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Edited Transcript of ARA earnings conference call or presentation 20-May-19 8:30pm GMT

Q1 2019 American Renal Associates Holdings Inc Earnings Call

BEVERLY Jun 11, 2019 (Thomson StreetEvents) -- Edited Transcript of American Renal Associates Holdings Inc earnings conference call or presentation Monday, May 20, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Darren P. Lehrich

American Renal Associates Holdings, Inc. - SVP of Strategy & IR

* Joseph A. Carlucci

American Renal Associates Holdings, Inc. - Co-Founder, CEO & Chairman

* Mark C. Herbers

American Renal Associates Holdings, Inc. - Interim CFO & Interim CAO

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Conference Call Participants

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* Stephen Vartan Tanal

Goldman Sachs Group Inc., Research Division - Equity Analyst

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Presentation

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Operator [1]

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Greetings and welcome to the American Renal Associates First Quarter 2019 Update Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Darren Lehrich, Senior Vice President of American Renal Associates. Thank you. You may begin.

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Darren P. Lehrich, American Renal Associates Holdings, Inc. - SVP of Strategy & IR [2]

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Thank you, operator. Welcome, everyone, to ARA's First Quarter 2019 Update Call. Joining me in the call today are Joe Carlucci, our Chief Executive Officer; Mark Herbers, our Interim Chief Financial Officer.

I want to remind everyone that we may make certain remarks today that constitute forward-looking statements within the meaning of the federal securities laws. The company's actual results may differ materially from such statements due to a number of risks and uncertainties, including those described in our most recent Form 10-K and subsequent filings with the SEC. Any forward-looking statements made today are effective only as of today, and the company undertakes no obligation to revise or update any forward-looking statements for any reason.

On today's call, we will refer to adjusted own net debt, a non-GAAP financial measure. The reconciliation of this non-GAAP financial measure to the most comparable GAAP measure is available in the 8-K filed on May 15, which is available within the Investor Relations section of our website at americanrenal.com.

Before we begin, I want to note that the format of this call will be a departure from our usual earnings calls. As previously disclosed, the Audit Committee of the Board of Directors has been conducting an examination of the company's revenue recognition methodology and related accounting matters. On March 27, the company filed an 8-K that, among other things, described the board's determination that the company's previously issued financial statements for certain prior fiscal periods identified therein should no longer be relied upon. The Audit Committee's review is still ongoing, and the company intends to restate financials for the identified prior fiscal periods as soon as practical. Until such time, all information that is being shared about the company's interim performance is preliminary and subject to change.

As a final housekeeping matter, we will conduct a Q&A session, but we'll be unable to answer questions about the status of the Audit Committee review or respond to questions about Q1 2019 operating or financial information other than the preliminary operating balance sheet data, including the 8-K filed on May 15.

With that, allow me to introduce our Chairman and CEO, Joe Carlucci.

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Joseph A. Carlucci, American Renal Associates Holdings, Inc. - Co-Founder, CEO & Chairman [3]

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Thank you, Darren. We appreciate everyone taking time to join us for an update on the first quarter of 2019. We are sharing certain preliminary operating data for the first quarter as follows. For our clinic activity, on a net basis, we added a total of 2 dialysis clinics during the first quarter of 2019. This includes 2 de novo clinics that we opened and 2 clinics that we acquired during the quarter, netted against 2 clinics that we sold during the first quarter of 2019.

Our pipeline includes 24 signed clinics, which we expect to open in the future. Second, treatment volume. Normalized for clinic sales and treatment days, our total treatment growth was 7.2% for the first quarter of 2019. Normalized non-acquired treatment growth was 5.3%. Dialysis clinics acquired over the past 12 months added 1.9% to treatment growth in the first quarter of 2019. Treatment growth improved slightly from our recent quarters due to the contribution from acquisitions and improved contribution from de novo ramping due in part to better certification timing.

As of March 31, 2019, we had no clinics awaiting certification. Third, treatment mix. Commercial mix was 11.5% of total treatments in the first quarter of 2019, and this was 50 basis points lower than the prior year period. Consistent with our historical disclosures, Veterans Affairs, or VA, are included in our commercial treatment mix metric and VA plans accounted for 2.6% of total treatments in Q1 2019 and 2.4% of total treatments in Q1 2018. Although commercial mix was relatively stable during the first 3 quarters of 2018 at the 12% level, we did experience a decline in mix during Q4 2018 that continued into the first quarter of 2019. Going forward, we will be disclosing commercial mix on a volume basis quarterly.

Fourth, since the 8-K was filed on March 27, 2019, disclosing the need to restate certain financials, our senior management team has been proactively meeting with our physician partners. Since March 27, we've spoken with many of our physician partner groups representing a majority of the clinics we operate, and I'm very pleased with the level of physician support and engagement we've experienced through these meetings.

Finally, let me close with a few observations about recent announcements and SEC filings. We recently completed an amendment to our credit agreement, and we are grateful for the support we received from our lenders to achieve this outcome. The amendment waives, among other things, certain defaults or potential defaults under the credit agreement and provides for additional time to prepare restated financials in our 2018 10-K and subsequent first and second quarter 10-Qs, which we are required to deliver by September 9, 2019. Mike Herbers will comment further on the revised terms in the credit agreement as a result of this amendment.

Our corporate accounting and finance team is working diligently to remediate the revenue recognition and related process issues identified in the ongoing Audit Committee review. Since the issues were identified, the remediation process has proceeded on plan.

Now allow me to turn it over to Mark Herbers, our Interim Chief Financial Officer. Mark?

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Mark C. Herbers, American Renal Associates Holdings, Inc. - Interim CFO & Interim CAO [4]

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Thank you, Joe. I'm going to cover 3 topics briefly. First, I will review certain preliminary balance sheet information as of March 31, 2019; second, I'll provide some additional detail about our recently announced credit agreement amendment; and third, I'll discuss our revolver borrowing.

First, preliminary balance sheet information. As of March 31, 2019, ARA had consolidated cash of $64.9 million and consolidated debt net of unamortized debt discounts and fees of $595 million. Consistent with our historical quarterly presentation, we are also disclosing owned cash and debt reflecting ARA's pro rata interest in the cash held at the clinic level and the clinic level debt guaranteed by the company. On that basis, owned cash was $42.6 million and owned debt was $535.1 million as of March 31, 2019. Adjusted owned net debt was $492.5 million.

As of March 31, 2019, we had $40.5 million drawn under our revolving credit facility, which is up from $5.5 million at December 31, 2018.

Second, I want to review the revised terms under the amendment to our credit agreement, which was completed on Friday, April 26, 2019. Under the revised terms, the spread on our Term Loan B debt will be LIBOR plus 5.5% during the waiver period. And then once we deliver restated financials and become current with our annual and quarterly filings, the spread will be LIBOR plus 5.0%. The original pricing on the Term Loan B debt was LIBOR plus 3.25%. The revolving credit facility pricing is 25 basis points inside the Term Loan B debt during the waiver period and thereafter, priced off a grid based on our consolidated net leverage ratio. At current debt balances, we estimate the incremental interest expense associated with the repricing of the loans relative to the original credit agreement will be approximately $4.4 million during the waiver period and $8.3 million on an annualized basis after the waiver period.

The upfront costs associated with the amendment were approximately $6 million, including a 1% fee to the lenders consenting to the waiver and other related fees and expenses.

Finally, I want to note that over the near term, our revolving credit facility borrowing is expected to remain higher than in past years as a result of higher professional fees related to the SEC investigation and restatement, the acquisitions in the first quarter of 2019, purchases of noncontrolling interest during the first half of the year and our second installment payment of a legal settlement in August in the amount of $8 million. We are not in a position to forecast professional fees related to the SEC inquiry and restatement at this time.

That concludes my remarks. And with that, let me turn it over to the operator to open up the line for questions and answers.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Steve Tanal with Goldman Sachs.

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Stephen Vartan Tanal, Goldman Sachs Group Inc., Research Division - Equity Analyst [2]

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So I guess the first thing that I just wanted to touch on was just the mix figures. The first time we're getting the treatment mix that way and so I guess ex VA, it looks like commercial was down about 70 bps. I was just hoping maybe you can give us a flavor for what drove that or what you think drove that and maybe some color on United having gone in network, do you think that has [driven] any incremental volume at this point or how we should be thinking about that as the year transpires?

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Joseph A. Carlucci, American Renal Associates Holdings, Inc. - Co-Founder, CEO & Chairman [3]

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Darren, you could take that one.

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Darren P. Lehrich, American Renal Associates Holdings, Inc. - SVP of Strategy & IR [4]

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Sure. Hi, Steve. So I think things are progressing well with United, so that was part of your question. We began in network with them in all products in September of last year. I think relative to our overall commercial book of business and as we've mentioned on the call here, it had remained relatively stable at about the 12% level for the first 3 quarters of 2018. And then it did decline slightly from that level in the fourth quarter and declined a little bit more again in the first quarter. I think as we think about the mix, we believe that some of our recent contracting efforts may help mitigate that trend, but that is a trend that we did see in both the fourth quarter and the first quarter. And I don't know if I could really get into payer-level detail or anything that would predict what did occur, but that was the trend.

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Stephen Vartan Tanal, Goldman Sachs Group Inc., Research Division - Equity Analyst [5]

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Got it. Okay. That's helpful. And just one more, just was hoping that we could get maybe your latest thinking on kind of the expansion strategy. You noted at March 31, there were no clinics kind of awaiting certification. Is there any change in sort of rollout for de novos? Obviously, your competitors just said some things recently about that and made comments about home too. So maybe in that, maybe touch on your home strategy as well, and that's all I really have.

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Joseph A. Carlucci, American Renal Associates Holdings, Inc. - Co-Founder, CEO & Chairman [6]

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Thank you. This is Joe. We closed the first quarter with 24 fully signed executed deals. I'll turn it over to Darren now to talk about our openings this year.

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Darren P. Lehrich, American Renal Associates Holdings, Inc. - SVP of Strategy & IR [7]

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Yes. So Steve, as you saw, we added 4, 2 by acquisition, 2 by de novo, and we do expect to open clinics this year. I think in terms of the number of clinics, we're going to refrain from providing any specific numbers there. But I would say that similar to the last probably 2 years, it will -- our openings will be more likely back half-weighted in terms of the numbers of them that we anticipate opening. As Joe mentioned, we have a signed pipeline that's consistent with sort of the numbers that we've shared with you in past quarters, so gives us some visibility into the outlook of our openings over, say, a 12- to 24-month time frame. And then I think what you were adding into your question was about home, and I would just maybe update you on that by saying that we continue to see growth in home modalities. We're investing in resources to support home modalities and our physician partners in all of our markets, and that continues to proceed well.

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Operator [8]

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(Operator Instructions) There are no further questions at this time, and I would like to turn the call back to Joe Carlucci for closing remarks.

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Joseph A. Carlucci, American Renal Associates Holdings, Inc. - Co-Founder, CEO & Chairman [9]

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Thank you, operator, and thanks very much for joining us today on this call. We really appreciate your continued interest in American Renal. And I wish you a good rest of the afternoon, and thanks again. Bye now.

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Operator [10]

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This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.