Adaptive Biotechnologies Corporation (ADPT) Q1 2016 Earnings Report, Transcript and Summary

Welcome to the Adeptus Health First Quarter 2016 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. If anyone needs assistance, please press star then zero to signal a conference specialist. Please note this event is being recorded. 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 first quarter 2016 earnings call. On the call with me today is our Chairman and Chief Executive Officer, Tom Hall; Graham Cherrington, our President and Chief Operating Officer, and Kevin Ellich, our VP of Investor Relations. Before we begin, I would like to remind everybody that our remarks and response to your questions today may contain forward-looking statements that are based on current expectations of management and involve inherent risks and uncertainties that could cause actual results to differ materially from those indicated, including those identified in the Risk Factors section of our annual report on Form 10-K and 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 first quarter 2016 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’ll introduce Adeptus Health’s Chairman and CEO, Tom Hall.

Thanks Tim. I’d like to welcome and thank all of you for joining us for Adeptus Health’s first quarter 2016 earnings call. We’re glad to have this opportunity to update you on our progress and results. We are pleased with our Q1 results, which were in line with our expectations and demonstrate our continued ability to execute on our growth plans and strategy. During the quarter, we opened seven new facilities, grew our existing partnerships with leading healthcare systems and announced entrance into our fifth state, Ohio, through a partnership, and achieved significant growth in revenues, patient volumes and EBITDA. Most importantly, we did this while continuing to deliver the highest quality care that ranks us among the top in the nation in patient satisfaction and has earned us the Press Ganey Guardian of Excellence Award for three consecutive years. As we continue to open new facilities on a steady clip, we also saw significant growth with same store revenues and patient volumes both posting double-digit increases during the quarter. That growth partly reflects the impact of our hospital in Dallas, which had its first full quarter of operations and meant that our 27 Dallas-Fort Worth freestanding ERs could accept all insurance. The increase came from both government and commercially insured patients, underscoring the need for access to high quality emergency medical care. In addition to our existing hospitals in Phoenix and Dallas, we currently have four hospitals under construction, two in Colorado, one in Louisiana all slated to open by the end of the year, and one in Houston, our second Texas hospital expected to open in early 2017. Partnerships with leading healthcare systems remain the key to our growth and to achieving our mission of expanding access and delivering high quality care. In Q1, we continued to add facilities with our partners in Arizona and Colorado. In Louisiana with our partner Ochsner Health, we began construction of a hospital and our first two freestanding facilities, and in February we announced our fifth state of Ohio through our partnership with Mount Carmel Health System, part of Trinity Health. Our potential partnership pipeline remains robust and we expect to announce additional partnerships over the course of 2016. As we told you on our full-year call in February, we are on track to open 27 new facilities in 2016, including 24 freestanding ERs and three hospitals. We’re reaffirming the full-year 2016 guidance which we continue to expect system-wide net patient service revenue, which includes revenues from our 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 $2.50 to $2.60 for the full year 2016. Now I’d like to turn the call over to our Chief Financial Officer, Tim Fielding, who will walk you through our first quarter financial results. Tim?

Thanks Tom. For the first quarter of 2016, system-wide net patient services revenue increased 67% to $140.4 million, with expansion of the number of freestanding facilities from 62 to 88, the opening of the Dallas hospital, and continued growth of our Phoenix hospital and its hospital outpatient departments all contributing to revenue growth. System-wide patient volume totaled 91,075 for the quarter. System-wide same store volumes increased 15% and same store revenues were up 12% year-over-year. We see this as especially significant as 54 facilities were included in the same store comparison. Net operating revenue for the quarter rose 38% to $112.8 million, which excludes revenue from 16 facilities in Colorado, 12 of which were consolidated in the prior year, and the Arizona hospital and its six freestanding facilities which are all accounted for as equity method investments. Adjusted EBITDA, which is a key metric we use to gauge performance of our business, was $21.7 million for the quarter, a 64% increase from a year ago. Growth in adjusted EBITDA was driven by the increase in net operating revenue and increased equity and earnings of our unconsolidated joint ventures. We reported Q1 net income of $7.9 million, of which $4.5 million was due to Adeptus Health compared to net income of $1.6 million of which $600,000 was due to Adeptus Health for the first quarter of 2015. Adjusted earnings per share was $0.47 and GAAP earnings per share was $0.32 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 an aggregate of 20,883,876 common shares at March31. For the quarter, it was adjusted for $1.9 million of pre-opening costs associated with new facility openings, $1.1 million of stock compensation expense, and $1.1 million of other costs associated with our growth initiatives, and an adjustment for taxes in order to establish a normalized tax rate of 35% for comparability purposes. At the end of the first quarter, we had cash of $3.7 million and $39.8 million available under our revolving credit facility. Cash flow used in operating activities was $7.4 million for the first quarter and $12 million for the prior year. We are in the early phase of McKesson performing our coding and collection processes, which led to an increase in DSO for the quarter, which we expect to decrease in future quarters. Q1 also included annual incentive compensation payouts. At March 31, 2016 we had total debt and capital lease obligations of $123.1 million and debt net of cash was $119.4 million. We continue to add facilities under our master lease agreements with Medical Properties Trust. As of March 31, 2016, we have $132.7 million available for future development. With that, let me turn the call back to Tom.

Thanks Tim. Amid our rapid growth, our commitment to providing the highest quality care remains our top priority. For the past three years, our patients have rated our care to exceed the top 5% nationwide, according to a patient survey by Press Ganey, and this satisfaction doesn’t stop with our patients. Last week, we were pleased to announce Fortune Magazine recognized Adeptus Health as one of the top 20 best workplaces in healthcare in America. By providing the best work environment and recruiting top talent, we are making a real difference in the lives of our patients every day and helping to transform the delivery of emergency care. In closing, I’d like to reiterate that we are confident in our strategy and ability to deliver on our growth plans. We look forward to continuing this positive momentum as 2016 unfolds with new hospital and freestanding ER openings and additional partnerships, all the while by working [indiscernible] and remaining focused on our core mission, which is to expand access to the highest quality emergency medical care to the communities we and our partners serve. With that, we’ll be pleased to answer your questions at this time. Operator?

[Operator instructions] The first question comes from Brian Tanquilut of Jefferies. Please go ahead.

Hey, good morning guys. Congratulations. Tom, first question for you. Blue Cross Blue Shield of Texas, that contract is up for renegotiation, so how should we think about pricing trends, kind of like expectations on pricing for that specific book of business?

I’m not sure that it’s up for renegotiation. We have many contracts in many different places. When I think of Blue Cross, we have a good relationship with Blue Cross so we’re seeing mix changes and stuff like that a little bit, but I see no reason for it not to remain flat to up.

Okay, got it. Then one of the things that investors have been focused on in recent weeks is just in-network versus of out-of-network and then balance billing. Do you think you can just give us some color on your practices and your exposure to in-network versus out-of-network as well?

Sure, I mean, we are in-network. Tim, what percentage of our patients would be billed out of network?

Yeah, the patients who would be out of network are probably in the 3 to 4% range.

Yeah, it’s very, very low.

Yeah, and to answer your second question, we do not balance bill.

Okay, got it. Last question from me, on the cash flow, Tim, you talked about the McKesson roll-out has impacted--is the reason for the DSOs going up a little bit. Just in terms of timing on that, how do you expect that to taper off during the course of the year? And then also, just if you could make some comments on bad debt.

Yes, so in terms of our DSO and McKesson, that conversion today has been completed. All of our bills are going out on a timely basis, but there was a transition when we first converted those guys over, so that caused an increase in our DSO. The other item in there is also the annual incentive compensation payments that were made during the quarter.

Just to that point, how much was that, if you don’t mind me asking? Sorry.

We don’t break that out.

We don’t disclose that.

But it’s across the whole management team. I mean, it goes all the way down to people that run facilities and stuff.

Okay. And then the--

Your second question, I think was regarding bad debt. Obviously Q1, we’ve stated in the past that our highest bad debt percentages are in the first quarter as deductibles reset. Our Q1 2016 bad debt as a percentage is still based on our historical averages. It’s just still too early to use McKesson. At June 30, we’ll be able to look at the bad debt using McKesson data and we think we should see positive results there.

All right, got it. Thank you.

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

Thanks everyone. Good morning and welcome to Kevin. Wanted to start by asking some questions about the same store volume number - certainly impressive, much higher than we were anticipating. Just give us a little bit more color please, if you will, on what drove that. I assume much of it has to do with Dallas, but do you expect this pact to continue, and maybe you can comment on the other Texas markets and were those positive as well?

From the same store perspective, the majority of it, of course, was driven by the fact that we could add government patients to our facilities. That being said, I would tell you if we only looked at commercial same store, same store revenue would have actually been higher than same store growth volume, to give you some sense, and so it was really positive in both arenas. You know, what we’ve said is we see not only more government patients but we’re also seeing more commercial patients, so we’re seeing a positive trend. It was interesting - we were talking about one of the questions we weren’t sure whether we would see today was, you know, the floods down in Houston that’s happened recently, and what’s interesting is when we have hail storms, floods and all that, that actually has a positive effect on us, not an negative effect on us, and we were talking about that this morning because people really need access to emergency care. So we’re seeing nice trends across the portfolio. As far as what we expect going forward, we just think it’s too early to tell that we’d continue to run double digits or high single digits. I just think we have to watch. Our own portfolio varies by month, but I will tell you that we’re very bullish on it and very pleased with it. Then as a side note, Paula, just to remind you, when we open the hospitals in Colorado, the majority of those freestandings will also come into same store--they're in same store, but they’ll be in same store, so that will have another positive impact on same store. So we have quite a few catalysts that we think will continue to drive very positive same store revenue and volumes.

And if I’m not mistaken, we should see Dignity come in at some point at the end of 2Q or 3Q. Is that correct, just given the 15 months pace?

That’s correct. The hospital will come in Q2 and then the freestandings will follow.

Okay. Just if I could follow up on that, can you just give us a little bit of color on the 54? Just remind us how many are in the Dallas market of the 54 and maybe how many are in Colorado?

I think you’re looking roughly at two-thirds of each market’s freestandings are included in those numbers.

Okay, thank you. That’s very helpful. Then just curious to know about your marketing efforts there. I mean, obviously I think you’ve been making a big push. How much more marketing spend did you add? Obviously the early results seem to be good, but any changes that you made, and as it pertains to Colorado, are you going to wait to build your marketing efforts there until after each of the hospitals are open, or do you think it’s better to sort of get that generated now in efforts to gain more momentum when you do open those hospitals?

No, it’s a really a function of when the hospitals open, because the real message is you can now take all patients. As we’ve mentioned before, clearly and all of a sudden you can take Medicare, Medicaid and Tricare, so these folks that don’t have access to emergency care now have access, so you need to get that message out once you can do it. But also, what we’ve seen is that it’s amazing when you can say you take all payors, all of a sudden you see more commercial people because even though we have the brand and even though we’ve been out there for a while, there’s still some confusion around it, so that’s powerful. But we really don’t want to say that until we can take all payors, so that’s a function of--we have quite an extensive launch we do when we open this and announce it, and it’s worked well in the past and we’re hopeful it will continue to work well in the future as we announce our new hospitals in new markets that we have those in.

And maybe just one last one from me on competition. Has that changed recently? We have heard from some of our research that we’ve done that there are some players in the market that have been closing, so wondering if you’re picking up those opportunities of it that’s just resulting in the potential to gain more market share and what are your thoughts there. And maybe if you could just update us on the hybrid models - I know you’ve talked about this before, but wonder if your feelings have changed at all on this concept.

On competition, there’s always a lot of competition out there, especially in Texas. That being said, we have seen some closures. I think we saw four--Kevin, I think it was four closures in Q1 of four facilities, and almost every one of those scenarios they were within a reasonable distance of our facility, so when that happens, that does have a positive impact on our facilities. So we don’t wish bad things on anyone, but that helps our business when that happens. Regarding the hybrid, really no new information on the hybrid or what we’re thinking about the hybrid. As we talk to new joint venture partners and all of that, some have some interest, some already have urgent cares. We’ve talked about the concept like medical malls before, and people call it different things but it’s basically having an emergency room near where our hospital partners have other types of facilities, and so there is quite a bit of interest in that. A lot of discussions going on right now, but really no update on the hybrid.

Okay, thanks. I’ll let someone ask some questions. Thanks.

Thank you.

The next question comes from Matthew Borsch of Goldman Sachs. Please go ahead.

Yes, hi. Good morning. Just wondering if you could touch on the--where you see the Acuity mix, if that’s changed at all from your most recent view that you’d given us as of full-year 2015.

Yeah, our Acuity mix has stayed very consistent. As we continue to grow, it stays right in the historical norms we’ve had, so it remains very consistent.

So the 1s and 2s are still below 5%?

Oh yeah, absolutely. We still have a lot of energy on that, Matthew.

Right, okay. No, I realize that. You made a reference in the press release to some impact from Chargemaster increase. Can you quantify that, and would that roll--I’m trying to think off the top of my head where that might roll through for in-network patient--in-network reimbursement versus out-of-network.

Oh, it’s all in-network, and what it really is, it’s not across the whole portfolio. It’s just in different states where we have direct contracts. As you know, we have contracts in all the states that we’re in today, and they renew at different times in the year and they typically have escalators in them, so that’s really what we’re talking about.

So some of those contracts, correct me if I’m wrong, would be where the payor is reimbursing you on a percent of your charges basis?

Correct, yeah.

Yeah, you have some of that, and then also have--you know, as an example, when the contracts come up, as an example in Arizona, those will be adjusted.

Got it, okay. Just one more, if I could. What’s on your radar screen, if anything, in terms of potential regulatory barriers, and I guess does this cut both ways - you know, new barriers that might inhibit you, or the reverse side being barriers that might fall and open up new market opportunities?

Well, I think on the new barriers, there’s always a lot of noise out there, but as it relates to us and what we’re doing, part of the beauty behind our joint venture model is our joint venture partners are some of the premier non-profit health systems in the country are the majority shareholders of these joint ventures, so that puts us in a very, very good position. As far as new opportunities, we’re constantly working on new ways of entering new markets, and we have some pretty exciting stuff we’re working on right now that we’re hopeful this year we’ll be able to talk to people about, and I think people will be pretty excited when they hear about it. So we’re just constantly working on those types of things.

Got it, fantastic. Thank you.

Thank you.

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

Good morning, this is actually Joanna Gajuk filling in for Kevin today. Question on the guidance, which you reiterated but seems like, just by our math, adjusted EBITDA was somewhat better, 5% better than consensus. So is there some sort of cost pressure that maybe the market wasn’t modeling correctly, I suspect probably around the new hospitals opening? So these are heavily weighted towards the back half of the year, right, so is any color around any particular increase in cost in the second half of the year?

No, I mean, we just gave our guidance. It wasn’t that long ago. We had a good first quarter, we’re pleased with our first quarter, but there’s really no reason to raise guidance right now. We need to let the year play out a little bit and see how it goes. That means that we’re very pleased with what’s going on and we’ll just continue to remain focused and execute. But no, you should not read anything into that at all.

Great, and then I’d appreciate a comment around some of the drivers around the same store volume number, which was very strong. Can you talk about the payor mix and maybe specifically in terms of if there is a way to quantify in terms of the growth in government versus commercial payors, which I guess you said [indiscernible] which was that there was growth in commercial as well. But is there any way to sort of put in perspective in terms of the 15% growth, how those buckets were driving that, and then any color around Medicare versus Medicaid potentially patients as well?

Yes, we haven’t broken that out. As you’ll notice today, we have Kevin Ellich on the call with us, who is our new head of investor relations, and Kevin’s got a lot of tasks that we’ve put on his plate, but one of the tasks is to allow us to find ways to communicate better with you all and give you the information you need. So today, we don’t have that answer, but Kevin will be working on it. Kevin?

Thanks Tom. So you know, I guess, Joanna, at this point we really haven’t broken out that information, but we’ll definitely take a look. I guess at this point, we’ll just have to get back to you after the call.

Yeah, we’re working on it. I just wanted you to be aware that today, we don’t have that answer for you, okay?

All right, but is there any color in terms of not just the growth in volumes but at least the payor mix [indiscernible] patients?

Well, the majority of the same store clearly came from government from a volume perspective, although as we mentioned, for example in Dallas, we have seen more commercial, so it’s been significant. It’s really across the portfolio, but other than that, no.

Great, and then in terms of the cash flow, also appreciate the commentary around what’s driving the, I guess, weaker operating cash flow. So is it right to say that you still kind of stand by your prior comments around outlook for free cash flow for the year around 25, $35 million range?

Yes, that’s correct. We’ll reaffirm that.

Great, that’s all for me. Thank you.

Thank you.

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

Hey, thanks. Just going back to the opening of the Dallas hospital and the impact on volumes here, in the K you guys reported that charity care was about 7% of volumes last year--sorry, 7.8%, and I think that a lot of that relates to non-commercial pay patients, so presumably government pay where you weren’t charging them. Just trying to understand now that you’ve opened the Dallas hospital and you can accept Medicare and Medicaid, where is that charity care ratio going, and were some of these volumes people you were already in theory seeing, you just weren’t getting paid, so that just improves collections?

On the volumes, some of them may have been, but the majority is new volume. It’s absolutely new volume. Regarding as far as where charity care, I don’t know if you have that number here with you today?

Yes, so charity care has come down a little bit so far, but it will continue to climb. You are correct.

Okay, thanks. Then thinking about the hospitals, probably a little too early for Dallas but for Arizona, could you talk about maybe how much earnings or volumes in the hospitals are coming outside the EDs, talk about your long-term thoughts here on rolling our surgeries, ORs, et cetera, and when we could start seeing that maybe start contributing more meaningfully? Thanks.

Well it’s a general hospital, so we’re doing surgeries there now. We have inpatients. It’s very--the Arizona hospital is very busy. We put it in an area that was significantly underserved. We did that intentionally. It’s kind of interesting - our industry historically has been painted with a brush that people love to talk about when you only take commercial, that you cherry-pick. So when we decided to build that hospital, we were really trying to do the right thing, right, which is we’re truly trying to put in a place that’s underserved and serve people that have not been served, and we challenged ourselves to come up with a model that we could be successful doing that. But that’s a general hospital, it’s a full service hospital. There’s surgeries going on there, there’s inpatients - I mean, it’s very busy, so that’s happening today as we speak. As far as the outpatients departments in hospital, the freestandings, which as we know are outpatient departments of that hospital, they’re doing very well. We’ve put these again in markets that are underserved, people are responding nicely to that. As I mentioned, we’re seeing over 20 patients a day in those facilities. As we continue to open new ones, that trend continues, and our patient satisfaction scores and everything, people are very, very pleased with our new offerings. And it’s of course Dignity Health, right? Dignity Health, if you see those facilities, you won’t see our name on them anywhere, it will be Dignity Health Arizona General Hospital. So--yeah.

Okay, thanks. Then just one last for me, just to clarify on the cash flows. Last quarter, you benefited from $4.2 million in distributions from JV that was kind of--you know, in last quarter to the first quarter, we saw the cash flow didn’t seem to repeat again this quarter. Is there some sort of seasonality around those distributions we should be thinking about when modeling cash flows throughout the year, or does it have to do with the timing of profitability per facility as it ramps through the year?

Well, there definitely is seasonality. There is also some signage that we put up when we changed signage for the Colorado facility, so that added to some of our cash flow requirements, so we did not make a distribution in Q1.

Okay, but going forward, you would expect maybe distributions in most of the other quarters, or--?

Yes.

Okay, thank you.

The next question comes from Jason Gurda of Keybanc. Please go ahead.

Hey, thanks. Tom, you mentioned that four competing ERs had closed recently. Do you have the reasons for those, or what you think might be the reasons for those closing?

Yes, I think it was just volume. I think it’s competition, right? We talk all the time about how these facilities breakeven at $3.5 million to $4 million of revenue, and while it may be slightly different, I don’t have any reason to think that our competitors have much different metrics. So if you’re not seeing patient volume or if you don’t have contracts, you don’t have the right relationships, you’re not going to be profitable. One of the things, especially more so in Houston than Dallas, is that we saw a lot of physicians just going and opening these things, thinking--you know, after our IPO, there was a lot of buzz. There’s been buzz before, but there was tremendous buzz around this industry and everybody thought, me too, we’re going to go do this. This is real easy - why not? We can do this. So we saw a lot of stuff open, and candidly we’ve seen some new things close. I mean, they literally just get open and they--you know, there’s a lot of expertise that goes into one, finding the locations, building the locations, bringing them online, staffing them, all the things we talk about that seem pretty simple. It’s not as simple as it looks. Then of course, they need to be profitable, and if you’re a sole proprietor, if you’re somebody that owns one of these things and it’s not doing well, it can sink your ship pretty fast. So it’d be pretty easy for some of these new start-ups to lose $1 million or $2 million if they don’t put them in the right locations, so that’s what we’re seeing. It’s good for us because what it does is when these people--when this happens, and again I don’t wish bad things to anybody, I really don’t, but when it happens to them, they usually--you know, if you’re a doctor, you usually had to sign on the line and put your house up as collateral and everything else, so you watch it all go away, it’s pretty ugly. So it just sends a strong message that this is a serious industry for serious players, and so we’ll benefit from that.

I appreciate that, that’s helpful. As far as on a per-facility basis, thinking about the company, when you did the IPO you were talking about, I think, expecting on average $5 million to $6 million in revenue, if I remember correctly, and maybe $1 million to $2 million in EBITDA contribution per ER. Does that still hold, or do you have more updated metrics on what you think each ER should do?

You know, it still holds. It really varies by market. It’s been fun having Kevin on board, because he got to look under the covers and see what reality looks like. I mean, it’s all very good, but it’s just fun to watch his face - he’s smiling at me right now when I said that. As you tend to have more government pay, you tend to need more patients because your revenue per patient is a little less, so that changes the patient mix . But from a revenue perspective, and if you think about it in the most simplistic terms, it’s $3.5 million to $4 million, really more $4 million these days for breakeven, and then above that the marginal cost per patient is about $100. So as we move up to $6 million in revenue, you’re going to make about $2 million. Of course, we have facilities that are doing significantly higher revenue than that, and we have a lot of new facilities. We still keep opening these new facilities that they have to ramp up, but the metrics are still pretty much the same. It may vary by market, again depending on whether you’re all commercial or if you get government pay, but fundamentally it’s the same.

Last question - you may have answered this already, I apologize, but for the Arizona facilities that have been open with a hospital longer, is it--and you’ve talked about the patients being about 20 per day on average or a little higher in some of those ERs. Is a large portion of that government pay?

You know, it’s above 20 patients per day, so I just want to get that out there, so above 20 patients per day. It really varies by market again, and it’s been fascinating. So we had a--we had our board meeting, of course, yesterday, Monday and Tuesday, and we had a real estate committee meeting where we look at--you know, we have all this sophisticated site selection, and then of course we go back and we track the real estate team and we see what does reality look like. For example, we have one facility out there that’s seeing a lot of government, more government than we thought, and in the initial forecast it didn’t show that. What we’re finding is where we fully--you know, we typically pull from three to five miles, and that facility we were pulling from seven to 10 miles because the market is so underserved. So outside that three to five-mile radius, there actually was a lot of government pay but we’re serving those patients and we’re pulling them in. Then we have other facilities where it’s behaving more like we expected and we’re seeing majority commercial, so it’s a real mix out there. Overall, I would say that the blend is probably, what, 60 commercial, 40 government type of thing. But there are some that are majority government and there are some that are higher than that commercial. As an average that 60/40 range is a good range to think about.

Okay, that’s great. Thanks a lot.

You’re welcome.

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

Hey, good morning. Thank you. Just on the cash flow, the seasonality, should we be expecting that first quarter is usually going to be negative, just because of payroll taxes and incentive comp?

Yes, I think that that is definitely going to be the drag in Q1 for first quarters off in the future as well. Once those go away, then the generation of cash should improve. One thing I would add is that with the two hospitals in Colorado that are opening, that can have an impact on cash flow. It remains to be seen, but we’ve got that modeled out.

Okay, and then on the balance with MPT, can you just remind me, when you’re doing the new developments with your joint venture partners, are you using MPT in that split roughly 50/50?

Yes, we absolutely are using MPT. It’s very similar whether or not we do a JV or not. Those leases are subleased down to the JV level.

Okay, and then just on those leases, can you give a sense of the imputed interest rate or the amount of lease per facility?

Yes, we’ve said in the past it’s 8.875 for the last tranche [indiscernible].

8.875 - okay. Then Tim too, on the--just for the non-facility or the corporate cost, can you just give us an update there where that’s been running and how you expect the growth of that with the growth of the company?

Yes, so for the quarter we were at 12.5%, excluding add-backs, so that was a little bit of an improvement over the previous quarter. We think as revenues continue to out-pace our expenses, that will continue to come down.

Okay. Then last one from me - Tom, when you go into--you know, Arizona is a relatively new market and there’s a lot of consumer education that goes around, can you just tell me about are you learning things from the Dallas and Houston markets where you can educate the consumers more quickly? And just maybe on that, Acuity per market, is there any real difference between the markets that you’re in?

So on the education aspect, Arizona was interesting because we never existed there. It’s always been the brand Dignity Health, right, and the facilities--I realize I’m a little partial here, but the facilities are beautiful and they’re in great locations, because we were the first ones to the market, so we’re getting the hard corners, we’re getting incredible locations out there. So people figured it out pretty quickly. It’s such an underserved market that they’ve actually figured it out and they really like it, so if anything, it’s outperformed Texas. I mean, it’s significantly outperformed Texas from just patient volumes and early adaptors and early acceptance and all that. So what we wonder is, we wonder in reverse what happens, like in Colorado where we go from the First Choice to changing the brand to watching that, and how much that will ramp, and so we’re kind of--we’re watching that. I think if anything, the ramp may take longer in our historical markets because people think of us as First Choice, which was a good brand, but as we educate them on the new brand, on UC Health and stuff like that, and then where does it mature out, only time will tell. From the Acuity perspective, we’re seeing similar Acuity--you know, I’m not sure if I had mentioned this to you, Dana, but before we took government pay, we talked about our admit rates and all of that, and in all fairness to everyone they would say, you guys are only taking commercial, so when you start taking government pay, your admit rates are going to go up And candidly, they have not. It’s been interesting - our Acuity rate has stayed very high. It’s high in Arizona. We’re seeing all these Medicare-type folks and that, so the Acuity is up there, but because of the model and the way that we’re able to really serve the patients and get quick results from labs and CTs and all that, and then direct them to the right level of care, we’ve been able to keep our admit rates at a similar level, like 4.5%, so it’s pretty powerful. It’s a tremendous saving for the healthcare system. Folks talk about freestanding emergency rooms, and Dana I believe you’re aware of this but I used to be president of a company called Matria Healthcare, which was one of the biggest players in disease management in the country, and we focused a lot of time on keeping people out of emergency rooms. The real focus wasn’t that emergency rooms charged too much, it’s just that people with chronic diseases would go there and all of the sick people were at the hospital emergency rooms, so you’d catch other things and it could end badly. But what we view it as, we view it very different because we’re able to handle these people, because we’re able to meet them where they need to be met, we’re able to figure out what’s wrong with them and get them on to the right level of healthcare within the system, the admit rates are way down, which we believe is a huge savings financially for the system. So the old thinking of keep people out of the emergency room, we think you’re going to see that shift dramatically over the next several years where people are going to say, yeah, get them to the emergency room, get them to the right place where they can get the right type of healthcare, and ultimately you’re going to save cost. That’s what we believe.

No, that’s a good point. I guess a follow-on would be are you in discussions at this point with any payors or systems about participating in any, broadly speaking, value-based purchasing or value-based reimbursement?

Yes, really the discussions that we’re having would be through our partners and those types of discussions. You know, people are always talking about it, but nothing really that we can talk about today.

Okay, thanks very much.

Thank you.

We have a follow-up from Brian Tanquilut of Jefferies. Please go ahead.

Great guys, thanks for taking the follow-up. Tom, just on the Dallas operations, you opened it in November, so do you mind just sharing with us what the ramp looks like? Is that starting to taper off on the Medicare side, or the government-pay side in terms of volumes?

The ramp, it started off quicker than we thought, but we didn’t know what to expect, so. We thought it was going to be 1 and it was 2. We were pleased with that, but then it continued to ramp nicely for us. The second part was government versus--?

On the government side, we have not seen a fall-off.

Yeah, or commercial.

So it’s not tapering yet? Okay. Then in terms of the Louisiana facilities that you guys are opening, we noticed that they look like they’re slightly bigger than your traditional model. Is there anything that we should know there, or is there a difference in the Louisiana strategy?

Well, what we’ve seen with our--we really saw it with Dignity. As you know, our old facilities were six to seven patients, and we’re thinking where we can, we’re going to have these facilities be nine--or six to seven rooms, pardon me, and we’re having these new facilities be nine rooms where we can. It’s just a function as we see increased volumes, the ability to handle the increased volumes and be a little bit bigger. The cost really isn’t that much greater to build nine rooms versus seven, and it just gives us a lot of flexibility, so that’s what we’re doing.

Then last question, Tom, timing of the Colorado hospitals, are we still thinking about May for the first one to open?

No, no. I’ll pass over to Graham. Graham?

So no, we’re expecting kind of mid to late Q3 on that, on the first one, and then the second one in Colorado Springs would be in the fourth quarter.

Okay, got it, and the Louisiana is Q4?

Probably more late Q3 than mid, I would say. Q3 always seems like it should be October-November, and it’s really in July.

And then the Louisiana hospital will be around late Q3 as well? Is that a good way to think about that?

Q4.

It will be Q4.

Q4 - okay, got it. All right, thanks guys.

Thank you.

Again if you have a question, please press star then one. We have a follow-up from Paula Torch of Avondale Partners. Please go ahead.

Hi, thanks again. Just a couple more. One question on D&A. It was a little bit lower in terms of dollars and percent versus what we were expecting, so how should we think about that ramping for the remaining quarters and where should we expect it to be for 2016 on depreciation?

On depreciation? Are you talking about depreciation or SG&A?

Yeah, depreciation.

Depreciation--well, let me back up a little bit on our capital expenditures. We again expect this year we’ll be in that $8 million to $10 million range, and then we basically straight-line our depreciation, so that should be similar in subsequent quarters with the addition of the capex that has come in.

Okay, and then just in terms of competition, one other question on seeing a lot of hospitals keeping up the pace and opening up freestanding EDs. Wondering if that’s putting any pressure in any of your core markets, and is that having a negative impact at all just given that hospitals already sort of have the volumes, and if they’re opening up their own freestanding EDs, does that sort of take away from you guys in your markets at all?

No. No, we’re not seeing--I mean, the biggest player from a hospital perspective is HCA, and as you know, HCA’s been in Dallas and Houston and all that. The markets are so massive that--I mean, they’re opening--I think they have 50-some now, but in many different states, and then after that it really falls off. I mean, we welcome the completion, which may not make sense to people, but it’s hard to have an industry of one, and I think the more that--especially the hospital system, the more that they do this the more it legitimizes the product and the offering.

Then just lastly, can you update us on any thoughts on getting a JV partner in Dallas? Is that something you’re still considering, or are you happy with the results and want to sort of run this on your own?

We are still having discussions, and we will do what’s best for the shareholders, I will tell you that. But we’re still having discussions. It’s part of the hospital. It takes a long time.

All right, thank you.

This concludes our question and answer session. I would like to turn the conference back over to Thomas Hall, Chairman and Chief Executive Officer for any closing remarks.

I’d like to thank everyone for joining us this morning. We appreciate your interest and your support in Adeptus Health. We look forward to seeing you. We’ll be on the road at some conferences coming up, and we look forward to seeing folks out there. If you have any questions, don’t hesitate to call us, and hopefully with the addition of Kevin Ellich we’ll be a little bit more responsive than maybe we have in the past. So with that, thank you for your interest and support.

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