Ensign Group Inc (ENSG) 2012 Q4 法說會逐字稿

Welcome to the Ensign Group Incorporated's fourth quarter fiscal-year 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, today's conference may be recorded. It is now my pleasure to turn the floor over to Greg Stapley, Executive Vice President. Please go ahead, sir.

Thanks, Huey. Thanks, everyone, for being on the call. Welcome -- we're glad to have you with us today. We filed our 10-K, and [issued a] press release yesterday. 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 Time on Friday, March 8, 2013.

As you know, we always start with a few housekeeping matters. 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 differ materially from those expressed or implied on the call. Listeners 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, changing circumstances, or for any other reason.

In addition, any Ensign 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 -- we, us, our, and similar verbiage, are not meant to imply that the Ensign Group Inc. has direct operating assets, employees, or revenue, or that the various operations, the service center, or our captive insurance subsidiary are operated by the same entity.

Also, we supplement our GAAP reporting with non-GAAP metrics. When viewed together with our GAAP results, we believe that these measures can provide a more complete understanding of our business. But they should not be relied upon to the exclusion of GAAP reports. A GAAP to non-GAAP reconciliation is available in yesterday’s press release and in the K.

Finally, we customarily take a moment at the outset to update you on the DOJ civil investigation that's been underway since 2006. If you've already reviewed our press release and 10-K, you saw that this quarter we recorded a $15 million reserve related to the Company's efforts to achieve a global resolution of any claims connected to the investigation. Over the past many months, as we've previously indicated, our special committee and counsel have been interacting with the government representatives to advance the matter toward resolution.

Included in these exchanges has been an in-depth review of Medicaid billings from six of our Southern California's skilled nursing facilities. In particular, experts for both our special counsel and the government have been closely reviewing substantial numbers of claims, spanning several years to determine whether errors, omissions, or other deficiencies may have existed with respect to these claims and operations. Both exchanges are still underway, but the progress to date has allowed the conversation between our representatives and the government to move toward active settlement discussions.

The taking of a reserve is not a guarantee of a settlement, and the ultimate settlement amount, if any, could end up being materially different from what we have recorded. As always, we cannot predict the possible outcome of the investigation, further settlement discussions, or any litigation that might yet follow. We redirect you to the more complete discussions of this matter contained in our 10-K for additional disclosures and details.

But, as Christopher noted in yesterday's press release, we view this reserve and a move toward a possible settlement as positive, and hope that the outstanding operating results posted by our field leaders in the face of enormous obstacles this year will not be lost in the noise that can sometimes surround such discussions, which, by the way, we expect to continue for a while.

With that, I'll turn the call over to Christopher Christiansen, our President and CEO. Christopher?

Thanks, Greg. Good morning, everyone. In our first full comparison quarter since the October 2011 Medicare cuts and therapy changes, our adjusted earnings were up 27.1%. As you'll recall, Ensign gives annual earnings guidance. We increased that annual guidance in August. We're pleased to report that results came in at the high end of our guidance, that increased guidance during a challenging year, and also exceeded analysts' consensus for the year.

More importantly, although there were some normal lumpiness in the individual quarters as is usually the case, we saw our operators improve markedly, quarter by quarter, throughout the year. Mitigating the effects of the cuts, and achieving an overall adjusted earnings per share increase on the year of 8.5% over 2011, again, despite the enormous cuts, and right within the increased guidance we published last August.

In addition, consolidated revenues were up 9.6% on the quarter, and 8.8% on the year. Same-store skilled revenue was up 5.3% on the quarter, despite a 3% drop for the year. And same-store occupancy was up 20 basis points on the quarter, and 53 basis points on the year.

We're especially pleased to report that same-store skilled revenue mix grew by 117 basis points to 53.9% of revenues in the quarter. So, despite continuing troubles in much of the rest of the industry, we've made up a lot of 2011's lost ground in the past four quarters. And things at Ensign are trending in the right direction, as we told you they would back in August of 2011, after the 2011 cuts were first announced.

With a very difficult 2012 behind us, we can confidently say once again that our operators and their dedicated teams are collectively second to none in producing outstanding clinical and financial performance, and in becoming the facilities of choice in the communities that they serve. As we've noted in the past, our Business can be a bit lumpy from quarter to quarter, but we're pleased to have been able to project performance fairly accurately on an annual basis to date. With 2012 in the books, we're looking forward to 2013 with great enthusiasm. We're pleased to be issuing 2013 annual guidance with projected revenues of $915 million to $931 million, and adjusted earnings of $2.79 to $2.88 per diluted share, which Suzanne will discuss in a moment.

Today, despite some uncertainty still on the horizon, all of which is just another iteration of the uncertainty we constantly contend with in our industry, we feel very confident, even enthusiastic, about the future, and our prospects for continued growth and performance. It's easy to do well when the operating environment is stable, but Ensign's local leaders stand tallest in times of uncertainty. As their colleagues, we wish to extend our heartfelt thanks, and give full credit to our local operational partners and clinical leaders who have performed spectacularly well in a very rough operating environment this year.

With that, I'll turn the time over to Greg, who will briefly discuss our recent growth. Greg?

Thanks, Christopher. Like operations, 2012 was a good year for acquisitions as well, with five SNFs and one ALF adding to our growing portfolio in 2012. Together these transactions brought our total senior housing and in-patient care portfolio to 108 facilities in 11 states, with 12,198 skill beds, 1,799 assisted and independent living units. Of the 108 facilities we operate, 86 are Ensign-owned, and 65 of those are owned free of mortgage debt.

Our nascent home health and hospice business added three home health and three hospice agencies in 2012 and since, bringing their total to seven home health and six hospice agencies. They grew both organically and by acquisition, with the number of patients on service in home health up by approximately 56% quarter over quarter, with 53 percentage points of that coming organically, and hospice up by 94% with 60 percentage points of that also coming organically.

In addition, our urgent care business, which remains largely at an early trial stage, opened its first three locations late in the year. And it has two more slated to open in the first quarter of 2013. Some expected start-up losses in these new businesses will negatively impact Q1 and Q2, but we anticipate that these pilot locations will start becoming accretive by the end of the third quarter.

We also acquired, in Q4, a small mobile ancillary services company. Like the home health, hospice, and urgent care businesses, this acquisition is a product of our innovative new ventures program, which allows our proven operators to seek out and develop compelling business opportunities in areas that are related to our core business. We expect this business, though relatively small, to also be accretive this year.

We continue to seek compelling opportunities to spread the Ensign operating philosophy across the country, and we have additional acquisition growth and diversification prospects in the pipeline. We continue to generate strong free cash flow that can be used to fund growth.

In addition, we just announced another $75 million expansion and extension of our revolving credit line, giving us up to $150 million in loan commitments that we can tap into as well. And we continue to have tremendous untapped equity in our real estate portfolio that we can use to access additional growth capital, as well as a very strong balance sheet, which together, leave the growth landscape wide open for us, if, as, and when we see compelling opportunities.

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

Thanks, Greg. As you can see by looking at the past year, our operations are trending in the right direction almost across the board, and did so in a very tough operating environment. We often get asked how we survive and thrive under circumstances that deal significant setbacks to others. We always respond that it happens not because of any corporate mandate, but rather as an aggregation of 100 separate solutions developed by 100 different leaders who oversee 100 different markets. They tell us what will work in their unique markets, and we do our best to support them as they lead out to literally change their corner of the world.

For this reason, our operating structure relies heavily on having superior local leaders at each operation who are both equipped and empowered to assemble the best teams available, and to quickly make the changes and innovations their unique situations require. The value of this local leadership structure has never been more evident than in the past five quarters, as we fought our way back while the broader industry has struggled to recover from the October 2011 Medicare cuts and therapy rule changes.

I wish I could tell you about all of them, but let me just mention three very different leadership teams in three very different facilities, all of whom have proven to be particularly good over time. In our recently-acquired bucket, Stillhouse Rehab and Healthcare Center in Paris, Texas, which we just acquired in June of last year, 2012, has blasted out of the gate under the leadership of Kevin Reese and [Danica] Simmons. Operationally challenged and running deep in the red at acquisition, Stillhouse was in need of real leadership. Rather than run the 59% occupied building as a 150-bed building, Kevin and Danica rightsized their expenses to run it as if it were a 110-bed facility, doing so in a very efficient, clinically and financially, manner. We still count it as a 150-bed facility. Building on that foundation, they have since steadily built occupancy while converting their patient base from convalescent to skilled. They've grown from 59% occupancy with almost no skilled, to 71% occupancy with skilled revenue mix that is now running at 43%, and EBITDAR margins that match some of our most mature facilities.

In our transitioning bucket, Arvada Care and Rehab Center in Arvada, Colorado, Executive Director Josh Wester, and his Director of Nursing, Melanie Kehmeier, have done a remarkable job at turning what was once a sleepy, long-forgotten convalescent home in a quiet neighborhood into a busy, well-regarded skilled nursing center, and part of a vibrant medical community in the Denver metro area. Not only have Josh and Mel taken Arvada from a CMS one-star facility when we acquired it just four years ago, to a five-star facility today, they've led the way and helped every single Ensign skilled nursing facility in the Denver area, all four of them, to achieve five-star status as well.

As the result of their clinical excellence and sterling reputation in the medical community, Arvada does a tremendous amount of managed care business, posting a 44% skilled revenue mix, a 90% occupancy rate, and a more than 90% increase in EBITDAR this quarter. These results are the product of basic blocking and tackling, coupled with a keen focus on the local market and a strong desire to do the right things for their patients, residents, and referral sources.

And in same store, proving that our more mature facilities can still improve dramatically from year to year, Executive Director Kirk Lindahl and COO Vicky Ablang at Rose Villa Healthcare Center in Bellflower, California, have turned what was once practically a tear-down facility into an absolute Medicare magnet. Although the facility itself is not fancy by any means, in the fourth quarter they ran a skilled revenue mix of nearly 74%, which places it among the best in the whole organization. It's very hard to describe how they have become the favorite of the medical community in their market until you go there and feel the spirit of the team. Rose Villa exudes a sense of community that Bellflower values, and produces clinical outcomes that have pushed that skilled mix to Company highs, resulting in a 260% quarter-over-quarter increase in EBITDAR in the fourth quarter.

These are just a sampling of the individual stories rolling in from across the organization, but you get the picture. Again, it's not about reimbursement or regulation or sequestration or any other external headwind, but rather about great leaders who take true ownership of their operations and markets, commit to superior clinical and operational performance, and innovate intelligently to overcome the obstacles that are thrown at them every day. They are what set Ensign apart from the crowd. And we are grateful to have the privilege of working with them.

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

Thank you, Christopher, and good morning, everyone. Before we discuss our operational results, which were very good overall, I'd like to take just a moment to highlight two unusual items that show up in the financials this quarter, and impact GAAP EPS. First, as Greg already mentioned, after years of cooperating with the government, we are finally at a point where we can take an initial reserve against a hoped-for resolution of the DOJ civil investigation. The liability we recorded is, of course, an estimate with many moving parts, and it could materially change as the discussions move forward. But we are encouraged that the discussion is moving, and we view the possibility of a resolution as a tremendous positive for the Company and its stakeholders.

Second, the quarter included a non-cash adjustment of $2.2 million for the impairment of the fair valuation of Doctors Express, Ensign's urgent care franchise system. The initial value of Doctors Express was based in part on the fair valuation of a non-controlling interest, which is an accounting analysis and not based on cash paid for the transaction.

So, back to operations, our mitigating efforts with respect to last year's Medicare cut and therapy rules changes came full circle this quarter, with this being the first quarter where our results are on an apples-to-apples basis. We are pleased to be reporting adjusted non-GAAP fourth-quarter earnings of $0.61, exiting Q4 2011 at 27%. In addition, for the full year's results, non-GAAP earnings per share increased by 8.5% despite three quarters of 11% Medicare rate cuts that took effect in the fourth quarter of last year. As always, we provided a reconciliation of GAAP to non-GAAP results in yesterday's release.

In reviewing the strength of our financial position, for the 12 months ended December 31, cash and cash equivalents for the year were $40.9 million, and the Company generated net cash from operations of $82.1 million. Free cash flow for the 12 months ended December 31 was $43.2 million. This number was impacted by aggressive CapEx in renovation projects to update our real estate portfolio, implementation of new technology, and other factors. Overall, we were pleased with how operations have performed through the first full five quarters since the Medicare cut and therapy changes.

Clearly, we are trending in the right direction despite headwinds affecting others. In addition, the [relationships] that we have built on the revenue side, and the discipline we have developed on the cost side, will continue to serve us well. In fact, we appear to be growing market share in key areas. We also noted that we still have a sizable portion of our portfolio, about 40%, in the recently-acquired and transitioning buckets, meaning not only that consolidated results were achieved despite the downward pull of these still-maturing operations, but we also have substantial organic upside built in to our portfolio that our continued growth will not be fully dependent upon acquisitions.

Now, as we look forward to 2013, we believe we have significant opportunities to improve occupancy, positive news on the Medicaid rates from several of our states, and the continued effect of the general operational discipline that has grown out of this past year's experience in mitigating the 2011 cuts. At the same time, we will remind you that our incentive compensation system for our local leaders, who participate in the performance of their operations, took a disproportional hit during last year, and now will rebound from it faster than revenues or earnings, somewhat muting earnings growth as operations performance rises.

Finally, as Christopher mentioned, we have published guidance for 2013 of $915 million to $931 million in revenue, which represents an annual average revenue growth rate of over 15% a year since 2009. We also are projecting $2.79 to $2.88 in diluted adjusted earnings per share, which represents an average annual growth rate in earnings per share of almost 16% a year since 2009. We are confident in projecting that this ramp will continue.

These projections are based on diluted weighted average common shares outstanding of approximately 22.5 million; no additional acquisitions or disposals beyond this made to date, exclusion of acquisition-related costs and amortization costs related to intangible assets acquired; exclusion of expenses and accruals related to the DOJ matter; tax rate at our historical average of approximately 38.5%; the effect of sequestration; followed by a Medicare market basket increase in October 1 of 2013; and approximately 1% increase in Medicaid reimbursement rate, net of provider tax.

In giving you 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 -- excuse me, from quarter to quarter. This is largely attributable to variations in reimbursement systems, delays and changes in state budgets, seasonality and occupancy in skilled mix, the influence of the general economy on our census and staffing, short-term impact of acquisition activities and other factors.

Full financials were included in our K and press release. I will be happy to answer any specific questions you might have later in the call. I will now turn it back over to Christopher to wrap up. Christopher?

Thanks, Suzanne. And thanks to everyone who's been on the call. We hope that this is helpful to you. We want to conclude by thanking our outstanding partners in the field, at the service center, and across the organization for their continued efforts to make Ensign the best company in the healthcare industry. We'd like to thank our shareholders again for their support and for your confidence.

Huey, if you'd like to instruct everyone on the Q&A procedure, that would be helpful.

Sure thing.

(Operator Instructions)

Kevin Campbell, Avondale Partners.

I wanted to just start with your fourth-quarter results. Typically, fourth quarter is usually a seasonally better period for you guys, and yet you were down a penny sequentially from the third. So maybe you could just talk about some of the things that impacted fourth-quarter results that didn't impact third, or why you didn't see that normal pick back up in the fourth quarter?

Yes, Kevin, there's probably a number of items, none of which are really about the basis of operations. We -- one thing that was quite a bit different this year and this is where we talk about lumpiness all the time. We have -- we're self-insured on a lot of our insurance fronts, and so that forces us to make estimates each quarter. We do our best where actuarially and by reviewing claims and what have you.

This year, our healthcare and workers' comp was a little bit higher in the fourth quarter than it was in the third -- well, substantially higher in the fourth quarter than it was in the third quarter, which created a difference between third and fourth quarter. It's probably one of the reasons we try to emphasize over and over and over again but our annual guidance is something that we feel very comfortable with, and the quarterly stuff is a little bit lumpy because of -- that insurance is influential.

Great. I'm curious on the pipeline in the -- maybe potential pace and deals a quarter or two back, you have talked about some potentially larger deals that could happen at year end. Obviously, nothing really -- do you think you can provide color on why there weren't maybe larger acquisitions? I know you had smaller ones. But why that didn't happen and maybe how we should be thinking about the pace and size of the pipeline going forward?

The pipeline looks pretty good. We see the current -- we do have some stuff in the pipeline. I would characterize them as traditional Ensign-type opportunistic deals, more than one-off or small group-type deals. I see no reason why we couldn't grow this year as much we grew last year, although that's not a prediction. With respect to larger portfolio deals, we continue to look at them. We continue to get in there and pitch for them. We made a pitch last year for some of the Kindred buildings that came out later in the year.

Our numbers in which we thought we could make those work, were not the same numbers that some smaller operators thought they could do that apparently and so we were not successful. But we'll continue to look at those portfolios as they come around and do our best with them. One of the challenges that you see when you get into those larger portfolio deals is the competition we see for them is markedly different than what we see on more traditional Ensign-type deals. So we are continuing to work out how we might figure a way around that and to compete in that market.

Kevin, we're not -- I think you know this, but we're not so anxious to grow by leaps and bounds that we're willing to compromise the discipline we've shown in the way that we acquire these operations and the way that we acquire these physical plants. It's -- we don't really want to compete in a world that where the pricing is not what we feel comfortable paying.

Yes. Your revenue growth guidance looks like it's about 12% or so revenue growth, year over year, in '13. Maybe you could just talk a little bit about what the key drivers are there. In the sequester, for instance, you've got some headwind. So what's really driving that solid revenue growth?

A portion of it is driven by some of new businesses that we're embedded into. They still represent a very small portion of our Company's total revenues. Based on our projections, the combination of home health, hospice, the ancillary business will pick up, and urgent care could potentially represent 4% to 4.5% of our total revenues at the end of this year. A large portion of our growth, less than half, but a large portion of our growth will come in those arenas, most of that probably being in the home health and hospice since we took on a number of acquisitions late in the year or early this year.

One of our large acquisitions we only had for two-thirds of the year last year. So that's where some of it comes from. Plus, we still have a number of operations in that transitional and new acquisition bucket that are improving rapidly. Those are probably two areas, the actual business and the new acquisition and transitional facilities, I'm sure represent the lion's share of that growth.

I'll also tell you just -- we anticipated an increase from a state or two last year that wasn't official yet. Some of that, we feel very confident will come this year and will come retroactively. That's where a small portion is derived as well.

Okay. Excuse me. The recent acquisitions you've done thus far in 2013 plus the ancillary one at year end, which really had no revenue impact, can you just give us a combined total annual revenues from those deals, just because it obviously had no impact in 4Q, but we can factor that into our models going forward?

Yes. Between those four, the impact is about $15 million.

Perfect. Thank you very much.

Thank you, sir.

(Operator Instructions)

Rob Mains with Stifel Nicolaus.

When you talk about some of the challenges you faced this year, the MPPR cuts that were included in the docs, I'm assuming since you don't have a therapy business, that's de minimis for you in terms of impact?

Rob, that's probably in the realm of -- annualized, it's probably about $750,000.

Okay. That's pretty small. You said that you had some positive momentum on some of your states for Medicaid. Can you give us a run-through of where Medicaid stands in some of your key states, please?

Yes. So in core, our key states, the one that we've probably talked a little about in the past, I'm not sure if we have or not, but we talked amongst ourselves. In Arizona, we're anticipating getting -- we -- I should remind everyone on the call, we've been hit there over and over and over again. But in -- we're anticipating retroactive to beginning of this year or the latter part of last year, about a little over a 5% increase; however that's offset by some fee that results in about a 4% increase overall. So we expect that to be impactful. In California, we expect it to be -- we expect to get a small -- that --

I think, like in California, what we've seen [QAF] come out with us that in the second part of the year that we think we're going to get a bump of about 3% in the second part of the year. So --

But that's offset by a fee. That's why I stumbled a little bit. We'll have an accompanying what's called QA Fee, and so that will probably be reduced by a significant number, but we expect it to be a net positive. Just to correct myself on Arizona, I was looking at the dollars, so we expect that actually to be about a 9% increase, which resulted for us in about a $4 million increase. Again, that's an annual increase. Remember that we've been hit there many, many times over the past year. So it's nice to have a little bit of a reprieve there.

And then in Utah, which is another big market for us, we don't expect much. We think that it will be about flat. We have had some increases there in the past, I think in 2011 and 2012. Then in Texas, we do understand that there's a budget surplus there. So we're hopeful that some of the -- I don't want to get into too much detail. But we've had some therapy changes made there relative to Part B, co-pay that was removed in the beginning of last year. We had some hopes that maybe that will be reversed the middle part this year. Those are our bigger markets. All the other states are smaller for us.

Okay. Thanks. And ex any acquisitions, can you give us an idea where CapEx might fall this year?

Yes. I think that our CapEx will fall somewhere between $35 million and $38 million.

Okay. And then --

We -- I should mention, even though we're larger, Rob, we've renovated a large portion of our portfolio. That could rise as our acquisition pool rises. But with our existing portfolio, I think we'll stay pretty close to that number.

Okay. And then Greg, your comments about acquisitions, some of the other companies, that have made those healthcare acquisitions, had big fourth quarters because sellers wanted to get stuff done before tax rates went up on 1/1. Since you didn't see that and I know you're not guiding to acquisitions, but is there any reason why the pace of acquisitions for you wouldn't be ratably over the course of the year rather than back-loaded?

No. I think you're probably right on that. The acquisitions that we do when I talk about a typical Ensign opportunistic acquisition, the flow in there is pretty steady. They don't carry a lot of Medicare census in the building so they're not deeply affected by like some of reimbursement headwinds that other facilities might be affected by. So it's just that the flow is -- the flow is the flow. I don't see a big change in it as I look out down the road this year.

Right. And then last question, those typical Ensign acquisitions, I assume you're not seeing a whole lot of competition for them.

We actually are seeing a little more competition, Rob. Money is cheap and capital is now flowing back into the industry. We see a few more of the capital providers who are willing to do the -- what have historically been the tougher deals. But we compete very well in that environment.

Who is there to enter -- who are you seeing? Is it operators, or is it financial backers, or --

It's financial backers and we're seeing more capital.

Okay. Got you. Thank you very much.

Thank you, sir.

(Operator Instructions)

Presenters, at this time, I'm showing no additional questioners in the queue. I'd like to turn the program back over to Mr. Christiansen for any additional or closing remarks.

Well, thank you, Huey. Appreciate your time and your help. Thanks to everyone for giving us your time. Appreciate the time you spent with us.

Thank you, presenters. Again, ladies and gentlemen, this does conclude today's conference. Thank you for your participation and have a wonderful day. Attendees, you may log off at this time.