Ensign Group Inc (ENSG) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Ensign Group, Inc. first quarter 2012 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions). As a reminder, this call may be recorded. I would now like to introduce your host for today's conference, Greg Stapley, Executive Vice President and Secretary. Sir, you may begin.

Thanks, Samya. Welcome, everybody, and thank you for joining us on the call today. Our 10-Q and press release resulting -- highlighting key financial results and other developments for the quarter are both 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 Pacific time on Friday, May 25, 2012.

Just a couple of housekeeping items as we start. 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 more complete discussions 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 or changes that arise as a result of new information, future events, changing circumstances, or for any other reason. In addition, any Ensign facility or business we may mention today is operated by a separate 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 terms like we, us, our, and similar verbiage, are not meant to imply that the Ensign Group has direct operating assets, employees, or revenue, or that any of the operations, the service center, the home health and hospice businesses, the urgent care business, 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 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.

Before we get into operations, we customarily take a moment at this point to update you on the ongoing DOJ investigation. Last quarter, we were pleased to the report that the government has closed the criminal portion of its investigation and had formally requested additional information from us in connection with the civil information. We have now delivered that information, and we remain hopeful that it will be useful to them in advancing the civil investigation toward resolution. Discussions between government representatives and our counsel are ongoing, and we intend to continue cooperating with the government's representatives to move the matter along. We cannot predict or provide any assurance as to the possible outcome of the remaining investigation or as to the possible outcome of any litigation that might yet follow. But we look hopefully toward the possibility of additional meaningful progress in the months ahead. So with that, I will turn it over to Christopher Christensen, our President and CEO, to get the call started. Christopher?

Thanks, Greg. Good morning, everyone. We hope our shareholders are as pleased and grateful as we are with the way our local operators have performed overall in what has probably been the most challenging operating environment for skilled nursing operators in at least a decade. Consolidated revenue in the first quarter was up 10.5% to an all-time high of $202 million. Consolidated skilled revenue grew more than 3% over last year and 9% sequentially to a record $92 million. Same-store occupancy grew by 44 basis points quarter over quarter and 169 basis points sequentially to 83.6%, with same-store medicare census up by 363 basis points over the prior-year quarter. And adjusted net income for the quarter was actually up 230 basis points over the same quarter last year, despite the October Medicare cuts and therapy rule changes to $13.2 million. And we posted adjusting earnings of $0.61 per share, exceeding last year's performance, and only falling $0.01 short of the all-time high set in the third quarter of 2011, the last quarter before those cuts and changes took effect.

We are especially pleased to be reporting that adjusted earnings per share this quarter climbed 27% over the fourth quarter of 2011, providing tangible evidence of the tremendous focus our operational leaders and their teams have brought to bear in this challenging environment as they work through the process of mitigating the Medicare cuts and therapy rule changes. These operating results were not the product of any one major change or program. Rather, they were produced by empowered and competent local leaders, changing 100 little things over time in each of their individual operations to make a huge difference in the overall outcome. I'll talk more about some of those things in a moment.

Even though we're pleased with the overall result, we would be remiss if we did not mention that there are many additional things that we can do to further improve operations as we continue to manage through the headwinds produced by last year's Medicare rate cuts and therapy rule changes. We also have many additional opportunities as we continue to improve our newly acquired transitioning and underperforming same-store operations. Having placed a couple of very tough quarters behind us and with much of the mitigation efforts to date only starting to bear fruit relatively late in the quarter, we also feel that it's important to remind ourselves and you that we are firmly committed to taking the long view in the decision-making processes that affect this Company.

Although some have suggested that we must run the Company with a quarter-to-quarter mindset, we have repeatedly declined to do so, because we believe that our operational philosophy, which emphasizes sustainable results, is in the best interests of those we serve, our Company, and our shareholders. As a result, our business can look lumpy if you only view it by quarters, but we continue our commitment to achieving annual operating results, and we are proud to have been fairly accurate to date. We've issued annual guidance for 2012, and while we have not predicted what will happen in any particular quarter, we remain confident in the guidance that we've given for this year and are reaffirming that guidance today. I'll talk more about that moment. But first I'd like to have Greg briefly discuss our recent growth. Greg?

Thanks, Christopher. Briefly, we continued our steady growth on multiple fronts during the first quarter. We acquired a second skilled nursing facility in our successful Pocatello, Idaho, market and a very nice assisted living facility in Reno, Nevada, to complement our recent skilled nursing acquisition in that market. Our home health and hospice business was busy as well, acquiring a small home health agency in the Portland, Oregon, market, our first foray into Oregon, and a thriving home health and hospice business with multiple agencies in southern Utah and northern Arizona. And our new urgent care joint venture, Immediate Clinic, announced the acquisition of Maryland-based Doctors Express, a national franchise for the urgent care industry with 51 franchise locations to date and many more in the pipeline.

These transactions brought our total portfolio to 104 facilities, 6 home healths, and 4 hospice businesses in 11 states, with 10,047 skilled beds; 1,776 assisted and independent living units; and over 1,800 home health, hospice, and private duty patients being served. Of the 104 facilities we operate, 79 are Ensign owned and 58 of those are owned free of mortgage debt. We continue to seek compelling opportunities to spread the Ensign operating philosophy across the country, and we remain busy with additional acquisition growth and diversification prospects in the pipeline. We continue to carefully deploy our capital and funds for growth to remain readily available.

We expect to continue growing by acquisition in what promises to be an interesting year for our core industry. And with the substantial organic upside, not only in our newly acquired and transitioning buckets, but also in our same-store portfolio, we believe we can continue to grow our operating results, regardless of what the acquisition pipeline might produce throughout the year. And with that, I'll hand it back to you, Christopher.

Thanks, Greg. It's not been easy to mitigate and neutralize the approximately $78-per-day drop in our average daily same-store Medicare rate initially produced by the October 1 changes or the significant expense increase caused by the therapy changes that went into effect at the same time. Our same-store skilled revenue was still off by 5.1% in the quarter. But this, of course, is less than 50% of the amount of the Medicare cut and a real tribute to the same-store operators who contributed to those mitigation efforts. And it was also offset by significant increases in skilled revenue at transitioning and recently acquired facilities, resulting in an increase in consolidated skilled revenue of 3.3%. We believe this demonstrates the strength inherent in our core business model of acquiring underperforming facilities at advantageous prices, building their skilled mix, and turning them around. We've always placed tremendous value on the enormous organic upside that consistently exists in Ensign's transitioning and recently acquired portfolios, which typically average approximately 40% less skilled revenue mix than Ensign's same-store facilities, especially following strong acquisition years like 2011. It's one reason why we were able to consistently perform year after year in spite of the broader marketplace.

I would also mention that notwithstanding the quarter over quarter decline in same-store skilled revenue, that same-store operations have shown marked progress in mitigating the 11.1% cut to Medicare rates that took effect in October of 2011, with a skilled mix revenue increase of 6.8% sequentially over the last quarter of 2011, even with a decrease in Medicare lengths of stay during that quarter. It's also why we were able to report that consolidated adjusted net income for the quarter was actually up 230 basis points over the same quarter last year before the cuts to $13.2 million. In effect, our outstanding operators across the Company have collectively found a way to almost entirely erase the effects of last year's rate cuts and regulatory changes.

Let me just share a couple of examples of individual facility teams who helped to mitigate the combined impact of the cuts and cost increases this quarter. At our recently acquired Wisteria Place in Abilene, Texas, Eric Gillis and his team have transformed their facility by retooling their therapy program, engaging the community with a regular weekly radio show, and mostly by making enormous strides in quality. The medical community has responded, helping Wisteria to increase its skilled mix by 669 basis points, driving revenue 8.1% higher and increasing EBITDAR by 53.4% over the same quarter last year. At one of our most seasoned facilities, Cloverdale Healthcare Center in Cloverdale, California, leaders Matt Rudder and Adam Willis mitigated the recent changes by carefully increasing their Medicaid and hospice occupancy and controlling costs. They drove occupancy from the high 80s to over 94%, a huge proportion of which is profit, increasing their EBIT by nearly 48%. And at Upland Rehabilitation and Care Center in Upland, California, CEO Gary Little and his team were able to offset the reduction in Medicare rates by replacing those lost Medicare dollars with other skilled and subacute patients, increasing their skilled revenue by 12.5% and their EBITDAR by more than 46%.

These great leaders and their teams will be the first to tell you that they are far from perfect and could have done much better. The important thing is that they did not allow a reimbursement headwind to set them back. They took the empowerment they've been given and the accountability that goes with it to find local solutions for the broader problems affecting their communities, their operations, their staffs, and their residents. Ensign is built and carried on the shoulders of leaders like these, each of whom has the training, authority, and support to make their own operational adjustments in pursuit of continuous improvement. We fear sometimes that we bore you with lengthy descriptions of how our unique facility-centric operating model allows us to be nimble and proactive in the ever-changing skilled nursing marketplace. But we hope that this quarter finally clarifies once and for all why we repeatedly take time to remind ourselves and you of the tremendous power designed into Ensign's unique management structure. We see additional opportunities for improvement in the months ahead as we continue to grow the Company and as these leaders continue to improve their operations and prepare for whatever else the future might bring.

I'll conclude by reminding everyone that we continue to focus squarely on our core business, where we have a tremendous amount of organic upside built into the existing portfolio. We have a very solid balance sheet. We continue to have industry low occupancy costs that stands as an additional hedge against the challenges facing the broader industry. Most importantly, we have a different caliber of leaders and partners who are not only committed to but have proven once again that they are capable of carefully executing on our very simple business plan to meet the needs and outperform the expectations of our communities, our shareholders, and especially, those entrusted to our care. We also believe that it's precisely because of that focus that we've been able to increase our dividends every year for the last 10 years to thank our shareholders for funding this quest.

With that, I'll turn the time over to Suzanne to provide more detail on the Company's financial performance. Then we'll open it up for questions. Suzanne?

Thank you, Christopher, and good morning, everyone. In August, 2011, you may recall us indicating that the collective impact of the October 1, 2011, changes would be approximately $32 million on an annual basis, of which $28 million would be in lost revenue and approximately $4 million would be in increased therapy costs. We also estimated that in our unique financial and operating structure, approximately 15% to 25% of those cuts and cost increases would actually drop to the bottom line. We are pleased to be reporting that the actual impact of adjusted consolidated net income for the first quarter was completely negated. But diluted adjusted earnings per share for the first quarter of 2012 were $0.61, compared to $0.60 in the prior-year quarter and $0.48 in the immediately proceeding quarter.

These numbers incorporate the exclusion of expenses associated with our response to the DOJ matter, as well as normalized rent and costs recorded in connection with one operating lease, a facility that is not yet open and operating, but for which GAAP purposes require us to record this expense. We have dozens of operating facilities which are undergoing substantial renovation activities for which we fully incorporate all costs. We also excluded the net benefit of the lower than normal consolidated tax rate, which we normalized by increasing it to approximately 39%. And as always, we excluded acquisition-related costs and amortization costs related to intangible assets acquired.

In other key metrics for the quarter, we are pleased to be reporting consolidated net revenue for approximately $202.2 million, up 10.5%. Consolidated EBITDAR for the quarter climbed to a record $33.6 million, which is an increase of 3.9% compared to Q1 2011, in spite of the unprecedented Medicare cuts and changes in therapy regulations, which were increased therapy costs on October 1. It has also increased 16.8% compared to the fourth quarter of 2011. Same-store Medicare days increased 363 basis points compared to Q1 2011, and same-store occupancy increased to 83.6%. And GAAP net income for the quarter climbed 124 basis points to $12.9 million, despite the Medicare cost and therapy increases. We note as in the case -- every quarter during and after periods of robust acquisition activities that these consolidated results were achieved despite the downward pull of the still maturing operations and transitioning in recently acquired buckets, which account for approximately 40% of our total portfolio.

In reviewing the strength of our financial position for the quarter ended March 31, cash and cash equivalents at quarter end were $32.6 million, and the Company generated net cash from operations of $5.3 million for the quarter. Free cash flow for the 12 months ended March 31 was $20.5 million. This number was impacted by aggressive CapEx and renovation projects to upgrade our real estate portfolio, implementation of new technologies, and, of course, the associated depreciation is now starting to show up in the delta between our EBITDA and net income. Overall, we are pleased with how our operations have performed thus far under the new Medicare rate and therapy rules. Under our current plan, mitigation efforts will continue to be implemented through the second and third quarters, which are historically our toughest quarters. We would also note that the recent flooding and storm damage in parts of Texas will likely impact these, too. We expect insurance to cover some of the losses, but we don't expect to record those reimbursements until at least the third or fourth quarter.

We have published guidance for 2012 of $830 million to $846 million in revenue, which represents an average revenue growth rate of almost 18% a year since 2009. We're also projecting adjusted diluted earnings per share of $2.36 to $2.42, which represents an average growth rate and earnings per share of almost 16% a year since 2009. We are confident in projecting that our annual ramp will continue. These projections are based on diluted weighted average common shares outstanding of approximately $22.1 million, no additional acquisitions or disposals beyond those made to date, the exclusion of acquisitional related cost and amortization related to intangible assets acquired, the exclusion of normalized rent at the unopened facility, exclusion of expenses related to the DOJ matter, tax rate at our average -- historical average of approximately 39%, no future changes in Medicare rates in 2012, and no decline in the overall Medicaid reimbursement rate, nor any increase in the related tax -- provider taxes.

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 rates, delays and changes in state budgets, seasonality and occupancy and scope mix, the influence of the general economy on our census and staffing, the short-term impact of our acquisition activities, and other factors. Full financials are included in our Q and press release, and we'd be happy to answer any specific questions that you might have later in the call. I will now turn it back to Christopher to wrap up. Christopher?

Thanks, Suzanne, and thanks to everyone who has been on the call. We hope the discussion's helpful. We want you to know that we all remain very optimistic that Ensign will continue to perform both clinically and financially during this time of extraordinary change and opportunity. As always, I want to conclude by thanking our outstanding co-workers for their continued effort to make Ensign the best company in the health care industry. More importantly, we want to acknowledge again the outstanding love and care they give daily to our residents.

I'd also like to thank our dedicated service center team, who worked tirelessly to support the field and help Ensign forge ahead. I'd like to thank our shareholders again for your support and confidence. Samya, if you would instruct the audience on the question-and-answer procedure.

Certainly.

(Operator Instructions)

At this time, I'm not showing any questions from the phone lines, sir.

Okay. Well, again, thank you very much for being on the call, and we -- I think there is one question now, isn't there, Samya?

Yes, I do see a question now. We have a question from Jim Bellessa of D.A. Davidson. Your line is now open.

Good morning.

Good morning, Jim.

First of all, I heard that you may have storm damage there in the narrative. What can you tell us about that? How many facilities were damaged?

Seriously damaged -- there were two, and they're doing fine. Nobody was injured, nobody was hurt, And they're recovering fine. But those were two extraordinary facilities for us. They really dominated that market.

And so it does have an impact on the second quarter, and as Suzanne said, Jim, we will most likely recover essentially all of our costs. And we do have proper coverage there for business interruption and things. So we're confident that we'll be fine across the year. We just don't know what quarter that will all get resolved.

And what part of Texas and what kind of weather damage was it? Was it a tornado?

No. It was just a very strong rainstorm, flood. You know, it was down in South Texas, down in the valley. And it was just very severe flooding. But there were no tornadoes or hurricanes or anything.

And then in the balance sheet, I see where -- I can't get my model at the moment because I've had a connection disruption. But there's been a jump in shares after you reported the March 31 results. I saw in your proxy that the share count went up about 200,000 shares in four days. What causes it to jump in those four-day period?

It wouldn't be a jump in four days. Maybe we can talk offline, Jim, to look at what numbers you're looking at.

Yes. Actual shares outstanding, 3-31-12, versus what was reported in the proxy.

Let's just look at it offline, Jim.

Thank you.

Thank you.

Thank you.

(Operator Instructions)

Okay, Samya. I appreciate that time, and thanks, everybody, for being on the call. And thanks for your time. Have a good day.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.