Ensign Group Inc (ENSG) 2011 Q2 法說會逐字稿

Good day, ladies and gentleman, and welcome to The Ensign Group, Inc. second quarter fiscal year 2011 earnings conference call.

(Operator instructions).

As a reminder, today's conference call is being recorded.

I'd now like to turn the conference over to your host, Mr. Greg Stapley, Executive Vice President of The Ensign Group. Please go ahead.

Thanks, Ally. Welcome, everyone, and thanks for being on the call today.

00 p.m. Pacific time on Friday, August 26.

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 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 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 stage of the call to update you regarding the ongoing DOJ investigations. We have nothing new to report today. The special committee appointed last year by our Board continues to work with regulatory counsel to identify and address concerns underlying the DOJ inquiry, and we remain anxious to cooperate with the DOJ to press the matter to conclusion.

With that, Christopher Christensen, our President and CEO, will get the call started.

Christopher?

Thanks, Greg. Good morning, everyone.

We're pleased to inform our shareholders that Q2 saw a local operator setting new performance records and continuing the year-over-year upward climb that has been underway for many years now. Our key performance drivers -- occupancy and skill mix -- continue to grow as our portfolio matures, and we believe that there is much more we still can do in terms of appropriate expense management, all while improving our clinical outcomes.

In the quarter, same-store occupancy grew to 82.4%, consolidated skill revenue grew by more than 25%, same-store skill revenue mix grew by 429 basis points on the quarter, to almost 57%, and earnings per share were up 30%, to $0.60 for the quarter.

These results are not merely the product of last year's reimbursement changes or any other isolated event -- far from it. They are the work product of many dedicated leaders and caregivers across the Ensign organization who are accountable for the performance, both clinical and financial, of their individual markets and operations every single day. These individuals have proven over and over that they know how to adjust quickly, accurately and appropriately, to changes both large and small in the constantly shifting business landscape that is our industry. We're confident that these nimble and motivated operators will continue to deliver industry-leading performance and returns, both clinical and financial, for our patients, our communities and our shareholders, no matter what obstacles we may encounter along the road, because they always have.

Suzanne will discuss the numbers in more detail in a moment, but first I'd like Greg to briefly discuss our recent growth.

Greg?

Thanks, Christopher.

2011 has been a significant growth year for Ensign so far. Consistent with our past practice, we have strategically used the latest temporary dislocation in the market, which was due largely to last April's announcement of the then-proposed 11.3% Medicare rate cut, but also to the state budget challenges across the country and their impact on local Medicaid discussions that began late last year, to accelerate our acquisition program. I am pleased to report that we believe we have made some very good buys at very attractive prices this year.

We've added 17 facilities, with 1,087 skilled nursing beds, and 801 assisted and independent living units since January 1. We've also added a very nice home health and hospice business in the Utah market, extending the reach of our successful Cornerstone home health business. A couple of our most recent acquisitions -- an assisted living in Las Vegas and nine skilled nursing facilities and home health in Iowa and Nebraska, have taken Ensign into three new states. And just this week we announced three more acquisitions -- a well-performing assisted and independent living facility in Dallas, a skilled nursing facility in coastal Texas, and our first ever skilled nursing facility in Southern Utah's popular retirement market. These acquisitions have brought our total footprint to 99 facilities, three home healths and three hospice businesses in 10 states, and we continue to see compelling opportunities to spread the Ensign operating philosophy across the country.

As you can also see, we continued to diversity our portfolio by adding additional assisted living, home health and hospice operations. We also continued to spread and reduce our single-state risk. At the same time, we've continued to focus on and grow our core skilled nursing business, bringing our current total to 9,806 beds, with an additional 1,625 assisted and independent living units and approximately 964 home health and hospice patients being served.

Much of this portfolio remains in the early stages of turnaround and growth. The recent acquisitions have further expanded the already tremendous organic upside in our portfolio. It is this organic growth that historically fueled our continued upward trajectory regardless of changes in state or federal reimbursement or other factories -- or other factors affecting our industries and competitors. Even taking into account -- especially taking into account last Friday's final rule, which was more draconian than we in the industry had expected, and also taking into account the changes in state Medicaid rates, which have largely been in line with our expectations and not nearly as dire as some predicted, we believe that the well-priced acquisitions we've made here today will serve us and our bottom line very, very well for years to come.

As for future growth, as we stay nimble and keep close track of our markets we expect to see both opportunistic and strategic growth opportunities, things that might not appeal to others but are just what we're always looking for. Uncertainty surrounding Federal and state budgets, regulatory changes and other industry headwinds only enhance our competitive position as we add beds at compelling prices. These temporarily depressed prices create built-in cost savings for us that offset uncertain reimbursement and other risks in the short run while allowing us to enjoy those built-in savings for as long as we hold those assets.

Capital for growth also remains readily available. We had $38 million in cash on hand at quarter end, and to further support our disciplined expansion program and ensure our operating capital needs for the future, we just entered into a $150 million credit facility led by SunTrust and Wells Fargo that Suzanne will discuss in greater detail in a moment. Even with the first half of this facility drawn, we still have an untapped $75-million revolving credit facility at our disposal. In addition, our current net debt to EBITDA ratio remains at right around 2.3 times today, and we have the borrowing capacity to raise additional funds for growth should they be needed, all without overleveraging the balance sheet. All of these resources can be used to drive additional growth and continue our upward climb.

That's it. Thanks.

I'll turn it back to Christopher.

Thanks, Greg.

Well, I want to get right to the issue that's at the top of everyone's minds, and then I'll comment on why we remain optimistic and continue to grow in the fact of some serious headwinds affecting our history. Those who know our history know that Ensign initially grew out of the aftermath of the post-PPS shakeout. That was a far more significant change than the one the industry faces right now, and the lessons we learned there still guide us today.

To be sure, the rate cut imposed by CMS last Friday will have a severely detrimental effect on the health of the industry as a whole, and we believe it should be reconsidered immediately by both CMS and, if necessary, Congress. Skilled nursing providers provide critical services at a much lower cost than alternate providers in the post-acute universe, some of whose reimbursement rates have just been inexplicably increased. These good skilled nursing providers should not be forced into survival mode just because regulators miscalculated the amount by which the services demanded from the industry would increase as hospitals discharge patients sooner and sicker under rule changes by those same regulators just one year ago.

However, despite the broader pain that will be afflicting the industry starting October 1, we're pleased to report that Ensign was built for exactly times like these. Our business model acknowledges as a foundational principle the unpredictability of operating in an environment where bureaucratic fiat and pure politics sometimes trump common sense and good governance. We have always worked to elevate the quality of our local leadership and empowered them to make the decisions on the fly which are necessary to respond appropriately to all manner of changes in their marketplaces, and this is certainly a significant change.

In addition, we have assiduously avoided overpaying our real -- for our real estate and have likewise avoided overleveraging our balance sheet. As a result, we can send more of our operating margins straight to the bottom line and reinvest more into our operations and the communities we serve than anyone else in the industry without having to raise equity or reduce our already low debt.

And, perhaps most importantly, our business model focuses on moving the struggling facilities we typically acquire, with their low census, even lower skill mix and acuity and correspondingly low average reimbursement rates, to a higher quality of care, higher occupancy and higher acuity in reimbursement operating standard. This steady movement allows us to constantly mine the huge organic upside in our existing portfolio in ways that often more than offset temporary challenges in reimbursement or other changes. A different operating model simply cannot adjust with the same speed or in the same way that we can. This model, growing and converting our acquired resident base from a traditional long-term convalescent population to a short-stay skill population, also known as growing skill mix, has consistently produced double-digit growth in key operating metrics year after year, even in years when we have made very few acquisitions, faced reimbursement headwinds or experienced other challenges.

As Greg noted, we are steadily acquiring underperforming facilities and adding them to the portfolio. We've demonstrated consistently that as a facility reaches and surpasses the key inflection point of 80% in occupancy our incremental margin growth begins to climb sharply. And remember that in the traditional Medicaid-focused convalescent facilities we acquire, the delta between the Medicaid rate and any Medicare, managed care or other skill rate is enormous, even when the latter rates are occasionally adjusted downward, allowing us to continue growing our average skill rates as we shift to a higher acuity population over time.

To illustrate, let me offer some concrete examples of how our rates move as we transform acquired facilities to our higher acuity model. This happens across our portfolio in our recently acquired as well as transitional and same store. In fact, if you look at fourth quarter results for our same-store facilities during the 2007 to 2009 period, before the RUG-IV increases kicked in you can see exactly what I'm talking about. The overall Medicare rate for that two-year period increased only 2.2%, with a 3.3% increase in 2008 and a 1.1% decrease in 2009. Look at our top 10 movers and average daily rate for that same period.

Whittier Hills grew its average daily Medicare rate by 21% for that period; Carmel Mountain grew it by 22%; a facility in Santa Rosa grew it by 24%; Park View Gardens, in the same town, grew its average daily rate by 28%; Desert Terrace in Phoenix, Arizona, which we discussed on this call last quarter, grew its rate by 29%; Arroyo Vista, a small facility in a tough neighborhood in San Diego, grew its average daily Medicare rate by 32%; Park Avenue, in Tucson, which started its life with Ensign as a special-focus facility many years ago, grew its average daily rate during the period by 33%; Cloverdale Healthcare in Cloverdale, California, increased its average daily rate by 41%; Sonoma Healthcare in Sonoma, California, grew its average daily rate by 46%; and, last example, Pacific Care in Hoquiam, Washington, which we also mentioned last quarter, grew its average daily Medicare rate for the 2007 to the 2009 period by 69%.

Please bear in mind that all of these facilities were the castoffs of other operators when we acquired them many years ago, and they are among our top-performing facilities today. Each one has moved its patient mix over time and increased its average daily Medicare rate much more significantly than any CMS rate increase or decrease would provide. And these are just the top 10 of the 59 facilities currently in our same-store bucket. 95% of them significantly beat the CMS rate changes during the two years prior to the RUG-IV implementation.

We think these examples say volumes about the incredible strength inherent in our unique business model. We think they speak volumes about the value of 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 around them. These stories and the extraordinary people who create them are why we believe we can perform and even grow in the current environment.

So, Ensign will not only survive. We believe we can thrive because of these and other things that make us unique and distinguish us from our industry peers. But, mind you, we only operate 99 out of the country's 15,000-plus nursing facilities, and we renew our call for CMS and if necessary Congress to acknowledge not only the valuable service that the entire industry provides and the true cost of providing that service but that skilled nursing itself represents the lowest cost alternative to most post-acute healthcare needs in this country and should be emphasized and preserved, not threatened in the larger discussion over how we are going to finance the healthcare needs of our aging population.

With that I'll turn the time over to Suzanne to provide more detail on the financials over the last quarter.

Thank you, Christopher, and good morning, everyone.

The second quarter produced record results (technical difficulty) operating margins (technical difficulty). Full financials were included in our Q and the press release yesterday, so I'm only going to touch on a few operating metrics that deserve special (technical difficulty) this quarter.

Consolidated revenue was $186.3 million, up 18% compared to $157.9 million for the prior year quarter. Part of the revenue increase was due to acquisitions made over the last year, but the real story was in our same-store improvements. The increase in overall Medicare rates aside, our same-store revenue growth of 10.1% in the quarter was mainly attributable to growth in our same-store skilled mix by 429 basis points, to 56.5%; an increase in same-store skilled days of 156 basis points, to 29.5%; an increase in same-store occupancy of 41 basis points, to 82.4%. These improvements are a reflection of our continued pattern of constantly strengthening our clinical offerings and attracting higher acuity patient population over time.

Other key metrics for the quarter include overall EBITDAR margins increased 147 basis points, to 17.8 percent, and consolidated net income margins climbed 87 basis points, to 7% for the quarter. These results were achieved despite the downward pull of the still-maturing facilities and transitioning in a recently acquired [bucket], which are still in the turnaround phases.

In reviewing the strength of our financial position for the six months ended June 30, cash and cash equivalents were approximately $38.1 million. The Company generated net cash from operations of $27.4 million. Net cash used in investing activities was $58.2 million, which primarily relates to business acquisitions and the purchase of PTME. In addition, we own the real estate at 70 of our 99 facilities, only 19 of which are encumbered with mortgage debt. We have the ability to leverage a portion of the unencumbered equity in our real estate portfolio to fund further expansion, and we have replaced our old AR line with a low-cost, five-year, $75 million revolving credit facility, which remains untapped. We believe 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 to execute on a disciplined growth strategy in 2011.

We are revising guidance for 2011 based both on our acquisitions year to date and the impact of the change in reimbursement which will take effect in the fourth quarter. We are increasing revenue guidance from the prior range of $740 million to $756 million, to a new range of $755 million to $770 million, and we are leaving earnings guidance unchanged, with adjusted diluted earnings per share up $2.15 to $2.25.

This updated guidance takes into account our initial projected effects of the CMS final rule issued last Friday as well as corresponding [offsets] produced by recent acquisitions, continued acuity shift across the portfolio, lower interest rates under our new credit facility, and other savings we expect to achieve. We plan to continue to work through the changes imposed by the final rule and a response to them during the quarter.

The guidance excludes the effect of a one-time, non-reoccurring charge associated with the prepayment of existing mortgage, which was made at the end -- after the end of the quarter and is based upon diluted weighted average common shares outstanding of $21.7 million, no additional acquisitions or disposals beyond those made to date, the exclusion of acquisition-related costs and amortization costs related to intangible assets acquired, no material increase in the tax rate, and an aggregate 1% projected decline in overall Medicaid reimbursement rates.

In giving these numbers I'd 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 reimbursement systems, delays in state budgets, seasonality, occupancy and skilled mix, the influence of the general economy on our census and staffing, the short-term impact of our acquisition activities, and other actors. 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 organization in 2011 and beyond.

I will now turn that back over to Christopher to wrap up.

Christopher?

Thanks, Suzanne, and thanks to everyone who's been on the call. We hope this discussion is somewhat helpful.

We commit to continue doing the things that have made Ensign successful for our residents, staff and shareholders as we navigate the rough waters of the coming reimbursement change. We also commit to look for new and better ways to serve our patients and residents with the resources at hand and to make each of our operations the facility of choice in the community it serves, just as we have for the past 12 years.

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 help Ensign progress.

We'd also like to thank our shareholders again for your support and confidence.

And, Ally, if you can instruct us and the audience on the Q&A procedure, that'd be great.

(Operator instructions).

Our first question comes from Kevin Campbell, of Avondale Partners. Please go ahead.

Good morning. Thanks for taking my questions. I wanted to start with if you guys could give us some sense of the impact on your Medicare rates you expect the final rule to have or maybe the impact you expect it to have on annual EBITDAR, some metrics you could give us there.

Yes, this is Christopher. I think the impact on EBITDAR -- I'll just start from the top, actually, and tell you that it looks like the impact on our revenue will be somewhere in the neighborhood of $31 million. And that's split -- it's mostly -- the change in the RUGs. Part of that, a small part of that is on the changes with therapy.

We do pay attention, obviously, to EBITDAR, but I -- and I'm not answering your question directly, but I want to answer a question that's more important to us. We pay a lot more attention to net income because of what it allows us to do. We feel like if we protect that number we're able to reinvest in the facilities without being dependent on what the banking industry is doing or being dependent on really anyone else to make sure that we reinvest the dollars back into the facility. So, I will tell you that we feel like when we look at the net income impacts that only about 15% to 25% of that actually hits us at the bottom line on a net income basis.

Is that -- so, that's after taxes, too, so you could maybe say -- well, if you took - well, anyway, I'll work through the math later, but --

Yes.

-- okay, and when you look at your guidance, too, in terms of revenue and earnings, can you give us some sense, too, of how we should maybe expect that to play out over the course of this year from 3Q to 4Q? Because obviously it will go down from the implementation of the rule on October 1, so some sense as to the magnitude of changes we might expect from 3Q to 4Q.

Changes in just revenue.

Revenue and EPS.

Okay. Well, I think that -- I'll ask Suzanne to fix whatever I don't say right here, but, I'll tell you, we expect the revenue difference to be --

Yes, in Q3 obviously there's no impact, so the only reason we have impact in Q3 is really the acquisitions that we've acquired during the quarter and then subsequent to the quarter. So, actually in Q3 we're anticipating that our revenue's going to go up. And so therefore we've had that increase to the bottom line. And then in Q4 we're anticipating that the revenue impact is about $5 million -- a little bit more than $5 million.

And so you said earlier the revenue impact was about $31 million annually. Is it -- does it get worse over the course of the year, or is it sort of a $5 million to $7 million sort of impact quarterly?

Correct, $5 million to $7 million quarterly.

It's because there are two different pieces there, and so once piece is relates to the RUGs and then one piece relates to therapy.

Okay. And on the recent acquisitions that you've made, is there any impact on rent expense from that? Will that go up? Or are these -- is there -- there's just going to be interest expense?

The only one that's impacted actually already occurred in May, so that's the Symbii Home Health and Hospice. It's really minor. So everything else is actually just going to be in depreciation and amortization.

Okay. And then two more quick questions, sorry, you had a disclosure in your filing about California and some of the proposals that have been made there. And how does that coincide with sort of what you have in your guidance as well? Because I just want to make sure that there's no further risk to guidance from changes in California if what was passed ultimately is implemented.

And, Kevin, I would just to want to make sure that I'm understanding your question. I'm assuming that you're referring to the 10% payment delays --

Correct.

-- that are happening. So it's a payment delay, not a rate cut

Okay.

And so that just has a cash flow impact, no actually revenue impact, and so that's not going to impact us during the quarter or all of next year.

Okay, great. And then, lastly, cash flow from operations obviously was down sequentially. I think if I recall correctly it was in the second quarter last year. Can you just -- is it something that is normal, and what are some of the drivers of that?

It's mostly just collections on the receivables and then continuing to pay a little bit more on the payable side. So, it's continuing to push and making sure that when we have new acquisitions it takes us a little bit longer to collect those amounts because we don't get paid for about the first six to nine months, and so [a delay].

Okay, that makes sense. Thank you very much.

You're welcome.

Our next question comes from Jerry Doctrow, of Stifel Nicolaus. Please go ahead.

Thanks. Christopher, just to follow up, and, again, I had to jump off a little earlier, so I apologize if you covered this, but you mentioned the impact of the rate cut and therapy, and I assume you're also talking about the impact of the changes in the assessment procedures or is that still sort of an unknown impact?

We're making an estimate there, but, as you well know, we don't -- we're not certain that we're perfect in that estimate.

Okay, but the numbers that you were throwing out kind of include, as best as you can tell at this point, sort of the whole [thing].

That's correct.

Okay, and then, and I apologize if you talked about this, but sort of mitigation, I mean, what kinds of things can you take to mitigate that? And, again, I assume when you're talking about impacts you're talking about unmitigated impacts, so are there things you could do by changing mix, cutting other costs, that sort of thing, to further mitigate from the numbers you're talking about?

Well, you know, it's obviously a great question, and there are several things that some are unique to us, some are obviously similar to others, but in terms of our revenue mix, for instance, you've watched us over the last many years, and we obviously talked about this in the script, but we've been moving that revenue mix quite substantially, and so we can offset part of that by continuing to move the revenue mix because we take these facilities that have no real significant skill mix to speak of, and obviously after developing the skill set and the reputation of these markets we move that dial, which offsets part of that.

Right.

You do have some variable costs. I won't get into all those on this call, but it's a significant number when you're talking about vendor relationships, you're talking about service center, you're talking about incentives, you're talking about ongoing reduction in turnover rates, things like that. And obviously a lot of those things are already in place anyway, but some of them we haven't enjoyed the full impact of yet. You've got some greater economies of scale. One thing that we talked about once, Jerry, almost 26% of our skill mix is managed care. And more than 80% of that managed care is not RUG sensitive.

Okay.

And so there's a smaller impact there from this, and obviously when I give the impact on a net income basis I also calculated the impact of income tax, as anybody ought to.

Yes, okay.

So, that's where I come up with the figure that I mentioned earlier.

Okay. And then, the other question, and this may be involved so we can take it offline, but I think one of the things I'm struggling with a little bit is how to model in the impact of acquisitions, and you sort of talk about it as a turnaround, and I was trying to look through the Q, and it's just been a busy day [for me] so I haven't gone through this, but it seems to me that you've got now a much more varied set of acquisitions, some are IL/AL, some are sort of turnaround SNFs, some are more your first acquisition in some of these markets you buy sort of a higher quality SNF, in some cases you're buying home health, so trying to figure out how we should model this in, because I think you gave us some pro forma numbers, but it's really kind of a mixed bag. Some of them come in at different times. So, is there more stuff -- I mean, I don't know -- I know you don't want to give out the economics on each individual deal, but is there some way we can get sort of some better sense of at least sort of what bucket of acquisition these fit into and maybe some generic sense of what the economics might be and typical periods for sort of turnaround and that kind of thing, because it's hard modeling in those --

Yes, well, we do want you to earn your dollars, Jerry. We want to make it as hard for you as we possibly can.

Appreciate that.

No, we're -- that's actually a good comment and probably something we should add in. Sometimes they don't fit perfectly in any basket, and that's one of the things -- for instance, I'll just use, for instance, the Iowa/Nebraska transaction that we did, terrific reputationally, so it really doesn't fit in a turnaround basket in terms of the -- but the reputation or the quality, they just were spectacular facilities with a great culture. However, from an overall census standpoint or skill mix standpoint they probably would still fit in that bucket. And so trying to put each of these acquisitions in a particular bucket becomes challenging, but let us work on that so that we can make this a little bit easier for you.

Yes, and, I mean, some of it you could -- if there are specifics you can give out, like what are the starting occupancy, what the starting skill mix is, maybe you can give us some parameters about initial cash yield or something like that or (multiple speakers) --

Yes, I don't --

-- or, again, at least by type of category and we can make some estimates. But that's (multiple speakers).

No, that's good advice. I don't know --

(Multiple speaker), but as they become more diverse it's really hard to figure out how to put them in.

Well, I don't think we have a problem giving -- of course, we'd never want to get into the place where we're having to update every single facility all the time.

Right.

But it's probably a good idea to give more census and skill mix data out of the gate, and I don't think we have a problem with that.

Okay. And I -- we can circle back offline. That's really all for me. Thanks.

Thank you.

(Operator instructions).

Our next question comes from James Bellessa, of D.A. Davidson. Please go ahead.

Congratulations on keeping up a great growth record.

Thanks, Jim.

Thanks, Jim.

On the $5 million to $7 million quarterly figure, if I annualize that, that doesn't come up to the $31 million. Is that the difference between those -- that annualized figure is the difference between RUGs and therapy changes?

Yes, you know, we weren't very good on that number, Jim. To be more clear, the RUGs impact is just over -- it's a little bit more than $5 million a quarter. And then the therapy impact is -- it's a pretty wide variance, because it is a difficult thing to come up with in a period of three or four days. But that number is somewhere between, believe it or not, $2.5 million and $5.5 million, and so --

On an annual basis.

-- on an annualized basis, and so we're -- we don't have, admittedly, a terrific grasp on what that piece is yet, and that's where the variant comes from.

We appreciate your helping us in trying to figure out what the impacts are. Did you say the fourth quarter revenue impact in total was $5.5 million, or did I hear that incorrectly?

Well, the direct impact, I mean, just looking at -- all things being the same, everything remaining static, I guess, the direct impact is more likely slightly over $7 million. However, it won't look like that when all is said and done because of the moving parts.

Okay.

Does that make sense?

Yes. That's what we're hearing from others. And then if I heard correctly, there's going to be a charge in the third quarter for the refinancing. Is that correct, and how much is that charge?

Correct. It's for the extinguishment of the debt. It's $2.5 million.

Is that pretax figure?

Correct.

And that is included in the guidance or not included in the guidance?

Not included in the guidance. It's a -- we believe it's a non-GAAP item. It's a one-time charge.

Thank you very much.

You're welcome.

Thank you.

I'm showing no further questions at this time. I would like to turn the call back over to management for any closing remarks.

Well, I'll just say thank you, everyone, for being on this call, and we appreciate you taking the time from your busy schedules, and thank you, Ally, for assisting us with this call.

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