Nobilis Health Corp (TSE:NHC)(NYSEMKT:HLTH) CEO Chris Lloyd says negative comments published by an anonymous blogger who his company alleges is working in concert with Anson Funds to drive down the company’s share price are false. He insists that the $300 million lawsuit his company filed against the group will not become a distraction for management.
[four_fifth_last padding=”0 0 0 20px”]Listen to the interview with Chris Lloyd:
Full Transcript of Interview:
James West: Chris, thanks for joining us today.
Chris Lloyd: Thanks. I appreciate you having me.
James West: Chris, what is the value proposition for investors in Nobilis Health Corp?
Chris Lloyd: Well, I think it’s important to point out that Nobilis is probably more like its competitors than it is dislike its competitors. We’re playing in a, or competing in a, vibrant and growing health care arena in the US. Where we set ourselves apart from the competition is that for some case volume. And again, we’re all for having surgeries in our ORs arena; we control our own destiny more than our competitors do, and what I mean by that is, for some percentage, anywhere between 20 and 25 percent of our annual case volume, those cases will be directed to our centres via direct consumer marketing initiatives, whereby we are helping affiliated physicians grow their practices with the hopes that they will then refer surgical candidates to our facilities. And again, that differs slightly from our competitors in that almost all of their case volume is 100 percent dependent upon referrals from physician-owners’ practices. And that’s really what sets us apart.
James West: Okay. So what’s the size of the market you’re pursuing, and how much of that do you plan to capture in the next couple of years?
Chris Lloyd: Well, the market – we are probably a year to two years away from health care being the largest component of the US GDP. Right now, energy is, but we’ve got 80 million Baby Boomers who are about to hit the period in their lives where historically people have consumed most of their health care dollars. So in very short order, it’s going to be the largest part, or a couple of trillion dollars a year, in US GDP.
So in terms of what we’re grabbing, it’s miniscule. Even if you break that down to some of our core markets in Dallas and/or Houston, Texas, you’re talking about, by some estimates, just in Texas, 22,000 physicians and surgeons, of which we’re working with two or three hundred. So it’s a very, very small market. I can break it down another way and say that there’s approximately 6,000, give or take, surgery centres in the United States; about 60 percent plus are owned by individual physician partnerships, so very, very fragmented. We kind of lump ASD surgery centres and surgical hospitals into the same basket for purposes of this discussion.
So we want to go in and take advantage of this fragmented market and as we do, even at that point, if we end up with a couple of hundred facilities, which would be enormous growth for us, you’re still kind of a rounding error. I spoke a lot, but I guess what I would say is, we’re competing in a gigantic marketplace that is still growing quite quickly.
James West: Boy, I’ll say. Okay. So what’s the financial condition of the company presently? You know, cash on hand, revenue per quarter, profitability, EBITDA, rate of growth, etcetera?
Chris Lloyd: We’re very, very healthy financially. We have somewhere around $20 million sitting on the balance sheet right now; we are about to hit our cash collection portion of our year. Generally, since the fourth quarter for us is far and away the busiest time of the year, and that’s because people with commercial insurance plans are largely through their deductibles and co-payments, they’re scrambling to have any big ticket items done before the end of the year, when their deductible will re-set for next year.
So really seasonal like that, so what happens is, our collection cycle is, our days outstanding is, call it, between 90 and 100 days, so we’re really busy in October, November, December, and we collect that cash starting in February, March, and on into April. So you should see us absent, holding all things constant, actually adding cash to the balance sheet in short order. Relative to our peers, we’re very under-levered, compared to what we expect to do for 2015 on an EBITDA basis, we’re less than ½ times, ½ turns levered; a lot of our peers are levered at 5 or 6 times. So there’s a lot of dry powder there for additional leverage, should we need it.
From a margin standpoint, on the net margin basis, again, we are probably closer to our competitors than you would expect, because we don’t take government pay at most of our facilities, and because we’re focused on higher reimbursing procedures, the obvious conclusion would be oh, these guys are going to have margins way in excess of our peers. And at the gross margin level, on a percentage basis, we do have better margins than most of our peers. However, we have this big marketing expense line that our peers don’t have, so at the net level, we end up kind of where they are, in the 18 to 21 percent net or EBITDA basis as a percentage of revenue.
James West: Hmm. Okay. Interesting. So with all that dry powder, do you have any plans or necessity to raise equity or debt capital in the near future?
Chris Lloyd: Absent doing an acquisition, I don’t think so. Again, we’re going to put cash on the balance sheet over the next few months, and so even if we go off and we buy one or two new centres on a one-off basis, we can largely purchase those through debt and cash on hand, and using our stock. The only way that I think we would be raising additional debt or equity would be in connection with a large acquisition, and at that point obviously it would have to be a very accretive transaction or we wouldn’t consider it.
James West: Okay. So then who are your biggest competitors in the space, and how much of a threat are they to you, or you to them?
Chris Lloyd: Well, it’s interesting. Right now when you look, go back to my earlier comment about the 6,000 give or take ASCs, the players in it…there’s four or five really big players, and those include Amsurg Corp (NASDAQ:AMSG), they include the ambulatory division of HCA, it includes Surgical Care Affiliates Inc. (NASDAQ:SCAI), it includes the newly public Surgery Partners Inc. (NASDAQ:SGRY) …those are all some of the really big players. I’d be remiss if I didn’t mention USPI, which is now a division of Tenet Healthcare Corp (NYSE:THC) here in Dallas. They’re the big players, and between them, they probably own a good percentage of the remaining 40 percent of the fragmented industry I talked about earlier.
However, we don’t run into them that often, either when we’re looking at assets, or when we’re recruiting physicians and trying to build our existing facilities, just because they’re so big and their strategy is slightly different in that their focus, they generally have a high government pay percentage; we don’t take government pay. They’re looking at higher volume types of case providers, so a lot of endoscopy, a lot of ophthalmology, and those are two specialities that we tend to not have at our facilities.
So when we’re looking at buying facilities, HCA, they’re generally not looking to buy one-off ASCs. They just can’t devote the energy to it. Whereas for us, if we buy two or three ASCs in a year, that can really move the needle.
So while we aspire to their size, we don’t run into them a lot on day-to-day operations or on M&A competition.
James West: So how was the company founded, and whose idea was it?
Chris Lloyd: Okay. Well, Nobilis came about when Norstar, which was a kind of legacy facilities company, purchased Athas, which was the legacy direct consumer marketing company. And Norstar was founded back in 2007 by a group of physicians that owned some facilities down in Houston, Texas. It’s kind of lived through a couple of evolutions. It started in ’07, kind of didn’t work great, kind of went quite for a couple of years, and then back in 2010, a new group of management came in and started everything up again, and really had a great track record of growth.
Athas was started back in late 2008, early 2009, with a single brand, and then it grew over the years to have multiple brands and was just having some really good success in this direct consumer marketing space. And Norstar had a desire to get serious about the direct consumer play, because they noticed that sort of macro-evolution in the US health care markets. So they bought Athas back in December of 2014, almost a year ago as we speak.
James West: You became involved how?
Chris Lloyd: I was the CEO and one of the founders of Athas, and when Norstar bought us, they made me CEO of the combined company.
James West: Sure. Okay, Chris, in the interests of time, let’s jump to the Part II of this interview, and we’re going to talk a bit about the Anson lawsuit that you’ve launched relative to the Emperor Has No Clothes Seeking Alpha commentary where you’ve been attacked by a short seller whose identity is essentially anonymous, and he’s suggesting that Nobilis has various issues that make it overvalued. And what is the company’s position on that?
Chris Lloyd: Well, we issued a direct response right after it came out and posted on the website. Our Board of Directors then engaged outside counsel to do an independent investigation to dig into the claims that were made on the Seeking Alpha blog post. They came back unequivocally and said the post was full of dubious claims, unsubstantiated claims, claims generally designed to hurt the stock price in the interest of helping a short-seller.
So we continue to say, even though we think we’re hopefully moving past the Seeking Alpha time in our life, we continue to say that there was a lot of just flat-out lies in that post, and then there was a lot of innuendo and sort of misdirection that was used to benefit people and confuse investors that just didn’t really know any better. So as we continue to execute on our business model, the truth continues to come out, and investors are going to see that there’s a lot of falsities that were put into that blog post.
James West: Sure. So the big fear amongst investors is that this becomes a major distraction for management, and you know, there’s some people drawing a correlation that the late filing of third quarter financials is somehow related, and I see that that’s hurting your share price. But I don’t concur with that sort of assessment, having heard your explanation on the call last week. But how much of a distraction are you willing to let this lawsuit become for Nobilis?
Chris Lloyd: It’s not going to be. We have outside attorneys who are handling this. The moment it becomes either too expensive, or too much of a distraction, we’ll step out of it. That’s just, right now, we do feel a fiduciary and moral obligation to the shareholders that were hurt by something that they shouldn’t have been hurt by. If there had been something amiss with the company and the Seeking Alpha post had pointed it out, then okay, we understand. But that wasn’t the case. So we feel like we need to do our best to protect shareholders’ interests, and that’s what we’re doing, and again, once it becomes too expensive or too much of a distraction, we’ll move on.
James West: Sure. How did Anson get involved with Nobilis in the first place?
Chris Lloyd: I personally met with them earlier this year; they presented themselves as a potential long shareholder, and then from there, I didn’t hear from them again until it was brought to our attention that they were the ones likely behind – or possibly behind, the blog post.
James West: So they misrepresented their intentions in their first meeting?
Chris Lloyd: Well, they certainly didn’t come in and say hey, we’re a short seller who likes to write articles and drive prices down and benefit that way. No, they didn’t say one way or the other, but they certainly acted like they were interested in a long position in our stock.
James West: Okay. So what evidence leads you to believe that the Seeking Alpha writer of the Emperor Has No Clothes, is in fact colluding with Anson, possibly, and other parties, to hurt your share price?
Chris Lloyd: Well, I can’t get into the details; it’s ongoing, and it’s in the hands of the courts and the lawyers at this point. But I will say that we heard it from multiple sources, and then we undertook our own internal investigation to figure out who the culprits were.
James West: Okay. Well, that’s great, Chris. I really appreciate you taking the time. Thank you.
Chris Lloyd: Hey, I appreciate the time.
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