Nobilis Health Corp (TSE:NHC) CEO Harry Fleming on Growth, Strategy in Multi-Billion Dollar Ambulatory Care Industry

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Nobilis Health Corp (NYSE:HLTH)(TSE:NHC) CEO Harry Fleming elucidates the investment case for his company, and describes in depth how the ambulatory care hospital business is a multi-billion segment that is growing, and how Nobilis is perfectly positioned to participate.

]Listen to the podcast interview with Harry Fleming:

Full Transcript of the Podcast Interview

James West:    Harry, thanks for joining us today.

Harry Fleming: Sure, happy to be here.

James West:    Harry, could you start with a brief overview of the business model and value proposition for investors in Nobilis Health Corp, please?

Harry Fleming: Nobilis is a little bit different than some of the other health companies out there. If you look at the traditional business that owns ASC’s [Ambulatory Service Centers-ed.], they’re a part of ASC’s, they bring in doctor partners who would then bring their business into the facility. What we did is, we wanted to drive business to the facility at a proactive way. So we built a model where we generally will own either all or the majority of a facility, but we deploy various marketing methods to drive cases to the doctors that are within our network. And that’s how we get our revenues at our centres.

So we’re much more proactive. If you think about the traditional model, the facility owner has to really just sit there, keep their fingers crossed and hope that their doctor partners bring their cases. Very reactive. We control our revenue flow through our marketing efforts.

Now, what we’ve found as we started rolling this out, is that the doctors, they really love this model. So if you’re a doctor, you can go and buy a piece of a surgery centre, and you would hope to get some distributions from your equity ownership. In our model, we’re actually going to help that doctor build and maintain his practice. We’ve found that to be much more important to the doctors, much more attractive, we want to make sure that they have adequate cases to handle. So it’s been very successful.

James West:    Interesting, okay. Why don’t you give us an overview of the financial condition of the company, and what’s the outlook for 2016?

Harry Fleming: We’ve done very well. So the first year I was here, we had grown from 20 to 30 million, and the next year we went to 84 million, 74 million of which was organic; and then this year we’re going to do between 220 and 230, I think we put a press release out a few weeks ago. We’ll have those numbers issued sometime in a month or so, as our auditors are on the ground here finishing our audit.

Our 2016 numbers, we haven’t released the organic numbers yet because we want to make sure we have our 2015 numbers in the can, and then we’re really going to impute about 20 percent growth organically on the top line, maybe a little higher on the EBITDA line. But on top of that, we’ll add strategic acquisitions, and as I think I said on our call a couple of weeks ago, after we released our financials, we’re in several substantive talks with different acquisition targets.

James West:    Sure, okay. Well, interesting. The share price has taken a bit of a hit recently, and I’m wondering if you could shed some light on what your opinion is causing that.

Harry Fleming: Initially, we were surprised that an anonymous blogger with a stated short position could have so much power in the market. And that happened back in October where we had the initial hit.

We then had our new audit firm do a re-statement of the financials our old audit firm had put out, however, it wasn’t your typical restatement where we’re saying ‘oh boy, we didn’t have the numbers that we thought’. This was more of a reclassification of non-cash items, so it was more of a sideways movement. In fact, I think net income actually went up with the re=statement. But it wasn’t anything that was really detrimental to the company, so we still just haven’t had the recovery we would like, after we’ve debunked any of the issues related to the blogger and the restatement. So we actually came out with stronger than forecast third quarter numbers; I believe we’re at around 52 million in revenue and around 9 or 10 million in EBITDA, so compared to the prior third quarter of the prior year, I mean, that was up exponentially, 200, 300, 400 percent.

So we’ve done very, very well. If we come out in March with our numbers at the 220 to 230 range, you need to think about that growth: going from 30 to 84 to 220+ in revenue, that’s pretty substantive. And we believe that the market will react appropriately when we put out our final numbers. We put out a forecast a few weeks ago of EBITDA falling between 37 and 42 million, and we still are standing firm behind those numbers. And again, you need to look at it in perspective. We went form 2 million in EBITDA in 2013 to 10 million in 2014 to a low of 37 million here; these are phenomenal growth numbers, and we’re feeling very good about our first quarter of 2016.

The business model is very, very strong, very robust, obviously, and as we start to get back on the road, do some investor relations, we don’t think it’s going to take very long to get our stock to the right price.

You know, one of the issues we have right now is that as we look at acquisitions, we generally want to include stock as a portion of the currency. We can’t do that today; our stock is undervalued, so we don’t want to use it. So we’re looking at smaller acquisitions and really trying to find the ones that don’t need any kind of stock component, so either cash or bring on some debt to accomplish it.

We’re really focusing now on acquisitions that will bring in revenue and EBITDA. So if you look at us historically, we’re generally getting these centres that were either closed or that were failing, and so we didn’t have that luxury of buying the EBITDA-accretive acquisitions. We will do that in 2016.

James West:    Sure. Okay. I’ve noticed that there’s been a number of press releases by law firms in the States who are trying to attract shareholders who might want to join a class action based on the deteriorating share price. Have any of those materialized substantively, and does that represent risk to the shareholders at this point?

Harry Fleming: Yeah, we’re not concerned about that here at management. If you go back to the same thing happened with the anonymous blogger, the anonymous short blogger back in October. You had law firms filing suits, multiple law firms putting out notices of ‘please join our shareholder suit here’. They were summarily dismissed, and we’ll do the same here. This is nothing that we are concerned with; this is a nuisance suit, and they’re frivolous.

James West:    Right. Do you think there’s any fundamental aspects of your business that constitute risk that investors might be misinterpreting?

Harry Fleming: No, I don’t. If you ask me what is our risk, I think our risk is the obvious one: as we grow so substantially, do we have the breadth and the depth in our management team to handle our growth? That’s a fair question, and it’s something that we think we’re answering every day as we bring on additional talent and additional expertise. We’ve tried to keep track of that growth by bringing in these people, and I’m pretty confident that we’ve done that so far.

James West:    Okay. What is there out there that could derail your business plan and your business model, that might keep you awake at night?

Harry Fleming: You know, I think we are on a growth track that is very aggressive. I think organically we’re very strong, but I believe our model is also dependent upon acquisitions, because we believe we’ve got this national, scalable marketing program. So we need to grab portfolio companies. We need to buy bigger companies so we can apply our marketing and see the kind of positive impact that can have on the new acquisitions. So if you talk about where the risk is here, can I get the stock price up? Can I get financing to buy these bigger companies? That, to me, is where we have to see our stock appreciate so we can do this.

And also, the debt markets, they’re very open right now. They’re very open to giving kind of bank money, but not secondary money, on these types of deals. So it’s a matter of really, can we get the debt, can we get our stock up, and can we do what we want to do as a company.

James West:    Right. Okay, so then, what is your long term strategy for maintaining your current rate of growth?

Harry Fleming: I think it’s a), you’ve got to have organic growth, and I think we’re good there. B), you have to be opportunistic. So when we do have these failed facilities come to us, we need to take them down as we can on a piecemeal basis, because we know how we can impact them. And then we need to really look at buying portfolio companies. So we’d like to buy companies that have eight, 10, 20 centres, because we feel we can roll out instantly our marketing program and have an instant material impact, and that’s really part of our game plan. And I can tell you that last fall, as we were rolling into October, we had some fairly substantial deals that we’re very close on, at the letter of intent stage, in fact, and because of the collapse of our stock price due to the false blog, we’ve had to put those deals on hold. Those are very, very detrimental to us.

But we bought Athas a year ago, a little over a year ago, with the thought that you need to build a scalable marketing program, and that’s exactly what we have. So now we want to flex our muscles and apply that across many, many centres.

James West:    Okay. So you’re currently operating in Texas and Arizona, which suggests there’s a lot of room for growth in America. Are you planning to expand nationally?

Harry Fleming: Yeah. We’re definitely looking at portfolio plays in the Midwest, the northeast and the southeast. We currently don’t have any deals that we’re looking at on the west coast, but there’s some exciting deals out there, I can tell you.

James West:    Okay. And you have some analyst coverage, now what are their targets?

Harry Fleming: So the analysts are very much behind us, and they’re very aggressive. The analysts targets for 2015 are, we’ll do around 40 in EBITDA and around 230 in revenue; in 2016, they’re forecasting I believe it’s around 60 in EBITDA and around 300+ in revenue. Under the right circumstances, with the right acquisitions and the organic growth we’ve got planned, these numbers are easily achievable.

James West:    Okay. So how big can Nobilis get in terms of revenue and market scope within the next five years?

Harry Fleming: Well, we definitely have a bullseye on the billion-dollar revenue figure. We certainly think we can hit that; EBITDA would be in the range of a few hundred million at that point. I think there’s going to be an inflection point for the company sometime near term down the road, where we’re going to have the right kind of revenues and EBITDA that can allow us to buy major portfolio companies. And that’s where it’s going to get very interesting, as we roll out perhaps across 100 centres, those kind of deals. I think it’s clearly we’re reaching for the stars.

James West:    That’s great. Harry, that’s an awesome first interview. Thank you so much for your time today, we’ll catch up with you in a quarter and see how you’re making out. Thanks again for joining us.

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