[VIDEO] Convalo Health International Inc on MidasLetter’s CEO Interactive

James West
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Convalo Health International Inc. (TSX.V:CXV) (OTCMKTS:CVHIF) CEO Michael Dalsin and Vice Chairman Roger Greene discuss the latest venture in their consolidation machine that has successfully launched Patient Home Monitoring (TSX.V:PHM) (OTCMKTS:PHMZF)
 

James West:    Thanks for joining us today. I’d like to talk a bit about Convalo Health International. What is the value proposition for investors, what does the future hold, and what’s the business model?

Michael Dalsin: Well, it’s a roll up of the US addictions centre market. There’s some new legislation that’s come to pass in the last couple of years that basically creates an opportunity for anyone in the United States who has addiction issues, to get insurance reimbursed addiction rehabilitation. So there’s about 300 million people in the United States; statistically, about 10 percent of them suffer from addiction issues. Maybe not surprisingly, only about 10 percent of those people seek treatment. That’s still 3 million people in the United States.

So 3 million people in the United States by law have to be covered by insurance for addiction services. Ten years ago, there were only about 300,000 people that could seek addiction services in places like Malibu – very expensive places. But this new reimbursement code, basically, has opened up the market.

It’s a very fragmented market, a very new market. There’s only about 16,000 of these centres in the United States. Now, the reason I say ‘only about 16,000’, most of them only have 20 or 30 beds or chairs, depending on whether they’re inpatient or outpatient. So if you do that math, there’s less than 800,000 total seats or beds available for the 3 million people looking.

So we’ve come in as institutional money to basically roll that up. I think we have a very unique model to be able to compete.

James West:    How does your offering differentiate itself from what’s already available?

Roger Greene: By the way, I do want to add that the legislative change was really mandated by US Supreme Court decisions. So it’s not –just so everyone’s clear, it’s not something associated with ObamaCare. It was a US Supreme Court decision and the legislative change implemented.

James West:    It won’t be rescinded.

Roger Greene:  It’s not going away anytime soon. One thing I do want to say about Convalo and, for example, the first centres we have opened at Boulevard (phon) – they offer outpatient services that I think are very different than the standard services offered.

James West:    How so?

Roger Greene:  Well, there are additional services offered. For example, everyone has heard of the 12-step program that’s used for addiction rehabilitation, but a lot of young people just don’t identify with that program. It was created in the 1930s, it’s very heavily steeped in Christian theology, and that’s not true for a lot of folks. So for these young people, we have different alternative therapies. It can be mindfulness, there are therapies that focus upon different niches including LGBT niches, and what’s happened, I think, in our first acquisitions, is that the clients have really liked it.

So it’s not simply a case that we find a great market, it’s also the case that we’ve found young people who really have enjoyed the program, I think. Although Michael talks a lot about some of the financial metrics, he sincerely is concerned about what happens to the clients, and our business has mushroomed, I think, because we’ve gotten great feedback on the services we provide.

James West:    So do you think your different approach has made it accessible, addiction treatment has become accessible for a range of people that previously would not be considered because of its 12-step orientation?

Michael Dalsin: Well, I don’t know about that; we offer 12 steps is still the foundation of what we do. We offer everything. I think really what we do is, we go acquire little, clinically-focused businesses. Some of them are clinically focused through 12-step rehabilitation; others are clinically focused in other types of insurance reimbursed rehabilitation. Everything is insurance reimbursed here.

But we add another kind of component, which is a hospitality component. You can imagine, if you’re young, and most of our clients are quite young, and addiction is usually an illness of youth, because if you’re smoking crack cocaine and you’re 50, that is not usually very compatible. It’s a miracle, exactly. So usually it’s under 25, under 28, under 30 year olds. And you know, they enjoy a lifestyle. Usually they’re out clubbing in Hollywood or in New York, and when you’re done clubbing and that life is not sustainable, you don’t want to go into a hospital or into the basement of a church; that doesn’t feel sexy.

So we offer a hospitality driven experience where the kids can come in, and not just get insurance-reimbursed clinically focused services like 12 step programs, or programs if you’re gay or programs if you’re a meditator or programs if you’re Eastern philosophy – there’s a lot of ways of getting sober – but we really try to make the experience a cool, interesting and hip experience for kids who want to be in a place that’s cool and hip.

James West:    So are you going to bring this model and apply it to a methodology that you’ve used in the past, whereby you issue shares and cash to acquire existing facilities, or are you going to build new facilities?

Michael Dalsin: Well, I think we’re really acquiring existing talent, really, existing marketing talent. That’s the most important thing for us. So we’ll go into a city; we like the city centre approach, ultimately the city centre approach is important for us. We like to be in the city centre in Los Angeles, for example. We’ll go make a small acquisition; the one in LA is a great example. We made a small acquisition, about 60,000 in monthly sales, this company had; 9 months later, it has 600,000 a month in sales.

James West:    A thousand-fold.

Michael Dalsin: How do we 10 x sales? Well, we 10 x sales by doing a couple of things. First, we took a very small business that was word of mouth, and we institutionalized sales and marketing. So we hired salespeople, we hired marketing people, we created a much more institutional presence for the Hollywood centre than the previous owner.

We also moved the facility. We only moved it about half a mile, but we made a much bigger facility. She has a facility with maybe 12 or 15 people total; we now have a hundred-person facility. The other thing is, we made it hip and cool. The people who stayed there used to stay there an average of about three weeks; now, our patients are staying more than 63 days. Our average is higher than 63 days.

So we’re getting paid per day, for more days. We have more people that we can fit. And we’re institutionalizing the sales. So we’ve gone from about 8 patients to about 60 patients. This is all in less than a year.

We have another acquisition in West LA that we’ve just made; I expect the same thing to happen there. And we’re looking at really five or six cities around the country that we’re going to do this to.

Now, these are just outpatient centres. We look at a city and we think there’s an entire service offering to have in that city. So we’ll be making acquisitions of detox centres, we’ll be making acquisitions of residential treatment centres, we’re already making acquisitions of outpatient centres, we’ll make acquisitions of after-care centres, and much like our other company, Patient Home Monitoring, these are very focused centres that are focused on basically one item of the spectrum of treatment. So you’ll go and only buy a detox centre, all they do is detox. The reality is, there’s about $100,000 a year per patient to be made here, and you really want to offer detox and residential and outpatient and after-care to be able to capture the entire kind of cross-selling spectrum.

So our plan is to go again, trailing 12 revenues, trailing 12 profits. Buy a multiple of trailing 12’s. That multiple is not represented as the total value of the patient or the database. And go basically expand the offering to the patient so we can capture the full spectrum of revenue.

James West:    Sure. Okay. So, on an annual basis, how much can you build, how fast can you acquire, how fast can you build and grow revenues? Roger?

Michael Dalsin: I say really fast, but I’m going to let Roger answer that question.

James West:    Let’s have the conservative view.

Roger Greene:  Well, again, it is a fragmented industry. So I think there are going to be plenty of opportunities, and I think that a lot of the sellers here appreciate the fact, you know, we’ve shown them that we can really take the services they provided and really increase the benefits to their patients. A lot of them are concerned about that as well as purchase price.

So I think just looking at LA, that market is a huge market alone. New York is a huge market. These major cities are just teeming with demand. So I can’t give you specifics, but I think there’s tons of opportunity.

Michael Dalsin: I’ll give you specifics.

James West:    I’m sure you will.

Michael Dalsin: So I would say, we bought the Hollywood Centre a year ago, and we’ll have about 1,000 percent organic growth.

James West:    Now, is that sustainable quarter-on-quarter growth?

Michael Dalsin: I don’t know if it is.

James West:    That’s a one-time growth?

Michael Dalsin: Perhaps. I mean, we haven’t been in business for longer than a year. In a year, we’ll sit here and I’ll let you know.

James West:    But that’s the objective?

Michael Dalsin: But that’s the objective: 1,000 percent in the first year. That’s certainly what we’ve done. I think we can do that in West LA as well. In terms of timing, it’s difficult to know when you can buy something; that’s a challenge for us. But what this company has, which is kind of a little bit different and maybe better than PHM, is it’s got very low CapEx. So we recouped 100 percent of our cash outlay for the first acquisition in five months. 100 percent. And this thing is going to last, we have a 15-year lease there, so for the next 15 years, it’s gravy, right?

In West LA it’s going to be the same situation, I believe; it looks like all the metrics are there. So we have a little bit of a lower CapEx and higher margins. We have about a 30 percent EBITDA margin in this business. Give us a little bit of comfort that we don’t have to run quite as fast or as hard, first of all.

It is difficult to buy these businesses, because a lot of the owners are recovering addicts and they are not business people, so it makes it difficult to do a transaction with them. It might not be as fast-moving from an M&A perspective as PHM, but from a torque on capital, it’s much more torque. You’ve got higher margins, lower CapEx, and way, way higher – PHM is in the double-digit figure for organic growth. We’re in the triple digit, I’m going to say quadruple in the first year, but I think triple digit is a fair number.

In the Hollywood Centre, even though it’s only doing $6 million a year in revenue now, that can get to 12 million at full capacity. And I think we can get it there in the next year.

James West:    Okay. So you’re in the enviable position of having launched two successful companies this year on the TSX Venture. PHM has performed many multiples of percentage gain. Convalo hasn’t yet. So there’s going to be some questions from the investing audience. They’re going to say well, PHM has gone as far as it can now; I’m going to play Convalo, and then I’m going to wait for the next one, because we know that you have other companies of rollout models coming. So how do you ameliorate that effect by convincing the investing audience that PHM is going to a billion, Convalo is just getting started, and you’re not being over-stretched by your multiple corporate commitments?

Michael Dalsin: We do not operate these businesses. We are managers of the managers. So we are ex-private equity guys. So what we do is hold the feet to the fire of the managers. We make sure that they are, on a weekly basis, giving us good metrics; on a monthly basis, we’re looking at the financials. We’re the architects of these deals, but again, we spend maybe a day a month running PHM. I mean, very, very little. We have a great banker in (inaudible, 0:11:23) that goes out and buys these companies, who knows exactly what to pay, how to pay, how to structure. We’ve taught him to do all of that.

The operatives know how to scrub the database. In Convalo, it’s turning into that. We now know what we’re willing to pay, how much organic growth we have, what the turn on capital is. So we’re really the architects. We sit on the Board, but really, we’re not operating the business. So a good example of that is, there’s maybe 700 employees in PHM now after these acquisitions; Roger and I interact with 7 or 8 of them, and I’ve personally frankly never been to New Hampshire or the Maine acquisition or the Virginia acquisition. I haven’t gone and seen those. It’s not necessary for us.

So in the early stages, we are very hands-on in these deals, but within the first four, five, six months, once we get them established, they’re off and going.

I do want to make one other point. Your question was, how can we sit here and say we’re going to get this company to a billion and this company to 300 million? I just want to remind Canadians particularly, the US health care economy is three times the size of the entire Canadian economy. Like, there’s $3.5 trillion spent on health care in the United States. So it’s not that mind-numbing to think that there might be a couple of billion dollar companies in the mix. I know that’s a little bit odd because in Canada, making money on health care is almost impossible. I think that’s why we’ve done so well on the TSX, because there’s cash flow in US health care; in Canadian health care, not so much. And I don’t know that they quite understand the size of the market, or the growth of it.

James West:    Which leads to another interesting point: you’re based in California, yet you have chosen to list on the TSX Venture Exchange in Canada. What has been the cause of that, and what are the advantages?

Roger Greene:  I would say one of our great competitive advantages has been being listed on the TSX Venture exchange. We could not do what we’re doing by being listed on an American exchange. We couldn’t acquire these small businesses, raise what in the US is relatively small amounts of money, get attention. No one would be interviewing us if we were a $250 million company on the NASDAQ.

In addition, it’s been a great exchange for us. As we try to buy companies, one of the things they’ve looked at is the volume in our stock, for example. Sellers who are taking stock are very excited about the notion that we have a liquid stock, because they know that someday, when they want to, they can get out; it’s not trading by appointment. So it’s been favourable for us.

James West:    Sure. Okay, now, what are the events that are going to occur in the future that would represent milestones that investors could say, okay, there’s a sign that there’s value appreciation coming. What are the key developments we should look for?

Michael Dalsin: Well, acquisitions. Always acquisitions. When you look at our deals, acquisition-oriented guys. So an acquisition, letter of intent. I like to think, quarterly financials. Those are my favourite catalysts for share price, right? You look at PHM, we’ve doubled in the last year, EPS. Convalo, it’s interesting, because PHM has $100 million in cash and it’s kind of a juggernaut. That thing is going to a billion, I think there’s no doubt about that.

Eighteen months ago, it was a different story. Eighteen months ago, Roger and I put our own money into this thing. Now, it wasn’t so much a gamble for us, because for 12 years we’ve been in health care services. But for a lot of the other people around us, they looked at us and thought oh my goodness, is this going to happen? And we only had a couple million bucks in cash, and it was mostly our money, to be able to do these deals with PHM.

Convalo now sits in a kind of interesting place. It’s eighteen months behind PHM, but it has 30 million in cash, not three. And it has much more organic growth, and we know that it works. We’ve seen it now for a year get to 1,000 percent growth rate. So Convalo is kind of – we’ve taken, sadly, maybe, for all of us, all of the lessons from PHM, and the shareholders have had to endure those lessons, we’ve been able to apply now to Convalo. We’re applying to Inspiro, which is our next deal.

So as we bring more deals out, there’s tons and tons of ways to make money in US health care. And it’s mostly in the cottage industry. It’s in these little segments where you couldn’t do this on a US exchange. So the Canadian exchange is really an important concept to us, because you can do little bits of money. Convalo is a good example. $30 million is not a lot of money to roll out a $40 billion industry, but we can do it in this specific way that we want to, in the big cities, with small businesses adding this kind of hospitality angle, we can turn 30 million into 300 or 400 million in a couple of years, because we are listed on the Canadian exchange.

James West:    Okay. So then how do investors keep track of where you’re going next?

Michael Dalsin: They just need to call you, James. Or alternatively, they could just read our press releases, and look at our financial statements. And ultimately, I think we are starting to get fairly well known in Canada, at least in the venture space, and we’re pretty transparent guys. That’s something that we bring from more of a NASDAQ background, more of a private equity background. We’re happy to talk about what works and what doesn’t work, and what the risks are. We’re also happy to put our own money into these deals. That’s, I’ve been told, rare in Canada.

So ultimately, we will just be out there letting people know what we’re up to, and we’ll keep you – you’ll know first.

James West:    Great. Thanks. Let’s leave it there, gentlemen. Thanks for joining us today.

Michael Dalsin: Thank you.

 

 

James West

James West

Editor and Publisher

James West founded Midas Letter in 2008 and has since been covering the best of Canadian and US small cap companies. He covers global economics, monetary policy, geopolitical evolution, political corruption, commodities, cannabis and cryptocurrencies. As an active market participant, James is not a journalist and is invariably discussing markets...
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