Ensign Group Inc (ENSG) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Ensign Group, Incorporated First Quarter FY '11 Earnings Conference Call. (Operator Instructions.) I'd now like to turn the conference to your host, Mr. Greg Stapley, Executive Vice President. Please go ahead.

Thanks, Amy. Welcome, everyone, and thank you for being on our call today. Yesterday we filed our 10Q 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 5.00 pm Pacific on Thursday -- or I think it's Friday, May 20.

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 forward-looking statements and are encouraged to review our 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 changes arise as a result of new information, future events, change in circumstances or for any other reason.

In addition, 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 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.

Finally, we supplement our GAAP reporting with non-GAAP metrics such as EBITDA, EBITDAR, adjusted net income and so forth. 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.

We also customarily take a moment, at this point in the call, to update you regarding the ongoing DOJ investigation. We have nothing new to report today. The special committee appointed last year by our Board, through their regulatory counsel, is continuing their targeted review and analysis of selected historical medical and billing records in an effort to identify and understand any concerns potentially an issue in the DOJ investigation.

Counsel continues to interact with representatives of the DOJ as circumstances allow, all in an effort to press the matter to conclusion.

With that, we'll hear first from Christopher Christensen, our President and CEO today. Christopher?

Thanks, Greg. Good morning, everyone. We're pleased to inform our shareholders that the first quarter saw our local operators propelling Ensign to yet another record quarter. Clinical results continue to improve, and financial performance followed, as they have for the past several quarters.

Two of our three key performance drivers, occupancy and skilled mix, have grown across the portfolio as our newly-acquired and transitioning facilities have continued to mature and as our same-store facilities have strengthened and extended their presence in their markets. In addition, we've made continued improvements in the third driver, appropriate expense management, all while improving our clinical outcomes.

In the quarter, same-store occupancy grew to 83.6%, consolidated skilled revenue grew by almost 22%, same-store skilled revenue mix grew by 331 basis points on the quarter to almost 57%, and earnings per share were up 34% to $0.59 for the quarter. These results are the work product of many dedicated leaders and caregivers across the Ensign organization who give their all to their residents, their communities and each other every day.

We continue to recruit and train the best local leaders and staff in the business and support them with world class systems and experts to help them grow and dominate their respected markets. We are confident that these nimble and motivated operators will continue to deliver industry-leading performance and returns, both financial and clinical, for our patients, our communities and our shareholders, no matter what obstacles we may encounter along the road.

Suzanne will discuss the numbers in more detail in a moment, but first I want Greg to briefly discuss our recent and upcoming growth. Greg?

Thanks, Christopher. We're happy to report that Ensign grew again in Q1. In January, we acquired an outstanding continuing care campus and a separate independent living faculty in Abilene, Texas. In February, we acquired a beautiful full-service senior care campus in Salt Lake City, Utah, that includes the Salt Lake Valley's premier long-term in-patient acute psychiatric program, which is a new and exciting business for us.

In March, we acquired all of the assets of a continuing care campus in Ventura, California, the skilled nursing component of which we have been operating under [a lease] for several years. We currently have some very exciting prospective acquisitions in the pipeline, and we'll share details with you on those when those transactions close, which they are expected to do in the coming months.

As for future growth beyond that, we see a brightening road ahead. Although the ultimate [form] of the recent CMS proposed rule is far from settled, if and to the extent that significant reimbursement rate reductions are ultimately enacted by Medicare or the state, we anticipate some short-term dislocation in the market for distressed assets, the very kind of assets that we like to acquire when facility prices are low.

A buyer's market has always favored Ensign's unique skill sets and business model, and periods of opportunistic growth have typically been followed by superior operating results of our portfolio. And it almost goes without saying that buying at reduced prices creates a built-in cost savings for us that not only offsets temporary reimbursement and [other rates] in the short run, but it also allows us to enjoy those built-in savings for as long as we hold that asset.

While we firmly believe that any predictions regarding final rate changes are quite premature, if a challenging reimbursement environment materializes, we see a potentially more favorable acquisition pipeline starting to develop in many of our target markets by year-end, one in which we believe we could be even more selective than we have been in choosing both strategic and opportunistic acquisition targets.

To support such a program, we had nearly $51 million in cash on hand at quarter end. Not withstanding the acquisitions we currently have in the pipeline, we are working to keep a good supply of dry powder on hand at all times. We also still have an untapped $50 million credit line as well as 32 facilities that we owned free and clear that can be used with, actually, over $300 million in leverageable equity in that portfolio. All these resources can be used to drive additional growth.

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

Thanks, Greg. I want to explain in more detail why the things Greg just told you, combined with our record occupancy skilled mix and earnings this quarter, are particularly significant for Ensign and its stakeholders.

Those of you who have followed our history know that Ensign was born in the aftermath of the post-PPS shakeout. Using the benefit of that perspective, Ensign has been built on fundamental business principals that emphasize low overhead, high service levels and nimble local leadership that can respond quickly and accurately to changing market conditions.

At the risk of oversimplifying what can be a very complicated business, these leaders, while developing brilliant community-focused strategies, have focused relentlessly on three fundamental things - - right-sizing expenses, growing occupancy and building exceptional clinical systems to attract higher acuity patients. By doing these things, our local leaders have been steadily converting their resident bases from a traditional long-term convalescent population to a short stay skilled population, also known as growing skilled mix. This model has consistently produced double-digit growth and key operating metrics year after year, even in years when we have had very few acquisitions.

We're steadily acquiring underperforming facilities and adding them to the portfolio with all of the organic upside and low overhead that they typically represent, and our talented market leaders are constantly and dramatically improving them. We've demonstrated, in past quarters, that as we reach and surpass the key inflection point of 80% in our overall occupancy, our incremental margin growth begins to climb sharply.

In our operating model, a small drop in a market basket is typically more than made up for by normal -- at least for Ensign, our normal movement in census skilled mix and expense management. We're doing it now. We've been doing it for years, and we expect to be able to continue to do it in both the near and long-term, regardless of what else may be going on in the industry.

As only one example of why this matters, just compare the 20-point delta between skilled mix revenue and our recently acquired and transitioning facilities, which are at about 37%, to our same-store facilities, which have skilled mix revenue of 57% today.

In fact, in the last quarter, our overall skill days grew by a whopping 7.8%, while, at the same time, the average length of stay for our Med A patients dropped by 3.3%, a reflection of our efforts to help them get better more quickly. And you should know that 42% of those skilled days are coming from managed care and other skilled patients who saw no meaningful increase related to RUGs-IV.

We believe that this combination of solid historical growth and skilled mix, combined with our enormous built-in growth potential, illustrates exactly why our dynamic business model positions us extremely well to survive and thrive in otherwise negative operating environments. That's a lot of organic upside, and it's just one of the many levers that we can pull to achieve superior results, regardless of other market conditions.

Those who follow the industry know that we deal with reimbursement uncertainties and other changes every year. And while nobody knows exactly what's coming, if we did experience reimbursement challenges for a period, we are confident and reassuring our shareholders that this is exactly the kind of environment for which Ensign was built. We see ways to grow earnings in such environments because we have done it before and have prepared for it all along. I'd like to offer a couple of current examples of such within the Company.

At Desert Terrace, which is a 102-bed skilled facility in the heart of Phoenix, Arizona, Pat Hobbs and Barb Duncan have responded remarkably well to cuts in Arizona's Medicaid rates. When rates peaked at $162 per day in the first quarter of 2009, the facility, which has been in our portfolio since 2002, had a respectable census of 80%, skilled mix revenues of 56% and an EBITDAR margin of 15%. All pretty good for a ['60] vintage facility in a declining neighborhood.

But, when rate cuts hit that year, followed by flat reimbursement the following year, they got busy reinventing themselves, resulting in improved performance. From the first quarter of 2009 to the first quarter of this year, Desert Terrace moved census from 80% to over 85%, they increased their skilled mix revenue from 55% to 70%, and they grew their EBITDAR margin from 15% to over 26%, all in the face of reimbursement headwinds.

In another example, in 2007, we acquired Willow Bend Nursing and Rehabilitation Center, a 136-bed skilled nursing facility on six acres in Metropolitan Dallas, Texas. We paid less than $15,000 per licensed bed for a facility that the seller had given up on. In its first quarter of operation under Ensign, Willow Bend census was under 50%, and skilled mix revenue was only 26%, and its EBITDAR was negligible.

It was not an easy turn, but through concerted efforts, the operation, the staff and the facility's reputation in the East Dallas medical community were completely transformed under the leadership of Kevin Niccum and Joy Kottwitz. Beginning in 2009, each of these metrics steadily improved, and today Willow Bend's first quarter 2011 census stands at 82%, their skilled mix revenue is at 58%, and their EBITDAR margin is nearly 28%.

But, here's the clincher. In 2010, and again in 2011, their base reimbursement rates from Texas Medicaid were cut. Yet, by continuing to grow occupancy, increasing the overall acuity of their patient base and managing expenses effectively across their operation, they still grew that EBITDAR margin from a negative 7% in the first quarter of 2009, before the cuts, to a positive 28% in the first quarter of 2011 after the cuts.

Finally, in 2006, we acquired an extremely challenged skilled facility in Washington State. After four years of steadily improving census, skilled mix and expenses, Pacific Care Center was doing quite well. But, in 2010, the state of Washington cut the facility's Medicaid daily rate by a daunting 17%.

Rather than get discouraged and complain about what the government did to them, Mike Clegg and Julie Wakefield and the team rolled up their sleeves and from the first quarter of 2010 to the first quarter of this year, just one year, they grew census from 73% to 80%, they drove skilled mix revenue from 55% to 67%, and they increased their EBITDAR margins from 20% to over 23%. And we and they believe that they are nowhere near done in terms of what they can yet achieve there.

We think these examples say volumes about the incredible strength inherent in our unique business model, the organic upside built by design into our existing portfolio and the abilities of our Ensign leaders to adjust quickly and effectively to the ever-changing business landscape we operate within.

These stories and the extraordinary people who create them are neither infrequent nor atypical at Ensign. By pushing to constantly provide outstanding clinical outcomes and minding the bottom line and all of the other moving parts of these complex operations at the same time, these leaders and their teams are making each facility the facility of choice in the market it serves, and we believe we can scale this model far beyond where we are today with similar and even superior results.

With that, I'll turn the time over to Suzanne to provide more detail and data on the Company's financial performance last quarter.

Thank you, Christopher, and good morning, everyone. The first quarter produced record operating results with net operating margins of 7% and record earnings of $0.59 per diluted share. Full financials were included in our Q and press release yesterday, so I'm only going to touch on a few operating metrics that deserve special attention this quarter.

Consolidated revenue was $182.9 million, up 18.7% compared to $154.2 million for the prior year quarter. Part of the revenue increase was due to acquisitions made last year and during the current quarter, but the real story was in our same-store improvements.

The increase in overall Medicare rates aside, our same-store revenue growth, up 10.5% in the quarter, was mainly attributable to an increase in same-store skilled days of 77 basis points to 29.6%, an increase in same-store occupancy of 144 basis points to 83.6%, and growth in our same-store revenue mix by 331 basis points to 56.7%. These improvements are a reflection of our continuing pattern of constantly strengthening our clinical offerings and attracting higher acuity patient population over time.

And other key metrics for the quarter include overall EBITDAR margins increased 135 basis points to 17.7% and consolidated net income margins climbed by 90 basis points to 7% for the quarter. These results were achieved despite the downward pull of the continuously improving facilities in our 10 (inaudible) and recently acquired buckets that are still in the turnaround stage.

[In] reviewing our financial -- strength of our financial position for the quarter, cash and cash equivalents are approximately $51 million. During Q1 2011, the Company generated net cash from operations of $18.7 million. Net [cashees] and investing activity was $38.2 million, which was primarily related to business acquisitions and the purchase of PP&E.

In addition, we own 32 of our facilities free and clear. Over time, we expect to leverage the unencumbered equity and our real estate portfolios to fund further expansion, and we continue to maintain our five-year $50 million credit facility 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 position us well to continue executing on our disciplined growth strategy in 2011.

We are maintaining guidance for 2011 with revenues to range from $740 million to $756 million and adjusted diluted earnings per share of $2.15 to $2.25. The guidance is based on diluted weighted average common shares outstanding of 21.7 million, no additional acquisitions or disposals beyond those made to date, no material increase in the tax rate and aggregate 1% projected decline in overall Medicaid reimbursement rates.

The latter point reflects the fact that although states presently discuss their budget plans in aggregate terms, that does not mean that all providers will be equally affected, and states are facility specific, our patient specific rate structures prevail.

In giving you these numbers, I'd like to remind you again that our business could be lumpy from quarter to quarter and year to year. This is largely attributable to variations in reimbursement systems, delays in state budgets, seasonality in occupancy and skilled mix, the influence of the general economy on our census and staffing, the impact of our acquisition activity and other factors.

But, as you can see from our results, the Company is performing well, at present, and we want our shareholders to know that even though we are pleased with the progress to date, we continue to see ample opportunity for additional improvements across the entire portfolio in 2011 and beyond.

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

Thanks, Suzanne. Thanks to everyone who's 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 another record quarter and another record year. 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 worked tirelessly in their stewardships, as we all do, to support the field and help Ensign progress. We'd also like to thank our shareholders again for your support and confidence. And Amy, I guess I'll turn it over to you to instruct us on the Q&A procedure.

(Operator instructions.) Jerry Doctrow, Stifel Nicolaus.

Christopher, I just wanted to explore a little bit more the CMS potential rate cut and, I guess, your views on likelihood. And I know you guys thought [you can say] that you can grow through it, but just maybe a little bit more color on potential impact and that kind of thing. And you mentioned, for example, that a lot of your skilled mix is on the managed care side, which presumably won't be affected, but any more color there you can give is helpful.

Yes. Obviously, it's a great question in light of everything that's gone around us the last few days, but I -- Jerry, I don't know that I can add more color than others have added. I guess I can give you my opinion, but it's simply that.

And it -- I think that after more data is studied, I think after CMS looks at some of the things that others have brought up -- I'm not sure that I can, again, bring up anything new, but length of stay, cost challenges to folks as they've implemented some of these things -- obviously, intention of this was to be cost neutral for the taxpayer as well as for the operator.

And I think that -- I think, after looking at a couple of more quarters to maybe three more quarters, so we get a good idea of what happens in each quarter, I think that the resulting outcome will be significantly less than what folks fear is.

I don't know whether I can even say whether it will be a reduction or not, but I do know that -- and again, I feel like I'm regurgitating what others have said, but this is what I feel. Looking at the fourth quarter as a good example of what happens across an entire year or looking at rate without considering the savings that's occurred based on the higher acuity patients that have been removed from a hospital environment and looking at these rates without considering the time of year, I think all of that needs to be looked at and will be looked at before any financial decisions are made.

Okay. That's helpful. Just a little bit about seasonality. Obviously, you guys continue to buy things, continue to buy stuff that's at lower mix levels and bring it up and that sort of thing, so there's a lot always going on.

If I think about your portfolio as it sits today, both from a seasonal standpoint and just in terms of where quality mix goes, how should I be thinking about, say, payer mix, skilled mix, occupancy and stuff go forward? What would be your expectations, maybe, as we go, even from first to second quarter? What are some of the seasonal issues? And how much flex do you have because of the new stuff you've brought on? I know that's --.

If I understand your question, it sounds like it's more of a short-term question from first quarter to second or second or third. Is that correct?

Yes. I'm just trying to (multiple speakers) --.

Yes.

The modeling, really.

I think that we have always seen -- we had a surprise in 2010 as we continued to increase second quarter over first quarter, but I think that in looking at it historically and given that we do have a number of larger acquisitions, I wouldn't be surprised if our skilled mix dropped a little bit in the second quarter as it has traditionally in the past and then, obviously, rises the latter part of the third quarter and the fourth quarter again.

But -- and I think that our newer acquisitions will help offset that, because they will be moving rapidly towards a much healthier skilled mix and occupancy, but I'm not sure that they make up a significant enough portion of our portfolio to offset the seasonality that we find ourselves in.

Okay. And occupancy, just again from seasonal versus maybe the improvements you're making in the new stuff, you'd expect occupancy to be up or down as we go into second and third?

Well, certainly, second quarter over second quarter I expected to be up. Second quarter over first quarter -- it traditionally falls slightly. And I don't see any reason why that wouldn't occur this year, particularly in light of the fact that we took a number of new facilities in the first -- excuse me, new beds. They -- we didn't take a number of new facilities, but there are a lot of beds in those facilities, and that obviously impacts the overall number.

Just last question, then I'll jump. In terms of just building out strategically, obviously you are, I would say, an optimistic -- or opportunistic acquirer, but also you -- are you trying to build a geographic concentration? If you can just give me a sense of, strategically, where the acquisitions might be headed?

Yes. I mean, I think that over the years we've talked about how, when it's the right time, we'll go into new markets, and I think that we're building up a significant base in a few states and are looking at some new states. I don't think that that's news I can't share. But, I -- but, we'll continue to backfill for sure, Jerry. We'll continue to grow in markets where we're already popular and where our services are desired and where the opportunities present themselves. And so, I think you'll see our growth occur on both fronts over the course of the next three quarters.

Okay. Thanks.

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

Congratulations on a very impressive quarter.

Good morning, Jim (multiple speakers).

Thanks, Jim.

I'm looking at your acquisitions in the last quarter, and you've spent $44 million for business acquisitions and asset acquisitions, yet your debt position didn't change during the quarter. Nonetheless, I went back and saw a January 6 press release that indicated you'd borrowed $35 million. Was that already on the books by the end of the year?

That's correct. We actually closed that loan on December 31. And so, all those amounts were already reflected in our 12/31 balance sheet.

Okay. And then, you've indicated you have sources of capital for acquisitions, but if we saw another announcement where you were borrowing against some additional facilities that you own, that would be a signal that a acquisition would be imminent. Would that be fair?

It could be. It's a good question, Jim. That's usually what we borrow money for. But, I hate to say that that's always the case, because I suppose there could be some other reason out there.

You've indicated that you have these prospective acquisitions in the pipeline, and you've, in past calls, noted that same thing, and then all of a sudden, real soon thereafter, you announced the acquisition. Are the prospective acquisitions later in this year? Or are they just imminent? Or are they imminent?

Jim, we have some stuff that could close in the current quarter. That's not definite, but we are working toward that. I think that [you'll] definitely see some stuff by the third quarter. And as far as beyond that, we're not sure, but we see a good -- as we said, a good pipeline of opportunities coming at us, and we'll take advantage of those as we see good targets for ourselves.

In the Q, you have some text about the DOJ investigation and so forth. And most of that hasn't changed at all, and you've indicated that there's no new movement. But, when I read the text, there's a few words that are different this time around, where you've -- your special committee has hired some third party consultants, and they're doing a targeted review. Is this just this most recent quarter? Or did I miss something in the previous quarters?

Well, the special committee itself dates back to third quarter of last year, and the hiring of counsel happened right about then. And then, as they sat down and mapped out a strategy for what to do, they brought in a consultant that is helping counsel to sort of analyze the kind -- some things that we think could point us toward to what the DOJ is concerned about, if they're still concerned about something.

Remember that this has been going for several years, and we've never had a substantive conversation with the DOJ about what it is that they might be nervous or concerned about. We simply responded to their record and document request and that's it.

And so, looking at those requests, having somebody who knows documentation and records come in and analyze them, start looking for trends or issues or potential problems we hope will give our special committee a chance to sort of figure out where, if anywhere, there are problems and then use that information to go back and engage in a more intelligent discussion with the DOJ.

That's what they're doing now, and we have great hopes that that will bear some fruit here before too terribly long.

Does the DOJ ever release a Company once they've started investigation? Do they ever -- and never say anything thereafter? Do they ever come back and say - - you're now clean, and we don't have any ongoing investigation? Or they just leave you in limbo? Is that -- or there is there any examples out there where they notify the Company and this no longer of a concern to them?

They do both, Jim. And if they do find something and they do work through it with the Company, it can get resolved. They often take a very, very long time, but it can get resolved. And there are a lot of resolutions that can occur that can be some -- so, everything from giving back a little bit of money to giving back a lot of money to giving back some money and being -- having a corporate integrity agreement and a monitor watch you for a period of time, provide periodic reports while they make sure that everything is the way it should be.

On the other hand, they also have the option to sort of let the thing set. And they're -- no obligation to come back and say - - okay, we're going to close this out, and you guys are done. But, they can throw the file in a corner and let it collect dust if they feel like they have bigger fish to fry or they don't have enough to go on.

So, it -- we have seen them leave companies in limbo. I can't give you a specific example of that, because you don't typically get any reporting on that kind of thing. It's like -- when nothing happens, there's nothing to report. But, there are plenty of companies out there in the healthcare space, not just skilled nursing companies but hospital companies and others, who have successfully closed out their encounters with the DOJ in a variety of ways. And those are well documented.

There's a [snip] that's headquartered nearby your location there in Orange County, and they've indicated that they've engaged an investment banker to do a strategic review to look at their portfolio of real estate for potential sale. Or alternatively, they'll sell the whole Company. Do you have any comments about that kind of situation?

They're indicating -- I mean, they think the pricing is ripe for taking advantage of that kind of situation. Do you feel like you're seeing ripe prices? Or are they eligible to be -- their assets something that you'd have an interest in or so forth? (Multiple speakers.)

Is it okay if we don't answer that question? I don't think we have much to say about that, if that's okay in this case, Jim.

How about your entertaining the possibility of spinning off your real estate?

It's not really anything -- obviously, we have the obligation to consider everything, but it's not really in our plans. We're an operating Company, and we feel like, over the long haul -- I'm sure there are things we could do in the extreme short run that might seem beneficial, but we don't see that as beneficial to the long-term nature of our organization.

Thank you very much.

Thank you.

Jim.

I'm showing no addition questions at this time.

All right. Well, thank you, Amy, and thank you everyone for joining us today. And have a great day.

Ladies and gentlemen, this does conclude today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.