Ensign Group Inc (ENSG) 2009 Q3 法說會逐字稿

Good day, everyone, and welcome to the The Ensign Group Incorporated third quarter fiscal year 2009 conference call. At this time, I'd like to turn the conference over to Mr Greg Stapley. Please go ahead, sir.

Thanks everybody for being on the call today. Yesterday we filed a 10-Q and we issued a press release as well highlighting key financial results and other developments for the quarter. Both are available on our Investor Relations section of our website at www.ensigngroup.net and a replay of this call will also be available there until 5 PM Pacific on Tuesday, November 10th. As usual I'll start by covering the stashed housekeeping items. First any forward looking statements made today are based on management's current expectations, assumptions and beliefs about our business and the environment in which we operate. These statements are subject to risks and uncertainties that could cause our actual results to materially differ from those expressed or implied on the call. Participants should not place undue reliance on any forward-looking statements and are encouraged to review Ensign Group's SEC filings for more complete discussion of factors that could impact our results. Except as required by Federal Securities Laws, Ensign does not undertake to publicly update or revise any forward-looking statements or the changes that arise as a result of new information, changing events, circumstances or for any other reason.

Second, any Ensign facility we may mention today is operated by a separate wholly owned independent operating subsidiary that has its own management, employees and assets. References to the consolidated Company and its assets and activities as well as the use of the terms we, us, our and similar verbiage is not meant to imply that the Ensign Group Inc has direct operating assets, employees or revenues or that any of the facilities of the service center our captured insurance subsidiary are operated by the same entity. Third, we find it helpful to supplement our GAAP reporting with EBITDA, EBITDAR, adjusted net income, adjusted EPS and other non-GAAP metrics. These measures reflect an additional way of looking at certain aspects of our operations that when viewed with our GAAP results provide more complete understanding of our business. They should not be relied on to the exclusion of GAAP financial measures. More ample discussion of these non-GAAP measures as well as a reconciliation of GAAP is available in yesterday's press release.

I'd also like to briefly update you on the ongoing DOJ investigation. We continue to have sporadic contact with the assistant US attorney primarily regarding document production issues. We also continue to renew our request as to the specific nature of their interest or concerns. At present there is no meaningful new information regarding the investigation since we last spoke with you and the Company and its regulatory counsel continue to actively cooperate with the US Attorney's office in an effort to move that matter along. With that, I will turn the call over to Christopher Christensen, our President and CEO. Suzanne Snapper, our CFO, will then discuss the financials and then we'll open up for questions. Christopher?

Good morning, everybody. Our operators have not only put up another solid quarter, but Ensign has grown since we last spoke with you. We're pleased to report the same store revenue was up nearly 5.5% over the prior year's quarter with consolidated revenue up 14.3% part of which was attributable to continuing improvements in our transitional facilities. These are facilities that are still early on in the operational maturation process and those of you who have followed closely will recall that we spoke last time about our intent to give you more detailed information by breaking out our operating reports into three categories, same store, transitional and recently acquired facilities. We've done this in order to provide greater transparency into our business, particularly during periods of higher growth like the present. We published an 8-K a couple weeks ago to lay the groundwork for this change and Suzanne is going to explain in greater detail that change in a moment.

More importantly we're pleased to report that same store skilled mix revenue eclipsed the 50% mark, marking another major milestone in the execution of our higher acuity business strategy. At the same time our same store EBITDAR margin rose 80 basis points to 16.5% and same store EBITDAR margins were up 62 basis points to 13.2%. Consolidated EBIT grew over 16.3% in the quarter to nearly $12.7 million and our net margin year-to-date surpassed the 6% mark. With these metrics as a backdrop we're also pleased to report adjusted GAAP earnings of $0.38 per share for the quarter. As always the credit for this performance goes to our local leaders and their teams. As we've mentioned before, long term carries first and foremost to local business. These local leaders assembled and supported under Ensign's unique system of recruiting and compensating highly talented business people, daily take the diverse challenges and opportunities facing their individual facilities and markets and continue to surpass all expectations. With such individuals in our corner we feel that we are well positioned to grow and we've done so in a significant way since our last call. On October 1st we acquired the assets of operations of force and operations of four skilled nursing facilities that we believe have very exciting prospects for the organization. Before I continue talking about the quarter I'm going to turn the time over to Greg to give us more color on those acquisitions.

In October we purchased [Gold Matres] a facility that is a bit atypical for us in that it was not a turn around at the outset, like about 90% of our acquisitions. The 22-acre campus in Dallas Texas includes 264 skilled nursing beds, 222 of which were in private rooms and a 39 unit independent living section which is frequently 100% full with a waiting list. Perhaps more importantly the acquisition included a small but well run and well regarded stand alone hospice business. We have believe this hospice presents an excellent platform to leverage our community-based model in the operating acumen of our outstanding local leaders into a potentially very rewarding service area which is directly related to our core business.

We also acquired three Utah skilled nursing facilities. The first, the 116 bed South Valley Care Center in west Jordan, a suburb of Salt Lake City, second, the 200 Bedrock Canyon rehab and care center in Provo, and third, the 80 bed Castle Country Care Center in price. These acquisitions were absolutely strategic offering close proximity to key hospitals and tremendous potential operating synergies with our existing operational base and the desirable Utah adult market. I'm pleased to report that staff, resident and community response to Ensign's acquisition of the facilities has been overwhelming positive. The three had a combined occupancy rate of approximately 48% at acquisition and we don't expect the group to become operationally accretive to earnings until sometime in 2010. It's a bit early now, but we believe that there's some terrific long term potential in these operations. Incidentally we were able to purchase the three facilities with a significant percentage of seller financing allowing us to conserve cash for future acquisitions.

The four acquisitions with the one lease expiration we've earlier discussed in our Q, bring Ensign's growing portfolio to 73 facilities, 42 of which are Ensign known and another nine of which are subject to purchase options in our favor. More importantly we believe we are currently in an era of significant growth opportunity. We are actively seeking additional opportunities to acquire both well performing and struggling long term care operations across the western United States. You may anticipate additional acquisitions in the near term as we reach out both strategically and opportunistically to expand our growing footprint in the west. Christopher?

Thanks, Greg. I want to reiterate that even more than our strong balance sheet and solid operating history, it's the strength of our talent and leadership at the local level who push the organization to find, acquire and take advantage of compelling growth opportunities that others simply miss or can't handle. They are Ensign's growth and operating story. The Ensign operating model not only recruits a different kind of leader than is typically found in the industry it, affords these local leaders the latitude they need to be nimble and respond to the demands of their unique markets, while supporting them and their teams of world class systems, technology, support personnel and other solutions. While we certainly share best practices across the organization and monitor both financial and clinical performance in these distinct operations, we do not attempt to impose a set of top down one size fits all operating methodologies across each market. The discipline inherent in this model continues to produce superior operating results in spite of general market conditions.

Since we're talking about transitional facilities for the first time in this quarter I thought I'd use a couple of examples or a few examples from our transitional building this quarter to illustrate might not and I'm sorry, there are several of these but just couldn't figure out which one to leave behind. So Larry Washburn and Len Southwick in our team in our holiday Utah facility, which was acquired from a major chain in 2007, grew EBIT by 28% to more than 200,000 in the quarter. Brad [Oberston] and his team in their Mount Ogden facility in Ogden, Utah, which we acquired in 2006 from a small operator who had given up on the building, increased their EBIT from negative to significantly positive this quarter. They posted an absolute increase of 118% and appear to have really turned the corner in that operation. Freshly managed CEO and training Nolan Hammond and his team in our Emerald Hill's facility just north of Seattle, a formerly very challenged that building we acquired out of a bank REO portfolio in 2006, has also turned the corner this year. They converted a substantial loss into a substantial gain in the quarter and their EBIT is up over 125% even in the face of a Medicaid rate decrease in the quarter. Dave [Mikum] and Mary Muse and their team in our Lake Village facility in Louisville Texas which was also acquired in 2007 from a small operator who was exiting the industry, grew EBIT by 287% in the quarter and notably just completed a deficiency free health survey. Rick [Forscut] and his team in our Carrollton, Texas facility, which we acquire misdemeanor 2006 from a small operator who was exiting the state, turned around a net loss in 2008 to post an EBIT of over $150,000 in Q3 of 2009, an increase of 223% and finally Jake Bowen and his team in our Draper, Utah facility which we acquired also in 2007 from a small operator who was exiting the business, increased their EBIT by 466% for the quarter. In fact, it's important to note that several of these facilities had Medicaid rate decreases from the second quarter to the third quarter this year and still performed far better than last year. Of course, this list is not comprehensive but it illustrates what's happening in our turnaround acquisitions as they get past their first full year and really begin the maturation process in their operations.

Overall EBIT in all of our transitional facilities grew by more than 23% quarter over quarter and we would expect that trend to continue as these talented local leaders continue to apply our systems and philosophies to their maturing acquisitions and as those operations continue to become more and more Ensign every year. It also serves as a clear reminder that because we acquire so many underperforming facilities, we believe we always have tremendous organic opportunities within our existing portfolio to continue improving skill mix, raising overall acuity and capturing the higher reimbursement rates that come with them even in markets like those when our acquisition growth slows. We remain confident and we have proven once again this quarter that our unique operating model is well suited to and even thrives in uncertain operating environments. We continue to remain vigilant and responsive as changes occur.

We expect, based on our history and experience to be able to continue delivering outside returns and superior patient outcomes regardless of changes in reimbursement regulation and the like. In that regard we have monitored with interest the ongoing healthcare reform debate launching at the very -- as the various proposals surface and change and surface again. While there's still much to be settled before we know or comment on how any of it might affect us we remain most interested in and focus upon staying healthy, nimble and ready to respond quickly and appropriately to whatever changes the debate may produce. We also remain financially sound with the lowest debt ratio and strongest balance sheet in the industry, a solid cash position and very manageable real estate costs. As of September 30th, we had $21 million of cash on hand, a $50 million credit facility with our primary learned and over $150 million in leveragable equity in the 27 unencumbered facilities in our portfolio. We remain committed to doing our debt relatively low and we continue to capital to ongoing acquisition and renovation programs as we look forward to the future. With that as a brief overview I'll turn the time over to Suzanne to provide more detail on the Company's financial performance.

Thank you, Christopher and good morning everyone. As Christopher mentioned, we are pleased to report another solid quarter. As we previewed on the last quarter's call effective with the filing of our third quarter 10-Q we expanded our disclosures to provide better visibility into our acquisitions and their simulation into our organization. We now disclose the following groups. Same facility results, this represents all facilities purchased at least three calendar years ago, which at September 30th, 2009, include facilities acquired prior to January 1st, 2006. Transitioning facility results, this represents all facilities purchased less than three but more than one calendar year ago, which at September 30th, 2009, includes all facilities acquired January 1st, 2006, to December 31st, 2007. Recently acquired facility results, this represents all facilities purchased less the one calendar year ago, which at September 30th, 2009, includes all facilities acquired on or subsequent to January 1st, 2008. We believe this will provide you with valuable insight regarding our operations as facilities are acquired and mature.

This quarter we have set another record for revenue. For the quarter ended September, 2009 total revenue was a record $132.9 million, up 14.3% over the prior year quarter. The increase in total revenue for the quarter was primarily due to increases in higher (inaudible) residents as well as the inquiries of our recently acquired facilities. Revenue growth occurred despite an overall sense decline of 90 basis points to 79.5% with same store occupancy at 82.4%. The skilled nursing occupancy of our same store facilities was 83.6% and our southern California group our most mature operations of 90.19% illustrating the long term occupancy growth our facilities can expect as they mature. Same store scaled mix by new increase 105 basis points to 50.5%. Our average daily same store Medicare rate increased 7.1% to 560, an increase of 37 for patient day resulting from the continued shift of our patient base to higher [acuity] mix.

Consolidated EBITDAR increased 19% to $20.8 million, an increase of $3.3 million. EBITDAR margins improved 62 basis points to 15.6% with same store EBITDA margins improving 80 basis points to 16.5. EBITDAR -- consolidated EBITDA grew $2.6 million to 17.1 or 20.4%. However, when adjusted for a one time recovery, 660,000 related to our favorable settlement of a rent liability in Q3 2008. The percentage increase would have been with that adjustment 26.2%. The Company's reported net income for the quarter of $7.7 million compared to $6.8 million the year before and an improvement of 13.1%. Deleted GAAP earning per share were $0.37 compared to $0.33 per share in 2008, an improvement of 12.1%. When adjusting GAAP numbers for the removal of the acquisition expense the amortization of acquired patient base and the operational results for the lease expiration on the lease expiration on the assisted living facility, our net income would have been $7.9 million or $0.38 per diluted share.

Turning to the balance sheet, as of September, 2009, cash and cash gives were $21.4 million. For the nine months ended September the Company generated net cash from operations of $38.7 million, of which -- excuse me, I said that number wrong. For the net -- for the nine months ended September the Company generated net cash from operations of $28.7 million of which $23.8 million was attributable to earnings. Net operating assets and liability grew by $8 million which was primarily attributable to the growth of accounts receivable as revenues grew, particularly in recent acquisitions. Net cash use in investing activities during first nine months was $45.4 million, which was primarily related to business acquisitions and the purchase of property and equipment. The bulk of our cash and investments are currently placed in high quality financial institutions and FDIC insured investments and bank term deposits with overnight deposits and conservative money market funds.

In addition, as Christopher mentioned we have the opportunity to access capital through leveraging substantial equity and our existing real estate portfolio. With the 2009 acquisitions the number of facilities we're owned free and clear stand at 27. We would note for you that despite the hard market we are seeing numerous opportunities to access the debt market at acceptable rates and terms. We therefore expect that we will continue to fund our growth as we always have with a combination of solid cash flow from operations and reasonable leverage on the growing equity in our real estate portfolio. We will continue to maintain our five year $50 million revolving credit with GE. We remind you that our business can be a bit lumpy from quarter to quarter due to unpredictability of government reimbursement systems delay in state budgets, seasonality and scope mix the impact of the general economy on census and other factors. For example, we still don't have our California MediCal rates which is retroactive to August 1st when they are finally published.

Quarterly and annual net income is also impacted by the cost of being a public company and fluctuating stock-based compensation expense. In addition, during periods when opportunistic acquisition activities are accelerating we would expect to experience some short term pressures on margins until we can begin developing the long term potential inherent in these opportunities. We are pleased to be reforming our guidance for 2009. We expect 2009 revenues of $536 million to $541 million, an adjusted EPS of $1.58 to $1.63 for the year. That is based upon the diluted shares outstanding of $21.5 million and it seems among other things new additional acquisitions of this division beyond designated as of October 1st and essentially flat reimbursement for both our Medicare and Medicaid rates. I will now turn it over to Christopher to wrap up.

Thanks, Suzanne. In closing our current fundamentals are excellent. Our local leaders are executing well and we see compelling opportunities for near term growth. In addition, the opportunities for organic growth and improvement across our evolving portfolio are outstanding. We're seeing results as we continue to focus on business fundamentals and higher acuity patients. Again, I just want to thank these great clinical and operational leaders and their teams for a solid third quarter and we look forward to a great finish for 2009. We'd also like to thank our shareholders again for your support and your confidence. Dana, can you please instruct the audience on Q and A procedures?

Yes, sir. (Operator Instructions) And our first question comes from Eric Gommel with Stifel Nicolaus.

Good afternoon. Just a couple questions. And I apologize. I did hop off the call for a second, but within the guidance, what is the assumption that you're putting in for, I think you talked about in the press release just want to be clear, for Medicare rates beginning October 1st and maybe your assumption for Medicaid?

We essentially put them out at flat. Our Medicare is a little bit down about half a percent but we actually currently have it at flat.

Okay. And then just a couple other things. Within your -- you talked about some of the successes you're showing right now at the local operator level. I'm curious what you're seeing in the Texas markets. We had another company report today that was talking about competitive pressure there and I'm curious how your Texas facilities are faring right now.

In the third quarter our Texas operations had a pretty good quarter both in terms of occupancy and skilled mix. That could be, Eric, partially because we have some newer acquisition there's and as you know, when these facilities are newer, they're not always very good. So improvement is maybe a little easier to come by, but our Texas operations have been very sound this entire year.

And I guess going towards your growth strategy, you've been pretty disciplined about growing occupancy but not sacrificing your skilled mix and we hear a lot about the top nine rug categories focusing on specialty Medicare units, but you appear to be looking at more of a broader swath of Medicare managed patients. Correct me if I'm wrong here, but talk to me a little bit about is this something that comes from sort of a company wide focus or is it just again going back to your local facility leadership that's driving the market by market strategy?

Yes. It's a good question. We really don't track those upper nine categories at all. Really the growth that comes both in terms of our skilled mix as well as our rates in that skilled mix have come because of the turnaround in the operations, the performance, the quality, the skill level of the nurses in those operations and it really is not a corporate drive that we have. There is really nobody in the organization that could tell you where they sit in those nine categories or what percentage they have in those nine categories or what we do company wide. It's just not something we track.

Okay. So it's more just a more local focus?

Absolutely.

And then a couple more questions and I'll hop back in the queue, but Suzanne, what's the opportunity perhaps or maybe Christopher to buy in more leases over maybe the next 12 to 18 months?

I'm sorry, to buy leases?

I mean did some of your lease facilities, the option to purchase those, I'm sorry, not worded very well, but I was just curious --

The nine facilities that we currently have options on?

Yes.

Eric, it's Greg. Those nine facilities, the option with those is open at a variety of times. I think we have a couple opening up in the middle of 2011. I think there's one open right now that we're currently working on and there's just -- it depends. One of them opens when the landlord dies. They're kind of all over the map, but we anticipate at this point exercising those as they open and as their cash position makes sense.

There's nothing near term that we should think about for modeling?

There is one that's open right now, but we haven't actually exercised it and are still kind of working through a couple things.

Great. Thanks.

Yes, Eric, I don't know what you mean near term. I know you're not on anymore in the question but just to answer if you're still listening, we do have three or four of those that do come available in the next --

Year.

14 months.

Yes.

And we'll take our next question from James Bellessa with DA Davidson & Company.

Good afternoon.

Hi, Jim.

Hi, Jim.

In your press release you say that earnings could have been $0.38 a share (inaudible) and amortization of patient basis and the effects of lease expiration.

Correct.

Now my question really involves are these acquisition expenses related to those that you made in October or are these the acquisition expenses that you made in the first nine months of the year?

The vast majority of the cost is related to the ones that we made in the first nine months of the year. I think we have the $2,000 related to the acquisition that we did on October 1st. So the vast majority of those costs are related to the earlier acquisitions.

So the fourth quarter will be impacted by acquisition expenses for the October 1st purchases?

That is correct. Acquisition expenses as well as an increase in the amortization costs of that patient base.

Okay. Now in your guidance you're calling for $1.58 to $1.63 and then you use the average weighted shares of 21.5 million shares. So I do the arithmetic and it suggests that you're looking for a total net income for the year of $34 million to $35 million. When I look at what that means for the fourth quarter, it suggests that you're looking for a $10 million to $11 million dollars fourth quarter. Where am I going wrong? You haven't been able to break $9 million yet.

I think that the shares are probably a little on the high side. That's where we could end up being but we probably won't be at that 21.5 million shares.

So, Jim, this is Christopher. Remember that year after year our fourth quarter has always been significantly better than the other quarters for the year always and granted we only have a 10 year history, but it's always been our best quarter.

Well, that's going to be a great quarter and we look forward to it thank you very much.

Thank you.

Thank you.

(Operator Instructions) We'll take a follow-up from Eric Gommel with Stifel Nicolaus.

Yes. Just the second question I didn't get a chance to -- and thanks, Christopher, for the 12 to 18 months out was what I was thinking on the leases, but just from a Medicaid standpoint I guess you could say you're comfortable sort of where your different operating states are from a Medicaid standpoint for at least the next -- till mid year relative to rates or reopening any of the budget processes that might bring those rates at risk to be tinkered with?

We think we've seen the declines that we're going to see.

Okay. All right. Thanks.

But one thing as I mentioned in think comments is that we didn't talk about -- we haven't received a final written for California.

Understood.

Okay.

And with no further questions in the queue I'd like to turn the conference back over to management for any additional or closing remarks.

Thanks, Dana, appreciate it. Again I just want to say thank you to our investors for your support and for your trust, grateful to all of our operating partners for what they've done and what they continue to do in markets that are very important to us and we're very excited about the future and excited about what we see in terms of our growth opportunities in the near term. Thank you.

And that concludes today's presentation. We thank you for your participation.