Atif Rahim - Head, IR Emad Rizk - President & CEO Peter Csapo - CFO & Treasurer Joe Flanagan - COO Dave Mason - Chief Strategy Officer.

Charles Rhyee - Cowen and Company Matthew Gillmor - Robert Baird.

Welcome to the Accretive Health's Fourth Quarter 2015 Conference Call. [Operator Instructions]. I'd now to turn the conference to Atif Rahim, Head of Investor Relations. Please begin..

Hello everyone and welcome to the call. With us today, we have Emad Rizk, Accretive Health’s President and CEO and Peter Csapo, CFO and Treasurer. We’ll start with prepared remarks from Emad and Peter and turn it over to Q&A.

We'll also Joe Flanagan, our Chief Operating Officer and Dave Mason, our Chief Strategy Officer available to answer your questions.

Today's conference call is been recorded and as a reminder, certain statements contained in this conference call may be considered forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

In particular, any statements about the benefits, expectations, and financial impact of the strategic relationship and renewed master professional service agreement with the session [ph] and our future growth, plans and performance are forward-looking statements Investors are cautioned not to place undue reliance on such forward-looking statements and all forward-looking statements made on today’s call involve risks and uncertainties.

Our actual results and outcomes could differ materially from those anticipated in these forward-looking statements as a result of various factors including the factors set forth in our annual report and Form 10-K for the year ended December 31, 2015 filed and our quarterly reports on Form 10-Q for the quarters ended March 31, 2015, June 30, 2015 and September 30, 2015 under the heading risk factors.

The forward-looking statements made on today’s call are based on Accretive Health’s expectations and projections, although our future events as of today only and should not be relied upon as representing the company’s views as of any subsequent date.

While the company may elect to update these forward-looking statements at some point in the future, Accretive Health specifically disclaims any obligation to do so to reflect actual results or changes in factors or assumptions affecting such forward-looking statements. Now, I’d like to turn the call over to Emad..

Thank you, Asif and good afternoon everyone. I'd like to thank all of you for joining us on the call today. Let me start by discussing some highlights of this past year. We had a tremendously busy year in many respects, despite the fact that we had to navigate choppy waters and many headwinds throughout the year.

Our team at the leadership level and across the entire organization did a tremendous job in maintaining our focus on our customers and our performance. It was exactly this focus on customers and performance that brought the five month long strategic review process to a successful outcome.

As we stand today we have a fully executed 10 year master services agreement with Ascension which we anticipate will migrate more than $8 billion in net patient revenue to us over the next three years.

As you may recall after we completed the restructuring and restatement we intensified our focus on building a scalable, disciplined and high performing organization. Operational excellence became our cornerstone.

As a company we focused across four areas, process and method, technology development and infrastructure, analytics and talent development and training. We did not focus on each of these in isolation. We identified the interdependencies and integrated them across all four areas. Now that we have over a year of results.

I would like to dive a little deeper into these areas than I have before. Starting with process and method, we deployed a standardized and disciplined operating model across the organization. Our site leads at each customer now have a standard set of operating and reporting metrics we use to optimize and track performance.

As I've discussed on prior calls we have seen significant improvement in the core operating metrics we track and this has a direct effect on our top and bottom line result. Our centralized operations team measures a total of 144 metrics. There are 10 core operating metrics that directly correlate the financial performance.

We found that within 90 days of achieving 95% standardization our customers typically achieve double digit percent improvement in the majority of these 10 metrics. In 2015, our customers in aggregate reduce the percentage of initial claims denied by 18%, we do slide off by 16% and cut key AR backlog by as much as 50%.

Performance like this directly impacts our customers bottom line and cash. And we still have significant opportunity to standardize across our cost to collect and our clinical middle value stream.

On the technology front we established a product management organization to enhance the value we deliver to our customers through future technology investments. Our efforts focused on denial [ph] management, registration, patients engagement and reducing down time.

We also improved the functionality of key revenue cycle functions such as benefits and eligibility verification, financial counseling and follow up on insurance balances. Our autolink tools now captures registration errors in real time from our customer's host system.

Our analytics capability now allow our users to drill down into our performance metrics for each customer site much faster than we have ever been able to do before. We also rebuilt our technology platform to support highly available and scalable services oriented architecture.

These improvements have increased stability evident by a 40% decrease in production support ticket and a 92% decrease in system down time. Value based reimbursed was a major priority for us. We focused on developing tools for patient outreach, transitional care management and analytics for performance and quality measurement.

On the talent development side we rolled out a comprehensive training program for all of our customer facing and line level employees. This includes a level of competency along three dimensions. Leadership traits, operational skills and revenue cycle acumen. We completed the year with a 100% certification of our customer facing and line staff.

This training program is what we will use to develop all the new employees who will join us in the future. In addition to these results we prepared our organization to expand capacity quickly, strengthening our onboarding and shared services capability.

In the fall we leverage our shared services to successfully migrate all of our customers to ICD-10 which was a major enterprise event for the healthcare industry. One of our key objectives in 2015 was to grow NPR under management and we fell short of this goal.

We lost a few hospitals during the year in part due to continued M&A activity within the hospital space. Also the uncertainty stemming from the strategic review process did create headwinds in sales and delays in renewal efforts. However we did close an RCM deal.

In the third quarter and expansion of the Ascension business was a major win for us but equally important we did not take our sights off of growing our customer base outside of Ascension.

Our PAS business started to stabilize in the second half of 2015 and we were successful in signing new customers late in the year which will contribute growth in 2016. Our pipeline for new PAS opportunities has also grow. As a reminder Ascension will transition their PAS vendor needs to a Accretive which will primary benefit beginning in 2017.

We closed the year with financial results that were below our guidance. The strategic review process delayed our ability to close out $5 million to $6 million of opportunity we had factored into the fourth quarter. As an organization, Accretive Health is stronger now than it was a year ago when we emerged from the restatement.

We have continued to enhance our management and financial discipline. Our leaders throughout the company demonstrated remarkable leadership this past year by steering the organization to our performance targets and remaining focused on our customers. Our bench is stronger and more resilient than before and committed as ever to our customers.

I am proud of this team's achievement across the entire organization. Turning to the future, the Ascension agreement is expected to give us a pathway to onboard more than $8 billion in NPR over the next three years.

With room to grow as Ascension expands over the next decade this gives us a level of visibility and predictability that we have never had before. We will begin to transition Ascension hospitals to the new MPSA and onto our platform in the coming months.

As we indicated in December following the transition of Ascension's new NPR along with organic growth we expect to grow revenue to approximately 3 to 4 times the current top line and generate operating margins in the mid to high teens.

Achieving these targets will require further investment in our operations, infrastructure, human resource system and back office capability. We will start making these investments and incurring ramp up cost in the second quarter which will impact our profitability in the first half of 2016.

We expect profitability to improve after we begin to onboard new hospitals from Ascension in the second half of 2016. Now broadly speaking we have three priorities for 2016, continue to execute on our operational excellence, onboard the new Ascension business successfully and flawlessly and grow our non-Ascension footprint.

We will balance these priorities judiciously. New customer growth outside of Ascension remains a top priority. We are beginning to reengage with customers who put their decision on hold during the strategic review process.

The financial pressures on health systems remain as high as ever driven by increasing complexity, reimbursement pressure from payers and growing patient deductible. Hospital CEO's and CFOs continue to prioritize clinical integration, mergers and acquisitions and value based reimbursement.

This as many studies indicate spans to increase the RCM outsourcing opportunity. We have a platform which addresses these pressures head on. We reduce the cost of revenue cycle operations, maximize appropriate revenue and prepare our customers for value based reimbursement. The transition to value based reimbursement is occurring quite rapidly.

With CMS just reporting that it is ahead of plan in transitioning certain Medicare payments to VBR. It is critical that we help prepare our customers for this transition.

To shift VBR has resulted in multiple challenges for providers such as increased cost of operations supporting clinical care, growing physician administrative burdens and overall poor performance outcomes and most importantly scalability.

Our value based reimbursement offering is designed to enable providers to optimize performance under multiple payment models seamlessly. We provide the technology, resources and capabilities to support the clinical operation thereby giving our customers the tools to improve outcome while decreasing the administrative burden on physician.

Having observed the industry and many of the players over the past year. I firmly believe we have a superior offering. Our technology and services model with domestic and offshore capabilities is differentiated from our competitors and the operating system we have implemented between these critical components drives superior results.

I strongly believe in the future of our company. We invested heavily in our capabilities, our infrastructure and our people in 2015. We expect these investments to benefit us as we begin to onboard the new business from Ascension in the middle of 2016 and additional business beyond that.

I look forward to updating you on development as the year progresses. Now I would like to turn the call over to Peter for a discussion of our financial.

Peter?.

Thank you, Emad. Good afternoon everyone. As I walk you through our results please note I will be referencing our non-GAAP measures. I would like to remind you that a reconciliation of our non-GAAP measures to the most comparable GAAP measures is included in this afternoon's press release and in the appendix of the presentation accompanying this call.

We use the following non-GAAP measures to supplement our GAAP results and to provide a better view of our operations. The first measure we use is gross cash generated from customer contracting activities which is our reported GAAP revenue plus the change in the deferred customer billings.

The second measure is net cash generated from customer contracting activities which is our reported net income before interest, taxes, depreciation amortization, share based compensation, restatement related expenses, reorganization related expenses and certain non-recurring items. As well as the change in the deferred customer billings.

Effectively it is our adjusted EBITDA plus the change in deferred customer billings. These two measures are primarily how we internally measure our financial performance and we believe it's important for investors to look at our results on this non-GAAP basis as well.

We have recently used these non-GAAP measures as GAAP revenue recognition for our customer contract is typically deferred until substantially later than when we deliver services, Bill and collect cash from our customers.

Now turning to our results, gross cash generated from customer contracting activities in the fourth quarter was seventy $72.7 million up 19.7% for $12 million year over year. The increase was driven by the RCM business where net operating fees grew 10.9% to $34.4 million and incentive fees grew 1.6% to $20.2 million.

The RCM other line which includes our fix fee arrangements was up $8.9 million in the quarter primarily due to significant progress on a proportionate performance contract. The increase in the RCM and other line was a result of the transition of the performance based contracts to fixed fee arrangements.

The RCM business overall was up 22.1% while the non-RCM business which primarily includes PAS revenue decline by $600,000 year over year to $3.4 million. During the quarter we collected $3.7 million in incentive fees which we referenced on our last quarter's call which we originally anticipated collecting during the third quarter.

This helped drive a 31.2% sequential improvement in gross cash generated. For the full year, gross cash generated declined 1.5% or $3.4 million to 230.2 million driven by $10.3 million declining in PAS revenue. PAS revenue continued to decline in the first half as a result of the two midnight rule but started to stabilize in the second quarter.

The RCM business was up $6.9 million or 3.3% for the full year 2015 driven by $15.1 million increase in the RCM other line for the reason I just mentioned. RCM net operating fees increased 1.2% or $1.5 million driven by continued cost reduction and customer sites and transition of customer operations to our shared services centers.

Cost to services declined 14.2% year over year in the fourth quarter to $35.5 million primarily due to lower incentive compensation costs, lower technology support costs and costs associated with our former population and health business in the prior year which we exited.

For the full year cost of services declined 9.7% or $16.6 million for the same reasons mentioned for the fourth quarter and a decrease in past pass costs offset in part by higher cost to open and operate our new shared services center and higher temporary cost related to the ICD-10 implementation.

SG&A expenses declined 18.9% year over year in the fourth quarter to $10.2 million primarily due to lower incentive compensation. For the full year SG&A expenses declind 9.8% to $49.6 million driven by lower incentive compensation and reductions in sales and marketing costs while the strategic review process was in progress.

Net cash generated from customer contracting activities was $27 million in the fourth quarter up $20.2 million year-over-year. For the full year net cash generated increase $18.6 million due to higher RCM gross cash generated and lower operating expenses.

Post-restatement related cost other onetime cost and cost related to the strategic review process amounted to $3.5 million in the fourth quarter and $9.3 million for the full year. Our cash position at the end of December inclusive of short term investments and restricted cash was $106 million down from $137.7 million at the end of September.

Cash used during the quarter was mainly a result of changes in working capital, driven in part by shift of [indiscernible] contracts for a couple of our customers which reduced customer deposits and accrued service costs included within our customer liabilities line on the balance sheet.

Over the course of 2015 our cash position inclusive of restricted cash and short term investments declined by $44.1 million driven by $ 21.3 million in capital expenditures net of tenant improvement allowances, capitalized software, onetime costs, payment for restatement related payables in early 2015 and an uptick in accounts receivable at the end of 2015 due to these shifting in a customer contract to a fixed fee arrangement.

Turning to 2016, usually at this time we would share with you financial outlook for the year. However our planning process for 2016 is still ongoing as we just recently signed a new MPSA sale with Ascension and are finalizing our launch plan with them. As Emad mentioned we expect to begin to transition Ascension hospitals in the coming months.

We expect hospitals we currently serve to transition to the new MPSA terms in the second quarter and anticipate new hospitals to begin to transition in the third quarter. The new MPSA terms shift the mix of fees from incentive fees to net operating due to the lower percent of fees which are performance based.

This shift will begin in the second quarter of 2016 as we transition the existing Ascension sites to the new pricing. The operational transition of these sites will occur during the third quarter.

at which point the net operating fees will become base fees as the customer reimbursement costs will no longer be netted and these expenses will become direct expenses of Accretive in our cost of services.

We may operationally transition a limited number of functions in the second quarter as part of a pilot transition initiative which we may have the accounting effect I just mentioned.

As discussed in our call in December we anticipate the annual top line contribution under the new Ascension MPSA to be in the mid $40 million range for every $1 billion of NPR.

Our current book of Ascension hospitals amounts to approximately $6 billion in NPR and we expect to onboard approximately $1.5 billion in new NPR from Ascension in the second half of 2016. To service this expanded NPR base and to deploy fully outsourced business model we will need to expand our infrastructure.

As such we expect to incur ramp up costs and investments related to the addition of new Ascension sites, transition of Ascension employees to Accretive and increases in hiring of our infused management to staff a larger customer base among other costs.

We expect these costs will continue to ramp up through 2016 and will start to normalize in 2017 before fully normalizing after the new NPR is fully on boarded.

While we are not in a position to quantify these cost for you at the present time we did want to make sure everyone understood at least directionally where our cost were headed in the near term. Our high level view of profitability under the new MPSA is unchanged relative to the comments I made in December.

We anticipate gross profit dollars per $1 billion of NPR on the existing book of Ascension business to initially remain similar to the current levels then improve over the life of the contract.

As we onboard the new Ascension NPR we anticipate gross profit dollars per $1 billion of NPR on that book of business to be lower than on the book of business we are currently managing but improve over the term of the contract as we deploy our model and drive reductions in hospitals, cost of revenue cycle operations.

In conclusion, in 2015 we put our house in order by becoming current with our filings. Continuing to invest and improve our operations and technology, solidifying our talent and defining a path forward. 2016 brings stability as we have a defined future of growth and new strategic partners heavily vested in diversifying our customer base.

The short term ramp up costs and investments that Emad and I alluded to are minor in comparison to the multi-year growth we believe is ahead of us and the momentum that this strategic relationship provides in the RCM market and financial flexibility it affords us. And now I'd like to turn the call over to the operator for Q&A.

Operator?.

[Operator Instructions]. The first question is from Charles Rhyee of Cowen and Company. Your line is open..

I just wanted to talk on the quarter really quickly first.

Emad you talked about 5 million to 6 million opportunities miss because of the strategic review, can you can you go into little bit more unlike, what would have been happening where senior management was dealing with the strategic review that operationally we might have missed some of the revenue..

I would separate that 5 million and 6 million from actually operational execution.

These were sort of amounts of a commercial nature and we had discussions with those customers and at this point in time because of the strategic process we elected to move on and not focus on that $5 million to $6 million because the strategic process was very important to us..

And when we talk about -- I might have missed it but the other service fees -- is this a lot of the value based services -- you were talking about that earlier.

You know what percent of your clients are deploying your new sort of value between reimbursement tools, like -- can you give us sort of a percent of the NPR that's maybe sort of deploying it..

Let me start with the first part of that question and I'll move it over to Emad as it relates to reimbursement. In the.

RCM services other that's really the line and we've talked about this before that's growing as we transition performance based contract primarily to what we call fixed fee type of arrangements, the fixed fee that's tied to you know percent of the cash collected.

So in that case our incentive fees go down and the RCM services other [indiscernible] line is increasing and so that's a trend. You know you've seen throughout the year and we will continue as we've been migrating contracts away from being performance based to being more these type of arrangements..

Charles, on the VBR capabilities. We've developed them this past year. We’re seeing a sales cycle that’s similar to revenue cycle but a little bit shorter, it takes about six months to eight months and we also expected that in the end of 2015 and the beginning of 2016 that we would begin to close some of those deals.

We're currently talking to approximately two to three health systems. We have not deployed them but we're in late stages of the sales process..

Okay. And then maybe last question for me for Peter, when we think about the Ascension business coming on board in the second half you are talking about 1.5 billion in [indiscernible] revenue.

If I'm not mistaken was that the total Ascension amount that will eventually come on closer to about $8 billion is that correct?.

8 billion of new NPR and then obviously as I mentioned on the call we will transition approximately 6 billion of the existing NPR..

The existing NPR is going to the new contract right?.

Yes that's correct. And that's the part that I indicated that we're going to migrate to the new pricing and the terms of the new MPSA for existing and NPR beginning in Q2..

But then the rest of the Ascension business that you don't already serve you start on-boarding that in the second half of this year and I think you said we expect about 1.5 billion this year, how long will it take to get all of that you would have expect to on board it?.

As we discussed back in December I mean it's a three year on boarding process leading up -- when we say a $1.5 billion that’s -- we will launch whether it's one ministry or multiple ministries that make up roughly $1.5 billion of NPR but it shouldn’t reflect in terms of how that translates into revenue this year because NPR is not a measurement in terms of being annualized it's just how much net patient revenue that hospital is managing..

I'll just, I kind of forgot exactly the time frame that we should expect, the three years that was helpful. I will jump back in queue. Thanks..

Thank you..

The next question is from [indiscernible] of William Blaire. Your line is open. .

So with the customer attrition and the impact from the Ascension transition not hitting until the second quarter.

How should we think about the fourth quarter as a run rate for Q1 and what kind of seasonality impact do you guys see?.

As we indicated we're still in the planning process for 2016. So we haven't finalized what 2016 looks like. So this time we're not commenting on 2016, I wouldn't necessarily take the fourth quarter as a runway we do see seasonality especially in our incentive fees being back loaded at that tailend of the year.

We should expect some impact from customer attrition on the front half of the year before we start the on boarding of the new Ascension business..

And then you mentioned on a prior call that you were targeting one to two new customer ads per year.

Is that still a target you're comfortable with given the pipeline in the near term?.

Rob, yes we definitely are more comfortable with the one to two. As I said in my comments earlier growing the non-Ascension business is a priority for us as much as on boarding the current and the new Ascension business.

We think with Ascension being a strong customer and a strong reference moving forward we feel more comfortable and frankly a little bit more bullish around the non-Ascension business and the one to two customers per year.

I will add one thing just we have not talked about some of the additions we've had our PAS business earlier is also stabilizing and we are seeing sort of an uptick in closing deals in that business..

[Operator Instructions]. The next question is from Matthew Gillmor of Robert Baird. Your line is open..

I wanted to ask a clarification to Charles question from earlier, will the transition of the current book be completed during 2016 or does the current book transition also take multiple quarters or multiple years..

This is Joe Flanagan, the transition of the current book will be completed in this year.

Really the book of work we're doing right now on our current park, our installed base is some final standardization work that the model alluded to in partnership with the sanction and we expect maybe your -- that will start the transition of that current book and that will be complete and as we have talked about in the past that's a book of business that we're very familiar with it, we’ve been managing it, albeit in a different model, but it's heavily penetrated in shared services and so we just want to make sure we take the opportunity to do a full standardization on that as we transition that in because that will create some opportunities economically that Peter alluded to as well as performance wise for those respective customer sites..

And maybe one or two more but I wanted to ask about the reaction from the customer base to the Ascension agreement, is there been any either apprehension in terms of the agreement and any potential for distraction or do the non-essential customer sort of view this as an advantage because it ensures long term stability with Accretive..

I've had a couple of conversations with customers that as I said earlier put us on hold during the strategic process.

The outcome of the Ascension finalizing that MPSA I would say it's more positive than negative and the fact that we're still independent gives a more confidence in our level of independence and thinking of other alternatives that could be out there.

As you know health care is very regionally competitive and many of our competitors, you have hospitals that compete with our customers in their geographies and the fact that we're independent and we have a strong customer that has elected to put their book of business on our platform.

Most of the customers that I’ve spoken to see that as a significant positive..

And then on the infrastructure investment that you mentioned to serve Ascension, can you maybe give us a sense for how much of the $200 million investment is earmarked for those investments and then outside of that sort of what our current priorities for capital deployment..

What I would say is that as we mentioned we're still going through our 2016 planning process.

So we're still gathering what the various requirements are throughout the business to support more than doubling of our workforce, bring on board a significant number of vendors that will be direct with Accretive versus going through our customers where we've been reimbursing them.

And so you know we have to make some investments to support this fully outsourced model.

We don't have an exact number yet I wouldn't say it's a significant piece of that 200 million by any means I mean that as we've discussed before, we really want to deploy our capital in terms of primarily doing tuck in type of acquisitions whether it be on the technology side, or on the services side and obviously with the brand new board we're still working with them in terms of finalizing what you know what their goals are in terms of how we deploy that capital because obviously reasons that cash came into us is part of this transaction.

We want to be really thoughtful, mindful of how that's going to get deployed and we've got a board new board literally been on the ground for less than 30 days.

So we need to still work through that but to answer your specific question I just don't foresee a significant amount of 200 million years I think investments we have to make are to support the larger infrastructure are not significant in nature to support it.

I also want to just in my prepared comments, I just want to clarify a comment that I had made which is that our CapEx number for 2015 was exclaiming [Technical Difficulty] that we had received..

Matt, just a couple of clarifications on that so we’re bored albeit new but half of the board is still from our legacy board, our chairman still is there so we have five new board members through this process.

The other thing I did want to mention when you asked about the customers they were and there was sort of people put us on pause when we were going through the strategic process. The main reason they actually put us on pause they were actually concerned of any of our competitors and any acquisitions that occurred there.

So that was mostly their biggest concern if we went to any of our competitors that would cause some geographic competitive tension there and the fact that we are now still independent is a big plus for them..

Thank you. And at this time I would like to turn the call back over to Emad Rizk for closing remarks..

Thank you, Operator I would to thank everybody for joining today. We obviously have a lot of work ahead of us in 2016. We've prepared our team well to handle the business coming on board. Thank you everyone. And we look forward to updating you in the future..

Thank you. Ladies and gentlemen this concludes today's conference. You may now disconnect. Good day..