Ensign Group Inc (ENSG) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to The Ensign Group third quarter fiscal year 2010 earnings 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 reminder, today's call is being recorded.

At this time I would like to turn the conference over to Mr. Greg Stapley, Executive Vice President. Sir, you may begin.

Welcome, everyone, and thank you 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 third quarter. Both are available in the investor relations sections of our website at www.ensigngroup.net. A replay of this call will also be available there until 5 PM next Friday, November 5.

Just taking care of a few housekeeping items at the beginning, 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'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 where the changes arise as a 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 revenues, or that any of the facilities, the service centers, the home health and hospice businesses or a 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.

As usual, I would also like to update you regarding the ongoing DOJ investigation. During the third quarter we formed an ad hoc committee of the board. This committee was delegated the task of overseeing the Company's response to the DOJ investigation, and the committee has retained second regulatory counsel to assist in that ongoing response. While we need to allow some time for our new counsel to become thoroughly familiar with the Company and the investigation, we expect the additional assistance to help move the matter toward a conclusion. In the meantime, we continue to reach out to the US attorney's office, and we have no other new information to report since our last call.

With that, I'll turn the call over to Christopher Christensen, our President and CEO. Suzanne Snapper, our CFO, will later discuss the financials, and then we will open up for questions. Christopher?

Thanks, Greg. Good morning, anyone. We're pleased to be able to again tell you that we have just finished another record quarter. We are very encouraged that, sequentially, third-quarter occupancy surpassed second quarter. This is unusual in our often lumpy business, and we believe it portends good things for the rest of the year and into 2011. More importantly, quarter-over-quarter metrics were strong as well with overall occupancy up 62 basis points, over 80%, and our same-store census up 216 basis points to more than 83%.

Some other key quarter-over-quarter numbers include earnings, which were up 29% to $0.47 per fully diluted share on revenues of almost $165 million, which grew nearly 24%; EBITDA, which grew nearly 34%; and EBITDAR margins, which climbed by 103 basis points to almost 14%; skilled revenue, which grew almost 22% while same-store skilled mix grew newly 200 basis points to 52.4% of revenues; and consolidated net income margins, which improved by 22 basis points to over 6% despite all the recent acquisitions.

As we've explained 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 one] leadership paradigm really shine in rapidly changing and increasingly challenging operating environments. We will continue to recruit, train and support the best local leaders in the business, and we're confident that there will continue to deliver industry-leading performance and returns, both financial and clinical, for our patients, our communities and our shareholders.

Suzanne will discuss the numbers in more detail in a moment, but first I would like to have Greg briefly discuss our growth for the last quarter. Greg?

Thanks, Christopher. In the third quarter we continued to successfully integrate and transition the 19 long-term care facilities we've acquired since January of 2009. In addition to the significant census growth that Christopher just mentioned, these new acquisitions are transitioning well in many other areas.

We'd also like to update you on the success of our most recent endeavor in our ongoing new markets and new ventures efforts. Under the leadership of Danny Walker, our Horizon Home Health and Hospice business in the greater Boise, Idaho market which we acquired earlier this year, continues to grow and perform well ahead of projection. Since acquisition on May 1, Horizon's census has grown by 26% overall and 44% in its core home health business. In its first full quarter with Ensign, Horizon has grown its EBITDA margin by 540 basis points and its EBIT margin by 687 basis points. With these kinds of results, Horizon could soon be ready to provide a springboard for additional expansion in the home health and hospice arenas in Idaho and in other markets.

Although we took a brief step back from acquisitions in Q3, consistent with our historical growth patterns, we do not expect it to be long before we make additional acquisition announcements. We continue to see a robust acquisition pipeline in our target markets, and we believe we can remain very selective in chasing 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 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.

With that, I'll hand it back to Christopher.

Before Suzanne runs through more numbers, I'd like to offer a few examples of how our front-line leaders and their teams continue to produce record results in a difficult operating environment. As I've often noted, even more than our strong balance sheet and solid operating history, it's our talented local leaders who make such results possible quarter after quarter. By pushing to constantly provide outstanding clinical outcomes and mind the bottom line and all of the other moving parts of these complex operations at the same time, these leaders and their teams strive daily to make their facility the facility of choice in the market they're serving.

For example, at Pacific Care Center in Hoquiam, Washington, CEO Mike Clegg and Director of Nursing Julie Wakefield have taken a facility with enormous clinical and regulatory challenges and the financial losses that tend to go with them and completely transformed it. In addition, a newly completed facility renovation allowed them to open a wing of a building that had long been closed, which they quickly filled. Today, quarter over quarter, occupancy is up nearly 9%, revenue was up almost 30% and skilled revenue increased nearly 50%, all huge leaps in just one year. And we believe these are a natural outgrowth of Pacific Care's quality record with a series of excellent surveys, including one perfect one over the past three years.

At our award-winning Chateau des Mons assisted living facility in the Denver area -- and excuse my French -- executive director Heidi Peterson has taken a tired little secure Alzheimer's facility and made it a community favorite with 94% occupancy, quarter over quarter EBITDAR of more than 162% and EBITDAR margins climbing from under 13% to nearly 30% in just a year.

At our Brookfield facility in Downey, California, which is part of the highly competitive greater Los Angeles market, executive directors Rich Jorgensen and David Howell, with Director of Nursing Marie Fe and the rest of the Brookfield team have increased occupancy 377 basis points to over 91% with revenue up 38%, skilled revenue up 68% and EBITDA up over 127% as their reputation for quality care and outcomes have soared.

Finally, at our Camarillo Care Center in Camarillo, California, one of the few facilities we've acquired that was not distressed at acquisition, Executive Director Matt Huefner and Director of Nursing Marjorie Cruz have increased their occupancy by more than 1000 basis points, propelling Camarillo to a 23% EBITDAR margins, a 39% increase in skilled revenue, proving to themselves and the rest of the organization that even the best can still get better.

There are many more such examples across the organization, and we appreciate you allowing us to share them since, to us, there is no more important information we will offer today. Ensign is literally full of people and stories just like these. These few examples show what makes us different and they illustrate that the opportunities for organic growth in all parts of the Company's expanding portfolio remain more compelling than ever. We continued to invest about $20 million a year in upgrading our physical plant. Renovations take beds out of service and tend to take a temporary toll on operations, but our local leaders work very hard to minimize the operational impact of renovation activities. We'll also continue to remain vigilant and responsive as changes occur around us.

In the meantime, we remain financially sound with the lowest debt rate 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 are now starting to catch up with the debt issued last November, Ensign's adjusted net debt to EBITDA ratio is still only 1.9 times, and as of September 30, we still had nearly $37 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'll 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 September 2010, the Company reported net income of $9.9 million compared to $7.7 million. Diluted earnings per share were $0.47 compared to $0.37 per share, a 27% increase.

This quarter, we also set another record for revenue. Total revenue was $164.7 million, up 23.9% over the prior-year quarter. Our revenue growth was mainly attributable to -- same-store revenue was up 7.4% due to increase in occupancy of 216 basis points, and skilled revenue mix, which grew by 2% to 52.4%; the addition of four new facilities in the home health/hospice business during the first half of 2010 as well as the ongoing performance improvements in our 15 2009 acquisitions.

Other key metrics include -- consolidated occupancy increased 62 basis points to 80.1%, EBITDA increased 33.9% to $22.8 million, and consolidated EBITDAR margins improved 45 basis points to 16.1% despite the addition of 19 new facilities, many of which were significantly underperforming at acquisition.

As we continue to strengthen our clinical offerings and raise our activity 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 tiers of acquisition growth our consolidated skilled mix in occupancy will be delivered by lower occupancy and mix in the recently acquired and transitional facilities.

In reviewing the strength of our financial position, as of September 2010 cash and cash equivalents were $36.9 million. During the nine months ended September 2010, the Company generated net cash from operations of $34.5 million, of which $28.9 million was attributable to earnings. $14.6 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 $9 million. This was primarily attributable to the growth in accounts receivable as revenues grew, particularly at recently acquired facilities. Net cash used in investing activities during the nine months was $32.8 million, which was primarily related to business acquisitions and the purchase of PP&E. Cash used in financing activities was $3.6 million.

In addition, we own 30 of our facilities free and clear. Over time, we expect to leverage the unencumbered equity in our real estate portfolios to further fund expansion, and we continue to maintain our five-year, $50 million revolving credit with GE, which was untapped at the end of the quarter.

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

I'd like to take a moment to discuss our DSO. Questions about our DSO are nothing new, especially following extended periods of growth in our portfolio. Our strategy of acquiring underperforming skilled nursing facilities has historically resulted in a temporary lengthening of our overall DSO as payments are always delayed when we transfer operations and set up new, reimbursement relationships with our payors.

In other words, during any period when we are acquiring a facility, we will always see growth in overall DSO. This increase typically has nothing to do with the quality of the revenue and everything to do with the delays we experience as government payors process our change of ownership paperwork and reinitiate the payment process to our newly acquired facilities. This frequently takes in excess of six to 12 months for both Medicare and Medicaid programs. We anticipate and sample these delays as we forecast cash flows during and following periods of acquisition. This is consistent with our performance over the past seven years when our DSO has dropped steadily from year-over-year expense following heavy acquisitions growth.

The third quarter illustrates the principles quite clearly. After rapidly acquiring 19 facilities plus the home health and hospice business from January 2009 through May 2010, our DSO at the end of Q2 rose to 44. In the third quarter, as we slowed our acquisition pace and allowed operations to catch up, overall DSOs steadily declined to 43, and our same-store DSO stands at 38, which, to our knowledge, is the best in the skilled nursing industry. In short, we are not like other industries when it comes to DSO. As an acquisitive skilled nursing company with a strong opportunistic bent, cash in the bank and solid credit relationships, we expect and are perfectly able to operate even through the longest of these transitional delays.

As we published in yesterday's press release, we are maintaining both our EPS and revenue guidance for the year, which we just increased last quarter 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 beyond those made to date, an aggregate 1% projected decline in the overall reimbursement rate, no material increase in tax rates and the negative impact associated with the implementation of RUGs-IV and MDS 3.0.

In giving you these numbers, I would like to remind you again that our business can be lumpy from quarter to quarter and year to year. This is largely attributable to variations in government reimbursement system, delay in state budgets, seasonality and skills 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 pressure on earnings and margins until we can begin to develop the long-term potential we believe is inherent in those operations.

I will now turn it back to Christopher to wrap up. Christopher?

Thanks, Suzanne. As you can see from our results and our upward revised guidance issued last quarter, we continue to see ample opportunity for additional improvement across the entire portfolio in 2010. We anticipate that these improvements will continue into 2011 as our portfolio continues to mature and our operators continue to thrive in an ever-changing environment.

Thanks to everyone who was on this call. We hope this discussion has been somewhat helpful. As always, I want to conclude by thanking our outstanding clinical and operational leaders and their teams for another record quarter, but more importantly, for the love and care they give daily to our residents. I'd 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. We'd also like to thank our shareholders again for your support and confidence.

Can you please instruct how you would like us to proceed with the Q&A?

(Operator instructions) Brian Williams, Avondale Partners.

Hey guys, good morning, congratulations on the quarter. You talked about the success of Horizon and that it may be a springboard into further home health and hospice acquisitions. Can you talk about some of the dynamics in terms of why Horizon is doing so well and the interest timing in terms of when you may do some further acquisitions in this space?

Yes; let me take the second part of that question first, Brian; this is Greg. We don't intend to -- we're certainly not making an announcement that we are acquiring anything or looking hard at anything on the home health and hospice front. We've only had Horizon under our belts since May 1. And, while we are really, really pleased with the way they are performing and have high hopes for their continued growth, we do want to take some time to really make sure that we understand that business and are really ready to move into other markets with that business

That said, we feel very optimistic about that, primarily because -- and this is the answer to the first part of your question -- primarily because we think we have the right people in place up there. And that's always how we look at any of our businesses here at Ensign. It's a first who, then what, approach. We believe that if we get the right people in the right place doing the right thing, we almost virtually cannot fail. And Danny Walker and his teams up there in Boise are proving that in a new business line for us, which is really, really exciting.

And then Greg, you [have] taken a breather from acquisitions recently. And so what is that pipeline like? And talk a little bit about valuations. I imagine those are little bit depressed recently. Do you anticipate resuming acquisitions again here in the fourth quarter?

You know, we -- yes, I think we probably will resume acquisitions here in the fourth quarter. We have some things we're working on. The pipeline is looking pretty good. Valuations are not as depressed as you might think. There seems to be a fair amount of money running around in the market right now; it's more than we've seen over the past 12 to 18 months. And it's getting competitive out there.

So with that said, Suzanne just ran through the numbers; we've still got a lot of cash and we still see a lot of opportunities. And I think you can expect to see us making a few announcements over the next few months as we continue to grow. Does that answer your question?

Yes, definitely, and my last one, and I'll jump off -- can you give us an update on RUGs-IV?

I think that what we've said in the past appears to be -- I don't think it's changed dramatically. It appears to be fairly budget-neutral. I think that we will be helped by the market basket, and I don't think that we have a whole lot more to add to that. But I think that what has been said in the past, it will be pretty accurate.

Kirk Streckfus, Stifel Nicolaus.

Thanks for all the color, and congrats on the great quarter. The occupancy, I believe, was the strongest you guys have had since '07, when you came public. Are you seeing any change in the types of patients you are admitting into your buildings, and specifically, longer length of stay, higher acuity?

Yes. I think that in the third quarter, we definitely saw the same thing that we've seen in many prior quarters, Kirk. We are seeing higher acuity continue to increase. Longer length of stay -- that's not the case for us. That's not changing; if anything, it could be declining. But that's a good sign. That means that we have great outcomes, and people that have great experiences with us will want to send more of their people to us in terms of physicians and hospitals.

And I think it has a lot more to do with higher acuity and higher volumes, not longer length of stay.

Okay, and with the 80% total occupancy, I guess, where do you think you might be able to get the portfolio in the next couple years, excluding any future acquisitions? Is this 84%, maybe a good way to think about it, 83%, somewhere around where the same-store facility portfolio is?

If you were to take the same facilities that are in same store now, remember that there are going to be some that are going to enter that bucket in the future. But if you took the same group that's there now, I think we'd be disappointed if we didn't get to 86% in two years, as you've defined, again excluding new facilities that are going to move into the same-store bucket over the next few years.

Okay, good, and just remind us again, with the guidance you are assuming, I think, a net 1% decline in rates in Q4; is that about right? And does that account for the market basket as well?

That's a good question. I guess we felt like people get tired of us adjusting our guidance upwards quarter after quarter. I'm sort of joking there. We feel very confident that the upward end of the guidance is something that we will achieve.

Okay, fair enough; and then my last question -- the private pay rates look like they grew sequentially again, which is a trend I think we've seen. And I was just wondering maybe if you can give us some color behind that.

Kirk, we are looking just to verify that. One of the things that we have seen is that our rates on the assisted living front, which are a tiny fraction of our business, I believe about 3% -- they have increased in a fairly significant way. And I'm guessing that that has some influence, but obviously 3% of our business isn't going to influence the overall in dramatic fashion. I don't have a great answer for that.

And it's just kind of overall; every state pretty much on the private side has gone up overall, and some of it has to do with mix, too. As some of the states get a higher rate as the mix shifts from one state to the other, that's another portion of the increase.

Okay, great. Thanks a lot and congrats again.

(Operator instructions) James Bellessa, D.A. Davidson & Co.

Talking about occupancy rates and improvement that you've just announced, directionally at the end of the quarter, which way was it moving? And has that carried into October?

Yes, it has. That's the answer to your second question your first question was?

Just directionally, at the end of the quarter, was it improving relative to the average for the quarter, or was there some seasonality that was holding it back, or anything like that?

No. As a matter of fact, a bit surprising -- September was the healthiest we saw in the quarter. So we are pretty enthused that it continues into October.

The number of beds that you have occupied -- or not occupied, but operational beds -- was unchanged for the quarter; in fact, it went down by even one bed. Do you work on those during the summer months and then get them into production? Or what will happen here?

We wouldn't expect the operational beds to change for Q4, unless there was an acquisition.

There are rare exceptions, as you've heard me mention in that example, Jim, where we may take some beds that just aren't usable right now because they have been closed down a decade ago, and we may have an opportunity to renovate them and make them extraordinary units. But we don't see that happening in the fourth quarter.

You have held to this guidance assumption of $21.4 million for the full year, yet it doesn't quite appear it's going to be that much, or is there something happening in the fourth quarter that jumps up the share count?

You know, on the share count we do have some triggers that come due, as we always have the large diluted amount. But as Christopher mentioned before, that we would actually expect to see at that top range of the EPS guidance for the year.

Thank you very much.

There appear to be no further questions on the phones.

Well, thank you, everyone, for being on the call. We appreciate your time and attention and look forward to talking to you again next quarter.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program, you may now disconnect. Everyone have a great day.