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Edited Transcript of ARA earnings conference call or presentation 15-Aug-19 1:00pm GMT

Preliminary Q2 2019 American Renal Associates Holdings Inc Earnings Call

BEVERLY Aug 23, 2019 (Thomson StreetEvents) -- Edited Transcript of American Renal Associates Holdings Inc earnings conference call or presentation Thursday, August 15, 2019 at 1:00:00pm 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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* Patrick Thomas Feeley

Barclays Bank PLC, Research Division - Research Analyst

* 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 Second Quarter 2019 Update Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Darren Lehrich, Senior Vice President of Strategy and Investor Relations. Thank you, sir. 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, and welcome everyone to ARA's Second Quarter 2019 Update Call. Joining me on the call today are Joe Carlucci, our CEO; and Mark Herbers, our Interim CFO.

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 owned net debt, a non-GAAP financial measure. A reconciliation of this non-GAAP financial measure to the most comparable GAAP measure is available in the 8-K filed on August 14, 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 quarterly 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 company is working diligently to complete the restatement of the 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 Q2 2019 operating or financial information other than the preliminary operating balance sheet data, including the 8-K filed on August 14.

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 second quarter of 2019. We are sharing certain preliminary operating data for the second quarter as follows. First, clinic activity. We added 2 de novo clinics during the second quarter of 2019. Year-to-date, we've added 6 clinics in total, including 4 de novo clinics and 2 acquired clinics. Netted against the 2 clinics sold in Q1, our clinic count has increased by 4 during the first 6 months of 2019. Subsequent to the end of Q2, in July, we divested an additional 2 clinics. We maintain an active pipeline of de novo clinic projects in both new and existing markets with our nephrologist partners. However, due to the time and expense devoted to our financial restatement process, at this time, we are reviewing the pipeline and the timing of certain projects and may delay or otherwise alter certain of these projects.

In addition, in light of recent proposals from the Trump administration, our pipeline review will include a reevaluation of certain satellite clinic projects. We may be able to serve some of our current markets with existing [in-center] capacity and an increased focus on growing our home program therapies in these markets.

Second, treatment volume. Normalized for clinic sales and treatment days, our total treatment growth was 7.9% for the second quarter of 2019. Normalized non-acquired treatment growth was 5.6%. Dialysis clinics acquired over the past 12 months added 2.2% to treatment growth in the second quarter of 2019. Treatment growth improved from 2018 levels primarily due to improved contribution from our de novo ramping due in part to better certification timing as well as the contribution from acquisitions.

Third, treatment mix. Commercial mix was 12% of total treatments in the second quarter of 2019, and this was consistent with our prior year period but a sequential improvement from Q1 2019. Consistent with our historical disclosures, Veterans Affairs or VA, are included in our commercial treatment mix metric. As mentioned in our Q1 2019 update, we experienced a decline in mix during Q4 2018 that continued into the first quarter of 2019. During Q2, the commercial treatment mix improved modestly driven by a slight increase in VA and traction from recent contracting efforts.

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

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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 June 30, 2019; and secondly, I will update you on our remediation efforts to date; and third, I will discuss our revolver borrowing.

First, our preliminary balance sheet information. As of June 30, 2019, ARA had consolidated cash of $69.1 million and consolidated debt net of unamortized debt discounts and fees of $611.7 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 $50.1 million and owned debt was $555.1 million as of June 30, 2019. Adjusted owned net debt was $505 million as of June 30, an increase of $12.5 million from $492.5 million as of March 31, 2019. As of June 30, 2019, we had $69.5 million drawn under our revolving credit facility, which is up from $40.5 million at March 31, 2019.

Second, we continue to make good progress with respect to our remediation efforts related to the issues associated with our restatement process. We have put new processes in place for revenue recognition and revenue accounting and have made process improvements in other related areas. Overall, we continue to work diligently to file restated financials within the time frame required by the April 2019 amendment to our credit agreement, which puts September 9 as the outside date for restating certain prior financials and becoming current with our Q1 and Q2 2019 financials.

Finally, with respect to our revolving credit facility borrowing. As discussed on our Q1 2019 update, we anticipate a near-term borrowing on the revolver to be higher than in past years as a result of higher professional fees related to the SEC investigation and restatement process, 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 Q&A.

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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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I guess just to start, the volumes were quite solid on sort of any metric any way you cut it. It seems a little at odds with at least one of your larger competitors of what's been happening there. And so I guess, I was just hoping you guys could comment on what you think is working well for you and what's sort of behind that volume growth that you guys are driving.

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

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Darren can answer that one. Thanks, Steve.

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

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Yes. So I think you have a few things going on with the treatment volume. First, we do have ramping of our de novos, which continues. I think over the last 3 years or so, we've opened more than 40 and many of those are still in the growth phase, and that's contributing to the volume growth. We've also benefited in recent months from faster certifications. And as we've talked with you all about, there is a new independent accreditation process in 2019, and we've been able to open clinics and get them Medicare-certified more quickly. And then, I think the final piece in terms of the total treatment growth is that you've seen a little bit of a higher contribution this year in the second quarter, it was 2.2% coming from acquisitions. And all these things combined led to the treatment growth being a little bit higher than the 6.1% that we reported in 2018.

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

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Got it. That's very helpful. And then the other piece that I was just sort of the most focused on here is commercial mix kind of ex-VA. You were giving us a little more sort of a granular disclosure with Q1 and so now, we're trying to estimate ranges with the rounding to the point. And so I guess, how did mix -- commercial mix, ex-VA, kind of move sequentially? Anything you can tell us about that?

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Darren P. Lehrich, American Renal Associates Holdings, Inc. - SVP of Strategy & IR [6]

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Yes. Steve, it's Darren again. So yes, in the first quarter, we obviously disclosed a more precise number. And we felt that because it was right in the middle at 11.5%, it was the first time we disclosed that number, we felt that, that was the right number to start with. Frankly, we're giving a quarterly disclosure, and a whole number really is appropriate given what our competitors are disclosing on a regular basis. In terms of your -- trend, we had a slight rebound from the first quarter in both VA and the commercial mix overall. It does round up to 12%. And I think the last thing I would just add is we are getting some traction from recent contracting efforts on the commercial side.

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Stephen Vartan Tanal, Goldman Sachs Group Inc., Research Division - Equity Analyst [7]

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Okay. Fair enough. But just to be clear then, you commented on VA and commercial overall inclusive of VA, not exclusive of VA. Just to make sure I heard that right.

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Darren P. Lehrich, American Renal Associates Holdings, Inc. - SVP of Strategy & IR [8]

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Both were up slightly from the first quarter.

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Stephen Vartan Tanal, Goldman Sachs Group Inc., Research Division - Equity Analyst [9]

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Got it. Yes. Understood. And anything you guys can tell us about sort of all-in average commercial rates and how that's been moving lately? Any changes there to call out? Or I know you guys aren't providing revenue disclosure at this point, but just trying to understand if there's anything you can say on that front?

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Darren P. Lehrich, American Renal Associates Holdings, Inc. - SVP of Strategy & IR [10]

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Yes. Steve, I appreciate the question. I think we are just not prepared to talk about revenue metrics at this point.

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Stephen Vartan Tanal, Goldman Sachs Group Inc., Research Division - Equity Analyst [11]

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Got it. Okay. And just last thing for me. You sort of mentioned that the de novo pipe may slow a little bit. Any sort of additional color on that? Or is it too early to sort of provide numbers for looking out number of clinic openings per year, something of that nature?

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Joseph A. Carlucci, American Renal Associates Holdings, Inc. - Co-Founder, CEO & Chairman [12]

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It's Joe, Steve. I think we, I think, did a good job with our growth, as Darren just described. But we're looking at our entire pipeline now and associated with the cost of the restatement, we just need to look at them all. And we may, actually, delay openings and also transition to more home therapies.

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Operator [13]

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(Operator Instructions) Our next question comes from the line of Patrick Feeley with Barclays.

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Patrick Thomas Feeley, Barclays Bank PLC, Research Division - Research Analyst [14]

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So it sounds like September 9 is still the target to get fully current with financials. Would you anticipate providing guidance again at that time as well?

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Darren P. Lehrich, American Renal Associates Holdings, Inc. - SVP of Strategy & IR [15]

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Patrick, you're right. September 9 continues to be our outside date, and we're all working really hard to make that occur. We haven't made any decisions about what we're going to be providing when we ultimately get the restatement numbers out there. So stay tuned.

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Patrick Thomas Feeley, Barclays Bank PLC, Research Division - Research Analyst [16]

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Got it. My other question was wondering if you can talk a little bit about the approach to home dialysis. Clearly, something that's been topical lately. Maybe I don't know if you can quantify and disclose today but what percentage of your patients are dialyzing at home today. And do you have any sort of quantitative or qualitative target for where that should go for the company over the next few years? And just anything, any color around the move to home dialysis would be helpful.

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Joseph A. Carlucci, American Renal Associates Holdings, Inc. - Co-Founder, CEO & Chairman [17]

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Yes. It's Joe. I'll start by telling you that the partnership model that we have employed for the last 20 years, I think we are positioned quite well to provide home therapies for patients that are appropriate candidates. We have been in touch with our entire senior team and our physician partners, and we think that it's a good direction for American Renal. I'll turn it over to Darren now to talk about specific percentages.

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Darren P. Lehrich, American Renal Associates Holdings, Inc. - SVP of Strategy & IR [18]

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Yes. So Patrick, we have 10% home mix, and that was the case in both the first and the second quarter. Within that 10%, approximately 9% related to peritoneal or PD and approximately 1% relates to home hemodialysis. And in terms of aspirational targets, we haven't really laid any numbers out. That's something we'll have to consider to do in the future.

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Operator [19]

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Thank you. We have no further questions at this time. I would now like to turn the floor back over to management for closing comments.

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Joseph A. Carlucci, American Renal Associates Holdings, Inc. - Co-Founder, CEO & Chairman [20]

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Yes. Joe Carlucci. Thanks very much for participating in today's update call, and we look forward to refiling soon. And really appreciate your interest in American Renal. Have a great day.

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Operator [21]

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Ladies and gentlemen, this does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.