Adaptive Biotechnologies Corporation (ADPT) Q3 2015 Earnings Report, Transcript and Summary

Welcome to the Adeptus Health Third Quarter 2015 Earnings Conference Call. Today's call is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. 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's third 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 Factor section of our Annual Report on Form 10-K. As such factors may 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 the third 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 in the earnings release and supplemental disclosure on the Investor Relations portion of our website. Following today's call, an archived recording of the replay will be available on the Adeptus Health Investor Relations Page for 30 days. With that, I will introduce the Adeptus Health Chairman and CEO, Tom Hall.

Thanks Tim. I would like to welcome and thank all of you for joining us for Adeptus Health's third quarter 2015 earnings call. We are glad to have this opportunity to update you on our progress and results. First, I want everybody to know that we are very pleased with our third quarter results, which were in line with our expectations and demonstrate the progress we are making in executing on our strategy and business plan. As our rapid growth continues, we remain focused on our core mission, which is to expand access to the highest quality emergency care. We opened six new freestanding facilities during the quarter and another two since the end of the quarter, which brings us to a total of 76 freestanding emergency rooms. So far this year, we have opened 21 new freestanding facilities, which includes 12 in Texas, five in Colorado and four in Arizona, as well as one hospital. Our second hospital remains on schedule to open in Carrollton, Texas, a Dallas-Fort Worth suburb, during the fourth quarter. This hospital would allow us to serve all patients at our 25 First Choice Freestanding Emergency Rooms in the Dallas Ft. Worth area. In Arizona, as you know, our CMS certified Dignity Health, Arizona General Hospital also allows us to serve all patients at our freestanding facilities in Phoenix and we continue to see strong momentum out there, as people are very pleased with the product that we are offering in the marketplace and are enjoying to have access to the high quality emergency care. Construction is underway on two hospitals currently in Colorado, where we now operate in partnership with UCHealth, 14 freestanding UCHealth emergency room facilities. The Colorado hospitals are both expected to be completed in 2016. And for those that don't know, we are in the early stages of construction on our fifth hospital down in Houston, Texas. This hospital would allow us to expand access to all patients in the majority of our freestanding emergency rooms in Houston, very similar to what we are doing here in DFW. This is very exciting, folks, as we talked many times, our ability to do this will allow everyone to have access to our facilities and we think will have a dramatic impact on our same store sales. Partnerships with leading healthcare systems remain a key driver of our growth. This quarter we announced entry into our fourth state, through a new partnership with Ochsner Health Systems in Louisiana, the largest health group in the state. We look forward to opening our first facility in Louisiana in late 2016. As we continue to deliver on our growth plans, we further strengthened our financial position by closing on a $175 million new senior credit facility this month. The new facility, part of which has been used to repay our previous senior credit facility, will both lower our borrowing costs and enhance our flexibility to fund future growth. Based on the strong earnings performance in the third quarter of 2015 and full-year growth plans including 24 freestanding emergency rooms at two new hospitals, we are again raising our annual guidance. We now expect system-wide net patient services revenue, which includes revenue from unconsolidated joint ventures of $405 million to $410 million for the full-year. We expect adjusted EBITDA of $73 million to $75 million and adjusted earnings per share of $1.20 to $1.25 for the full-year 2015. Now I would like to turn the call over to our Chief Financial Officer Tim Fielding, who will walk you through our third quarter financial results. Tim.

Thanks Tom. For the third quarter of 2015, Adeptus Health generated net operating revenue of $88.2 million, an increase of 53% from the third quarter of 2015. The growth is due to increased patient volumes at our newly opened freestanding facilities and a gross charge increase implemented in the first quarter. Adjusted EBITDA which is a key metric we use to gauge the performance of our business was $18.6 million for the quarter, a 166% increase from a year ago. For the third quarter we reported net income of $1.5 million, of which $700,000 was due to Adeptus Health, compared to a net loss of $3.6 million, of which $1.6 million was due to Adeptus for the third quarter of 2014. The increase in net income was due to an increase of $30.6 million in net operating revenue and a $4.5 million increase in equity and earnings of unconsolidated joint ventures. The increase was partially offset by increases in salaries and wages and other costs related to our growth initiatives and an increase in depreciation and amortization expense. Adjusted earnings per share was $0.31 and GAAP earnings per share was $0.05 for the quarter. Adjusted earnings per share as calculated using a weighted average of Class A and Class B common shares outstanding, which was 20,767,707 shares as of September 30, 2015 and like adjusted EBITDA was adjusted for pre-opening expenses associated with new facilities, public offering expenses associated with our secondary offering in July, stock compensation expense and then other costs associated with our growth initiatives and an adjustment to establish a normalized tax rate of 35% for comparison purposes. As a reminder, the UCHealth and Dignity Health Arizona General Hospital joint ventures are accounted for using the equity method. Results from the joint ventures are reflected in two line items of our consolidated statement of operations. Equity and earnings of unconsolidated joint ventures and management and contract services revenue. For the third quarter, system-wide net patient services revenue including both UCHealth and Dignity Health Arizona General Hospital totaled $109 million, up 89% year-over-year. We saw system-wide patient volume of 60,926 patients, a 54% increase over the prior year, system-wide same-store volume decreased by 11.1%, while same-store revenue increased 19.6%. At the end of the third quarter we had cash of $46.3 million and $9.5 million available under our revolving credit facility. Net cash flow from operations was $4 million for the third quarter and at September 30, 2015 the Company had total long-term debt and capital lease obligations of $158.7 million and debt net of cash of $112.4 million. In October, we closed on a new $175 million senior secured credit facility. The new credit facility includes a $50 million revolver and a $125 million term loan. In addition, the facility has a $50 million accordion feature providing additional borrowing capacity. As a result of this new facility, our interest rate has been reduced to LIBOR plus 3.75 from LIBOR plus 7.5. The proceeds from the new credit facility along with a portion of existing cash were used to pay off the previous credit facility. We continue to add facilities under our master lease agreements with MPT, Medical Properties Trust. As of September 30, 2015, we had 32 facilities operating under the lease agreements and we have $211.2 million available for future development. With that, let me turn the call back to Tom.

Thanks Tim. I want to take a moment to thank all of our team members whose accomplishments are integral to our success. I spent some time this quarter out on the road conducting town hall meetings and talking with our team. I am awed by their dedication, enthusiasm and commitment to delivering the highest quality care, which is undoubtedly why we are ranked in the top 1% of emergency departments nationwide for patient satisfaction. We are on the front lines of transforming the delivery of emergency care in the U.S. and I'm very proud of what Adeptus Health and our partners are doing and are confident in what we are achieving and look forward to achieving even better results going forward. In closing, I would like to reiterate that we are confident in our strategy and our abilities to sustain our growth momentum and maximize opportunities ahead. Our innovative scalable emergency care and delivery model, coupled with partnerships with leading healthcare systems, is allowing us to expand access to the highest quality emergency care in the communities we serve. Before I pass it over to questions, the market is pretty crazy out there, as you might imagine and I kind of just want to put this in perspective for people. When you look at 2015, in 2014 we had revenues of $210 million and adjusted EBITDA of $28.2 million. In February, we gave guidance of $50 million of EBITDA. After Q1 we gave guidance of $60 million of EBITDA. After Q2, we gave guidance of $69 million to $71 million of EBITDA and today we have given guidance of $73 million to $75 million of EBITDA and revenue of $405 million to $410 million. Folks, at $73 million of EBITDA, that is up 259% over last year. $75 million of EBITDA is up 266%. We are killing it here at Adeptus Health. Let's be clear. We are confident, we are executing. We are doing what is expected of us. We are beating what is expected of us and I'm not sure why there is so much confusion out there. I'm very proud of our team, I'm proud of all of the folks here and what they are doing and we are extremely confident on our ability to continue to execute and continue to deliver numbers that we think people will be impressed with. With that, I want to hand it back over to the operator and we will answer questions at this time. Thank you.

We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Paula Porch from Avondale Partners. Please go ahead.

Thank you everybody. Good morning. My first question is on the new market with Louisiana. I was just wondering if you could talk to us about the growth profile in that state, maybe help us understand the demographics, some of the key metrics in that market. Has it been on your radar screen? And maybe what some of the initial reasonings are behind that deal? And is this sort of the way we should think about entrance into new markets going forward?

I think Paula, when we look at Louisiana, we are having a lot of conversations with a lot of healthcare systems and so there is no magic to which one drops to the front of the line and which one doesn't. It is really how well do the conversations go and how quickly do people want to move forward. That being said, we see the New Orleans area as a very underserved market. When you think about what we are really doing, we are trying to improve access to emergency care across the country and so which markets are underserved. I think you saw from our initial press release that even the CEO of Ochsner there said he looks forward to having his patients not have to drive an average of 30 minutes to get emergency care. So it is just a massively underserved market. We are real excited about the opportunity to work with Ochsner. They are a world class organization; they are going to be great partners. We are excited about the ability to bring access of emergency care to that marketplace. We have not disclosed the exact numbers, but our initial focus will be on the New Orleans market and New Orleans area. We have said numbers like 8 to 10, but we are not going to give the exact number. But we are excited about the market. We think we are going to do really well in the market and what it is really about is you have a market that it is massively underserved and we are excited about our new partner. And I think it will be a great opportunity for us. We are going to be really be able to make a difference and then we will do well. We will do very well with this JV.

Okay, great. And as a follow-up to that quickly, should we anticipate expanding into more states next year? I mean is that part of your plan and how you think about the pipeline?

I don't think you will see us enter, I mean if we haven't announced a new state by now we won't be in it by next year. With all that takes place with the building new facilities and all of that. I think you can absolutely expect to hear from us quite a bit on additional joint venture partners and you can expect to hear a lot of that next year. It is not inconceivable you might not hear about another one this year. We are not going to commit to that, because things always have a tendency to taking longer than what you anticipated. But there is a lot of good conversations going on. I would tell you that our joint venture pipeline, the discussions that we are having with people is fuller than it has ever been. Every time we announce one of these, every time we announce a good quarter, every time people see that what we are doing out there and how we continue to impact patient care, folks are reaching out to us. And they are really looking for solutions, they realize they have a problem with access to emergency care and we are more and more every day becoming the brand, that partner of choice, the people that they want to work with. It is an exciting time here at Adeptus; we have a lot of good stuff going on.

Absolutely. And just on that note, you talked about your visibility, I think last year you said you had over 60 facilities in the pipeline and I think that was really just geared to freestanding ED. So just wondering what your visibility looks like today for the next 12 to 24 months? Has it changed any and why? I'm assuming that it is getting larger, but just want to understand how you are thinking about it?

Yes. It is absolutely larger. No doubt it is getting bigger. As we announced new JV partners, as we announce with our own facilities that we are building and what we have going on. It is bigger than it was and continues to get bigger. When you think about the pipeline these days, think about the pipeline of freestanding facilities, as you know we now have hospitals under construction for example, two in Colorado. Just announced this morning, Houston which is a big deal for folks that don't get it. It is a huge deal, because that means we will be able to take Medicare and Medicaid and Tricare government pay across our facilities down there and really add to our same store sales growth story. Of course, we have one under construction in Louisiana with our new partner and then we have several, many, many, many other potential partners that we are talking to right now. And so there is a lot going on in our pipeline. It is actually fuller than it has ever been.

In terms of same store sales, can you maybe help us think about how we should sort of approach the model in 2016? I know it is early for this. As you add Dallas, as you potentially ad Houston next year. Not sure on timing, but acuity levels have been increasing. How much room is there around the pricing, I am assuming as we fold Medicare admits into the mix, we will see maybe a potential for softer pricing and an increase in volumes? How should we really be thinking about that? Do we see a switch to volumes from pricing, or can we have sort of a little bit of a steady increase on both sides?

I think that is a great question. There is a lot of questions there.

Sorry.

That is okay. If you think about acuity, our acuity has risen. And recently I was giving some people some perspective on that and what is going on. But basically levels three, four and five make up 93% of our patients today. And they are all what you would consider to be emergency room patients. And so it is really only about 7%, or what you would consider some type of urgent care and the vast majority of those patients are seen after hours, when we are the option, the only option. So I don't know if we will continue to see our acuity rise, because it has risen quite a bit. But you may. Regarding pricing, I think you will see pricing stabilize. We would anticipate continued price increases. With our partners and with our own on a commercial basis. And so you I think will see pricing stabilize and be up slightly as you see those types of price increases go through. But then when you think about bringing onboard the government pay, of course, that is on a much lower level. And so the blend over time, our blended pricing will actually go down, but it will appear to go down quite dramatically, but that is nothing to be alarmed at, that is just a function of we are adding those incremental patients into the system, but at a much lower reimbursement. A function of blend and mix and all of those things that we talked about before that, at full joint venture capacity and what I mean by that is the fact that Dallas is online and without taking government pay, Houston is online and we are taking government pay and the vast, vast majority of our facilities become outpatient departments of a hospital. I don't know that we know the exact number, but probably somewhere around $1,100, $1,200, $1,300 and it is just a blend, or mix thing, I can tell you that. And that will smooth out as we get more data. It is not something to be alarmed at. It is actually a good thing, because just to jog everyone's memory, once we are above breakeven, the incremental costs and marginal costs of an incremental patient is about $100. So even if you are getting government pay at whatever you want to consider it is at, it is still nicely profitable for us and we have a lot of capacity just to jog everybody's memory on that one. So there is a lot of capacity out there, too. It should be very positive. From same store sales perspectives, when we bring DFW online, again it is a big unknown, because we just don't know what is going to happen, but a reasonable person would assume that our volumes would go up nicely and if they go up nicely, that will have a dramatic impact on same store sales from a positive perspective. The reason the volumes have continued to be negative is because we have continued to cluster, because we know that we are bringing these hospitals online, that when you open a hospital, we want to be dominant in the markets we are located and clustering down in Houston. Up until recently we have not talked about a hospital in Houston but we are talking about it today. That is a reason to be clustering down there. And so it is very, very intentional. But we expect to see in 2016, I fully expect same store sales to be positive from a volume perspective nicely positive and of course positive from a revenue perspective, too. Tim, anything to add on that?

That is right, in terms of same store sales, once you bring those online and we will have marketing campaign around that, we should see the positive volumes.

Okay, great. Thank you so much for that color. That is really helpful. Just quickly, the First Texas Hospital, I thought we saw some musings on Facebook that it had already opened. So just wondering if we sort of missed that, because I think your commentary was that it’s coming online in the fourth quarter and I think we may have been under the impression that it had already been online and I was just curious if you could maybe clarify that for us?

Sure, what creates the confusion is that when you open a hospital, the phases, so there are stages right, we have got the pre, before you see anybody, where you have to hire all of these folks, you have to train all of these folks, you have to make sure that everything is up and running and everything is fine. And then you have to go through a training and certification phase. And what that is, Graham Cherrington is here with me, our Chief Operating Officer. Graham, can you give us the short version on the training and certification phase. What goes on there?

Sure Tom. Once we open our doors to the public, we enter our training and certification phase and at that point we need to see a certain number of inpatient admitted patients before the Joint Commission will come out and certify us on behalf of CMS, so we are in that process right now and that is going very well. We are hopeful that we get the required number of inpatients soon and then the Joint Commission will be able to come out and complete its certification.

And once that certification and we have the same situation or methodology, it is just how it works out in Phoenix and it worked out fine there. And then First Texas is doing great, it is working out fine there. So during that process you are actually seeing patients, but you are not seeing them nearly at the level you would anticipate once you get CMS certified, because we are not doing a lot of marketing around it, we are not doing a lot of that type of stuff, it is really the training and certification phase and then once we get that, which we would anticipate to be in the fairly near future, then are going to go gangbusters on marketing and everyone will know about it. It will be a big deal.

Okay, we are excited. Thank you.

Thank you.

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

Thanks. Good morning. Just a few follow-ups here. When we are thinking about Arizona, maybe if you could update us on how that is progressing in terms of profitability, both with the hospital there and the freestandings you are opening? You suggested 20-plus patients a day last quarter. How is that number trending?

Arizona is actually doing well for us. We are very, very pleased. It makes us anxious as we look at bringing in our other facilities as and outpatient department of a hospital, to see if they will perform like Arizona. We have a great brand out there with partner Dignity and we are very, very pleased and excited to be partnering with Dignity Health. But it is doing well. The hospital emergency department is very active these days and the freestandings, I’m just sitting here looking at it right now, they are absolutely performing at the level we told you before, or above.

Okay. Great. And then the $5 million in pre-opening expenses, is some of that the Dallas hospital? What are the buckets there? And obviously we back that out ultimately, but just thinking going forward is there still some Texas hospital expenses in there this quarter as well, which should go down going forward, or is that all just related to the ramp in new facilities thing?

Yes, the Texas hospital portion is $2.9 million. You will see that go down as soon as we have our grand opening for that hospital. As we previously discussed, that will stop.

And then lastly, on Texas, we discussed partnering that facility in the past and the first course of action is just to get that up and certified with CMS, but any updates on potentially JV-ing that with an existing system in Texas? Thank you.

Absolutely in discussions with people. As I said before, we are fully moving forward on our own, candidly. Just to give you color of what happens, we have people, analysts calling health systems and monkeying with us, right? It doesn't help our progress when we have people around in there digging around in all this stuff. And so the point is, we are making great progress. We don't want to give you anything other than that. But people are not being helpful when they are out there stirring the pot on these types of things, because people perceive they have leverage on you then. And so with that, we are moving forward on the basis that we will open under our own name and I can tell you that it will be open under our own name when it opens in the fourth quarter and running and we are fully capable and on the path of moving forward under the name First Texas. That being said, there are people that are very interested in partnering with us and we think they would be wonderful partners. So that is kind of the update.

Okay. Great. Thank you.

Our next question comes from Brooks O'Neil from Dougherty & Co. Please go ahead.

Good morning. I have a couple of questions, too. So, could you just talk a little bit about seasonality in the business? I guess I would confess that I thought it was possible that Q3 results might be a little better than Q2 since you had opened some facilities and clearly that did not turn out to be the case this quarter. So, what is going on there?

I think I’ll give you two answers to that. One is from a seasonality perspective we talked a lot about seasonality and about how Q3 is always our slowest quarter. The fact that the majority of the facilities in Texas and Arizona and all the places, where it is quite hot and just not a real active time. People go places. They go on vacation. They go away. Unlike being the north where the summer is very, very busy, it is not. A little surprised by your questions as we beat your guidance by $5 million, so I'm not sure how that connects up, Brooks.

You did a lot better than I was modeling. But there are always things you want to understand better and the seasonality is definitely one of them?

Yes. I don't mean to be smartass, Brooks. Please don't take it that way. We had a great quarter Brooks, the Company is doing really well and for some reason people are just really uneasy about it and the business is going real well. Just typical seasonality. That is what we have seen. We talked about it before and I think we had great quarter. If you think of it as our lowest quarter of the year, we opened all of those new facilities, we have the Texas hospital, Graham has been busy with his people over there bringing that baby online and all of the training and certification that has been going on and all of that stuff. There is just a lot of fur flying around here and we opened two more new facilities since the end of the quarter. Just a lot of good progress. We have two hospitals, actually three hospitals under construction. There is a lot of good stuff going on right now.

That is great. So you would expect if I am thinking about this properly, like Q4 and maybe even into Q1 and Q2 seasonally should show some strength, relative to what we saw this quarter?

Oh yes, our guidance is higher. Yes.

That’s great. Can you talk just a little bit about competition? There is a lot of noise in the marketplace about a lot of competition, particularly in Texas. What are you seeing and how do you think about it?

Yes, we see competition. I mean the two big markets are Houston and Dallas. A lot more competition in Houston than in Dallas. But that being said, our Houston facilities are holding up fine. It is kind of double edged sword. From one perspective you have competition, as you might imagine, any time you have competition the theory is, it will pull from your patient base and so in theory you would see less patients. I think that there is a flipside to that and the flipside to it is, with Houston as an example, it is probably the best market in the country for people understanding what a freestanding emergency room is. I don't know if you call them early adapters, I don't know if you call them adapters. I am looking at our Chief Marketing Officer, who is with me this morning. What term you would use around that. But people are understanding what we are, they are understanding the name recognition, that we are really a real emergency room and all of that. And so with that, I think we are holding our own pretty well actually. We have seen some smaller competitors go by the wayside, as they have not done as well as they have thought. And we have seen a little bit of consolidation with the smaller guys, but again, they are throwing each other a life raft. From that perspective on how their facilities are doing. Graham, you are living it every day. What do you think, Graham?

Well, I think your comments are spot on, Tom. Obviously there is a lot more competition and some folks' strategy is simply to follow us around. But some of those folks, that strategy hasn't worked out all that well for them. But at the end of the day, we continue to build our brand and represent the industry well and we think over time that is the differentiator.

Yes, as I mentioned, how many facilities we have now, we are becoming fairly dominant, Brooks.

That is great. Last question. I'm hoping you will just take a step back and talk a little bit more about the joint venture strategy, sort of why you think that is particularly appropriate and attractive for Adeptus now. Clearly you have said we will see more of those going forward. So how do you think about the benefits of that to Adeptus and Adeptus shareholders going forward? Thanks a lot.

The magic to the joint venture strategy is there are a lot of states, the vast majority of states that you are not allowed to go into unless you are an outpatient department of a hospital. As we look at growing into new states and as we look at going into Greenfield, totally into Greenfield, we can go in and build our own hospital which we have done in other places and then build our facilities. But we think we are a much better position if we find a premier health system in one of those markets. And help them be a solution to the problems they have, Ochsner is a perfect example. Ochsner is an incredible system, very respected on a national basis. All of that and they have a real problem with access to emergency care. It was interesting I believe Ochsner's CEO was talking to MedPAC and he actually made the comment. Graham, can you give us the comment he made at MedPAC?

His comment was, they extended hours at all of their clinics, both freestanding clinics and primary care, well into the evening, thinking that would reduce ER business, yet it has had no impact. He also discussed how these freestanding emergency rooms have been critical in their access to care and still they don't have enough access to care in the New Orleans community. So he has been a big advocate of it.

So when we think about it, here is an example if you think about our organization, we started doing freestanding emergency rooms in Texas on our own which was great and we have been wonderful and successful and helped a lot of people. But across country healthcare systems have an access to emergency care problem. They have an access to healthcare problem. And what we have done as an organization is we have really pivoted and we have really said hey, we will be part of that solution, but we will be part of the solution partnering with the premier healthcare systems in the country and in doing that, we think we are going to be part of the problem of healthcare costs, access to healthcare and all of the different things and I will tell you that our partners think that also and they are excited and they really embrace us. What does it mean for our shareholders? It means a tremendous growth opportunity when you think of how many systems are across the country and how many places we could potentially go and how many freestanding emergency rooms which are really going to be called outpatient departments of a hospital that we can build with the systems. The second aspect of that that is very, very important is you get the brands. So you are a part of their brand. They are the majority shareholder. So it’s really Dignity Health, it is really UCHealth, it is really Ochsner. And so that’s the brand on TV, that’s the brand in the marketplace, that’s the thing that people are accustomed to seeing and we all know, we all favor brand names. We just do. We all tend to hit the default button on the brand name wherever it is. And so we will benefit by that versus having to go out there and pave our own way and try to get our own brand recognition in the marketplace. And then when you think about it because our partners own 50.1%, because their names are on the facilities, because we are following their medical protocols, we just really are a part of them. We also become part of their managed care contracting and all of that and so we just fold into the system. For our shareholders, that takes a tremendous amount of instability or uneasiness about pricing out of the equation, because we are just part of the big healthcare system. And when you are part of the big healthcare system you typically have very good reimbursement rates, you typically get raises every year, they typically get raises. For those folks we have talked about it many times, it has followed the surgery center space. This were basically two groups and surgery center companies. There were groups, like my old company that did not partner with health systems and there were the groups that did. The USBIs of this world and the surgical care affiliates, the people like that and everyone knows that they got better rates. Everyone knows that they got rate increases, when we got rate decreases. It was just a very good place to be. And so from a shareholder perspective, it is a much better place for us to be, it is a much more secure place to be. Takes a lot of uncertainty, not that we have a lot of uncertainty, not that we have a lot of uncertainty, but whatever we have it gets rid of and it just shows a tremendous growth trajectory. And so financially, we think it will be incredibly rewarding. But as a Company, I can it tell you that we are extremely passionate about improving access to emergency care in America. Brooks, you may have heard me tell the story, but I will just tell it one more time. My mother is 84 years old, she lives in Northern New York and she had an issue and she went to the emergency room. She waited four hours to be seen, then they put her on a gurney in the hallway for six hours and she calls me up and asks me when we are going to build a First Choice in her community, in little Watertown New York. Okay the reality is we can't build them there. She was very upset with me when I told her that, Brooks. She thinks I should just go do it, right. There are people like that out there everywhere and here is what I tell people and I'm very passionate about this. Doesn't my mother deserve access to our facilities? Doesn't your mother, your grandparents, your cousins, whoever they are, don't they deserve access to these facilities. The answer is yes, absolutely yes, that is what we are doing. I mean we are on a mission around here let's be clear. And we will change the delivery of emergency care in America. We are going to do it with premier health systems. We are going to lower costs. We are going to improve access. We are going to improve quality of care. I mean this is just a winner all of the way around.

That’s great. Thank you very much.

Thank you, Brooks.

Our next question comes from Kevin Fischbeck from Bank of America Merrill Lynch. Please go ahead.

Okay. Great, thanks. I appreciate the comment before about the acuity level, because that seems to be what some people are obviously worried about, so good to hear that you have got 90% in the three and above category. But I guess pardon my lack of knowledge on this, do you know what the typical hospital would look like, how does that 09% compare to a typical hospital emergency room?

We are actually above them. Our average acuity is above them. In all fairness to the typical hospital, they have to take all comers historically and then they also see a lot of indigent care and so they actually see a lot of urgent care in a lot of those folks. We partner as you know with urgent cares and by partner we don't have any ownership, or anything like that, but we actually send patients their way and we try to get patients into the right care and right level of care they need and it is really that that is driving it. That being said, if you come in and you don't have the ability to pay and you need to be seen, we will see you. We absolutely will see you. We see everybody and so but on average, we know that we are seeing a higher acuity. We have said many times, 35 plus percent of our patients are some form of sports injury. When you think about where we are putting these facilities, we are putting them in the communities where people live. We are making access easy. We are marketing to the schools, we are marketing to people like that and we are saying, hey come to our facilities and people just, they have an incredible experience. And so that is the reason I think we know on average, realize we have partners now, so we can see their data. Our acuity level is higher.

Okay that’s good to hear. It look Tom, but I just wanted to make sure. Okay, so I guess in the past, when you talk about the pipeline being robust, I think last quarter you talked about 150 sites and two states, but 60 sites in the pipeline. Do you have an update on what exactly that looks like today?

Yes, I think I mentioned the last time the 150 has gone to 170 we think we can do in our existing states and of course that is before we added Louisiana. So that probably takes it to 180 approximately. And then with the other states that we have identified and we are working on JV partners with takes us well over 200.

Okay. And I guess two states you identified, obviously Louisiana was one of them, how does the new state pipeline look?

The new state pipeline is fuller than it has ever been. When you think about it about it, it’s really about JV partners. So as an example, in Louisiana we have one partner and in Texas you could have several partners, because there are a lot of big metropolitan areas as an example. And so just we talk about it in the relationships of states, but it is really markets with partners and we have a lot of those. We have more discussions going on now than we have ever had. I mean by a factor of two probably or three, there are a lot of discussions going on right now and the momentum builds. The more that we are able to be successful, do the things that we say we’re going to do and then announce new partners, when we announced Ochsner, that was - Dignity was very powerful, UCHealth was powerful, big academic university, Ochsner is incredibly respected on a national basis. The more that we are able to announce these types of partnerships, the discussions become easier, right, because we are the brand in the states and so that helps us a lot.

Okay. And then just lastly trying to understand how to think about the rollout and the ability to start taking government patients. So you guys already treat, maybe a couple of patients in our existing sites that you are just not billing for, which you have that hospital and you all of a sudden start billing for them. So that is kind of low hanging fruit, but then after that how do you move that number up? Do you follow that up with a marketing plan? And would it be different, I guess different on the freestanding ones you are building yourself in Texas, versus being part of a JV. Does being part of a JV almost, accelerate that shift towards Medicaid patients, because the seniors know the name brand of the partner?

Yes, we have a big marketing blitz planned for Dallas, I can tell you that. And then it really depends on the market, when we go into a market we do a big blitz. And so there is a lot of planning that goes around that. And we are really ready for it, okay. I want to if I could, you asked the acuity question, so I got something I want to read you. I have told you I have been doing town hall meetings and so I just said to ask a question to legal here. I want to read you guys something. So we talked about the acuity and what we do. This is a quote we got, okay, I am going to read a note we got to you about and this will give you a sense for our acuity. I recently broke my ankle and went to your Flower Mound facility for treatment. It was by far the most impressive healthcare experience I have ever had. I was met at the door with a wheelchair, and wheeled directly into your treatment room, where the exam was immediately started. The X-ray equipment was wheeled into the room. Rather than moving me to Imaging. The doctor was talking to me the entire time. I was in a boot, on crutches and out of the building in 35 to 40 minutes. This is how all healthcare experiences should be delivered. Again, I want to say it was by far the most impressive healthcare experience I have ever had. I won't give you the name, but this gentleman is a Senior Vice President with a company called Press Ganey. The people who rate hospitals and rate emergency rooms. And he says this was by far the most impressive healthcare experience I have ever had. As he was walked in with his broken ankle. So I just wanted to give you that for a little color. That is something I have been doing in the town hall meetings, I have been traveling around, people wonder about acuity and what do we really do. How powerful is that, folks? This is the people that rate all of the people, and he said it was by far the most impressive healthcare experience he ever had. Sorry to get on my band wagon there, Kevin. But I get that question a lot.

I think it is helpful to talk about it in the forum like this, because I think that has been a question, and it sounds like you just answered it pretty well. All right, thanks.

Okay. Thank you.

Our next question comes from Kevin Ellich from Piper Jaffray. Please go ahead.

Hey guys, thanks for taking the questions. A few things to follow up on here. I guess let's start off with the guidance. So you raised EBITDA guidance nicely. But doing the math it looks like you are implying Q4 EBITDA of $18 million to about $20 million. I was expecting a little bit more than that. Could you help us understand why it is not going to be up more? Is this just a bit of conservatism? I guess how should we think about that?

Kevin, I guess I would answer it the following way - have we missed our guidance since we went public?

You have not.

We have not, put is that way.

Okay, thanks.

Give you a lot more. So it is like…

That is always the case. Just had who check in case there is something else I was missing in terms of seasonality, things like that?

Nothing you are missing, Kevin.

Okay, great. And then I think there is a little bit of confusion on the pricing comments you just made, when Medicare and government comes in with the JVs, so could you help clarify kind of pricing, and what it looks like today with your hospitals and JVs, before right today I did the math and came in at about $1,790 on the system-wide volume that you gave us. And then Tom, you made a comment about like $1100, $1200, $1300. Could you help clarify the difference, and how that is really going to shake out?

Yes, I think you know as Tom was saying earlier, it is just a fact of how you blend in the governmental side of this, right.

Right.

If your current state, because frankly the majority of our visits right now are all commercial, but once you blend in governmental in Arizona, Colorado, Texas, that rate is going to come down. And that is the rate that Tom is talking about that can range anywhere from $1100 to $1300.

It is not a bad thing, there will be a lot more patients.

Right. I mean…

And I think the good part of it is, that as we become more outpatient departments at hospitals, we will tend to look more like them, and what I mean is that more blended rate that people are accustomed to seeing, what I have said all along, is we have always just talked about our commercial rates, and I have always said that what the hospital commercial rates were. But realize that is not their blended rate. Which is what they tend to talk about all of the time.

Okay. That is helpful. And then, you guys put in the press release about the Houston hospital that is I think slated to open up in Q3 of next year. Have you thought yet about hospital partner in that market, or do you think you can do it by yourself, like you are going to do in Dallas?

I don't think we said Q3 of next year, but good try there. But I do know you rooted around and found it, so congratulations, Kevin. But regarding partners, we are talking to folks down there, and it is really the same approach that we are taking in DFW, which is you have to prepared to do it alone. The good news is we have a brand. That is what is so different about those two markets. We actually have a brand, we have name recognition, and people knew who we are and so people - it was interesting I think even that we’ve even had a few analysts and recently we jog by the Texas hospital - and is your same cross and is First Choice, yes it does, and it was interesting they picked up on that, just seeing a few of them. So it is recognizable that it is the brand. It is recognizable that it is part of the organization. That being said, it would be great to have a good partner, and all of that, and so we will just keep moving forward.

Right, right. Okay. And then certainly it is a tough day in the market for a lot of healthcare facility and services companies, but could you talk a little bit about the staffing business that you guys have, and the pool of physicians that you can pull from, do you think you are taking some doctors away from some of the other ER companies or hospitals, because it seems like staffing is a bit of an issue for a few of these other companies?

Yes, I don't know that we are taking doctors away from them. I guess we are getting them from somewhere. I mean what do we have today, 600 or 700.

Well over 600.

And all national medical professionals. Doing really well, the business is doing well, as we contract with our JV partners going forward, we have really good contracts. They are not 90-day cancellation contracts. They are long-term contracts. It is part of our culture in our Company, and who we are, and part of the joint venture. So we are in a much different position I think than most or people, with those types of relationships, so we are doing well with it. We think actually if anything it is a great opportunity for us. But it is little, right. Any time you are little and the market is big it is easier to gain market share. So if anything we see this as a growth machine for us going forward. We are just having those discussions internally right now, we are focused on as we said so many times we are opening all of these freestandings, we are opening these hospitals, we have got a lot going on, but that being said, we have people reaching out to us to staff their facilities. And so I think it is a real positive for us. I don't see any negative at all, do you, Graham?

No, I do not.

I think if anything we could probably be disruptive in that space if we wanted to be.

Great. And then last question for me, so we have seen nice performance in the Arizona with the JV with Dignity. Just wondering have you seen any improvement in volumes yet in Colorado with UCHealth?

We haven't seen much. It might be a little, but we haven't really seen much. And part of the reason is that we haven't done a big marketing push, because right now they are not an outpatient department of a hospital, because those two hospitals are in construction out there, we have intentionally not put a lot of marketing around it, because we didn't want to create a lot of confusion in the marketplace. Once you really push that UCHealth brand. We don't want is have people to come to the facilities, have a huge push, and find out we can't see them, and then don't come back when we can see them. For right or wrong we have made the decision not to do that. The facilities are doing fine, and doing well and partnership is great with UCHealth, we enjoy the brand and the contracts. With the different contracts with them. Shared contracts. I don't know if Graham, it is going well, right?

Yes. The integration is going extremely well. And again as Tom outlined, we are prepping for when we bring the hospitals online, and become fully integrated with them, so that is our strategic focus right now.

Great, great. Do you have timing on the hospital in Colorado, the one in Broomfield that just broke ground recently, Tom?

It is kind of Q3, Q4. There are two sets of timings. When is the building done, so Graham gets it and does his training and certification, and then when does he actually get his certification. He will probably get the buildings, one of them at least, at the end of Q2, but then he will be in certification in Q3, and he will probably get the second one early Q3, and be in certification through maybe early Q4 type of thing.

Okay. Sounds good. Thanks, guys. Nice quarter.

Thank you.

[Operator Instructions]. Our next question comes from Brian Tanquilut of Jefferies. Please go ahead. You have the floor, sir.

Hey, this is Jason Plagman on for Brian. Quick question on Louisiana, so is the plan there to open a few freestanding EDs first, and then do the hospital later? How are you thinking about the sequencing?

No. We are actually doing the hospital. We are doing a little bit of a hybrid down there. We are doing a hospital inside of a hospital, and then we are going to build our own hospital, and we are really doing that for speed to market. I'm glad you asked that question, because I think I might have mentioned it last quarter on the call, but I want to bring it up again. When I talk about the complexities of getting into these new markets and what is going on, Louisiana with Ochsner is a great example. We thought that we would be announcing that thing back in April. We were two weeks away, everything was great, and we were going to use the facility they had, that they had bought from another system 20 years before, or 25 years before, but it was going to work great for us, we were going to be able to modify it and update it, and really improve the speed to market. Two weeks from closing, the attorneys are doing all of their deep dive due diligence, to find out that when the facility was acquired 25 years before, there was a clause in there that said it couldn't be used as a hospital. Now a rational person would say, why didn't people know that ahead of time. Well it was 25 years ago, and there was nobody there that was there that years ago, and no one had thought about using it as a hospital. That is an example of here we are ready to go, you just got to know that I would love to tell you more about this stuff, because we have so many exciting conversations going on. But every time I do something baloney like this happens. And so that is why we just have to be so careful about what we say, and really make sure that we have everything done before we announce it. So what we have decided to do is speed to market, they actually there is something called a hospital inside of a hospital, and don't get overly caught up on that. It is just a way you can license something. And so we are going to start off with that, so we can get the freestandings under construction and going, but also the hospital, the standalone hospital will be under construction at the same time, and then bring them all online. And so we plan to have some up and running end of next year, right, Graham?

Latter part of the year.

Yes.

Great, and with that structure will you be able to take government patients immediately when the window…

Absolutely. Yes, take all comers.

Okay. And then switching gears real quickly. On the debt refinancing, how should we think about, are you thinking about funding some of your construction on your own balance sheet, or is MPT going to be the main source for the foreseeable future?

I was talking to Tim, and he can give you the details. Historically MPT has been the main source, but we have had other third parties finance a lot of these, and we have the ability to do that off our own balance sheet. We are working on that right now. I would tell you it is not a top priority, but it is clearly under discussions on what we should be doing and shouldn't be doing. MPT has been a great partner and we value that partnership, and I don't want anybody to get any impression other than that. Tim.

Yes, I would say that MPW has absolutely been a great partner, and we will have a, I would describe it as a mix of financing options, and one will be in the future, an option that we build it and then take appropriate action after that.

Great. And then one just clerical thing. Can you give me the total patient visits again? I wanted to make sure I wrote it down correctly.

Yes, Tim is looking for it. He put it away. But you got it, Tim?

I got it here. Hang on just a second. I will pull it back up. 60,926.

Okay, that’s what I had. Great. Thanks, guys.

Thank you.

Our next question comes from Dana Hambly from Stephens. Please go ahead.

Hi, thanks. Thanks for all of the detail today. I did just want to, sorry to hit back on seasonality, but just as we look into next year and the progression, you guys did nearly $23 million in EBITDA in the second quarter, with a really high margin in the fourth quarter. I thought it was your strongest, but you are implying that is going to be a little bit below where we were in the second quarter. So just was there something in the second quarter of this year that was exceptional, or should we always think of that second quarter being the best of the year?

A couple of things were going on there. From a perspective we, one of the things that Tim just mentioned to me, flu is a big issue for us. And don't get confused, flu with the sniffles, okay. Really the flu. And it does two things. One, we see people with the flu, but two, it also clogs up the other healthcare facilities, which then drives people to us, in our guidance we don't have a big flu number in that guidance, okay.

Okay.

So if all of a sudden if a big flu hit it so hard, right, because we try to give you guys as much clarity as we can, as possible. But we also don't want to overstate something, and then miss it. So right now we probably have very little if any flu in our projections, if all of a sudden the big flu hit, you can imagine December will probably be pretty good. And then with Q2, Q2 was just a great quarter for a lot of different reasons. I don't have all of the details in front of me, but it wasn't like a sequential quarter, we just had a bunch of good things going on in Q2, and I wish, we'll see. But I mean, we are pretty bullish on Q4, so I don't want to give you any impression other than that. We are just trying to be careful. We don't want to end up like a bunch of folks today that missed the hell out of their numbers, right.

We appreciate that.

And so we are putting up killer numbers, right. As I mentioned to you guys my gosh, last year, $28 million of EBITDA and $73 million to $75 million this year. And we are trying to, you have heard me say to use the term before, how much gasoline do you throw on a fire.

Yes, the growth is without question phenomenal. So we hope to see it continue.

We are bullish about next year. We are bullish about next year, we are real excited about it.

Okay, great. And then Tim, just on the provision that looked like it was a little bit higher, anything going on there that we should be concerned with, or you feel good about the revenue cycle?

I'm not concerned with it. We do watch that carefully. It did tick up, and it is really just a function of these, higher deductible plans would we continue to see. I saw one state in 2015 that said that 25% of the companies moved over into a high deductible plan. So whenever you do that, you are dealing more on the patient side than you are on the insurance side.

Okay, all right. That is fair. Tim, what are the number of facilities in the same store count now?

I believe there are 36 in the same store count, out of the 77 that we have.

Okay, great. Thanks very much.

Having no further questions, this concludes our question and answer session. I would like to turn the conference back over to Mr. Thomas Hall, Chairman and Chief Executive Officer for any closing remarks.

Thank you operator. I would like to thank everybody for joining us today, and we really do appreciate your support and your interest in Adeptus Health. Hopefully you have gotten clarity on some of your questions today. I can tell you that we are very bullish about our business. Our pipeline is fuller than it has ever been, our joint venture pipeline is fuller that it has ever been. Our new facilities are coming online, we are getting ready to bring our new facility online here in DFW, that will allow all of those 25 DFW First Choice emergency rooms to be able to accept government pay, consequently your parents, my parents, everybody's parents, and people like that. We announced today the Houston hospital that will be the same thing for Houston next year. We also have two other hospitals under construction in Colorado that will do that for Colorado next year. We had previously announced Ochsner was a new JV partner, and as I mentioned before, we have a lot of conversations going on with people. So we are really bullish about our business. We have got a great business, we have a lot of wonderful people here. And we are excited about our future, and we appreciate your support, and look forward to talking to you soon. Thank you.

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