R1 RCM Inc.

Good morning. My name is Chris, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the R1RCM Q1 2022 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. To withdraw your question, please press star one again. Thank you. Atif Rahim, Head of Investor Relations. You may begin.

Good morning, everyone, and welcome to the call. Statements made during this call may be considered forward-looking statements pursuant to the state public provisions of the Private Securities Mitigation Reform Act of 1995. In particular, any statements about our future goals, plans, and performance, including statements about the proposed acquisition of CloudNet and its expected benefits, our strategic and cost-saving initiatives, our liquidity positions, our growth opportunities, and our future financial performance are forward-looking statements. These statements are often identified by the use of words such as anticipate, believe, estimate, expect, intend, design, make, plan, project, work, and similar expressions or variations. Industrial precaution not to place undue reliance on such forward-looking statements. All forward-looking statements made on today's call involve risks and uncertainties. While we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so, except to the extent required by applicable law. Our actual results and outcomes could differ materially from those included in these forward-looking statements as a result of various factors, including but not limited to the potential acquisition of private net, which may not be completed on our anticipated timeline or at all, our growth strategy, the impacts of the COVID-19 pandemic, and factors discussed under the heading risk factors in our most recent annual report, on Form 10-K, our latest quarterly report on Form 10-Q, and our proxy statement and prospectus for our upcoming annual meeting. We will also be referencing non-GAAP metrics on this call. For the reconciliation of the non-GAAP amounts mentioned to the equivalent GAAP amounts, please refer to our request release. Information related to CloudNet is based on data available to us and is subject to change. Now, I'd like to turn the call over to Joe.

Thanks, Atif. Good morning, everyone, and thank you for joining us. I'm pleased to report 2022 is off to a strong start, with revenue ahead of expectations and adjusted EBITDA at the high end of expectations for the quarter communicated on our last earnings call. Our team continues to perform well and deliver on our commitments to our customers. I'd like to extend a big thank you to all our team members for the tremendous dedication that goes into delivering our results every day. On the call today, I'd like to cover three topics. First, an update on commercial activity, followed by color on our ongoing operational performance. And lastly, I'll discuss our pending acquisition of CloudMed. On the commercial front, I'll start with an update on the 10 billion NPR contract we've discussed over the past few months. Negotiations with the customer are complete with the economic terms agreed to, and we are through their internal governance process. One open item we are now focused on is the provisioning of user access for our employees with a third-party vendor used by the customer. In our normal contract sequencing, this provisioning process takes place post-contract signing. However, this customer prefers this provisioning to be completed prior to signing. This is a change relative to what we have previously planned, and therefore the process is admittedly taking longer than expected. We remain very confident in getting the deal completed and are working as expeditiously as possible towards signing. This deal aside, commercial activity in the quarter was very strong, with new entrants coming into our pipeline, progression of deals in the pipeline, and the conversion of activity into signed deals. We issued a press release this morning announcing a 10-year end-to-end agreement with Scion Health. Scion Health is a health system comprised of 61 long-term acute care hospitals, or LTACs, and 18 short-term acute care community hospitals. Our agreement encompasses approximately $2 billion in NPR across the 61 LTACs. Scion Health is our first win in the LTAC segment of the market, reinforcing our identity as the revenue cycle partner for providers across all care settings. We expect onboarding activities at Scion to commence next month with employee transitions expected to begin in August. Additionally, we have roughly 500 million of health system NPR in the contracting stage under a full operating partner model. We're seeing strong demand from physician groups where our value proposition is resonating well amidst staffing challenges and an ability to rapidly scale with growth. In the first quarter, In addition to our normal physician flow business, we signed $750 million in end-to-end operating partner NPR across three large independent physician groups, Kepler Vision, Samsung Clinic, and Emergency Physicians Professional Association. The physician space is strategically important to us. We believe we have a disruptive offering targeted at both IDM-affiliated physicians as well as large independent physician groups who are underserved by the current vendor set focused on this segment of the market. In 2020, we launched a physician-specific solution to the market with a pricing structure aligned to performance and a robust offering based on our technology architecture, shared services infrastructure, and analytics tools. Collectively, these factors enable us to price below prevailing market pricing and at the same time achieve 30% plus EBITDA contribution margins at steady state. This offering has been received very well in the market and ranked number one by class for the last two years. With over $2.7 billion in operating partner NPR already signed in Q1 and $500 million in the contracting stage, In addition to the expected $10 billion NPR contract, we are re-evaluating our investment and deployment capacity, which I'll discuss later. Activity for our modular offerings also remains strong, with 23 new deals signed across 12 new customers in the first quarter, including Hendrick Health, Rocky Mountain State anesthesia providers, BP Health, and Liberty Hospital. The largest of these new modular deals is to provide accounts receivable management for a major healthcare provider in California. These wins are reflective of our strong modular offering and competitive positioning in the market, which we expect to be enhanced by the pending CloudMed acquisition. Our purpose-built platform encompassing comprehensive technology, global delivery infrastructure, and a best-in-class operating system to drive performance were common factors across all customer decisions in the quarter. The investments we've made in these areas over the last several years have significantly enhanced our value proposition and are competitively differentiated. As we sit today, we believe we have the highest quality, lowest cost platform to manage provider revenue across all care settings. We continue to build on this strong foundation with additional investments in automation, patient experience, and most recently, revenue intelligence with the pending acquisition of CloudNet. Providers are increasingly recognizing the strength of our value proposition, and this has resulted in a doubling of our end-to-end pipeline over the past two years, even after converting more than $13 billion of NPR across LifePoint, Scion, Penn State, Rush, Pediatrics, Quorum, and American Physician Partners. Ongoing discussions with prospective customers and market dynamics point to a continued acceleration of demand over the next three to five years. In order to successfully onboard this accelerated activity, we plan to increase our deployment capacity to a range of 9 to 10 billion NPR annually exiting 2022. This is a meaningful increase from the 5 billion as we enter 2022 and is supported by the progression of deals in our pipeline. We first launched a dedicated deployment office in 2016, and it has proven to be a prudent investment in ensuring that new customers are onboarded as smoothly as possible. We are in the process of finalizing the level of investment needed to increase our deployment capacity and anticipate being in a position to provide specifics when we update our guidance after completion of the CloudMed acquisitions. Our early expectation, however, is to see meaningful scale and cost efficiencies relative to the 7 to 8 million in incremental costs we saw when we increased capacity from 3 million to 5 billion in 2021. In addition to a dedicated deployment function, we also bear upfront costs when onboarding a new customer. Some of these costs entail duplicative labor costs to hire and train new employees in advance of a transition to our shared service centers, IT integration costs, and run out of third-party vendor contracts. These costs have typically averaged approximately $4 million per $1 billion of NPR. In the LTAC setting, onboarding costs and contract economics are different. compared to illustrative models we have provided for IDNs historically. In the LTCH setting, there are lower needs for certain revenue cycle functions. As an example, nearly all patients are transferred directly from an acute care facility, eliminating the need for traditional patient access registration at entry points, such as an emergency department or diagnostic imaging centers. As it relates to the LTCH setting, we expect a revenue collection rate of approximately 2.5%, with even a contribution margin rates in line with the contract economics for operating partner customers. As a result of the lower personnel needs, upfront costs are lower. We expect upfront costs in the LTAC setting to be approximately $2 million per billion of NPR. Next, I'd like to provide an update on our operational performance. Our team is performing well under the current backdrop. navigating a very complex operating environment and delivering sustained financial improvements and a better patient experience across our customer base. Two dynamics we are closely watching are patient volumes and the labor environment. Patient volumes to date have trended in line with the expectations embedded in our 2022 guidance, which assumes volumes and cash collections at close to pre-pandemic levels. Gross charges, which are a leading indicator of cash collections, are trending slightly above pre-pandemic levels with stronger performance in the inpatient setting and outpatient surgery. Emergency visits and office-based visits are closer to flat versus pre-pandemic levels. From an operating capacity standpoint, we are adequately staffed to process current volumes and maintain a close watch on leading indicators such as scheduling data. turning to the labor environment. Current tight conditions present us with the same challenges many other companies are facing. Our 2022 guidance incorporates wage increases in select markets, and we feel comfortable with our current wage levels. Technology-driven productivity improvements presents a significant opportunity to reduce labor costs, which is why we continue to invest heavily in automation and digitization. In the first quarter, we automated more than 12 million additional tasks on an annualized basis and are on track to exceed 100 million manual tasks annually as we exit 2022. This automation capability is turning challenging labor market conditions into an opportunity for us as providers recognize it presents a superior alternative to their internal efforts. Turning next to CloudNet. We are on track to complete the acquisition by the end of June, subject to the completion of debt financing and satisfaction of the remaining closing conditions, including shareholder approval for the issuance of stock related to the transaction. We have announced the post-close senior leadership structure to both teams, bringing together the best commercial and operational acumen from both sides to accelerate growth across end-to-end and modular relationships. While we cannot yet approach the market as a combined entity, feedback from customers on both sides has been positive along the lines of breadth of payer coverage and geographic coverage, significant strengthening of our middle operations, and the ability to meet providers where they are in their revenue cycle journey. Our integration team is fully mobilized and resourced with the help of external advisors to launch our plans immediately post-close. We've conducted extensive deep dive sessions across CloudMed's product and technology, operations, commercial capabilities, and human capital. Coming out of this, we have established a roadmap for a cohesive market presence across all solutions, a unified technology platform, and integrated delivery capability. We've also completed capability mapping for customer solutions and technology applications to establish a detailed plan for technology rationalization, investment, and timeline, leveraging the best capabilities for both companies. Our planning process to date has confirmed several of our deal thesis assumptions. One, our base case assumptions for revenue and cost synergies are achievable given operating models and efficiency opportunities. Two, CloudMed's technology architecture and assets are extendable to establish R1 as the technology and data platform leader in the industry. Three, both companies' cultures are highly aligned, and CloudMed's talent base is very complementary to R1's base. And finally, CloudMed's modular commercial engine, in particular the combination of R1's comprehensive automation catalog with CloudMed's superior go-to-market capabilities has emerged as a significant opportunity for us. We believe the capabilities CloudMed adds to our portfolio will enhance R1's existing functionality and drive significant growth in the years ahead. We look forward to completing the transaction and launching our integration plans, with the long-term goal of positioning R1 as the premier brand to serve healthcare providers' revenue management needs. For those of you who may still be looking to come up to speed with CloudMed and its offerings, we hosted a teach-in for investors on April 12th, and a replay is available on the investor relations section of our website. We are encouraged by CloudMed's performance today with our understanding that top-line results for Q1 were ahead of their plan, driven by a healthy mix of cross-sales into the existing base as well as new customers. CloudNet is also making progress in launching new products to drive organic growth and saw strong demand for its 340B tech solution, which enables lower-income consumers to access affordable prescription drugs. Overall, we believe CloudNet is solidly on track to meet or exceed the $446 million in revenue and $191 million in adjusted EBITDA targets we expected when we announced the transaction in January. We plan to update 2022 guidance to reflect the contribution from CloudMed and expansion of deployment capacity following the completion of the acquisition. In closing, I'm pleased with our performance in the quarter, and we are well positioned to deliver on our 2022 goals. We remain focused on pursuing the commercial opportunities ahead of us and planning for a successful integration of CloudMed while maintaining our commitment to strong operational executions. Now I'd like to turn the call over to Rachel.