CRH Medical Corp. (CRHM) CEO Edward Wright on Q4 2018 Results - Earnings Call Transcript

|
About: CRH Medical Corporation (CRHM)
by: SA Transcripts
Subscribers Only
Earning Call Audio

CRH Medical Corporation (NYSEMKT:CRHM) Q4 2018 Earnings Conference Call March 14, 2019 10:00 AM ET

Company Participants

Kettina Cordero - Director, IR

Edward Wright - CEO

Richard Bear - CFO

Jay Kreger - President, CRH Anesthesia

Conference Call Participants

Noel Atkinson - Clarus Securities

Richard Close - Canaccord Genuity

Doug Cooper - Beacon Securities

David Martin - Bloom Burton & Company

Tania Gonsalves - Cormack Securities

Operator

Thank you for standing by. This is the conference operator. Welcome to the CRH Medical Fourth Quarter and Full-Year 2018 Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]. I would now like to turn the conference over to Ms. Kettina Cordero, Director, Investor Relations. Please go ahead, Ms. Cordero.

Kettina Cordero

Thank you, operator and good morning everyone. I am joined today by our CEO, Edward Wright; our CFO, Richard Bear; and the President of CRH Anesthesia, Jay Kreger.

Before we start, I would like to remind everyone that certain statements you will hear today constitute forward-looking statements within the meaning of applicable securities laws. For important assumptions, definitions and cautionary statements about forward-looking information and the risk inherent to our business, please refer to the cautionary notes in our financial report for the quarter and year ended December 31, 2018 and the risk factors section in our most recent Annual Information Form.

During this call, we will discuss non-GAAP measures as indicators of our performance. You can refer to our management’s disclosure and analysis for the quarter and year ended December 31, 2018 for reconciliations of non-GAAP measures to reported GAAP measures. These documents are available on SEDAR, EDGAR, and on the Investors section of our website. In addition, please note that we use the abbreviation GI to refer to gastroenterology. Finally, please be advised that our reporting and functional currency is the U.S. dollar and that all dollar figures referenced today are in U.S. dollars.

Now, I leave you with Edward Wright.

Edward Wright

Thank you Kettina. Yesterday we announced that 2018 was a record year for revenues and most importantly adjusted operator shareholder EBITDA. Our anesthesia revenue grew 22%. We are extremely pleased with these results considering the headwind we faced with the reduction in anesthesia reimbursement rates that went into effect on January 01, 2018. This growth was partly due to the five acquisitions we completed throughout the year. The growth of our anesthesia business continues to be driven by our reputation within the GI community, stemming from our loyal and stable O’Regan customer base. And although the O’Regan revenue decreased by 5% in 2018 compared to 2017 our revenue for the fourth quarter exceeded 3 million and was our best quarter ever. Our O'Regan relationships continued to be a conduit to our anesthesia business and integral in driving our acquisition pipeline.

Our pipeline remains robust providing more opportunities for future expansion. An example of this we announced our first acquisition of 2019 earlier this quarter. Anesthesia Care Associates marked our 21st acquisition across 11 states. With this acquisition we have now invested more than $175 million accelerating us towards the position of the preeminent provider of GI anesthesia. At December 31, 2018 we had approximately $30 million available on our credit facility, this combined with our free cash flow provides ample funds for us to continue executing on our growth strategy. I will now turn it over to Richard for his commentary.

Richard Bear

Thank you Edward. I'd like to start by reminding everyone that since the company no longer meets the definition of a foreign private issuer we are required to prepare consolidated financial statements in accordance with U.S. GAAP. Additionally we are required to report with the SEC on domestic forms, comply with the SEC rules and regulations that are applicable domestic issuers. Overall the conversion from IFRS to U.S. GAAP had no impact on revenue or adjusted operating EBITDA but did have impacts historically on the historically reported net income. We also report consolidated financial statements which means our financial statements include those of the subsidiaries in which we hold a controlling interest. This practice is in keeping with our current accounting standards.

For the year-ended December 31, 2018 we reported total revenue of $112.8 million, a 19% increase compared to 2017. Anesthesia revenues grew 23% in 2018 to 101.8 million. For the year ending December 31, 2018 we service 276,766 patient cases which is 37% more than in 2017. Total adjusted operating EBITDA for the year was 54.7 million, an 11% increase compared to 2017. Adjusted operating EBITDA margin for the year was 49%.

Adjusted operating EBITDA attributable to shareholders was 35.8 million. For the year ending December 31, 2018 cash flow from operations was 41 million and free cash flow defined as cash flow from operations plus distributions to non-controlling interest was 21.7 million. As of December 31m 2018 we had 9.9 million in cash and 20 million in working capital. Our acquisitions continue to be financed through these internally generated cash flows along with a $100 million credit facility which has an interest rate LIBOR plus 250 basis points. At year-end we had $30.1 million available on our credit facility to fund future growth. With that I will leave you with Jay for his update.

Jay Kreger

Thank you, Richard. We are very pleased to tell the anesthesia business finished up the year overall. We recognized record revenues and EBITDA and invested over $27 million on five new acquisitions. We grew the facilities that we serve from 35 at the end of 2017 to 46 at the end of 2018. And of course these totals do not include our newest MAC development program in North Carolina that was announced during the third quarter of last year. We started off strong in 2019 with the announcement of our first acquisition in early January. As Edward stated it is our first acquisition in Indiana market marking our 11th state. This also marks our 47th ASC served with our providers now serving over 320,000 patients annually. We look forward to the continuing expansion of our anesthesia footprint this year and beyond.

Our pipeline is as strong as ever with our business development team actively speaking to GI groups all over the country. We continue to work in unison with our regular O'Regan account team to maximize opportunities and to help the GI community realize the value of their anesthesia businesses. Our operations team is ensuring that we're able to integrate these new practices seamlessly and that all of our providers are providing care at a quality and experience level which is second to none.

Aside from an ongoing recruitment effort geared towards providing ultimate coverage and making sure we operate most efficiently, we've also continued to emphasize the focus on patient satisfaction and safety. Meanwhile our ability to drive financial performance at an industry leading level continues to be our competitive advantage and therefore sets us apart from other ancillary partners. As I mentioned we're pleased with how we finished up last year but we're more excited about how this year is starting off. We expect that position growth to be greater than last year and we have a plan in place to spend $35 million or more this year.

Our O'Regan customers will continue to serve as a catalyst for this growth but will also rely on our existing physician partners as positive references. In short our position as a GI anesthesia partner of choice continues to thrive. I'll now leave you back with Edward for his closing remarks.

Edward Wright

Thanks Jay. With that we will just open it up for questions. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question comes from Noel Atkinson with Clarus Securities. Please go ahead.

Noel Atkinson

Hey, good morning. Thanks for taking my call. Nice quarter. I was wondering if you could talk at all about any sort of efforts to improve profitability within the anesthesia practice unit?

Richard Bear

Hey Noel, this is Richard. You know it is an interesting question. I mean our anesthesia -- overall our margins are 49%. If you peeled out the corporate costs in that I think the margins would be even higher than that. We're constantly looking at maximizing revenue, maximizing the staff in order to deliver services at the most efficient price. I would say that we believe that our profitability at those centers are at optimized levels today.

Noel Atkinson

Okay, and then the average rate shifts that happened in Q4 like rate for reimbursement that's from primarily a shift to in-network contracts that was completed?

Richard Bear

That's correct. As we have stated last year we talked about the 5% in addition to the CMS changes. So, if you look at the Q4 numbers of 354.23 [ph] it actually is almost exactly -- it was impacted by about 5% compared to fourth quarter 2017 after adjusting for the CMS changes.

Noel Atkinson

And was that concentrated in any geographic region that you can talk about?

Edward Wright

No, no, it was -- it was over the entire base of customers that we have. And as we look forward if you take that 354 for the fourth quarter and seasonally adjust that you get a number of course that's about 341 and we believe that's a good number as we look at 2019.

Noel Atkinson

Okay, just one more question just on that sort of in network stuff, is there any geographic region in which CRH still has sort of an outsized proportion of procedures that are out of network that would be looking to come in network?

Edward Wright

No.

Noel Atkinson

So it sounds like the pipeline for acquisitions is pretty robust. You guys have a meaningful amount of capital. You know you did a little bit less last year in 2018 than the couple prior years, are you seeing any constraints on your acquisition activities, are you trying to be more focused on the nature or the scale of the acquisitions you're attempting to achieve?

Jay Kreger

Hey Noel it is Jay. I think last year was in some cases as much about timing. I think there were some people that were waiting on to see what the full impact of the CMS changes would have on their business. But that's also fueled more conversations that we'll have this year and have had to date which is why we have actually put a number out and felt comfortable doing so. I think we'll do more deals that may be smaller in nature but we will get to that total. One of the other dynamics that we've seen is now that we're out -- have been out in the market for going on five years is that there's a lot of groups that we've spoken to in the past that have come back to us that will fuel some future growth.

Noel Atkinson

And then just if we are looking at the operating EBITDA if that's attributable to the CRH shareholders it seems like the 100% owned centers or the varying majority owned centers seem to be performing well in Q4 and it sounded like they performed well in Q3. What do you see driving this, is this -- can you give us any explanation?

Richard Bear

I think as you know you when you're talking about 100% on centers the largest one being GAA and GAA continues to perform well and then fourth quarter is always positively impacted by payer mix where our commercial payer mix percentage from commercial cases as a percentage total is always higher in Q4 than in previous quarter. So that and continued organic growth in those markets continue to help.

Noel Atkinson

Okay, great. Thanks very much.

Operator

The next question comes from Richard Close with Canaccord Genuity.

Richard Close

Great, thanks, congratulations on finishing the year off. A lot of those questions were similar to mine. With respect to the fourth quarter revenue on anesthesia in the MD&A you talk about approximately 5% decrease existing contracts with non contracted payers, is that just all of the pricing or the rate that you just talked about moving into in network or if you could give us some sort of characterization of maybe the same store patient case growth in the quarter?

Edward Wright

Yeah, so to answer your first question it would all be, it would all be the result of going from non contracted to contracted. In terms of the same store sales we are organic, it varies depending on what quarter we are in and by entity the overall organic growth rate is about 1% to 3%.

Richard Close

Okay, I think in looking at your credit facility you had mentioned the LIBOR plus and I think you said 250 basis points. How are you thinking about the credit facility and is there any thoughts in and around there's been discussions of moving away from LIBOR and have you guys -- how that potentially would impact any changes for you guys?

Richard Bear

Yes it is good question Richard. I mean it is something now that we are through the filing of our first 10-K which took a lot of time. We went out beginning in -- beginning probably more closer to Q2, we will start looking at our credit facilities because we don't want to take it to term which would be due in 2020. So we had some initial discussions but nothing to the point where I could provide specific comment about what the nature and structure of a new credit facility might look like.

Richard Close

Okay, and I see contingent consideration I think the 2.9 million there and that's to be paid here in 2019, correct?

Richard Bear

Yes, that's the earn out obligation on the GAA acquisition that we would expect based on the agreements that are in place, I would expect to payout in June or July of 2019.

Richard Close

Okay, that's helpful, thanks. And my final question I guess is related to looking at the impairment of intangibles, part of the MD&A and you talk about two professional services agreement there, is there any more color that you can give us on those two that you're still evaluating?

Edward Wright

Yeah, they was -- so impairment testing onto U.S. GAAP which we now comply with as a U.S. filer is a two step program. The first is -- well we look into this impairment triggers which didn’t change dramatically from when we acquired it and the assumptions that we used. Then we do -- then we perform undiscounted cash flow models with certain limitations on assumptions and if we see that there are impairment issues related to the undiscounted cash flow models we go to a different set of assumptions and then a discounted cash flow model we had to perform that with two of our entities. We haven’t named those entities but they were smaller entities and small dollars. But the analysis that result in any impairment so there is no impairment charges in the financial themselves. What you are reading is honestly required disclosure.

Richard Close

Okay, great. Just one to double check on that and my final question maybe is for Jay and then just a little bit more clarity or details on the acquisition and the pipeline opportunity, you mentioned that some of these there I guess rebounds potential deals that are coming back, are there any specific reason maybe that deals weren't consummated in the first place, was it just way too early, any specific reason that you're noticing why they're coming back into the fold?

Jay Kreger

Yes, it is an interesting question Richard and the answer is it's been different with every group. I think two of our deals that we did last year were deals that were pitched originally two years prior where some could argue that we were just getting started in this business. I think more and more now we're becoming known as an anesthesia company. And that credibility goes a long way. Also just sometimes the timing isn't right because the physicians may be focusing on another part of their practice, other ancillary pieces or possibly just growing endoscopy and maybe divesting or taking some chips off the table after some of their ancillaries like anesthesia. So it's just been different with each group.

Richard Close

Okay, thank you and congratulations.

Jay Kreger

Thank you.

Operator

The next question comes from Doug Cooper with Beacon Securities.

Doug Cooper

Hi, good morning guys. A great quarter with the headwinds you are facing especially early in the year. Just getting back to the acquisitions, you've made a number as you have indicated over the past five years or so, can you give us any indication of what you think your market share is and I guess how many -- I guess just trying to figure out or trying to put in context how many more acquisitions you can make, is it sort of you talked about accelerating the program a little bit this year to get market share up in words of say 10%, 20%, 30%, is this a multi-year continuation of the strategy?

Jay Kreger

Yeah, sure Doug. I think the runway overall is still we consider to be long. Right now we're in 47 ASCs, we estimate but we don't estimate we have a list of approximately 800 GI specific ASCs. There is a percentage of those that are providing anesthesia and a sub percentage of those that are only in that anesthesia that open themselves up for acquisitions. But there's also a number of those where they're either using third party anesthesia where we could become important for them in the future or those that are still using conscious sedation which we believe will eventually convert to the desedation from conscious. That number is probably around 400 or 500 centers in total based on ample volumes that would make it worthwhile. So if you're looking at it from that standpoint we've got approximately you know 10% of that market and it will go a long way in future years.

Doug Cooper

Okay, and I guess the question, is the program sort of running on its own with you today or in how much time would the senior guys like Edward and Richard for example spend on that acquisition program or how much time is of the senior guys are spent looking for the next leg of growth in terms of transformational acquisition and do ancillary product?

Jay Kreger

I will let Edward answer in a second. One thing I would add is that every physician, GI physician that we speak to is a potential customer. So when -- whether it's Edward or Richard or anyone in the senior team as well as the anesthesia specific team we're speaking to doctors. I think we're always selling our services and the level of quality and credibility that we bring. So I think they're involved all the time. But I will let Edward…

Edward Wright

No, absolutely, I mean Jay, you know if you go back to a year or maybe a little bit longer Doug I would say a significant portion of Jay's time was focused on integrating operations. Just over a -- actually about a year ago we hired a wonderful gentleman by the name of Vimal Shah who has become the Senior Vice President of Operations and has done terrific work with the entire operations team freeing Jay basically to spend the vast -- almost always but certainly the vast majority on the time on the BB side. And I think that in the latter half of 2018 was significant when we saw the effect of the pipeline and what we have in front of us now. I mean his team, Jay's team on the BB side is growing and that team's on the road every week. Richard obviously is very actively involved in all of the financial aspects of any and every opportunity. So yeah, everybody is very focused. Even here as Jay alluded to earlier, the O'Regan team which has a very strong interfacing with all of their customers that are across the country and our doctors that are traveling throughout the weeks those all are initiatives which cross back and forward between the two business segments. So it's very much a focus of everybody in the company towards the anesthesia opportunities.

Doug Cooper

And you think the acquisition can get easier and maybe accelerate as CRH itself gets bigger, it is the other guys would feel more comfortable selling their business to a larger operation especially on a JV status, you know what I mean?

Edward Wright

Possibly, I think that will happen but it's also a result of awareness. I think it's important to note that when we moved into this business four and a half years ago it really was not something that people were doing. So although it seems like a long time for us and we've done 21 acquisitions, a lot of the people that we spoke to early on whether it was year one, year two, or year three as Jay mentioned, a lot of them were coming back around. I mean those early discussions were very much -- well that's interesting and we would try to encourage them to speak to the one or two or four or five customers that we had done acquisitions with. Well as time goes on there's just more and more awareness of who we are and what we're doing in this area of business. And the beauty is now that we've got a customer list of 21 practices that we've been successful with we can hand that out and really encourage these people to speak to their counterparts around the country. So I think it's -- I think it's more awareness than anything else.

Doug Cooper

Right, and as a final one, just on that GAA was obviously I think still the biggest one to date, is there any sort of big elephants out there. I know you talked about in the past that they're a bit of the anomaly but are most of them…

Jay Kreger

There certainly is. There's a handful of large ones. Clearly we know who they are, we're continuing to make them aware of our offering and speak with them. But there's a handful where as there are many, many others, the numbers and the three to five up to 15 million are much, much greater and that's I think when Jay cautioned earlier and said you should expect more deals as opposed to one deal in a given year. I would certainly support that and that's what our pipeline would indicate.

Doug Cooper

Okay gentleman, thank you very much.

Operator

Our next question comes from David Martin with Bloom Burton. Please go ahead.

David Martin

Good morning, I have got a couple of questions. The first is how many service agreements they have -- expired during 2018 and were you able to reach all of them and then how many are expiring in 2019?

Edward Wright

So, ours are PSAs, Professional Services Agreements associated with the acquisitions we have done to date range anywhere from 1 that 15 years in term. Again it's the structure of the asset purchase agreements or in some cases membership purchase agreements that really drive that relationship and the PSAs just renew as they matter of course. So, during 2018 I think we had one or two that auto renewed as expected and would expect the same number in 2019 because it's not -- the PSA defines our relationship but it's the myth or the act of purchase agreement that controls our relationship.

David Martin

Okay, the second question is you know, when I see my calculations on the price to revenue or price to EBITDA that you are paying for your acquisitions certainly after the reimbursement cuts were initiated in January 2018 your revenue multiple looks like it's trending lower which makes sense, you're going to pay less for revenues where there's less profit on them. By my calculations it looks like the price to EBITDA is trending off of that and I'm wondering is that a trend you expect you're going to have to pay more for EBITDA than you did previously or have these just been better quality businesses that you bought since 2018, since January 01, 2018?

Richard Bear

Yeah, I'm not knowing exactly what you're looking at David. I would say that are effective multiples are all EBITDA based and are ranged anywhere from four to five times and are consistent with how we have been pricing deals since 2015. So maybe what you're seeing is just effect of acquisitions that maybe on -- that based on your calculations might be on the higher side but we are not -- we have not seen our valuations change. We continue to have discipline of our valuations and believe that we'll continue to be able to acquire to the numbers that Jay mentioned earlier based on those valuations.

David Martin

Okay, it was just a small data set for January 01, 2018 but I thought I would ask. Are you seeing any competition out there that wasn't there before as far as acquiring assets?

Jay Kreger

Our competition has been and continues to be just the physicians deciding not to do anything. That's always been and again which goes back to Edward's statement about awareness. As we've stated on other calls these businesses are generally not for sale. And so when we've come to them it's the first time that they've ever even considered the option. So I think that continues to be the biggest competition there is. There is not another anesthesia company making acquisitions in this space currently.

David Martin

And given your 10% penetration you know a few years into this now that means a lot have either said no or haven't been approached by you yet, would you say de novo introductions to these businesses, the majority say no, we want to keep it or is it 50:50 on the first interaction or at 10% are most people still saying no, we want to keep it I guess is my question?

Jay Kreger

Yeah, like anything David, they don't always know what they're saying yes or no to. And so if it's a no, it's a short conversation.

David Martin

And is that the majority of your new interactions or is that not the majority?

Jay Kreger

We had conversations with everyone of varying degrees and so I couldn’t put a number on it specifically.

David Martin

Okay, thanks.

Operator

The next question comes from Tania Gonsalves with Cormack Securities.

Tania Gonsalves

Good morning gentleman, and just a few from me. Firstly we've seen one of your peers Medmax experience a shift in payer mix toward more federal payers much like you have also seen. And I know this is difficult to predict but have you put any thought into how long you expect this to continue based on demographic trends?

Edward Wright

We have not seen as we look back historically at acquisitions we've made in 2014, 2015, 2016ish. We're not seeing demographic changes, we are seeing fairly consistent changes in our payer mix at an entity level. Typically when you see shifts in our payer mix it is a result of just the acquisitions that we've done. I think it's difficult to compare a facility based entity like Medmax and others to an outpatient facility company more like ours where we're servicing physicians in private practice who honestly self select the patients they want and ensuring they have a strong commercial mix because that is going to be most profitable for every aspect of their business.

Tania Gonsalves

Okay, so just assuming we will see an aging population I would have expected there would be more volume with Medicare, you're not experiencing there?

Edward Wright

No, I wouldn’t think that, I have not seen any material shifts or expect any material over the current timing horizon.

Tania Gonsalves

Okay, perfect and then another one a little also macro based on has there been any changes in labor cost pressure on the ASCs and have you witnessed any increased utilization of CRH to combat that?

Edward Wright

Yeah, we are constant looking at utilization metrics across our entire platform by site, by room, by day ensuring that our staffing algorithms is efficient as possible. And so we're always -- we're always looking at kind to drive those costs down or we can are adjusted our cost per case in 2018 it was 177 compared to our cost per case in 2017 of 187. We are asking as you would see and as everybody sees, there are increases in labor costs. We built in a price index and ensuring that we can retain those people that are doing a great job for us. But we are also have appeared based on the numbers to offset that with greater efficiency of the kind of the platform that we've created and maximizing vision at each market.

Tania Gonsalves

Okay, yes, that was clear. And then on the pricing of the Tennessee Valley acquisition, I noticed on EBITDA sales basis it was a little bit more expensive than what you typically pay, do you assume then that the EBITDA margins are better than other acquisitions?

Jay Kreger

I think rather than looking at these each acquisition only by the numbers there is a holistic component to it as well and what we believe the future growth to be. And so any that might fall generally at the top end of the range that Richard mentioned earlier would be for those types of reasons.

Tania Gonsalves

And then just one last one from me, do you have an update on how the MAC program is progressing at digestive health specialist?

Jay Kreger

You're talking about Triad.

Tania Gonsalves

Yeah, yeah.

Jay Kreger

Yeah, thank you. We generally don't speak of the practice name. It has launched and going very well.

Tania Gonsalves

Okay, alright, that's it for me, thank you gentlemen.

Operator

We have a follow up question from Richard Close. Please go ahead.

Richard Close

Great, thanks. Just a clarification, looking at the seasonality in the 10-K Richard, should we just assume similar flow in patient cases during 2019 as occurred in 2018, that would be the first question? And then with respect to the rate as it progresses throughout the year should we see the first quarter be in the lowest and then maybe second and third a little bit higher, and then obviously the fourth with more commercial if that being the highest as we think about 2019?

Richard Bear

Two great questions Richard and to both questions I will answer yes and yes.

Richard Close

Okay, great. Thank you.

Operator

We have another follow-up question from David Martin.

David Martin

Yeah, thanks. So kind of like corollary to one of Tania's questions if they lowered the recommended age for colonoscopy screening in the U.S. your number of procedures were higher than we have forecast, I'm wondering is that part of it or did any of your ASC groups open new clinics during the year and if you are seeing more younger patients coming in, is it actually pushing your percentage of commercial payers higher because of that?

Jay Kreger

I don't know that I would say that it's due to guidelines getting younger or that there are more cases from younger patients. I think growth maybe like anything else based on awareness and I don't see that at least in the near-term pushing our payer mix more towards commercial.

David Martin

Okay, thanks.

Operator

This concludes the question-and-answer session. I would like to turn the conference back over to Edward Wright for any closing remarks.

Edward Wright

Just like to thank everyone for joining us and we'll look forward to updating on our Q1 in the near future. So thank you and have a great day.

Operator

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.