Atif Rahim - Head, Investor Relations Joe Flanagan - President and Chief Executive Officer Chris Ricaurte - Chief Financial Officer and Treasurer.

Charles Rhyee - Cowen and Company.

Good day, ladies and gentlemen and welcome to the Accretive Health Third Quarter 2016 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference Mr. Atif Rahim. Sir, you may begin..

Thank you, operator. Good afternoon everyone. And welcome to the call. With us today, we have Joe Flanagan, Accretive Health’s President and CEO and Chris Ricaurte, CFO and Treasurer. We’ll start with prepared remarks and turn it over to Q&A.

Today’s conference call is being recorded and as a reminder, certain statements contained in this conference call maybe considered forward-looking statements for purposes of the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995.

In particular, any statements about the benefits, expectations and financial impacts of our deployment with Ascension or cost reduction measures or of future growth, plans and performance are forward-looking statements. Investors are cautioned not to place undue reliance on such forward-looking statements.

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 on Form 10-K for the year ended December 31, 2015, under the heading "Risk Factors".

The forward-looking statements made on today’s call are based on Accretive Health’s current expectations and projections of 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 Joe..

Thanks, Atif. Good afternoon, everyone. Thank you for joining the call today. What I’d like to do today is provide you with an update on the progress of our business and lay out the groundwork for what to expect in the coming months.

It’s an exciting time at Accretive and I am pleased with our pace of execution on the near term priorities I discussed on the last call. Here are some of the highlights from the third quarter and progress against those priorities. First, from a number standpoint. We made significant sequential improvement in our top and bottom line results.

Our gross cash generated in the quarter was $59.7 million and our net cash generated was $3.6 million. Chris will cover the financials in more details in a few minutes, but I’m pleased to say we are on track to deliver the top line guidance we have provided for 2016 and are making progress towards sustained profitability.

Second, our roll out with Ascension is proceeding on plan. We formally started the onboarding of the first Tranche of new hospitals over the summer, which takes our total hospital count to 91 from 72 as of the last call. Our team has made excellent progress on the strategic priority of building a world class deployment capability.

These efforts have directly resulted in our successes to date and looking forward give us confidence in our ability to effectively scale the business. We are currently in the process of deploying our proprietary operating system and technology suite to the additional book ministries or ABMs.

In the first half of 2017, we will transition employees on to our payroll and move work to our shared service centers at which point we expect to start seeing a meaningful contribution to our topline.

For the Ascension hospitals that we have served over the years, which we refer to as current book ministries or CBMs, we have transitioned the work of 1000 employees and are on track to complete the remaining 700 by the end of the year.

To put this in perspective from an employee headcount standpoint, we will have increased the size of the company by 50% as we exit the year. In addition, we have begun work at three other facilities which were added to the CBMs via acquisition or Greenfield [ph] development.

The third area I’d like to highlight is our multi year renewal with Intermountain Healthcare. Intermountain is our second largest customer and we are delighted to continue to partner with them for their revenue cycle needs.

This relationship is a good example of a complementary partnership between us, Intermountain and their EHR vendor as they go through a multiyear EHR implementation process.

This renewal demonstrates the important role that Accretive plays to provide focused and comprehensive RCM solutions in the face of the increasingly complex environment our customers are operating in. The fourth area of progress I would like to update on is the strengthening of our leadership team.

In addition to the leadership announcements we made on our last call, I am pleased to announce that earlier this month we brought on board Jack Brock as Chief Information Officer to lead out IT organisation. Jack joins us from Highmark where he was Senior Vice President of Technology Operations. Jack helped launch and grow Highmark Health Solutions.

The Highmark health technology company that now serves 11 health plans and supports over 8 million members. Now let me turn to some of the other efforts we have underway at the company. In early 2017, we plan to officially re-launch the company. You’ve heard me discuss the need to refine our go-to-market approach and increase our external focus.

But let me explain what our re-launch effort entails. First, we will rebrand the company. Our focus will be on developing brand identity that reflects our core value proposition. We have had a dedicated internal team complemented by external advisors working on a comprehensive approach for the past five months.

And as a result of these efforts we are excited to launch the new brand in January of 2017. The second part of our re-launch effort is relisting on one of the major exchanges. We are in the midst of selecting an exchange and plan to relist after launching our new brand.

In conjunction with the re-listing we also plan to launch an extensive investor outreach effort that will include increased participation at industry conferences and a higher degree of interaction with the investment community.

The final component of our re-launch effort entails the adoption of FASBs new revenue recognition standard in 2017, which will simplify our financial reporting and present our GAAP financials in a manner that closely reflects our actual operations and cash flow. Chris will provide more details on this.

In all, the re-launch effort is a comprehensive plan focussed on re-establishing our identity and core value proposition, increasing external focus with customers and investors and finally, improving financial visibility. The next major effort we have underway is growth of the company.

While the Ascension contract provides us with significant run rate to grow over the next few years, we believe our target market affords us a substantially larger opportunity, both in the form of addressable market as well as the expansion of our solution FAB [ph] We estimate that today, less than 10% of hospitals use a fully outsourced end-to-end solution.

It is our point of view that as market conditions drive increasing financial pressures on providers, combined with the complexity that comes with managing multiple payment models, providers will increasingly look to an operating partner that can maximize and best leverage proprietary and bolt on technology as well as provide and optimize the commercial infrastructure to manage their revenue regardless of payment model or [Indiscernible].

We feel this market dynamic creates a significant opportunity for Accretive Health as we have invested heavily in the core components required to transform this commercial infrastructure, namely human capital, technology, shared services book rent and a comprehensive operating system.

We highlighted on our last call the three engagement models with which we go to market. These engagement models provide customers a flexible approach to create the required commercial infrastructure they will need to manage their revenue.

We are increasingly encouraged by the response we have received from perspective customers on our holistic solution. One of the components of our offering that I would like to highlight on this call is our technology platform, which is a critical underpinning of our value proposition and an area we continue to invest heavily in.

Since our last call, we launched our proprietary and flexible AHtoDecision workflow application, which is a comprehensive overhaul of our technology that manages payor billing and follow-up operations. This overhaul improves productivity by automating a number of manual tasks and at the same time accelerates resolution rates on accounts worked.

For providers, this means a higher revenue yield at a lower cost and improved [Indiscernible] Before I turn the call over to Chris, let me touch a little on our PAS module which continues to see strong growth.

What we are seeing in the market is continued demand for the service since the two midnight rule is an clear cut [ph] on patient's status as hospitals thought it might be. We consistently see medical necessity denials as one of the top three write-off set systems.

Hospitals are increasingly realizing the value of a partnership with Accretive as an independent party to help strengthen their internal operations and provide the necessary capacity to cover transactional services.

We’ve also differentiated our service by continuing to provide customers with education, high quality reviews and contracts that let them flex their demands. This has helped us gain market share from other non-independent captive competitors and we currently have 167 hospitals referring cases to us, up from 93 at the end of 2015.

We expect this number to ramp higher as we – onboard Ascensions past business in the coming months. Now, I’d like to turn the call over to Chris..

Thank you, Joe. Good afternoon, everyone. In the third quarter we made progress on a number of initiatives designed to improve our financial performance and position the company to effectively grow at scale.

I’m encouraged about the progress the finance team has made partnering with operations to identify and execute on opportunities to drive improved financial performance as we are beginning to see this play through in our financial results.

With the cost structure alignment marginally completely at the end of the second quarter, we are focussed on investing in the right areas to support our growth in the coming years and continuing to build a finance organization that would partner closely with our operations team to drive operational and financial outcomes [ph].

As we enhance this partnership, I expect this to result in improved visibility of financial expectation and clarity of results. The budgeting process for 2017 is well underway and we anticipate being in a position to provide you with 2017 guidance early next year.

In addition, as Joe mentioned, we plan to early adopt FASBs new revenue recognition standard in 2017, which stands to simplify our GAAP accounting. We expect approximately 95% of our customer billings we recognized on the timely basis for GAAP purposes.

While this will not have an affect on our cash generation profile, we expect that it substantially reduce the variation between GAAP and non-GAAP numbers. This is because almost all of our net operating fees and our portion of our incentive fees will be recognized as services are build to our customers.

We'll have more color for you on this front on the next earnings call. Turning to our third quarter results, there was a significant sequential improvement in our financial metric in the quarter during by the transition to the new Ascension agreement and the renewal of our agreement with Intermountain which resulted in catch up contribution in Q3.

Before I walk you through the details of the results I would like to remind you that we will be referencing non-GAAP numbers and the reconciliations in the most comparable GAAP measures as included in this afternoon's press release.

As a reminder, we use two non-GAAP measures to supplement our GAAP results and to provide a better view of our operation. The first measure we use is gross cash generated from customer contracting activities which is our reported GAAP revenue plus the change in deferred customer billing.

The second measure is net cash generated from customer contracting activities which is our reported net income before interest, taxes, depreciation and amortization, share based compensation, reorganization-related expenses and certain other items, as well as the change in 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 our investors to look at our results on this non-GAAP basis as well.

The reason we use these non-GAAP measures is GAAP revenue recognition for a customer contract is typically deferred until substantially later than when we deliver services bill and collect cash from our customers.

As I referenced earlier the adoption of new accounting standard in 2017 should simplify our GAAP accounting and reduced the reliance on non-GAAP measures. Turning to Q3 results, gross cash generated from customer contracting activities was $59.7 million up 7.8% from $55.4 million in the third quarter of 2015, and from $38.3 million last quarter.

The improvement in Q3 was driven by a number of factors.

First we had a $9.5 million contribution as a result of Intermountain renewal, part of which was a catchup contribution from prior quarters in 2016 even after normalizing for this we had sequential improvement of $11 million in Q3 driven by improved performance on client metrics and cost efficiency.

Second, the transition for the new Ascension agreement is starting to contribute the top line. As discussed on prior calls employee and vendor costs we onboard under a full outsource type arrange are not deducted from our net operating fees since they become our direct cost.

In Q3 we started to transition employees at the Ascension CDM [ph], the CDM's transition will continue into the fourth quarter and we expect additional contribution to our top line in Q4. In January 2017, we expect to start transitioning employees from the new hospitals we are on boarding or ADMs.

As a result starting in Q1, 2017 we expect to see a meaningful ramp in our top line. Third our PAS business continues to experience improvement as Joe reference. Revenue in this business was up $1 million north of 30% growth over Q3 of 2015.

We continue to expect strong growth in this business over the next 12 months from an increase in volume driven by industry demand and market share gains.

Cost of services in Q3 were $43.6 million, an increase of $3.9 million or 9.7% over the prior year quarter, and up $2.2 million quarter over quarter primarily due to onboarding of employees as we transition to the new agreement with this Ascension.

SG&A expenses were $12.6 million, up $0.6 million year-over-year and down$1.7 million from the second quarter. As discuss on the last call we expect SG&A expenses to moderate over the remainder of 2016 due to our restructuring actions taken at the end of Q2.

However we do expect some cost related to the re-launch effort which will be one-time in nature and we started recurring some of these costs in Q3. We expect the relaunch effort to be completed in the first quarter of 2017. After adjusting for these one-time expenses we expect the run rate for SG&A to be circled $11 million per quarter.

Net cash generated from customer contracting activities was $3.6 million in the quarter compared to $3.7 million a year ago and a negative $17.4 million last quarter. The sequential improvement was a function of higher gross cash generated offset by higher cost of sales due to the reasons just discussed.

One-time cost and other cost amounted to $0.5 million primarily due to the finalization of restatement related expense. Cash at the end of September inclusive of restricted cash with 203.4 million down from $223.2 million at the end of June, while net cash generate from customer contracting activities was positive in Q3.

Our total cash decline due to capital expenditures of $3.3 million and approximately $20 million reduction in working capital of which $40 million was due to the reduction in customer liabilities.

Let me spend a minute discussing the dynamics around our working capital especially in relation to customer cash which we carry which just contain within the customer liability section of our balance sheet. This customer cash or float if you will is disclosed in our 10-Qs and 10-Ks under two line customer deposits and accrued services costs.

The transition to fixed fee type contract and the full outsource arrangement with will Ascension will result in a significant reduction of this flow which we have historically carried on our balance sheet. At the end of September the two line items I have mentioned amounted to $44 million collectively down from $72.8 million at the start 2016.

Over the next few quarters we expect the further reduction in the remaining balance as we onboard the remaining essential PBM. Now turning to our outlook. We are comfortable with guidance we've provided earlier this year and expect to be at the midpoint of the $200 million to $220 million range for growth cash generated for the full year.

This implies Q4 gross cash generated of approximately $71 million, up 11 million sequentially. The sequential ramp will be driven in large part by the transition to the new Ascension contract structure and we have a high degree of visibility into this.

We do expect continued moderation in our cash burn and expect to turn positive from cash from operations standpoint at some point in 2017. Longer term we remain comfortable with our 2020 outlook where we expect gross cash generated of $700 million to $900 million and net cash generated margin rate in the mid to high teens.

More than 90% of the low end of this guidance range is attendable from customers we currently have under contract with the significant contribution coming from the Ascension rollout plan over the next three years.

In closing, I'd like to reiterate the high degree of confidence and visibility we have in the business as we look out over the next four to five years. As we look to 2017 we expect the profitability profile of the business to improve and I look forward to providing you more color on our detailed 2017 views earlier next year.

Now, I'd like to turn the call over to the operator for Q&A.

Operator?.

[Operator Instructions] Our first question comes from the line of Charles Rhyee with Cowen and Company. Your line is open..

Hey, guys.

How is it going?.

Good. Thank you, Charles..

Just wanted to – I just had a few questions here.

First on this $0.5 million that you're going to called that in the quarter as a kind of catch up contribution relate to Intermountain, how much of that was contemplating when you gave the guidance earlier this year? Or was it all contemplated in guidance already?.

It was all contemplate in the guidance we gave earlier this year, that's all your guidance, it was all contemplated..

Okay, great.

And so that if we think about really than the sequential ramp from third quarter to fourth quarter, is it right, better to think of it more like going from, call it 50 million to 71 million and really the 21 then is the on – is that move the conversion of the existing ministry still or is that includes some of the new ministries?.

The conversion of the existing ministry, the ramp of Q3 to Q4 is driving the increase..

Okay. That's helpful. And then gross margin, the gross margin came in much better than we expected.

I think we had kind of anticipated that as we roll on, as we convert the existing ministries and we're budging the people, our COGS would have kind of gone up more since of that is the pass-through, but it seems like that's not the case or is it more right to think that we're looking more like $50 million versus the 43, is that the better way to think about, maybe how gross margin should look next quarter?.

Yes. The one that significant amount of cost that's moved from revenue down in the COG this quarter, so there really wasn’t that much in this quarter.

And as you think about going and essentially what drove the change quarter over quarter, was we had an improvement in our performance with our client metrics and then our cost efficiency those were the two things that drawn us, so higher cash performance and higher proven with out client effort.

As well as we had improvement in our SG&A cost structure as a result of the restructuring that we did at the end of the second quarter..

Right. So when we think about in the next quarter we were still expecting – so there was no, what we're saying that its not much that we're seeing like a timing where you might have recognize some revenue…..

No..

Okay.

So our costs are aligned with our revenue and so this is sort of how we should think about it going forward?.

Correct..

And then you called out SG&A that we should think about it going forward like a $11 million a quarter.

Should we think about that next year?.

Yes. You think about that more next year as we reference in our comments, so there is still some one time cost that were incurring related to the relaunch of the company that we expect to incur some in the fourth quarter and maybe a little bit in the first quarter.

But once that's complete we expect the SG&A levels to be circle around the $11 million on a quarterly basis..

Okay. That's helpful. And then Joe maybe I can jump to you here.

When you're talking about this new brand, and we're branding, are we looking to change name of the company, is that what we should expect – how is the organization, anything you can kind of give us a sense on what this new look will be like and maybe talk about the participation of Ascension senior management in helping promote the new company?.

Sure.

First the rebranding of the comprehensive obviously starting with the name change, but probably more importantly or as important is the solidifying the identity of the company and the value prop associated with that identity in the eyes of our employees historical as well as those employees that are joining us every month from Ascension with our customers and then with capital markets.

And as we said in some of the opening comments, our point of view of is that the combination of financial pressures that all customers are facing combined with the increase in complexity in the operational environment lends itself really to an operating partner that is able to holistically partner with those customers and transform the commercial infrastructure to manage revenue.

And that holistic capability comes in the form of human capital. It comes in the form of technology overlays that are able to complement the Corey HR system. And then infrastructure shared services being the primary example of infrastructure both in the U.S.

and offshore and we've been investing in that holistic capability for some time when we think right now the market conditions are lending itself to that type of value proposition and the brand will be very much about making sure we establish that identify in the eyes of our various constituents.

The second question, I'm delighted with the board we have right now and the participation of Ascension – as an important owner and they bring a very educated perspective on the market and they bring a very comprehensive network across the provider base that we serve in and that's very short period of time, that's been a very encouraging from the company's perspective..

Can you give us sense on how much you know sort of like what your pipeline currently looks like? And maybe how much of the current pipeline has been develop through this new partnership?.

I'm going to comment in terms of quantitative number Charles at this point in time. I would just say since the investments was made or the deal was closed, the activity inside the pipeline has increased significantly.

And I would say without dialing in the exact percentage a large amount of that activity is really either been facilitated or complemented by our new ownership structure..

Great. I guess my last question really is as you think about the competitive landscape today, how do you feel that you're position, you are going forward now that obviously other provider groups that they own sort of RCM arms out there, so the Parallon, Conifer as well as United upterm [ph] has been really gearing up in this area as well.

How do you think the market has look, you’re coming and you've been here last three years or so and you have to had your heads down kind of fixing things, the markets been growing up around you. Maybe give us sense on what you guys thinking you are sitting at the moment? Thank.

And I'll stop there?.

Yes.

The first thing I'll reiterate the prior comment on, we think the market and we're seeing this in our pipeline discussions the market is increasingly receptive to an end to end partnership to transform and optimize this commercial infrastructure regardless of payment model, regardless of care setting, so I think that plays into the strength of us and the other your competitors of ours that you mentioned.

The second comment I would say Charles is and I think this is an important comment to make without a doubt, the company over the past three years has quite a bit of internal distractions, its my words, whether that's working through the restatement or other items.

One thing I would emphasize for 12 consecutive quarters the operations and technology teams had a pretty consistent heads down focus on just building up the capability, so as we prepare ourselves with new owners and we prepare ourselves to relaunch the company we feel very good about the operational model and the technology footprint and that's a direct result of 12 consecutive quarters we talked about different elements of this – of just having a consistent focus on building that.

We've made quite a bit of investment over those 12 quarters and so that's the second point I would make.

The third point I would make is as you start to comparing contrast us to other alternatives, I think one of the things that we enjoy is we've been in this a long time, I mean the company has been at this web cycle for 10 years as an independent entity meaning our human capital, our infrastructure is not born out of health system, its purpose builds.

The second thing is being an independent entity we have quite a bit of experience driving results in different cultures that our customers have and that's very important as you think about engagement on a commercially arranged installed base which we enjoy right now.

And then the final thing I would say and I think we have to emphasize this more and more in our dialogue with the capital markets is the strength of our balance sheet and we're really excited about the opportunities to expand capabilities that really allow us to bring a comprehensive value proposition to the market, some areas that we're focused on.

We think the front end of the rev cycle is opportunistic for an over haul there's a lot of interesting technologies that have been build in some of those areas. We think it's very fragmented. As we look at our customers, we see them struggling to get all of those technologies implemented into their core processes.

We've talked before about expanding our capability and our position setting, we think that's very, very important. So we're interested, we're excited and we think we are in a great position with where our balance is at and our current capital structure that I would emphasize as well..

Great. I'll stop there. I guess maybe just -- any sense of timing on re-listing. Thanks a lot..

Thank you. [Operator Instructions] And I'm showing no further question at this time. I'd like to turn the call back to Mr. Flanagan for closing remarks..

Sure. Thank you, operator. And before I'll just share a couple of closing remarks, just a follow-up Charles on your last question there I think,, our early 2017 is kind of view on relisting, you're inline with some of the other relaunch efforts that we mentioned.

Switching to just closing comments from my side, some things I would emphasize, we're very encourage with the pace of execution. And I would say specifically with the deployment capability we've expanded over the past quarter that gives us a lot of confidence financially as well as operationally around serving Ascension.

The second thing we just talked about it. Yes, we think value proposition increasingly is important for the customer base we serving, I think market conditions are favourable for the approach. We've set the company off to take.

And then third thing I would say and emphasize is we're really taking a very thoughtful approach to the re-launch of the company.

I have mentioned in the past we have been much too internally focused over the past three years and I'm really excited because there's quite a bit of substance for us to convey to the market inside of this re-launch efforts. Finally, I'd say thank. I really look forward to continuing the dialogue on these calls going forward.

And with that, I'll turn it over to the operator..

Ladies and gentlemen, thank you for participation in today’s conference. This does conclude the program and you may all disconnect at this time. Everyone, have a great day..