Adaptive Biotechnologies Corporation (ADPT) Q2 2015 Earnings Report, Transcript and Summary

Welcome to the Adeptus Health Second Quarter Earnings Conference Call. Today's call is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] At this time, for opening remarks and introductions I would like to turn the call over to Tim Fielding, Chief Financial Officer of Adeptus Health. Please go ahead sir.

Thank you, operator. Welcome to Adeptus Health second quarter 2015 earnings call. On the call with me today is our Chairman and Chief Executive Officer, Tom Hall and Graham Cherrington, our President and Chief Operating Officer. Before we begin, I would like to remind everyone that our remarks and responses to your questions today may contain forward-looking statements that are based on current expectations of management and involve inherent risks and uncertainties that could cause actual results to differ materially from those indicated, including those identified in the Risk Factors section of our annual report on Form 10-K. Such factors might be updated from time to time in our filings with the SEC, which are available on our website. We assume no obligation to update any forward-looking statements. In today's remarks, all financial comparisons will compare to second quarter 2015 to the same period in the prior year unless otherwise noted. In addition we will refer to certain non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most comparable measures calculated and presented in accordance with GAAP are available on the earnings release and supplemental disclosure on the Investor Relations portion of our website. Following today's call, an archive recording of the replay will be available on Adeptus Health Investor Relations page for 30 days. With that, I'll introduce Adeptus Health's Chairman, President and CEO, Tom Hall.

Thanks, Tim. I would like to welcome and thank all of you for joining us for Adeptus Health's second quarter 2015 earnings call. We are glad to have this opportunity to update you on our progress and results. First, we're pleased with our second quarter results, which reflect our continued strong growth and momentum. Hopefully our growth in system wide revenue, adjusted EBITDA and earnings per share, adjusted earnings per share was made surprise for most of you. What's very important to note is that our cash flow from operations was $13 million in the quarter, this was real cash folks and demonstrates the profitability our model is starting to experience. As our rapid growth continues we remain focused on our core mission of expanding access to the highest quality emergency care. So far this year, we've opened 15 new facilities in Texas, Colorado and Arizona, including our first hospital. We now have a total of 70 facilities and look forward to continuing our expansion. Partnerships with leading healthcare systems are a key driver of our growth. As announced during our last call in Q2 we entered in an exciting new partnership with University of Colorado Health to expand to excess the high quality emergency care in Colorado. Earlier this month, we rebranded 13 freestanding emergency rooms as UC Health Emergency Room. These newly rebranded facilities, which will continue to be operated by Adeptus Health now can be seen throughout Colorado Springs and northern Colorado and Denver Metro Area. Our 14th and 15th locations in Colorado are scheduled to open by the end of 2015, construction is also underway in two new hospitals in Colorado. They're expected to open in 2016. Based on our strong performance in the first half of 2015 and full year growth plans, we are again raising guidance. We expect to generate system-wide net patient services revenue, which includes revenue from our unconsolidated joint ventures, of $400 million to $405 million for the full year 2015. We expect adjusted EBITDA of $69 million to $71 million and adjusted earnings per share of $1.10 to $1.15 for the full year 2015. Now I would like to turn the call back over to our Chief Financial Officer, Tim Fielding, who will walk you through our financials for the second quarter. Tim?

Thanks, Tom. For the second quarter of 2015, Adeptus sales generated net operating revenues of $89.6 million, an increase of 103% from the second quarter of 2014. The growth is due to increased pace of volumes at our newly opened freestanding facilities and annual gross charge increases. Adjusted-EBITDA which is a key metric we use to gauge the performance of our business was 22.9 million for the quarter, 286% increase from the year ago. For the second quarter we reported net income of 27.7 million of which 10.6 was due to Adeptus Health compared to a net loss of 9.4 million of which 2 million of that was due to Adeptus Health for the second quarter of 2014. The increase in net income was due to an increase of 45.4 million in net operating revenue coupled with the gain of 24.3 million recognized on the contribution of existing freestanding facilities to the joint venture in Colorado. This increase in net income was partially offset by increases in salaries, wages and benefits and other cost related to our growth initiatives and an increase in depreciation and amortization expense. Adjusted earnings per share was $0.44 and GAAP earnings per share was $0.97 for the quarter adjusted earnings per share is calculated using a weighted average of both the Class A and Class B common shares outstanding, which was 20,766,094 shares at June 30. And like adjusted-EBITDA was adjusted for the gain recognized on the contribution of existing freestanding facilities to the joint venture in Colorado preopening cost associated with new facility openings, stock compensation expense and other costs associated with our growth initiatives in addition adjusted for taxes in order to establish a normalized tax rate of 35% for comparison purposes. As you are aware the UC Health and Dignity Health-Arizona General Hospital joint ventures are accounted for using the equity methods. Results from the joint ventures are reflected in two line items on our consolidated segment of operations. Equity and earnings of unconsolidated joint ventures and management and contract services revenue. For the second quarter system-wide net patient services revenue including both UC Health and Dignity Health-Arizona totaled 104.5 million up 136% year-over-year. In the second quarter we saw 56,000 patients system-wide an 80% increase over the prior year, system-wide same store volume was negative 11.6% as we continue to see the impact of clustering and same store revenue was positive 20.8%. At the end of the second we had cash of 46.1 million and 9.9 million available under our revolving credit facility. Net cash flow from operations was 13 million for the second quarter prior to the expiration of the delayed drop component of our credit facility, we did borrow an additional 30 million in the second quarter. At June 30, 2015, we had total long-term debt and capital lease obligations of 159 million and debt net of cash of 112.9 million. We continue to add facilities under our master lease agreements with Medical Properties Trust. As of June 30 we had 26 facilities operating under the lease and we had 228.5 million available for future development. Accounts receivable increased to 46.3 million at June 30, compared to 22.9 million in the prior year this increase was primarily associated with new facility openings. With that let me turn the call back to Tom.

Thanks Tim. As we continue to grow and execute on our strategy we maintained our consistent focus on delivering the highest quality patient care. In closing I want to take a moment to thank all of our team members whose accomplishments are integral to our success. The dedication and skill they bring every day is why we’re ranked in a top 1% of emergency departments nationwide in patient satisfaction. And I'm proud that they considered us among the 2015 best companies to work for in Texas. I would like to reiterate that we’re confident in our strategy to sustain our growth momentum and maximize the opportunities ahead. Our innovative and scalable emergency care delivery model coupled with partnerships with leading healthcare systems is allowing us to realize our core goal to expand access for the highest quality emergency medical care. What I tell folks all the time is doesn't everybody deserve access to the highest quality emergency medical care, doesn't everybody deserve to see a doctor in less than five minutes? With that we would be pleased to answer any questions you have at this time. I will pass back to the operator. Operator?

We will now begin the question-and-answer session. [Operator Instructions]. The first question comes from Matthew [Borge] of Goldman Sachs. Please go ahead.

Good morning this is Alex Cargos on for Matthew [Borge]. Really a strong quarter with regards to the JV contribution. Can you walk us through the drivers behind the hospital performance as well as how the Arizona-Dignity results tracking into your own internal expectations?

I will let Tim get into more of the details. What I would tell you about that is that our Arizona joint venture is doing very well for us and we've talked about the hospital front is performing well. Got a lot of questions what we did with secondary offering back in May about how's the freestanding emergency rooms working out there how they are being perceived and I've told folks that we would talk to this call. We really have to open right now we've had one that's been open for several months and here is I'm not be able to tell you that we’re very pleased with the way its functioning right now. We’re seeing in the 20 plus patients a day what does that mean to people I get questions all times so how are these going to perform? What's it going to look like for the joint venture time? What do we think about the metrics? And what I told you all is that one we just don't know until we get some of these well clearly we only have a data point of one, but when that data point one is performing very well, with our second one that recently opened its performing very well also. And so when we think about our JVs as we seem them today in the Arizona marketplace, I think we expect our freestanding facilities to see 20 plus patients per day and so we're pretty bullish, we're pretty excited about that and it's growing really well and I think there is a couple of things that are important to remember as I tell you this, realize, it's in Arizona, this is the summer, okay. This is the off season and by the way this is a brand new category. So people don't even know what it is, really, I mean what's a freestanding emergency in Phoenix. And so we get a brand new category, we really have the off season and they are performing really well. And so Tim I don't know if there is anything else to add.

No, I think I just stick with your comments, I would say the Colorado JV is a little bit unique because we do have to prefer return and that's also baked into the numbers.

Got it and then one more quick one just staying on the Colorado venture. You've mentioned that they are supposed to launch to 2016, do you have any plan time line into year, how that's going to play out?

It's probably third and fourth quarter is what we're thinking right now.

Great, thank you.

And more toward the end of third quarter, so I guess third quarter starts in July so more toward the end of the third quarter than first quarter.

The next question comes from Brooks O'Neil with Dougherty & Company. Please go ahead.

Good morning guys, congratulations on a terrific result here. I have a couple of questions, number one, I'm curious obviously a pretty big jump in performance from Q1 to Q2. And I know some of that is the growth of facilities, but can you just comment on what do you think were the big drivers of the improvement? And I guess, I have to ask you if you think that improvement can continue as we go through the year?

Well, I think that when we think about the drivers of the improvement, what we're seeing is we're seeing a couple of things, our joint ventures are doing well and so we're seeing really nice performance out of those, it's very too early yet to give a global view of that but I've mentioned just a minute ago that our Arizona facilities, one of the questions we've got from everybody and rightly so is, so how are these facilities going to perform for example in Dallas when we move them in to our joint venture. One, we will know our story for hospital, we will know that we do it. The only indication we have is as brand as Arizona its doing really well and we're very, very pleased with that. I think when you look at our improvement to quarter, we had good volumes, we continue to cluster, we had our joint venture now in Colorado, and then also which you saw in Q1, which is sort of some pricing and pricing was being driven by acuity, change in acuity as we had a higher acuity level because as we continue to focused on the fact that we're emergency room and urgent care, we put a lot of energy into that. And then we also said, pricing in that talked about in the past with folks that as we moved toward the hospital joint ventures it's probably reasonable to assume we're going to get paid more like a hospital. Now that being said, we believe that hospitals are paid in the 2200 to 2400 patient range and talked about that many times. As I've said here today and that's not our intention of seeing a revenue per patient in that level, but we've said many times that we think it can be somewhere between where it was historically and what those levels are and if you look at revenue per patient for this quarter, what was it, Tim?

18.65

18.65. Okay. And so that was a big driver there also Brooks, and do I think that's sustainable, yes I do. And so definitely. Second piece to that is realize as we start bringing on more government pay that revenue per patient will go down, it's not anything for people to be alarmed about, we’ll just start looking more like the types of numbers people have seen historically from a fully blended, what today you're seeing a disproportion amount of commercial compared to government pay.

Sure, all that makes sense and we should start seeing a little bit of that effect in Q3, do you think?

Yes, Q4, you will see more of it.

I got distracted when Tim was talking about the same facility revenue performance in 2Q, would you mind just repeating that briefly Tim?

Sure, so system-wide same store volume was negative 11.6 and the same store revenue was positive 20.8.

And what's driving that Brooks is that again with these hospitals coming on line and the things we have we get pretty aggressive in our clustering. We know, once we turned the switch with the hospitals, we're going to be a really well positioned. And so as I've said before we've made a decision to do that and makes senses to the people on face of another yield we're doing hospitals it does. And as we bring DFW on board with the hospital, we expect to see that same store volumes shift quite dramatically positive and of course same store revenues become will be more positive growth.

Yes, that's great. Just a little bit of a detail question. Tim, maybe you could help us all understand the 24.3 gain on transferring the facilities into the joint venture and I guess if I read it correctly, I'm 99% sure, you adjusted that back out again, but help us to understand exactly what that is?

That is correct, we did adjusted back out because it is a onetime item, non-recurring. The way, it's calculated is that because we contributed the 12 assets that we already had operating over into the joint venture, we went from a controlling interest in those 12 facilities to a non-controlling interest and as a result of that you basically a fair value those and calculated a gain. And so that's what you see there.

Okay, that's very helpful. Let me just ask one or two more quickies. Could you just clarify the purpose of the registration statement that you filed earlier this week?

Back when we did the IPO a year-ago, we have A shares and B shares we have this up see things you heard us talk about, as part of that, the B shares right Tim?

That’s correct, the B shares were not registered and again it goes back to the up C structure as part of the IPO typically what you would see is people would have a lock up for six months or something like that, we actually had a lock up for a year on those shares, and so when those shares were registered this past week we were contractually required to registered those shares because up for that people couldn't do anything I mean employees had them, just regular employees [indiscernible] shares. And so it was really a contractual thing that we had to do we just simply registered the shares and that was really all that took place that was what was going within the proxy a year ago it’s been in our update and we’re contractually obligated to do it, nothing more nothing less.

Two more quickies, one, obviously you commented about progress with the Dallas Hospital in the press release, but what’s your outlook there, what sort of the timing would you expect and should we be thinking that it's likely you'll have a joint venture in the Dallas market like you do in Colorado?

Two things there. On timing it's going very well, and equipment by the facility, the facility is beautiful and is coming together well. Graham's getting ready to take it into the -- it will be a few months from now but get into the certification phase and all that. So our expectation is to have it online in Q4 this year probably the later part of Q4 but to have it online in Q4 and we’re really excited about it, everybody that sees it, it's very impressive, it's a very impressive facility and then in the timeframe we've been able to build it, our hospital partners that we have in other markets are extremely impressed with how quickly the team's been able to put that together and how well thought out it is. On the joint venture perspective we have people that are interested in doing a joint venture with us, we’re talking to them, [indiscernible] one party, what I've said all along is that we’re fully capable of just operating it ourselves and running it and so we have a hospital CEO already, we have the whole team, Graham's got the whole team already hired and so we’re very, very capable of running this thing, that being said if we can find a nice joint venture partner wed happy to have a nice joint venture partner. So we’re just keeping all of our options open, I can tell you either way it goes it's going to be very good shareholders.

And then lastly I think I've heard you comment that there is likely to be some more states in the not too distant future and I just wondered if you could give us any color on that?

We keep diligently working on it, we have a lot of discussions going on, we feel really good about it, I think as a company we believe we know where states four and five are, and the one thing I've learned with talking with hospitals is the minute I give you a date I will miss it. So I'm not going to do that that's no disrespect to our partners there are just a lot of moving parts. And probably the biggest [indiscernible] me and maybe others is I'm not willing to announce anything until it's fully inked, fully done and we know it's a done-done deal. That’s where we’re at. But what we’re very bullish on, we’re very excited about it.

The next question comes from Andrew Schenker of Morgan Stanley. Please go ahead.

So definitely obviously a very impressive raise on guidance here but when I look at the components here on same store or system-wide revenue trends, it seems like you are assuming revenues are roughly flat from Q2 levels despite the additional facility openings and [indiscernible] for EBITDA actually looks you are implying at third quarter and fourth quarter on average are lower than the Q2 levels. I am just trying to understand that simply kind of conservatism you are after, a significant raise or are there more or there is something else we should be thinking about us impacting in the second of the year.

I will give you my view then Tim come in. If you look at our business we talked about this historically, it's cyclical business and our lowest quarter as you see Q3 when you think about it we're in Texas I think it will be 104 here today, in Arizona -- and so it's just the oppose, so many folks with nor where the summer is like the busiest time and when you actually live in Texas a place like that tends to be the quietist time because people tend to stay inside with those high temperatures. And so usually Q3 is our softest quarter, not a bad quarter I don't give you that impression, that's usually our softness quarter, it's typically not as good as Q1 or Q2. And so it will be real easy for people to think, well this is just sequential and this is going to keep going up and then that’s not the case Q3 is typically a little softer than Q2 or Q1 and Q4 is usually our best quarter. And so what we’re trying to do is we’re trying to get a reasonable guidance to people, how much gas do you try in a fire Andrew, it's like the perspective and so we take guidance very seriously we take not missing guidance very seriously and so we’re just trying to get people as much visibility as possible and that’s what we put out it's a pretty raise, I think we started the year with 50 and now we’re up to basically 70 and we feel good about our guidance, I don't want to say anything other than that. But it's just we got to see how Q3 goes and Q4 goes and then of course we got -- when you look into next year we have that Dallas Hospital coming online, there is just a lot of fuel on the fire right now and so a lot of good stuff happening and the last thing we need to do is get ahead of ourselves on guidance, so that’s I don't know if I answered your question. Tim any other?

We've been seeing the impact from clustering here for I guess is the third quarter pretty consistent pressure from last quarter, how should we think about the impact of that, when should start anniversary at the end of this year or as you continue to add new facilities in Texas are those going to continue as a result of clustering negatively impact the same store volumes, also I understand driving, obviously total volumes up.

When you think of the clustering really, were put together for two reasons, one was that historically what we've seen in markets where we have a great facility and I've talked quite a bit about market called [indiscernible] in other calls and you will a have a great facility that will perform really well, competitors hear about it, they tell me they pull one across the street and hit this negatively. What we decided to do quite a while ago now, if you think about it from the time we decided do this, to opening our facilities 15 month. So this strategy was put in place a long time ago. The thought process was that when we find really good markets, we're going to go in and cluster because we have this very sophisticated data analytics from our locations and so we know where we want to put these things and the thought process is we'll go in, we'll cluster our market and then we'll own the market totally. And so I've talk about [indiscernible] work, I've said theoretically they had a facility that made $3 million, paid me to profit one to two which was just hugely negative same store sales, you put two more in there, and they make $1.5 million to $2 million apiece, market is up substantially even though you're seeing sort of on that is soft. A second part of that, that we put in place a while and you should have been seeing it roll out is, we knew we were going to build this hospital and then into the other markets, we knew in Colorado and that we were going to do this, so again these hospitals have been in the pipe for a long time and we said oh my gosh, now with these hospitals, we really want to work what makes sense to get it own these different geographic areas and to be pretty aggressive on that, if you think of what Starbucks was back in the day, we have a very retail focus around here and how we did that, so with that, that's what you're seeing and it's causing obviously what appears to be a disproportionate negative same store sales. When it turned is, it's not just going to just turn because of anniversary, it's going to turn when we turn the hospitals on. Okay. When we turn the hospitals on, so if you think about you averaging 10 patients a day to keep the math very simple, who knows what the numbers are going to be and a reasonable person would assume you'll probably pick up at least five patients a day because now you can take government pay and then you also put a hospital name on the building and all that and that scenario, Andrew, your same store sales would be 50% positive volume. You can imagine what happens at proper, remember we're a fixed cost model and so our marginal cost per patient's a $100 approximately. So, you're going to see same store profit grow dramatically also. Tie that into a comment I made earlier today which is the only thing we have to the operating that's operating full hospital, taking all payers is in Arizona and we're seeing 20 plus patients a day. What gets people excited is imagine by year end, I think we're going to have approximately 25 facilities in DFW, imagine that DFW when you turn that hospital on and you start hitting those tighter numbers, it gets pretty exciting, pretty fast, okay. As you might have [indiscernible] okay. And so same stores are going to turn positive, really positive and no bullshit, I mean, it's going to be like real numbers, real same store not because you're anniversarying, and also the revenues can be even more positive and then to add to that we mentioned that we have two hospitals coming online in Colorado. So, when those things come online, it's going to pound Colorado big time same store positive and then people who will asked us before, we don't have any players -- it's probably a reasonable person would assume, we're going to public continue this strategy in other markets in Texas. And so you should expect to see very positive same store out of us for quite a while, I mean it's pretty exciting, okay. And it's going to drive a disproportionate amount of profitability when we do that. And so that's what's causing it, so you never say never, but my guess is we have one at most, two more quarters of this negative volume we're seeing and then I think you will see it turn very positive, very quickly.

Just follow up on my first question there, it sounds to me that there is kinds of assumptions on Texas turns on are not in your guidance, is that a safe assumption there?

We're assuming Texas doesn’t turn out till year end and so we don't really know what it's going to do, who knows we'll get new certifications and all that. So, at best case, I think, we think, it might be in for two months and that will be best case and maybe it's one month and maybe it's year end. We expect to be fully online next year.

The next question is come from Kevin Ellich of Piper Jaffray. Please go ahead

Congrats on a good quarter, thanks for taking my questions. Just wanted to dive a little bit deeper into some of the joint venture metrics if you would, I guess, first half Tom, you gave some good detail on the facilities in Arizona. I guess, how is the hospital performing in terms of [indiscernible] in volume, do you have any thing you can share with us?

We've made a decision as a company -- because now we have Colorado as a partner and now we have -- our partners are a little sensitive to us giving too much data away and so I will just tell you it's doing very well. Okay. It continues to do very well. We're extremely pleased with it and our partners are extremely pleased with it. And so, I went out on a limb here to give you the volume on that facility in Arizona but I realized people need to have some ideas what's going on and it's going really well.

Right and then what about paid mix, even at the freestanding ER in Arizona, I know you have two open now and one more on the way, just wondering what type of pair mix we should be thinking about with those facilities?

Well again so we have data point of one for two. I guess, I would tell you that we're very pleased with our commercial pair mix, it's more than 50% commercial. Okay. It's going really well, and I get kind of passionate about this, we had a Board meeting yesterday and so the Board has asked me [indiscernible] you're see and how much you should see and the typical questions and you’ve heard me talk about this, but I get really passionate about the fact that I just believe everybody deserves access to our facilities, we do not cherry pick. We take all comers and it's just the right thing to do. You heard me say many times, my mother is 83 years old, she went to the emergency room recently and waited four plus hours to be seen, doesn't everybody's mother deserve access to these facilities, doesn't your sister your brother, I mean everyone deserves access and so that’s how we see it. The challenges I've asked to build a business model that’s very successful seeing all comers and that’s really what we’re doing Kevin. Starting to get [eye watery] here but I'm real passionate about that everybody deserves access to these things, and I just think that people can't forward to pay.

And then I guess Tim made a comment about the Colorado JV, you guys still get that preferred returning the waterfall. So of the 3.6 million in equity and net income from unconsolidated JVs, how much of that was attributed to Arizona versus Colorado and how much of it did come from the preferred return?

We just are not going to go into each individual JV, we think its competitive information so we've got those combined together and that's about it as far as I can give you on that.

But suffice to say Colorado did contribute -- how long was Colorado in this quarter Tim?

Absolutely contributed two months.

Two months, okay. And I guess the point there is have you seen, we all saw on the press release that you rebranded the facilities in Colorado UC Health, have you seen any lift in volumes at those facilities or is it really just kind of getting going now?

It's really too soon to tell you, we haven't done a big marketing push because we really want the hospitals to come online and that we again take all payers and all folks and all that. But we have changed the signage and I think we expect to see a pick up from that, I think we absolutely expect to see a pick up, we’re just real careful about what we say.

Yes, I think it's just too early, I mean it's been a week, a week and half. Yes, way too early to tell.

And then I guess just going back thinking about the pricing discussion, you said Tim what 56,000 patient's system-wide this quarter?

Correct.

And I guess looking at pricing of 1,855 did you guys actually see any commercial -- like any pricing increases from payer comp cash or was this all just really driven to acuity and taking on some of hospital pricing?

Well this goes back to Q2 or Q1 -- remember in Q1 we talked about it and we said that it wasn't in for the full quarter in Q1, it was in for a full quarter in Q2 and what it really is, is that it's a combination of acuity and we had sub price increase within the hospital pricing, but as we said many times in general just the hospitals are significantly higher than us and their pricing. Our goal is to not be at that level, our goal is to still be a less expensive alternative and a high quality alternative and so -- but you're just seeing that come through, that's part of the -- we've all seen this in other parts of healthcare.

Sure, makes sense.

Also the nice thing about it is, you got hospital partners now, right? They're the big boys and girls.

Yes exactly. Tom, you talked about the clustering strategy in Texas especially Dallas and Houston where maybe it's getting a little crowed, just wondering if you can talk about competitive landscape, I guess what are your thoughts on that front and especially in those two markets?

We’re seeing competition, there is no doubt that we’re seeing competition in those markets. And we continue to cluster and do what we’re doing and in Dallas as example we moved to our hospital model, we think that will be a differentiator for us and Texas is expedited market, it's competition, I think we feel okay about it, we’re starting to see some of our smaller competitors fail just because they don't have the staying power. A lot of folks they don't have the same size selection criteria models that we have. And so you've heard me talk about this one position that came to me, he was upset because he build a new facility in a blockbuster video and he was telling me how he was going to kill it and this was quite valuable now. And I said to him, I said, you if think that was a good facility we wouldn’t have picked it and his face went just white right, ghost white. I mean the reality is there is a secret sauce to our site selection and we’re starting to see some close, some of the competitors which I think is I know which is bad news on anyone, so it's not that at all but it shows, it's more than just putting a box up on a corner and hope people call you, You better have a sophisticated model that helps you figure out where to go and so. The good news is in Colorado with the different model of course in Arizona, you got to be hospital. And so as we move forward with these hospital JVs, I believe that the markets we’re going we'll see significantly less competition.

Two last ones from me. Tim could you just remind us again, you said in the prepared remarks but I missed it, available with MPT that's left and I guess thoughts on re-upping with them and then just any comments or update Tom on the regulatory environment, anything that we should be aware of?

Yes, we have 228.5 million that's available for future development through MPT and we still continue to see those guys as a strong partner with us and we'll have those conversations when the time comes.

And it's a very good relationship with MPT. On a regulatory basis I have Graham here with us -- in Colorado the session is closed and nothing happened, and realized now we're university of Colorado so that’s a very different deal, all right, it's a wonderful place to be. And in Texas I'll let Graham talk to you.

So Kevin [SP 425] which is the disclosure deal did past here in Texas in [indiscernible] our trade association here in Texas work closely with the Senator and his staff to finalize the bill and we supported it.

And it really means that doesn't that requires -- I mean, when does it requires people to put up information on pricing and stuff like that right, because we already do.

In most all of the facilities in Texas do that.

The next question is come from Paula Torch of Avondale Partners. Please go ahead.

Great, thanks guys. Congratulations on a wonderful quarter. So, let me start with maybe talking about the Dignity Hospital. Are you happy with the size and scale and layout there of the Phoenix hospital and maybe given some of your learnings theories, is there anything different that you'd like to do in Carlton or Colorado in 2016, when you build them any larger, any more rooms, how are you showing about that?

Yes, the Dignity Hospital is doing really well, we built it, we kept it smaller -- it was our first time trying that and we want to be very careful to make sure we didn't create a bad situation for ourselves. It's doing very well, it's very busy. In Carlton, because it's Dallas it's a much bigger facility, it's about -- probably twice the size, its 50 beds and three operating rooms and I mean it's a big facility and people can see it's quite impressive when you see them standing there and so it's bigger facility because we're in DFW and so that's why we have that. As we go to Colorado, you may see a mix, you may see in Denver, it's built a big facility like we have, here in DFW and Colorado Springs and you may see us a little bit smaller facility more of a 20 type bed facility down in Colorado Spring. And [indiscernible] we've got some thoughts on how we make it more sports area and something like that but all that being said, the hospitals are doing well and I can tell you the first one was great, the second one even smoother and we have a couple more under construction and it's going really well. So, we're very pleased with our team and what's going on there.

Well that's great. And so in the Dallas market I am sure I probably know the answer to this question but I just want to make sure. So you have about 23 freestanding EDs there now based on our calculation, so I'm assuming that you will be able to get reimbursed by Medicare through all of them once Carlton is open, I just wondered if there was any regulations limiting the amount of FCD -- freestanding EDs, you could have for hospital in Texas like you do in Arizona, I think there is a 10:1 ratio in Arizona, so just anything there that we need to know about or are we good?

In Texas, it's just simply a 35 mile radius around the hospital in all of our facilities as you might imagine we built that, so they all fit within a 35 mile radius. And so in Dallas, it's not an issue.

Okay. And I was wondering if you might be able to share, what's the percent of Medicare is currently like in those freestanding EDs in the Dallas market, how many patients you are sort of seeing in that market right now that you may not be getting reimbursed for just to sort of help us understand what the uptake might be?

You know, we don't see a lot today but it's not because there's not people there, people are just very educated until we are and what we do and if patients come in that are emergent, we see them and as a Medicare we don't charge them. It maybe a few patients a day, but it's not a lot. In different parts, we also see Tricare which you know is [indiscernible] families and again we don't charge them. I can give you a little sense for this in our history in one of our facilities, again we didn't charge for it back in the day but one of our facilities we saw Tricare and it's just one of the facilities we're seeing seven or eight patients a day to give you some sense for it, before we decided to move away from that and that was several years ago now. And so our belief is that demand is out there, I believe that once people realize they can go to these beautiful facilities and be seen by a physician in five minutes and I was touring somebody, we have a new board member and I was touring him yesterday in a few of our facilities day before yesterday and as much as you talk about this, he was just taking back and I love talking to all of our focus who are in these facilities business, they are such wonderful people, they've evolved and they've worked in the biggest hospitals, they've worked in the biggest emergency rooms, I mean they've got such experience and they're just telling our new board member how it's unbelievable you can [indiscernible], we say 20 to 30 minutes, they say 10 minutes, how you can do a CT scanning, get the results back so quickly and you just sounds the enthusiasm and so my point of all that is, we've talked about all the time that we've won the Press Ganey drug [indiscernible] award, we've ranked in the top 1% of emergency rooms in that country, which means nobody better that. Okay, we're best of the best. And so when people experience this, when you walk in, you're basically are seeing that quickly and by the way your Medicare will pay for it or your track will for pay for it and all that, we don't balanced bills, to give you an example and so the -- it's incredible and so we're really excited about it, I think that once people understand that we're able to do that, that will see significant volumes and so I think, it will be wonderful for us from a financial perspective. As I mentioned earlier on the call, I am pretty passionate that everybody deserves access to these things. I think that -- there is a lot of work for people to work in hospitals, they do a wonderful job, there is just over a round of patients, the market is so under served and we have an opportunity to really change in delivery of emergency medical care in America and I at 55 years old I am pretty passionate about that, okay. And it's just very cool, it's a very cool place to be in, it's very cool that we have these beautiful facilities that we can help people and with that I think they're going to come, we're seeing it in Arizona, I mean, actually we just opened it, they don't even know what really is out there and at the heat of the summer we're seeing 20 plus patients per day, right out of the box. And so you know, once the numbers in Denver or Dallas, I don't think any of us know, but I think whatever is [policy] can be pretty exciting.

And anything that you might be doing from an advertising perspective to attract that patient population or to let them know that now hey you are able to come to your facilities and take advantage of a great ER.

In Arizona we are Dignity Health so we’re tied right with Dignity Health and our Chief Marketing Officer, Andrew Jordan works with them all the time and they have been a great partner, they are really excited about the relationship. And so they are driving it out there. And Texas we’re not going to do it until we take them right, which is at the end of the year but I am sure we will have plans around that and I know that Graham Cherrington has a roll off plan for how we’re going to do this and so it’s already laid out exactly what we’re going to do but I don't care to educate my competitors on it.

And maybe just a couple of modeling ones. Looking at the salaries, wages and benefits lines, saw some nice leverage there in the quarter even though I know that went up in terms of dollars, but what’s going on there and how should that line shake out for the rest of the year, if you can help us model that?

Yes, I think you got to remember if you are doing comparisons to prior quarters, prior years that as a result of doing the JVs some of that salary and wages is not in that line anymore so just keep that in mind when you are doing the modeling.

But also as we grow as you might imagine we’re continuing to leverage that overhead, and so you can expect this year EBITDA margin continue to expand.

And then just in terms of CapEx. I think we talked about an 8 million to 10 million for the year and for the past two quarters I think it's been below 2 million a quarter. Should we be making any adjustments here or is that 8 million to 10 million still the expected range?

I still think the 8 million to 10 million is reasonable.

That’s a great question. One of the things I mentioned in my remarks is that we’re excited about a lot of things going here, but clearly this quarter that’s one of the things I'm most excited about is that, that we’re really putting our cash down, when we talk about earnings on adjusted-EBITDA and all these things but the machine is really starting to run, and this comes through a lot of free cash flow in because we have these wonderful relationships with MBT and the people who do our leasing in our equipment and all this and that, this company should start generating a significant amount of cash and that’s just going to be another exciting part of the story.

And then maybe just last one, and I think it's a follow-up to Andrew's. When you were talking about the seasonality in the second half if Q4 is the best quarter would we be wrong in assuming that, that should be on par with the second quarter or will expenses in your openings and anything that might be happening in the fourth quarter that would say otherwise?

I don't think we know right now, but it's probably not unreasonable to assume that is something like -- I'm just look at Tim as I say this…

I think it's dependent on the…

I think you actually referenced it, it's dependent on when we open the hospitals we model those to generate negative cash flow at the beginning and so that has an impact on what the quarter is going to look like. So it's a little bit early to be able to tell what Q4 is going to perform like.

The next question comes from Kevin [Fishback] of Bank of America Merrill Lynch. Please go ahead.

If I go back to the comment about what’s going on in that first facility in Arizona because 20 visits per facility is just a huge number if you try and extrapolate that across the entire portfolio, and I appreciate the fact that it's the one facility that's able to build all payers but I guess this is also probably the one facility that doesn't have a clustering dynamic around it. As you build out density in that market would you expect that to bring down that 20 visits per facility number or do you really think that even as you identify that region 20 is a good number to think about?

I think 20 is a good number to think about. I would say that our different partners and different markets think 20 is a low number. But I think 20 is a good number, and our second facility which has been opened five day is really on top of that facility just patient count-wise. And so we’ll just see I think as again we have one or two data points and we’ll have see and I'm not sitting here on the phone suggesting you today that all of our VWF facilities will see 20. I don't know the answer to that, only time will tell, but it's certainly bodes well for them seeing 15 or more and it could be, you know who knows.

I would say that we don't have our model set at 20 a day but.

If it did, it'd be really so.

It would be, that's exactly what I'm trying to get to the bottom of, ok that’s helpful. I guess you are saying part of it is going to be the ability to bill our payers and maybe there is another part of it to take it 20 that's having a joint venture hospital system that might be part of the reason.

Yes, we think just putting the hospital name, and by the way if you have a big name that’s wonderful we’re just saying here a hospital it's just the default for people right? And so even if we added I just going to be called First Texas region and even if you just put First Texas on the building our belief is that, that you will see more patients.

And just to clarify a question earlier about the payer mix in that hospital, when you said [indiscernible] commercial were you talking about volumes or revenue?

We were just talking about I think really volume trade. But it wasn't the hospital it was the freestanding we were talking about.

And I want to go back to the margin thing, because as good as the revenue was the margins really were kind of where the upside turmoil was and so it sounds like you're saying, it is just largely an area of -- a function of its leveraging the fixed cost structure at the business as we think about where margins could go, where do you see the most opportunity, is it on FWB, is it on G&A, what should be driving the continued margin improvement?

I think, once we drive the -- I mean the margins from a corporate perspective, it's leveraging corporate over a bigger base of revenue, right. And margins on a facility basis, it's a function as we add more patients to your facility your marginal cost is so low that it should increase your margin right.

It's because the fixed cost may adhere.

Okay. And then I guess from a volume perspective, you've mentioned your cost trend being a headwind and then also kind of focusing on higher acuity patients being able to be volumetric, is it right to assume that the higher acuity business is also a higher margin business?

Yes, absolutely, absolutely.

And then from that dynamic of kind of shifting volume towards the high acuity patients, where are we in that stage is it a type of thing where every time you look over an open facility that it takes a while for that local market to understand exactly who should be going so there's always going to be open facility you end up with more low acuity stuff than you want but over 12 months low acuity eventually goes to the right setting and gets replaced with higher acuity, so there's always going to be some amount of a acuity headwinds as the facility ramps up or [Multiple Speakers]?

No I think, what's driving our acuity headwind, I wouldn't call them headwinds let me refer you to that I would not call them headwinds so I mean. What's driving the acuity is, is that we are just constantly educating people on our historical facilities and I would put in place, it was interesting by marketing presented to the Board, one of our key drivers of patient volumes this quarter was we got referrals from urgent cares. Wow that's a change from a few years ago right. They used to be with us they hate us and think all that now also they are referring a lot of patients to it because they realized we're just being a corporate citizens and want and we are trying to educate people of them and are sending higher acuity to us and so I don’t see there is a headwind at all, regarding new facilities, it's just a function of how they roll off everyone is different on what they do and what they don't do and all of that. So, I don't really say, I don't really see that the headwind and I don't see the clusters of the headwind, I see the clusters of as what I understand, why it's impacting today, but the reality is it is just going to put us in a very powerful position going forward. And so that thing may be pursued as a headwind, maybe pursued as a massive tailwind in a not too distant future.

Okay then maybe last question. You mentioned kind of you identified markets four and five to get into and you guys have been talking about kind of I guess 26 facilities a year is a descent way to think about the next couple of years as far as 24 freestanding in a couple of hospitals, as you enter stage three, four and five do those growth rates go up because what you are talking in here three states today or are you kind of assuming that eventually you're going to enter new states and so we should always kind of think about 24-26 like two year is the right number?

I don't know that I would break it out on that basis and that specifically. I would tell you that, if you look at just three states right now, I've said many times, that we can build 150 so regional states we've 150 mapped out I would tell you in the recent mapping, we've got more than that now in those states and so we usually have a few more years of growth in those states. That being said, these new states obviously have facilities and a lot of facilities, how I tend to look at it is, we do these joint ventures where we bring them online, in the new states, the first thing we will bring online is the hospital and then we will fold and shortly thereafter with the freestandings and so far in definition neurology when even right now is for probably year and a half, two years out. I would tell you that from our pipeline perspective, it would get our pipelined we know where we're going in '15, we know where we're going in '16 and we know where we're going in '17. And so I mean our pipeline, we have over 60 facilities in our pipeline and it is very robust and we feel really good about it, as far as our ability to over achieve what could cause us to do more as we sell a lot more partnerships and people just demand a more facilities come online. And we can do that, we absolutely have the ability to do that and execute on that right now, it's a balancing from positive perspective, you've heard me say the phrase, how much gas laid you to on the fire here and we just put up EBITDA growth of 286% in the quarter, it's like we got to tell you where the tail here and we're trying to be very systematic about how we manage it, and how we grow it, and how we put numbers up. And so not sure answered your question, that's kind of how we view it.

No, I think that makes sense. All right, thank you.

The next question is come from Frank Morgan of RBC Capital Markets. Please go ahead.

Going back to your comments about the cash flow -- in the cash flow potential, I was wondering if you could comment a little bit more about maybe what you see in your guidance of 69 million to 71 million of EBITDA in your guidance. How do you see cash flow from ops playing out over the balance for the year, you obviously had a good quarter and I think your net positive now year-to-date but how do you see cash flow from ops relative to that EBITDA number for 2015?

Thank you will see it in line with what we projected in terms of our additional guidance. As that guidance goes up, you will also see that operating cash flow go up as well?

Do you think it would go up, and do you think it would be up in the magnitude in the second half of the year assuming what it was in the second quarter maybe annualizing off that?

Similar to what we talked about in terms of seasonality in Q3-Q4 I think you will see that same impact on your operating cash flow but you should be able to use your model to kind of forecast that out for each quarter.

And in terms of using the remaining of another $30 million under as part of your facility, just curious about any needs there I think you had commented in the last quarter that between MPT and being cash flow positive so there probably won't be a need for additional borrowings. Just curious about going ahead and pulling down that 30 million kind of how you see that or what’s the -- some color around that?

Yes that was just purely defensive. We had that delayed draw was expiring it actually expired at the end of April and so we drew it and just had it in our back pocket we don't have any plans for using it at this time?

So with the cash flow from ops and your CapEx requirements you should be fine am I correct?

Correct.

And then one last on bad debt, I noticed that was up year-over-year not sequentially just curious is that is a result of seeing more of these Medicare patients or Medicaid government patients that you are weekly paying for, but do you have any comments here around bad debt? Thanks.

No it really has nothing to do with the Medicare-Medicaid, we have a sophisticated model that we apply every quarter to determine what our contractual allowances are, where our bad debt is going to be and as we continue to see more and more high deductible plans we’re going to make adjustments to our bad debt as needed. And so we feel like it's in a reasonable range and actually we think it's a quite a bit less than some of the other businesses that we have out there that do emergency care.

[Operator Instructions] The next question comes from Dana Hambly of Stephens. Please go ahead.

Just continue on the cash flow the DSO ticked down pretty good to under 50 days is high 40 is the way we should be modeling that going forward?

Yes 49 to be exact. I would leave it in the 50 days to 52 days just to be conservative.

And then on the this Arizona facility that has over 20 patients plus sounds like that could go higher, has the staffing model changed on that? And if not when at what point do you think the staffing model would change?

Actually in Arizona we have an extra nurse Danny and so that’s really a regulation in Arizona that we have to do. So it wasn’t so much driven by volume as well as the regulatory issue in Arizona but I would expect that staffing level to be able handle the volumes with easily actually.

And then on for corporate overhead where is the -- where are we on a run rate there? And as you continue to grow are there major investments there or has that become a very leverageable number as well?

Yes so we’re at approximately 50% on a corporate basis for the quarter. And we really think as the revenues -- you will see corporate expenses increase but not to the same level as what our revenues are so it should continue to trend down a little bit.

Okay.

With that said as we see opportunities we’re going to invest in those opportunities. And so frankly my model is in that 15% to 20% range.

Yes but I don't think it's 20% of the corporate…

No it's coming down they are coming down I am just feeling that’s what our…

I am clearly is the guy who makes the decisions around here it is going to come down Dana.

Okay, good to hear. [Multiple speakers] And then lastly the growth share as I know I think you have talked last quarter you had raised it at the end of the first quarter should we think of end of end the first quarter raising or maybe next year going to the beginning of the year and it's just you see that just an annual raise or could that be multiple?

Well I think it really depends on our partners they are moving with our partners they have much more control over that than we do. And this depends on when that happens in the year we just have to do it for us historically it has been like in the Q1 all of that a little before that this year because some of the partnerships and then also as we go over these partnerships and we shut all our nurse contracts. And so it could be lumpy as we add new partners and stuff like that it won’t be a specific add it is just may be we do a Q1, Dana you do it one time and you see often those time our next partner in other time.

This concludes our question-and-answer session. I would like to turn the conference back over to Thomas Hall Chairmen and CEO for any closing remarks.

Thank you, operator. I would to thank everybody for joining us today for our conference call. We’re really excited about where we’re at. We appreciate your support, we appreciate the support of all the wonderful folks that are part of Adeptus Health, and folks that we haven’t got it from today's call we’re continuing to be very excited about our future. We have a lot of good stuff going on and we expect it to be very positive for a very long time, so with that thank you for joining us today. Bye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.