American Renal Associates Holdings (ARA) Q4 2019 Earnings Call Transcript

American Renal Associates Holdings (ARA)
Q4 2019 Earnings Call
Mar 16, 2020, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the American Renal Associates fourth-quarter 2019 earnings conference call. [Operator instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Darren Lehrich, senior vice president. Please go ahead, sir.

Darren Lehrich -- Senior Vice President, Strategy, and Investor Relation

Thank you, operator. Good afternoon, everyone, and welcome to our fourth-quarter 2019 earnings conference call and webcast. Joining me for today's presentation are Joe Carlucci, our chairman and CEO; Mark Herbers, our interim CFO; and Dr. Don Williamson, our COO.

Also joining on the call today are Syed Kamal, our president; and Jillian Bernard, our controller. 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. Any forward-looking statements made in this call are effective only as of today, and the company undertakes no obligation to revise or update any forward-looking statement for any reason.

On today's call, we will refer to certain non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most comparable GAAP measures are available as is important information concerning the use of non-GAAP measures, generally, in the press release and our current Investor Relations presentation deck both of which are available within the Investor Relations section of our website at americanrenal.com. On today's call, we will also be discussing our guidance for 2020. I want to note that our guidance ranges could be impacted by a variety of factors that are discussed in greater detail in the risk factors in our SEC filings, including our most recent 10-K and press release.

I also want to remind you that our adjusted EBITDA, less NCI calculations, do not include the cost of certain legal and other matters, including costs relating to certain litigation and the SEC investigation. With that, I'm pleased to turn the call over to Joe Carlucci.

Joe Carlucci -- Chairman and Chief Executive Officer

Thank you, Darren, and good afternoon, everyone. The coronavirus has proven to be challenging for our entire country and our healthcare system, and I'm humbled by the dedication and hard work of all healthcare workers and especially the efforts of our organization's preparedness for COVID-19. ARA caregivers across 27 states are playing a critical role day-to-day to keep patients and staff healthy and safe during this time. Dr.

Don Williamson will be providing more detailed remarks on this topic in his prepared remarks. But I want to start by saying thank you to our staff, our physician partners for everything they are doing in this rapidly evolving public health crisis. Before I get into the quarter, I want to make a few remarks about my decision to retire as CEO. I have enjoyed a wonderful 42-year career in the healthcare industry.

Cofounding ARA some 20 years ago and leading the growth of this organization for so many years has been the highlight of my career. It has been an incredible privilege to work with so many exceptional and dedicated staff and physician partners. Over these 20 years at ARA, I have been fortunate to see our company grow from one small clinic in Western Pennsylvania to nearly 250 dialysis clinics across 27 states. We've accomplished this alongside the best physician partners in the nephrology community and the best operational and clinical professionals in the dialysis industry.

I'm so proud of what we have achieved in this time together and think now is the right time for ARA to usher in a new leader who can further realize the company's growth opportunities in a way that still prioritizes our core values, which so near and dear to me and our entire company's culture. In terms of my timing, there's never a perfect time to announce retirement, but I wanted to make this announcement now to facilitate the search process for my successor so that the transition can occur by the end of 2020 as intended. I've agreed to remain with ARA in my current role until a successor has started, and I look forward to assisting and ensuring a smooth transition. In the meantime, I take great comfort in the strength of our team, the continued leadership within our senior management team, and I remain optimistic about ARA's future.

Now on to the fourth quarter. I'm pleased to share some of the progress experienced during our fourth quarter. At a very high level, we delivered fourth-quarter and year-end 2019 results that were in line with the adjusted EBITDA, less NCI, guidance we provided in November at the time of our third-quarter 2019 earnings. For the fourth quarter and for the year 2019, we delivered strong normalized total treatment growth.

We also produced very strong volume growth in home modalities, which reached double-digit gains in Q4. Our fourth-quarter commercial treatment mix trends were stable with that of the second and third quarters of '19, and we have reached stability with our in-network mix at year-end. We made further progress to improve operating efficiencies during the fourth quarter with certain expense initiatives and anticipate these will result in additional savings in 2020. While our year-end 2019 leverage moved up slightly from September 30, 2019, due primarily to the timing of payments related to our restatement, we remain committed to strengthening our balance sheet over the course of 2020 by reducing debt and improving leverage from current levels.

Let me outline the key elements of our fourth quarter in a little more detail. First and foremost, we are committed to delivering high-quality, clinically integrated patient care, and we believe our physician partnership operating model remains positioned well to sustain this commitment. By staying true to this operating model, we believe we can continue to grow our market share and take great care for even more patients into the future. We are very pleased with our treatment growth performance during 2019.

Our volume trends continue to track above many of our industry peers, and this fact demonstrates that more patients continue to choose ARA for their dialysis care. During the fourth quarter of 2019, normalized total treatment growth was 6%, and for the full year of 2019, this growth metric was 7.3%, which is consistent with our 7% to 7.5% guidance range for 2019. Acquisitions accounted for 1.6% of the 6% growth in Q4 2019 and 2% of the 7.3% growth in fiscal-year 2019. We benefited in 2019 from the ramping of de novos that experienced certification delays in prior years, as well as strong gains in home dialysis modalities.

We have invested additional resources in our home programs and our physician partners continue to be strong advocates for home therapies when it is the right choice for the patient. Normalized for clinic divestitures, our Q4 2019 home therapy treatment growth was 13%, and for the full-year 2019, it was 10%, normalized for clinic sales. Our Q4 2019 home treatment mix improved to approximately 11% from 10% in Q4 of 2018. As we look ahead into 2020, our normalized treatment growth outlook of 4.5% to 5% growth excludes any impact from acquisitions and also reflects the more moderate de novo opening pace we've experienced over the past 12 months.

Second, our commercial treatment mix was approximately 12% during the fourth quarter, and it remained stable with the second and third quarters of 2019. Our in-network commercial treatment volume mix for the year 2019 was 79%. We exited the year in Q4 with an in-network commercial treatment mix of approximately 82%, and we expect to remain around this level for 2020 based on our contracting efforts. Our revenue per treatment for the full-year 2019 was $334 or 4% below the $349 rate per treatment reported for full-year 2018, and this was slightly below the 2% to 3% decline assumed in our guidance.

As Mark Herbers will discuss, Q4 2019 rate per treatment was slightly below our expectation due to weaker collection performance. We have action plans in place to improve collections for 2020. Third, our Q4 performance benefited from favorable expense trends. At the clinic level, we've maintained discipline with our processes to thoughtfully manage labor productivity while also sustaining low clinic-level staff turnover.

Our 2019 voluntary clinics turnover rate was 7.8%, which is consistent with the turnover rates we experienced during both 2017 and 2018. Low clinic staff turnover not only helps us operate more efficiently but it is important as we think about delivering high-quality care to chronically ill patients who see the benefit of having good continuity with their local dialysis facility caregivers. At the corporate level, we've also made further progress with our cost initiatives, which have included targeted reductions in certain G&A expenses, increased virtual meetings to reduce travel and other actions that have reduced the cost structure within certain departments in our corporate office. Our operating plan for 2020 includes other actions designed to improve our operating efficiency and reduce manual processes, while also investing strategically in certain areas such as home therapies, finance, accounting and IT.

Four, we're providing a 2020 outlook for adjusted EBITDA, less NCI, that is consistent with the preliminary outlook first established in September 2019. We expect 2020 adjusted EBITDA, less NCI, to be in the range of $90.0 million to $95.0 million, representing growth of 3% to 8%. Mark Herbers will provide some additional thoughts about our 2020 outlook in his section, but I want to emphasize that this range contemplates a meaningful reduction in calcimimetic revenue as a result of the reimbursement and the ASP changes for this drug class in 2020. With that, I'm pleased to turn the call over to Dr.

Don Williamson, our chief operating officer, to provide a clinical update. Don?

Don Williamson -- Chief Operating Officer

Thank you, Joe. I'm pleased to join everyone today to provide the fourth-quarter 2019 clinical update. As you know, ARA's business model allows its physician partners to direct the care of their patients. In this physician-driven model, our goal is to provide the highest quality of care.

You may already be familiar with the two clinical metrics we've routinely been sharing in our quarterly press releases. So I'm going to focus my comments on recent developments related to home therapies, our performance in 2019 on hospital days and close with some thoughts regarding the coronavirus outbreak. The two clinical measures in our earnings press release are Kt/V greater than 1.2 in prolonged catheter use. I am pleased to report that these measures remain fairly consistent with recent results and are being well managed.

With respect to home therapies, this has been a significant area of focus for our organization and many of our nephrology groups. And there has been equal focus on the topic of home therapy within the Kidney Care community at Lord's since the President's executive order this past summer. From a corporate perspective, ARA has been developing more corporate resources for its clinics to provide additional training and support, and we are exploring ways to further enhance the education process for patients prior to starting dialysis. During the second half of 2019, our home therapy treatment growth accelerated markedly and reached 13.4% in the fourth quarter, up from 11% in the third quarter.

For the full-year 2019, our normalized home treatment growth increased 9.7% as compared to 5% in 2018. During the fourth quarter of 2019, 10.6% of ARA's treatments were in home therapies, up 30 basis points from the third quarter of 2019 and up 70 basis points from the fourth quarter of 2018. Home therapies include both peritoneal dialysis and home hemodialysis. Given the additional focus in this area by our nephrologist and coupled with ARA's commitment to increasing its corporate support, we believe it is likely that ARA's home therapy treatment mix should continue to move higher in the coming quarters and may outpace in-center treatment growth given this additional focus.

With respect to hospitalizations, I am pleased to share that our 2019 performance, ARA's companywide average hospital days per patient was 10 days, and this compares to an industry average of 13.65 according to 2018 CMS data. We believe these results demonstrate that ARA-affiliated nephrologists and local caregivers are working in a coordinated fashion to keep patients as healthy as possible so they can minimize expensive hospital stays. These efforts saved money for the Medicare program and commercial payers alike. Finally, with respect to the coronavirus.

We have not yet experienced any operational disruptions as a result of the COVID-19 outbreak. It is hard to predict the extent of the outbreak and impact on our operations in the future. I would like to take a moment and thank all of our staff and physician partners for the exceptional effort that has been put forth on this rapidly emerging public health crisis. Over the last several weeks, ARA executives, senior management along with our physician partners have been in many discussions to develop additional policies, procedures and guidelines to assure that our patients and staff in our clinics and at our corporate office are protected and the best prevention procedures are in place and being followed.

Now, as always, we are committed to maintaining the highest standards of infection control in our dialysis clinics. We are following the CDC and CMS guidelines and adapting as new guidelines are released. We are screening every patient for signs and symptoms of COVID-19 before they enter the treatment floor and are restricting access to the treatment floor and waiting rooms to only patients. This screen includes travel history, exposure to anyone known to have COVID-19 and symptoms consistent with COVID-19.

If the screen indicates that an individual may be infected, the individual is placed in designated isolation area and not allowed to enter the treatment floor. We are not accepting international transient patients at this current time. We have implemented steps to make sure our clinics have additional protective equipment for the safety of our staff. Based on the most recent information from our key suppliers, we are not yet experiencing any shortage of supplies, and we will be monitoring closely our supply chain.

That concludes my remarks for the clinical section. So let me now turn it over to Mark Herbers, our interim chief financial officer.

Mark Herbers -- Interim Chief Financial Officer

Thank you, Dr. Williamson, and good afternoon to everyone. I plan to cover three key topics today: first, I'll provide some additional details regarding our fourth-quarter financial and operating trends; second, I will review our balance sheet position and cash flow performance for the fourth quarter and the year; and third, I will review our 2020 outlook. First, let me cover the fourth-quarter trends.

Our volume performance remained strong in Q4. In terms of normalized treatment growth, the fourth-quarter 2019 treatments increased 6%, consistent with our expectations. Our fourth-quarter non-acquired treatment growth was 4.4%, and acquisitions contributed 1.6% to our total normalized treatment growth. Full-year 2019 normalized total treatment growth was 7.3%, consistent with our expectations, and this was up from 6.1% for the full-year 2018.

Volume trends during 2019 were driven by a combination of same market growth, ramping de novo performance and the three acquisitions we completed during the fourth quarter of 2018 and the first quarter of 2019. Our non-acquired growth decelerated during the fourth quarter due to our more moderate de novo opening pace over the past year, although this growth rate is more consistent with the level we expect for 2020, and we expect this reduced growth rate to continue into 2020. Fourth-quarter 2019 revenue per treatment was $328, and our full-year 2019 revenue per treatment was $334. Although our commercial treatment mix and in-network trends were consistent with our expectations, revenue per treatment was approximately $10 below third-quarter levels due primarily to weaker collections performance.

We ended the full year 4% below the full-year 2018 revenue per treatment of $349, and this performance was approximately 100 basis points below the 2% to 3% decline assumed in our guidance, although we were able to offset this impact with lower cost trends. Revenue per treatment from calcimimetics in the fourth quarter of 2019 remained fairly consistent with the first three quarters of 2019 at around $30 per treatment. In terms of patient care costs, the fourth-quarter 2019 patient care costs per treatment were $246, which was a $1 per treatment improvement year over year and $1 per treatment improvement quarter over quarter. With respect to personnel costs, we are seeing consistent efficiency in labor productivity and experiencing normal wage increases.

The improvement reflects lower ancillary costs, including ESAs and calcimimetics as a result of greater generic availability of the oral form, as well as savings in other labs, such as laboratory testing. In terms of general and administrative expense, fourth-quarter 2019 adjusted G&A expense per treatment was $34, which was an $8 per treatment improvement year over year and, as expected, $2 higher from $32 in Q3 2019 due in part to the bonus reversal in the third quarter, as well as the timing of our Medical Director meeting in the fourth quarter. We implemented certain G&A savings initiatives during the first-half 2019 and experienced additional savings during the second half of the year driven by a number of factors, including lower corporate headcount and our efforts to drive greater efficiency by reducing manual processes. Please note, our adjusted G&A is delineated on Page 11 of our press release in the supplemental business metrics table.

For the fourth quarter of 2019, our adjusted EBITDA was $32.0 million and adjusted EBITDA, less NCI, was $23.0 million as compared to $36.5 million and $24.7 million, respectively, in the fourth quarter of 2018. For the full year, our adjusted EBITDA was $127.5 million and adjusted EBITDA, less NCI, was $87.6 million as compared to $141.3 million and $90.0 million, respectively, for the fiscal-year 2018. I will now move on to a review of our balance sheet and cash flow. At December 31, 2019, we had consolidated cash of $34.5 million and consolidated debt of $587.6 million net of unamortized discounts and fees.

Our consolidated debt balance decreased by approximately $5.8 million, and our consolidated cash decreased by $25.7 million quarter over quarter. Adjusted for our pro rata ownership of clinic cash and a pro rata portion of the clinic level debt that we guarantee, our adjusted owned net debt was $515.2 million at December 31, 2019, up from $497.4 million at September 30, 2019. The increase in our net debt was a result of cash payments primarily related to the restatement, as well as the impact of working capital changes during the fourth-quarter 2019. Our leverage ratio, defined as adjusted owned net debt divided by the last 12 months adjusted EBITDA, less NCI, was 5.9 times at December 31, 2019, and this is 0.3 times higher from the third quarter of 2019.

Trailing last 12-month adjusted EBITDA, less NCI, decreased $1.7 million quarter over quarter due to our weaker first-quarter 2019 results and the stronger fourth-quarter 2018 result slowing off the last 12-month calculation. Moving on to capital expenditures. For the fourth quarter of 2019, capital expenditures totaled $5.2 million as compared to $15.9 million during the fourth quarter of 2018. Development capex in the fourth quarter of 2019 was $2.6 million as compared to $13.2 million in the prior-year quarter, and routine capex was $2.7 million, which was consistent with the prior-year quarter.

Our capital expenditures continue to reflect more moderate development activity and careful prioritization of our routine capex needs. Our development pipeline remains active, and we plan to continue to expand our footprint into new markets, as well as expand in existing markets with new clinics and additional capacity. We are approaching our development activity in a thoughtful manner as we balance these growth opportunities carefully against our objective to strengthen the balance sheet over the near and medium term. During the fourth quarter, we opened two de novo clinics.

For the full-year 2019, we opened seven de novo clinics and acquired two clinics and divested four clinics. Moving on to legal and professional fees. Professional fees associated with the restatement, the SEC investigation and other legal matters that we believe do not reflect our core business operations totaled $2.5 million during the fourth quarter, down from $9.6 million during the third quarter of 2019. On a full-year basis, these costs totaled $25.8 million.

Given the timing of our 2018 10-K filing on September 5, the heaviest activity related to the restatement was during the second and third quarters. However, cash payments related to the restatement work and the timing of certain working capital items contributed to approximately $19 million of cash used during the fourth quarter that we consider to be unusual in nature. Excluding these items, our cash flow from operating activities would have been approximately $22.7 million instead of the $3.7 million reported during the fourth quarter of 2019. Finally, as it relates to the remediation associated with the restatement effort, we are pleased to report that we continue to make progress and that the processes we put in place are functioning per financial reporting purposes.

As indicated in our 10-K filing, the material weaknesses identified during the restatement and subsequently will be considered unremediated until a sufficient period of time has passed. And through testing, we've determined that the controls are operating effectively. We expect that time frame to be at minimum one year from the time of our 2018 10-K filing on September 5, 2019. Let me conclude my remarks with a brief discussion related to our guidance.

We expect 2020 adjusted EBITDA, less NCI, to be in the range of $90 million to $95 million, barring any future impact from COVID-19. This outlook remains unchanged with the preliminary outlook we first issued on September 5, 2019. Our 2020 guidance takes into account the following key assumptions: normalized treatment growth of 4.5% to 5%, which excludes any impact from acquisitions; five to 10 de novo clinic openings spread throughout the year; revenue per treatment, or RPT, that is expected to be flat to down approximately 1% as compared to full-year 2019 of $334. This assumes relatively stable commercial treatment and in-network mix with Q4 2019 levels.

Please note that revenue per treatment from calcimimetics is expected to decline approximately $10, offset slightly by the Medicare rate increase and other payer increases. We expect NCI as a percentage of adjusted EBITDA to be in the range of 34% to 35% for the full-year 2019. We expect depreciation and amortization expense to be between 4.5% and 5% of net patient service revenue during 2020. Excluding $5.2 million of impairments related to assets held for sale, including $4.2 million in Q4, G&A was 4.8% of revenue in 2019.

We expect interest expense to be approximately $11 million per quarter during 2020 and noncash stock-based compensation to be approximately $2 million per quarter during 2020. We expect capital expenditures to be between 2.5% and 3% of net patient service revenue during 2020. We expect leverage to improve by 0.3 times and 0.6 times at year-end 2020 as compared to December 31, 2019. With that, let me turn it back to Joe for closing remarks.

Joe Carlucci -- Chairman and Chief Executive Officer

Thank you, Mark. In closing, I want to thank our entire team for their contributions, especially during this COVID-19 public health crisis. With that, I'm happy to turn the call over to questions. Operator, can you please open up the Q&A session? Thank you.

Questions & Answers:

Operator

[Operator instructions] Your first question comes from the line of Andrew Mok with Barclays. Please proceed with your question.

Andrew Mok -- Barclays Capital -- Analyst

First, congratulations to Joe on your retirement. Then my question, I appreciate the color on your screening efforts for the coronavirus. Can you discuss in more detail what measures do you plan on taking if when your patients become infected?

Joe Carlucci -- Chairman and Chief Executive Officer

Andrew, thanks very much, it's Joe. I appreciate your comments. I'd like to ask Dr. Don Williamson to take that question.

Thanks.

Don Williamson -- Chief Operating Officer

Yeah. Thank you, Andrew. Yeah, all of our patients are -- determined to possibly have COVID-19 are referred for appropriate testing. And at this time, we refer them to an acute care hospital for dialysis.

We are currently working on a plan to -- to finalize a plan to dialyze COVID-19-positive patients safely in the outpatient setting using COVID-19-only shift if that is required. These additional shifts will be set up in geographic locations to provide care so that all the patients will be able to receive their dialysis treatment regardless of whether they are COVID positive or not.

Joe Carlucci -- Chairman and Chief Executive Officer

And Andrew, it's Joe. We've been working very hard, as you can imagine, and we've set up a whole team here to direct and work cooperatively with our physicians at the local level to continue to provide care to the chronically ill patients safely. So thanks for that question.

Andrew Mok -- Barclays Capital -- Analyst

Got it. Do you have any confirmed cases so far in the U.S.?

Joe Carlucci -- Chairman and Chief Executive Officer

No.

Andrew Mok -- Barclays Capital -- Analyst

OK. That's helpful. And then, I guess, moving on. On the quarter, your normalized non-acquired treatment growth of 4.4% declined about 100 basis points from the prior year-to-date trend.

Any additional comments on what you're seeing on volumes that contributed to the sequential decline?

Joe Carlucci -- Chairman and Chief Executive Officer

Darren will take that.

Darren Lehrich -- Senior Vice President, Strategy, and Investor Relation

Andrew, yes. So I think what you saw in the fourth quarter is really what we would expect to see in 2020. There was a deceleration. And we've talked a little bit this year about the fact that we had seen some pent-up ramping of clinics that were opened in previous years that were able to get their certifications and that deceleration was expected.

So when you think about 4.5% to 5% next year in terms of our growth outlook, that excludes any acquisitions and would assume a more normal type of trend with non-acquired treatment growth and also taking into account the fact that we've seen a little bit more of a moderate opening pace over the last year.

Andrew Mok -- Barclays Capital -- Analyst

Got it. That's helpful. And then on the rate side, Joe, you mentioned weaker collection performance in your prepared remarks. Can you elaborate on your experience there? And what you're doing to improve the situation?

Joe Carlucci -- Chairman and Chief Executive Officer

Yeah, it's Joe. I think I'd turn that over to Darren and Mark Herbers.

Darren Lehrich -- Senior Vice President, Strategy, and Investor Relation

Thanks, Andrew. Yes. So I think the collections performance was partly explained by really just a lot of activities from the remediation. And we think the collections team now has much greater focus on day-to-day activities and so would expect to see some improvement in that area in 2020.

So again, expecting an improvement from what we saw in the fourth quarter and really just that comes from greater focus from that entire team.

Andrew Mok -- Barclays Capital -- Analyst

Got it. OK. And then last question on home dialysis. You mentioned that you're adding resources to your home programs.

Can you give us a little more color on the types of investments that you're making? And what are your expectations for home treatment growth in 2020?

Joe Carlucci -- Chairman and Chief Executive Officer

Yeah. I'll start it off a little. We're really looking at growing the home therapies program from the bottom-up with our physician partners, but we have invested nationally. I'm going to turn it over to Don Williamson for some more information there.

Don Williamson -- Chief Operating Officer

Yeah. We've had another home care nurse manager here. So that gives us an additional person here that's focused just on home to continue to grow. We've had multiple conversations with our physicians.

They are very much engaged after the president's announcement. And so we continue to see our home growth going very well into next year.

Joe Carlucci -- Chairman and Chief Executive Officer

And I'd just like to add to that. What we did was that we stratified all of our home programs, and we really looked at best practices in some of the locations throughout the United States, and we're replicating or trying to replicate what they do. So there's tremendous emphasis at the local level, at the national level and within our regional staff.

Operator

[Operator instructions]

Darren Lehrich -- Senior Vice President, Strategy, and Investor Relation

Hector, I don't think we have any other questions in queue. So we'd like to thank everybody for participating in today's call and wish you all well and stay safe. Thank you.

Joe Carlucci -- Chairman and Chief Executive Officer

Thank you all. Thank you.

Operator

[Operator signoff]

Duration: 40 minutes

Call participants:

Darren Lehrich -- Senior Vice President, Strategy, and Investor Relation

Joe Carlucci -- Chairman and Chief Executive Officer

Don Williamson -- Chief Operating Officer

Mark Herbers -- Interim Chief Financial Officer

Andrew Mok -- Barclays Capital -- Analyst

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