Adaptive Biotechnologies Corporation (ADPT) Q4 2015 Earnings Report, Transcript and Summary

Good morning and welcome to the Adeptus Health fourth quarter and full year 2015 earnings event, all participants will be in a listen only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Tim Fielding, Chief Financial Officer of Adeptus Health. Please go ahead,

Thank you, Operator. Welcome to Adeptus Health's fourth quarter and full year 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 Web site. We assume no obligation to update any forward-looking statements. In today's remarks all financial comparisons will compare the fourth 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 Web site. 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 fourth quarter and full year 2015 earnings call. We are glad to have this opportunity to update you on our progress and results. 2015 was a year of significant accomplishment for Adeptus Health'. We doubled our revenue, grew adjusted EBITDA by 169%, opened 26 new freestanding emerging rooms, and two hospitals, while continuing to deliver high quality care that is consistently rated among the top in the nation for patient satisfaction. As you all know, we won the Press Ganey Guardian of Excellence Award for the third year in a row and that’s something we’re very proud of. During 2015 we expanded access into more and more communities including 16 freestanding emergency rooms and one hospital in Texas, six freestanding emergency facilities in Colorado in partnership with the University of Colorado Health; a hospital and freestanding emergency facility in Arizona with partner Dignity Health. I am pleased to be able to report that our Arizona extraneous facilities continue to perform well and are seeing patient per day counts above 20. In Q4 we opened seven new freestanding facilities and a new hospital since the quarter ended we’ve opened four additional freestanding facilities bringing our current total to 85 freestanding facilities and two hospitals. Earlier this month we announced expansion into our fifth state Ohio, through our partnership with Mount Carmel Health Systems which is part of the Trinity Health. Partnerships will remain a cornerstone of our growth. As 2016 unfolds we expect to announce additional joint venture partnerships. As I’ve mentioned to you before in the second half of 2015 we doubled the size of our development team and our potential JV pipeline is building nicely. Based on our strong performance in 2015 we expect to open 27 new facilities in 2016 including 24 freestanding emergency rooms and three hospitals. We expect system wide net base and services revenue, which includes revenue from unconsolidated joint ventures of $635 million to $665 million for the full year 2016. We expect adjusted EBITDA of $108 million to $113 million and adjusted earnings per share of 250 to 260 for the full year 2016, and we expect same store sales volumes and revenue to be positive in 2016. Let me say that again. And we expect same store same volumes and revenues to be positive in 2016. I am pleased to report that year-to-date, so through yesterday same store sales volumes and same store sales revenue has been positive across our portfolio. We now have 51 facilities in the same store count. Now I’d like to turn the call over to Tim to take us through the financials. Tim?

Thanks Tom. For the fourth quarter 2015, system wide net patient services revenue increased 82% to $127.8 million. The increase was primarily due to patient volumes from the expansion of the number of freestanding facilities from 55 to 81, annual gross charge increases and the opening of hospitals in Texas and Arizona. Net operating revenue was $105.4 million, an increase of 50% from the fourth quarter of 2014. Of note net operating revenue excludes revenue from 15 facilities in Colorado, nine of which were consolidated in the prior year and the Arizona Hospital and its four freestanding facilities which are all accounted for as equity method investments. The increase is primarily due to the impact of patient volumes from the expansion of the number of consolidated freestanding facilities from 46 to 62, annual gross charge increases and the opening of the hospital in Texas. Offset by the deconsolidation of our Colorado locations due to the UCHealth joint venture. Adjusted EBITDA which is a key metric we use to gauge the performance of our business was $21.1 million for the quarter, 106% increase from year ago. For the fourth quarter we reported net income of $2.1 million of which $1.3 million was due to Adeptus Health compared to a net loss of $1.5 million of which $300,000 was due to Adeptus Health for the fourth quarter of 2014. This increase in net income was due to an increase of $35.4 million in net operating revenue and $2.4 million increase in equity and earnings of unconsolidated joint ventures. This increase is partially offset by increases in salaries, wages and benefits and other costs related to our growth initiatives, a $5 million loss on extinguishment of debt, and increase in depreciation and amortization expense and the impact of taxes on higher earnings. Adjusted earnings per share was $0.45 and GAAP earnings per share was $0.09 for the quarter. Adjusted earnings per share is calculated using a weighted average of both Class A and Class B common shares outstanding, which was 20,767,295 common shares at December 31, 2015 and for the quarter, was adjusted for $3.8 million of preopening cost associated with new facility openings, 900,000 of stock compensation expense, $5 million related to the loss on the debt extinguishment, and $1.7 million of other costs associated with our growth initiatives and an adjustment for taxes in order to establish the normalized tax rate of 35% for comparability purposes. We saw system wide patient volume of 76,162 patients, a 60% increase over prior year; system wide same store volume decreased by 8.5% while same store revenue increased 17.7%. For the full year, system wide net patient services revenue increased to 102% to $425.3 million. Net operating revenue excluding revenue from the JV facilities for all of 2015 was $364.7 million, an increase of 73% over the prior year. For the full year adjusted EBITDA totaled $75.9 million, an increase of 169% over 2014. We reported net income for the full year of $32.8 million of which $13.2 million was attributable to the debt to sales compared to the net loss of $17.3 million from the prior year of which $3.4 million was attributable to debt to sale. The increase in net income was due to an increase of $154 million in net operating revenue, a $9.8 million increase in equity and earnings of unconsolidated joint ventures coupled with a $24.3 million gain recognized on the contribution of existing freestanding facilities to the joint venture with University of Colorado Hill. This increase is partially offset by increases in salaries, wages and benefits and other costs related to our growth initiatives, a $5 million loss on extinguishment of debt and increase in depreciation and amortization expense and the impact of higher taxes on higher earnings. For the full year, adjusted earnings per share was $1.37 per share and GAAP earnings per share was $1.09 per share. Adjustments for the year included $24.3 million gain recognized on the contribution of the existing freestanding facilities to the joint venture with the University of Colorado Hill, $13 million of preopening costs associated with new facility openings, $2.8 million of stock compensation expense, $2.1 million related to public offerings of our Class A common stock, $5 million related to loss on debt extinguishment and $3.6 million of other costs associated with our growth initiatives. And we adjusted taxes in order to establish normalized tax rate of 35%. System wide patient volume for the year was 243,670 patients, a 67% increase over the prior year, system wide same store volume decreased by 10.2% while same store revenue increased to 18.3%. At year end we had cash of $16 million and $39.8 million available under our revolving credit facility. Net cash flow from operations was $13.1 million for the year. At year-end the Company had total long-term debt and capital lease obligations of $128.9 million and debt net of cash was $112.8 million. In October of 2015, the Company closed on a new $175 million senior credit facility, the new senior credit facility includes a $50 million revolver a $125 million term loan. 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 the portion of the existing cash were used to pay off the previous credit facility. We continue to add facilities under our master lease agreement with the Medical Properties Trust and as of December 31 we have $200 million available for future development. In the third quarter earnings call we informed you that because of our increased market cap that exceeded the $700 million threshold on June 30th that as of December 31st we would no longer qualify as emerging growth Company. As a result we had five months as opposed to the traditional five year window to become fully compliant with auditor asset session requirements of our internal controls as required in the Sarbanes Oxley. In August we hired a consultant firm to assist us with enhancing our internal control documentation so that we could assess the effectiveness and our auditors could attest as to the adequacy of those internal controls. I am extremely proud of the accounting team’s monumental efforts with respect to the condensed timeline we were placed with. As a result of the internal control evaluation a material weakness was identified as it relates to the outsourcing of our coding and billing functions to McKesson. We outsourced our coding and billing functions on October 1, 2015 because we do not have the internal expertise to meet the coding and billing compliance requirements under ICD 10 code sets as required by HIPAA on October 1, 2015. In a normal year we would rely on the McKesson’s service organization control report commonly referred to as a stock one report as the internal control over the outsourced coding and billing function. However because of stock one report, the testing period ended on September 30th, it did not include any of our billing and coding data and therefore we could not rely upon it, as our internal control that is typically used in an outsourced environment. Effectively this was impossible to overcome as there was not sufficient time before December 31st, to implement alternative internal controls to compensate for not being able to use the stock one report. This deficiency is going to be remediated in 2016 as the stock one report will include our coding and billing data and therefore can be relied upon by us for internal control purposes. We do expect to receive a clean opinion, audit opinion from our auditors when we file the 10-K on Monday. With that let me turn the call back to Tom.

Thanks, Tim. As we continue our extraordinary growth our focus remains on patient care, our patients have consistently rated our care among the highest quality in the nation. I want to take a moment to thank all of our team members whose accomplishments are integral to our success this year and every year. I'm proud of our growth and excited to continue working on the frontline of transforming the delivery of emergency care in the U.S. In closing I'd like to reiterate that we are confident in our proven strategy, in our ability to deliver on our growth plans. As 2016 unfolds we expect to announce additional JV relationships in existing and new markets as well as continue to expand in the markets we currently operate, never losing sight of our core mission which is to bring access to the highest quality emergency medical care to more and more communities. With that we'll be pleased to answer questions at this time. Operator?

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Kevin Ellich of Piper Jaffray. Please go ahead.

I guess starting off, equity and net income from unconsolidated JV's 1.5 million just wondering if you guys could explain why we started a sequential decrease?

Yes, this is Tim. So the reason for the decrease is that as you recall one of our joint ventures has a preferred return. That preferred return was met in the third quarter and so we didn't have that full equity and earnings for that particular JV for the fourth quarter. We basically had to split 50% with our JV partner.

Would that be Colorado or Arizona, are you willing to say Tim?

Yes, that's Colorado.

And then how does that work, well does it get reset at the end of the year and then you start over again or is it 50-50 from --?

That particular contract will reset May 1st.

And then good color on the same-store volumes and revenue tongs, Tom you sounded pretty excited about the positive growth that you're seeing so far this year, what gives you confidence that you're going to see this sustained throughout the year and I guess how should we think about what's you guys have baked in your guidance for same-store volumes?

So, regarding the confidence, I mean what we're really seeing Kevin as you know, is we brought the Dallas hospital online and then, yes we really challenged our marketing team to get out there, put together a good program and they've done a fabulous job with the program and what's happened is that because we now market for example across DFW seeing that we take all payers all insurance, it just gets rid of a lot of confusion. Even though we've been around for a long time, it's amazing the confusion out there, where you can go on, who takes us -- our insurance and who doesn't accept our insurance and so with that what we've actually seen without getting into the specific details, we've seen couple of patients they pick up in commercial, people will think it would be just government paying us, it’s not we've actually seen the pickup in commercial, also which is very-very nice and very significant and so generally it continues to build and so it's really building nicely for us. While we learned through this process which is fascinating is we've went out and we've always called out for example trainers in schools to send your students, athletes if they get hurt. What we didn't know was there was a lot of trainers not sending us the athletes because they didn't know whether they're athletes had insurance or if they’re on Medicaid, and what they didn't want to do is embarrass the children, right and then they want to send them over and find out they didn’t have insurance coverage and we couldn't see them, well no one had ever told us that right, but it came out as our sales force up calling on these people again telling them. We're getting that kind of feedback which is yes, we'll send our folks, we'll send more people now because there's just no confusion around it, we're seeing that -- we heard the same thing with doctor's offices had referred to us again in fact we couldn't think Medicare before, we didn't take -- be it Tricare or whatever, it was a just confusion thing and through all that we're generally picking up as I mentioned more commercial pay. And then that also allows our marketing folks to really put out a powerful message, which say hey folks here we are, we're top quality, we're going to serve you in the communities where you live and we take all payers and all patients and so that's worked well for us. And so we're seeing that. And so as we watched that unfold we know what DFW, the ability DFW has, just goes with the size, generally to carry a whole portfolio. But that being said, as you know we have a hospital come online in Denver this year, we have a hospital coming online in Colorado Springs this year that both these same-store sales and it’s too early to tell whether we will see the same reaction but those markets are very similar to the DFW as far as how we market today, how we’re positioned and what the potential uptick is and off course what partner there would you see helped which is positive. And so I think around same-store sales volume we feel pretty good about it right now, we talked about it last year and felt like we have to get to this point and then off course there as a final note were building -- there is a hospital under construction right now in Houston and then we are planning for that to come online in Q1 of next year but again we expect a lift, a big lift when we do that and so were pretty bullish on that. We talked about it, we weren’t sure how it's going to unfold and now we've seen it and then we are very, very pleased with the results that were seeing and the nice thing is our quality scores are still as high as they are everywhere I mean everything is going really, really well and people like it. And so that's kind of how we think about as far as guiding specifically to the year what we're seeing is this we expect volumes and we expect revenues to be positive that doesn’t sound like much guidance but we are negative eight last year that's at least an eight point move and of course we expect it to be more than that, Kevin, but until we watch these things unfold we really don’t know and so.

And then I guess going to guidance, so really strong revenue and EPS guidance but EBITDA was kind of just in line and given the strength we would have expected the little bit higher EBITDA, wondering if there is anything, I mean are there greater costs associated with opening up those hospitals which is why that's the past. I don’t know Tim do you have any color on that?

There is just a lot of moving parts Kevin and I mean we got three, four hospitals under construction and they are just all kinds and moving pieces and those things are much bigger and I will tell you as a side note that was not in our remarks from an investors health perspective Arizona in Q4 made money for us, Arizona Hospital and so that's kind of interesting right. Again we wonder, how are you going to run these hospitals, you guys really pay money to these things what’s going on, Arizona's General Hospital made money for indebt [ph] health in Q4, unwise, but it wasn’t negative. And so with that being said of course Dallas did not receive the obvious. And so with all of these new hospitals come online who the hell can give the specifics.

Well, I would just add to that. We set all along that we model these hospitals to turning positive in terms of cash flow after one year period and that's exactly what we saw in Arizona, so we’re pleased with that.

So there is lot of cost coming online in Q3 and Q4 that leads you right to that Kevin.

Got, it. And then I guess in Q4 with the EBITDA was little bit lower than you extracted, sure your interest expense when down due to the debt refi which is great, but did you Tim, did you say in you prepared remarks you guys were operating 2 billings systems, I know switched over in the [Indiscernible] and then could you go over again, did you talk about the audit and was there anything that they found in it?

Yes, so in terms of the actual audit no they did not had any founding's with the audit, the issues is with respect to internal controls and the one material weakness that I referred to. In terms of our adjusted EBITDA I would add that in fourth quarter we spend about $1.5 million on for [indiscernible] auxiliary requirements split between the consultants that we hired and TPMG [ph].

Okay, great. And then lastly Tom you talked about more partnerships coming online you've announced a number of partnerships, Ochsner and then Ohio should we expect to only hear about would that be one or two or could it be even more than that?

We're not going to say right now, but as you might imagine. With our ability to announce -- I mean right now as we meet with folks, before we had Dignity which was a great partner and then we had UCHealth and then when we announced Ochsner and then we announce our newest partner which is a of course part of Trinity as you might imagine that helps dull momentum, right because and we have brands like that are partnering with you just sends a loud message to the people out there, so what's happening in our process is that it goes from us educating people on what the concept is and why they have to do it to hospital systems approaching are saying we realize this is something we need to do, we need to improve access to care, we need to -- I mean they’re all over the board on why they want to do it from market share, competiveness, the speed of access and all that. But there is a buzz out there about it right now I will tell you and with our team, our team I had two people, actually and two people, a year and half gone we had six today and these are very seasoned people that are out there really pounding on the doors and talking to folks. So there is a lot of conversations going on.

Great thanks guys.

The next question comes from Brian Tanquilut of Jefferies. Please go ahead.

Tom just on the last comment you made on Dignity and all these things, with Trinity. So should we expect these relationships that you have, whether it's with Dignity and Trinity to open the doors to other hospitals and sell to other markets because of the size of these health systems? And kind of like in addition to that we saw that Dignity just partner with Emerus [ph] in Nevada. If you’re allowed to give me just a little bit of color on what's going on in the market especially business large nonprofit hospitals systems?

Sure. So I just talked to Dignity and basically it was in Vegas that they announced the JV with Emerus that actually as you go back two years ago probably. We were right in the middle -- I don’t think we’d even finalized our Dignity relationship in Phoenix at the time. And what they were looking for is as you will see they’re building hospitals out there that’s what they’re doing. And at that point in time we were talking to them about the freestanding emergency room market but really -- it's just really wasn’t a fit for what they wanted to do and we really weren’t building micro hospitals the way they wanted to build them at the time. And so, the relationship while it was just announced recently really took place a long time ago. I can tell you that we did get our Dignity partner pretty good right now because they go on record saying we’re the best partner they have. And so when that press release came out we can’t tell you but we have a great relationship with them and they would definitely love to do more with us in different places, it's just finding out what that is. Regarding Trinity, its way too new yet but I think a reasonable person were to say that if you had a relationship and you did a great job and it could absolutely evolve into other things and other markets. And so we really with these big systems every market tends to be run by an individual and so they tend to make the call in their markets, but that being said it's not unreasonable to think we can announce future relationships with people like that absolutely and then as we go into newer systems the same case.

And then Tom just a follow up on your comment about you got four hospitals under construction right now, I mean Dallas just came out. How should we think about partnership opportunities there, in the past you’ve mentioned Dallas as a possible partnership opportunity? So if you don’t mind just give us some color on where you minds are on those things.

I will tell you as I’ve mentioned to you before we have discussions going on with our potential partners in Dallas and we’re absolutely going to do a specialty shareholders that’s given. One other things and first of all you don’t have visibility to it but let’s just say that Dallas has done much better than we expected and so that’s pretty powerful. But we clearly are talking about -- talking to partners, we clearly value partners and we’re going to do what’s right for the business. So don’t read into that the times like we’re making partners, don’t read that into it, I’m just saying we’re going to do what’s right for the business. And we have lot of discussions going on right now.

And then Tim from a guidance perspective I mean how should we be thinking about the Medicare assumption that you’ve baked into the guidance whether it’s coming from Dallas or Colorado and the other partnerships that are in the books?

So in terms of the percentages that we feel like the government pay will participate it's probably going to be somewhere in the 4% to 5% range. It will continue to grow as we continue to add facilities like ones we have Houston up and running and are able to take government pay there, that’s going to increase that percentage as well, in Colorado for sure.

And then Tom last question from me, Emerus obviously bought into by private equity several months back. What are you seeing in the market in terms of private equity interest in this space, number one and then new capacity builds that we’re seeing whether it's in Texas or in other geographies where you have a presence?

As far as private equity they’ve been swirling around this space a lot ever since our IPO. And so I think one of the challenges they have is there is not a lot of good properties out there to buy or to investment, there are some but not a lot and so they’re trying to figure out what that means. From the new markets perspective you may have seen one of the smaller players I think it was Rhode Island we talked about, it was Rhode Island, obviously we’re familiar with Rhode Island and it doesn’t really interest us, it's just small. That doesn’t mean they won’t be successful there. Today I can tell you that outside of Texas competition -- we see competition in Colorado but as far as for new joint venture partners and all that it's really not affecting us that much. It's hard to have an industry of one so we welcome competition to be honest with you and as insane as that may sound to you. If you think about these major markets if you got two, or three, or four hospital systems in the major market and certainly they all need a partner right or they need to have somebody to help them build these things. And so right now we have a lot of momentum and a lot of great conversations taken place. And so we just continue to evolve. I would tell you the competition there was an interesting competition in Texas and I think it's a pretty fierce and what I mean by that is that we’ve watched it build and regarding its impact on us, it hasn’t been as fierce as maybe there has been some of the other smaller competitors. But I know there was some common that, I believe it was earlier this week and some other companies in the space have been not seeing as many builds now and they’re not seeing that. We’re starting to see some small competitors close facilities. And what’s really interesting is if you look at DFW then you look at what we’re going to do in Houston. As we transform to our [indiscernible] hospital model. If we were a tough competitor yesterday we’re twice as tough today with that model. And so it's just an evolving marketplace but I mean we feel good about it, but there is a lot of competition out there in Texas.

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

My first question was just on the pace of growth in 2016 and the 24 freestanding EDs. I was just wondering how many are geared towards your JV market versus your legacy markets in Texas? And how should we think about the growth in those markets going forward, especially in areas where you may not have a hospital yet, or are you going to continue to grow in Houston before you actually set the hospital for example.

So the answer to that is that we continue to grow in all the areas. I know you visited in the Dallas, Fort Worth area and you've driven around Dallas and so you know that the capacity for the Dallas area is -- still has that availability, we will be adding as you know in Arizona we'll be adding six facilities out there in 2016 and it's just we've manage that process in terms of where we open those.

And we'll be adding in Colorado which is a joint venture relationship, we're planning to bring that hospital online and in Louisiana, so that will be online at year end and of course today in DFW we're now all patients to the hospital would be doing that and then of course Houston will be following so, you'll see quite a bit of new development outside of Texas, but you'll also see Texas continue to develop and as we bring the hospitals online and of course now with the announcement of Louisiana and Ohio and of course Arizona, I think that one other things Graham Cherrington shared with us this morning, our COO, Graham we've closed that and have we broken ground on our second hospital in Arizona right now?

We have not, we've closed on, we have not broken ground quite yet.

When will we break ground?

Very soon.

Very soon, so the point of that folks is that just means that the additional growth out in Arizona, so we're very-very bullish on that Phoenix market and we see 20 plus facilities out there and it's doing extremely well, we are very pleased, with what's going out there in Dignity is very pleasing with what's going on there and so it's all still so new, but it's just amazing how well they’re doing and the patient lines that we're seeing. So it'll be across the portfolio, I would anticipate as we move into '17 and '18, you'll see more and more from the percentage perspective the outside of the State of Texas as we announce JV's rolling.

And the patient per day counts in Arizona are above 20 is that in the ED or is that's just in the -- I mean that's in the ED correct?

That's in the emergency room.

Okay.

[Indiscernible] I realize we think we're in the season out there, so it's in the season. But in there all over report so that I mean I won't give you the highest performing one, but we opened one January 22nd and the month of February it's averaging 35 patients a day. I mean we are very pleased with what we're seeing in Arizona right now and Dignity is very pleased, I mean we're transferring patients to our partner, our partner is working well with us, I mean people just couldn't be happier out there and of course it's a new product in that marketplace and the beauty of that is and what I'm really pleased to tell people is, as well as we're doing and certain facilities we're seeing a lot of government pay and I mean a lot. And so the point that is -- not across all of them, but in some of them and [indiscernible] we’re not cherry picking and we can stand in front of anybody and justify what we’re doing out there, we're truly improving access to emergency care for every one and if you look at our hospital, our hospital was put -- I mean that's, that's just really below low end blue color, there was nobody else there, we built this facility, we see high government pay in that facility, satisfaction scores are wonderful, people are just so happy that we're there and as I mentioned to you in Q4 we actually made money on that facility. And so the point of it is, if you run it right, you build it right, you run in efficient, you can offer great service and you also can make money.

And I was wondering if you could give us a little bit more color just on the performance of the first Texas hospital and Dallas, what we did visit and it is quite impressive, I know that it's early but I just wonder if it's performing relative to your expectations are and maybe where are the admissions, what are they like compared to Dignity when it first opened at this time as well?

Actually it's, it's performing well, it's so new right, it's hard to imagine, because how long it's been opened, but it's performing well. And we continue to -- when you open this of course you've to -- everyone has to get educated and when do you transfer patients, don’t transfer patients and how do you manage them and how do you manage surgery and how do you doc's credential then get them on to do surgery and just all the different aspects that take place in this, but all that being said I will tell that it's doing well for us, Graham and his team are continuing to be very focused on it, they’re putting together new plans, new models and doing all kinds of good stuff that we're very confident is going to make that facility profitable and nicely profitable and so I would say that yes we are very pleased with it, it's a beautiful facility, our patients love it every time and people are positive about it and then of course the lift that we’ve seen in DFW is just tremendous. And so, it's been a very good move for us.

And just one last one from me, just wanted to ask you about your acuity and how that's been holding up, I know we're going to start to maybe wrap some tougher comparisons there on pricing but wonder if you expect a acuity mix to hold or continue to improve especially as you add marketing and awareness and add more facilities?

It's interesting because for example, I just talked to Arizona General Hospital right, where we see a lot of government pay a lot, okay and the -- and you would assume, we all would have assumed that the acuity level will go down, because basically you're taking all covers but with that I actually had Graham with me here as I mentioned and he just showed me a report yesterday at the Board meeting what the acuity levels actually similar to what we are seeing in our commercial pay, Graham you want to talk about that a little bit?

Yes, Tom, I think the natural assumption is that people don't have anywhere else to go so we tend to see lower acuity patients but that has proven out so far, the acuity has been very similar across all payer classes so again we're pleased to see that and making sure we’re taking care of people in need. And then just across our portfolio the acuity levels continue to hold, but not even maybe tweak up a little bit its, Tim?

In Q4 the acuity levels three, four and five they were at 93% of our business.

Great, thank you guys so much for the color.

And we have a question from Matthew Borsch of Goldman Sachs. Please go ahead.

Yes, thank you. I was hoping you cold maybe just update and touch on bad debt for a moment it looked pretty inline at 16% but it is that sort of high teen’s range where you see it settling out as you move from 2016 and any changes in the composition there?

I think that’s accurate, I think it’s what we expected we would see in Q4 is that it would come down from Q3. I think Q3 was 17.7% so it came down a point, we expect that I think obviously people have met their deductibles and so that has an impact on it and then additionally we did start taking government play which has that impact as well so I think if you look going into 2016 that range of somewhere between 16% to 19% is probably where will bit for the year.

Logical [ph] might be a little higher in Q1 because we again we don’t deductibles [multiple speakers].

Absolutely because all the plans start over in Q1.

Right that makes sense. And on maybe sort of related topic, when you say that you are accepting all insurance I think you are referring to your Dallas operations. Does that mean that you have a formal contract with all of the payers or that because they are emergency visits you are getting reimburse by sort of for every covered patient.

It actually in some ways means both, but because of Texas you get reimburses, so has to go with Texas is, if you don’t [indiscernible] swiftly, but the reality is that we have a -- as we've said to you before we have a multi-plan contract, we have a new multi-plan contract now with the hospital because it's the hospital versus the freestanding and it covers all those but we have charge master and all of that and all the different payers that participate in multi-plan and so we have that and you will see us either through ourselves or through our joint venture partner eventually contract directly with our bigger payers there and unfortunate and Texas and in any other places we talked about our loose contract directing. So the combination of things but it's the real thing is that the real aspect is historically because we’re multi-planning our loose contract and other contracts from different markets, we really can only take commercial and so you can never say that you take all payers and so because we take all the government payers now we are able to say we take all payers which there was a lot of confusion on the commercial side is what we’ve seen, two and we’re seeing more commercial pieces together now.

So are there any sort of [Indiscernible] either in the Texas market. So typically visits that qualify as out of network?

Not really the way we do it, no.

We process everything as an in network benefit.

Got, it. Okay just wanted to make sure as I understand. And I think you guys had talked about that you contemplating co-locating urgent care whether it would be owned by you or somebody else. If I got that right, is that something that's under discussion?

I don’t know that we’ve ever officially said that, I would say that we've had partners and we've had partners asks us what types of solutions we can help bring to the market .One of the solutions some of the partners want is what you’d call hybrid, which would be emergency care, ER combined. I can tell you right now we have none under construction we don’t have any agreements and building any for anybody or any of that. What we're hearing from the lot of our partners is really what they what to do on freestanding of our insurance and they want it in the market, and a significant number of these partners have their own insurance right, they’ve brought [indiscernible] and so it really depends on market I think as you watch us unfold in the n next several years, if we do any vast, vast, vast, vast majority of our facilities to be freestanding on our terms. Our patience [indiscernible].

Right, okay. And just lastly on again coming back to Texas is it the DFW market where you see over capacity or potential over capacity with freestanding emergency rooms and in those competitive situations, just correct me if I'm wrong here is it primarily the desirability of the location and the service levels that are driving your competitive edge against others?

I think in DFW I'm not sure that were seeing over capacity because there is still a huge need out there in the market place or so long lead times for people at the bigger hospital facilities and all that. You are seeing competition, so what some of the competition has done in the past is that we would build a facilities and so they would do two things. One they would build their own somewhere and maybe they picked real estate and they had quite a failure percentage right in doing that and so then probably I don’t know maybe a few years ago they just started following us to market. They feel like, these guys are smart, they know this is a good market we are going to go across the street and down the road or whatever. And what’s happened is, is that, let's talk about DFW as an example. Our brand is continuing to grow. I mean people really know our brand now and DFW who we are, we have 25 freestanding. And so that’s helped us and they know the other brand. And then candidly as that happened we’ve had staying power and so you might have somebody who do that, they may impact your volumes for three months, six months, a year, but eventually if they don’t get to breakeven or making money, they have to close. And so for us we’ve had facilities and private backup facilities maybe opened three years ago. We had facilities that made money, people came across the street out somewhere marginal. And then [indiscernible] and now they’re making nice money again, but what’s happened is that we’re starting to see more of that type of fall out. And so the people realized it's not a great idea, it's not a great strategy just to build across the street from us and now that we have of course -- now that we’re outpatient [indiscernible] first Texas hospital it’s even more powerful for us.

The next question comes from Kevin Fischbeck of Bank of America. Please go ahead.

Just wanted to clarify is the same store numbers that you gave, I think those were for the year, do you have Q4 same store numbers?

No I actually gave Q4 same store before the quarter volume was at negative 8.5% and revenue was positive 17.7%.

Okay, I guess I missed that. And I guess one of the things that it seems like you guys are really growing your free cash flow this quarter, it was pretty strong and I want to understand do you have a complete cash flow assumptions for 2016? Because even with all the development it feels like you’re going to be building cash as the year goes on, so wondering what that cash might look like? And then what you might use that on, it’s doesn’t sound like you’re necessarily out there buying things, so any color there for range?

I think if you want a range for our cash flow it's going to in the $25 million to $35 million range.

That’s a decent chunk of change, how do you think about deploying that capital? After you do all the development that you’re looking to do?

It obviously gives us opportunities right, I mean we can look at -- with our relationship with MPT we could actually do some on our own. It just depends on the locations and where they are in terms of their approval process, it also gives us ability to pay down debt. And if we so chose. So it opens up the options that we haven’t had in the past.

Kevin really how we think about this is as you know it’s kind of interesting with the turmoil just in the entire marketplace this year. And see our focus is on making sure that we’re prepared that we have access to capital so that we can continue our growth. And so deleveraging and our [indiscernible] is not a bad thing, we don’t think and not that we have much leverage today but it just gives us access to capital and we’re just going to be very careful about what we do there to make sure we have a lot of dry powder to continue on our growth. And so that’s how we see it.

Okay, between that cash flow and the -- what we’ve already have is, inside there is a lot of dry powder in this, so are you gearing up for anything?

There is and we feel really good about it.

And don’t forget that we also have an accordion feature in our debt as well.

And so I just also wanted to dig into the metrics because just want to understand a little bit how optically some of the use different puts and takes go into all that your saying year-to-date and 2016 you expect volume and sales revenue to grow. But if you think about the puts and takes around pricing, obviously the government pricing is below average. So to the extent that you’re growing that quickly that would all else equal put pressure on pricing. Does opening up new hospitals and ramping up the hospital you have so far. Is that an upward pressure on volumes, is that why volumes coming at a higher rate versus ER?

Is there an upward pressure on volumes, what exactly do you mean?

On pricing, I am sorry, I figured that the hospital volumes would be higher priced than your ER price would be, so because you’re opening more hospitals and the hospital you have it ramping volumes then that should result in a higher price per visit, all else equal?

The pricing, the hospital is still a small percentage of our total portfolio and take our new facilities and so we’re going to anniversary after Q1 on our price increase we had last year, we still expect to see positive pricing trends this year. So, the comment was really one of if you do some speculation that all we were adding was government paying, that we weren’t adding any commercial pay and so that maybe you ended up in a scenario where you had positive volumes and negative revenue or in the price, and that’s not the case at all, so much at DFW we’re actually picking up commercial too as we go. And so we just got to watch it unfold, there is just a lot of moving pieces. But through 23rd of February I can tell you that we’re very bullish on what we’re seeing there but, Tim?

If you’re talking about the OR and the insights that’s out of the business, we’re pretty conservative on those because it takes a while to build out that portfolio and to get the [indiscernible], employees, et cetera.

Okay let me get to it, when I look at the P&L the cost per facility pretty much all the expense items on the consolidated seems to be going up. Any color there on what’s driving and I guess you mentioned a little bit of [indiscernible] costs, but any other color there?

If you’re talking about cost per facility then you are talking about some of the costs that are in the hospital as well. And so those costs obviously are not as fixed as what you have in the freestanding.

Also what you're seeing as you watch out and I guess it depends on what it's showing up, but as our volumes are building in some of these facilities that in Arizona [indiscernible], you staff up a little bit because you're seeing a lot more volume, you're still making, I mean incrementally you're making significantly more dollars but the hospitals, you’re in on the hospitals.

To answer your question on the facility side, we did not see significant increases in any kind of drafting pressures that we would have on the expenses.

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

So, first another company discussing some wage pressures and tax, you’ve been and specifically of the [indiscernible] given your competition from freestanding, do you use, I mean are you seeing any pressure in terms of salary costs as you keep growing in those markets?

I mean nothing due to competition or anything like that, what's interesting is as we grow our volumes substantially in some of our DFW facilities we're having to relook -- I mean it’s not much money at all, it’s not a lot of money, it’s just that if all of a sudden, we’re seeing -- some of our facilities are seeing very strong volumes and so -- but nothing meaningful, nothing to be conservative about from our perspective, no.

And then just a real quick one here on the cash versus following up you had a 4.2 million in distributions from JV partners this quarter, and that just because Arizona turned positive or is that -- and has to be thinking about cash flows from the JV's and how that flows through all the standings.

So, that obviously having to record these as equity investments, the distributions are what flow through our cash flow statement and that's what you see on a quarterly basis we'll make the distributions based upon the cash flow, running those joint ventures.

That's going to be quarterly for each quarter?

Yes, yes.

And then just thinking about the bigger picture, you've highlighted here in the past 200, your pipelines are robust over 200 sites you're looking at, I mean realistically that sounds technically over eight years of development here. I mean where are you though on the development I mean how many sites, how many years of development you already have in agreements with your partners in Louisiana and Arizona, Ohio and Colorado here, as you continue to grow I mean will that growth really be should we think about that three, four and maybe even five years down the line as you continue to partner?

Yes, we've given just for numbers, if you think about your 200 number that you just mentioned but that really was -- that just as in current markets and with the current relationship we have at the time, we felt like we have ability to build 200 facilities and so I think it was 180, but as we sit here saying we're saying 85, so for example we have room for another 100 facilities approximately in that example and if you do in 24 year that's four years growth is all we said and as we proceeded to ramp this JV pipeline we expect that to -- I expect it to fill faster than we burn it off. So if we’re burning off 24 a year, I expect to add more than 24 a year. And so to that pipeline and so as we watch that build, we continue to talk about it, it's all still so new, we feel that we've been doing this forever I understand, but just as a memory jogger, we didn't open Arizona General until February of last year. So while it feels like we've been doing it forever, we're really -- our first JV started 12 months ago and so a lot of discussions going on, very-very bullish and how we feel those are going and what we're going to be able to do there and so we're I mean we're very-very positive about our pipeline and excited about it and probably what we're even more excited about than that which is how to imagine is that how these JV's are performing and how basically an outpatient department of a hospital performs and we all expect at least from all that overseeing it first hand, we're seeing it and Arizona and we're seeing it in Dallas today and we're very pleased with what we're seeing.

I mean I agree that the pipeline looks great, I mean in terms of be specific I mean can you offer up I mean how much of that is actually a locked down and signed agreements already or do you want to get to specifics?

Of what I just told you?

Yes.

100% is locked. If we all -- as we add additional ones so we just add to that pipe.

The next question comes from Dana Hambly of Stephens. Please go ahead.

I had a question and maybe too early to answers, but just in Arizona with the success you're having with Dignity any senses to how the other larger healthcare systems are responding or any kind of level of competition growing in that market at this point?

Dana, what I guess I'll let Graham talk to that because Graham's on that Board out there and without saying too much about competition, but Graham's what's Dignity saying are we gaining are they gaining market share?

Yes, they are very pleased that they are gaining market share in their market. We certainly hear potential competition coming but we've not seen a lot of visible evidence to that yet, but in the meanwhile our partner continues to gain market share in that market and we’re thrilled with that.

And to give you some sense of that if you think about an Arizona market where we are in Phoenix this is a big market, and so if you think if you compare to Houston or Dallas, where some people speculate you have over 100 freestanding facilities in those markets. Today in Phoenix we have about five and there is maybe two or three others that we had before. And so just even if a competitor, which you need know who would be the main competitor and building a few of these is still, it's nothing like what you see in Texas or Colorado.

Okay, alright that's helpful.

But yes that are hospitals doing out there.

That's right. And then Tim just a couple for you on the first Texas, I think it was the pretty big preopening loss in the third quarter, would that -- and I know it opened kind of mid-fourth quarter was there still some of that drag into the preopening or is that all in your all in the adjusted EBITDA numbers from the quarter?

Yes so it was in preopening until November 4.

It was in preopening till November 4 and you would expect that would be a -- continue to lose money for the next year or so?

Approximately, yes.

Okay. And then just as thinking about preopening expenses this year could you just remind me again though I think like we know what the freestanding are but just what the hospitals running preopening?

Yes so the free standings are roughly 270,000 for each one of those facilities and then the hospitals can range, rather it depends on how long it take us to get that Medicare certification.

Okay. I think that's it from me. Thanks.

[Operator Instructions] And we have a follow up from Kevin Ellich with Piper Jaffray. Please go ahead.

So in 2015 you guys saw a, I think the price increase on your charge master do you have anything like that expected in 2016?

I think Kevin if you think it really varies by market, but the answer is yes. Not the magnitude okay because the price increase -- and if you remember in 2015 the magnitude if it was driven by acuity. Remember we said that charge master really was set up years ago and as we looked at it and how it really addresses acuity and acuity levels we’re seeing in all that and that was really the big driver that drove a lot of that. As we look to go forward we would anticipate you see what I would describe you is normal price increases, which means for example on Arizona we’re part of the Dignity Health and so as Dignity Health negotiates 3%, 4% or 5% of price increase we would get that price increase across our managed share contracts and we’re in Colorado with the UCHealth, I mean that's kind of how we see it unfolding and then the same thing with our own contracts with our own contracts we have ability to put an annual prize to the increase but I don’t see anything that is a big out lire and of course that would be normal course of.

Sure. Helpful Tom, thanks. And then clearly it was good to see the improvement in provision through bad debt and Tim I think you talked about that deductible of resets and people finding their deductibles. So can you maybe help us out what the what the seasonality how much of a hit do you think that will be in Q1 as the deductibles have reset we've seen a weak flu season, obviously, I think last year you guys called it out in Q4, but what are you seeing so far this year. I think it's still pretty weak relative to what we’re seeing in on the northern plains or the northern part of country but any comment?

We've definitely seeing a milder flu season this.

Very milder in Q4 it was very mild almost while exists in Q4.

Okay what about with the deductibles you said and talked about where you think provision through bad debts is going to go for the full year but for Q1 specifically can you help us out at all?

Yes frankly we’re saying that it’s just going to be it's in the upper teens.

Okay, got it. And then Tom going back to really good performance in Arizona seeing over 20 patients today do you think DFW has that potential to get to that same sort of patient per day level or I mean clearly any incremental volume will be helpful but do you think we can get to 20, north of 20?

It's a great question. Kevin I think only time will tell. As far as on an average we just don’t know if we’ll match it. I can say you that on occasional days we see a glimpse of greatness, I’ll put it t you that way. But one day doesn’t make a trends right. We’ve had over a handful of days that have been very impressive.

Got you. And then the last thing I wanted to try to see if we could keys out or figure out here is where do you think EBITDA margins ultimately shake out, obviously with the big growth and the ramp you guys have in your facilities and hospitals that's going to pull a little bit of pressure on things but do you know where same-store EBITDA margins came in, in Q4 or for 2015 and what do you think is sustainable with your business model?

We're not going to give you same store EBITDA margin, but I would tell you this that just margins in general, overtime and by overtime I'm not saying six months or 12 months. But if you think about business maturing as we intended to get bigger and bigger and the basics gets larger, it's reasonable to expect that the EBITDA margins would climb given over some multiple year process, I think it’s how we reasonably think we’d be in the 20 plus percent range but we just have so much growth going on and so many of these builds and all of that stuff that tends to keep it where it is today. And then things are there that Kevin we just don’t know yet, is as we move the rest of our facilities to outpatient departments of the hospital what happens. What we’ve seen so far is it’s very good. And so what we’ve said I mean if you think about is, so we basically had a model where we’ve always done well, but we had pressure because we did our own cannibalization because we did clusters and so that put pressure on margins. And then we all know that we have a lot of competition in the Texas specifically and that put pressure on margins. Our strategy internally was, we were going to build this Dallas hospital, we’re going to give access to everybody and it was really going to improve our position and it's probably way too early to tell, but early reports are that we’ve nailed it. And we’re really-really pleased with what’s happening there and so think about this is that’s trends headed to Houston and it's headed across our portfolio. And so as we do that those margins are better and those facilities and so we’re cautiously optimistic.

And we have a follow up from Brian Tanquilut of Jefferies. Please go ahead.

Just a follow up. So, Tim as we think about your comment on equity and earnings and how that ramped up, or that kind of flowed through in 2015. How should we think about the seasonality of that for ’16 as it resets in May and then ramps up again over the course of the year?

So what you see is that until we get to May we’ll share 100% of the profits with our JV partner and then starting in May the preferred return kicks in again and so we’ll recognize 100% of those profits until we reach that number and then we start sharing again. So if you project out that this past year I believe it was in August so look at July to August when we hit that preferred return.

And then tax rate how should we’d be thinking about tax rate for 2016?

Well, you know, when we do our adjusted EPS we use as normalized tax rate of 35% which is actually very close to where we are in our Q4 numbers. And so we expect that to be reasonable estimate in 2016 as well.

And then last question from me, follow to Kevin’s earlier question, how should we think about same store pricing as you build your model through 2016?

That’s a great question because you have a government pay in there forcing you commercial. I don’t know that we think about it from a pricing perspective. I mean clearly government pay is less than commercial.

I guess Tom if we just pull out the government side, just look at the commercial book, what kind of same store pricing will you be thinking about?

I think that over time we would expect -- it's just a normalized expression I spoke to a minute ago which is maybe a 3%, 4%, 5% price increase.

Okay, so that’s sustainable. Thank you.

This concludes our questing-and-answer session. I would like to turn the conference back over to Tom Hall, Chairman and Chief Executive of Adeptus Health for any closing remarks.

Thank you, Operator. And thank you everyone for joining us today on our earnings call. We appreciate your support. We appreciate your questions and look forward to seeing you all soon. Thank you.

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