Ensign Group Inc (ENSG) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to The Ensign Group third quarter 2014 earnings conference call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions)

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

I would now like to turn the call over to Chad Keetch, Executive Vice President. Sir, you may begin.

Thank you, Shannon. Welcome, everyone, and thank you for joining us today. We filed our 10Q and accompanying press release yesterday. All of these announcements are available on the investor relations section of our website at www.ensigngroup.net. A replay of this call will also be available on our website until 5.00 PM Pacific on Friday, November, 28th, 2014.

Before we begin, I have 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 materially differ from those expressed or implied on today's 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 and its affiliates do 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 operation 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 any of the various operations, the service center, the real estate subsidiaries, or our captive insurance subsidiaries, 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 10Q.

And with that, I'll turn the call over to Christopher Christensen, our President and CEO. Christopher.

Thanks, Chad. Good morning, everyone. We're pleased to report that are operational leaders achieved another solid quarter with same-store skilled revenue up 7.2% over the prior year's quarter.

Our consolidated revenue was up 13.8% over the prior year quarter, part of which was attributable to an increase in our transitional skilled revenue of 6.4% in the quarter.

As those of you have followed us closely well know, we break out our operating results into three categories - same store, consisting of our most mature operations, transitional, comprised of operations we've owned for less than three years but are still early on in the operational maturation process, and recently acquired operations. We do this to provide greater transparency into our business, particularly during periods of higher growth like we have experienced recently.

We're also pleased to report that same-store skilled occupancy grew by 156 basis points over the prior-year quarter, to 81.9%, demonstrating our continued execution of our higher acuity business strategy. And while we are pleased with the growth and occupancy and skilled mix within our same-store group, we want to be very clear that there is still a significant amount of room to grow both occupancy and skilled mix in our same-store operations.

At the same time, our transitioning skilled occupancy grew by 103 basis points over the prior-year quarter, to 71.3%, showing increased strength in some of our transitions that have been slower to turn.

Our consolidated adjusted EBITDAR increased by 10.4% over the prior-year quarter, to $38.8 million. In addition, our assisted living home health hospice, urgent care, and our relatively young ancillary businesses all gained strength, as each operation continued a relentless focus on the fundamentals.

We've been especially grateful to our home health and hospice operators, Cornerstone Healthcare, which grew revenues by 45.6% over the prior year quarter, to $14.1 million in the quarter. Cornerstone's influence on our organization's success continues to expand both clinically and financially.

We're also pleased to report that we are making preparations to begin reporting our results from some of our other operations, including home health and hospice as separate business segments. We anticipate that we will begin breaking out those numbers beginning with the fourth quarter of this year.

With these metrics as a backdrop, we're happy to report adjusted GAAP earnings of $0.44 per diluted share for the quarter. As we announced yesterday, we reaffirmed our 2014 guidance and increased our 2015 revenue guidance. While third quarter results were solid, given our census and cyclical business and the timing of various reimbursement increases we discussed last quarter, we expect many of the improvements we have been anticipating to occur in the fourth quarter.

As always, the credit for this performance goes to our local leaders and their teams. As we've mentioned before, our operations are local in nature. Ensign's highly talented and compassionate business leaders continue to tackle the diverse challenges and opportunities facing their markets, with the support of Ensign's unique system.

With such individuals in our corner, we feel that we are able to approach our anticipated acquisition growth from a position of greater strength than ever before, and we continue to see very exciting prospects for the organization on the horizon.

I'd like Chad to take a minute and give you a little color on our growth. Chad.

Thank you, Christopher. We continued our steady growth on multiple fronts during the quarter. In July, we acquired Beacon Hill Rehabilitation, a 67-bed skilled nursing operation located in Longview, Washington, under a long-term lease agreement, and Namaste Hospice located in Denver Colorado, adding to our home health subsidiary already operating in that market.

In August, we acquired Angeles Home Healthcare, a home health agency in Los Angeles, California, adding to a hospice subsidiary already operating in that market.

In September, we acquired Sherwood Village Assisted Living and Memory Care, 135-bed assisted living operation in Tucson Arizona. And our urgent care operating subsidiary, Immediate Clinic Healthcare, opened two new clinics in the Seattle, Washington area. These openings bring a total number of our clinics in that market to 14, making us one of the largest consolidated urgent care clinic operators in Seattle.

These acquisitions brought Ensign's growing portfolio to 127 healthcare operations, 10 hospice companies, 11 home health agencies, and 14 urgent care clinics across 12 states.

We also disclosed during the quarter that our previously announced agreement to purchase four California-based operations from Cato Senior Healthcare was not approved by California's Attorney General, which, under California law, must give consent to the acquisition of a nonprofit business by a for-profit business.

Although both parties continue to believe that Ensign is the best operator for that portfolio, we recently came to an agreement with Cato to terminate our purchase agreement. We wish our friends at Cato well in their pursuit for another operating partner, as we move forward in our pursuit of many other very attractive opportunities on the horizon.

We continue to see a very healthy pipeline for growth and we expect to complete additional operation and real estate acquisitions before the end of this year and in the first quarter of 2015. We are currently under contract to purchase 11 operations, including 9 skilled nursing and assisted living communities, a home health agency, and a private homecare business from Shea Family Care, the largest provider of a complete continuum of post-acute healthcare services in the San Diego market.

Ensign will purchase and retain the real estate in two of those facilities, and will assume long-term leases on the remaining operations, one of which will include an option to purchase the real estate. We are on schedule to complete that transaction in the fourth quarter of this year.

And as we frequently reminded you, we continue to actively seek additional opportunities to acquire real estate or to lease both well-performing and struggling skilled nursing assisted living and other healthcare-related businesses within our existing portfolio and in new markets.

We believe that due to the unique combination of our reputation as one of the best post-acute operators in the industry and our healthy balance sheet, we are often the preferred buyer for many sellers. As a result, we continue to have the ability to be very selective in our evaluation of the many deal opportunities that are presented to us.

Lastly, while we have excellent relationships with our lending partners and have plenty of dry powder to complete a significant number of acquisitions, we continue to vigilantly protect our healthy balance sheet. To that end, we have also established a shelf registration statement that allows us to opportunistically access the equity markets for additional capital as we carefully pursue growth opportunities.

And with that, I'll hand it back to Christopher.

Thanks, Chad. Before Suzanne runs through the numbers, I want to offer a few examples of how our front-line leaders and their teams continue to produce record results in a dynamic operating environment. As I've often noted, even more than our strong balance sheet and solid operating history, it's our talented local leaders who make such results possible quarter after quarter, by pushing to constantly provide outstanding clinical outcomes and mine the bottom line and all of the other moving parts of these complex operations at the same time.

These leaders and their team strive daily to make their operations the community of choice in the market they serve. For instance, at the Grove Care and Wellness Center, a healthcare campus in Riverside, California, Executive Director, Trevor Weed, and Director of Nursing, Julie Martinez, have taken their five-star community to a leading position in one of the most competitive markets in Southern California, leveraging their unique offering of post-acute services that include skilled nursing, assisted and independent living service. They have driven unprecedented demand, taking clinical and financial performance to new heights. Their team has partnered with local hospitals and physicians to better manage the continuum of care across these service lines, which has led to better patient satisfaction and better outcomes.

While achieving high standards clinically, third-quarter skilled mix was up 18.8% to an impressive 89.6%, which is amazing. Because I remember when we took over this operation, we were in the single-digit skilled mix. An impressive 89.6%. Total revenues grew by over 21%, and EBITDAR margins increased by 858 basis points, all compared to all the same quarter last year.

Zion's Way, another example, home health and hospice in Saint George, Utah, has been emblematic of our Cornerstone strong 2014 performance. Led by CEO Brent Guerisoli, and key operational and clinical leaders Jason Olsen and Val Shumway, the team has grown top-line revenue by 45%, improved EBITDAR performance by 153%, and EBIT performance by 260% over the same quarter in 2013.

Zion's Way's team of caregivers have become a provider of choice by designing programs and delivering care to underserved populations that meet the unique needs of the rural communities of southern Utah and, in large part, due to the leadership of Justin Hofer, in northern Arizona.

This performance has been achieved in spite of seasonality and changes in declining reimbursement and increasing regulatory scrutiny that have confronted home health and hospice operators over the past year.

In addition, we also saw breakthrough performance from the team at Brookside Healthcare Center in Redlands, California. Executive Director Matthew Stevenson, and long-time COO, [Angie Bravo], have worked together with their local acute hospital and physicians to add to their existing therapy and nursing services.

This strategic partnership has allowed them to develop a state-of-the-art post-acute cardiac wellness program, resulting in superior outcomes for the residents and reducing unnecessary readmissions to there acute partners.

Marketing director [Jeff Beltram] has also focused on underserved submarkets outside their immediate community, leveraging Brookside's five-star rating and enhanced clinical capabilities to become a post-acute solution for much of the inland empire.

Financially, skilled mix has improved 18.2%, to almost 55%. Total occupancy grew 195 basis points to 92.3%. Revenues grew by 17.6%, and EBITDAR margins climbed 543 basis points, all over the same quarter last year. A testament to what mature operations within the organization can still achieve over time.

There are many more such examples across the organization, and we really appreciate you allowing us to share them, since, to us, there's no more important information we'll offer today than to tell you that Ensign is literally full of extraordinary leaders with stories like these.

These few examples show what makes us different, and they illustrate the opportunities for organic growth in all parts of the Company's expanding portfolio, and they remain more compelling than ever.

We're also pleased to report continued improvements in compliance and quality outcomes across the organization. And as we always remind you, it is essential to sustaining our mission and to healthy financial performance.

In the third quarter, four more of our skilled nursing operations achieved four- and five- star CMS ratings. And with those additions, 72 of our operations carry that designation at quarter end. This continued improvement also demonstrates that we are approaching our upcoming growth from a very solid clinical foundation.

We did experience a temporary increase in certain expenses during the quarter. These increases resulted from adding necessary resources and leaders in anticipation of unprecedented acquisition growth.

In addition, in the third quarter, we also underwent our inaugural chart audit by our assigned independent review organization. This effort required larger-than-normal amounts of time, effort, and expense for many of our operations.

Further, we continue to invest in additional infrastructure to adapt to this changing reimbursement environment, and we're encouraged by the response to this investment as is evidenced by the growth, [consensus], and reimbursement rates.

As with most things, the first time through the [IRO] audit will be the most difficult. But now that we've been through it, we're confident that we can build on the success of this year's audit and our organization will be stronger as a result. We're grateful to our industry, best team of compliance resources led by our Chief Compliance Officer Debbie Miller, for leading us through this process.

While we're pleased with the progress we made in the third quarter, we note that the lion's share of the improvement to Medicaid reimbursement in key states and the 2% net market basket update, the Medicare reimbursement we discussed last quarter; we'll occur it in the first quarter -- fourth quarter - excuse me - which is why our guidance heavily favored the fourth quarter.

Our census cyclical business and the timing of various reimbursement increases are examples of why our results are not symmetrical on quarter-by-quarter basis and why we do not provide quarterly guidance. With that understanding, our focus is on the fundamentals of our business and on driving improvements and performance throughout the year and over the long term.

With that, I'll turn the time over to Suzanne to provide more detail on the Company's financial performance and our updated guidance, and then we can open it up for questions. Suzanne.

Thank you, Christopher, and good morning, everyone. Detailed financials for the third quarter are contained in our 10Q and press release filed yesterday. Highlights for the quarter ended September 30th, 2014, as compared to the quarter ended September 30th, 2013, included record quarterly revenues of $260.8 million on a GAAP basis, or a 13.8% increase.

Same-store skilled revenues increased $6.1 million or 7.2%. Same-store skilled days increased 125 basis points to 28.7%. Same-store occupancy increased 156 basis points to 81.9%, which resulted in an overall diluted earnings per share on a non-GAAP basis of $0.44.

As for other key data points at September 30th, cash and cash equivalents were $39.2 million. And net cash from operations for the nine months was $66.7 million. We are reaffirming our annual 2014 revenue guidance of $1.01 billion to $1.025 billion, with projecting adjusted net income of $50.1 million to $51.2 million, and $2.16 to $2.21 per diluted share.

These projections are based on exclusion of startup losses at the newly created operations, included anticipated Medicare and Medicaid reimbursement rate increases net of provider tax, a tax rate of approximately 38%, the inclusion of acquisition-related costs -- excuse me -- the exclusion of acquisition-related costs and amortization costs related to intangible assets acquired, acquisitions announced to date, the impact of the spinoff transactions, the exclusion of transaction related cost, and diluted weighted average common shares outstanding of approximately $23.2 million.

We are also increasing our 2015 revenue guidance to $1.2 billion to $1.25 billion, and maintained our 2005 (sic - see press release 2015) annual earnings guidance with net income of $58.1 million to $60.2 million, and $2.44 to $2.53 per diluted share. The 2015 guidance is based on diluted weighted average common shares outstanding of approximately $23.8 million, the exclusion of acquisition-related costs and amortization costs related to intangible assets acquired, the exclusion of startup losses at newly created operations, the inclusion of anticipated Medicare and Medicaid reimbursement rate increases net of provider tax, a tax rate of approximately 38.5%, and acquisitions anticipated to be closed in the first quarter of 2015.

As Chad mentioned earlier, the previously announced Cato acquisition is no longer going to close. However, due to the strength of our pipeline, the termination of this agreement did not require the adjustment of our guidance for 2014 or 2015. In fact, our pipeline is such that we increased our revenue guidance for 2015, to include the acquisitions we have on the horizon that are now expected to close in the first quarter of 2015.

In giving you these numbers, I'd remind you again that our business is not symmetrical from quarter to quarter. This is largely attributable to variations in reimbursement systems, delays and changes in state budgets, seasonality and occupancy and skilled mix, the influence of the general economy in our census and staffing, the short-term impact of our acquisition activities, variations and assurance accruals for our self-insurance program, and other factors.

We'd be happy to answer any specific questions you might have later in the call. And I will now turn it back over to Christopher. Christopher.

Thanks, Suzanne, and thanks to all of you that joined us today. We hope this discussion is helpful.

As always, 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 also like to thank our shareholders again for your support and confidence.

Shannon, maybe you can instruct us on how to read the Q&A. I hope you're not all hearing this heavy echo that's on our side. It's a little bit distracting. But hopefully you've been able to hear us. But I'll turn this over to you, Shannon.

Thank you. (Operator Instructions) One moment, please, for our first question. Ryan Halsted of Wells Fargo.

I'm able to hear you guys loud and clear. So no echo on my end, at least.

Thank you. Good.

Good.

I wanted to go back to the reimbursement increase timing issue. I was hoping you could maybe just sort of revisit that and just explain exactly what's happening with that.

Sure. I mean if you kind of look, when we get most of our reimbursement increases, the vast majority of that occurs in Q4. So Medicare is effective October 1st. Some of our larger states, for example, Texas, that is effective September 1st. So the vast majority of the Medicaid and Medicare reimbursement increases really impact us beginning into Q4. So later part of Q3, and then all the new rates really roll in, in Q4.

So yes, just in your model, all of our big states give us an increase in reimbursement at the very end of the third quarter. And then, obviously, Medicare isn't until the fourth quarter. So that's why we get almost all of this at the same time and we don't see as much of an impact on the third quarter.

Okay. But I guess on the nongovernment portion of your business, was there any timing issues on reimbursement?

No. No.

Okay. All right. And then I was hoping maybe you could give some details on the Shea transaction. Just curious on the size and would also be interested to hear other deals that you have in your pipeline that are of a comparable size and just how those deals, how you're approaching the closure of those deals.

Yes. So thanks, Ryan. So the Shea transaction consists of eight skilled nursing facilities. It has one assisted living facility and two home health businesses - one's a home health agency and the other's a private duty business. And as we mentioned, those are all scheduled to close in the fourth quarter. We're on pace to do that.

In terms of sort of our other acquisitions, we have several that are still in the negotiation process. But many of those, we initially had thought we're going to close in 2014. But just for kind of standard transactional reasons, it's looking like most of those are going to move to the first quarter of 2015. We haven't disclosed in detail what those transactions are yet.

And I guess I will just also note, we don't typically disclose in advance of closing our transactions. We did that in the Shea context and the Cato context. But for the most part, we don't disclose the acquisitions until they're closed.

Okay.

Ryan, maybe to give you a little more color, it probably won't satisfy you. But the difference is, the many other transactions we're hoping to close are smaller, but there are many of them and they're spread across many of our states.

Okay. And then I guess, big picture question, just I'd be interested in your thoughts on the competitive landscape on these deals. Given that there seems to be a decent amount of visibility on reimbursement, I'm just curious if you're seeing more or less competition. And -- well, let's just leave it at that.

Yes. So I think we're seeing increased competition on performing assets, and pricing on those is creeping upward. But with respect to facilities that are more transitioning and need to be turned around, we still see a lot of those opportunities and much less competition in that context.

Okay. So you guys will keep your focus on those types of turnaround deals rather than try to sort of compete on more of the performing assets?

Yes and no. This is Christopher again. We have seen some opportunities, like the Shea opportunity, that are not the typical turnarounds that we deal with in the past. There may be some financial challenges in other, but they're not the clinical, physical plan, cultural and financial big challenges that we have often taken.

So, while they're not highly performing assets because there is a lot of competition on the highly performing assets, we are seeing stuff that's sort of in between. It's not what has made up most of our portfolio, the heavy, heavy turnarounds that have very, very low occupancy.

But yes, we're still doing both. We're still taking the turnarounds, but we are finding stuff in between that's reasonably priced, and you'll see some of those assets in the next few months.

All right. Great. Thank you.

Thank you. Dana Hambly of Stephens.

Just following up on that, the acquisition environment, you filed the S-3 earlier this year. Are you seeing on some of the larger deals, has something changed in the environment that is going -- that you think will just force bigger -- more consolidation among some of the bigger players? Obviously, there's a pending transaction out there right now. Just anything you're seeing with some of the bigger portfolios?

Yes. I mean, that's a great question. There's a lot of talk out there about a lot of things. You know, I guess relative to us, the way we benefit from that, we think is in some of this consolidation. Usually these bigger players take certain sections of these companies that they buy and sell them off and parcel them off because they're markets that they didn't want to be in. And that's really where we benefit.

I don't know how to -- I understand what you're asking, Dana. I just don't know how to answer what might happen with the rest of the industry. We are liking, though, what's happening with some of the big mergers that have been announced and some of the big mergers that have been completed, because we have, as you'll see, and as you've seen, we are getting some acquisitions as a result of those transactions.

Okay. No, that's fair. And you did mention, Christopher, I think --

Yes.

-- and correct me if I'm wrong, the cost in the quarter for increase the staffing for unprecedented acquisition growth, is that for deals that you've recently announced and the Shea, or --?

It's for that and for beyond. There are other deals. I mean, we are under certain -- we can't discuss certain things, unfortunately.

Right.

Hopefully we can soon. But, yes, there's -- its not just Shea. There's substantially more behind that.

Okay.

Yes.

And, Dana, just to add to that, I think to the extent we're talking about larger deals, I think the Shea opportunity is sort of what we're referring to there. I mean, we see a lot of regional operators that have more than just a handful of facilities. And then, but outside of that, most of our opportunities kind of still remain sort of the one or two facility-at-a-time approach across several states.

Okay. [Thank you].

And, Dana, one other thing I want to mention to you, because I don't think I was very clear about this in our earlier discussion. Because a lot of this is happening in the first quarter, the guidance we gave on revenue for 2015, is probably more heavily weighted to second, third, fourth quarter than it is first quarter.

That's good to know. Thank you. I'll ask too, on the big REIT transaction announced recently, do you see that as having any impact on, I'm guessing not so much your ability to buy some of the underperforming assets, but anything in general that might signal something different for you guys?

Again, in some of these larger private and public REIT transactions, we have seen opportunities presented to us in the midst of these transactions. So we're hopeful that it'll create more opportunities for us as the transaction closes. It's happened with us in almost every transaction so far.

Okay. Last one for me. It's a small piece of the business. But it looked like the Medicaid skilled business picked up 100 basis points or so. And I think it had picked up in the second quarter a little bit. Again, it's only about 5% of the business.

But is anything happening there with either, [do] eligible projects in California or something we'd expect the Medicaid skilled to push up?

Yes, we're benefiting from all of that. So we've had some uptick in California. We've had some uptick with some of our other sub-acute units that we have in other states. So it's been a really good business model that has been continuing to grow.

Okay. Thanks very much.

Thank you. (Operator Instructions) And I'm showing no further questions at this time. I'd like to turn the conference back over to Christopher Christiansen for closing remarks.

Thank you, Shannon. And thanks to everyone else for joining us on this call and for your interest and trust and confidence. We appreciate it and look forward to talking to you again soon.

Ladies and gentlemen, this concludes today's conference. Thanks for your participation. Have a wonderful day.