Ensign Group Inc (ENSG) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to The Ensign Group, Inc., second-quarter FY 2010 earnings conference call. At this time all participants are in listen-only mode mode. Later we will conduct a question-and-answer session, and instructions will be given at that time. (Operator Instructions) As a reminder, today's conference call is being recorded.

I would now like to turn the conference over to today's host, Mr. Greg Stapley, Executive Vice President. Please go ahead, sir.

Thank you, Allie, and welcome, everyone, and thank you for being on the call today. On Friday 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 Tuesday, August 17.

Just a few housekeeping items to start. First, any forward-looking items or statements that we may make 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'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 a result of new information, future events, change in 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 to 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 home health and hospice businesses, 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 Friday's press release.

As usual I would also like to update you regarding the ongoing DOJ investigation. We remain in cooperative discussions with the US Attorney's office over the delivery of requested documentation and expect that process to continue. In the meantime, we have no new 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 it up for questions. Christopher?

Thanks, Greg, and good afternoon, everyone. We are pleased to be able to again tell our shareholders that we've just finished another record quarter. As we have explained before, the 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 to [then what] leadership paradigm really shines -- in rapidly changing and increasingly challenging operating environments.

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

A couple of key numbers. Earnings for the quarter were up over 17.5% at an adjusted $0.46 per fully diluted share and on track with our annual guidance. Revenues were $157.9 million, well ahead of our annual guidance.

With this performance I am pleased to announce that we are raising both revenue and earnings guidance today, and I will let Suzanne tell you more on that in a moment.

These results were largely the product of carefully focused expense control across the organization and accelerating turnarounds in several of the 19 new facilities and other businesses we've acquired beginning in the first quarter of 2009.

Quarter-over-quarter highlights include -- revenue grew nearly 20%, EBITDA grew nearly 25%, and our EBITDA margin grew 58 basis points to 14%. Skilled revenue grew over 19%, while same-store skilled mix grew nearly 3 percentage points to approximately 53% of revenues. Net earnings grew by 17.5%, while our consolidated net income margins remained steady at just over 6%, even including all of the recent acquisitions.

Occupancy continued to be a bright spot, with same-store occupancy at over 82% and occupancy in our transitional facilities climbing almost 3 percentage points to over 70%. Occupancy continues to grow in facilities we have operated for more than a year, consistent with our past history.

Remember that our pattern of requiring distressed properties with unusually low initial occupancies continually holds our average overall occupancy at 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 the growth that we have had over the last quarter. Greg?

Thanks, Christopher. In the second quarter we continued the process of absorbing and transitioning the 19 long-term care facilities we acquired in 2009 and the first part of this year. We are pleased to report that as a group these new acquisitions are transitioning well, with all but one of them achieving profitability as of today.

We are also very encouraged by the success of our new markets and new ventures programs. Our Horizon Home Health and Hospice unit, a four-office home health and hospice business based in the Greater Boise, Idaho, market which we acquired on May 1 and told you about on our last call, is already running ahead of pro forma. In addition, the synergies and lessons we have learned there are helping our Dallas Hospice, which we acquired just last October, to improve as well.

We pledge to continue pursuing these new opportunities in a very disciplined fashion, being judicious in identifying the ones we will go after, and working hard to ensure that they have every opportunity to succeed once we step into them. We continue to see a robust acquisition pipeline in our target markets and believe we can remain very selective in choosing our objectives.

Ensign's growing portfolio today stands at 81 facilities, 51 of which are Ensign-owned, plus the growing home health and hospice businesses. 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 future.

We do 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. With that, I will hand it back to you, Christopher.

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

As I have often noted, even more than our strong balance sheet and solid operating history, it's 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.

The remarkable results produced by these leaders build up over time, as they and their operations mature and grow to dominate their markets. We firmly believe that financial performance follows clinical quality, and each of the following examples illustrates that point.

At Victoria Care Center in Ventura, California, CEO John Albrechtsen, Director of Nursing Juvie Lopez, and Clinical Resource Director Elizabeth [Darden] have taken a facility with enormous clinical and regulatory challenges -- and the financial losses that tend to go with them -- and completely transformed it. Quarter-over-quarter occupancy is up over 20%; revenue is up 67%; skilled revenues are up 427%; and EBITDAR margins have swung nearly 33% percentage points from a negative 19% to a positive 13.6%, a huge leap in just one year.

At our Emerald Hills facility in the Seattle area, Executive Director Owen Hammond and Director of Nursing Services [Lynn Emery] have taken a tired and failing facility that we bought at a foreclosure and make it a community favorite, with quarter-over-quarter occupancy up over 26%, revenue up 66%, and EBITDAR margins climbing from virtually zero to over 16%.

At our Willow Bend facility, which is located in the highly competitive Mesquite, Texas, market just outside of Dallas and which has been undergoing a major renovation and addition program for over a year, the leadership team of Executive Director Kevin [Mickam] and Director of Nursing [Joy Hopwitz] have pushed occupancy up nearly 14% over the same quarter last year, even though the new addition is not even finished or open yet.

Even with the challenging physical plant, this team produced a quarter-over-quarter revenue increase of 37%; a skilled revenue increase of 56%; an EBITDAR increase of 257%; and they nearly tripled their EBITDAR margin to over 20%. This performance will be remarkable at nearly any facility, especially one that is an active construction zone.

Finally, at one of our perennial top performers, Park View Gardens in Santa Rosa, California, longtime CEO [Eric Molstein] and Director of Nursing [Janice Diaz] have continued to push on the flywheel. Their hard work has propelled Park View to a quarter-over-quarter 18% revenue increase, a [58]% skilled revenue mix, and a facility EBITDAR margin of almost 22%, proving to themselves and the rest of the organization that even the best can still get better.

There are so many more such examples across the entire organization. We appreciate you allowing us to share them, since there is no more important information to offer today than to tell you that Ensign is literally full of people and stories like these. These few examples show what makes us different, and they illustrate the opportunities for organic growth in all parts of the Company's expanding portfolio.

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 our operations. But our local leaders work very hard to minimize the operational impact of renovation activities. Although it can be very difficult -- as you saw from our discussion of Willow Bend a moment ago -- our operators are starting to learn how to manage the significant construction projects and still perform well. By the way, we expect Willow Bend's new addition to open in the fourth-quarter and to see its performance improve even further next year.

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 June 30, we still had over $26 million of cash on hand.

We remain committed to keeping our cash flow 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. Suzanne?

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

For the quarter ended June 2010, the Company reported adjusted net income for the quarter of $9.7 million compared to $8.3 million. Diluted adjusted earnings per share were $0.46 compared to $0.40 per share, a 15% increase. These results exclude our acquisition-related expenses.

This quarter we also set another record for revenue. Total revenue was $157.9 million, up 19.5% over the prior-year quarter. Our revenue growth was mainly attributable to same-store revenue, which was up 4% due to an increase in occupancy of 88 basis points, and skilled revenue mix, which grew 2.8% to approximately 53%; the addition of four new facilities in the home health and hospice business during the first half of 2010; as well as the ongoing performance in our 15 2009 acquisitions.

Key metrics include GAAP net income increased 17.5% to $9.6 million or $0.46 per diluted share. EBITDA increased 24.6% to $22.1 million. And consolidated EBITDAR margins were 16.3% despite the recent addition of 19 new facilities, many of which were seriously underperforming at acquisition.

As we continue to strengthen our clinical offering and raise our acuity levels at immature facilities, we expect our skilled mix to increase over time. As we typically acquire underperforming 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 in the recently acquired and transitioning facilities.

In reviewing the strengths of our financial position as of June 2010, cash and cash equivalents were $26.4 million. [For] 2010 the Company generated net cash from operations of $14.9 million, of which $19 million was attributable to earnings. $9.3 million was related to non-cash items including depreciation and amortization, provision for doubtful accounts, and stock-based compensation.

Net operating assets and liabilities grew by $13.4 million, which is primarily attributable to the growth in accounts receivable as revenues grew, particularly in recently acquired facilities, which typically experience collection delays of up to six months or more as we await completion of a change in ownership process by state and federal reimbursement programs.

We used cash in investing activities during the six months -- was $25.2 million which is primarily related to business acquisitions and purchase of PP&E. Net cash used in financing activities for the period was $2.3 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 quarter.

We believe that our current cash balance, strong cash flow, the equity in our existing real estate portfolio, and availability in our credit facility -- we are well positioned to continue executing on our disciplined growth strategy in 2010.

As we published in Friday's press release, we are increasing both our EPS and revenue guidance for the year, with 2010 revenues to range from $628 million to $638 million and adjusted diluted earnings per share of $1.79 to $1.83.

This guidance is based on diluted weighted average common shares outstanding of 21.4 million; no additional acquisitions or disposals; an aggregate 1% projected decline in overall reimbursement rates during fiscal 2010, some of which have already occurred; no material increase in the tax rate; and no negative impact associated with the anticipated implementation of RUGs IV and MDS 3.0.

In giving these numbers I would like to remind you again that our business can be lumpy from quarter to quarter and year to year, with the third quarter being the least predictable. This is largely attributable to variations in the government reimbursement system; delays of state budgets; seasonality and skilled mix; the impact of the general economy on our 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 results and our revised guidance, we continue to see ample opportunities for additional improvements across the entire portfolio in 2010. I will now turn it back over to Christopher to wrap up. Christopher?

Thanks, Suzanne; and I do know the difference between afternoon and morning. I think I have been up all night here. But thanks to everyone who has been on the call. We hope this discussion has been helpful.

I want to conclude by thanking our outstanding clinical and operational leaders, as always. Their teams have helped us to another record quarter. But more importantly, grateful for the love and care they give daily to our residents.

I would also like to thank our dedicated Service Center team who work tirelessly in their stewardships, as we all do, to support the field and make Ensign go. I want to thank also our shareholders again for your support and confidence.

And, Allie, if you wouldn't mind giving us the instruction on the Q&A procedure, that would be great.

(Operator Instructions) Jerry Doctrow, Stifel Nicolaus.

Good morning. Congrats on the quarter. Just a few questions here for you.

First, in the Q it says that you accrued a liability as a result of the internal inquiry you initiated last quarter. Could you give us the dollar amount of that liability?

And is it consistent related to the $0.5 million revenue adjustment you took in the quarter?

I believe that you are referring to the -- in the disclosure in footnote 14, yes, it is related to that. The $0.5 million relates to the compliance review that we took under during the quarter.

Okay, okay, great. Just a couple reimbursement questions for you. Do you still believe RUGs IV goes into effect this year?

Do you see any specific piece of legislation going through Congress in the next month or two that could potentially reverse the delay?

This is Christopher. We have every reason to believe that it will still move forward this year, although you don't guarantee that; things can change rapidly.

And what was your second question?

Just if you see any specific piece of legislation where it could be included in the next couple months.

You know, from everything we read, everything we hear, the interactions that some of our folks have with folks in MS, I don't have any reason to believe that it is not going to be fully implemented in October. But again I reiterate, there are things that have changed before, even after the fact. So only go by what we know so far.

Okay, let's say assuming it doesn't get implemented this October, do you have any sense of how everything would work? It looks like you would be paid the RUGs IV rates until CMS comes up with a hybrid grouper in crosswalk.

Would that create any kind of reserve issue for you? Or would your rates be retroactively adjusted? Could you give us any color there?

You know, as I read it, it appears to me that we repaid as normal. But there could be -- we would have to accrue some sort of potential adjustment retroactively.

But we are planning on it being implemented in October. And even if it is not implemented, we would probably in that case have to keep two separate numbers, and we would retain both and somehow reflect both. But we hope that that doesn't happen.

Okay, okay. That's helpful. Could you give us any sense of what the potential impact could be from the proposed Part B changes for multiple procedures?

You know, in our organization we have looked at that stuff. And, Suzanne, I don't know if you have specific numbers there, but it is not nearly as great as we thought the impact would be.

As you know, there was something implemented and then retroactively changed earlier this year. I believe that the impact was -- gosh, I don't want to throw out a number.

But I want to make this clear -- this is off the top of my head. It seems like it was somewhere in the neighborhood of $40,000 or $50,000 per month.

Okay.

For the entire organization.

Okay, great. Okay, and just now that state budgets are closed, any updates you can give us on the Medicaid front?

Boy, across the seven states that we are in, most of the changes that we have seen have been in -- either it hasn't been much change other than what we have already reported in prior periods in terms of the reimbursement level.

There are some things happening with -- whether you want to call it a bed tax or QA fee, it goes by different names in different states. But we have seen some increase in that tax, which results in a negative reimbursement hit, I guess, even though it shows up as an expense and not on the revenue front.

But I think we feel pretty comfortable about our 1% overall decline as it compares to last year's reimbursement. We are seeing -- we have seen declines, as we said before, in Idaho and Washington. And seeing a fairly flat environment in California, slight, slight decrease. Seeing a relatively flat environment in Arizona. In Texas we're still sort of waiting on -- unless Suzanne knows something I don't know.

Yes, it looks like (multiple speakers) a 1% decrease in Texas for this year, is what they have got so far.

Okay, okay, great. Just in terms of acquisitions, I believe last quarter you guys said you were going to step back and be a little bit more strategic. Can you give us any sense of what you are seeing there, just in terms of pipeline and valuations?

Greg?

Jerry, this is Greg. The pipeline still looks good. Valuations still look good.

We're actually cautiously optimistic the valuations are going to get better for us as an opportunistic acquirer later in the year, as some more of the things you guys were just talking about shake out.

But there is no shortage of opportunities for us right now. We're just busily working on absorbing what we have got.

Okay. Just last question, in terms of the occupancy, assuming you don't do any additional acquisitions. You still feel pretty confident about getting the rest of the portfolio up to where the same facility levels are, around 83%, somewhere around there, maybe?

Yes, you know, it's a great question. I will tell you that we have seen a fairly significant increase in our overall occupancy just in the last 30 days. We are pretty pleased, including the new acquisitions that averaged in the mid-60% level.

We are seeing are occupancy, our overall occupancy, at levels that we haven't seen for several years. So we are pretty enthused about what is happening in our existing portfolio in the last few weeks.

Okay, great. Thank you very much.

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

Good morning and congratulations on an excellent quarter.

Thank you.

Thank you.

Besides the earnings ding that was already mentioned about the revenue adjustment for estimated overpayments, it looks like about a penny a share, could there have been another penny a share taken out for impairment of software development costs?

Yes, we did during the quarter have a HR system that we decided not to implement. It was something that we went down the road with and decided that it was not a good fit for us.

So both of these items shouldn't repeat going forward; is that fair?

That is a fair statement.

Well, Jim, you have to remember that from the compliance item -- we constantly are monitoring and auditing and making sure that we don't have overpayments. We do typically send a little money back to the government every quarter. This one was just larger than usual.

So in that sense we would hope it would not repeat; but there is always a little something going back and forth. It is part of our standard practice.

Are there penalties due when you have these kind of occurrences?

No, we pay interest on it, but not penalties.

There is a note in the Q that talks about total capital expenditures for property and equipment were $13.8 million in the first half. You are saying that the whole year is budgeted at $16.8 million.

Why is there such a high percentage of planned CapEx for property and equipment in the first half? Or do you need to revise your budget?

No, Jim, it's a good question; and Greg, you can jump in after I'm finished. But I -- we had a couple significant construction projects under way in the first half that we almost finished in the first half. We are just cleaning them up now. But they were -- they comprised roughly $6 million of that number.

And we won't have similar projects in the second half of this year. So while $16.8 million, you're probably right in pointing that out; we will probably be higher than $16.8 million. It is not going to be a repeat of the first half of the year.

There is another skilled nursing facility operator that is under certain pressures because of being found by a jury in California to have not been able to reach its minimum nursing staffing. Have you been accused of that ever? Is this something that you are always being watched and vigilantly watching yourself, that you are at the minimum standard?

Jim, this is Greg. Every operator of any size in California has been accused of that. This is a unique to California thing, because it is the one state where we have the mandated staffing ratio of our seven states. And we have all been accused of it.

Our case came up in 2007 and was concluded in 2008 as a class action. We disclosed it in our filings. We settled that class action for a very, very small sum. Everything -- very small relative to what our competitor got hit with, but a very small sum.

And we have implemented systems that we hope and believe will keep us from violating that mandate now or in the future. And we've continued to go forward. Nobody has raised that question for us or any of our facilities since we concluded that case in 2008.

In your guidance statement you call for an aggregate 1% projected decline in overall reimbursement rates. If I am reading your Q correctly, for the first half they were up 1.3%.

That suggests, if we hold true to your guidance assumption here, that the second half is going to be down materially. What is causing it to go down?

Sorry, Jim. Not necessarily. One of the things that we have to look at when we look at whether the reimbursement goes up or down -- sometimes it goes up because of a change in acuity. So it is not exactly an apples-to-apples comparison.

Even though our activity might have gone up -- some of our states are acuity-based reimbursement too. So if our acuity rose, our reimbursement for that level of acuity might have gone down in the state; but because our overall acuity rose it's going to look like our reimbursement went up. Does that make some sense?

Yes, it does.

So we have already seen the vast majority of that 1% decline in the second quarter on a year-over-year basis. It just doesn't -- because the financial statement doesn't necessarily show an apples-to-apples comparison, it doesn't look like it.

Thank you very much.

Thank you for the questions.

(Operator Instructions) Jerry Doctrow, Stifel Nicolaus.

Hey, guys. It's Kirk again in for Jerry. One last question.

The private pay rates look really strong for the quarter. Just wanted to see what was driving that.

That's a good question and, Kirk, I am not sure I am prepared to answer that. I will tell you that we saw quite an increase in our assisted-living occupancy. And our assisted-living occupancy or our assisted-living business, as you know, is -- while it makes up a small percentage of our business, it does make up a significant piece of our private pay.

Instead of dropping our rates in assisted-living, we simply kept our rates the same or increased them along with perceived cost increases in our (technical difficulty) level.

So I think that probably is part of the reason that you see the private rates increasing. That is the only justification I can find.

We didn't do any across-the-board large increases in our private rates in the skilled nursing. Nor did we do it in the assisted-living; that is really a local function for our folks.

But I have got to believe that that is the reason why you are seeing it. I think we did have a very significant increase in our occupancy rates on the assisted-living side.

Okay. Can you just remind us where are your assisted-living facilities again? I know you had some in California. Just geographically where are they located again?

They are principally in California and Arizona. We do have a small operation in Colorado and a small operation in Texas.

Okay. Thank you very much.

I am showing no further questions at this time, gentlemen.

All right. Well, thanks again, Allie, and thank you, everyone, for spending the time with us this day. We appreciate you being our shareholders and appreciate your time.

Ladies and gentlemen, that does complete today's conference. You may all disconnect and have a wonderful day.