The Ellis Martin Report Interview with Harry Fleming
January 9, 2015
TEMR: I'm Ellis Martin. Today I'm speaking with Harry Fleming, the President of Nobilis Health Corp. trading on the Toronto Stock Exchange under the symbol NHC.TO. Nobilis Health strategically partners with physicians in the development and management of ambulatory surgical centers or ASCs with the mission of providing superior medical care, increased patient satisfaction, and lower costs for healthcare delivery. Nobilis, under its previous name Northstar Healthcare, recently acquired Athas Health for $34 million. Athas, based in Dallas focused on the marketing and delivery of specialized healthcare services in 7 states. Harry, welcome to the program.
Harry Fleming: Thank you for having me.
TEMR: Give us a quick overview of the company, if you don’t mind.
HF: Sure. Nobilis Health is a healthcare company that owns a multiple number of ASCs, which are outpatient surgery centers, hospitals and MRI centers in Texas and Arizona.
TEMR: Would you discuss the recent acquisition of Athas and the value that this brings to Nobilis as a Healthcare marketing firm specifically?
HF: Sure. Nobilis is a little different than other healthcare companies in that we're selective in the procedures that we do in our centers. We're not like the big hospitals where you take all the emergencies and every type of case. As a business we're able to select the type of procedures that get good reimbursements and also the type of procedures that we think are easy to market to the consumer. As a healthcare company we also have a very strong marketing team. We drive our revenues through the case flow through marketing efforts rather, online or through television ads. As we've built this model over the last 2 years, we've built up a very large in-house advertising team. We're well aware of one of main competitors, which is Athas Health. These guys are based out of Dallas and they specialize in spine cases through a laser procedure. WE knew the team from years gone by and we engaged in discussions with them. The concept from our point of view was pretty simple. They have a very, very advanced marketing team so they were ahead of us by a couple of years. Very good conversion process. One of the ways we illustrate that is at our end we have a call center which is substantial and our ladies are pretty well operators. They'll take the message and they forward it to try to set up the patient visit with the doctor. Over at Athas they have patient coordinators, which are very much like sales and educators. They'll educate the callers. They'll have 15 to 20 different conversations with them along the healthcare continuum. They're very good at what they do. We wanted to apply that type of model to our bariatric program, our spine program and our podiatry program as well as overlay it onto new programs that we intend to offer at our facilities in both Texas and Arizona.
TEMR: Clearly In this case with regard to Athas, you came across very stiff competition in your area, in your business and the logical move for the previous entity Northstar was to acquire the competition becoming Nobilis.
HF: This was an odd acquisitions in that I've been doing acquisitions for 30 years and this is the first time I've come across a deal like this where there's great synergies and you often see that in acquisitions. There's a great pick up in management and, again, you often see that. Where we really deviated from the typical acquisition in a good way, is that the Athas model is that they go and spend marketing dollars to acquire patients and they send those patients to facilities. Basically they split the facility fee with that facility as a marketing source. That other half of the equation is where Northstar plays, although we market, we have the facility side of the revenue equation. Athas was unable to acquire those revenues. Northstar, in acquiring the Athas company, is not only getting the Athas revenues, but the other facility fee revenues that otherwise would not go to Athas. Kind of, a double pickup in revenues.
TEMR: Break that down just a bit please Harry.
HF: So Athas has approximately $40 million in revenues for 2014. You would model that out and say we bought $40 in revenue, $5 in EBITDA. We really didn't because all the cases that are being referred to other facilities equal another $40 million in revenues. We're now going to capture that. If you look at it this way, we've got the Athas revenues, the Athas EBITDA, but we're also getting the facility revenues. What that means and why it's so impactful to us is that those revenues are going to go to our facilities that are already past breakeven and the margin on these cases is over 95%. You can imagine how much of that $40 million now is going drop to the bottom line, quite a substantial portion of it.
TEMR:Does that mean that Nobilis won’t be subcontracting out business to other health care facilities outside of those that you own?
HF: No, no. We won't be subcontracting those cases in our markets. The Houston, Dallas and Phoenix markets comprise 90% of Athas revenues. We're getting 90% of that additional $40 million in revenue will come to our centers. In the other cities, for the other 10%, those are cities like Detroit, Michigan and Tampa in Florida, we'll continue to contract those out because we don't have facilities in those locations yet.
TEMR: Your projected revenue for 2015 is 300% above last year’s. That’s about $205 million dollars. Does that include acquisitions? What are you basing that on?
HF: The 2015 estimates do not include any acquisitions in the future. We may be acquiring companies, but right now for purposes of the performer we simply did this, we took the estimated $75 million that Northstar was going to do in 2014, we imputed 20% growth there so that took it to about $90 million. We just acquired a hospital at the end of last September and we imputed about $40 million in revenue from that. Then we took the Athas 2014 numbers and we added those to our 2015 with zero growth. One of the reasons, it's important to understand that number is Athas has grown at over 50% a year each of the last 5 years and Northstar has a similar growth track also if you know. It's a very conservative number when we say we're going to hit $205 million and have $41 in EBITDA.
TEMR: Are there any acquisitions targets for 2015 and 2016?
HF: We always have conversations going because companies are approaching us all the time now. We have a unique positions where we can acquire, we think, facilities at a discounted rate in a numerous markets. We're going to look at our markets, like Dallas, I think we need capacity up there because we're exceeding our estimates in a great number. I think we'll probably look for a small hospital in the Dallas area, in the Phoenix area. One of the things we like about the Athas model is their market is typically online. It's digital. They reach around the country. What they've done is they've very effectively moved into a multiple number of out of state markets. They do these contractual relationships with facilities in these markets. Now they've set up a model where we can go into a new market without spending millions of dollars in capex. We can test the market, we can prove the market and then we'll go in and acquire a facility to support the case load that we've established.
TEMR: So Athas has really been able to assess the facilities that they’ve been doing business with over the years, correct?
HF: Right. There's eleven additional markets from Detroit, like I said, down to Tampa. Some of them are good, like Detroit, for example, turned out to be a very good market. We're looking very closely at that. Some markets are really on the edge, like Tampa. We don't know if we want to move there yet. It's too early to tell, but it's a great way to grow where you really minimize your risk.
TEMR: Is it safe to assume that Nobilis will realize an organic growth figure of 15%? I’m not sure if that is a year to year figure, or is it just the next couple of years? How does that break down?
HF: We're probably going to finish the year, 2014, around $80 million. We expect we'll exceed our estimates. $205 million we think is a conservative number for 2015. That's going to be 150% growth there. To move into 2016 we can't forecast that far ahead for this reason, we can talk about organic growth and we could see that happening, but we don't know what acquisitions we're going to enter into. The fact is that there's a multiple number of possibilities right now. As you can imagine, with closing the Athas deal a little over a month ago we're more preoccupied with integrating the companies and rolling out the 2015 strategy. We still have a lot of opportunities in acquisitions, but I won't imagine we could do anything before the second half of 2015.
TEMR: Are there going to be any equity raises going forward, any future financings?
HF: We're looking for a debt financing right now. We've got multiple options on the table. As part of the purchase of Athas we structured the deal this way. It was a $34 million dollar acquisitions and it was basically between a 6 and a 6½ times EBITDA forecast. We structured the deal this way, $12 million in shareholder debt, $3 million in cash and the balance of about $19 million was in stock. We'd like to take out the shareholder debt with a larger credit facility. Like I said, we're probably going to look for around a $20 million dollar credit facility. We've got several offers on the table right now that are very good terms. We're just deciding which way to go. Beyond that debt raise we have no plans for any equity raises. If you look at our business, it's very cyclical, which means the fourth quarter is where you do your lion's share of your business. Almost half of your annual business happens in Q4. We had a very, very strong fourth quarter here, which means, from a cash flow perspective, Q1 is going to be very, very strong for us achieve, kind of, 60 to 90 day collection process.
TEMR: Who’s on your, what I would deem, a stellar management team?
HF: I'll start with myself first. My background is 30 years of M&A in securities as an attorney and also as a executive whether as a CEO, CFO or a President or even general counsel for a multiple number of public and private companies. Our CEO, Chris Lloyd, before becoming a CPA MBA, run a multiple number of companies and has a done a very good job in growing Athas over the last 5 years. Our Chief Operating Officer, Vance Wells, Columbia graduate, MBA. Very, very well versed in technology. If you can imagine, marketing is all data driven, as you would know, so very, very strong in this regard. He's really the brains behind that kind of marketing concept there. Don Kramer, our Chairman has 20 years of just constant M&A activity in the healthcare sector buying and selling multiple units and portfolios of companies in the facility area where we play right now.
TEMR: Marketing is such a strategic component of your business. Without proper branding it’s hard for any business to gain a strong position in the market place, especially in health care. Did you bring this mindset to the company?
HF: Well, yeah. I think the old model is this, companies would get together with a group of doctors and they'd form partnership where the doctors would become owners of the facility. The reason they'd do that is you can't say to a doctor--- There's two revenue sources in a case, you've got the professional fee that the doctor makes and you've got the facility fee that we make. We can't say to a doctor, if you bring your cases here we'll give you 10% of the facility fees as an incentive. That's illegal. You can't do that. We've had to find a way to get out of the doctor partner model because what happened, especially in the outpatient area is that the doctors would get together, they'd form a partnership. They'd build an ASC for about $3 million dollars and initially they'd be very profitable. You'd have five or ten doctors together. Over the years there was a proliferation of ASCs built all around the country and especially in Texas. The doctors would start buying a piece of another ASC down the road, another ASC across the town so they would dilute their interest, but they also have to dilute their patient flow now. That's more of a reactive way of running your business where you have to depend on a doctor to bring a case to you. We need to break out of that mold. We wanted to find a way to source the patient. I can tell you, every doctor in any of the specialties that we participate in would love to handle our patients. It's a great revenue source for them so the patient acquisition process is I think what rules the day. We wanted to be able to control our revenues so we've been very effective at building a market machine to bring the cases or the patients to our centers. Then we hvae relationships with the doctors to come and treat the patients at our centers.
TEMR: The name of the new company post acquisition is Nobilis. Do you have any fear of attrition of patient flow in the redirection to the Nobilis brand and facilities?
HF: No because with the Athas model they would send our patient to whichever facility they had a relationship with. The patient doesn't care. It doesn't matter where they get the procedure done. The relationship that Athas has with its doctors, again, they'll say, we have a patient for you to see at this center, at this address. That's where the doctor will go.
TEMR: Tell us about the Nobilis share structure.
HF: We are listed currently on the Toronto Stock Exchange. We were known as Northstar Healthcare up until about a month ago where we formally changed the name. The reason for the name change is this, we recognize that we needed to access the U.S. market and so we applied for a listing on the New York Stock Exchange. We qualified for that listing and we're the process of finalizing our U.S. registration statement and we would expect to have our listing come up some time here in the next month or two. We're on the cusp of that. On the New York Stock Exchange there are other companies called Northstar Healthcare or similar and so we needed to change our name. We did it in conjunction with the Athas acquisition. We will remain dual listed for a time on the Toronto Exchange and the New York Stock Exchange. Our ticker in Toronto is NHC for Nobilis Health Corp. and on the U.S. exchange, on the New York Stock Exchange it will be HLTH for health. Shares outstanding are about 60 million. Fully diluted would be about 73 million. Those would be primarily the employee stock options or the shares from the Athas transaction that have been locked up.
TEMR: Considering the assets of the company, that’s not a huge float at all.
HF: No. I think that we're happy with where we are right now. We think our price is obviously a little undervalued. We think we can rectify that as we roll onto the New York Exchange here in February.
TEMR: Harry, I’ve enjoyed speaking with you today. I look forward to visiting with you again as we assist in sharing your story with our audience. Thanks for joining us on the program.
HF: I appreciate it Ellis. We love telling our story.
TEMR: I've been speaking with Harry Fleming, the President of Nobilis Health Corp trading on the Toronto Stock Exchange under the symbol NHC.TO. That's NHC.TO. Go to their website, nobilishealth.com. Listen to this segment again on our website, ellismartinreport.com.
Nobilis Health Corp (TSX:NHC) is a paid sponsor of The Ellis Martin Report