Ensign Group Inc (ENSG) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Ensign Group Inc. first-quarter fiscal year 2010 earnings conference call.

At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder this is being recorded.

I would now like to introduce Mr. Greg Stapley, Executive Vice President. Please go ahead, sir.

Thanks, Mary, and welcome, everyone, and thank you today for being on the call today.

Yesterday we filed our 10-Q and issued a press release highlighting key financial results and other developments for the quarter. Both are available on the Investor Relations section of our website at www.EnsignGroup.net. A replay of this call will also be available there until 5 p.m. Pacific on Friday, May 14.

Just a few housekeeping items to start. 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 statement and are encouraged to review Ensign's SEC filings for a 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 whether changes arise as the result of new information, future events, changing circumstances, or for any other reason.

Second, any Ensign facility or business 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 revenue or that any of the facilities, the service center, the hospice business, or our captive insurance subsidiary are operated by the same entity.

Third, we supplement our GAAP reporting with EBITDA, EBITDAR, adjusted net income, adjusted EPS, and other non-GAAP metrics. These measures reflect additional ways of looking at our operations which, when viewed together with our GAAP results, provide a more complete understanding of our business. They should not be relied upon to the exclusion of GAAP financial measures.

A reconciliation of these non-GAAP measures to GAAP is available in yesterday's press release.

I would also like to take a moment and update you regarding the ongoing DOJ investigation. We, through our regulatory counsel, remain in cooperative discussions with the US Attorney's office over the delivery of requested documentation and expect that process to continue for some time. In the meantime, we have no new insights or information to report since our last call but we are always happy to answer any questions people might have about it.

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 will open up for questions. Christopher?

Thanks, Greg. Good afternoon, everyone. We are very pleased to again be able to again tell our shareholders that we have just finished another record quarter. This one in the face of significant reimbursement headwinds and other challenges stemming from the downturn in the economy.

As we have explained many times before, this success is due to the superior competency, careful management, and hard work of our incredible local leaders and their teams. Although it has served us well in all kinds of situations, this is where Ensign's bottom-up [first two then what] leadership paradigm really shines -- in rapidly changing and increasingly challenging operating environments.

We will continue to recruit, train, and support the very best local leaders in the business and we are confident that they will continue to deliver industry-leading performance and returns, both financial and clinical, for our patients, our communities, and our shareholders.

I am also pleased to report that we have not only posted our best quarter ever, but Ensign has grown yet again this quarter and done so in some very different and special ways that we will discuss in a moment. But first a couple of key numbers.

Earnings for the quarter were up over 15% at an adjusted $0.45 per fully diluted share, $0.02 ahead of consensus and right on track with our annual guidance of $1.75 to $1.79 per share. Revenues were $154.2 million, also on track with our annual guidance of $605 million to $615 million. We are reaffirming both our EPS and revenue guidance for the year today.

These results were largely the product of carefully focused expense control across the organization and accelerating turnaround in several of the 17 new facilities we acquired beginning in the first quarter of 2009.

Our quarter-over-quarter highlights include revenue grew more than 18%, EBITDA grew over 24%, and our EBITDA margin grew nearly 5% surpassing the 14% mark. Skilled revenue grew nearly 22% while same-store skilled mix grew more than 7% to 54% of revenues and net earnings grew by 18%. And our consolidated net income margins remained steady at 6.1%, even including all of the recent acquisitions.

Occupancy was another bright spot with same-store occupancy approaching 83% and occupancy in our transitional facilities climbing over 2 percentage points to nearly 70%. As you can see, occupancy continues to grow in facilities we have operated for more than a year, consistent with our past history.

Remember that our pattern of acquiring distressed properties with unusually low initial occupancies continually holds our average overall occupancy at or around the 79% level. This is why we report same-store and transitional performance so that you can see exactly how we are progressing in each of these three somewhat different asset classes.

Suzanne will discuss the numbers in more detail in a moment, but first I would like to have Greg briefly discuss some of our growth.

Thanks, Christopher. As you probably know, we acquired 15 long-term care facilities in 2009 which was a big push for us. We are pleased to report that as a Group those new acquisitions are transitioning quite well.

We also acquired a small hospice business in the greater Dallas market with one of them. By design we have been using that business as a bit of a laboratory, if you will, to learn that related business before considering getting into it in any bigger way. We are happy to report that our hospice business, though small, has already been accretive and is showing real promise as well.

While it would have been easy to sit back and take a breather after a year like that, our operators elected instead to start off 2010 with two more strategic acquisitions in southern Idaho followed by yet two others just last week in Dallas and Houston. We are excited about these new facilities and especially about the wonderful people who joined us when we acquired their workplaces. And we are grateful that the former operators, both well-regarded regional companies, would entrust their legacies to us.

These acquisitions bring Ensign's growing portfolio to 81 facilities, 51 of which are Ensign owned and another 8 of which carry purchase options. As these option exercises generally reduce our occupancy costs over time, we expect to exercise most or all of them in due course.

We are particularly excited to announce today that through an internal program we have had in place for a few years and with lessons learned from our Dallas hospital experience we have now expanded into the home health and hospice business in southwestern Idaho. Last Saturday an Ensign subsidiary led by our own Daniel Walker acquired the operating assets of Horizon Home Health and Hospice, a four-office home health and hospice business based in Meridian, Idaho, which serves the greater Boise area and surrounding markets.

Horizon is profitable and was purchased for just 0.37 times 2009 revenue, a significant discount to market. Horizon was founded and has been operated successfully for 17 years by Marcie Little, a fixture in the Idaho healthcare community. Danny brought this strategic acquisition to us under our long-standing new ventures program which offers proven Ensign leaders a chance to scratch their entrepreneurial itch while staying within and remaining key contributors to the Ensign Group.

As a native Idahoan and a talented leader himself, Danny was able to couple his considerable skill sets and local connections with Ensign's world-class operating philosophy and support systems. Working with Ms. Little and her outstanding staff he has devoted the last several months to personally making the transition from our skilled nursing and service center functions to preparing himself to know, understand, and lead this dynamic business. And our service center as well is fully prepared to back Danny and his team.

We expect Horizon's already broad reach into the Idaho healthcare community to not only help us grow all of our business lines in that part of the country, but we also expect Ensign's growing expertise in this new operating arena to function as a springboard allowing us to eventually acquire and/or start up new home health and hospice businesses in other strategic markets creating additional value for shareholders.

We continue to actively seek opportunities to acquire both well-performing and struggling long-term care operations across the western United States and we expect to continue our pattern of disciplined growth in the near term.

We have significant cash on hand and we still have an untapped $50 million credit line in our hip pocket. We also have 30 facilities that we own free and clear with well over $150 million in leverageable equity in our portfolio. All of these resources can be used to finance additional growth as opportunities arise.

And with that I will hand it back to Christopher.

Thanks, Greg. Before Suzanne discusses the financials I would be remiss if I didn't take another moment to explain more about our front-line leaders and their teams and how they produce these record results in such a difficult operating environment.

As I have often noted, even more than our strong balance sheet and solid operating history it is the strength of our talented leaders at the local level which makes such results possible quarter after quarter. These leaders who immerse themselves in their individual markets and push daily to make their facility the facility of choice in the market they serve make Ensign unique.

As you know, the Ensign operating model affords these unique local leaders the latitude they need to be nimble and respond to demands of their unique markets. Ensign simultaneously supports them with world-class systems, technologies, and specialists. 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 single 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. The results these leaders produce build up over time as they and their operations mature and grow to dominate their markets. And it can be remarkable.

We firmly believe that financial performance follows clinical quality and each of the following examples illustrates that point. At our Park Avenue facility in Tucson, Arizona, Executive Director Ellen Cote and Director of Nursing [Sheila Sumne] have taken the facility with the poorest reputation in Southern Arizona, a recent special focus facility with a CMS one-star rating, and turned it into a five-star facility with stellar survey results and excellent reputation and naturally outstanding clinical and operating results.

Although Park Avenue's occupancy has just begun to climb, skilled revenues are already up over 7% and EBITDAR has grown over 120%.

At our Atlantic Memorial Healthcare Center in Long Beach, California, our newest CEO, [Rusty Marsh], and COO [Armeda Fessler] have led that formerly average facility to 142% quarter-over-quarter increase in net income with occupancy at 93% and skill mix of over 65%, making it one of the most popular and sought after facilities in the state.

At Carmel Mountain Rehabilitation and Care Center in San Diego, California, the leadership team CEO Andy Ashton and COO Cynthia Francia have immersed themselves completely in their market discovering in the process a compelling need for an active respiratory therapy program in their market.

Armed with real market data gathered directly from other providers in their area they converted one portion of their facility to a 26-bed sub acute unit in mid-2009. Today that bed unit or sub acute unit remains at or near full occupancy all the time and Carmel's overall occupancy has grown to 94% with a 65% skill mix and 140% quarter-over-quarter increase in net income.

Finally, at our Timberwood Nursing and Rehabilitation Center in Livingston, Texas, Executive Director Tim Burningham and Director of Nursing [Diane Frankens] have catapulted that facility into the ranks of our top performers with occupancy jumping 12% to over 87%, skilled mix up to 45%, and net income up over 64%.

There are so many other stories like these across the organization. Many of our facilities remain in the early stages of the transition process and we believe that the opportunities for organic growth across the Company's expanding portfolio are more compelling than ever. These opportunities become successes as our local leaders continue to focus on becoming the provider of choice in their market and consistently grow occupancy revenues and earnings, even in challenging market cycles.

We continue to invest about $20 million a year in upgrading our physical plants. Renovations take beds out of service and tend to take a temporary toll on operations but we strive to minimize the costs and our local leaders worked very hard to minimize the operational impact of renovation activities.

For example, during the quarter and a third of our transitional facilities, which are those that we have operated for more than one year but less than three years, were undergoing significant renovations and additions. Although the Group posted about a 1% drop in revenue, we are pleased to report that through excellent expense management their combined EBIT actually grew 27%.

We are also pleased to report that those particular renovations are now nearly done and we are seeing skilled occupancy and top line return even faster than the renovations are being completed.

We are also very encouraged by the past and anticipated future successes of our new markets and new ventures programs. These programs have helped us expand our core skilled nursing business into new markets and to leverage off the expertise acquired in that business to extend our reach into new business lines such as the home health and hospice platform we acquired in Idaho last week.

We pledge to pursue these new opportunities in a very disciplined fashion, but to be aggressive and make sure that they have every opportunity to succeed once we step into them.

As you can tell, we believe strongly in our outstanding leaders. We are pleased that some of the best among them would make the personal commitment and take the personal risk to give themselves wholeheartedly to these entrepreneurial ventures and to thereby extend Ensign's growing influence in the healthcare world. It is through them and our other local leaders that we will realize our mission of bringing a new level of quality and dignity to the long-term care industry doing it one facility at a time.

We will also continue to remain vigilant and responsive as changes occur around us. In the meantime, we 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. Even after a very robust year of acquisitions whose EBITDARs have yet to catch up with the new debt, Ensign's adjusted net debt to EBITDAR ratio is still only 2.1 times. And, as of March 31, we still had over $41 million of cash on hand.

We remain committed to keeping our cash flows strong and our debt relatively low, and we continue to commit capital to our ongoing acquisition and renovation programs as we look to the future.

With that I will turn the time over to Suzanne to provide more detail on the Company's financial performance.

Thank you, Christopher, and good afternoon, everyone. This quarter we set another earnings record.

For the quarter in the March 2010 the Company reported adjusted net income of $9.5 million compared to $8.1 million. Diluted adjusted earnings per share were $0.45 compared to $0.39, a 15.4% increase. These results exclude expense adjustments related to our acquisitions of $0.2 million.

This quarter we also set another record for revenue. Total revenue was $154.2 million, up 18.3% over the prior-year quarter. Our revenue growth was mainly attributable to improved higher acuity mix in our same-store facilities which grew to 54%, solid same-store occupancy of 83% which grew 47 basis points, the addition of two new facilities during the first quarter of 2010, as well as ongoing performance improvements in our 15 2009 acquisitions.

Key metrics for the quarter include GAAP net income increased 18% to $9.3 million or $0.44 per diluted share. EBITDA increased 24.2% to $21.6 million and consolidated EBITDAR margins grew to 16.4%. As we continued to strengthen our clinical offerings and raise our acuity levels at immature facilities we expect our skilled mix to increase over time.

As we typically acquire Medicaid-focused facilities we anticipate that during and after periods of acquisition growth our consolidated skilled mix and occupancy will be diluted by lower occupancy and mix and recently acquired and transitional facilities.

In reviewing the strength of our financial position as of March 2010, cash and cash equivalents were $41.5 million. The Company generated net cash from operations of $10.3 million, of which $9.3 million was attributable to earnings. $5.3 million was related to non-cash items including depreciation and amortization, provision for doubtful accounts, and stock-based compensations.

Net operating assets and liabilities grew by $4.3 million, which was primarily attributable to the growth in accounts receivable as revenue grew particularly in recently acquired facilities which typically experience collection delays of up to six months or more as we will await completion of the change of ownership process by state and federal reimbursement programs.

Net cash used in investing activities during the three months was $6.9 million, which was primarily related to business acquisitions and purchase of PP&E. Net cash used in financing activities for the quarter was $0.9 million.

In addition, the number of facilities we own free and clear has grown to 30. Over time we expect to leverage the unencumbered equity in our real estate portfolio to fund further expansion and we continue to maintain our five-year $50 million revolving credit facility with GE which was untapped at the end of the first quarter. We believe that with our current cash balance, strong cash flows, the equity in our existing real estate portfolio, and the availability of our credit facility we are well positioned to continue executing on our disciplined growth strategy in 2010.

As we published in yesterday's press release, we are reaffirming both our EPS and revenue guidance for the year with 2010 revenue to range from $605 million to $615 million and diluted earnings per share of $1.35 to $1.79. In giving these numbers I remind you again that our business can be lumpy from quarter to quarter and year to year due to the unpredictability of government reimbursement systems, delays in state budgets, seasonality and skills mix, the impact of our general economy on census, and other factors.

Performance is also impacted by fluctuating stock-based compensation expense, the cost of being a public company, and other matters that have little to do with operations. In addition, during periods when our opportunistic acquisition activities are accelerating it is both common and expected to see some short-term pressures on earnings and margins until we can begin to develop the long-term potential we believe is inherent in those operations.

But as you can see from our projections we continue to see ample opportunity for additional improvements across the entire portfolio in 2010 and we believe we are already seeing it.

I will not turn it back to Christopher to wrap up.

Thanks, Suzanne, and thanks everyone who is on the call. We hope this discussion is helpful.

As always I want to conclude by thanking our outstanding clinical and operational leaders and their teams for a solid start to 2010. Many of them have made great sacrifices in the organization in our behalf and I wish that I had the time to share all of their stories with you. I would also like to thank our dedicated service center team who worked tirelessly in their stewardships, as we all do, to support the field and make Ensign go.

We would also like to thank our shareholders again for your support and confidence. And with that, Mary, can you please instruct the audience on how we proceed with the Q&A?

(Operator Instructions) Jerry Doctrow, Stifel Nicolaus.

Hello, this is actually Kirk Streckfus in for Jerry. Just a few questions for you. I was wondering -- first could you talk a little bit more about your recent acquisition of Horizon? Was this more opportunistic in terms the valuation you received for the deal or strategic in that you are looking to expand into home health and have been looking at this for a while?

Yes. How is that? You know, it really -- it was more strategic but I will tell you that because of the way in which the transaction took place and the great concern and care that the seller had for the company itself, the way the deal was struck it was more -- I guess what I am trying to say, Kirk, is we didn't do the deal because it was some great deal.

Even though the deal terms are terrific, we did the deal because it was something that made sense in that particular market and it made sense for the person who is going to be leading that deal who is very excited about both the geography and the business itself.

And I guess the fact that you already have a presence in Emmett probably helps you gain traction with it as well, right?

That helps. Although I will tell you that the size of that company is large enough, that Emmett is really a very small company as compared to the size of the home health hospice company.

Okay. And you have indicated you would be looking to possibly expand home health and hospice into California and maybe Arizona, Texas, some of these other areas where you definitely have a big presence on the SNF side, right?

Well, I think we are going to have -- the way we are set up, and both Christopher and I have alluded to our new markets, new ventures programs, the way we are set up we can take these things just about anywhere we want to go. We just want to be sure before we do that that we are on as solid footing as we think we are with this. That we feel good about the business, that we are successful at it, that we find some operating advantages that we can bring to bear to do it better than others.

And as we do that -- and I think we really have a great platform to do that -- I think you can expect to see us grow into other markets and other places, whether we do it by acquisition or by start up.

Okay. And how is the current acquisition pipeline looking? Do you still see many opportunities and have valuations changed at all?

You know, the acquisitions we just did we feel like we got a very good deal on. The ones we did at the beginning of the year we feel like we got a very good deal on and we are seeing additional acquisition opportunities in the pipeline. After a year like last year I do think we are being a little more strategic this year, particularly in markets where we have grown a lot, but the pipeline is as robust as ever.

The pricing we are seeing is -- it's still a little all over the map but we are seeing some gems in there and those are the ones that we tend to pick off. And I think we are going to continue to grow this year.

Kirk, just to add to that, we will continue to make acquisitions; the pipeline looks good. But do recognize that we will be comparing acquisition opportunities to the organic opportunities we have in our existing portfolio right now and those are as good as they have ever been. So we will be looking at both as we consider whether an acquisition makes sense.

Okay. And I think you made comments last quarter that you thought maybe you could get to 81% occupancy, roughly, if you didn't make any additional acquisitions. Do you still feel pretty confident in that number?

Well, if you look at where we are in our same-store we are at 83%.

Right, right.

So if we stop tomorrow and let things sort of -- the wave that is sort of running behind us sort of catch up I think we could push to 81% and 83% and well beyond. Our most mature facilities here in Southern California are right in the mid-90%s some of them. So it's no -- that is an easy answer to give.

Okay, and just one last one. Obviously states are starting to open up budgets again [more] in the spring. Can you give us any color on the Medicaid environment and how that is looking?

The Medicaid did you say?

Right.

The guidance we gave I think will turn out to be pretty accurate. We are seeing some declines that we still haven't seen in certain states where we are smaller. It looks like we will see some decreasing rate in places like Idaho and Washington later in the year. Those represent obviously a small fraction of our revenue base.

But we don't see any big surprises on the horizon, anything differently than we anticipated. It's a little different than maybe what was advertised out there but so far it has looked pretty consistent with what we expected when we gave our guidance.

Okay, great. Thanks a lot.

(Operator Instructions) Jim Bellessa, D.A. Davidson.

Good morning. I would like to go over your guidance. When you gave the guidance last February you indicated that revenue forecast was $605 million to $615 million and there was an assumption there that there would be no additional acquisitions. You have now made an acquisition in Texas and one in Idaho, yet you haven't increased your revenue guidance. How come?

Just one correction -- and you are right, we did say that. But remember we did include the Idaho acquisition in that guidance so we know about that and had that included.

The home hospice business you had already in your guidance?

No, the two Idaho facilities. I thought that is what you were referring to.

No, I am talking about the Texas acquisitions on May 1 and the Idaho home and hospice business.

Right. I think that we wanted to see how the year plays out, Jim. Those acquisitions on the revenue side take us to the upper end of our guidance. And if we see something compelling that says it's going to take us outside of that guidance, then we will make the adjustments accordingly.

But you are right; on the revenue front these acquisitions do take as us to the high end of our guidance range.

If I were just to annualize the first-quarter revenues I get above your guidance range. So are you expecting things to remain static, that you are going to have a lower reimbursement rate the rest of the year?

No, but remember, Jim if you look back at history first quarter has always been a very strong quarter. One of the reasons we always say in this call -- we try to remind everybody of the lumpiness is we try not to guide our business on a quarterly basis. It's an annual basis and beyond.

And second quarter and third quarter do have a tendency to fall off a little bit in revenues. And so we are trying to not get overly excited too early until we see how the second quarter turns out on the revenue front, but we do feel very comfortable with how things are progressing in our market and in our facilities. It's a great question.

If I am understanding correctly, if I heard correctly, if I take the acquisition cost of that southern Idaho home health and hospice business and gross it up for the 0.37 times multiple that you bought it at, if I heard it correctly, that is over $7 million of revenues. Is that a correct calculation?

That is pretty close, yes.

And then this nice improvement that you had in occupancy in the most recent quarter versus the fourth quarter, is this not on a level that is maintainable the rest of the year? You probably expect it to inch down?

That is a good question. I don't think we expect it to inch down, Jim. I just -- again, second quarter tends to be a little bit softer. I don't know if it's -- I think we talked about this last year -- I don't know if it's because of the weather or what have you, but we are trying to be a bit conservative with our estimates and want to see how the second quarter is progressing.

We don't have any evidence that it's soft yet but traditionally that is how the second quarter has been.

I will just add that we had a great first quarter. If you looked at our same-store skilled mix we were at 54%. The two acquisitions from Texas are traditional type of acquisitions where they are turnaround acquisition so keep that in mind as you are looking at those projected numbers.

Thank you very much.

(Operator Instructions) I am not showing any questions at this time.

Okay. Well, Mary, thank you --

Actually, we do have two questions. Would you like to take them?

Okay.

[Lane Timmons], (inaudible) Investments.

Good afternoon. I was wondering if you could just provide a little bit of detail on how much of the growth that we are seeing is organic versus acquisition.

So on a same-store front we had revenue growth of about 4%.

Okay.

And so if you look at our financials and break it into various buckets -- we would break it into same-store, transitioning, and recently acquired -- and so that is how you can kind of differentiate the amounts in each bucket.

Okay, great. Thank you.

You are welcome.

(Operator Instructions) Jerry Doctrow, Stifel Nicolaus.

Hi, just one more question for you. I was wondering if you had any thoughts on the [RUGS] score implementation. We are hearing that the delay should probably be reversed and we should get implementation probably sometime October 1 or January 1. Just wondering if you have any comments?

Well, we probably hear the same thing that you hear. It looks today like it will actually go into effect on October 1. That has changed about three times over the last three or four months, but it's looking fairly probable that that will go into effect.

And you would argue that probably your internal growth opportunity and just given CMS's intended budget neutrality it probably shouldn't have a material impact?

You know, it would have a material impact if we didn't adjust some things, but you are right. If our local leaders are making the adjustments that they ought to make, there are some things that we don't do currently that some of the changes allow us to do. And so we will be making some changes to some of our practices that should counterbalance some of the reimbursement changes.

Okay, great. Thanks very much.

(Operator Instructions) I am not showing any questions.

Okay. Thank you, Mary, and thanks everyone for joining this call. We appreciate your time.

Ladies and gentlemen, this does conclude today's program. You may now disconnect and have a wonderful day.