, because was an 80% gross margin, the operating leverage is quite impactful of Gould & Lamb.

And it’s just a little too early to give you sort of forecast of kind of where we think the revenues could end up. But certainly we see an opportunity to grow them at very, very attractive growth rates over the next couple of years.

Jonathan Chan - Credit Suisse

Got you. I guess I just had one last one. I think Jim you referenced potential strategic acquisitions that you may pay I guess above average multiples for. Could you elaborate on those comments; are there any key geographies that you guys are still under penetrating or additional service line, or any comments there would be useful?

Jim Price

Sure. Well, you know our history. I mean we paid up for a unique property that might be a market leader or have strategic technology or unique growth rates that are very unique. We’re very disciplined. So the majority of all the acquisitions you will see in the future at our historical 4.75 or 4.6 times whatever but we -- for strategic deals, you will see us stay up in the future.

Jonathan Chan - Credit Suisse

Understood, okay. Thanks for the questions guys.

Operator

We have no further questions at this time.

Jim Price

Okay. Well thank you all for joining the call and we look forward to having you on our next call. Thanks.

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