R1 RCM Inc (RCM) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Accretive Health First Quarter 2016 Earnings Conference Call. At this time, all participant lines are in a listen-only mode to prevent background noise, but later, we will be holding a question-and-answer session after the prepared remarks and instructions will follow at that time. (Operator Instructions) As a reminder, today's program is being recorded.

I would now like to introduce your first speaker for today, Atif Rahim, Head of Investor Relations. You have the floor, sir.

Hello, everyone, and welcome to the call. With us today we have Emad Rizk, Accretive Health's CEO; Joe Flanagan, President and CEO, and Chris Ricaurte, CFO and Treasurer. We'll start with prepared remarks and turn it over to Q&A. We will also have Dave Mason, our Chief Commercial Officer available to answer your questions.

Certain statements contained in this conference call may be considered forward-looking statements for purposes of the Safe Harbor provisions act under the Private Securities Litigation Reform Act of 1995. In particular, any statements about the benefits, expectations and financial impact, strategic relationship and renewed MPSA with Ascension and/or future growth, plans, performance are forward-looking statements. Investors are cautioned not to place undue reliance on such forward-looking statements. All forward-looking statements made on today's call involve risk and uncertainties. Our actual results and outcomes could differ materially from those anticipated in these forward-looking statements as a result of various factors, including the factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2015 under the heading Risk Factors.

The forward-looking statements made on today's call are based on Accretive Health's current expectations and projections of our future events as of today only, and should not be relied upon as representing the Company's views as of any subsequent date. While the Company may elect to update these forward-looking statements at some point in the future, Accretive Health specifically disclaims any obligation to do so to reflect actual results or changes in factors or assumptions affecting such forward-looking statements.

Now I'd like to turn the call over to Emad.

Thank you, Atif. Good afternoon, everyone and thank you for joining us today. Over the last couple of years, we have executed very well on all of our key initiatives and made significant progress on many fronts. Last year we accelerated our investments in R&D, analytics and IT infrastructure. We also deployed a standardized operating model across the entire organization and rolled out a talent development program for our employees.

As I mentioned on our last call, we have three priorities for 2016. First, continue to execute on our operational excellence goals and product development plan. Second, onboard the new and existing Ascension business successfully and seamlessly. And third, diversify our customer base by growing our non-Ascension footprint. The management changes and alignment we announced earlier this month will help us better execute on these priorities. Joe and his expanded role as President and COO will be taking on more responsibility for our day-to-day operations. This will allow me to focus on our strategy, growth, business development and position us as a leader in the revenue cycle management industry.

Diversifying our customer base is crucial, and my goal is to add a meaningful number of new customers each year. In addition, Chris' operations and finance experience, including his 2.5 years as head of our shared services operations, position him well to run our finance organization. His experience provides him with a unique perspective in his new role as our CFO, which ensures that key business and performance indicators are aligned with financial goals.

Chris will provide more details on our financials in a few minutes, but I feel from our first quarter results, 2016 is shaping up to be a challenging year. The two main reasons are; first, we lost customers in late 2015 and although the NPR associated with these customers was relatively small, they are having a disproportionate effect on 2016 because they were mature customers. Our business model is such that customer contracts generally have higher margins as our contracts mature. Some of these customer losses were due to M&A activities among providers.

Second, the fully-outsourced nature of the new Ascension contract requires upfront investments and deployment cost, and we do not anticipate generating meaningful incremental revenue from the contracts until late in the year. We will right size our cost structure to ensure we are organized in a way that is aligned with our current revenue and also prepare for the onboarding of Ascension business. Once we have completed this initiative, we will be in a better position to provide you with our full-year views and guidance for 2016.

I understand the customer attrition we have experienced is disappointing. However, we are rationalizing our cost structure and relaunching our sales efforts.

The long-term relationship and 10-year contract with Ascension is the first step in the Company's repositioning. The three-year onboarding schedule and $8 billion plus of new NPR provides long-term stability to our Company. As we transition to a fully outsourced model, we will have more control over the cost of revenue cycle operation, and therefore should be able to further reduce cost over the life of the contract. This is an important transition from our legacy model because our customer needs are shifting more towards aggressive control of the cost of revenue cycle operation, in addition to revenue yield improvement. This is driven by the reduced reimbursement in fee-for-service business and the accelerated shift to value based payment model. The complexity of payment models has increased the cost of revenue cycle operations and has become a greater pain point for health systems around the country. We are adapting to this evolving customer needs by continuing to integrate and standardize our processes. This will include adjusting our infused management footprint, further automating manual processes and breaking down traditional silos and expanding our shared services capability.

As we look to the future, attrition of customers on our legacy model provides us with an opportunity to rebuild the Company with a more vibrant and robust mix of contracts, priced at a cost reduction type environment. In the interim, the Ascension contract provides us with the stability while we execute on building and closing on our pipeline opportunity. I am optimistic on our long-term prospects, given our strong balance sheet, scalable infrastructure, healthcare domain knowledge and our operating capability. I am confident we are well positioned to deliver a competitive cost structure when it comes to running our customers' revenue cycle operation, and we can do so at a satisfactory margin.

RCM outsourcing remains a growing market, and our 10-year plus experience positions us well to capture share in this growing market. We will continue to invest in the Company, and technology in particular is crucial for us. In addition to improving stability and customer experience, we are also deepening the functionality of our technology product suite. And as the industry transitions to value-based reimbursement, we are also enhancing our revenue cycle capabilities in the physician as well as the post-acute care environments and beginning to strengthen our patient engagement tools. This is crucial because in a value-based system, the reimbursement touch points between patients, providers across the continuum of care and payers are no longer simply linear. They will need to be connected in a meaningful way with data and significant coordination of all the different settings where patients receive care.

Before I turn it over to Joe and Chris, I would like to comment on our re-listing process. I know this is an important topic and many of you have asked about it in recent weeks. At this time, our Board is actively engaged in the process of evaluating the timing of our re-listing. We expect the Board to make a decision soon and we will in turn convey the information promptly to all of you.

And now I'd like to turn the call over to Joe. Joe?

Thank you, Emad. What I'd like to do today and on future earnings calls is to provide you with additional color from an operational standpoint. One of the important differentiating factors about Accretive is that our ongoing operating performance with our customers is what drives value for them. Our model to drive performance is a function of people on the ground, technology we deploy and the operating processes we have developed. I believe our operating performance will be our single largest competitive advantage over the long term.

As Emad has commented on in prior calls, one of the first things our team embarked on was to distill the numerous processes, methods and technology configurations historically used by the Company into a standard operating system to ensure the highest focus was placed on those areas that were most correlated to our customers' revenue cycle performance in a consistent manner. This was important for three reasons. First, to clearly communicate what our value proposition was, second to remove the variation in our results, and third, to create a stable foundation with which we could scale effectively. As a result, we now have what we refer to as our operating system, comprised of five modules deployed consistently across all of our customer sites. These modules cover key areas such as human capital, methods, technology deployment and our operating system.

To provide some context on the specificity of the operating system, we have over 100 discrete methods, more than 70 in-process measures and 20 output measures, 30 standard technology configurations, four curriculums of course work with more than 40 discrete courses for certifying our operators and a comprehensive daily and weekly accountability framework for driving performance that is back-stopped by a dedicated performance monitoring organization.

To date, we have assessed 100% of our clients sites relative to our standard model, and in aggregate, our RCM business has achieved 96% standardization to our operating system. As a result of this standardization, since implementation, we have seen double-digit percent improvement in many of the 20 core output measures we track. These measures have not directly correlated to our financial performance in all situations because of the varied contract structures we currently have under management. This variation is largely the result of the transition off our legacy best possible model, which largely occurred at the mid-term of contract's life. As part of this transition, a number of customers have preferred to switch to a fixed fee or modular market-based agreements with SLAs. This dynamic, combined with customer attrition, has reduced the historical correlation between our improvement in our customers' RCM operations and our financial performance.

As I move into my expanded the role of President, I will be focusing on three main areas or opportunities. The first area of focus will be driving cross-functional efficiencies between operations, HR, and IT with an overall objective of making our scaling capability a competitive advantage. This should result in the organization's ability to respond quickly to increased demand and drive cost leverage with growth.

The second area of focus will be looking to capitalize on the fact that we have operators on site at our customers every day and our ability to rapidly translate the operational findings from our teams in the field into technology functionality will be an important element to continue to create value for our customers.

The final focus area will be on creating a clear and unified cultural identity for the Company. This is a critical area focus as it will allow for the successful transition and integration of new employees, which is a critical component of our Ascension contract as well a critical capability to enable successful outsourcing of revenue cycle operations, the ability to unify the organization on a common culture and a set of associated behaviors, will be a key factor in delivering superior financial performance over time.

Next I'd like to discuss the progress we're making with the renewed and expanded relationship with Ascension. We now have a dedicated deployment organization in place, which is fully resourced and functioning. We have designed this deployment office as a strategic function, able to scale and support simultaneous implementations across multiple customers. Since the signing of the MPSA in February, the deployment office has established four focus areas or pillars under a joint accountability framework with Ascension. The four pillars are organized as follows. Operational deployment, employee transition, contract administration and finally, internal readiness. Each pillar represents a defined outcome, which is then broken down into major work streams with a detailed plan. That plan includes coordination across all aspects of the accretive and customer organizations.

Stepping back from the details, at a high level, I see the task at hand is twofold. The first is to successfully onboard Ascension, and second, perhaps more importantly, is to build on the organizational competency around deployment and onboarding that will be important to support our future growth.

As you'll hear from Chris, he and I will work together to help you translate the effect of our operational metrics on our financial metrics. I understand that is an area we need to provide you more information on and plan to do so in the future.

With that I'd like to turn the call over to Chris.

Thanks, Joe. Let me give a brief introduction of my background. I have spent 30 plus years of my career in financial roles and about 20 years in executive finance roles, including four CFO roles in large multinational companies such as GE, Nortel and Applied Materials. My strength is playing the role of a strong operating partner of the executive team to drive value in the business. The uniqueness of this opportunity is that I have 2.5 years of experience running the largest operation in Accretive, and I have a strong foundation of the business model. Consequently, I expect to hit the ground running and be able to partner with Emad and Joe immediately to develop our go-forward plans and execute them.

I'm excited about the future of this business. The signing of the 10-year MPSA with Ascension provides a great foundation on which to grow this business. Coming from a position of running the shared services operation, I am confident that we are well positioned to deliver cost competitive solutions with superior results. Our blended shore model with US Centers and a strong India footprint has run seamlessly and is unique in our industry. In the third quarter of last year, we opened a new shared service center in Southfield, Michigan. I expect the capabilities of this model will deliver value well beyond the Ascension contract.

Before I get into the financials, I want to talk a moment about my initial priorities in the role. I think it is critical we develop operating metrics and key performance indicators that are truly indicative of the performance of this business and easily understood by management and our investment community. We would like to possibly move away from NPR under management as the key indicator, because as we modularize our service offering, the NPR of different clients will deliver different economic value to Accretive depending upon the offering and type of contract they have with us. I expect to talk about this in more detail on future calls.

Before I walk through a discussion of our financials, I would like to remind you that we will be referencing non-GAAP numbers and a reconciliation to the most comparable GAAP measures is included in this afternoon's press release. We use two non-GAAP measures to supplement our GAAP results and to provide a better view of our operations. The first measure we use is gross cash generated from customer contracting activities, which is our reported GAAP revenue plus the change in deferred customer billings. The second measure is net cash generated from customer contracting activities, which is our reported net income before interest, taxes, depreciation and amortization, shareholder based compensation, restatement related expenses, reorganization related expenses and certain non-recurring items as well as the change in deferred customer billing. Effectively, it is our adjusted EBITDA plus the change in deferred customer billings. These two measures are primarily how we internally measure our financial performance and we believe it's important for our investors to look at our results on this non-GAAP basis as well. The reason we use these non-GAAP measures is GAAP revenue recognition for our customer contracts is typically deferred until substantially later than when we deliver services, bill and collect cash from our customers.

Now I'd like to discuss our first quarter results. Gross cash generated from customer contracting activities was [$40.9 million] (corrected by company after the call) compared to $54.9 million for the first quarter of 2015. This decrease was largely a result of M&A related customer attrition we experienced last year, which accounted for $7.5 million of the year-over-year decline. Our contracts typically generate the highest margin rate at maturity, so while the attrition was marginal from an NPR standpoint, it had a larger effect on our bottom line. This was compounded further by the fact that these contracts had higher margin rates than the rest of our book of business. We are also impacted $6.9 million due to a pending contract renewal, transition of a customer to a fixed fee arrangement and a reduction in scope to add another customer.

The non-RCM business declined $1.2 million year-over-year, partly due to the PAS business. However, as noted on prior calls, the PAS business started to stabilize in the third quarter of 2015. Cost of services increased $1.7 million over the prior year to $41 million due to higher shared services cost resulting from the transition to ICD-10 and expanded services provided by our shared service centers. SG&A expenses were down $900,000 relative to the prior-year to $12.5 million. Net cash generated from our customer contracting activities was negative $12.6 million in the first quarter compared to positive $2.3 million in the year-ago quarter, driven by the decline in gross cash generated and the increase in cost of services I just covered.

One-time cost and other cost amounted to $11 million and were largely related to closing the transaction with Ascension and TowerBrook. Our cash position at the end of March, inclusive of short-term investments and restricted cash was $283.5 million, up from $106 million at the end of December. The increase was driven by the $200 million investment from Ascension and TowerBrook, which was offset by deal fees for a net impact of $178 million. Working capital improvements were offset by cash use of $2.3 million for capital expenditures.

Turning to 2016. At this point in time, we are not in a position to provide formal guidance due to the ongoing evaluation of our cost structure, but I did want to provide you with an indication of where some of the moving parts may land. At the top line, our first quarter results were down about $14 million versus the prior year. For the full year, we expect our top line to be pressured by $40 million to $50 million due to prior customer losses, changes in scope and renewals we are factoring in. Mitigating the downside somewhat is the revenue we begin to generate as we onboard Ascension ministries. We expect this to contribute $20 million to $30 million to our 2016 top-line, given our current onboarding plan for Ascension employees.

From a contractual standpoint, we are on track to onboard the current and new ministries in line with the previous timing we provided with the formal transitioning of majority of Ascension employees on to our payroll is now planned for late 2016, early 2017 versus our earlier plan of mid-2016. This gives us more time to ensure a smooth transition for onboarding incoming employees. As a result of this timing change, the cost of Ascension employees will continue to be netted out of our top line for longer than originally anticipated. Please note that this does not affect our profitability at the gross profit level, but does help us mitigate the associated G&A cost.

As we have previously communicated, we continue to anticipate annual revenue in the mid $40 million range for every $1 billion for Ascension NPR when fully transitioned to the outsourced model.

Moving beyond the top line to cost of services and SG&A, we are actively evaluating what the optimal cost structure should be for the Company, given our current book of revenue, while at the same time, keeping in mind, the new business we plan to onboard from Ascension. Under the new model with Ascension, our model for infused management cost can be lowered from our historical run rate because we now have the existing hospital team fully trained and deployed to run our operating system and playbook. So there is an opportunity to streamline our infused management cost.

Secondly, we are looking at our SG&A cost structure to ensure we are operating at the right levels for a Company our size. The offsetting factors to these cost savings is that we expect higher HR, payroll, IT infrastructure related cost as we onboard new employees. In light of these moving parts and the early days in the tenure of my position, we need more time before presenting you with a comfortable view of our 2015 expectations. I also plan to re-evaluate our long-term outlook and expect to have more clarity for you regarding our longer-term outlooks on future calls.

In closing, the Company remain solidly positioned with a 10-year contract with Ascension. My experience from the operations team affords me a deep understanding of the business and I plan to leverage that along with my financial background to execute on our value proposition. And the most significant customer need we see is an ability to deliver lower cost RCM solutions that deliver superior and consistent results, which we are well-positioned to deliver.

Now I'd like to turn the call over to the operator for Q&A. Operator?

(Operator Instructions) Charles Rhyee, Cowen.

Thanks for taking the question. Hey guys. So obviously we're taken a hit here on the lost customers, should we expect a further hit for existing -- I guess let me ask this way, for existing customers, are we going to transition them to the modular approach of products?

Hi, Charles, it's Emad. Can you just rephrase what do you mean existing customers (Multiple Speakers) modular?

Okay, so you are talking about we're going to have five models going forward. And so we want to get away from NPR because future customers may or may not be using all the services from us, right? So it's not as indicative of what we're going to be generating in terms of contribution, but our existing customers, let's say, the Ascension aside, everything that wasn't Ascension prior; in my understanding they were doing the full outsourced service with the base fee and the incentive payments, will those guys transition to using all the modules and they have the ability to decide we'll take three out of five modules going forward?

Sure. Let me clarify about the modules, right. I believe that you're thinking about the modules, which are the operating modules that Joe spoke about. So those are how we execute at our operating system, we do not go to market with those modules, that is the entire operating system. So to answer your question moving away from the modules, we are probably very differentiated in the marketplace that we can exist in two different types of models. The infused management model, which is infused management on site, it's not a fully outsourced, we use our technology and we use our folks, our healthcare expertise on the ground. That's one model that we've had for multiple years. The Ascension model is a fully outsourced model that deploys our shared services, also our employees and our technology. Our preference is to usually go to the fully-outsourced end-to-end model. So if we do have the opportunity to move our customers from the infused management model to the fully outsourced model that, would be a preference. But some customers will want to exist in that infused management model with technology wrapper and sort of shared services, we can also exist into that, but we will be having strategic discussions with our current customers about the different models that we can move forward with them. Does that help?

Thanks, that's helpful. And I guess a question on the other line, other service fees. How much of an impact are you seeing with the reversal of the two midnight rule? Should we expect that to have a positive impact that we -- as we look in the course of the year?

We've not -- this past quarter, we've not seen an effect, at this point in time, we're watching it carefully to see whether it will have a positive effect moving forward. But generally speaking, our PAS business, we continue to close deals and we're getting good traction in the market.

Rob Munnings, William Blair.

Hey guys, thanks for taking the questions. I'm just wondering when Ascension or when the existing Ascension business flips over to the new MPSA, in addition to the accounting changes, are there any operational changes that are important for us to understand?

Yes, it's a big question, I'd like to turn this over to both Joe and Chris and they'll walk you through our sort of old contract to our new contract, our current book of business and our new book of business. Joe?

Sure. So I think the operational changes that come with the conversion of the current book of business to the new MPSA are really are along the lines of this degree of control and the amounts of outsourcing that is occurring. So as Emad commented in the prior question, the new MPSA is a fully outsourced arrangement. That means that the employees are transitioning from Ascension's payroll to Accretive's payroll. In addition to that, the vendor management for all of the vendor's technology or other services associated with delivering the revenue cycle will convert over to our control as well. And so from an operational lens, what that affords us is the ability to drive the standards and drive our operating system with a high amount of confidence, so to speak, and in a simpler change management environment.

And we are working hand-in-hand with Ascension on the current book of business, current book of ministries as we speak, really going through that standardization work. And that gives us a human capital profile that we didn't have historically, it also gives us a lens on spend and ability to, whether that be in-sourced, outsourced decisions, whether that be different strategies that comes with that degree of control, those are all coming as a result of this change of the MPSA and they're all related to both the current book as well as the additional book of growth that will be deployed over time.

Yes. And this is Chris Ricaurte. The other thing that it will enable to do and I referenced it on call, we will no longer have to net down that cost from the revenue and it will show up in our cost of services. Additionally, what it will afford us to do, as Joe referenced is, it will enable us to have a -- to manage that cost structure in a more effective manner.

And then just maybe one more from me. Last quarter you talked a little bit about the $200 million investment from TowerBook being potentially used for tuck-in acquisitions. Kind of broadly, how should we think of tuck-in acquisitions, is it something that should reduce third-party elements that you guys procure for clients or as novel features that you -- that would give you a competitive advantage? Thank you.

Well, I think tuck-in probably might have been an -- sort of an overused term. I would not limit us to just tuck-ins, we see ourselves as an end-to-end revenue cycle management organization and that is across the entire continuum with both services and technology, that is what we do. We have certain areas that we believe will become more important to emphasize moving forward. One of them, as we manage across the continuum, the physician component, managing the physician revenue cycle needs to be integrated into the acute care revenue cycle. So that's an area that we need to focus on significantly.

Also moving forward, the patient liability piece with the Affordable Care Act and some of the exchanges that are out there, the patient liability is increasing significantly in some areas and some studies, it's going to double. So we are now beginning to see that the patient will become more of an important consumer as they make decisions and navigate the healthcare system. So we will look at improving our interchange with our patients that could be through acquisitions or it could be through infusion and technology development. But the acquisitions would not be limited to tuck-ins, they will be mostly around our core offerings, which is end-to-end revenue cycle across the entire continuum. And we will leverage and deploy the $200 million or more in a very strategic manner.

The only thing I would add to that a little bit related to your last comment inside of the question in terms of in-source or vendor consolidation, I think as we look through an operational lens, I don't know that paying a large premium for capacity or any premium for capacity is really in the cards. We feel like we've got a very good infrastructure, and we've got the ability both on a service delivery standpoint or on a technology platform standpoint to grow off that infrastructure. So I think really as Emad commented, it's to fill in gaps in capability that we don't have today.

Thank you, Joe.

(Operator Instructions) And I'm seeing no other questioners in the queue at this time. So I would like to turn the call back over to management for closing remarks.

Okay. Thank you, operator. I'd like to thank everybody for joining today. I want to emphasize my continued confidence about our competitive position in the market and our continued performance and I look forward to updating you in the future. Have a good afternoon.

Ladies and gentlemen, thank you again for your participation in today's conference. This now concludes the program and you may all disconnect your telephone lines at this time. Everyone, have a great day.