21st Century Oncology Holdings' (ICC) CEO Bill Spalding on Q1 and Q2 2016 Results - Earnings Call Transcript

| About: 21st Century (ICC)

21st Century Oncology Holdings (Pending:ICC)

Q1 and Q2 2016 Earnings Conference Call

September 29, 2016 02:00 PM ET

Executives

Bill Spalding - President and CEO

LeAnne Stewart - CFO

Connie Mantz - Chief Medical Officer

Analysts

Tristan Peitz - Cohen Capital

Luther Gatewood - Q Investments

Operator

Greetings, and welcome to 21st Century Oncology Holdings’ First and Second Quarter 2016 Financial Results Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation [Operator Instructions]. As a reminder, this conference is being recorded.

It is now my pleasure to turn the conference over to your host, LeAnne Stewart, CFO at 21st Century Oncology Holdings. Thank you. You may begin.

LeAnne Stewart

Good afternoon everyone, and thank you all for joining us today. Before we begin, I'd like to review the Safe-Harbor statements. This conference call may contain forward-looking statements about the Company's future plans, expectations and objectives, concerning, but not limited to, the Company's expected financial results. Words such as will, may, expect, intent, anticipate, plan, believe, could, and variations thereof and similar expressions are intended to identify forward-looking statements.

These forward-looking statements are not historical facts and are subject to risks and uncertainties that could cause the actual results to differ materially from those predicted in the forward-looking statements. Such risks and uncertainties include, but are not limited to, the risk factors described in the risk factors section and other information on the Company's most recently filed Annual Report on Form 10-K. The Company undertakes no obligation to publicly update or revise the forward-looking statements contained herein to reflect the changes of events or circumstances as of the date of this conference call.

And with that, I would like to introduce you to Bill Spalding our President and Chief Executive Officer. Bill?

Bill Spalding

Thank you, LeAnne, and thanks to those who have called in to hear us report on Q1 and Q2 operating results. In addition to LeAnne, our CFO, I want to note that the outset that our Chief Medical Officer, Dr. Connie Mantz, has joined us for this call and will be available for Q&A, and his insights on the business at the end of the call.

As I am new to my role at 21C's, and this is my first earnings call, I wanted to spend some time at the outset, providing background and who I am, my prior experience in the healthcare industry and then turn the discussions to sharing my views on the Company, its position in the cancer care market today and its future prospects. So longer than I care to mention publically, I’ve been involved in leading and advising complex of highly regulated healthcare businesses, serving in finance, operations, strategy, legal and general management roles. Most recently I was CEO of PharMEDium Healthcare Corporation. It was the leading sterile preparations for acute care hospitals in the U.S.

I joined PharMEDium, first as the Board of Directors level in 2010. I moved from a Board position into a member on the senior management team in 2013, and ultimately became CEO of the business in 2014. During my tenure with PharMEDium, we grew top line revenue in the mid 20s and bottom line EBITDA in the mid 30s. And I’m proud to say we did so totally on an organic basis without any acquisitions. Upon assuming the leadership role at PharMEDium, my initial mission was to get the Company ready to go public and we commenced that process and earnest in the spring of 2014.

By mid 2015, we have completed our filings with the SEC and just finished our test in the Waters Meeting with key financial institutions in the recognized markets. And literally on the eve of commencing the road show, we were approached by AmerisourceBergen Corporation with an unsolicited offer to buy the business at a very attractive price, plus the counts at the time and quantified the prices roughly 25 times forward EBITDA.

Prior to the PharMEDium experience, I served as the Executive Vice President of Strategy and Managed Care at the CVS Caremark organization and Executive Vice President of Strategic Initiatives at Caremark Rx. I love the strategic initiatives that resulted in the merger of the two companies and had principal operating roles at both organizations. In terms of my connection to 21C, as many of you know, I joined the Board in May of this year. And I cannot be more honored to be given responsibility from the Board to lead the organization going forward. So that’s my recent background.

In terms of my decision to take this new role at 21C, I want to say that Dr. Dosoretz and the senior team here at 21C have built a really remarkable organization that today has unparelled size, scale and relevance in the delivery of academic quality integrated cancer care in the markets we operate in. Our business model is distinct and positions the Company well in the current healthcare reform environment.

Let me share a few aspects of the business that the Board and I believe position 21C for success in the future. First, it's clearly obvious, it’s the market we serve cancer care is a $290 billion global market opportunity, and cancer is the second leading cause of debt in the U.S. It’s difficult or impossible, I might say, to find anyone today who is not been stung by this terrible disease, whether themselves, the family member, or colleague at work or in their community. The second aspect of the business is the talent we have. Our clinical team today includes over 950 highly credential physicians dedicated to providing high quality integrated care. These include radiation oncologists, urologists, surgeons, medical oncologists, gynecologic oncologists, pathologists, and many other specialists at the front lines of delivery high quality care to cancer patients.

Third, you’ll hear this from me over the course of this call, our unique and integrated model. We believe we benefit from this model in many respects. It allows us to deliver care and achieve cost savings without compromising quality. In fact, our lower costs outpatient venues, convenient locations, talented clinicians and state-of-the-art technology, provided advantage when treating patients. Equally important these core attributes position us well in terms of recruiting high quality clinicians to the organization who are drawn to us by our stimulating clinical environment and our long-standing commitment to advancing cancer care and related clinical research.

Four, I would say our size and scale allows us to deliver the latest and best care protocols to cancer patients with state-of-the-art technology, and that delivery is done in their local communities, their own backyard, so to speak. In today’s world, not everyone can afford to fly to Texas to visit MD Anderson or go to the Cleveland Clinic we deliver the care with the highest quality clinicians right in their own backyard.

Moving forward, our focus for the balance of this year and into next will be on clinical excellence, improving our financial controls and transparency, augmenting our capital base and building our go-forward team and culture. We have a solid and committed team today at 21C and their ability to focus on our business, despite the many discussions in the last nine months is a testament to their results. I intend to build on this team overtime and I am proud to announce the addition of Matt Anderson to the organization. Matt will report to me and serve as our Executive Vice President of Strategic Initiatives. I suspect that some of you may know Matt from his prior role as a member of my senior team at PharMEDium.

In terms of culture, which is very important in building and growing an organization, and I would say that I’ve established five core expectations for all 21C leaders. They are; first and foremost, quality of care and clinical excellent; second, integrity and compliance; third accountability alignment and transparency; fourth, informed decision making and serve the all important one teamwork. As a leading healthcare provider, quality of care and clinical excellence form the cornerstone of everything we do. Our commitment to this remains unchanged.

We must operate with the highest levels of integrity and compliance in all that we do, day-in and day-out, anything less is not acceptable in my book. Accountability, alignment, and transparency, are further expectations I've established for the entire team here at 21 C. I've done so to ensure that we're working in a disciplined fashion toward identified goals and objectives. And most importantly that accountability to delivering on these goals and objectives is honored uniformly and in a fair manner on the merits.

The expectation with respect to informed decision making is meant to empower individuals in the organizations to act, but to do so, based on facts, data, analysis and appropriate transparent deliberative processes. And finally, we want to work as a team here, take pride in the organization in what we do for patients on a day-in and day-out basis, and celebrate in our collective success.

More near-term, I've established a 100-day plan for the organization with discrete time-lines for accomplishing tasks. I don't propose to go through that 100-day plan on this call, but I want to highlight, three components of it. The first is a keen and unrelenting focus on efficiency and effectiveness. We're in the Healthcare business and Healthcare Reform is increased quality at lower costs wherever you look. We must be lean, efficient and agile to ensure that we remain aligned with these core principles. We will absolutely of course not compromise our commitment to clinical excellence or steadfast commitment to compliance and transparency in this exercise. Second, we intend to analyze each of the markets we operate in and our business processes in those markets to make sure that we will be as efficient and effective in delivering top quality care to our patients. And finally, we will work diligently on getting our balance sheet in shape, augmenting our financial controls and resources.

On this note, I'm sure you'll aware of it. On September 9th, we announced the closing of our first 25 million capital event required by our credit documents. My thanks go to the CTTID organization for that investment and their continuing support of the 21 C organization. As we’ve previously stated on earlier calls, we're working on the remaining capital events. While we do not have firm commitments in hand at this time, we remain confident in our ability to satisfy these requirements and strengthen our balance sheet.

To wrap matters up, from a high level, I believe our future is bright at 21 Sales beyond our size and scale in the markets we operate-in, our core assets, which I’ve covered with you over the course of this call; highest quality clinicians; integrated model; convenient and cost effective outpatient locations and state-of-the-art technology; all position us well with patients, physicians, payers and care partners. Notwithstanding all that, I'm not naïve, I've been around the block a few times and I understand that good things do not happen in business without a senior leadership team, laser focused on excellence and execution. You have my pledge to do all within my power to see that the entire senior team at 21C delivers on that commitment.

Before I turn the call over the LeAnne, I’d be remised in not extending my thanks to all of our physicians, partners and employees who maybe on the call and who are our greatest assets and who are critical to our future success. Thanks for the warm welcome you’ve extended to me and my new role, and thanks for what you do on a day-in and day-out basis for the organization. I look forward to partnering with you, and believe that together, we will continue on the path established by our Founder, Dr. Dosoretz, of elevating the standard of excellence in cancer care for our patients.

I would like to turn the call over the LeAnne to walk through the numbers.

LeAnne Stewart

Thank you, Bill. As you know, we filed our 10-Qs for the first and second quarter of 2016 last week. I want to thank the team at 21C, as well as our various consultants and advisors, for all the effort that has gone into getting us to this point. We are all very happy to be current with our financial reporting requirements. The team is committed to remediating our internal control environment and to providing timely and accurate financial results going forward.

I will start with the first quarter of 2016. Total revenues were $270.3 million, a decrease of $5.3 million or 1.9% as compared to the same quarter in 2015. Net patient service revenue in our ICC line of business declined to $2.9 million as compared to the same period in the prior year due to the conversion of our Jacksonville Medical Oncology Group to a professional services agreement with the University of Florida. Under the PSA, 21C will invoice for the administration of chemotherapy services, but not the drug portion. While 21C loses significant drug revenue, it is more than offset by reduction in medical supply expense. This partnership increases our geographic presence in the Jacksonville market and allows us to provide cancer care for patients we might otherwise not have served.

Our international net patient service revenue decrease $3.3 million for the first quarter of 2016 as compared to the same period in the prior year due to the devaluation of the Argentine Peso in late December of 2015, which negatively impacted our revenue per case, offset by strong growth in cases. The Argentine Peso exchange rate to the U.S. dollar declined approximately 40% from the first quarter of 2015 to the first quarter of 2016. Our domestic free-standing net patient service revenue was up 400,000 or 0.3% in the first quarter of 2016 relative to the same quarter in 2015.

Adjusted EBITDA for the first quarter of 2016 was $39 million or 14.4% of total revenues, down from $42.3 million or 15.3% of total revenues in the first quarter of 2015. The decline in adjusted EBITDA was partly attributable to a $5.3 million reduction in revenue, a $1.2 million increase in medical supply expense and $3.5 million increase in other operating and general and administrative costs. These negative items were partially offset by $6.3 million decrease in salaries and benefits and reduction in cash distribution to non-controlling interest of $0.8 million.

Total radiation oncology treatment plans increased 0.2% in the first quarter of 2016 as compared to the same period in the prior year, and on a same market basis, increased 0.7%. Radiation oncology treatments per day declined 3% for the first quarter compared to period due to the closing of our Bronx-Lebanon and Riverhead centers, and the contribution of our Greenville, North Carolina radiation center to an unconsolidated health system joint venture. Same market radiation oncology treatments per day declined 1.5% for the same quarter as compared to the same period in the prior year. As previously disclosed, the Company has experienced a decrease in treatments per case for breast and some newly diagnosed lung cancers as a result of advances in hypo-fractionated external beam radiotherapy and stereotactic radiosurgery.

Net patient service revenue per radiation oncology treatment increased 1.8% in the first quarter of 2016 as compared to the same period in the prior year. On a same market basis, revenue per treatment was relatively flat. Looking at the same market comparison more closely, there are four factors affecting the rate. The simulation code bundle implemented in July 2015 reduced our rate by 1.6% for the first quarter of 2016 as compared to the same period in the prior year.

In addition, the net effect of the 2016 final rule on the physician fee schedule reduced our rate by 1.4% for the first quarter of 2016 as compared to the same period in the prior year. A further rate reduction of 0.4% occurred as a result of not achieving the meaningful use criteria for electronic health records. Offsetting these reductions in reimbursement were, a 1% increase in our rate for the first quarter of ’16 as compared to the same period in ’15, as a result of the SFRO facilities being added to the existing 21C commercial insurance fee schedules.

Finally, our rate in the first quarter of 2015 as compared to the first quarter of 2016 was negatively affected by 2.6% as a result of uncertainties driven by the newly issued IMRT G codes.

Turning to the second quarter of 2016, total revenues were $258.4 million, a decrease of $19.8 million or 7.1% as compared to the same quarter of 2015. Net patient service revenue in our ICC line of business declined $5.1 million as compared to the same period in the prior year due to the Jacksonville PSA conversion discussed earlier. Our freestanding revenue declined $12.9 million or 8.1% in the second quarter of 2016 relative to the same quarter in 2015. This decline was driven by a 4.7% decline in treatments per day and a 3.5% decline in revenue per treatment for the second quarter of 2016 as compared to the same period in the prior year.

Our international net patient service revenue declined $1.4 million for the second quarter of 2016 as compared to the same period in the prior year due to the devaluation of the Argentine Peso, which negatively impacted our revenue per case offset again by strong growth in cases. Consistent with what we experience in the first quarter, the Argentine Peso exchange to U.S. dollar decline approximately 39% from second quarter of 2015 to the second quarter of 2016.

Adjusted EBITDA for the second quarter of 2016 was $33.4 million or 12.9% of total revenues, down from $46.2 million or 16.6% of total revenues in the second quarter of 2015. The contributors to the adjusted EBITDA decline were $19.8 million reduction in the revenue offset by a $7.9 million decrease in salaries and benefits and a reduction of a $0.5 million in other operating expenses.

Last 12 months, or LTM pro-forma EBITDA for June 2016, was $147 million. The June 2016 LTM pro-forma EBITDA includes a pro-forma annualization adjustment of $4.3 million for expense reductions 21 C implemented in the second quarter of 2016. The cost savings included staff terminations and renegotiating certain physician and vendor contracts. LTM pro-forma EBITDA was used to calculate our consolidated leverage ratio of 7.39, which is in compliance with our debt covenants.

Total radiation oncology treatment plans decreased 4.8% in the second quarter of 2016 as compared to the same period in the prior year. And on a same market basis, decreased 3.2%. Radiation oncology treatments per day declined 4.7% for the second comparative quarter due to the previously discussed closing of Bronx-Lebanon and Riverhead and the Greenville, North Carolina joint venture. Same market radiation oncology treatments per day declined 3.1% for the second quarter as compared to the same period in the prior year.

Net patient service revenue per radiation oncology treatments declined 3.5% in the second quarter of 2016, and same market revenue for treatment decreased 3.6% in the second quarter of 2016, as compared to the same period in the prior year. The elements affecting our rate in the second quarter are consistent with those experienced in the first quarter. The stimulation code bundle implemented in July 2015 reduced our rate by 1.4% for the second quarter of 2016 as compared to the same period in the prior year. In addition, the net effect of the 2016 final rule on the physician fee schedule reduced our rate by 1.4% for the second quarter of '16 as compared to the same period in the prior year. A further rate reduction of 0.4% occurred as a result of not achieving the meaningful use criteria for electronic health records.

Our rate in the second quarter of 2015 as compared to the second quarter of 2016 was positively affected by 2.6% as uncertainties driven by the newly issued IMRT G codes in the first quarter of 2015 were resolved. Offsetting these reductions and the rate was a 1.7% increase in our rate for the second quarter as compared to the same period in the prior year as a result of SFRO facilities being added to the existing 21C commercial insurance fee schedules.

Moving to cash flow. If you may recall, we define free cash flow as cash from operations, less capital expenditures, less distributions to non controlling interest holder. For the first half of 2016, free cash flow was negative $57.1 million as compared to negative $14.8 million for the same period in 2015. Excluding the GAMMA Settlement of $34.7 million and refund payments of approximately $5.7million in connection with electronic health records incentive payment, our free cash flow for the first half of 2016 was negative $16.7 million.

Capital expenditures for the first half of 2016 were $20.2 million, a decline from $25.8 million in the first half of 2015. Cash distributions to non-controlling interest were $1.4 million for the first half of 2016 as compared to $2 million in the first half of 2015. As of August 31, 2016, the Company had approximately $38 million in cash and cash equivalent. Under the amended credit agreement and indenture, 21C is required to pass a month and liquidity covenant test, certifying that we have in access of $40 million in cash and revolver capacity. The first covenant cast date will be tomorrow, September 30, 2016, and we will be compliant.

Days revenue is outstanding at the end of the second quarter was 45, up from 42 at the end of the second quarter in 2015. This increased as a result of the healthcare industry shifting more financial responsibility to the patient, which represents collection challenges for us. When comparing this metric to that at the end of the first quarter of 2016, we have experienced increase of 4 days in revenue outstanding. This sequential increase reflects the seasonality of the business and we expect the number of days revenue outstanding to decline in the third quarter of 2016.

In talking with some of you, I know you have questions about the fair market value adjustment associated with the better derivatives and other financial instruments. There are essentially two things that are driving fair market value adjustments. The preferred stock and an earn-out liability associated with the purchase of SFRO. The preferred stock has both an embedded derivative and warrants that are separately valued and adjusted to fair value each quarter. So the earn-out liability is similar and that it is has an emended derivative that is adjusted to fair value each quarter. Changes in value are driven by changes in assumptions associated with each instrument as well as the passage of time, and are non-cash.

Finally, I would like to point out that along with the press release and 8-K, covering our results for the first and second quarter, we provided additional schedules providing details of adjusted EBITDA and operating metrics on a quarterly basis for 2014 and 2015. With this, you will have consistent restated financial information with which to build your models.

And with that, I’ll turn the call back to Bill, who will provide closing comments.

Bill Spalding

Thank you, LeAnne. Listen, we recognize operating results for the second quarter were disappointing, and are committed to making the changes necessary to improve performance going forward. We further recognize that you are all interested in an outlook for the right for the year. We’re not prepared to speak to that at this time and ask that you hold your questions on the subject for the time being.

With that, I’ll open it up it to Q&A.

Question-and-Answer Session

Operator

Thank you. At this time, we’ll be conducting a question-and-answer session [Operator Instructions]. Our first question comes from Tristan Peitz with Cohen Capital. Please proceed with your question.

Tristan Peitz

Hi. Good afternoon. Given the new hire, I’m curious as to what type of strategic initiatives that you’re considering. Are there M&A opportunities either geographically or in ancillary services, possibly the sale of some part of the business that you might be speeding the charge on?

Bill Spalding

Let me take a shot at that, LeAnne, and you can add into it. That background at PharMEDium was in the capacity as Chief Financial Officer. He’s an MBA and CTA as well. Year-and-year on his to do with real-time is to work with LeAnne on remediating internal control efficiencies within the organization. They work with the two of us on addressing the balance sheet and making sure that the capital events take place. I would say longer term to spend some time taking a look at the markets we operate in, where we are successful, and why, and making sure the future resources and investments go into the right markets, so to speak, and that we’re efficient and effective in the deployment of capital.

I really don’t think, I maybe off on this. But I really don’t think there are M&A opportunities in the immediate future. And even in the near-term year and half, there are tuck-in opportunities out there in select markets. But I don’t think there any large freestanding radiation oncology opportunities to pursue. So the title maybe a little bit of a misnomer from a strategic initiative standpoint. But it's the initiatives that are important to the organization today as we charge the next 18 months.

LeAnne Stewart

No, I think, well said. I wouldn’t anything else. And that’s been around for a little bit. He’s been a nice addition to the team. There is a lot of activity going on and having him here to help is great.

Tristan Peitz

And just a follow up, if I may?

Bill Spalding

Sure, go ahead.

Tristan Peitz

Century saw the Genesis acquisition in Australia, the 12 times EBITDA, if you considered and possibly sale of the international business?

Bill Spalding

I think the focus…

Tristan Peitz

It could be de-levering…

Bill Spalding

Yes. Tristan, my focus near-term is to raise equity capital. And I think the business model is compelling. Yes, we have work to do on internal controls, and we’ve got to execute as a senior team. But I think that there is equity capital, whether it’s an existing part of the organization today or others who are interested in it. And the last thing I would want to do is pursue an asset sale, particularly one of any size and scale under the kind of the capital events, November 30th and March 31st.

Operator

[Operator Instructions] Our question comes from Tristan Peitz with Cohen Capital. Please proceed with your question.

Tristan Peitz

Hi, it's Tristan Peitz. But anyway, just want to get a sense as to why volumes were weak in Q2? What happened to patients? Is that a concern longer term?

Bill Spalding

Let me take a shot at it. And in the interest of transparency and speaking frankly with key stakeholders, this business has been pummeled about the head and shoulders over the last nine to 12 months. FISH, Gamma, Data Breach, credit agreement, waivers, going concerned qualification and the like. And it's hard for me fresh set eyes in the organization not to think that had some impact. Beyond that there are other factors that came into play in Q2 that may have had an impact on volumes that LeAnne has commented on in her remarks, whether it's slight or other disposed operations or businesses that have been shut down.

I would say, I commented that we're not going to get into expressing views about future guidance at this stage. But I would say, we're sitting here almost at the end of September and volumes have improved, in Q3 over what they were in Q2. So there may be aspect of this business model that is episodic around periods of time, particularly in the markets we're strong in and migration of seniors out of the South Florida marketplace that takes place in the spring period. Sufficed to say, we've got our eye on our daily treatments. We're monitoring the business actively and we're committed to improving financial results going forward. LeAnne anything you want to add?

LeAnn Stewart

No, I think that's well said. And one of the things Tristan that occurred this year is Easter was early. And I sort of always hate explanations like that. But the reality is a big chunk of our business is seasonal in nature and the timing of holiday influences some of the patient volume that we have, and that they head north to spend the holidays with their family.

Tristan Peitz

Okay, thanks for that color.

Operator

There are no further questions at this time. At this point, I'd like to turn the call back over to Bill Spaulding for final closing comments.

Bill Spaulding

Listen, I couldn't be more pleased to be leading this organization. We've got work in front of us, and we're committed to executing on that. Thanks for participating in the call today, and I look forward to meeting you folks in person in the coming months. Thank you.

LeAnn Stewart

Thanks everybody.

Operator

Well excuse me. We do have more question that popped into the queue, would you like to take it or?

Bill Spaulding

Yes, go ahead.

Operator

It's from Luther Gatewood with Q Investments. Please proceed with your question.

Luther Gatewood

Good afternoon. We just wanted to ask, what were the principal drivers of the sequential drop in EBITDA between Q1 and Q2? It seems like the week, Easter -- came from Easter would have been into March, in March of 2016.

LeAnne Stewart

Yes, I mean, I think if you look at the sequential driver from Q1 to Q2, it's mostly revenue driven. I know you know our business fairly well. I talked with you guys in the past. A lot of our business is very much driven by that top line and it has a tendency to fall all the way to the bottom. And so it's really revenue driven related matter offset by some changes in expenses, which were helpful. But that’s really the cost of the issue.

Luther Gatewood

Got it, okay. Thank you.

Bill Spaulding

All right, thanks folks.

Operator

Okay, there are no further questions. This concludes today’s conference. Thank you for your participation. You may disconnect your lines at this time.

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